Background and Basis of Presentation

9 Months Ended

Sep. 30, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Background

Neenah, Inc. ("Neenah" or the "Company"), is a Delaware corporation incorporated in April 2004. The Company has two 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 annual 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.

Impacts of COVID-19

The Company continues to assess the impacts of the novel coronavirus pandemic (“COVID-19” or the "pandemic") on its various accounting estimates and significant judgments, including those that require consideration of forecasted financial information in the context of the unknown future impacts of COVID-19, using information that is reasonably available at this time. The accounting estimates and other matters assessed included, but were not limited to, goodwill, indefinite-lived intangibles and other long-lived assets, allowance for uncollectible accounts receivable, valuation allowances for tax assets and revenue recognition. Based on the Company’s assessment of these estimates and due to the adverse impacts of COVID-19, during the three months ended June 30, 2020, the Company recorded a non-cash impairment loss of $52.3 million to write-down certain long-lived assets, and $2.6 million of restructuring charges due to the idling of a fine paper machine and other smaller assets and $0.4 million of related severance costs. See Note 10, "Asset Restructuring and Impairment Costs" for further discussion. During the three months ended September 30, 2020, the Company qualitatively reviewed its fixed assets and intangibles including goodwill and indefinite-lived intangibles and noted no impairment indicators triggered.

The Company also recorded incremental and direct costs of responding to COVID-19 including purchases of personal protective equipment and additional cleaning and sanitation costs of $2.1 million for the nine months ended September 30, 2020. This included a one-time special payment to its mill operators of $1.1 million related to COVID-19 during the three months ended March 31, 2020.

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,
	2020		2019		2020		2019
Income (loss) from continuing operations	$	7.9	$	14.4	$	(25.8)	$	39.8
Amounts attributable to participating securities	(0.1)		(0.1)		(0.2)		(0.2)


Net income (loss) available to common stockholders	$	7.8	$	14.3	$	(26.0)	$	39.6

Weighted-average basic shares outstanding	16,802		16,837		16,810		16,850



Basic earnings (loss) per share	$	0.46	$	0.85	$	(1.55)	$	2.35

Earnings (Loss) Per Diluted Common Share


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Income (loss) from continuing operations	$	7.9	$	14.4	$	(25.8)	$	39.8
Amounts attributable to participating securities	(0.1)		(0.1)		(0.2)		(0.2)


Net income (loss) available to common stockholders	$	7.8	$	14.3	$	(26.0)	$	39.6

Weighted-average basic shares outstanding	16,802		16,837		16,810		16,850
Add: Assumed incremental shares under stock compensation plans (a)	19		68		—		60
Weighted-average diluted shares	16,821		16,905		16,810		16,910



Diluted earnings (loss) per share	$	0.46	$	0.84	$	(1.55)	$	2.33

(a) For the three months ended September 30, 2020 and 2019, there were 330,789 and 231,471 potentially dilutive options, respectively, 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, 2020 and 2019, there were 337,180 and 231,199 potentially dilutive options, respectively, similarly excluded from the computation of dilutive common shares. In addition, as a result of the loss from continuing operations for the nine months ended September 30, 2020, incremental shares of 25,626, resulting from the dilutive options and performance share units, were excluded from the diluted earnings per share calculation as the effect would have been anti-dilutive.

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).

As of September 30, 2020, the carrying values of the Company’s debt approximated fair value.The fair value for all debt instruments was estimated from Level 2 measurements using rates currently available to the Company for debt of the same remaining maturities.

As of September 30, 2020, the Company had $4.1 million in marketable securities in the U.S. classified as "Other Noncurrent Assets" on the Condensed Consolidated Balance Sheet. The cost of such marketable securities was $4.5 million. Fair value for the Company’s marketable securities was estimated from Level 1 inputs. The Company’s U.S. marketable securities are

designated for the payment of benefits under its supplemental employee retirement plan ("SERP"). As of September 30, 2020, Neenah Germany had investments of $2.3 million that were restricted to the payment of certain post-retirement employee benefits of which $0.7 million and $1.6 million are classified as "Prepaid and other current assets" and "Other Noncurrent Assets", respectively, on the Condensed Consolidated Balance Sheet. The cost of these investments approximated market.

Revenue from Contracts with Customers

The Company recognizes sales revenue at a point in time following the transfer of control of the product to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Sales are reported net of allowable discounts and estimated returns. Reserves for cash discounts, trade allowances and sales returns are estimated using historical experience. The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, the Company records customer payments of shipping and handling costs as a component of net sales and classifies such costs as a component of cost of sales. The Company excludes tax amounts assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers from our measurement of transaction prices. Accordingly, such tax amounts are not included as a component of net sales or cost of sales.

The Company considers each transaction/shipment as a separate performance obligation. Neenah recognizes revenue when the title transfers to the customer. As such, the remaining performance obligations at period end are not considered significant.

Sales terms in the technical products business vary depending on the type of product sold and customer category. In general, sales are collected in 45 to 55 days. Credit terms of up to 120 days are offered to customers located in certain international markets. Fine paper and packaging sales terms range between 20 and 30 days with discounts of 0 to 2% for customer payments, with discounts of 1% and 20-day terms used most often. Credit terms of up to 90 days are offered to customers located in certain international markets.

Refer to Note 11, "Business Segment Information" for disaggregation of segment revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019.

Allowance for Uncollectible Accounts Receivable

In January 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model (known as the "current expected credit loss model" or "CECL") that is based on expected losses rather than incurred losses. The adoption of this standard did not have a material impact on the Company's financial position, results of operations and cash flows. Losses on receivables are estimated based on known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written-off when it is probable that contractual payments due will not be collected in accordance with the terms of the agreement. The allowance for uncollectible accounts receivable was $1.7 million and $1.5 million as of September 30, 2020 and December 31, 2019. The Company recorded a $1.0 million provision for uncollectible accounts receivable from the impacts of COVID-19 for the three months ended March 31, 2020. For the three months ended September 30, 2020, the provision for uncollectible accounts receivable was reduced by $0.3 million as a result of improved collections.

Leases

The Company has operating leases for corporate offices, warehouses, converting operations, and certain equipment, with remaining lease terms of up to 11 years, some of which include options to extend the leases for up to five years. The Company determines if an arrangement is a lease at inception. Operating leases with terms greater than 12 months are included in "Lease Right-of-Use Assets", "Lease liabilities payable within one year" and "Noncurrent Lease Liabilities" on the Condensed Consolidated Balance Sheets. As of September 30, 2020, the Company did not have any material financing leases.

In March 2020, the Company entered into operating leases for two warehouse buildings, and recognized a right-of-use ("ROU") asset and a corresponding lease liability of $6.6 million with a term of 10 years, and an ROU asset and corresponding lease liability of $1.8 million with a term of 5 years. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.