N E E N A H
N E E N A H
PA P E R , I N C .
PA P E R , I N C .
( U N ) C O N V E N T I O N A L
( U N ) C O N V E N T I O N A L
W I S D O M
W I S D O M
2 0 0 6 A N N UA L
2 0 0 6 A N N UA L
R E P O R T
R E P O R T
Hello! Recognize us? If we seem different, that’s by
design. 2006 was a busy year, a year of promised action
and significant change. We took significant steps
to transform our business – just as we said we would.
And we continue to change in dramatic ways.
At Neenah Paper, change is great.
look inside to
see how we have
changed 3
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 1
( U N )
C O N V E N T I O N A L
E V O L U T I O N
We’re transforming, fast,
and becoming much closer
to the premium fine paper
and technical products
company we envision. 2006
brought great change, as
we said good-bye to our
operations in Terrace Bay
and welcomed new team
members in Germany.
Yet Neenah is still Neenah.
We remain a unique com-
pany – committed to pre-
mium products and
collaborative solutions, with
world-class safety perfor-
mance and financial returns
unlike many others in our
industry. Our legacy and
our future are in exceptional
quality, service and
innovation, and not letting
conventional thinking
stand in our way.
Our path will not be the
one of least resistance.
We do what we think is
right, challenge each other
and work to make the
future happen. That’s our
way. And, I hope you agree,
we think it’s working.
We just completed our second full year as an
independent company, and Neenah is a great deal dif-
ferent than it was in November 2004 – and ready for
more. We believe we have what it takes to succeed:
discipline, hard work and an uncommon sense of where
we want to grow and what we need to do.
In 2006, we moved forward with strategic, com-
plementary initiatives in a number of areas: divesting
our Terrace Bay pulp operations, selling half a million
acres of timberlands in Nova Scotia and acquiring
FiberMark’s German technical and specialty papers
business. Our progress will continue in 2007, as we
recently completed the purchase of Fox River, adding
scale, well-known brands and the promise
of important benefits as we combine Fox River with
our existing fine paper business.
Neenah is not done growing. We’ll continue to
explore opportunities that create value and are
the right fit with our businesses and skills. Because,
while bigger is nice, fitter is better. That’s how
we will grow.
4
( U N ) C O N V E N T I O N A L W I S D O M
( U N ) C O N V E N T I O N A L W I S D O M # 1 :
WE OPENED THE
DOOR BE FORE
OPPORT UNIT Y KNOCKED
look inside
to see whe re we
inves ted 3
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 5
( U N )
C O N V E N T I O N A L
I N S I G H T
In pursuing acquisitions
you can get bigger first,
then work on getting better.
Or, you can pursue focused
expansion, seeking com-
plementary strengths.
And be advantaged from
the get-go.
Neenah Germany, we have
nearly tripled the size
of our technical products
business and greatly
expanded its product
portfolio, global footprint,
customer access and
technological capabilities.
We see technical products
as an opportunity space –
collaborating with our
customers to create and
deliver unique products –
with room to grow. We
believe in this business and
are investing in it. With the
purchase of what is now
The acquisition gives us
multiple opportunities
to converge best practices
and drive synergies where
we overlap in products
such as high-performance
tape, abrasives and
printing and coating sub-
strates. It also provides
a dynamic platform to
merge and improve tech-
nologies in the pursuit
of new areas of growth.
And the acquisition
expands the business into
areas such as premium
transportation filter media
and nonwoven wall cover-
ings that are both growing
and profitable. We have
quickly moved to reorgan-
ize the business into global
product teams with one
face to the customer. We
are now bigger and better.
Many assumed our Terrace Bay pulp operation would
continue to be a detriment to our overall results,
principally due to its high-cost position. We knew
something had to be done, and done now. Our
people looked diligently for creative ways to address
the situation.
It’s not often that it makes sense to make a sale
where you pay the buyer, but in the case of Terrace
Bay, this made sense. Ultimately, we were able to
transfer the mill to a local forest products company
that had the opportunity to integrate vertically
and keep the mill operating. As part of the transfer,
Neenah Paper paid the new owner funds that could
be used to invest in the mill to make it more compet-
itive and also made contributions to the employee
pension plan. The result was a win for the employees,
their towns, the buyer and for Neenah Paper
shareholders. With this transaction, the profile of
our entire company was significantly improved.
8
( U N ) C O N V E N T I O N A L W I S D O M
( U N ) C O N V E N T I O N A L W I S D O M # 2 :
WE ACTED WHEN LESS
WAS MORE PROFITABLE
look inside to
see the fores t and
the t rees 3
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 9
( U N )
C O N V E N T I O N A L
T E A M
In Nova Scotia, our Pictou
team understood the
valuable asset that its one
million acres of timber-
lands represented. But
selling off woodlands
would mean higher costs
for Pictou’s pulp mill.
The Pictou team quickly
went to work to find ways
to offset part of these
cost increases. Confident
in their plans, a decision
was made to sell half of the
woodlands and we were
able to invest these
proceeds in higher growth
areas more aligned with
our strategic priorities.
That sort of move takes
being able to see the forest
and the trees.
We intend to thrive in all our businesses. So while
some see only the challenges of the paper industry,
we still see opportunity. Neenah Paper has always
stood apart. We have a branded fine paper business –
often specified and specifically requested by
designers and our customers. And we continually
reinvest in our brands. We sell only premium paper.
We’ll probably never be your copy machine paper.
But when the message is an important one, there is
a good chance it will be on paper from Neenah.
Neenah Paper continues to lead the way in
premium fine paper by combining choice in colors
and textures with eco-friendly options, and by setting
high standards of quality, performance and service.
Our Neenah Green initiative is making it easier and
simpler for our customers to do the right thing
for the environment, and for them to reinforce their
message with these communications.
And we push beyond the envelope. As the
market leader in premium fine papers, we strive to
grow the category by continually demonstrating
how great paper can result in great communication.
12
( U N ) C O N V E N T I O N A L W I S D O M
( U N ) C O N V E N T I O N A L W I S D O M # 3 :
AND WE THOUGHT
OU TSIDE THE BOX BY TRULY
THINKING: “OUTSIDE.“
look inside to
see why the future is
bright 3
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 13
RECEIVE $2.00 OFF
on your purchase of any of our
ENVIRONMENT® brand papers
when you place your order
online at www.neenahpaper.com
promo code #GREEN7
Expires June 30, 2007.
( U N )
C O N V E N T I O N A L
C O M M I T M E N T
Neenah Paper brings a
“brighter shade of green”
to the work of designers
and the organizations
they illuminate. Our
ENVIRONMENT® brand
makes the most explicit
statement of a shared con-
cern for the earth and sky
and future generations,
but it’s not alone. Nearly
all of our premium brands
include papers capable
of being produced with
green energy and that have
been certified by the
Forest Stewardship Council
(FSC), Green Seal and/
or the Rainforest Alliance’s
SmartWood program.
(cid:129) We are the first premium
paper company to have
our writing brands water-
marked with the FSC
certification seal and Chain
of Custody number.
(cid:129) We are the first premium
paper mill certified by
the Chlorine Free Products
Association that our
100% post-consumer recy-
cled papers are Processed
Chlorine Free (PCF).
(cid:129) We are the largest
purchaser of renewable
energy in the state of
Wisconsin, powering a
portion of our mills in that
state with Green-e certi-
fied renewable energy.
This has earned Neenah
Paper coveted recognition
as a Leadership Club
Member in the U.S. EPA
Green Power Partnership.
It’s easy being green.
With Neenah.
Now, let’s talk business
2006 WA S A PIVOTAL
YEAR FOR NEENAH
PAPER, A YEAR OF
STR ATEGIC TR ANSFOR -
MAT ION. WE ARE VER Y
short time, we believe
we’ve already become a
much stronger company,
poised for future growth.
PROU D OF OUR
STR ATEGY ON POINT:
PEOPLE FOR TAKING
BECOMING WHO
ON BIG CHALLENGES
WE SAID WE’D BE.
AND MAKING THE
RIGHT THINGS HAPPEN.
We again improved safety.
We successfully transferred
our Terrace Bay pulp mill
and monetized half of our
Pictou woodlands. Our
technical products capabil-
ities and reach greatly
expanded through an
important acquisition, and
this was followed by a
significant purchase in fine
paper in early 2007.
We introduced grade line
extensions in our fine paper
offerings and launched
our Neenah Green platform.
We continue to deliver on
an enterprise-wide Oracle
system. Both our paper
businesses grew their top
lines and continued to
provide attractive returns
on capital.
What all of that activity
adds up to: we are execut-
ing on our strategy and
seeing results. In a very
When Neenah became its
own company in late 2004,
we were a business with
half of its revenues in pulp
and half in paper. We said
that we would change that
mix, and become a pre-
mium paper and technical
products company that
could be far more than the
sum of its parts. Look at us
now. In 2005, over 50 per-
cent of our net sales came
from pulp. In 2007,
we expect that around
80 per cent of our sales
will now come from our
paper segments.
BUS IN E SS T R ANS F ORMAT I ON
N E T SAL E S
BEF ORE
PULP
FINE
TECH
AFT ER
FINE
PULP
TECH
WE SAID WE’D UNLOCK
VALUE FROM OUR PULP
OPER AT IONS.
This was not easy. The year
began with labor negotia-
tions with our Terrace Bay
woodlands operations
employees at an impasse
over necessary contract
changes. We implemented
these changes, which
resulted in a strike by the
woodlands workers and
the mill being shut down
in February. We then
enacted strict controls over
spending until the situation
could be resolved. While
looking at ways to control
costs in the short term, we
recognized that the fiber
supply in Northern Ontario
and other challenges inher-
ent in pulp would make it
difficult for us to create
real long-term value there.
While we might be able to
improve the operation,
it would still not generate
required financial returns.
Therefore we looked at
other alternatives.
17
businesses, as well as
acquisitions, if attractive
opportunities arose.
In our core businesses, we
continued to lay the foun-
dation for sustainable
growth. We further
enhanced our R&D capabil-
ities, especially in technical
products. We have
made the investment, now
we have to deliver. These
efforts are starting to yield
benefits as we enter into
more joint development
with customers and com-
mercialize a greater stream
of new or enhanced prod-
ucts. Fine paper also saw
successes in 2006. We
expanded our Neenah
Green platform of pre-
mium fine papers and
began to develop a pres-
ence in the retail channel.
We launched, in an exclu-
sive partnership with the
Susan G. Komen Breast
Cancer Foundation, a new
retail line of stationery
watermarked with the
breast cancer awareness
ribbon. A portion of each
sale goes to the Foundation
to support the fight
against this terrible disease.
In August, our Terrace Bay
operations were trans-
ferred to local forest prod-
ucts companies with the
ability to integrate this
business into their own
operations. We paid
$18 million as part of the
transfer and also made
contributions to the pen-
sion plan. By drawing down
working capital, we helped
pay for the one-time costs
of the transaction. We
implemented a tolling
arrangement, so that
Terrace Bay, under the new
owners, would continue to
supply its high-quality pulp
to Kimberly-Clark under
terms of the Pulp Supply
Agreement and the mill
would be able to continue
to operate. We understand
the very difficult times
faced by the employees
of Terrace Bay over the
past year and wish them
future success.
Our efforts to unlock value
from pulp also extended
to our Pictou operations in
Nova Scotia. While we
began the year with a mil-
lion acres of timberlands,
working with our Pictou
team, we felt that half of
18
these lands could be sold.
The team committed to
find ways to help offset
some of the higher result-
ing fiber costs. Conse -
quently, we sold 500,000
acres of woodlands in
June for approximately
$140 million, releasing
value that we were able
to use to finance our
German acquisition.
The Pictou team has re-
s ponded with tremendous
focus on driving profitabil-
ity and competitiveness.
The mill set a number of
productivity records in
2006. Cost-cutting initia-
tives – improving produc-
tivity and throughput,
labor efficiencies and
changes to existing fiber
sourcing and supply chain –
are underway to continue
to help Pictou remain a
cost competitive mill
known for high quality
northern bleached soft-
wood kraft pulp.
WE SAID WE’D DRIVE
SUSTAINABLE GROWTH.
In addition to unlocking
value from pulp, we also
said one of our strategic
objectives was to drive
sustainable growth. This
growth would come both
from our core fine paper
and technical products
COMPARISON OF 25-MONTH CUMULATIVE TOTAL RETURN
Based upon an initial investment of $100 on December 1, 2004 with dividends reinvested
$100
Russell 2000 Value
Russell 2000
Neenah Paper, Inc.
Dow Jones US Paper
Peer Group*
12/01/04
12/31/05
12/31/06
Acquisitions were also
completed to support
future growth. The acqui-
sition in October of
FiberMark’s German busi-
ness adds new technolo-
gies and products as well
as great talent and com-
plementary strengths, and
extends our franchise into
new growing markets, such
as filtration media. Our
technical products busi-
ness now has better scale
in the global market, with
an increased capability for
delivering sustainable
growth. As part of our
business plan following the
acquisition, we approved
capital investments to
increase capacity of filtra-
tion media and wall
coverings. Each of these
investments is ex pected
to provide attractive
financial returns.
*Defined Peer Group: Wausau Paper,
International Paper, Bowater, Caraustar,
Glatfelter and Schweitzer Mauduit.
We are equally excited
about the acquisition of
Fox River in 2007. This
transaction gives us the
ability to offer a broader
array of premium branded
products and better serv-
ice to our customers, with
added scale in the pre-
mium fine papers market.
We also expect to create
real value as we consoli-
date and optimize our
combined operations and
product portfolio.
In summary, both organi-
cally and through acquisi-
tions, we believe we are
now a stronger company
with a greater ability
to grow and better serve
our customers.
WE SAID WE’D DELIVER
AT TR ACT IVE
RE TURNS TO YOU, OUR
SHAREHOL DERS.
If we have the right strat-
egy and execute with
excellence, our shareholders
should benefit. In 2006,
investors recognized the
transformation that
occurred in Neenah Paper
and our stock price
increased 26 percent, well
ahead of peer paper
stocks and broad market
indices. We continue
to pay a steady dividend
and work to ensure
our actions remain closely
aligned with shareholder
interests. In fact, in
2007, we changed our
performance-based
compensation plan to
include economic value
created and total
shareholder return as
key measures.
2 0 0 6 RE S ULT S
Industry conditions
remained challenging in
2006, as input prices for
raw materials and energy
were again higher versus
the prior year. Higher
selling prices for pulp,
while a boost to results
for this segment and the
company as a whole,
19
came with a corresponding
negative impact in our
paper businesses. Pulp
profitability was also
influenced by a six percent
strengthening in the
Canadian dollar. None -
theless, each of our
business segments deliv-
ered year-on-year growth
in revenues. Operating mar-
gins, while reduced by the
rapid run-up in input costs
over the past two years,
were helped by increased
selling prices and active cost
savings programs.
Fine Paper segment
revenues increased one
percent over 2005, with
stable volumes and slightly
higher selling prices. The
business remained focused
on sales of profitable pre-
mium branded products,
which accounted for over
80 percent of volumes.
Operating income for Fine
Paper was $56 million, ver-
sus $58 million in the prior
year. The lower profits
resulted primarily from
higher costs for pulp, labor
and other raw materials,
which could only be partly
offset by higher selling
prices and cost savings
programs.
20
In Technical Products, base
business net sales increased
two percent compared to
2005, with volume growth
in key product lines and
selling price increases across
all product lines. Including
the results of Neenah
Germany, sales increased
40 percent. Operating
income in Technical
Products fell $1.3 million
from the previous year
however, due primarily to
higher costs for raw materi-
als, labor and energy, as
well as increased spending
for research and develop-
ment of new products.
Following the sale of Terrace
Bay, our Pulp results are
comprised of our Pictou
operations, gains or losses
on hedges and allocations
of corporate costs. Pulp
net sales were up three
percent versus 2005, with
a 10 percent increase in
selling prices for softwood
and two percent higher
volumes. Partly offsetting
were losses on pulp
hedges in 2006 of more
than $11 million. All of our
pulp hedges expired as of
December 2006. Operating
results from pulp, exclud-
ing gains on the timber-
lands sale, were in line with
the 2005 operating loss
of $9 million. While results
in 2006 benefited from
higher selling prices and
lower costs at Pictou; these
were offset by a stronger
Canadian dollar and
increased hedging losses.
Results for Terrace Bay
have been classified as dis-
continued operations and
excluded from Pulp seg-
ment results for all periods
presented. In 2006, net
losses for Terrace Bay were
$33 million, compared
with a loss of $52 million in
2005. Results included the
loss on transfer and non-
cash charges for pension
curtailment and settlement
in 2006 and for asset
impairment in 2005.
Overall, Neenah Paper is in
sound shape financially. In
fact, following the sale of
Terrace Bay, our credit met-
rics are better than ever.
Cash generated from oper-
ations was over $60 million
in 2006 and year-end debt
of $284 million was well
within our targeted capital
structure range. Return on
capital, a key metric for
how we measure our per-
formance, more than dou-
bled with our new business
mix. Our businesses are
poised to perform. And
with Neenah Germany and
Fox River, we have addi-
tional opportunities to
drive profits and growth.
TECHNICAL PROD UC TS GLOBAL
N E T SAL E S
WALL
COVERING
GRAPHICS &
IDENTIFICATION
TAPE
COMPONENT
MATERIALS
FILTRATION
Materials, Graphics and
Identification, and Wall
Covering. The combined
businesses are acting as
one with our customers.
We strengthened our
management depth and
R&D capabilities and are
now pursuing ways to
leverage our combined
technologies and expanded
global presence to grow
the business profitably.
As part of our business
plan for Neenah Germany,
we are investing to expand
capacity in both filtration
media and nonwoven wall
covering – both profitable
growth businesses.
As for other activities, we
successfully started up the
first phase of Oracle, cover-
ing financial systems, in
January 2006. In 2007, we
began utilizing the full scope
of the system, including
order processing, operat-
ing and cost management
at all our U.S. locations.
This will support our ability
to adopt consistent best
practices and allow our
teams to react even faster
with better information.
OUR T R ANSFORMATION
CON T INUES .
Our team developed a
sound strategy in 2005,
the Board of Directors
approved it, and our peo-
ple began to make it hap-
pen. We’re proud of our
progress so far, but we are
not done.
Our people remain ener-
gized by this continuing
transformation, are excited
by the future and embrace
the tasks ahead. A lot of
hard work got us here, and
more will be needed to get
us where we want to go.
Our strategy remains
largely unchanged.
Continue to transform into
a leading premium fine
paper and technical prod-
ucts company. Use our
strengths in quality, service
and innovation to drive
growth in core businesses.
Work closely with our
customers on joint devel-
opment activities. Support
our brands. And provide
attractive returns to our
shareholders.
In Fine Paper, we continu-
ally invest in our brands
and launch new lines.
Neenah Green gives us a
strong platform in the mar-
ketplace. We are also try-
ing lots of new things –
exploring retail, growing
niches like packaging and
wine labels, and exploring
alternative channels to
customers. Our goal
remains to grow the seg-
ment. We have a very
strong base business. And
the recent acquisition of
Fox River, will allow us to
serve our customers better
and more profitably.
In Technical Products, we
acquired Neenah Germany
and reorganized into five
global business units –
Filtration, Tape, Component
21
In the midst of a strategic
transformation, Neenah is
growing its market leader-
ship in the premium paper
and technical product
markets. We have attrac-
tive margins and returns on
a modestly growing base,
with strong cash flows and
a sound capital structure.
We plan to maintain our
track record of executing
to deliver value.
2006 was a busy year – a
transformative year. Thanks
to our employees for mak-
ing it happen, our Board for
their support and guidance,
and our shareholders for
your continued investment.
Sean T. Erwin
Chairman, President and
Chief Executive Officer
In Pulp, our operations
remain focused on produc-
ing the best quality at
lowest cost. Our Pictou
team is making great strides
in implementing changes
to improve the mill’s
competitive position and
to offset higher fiber
costs following the sale of
500,000 acres of timber-
land. The team already has
identified a number of
initiatives to drive down
costs via improved produc-
tivity and throughput, labor
efficiencies and changes
to existing fiber sourcing
and the supply chain.
We are implementing many
of these in 2007.
As Neenah transforms into
the company we envision,
I continue to believe it all
starts with the dramatic
improvements our people
have made in safety. Our
reportable incident rate
has dropped to less than
1.5 – very low in our indus-
try, but a number we still
seek to improve upon. The
pride that this has gener-
ated carries over into all of
the other aspects of how
we operate. If we are not
totally committed to send-
ing home all employees as
healthy and safe as when
they arrive, we shouldn’t
expect them to respond to
other needs and initiatives
we have as a business.
FULL YEAR
INCIDENT RATE
04
05
06
EARNING AND KEEPING
YOUR TRUS T.
We understand the impor-
tance of generating prof-
itable growth and
employing our capital
wisely, and that is what you,
our shareholders, expect
of us. Our job is to figure
out how to make it happen
and execute it well. That is
what we are paid to do.
Customers also expect a
lot from us, and that’s how
we like it. Our ability to
deliver sets us apart. The
Neenah experience is built
around the power of
premium performance and
excellent customer care,
this year and every year.
22
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the world of neenah
Neenah Paper manufactures an extensive array of
essential products for everyday use and extraordinary
occasions – from advanced auto filters and backing
papers to high quality pulp to the greatest selection
of premium uncoated papers on the market.
01 Neenah Germany –
Automotive Fuel Filter
02 Neenah Germany –
PRETEX® Sports Tag
03 Neenah Germany –
Wet-Abrasive Sheet
04 Neenah Technical
Products –
KIMDURA® Tree Tag
05 Neenah Fine Paper –
Neenah Bound Direct
Mail Promotion
06 Neenah Fine Paper –
Neenah Green Guide
Promotion
07 Neenah Technical
Products – Tape
and Premask
08 Neenah Fine Paper –
ENVIRONMENT®
Papers Sample Book
09 Neenah Technical
Products – Label &
Tag Brochure
10 Neenah Germany –
Base Papers for
Coated Abrasives
11 Neenah Fine Paper –
EAMES™ Paper
Collection Sample Book
12 Neenah Germany –
VARITESS® Nonwoven
Wallpaper
13 Neenah Germany –
Automotive Fuel Filter
14 Neenah Fine Paper –
CLASSIC COLUMNS®
Papers Sample Book
22 Neenah Fine Paper –
CLASSIC CREST®
Papers Letterhead
Promotion
23 Neenah Fine Paper –
Neenah Green
Merchant Manual
24 Neenah Germany –
Vacuum Cleaner
Filter Media
25 Pulp – Pulp Sheets
15 Neenah Germany –
Fashion Catalog
printed on NEOBOND®
Print Media
26 Neenah Fine Paper –
EAMES™ Paper
Collection Promotion
27 Neenah Germany –
16 Neenah Technical
Automotive Air Filter
30 Neenah Technical
Products – Latex
Polymer Impregnated
Papers for Wood
Veneer Backing
31 Neenah Technical
Products – KIMDURA®
Multi-Task Synthetic
Paper Label
32 Neenah Fine Paper –
Premium Writing, Text,
Cover and Envelope
Chip Chart
33 Neenah Fine Paper –
CLASSIC COTTON®
and CLASSIC CREST®
Papers Sample Book
Products – Tag Sample
28 Neenah Technical
34 Neenah Germany –
17 Neenah Fine Paper –
Annual Report Kit
Products – PRETEX®
Paper Map
18 Neenah Fine Paper –
Multi-grade
Letterhead Kit
29 Neenah Fine Paper –
CLASSIC CREST®
Papers Sample Book
19 Pulp – Tissue Product
20 Neenah Technical
Products – Tape
21 Neenah Technical
Products –
PREVAIL® Papers
Promotional Binder
VARITESS® Nonwoven
Wall Coverings
Sample Book
35 Neenah Germany –
Wall Covering Roll
36 Neenah Technical
Products – Base Stock
Product Label
37 Neenah Fine Paper –
CLASSIC COLUMNS®
Papers Promotion
38 Neenah Technical
Products – Heat
Transfer Product
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 27
28
( U N ) C O N V E N T I O N A L W I S D O M
technical products
In this diverse, global, business-to-business segment,
we work closely with our customers to develop and
manufacture a variety of highly specialized products.
These products begin as papers and substrates,
which can then be saturated, coated or otherwise
modified for a variety of end-use markets.
TECHNICAL PROD UC TS U.S.
NE T SALES
05 06
05 06
05 06
tape
graphics &
identification
component
materials
Technology, best practices
and customer intimacy
create a preference for
products of Neenah Paper
in the marketplace.
Increased investment in
R&D is helping us to drive
innovation and new
product development.
Specialized know-how and
machine capabilities
allow production of a vari-
ety of defensible, niche
products. Organic growth
comes from working
closely with customers in
product designs and
upgrades to meet the
needs of their end-users.
“We felt that Neenah Paper
was the best possible
strategic partner. The repu-
tation of Neenah Paper in
the marketplace, the
opportunity to join our
technologies and the solid
financial situation of the
company made it easy to
put concerns to rest. The
quick approvals of key
expansion projects also set
clear signals about growth
expectations for Neenah
Germany and willingness to
invest in our businesses.
Our teams have been work-
ing in close cooperation
with our colleagues in
Neenah to realize antici-
pated benefits and syner-
gies, and we will work
hard to meet the expecta-
tions of the company and
its shareholders.”
Dr. Walter Haegler
Managing Director,
Neenah Germany
Our markets include
abrasives, tapes, labels,
medical packaging,
decorative components,
furniture backing, heat
transfer and, now with the
addition of Neenah
Germany, advanced trans-
portation filtration media
and nonwoven wall cover-
ing. We have organized
into five global product
groups: Filtration, Tape,
Component Materials,
Graphics and Identification,
and Wall Covering.
The acquisition of Neenah
Germany enhances the
customer-focused strategy
of this business, adding
important positions in over-
lapping specialized
abrasives and tapes while
expanding our product
portfolio, customer
base, technical expertise
and R&D support.
Following the acquisition,
important capital invest-
ments were approved to
expand capacity and
accelerate growth in higher-
value filtration media and
wall covering products.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 29
30
( U N ) C O N V E N T I O N A L W I S D O M
fine paper
Neenah sells branded, premium fine papers.
Our brands enjoy high recognition and preference,
due in part to relationships with the design
community and our continual reinvestment in
our brands.
Selective distribution
sustains loyalty. Our fine
papers are produced on
some of the newest
machines in the industry,
purpose-built to ensure the
best and most consistent
formation and to enable a
wide variety of colors and
textures – because great
colors and texture make for
high-impact communication.
The Neenah Green platform
for premium fine papers is
bringing to market the story
of our deep commitment
to eco-friendly processes
and products. Neenah also
has launched a new retail
line of stationery, water-
marked with the breast can-
cer aware ness ribbon, in an
exclusive fund-raising
partnership with the Susan
G. Komen Breast Cancer
Foundation.
Strong brands, outstanding
paper quality, promotions
and an uncompromising
focus on customer service
and support help Neenah
Paper maintain a consis-
tently strong position. The
recent Fox River purchase
strengthens these advan-
tages and allows us to
provide a broader array of
premium branded products.
Our strategy in this
segment is to continue to
launch new products
and brand extensions, open
new distribution channels
and leverage our cost-
effective asset base to
drive growth.
DELIGHT LOVE S
COMPANY.
FINE PAPER
NE T SALES
Clichés are true. Conven -
tional wisdom works. But
they rarely persuade or
move people to action. To
get more than a nod, to
raise an eyebrow, to engage
the imagination and alter
a viewpoint and catalyze
belief…you have to rise
above the conventional, go
beyond the ordinary and
truly delight. That’s why we
encourage designers and
their clients to: Always
mix business with pleasure.
With Neenah Paper.
04
05
06
Non-branded
Branded
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 31
32
( U N ) C O N V E N T I O N A L W I S D O M
pulp
Neenah’s Pulp segment produces and sells
primarily northern bleached softwood
kraft pulp for use in manufacture of tissue and
printing/writing papers.
Neenah’s pulp operations
are located in Nova Scotia,
Canada. The operation
includes our Pictou kraft
pulp mill and about 500,000
acres of associated forest-
lands. The location allows
attractive shipping into
northern Europe and east-
ern North America. The
majority of our pulp pro-
duction is sold to Kimberly-
Clark Corporation tissue
mills under a market-based
pulp supply agreement.
To enhance the competi-
tiveness of our pulp
operations, the Pictou team
has launched a series of
cost-cutting initiatives –
improving productivity and
throughput, creating labor
efficiencies and making
changes to existing fiber
sourcing and supply chain
to drive profitability.
Like all of Neenah Paper,
the Pulp business is very
responsive to customer
needs. Significant improve-
ments have been made in
bale quality – creating a
more stable and uniform
bale for improved shipping
and customer handling.
In addition, the mill now
offers customers wireless
bales which provide an
easier and safer way for
customers to process our
product.
The Pictou pulp mill has a
strong record of environ-
mental improvement driven
largely through employee
involvement. The mill has
taken a leadership role to
ensure environmental risks
are managed and impacts
are reduced through con-
tinuous improvement.
SUSTAINABLE
SILVICULTURE AS A WAY
OF BUSINESS
P I C TOU MIL L
CAN ADI AN DOL L AR COS T/
ME T RI C TON
03
04
05
06
Neenah has a longstanding
commitment to silviculture
and responsible land
management. Our Pictou
woodlands facilities include
a tree nursery that pro-
duces over nine million
seedlings annually to refor-
est lands harvested by the
company and for sale to
other forest managers.
Other silviculture practices
include pre-commercial
thinning, commercial
thinning and measures to
enhance tree growth.
The Neenah woodlands
operations are certified
under the widely recog-
nized Sustainable Forestry
Initiative (SFI) and
under the ISO 14000
Environmental Management
System (EMS) with focus on
the protection of soil, water
and forest biodiversity.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 33
34
( U N ) C O N V E N T I O N A L W I S D O M
environment
We see ourselves as stewards…of the land, yes,
but also of our relationships with all our
stakeholders – customers, end-users, investors and
neighbors alike. The people of Neenah tend
a legacy we hope and intend will long outlive us.
derived from waste wood,
a renewable, carbon neutral
energy source, and
our 500,000 acres of forest
lands in Nova Scotia have
been independently certi-
fied as sustainably managed.
All of us at Neenah Paper
are trying to make environ-
mentally sound decisions
for our business and
the communities in which
we live. And for our cus-
tomers, we are working
to make the environmen-
tally wise choice an
easy one: Neenah Green.
At Neenah Paper,
minimizing our environmen-
tal footprint is not just
the right thing to do, it is
part of our business plan.
Our business is diverse.
We manufacture the high-
est quality products at
plants located in the United
States, Germany and
Canada. In all of our opera-
tions, environmental stew-
ardship is a priority. Our
stewardship goals reflect a
commitment to improve
our environmental perform-
ance well beyond mere
compliance. To help
achieve this, all facilities
have initiated formal
Environmental Management
Systems. These systems
incorporate corporate stan-
dards as well as unique
regional considerations
and help us with continual
improvement in
managing our environmen-
tal responsibilities.
Our efforts to conduct eco-
friendly business range
from securing sustainable
energy sources to preserv-
ing wilderness to investing
in the development of envi-
ronmentally preferable
products. We are now the
largest purchaser of renew-
able energy in the state of
Wisconsin and have
achieved coveted recogni-
tion as a Leader ship Club
Member in the U.S. EPA
Green Power Partnership,
utilizing Green-e certified
renewable energy. At our
German operations, all
organic waste is used as
biomass to produce energy
and all of our manufactur-
ing operations are
ISO 14001 certified. In
Munising, we have reformu-
lated certain technical
products grades to contain
30 percent post-consumer
recycled fiber content. At
our Pictou mill in Nova
Scotia, Canada, 85 percent
of the energy needs are
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 35
good business
fighting breast cancer In an exclusive partnership
with the Susan G. Komen Breast Cancer Foundation,
Neenah has launched a new retail line of stationery.
The soft pink sheets are watermarked with the
breast cancer awareness ribbon. A portion of each sale
goes to the Foundation to support the fight
against breast cancer. For more than 20 years, the
Susan G. Komen Breast Cancer Foundation has been
a global leader in this cause through its support
of innovative research and community-based outreach
programs, and Neenah is proud to play a part.
36
( U N ) C O N V E N T I O N A L W I S D O M
good ideas
abrasives champion Expanding on the expertise of
Neenah Paper in the coated abrasives market, Technical
Products has developed and refined the technology to
produce “ever-flat” abrasive papers for this demanding
market. Such papers are the dream
of most coated abrasives manufactur-
ers and users of the final product.
Technology developed and refined by
Dr. Ganesh Deka achieves that
goal in a manner that allows it to be
applied to all types of products –
without the complications typically
caused by high humidity environ-
Ganesh Deka, Ph.D.
R&D Technical Leader II
ments. Ganesh championed this effort for Neenah Paper
by tirelessly utilizing his experience with a variety of
raw materials and enlisting the collaboration of material
suppliers and technical specialists throughout Neenah
Paper. Through persistence and unwavering belief,
he devised a way of incorporating innovative chemistry
with the extraordinary Neenah Fine Paper technology to
produce these unique “ever-flat” abrasive backers.
2006 was the year for fine-tuning the process and 2007
will see the introduction of several new Neenah Paper
branded products, broadening and extending our current
offerings. We expect big things.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N UA L R E P O R T 37
leadership
board of directors
executive team
Sean T. Erwin
Chairman of the Board,
President and
Chief Executive Officer,
Neenah Paper, Inc.
Timothy S. Lucas, CPA
Independent Consultant,
Lucas Financial Reporting
and Former Director of
Research, FASB
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.
Senior Strategic Advisor,
Female Health Company
and Former President and
Chief Operating Officer,
Female Health Company
John F. McGovern
Partner, Aurora Capital and
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.
President and
Chief Executive Officer,
FiberVisions Corporation
Bonnie C. Lind
Senior Vice President,
Chief Financial Officer
and Treasurer
Steven S. Heinrichs
Senior Vice President,
General Counsel and
Secretary
William K. O’Connor
President,
Fine Paper
Dennis P. Runsten
President,
Technical Products – U.S.
Walter M. Haegler, Ph.D.
Managing Director,
Neenah Germany
James R. Piedmonte
Senior Vice President,
Operations
38
( U N ) C O N V E N T I O N A L W I S D O M
financial index
Business Summary 40 Selec ted Financial Data 44
Management’s Discussion and Analysis of
Financial Condition and Results of Operations 46
Quantitative and Qualitative Disclosures About
Market Risk 60 Report of Management on Internal
Control 63 Reports of Independent Registered Public
Accounting Firm 64 Consolidated and Combined
Statements of Operations 66 Consolidated Balance
Sheets 67 Consolidated and Combined Statements
of Changes in Stockholders’ and Invested Equit y 68
Consolidated and Combined Statements of
Cash Flows 69 Notes to Consolidated and Combined
Financial Statements 70 Produc tion Notes 109
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 39
business summary
In this report, unless the context requires otherwise, refer-
ences to “we,” “us,” “our,” “Neenah” or the “Company”
are intended to mean Neenah Paper, Inc. and its consoli-
dated subsidiaries.
OV E R V I E W
Neenah, a Delaware corporation, was incorporated in
April 2004 in contemplation of the spin-off by Kimberly-
Clark Corporation (“Kimberly-Clark”) of its fine paper and
technical products businesses in the United States and its
Canadian pulp business (collectively, the “Pulp and Paper
Business”). We had no material assets or activities until
Kimberly-Clark’s transfer to us of the Pulp and Paper busi-
ness on November 30, 2004. On that date, Kimberly-Clark
completed the distribution of all of the shares of our com-
mon stock to the stockholders of Kimberly-Clark (the “Spin-
Off”). Kimberly-Clark stockholders received a dividend
of one share of our common stock for every 33 shares of
Kimberly-Clark common stock held. Based on a private
letter ruling Kimberly-Clark received from the Internal
Revenue Service, receipt of our shares in the Spin-Off was
tax-free for United States federal income tax purposes.
Following the Spin-Off, we are an independent public com-
pany and Kimberly-Clark has no ownership interest in us.
We are a leading international producer of premium
fine papers and technical products. We also produce bleached
kraft market pulp in Canada, where we own approximately
500,000 acres of timberlands and have non-exclusive rights
to harvest wood on approximately 200,000 acres of other
timberlands. We have three primary operations: our fine
paper business, our technical products business and our
pulp business.
Our fine paper business is a leading producer of
premium writing, text, cover and specialty papers used in
corporate annual reports, corporate identity packages, invi-
tations, personal stationery and high-end packaging. Our
products include some of the most recognized 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, convert-
ers and specialty businesses. Our fine paper manufacturing
facilities are located in Neenah and Whiting, Wisconsin.
Our technical products business is a leading pro-
ducer of transportation and other filter media and durable,
saturated and coated substrates for a variety of end uses.
We sell our technical products globally into 17 product cate-
gories, and we focus on categories where we believe we are
a market leader or have a competitive advantage, which
include, among others, transportation and other filter media,
nonwoven wall coverings, specialty tape, label, abrasive,
medical packaging and heat transfer technical products mar-
kets. We are also a global supplier of materials used to create
customer-specific components for furniture, book covers and
original equipment manufacturers’ products. Our customers
40
( U N ) C O N V E N T I O N A L W I S D O M
are located in more than 35 countries. Our technical products
manufacturing facilities are located in Munising, Michigan
and near Munich and Frankfurt, Germany.
Our pulp business primarily produces northern
bleached softwood kraft pulp used by paper mills to manu-
facture tissue and printing and writing papers. Our pulp
business consists of a mill located in Pictou, Nova Scotia
together with related timberlands. The Pictou mill is com-
prised of a single-line pulp facility, which produces primarily
softwood pulp, as well as timberlands encompassing
approximately 500,000 acres of owned and 200,000 acres
of licensed or managed land in Nova Scotia. Timberland
operations on land owned and licensed by the Pictou mill
are provided by third-party contractors. In 2006, the Pictou
mill produced approximately 260,000 metric tons of
bleached kraft pulp.
RE C E N T DE V ELOP ME N T S
In June 2006, we completed the sale of approximately
500,000 acres of woodlands in Nova Scotia for gross pro-
ceeds of $139.1 million. The agreement includes a fiber
supply agreement to secure a source of fiber for the
Company’s Pictou pulp mill. The transaction resulted in a
net pretax gain of $131.6 million. See Note 3 of Notes to
Consolidated and Combined Financial Statements, “Sale
of Woodlands.”
In August 2006, we completed the transfer of our
Terrace Bay mill and related woodlands operations (exclud-
ing certain working capital amounts and post-employment
obligations) to certain affiliates of Buchanan Forest Products
Ltd. (“Buchanan”). Pursuant to the terms of the agreement,
Buchanan assumed responsibility for substantially all liabili-
ties related to the future operation of the mill in exchange
for a payment of $18.6 million. See Note 4 of Notes to
Consolidated and Combined Financial Statements,
“Discontinued Operations.”
In October 2006, we completed the purchase of
the outstanding interests of FiberMark Services GmbH &
Co. KG and the outstanding interests of FiberMark
Beteiligungs GmbH (collectively “Neenah Germany”).
Neenah Germany was acquired from FiberMark, Inc. and
FiberMark International Holdings LLC for $218 million in
cash. The assets acquired as a result of the acquisition of
Neenah Germany consist of three mills located near Munich
and Frankfurt Germany, that produce a wide range of prod-
ucts, including transportation and other filter media, non-
woven wall coverings, masking and other tapes, abrasive
backings, and specialized printing and coating substrates.
Neenah Germany is being operated as part of our Technical
Products business. See Note 5 of Notes to Consolidated
and Combined Financial Statements, “Acquisitions.”
In March 2007, we acquired the Fox Valley
Corporation, which owns Fox River Paper Company, LLC
(“Fox River”). We paid $52 million in cash for the acquisition
B U S I N E S S S U M M A R Y
and financed it through a combination of cash and debt
drawn against our existing revolving credit facility. The
assets acquired as a result of the acquisition of Fox River
consist of four U.S. paper mills and various related assets,
producing premium fine papers with well-known brands
including STARWHITE®, SUNDANCE®, ESSE® and OXFORD®.
The Fox River assets will be operated as part of our fine
paper business.
In conjunction with the acquisition of Fox River, we
announced plans to permanently close the Housatonic mill,
located near Great Barrington, Massachusetts. The Housatonic
mill, the smallest of the fine paper plants acquired in the
Fox River acquisition, has annual production capacity of
approximately 15,000 tons per year and is expected to
cease manufacturing operations by the end of the second
quarter. The Housatonic mill was not profitable due to its
small size, cost structure and the pricing of many of the
grades made there. Closing the mill will allow us to eliminate
costs and improve margins while still serving the needs of
key customers. We expect to incur one-time cash costs
of approximately $3 million, which includes approximately
$2 million for employee severance pay and approximately
$1 million of other charges related to the closure. See
Note 20 of Notes to Consolidated and Combined Financial
Statements, “Subsequent Events.”
PROD U C T S
F IN E PA P E R BUS IN E S S . The fine paper business manu -
factures and sells branded world-class premium writing,
text, cover and specialty papers used in corporate annual
reports, corporate identity packages, invitations, personal
stationery and high-end packaging. Net sales of the fine
paper business were approximately $224 million in 2006,
$222 million in 2005 and $221 million in 2004.
Premium writing papers are used for business and
personal stationery, corporate letterhead, corporate iden-
tity packages, private watermarked papers, envelopes and
similar end-use applications. Market leading writing papers
are sold by the fine paper business under the CLASSIC®,
ENVIRONMENT®, NEENAH®, ATLAS® and OLD COUNCIL
TREE® trademarks, which are denoted by a brand water-
mark in each sheet of writing paper. During 2006, we suc-
cessfully introduced the NEENAH GREEN® environmental
platform. Key components of the platform include
(1) becoming the largest purchaser of green energy in
the State of Wisconsin, (2) using papermaking waste
by-products at a third party reprocessing site to create
steam that is reused in papermaking, reducing carbon
dioxide emissions by 80 percent at our Neenah mill and
(3) introducing the first Forest Stewardship Council (FSC)
watermarked paper and introducing it across all our CLASSIC®
brands. We are the first premium text and cover manu -
facturer to be certified as “Processed Chorine Free” in our
100 percent post-consumer products. The fine paper busi-
ness also sells private watermarked and other custom man-
ufactured writing papers.
Text and cover papers are used in applications
such as corporate annual reports, corporate identity pack-
ages, insert advertising, direct mail, facility brochures, busi-
ness cards, hang tags, scrapbooks, and a variety of other
uses where colors, textured finishes or heavier weight
papers are desired. Our brands in this category include
CLASSIC®, CLASSIC CREST® and ENVIRONMENT®. We also
sell a variety of custom paper colors, paper finishes, and
duplex/laminated papers.
The fine paper business produces and sells other
specialty papers, including translucent papers, art papers,
papers for optical scanning and other specialized applica-
tions, under the UV/ULTRA® II trademark and other brands.
T E C H NI C AL PR OD U C T S BUS IN E S S . The technical prod-
ucts business is a leading producer of durable, saturated
and coated substrates for a variety of end uses, including
tapes, premask, abrasives, filtration media, labels, medical
packaging, decorative components, wall covering, and
image transfer papers. Net sales of our technical products
business were approximately $183 million in 2006, $131
million in 2005 and $132 million in 2004. KIMDURA®,
MUNISING LP®, PREVAIL™, NEENAH®, Gessner® and
varitess® are brands of our technical products business.
Products of the technical products business are typi-
cally sold to other manufacturers as a component of a finished
product. The technical products business sells its products
into major market segments, including filtration, tape, pre-
mask, abrasives, wall covering, label, medical packaging and
ten specialty segments. Several key market segments served,
including tape and abrasives, are global in scope.
The technical products business produces tape
base sheets from latex saturated crepe and flat papers and
sells them to manufacturers to produce finished pressure
sensitive products for sale in automotive, automotive after-
market, transportation, manufacturing and building con-
struction, and industrial general purpose applications.
Premask paper is used as a protective over wrap for products
during the manufacturing process and for applying signs,
labeling and other finished products.
The technical products business produces filtra-
tion media for automotive induction air, fuel, oil, and cabin
air applications and vacuum cleaner bags and filters. Trans -
portation filtration media are sold to suppliers of auto -
motive companies and of the automotive aftermarket.
The technical products business is a leading pro-
ducer of latex saturated and coated abrasive backing papers
for use by sandpaper manufacturers. The finished lightweight
sandpaper is sold in the automotive, automotive after -
market, construction, metal and woodworking industries for
both waterproof and dry sanding applications.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 41
B U S I N E S S S U M M A R Y
Label and tag products are produced from satu-
rated (latex impregnated) base label stock and purchased
synthetic (bi-axially stretched polypropylene film) base label
stock. Top coatings are applied to the base label stock to
allow for high-quality variable and digital printing. The syn-
thetic label stock of the technical products business is recog-
nized as a high-quality, UV (ultra-violet) stable product used
for outdoor applications. The business sells its label and tag
stock to pressure sensitive coaters, who in turn sell the
coated label and tag stock to the label printing community.
Wall covering substrates are made from saturated
and coated wet-laid nonwovens and marketed to convert-
ers serving commercial and do-it-yourself markets.
The technical products business’s medical packag-
ing paper is a polymer impregnated base sheet that pro-
vides a breathable sterilization barrier. When sealed
together with film, this paper becomes a medical packaging
material that allows sterilization from steam, ethylene
oxide, or gamma radiation and at the same time provides
unique barrier properties.
Decorative components papers, designed for
durability and flexibility, are made from light- and medium-
weight latex saturated papers. The base paper can be rein-
forced with synthetic fiber for additional tear strength.
Coatings can also be applied for printability. A variety of
different base weights, colors and textures are available for
sale to coater converters, distributors, publishers and print-
ers for use in book covers, stationery and fancy packaging.
M AR K E T S AN D C US TOME R S
F IN E PA P E R BUS IN E S S . Premium papers are used prima-
rily for stationery and corporate identification applications
and represent approximately 3% of the uncoated free sheet
market. Growth in the uncoated free sheet market has been
restrained due to the increasing use of electronic media for
communication. The stationery segment of this market is
divided into cotton and sulfite grades. The text and cover
paper segment of the market, used in corporate identifica-
tion applications, is split between smooth papers and tex-
tured papers. Text papers have traditionally been utilized
for special, high-end collateral material such as corporate
brochures, annual reports and special edition books. Cover
papers are used as covers primarily for business cards,
pocket folders, brochures and report covers including cor-
porate annual reports.
The fine paper business sells its products through
our sales and marketing organizations primarily in three chan-
nels: authorized paper distributors, converters and direct
sales to specialty businesses. Distributor sales account for
more than 80% of our customer base in the fine paper busi-
ness, including distributor-owned paper stores. There is also
a small but growing sales channel in office supply catalogs
and business copy center stores, primarily to distributors in
North America. Less than 5% of the sales of our fine paper
business in 2006 were exported to international distributors
in Europe, South Africa, Asia and Australia.
Image transfer papers are used to transfer an
Sales to the fine paper business’s two largest cus-
image from paper to T-shirts, hats, coffee mugs, and other
surfaces. The technical products business produces and
applies a proprietary imaging coating to its image transfer
papers for use in digital printing applications. Image trans-
fer papers are primarily sold through large retail outlets and
through master distributors who then offer small quantity
options and services to the large number of customers in
the supply channel.
The technical products business also produces
and sells several other specialty papers including furniture
backer, printing substrates, and release paper.
P UL P BUS IN E S S . Our Pictou pulp mill produces virgin
northern bleached softwood and hardwood kraft pulp and
various blends of each for sale to paper mill customers
located primarily in North America and Europe. In 2006,
approximately 80% of our Pictou mills’ output was consumed
by Kimberly-Clark. The Pictou pulp mill’s major products are
Pictou HARMONY® Softwood (northern bleached softwood
kraft pulp) and Pictou Hardwood (northern bleached hard-
wood kraft pulp).
Net sales of our pulp business were approximately
$189 million in 2006, $184 million in 2005 and $177 million
in 2004.
tomers (both of which are distributors) represented approx-
imately 30% of its total sales in 2006. We have limited our
distribution agreements to improve our ability to control
the marketing of our products. Although a complete loss of
either of these customers would cause a temporary decline
in the business’s sales volume, the decline could be partially
offset by expanding sales to existing distributors, and fur-
ther offset over a several month period with the addition of
new distributors.
T E C H NI C AL PR OD U C T S BUS IN E S S . The technical prod-
ucts business relies on a direct sales team and marketing
organization to sell its products in 17 separate market
segments in the U.S. and internationally. Such segments,
broadly defined as polymer impregnated and synthetic
paper, include papers used as components in the following
applications: transportation and other filter media, nonwo-
ven wall coverings, saturated label, clean room papers,
release papers, abrasives, masking tape, decal premask,
heat transfer, medical packaging, decorative components,
durable printing papers, furniture components, washable
tag, and industrial components. Our technical products
business is recognized as a leading specialty paper manu -
facturer in the following market segments: furniture
42
( U N ) C O N V E N T I O N A L W I S D O M
B U S I N E S S S U M M A R Y
compnents, washable tag, decal premask, saturated label,
clean room, saturated release paper, reinforced medical
packaging and saturated abrasive backings.
Several traditional products (abrasives, tapes,
labels) are used in markets that are directly affected by
economic business cycles. Other market segments such as
heat transfer papers used in small/home office and con-
sumer applications are relatively stable. Price competition is
common in most of the segments served by the technical
products business and has increased due to a trend of
using film and other lower cost substrates instead of paper
in some applications.
The technical products business relies on a team
of direct sales representatives and customer service repre-
sentatives to market and sell approximately 95% of its sales
volume directly to customers and converters. Less than 5%
of the sales of the technical products business are sold
through industrial distributors.
The technical products business has over 500 cus-
tomers worldwide. The distribution of sales in 2006 was
approximately 55% in North America, 30% in Europe and
15% in Latin America and Asia. The distribution of sales
during the fourth quarter of 2006, which includes the
results of Neenah Germany for the period subsequent to
its acquisition in October 2006, was approximately 30% in
North America, 50% in Europe and 15% in Latin America
and Asia and 5% in other countries. Customers typically
convert and transform base papers and film into finished
rolls and sheets by adding adhesives, coatings, and finishes.
Such transformed product is then sold to end-users.
P UL P BUS IN E S S . Northern bleached softwood kraft pulp
is used by paper mills to manufacture tissue and printing
and writing paper. In 2005, worldwide demand for northern
bleached softwood kraft market pulp (which excludes pulp
produced for internal consumption by integrated pulp man-
ufacturers) was estimated to be 13.0 million metric tons,
of which about 6.6 million metric tons were produced in
Canada. Western Europe consumed an estimated 5.7 mil-
lion metric tons of northern bleached softwood kraft pulp in
2005, followed by the United States at 2.9 million metric
tons and China at 1.6 million metric tons.
In 2006, Pictou produced about 248,000 metric
tons of northern bleached softwood kraft pulp. In 2006,
approximately 80% of Pictou’s northern bleached softwood
kraft pulp production was sold to Kimberly-Clark. Our
Pictou mill has historically sold or transferred more than
90% of its output of northern bleached softwood kraft pulp
to Kimberly-Clark.
In 2005, worldwide demand for northern bleached
hardwood market pulp was estimated to be 18.1 million
metric tons of which an estimated 1.7 million metric tons
were northern bleached hardwood kraft pulp produced in
Canada. In 2005, the United States consumed approximately
0.6 million metric tons of Canadian northern bleached hard-
wood kraft pulp, followed by Asia at 0.54 and Europe at
0.25 million metric tons.
In 2006, our Pictou mill produced about 12,000 met-
ric tons of northern bleached hardwood kraft pulp. In 2006,
our Pictou mill sold more than 80% of its northern bleached
hardwood kraft pulp production to Kimberly-Clark. The bal-
ance of the pulp mill’s output of northern bleached hardwood
kraft pulp was sold to our fine paper business and paper mills
in the northeastern and midwestern United States.
Northern bleached softwood kraft pulp and north-
ern bleached hardwood kraft pulp are commodity products
whose prices are subject to substantial increase or decrease
depending on production capacity and customer demand.
Northern bleached hardwood kraft pulp is subject to
increasing competition, primarily from lower-priced South
American eucalyptus pulp and excess capacity of northern
bleached hardwood kraft pulp.
Historically, our Pictou mill has transferred its pulp
directly to Kimberly-Clark and used brokers for sales to
external customers. We utilize an internal sales team to
generate sales to external customers.
For the years ended December 31, 2006, 2005
and 2004, we had pulp sales to Kimberly-Clark of $163 mil-
lion, $135 million and $137 million, respectively. Such sales
represented approximately 86%, 73% and 77% of sales for
our pulp business in 2006, 2005 and 2004, respectively. No
single customer, other than Kimberly-Clark, accounted for
more than 10% of our net sales in those years.
GE O GR A P HI C INF OR M AT I ON
The following table presents further information about our
businesses by geographic area (dollars in millions):
Net sales
United States
Canada
Europe
Intergeographic Items
Consolidated
Total Assets
United States
Canada
Europe
Total
Year Ended December 31,
2006
2005
2004
$357.3
189.3
49.7
(2.0)
$594.3
$352.9
183.8
–
(2.0)
$534.7
$354.0
177.0
–
(2.2)
$528.8
Year Ended December 31,
2006
2005
2004
$223.5
180.8
340.4
$744.7
$231.9
305.1
–
$537.0
$241.8
315.5
–
$557.3
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 43
selec ted
financial data
The following table sets forth our selected historical financial
and other data. You should read the following information in
conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our his-
torical consolidated and combined financial statements and
the notes to those consolidated and combined financial
statements included elsewhere in this Annual Report. The
statement of operations data for the years ended December
31, 2006, 2005 and 2004 and the balance sheet data as of
December 31, 2006 and 2005 are derived from our audited
historical consolidated and combined financial statements
included elsewhere in this Annual Report. The statement of
operations data for the years ended December 31, 2003
and 2002 and the balance sheet data as of December 31,
2004, 2003 and 2002 are derived from our audited historical
combined financial statements not included in this Annual
Report. In August 2006, we completed the transfer of our
Terrace Bay mill to Buchanan. For the year ended December 31,
2006, the results of operations of the Terrace Bay mill and
the loss on transfer are reflected as discontinued operations
in the statement of operations data. The statements of
operations data for all prior periods have been restated
to reflect the results of operations of the Terrace Bay mill as
discontinued operations. See Note 4 of the notes to our
audited historical consolidated and combined financial
statements included elsewhere in this Annual Report.
The consolidated and combined financial state-
ments reflect the consolidated operations of Neenah and
its subsidiaries as a separate, stand-alone entity subsequent
to November 30, 2004. The historical financial and other
data for periods through November 30, 2004 have been
prepared on a combined basis from Kimberly-Clark’s con-
solidated financial statements using the historical results
of operations and bases of the assets and liabilities of
Kimberly-Clark’s fine paper and technical products busi-
nesses in the United States and its Canadian pulp business
and give effect to allocations of expenses from Kimberly-
Clark. For a description of these allocations, see Note 1
of the notes to our audited historical consolidated and
combined financial statements included elsewhere in this
Annual Report. The historical financial and other data for
periods prior to November 30, 2004 are not indicative of
our future performance and do not reflect what our finan-
cial position and results of operations would have been had
we operated as a separate, independent company during
the periods presented.
Prior to the Spin-Off, all of the operations of our
pulp and paper business were included in the consolidated
income tax returns of Kimberly-Clark. Under the tax-sharing
agreement, Kimberly-Clark will indemnify us for all income
tax liabilities and retain rights to all tax refunds relating to
operations in the consolidated income tax returns for peri-
ods through the date of the Spin-Off. Accordingly, the com-
bined balance sheets for 2003 and 2002 do not include
current- or prior-period income tax receivables or payables
related to our operations, which were filed on a consolidated
basis with Kimberly-Clark. The income tax provisions were
determined as if our business were a separate taxpayer.
44
( U N ) C O N V E N T I O N A L W I S D O M
S E L E C T E D F I N A N C I A L D ATA
(Dollars in millions, except per share data)
Consolidated and Combined Statement of Operations Data(a)(b)
Net sales
Cost of products sold
Gross profit
Selling, general and administrative expenses
Gain on sale of woodlands(c)
Other (income) expense – net
Operating income
Interest expense – net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations(d)(e)
Net income (loss)
Earnings from continuing operations per basic share(f)
Earnings from continuing operations per diluted share(f)
Cash dividends per common share
Other Financial Data(g)
Net cash flow provided by (used in):
Operating activities
Investment activities
Financing activities
Capital expenditures
Ratio of earnings to fixed charges(h)
(Dollars in millions)
Consolidated and Combined Balance Sheet Data
Working capital
Total assets
Long-term debt
Total liabilities
Total stockholders’ and invested equity
Year Ended December 31,
2006
2005
2004
2003
2002
$ 594.3
502.3
92.0
56.9
(125.5)
(7.8)
168.4
16.5
151.9
56.5
95.4
(32.9)
$ 62.5
$ 6.47
$ 6.43
$ 0.40
$ 65.8
(127.7)
50.8
(25.1)
8.6x
$534.7
438.7
96.0
49.4
–
(6.8)
53.4
18.2
35.2
12.9
22.3
(52.0)
$ (29.7)
$ 1.51
$ 1.51
$ 0.40
$ 22.8
(25.8)
(3.6)
(25.7)
2.9x
$528.8
399.4
129.4
42.0
–
1.6
85.8
1.4
84.4
30.4
54.0
(80.4)
$ (26.4)
$ 3.66
$ 3.65
$ –
$ 76.0
(19.1)
(37.8)
(19.1)
50.6x
$462.7
352.2
110.5
30.0
–
4.0
76.5
–
76.5
29.2
47.3
(8.4)
$ 38.9
$ 3.22
$ 3.22
$ –
$ 73.6
(23.6)
(50.0)
(24.4)
383.5x
$473.1
341.0
132.1
30.8
–
(1.4)
102.7
–
102.7
39.5
63.2
(0.9)
$ 62.3
$ 4.30
$ 4.30
$ –
$111.8
(16.0)
(95.8)
(18.4)
343.3x
2006(b)(c)(g)
2005
2004
2003
2002
As of December 31,
$ 92.9
744.7
282.3
559.8
184.9
$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
(a) As noted elsewhere in this Annual Report, for periods prior to the Spin-
Off, our historical financial results are not indicative of our future per-
formance, and do reflect what our financial position and results of
operations would have been had we operated as a separate, independ-
ent company during the periods presented.
(b) In August 2006, we transferred the Terrace Bay mill and related wood-
lands operations (excluding certain working capital amounts and post-
employment obligations) to certain affi liates of Buchanan Forest
Products Ltd. (“Buchanan”). Pursuant to the terms of the agreement,
Buchanan assumed responsibility for substantially all liabilities related to
the future operation of the mill in exchange for a payment of $18.6 mil-
lion. For the year ended December 31, 2006, the results of operations of
the Terrace Bay mill and the loss on transfer are reflected as discontinued
operations in the consolidated and combined statements of operations.
The consolidated results of operations for all prior periods have been
restated to reflect the results of operations of the Terrace Bay mill as dis-
continued operations.
In June 2006, we completed the sale of approximately 500,000 acres of
woodlands in Nova Scotia for gross proceeds of $139.1 million. The
agreement includes a fiber supply agreement to secure a source of fiber
for our Pictou pulp mill. The trans action resulted in a net pretax gain of
$131.6 million. We immediately recognized approximately $122.6 million
of such gain and deferred approximately $9.0 million which is being rec-
ognized in income pro-rata through December 2007. During 2006, $2.9
million of such deferred gain was recognized in income.
(c)
(d) In 2005, we recorded a $53.7 million pretax 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 pretax 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 benefits related to early retirement, severance and
defined benefit 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 –
Executive Summary – Results of Discontinued Operations.”
In 2004, we recorded a $112.8 million pretax, 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 –
Executive Summary – Results of Discontinued Operations.”
(e)
(f) For 2003 and 2002, basic and diluted earnings per share were computed
using the number of shares of Neenah common stock outstanding at the
Spin-Off date.
(g) In October 2006, we completed the purchase of the outstanding inter-
ests of Neenah Germany. Neenah Germany was acquired from FiberMark,
Inc. and FiberMark International Holdings LLC for $218 million in cash.
The transaction was financed through $160 million of available cash and
$58 million of debt drawn against our revolving credit facility.
(h) For purposes of determining the ratio of earnings to fixed charges, earn-
ings consist of income before income taxes (less interest) plus fixed
charges. Fixed charges consist of interest expense, including amortiza-
tion of debt issuance costs, and the estimated interest portion of
rental expense.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 45
management’s discussion and analysis
of financial condition and results of operations
The following discussion and analysis presents the factors
that had a material effect on our results of operations dur-
ing the years ended December 31, 2006, 2005 and 2004.
Also discussed is our financial position as of the end of
those periods. You should read this discussion in conjunction
with our consolidated and combined financial statements
and the notes to those consolidated and combined financial
statements included elsewhere in this Annual Report.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-
looking statements. See “Forward-Looking Statements”
for a discussion of the uncertainties, risks and assumptions
associated with these statements.
IN T R OD U C T I ON
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations are intended to pro-
vide investors with an understanding of the historical per-
formance of our business, its financial condition and its
prospects. The results of operations of our business after
the Spin-Off are, and will continue to be, significantly differ-
ent than the results of operations of our business prior to
the Spin-Off. This difference results from, among other
things, the prices at which we sell pulp to Kimberly-Clark
after the Spin-Off, which are significantly different than the
prices reflected in transfers of pulp to other Kimberly-Clark
operations prior to the Spin-Off, interest expense of new
long-term debt and incremental selling, general and admin-
istrative expenses related primarily to reduced economies
of scale as a result of operating on a stand-alone basis. We
will discuss and provide our analysis of the following:
(cid:129) Overview of Business;
(cid:129) Business Segments;
(cid:129) Separation from Kimberly-Clark;
(cid:129) Results of Operations and Related Information;
(cid:129) Liquidity and Capital Resources; and
(cid:129) Critical Accounting Policies and Use of Estimates.
OV E R V I E W OF BUS IN E S S
We are a leading international producer of pre-
mium fine papers and technical products. We also produce
bleached kraft market pulp in Canada, where we own
approximately 500,000 acres of timberlands and have non-
exclusive rights to harvest wood from approximately
200,000 acres of other timberlands. We have three primary
operations: our fine paper business, our technical products
business and our pulp business.
In managing this diverse paper and pulp business,
management believes that achieving and maintaining a
leadership position for our fine paper and technical products
46
( U N ) C O N V E N T I O N A L W I S D O M
businesses, responding effectively to competitive chal-
lenges, employing capital optimally, controlling costs and
managing currency, commodity and other 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.
(cid:129) M AR K E T L E A DE R S HI P. Achieving and maintaining
leadership for our fine paper and technical products
businesses have been an important part of our past per-
formance. We have long been recognized as a leading
manufacturer of world class premium writing, text and
cover papers used in corporate annual reports, corpo-
rate identity packages, invitations, personal stationery
and high-end packaging. Maintaining our leadership is
important to our results, particularly in light of the com-
petitive environment in which we operate.
(cid:129) COM P E T I T I V E E N V IR ON ME N T. Our past results
have been, and our future prospects will be, significantly
affected by the competitive environment in which we
operate. We experience intense competition for sales of
our principal products in our major markets. Our paper
business competes directly with well-known competi-
tors, some of which are larger and more diversified in
most of our markets. In our pulp business, we have expe-
rienced, and will continue to experience, intense compe-
tition from suppliers of softwood pulps and southern
hemisphere suppliers of hardwood pulps. We expect our
competitors to continue to be aggressive in the future.
(cid:129) COS T CON T ROL . To improve and maintain our com-
petitive position, we must control our raw material, man-
ufacturing, distribution and other costs. A portion of
our investments in capital improvements are intended to
achieve cost savings and improvements in productivity.
(cid:129) C YC L I C AL N AT URE OF T H E P UL P IN D US T R Y.
Revenues in the pulp industry and our pulp business
tend to be cyclical, with periods of shortage and rapidly
rising market prices, leading to increased production
and increased industry investment until supply exceeds
demand. Those periods are then typically followed by
periods of reduced market prices and excess and idle
capacity until the cycle is repeated.
(cid:129) GE N E R AL E CON OMI C CON D I T I ONS . The markets
for all of our products are affected to a significant degree
by general economic conditions. Downturns and
improvements in the U.S. economy or in our export
markets affect the demand for our products.
(cid:129) F ORE I G N C URRE N C Y AN D COM M OD I T Y R I SK .
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 oper-
ations. However, we are exposed to changes in foreign
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
currency exchange rates because most of the costs relat-
ing to our pulp business are incurred in Canadian dollars.
These risks could have a material impact on our results
of operations if not effectively managed. The following
charts illustrate changes in currency and pulp prices
that occurred during the periods covered by this
Management’s Discussion and Analysis of Financial
Condition and Results of Operations:
P UL P PR I C E HI S TOR Y
AV E R AGE QUAR T E R LY PR I C E S
northern bleached softwood kraft pulp
northern bleached hardwood kraft pulp
Q2
Q3
Q1
2004
Source: Resource Information Systems, Inc.
Q1
2005
Q2
Q4
Q3
Q4
Q1
2006
Q2
Q3
Q4
U . S . D OL L AR / C AN A D I AN D OL L AR E XC H ANGE R AT E
HI S TOR Y – AV E R AGE QUAR T E R LY E XC H ANGE R AT E S
Q1
2004
Q2
Q3
Q4
Q1
2005
Q2
Q3
Q4
Q1
2006
Q2
Q3
Q4
BUS IN E S S SE G ME N T S
Our fine 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 recognized and preferred papers in
North America, where we enjoy leading market positions
in many of our product categories. We sell our products
800
700
600
500
0.9
0.8
0.7
primarily to authorized paper distributors, converters and
specialty businesses, with sales to distributors and distributor-
owned paper stores accounting for more than 85% of sales.
We believe that our fine paper manufacturing facilities
located in Neenah and Whiting, Wisconsin are among the
most efficient in their markets and make us one of the low-
est cost producers.
Our technical products business is a leading pro-
ducer of durable, saturated and coated substrates for a vari-
ety of end uses. We sell our technical products globally in
17 product categories, and we focus on major categories
where we believe we are a market leader, which include,
among others, the tape, label, abrasive, filtration media, wall
covering, medical packaging and heat transfer technical
products markets. We are also a global supplier of materials
used to create customer-specific components for furniture,
book covers and original equipment manufacturers’ prod-
ucts. Our customers are located in more than 35 countries.
Our technical products manufacturing facilities are located in
Munising, Michigan and near Munich and Frankfurt, Germany.
Our pulp business consists of a mill located in
Pictou, Nova Scotia 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 500,000 acres of owned and
200,000 acres of licensed or managed land in Nova Scotia. In
2006, the Pictou mill produced approximately 260,000 metric
tons of bleached kraft pulp.
SEPAR AT I ON FROM K IM BE R LY- C L AR K
Neenah Paper, Inc. was incorporated under the laws of
the State of Delaware in April 2004, as a wholly owned sub-
sidiary 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 in November 2004. 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 sep-
aration 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 agreement 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 fine paper and technical products business
in the United States, and the assumption by us of the liabili-
ties relating to these businesses. The pulp supply agree-
ment supports our transition from a captive pulp producer
to a market supplier of pulp. The employee matters
agreement allocates responsibilities relating to employee
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 47
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
compensation and benefit plans and programs and other
related matters. The tax-sharing agreement governs tax obli-
gations arising out of our business both before and after the
Spin-Off. The corporate services agreement, which was termi-
nated in January 2006, facilitated an orderly transition from
being a part of a larger company to a stand-alone company.
RE S ULT S OF OP E R AT I ONS
AN D REL AT E D INF OR M AT I ON
In this section, we discuss and analyze our net sales, income
before interest and income taxes (which we refer to as
“operating income” in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations)
and other information relevant to an understanding of our
results of operations for the years ended December 31,
2006, 2005 and 2004.
E X E C U T I V E S UM M AR Y
R E S U LT S O F D I S C O N T I N U E D O P E R AT I O N S
Manufacturing operations at the Terrace Bay mill were sus-
pended in February 2006 due to a lack of wood fiber for its
operations. The mill’s fiber supply was exhausted as a result
of a strike by the approximately 250 workers employed by
the Longlac woodlands operations that supplied wood fiber
to the mill. Most of the approximately 400 hourly and
salaried workers employed at the mill were laid off during
the two weeks following the suspension of manufacturing
activities. In 2005, the Terrace Bay mill produced approxi-
mately 375,000 metric tons of pulp.
Following the suspension of manufacturing opera-
tions, we fulfilled our contractual obligation to supply pulp
to Kimberly-Clark by shipping from the mill’s inventory of
finished goods. The mill’s inventory of finished goods was
exhausted in July. As a result, we notified Kimberly-Clark
that due to a Force Majeure Event (as defined in our pulp
supply agreement) we were unable to fulfill our obligations
under the pulp supply agreement.
In May 2006, we announced a tentative agreement
to transfer the Terrace Bay mill to Buchanan. In August 2006,
we consummated the agreement by transferring the mill
(excluding certain working capital amounts and post-
employment obligations) to Buchanan. Pursuant to the
terms of the agreement, Buchanan assumed responsibility
for substantially all liabilities related to the future operation
of the mill in exchange for a payment of $18.6 million. The
Terrace Bay mill is composed of a single-line pulp facility,
which primarily produces softwood pulp, and a woodlands
operation. The Terrace Bay mill holds non-exclusive rights
under a sustainable forest license (which was transferred
to Buchanan) to harvest wood on approximately 4.6 million
acres of land owned by the Province of Ontario.
48
( U N ) C O N V E N T I O N A L W I S D O M
For the year ended December 31, 2006, net sales
at the Terrace Bay mill of $46.0 million decreased by
$152.7 million compared to the prior year due to the sus-
pension of manufacturing operations in February 2006. For
the year ended December 31, 2006, the Terrace Bay mill’s
operating loss of $46.8 million decreased $37.4 million from
the prior year primarily due to restructuring costs and asset
impairment losses of $59.8 million in 2005 partially offset
by the recognition of a loss of approximately $26.4 million
related to the curtailment and partial settlement of pension
obligations to current retirees in the Ontario, Canada pen-
sion plan in 2006. Excluding these items, the mill’s operat-
ing loss decreased $4.0 million as the costs incurred to
maintain the mill during the suspension of manufacturing
operations offset by revenue generated from the sale of
finished goods inventories on hand were less than the
losses incurred while operating the mill in 2005. In addition,
we recognized a pretax loss of $6.5 million to recognize the
loss on the assets transferred to Buchanan.
At closing, we retained certain working capital
amounts, primarily consisting of trade accounts receivable,
finished goods inventory and trade accounts payable. In
addition, we retained long-term disability obligations for
current and former mill employees and post-employment
medical and life insurance liabilities for current retirees.
In conjunction with the transfer of mill employees
to Buchanan and as a closing condition of the agreement,
we initiated plans to curtail and settle our Ontario, Canada
defined benefit pension plan. In August 2006, we made a
payment to the pension trust of approximately $10.8 million
for the purchase of annuity contracts to settle our pension
liability for current retirees. As a result of the transaction,
we recognized a pension curtailment and settlement loss
of approximately $26.4 million. In addition, we expect to
record a settlement loss of approximately $40 million
related to the future settlement of pension obligations for
active employees. The amount of any funds that we may
pay or receive and the timing of recognition of the loss to
settle the liability for active employees are dependent
upon, among other things, an actuarial determination of
the value of the obligations being settled, the cost of annu-
ity contracts, regulatory approval to settle the plan and
employee elections.
For the year ended December 31, 2005, net sales
at the Terrace Bay mill of $198.7 million decreased $44.6 mil-
lion compared to the prior year primarily due to the closure
of the No. 1 Mill, and to a lesser extent, extended downtime
to replenish wood chip inventories. For the year ended
December 31, 2005, the Terrace Bay mill’s operating loss of
$84.2 million decreased $41.5 million. Excluding restructur-
ing costs and asset impairment losses of $59.8 million and
$112.8 million in 2005 and 2004, respectively, the operating
loss for 2005 increased $11.5 million from the prior year.
The unfavorable comparison was primarily due to higher
discounts on pulp shipments to Kimberly-Clark pursuant to
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
our pulp supply agreement, unfavorable currency translation
effects, increased fiber and energy-related manufacturing
costs and cost associated with our operation as a stand-
alone company. These unfavorable factors were partially off-
set by lower maintenance spending, cost savings associated
with the closure of the No.1 Mill and higher average prices
for softwood pulp.
S A L E O F W O O D L A N D S
In June 2006, we completed the sale of approximately
500,000 acres of woodlands in Nova Scotia to Atlantic Star
Forestry LTD and Nova Star Forestry LTD (the “Purchaser”)
for gross proceeds of $139.1 million. We received the
total proceeds from the sale in cash at closing. We also
entered into a fiber supply agreement (the “FSA”) with the
Purchaser to secure a source of fiber for our Pictou pulp
mill. Following the sale, we have approximately 500,000 acres
of owned and 200,000 acres of licensed or managed wood-
lands in Nova Scotia.
Pursuant to the terms of the FSA, the Purchaser is
required to make available to us sufficient woodlands acreage
to yield 200,000 metric tons of softwood timber annually.
We are required to bear all costs associated with harvesting
the timber, and title to the timber transfers to us when the
timber is cut. Timber purchases under the FSA are at mar-
ket-based prices subject to semi-annual adjustment. The
FSA expires on December 31, 2010 and can be extended
for an additional five years at our discretion. The FSA can
be extended for a subsequent five years upon the mutual
agreement of us and the Purchaser. The FSA does not give
us the option or right to reacquire the woodlands that
were sold.
The sale qualified for gain recognition under the
“full accrual method” described in Statement of Financial
Accounting Standards No. 66, Accounting for Sales of Real
Estate (“FAS 66”). Our commitment to accept acreage
offered by the Purchaser to satisfy the timber requirements
for the first 18 months of the FSA represents a “constructive
obligation.” As a result, we recognized a pretax gain on the
sale of approximately $122.6 million in the three months
ended June 30, 2006 and deferred approximately $9.0 mil-
lion, which represents our estimated “maximum exposure to
loss,” related to our constructive obligation under the FSA.
The deferral related to the constructive obligation will be
amortized over the 18-month term of such obligation.
During the last six months of 2006, approximately $2.9 mil-
lion of such deferred gain was recognized in income.
A C Q U I S I T I O N O F N E E N A H G E R M A N Y
In October 2006, we completed our previously announced
purchase of the outstanding interests of FiberMark Services
GmbH & Co. KG and the outstanding interests of FiberMark
Beteiligungs GmbH (together “Neenah Germany”). Neenah
Germany was acquired from FiberMark, Inc. and FiberMark
International Holdings LLC for $218 million in cash. The
transaction was financed through $160 million of available
cash and $58 million of debt drawn against our revolving
credit facility. Neenah Germany has been included in the
operating results of our Technical Products segment since
the date of acquisition.
The assets acquired as a result of the acquisition of
Neenah Germany consist of three mills located near Munich
and Frankfurt Germany, that produce a wide range of prod-
ucts, including transportation and other filter media, non-
woven wall coverings, masking and other tapes, abrasive
backings, and specialized printing and coating substrates.
R E C E N T D E V E L O P M E N T S
In March 2007, we acquired the Fox Valley Corporation,
which owns Fox River Paper Company, LLC (“Fox River”).
We paid $52 million in cash for the acquisition and financed
it through a combination of cash and debt drawn against
our existing revolving credit facility. The assets acquired as
a result of the acquisition of Fox River consist of four U.S.
paper mills and various related assets, producing premium
fine papers with well-known brands including STARWHITE®,
SUNDANCE®, ESSE® and OXFORD®. The Fox River assets will
be operated as part of our fine paper business.
In conjunction with the acquisition of Fox River,
we announced plans to permanently close the Housatonic
mill, located near Great Barrington, Massachusetts. The
Housatonic mill, the smallest of the fine paper plants acquired
in the Fox River acquisition, has annual production capacity
of approximately 15,000 tons per year and is expected to
cease manufacturing operations by the end of the second
quarter. The Housatonic mill was not profitable due to its
small size, cost structure and the pricing of many of the
grades made there. Closing the mill will allow us to elimi-
nate costs and improve margins while still serving the
needs of key customers. We expect to incur one-time cash
costs of approximately $3 million, which includes approxi-
mately $2 million for employee severance pay and
approximately $1 million of other charges related to the
closure. See Note 20 of Notes to Consolidated and
Combined Financial Statements, “Subsequent Events.”
R E S U LT S O F C O N T I N U I N G O P E R AT I O N S
Net sales for the year ended December 31, 2006 increased
$59.6 million from the prior year primarily due to the acqui-
sition of Neenah Germany in October 2006. Excluding
Neenah Germany, sales increased $9.9 million or 1%, prima-
rily due to favorable average net selling prices for all our
businesses and increased pulp shipments. The increase in
average net selling prices was primarily due to the realiza-
tion of price increases on branded fine paper products, in
our technical products business and higher market prices
for softwood pulp. Higher prices were partially offset by
marginally lower volumes in our fine paper and technical
products businesses (excluding Neenah Germany).
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 49
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
Consolidated operating income for the year ended
ANALYSIS OF NET SALES – YEARS ENDED
December 31, 2006 increased $115.0 million compared to
2005 due to the gain on the sale of woodlands. See “Sale
of Woodlands” above. Excluding the gain on sale, consoli-
dated operating income was $10.5 million unfavorable to
the prior year primarily due to unfavorable currency trans -
lation effects related to the strengthening of the Canadian
dollar compared to the U.S. dollar, higher manufacturing
input costs, an unfavorable comparison on pulp hedging
activities and increased corporate expenses for stock-based
compensation and depreciation related to our enterprise
resource planning (“ERP”) software. The unfavorable manu-
facturing costs were primarily due to higher raw material
(primarily fiber and latex), energy and employee benefit
costs. These unfavorable effects were partially offset by
higher average net prices in all of our businesses, gains on
currency hedges and cost savings.
On January 1, 2006, we adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment
(“FAS 123R”) using the modified-prospective transition
method. Stock-based compensation cost recognized under
FAS 123R for the year ended December 31, 2006 was
$5.8 million and consisted of (a) compensation cost for all
unvested stock-based grants outstanding as of January 1,
2006, based on the grant date fair value estimated in
accordance with the pro forma provisions of Statement of
Financial Accounting Standards 123, Accounting for Stock-
Based Compensation (“FAS 123”) and (b) compensation
cost for all stock-based awards granted subsequent to
adoption based on the grant date fair value estimated in
accordance with the provisions of FAS 123R. The adoption
of FAS 123R resulted in additional stock-based compen -
sation expense of $4.2 million and income tax benefits of
$1.6 million and reduced earnings per diluted share by
$0.17 for the year ended December 31, 2006.
At December 31, 2006, we adopted Statement
of Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other
Postretirement Plans (“SFAS 158”) which requires an
employer to recognize the overfunded or underfunded sta-
tus of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recog-
nize changes in that funded status in the year in which the
changes occur through comprehensive income. SFAS 158
also requires an employer to measure the funded status of
a plan as of the date of its year-end statement of financial
position. We were not affected by the measurement provi-
sions of SFAS 158 because the Company currently meas-
ures the funded status of its benefit plans as of year-end.
Recognition of the funded status provisions of SFAS 158
reduced our Stockholders’ Equity on the Consolidated
Balance Sheet at December 31, 2006 by $55.4 million.
50
( U N ) C O N V E N T I O N A L W I S D O M
DECEMBER 31, 2006, 2005 AND 2004
The following table presents net sales by segment,
expressed as a percentage of total net sales before inter-
segment eliminations:
Fine Paper
Technical Products
Pulp
Total
Year Ended December 31,
2006
2005
2004
37%
31%
32%
100%
42%
24%
34%
100%
42%
25%
33%
100%
The following table presents our net sales by seg-
ment for the periods indicated:
Net sales
Fine Paper
Technical Products
Pulp
Intersegment sales
Consolidated
COMMENTARY:
Y E A R 2 0 0 6 V E R S U S 2 0 0 5
Fine Paper
Technical Products
Pulp(a)(b)
Consolidated
Year Ended December 31,
2006
2005
2004
$223.9
183.1
189.3
(2.0)
$594.3
$222.3
130.6
183.8
(2.0)
$534.7
$220.8
132.3
177.4
(1.7)
$528.8
Change in Net Sales
Compared to Prior Period
Change Due to
Total
Change
$ 1.6
52.5
5.5
$59.6
Volume
$ (0.8)
47.4
3.6
$50.2
Average
Net Price
$2.4
5.1
1.9
$9.4
(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.
(b) Average net price includes an $11.4 million reduction due to pulp
hedging activities.
Consolidated net sales increased $59.6 million or
11% in 2006 versus 2005, primarily due to the acquisition
of Neenah Germany in October 2006. Excluding Neenah
Germany, sales increased $9.9 million or 1%, primarily due
to favorable average net selling prices for all our businesses
and increased pulp shipments.
(cid:129) Net sales in our fine paper business increased $1.6 mil-
lion, or 1%, primarily due to higher average net prices.
Higher average net selling prices reflected the realiza-
tion of price increases on branded products imple-
mented in January and June 2006. Unit volumes were
essentially unchanged from the prior year.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
(cid:129) Net sales in our technical products business increased
$52.5 million, or 40%, primarily due to the acquisition of
Neenah Germany in October 2006. Excluding Neenah
Germany, sales increased $2.8 million or 2% due to
higher average net selling prices partially offset by lower
volume. The increase in average net selling prices was
primarily due to the implementation of a surcharge to
recover higher raw material costs and a general price
increase in January 2006.
(cid:129) Net sales in our pulp business increased $5.5 million, or
3%, primarily due to higher selling prices and an increase
in shipments. Average net selling prices were favorable
due to a 10% increase in average market prices for soft-
wood pulp, partially offset by losses on pulp future con-
tracts ($11.4 million). The increase in shipments was
primarily due to increased production.
Y E A R 2 0 0 5 V E R S U S 2 0 0 4
Change in Net Sales
Compared to Prior Period
Change Due to
Total
Change
$ 1.5
(1.7)
6.4
(0.3)
$ 5.9
Volume
$(0.2)
3.7
2.9
(0.3)
$ 6.1
Average
Net Price
$ 1.7
(5.4)
3.5
–
$(0.2)
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 increased $5.9 million, or
1%, in 2005 compared with 2004, primarily due to increased
technical products and pulp volumes.
(cid:129) Net sales in our fine paper business increased $1.5 mil-
lion, or 1%, primarily due to higher average net selling
prices, partially offset by lower product mix. Favorable
pricing was primarily due to realization of a price
increase for most branded 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 propor-
tion of lower-priced grades. Unit volumes were essen-
tially unchanged from the prior year, while the uncoated
free sheet market decreased approximately 3% in 2005.
(cid:129) Net sales in our technical products business decreased
$1.7 million, or 1%, as 3% growth in unit volumes and
favorable product pricing were more than offset by a
product mix with a higher proportion of relatively lower-
priced premask and tape volume. The volume improve-
ment reflected strong growth in sales of premask and
tape products partially offset by reduced label shipments.
Favorable average net selling prices were due to the real-
ization of a price increase implemented in the fourth quar-
ter of 2004 and a surcharge 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 termination of a dis-
tribution agreement and the shift in sales volumes.
(cid:129) Our pulp business net sales increased $6.4 million, or
4%, primarily due to a 1% increase in pulp shipments
and a shift in product mix to a higher proportion of soft-
wood pulp shipments, partially offset by higher discounts
on pulp shipments to Kimberly-Clark. Average net selling
prices were unfavorable to the prior year as marginally
higher average market prices for softwood pulp were
more than offset by higher discounts on shipments to
Kimberly-Clark pursuant to our pulp supply agreement.
Product mix improved from the prior year due to ship-
ping a higher proportion of softwood pulp.
The following table sets forth line items from our
consolidated and combined statements of operations as a per-
centage of net sales for the periods indicated and is intended
to provide a perspective of trends in our historical results:
Net sales
Cost of products sold
Gross profit
Selling, general and
administrative expenses
Gain on sale of woodlands
Other (income) expense – net
Operating income
Interest expense – net
Income from continuing
operations before
income taxes
Provision for income taxes
Income from
Year Ended December 31,
2006
2005
2004
100.0%
84.5
15.5
100.0%
82.0
18.0
100.0%
75.5
24.5
9.6
(21.1)
(1.3)
28.3
2.8
25.5
9.5
9.2
0.1
(1.3)
10.0
3.4
6.6
2.4
8.0
–
0.3
16.2
0.2
16.0
5.8
continuing operations
16.0%
4.2%
10.2%
ANALYSIS OF OPERATING INCOME – YEARS ENDED
DECEMBER 31, 2006, 2005 AND 2004
The following table sets forth our pretax income (loss) by
segment for the periods indicated:
Year Ended December 31,
2006
2005
2004
Operating income
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Consolidated
$ 56.2
9.2
115.8
(12.8)
$168.4
$58.4
10.5
(9.0)
(6.5)
$53.4
$67.0
21.9
5.2
(8.3)
$85.8
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 51
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
COMMENTARY:
Y E A R 2 0 0 6 V E R S U S 2 0 0 5
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Consolidated
Change in Operating Income (Loss) Compared to Prior Period
Total
Change
$ (2.2)
(1.3)
124.8
(6.3)
$115.0
Volume
$(0.4)
1.5
2.8
–
$ 3.9
Change Due To
Net
Price(a)
Material
Costs(b)
$ 3.1
4.0
3.5
–
$10.6
$ (4.0)
(3.5)
(3.1)
–
$(10.6)
Currency
Other(c)(d)
$ –
–
(12.0)
–
$(12.0)
$
(0.9)
(3.3)
133.6
(6.3)
$123.1
Includes price changes, net of pulp discounts, changes in product mix and results of pulp hedging activities.
(a)
(b) Includes price changes for raw materials and energy.
(c)
(d) Includes $125.5 million gain on sale of woodlands.
Includes annual maintenance-related downtime spending, other materials, manufacturing labor, distribution and selling, general and administrative expenses.
Consolidated operating income in 2006 increased
$115.0 million compared to 2005 due to the $125.5 million
gain on the sale of woodlands. Excluding the gain on sale,
consolidated operating income was $10.5 million lower
than the prior year primarily due to unfavorable currency
effects related to the strengthening of the Canadian dollar
compared to the U.S. dollar, an unfavorable comparison on
pulp hedging activities, higher manufacturing input costs,
and increased corporate expenses for stock-based com-
pensation and depreciation related to our ERP software.
These unfavorable effects were partially offset by higher
average net prices in all our businesses.
(cid:129) Operating income for our fine paper business decreased
$2.2 million, or 4%, primarily due to higher raw material,
energy and labor costs. The increase in manufacturing
costs was partially offset by higher average net selling
prices due to the realization of price increases on branded
products implemented in January and June 2006.
(cid:129) Operating income for our technical products business
decreased $1.3 million, or 12%, primarily due to higher
raw material (primarily latex and pulp), energy, labor and
research and development costs. The increase in manu-
facturing costs was partially offset by higher average net
selling prices due to the realization of a general price
increase in January 2006 and the implementation of a
surcharge to recover increased latex costs, and favorable
volume due to Neenah Germany.
(cid:129) Operating income for our pulp business increased
$124.8 million from the prior year due to the gain on the
sale of the woodlands of $125.5 million. Excluding the
gain on sale of the woodlands, our pulp business had an
operating loss of $9.7 million, a $0.7 million increase
from 2005. The increase in the operating loss for the
pulp business was primarily due to unfavorable currency
effects related to the strengthening of the Canadian dol-
lar compared to the U.S. dollar, an unfavorable compari-
son on pulp hedging activities ($11.4 million) and higher
raw material and energy costs. These effects were par-
tially offset by higher selling prices, gains on currency
hedges and cost savings.
(cid:129) Unallocated corporate expenses increased by $6.3 mil-
lion primarily due to stock-based compensation costs
and depreciation related to our ERP software. Stock-
based compensation increased approximately $5.0 mil-
lion primarily due to the adoption on January 1, 2006 of
SFAS 123R.
52
( U N ) C O N V E N T I O N A L W I S D O M
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
Y E A R 2 0 0 5 V E R S U S 2 0 0 4
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Consolidated
Change in Operating Income (Loss) Compared to Prior Period
Total
Change
$ (8.6)
(11.4)
(14.2)
1.8
$(32.4)
Volume
$(0.1)
0.8
4.6
–
$ 5.3
Change Due To
Net
Price(a)
Material
Costs(b)
$(0.2)
(1.5)
(6.1)
–
$(7.8)
$ (4.3)
(6.4)
(10.9)
–
$(21.6)
Currency
Other(c)
$ –
–
(4.4)
–
$(4.4)
$(4.0)
(4.3)
2.6
1.8
$(3.9)
Includes price changes, net of pulp discounts, changes in product mix and results of pulp hedging activities.
(a)
(b) Includes price changes for raw materials and energy.
(c)
Includes restructuring costs, annual maintenance-related downtime spending, other materials, manufacturing labor, distribution and selling, general and
administrative expenses.
Consolidated operating income in 2005 of
$53.4 million decreased $32.4 million versus the prior year.
Higher raw material and energy costs, unfavorable currency
translation effects related to the strengthening of the
Canadian dollar compared to the U.S. dollar, higher dis-
counts on pulp sales to Kimberly-Clark and costs associated
with our operation as a stand-alone company were the pri-
mary drivers of the unfavorable comparison.
(cid:129) Operating income for our fine paper business decreased
$8.6 million primarily due to increased manufacturing and
distribution costs and costs associated with our operation
as a stand-alone company. The increase in manufacturing
costs was primarily due to higher raw material prices
including an 11% increase in average hardwood pulp
prices, gas prices that increased more than 20% from the
prior year and increased costs for chemicals and dyes. The
increase in distribution costs was primarily due to an increase
in fuel prices. In addition, net price was unfavorable to the
prior year as an increase in the proportion of unbranded
product sales more than offset branded product price
increases implemented in December 2004 and the third
quarter of 2005.
(cid:129) Operating income for our technical products business
decreased $11.4 million due to higher manufacturing
costs, costs associated with our operation as a stand-
alone company and lower average net selling prices,
partially offset by favorable volume. The increase in man-
ufacturing costs was primarily due to higher costs for oil-
based latex and increased utility costs related to higher
coal prices. Net price was unfavorable as higher average
prices were more than offset by lower heat transfer ship-
ments and the shift in product mix to selling a higher
proportion of relatively lower priced premask and tape
products. Volume was favorable to the prior year prima-
rily due to the strong growth in premask sales.
(cid:129) Our pulp business incurred an operating loss of $9.0 mil-
lion in 2005 which increased $14.2 million compared to
the prior year. The unfavorable comparison to the prior
year was primarily due to higher discounts on pulp ship-
ments to Kimberly-Clark pursuant to our pulp supply
agreement, unfavorable currency translation effects,
increased fiber and energy related manufacturing costs
and costs associated with our operation as a stand-alone
company. These unfavorable factors were partially offset
by higher average market prices for softwood pulp.
ADDITIONAL STATEMENT OF
OPERATIONS COMMENTARY:
(cid:129) For the years ended December 31, 2006 and 2005, we
incurred $19.4 million and $18.5 million, respectively, of
interest expense (including approximately $2.0 million
of amortization of debt issuance costs in each year). The
increase in interest expense was primarily due to bor-
rowing under our revolving credit agreement to partially
finance the acquisition of Neenah Germany. In 2004,
we incurred $1.4 million of interest expense on our
$225 million of senior notes for the month of December
(following the Spin-Off). Kimberly-Clark used a central-
ized approach to cash management and the financing of
its operations. As a result, none of Kimberly-Clark’s cash,
cash equivalents, debt or interest income or expense
was allocated to the Pulp and Paper Business for periods
prior to the Spin-Off.
(cid:129) The effective tax rate was 37.2%, 36.6% and 36.0% for
2006, 2005 and 2004, respectively. The increase in the
effective tax rate between 2006 and 2005 was primarily
due to a change in the proportion of the pretax income
in tax jurisdictions with different marginal tax rates. For
the three months ended December 31, 2006, our effec-
tive tax rate was 17.9%. The decrease in the effective tax
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 53
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
rate in the fourth quarter was primarily due to the mix
of pretax income between tax jurisdictions with different
marginal tax rate and the benefits of changes in our
corporate structure following the acquisition of Neenah
Germany. The increase in the effective tax rate between
2005 and 2004 was primarily due primarily due to the
mix of pretax income between tax jurisdictions with dif-
ferent marginal tax rate, partially offset by an increase in
the proportion of non-taxable income items to pretax
income. See Note 7 of Notes to Consolidated and
Combined Financial Statements included elsewhere
in this Annual Report for a reconciliation of the annual
effective tax rates.
L I QUID I T Y AN D C A P I TAL RE S O URC E S
Year Ended December 31,
2006
2005
2004
Net cash flow provided
by (used in):
Operating activities
Investing activities, including
capital expenditures
Capital expenditures
Financing activities
$ 65.8
$ 22.8
$ 76.0
(127.7)
(25.1)
50.8
(25.8)
(25.7)
(3.6)
(19.1)
(19.1)
(37.8)
OPERATING CASH FLOW COMMENTARY
(cid:129) Cash provided by operations of $65.8 million for the year
ended December 31, 2006 increased $43.0 million from
the prior year. This increase was primarily due to a
decrease in our investment in operating working capital,
partially offset by pension contributions to settle liabili-
ties for current retirees in the Terrace Bay pension plan.
The decrease in operating working capital was primarily
due to the depletion of finished goods inventory and the
collection of accounts receivable at the Terrace Bay mill.
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 benefits and
depreciation) and higher income tax payments, partially
offset by a decrease in our investment in operating
working capital. The decrease in operating working capi-
tal 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.
(cid:129) Our investment in operating working capital at
December 31, 2006 decreased $31.0 million from the
prior year. The decrease in operating working capital
was primarily due to the depletion of finished goods
inventory and the collection of related receivables at
54
( U N ) C O N V E N T I O N A L W I S D O M
Terrace Bay prior to the transfer to Buchanan. This reduc-
tion was partially offset by working capital acquired in
the Neenah Germany acquisition. During 2005, higher
discounts on pulp shipments to Kimberly-Clark and
lower pulp volume resulted in lower accounts receivable
and reduced our investment in operating working capital
(excluding the effects of a stronger Canadian dollar rela-
tive to the U.S. dollar). Our reduced investment in oper-
ating working capital due to lower accounts receivable
was partially offset by an increase of $7.6 million in
inventories (excluding the effects of a stronger Canadian
dollar relative to the U.S. dollar). We built pulp finished
good inventories to comply with contractually required
safety stock levels as we transitioned to being a supplier
of market pulp. During 2004, higher average selling
prices for pulp resulted in significantly higher accounts
receivable and increased our investment in working
capital at December 31, 2004 to $116.4 million.
INVESTING COMMENTARY:
(cid:129) Cash used by investing activities for 2006 of $127.7 mil-
lion, increased $101.9 million from the prior year period.
The increase was primarily due to the acquisition of
Neenah Germany for $218.6 million (net of cash acquired)
and a payment of $18.6 million to Buchanan to transfer
the Terrace Bay mill, partially offset by net proceeds from
the sale of woodlands of $134.8 million. Capital spending
for 2006 of $25.1 million was $0.6 million lower than the
comparable prior year period. Capital spending in 2006
included significant amounts for the acquisition and
installation of ERP software and general projects in
North America.
Capital spending in 2005 of $25.7 million was $6.6 mil-
lion higher than the comparable prior year period. The
increased spending was primarily for the acquisition and
installation of enterprise resource planning (ERP) soft-
ware and leasehold improvements at our new research
and development center.
(cid:129) We anticipate capital expenditures for 2007 will be
approximately $50 to $55 million including amounts
related to our recently acquired Fox River Paper opera-
tion. Spending in 2007 includes major projects in
Neenah Germany to add capacity and increase produc-
tivity. Capital spending in Neenah Germany will primarily
be financed through locally generated cash flow, gov-
ernment subsidized project financing and a $15 million
Euro line of credit. The timing and amount of capital
expenditures will depend on the results of engineering
studies, the outcome of negotiations with regulatory
authorities and the remediation methods ultimately
selected. These capital expenditures are not expected
to have a material adverse effect on our financial condi-
tion, results of operations or liquidity.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
(cid:129) In March 2007, we acquired the Fox Valley Corporation,
which owns Fox River. We paid $52 million in cash for
the acquisition and financed it through a combination of
cash and debt drawn against our existing revolving
credit facility.
FINANCING COMMENTARY:
(cid:129) Our liquidity requirements are being provided by cash
generated from operations, proceeds from asset sales
and short-term and long-term borrowings. Availability
under our revolving credit facility varies over time
depending on the value of our inventory, receivables and
various capital assets. At December 31, 2006, we had
$57.3 million outstanding under our revolving credit
facility, outstanding letters of credit of $2.8 million and
$88.2 million of available credit. Prior to the Spin-Off,
our financing (net of cash transfers to Kimberly-Clark)
was provided by Kimberly-Clark.
(cid:129) In 2006, net borrowings under our revolving credit
agreement increased from $0 to $57.3 million primarily
to partially finance the acquisition of Neenah Germany.
(cid:129) In 2005, we financed the acquisition of our ERP software
($3.6 million) through third-party financing payable over
three years. We financed our current year insurance pre-
miums ($2.3 million) through the issuance of a short-
term note. Payments under the agreements for our ERP
software and insurance premiums in 2005 were $1.1 mil-
lion and $2.3 million, respectively.
CREDIT AGREEMENT AMENDMENT:
(cid:129) In October 2006, we amended our Credit Agreement to,
among other things, (i) increase availability under our
Revolver from $150 million to $165 million, (ii) extend the
termination date of the Credit Agreement to November 30,
2010, (iii) set the interest rate under the Revolver to either
(A) the Prime Rate (as defined in the amended Credit
Agreement) plus a percentage ranging from 0% to 0.75%,
or (B) LIBOR plus a percentage ranging from 1.25% to
2.25%, (iv) reduce the commitment fee pricing on the
Revolver, and (v) make other definitional, administrative
and covenant modifications to the Credit Agreement.
(cid:129) In the amendment, the lenders also consented to
consummation of our announced purchase of Neenah
Germany. Neenah Germany is not expected to become
a borrower or guarantor with respect to the Revolver.
However, we pledged 65% of our equity interest in
Neenah Germany as security for our obligations under
the Credit Agreement.
(cid:129) Our ability to borrow under the Revolver is limited by
the amendment to the lowest of (a) $165 million, (b) our
borrowing base (as determined in accordance with the
amended Credit Agreement), and (c) the applicable cap
on the amount of “credit facilities” under the indenture.
As of December 31, 2006, our borrowing base was
approximately $153 million. The amount of the borrow-
ing base is subject to change from time to time in accor-
dance with the terms of the Credit Agreement.
(cid:129) We paid cash dividends of $0.40 per share or $5.9 mil-
(cid:129) The Revolver, as amended, contains events of default
lion in each of 2006 and 2005.
TRANSFER OF TERRACE BAY MILL:
(cid:129) In conjunction with the transfer of the Terrace Bay mill to
Buchanan and as a closing condition of the agreement,
we initiated plans to curtail and settle our Ontario,
Canada defined benefit pension plan. In August 2006,
we made a payment to the pension trust of approxi-
mately $10.8 million for the purchase of annuity con-
tracts to settle our pension liability for current retirees.
As a result of the transaction, we recognized a pension
curtailment and settlement loss of approximately
$26.4 million in the year ended December 31, 2006. In
addition, we expect to record a settlement loss of approx-
imately $40 million related to the future settlement of
pension obligations for active employees. The amount of
any funds that we may pay or receive and the timing of
recognition of the loss to settle the liability for active
employees are dependent upon, among other things, an
actuarial determination of the value of the obligations
being settled, the cost of annuity contracts, regulatory
approval to settle the plan and employee elections.
customary for financings of this type, including failure to
pay principal or interest, materially false representations
or warranties, failure to observe covenants and other
terms of the Revolver, cross-defaults to other indebted-
ness, bankruptcy, insolvency, various ERISA violations, the
incurrence of material judgments and changes in control.
(cid:129) In March 2007, we entered into the fourth amendment to
our Credit Agreement to, among other things, (i) increase
our secured revolving line of credit from $165 million to
$180 million, and (ii) assist us in consummating the acqui-
sition of Fox River for $52 million, and (iii) make other
definitional, administrative and covenant modifications to
the Credit Agreement. The entities acquired pursuant
to the Fox River transaction will become guarantors with
respect to such secured revolving line of credit.
(cid:129) Despite the increase in the total commitment to
$180 million, our ability to borrow under the revolving
credit facility is limited by the terms of the Third
Amendment to the lowest of (a) $180 million, (b) our
borrowing base (as determined in accordance with the
amended Credit Agreement), and (c) the applicable cap
on the amount of “credit facilities” under the indenture.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 55
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
(cid:129) As part of closing the Fox River acquisition, we borrowed
$54 million in principal under the Revolver. As of such
date the total amount outstanding under the Revolver
was approximately $111 million. All principal amounts
outstanding under the Credit Agreement are due and
fully payable on the date of termination of the Credit
Agreement. While the Fourth Amendment increases the
total commitment available to us under the Credit
Agreement, no assurance can be given that we will meet
the requirements to borrow the full amount available
under the Credit Agreement.
Management believes our ability to generate cash
from operations and our borrowing capacity are adequate
to fund working capital, capital spending and other cash
needs for the next twelve months. Our ability to generate
adequate cash from operations beyond 2007, however, will
depend on, among other things, our ability to successfully
implement our business strategies and cost cutting initia-
tives and to manage the impact of changes in pulp prices
and currencies. We can give no assurance we will be able to
successfully implement those strategies and cost cutting
initiatives or successfully manage our pulp pricing and cur-
rency exposures.
CONTRACTUAL OBLIGATIONS
The following table presents the total contractual obligations for which cash flows are fixed or determinable as of
December 31, 2006:
(In millions)
Unconditional purchase obligations
Long-term debt payments
Interest payments on long-term debt
Other post-employment benefit obligations
Operating leases
Open purchase orders
Contributions to pension trusts
Total contractual obligations
2007
$48.0
1.3
16.7
3.5
1.3
20.2
8.7
$99.7
2008
$47.3
–
16.6
2.7
0.9
–
–
$67.5
2009
$43.9
–
16.6
1.5
0.8
–
–
$62.8
2010
$ 41.9
57.3
16.6
1.8
0.7
–
–
$118.3
2011
$38.4
–
16.6
2.1
0.6
–
–
$57.7
Beyond
2011
$214.0
225.0
49.8
15.0
1.4
–
–
$505.2
Total
$433.5
283.6
132.9
26.6
5.7
20.2
8.7
$911.2
The unconditional purchase obligations are for the
purchase of raw materials, primarily wood chips. Although
we are primarily liable for payments on the above operating
leases and unconditional purchase obligations, based on
historic operating performance and forecasted future cash
flows, we believe our exposure to losses, if any, under these
arrangements is not material.
The open purchase orders represent amounts we
anticipate will become payable within the next year for
goods and services that we have negotiated for delivery.
The future payments that we will make for post-
employment benefits other than pensions are estimated
using actuarial assumptions, including expected future
service, to project the future obligations.
C R I T I C AL ACCO UN T ING P OL I C I E S
AN D USE OF E S T IM AT E S
The preparation of financial 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
financial statements 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 account-
ing policies used in the preparation of the consolidated
financial statements are those that are important both to
the presentation of financial condition and results of opera-
tions and require significant judgments with regard to esti-
mates used. These critical judgments relate to the reported
amounts of assets and liabilities, disclosure of contingent
assets and liabilities, and the reported amounts of revenue
and expenses.
The following summary provides further informa-
tion about the critical accounting policies and should be
read in conjunction with the notes to the Consolidated and
Combined Financial Statements. We believe that the
consistent application of our policies provides readers of
Neenah’s financial statements with useful and reliable infor-
mation about our operating results and financial condition.
We have discussed the application of these
critical accounting policies with our Board of Directors
and Audit Committee.
56
( U N ) C O N V E N T I O N A L W I S D O M
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
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 fixed or determinable,
and (4) collection is reasonably assured. Delivery is not con-
sidered 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 des-
ignated free on board (“FOB”) shipping point. For pulp
sales to Kimberly-Clark and other customers that are desig-
nated FOB destination, revenue is recognized when the
product is delivered to the customer’s delivery site. Sales
are reported net of allowable discounts and estimated
returns. Reserves for cash discounts, trade allowances and
sales returns are estimated using historical experience.
INVENTORIES
We value U.S. inventories at the lower of cost, using the
Last-In, First-Out (“LIFO”) method for financial reporting
purposes, or market. Canadian and German inventories are
valued at the lower of cost, using either the First-In, First-
Out (“FIFO”) or a weighted-average cost method, or mar-
ket. The FIFO values of total U.S. inventories valued on
the LIFO method were $37.9 million and $35.2 million at
December 31, 2006 and 2005, respectively. Cost includes
labor, materials and production overhead. Inventories of
the Canadian pulp operations include both roundwood
(logs) and wood chips. These inventories are located both
at the pulp mills and at various timberlands locations. In
accordance with industry practice, physical inventory counts
utilize “scaling” techniques to estimate quantities of round-
wood, as well as various electronic devices to calculate
wood chip inventory amounts. These techniques historically
have provided reasonable estimates of such inventories.
DEFERRED INCOME TAX ASSETS
As of December 31, 2006, we have recorded deferred
income tax assets totaling $34.2 million related to tempo-
rary differences, and we have established no valuation
allowances against these deferred income tax assets. As of
December 31, 2005, our deferred income tax assets were
$29.3 million. In determining the need for valuation
allowances, we consider many factors, including specific
taxing jurisdictions, sources of taxable income, income tax
strategies and forecasted earnings for the entities in each
jurisdiction. A valuation allowance would be recognized if,
based on the weight of available evidence, we conclude
that it is more likely than not that some portion or all of the
deferred income tax assets will not be realized.
Prior to the Spin-Off, our operations were included
in the consolidated income tax returns of Kimberly-Clark.
Kimberly-Clark will indemnify us for all income tax liabilities
and retain rights to all tax refunds for periods through the
date of the Spin-Off. Accordingly, the consolidated balance
sheets for periods prior to the Spin-Off do not include
current or prior period income tax receivables or payables
related to our operations, which were filed on a consoli-
dated basis with Kimberly-Clark. For all periods, the income
tax provisions have been determined as if we were a sepa-
rate taxpayer.
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 financial institutions.
We use derivative instruments to manage expo-
sures 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 are measured at fair market value. Derivative
instruments that have been designated as hedges of antici-
pated future cash flows 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 hedges are adjusted to fair value through other income.
Fair value estimates are based on relevant market informa-
tion, including current market rates and prices. We docu-
ment relationships between hedging instruments and
hedged items, and link derivatives designated as cash flow
hedges to specific 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 flows associated with the hedged items.
Any hedge ineffectiveness is charged to expense in the
period incurred.
PENSION BENEFITS
In connection with the Spin-Off, and as set forth in the
employee matters agreement, obligations for Kimberly-Clark’s
defined benefit pension plans and defined contribution
retirement plans related to active and former employees of
the Canadian pulp operations and active employees of the
U.S. paper operations became our responsibility. Kimberly-
Clark retained the obligations for former employees of the
U.S. paper operations. A share of pension assets related to
active employees of the U.S. paper operations were trans-
ferred from Kimberly-Clark’s pension plan to a new pension
plan established by us. The new plan provides substantially
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 57
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
similar benefits and credits our employees for service earned
with Kimberly-Clark. With respect to Canadian employees,
we assumed the existing pension assets and obligations of
the related Kimberly-Clark pension plans.
Our funding policy for qualified defined benefit
plans is to contribute assets to fully fund the accumulated
benefit obligation. Subject to regulatory and tax deducti -
bility limits, any funding shortfall is to be eliminated over a
reasonable number of years. Nonqualified plans providing
pension benefits in excess of limitations imposed by the
taxing authorities are not funded.
Consolidated and combined pension expense for
defined benefit pension plans was $35.5 million, $13.2 million
and $10.7 million for the years ended December 31, 2006, 2005
and 2004, respectively. Pension expense for 2006 includes
$26.4 million for settlement and curtailment losses related
to the purchase of annuity contracts to settle pension liabil-
ities for current retirees in our Ontario, Canada defined
benefit pension plan. In addition, in May 2005 we recog-
nized a pretax 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 assumptions applied to each of the
defined benefit plans. The weighted-average expected
long-term rate of return on pension fund assets used to cal-
culate pension expense was 8.39%, 8.41% and 8.50% for
the years ended December 31, 2006, 2005 and 2004,
respectively. The expected long-term rate of return on pen-
sion fund assets held by our pension trusts was determined
based on several factors, including input from pension
investment consultants and projected long-term returns of
broad equity and bond indices. Also con sidered were the
plans’ historical 10-year and 15-year compounded annual
returns. We anticipate that, on average, the investment
managers for our U.S. and Canadian plans will generate
annual long-term rates of return of at least 8.0% and 8.5%,
respectively. Our expected long-term rate of return on the
assets in the plans is based on an asset allocation assump-
tion of about 60% with equity managers, with expected
long-term rates of return of approximately 10%, and 40%
with fixed income managers, with an expected long-term
rate of return of about 6%. The actual asset allocation is reg-
ularly reviewed and periodically rebalanced to the targeted
allocation when considered appropriate. We evaluate our
investment strategy and long-term rate of return on pension
asset assumptions at least annually.
Pension expense is estimated based on the fair
value of assets rather than a market-related value that aver-
ages gains and losses over a period of years. Investment
gains or losses represent the difference between the
expected return calculated using the fair value of the assets
and the actual return based on the fair value of assets. The
variance between the actual and the expected gains and
losses on pension assets is recognized in pension expense
more rapidly than it would be if a market-related value for
58
( U N ) C O N V E N T I O N A L W I S D O M
plan assets was used. As of December 31, 2006, our pen-
sion plans had cumulative unrecognized investment losses
and other actuarial losses of approximately $97.3 million.
These unrecognized net losses may increase our future pen-
sion expense if not offset by (i) actual investment returns
that exceed the assumed investment returns, (ii) other fac-
tors, including reduced pension liabilities arising from
higher discount rates used to calculate our pension obliga-
tions or (iii) other actuarial gains, including whether such
accumulated actuarial losses at each measurement date
exceed the “corridor” determined under SFAS 87,
Employers’ Accounting for Pensions.
The discount (or settlement) rate that is utilized for
determining the present value of future pension obligations
in the U.S. is generally based on the yield for a theoretical
basket of AA-rated corporate bonds currently available in
the marketplace, whose duration matches the timing of
expected pension benefit payments. The discount (or set-
tlement) rate that is utilized for determining the present
value of future pension obligations in Canada is generally
based on the Government of Canada long bond rate plus
the spread for a long-term AA-rated bond index over the
yield on 30-year U.S. Treasury bonds converted to an equiv-
alent one-year compound basis. The weighted-average dis-
count rate was 5.25% and 5.20% at December 31, 2006 and
2005, respectively.
Our consolidated pension expense in 2006 is
based on an expected weighted-average long-term rate of
return on assets of 8.39%, a weighted-average discount rate
of 5.20% and various other assumptions. Pension expense
beyond 2006 will depend on future investment perform-
ance, our contributions to the pension trusts, changes in
discount rates and various other factors related to the cov-
ered employees in the plans.
The fair value of the assets in our defined bene-
fit plans decreased to approximately $351 million at
December 31, 2006 from about $375 million at December 31,
2005, primarily due to benefit payments of $92.4 million
(including purchases of annuity contracts to settle pension
liabilities for current retirees in the Ontario, Canada defined
benefit pension plan), partially offset by investment gains
of $42.3 million and plan contributions of $24.2 million. At
December 31, 2006, the projected benefit obligations of
the defined benefit plans exceeded the fair value of plan
assets by approximately $69 million and were marginally
lower than the $75 million deficit at December 31, 2005.
The accumulated benefit obligation exceeded the fair value
of plan assets by approximately $31.4 million and $5.4 mil-
lion at December 31, 2006 and 2005, respectively. Contri -
bu tions to pension trusts in 2006 were $24.2 million compared
with $20.3 million in 2005 (including $1.6 million for special
termination benefits related to the closure of the No. 1 Mill).
In addition, we made direct benefit payments of approxi-
mately $0.1 million in each of 2006, 2005 and 2004 for
unfunded supplemental retirement benefits.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
IMPAIRMENT
Property, plant and equipment are tested for impairment in
accordance with Statement of Financial Accounting Standards
(“SFAS”) 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, whenever events or changes in circum-
stances indicate that the carrying amounts of such long-
lived assets may not be recoverable from future net pretax
cash flows. Impairment testing requires significant manage-
ment judgment including estimating the future success of
product lines, future sales volumes, growth rates for selling
prices and costs, alternative uses for the assets and esti-
mated proceeds from disposal of the assets. Impair ment
testing is conducted at the lowest level where cash flows
can be measured and are independent of cash flows of
other assets. An asset impairment would be indicated if
the sum of the expected future net pretax cash flows from
the use of the asset (undiscounted and without interest
charges) is less than the carrying amount of the asset. An
impairment loss would be measured based on the differ-
ence between the fair value of the asset and its carrying
amount. We determine fair value based on an expected
present value technique in which multiple cash flow scenar-
ios that reflect a range of possible outcomes and a risk free
rate of interest are used to estimate fair value.
The estimates and assumptions used in the impair-
ment analysis are consistent with the business plans and
estimates we use to manage our business operations. The
use of different assumptions would increase or decrease
the estimated fair value of the asset and would increase or
decrease the impairment charge. Actual outcomes may dif-
fer from the estimates.
See “Results of Operations and Related Information –
Executive Summary – Results of Discontinued Operations”
for a summary of our asset impairment test on the Terrace
Bay pulp facility, which resulted in net pretax impairment
losses of approximately $54.5 million and $112.8 million in
2005 and 2004, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill arising from a business combination is recorded as
the excess of purchase price and related costs over the fair
value of identifiable assets acquired and liabilities assumed
in accordance with the guidance of Statement of Financial
Accounting Standards No. 141, Business Combinations
(“SFAS 141”). All of our goodwill was acquired in conjunction
with the acquisition of Neenah Germany in October 2006.
Under Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”), goodwill is subject to impairment testing at
least annually. A fair-value-based test is applied at the
reporting unit level, which is generally one level below
the segment level. The test compares the fair value of an
entity’s reporting units to the carrying value of those
reporting units. This test requires various judgments and
estimates. The fair value of the reporting unit is determined
using an estimate of future cash flows and a risk adjusted
discount rate to compute a net present value of future cash
flows. An adjustment to goodwill will be recorded for any
goodwill that is determined to be impaired. Impairment
of goodwill is measured as the excess of the carrying amount
of goodwill over the fair values of recognized assets and lia-
bilities of the reporting unit. The Company tests goodwill
for impairment at least annually on November 30 in con-
junction with preparation of its annual business plan, or
more frequently if events or circumstances indicate it might
be impaired. Goodwill was last tested for impairment as of
November 30, 2006 and no impairment was indicated.
Intangible assets with estimable useful lives are
amortized on a straight-line basis over their respective esti-
mated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Intangible
assets consist primarily of customer relationships, trade
names and acquired intellectual property. Such intangible
assets are being amortized using the straight-line method
over estimated useful lives of between 10 and 15 years.
Certain trade names are estimated to have indefinite useful
lives and as such are not being amortized.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment
(“SFAS 123R”) using the modified-prospective transition
method. Stock-based compensation cost recognized under
SFAS 123R consists of (a) compensation cost for all unvested
stock-based grants outstanding as of January 1, 2006,
based on the grant date fair value estimated in accordance
with the pro forma provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”) and (b) compensation cost for
all stock-based awards granted subsequent to adoption
based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R. The amount of stock-
based compensation cost recognized is based on the fair
value of grants that are ultimately expected to vest and is
recognized pro-rata over the requisite service period for
the entire award.
SFAS 123R amends Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows, to
require the reporting of excess tax benefits related to the
exercise or vesting of stock-based awards as cash provided
by financing activities rather than as a reduction in income
taxes paid and reported as cash provided by operations.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 59
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
F OR WAR D - LO OK ING S TAT E ME N T S
(cid:129) the cost or availability of wood, other raw materials
Certain statements in this Annual Report may constitute
“forward-looking” statements as defined in Section 27A of
the Securities Act of 1933 (the “Securities Act”), Section
21E of the Securities Exchange Act of 1934 (the “Exchange
Act”), the Private Securities Litigation Reform Act of 1995
(the “PSLRA”), or in releases made by the Securities and
Exchange Commission (the “SEC”), all as may be amended
from time to time. Statements contained in this annual
report that are not historical facts may be forward-looking
statements within the meaning of the PSLRA. Any such
forward-looking statements reflect our beliefs and assump-
tions and are based on information currently available to us.
Forward-looking statements are only predictions and
involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or
achievements, or industry results, to be materially different
from any future results, performance or achievements
expressed or implied by such forward-looking statements.
These cautionary statements are being made pursuant to
the Securities Act, the Exchange Act and the PSLRA with
the intention of obtaining the benefits of the “safe harbor”
provisions of such laws. The Company cautions investors
that any forward-looking statements we make are not guar-
antees or indicative of future performance. For additional
information regarding factors that may cause our results of
operations to differ materially from those presented herein,
please see “Risk Factors” contained in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006
and as are detailed from time to time in other reports we
file with the SEC.
You can identify forward-looking statements as
those that are not historical in nature, particularly those that
use terminology such as “may,” “will,” “should,” “expect,”
“anticipate,” “contemplate,” “estimate,” “believe,” “plan,”
“project,” “predict,” “potential” or “continue,” or the nega-
tive of these, or similar terms. In evaluating these forward-
looking statements, you should consider the following
factors, as well as others contained in our public filings from
time to time, which may cause our actual results to differ
materially from any forward-looking statement:
(cid:129) general economic conditions, particularly in the
United States, Canada and Europe;
(cid:129) fluctuations in global equity and fixed-income markets;
(cid:129) the competitive environment;
and energy;
(cid:129) unanticipated expenditures related to the cost of
compliance with environmental and other govern-
mental regulations;
(cid:129) our ability to control costs and implement measures
designed to enhance operating efficiencies;
(cid:129) our ability to successfully integrate and realize syner-
gies from future acquisitions;
(cid:129) the loss of current customers or the inability to obtain
new customers;
(cid:129) the cyclical nature of our pulp business;
(cid:129) increases in the funding requirements for our pension
and post-employment liabilities;
(cid:129) changes in asset valuations including write-downs of
assets including fixed assets, goodwill, intangible assets,
inventory, accounts receivable or other assets for impair-
ment or other reasons;
(cid:129) our existing and future indebtedness;
(cid:129) strikes, labor stoppages and changes in our collective
bargaining agreements and relations with our employ-
ees and unions; and
(cid:129) other risks that are detailed from time to time in
reports we file with the SEC.
You are cautioned not to unduly rely on such
forward-looking statements, which speak only as of the
date made, when evaluating the information presented in
this information statement.
QUAN T I TAT I V E AND QUAL I TAT I V E D I S C LOS URE S
A B O U T M AR K E T R I SK
As a multinational enterprise, we are exposed to risks such
as changes in commodity prices, foreign currency exchange
rates, interest rates and environmental regulation. A variety
of practices are employed to manage these risks, including
operating and financing 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. Credit risk with respect
to the counterparties is considered minimal in view of the
financial strength of the counterparties.
(cid:129) fluctuations in commodity prices, exchange rates (in
Presented below is a description of our most sig-
particular changes in the U.S./Canadian dollar and
U.S./Euro currency exchange rates) and interest rates;
nificant risks.
(cid:129) the ability to realize anticipated cost savings, and the
successful integrations of the former Fox River busi-
ness and Neenah Germany operations;
F O R E I G N C U R R E N C Y R I S K
Our results of operations and cash flows are affected by
changes in the Canadian dollar exchange rate relative to the
U.S. dollar. In addition, our reported results of operations
60
( U N ) C O N V E N T I O N A L W I S D O M
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
are affected by changes in the Euro exchange rate relative
to the U.S. dollar. Exchange rate fluctuations can have a
material impact on our financial results because substantially
all of our pulp mill’s expenses are incurred in Canadian
dollars and our pulp revenues are denominated in U.S. dol-
lars. In 2006, 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 $2 million,
excluding additional currency remeasurement losses.
We use hedging arrangements to reduce our
exposure to Canadian dollar exchange rate fluctuations,
although these arrangements could result in us incurring
higher costs than we would incur without the arrangements.
At December 31, 2006 we had foreign currency contracts
outstanding in a notional amount of $93 million Canadian
dollars designated as cash flow hedges of U.S. dollar
denominated pulp sales. The fair value of the contracts was
a current asset of $0.7 million U.S. dollars. The weighted-
average exchange rate for the foreign currency contracts at
December 31, 2006 was $0.854 U.S. dollars per Canadian
dollar and the contracts extend through December 2007.
Currency transactional exposures are also sensitive
to changes in the exchange rate of the U.S. dollar against
the Canadian dollar and the Euro. We performed a sensitiv-
ity test to quantify the effects that possible changes in the
exchange rate of the U.S. dollar would have on our pretax
income based on the transactional exposure at December 31,
2006. The effect is calculated by multiplying our net mone-
tary asset or liability position by a 10% change in the
exchange rate of the Canadian dollar and the Euro versus
the U.S. dollar. The results of this sensitivity test are as fol-
lows. As of December 31, 2006, a 10% unfavorable change
in the exchange rate of the U.S. dollar against the Canadian
dollar and the Euro involving balance sheet transactional
exposure would have resulted in net pretax losses of
approximately $3 million and $4 million, respectively.
Finally, the translation of the balance sheets of our
Canadian operations from Canadian dollars into U.S. dollars
and our German operations from Euros into U.S. dollars
also are sensitive to changes in the exchange rate of the
U.S. dollar against the Canadian dollar and Euro, respectively.
Consequently, we performed a sensitivity test to determine
if changes in the exchange rate would have a significant
effect on the translation of the balance sheets of our
Canadian operations and German operations into U.S. dol-
lars. These translation gains or losses are recorded as unre-
alized translation adjustments, or UTA (a component of
comprehensive income), within stockholders’ equity. The
hypothetical change in UTA is calculated by multiplying the
net assets of our Canadian and German operations by a
10% change in the U.S.$/Canadian$ and U.S.$/Euro
exchange rates, respectively. The results of this sensitivity
test are presented in the following paragraph.
As of December 31, 2006, a 10% unfavorable
change in the exchange rate of the U.S. dollar against the
Canadian dollar and the U.S. dollar against the Euro would
have decreased our stockholders’ equity by approximately
$6 million and $23 million, respectively. The hypothetical
increase in UTA is based on the difference between the
December 31, 2006 exchange rate and the assumed
exchange rate.
C O M M O D I T Y R I S K
PULP
Our results of operations, cash flows and financial position
are sensitive to the selling prices of wood pulp. Wood pulp
is a commodity for which there are multiple other suppliers.
Typically, commodities businesses compete primarily on the
basis of price and availability. The revenues from producing
a commodity tend to be cyclical, with periods of shortage
and rapidly rising prices leading to increased production
and increased industry investment until supply exceeds
demand. Those periods are then typically followed by
periods of reduced prices and excess and idle capacity until
the cycle is repeated.
The markets and profitability of pulp have been, and
are likely to continue to be, cyclical. Because our pulp busi-
ness competes primarily on the basis of price and availabil-
ity, the financial success of our pulp mills depends on their
ability to produce pulp at a competitive cost. Accordingly,
we must continuously and effectively manage our cost
structure and production capacity to be able to respond
effectively to business cycles in the pulp industry.
In the past, we have used hedging arrangements
to reduce our exposure to pulp price fluctuations, although
these arrangements could result in us incurring higher costs
than we would incur without the arrangements. During
2005 and 2006, we entered into a series of pulp futures
contracts to hedge fluctuations in pulp prices through
December 2006. At December 31, 2006, we had no out-
standing pulp future contracts.
Based on 2006 shipment volume, a 10% decrease
in the market price for northern bleached softwood kraft
pulp (excluding the impact of volume and other discounts)
would reduce pretax income of our Pulp segment by
approximately $17.6 million.
RAW MATERIALS
We purchase a substantial portion of the raw materials and
energy necessary to produce our products on the open
market, and, as a result, the price and other terms of those
purchases are subject to change based on factors such as
worldwide supply and demand and government regulation.
We do not have significant influence over our raw material
or energy prices and generally do not possess enough
power to pass increases in those prices along to purchasers
of our products, unless those increases coincide with
increased demand for the product. Therefore, an increase
in raw material or energy prices could occur at the same
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 61
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
time that prices for our products are decreasing and have
an adverse effect on our results of operations, financial
position and cash flows.
We obtain a portion of the wood fiber required for
the Pictou pulp mill from timberland areas licensed by the
Nova Scotia provincial government. The government has
granted us non-exclusive licenses for substantial timberland
areas from which we obtain fiber, and we also obtain fiber
harvested from timberland areas licensed to others by this
government. There can be no assurance that the amount of
fiber that we are allowed to harvest from these licensed
areas will not be decreased, or that our licenses will con-
tinue to be renewed or extended by the governments on
acceptable terms. In the area where our Pictou mill is located,
there is increasing competition for wood fiber from various
other users. Changes in governmental practices and poli-
cies as they apply to us and to others from whom we obtain
fiber may result in less fiber being available, increased costs
to obtain the fiber and additional expense in meeting
forestry standards. These results could have a material
adverse effect upon our financial position, liquidity and
results of operations.
In 2006, two suppliers provided over 70% of the
wood chips used by the Pictou mill. While we believe that
alternative sources of critical supplies, such as wood chips,
would be available, disruption of our primary sources could
create a temporary, adverse effect on product shipments.
Also, an interruption in supply of single source specialty
grade latex or specialty softwood pulp to our technical
products business could disrupt and eventually cause a
shutdown of production of certain technical products.
We generate substantially all of the electrical
energy used by our Munising and Pictou mills. Availability
of energy is not expected to be a problem in the foresee-
able future, but the purchase price of such energy can and
likely will fluctuate significantly based on fluctuations in
demand and other factors. In addition, we have forward
purchase contracts for natural gas through June 2007.
At December 31, 2006, we had future contracts for
290,000 MMBTUs of natural gas with a notional amount of
approximately $2.5 million. The weighted average price for
the natural gas futures contracts at December 31, 2006 was
$8.79 per MMBTU. In January 2006, we entered into an
agreement to purchase 350 thousand pounds per year of
“Green Steam” to supply energy at our Neenah paper mill.
We anticipate that the agreement will substantially reduce
the mill’s annual consumption of natural gas. There is no
assurance that we will be able to obtain electricity or natu-
ral gas purchases on favorable terms in the future.
62
( U N ) C O N V E N T I O N A L W I S D O M
I N T E R E S T R AT E R I S K
We are exposed to interest rate risk on our fixed rate long-
term debt and our variable rate bank debt. Our objective is
to manage the impact of interest rate changes on earnings
and cash flows from our variable rate debt and on the mar-
ket value of our fixed rate debt. At December 31, 2006, we
had $225.0 million of fixed rate long-term debt outstanding
and $57.3 million of variable rate borrowings outstanding
under our revolving credit agreement. We are exposed
to fluctuations in the fair value of our fixed rate long-term
debt resulting from changes in market interest rates,
but not to fluctuations in our earnings or cash flows. At
December 31, 2006, the fair market value of our fixed rate
long-term debt was $273.3 million based upon the quoted
market price of the senior notes. A 100 basis point increase
in interest rates would increase our annual interest expense
on variable rate borrowings outstanding under our revolv-
ing credit agreement by approximately $0.6 million.
We could in the future, reduce our exposure to
interest rate fluctuations on our variable rate debt by enter-
ing into interest rate hedging arrangements, although
those arrangements could result in us incurring higher costs
than we would incur without the arrangements.
E N V I R O N M E N TA L R E G U L AT I O N
Our manufacturing operations are subject to extensive
regulation by U.S. and international authorities. We have
made significant capital expenditures to comply with
environ mental laws, rules and regulations. Due to changes
in environmental laws and regulations, the application of
such regulations and changes in environmental control
technology, we are not able to predict with certainty the
amount of future capital spending to be incurred for envi-
ronmental purposes. Taking these uncertainties into account,
we have planned capital expenditures for environmental
projects during the period 2007 through 2010 of approxi-
mately $2 million to $3 million annually. Following the com-
pletion of engineering studies and negotiations with local
authorities and other interested parties in Canada, we do
not currently anticipate any material capital expenditures
would be required at the Pictou mill related to the effluent
treatment system, total sulphur emissions or other environ-
mental matters until 2009 or later.
We believe these risks can be managed and will
not have a material adverse effect on our business or our
consolidated financial position, results of operations or
cash flows.
management’s annual report on
internal control over financial reporting
Management of the Company is responsible for establish-
ing and maintaining effective internal control over financial
reporting as defined in Rules 13a-15(f) or 15a-15(f) under the
Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is designed to provide rea-
sonable assurance to the Company’s management and
board of directors regarding the preparation and fair pres-
entation of published financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstate-
ments. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect
to financial statement preparation and presentation.
Management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2006. The scope of management’s assess-
ment of the effectiveness of internal control over financial
reporting includes all of the Company’s businesses except
for Neenah Germany manufacturing operations acquired in
October 2006. Neenah Germany constituted approximately
125% and 46% of net and total assets, respectively, and 8%
of revenues, and 3% of net income of the consolidated
financial statement amounts as of and for the year ended
December 31, 2006. Further discussion of this acquisition
can be found in Note 5 to our consolidated and combined
financial statements. In making this assessment, manage-
ment 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,
2006, the Company’s internal control over financial report-
ing is effective based on those criteria.
Management’s assessment of the effectiveness of
internal control over financial reporting as of December 31,
2006, has been audited by Deloitte & Touche LLP, the inde-
pendent registered public accounting firm who also audited
the Company’s consolidated financial statements. Deloitte
& Touche’s attestation report on management’s assessment
of the Company’s internal control over financial reporting is
included herein.
Neenah Paper, Inc.
March 15, 2007
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 63
report of independent registered
public accounting firm ON M AN AGE ME N T ’S A S SE S S ME N T AN D T H E E F F E C T I V E N E S S
OF IN T E R N AL CON T R OL OV E R F IN AN C I AL REP OR T ING
To the Board of Directors and Stockholders of
Neenah Paper, Inc., Alpharetta, Georgia
We have audited management’s assessment, included in the
accompanying “Management’s Annual Report on Internal
Control over Financial Reporting,” that Neenah Paper, Inc.
and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
As described in Management’s Annual Report on Internal
Control Over Financial Reporting, management excluded
from its assessment the internal control over financial
reporting at Neenah Germany, which was acquired in
October 2006 and whose financial statements constitute
125 percent and 46 percent of net and total assets, respec-
tively, 8 percent of revenues, and 3 percent of net income
of the consolidated financial statement amounts as of and
for the year ended December 31, 2006. Accordingly, our
audit did not include the internal control over financial
reporting at Neenah Germany. The Company’s manage-
ment is responsible for maintaining effective internal con-
trol over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on manage-
ment’s assessment and an opinion on the effectiveness of
the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance
about whether effective internal control over financial
reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control
over financial reporting, evaluating management’s assess-
ment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other
procedures as we considered necessary in the circum-
stances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial report-
ing is a process designed by, or under the supervision of,
the company’s principal executive and principal financial
officers, 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 financial reporting and the prepa-
ration of financial statements for external purposes in accor-
dance with generally accepted accounting principles. A
company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the main-
tenance of records that, in reasonable detail, ccurately and
64
( U N ) C O N V E N T I O N A L W I S D O M
fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit prepara-
tion of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accor-
dance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regard-
ing prevention or timely detection of unauthorized acquisi-
tion, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of the inherent limitations of internal
control over financial 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 financial 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 policies or procedures may deteriorate.
In our opinion, management’s assessment that the
Company maintained effective internal control over finan-
cial reporting as of December 31, 2006, 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 finan-
cial reporting as of December 31, 2006, based on the crite-
ria 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 stan-
dards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and
financial statement schedule as of and for the year ended
December 31, 2006 of the Company and our report dated
March 15, 2007 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph
relating to the preparation of the combined financial state-
ments of the Pulp and Paper Business of Kimberly-Clark
Corporation and an explanatory paragraph regarding the
Company’s adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, on January 1,
2006, and the recognition and related disclosure provisions
of Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, on December 31, 2006.
Atlanta, Georgia
March 15, 2007
report of independent registered
public accounting firm
To the Board of Directors and Stockholders of
Neenah Paper, Inc., Alpharetta, Georgia
We have audited the accompanying consolidated balance
sheets of Neenah Paper, Inc. and subsidiaries (the “Company”)
as of December 31, 2006 and 2005, and the related consoli-
dated and combined statements of operations, stockhold-
ers’ and invested equity, and cash flows 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, 2006. These financial state-
ments are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the finan-
cial statements. An audit also includes assessing the account-
ing principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
The accompanying combined financial statements
were prepared to present the results of operations and cash
flows 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 financial state-
ments, and may not necessarily be indicative of the condi-
tions that would have existed or the results of operations
and cash flows if the Pulp and Paper Business had operated
as a stand-alone company during the period presented.
In our opinion, such consolidated and combined finan-
cial statements present fairly, in all material respects, the
financial position of Neenah Paper, Inc. and subsidiaries at
December 31, 2006 and 2005, and the results of operations
and cash flows of the Company and the Pulp and Paper
Business for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, on January 1, 2006
and the recognition and related disclosure provisions of
Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, on December 31, 2006.
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 financial reporting as of December 31,
2006, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and
our report dated March 15, 2007 expressed an unqualified
opinion on management’s assessment of the effectiveness
of the Company’s internal control over financial reporting
and an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Atlanta, Georgia
March 15, 2007
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 65
consolidated and combined
statements of operations
(In millions, except share and per share data)
Net sales
Cost of products sold
Gross profit
Selling, general and administrative expenses
Gain on sale of woodlands (Note 3)
Other (income) expense – net
Operating income
Interest expense
Interest income
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations (Note 4)
Net income (loss)
Earnings (Loss) Per Common Share
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
Weighted-Average Common Shares Outstanding (in thousands)
Basic
Diluted
See Notes to Consolidated and Combined Financial Statements
Year Ended December 31,
2006
2005
2004
$ 594.3
502.3
92.0
56.9
(125.5)
(7.8)
168.4
19.4
(2.9)
151.9
56.5
95.4
(32.9)
$ 62.5
$ 6.47
(2.23)
$ 4.24
$ 6.43
(2.22)
$ 4.21
14,757
14,847
$534.7
438.7
96.0
49.4
–
(6.8)
53.4
18.5
(0.3)
35.2
12.9
22.3
(52.0)
$ (29.7)
$ 1.51
(3.53)
$ (2.02)
$ 1.51
(3.52)
$ (2.01)
14,739
14,787
$528.8
399.4
129.4
42.0
–
1.6
85.8
1.4
–
84.4
30.4
54.0
(80.4)
$ (26.4)
$ 3.66
(5.45)
$ (1.79)
$ 3.65
(5.43)
$ (1.78)
14,738
14,799
66
66
( U N ) C O N V E N T I O N A L W I S D O M
( U N ) C O N V E N T I O N A L W I S D O M
consolidated balance sheets
(In millions)
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
Deferred Income Taxes
Prepaid and Intangible Pension Costs (Note 9)
Goodwill (Note 5)
Intangible Assets (Note 5)
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
Deferred Income Taxes
Noncurrent Employee Benefits and Other Obligations
TOTAL LIABILITIES
Commitments and Contingencies (Notes 13 and 14)
Stockholders’ Equity
Common stock, par value $0.01 – authorized: 100,000,000 shares;
issued and outstanding: 14,811,520 shares and 14,766,203 shares
Treasury stock, at cost: 1,999 shares and 814 shares
Additional paid-in capital
Accumulated deficit
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
December 31,
2006
2005
$ 1.6
112.5
74.9
1.5
31.9
222.4
355.6
32.7
–
92.0
29.5
12.5
$744.7
$ 1.3
74.7
53.5
129.5
282.3
35.8
112.2
559.8
0.1
(0.1)
224.7
(49.7)
9.9
–
184.9
$744.7
$ 12.6
79.1
87.1
1.7
23.8
204.3
217.9
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
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 67
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 67
consolidated and combined statements
of changes in stockholders’ equit y and invested capital
Common Stock
Shares Amounts
Additional
Kimberly-
Treasury
Stock
Paid-In Clark’s Net Accumulated
Deficit
Capital
Investment
Accumulated Unearned
Other Compen-
sation on
hensive Restricted
Compre-
Income/(Loss)
Compre-
hensive
Stock Income/(Loss)
–
$ –
$
–
$
–
$ 436.8
44.3
$
–
(70.7)
$ (3.1)
$ –
$(26.4)
24.8
30.0
(0.1)
$ 28.3
$(29.7)
10.1
(12.5)
4.7
$(27.4)
$ 62.5
12.8
2.9
(4.3)
$ 73.9
(37.6)
(12.7)
(1.8)
(213.0)
(216.0)
–
(70.7)
(29.7)
(5.9)
–
(106.3)
62.5
(5.9)
24.8
30.0
(0.1)
51.6
10.1
(12.5)
4.7
(2.2)
(2.2)
0.4
53.9
(1.8)
12.8
2.9
(4.3)
(55.4)
1.8
$ –
$ (49.7)
$ 9.9
$ –
(In millions,
shares in thousands)
Balance, December 31, 2003
Net income (loss)
Other comprehensive income
Unrealized foreign currency translation
Minimum pension liability
Loss on cash flow hedges
Net 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
Stock-based compensation awards,
less amortization
Balance, December 31, 2004
Net loss
Other comprehensive income
14,738
0.1
216.0
25
14,763
0.1
2.3
– 218.3
Unrealized foreign currency translation
Minimum pension liability
Gain on cash flow hedges
Dividends declared
Restricted stock vesting
Stock-based compensation awards,
3
less amortization
Other (Note 7)
Balance, December 31, 2005
Net income
Other comprehensive income
14,766
0.1
0.4
0.7
– 219.4
Unrealized foreign currency translation
Minimum pension liability
Loss on cash flow hedges
Dividends declared
Transfer of unearned compensation to
additional paid-in capital
Adjustment to initially adopt
SFAS 158 (Note 9)
Stock options exercised
Restricted stock vesting (Note 12)
Stock-based compensation
Balance, December 31, 2006
(1.8)
1.3
(0.1)
5.8
$(0.1) $224.7
43
3
14,812
$0.1
See Notes to Consolidated and Combined Financial Statements
68
68
( U N ) C O N V E N T I O N A L W I S D O M
( U N ) C O N V E N T I O N A L W I S D O M
consolidated and combined
statements of cash flows
(In millions)
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization
Stock-based compensation
Deferred income tax provision
Asset impairment loss
Gain on sale of woodlands (Note 3)
Loss on disposal of Terrace Bay (Note 4)
Loss on curtailment and partial settlement of pension plan (Note 4)
Loss on other asset dispositions
Net cash provided by (used in) changes in operating working capital,
net of effects of acquisition
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued expenses
Foreign currency effects on working capital
Contribution to settle pension liabilities (Note 4)
Pension and other post-employment benefits
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Net proceeds from sale of woodlands (Note 3)
Payment for transfer of Terrace Bay (Note 4)
Acquisition of German operations, net of cash acquired (Note 5)
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
Proceeds from exercise of stock options
Spin-Off payment to Kimberly-Clark
Net transfers to Kimberly-Clark
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
See Notes to Consolidated and Combined Financial Statements
Year Ended December 31,
2006
2005
2004
$ 62.5
$(29.7)
$ (26.4)
30.2
5.8
30.0
–
(125.5)
6.5
26.4
0.8
3.0
24.7
(0.8)
8.0
0.7
4.2
(10.8)
0.3
(0.2)
65.8
(25.1)
134.8
(18.6)
(218.6)
(0.2)
(127.7)
84.3
(0.7)
(28.2)
0.6
(0.6)
(5.9)
1.3
–
–
50.8
0.1
(11.0)
12.6
$ 1.6
29.0
0.8
(20.1)
54.5
–
–
–
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
36.0
0.6
(43.6)
112.8
–
–
–
3.1
(14.1)
(9.4)
2.4
11.3
5.6
5.7
–
(7.4)
(0.6)
76.0
(19.1)
–
–
–
–
(19.1)
225.0
(12.2)
–
10.0
(10.0)
–
–
(213.0)
(37.6)
(37.8)
–
19.1
–
$ 19.1
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 69
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 69
notes to consolidated and
combined financial statements (Dollars in millions, except as noted)
one
Background and Basis of Presentation
B A C K G R O U N D
Neenah Paper, Inc. (“Neenah” or the “Company”), a
Delaware corporation, was incorporated in April 2004 in
contemplation of the spin-off by Kimberly-Clark Corporation
(“Kimberly-Clark”) of its fine paper and technical products
businesses in the United States and its Canadian pulp
business (collectively, the “Pulp and Paper Business”). In
November 2004, Kimberly-Clark completed the distribution
of all of the shares of Neenah’s common stock to the stock-
holders 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 com-
mon stock held. As a result of the Spin-Off, Kimberly-Clark
transferred all of the assets and liabilities of the Pulp and
Paper Business to Neenah. Following the Spin-Off, Neenah
is an independent public company and Kimberly-Clark has
no continuing stock ownership.
The fine paper business is a leading producer
of premium writing, text, cover and specialty papers. The
technical products business is a leading producer of durable,
saturated and coated substrates for a variety of end uses.
At the time of the Spin-Off, the Canadian pulp business
consisted of pulp mills in Terrace Bay, Ontario and Pictou,
Nova Scotia and the related woodlands (including
1,000,000 acres in Nova Scotia).
In May 2006, the Company announced a tentative
agreement to transfer the Terrace Bay mill and related
woodlands operations to certain affiliates of Buchanan
Forest Products Ltd. (“Buchanan”). In August 2006, the
Company consummated the agreement by transferring the
mill and related woodlands operations (excluding certain
working capital amounts and post-employment obligations)
to Buchanan. Pursuant to the terms of the agreement,
Buchanan assumed responsibility for substantially all lia -
bilities related to the future operation of the mill in exchange
for a payment of $18.6 million. For the year ended
December 31, 2006, the results of operations of the Terrace
Bay mill and the loss on transfer are reflected as discontin-
ued operations in the consolidated and combined state-
ments of operations. The consolidated results of operations
for all prior periods have been restated to reflect the results
of operations of the Terrace Bay mill as discontinued opera-
tions. See Note 4, “Discontinued Operations.”
In June 2006, the Company completed the sale of
approximately 500,000 acres of woodlands in Nova Scotia
for gross proceeds of $139.1 million. The agreement
includes a fiber supply agreement to secure a source of
70
( U N ) C O N V E N T I O N A L W I S D O M
fiber for the Company’s Pictou pulp mill. The transaction
resulted in a net pretax gain of $131.6 million. Approxi -
mately $9.0 million of such gain was deferred and will be
recognized in income pro-rata through December 2007.
See Note 3, “Sale of Woodlands.”
In October 2006, the Company completed the
purchase of the outstanding interests of FiberMark Services
GmbH & Co. KG and the outstanding interests of FiberMark
Beteiligungs GmbH (collectively “Neenah Germany”).
Neenah Germany was acquired from FiberMark, Inc.
(“FiberMark”) and FiberMark International Holdings LLC for
$218 million in cash. The transaction was financed through
$160 million of available cash and $58 million of debt drawn
against the Company’s revolving credit facility. The assets
acquired as a result of the acquisition of Neenah Germany
consist of three mills located near Munich and Frankfurt,
that produce a wide range of products, including transporta-
tion and other filter media, nonwoven wall coverings, mask-
ing and other tapes, abrasive backings, and specialized
printing and coating substrates. See Note 5, “Acquisitions.”
B A S I S O F C O N S O L I D AT I O N A N D P R E S E N TAT I O N
The consolidated and combined financial statements
include the financial statements of the Company and its
wholly owned and majority owned subsidiaries. All signifi-
cant intercompany balances and transactions have been
eliminated in consolidation.
The consolidated and combined financial state-
ments reflect the consolidated operations of Neenah and
its subsidiaries as a separate, stand alone entity subsequent
to November 30, 2004, combined with the historical opera-
tions of the Pulp and Paper Business, which were operated
as part of Kimberly-Clark prior to the Spin-Off. The com-
bined financial statements for periods through November 30,
2004 have been derived from the consolidated financial
statements and accounting records of Kimberly-Clark using
the historical results of operations and the historical basis
of assets and liabilities of the Pulp and Paper Business.
Manage ment believes the assumptions underlying the com-
bined financial statements for these periods are reasonable.
However, the combined financial statements included
herein for periods through November 30, 2004 are not
indicative of the Pulp and Paper Business’ results of opera-
tions, financial position and cash flows in the future or what
its results of operations, financial position and cash flows
would have been had the Pulp and Paper Business been a
stand alone company during the periods presented. See
Note 15, “Transactions with Kimberly-Clark.”
Kimberly-Clark’s investment in the Pulp and Paper
Business is shown as “Kimberly-Clark’s net investment” in
the combined financial statements through November 30,
2004 because no direct ownership relationship existed
among the entities that comprised the Pulp and Paper
Business. Intercompany accounts between the Pulp and
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
Paper Business and Kimberly-Clark are combined with
“Kimberly-Clark’s net investment.” As of November 30,
2004, the balance reflected in “Kimberly-Clark’s net invest-
ment” was transferred to “Additional paid-in capital” of
Neenah. “Accumulated deficit” reflected in the consoli-
dated financial statements represents net losses beginning
December 1, 2004.
Basic earnings (loss) per share (“EPS”) are com-
puted by dividing net income (loss) by the number of
weighted-average shares of common stock outstanding.
Diluted earnings (loss) per share are calculated to give
effect to all potentially dilutive common shares applying
the “Treasury Stock” method. Outstanding stock options,
restricted shares, restricted stock units and restricted
stock units with performance conditions represent the only
potentially dilutive effects on the Company’s weighted-
average shares. Approximately 1,095,000, 790,000 and
875,000 potentially dilutive options in 2006, 2005 and 2004,
respectively, were excluded from the computation of dilu-
tive common shares.
The following table presents the computation of
basic and diluted shares of common stock used in the cal-
culation of EPS (amounts in thousands):
Basic shares outstanding
Add: Assumed incremental
shares under stock
compensation plans
Assuming dilution
Year Ended December 31,
2006
2005
2004
14,757
14,739
14,738
90
14,847
48
14,787
61
14,799
Prior to the Spin-Off, certain corporate, general
and administrative expenses of Kimberly-Clark were allo-
cated to the Pulp and Paper Business, using a three-factor
formula comprised of net sales, total assets and employee
head count. In the opinion of management, such an alloca-
tion is reasonable. However, such expenses are not indica-
tive of, nor is it practical or meaningful for management to
estimate for all historical periods 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 includes information
technology, accounting, cash management, legal, tax, insur-
ance and public relations. Such expenses for 2004 were
$0.5 million. Subsequent to November 30, 2004, the Company
performed these functions using its own resources or pur-
chased services, some of which were provided by Kimberly-
Clark pursuant to a Corporate Services Agreement. See
Note 15, “Transactions with Kimberly-Clark.”
Changes in Kimberly-Clark’s net investment repre-
sent 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 flows
from operations.
C A S H PAY M E N T TO K I M B E R LY- C L A R K
On November 30, 2004, the Company made a Spin-Off
payment of $213 million to a Kimberly-Clark subsidiary pri-
marily from the proceeds of a $225 million principal amount
senior note offering (See Note 8, “Debt”).
I N C O M E TA X E S
For periods prior to November 30, 2004, income tax provi-
sions 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 posi-
tion for the benefit of its entire portfolio of businesses, and
its tax strategies are not necessarily reflective of the tax
strategies that the Pulp and Paper Business would have fol-
lowed as a stand alone entity.
two
Summary of Significant Accounting Policies
U S E O F E S T I M AT E S
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and
the reported amounts of net sales and expenses during the
reporting periods. Actual results could differ from these
estimates, and changes in these estimates are recorded
when known. Significant management judgment is required
in determining the accounting for, among other things,
pension and post-employment benefits, retained insurable
risks, allowances for doubtful accounts and reserves for
sales returns and cash discounts, purchase price allocations,
useful lives for depreciation, depletion and amortization,
future cash flows associated with impairment testing for
long-lived assets, income taxes, contingencies, inventory
obsolescence and market reserves, valuation of stock-
based compensation and derivative instruments.
R E V E N U E R E C O G N I T I O N
The Company recognizes sales revenue when all of the
following have occurred: (1) delivery has occurred, (2) per-
suasive evidence of an agreement exists, (3) pricing is fixed
or determinable, and (4) collection is reasonably assured.
Delivery is not considered to have occurred until the cus-
tomer 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
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 71
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
time of shipment for terms designated free on board
(“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 reported net of allowable
discounts and estimated returns. Reserves for cash dis-
counts, trade allowances and sales returns are estimated
using historical experience.
Pursuant to a 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, reflecting the one-time effect
of this change in terms.
S H I P P I N G A N D H A N D L I N G C O S T S
All amounts billed to customers in a sales trans action
related to shipping and handling are recorded as revenue,
and costs incurred by the Company for shipping and han-
dling are recorded as costs of products sold.
F I N A N C I A L I N S T R U M E N T S
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 high credit quality financial institutions.
The Company uses derivative instruments to man-
age exposures to foreign currency and commodity price
risks. The Company principally uses foreign currency for-
ward and pulp future contracts to hedge against these
exposures. Derivative instruments are recorded on the bal-
ance sheet as assets or liabilities and measured at fair mar-
ket value. Derivative instruments that have been designated
as hedges of anticipated future cash flows are marked-to-
market through accumulated other comprehensive income
(balance sheet adjustments) until such time as the related
forecasted transactions affect earnings. Derivatives that are
not designated as hedges are adjusted to fair value through
Other (income) expense – net. Fair value estimates are
based on relevant market information, including current
market rates and prices. The Company documents relation-
ships between hedging instruments and hedged items, and
links derivatives designated as cash flow hedges to specific
forecasted transactions. The Company also assesses and
documents, 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 flows associated with the hedged items. Any hedge
ineffectiveness is charged to expense in the period incurred.
I N V E N TO R I E S
U.S. inventories are valued at the lower of cost, using the
Last-In, First-Out (LIFO) method for financial reporting pur-
poses, or market. Canadian and German inventories are
valued at the lower of cost, using either the First-In, First-
Out (FIFO) or a weighted average cost method, or market.
The FIFO values of total inventories valued on the LIFO
method were $37.9 million and $35.2 million at December
31, 2006 and 2005, respectively. Cost includes labor, mate-
rials and production overhead. Inventories of the Canadian
pulp operations include both roundwood (logs) and wood
chips. These inventories are located both at the pulp mills
and at various timberlands locations. In accordance with
industry practice, physical inventory counts utilize “scaling”
techniques to estimate quantities of roundwood, as well as
various electronic devices to calculate wood chip inventory
amounts. These techniques historically have provided rea-
sonable estimates of such inventories.
F O R E I G N C U R R E N C Y
Balance sheet accounts of the Canadian pulp operations
and Neenah Germany are translated from Canadian dollars
and Euros, respectively, into U.S. dollars at period-end
exchange rates, and income and expense are translated
at average exchange rates during the period. Translation
gains or losses related to net assets located in Canada and
Germany are recorded as unrealized foreign currency trans-
lation adjustments within comprehensive income (loss) in
stockholders’ and invested equity. Gains and losses result-
ing from foreign currency transactions (transactions denom-
inated in a currency other than the entity’s functional
currency) are included in Other (income) expense-net in
the consolidated and combined statements of operations.
P R O P E R T Y A N D D E P R E C I AT I O N
Property, plant and equipment are stated at cost, less accu-
mulated depreciation. Certain costs of software developed
or obtained for internal use are capitalized. When property,
plant and equipment is sold or retired, the costs and the
related accumulated depreciation are removed from the
accounts, and the gains or losses are recorded in Other
(income) and expense – net. For financial reporting purposes ,
depreciation is principally computed on the straight-line
method over the estimated useful asset lives. Weighted
average useful lives are approximately 33 years for build-
ings, 9 years for land improvements and 17 years for machin-
ery and equipment. The cost of permanent and secondary
logging roads is capitalized and amortized over the esti-
mated useful lives of the roads, generally 20 years. The cost
of tertiary roads (which are not permanent) is expensed as
incurred. For income tax purposes, accelerated methods
of depreciation are used.
72
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
Estimated useful lives are periodically reviewed
and, when warranted, changes are made to them. Long-
lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that their cost may not
be recoverable. An impairment loss would be recognized
when estimated undiscounted future pretax cash flows
from the use of the asset are less than its carrying amount.
Measurement of an impairment loss is based on
the excess of the carrying amount of the asset over its fair
value. Fair value is generally measured using discounted
cash flows. See Note 4, “Discontinued Operations” 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 main-
tenance performed on manufacturing facilities, composed
of labor, materials and other incremental costs, is charged
to operations as incurred. Start-up costs for new or
expanded facilities are expensed as incurred.
T I M B E R L A N D S
Timberlands are stated at cost, less the accumulated cost
of timber previously harvested. The Company’s owned tim-
berlands 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 (principally herbicide and
insecticide applications) during the stand establishment
period also are capitalized. The Company charges capital-
ized costs, excluding land, to operations at the time the
wood is harvested, based on periodically determined
depletion rates.
Fertilization, control of competition and seedling
protection activities following the stand establishment period
are expensed as incurred. The Company pays stumpage fees
for wood harvested under long-term licenses and charges
such costs to operations as incurred. Costs of administra-
tion, insurance, property taxes and interest are expensed
as incurred.
The Company distinguishes between costs associ-
ated with pre-merchantable timber and costs associated
with merchantable timber. Costs of merchantable timber
are currently depletable, whereas costs of pre- merchantable
timber are not yet depletable. Timberland depletion rates
for owned timberlands are calculated periodically, based on
capitalized costs and the total estimated volume of timber
that is mature enough to be harvested and processed.
Timber inventory volume is determined by adding an
estimate of current-year growth to the prior-year ending
balance, less the current-year harvest. The volume and
growth estimates are tested periodically using statistical
sampling techniques. The depletion rate calculated at the
end of the year is used to calculate the cost of timber har-
vested in the subsequent year.
G O O D W I L L A N D O T H E R I N TA N G I B L E A S S E T S
The Company follows the guidance of Statement of
Financial Accounting Standards No. 141, Business
Combinations (“SFAS 141”), in recording goodwill arising
from a business combination as the excess of purchase
price and related costs over the fair value of identifiable
assets acquired and liabilities assumed. All of the Company’s
goodwill was acquired in conjunction with the acquisition of
Neenah Germany in October 2006. See Note 5, “Acquisitions.”
Under Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”), goodwill is subject to impairment testing at
least annually. A fair-value-based test is applied at the
reporting unit level, which is generally one level below the
segment level. The test compares the fair value of an
entity’s reporting units to the carrying value of those
reporting units. This test requires various judgments and
estimates. The fair value of the reporting unit is determined
using an estimate of future cash flows and a risk-adjusted
discount rate to compute a net present value of future cash
flows. An adjustment to goodwill will be recorded for any
goodwill that is determined to be impaired. Impairment of
goodwill is measured as the excess of the carrying amount
of goodwill over the fair values of recognized and unrecog-
nized assets and liabilities of the reporting unit. The
Company tests goodwill for impairment at least annually on
November 30 in conjunction with preparation of its annual
business plan, or more frequently if events or circumstances
indicate it might be impaired. Goodwill was last tested for
impairment as of November 30, 2006 and no impairment
was indicated.
Intangible assets with estimable useful lives are
amortized on a straight-line basis over their respective esti-
mated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets (“SFAS 144”).
Intangible assets consist primarily of customer relation-
ships, trade names and acquired intellectual property. Such
intangible assets are being amortized using the straight-line
method over estimated useful lives of between 10 and
15 years. Certain trade names valued at $6.9 million are
estimated to have indefinite useful lives and as such are not
being amortized.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 73
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
R E S E A R C H E X P E N S E
Research and development costs are charged to expense as
incurred and are recorded in “Selling, general and adminis-
trative expenses” on the Consolidated and Combined
Statement of Operations.
FA I R VA L U E O F F I N A N C I A L I N S T R U M E N T S
The carrying amounts reflected in the Consolidated
Balance 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 or rates currently available to the
Company for debt of the same remaining maturities. The
fair value of the Company’s long-term debt at December 31,
2006 was $273.3 million compared to the carrying value of
$282.3 million. 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.
O T H E R C O M P R E H E N S I V E I N C O M E
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 bal-
ance sheets consists of foreign currency translation, deferred gains and (losses) on cash flow hedges, gains or losses, prior
service costs or credits, and transition assets or obligations related to pensions and other post-employment benefits, and
minimum pension liability adjustments. The foreign currency translation adjustments are not adjusted for income taxes since
they relate to indefinite investments in the Canadian pulp operations and Neenah Germany.
The changes in the components of other comprehensive income (loss) are as follows:
Pretax
Amount
2006
Tax
Effect
Net
Amount
Pretax
Amount
2005
Tax
Effect
Net
Amount
Pretax
Amount
2004
Tax
Effect
Net
Amount
Year Ended December 31,
$12.8
4.6
$ –
(1.7)
$12.8
2.9
$ 10.1
(20.5)
$ –
8.0
$ 10.1
(12.5)
$24.8
46.3
$ –
(16.3)
$24.8
30.0
(6.8)
2.5
(4.3)
7.4
(2.7)
4.7
(0.2)
0.1
(0.1)
$10.6
$ 0.8
$11.4
$ (3.0)
$ 5.3
$ 2.3
$70.9
$(16.2)
$54.7
Unrealized foreign
currency translation
Minimum pension liability
Deferred gain (loss) on
cash flow hedges
Other comprehensive
income (loss)
The components of accumulated other comprehen-
sive income (loss), net of applicable income taxes are as follows:
Unrealized foreign currency translation
Adjustment to pension and other benefit
liabilities (net of income tax benefits
of $43.1 million and $11.6 million,
respectively)(a)
Deferred gain on cash flow hedges (net
of income tax expense of $0.2 million
and $2.7 million, respectively)
Accumulated other
December 31,
2006
$ 80.8
2005
$ 68.0
(71.3)
(18.8)
0.4
4.7
comprehensive income
$ 9.9
$ 53.9
(a) Adjustment to pension and other liabilities at December 31, 2006,
includes an adjustment of ($55.4) million, net of income tax benefits of
$33.2 million related to the Company’s initial adoption of SFAS No. 158.
See Note 9, “Post-Employment and Other Benefits.”
A C C O U N T I N G S TA N D A R D S C H A N G E S
On December 31, 2006, the Company adopted Statement
of Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other
Postretirement Plans (“SFAS 158”) which requires an
employer to recognize the overfunded or underfunded sta-
tus of a defined benefit postretirement plan as an asset or lia-
bility in its statement of financial position and to recognize
changes in that funded status in the year in which the
changes occur through comprehensive income. SFAS 158
also requires an employer to measure the funded status of a
plan as of the date of its year-end statement of financial posi-
tion. The Company was not affected by the measurement
provisions of SFAS 158 because the Company currently
measures the funded status of its benefit plans as of year-
end. For a discussion of the impact of adopting SFAS 158,
see Note 9, “Post-Employment and Other Benefits.”
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N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
On January 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment (“SFAS 123R”) using the modified-prospective
transition method. The restatement of prior year periods
for the adoption of SFAS 123R is not permitted under the
modified-prospective transition method. Stock-based com-
pensation cost recognized under SFAS 123R in the year
ended December 31, 2006 consisted of (a) compensation
cost for all unvested stock-based grants outstanding as
of January 1, 2006, based on the grant date fair value esti-
mated in accordance with the pro forma provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (“SFAS 123”)
and (b) compensation cost for all stock-based awards
granted subsequent to adoption based on the grant date
fair value estimated in accordance with the provisions of
SFAS 123R. The amount of stock-based compensation cost
recognized is based on the fair value of grants that are ulti-
mately expected to vest and is recognized pro-rata over the
requisite service period for the entire award. See Note 10,
“Stock Compensation Plans.”
In June 2006, the Financial Accounting Standards
Board (“FASB”) issued FIN 48, Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement
No. 109 (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition and measure-
ment threshold for an enterprise to report tax positions in
their financial statements. Under FIN 48 an enterprise must
also make extensive disclosures about tax positions that
do not qualify for financial statement recognition.
The evaluation of a tax position in accordance with
FIN 48 is a two-step process. The first step is recognition:
the enterprise determines whether it is more likely than not
that a tax position will be sustained upon examination. The
second step is measurement: a tax position that meets the
more-likely-than-not recognition threshold is measured to
determine the amount of expense or benefit to recognize in
the financial statements. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is evalu-
ating FIN 48 and is currently unable to estimate the effect
of adoption on the Company’s financial position, results of
operations or cash flows.
In September 2006, the FASB issued Statement
of Financial Accounting Standards No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value under GAAP,
and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements. SFAS 157
does not require any new fair value measurements.
The definition of fair value in SFAS 157 retains the
exchange price notion in earlier definitions of fair value and
emphasizes that fair value is a market-based measurement, not
an entity-specific measurement. SFAS 157 expands disclosures
about the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to initial recognition.
SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods
within those fiscal years. Adoption of SFAS 157 is not expected
to have a material effect on the Company’s financial position,
results of operations or cash flows.
In September 2006, the SEC issued Staff
Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (“SAB 108”). SAB 108
provides guidance on the consideration to be given to prior
year misstatements when quantifying misstatements in cur-
rent year financial statements for purposes of determining
whether the financial statements are materially misstated.
SAB 108 requires the quantification of misstatements based
on their impact to both the balance sheet and the state-
ment of operations to determine materiality. The guidance
provides for a one-time cumulative-effect adjustment to
correct for misstatements for errors that were not deemed
material under a company’s prior approach but are material
under the SAB 108 approach. SAB 108 is effective as of
December 31, 2006 for calendar year companies. The
Company did not have any SAB 108 adjustments.
In February 2007, the FASB issued Statement of
Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115
(“SFAS 159”). SFAS 159 permits entities to choose to meas-
ure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex
hedge accounting provisions. Most of the provisions of
SFAS 159 apply only to entities that elect the fair value option.
However, the amendment to FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and
trading securities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is per-
mitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects
to apply the provisions of FASB Statement No. 157, Fair
Value Measurements. The Company does not expect the
adoption of SFAS 159 to have a material effect on its finan-
cial position or results of operations.
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three
Sale of Woodlands
four
Discontinued Operations
In June 2006, the Company completed the sale of approxi-
mately 500,000 acres of woodlands in Nova Scotia to Atlantic
Star Forestry LTD and Nova Star Forestry LTD (collectively,
the “Purchaser”) for $139.1 million (proceeds net of trans -
action costs were $134.8 million). The Company received the
total proceeds from the sale in cash at closing. The Company
also entered into a fiber supply agreement (the “FSA”) with
the Purchaser to secure a source of fiber for the Company’s
Pictou pulp mill. Following the sale, the Company has
approximately 500,000 acres of owned and 200,000 acres
of licensed or managed woodlands in Nova Scotia.
T R A N S F E R O F T H E T E R R A C E B AY M I L L
Manufacturing operations at the Terrace Bay mill were sus-
pended in February 2006 due to a lack of wood fiber for its
operations. The mill’s fiber supply was exhausted as a result
of a strike started in January 2006 by the approximately
250 workers employed by the Longlac woodlands operations
that supplied wood fiber to the mill. Most of the approxi-
mately 400 hourly and salaried workers employed at the mill
were laid off during the two weeks following the suspension
of manufacturing activities. In 2005, the Terrace Bay mill
produced approximately 375,000 metric tons of pulp.
Pursuant to the terms of the FSA, the Purchaser is
In May 2006, the Company announced a tentative
required to make available to the Company sufficient wood-
lands acreage to yield 200,000 metric tons of softwood
timber annually. The Company is required to bear all costs
associated with harvesting the timber. Timber purchases
under the FSA are at market-based prices subject to semi-
annual adjustment. The FSA expires on December 31, 2010
and the Company has the option to unilaterally extend the
contract for an additional five years. The FSA can be
extended for a subsequent five years upon the mutual
agreement of the Company and the Purchaser.
The sale qualified for gain recognition under the
“full accrual method” described in Statement of Financial
Accounting Standards No. 66, Accounting for Sales of Real
Estate (“SFAS 66”). The Company’s commitment to accept
acreage offered by the Purchaser to satisfy the timber
requirements for the first 18 months of the FSA represents
a “constructive obligation.” As a result, the Company rec-
ognized a net pretax gain on the sale of approximately
$122.6 million in the three and six months ended June 30,
2006 and deferred approximately $9.0 million, which repre-
sents the Company’s estimated maximum exposure to loss
of profit due to the constructive obligation under the FSA.
The deferral related to the constructive obligation will be
amortized through December 2007. During the last six
months of 2006, the Company recognized approximately
$2.9 million of such deferred gain.
agreement to transfer the Terrace Bay mill and related
woodlands operations to certain affiliates of Buchanan. In
August 2006, the Company consummated the agreement
by transferring the mill and related woodlands operations
(excluding certain working capital amounts and post-
employment obligations) to Buchanan. Pursuant to the
terms of the agreement, Buchanan assumed responsibility
for substantially all liabilities related to the future operation
of the mill in exchange for a payment of $18.6 million.
The Terrace Bay mill held non-exclusive rights under a sus-
tainable forest license to harvest wood on approximately
4.6 million acres of land owned by the Province of Ontario
which was transferred to Buchanan.
At closing, the Company retained certain working
capital amounts, primarily trade accounts receivable, finished
goods inventory and trade accounts payable. In addition,
the Company retained certain long-term disability obligations
for current and former mill employees and post-employment
medical and life insurance liabilities for current retirees.
In conjunction with the transfer of the Terrace Bay
mill to Buchanan and as a closing condition of the agree-
ment, the Company initiated plans to curtail and settle its
Ontario, Canada defined benefit pension plan. In August 2006,
the Company made a payment to the pension trust of
approximately $10.8 million for the purchase of annuity con-
tracts to settle its pension liability for current retirees. As a
result of the transaction, the Company recognized a pen-
sion curtailment and settlement loss of approximately
$26.4 million in the year ended December 31, 2006. In
addition, the Company expects to record a settlement loss
of approximately $40 million related to the future settlement
of pension obligations for active employees. The amount
of any funds that we may pay or receive and the timing of
76
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
recognition of the loss to settle the liability for active
employees are dependent upon, among other things, an
actuarial determination of the value of the obligations
being settled, the cost of annuity contracts, regulatory
approval to settle the plan and employee elections.
The results of operations and loss on disposal of
the Terrace Bay mill are reflected as discontinued opera-
tions in the consolidated and combined statements of
operations for each period presented. The following table
presents the results of discontinued operations:
Net sales, net of
intersegment sales
Discontinued Operations:
Loss from operations
Loss on disposal
Loss before income taxes
Benefit for income taxes
Loss from discontinued
Year Ended December 31,
2006
2005
2004
$ 46.0
$198.7
$ 243.3
$(46.8)
(6.5)
(53.3)
20.4
$ (84.2)
–
(84.2)
32.2
$(125.7)
–
(125.7)
45.3
operations
$(32.9)
$ (52.0)
$ (80.4)
RESTRUCTURING ACTIVITIES AT TERRACE BAY:
The Company closed the No. 1 Mill in May 2005. The No. 1
Mill was originally constructed in 1948 and had annual
capacity of approximately 125,000 metric tons of bleached
kraft pulp. In conjunction with the closure, the Company
offered early retirement and severance packages to approx-
imately 150 employees.
During 2005, the Company recorded approxi-
mately $5.0 million for one-time termination benefits
related to early retirement, severance and defined benefit
pension plans in connection with the closure of the No.1
Mill and approximately $0.3 million for other exit costs. As
of December 31, 2006, termination benefits of approxi-
mately $4.9 million had been paid to 147 employees. With
respect to certain termination benefits that remain unpaid,
such benefits relate to three employees that cannot be ter-
minated until they return from long-term disability leave.
During the first quarter of 2005, the Company
recorded a pretax, non-cash asset impairment loss of
approximately $0.8 million related to the remaining value
of the long-lived assets of the No. 1 Mill. In addition, the
Company recorded $0.4 million of incremental training
costs for employees in new positions as a result of the
closure in 2005. Such training costs were expensed as
incurred. The consolidated and combined statements of
operations have been restated to reflect costs associated
with the closure, including expenses related to employee
training, for the year ended December 31, 2005 in
Discontinued operations – loss from operations.
ASSET IMPAIRMENT LOSSES:
In December 2004, the Company performed an asset
impairment test on the Terrace Bay, Ontario pulp mill under
the guidance of SFAS 144. The facility had incurred operat-
ing losses in each of 2002, 2003 and 2004. The Company
anticipated that the facility would continue to incur operat-
ing losses in 2005, 2006 and 2007. The principal causes of
these projected losses were:
(cid:129) continued high operating costs at this facility;
(cid:129) substantially higher discounts, under the pulp supply
agreement, 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
pulp cycle; and
(cid:129) continued strength of the Canadian dollar relative to the
U.S. dollar.
An extended period of operating losses is an indi-
cator of impairment under SFAS 144. The results of the
impairment test indicated that the carrying amount of the
Terrace Bay facility would not be recoverable from esti-
mated future undiscounted cash flows. The Company’s esti-
mate of the fair value of the Terrace Bay facility was based
on probability weighted pretax cash flows from operating
the facility, discounted at a risk-free interest rate. The signif-
icant assumptions the Company used to determine the esti-
mate of fair value included its long-term projections of the
market price of pulp, the projected cost structure of the
facility and the long-term relationship of the Canadian dol-
lar and the U.S. dollar. The estimated fair value of the
Terrace Bay facility also reflected assumed improvements
to the facility’s cost structure resulting from the Company’s
plans for future capital projects and a plan for a cogenera-
tion arrangement that would lower the cost of electricity.
In December 2004, the Company recorded a pre-
tax, non-cash impairment loss of approximately $110.0 mil-
lion to reduce 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 facility. A deferred tax benefit 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 operat-
ing losses at the Terrace Bay facility, a review of strategic
alternatives and anticipated continuing losses in 2006, the
Company performed another impairment test of the facility
which indicated that the carrying value of its long-lived
assets was not recoverable from estimated future cash
flows. In estimating the impairment loss, the fair value of
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 77
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
papers and technical products businesses. The goodwill
amount recognized in the Acquisition is primarily due to
synergies expected to be achieved from combining the
technologies and expertise of Neenah Germany with the
Company’s existing Technical Products business. In addi-
tion, the Acquisition provided the Company with immediate
entry into the profitable and growing filtration and nonwo-
ven wall coverings segments of the Technical Products mar-
ket. Of the $28.0 million of acquired intangible assets,
$15.2 million was assigned to customer relationships,
$5.0 million was assigned to registered trade names with
definite lives and $0.9 million was assigned to acquired
technology which are being amortized over weighted aver-
age useful lives of 15 years, 10 years and 10 years, respec-
tively. Of the remaining balance of intangible assets
acquired, $6.9 million was assigned to registered trade
names with indefinite lives. The Company did not acquire
any research and development assets as part of the
Acquisition. The allocation of the purchase price to the fair
value of assets acquired has not been completed pending
payment for certain working capital amounts acquired in
the Acquisition. In addition, the ultimate settlement with
FiberMark for potential additional taxes due for Neenah
Germany tax returns filed for periods prior to the
Acquisition will impact the final allocation of the purchase
price to the fair value of assets acquired.
The following table summarizes the preliminary
allocation of the purchase price to the estimated fair value
of the assets acquired and liabilities assumed at the date
of Acquisition:
As of October 11, 2006
Cash
Accounts receivable
Inventories
Receivable from FiberMark for income taxes (Note 14)
Prepaid and other current assets
Property, plant and equipment at cost
Goodwill
Unamortizable intangible assets
Amortizable intangible assets
Other noncurrent assets
Total assets acquired
Accounts payable
Income taxes payable
Accrued expenses
Deferred income taxes
Employee benefits and other obligations
Total liabilities assumed
Net assets acquired
$ 3.0
36.4
23.8
9.8
2.3
133.4
87.6
6.9
21.1
0.5
324.8
21.4
9.8
4.9
34.1
33.0
103.2
$221.6
the facility was determined in a manner consistent with that
applied in December 2004. While the significant 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 flows
was different. The estimated fair value for the facility indi-
cated that its long-lived assets were fully impaired. As a
result, the Company recorded a pretax, non-cash impair-
ment loss of approximately $53.7 million to reduce the car-
rying amount of the facility’s tangible long-lived assets to
zero. A deferred tax benefit of approximately $20.6 million
was recorded as a result of the impairment losses, resulting
in a net after-tax charge of approximately $33.1 million. The
consolidated and combined statements of operations have
been restated to reflect asset impairment losses for the
years ended December 31, 2005 and 2004 in Discontinued
operations – loss from operations.
five
Acquisitions
In October 2006, the Company completed the purchase
of the outstanding interests of Neenah Germany. Neenah
Germany was acquired from FiberMark and FiberMark
International Holdings LLC for $218 million in cash (the
“Acquisition”). The Company also incurred approximately
$5.1 million of transaction costs directly related to the
Acquisition. The Acquisition was financed through $160 mil-
lion of available cash and $58 million of debt drawn against
the Company’s revolving credit facility. The primary source
of available cash used to finance the Acquisition was pro-
ceeds from the sale of woodlands in June 2006. See Note 3,
“Sale of Woodlands.” The consolidated results of the
Company include Neenah Germany for all periods subse-
quent to the Acquisition.
The total cost of the acquisition has been allo-
cated to the assets acquired and liabilities assumed in
accordance with SFAS 141. Goodwill, of which approxi-
mately $2.5 million related to transaction costs is deductible
for income tax purposes, and other intangibles recorded in
connection with the Acquisition originally totaled $87.6 mil-
lion and $28.0 million, respectively, and are reported within
the Technical Products segment. See Note 16, “Segments.”
The Acquisition was consistent with the Company’s stated
strategic plan and direction to expand in the premium
78
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
The following unaudited condensed pro forma
consolidated statements of operations for the years ended
December 31, 2006 and 2005, were prepared as though
the Acquisition had occurred on January 1, 2006 and 2005
(in millions, except per share data):
Net Sales
Operating income
Income from continuing operations
Loss from discontinued operations
Net income (loss)
Earnings (Loss) Per Common Share:
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
Year Ended December 31,
2006
2005
$770.0
183.9
101.4
(32.9)
68.5
$ 6.87
(2.23)
$ 4.64
$ 6.83
(2.22)
$ 4.61
$760.3
204.9
112.6
(52.0)
60.6
$ 7.64
(3.53)
$ 4.11
$ 7.62
(3.53)
$ 4.09
These pro forma statements have been prepared
for comparative purposes only and are not intended to
be indicative of the Company’s results had the Acquisition
occurred on January 1, 2006 or 2005 or of its results in the
future. The Company used the proceeds from the sale of
woodlands in June 2006 (see Note 3 “Sale of Woodlands”)
to provide a substantial portion of the financing for the
Acquisition. As a result, the pro forma financial statements
have been adjusted to present the effects of the sale of the
woodlands as if the sale occurred on January 1, 2005.
six
Risk Management
The Company is exposed to risks such as changes in for-
eign currency exchange rates and pulp prices. A variety of
practices are employed to manage these risks, including
operating and financing 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 foreign currency and
commodity derivative instruments are either exchange
traded or entered into with major financial institutions.
Credit risk with respect to the counterparties is considered
minimal in view of the financial strength of the counter -
parties. The notional amounts of the Company’s derivative
instruments do not represent amounts exchanged by the
parties and, as such, are not a measure of exposure to
credit loss. The amounts exchanged are determined by
reference to the notional amounts and the other terms of
the contracts.
In accordance with SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended,
the Company records all derivative instruments as assets (in
Prepaid and other current assets and Other assets) or liabil-
ities (in Accrued expenses or Noncurrent employee benefits
and other obligations) on the balance sheet at fair value.
Changes in the fair value of derivatives are either recorded
in income or other comprehensive income, as appropriate.
The related unrealized gain or loss from changes in the fair
value of highly effective derivatives designated as cash flow
hedges is recorded in Accumulated other comprehensive
income (loss) in the period that changes in fair value occur
and is reclassified to income in the same period that the
hedged item affects income.
P U L P P R I C E A N D F O R E I G N C U R R E N C Y R I S K
The operating results, cash flows and financial 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 profitability of the Company’s pulp operations is
subject to foreign currency risk. The Company uses foreign
currency forward and pulp futures contracts to manage its
foreign currency and pulp price risk. The use of these instru-
ments allows management of this transactional exposure
to exchange rate and pulp price fluctuations 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 subsidiaries is
not hedged. In addition, the Company’s reported operating
results are affected by changes in the Euro exchange rate
relative to the U.S. dollar. The Company’s exposure to such
Euro risk is not hedged.
The Company is also subject to price risk for elec-
tricity used in its manufacturing operations. At the Spin-Off,
Kimberly-Clark transferred to the Company a fixed price
forward purchase contract to hedge fluctuations in the
price of electricity at the Terrace Bay mill. The contract
matured on December 31, 2005 and was not replaced.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 79
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
C A S H F L O W H E D G E S
At December 31, 2006, the Company had outstanding
foreign currency forward exchange contracts designated as
cash flow hedges of U.S dollar denominated pulp sales in a
notional amount of $93 million Canadian dollars. The fair
value of the contracts was a current asset of $0.7 million
U.S. dollars. The weighted-average exchange rate for the
foreign currency contracts at December 31, 2006 was
$0.854 U.S. dollars per Canadian dollar. The contracts extend
through December 2007 with the highest value of contracts
maturing in January 2007. The Company recorded net pre-
tax gains of $10.2 million and $4.3 million on foreign currency
contracts as the forecasted transactions occurred in the
years ended December 31, 2006 and 2005, respectively.
Realized gains and losses on foreign currency forward exchange
contracts are recorded in Other (income) expense – net on
the consolidated and combined statements of operations.
Gains and losses on foreign currency forward
exchange contracts related to the operations of the Terrace
Bay mill have been recorded in Loss from discontinued
operations on the consolidated and combined statements
of operations. For the years ended December 31, 2006 and
2005, $2.6 million and $2.3 million of such gains have been
recorded in Loss from discontinued operations.
During 2006 and 2005, the Company entered into
a series of pulp futures contracts to hedge fluctuations in
pulp prices through December 2006. At December 31,
2006, the Company had no outstanding pulp future con-
tracts. The Company recorded net pretax gains (losses) of
$(12.7) million and $0.6 million on pulp futures contracts as
the forecasted transactions occurred in the years ended
December 31, 2006 and 2005, respectively. Realized gains
and losses on pulp derivatives are recorded in Net sales on
the consolidated and combined statements of operations.
Gains and losses on pulp futures contracts related
to the operations of the Terrace Bay mill have been
recorded in Loss from discontinued operations on the con-
solidated and combined statements of operations. Gains
(losses) of $(1.5) million and $0.4 million for the years ended
December 31, 2006 and 2005, respectively, have been
recorded in Loss from discontinued operations.
For the year ended December 31, 2006, changes
in the fair value of the Company’s derivative instruments
were reflected in other comprehensive income. If future
market rates are consistent with the rates assumed at
December 31, 2006, a net pretax gain of approximately
$0.7 million (or $0.4 million after-tax) is expected to be
recognized in earnings during the next 12 months.
F O R E I G N C U R R E N C Y T R A N S A C T I O N S
In May 2006, the Company entered into a foreign currency
forward contract to eliminate variability in the U.S. dollar
proceeds from the sale of woodlands in Nova Scotia,
80
( U N ) C O N V E N T I O N A L W I S D O M
Canada (see Note 3 “Sale of Woodlands”). The Company
settled the contract in June 2006 and had no realized gain
or loss on settlement. The foreign currency forward con-
tract had a notional value of $155 million Canadian dollars
and an exchange rate of $0.902 U.S. dollars per Canadian
dollar. Realized gains and losses on the foreign currency for-
ward contract are recorded in Other (income) expense – net
on the consolidated and combined statements of operations.
Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other
than the entity’s functional currency) are included in Other
(income) expense – net in the consolidated and combined
statements of operations. Net foreign currency transaction
gains (losses) for the years ended December 31, 2006, 2005
and 2004 were $(0.4) million, $0.1 million and $(5.1) mil-
lion, respectively.
Gains and losses resulting from foreign currency
transactions related to the operations of the Terrace Bay
mill have been recorded in Loss from discontinued opera-
tions. For the years ended December 31, 2006, 2005 and
2004, $0.4 million, $4.5 million and $4.0 million, respec-
tively, of such foreign currency transactions losses have
been recorded in Loss from discontinued operations.
seven
Income Taxes
Income tax expense in the Company’s consolidated and
combined financial statements has been calculated on a
separate tax return basis. Income tax expense represented
37.2%, 36.6% and 36.0% of income from continuing opera-
tions before income taxes in 2006, 2005 and 2004, respec-
tively. The following table presents the principal reasons for
the difference between the effective tax rate and the U.S.
federal statutory income tax rate:
U.S. federal statutory
income tax rate
U.S. state income taxes, net of
federal income tax effect
Foreign tax rate differences
Other differences – net
Effective income tax rate
Year Ended December 31,
2006
2005
2004
35.0%
35.0%
35.0%
3.1%
(0.5)%
(0.4)%
37.2%
2.3%
–
(0.7)%
36.6%
2.2%
–
(1.2)%
36.0%
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
The following table presents the U.S. and foreign
components of income from continuing operations before
income taxes and the provision for income taxes:
Year Ended December 31,
2006
2005
2004
Income from continuing operations before income taxes:
U.S.
Foreign
Total
$150.0
1.9
$151.9
$35.2
–
$35.2
Provision for income taxes:
Current:
Federal
State
Foreign
Subtotal
Deferred:
Federal
State
Foreign
Subtotal
Total
$ 20.0
2.8
0.4
23.2
29.5
4.3
(0.5)
33.3
$ 56.5
$11.1
1.0
–
12.1
0.6
0.2
–
0.8
$12.9
$84.4
–
$84.4
$26.6
2.1
–
28.7
1.5
0.2
–
1.7
$30.4
For periods subsequent to the Spin-Off, the
Company has elected to treat its Canadian operations as a
branch for U.S. income tax purposes. Therefore, the amount
of income (loss) before income taxes from Canadian opera-
tions, generated after the Spin-Off, are included in the
Company’s consolidated U.S. income tax returns and such
amounts are subject to U.S. income taxes.
The asset and liability approach is used to recog-
nize 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 liabili-
ties. The components of deferred tax assets and liabilities
are as follows:
December 31,
2006
2005
Net current deferred income tax assets
Accrued liabilities
Employee benefits
Other
Net current deferred income tax assets
Net noncurrent deferred income tax assets
Canadian timberlands
Employee benefits
Accumulated depreciation
Other
Net noncurrent deferred
income tax assets
Total deferred income tax assets
Net noncurrent deferred income tax liability
Accumulated depreciation
Intangibles
Employee benefits
Other
$ (1.5)
3.0
–
1.5
32.1
50.3
(53.0)
3.3
32.7
$ 34.2
$ 29.9
11.2
(4.2)
(1.1)
Net noncurrent deferred income
tax liabilities
$ 35.8
$
$ 2.4
0.5
(1.2)
1.7
67.7
17.3
(57.4)
–
27.6
$ 29.3
$
–
–
–
–
–
At December 31, 2006, the Company’s net non-
current deferred income tax liability was related to the
operations of Neenah Germany. Prior to the Acquisition,
the Company had no net noncurrent deferred income
tax liabilities.
No valuation allowance has been provided on
deferred income tax assets. In determining the need for
valuation allowances, the Company considers many factors,
including specific taxing jurisdictions, sources of taxable
income, income tax strategies and forecasted earnings for
the entities in each jurisdiction. 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, 2006, the
Company had $8.2 million of Canadian net operating
losses, substantially all of which may be carried forward to
2015 to offset future taxable income. The Company has
recorded a deferred tax liability to offset the deferred tax
asset related to the Canadian net operating losses due to the
U.S. Dual Consolidated Loss Recapture rules and provisions
under SFAS 109. The Company has no foreign tax credits.
Pursuant to the terms of the purchase agreement
with FiberMark (see Note 5, “Acquisitions”), the Company
is liable for potential additional taxes due for Neenah Germany
tax returns filed for periods prior to the Acquisition.
FiberMark has agreed to indemnify the Company for such
additional taxes and a portion of the purchase price has
been reserved in an escrow account to fund the indemnifi-
cation. The Company believes it is probable that Neenah
Germany is liable for approximately $5.4 million in addi-
tional taxes for certain tax positions asserted in tax returns
filed for prior years. As of December 31, 2006, the Company
has recognized a current liability on the consolidated bal-
ance sheet for such potential additional taxes. The Company
has also recognized a receivable in an equal amount in pre-
paid and other current assets on the consolidated balance
sheet for the value of the indemnification. In addition,
FiberMark has agreed to reimburse the Company for
FiberMark’s pro-rata share of taxes incurred by Neenah
Germany in 2006 that have not been remitted to taxing
authorities. As a result, the Company has recorded a receiv-
able for $4.9 million in Prepaid and other current assets on
the consolidated balance sheet.
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 reflected in stockholders’ and invested equity. The
Company recorded a net credit to deferred income tax
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 81
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
assets of approximately $12.7 million and an offsetting
charge to “Kimberly-Clark’s net investment” on the state-
ment of changes in stockholders’ equity and invested capital.
Germany. In August 2005, the Company completed an offer
to exchange the unregistered Senior Notes for registered
notes with similar terms.
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 liabili-
ties and retain rights to all tax refunds relating to the Pulp
and Paper Business in its consolidated 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.
eight
Debt
The following debt was incurred either as a result of or
since the Spin-Off. Long-term debt is as follows:
7.375% Senior notes due 2014
Revolving bank credit facility (7.30%
weighted-average variable
rate), due 2010
Third-party financing (7.375% fixed rate)
due in quarterly installments through
December 2007
Neenah Germany project financing
(3.8% fixed rate) due in equal semi-annual
installments beginning June 2009
Neenah Germany revolving line of credit
December 31,
2006
2005
$225.0
$225.0
57.3
–
1.3
2.5
–
–
(variable rates)
Total Debt
Less: Debt payable within one year
Long-term debt
–
283.6
1.3
$282.3
–
227.5
1.2
$226.3
S E N I O R U N S E C U R E D N O T E S
On November 30, 2004, the Company completed an under-
written offering of ten-year senior unsecured notes (the
“Senior Notes”) at an aggregate face amount of $225 mil-
lion. 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 substantially all of
the Company’s subsidiaries, with the exception of Neenah
82
( U N ) C O N V E N T I O N A L W I S D O M
S E C U R E D R E V O LV I N G C R E D I T FA C I L I T Y
On November 30, 2004, the Company entered into a Credit
Agreement by and among the Company, certain of its sub-
sidiaries, the lenders listed in the Credit Agreement and JP
Morgan Chase Bank, N.A. as agent for the lenders (the “Credit
Agreement”). Under the Credit Agreement, the Company
had a secured revolving credit facility (the “Revolver”)
that provided for borrowings of up to $150 million. At
December 31, 2005, no amounts were outstanding under
the Revolver. Borrowing availability under the Revolver
is reduced by outstanding letters of credit (“LOCs”). At
December 31, 2005, the Company had approximately
$5.2 million of LOCs outstanding and $144.8 million of bor-
rowing availability under the Revolver. Amounts outstand-
ing under the Revolver may be repaid, in whole or in part, at
any time without premium or penalty except for specified
make-whole payments on LIBOR-based loans.
The Credit Agreement is secured by substantially
all of the Company’s assets, including the capital stock of its
subsidiaries and is guaranteed by Neenah Paper Company
of Canada, a wholly-owned subsidiary. The Credit Agreement
originally terminated on November 30, 2008.
The interest rate applicable to borrowings under
the 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 com-
puted 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.
In October 2006, the Company entered into the
Third Amendment (the “Third Amendment”) to the Credit
Agreement. Except as indicated, the Third Amendment
retained the terms described above for the Credit Agreement.
The Third Amendment, among other things, (i) provides
for a secured revolving credit facility that provides for bor-
rowings of up to $165 million, (ii) extends the termination
date of the Credit Agreement to November 30, 2010,
(iii) sets the interest rate under the Revolver to either (A) the
Prime Rate (as defined in the Third Amendment) plus a
percentage ranging from 0% to 0.75%, or (B) LIBOR plus a per-
centage ranging from 1.25% to 2.25%, (iv) reduces the com-
mitment fee pricing on the Revolver, and (iv) makes other
definitional, administrative and covenant modifications to
the Credit Agreement.
The Company’s ability to borrow under the Revolver
is limited by the Third Amendment to the lowest of (a) $165 mil-
lion, (b) the Company’s borrowing base (as determined in
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
accordance with the amended Credit Agreement), and (c) the
applicable cap on the amount of “credit facilities” under the
indenture. 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 0.25% on the average daily
unused amount of the commitment.
In the Third Amendment, the lenders also con-
sented to consummation of the Company’s purchase of
Neenah Germany. Neenah Germany is not a borrower
or guarantor with respect to the Revolver. However, the
Company pledged 65% of its equity interest in Neenah
Germany as security for the obligations of the Company
and its subsidiaries under the Credit Agreement.
As of December 31, 2006, the Company’s borrow-
ing base was approximately $153 million and $57.3 million
of borrowings were outstanding under the Revolver.
Interest on amounts borrowed under the Revolver is paid
monthly. Borrowing availability under the Revolver is
reduced by outstanding LOCs and reserves for certain
other items as defined in the Credit Agreement. At
December 31, 2006, the Company had approximately
$2.8 million of LOCs outstanding and $88.2 million of bor-
rowing availability under the Revolver. The weighted aver-
age interest rate on such borrowings was 7.30%. Amounts
outstanding under the Revolver may be repaid, in whole or
in part, at any time without premium or penalty except for
specified make-whole payments on LIBOR-based loans. All
principal amounts outstanding under the Revolver are due
and payable on the date of termination of the Revolver. The
amount of the borrowing base is subject to change from
time to time in accordance with the terms of the Credit
Agreement. Availability under the Credit Agreement will
fluctuate over time depending on the value of the
Company’s inventory, receivables and various capital assets.
The Revolver, as amended, contains events of
default customary for financings of this type, including fail-
ure to pay principal or interest, materially false representa-
tions or warranties, failure to observe covenants and other
terms of the Revolver, cross-defaults to other indebtedness,
bankruptcy, insolvency, various ERISA violations, the incur-
rence of material judgments and changes in control.
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 agreements. Such covenants restrict the
Company’s ability to, among other things, incur certain
additional debt, make specified restricted payments and
capital expenditures, authorize or issue capital stock, enter
into transactions with affiliates, consolidate or merge with
or acquire another business, sell certain of its assets or liq-
uidate, dissolve or wind-up. In addition, the terms of the
Credit Agreement require the Company to achieve and
maintain certain specified financial ratios. At December 31,
2006 and 2005, the Company was in compliance with all
such covenants.
The Company’s ability to pay cash dividends on
its Common Stock is limited under the terms of both the
Credit Agreement and the Senior Notes. At December 31,
2006, under the most restrictive terms of these agree-
ments, the Company’s ability to pay cash dividends on its
common stock is limited to a total of $10.0 million in a
twelve-month period.
In March 2007, the Company entered into the
fourth amendment to the Credit Agreement. The fourth
amendment retained the terms described above for the
Credit Agreement except as described in such amendment.
For a discussion of the modifications included in the fourth
amendment to the Credit Agreement, see Note 20,
“Subsequent Event.”
O T H E R N O T E S
In December 2006, Neenah Germany entered into an
agreement with HypoVereinsbank and IKB Deutsche
Industriebank AG (the “Lenders”) to provide project financ-
ing for the construction of a saturator. The Lenders have
agreed to provide 10 million Euros of construction financ-
ing which will be secured by the saturator. The loan matures
in December 2016 and principal is repaid in equal semi-
annual installments beginning in June 2009. Principal out-
standing under the agreement may be repaid at any time
without penalty. The interest rate on amounts outstanding
is 3.8% based on actual days elapsed in a 360-day year and
is payable semi-annually. At December 31, 2006, no
amounts were outstanding under this agreement.
Neenah Germany has an unsecured revolving line
of credit (the “Line of Credit”) with HypoVereinsbank that
provides for borrowings of up to 15 million Euros for gen-
eral corporate purposes. The Line of Credit terminates on
November 30, 2007. Neenah Germany has the ability to
borrow in either Euros or U.S. dollars. Interest is computed
on U.S. dollar loans at the rate of 8.5% per annum and on
Euro loans at EURIBOR plus a margin of 1.5%. Interest is
payable quarterly and principal may be repaid at any time
without penalty. At December 31, 2006, no amounts were
outstanding under the Line of Credit.
During the first quarter of 2005, the Company
obtained third-party financing to fund its purchase of enter-
prise resource planning (ERP) software. At inception, the
present value of the financing agreement was $3.6 million
(discounted at 7.375%) payable in quarterly installments
through January 2008. At December 31, 2006, $1.3 million
of such third-party financing was outstanding. In the first
quarter of 2005, the Company issued a short-term note for
$2.3 million to finance current year insurance premiums. The
note was repaid in monthly installments through October 2005
including interest at the rate of 3.9% per annum.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 83
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
P R I N C I PA L PAY M E N T S
The following table presents the Company’s required
debt payments:
2007
2008
2009
2010
2011
There-
after
Total
Debt
payments $1.3
$ –
$ –
$57.3
$ – $225.0 $283.6
nine
Post-Employment and Other Benefits
A D O P T I O N O F S FA S 1 5 8
On December 31, 2006, the Company adopted SFAS 158
which requires an employer to recognize the overfunded
or underfunded status of a defined benefit postretirement
plan as an asset or liability in its statement of financial posi-
tion and to recognize changes in that funded status in the
year in which the changes occur through comprehensive
income. The following table presents the impact of the
Company’s adoption of SFAS 158 on its consolidated bal-
ance sheet as of December 31, 2006:
Incremental Effect of the Adoption of SFAS 158
on the Balance Sheet
As of December 31, 2006
Before
Adoption
of SFAS 158 Adjustments
After
Adoption
of SFAS 158
Prepaid and other
current assets
Prepaid and intangible
pension costs
Deferred income taxes
Total Assets
Accrued expenses
Deferred income taxes
Noncurrent employee benefits
Total Liabilities
Accumulated other
comprehensive income
Total Stockholders’ Equity
Total Liabilities and
$ 25.6
$ 6.3
$ 31.9
59.9
–
765.6
51.4
36.3
79.3
525.3
65.3
240.3
(59.9)
32.7
(20.9)
2.1
(0.5)
32.9
34.5
(55.4)
(55.4)
–
32.7
744.7
53.5
35.8
112.2
559.8
9.9
184.9
Stockholders’ Equity
765.6
(20.9)
744.7
P E N S I O N P L A N S
Substantially all active employees of the Pulp and Paper
Business participated in Kimberly-Clark’s defined benefit
pension plans and defined contribution retirement plans.
On November 30, 2004, the Company assumed responsibil-
ity for pension and post-employment benefit obligations
for active employees of the Pulp and Paper Business and
former employees of the Canadian pulp operations.
Pension and post-employment benefit obligations related
to former employees of the U.S. paper operations were
retained by Kimberly-Clark. Neenah Germany has defined
benefit plans designed to provide a monthly pension upon
retirement for all its hourly employees in Germany. There is
no legal or governmental obligation to fund Neenah Germany’s
benefit plans and as such the Neenah Germany defined
benefit plans are currently unfunded.
During 2005, hourly employees at the Pictou
pulp mill, represented by the Communications, Energy and
Paperworkers Union of Canada and the Company executed a
new collective bargaining agreement providing for enhanced
pension benefits. The amendment to the plan resulted in an
increase of $6.9 million in the Company’s projected benefit
obligation and did not require a plan remeasurement.
Pension assets related to active employees of the
U.S. paper operations for which the Company assumed
responsibility were transferred from a Kimberly-Clark pen-
sion trust to a new trust for a pension plan established by
the Company. The new pension plan provides for substan-
tially similar benefits 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 finalized and resulted in a credit of $0.7 million to
Additional paid-in capital.
The Company’s funding policy for its qualified
defined benefit plans is to contribute assets to fully fund
the accumulated benefit obligation (“ABO”). Subject to
regulatory and tax deductibility limits, any funding shortfall
is to be eliminated over a reasonable number of years.
Nonqualified plans providing pension benefits 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 calculated using the fair value of the assets and the
actual return based on the fair value of assets. The Company’s
pension obligations are measured annually as of December 31.
As of December 31, 2006, the Company’s pension plans
had cumulative unrecognized investment losses and other
actuarial losses of approximately $97.3 million.
84
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
A minimum pension liability for underfunded plans
representing the excess of the unfunded ABO over previ-
ously recorded net pension liabilities was reflected on the
consolidated balance sheet at December 31, 2005. The
minimum pension liability is included in Noncurrent employee
benefits and other obligations on the consolidated balance
sheet. An offsetting amount was included as an intangible
asset to the extent of unrecognized prior service cost, and
the balance is included in accumulated other comprehensive
income. The Company’s minimum pension liability was elim-
inated upon its adoption of SFAS 158 at December 31, 2006.
The following is a summary of amounts related to
the minimum pension liability recorded in accumulated
other comprehensive income at December 31, 2005:
Minimum pension liability
Less intangible assets
Accumulated other comprhensive income
$42.4
12.0
$30.4
O T H E R P O S T- E M P L OY M E N T B E N E F I T P L A N S
Prior to the Spin-Off, the employees of the Pulp and Paper
Business participated in Kimberly-Clark’s health care and life
insurance benefit plans (the “Benefit Plans”), which covered
substantially all retirees and active employees. Certain bene-
fits 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 contributory for most employees who retire on or after
January 1, 1993. Kimberly-Clark provided no subsidized ben-
efits to most employees 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 operations and established
new health care and life insurance benefit plans to provide
substantially similar benefits and credit such employees for
service earned with Kimberly-Clark.
Medicare Prescription Drug, Improvement and Modernization
Act of 2003, was adopted. Adoption of FSP 106-2 reduced
the Company’s accumulated post-employment benefit obli-
gation by approximately $6.8 million and resulted in an
unrecognized actuarial gain of a similar amount. The adop-
tion of FSP 106-2 resulted in an increase of $0.2 million in
post-employment benefit costs in 2006 and a reduction in
such costs of $0.5 million and $0.3 million in 2005 and 2004,
respectively. During 2006 and 2005, the Company paid
$31 thousand and $6 thousand, respectively, for prescrip-
tion drug benefits for retirees who were eligible for Medicare
Part D and has not been reimbursed for any such payments.
Prior to 2004, the U.S. benefit plans limited future
annual per capita retiree medical benefits to no more than
200% of the 1992 annual per capita cost. These plans
reached this limitation (the “Cap”) and were amended dur-
ing 2003. Among other things, the amendments index the
Cap by 3% annually beginning in 2005 for certain employ-
ees retiring on or before April 1, 2004 and limit the future
cost for retiree health care benefits to a defined fixed per
capita cost for certain employees retiring after April 1,
2004. At December 31, 2006, the assumed inflationary
pre-65 and post-65 health care cost trend rates used to
determine year-end obligations and costs for the year
ended December 31, 2007 was 8.9%, decreasing to 8.1% in
2008, and then gradually decreasing to an ultimate rate of
4.9% in 2013. The assumed inflationary pre-65 and post-65
health care cost trend rate used to determine obligations at
December 31, 2005 and cost for the year ended December 31,
2006 was 9.8% in 2006, decreasing to 8.8% in 2007, and
gradually decreasing to an ultimate rate of 4.8% in 2013.
In May 2005, the Company closed the No. 1 Mill at
the Terrace Bay facility. See Note 4, “Discontinued Operations.”
In conjunction with the closure, the Company recognized a
pretax charge of approximately $1.6 million related to a par-
tial settlement of certain pension obligations.
On December 8, 2003, the Medicare Prescription
The Company’s obligations for post-employment
Drug, Improvement and Modernization Act of 2003 (the
“Act”) became law. Among other things, the Act provides a
prescription drug benefit under Medicare (Medicare Part D)
and a federal subsidy to sponsors of retiree health care
benefit plans that provide a prescription drug benefit 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 to
benefits other than pensions are measured annually as
of December 31. Accrued benefit obligations for the
Company’s other post-employment benefits of $3.4 million
and $36.6 million are reflected in Accrued expenses and
Noncurrent employee benefits and other obligations,
respectively on the consolidated balance sheet.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 85
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
The following table reconciles the benefit obligations, plan assets, funded status and net liability information of the
Company’s pension and other benefit plans. Amounts shown as N/A in the following table are not applicable at December 31,
2006 following the Company’s adoption of SFAS 158.
Pension Benefits
Post-Employment
Benefits Other
than Pensions
Year Ended December 31,
2006
2005
2006
2005
$449.9
8.1
22.3
2.5
(3.0)
(92.4)
34.8
0.8
–
(4.7)
6.1
(4.7)
–
$419.7
$375.1
42.3
24.2
–
0.9
(92.4)
0.8
–
–
$350.9
$ N/A
N/A
N/A
N/A
$ N/A
$ 6.3
(2.5)
(72.6)
N/A
N/A
N/A
N/A
$ (68.8)
$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
$ N/A
N/A
N/A
84.8
12.0
(42.4)
30.4
$ 84.8
$ 76.1
2.2
3.5
1.2
(2.7)
(2.3)
2.6
–
–
(14.1)
(26.5)
–
–
$ 40.0
$
$
–
–
2.3
–
–
(2.3)
–
–
–
–
$ N/A
N/A
N/A
N/A
$ N/A
$ –
(3.4)
(36.6)
N/A
N/A
N/A
N/A
$(40.0)
$ 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)
$ N/A
N/A
N/A
–
–
(45.6)
–
$(45.6)
Change in Benefit Obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Currency
Actuarial loss (gain)
Benefit payments from plans
Business combinations
Participant contributions
Special termination benefits
Plan amendments
(Gain) loss on plan curtailment
Gain on plan settlement
Other
Benefit 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 benefit contributions
Currency
Benefit payments
Participant contributions
Adjustment related to Spin-Off
Other
Fair value of plan assets at end of year
Funded Status:
Benefit obligations in excess of plan assets
Unrecognized net actuarial loss
Unrecognized transition amount
Unrecognized prior service cost
Net amount recognized
Amounts Recognized in Balance Sheets:
Current assets
Current liabilities
Noncurrent liabilities
Prepaid benefit costs
Intangible asset
Accrued benefit costs
Accumulated other comprehensive income
Net amount recognized
86
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
Amounts recognized in accumulated other comprehensive income consist of:
Accumulated net loss
Prior service cost (credit)
Transition asset
Total recognized in accumulated other comprehensive income
Pension Benefits
Post-Employment
Benefits Other
than Pensions
2006
$ 97.3
10.6
(0.3)
$107.6
December 31,
2005
N/A
N/A
N/A
2006
$14.3
(7.5)
–
$ 6.8
2005
N/A
N/A
N/A
Amounts shown as N/A in the preceding table were not applicable prior to the Company’s adoption of SFAS 158 at
December 31, 2006.
Summary disaggregated information about the pension plans follows:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
C O M P O N E N T S O F N E T P E R I O D I C B E N E F I T C O S T
December 31,
Assets Exceed ABO
ABO Exceed Assets
Total
2006
2005
2006
2005
2006
$207.3
189.2
204.2
$279.5
227.5
239.4
$212.4
193.1
146.7
$170.4
153.0
135.7
$419.7
382.3
350.9
2005
$449.9
380.5
375.1
Pension Benefits
Post-Employment Benefits
Other than Pension
Year Ended December 31,
Service cost
Interest cost
Expected return on plan assets(a)
Recognized net actuarial loss
Amortization of unrecognized transition asset
Amortization of prior service cost
Amount of curtailment (gain) loss recognized
Amount of settlement loss recognized
Adjustment related to Spin-Off
Net periodic benefit cost (credit)
Less: Cost/(credit) related to discontinued operations(b)(c)
Net periodic benefit cost (credit) related to
2006
$ 8.1
22.3
(30.3)
7.7
(0.3)
1.6
1.6
24.8
–
35.5
26.1
2005
$ 10.7
21.9
(27.7)
7.1
(0.2)
1.4
–
–
–
13.2
7.1
2004
$ 9.1
24.2
(27.7)
4.7
(0.2)
1.0
–
–
(0.4)
10.7
6.4
2006
$ 2.2
3.5
–
2.3
–
(1.3)
(19.9)
–
–
(13.2)
(18.2)
continuing operations
$ 9.4
$ 6.1
$ 4.3
$ 5.0
2005
$1.5
3.1
–
0.7
–
0.1
–
–
–
5.4
2.5
$2.9
2004
$ 1.2
3.4
–
(4.6)
–
–
–
–
(0.4)
(0.4)
1.7
$(2.1)
(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
benefit payments and contributions) by the expected long-term rate of return.
(b) In conjunction with the transfer of the Terrace Bay mill to Buchanan and as a closing condition of the agreement, the Company initiated plans to curtail and
settle its Ontario, Canada defined benefit pension plan. The pension (credit) cost related to the operations of the Terrace Bay mill has been classified as Loss
from discontinued operations on the consolidated and combined statements of operations.
(c) Pursuant to the terms of the transfer agreement, Buchanan assumed responsibility for post-employment medical and life insurance benefits for active
employees at the Terrace Bay mill.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 87
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
O T H E R C H A N G E S I N P L A N A S S E T S A N D B E N E F I T O B L I G AT I O N S R E C O G N I Z E D I N O T H E R C O M P R E H E N S I V E I N C O M E
Net periodic benefit expense (income)
Net loss
Prior service cost (credit)
Transition asset
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
Pension Benefits
Post-Employment Benefits
Other than Pensions
Year Ended December 31, 2006
$ 35.5
97.3
10.6
(0.3)
107.6
$143.1
$(13.2)
14.3
(7.5)
–
6.8
$ (6.4)
The estimated net loss, prior service cost and tran-
sition (asset) for the defined benefit pension plans expected
to be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal
year are $4.7 million, $1.7 million and $(0.2) million, respec-
tively. The estimated net loss and prior service (credit) for
post-employment benefits other than pension expected to
be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal
year are $3.6 million and $(6.2) million, respectively.
A D D I T I O N A L I N F O R M AT I O N
Year Ended
December 31,
2006
2005
Decrease (increase) in minimum liability
included in other comprehensive income
$4.6
$(20.5)
W E I G H T E D - AV E R A G E A S S U M P T I O N S U S E D TO
D E T E R M I N E B E N E F I T O B L I G AT I O N S
Pension Benefits
Post-Employment
Benefits Other
than Pensions
December 31,
2006
5.25%
2005
5.20%
2006
5.66%
2005
5.22%
Discount rate
Rate of compen-
sation increase
3.29%
3.24%
–
–
W E I G H T E D - AV E R A G E A S S U M P T I O N S U S E D TO
D E T E R M I N E N E T P E R I O D I C B E N E F I T C O S T
Pension Benefits
Post-Employment
Benefits Other
than Pensions
E X P E C T E D L O N G - T E R M R AT E O F R E T U R N A N D
I N V E S T M E N T S T R AT E G I E S
The expected long-term rate of return on pension fund
assets held by the Company’s pension trusts was deter-
mined based on several factors, including input from pen-
sion 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 anticipated that on average the invest-
ment 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 man-
agers, with expected long-term rates of return of approxi-
mately 10%, and 40% with fixed income managers, with an
expected long-term rate of return of about 6%. The actual
asset allocation is regularly reviewed and periodically rebal-
anced to the targeted allocation when considered appro-
priate. 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 con-
tinuing to evaluate its long-term rate of return assumptions.
P L A N A S S E T S
Pension plan asset allocations are as follows:
Percentage of Plan Assets
December 31,
2006
2005
2004
Asset Category
Equity securities
Debt securities
Real estate
Cash and money-market funds
Total
65%
31%
–%
4%
100%
68%
24%
–%
8%
100%
66%
24%
3%
7%
100%
Year Ended December 31,
Plan assets were not invested in the Company’s
2006
2005
2004
2006
2005
2004
5.20% 5.75% 6.21% 5.22% 5.75% 6.17%
securities for periods subsequent to the Spin-Off or
Kimberly-Clark securities prior to the Spin-Off.
–
–
–
–
–
–
C A S H F L O W S
Based on December 31, 2006 exchange rates, the
Company expects to contribute approximately $8.7 million
to its pension trusts in 2007. During 2007, the Company
Discount rate
Expected long-
term return on
plan assets
Rate of compen-
8.39% 8.41% 8.50%
sation increase 3.24% 3.75% 3.75%
88
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
expects to settle its obligations for active employees in the
Ontario, Canada defined benefit pension plan. The amount
of any funds that the Company may pay or receive related
to the termination of such pension obligations is dependent
upon, among other things, an actuarial determination of
the value of the obligations being settled, the cost of annu-
ity contracts and employee elections.
F U T U R E B E N E F I T PAY M E N T S
The following benefit payments, which reflect expected
future service, as appropriate, are expected to be paid:
Pension Plans
Post-Employment Benefits
Other then Pensions
2007
2008
2009
2010
2011
Years 2012–2016
$143.6
11.3
12.3
13.6
15.2
103.1
$3.5
2.7
1.5
1.8
2.1
15.0
H E A LT H C A R E C O S T T R E N D S
Assumed health care cost trend rates affect the amounts
reported for post-employment health care benefit plans. A
one percentage-point change in assumed health care cost
trend rates would have the following effects:
One Percentage-Point
Increase
Decrease
Effect on total of service and
interest cost components
Effect on post-retirement benefit obligation
$0.2
2.0
$(0.1)
(1.7)
D E F I N E D C O N T R I B U T I O N R E T I R E M E N T P L A N S
Kimberly-Clark’s contributions to its defined contribution
retirement plans were primarily based on the age and
compensation 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
defined contribution retirement plans that provide substan-
tially similar benefits. Contributions to these plans, all of
which were charged to expense, were $1.1 million in 2006,
$1.0 million in 2005 and $0.5 million in 2004.
I N V E S T M E N T P L A N S
The Company provides voluntary contribution investment
plans to substantially all employees. Under the plans,
Kimberly-Clark matched a portion of employee contribu-
tions. In connection with the Spin-Off, Kimberly-Clark trans-
ferred the related assets and liabilities of these plans to trusts
established by the Company. In December 2004, the Company
established investment plans that provide substantially simi-
lar benefits. Costs charged to expense for company match-
ing contributions under these plans were $1.3 million in 2006
and $1.2 million in each of 2005 and 2004.
ten
Stock Compensation Plans
The Company adopted and established the 2004 Omnibus
Stock and Incentive Plan (the “Omnibus Plan”) under unani-
mous written consent of its Board of Directors on December 1,
2004. The Company reserved 3,500,000 shares of $0.01 par
value common stock (“Common Stock”) for issuance under
the Omnibus Plan. Pursuant to the terms of the Omnibus
Plan, the compensation committee of the Company’s Board
of Directors may grant various types of equity-based com-
pensation awards, including incentive and nonqualified stock
options, stock appreciation rights, restricted stock, restricted
stock units (“RSUs”), restricted stock units with performance
conditions (“Performance Shares”) and performance units, in
addition to certain cash-based awards. All grants under the
Omnibus Plan will be made at fair market value and no grant
may be repriced. In general, the options expire ten years
from the date of grant and vest over a three-year service
period. At December 31, 2006, a total of 1,884,245 shares of
Common Stock were reserved for future issuance under the
Omnibus Plan.
On January 1, 2006, the Company adopted the fair
value recognition provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment (“SFAS 123R”) using the modified-prospective tran-
sition method. The restatement of prior year periods for the
adoption of SFAS 123R is not permitted under the modified-
prospective transition method. Stock-based compensation
cost recognized under SFAS 123R in the year ended
December 31, 2006 consisted of (a) compensation cost for
all unvested stock-based grants outstanding as of January 1,
2006, based on the grant date fair value estimated in accor-
dance with the pro forma provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”) and (b) compensation cost for all
stock-based awards granted subsequent to adoption based
on the grant date fair value estimated in accordance with the
provisions of SFAS 123R. The amount of stock-based com-
pensation cost recognized is based on the fair value of grants
that are ultimately expected to vest and is recognized pro-rata
over the requisite service period for the entire award.
SFAS 123R amends Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows, to
require the reporting of excess tax benefits related to the
exercise or vesting of stock-based awards as cash provided
by financing activities rather than as a reduction in income
taxes paid and reported as cash provided by operations. For
the year ended December 31, 2006, the Company recog-
nized $67 thousand of excess tax benefits related to the
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 89
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
exercise or vesting of stock-based awards. The Company did
not recognize any excess tax benefits for the years ended
December 31, 2005 and 2004.
VALUATION AND EXPENSE INFORMATION UNDER SFAS 123R
The following table summarizes stock-based compensation
costs and related income tax benefits. All stock-based com-
pensation expense has been recorded in selling, general and
administrative expenses.
Stock-based
compensation expense
Income tax benefit
Stock-based compensation,
net of income tax benefit
Year Ended December 31,
2006
2005
2004
$ 5.8
(2.2)
$ 0.8
(0.3)
$ 0.6
(0.2)
$ 3.6
$ 0.5
$ 0.4
Company’s common stock on the date of grant. Except for
options awarded to Board Members, one-third of the options
vest on each of the first three anniversaries of the date of
grant. Options granted to Board Members vest one year
from the date of grant. For the year ended December 31,
2006, the weighted-average exercise price for options granted
was $29.39 per share. For the year ended December 31,
2005, the Company granted options to purchase 125,700
shares and 11,250 shares of common stock to LTIP partici-
pants and Board Members, respectively. The weighted-average
exercise price and grant date fair value of such options was
$32.52 and $12.46, respectively (see “Pro Forma Information
Under SFAS 123 for Periods Prior to January 1, 2006”).
The weighted-average grant date fair value for stock
options granted during the year ended December 31, 2006
was $11.44 and was estimated using the Black-Scholes
option valuation model with the following assumptions:
The adoption of SFAS 123R resulted in additional
stock-based compensation expense of $4.2 million and
income tax benefits of $1.6 million and reduced basic and
diluted EPS by $0.17 for the year ended December 31, 2006.
The following table summarizes total compensation
costs related to the Company’s equity awards and amounts
recognized in the year ended December 31, 2006.
Stock
Options(a)
Restricted
Stock
Unrecognized compensation cost –
December 31, 2005
Add: Grant date fair value current year grants
Less: Compensation expense recognized
Less: Grant date fair value of shares forfeited
Unrecognized compensation cost –
December 31, 2006
Expected amortization period (in years)
$4.8
2.2
3.7
–
$3.3
1.0
$1.8
2.6
2.1
0.1
$2.2
2.2
(a) Fair value of current year grants includes $0.2 million related to a change in
the Company’s estimate of stock option forfeitures.
STOCK OPTIONS
For the year ended December 31, 2006, the Company
granted options to purchase 166,382 shares of common
stock to participants in its Long-Term Incentive Plan (the
“LTIP”), options to purchase 11,220 shares of common stock
to non-employee members of the board of directors (“Board
Members”) and options to purchase 5,000 shares to other
employees. The options expire in ten years and the exercise
price of the options was equal to the market price of the
Expected life in years
Interest rate
Volatility
Dividend yield
Year Ended December 31, 2006
5.9
4.8%
37.9%
1.4%
The expected term was estimated based upon his-
torical data for Kimberly-Clark stock option awards and the
expected volatility was estimated by reference to the histori-
cal stock price performance of a peer group of companies.
The risk-free interest rate was based on the yield on U.S.
Treasury bonds with a remaining term approximately equiva-
lent to the expected term of the stock option award.
Forfeitures were estimated at the date of grant.
The following table summarizes stock option activity
under the Omnibus Plan for the year ended December 31, 2006:
Number of
Stock
Weighted-
Average
Options Exercise Price
Options outstanding – December 31, 2005 1,284,428
182,602
Add: Options granted
Less: Options exercised
42,383
23,126
Less: Options forfeited/cancelled
Options outstanding – December 31, 2006 1,401,521
$31.90
$29.39
$27.80
$34.27
$31.66
90
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
The status of outstanding and exercisable stock options as of December 31, 2006, summarized by exercise price follows:
Exercise Price
$24.01–$26.04
$26.95–$31.70
$32.60–$37.59
Options Vested or Expected to Vest
Options Exercisable
Weighted-
Average
Remaining
Contractual Life
5.6
7.4
6.6
6.6
Number of
Options
186,770
274,901
917,144
1,378,815
Weighted-
Average
Exercise
Price
$24.26
$29.37
$33.85
$31.66
Aggregate
Intrinsic
Value(a)
$2.1
1.6
1.8
$5.5
Number of
Options
186,770
90,852
684,221
961,843
Weighted-
Average
Exercise
Price
$24.26
$29.84
$34.16
$31.83
Aggregate
Intrinsic
Value(a)
$2.1
0.5
1.2
$3.8
(a) Represents the total pretax intrinsic value as of December 31, 2006 that option holders would have received had they exercised their options as of such date.
The pretax intrinsic value is based on the closing market price for the Company’s common stock of $35.32 on December 31, 2006.
The aggregate pretax intrinsic value of stock
options exercised during the year ended December 31, 2006
was $0.2 million. No stock options were exercised during the
years ended December 31, 2005 and 2004.
The following table summarizes the status of the
Company’s unvested stock options as of December 31, 2006
and activity for the year then ended:
Outstanding – December 31, 2005
Add: Options granted
Less: Options vested
Less: Options forfeited/cancelled
Outstanding – December 31, 2006
Number of
Stock Options
544,144
182,602
333,770
13,580
379,396
Weighted-
Average
Grant Date
Fair Value
$12.98
$11.44
$13.03
$12.36
$12.23
As of December 31, 2006, certain participants met
age and service requirements that allowed their options to
qualify for accelerated vesting upon retirement. For the
year ended December 31, 2006, there were 60,282 stock
options subject to accelerated vesting that such partici-
pants would have been eligible to exercise if they had
retired as of December 31, 2006. The aggregate grant date
fair value of options subject to accelerated vesting was
$0.7 million. For the year ended December 31, 2006, stock-
based compensation expense for such options was
$0.7 million. For the year ended December 31, 2006, the
aggregate grant date fair value of options vested, including
options subject to accelerated vesting, was $4.3 million.
Stock options that reflect accelerated vesting for expense
recognition become exercisable according to the contract
terms of the stock option grant.
RESTRICTED STOCK AND RSUs
In February 2006, the Company granted 48,100 Performance
Shares to LTIP participants. The measurement period for the
Performance Shares is January 1, 2006 through December 31,
2006. Based on Company performance compared to revenue
growth and return on invested capital targets, RSUs equal to
between 30% and 225% of the performance award would be
issued. At December 31, 2006, 76,375 RSUs (equal to
162.5% of the Performance Shares granted) were awarded.
The RSUs carry a promise to pay out in Common Stock at a
future date. In general, the RSUs issued become 100%
vested two years from the end of the performance period.
During the vesting period, the holders of RSUs are entitled to
dividends, but are not permitted to vote such shares and the
RSUs are forfeited in the event of termination of employment
(as defined in the Omnibus Plan). The grant date fair value for
the performance shares was $27.58 per share and was equal
to the market price of the Company’s common stock on the
date of grant. Compensation cost is recognized pro rata over
the vesting period.
In October 2006, in connection with the Company’s
acquisition of Neenah Germany, the Company granted
10,100 RSUs to certain key management employees of Neenah
Germany. The RSUs vest three years from the date of grant.
During the vesting period, the holders of RSUs are entitled to
dividends, but are not permitted to vote such shares and the
RSUs are forfeited in the event of termination of employment
(as defined). The grant date fair value for the RSUs was $35.92 per
share and was equal to the market price of the Company’s com-
mon stock on the date of grant. Compensation cost is recog-
nized pro rata over the vesting period.
During the year ended December 31, 2006, the
Company awarded 3,510 RSUs to Board Members. The RSUs
vest one year from the date of grant. During the vesting period,
the holders of RSUs are entitled to dividends, but are not per-
mitted to vote such shares and the RSUs are forfeited in the
event holder does not continue to serve as a Board Member (as
defined). The grant date fair value for the RSUs was $32.84 per
share and was equal to the market price of the Company’s com-
mon stock on the date of grant. Compensation cost is recog-
nized pro rata over the vesting period.
In December 2004, the Company awarded 40,800
and 3,450 RSUs (“Fresh Start Grants”) to LTIP participants
and Board Members, respectively. The Fresh Start Grants
awarded to LTIP participants vest over a five-year period,
with one-third vesting on the third anniversary of the date of
grant, one-third vesting on the fourth anniversary, and the
balance vesting on the fifth anniversary. The RSUs awarded
to Board Members vest on the first anniversary of the date of
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 91
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
grant. At December 30, 2006, 140,673 RSUs were outstand-
ing, with 17,647 shares, 99,755 shares and 23,271 shares
vesting in 2007, 2008 and 2009, respectively.
At the time of the Spin-Off, the vesting schedule of
Kimberly-Clark restricted stock awards for employees of the
Pulp and Paper Business were adjusted so that the awards
vested on a prorated basis determined by the number of full
years of employment with Kimberly-Clark during the restric-
tion 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 com-
mon stock were forfeited. 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, 2006, 19,190 of such restricted
shares were outstanding, with 2,025 shares, 16,591 shares
and 574 shares vesting in 2007, 2008 and 2009, respectively.
The following table summarizes the activity of the Company’s unvested stock-based awards (other than stock options)
for the year ended December 31, 2006:
Outstanding – December 31, 2005
Add: Shares granted(a)
Less: Shares vested
Less: Shares expired or cancelled
Outstanding – December 31, 2006(b)
Weighted-
Average
Grant Date
Fair Value
$34.28
–
$34.28
–
$34.28
Performance
Shares/RSUs
55,193
91,173
2,934
2,759
140,673
Weighted-
Average
Grant Date
Fair Value
$31.68
$28.71
$33.31
$30.03
$29.76
Restricted
Stock
22,871
–
3,681
–
19,190
Includes the grant of 88 RSUs to Canadian employees and directors in lieu of cash dividends. Such dividends-in-kind vest concurrently with the underlying RSU.
(a)
(b) The aggregate pretax intrinsic value of restricted stock and RSUs at December 31, 2006 was $0.8 million and $5.0 million, respectively.
PRO FORMA INFORMATION UNDER SFAS 123
FOR PERIODS PRIOR TO JANUARY 1, 2006
Prior to January 1, 2006, the Company applied 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 as permitted by SFAS 123. No employee com-
pensation expense related to stock options has been charged
to earnings because the exercise prices of all stock options
granted were equal to the market value of the Company or
Kimberly-Clark’s common stock on the date of grant. SFAS 123R
requires the recognition of compensation costs for stock-
based awards subject to accelerated vesting upon retirement
over a service period ending no later than the earliest date
the employee becomes eligible for retirement, generally age
55 with five years of vested service. Prior to the adoption of
SFAS 123R, the Company recognized compensation cost
over the explicit service period for restricted stock and RSU
awards subject to accelerated vesting upon retirement. For
such awards and other stock-based awards granted prior to,
but unvested as of, January 1, 2006, compensation cost will
be recognized pro-rata over the explicit service period for
the award and any remaining unamortized compensation
cost will be recognized upon the employees’ retirement.
The following table presents the effects on net
income and earnings per share if the Company had adopted
the fair value recognition provisions of SFAS 123 for options
granted in the years ended December 31, 2005 and 2004.
Year Ended December 31,
(In millions, except per share data)
Reported net loss
Add: Stock-based compensation
expense, net of tax effects,
included in net income as reported
2005
2004
$(29.7)
$(26.4)
0.5
0.4
Less: Pro forma compensation
expense, net of tax
Pro forma net loss
Reported earnings per share:
Basic
Diluted
Pro forma earnings per share:
Basic
Diluted
(2.5)
$(31.7)
$(2.02)
$(2.02)
$(2.15)
$(2.15)
(1.6)
$(27.6)
$(1.79)
$(1.79)
$(1.87)
$(1.87)
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The weighted-average grant date fair value for stock
options granted during the years ended December 31, 2005
and 2004 was estimated using the Black-Scholes option val-
uation model with the following assumptions:
Expected life in years
Interest rate
Volatility
Dividend yield
Year Ended
December 31,
2005
5.9
3.9%
39.0%
1.2%
2004
4.7
3.6%
36.3%
1.2%
The expected term was estimated based upon
historical data for Kimberly-Clark stock option awards and
expected volatility was estimated by reference to the histori-
cal stock price performance of a peer group of companies.
The grant date fair market value of stock options awarded
during the years ended December 31, 2005 and 2004 was
$12.46 and $11.71, respectively. Forfeitures were estimated
at the date of grant.
eleven
Goodwill and Other Intangible Assets
As of December 31, 2006, the Company had goodwill and net identifiable intangible assets of $92.0 million and
$29.5 million, respectively. The following table details amounts related to those assets.
Unamortizable intangible assets:
Goodwill
Trade names
Amortizable intangible assets
Customer based intangibles
Trade names
Acquired technology
Total
Weighted-Average
Amortization
Period (Years)
Not amortized
Not amortized
15
10
10
December 31, 2006
Gross Accumulated
Amount Amortization
Net
$92.0
$ 7.2
16.2
5.3
1.1
$29.8
$ –
$ –
$92.0
$ 7.2
(0.2)
(0.1)
–
$(0.3)
16.0
5.2
1.1
$29.5
Aggregate amortization expense in 2006 related
The following table presents changes in goodwill
to acquired intangible assets subsequent to the Acquisition
was $0.3 million. Estimated annual amortization expense
for each of the next five years is $1.7 million.
(all of which relates to the Company’s Technical Products
segment) for the year ended December 31, 2006:
Balance at December 31, 2005
Goodwill acquired in the Acquisition
Foreign currency translation
Balance at December 31, 2006
$ –
87.6
4.4
$92.0
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twelve
thirteen
Stockholders’ Equity
Commitments
C O M M O N S TO C K
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 shares
of Common Stock were issued to the stockholders of
Kimberly-Clark as a dividend in the ratio of one share of the
Company’s Common Stock for every thirty-three shares of
Kimberly-Clark common stock outstanding.
During 2006 and 2005, the Company acquired
1,185 shares and 814 shares of Common Stock at a cost of
approximately $41,000 and $25,000, respectively, for shares
surrendered by employees to pay taxes due on vested
restricted stock awards.
Each share of our Common Stock contains a pre-
ferred stock purchase right that is associated with the share.
These preferred stock purchase rights are transferred only
with shares of Common Stock. The preferred stock pur-
chase rights become exercisable and separately certificated
only upon a “Rights Distribution Date” as that term is
defined in our stockholder rights agreement adopted by
the Company at the time of the Spin-Off. In general, a
Rights Distribution Date occurs ten business days following
either of these events: (i) a person or group has acquired or
obtained the right to acquire beneficial ownership of
15 percent or more of the outstanding shares of our
Common Stock then outstanding or (ii) a tender offer or
exchange offer is commenced that would result in a person
or group acquiring 15 percent or more of the outstanding
shares of our Common Stock then outstanding.
P R E F E R R E D S TO C K
The Company has authorized 20 million shares of $0.01 par
value preferred stock. The preferred stock may be issued in
one or more series and with such designations and prefer-
ences for each series as shall be stated in the resolutions
providing for the designation and issue of each such series
adopted by the Board of Directors of the Company. The
board of directors is authorized by the Company’s articles
of incorporation to determine the voting, dividend,
redemption and liquidation preferences pertaining to each
such series. No shares of preferred stock have been issued
by the Company.
L E A S E S
The future minimum obligations under operating leases
having a noncancelable term in excess of one year as of
December 31, 2006, are as follows:
2007
2008
2009
2010
2011
Thereafter
Future minimum lease obligations
$1.3
0.9
0.8
0.7
0.6
1.4
$5.7
Rental expense under operating leases was
$2.0 million, $1.3 million and $0.9 million in 2006, 2005 and
2004, respectively.
P U R C H A S E C O M M I T M E N T S
The Company has entered into long-term contracts for the
purchase of sawmill wood chips. The minimum purchase
commitments extend beyond 2009. Commitments under
these contracts are approximately $48.0 million in 2007,
$47.3 million in 2008, $43.9 million in 2009, $41.9 million in
2010 and $38.4 million in 2011. Total commitments beyond
2011 are $214.0 million.
In conjunction with the sale of 500,000 acres of
woodlands in Nova Scotia, the Company entered into a
Fiber Supply Agreement (the “FSA”) with the purchaser.
See Note 3, Sale of Woodlands. Pursuant to the terms of
the FSA, the Company agreed to purchase 200,000 metric
tons of softwood timber annually through December 31,
2010. Based on the contract price in effect at December 31,
2006, commitments under the FSA are approximately
$5.7 million annually for 2007 through 2010. Timber pur-
chases under the FSA are at market-based prices subject to
semi-annual adjustment. The FSA expires on December 31,
2010 and can be extended for an additional five years at
the Company’s discretion. The FSA can be extended for a
subsequent five years upon the mutual agreement of the
Company and the Purchaser.
Although the Company is primarily liable for pay-
ments on the above mentioned leases and purchase com-
mitments, management believes exposure to losses, if any,
under these arrangements is not material.
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fourteen
Contingencies and Legal Matters
L I T I G AT I O N
On February 19, 2007, certain former employees of Neenah
Paper Company of Canada ("NPCC") who were previously
employed in NPCC's Longlac woodlands operations brought
suit against the Company and NPCC in the Ontario (Canada)
Superior Court of Justice for damages the plaintiffs claim
to have suffered from an alleged wrongful termination of
employment by NPCC occurring on or about August 21,
2006. Eagle Logging Inc. (the purchaser of NPCC’s Longlac
woodlands assets on August 29, 2006), Terrace Bay Pulp
Inc. (the purchaser of NPCC’s Terrace Bay pulp mill),
Buchanan Forest Products Ltd., Lucky Star Holdings Inc.
(each affiliates of Eagle Logging Inc. and Terrace Bay Pulp
Inc.), Kimberly-Clark Corporation and Kimberly-Clark Inc.
have also been named in the lawsuit. The lawsuit seeks
damages for severance and notice pay under Ontario law,
as well as damages for wrongful termination, breach of
contract, conspiracy and punitive damages, among other
things. The Company and NPCC believe that the lawsuit
is without merit and will vigorously defend the litigation.
The Company is involved in certain other legal
actions and claims arising in the ordinary course of busi-
ness. While the outcome of these legal actions and claims
cannot be predicted with certainty, it is the opinion of man-
agement that the outcome of any such claim which is pending
or threatened, either individually or on a combined basis,
will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of
the Company.
I N D E M N I F I C AT I O N S
In conjunction with the transfer of the Terrace Bay mill
(see Note 4, “Discontinued Operations”), the Company
entered into a pulp manufacturing agreement (the “Pulp
Manufacturing Agreement”) with Terrace Bay Pulp Inc.
(“TBPI”). Pursuant to the Pulp Manufacturing Agreement,
the Company has agreed to sell pulp manufactured by TBPI
at the Terrace Bay mill to satisfy the Company’s supply obli-
gations under an amended and restated pulp supply agree-
ment with Kimberly-Clark (as amended and restated, the
“Pulp Supply Agreement”). The price paid by the Company
under the Pulp Manufacturing Agreement will equal the
price paid by Kimberly-Clark pursuant to the Pulp Supply
Agreement. TBPI has agreed to perform substantially all of
the Company’s obligations under the Pulp Supply Agreement
and, together with three of its affiliated companies, to indem-
nify and hold the Company harmless for any claims arising
from the Terrace Bay mill’s failure to so perform. The Pulp
Manufacturing Agreement will terminate on December 31,
2010 or sooner by mutual agreement by the parties or
upon the occurrence of certain events (as defined in the
Pulp Manufacturing Agreement). The Company believes
that any liability it may have under the Pulp Supply
Agreement in excess of TBPI’s indemnification under the
Pulp Manufacturing Agreement is immaterial.
For the year ended December 31, 2006, the
Company did not recognize revenue or cost in its con -
solidated and combined statement of operations for the
pulp manufactured by TBPI at the Terrace Bay mill for sale
to Kimberly-Clark. The Company receives payments from
Kimberly-Clark for Kimberly-Clark’s purchases of pulp from
TBPI and immediately remits such payments to TBPI. In
general, Kimberly-Clark pays for such pulp purchase in
approximately 45 days from receipt of the product. Due to
the lag in payments, at any given time, the Company has
equal accounts receivable from Kimberly-Clark and
accounts payable to TBPI for such pulp shipments. At
December 31, 2006, the Company had a receivable from
Kimberly-Clark for $19.8 million recorded in Accounts
receivable, net on the Consolidated Balance Sheet and an
equal payable to TBPI recorded in Accounts payable.
Pursuant to the terms of the purchase agreement
with FiberMark (see Note 5, “Acquisitions”), the Company
is liable for potential additional taxes due for tax returns
filed for periods prior to the Acquisition. FiberMark has
agreed to indemnify the Company for such additional taxes
and a portion of the purchase price has been reserved in an
escrow account to fund the indemnification. The Company
believes it is probable that Neenah Germany is liable for
approximately $5.4 million in additional taxes. See Note 7,
“Income Taxes.” As of December 31, 2006, the Company
has recognized approximately $5.4 million as a current lia-
bility on the consolidated balance sheet for such potential
additional taxes. The Company has also recognized a
receivable in an equal amount in prepaid and other current
assets on the consolidated balance sheet for the value of
the indemnification. The Company does not believe its lia-
bility for such taxes are in excess of the escrow amount.
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 15, “Transactions with
Kimberly-Clark.” Many of the potential indemnification lia-
bilities under these agreements are unknown, remote or
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highly contingent. Furthermore, even in the event that an
indemnification claim is asserted, liability for indemnifica-
tion is subject to determination under the terms of the
applicable agreement. For these reasons, the Company is
unable to estimate the maximum potential amount of the
possible future liability under the indemnity provisions of
these agreements. However, the Company accrues for any
potentially indemnifiable liability or risk under these agree-
ments for which it believes a future payment is probable
and a range of loss can be reasonably estimated. As of
December 31, 2006, management believes the Company’s
liability under such indemnification obligations was not
material to the consolidated financial statements.
E N V I R O N M E N TA L , H E A LT H A N D S A F E T Y M AT T E R S
Neenah is subject to federal, state, provincial and local
laws, regulations and ordinances relating to various environ-
mental, health and safety matters. The Company is in com-
pliance 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 in connec-
tion with such claims. Except for certain orders issued by
environmental, health and safety regulatory agencies, with
which management believes the Company is in compliance
and which management believes are immaterial to the
results of operations of the Company’s business, Neenah is
not currently named as a party in any judicial or administra-
tive proceeding relating to environmental, health and
safety matters.
While the Company has incurred in the past sev-
eral years, and will continue to incur, capital and operating
expenditures in order to comply with environmental, health
and safety laws, regulations and ordinances, management
believes that the Company’s future cost of compliance with
environmental, health and safety laws, regulations and ordi-
nances, and its exposure to liability for environmental,
health and safety claims will not have a material adverse
effect on its financial condition, results of operations or liq-
uidity. However, future events, such as changes in existing
laws and regulations or contamination of sites owned, oper-
ated or used for waste disposal by the Company (including
currently unknown contamination and contamination
caused by prior owners and operators of such sites or other
waste generators) may give rise to additional costs which
could have a material adverse effect on the Company’s
financial condition, results of operations or liquidity.
The Company incurs capital expenditures neces-
sary to meet legal requirements and otherwise relating to
the protection of the environment at its facilities in the
United States and internationally. For these purposes, the
Company has planned capital expenditures for environmen-
tal projects during the period 2007 through 2010 of
approximately $2 million to $3 million annually. Following
the completion of engineering studies and negotiations
with local authorities and other interested parties in
Canada, the Company does not anticipate any material cap-
ital expenditures would be required at the Pictou mill in the
foreseeable future related to the effluent treatment system,
total sulphur emissions or other environmental matters until
2009 or later. The Company’s anticipated capital expendi-
tures for environmental projects are not expected to have a
material adverse effect on our financial condition, results of
operations or liquidity.
E M P L OY E E S A N D L A B O R R E L AT I O N S
Hourly employees at the Pictou pulp mill are represented by
the Communications, Energy and Paperworkers Union of
Canada pursuant to a collective bargaining agreement
expiring in May 2009.
Hourly employees at the Neenah, Whiting and
Munising paper mills are represented by the United
Steelworkers Union (the “USW”). The collective bargaining
agreements for the Neenah, Whiting and Munising paper
mills expire on February 1, 2009, July 1, 2009 and July 15,
2009, respectively. Additionally, these mills have bargained
jointly with the union on pension matters. The agreements
on pension matters for these mills expire in June 2007.
Approximately 50 percent of salaried employees
and 80 percent of hourly employees of Neenah Germany
are eligible to be represented by the Mining, Chemicals and
Energy Trade Union, Industriegewerkschaft Bergbau,
Chemie and Energie (the “IG BCE”). Union membership is
voluntary, and under German law does not need to be dis-
closed to the Company. As a result, the number of employ-
ees covered by the collective bargaining agreement that
expired on February 28, 2007 cannot be determined. The
collective bargaining agreement covering union employees
of Neenah Germany is negotiated by the IG BCE and a
national trade association representing all employers in the
industry. The collective bargaining agreement between the
IG BCE and the national trade association expired on
February 28, 2007. Negotiations on a new contract have
not begun; however, the Company believes that expiration
of the collective bargaining agreement will not result in a
work stoppage.
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fifteen
Transactions with Kimberly-Clark
During all periods presented, the Company sold or trans-
ferred 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 agree-
ment 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 $163 million, $135 million and $137 million for
the years ended December 31, 2006, 2005 and 2004, respec-
tively. For periods prior to the Spin-Off, settlement of pulp
transfers was effected through Kimberly-Clark’s net invest-
ment account. In connection with the Spin-Off, the Company
and Kimberly-Clark entered into a new pulp supply agree-
ment (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.
D I S T R I B U T I O N A G R E E M E N T
The Distribution Agreement provided for, among other
things, the principal corporate transactions required to
effect the separation of the Pulp and Paper Business from
Kimberly-Clark, the distribution of the Company’s common
stock to the holders of record of Kimberly-Clark common stock
and other agreements governing the Company’s relation-
ship with Kimberly-Clark after the Spin-Off. Pursuant to the
Distribution Agreement, Kimberly-Clark transferred to the
Company assets used primarily in the Company’s business
and in general the Company assumed and agreed to per-
form and fulfill all of the liabilities arising out of the owner-
ship or use of the transferred assets or the operation of the
transferred business. The Distribution Agreement provides
for cross-indemnities principally designed to place financial
responsibility for the obligations and liabilities of the Pulp
and Paper Business with the Company and financial respon-
sibility for the obligations and liabilities of Kimberly-Clark’s
retained businesses with Kimberly-Clark except as may
other wise be provided in the Distribution Agreement.
P U L P S U P P LY A G R E E M E N T
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 specified tonnages of northern bleached softwood
and hardwood kraft pulp, except to the extent excused by a
Force Majeure Event. For 2006, the commitment for north-
ern bleached softwood kraft pulp was 322,000 metric tons.
For 2007, and for 2008 and any subsequent year, the com-
mitment is 365,000 metric tons and 345,000 metric tons,
respectively. These tonnages have been and will be sup-
plied to Kimberly-Clark by the Company’s Pictou Pulp mill
and, on a pass-through basis, by the Company’s former
Terrace Bay pulp mill (the “Terrace Bay Mill”) which the
Company sold to TBPI in August 2006. TBPI has agreed to
perform substantially all of the Company’s obligations
under the Pulp Supply Agreement and, together with three
of its affiliated companies, to indemnify and hold the
Company harmless for any claims arising from the Terrace
Bay Mill’s failure to so perform. See Note 14, “Contingencies
and Legal Matters.” Based on current forecasts, the Pictou
mill’s supply commitments for 2007 and 2008 represent
approximately 60%, and 55%, respectively, of the Pictou
mill’s total production of northern bleached softwood kraft
pulp in 2006.
The Company’s commitment to supply northern
bleached hardwood kraft pulp from the Pictou mill for 2006
was 14,000 metric tons and for 2007 and 2008 is 20,000
and 10,000 metric tons, respectively. The commitments for
2007 and 2008 represent approximately 155% and 75%,
respectively; of the Pictou mill’s production of northern
bleached hardwood kraft pulp in 2006. During 2006, the
Company fulfilled its supply commitments pursuant to the
Pulp Supply Agreement.
Under the Pulp Supply Agreement, the prices for
northern bleached softwood kraft pulp and northern
bleached hardwood kraft pulp will be based on published
industry index prices for the pulp (subject to minimum and
maximum prices for northern bleached kraft softwood pulp
shipped to North America prior to December 31, 2007),
less agreed upon discounts. The commitments are struc-
tured as supply-or-pay and take-or-pay arrangements.
Accordingly, if the Company does not supply the specified
minimums, the Company must pay Kimberly-Clark for the
shortfall based on the difference between the contract
price and any higher price that Kimberly-Clark pays to pur-
chase the pulp, plus 10% of that difference. If Kimberly-
Clark does not purchase the specified minimums,
Kimberly-Clark must pay for the shortfall based on the dif-
ference between the contract price and any lower price the
Company obtains for the pulp, plus 10% of the difference.
The Company will incur the cost of freight to delivery points
specified in the agreement.
The Pulp Supply Agreement may be partially termi-
nated as to the Terrace Bay Mill portion of the pulp supply
by either the Company or Kimberly-Clark giving a reduction
notice on June 29, 2007. If either the Company or Kimberly-
Clark gives such a notice, then the Terrace Bay portion of
the contract will cease on or about June 30, 2008, unless an
earlier termination date is otherwise agreed upon by the
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parties. A June 30, 2008 termination of the Terrace Bay por-
tion of the Pulp Supply Agreement would cancel the pass-
through sales agreement between the Company and TBPI
with respect to the Terrace Bay Mill, but does not terminate
the Company’s supply arrangements with Kimberly-Clark for
pulp manufactured at the Pictou mill.
Either party can elect a two-year phase-down
period for the agreement, to begin no earlier than January 1,
2009, under which the commitments for northern bleached
softwood kraft pulp in the first and second years of the
phase-down period would be 225,000 and 150,000 metric
tons, respectively. If either company were to choose to ter-
minate the Terrace Bay portion of the Pulp Supply Agreement
pursuant to a reduction notice, the phase-down commit-
ments in the first and second years would be 165,000 and
101,000 metric tons, respectively. Either the Company or
Kimberly-Clark may terminate the pulp supply agreement
for certain events specified in the agreement, including a
material breach of the agreement by the other party that is
not cured after 30 days’ notice, insolvency or bankruptcy of
the other party, or a fundamental change in the nature of the
business of the other party that may substantially affect its
ability to sell or to purchase or utilize pulp under the agree-
ment. In addition, Kimberly-Clark may terminate the agreement
if the ownership or control of the Company or any of its
pulp production facilities becomes vested in or is made
subject to the control or direction of, any direct competitor
of Kimberly-Clark or any governmental or regulatory
authority or any other third party, who in Kimberly-Clark’s
reasonable judgment may not be able to reliably perform
the Company’s obligations under the agreement. Kimberly-
Clark may also terminate the agreement upon one year’s
notice if, as a result of the Company’s forestry activities,
continued use of the Company’s pulp by Kimberly-Clark
does or, in Kimberly-Clark’s reasonable judgment is likely to,
result in a substantial loss of sales of Kimberly-Clark’s prod-
ucts or to otherwise materially and adversely affect the
reputation of Kimberly-Clark or its products. Kimberly-Clark
may also terminate the agreement upon 180 days’ notice that
the Company’s failure to comply with United States customs
requirements jeopardizes Kimberly-Clark customs certification.
The description above is a summary of the princi-
pal provisions of the Pulp Supply Agreement and is quali-
fied in its entirety by the Amended and Restated Pulp
Supply Agreement dated August 29, 2006.
C O R P O R AT E S E R V I C E S A G R E E M E N T
The Company and Kimberly-Clark entered into a Corporate
Services Agreement whereby Kimberly-Clark provided the
Company, on an interim, transitional basis, with various cor-
porate support services, including: certain employee bene-
fits administration and payroll, management information,
transportation, environment and energy, purchasing, treas-
ury, accounting and other services, as well as transitional
office space for the Company’s research team. Each service
was made available to the Company on an as-needed basis
through December 31, 2005, or such shorter or longer peri-
ods as may be provided in the Corporate Services Agreement.
The fees charged for the services were generally 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.
E M P L OY E E M AT T E R S A G R E E M E N T
The Company and Kimberly-Clark entered into an Employee
Matters Agreement which provides for their respective obli-
gations to employees and former employees, who are or
were, associated with the Pulp and Paper Business and for
other employment and employee benefits matters.
Pursuant to the Employee Matters Agreement, the
Company employed or offered to employ all employees of
Kimberly-Clark with employment duties principally related
to the Pulp and Paper Business on terms and conditions
substantially similar to the terms and conditions of their
employment with Kimberly-Clark. The Company main-
tained, subject to applicable laws, labor agreements with
substantially the same terms and conditions that existed
with Kimberly-Clark.
The Company also assumed, and indemnified
Kimberly-Clark against, certain liabilities related to employ-
ees of the Pulp and Paper Business who are employed by
the Company or retired Canadian employees. The Company
assumed responsibility for the Kimberly-Clark retirement
plans in which employees of the Pulp and Paper Business
participated. The Company granted credit for service recog-
nized under the Kimberly-Clark plans for all purposes under
its plans. Kimberly-Clark transferred the assets and liabilities
of the Kimberly-Clark retirement plans attributable to trans-
ferring active employees and retired Canadian employees of
the Pulp and Paper Business to the Company.
98
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
In connection with the Spin-Off, outstanding
options held by transferring employees under Kimberly-
Clark’s equity compensation plans (other than the Kimberly-
Clark Corporation Global Stock Option Plan) were converted
into substitute options to purchase Company common stock,
or to the extent such options were exercisable they could, at
the election of the option holder on or before November 30,
2004, remain exercisable in accordance with the terms of
such plans as applicable to terminated employees.
TA X S H A R I N G A G R E E M E N T
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 obligations after the Spin-Off with respect to taxes
attributable to the Company’s business, as well as any taxes
incurred by Kimberly-Clark as a result of the failure of the
Spin-Off to qualify for tax-free treatment under Section 355
of the Code.
General Taxes. Under the Tax Sharing Agreement,
Kimberly-Clark is generally liable for all pre-Spin-Off, and
the Company is generally be liable for all post-Spin-Off,
U.S. federal income taxes, foreign taxes and certain state
taxes attributable to the Company’s business. The Tax
Sharing Agreement sets forth rules for determining which
taxes are attributable to pre-Spin-Off and post-Spin-Off
periods and rules on the effect of subsequent adjustments
to those taxes due to tax audits or examinations.
Distribution Related Taxes. Under the Tax Sharing
Agreement the Company is liable for taxes incurred by
Kimberly-Clark that arise as a result of the Company taking
or failing to take, as the case may be, certain actions that
result in the Spin-Off failing to meet the requirements of a
tax-free distribution under Section 355 of the Code. The
Company is also liable for taxes incurred by Kimberly-Clark
in connection with certain acquisitions or issuances of
Company stock, even if such acquisitions or issuances occurred
after the Spin-Off, if such acquisitions or issuances result in
the Spin-Off failing to meet the requirements of a tax-free
distribution pursuant to Section 355(e) of the Code.
Administrative Matters. The Tax Sharing Agreement
also sets forth Kimberly-Clark’s and the Company’s respec-
tive obligations with respect to the filing of tax returns, the
administration of tax contests, assistance and cooperation
and other matters.
sixteen
Business Segment and
Geographic Information
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 papers. The Technical Products business
is a leading producer of filtration media, durable, saturated
and coated substrates for a variety of end uses. The Pulp
business consists of a mill and related timberlands, which
produces northern bleached softwood and hardwood kraft
pulp. Each segment requires different technologies and
marketing strategies. Disclosure of segment information is
on the same basis that management uses internally for eval-
uating segment performance and allocating resources.
Prior to the Spin-Off, Kimberly-Clark provided the
Pulp and Paper Business with certain centralized adminis-
trative functions to realize economies of scale and efficient
use of resources. The costs of shared services, and other
administrative functions managed on a common basis, are
allocated to the segments based on usage, where possible,
or other factors based on the nature of the activity. The
accounting policies of the reportable operating segments
are the same as those described in Note 2, “Summary of
Significant Accounting Policies.”
B U S I N E S S S E G M E N T S
Net sales
Fine Paper
Technical Products
Pulp
Intersegment sales
Consolidated
Year Ended December 31,
2006
2005
2004
$223.9
183.1
189.3
(2.0)
$594.3
$222.3
130.6
183.8
(2.0)
$534.7
$220.8
132.3
177.4
(1.7)
$528.8
Year Ended December 31,
2006
2005
2004
Operating income
Fine Paper
Technical Products
Pulp(a)
Unallocated corporate costs
Consolidated
$ 56.2
9.2
115.8
(12.8)
$168.4
$58.4
10.5
(9.0)
(6.5)
$53.4
$67.0
21.9
5.2
(8.3)
$85.8
(a) Operating income for the pulp segment in 2006 includes a gain on sale
of woodlands of $125.5 million.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 99
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
Year Ended December 31,
2006
2005
2004
Depreciation and amortization
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
$ 9.5
6.2
10.0
4.5
30.2
–
Total Continuing Operations $30.2
Less: Discontinued operations
Total
$ 9.5
4.0
13.5
2.0
29.0
3.4
$25.6
$ 9.7
3.7
22.4
0.2
36.0
11.5
$24.5
Year Ended December 31,
2006
2005
2004
Capital expenditures
Fine Paper
Technical Products
Pulp
Corporate
Total
$ 4.8
6.7
6.7
6.9
25.1
–
Total Continuing Operations $25.1
Less: Discontinued operations
Total Assets
Fine Paper
Technical Products
Pulp
Unallocated corporate and
intersegment items
Total
G E O G R A P H I C I N F O R M AT I O N
$ 5.5
2.4
9.8
8.0
25.7
4.2
$21.5
$ 3.5
1.6
11.0
3.0
19.1
8.0
$11.1
December 31,
2006
2005
$111.0
394.1
202.6
37.0
$744.7
$105.2
58.3
352.0
21.5
$537.0
C O N C E N T R AT I O N S
For the years 2006, 2005 and 2004, the Company had pulp
sales to Kimberly-Clark of $163 million, $135 million and
$137 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 Pictou
mill and certain specialty latex grades and specialty soft-
wood pulp used by Technical Products, management is not
aware of any significant concentration of business trans-
acted with a particular supplier that could, if suddenly elimi-
nated, have a material adverse affect on its operations. In
2006, two suppliers provided over 70% of the wood chips
used by the Pictou mill. While management believes that
alternative sources of critical supplies, such as wood chips,
would be available, disruption of its primary sources could
create a temporary, adverse effect on product shipments.
An interruption in supply of a latex specialty grade or of
specialty softwood pulp could disrupt and eventually cause
a shutdown of production of certain technical products.
seventeen
Supplemental Data
Net sales
United States
Canada
Europe
Intergeographic Items
Consolidated
Total Assets
United States
Canada
Europe
Total
Year Ended December 31,
S U P P L E M E N TA L S TAT E M E N T O F O P E R AT I O N S D ATA
2006
2005
2004
$357.3
189.3
49.7
(2.0)
$594.3
$352.9
183.8
–
(2.0)
$534.7
$354.0
177.0
–
(2.2)
$528.8
Summary of Advertising and
Research Expenses
Advertising expense
Research expense
Year Ended December 31,
2006
2005
2004
$6.3
3.5
$7.9
2.2
$7.7
1.5
December 31,
2006
2005
$223.5
180.8
340.4
$744.7
$231.9
305.1
–
$537.0
S U P P L E M E N TA L B A L A N C E S H E E T D ATA
Summary of Accounts Receivable – net
Accounts Receivable:
From customers
Other
Less allowance for doubtful accounts
and sales discounts
Total
December 31,
2006
2005
$105.2
11.7
(4.4)
$112.5
$76.7
6.0
(3.6)
$79.1
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 identifiable assets are those that are directly
used in the segments operations. Corporate assets are prima-
rily cash, prepaid pension costs and deferred financing costs.
100
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
Summary of Inventories
Inventories by Major Class:
Raw materials
Work in progress
Finished goods
Supplies and other
Excess of FIFO over LIFO cost
Total
Summary of Prepaid and
Other Current Assets
Indemnification from FiberMark
for German taxes (Note 7)
Receivable from FiberMark for
German taxes (Note 7)
Spare parts
Prepaid pension costs (Note 9)
Other prepaid expenses
Prepaid income taxes
Cash flow hedges
Total
Summary of Property, Plant and
Equipment – Net
Land and land improvements
Buildings
Machinery and equipment
Roads
Timberlands
Construction in progress
Less accumulated depreciation
and depletion
Net Property, Plant and Equipment
December 31,
2006
2005
$24.2
11.1
44.5
3.4
83.2
(8.3)
$74.9
$30.5
8.2
47.8
7.6
94.1
(7.0)
$87.1
December 31,
2006
2005
$ 5.4
$ –
4.9
7.2
6.3
4.1
3.3
0.7
$31.9
–
6.9
–
4.1
5.6
7.2
$23.8
December 31,
2006
2005
$ 2.7
124.9
595.7
14.5
8.4
21.9
768.1
412.5
$355.6
$ 2.7
81.2
478.7
23.4
15.8
15.0
616.8
398.9
$217.9
Depreciation expense was $28.0 million, $27.0 mil-
lion and $35.8 million in 2006, 2005 and 2004, respectively.
Interest expense capitalized as part of the costs of capital
projects was $0.3 million and $0.4 million in 2006 and 2005,
respectively. No amount of interest expense was capitalized
for periods prior to the Spin-Off or in December 2004 fol-
lowing the Spin-Off.
Summary of Accrued Expenses
Accrued salaries and employee benefits
Accrued income taxes
Accrued interest
Deferred revenue
Other
Total
December 31,
2006
2005
$26.6
10.2
2.1
5.8
8.8
$53.5
$25.8
–
2.1
0.1
10.8
$38.8
Summary of Noncurrent Employee
Benefits and Other Obligations
Pension benefits
Post-employment benefits other
than pensions
Other
Total
S U P P L E M E N TA L C A S H F L O W D ATA
December 31,
2006
2005
$ 72.6
$17.3
36.6
3.0
$112.2
44.2
3.5
$65.0
Cash paid during period for
interest, net of interest
expense capitalized
Cash paid during period for
Year Ended December 31,
2006
2005
2004
$17.1
$15.8
$ –
income taxes, net of refunds
4.1
Non-cash transfers (to) from
Kimberly-Clark (Note 7)
Non-cash investing activities:
Liability for
–
6.6
0.7
–
(14.5)
equipment acquired
(4.2)
(1.7)
–
eighteen
Condensed Consolidating
Financial Information
Neenah Paper Company of Canada, Neenah Paper
Michigan, Inc. and Neenah Paper Sales, Inc. (the “Guarantor
Subsidiaries”) guarantee the Company’s Senior Notes. The
Guarantor Subsidiaries are 100% owned by the Company and
all guarantees are full and unconditional. At December 31,
2006, Neenah Paper Sales, Inc. was merged into Neenah
Paper, Inc. (the parent company and issuer of the Senior Notes).
The following condensed consolidating financial informa-
tion is presented in lieu of consolidated financial statements
for the Guarantor Subsidiaries as of December 31, 2006
and 2005 and for the years ended December 31, 2006 and
2005. Condensed consolidating financial information is not
included for the years ended December 31, 2004 because:
(a) historical information required to prepare the compara-
tive consolidating statements was not maintained on a dis-
crete comparable basis within Kimberly-Clark, (b) prior to
the Spin-Off, the business operations that now constitute
Neenah were not part of separate operating units or
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 101
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
divisions of Kimberly-Clark for which discrete financial statements were prepared and (c) the functions 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
For the Year Ended December 31, 2006
Neenah
Paper, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
Net sales
Cost of products sold
Gross profit
Selling, general and administrative expenses
Gain on sale of woodlands
Other (income) expense – net
Operating income
Equity in earnings of subsidiaries
Interest expense – net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations
Net income
$223.9
146.0
77.9
34.6
–
(0.1)
43.4
(44.6)
14.9
73.1
10.6
62.5
–
$ 62.5
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net sales
Cost of products sold
Gross profit
Selling, general and administrative expenses
Other (income) expense – net
Operating income
Equity in earnings of subsidiaries
Interest expense – net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations
Net loss
$ 322.7
313.0
9.7
19.7
(125.5)
(7.6)
123.1
–
1.6
121.5
46.0
75.5
(32.9)
$ 42.6
$49.7
45.3
4.4
2.6
–
(0.1)
1.9
–
–
1.9
(0.1)
2.0
–
$ 2.0
$ (2.0)
(2.0)
–
–
–
–
–
44.6
–
(44.6)
–
(44.6)
–
$(44.6)
$ 594.3
502.3
92.0
56.9
(125.5)
(7.8)
168.4
–
16.5
151.9
56.5
95.4
(32.9)
$ 62.5
For the Year Ended December 31, 2005
Neenah
Paper, Inc.
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ 78.7
69.3
9.4
5.8
(0.2)
3.8
21.1
18.1
(35.4)
(5.7)
(29.7)
–
$(29.7)
$584.0
497.4
86.6
43.6
(6.6)
49.6
–
0.1
49.5
18.6
30.9
(52.0)
$ (21.1)
$(128.0)
(128.0)
–
–
–
–
(21.1)
–
21.1
–
21.1
–
$ 21.1
$534.7
438.7
96.0
49.4
(6.8)
53.4
–
18.2
35.2
12.9
22.3
(52.0)
$ (29.7)
102
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable – net
Inventories
Deferred income taxes
Intercompany amounts receivable
Prepaid and other current assets
Total Current Assets
Property, plant and equipment at cost
Less accumulated depreciation
Property, Plant and Equipment – net
Investments in Subsidiaries
Deferred Income Taxes
Goodwill (Note 5)
Intangible Assets (Note 5)
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
Deferred Income Taxes
Noncurrent Employee Benefits and Other Obligations
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
As of December 31, 2006
Neenah
Paper, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ 0.1
18.2
17.0
0.6
33.6
7.3
76.8
244.2
145.0
99.2
341.8
(3.7)
–
–
9.3
$523.4
$ 1.3
13.7
–
14.6
29.6
282.3
–
26.6
338.5
184.9
$523.4
$ 0.5
61.6
30.2
0.9
–
12.2
105.4
376.7
264.9
111.8
–
36.4
–
–
2.7
$256.3
$ –
37.3
33.6
24.4
95.3
–
–
51.0
146.3
110.0
$256.3
$ 1.0
32.7
27.7
–
–
12.4
73.8
147.2
2.6
144.6
–
–
92.0
29.5
0.5
$340.4
$ –
23.7
–
14.5
38.2
–
35.8
34.6
108.6
231.8
$340.4
$ –
–
–
–
(33.6)
–
(33.6)
–
–
–
(341.8)
–
–
–
–
$(375.4)
$ –
–
(33.6)
–
(33.6)
–
–
–
(33.6)
(341.8)
$(375.4)
$ 1.6
112.5
74.9
1.5
–
31.9
222.4
768.1
412.5
355.6
–
32.7
92.0
29.5
12.5
$744.7
$ 1.3
74.7
–
53.5
129.5
282.3
35.8
112.2
559.8
184.9
$744.7
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 103
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable – net
Inventories
Intercompany amounts receivable
Deferred income taxes
Prepaid and 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
Noncurrent Employee Benefits and Other Obligations
TOTAL LIABILITIES
Stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
As of December 31, 2005
Neenah
Paper, Inc.
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ 12.0
(5.9)
0.1
32.1
0.7
8.0
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
–
1.0
15.8
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
–
1.7
23.8
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
104
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization
Stock-based compensation
Loss on disposal of Terrace Bay (Note 4)
Loss on curtailment and partial settlement of
pension plan (Note 4)
Deferred income tax provision
Gain on sale of woodlands (Note 3)
Loss on other asset dispositions
Net cash provided by (used in) changes in operating
working capital, net of effects of acquisition
Equity in earnings of subsidiaries
Contribution to settle pension liabilities (Note 4)
Pension and other post-employment benefits
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Net proceeds from sale of woodlands (Note 3)
Payment for transfer of Terrace Bay (Note 4)
Acquisition of German operations, net of cash acquired
Other
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Repayments of long-term debt
Debt issuance costs
Repayments of long-term debt
Short-term borrowings
Repayments of short-term borrowings
Cash dividends paid
Proceeds from exercise of stock options
Intercompany transfers – net
NET CASH PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF PERIOD
For the Year Ended December 31, 2006
Neenah
Paper, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ 62.5
$ 42.6
$ 2.0
$(44.6)
$62.5
14.0
5.5
–
–
(6.9)
–
(0.1)
0.6
(44.6)
–
4.7
(1.0)
34.7
(11.7)
–
–
(218.6)
0.4
(229.9)
84.3
(0.7)
(28.2)
0.6
(0.6)
(5.9)
1.3
132.5
183.3
13.3
0.3
6.5
26.4
37.4
(125.5)
0.7
38.1
–
(10.8)
(4.2)
0.7
25.5
(7.6)
134.8
(18.6)
–
(0.8)
107.8
–
–
–
–
–
–
–
(133.4)
(133.4)
2.9
–
–
–
(0.5)
–
0.2
1.1
–
–
(0.2)
0.1
5.6
(5.8)
–
–
–
0.2
(5.6)
–
–
–
–
–
–
–
0.9
0.9
–
(11.9)
12.0
$ 0.1
–
(0.1)
0.6
$ 0.5
0.1
1.0
–
$ 1.0
$
–
–
–
–
–
–
–
–
44.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
30.2
5.8
6.5
26.4
30.0
(125.5)
0.8
39.8
–
(10.8)
0.3
(0.2)
65.8
(25.1)
134.8
(18.6)
(218.6)
(0.2)
(127.7)
84.3
(0.7)
(28.2)
0.6
(0.6)
(5.9)
1.3
–
50.8
0.1
(11.0)
12.6
$ 1.6
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 105
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization
Stock-based compensation
Asset impairment loss
Deferred income tax benefit
Loss on other asset dispositions
Net cash provided by (used in) changes in operating working capital
Equity in earnings of subsidiaries
Pension and other post-employment benefits
Other
NET CASH PROVIDED BY 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
Short-term borrowings
Repayments of short-term borrowings
Cash dividends paid
Other
NET CASH PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF PERIOD
For the Year Ended December 31, 2005
Neenah
Paper, Inc.
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$(29.7)
$(21.1)
$21.1
$(29.7)
12.5
0.8
–
(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)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ –
29.0
0.8
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
106
( U N ) C O N V E N T I O N A L W I S D O M
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
nineteen
Unaudited Quarterly Data
Net Sales
Gross Profit
Operating Income
Income From Continuing Operations
Earnings (Loss) Per Common Share
From Continuing Operations:
Basic
Diluted
Net Sales
Gross Profit
Operating Income
Income (Loss) From Continuing Operations
Earnings (Loss) Per Common Share
From Continuing Operations:
Basic
Diluted
First
$132.9
23.5
10.0
3.4
Second(a)
$142.8
26.1
138.9
84.2
$ 0.23
$ 0.23
$ 5.71
$ 5.68
2006 Quarters
Third
$141.4
20.0
10.5
4.6
$ 0.31
$ 0.31
First
$140.9
30.5
18.9
8.9
Second
$130.1
30.1
18.5
9.1
2005 Quarters
Third
$127.7
24.3
15.4
7.0
Fourth(b)
$177.2
22.4
9.0
3.2
$ 0.22
$ 0.21
Fourth
$136.0
11.1
0.6
(2.7)
Year
$594.3
92.0
168.4
95.4
$ 6.47
$ 6.43
Year
$534.7
96.0
53.4
22.3
$ 0.60
$ 0.60
$ 0.62
$ 0.62
$ 0.48
$ 0.47
$ (0.18)
$ (0.18)
$ 1.51
$ 1.51
(a) Operating income for the second quarter of 2006 includes $122.6 million for the gain on sale of woodlands.
(b) Includes the results of Neenah Germany subsequent to October 10, 2006.
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 107
N O T E S TO C O N S O L I D AT E D A N D C O M B I N E D F I N A N C I A L S TAT E M E N T S
twenty
Subsequent Events
A C Q U I S I T I O N O F F OX R I V E R
In March 2007, the Company acquired the Fox Valley
Corporation, which owns Fox River Paper Company, LLC
(“Fox River”). The Company paid $52 million in cash for the
acquisition and financed it through a combination of cash
and debt drawn against its existing revolving credit facility.
The assets acquired as a result of the acquisition of Fox River
consist of four U.S. paper mills and various related assets,
producing premium fine papers with well-known brands
including STARWHITE®, SUNDANCE®, ESSE® and OXFORD®.
The Fox River assets will be operated as part of the
Company’s fine paper business.
The Fox River acquisition strengthens the Company’s
Fine Paper business by providing added scale and the ability
to offer a broader array of premium branded products and
better service to its customers. In addition, the Company
expects to realize economic benefits in part by consolidating
operations of the two businesses, including manufacturing
and administrative operations, to reduce costs as it integrates
Fox River with its existing Fine Paper business.
In conjunction with the acquisition of Fox River,
the Company announced plans to permanently close the
Housatonic mill, located near Great Barrington, Massachusetts.
The Housatonic mill, the smallest of the fine paper plants
acquired in the Fox River acquisition, has annual production
capacity of approximately 15,000 tons per year and is
expected to cease manufacturing operations by the end of
the second quarter. The Housatonic mill was not profitable
due to its small size, cost structure and the pricing of many
of the grades made there. Closing the mill will allow the
Company to eliminate costs and improve margins while still
serving the needs of key customers. The Company expects
to incur one-time cash costs of approximately $3 million,
which includes approximately $2 million for employee sev-
erance pay and approximately $1 million of other charges
related to the closure.
A M E N D M E N T TO B A N K C R E D I T A G R E E M E N T
In March 2007, the Company entered into the Fourth
Amendment (the “Fourth Amendment”) to its Credit
Agreement (as previously amended, the “Credit Agreement”)
dated as of November 30, 2004, by and among the Company,
certain of its subsidiaries as co-borrowers or guarantors,
the lenders party thereto and JPMorgan Chase Bank, N.A.,
as agent for the lenders. The Fourth Amendment, among
other things, (i) increases the Company's secured revolving
line of credit from $165 million to $180 million, and (ii) assists
the Company in consummating the purchase of the out-
standing stock of Fox, which owns Fox River for $52 million,
and (iii) makes other definitional, administrative and
covenant modifications to the Credit Agreement. The enti-
ties acquired by the Company pursuant to the Fox River
transaction will become guarantors with respect to such
secured revolving line of credit. Such entities will also be
subsidiary guarantors with respect to the Company’s
Senior Notes.
Despite the increase in the total commitment to
$180 million, the Company’s ability to borrow under the
revolving credit facility is limited by the terms of the Third
Amendment to the lowest of (a) such commitment, (b) the
Company’s borrowing base (as determined in accordance
with the amended Credit Agreement), and (c) the applicable
cap on the amount of “credit facilities” under the indenture.
As part of closing the Fox River acquisition, the
Company borrowed $54 million in principal under the
Revolver. As of such date the total amount outstanding
under the Revolver was approximately $111 million. All prin-
cipal amounts outstanding under the Credit Agreement are
due and fully payable on the date of termination of the
Credit Agreement.
The Credit Agreement contains events of default
customary for financings of this type, including failure to pay
principal or interest, materially false representations or war-
ranties, failure to observe covenants and other terms of the
revolving credit facility, cross-defaults to other indebted-
ness, bankruptcy, insolvency, various ERISA violations, the
incurrence of material judgments and changes in control.
108
( U N ) C O N V E N T I O N A L W I S D O M
produc tion notes
covers:
CLASSIC COLUMNS® Paper
Canyon Brown /
Classic Natural White
120 lb. duplex cover
design and production:
AD DI S ON , N YC
copywriting:
S T EP H E N S TAR BUC K
printing:
L P T H E BAULT
laser die-cutting:
L A SER E XC EL
illustration, cover, p 14 –15:
S I S COT T
photography, p 2 – 3:
I OUL E X
illustration, p 6 – 7:
FAI YA Z JAFRI
photography, p 10 –11:
LOR N E B RID G MAN
photography, p 23 – 26:
RI C K BURDA
SW-COC- 885 FSC Trademark
© 1996 Fores t Stewardship
Counc il A.C.
® PCF logos and t rademarks are
re gis te red to t he CFPA.
© 2005 Green Seal Ce r t if ied.
® The Green- e logo is a
Re gis te red Trademar k of the
Cente r fo r Resourc e Solut ions.
pages 1 – 4:
CLASSIC CREST® Paper
Recycled Bright White
80 lb. text
pages 5 – 8:
CLASSIC® Linen Paper
Recycled Bright White
80 lb. text
pages 9 – 12:
CLASSIC COLUMNS® Paper
Recycled Bright White
80 lb. text
pages 13 – 16:
CLASSIC® Laid Paper
Recycled Bright White
75 lb. text
pages 17 – 22:
EAMES™ Paper
Furniture Finish
Tivoli Green, 24 lb. text
pages 23 – 26:
EAMES™ Paper
Architecture Finish
Eames White, 50 lb. text
pages 27 – 38:
CLASSIC CREST® Paper
Tarragon
80 lb. text
pages 39 – 110:
ENVIRONMENT® Paper
PC 100 Natural
80 lb. text
N E E N A H PA P E R , I N C . / / / / 2 0 0 6 A N N U A L R E P O R T 109
shareholder information
C O R P O R AT E H E A D Q U A R T E R S
Neenah Paper, Inc.
3460 Preston Ridge Road
Suite 600
Alpharetta, GA 30005
678.566.6500
www.neenah.com
A N N U A L M E E T I N G O F S H A R E H O L D E R S
The 2007 annual meeting of the shareholders of
Neenah Paper, Inc. will be held Monday,
May 14, 2007, at 1:00 p.m., Eastern time at Neenah’s
headquarters in Alpharetta, Georgia.
R E G I S T R A R A N D T R A N S F E R A G E N T
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
www.computershare.com
877.498.8847
F I N A N C I A L A N D O T H E R C O M PA N Y I N F O R M AT I O N
Our Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 is available on our website
at www.neenah.com. In addition, financial reports, recent
filings with the Securities and Exchange Commission
(SEC), news releases and other information are available
on 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
110
110
( U N ) C O N V E N T I O N A L W I S D O M
( U N ) C O N V E N T I O N A L W I S D O M
C E R T I F I C AT I O N S
Neenah has included as exhibits to its Annual Report on
Form 10-K for the fiscal year ended December 31, 2006
filed with the SEC, certifications of Neenah’s Chief
Executive Officer and Chief Financial Officer certifying the
quality of our public disclosure. 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 listing standards.
T R A D I N G A N D D I V I D E N D I N F O R M AT I O N
2006
Fourth quarter
Third quarter
Second quarter
First quarter
2005
Fourth quarter
Third quarter
Second quarter
First quarter
Common Stock
Market Price
High
Low
Dividends
Declared
$ 37.23
$ 34.58
$ 34.50
$ 33.85
$ 30.52
$ 33.58
$ 33.90
$ 36.62
$ 33.25
$ 28.69
$ 28.71
$ 26.81
$ 26.25
$ 28.71
$ 29.19
$ 31.03
$ 0.10
$ 0.10
$ 0.10
$ 0.10
$ 0.10
$ 0.10
$ 0.10
$ 0.10
As of February 28, 2007, Neenah had approximately 11,600
holders of record of its common stock.
S TO C K E X C H A N G E
Neenah Paper’s common stock is traded on the New York
Stock Exchange under the symbol NP.
I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M
Deloitte & Touche LLP
191 Peachtree Street
Suite 1500
Atlanta, GA 30303
T R A D E M A R K S
The brand names mentioned in this report – ATLAS, CLASSIC, CLASSIC COLUMNS,
CLASSIC COTTON, CLASSIC CREST, EAMES, ENVIRONMENT, KIMDURA, NEENAH,
NEOBOND, PRETEX, PREVAIL, VARITESS – are trademarks of Neenah Paper, Inc.
3460 PRESTON RIDGE ROAD
3460 PRESTON RIDGE ROAD
SUITE 600
SUITE 600
ALPHARE T TA, GA 30005
ALPHARE T TA, GA 30005
678.566.6500
678.566.6500
N E E N A H
N E E N A H
PA P E R , I N C .
PA P E R , I N C .
( U N ) C O N V E N T I O N A L
( U N ) C O N V E N T I O N A L
W I S D O M
W I S D O M
2 0 0 6 A N N UA L
2 0 0 6 A N N UA L
R E P O R T
R E P O R T
N
N
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E
E
N
N
A
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H
H
P
P
A
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R
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,
,
I
I
N
N
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C
.
.
2
2
0
0
0
0
6
6
A
A
N
N
N
N
U
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L
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