2
In 2008, Neenah Paper
substantially completed
the major strategic
transformation
we announced a few
years ago.
We’re a vastly different company
today than we were just four short
years ago, due to our efforts to
strengthen our leadership positions in
fi ne paper and technical products,
exit the pulp business and drive greater
operational effi ciencies, all while
maintaining a prudent capital structure
and liquidity position.
The result is a company that is
better able to weather economic storms
in the near-term – and that will be more
competitive, more dynamic and
more profi table over the long-term.
We’ve accomplished a lot, but
we’ll never stop working to make
Neenah the strongest, sharpest, leanest,
smartest and greenest premium paper
company we can be.
1
2
®
In 2008, w e stren gthene d b oth our fi ne pap er an d technical pro d ucts b usinesses. B uildin g on our
p osition as the to p pre miu m fi ne paper fi r m in N orth A m erica, w e re-launched C L A SSIC C R EST
and C L A SSIC ® Linen with m ore colors and expanded digital printing capabilities, and m ade
the m fully Forest Ste w ardship C ouncil ™ (FS C) certifi ed and carb on neutral. W e backed
these q uality brands with a Print Perfor m ance G uarantee. W e also acq uired the
C L A SSIC ® Pap ers na m e in Euro p e an d other key international m arkets.
In technical pro d ucts, w e stren gthene d sp ecialize d ap plicatio ns
Stro n g er b usiness platfor m s m ean stro n g er gro w th p otential.
in heat transfer, for m ulatio ns for release pap ers an d certain
abrasives, an d filtratio n techn olo gies. W e also b e gan
o p eratin g a state-of-the-art filtratio n saturatio n
line in G er m any an d im prove d the efficiency
of o ur M unisin g, M ichigan mill. These
actions give us m ore w ays to satisfy
custo m ers’ needs–for a stronger
co m petitive advantage.
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7
8
W e are w orkin g s m arter, an d hard er, b uildin g o n inn ovatio n an d techn olo gical excellence to m eet
custo m ers’ nee ds an d create o p p ortunities. O ur vast kno w-ho w in pap er for m ation, saturation
an d coatin gs gives us a p o w erful advantag e in a wid e array of ap plications. In fi ne pap er, w e
created a ne w universal digital fi nish, earning the hig hly-resp ected H P Indig o® certifi cation
m ercial digital pap ers. In technical pro d ucts, w e launche d
ne w heat transfer pro d ucts that use advance d d eskto p printer technolo gy to
d eliver m ore vivid colors an d a softer feel. O ur tea m s have also adapte d
zero e missio n resins for hig h-effi ciency fi ltratio n in H V A C syste m s
A n d w e’ve d evelo p e d a w all liner that is pre-coate d for easy
ap plicatio n an d lo w er cost. C usto m ers with sp ecialize d
pro d uct re q uire m ents kno w they can count on us to
ap ply our “s m arts” to g et the jo b d one.
o n 10 0 % of o ur co m
.
10
.
,
Pro m otin g gre e n er practices isn’t just a “nice thin g ” to d o –it’s alw ays b e e n th e rig ht thin g to d o
mit m ent that provid es a stron g co m p etitive
advantag e. To day’s custo m ers d e m an d enviro n m ental solutio ns. That’s w hy w e sell m ore
™ certifi ed C L A SSIC ® Linen
HIT E® Pap ers. O ur m anufacturin g o p eratio ns m ake
extensive use of rene w able energy sources such as hydroelectric, win d p o w er
an d bio m ass. W e’re pro u d of the fact that w e’ve achieve d m ost of o ur
pro gress by investing in energy effi ciency up grad es and strea mlining
processes in our o p erations and pro d ucts to red uce our carb on
carb on neutral fi ne pap ers than anyone else, including our FS C
fo otprint, rather than just by p urchasin g cre dits to offset
For N eenah, it has lon g b een a serious corp orate co m
e missio ns. In fact, as a m e m b er of the C hicag o
Clim ate Exchan g e (C C X), w e have agree d to
au dite d re d uctio ns in greenh o use g as
green that can clearly b e seen
C L A SSIC C R E ST® an d ST A R W
e missions by 2010–a co m
mit m ent to
.
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13
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15
To Neenah Paper
Shareholders:
18
2008 was a year of unprecedented
economic challenges, but it also was
the year in which we essentially completed
our strategic transformation.
In many ways, we are fortunate to
have started – and fi nished – the trans-
formation when we did, as our actions
have placed us in a much stronger
position to cope with the present eco-
nomic turmoil. If we had done nothing
to alter the business structure that
existed at Neenah’s creation four years
ago, it is likely that we would be
having an entirely different kind of con-
versation about the impact of this
economic environment on our business.
Like many other manufacturing
businesses, we dealt with two separate
economic dynamics last year. Sharply
rising raw material and energy prices
prevailed during most of the year, fol-
lowed by weakening customer demand,
inventory destocking and the need
for significantly reduced operating
schedules at year-end. With our ongo-
ing focus on managing cash fl ows
and working capital, our teams were
able to move very quickly as the econ-
omy and fi nancial markets weakened in
the fall. During the fourth quarter, we
were able to improve our cash fl ow and
reduce debt in spite of the weaker
market conditions. We have implemented
important reductions in operating
expenses and capital spending for 2009.
We expect the actions we have taken
to control spending, combined with the
reversal of prior input price increases,
to provide us with the cash and liquidity
we will need in spite of the “unprece-
dented” market conditions that have
become an unfortunate reality.
While these initiatives will help
us through the short term, the comple-
tion of our strategic transformation has
better prepared us for the long term.
With the sale of the Pictou pulp mill and
consolidation of the remaining Fox River
sites into our Fine Paper manufacturing
footprint, we are now focused 100%
on Fine Paper and Technical Products
and have a larger platform from which to
grow. We’re focused on high-value
niches where we can excel due to our
superior quality, service, innovation
and technological skills. Our business is
less cyclical and more effi cient, and
our teams are fi rst-rate. We’re confi dent
that Neenah is well prepared for the
near-term challenges – and solidly
positioned for long-term opportunities
and performance.
Our team did a sound job of
managing the factors under our control,
helping to partly absorb the impact
of the economic forces we encountered.
A main area of emphasis for much of the
year was on offsetting the sharp rise in
energy and raw material costs, which
increased more than $25 million from
2007. We worked with customers to
obtain price increases, partnered with
suppliers to control costs and continued
to leverage expanded data available
from our systems to improve mix, reduce
waste and manage production more
effi ciently. We also took out costs
through synergies with Fox River inte-
gration and reductions in administrative
expenses. In total, these efforts yielded
over $20 million of benefits and largely
offset the impact of higher input costs.
19
We continued to launch new
products in our core businesses, investing
to improve our long-term competitive
position. And, we have continued
to make safety a priority. In 2008, our
reportable safety incident rate improved
more than 11 percent – from 2.0 to 1.8
incidents per 200,000 hours worked.
This compares very favorably to an indus-
try average of 4.0.
Our fi nancial results refl ected the
global economic challenges faced in
2008, particularly in the fourth quarter.
Consolidated net sales from continuing
operations were $732 million, versus
$767 million in 2007, and operating
income (before a $55 million goodwill
and other intangible asset impairment
charge) was $35 million, compared
with $54 million a year earlier. The severe
contraction in market demand and
economic conditions in the fourth quarter
accounted for $15 million of the
$19 million decline in full year operating
income. Net income from continuing
operations (also excluding the impairment
charge and a tax adjustment) fell to
$11 million in 2008 from $32 million in 2007.
As mentioned above, our 2008
results included a noncash charge to
write-down goodwill associated
with Neenah Germany. Accounting
convention requires that we adjust
carrying value to refl ect the levels inher-
ent in the current weakened condition
of the fi nancial markets and the
commensurate higher costs of debt and
equity. Our expectations for the
long-term value of this business have
not changed materially.
The key transformational event
in 2008 was the sale of the Pictou mill,
which has made Neenah less vulnerable
to the cyclical pulp business. Terms of
the sale allowed us to transfer all of the
assets and liabilities of Pictou, including
pension obligations and other post-
retirement obligations. Given the rapid
drop in pulp prices that occurred since
the sale, our timing was fortunate, as we
can now fully benefi t from these falling
prices. Finally, the sale enables us to
focus our management and fi nancial
resources squarely on the opportunities
in Fine Paper and Technical Products.
We recognize the importance
of strong cash fl ows and a sound
balance sheet as a buffer against dete-
riorating fi nancial and credit markets
and a worsening economy. Neenah
ended 2008 with $56 million of
untapped borrowing capacity on exist-
ing credit facilities. We have limited
fi nancial covenants and no major fi nanc-
ing needs in the coming year. Our
revolving facility does not mature until
November 2010 and our senior notes
do not mature until November 2014.
Nonetheless, we are more focused than
ever heading into 2009 on preserving
cash through spending reductions and
on maintaining a solid balance sheet.
In addition we are continuing our efforts
to unlock value from our timberlands.
20
Our stock price performance in
2008 refl ected the adverse market
environment, as well as challenges unique
to our industry. We continue to believe
in Neenah’s long-term prospects – and
our ability to deliver important cash
fl ows from our businesses to support
future growth. We have transformed the
company into a leader in premium fi ne
and specialty paper markets and away
from commodities, as we said we would.
Now, we are striving to match our solid
market position with strong fi nancial
performance to generate the increase in
value you expect and deserve. In the
interim, we continue to pay an attractive
dividend as part of our commitment to
shareholder value.
In Fine Paper, we continued
to build on the qualities that have made
Neenah #1 in premium writing, text and
cover papers in North America.
Product leadership is something we
never take for granted – and we worked
to enhance and expand our leading
position during 2008. We re-launched
our top heritage brands, CLASSIC CREST®
and CLASSIC® Linen Papers, adding
new colors, textures and a full range of
digital printing options. Refl ecting
our customers’ growing interest in eco-
responsible products, every grade within
these brands is now FSC certifi ed and
produced in a carbon-neutral manner.
A new industry-leading customer service
and print performance guarantee and
accompanying promotional materials
completed the package – demonstrating
to the design, printing and merchant
communities that we will continue to lead
the way in the premium papers market.
We are especially honored by
While our actions helped
an important recent recognition of our
quality and market leadership. The
Presidential Inaugural Commission
selected CLASSIC CREST®, one of our
fi nest eco-friendly papers, for the invita-
tions to the inauguration of President
Obama – a good example of why cus-
tomers choose Neenah for outstanding
quality and environmental performance.
We also took steps to reap
additional benefi ts from our 2007
acquisition of Fox River. The addition
of Fox River combined some of the
industry’s best known brands into our
portfolio and made us the clear leader
in premium branded papers, along
with increased scale and a broader
distribution network. Our efforts in 2008
were designed to reduce costs and
leverage these competitive advantages.
Specifi cally, we consolidated fi nishing
centers in Wisconsin and exited the
Urbana, Ohio operations. Fox River sites
were fully incorporated into our systems
platform, which allowed us to imple-
ment benefi cial supply chain processes
and present “one face” to the customer.
We sold surplus assets resulting from
the integration and generated proceeds
of more than $13 million. We will
continue to take further steps as needed
to consolidate our manufacturing
footprint and organization to optimize
our effi ciencies.
21
strengthen our competitive position,
fi nancial results in 2008 refl ected a
market for premium fine papers that
was the weakest we’ve seen in many
years. Net sales for Fine Paper were
$336 million, 8% below the prior year,
refl ecting weaker market demand, partly
offset by two extra months of Fox River
in 2008. Operating income in Fine
Paper was $34 million in 2008, versus
$47 million for the previous year, as
higher input costs and reduced volumes
offset the benefi ts of increased selling
prices and greater cost effi ciencies.
While we could not offset the impact of
weaker market and economic condi-
tions, we remain confi dent in our ability
to win with our customers and gain
share with our strong brands, “go-to-
market” capabilities and leading market
position. In this regard, it is worth not-
ing that sales of our ENVIRONMENT®
Paper rose during 2008 despite the
market conditions and that we also
delivered double-digit growth in areas
like digital products, luxury packaging
and international sales.
In Technical Products, we’ve
made key investments to drive new or
expanded market opportunities.
To serve the growing needs of transpor-
tation fi lter customers, we successfully
started a third fi ltration saturator in
Germany, as well as expanded our
nonwoven line which became fully oper-
ational in 2008. Transportation fi ltration
volumes grew solidly. While the current
decline in global automotive industry
production will impact our short-term
fi ltration volumes, we remain committed
to be the innovation leader with our
key customers and expect to grow
with them globally as the industry
recovers and moves to more advanced
and effi cient engine platforms.
Another major accomplishment
in Technical Products was the improve-
ment in manufacturing effi ciencies at
our Munising, Michigan mill. Munising
is the primary source for three of our
global product groups, Component
Materials, Graphics & Identifi cation and
Tape. We improved coordination
among marketing, sourcing and manu-
facturing functions, and used new data
available from our systems to analyze
the costs and profi tability of each prod-
uct, process and customer relationship.
Our team in Munising has thus been
able to adjust product mix, raw material
usage, production runs and quality
control, along with many other pro-
cesses. The benefi ts are meaningful, as
cost savings totaled almost $3 million
in 2008. Having more and better infor-
mation has led to smarter decisions.
22
Net sales of Technical Products
were $397 million for 2008, slightly
below last year’s level of $401 million.
Volume increases in our Filtration,
Component Materials and Wall Covering
product groups, along with benefi ts
from higher selling prices and
a stronger Euro, were offset by Tape
volume declines due to reduced exports
from Germany and lower Graphics &
Identifi cation sales. Segment operating
income (excluding the impairment
charge) was $12 million in 2008, versus
$25 million for 2007. Similar to Fine
Paper, the large majority of the decline
in profi ts occurred in the fourth quarter
as a result of sharply lower demand and
the need to take reduced operating
schedules to manage cash and working
capital levels.
Neenah is prepared to face the
challenges of 2009, and without pulp
operations we’re better positioned for
harsh economic times. We are maintain-
ing our focus on cash management and
our business teams are implementing
tough decisions that will deliver
additional signifi cant savings, primarily
through reduced operating, administra-
tive and capital expenditures. In many
cases, these efforts come with sacrifi ces
– such as headcount reductions,
salary and hiring freezes, and reduced
operating and administrative spending
– but our teams are committed to
delivering results and I am confi dent in
their drive and determination. We also
expect to achieve additional improve-
ments in our supply chain in 2009
to drive productivity, cost-effi ciency
and superior customer service. Last but
not least, we expect to benefi t from
dramatically lower input costs. While
we cannot predict volumes, or forecast
the length and depth of any recession,
we are taking the right steps to protect
our fi nancial position. We are also
making the right moves to strengthen
our competitive position, so we can
continue to win in the strategic markets
in which we compete both today and
in the future.
Neenah is a company that
delivers on its promises. We trans-
formed the business over the past three
years, as we said we would, and we’re
following a defi ned strategic path
going forward. In our Fine Paper busi-
ness, we’ll continue to promote superior
quality and service to maintain our
market leadership and strong cash
fl ows, and give customers every reason
to choose to do business with Neenah.
In Technical Products, we’ll continue
to use our edge in innovation,
ability to provide advanced solutions,
and intimacy with customers to
strengthen our competitive position.
And we’ll target complementary product
and geographic areas that can leverage
these capabilities and allow us to
serve growing and profi table markets.
As we enter a new year, facing
the expectation of a harsh business
climate, we are confident in Neenah’s
fundamental strengths. We are brand
and category leaders with a reputation
for world-class products, serving high-
value markets with a business that is
diversifi ed and balanced by product and
region. We are committed to building
on these strengths to enhance share-
holder value over the long term.
We deeply appreciate the
guidance of our Board of Directors and
the hard work and dedication of all
our employees, especially in these chal-
lenging times. We’re also most grateful
for the support of our shareholders,
and we will continue our efforts to reward
your confi dence in Neenah.
Sincerely,
Sean T. Erwin
Chairman, President and
Chief Executive Offi cer
23
Net Sales by Segment
(dollars in millions), from left:
Technical Products: $397
Fine Paper: $336
Technical Products Sales by SBU
(dollars in millions), from left:
Wall Covering: $44
Graphics & Identifi cation: $51
Component Materials: $78
Tape: $90
Filtration: $133
26
Neenah Paper
At A Glance
At Neenah Paper,
our mission is
to be the first choice
for premium
branded and
customized paper
products.
Our goal is to
create value for our
customers
and stockholders
through innovation,
service and
excellence in
execution; and it is
our employees
who drive this value.
27
FINE PAPER BRANDS
Writing Brands
CLASSIC CREST® Papers
CLASSIC® Linen Papers
CLASSIC® Laid Papers
FOX RIVER SELECT® Papers
NEUTECH® Papers
CAPITOL BOND® Papers
Text and Cover Brands
STARWHITE® Papers
ENVIRONMENT® Papers
ESSE® Papers
SUNDANCE® Papers
OXFORD® Papers
CLASSIC COLUMNS® Papers
CORONADO® SST Papers
Specialty Brands
EAMES™ Paper Collection
CLEARFOLD® Papers
UV/ULTRA® II Papers
Neenah Fine Paper
Neenah’s fi ne paper
business is the undisputed
leader in the premium fi ne paper
market. We are recognized as a
world-class manufacturer of
premium writing, text and cover
materials, cotton fi ber papers
and specialty items. Our
well-known brands, such as
CLASSIC®, NEENAH®,
STARWHITE® and ESSE® Papers,
set the gold standard for quality
and consistently rank as number
one and two in sales in their
categories. A pioneer in eco-
friendly paper products, our
ENVIRONMENT® Paper is the
premier offering of recycled
content papers in the market.
Neenah’s leadership role in fi ne
paper is supported by our broad
range of colors, textures and
other product features, as well as
our reputation for attentive
customer service. Our products
are in demand wherever image
counts: for letterhead, business
cards, private watermark
stationery, annual reports,
brochures and such specialized
uses as upscale retail packaging
and wine labels – even the
Presidential Inaugural Invitation.
29
TECHNICAL PRODUCTS –
GLOBAL BUSINESS UNITS
Filtration
Transportation
Other (Home, Industrial)
Component Materials
Medical Packaging
Abrasives
Release Base
Application Masking
Veneer Backings
Tape
Crepe Base
Specialty Flatbacks
Graphics & Identifi cation
Label & Tag
Image Transfer
Decorative Components
Clean Room
Durable Printing
Wall Covering
Nonwoven
Saturated Wetlaids
Neenah Technical Products
Neenah’s Technical
Products business is a leading
producer of specialty papers
and substrates for complex
commercial applications that
require saturating, coating and
other engineered solutions.
The segment consists of fi ve
global business units: Filtration,
Specialty Tape, Component
Materials, Graphics &
Identifi cation and Wall Covering.
Our products might be found
in the car you drive, the wall
covering in your offi ce, the
personalized t-shirt you wear,
or the tapes you use in a
painting project. Specifi c uses
include automotive, household
and industrial fi lters, masking
and industrial tapes, coated
abrasives, medical packaging,
heat transfer and book covers.
Other graphics applications
include specialty papers and
labels that provide printability,
durability and security. The
technical products group serves
customers in more than 35
countries through manufacturing
facilities in the U.S. and
Germany, supported by R&D
efforts focused on developing
the new processes and products
that will meet customers’ needs
and drive our growth.
31
Neenah and the Environment
The following highlights some of our
environmental programs and policies:
All fi ber utilized in Neenah products
must be from sustainably managed forests.
An objective of our Responsible Procurement
Policy is to give preference to fi ber sources
that are certifi ed to internationally recognized
certifi cation schemes.
We take an active role in conserving
green spaces, and have been recognized by the
Natural Resources Foundation of Wisconsin for
our efforts to promote conservation and for our
donation of properties for greenways, nature
preserves and other public uses.
Where possible, we promote Minimum
Impact Mill strategies through the use of renew-
able energies and reduction of waste. Our Neenah
mill has a treatment plant that can return the water
we use to the Fox River in a purer state than we
found it. We’re also working to eliminate the need
to landfi ll any solid waste from all of our mills
by 2010, and our German operations are already
100% landfi ll-free.
Our mills in Bruckmuehl, Germany and
Appleton, Wisconsin generate signifi cant amounts
of their electricity from on-site hydropower.
And 100% of purchased electricity of our
Neenah and Appleton mills is certifi ed as “green-e”
from renewable energy sources.
As a leader in a wide range
of paper-based products, we’re
aware of the need to preserve
and renew our natural resources.
In addition, our customers are
becoming more and more
concerned with the environment
and increasingly wish to do
business with companies that
share this concern. For these
reasons and more, Neenah has
long taken a leadership stance in
sustainability and is considered
to be among the top
environmental performers in our
industry. Our eco-friendly
product offerings are robust
and growing rapidly. The
ENVIRONMENT® Paper was
introduced in 1990 and was one
of the industry’s fi rst FSC
certifi ed lines of colored writing,
text and cover papers.
Our sustainability strategy is
designed to support our
commitment to meet
international standards for
socially and environmentally
responsible behavior, minimize
material/resource use, and
reduce waste and emissions.
32
Financial Information
34
—
Business Summary
37
—
Selected Financial Data
40
—
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
53
—
Quantitative and
Qualitative Disclosures About
Market Risk
55
—
Management’s Annual
Report on Internal Control Over
Financial Reporting
57
—
Reports of Independent
Registered
Public Accounting Firm
60
—
Consolidated
Statements of Operations
61
—
Consolidated Balance Sheets
62
—
Consolidated Statements of
Change in Stockholders’ Equity
63
—
Consolidated Statements
of Cash Flows
64
—
Notes to Consolidated
Financial Statements
104
—
Leadership
105
—
Shareholder Information
Business Summary
In this report, unless the context requires otherwise, references 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 com-
pleted the distribution 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 com-
pany 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 have two pri-
mary operations: our fi ne paper business and our technical
products business. We also own approximately 500,000 acres
of timber lands in Nova Scotia, Canada.
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 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
businesses. Our fi ne paper manufacturing facilities are
located in Appleton, Neenah and Whiting, Wisconsin and
Ripon, California.
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 busi-
ness is organized into fi ve global strategic business units
(“SBUs”) which sell into 17 product categories, and we focus
on categories where we believe we are a market leader
or have a competitive advantage, which include, among
others, transportation and other fi lter media, specialty tape,
label, abrasive, medical packaging, nonwoven wall cover-
ings and image transfer technical products. We are also
a global supplier of materials 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 technical products manufacturing
facilities are located in Munising, Michigan and near Munich
and Frankfurt, Germany.
In June 2008, we sold our pulp mill located in
Pictou, Nova Scotia, Canada which was the last remaining pulp
mill we owned. The Pictou mill was comprised of a single-line
pulp facility, which primarily produced softwood pulp.
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 $336 million
in 2008, $367 million in 2007 and $224 million in 2006.
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 writ-
ing 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. The fi ne paper
business also sells private watermarked and other custom
manufactured writing papers.
Text and cover papers are used in applications
such as corporate 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.
Refl ecting our commitment to the environment, we
successfully introduced the NEENAH GREEN environmental
platform in 2006. Key components of the platform include (i) the
introduction of Forest Stewardship Council watermarked paper
across all our CLASSIC® brands and (ii) being the fi rst premium
text and cover manufacturer to be processed chlorine free in
our 100 percent post-consumer products.
34
Neenah Paper, Inc. 2008 Annual Report
B U S I N E S S S U M M A R Y
TECH NICAL PRODUCTS. The technical products busi-
ness is a leading producer of fi ltration media and durable,
saturated and coated substrates for a variety of end uses,
including tapes, premask, abrasives, labels, medical pack-
aging, decorative components, wall covering, and image
transfer papers. Our technical products business had net
sales of approximately $397 million in 2008, $401 million
in 2007 and $183 million in 2006. JET-PRO,® SofStretch,™
KIMDURA,® MUNISING LP,® PREVAIL,™ NEENAH,® Gessner®
and varitess® are brands of our technical products business.
In general, the products of our technical products
business are sold to other manufacturers as key components
for their fi nished products. The technical products business
is organized into fi ve SBUs: Filtration; Tape; Component
Materials, which includes our abrasives business; Graphics
and Identifi cation; and Wall Covering to sell its products into
major market segments. Several of the key market segments
served, including tape and abrasives, are global in scope.
The Filtration SBU produces fi ltration media for
induction air, fuel, oil, and cabin air applications in automo-
tive transportation and for vacuum cleaner bags and fi lters.
Transportation fi ltration media are sold to suppliers of auto-
motive companies as original equipment on new cars and
trucks as well as the automotive aftermarket. This business is
primarily in Europe.
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, construction,
metal and woodworking industries for both waterproof and
dry sanding applications. Premask paper is used as a protec-
tive over wrap for products during the manufacturing process
and for applying signs, labeling and other fi nished products.
Medical packaging paper is a polymer impregnated base
sheet that provides a breathable sterilization barrier. When
sealed together with fi lm, this paper becomes a medical pack-
aging 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 furniture backers.
35
Neenah Paper, Inc. 2008 Annual Report
The Graphics and 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 com-
munity. Image transfer papers are used to transfer an image
from paper to tee shirts, hats, coffee mugs, and other sur-
faces. The technical products business produces and applies
a proprietary imaging coating to its image transfer papers for
use in digital printing applications. Image transfer papers are
primarily sold through large retail outlets and through mas-
ter 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 and 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.
MARKETS AND CUS TO MERS
FINE P APER. Premium writing, text and cover papers
represent approximately 3 percent of the North American
uncoated free sheet market. The uncoated free sheet mar-
ket has been declining one to two percent annually 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 corporate brochures, annual reports and
special edition books. Cover papers are primarily used for
business cards, pocket folders, brochures and report covers
including corporate annual reports.
B U S I N E S S S U M M A R Y
The fi ne paper business sells its products through
The technical products business has over
our sales and marketing organizations primarily in three
channels: authorized paper distributors, converters and
direct sales. Sales to distributors, including distributor owned
paper stores, account for approximately 70 percent of
revenue in the fi ne paper business. Less than 5 percent
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
customers (both of which are distributors) represented
approximately 30 percent of its total sales in 2008. We prac-
tice 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 expanding sales to existing distributors, and fur-
ther offset over a several month period with the addition of
new distributors.
T ECH NICAL 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: fi ltration, tape,
component materials for manufactured products, graphics
and identifi cation, and wall covering.
Several products (fi ltration media, wall coverings,
abrasives, tapes, labels) are used in markets that are directly
affected by economic business cycles. Other market seg-
ments 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.
500 customers worldwide. The distribution of sales in 2008
was approximately 60 percent in Europe, 25 percent in
North America and 15 percent in Latin America and Asia.
Customers typically convert and transform base papers and
fi lm into fi nished rolls and sheets by adding adhesives, coat-
ings, and fi nishes. These transformed products are then sold
to end-users.
CO NCENTRATION. For the years ended December 31,
2008, 2007 and 2006, no customer accounted for more than
10 percent of our consolidated net sales.
GEOGRAPHIC INFO RMATION
The following tables present further information about our
businesses by geographic area (dollars in millions):
Net sales
United States
Europe
Intergeographic items
Consolidated
Total Assets
United States
Canada
Europe
Total
Year Ended December 31,
2008
2007
2006
$467.3
265.0
–
$732.3
$502.9
264.4
(0.3)
$767.0
$357.3
49.7
(2.0)
$405.0
December 31,
2008
2007
2006
$361.7
8.5
314.4
$684.6
$332.5
201.6
398.7
$932.8
$223.5
180.8
340.4
$744.7
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. See Note 14
of Notes to Consolidated Financial Statements included else-
where in this Annual Report for information with respect to
net sales and total assets by business segment.
36
Neenah Paper, Inc. 2008 Annual Report
Selected Financial 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, 2008, 2007 and 2006
and the balance sheet data as of December 31, 2008 and
2007 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,
2006, 2005 and 2004 and the statement of operations data
for the year ended December 31, 2005 set forth below are
derived from our audited historical consolidated fi nancial
statements not included in this Annual Report. The state-
ment of operations data for the year ended December 31,
2004 set forth below are derived from our audited his-
torical combined fi nancial statements 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.
37
Neenah Paper, Inc. 2008 Annual Report
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)
2008
2007(e)
2006(f)
2005
2004(a)
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
Goodwill and other intangible asset impairment charge
Other (income) expense – net
Operating income (loss)
Interest expense – net
Income (loss) from continuing operations before income taxes
Provision (benefi t) for income taxes
Income (loss) from continuing operations
Income (loss) from discontinued operations(b)(c)(d)
Net income (loss)
Earnings (loss) from continuing operations per basic share
Earnings (loss) from continuing operations per diluted share
Cash dividends per common share
$ 732.3
633.2
99.1
75.2
54.5
(11.3)
(19.3)
25.0
(44.3)
3.0
(47.3)
(111.2)
$(158.5)
$ (3.23)
$ (3.23)
$ 0.40
$767.0
635.5
131.5
79.3
–
(1.7)
53.9
25.4
28.5
(3.7)
32.2
(22.0)
$ 10.2
$ 2.17
$ 2.13
$ 0.40
$ 405.0
305.4
99.6
54.4
–
(0.5)
45.7
16.9
28.8
9.4
19.4
43.1
$ 62.5
$ 1.31
$ 1.31
$ 0.40
$352.8
250.0
102.8
40.9
–
0.1
61.8
18.4
43.4
16.3
27.1
(56.8)
$ (29.7)
$ 1.84
$ 1.83
$ 0.40
$351.4
234.2
117.2
36.8
–
(0.2)
80.6
1.4
79.2
28.5
50.7
(77.1)
$ (26.4)
$ 3.44
$ 3.43
$ –
Other Financial Data
Net cash fl ow provided by (used for):
Operating activities
Capital expenditures
Other investing activities(b)(e)(f)
Financing activities(e)(f)
Ratio of earnings to fi xed charges(g)(h)
(Dollars in millions)
Consolidated Balance Sheet Data
Working capital
Total assets
Long-term debt
Total liabilities
Total stockholders’ and invested equity
$ 13.1
(30.0)
(0.4)
18.2
–
$ 69.5
(58.3)
(55.1)
43.8
2.1x
$ 65.8
(25.1)
(102.6)
50.8
2.5x
$ 22.8
(25.7)
(0.1)
(3.6)
3.3x
$ 76.0
(19.1)
–
(37.8)
50.5x
2008
2007(e)
2006(f)
2005
2004
As of December 31,
$ 144.9
684.6
340.5
574.2
110.4
$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
38
Neenah Paper, Inc. 2008 Annual Report
(a) 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.
(b) In February 2008, we committed to a plan to sell our pulp mill in Pictou,
Nova Scotia (the “Pictou Mill”) and approximately 500,000 acres of wood-
land assets in Nova Scotia (the “Woodlands”). In June 2008, our wholly-
owned subsidiary, Neenah Paper Company of Canada (“Neenah Canada”)
sold the Pictou Mill to Northern Pulp Nova Scotia Corporation (“Northern
Pulp”). Neenah Canada made a payment of approximately $10.3 million
to Northern Pulp in connection with the sale of the Pictou Mill. In addition,
we paid approximately $3.3 million of transaction costs. In August 2006, we
transferred our Terrace Bay mill and related woodlands operations to
Buchanan for a payment of approximately $18.6 million.
(c) For the year ended December 31, 2008, the results of operations of the
Pictou Mill and the Woodlands and the loss on disposal of the Pictou
Mill are reported as discontinued operations in the Consolidated and
Combined Statement of Operations Data. The consolidated results of
operations for all prior periods have been restated to refl ect the results
of operations of the Terrace Bay mill, the Pictou Mill and the Woodlands
and the loss on transfer of the Terrace Bay mill as discontinued operations.
(d) The following table presents the results of discontinued operations:
(Dollars in millions)
2008
2007
2006
2005
2004
Year Ended December 31,
Discontinued operations:
Income (loss)
from opera-
tions (1)(3)(4)(5)(6)(7)
Loss on disposal:
Loss on disposal –
Terrace Bay Mill
Loss on disposal –
Pictou Mill(1)
Loss on settlement of
postretirement
benefi t plans(2)
Loss on disposal
Income (loss) before
income taxes
(Provision) benefi t for
income taxes
Income (loss) from
discontinued
operations, net
of income taxes
$ (97.8) $(31.6) $ 76.3
$(92.4) $(120.5)
–
(29.4)
(53.7)
(83.1)
–
–
–
–
(6.5)
–
–
(6.5)
–
–
–
–
–
–
–
–
(180.9)
(31.6)
69.8
(92.4)
(120.5)
69.7
9.6
(26.7)
35.6
43.4
$(111.2) $(22.0) $ 43.1
$(56.8) $ (77.1)
(1) During the fi rst quarter of 2008, we determined that the estimated
value we would receive from a sale of the Pictou Mill indicated that we
would not recover the carrying value of the mill’s long-lived assets. As
a result, for the year ended December 31, 2008, we recognized non-
cash, pre-tax impairment charges of $91.2 million to write-off the carry-
ing value of the Pictou Mill’s long-lived assets. In addition, for the year
ended December 31, 2008, we recorded a pre-tax loss of $29.4 million
to recognize the loss on disposal of the Pictou Mill.
(2) In conjunction with the sale of the Pictou Mill, Northern Pulp assumed
responsibility for all pension and other postretirement benefi t obliga-
tions for active and retired employees of the mill. We accounted for
the transfer of these liabilities as a settlement of postretirement benefi t
obligations pursuant to Statement of Financial Accounting Standards
No. 88, Employers’ Accounting for Settlements and Curtailments of
Defi ned Benefi t Pension Plans and for Termination Benefi ts. For the
year ended December 31, 2008, we recognized a non-cash, pre-tax
settlement loss of $53.7 million due to the reclassifi cation of deferred
pension and other postretirement benefi t adjustments related to the
transfer of the Nova Scotia Plan to Northern Pulp from accumulated
other comprehensive income to the loss on disposal of the Pictou Mill.
(3) In December 2007, our Ontario, Canada defi ned benefi t pension
plan (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 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.
(4) 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.
(5) In June 2006, Neenah Canada sold approximately 500,000 acres of
woodlands 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 million and $2.9 million,
respectively, of such deferred gain in income.
(6) 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.
(7) In 2004, we recorded a $112.8 million non-cash pre-tax impairment
loss to reduce the carrying amount of the Terrace Bay facility.
(e) In March 2007, we acquired the stock of Fox Valley Corporation and its sub-
sidiary, Fox River 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 reported as part of our Fine Paper segment and have been
included in our consolidated fi nancial results since the acquisition date.
(f)
In October 2006, we purchased the outstanding interests of Neenah
Germany from FiberMark, Inc. (“FiberMark”) and FiberMark International
Holdings LLC 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 reported as part of our Technical Products segment and have been
included in our consolidated fi nancial results since the acquisition date.
(g) 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.
(h) For the year ended December 31, 2008, the defi cit of earnings to fi xed
charges was $44.3 million.
39
Neenah Paper, Inc. 2008 Annual Report
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
The following discussion and analysis presents the factors
that had a material effect on our results of operations dur-
ing the years ended December 31, 2008, 2007 and 2006.
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 R ODU 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 have two primary opera-
tions: our fi ne paper business and our technical products
business. We also own approximately 500,000 acres of
timberlands in Nova Scotia, Canada.
In managing our businesses, management believes
that achieving and maintaining a leadership position in our
markets, responding effectively to competitive challenges,
employing capital optimally, controlling costs and manag-
ing risks are important to long-term success. Input costs for
energy and raw materials 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
businesses has been an important part of our past perfor-
mance. Our fi ne paper business has long been recognized
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,
40
Neenah Paper, Inc. 2008 Annual Report
fi ltration, component materials, graphics and identifi ca-
tion and wall covering markets. Maintaining our leader-
ship is important to our results, particularly in light of the
competitive 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 principal
products in our major markets. In most of our markets, our
paper businesses compete directly with well-known com-
petitors, some of which are larger and more diversifi ed.
• 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.
• 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.
BUSINESS 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
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
producer 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
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
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.
RESU LTS OF OPER ATIONS
AN D RELATED INFOR MATION
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, 2008, 2007
and 2006.
EXECUTIVE SUMMARY
S T R A T E G I C I N I T I A T I V E S
During the previous three years, we completed several
complementary initiatives in line with our strategy to transi-
tion to a premium technical products and fi ne paper com-
pany. In 2006 and 2007, we sold 500,000 acres of woodlands
in Nova Scotia, divested our Terrace Bay pulp operations,
acquired the German technical and specialty paper business
of FiberMark, Inc. and purchased Fox River.
In February 2008, we committed to a plan to sell
the Pictou Mill and the Woodlands. In June 2008, Neenah
Canada sold the Pictou Mill to Northern Pulp, a new oper-
ating company jointly owned by Atlas Holdings LLC and
Blue Wolf Capital Management LLC. Pursuant to the terms
of the transaction, Northern Pulp assumed all of the assets
and liabilities associated with the Pictou Mill, as well as
existing customer contracts, supply agreements (including
the pulp supply agreement with Kimberly-Clark), labor agree-
ments and pension obligations. The sale did not include
the Woodlands.
In conjunction with the sale of the Pictou Mill,
we entered into a stumpage agreement (the “Stumpage
Agreement”) which allows Northern Pulp to harvest an aver-
age of approximately 400,000 metric tons of softwood tim-
ber annually from the Woodlands. The Stumpage Agreement
is for a term of ten years and Northern Pulp has the option
to extend the agreement for an additional three years. For
calendar year 2008, Northern Pulp paid a nominal amount
for approximately 236,000 metric tons of softwood timber
harvested under the Stumpage Agreement. For timber pur-
chases during calendar year 2009, Northern Pulp has agreed
to pay the stumpage rate charged by the Nova Scotia pro-
vincial government for harvesting on government licensed
lands. The price paid for all subsequent purchases will be
based on an agreed upon formula for estimating market
41
Neenah Paper, Inc. 2008 Annual Report
prices. We believe the Stumpage Agreement prices for cal-
endar 2009 and beyond represent market rates. Northern
Pulp has agreed to pay substantially all costs associated with
maintaining the Woodlands and harvesting the timber. An
agreement to sell the Woodlands will be subject to the terms
of the Stumpage Agreement.
We believe it is probable that a sale of the
Woodlands will occur within 12 months. We expect to recog-
nize a substantial gain on the sale of the Woodlands. Upon
consummation of the sale of the Woodlands, we will have
completely divested our pulp manufacturing operations
and the revenues of our remaining businesses will be almost
evenly divided between fi ne paper and technical products.
In addition, we will have signifi cantly changed the profi le of
our company by eliminating our pulp operations in favor
of higher growth, more profi table and less capital-intensive
specialty paper businesses.
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, 2008, our consolidated
net sales decreased approximately $35 million from the
prior year to $732.3 million. The decrease was primarily
due to lower volumes in both our businesses, especially in
the fourth quarter, partially offset by the realization of price
increases and favorable currency translation effects due to
the strengthening of the Euro versus the U.S. dollar. For the
year ended December 31, 2008, we incurred a consolidated
operating loss of $19.3 million compared to operating
income in the prior year of $53.9 million. The operating loss
in the current year was primarily due to the recognition of
a non-cash pre-tax charge of $54.5 million for the impair-
ment of goodwill and other intangible assets assigned to
Neenah Germany. See “Executive Summary – Impairment
of Goodwill and Other Intangible Assets.” Excluding the
impairment charge, consolidated operating income for
the year ended December 31, 2008 of $35.2 million was
$18.7 million unfavorable to the prior year primarily due
to increased manufacturing input costs of approximately
$26 million, decreased volumes and less favorable fi xed cost
absorption due to reduced operating schedules. These fac-
tors were partially offset by gains from the sale of certain
assets acquired in the Fox River acquisition and the benefi ts
of higher net prices. The reduced volumes were primarily a
result of weaker market demand in 2008, particularly in the
fourth quarter, due in part to weakening economic condi-
tions, as well as reduced exports from Germany as a result
of the stronger Euro.
For the three months ended December 31, 2008,
our consolidated net sales decreased approximately $46 mil-
lion from the prior year period to $146.6 million. The decrease
was due to lower volumes and unfavorable currency trans-
lation effects due to the strengthening of the U.S. dollar
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
versus the Euro, partially offset by higher average prices. The
reduced volumes were a result of substantially weaker market
demand in the fourth quarter of 2008 due to weakening eco-
nomic conditions. Excluding the asset impairment charge, we
incurred a consolidated operating loss of $9.2 million for the
three months ended December 31, 2008 compared to con-
solidated operating income of $6.0 million in the prior year.
The unfavorable comparison to the prior year was primarily
due to lower volumes, increased manufacturing input costs
and manufacturing ineffi ciencies as a result reduced paper
machine operating schedules to control inventory. These
unfavorable factors were only partially offset by higher aver-
age selling prices and reductions in administrative costs.
We expect that the recent uncertainty in the credit
markets and global economic weakness will continue to
negatively affect customer demand for many of our prod-
ucts. However, we anticipate that the slowdown in global
economic activity will also result in a decrease in costs for
manufacturing inputs, particularly pulp, energy and latex that
adversely affected 2008 operating results.
We have not yet observed any signifi cant reduc-
tion in the ability of our customers to make payments in
a timely manner or in the ability of our vendors to provide
products and services due to the availability of credit.
However, there can be no assurance that our customers
or vendors will not experience such problems.
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, 2008, net sales of discon-
tinued operations decreased approximately $121.6 million
from the prior year period to $101.9 million. The decrease
was due to the sale of the Pictou Mill in June 2008 resulting
in only six months of pulp sales in the current year versus
12 months of pulp sales in the prior year period.
For the year ended December 31, 2008, we
recognized a pre-tax loss from discontinued operations of
$180.9 million compared to a pre-tax loss of $31.6 million
in the prior year period. The pre-tax loss in the current
year was primarily due to recognition of non-cash charges
of $91.2 million to write-off the long-lived assets of
the Pictou Mill. In addition, we recognized a pre-tax loss
of $83.1 million for the loss on disposal of the Pictou Mill.
The loss on disposal included a non-cash charge of $53.7 mil-
lion for the reclassifi cation from accumulated other compre-
hensive income of deferred adjustments related to pensions
and other postretirement benefi ts in connection with the
transfer of postretirement benefi t plans for the Pictou Mill to
Northern Pulp. The pre-tax loss in the prior year includes a
non-cash charge of $38.7 million related to settlement of
the Terrace Bay Ontario, Canada defi ned benefi t pension
plan (the “Ontario Plan”). Excluding the impairment charge,
42
Neenah Paper, Inc. 2008 Annual Report
the estimated loss on disposal and the loss on settlement
of the Ontario Plan, the pre-tax loss from operations for the
year ended December 31, 2008 was $6.6 million compared to
pre-tax income of $7.1 million in the prior year. The unfavor-
able comparison to the prior year was primarily due to higher
fi ber and other input costs and unfavorable currency trans-
lation effects, partially offset by higher softwood pulp prices.
I M P A I R M E N T O F 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
We test goodwill for impairment at least annually on
November 30 in conjunction with preparation of our annual
business plan, or more frequently if events or circumstances
indicate goodwill might be impaired. Our annual test of
goodwill for impairment at November 30, 2008, indicated
that the carrying value of the Neenah Germany report-
ing unit exceeded its estimated fair value. For the year
ended December 31, 2008, we recognized a pre-tax loss of
$52.7 million (the Company did not recognize a tax benefi t
related to the impairment loss which was not deductible for
U.S. or German income taxes) for the impairment of good-
will assigned to the Neenah Germany reporting unit. The
impairment loss was primarily due to a substantial increase
in the estimated cost of capital we used to calculate the
present value of Neenah Germany’s estimated future cash
fl ows which resulted in a substantially lower estimated fair
value. The higher estimated cost of capital refl ected current
market/ fi nancial conditions at the time the annual impair-
ment test was performed which indicated higher risk premi-
ums for debt and equity.
During our annual test of other intangible assets
for impairment, we determined that certain trade names
and customer based intangible assets were also impaired at
December 31, 2008. For the year ended December 31, 2008,
we recognized a non-cash pre-tax charge of approximately
$1.8 million for the impairment of such assets. See “Critical
Accounting Policies and Use of Estimates – Impairment of
Long-Lived Assets.”
I N C O M E T A X E S
For the year ended December 31, 2008, we recorded an
income tax provision related to continuing operations of
$3.0 million compared to an income benefi t of $3.7 million
in the prior year period. As a result, our effective income
tax (benefi t) rate for the years ended December 31, 2008
and 2007 was approximately 7 percent and (13) percent,
respectively. Our effective tax rate for the year ended
December 31, 2008 primarily refl ected the non tax deduct-
ible nature of the goodwill impairment charge. Excluding
the impairment charge, our effective income tax rate for the
year ended December 31, 2008 was 35.7 percent primarily
due to the benefi ts of our corporate tax structure and the
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
proportion of pre-tax income in jurisdictions with differ-
ent marginal tax rates. These benefi ts were partially offset
by an increase in the limitation on available tax benefi ts
acquired in the Fox River acquisition. 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 liabili-
ties 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 million 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 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 effec-
tive tax rate for the year ended December 31, 2007 was
approximately 17.5 percent.
AD OPTION OF NEW
ACCO UNTIN G PRONOUNCEM ENTS
On January 1, 2008, we adopted 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 per-
mit fair value measurements. SFAS 157 does not require
any new fair value measurements. In February 2008, the
Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”). FSP 157-2 defers the effective date
of SFAS 157 to fi scal years beginning after November 15,
2008 for all nonfi nancial assets and nonfi nancial liabilities,
except those that are recognized or disclosed at fair value in
the fi nancial statements on a recurring basis (at least annu-
ally). We do not have any assets or liabilities measured at
fair value that require disclosure under SFAS 157. Pursuant
to FSP 157-2, we will provide the disclosures required by
SFAS 157 for nonfi nancial assets and nonfi nancial liabilities
measured at fair value on a nonrecurring basis beginning
January 1, 2009.
On January 1, 2008, we adopted 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 reporting by
43
Neenah Paper, Inc. 2008 Annual Report
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. Most of the provisions of SFAS 159
apply only to entities that elect the fair value option.
However, the amendment to FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and
trading securities. Our adoption of SFAS 159 did not affect
our fi nancial position, results of operations or cash fl ows
because we did not elect any new fair value measurements of
fi nancial assets or fi nancial liabilities.
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 8 , 2 0 0 7 A N D 2 0 0 6
The following table presents net sales by segment,
expressed as a percentage of total net sales before inter-
segment eliminations:
Fine Paper
Technical Products
Total
Year Ended December 31,
2008
2007
2006
46%
54%
100%
48%
52%
100%
55%
45%
100%
The following table presents our net sales by seg-
ment for the periods indicated:
Year Ended December 31,
2007
2006
2005
$335.5
396.8
–
$732.3
$366.5
400.8
(0.3)
$767.0
$223.9
183.1
(2.0)
$405.0
Fine Paper
Technical Products
Intersegment sales
Consolidated
C O M M E N T A R Y :
Y E A R 2 0 0 8 V E R S U S 2 0 0 7
Fine Paper
Technical Products
Intersegment sales
Consolidated
Total
Change
$(31.0)
(4.0)
0.3
$(34.7)
Change in Net Sales
Compared to the Prior Year
Change Due to
Average
Net Price
$ 0.6
16.3
–
$16.9
Volume
$(31.6)
(40.9)
0.3
$(72.2)
Currency
$ –
20.6
–
$20.6
Consolidated net sales of $732.3 million in the year
ended December 31, 2008 were $34.7 million lower than the
prior year primarily due to lower volumes and a less favorable
product mix in our fi ne paper business, partially offset by the
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
realization of price increases and favorable currency trans-
lation effects due to the strengthening of the Euro versus
the U.S. dollar. Consolidated net sales for the three months
ended December 31, 2008 were $46.4 million unfavorable
to the prior year period primarily due to steep declines in
general economic conditions and market demand.
• Net sales in our fi ne paper business of $335.5 million
decreased $31.0 million or 8 percent primarily due to
a 9 percent decrease in shipments. The lower volume
was primarily due to an unusually large market decline
in 2008 for premium uncoated free sheet papers as a
result of weaker economic conditions, partially offset by
incremental sales related to the acquisition of Fox River in
March 2007. The increase in average net price refl ected
increased selling prices for most products that were par-
tially offset by a less favorable mix. The less favorable mix
was primarily due to the dilutive nature of the relatively
lower priced grades acquired with Fox River.
• Net sales in our technical products business of $396.8 mil-
lion decreased $4.0 million or 1 percent, primarily due
to lower volumes for certain products that were partially
offset by favorable currency effects and higher net prices.
Net prices increased approximately 4.1 percent on aver-
age due to a more favorable mix and higher selling prices.
The mix refl ected an increased proportion of sales of
higher priced products such as fi ltration and abrasives.
Volumes declined primarily due to weaker economic con-
ditions and lower export tape sales from Germany as a
result of the strengthening of the Euro.
Y E A R 2 0 0 7 V E R S U S 2 0 0 6
Change in Net Sales
Compared to the Prior Year
Change Due to
Total
Change
$142.6
217.7
1.7
$362.0
Volume
$160.7
208.5
1.7
$370.9
Average
Net Price
$(18.1)
9.2
–
$(8.9)
Fine Paper
Technical Products
Intersegment sales
Consolidated
Consolidated net sales of $767.0 million in the
year ended December 31, 2007 were $362.0 million higher
than the prior year primarily as a result of increased volume
due to the acquisitions of Neenah Germany and Fox River.
In addition, the current year benefi ted from the realiza-
tion of price increases in our technical products business,
partially offset 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
44
Neenah Paper, Inc. 2008 Annual Report
to the acquisition 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 sell-
ing a higher proportion 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.
The following table sets forth line items from our
consolidated 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
Goodwill and other intangible
asset impairment charge
Other income – net
Operating income (loss)
Interest expense – net
Income (loss) from continuing
operations before
income taxes
Provision (benefi t) for
income taxes
Income (loss) from
Year Ended December 31,
2008
2007
2006
100.0%
86.5
13.5
100.0%
82.9
17.1
100.0%
75.4
24.6
10.3
10.3
13.4
7.4
(1.6)
(2.6)
3.4
–
(0.2)
7.0
3.3
(6.0)
3.7
0.5
(0.5)
–
(0.1)
11.3
4.2
7.1
2.3
continuing operations
(6.5)%
4.2%
4.8%
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 8 , 2 0 0 7 A N D 2 0 0 6
The following table sets forth our operating income (loss) by
segment for the periods indicated:
Year Ended December 31,
2008
2007
2006
Fine Paper
Technical Products
Unallocated corporate costs
Consolidated
$ 34.0
(42.3)
(11.0)
$(19.3)
$ 46.6
24.7
(17.4)
$ 53.9
$ 56.2
9.2
(19.7)
$ 45.7
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
C O M M E N T A R Y :
Y E A R 2 0 0 8 V E R S U S 2 0 0 7
Fine Paper
Technical Products
Unallocated corporate costs
Consolidated
Change in Operating Income (Loss) Compared to the Prior Year
Total
Change
$(12.6)
(67.0)
6.4
$(73.2)
Change Due to
Material
Volume
Net Price(a)
Costs(b)
Currency
Other(c)(d)
$ (4.1)
(7.3)
–
$(11.4)
$(0.7)
8.1
–
$ 7.4
$(12.2)
(13.7)
–
$(25.9)
$ –
1.9
–
$1.9
$ 4.4
(56.0)
6.4
$(45.2)
(a) Includes price changes, net of changes in product mix.
(b) Includes price changes for raw materials and energy.
(c) Includes other materials, manufacturing labor, distribution, selling, general and administrative expenses and gains and losses on asset sales.
(d) For the year ended December 31, 2008, results for the Technical Products segment include a non-cash pre-tax goodwill and other intangible asset impairment
charge of $54.5 million.
For the year ended December 31, 2008, we
incurred a consolidated operating loss of $19.3 million pri-
marily due to a non-cash pre-tax goodwill and other intan-
gible asset impairment charge of $54.5 million. Excluding the
asset impairment charge, consolidated operating income for
the year ended December 31, 2008 decreased $18.7 million
compared to 2007 primarily due to increased manufacturing
input costs that exceeded selling price increases in both
businesses, lower volumes and a less favorable mix of prod-
ucts in our fi ne paper business. These unfavorable factors
more than offset benefi ts related to improved manufacturing
operations, lower administrative costs, gains related to the
sale of certain assets acquired in the acquisition of Fox River
and gains on the settlement of certain employee benefi t
liabilities that we retained following the sale of Terrace Bay.
Consolidated operating income for the three months ended
December 31, 2008 was $15.3 million unfavorable to the
prior year period due to steep declines in general economic
conditions and market demand that resulted in lower sales
and downtime at our facilities to manage inventory levels.
• Operating income for our fi ne paper business of
$34.0 million decreased $12.6 million primarily due to
higher manufacturing input costs, principally for hard-
wood pulp and energy, a less favorable product mix due
to the dilutive effect of selling relatively lower priced
grades acquired in the Fox River acquisition and lower
volumes. These unfavorable factors were only partially
offset by gains on asset sales of approximately $6.8 mil-
lion, higher selling prices, improved manufacturing effi -
ciencies and incremental volume related to the acquisition
of Fox River.
• Our technical products business incurred an operating
loss of $42.3 million for the current year due to a non-
cash pre-tax goodwill and other intangible asset impair-
ment charge of $54.5 million. Excluding the asset impairment
charge, operating income for our technical products busi-
ness of $12.2 million decreased $12.5 million from the
prior year primarily due to higher manufacturing input costs
and lower volume. The increase in manufacturing costs pri-
marily refl ected higher input prices for energy, pulp and
latex and increased costs in Germany following the start-up
of new and rebuilt assets. These unfavorable factors were
partially offset by improved pricing and mix, improved
manufacturing operations and the favorable translation
impact from a stronger Euro relative to the U.S. dollar.
• Unallocated corporate expenses decreased $6.4 mil-
lion primarily due to the favorable settlement of certain
employee benefi t liabilities that we retained following the
sale of our Terrace Bay pulp mill and due to decreased
spending for other corporate expenses.
45
Neenah Paper, Inc. 2008 Annual Report
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
Y E A R 2 0 0 7 V E R S U S 2 0 0 6
Fine Paper
Technical Products
Unallocated corporate costs
Consolidated
Change in Operating Income (Loss) Compared to the Prior Year
Change Due to
Total
Change
$ (9.6)
15.5
2.3
$ 8.2
Volume
Net Price(a)
$55.7
15.6
–
$71.3
$(45.0)
6.3
–
$(38.7)
Material
Costs(b)
$(2.8)
(2.8)
–
$(5.6)
Other(c)
$(17.5)
(3.6)
2.3
$(18.8)
(a) Includes price changes, net of changes in product mix.
(b) Includes price changes for raw materials and energy.
(c) Includes other materials, manufacturing labor, distribution, selling, general and administrative expenses and gains and losses on asset sales.
Consolidated operating income of $53.9 million
for the year ended December 31, 2007 increased $8.2 mil-
lion compared to 2006 primarily due to the added earn-
ings of Neenah Germany and an improved sales mix in our
technical products business. These factors were partially
offset by increased manufacturing input costs. 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 favor-
able product mix, direct selling and administrative expenses
of Fox River and costs related to the integration of Fox River.
Operating income for our fi ne paper business of $46.6 mil-
•
lion 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 distribution costs, addi-
tional 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 pur-
chase accounting. These unfavorable factors were only par-
tially 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.
• Unallocated corporate expenses decreased $2.3 million
primarily due to currency translation gains on an inter-
company loan partially offset by costs associated with
an executive retirement.
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, 2008, 2007 and 2006,
we incurred $25.0 million, $25.5 million and $19.4 million,
respectively, of interest expense. The decrease in interest
expense for the current year was primarily due to lower
average interest rates partially offset by higher average
borrowings. The increase in net interest expense in 2007
versus the prior year was primarily due to an increase in
average borrowings under our bank credit agreement
to partially fi nance the acquisitions of Neenah Germany
and Fox River.
• Our effective income tax (benefi t) rate was 6.8 percent,
(13.0) percent and 32.6 percent for the years ended
December 31, 2008, 2007 and 2006, respectively.
Excluding the goodwill and other intangible asset
impairment charge (which was not deductible for U.S.
or German income taxes), our effective income tax rate
for the year ended December 31, 2008 was 35.7 percent
and primarily refl ected the benefi ts of our corporate tax
structure and the proportion of pre-tax income in juris-
dictions with different marginal tax rates, partially offset
by an increase in the limitation on available tax benefi ts
acquired in the Fox River acquisition. The decrease in
our effective income tax rate between 2007 and 2006
was primarily due to the application of a new tax law in
Germany to our existing deferred tax assets and liabilities.
See “Executive Summary – Income Taxes.” See Note 7
of Notes to Consolidated Financial Statements included
elsewhere in this Annual Report for a reconciliation of the
annual effective tax rates.
46
Neenah Paper, Inc. 2008 Annual Report
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
LIQU IDITY AN D CAPITAL RESOURCES
Net cash fl ow provided
by (used in):
Operating activities
Investing activities
Capital expenditures
Other investing activities
Total
Financing activities
Year Ended December 31,
2008
2007
2006
$ 13.1
$ 69.5
$ 65.8
(30.0)
(0.4)
(30.4)
18.2
(58.3)
(55.1)
(113.4)
43.8
(25.1)
(102.6)
(127.7)
50.8
O P E R A T I N G C A S H F L O W C O M M E N T A R Y
• Cash provided by operating activities of $13.1 million for
the year ended December 31, 2008 was $56.4 million lower
than cash provided by operating activities in the prior
year. The unfavorable comparison to the prior year was
primarily due to an increase in cash used by operating
activities of our discontinued pulp operations of approxi-
mately $33.4 million, lower earnings (excluding the effects
of non-cash items) and increased investments in working
capital in the current year.
• Our investment in operating working capital at December 31,
2008 of $144.9 million was $24.6 million higher than the
prior year. The increase was primarily due to classifying
the deferred tax consequences related to the Woodlands
as current deferred income taxes to conform to the
classifi cation of the assets and liabilities of discontinued
operations as current assets and liabilities. In general, such
amounts were classifi ed as noncurrent deferred income
taxes as of December 31, 2007. Our investment in operat-
ing working capital at December 31, 2007 of $120.3 mil-
lion 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. dollar.
• 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 (excluding the
effects of non-cash items), partially offset by the liquida-
tion of Terrace Bay working capital in 2006. The improve-
ment 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 techni-
cal 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 working capital in 2007 was primarily the result of
higher accounts receivable for Neenah Germany and our
47
Neenah Paper, Inc. 2008 Annual Report
pulp business, partially offset by an increase in amounts
payable for income taxes and interest and foreign cur-
rency effects.
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, 2008, cash used in
investing activities was $30.4 million, a decrease of
$83.0 million versus the prior year period. The decrease in
cash used was primarily due to spending of $54.7 million
for the acquisition of Fox River in 2007. Capital spending for
the year ended December 31, 2008 was $30.0 million
compared to spending of $58.3 million in the comparable
prior year period. The reduction in capital spending is
primarily due to expenditures in 2007 for major projects
to increase capacity and improve effi ciency at Neenah
Germany and for capital projects in our pulp business.
For the year ended December 31, 2008, cash used in
investing activities includes payments by Neenah Canada
of approximately $10.3 million to Northern Pulp in connec-
tion with the transfer of the Pictou Mill. In addition, we paid
approximately $3.3 million in transaction costs. Such pay-
ments were more than offset by proceeds of $13.8 million,
primarily from the sale of surplus Fox river assets.
•
• We have aggregate planned capital expenditures for
2009 of less than $15 million. These capital expenditures
are not expected to have a material adverse effect on our
fi nancial condition, results of operations or liquidity.
• For the year ended December 31, 2007, cash used in
investing 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 acquisition of Neenah Germany for
$218.6 million (net of cash acquired) and a payment
of $18.6 million to Buchanan to transfer the Terrace Bay
mill, partially offset by net proceeds from the sale of
woodlands of $134.8 million. Capital 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 capacity and improve effi ciency
at Neenah Germany. In general, our 2007 capital expendi-
tures in Neenah Germany were fi nanced from locally gen-
erated cash fl ow and government subsidized fi nancing.
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
F I N A N C I N G C O M M E N T A R Y :
• Our liquidity requirements are provided by cash gener-
ated from operations, short- and long-term borrowings
and proceeds from asset sales. Availability under our bank
revolving credit facility varies over time depending on
the value of our inventory, receivables and various capital
assets. As of December 31, 2008, we had $101.1 million
outstanding under our revolving credit facility, outstand-
ing letters of credit of $1.6 million and $49.2 million of
available credit. We expect that JP Morgan Chase, N.A.
and the other lenders listed in our credit agreement will
continue to honor their commitment to provide funds in
accordance with the terms of the credit agreement.
• In June 2008, we entered into the sixth amendment to the
bank credit agreement in which the lenders consented to
the sale of the Pictou Mill.
• In June 2008, we entered into the fi rst amendment to a
term loan agreement which reduced required amortiza-
tion payments to $1.25 million per quarter. All remain-
ing amounts outstanding under the term loan are due
and payable upon termination of the agreement in
November 2010.
• During the year ended December 31, 2007, we amended
our bank credit agreement to increase available borrow-
ing capacity under our bank revolving credit facility from
$165 to $210 million. Despite the increase in the total
commitment, our ability to borrow under the bank revolv-
ing credit facility is limited to the lowest of (a) $210 mil-
lion, (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, 2008, additional net
borrowings on our bank revolving credit facility were
$34.9 million primarily to fi nance our increased investment
in operating working capital, our purchase of common
stock ($9.4 million) in connection with a reverse/forward
split of common stock and our regular quarterly dividends
($6.0 million).
• For the year ended December 31, 2008, additional net
borrowings on our German revolving line of credit were
$15.1 million (€10.2 million).
• For the year ended December 31, 2008, we prepaid
approximately $9.5 million in Term Loan borrowings with
the proceeds from the sale of certain Fox River assets.
• For each of the years ended December 31, 2008, 2007
and 2006, we paid cash dividends of $0.40 per share or
$6.0 million, $6.0 million and $5.9 million, respectively.
• We have required debt payments for the year ended
December 31, 2009 are $24.1 million. Such payments
include required amortization payments on our Term
Loan and German construction fi nancing of approximately
$5.0 million and $1.8 million, respectively, and $17.3 mil-
lion on our German unsecured revolving line of credit
which we expect to refi nance in November 2009.
• We expect to make required pension contributions of
approximately $11 million in calendar 2009 compared to
contributions to pension trusts of $7.5 million in calen-
dar 2008 which included contributions of approximately
$2.6 million to the Nova Scotia Plan.
• We have approximately $11.2 million in refundable U.S.
income taxes that are expected to be received in the
next 12 months. In addition, we do not expect to pay U.S.
income taxes for the next three calendar years as a result
of the utilization of net operating losses.
Management believes that our ability to gener-
ate cash from operations and our borrowing capacity are
adequate to fund working capital, capital spending and other
cash needs for the next 12 months. Our ability to generate
adequate cash from operations beyond 2009 will depend on,
among other things, our ability to successfully implement our
business strategies, control costs in line with market condi-
tions and manage the impact of changes in input prices and
currencies. We can give no assurance we will be able to suc-
cessfully implement these items.
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, 2008:
(In millions)
2009
2010
Minimum purchase commitments
Long-term debt payments
Interest payments on long-term debt
Other postretirement benefi t obligations
Operating leases
Open purchase orders
Contributions to pension trusts
Liability for uncertain tax positions
Total contractual obligations
$ 4.4
24.1
22.1
2.6
3.3
59.2
10.7
0.2
$126.6
$ 0.6
105.0
20.4
1.5
3.4
–
–
–
$130.9
2011
$ 0.5
1.7
17.0
1.9
2.1
–
–
–
$23.2
2012
$ 0.3
1.8
16.9
2.2
1.8
–
–
–
$23.0
2012
$ 0.3
1.7
16.8
2.6
1.3
–
–
–
$22.7
Beyond
2013
$ –
230.3
16.2
17.4
1.7
–
–
–
$265.6
Total
$ 6.1
364.6
109.4
28.2
13.6
59.2
10.7
0.2
$592.0
48
Neenah Paper, Inc. 2008 Annual Report
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 minimum purchase commitments in 2009 are
primarily for natural gas contracts. Although we are primar-
ily liable for payments on the above operating leases and
minimum purchase commitments, based on historic operat-
ing 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
interest on variable rate debt at December 31, 2008
weighted average interest rates.
The open purchase orders displayed in the table
represent amounts we anticipate will become payable within
the next 12 months for goods and services that we have
negotiated for delivery.
The above table includes future payments that we
will make for postretirement benefi ts other than pensions. Those
amounts are estimated using actuarial assumptions, including
expected future service, to project the future obligations.
CRITICAL ACCOUNTING POLICIES AND
US 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
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,
49
Neenah Paper, Inc. 2008 Annual Report
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.
In general, our shipments are designated free on board
shipping point and we recognize revenue at the time of ship-
ment. Sales are reported net of allowable discounts and esti-
mated returns. Reserves for cash discounts, trade allowances
and sales returns are estimated using historical experience.
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. 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
$66.5 million and $45.2 million at December 31, 2008
and 2007, respectively and exceeded such LIFO value by
$8.2 million and $9.6 million, respectively. Cost includes
labor, materials and production overhead.
As of December 31, 2008, we had no Canadian
pulp inventories. As of December 31, 2007, Canadian pulp
inventories were $17.0 million and consisted of both round-
wood (logs) and wood chips. These inventories were located
both at the pulp mills and at various timberlands locations.
I N C O M E T A X E S
As of December 31, 2008, we have recorded aggregate
deferred income tax assets of $95.3 million related to
temporary differences, and have established no valuation
allowances against these deferred income tax assets. As of
December 31, 2007, our aggregate deferred income tax
assets were $57.3 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 state-
ments in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. As of
December 31, 2008, our liability for uncertain income taxes
positions was $0.2 million. In evaluating and estimating
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
tax positions and tax benefi ts, we consider many factors
which may result in periodic adjustments and which may not
accurately anticipate 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 or defi ned
contribution retirement plans. In November 2004, we
assumed responsibility for pension and postretirement ben-
efi t obligations for active employees of the Pulp and Paper
business and former employees of the pulp business in
Canada. In August 2006, Neenah Canada purchased annuity
contracts to settle its obligations under 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 ter-
minate 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. In conjunc-
tion with the sale of the Pictou Mill, Northern Pulp assumed
responsibility for all pension and other postretirement ben-
efi t obligations for active and retired employees of the mill.
The Company accounted for the transfer of these liabilities
as a settlement of postretirement benefi t obligations pursu-
ant to Statement of Financial Accounting Standards No. 88,
Employers’ Accounting for Settlements and Curtailments of
Defi ned Benefi t Pension Plans and for Termination Benefi ts.
Substantially all of Neenah Germany’s employees participate
in defi ned benefi t plans designed to provide a monthly pen-
sion 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
benefi t pension plans was $7.8 million, $49.5 million and
$35.5 million for the years ended December 31, 2008,
2007 and 2006, respectively. Pension expense for the year
ended December 31, 2008, excludes a non-cash, pre-tax
settlement loss of $53.7 million due to the reclassifi ca-
tion of deferred pension and other postretirement benefi t
adjustments related to the transfer of the Nova Scotia Plan
to Northern Pulp from accumulated other comprehensive
income to loss from discontinued operations in the consoli-
dated statement of operations. Pension expense for the year
50
Neenah Paper, Inc. 2008 Annual Report
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
settlement and curtailment losses related to the settlement
of pension obligations for current retirees in the Ontario
Plan. Pension expense is calculated 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 8.02 percent, 7.90 percent and 8.39 percent for
the years ended December 31, 2008, 2007 and 2006, respec-
tively. The expected long-term rate of return on pension
fund assets held by our pension trusts was determined based
on several factors, including input from pension investment
consultants and projected long-term returns of broad equity
and bond indices. We also considered the plans’ historical
10-year and 15-year compounded annual returns. We antici-
pate 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 periodi-
cally rebalanced to the targeted allocation when considered
appropriate. We evaluate our investment strategy and
long-term rate of return on pension asset assumptions at
least annually.
Pension expense is estimated based on the fair
value of assets rather than a market-related value that aver-
ages gains and losses over a period of years. Investment
gains or losses represent the difference between the
expected return calculated using the fair value of the assets
and the actual return based on the fair value of assets. The
variance between the actual and the expected gains and
losses on pension assets is recognized in pension expense
more rapidly than it would be if a market-related value for
plan assets was used. As of December 31, 2008, our pen-
sion plans had cumulative unrecognized investment losses
and other actuarial losses of approximately $30.5 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
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
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, 2008 and 2007 was 6.80 per-
cent and 6.10 percent, respectively.
Our consolidated pension expense in 2009 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 2009 will depend on future investment per-
formance, our contributions to the pension trusts, changes in
discount rates and various other factors related to the cov-
ered employees in the plans. As of December 31, 2008, our
actuarially determined pension expense for the year ended
December 31, 2009, will be approximately $7.9 million.
The fair value of the assets in our defi ned benefi t
plans at December 31, 2008 of approximately $143 million
decreased approximately $201 million from the fair value
of about $344 million at December 31, 2007, due to the
transfer of assets of $160.6 million to Northern Pulp in con-
nection with the sale of the Pictou Mill. Pension plan assets
also decreased due to investment losses, benefi t payments
and currency effects. At December 31, 2008, the projected
benefi t obligations of the defi ned benefi t plans exceeded
the fair value of plan assets by approximately $71 million
which was approximately $7 million larger than the $64 mil-
lion defi cit at December 31, 2007. The accumulated benefi t
obligation exceeded the fair value of plan assets by approxi-
mately $52.8 million and $24.7 million at December 31, 2008
and 2007, respectively. Contributions to pension trusts for
the year ended December 31, 2008 were $7.5 million com-
pared with $8.4 million for the year ended December 31,
2007. In addition, we made direct benefi t payments for
unfunded supplemental retirement benefi ts of approxi-
mately $2.5 million and $1.8 million for the years ended
December 31, 2008 and 2007, respectively.
51
Neenah Paper, Inc. 2008 Annual Report
I M P A I R M E N T O F L O N G - L I V E D A S S E T S
P R O P E R T Y , P L A N T A N D E Q U I P 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
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 deter-
mine fair value based on an expected present value tech-
nique 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 W I T H I N D E F I N I T E L I V E 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 annually. A fair-value-based test is applied at the
reporting unit level, which is generally one level below the
segment level. The test compares the fair value of an entity’s
reporting units to the carrying value of those reporting
units. This test requires various judgments and estimates.
We determine the fair value of the reporting unit using a
market approach in combination with a probability-weighted
discounted operating cash fl ow approach for a number of
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
scenarios representing differing operating and economic
assumptions. We will record an adjustment to goodwill for
any goodwill that is determined to be impaired.
Impairment of goodwill is measured as the excess
of the carrying amount of goodwill over the fair values of
recognized assets and liabilities of the reporting unit. We test
goodwill for impairment at least annually on November 30 in
conjunction with preparation of our annual business plan, or
more frequently if events or circumstances indicate it might
be impaired.
Certain trade names are estimated to have indefi -
nite useful lives and as such are not amortized. Intangible
assets with indefi nite lives are annually reviewed for impair-
ment in accordance with SFAS 142.
O T H E R I N T A N G I B L E A S S E T S W I T H F I N I T E L I V E S
Acquired intangible assets with estimable useful lives are
amortized on a straight-line basis over their respective
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 amortized using the straight-line method over
estimated useful lives of between 10 and 15 years.
I M P A I R M E N T O F 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
Our annual test of goodwill for impairment at November 30,
2008, indicated that the carrying value of the Neenah
Germany reporting unit exceeded its estimated fair value.
We estimated fair value using a market approach in combina-
tion with a probability-weighted discounted operating cash
fl ow approach for a number of scenarios representing dif-
fering operating and economic assumptions. Signifi cant
assumptions used in developing the discounted operating
cash fl ow approach were revenue growth rates and pric-
ing, costs for manufacturing inputs, levels of capital invest-
ment and estimated cost of capital for high, medium and
low growth environments. We measured the estimated fair
value of goodwill as the excess of the carrying amount of the
Neenah Germany reporting unit over the fair values of recog-
nized assets and liabilities of the reporting unit. We recorded
an impairment adjustment to goodwill for the excess of the
carrying value of goodwill assigned to the reporting unit
over the estimated fair value of goodwill. For the year ended
December 31, 2008, we recognized a non-cash pre-tax loss
of $52.7 million for the impairment of goodwill assigned
to the Neenah Germany reporting unit. We did not recog-
nize a tax benefi t related to the non tax deductible loss.
As of December 31, 2007, the carrying amount of goodwill
assigned to the Neenah Germany reporting unit was consid-
ered recoverable.
52
Neenah Paper, Inc. 2008 Annual Report
The impairment loss was primarily due to a sub-
stantial increase in the estimated cost of capital we used
to calculate the present value of Neenah Germany’s esti-
mated future cash fl ows which resulted in a substantially
lower estimated fair value. The higher estimated cost of
capital refl ected current market/fi nancial conditions at
the time the annual impairment test was performed which
indicated higher risk premiums for debt and equity. As of
December 31, 2008, a one percentage point increase in
the estimate for our cost of capital used in the impairment
test would result in an approximately $15 million change
in the estimated fair value of the Neenah Germany report-
ing unit and a corresponding reduction in the implied value
of goodwill.
During our annual test of other intangible assets
for impairment, we determined that certain trade names
and customer based intangible assets were also impaired at
December 31, 2008. For the year ended December 31, 2008,
we recognized a non-cash pre-tax charge of approximately
$1.8 million for the impairment of such assets.
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
compensation cost recognized under SFAS 123R consists
of (a) compensation cost for all unvested stock-based
grants outstanding as of January 1, 2006, based on the grant
date fair value estimated in accordance with the pro forma
provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation
(“SFAS 123”) and (b) compensation cost for all stock-based
awards granted subsequent to adoption based on the grant
date fair value estimated in accordance with the provisions of
SFAS 123R. The amount of stock-based compensation cost
recognized is based on the fair value of grants that are ulti-
mately expected to vest and is recognized pro-rata over the
requisite service period for the entire award.
SFAS 123R amends Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows, to
require the reporting of excess tax 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.
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
QU AN TITATIVE AND QUALITATIVE DISCLOSURES
AB OUT MARKET 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 sig-
nifi cant risks.
F O R E I G N C U R R E N C Y R I S K
Our reported operating results are affected by changes in the
exchange rates of the Euro relative to the U.S. dollar. For
the year ended December 31, 2008, a hypothetical 10 per-
cent decrease in the exchange rates of the Euro relative to
the U.S. dollar would have decreased our income before
income taxes by approximately $0.6 million. Our expo-
sure to such exchange risk on reported operating results is
not hedged.
Currency transactional exposures are sensitive to
changes in the exchange rate of the U.S. dollar against 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, 2008. The effect is calculated by
multiplying our net monetary asset or liability position by a
10 percent change in the exchange rate of the Euro versus
the U.S. dollar. The results of this sensitivity test are as fol-
lows. As of December 31, 2008, a 10 percent unfavorable
change in the exchange rate of the U.S. dollar against the Euro
involving balance sheet transactional exposures would have
resulted in net pre-tax losses of approximately $4 million.
Finally, the translation of the balance sheets of our
German operations from Euros into U.S. dollars also is sensi-
tive to changes in the exchange rate of the U.S. dollar against
the Euro. Consequently, we performed a sensitivity test to
determine if changes in the exchange rate would have a sig-
nifi cant effect on the translation of the balance sheets of our
German operations into U.S. dollars. These translation gains
or losses are recorded as unrealized translation adjustments
(“UTA”, a component of comprehensive income) within
stockholders’ equity. The hypothetical change in UTA is cal-
culated by multiplying the net assets of our German opera-
tions by a 10 percent change in the U.S.$/Euro exchange
rates. As of December 31, 2008, a 10 percent unfavorable
change in the exchange rate of the U.S. dollar against the
Euro would have decreased our stockholders’ equity by
53
Neenah Paper, Inc. 2008 Annual Report
approximately $26 million. The hypothetical increase in UTA
is based on the difference between the December 31, 2008
exchange rate and the assumed exchange rate.
Prior to the sale of the Pictou Mill, our results
of operations and cash fl ows were affected by changes in
the Canadian dollar exchange rate relative to the U.S. dol-
lar. From time-to-time, we used hedging arrangements to
reduce our exposure to Canadian dollar exchange rate fl uc-
tuations. At December 31, 2008, we had no foreign currency
contracts outstanding. Following the sale of the Pictou Mill,
the risk that our results of operations and cash fl ows will be
affected by changes in the Canadian dollar exchange rate
relative to the U.S. dollar has been substantially reduced.
At December 31, 2007 we had foreign currency contracts
outstanding in a notional amount of $3.4 million Canadian
dollars. The fair value of the contracts was a current asset of
$0.5 million U.S. dollars.
C O M M O D I T Y R I S K
P U L P
We purchase the wood pulp used 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 govern-
ment regulation. We do not have signifi cant infl uence over
the price paid for our wood pulp purchases. Therefore, an
increase in wood pulp 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.
Based on 2008 pulp purchases, a 10 percent
increase in the average market price for pulp (approximately
$80 per ton) would have increased our annual costs for pulp
purchases by approximately $19 million.
Prior to the sale of the Pictou Mill, our results of
operations, cash fl ows and fi nancial position were sensitive to
the selling prices of wood pulp. From time-to-time, we used
hedging arrangements to reduce our exposure to pulp price
fl uctuations. At December 31, 2008 and 2007, we had no
outstanding pulp future contracts.
O T H E R M A N U F A C T U R I N G I N P U T S
We purchase a substantial portion of the other manufactur-
ing inputs 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 costs for such
manufacturing inputs. Therefore, an increase in other manu-
facturing inputs 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.
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
While we believe that alternative sources of critical
supplies would be available, an interruption in supply of single
source specialty grade latex or specialty softwood pulp to our
technical products business could disrupt and eventually cause
a shutdown of production of certain technical products.
We generate substantially all of the electrical
energy used by our Munising mill and approximately 20 per-
cent 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 uc-
tuations in demand and other factors. 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. At December 31,
2008, we had $237.2 million of long-term fi xed rate debt
outstanding and $103.3 million of long-term variable rate
borrowings outstanding. 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, 2008, the fair
market value of our fi xed rate long-term debt was $138.1 mil-
lion based upon the quoted market price of the senior notes
or rates currently available to us for debt of the same remain-
ing maturities. A 100 basis point increase in interest rates
would increase our annual interest expense on outstanding
variable rate borrowings by approximately $1.0 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 2009 through 2011
of approximately $1 million to $2 million annually.
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.
54
Neenah Paper, Inc. 2008 Annual Report
FORWARD-LOOKING STATEMENT S
Certain statements in this Annual Report may consti-
tute “forward-looking” statements as defi ned in Section
27A of the Securities Act of 1933 (the “Securities Act”),
Section 21E of the Securities Exchange Act of 1934 (the
“Exchange Act”), the Private Securities Litigation Reform Act
of 1995 (the “PSLRA”), or in releases made by the Securities
and Exchange Commission, all as may be amended from
time to time. Statements contained in this Annual Report that
are not historical facts may be forward-looking statements
within the meaning of the PSLRA. Any such forward-looking
statements refl ect our beliefs and assumptions and are based
on information currently available to us and are subject to
risks and uncertainties that could cause actual results to differ
materially including, but not limited to: (i) worldwide eco-
nomic conditions, which have deteriorated signifi cantly in the
U.S., Germany and many other countries and regions, (ii) sig-
nifi cant capital and credit market volatility and deterioration,
(iii) U.S. dollar/Euro and other exchange rates, (iv) changes in
prices for pulp, energy, latex and other raw materials, (v) the
cost or availability of raw materials, (vi) unanticipated expen-
ditures related to the cost of compliance with environmental
and other governmental regulations and (vii) the ability of the
company to realize anticipated cost savings. These and other
factors that could cause or contribute to actual results differ-
ing materially from any forward-looking statements are dis-
cussed in more detail in our other fi lings with the Securities
and Exchange Commission. Forward-looking statements
are only predictions and involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements, or industry results, to
be materially different from any future results, performance
or achievements expressed or implied by such forward-
looking statements. We undertake no obligation to publicly
update any forward-looking statements, whether as a result
of new information, future events or otherwise. These cau-
tionary statements are being made pursuant to the Securities
Act, the Exchange Act and the PSLRA with the intention of
obtaining the benefi ts of the “safe harbor” provisions of such
laws. Neenah Paper, Inc. cautions investors that any forward-
looking statements we make are not guarantees or indicative
of future performance.
Management’s Annual Report on
Internal Control Over Financial Reporting
The Company’s management, with the participation of its
Chief Executive Offi cer and Chief Financial Offi cer, has
evaluated the effectiveness of the Company’s disclosure
controls and procedures (as such term is defi ned in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end
of the period covered by this report. Based on such evalu-
ation, the Company’s Chief Executive Offi cer and Chief
Financial Offi cer have concluded that, as of the end of such
period, the Company’s disclosure controls and procedures
are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be dis-
closed by the Company in the reports that it fi les or submits
under the Exchange Act and are effective in ensuring that
information required to be disclosed by the Company in
the reports that it fi les or submits under the Exchange Act is
accumulated and communicated to the Company’s manage-
ment, including the Company’s Chief Executive Offi cer and
Chief Financial Offi cer, as appropriate to allow timely deci-
sions regarding required disclosure.
MA NA GEMENT’S ANNUAL REPORT ON INTERNAL
CON TROL OVER FINANC IAL REPORTING
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, 2008. The scope of management’s assessment
of the effectiveness of internal control over fi nancial report-
ing includes all of the Company’s businesses. 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, management believes that
as of December 31, 2008, 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 nancial state-
ments 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 mis-
statement of the Company’s annual or interim fi nancial state-
ments will not be prevented or detected on a timely basis.
CO NT ROLS OVER INCOME TAX ACCO UNT IN G: As
discussed in our Annual Report on Form 10-K for the year
ended December 31, 2007, as of December 31, 2007 the
Company did not maintain effective controls over the deter-
mination and reporting of the provision for income taxes and
related income tax balances. We believe signifi cant progress
has been made towards improving the level of skills and
resources and internal control procedures for preparing,
analyzing, reconciling, and reviewing our income tax provi-
sion and income tax balance sheet accounts. This includes
(i) hiring an income tax service provider during 2008 to pre-
pare the income tax provision and related income tax bal-
ance sheet accounts; and (ii) utilizing a standard spreadsheet
template provided by our service provider to summarize
the components of our income tax provision. However, at
55
Neenah Paper, Inc. 2008 Annual Report
M A N A G E M E N T ’ S A N N U A L R E P O R T
December 31, 2008, there were certain auditor identi-
fi ed misstatements in the Company’s December 31, 2008
deferred tax balances. These misstatements were the result
of a failure in the operating effectiveness of the Company’s
underlying control activities related to the preparation and
review of the provision for income taxes and related income
tax balances.
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, 2008. 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 provi-
sion for income taxes and related income tax balances in the
Company’s annual or interim consolidated fi nancial state-
ments that would not be prevented or detected on a timely
basis. Therefore, management has concluded that, as of
December 31, 2008, there is a material weakness in internal
control over fi nancial reporting as it relates to accounting for
income taxes that resulted from a defi ciency in the operation
of internal control.
The effectiveness of internal control over fi nancial
reporting as of December 31, 2008, 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 attesta-
tion report on the Company’s internal control over fi nancial
reporting follows.
Neenah Paper, Inc.
March 12, 2009
56
Neenah Paper, Inc. 2008 Annual Report
Report of Independent Registered
Public Accounting Firm on
Internal Control Over Financial Reporting
To the Board of Directors and Stockholders of
Neenah Paper, Inc., Alpharetta, Georgia
We have audited the internal control over fi nancial report-
ing of Neenah Paper, Inc. and subsidiaries’ (the “Company”)
as of December 31, 2008, based on criteria established in
Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over fi nancial report-
ing and for its assessment of the effectiveness of internal
control over fi nancial reporting, included in the accompany-
ing Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opin-
ion on the Company’s internal control over fi nancial report-
ing 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 per-
form the audit to obtain reasonable assurance about whether
effective internal control over fi nancial reporting was main-
tained 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 effectiveness of internal
control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.
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 regarding the reli-
ability 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 policies and procedures
that (1) pertain to the maintenance of records that, in reason-
able detail, accurately and fairly refl ect the transactions and
dispositions of the assets of the company; (2) provide reason-
able assurance that transactions are recorded as necessary to
permit preparation of fi nancial statements in accordance with
generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors
57
Neenah Paper, Inc. 2008 Annual Report
of the company; and (3) provide reasonable assurance regard-
ing prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a
material effect on the fi nancial statements.
Because of the inherent limitations of internal 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 combina-
tion of defi ciencies, in internal control over fi nancial reporting,
such that there is a reasonable possibility that a material mis-
statement of the company’s annual or interim fi nancial state-
ments will not be prevented or detected on a timely basis.
The following material weakness has been identi-
fi ed and included in management’s assessment: The Company
did not maintain effective controls over the determination
and reporting of the provision for income taxes and related
income tax balances. Signifi cant progress has been made
towards improving the level of skills and resources and internal
control procedures for preparing, analyzing, reconciling, and
reviewing the Company’s income tax provision and income tax
balance sheet accounts. This includes (i) hiring an income
tax service provider during 2008 to prepare the income tax
provision and related income tax balance sheet accounts;
and (ii) utilizing a standard spreadsheet template provided
by our service provider to summarize the components of our
income tax provision. However, at December 31, 2008, there
were certain auditor identifi ed misstatements identifi ed in the
Company’s December 31, 2008 deferred tax balances. These
misstatements were the result of a failure in the operating
effectiveness of the Company’s underlying control activities
related to the preparation and review of the provision for
income taxes and related income tax balances.
In our opinion, because of the effect of the mate-
rial weakness identifi ed above on the achievement of the
objectives of the control criteria, the Company has not
maintained effective internal control over fi nancial report-
ing as of December 31, 2008, based on the criteria estab-
lished in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the
Treadway Commission.
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
We have also audited, in accordance with the stan-
dards of the Public Company Accounting Oversight Board
(United States), the consolidated fi nancial statements and
fi nancial statement schedule as of and for the year ended
December 31, 2008 of the Company and our report dated
March 12, 2009, expressed an unqualifi ed opinion on those
fi nancial statements and fi nancial statement schedule and
included an explanatory paragraph related to the adoption
of 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.
Atlanta, Georgia
March 12, 2009
58
Neenah Paper, Inc. 2008 Annual Report
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Stockholders of
Neenah Paper, Inc., Alpharetta, Georgia
We have audited the accompanying consolidated balance
sheets of Neenah Paper, Inc and subsidiaries (the “Company”)
as of December 31, 2008 and 2007, and the related consoli-
dated statements of operations, changes in stock holders’
equity, and cash fl ows for each of the three years in the
period ended December 31, 2008. Our audits also included
the fi nancial statement schedule listed in the Index at
Item 15. These fi nancial statements and fi nancial statement
schedule are the responsibility of the Company’s manage-
ment. Our responsibility is to express an opinion on the
fi nancial statements and fi nancial statement schedule 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 mis-
statement. An audit includes examining, on a test basis, evi-
dence 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 manage-
ment, 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,
2008 and 2007, and the results of their operations and their
cash fl ows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in
our opinion, such fi nancial statement schedule, when consid-
ered in relation to the basic consolidated fi nancial statements
taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 6, 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.
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, 2008, 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 12, 2009
expressed an adverse opinion on the Company’s internal
control over fi nancial reporting.
Atlanta, Georgia
March 12, 2009
59
Neenah Paper, Inc. 2008 Annual Report
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
Goodwill and other intangible asset impairment charge (Note 4)
Other income – net
Operating income (loss)
Interest expense
Interest income
Income (loss) from continuing operations before income taxes
Provision (benefi t) for income taxes
Income (loss) from continuing operations
Income (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 Financial Statements
Year Ended December 31,
2008
2007
2006
$ 732.3
633.2
99.1
75.2
54.5
(11.3)
(19.3)
25.0
–
(44.3)
3.0
(47.3)
(111.2)
$(158.5)
$ (3.23)
(7.59)
$(10.82)
$ (3.23)
(7.59)
$(10.82)
$767.0
635.5
131.5
79.3
–
(1.7)
53.9
25.5
(0.1)
28.5
(3.7)
32.2
(22.0)
$ 10.2
$ 2.17
(1.48)
$ 0.69
$ 2.13
(1.46)
$ 0.67
$405.0
305.4
99.6
54.4
–
(0.5)
45.7
19.4
(2.5)
28.8
9.4
19.4
43.1
$ 62.5
$ 1.31
2.93
$ 4.24
$ 1.31
2.90
$ 4.21
14,642
14,642
14,874
15,141
14,757
14,847
60
Neenah Paper, Inc. 2008 Annual Report
Consolidated Balance Sheets
(In millions)
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Income taxes receivable
Deferred income taxes
Prepaid and other current assets
Assets held for sale – discontinued operations (Note 5)
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 11 and 12)
Stockholders’ Equity
Common stock, par value $0.01 – authorized: 100,000,000 shares; issued and outstanding:
15,054,852 shares and 14,968,650 shares
Treasury stock, at cost: 405,744 shares and 13,544 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,
2008
2007
$ 3.3
63.2
88.6
11.2
53.3
19.0
3.3
241.9
316.2
42.0
43.8
28.7
12.0
$ 684.6
$ 24.1
40.6
32.3
97.0
340.5
25.4
111.3
574.2
0.1
(10.1)
238.7
(210.0)
91.7
110.4
$ 684.6
$ 2.4
145.4
110.6
0.6
1.9
29.3
–
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
0.1
(0.4)
235.3
(45.5)
98.5
288.0
$932.8
61
Neenah Paper, Inc. 2008 Annual Report
Consolidated Statements of
Change in Stockholders’ Equity
(In millions,
shares in thousands)
Common Stock
Shares
Amount
Additional
Treasury
Stock
Paid-In Accumulated
Defi cit
Capital
Accumulated
Other
Compre-
hensive
Income
Unearned
Compen-
sation on
Restricted
Stock
Compre-
hensive
Income/(Loss)
Balance, December 31, 2005
Net income
Other comprehensive income/(loss)
Unrealized foreign
currency translation gains
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
Stock options exercised
Restricted stock vesting
(Note 10)
Stock-based compensation
Balance, December 31, 2006
Net income
Other comprehensive income/(loss)
Unrealized foreign
currency translation gains
Adjustment to pension and
other benefi t liabilities
Loss on cash fl ow hedges
Dividends declared
Excess tax benefi ts from
stock-based compensation
Stock options exercised
Restricted stock vesting (Note 10)
Stock-based compensation
Balance, December 31, 2007
Net loss
Other comprehensive income/(loss)
Unrealized foreign
currency translation losses
Adjustment to pension and
other benefi t liabilities
Loss on cash fl ow hedges
Dividends declared
Excess tax defi cit from
stock-based compensation
Share purchases
Restricted stock vesting (Note 10)
Stock-based compensation
Balance, December 31, 2008
14,766
$0.1
$ –
$219.4
$(106.3)
62.5
$ 53.9
$(1.8)
43
3
(0.1)
14,812
0.1
(0.1)
(1.8)
1.3
5.8
224.7
124
33
(0.3)
14,969
0.1
(0.4)
0.5
3.7
6.4
235.3
(5.9)
12.8
2.9
(4.3)
(55.4)
1.8
(49.7)
10.2
9.9
–
58.0
30.7
(0.1)
(6.0)
(45.5)
(158.5)
98.5
–
(22.8)
16.3
(0.3)
(6.0)
86
(9.4)
(0.3)
15,055
$0.1
$(10.1)
(0.6)
4.0
$238.7
$(210.0)
$ 91.7
$ –
$ 62.5
12.8
2.9
(4.3)
$ 73.9
$ 10.2
58.0
30.7
(0.1)
$ 98.8
$(158.5)
(22.8)
16.3
(0.3)
$(165.3)
See Notes to Consolidated Financial Statements
62
Neenah Paper, Inc. 2008 Annual Report
Consolidated Statements of Cash Flows
(In millions)
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Deferred income tax provision (benefi t)
Goodwill and other intangible asset impairment charge (Note 4)
Asset impairment loss (Note 5)
Loss on disposal – transfer of the Pictou Mill (Note 5)
Amortization of deferred revenue – transfer of the Pictou Mill
Loss on disposal – transfer of the Pictou Mill postretirement benefi t plans (Note 5)
Loss on disposal of Terrace Bay (Note 5)
Gain on curtailment of postretirement benefi t plan
Gain on sale of woodlands (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 15)
Pension and other postretirement 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)
Acquisition of Neenah Germany, net of cash acquired (Note 4)
Payments in conjunction with the transfer of the Pictou Mill
Payment for transfer of Terrace Bay
Proceeds from asset sales
Net proceeds from sale of woodlands (Note 5)
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
Share purchases (Note 10)
Proceeds from exercise of stock options
Other
NET CASH PROVIDED BY 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
63
Neenah Paper, Inc. 2008 Annual Report
Year Ended December 31,
2008
2007
2006
$(158.5)
$ 10.2
$ 62.5
38.6
4.0
(55.7)
54.5
91.2
29.4
(2.8)
53.7
–
(4.3)
–
(6.3)
(21.5)
(7.6)
–
–
(1.6)
13.1
(30.0)
–
–
(13.6)
–
13.8
–
(0.6)
(30.4)
53.7
(34.6)
18.7
(3.3)
(6.0)
(9.4)
–
(0.9)
18.2
–
0.9
2.4
$ 3.3
45.3
6.4
(26.8)
–
–
–
–
–
–
–
(6.2)
(0.8)
–
4.1
38.7
–
(1.4)
69.5
(58.3)
(54.7)
(1.5)
–
–
–
–
1.1
(113.4)
77.0
(34.1)
8.0
(5.0)
(6.0)
–
3.7
0.2
43.8
0.9
0.8
1.6
$ 2.4
30.2
5.8
30.0
–
–
–
–
–
6.5
–
(125.5)
0.8
39.8
0.3
26.4
(10.8)
(0.2)
65.8
(25.1)
–
(218.6)
–
(18.6)
–
134.8
(0.2)
(127.7)
83.6
(28.2)
0.6
(0.6)
(5.9)
–
1.3
–
50.8
0.1
(11.0)
12.6
$ 1.6
Notes to Consolidated Financial Statements
(Dollars in millions, except as noted)
One
Background and Basis of Presentation
B A C K G R O U N D
Neenah Paper, Inc. (“Neenah” or the “Company”), a
Delaware corporation, was incorporated in April 2004 in
contemplation of the spin-off by Kimberly-Clark Corporation
(“Kimberly-Clark”) of its fi ne paper and technical products
businesses in the United States and its pulp business in Canada
(collectively, the “Pulp and Paper Business”). In November 2004,
Kimberly-Clark completed the distribution of all of the
shares of Neenah’s common stock to the 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 independent publicly held
company. Kimberly-Clark has no continuing stock owner-
ship in Neenah. Following the Spin-Off, management began
executing a strategy to exit the pulp business and transform
the Company into a manufacturer of specialty papers.
The 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 for
point of sale advertising. The technical products business is
a leading producer of transportation and other fi lter media;
durable, saturated and coated substrates for a variety of end
uses; and nonwoven wall coverings.
In June 2006, the Company’s wholly owned
subsidiary, Neenah Paper Company of Canada (“Neenah
Canada”) sold approximately 500,000 acres of woodlands in
Nova Scotia. The woodlands sale agreement included a fi ber
supply agreement to secure a source of fi ber for Neenah
Canada’s Pictou pulp mill. See Note 5, “Discontinued
Operations – Sale of Woodlands in 2006.”
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
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. The results of operations of Terrace Bay are reported
as discontinued operations on the consolidated statements
of operations for the years ended December 31, 2008, 2007
and 2006. See Note 5, “Discontinued Operations – Transfer
of Terrace Bay Mill.”
In October 2006, the Company purchased the
stock of FiberMark Services GmbH & Co. KG and the stock
of FiberMark Beteiligungs GmbH (collectively, “Neenah
Germany”) from FiberMark, Inc. (“FiberMark”) and FiberMark
64
Neenah Paper, Inc. 2008 Annual Report
International Holdings LLC. 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 sub-
strates. 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 –
Neenah Germany.”
In March 2007, the Company acquired the stock
of Fox Valley Corporation and its subsidiary, Fox River Paper
Company, LLC (collectively, “Fox River”). The Company
fi nanced the acquisition through a combination of cash and
debt drawn against its existing revolving credit facility. At
the time of the acquisition, the Fox River assets consisted 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 acquisi-
tion date. See Note 4, “Acquisitions – Fox River,” 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.
In February 2008, the Company committed to a
plan to sell its pulp mill in Pictou, Nova Scotia (the “Pictou
Mill”) and approximately 500,000 acres of woodland assets
in Nova Scotia (the “Woodlands”). In June 2008, Neenah
Canada sold the Pictou Mill to Northern Pulp Nova Scotia
Corporation (“Northern Pulp”), a new operating company
jointly owned by Atlas Holdings LLC and Blue Wolf Capital
Management LLC. Pursuant to the terms of the transac-
tion, Northern Pulp assumed all of the assets and liabilities
associated with the Pictou Mill, as well as existing customer
contracts, supply agreements, labor agreements and pension
obligations. The sale did not include the Woodlands.
Management believes it is probable that the
sale of the Woodlands will be completed within 12 months.
As of December 31, 2008, the assets and liabilities of the
Woodlands are reported as assets held for sale – discontin-
ued operations on the consolidated balance sheet. For the
three years ended December 31, 2008, the results of opera-
tions of the Pictou Mill and the Woodlands and the loss on
disposal of the Pictou Mill are reported as discontinued oper-
ations in the consolidated statements of operations. The con-
solidated results of operations for all prior years have been
restated to refl ect the results of operations of the Pictou Mill
and the Woodlands as discontinued operations. See Note 5,
“Discontinued Operations – Sale of the Pictou Mill and
the Woodlands.”
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
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.
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 esti-
mates, 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 postretirement benefi ts, retained insurable risks, allow-
ances for doubtful accounts and reserves for sales returns
and cash discounts, purchase price allocations, useful lives
for depreciation, depletion and amortization, future cash
fl ows associated with impairment testing for tangible and
intangible long-lived assets, income taxes, contingencies,
inventory obsolescence and market reserves, valuation
of stock-based compensation and derivative instruments.
R E V E N U E R E C O G N I T I O N
The Company recognizes sales revenue when all of the
following have occurred: (1) delivery has occurred, (2) per-
suasive evidence of an agreement exists, (3) pricing is 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. In general, the Company’s
shipments are designated free on board shipping point and
revenue is recognized at the time of shipment. Sales are
reported net of allowable discounts and estimated returns.
Reserves for cash discounts, trade allowances and sales
returns are estimated using historical 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
65
Neenah Paper, Inc. 2008 Annual Report
the “Treasury Stock” method. Outstanding stock options,
restricted shares, restricted stock units and restricted stock
units with performance conditions represent the only poten-
tially dilutive effects on the Company’s weighted-average
shares. For the years ended December 31, 2008, 2007 and
2006, approximately 1,510,000, 335,000 and 1,095,000
potentially dilutive options, respectively, were excluded
from the computation of dilutive common shares because
their inclusion would be antidilutive. In addition, as a result
of the loss from continuing operations for the year ended
December 31, 2008, approximately 130,000 incremental
shares resulting from the assumed vesting of restricted stock
and restricted stock units were excluded from the diluted
earnings per share calculation, as the effect would have
been anti-dilutive.
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,
2008
2007
2006
14,642
14,874
14,757
–
14,642
267
15,141
90
14,847
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.
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
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 $66.5 million and $45.2 million at December 31, 2008
and 2007, respectively. Cost includes labor, materials and
production overhead. The Company recognized approximately
$0.1 million of expense for the year ended December 31,
2008 due to the liquidation of LIFO inventories. As of
December 31, 2008, the Company had no Canadian pulp
inventories. As of December 31, 2007, Canadian pulp inven-
tories were $17.0 million and included both roundwood
(logs) and wood chips. These inventories were located both
at the pulp mill and at various timberlands locations.
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
F O R E I G N C U R R E N C Y
Balance sheet accounts of Neenah Canada 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 translation
adjustments within comprehensive income (loss) in stock-
holders’ equity. Gains and losses resulting from foreign cur-
rency transactions (transactions denominated in a currency
other than the entity’s functional currency) are included
in Other (income) expense-net in the consolidated state-
ments 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,
9 years for land improvements and 17 years for machinery
and equipment. 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 – Sale of the Pictou Mill
and the Woodlands” for a discussion of asset impairment
losses recorded for the year ended December 31, 2008
related to the Pictou Mill’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.
66
Neenah Paper, Inc. 2008 Annual Report
W O O D L A N D S
As of December 31, 2008, the Company had $3.3 million
in woodland assets reported at their historic book value
on the Consolidated Balance Sheet as assets held for sale.
As of December 31, 2007, the historic book value of such
woodland assets was $4.1 million and was reported on the
Consolidated Balance Sheet as property, plant and equip-
ment – net. Woodlands are stated at cost, less the accumu-
lated cost of timber previously harvested. The Company
charges capitalized costs, excluding land, to operations at
the time the wood is harvested, based on periodically deter-
mined depletion rates.
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 –
Neenah Germany.”
Under Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (“SFAS 142”),
goodwill is subject to impairment testing at least annually.
A fair-value-based test is applied at the reporting unit level,
which is generally one level below the segment level. The
test compares the fair value of an entity’s reporting units to
the carrying value of those reporting units. This test requires
various judgments and estimates. The fair value of the
reporting unit is determined using a market approach in com-
bination with a probability-weighted discounted operating
cash fl ow approach for a number of scenarios representing dif-
fering operating and economic assumptions. 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 prepara-
tion of its annual business plan, or more frequently if events
or circumstances indicate it might be impaired. The Company
last tested goodwill for impairment as of November 30, 2008
and an impairment was indicated. See Note 4, “Acquisitions –
Impairment of Goodwill.”
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”).
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
Intangible assets consist primarily of customer relationships,
trade names and acquired intellectual property. Such intan-
gible assets are 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 amortized.
Intangible assets with indefi nite lives are annually reviewed
for impairment in accordance with SFAS 142.
R E S E A R C H E X P E N S E
Research and development costs are charged to expense as
incurred and are recorded in “Selling, general and adminis-
trative expenses” on the consolidated statement of opera-
tions. See Note 15, “Supplemental Data – Supplemental
Statement of Operations Data.”
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, 2008 and 2007.
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, 2008
December 31, 2007
Carrying
Value
$225.0
12.2
101.1
2.2
$340.5
Fair
Value
$126.5
11.6
101.1
2.2
$241.4
Carrying
Value
$225.0
14.6
66.2
15.4
$321.2
Fair
Value
$204.9
10.6
66.2
15.4
$297.1
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 (loss) includes, in addition to net income (loss), gains and losses recorded directly into stockholders’
equity on the consolidated balance sheet. These gains and losses are referred to as other comprehensive income items.
Accumulated other comprehensive income (loss) consists of foreign currency translation gains and (losses), deferred gains
and (losses) on cash fl ow hedges, and adjustments related to pensions and other post-retirement benefi ts. Income taxes are
not provided for foreign currency translation adjustments because they relate to indefi nite investments in Neenah Germany.
The Company also does not provide income taxes for foreign currency translation adjustments for its Canadian operations.
For the year ended December 31, 2008, the Company did not record deferred taxes related to future funds expected to be
repatriated upon the sale of the Woodlands because there are no expected tax consequences considering the anticipated
proceeds from the disposal of the Woodlands.
Changes in the components of other comprehensive income (loss) are as follows:
2008
Year Ended December 31,
2007
2006
Pretax
Amount
Tax
Effect
Net
Amount
Pretax
Amount
Tax
Effect
Net
Amount
Pretax
Amount
Tax
Effect
Net
Amount
$(22.8)
$ –
$(22.8)
$ 58.0
$ –
$58.0
$12.8
$ –
$12.8
26.4
(10.1)
16.3
48.2
(17.5)
30.7
–
–
–
–
(0.5)
0.2
(0.3)
(0.1)
–
–
–
4.6
–
(1.7)
–
2.9
–
(0.1)
(6.8)
2.5
(4.3)
Foreign currency
translation
Adjustment to
pension and other
benefi t liabilities
Minimum pension
liability
Deferred loss on
cash fl ow hedges
Other comprehensive
income (loss)
$ 3.1
$ (9.9)
$ (6.8)
$106.1
$(17.5)
$88.6
$10.6
$ 0.8
$11.4
67
Neenah Paper, Inc. 2008 Annual Report
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 components of accumulated other compre-
hensive income (loss), net of applicable income taxes are
as follows:
Foreign currency translation
Adjustment to pension and other benefi t
liabilities (net of income tax benefi ts of
$15.5 million and $25.6 million,
respectively)
December 31,
2008
2007
$116.0
$138.8
(24.3)
(40.6)
Deferred gain on cash fl ow hedges
(net of income tax expense of
$0 million and $0.2 million,
respectively)
–
Accumulated other comprehensive income $ 91.7
0.3
$ 98.5
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, 2008, the Company adopted 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. SFAS 157 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. In February 2008, the
Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”). FSP 157-2 defers the effective date of
SFAS 157 to fi scal years beginning after November 15, 2008
for all nonfi nancial assets and nonfi nancial liabilities, except
those that are recognized or disclosed at fair value in the
fi nancial statements on a recurring basis (at least annually).
The Company does not have any assets or liabilities mea-
sured at fair value that require disclosure under SFAS 157.
Pursuant to FSP 157-2, the Company will provide the disclo-
sures required by SFAS 157 for nonfi nancial assets and non-
fi nancial liabilities measured at fair value on a nonrecurring
basis beginning January 1, 2009.
On January 1, 2008, the Company adopted
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 measure 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 nan-
cial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring
68
Neenah Paper, Inc. 2008 Annual Report
related assets and liabilities differently without having to
apply complex hedge accounting provisions. Most of the
provisions of SFAS 159 apply only to entities that elect
the fair value option. However, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with avail-
able-for-sale and trading securities. The Company’s adop-
tion of SFAS 159 did not affect its fi nancial position, results
of operations or cash fl ows because the Company did not
elect any new fair value measurements of fi nancial assets or
fi nancial liabilities.
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 valua-
tion allowance for deferred tax assets and liabilities for uncer-
tain tax positions related to an acquisition to be recognized
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.
In December 2007, the FASB issued Statement
of Financial Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements – an amend-
ment of ARB No. 51 (“SFAS 160”). SFAS 160 requires:
• The ownership interests in subsidiaries held by parties
other than the parent be clearly identifi ed in the consoli-
dated statement of fi nancial position;
• The amount of consolidated net income attributable to
the parent and to the noncontrolling interest be clearly
identifi ed and presented on the face of the consolidated
statement of income;
• Changes in a parent’s ownership interest while the parent
retains its controlling fi nancial interest in its subsidiary be
accounted for consistently;
• When a subsidiary is deconsolidated, any retained non-
controlling equity investment in the former subsidiary be
initially measured at fair value; and
• Entities provide suffi cient disclosures that clearly identify
and distinguish between the interests of the parent and
the interests of the noncontrolling owners.
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
SFAS 160 is effective for fi scal years beginning
on or after December 15, 2008. The Company will apply
the provisions of SFAS 160 as of January 1, 2009. As of
December 31, 2008, the Company did not have any material
noncontrolling interests.
In March 2008, the FASB issued Statement of
Financial Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities – an amend-
ment of FASB Statement No. 133 (“SFAS 161”). FASB
Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (“SFAS 133”), establishes, among
other things, the disclosure requirements for derivative
instruments and for hedging activities. This Statement
amends and expands the disclosure requirements of SFAS 133.
SFAS 161 requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures
about fair value amounts of and gains and losses on deriva-
tive instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. SFAS 161 is
effective for fi nancial statements issued for fi scal years begin-
ning after November 15, 2008. The Company will apply the
disclosure provisions of SFAS 161 as of January 1, 2009.
In April 2008, the FASB issued FASB Staff Position
No 142-3, Determination of the Useful Life of Intangible
Assets (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing renewal or extension
assumptions used to determine the useful life of a recog-
nized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. FSP 142-3 is effective
for fi nancial statements issued for fi scal years beginning after
December 15, 2008, and interim periods within those fi scal
years. Early adoption is prohibited. The Company’s adoption
of FSP 142-3 is not expected to have a material impact on its
fi nancial position, results of operations or cash fl ows.
In December 2008, the FASB issued FASB Staff
Position 132(R)-1, Employers’ Disclosure About Postretirement
Benefi t Plan Assets (“FSP 132(R)-1”). FSP 132(R)-1 enhances
the required annual disclosures about plan assets in an
employer’s defi ned benefi t pension or other postretire-
ment plan. Such enhanced disclosures include, but are not
limited to, investment allocation decisions, the inputs and
valuation techniques used to measure the fair value of
plan assets and signifi cant concentrations of risk within plan
assets. FSP 132(R)-1 is effective for fi scal years ending after
December 15, 2009. The Company will apply the annual dis-
closure provisions of FSP 132(R)-1 in 2009.
69
Neenah Paper, Inc. 2008 Annual Report
Three
Risk Management
The Company is exposed to risks such as changes in foreign
currency exchange rates and pulp prices. The Company
has, from time-to-time, employed a variety of practices to
manage these risks, including operating and fi nancing activi-
ties and, where deemed appropriate, the use of derivative
instruments. The Company has used derivative instruments
only for risk management purposes and not for speculation
or trading. All foreign currency derivative instruments were
either exchange traded or entered into with major fi nancial
institutions. The notional amounts of the Company’s deriva-
tive instruments did not represent amounts exchanged by
the parties and, as such, were not a measure of exposure to
credit loss. The amounts exchanged were determined by
reference to the notional amounts and the other terms of
the contracts.
In accordance with Statement of Financial
Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, the
Company recorded 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 bal-
ance sheet at fair value. Changes in the fair value of deriva-
tive instruments were 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 were recorded
in accumulated other comprehensive income (loss) in the
period that changes in fair value occurred and were reclas-
sifi ed to income in the same period that the hedged item
affected income. As of December 31, 2008, the Company
did not have any outstanding derivative instruments.
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. Prior to the
sale of the Pictou Mill, the profi tability of the Company’s
Canadian pulp operations was subject to foreign currency
risk because the price of pulp is established in U.S. dollars
and the Company’s cost of producing pulp was incurred prin-
cipally in Canadian dollars. Prior to the sale of the Pictou Mill,
the Company used foreign currency forward contracts to
manage its Canadian dollar foreign currency risks. In addi-
tion, the Company used pulp futures contracts to manage its
pulp price risks. The use of these instruments allowed man-
agement of this transactional exposure to exchange rate and
pulp price fl uctuations because the gains or losses incurred
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
on the derivative instruments were intended to offset, in
whole or in part, losses or gains on the underlying trans-
actional exposure. (See “Cash Flow Hedges” below). The
translation exposure related to the Company’s net invest-
ment in its Canadian and German subsidiaries is not hedged.
The Company’s reported operating results are also affected
by changes in the Euro exchange rate relative to the U.S. dol-
lar. The Company’s exposure to such currency translation risk
is not hedged.
C A S H F L O W H E D G E S
As of December 31, 2008, the Company had no outstanding
foreign currency forward exchange contracts. At December 31,
2007, the Company had outstanding foreign currency for-
ward 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 con-
tracts was a current asset of $0.5 million U.S. dollars at
December 31, 2007. The weighted-average exchange rate
for the foreign currency contracts at December 31, 2007
was $0.852 U.S. dollars per Canadian dollar. The contracts
matured at various dates through February 2008. For the
years ended December 31, 2008, 2007 and 2006, all real-
ized gains and losses on foreign currency forward exchange
contracts were related to the operations of Terrace Bay and
the Pictou Mill and were recorded in loss from discontinued
operations on the consolidated statements of operations.
During 2006, the Company entered into a series
of pulp futures contracts to hedge fl uctuations in pulp prices
through December 2006. At December 31, 2008 and 2007,
the Company had no outstanding pulp futures contracts. The
Company realized pre-tax gains (losses) on such pulp futures
contracts as the forecasted transactions occurred in the year
ended December 31, 2006. For the year ended December 31,
2006, all realized gains and losses on pulp futures contracts
were related to the operations of Terrace Bay and the
Pictou Mill and were recorded in loss from discontinued
operations on the consolidated statements of operations.
For the year ended December 31, 2008 changes
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
$0.3 million, $0.4 million and $3.8 million of after-tax gains
from accumulated other comprehensive income to earn-
ings for the years ended December 31, 2008, 2007 and
2006, respectively.
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 November 2008, the Company entered into a foreign
currency forward contract to eliminate variability in the
U.S. dollar reimbursement from FiberMark for certain
German taxes (see Note 6 “Income Taxes”). The Company
settled the contract in December 2008 and realized a pre-
tax gain of $0.1 million on settlement. The foreign currency
forward contract had a notional value of €1.1 million and an
exchange rate of $1.255 U.S. dollars per Euro. In May 2006,
the Company entered into a foreign currency forward con-
tract to eliminate variability in the U.S. dollar proceeds from
the sale of woodlands in Nova Scotia, Canada (see Note 5
“Discontinued Operations – Sale of Woodlands in 2006”).
The Company settled the contract in June 2006 and had
no realized gain or loss on settlement. The foreign cur-
rency 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 trans actions
(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.
The following table presents gains (losses) from
the Company’s risk management activities:
Year Ended December 31,
2008
2007
2006
Gains on foreign currency
forward exchange contracts
$ 0.6
$ 6.7
$10.2
Gains (losses) from foreign
currency transactions
Net gain from risk
management activities
Less: Amounts related to
discontinued operations
Net gain (loss) related to
continuing operations
0.1
0.7
1.3
(2.3)
(0.4)
4.4
2.7
9.8
9.6
$(0.6)
$ 1.7
$ 0.2
70
Neenah Paper, Inc. 2008 Annual Report
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
Four
Acquisitions
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
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.
The total cost of the acquisition has been allo-
cated to the assets acquired and liabilities assumed in accor-
dance with Statement of Financial Accounting Standards
No. 141, Business Combinations (“SFAS 141”). The Company
did not acquire any in-process research and development
assets as part of the acquisition. The following table sum-
marizes the fi nal allocation of the purchase price to the
estimated fair value of the assets acquired and liabilities
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
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
34.8
0.1
2.2
1.8
32.9
2.6
0.3
16.8
110.3
13.3
5.3
14.0
17.6
5.4
55.6
$ 54.7
71
Neenah Paper, Inc. 2008 Annual Report
In May 2007, the Company closed the former
Fox River fi ne paper mill located in Housatonic, Massachusetts
(the “Housatonic Mill”). In September 2007, the Company
ceased manufacturing operations at the former Fox River
fi ne paper mill located in Urbana, Ohio (the “Urbana Mill”).
Converting operations at the Urbana Mill were phased out
during the fi rst quarter of 2008. The Company also closed
a Fox River converting and distribution center located in
Appleton, Wisconsin during the second quarter of 2008. The
closures of the Housatonic Mill and the Urbana Mill allowed
the Company to maximize cost effi ciencies by shifting fi ne
paper manufacturing to utilize available capacity at its other
fi ne paper mills.
Following the closures, the Company began a pro-
cess to sell the surplus equipment and facilities. For the year
ended December 31, 2008, the Company recognized gains
of approximately $6.8 million from the sale of the Fox River
converting and distribution center, land and buildings at the
Urbana Mill and the Housatonic Mill and all related equip-
ment. For the year ended December 31, 2008, proceeds
from such asset sales were $13.8 million. Assets held for
sale are valued at the lower of cost (which was fair value at
acquisition for the Fox River assets) or fair value less cost to
sell. As of December 31, 2008, the Company had disposed
of substantially all of the Fox River assets held for sale.
As of December 31, 2007, only the Housatonic Mill
($2.2 million) was recorded as assets held for sale and
reported on the consolidated balance sheet as prepaid and
other current assets.
As of December 31, 2008, the Company had
completed the process of terminating certain Fox River sales
and administrative employees whose jobs were eliminated
as the acquired Fox River business was integrated with the
Company’s existing fi ne paper business. Severance benefi ts
were paid to approximately 320 former hourly and salaried
employees at the Housatonic Mill and the Urbana Mill, and
Fox River sales and administrative employees in conjunction
with the previously described closure and integration activi-
ties. All the previously described integration activities were
components of the Company’s plan to exit certain activities
of the acquired Fox River 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”).
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 liabilities in the preceding table include approximately $12.5 million for the cost of post-acquisition exit activities
that the Company recognized in accordance with EITF 95-3. As of December 31, 2008, approximately $5.6 million in severance
benefi ts had been paid to former Fox River employees. The following table presents the status of post-acquisition restructuring
liabilities as of and for the year ended December 31, 2008.
Post acquisition exit costs
Payments for the year ended December 31, 2007
Post acquisition exit costs at December 31, 2007
Adjustments to fi nalize exit plan
Payments for the year ended December 31, 2008
Amounts recognized in income
Post acquisition exit costs at December 31, 2008
Severance
benefi ts(a)
Contract Environmental
termination clean-up and
costs monitoring
$ 6.4
(3.1)
3.3
(0.2)
(2.5)
–
$ 0.6
$ 4.9
(1.5)
3.4
0.1
(1.7)
(0.7)
$ 1.1
$ 1.2
(0.2)
1.0
–
(0.4)
(0.2)
$ 0.4
Total
$12.5
(4.8)
7.7
(0.1)
(4.6)
(0.9)
$ 2.1
(a) Includes severance benefi ts that will be paid over a period of 18 to 36 months from the date of acquisition pursuant to the terms of employment agreements
with certain former Fox River executives. As of December 31, 2008, approximately $1.7 million had been paid under such agreements and approximately
$0.6 million remained to be paid. As of December 31, 2008, the payment of all other severance benefi ts had been completed.
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 acqui-
sition 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 acquisition 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 seg-
ment and have been included in the Company’s consolidated
fi nancial results since the acquisition date.
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, 2008, the Company had goodwill of
$43.8 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, 2008, 2007 and 2006:
Balance at December 31, 2005
Goodwill acquired in the acquisition of
Neenah Germany
Foreign currency translation
Balance at December 31, 2006
Finalization of Neenah Germany purchase
price allocation
Foreign currency translation
Balance at December 31, 2007
Goodwill impairment charge
Foreign currency translation
Balance at December 31, 2008
$ –
87.6
4.4
92.0
4.0
10.6
106.6
(52.7)
(10.1)
$ 43.8
72
Neenah Paper, Inc. 2008 Annual Report
I M P A I R M E N T
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 goodwill might be impaired. The Company’s annual
test of goodwill for impairment at November 30, 2008, indi-
cated that the carrying value of the Neenah Germany report-
ing unit exceeded its estimated fair value. The Company
estimated fair value using a market approach in combination
with a probability-weighted discounted operating cash fl ow
approach for a number of scenarios representing differing
operating and economic assumptions. Signifi cant assump-
tions used in developing the discounted operating cash
fl ow approach were revenue growth rates and pricing, costs
for manufacturing inputs, levels of capital investment and
estimated cost of capital for high, medium and low growth
environments. The Company measured the estimated fair
value of goodwill as the excess of the carrying amount of
the Neenah Germany reporting unit over the fair values
of recognized assets and liabilities of the reporting unit. The
Company recorded an impairment adjustment to goodwill
for the excess of the carrying value of goodwill assigned to
the reporting unit over the estimated fair value of goodwill.
For the year ended December 31, 2008, the Company rec-
ognized a pre-tax loss of $52.7 million (the Company did not
recognize a tax benefi t related to the non tax deductible
loss) for the impairment of goodwill assigned to the Neenah
Germany reporting unit. As of December 31, 2007, the car-
rying amount of goodwill assigned to the Neenah Germany
reporting unit was considered recoverable.
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 impairment loss was primarily due to a sub-
stantial increase in the estimated cost of capital the Company
used to calculate the present value of Neenah Germany’s
estimated future cash fl ows which resulted in a substan-
tially lower estimated fair value. The higher estimated cost
of capital refl ected current market/fi nancial conditions at
the time the annual impairment test was performed which
indicated higher risk premiums for debt and equity. As of
December 31, 2008, a one percentage point increase in
the Company’s estimate for its cost of capital used in the
impairment test would result in an approximately $15 million
change in the estimated fair value of the Neenah Germany
reporting unit and a corresponding reduction in the implied
value of goodwill.
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, 2008, the Company had net identifi able intangible assets of $28.7 million. All such intangible assets were
acquired in the Neenah Germany and Fox River acquisitions. 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
Cost
Balance at December 31, 2007
Impairment charge
Purchased intantibles
Foreign currency translation
Balance at December 31, 2008
Less: Accumulated amortization
Balance at December 31, 2007
Amortization
Impairment charge
Foreign currency translation
Balance at December 31, 2008
Intangible assets – net at December 31, 2008
Trade
names
$ –
7.2
$ 7.2
$ –
–
$ –
$ 7.2
$ 7.2
2.6
0.2
$ 10.0
$ –
–
–
$ –
$ 10.0
$ 10.0
–
–
(0.3)
$ 9.7
$ –
–
–
–
$ –
$ 9.7
Customer Trade names
and
intangibles Trademarks
based
Acquired
Technology
Total
Intangible
Assets
$ –
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
$ 17.9
(1.9)
–
(0.8)
$ 15.2
$ (1.5)
(1.2)
0.4
–
$ (2.3)
$12.9
$ –
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
$ 6.9
(0.3)
0.2
(0.3)
$ 6.5
$ (0.7)
(0.6)
–
–
$ (1.3)
$ 5.2
$ –
1.1
$ 1.1
$ –
–
$ –
$ 1.1
$ 1.1
–
0.1
$ 1.2
$ –
(0.1)
(0.1)
$ (0.2)
$ 1.0
$ 1.2
–
–
(0.1)
$ 1.1
$ (0.2)
(0.1)
–
0.1
$ (0.2)
$ 0.9
$ –
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
$ 36.0
(2.2)
0.2
(1.5)
$ 32.5
$ (2.4)
(1.9)
0.4
0.1
$ (3.8)
$28.7
Weighted average Amortization Period (Years)
Not amortized
15
10
10
10
73
Neenah Paper, Inc. 2008 Annual Report
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 14, “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 with indefi nite lives. Aggregate amortization
expense of acquired intangible assets for the years ended
December 31, 2008, 2007 and 2006 was $1.9 million,
$1.9 million and $0.3 million, respectively. Estimated annual
amortization expense for each of the next fi ve years is
approximately $2.0 million.
The Company determined during its annual test of
intangible assets for impairment that certain trade names and
customer based intangible assets acquired in the Neenah
Germany acquisition were impaired at December 31, 2008.
For the year ended December 31, 2008, the Company recog-
nized a non-cash pre-tax charge of approximately $1.8 mil-
lion for the impairment of such intangible assets.
Five
Discontinued Operations
S A L E O F T H E P I C T O U M I L L A N D T H E W O O D L A N D S
As of December 31, 2006, the Company’s pulp opera-
tions consisted of the Pictou Mill and the Woodlands. The
Company considered its pulp operations as non-strategic
assets and sought opportunities to reduce its exposure to
the cyclical commodity pulp business. In the fi rst quarter of
2007, the Company engaged a nationally known investment
banking fi rm to identify buyers who would be interested in
acquiring the Pictou Mill and/or the Woodlands. Throughout
2007, the Company actively pursued opportunities to maxi-
mize the value of these assets through a sale or divesture,
however, as of December 31, 2007, the Company did not
believe it was probable that the assets could be sold within
twelve months and had not received any binding offers for
the Pictou Mill and/or the Woodlands.
In February 2008, Atlas was identifi ed as a party
that was interested in acquiring the Pictou Mill. The trans-
action with Atlas did not include the Woodlands. At that time,
the Company committed to a plan to sell the Pictou Mill to
Atlas and to separately pursue purchasers of the Woodlands.
In June 2008, Neenah Canada completed the sale of the
Pictou Mill to Northern Pulp, a new operating company
74
Neenah Paper, Inc. 2008 Annual Report
jointly owned by Atlas Holdings LLC and Blue Wolf Capital
Management LLC. In connection with the transfer of the
Pictou Mill, Neenah Canada made payments of approximately
$10.3 million to Northern Pulp. In addition, the Company
incurred transaction costs of approximately $3.3 million.
Pursuant to the terms of the transaction, Northern Pulp
assumed all of the assets and liabilities associated with the
Pictou Mill, as well as existing customer contracts, sup-
ply agreements (including a pulp supply agreement with
Kimberly-Clark), labor agreements and pension obligations.
In conjunction with the sale of the Pictou Mill,
the Company entered into a stumpage agreement (the
“Stumpage Agreement”) which allows Northern Pulp to
harvest an average of approximately 400,000 metric tons of
softwood timber annually from the Woodlands. The Stumpage
Agreement is for a term of ten years and Northern Pulp
has the option to extend the agreement for an additional
three years. For calendar year 2008, Northern Pulp paid a
nominal amount for approximately 236,000 metric tons of
softwood timber harvested under the Stumpage Agreement.
As a result, the Company recorded $2.8 million in deferred
revenue for the estimated fair value of the timber to be har-
vested by Northern Pulp in calendar 2008. The loss on transfer
of the Pictou Mill was increased by an amount equal to such
deferred revenue. For the year ended December 31, 2008, the
Company recognized all of such deferred revenue. For tim-
ber purchases during calendar year 2009, Northern Pulp has
agreed to pay the then current stumpage rate charged by the
Nova Scotia provincial government for harvesting on govern-
ment licensed lands. The price paid for timber purchases dur-
ing the remainder of the Stumpage Agreement will be based
on an agreed upon formula for estimating market prices. The
Company believes the Stumpage Agreement prices for calen-
dar year 2009 and beyond represent market rates. Northern
Pulp has agreed to pay substantially all costs associated with
maintaining the Woodlands and harvesting the timber. An
agreement to sell the Woodlands will require the buyer to
assume the Stumpage Agreement.
During the fi rst quarter of 2008, the Company deter-
mined that the estimated value it would receive from a sale of
the Pictou Mill indicated that it would not recover the carrying
value of the mill’s long-lived assets. As a result, the Company
recognized non-cash, pre-tax impairment charges of $91.2 mil-
lion to write-off the carrying value of the Pictou Mill’s long-lived
assets. In addition, for the year ended December 31, 2008, the
Company recorded a pre-tax loss of $29.4 million to recognize
the loss on disposal of the Pictou Mill.
In conjunction with the sale of the Pictou Mill,
Northern Pulp assumed responsibility for all pension and
other postretirement benefi t obligations for active and retired
employees of the mill. The Company accounted for the transfer
of these liabilities as a settlement of postretirement benefi t
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
obligations pursuant to Statement of Financial Accounting
Standards No. 88, Employers’ Accounting for Settlements
and Curtailments of Defi ned Benefi t Pension Plans and for
Termination Benefi ts. For the year ended December 31, 2008,
the Company recognized a non-cash, pre-tax settlement loss of
$53.7 million due to the reclassifi cation of deferred pension and
other postretirement benefi t adjustments related to the transfer
of the Nova Scotia Plan to Northern Pulp from accumulated
other comprehensive income to loss from discontinued opera-
tions in the consolidated statement of operations.
Management believes that it is probable that the
sale of the Woodlands will be completed within 12 months. As
of December 31, 2008, the Woodlands are reported as assets
held for sale – discontinued operations on the consolidated bal-
ance sheet. For the year ended December 31, 2008, the results
of operations of the Pictou Mill and the Woodlands and the
loss on disposal of the Pictou Mill are reported as discontinued
operations in the consolidated statements of operations. The
consolidated results of operations for all prior periods have
been restated to refl ect the results of operations of the Pictou
Mill and the Woodlands as discontinued operations. Assets held
for sale are valued at the lower of cost or fair value less cost to
sell. As of December 31, 2008, the assets of the Woodlands are
reported at their historic book cost of $3.3 million.
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
In August 2006, Neenah Canada transferred Terrace Bay
to Buchanan. Buchanan assumed responsibility for substan-
tially 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 cur-
rent and former mill employees and postretirement medical
and life insurance obligations for current retirees.
As a closing condition of the agreement to transfer
Terrace Bay to Buchanan, 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. For the year ended
December 31, 2006, Neenah Canada recognized a pension
curtailment loss of approximately $26.4 million related to
the settlement of its pension liability for current retirees. 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 pursuant to participant elections. For the year
75
Neenah Paper, Inc. 2008 Annual Report
ended December 31, 2007, Neenah Canada recognized a
non-cash pre-tax settlement loss of $38.7 million upon termi-
nation of the Ontario Plan.
During the fi rst quarter of 2008, Neenah Canada
paid approximately $5.0 million to settle litigation related to
the reduction and/or elimination of certain retiree benefi ts
following the transfer of Terrace Bay to Buchanan. In conjunc-
tion with the settlement, Neenah Canada agreed to continue
certain retiree life insurance benefi ts at a reduced rate in
the future. As a result of the settlement, for the year ended
December 31, 2008, Neenah Canada recorded a curtailment
gain of approximately $4.3 million which is recorded in other
income-net on the consolidated statement of operations.
The results of operations and loss on disposal of
the Terrace Bay and Pictou mills are refl ected as discontin-
ued operations in the consolidated statements of operations
for each period presented. The following table presents the
results of discontinued operations:
Year Ended December 31,
2008
2007
2006
$ 101.9
$223.5
$235.3
Net sales, net of
intersegment sales(a)
Discontinued operations:
Income (loss) from operations
Pictou Mill and
the Woodlands(b)
Terrace Bay(c)
Income (loss)
$ (97.8)
–
$ 13.3
(44.9)
$123.1
(46.8)
from operations
(97.8)
(31.6)
76.3
Loss on disposal –
Terrace Bay Mill
Loss on disposal –
Pictou Mill
Loss on settlement of
postretirement
benefi t plans
Loss on disposal
Income (loss) before
income taxes
(Provision) benefi t for
income taxes
Income (loss) from
discontinued operations,
net of income taxes
–
(29.4)
(53.7)
(83.1)
–
–
–
–
(6.5)
–
–
(6.5)
(180.9)
(31.6)
69.8
69.7
9.6
(26.7)
$(111.2)
$ (22.0)
$ 43.1
(a) For the years ended December 31, 2008 and 2007, represent net sales of
the Pictou Mill and the Woodlands only.
(b) For the year ended December 31, 2008, the loss from operations includes
a non-cash, pre-tax impairment charge of $91.2 million to write-off the
carrying value of the Pictou Mill’s long-lived assets. For the year ended
December 31, 2006, income from operations includes a pre-tax gain of
$125.5 million related to the sale of woodlands. See Note 5, “Discontinued
Operations – Sale of Woodlands in 2006.”
(c) For the year ended December 31, 2007, the loss from operations includes
a loss of $38.7 million related to the settlement of the Ontario Plan. The
loss from operations for the year ended December 31, 2006 includes a loss
of $26.4 million related to the curtailment and partial settlement of pen-
sion benefi ts for current retirees in the Ontario Plan.
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 summarizes assets held for
sale related to discontinued operations:
Current Assets
The Woodlands
Assets Held for Sale – Discontinued Operations
$3.3
$3.3
December 31, 2008
As of December 31, 2008, the deferred tax con-
sequences related to the Woodlands are reported as current
deferred income taxes on the consolidated balance sheet
to conform to the classifi cation of the assets of discontinued
operations as current assets and liabilities. In general, such
amounts were classifi ed as noncurrent deferred income taxes
as of December 31, 2007.
In conjunction with the transfer of Terrace Bay,
the Company entered into a pulp manufacturing agree-
ment (the “Pulp Manufacturing Agreement”) with Terrace
Bay Pulp Inc. (“TBPI”). Pursuant to the Pulp Manufacturing
Agreement, the Company agreed to sell pulp manufactured
by TBPI at Terrace Bay to satisfy the Company’s supply obli-
gations under an amended and restated pulp supply agree-
ment with Kimberly-Clark (as amended and restated, the
“Pulp Supply Agreement”). The price paid by the Company
to TBPI under the Pulp Manufacturing Agreement was equal to
the price paid by Kimberly-Clark to the Company pur suant
to the Pulp Supply Agreement. TBPI agreed to perform sub-
stantially all of the Company’s obligations under the Pulp
Supply Agreement and, together with three of its affi liated
companies, to indemnify and hold the Company harmless for
any claims arising from Terrace Bay’s failure to so perform. In
June 2007, the Company notifi ed Kimberly-Clark of its inten-
tion to terminate its obligation to supply pulp from Terrace
Bay under the Pulp Supply Agreement in June 2008. The
Pulp Manufacturing Agreement was terminated contempo-
raneously with the Terrace Bay portion of the Pulp Supply
Agreement in June 2008.
For the years ended December 31, 2008, 2007
and 2006, the Company did not recognize revenue or cost
in its consolidated statement of operations for pulp manu-
factured by TBPI for sale to Kimberly-Clark. The Company
received payments from Kimberly-Clark for Kimberly-Clark’s
purchases of pulp from TBPI and immediately remitted
such payments to TBPI. In general, Kimberly-Clark paid for
76
Neenah Paper, Inc. 2008 Annual Report
such pulp purchases in approximately 45 days from receipt
of the product. As of December 31, 2008, there were no
amounts receivable from Kimberly-Clark or payable to TBPI
on the consolidated balance sheet pursuant to the Pulp
Manufacturing Agreement. As of December 31, 2007, the
Company had a receivable from Kimberly-Clark for $17.7 mil-
lion 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.
S A L E O F W O O D L A N D S I N 2 0 0 6
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 proceeds of $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 Pictou Mill. Following the sale, Neenah Canada had
approximately 500,000 acres of owned and 200,000 acres
of licensed or managed woodlands in Nova Scotia, Canada.
Neenah Canada transferred the FSA to Northern Pulp in
conjunction with the sale of the Pictou Mill. Neenah Canada’s
rights to harvest timber on the 200,000 acres of licensed
or managed lands in Nova Scotia were also transferred to
Northern Pulp as part of the sale.
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 represented
a “constructive obligation.” As a result, Neenah Canada
deferred approximately $9.1 million of the gain on sale,
which represented 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 mil-
lion and $2.9 million, respectively, of such deferred gain. As
of December 31, 2008 and 2007, the deferred gain related
to the constructive obligation was fully amortized and no
amounts of such deferred gain were recognized for the year
ended December 31, 2008.
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
Income Taxes
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 rec-
ognized in an enterprise’s fi nancial statements in accordance
with SFAS 109. The Company’s adoption of FIN 48 had no
material effect on the fi nancial statements and no cumulative
effect on retained earnings. However, certain amounts have
been reclassifi ed in the consolidated balance sheet to com-
ply with the requirements of FIN 48. As of January 1, 2007,
the total amount of uncertain tax positions was $6.5 million
and as a result of the adoption of FIN 48, the Company rec-
ognized a $1.0 million increase in its liability for uncertain
tax positions.
The following is a tabular reconciliation of the total
amounts of uncertain tax positions as of and for the years
ended December 31, 2008 and 2007:
Balance at January 1,
Initial adoption of FIN 48
Decrease in the liability for
uncertain tax positions
Balance at December 31,
For the Years Ended
December 31,
2008
$ 1.0
–
(0.8)
$ 0.2
2007
$ –
6.5
(5.5)
$ 1.0
If recognized, approximately $0.2 million of the
benefi t for uncertain tax positions at December 31, 2008
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, 2008.
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 agreed to indemnify the
Company for the Euro value of such taxes and a portion of
the purchase price was 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. As of December 31, 2007,
the German tax authorities had completed their examination
of the tax returns and determined that Neenah Germany
was liable for approximately $5.5 million in additional taxes
which was approximately equal to the Company’s esti-
mate of its liability for such uncertain tax positions. As of
December 31, 2007, the liability for such additional taxes did
not represent an uncertain tax position and was recorded as
current income taxes payable in the consolidated balance
sheet. The payment of such taxes was funded through the
escrow account.
Tax years 2004 through 2008 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 2004, 2005 and 2006 tax years are being audited by the
Internal Revenue Service; the 2005, 2006 and 2007 tax
years are being audited by German tax authorities and the
2004, 2005, 2006 and 2007 tax years are being audited by
Canadian tax authorities.
The Company recognizes accrued interest and
penalties related to uncertain income tax positions in the
Provision (benefi t) for income taxes on the consolidated
statements of operations. As of December 31, 2008 and
2007, the Company had less than $0.1 million accrued for
interest related to uncertain income tax positions.
Income tax expense (benefi t) represented 6.8 per-
cent, (13.0) percent and 32.6 percent of income (loss) from
continuing operations before income taxes for the years
ended December 31, 2008, 2007 and 2006, respectively. The
following table presents the principal reasons for the differ-
ence between the effective income tax (benefi t) rate and the
U.S. federal statutory income tax (benefi t) rate:
Year Ended December 31,
2008
2007
2006
U.S. federal statutory
income tax (benefi t) rate
(35.0)%
35.0%
35.0%
U.S. state income taxes,
net of federal income
tax effect
Nondeductible goodwill and
other intangible asset
impairment charge
Limitation on tax benefi ts
available to Fox River
Enacted German tax
law changes
Foreign tax rate differences
Other differences – net
Effective income tax (benefi t) rate
0.5%
0.8%
2.5%
33.0%
8.8%
–
1.0%
(1.5)%
6.8%
–
–
–
–
(30.7)%
(10.6)%
(7.5)%
(13.0)%
–
(2.7)%
(2.2)%
32.6%
77
Neenah Paper, Inc. 2008 Annual Report
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’s effective income tax (benefi t) 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 examinations 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 liabilities 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 million 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 (loss) from continuing operations before
income taxes and the provision (benefi t) for income taxes:
Income (loss) from continuing
operations before
income taxes:
U.S.
Foreign
Total
Provision (benefi t) for
income taxes:
Current:
Federal
State
Foreign
Total current
Year Ended December 31,
2008
2007
2006
$ 3.1
(47.4)
$(44.3)
$ 6.6
21.9
$ 28.5
$26.9
1.9
$28.8
$ 0.5
(0.4)
1.2
$ 4.7
0.4
6.1
$13.4
1.8
0.4
tax provision
1.3
11.2
15.6
Deferred:
Federal
State
Foreign
Total deferred tax
provision (benefi t)
Total provision (benefi t)
for income taxes
4.3
1.3
(3.9)
(4.6)
(0.2)
(10.1)
1.7
(14.9)
(4.9)
(0.8)
(0.5)
(6.2)
$ 3.0
$ (3.7)
$ 9.4
The Company has elected to treat its Canadian
operations as a branch for U.S. income tax purposes.
Therefore, the amount of income (loss) before income taxes
from Canadian operations are included in the Company’s
consolidated U.S. income tax returns and such amounts are
subject to U.S. income taxes.
The asset and liability approach is used to recog-
nize deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
The components of deferred tax assets and liabilities are
as follows:
December 31,
2008
2007
Net current deferred income tax assets
Canadian timberlands
Intangible assets
Net operating losses
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
Alternative minimum tax credit carryovers
Other long-term obligations
Accumulated depreciation
Other
Net noncurrent deferred income
tax assets
Total deferred income tax assets
Net noncurrent deferred income tax liability
Accumulated depreciation
Intangibles
Employee benefi ts
Other
$ 23.0
19.9
10.9
4.5
–
(5.0)
53.3
31.7
–
–
31.8
3.7
0.8
(23.8)
(2.2)
42.0
$ 95.3
$ 21.0
6.8
0.5
(2.9)
$ –
–
–
6.0
0.4
(4.5)
1.9
34.8
26.5
20.2
2.6
2.8
1.6
(43.6)
10.5
55.4
$ 57.3
$ 22.0
7.4
(1.8)
2.8
Net noncurrent deferred income
tax liabilities
$ 25.4
$ 30.4
As of December 31, 2008, no valuation allow-
ance 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 income, income tax strategies and fore-
casted earnings for the entities in each jurisdiction. A valua-
tion 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, 2008, the Company had
$107.2 million of U.S. Federal and $164.9 million of U.S. State
net operating losses, substantially all of which may be carried
78
Neenah Paper, Inc. 2008 Annual Report
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
forward to offset future taxable income through 2028. In
addition, the Company has $3.7 million of AMT carryovers,
which can be carried forward indefi nitely.
No provision for U.S. income taxes has been
made for $35.9 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
undistributed foreign earnings were repatriated.
Seven
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 2010
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,
2008
2007
$225.0
$225.0
101.1
7.2
66.2
23.1
14.0
14.6
17.3
364.6
24.1
$340.5
3.2
332.1
10.9
$321.2
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 ca-
tions to the amended Initial Credit Agreement. Despite
the increase in the total commitment to $180 million, the
Company’s ability to borrow under the Revolver was limited
to the lowest of (a) $180 million, (b) the Company’s bor-
rowing 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 guar-
antors with respect to the Senior Notes; however, the prop-
erty, 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 mil-
lion to $210 million. Despite the increase in the total commit-
ment to $210 million, the Company’s ability to borrow under
the Revolver was limited to the lowest of (a) $210 million,
(b) the Company’s borrowing base (as determined in accor-
dance with the Credit Agreement), and (c) the applicable cap
on the amount of “credit facilities” under the indenture for
the Senior Notes.
79
Neenah Paper, Inc. 2008 Annual Report
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 2008, the Company entered into the
Sixth Amendment to the Initial Credit Agreement (the “Sixth
Amendment”). In the Sixth Amendment, the lenders con-
sented to consummation of the sale of the Pictou Mill. As
of December 31, 2008, the Initial Credit Agreement (as
amended the “Amended Credit Agreement”) provides for
a secured revolving credit facility (the “Revolver”) to pro-
vide for borrowings of up to $210 million. The Company’s
ability to borrow under the Revolver is limited to the low-
est of (a) $210 million, (b) the Company’s borrowing base
(as determined in accordance with the Amended Credit
Agreement), and (c) the applicable cap on the amount of
“credit facilities” under the indenture for the Senior Notes.
The Amended Credit Agreement is currently scheduled
to terminate on November 30, 2010. As of December 31,
2008, the Company’s borrowing base was approximately
$152.3 million.
As of December 31, 2008, the interest rate appli-
cable to borrowings under the Revolver will be either (1) the
Prime Rate plus a percentage ranging from 0 percent to
2.00 percent or (2) LIBOR plus a percentage ranging from
1.25 percent to 3.50 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 inter-
est period. The commitment is subject to an annual facility
fee of 0.25 percent on the average daily unused amount of
the commitment.
The Amended Credit Agreement is secured by
substantially all of the assets of the Company and the subsid-
iary borrowers, including the capital stock of such subsidiaries,
and is guaranteed by Neenah Canada. Neenah Canada’s
guarantee is secured by substantially all of that subsidiary’s
assets. In the Amended Credit Agreement, the lenders con-
sented 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
Amended Credit Agreement.
The weighted-average interest rate on out-
standing Revolver borrowings as of December 31, 2008 and
2007 was 3.6 percent per annum and 6.4 percent per
annum, respectively. Interest on amounts borrowed under
the Revolver is paid monthly. Amounts outstanding under the
Revolver may be repaid, in whole or in part, at any time with-
out 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 Amended Credit Agreement.
Borrowing availability under the Revolver is reduced by out-
standing 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 uctuate over
time depending on the value of the Company’s inventory,
receivables and various capital assets. As of December 31,
2008, the Company had approximately $1.6 million of letters
of credit outstanding, $0.4 million of other items outstand-
ing which reduced availability and $49.2 million of borrowing
availability under the Revolver. As of December 31, 2008,
the Company had approximately $16.7 million in outstanding
Revolver borrowings that are due within the next 12-months
and are expected to be refi nanced.
The Amended Credit Agreement contains events
of default customary for fi nancings of this type, including
failure to pay principal or interest, materially false represen-
tations or warranties, failure to observe covenants and other
terms of the Revolver, cross-defaults to other indebtedness,
bankruptcy, insolvency, various ERISA violations, the incur-
rence of material judgments and changes in control.
The 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 Amended Credit Agreement require the Company to
achieve and maintain certain specifi ed fi nancial ratios if
availability under the agreement is less than $25 million. At
December 31, 2008, 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, 2008, under the most restrictive terms of
these agreements, the Company’s ability to pay cash divi-
dends on its common stock is limited to a total of $8 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
80
Neenah Paper, Inc. 2008 Annual Report
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
December 31, 2008 and 2007, the weighted-average inter-
est rate on outstanding Term Loan borrowings was 3.6 per-
cent per annum and 6.7 percent per annum, respectively.
Borrowings under the Term Loan are being repaid in equal
quarterly installments which began in November 2007. Term
Loan borrowings were used to repay outstanding Revolver
borrowings. The Term Loan is secured by substantially all of
the property, plant and equipment acquired by the Company
in the acquisition of Fox River and is fully and uncondition-
ally guaranteed by substantially all of the Company’s other
subsidiaries, except Neenah Germany. For the year ended
December 31, 2008, the Company used proceeds from the
sale of Fox River assets to prepay approximately $9.5 mil-
lion in Term Loan borrowings. In June 2008, the Company
entered into the First Amendment (the “First Amendment”)
to the Term Loan. The First Amendment reduced required
amortization payments to $1.25 million per quarter. Any
remaining amounts outstanding under the Term Loan
are due and payable upon termination of the Term Loan
Agreement, currently scheduled to occur in November 2010.
At the Company’s option, Term Loan borrow-
ings may be designated as either Alternate Base Rate
Borrowings (as defi ned in the Term Loan Agreement) or
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 per-
centage ranging from 0 percent to 0.75 percent. The interest
rate on LIBOR Borrowings is LIBOR plus a percentage rang-
ing 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. Amounts outstand-
ing 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) may not be partially repaid such that
less than $3.0 million of LIBOR Borrowings are outstanding.
O T H E R D E B T
In December 2006, Neenah Germany entered into an agree-
ment with HypoVereinsbank and IKB Deutsche Industriebank
AG (the “Lenders”) to provide €10.0 million of project
fi nancing for the construction of a saturator and the fi nanc-
ing matures in December 2016. Principal outstanding under
the agreement may be repaid at any time without penalty.
Interest on amounts outstanding is based on actual days
elapsed in a 360-day year and is payable semi-annually. As
of December 31, 2008, €10.0 million ($14.0 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, 2008 and 2007, the
weighted-average interest rate on outstanding Line of Credit
borrowings was 5.7 percent per annum and 6.5 percent per
annum, respectively. In November 2008, Neenah Germany
extended the termination date for the Line of Credit to
November 30, 2009. Neenah Germany has the ability to
borrow in either Euros or U.S. dollars. 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, 2008,
€12.4 million ($17.3 million, based on exchange rates at
December 31, 2008) was outstanding under this agreement.
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:
2009
2010(a) 2011 2012 2013
after(b) Total
There-
Debt payments $24.1 $105.0 $1.7 $1.8 $1.7 $230.3 $364.6
(a) Includes principal payments on the Company’s revolving bank credit facil-
ity and remaining outstanding term loan of $101.1 million and $2.2 mil-
lion, respectively.
(b) Includes principal payments on the Senior Notes of $225.0 million.
Eight
Pension and Other Postretirement 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.
P E N S I O N P L A N S
Substantially all active employees of the Company’s
U.S. paper operations participate in defi ned benefi t pen-
sion plans or defi ned contribution retirement plans. Neenah
Germany has defi ned benefi t plans designed to provide
a monthly pension upon retirement for substantially all its
employees in Germany.
81
Neenah Paper, Inc. 2008 Annual Report
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 the Pictou Mill,
Northern Pulp assumed responsibility for all pension and
other postretirement benefi t obligations for active and
retired employees of the mill. As of December 31, 2008, the
Company had no pension or other postretirement benefi t
obligations for active or retired employees of the Pictou Mill.
The Company accounted for the transfer of these liabilities
as a settlement of postretirement benefi t obligations pur-
suant to SFAS 88 and recognized a pre-tax non-cash settle-
ment loss of approximately $53.7 million for the year ended
December 31, 2008. See Note 5, “Discontinued Operations –
Sale of the Pictou Mill and the Woodlands.”
In conjunction with the transfer of Terrace Bay
to Buchanan, Neenah Canada initiated plans to curtail and
settle the Ontario Plan. In August 2006, Neenah Canada
purchased 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
December 2007, the Company terminated the Ontario
Plan and settled all outstanding pension obligations for
active employees through the purchase of annuity con-
tracts or lump-sum payments pursuant to participant elec-
tions. 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
additional funding was required to settle the Ontario Plan.
See Note 5, “Discontinued Operations – Transfer of the
Terrace Bay Mill.”
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 transferred
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 reduc-
tion 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 is to con-
tribute assets to fully fund the accumulated benefi t obliga-
tion. 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 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 benefi t plans are currently unfunded.
The Company uses the fair value of pension plan
assets to determine pension expense, rather than averaging
gains and losses over a period of years. Investment gains or
losses represent the difference between the expected return
calculated using the fair value of the assets and the actual
return based on the fair value of assets. The Company’s pen-
sion obligations are measured annually as of December 31.
As of December 31, 2008, the Company’s pension plans
had cumulative unrecognized investment losses and other
actuarial losses of approximately $31.5 million recorded in
accumulated other comprehensive income.
O T H E R P O S T R E T I R E 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. In conjunction with the sale of
the Pictou Mill, Northern Pulp assumed responsibility for
health care and life insurance benefi t plans for active and
retired employees of the mill.
In the fourth quarter of 2007, Neenah Canada
settled a class action lawsuit brought by certain retired
employees of Neenah Canada by agreeing to pay the plain-
tiffs approximately $5.5 million Canadian dollars for a full and
complete dismissal of all claims for retiree health and medical
benefi ts against Neenah Canada and the Company. Neenah
Canada also agreed to continue certain retiree life insurance
benefi ts at a reduced rate in the future. For the year ended
December 31, 2007, Neenah Canada recorded a charge
related to the litigation settlement of $5.2 million.
The Company’s obligations for postretirement
benefi ts other than pensions are measured annually as of
December 31. At December 31, 2008, 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, 2009 was 9.0 percent, decreasing to 8.7 per-
cent in 2010, and then gradually decreasing to an ultimate
rate of 5.0 percent in 2023. The assumed infl ationary pre-65
and post-65 health care cost trend rate used to determine
obligations at December 31, 2007 and cost for the year
ended December 31, 2008 was 8.6 percent, decreasing to
7.7 percent in 2009, and then gradually decreasing to an
ultimate rate of 4.9 percent in 2014.
82
Neenah Paper, Inc. 2008 Annual Report
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 (gain) loss
Benefi t payments from plans
Business combinations
Divestitures
Participant contributions
Special termination benefi ts
Gain on plan curtailment
Loss 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 (loss) on plan assets
Employer contributions
Currency
Benefi t payments
Settlement payments
Business combinations
Divestitures
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
Postretirement
Benefi ts Other
than Pensions
Year Ended December 31,
2008
2007
2008
2007
$ 407.4
6.8
18.5
(14.6)
(13.8)
(15.0)
–
(175.1)
–
–
–
–
$ 214.2
$ 343.6
(20.4)
7.5
(11.7)
(12.6)
–
–
(160.6)
–
(2.9)
$ 142.9
$ 142.9
214.2
$ (71.3)
$ –
(2.6)
(68.7)
$ (71.3)
$ 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
8.3
38.0
(18.8)
(141.4)
90.5
–
0.9
(4.9)
$ 343.6
$ 343.6
407.4
$ (63.8)
$ 2.9
(2.5)
(64.2)
$ (63.8)
$ 55.2
2.2
2.5
(1.6)
(1.3)
(8.9)
–
(11.3)
–
–
–
–
$ 36.8
$ –
–
–
–
–
–
–
–
–
–
$ –
$ –
36.8
$(36.8)
$ –
(2.5)
(34.3)
$(36.8)
$ 40.0
2.4
2.5
2.9
0.6
(4.1)
5.9
–
–
–
5.0
$ 55.2
$ –
–
–
–
–
–
–
–
–
–
$ –
$ –
55.2
$(55.2)
$ –
(9.5)
(45.7)
$(55.2)
Amounts recognized in accumulated other comprehensive income consist of:
Accumulated actuarial loss
Prior service cost (credit)
Transition asset
Total recognized in accumulated other comprehensive income
83
Neenah Paper, Inc. 2008 Annual Report
Pension Benefi ts
December 31,
Postretirement
Benefi ts Other
than Pensions
2008
$30.9
0.9
–
$31.8
2007
$45.4
10.5
(0.1)
$55.8
2008
$5.0
3.1
–
$8.1
2007
$12.6
(2.2)
–
$10.4
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
2008
2007
2008
2007
2008
2007
$104.6
90.8
91.4
$234.5
205.0
225.6
$109.6
104.9
51.5
$172.9
163.3
118.0
$214.2
195.7
142.9
$407.4
368.3
343.6
Pension Benefi ts
Postretirement Benefi ts
Other than Pensions
Year Ended December 31,
2008
2007
2006
$ 6.8
18.5
(19.8)
1.4
(0.1)
1.0
–
–
–
7.8
1.9
$ 5.9
$ 9.2
28.1
(32.0)
(0.2)
1.8
5.0
0.1
(1.2)
38.7
49.5
46.0
$ 3.5
$ 8.1
22.3
(30.3)
7.7
(0.3)
1.6
–
1.6
24.8
35.5
30.4
$ 5.1
2008
$ 2.2
2.5
–
1.3
–
(5.0)
–
–
–
1.0
0.6
$ 0.4
2007
2006
$ 2.4
2.5
–
–
(6.7)
3.8
–
–
5.0
7.0
1.1
$ 5.9
$ 2.2
3.5
–
2.3
–
(1.3)
–
(19.9)
–
(13.2)
(17.2)
$ 4.0
(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 postretirement medical and life insurance benefi ts for active employees
at the Terrace Bay mill.
O T H E R C H A N G E S I N P L A N A S S E T S A N D B E N E F I T O B L I G A T I O N S R E C O G N I Z E D I N O T H E R C O M P R E H E N S I V E I N C O M E
Net periodic benefi t expense
Accumulated actuarial gain
Prior service cost (credit)
Transition asset
Total recognized in other comprehensive income
Total recognized in net periodic benefi t cost and other comprehensive income
Pension Benefi ts
Postretirement
Benefi ts Other
than Pensions
Year Ended December 31,
2008
2007
$ 7.8
(14.5)
(9.6)
0.1
(24.0)
$(16.2)
$ 49.5
(51.9)
(0.1)
0.2
(51.8)
$ (2.3)
2008
$ 1.0
(7.6)
5.3
–
(2.3)
$(1.3)
2007
$ 7.0
(1.7)
5.3
–
3.6
$10.6
The estimated net loss and prior service cost for the defi ned benefi t pension plans expected to be amortized from
accumulated other comprehensive income into net periodic benefi t cost over the next fi scal year are $2.1 million and $1.6 mil-
lion, respectively. The estimated net loss and prior service cost for postretirement benefi ts other than pension expected to be
amortized from accumulated other comprehensive income into net periodic benefi t cost over the next fi scal year are $0.1 mil-
lion and $0.5 million, respectively.
84
Neenah Paper, Inc. 2008 Annual Report
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
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
Postretirement
Benefi ts Other
than Pensions
Year Ended December 31,
2008
6.80%
3.42%
2007
6.10%
3.30%
2008
6.82%
–
2007
6.00%
–
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
Postretirement Benefi ts
Other than Pensions
2008
6.10%
8.02%
3.30%
Year Ended December 31,
2007
2006
2008
5.25%
7.90%
3.29%
5.20%
8.39%
3.24%
6.00%
–
–
2007
5.66%
–
–
2006
5.22%
–
–
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,
2008
2007
2006
55%
44%
1%
100%
61%
35%
4%
100%
65%
31%
4%
100%
For the years ended December 31, 2008, 2007 and
2006, no plan assets were invested in the Company’s securities.
C A S H F L O W S
At December 31, 2008 exchange rates, the Company
expects to contribute approximately $10.7 million to its pen-
sion trusts in 2009.
85
Neenah Paper, Inc. 2008 Annual Report
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
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:
Nine
Stock Compensation Plans
2009
2010
2011
2012
2013
Years 2014–2018
Pension Plans
Postretirement
Benefi ts Other
than Benefi ts
$10.3
10.7
11.5
12.4
13.9
81.7
$ 2.6
1.5
1.9
2.2
2.6
17.4
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 postretirement 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 postretirement benefi t obligation
$0.1
0.6
$(0.1)
(0.6)
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 $1.6 mil-
lion in 2008, $1.2 million in 2007 and $1.1 million in 2006. In
addition, the Company maintains a supplemental retirement
contribution plan (the “SRCP”) which is a non-qualifi ed,
non-contributing 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, 2008 and 2007, the Company recog-
nized expense related to the SRCP of $35 thousand and
$69 thousand, respectively. No expense related to the SRCP
was recognized for the year ended December 31, 2006.
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, 2008, 2007
and 2006, costs charged to expense for company matching
contributions under these plans were $1.8 million, $1.7 mil-
lion and $1.3 million, respectively.
86
Neenah Paper, Inc. 2008 Annual Report
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, 2008, approximately
1,525,000 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 rec-
ognized under SFAS 123R consists of (a) compensation
cost for all unvested stock-based grants outstanding as of
January 1, 2006, based on the grant date fair value estimated
in accordance with the pro forma provisions of Statement
of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (“SFAS 123”) and (b) 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.
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 the years ended December 31, 2008, 2007 and 2006,
the Company recognized excess tax benefi ts (costs) related
to the exercise or vesting of stock-based awards of approxi-
mately $(0.7) million, $0.5 million and $67 thousand, respectively.
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
V A L U A T I O N A N D E X P E N S E I N F O R M A T I O N U N D E R S F A S 1 2 3 R
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-based
compensation expense
Income tax benefi t
Stock-based compensation,
net of income tax benefi t
Year Ended December 31,
2008
2007
2006
$ 4.0
(1.5)
$ 6.4
(2.5)
$ 5.8
(2.2)
$ 2.5
$ 3.9
$ 3.6
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, 2008 and 2007
was $6.30 per share and $14.00 per share, respectively, and was
estimated using the Black-Scholes option valuation model with
the following assumptions:
Year Ended
December 31,
2008
5.9
3.4%
31.5%
1.9%
2007
5.9
4.7%
35.2%
1.1%
The following table summarizes total compen-
sation costs related to the Company’s equity awards and
amounts recognized in the year ended December 31, 2008.
Expected life in years
Interest rate
Volatility
Dividend yield
Unrecognized compensation cost –
December 31, 2007
Add: Grant date fair value
current year grants
Less: Compensation expense recognized
Less: Grant date fair value of shares forfeited
Unrecognized compensation cost –
December 31, 2008
Expected amortization period (in years)
Stock
Options(a)
Restricted
Stock
$1.9
$2.9
1.6
1.9
0.1
$1.5
1.8
1.2
2.1
0.4
$1.6
1.3
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, 2008:
(a) The grant date fair value of current year stock awards and compensation
expense recognized each include $13 thousand related to a change in the
Company’s estimate for forfeitures.
S T O C K O P T I O N S
For the year ended December 31, 2008, the Company awarded
nonqualifi ed stock options to purchase 266,850 shares of com-
mon stock at a weighted-average exercise price of $21.80 per
Weighted-
Average
Stock Options Exercise Price
Number of
Options outstanding – December 31, 2007 1,457,882
266,850
Add: Options granted
Less: Options forfeited/cancelled
102,687
Options outstanding – December 31, 2008 1,622,045
$ 32.51
$ 21.80
$ 31.47
$30.81
The status of outstanding and exercisable stock options as of December 31, 2008, 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
554,945
726,180
337,504
1,618,629
7.2
5.7
5.5
6.2
$24.44
$32.70
$37.35
$30.84
Aggregate
Intrinsic
Value(a)
$ –
–
–
$ –
Number of
Options
253.048
717,847
236,322
1,207,217
Weighted-
Average
Exercise
Price
$26.43
$32.71
$37.54
$32.34
Aggregate
Intrinsic
Value(a)
$ –
–
–
$ –
(a) Represents the total pre-tax intrinsic value as of December 31, 2008 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 $8.84 on December 31, 2008.
87
Neenah Paper, Inc. 2008 Annual Report
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 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, 2008.
The following table summarizes the status of the
Company’s unvested stock options as of December 31, 2008
and activity for the year then ended:
Outstanding – December 31, 2007
Add: Options granted
Less: Options vested
Less: Options forfeited/cancelled
Outstanding – December 31, 2008
Weighted-
Average
Grant Date
Fair Value
Number of
Stock Options
232,756
266,850
49,838
34,940
414,828
$ 13.01
$ 6.30
$ 13.50
$ 32.65
$ 6.98
As of December 31, 2008, certain participants
met age and service requirements that allowed their options
to qualify for accelerated vesting upon retirement. As of
December 31, 2008, there were 136,099 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 $0.5 million. For the year ended
December 31, 2008, stock-based compensation expense
for such options was $0.7 million. For the year ended
December 31, 2008, the aggregate grant date fair value of
options vested, including options subject to accelerated
vesting, was $2.4 million. Stock options that refl ect acceler-
ated vesting for expense recognition become exercisable
according to the contract terms of the stock option grant.
In January 2009, the Compensation Committee of
the Board of Directors approved the conversion of approxi-
mately 1,105,000 outstanding non-qualifi ed stock options
with an exercise price in excess of $25.00 per share to an
equal number of stock appreciation rights (“SARs”). Upon
exercise, the holder of an SAR will receive shares of Common
Stock equal to the difference between the market price at
the time of exercise less the exercise price divided by the
market price at the time of exercise. The SARs can only be
settled for share of Common Stock and the Company will
not receive any cash proceeds upon exercise. All other con-
tractual terms of the SARs are unchanged from those of the
stock options converted. At the date of conversion the fair
value of the SARs was equal to the fair of the stock options
exchanged. As a result, the Company did not recognize any
additional compensation expense due to the conversion.
88
Neenah Paper, Inc. 2008 Annual Report
P E R F O R M A N C E S H A R E S
For the year ended December 31, 2008, the Company made
a target award of 76,725 Performance Shares to LTIP partici-
pants. The measurement period for the Performance Shares is
January 1, 2008 through December 31, 2010. Common stock
equal to between 30 percent and 250 percent of the perfor-
mance share target will be awarded based on the Company’s
growth in earnings before interest, taxes, depreciation and
amortization (“EDITDA”) 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 for the Performance Shares was $13.55 per
share (which represents the grant date market price of the
Company’s common stock of $25.70 per share multiplied by
the probability weighted expected payout of approximately
0.53 shares of common stock for each Performance Share)
and was estimated using a “Monte Carlo” simulation tech-
nique. Compensation cost is recognized pro rata over the
vesting period.
R S U S
For the year ended December 31, 2008, the Company awarded
6,960 RSUs to non-employee members of the Company’s
board of directors (“Director Awards”). The weighted-average
grant date fair value of such awards was $21.13 per share.
Director Awards vest one year from the date of grant. During
the vesting period, the holders of RSUs are entitled to divi-
dends, but the shares do not have voting rights and the RSUs
are forfeited in the event the holder is no longer a member
of the board of directors. In addition, the Company issued
59 RSUs in lieu of dividends on RSUs held by non-U.S. employ-
ees and a non-U.S. member of the board of directors.
R E S T R I C T E D S T O C K
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 conversion 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, 2008,
574 of such restricted shares were outstanding.
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 summarizes the activity of the Company’s unvested stock-based awards (other than stock
options) for the year ended December 31, 2008:
Outstanding – December 31, 2007
Add: Shares granted(a)
Less: Shares vested
Less: Shares expired or cancelled
Outstanding – December 31, 2008(b)
Restricted
Stock
Weighted-Average
Grant Date
Fair Value
Performance
Shares/RSUs
Weighted-Average
Grant Date
Fair Value
14,292
–
13,718
–
574
$ 34.28
–
$ 34.28
–
$34.28
170,165
83,744
86,202
14,896
152,811
$ 35.03
$ 14.36
$ 28.81
$ 30.20
$27.69
(a) Includes the grant of 59 RSUs to non-U.S. 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, 2008 was $5 thousand, $0.3 million and $0.3 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, 2008.
The aggregate pre-tax intrinsic value of restricted
stock and RSUs that vested for the years ended December 31,
2008, 2007 and 2006 was $1.1 million, $1.3 million and
$0.2 million, respectively.
Ten
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.
On March 12, 2008, the Company’s shareholders
approved a reverse/forward split of the issued and out-
standing shares of Common Stock. The reverse/forward split
consisted 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 were converted into
fractional shares. Such fractional shares were purchased by
the Company for $24.99 per share. The Company purchased
360,548 shares of Common Stock at a total cost of approxi-
mately $9.4 million including transaction costs. The reverse/
forward split resulted in a signifi cant reduction in shareholder
record keeping and mailing expenses and provided holders
of fewer than 50 shares with a cost-effective way to effi ciently
dispose of their investment.
For the years ended December 31, 2008, 2007 and
2006, the Company acquired 31,652 shares, 11,445 shares
and 1,185 shares of Common Stock, respectively, at a cost of
approximately $0.3 million, $0.3 million and $41 thousand,
respectively, primarily for shares surrendered by employees
to pay taxes due on vested restricted stock awards. In addi-
tion, 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 Common Stock contains a preferred
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 stock-
holder 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 acquiring 15 percent or more of the
outstanding shares of our Common Stock then outstanding.
P R E F E R R E D S 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, redemption
and liquidation preferences pertaining to each such series. No
shares of preferred stock have been issued by the Company.
89
Neenah Paper, Inc. 2008 Annual Report
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
Eleven
Commitments
Twelve
Contingencies and Legal Matters
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, 2008, are as follows:
2009
2010
2011
2012
2013
Thereafter
Future minimum lease obligations
$ 3.3
3.4
2.1
1.8
1.3
1.7
$13.6
The following table presents the Company’s
rent expense under operating leases for the years ended
December 31, 2008, 2007 and 2006:
Year Ended December 31,
Rent expense
Less: Amounts related to
discontinued operations
Rent expense related to
2008
$3.3
2007
$3.0
0.5
1.0
continuing operations
$2.8
$2.0
2006
$3.2
2.0
$1.2
P U R C H A S E C O M M I T M E N T S
The Company has certain minimum purchase commitments,
none of which are individually material, that extend beyond
2008. Commitments under these contracts are approxi-
mately $4.4 million in 2009, $0.6 million in 2010, $0.5 million
in 2011, $0.3 million in 2012and $0.3 million in 2013.
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.
L I T I G A T I O N
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 purchaser of
Neenah Canada’s Longlac woodlands assets on August 29,
2006), TBPI (the purchaser of Neenah Canada’s Terrace Bay
pulp mill, collectively, the “Buchanan Entities”), Buchanan
Forest Products Ltd., Lucky Star Holdings Inc. (each affi liates
of Eagle Logging Inc. and TBPI), Kimberly-Clark Corporation
and Kimberly-Clark Inc. have also been named in the lawsuit.
The lawsuit seeks damages for severance and notice pay
under Ontario law, as well as damages for wrongful termina-
tion, breach of contract, conspiracy and punitive damages,
among other things. Eagle Logging Inc. and certain 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 employees 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.
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
breached a contract to provide benefi ts, breached their
fi duciary duty to the plaintiffs and made negligent misrepre-
sentations regarding retiree benefi ts. The plaintiffs sought
unspecifi ed damages for the value of the loss of retiree medi-
cal 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 for a full and com-
plete dismissal of all claims for retiree health and medical
90
Neenah Paper, Inc. 2008 Annual Report
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
benefi ts against Neenah Canada and the Company, Neenah
Canada agreed to pay the plaintiffs approximately $5.5 mil-
lion 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 was 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 litigation settlement of $5.2 million.
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 manage-
ment that the outcome of any such claim which is pending
or threatened, either individually or on a combined basis,
will not have a material adverse effect on the consolidated
fi nancial condition, results of operations or liquidity of
the Company.
I N D E M N I F I C A T I O N S
In connection with the sale of the Pictou Mill, Northern
Pulp assumed responsibility for a pulp supply agreement
with Kimberly-Clark (the “Pulp Supply Agreement”) which
requires Northern Pulp to supply and Kimberly-Clark to
purchase 384,000 metric tons of pulp from the Pictou Mill
through 2010. The prices at which Northern Pulp sells pulp
to Kimberly-Clark under the Pulp Supply Agreement refl ect a
discount from published industry index prices. The commit-
ments under the Pulp Supply Agreement are structured as
supply-or-pay and take-or-pay arrangements. The Company
has guaranteed certain obligations under the Pulp Supply
Agreement; however, in the event that Northern Pulp and
Kimberly-Clark enter into an amended agreement or make
other material changes to the Pulp Supply Agreement, the
Company’s guarantee obligations cease. Accordingly, if
Northern Pulp does not supply the specifi ed minimums and
is not excused from supplying those amounts under the Pulp
Supply Agreement, the Company may become obligated
to pay Kimberly-Clark for the shortfall based on the differ-
ence between the contract price and any higher price that
Kimberly-Clark pays to purchase the pulp, plus 10 percent
of that difference. As of December 31, 2008, management
believes the Company does not have a liability under its
indemnifi cation obligation to Kimberly-Clark.
91
Neenah Paper, Inc. 2008 Annual Report
Pursuant to the Distribution 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 13, “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 determination under
the terms of the applicable agreement. For these reasons, the
Company is unable to estimate the maximum potential
amount of the possible future liability under the indemnity
provisions of these agreements. However, the Company
accrues for any potentially indemnifi able liability or risk under
these agreements for which it believes a future payment is
probable and a range of loss can be reasonably estimated.
As of December 31, 2008, management believes the
Company’s liability under such indemnifi cation obligations
was not material to the consolidated fi nancial statements.
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 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 environ mental,
health and safety matters.
While the Company has incurred in the past sev-
eral years, and will continue to incur, capital and operating
expenditures in order to comply with environmental, health
and safety laws, regulations and ordinances, management
believes that the Company’s future cost of compliance with
environmental, health and safety laws, regulations and ordi-
nances, and its exposure to liability for environmental, health
and safety claims will not have a material adverse effect
on its 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
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
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.
Hourly employees at the Ripon paper mill are
represented by a local of the Association of Western Pulp
and Paper Workers pursuant to a collective bargaining
agreement that expires on April 30, 2010.
Approximately 50 percent of salaried employees
The Company incurs capital expenditures neces-
sary to meet legal requirements and otherwise relating to the
protection of the environment at its facilities in the United
States and internationally. For these purposes, the Company
has planned capital expenditures for environmental proj-
ects during the period 2009 through 2011 of approximately
$1 million to $2 million annually. The Company’s anticipated
capital expenditures for environmental projects are not
expected to have a material adverse effect on our fi nancial
condition, results of operations or liquidity.
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
As of December 31, 2008, the Company had approximately
1,950 regular full-time employees of whom 800 hourly and
390 salaried employees were located in the United States
and 500 hourly and 260 salaried employees were located
in Germany. As of December 31, 2008, the Company has
approximately 430 hourly employees covered by collec-
tive bargaining agreements that will expire within the next
12-months. The Company believes it has satisfactory rela-
tions with its employees covered by such collective bargain-
ing agreements and does not expect the negotiation of new
collective bargaining agreements to have a material effect on
its results of operations or cash fl ows.
Hourly employees at the Whiting, Neenah,
Munising and Appleton paper mills are represented by the
United Steelworkers Union (the “USW”). The collective bar-
gaining agreement for the Whiting paper mill expired on
January 31, 2009. The Company is currently negotiating a new
labor agreement for the Whiting mill with the USW. The col-
lective bargaining agreements for the Neenah, Munising, and
Appleton paper mills expire on 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. The agreement on pension mat-
ters for these mills expires in 2019. As of December 31, 2008,
all employees at the Urbana paper mill and the Appleton
converting center represented by locals of the USW had been
transferred to other facilities or terminated.
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 bargaining
agreement covering union employees of Neenah Germany
is negotiated by the IG BCE and a national trade association
representing all employers in the industry. Union membership
is voluntary, and under German law does not need to be dis-
closed to the Company. As a result, the number of employees
covered by the collective bargaining agreement that expires
in August 2010 cannot be determined.
Following the sale of the Pictou Mill, Northern
Pulp assumed Neenah Canada’s obligations and responsibili-
ties to hourly employees of the mill pursuant to the terms of
a collective bargaining agreement with the Communications,
Energy and Paperworkers Union of Canada.
Thirteen
Transactions with Kimberly-Clark
During all years presented, the Company sold softwood
and hardwood pulp to Kimberly-Clark. All such sales were
from Terrace Bay and the Pictou Mill. For the years ended
December 31, 2008, 2007 and 2006, net sales revenue for
the pulp sold to Kimberly-Clark was $37 million, $115 million
and $163 million, respectively. All such revenue is reported
as Loss from discontinued operations on the consolidated
statements of operations.
P U L P S U P P L Y A G R E E M E N T
In conjunction with the sale of the Pictou Mill, Northern
Pulp assumed responsibility for the Pulp Supply Agreement
with Kimberly-Clark. The Company has agreed to indemnify
Kimberly-Clark in the event Northern Pulp fails to per-
form under the Pulp Supply Agreement. See Note 12,
“Contingencies and Legal Matters – Indemnifi cations.”
92
Neenah Paper, Inc. 2008 Annual Report
functions managed on a common basis, are allocated to the
segments based on usage, where possible, or other fac-
tors based on the nature of the activity. General corporate
expenses that do not directly support the operations of
the business segments are shown as Unallocated corporate
costs. The accounting policies of the reportable operat-
ing 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
Intersegment sales
Consolidated
Operating income (loss)
Fine Paper
Technical Products(a)
Unallocated corporate costs
Consolidated
Year Ended December 31,
2008
2007
2006
$335.5
396.8
–
$732.3
$366.5
400.8
(0.3)
$767.0
$223.9
183.1
(2.0)
$405.0
Year Ended December 31,
2008
2007
2006
$ 34.0
(42.3)
(11.0)
$(19.3)
$ 46.6
24.7
(17.4)
$ 53.9
$ 56.2
9.2
(19.7)
$ 45.7
(a) The operating loss for the year ended December 31, 2008, includes a non-
cash pre-tax goodwill and other intangible asset impairment charge of
$54.5 million.
Year Ended December 31,
2008
2007
2006
Depreciation and amortization
$11.4
Fine Paper
18.9
Technical Products
1.9
Pulp
6.4
Corporate
38.6
Total
Less: Discontinued operations
1.9
Total Continuing Operations $36.7
$11.3
17.2
10.7
6.1
45.3
10.7
$34.6
$ 9.5
6.2
10.0
4.5
30.2
10.0
$20.2
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
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 prin-
cipal provisions of the various agreements and are qualifi ed
in their entirety by the respective agreements.
Fourteen
Business Segment and Geographic Information
The Company reports its operations in two segments: Fine
Paper and Technical Products. The Fine Paper business is a
leading producer of premium writing, text, cover and spe-
cialty 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 nonwoven wall cov-
erings. Each segment employs different technologies and
marketing strategies. Disclosure of segment information
is on the same basis that management uses internally for
evaluating segment performance and allocating resources.
Transactions between segments are executed at market
prices and such transactions are eliminated in consolida-
tion. The costs of shared services, and other administrative
93
Neenah Paper, Inc. 2008 Annual Report
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,
Net sales are attributed to geographic areas based
2008
2007
2006
Capital expenditures
$ 8.9
Fine Paper
15.0
Technical Products
1.4
Pulp
4.7
Corporate
30.0
Total
1.4
Less: Discontinued operations
Total Continuing Operations $28.6
$ 9.5
39.5
5.4
3.9
58.3
5.4
$52.9
$ 4.8
6.7
6.7
6.9
25.1
6.7
$18.4
December 31,
2008
2007
Total Assets
Fine Paper
Technical Products
Pulp(a)
Assets held for sale – discontinued operations
Unallocated corporate and
intersegment items
Total Continuing Operations
$186.6
366.6
–
3.3
128.1
$684.6
$209.8
467.9
223.0
–
32.1
$932.8
(a) As of December 31, 2008, the Company’s pulp operations are not a
reportable segment. As of December 31, 2008, approximately $88.2 mil-
lion of current and deferred income taxes and certain other assets previ-
ously reported in the Pulp segment have been reclassifi ed to Corporate
and other. As of December 31, 2007, the value of these assets was
approximately $69.0 million.
G E O G R A P H I C I N F O R M A T I O N
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, 2008, 2007 and 2006,
sales to the fi ne paper business’s two largest customers
(both of which are distributors) represented approximately
30 percent, 30 percent and 35 percent, respectively, of its
total sales. For the years ended December 31, 2008, 2007
and 2006, no single customer accounted for more than
10 percent of the Company’s consolidated revenue. Except
for 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 partic-
ular supplier that could, if suddenly eliminated, have a mate-
rial adverse affect on its operations. An interruption in supply
of a latex specialty grade or of specialty softwood pulp could
disrupt and eventually cause a shutdown of production of
certain technical products.
Fifteen
Supplemental Data
Year Ended December 31,
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
Net sales
United States
Europe
Intergeographic items
Consolidated
2008
2007
2006
$467.3
265.0
–
$732.3
$502.9
264.4
(0.3)
$767.0
$357.3
49.7
(2.0)
$405.0
Summary of Advertising and
Research Expenses
Advertising expense
Research expense
Year Ended December 31,
2008
2007
2006
$8.7
6.5
$10.3
6.4
$6.1
2.5
Total Assets
United States
Canada
Europe
Total
December 31,
2008
2007
$361.7
8.5
314.4
$684.6
$332.5
201.6
398.7
$932.8
94
Neenah Paper, Inc. 2008 Annual Report
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,
2008
2007
2006
December 31,
2008
2007
Summary of Other Income
(Expense) – net
Summary of Property, Plant and
Equipment – net
Land and land improvements
Buildings
Machinery and equipment
Roads
$ 23.9
99.9
439.1
–
–
12.5
575.4
Less accumulated depreciation and depletion 259.2
$316.2
Net Property, Plant and Equipment
Construction in progress
Timberlands
$ 13.0
159.7
714.6
16.8
9.8
11.2
925.1
492.8
$432.3
Depreciation expense for the years ended
December 31, 2008, 2007 and 2006 was $34.7 million,
$41.6 million and $28.0 million, respectively. Interest
expense capitalized as part of the costs of capital projects
was $0.3 million, $0.5 million and $0.3 million for the years
ended December 31, 2008, 2007 and 2006, respectively.
Summary of Accrued Expenses
Accrued salaries and employee benefi ts
Accrued interest
Accrued restructuring costs (Note 4)
Accrued income taxes
Deferred revenue
Other
Total
December 31,
2008
2007
$16.6
2.1
1.7
1.3
–
10.6
$32.3
$34.2
2.1
5.3
13.7
0.1
16.7
$72.1
December 31,
2008
2007
Summary of Noncurrent Employee
Benefi ts and Other Obligations
Pension benefi ts
Postretirement benefi ts other than pensions(a)
Other
Total
$ 68.7
39.1
3.5
$111.3
$ 64.2
52.1
7.0
$123.3
(a) Includes $4.8 million in long-term disability benefi ts due to Terrace Bay retirees.
$(0.4)
3.4
(5.2)
2.3
4.4
4.5
2.8
$ 1.7
$(0.1)
–
–
4.8
9.8
14.5
14.0
$ 0.5
December 31,
2008
2007
$64.7
0.2
$135.1
12.4
(1.7)
$63.2
(2.1)
$145.4
December 31,
2008
2007
$21.8
13.0
59.0
3.0
96.8
(8.2)
$88.6
$ 26.2
18.1
70.2
5.7
120.2
(9.6)
$110.6
December 31,
2008
2007
$11.8
6.6
$ 6.9
10.0
0.6
4.6
–
–
–
$19.0
5.1
2.2
0.5
$29.3
Gain (loss) on property disposals $ 6.3
4.4
Terrace Bay employee benefi ts
–
Litigation settlement
1.4
Miscellaneous other income
Net gain from risk
management activities
Other income – net
Less: Amounts related to
discontinued operations
Total
1.5
$11.3
0.7
12.8
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
Prepaid and other current assets
Spare parts
Receivable from FiberMark for
German taxes
Indemnifi cation from FiberMark for
German taxes
Assets held for sale (Note 4)
Cash fl ow hedges (Note 3)
Total
95
Neenah Paper, Inc. 2008 Annual Report
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 U P P L E M E N T A L C A S H F L O W D A T A
Net cash provided by (used in)
changes in working capital,
net of effects of acquisitions
Accounts receivable
Inventories
Income taxes receivable
Prepaid and other current assets
Accounts payable
Accrued expenses
Foreign currency effects on
working capital
Total
Sixteen
Year Ended December 31,
2008
2007
2006
Cash paid during period for
interest, net of interest
expense capitalized
Cash paid during period for
Year Ended December 31,
2008
2007
2006
$23.0
$23.7
$17.1
income taxes, net of refunds
6.6
Non-cash investing activities:
Liability for equipment acquired
2.7
6.2
3.9
4.1
7.1
$ 48.7
(2.4)
(10.6)
2.6
(33.3)
(24.0)
$(14.3)
(1.1)
–
(3.3)
2.8
7.2
(2.5)
$(21.5)
8.7
$ –
$ 3.0
24.7
–
(0.8)
8.0
0.7
4.2
$39.8
Condensed Consolidating Financial Information
Neenah Paper Company of Canada, Neenah Paper Michigan, Inc. and Neenah Paper Sales, Inc. (the “Guarantor Subsidiaries”)
guarantee the Company’s Senior Notes. The Guarantor Subsidiaries are 100 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 following condensed consolidating fi nancial information is presented in lieu of
consolidated fi nancial statements for the Guarantor Subsidiaries as of December 31, 2008 and 2007 and for the years ended
December 31, 2008, 2007 and 2006.
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, 2008
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
Goodwill and other intangible asset impairment charge
Other income (expense) – net
Operating income (loss)
Equity in losses of subsidiaries
Interest expense – net
Income (loss) from continuing operations before income taxes
Provision (benefi t) for income taxes
Income (loss) from continuing operations
Loss from discontinued operations, net of income tax benefi t
Net income (loss)
$ 284.2
230.1
54.1
47.6
–
0.6
5.9
146.7
21.6
(162.4)
(3.9)
(158.5)
–
$(158.5)
$183.1
161.1
22.0
12.3
–
(10.9)
20.6
–
1.9
18.7
9.5
9.2
(111.2)
$(102.0)
$265.0
242.0
23.0
15.3
54.5
(1.0)
(45.8)
–
1.5
(47.3)
(2.6)
(44.7)
–
$ (44.7)
$ –
–
–
–
–
–
–
(146.7)
–
146.7
–
146.7
–
$ 146.7
$ 732.3
633.2
99.1
75.2
54.5
(11.3)
(19.3)
–
25.0
(44.3)
3.0
(47.3)
(111.2)
$(158.5)
96
Neenah Paper, Inc. 2008 Annual Report
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, 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
Other income – net
Operating income
Equity in earnings of subsidiaries
Interest expense – net
Income from continuing operations before income taxes
Provision (benefi t) for income taxes
Income from continuing operations
Loss from discontinued operations, net of income tax benefi ts
Net income (loss)
$222.8
157.0
65.8
42.0
(0.1)
23.9
(9.2)
22.6
10.5
0.3
10.2
–
$ 10.2
$280.2
251.2
29.0
21.9
(1.0)
8.1
–
2.8
5.3
–
5.3
(22.0)
$ (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)
$767.0
635.5
131.5
79.3
(1.7)
53.9
–
25.4
28.5
(3.7)
32.2
(22.0)
$ 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
Other income – net
Operating income
Equity in earnings of subsidiaries
Interest expense – net
Income (loss) from continuing operations before income taxes
Provision (benefi t) for income taxes
Income (loss) from continuing operations
Income from from discontinued operations, net of income taxes
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
$133.4
116.1
17.3
17.2
(0.3)
0.4
–
2.0
(1.6)
(1.1)
(0.5)
43.1
$ 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)
$405.0
305.4
99.6
54.4
(0.5)
45.7
–
16.9
28.8
9.4
19.4
43.1
$ 62.5
97
Neenah Paper, Inc. 2008 Annual Report
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
Income taxes receivable
Deferred income taxes
Intercompany amounts receivable
Prepaid and other current assets
Assets held for sale – discontinued operations
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, 2008
Neenah
Paper, Inc.
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ 1.9
22.4
45.8
11.2
(0.9)
69.6
5.5
–
155.5
261.7
169.1
92.6
300.2
9.8
–
3.0
6.8
$567.9
$ 5.0
17.4
55.6
17.6
95.6
328.3
–
33.6
457.5
110.4
$567.9
$ 1.1
12.9
11.2
–
54.2
55.6
5.4
3.3
143.7
113.4
62.1
51.3
–
32.1
–
–
0.1
$227.2
$ –
3.2
69.6
8.6
81.4
–
–
44.3
125.7
101.5
$227.2
$ 0.3
27.9
31.6
–
–
–
8.1
–
67.9
200.3
28.0
172.3
–
0.1
43.8
25.7
5.1
$314.9
$ 19.1
20.0
–
6.1
45.2
12.2
25.4
33.4
116.2
198.7
$314.9
$ –
–
–
–
–
(125.2)
–
–
(125.2)
–
–
–
(300.2)
–
–
–
–
$(425.4)
$ –
–
(125.2)
–
(125.2)
–
–
–
(125.2)
(300.2)
$(425.4)
$ 3.3
63.2
88.6
11.2
53.3
–
19.0
3.3
241.9
575.4
259.2
316.2
–
42.0
43.8
28.7
12.0
$684.6
$ 24.1
40.6
–
32.3
97.0
340.5
25.4
111.3
574.2
110.4
$684.6
98
Neenah Paper, Inc. 2008 Annual Report
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
Income tax receivable
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, 2007
Neenah
Paper, Inc.
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$ (0.9)
31.8
21.7
0.5
0.6
44.6
12.8
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
0.6
–
29.3
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
99
Neenah Paper, Inc. 2008 Annual Report
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
December 31, 2008
Neenah
Paper, Inc.
Guarantor Non-Guarantor
Subsidiaries
Subsidiaries
Consolidating
Adjustments
Consolidated
Amounts
$(158.5)
$(102.0)
$(44.7)
$ 146.7
$(158.5)
15.4
4.0
2.7
–
–
–
–
–
–
0.4
(19.8)
146.7
(3.8)
(0.4)
(13.3)
(11.2)
–
–
(1.3)
(12.5)
53.7
(34.6)
–
–
(6.0)
(9.4)
(0.3)
25.2
28.6
2.8
(0.9)
$ 1.9
7.4
–
(54.4)
–
91.2
29.4
(2.8)
53.7
(4.3)
(6.7)
7.1
–
(4.6)
(1.1)
12.9
(7.4)
(13.6)
13.8
0.8
(6.4)
–
–
–
–
–
–
(0.6)
(7.6)
(8.2)
(1.7)
2.8
$ 1.1
15.8
–
(4.0)
54.5
–
–
–
–
–
–
(8.8)
–
0.8
(0.1)
13.5
(11.4)
–
–
(0.1)
(11.5)
–
–
18.7
(3.3)
–
–
–
(17.6)
(2.2)
(0.2)
0.5
$ 0.3
–
–
–
–
–
–
–
–
–
–
–
(146.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ –
38.6
4.0
(55.7)
54.5
91.2
29.4
(2.8)
53.7
(4.3)
(6.3)
(21.5)
–
(7.6)
(1.6)
13.1
(30.0)
(13.6)
13.8
(0.6)
(30.4)
53.7
(34.6)
18.7
(3.3)
(6.0)
(9.4)
(0.9)
–
18.2
0.9
2.4
$ 3.3
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 (benefi t)
Goodwill and other intangible asset impairment charge
Asset impairment loss
Loss on disposal – transfer of the Pictou Mill
Amortization of deferred revenue – transfer of the Pictou Mill
Loss on disposal – transfer of the Pictou Mill
postretirement benefi t plans
Gain on curtailment of postretirement benefi t plan
(Gain) loss on other asset dispositions
Increase (decrease) in working capital, net of
effects of acquisitions
Equity in losses of subsidiaries
Pension and other postretirement benefi ts
Other
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Payments in conjunction with transfer of the Pictou Mill
Proceeds from asset sales
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 debt
Cash dividends paid
Share purchases
Other
Intercompany transfers – net
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
100
Neenah Paper, Inc. 2008 Annual Report
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 (loss)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization
Stock-based compensation
Deferred income tax provision (benefi t)
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
Pension and other postretirement 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
Acquisition of Neenah Germany, net of cash acquired
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
Proceeds from exercise of stock options
Other
Intercompany transfers – net
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
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
(9.2)
2.9
–
0.1
22.8
(12.9)
(54.7)
(1.5)
0.1
(69.0)
63.6
(34.1)
–
–
(6.0)
3.7
0.2
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)
–
–
4.1
38.7
(1.4)
69.5
(58.3)
(54.7)
(1.5)
1.1
(113.4)
77.0
(34.1)
8.0
(5.0)
(6.0)
3.7
0.2
–
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
101
Neenah Paper, Inc. 2008 Annual Report
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 (benefi t)
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 postretirement 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 PROVIDED BY (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
Proceeds from exercise of stock options
Intercompany transfers – net
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
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)
83.6
(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)
83.6
(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
102
Neenah Paper, Inc. 2008 Annual Report
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
Seventeen
Unaudited Quarterly Data
Net Sales
Gross Profi t
Operating Income
Income From Continuing Operations
Earnings Per Common Share From Continuing Operations:
Basic
Diluted
Net Sales
Gross Profi t
Operating Income
Income From Continuing Operations
Earnings Per Common Share From Continuing Operations:
Basic
Diluted
First
$205.6
34.2
17.9
8.5
$ 0.58
$ 0.57
First(b)
$172.7
35.5
19.4
10.1
$ 0.68
$ 0.67
Second
$194.5
28.9
14.2
6.2
$ 0.43
$ 0.42
Second
$206.1
37.4
18.2
7.4
$ 0.50
$ 0.49
2008 Quarters
Third
$185.6
25.0
12.3
5.0
$ 0.34
$ 0.34
2007 Quarters
Third
$195.2
28.5
10.3
13.3
$ 0.89
$ 0.87
Fourth(a)
Year(a)
$146.6
11.0
(63.7)
(67.0)
$ (4.58)
$ (4.58)
Fourth
$193.0
30.1
6.0
1.4
$ 0.09
$ 0.09
$732.3
99.1
(19.3)
(47.3)
$ (3.23)
$ (3.23)
Year
$767.0
131.5
53.9
32.2
$ 2.17
$ 2.13
(a) Includes non-cash pre-tax goodwill and other intangible asset impairment charge of $54.5 million.
(b) Includes the results of Fox River beginning March 1, 2007.
103
Neenah Paper, Inc. 2008 Annual Report
Leadership
E XE CUTIVE TEAM
BOARD OF DIRECTORS
Sean T. Erwin
Chairman of the Board,
President and
Chief Executive Offi cer,
Neenah Paper, Inc.
Bonnie C. Lind
Senior Vice President,
Chief Financial Offi cer
and Treasurer
Steven S. Heinrichs
Senior Vice President,
General Counsel
and Secretary
Walter M. Haegler, Ph.D.
Managing Director,
Neenah Germany
John P. O’Donnell
President, Fine Paper
James R. Piedmonte
Senior Vice President,
Operations
Dennis P. Runsten
President,
Technical Products – U.S.
Sean T. Erwin
Chairman of the Board,
President and
Chief Executive Offi cer,
Neenah Paper, Inc.
Edward Grzedzinski
Former Chief Executive
Offi cer, NOVA
Information Systems
Mary Ann Leeper, Ph.D.
Senior Strategic Advisor,
Female Health Company
and Former President and
Chief Operating Offi cer,
Female Health Company
Timothy S. Lucas, CPA
Independent Consultant,
Lucas Financial Reporting
and Former Director of
Research, FASB
John F. McGovern
Partner, Aurora Capital LLC
and Former Executive
Vice President and
Chief Financial Officer,
Georgia Pacific
Corporation
Philip C. Moore
Partner,
McCarthy Tétrault, L.L.P.
Stephen M. Wood, Ph.D.
President and
Chief Executive Officer,
FiberVisions Corporation
104
Neenah Paper, Inc. 2008 Annual Report
Shareholder Information
C O M P A R I S O N O F 4 9 - 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 *
$125
$100
$75
$50
$25
12/01
04
12/31
04
12
05
12
06
12
07
12
08
Neenah Paper, Inc.
Russell 2000 value
Peer group: AbitibiBowater, Caraustar Industries, Inc.,
Glatfelter, International Paper, Schweitzer-Mauduit,
Wausau Paper.
* $100 invested on 12/1/04 in stock or index – including reinvestment
of dividends. Fiscal year ended December 31.
105
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,
2008 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 gover-
nance listing standards.
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
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 2009 annual meeting
of the shareholders of
Neenah Paper, Inc. will
be held Wednesday,
May 20, 2009, at 10:00 a.m.,
Eastern time at Neenah’s
headquarters in
Alpharetta, Georgia.
As of February 28, 2009,
Neenah had approximately
2,500 holders of record
of its common stock.
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, 2008
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 informa-
tion are available on our
website. For a printed copy
of our Form 10-K, without
charge, please contact:
Colophon
Production
Notes
Cover
The cover of this annual
report was produced in
three editions, each using
a different paper stock
from Neenah’s Fine Paper
portfolio, including:
CLASSIC® Linen Paper
Gold Pearl
84 lb. cover
CLASSIC CREST® Paper
Epic Black
100 lb. cover
STARWHITE® Paper
Soft Touch Natural
110 lb. cover
SW-COC-000885 FSC Trademark
© 1996 Forest Stewardship Council A.C.
The mark of responsible forestry.
Credits
Illustration &
Photography
Design and Production
Addison
www.addison.com
Cover
Ilovedust
Copywriting
Edward Nebb
Printing
Lake County Press
Foil Stamping
Letterhead Press
p. 2
STRONGER
Raymond Biesinger
p. 4
SHARPER
Mario Hugo
p. 6
LEANER
Dean Kaufman
p.8
SMARTER
Horacio Salinas
p.10
GREENER
Faiyaz Jafri
p.12
QUICKER
Corriette Schoenaerts
p.14
TRANSFORMED
Sarah Illenberger
p. 26
Aakash Nihalani
End papers
CLASSIC CREST® Paper
Classic Cream
24 lb. writing
p.1–16
CLASSIC CREST® Paper
Avalanche White
100 lb. text
p.17–24
ESSE® Paper
Pearlized Willow
80 lb. text
p. 25–32
CORONADO® SST Paper
Infinite White Stipple
100 lb. text
p. 33–40, 73–80
CLASSIC CREST® Paper
Potomac Blue
80 lb. text
p. 41–48, 81–88
ESSE® Paper
Pearlized Willow
80 lb. text
p. 49–56, 89–96
CLASSIC CREST® Paper
Saw Grass
80 lb. text
p. 57–64, 97–104
ESSE® Paper
Latte
80 lb. text
p. 65–72
CLASSIC® Laid
Natural White
70 lb. text
3