Neenah Paper, Inc. / Annual Report 2007
Neenah Paper, Inc. / Annual Report 2007
in the three short
years since
ou founding, neenah
pape has
changed greatly.
/ 2
We’ve grown, to be sure, with important
acquisitions in fine paper and technical products.
And our portfolio of businesses has become
more balanced and profitable. Most importantly,
we continue to gather the elements needed
to support our long-range vision – from people
to new products and technology to new channels
and geographic areas. We are bringing them
all together. Now. They are essential building
blocks for a bright future.
// 3
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connecting the dots. profi tably.
We’re proud of our employees for reshaping the
company. Neenah started life as a North American
pulp and paper company, with revenues about
equally split between the two. Today, we operate
three profi table lines of business: fi ne paper, techni-
cal products and pulp, with approximately 80 percent
of our revenues in premium paper products. With
recent acquisitions of our German technical products
business and Fox River Paper, the past year has
been one of integration and execution, just as we
said it would be. Both acquisitions are delivering
expected benefits and positioning us more solidly
in our markets. Furthermore, we have accomplished
this while maintaining a stronger than ever balance
sheet. Naturally, the dots will continue.
/ 5
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// 6
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We’re adding to our lead in premium fi ne paper.
We’re adding to our lead in premium fi ne paper.
There’s no substitute for the look, feel and quality of
There’s no substitute for the look, feel and quality of
premium paper. That’s why so many designers select
premium paper. That’s why so many designers select
Neenah fine paper. Our heritage paper brands – –
Neenah fine paper. Our heritage paper brand
ENVIRONMENT®
CLASSIC® Laid, CLASSIC CREST
CLASSIC
andand EAMES
have defi ned the words “quality paper”
EAMESTM– have defi ned the words “quality paper”
for the entire industry. With our purchase of Fox River
for the entire industry. With our purchase of Fox River
Paper Company, we’ve added recognized brands,
Paper Company, we’ve added recognized brands,
Laid, CLASSIC CREST®, , ENVIRONMENT
SUNDANCE,® ESSE
ESSE® and
including STARWHITE,® SUNDANCE
including STARWHITE
and
OXFORD.® We optimized our asset base, consolidat-
OXFORD
We optimized our asset base, consolidat-
ing from six mills to four. In addition, we combined
ing from six mills to four. In addition, we combined
the best of sales, marketing and back offi ce functions
the best of sales, marketing and back offi ce functions
from both companies. The acquisition not only pro-
from both companies. The acquisition not only pro-
vided cost efficiencies, but also better positioned us
vided cost efficiencies, but also better positioned us
to serve our customers. When it comes to premium
to serve our customers. When it comes to premium
paper, Neenah offers a full selection.
paper, Neenah offers a full selection.
/ 7
/ 8
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We’re meeting a growing need for green. Printers,
designers, corporations and individuals – all are
looking for ways to work in harmony with the environ-
ment. And Neenah Paper continues to help them with
an ever-widening array of eco-friendly product
offerings. Many of our leading brands are Green-e
certifi ed, made with clean, green renewable energy.
They also carry the Forest Stewardship Council (FSC)
chain of custody certifi cation. Our ENVIRONMENT®
line includes papers made with 100 percent post
consumer recycled, FSC certifi ed fi bers. STARWHITE®
is made entirely from 100 percent pure, FSC certifi ed
virgin fi ber and 100 percent Green-e certifi ed renew-
able energy. It’s also made Carbon Neutral and
elemental chlorine free. Many of our CLASSIC® brands
now also offer Carbon Neutral alternatives. In 2007,
we joined the Chicago Climate Exchange, making a
commitment to reduce future carbon dioxide emissions.
We will continue to look for new opportunities to
decrease our ecological footprint. At Neenah, think-
ing green puts us well in the black.
/ 9
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/ 10/ 1010
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growing in technical products. globally.
It’s been
We’re opening a world of new opportunities. It’s been
We’re opening a world of new opportunities.
more than a year since we added our German-based
more than a year since we added our German-based
operations to the Neenah map. But the acquisition of
operations to the Neenah map. But the acquisition of
what is now Neenah Germany did more than just estab-
what is now Neenah Germany did more than just estab-
lish a solid European footprint for Neenah Technical
lish a solid European footprint for Neenah Technical
Products. It also took us into profitable new growth
Products. It also took us into profitable new growth
such as fi lter media for transportation and other
markets –s – such as fi lter media for transportation and other
market
applications and specialized nonwoven wall coverings,
applications and specialized nonwoven wall coverings,
an increasingly popular decorating alternative in Europe
an increasingly popular decorating alternative in Europe
to traditional wallpapers. It also expanded our global
to traditional wallpapers. It also expanded our global
presence in markets for specialized tapes and abrasives.
presence in markets for specialized tapes and abrasives.
Ultimately, it gave us something even more valuable: a glo-
Ultimately, it gave us something even more valuable: a glo-
bal gateway to new sales, technologies and employees.
bal gateway to new sales, technologies and employees.
/ 1111
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/ 12
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Looking at the big picture. up close.
We’re building a global company, one product line
at a time. At Neenah Paper, we continue to direct
our company into strong niche markets, like fi ltration,
graphics & identification products, wall covering
and premium printing and writing papers. Rather
than manage our businesses geographically, we’ve
organized our global businesses along product
lines. Technical Products, for example, now breaks
down into five categories – filtration, component
materials, tape, graphics & identification, and wall
covering – regardless of where the products are
manufactured or sold. This arrangement gives us
more flexibility in sourcing and sales, and more
balance for managing profi table growth opportuni-
ties. Today, we don’t make decisions based on
what’s best for a particular country or region. We
look at what’s best for Neenah as a whole.
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/ 1414
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adding capability. everywhere.
We’re putting the pieces into place. And building
We’re putting the pieces into place. And building
In 2007, we expanded our
a stronger Neenah Paper. In 2007, we expanded our
a stronger Neenah Paper.
fi ltration capabilities, investing more than $20 million
fi ltration capabilities, investing more than $20 million
to add a third saturating line at our Weidach techni-
to add a third saturating line at our Weidach techni-
cal products mill in Germany. At our Lahnstein mill,
cal products mill in Germany. At our Lahnstein mill,
where we produce wall coverings, we invested more
where we produce wall coverings, we invested more
than $2 million to upgrade our paper-manufacturing
than $2 million to upgrade our paper-manufacturing
capabilities for increased throughput and quality.
capabilities for increased throughput and quality.
We extended our fi ne paper and technical products
We extended our fi ne paper and technical products
lines, adding new premium brands. The successful
lines, adding new premium brands. The successful
implementation of a new ERP system in the U.S. gave
implementation of a new ERP system in the U.S. gave
us tools to help us improve customer service and
us tools to help us improve customer service and
operational performance. Our wider footprint has
operational performance. Our wider footprint has
given us greater access to new technologies, which
given us greater access to new technologies, which
in turn helps us make existing products better. It also
in turn helps us make existing products better. It also
points the way to new products. We are building
points the way to new products. We are building
organizational strength through acquisitions. Last but
organizational strength through acquisitions. Last but
not least, we are continuing to invest in our future.
not least, we are continuing to invest in our future.
The more we grow our capabilities, the more we can
The more we grow our capabilities, the more we can
grow. Period.
grow. Period.
/ 1515
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To Neenah Paper Shareholders:
It was another busy year at Neenah Paper. Since becoming a separate
public company in late 2004, Neenah Paper’s strategic vision has
centered on profitable growth and transformation. Our plan was to
sustain and improve our very profitable, branded fine paper busi-
ness and to gain scale and enhance technical products. At the same
time, we worked on strengthening our pulp operation, making it
profi table. We have made signifi cant progress on each of these fronts
in 2007, and in the process, continued to reshape our company.
2007 was a year of integration and execution, establishing
the groundwork for our future. Following our acquisition of Neenah
Germany in late 2006, we implemented a new structure in Technical
Products in order to manage this segment as fi ve global business
units to take advantage of our new global footprint. We also
invested capital in Germany, supporting future growth in filtration,
wall covering and other durable printing products. In our fine
paper business, the acquisition of the Fox River Paper Company in
early March set the stage for a very busy and important year in
this segment. We executed a detailed business integration plan,
aligning our brands and our distribution network, merging sales
and administrative functions, and consolidating our manufacturing
footprint. Our remaining pulp operation in Pictou, Nova Scotia
achieved record productivity levels and implemented other initia-
tives to control costs. Finally, we successfully started up Phase II of
our ERP (Enterprise Resource Planning) system in the U.S., which
drove important change in how we do our jobs and provides us with
another tool for improving customer service, operations and supply
chain capabilities. As I said, it was a busy year.
/ 17
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A Challenging Environment – but what else is new?
When is the last time you read an annual report that said that the
markets and competitive situation are getting easier? At Neenah
Paper, we accept that such challenges are our reality. As expected,
our businesses faced difficult external conditions in 2007. Input
costs rose rapidly and in total, costs of fi ber, energy and distribution
increased almost $20 million from prior year levels. In our paper
businesses, we were able to offset more than half of these higher
costs with selling price increases. In pulp, while selling prices also rose,
about half of these gains were offset due to a stronger Canadian
dollar. In response to these conditions, our teams remained focused
on improving efficiencies and delivering cost savings, while at
the same time successfully executing key tasks associated with the
integration of our acquisitions and ERP start-up.
As a result, Neenah has emerged a larger and stronger
company than ever before. Consolidated net sales for 2007 reached
nearly $1 billion, an increase of almost 67 percent versus the prior
year. After excluding gains in 2006 and 2007 related to the sale of
our timberlands, our EBIT increased approximately 43 percent
and earnings per share grew even more rapidly.
We maintained a strong balance sheet in 2007, despite
spending for acquisitions and strategic capital investments.
Following the Fox River acquisition in the first quarter, we con-
secutively reduced net debt in each of the second, third and fourth
quarters of 2007. Cash from operations increased in 2007 versus
2006 and credit ratios such as debt to EBITDA and interest coverage
also improved. Despite recent turmoil in the credit markets,
Neenah has the cash flows, liquidity and financial flexibility to allow
us to continue to grow.
/ 18/ 18
66500ne_17-24 18
4/17/08 5:48:36 PM
Fine Paper – it’s all about brands
In fine paper, the Fox River acquisition added to our already very
strong franchise. Acquiring Fox River Paper boosted Neenah’s brand
portfolio, distribution and market share, making us the clear leader
in premium fi ne paper in the United States. Fine Paper net sales in
2007 climbed to $367 million, a 64 percent increase over the previous year.
While still very profitable, our Fine Paper business earned
$47 million in 2007 versus $56 million in 2006. In addition to higher
input costs and a weaker paper market, 2007 results included
planned transition and integration costs of over $5 million related to
the Fox River acquisition. At the time we purchased Fox River, we
said the benefits from the acquisition would become more visible in
2008, and the work done in 2007 laid the groundwork for this future
benefit realization.
Part of our integration plan involved the closing of paper
mills at Housatonic, Massachusetts, and Urbana, Ohio. Consolidating
our manufacturing footprint from six paper mills into four provides
a more cost-effective manufacturing platform with capabilities
and capacity aligned with our new business. We also merged sales
and other functions, allowing us to build a stronger combined
organization, drawing from the best in both companies. Remaining
2008 activities include the consolidation of finishing operations
in Wisconsin and the closure of the Urbana finishing and distribution
operations. Also in 2008, we will add Fox River sites to our ERP plat-
form, enabling Neenah Paper to present “one face” to our customers.
Acquiring Fox River Paper provided Neenah with added scale
and a larger footprint. Not only that, it allows us to offer a broader
range of premium branded papers through a stronger distributor
network – better serving graphic designers, printers and direct
corporate markets. The acquisition brought us some of the industry’s
best known brands, including STARWHITE,® SUNDANCE,® ESSE®
and OXFORD.® We are excited to be “Neenahtizing” these brands and
integrating them as key parts of our portfolio.
/ 19
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4/17/08 5:48:36 PM
Technical Products – a new global perspective
With the integration in 2007 of what we now call Neenah Germany,
we markedly changed the scale of our technical products segment.
We went from a predominantly North American business to one that
operates globally. Rather than managing our wide range of technical
products geographically, we grouped them (based on markets
and end-usage) into five businesses: filtration, tape, graphics & iden-
tification, component materials and wall covering.
Net sales for Technical Products were $401 million for 2007,
compared to $183 million the prior year. This made Technical
Products Neenah Paper’s single largest segment in terms of revenues.
The increase was primarily driven by the addition of Neenah
Germany and refl ected growth in key markets such as fi ltration, tape,
graphics & identification and wall covering. Operating income for
2007 was $25 million, up more than two and one-half times from 2006.
To support future growth, we expanded our filtration
and wall covering capacities. Capital projects in Germany included
the addition of a third fi ltration saturator at our Weidach mill and
upgrades to a paper machine at our Lahnstein mill. Both projects
were completed on schedule and on budget, providing us with
the capacity to grow.
We will continue to seek out ways to expand our presence
and leverage our broader technological base in these growing
specialty markets. In addition, we remain focused on margin improve-
ment through improved manufacturing effi ciencies, mix optimization
and enhanced product designs.
/ 20
/ 20
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Pulp – a record-breaking year
Our Pictou pulp mill turned in a solid performance in 2007 –
increasing production to 269,000 tons, an all-time record, while con-
tinuing to control costs.
Net sales for pulp climbed to $223 million in 2007, an 18
percent gain over 2006. Higher sales were due to increased selling
prices and a four percent rise in volume over the previous year,
supported by the record production. Excluding gains on timberland
sales, operating income increased almost $13 million compared
with 2006. This reflected the benefits of higher selling prices, pro-
ductivity increases and the elimination of losses on pulp hedges
in 2006 that offset the impact of a weaker U.S. dollar and higher
costs for fiber and energy.
We are pleased with the 2007 performance of our pulp
operation, which resulted from the strong commitment and efforts
of our Pictou Mill team. The segment contributed positively to
Neenah Paper results. At the same time, we are committed to fi nding
ways to unlock additional value for our shareholders from our
pulp operations and ownership of approximately 500,000 acres of
timberlands and have communicated our intent to exit this
business segment.
/ 21
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The Future – is now
As we enter our fourth year in business, Neenah Paper is positioned
to take full advantage of our hard work this past year. The pieces
are coming together. The investments we made in acquiring Fox River
Paper and Neenah Germany are showing results and will continue
to do so.
Neenah Paper has the financial strength and cash flow
generation that allow us to invest in and support profi table growth.
We will continue to evaluate strategic opportunities, including
acquisitions, but will proceed only if we fi rmly believe we can create
real value for our shareholders and have a detailed plan for how we
will accomplish it. We take the job of creating value for shareholders
very seriously. We know what our core businesses are and where
our strengths lie. We will play to those strengths.
In 2007, our stock did not perform well, declining 17 percent
in a difficult market. We are not pleased with this performance. It
belies Neenah’s strengths and capabilities. We firmly believe that by
continuing to execute our strategy successfully, and delivering on
the potential of our core businesses, we can create real value for our
shareholders and we are committed to doing so.
/ 22
/ 22
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The Transformation – what’s next?
In past annual reports, we’ve stated that we are transforming
Neenah Paper from a commodity (pulp and paper) company into a
more profi table premium fi ne paper and technical products company.
Our transformation will remain an ongoing process – one designed to
produce a steady stream of value for our shareholders.
With Neenah Germany and Fox River Paper, we expect to
deliver benefits to our shareholders for years to come. We have
grown into a global company, one more profitable with the financial
stability and cash fl ows needed to pursue growth. At the same time,
we never lose sight of our core businesses, and remain focused on
driving growth in technical products, delivering strong cash flows
from fine paper, including synergies from the Fox River acquisition,
creating value from our pulp operations and improving margins in all
our businesses, all while carefully controlling capital.
/ 23
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4/17/08 5:48:37 PM
Neenah People – embracing change
We believe change is the new reality. At Neenah Paper, we saw
a great deal of change in 2007. We integrated two companies,
one in the U.S. and one in Germany. We consolidated mills and
organizations. In addition, we implemented a new ERP system
throughout the U.S. We consider these important accomplishments
for Neenah, but in reality, they are a way of life if we are to succeed
as a company. None of this could happen without the dedication,
fl exibility and hard work of our employees.
I would also like to express my appreciation to our Board
of Directors for their continuing support and guidance. As share-
holders, you should be confident that you have a first-rate board
that takes their role as your representative very seriously.
And finally, I would like to thank our shareholders for the
confidence you have shown with your investment in Neenah Paper.
We will continue to work hard to create value on your investment
in our company. Thank you.
Sean T. Erwin
Chairman, President and
Chief Executive Officer
/ 24
/ 24
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4/17/08 5:48:37 PM
leadership
Bonnie C. Lind
Senior Vice President,
Chief Financial Officer
and Treasurer
Steven S. Heinrichs
Senior Vice President,
General Counsel and
Secretary
Walter M. Haegler, Ph.D.
Managing Director,
Neenah Germany
James R. Piedmonte
Senior Vice President,
Operations
Dennis P. Runsten
President, Technical
Products – U.S.
Edward Grzedzinski
Former Chief Executive
Officer, NOVA
Information Systems
Philip C. Moore
Partner,
McCarthy Tétrault, L.L.P.
Mary Ann Leeper, Ph.D.
Senior Strategic Advisor,
Female Health Company
and Former President
and Chief Operating
Officer, Female Health
Company
Stephen M. Wood, Ph.D.
President and
Chief Executive Officer,
FiberVisions Corporation
Timothy S. Lucas, CPA
Independent Consultant,
Lucas Financial Reporting
and Former Director of
Research, FASB
Executive Team
(top row, from left)
Sean T. Erwin
Chairman of the Board,
President and
Chief Executive Officer,
Neenah Paper, Inc.
John P. O’Donnell
President, Fine Paper
Board of Directors
(bottom row, from left)
Sean T. Erwin
(pictured, top row)
Chairman of the Board,
President and
Chief Executive Officer,
Neenah Paper, Inc.
John F. McGovern
Partner, Aurora Capital
and Former Executive
Vice President and
Chief Financial Officer,
Georgia Pacific
Corporation
/ 25
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66500ne_25-40 32
4/17/08 5:51:32 PM
neenah pape at a glance
the neenah pape of today
is quite different from the
neenah pape you read
about in last yea ’s annual
report. our three business
segments–fine pape tech-
nical products and pulp–
have been reshaped in
2007 by new acquisitions,
products, markets and
initiatives. taken togethe,
they offe a broad view of
ou business today.
/ 33
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4/17/08 5:51:33 PM
66500ne_25-40 34
4/17/08 5:51:34 PM
neenah fine pape
Neenah is the brand leader for world-class premium fine paper.
In fact, we are number one in market share in four out of the fi ve
categories in which we compete. We are also leaders in value-added
color and texture capabilities. You’ll find us everywhere image
counts – from the home office to the boardroom. Neenah brand fine
paper is the first choice for letterhead, business cards, private
watermark stationery, invitations, note cards, high-end packaging,
annual reports, brochures and more. With our array of premium
brands, we offer many ways to make an impression.
FINE PAPE R:
SERV ING N ORTH AM ER ICAN P R IN T IN G MARK ET S
GREEN ENERGY
06
07
08
Committed
Wisconsin
Wisconsin
Mills
Mills
Ripon
Ripon
4.5
23.4
48.7
million
kilowatt hours
million
kilowatt hours
million
kilowatt hours
FINE PAPE R BRAND S
Writing Brands
Text & Cover Brands
Specialty Brands
CLASSIC CREST® Papers
CLASSIC® Linen Papers
CLASSIC® Laid Papers
FOX RIVER SELECT® Papers
NEUTECH® Papers
CAPITOL BOND® Papers
STARWHITE® Papers
ENVIRONMENT® Papers
ESSE® Papers
SUNDANCE® Papers
OXFORD® Papers
CLASSIC COLUMNS® Papers
CORONADO® SST Papers
EAMESTM Paper Collection
CLEARFOLD® Papers
UV/ULTRA® II Papers
/ 35
66500ne_25-40 35
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66500ne_25-40 36
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neenah technical products
Around the globe, there’s an ever-expanding list of products that
incorporate essential components from Neenah’s wide range of
technical products. A partial list includes: air, oil and fuel filtration
for transportation; medical packaging; specialized abrasive back-
ings; tapes and labels; heat transfer for T-shirts and other apparel;
furniture com ponents and wall covering; and more. In 2007, Neenah
successfully integrated Neenah Germany and executed a variety
of other global growth initiatives. We are getting closer to our key
cus tomers. We offer a solution for nearly every manufacturing
need. If not, we’ll invent it.
TECH NIC AL P ROD UC TS :
GLOB AL MARKET S SE RV ED
North
North
NoNorth
America
Amermerica
America
Munising
Munising
Latin
Latin
Latin
America
AmAmerica
America
Europe
Europe
Europope
Neenah
Neenah
Neenah
Neenah
Germany
GermGGerm
Germany
Asia
Asia
Asia
600
technical products
customers – worldwide
TECH NIC AL P ROD UC TS / G LOBAL B US I NESS U NI TS
Filtration
Component
Materials
Tape
Transportation
Other
Crepe Base
Specialty Flatbacks
Medical Packaging
Abrasives
Release Base
Application Masking
Veneer Backings
Wall Covering
Nonwoven
Saturated Wetlaids
Graphics &
Identification
Label & Tag
Image Transfer
Decorative
Components
Clean Room
Durable Printing
/ 37
66500ne_25-40 37
4/17/08 5:52:43 PM
66500ne_25-40 38
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neenah pulp
From seedling, to timberlands and saw mills, and ultimately to
our pulp mill in Pictou, Nova Scotia – it’s the path Neenah Paper’s
sustainable pulp operation follows. From there, we ship to
customers in North America and Europe. Our mill has the capability
to manufacture both softwood and hardwood kraft pulp and
various blends of each. In addition, we own over 500,000 acres
of timberland.
PULP:
GLOB AL MARKET S SE RV ED
Canada
Canada
anada
Europe
Europe
Europe
United
United
United
States
States
States
Pictou,
Picto
Pictou,
N
Nova Scotia
Nova S
Nova Scotia
PULP S ALE S V OLUME
(met ri c tons in thous an ds )
280
250
0
2005
2006
2007
259
264
275
/ 39
66500ne_25-40 39
4/17/08 5:52:46 PM
corporate social
responsibility
Paper products are an integral and necessary part of our society and economy.
Neenah Paper recognizes that to achieve its vision of being the first choice for
branded and customized paper products, we must continue to be a leader in
our field. Our corporate responsibilities, as we see them, address a continuum
of environmental, community, stakeholder and employee needs.
Safety
We continue to make the safety of our employees a top priority. Our facilities
have implemented proven behavior-based safety programs to reduce hazards,
improve processes and reduce injuries. These efforts have been successful,
with a company-wide injury rate about half of the industry average.
Environmentally Friendly Products
Customers are asking for more environmentally friendly choices. Neenah
is answering by certifying our eco-friendly papers through independent
third-party organizations such as the Forest Stewardship Council (FSC) and
Green-e Certifi ed. The fi bers we use come from sustainably managed forests,
also certified by one or more international groups, such as the FSC and
Programme for the Endorsement of Forest Certification Schemes (PEFC). In
Technical Products, Heirloom® NAFTM, our new premium veneer and furniture
backer, is one of the first to be made with saturants and adhesives that con-
tain no formaldehyde. In Fine Paper, we offer customers a variety of environ-
mentally friendly choices including FSC certified papers, as well as Carbon
Neutral papers made from 100 percent recycled fibers and renewable energy.
Preserving Our Natural Heritage
Neenah Paper works diligently to protect the natural environment where we
live, work and play. In 2007, we worked with local Canadian environmental
organizations, the Provincial government and general public to designate a
new 35,000 acre wilderness area near Halifax, Nova Scotia. In Wisconsin, we
are working with The Natural Resources Foundation of Wisconsin (NRF) and
the Wisconsin Natural Heritage Corps (WNHC) to help protect the state’s
most pristine natural areas.
Climate Change and Air Quality
Neenah is reducing air emissions by improving energy efficiencies in our
operations, and through the use of renewable, clean energy sources. We have
demonstrated our commitment to achieving real reductions in greenhouse
gases by joining the Chicago Climate Exchange (CCX), the world’s first and
North America’s only voluntary, legally binding integrated trading system to
reduce greenhouse gas emissions.
Corporate Governance
At Neenah Paper, we are as committed to protecting our shareholders as we
are to protecting our natural resources. Our Board of Directors has adopted
strong corporate governance policies that represent and protect shareholders’
interests. Our Code of Business Conduct and Ethics is applicable to all
directors, officers and employees and ensures Neenah Paper conducts its
business in a manner that will always reflect a high standard of ethics.
We believe all of these actions help deliver value and returns to
our shareholders.
/ 40
/ 40
66500ne_25-40 40
4/17/08 5:53:00 PM
fi nancial index
Business Summary 42 Selected Financial Data 46
Management’s Discussion and Analysis of Financial Condition
and Results of Operations 48 Quantitative and Qualitative
Disclosures About Market Risk 61 Management’s Annual
Report on Internal Control Over Financial Reporting 64
Reports of Independent Registered Public Accounting Firm 65
Consolidated Statements of Operations 68 Consolidated
Balance Sheets 69 Consolidated Statements of Change in
Stockholders’ Equity 70 Consolidated Statements of Cash
Flows 71 Notes to Consolidated Financial Statements 72
Shareholder Information 112
66500ne_fin 41
4/17/08 5:56:20 PM
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 consolidated
subsidiaries.
OV ERVIEW
Neenah, a Delaware corporation, was incorporated in
April 2004 in contemplation of the spin-off by Kimberly-Clark
Corporation (“Kimberly-Clark”) of its fi ne 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 business on November
30, 2004. On that date, Kimberly-Clark completed the dis-
tribution of all of the shares of our common stock to the
stockholders of Kimberly-Clark (the “Spin-Off”). Following
the Spin-Off, we are an independent public company and
Kimberly-Clark has no ownership interest in us.
We are a leading international producer of pre-
mium fi ne 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 off approximately
200,000 acres of other timberlands. We have three primary
operations: our fi ne paper business, our technical products
business and our pulp business.
Our fi ne paper business is a leading producer of
premium writing, text, cover and specialty papers used in
corporate identity packages, corporate annual reports, invi-
tations, personal stationery and high-end packaging for point
of purchase advertising. 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, converters and specialty busi-
nesses. Our fi ne paper manufacturing facilities are located in
Appleton, Neenah and Whiting, Wisconsin; Ripon, California
and Urbana, Ohio. In June 2007, we announced plans to per-
manently close the fi ne paper mill located in Urbana, Ohio
(the “Urbana mill”). Manufacturing operations at the Urbana
mill ceased in September 2007. Converting operations at the
Urbana mill are expected to be phased out during the fi rst
six months of 2008.
Our technical products business is a leading pro-
ducer of transportation and other fi lter media, durable, satu-
rated and coated substrates for a variety of end uses; and
nonwoven wall coverings. Our technical products business is
organized into fi ve global strategic business units (“SBUs”)
which sell into 17 product categories, and we focus on cat-
egories where we believe we are a market leader or have a
competitive advantage, which include, among others, trans-
portation and other fi lter media, nonwoven wall coverings,
specialty tape, label, abrasive, medical packaging and image
transfer technical products markets. We are also a global
supplier of materials used for customer-specifi c applications
in furniture, book covers and original equipment manufac-
turers’ products. Our customers are located in more than
35 countries. Our technical products manufacturing facili-
ties 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,
Canada together with related timberlands. The Pictou mill is
comprised of a single-line pulp facility, which produces pri-
marily 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 opera-
tions on land owned and licensed by the Pictou mill are pro-
vided by third-party contractors.
RE CENT DEVELOPMENTS
In February 2008, we committed to a plan to sell the Pictou
mill and our remaining woodland assets in Nova Scotia. We
believe it is probable that a sale of the Pictou mill and the
woodland assets will be completed within 12 months.
PRODUCTS
FINE P APER. The fi ne paper business manufactures and
sells branded world-class premium writing, text, cover and
specialty papers used in corporate identity packages, corpo-
rate annual reports, invitations, personal stationery and high-
end packaging for point of purchase advertising. Our fi ne
paper business had net sales of approximately $367 million
in 2007, $224 million in 2006 and $222 million in 2005.
/ 42
Neenah Paper, Inc. 2007 Annual Report
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4/17/08 5:56:20 PM
B U S I N E S S S U M M A R Y
Premium writing papers are used for business
and personal stationery, corporate letterhead, corporate
identity packages, private watermarked papers, envelopes
and similar end-use applications. Market leading writing
papers are sold by the fi ne paper business under the
CLASSIC,® ENVIRONMENT,® NEENAH,® CAPITOL BOND®
and NEUTECH® trademarks, which are denoted by a brand
watermark in each sheet of writing paper. During 2006,
we successfully introduced the NEENAH GREEN environ-
mental 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 fi rst
Forest Stewardship Council (“FSC”) watermarked paper and
introducing it across all our CLASSIC® brands. We are the
fi rst premium text and cover manufacturer to be certifi ed as
“Processed Chlorine Free” in our 100 percent post-consumer
products. The fi ne paper business also sells private water-
marked and other custom manufactured writing papers.
Text and cover papers are used in applications
such as corporate identity packages, corporate annual
reports, insert advertising, direct mail, facility brochures,
business cards, hang tags, scrapbooks, and a variety of
other uses where colors, textured fi nishes or heavier weight
papers are desired. Our brands in this category include
CLASSIC,® CLASSIC CREST,® STARWHITE,® SUNDANCE,®
CORONADO,® ESSE and ENVIRONMENT.® We also sell a
variety of custom paper colors, paper fi nishes, and duplex/
laminated papers.
The fi ne 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.
TECH NICAL PRODUCTS. The technical products business
is a leading producer of fi ltration media and durable, satu-
rated and coated substrates for a variety of end uses, includ-
ing tapes, premask, abrasives, labels, medical packaging,
decorative components, wall covering, and image transfer
papers. Our technical products business had net sales of
approximately $401 million in 2007, $183 million in 2006 and
$131 million in 2005. JET-PRO,® SofStretch™, KIMDURA,®
MUNISING LP,® PREVAIL,™ NEENAH,® Gessner® and
varitess® are brands of our technical products business.
Products of the technical products business are
typically sold to other manufacturers as raw materials for
their fi nished products. The technical products business sells
its products into major market segments by fi ve SBUs: Tape;
Filtration; Component Materials, which includes our abra-
sives business; Graphics & Identifi cation; and Wall Covering.
Several key market segments served, including tape and
abrasives, are global in scope.
The Filtration SBU produces fi ltration media for
automotive induction air, fuel, oil, and cabin air applications
and vacuum cleaner bags and fi lters. Transportation fi ltration
media are sold to suppliers of automotive companies and of
the automotive aftermarket.
The Tape SBU produces tape base sheets from
latex saturated crepe and fl at papers and sells them to manu-
facturers to produce fi nished pressure sensitive products for
sale in automotive, automotive aftermarket, transportation,
manufacturing and building construction, and industrial gen-
eral purpose applications.
The Component Materials SBU is a leading pro-
ducer of latex saturated and coated papers for use by a wide
variety of manufacturers. Finished lightweight sandpaper is
sold in the automotive, automotive aftermarket, construc-
tion, metal and woodworking industries for both waterproof
and dry sanding applications. Premask paper is used as a
protective over wrap for products during the manufacturing
process and for applying signs, labeling and other fi nished
products. Medical packaging paper is a polymer impreg-
nated base sheet that provides a breathable sterilization
barrier. When sealed together with fi lm, 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. The Component
Materials SBU also produces a line of release papers and fur-
niture backers.
The Graphics & Identifi cation SBU produces label
and tag products from saturated (latex impregnated) base
label stock and purchased synthetic base label stock. Top
coatings are applied to the base label stock to allow for
high quality variable and digital printing. The synthetic label
stock is recognized 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. Image transfer papers are used to transfer an
image from paper to tee shirts, hats, coffee mugs and other
/ 43
Neenah Paper, Inc. 2007 Annual Report
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4/17/08 5:56:21 PM
B U S I N E S S S U M M A R Y
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. Decorative components papers
are made from light and medium weight latex saturated
papers which can then be coated for printability. Decorative
components papers are primarily sold to coater converters,
distributors, publishers and printers for use in book covers,
stationery and fancy packaging. The Graphics & Identifi cation
SBU also produces and sells clean room papers and durable
printing papers into their respective markets.
The Wall Covering SBU produces a line of sub-
strates made from saturated and coated wet-laid nonwovens
and markets to converters serving primarily European com-
mercial and do-it-yourself markets.
P UL P. 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 2007, the Pictou mill produced
approximately 270,000 metric tons of bleached kraft pulp,
of which more than 60 percent was sold to Kimberly-Clark.
The Pictou pulp mill’s major products are Pictou HARMONY®
Softwood (northern bleached softwood kraft pulp) and
Pictou Hardwood (northern bleached hardwood kraft pulp).
Our pulp business had net sales of approximately
$223 million in 2007, $189 million in 2006 and $184 million
in 2005.
MA RKETS AN D CUSTOMER S
F IN E PAPER. Premium papers are used primarily for
stationery and corporate identifi cation applications and
represent approximately 3 percent 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 sulfi te grades. The text
and cover paper segment of the market, used in corporate
identifi cation applications, is split between smooth papers
and textured papers. Text papers have traditionally been
utilized for special, high-end collateral material such as cor-
porate brochures, annual reports and special edition books.
Cover papers are used as covers primarily for business cards,
pocket folders, brochures and report covers including corpo-
rate annual reports.
The fi ne paper business sells its products through
our sales and marketing organizations primarily in three
channels: authorized paper distributors, converters and
direct sales. Distributor sales account for approximately
70 percent of our customer base in the fi ne paper business,
including distributor owned paper stores. Less than 5 per-
cent of the sales of our fi ne paper business are exported
to international distributors in Europe, South Africa, Asia,
Australia and South America.
Sales to the fi ne paper business’s two largest cus-
tomers (both of which are distributors) represented approxi-
mately 30 percent of its total sales in 2007. We practice limited
distribution 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 expand-
ing sales to existing distributors, and further offset over a
several month period with the addition of new distributors.
TECHNICAL PRODUCTS. The technical products business
relies on fi ve SBUs to sell its products globally into 17 prod-
uct categories. Such categories, broadly defi ned as polymer
impregnated and synthetic paper, include papers used as
raw materials in the following applications: tape, fi ltration,
component materials for manufactured products, graphics
and identifi cation, and wall covering.
Several products (abrasives, tapes, labels) are used
in markets that are directly affected by economic business
cycles. Other market segments such as image transfer papers
used in small/home offi ce and consumer 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 fi lm 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 percent of its
sales volume directly to customers and converters. Less than
5 percent of the sales of the technical products business are
sold through industrial distributors.
The technical products business has over
500 customers worldwide. The distribution of sales in 2007
was approximately 55 percent in Europe, 25 percent in
North America and 20 percent in Latin America and Asia.
Cus tomers typically convert and transform base papers and
fi lm into fi nished rolls and sheets by adding adhesives, coat-
ings and fi nishes. Such transformed product is then sold
to end-users.
/ 44
Neenah Paper, Inc. 2007 Annual Report
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4/17/08 5:56:21 PM
For the years ended December 31, 2007, 2006
and 2005, we had pulp sales to Kimberly-Clark of $115 mil-
lion, $163 million and $135 million, respectively. Such sales
represented approximately 60 percent, 85 percent and
75 percent of sales for our Pulp business for the years ended
December 31, 2007, 2006 and 2005, respectively. No single
customer, other than Kimberly-Clark, accounted for more
than 10 percent of our pulp net sales in those years.
GEOGRAPHIC INFO RMATION
The following tables present 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,
2007
2006
2005
$502.9
223.5
264.4
(0.3)
$990.5
$357.3
189.3
49.7
(2.0)
$594.3
$352.9
183.8
–
(2.0)
$534.7
Year Ended December 31,
2007
2008
2005
$332.5
201.6
398.7
$932.8
$223.5
180.8
340.4
$744.7
$231.9
305.1
–
$537.0
Net sales and total assets are attributed to geo-
graphic areas based on the physical location of the selling
entities and the physical location of the assets.
B U S I N E S S S U M M A R Y
PUL P. Northern bleached softwood kraft pulp is used by
paper mills to manufacture tissue and printing and writing
paper. In 2007, worldwide demand for northern bleached
softwood kraft market pulp (which excludes pulp produced
for internal consumption by integrated pulp manufacturers)
was estimated to be 12.6 million metric tons, of which about
6.3 million metric tons were produced in Canada. Western
Europe consumed an estimated 5.6 million metric tons of
northern bleached softwood kraft pulp in 2007, followed
by the United States at 3.1 million metric tons and China at
1.5 million metric tons.
In 2007, Pictou produced about 245,000 metric tons
of northern bleached softwood kraft pulp. In 2007, approxi-
mately 60 percent of the northern bleached softwood kraft
pulp production at the Pictou mill was sold to Kimberly-Clark.
Our Pictou mill has historically sold or transferred more than
90 percent of its output of northern bleached softwood kraft
pulp to Kimberly-Clark.
In 2007, worldwide demand for northern bleached
hardwood market pulp was estimated to be 4.6 million met-
ric tons of which an estimated 1.7 million metric tons were
northern bleached hardwood kraft pulp produced in Canada.
In 2007, the United States consumed approximately 0.8 mil-
lion metric tons of Canadian northern bleached hardwood
kraft pulp, followed by Asia at 0.6 million metric tons and
Europe at 0.2 million metric tons.
In 2007, our Pictou mill produced about 25,000 met-
ric tons of northern bleached hardwood kraft pulp and sold
approximately 70 percent of such production to Kimberly-
Clark. The balance of the pulp mill’s output of northern
bleached hardwood kraft pulp was sold to 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 increas-
ing competition, primarily from lower cost South American
eucalyptus pulp and excess capacity for 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 gen-
erate sales to external customers.
/ 45
Neenah Paper, Inc. 2007 Annual Report
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4/17/08 5:56:21 PM
selected fi nancial data
The following table sets forth our selected historical fi nancial
and other data. You should read the information set forth
below in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our historical consolidated fi nancial statements and the
notes to those consolidated fi nancial statements included
elsewhere in this Annual Report. The statement of operations
data for the years ended December 31, 2007, 2006 and 2005
and the balance sheet data as of December 31, 2007 and
2006 set forth below are derived from our audited historical
consolidated fi nancial statements included elsewhere in this
Annual Report. The balance sheet data as of December 31,
2005 and 2004 set forth below is derived from our audited
historical consolidated fi nancial statements not included in
this Annual Report. The statement of operations data for
the years ended December 31, 2004 and 2003 and the bal-
ance sheet data as of December 31, 2003 set forth below are
derived from our audited historical combined fi nancial state-
ments not included in this Annual Report.
The consolidated and combined fi nancial state-
ments refl ect the consolidated operations of Neenah and its
subsidiaries as a separate, stand-alone entity subsequent to
November 30, 2004. The historical fi nancial and other data
for periods through November 30, 2004 have been prepared
on a combined basis from Kimberly-Clark’s consolidated
fi nancial statements using the historical results of operations
and bases of the assets and liabilities of Kimberly-Clark’s fi ne
paper and technical products businesses in the United States
and its pulp business in Canada and give effect to allocations
of expenses from Kimberly-Clark. The historical fi nancial and
other data for periods prior to November 30, 2004 are not
indicative of our future performance and do not refl ect what
our fi nancial 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 periods
through the date of the Spin-Off. Accordingly, the combined
balance sheet as of December 31, 2003 does not include
current or prior period income tax receivables or payables
related to our operations, which were fi led on a consolidated
basis with Kimberly-Clark. The income tax provisions were
determined as if our business were a separate taxpayer.
/ 46
Neenah Paper, Inc. 2007 Annual Report
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S E L E C T E D F I N A N C I A L D A T A
(Dollars in millions, except per share data)
2007(a)
2006(b)
2005
2004(j)
2003(j)
Year Ended December 31,
Consolidated and Combined Statement of Operations Data
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Gain on sale of woodlands(d)
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(c)(e)(f)(g)(h)
Net income (loss)
Earnings from continuing operations per basic share(i)
Earnings from continuing operations per diluted share(i)
Cash dividends per common share
Other Financial Data
Net cash fl ow provided by (used in):
Operating activities
Investing activities(a)(b)(c)
Financing activities(a)(b)
Capital expenditures
Ratio of earnings to fi xed charges(k)
$ 990.5
852.9
137.6
82.4
(6.2)
(5.5)
66.9
25.1
41.8
3.9
37.9
(27.7)
$ 10.2
$ 2.55
$ 2.50
$ 0.40
$ 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
$ 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
$ 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
–
$
$ 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
–
$
$ 69.5
(113.4)
43.8
(58.3)
2.6x
$ 65.8
(127.7)
50.8
(25.1)
8.6x
$ 22.8
(25.8)
(3.6)
(25.7)
2.9x
$ 76.0
(19.1)
(37.8)
(19.1)
50.6x
$ 73.6
(23.6)
(50.0)
(24.4)
383.5x
As of December 31,
(Dollars in millions)
2007(a)
2006(b)
2005
2004
2003
Consolidated and Combined Balance Sheet Data
Working capital
Total assets
Long-term debt
Total liabilities
Total stockholders’ and invested equity
(a) In March 2007, we acquired the stock of Fox Valley Corporation and its subsid-
iary, Fox River Paper Company, LLC (collectively, “Fox River”) for approximately
$54.7 million in cash. We fi nanced the acquisition through a combination of
cash and debt drawn against our existing revolving credit facility. The results of
Fox River are being reported as part of our Fine Paper segment and have been
included in our consolidated fi nancial results since the acquisition date.
(b) In October 2006, we purchased the outstanding interests of Neenah
Germany. Neenah Germany was acquired from FiberMark, Inc. and
FiberMark International Holdings LLC (collectively “Neenah Germany”) for
approximately $220.1 million in cash. We fi nanced the acquisition through
a combination of cash and debt drawn against our existing revolving credit
facility. The results of Neenah Germany are being reported as part of our
Technical Products segment and have been included in our consolidated
fi nancial results since the acquisition date.
(c) In August 2006, we transferred our Terrace Bay mill and related wood-
lands operations to certain affi liates of Buchanan Forest Products Ltd.
(“Buchanan”) for a payment of approximately $18.6 million. The results of
operations of the Terrace Bay mill and the loss on transfer are refl ected as
discontinued operations in the consolidated statements of operations.
(d) In June 2006, our wholly owned subsidiary, Neenah Paper Company of
Canada (“Neenah Canada”) sold approximately 500,000 acres of wood-
lands in Nova Scotia for gross proceeds of $139.1 million. The agreement
includes a fi ber supply agreement to secure a source of fi ber for Neenah
Canada’s Pictou pulp mill. The transaction resulted in a net pre-tax gain
of $131.7 million. Neenah Canada immediately recognized approximately
$122.6 million of such gain and deferred approximately $9.1 million which
was recognized in income pro-rata through December 2007. For the years
ended December 31, 2007 and 2006, Neenah Canada recognized $6.2 mil-
lion and $2.9 million, respectively, of such deferred gain in income.
/ 47
Neenah Paper, Inc. 2007 Annual Report
$ 120.3
932.8
321.2
644.8
288.0
$ 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
(e) In December 2007, the Ontario Plan was terminated and all outstanding pen-
sion obligations for active employees were settled through the purchase of
annuity contracts or lump-sum payments pursuant to participant elections. For
the year ended December 31, 2007, Neenah Canada recognized a non-cash
pre-tax settlement loss of $38.7 million upon termination of the Ontario Plan.
In August 2006, Neenah Canada made a payment to the pension trust of
approximately $10.8 million for the purchase of annuity contracts to settle
its pension liability for current retirees. As a result, Neenah Canada recog-
nized a pension curtailment and settlement loss of approximately $26.4 mil-
lion in the year ended December 31, 2006.
(f)
(g) In 2005, we recorded a $53.7 million non-cash pre-tax impairment loss to
write off the carrying value of the Terrace Bay facility’s tangible long-lived
assets. In addition, we recorded a $6.1 million pre-tax charge for exit costs
in connection with the closure of the smaller of the two single-line pulp mills
at our Terrace Bay facility. The charge included $5.0 million for one-time
termination benefi ts related to early retirement, severance and defi ned
benefi t pension plans, $0.3 for other associated exit costs and $0.8 million
for a non-cash asset impairment loss.
(h) In 2004, we recorded a $112.8 million non-cash pre-tax impairment loss to
(i)
(j)
reduce the carrying amount of the Terrace Bay facility.
For 2003, basic and diluted earnings per share were computed using the num-
ber of shares of Neenah common stock outstanding at the Spin-Off date.
As noted elsewhere in this Annual Report, for periods prior to the Spin-Off,
our historical fi nancial results are not indicative of our future performance,
and do not refl ect what our fi nancial position and results of operations
would have been had we operated as a separate, independent company
during the periods presented.
(k) For purposes of determining the ratio of earnings to fi xed charges, earnings
consist of income before income taxes (less interest) plus fi xed charges.
Fixed charges consist of interest expense, including amortization of debt
issuance costs, and the estimated interest portion of rental expense.
66500ne_fin 47
4/17/08 5:56:21 PM
management’s discussion and analysis
of fi nancial 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, 2007, 2006 and 2005.
Also discussed is our fi nancial position as of the end of those
periods. You should read this discussion in conjunction
with our consolidated fi nancial statements and the notes to
those consolidated fi nancial 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.
INT RODU CTION
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations are intended to provide
investors with an understanding of the historical performance
of our business, its fi nancial condition and its prospects. We
will discuss and provide our analysis of the following:
• Overview of Business;
• Business Segments;
• Results of Operations and Related Information;
• Adoption of New Accounting Pronouncements;
• Liquidity and Capital Resources; and
• Critical Accounting Policies and Use of Estimates.
OV ERVIEW OF BUSINESS
We are a leading international producer of premium fi ne papers
and technical products. We also produce bleached kraft pulp
in Canada, where we own approximately 500,000 acres of tim-
berlands and have non-exclusive rights to harvest wood from
approximately 200,000 acres of other timberlands. We have
three primary operations: our fi ne paper business, our technical
products business and our pulp business.
In managing this diverse paper and pulp business,
management believes that achieving and maintaining a
leadership position for our fi ne paper and technical products
businesses, responding effectively to competitive challenges,
employing capital optimally, controlling costs and manag-
ing 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.
• MA RKET LEADERSHIP. Achieving and maintaining
leadership for our fi ne paper and technical products busi-
nesses have been an important part of our past perfor-
mance. Our fi ne paper business has long been recognized
/ 48
Neenah Paper, Inc. 2007 Annual Report
as a leading manufacturer of world-class premium writing,
text and cover papers used in corporate identity pack-
ages, corporate annual reports, invitations, personal sta-
tionery and high-end packaging. Our technical products
business is recognized as a leading supplier in the tape,
fi ltration, component materials, graphics & identifi cation,
and wall covering markets. Maintaining our leadership is
important to our results, particularly in light of the com-
petitive environment in which we operate.
• CO MPET ITIVE E NVIRONME NT . Our past results have
been and future prospects will be signifi cantly affected
by the competitive environment in which we operate.
We experience intense competition for sales of our prin-
cipal products in our major markets. Our paper business
competes directly with well-known competitors, some of
which are larger and more diversifi ed in most of our mar-
kets. In our pulp business, we have experienced, and will
continue to experience, intense competition from suppli-
ers of softwood pulps and southern hemisphere suppliers
of hardwood pulps. We expect our competitors to con-
tinue to be aggressive in the future.
• CO ST CONTROL. To improve and maintain our com-
petitive position, we must control our raw material,
manufacturing, distribution and other costs. A portion of
our investments in capital improvements are intended to
achieve cost savings and improvements in productivity.
• CYCLICAL NATURE OF THE PULP INDUS T RY.
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.
• GENERAL E CONOMIC CONDITIO NS. The markets for
all of our products are affected to a signifi cant degree by
general economic conditions. Downturns and improve-
ments in the U.S. and European economies or in our
export markets affect the demand for our products.
• FOREIGN CURRE NCY AND COMMODITY RIS K. Sales
of pulp by our Pictou mill 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 operation. However, we are exposed to
changes in foreign currency exchange rates because most
of the costs relating to our pulp business are incurred in
Canadian dollars. These risks could have a material impact
66500ne_fin 48
4/17/08 5:56:22 PM
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 L Y S I S
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:
PUL P PRICE HISTOR Y
AV ERAGE QUARTERLY PRICES
$900
($ in metric tons)
$800
$700
$600
$500
$1.10
$0.90
$0.70
northern bleached softwood kraft pulp
northern bleached hardwood kraft pulp
Q1
2005
Q2
Q3
Q4
Q1
2006
Q2
Q3
Q4
Q1
2007
Q2
Q3
Q4
Source: Resource Information Systems, Inc.
U. S. $/CAN ADIAN $ EXC HANGE RATE HISTORY
AV ERAGE QUARTERLY EXCHANGE RATES
Q1
2005
Q2
Q3
Q4
Q1
2006
Q2
Q3
Q4
Q1
2007
Q2
Q3
Q4
Source: Thomson Financial, an operating unit of The Thomson Corporation
BU SIN ESS SEGMENTS
Our fi ne paper business is a leading producer of premium
writing, text, cover and specialty papers used in corporate
identity packages, corporate annual reports, 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
/ 49
Neenah Paper, Inc. 2007 Annual Report
many of our product categories. We sell our products primar-
ily to authorized paper distributors, converters and specialty
businesses, with sales to distributors and distributor-owned
paper stores accounting for approximately 70 percent of
sales. We believe that our fi ne paper manufacturing facilities
located in Appleton, Neenah and Whiting, Wisconsin; and
Ripon, California are among the most effi cient in their mar-
kets and make us one of the lowest cost producers.
Our technical products business is a leading pro-
ducer of transportation and other fi lter media; durable,
saturated and coated base papers for a variety of end uses
and nonwoven wall coverings. We sell our technical prod-
ucts globally via fi ve SBUs 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, abra-
sive, transportation and other fi lter media, nonwoven wall
coverings, medical packaging and image transfer technical
products markets. We are also a global supplier of materi-
als used for customer-specifi c applications in furniture, book
covers and original equipment manufacturers’ products. Our
customers are located in more than 35 countries. Our techni-
cal 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”). 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 2007, the Pictou Mill produced approxi-
mately 270,000 metric tons of bleached kraft pulp.
RE SULT S OF OPERATIONS AND
RE LATE D INFORMATION
In this section, we discuss and analyze our net sales, income
before interest and income taxes (which we refer to as “oper-
ating 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, 2007, 2006
and 2005.
EXECUTIVE SUMMARY
During 2006, we completed several complementary strategic
initiatives: (1) we sold 500,000 acres of woodlands in Nova
Scotia, (2) we divested our Terrace Bay pulp operations and
(3) we acquired the German technical and specialty paper
business of FiberMark, Inc. (“FiberMark”). During the fi rst
quarter of 2007, our strategic initiatives continued with the
66500ne_fin 49
4/17/08 5:56:22 PM
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 L Y S I S
purchase of Fox River (as defi ned below) to add scale, well-
known brands and integration benefi ts as we combine Fox
River with our existing fi ne paper business.
These strategic initiatives substantially changed the
composition of our business and reduced our exposure to
the cyclical pulp market. For the year ended December 31,
2007, our paper businesses (fi ne paper and technical prod-
ucts) represented more than 75 percent of our consolidated
net sales. This compares to our paper businesses repre-
senting approximately 55 percent of our consolidated net
sales for the fi rst quarter of 2006, prior to the transfer of the
Terrace Bay pulp operations.
In February 2008, we committed to a plan to sell the
Pictou mill and our remaining woodland assets in Nova Scotia.
We believe it is probable that a sale of the Pictou mill and the
woodland assets will be completed within 12 months.
Following is a more detailed discussion of the com-
pleted strategic activities:
S A L E O F W O O D L A N D S
In June 2006, our wholly owned subsidiary, Neenah Paper
Company of Canada (“Neenah Canada”) sold approximately
500,000 acres of woodlands in Nova Scotia to Atlantic Star
Forestry LTD and Nova Star Forestry LTD (collectively,
the “Purchaser”) for net cash proceeds of $134.8 million.
Neenah Canada also entered into a fi ber supply agreement
(the “FSA”) with the Purchaser to secure a source of fi ber
for the Pictou mill. Following the sale, Neenah Canada has
approximately 500,000 acres of owned and 200,000 acres of
licensed or managed woodlands in Nova Scotia.
Pursuant to the terms of the FSA, the Purchaser
is required to make available to the Pictou Mill suffi cient
woodlands acreage to yield 200,000 metric tons of softwood
timber annually. The FSA expires in December 2010 and
Neenah Canada has the option to unilaterally extend the FSA
for an additional fi ve years. Also, the FSA can be extended for
an additional fi ve years upon the mutual agreement of
Neenah Canada and the Purchaser.
The sale qualifi ed 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”). As a result, Neenah Canada recognized
a pre-tax gain on the sale of approximately $122.6 million
and deferred approximately $9.1 million, which represents
Neenah Canada’s estimated “maximum exposure to loss”
under the FSA.
by workers employed by the woodlands operations that sup-
plied wood fi ber to the mill. In August 2006, Neenah Canada
transferred the Terrace Bay, Ontario pulp mill and related
woodlands operations (“Terrace Bay”) to certain affi liates
of Buchanan Forest Products Ltd. (“Buchanan”). Buchanan
acquired substantially all of the assets of Terrace Bay and
assumed responsibility for substantially all of the liabilities
related to its future operation in exchange for a cash pay-
ment of $18.6 million. At closing, in addition to certain work-
ing capital amounts, Neenah Canada retained pension and
long-term disability obligations for current and former mill
employees and post-employment medical and life insurance
obligations for current retirees.
In December 2007, Neenah Canada settled its pen-
sion obligations under the Ontario, Canada defi ned benefi t
pension plan (the “Ontario Plan”) and terminated the plan.
Upon termination of the Ontario Plan, Neenah Canada
recognized a non-cash pre-tax settlement loss of $38.7 mil-
lion. See “Executive Summary – Results of Discontinued
Operations.” In addition, in the fourth quarter of 2007,
Neenah Canada reached an agreement to settle a proposed
class action lawsuit alleging the wrongful reduction and/or
elimination of certain retiree benefi ts following the transfer
of Terrace Bay to Buchanan. We agreed to pay the plaintiffs
approximately $5.5 million Canadian dollars as part of the
settlement and recorded a charge of $5.2 million to continu-
ing operations.
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 purchased the stock of FiberMark
Services GmbH & Co. KG and the stock of FiberMark
Beteiligungs GmbH (collectively, “Neenah Germany”) for
$220.1 million in cash, including $1.5 million paid in the fi rst
quarter of 2007 primarily for the adjusted value of working
capital at the acquisition date. The transaction was fi nanced
through available cash and debt drawn against our existing
revolving credit facility.
The Neenah Germany assets consist of two mills
located near Munich, Germany and a third mill near
Frankfurt, Germany that produce a wide range of products,
including transportation and other fi lter media, nonwoven
wall coverings, masking and other tapes, abrasive backings,
and specialized printing and coating substrates. The results
of Neenah Germany are being reported as part of our
Technical Products segment and have been included in our
consolidated fi nancial results since the acquisition date.
D I V E S T I T U R E O F T E R R A C E B A Y
We suspended manufacturing at our Terrace Bay, Ontario
pulp operation in February 2006 when the mill’s fi ber supply
was exhausted as a result of a strike initiated in January 2006
A C Q U I S I T I O N O F F O X R I V E R
In March 2007, we acquired the stock of Fox Valley
Corporation and its subsidiary Fox River Paper Company, LLC
(collectively, “Fox River”) for $54.7 million in cash (net of
cash acquired). Included in such acquisition costs were
/ 50
Neenah Paper, Inc. 2007 Annual Report
66500ne_fin 50
4/17/08 5:56:51 PM
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 L Y S I S
amounts for the repayment of debt, the payment of deferred
employee compensation obligations of the acquired com-
panies and fees and expenses directly related to the acquisi-
tion. We fi nanced the acquisition through a combination of
cash and debt drawn against our existing revolving credit
facility. The Fox River assets consist of four U.S. paper
mills and various related assets, producing premium fi ne
papers with well-known brands including STARWHITE,®
SUNDANCE,® ESSE® and OXFORD.® The acquisition of
Fox River strengthens our fi ne paper business by providing
added scale and the ability to offer a broader array of pre-
mium branded products and better service to our customers.
We believe that the added scale provided by Fox River will
result in improved earnings, but profi t margins that are lower
than those historically reported for our existing fi ne paper
business. The results of Fox River are being reported as part
of our Fine Paper segment and have been included in our
consolidated fi nancial results since the acquisition date.
During the second quarter of 2007, we closed
the Housatonic mill, located near Great Barrington,
Massachusetts. In June 2007, we announced plans to per-
manently close the fi ne paper mill located in Urbana, Ohio
(the “Urbana mill”). Manufacturing operations at the Urbana
mill ceased in September 2007. Converting operations at
the Urbana mill are expected to be phased out over the
fi rst six months of 2008. The closure of the Housatonic and
Urbana mills, will allow us to maximize cost effi ciencies by
shifting fi ne paper manufacturing to utilize available capacity
at our other fi ne paper mills. In addition, we have completed
the process of identifying and notifying certain Fox River
sales and administrative employees who were terminated as
the acquired business was integrated with our existing fi ne
paper business.
In conjunction with the acquisition of Fox River, we
recorded liabilities of approximately $12.5 million for the
cost of post-acquisition restructuring activities in accordance
with Emerging Issues Task Force Issue 95-3 Recognition
of Liabilities in Connection with a Purchase Business
Combination. Such costs include severance benefi ts, contract
termination costs and environmental clean-up and monitor-
ing costs. For the year ended December 31, 2007, we made
payments of approximately $4.8 million related to post-
acquisition restructuring activities.
R E S U L T S O F C O N T I N U I N G O P E R A T I O N S
For the year ended December 31, 2007, our operating
results benefi ted from the strategic initiatives described
above as consolidated net sales increased 67 percent.
Consolidated net sales were $396.2 million higher in the
year ended December 31, 2007 compared to the prior year
primarily due to increased volume in our paper businesses
from the acquisitions of Neenah Germany and Fox River.
/ 51
Neenah Paper, Inc. 2007 Annual Report
Consolidated operating income of $66.9 million for the year
ended December 31, 2007 decreased $101.5 million com-
pared to the prior year primarily due to a gain of $125.5 mil-
lion on the sale of woodlands in the prior year. Excluding the
gain on sale of the woodlands and the related recognition of
$6.2 million of the deferred gain on the sale of woodlands in
the current year, operating income increased by $17.8 mil-
lion. The increase versus the prior year was primarily due to
incremental earnings of Neenah Germany, higher average
selling prices, particularly prices for softwood pulp at our
Pictou Mill, and the absence in 2007 of losses on pulp price
hedges in the prior year. The benefi ts of increased volume
from Fox River were largely offset by a less favorable product
mix due to the inclusion of Fox River volume with relatively
lower margins, the addition of direct selling and administra-
tive costs for Fox River, and costs related to the integration
of Fox River and our existing fi ne paper operations.
R E S U L T S O F D I S C O N T I N U E D O P E R A T I O N S
For the year ended December 31, 2007, we incurred an
after-tax loss from discontinued operations of $27.7 million
compared to an after-tax loss of $32.9 million in the prior
year period. The loss in the current year is primarily due to
costs associated with employee benefi t obligations retained
by Neenah Canada.
In August 2006, we initiated the process to settle
our pension obligations under the Ontario, Canada defi ned
benefi t pension plan (the “Ontario Plan”). In July 2007, the
Financial Services Commission of Ontario approved our
request to settle our pension obligations for active employ-
ees and terminate the Ontario Plan. In December 2007, the
Ontario Plan was terminated and all outstanding pension
obligations for active employees were settled through the
purchase of annuity contracts or lump-sum payments pur-
suant to participant elections. Neenah Canada recognized
a non-cash pre-tax settlement loss of $38.7 million upon
termination of the Ontario Plan. No additional funding was
required to settle the Ontario Plan.
For the year ended December 31, 2006, net sales
from discontinued operations of $46.0 million were primar-
ily due to the liquidation of fi nished goods inventory during
the suspension of manufacturing operations at Terrace Bay.
For the year ended December 31, 2007, we did not have any
sales from discontinued operations due to the transfer of
Terrace Bay to Buchanan in August 2006. For the year ended
December 31, 2006, the loss from discontinued operations
includes pre-tax losses of $26.4 million related to the curtail-
ment of the Ontario Plan and $6.5 million to recognize the
loss on the assets transferred to Buchanan.
66500ne_fin 51
4/17/08 5:56:51 PM
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 L Y S I S
I N C O M E T A X E S
For the year ended December 31, 2007, we recorded income
tax expense related to continuing operations of $3.9 mil-
lion compared to income tax expense of $56.5 million in
the prior year period. As a result, our effective income tax
rate for the years ended December 31, 2007 and 2006
was approximately 9 percent and 37 percent, respectively.
During the year ended December 31, 2007, German tax laws
were amended to reduce statutory income tax rates effective
as of January 1, 2008. Application of the new rates to our
existing deferred tax assets and liabilities reduced our net
deferred tax liabilities at December 31, 2007. The reduction
in our net deferred tax liabilities due to the benefi t of the tax
rate change resulted in an income tax benefi t of $8.8 mil-
lion and was treated as a discrete item for the year ended
Decembe 31, 2007 in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes” and had no further impact on our effective tax
rate in 2007. Excluding the impact of the German tax law
amendment on our deferred tax liabilities and other tax
adjustments, our effective tax rate for the year ended
December 31, 2007 was approximately 28.6 percent and
we expect an additional three percentage point decrease in
our effective income tax rate in 2008 when the new German
tax law becomes effective.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpreta-
tion of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifi es
the accounting for uncertainty in income taxes recognized
in an enterprise’s fi nancial statements in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. There was no material effect
on the fi nancial statements and no cumulative effect on
retained earnings from our adoption of FIN 48. However,
certain amounts have been reclassifi ed in the consolidated
balance sheet to comply with the requirements of FIN 48.
As of January 1, 2007, the total amount of unrecognized tax
benefi ts was $6.5 million and, as a result of the adoption of
FIN 48, we recognized a $1.0 million increase in our liability
for unrecognized tax benefi ts. As of December 31, 2007, our
liability for unrecognized tax benefi ts was $1.0 million.
If recognized, approximately $0.6 million of the
unrecognized income tax benefi ts at December 31, 2007
would favorably affect our effective tax rate in future periods.
We do not anticipate that the expiration of the statute of
limitations or the settlement of audits in the next 12 months
will result in liabilities for uncertain income tax positions
that are materially different than the amounts accrued as of
December 31, 2007.
In September 2006, the FASB issued Statement
of Financial Accounting Standards No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defi nes fair value,
establishes a framework for measuring fair value under GAAP
and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements but does not
require any new fair value measurements.
The defi nition of fair value in SFAS 157 retains the
exchange price notion in earlier defi nitions of fair value and
emphasizes that fair value is a market-based measurement,
not an entity-specifi c measurement. SFAS 157 expands dis-
closures 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 fi nancial statements
issued for fi scal years beginning after November 15, 2007,
and interim periods within those fi scal years. We do not
expect the adoption of SFAS 157 to have a material effect on
our fi nancial position, results of operations or cash fl ows.
In February 2007, the FASB issued Statement of
Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities – Includ ing
an amendment of FASB Statement No. 115 (“SFAS 159”).
SFAS 159 permits entities to choose to measure many fi nan-
cial instruments and certain other items at fair value that
are not currently required to be measured at fair value. The
objective is to improve fi nancial reporting by providing enti-
ties with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge account-
ing 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 fi scal years beginning
after November 15, 2007. Early adoption is permitted as
of the beginning of a fi scal 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. We do not expect the adoption of SFAS 159
to have a material effect on our fi nancial position, results of
operations or cash fl ows.
In December 2007, the FASB issued Statement
of Financial Accounting Standards No. 141 (revised 2007),
Business Combinations (“SFAS 141R”). SFAS 141R establishes
principles and requirements for how the acquirer in a business
combination (i) recognizes and measures the identifi able assets
acquired, the liabilities assumed, and any noncontrolling inter-
est in the acquiree, (ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain
purchase and (iii) determines what information to disclose to
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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 L Y S I S
enable users of the fi nancial statements to evaluate the nature
and fi nancial effects of the business combination. In addition,
SFAS 141R will require, subsequent to the acquisition period,
changes in the valuation allowance for deferred tax assets and
liabilities for unrecognized tax benefi ts related to an acquisition
to be recognized as a component of income tax expense. SFAS
141R applies prospectively to business combinations com-
pleted during annual reporting period beginning on or after
December 15, 2008. We are evaluating SFAS 141R and will
apply the provisions of the new standard to business combina-
tions completed on or after January 1, 2009.
A N A L Y S I S O F N E T S A L E S – Y E A R S E N D E D
D E C E M B E R 3 1 , 2 0 0 7 , 2 0 0 6 A N D 2 0 0 5
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,
2007
2006
2005
37%
40%
23%
100%
37%
31%
32%
100%
42%
24%
34%
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
C O M M E N T A R Y :
YEAR 2007 VERSUS 2006
Fine Paper
Technical Products
Pulp(a)(b)
Intersegment sales
Consolidated
Year Ended December 31,
2007
2006
2005
$366.5
400.8
223.5
(0.3)
$990.5
$223.9
183.1
189.3
(2.0)
$594.3
$222.3
130.6
183.8
(2.0)
$534.7
Change in Net Sales
Compared to the Prior Year
Change Due to
Total
Average
Change
Volume
Net Price
$142.6
217.7
34.2
1.7
$396.2
$160.7
208.5
7.5
1.7
$378.4
$(18.1)
9.2
26.7
–
$ 17.8
(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 $11.2 million benefi t due to the absence in
2007 of losses on pulp price hedges in the prior year.
/ 53
Neenah Paper, Inc. 2007 Annual Report
Consolidated net sales of $990.5 million in the year
ended December 31, 2007 were $396.2 million higher than
the prior year primarily as a result of increased volume in our
paper businesses due to the acquisitions of Neenah Germany
and Fox River. In addition, the current year benefi ted from
higher market prices for softwood pulp and the realization of
price increases in our technical products business, partially off-
set by a less favorable product mix in our fi ne paper business.
Net sales in our fi ne paper business of $366.5 million
•
increased $142.6 million or 64 percent as shipment volume
improved more than 70 percent primarily due to the acqui-
sition of Fox River. The benefi t from higher volume was
partially offset by lower average net price resulting from a
less favorable product mix due to selling a higher propor-
tion of lower priced grades, primarily Fox River grades,
partially offset by improved pricing for branded products.
• Net sales in our technical products business of $400.8 mil-
lion increased $217.7 million or more than double the
prior year primarily due to the acquisition of Neenah
Germany, and to a lesser extent, improved product mix,
favorable currency effects due to a stronger Euro relative
to the U.S. dollar and prices. The improvement in average
net price refl ected a more favorable product mix due to
higher priced grades representing a larger proportion of
sales and increased selling prices for most products.
• Net sales in our pulp business of $223.5 million increased
$34.2 million or 18 percent primarily as a result of higher
market prices for softwood pulp, the absence in 2007
of losses on pulp price hedges in the prior year and a
four percent increase in pulp shipment volume. Average
market prices for softwood pulp increased approximately
16 percent versus the prior year. The increase in pulp
prices was partially offset by lower shipments of logs to
sawmills and veneer manufacturers due to the sale of a
portion of our woodlands in June 2006.
YEAR 2006 VERSUS 2005
Fine Paper
Technical Products
Pulp(a)(b)
Consolidated
Change in Net Sales
Compared to the Prior Year
Change Due to
Total
Average
Change
Volume
Net Price
$ 1.6
52.5
5.5
$59.6
$ (0.8)
47.4
3.6
$50.2
$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 a net reduction of $11.4 million due to pulp
hedging activities.
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Consolidated net sales increased $59.6 million or
The following table sets forth line items from our con-
11 percent in 2006 versus 2005, primarily due to the acquisi-
tion of Neenah Germany in October 2006. Excluding Neenah
Germany, sales increased $9.9 million or 1 percent, primarily
due to favorable average net selling prices for all our busi-
nesses and increased pulp shipments.
• Net sales in our fi ne paper business increased $1.6 million,
or 1 percent, primarily due to higher average net prices.
Higher average net selling prices refl ected the realization
of price increases on branded products implemented in
January and June 2006. Unit volumes were essentially
unchanged from the prior year.
• Net sales in our technical products business increased
$52.5 million, or 40 percent, primarily due to the acquisi-
tion of Neenah Germany in October 2006. Excluding
Neenah Germany, sales increased $2.8 million or 2 per-
cent due to higher average net selling prices partially off-
set by lower volume. The increase in average net selling
prices was primarily due to the implementation of a sur-
charge to recover higher raw material costs and a general
price increase in January 2006.
• Net sales in our pulp business increased $5.5 million, or
3 percent, primarily due to higher selling prices and an
increase in shipments. Average net selling prices were
favorable due to a 10 percent increase in average market
prices for softwood pulp, partially offset by losses on pulp
future contracts ($11.4 million). The increase in shipments
was primarily due to increased production.
solidated statements of operations as a percentage 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 profi t
Selling, general and
administrative expenses
Gain on sale of woodlands
Other income – net
Operating income
Interest expense – net
Income from continuing
operations before
income taxes
Provision for income taxes
Income from continuing
operations
Year Ended December 31,
2007
2006
2005
100.0%
86.1
13.9
100.0%
84.5
15.5
100.0%
82.0
18.0
8.3
(0.6)
(0.5)
6.7
2.5
4.2
0.4
9.6
(21.1)
(1.3)
28.3
2.8
25.5
9.5
9.3
–
(1.3)
10.0
3.4
6.6
2.4
3.8%
16.0%
4.2%
A N A L Y S I S O F O P E R A T I N G I N C O M E – Y E A R S E N D E D
D E C E M B E R 3 1 , 2 0 0 7 , 2 0 0 6 A N D 2 0 0 5
The following table sets forth our operating income (loss) by
segment for the periods indicated:
Operating income
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Consolidated
Year Ended December 31,
2007
2006
2005
$ 46.6
24.7
9.2
(13.6)
$ 66.9
$ 56.2
9.2
115.8
(12.8)
$168.4
$58.4
10.5
(9.0)
(6.5)
$53.4
C O M M E N T A R Y :
YEAR 2007 VERSUS 2006
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Consolidated
Change in Operating Income Compared to the Prior Year
Change Due To
Material
Volume
Net Price(a)
Costs(b)
Currency
Other(c)(d)
$55.7
15.6
(0.3)
–
$71.0
$(45.0)
6.3
33.5
–
$ (5.2)
$ (2.8)
(2.8)
(9.7)
–
$(15.3)
$ –
–
(13.2)
–
$(13.2)
$ (17.5)
(3.6)
(116.9)
(0.8)
$(138.8)
Total
Change
$ (9.6)
15.5
(106.6)
(0.8)
$(101.5)
(a) Includes price changes, net of pulp discounts, changes in product mix and results of pulp hedging activities.
(b) Includes price changes for raw materials and energy.
(c) Includes annual maintenance-related downtime spending, other materials, manufacturing labor, distribution and selling, general and administrative expenses.
(d) Includes $6.2 million and $125.5 million for gain on sale of woodlands and amortization of the deferred gain on sale for the years ended December 31, 2007
and 2006, respectively.
/ 54
Neenah Paper, Inc. 2007 Annual Report
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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 L Y S I S
Consolidated operating income of $66.9 million for the
year ended December 31, 2007 decreased $101.5 million
compared to 2006 primarily due to the gain on the sale
of woodlands in the prior year. Excluding the gain on sale of
woodlands in 2006 and the recognition of $6.2 million of the
deferred gain on the sale of woodlands in the current year,
operating income increased $17.8 million compared to the
prior year primarily due to the added earnings of Neenah
Germany, higher selling prices, particularly for softwood pulp
and an improved sales mix in our technical products busi-
ness. These factors were partially offset by increased manu-
facturing cost inputs, unfavorable currency effects due to a
stronger Canadian dollar and higher spending associated
with scheduled maintenance downtime at our Pictou Mill.
The benefi t of increased volume in our fi ne paper business
associated with the acquisition of Fox River was largely offset
by a less favorable product mix, direct selling and administra-
tive expenses of Fox River and costs related to the integra-
tion of Fox River.
• Operating income for our fi ne paper business of
$46.6 million decreased $9.6 million from the prior
year primarily due to higher fi ber and other costs. The
increase in other costs was primarily due to higher distri-
bution costs, additional direct selling and administrative
expenses for the Fox River business and approximately
$3.3 million in costs related to the integration of Fox
River and our existing fi ne paper operations. In addition,
approximately $1.9 million of profi ts associated with the
Fox River acquisition were capitalized as part of beginning
inventory values under purchase accounting. These unfa-
vorable factors were only partially offset by the combined
factors of increased volume and a less favorable product
mix related to the acquisition of Fox River and higher
average selling prices.
• Operating income for our technical products business
of $24.7 million increased $15.5 million from the prior
year primarily as a result of the incremental earnings of
Neenah Germany, including favorable currency effects
due to a stronger Euro relative to the U.S. dollar, and
favorable average net price, partially offset by higher
fi ber costs. Favorable average prices were primarily due
to an improved product mix and higher selling prices for
most products.
• Operating income for our pulp business of $9.2 million
decreased $106.6 million from the prior year primarily due
to the gain on the sale of woodlands in 2006. Excluding
the $125.5 million gain on sale of woodlands and the rec-
ognition of $6.2 million of the deferred gain on the sale
of woodlands in the current year, our pulp business had
operating income of $3.0 million compared to an operat-
ing loss of $9.7 million in the prior year. The improvement
in operating results was primarily due to higher market
prices for softwood pulp and the absence in 2007 of
losses of $11.2 million on pulp price hedges in the prior
year. These favorable factors were partially offset by
increased costs associated with scheduled maintenance
downtime, higher fi ber costs and unfavorable currency
translation effects.
• Unallocated corporate expenses increased by
$0.8 million primarily due to costs associated with an
executive retirement.
YEAR 2006 VERSUS 2005
Fine Paper
Technical Products
Pulp
Unallocated corporate costs
Consolidated
Change in Operating Income (Loss) Compared to the Prior Year
Total
Change
$ (2.2)
(1.3)
124.8
(6.3)
$115.0
Change Due To
Material
Volume
Net Price(a)
Costs(b)
Currency
Other(c)(d)
$(0.4)
1.5
2.8
–
$ 3.9
$ 3.1
4.0
3.5
–
$10.6
$ (4.0)
(3.5)
(3.1)
–
$(10.6)
$ –
–
(12.0)
–
$(12.0)
$ (0.9)
(3.3)
133.6
(6.3)
$123.1
(a) Includes price changes, net of pulp discounts, changes in product mix and results of pulp hedging activities.
(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 admin-
istrative expenses.
(d) Includes $125.5 million gain on sale of woodlands.
/ 55
Neenah Paper, Inc. 2007 Annual Report
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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 L Y S I S
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 com-
pared to the U.S. dollar, an unfavorable comparison on pulp
hedging activities, higher manufacturing input costs, and
increased corporate expenses for stock-based compensation
and depreciation related to our ERP software. These unfavor-
able effects were partially offset by higher average net prices
in all our businesses.
•
Operating income for our fi ne paper business decreased
$2.2 million, or 4 percent, primarily due to higher raw mate-
rial, energy and labor costs. The increase in manufactur-
ing 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.
• Operating income for our technical products business
decreased $1.3 million, or 12 percent, primarily due to
higher raw material (primarily latex and pulp), energy,
labor and research and development costs. The increase
in manufacturing costs was partially offset by higher aver-
age 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 favor-
able volume due to Neenah Germany.
• 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 the 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 dollar com-
pared to the U.S. dollar, an unfavorable comparison on
pulp hedging activities ($11.5 million) and higher raw
material and energy costs. These effects were partially off-
set by higher selling prices, gains on currency hedges and
cost savings.
• 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 com-
pensation increased approximately $5.0 million primarily
due to the adoption on January 1, 2006 of Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment.
A D D I T I O N A L S T A T E M E N T O F O P E R A T I O N S C O M M E N T A R Y :
• For the years ended December 31, 2007, 2006 and 2005,
we incurred $25.5 million, $19.4 million and $18.5 mil-
lion, respectively, of interest expense. The increase in net
interest expense was primarily due to borrowings under
our bank credit agreement to partially fi nance the acquisi-
tions of Neenah Germany and Fox River.
• Our effective income tax rate was 9.3 percent, 37.2 per-
cent and 36.6 percent for the years ended December 31,
2007, 2006 and 2005, respectively. The decrease in our
effective income tax rate between 2007 and 2006 was pri-
marily due to the application of a new tax law in Germany
to our existing deferred tax assets and liabilities. See
“Executive Summary – Income Taxes.” The increase in our
effective tax rate between 2006 and 2005 was primarily
due to a change in the proportion of pretax income in tax
jurisdictions with different marginal tax rates. See Note 7
of Notes to Consolidated Financial Statements included
elsewhere in this Annual Report for a reconciliation of the
annual effective tax rates.
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
Net cash fl ow provided
by (used in):
Operating activities
Investing activities, including
capital expenditures
Financing activities
Capital expenditures
Year Ended December 31,
2007
2006
2005
$ 69.5
$ 65.8
$ 22.8
(113.4)
43.8
(58.3)
(127.7)
50.8
(25.1)
(25.8)
(3.6)
(25.7)
OPERATING CASH FLOW COMMENTARY
• Cash provided by operations of $69.5 million for the year
ended December 31, 2007 increased $3.7 million from
the prior year primarily due to higher earnings (exclud-
ing the non-cash effects of deferred income taxes, the
gain on sale of woodlands and pension curtailment
losses), partially offset by the liquidation of Terrace Bay
working capital in 2006. The improvement in earnings
was primarily due to the added earnings of Neenah
Germany, higher selling prices, particularly for softwood
pulp and an improved sales mix in our technical products
business. Cash provided by working capital for the year
ended December 31, 2006 of $39.8 million compares to
no change in working capital in 2007. Cash used for work-
ing capital in the current year was primarily the result of
higher accounts receivable for Neenah Germany and our
pulp business, partially offset by an increase in amounts
payable for income taxes and interest and foreign
currency effects.
• 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,
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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 L Y S I S
partially offset by pension contributions to settle liabilities
for current retirees in the Ontario Plan. The increase in
cash provided by operating working capital was primarily
due to the depletion of fi nished goods inventory and the
collection of accounts receivable at the Terrace Bay mill.
• Our investment in operating working capital at
December 31, 2007 of $120.3 was $27.4 million higher
than the prior year. The increase was primarily due to
working capital acquired in the Fox River acquisition
and currency effects related to the strengthening of the
Canadian dollar and the Euro relative to the U.S. dol-
lar. Our investment in operating working capital at
December 31, 2006 decreased $31.0 million from the
prior year primarily due to the depletion of fi nished goods
inventory and the collection of related receivables at
Terrace Bay prior to the transfer to Buchanan. This reduc-
tion was partially offset by working capital acquired in the
Neenah Germany acquisition.
I N V E S T I N G C O M M E N T A R Y :
• For the year ended December 31, 2007, cash used in invest-
ing activities was $113.4 million versus cash used in investing
activities of $127.7 million in the prior year. Cash used
in investing activities for the year ended December 31,
2007 was primarily due to spending of $54.7 million for
the acquisition of Fox River and capital expenditures of
$58.3 million. Cash used in investing activities in the year
ended December 31, 2006 was primarily due to the acqui-
sition 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 expenditures of $58.3 million for the year ended
December 31, 2007 more than doubled from the prior
year. Capital expenditures in the year ended December 31,
2007 were primarily for major projects to increase capac-
ity and improve effi ciency at Neenah Germany. In general,
our 2007 capital expenditures in Neenah Germany were
fi nanced from locally generated cash fl ow and govern-
ment subsidized fi nancing.
Capital spending for 2006 of $25.1 million was
$0.6 million lower than the comparable prior year period.
Capital spending in 2006 included signifi cant amounts for
the acquisition and installation of ERP software and gen-
eral projects in North America.
• We anticipate capital expenditures for 2008 will be
approximately $45 million, including approximately $5 to
$10 million for projects related to the integration of Fox
River with our existing fi ne paper business. These capital
expenditures are not expected to have a material adverse
effect on our fi nancial condition, results of operations
or liquidity.
/ 57
Neenah Paper, Inc. 2007 Annual Report
F I N A N C I N G C O M M E N T A R Y :
• Our liquidity requirements are being provided by cash
generated from operations, proceeds from asset sales
and short- 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. As of December 31, 2007, we had $66.2 million
outstanding under our revolving credit facility, outstand-
ing letters of credit of $1.6 million and $114.9 million of
available credit.
During the year ended December 31, 2007, we
amended our bank credit agreement to increase available
borrowing capacity from $165 to $210 million. Despite
the increase in the total commitment, our ability to bor-
row under the revolving credit facility is limited to the low-
est of (a) $210 million, (b) our borrowing base (as defi ned
in the credit agreement), and (c) the applicable cap on the
amount of “credit facilities” under the indenture for our
senior notes.
• For the year ended December 31, 2007, net borrowings
under our revolving credit facility increased by $8.9 million
primarily due to borrowings to partially fi nance the acqui-
sition of Fox River.
• In March 2007, we entered into a term loan agreement
to provide borrowings of up to $25 million (the “Term
Loan”). The Term Loan is secured by substantially all of
the property, plant and equipment we acquired in the Fox
River acquisition and is fully and unconditionally guaran-
teed by substantially all of our other subsidiaries, except
Neenah Germany. The term loan agreement terminates
in November 2010. During the second quarter, we bor-
rowed $25 million under the Term Loan to repay amounts
outstanding under our revolving credit facility.
• For the year ended December 31, 2007, Neenah Germany
incurred €10 million ($14.7 million) of government sub-
sidized project fi nancing. Neenah Germany’s use of such
funds was restricted to the payment of costs directly
related to the construction of a saturator. In addition,
Neenah Germany has an unsecured revolving line of
credit to fi nance working capital needs. At December 31,
2007, $3.1 million was outstanding under such facility.
• For the year ended December 31, 2006, net borrowings
under our revolving credit agreement increased from
$0 to $57.3 million primarily to partially fi nance the acqui-
sition of Neenah Germany.
• For each of the years ended December 31, 2007, 2006
and 2005, we paid cash dividends of $0.40 per share or
$6.0 million, $5.9 million and $5.9 million, respectively.
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
66500ne_fin 57
4/17/08 5:56:52 PM
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 L Y S I S
for the next twelve months. Our ability to generate adequate
cash from operations beyond 2008, however, will depend on,
among other things, our ability to successfully implement our
business strategies and cost cutting initiatives 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 currency exposures.
C O N T R A C T U A L O B L I G A T I O N S
The following table presents the total contractual obligations for which cash fl ows are fi xed or determinable as of December 31, 2007:
(In millions)
2008
2009
2010
Unconditional purchase obligations
Long-term debt payments
Interest payments on long-term debt
Other post-employment benefi t obligations
Operating leases
Open purchase orders
Contributions to pension trusts
Liability for uncertain tax positions
Total contractual obligations
$ 50.9
10.9
23.0
4.5
3.4
20.2
11.3
–
$124.2
$47.8
9.5
22.2
2.4
3.3
–
–
1.0
$86.2
$ 45.0
75.7
21.2
2.6
2.3
–
–
–
$146.8
2011
$35.3
1.8
17.0
2.9
1.9
–
–
–
$58.9
2012
$21.7
1.8
16.9
3.2
1.4
–
–
–
$45.0
Beyond
2012
$184.1
232.4
33.1
19.8
2.3
–
–
–
$471.7
Total
$384.8
332.1
133.4
35.4
14.6
20.2
11.3
1.0
$932.8
The unconditional purchase obligations are for the
purchase of raw materials, primarily wood chips and timber
under the FSA. 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 fl ows, we believe our exposure to
losses, if any, under these arrangements is not material.
Interest payments on long-term debt includes inter-
est on variable rate debt at December 31, 2007 weighted
average interest rates.
The open purchase orders displayed in the above
table represent amounts we anticipate will become payable
within the next year for goods and services that we have
negotiated for delivery.
The table also includes future payments that we will
make for post-employment benefi ts other than pensions. Those
amounts are estimated using actuarial assumptions, including
expected future service, to project the future obligations.
CR ITICAL ACCOUNTING POLICIES AND
U S E O F ESTIMATES
The preparation of fi nancial statements in conformity with
Generally Accepted Accounting Principles (“GAAP”) in the
United States requires estimates and assumptions that affect
the reported amounts and related disclosures of assets and
liabilities at the date of the fi nancial statements and net sales
and expenses during the reporting period. Actual results
could differ from these estimates, and changes in these
estimates are recorded when known. The critical accounting
policies used in the preparation of the consolidated fi nancial
statements are those that are important both to the presen-
tation of fi nancial condition and results of operations and
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Neenah Paper, Inc. 2007 Annual Report
require signifi cant judgments with regard to estimates used.
These critical judgments relate to the reported amounts of
assets and liabilities, disclosure of contingent assets and lia-
bilities, 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 Financial
Statements. We believe that the consistent application of our
policies provides readers of Neenah’s fi nancial statements
with useful and reliable information about our operating
results and fi nancial condition.
We have discussed the application of these criti-
cal accounting policies with our Board of Directors and
Audit Committee.
R E V E N U E R E C O G N I T I O N
We recognize sales revenue when all of the following have
occurred: (1) delivery has occurred, (2) persuasive evidence
of an agreement exists, (3) pricing is fi xed or determinable,
and (4) 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 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 discounts, trade allowances and sales returns are
estimated using historical experience.
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I N V E N T O R I E S
We value U.S. inventories at the lower of cost, using the
Last-In, First-Out (“LIFO”) method for fi nancial 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 market.
The FIFO value of U.S. inventories valued on the LIFO
method was $45.2 million and $37.9 million at December 31,
2007 and 2006, respectively and exceeded such LIFO value
by $9.6 million and $8.3 million, 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 “scal-
ing” techniques to estimate quantities of roundwood, as well
as various electronic devices to calculate wood chip inven-
tory amounts. These techniques historically have provided
reasonable estimates of such inventories.
I N C O M E T A X E S
As of December 31, 2007, we have recorded aggregate
deferred income tax assets of $57.3 million related to
temporary differences, and have established no valuation
allowances against these deferred income tax assets. As of
December 31, 2006, our aggregate deferred income tax
assets were $34.2 million. In determining the need for valua-
tion allowances, we consider many factors, including specifi c
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.
On January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN
48 clarifi es the accounting for uncertainty in income taxes
recognized in an enterprise’s fi nancial statements in accor-
dance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. As of December 31,
2007, our liability for uncertain income taxes positions was
$1.0 million. In evaluating and estimating tax positions and
tax benefi ts, we consider many factors which may result in
periodic adjustments and which may not accurately antici-
pate actual outcomes.
P E N S I O N B E N E F I T S
Substantially all active employees of our U.S. paper opera-
tions participate in defi ned benefi t pension plans and
defi ned contribution retirement plans. In November 2004,
we assumed responsibility for pension and post-employment
benefi t obligations for active employees of the Pulp and
Paper business and former employees of the pulp busi-
ness in Canada. In August 2006, Neenah Canada purchased
annuity contracts to settle its obligations under the Ontario,
Canada defi ned benefi t pension plan (the “Ontario Plan”) for
former employees of Terrace Bay. In July 2007, the Financial
Services Commission of Ontario approved our request to
settle our pension obligations for active employees and
terminate the Ontario Plan. In December 2007, the Ontario
Plan was terminated and all outstanding pension obligations
were settled through the purchase of annuity contracts or
lump-sum payments pursuant to participant elections. For
the year ended December 31, 2007, Neenah Canada rec-
ognized a non-cash pre-tax settlement loss of $38.7 million
upon termination of the Ontario Plan. Substantially all of
Neenah Germany’s hourly employees participate in defi ned
benefi t plans designed to provide a monthly pension benefi t
upon retirement.
Our funding policy for qualifi ed defi ned benefi t
plans is to contribute assets to fully fund the accumulated
benefi t obligation, as required by the Pension Protection
Act. Subject to regulatory and tax deductibility limits, any
funding shortfall is to be eliminated over a reasonable num-
ber of years. Nonqualifi ed plans providing pension benefi ts
in excess of limitations imposed by the taxing authorities are
not funded. There is no legal or governmental obligation to
fund Neenah Germany’s benefi t plans and as such the plans
are currently unfunded.
Consolidated pension expense for defi ned ben-
efi t pension plans was $49.5 million, $35.5 million and
$13.2 million for the years ended December 31, 2007,
2006 and 2005, respectively. Pension expense for the year
ended December 31, 2007, includes $38.7 million for losses
related to the settlement of pension obligations for active
employees in the Ontario Plan. In addition, we recognized
a reduction in pension expense of $1.2 million related to an
amendment to the Fox River defi ned benefi t pension plan
to freeze the vested pension benefi t for salaried employees
born after December 31, 1957. Pension expense for the year
ended December 31, 2006, includes $26.4 million for settle-
ment and curtailment losses related to the settlement of
pension obligations for current retirees in the Ontario Plan.
Pension expense for the year ended December 31, 2005
includes a pre-tax charge of $1.6 million for a partial settle-
ment of certain pension obligations related to the closure of
the No. 1 pulp mill at Terrace Bay. Pension expense is calcu-
lated based upon a number of actuarial assumptions applied
to each of the defi ned benefi t plans.
The weighted-average expected long-term rate
of return on pension fund assets used to calculate pension
expense was 7.90 percent, 8.39 percent and 8.41 percent
for the years ended December 31, 2007, 2006 and 2005,
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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 L Y S I S
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 invest-
ment consultants and projected long-term returns of broad
equity and bond indices. We also considered the plans’
historical 10-year and 15-year compounded annual returns.
We anticipate that on average the investment managers for
both our U.S. and Canadian plans will generate annual long-
term rates of return of at least 8.0 percent. Our expected
long-term rate of return on the assets in the plans is based
on an asset allocation assumption of about 60 percent with
equity managers, with expected long-term rates of return
of approximately 10 percent, and 40 percent with fi xed
income managers, with an expected long-term rate of return
of about 6 percent. The actual asset allocation is regularly
reviewed and periodically rebalanced to the targeted alloca-
tion when considered appropriate. We evaluate our invest-
ment 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
plan assets was used. As of December 31, 2007, our pen-
sion plans had cumulative unrecognized investment losses
and other actuarial losses of approximately $45.4 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 obligations or
(iii) other actuarial gains, including whether such accumulated
actuarial losses at each measurement date exceed the “cor-
ridor” 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 market place, whose duration matches the timing of
expected pension benefi t payments. The discount (or settle-
ment) 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 equivalent
one year compound basis. The weighted average discount
rate utilized to determine the present value of future pension
obligations at December 31, 2007 and 2006 was 6.10 percent
and 5.25 percent, respectively.
Our consolidated pension expense in 2007 is based
on the expected weighted-average long-term rate of return on
assets and the weighted-average discount rate described
above and various other assumptions. Pension expense
beyond 2007 will depend on future investment performance,
our contributions to the pension trusts, changes in dis-
count rates and various other factors related to the covered
employees in the plans.
The fair value of the assets in our defi ned benefi t
plans at December 31, 2007 of approximately $344 mil-
lion decreased approximately $7 million from the fair value
of about $351 million at December 31, 2006, as assets
transferred from the Fox River pension plans of $90.5 mil-
lion and currency effects of $38.0 million, were more than
offset by benefi t payments (including payments to settle the
Ontario Plan) of $162.0 million. At December 31, 2007, the
projected benefi t obligations of the defi ned benefi t plans
exceeded the fair value of plan assets by approximately
$64 million which was approximately $5 million lower than
the $69 million defi cit at December 31, 2006. The accu-
mulated benefi t obligation exceeded the fair value of plan
assets by approximately $24.7 million and $31.4 million at
December 31, 2007 and 2006, respectively. Contributions to
pension trusts for the year ended December 31, 2007 were
$10.1 million compared with $24.2 million for the year ended
December 31, 2006 (including $10.8 million to purchase
annuity contracts to settle pension obligations for current
retirees in the Ontario Plan). In addition, we made direct
benefi t payments of approximately $0.3 million for the year
ended December 31, 2007 and approximately $0.1 million
in each of the years ended December 31, 2006 and 2005 for
unfunded supplemental retirement benefi ts.
I M P A I R M E N T
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 circumstances indicate that the carrying amounts of such
long-lived assets may not be recoverable from future net
pre-tax cash fl ows. Impairment testing requires signifi cant
management judgment including estimating the future suc-
cess of product lines, future sales volumes, growth rates for
selling prices and costs, alternative uses for the assets and
estimated proceeds from disposal of the assets. Impairment
testing is conducted at the lowest level where cash fl ows can
be measured and are independent of cash fl ows of other
assets. An asset impairment would be indicated if the sum
of the expected future net pre-tax cash fl ows from the use of
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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 L Y S I S
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 difference 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 fl ow scenarios that refl ect 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 differ
from the estimates.
G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S
Goodwill arising from a business combination is recorded as
the excess of purchase price and related costs over the fair
value of identifi able 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 annu-
ally. 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 a market approach
in combination with an estimate of future cash fl ows and a
risk adjusted discount rate to compute a net present value
of future cash fl ows. 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 car-
rying amount of goodwill over the fair values of recognized
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, 2007 and no impairment was indicated.
Acquired intangible assets with estimable useful
lives are amortized on a straight-line basis over their respec-
tive estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS 144.
Intangible assets consist primarily of customer relationships,
trade names and acquired intellectual property. Such intangi-
ble 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 indefi nite useful
lives and as such are not being amortized. Intangible assets
with indefi nite lives are annually reviewed for impairment in
accordance with SFAS 144.
S T O C K - B A S E D C O M P E N S A T I O N
We account for stock-based compensation in accordance
with the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (“SFAS 123R”). Stock-based com-
pensation 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 provi-
sions 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 recog-
nized is based on the fair value of grants that are ultimately
expected to vest and is recognized pro-rata over the requi-
site 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 benefi ts related to the
exercise or vesting of stock-based awards as cash provided
by fi nancing activities rather than as a reduction in income
taxes paid and reported as cash provided by operations.
QUANTIT ATIVE AND QUALIT ATIVE DIS CLOSU R ES
ABOUT MARKE T RISK
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 fi nancing activities and, where deemed appro-
priate, the use of derivative instruments. Derivative instru-
ments are used only for risk management purposes and not
for speculation or trading.
Presented below is a description of our most signifi -
cant risks.
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 fl ows are affected by
changes in the Canadian dollar exchange rate relative to the
U.S. dollar. In addition, our reported results of operations are
affected by changes in the Euro exchange rate relative to the
U.S. dollar. Exchange rate fl uctuations can have a material
impact on our fi nancial results because substantially all of our
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pulp mill’s expenses are incurred in Canadian dollars and
our pulp revenues are denominated in U.S. dollars. For the
year ended December 31, 2007, 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 re-measurement
losses. In addition, our reported operating results are
affected by changes in the exchange rates of the Canadian
dollar and Euro relative to the U.S. dollar. For the year ended
December 31, 2007, a hypothetical 10 percent increase
in the exchange rates of the Canadian dollar and the Euro
relative to the U.S dollar would have decreased our income
before income taxes by approximately $1.6 million and
$2.1 million, respectively. Our exposure to such exchange
risk on reported operating results is not hedged.
From time-to-time, we use hedging arrangements
to reduce our exposure to Canadian dollar exchange rate
fl uctuations, although these arrangements could result in
us incurring higher costs than we would incur without the
arrangements. At December 31, 2007 we had foreign currency
contracts outstanding in a notional amount of $3.4 million
Canadian dollars designated as cash fl ow hedges of U.S. dol-
lar denominated pulp sales. The fair value of the contracts
was a current asset of $0.5 million U.S. dollars. The weighted
average exchange rate for the foreign currency contracts at
December 31, 2007 was $0.852 U.S. dollars per Canadian
dollar and the contracts extend through February 2008.
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 sensitivity test
to quantify the effects that possible changes in the exchange
rate of the U.S. dollar would have on our pre-tax income
based on the transactional exposure at December 31, 2007.
The effect is calculated by multiplying our net monetary asset
or liability position by a 10 percent 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 follows. As of December 31,
2007, a 10 percent 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 pre-tax losses of approximately $2 million and
$4 million, respectively.
Finally, the translation of the balance sheets of our
Canadian operations from Canadian dollars into U.S. dollars
and our German operations from Euros into U.S. dollars also
are sensitive to changes in the exchange rate of the U.S. dollar
against the Canadian dollar and Euro, respectively. Con-
se quently, we performed a sensitivity test to determine if
changes in the exchange rate would have a signifi cant effect
on the translation of the balance sheets of our Canadian
operations and German operations into U.S. dollars. These
translation gains or losses are recorded as unrealized trans-
lation adjustments (“UTA”, a component of comprehensive
income) within stockholders’ equity. The hypothetical change
in UTA is calculated by multiplying the net assets of our
Canadian and German operations by a 10 percent change in
the U.S.$/Canadian$ and U.S.$/Euro exchange rates, respec-
tively. The results of this sensitivity test are presented in the
following paragraph.
As of December 31, 2007, a 10 percent 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
$13 million and $28 million, respectively. The hypotheti-
cal increase in UTA is based on the difference between
the December 31, 2007 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 fl ows and fi nancial 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 profi tability 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 availability,
the fi nancial 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 busi-
ness cycles in the pulp industry.
From time-to-time, we have used hedging arrange-
ments to reduce our exposure to pulp price fl uctuations,
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 fl uctuations in pulp prices through
December 2006. At December 31, 2007 and 2006, we had
no outstanding pulp future contracts.
Based on 2007 shipment volume, a 10 percent
decrease in the market price for northern bleached softwood
kraft pulp (excluding the impact of volume and other dis-
counts) would reduce pretax income of our Pulp segment by
approximately $22.6 million.
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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 L Y S I S
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 signifi cant infl uence 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 mate-
rial or energy prices could occur at the same time that prices
for our products are decreasing and have an adverse effect
on our results of operations, fi nancial position and cash fl ows.
We obtain a portion of the wood fi ber 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 fi ber, and we also obtain fi ber
harvested from timberland areas licensed to others by this
government. There can be no assurance that the amount
of fi ber that we are allowed to harvest from these licensed
areas will not be decreased, or that our licenses will continue
to be renewed or extended by the governments on accept-
able terms. In the area where our Pictou mill is located, there
is increasing competition for wood fi ber from various other
users. Changes in governmental practices and policies as
they apply to us and to others from whom we obtain fi ber
may result in less fi ber being available, increased costs to
obtain the fi ber and additional expense in meeting forestry
standards. These results could have a material adverse
effect upon our fi nancial position, liquidity and results
of operations.
In 2007, two suppliers provided over 60 percent 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 prod-
ucts 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 and approximately
20 percent of the electrical energy at our Bruckmühl and
Appleton mills. Availability of energy is not expected to be a
problem in the foreseeable future, but the purchase price of
such energy can and likely will fl uctuate signifi cantly based
on fl uctuations in demand and other factors. 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 that we will be able to obtain
electricity or natural gas purchases on favorable terms in
the future.
I N T E R E S T R A T E R I S K
We are exposed to interest rate risk on our fi xed 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 fl ows from our variable-rate debt and on the market
value of our fi xed-rate debt. At December 31, 2007, we had
$239.6 million of long-term fi xed-rate debt outstanding and
$81.6 million of long-term variable-rate borrowings outstand-
ing. We are exposed to fl uctuations in the fair value of our
fi xed-rate long-term debt resulting from changes in market
interest rates, but not to fl uctuations in our earnings or cash
fl ows. At December 31, 2007, the fair market value of our
fi xed-rate long-term debt was $215.5 million based upon the
quoted market price of the senior notes or rates currently
available to us for debt of the same remaining maturities.
A 100 basis point increase in interest rates would increase
our annual interest expense on outstanding variable-rate
borrowings by approximately $0.9 million.
We could in the future, reduce our exposure to
interest rate fl uctuations 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 T A L R E G U L A T I O N
Our manufacturing operations are subject to extensive
regulation primarily by U.S., Canada, Germany and other
international authorities. We have made signifi cant capital
expenditures to comply with environmental laws, rules and
regulations. Due to changes in environmental laws and regu-
lations, 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 environmental purposes. Taking these uncertain-
ties into account, we have planned capital expenditures for
environmental 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, we
do not currently anticipate any material capital expenditures
would be required at the Pictou mill related to the effl uent
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 consoli-
dated fi nancial position, results of operations or cash fl ows.
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The Company’s management is responsible for establish-
ing and maintaining effective internal control over fi nancial
reporting as defi ned in Rules 13a-15(f) or 15a-15(f) under
the Securities Exchange Act of 1934. The Company’s inter-
nal control over fi nancial reporting is designed to provide
reasonable assurance to the Company’s management and
board of directors regarding the preparation and fair presen-
tation of published fi nancial statements.
Because of its inherent limitations, internal control
over fi nancial reporting may not prevent or detect misstate-
ments. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect
to fi nancial statement preparation and presentation.
Management assessed the effectiveness of the
Company’s internal control over fi nancial reporting as of
December 31, 2007. The scope of management’s assessment
of the effectiveness of internal control over fi nancial reporting
includes all of the Company’s businesses except for Fox River
manufacturing operations acquired in March 2007. Fox
River constituted approximately 15 percent and 9 percent
of net and total assets, respectively, and 15 percent of rev-
enues, and 27 percent of net income of the consolidated
fi nancial statement amounts as of and for the year ended
December 31, 2007. Further discussion of this acquisition can
be found in Note 4 to our consolidated fi nancial statements.
In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control –
Integrated Framework. Based upon its assessment, manage-
ment believes that as of December 31, 2007, the Company’s
internal controls over fi nancial reporting were not effective.
As a result of identifying the material weakness described
below, the Company performed additional analysis and other
post-closing procedures to ensure its consolidated fi nan-
cial statements are prepared in accordance with generally
accepted accounting principles.
A material weakness is a signifi cant control defi ciency,
or a combination of signifi cant control defi ciencies, such that
there is a reasonable possibility that a material misstatement of
the Company’s annual or interim fi nancial statements will not be
prevented or detected on a timely basis.
CO NT ROLS OVER INCOME TAX ACCO UNTING: The
Company did not maintain effective controls over the deter-
mination and reporting of the provision for income taxes and
related income tax balances. Specifi cally, the requisite level
of skills and resources in accounting for income taxes is inad-
equate and the Company’s procedures for preparing, analyz-
ing, reconciling and reviewing its income tax provision and
income tax balance sheet accounts did not provide effective
internal control. Spreadsheets supporting the calculation of
income tax balances are inadequately controlled and are sus-
ceptible to manual input errors.
Despite these control defi ciencies, management
believes that the consolidated fi nancial statements are fairly
stated in all material respects as of and for the year ended
December 31, 2007. However, until such control defi ciency
is remediated, it is reasonably possible that these control
defi ciencies could result in a material misstatement of the
provision for income taxes and related income tax balances
in the Company’s annual or interim consolidated fi nancial
statements that would not be prevented or detected on a
timely basis. Therefore, management has concluded that, as
of December 31, 2007, there is a material weakness in inter-
nal control over fi nancial reporting as it relates to accounting
for income taxes that resulted from a defi ciency in the opera-
tion of internal control.
The effectiveness of internal control over fi nancial
reporting as of December 31, 2007, has been audited by
Deloitte & Touche LLP, the independent registered public
accounting fi rm who also audited the Company’s consoli-
dated fi nancial statements. Deloitte & Touche’s attestation
report on the Company’s internal control over fi nancial
reporting is included herein.
Neenah Paper, Inc.
March 13, 2008
/ 64
Neenah Paper, Inc. 2007 Annual Report
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4/17/08 5:56:53 PM
To the Board of Directors and Stockholders of
Neenah Paper, Inc., Alpharetta, Georgia
We have audited Neenah Paper, Inc. and subsidiaries’ (the
“Company’s”) internal control over fi nancial reporting as of
December 31, 2007, 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 fi nancial report-
ing at Fox River, which was acquired in March 2007 and
whose fi nancial statements constitute 15 percent and 9
percent of net and total assets, respectively, 15 percent of
revenues and 27 percent of net income of the consolidated
fi nancial statement amounts as of and for the year ended
December 31, 2007. Accordingly, our audit did not include
the internal control over fi nancial reporting at Fox River.
The Company’s management is responsible for maintaining
effective internal control over fi nancial reporting and for its
assessment of the effectiveness of internal control over fi nan-
cial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s
internal control over fi nancial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether effective internal control over fi nancial reporting
was maintained in all material respects. Our audit included
obtaining an understanding of internal control over fi nancial
reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effective-
ness of internal control based on that risk, and performing
such other procedures as we considered necessary in the cir-
cumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over fi nancial report-
ing is a process designed by, or under the supervision of, the
company’s principal executive and principal fi nancial offi -
cers, or persons performing similar functions, and effected
by the company’s board of directors, management, and
other personnel to provide reasonable assurance regard-
ing the reliability of fi nancial reporting and the preparation
of fi nancial statements for external purposes in accordance
with generally accepted accounting principles. A company’s
internal control over fi nancial reporting includes those poli-
cies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
refl ect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of fi nancial
statements in accordance with generally accepted account-
ing principles, and that receipts and expenditures of the
company are being made only in accordance with authori-
zations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposi-
tion of the company’s assets that could have a material effect
on the fi nancial statements.
Because of the inherent limitations of internal con-
trol over fi nancial reporting, including the possibility of collu-
sion 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 evalua-
tion of the effectiveness of the internal control over fi nancial
reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in con-
ditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A material weakness is a defi ciency, or a combination
of defi ciencies, in internal control over fi nancial reporting, such
that there is a reasonable possibility that a material misstate-
ment of the company’s annual or interim fi nancial statements
will not be prevented or detected on a timely basis.
The following material weakness has been identifi ed
and included in management’s assessment: The Company did
not maintain effective internal controls over the determination
and reporting of the provision for income taxes and related
income tax balances. Specifi cally, the requisite level of skills
and resources in accounting for income taxes is inadequate
and the Company’s procedures for preparing, analyzing, rec-
onciling and reviewing its income tax provision and income tax
balance sheet accounts do not provide for effective internal
controls to account for income taxes and the related income
tax balances in accordance with generally accepted account-
ing principles. Spreadsheets supporting the calculation of
income tax balances are inadequately controlled and are sus-
ceptible to manual input errors. These control defi ciencies
result in a reasonable possibility that material misstatements of
the Company’s annual or interim consolidated fi nancial
/ 65
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4/17/08 5:56:56 PM
R E P O R T O F 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
O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G
statements will not be prevented or detected on a timely
basis. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our
audit of the consolidated fi nancial statements as of and for the
year ended December 31, 2007, of the Company and this
report does not affect our report on such fi nancial statements.
In our opinion, because of the effect of the material
weakness identifi ed above on the achievement of the objectives
of the control criteria, the Company has not maintained effec-
tive internal control over fi nancial reporting as of December 31,
2007, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States), the consolidated fi nancial statements
as of and for the year ended December 31, 2007, of the
Company and our report dated March 13, 2008 expressed
an unqualifi ed opinion on those fi nancial statements and
included an explanatory paragraph regarding the adoption of
Financial Accounting Standards Board Interpretation No. 48
“Accounting for Uncertainty in Income Taxes – an interpreta-
tion of FASB Statement No. 109” on January 1, 2007 and
the adoption of the recognition and disclosure provisions
of Statement of Financial Accounting Standards No. 158,
“Employers Accounting for Defi ned Benefi t Pension and
Other Postretirement Plans,” on December 31, 2006 and the
provisions of Statement of Financial Accounting Standards
No 123(R), “Share-Based Payment,” on January 1, 2006.
Atlanta, Georgia
March 13, 2008
/ 66
Neenah Paper, Inc. 2007 Annual Report
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4/17/08 5:56:58 PM
report of independent registered public accounting fi rm
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, 2007 and 2006, and the related consoli-
dated statements of operations, changes in stockholders’
equity, and cash fl ows for each of the three years in the
period ended December 31, 2007. These fi nancial state-
ments are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the fi nancial
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 fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
fi nancial statements. An audit also includes assessing the
accounting principles used and signifi cant estimates made
by management, as well as evaluating the overall fi nancial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated fi nancial state-
ments present fairly, in all material respects, the fi nancial posi-
tion of Neenah Paper, Inc. and subsidiaries at December 31,
2007 and 2006, and the results of their operations and their
cash fl ows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 7, the Company adopted
the provisions of Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement
No. 109”on January 1, 2007. Also, as discussed in Notes 9
and 10, respectively, the Company adopted the recogni-
tion and disclosure provisions of Statement of Financial
Accounting Standards No. 158, “Employers Accounting for
Defi ned Benefi t Pension and Other Postretirement Plans,”
on December 31, 2006 and the provisions of Statement of
Financial Accounting Standards No 123(R), “Share-Based
Payment,” on January 1, 2006.
We have also audited, in accordance with the stan-
dards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over fi nancial
reporting as of December 31, 2007, 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 13, 2008
expressed an adverse opinion on the Company’s internal
control over fi nancial reporting.
Atlanta, Georgia
March 13, 2008
/ 67
Neenah Paper, Inc. 2007 Annual Report
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consolidated statements of operations
(In millions, except share and per share data)
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Gain on sale of woodlands (Note 6)
Other income – 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, net of taxes (Note 5)
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,
2007
2006
2005
$ 990.5
852.9
137.6
82.4
(6.2)
(5.5)
66.9
25.5
(0.4)
41.8
3.9
37.9
(27.7)
$ 10.2
$ 2.55
(1.86)
$ 0.69
$ 2.50
(1.83)
$ 0.67
$ 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
$ 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)
14,874
15,141
14,757
14,847
14,739
14,787
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Neenah Paper, Inc. 2007 Annual Report
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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
Goodwill (Note 4)
Intangible Assets – net (Note 4)
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 Benefi ts and Other Obligations
TOTAL LIABILITIES
Commitments and Contingencies (Notes 12 and 13)
Stockholders’ Equity
Common stock, par value $0.01 – authorized: 100,000,000 shares;
issued and outstanding: 14,968,650 shares and 14,811,520 shares
Treasury stock, at cost: 13,544 shares and 1,999 shares
Additional paid-in capital
Accumulated defi cit
Accumulated other comprehensive income
Total Stockholders’ Equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See Notes to Consolidated Financial Statements
December 31,
2007
2006
$ 2.4
145.4
110.6
1.9
29.9
290.2
432.3
55.4
106.6
33.6
14.7
$ 932.8
$ 10.9
86.9
72.1
169.9
321.2
30.4
123.3
644.8
$ 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
(0.4)
235.3
(45.5)
98.5
288.0
$ 932.8
0.1
(0.1)
224.7
(49.7)
9.9
184.9
$ 744.7
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consolidated statements of change in stockholders’ equity
Common Stock
Shares
Amount
Treasury
Stock
Paid-In Accumulated
Defi cit
Capital
Additional
Accumulated
Other
Compre-
hensive
Income
Unearned
Compen-
sation on
Restricted
Stock
Compre-
hensive
Income/(Loss)
14,763
$0.1
$ –
$218.3
$ (70.7)
(29.7)
$ 51.6
$(2.2)
(In millions,
shares in thousands)
Balance, December 31, 2004
Net loss
Other comprehensive income
Unrealized foreign
currency translation
Minimum pension liability
Gain on cash fl ow hedges
Dividends declared
Restricted stock unit vesting
Stock-based compensation
awards, less amortization
Other (Note 9)
Balance, December 31, 2005
Net income
Other comprehensive income
Unrealized foreign
currency translation
Minimum pension liability
Loss on cash fl ow 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 11)
Stock-based compensation
Balance, December 31, 2006
Net income
Other comprehensive income
Unrealized foreign
currency translation
Adjustment to pension and
other benefi t liabilities
Loss on cash fl ow hedges
Dividends declared
Excess tax benefi ts from
3
14,766
0.1
–
43
3
(0.1)
14,812
0.1
(0.1)
0.4
0.7
219.4
(1.8)
1.3
5.8
224.7
stock-based compensation
Stock options exercised
Restricted stock vesting (Note 11)
Stock-based compensation
Balance, December 31, 2007
124
33
(0.3)
14,969
$0.1
$(0.4)
0.5
3.7
6.4
$235.3
See Notes to Consolidated Financial Statements
$(29.7)
10.1
(12.5)
4.7
$(27.4)
$ 62.5
12.8
2.9
(4.3)
$ 73.9
$ 10.2
58.0
30.7
(0.1)
$ 98.8
(5.9)
(106.3)
62.5
(5.9)
10.1
(12.5)
4.7
53.9
12.8
2.9
(4.3)
(55.4)
0.4
(1.8)
1.8
(49.7)
10.2
9.9
–
58.0
30.7
(0.1)
(6.0)
$ (45.5)
$ 98.5
$ –
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Neenah Paper, Inc. 2007 Annual Report
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consolidated statements of cash fl ows
(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
Gain on sale of woodlands (Note 6)
Asset impairment loss
Loss on disposal of Terrace Bay (Note 5)
(Gain) loss on other asset dispositions
Net cash provided by (used in) changes in operating working capital, net of
effects of acquisitions (Note 16)
Excess tax benefi t from stock-based compensation
Pension and other post-employment benefi ts
Loss on curtailment and settlement of pension plan (Note 5)
Contribution to settle pension liabilities (Note 5)
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Acquisition of Fox River, net of cash acquired (Note 4)
Net proceeds from sale of woodlands (Note 6)
Payment for transfer of Terrace Bay
Acquisition of Neenah Germany, net of cash acquired (Note 4)
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
Excess tax benefi t from stock-based compensation
Other
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 Financial Statements
Year Ended December 31,
2007
2006
2005
$ 10.2
$ 62.5
$ (29.7)
45.3
6.4
(26.8)
(6.2)
–
–
(0.8)
–
(0.5)
4.1
38.7
–
(0.9)
69.5
(58.3)
(54.7)
–
–
(1.5)
1.1
(113.4)
78.1
(1.1)
(34.1)
8.0
(5.0)
(6.0)
3.7
0.5
(0.3)
43.8
0.9
0.8
1.6
2.4
$
30.2
5.8
30.0
(125.5)
–
6.5
0.8
39.8
–
0.3
26.4
(10.8)
(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
(10.1)
–
(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
/ 71
Neenah Paper, Inc. 2007 Annual Report
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notes to consolidated fi nancial statements
(Dollars in millions, except as noted)
Products Ltd. (“Buchanan”). Buchanan acquired substantially
all of the assets of Terrace Bay and assumed responsibility for
substantially all of the liabilities related to its future opera-
tion in exchange for a cash payment of $18.6 million. For the
year ended December 31, 2007, the loss from discontinued
operations primarily refl ects costs associated with Terrace
Bay’s defi ned benefi t pension plan. The results of opera-
tions of Terrace Bay are reported as discontinued operations
on the consolidated statements of operations for the years
ended December 31, 2007, 2006 and 2005. See Note 5,
“Discontinued Operations.”
In October 2006, the Company purchased
the stock of FiberMark Services GmbH & Co. KG and the
stock of FiberMark Beteiligungs GmbH (collectively,
“Neenah Germany”). Neenah Germany was acquired from
FiberMark, Inc. (“FiberMark”) and FiberMark International
Holdings LLC for $220.1 million in cash (net of cash
acquired). The transaction was fi nanced from available cash
and debt drawn against the Company’s existing revolving
credit facility. The Neenah Germany assets consist of two
mills located near Munich, Germany and a third mill near
Frankfurt, Germany, that produce a wide range of products,
including transportation and other fi lter media, nonwoven
wall coverings, masking and other tapes, abrasive back-
ings, and specialized printing and coating substrates. The
results of Neenah Germany are being reported as part of
the Company’s Technical Products segment and have been
included in the Company’s consolidated fi nancial results
since the acquisition date. See Note 4, “Acquisitions.”
In March 2007, the Company acquired the stock of
Fox Valley Corporation and its subsidiary, Fox River Paper
Company, LLC (collectively, “Fox River”) for approximately
$54.7 million in cash (net of cash acquired). The Company
fi nanced the acquisition through a combination of cash and
debt drawn against its existing revolving credit facility. The
Fox River assets consist of four U.S. paper mills and various
related assets. The results of Fox River are being reported as
part of the Company’s Fine Paper segment and have been
included in the Company’s consolidated fi nancial results
since the acquisition date. See Note 4, “Acquisitions,” for
a summary of the allocation of the purchase price to the
fair value of assets acquired and liabilities assumed, and a
description of certain post-acquisition restructuring activities.
B A S I S O F P R E S E N T A T I O N
The consolidated fi nancial statements include the fi nancial
statements of the Company and its wholly owned and major-
ity owned subsidiaries. All signifi cant inter-company balances
and transactions have been eliminated in consolidation.
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 fi ne paper and technical prod-
ucts businesses in the United States and its pulp business
in Canada (collectively, the “Pulp and Paper Business”).
In November 2004, Kimberly-Clark completed the distribu-
tion of all of the shares of Neenah’s common stock to the
stockholders of Kimberly-Clark (the “Spin-Off”). 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 continued as an indepen-
dent publicly held company. Kimberly-Clark has no continu-
ing stock ownership in Neenah.
The Company’s fi ne paper business is a leading
producer of premium writing, text, cover and specialty
papers. The Company’s technical products business is a
leading producer of transportation and other fi lter media,
durable, saturated and coated base papers for a variety of
end uses and nonwoven wall coverings. The Company’s pulp
business primarily produces northern bleached softwood
kraft pulp used by paper mills to manufacture tissue and
printing and writing papers. At the time of the Spin-Off, the
pulp business consisted of pulp mills in Terrace Bay, Ontario
and Pictou, Nova Scotia and the related woodlands (includ-
ing 1,000,000 acres in Nova Scotia).
In June 2006, the Company’s wholly owned sub-
sidiary, Neenah Paper Company of Canada (“Neenah
Canada”) sold approximately 500,000 acres of woodlands
in Nova Scotia for $139.1 million (proceeds net of trans-
action costs were $134.8 million). The woodlands sale
agreement included a fi ber supply agreement to secure a
source of fi ber for Neenah Canada’s Pictou pulp mill. The
transaction resulted in a net pre-tax gain of $131.7 million.
Approximately $9 million of such gain was deferred and was
recognized in income pro rata through December 2007.
See Note 6, “Sale of Woodlands.”
In August 2006, Neenah Canada transferred the
Terrace Bay, Ontario pulp mill and related woodlands opera-
tions (“Terrace Bay”) to certain affi liates of Buchanan Forest
/ 72
Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
two
Summary of Signifi cant Accounting Policies
U S E O F E S T I M A T E S
The preparation of fi nancial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities at the date of the fi nancial 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. Signifi cant management judgment is required
in determining the accounting for, among other things,
pension and post-employment benefi ts, retained insurable
risks, allowances for doubtful accounts and reserves for sales
returns and cash discounts, purchase price allocations, use-
ful lives for depreciation, depletion and amortization, future
cash fl ows associated with impairment testing for tangible
and intangible long-lived assets, income taxes, contingen-
cies, 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 fi xed
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 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 discounts,
trade allowances and sales returns are estimated using his-
torical experience.
E A R N I N G S P E R S H A R E ( “ E P S ” )
Basic EPS are computed by dividing net income (loss) by the
number of weighted average shares of common stock out-
standing. 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
/ 73
Neenah Paper, Inc. 2007 Annual Report
units with performance conditions represent the only poten-
tially dilutive effects on the Company’s weighted-average
shares. For the years ended December 31, 2007, 2006 and
2005, approximately 335,000, 1,095,000 and 790,000 poten-
tially dilutive options, respectively, were excluded from the
computation of dilutive common shares because their inclu-
sion would be antidilutive.
The following table presents the computation of
basic and diluted shares of common stock used in the calcu-
lation of EPS (amounts in thousands):
Basic shares outstanding
Add: Assumed incremental
shares under stock
compensation plans
Assuming dilution
Year Ended December 31,
2007
2006
2005
14,874
14,757
14,739
267
15,141
90
14,847
48
14,787
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 fi nancial institutions.
From time-to-time, the Company uses derivative
instruments to manage exposures to foreign currency and
commodity price risks. The Company principally uses foreign
currency forward and pulp future contracts to hedge against
these exposures. Derivative instruments are recorded on
the balance sheet as assets or liabilities and measured at fair
market value. Derivative instruments that have been desig-
nated as hedges of anticipated future cash fl ows are marked-
to-market through accumulated other comprehensive
income (balance sheet adjustments) until such time as the
related forecasted 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 fl ow hedges to specifi c
forecasted transactions. The Company also assesses and
documents, both at the hedge’s inception and on an ongo-
ing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash
fl ows associated with the hedged items. Any hedge ineffec-
tiveness is charged to expense in the period incurred.
I N V E N T O R I E S
U.S. inventories are valued at the lower of cost, using the
Last-In, First-Out (LIFO) method for fi nancial reporting pur-
poses, or market. Canadian and German inventories are
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
valued at the lower of cost, using either the First-In, First-Out
(FIFO) or a weighted-average cost method, or market. The
FIFO value of inventories valued on the LIFO method was
$45.2 million and $37.9 million at December 31, 2007 and
2006, respectively. Cost includes labor, materials and pro-
duction overhead. Inventories of the Canadian pulp opera-
tions include both roundwood (logs) and wood chips. These
inventories are located both at the pulp mill and at various
timberlands locations. In accordance with industry practice,
physical inventory counts utilize “scaling” techniques to esti-
mate quantities of roundwood, as well as various electronic
devices to calculate wood chip inventory amounts. These
techniques historically have provided reasonable 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 accounts 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’ equity. Gains and losses resulting from foreign
currency transactions (transactions denominated in a cur-
rency other than the entity’s functional currency) are included
in Other (income) expense-net in the consolidated statements
of operations.
P R O P E R T Y A N D D E P R E C I A T 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 fi nancial reporting purposes,
depreciation is principally computed on the straight-line
method over the estimated useful asset lives. Weighted aver-
age useful lives are approximately 33 years for buildings,
nine years for land improvements and 17 years for machinery
and equipment. The cost of permanent and secondary log-
ging roads is capitalized and amortized over the estimated
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.
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 pre-tax cash fl ows 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
fl ows. See Note 5 “Discontinued Operations” for a discus-
sion of asset impairment losses recorded for the year ended
December 31, 2005 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 mainte-
nance 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 timber-
lands 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 fertil-
ization, 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 capitalized costs, exclud-
ing 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 administration,
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 tim-
ber that is mature enough to be harvested and processed.
Timber inventory volume is determined by adding an esti-
mate of current-year growth to the prior-year ending bal-
ance, 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 harvested in
the subsequent year.
/ 74
Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
G O O D W I L L A N D O T H E R I N T A 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 identifi able 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 4, “Acquisitions.”
Under Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (“SFAS 142”),
goodwill is subject to impairment testing at least annu-
ally. 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 a market approach in
combination with an estimate of future cash fl ows and a risk
adjusted discount rate to compute a net present value of future
cash fl ows. 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
unrecognized 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, 2007 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 relationships,
trade names and acquired intellectual property. Such intangi-
ble assets are being amortized using the straight-line method
over estimated useful lives of between 10 and 15 years.
Certain trade names valued at $10.0 million are estimated
to have indefi nite useful lives and as such are not being
amortized. Intangible assets with indefi nite lives are annually
reviewed for impairment in accordance with SFAS 144.
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 administra-
tive expenses” on the consolidated statement of operations.
F A I R V A 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 refl ected 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 cur-
rent market prices for the Company’s publicly traded debt or rates currently available to the Company for debt of the same
remaining maturities. The following table presents the carrying value and the fair value of the Company’s long-term debt at
December 31, 2007 and 2006.
Senior Notes (7.375% fi xed rate)
Neenah Germany project fi nancing (3.8% fi xed rate)
Revolving bank credit facility (variable rates)
Term Loan (variable rates)
Long-term debt
December 31, 2007
December 31, 2006
Carrying
Value
Fair
Fair Value
$225.0
14.6
66.2
15.4
$321.2
$204.9
10.6
66.2
15.4
$297.1
Carrying
Value
$225.0
–
57.3
–
$282.3
Fair
Value
$216.0
–
57.3
–
$273.3
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, gains and losses recorded directly into a separate section of
stockholders’ equity on the consolidated balance sheet. These gains and losses are referred to as other comprehensive
income items. The accumulated other comprehensive income (loss) shown on the consolidated balance sheets consists
of foreign currency translation gains and (losses), deferred gains and (losses) on cash fl ow hedges, and deferred gains and
(losses) related to pensions and other post-employment benefi ts. The foreign currency translation adjustments are not
adjusted for income taxes since they relate to indefi nite investments in the Canadian pulp operations and Neenah Germany.
/ 75
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Changes in the components of other comprehensive income (loss) are as follows:
2007
Year Ended December 31,
2006
2005
Pretax
Amount
Tax
Effect
Net
Amount
Pretax
Amount
Tax
Effect
Net
Amount
Pretax
Amount
Tax
Effect
Net
Amount
$ 58.0
$ –
$58.0
$12.8
$ –
$12.8
$ 10.1
$ –
$ 10.1
48.2
(17.5)
30.7
–
4.6
–
–
–
–
–
(1.7)
2.9
(20.5)
8.0
(12.5)
–
(0.1)
(6.8)
2.5
(4.3)
7.4
(2.7)
4.7
–
(0.1)
–
–
Foreign currency
translation
Adjustment to
pension and other
benefi t liabilities
Minimum pension
liability
Deferred gain (loss)
on cash fl ow hedges
Other comprehensive
income (loss)
$106.1
$(17.5)
$88.6
$10.6
$ 0.8
$11.4
$ (3.0)
$ 5.3
$ 2.3
The components of accumulated other compre-
hensive income (loss), net of applicable income taxes are
as follows:
December 31,
2007
$138.8
2006
$80.8
Foreign currency translation
Adjustment to pension and other benefi t
liabilities (net of income tax benefi ts of
$25.6 million and $43.1 million,
respectively)(a)
(40.6)
(71.3)
Deferred gain on cash fl ow hedges
(net of income tax expense of
$0.2 million and $0.2 million,
respectively)
Accumulated other comprehensive income
0.3
$ 98.5
0.4
$ 9.9
(a) Adjustment to pension and other liabilities at December 31, 2006, includes
an adjustment of ($55.4) million, net of income tax benefi ts of $33.2 million
related to the Company’s initial adoption of SFAS No. 158. See Note 9,
“Post-Employment and Other Benefi ts.”
A C C O U N T I N G S T A N D A R D S C H A N G E S
On January 1, 2007, the Company adopted FASB Interpre-
tation No. 48, Accounting for Uncertainty in Income Taxes
– an interpretation of FASB Statement No. 109 (“FIN 48”).
FIN 48 clarifi es the accounting for uncertainty in income
taxes recognized in an enterprise’s fi nancial statements
in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The
Company’s adoption of FIN 48 resulted in a $1.0 million
increase in its liability for uncertain income tax positions.
See Note 7, “Income Taxes.”
In September 2006, the FASB issued Statement
of Financial Accounting Standards No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defi nes fair value,
establishes a framework for measuring fair value under
GAAP and expands disclosures about fair value measure-
ments. SFAS 157 applies to other accounting pronounce-
ments that require or permit fair value measurements but
does not require any new fair value measurements.
The defi nition of fair value in SFAS 157 retains the
exchange price notion in earlier defi nitions of fair value and
emphasizes that fair value is a market-based measurement,
not an entity-specifi c measurement. SFAS 157 expands dis-
closures 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 fi nancial statements
issued for fi scal years beginning after November 15, 2007,
and interim periods within those fi scal years. The adoption
of SFAS 157 is not expected to have a material effect on
the Company’s fi nancial position, results of operations or
cash fl ows.
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 mea-
sure many fi nancial instruments and certain other items at
fair value that are not currently required to be measured
at fair value. The objective is to improve fi nancial report-
ing 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 provi-
sions 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 fi scal years
beginning after November 15, 2007. Early adoption is per-
mitted as of the beginning of a fi scal year that begins on or
/ 76
Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
before November 15, 2007, provided the entity also elects to
apply the provisions of FASB Statement No. 157, Fair Value
Measurements. The adoption of SFAS 159 is not expected to
have a material effect on the Company’s fi nancial position,
results of operations or cash fl ows.
In December 2007, the FASB issued Statement
of Financial Accounting Standards No. 141 (revised 2007),
Business Combinations (“SFAS 141R”). SFAS 141R estab-
lishes principles and requirements for how the acquirer in
a business combination (i) recognizes and measures the
identifi able assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, (ii) recognizes and
measures the goodwill acquired in the business combina-
tion or a gain from a bargain purchase and (iii) determines
what information to disclose to enable users of the fi nancial
statements to evaluate the nature and fi nancial effects of the
business combination. In addition, SFAS 141R will require,
subsequent to the acquisition period, changes in the valu-
ation allowance for deferred tax assets and liabilities for
unrecognized tax benefi ts related to an acquisition to be rec-
ognized as a component of income tax expense. SFAS 141R
applies prospectively to business combinations completed
during annual reporting period beginning on or after
December 15, 2008. The Company is evaluating SFAS 141R
and will apply the provisions of the new standard to business
combinations completed on or after January 1, 2009.
three
Risk Management
The Company is exposed to risks such as changes in foreign
currency exchange rates and pulp prices. A variety of prac-
tices are employed to manage these risks, including operat-
ing and fi nancing activities and, where deemed appropriate,
the use of derivative instruments. Derivative instruments are
used only for risk management purposes and not for specula-
tion or trading. All foreign currency derivative instruments
are either exchange traded or entered into with major fi nan-
cial institutions. Credit risk with respect to the counterpar-
ties is considered minimal in view of the fi nancial strength of
the counterparties. 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.
/ 77
Neenah Paper, Inc. 2007 Annual Report
In accordance with Statement of Financial
Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, the
Company records all derivative instruments as assets (included
in Prepaid and other current assets and Other Assets) or
liabilities (included in Accrued expenses or Other Noncurrent
Obligations) on the consolidated balance sheet at fair value.
Changes in the fair value of derivative instruments are either
recorded in income or other comprehensive income, as
appropriate. Unrealized gains or losses from changes in the
fair value of highly effective derivatives designated as cash
fl ow hedges are recorded in Accumulated other compre-
hensive income (loss) in the period that changes in fair value
occur and are reclassifi ed 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 fl ows and fi nancial condition of
the Company are subject to pulp price risk. Because the
price of pulp is established in U.S. dollars and the Company’s
cost of producing pulp is incurred principally in Canadian
dollars, the profi tability of the Company’s pulp operations is
subject to foreign currency risk. The Company uses foreign
currency forward contracts to manage its foreign currency
risks. In addition, the Company has used, from time-to-time,
pulp futures contracts to manage its pulp price risks. The
use of these instruments allows management of this transac-
tional exposure to exchange rate and pulp price fl uctuations
because the gains or losses incurred on the derivative instru-
ments are intended to offset, in whole or in part, losses or
gains on the underlying transactional exposure. (See “Cash
Flow Hedges” below). The translation exposure related to
the Company’s net investment in its Canadian and German
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 fi xed price
forward purchase contract to hedge fl uctuations in the price
of electricity at the Terrace Bay mill. The contract matured on
December 31, 2005 and was not replaced.
C A S H F L O W H E D G E S
At December 31, 2007, the Company had outstanding
foreign currency forward exchange contracts designated
as cash fl ow hedges of U.S dollar denominated pulp sales
in a notional amount of $3.4 million Canadian dollars. The
fair value of the contracts was a current asset of $0.5 mil-
lion U.S. dollars. The weighted-average exchange rate
for the foreign currency contracts at December 31, 2007
66500ne_fin 77
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
was $0.852 U.S. dollars per Canadian dollar. The contracts
extend through February 2008. At December 31, 2006,
the Company had outstanding foreign currency forward
exchange contracts designated as cash fl ow hedges of
U.S dollar denominated pulp sales in a notional amount
of $93 million Canadian dollars. The fair value of the con-
tracts was a current asset of $0.7 million U.S. dollars. The
weighted-average exchange rate for the foreign currency
contracts at December 31, 2007 was $0.854 U.S. dollars per
Canadian dollar.
The Company realized total pre-tax gains of
$6.7 million, $10.2 million and $4.3 million on foreign cur-
rency contracts as the forecasted transactions occurred in
the years ended December 31, 2007, 2006 and 2005, respec-
tively. Realized gains and losses on foreign currency forward
exchange contracts related to the Pictou mill are recorded
in Other (income) expense – net on the consolidated state-
ments of operations. Pre-tax gains of $2.6 million and
$2.3 million on foreign currency forward exchange contracts
related to the operations of Terrace Bay were recorded
in Loss from discontinued operations for the years ended
December 31, 2006 and 2005, respectively.
During 2006 and 2005, the Company entered into
a series of pulp futures contracts to hedge fl uctuations in
pulp prices through December 2006. At December 31, 2007
and 2006, the Company had no outstanding pulp futures
contracts. The Company realized total pre-tax 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 related to the Pictou mill
are recorded in Net sales on the consolidated statements
of operations. Pre-tax gains (losses) of $(1.5) million and
$0.4 million on pulp futures contracts related to the opera-
tions of Terrace Bay were recorded in Loss from discontinued
operations for the years ended December 31, 2006 and
2005, respectively.
with the rates assumed at December 31, 2007, a net pre-tax
gain of approximately $0.5 million (or $0.3 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, 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 contract 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 forward
contract are recorded in Other (income) expense – net on
the consolidated 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 statements of
operations. Total foreign currency transaction gains (losses)
for the years ended December 31, 2007, 2006 and 2005
were $(2.3) million, $(0.4) million and $0.1 million, respec-
tively. Losses of $0.4 million and $4.5 million on foreign cur-
rency transactions related to the operations of Terrace Bay
were recorded in Loss from discontinued operations in the
consolidated statements of operations for the years ended
December 31, 2006 and 2005, respectively.
For the year ended December 31, 2007, changes
Acquisitions
in the fair value of the Company’s derivative instruments
were refl ected in other comprehensive income. During the
same period in which the hedged forecasted transactions
affected earnings, the Company reclassifi ed approximately
$0.4 million, $3.8 million and $(36,000) of after-tax gains
(losses) from accumulated other comprehensive income
to earnings for the years ended December 31, 2007, 2006
and 2005, respectively. If future market rates are consistent
F O X R I V E R
In March 2007, the Company acquired the stock of Fox River
for $54.7 million in cash (net of cash acquired). Included in
the cost of the acquisition were amounts for the repayment
of debt, the payment of deferred employee compensa-
tion obligations of the acquired companies and fees and
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
expenses directly related to the acquisition. The Company
fi nanced the acquisition through a combination of cash and
debt drawn against its existing revolving credit facility. The
Fox River assets consist of four U.S. paper mills and various
related assets, producing premium fi ne papers with well-
known brands including STARWHITE,® SUNDANCE,® ESSE®
and OXFORD.® The results of Fox River are reported as
part of the Company’s Fine Paper segment and have been
included in the Company’s consolidated fi nancial results
since the acquisition date.
During the second quarter of 2007, the Company
closed the Housatonic mill, located near Great Barrington,
Massachusetts. At December 31, 2007, the long-lived assets
of the Housatonic mill are classifi ed as assets held for sale and
are recorded on the consolidated balance sheet in Prepaid
and other current assets at their estimated fair values less
costs to sell of $2.2 million. In June 2007, the Company
announced plans to permanently close the fi ne paper mill
located in Urbana, Ohio (the “Urbana mill”). Manufacturing
operations at the Urbana mill ceased in September 2007.
Converting operations at the Urbana mill are expected to be
phased out over the fi rst six months of 2008. The closure of
the Housatonic and Urbana mills will allow the Company to
maximize cost effi ciencies by shifting fi ne paper manufactur-
ing to utilize available capacity at its other fi ne paper mills. In
addition, the Company has completed the process of notifying
certain Fox River sales and administrative employees who will
be terminated as the acquired business is integrated with its
existing fi ne paper business. Approximately 325 former Fox
River employees will receive severance benefi ts in conjunction
with the closure and integration activities. All the preceding
integration activities were components of the Company’s plan
to exit certain activities of the acquired business and were
accounted for in accordance with Emerging Issues Task Force
Issue 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination (“EITF 95-3”).
The total cost of the acquisition has been allocated
to the assets acquired and liabilities assumed in accordance
with Statement of Financial Accounting Standards No. 141,
Business Combinations (“SFAS 141”). The values of certain
assets and liabilities are based on preliminary valuations
and are subject to adjustment as additional information is
obtained. Such additional information includes, but is not
limited to, gains or losses related to the settlement of post-
retirement obligations at closed facilities and the liability for
post-acquisition restructuring activities. The Company is in
the process of fi nalizing its valuations and purchase price
allocations which will be completed no later than one year
from the acquisition date. Changes to the valuation of assets
and liabilities acquired may result in adjustments to the car-
rying value of property, plant and equipment acquired. The
Company did not acquire any in-process research and devel-
opment assets as part of the acquisition. The following table
summarizes the preliminary allocation of the purchase price
to the estimated fair value of the assets acquired and liabili-
ties assumed at March 1, 2007:
Accounts receivable
Inventories
Current deferred income taxes
Assets held for sale
Prepaid and other current assets
Property, plant and equipment at cost
Unamortizable intangible assets
Amortizable intangible assets
Deferred income taxes
Other noncurrent assets
Total assets acquired
Accounts payable
Accrued salaries and employee benefi ts
Accrued expenses
Noncurrent employee benefi ts
Other noncurrent obligations
Total liabilities assumed
Net assets acquired
$ 18.8
34.6
0.1
2.2
1.8
32.1
2.6
0.3
17.8
0.1
110.4
13.3
5.5
13.9
17.6
5.4
55.7
$ 54.7
The preceding table includes approximately
$12.5 million for the cost of post-acquisition exit activities
that the Company recognized in accordance with EITF 95-3.
For the year ended December 31, 2007, severance benefi ts
of approximately $3.1 million had been paid to 230 employ-
ees and severance benefi ts of approximately $3.3 million
due to approximately 95 former Fox River employees
remained unpaid. Included in such amounts are approxi-
mately $2.2 million in severance benefi ts which will be
paid over a period of 18 to 36 months from the date of
acquisition pursuant to the terms of employment agree-
ments with certain former Fox River executives. For the year
ended December 31, 2007, the Company made payments
of approximately $0.7 million under such agreements. The
Company expects the payment of all other severance ben-
efi ts to be substantially complete by December 31, 2008.
/ 79
Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following table presents the status of post-ac-
quisition restructuring activities as of and for the year ended
December 31, 2007.
Post-Acquisition
Exit Costs
Payments
through
December 31,
2007
Accrued Exit
Costs as of
December 31,
2007
Severance benefi ts
Contract termination costs
Environmental clean-up
and monitoring
Total
$ 6.4
4.9
1.2
$12.5
$(3.1)
(1.5)
(0.2)
$(4.8)
$3.3
3.4
1.0
$7.7
The following selected unaudited pro forma con-
solidated statements of operations data for the years ended
December 31, 2007 and 2006 was prepared as though the
acquisition of Fox River had occurred on January 1, 2007 and
2006 (in millions, except per share data):
Net Sales
Operating income(a)(b)
Income from continuing operations
Loss from discontinued operations
Net income (loss)
Earnings Per Common Share:
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
Year Ended
December 31,
2007
2006
$1,023.3
67.4
37.8
(27.7)
10.1
$ 2.54
(1.86)
$ 0.68
$ 2.50
(1.83)
$ 0.67
$796.3
174.2
99.6
(32.9)
66.7
$ 6.75
(2.23)
$ 4.52
$ 6.71
(2.22)
$ 4.49
(a) Results for the year ended December 31, 2007, include $6.2 million for the
gain on sale of woodlands.
(b) Results for the year ended December 31, 2006, include $125.5 million for
the gain on sale of woodlands.
N E E N A H G E R M A N Y
In October 2006, the Company purchased the stock
of Neenah Germany from FiberMark and FiberMark
International Holdings LLC for $220.1 million in cash (net of
cash acquired). In addition, $1.5 million was paid in the fi rst
quarter of 2007 primarily for the adjusted value of working
capital at the acquisition date. The acquisition of Neenah
Germany was fi nanced through available cash and debt
drawn against the Company’s revolving credit facility. The
primary source of available cash used to fi nance the acquisi-
tion was proceeds from the sale of woodlands in June 2006.
The results of Neenah Germany are reported as part of the
Company’s Technical Products segment and have been
included in the Company’s consolidated fi nancial results
since the acquisition date.
The total cost of the acquisition has been allocated
to the assets acquired and liabilities assumed in accordance
with SFAS 141. The following table summarizes the fi nal allo-
cation of the purchase price to the estimated fair value of the
assets acquired and liabilities assumed at October 11, 2006:
Cash
Accounts receivable
Inventories
Receivable from FiberMark for income taxes
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 benefi ts and other obligations
Total liabilities assumed
Net assets acquired
$ 3.0
36.4
23.8
10.6
2.3
133.4
90.7
6.9
21.1
0.5
328.7
21.4
9.8
6.5
34.1
33.0
104.8
$223.9
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following unaudited condensed pro forma
consolidated statement of operations for the year ended
December 31, 2006, was prepared as though the Acquisition
had occurred on January 1, 2006 (in millions, except per
share data):
Net Sales
Operating income
Income from continuing operations
Loss from discontinued operations
Net income
Earnings Per Common Share:
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
2006
$770.0
183.9
101.4
(32.9)
68.5
$ 6.87
(2.23)
$ 4.64
$ 6.83
(2.22)
$ 4.61
The pro forma statement has been prepared for
comparative purposes only and is not intended to be indica-
tive of the Company’s results had the acquisition of Neenah
Germany occurred on January 1, 2006 or of its results in the
future. The Company used the proceeds from the sale of
woodlands in June 2006 (see Note 6 “Sale of Woodlands”)
to provide a substantial portion of the fi nancing for the
acquisition. As a result, the pro forma fi nancial statements
have been adjusted to present the effects of the sale of the
woodlands as if the sale occurred on January 1, 2006.
G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S
As of December 31, 2007, the Company had goodwill of
$106.6 million which is not amortized. The following table
presents changes in goodwill (all of which relates to the
Company’s Technical Products segment) for the years ended
December 31, 2007 and 2006:
Balance at December 31, 2005
Goodwill acquired in the acquisition of
Neenah Germany
Foreign currency translation
Balance at December 31, 2006
Foreign currency translation
Finalization of Neenah Germany purchase
price allocation
Balance at December 31, 2007
$ –
87.6
4.4
92.0
10.6
4.0
$106.6
O T H E R I N T A N G I B L E A S S E T S
As of December 31, 2007, the Company had net identifi able intangible assets of $33.6 million. The following table details
amounts related to those assets.
Cost
Balance at December 31, 2005
Amounts acquired in the acquisition of Neenah Germany
Balance at December 31, 2006
Less: Accumulated amortization
Balance at December 31, 2005
Amortization
Balance at December 31, 2006
Intangible assets – net at December 31, 2006
Cost
Balance at December 31, 2006
Amounts acquired in the acquisition of Fox River
Foreign currency translation
Balance at December 31, 2007
Less: Accumulated amortization
Balance at December 31, 2006
Amortization
Foreign currency translation
Balance at December 31, 2007
Intangible assets – net at December 31, 2007
Weighted average Amortization Period (Years)
/ 81
Neenah Paper, Inc. 2007 Annual Report
Trade
names
$ –
7.2
7.2
$ –
–
–
$ 7.2
$ 7.2
2.6
0.2
10.0
$ –
–
–
–
$10.0
Not amortized
Customer Trade names
and
intangibles Trademarks
based
Acquired
Technology
Total
Intangible
Assest
$ –
16.2
16.2
$ –
(0.2)
(0.2)
$16.0
$16.2
–
1.7
17.9
$ (0.2)
(1.2)
(0.1)
(1.5)
$16.4
15
$ –
5.3
5.3
$ –
(0.1)
(0.1)
$ 5.2
$ 5.3
0.3
1.3
6.9
$(0.1)
(0.6)
–
(0.7)
$ 6.2
10
$ –
1.1
1.1
$ –
–
–
$ 1.1
$ 1.1
–
0.1
1.2
$ –
(0.1)
(0.1)
(0.2)
$ 1.0
10
$ –
29.8
29.8
$ –
(0.3)
(0.3)
$29.5
$29.8
2.9
3.3
36.0
$ (0.3)
(1.9)
(0.2)
(2.4)
$33.6
10
66500ne_fin 81
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The intangible assets acquired in the Fox River
acquisition are reported within the Fine Paper segment. See
Note 15, “Business Segment and Geographic Information.”
Of the $2.9 million of acquired intangible assets identifi ed
in the purchase price allocation, $0.3 million was assigned
to registered trade names and trademarks with defi nite
lives and is being amortized over a weighted average use-
ful life of 7.5 years. The remaining balance of intangible
assets acquired of $2.6 million was assigned to registered
trade names and trademarks with indefi nite lives. Aggregate
amortization expense of acquired intangible assets for the
years ended December 31, 2007 and 2006 was $1.9 million
and $0.3 million, respectively. Estimated annual amortization
expense for each of the next fi ve years is $2.0 million.
fi ve
Discontinued Operations
T R A N S F E R O F T H E T E R R A C E B A Y M I L L
The Company suspended manufacturing operations at
Terrace Bay in February 2006 due to a lack of wood fi ber for its
operations as the result of a strike initiated in January 2006 by
workers employed by the woodlands operations that supplied
wood fi ber to the mill. Most of the hourly and salaried workers
employed at the mill were laid off during the two weeks fol-
lowing the suspension of manufacturing activities.
In August 2006, Neenah Canada transferred
Terrace Bay to Buchanan. Buchanan assumed responsibility
for substantially all liabilities related to the future operation
of Terrace Bay in exchange for a payment of $18.6 million.
At closing, Neenah Canada retained certain working capital
amounts, primarily trade accounts receivable, fi nished goods
inventory and trade accounts payable. In addition, Neenah
Canada retained pension and long-term disability obligations
for current and former mill employees and post-employment
medical and life insurance obligations for current retirees.
In conjunction with the transfer of Terrace Bay
to Buchanan and as a closing condition of the agreement,
Neenah Canada initiated plans to curtail and settle its
Ontario, Canada defi ned benefi t pension plan (“the Ontario
Plan”). In August 2006, Neenah Canada made a payment
to the pension trust of approximately $10.8 million for the
purchase of annuity contracts to settle its pension liability
for current retirees. As a result, Neenah Canada recognized
a pension curtailment and settlement loss of approximately
$26.4 million in the year ended December 31, 2006.
In July 2007, the Financial Services Commission of
Ontario approved the Company’s request to settle its pen-
sion obligations for active employees and terminate the
Ontario Plan. In December 2007, the Ontario Plan was ter-
minated and all outstanding pension obligations for active
employees were settled through the purchase of annuity
contracts or lump-sum payments pursuant to participant
elections. Neenah Canada recognized a non-cash pre-tax
settlement loss of $38.7 million upon termination of the
Ontario Plan. No additional funding was required to settle
the Ontario Plan.
The results of operations and loss on disposal of the
Terrace Bay mill are refl ected as discontinued operations in
the consolidated statements of operations for each period
presented. The following table presents the results of discon-
tinued operations:
Net sales, net of
intersegment sales
Discontinued Operations:
Loss from operations(a)(b)
Loss on disposal
Loss before income taxes
Benefi t for income taxes
Loss from discontinued
operations, net of taxes
Year Ended December 31,
2007
2006
2005
$ –
$ 46.0
$198.7
$(44.9)
–
(44.9)
17.2
$(46.8)
(6.5)
(53.3)
20.4
$ (84.2)
–
(84.2)
32.2
$(27.7)
$(32.9)
$ (52.0)
(a) For the year ended December 31, 2007, the loss from operations includes
a non-cash pre-tax loss of $38.7 million related to the settlement of the
Ontario Plan.
(b) For the year ended December 31, 2006, the loss from operations includes
a loss of $26.4 million related to the curtailment and partial settlement of
pension benefi ts for current retirees in the Ontario Plan.
In conjunction with the transfer of Terrace Bay, 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 Terrace Bay to satisfy the Company’s supply obligations
under an amended and restated pulp supply agreement with
Kimberly-Clark (as amended and restated, the “Pulp Supply
Agreement”). The price paid by the Company to TBPI under
the Pulp Manufacturing Agreement will equal the price paid
by Kimberly-Clark to the Company pursuant to the Pulp
Supply Agreement. TBPI has agreed to perform substantially
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
all of the Company’s obligations under the Pulp Supply
Agreement and, together with three of its affi liated compa-
nies, to indemnify and hold the Company harmless for any
claims arising from Terrace Bay’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 defi ned in the Pulp
Manufacturing Agreement). In June 2007, the Company
notifi ed Kimberly-Clark of its intention to terminate its
obligation to supply pulp from Terrace Bay under the Pulp
Supply Agreement effective June 2008. As a result, the
Pulp Manufacturing Agreement will terminate contempo-
raneously with the Terrace Bay portion of the Pulp Supply
Agreement in June 2008.
RESTRUCTURING ACTIVITIES AT TERRACE BAY:
The Company closed the No. 1 Mill at Terrace Bay (the
“No. 1 Mill”) in May 2005. In conjunction with the closure,
Neenah Canada paid approximately $4.9 million in termina-
tion benefi ts to 147 employees.
During the fi rst quarter of 2005, Neenah Canada
recorded a pre-tax, 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, for the
year ended December 31, 2005, Neenah Canada recorded
$0.4 million of incremental training costs for employees
in new positions as a result of the closure. Such train-
ing costs were expensed as incurred. For the year ended
December 31, 2005, costs associated with the closure,
including expenses related to employee training, have been
recorded on the consolidated statement of operations in
Discontinued operations.
ASSET IMPAIRMENT LOSS:
In December 2005, the Company performed an asset impair-
ment test on Terrace Bay under the guidance of SFAS 144.
Terrace Bay had incurred operating losses in recent years
and Neenah Canada anticipated that the facility would con-
tinue to incur operating losses in the future. The principal
causes of these projected losses were:
• continued high operating costs at this facility;
• 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;
• anticipated lower market prices for pulp in the foresee-
able future as a result of an expected downturn in the
pulp cycle; and
• 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 estimated
future undiscounted cash fl ows. The Company’s estimate
of the fair value of the Terrace Bay facility was based on
probability-weighted pre-tax cash fl ows from operating the
facility, discounted at a risk-free interest rate. The signifi cant
assumptions the Company used to determine the estimate
of fair value included its long-term projections of the market
price of pulp, the projected cost structure of the facility and
the long-term relationship of the Canadian dollar and the
U.S. dollar. The estimated fair value of the Terrace Bay facil-
ity also refl ected assumed improvements to the facility’s cost
structure resulting from the Company’s plans for future capi-
tal projects and a plan for a cogeneration arrangement that
would lower the cost of electricity.
The estimated fair value for Terrace Bay indicated
that its long-lived assets were fully impaired. As a result,
in December 2005, Neenah Canada recorded a pre-tax,
non-cash impairment loss of approximately $53.7 million to
reduce the carrying amount of the facility’s tangible long-
lived assets to zero. A deferred tax benefi t of approximately
$20.6 million was recorded as a result of the impairment
losses, resulting in a net after-tax charge of approximately
$33.1 million. For the year ended December 31, 2005, the
asset impairment loss has been recorded on the consoli-
dated statement of operations in Discontinued operations.
O T H E R A C T I V I T I E S
In February 2008, the Company committed to a plan to sell
the Pictou mill and its remaining woodland assets in Nova
Scotia (the “Pictou Mill”). Management believes it is prob-
able that a sale of the Pictou Mill will be completed within
12 months. In the Company’s future fi nancial statements, the
results of operations for the Pictou Mill will be reported as
discontinued operations and as assets held for sale until such
time as a sale is consummated or the Company determines
that a sale is no longer probable. In addition, the consoli-
dated statements of operations for all comparative prior year
periods will be restated to present the results of the Pictou
Mill as discontinued operations.
As of December 31, 2007, while efforts to market
the Pictou Mill had begun, the Company did not believe it
was probable that a sale of the Pictou Mill would be com-
pleted within 12 months. In accordance with SFAS 144, as of
December 31, 2007, the Company did not meet the criteria
for reporting the operations of the Pictou Mill as discon-
tinued operations, and therefore the results of the Pictou
Mill have been included in continuing operations and its
assets have been reported as assets to be held and used.
/ 83
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
six
seven
Sale of Woodlands
Income Taxes
In June 2006, Neenah Canada sold approximately 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 transaction
costs were $134.8 million). Neenah Canada received the total
proceeds from the sale in cash at closing. Neenah Canada
also entered into a fi ber supply agreement (the “FSA”) with
the Purchaser to secure a source of fi ber for the Company’s
Pictou pulp mill. Following the sale, Neenah Canada has
approximately 500,000 acres of owned and 200,000 acres of
licensed or managed woodlands in Nova Scotia.
Pursuant to the terms of the FSA, the Purchaser
is required to make available to Neenah Canada suffi cient
woodlands acreage to yield 200,000 metric tons of softwood
timber annually. Neenah Canada 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 Neenah Canada has the option to unilaterally extend
the contract for an additional fi ve years. The FSA can be
extended for a subsequent fi ve years upon the mutual agree-
ment of Neenah Canada and the Purchaser.
The sale qualifi ed 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”). Neenah Canada’s commitment
to accept acreage offered by the Purchaser to satisfy the
timber requirements for the fi rst 18 months of the FSA rep-
resents a “constructive obligation.” As a result, for the year
ended December 31, 2006, Neenah Canada recognized a
net pre-tax gain on the sale of approximately $122.6 million
and deferred approximately $9.1 million, which represents
Neenah Canada’s estimated maximum exposure to loss
of profi t due to the constructive obligation under the FSA.
For the years ended December 31, 2007 and 2006, Neenah
Canada recognized approximately $6.2 and $2.9 million,
respectively, of such deferred gain. As of December 31,
2007, the deferral of the gain related to the constructive
obligation was fully amortized.
On January 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109
(“FIN 48”) which clarifi es the accounting for uncertainty in
income taxes recognized in an enterprise’s fi nancial state-
ments in accordance with SFAS 109. There was no material
effect on the fi nancial statements and no cumulative effect
on retained earnings from the Company’s adoption of
FIN 48. However, certain amounts have been reclassifi ed in
the consolidated balance sheet to comply with the require-
ments of FIN 48. As of January 1, 2007, the total amount of
unrecognized tax benefi ts was $6.5 million and as a result of
the adoption of FIN 48, the Company recognized a $1.0 mil-
lion increase in its liability for unrecognized tax benefi ts.
The following is a tabular reconciliation of the total
amounts of unrecognized tax benefi ts as of January 1, 2007
and December 31, 2007:
Balance at January 1, 2007
Decrease in the liabilty for tax positions prior to 2007
Balance at December 31, 2007
$ 6.5
(5.5)
$ 1.0
If recognized, approximately $0.6 million of the
unrecognized income tax benefi ts at December 31, 2007
would favorably affect the Company’s effective tax rate in
future periods. The Company does not anticipate that the
expiration of the statute of limitations or the settlement of
audits in the next 12 months will result in liabilities for uncer-
tain income tax positions that are materially different than
the amounts accrued as of December 31, 2007.
The Company is liable for taxes due for tax returns
fi led by Neenah Germany for periods prior to the acquisi-
tion (see Note 4, “Acquisitions”). Pursuant to the terms of
the purchase agreement, FiberMark has agreed to indem-
nify the Company for the Euro value of such taxes and
a portion of the purchase price has been reserved in an
escrow account to fund the indemnifi cation. At January 1,
2007, the Company believed it was probable that Neenah
Germany was liable for additional taxes and recognized a
$5.5 million liability for this uncertain income tax position.
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
As of December 31, 2007, the German tax authorities had
completed their examination and determined that Neenah
Germany was liable for such additional taxes. The amount of
such additional taxes was approximately equal to the liabil-
ity for uncertain tax benefi ts recognized by the Company.
As of December 31, 2007, the liability for such additional
taxes does not represent an uncertain tax position and has
been recorded as current income taxes payable. The escrow
amount is suffi cient to fund the payment of such taxes.
Tax years 2004 through 2007 are subject to exami-
nation by federal and state tax authorities in the United
States, federal and provincial tax authorities in Canada and
federal and municipal tax authorities in Germany. Currently,
the 2005 and 2006 tax years are being audited by German
tax authorities.
The Company recognizes accrued interest and
penalties related to uncertain income tax positions in the
Provision for income taxes on the consolidated statements
of operations. As of December 31, 2007, the Company had
approximately $20 thousand accrued for interest related to
uncertain income tax positions.
Income tax expense represented 9.3 percent,
37.2 percent and 36.6 percent of income from continu-
ing operations before income taxes for the years ended
December 31, 2007, 2006 and 2005, respectively. The fol-
lowing 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
Enacted German tax
law changes
Foreign tax rate differences
Other differences – net
Effective income tax rate
Year Ended December 31,
2007
2006
2005
35.0%
35.0%
35.0%
1.6%
3.1%
2.3%
(21.0)%
(7.2)%
0.9%
9.3%
–
(0.5)%
(0.4)%
37.2%
–
–
(0.7)%
36.6%
The Company’s effective tax rate can be affected
by many factors, including but not limited to, changes in the
mix of earnings in taxing jurisdictions with differing statutory
rates, changes in corporate structure as a result of business
acquisitions and dispositions, changes in the valuation of
deferred tax assets and liabilities, the results of audit exami-
nations of previously fi led tax returns and changes in tax
laws. During the year ended December 31, 2007, German
tax laws were amended to reduce statutory income tax rates
effective as of January 1, 2008. Application of the new rates
to the Company’s existing deferred tax assets and liabili-
ties reduced the Company’s net deferred tax liabilities at
December 31, 2007. The reduction in the Company’s net
deferred tax liabilities due to the benefi t of the enacted tax
rate change resulted in an income tax benefi t of $8.8 mil-
lion and was treated as a discrete item for the year ended
December 31, 2007 in accordance with Statement of
Financial Accounting Standards No. 109, “Accounting for
Income Taxes” and had no further impact on the Company’s
effective tax rate in 2007.
The following table presents the U.S. and foreign
components of income from continuing operations before
income taxes and the provision for income taxes:
Income from continuing
operations before
income taxes:
U.S.
Foreign
Total
Provision for income taxes:
Current:
Federal
State
Foreign
Total current
Year Ended December 31,
2007
2006
2005
$ 19.9
21.9
$ 41.8
$150.0
1.9
$151.9
$ 7.7
0.8
6.1
$ 20.0
2.8
0.4
$35.2
–
$35.2
$11.1
1.0
–
tax provision
14.6
23.2
12.1
Deferred:
Federal
State
Foreign
Total deferred
(1.0)
0.4
(10.1)
29.5
4.3
(0.5)
tax provision
(10.7)
33.3
Total provision
0.6
0.2
–
0.8
for income taxes
$ 3.9
$ 56.5
$12.9
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The Company has elected to treat its Canadian
operations as a branch for U.S. income tax purposes. There-
fore, the amount of income (loss) before income taxes from
Canadian operations are included in the Company’s consoli-
dated U.S. income tax returns and such amounts are subject
to U.S. income taxes.
The asset and liability approach is used to recognize
deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
The components of deferred tax assets and liabilities are
as follows:
December 31,
2007
2006
Net current deferred income tax assets
Accrued liabilities
Employee benefi ts
Other
Net current deferred income tax assets
Net noncurrent deferred income tax assets
Employee benefi ts
Canadian timberlands
Intangibles
Net operating losses
Other long-term obligations
Accumulated depreciation
Other
Net noncurrent deferred
$ 6.0
0.4
(4.5)
1.9
34.8
26.5
20.2
5.4
1.6
(43.6)
10.5
income tax assets
55.4
Total deferred income tax assets $ 57.3
Net noncurrent deferred income tax liability
Accumulated depreciation
Intangibles
Employee benefi ts
Other
Net noncurrent deferred
income tax liabilities
$ 22.0
7.4
(1.8)
2.8
$ (1.5)
3.0
–
1.5
30.1
32.1
20.2
0.9
–
(53.0)
2.4
32.7
$ 34.2
$ 29.9
11.2
(4.2)
(1.1)
$ 30.4
$ 35.8
In the disclosure of the components of net noncur-
rent deferred income tax assets as of December 31, 2006,
the Company inappropriately classifi ed approximately
$20.2 million in noncurrent deferred tax assets related to
intangible assets associated with employee benefi ts. The
Company has corrected the 2006 disclosure to separately
present the noncurrent deferred tax assets related to such
intangible assets. There was no impact on the Company’s
2006 fi nancial statements as a result of this change.
No valuation allowance has been provided on
deferred income tax assets. In determining the need for
valuation allowances, the Company considers many factors,
including specifi c taxing jurisdictions, sources of taxable
/ 86
Neenah Paper, Inc. 2007 Annual Report
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, 2007, the Company had
$13.5 million of U.S. and $8.7 million of Canadian net operat-
ing losses, substantially all of which may be carried forward
to 2025 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.
No provision for U.S. income taxes has been made
for $27.9 million of undistributed earnings of certain of the
Company’s foreign subsidiaries which have been indefi nitely
reinvested. The Company is unable to estimate the amount
of U.S. income taxes that would be payable if such undistrib-
uted foreign earnings were repatriated.
eight
Debt
Long-term debt consisted of the following:
Senior Notes (7.375% fi xed rate) due 2014
Revolving bank credit facility
(variable rates), due 2010
Term Loan (variable rates), due in 13 equal
quarterly installments beginning
November 2007
Third-party fi nancing (7.375% fi xed rate)
due in quarterly installments through
December 2007
Neenah Germany project fi nancing
(3.8% fi xed rate) due in 16 equal
semi-annual installments beginning
June 2009
Neenah Germany revolving line of
credit (variable rates)
Total Debt
Less: Debt payable within one year
Long-term debt
December 31,
2007
2006
$225.0
$225.0
66.2
57.3
23.1
–
–
1.3
14.6
–
3.2
332.1
10.9
$321.2
–
283.6
1.3
$282.3
66500ne_fin 86
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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. Interest payments on the Senior Notes commenced on
May 15, 2005 and are payable May 15 and November 15 of
each year. The Senior Notes are fully and unconditionally
guaranteed by substantially all of the Company’s subsidiar-
ies, with the exception of Neenah Germany. In August 2005,
the Company exchanged the unregistered Senior Notes for
registered notes with similar terms.
S E C U R E D R E V O L V I N G C R E D I T F A 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 subsidiaries, the lenders listed in the Credit Agreement
and JP Morgan Chase Bank, N.A. as agent for the lenders
(the “Initial Credit Agreement”). Under the Initial Credit
Agreement, the Company had a secured revolving credit
facility (the “Revolver”) that provided for borrowings of
up to $150 million. The Initial Credit Agreement is secured
by substantially all of the Company’s assets, including the
capital stock of its subsidiaries and is guaranteed by Neenah
Canada, a wholly-owned subsidiary. The Initial Credit
Agreement originally terminated on November 30, 2008.
In March 2007, the Company entered into the
Fourth Amendment (the “Fourth Amendment”) to the Initial
Credit Agreement. Except as generally described herein, the
Fourth Amendment retained the terms of the amended Initial
Credit Agreement. The Fourth Amendment, among other
things, (i) increased the Company’s secured revolving line of
credit from $165 million to $180 million and (ii) made other
defi nitional, administrative and covenant modifi cations to the
amended Initial Credit Agreement. Despite the increase in
the total commitment to $180 million, the Company’s abil-
ity to borrow under the Revolver is currently limited to the
lowest of (a) $180 million, (b) the Company’s borrowing base
(as determined in accordance with the Credit Agreement),
and (c) the applicable cap on the amount of “credit facilities”
under the indenture.
The closing of the Fourth Amendment occurred
simultaneously with the Company’s consummation of its
acquisition of Fox River. In March 2007, the Company bor-
rowed $54 million in principal under the Credit Agreement
as part of the fi nancing for the acquisition of Fox River. The
entities acquired by the Company pursuant to the Fox River
acquisition are guarantors with respect to such secured
revolving line of credit. Such entities are also subsidiary
guarantors with respect to the Senior Notes; however, the
property, plant and equipment acquired in the acquisition of
Fox River does not secure the Company’s obligations under
the Credit Agreement.
In October 2007, the Company entered into the Fifth
Amendment (the “Fifth Amendment”) to the Initial Credit
Agreement. Except as generally described herein, the Fifth
Amendment retained the terms of the amended Initial Credit
Agreement. The Fifth Amendment increased the Company’s
secured revolving line of credit from $180 million to $210 million.
Despite the increase in the total commitment to $210 mil-
lion, the Company’s ability to borrow under the Revolver is
limited to the lowest of (a) $210 million, (b) the Company’s
borrowing base (as determined in accordance with the Credit
Agreement), and (c) the applicable cap on the amount of
“credit facilities” under the indenture for the Senior Notes.
As of December 31, 2007, the amended Initial
Credit Agreement (the “Amended Credit Agreement”) pro-
vides for a secured revolving credit facility (the “Revolver”)
to provide for borrowings of up to $210 million. The
Company’s ability to borrow under the Revolver is limited
to the lowest of (a) $210 million, (b) the Company’s borrow-
ing base (as determined in accordance with the Amended
Credit Agreement), and (c) the applicable cap on the amount
of “credit facilities” under the indenture for the Senior
Notes. The Amended Credit Agreement will terminate on
November 30, 2010.
The interest rate applicable to borrowings under
the Revolver will be either (1) the Prime Rate (as defi ned in the
Amended Credit Agreement) plus a percentage ranging
from 0 percent to 0.75 percent or (2) LIBOR plus a percent-
age ranging from 1.25 percent to 2.25 percent. 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 percent on the average daily
unused amount of the commitment.
In the Amended Credit Agreement, the lenders
consented to 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 percent
of its equity interest in Neenah Germany as security for the
obligations of the Company and its subsidiaries under the Initial
Credit Agreement.
/ 87
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
In March 2007, the Company borrowed $54 million
in principal under the Amended Credit Agreement as part
of the fi nancing for the acquisition of Fox River. The entities
acquired by the Company pursuant to the Fox River acqui-
sition are guarantors with respect to the Amended Credit
Agreement. Such entities are also subsidiary guarantors with
respect to the Senior Notes; however, the property, plant
and equipment acquired in the acquisition of Fox River does
not secure the Company’s obligations under the Amended
Credit Agreement.
The weighted-average interest rate on outstanding
borrowings as of December 31, 2007 and 2006 was 6.4 per-
cent per annum and 7.3 percent per annum, respectively.
Amounts outstanding under the Revolver may be repaid,
in whole or in part, at any time without premium or penalty
except for specifi ed 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. Borrowing availability under the Revolver is reduced
by outstanding letters of credit and reserves for certain
other items as defi ned in the Amended Credit Agreement.
Availability under the Amended Credit Agreement will fl uctu-
ate over time depending on the value of the Company’s inven-
tory, receivables and various capital assets. As of December 31,
2007, the Company had approximately $1.6 million of letters
of credit outstanding and $114.9 million of borrowing avail-
ability under the Revolver. Interest on amounts borrowed
under the Revolver is paid monthly.
The Amended Credit Agreement contains events of
default customary for fi nancings 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 indebtedness, bank-
ruptcy, insolvency, various ERISA violations, the incurrence
of material judgments and changes in control.
The Amended Credit Agreement contains, 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 specifi ed restricted payments
and capital expenditures, authorize or issue capital stock,
enter into transactions with affi liates, consolidate or merge
with or acquire another business, sell certain of its assets
or liquidate, dissolve or wind-up. In addition, the terms of
the Credit Agreement require the Company to achieve and
maintain certain specifi ed fi nancial ratios. At December 31,
2007, the Company was in compliance with all covenants.
The Company’s ability to pay cash dividends on
its common stock is limited under the terms of both the
Amended Credit Agreement and the Senior Notes. At
December 31, 2007, under the most restrictive terms of
these agreements, the Company’s ability to pay cash dividends
on its common stock is limited to a total of $10 million in a
12-month period.
T E R M L O A N
In March 2007, the Company entered into an agreement
by and among the Company, certain of its subsidiaries and
JP Morgan Chase Bank, N.A. (the “Term Loan Agreement”)
to borrow up to $25 million (the “Term Loan”). As of
December 31, 2007, the weighted-average interest rate
on outstanding Term Loan borrowings was 6.7 percent per
annum. Term Loan borrowings were used to repay outstand-
ing Revolver borrowings. The Term Loan is secured by sub-
stantially all of the property, plant and equipment acquired
by the Company in the acquisition of Fox River and is fully
and unconditionally guaranteed by substantially all of the
Company’s other subsidiaries, except Neenah Germany.
Amounts outstanding under the Term Loan may be repaid,
in whole or in part, at any time without premium or penalty
except that LIBOR Borrowings (as defi ned below) may not
be partially repaid such that less than $3.0 million of LIBOR
Borrowings are outstanding. The Term Loan Agreement ter-
minates in November 2010.
At the Company’s option, Term Loan borrowings
may be designated as either Alternate Base Rate Borrowings
(as defi ned in the Term Loan Agreement) or London
Interbank Offered Rate Borrowings (“LIBOR Borrowings”).
The interest rate on Alternate Base Rate Borrowings is the
greater of (i) the Prime Rate (as defi ned in the Term Loan
Agreement) or (ii) the Federal Funds Effective Rate (as
defi ned in the Term Loan Agreement) plus a percentage
ranging from 0 percent to 0.75 percent. The interest rate on
LIBOR Borrowings is LIBOR plus a percentage ranging from
1.50 percent to 2.25 percent. Interest is computed based
on actual days elapsed in a 360-day year, payable monthly
in arrears for Alternate Base Rate Borrowings, or for LIBOR
Borrowings, payable monthly in arrears and at the end of the
applicable interest period.
O T H E R N O T E S
In December 2006, Neenah Germany entered into an agree-
ment with HypoVereinsbank and IKB Deutsche Industriebank
AG (the “Lenders”) to provide project fi nancing for the
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Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
construction of a saturator. The Lenders agreed to provide
10 million Euros of construction fi nancing which is secured by
the saturator. The loan matures in December 2016 and prin-
cipal is repaid in equal semi-annual installments beginning
in June 2009. Principal outstanding under the agreement
may be repaid at any time without penalty. The interest rate
on amounts outstanding is 3.8 percent based on actual days
elapsed in a 360-day year and is payable semi-annually. As
of December 31, 2007, €10.0 million ($14.6 million) was out-
standing 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 general
corporate purposes. As of December 31, 2007, the weight-
ed-average interest rate on outstanding Line of
Credit borrowings was 6.5 percent per annum. No Line of Credit
borrowings were outstanding as of December 31, 2006. In
November 2007, Neenah Germany extended the termination
date for the Line of Credit to November 30, 2008. Neenah
Germany has the ability to borrow in either Euros or U.S. dol-
lars. Interest is computed on U.S. dollars loans at the rate of
8.5 percent per annum and on Euro loans at EURIBOR plus
a margin of 1.5 percent. Interest is payable quarterly and
principal may be repaid at any time without penalty. As of
December 31, 2007, $3.2 million was outstanding under the
Line of Credit.
During the fi rst quarter of 2005, the Company
obtained third-party fi nancing to fund its purchase of enter-
prise resource planning (ERP) software. At inception, the
present value of the fi nancing agreement was $3.6 million
(discounted at 7.375 percent) payable in quarterly install-
ments through December 2007. As of December 31, 2007,
no third-party fi nancing was outstanding. In the fi rst quarter
of 2005, the Company issued a short-term note for $2.3 mil-
lion to fi nance current year insurance premiums. The note
was repaid in monthly installments through October 2005
including interest at the rate of 3.9 percent per annum.
P R I N C I P A L P A Y M E N T S
The following table presents the Company’s required
debt payments:
2008 2009 2010 2011 2012
There-
after
Total
Debt payments
$10.9 $9.5 $75.7 $1.8 $1.8 $232.4 $332.1
nine
Post-Employment and Other Benefi ts
In conjunction with the Spin-Off, the Company agreed to
provide active employees of the Pulp and Paper Business
and former employees of the Canadian pulp operations with
employee benefi ts that were substantially similar to those
provided by Kimberly-Clark and to credit such employees
for service earned with Kimberly-Clark. In general, employee
obligations related to former employees of the U.S. paper
operations were retained by Kimberly-Clark.
A D O P T I O N O F S F A S 1 5 8
At December 31, 2006, the Company adopted Statement
of Financial Accounting Standards No. 158, Employers’
Accounting for Defi ned Benefi t Pension and Other
Postretirement Plans which requires an employer to recog-
nize the overfunded or underfunded status of a defi ned ben-
efi t postretirement plan as an asset or liability in its statement
of fi nancial position and to recognize changes in that funded
status in the year in which the changes occur through com-
prehensive 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 fi nancial position. The Company’s adoption
of SFAS 158 reduced stockholders’ equity at December 31,
2006 by $55.4 million.
P E N S I O N P L A N S
Substantially all active employees of the Company’s U.S.
paper operations and its Canadian pulp operations partici-
pate in defi ned benefi t pension plans and defi ned contribu-
tion retirement plans. Neenah Germany has defi ned benefi t
plans designed to provide a monthly pension upon retire-
ment for all its hourly employees in Germany.
In December 2004, pension assets related to
active employees of the U.S. paper operations for which the
Company assumed responsibility were transferred from a
Kimberly-Clark pension trust to a new trust for a pension plan
established by the Company. In the fourth quarter of 2005,
the transfer of assets by Kimberly-Clark to the new pension
trust for obligations assumed by the Company in the Spin-
Off was fi nalized and resulted in a credit of $0.7 million to
Additional paid-in capital.
/ 89
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
In May 2005, the Company closed the No. 1 Mill
at Terrace Bay. See Note 5, “Discontinued Operations.” In
conjunction with the closure, the Company recognized a pre-
tax charge of approximately $1.6 million related to a partial
settlement of certain pension obligations.
plans providing pension benefi ts in excess of limitations
imposed by taxing authorities are not funded. There is no
legal or governmental obligation to fund Neenah Germany’s
benefi t plans and as such the Neenah Germany defi ned ben-
efi t plans are currently unfunded.
In conjunction with the transfer of Terrace Bay to
The Company uses the fair value of pension plan
Buchanan, Neenah Canada initiated plans to curtail and set-
tle the Ontario Plan. In August 2006, Neenah Canada made a
payment to the pension trust of approximately $10.8 million
for the purchase of annuity contracts to settle its pension
liability for current retirees. As a result, Neenah Canada rec-
ognized a pension curtailment and settlement loss of approx-
imately $26.4 million in the year ended December 31, 2006.
In July 2007, the Financial Services Commission of
Ontario approved the Company’s request to settle its pen-
sion obligations for active employees and terminate the
Ontario Plan. In December 2007, the Ontario Plan was ter-
minated and all outstanding pension obligations for active
employees were settled through the purchase of annuity
contracts or lump-sum payments pursuant to participant
elections. For the year ended December 31, 2007, Neenah
Canada recognized a non-cash pre-tax settlement loss of
$38.7 million upon termination of the Ontario Plan. No addi-
tional funding was required to settle the Ontario Plan.
In November 2007, the Company amended the
Fox River defi ned benefi t pension plan to freeze the
vested pension benefi t for salaried employees born after
December 31, 1957. The effected employees were trans-
ferred to the Company’s defi ned contribution retirement
plan. The pension benefi t for salaried employees of Fox River
born on or before December 31, 1957 was unaffected. For
the year ended December 31, 2007, the Company recognized
a reduction in pension expense of approximately $1.2 million
related to the amendment.
The Company’s funding policy for its qualifi ed
defi ned benefi t plans for its U.S. paper operations and its
Canadian pulp operations is to contribute assets to fully fund
the accumulated benefi t obligation. Subject to regulatory
and tax deductibility limits, any funding shortfall is to be
eliminated over a reasonable number of years. Nonqualifi ed
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 pen-
sion obligations are measured annually as of December 31.
As of December 31, 2007, the Company’s pension plans had
cumulative unrecognized investment losses and other actu-
arial losses of approximately $55.8 million in accumulated
other comprehensive income.
O T H E R P O S T - E M P L O Y M E N T B E N E F I T P L A N S
The Company maintains health care and life insurance ben-
efi t plans for active employees of the Company and former
employees of the Canadian pulp operations. The plans are
generally 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.
The Company does not provide a subsidized benefi t to most
employees hired after 2003.
The Company’s obligations for post-employment
benefi ts other than pensions are measured annually as of
December 31. At December 31, 2007, the assumed infl ation-
ary pre-65 and post-65 health care cost trend rates used to
determine year-end obligations and costs for the year ended
December 31, 2008 was 8.6 percent, decreasing to 7.7 per-
cent in 2009, and then gradually decreasing to an ultimate
rate of 4.9 percent in 2014. The assumed infl ationary pre-65
and post-65 health care cost trend rate used to determine
obligations at December 31, 2006 and cost for the year
ended December 31, 2007 was 8.9 percent, decreasing to
8.1 percent in 2008, and then gradually decreasing to an ulti-
mate rate of 4.9 percent in 2013.
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following table reconciles the benefi t obligations, plan assets, funded status and net liability information of the
Company’s pension and other benefi t plans.
Change in Benefi t Obligation:
Benefi t obligation at beginning of year
Service cost
Interest cost
Currency
Actuarial loss (gain)
Benefi t payments from plans
Business combinations
Participant contributions
Special termination benefi ts
Plan amendments
(Gain) loss on plan curtailment
Gain on plan settlement
Benefi t obligation at end of year
Change in Plan Assets:
Fair value of plan assets at beginning of year
Actual gain on plan assets
Employer contributions
Currency
Benefi t payments
Settlement payments
Business combinations
Participant contributions
Other
Fair value of plan assets at end of year
Reconciliation of Funded Status
Fair value of plan assets
Projected benefi t obligation
Net liability recognized in statement of fi nancial position
Amounts recognized in statement of fi nancial position consist of:
Current assets
Current liabilities
Noncurrent liabilities
Net amount recognized
Pension Benefi ts
Post-Employment
Benefi ts Other
than Pensions
Year Ended December 31,
2007
2006
2007
2006
$ 419.7
9.2
28.1
44.2
(33.6)
(162.0)
102.0
0.9
0.1
–
(1.2)
–
$ 407.4
$ 350.9
20.1
10.1
38.0
(20.6)
(141.4)
90.5
0.9
(4.9)
$ 343.6
$ 343.6
407.4
$ (63.8)
$ 2.9
(2.5)
(64.2)
$ (63.8)
$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
$350.9
419.7
$ (68.8)
$ 6.3
(2.5)
(72.6)
$ (68.8)
$ 40.0
2.4
2.5
2.9
0.6
(4.1)
5.9
–
–
–
–
5.0
$ 55.2
$ –
–
4.1
–
(4.1)
–
–
–
–
$ –
$ –
55.2
$(55.2)
$ –
(9.5)
(45.7)
$(55.2)
$ 76.1
2.2
3.5
1.2
(2.7)
(2.3)
2.6
–
–
(14.1)
(26.5)
–
$ 40.0
$ –
–
2.3
–
(2.3)
–
–
–
–
$ –
$ –
40.0
$(40.0)
$ –
(3.4)
(36.6)
$(40.0)
Amounts recognized in accumulated other comprehensive income consist of:
Pension Benefi ts
Post-Employment
Benefi ts Other
than Pensions
December 31,
2007
2006
2007
$45.4
10.5
(0.1)
$55.8
$ 97.3
10.6
(0.3)
$107.6
$12.6
(2.2)
–
$10.4
2006
$14.3
(7.5)
–
$ 6.8
Accumulated actuarial loss
Prior service cost (credit)
Transition asset
Total recognized in accumulated other comprehensive income
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Summary disaggregated information about the pension plans follows:
Projected benefi t obligation
Accumulated benefi t 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
Service cost
Interest cost
Expected return on plan assets(a)
Recognized net actuarial loss
Amortization of unrecognized transition asset
Amortization of prior service cost
Cost of contractual termination benefi ts
Amount of curtailment (gain) loss recognized
Amount of settlement loss recognized
Net periodic benefi t cost (credit)
Less: Cost/(credit) related to discontinued operations(b)(c)
Net periodic benefi t cost related to continuing operations
Assets
Exceed ABO
December 31,
ABO
Exceed Assets
Total
2007
2006
2007
2006
2007
2006
$234.5
205.0
225.6
$207.3
189.2
204.2
$172.9
163.3
118.0
$212.4
193.1
146.7
$407.4
368.3
343.6
$419.7
382.3
350.9
Pension Benefi ts
Post-Employment Benefi ts
Other than Pensions
Year Ended December 31
2007
2006
2005
$ 9.2
28.1
(32.0)
(0.2)
1.8
5.0
0.1
(1.2)
38.7
49.5
41.9
$ 7.6
$ 8.1
22.3
(30.3)
7.7
(0.3)
1.6
–
1.6
24.8
35.5
26.1
$ 9.4
$ 10.7
21.9
(27.7)
7.1
(0.2)
1.4
–
–
–
13.2
7.1
$ 6.1
2007
$ 2.4
2.5
–
–
(6.7)
3.8
–
–
5.0
7.0
–
$ 7.0
2006
$ 2.2
3.5
–
2.3
–
(1.3)
–
(19.9)
–
(13.2)
(18.2)
$ 5.0
2005
$1.5
3.1
–
0.7
–
0.1
–
–
–
5.4
2.5
$2.9
(a) The expected return on plan assets is determined by multiplying the fair value of plan assets at the prior year-end (adjusted for estimated current year cash
benefi t payments and contributions) by the expected long-term rate of return.
(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 defi ned benefi t pension plan. The pension (credit) cost related to the operations of the Terrace Bay mill has been classifi ed as Loss
from discontinued operations on the consolidated statements of operations. Pension expense for the years ended December 31, 2007 and 2006 includes
settlement/curtailment losses related to the Ontario Plan of $38.7 million and $26.4 million, respectively.
(c) Pursuant to the terms of the transfer agreement, Buchanan assumed responsibility for post-employment medical and life insurance benefi ts for active employ-
ees at the Terrace Bay mill.
Other Changes in Plan Assets and Benefi t Obligations Recognized in Other Comprehensive Income
Net periodic benefi t expense (income)
Accumulated actuarial gain
Prior service cost (credit)
Transition asset
Minimum pension liability adjustment
Total recognized in other comprehensive income
Total recognized in net periodic benefi t cost and other comprehensive income
Pension Benefi ts
Post-Employment
Benefi ts Other
than Pensions
2007
$ 49.5
(51.9)
(0.1)
0.2
–
(51.8)
$ (2.3)
Year Ended December 31,
2006
$35.5
–
–
–
(4.6)
(4.6)
$30.9
2007
2006
$ 7.0
(1.7)
5.3
–
–
3.6
$10.6
$(13.2)
–
–
–
–
–
$(13.2)
The estimated net loss, prior service cost and transition (asset) for the defi ned benefi t pension plans expected to be
amortized from accumulated other comprehensive income into net periodic benefi t cost (credit) over the next fi scal year are
$2.6 million, $1.9 million and $(0.2) million, respectively. The estimated net loss and prior service (credit) for post-employment
benefi ts other than pension expected to be amortized from accumulated other comprehensive income into net periodic ben-
efi t cost over the next fi scal year are $0.7 million and $(5.3) million, respectively.
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A D D I T I O N A L I N F O R M A T I O N
Decrease in pre-tax minimum liability included in other comprehensive income
Year Ended December 31, 2006
$4.6
W E I G H T E D - A V E R A G E A S S U M P T I O N S U S E D T O D E T E R M I N E B E N E F I T O B L I G A T I O N S A T D E C E M B E R 3 1
Discount rate
Rate of compensation increase
Pension Benefi ts
Post-Employment
Benefi ts Other
than Pensions
Year Ended December 31,
2007
6.10%
3.30%
2006
5.25%
3.29%
2007
6.00%
–
2006
5.66%
–
W E I G H T E D - A V E R A G E A S S U M P T I O N S U S E D T O 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 F O R Y E A R S E N D E D D E C E M B E R 3 1
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension Benefi ts
Post-Employment Benefi ts
Other than Pensions
2007
5.25%
7.90%
3.29%
2006
5.20%
8.39%
3.24%
Year Ended December 31,
2005
5.75%
8.41%
3.75%
2007
5.66%
–
–
2006
5.22%
–
–
2005
5.75%
–
–
E X P E C T E D L O N G - T E R M R A T 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 A T E G I E S
The expected long-term rate of return on pension fund assets
held by the Company’s 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 considered were the plans’ historical
10-year and 15-year compounded annual returns. It is antici-
pated that on average the investment managers for each of
the plans will generate annual long-term rates of return of
8.5 percent. The expected long-term rate of return on the
assets in the plans was based on an asset allocation assump-
tion of about 60 percent with equity managers, with expected
long-term rates of return of approximately 10 percent, and
40 percent with fi xed income managers, with an expected
long-term rate of return of about 6 percent. The actual asset
allocation is regularly reviewed and periodically rebalanced to
the targeted allocation when considered appropriate.
P L A N A S S E T S
Pension plan asset allocations are as follows:
Asset Category
Equity securities
Debt securities
Cash and money-market funds
Total
Percentage of Plan Assets
at December 31,
2007
2006
2005
61%
35%
4%
100%
65%
31%
4%
100%
68%
24%
8%
100%
For the years ended December 31, 2007, 2006 and
2005, no plan assets were invested in the Company’s securities.
C A S H F L O W S
Based on December 31, 2007 exchange rates, the Company
expects to contribute approximately $11.3 million to its pen-
sion trusts in 2008.
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F U T U R E B E N E F I T P A Y M E N T S
The following benefi t payments, which refl ect expected
future service, as appropriate, are expected to be paid:
ten
Post-Employment
Benefi ts Other
than Benefi ts
Pension Plans
Stock Compensation Plans
2008
2009
2010
2011
2012
Years 2013–2017
$ 22.5
23.4
25.0
27.4
29.4
184.2
$ 4.5
2.4
2.6
2.9
3.2
19.8
H E A L T 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 benefi t 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 benefi t obligation
$0.2
1.9
$(0.2)
(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
The Company’s contributions to its defi ned contribution
retirement plans are primarily based on the age and com-
pensation of covered employees. Contributions to these
plans, all of which were charged to expense, were $1.2 mil-
lion in 2007, $1.1 million in 2006 and $1.0 million in 2005.
In addition, the Company maintains a supplemental retire-
ment contribution plan (the “SRCP”) which is a nonqualifi ed,
noncontributing defi ned contribution plan. The Company
provides benefi ts under the SRCP to the extent necessary to
fulfi ll the intent of its defi ned contribution retirement plans
without regard to the limitations set by the Internal Revenue
Code on qualifi ed defi ned contribution plans. For the years
ended December 31, 2007, the Company recognized
expense related to the SRCP of $69 thousand. No expense
related to the SRCP was recognized for the years ended
December 31, 2006 and 2005.
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 North American employees. Under
the plans, the Company matches a portion of employee con-
tributions. For the years ended December 31, 2007, 2006
and 2005, costs charged to expense for company matching
contributions under these plans were $1.7 million, $1.3 mil-
lion and $1.2 million, respectively.
The Company established the 2004 Omnibus Stock and
Incentive Plan (the “Omnibus Plan”) in December 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 compen-
sation awards, including incentive and nonqualifi ed 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. As of December 31, 2007, approximately
1,690,000 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 modifi ed-prospective
transition method. Stock-based compensation cost recog-
nized under SFAS 123R for the years ended December 31,
2007 and 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
accordance with the pro forma provisions of Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (“SFAS 123”) and (b) compen-
sation 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. The adoption of SFAS 123R resulted in addi-
tional stock-based compensation expense of $4.2 million and
income tax benefi ts of $1.6 million and reduced basic and
diluted EPS by $0.17 for the year ended December 31, 2006.
SFAS 123R amends Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows, to
require the reporting of excess tax benefi ts related to the
exercise or vesting of stock-based awards as cash provided
by fi nancing activities rather than as a reduction in income
taxes paid and reported as cash provided by operations. For
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the years ended December 31, 2007 and 2006, the Company
recognized approximately $0.5 million and $67 thousand,
respectively, of excess tax benefi ts related to the exer-
cise or vesting of stock-based awards. The Company did
not recognize any excess tax benefi ts for the year ended
December 31, 2005.
VALUATION AND EXPENSE INFORMATION UNDER SFAS 123R
The following table summarizes stock-based compensation
costs and related income tax benefi ts. Substantially all stock-
based compensation expense has been recorded in selling,
general and administrative expenses.
STOCK OPTIONS
For the year ended December 31, 2007, the Company awarded
nonqualifi ed stock options to purchase 182,785 shares of com-
mon stock at a weighted-average exercise price of $36.97 per
share. The exercise price of the options was equal to the market
price of the Company’s common stock on the date of grant.
The options expire in ten years and, in general, one-third vest
on each of the fi rst three anniversaries of the date of grant.
The weighted-average grant date fair value for stock options
granted during the years ended December 31, 2007 and 2006
was $14.00 per share and $11.44 per share, respectively, and
was estimated using the Black-Scholes option valuation model
with the following assumptions:
Year Ended December 31,
2007
2006
2005
Stock-based
compensation expense
Income tax benefi t
Stock-based compensation,
net of income tax benefi t
$ 6.4
(2.5)
$ 5.8
(2.2)
$ 0.8
(0.3)
$ 3.9
$ 3.6
$ 0.5
Expected life in years
Interest rate
Volatility
Dividend yield
Year Ended
December 31,
2007
5.9
4.7%
35.2%
1.1%
2006
5.9
4.8%
37.9%
1.4%
The following table summarizes total compensation
costs related to the Company’s equity awards and amounts
recognized in the year ended December 31, 2007.
Unrecognized compensation cost –
December 31, 2006
Add: Grant date fair value of
current year grants
Less: Compensation expense recognized
Less: Grant date fair value of shares forfeited
Unrecognized compensation cost –
December 31, 2007
Expected amortization period (in years)
Stock
Options(a)
Restricted
Stock
$3.3
$2.2
2.8
4.2
–
$1.9
1.9
3.0
2.2
0.1
$2.9
1.8
(a) The grant date fair value of current year stock awards and compensation
expense recognized each include $0.2 million related to a change in the
Company’s estimate for forfeitures and $0.2 million related to the modifi ca-
tion of certain awards.
The expected term was estimated based upon
historical data for Kimberly-Clark stock option awards and
the expected volatility was estimated by reference to the
historical stock price performance of a peer group of com-
panies. The risk-free interest rate was based on the yield on
U.S. Treasury bonds with a remaining term approximately
equivalent 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, 2007:
Weighted-
Average
Stock Options Exercise Price
Number of
Options outstanding – December 31, 2006 1,401,521
182,785
Add: Options granted
123,849
Less: Options exercised
Less: Options forfeited/cancelled
2,575
Options outstanding – December 31, 2007 1,457,882
$31.66
$36.97
$29.42
$37.90
$32.51
The status of outstanding and exercisable stock options as of December 31, 2007, summarized by exercise price follows:
Options Vested or Expected to Vest
Options Exercisable
Exercise Price
$24.01–$29.43
$30.15–$34.61
$35.92–$42.24
Remaining
Number of Contractual Life
(Years)
Weighted-Average Weighted-
Average
Exercise
Price
Options
320,661
770,051
357,794
1,448,506
6.0
6.3
6.2
6.2
$26.68
$32.67
$37.35
$32.50
Aggregate
Intrinsic
Value(a)
$0.8
–
–
$0.8
Number of
Options
228,480
719,204
185,810
1,133,494
Weighted-
Average
Exercise
Price
$25.97
$32.68
$37.53
$32.12
Aggregate
Intrinsic
Value(a)
$0.7
–
–
$0.7
(a) Represents the total pre-tax intrinsic value as of December 31, 2007 that option holders would have received had they exercised their options as of such date.
The pre-tax intrinsic value is based on the closing market price for the Company’s common stock of $29.15 on December 31, 2007. The aggregate pre-tax
intrinsic value of stock options exercised for the years ended December 31, 2007 and 2006 was $1.5 million and $0.2 million, respectively. No stock options
were exercised for the year ended December 31, 2005.
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The following table summarizes the status of the
Company’s unvested stock options as of December 31, 2007
and activity for the year then ended:
Outstanding – December 31, 2006
Add: Options granted
Less: Options vested
Less: Options forfeited/cancelled
Outstanding – December 31, 2007
Weighted-
Average
Grant Date
Fair Value
Number of
Stock Options
379,396
182,785
326,850
2,575
232,756
$12.23
$14.00
$12.64
$14.73
$13.01
As of December 31, 2007, certain participants met
age and service requirements that allowed their options
to qualify for accelerated vesting upon retirement. As of
December 31, 2007, there were 91,632 stock options subject
to accelerated vesting that such participants would have
been eligible to exercise if they had retired as of such date.
The aggregate grant date fair value of options subject to
accelerated vesting was $1.2 million. For the year ended
December 31, 2007, stock-based compensation expense for
such options was $0.7 million. For the year ended Decem-
ber 31, 2007, the aggregate grant date fair value of options
vested, including options subject to accelerated vesting, was
$4.1 million. Stock options that refl ect accelerated vesting
for expense recognition become exercisable according to
the contract terms of the stock option grant.
PERFORMANCE SHARES
For the year ended December 31, 2007, the Company
made a target award of 53,300 Performance Shares (net of
2,700 Performance Shares forfeited due to termination of
employment) to Long Term Incentive Plan (“LTIP”) partici-
pants. The measurement period for the Performance Shares
is January 1, 2007 through December 31, 2009. Common
stock equal to between 30 percent and 224 percent of the
performance share target will be awarded based on the
Company’s growth in earnings before interest, taxes, depre-
ciation and amortization (“EBITDA”) minus a capital charge
and total return to shareholders relative to a peer group of
companies and the Russell 2000® Value Small-Cap Index.
The weighted-average grant date fair value was $47.15 per
Performance Share (which represents the grant date market
price of the Company’s common stock of $36.51 per share
multiplied by the probability weighted expected payout
of approximately 1.29 shares of common stock for each
Performance Share) and was estimated using a “Monte Carlo”
simulation technique. Compensation cost is recognized pro
rata over the vesting period.
RSUs
For the year ended December 31, 2007, the Company award
certain LTIP participants and directors of the Company
(“Directors”) 9,473 RSUs and 2,760 RSUs, respectively.
The weighted-average grant date fair value of such awards
to employees and Directors were $30.80 per share and
$41.51 per share, respectively. Awards to Directors vest one
year from the date of grant. In general, awards to LTIP partici-
pants vest equally on the fi rst three anniversaries of the award.
RESTRICTED STOCK
A number of employees of the Pulp and Paper Business were
granted Kimberly-Clark restricted stock awards in previous
years. These awards generally vested and became unrestricted
shares in three to fi ve years from the date of grant. At the time
of the Spin-Off, the vesting schedule of 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 restriction period. Unvested restricted shares of Kimberly-
Clark common stock were forfeited.
On December 1, 2004, the Company awarded 25,360
replacement restricted shares to employees whose restricted
shares of Kimberly-Clark common stock were forfeited. The
number of restricted shares was calculated using a ratio con-
version methodology approved under FASB Interpretation
No. 44, Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25
based on the fair market value of the Company’s Common
Stock on the date of grant. As of December 31, 2007, 14,292
of such restricted shares were outstanding.
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The following table summarizes the activity of the Company’s unvested stock-based awards (other than stock
options) for the year ended December 31, 2007:
Outstanding – December 31, 2006
Add: Shares granted(a)
Less: Shares vested
Less: Shares expired or cancelled
Outstanding – December 31, 2007(b)
Restricted
Stock
Weighted-Average
Grant Date
Fair Value
Performance
Shares/RSUs
Weighted-Average
Grant Date
Fair Value
19,190
–
4,898
–
14,292
$34.28
–
$34.28
–
$34.28
140,673
65,533
33,281
2,760
170,165
$29.76
$44.63
$30.51
$48.53
$35.03
(a) Includes the grant of 212 RSUs to Canadian employees and directors in lieu of cash dividends. Such dividends-in-kind vest concurrently with the underlying RSU.
(b) The aggregate pre-tax intrinsic value of restricted stock, RSUs and Performance Shares as of December 31, 2007 was $0.4 million, $3.5 million and $3.4 million,
respectively. The aggregate pre-tax intrinsic value of Performance Shares was calculated on the shares that would be issued based on the Company’s achievement
of performance targets if the performance period ended at December 31, 2007.
The aggregate pre-tax intrinsic value of restricted
The following table presents the effects on net
stock and RSUs that vested for the years ended December 31,
2007, 2006 and 2005 was $1.3 million, $0.2 million and
$0.2 million, respectively.
income and earnings per share if the Company had adopted
the fair value recognition provisions of SFAS 123 for options
granted in the year ended December 31, 2005.
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
compensation 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 retire-
ment, generally age 55 with fi ve years of vested service.
Prior to the adoption of SFAS 123R, the Company recog-
nized compensation cost over the explicit service period for
restricted stock and RSU awards subject to accelerated vest-
ing 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.
(In millions, except per share data)
Reported net loss
Add: Stock-based compensation expense,
net of tax effects, included in net income as reported
Less: Pro forma compensation expense, net of tax
Pro forma net income
Reported earnings per share:
Basic
Diluted
Pro forma earnings per share:
Basic
Diluted
$(29.7)
0.5
(2.5)
$(31.7)
$(2.02)
$(2.01)
$(2.15)
$(2.14)
The weighted-average grant date fair value for
stock options granted during the years ended December 31,
2005 was estimated using the Black-Scholes option valuation
model with the following assumptions:
Expected life in years
Interest rate
Volatility
Dividend yield
5.9
3.9%
39.0%
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 year ended December 31, 2005 was $12.46.
Forfeitures were estimated at the date of grant.
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eleven
Stockholders’ Equity
C O M M O N S T O C K
The Company has authorized 100 million shares of Common
Stock. Holders of the Company’s Common Stock are entitled
to one vote per share.
For the years ended December 31, 2007, 2006 and
2005, the Company acquired 11,445 shares, 1,185 shares
and 814 shares of Common Stock, respectively, at a cost of
approximately $0.3 million, $41,000 and $25,000, respec-
tively, primarily for shares surrendered by employees to pay
taxes due on vested restricted stock awards. In addition, in
connection with the acquisition of Fox River, the Company
acquired 100 shares of Common Stock with a fair market
value of approximately $4,000.
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 purchase
rights become exercisable and separately certifi cated only
upon a “Rights Distribution Date” as that term is defi ned 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 benefi cial 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 acquir-
ing 15 percent or more of the outstanding shares of our
Common Stock then outstanding.
On March 12, 2008, the Company’s shareholders
approved a reverse/forward split of the issued and outstand-
ing shares of Common Stock. The reverse/forward split will
consist of a 1-for-50 reverse split of Common Stock fol-
lowed immediately by a 50-for-1 forward split of Common
Stock. Holdings of stockholders with fewer than 50 shares
of Common Stock prior to the split would be converted into
fractional shares. Such fractional shares would be purchased
by the Company at a price equal to the average closing price
per share of the Company’s Common Stock on the New
York Stock Exchange on the fi ve days preceding the split.
Stockholders holding 50 or more shares of common stock
will continue to hold the same number of shares after the for-
ward stock split, and will not receive any cash payment. The
Company expects to fund up to $9 million to acquire a por-
tion of these shares. The reverse/forward split is expected to
result in a signifi cant reduction in shareholder record keeping
/ 98
Neenah Paper, Inc. 2007 Annual Report
and mailing expenses and provide holders of fewer than
50 shares with a cost-effective way to effi ciently dispose of
their investment.
P R E F E R R E D S T O 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, redemp-
tion and liquidation preferences pertaining to each such
series. No shares of preferred stock have been issued by
the Company.
twelve
Commitments
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, 2007, are as follows:
2008
2009
2010
2011
2012
Thereafter
Future minimum lease obligations
$3.4
3.3
2.3
1.9
1.4
2.3
$14.6
For the years ended December 31, 2007, 2006 and
2005, rental expense under operating leases was $3.0 mil-
lion, $2.0 million and $1.3 million, 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 2008. Commitments under
these contracts are approximately $43.5 million in 2008,
$40.5 million in 2009, $37.7 million in 2010, $34.8 million
in 2011 and $21.4 million in 2012. Total commitments
beyond 2012 are $184.1 million.
66500ne_fin 98
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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
6, “Sale of Woodlands.” Pursuant to the terms of the FSA, the
Company agreed to purchase 200,000 metric tons of soft-
wood timber annually through December 31, 2010. Based on
the contract price in effect at December 31, 2006, commit-
ments under the FSA are approximately $6.7 million annually
for 2008 through 2010. Timber purchases 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 fi ve years at the Company’s discretion. The FSA
can be extended for a subsequent fi ve years upon the mutual
agreement of the Company and the Purchaser.
The Company has certain other minimum purchase
commitments, none of which are individually material, that
extend beyond 2008. Commitments under these contracts
are approximately $0.7 million in 2008, $0.6 million in 2009,
$0.6 million in 2010, $0.5 million in 2011and $0.3 million
in 2012.
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.
thirteen
Contingencies and Legal Matters
L I T I G A T I O N
In December 2006, certain retirees of Neenah Canada
brought a proposed class action lawsuit (the “Retiree
Class Action”) against Neenah Canada, the Company and
Kimberly-Clark Inc. alleging the wrongful reduction and/
or elimination of certain retiree benefi ts following Neenah
Canada’s transfer of the Terrace Bay pulp and woodlands
operations to Terrace Bay Pulp Inc. and Eagle Logging Inc.
The plaintiffs alleged that the Company and Neenah Canada
have breached a contract to provide benefi ts, breached
their fi duciary duty to the plaintiffs and have made negligent
misrepresentations regarding retiree benefi ts. The plaintiffs
sought unspecifi ed damages for the value of the loss of
retiree medical and health benefi ts (and/or reinstatement
of the reduced/eliminated benefi ts), plus punitive damages
in the amount of $5.0 million Canadian dollars. In the fourth
quarter of 2007, Neenah Canada and the plaintiffs reached
an agreement to settle the Retiree Class Action. In return
/ 99
Neenah Paper, Inc. 2007 Annual Report
for a full and complete dismissal of all claims for retiree
health and medical benefi ts against Neenah Canada and
the Company, Neenah Canada agreed to pay the plaintiffs
approximately $5.5 million Canadian dollars for settlement
of the Retiree Class Action. Neenah Canada also agreed to
continue certain retiree life insurance benefi ts at a reduced
rate in the future. The settlement of the Retiree Class Action
has been approved by all class members and the court, and
the settlement amounts were paid to the putative class in
February 2008, resulting in a full and complete dismissal of
the Retiree Class Action. For the year ended December 31,
2007, Neenah Canada recorded a charge related to the liti-
gation settlement of $5.2 million.
In February 2007, certain former employees of
Neenah Canada who were previously employed in Neenah
Canada’s Longlac woodlands operations brought suit
against the Company and Neenah Canada in the Ontario
(Canada) Superior Court of Justice for damages. The
plaintiffs claim to have suffered from an alleged wrongful
termination of employment by Neenah Canada occurring
on or about August 21, 2006. Eagle Logging Inc. (the pur-
chaser of Neenah Canada’s Longlac woodlands assets on
August 29, 2006), Terrace Bay Pulp Inc. (the purchaser of
Neenah Canada’s Terrace Bay pulp mill), Buchanan Forest
Products Ltd., Lucky Star Holdings Inc. (each affi liates 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 wrong-
ful termination, breach of contract, conspiracy and punitive
damages, among other things. Eagle Logging Inc. and cer-
tain affi liated companies have agreed to indemnify and hold
the Company and Neenah Canada harmless from claims and
damages arising from the termination of woodlands employ-
ees prior to the acquisition of Neenah Canada’s woodlands
assets by Eagle Logging Inc. in 2006. The Company and
Neenah Canada believe they have adequate defenses
against such claims and will vigorously defend the litigation.
The Company is involved in certain other legal
actions and claims arising in the ordinary course of business.
While the outcome of these legal actions and claims cannot
be predicted with certainty, it is the opinion of management
that the outcome of any such claim which is pending or threat-
ened, either individually or on a combined basis, will not have
a material adverse effect on the consolidated fi nancial condi-
tion, results of operations or liquidity of the Company.
I N D E M N I F I C A T I O N S
For the years ended December 31, 2007 and 2006, the
Company did not recognize revenue or cost in its consoli-
dated statement of operations for the pulp manufactured
by TBPI at the Terrace Bay mill for sale to Kimberly-Clark.
66500ne_fin 99
4/17/08 5:57:04 PM
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The Company receives payments from Kimberly-Clark for
Kimberly-Clark’s purchases of pulp from TBPI and immedi-
ately 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 approximately equal
accounts receivable from Kimberly-Clark and accounts pay-
able to TBPI for such pulp shipments. As of December 31,
2007, the Company had a receivable from Kimberly-Clark
for $17.7 million recorded in Accounts receivable, net,
$1.7 million of cash received from Kimberly-Clark that had
not been remitted to Buchanan recorded in Cash and cash
equivalents and a $19.4 million payable to TBPI recorded in
Accounts payable on the consolidated balance sheet.
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 14, “Transactions with Kimberly-
Clark.” Many of the potential indemnifi cation liabilities under
these agreements are unknown, remote or highly contingent.
Furthermore, even in the event that an indemnifi cation claim
is asserted, liability for indemnifi cation is subject to determina-
tion 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 indemnifi able liability or
risk under these agreements for which it believes a future pay-
ment is probable and a range of loss can be reasonably esti-
mated. As of December 31, 2007, management believes the
Company’s liability under such indemnifi cation obligations was
not material to the consolidated fi nancial statements.
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 fi nancial condition, results of operations or liquidity.
However, future events, such as changes in existing laws and
regulations or contamination of sites owned, operated 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 genera-
tors) may give rise to additional costs which could have a
material adverse effect on the Company’s fi nancial condition,
results of operations or liquidity.
The Company incurs capital expenditures necessary
to meet legal requirements and otherwise relating to the pro-
tection of the environment at its facilities in the United States
and internationally. For these purposes, the Company has
planned capital expenditures for environmental projects dur-
ing the period 2008 through 2010 of approximately $2 million
to $3 million annually. Following the completion of engineer-
ing studies and negotiations with local authorities and other
interested parties in Canada, the Company does not antici-
pate any material capital expenditures would be required at
the Pictou mill in the foreseeable future related to the effl uent
treatment system, total sulfur emissions or other environmen-
tal matters until 2009 or later. The Company’s anticipated cap-
ital expenditures for environmental projects are not expected
to have a material adverse effect on our fi nancial condition,
results of operations or liquidity.
E N V I R O N M E N T A L , H E A L T H A N D S A F E T Y M A T T E R S
Neenah is subject to federal, state, provincial and local laws,
regulations and ordinances relating to various environmental,
health and safety matters. The Company is in compliance
with, or is taking actions designed to ensure compliance with,
these laws, regulations and ordinances. However, the nature
of the Company’s business exposes it to the risk of claims
with respect to environmental, health and safety matters, and
there can be no assurance that material costs or liabilities
will not be incurred in connection 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 administrative proceeding relating to environmen-
tal, health and safety matters.
E M P L O Y E E S A N D L A B O R R E L A T I O N S
Hourly employees at the Pictou pulp mill are represented
by the Communications, Energy and Paperworkers Union of
Canada. The collective bargaining agreement for the Pictou
mill expires on May 31, 2009.
Hourly employees at the Neenah, Appleton, Whiting,
Munising, and Urbana paper mills and the Appleton convert-
ing center are represented by the United Steelworkers Union
(the “USW”). The collective bargaining agreement for the
Appleton converting center expires in November 2008. The
collective bargaining agreements for the Whiting, Urbana,
Neenah, Munising, and Appleton paper mills expire on
January 31, 2009, May 31, 2009, June 30, 2009, July 14, 2009
and May 31, 2010, respectively. Additionally, the Neenah,
Whiting and Munising, paper mills have bargained jointly
with the union on pension matters. In September 2007, the
Company and the union entered into a new agreement gov-
erning pension matters that expires in 2019.
/ 100
Neenah Paper, Inc. 2007 Annual Report
66500ne_fin 100
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Hourly employees at the Ripon paper mill are rep-
resented by a local of the Association of Western Pulp and
Paper Workers pursuant to a collective bargaining agree-
ment that expires on April 30, 2010. As of December 31,
2007, all hourly employees at the Housatonic mill repre-
sented by locals of the USW had been terminated.
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”). The collective bar-
gaining agreement covering union employees of Neenah
Germany is negotiated by the IG BCE and a national trade
association representing all employers in the industry. Union
membership is voluntary, and under German law does
not need to be disclosed to the Company. As a result, the
number of employees covered by the collective bargaining
agreement that expires in September 2008 cannot be deter-
mined. Negotiations on a new contract have not begun.
fourteen
Transactions with Kimberly-Clark
During all years presented, the Company sold softwood
and hardwood pulp to Kimberly-Clark. For the years ended
December 31, 2007, 2006 and 2005, net sales revenue for
the pulp sold to Kimberly-Clark were $115 million, $163 million
and $135 million, respectively. In connection with the Spin-Off,
the Company and Kimberly-Clark entered into the Pulp
Supply Agreement as described below.
P U L P S U P P L Y A G R E E M E N T
Pursuant to the terms of the Pulp Supply Agreement, the
Company agreed to supply from its Terrace Bay and Pictou
pulp mills and Kimberly-Clark agreed to purchase annu-
ally specifi ed tonnages of northern bleached softwood
and hardwood kraft pulp, except to the extent excused by
a Force Majeure Event. The northern bleached softwood
kraft pulp commitment is 365,000 metric tons for 2007,
278,000 metric tons for 2008, and 165,000 metric tons for
2009. These tonnages have been and will be supplied to
Kimberly-Clark by the Company’s Pictou Pulp mill and, on
a pass-through basis, by Terrace Bay 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 affi liated
/ 101
Neenah Paper, Inc. 2007 Annual Report
companies, to indemnify and hold the Company harmless for
any claims arising from Terrace Bay’s failure to so perform.
See Note 13, “Contingencies and Legal Matters.” The Pictou
mill’s supply commitment to Kimberly-Clark for 2008 rep-
resents approximately 65 percent of its total production of
northern bleached softwood kraft pulp in 2007.
In June 2007, the Company notifi ed Kimberly-Clark
of its intention to terminate its obligation to supply pulp
from Terrace Bay under the Pulp Supply Agreement effec-
tive June 2008. Such notice will also result in cancellation of
the pass-through sales agreement between the Company
and TBPI with respect to Terrace Bay, but does not termi-
nate the Company’s supply arrangements with Kimberly-
Clark for pulp manufactured at the Pictou Mill. See Note 5,
“Discontinued Operations.”
The Company’s commitment to supply northern
bleached hardwood kraft pulp from the Pictou Mill for
2007 was 20,000 metric tons and is 10,000 metric tons for
2008. The commitments for 2008 represent approximately
40 percent of the Pictou Mill’s production of northern
bleached hardwood kraft pulp in 2007. For the year ended
December 31, 2007, the Company fulfi lled its supply commit-
ments 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 are 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 structured as
supply-or-pay and take-or-pay arrangements. Accordingly, if
the Company does not supply the specifi ed 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 purchase the pulp, plus
10 percent of that difference. If Kimberly-Clark does not pur-
chase the specifi ed minimums, Kimberly-Clark must pay for
the shortfall based on the difference between the contract
price and any lower price the Company obtains for the pulp,
plus 10 percent of the difference. The Company will incur the
cost of freight to delivery points specifi ed in the agreement.
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 fi rst and second years of the
phase-down period 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
specifi ed 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,
66500ne_fin 101
4/17/08 5:57:04 PM
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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 agreement. In addition,
Kimberly-Clark may terminate the agreement if the owner-
ship 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 agree-
ment 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 products or to otherwise materially and
adversely affect the reputation of Kimberly-Clark or its prod-
ucts. 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 certifi cation.
fi fteen
Business Segment and Geographic Information
The Company reports its operations in three segments: Fine
Paper, Technical Products and Pulp. The Fine Paper busi-
ness is a leading producer of premium writing, text, cover
and specialty papers. The Technical Products business is
a leading producer of fi ltration media, durable, saturated
and coated substrates for a variety of end uses; and non-
woven wall coverings. 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 manage-
ment uses internally for evaluating segment performance
and allocating resources. Transactions between segments
are executed at market prices and such transactions are
eliminated in consolidation.
The description above is a summary of the principal
The costs of shared services, and other administra-
provisions of the Pulp Supply Agreement and is qualifi ed
in its entirety by the Amended and Restated Pulp Supply
Agreement dated August 29, 2006.
O T H E R A G R E E M E N T S W I T H K I M B E R L Y - C L A R K
The Company also entered into a (i) Distribution Agreement,
(ii) Employee Matters Agreement, (iii) Corporate Services
Agreement and (iv) Tax Sharing Agreement with Kimberly-
Clark in connection with the Spin-Off. These agreements
provided for, among other things, (i) the principal corporate
transactions required to effect the separation of the Pulp
and Paper Business from Kimberly-Clark, cross-indemnities
principally designed to place fi nancial responsibility for the
obligations and liabilities of the Pulp and Paper Business
with the Company and fi nancial responsibility for the obliga-
tions and liabilities of Kimberly-Clark’s retained businesses
with Kimberly-Clark, (ii) employee liability transfers to the
Company and retention of certain employment liabilities by
Kimberly-Clark, (iii) various transitional corporate support
services and (iv) the Company’s and Kimberly-Clark’s respec-
tive 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.
The descriptions above are summaries of the princi-
pal provisions of the various agreements and are qualifi ed in
their entirety by the respective agreements.
tive 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 account-
ing policies of the reportable operating segments are the
same as those described in Note 2, “Summary of Signifi cant
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
Operating income
Fine Paper
Technical Products
Pulp(a)(b)
Unallocated corporate costs
Consolidated
Year Ended December 31,
2007
2006
2005
$366.5
400.8
223.5
(0.3)
$990.5
$223.9
183.1
189.3
(2.0)
$594.3
$222.3
130.6
183.8
(2.0)
$534.7
Year Ended December 31,
2007
2006
2005
$ 46.6
24.7
9.2
(13.6)
$ 66.9
$ 56.2
9.2
115.8
(12.8)
$168.4
$58.4
10.5
(9.0)
(6.5)
$53.4
(a) For the years ended December 31, 2007 and 2006, operating income for
the pulp business includes amortization of the deferred gain on sale of
woodlands of $6.2 million and $2.9 million, respectively.
(b) For the years ended December 31, 2006, operating income for the pulp
business includes a $122.6 million gain on sale of woodlands.
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Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Year Ended December 31,
2007
2006
2005
Depreciation and amortization
$11.3
Fine Paper
17.2
Technical Products
10.7
Pulp
6.1
Corporate
45.3
Total
Less: Discontinued operations
–
Total Continuing Operations $45.3
$9.5
6.2
10.0
4.5
30.2
–
$30.2
$9.5
4.0
13.5
2.0
29.0
3.4
$25.6
Year Ended December 31,
2007
2006
2005
Capital expenditures
$ 9.5
Fine Paper
39.5
Technical Products
5.4
Pulp
3.9
Corporate
58.3
Total
–
Less: Discontinued operations
Total Continuing Operations $58.3
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 A T I O N
$ 4.8
6.7
6.7
6.9
25.1
–
$25.1
$ 5.5
2.4
9.8
8.0
25.7
4.2
$21.5
December 31,
2007
2006
$209.8
467.9
223.0
32.1
$932.8
$111.0
394.1
202.6
37.0
$744.7
Net sales are attributed to geographic areas based
on the physical location of the entities. Segment identifi able
assets are those that are directly used in the segments opera-
tions. Corporate assets are primarily cash, prepaid pension
costs and deferred fi nancing costs.
C O N C E N T R A T I O N S
For the years ended December 31, 2007, 2006 and 2005, the
Company had pulp sales to Kimberly-Clark of $115 million,
$163 million and $135 million, respectively. For the years
ended December 31, 2007, 2006 and 2005, sales to the fi ne
paper business’s two largest customers (both of which are
distributors) represented approximately 30 percent, 30 per-
cent and 35 percent, respectively, of its total sales. For the
periods presented, no other single customer accounted for
more than 10 percent of the consolidated revenue of the
Company. Except for wood chips used by the Pictou mill and
certain specialty latex grades and specialty softwood pulp
used by Technical Products, management is not aware of
any signifi cant concentration of business transacted with a
particular supplier that could, if suddenly eliminated, have a
material adverse affect on its operations. For the year ended
December 31, 2007, two suppliers provided over 60 percent
of the wood chips used by the Pictou mill. While manage-
ment 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 spe-
cialty grade or of specialty softwood pulp could disrupt and
eventually cause a shutdown of production of certain techni-
cal products.
Net sales
United States
Canada
Europe
Intergeographic items
Consolidated
Total Assets
United States
Canada
Europe
Total
Year Ended December 31,
2007
2006
2005
$502.9
223.5
264.4
(0.3)
$990.5
$357.3
189.3
49.7
(2.0)
$594.3
$352.9
183.8
–
(2.0)
$534.7
sixteen
Supplemental Data
December 31,
2007
2006
$332.5
201.6
398.7
$932.8
$223.5
180.8
340.4
$744.7
S U P P L E M E N T A L S T A T E M E N T O F O P E R A T I O N S D A T A
Summary of Advertising and
Research Expenses
Advertising expense
Research expense
Year Ended December 31,
2007
2006
2005
$10.3
6.4
$6.3
3.5
$7.9
2.2
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Summary of Other (Income)
Expense – net
Foreign currency (gains) losses
Gains on derivative
fi nancial instruments
Cost of litigation settlement
(Note 13)
Terrace Bay employee benefi ts
Other income – net
Total
Year Ended December 31,
2007
2006
2005
$ 2.3
$ –
$(4.6)
(6.7)
(7.6)
(2.0)
5.2
(3.5)
(2.8)
$(5.5)
–
–
(0.2)
$(7.8)
–
–
(0.2)
$(6.8)
S U P P L E M E N T A L B A L A N C E S H E E T D A T A
Summary of Accounts Receivable – net
Accounts Receivable:
From customers
Other
Less allowance for doubtful accounts and
sales discounts
Total
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
Indemnifi cation from FiberMark for
German taxes
Receivable from FiberMark for
German taxes
Spare parts
Prepaid pension costs (Note 9)
Prepaid and other current assets
Prepaid income taxes
Assets held for sale (Note 4)
Cash fl ow hedges (Note 3)
Total
December 31,
2007
2006
$135.1
12.4
$105.2
11.7
(2.1)
$145.4
(4.4)
$112.5
December 31,
2007
2006
$ 26.2
18.1
70.2
5.7
120.2
(9.6)
$110.6
$24.2
11.1
44.5
3.4
83.2
(8.3)
$74.9
December 31,
2007
2006
$ 5.1
$ 5.4
4.6
10.0
–
6.9
0.6
2.2
0.5
$29.9
4.9
7.2
6.3
4.1
3.3
–
0.7
$31.9
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Neenah Paper, Inc. 2007 Annual Report
Summary of Property, Plant and
Equipment – net
December 31,
2007
2006
Land and land improvements
Buildings
Machinery and equipment
Roads
$ 13.0
159.7
714.6
16.8
9.8
11.2
925.1
Less accumulated depreciation and depletion 492.8
$432.3
Net Property, Plant and Equipment
Construction in progress
Timberlands
$ 2.7
124.9
595.7
14.5
8.4
21.9
768.1
412.5
$355.6
Depreciation expense for the years ended
December 31, 2007, 2006 and 2005 was $41.6 million,
$28.0 million and $27.0 million, respectively. Interest expense
capitalized as part of the costs of capital projects was
$0.5 million, $0.3 million and $0.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Summary of Accrued Expenses
Accrued salaries and employee benefi ts
Accrued income taxes
Accrued interest
Accrued restructuring costs (Note 3)
Deferred revenue
Other
Total
December 31,
2007
2006
$34.2
13.7
2.1
5.3
0.1
16.7
$72.1
$26.6
10.2
2.1
–
5.8
8.8
$53.5
December 31,
2007
2006
Summary of Noncurrent Employee
Benefi ts and Other Obligations
Pension benefi ts
Post-employment benefi ts other than pensions
Other
Total
$ 64.2
45.7
13.4
$123.3
$ 72.6
36.6
3.0
$112.2
S U P P L E M E N T A L C A S H F L O W D A T A
Year Ended December 31,
2007
2006
2005
Net cash provided by (used in)
changes in working capital,
net of effects of acquisitions
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued expenses
Foreign currency effects on
working capital
Total
$(14.3)
(1.1)
(3.3)
2.8
7.2
8.7
$ –
$ 3.0
24.7
(0.8)
8.0
0.7
4.2
$39.8
$ 13.3
(7.6)
(6.9)
(10.1)
(0.2)
1.4
$(10.1)
66500ne_fin 104
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Year Ended December 31,
2007
2006
2005
seventeen
$23.7
$17.1
$15.8
Condensed Consolidating Financial Information
Cash paid during period for
interest, net of interest
expense capitalized
Cash paid during period for
income taxes, net of refunds
6.2
Non-cash transfers (to) from
Kimberly-Clark (Note 9)
Non-cash investing activities:
–
4.1
–
6.6
0.7
Liability for equipment acquired
3.2
(4.2)
(1.7)
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 percent 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 follow-
ing condensed consolidating fi nancial information is presented
in lieu of consolidated fi nancial statements for the Guarantor
Subsidiaries as of December 31, 2007 and 2006 and for the years
ended December 31, 2007, 2006 and 2005.
C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F O P E R A T I O N S
Year Ended December 31, 2007
Neenah
Paper, Inc
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Gain on sale of woodlands
Other income – 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
$222.8
157.0
65.8
42.0
–
(0.1)
23.9
(9.2)
22.6
10.5
0.3
10.2
–
$ 10.2
$503.7
468.6
35.1
25.0
(6.2)
(4.8)
21.1
–
2.5
18.6
7.6
11.0
(27.7)
$ (16.7)
$264.3
227.6
36.7
15.4
–
(0.6)
21.9
–
–
21.9
(4.0)
25.9
–
$ 25.9
$(0.3)
(0.3)
–
–
–
–
–
9.2
–
(9.2)
–
(9.2)
–
$(9.2)
$990.5
852.9
137.6
82.4
(6.2)
(5.5)
66.9
–
25.1
41.8
3.9
37.9
(27.7)
$ 10.2
C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F O P E R A T I O N S
Year Ended December 31, 2006
Neenah
Paper, Inc
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Gain on sale of woodlands
Other income – 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
$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
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F O P E R A T I O N S
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)
December 31, 2007
Neenah
Paper, Inc
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ (0.9)
31.8
21.7
0.5
44.6
13.4
111.1
253.8
157.5
96.3
467.5
(1.4)
–
–
8.5
$682.0
$ 7.7
15.0
16.9
23.9
63.5
306.5
–
24.0
394.0
288.0
$682.0
$ 2.8
71.0
56.7
1.3
16.9
14.1
162.8
472.1
319.7
152.4
–
56.8
–
2.8
4.7
$379.5
$ –
46.0
44.6
34.5
125.1
–
–
64.0
189.1
190.4
$379.5
$ 0.5
42.6
32.2
0.1
–
2.4
77.8
199.2
15.6
183.6
–
–
106.6
30.8
1.5
$400.3
$ 3.2
25.9
–
13.7
42.8
14.7
30.4
35.3
123.2
277.1
$400.3
$ –
–
–
–
(61.5)
–
(61.5)
–
–
–
(467.5)
–
–
–
–
$(529.0)
$ –
–
(61.5)
–
(61.5)
–
–
–
(61.5)
(467.5)
$(529.0)
$ 2.4
145.4
110.6
1.9
–
29.9
290.2
925.1
492.8
432.3
–
55.4
106.6
33.6
14.7
$932.8
$ 10.9
86.9
–
72.1
169.9
321.2
30.4
123.3
644.8
288.0
$932.8
Net sales
Cost of products sold
Gross profi t
Selling, general and administrative expenses
Other income – 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
C O N D E N S E D C O N S O L I D A T I N G B A L A N C E S H E E T
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
Intangible Assets – net
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 Benefi ts and Other Obligations
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
C O N D E N S E D C O N S O L I D A T I N G B A L A N C E S H E E T
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
Intangible Assets – net
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 Benefi ts and Other Obligations
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31, 2006
Neenah
Paper, Inc
Guarantor Non-Guarantor
Subsidiaries
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
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
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
Gain on sale of woodlands
(Gain) loss on other asset dispositions
Net cash provided by (used in) changes in operating
working capital, net of effects of acquisition
Excess tax benefi t from stock-based compensation
Equity in earnings of subsidiaries
Pension and other post-employment benefi ts
Loss on curtailment and settlement of pension plan
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Acquisition of Fox River, net of cash acquired
Net proceeds from sale of woodlands
Acquisition of Neenah Germany, net of cash acquired
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
Excess tax benefi t from stock-based compensation
Other
Intercompany transfers – net
NET CASH PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
December 31, 2007
Neenah
Paper, Inc
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ 10.2
$(16.7)
$ 25.9
$(9.2)
$ 10.2
15.1
5.8
(3.9)
–
0.2
1.6
(0.5)
(9.2)
2.9
–
0.6
22.8
(12.9)
(54.7)
–
(1.5)
0.1
(69.0)
64.7
(1.1)
(34.1)
–
–
(6.0)
3.7
0.5
(0.3)
17.8
45.2
–
16.2
0.3
(12.8)
(6.2)
(1.0)
0.3
–
–
(0.8)
38.7
(0.1)
17.9
(10.0)
–
–
–
0.5
(9.5)
–
–
–
–
–
–
–
–
–
(6.4)
(6.4)
0.3
14.0
0.3
(10.1)
–
–
(1.9)
–
–
2.0
–
(1.4)
28.8
(35.4)
–
–
–
0.5
(34.9)
13.4
–
–
8.0
(5.0)
–
–
–
–
(11.4)
5.0
0.6
–
–
–
–
–
–
–
9.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
45.3
6.4
(26.8)
(6.2)
(0.8)
–
(0.5)
–
4.1
38.7
(0.9)
69.5
(58.3)
(54.7)
–
(1.5)
1.1
(113.4)
78.1
(1.1)
(34.1)
8.0
(5.0)
(6.0)
3.7
0.5
(0.3)
–
43.8
0.9
(1.0)
0.1
$ (0.9)
2.3
0.5
$ 2.8
(0.5)
1.0
$ 0.5
–
–
$ –
0.8
1.6
$ 2.4
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F C A S H F L O W S
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization
Stock-based compensation
Loss on disposal of Terrace Bay
Loss on curtailment and partial settlement of pension plan
Deferred income tax provision
Gain on sale of woodlands
(Gain) 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
Pension and other post-employment benefi ts
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Net proceeds from sale of woodlands
Payment for transfer of Terrace Bay
Acquisition of Neenah German, net of cash acquired
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
Intercompany transfers – net
NET CASH PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
December 31, 2006
Neenah
Paper, Inc
Guarantor Non-Guarantor
Subsidiaries
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
0.1
–
–
–
–
–
–
–
–
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
(11.9)
12.0
$ 0.1
(0.1)
0.6
$ 0.5
1.0
–
$ 1.0
–
–
$ –
(11.0)
12.6
$ 1.6
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F C A S H F L O W S
OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization
Stock-based compensation
Asset impairment loss
Deferred income tax benefi t
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 benefi ts
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 DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
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
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)
–
–
–
–
–
–
(21.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.9)
13.9
$ 12.0
0.1
(4.6)
5.2
$ 0.6
–
–
–
$ –
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
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Neenah Paper, Inc. 2007 Annual Report
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
.eighteen
Unaudited Quarterly Data
Net Sales
Gross Profi t
Operating Income
Income From Continuing Operations
Earnings Per Common Share From Continuing Operations:
Basic
Diluted
First(a)
$224.7
43.5
27.6
15.2
$ 1.03
$ 1.01
Second
$258.1
30.7
11.4
3.3
$ 0.22
$ 0.22
First
Second(b)
Net Sales
Gross Profi t
Operating Income
Income From Continuing Operations
Earnings Per Common Share From Continuing Operations:
Basic
Diluted
$132.9
23.5
10.0
3.4
$ 0.23
$ 0.23
$142.8
26.1
138.9
84.2
$ 5.71
$ 5.68
(a) Includes the results of Fox River beginning March 1, 2007.
(b) Operating income for the second quarter of 2006 includes $122.6 million for the gain on sale of woodlands.
(c) Includes the results of Neenah Germany beginning October 11, 2006.
2007 Quarters
Third
$251.9
32.7
16.3
16.5
$ 1.10
$ 1.08
2006 Quarters
Third
$141.4
20.0
10.5
4.6
$ 0.31
$ 0.31
Fourth
$255.8
30.7
11.6
2.9
$ 0.19
$ 0.19
Fourth(c)
$177.2
22.4
9.0
3.2
$ 0.22
$ 0.21
Year
$990.5
137.6
66.9
37.9
$ 2.55
$ 2.50
Year
$594.3
92.0
168.4
95.4
$ 6.47
$ 6.43
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Neenah Paper, Inc. 2007 Annual Report
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C O R P O R A T 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 2008 annual meeting of the shareholders of
Neenah Paper, Inc. will be held Tuesday,
May 20, 2008, 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
BNY Mellon Shareowner Services
P.O. Box 358010
Pittsburgh, PA 15252
Contact Center:
Toll Free U.S. and Canada: 877.498.8847
International callers: 201.680.6578
www.melloninvestor.com/isd
F I N A N C I A L A N D O T H E R C O M P A N Y I N F O R M A T I O N
Our Annual Report on Form 10-K for the fi scal year
ended December 31, 2007 is available on our website
at www.neenah.com. In addition, fi nancial reports, recent
fi lings 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
C E R T I F I C A T I O N S
Neenah has included as exhibits to its Annual Report on
Form 10-K for the fi scal year ended December 31, 2007
fi led with the SEC, certifi cations of Neenah’s Chief
Executive Offi cer and Chief Financial Offi cer certifying
the quality of our public disclosure. Further, Neenah’s
Chief Executive Offi cer has certifi ed to the New York
Stock Exchange (NYSE) that he is not aware of any
violations by Neenah of the NYSE corporate governance
listing standards.
$150
$125
$100
$75
/ 112
Neenah Paper, Inc. 2007 Annual Report
S T O 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 I N G A N D D I V I D E N D I N F O R M A T I O N
2007
Fourth quarter
Third quarter
Second quarter
First quarter
2006
Fourth quarter
Third quarter
Second quarter
First quarter
Common Stock
Market Price
High
Low
Dividends
Declared
$36.39
$43,78
$45.55
$40.56
$37.43
$34.73
$34.50
$33.87
$27.50
$32.10
$36.84
$53.18
$33.19
$28.10
$28.50
$26.32
$0.10
$0.10
$0.10
$0.10
$0.10
$0.10
$0.10
$0.10
As of February 29, 2008, Neenah had approximately
10,900 holders of record of its common stock.
C O M P A R I S O N O F 3 7 M O N T H C U M U L A T I V E T O T A L R E T U R N *
†
12/01
04
12/31
04
12
05
12
06
1
07
2
07
3
07
4
07
5
07
6
07
7
07
8
07
9
07
10
07
11
07
12
07
Neenah Paper, Inc.
New peer group
Russell 2000 value
Old peer group
*$100 invested on 12/1/04 in stock or index-including reinvestment of dividends.
Fiscal year ended December 31.
†Peer group changed to refl ect Abitibi-Bowater merger.
T R A D E M A R K S
The brand names mentioned in this report – CAPITAL BOND, CLASSIC,
CLASSIC COLUMNS, CLASSIC CREST, CLEARFOLD UV/ULTRA, EAMES,
ENVIRONMENT, ESSE, FOX RIVER SELECT, JET-PRO SOFT STRETCH,
NEENAH, NEUTECH, OXFORD, STARWHITE, SUNDANCE – are
trademarks of Neenah Paper, Inc.
66500ne_fin 112
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production notes
Covers:
ESSE® Paper
Pearlized Latte
105 lb. cover
Design and production:
Addison
www.addison.com
Pages 1 – 16:
CLASSIC CREST® Paper
Avalanche White [FSC Pure]
100 lb. text
Copywriting:
Robert Roth
Printing:
Sandy Alexander
Illustration, Pages 4 – 5:
Bernard Maisner
Photography,
Pages 5 – 6, 26 – 31:
Ioulex
Photography, Pages 10 – 11:
Kyoko Hamada
Photography, Pages 12– 13:
Burkhard Schittny
Photography, Pages 14 – 15:
Nadav Kander
Photography, Pages 16, 32:
Rick Burda
Photography, Page 25:
Clark Savage
(Executive Team);
Studio Burns
(Board of Directors)
Pages 17 – 24:
OXFORD® Paper
Peace
80 lb. text
Pages 25 – 40:
STARWHITE® Paper
Flash Blue [FSC Pure]
80 lb. text
Pages 41–56:
ENVIRONMENT® Paper
Blue Moon
80 lb. text
Pages 57–72:
EAMESTM Paper Collection
Furniture Finish
Pacific Blue
80 lb. text
Pages 73 – 88:
CLASSIC® Linen Paper
Monterey Sand
80 lb. text
Pages 89 – 112:
CLASSIC CREST® Paper
Tarragon
80 lb. text
3460 Preston Ridge Road
3460 Preston Ridge Road
Suite 600
Suite 600
Alpharetta, GA 30005
Alpharetta, GA 30005
678.566.6500
678.566.6500
To minimize our environmental
To minimize our environmental
impact, the Neenah Paper Inc.
impact, the Neenah Paper Inc.
2007 Annual Report was printed
2007 Annual Report was printed
using renewable energy on
using renewable energy on
papers containing fibers from
papers containing fibers from
environmentally appropriate,
environmentally appropriate,
socially beneficial and economi-
socially beneficial and economi-
cally viable forest resources.
cally viable forest resources.