10-Q 1 np2016093010-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
  
 
FORM 10-Q
 
 
(Mark One)
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
OR
 
¨         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                           to                           
 
Commission File Number: 001-32240
 
NEENAH PAPER, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-1308307
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3460 Preston Ridge Road
Alpharetta, Georgia
 
30005
(Address of principal executive offices)
 
(Zip Code)
 
(678) 566-6500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 2, 2016, there were approximately 16,749,000 shares of the Company’s common stock outstanding.



TABLE OF CONTENTS
 




Part I—FINANCIAL INFORMATION

Item 1.  Financial Statements

 
NEENAH PAPER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share and per share data)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
232.9

 
$
231.6

 
$
721.0

 
$
657.3

Cost of products sold
 
183.7

 
183.2

 
553.0

 
511.4

Gross profit
 
49.2

 
48.4

 
168.0

 
145.9

Selling, general and administrative expenses
 
21.0

 
21.2

 
71.8

 
61.6

Integration/restructuring costs
 
1.2

 
2.9

 
3.7

 
2.9

Other expense (income) - net
 
0.1

 
(0.1
)
 
0.3

 
0.9

Operating income
 
26.9

 
24.4

 
92.2

 
80.5

Interest expense - net
 
2.7

 
2.9

 
8.3

 
8.7

Income from continuing operations before income taxes
 
24.2

 
21.5

 
83.9

 
71.8

Provision for income taxes
 
7.8

 
8.0

 
26.9

 
25.8

Income from continuing operations
 
16.4

 
13.5

 
57.0

 
46.0

Loss from discontinued operations, net of income taxes (Note 10)
 

 
(7.4
)
 
(0.4
)
 
(6.9
)
Net income
 
$
16.4

 
$
6.1

 
$
56.6

 
$
39.1

Earnings (Loss) Per Common Share
 
 

 
 

 
 

 
 

Basic
 
 

 
 

 
 

 
 

Continuing operations
 
$
0.97

 
$
0.79

 
$
3.36

 
$
2.72

Discontinued operations
 

 
(0.43
)
 
(0.02
)
 
(0.41
)
Basic
 
$
0.97

 
$
0.36

 
$
3.34

 
$
2.31

Diluted
 
 

 
 

 
 

 
 

Continuing operations
 
$
0.95

 
$
0.78

 
$
3.30

 
$
2.68

Discontinued operations
 

 
(0.43
)
 
(0.02
)
 
(0.40
)
Diluted
 
$
0.95

 
$
0.35

 
$
3.28

 
$
2.28

Weighted Average Common Shares Outstanding (in thousands)
 
 

 
 

 
 

 
 

Basic
 
16,771

 
16,738

 
16,774

 
16,737

Diluted
 
17,088

 
16,949

 
17,068

 
16,991

Cash Dividends Declared Per Share of Common Stock
 
$
0.33

 
$
0.30

 
$
0.99

 
$
0.90

 
See Notes to Condensed Consolidated Financial Statements

F-1


NEENAH PAPER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
16.4

 
$
6.1

 
$
56.6

 
$
39.1

Unrealized foreign currency translation gain (loss)
 
0.7

 
1.8

 
0.9

 
(9.1
)
Reclassification of amortization of adjustments to pension and other postretirement benefit liabilities recognized in net periodic benefit cost (Note 6)
 
1.9

 
1.8

 
5.5

 
5.4

Unrealized gain on “available-for-sale” securities
 

 

 
0.1

 

Income (loss) from other comprehensive income items
 
2.6

 
3.6

 
6.5

 
(3.7
)
Provision for income taxes
 
0.7

 
0.7

 
2.1

 
2.0

Other comprehensive income (loss)
 
1.9

 
2.9

 
4.4

 
(5.7
)
Comprehensive income
 
$
18.3

 
$
9.0

 
$
61.0

 
$
33.4

 
See Notes to Condensed Consolidated Financial Statements

F-2


NEENAH PAPER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 

 
 

Current Assets
 
 

 
 

Cash and cash equivalents
 
$
7.3

 
$
4.2

Accounts receivable (less allowances of $1.6 million and $1.7 million)
 
104.3

 
97.3

Inventories
 
117.8

 
120.6

Prepaid and other current assets
 
14.4

 
24.5

Total Current Assets
 
243.8

 
246.6

Property, Plant and Equipment
 
 

 
 

Property, Plant and Equipment, at cost
 
748.1

 
694.5

Less accumulated depreciation
 
390.5

 
371.5

Property, plant and equipment—net
 
357.6

 
323.0

Deferred Income Taxes
 
8.6

 
20.0

Goodwill
 
72.5

 
72.2

Intangible Assets—net
 
75.7

 
79.1

Other Assets
 
14.2

 
10.5

TOTAL ASSETS
 
$
772.4

 
$
751.4

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current Liabilities
 
 

 
 

Debt payable within one year
 
$
1.3

 
$
1.2

Accounts payable
 
60.1

 
53.7

Accrued expenses
 
49.6

 
51.2

Total Current Liabilities
 
111.0

 
106.1

Long-term Debt
 
209.9

 
228.2

Deferred Income Taxes
 
12.3

 
11.8

Noncurrent Employee Benefits
 
82.5

 
89.7

Other Noncurrent Obligations
 
4.2

 
4.0

TOTAL LIABILITIES
 
419.9

 
439.8

Contingencies and Legal Matters (Note 9)
 

 

TOTAL STOCKHOLDERS’ EQUITY
 
352.5

 
311.6

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
772.4

 
$
751.4

 
See Notes to Condensed Consolidated Financial Statements

F-3


NEENAH PAPER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
56.6

 
$
39.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
24.0

 
23.1

Stock-based compensation
 
4.4

 
4.5

Excess tax benefits from stock-based compensation (Note 2)
 

 
(1.1
)
Deferred income tax provision
 
10.4

 
12.3

Asset impairment related to discontinued operations
 

 
5.5

Non-cash effects of changes in liabilities for uncertain income tax positions
 

 
(0.1
)
Loss (gain) on asset dispositions
 
0.1

 
(0.1
)
Decrease (increase) in working capital
 
4.7

 
(8.1
)
Pension and other postretirement benefits
 
(2.3
)
 
3.9

Other
 
(0.2
)
 
0.5

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
97.7

 
79.5

INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(49.4
)
 
(25.7
)
Acquisitions (Note 3)
 

 
(118.2
)
Purchase of marketable securities
 
(0.1
)
 
(0.1
)
Other
 

 
0.5

NET CASH USED IN INVESTING ACTIVITIES
 
(49.5
)
 
(143.5
)
FINANCING ACTIVITIES
 
 

 
 

Long-term borrowings (Note 5)
 
185.9

 
44.0

Repayments of long-term debt (Note 5)
 
(206.3
)
 
(27.2
)
Shares purchased (Note 8)
 
(8.0
)
 
(6.0
)
Proceeds from exercise of stock options
 
0.3

 
0.9

Excess tax benefits from stock-based compensation (Note 2)
 

 
1.1

Cash dividends paid
 
(16.8
)
 
(15.2
)
NET CASH USED IN FINANCING ACTIVITIES
 
(44.9
)
 
(2.4
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(0.2
)
 
(0.7
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
3.1

 
(67.1
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
 
4.2

 
72.6

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
7.3

 
$
5.5

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 

 
 

Cash paid during period for interest, net of interest expense capitalized
 
$
5.2

 
$
5.8

Cash paid during period for income taxes
 
$
14.1

 
$
12.2

Non-cash investing activities:
 
 

 
 

Liability for equipment acquired
 
$
10.0

 
$
6.0

Liability related to acquisition
 
$

 
0.3

 
See Notes to Condensed Consolidated Financial Statements

F-4


NEENAH PAPER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except as noted)
 
Note 1.  Background and Basis of Presentation
 
Background
 
Neenah Paper, Inc. (“Neenah” or the “Company”), is a Delaware corporation incorporated in April 2004. The Company has 2 primary operations: its technical products business and its fine paper and packaging business. See Note 11, “Business Segment Information.”
 
Basis of Consolidation and Presentation
 
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make extensive use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
 
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
 
The condensed consolidated financial statements of Neenah and its subsidiaries included herein are unaudited. The condensed consolidated financial statements include the financial statements of the Company and its wholly owned and majority owned subsidiaries. Intercompany balances and transactions have been eliminated.

Earnings per Share (“EPS”)
 
The following table presents the computation of basic and diluted EPS (dollars in millions except per share amounts, shares in thousands):
 
Earnings (Loss) Per Basic Common Share
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Income from continuing operations
 
$
16.4

 
$
13.5

 
$
57.0

 
$
46.0

Amounts attributable to participating securities
 
(0.2
)
 
(0.2
)
 
(0.6
)
 
(0.5
)
Income from continuing operations available to common stockholders
 
16.2

 
13.3

 
56.4

 
45.5

Loss from discontinued operations, net of income taxes
 

 
(7.4
)
 
(0.4
)
 
(6.9
)
Amounts attributable to participating securities
 

 
0.1

 

 
0.1

Net income available to common stockholders
 
$
16.2

 
$
6.0

 
$
56.0

 
$
38.7

Weighted-average basic shares outstanding
 
16,771

 
16,738

 
16,774

 
16,737

Basic earnings (loss) per share
 
 

 
 

 
 

 
 

Continuing operations
 
$
0.97

 
$
0.79

 
$
3.36

 
$
2.72

Discontinued operations
 

 
(0.43
)
 
(0.02
)
 
(0.41
)
 
 
$
0.97

 
$
0.36

 
$
3.34

 
$
2.31

 



F-5


Earnings (Loss) Per Diluted Common Share 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Income from continuing operations
 
$
16.4

 
$
13.5

 
$
57.0

 
$
46.0

Amounts attributable to participating securities
 
(0.2
)
 
(0.2
)
 
(0.6
)
 
(0.5
)
Income from continuing operations available to common stockholders
 
16.2

 
13.3

 
56.4

 
45.5

Loss from discontinued operations, net of income taxes
 

 
(7.4
)
 
(0.4
)
 
(6.9
)
Amounts attributable to participating securities
 

 
0.1

 

 
0.1

Net income available to common stockholders
 
$
16.2

 
$
6.0

 
$
56.0

 
$
38.7

Weighted-average basic shares outstanding
 
16,771

 
16,738

 
16,774

 
16,737

Add: Assumed incremental shares under stock compensation plans (a)
 
317

 
211

 
294

 
254

Weighted-average diluted shares
 
17,088

 
16,949

 
17,068

 
16,991

Diluted earnings (loss) per share
 
 

 
 

 
 

 
 

Continuing operations
 
$
0.95

 
$
0.78

 
$
3.30

 
$
2.68

Discontinued operations
 

 
(0.43
)
 
(0.02
)
 
(0.40
)
 
 
$
0.95

 
$
0.35

 
$
3.28

 
$
2.28

 

(a)         For the three months ended September 30, 2016, there were no antidilutive options. For the three months ended September 30, 2015, approximately 90,000 potentially dilutive options were excluded from the computation of dilutive common shares because the exercise price of such options exceeded the average market price of the Company’s common stock. For the nine months ended September 30, 2016 and 2015, approximately 47,000 and 45,000 potentially dilutive options, respectively, were excluded from the computation of dilutive common shares because the exercise price of such options exceeded the average market price of the Company’s common stock for the respective nine month periods during which the options were outstanding.
 
Fair Value of Financial Instruments
 
The Company measures the fair value of financial instruments in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) which establishes a framework for measuring fair value. ASC Topic 820 provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
 
The following table presents the carrying value and the fair value of the Company’s debt. 
 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying
Value
 
Fair Value (a)(b)
 
Carrying
Value
 
Fair Value (a)(b)
2021 Senior Notes (5.25% fixed rate)
 
$
175.0

 
$
175.1

 
$
175.0

 
$
169.9

Global Revolving Credit Facilities (variable rates)
 
32.7

 
32.7

 
51.1

 
51.1

German loan agreement (2.45% fixed rate)
 
7.6

 
7.5

 
8.3

 
8.3

Total debt
 
$
215.3

 
$
215.3

 
$
234.4

 
$
229.3

(a)         The fair value for all debt instruments was estimated from Level 2 measurements.
(b)         The fair value of short and long-term debt is estimated using rates currently available to the Company for debt of the same remaining maturities.
 
As of September 30, 2016, the Company had $3.5 million in marketable securities classified as “Other Assets” on the condensed consolidated balance sheet. The cost of such marketable securities was $3.4 million. Fair value for the Company’s marketable securities was estimated from Level 1 inputs. The Company’s marketable securities are designated for the payment of benefits under its supplemental employee retirement plan (“SERP”). As of September 30, 2016, Neenah Germany had investments of $1.7 million that were restricted to the payment of certain post-retirement employee benefits of which $0.6 million and $1.1 million are classified as “Prepaid and other current assets” and “Other Assets”, respectively, on the condensed consolidated balance sheet.

F-6



Note 2.  Accounting Standard Changes
 
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). This guidance specifies how and when an entity will recognize revenue arising from contracts with customers and requires entities to disclose information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new revenue recognition standard and clarifying standards are effective for interim and annual periods beginning on January 1, 2018, and may be adopted earlier, but not before January 1, 2017. The Company is currently assessing the new standards and does not believe there will be a material impact from adoption on its consolidated financial statements. The Company believes it will adopt the new standards using the modified retrospective method as of January 1, 2018.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current lease accounting. The guidance also eliminates current real estate-specific provisions for all entities. ASU 2016-09 is effective for fiscal years beginning after December 15, 2018, although early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-09 on its consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 modifies the accounting for excess tax benefits and tax deficiencies associated with share-based payments and amends the associated cash flow presentation. ASU 2016-09 (i) eliminates the requirement to recognize excess tax benefits in additional paid-in capital (“APIC”), (ii) eliminates the requirement to evaluate tax deficiencies for APIC or income tax expense classification and (iii) provides for these benefits or deficiencies to be recorded as an income tax expense or benefit in the income statement. Additionally, the tax benefits related to dividends paid on share-based payment awards will be reflected as an income tax benefit in the income statement. With these changes, tax-related cash flows resulting from share-based payments will be classified as operating activities as opposed to financing activities, as currently presented. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, although early adoption is permitted. The company has elected to early adopt the standard in the three month period ended September 30, 2016, effective as if adopted on the first day of the fiscal year, January 1, 2016. As of December 31, 2015, there were no unrecognized deferred tax assets attributable to excess tax benefits. The adoption of the new standard decreased the provision for income taxes and increased income from continuing operations by $0.4 million in the third quarter of 2016. In addition, we recast our previously reported provision for income taxes and increased income from continuing operations by $0.2 million and $0.7 million for the first and second quarter of 2016, respectively.  Further, as part of the adoption, the Company elected to account for forfeitures in compensation cost as they occur. The cumulative impact for the change in election was not material. The Company elected to adopt prospectively the classification of tax-related cash flows resulting from share-based payments in operating cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230 or "ASU 2016-15"), a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017. The guidance requires application using a retrospective transition method. The Company does not expect a material impact from the adoption of ASU 2016-15 on its consolidated financial statements.

As of September 30, 2016, no other amendments to the ASC have been issued that will have or are reasonably likely to have a material effect on the Company’s financial position, results of operations or cash flows. 

Note 3.  Acquisitions
 
Acquisition of FiberMark
 
On August 1, 2015, the Company purchased all of the outstanding equity of ASP FiberMark, LLC (“FiberMark”) from ASP FiberMark Holdings, LLC for approximately $118.0 million (the “FiberMark Acquisition”). For the three and nine months ended September 30, 2016, the Company incurred $0.4 million and $2.2 million of integration costs, respectively.
 
The following selected unaudited pro forma consolidated statement of operations data for the nine months ended September 30, 2015 was prepared as though the FiberMark Acquisition had occurred as of the beginning of 2015. The information does not reflect events that occurred after September 30, 2015 or any operating efficiencies or inefficiencies that may result from the FiberMark Acquisition. Therefore, the information is not necessarily indicative of results that would have been achieved had the businesses been combined during the period presented or the results that the Company will experience going forward.
 

F-7


 
 
Nine Months Ended
September 30, 2015
Net sales
 
$
753.6

Operating income
 
82.8

Income from continuing operations
 
47.2

Income from discontinued operations
 
(6.9
)
Net income
 
40.3

Earnings Per Common Share
 
 

Basic
 
 

Continuing operations
 
$
2.79

Discontinued Operations
 
(0.41
)
 
 
$
2.38

Diluted
 
 

Continuing operations
 
$
2.75

Discontinued Operations
 
(0.40
)
 
 
$
2.35


Note 4.  Supplemental Balance Sheet Data
 
The following table presents inventories by major class:
 
 
 
September 30, 2016
 
December 31, 2015
Raw materials
 
$
31.4

 
$
30.4

Work in progress
 
31.1

 
28.9

Finished goods
 
60.8

 
67.2

Supplies and other
 
2.8

 
4.1

 
 
126.1

 
130.6

Adjust FIFO inventories to LIFO cost
 
(8.3
)
 
(10.0
)
Total
 
$
117.8

 
$
120.6

 
The FIFO values of inventories valued on the LIFO method were $114.5 million and $118.2 million as of September 30, 2016 and December 31, 2015, respectively. For the three and nine months ended September 30, 2016, income from continuing operations before income taxes was reduced by less than $0.1 million due to a decrease in certain LIFO inventory quantities.
 

F-8


The following table presents changes in accumulated other comprehensive income (“AOCI”) for the nine months ended September 30, 2016:
 
 
 
Unrealized foreign
currency translation
gain (loss)
 
Net gain (loss) from
pension and other
postretirement
liabilities
 
Unrealized gain on
“available-for-sale”
securities
 
Accumulated other
comprehensive income
(loss)
AOCI — December 31, 2015
 
$
(20.8
)
 
$
(57.5
)
 
$

 
$
(78.3
)
Other comprehensive income before reclassifications
 
0.9

 

 
0.1

 
1.0

Amounts reclassified from AOCI
 

 
5.5

 

 
5.5

Income from other comprehensive income items
 
0.9

 
5.5

 
0.1

 
6.5

Provision for income taxes
 

 
2.1

 

 
2.1

Other comprehensive income
 
0.9

 
3.4

 
0.1

 
4.4

AOCI — September 30, 2016
 
$
(19.9
)
 
$
(54.1
)
 
$
0.1

 
$
(73.9
)
 
For the nine months ended September 30, 2016 and 2015, the Company reclassified $5.5 million and $5.4 million, respectively, of costs from accumulated other comprehensive income to cost of products sold and selling, general and administrative expenses on the condensed consolidated statements of operations. For the nine months ended September 30, 2016 and 2015, the Company recognized an income tax benefit of $2.1 million and $2.0 million, respectively, related to such reclassifications classified as "Provision for income taxes" on the condensed consolidated statements of operations.

Note 5.  Debt
 
Long-term debt consisted of the following:
 
 
 
September 30, 2016
 
December 31, 2015
2021 Senior Notes (5.25% fixed rate) due May 2021
 
$
175.0

 
$
175.0

Global Revolving Credit Facilities (variable rates) due December 2019
 
32.7

 
51.1

German loan agreement (2.45% fixed rate) due in 32 equal quarterly installments ending September 2022
 
7.6

 
8.3

Deferred financing costs
 
(4.1
)
 
(5.0
)
Total debt
 
211.2

 
229.4

Less: Debt payable within one year
 
1.3

 
1.2

Long-term debt
 
$
209.9

 
$
228.2

 
2021 Senior Notes
 
In May 2013, the Company completed an underwritten offering of eight-year senior unsecured notes (the “2021 Senior Notes”) at a face amount of $175 million. The 2021 Senior Notes contain terms, covenants and events of default with which the Company must comply, which the Company believes are ordinary and standard for notes of this nature. As of September 30, 2016, the Company was in compliance with all terms of the indenture for the 2021 Senior Notes.
 
Amended and Restated Secured Revolving Credit Facility
 
In December 2014, the Company amended and restated its existing credit facility by entering into the Third Amended and Restated Credit Agreement (the “Third Amended Credit Agreement”).  The Third Amended Credit Agreement, among other things:
 
provides for a secured U.S. revolving credit facility in the maximum principal amount of $125 million (the “U.S. Revolving Credit Facility”);
provides for a secured, multicurrency, revolving credit facility for the German borrowers in the maximum principal amount of $75 million (the “German Revolving Credit Facility,” and together with the U.S. Revolving Credit Facility, the “Global Revolving Credit Facilities”); and

F-9


provides for an accordion feature permitting one or more increases in the Global Revolving Credit Facilities in an aggregate principal amount not exceeding $50 million, such that the aggregate commitments under the Global Revolving Credit Facilities do not exceed $250 million.
 
The Third Amended Credit Agreement contains covenants with which the Company and its subsidiaries must comply during the term of the agreement, which the Company believes are ordinary and standard for agreements of this nature. As of September 30, 2016, the Company was in compliance with all terms of the Third Amended Credit Agreement. In addition, if aggregate availability under the Global Revolving Credit Facilities is less than the greater of (i) $20 million or (ii) 10% of the maximum aggregate commitments under the Global Revolving Credit Facilities as then in effect, the Company is required to comply with a fixed charge coverage ratio (as defined in the Third Amended Credit Agreement) of not less than 1.1 to 1.0 for the preceding four-quarter period, tested as of the end of each quarter. As of September 30, 2016, aggregate availability under the Global Revolving Credit Facilities exceeded the minimum required amount, and the Company was not required to comply with such fixed charge coverage ratio.
 
Availability under the Global Revolving Credit Facilities varies over time depending on the value of the Company’s inventory, receivables and various capital assets. As of September 30, 2016, the Company had $32.7 million of borrowings and $1.2 million in letters of credit outstanding under the Global Revolving Credit Facilities and $113.4 million of available credit (based on exchange rates at September 30, 2016). As of September 30, 2016, the weighted-average interest rate on outstanding Global Revolving Credit Facility borrowings was 2.2 percent per annum. As of December 31, 2015, the weighted-average interest rate under the Global Revolving Credit Facilities was 1.8 percent per annum.
 
Under the terms of the 2021 Senior Notes and the Third Amended Credit Agreement, the Company has limitations on its ability to repurchase shares of and pay dividends on its Common Stock. These limitations are triggered depending on the Company’s credit availability under the Third Amended Credit Agreement and leverage levels under the Senior Notes. As of September 30, 2016, none of these covenants were restrictive to the Company’s ability to repurchase shares of and pay dividends on its Common Stock.

Borrowings and Repayments of Long-Term Debt
 
The condensed consolidated statements of cash flows present borrowings and repayments under the Global Revolving Credit Facilities using a gross approach. This approach presents not only discrete borrowings for transactions such as a business acquisition, but also reflects all borrowings and repayments that occur as part of daily management of cash receipts and disbursements. For the nine months ended September 30, 2016, the Company made scheduled debt repayments of $0.9 million and net long-term debt repayments of $19.5 million related to daily cash management activities. For the nine months ended September 30, 2015, the Company made scheduled debt repayments of $0.9 million and net long-term debt borrowings of $17.7 million related to daily cash management activities, as well as the FiberMark Acquisition.
 
Note 6.  Pension and Other Postretirement Benefits
 
Pension Plans
 
Substantially all active employees of the Company’s U.S. operations participate in defined benefit pension plans and/or defined contribution retirement plans. The Company has defined benefit plans designed to provide a monthly pension upon retirement for substantially all its employees in Germany and the United Kingdom. In addition, the Company maintains a SERP which is a non-qualified defined benefit plan and a supplemental retirement contribution plan (the “SRCP”) which is a non-qualified, unfunded defined contribution plan. The Company provides benefits under the SERP and SRCP to the extent necessary to fulfill the intent of its retirement plans without regard to the limitations set by the Internal Revenue Code on qualified and non-qualified retirement benefit plans.
 

F-10


The following table presents the components of net periodic benefit cost for the Company’s defined benefit plans and postretirement plans other than pensions:
 
Components of Net Periodic Benefit Cost for Defined Benefit Plans
 
 
 
Pension Benefits
 
Postretirement Benefits
Other than Pensions
 
 
Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
1.2

 
$
1.4

 
$
0.3

 
$
0.4

Interest cost
 
4.0

 
3.6

 
0.4

 
0.4

Expected return on plan assets (a)
 
(4.7
)
 
(5.0
)
 

 

Recognized net actuarial loss
 
1.6

 
1.6

 
0.1

 

Amortization of prior service benefit
 
0.1

 
0.1

 
(0.1
)
 
(0.1
)
Net periodic benefit cost
 
$
2.2

 
$
1.7

 
$
0.7

 
$
0.7

 
 
 
Pension Benefits
 
Postretirement Benefits
Other than Pensions
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
3.6

 
$
4.2

 
$
0.9

 
$
1.1

Interest cost
 
12.0

 
10.2

 
1.2

 
1.2

Expected return on plan assets (a)
 
(14.2
)
 
(14.1
)
 

 

Recognized net actuarial loss
 
4.9

 
4.7

 
0.2

 
0.1

Amortization of prior service benefit
 
0.2

 
0.2

 
(0.2
)
 
(0.2
)
Net periodic benefit cost
 
$
6.5

 
$
5.2

 
$
2.1

 
$
2.2

 

(a)         The expected return on plan assets is determined by multiplying the fair value of plan assets at the prior year-end (adjusted for estimated current year cash benefit payments and contributions) by the expected long-term rate of return.
 
The Company expects to make aggregate contributions to qualified and nonqualified defined benefit pension trusts and to pay pension benefits for unfunded pension plans of approximately $10 million in calendar 2016.  For the nine months ended September 30, 2016, the Company made $5.6 million of such payments. The Company made similar payments of $1.3 million and $2.8 million for the nine months ended September 30, 2015 and for the year ended December 31, 2015, respectively.

Note 7.  Stock Compensation Plan
 
Stock Options and Stock Appreciation Rights (“Options”)
 
The following table presents information regarding Options awarded during the nine months ended September 30, 2016:
 
Options granted
113,935

Per share weighted average exercise price
$
58.03

Per share weighted average grant date fair value
$
13.51

 
The weighted-average grant date fair value for Options granted during the nine months ended September 30, 2016 was estimated using the Black-Scholes option valuation model with the following assumptions:
 
Expected term in years
5.8

Risk free interest rate
1.8
%
Volatility
32.1
%
Dividend yield
3.0
%
 
The following table presents information regarding Options that vested during the nine months ended September 30, 2016:
 
Options vested
91,022

Aggregate grant date fair value of Options vested (in millions)
$
1.2

 
The following table presents information regarding outstanding Options:
 
 
 
September 30, 2016
 
December 31, 2015
Options outstanding
 
546,008

 
526,611

Aggregate intrinsic value (in millions)
 
$
22.3

 
$
16.1

Per share weighted average exercise price
 
$
38.08

 
$
31.94

Exercisable Options
 
225,972

 
232,594

Aggregate intrinsic value (in millions)
 
$
11.1

 
$
9.0

Unvested Options
 
320,036

 
294,017

Per share weighted average grant date fair value
 
$
12.44

 
$
12.09


F-11


 
Performance Share Units (“PSUs”) and Restricted Share Units (“RSUs”)
 
For the nine months ended September 30, 2016, the Company granted target awards of approximately 54,364 PSUs. The measurement period for the PSUs is January 1, 2016 through December 31, 2016. The PSUs vest on December 31, 2018. Common Stock equal to not less than 40 percent and not more than 200 percent of the PSUs target will be awarded based on the Company’s return on invested capital, consolidated revenue growth and total return to shareholders relative to the companies in the Russell 2000® Value small cap index. The market price on the date of grant for the PSUs was $57.95 per share.
 
For the nine months ended September 30, 2016, the Company awarded 1,652 RSUs to employees and 8,083 RSUs to non-employee members of the Board of Directors. The weighted average grant date fair value of such awards was $67.77 per share and the awards vest one year from the date of grant. During the vesting period, the holders of the RSUs are entitled to dividends, but the RSUs do not have voting rights and are forfeited in the event the holder is no longer an employee or member of the Board of Directors on the vesting date.
 
Note 8.  Stockholders’ Equity
 
Common Stock
 
As of September 30, 2016 and December 31, 2015, the Company had 16,762,893 shares and 16,819,000 shares of Common Stock outstanding, respectively.

In May 2016, the Company’s Board of Directors authorized a program that would allow the Company to repurchase up to $25 million of its outstanding Common Stock over the next 12 months (the “2016 Stock Purchase Plan”). The Company also had $25 million repurchase programs in place during the preceding two years that expired in May 2016 (the “2015 Stock Purchase Plan”) and May 2015 (the “2014 Stock Purchase Plan”), respectively. The following table shows shares purchased under the respective stock purchase plans:
 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
Shares
 
$
 
Shares
 
$
2016 Stock Purchase Plan
 
33,800

 
$
2.6

 

 
$

2015 Stock Purchase Plan
 
93,600

 
5.2

 
42,100

 
2.4

2014 Stock Purchase Plan
 

 

 
60,900

 
3.4

 

F-12


Note 9.  Contingencies and Legal Matters
 
Litigation
 
The Company is involved in certain legal actions and claims arising in the ordinary course of business. While the outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material effect on the consolidated financial condition, results of operations or cash flows of the Company.

Income Taxes
 
The Company periodically undergoes examination by the Internal Revenue Service (the “IRS”) as well as various state and foreign jurisdictions. These tax authorities routinely challenge certain deductions and credits reported by the Company on its income tax returns. No significant tax audit findings are being contested at this time with either the IRS or any state or foreign tax authority.
 
Employees and Labor Relations
 
The Company’s U.S. union employees are represented by the United Steelworkers Union (the “USW”).  Approximately 50 percent of salaried employees and 80 percent of hourly employees of Neenah Germany are eligible to be represented by the Mining, Chemicals and Energy Trade Union, Industriegewerkschaft Bergbau, Chemie and Energie (the “IG BCE”). As of September 30, 2016, the Company had approximately 189 U.S. employees covered under collective bargaining agreements that will expire in the next 12 months. The following table shows the expiration dates of the Company’s various bargaining agreements and the number of employees covered under each of these agreements.
 
Contract Expiration
Date
Location
Union
Number of
Employees
September 2016 (a)
Reading, PA
USW
29

November 2016
Brattleboro, VT
USW
70

November 2016
Lowville, NY
USW
90

June 2017
Neenah Germany
IG BCE
(b)

January 2018
Whiting, WI
USW
204

June 2018
Neenah, WI
USW
266

July 2018
Munising, MI
USW
201

May 2019
Appleton, WI
USW
77

 
(a)
We have announced the closure of the Reading facility by mid-2017. The current collective bargaining arrangement will remain in effect until that time.
(b)         Under German law union membership is voluntary and does not need to be disclosed to the Company. As a result, the number of employees covered by the collective bargaining agreement with the IG BCE cannot be determined.
 
The Company’s United Kingdom salaried and hourly employees are eligible to participate in Unite the Union (“UNITE”) on an individual basis, but not under a collective bargaining agreement. 
Note 10.  Discontinued Operations
 
Discontinued Operations
 
On October 31, 2015, the Company sold the Lahnstein Mill to the Kajo Neukirchen Group (“the Acquirer”) for net cash proceeds of approximately $5.4 million. During the second quarter of 2016, the Company and the Acquirer finalized the purchase price for the Lahnstein Mill, which resulted in a payment by the Company of $0.5 million to the Acquirer. The Company recognized this payment, plus associated transaction costs, as a loss from discontinued operations of $0.6 million ($0.4 million, net of tax) in our consolidated statement of operations for the nine months ended September 30, 2016.

The condensed consolidated statement of operations for the three and nine months ended September 30, 2015 present the results of the Lahnstein Mill and the loss on sale of $6.9 million as discontinued operations. The results of the Lahnstein Mill were previously reported in the Technical Products segment. The following table presents the selected financial information for discontinued operations:

F-13


 
 
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
Net sales
 
$
12.2

 
$
38.8

Cost of products sold
 
11.5

 
35.5

Gross profit
 
0.7

 
3.3

Selling, general and administrative expenses and other expenses
 
0.9

 
2.9

(Loss) Income from discontinued operations before income taxes
 
(0.2
)
 
0.4

Loss on sale
 
(6.9
)
 
(6.9
)
Loss before income taxes
 
(7.1
)
 
(6.5
)
Income tax provision
 
0.3

 
0.4

Loss from discontinued operations
 
$
(7.4
)
 
$
(6.9
)


 The following table presents selected cash flow information for discontinued operations:
 
 
Nine Months Ended
September 30, 2015
Depreciation and amortization
$
2.5

Capital expenditures
$
0.4

 
Note 11.  Business Segment Information
 
The Company’s reportable operating segments consist of Technical Products, Fine Paper and Packaging and Other.
 
The Technical Products segment is an aggregation of the Company’s filtration and performance materials businesses which are similar in terms of economic characteristics, nature of products, processes, customer class and product distribution methods and is an international producer of fiber-formed, coated and/or saturated specialized media that delivers high performance benefits to customers. Included in this segment are filtration media, tape and abrasives backings products, and durable label and specialty substrate products.

The Fine Paper and Packaging business is a leading supplier of premium printing and other high-end specialty papers, premium packaging and specialty office papers primarily in North America.

The Other segment is composed of papers sold to converters for end uses such as covering materials for datebooks, diaries, yearbooks and traditional photo albums. These product lines represent an operating segment which does not meet the quantitative threshold for a reportable segment, however, due to the dissimilar nature of these products, they are not managed as part of either the Fine Paper and Packaging or Technical Products businesses.
 
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 eliminated in consolidation. The costs of shared services, and other administrative functions managed on a common basis, are allocated to the segments based on usage, where possible, or other factors based on the nature of the activity. General corporate expenses that do not directly support the operations of the business segments are shown as Unallocated corporate costs.
 

F-14


The following table summarizes the net sales and operating income for each of the Company’s business segments.
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
 

 
 

 
 

 
 

Technical Products
 
$
114.1

 
$
108.9

 
$
362.1

 
$
321.2

Fine Paper and Packaging
 
112.9

 
116.9

 
340.4

 
330.3

Other
 
5.9

 
5.8

 
18.5

 
5.8

Consolidated
 
$
232.9

 
$
231.6

 
$
721.0

 
$
657.3

 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating income (loss)
 
 

 
 

 
 

 
 

Technical Products
 
$
14.1

 
$
11.0

 
$
53.4

 
$
41.7

Fine Paper and Packaging
 
17.3

 
17.2

 
53.2

 
52.2

Other
 
0.1

 
(0.2
)
 
0.1

 
(0.2
)
Unallocated corporate costs
 
(4.6
)
 
(3.6
)
 
(14.5
)
 
(13.2
)
Consolidated
 
$
26.9

 
$
24.4

 
$
92.2

 
$
80.5



F-15


Item 2.  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 financial position as of September 30, 2016 and our results of operations for the three and nine months ended September 30, 2016 and 2015. You should read this discussion in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included in our most recent Annual Report on Form 10-K. 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.
 
Executive Summary
 
For the three months ended September 30, 2016, consolidated net sales of $232.9 million increased $1.3 million (1%) from the prior year period $231.6 million as revenues related to the August 1, 2015, FiberMark Acquisition and incremental Technical Products volume growth, were partially offset by a decline in average net selling prices primarily due to mix in both segments and lower volumes in Fine Paper and Packaging.
 
Consolidated operating income of $26.9 million for the three months ended September 30, 2016 increased $2.5 million (10%) from the prior year period. The favorable comparison was primarily due to lower manufacturing costs resulting from reduced prices for materials, increased acquisition synergies and operational efficiencies, higher volume, and lower integration and restructuring costs. These favorable variances were partially offset by lower net selling prices, mostly due to the mix of products sold. 

Cash provided by operating activities of $97.7 million for the nine months ended September 30, 2016 was $18.2 million higher than cash generated of $79.5 million in the prior year period, primarily due to higher operating earnings and a decrease in our investment in working capital, partly offset by higher post-retirement benefit contributions in the current year.


Results of Operations and Related Information
 
In this section, we discuss and analyze our net sales, earnings before interest and taxes (which we refer to as “operating income”) and other information relevant to an understanding of our results of operations for the three and nine months ended September 30, 2016 and 2015.
 
Analysis of Net Sales — Three and nine months ended September 30, 2016 and 2015
 
The following table presents net sales by segment, expressed as a percentage of total net sales:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Technical Products
 
$
114.1

 
49
%
 
$
108.9

 
47
%
 
$
362.1

 
50
%
 
$
321.2

 
49
%
Fine Paper and Packaging
 
112.9

 
48
%
 
116.9

 
50
%
 
340.4

 
47
%
 
330.3

 
50
%
Other
 
5.9

 
3
%
 
5.8

 
3
%
 
18.5

 
3
%
 
5.8

 
1
%
Consolidated
 
$
232.9

 
100
%
 
$
231.6

 
100
%
 
$
721.0

 
100
%
 
$
657.3

 
100
%


F-16


Commentary:
 
The following table presents our net sales by segment for the three months ended September 30, 2016 and 2015:
 
 
 
Three Months Ended September 30,
 
Change in Net Sales Compared to Prior Period
 
 
 
 
 
Change Due To
 
 
2016
 
2015
 
Total Change
 
Volume
 
Net Price
 
Currency
Technical Products
 
$
114.1

 
$
108.9

 
$
5.2

 
$
9.8

 
$
(4.3
)
 
$
(0.3
)
Fine Paper and Packaging
 
112.9

 
116.9

 
$
(4.0
)
 
(1.9
)
 
(2.1
)
 

Other
 
5.9

 
5.8

 
$
0.1

 
0.1

 

 

Consolidated
 
$
232.9

 
$
231.6

 
$
1.3

 
$
8.0

 
$
(6.4
)
 
$
(0.3
)
 
Consolidated net sales for the three months ended September 30, 2016 were $1.3 million (1%) higher than the prior year period as revenues related to the FiberMark Acquisition and incremental Technical Products volume growth, were partially offset by a decline in average net selling prices primarily due to mix in both segments and lower volumes in Fine Paper and Packaging.
 
Net sales in our technical products business increased $5.2 million (5%) from the prior period due to acquired sales and organic volume growth led by transportation filtration and tape and abrasive backings. These items were partially offset by a decline in net selling prices resulting from a lower-priced mix of products sold and reduced selling prices on products with contractual adjusters for certain input costs.
 
Net sales in our fine paper and packaging business decreased $4.0 million (3%) from the prior year period due to a decline in average net selling price due to a lower-priced mix of products sold, and reduced organic volume compared to a strong third quarter of 2015. The sales mix in 2016 reflected a higher proportion of sales of non-branded products. These items were only partially offset by acquired volume and increased list prices for some products.
 
The following table presents our net sales by segment for the nine months ended September 30, 2016 and 2015:
 
 
 
Nine Months Ended September 30,
 
Change in Net Sales Compared to Prior Period
 
 
 
 
 
Change Due To
 
 
2016
 
2015
 
Total Change
 
Volume
 
Net Price
 
Currency
Technical Products
 
$
362.1

 
$
321.2

 
$
40.9

 
$
50.9

 
$
(9.6
)
 
$
(0.4
)
Fine Paper and Packaging
 
340.4

 
330.3

 
$
10.1

 
14.8

 
(4.7
)
 

Other
 
18.5

 
5.8

 
$
12.7

 
12.7

 

 

Consolidated
 
$
721.0

 
$
657.3

 
$
63.7

 
$
78.4

 
$
(14.3
)
 
$
(0.4
)
 
Consolidated net sales for the nine months ended September 30, 2016 were $63.7 million (10%) higher than the prior year period as revenues related to the FiberMark Acquisition and incremental volume growth more than offset lower net selling prices.
 
Net sales in our technical products business increased $40.9 million (13%) from the prior period due to acquired volume and organic volume growth, which were partially offset by lower net selling prices.

Net sales in our fine paper and packaging business increased $10.1 million (3%) from the prior year period due to acquired volume, which was partially offset by lower net selling prices.

Net sales in our other business segment increased $12.7 million from the prior year period due to acquired volume.


F-17


Analysis of Operating Income—Three and nine months ended September 30, 2016 and 2015
 
The following table sets forth line items from our condensed 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:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net sales
 
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
%
Cost of products sold
 
78.9
%
 
79.1
 %
 
76.7
%
 
77.8
%
Gross profit
 
21.1
%
 
20.9
 %
 
23.3
%
 
22.2
%
Selling, general and administrative expenses
 
9.0
%
 
9.2
 %
 
10.0
%
 
9.4
%
Integration/restructuring costs
 
0.5
%
 
1.2
 %
 
0.5
%
 
0.4
%
Other expense (income) - net
 
%
 
 %
 
%
 
0.1
%
Operating income
 
11.6
%
 
10.5
 %
 
12.8
%
 
12.2
%
Interest expense - net
 
1.2
%
 
1.2
 %
 
1.2
%
 
1.3
%
Income from continuing operations before income taxes
 
10.4
%
 
9.3
 %
 
11.6
%
 
10.9
%
Provision for income taxes
 
3.4
%
 
3.5
 %
 
3.7
%
 
3.9
%
Income from continuing operations
 
7.0
%
 
5.8
 %
 
7.9
%
 
7.0
%
 
Commentary:
 
The following table presents our operating income by segment for the three months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
Change in Operating Income Compared to Prior Period
 
 
Three Months Ended September 30,
 
 
 
Change Due To
 
 
 
Total
 
 
 
Net
 
Input
 
 
 
 
 
 
2016
 
2015
 
Change
 
Volume
 
Price (a)
 
Costs (b)
 
Currency
 
Other (c)
Technical Products
 
$
14.1

 
$
11.0

 
$
3.1

 
$
1.8

 
$
(3.2
)
 
$
2.5

 
$
(0.1
)
 
$
2.1

Fine Paper and Packaging
 
17.3

 
17.2

 
0.1

 
(1.2
)
 
(2.3
)
 
3.0

 

 
0.6

Other
 
0.1

 
(0.2
)
 
0.3

 
0.1

 

 

 

 
0.2

Unallocated corporate costs
 
(4.6
)
 
(3.6
)
 
(1.0
)
 

 

 

 

 
(1.0
)
Consolidated
 
$
26.9

 
$
24.4

 
$
2.5

 
$
0.7

 
$
(5.5
)
 
$
5.5

 
$
(0.1
)
 
$
1.9

 

(a)         Includes changes in selling price and product mix.
(b)         Includes price changes for raw materials, energy, and acquisition related purchasing synergies.
(c)          Includes other manufacturing costs, over (under) absorption of fixed costs, distribution and SG&A expenses, and integration/restructuring costs and other acquisition-related synergies.
 
Consolidated operating income of $26.9 million for the three months ended September 30, 2016 increased $2.5 million (10%) from the prior year period.  The favorable comparison was primarily due to lower manufacturing costs resulting from reduced prices for materials, increased acquisition synergies and operational efficiencies, higher volume, and lower integration and restructuring costs. These favorable variances were partially offset by lower net selling prices, mostly due to the mix of products sold.  Excluding integration and restructuring costs of $1.2 million and $2.9 million for 2016 and 2015, respectively, operating income increased $0.8 million (3%).
 
Operating income for our technical products business increased $3.1 million (28%) from the prior year period primarily due to incremental volume growth, lower manufacturing costs resulting from lower material prices and operational efficiencies, and lower integration and restructuring costs. These favorable variances were partially offset by added SG&A from the acquisition and lower net selling prices. Excluding integration and restructuring costs of $0.1 million and $1.1 million for 2016 and 2015, respectively, operating income increased $2.1 million (17%) from the prior year.


F-18


Operating income for our fine paper and packaging business increased $0.1 million (1%) from the prior year period as lower manufacturing material prices, reduced SG&A expense, and lower integration costs, combined, were mostly offset by a lower-priced mix of products sold and lower volumes. Excluding integration costs of $0.3 million and $0.9 million for 2016 and 2015, respectively, operating income decreased $0.5 million (3%).
 
Unallocated corporate expenses for the three months ended September 30, 2016 of $4.6 million were $1.0 million higher than the prior year period. The unfavorable comparison to the prior year period is primarily due to the non-capitalizable costs related to the U.S. Filtration project, which is expected to go into production in early 2017.
 
The following table presents our operating income by segment for the nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
Change in Operating Income Compared to Prior Period
 
 
Nine Months Ended September 30,
 
 
 
Change Due To
 
 
 
Total
 
 
 
Net
 
Input
 
 
 
 
 
 
2016
 
2015
 
Change
 
Volume
 
Price (a)
 
Costs (b)
 
Currency
 
Other (c)
Technical Products
 
$
53.4

 
$
41.7

 
$
11.7

 
$
10.3

 
$
(4.8
)
 
$
7.8

 
$
(0.2
)
 
$
(1.4
)
Fine Paper and Packaging
 
53.2

 
52.2

 
1.0

 
(0.6
)
 
(3.0
)
 
9.0

 

 
(4.4
)
Other
 
0.1

 
(0.2
)
 
0.3

 
1.3

 

 

 

 
(1.0
)
Unallocated corporate costs
 
(14.5
)
 
(13.2
)
 
(1.3
)
 

 

 

 

 
(1.3
)
Consolidated
 
$
92.2

 
$
80.5

 
$
11.7

 
$
11.0

 
$
(7.8
)
 
$
16.8

 
$
(0.2
)
 
$
(8.1
)
 

(a)         Includes changes in selling price and product mix.
(b)         Includes price changes for raw materials, energy, and acquisition related purchasing synergies.
(c)          Includes other manufacturing costs, over (under) absorption of fixed costs, distribution and SG&A expenses, integration/restructuring costs, and other acquisition related synergies.
 
Consolidated operating income of $92.2 million for the nine months ended September 30, 2016 increased $11.7 million (15%) from the prior year period. The favorable comparison was primarily due to lower manufacturing material costs (including purchasing synergies resulting from the FiberMark Acquisition), and incremental volume and increased sales. These favorable variances were partially offset by incremental acquired SG&A, integration and restructuring costs, and lower net selling prices. Excluding integration and restructuring costs of $3.7 million and $2.9 million for 2016 and 2015, respectively, operating income increased $12.5 million (15%).
 
Operating income for our technical products business increased $11.7 million (28%) from the prior year period primarily due to incremental volume growth, lower manufacturing material and other costs and lower integration and restructuring costs. These favorable variances were partially offset by incremental acquired SG&A and lower net selling prices. Excluding integration and restructuring costs of $0.6 million and $1.1 million for 2016 and 2015, respectively, operating income increased $11.2 million (26%).

Operating income for our fine paper and packaging business increased $1.0 million (2%) from the prior year period as lower manufacturing material costs and manufacturing efficiencies were partially offset by lower net selling prices, incremental acquired SG&A, and higher integration costs. Excluding integration costs of $1.1 million and $0.9 million for 2016 and 2015, respectively, operating income increased $1.2 million (2%).

Unallocated corporate expenses for the nine months ended September 30, 2016 of $14.5 million were $1.3 million higher than the prior year period. The unfavorable comparison to the prior year period is primarily due to the non-capitalizable costs related to the U.S. Filtration project, which is expected to go into production in early 2017.


F-19


The following table sets forth our operating income by segment, adjusted for the effects of integration and restructuring costs, for the periods indicated:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating income
 
 

 
 

 
 

 
 

Technical Products
 
$
14.1

 
$
11.0

 
$
53.4

 
$
41.7

Fine Paper and Packaging
 
17.3

 
17.2

 
53.2

 
52.2

Other
 
0.1

 
(0.2
)
 
0.1

 
(0.2
)
Unallocated corporate costs
 
(4.6
)
 
(3.6
)
 
(14.5
)
 
(13.2
)
Operating Income as Reported
 
$
26.9

 
$
24.4

 
$
92.2

 
$
80.5

Adjustments to Reported Operating Income
 
 

 
 

 
 

 
 

Technical Products
 
 

 
 

 
 

 
 

Integration/Restructuring costs
 
0.1

 
1.1

 
0.6

 
1.1

Fine Paper and Packaging
 
 

 
 

 
 

 
 

Integration costs
 
0.3

 
0.9

 
1.1

 
0.9

Other
 
 

 
 

 
 

 
 

Integration costs
 

 
0.3

 
0.6

 
0.3

Unallocated corporate costs
 
 

 
 

 
 

 
 

Restructuring costs
 
0.8

 
0.6

 
1.4

 
0.6

Total Adjustments to Reported Operating Income
 
1.2

 
2.9

 
3.7

 
2.9

Operating Income as Adjusted
 
$
28.1

 
$
27.3

 
$
95.9

 
$
83.4

 
In accordance with generally accepted accounting principles in the United States (“GAAP”), consolidated operating income includes the pre-tax effects of integration and restructuring costs. We believe that by adjusting reported operating income to exclude the effects of these items, the resulting adjusted operating income is on a basis that reflects the results of our ongoing operations. We believe that providing adjusted operating results will help investors gain an additional perspective of underlying business trends and results. Adjusted operating income is not a recognized term under GAAP and should not be considered in isolation or as a substitute for operating income derived in accordance with GAAP. Other companies may use different methodologies for calculating their non-GAAP financial measures and, accordingly, our non-GAAP financial measures may not be comparable to their measures.
 
Additional Statement of Operations Commentary:
 
SG&A expense of $21.0 million for the three months ended September 30, 2016 was $0.2 million lower than SG&A expense of $21.2 million in the prior year period as incremental acquired SG&A was offset by reduced expense due to timing of certain items. For the three months ended September 30, 2016, SG&A expense as a percent of sales decreased to 9.0 percent from 9.2 percent in the prior year period.
 
For the three months ended September 30, 2016, we incurred net interest expense of $2.7 million which was slightly lower than the prior year period due to higher borrowings in the third quarter of 2015 under our Global Revolving Credit Facilities to partially fund the FiberMark Acquisition.
 
In general, our effective tax rate differs from the U.S. statutory tax rate of 35 percent primarily due to the proportion of pre-tax income in jurisdictions with marginal tax rates that differ from the U.S. statutory tax rate. For the three months ended September 30, 2016 and 2015, we recorded an income tax provision of $7.8 million and $8.0 million, respectively. The effective income tax rate of 32 percent for the three months ended September 30, 2016 was lower than the tax rate of 37 percent for the three months ended September 30, 2015. The 2015 rate was unusually high due to an adjustment to the amount of state R&D Credits which were expected to be utilized prior to expiration as a result of the FiberMark acquisition. For 2016, the adoption of ASU 2016-09, as discussed in Note 2 in the consolidated financial statements, allowed excess tax benefits from share-based payments to be shown as a reduction to income tax expense and reduced the rate for the quarter by 1.75 percent. Our effective income tax rate of 32 percent for the nine months ended September 30, 2016 was consistent with the full-year rate for 2015.
 

F-20


Liquidity and Capital Resources
 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Net cash flow provided by (used in):
 
 

 
 

Operating activities
 
$
97.7

 
$
79.5

Investing activities:
 
 

 
 

Capital expenditures
 
(49.4
)
 
(25.7
)
Acquisitions
 

 
(118.2
)
Other investing activities
 
(0.1
)
 
0.4

Total
 
(49.5
)
 
(143.5
)
Financing activities:
 
 
 
 
Net (repayments) borrowings of long-term debt
 
(20.4
)
 
16.8

Other financing activities
 
(24.5
)
 
(19.2
)
Total
 
(44.9
)
 
(2.4
)
Effect of exchange rate changes on cash and cash equivalents
 
(0.2
)
 
(0.7
)
Net increase (decrease) in cash and cash equivalents
 
$
3.1

 
$
(67.1
)
 
Operating Cash Flow Commentary
 
Cash provided by operating activities of $97.7 million for the nine months ended September 30, 2016 was $18.2 million higher than cash provided by operating activities of $79.5 million in the prior year period. The favorable comparison was primarily due to higher operating earnings and a decrease in our investment in working capital, partly offset by higher post-retirement benefit contributions in the current year.
 
Investing Commentary:
 
For the nine months ended September 30, 2016 and 2015, cash used by investing activities was $49.5 million and $143.5 million, respectively. Cash used by investing activities for the nine months ended September 30, 2015 includes acquisition related spending of $118.2 million. Capital expenditures for the nine months ended September 30, 2016 were $49.4 million compared to spending of $25.7 million in the prior year period. In general, we expect aggregate annual capital expenditures of approximately 3 to 5 percent of net sales. For 2016, we expect annual capital expenditures of approximately $75 million to exceed our normal level of spending due to incremental investments in filtration assets in the U.S. We expect that capital spending will return to our normal range in 2017. We believe that the level of our capital spending can be more than adequately funded from cash provided from operating activities and allows us to maintain the efficiency and cost effectiveness of our assets and also invest in expanded manufacturing capabilities to successfully pursue strategic initiatives and deliver attractive returns.
 
Financing Commentary:
 
Our liquidity requirements are provided by cash generated from operations and short and long-term borrowings.
 
For the nine months ended September 30, 2016 and 2015, cash used in financing activities was $44.9 million and $2.4 million, respectively. Cash used in financing activities consists primarily of net repayments of long-term debt, dividends paid, and share repurchases. For the nine months ended September 30, 2015, we drew down from our Global Revolving Credit Facilities to fund the FiberMark Acquisition.

Availability under our revolving credit facility varies over time depending on the value of our inventory, receivables and various capital assets. As of September 30, 2016, we had $32.7 million outstanding under our Global Revolving Credit Facilities and $113.4 million of available credit (based on exchange rates at September 30, 2016).

We have required debt principal payments through September 30, 2017 of $1.3 million for principal payments on the German loan agreement.



F-21


For the nine months ended September 30, 2016, cash and cash equivalents increased $3.1 million to $7.3 million at September 30, 2016 from $4.2 million at December 31, 2015. Total debt decreased $18.2 million to $211.2 million at September 30, 2016 from $229.4 million at December 31, 2015. Net debt (total debt minus cash and cash equivalents) decreased by $21.3 million.

As of September 30, 2016, our cash balance of $7.3 million consists of $4.6 million in the U.S. and $2.7 million held at entities outside of the U.S. As of September 30, 2016, there were no restrictions regarding the repatriation of our non-U.S. cash and, we believe, the repatriation of these cash balances to the U.S. would not materially increase our income tax provision.

Transactions With Shareholders
 
In November 2015, our Board of Directors approved a ten percent increase in the annual dividend rate on our common stock to $1.32 per share. Beginning in March 2016, the dividend is being paid in four equal quarterly installments of $0.33 per share. For the nine months ended September 30, 2016 and 2015, we paid cash dividends of $0.99 per common share or $16.8 million and $0.90 per common share or $15.2 million, respectively.

Purchases under the 2016 Stock Purchase Plan will be made from time to time in the open market or in privately negotiated transactions in accordance with the requirements of applicable law. The timing and amount of any purchases will depend on share price, market conditions and other factors. The 2016 Stock Purchase Plan does not require us to purchase any specific number of shares and may be suspended or discontinued at any time. For the nine months ended September 30, 2016 and 2015, we repurchased approximately 127,400 shares of Common Stock at a cost of $7.8 million and 103,000 shares of Common Stock at a cost of $5.8 million, respectively. For further details on our Stock Purchase Plans refer to Note 8.
 
Other Items: