Neenah Paper

Neenah Paper Reports 2012 Third Quarter Results

Neenah Paper, Inc. reported earnings from continuing operations of $0.55 per diluted common share in the third quarter of 2012 compared with earnings of $0.42 per share in the third quarter of 2011. After excluding costs of $0.01 per share ($0.3 million pre-tax) to integrate purchased fine paper brands, adjusted earnings in the third quarter of 2012 were $0.56 per share.

“Our teams continue to execute well, with both business segments delivering double-digit earnings growth and improved efficiencies. With working capital improving as expected, we generated record cash flow that was used to further reduce debt”

Net sales of $206.3 million in the third quarter of 2012 rose 18 percent compared to $174.9 million in the third quarter of 2011, while consolidated operating income increased 30 percent, growing to $16.3 million in the current quarter from $12.5 million in the third quarter of 2011. Results include the acquisition of selected fine paper brands from Wausau Paper Corporation in January 2012.

“Our teams continue to execute well, with both business segments delivering double-digit earnings growth and improved efficiencies. With working capital improving as expected, we generated record cash flow that was used to further reduce debt,” said John O’Donnell, Chief Executive Officer. “I am proud of the fact that we are delivering consistent top-line growth and margin improvement, both over the past few years and in the current environment. Our strategy going forward remains unchanged as we continue to grow in high value, performance-oriented Technical Products categories and pursue niche growth opportunities that complement the value of our Fine Paper business.”

Quarterly Segment and Other Financial Results

Technical Products net sales of $98.7 million in the third quarter of 2012 compared to $107.1 million in the third quarter of 2011. Revenues declined eight percent primarily due to currency, as the Euro weakened 12 percent relative to the U.S. Dollar. On a constant currency basis, revenues were flat as benefits from an improved mix were offset by a two percent decline in volume, which generally reflected softer economic conditions overseas.

Operating income increased 14 percent in 2012, growing to $6.4 million from $5.6 million in the prior year period. The higher income resulted primarily from a more profitable mix of products sold, as well as lower prices for some raw materials. Third quarter results include costs associated with planned maintenance shutdowns. Since these shutdowns occurred largely in the same quarter of 2011, there is minimal year-on-year impact on results.

Fine Paper net sales of $99.1 million in the third quarter increased 46 percent compared to $67.8 million in 2011. Higher sales in 2012 resulted from volume growth, primarily due to brands acquired from Wausau in January 2012 but also from double-digit gains in luxury packaging, labels and international markets.

Operating income of $12.8 million in the third quarter of 2012, which included $0.3 million of integration costs for the acquired brands, increased 35 percent compared to $9.5 million in the prior year. Income growth in 2012 reflected higher sales and manufacturing cost efficiencies, as well as lower pulp prices. Combined, these items more than offset higher selling and advertising costs related to increased sales from the acquired brands. Third quarter results include costs associated with planned maintenance shutdowns. Since these shutdowns occurred largely in the same quarter of 2011, there is minimal year-on-year impact on results.

Other/Unallocated Corporate Costs include sales and profits from non-premium business acquired in the Wausau transaction, as well as unallocated corporate costs. In the third quarter of 2012, sales for these products were $8.5 million, with operating income of $0.5 million. There were no sales in the prior year period. Unallocated Corporate Costs were $3.4 million in 2012 and $2.6 million in 2011, reflecting timing differences resulting in lower spending in the third quarter of 2011.

Net interest expense of $3.3 million in the third quarter of 2012 compared to $3.6 million in the prior year period. Lower interest expense in 2012 resulted from reduced debt levels and lower average interest rates, reflective of a reduced proportion of long-term bonds in the mix of debt following the Company’s partial redemptions of long-term notes in March 2011 and April 2012.

The effective income tax rate of 29 percent for the third quarter of 2012 compared to a rate of 24 percent in the third quarter of 2011. The 2012 year-to-date rate of 30 percent is consistent with the full year rate of 29 percent in 2011. The 2011 third quarter rate was unusually low as a result of changes to the projected mix of income.

Cash flow provided by operations of $32.1 million for the third quarter 2012 was $7.1 million higher than the prior year period. Increased cash flow in 2012 was due to higher operating income and reduced investments in working capital. Capital spending was $6.5 million in the third quarter of 2012 compared to $6.0 million in the prior year period.

Debt as of September 30, 2012 was $183.1 million, down $19.7 million from June 30, 2012. Cash and equivalents as of September 30, 2012 were $6.6 million compared to $1.8 million on June 30, 2012. Cash flow generated in the third quarter of 2012 was used primarily to reduce debt.

Reconciliation to GAAP Measures

The Company will report adjustments to GAAP figures when they are believed to communicate results of ongoing operations more clearly. In these instances, a reconciliation of adjusted income measures to comparable GAAP measures will be provided.

Year-to-Date

Year-to-date sales of $616.2 million for the first nine months of 2012 increased 16 percent compared to sales of $530.5 million in the prior year. The increase in 2012 reflected higher sales of Fine Paper primarily due to brands acquired from Wausau in January 2012. Technical Products sales for the first nine months of 2012 decreased five percent compared to 2011, as a higher value mix and improved selling prices were more than offset by unfavorable currency effects and lower volumes. On a constant currency basis, year-to-date Technical Products sales increased less than one percent.

Operating income of $54.5 million in 2012 increased from $43.0 million in 2011. Growth in income in 2012 resulted from higher sales levels, improvements in mix and selling prices, manufacturing efficiencies and lower input costs. Operating income in 2012 includes costs of $8.2 million for integration of acquired fine paper brands and a pension settlement charge.

Cash provided by operating activities of $21.9 million for the nine months ended September 30, 2012 compared to $39.5 million in the prior year period. Cash flow in 2012 was lower due to $23.3 million of unusual items, consisting of a SERP pension payment of $6.9 million, a payment of $6.6 million to acquire Wausau inventory, excess tax benefits of $5.1 million related to the vesting or exercise of stock-based awards and acquisition integration costs of $4.7 million. Excluding these items, cash provided by operating activities for the nine months ended September 30, 2012 was $45.2 million, or $5.7 million higher than the comparable prior year period, as higher operating income more than offset increased investments in working capital.

Year-to-date capital spending in 2012 of $15.8 million compared to $18.9 million the prior year period.

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