Neenah Paper Reports Third Quarter Results
Nov. 7, 2007 - Neenah Paper, Inc. today reported income from continuing operations for the third quarter 2007 of $16.5 million, or $1.08 per diluted common share, compared with income from continuing operations of $4.6 million, or $0.31 per diluted common share, for the third quarter of 2006. Consolidated net income in the third quarter of 2007 included a reduction of income tax expense of $8.9 million, or $0.59 per diluted common share, due to a decrease in deferred tax liabilities as a result of newly enacted lower German statutory tax rates. Consolidated net sales of $251.9 million for the third quarter 2007 increased almost 80 percent versus the prior year, and operating income of $16.3 million in the current quarter was 55 percent ahead of prior year levels. Results in 2007 include the Company's acquisitions of Neenah Germany and the Fox River Paper Company.
Fine Paper quarterly net sales in 2007 of $95.3 million increased 77 percent, from $53.8 million last year, primarily due to higher volumes from the addition of Fox River. Operating income was $9.3 million in the third quarter of 2007, compared to $12.8 million in the third quarter of 2006. Operating income in the current quarter reflected integration costs associated with implementing a new manufacturing footprint following the closure of the former Fox River Housatonic and Urbana paper mills, as well as the impact of annual maintenance downs at the Company's four remaining fine paper mills. Higher selling prices in 2007 were not able to offset increased costs for pulp, distribution and other inputs.
Technical Products net sales were $99.9 million in the third quarter of 2007, compared to $33.5 million in the same period last year. The increase was primarily due to the Neenah Germany acquisition, although net sales also benefited from an improved mix and higher selling prices in the domestic business. Operating income for the third quarter of 2007 was $3.2 million, up from $0.9 million in the third quarter of 2006. Third quarter results tend to be lower compared to other quarters due to scheduled mill maintenance downs and lower customer demand in the second half of the year. The higher operating income in 2007 compared with 2006 was primarily due to the inclusion of Neenah Germany. Benefits of the improved mix and higher selling prices in domestic operations were offset by higher costs for pulp, distribution and energy.
Net sales for Pulp in the third quarter of 2007 were $56.7 million, an increase of five percent from $54.2 million for the same period of 2006. Sales grew as a result of higher market selling prices in 2007 and the absence of pulp hedging losses, which reduced net sales by $4.3 million in 2006. These factors offset an 11 percent decline in volume compared with unusually high shipments in the third quarter of 2006. The pulp segment achieved operating income of $6.7 million in the quarter, compared with an operating loss of $0.3 million in 2006. The increase in income resulted from the higher selling prices, strong mill performance, the absence of pulp hedge losses and lower distribution costs that were able to offset negative impacts of a significantly stronger Canadian dollar, increased fiber costs and lower sales volumes.
Commenting on results, Sean Erwin, Chairman and Chief Executive Officer said, "Third quarter paper results reflect the scheduled annual mill maintenance downs and an external landscape that remains challenging due to higher input costs. Recently implemented selling price increases for most paper products and efficiency gains should help to mitigate these impacts. In addition, we are continuing to make progress on key initiatives to integrate and deliver synergies from the Fox River and Neenah Germany purchases and to optimize our product mix. In pulp, our teams and the mill continue to perform well and the Pictou operation was again profitable despite the stronger Canadian dollar and weakness in the lumber market that is impacting the price of wood chips."
Selling, general and administrative expense was $20.5 million in the third quarter of 2007, compared with $13.1 million in the third quarter of 2006. The increase was primarily due to incremental expenses of acquired companies. However, as a percent of net sales, selling, general and administrative expense declined from 9.3 to 8.1 percent. Net interest expense of $6.4 million in the third quarter of 2007 increased from $2.8 million in the third quarter of 2006 as a result of added borrowings to finance acquisitions. Net debt in the quarter was reduced by $13 million from second quarter levels. Tax expense in the third quarter 2007 was significantly lower than the prior year due to the previously mentioned $8.9 million credit related to the statutory rate change in Germany.
The Company's Terrace Bay pulp and woodlands operations, excluding certain post-retirement obligations, were transferred to Terrace Bay Pulp Inc. and Eagle Logging Inc. in August 2006. Results from Terrace Bay have been classified as discontinued operations for all periods presented. Losses for discontinued operations in the third quarter of 2007 were $1.1 million due to expenses for certain post-employment obligations of former Terrace Bay employees. In the third quarter of 2006, there was a net loss of $19.0 million from discontinued operations, including losses related to the sale of the facility and curtailment and partial settlement of the Ontario pension plan.
Year-to-date consolidated net sales through the third quarter were $734.7 million in 2007 and $417.1 million in 2006. Higher sales in 2007 resulted from acquisitions and improved selling prices in all product segments. For the same nine month period, income from continuing operations was $35.0 million, or $2.31 per diluted common share in 2007, compared to $92.2 million, or $6.22 per diluted common share, in the prior year.
Results in 2007 and 2006 included gains of $0.18 and $5.17 per diluted common share, respectively, related to the sale of timberlands; and 2007 results included an additional $0.59 per diluted common share for the impact of the change in German tax rates on deferred tax liabilities. Excluding these items, adjusted earnings per diluted common share for the first nine months of 2007 increased almost 50 percent, from $1.05 in 2006 to $1.54 in 2007. These adjusted earnings are a non-GAAP measure and are reconciled to GAAP earnings in a table that can be found at the end of this release.
Adjusted earnings per share increased in 2007 as a result of additional earnings from acquired businesses, an improved Technical Products mix, higher pulp earnings and a decline in the effective tax rate due to changes in corporate structure in connection with the acquisition of Neenah Germany and the mix of income between tax jurisdictions.
Losses from discontinued operations were $0.15 per diluted common share for the first nine months of 2007 and $2.19 per diluted common share for the same period in 2006.
SOURCE: Neenah Paper, Inc.