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EX-32.2 - EXHIBIT 32.2 - Neenah Paper Incnp20161231ex-322.htm
EX-32.1 - EXHIBIT 32.1 - Neenah Paper Incnp20161231ex-321.htm
EX-31.2 - EXHIBIT 31.2 - Neenah Paper Incnp20161231ex-312.htm
EX-31.1 - EXHIBIT 31.1 - Neenah Paper Incnp20161231ex-311.htm
EX-24 - EXHIBIT 24 - Neenah Paper Incpowerofattorney.htm
EX-23 - EXHIBIT 23 - Neenah Paper Incconsent.htm
EX-21 - EXHIBIT 21 - Neenah Paper Inclistofsubsidiaries.htm
EX-12 - EXHIBIT 12 - Neenah Paper Incratioofearningstofixedchar.htm
EX-10.5 - EXHIBIT 10.5 - Neenah Paper Incneenahpaperamendedandresta.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-K
__________________________________________________
(Mark One)
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2016
 
OR
 
 
 
o
 
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)
 
 
 
Registrant's telephone number, including area code: (678) 566-6500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class 
 
Name of Each Exchange on Which Registered 
Common Stock — $0.01 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 ý    No o
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 such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
The aggregate market value of the registrant's common stock held by non-affiliates on June 30, 2016 (based on the closing stock price on the New York Stock Exchange) on such date was approximately $1,190,000,000.
As of February 21, 2017, there were 16,805,000 shares of the Company's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the definitive proxy statement for the Company's Annual Meeting of Stockholders to be held on May 23, 2017 is incorporated by reference into Part III hereof.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I

In this report, unless the context requires otherwise, references to "we," "us," "our," "Neenah" or the "Company" are intended to mean Neenah Paper, Inc., its consolidated subsidiaries and predecessor companies.
Item 1.    Business
Overview

np20161231_chart-13370.jpg
We are organized into two primary businesses: a performance-based technical products business and a premium fine paper and packaging business.
Our technical products business is a leading international producer of transportation, water and other filter media and durable, saturated and coated substrates for a variety of end markets. We focus on categories where we believe we are, or can be, a market leader. These categories include filtration media for transportation, water and other uses, backings for specialty tapes and abrasives, performance labels and other specialty markets. Our dedicated technical products manufacturing facilities are located near Munich, Germany, in Bolton, England, in Munising, Michigan and in Pittsfield, Massachusetts. In addition, certain technical products are manufactured along with fine paper and packaging products in shared facilities located in upstate New York and Quakertown, Pennsylvania. In 2017, a filtration machine (which was converted from a fine paper machine) will begin production in Appleton, Wisconsin, a site also shared with the fine paper and packaging business. For a description of the shared facilities, see Item 2, "Properties."
We believe our fine paper and packaging business is the leading supplier of premium printing and other high end specialty papers in North America. Our products include some of the most recognized and preferred papers in North America, where we enjoy leading market positions in many of our product categories. We sell our products primarily to authorized paper distributors, as well as through converters, major national retailers and specialty businesses. Our primary fine paper and packaging manufacturing facilities are located in Neenah and Whiting, Wisconsin and in Brattleboro, Vermont. In addition, certain products are manufactured in shared facilities located in upstate New York and Quakertown, Pennsylvania, as well as an existing site shared with technical products in 2017 in Appleton, Wisconsin. For a description of the shared facilities, see Item 2, "Properties."


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Company Structure
Our corporate structure consists of Neenah Paper, Inc. and seven direct wholly owned subsidiaries.
Neenah Paper, Inc. is a Delaware corporation that holds our trademarks and patents related to all of our U.S. businesses (except Neenah Paper FVC, Inc), all of our U.S. fine paper and packaging inventory, the real estate, mills and manufacturing assets associated with our fine paper and packaging operations in Neenah and Whiting, Wisconsin and all of the equity in our subsidiaries listed below. The common stock of Neenah is publicly traded on the New York Stock Exchange under the symbol "NP."
Neenah Paper Michigan, Inc. is a Delaware corporation and a wholly owned subsidiary of Neenah that owns the real estate, mill and manufacturing assets associated with our U.S. technical products business in Munising, Michigan.
Neenah Paper FVC, LLC is a Delaware limited liability company and wholly owned subsidiary of Neenah that owns all of the equity of Neenah Paper FR, LLC. Neenah Paper FR, LLC ("Fox River") is a Delaware limited liability company that owns the real estate, mill and manufacturing assets associated with our fine paper and packaging operation in Appleton, Wisconsin.
Neenah Paper International Holding Company, LLC is a Delaware limited liability company and wholly owned subsidiary of Neenah that owns all of the equity of Neenah Paper International, LLC. Neenah Paper International, LLC is a Delaware limited liability company that owns all of the equity of Neenah Germany GmbH and in conjunction with Neenah Germany GmbH all of the equity of Neenah Services GmbH & Co. KG.
NPCC Holding Company LLC is a Delaware limited liability company and wholly owned subsidiary of Neenah that owns all of the equity of Neenah Paper Company of Canada ("Neenah Canada"). Neenah Canada is a Nova Scotia unlimited liability corporation that holds certain post-employment liabilities of our former Canadian operations.
Neenah Paper International Finance Company BV is a private company with limited liability organized under the laws of the Netherlands and a wholly owned subsidiary of Neenah that facilitates the financing of our international operations.
Neenah Filtration, LLC is a Delaware limited liability company and wholly owned subsidiary of Neenah that owns all of the equity of Neenah Technical Materials, Inc. ("NTM") and Neenah Filtration Appleton, LLC ("NFA"). NTM is a Massachusetts corporation that owns all of the real estate, mills and manufacturing assets associated with our technical materials business in Pittsfield, Massachusetts. NFA is a Delaware limited liability company that owns certain assets associated with our filtration business in Appleton, Wisconsin. The filtration assets in Appleton, Wisconsin have started production in January 2017. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources."
Neenah FMK Holdings, LLC is a Delaware limited liability company and a wholly owned subsidiary of Neenah that owns all of the equity of ASP FiberMark, LLC ("ASP"). ASP is a Delaware limited liability company that owns all of the equity of Neenah Northeast, LLC ("NNE") and Neenah International UK Limited, a United Kingdom corporation ("Neenah UK"). NNE is a Delaware limited liability company that owns certain real estate, mills and manufacturing assets associated with our fine paper and packaging business and technical products business located in Brattleboro, Vermont, West Springfield, Massachusetts, Quakertown and Reading, Pennsylvania, and Brownville and Lowville, New York. Neenah UK is a United Kingdom corporation that owns all of the equity of Neenah Red Bridge International Limited ("Red Bridge"). Red Bridge is a United Kingdom corporation that owns all of the real estate, manufacturing assets and inventory associated with our technical products business in Bolton, England.
History of the Businesses
Neenah was incorporated in April 2004 in contemplation of the spin-off by Kimberly-Clark Corporation ("Kimberly-Clark") of its technical products and fine paper businesses in the United States and its Canadian pulp business (collectively, the "Pulp and Paper Business"). We had no material assets or activities until Kimberly-Clark's transfer to us of the Pulp and Paper business on November 30, 2004. On that date, Kimberly-Clark completed the distribution of all of the shares of our common stock to the stockholders of Kimberly-Clark (the "Spin-Off"). Following the Spin-Off, we are an independent public company and Kimberly-Clark has no ownership interest in us.
Former Pulp Operations.    At the Spin-Off, our pulp operations consisted of mills located in Terrace Bay, Ontario and Pictou, Nova Scotia and approximately 975,000 acres of related woodlands. We disposed of these mills and woodlands in a series of transactions from 2006 to 2010.
Technical Products.   The Munising, Michigan mill was purchased by Kimberly-Clark in 1952. Subsequent to the purchase, the mill was converted to produce durable, saturated and coated papers for sale and use in a variety of industrial applications for our technical products business.

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In October 2006, we purchased the outstanding interests of FiberMark Services GmbH & Co. KG and the outstanding interests of FiberMark Beteiligungs GmbH (collectively "Neenah Germany"). At acquisition, the Neenah Germany assets consisted of two mills located near Munich, Germany and a third mill near Frankfurt, Germany. These mills produced a wide range of products, including transportation filter media, nonwoven wall coverings, masking and other tapes, abrasive backings, and specialized printing and coating substrates.
In July 2014, we purchased all of the outstanding equity of Crane Technical Materials, Inc. from Crane & Co., Inc. The acquired business provides performance-oriented wet laid nonwoven media for water filtration end markets as well as environmental, energy and industrial uses. The business has two manufacturing facilities in Pittsfield, Massachusetts.
On October 31, 2015, we sold our paper mill located near Frankfurt, Germany (the "Lahnstein Mill") to the Kajo Neukirchen Group (the "Buyer") for net cash proceeds of approximately $5.4 million. The Lahnstein Mill, which had annual sales of approximately €50 million, had been operating as a stand-alone business, manufacturing non-woven wallcoverings and various other specialty papers. See Note 13 of Notes to Consolidated Financial Statements, "Discontinued Operations."
Fine Paper and Packaging.    The fine paper and packaging business was incorporated in 1885 as Neenah Paper Company, which initially operated a single paper mill in Neenah, Wisconsin. Kimberly-Clark acquired the mill in 1956. In 1981, Kimberly-Clark purchased an additional mill located in Whiting, Wisconsin and in the late 1980s and early 1990s, the capacity of the fine paper and packaging business was expanded by building two new paper machines at the Whiting mill and completing a major expansion of the Neenah facility with the installation of a new paper machine, finishing center, customer service center and an expanded distribution center.
In March 2007, we acquired the assets and brands of Fox River, which was a consolidating acquisition. In January 2012, we purchased certain premium fine paper brands and other assets from Wausau Paper Mills, LLC, a subsidiary of Wausau Paper Corp. ("Wausau") and in January 2013, we purchased certain premium business paper brands from the Southworth Company ("Southworth").
FiberMark Acquisition.    On August 1, 2015, we purchased all of the outstanding equity of ASP FiberMark, LLC ("FiberMark") from ASP FiberMark Holdings, LLC ("American Securities") for approximately $118 million (the "FiberMark Acquisition"). We added specialty coating and finishing capabilities with this acquisition, particularly in luxury packaging and technical products. The results of operations and assets related to the FiberMark Acquisition are reflected in each of our business segments.
Business Strategy
Our mission is to create value by improving the image and performance of everything we touch. We expect to create value by growing in specialized niche markets that value performance or image and where we have competitive advantages. In managing our businesses, we believe that achieving and maintaining a leadership position in our markets, responding effectively to customer needs and competitive challenges, employing capital optimally, controlling costs and managing risks are important to our long-term success. Strategies to deliver value include:
Leading in profitable, specialty niche markets — We will increase our participation in niche markets that can provide us with leading positions and value our core competencies in performance-based fiber and non-woven media production, coating and saturating. Key markets include filtration, specialty backings and technical products, and premium fine paper and packaging.
Increasing our size, growth rate and portfolio diversification — We will invest and focus resources in higher growth specialty markets to grow with customers in new geographies and to enter into adjacent markets that are growing and profitable. We will do this both through organic initiatives that build on our technologies and capabilities, and through acquisitions that fit with our competencies and provide attractive financial returns.
Delivering consistent, attractive returns to our shareholders — We will continue to use Return on Invested Capital ("ROIC") as a key metric to evaluate investment decisions, measure our performance, maintain a prudent capital structure and deploy cash flows in ways that can provide value, including direct cash returns to shareholders through a meaningful dividend.
Products
Technical Products.    Our technical products business is a leading international producer of performance-based substrates such as filtration media for transportation, water and other filtration markets, and saturated and coated performance materials used for industrial backings, labels and a variety of other end markets. In general, our technical products are sold to other manufacturers as key components for their finished products. Several of our key market segments served, including filtration and specialty backings for tape and abrasives, are global in scope. JET-PRO®SofStretchTM , KIMDURA®, PREVAILTM, NEENAH®, and GESSNER® are brands of our technical products business.

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The following is a description of certain key products and markets:
Filtration media for transportation including induction air, fuel, oil, and cabin air applications. Transportation filtration media are sold to suppliers of automotive companies as original equipment on new cars and trucks as well as to the automotive aftermarket, which represents the large majority of sales.
Filtration media for water and other industrial end markets. Primary applications include reverse osmosis, catalytic conversion, nanofiltration, ultrafiltration, pervaporation and vapor permeation, as well as other applications for specialty markets.
Specialty backings including a) saturated and unsaturated crepe and flat paper tapes sold to manufacturers to produce finished pressure sensitive products for sale in automotive, transportation, manufacturing, building construction, and industrial general purpose applications, including sales in the consumer do-it-yourself retail channel and b) coated lightweight abrasive paper used in the automotive, construction, metal and woodworking industries for both dry and wet sanding applications.
Label and tag products made from both saturated base label stock and purchased synthetic base label stock, with coatings applied to allow for high quality variable and digital printing. The synthetic label stock is recognized as a high quality, UV (ultra-violet) stable product used for outdoor applications. Label and tag stock is sold to pressure sensitive coaters, who in turn sell the coated label and tag stock to the label printing community.
Other latex saturated and coated papers for use by a wide variety of manufacturers. Premask paper is used as a protective over wrap for products during the manufacturing process and for applying signs, labeling and other finished products. Medical packaging paper is a polymer impregnated base sheet that provides a breathable sterilization barrier that provides unique properties. Image transfer papers used to transfer an image from paper to tee shirts, hats, coffee mugs, and other surfaces using a proprietary imaging coating for use in digital printing applications. Publishing and security papers used to produce book covers, stationery, fancy packaging and passports. Other specialty products include clean room papers, durable printing papers, release papers and furniture backers.
Fine Paper and Packaging.    Our fine paper and packaging business manufactures and sells world-class branded premium writing, text, cover and specialty papers and envelopes used in corporate identity packages, advertising collateral, premium labels and packaging, and wide format applications. Often these papers are characterized by distinctive coating, finishing, colors, and textures.
Commercial printing papers include premium writing, text and cover papers, and envelopes. Uses include advertising collateral, stationery, corporate identity packages and brochures, pocket folders, annual reports, advertising inserts, direct mail, business cards, scrapbooks, and a variety of other uses where colors, texture, coating, unique finishes or heavier weight papers are desired. Our market leading brands in this category include CLASSIC®, CLASSIC CREST®, ESSE®, ENVIRONMENT®, CAPITOL BOND®, ROYAL SUNDANCE®, SOUTHWORTH®, and TOUCHE® trademarks. Our fine paper and packaging business has an exclusive agreement to manufacture, market and distribute Crane & Co.'s CRANE'S CREST®, CRANE'S BOND®, and CRANE'S LETTRA®, branded fine papers in the commercial print category. Our fine paper and packaging business has an exclusive agreement to market and distribute Gruppo Cordenons SpA's SO...SILK®, PLIKE® and STARDREAM® branded fine papers in the U.S. and Canada. The fine paper and packaging business also sells private watermarked paper and other specialty writing, text, and cover papers. Additionally, the fine paper and packaging business provides leading solutions in the wide format arena, led by its Neenah Wide Format® and CONVERD® brands.
Premium packaging and label papers are used for wine, spirits and beer labels, folding cartons, box wrap, bags, hang tags, and stored value cards servicing high-end retail, cosmetics, spirits, and electronics end-use markets. Our market leading brands in these categories include NEENAH® Folding Board, "ESTATE LABEL®, Neenah® Box Wrap, PELLAQ®, KIVAR®, SKIVERTEX®, ILLUSIO®, and SENZO®.
Bright papers are used in applications such as direct mail, advertising inserts, scrapbooks and marketing collateral. Our brands in this category include ASTROBRIGHTS® and CREATIVE COLLECTIONTM. Additionally, business papers for professionals and small businesses are sold under our Southworth® brand through major retailers.
The fine paper and packaging business also produces and sells other specialty papers that address a consumer's need for enhanced image such as translucent papers, art papers, papers for optical scanning and other specialized applications.
Markets and Customers
Technical Products.    The technical products business sells its products globally into product categories generally used as base materials in the following applications: filtration, component backing materials for manufactured products such as tape and abrasives, and other specialized product uses such as graphics and identification.

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Several products (filtration media, abrasives, specialty tapes, labels) are used in markets that are directly affected by economic business cycles. Other market segments such as image transfer papers used in small/home office and consumer applications are relatively stable. Most products are performance-based and require qualification at customers; however, certain categories may also be subject to price competition and the substitution of lower cost substrates in some less demanding applications.
The technical products business relies on a team of direct sales representatives and customer service representatives to market and sell approximately 95 percent of its sales volume directly to customers and converters.
The technical products business has more than 500 customers worldwide. The distribution of sales in 2016 was approximately 43 percent in North America, 35 percent in Europe and 22 percent in Latin America and Asia. Customers typically convert and transform base papers and film into finished rolls and sheets by adding adhesives, coatings, and finishes. These transformed products are then sold to end-users.
Sales to the technical products business's three largest customers represented approximately 14 percent of total sales for the segment in 2016. Although a complete loss of any of these customers would cause a temporary decline in the business's sales volume, the decline could be partially offset by expanding sales to existing customers, and further offset over a several month period with the addition of new customers.
Fine Paper and Packaging.    We believe our fine paper and packaging business is the leading supplier of premium writing, text and cover papers, bright papers and specialty papers in North America. These products are used in high-end collateral material, business and legal professions, and corporate identity products. Our premium packaging business includes products such as food and beverage labels and high-end packaging materials such as folding cartons and box wrap used for luxury retail goods. Bright papers are generally used by consumers for flyers, direct mail and packaging.
The fine paper and packaging business sells its products in a variety of channels including authorized paper distributors, converters, retailers, and direct to end users. Sales to distributors account for approximately 60 percent of revenue in the fine paper and packaging business. During 2016, approximately 10 percent of the sales of our fine paper and packaging business were exported to markets outside the United States.
Sales to the largest customer of the fine paper and packaging business represented approximately 15 percent of its total sales in 2016. We practice limited sales distribution to improve our ability to control the marketing of our products. Although a complete loss of this customer would cause a temporary decline in the business's sales volume, the decline could be partially offset by expanding sales to existing customers, and further offset over a several month period with the addition of new customers.
Concentration.    In July 2014, Unisource Worldwide, Inc ("Unisource") and xpedx, formerly owned by International Paper ("xpedx") merged to form Veritiv Corporation ("Veritiv"). For the year ended December 31, 2016, sales to Veritiv represented approximately 8 percent of consolidated net sales and approximately 15 percent of net sales of the fine paper and packaging business. For the year ended December 31, 2015 and 2014 sales to Unisource and xpedx (and as merged Veritiv) represented approximately 10 percent of consolidated net sales and approximately 20 percent of net sales of the fine paper and packaging business.
The following graphs present further information about our businesses by geographic area (dollars in millions):
Net Sales from Geographic Region
(in Millions)

np20161231_chart-15151.jpg np20161231_chart-15685.jpg np20161231_chart-16396.jpg

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Total Assets by Geographic Region
(in Millions)
    
np20161231_chart-17066.jpg np20161231_chart-17727.jpg np20161231_chart-18458.jpg
Net sales and total assets are attributed to geographic areas based on the physical location of the selling entities and the physical location of the assets. See Note 14 of Notes to Consolidated Financial Statements, "Business Segment and Geographic Information", for information with respect to net sales, profits and total assets by business segment.
Raw Materials
Technical Products.    Softwood pulp, specialty pulp and fibers, and latex are the primary raw materials consumed by our technical products business. The technical products business purchases softwood pulp, specialty pulp and fibers, and latex from various external suppliers. We believe that all of the raw materials for our technical products operations, except for certain specialty latex grades and specialty softwood pulp, are readily available from several sources and that the loss of a single supplier would not cause a shutdown of our manufacturing operations.
Our technical products business acquires all of its specialized pulp requirements from two global suppliers and certain critical specialty latex grades from four suppliers. In general, these supply arrangements are not covered by formal contracts, but represent multi-year business relationships that have historically been sufficient to meet our needs. We expect these relationships to continue to operate in a satisfactory manner in the future. In the event of an interruption of production at any one supplier, we believe that each of these suppliers individually would be able to satisfy our short-term requirements for specialized pulp or specialty latex. In the event of a long-term disruption in our supply of specialized pulp or specialty latex, we believe we would be able to substitute other pulp grades or other latex grades that would allow us to meet required product performance characteristics and incur only a limited disruption in our production. As a result, we do not believe that the substitution of such alternative pulp or latex grades would have a material effect on our operations.
Fine Paper and Packaging.    Hardwood pulp is the primary fiber used to produce products of the fine paper and packaging business. Other significant raw material inputs in the production of fine paper and packaging products include softwood pulp, recycled fiber, cotton fiber, dyes and fillers. The fine paper and packaging business purchases all of its raw materials externally. We believe that all of the raw materials for our fine paper and packaging operations are readily available from several sources and that the loss of a single supplier would not cause a shutdown of our manufacturing operations.
Energy and Water
The equipment used to manufacture the products of our technical products and fine paper and packaging businesses uses significant amounts of energy, primarily electricity, natural gas, oil and coal. We generate substantially all of our electrical energy at the Munising mill and approximately 25 percent of the electrical energy at our mills in Appleton, Wisconsin and Bruckmühl, Germany. We also purchase electrical energy from external sources, including electricity generated from renewable sources.
Availability of energy is not expected to be a problem in the foreseeable future, but the purchase price of such energy can and likely will fluctuate significantly based on changes in demand and other factors.

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An adequate supply of water is needed to manufacture our products. We believe that there is an adequate supply of water for this purpose at each of our manufacturing locations.
Working Capital
Technical Products.    The technical products business maintains approximately 25 to 30 days of raw materials and supplies inventories to support its manufacturing operations and approximately 25 to 35 days of finished goods and semi-finished goods inventory to support customer orders for its products. Sales terms in the technical products business vary depending on the type of product sold and customer category. Extended credit terms of up to 120 days are offered to customers located in certain international markets. In general, sales are collected in approximately 45 to 55 days and supplier invoices are paid within 20 to 30 days.
Fine Paper and Packaging.    The fine paper and packaging business maintains approximately 10 days of raw material inventories to support its paper making operations and about 55 days of finished goods inventory to fill customer orders. Fine paper and packaging sales terms range between 20 and 30 days with discounts of zero to two percent for customer payments, with discounts of one percent and 20-day terms used most often. Extended credit terms are offered to customers located in certain international markets. Supplier invoices are typically paid within 60 days.
Competition
Technical Products.    Our technical products business competes in global markets with a number of large multinational competitors, including Ahlstrom Corporation, Munksjö, ArjoWiggins SAS and Hollingsworth & Vose Company. It also competes in some, but not all, of these segments with smaller regional manufacturers, such as Monadnock Paper Mills, Inc., Expera Specialty Solutions LLC., Potsdam Specialty Paper, Inc. and Paper Line S.p.A. We believe the basis of competition in most of these segments are the ability to design and develop customized product features to meet customer specifications while maintaining quality, customer service and price. We believe our research and development program gives us an advantage in customizing base papers and developing advanced filter media to meet customer needs.
Fine Paper and Packaging.    We believe our fine paper and packaging business is the leading supplier of premium printing and other high end specialty papers in North America. Our fine paper and packaging business also competes in the premium segment of the uncoated free sheet market. The fine paper and packaging business competes directly in North America with Mohawk Fine Paper Inc. and other smaller companies. We believe the primary basis of competition for premium fine papers are brand recognition, product quality, customer service, product availability, promotional support and variety of colors and textures. Price also can be a factor particularly for lower quality printing needs that may compete with opaque and offset papers. We have and will continue to invest in advertising and other programs aimed at graphic designers, printers and corporate end-users in order to maintain a high level of brand awareness as well as communicate the advantages of using our products. Our premium packaging business is focused on high-end packaging needs in end market verticals like beauty products, spirits and retail.   Primary bases of competition are similarly brand recognition, product quality, customer service, product availability, and a variety of colors and textures. Premium packaging is primarily a North American business, but we also sell to customers in Asia and other markets outside the U.S. We believe the premium packaging market to be highly fragmented, with multiple competitors, many of which produce premium packaging products as a small subset of larger packaging operations.
Research and Development
Our technical products business maintains research and development laboratories in Feldkirchen-Westerham, Germany, Munising, Michigan and Pittsfield, Massachusetts to support its strategy of developing new products and technologies, and to support growth in its existing product lines and other strategically important markets. We also have a research and development laboratory in West Springfield, Massachusetts that supports both our technical products and fine paper and packaging businesses. We have continually invested in product research and development with spending of $9.4 million in 2016, $6.8 million in 2015 and $5.7 million in 2014.
Intellectual Property
We own more than 100 granted patents and have multiple pending patent applications in the United States, Canada, Europe and certain other countries covering image transfer paper, abrasives and medical packaging, and other paper processing. We also own more than 150 trademarks with registrations in approximately 80 countries. Our image transfer patents have contributed to establishing the technical products business as a leading global supplier of image transfer papers through our highly recognized JET-PRO®, 3G JET-OPAQUE®, TECHNIPRINT®, LASER-ONE OPAQUE® and IMAGE CLIP® brands, and our global trademark collection demonstrates strong product brand recognition.
For more than 100 years, Neenah’s fine paper and packaging business has built its market leading reputation on creating and manufacturing trademarked brands for premium writing, text, cover, digital, packaging, and specialty needs. The Neenah Paper

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signature portfolio includes innovative, market leading brands such as ASTROBRIGHTS®, CLASSIC® (including CLASSIC CREST®, CLASSIC® Linen, CLASSIC® Laid, CLASSIC COLUMNS®, CLASSIC® Stipple, CLASSIC® Woodgrain, and CLASSIC® Techweave), ENVIRONMENT®, The Design Collection, ROYAL SUNDANCE® Papers, and many more. Our fine paper and packaging business provides unique and sustainable packaging papers and custom solutions for premium packaging needs. With brands that stand for consistency and quality such as NEENAH® Folding Board, NEENAH® Box Wrap, ESTATE LABEL®, BELLA® Label, and NEENAH IMAGEMAX® Paper Card, our fine paper and packaging business enables leading and emerging brands to deliver on their brand’s promise. In 2012, we entered the retail channel by acquiring the brand portfolio of Wausau Paper including ASTROBRIGHTS® Papers, the first brightly colored paper in the industry, followed by the SOUTHWORTH Brand, a time-honored product for business professionals. Our fine paper and packaging business maintains a well-rounded and well-respected portfolio of brands allowing us to be recognized as an industry leader setting standards for quality, consistency, and dependability on press.

The 2015 acquisition of FiberMark added other trademarks recognized in both the publishing and packaging markets, including SKIVERTEX®, KIVAR®, CORVON®, HYFLEX®, TOUCHE®, and MULTICOLOR®. Development work after the acquisition added the MONTELENA® mark to our portfolio as well.

The KIMDURA® and MUNISING LP® trademarks have made a significant contribution to the marketing of synthetic film and clean room papers of the technical products business. Finally, the GESSNER® trademark has played an important role in the marketing of Neenah’s filtration product lines.
Backlog and Seasonality
Technical Products.    In general, sales and profits for the technical products business have been relatively stronger in the first half of the year with reductions in the third quarter due to reduced customer converting schedules and in the fourth quarter due to a reduction in year-end inventory levels by our customers. The order flow for the technical products business is subject to seasonal peaks for several of its products, such as the larger volume grades of specialty tape, abrasives, premask, and label stock used primarily in the downstream finished goods manufacturing process. To assure timely shipments during these seasonal peaks, the technical products business provides certain customers with finished goods inventory on consignment. Historically, consignment sales have represented approximately 15 percent of the technical products business's annual sales. Orders are typically shipped within six to eight weeks of receipt of the order. However, the technical products business periodically experiences periods where order entry levels surge, and order backlogs can increase substantially. Raw materials are purchased and manufacturing schedules are planned based on customer forecasts, current market conditions and individual orders for custom products. The order backlog in the technical products business on December 31, 2016 was approximately $101 million and represented approximately 22 percent of prior year sales. The order backlog in the technical products business on December 31, 2015 was approximately $103 million and represented approximately 25 percent of prior year sales. We previously filled the order backlog from December 31, 2015 and expect to fill the order backlog from December 31, 2016 within the next year.
Fine Paper and Packaging.    The fine paper and packaging business has historically not experienced seasonality. Orders for stock products are typically shipped within two days, while custom orders are shipped within two to three weeks of receipt. Raw material purchases and manufacturing schedules are planned based on a combination of historical trends, customer forecasts and current market conditions. The order backlogs in the fine paper and packaging business on December 31, 2016 and 2015 were $19.6 million and $19.2 million, respectively, which represent approximately 15 days of sales. The order backlogs from December 31, 2016 and 2015 were filled in the respective following years.
The operating results at each of our businesses are influenced by the timing of our annual maintenance downs, which are generally scheduled in the third quarter.
Employee and Labor Relations
As of December 31, 2016, we had approximately 2,303 regular full-time employees of whom 1,099 hourly and 526 salaried employees were located in the United States and 405 hourly and 273 salaried employees were located in Europe.
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"). In June 2015, the IG BCE and a national trade association representing all employers in the industry signed a collective bargaining agreement covering union employees of Neenah Germany that expires in June 2017. 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 that expires in June 2017 cannot be determined.

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As of December 31, 2016, no employees are covered under collective bargaining agreements that expire in the next 12 months, with the exception of the employees covered by the collective bargaining arrangement with the IG BCE. We believe we have satisfactory relations with our employees covered by collective bargaining agreements and do not expect the negotiation of new collective bargaining agreements to have a material effect on our results of operations or cash flows. See Note 12 of Notes to Consolidated Financial Statements, "Contingencies and Legal Matters — Employees and Labor Relations."
Environmental, Health and Safety Matters
Our operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental, health and safety matters. We believe our operations are in compliance with, or we are taking actions designed to ensure compliance with, these laws, regulations and ordinances. However, the nature of our operations exposes us to the risk of claims concerning non-compliance with environmental, health and safety laws or standards, and there can be no assurance that material costs or liabilities will not be incurred in connection with those claims. Except for certain orders issued by environmental, health and safety regulatory agencies with which we believe we are in compliance and which we believe are immaterial to our financial condition, results of operations and liquidity, we are not currently named as a party in any judicial or administrative proceeding relating to environmental, health and safety matters.
Greenhouse gas ("GHG") emissions have increasingly become the subject of political and regulatory focus. Concern over potential climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting GHG emissions. In addition to certain federal proposals in the United States to regulate GHG emissions, Germany, the United Kingdom (“U.K.”) and all the states in which we operate are currently considering GHG legislation or regulations, either individually and/or as part of regional initiatives. While not all are likely to become law it is reasonably possible that additional climate change related mandates will be forthcoming, and it is expected that they may adversely impact our costs by increasing energy costs and raw material prices, requiring operational or equipment modifications to reduce emissions and creating costs to comply with regulations or to mitigate the financial consequences of such compliance.
While we have incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental, health and safety laws, regulations and ordinances, we believe that our future cost of compliance with environmental, health and safety laws, regulations and ordinances, and our exposure to liability for environmental, health and safety claims will not have a material effect on our financial condition, results of operations or liquidity. However, future events, such as changes in existing laws and regulations, new legislation to limit GHG emissions or contamination of sites owned, operated or used for waste disposal by us (including currently unknown contamination and contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material effect on our financial condition, results of operations or liquidity.
We have planned capital expenditures to comply with environmental, health and safety laws, regulations and ordinances during the period 2017 through 2018 of approximately $1 million to $2 million annually. Our anticipated capital expenditures for environmental projects are not expected to have a material effect on our financial condition, results of operations or liquidity.
AVAILABLE INFORMATION
We are subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. As such, we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Our SEC filings are available to the public on the SEC's web site at www.sec.gov. You may also read and copy any document we file at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our common stock is traded on the New York Stock Exchange under the symbol NP. You may inspect the reports, proxy statements and other information concerning us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Our web site is www.neenah.com. Information on our web site is not incorporated by reference in this document. Our reports on Form 10-K, Form 10-Q and Form 8-K, as well as amendments to those reports, are and will be available free of charge on our web site as soon as reasonably practicable after we file or furnish such reports with the SEC. In addition, you may request a copy of any of these reports (excluding exhibits) at no cost upon written request to us at: Investor Relations, Neenah Paper, Inc., 3460 Preston Ridge Road, Suite 600, Alpharetta, Georgia 30005.
Item 1A.    Risk Factors

You should carefully consider each of the following risks and all of the other information contained in this Annual Report on Form 10-K. Some of the risks described below relate principally to our business and the industry in which we operate, while

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others relate principally to our indebtedness. The remaining risks relate principally to the securities markets generally and ownership of our common stock.
Our business, financial condition, results of operations or liquidity could be materially affected by any of these risks, and, as a result, the trading price of our common stock could decline. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Business and Industry
Our business will suffer if we are unable to effectively respond to decreased demand for some of our products due to conditions in the global economy or secular pressures in some markets.
We have experienced and may experience in the future decreased demand for some of our products due to slowing or negative global economic growth, uncertainty in credit markets, declining consumer and business confidence, fluctuating commodity prices, increased unemployment and other challenges affecting the global economy. Parts of our fine paper and packaging business are subject to electronic substitution. In addition, our customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. If we are unable to implement business strategies to effectively respond to decreased demand for our products, our financial position, cash flows and results of operations would be adversely affected.
Changes in international geopolitical and macro economic conditions generally, and particularly in Germany, could adversely affect our business and results of operations. Fluctuations in the prices of and the demand for products could result in smaller profit margins and lower sales volumes.
Our operating results and business prospects could be adversely affected by risks related to the countries outside the United States in which we have manufacturing facilities or sell our products, including Germany, the Eurozone and elsewhere. Downturns in economic activity, adverse tax consequences, fluctuations in the value of local currency versus the U.S. dollar, or any change in social, political, macro economic or labor conditions in any of these countries or regions could negatively affect our financial results.
On June 23, 2016, the U.K. voted by referendum to exit the European Union (“E.U.”); this vote is commonly referred to as “Brexit.” The referendum is non-binding and the exit from the E.U. is not immediate. Once the U.K. invokes E.U. Article 50, there is a two-year window in which the U.K. and European Commission can negotiate the future terms for imports, exports, taxes, employment, immigration and other areas. Brexit has caused volatility in global stock markets and currency exchange rates, affecting the markets in which we operate. The implications of Brexit could adversely affect demand for our products, our financial results and operations, and our relationships with customers, suppliers and employees in the short- or long-term.
Historically, economic and market shifts, and fluctuations in capacity have created cyclical changes in prices, sales volume and margins for products in the paper, packaging and related industries. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. The overall levels of demand for many of our products reflect fluctuations in levels of end-user demand, which depend in large part on general macroeconomic conditions in North America and regional economic conditions in our markets (including Europe, Asia, and Central and South America), as well as foreign currency exchange rates. The foregoing factors could materially and adversely impact our sales, cash flows, profitability and results of operations.
The availability of and prices for raw materials and energy will significantly impact our business.
We purchase a substantial portion of the raw materials and energy necessary to produce our products on the open market, and, as a result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply and demand and government regulation. We do not have significant influence over our raw material or energy prices and our ability to pass increases in those prices along to purchasers of our products may be challenged, unless those increases coincide with increased demand for the product. Therefore, raw material or energy prices could increase at the same time that prices for our products are steady or decreasing. In addition, we may not be able to recoup other cost increases we may experience, such as those resulting from inflation or from increases in wages or salaries or increases in health care, pension or other employee benefits costs, insurance costs or other costs.
Our technical products business acquires all of its specialized pulp requirements from two global suppliers and certain critical specialty latex grades from four suppliers. In general, these supply arrangements are not covered by formal contracts, but represent multi-year business relationships that have historically been sufficient to meet our needs. We expect these relationships to continue to operate in a satisfactory manner in the future. In the event of an interruption of production at any one supplier, we believe that each of these suppliers individually would be able to satisfy our short-term requirements for

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specialized pulp or specialty latex. In the event of a long-term disruption in our supply of specialized pulp or specialty latex, we believe we would be able to substitute other pulp grades or other latex grades that would allow us to meet required product performance characteristics and incur only a limited disruption in our production.
Our fine paper and packaging business acquires a substantial majority of the cotton fiber used in the production of certain branded bond paper products pursuant to annual agreements with two North American producers. The balance of our cotton fiber requirements are acquired through "spot market" purchases from a variety of other producers. We believe that a partial or total disruption in the production of cotton fibers at our two primary suppliers would increase our reliance on "spot market" purchases with a likely corresponding increase in cost.
Our operating results are likely to fluctuate.
Our operating results are subject to substantial quarterly and annual fluctuations due to a number of factors, many of which are beyond our control. Operating results could be adversely affected by general economic conditions causing a downturn in the market for paper products. Additional factors that could affect our results include, among others, changes in the market price of pulp, the effects of competitive pricing pressures, production capacity levels and manufacturing yields, availability and cost of products from our suppliers, the gain or loss of significant customers, our ability to develop, introduce and market new products and technologies on a timely basis, changes in the mix of products produced and sold, seasonal customer demand, the relative strength of the Euro versus the U.S. dollar, increasing interest rates and environmental costs. The timing and effect of the foregoing factors are difficult to predict, and these or other factors could materially adversely affect our quarterly or annual operating results.
We face many competitors, several of which have greater financial and other resources.
We face competition in each of our business segments from companies that produce the same type of products that we produce or that produce lower priced alternative products that customers may use instead of our products. Some of our competitors have greater financial, sales and marketing, or research and development resources than we do. Greater financial resources and product development capabilities may also allow our competitors to respond more quickly to new opportunities or changes in customer requirements.
Our businesses are significantly dependent on sales to their largest customers.
Sales to the largest customer of the fine paper and packaging business represented approximately 15 percent of total sales for the segment in 2016. Sales to the three largest customers of the technical products business represented approximately 14 percent of total sales for the segment in 2016. A significant loss of business from any of our major fine paper and packaging or technical products customers may have a material adverse effect on our financial condition, results of operations and liquidity. We are also subject to credit risk associated with our customer concentration. If one or more of our largest fine paper and packaging or technical products customers were to become bankrupt, insolvent or otherwise were unable to pay for services provided, we may incur significant write-offs of accounts receivable.
We cannot be certain that our tax planning strategies will be effective and that our research and development tax credits will continue to be available to offset our tax liability.
We are continuously undergoing examination by the Internal Revenue Service (the "IRS") as well as taxing authorities in various state and foreign jurisdictions in which we operate. The IRS and other taxing authorities routinely challenge certain deductions and credits reported on our income tax returns.
As of December 31, 2016, we had $25.2 million of U.S. federal and state research and development credits ("R&D Credits") which, if not used, will expire between 2027 and 2035 for the U.S. federal R&D Credits and between 2017 and 2031 for the state R&D Credits. The availability of state NOLs and state credits to offset taxable income and income tax, respectively, could also be substantially reduced if we were to undergo an "ownership change" as defined within certain state tax codes.
In accordance with Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("ASC Topic 740"), as of December 31, 2016, we have recorded a liability of $10.3 million for uncertain tax positions where we believe it is "more likely than not" that the benefit reported on our income tax return will not be realized. There can be no assurance, however, that the actual amount of unrealized deductions will not exceed the amounts we have recognized for uncertain tax positions.
We have significant obligations for pension and other postretirement benefits.
We have significant obligations for pension and other postretirement benefits which could require future funding beyond that which we have funded in the past or which we currently anticipate. At December 31, 2016, our projected pension benefit obligations were $370.9 million and exceeded the fair value of pension plan assets by $52.8 million. In 2016, we made total contributions to qualified pension trusts of $17.8 million. In addition, during 2016 we paid pension benefits for unfunded

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qualified and supplemental retirement plans of $0.6 million. At December 31, 2016, our projected other postretirement benefit obligations were $40.7 million. No assets have been set aside to satisfy our other postretirement benefit obligations. In 2016, we made payments for postretirement benefits other than pensions of $3.8 million. A material increase in funding requirements or benefit payments could have a material effect on our cash flows.
We may be required to pay material amounts under multiemployer pension plans.
We contribute to The PACE Industry Union-Management Pension Fund ("the PIUMPF"), a multiemployer pension plan. The amount of our annual contributions to the PIUMPF is negotiated with the plan and the bargaining unit representing our employees covered by the plan. In 2016, we contributed approximately $0.1 million to the PIUMPF. In addition, in the event of a partial or complete withdrawal by us from the PIUMPF at a time when the plan is underfunded, we would be liable for a proportionate share of such plan's unfunded vested benefits, referred to as a withdrawal liability. In the event that any other contributing employer withdrew from the PIUMPF at a time when the plan is underfunded, and such employer cannot satisfy its obligations to the plan at the time of withdrawal, then the proportionate share of the plan's unfunded vested benefits that would be allocable to us and to the other remaining contributing employers, would increase and there could be an increase to our required annual contributions. In future negotiations of collective bargaining agreements with the labor union that participates in the PIUMPF, we may decide to discontinue participation in the plan.
The PIUMPF was certified to be in "critical status" for the plan year beginning January 1, 2010, and continued to be in critical status for the plan year beginning January 1, 2016. In 2013, two large employers withdrew from the PIUMPF. Further withdrawals by other contributing employers could cause a "mass withdrawal" from, or effectively a termination of, the PIUMPF or alternatively we could elect to withdraw. Although we have no current intention to withdraw from the PIUMPF, if we were to withdraw, either completely or partially, we would incur a withdrawal liability based on our share of the PIUMPF's unfunded vested benefits. Based on information as of December 31, 2015 provided by the PIUMPF and reviewed by our actuarial consultant, we estimate that, as of December 31, 2016, the payments that we would be required to make to PIUMPF in the event of our complete withdrawal would be approximately $0.1 million per year on a pre-tax basis. These payments would continue for 20 years, unless we were deemed to be included in a "mass withdrawal" from the PIUMPF, in which case these payments would continue in perpetuity. However, we are not able to determine the exact amount of our withdrawal liability because the amount could be higher or lower depending on the nature and timing of any triggering event, the funded status of the plan and our level of contributions to the plan prior to the triggering event. These withdrawal liability payments would be in addition to pension contributions to any new pension plan adopted or contributed to by us to replace the PIUMPF and could have a material effect on our cash flows. Adverse changes to pension laws and regulations could increase the likelihood and amount of our liabilities arising under the PIUMPF.
The outcome of legal actions and claims may adversely affect us.
We are involved in legal actions and claims arising in the ordinary course of our business. The outcome of such legal actions and claims against us cannot be predicted with certainty. Legal actions and claims against us could have a material effect on our financial condition, results of operations and liquidity.
Labor interruptions would adversely affect our business.
Except for our Pittsfield, Massachusetts, Brownville, New York and Quakertown, Pennsylvania manufacturing facilities which are non-union, substantially all of our hourly employees are unionized. In addition, some key customers and suppliers are also unionized. Strikes, lockouts or other work stoppages or slowdowns involving our unionized employees could have a material effect on us.
If we are unable to continue to implement our business strategies, our financial conditions and operating results could be materially affected.
Our future operating results will depend, in part, on the extent to which we can successfully implement our business strategies in a cost effective manner. However, our strategies are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. If we are unable to successfully implement our business strategies, our business, financial condition and operating results could be materially adversely affected.
We may not successfully integrate acquisitions and may be unable to achieve anticipated cost savings or other synergies.
The integration of the operations of acquired companies involves a number of risks and presents financial, managerial, legal and operational challenges. We may have difficulty, and may incur unanticipated expenses related to, integrating information systems, financial reporting activities, and integrating and retaining management and personnel from acquired companies. We may not be able to achieve anticipated cost savings or commercial or growth synergies, for a number of reasons, including contractual constraints and obligations or an inability to take advantage of expected commercial opportunities, increased

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operating efficiencies or commercial expansion of key technologies. Failure to successfully integrate acquired companies may have an adverse effect on our business, financial condition, results of operations, and cash flows.
We may not be able to adequately protect our intellectual property and proprietary rights, which could harm our future success and competitive position.
Our future success and competitive position also depends, in part, upon our ability to obtain and maintain protection for our intellectual property and proprietary rights. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or may require us to license other companies' intellectual property rights. It is possible that any of our patents may be invalidated, rendered unenforceable, circumvented, challenged or licensed to others or any of our pending or future patent applications may not be issued within the scope of the claims sought by us, if at all. Further, others may develop technologies that are similar or superior to our technologies, duplicate our technologies or design around our patents, and steps taken by us to protect our technologies may not prevent misappropriation of such technologies.
Future dividends on our common stock may be restricted or eliminated.
Dividends are declared at the discretion of our Board of Directors, and future dividends will depend on our future earnings, cash flow, financial requirements and other factors. Our ability to pay cash dividends on our common stock is limited under the terms of both our bank credit agreement and the indenture for our $175 million of senior notes due November 2021 (the "2021 Senior Notes"). As of December 31, 2016, under the most restrictive terms of our bank credit agreement and the indenture for the 2021 Senior Notes, our ability to pay cash dividends on our common stock is limited, as described under "Risks Relating to Our Indebtedness." There can be no assurance that we will continue to pay dividends in the future.
We may be required to record a charge to our earnings if our goodwill or intangible assets become impaired.
As of December 31, 2016, we had goodwill of $70.4 million and other intangible assets of $74.0 million. Goodwill and other intangible assets are recorded at fair value on the date of acquisition. In accordance with applicable accounting guidance, we review goodwill and other indefinite-lived intangible assets at least annually for impairment, and long-lived intangible assets when facts and circumstances warrant an impairment review. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, and a variety of other factors. The amount of any non-cash impairment would be recognized immediately through our consolidated statement of operations. Any future goodwill or other intangible asset impairment could have a material adverse effect on our results of operations and financial position.
If we have a catastrophic loss or unforeseen or recurring operational problems at any of our facilities, we could suffer significant lost production and/or cost increases.
Our technical products and fine paper and packaging businesses may suffer catastrophic loss due to fire, flood, terrorism, mechanical failure, or other natural or man-made events. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, delay or reduce shipments, reduce revenue, and result in significant expenses to repair or replace the facility. These expenses and losses may not be adequately covered by property or business interruption insurance. Even if covered by insurance, our inability to deliver our products to customers, even on a short-term basis, may cause us to lose market share on a more permanent basis.
Fluctuations in currency exchange rates could adversely affect our results.
Exchange rate fluctuations for the Euro do not have a material effect on the operations or cash flows of our German technical products business. Our German technical products business incurs most of its costs and sells most of its production in Europe and, therefore, its operations and cash flows are not materially affected by changes in the exchange rate of the Euro relative to the U.S. dollar. Changes in the Euro exchange rate relative to the U.S. dollar will, however, have an effect on our balance sheet and reported results of operations. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk."
In addition, because we transact business in other foreign countries, some of our revenues and expenses are denominated in a currency other than the local currency of our operations. As a result, changes in exchange rates between the currency in which the transaction is denominated and the local currency of our operations into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenues or costs related to such transaction, and thus have an effect on our reported sales and income before income taxes.



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Our activities are subject to extensive government regulation, which could increase our costs, cause us to incur liabilities and adversely affect the manufacturing and marketing of our products.
Our operations are subject to federal, state and local laws, regulations and ordinances in the United States and Germany relating to various environmental, health and safety matters. The nature of our operations requires that we invest capital and incur operating costs to comply with those laws, regulations and ordinances and exposes us to the risk of claims concerning non-compliance with environmental, health and safety laws or standards. We cannot assure that significant additional expenditures will not be required to maintain compliance with, or satisfy potential claims arising from, such laws, regulations and ordinances. Future events, such as changes in existing laws and regulations or contamination of sites owned, operated or used for waste disposal by us (including currently unknown contamination and contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs that could require significantly higher capital expenditures and operating costs, which would reduce the funds otherwise available for operations, capital expenditures, future business opportunities or other purposes.
We are subject to risks associated with possible climate change legislation and various cost and manufacturing issues associated with such legislation.
GHG emissions have increasingly become the subject of political and regulatory focus. Concern over potential climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting GHG emissions. In addition to certain federal proposals in the United States to regulate GHG emissions, Germany, the U.K. and all the states in which we operate are currently considering GHG legislation or regulations, either individually and/or as part of regional initiatives. While not all are likely to become law it is reasonably possible that additional climate change related mandates will be forthcoming, and it is expected that they may adversely impact our costs by increasing energy costs and raw material prices, requiring operational or equipment modifications to reduce emissions and creating costs to comply with regulations or to mitigate the financial consequences of compliance.
We are subject to cybersecurity risks related to breaches of security pertaining to sensitive company, customer, employee and vendor information as well as breaches in the technology that manages operations and other business processes.
We use information technologies to securely manage operations and various business functions. We rely on various technologies to process, store and report on our business and interact with customers, vendors and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security design and controls, and those of our third party providers, our information technology and infrastructure may be vulnerable to cyber attacks by hackers or breaches due to employee error, malfeasance or other disruptions. Any such breach could result in operational disruptions or the misappropriation of sensitive data that could subject us to civil and criminal penalties, litigation or have a negative impact on our reputation. There can be no assurance that such disruptions or misappropriations and the resulting repercussions will not negatively impact our cash flows and materially affect our results of operations or financial condition. The U.S. Congress is considering cybersecurity legislation that, if enacted, could impose additional obligations on us and could expand our potential liability in the event of a cyber-security incident.
Our business may suffer if we do not retain our senior management.
We depend on our senior management. The loss of services of members of our senior management team could adversely affect our business until suitable replacements can be found. There may be a limited number of persons with the requisite skills to serve in these positions and we may be unable to locate or employ qualified personnel on acceptable terms. In addition, our future success requires us to continue to attract and retain competent personnel.

Risks Relating to Our Indebtedness
We may not be able to fund our future capital requirements internally or obtain third-party financing.
We may be required or choose to obtain additional debt or equity financing to meet our future working capital requirements, as well as to fund capital expenditures and acquisitions. To the extent we must obtain financing from external sources to fund our capital requirements, we cannot guarantee financing will be available on favorable terms, if at all. As of December 31, 2016, we have required debt payments of $1.2 million during the year ending December 31, 2017.
We may not be able to generate sufficient cash flow to meet our debt obligations, including the 2021 Senior Notes.
Our ability to make scheduled payments or to refinance our obligations with respect to the 2021 Senior Notes, our other debt and our other liabilities will depend on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and to certain financial, business and other factors beyond our control. If our cash flow and capital

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resources are insufficient to fund our debt obligations and other liabilities, we could face substantial liquidity problems and may be forced to reduce or delay scheduled expansions and capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. We cannot assure that our operating performance, cash flow and capital resources will be sufficient to repay our debt in the future. In the event that we are required to dispose of material assets or operations or restructure our debt to meet our debt and other obligations, we can make no assurances as to the terms of any such transaction or how quickly any such transaction could be completed.
If we cannot make scheduled payments on our debt, we will be in default and, as a result:
our debt holders could declare all outstanding principal and interest to be due and payable;
our senior secured lenders could terminate their commitments and commence foreclosure proceedings against our assets; and
we could be forced into bankruptcy or liquidation.
If our operating performance declines in the future or we breach our covenants under our revolving credit facility, we may need to obtain waivers from the lenders under our revolving credit facility to avoid being in default. We may not be able to obtain these waivers. If this occurs, we would be in default under our revolving credit facility.
We have significant indebtedness which subjects us to restrictive covenants relating to the operation of our business.
As of December 31, 2016, we had $175 million of 2021 Senior Notes, $42.9 million in revolving credit borrowings and $6.8 million of project financing outstanding. In addition, availability under our bank credit agreement was approximately $125 million. Our leverage could have important consequences. For example, it could:
make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on the 2021 Senior Notes and our other indebtedness;
place us at a disadvantage to our competitors;
require us to dedicate a substantial portion of our cash flow from operations to service payments on our indebtedness, thereby reducing funds available for other purposes;
increase our vulnerability to a downturn in general economic conditions or the industry in which we operate;
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate and other purposes; and
limit our ability to plan for and react to changes in our business and the industry in which we operate.
The terms of our indebtedness, including our bank credit agreement and the indenture governing the 2021 Senior Notes, contain covenants restricting our ability to, among other things, incur certain additional debt, incur or create certain liens, make specified restricted payments, pay dividends, authorize or issue capital stock, enter into transactions with our affiliates, consolidate or merge with or acquire another business, sell certain of our assets or liquidate, dissolve or wind-up our Company. Under the most restrictive terms of the Third Amended and Restated Credit Agreement, we are permitted to pay cash dividends on or repurchase shares of our common stock up to the amount available under the Third Amended and Restated Credit Agreement, as long as the availability under the Third Amended and Restated Credit Agreement exceeds $25 million. If the availability is below $25 million, we are restricted from paying dividends or repurchasing shares. Under the most restrictive terms of the 2021 Senior Notes, we are permitted to pay cash dividends of up to $25 million in a calendar year, but not permitted to repurchase shares of our common stock. However, as long as the net leverage ratio (net debt/EBITDA) under the 2021 Senior Notes is below 2.5x, we can pay dividends or repurchase shares without limitation. Refer to Item 7A, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" for the current limitations on our ability to pay dividends on or repurchase shares of our common stock.
In addition, if the aggregate availability under our revolving credit facilities is less than the greater of (i) $25 million and (ii) 12.5 percent of the maximum aggregate commitments under our revolving credit facilities as then in effect, we will be subject to increased reporting obligations and controls until such time as availability is more than the greater of (a) $35 million and (b) 17.5 percent of the maximum aggregate commitments under our revolving credit facilities as then in effect for at least 60 consecutive days and no default or event of default has occurred or is continuing during such 60-day period.
If aggregate availability under our revolving credit facilities is less than the greater of (i) $20 million and (ii) 10 percent of the maximum aggregate commitments under our revolving credit facilities as then in effect, we are required to comply with a fixed charge coverage ratio (as defined in our bank 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. Such compliance, once required, would no longer be necessary once (x) aggregate

15


availability under our revolving credit facilities exceeds the greater of (i) 17.5 percent of the aggregate commitment for our revolving credit facilities and (ii) $35 million for 60 consecutive days and (y) no default or event of default has occurred and is continuing during such 60- day period. As of December 31, 2016, aggregate availability under our revolving credit facilities exceeded the minimum required amount, and we are not required to comply with such fixed charge coverage ratio.
Our revolving credit facilities accrue interest at variable rates. As of December 31, 2016, we had $42.9 million of revolving credit borrowings outstanding. We may reduce our exposure to rising interest rates by entering into interest rate hedging arrangements, although those arrangements may result in us incurring higher interest expenses than we would incur without the arrangements. If interest rates increase in the absence of such arrangements, we will need to dedicate more of our cash flow from operations to make payments on our debt. For more information on our liquidity, see Item 7A, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources."
Our failure to comply with the covenants contained in our revolving credit facility or the indenture governing the 2021 Senior Notes could result in an event of default that could cause acceleration of our indebtedness.
Our failure to comply with the covenants and other requirements contained in the indenture governing the 2021 Senior Notes, our revolving credit facility or our other debt instruments could cause an event of default under the relevant debt instrument. The occurrence of an event of default could trigger a default under our other debt instruments, prohibit us from accessing additional borrowings and permit the holders of the defaulted debt to declare amounts outstanding with respect to that debt to be immediately due and payable. Our assets or cash flows may not be sufficient to fully repay borrowings under our outstanding debt instruments, and we may be unable to refinance or restructure the payments on indebtedness on favorable terms, or at all.
Despite our indebtedness levels, we and our subsidiaries may be able to incur substantially more indebtedness, which may increase the risks created by our substantial indebtedness.
Because the terms of our bank credit agreement and the indenture governing the 2021 Senior Notes do not fully prohibit us or our subsidiaries from incurring additional indebtedness, we and our subsidiaries may be able to incur substantial additional indebtedness in the future, some of which may be secured. If we or any of our subsidiaries incur additional indebtedness, the related risks that we and they face may intensify.
Our bank credit agreement is secured by a majority of our assets.
Our bank credit agreement is secured by a majority of our assets. Availability under our bank credit agreement will fluctuate over time depending on the value of our inventory, receivables and various capital assets. An extended work stoppage or decline in sales volumes would result in a decrease in the value of the assets securing the bank credit agreement. A reduction in availability under the bank credit agreement could have a material effect on our liquidity.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities.
Our debt currently has a non-investment grade rating, and there can be no assurance that any rating assigned by the rating agencies will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency's judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital, which could have a material adverse impact on our financial condition and results of operations.
We depend on our subsidiaries to generate cash flow to meet our debt service obligations.
We conduct a substantial portion of our business through our subsidiaries. Consequently, our cash flow and ability to service our debt obligations depend upon the earnings of our subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by these entities to us. The ability of these entities to pay dividends or make other payments or advances to us will be subject to applicable laws and contractual restrictions contained in the instruments governing their debt, including our revolving credit facility and the indenture governing the 2021 Senior Notes. These limitations are also subject to important exceptions and qualifications.
The ability of our subsidiaries to generate sufficient cash flow from operations to allow us to make scheduled payments on our debt will depend upon their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control as well as their ability to repatriate cash to us. If our subsidiaries do not generate sufficient cash flow from operations to help us satisfy our debt obligations, including payments on the 2021 Senior Notes, or if they are unable to distribute sufficient cash flow to us, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital expenditures or seeking to raise additional

16


capital. Refinancing may not be possible, and any assets may not be saleable, or, if sold, we may not realize sufficient amounts from those sales. Additional financing may not be available on acceptable terms, if at all, or we may be prohibited from incurring it, if available, under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms would have an adverse effect on our business, financial condition and results of operations.

FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K may constitute "forward-looking" statements as defined in Section 27A of the Securities Act of 1933 (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), or in releases made by the SEC, all as may be amended from time to time. Statements contained in this Annual Report on Form 10-K that are not historical facts may be forward-looking statements within the meaning of the PSLRA. Any such forward-looking statements reflect our beliefs and assumptions and are based on information currently available to us. Forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the "safe harbor" provisions of such laws. We caution investors that any forward-looking statements we make are not guarantees or indicative of future performance. For additional information regarding factors that may cause our results of operations to differ materially from those presented herein, please see "Risk Factors" contained in this Annual Report on Form 10-K and as are detailed from time to time in other reports we file with the SEC.
You can identify forward-looking statements as those that are not historical in nature, particularly those that use terminology such as "may," "will," "should," "expect," "anticipate," "contemplate," "estimate," "believe," "plan," "project," "predict," "potential" or "continue," or the negative of these, or similar terms. In evaluating these forward-looking statements, you should consider the following factors, as well as others contained in our public filings from time to time, which may cause our actual results to differ materially from any forward-looking statement:
changes in market demand for our products due to global economic and political conditions;
the impact of competition, both domestic and international, changes in industry production capacity, including the construction of new mills or new machines, the closing of mills and incremental changes due to capital expenditures or productivity increases;
the enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
fluctuations in (i) exchange rates (in particular changes in the U.S. dollar/Euro currency exchange rates) and (ii) interest rates;
increases in commodity prices, (particularly for pulp, energy and latex) due to constrained global supplies or unexpected supply disruptions;
the availability of raw materials and energy;
strikes, labor stoppages and changes in our collective bargaining agreements and relations with our employees and unions;
capital and credit market volatility and fluctuations in global equity and fixed-income markets;
unanticipated expenditures related to the cost of compliance with environmental and other governmental regulations;
our ability to control costs and implement measures designed to enhance operating efficiencies;
the loss of current customers or the inability to obtain new customers;
loss of key personnel;
increases in the funding requirements for our pension and postretirement liabilities;
changes in asset valuations including write-downs of assets including property, plant and equipment; inventory, accounts receivable, deferred tax assets or other assets for impairment or other reasons;
our existing and future indebtedness;
our ability to successfully integrate acquired businesses into our existing operations;

17


our net operating losses may not be available to offset our tax liability and other tax planning strategies may not be effective;
other risks that are detailed from time to time in reports we file with the SEC; and
other factors described under "Risk Factors."
You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this information statement. We undertake no duty to update these forward-looking statements after the date of this Form 10-K, even though our situation may change in the future.
Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
Our principal executive offices are located in Alpharetta, Georgia, a suburb of Atlanta, Georgia. We operate 10 manufacturing facilities in the United States that produce printing and writing, text, cover, durable saturated and coated substrates and other specialty papers for a variety of end uses. In 2016, we converted one of the two machines at the Appleton, Wisconsin, mill into a machine that produces transportation and other filtration media, and the mill will now be a shared facility with our fine paper and packaging business. We own and operate two manufacturing facilities in Germany that produce transportation and other filter media, and durable and saturated substrates. We own and operate one manufacturing facility in the U.K. that produces durable printing and specialty paper.
We believe that each of these facilities is adequately maintained and is suitable for conducting our operations and business. We manage machine operating schedules at our manufacturing locations to fulfill customer orders in a timely manner and control inventory levels.
As of December 31, 2016, following are the locations of our principal facilities and operating equipment and the products produced at each location:


18


 
 
 
 
 
 
 
Location
 
Equipment/Resources
 
Owned or Leased
 
Products
Fine Paper and Packaging Segment
 
 
 
 
 
 
Neenah Mill
Neenah, Wisconsin
 
Two paper machines; paper finishing equipment
 
Owned
 
Printing and writing, text, cover and other specialty papers
Whiting Mill
Whiting, Wisconsin
 
Four paper machines; paper finishing equipment
 
Owned
 
Printing and writing, text, cover and other specialty papers
Converting Center
Neenah, Wisconsin
 
Paper finishing equipment
 
Owned
 
Printing and writing, text, cover and other specialty papers
 
 
 
 
 
 
 
Technical Products Segment
 
 
 
 
 
 
Munising Mill
Munising, Michigan
 
Two paper machines; two off line saturators; two off line coaters; specialty finishing equipment
 
Owned
 
Tapes, abrasives, premask, medical packaging and other durable, saturated and coated substrates
Pittsfield Mill
Pittsfield, Massachusetts
 
Three paper machines; paper finishing equipment
 
Owned
 
Reverse osmosis filtration and glass applications
Bruckmühl Mill
Bruckmühl, Germany
 
One paper machine; two saturator/coaters; finishing equipment
 
Owned
 
Masking tape backings and abrasive backings
Weidach Mill
Feldkirchen-Westerham, Germany
 
Two paper machines; three saturators; one laminator; three meltblown machines; specialty finishing equipment
 
Owned
 
Transportation filtration and other industrial filter media
Red Bridge Mill
Bolton, England
 
Saturating, coating, and finishing equipment
 
Owned
 
Durable printing and specialty paper
 
 
 
 
 
 
 
Shared Facilities
 
 
 
 
 
 
Appleton Mill
Appleton, Wisconsin
 
Two paper machines; saturating equipment; paper finishing equipment
 
Owned
 
Transportation filtration, printing and writing, text, cover and other specialty papers
Brattleboro Mill
Brattleboro, Vermont
 
One paper machine;paper finishing equipment
 
Owned
 
Printing and specialty paper board
Brownville Mill
Brownville, New York
 
One paper machine; one off-line coater
 
Owned
 
Durable printing and specialty paper
Lowville Mill
Lowville, New York
 
Saturating, coating, embossing and finishing equipment
 
Owned
 
Durable printing and specialty paper
Quakertown Mill
Quakertown, Pennsylvania
 
Saturating, coating, embossing and finishing equipment
 
Owned
 
Durable printing and specialty paper
Reading Mill (1)
Reading, Pennsylvania
 
Embossing and finishing equipment
 
Leased
 
Durable printing and specialty paper
_______________________

(1)
In December 2016, we ceased manufacturing operations at the Reading, Pennsylvania, facility. The facility is leased and the lease will expire June 30, 2017.

See Note 7 of Notes to Consolidated Financial Statements, "Debt", for a description of the material encumbrances attached to the properties described in the table above.
As of December 31, 2016, following are the locations of our owned and leased office and laboratory space and the functions performed at each location.


19


 
 
 
 
 
Administrative Location
 
Office/Other Space
 
Function
Alpharetta, Georgia
 
Leased Office Space
 
Corporate Headquarters, Administration and Design Center
Neenah and Appleton, Wisconsin
 
Owned Office Space
 
Administration
Munising, Michigan
 
Owned Office and Laboratory Space
 
Administration and Research and Development for our technical products businesses
Pittsfield, Massachusetts
 
Owned Office and Laboratory Space
 
Administration and Research and Development for our technical products businesses
West Springfield, Massachusetts
 
Owned Office and Laboratory Space
 
Administration and Research and Development for our technical products and fine paper and packaging businesses
Feldkirchen-Westerham, Germany
 
Owned Office and Laboratory Space
 
Administration and Research and Development for our technical product businesses
Capacity Utilization
Paper machines in our manufacturing facilities generally operate on a combination of five- or seven-day schedules to meet demand. We are not constrained by input factors and the maximum operating capacity of our manufacturing facilities is calculated based on operating days to account for variations in mix and different units of measure between assets. Due to required maintenance downtime and contract holidays, the maximum number of operating days is defined as 350 days per year. We generally expect to utilize approximately 80 to 90 percent of our maximum operating capacity. The following table presents our percentage utilization of maximum operating capacity by segment:
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Technical Products
 
87
%
 
84
%
 
85
%
Fine Paper and Packaging
 
80
%
 
80
%
 
77
%

Item 3.    Legal Proceedings
Litigation
We are 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 our consolidated financial condition, results of operations or liquidity.
Income Taxes
We periodically undergo examination by the IRS as well as various state and foreign jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and credits we report on our income tax returns.
Item 4.    Mine Safety Disclosures
Not applicable.


20


PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Neenah common stock is listed on the New York Stock Exchange and is traded under the ticker symbol NP. Trading, as reported on the New York Stock Exchange, Inc. Composite Transactions Tape, and dividend information follows:

 
 
Common Stock
Market Price
 
 
 
 
Dividends
Declared
 
 
High
 
Low
 
2016
 
 

 
 

 
 

Fourth quarter
 
$
90.23

 
$
75.50

 
$
0.33

Third quarter
 
$
82.24

 
$
70.62

 
$
0.33

Second quarter
 
$
74.15

 
$
61.77

 
$
0.33

First quarter
 
$
64.10

 
$
63.37

 
$
0.33

 
 
 
 
 
 
 
2015
 
 

 
 

 
 

Fourth quarter
 
$
69.63

 
$
57.68

 
$
0.30

Third quarter
 
$
62.75

 
$
54.90

 
$
0.30

Second quarter
 
$
62.88

 
$
58.23

 
$
0.30

First quarter
 
$
63.87

 
$
55.14

 
$
0.30

For the year ended December 31, 2016 we paid cash dividends of $1.32 per common share or $22.4 million. For the year ended December 31, 2015, we paid cash dividends of $1.20 per common share or $20.3 million. In November 2016, our Board of Directors approved a 12 percent increase in the annual dividend rate on our common stock to $1.48 per share. The dividend is scheduled to be paid in four equal quarterly installments beginning in March 2017.
Dividends are declared at the discretion of the Board of Directors, and future dividends will depend on our future earnings, cash flow, financial requirements and other factors. Our ability to pay cash dividends on our common stock is limited under the terms of both our bank credit agreement and our 2021 Senior Notes. Under the most restrictive terms of the Third Amended and Restated Credit Agreement, we are permitted to pay cash dividends on or repurchase shares of our common stock up to the amount available under the Third Amended and Restated Credit Agreement, as long as the availability under the Third Amended and Restated Credit Agreement exceeds $25 million. If the availability is below $25 million, we are restricted from paying dividends or repurchasing shares. As of December 31, 2016, our availability exceeded $25 million, so this restriction did not apply. Under the most restrictive terms of the 2021 Senior Notes, we are permitted to pay cash dividends of up to $25 million in a calendar year, but not permitted to repurchase shares of our common stock. However, as long as the net leverage ratio (net debt/EBITDA) under the 2021 Senior Notes is below 2.5x, we can pay dividends or repurchase shares without limitation. In the event the net leverage ratio exceeds 2.5x, we may still pay dividends in excess of $25 million or repurchase shares by utilizing "restricted payment baskets" as defined in the indenture for the 2021 Senior Notes. As of December 31, 2016, since our leverage ratio was less than 2.5x, none of these covenants were restrictive to our ability to pay dividends on or repurchase shares of our common stock.
As of February 22, 2017, Neenah had approximately 1,400 holders of record of its common stock. The closing price of Neenah's common stock on February 22, 2017 was $75.90.
Purchases of Equity Securities:
The following table sets forth certain information regarding purchases of our common stock during the fourth quarter of 2016.


21


Period
 
Total Number
of Shares
Purchased (a)
 
Average Price
Paid Per
Share (c)
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (b)
 
Approximate Dollar Value
of Shares that May Yet
Be Purchased Under
Publicly Announced
Plans or Programs
October 2016
 
19,497

 
$
80.15

 
19,497

 
$
20,815,812

November 2016
 
20,439

 
$
81.78

 
20,439

 
$
19,151,525

December 2016
 
61,746

 
$
86.91

 
17,945

 
$
17,591,939

_______________________

(a)
Transactions include the purchase of vested restricted shares from employees to satisfy minimum tax withholding requirements upon vesting of stock-based awards. See Note 9 of Notes to Consolidated Financial Statements, "Stock Compensation Plans."
(b)
In May 2016, our Board of Directors authorized a program that would allow for the purchase of up to $25 million of outstanding common stock through May 21, 2017.
(c)
Average price paid per share for shares purchased as part of our program.

Equity Compensation Plan Information
The following table summarizes information about outstanding options, share appreciation rights and restricted stock units and shares reserved for future issuance under our existing equity compensation plans as of December 31, 2016.

Plan Category
 
(a)
Number of
securities
to be issued upon
exercise of
outstanding
options,
warrants, and
rights
 
(b)
Weighted-
average
exercise price
of
outstanding
options,
warrants, and
rights (1)
 
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
Equity compensation plans approved by security holders
 
380,820

(2)(3)
$
38.35

 
950,000

Equity compensation plans not approved by security holders
 

 

 

Total
 
380,820

 
$
38.35

 
950,000

_______________________

(1)
The weighted-average exercise price of outstanding options, warrants and rights does not take into account restricted stock units since they do not have an exercise price.
(2)
Includes (i) 226,000 shares issuable upon the exercise of outstanding options and stock appreciation rights ("SARs"), (ii) 74,100 shares issuable following the vesting and conversion of outstanding performance share unit awards, and (iii) 80,720 shares issuable upon the vesting and conversion of outstanding restricted stock units, all as of December 31, 2016. As of December 31, 2016, we had an aggregate of 530,462 stock options and SARs outstanding. The weighted average exercise price of the stock options and SARs was $38.35 per share and the remaining contractual life of such awards was 6.3 years.
(3)
Includes 218,400 shares that would be issued upon the assumed exercise of 307,518 SARs at the $85.20 per share closing price of our common stock on December 31, 2016.

Item 6.    Selected Financial Data
The following table sets forth our selected historical financial and other data. You should read the information set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Annual Report. The statement of operations data for the years ended December 31, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2016 and 2015 set forth below are derived from our audited historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The balance sheet data as of December 31, 2014, 2013 and 2012 and the statement of operations data for the years ended December 31, 2013 and 2012 set forth below are derived from our historical consolidated financial statements not included in this Annual Report on Form 10-K.
On October 31, 2015, we sold the Lahnstein Mill for net cash proceeds of approximately $5.4 million. For the years ended December 31, 2016 and December 31, 2015, discontinued operations reported on the consolidated statements of operations reflect the results of operations and the estimated loss on sale of the Lahnstein Mill. The consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012 have been restated to report results of the Lahnstein Mill as discontinued operations. As of December 31, 2015, 2014, 2013 and 2012, the assets and liabilities of the Lahnstein Mill are classified as assets held for sale on the consolidated balance sheet. See Note 13 of Notes to Consolidated Financial Statements, "Discontinued Operations."

22


 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
Consolidated Statement of Operations Data
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
941.5

 
$
887.7

 
$
839.7

 
$
781.7

 
$
738.3

Cost of products sold
 
727.0

 
692.3

 
668.9

 
621.8

 
588.6

Gross profit
 
214.5

 
195.4

 
170.8

 
159.9

 
149.7

Selling, general and administrative expenses
 
92.2

 
86.5

 
78.0

 
74.7

 
71.3

Integration/restructuring costs (a)
 
7.0

 
6.5

 
2.3

 
0.4

 
5.8

Pension plan settlement charge (b)
 
0.8

 

 
3.5

 
0.2

 
3.5

Loss on early extinguishment of debt (c)
 

 

 
0.2

 
0.5

 
0.6

Other (income) expense — net
 
0.4

 
1.0

 
0.2

 
1.5

 
1.6

Operating income
 
114.1

 
101.4

 
86.6

 
82.6

 
66.9

Interest expense — net
 
11.1

 
11.5

 
11.1

 
11.0

 
13.4

Income from continuing operations before income taxes
 
103.0

 
89.9

 
75.5

 
71.6

 
53.5

Provision for income taxes (h)
 
29.6

 
29.4

 
7.5

 
23.1

 
16.1

Income from continuing operations
 
73.4

 
60.5

 
68.0

 
48.5

 
37.4

Income (loss) from discontinued operations, net of taxes (e)
 
(0.4
)
 
(9.4
)
 
0.7

 
3.5

 
6.9

Net income
 
$
73.0

 
$
51.1

 
$
68.7

 
$
52.0

 
$
44.3

 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations per basic share
 
$
4.33

 
$
3.58

 
$
4.05

 
$
2.97

 
$
2.30

Earnings from continuing operations per diluted share
 
$
4.26

 
$
3.53

 
$
3.99

 
$
2.91

 
$
2.26

Cash dividends per common share
 
$
1.32

 
$
1.20

 
$
1.02

 
$
0.70

 
$
0.48

 
 
 
 
 
 
 
 
 
 
 
Other Financial Data
 
 

 
 

 
 

 
 

 
 

Net cash flow provided by (used for):
 
 

 
 

 
 

 
 

 
 

Operating activities (h)
 
$
115.8

 
$
111.2

 
$
94.5

 
$
83.5

 
$
40.1

Capital expenditures (g)
 
(68.5
)
 
(48.1
)
 
(27.9
)
 
(28.7
)
 
(25.1
)
Other investing activities (f)
 
0.3

 
(112.0
)
 
(77.0
)
 
(4.6
)
 
(7.2
)
Financing activities (c)(h)
 
(48.4
)
 
(18.8
)
 
10.2

 
15.0

 
(13.0
)
Ratio of earnings to fixed charges (d)
 
8.7x

 
7.7x

 
6.9x

 
6.7x

 
4.6x

 
 
 
December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(Dollars in millions)
Consolidated Balance Sheet Data
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
3.1

 
$
4.2

 
$
72.6

 
$
73.4

 
$
7.8

Working capital, less cash and cash equivalents
 
125.2

 
136.3

 
129.5

 
123.9

 
132.0

Total assets (h)
 
765.6

 
751.4

 
724.5

 
670.9

 
608.0

Long-term debt (c)(h)
 
219.7

 
228.2

 
226.8

 
185.5

 
174.9

Total liabilities (h)
 
427.3

 
439.8

 
435.8

 
403.4

 
410.2

Total stockholders' equity
 
338.3

 
311.6

 
288.7

 
267.5

 
197.8

_______________________

(a)
For the year ended December 31, 2016, we incurred $7.0 million of integration and restructuring costs and $0.8 million of pension settlement charges. For the year ended December 31, 2015, we incurred $5.3 million of integration

23


costs related to the FiberMark Acquisition and $1.2 million of restructuring costs. For the year ended December 31, 2014, we incurred $1.0 million of integration costs related to the acquisition of the Crane technical materials business and $1.3 million of restructuring costs. For the year ended December 31, 2013, we incurred $0.4 million of integration costs related to the acquisition of the Southworth brands. For the year ended December 31, 2012, we incurred $5.8 million integration costs related to the acquisition of the Wausau brands.
(b)
For the year ended December 31, 2016, we elected settlement accounting even though the benefit payments did not exceed the sum of expected service cost and interest costs of the affected plans, and recognized a settlement loss of $0.8 million. For the years ended December 31, 2014, 2013 and 2012, benefit payments under certain pension plans exceeded the sum of expected service cost and interest costs for the plan for the respective calendar years. In accordance with ASC Topic 715, Compensation — Retirement Benefits ("ASC Topic 715"), we measured the liabilities of the post-retirement benefit plans and recognized settlement losses of $3.5 million, $0.2 million and $3.5 million, respectively.
(c)
For the year ended December 31, 2014, we amended and restated our existing bank credit facility and recognized a pre-tax loss of $0.2 million for the write-off of unamortized debt issuance costs. For the year ended December 31, 2013, we redeemed $90 million of 2014 Senior Notes and repaid all outstanding term loan borrowings ($29.3 million). In connection with the early extinguishment of debt we recognized a pre-tax loss of $0.5 million for the write-off of unamortized debt issuance costs. For the year ended December 31, 2012, we completed an early redemption of $68 million in aggregate principal amount of the 2014 Senior Notes. In connection with the early redemption we recognized a pre-tax loss of $0.6 million, including a call premium and the write-off of unamortized debt issuance costs.
(d)
For purposes of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes (less interest) plus fixed charges. Fixed charges consist of interest expense, including amortization of debt issuance costs, and the estimated interest portion of rental expense.
(e)
The following table presents the results of discontinued operations:
 
 
Year Ended December 31,
 
 
2016 (1)
 
2015 (2)
 
2014
 
2013 (3)
 
2012 (4)
Discontinued operations: (5)
 
 

 
 

 
 

 
 

 
 

Income from operations
 
$

 
$
0.2

 
$
0.9

 
$
5.4

 
$
(0.1
)
Loss on sale of the Lahnstein Mill (5)
 
(0.6
)
 
(13.6
)
 

 

 

Income (loss) before income taxes
 
(0.6
)
 
(13.4
)
 
0.9

 
5.4

 
(0.1
)
Provision (benefit) for income taxes
 
(0.2
)
 
(4.0
)
 
0.2

 
1.9

 
(4.5
)
Income (loss) from discontinued operations, net of taxes
 
$
(0.4
)
 
$
(9.4
)
 
$
0.7

 
$
3.5

 
$
4.4

_______________________

(1)
The loss in 2016 was due to the final adjustment of the sales price of the Lahnstein Mill.
(2)
The loss on sale of the Lahnstein Mill includes a net curtailment gain related to the divesture of the pension plan of $15.8 million, including a $5.5 million write-off of deferred actuarial losses in 2015.
(3)
During the first quarter of 2013, we received a refund of excess pension contributions from the terminated Terrace Bay pension plan. As a result, we recorded income before income taxes from discontinued operations of $4.2 million and a related provision for income taxes of $1.6 million.
(4)
In November 2012, audits of the 2007 and 2008 tax years were finalized with a finding of no additional taxes due. As a result, we recognized a non-cash tax benefit of $4.5 million related to the reversal of certain liabilities for uncertain income tax positions.
(5)
On October 31, 2015, we sold the Lahnstein Mill. For the year ended December 31, 2016, 2015, 2014, 2013 and 2012, the results of operations and the loss on sale of the Lahnstein Mill are reported as discontinued operations in the Consolidated Statement of Operations Data.

(f)
In August 2015, we purchased all of the outstanding equity of FiberMark for approximately $118 million. In July 2014, we purchased all of the outstanding equity of Crane for approximately $72 million.
(g)
During the year ended December 31, 2016, we completed our U.S. Filtration project.
(h)
At December 31, 2016, we adopted ASC Topic No. 2016-09 and applied the guidance retroactively to January 1, 2016. At December 31, 2015, we adopted ASC Topic No. 2015-03 and ASC Topic No. 2015-17 and elected to apply the guidance retroactively to all periods presented. See Note 2 of Notes to Consolidated Financial Statements, "Summary of Significant Accounting Policies — Recently Adopted Accounting Standards."


24


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents the factors that had a material effect on our results of operations during the years ended December 31, 2016, 2015 and 2014. Also discussed is our financial position as of the end of those years. You should read this discussion in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this 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.
Introduction
This Management's Discussion and Analysis of Financial Condition is intended to provide investors with an understanding of the historical performance of our business, its financial condition and its prospects. We will discuss and provide our analysis of the following:
Overview of Business;
Business Segments;
Results of Operations and Related Information;
Liquidity and Capital Resources;
Adoption of New Accounting Pronouncements; and
Critical Accounting Policies and Use of Estimates.
Overview of Business
We are a leading producer of technical products and premium fine papers and packaging. We have two primary operations: our technical products business and our fine paper and packaging business.
Our mission is to create value by improving the image and performance of everything we touch. We expect to create value by growing in specialized niche markets that value performance or image and where we have competitive advantages. In managing our businesses, we believe that achieving and maintaining a leadership position in our markets, responding effectively to customer needs and competitive challenges, employing capital optimally, controlling costs and managing risks are important to long-term success. Changes in input costs and general economic conditions can also impact our results. In this discussion and analysis, we will refer to these factors.
Competitive Environment — Our past results have been and our future prospects will be significantly affected by the competitive environment in which we operate. While our businesses are oriented to premium performance and quality, they may also face competitive pressures from lower value products and in most of our markets our businesses compete directly with well-known competitors, some of which are larger and more diversified.
Economic Conditions and Input Costs — The markets for all of our products are affected to a significant degree by economic conditions, including rapid changes in input costs, particularly for pulp, latex and natural gas that may not be recovered immediately through pricing or other actions. Our results are also affected by fluctuations in exchange rates, particularly for the Euro.
Business Segments
Our reportable operating segments consist of Technical Products, Fine Paper and Packaging, and Other.
Our technical products business is a leading international producer of transportation, water and other filter media and durable, saturated and coated substrates for a variety of end markets. We focus on categories where we believe we are, or can be, a market leader. These categories include filtration media for transportation, water and other uses, backings for specialty tapes and abrasives, performance labels and other specialty markets. Our dedicated technical products manufacturing facilities are located near Munich, Germany, in Bolton, England, in Munising, Michigan and in Pittsfield, Massachusetts. In addition, certain technical products are manufactured along with fine paper and packaging products in shared facilities located in upstate New York and Quakertown, Pennsylvania. In 2017, a filtration machine (which was converted from a fine paper machine) will begin production in Appleton, Wisconsin, a site also shared with the fine paper and packaging business.

25


We believe our fine paper and packaging business is the leading supplier of premium printing and other high end specialty papers in North America. Our products include some of the most recognized and preferred papers in North America, where we enjoy leading market positions in many of our product categories. We sell our products primarily to authorized paper distributors, as well as through converters, major national retailers and specialty businesses. Our primary fine paper and packaging manufacturing facilities are located in Neenah and Whiting, Wisconsin and in Brattleboro, Vermont. In addition, certain products are manufactured in shared facilities located in upstate New York and Quakertown, Pennsylvania, as well as an existing site shared with technical products in 2017 in Appleton, Wisconsin.
Our other segment includes certain product lines composed of papers sold to converters for end uses such as covering materials for datebooks, diaries, yearbooks and traditional photo albums. These products are primarily manufactured at our mill in Brattleboro, Vermont that also makes fine paper and packaging.
Results of Operations and Related Information
In this section, we discuss and analyze our net sales, income before interest and income taxes (which we refer to as "operating income") and other information relevant to an understanding of our results of operations.
Executive Summary
For the year ended December 31, 2016, consolidated net sales of $941.5 million increased $53.8 million, or 6 percent, from $887.7 million in 2016. The increase reflects a full year of the acquired volume from the August 1, 2015 FiberMark Acquisition and other incremental volume growth which more than offset lower net selling prices and currency effects.
Consolidated operating income of $114.1 million for the year ended December 31, 2016 increased $12.7 million, or 13 percent, from the prior year. The favorable comparison to the prior year was primarily due to lower manufacturing material costs (including purchasing synergies resulting from the FiberMark Acquisition), and increased sales as a result of incremental volume growth. These favorable variances were partially offset by incremental acquired selling, general and administrative costs ("SG&A"), lower net selling prices, and higher integration and restructuring costs, primarily due to costs related to the Appleton filtration machine conversion and a pension settlement charge. Excluding aggregate charges of $7.8 million in 2016 for integration and restructuring costs and pension settlement losses, and aggregate charges of $6.5 million in 2015 for integration and restructuring costs, operating income for the year ended December 31, 2016 increased $14.0 million from the prior year. See later in this section for further information regarding the presentation of operating income, as adjusted.
Cash provided by operating activities of $115.8 million for the year ended December 31, 2016 was $4.6 million higher than cash provided by operating activities of $111.2 million in the prior year primarily due to higher operating earnings with commensurate benefits of increased utilization of federal research and development tax credits, partly offset by higher post-retirement benefit plan contributions.
Capital expenditures for the year ended December 31, 2016 were $68.5 million compared to spending of $48.1 million in the prior year. Higher spending in 2016 was due to an incremental investment in filtration assets in the U.S. that was completed at the end of 2016.
Analysis of Net Sales — Years Ended December 31, 2016, 2015 and 2014
The following table presents net sales by segment and net sales expressed as a percentage of total net sales:

 
 
Year Ended December 31,
Net sales
 
2016
 
2016
 
2015
 
2015
 
2014
 
2014
Technical Products
 
$
466.4

 
50
%
 
$
429.2

 
48
%
 
$
403.6

 
48
%
Fine Paper and Packaging
 
452.1

 
48
%
 
442.7

 
50
%
 
436.1

 
52
%
Other
 
23.0

 
2
%
 
15.8

 
2
%
 

 
%
Consolidated
 
$
941.5

 
100
%
 
$
887.7

 
100
%
 
$
839.7

 
100
%





26


Commentary:
Year 2016 versus 2015

 
 
 
 
 
 
Change in Net Sales Compared to the
Prior Year
 
 
For the Year
Ended
December 31,
 
 
 
Change Due To
 
 
 
Total
Change
 
 
 
Net Price
 
 
 
 
2016
 
2015
 
 
Volume
 
 
Currency
Technical Products
 
$
466.4

 
$
429.2

 
$
37.2

 
$
49.8

 
$
(11.0
)
 
$
(1.6
)
Fine Paper and Packaging
 
452.1

 
442.7

 
9.4

 
18.2

 
(8.8
)
 

Other
 
23.0

 
15.8

 
7.2

 
7.2

 

 

Consolidated
 
$
941.5

 
$
887.7

 
$
53.8

 
$
75.2

 
$
(19.8
)
 
$
(1.6
)
Consolidated net sales for the year ended December 31, 2016 were $53.8 million (6%) higher than the prior year. The increase reflects a full year of the acquired volume from the August 1, 2015 FiberMark Acquisition and other incremental volume growth which more than offset lower net selling prices and currency effects. Excluding currency exchange effects, consolidated net sales increased $55.4 million from the prior year.
Net sales in our technical products business increased $37.2 million (9%) from the prior year due to acquired volume and organic volume growth, which were partially offset by lower net selling prices. Excluding currency exchange effects, technical product sales increased $38.8 million (9%). Organic volumes increased from the prior year period due to growth in transportation filtration and backings for tapes and abrasives. Net selling prices were down primarily due to a lower-priced mix of products sold but also for reduced selling prices on products with contractual adjusters for certain input costs.
Net sales in our fine paper and packaging business increased $9.4 million (2%) from the prior year due to acquired volume, which was partially offset by lower net selling prices. Net selling prices were down from the prior year due to a lower-priced mix of products sold in 2016, which reflected a higher proportion of sales of non-branded products.
Net sales in our other business segment increased $7.2 million from the prior year period due to acquired volume.

Year 2015 versus 2014

 
 
 
 
 
 
Change in Net Sales Compared to the
Prior Year
 
 
For the Years Ended
December 31,
 
 
 
Change Due To
 
 
2015
 
2014
 
Total
Change
 
Volume
 
Net Price
 
Currency
Technical Products
 
$
429.2

 
$
403.6

 
$
25.6

 
$
66.5

 
$
(2.4
)
 
$
(38.5
)
Fine Paper and Packaging
 
442.7

 
436.1

 
6.6

 
(4.5
)
 
11.1

 

Other
 
15.8

 

 
15.8

 
15.8

 

 

Consolidated
 
$
887.7

 
$
839.7

 
$
48.0

 
$
77.8

 
$
8.7

 
$
(38.5
)
Consolidated net sales for the year ended December 31, 2015 were $48.0 million (6%) higher than the prior year due to organic technical products volume growth, incremental sales from the FiberMark Acquisition and higher average selling prices, partially offset by unfavorable currency exchange effects. Excluding incremental FiberMark sales and currency exchange effects, consolidated net sales increased $28.4 million from the prior year.
Net sales in our technical products business increased $25.6 million (6%) from the prior year as organic volume growth, incremental sales from the FiberMark Acquisition and higher selling prices were only partially offset by unfavorable currency exchange effects. Unfavorable currency exchange effects resulted from the Euro weakening by approximately 16 percent relative to the U.S. dollar in the year ended December 31, 2015 as compared to the prior year. Excluding currency exchange effects and incremental FiberMark sales, technical product sales increased $40.7 million (10%) and

27


volumes increased approximately 11% from the prior year period due to growth in shipments of filtration and specialty performance products and incremental sales from the technical materials business acquired in July 2014.
Net sales in our fine paper and packaging business increased $6.6 million (2%) from the prior year due to higher average net prices and incremental FiberMark sales. Excluding acquired revenues, fine paper and packaging sales decreased $12.3 million (3%) as higher average net price was more than offset by a four percent decrease in sales volumes. Sales volumes were unfavorable to the prior year as increases in premium packaging and retail products were more than offset by lower sales of other grades; including lower margin special make business. Average net price improved from the prior year due to a two percent increase in average selling prices and a more favorable product mix.
Analysis of Operating Income — Years Ended December 31, 2016, 2015 and 2014
The following table sets forth line items from our consolidated statements of operations as a percentage of net sales for the periods indicated and is intended to provide a perspective of trends in our historical results:

 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
Cost of products sold
 
77.2
%
 
78.0
%
 
79.7
%
Gross profit
 
22.8
%
 
22.0
%
 
20.3
%
Selling, general and administrative expenses
 
9.8
%
 
9.8
%
 
9.3
%
Integration costs and settlement charges
 
0.8
%
 
0.7
%
 
0.7
%
Other (income) expense — net
 
0.1
%
 
0.1
%
 
%
Operating income
 
12.1
%
 
11.4
%
 
10.3
%
Interest expense — net
 
1.2
%
 
1.3
%
 
1.3
%
Income from continuing operations before income taxes
 
10.9
%
 
10.1
%
 
9.0
%
Provision for income taxes
 
3.1
%
 
3.3
%
 
0.9
%
Income from continuing operations
 
7.8
%
 
6.8
%
 
8.1
%

Commentary:
Year 2016 versus 2015

 
 
 
 
 
 
Change in Operating Income (Loss) Compared to the Prior Year
 
 
For the Years Ended
December 31,
 
 
 
Change Due To
 
 
2016
 
2015
 
Total
Change
 
Volume
 
Net Price (a)
 
Input Costs (b)
 
Currency
 
Other
Technical Products
 
$
65.6

 
$
54.1

 
$
11.5

 
$
9.1

 
$
(5.5
)
 
$
11.0

 
$
(0.5
)
 
$
(2.6
)
Fine Paper and Packaging
 
70.7

 
67.3

 
3.4

 
0.2

 
(4.1
)
 
10.4

 

 
(3.1
)
Other
 
(1.1
)
 
(2.0
)
 
0.9

 
0.7

 

 

 

 
0.2

Unallocated corporate costs
 
(21.1
)
 
(18.0
)
 
(3.1
)
 

 

 

 

 
(3.1
)
Consolidated
 
$
114.1

 
$
101.4

 
$
12.7

 
$
10.0

 
$
(9.6
)
 
$
21.4

 
$
(0.5
)
 
$
(8.6
)
_______________________

(a)
Includes price changes, net of changes in product mix.
(b)
Includes price changes for raw materials and energy.
Consolidated operating income of $114.1 million for the year ended December 31, 2016 increased $12.7 million (13%) from the prior year. The favorable comparison to the prior year was primarily due to lower manufacturing material costs (including purchasing synergies resulting from the FiberMark Acquisition), and increased sales as a result of incremental volume growth.

28


These favorable variances were partially offset by incremental acquired SG&A, lower net selling prices, and higher integration and restructuring costs, primarily due to costs related to the Appleton filtration machine conversion and a pension settlement charge. Excluding aggregate charges of $7.8 million in 2016 for integration and restructuring costs and pension settlement losses, and aggregate charges of $6.5 million in 2015 for integration and restructuring costs, operating income for the year ended December 31, 2016 increased $14.0 million (13%) from the prior year.
Operating income for our technical products business increased $11.5 million (21%) from the prior year primarily due to lower manufacturing input costs and operational efficiencies, organic and acquired volume growth, and lower integration and restructuring costs. These favorable variances were partially offset by added SG&A from the acquisition, lower net selling prices and currency effects. Results for the years ended December 31, 2016 and 2015 include $1.4 million and $1.8 million for integration/restructuring costs, respectively. Excluding integration/restructuring costs, operating income for the technical products business increased $11.1 million (20%).
Operating income for our fine paper and packaging business increased $3.4 million (5%) from the prior year period primarily due to lower manufacturing material prices and increased volume, partially offset by a lower-priced mix of products sold and added SG&A from the acquisition. Results for the years ended December 31, 2016 and 2015 include $1.8 million and 1.5 million for integration costs related to the FiberMark Acquisition, respectively. Excluding integration costs, operating income for the fine paper and packaging business increased $3.7 million (5%).
Unallocated corporate costs for the year ended December 31, 2016 were $21.1 million, or $3.1 million unfavorable to the prior year. The unfavorable comparison to the prior year period is primarily due to pre-operating costs related to conversion of a fine paper machine to filtration, which went into production in early 2017. Excluding charges of $2.7 million of restructuring costs and a pension plan settlement charge of $0.8 million in 2016, and $0.8 million of restructuring costs in 2015, unallocated corporate expenses were $0.4 million unfavorable to the prior year.
Year 2015 versus 2014

 
 
 
 
 
 
Change in Operating Income (Loss) Compared to the Prior Year
 
 
For the Years Ended
December 31,
 
 
 
Change Due To
 
 
2015
 
2014
 
Total Change
 
Volume
 
Net Price (a)
 
Input Costs (b)
 
Currency
 
Other
Technical Products
 
$
54.1

 
$
46.0

 
$
8.1

 
$
10.8

 
$
0.6

 
$
4.4

 
$
(4.9
)
 
$
(2.8
)
Fine Paper and Packaging
 
67.3

 
60.8

 
6.5

 
(7.2
)
 
8.5

 
8.7

 

 
(3.5
)
Other
 
(2.0
)
 

 
(2.0
)
 
0.2

 

 

 

 
(2.2
)
Unallocated corporate costs
 
(18.0
)
 
(20.2
)
 
2.2

 

 

 

 

 
2.2

Consolidated
 
$
101.4

 
$
86.6

 
$
14.8

 
$
3.8

 
$
9.1

 
$
13.1

 
$
(4.9
)
 
$
(6.3
)
_______________________

(a)
Includes price changes, net of changes in product mix.
(b)
Includes price changes for raw materials and energy.
Consolidated operating income of $101.4 million for the year ended December 31, 2015 increased $14.8 million (17%) from the prior year. The favorable comparison was primarily due to lower manufacturing input costs, higher net price for the fine paper and packaging business, and organic technical products volume growth; partially offset by higher manufacturing costs, increased SG&A, including amounts acquired as part of the FiberMark Acquisition; lower fine paper and packaging volume and unfavorable currency effects. Excluding results of the FiberMark Acquisition, currency effects and aggregate charges of $6.5 million in 2015 for integration and restructuring costs and aggregate charges of $6.0 million in 2014 for integration and restructuring costs, costs related to the early extinguishment of debt and a pension plan settlement charge, operating income for the year ended December 31, 2015 increased $18.8 million (20%) from the prior year.
Operating income for our technical products business increased $8.1 million (18%) from the prior year primarily due to lower manufacturing input costs, organic volume growth and higher selling prices. These favorable variances were partially offset by unfavorable currency exchange effects and higher manufacturing costs. Results for the years ended December 31, 2015 and 2014 include $1.8 million and $1.6 million for integration/restructuring costs, respectively.

29


Excluding incremental volume from the FiberMark Acquisition, unfavorable currency exchange effects and acquisition integration/restructuring costs, operating income for the technical products business increased $11.2 million (24%).
Operating income for our fine paper and packaging business increased $6.5 million (11%) from the prior year period primarily due to lower manufacturing input costs principally as a result of lower natural gas prices and higher net price. Extreme winter weather conditions during the first quarter of 2014 resulted in a temporary increase in natural gas prices. These favorable variances were partially offset by lower shipment volume and higher manufacturing costs. Results for the ended December 31, 2015 include $1.5 million for acquisition related integration costs. Excluding incremental volume from the FiberMark Acquisition and acquisition integration costs, operating income for the fine paper and packaging business increased $8.8 million (14%).
Unallocated corporate costs for the year ended December 31, 2015 were $18.0 million, or $2.2 million favorable to the prior year. Excluding charges of $0.8 million in 2015 for restructuring costs and aggregate charges of $4.4 million in 2014 for a pension plan settlement charge, restructuring costs and costs related to the early extinguishment of debt, unallocated corporate expenses were $1.4 million unfavorable to the prior year primarily due to increased employee compensation costs.
The following table sets forth our operating income by segment for the periods indicated:
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Operating income
 
 

 
 

 
 

Technical Products
 
$
65.6

 
$
54.1

 
$
46.0

Fine Paper and Packaging
 
70.7

 
67.3

 
60.8

Other
 
(1.1
)
 
(2.0
)
 

Unallocated corporate costs
 
(21.1
)
 
(18.0
)
 
(20.2
)
Operating Income as Reported
 
114.1

 
101.4

 
86.6

Non-GAAP Adjustments
 
 

 
 

 
 

Technical Products
 
 

 
 

 
 

Acquisition/integration/restructuring costs
 
1.4

 
1.8

 
1.6

Fine Paper and Packaging
 
 

 
 

 
 

Acquisition/integration costs
 
1.8

 
1.5

 

Other
 
 

 
 

 
 

Acquisition/integration costs
 
1.1

 
2.4

 

Unallocated corporate costs
 
 

 
 

 
 

Pension plan settlement charge
 
0.8

 

 
3.5

Restructuring costs
 
2.7

 
0.8

 
0.7

Loss on early extinguishment of debt
 

 

 
0.2

Total
 
3.5

 
0.8

 
4.4

Total non-GAAP Adjustments
 
7.8

 
6.5

 
6.0

Operating Income as Adjusted
 
$
121.9

 
$
107.9

 
$
92.6

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, pension plan settlement charges, and loss on early extinguishment of debt. 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.

30


Additional Statement of Operations Commentary:
SG&A expense of $92.2 million for the year ended December 31, 2016 was $5.7 million higher than the prior year due to incremental selling and administrative costs related to the FiberMark Acquisition. SG&A expense as a percentage of net sales for the year ended December 31, 2016, was approximately 9.8 percent and was comparable to the prior year.
SG&A expense of $86.5 million for the year ended December 31, 2015 was $8.5 million higher than the prior year due to incremental selling and administrative costs related to the FiberMark Acquisition. SG&A expense as a percentage of net sales for the year ended December 31, 2015, was approximately 9.8 percent and was 0.5 percentage points higher than the prior year as the increase in net sales in the current year was more than offset by higher SG&A expenses.
For the years ended December 31, 2016, 2015 and 2014, we incurred $11.2 million, $11.7 million and $11.4 million of interest expense, respectively.
In general, our effective tax rate differs from the U.S. statutory tax rate of 35 percent primarily due to impacts of our corporate tax structure, benefits from R&D credits earned, and the mix of pre-tax income in jurisdictions with marginal tax rates that differ from the U.S. statutory tax rate. For the years ended December 31, 2016 and 2015, our effective income tax rate related to continuing operations was 29 percent and 33 percent, respectively. For 2016, the adoption of ASU 2016-09, as discussed in Note 2 of Notes to Consolidated Financial Statements, "Summary of Significant Accounting Policies — Recently Adopted Accounting Standards", allowed excess tax benefits from share-based payments to be shown as a reduction to income tax expense and reduced the rate for the year by 3 percent. For the year ended December 31, 2014, our effective income tax rate related to continuing operations was 10 percent and included the benefit from recognizing R&D credits earned in prior periods. Excluding the benefit of R&D Credits related to prior year activities, our effective income tax rate for the year ended December 31, 2014 would be approximately 33 percent. For a reconciliation of effective tax rate to the U.S. federal statutory tax rate, see Note 6 of Notes to Consolidated Financial Statements, "Income Taxes."

Liquidity and Capital Resources
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Net cash flow provided by (used in):
 
 

 
 

 
 

Operating activities
 
$
115.8

 
$
111.2

 
$
94.5

Investing activities:
 
 

 
 

 
 

Capital expenditures
 
(68.5
)
 
(48.1
)
 
(27.9
)
Acquisitions
 

 
(118.2
)
 
(72.4
)
Purchase of equity investment
 

 

 
(2.9
)
Proceeds on sale of discontinued operations
 

 
5.4

 

Other investing activities
 
0.3

 
0.8

 
(1.7
)
Total
 
(68.2
)
 
(160.1
)
 
(104.9
)
Financing activities
 
(48.4
)
 
(18.8
)
 
10.2

Effect of exchange rate changes on cash and cash equivalents
 
(0.3
)
 
(0.7
)
 
(0.6
)
Net decrease in cash and cash equivalents
 
$
(1.1
)
 
$
(68.4
)
 
$
(0.8
)
Operating Cash Flow Commentary
Cash provided by operating activities of $115.8 million for the year ended December 31, 2016 was $4.6 million favorable to cash provided by operating activities of $111.2 million in the prior year. The favorable comparison was primarily due to a $12.7 million increase in operating income and the benefits of higher utilization of federal research and development tax credits. These favorable variances were partially offset by higher post-retirement benefit contributions in the current year and a decrease of $1.8 million in our investment in working capital in the prior year compared to an increase of $1.2 million in our investment in working capital for the year ended December 31, 2016.
Cash provided by operating activities of $111.2 million for the year ended December 31, 2015 was $16.7 million favorable to cash provided by operating activities of $94.5 million in the prior year. The favorable comparison was primarily due to a $16.1 million increase in operating income and lower contributions and benefit payments for post-retirement benefit obligations. These favorable variances were partially offset by a decrease of $9.0 million in our investment in working

31


capital in the prior year compared to a decrease of $1.8 million in our investment in working capital for the year ended December 31, 2015.
Investing Commentary:
For the years ended December 31, 2016 and 2015, cash used by investing activities was $68.2 million and $160.1 million, respectively. Capital expenditures for the year ended December 31, 2016 were $68.5 million compared to spending of $48.1 million in the prior year. In general, we expect aggregate annual capital expenditures of approximately 3 to 5 percent of net sales. For the year ended December 31, 2016, annual capital expenditures were above that range due to incremental investment in filtration assets in the U.S. We expect capital spending in 2017 to return to the normal range. 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.
For the year ended December 31, 2015, cash used by investing activities includes $118.2 million for the FiberMark Acquisition. For the year ended December 31, 2014, cash used by investing activities includes $72.4 million for the purchase of the Crane Technical Materials business and $2.9 million for the acquisition of a non-controlling equity investment in a joint venture in India.
For the year ended December 31, 2015, we received net cash proceeds of $5.4 million from the sale of the Lahnstein Mill.
Capital expenditures for the year ended December 31, 2015 were $48.1 million compared to spending of $27.9 million in the prior year.
Financing Commentary:
Our liquidity requirements are provided by cash generated from operations and short and long-term borrowings.
For the year ended December 31, 2016, cash used by financing activities was $48.4 million compared to cash used by financing activities of $18.8 million for the prior year. The increase was due to higher net debt repayments, as well as higher share repurchases and dividends paid in 2016. For the year ended December 31, 2015, cash used by financing activities was $18.8 million compared to cash provided by financing activities of $10.2 million for the prior year. The change was due to lower net borrowings, and higher share repurchases and dividends paid in 2015.
We have the following short- and long-term borrowings:
Secured Bank Credit Facility
In December 2014, we entered into the Third Amended Credit Agreement. The Third Amended Credit Agreement, among other things: (1) increased the maximum principal amount of our existing credit facility for the U.S. Revolving Credit Facility to $125 million; (2) established the German Revolving Credit Facility in the maximum principal amount of $75 million; (3) caused Neenah and the other domestic borrowers to guarantee, among other things, the obligations arising under the German Revolving Credit Facility; (4) provides for the Global Revolving Credit Facilities to mature on December 18, 2019; and (5) 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. In addition, domestic borrowers may request letters of credit under the U.S. Revolving Credit Facility in an aggregate face amount not to exceed $20 million outstanding at any time, and German borrowers may request letters of credit under the German Revolving Credit Facility in an aggregate face amount not to exceed $2 million outstanding at any time. See Note 7 of Notes to Consolidated Financial Statements, "Debt."
Unsecured Senior Notes
We have $175 million of 2021 Senior Notes. Proceeds from this offering were used to retire the remaining principal amount of 2014 Senior Notes, to repay approximately $56 million in outstanding revolver borrowings under our bank credit agreement and for general corporate purposes. See Note 7 of Notes to Consolidated Financial Statements, "Debt."
Other Debt
In June 2014, we repaid the remaining €3.7 million ($5.2 million) in outstanding project financing borrowings under the German Loan Agreement.
The Second German Loan Agreement provides for €9.0 million of construction financing which is secured by the melt blown machine. The loan matures in September 2022 and principal is repaid in equal quarterly installments. At

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December 31, 2016, €6.5 million ($6.8 million, based on exchange rates at December 31, 2016) was outstanding under the Second German Loan Agreement.
Availability under our revolving credit facility varies over time depending on the value of our inventory, receivables and various capital assets. As of December 31, 2016, we had $42.9 million outstanding under our Revolver and $125.2 million of available credit (based on exchange rates at December 31, 2016).
We have required debt payments through December 31, 2017 of $1.2 million on the Second German Loan Agreement.
For the year ended December 31, 2016, cash and cash equivalents decreased $1.1 million to $3.1 million at December 31, 2016 from $4.2 million at December 31, 2015. Total debt decreased $8.5 million to $220.9 million at December 31, 2016 from $229.4 million at December 31, 2015. Net debt (total debt minus cash and cash equivalents) decreased by $7.4 million primarily due to cash flow from operations.
As of December 31, 2016, our cash balance consists of $1.1 million in the U.S. and $2.0 million held at entities outside of the U.S. As of December 31, 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
For the years ended December 31, 2016 and 2015, we paid cash dividends of $1.32 per common share or $22.4 million and $1.20 per common share or $20.3 million, respectively.
In November 2016, our Board of Directors approved a 12 percent increase in the annual dividend rate on our common stock to $1.48 per share. The dividend is scheduled to be paid in four equal quarterly installments beginning in March 2017.
In May 2016, our Board of Directors authorized the 2016 Stock Purchase Plan. The 2016 Stock Purchase Plan allows us to repurchase up to $25 million of our outstanding Common Stock through May 2017. 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 year ended December 31, 2016, we acquired approximately 185,200 shares of Common Stock at a cost of $12.6 million. For further details on our Stock Purchase Plans refer to Note 10 of Notes to Consolidated Financial Statements, "Stockholders' Equity."
For the years ended December 31, 2016 and 2015, we acquired approximately 46,000 and 40,000 of Common Stock, respectively, at a cost of $3.8 million and $2.5 million, respectively, for shares surrendered by employees to pay taxes due on vested restricted stock awards and stock appreciation rights exercised. In addition, we received $0.4 million and $1.2 million in proceeds from the exercise of employee stock options for the years ended December 31, 2016 and 2015, respectively.
Under the most restrictive terms of the Third Amended and Restated Credit Agreement, we are permitted to pay cash dividends on or repurchase shares of our common stock up to the amount available under the Third Amended and Restated Credit Agreement, as long as the availability under the Third Amended and Restated Credit Agreement exceeds $25 million. If the availability is below $25 million, we are restricted from paying dividends or repurchasing shares. As of December 31, 2016, our availability exceeded $25 million, so this restriction did not apply.  See our availability under the Third Amended and Restated Credit Agreement in Note 7 of Notes to Consolidated Financial Statements, "Debt." Under the most restrictive terms of the 2021 Senior Notes, we are permitted to pay cash dividends of up to $25 million in a calendar year, but not permitted to repurchase shares of our common stock. However, as long as the net leverage ratio (net debt/EBITDA) under the 2021 Senior Notes is below 2.5x, we can pay dividends or repurchase shares without limitation. In the event the net leverage ratio exceeds 2.5x, we may still pay dividends in excess of $25 million or repurchase shares by utilizing "restricted payment baskets" as defined in the indenture for the 2021 Senior Notes. As of December 31, 2016, since our leverage ratio was less than 2.5x, none of these covenants were restrictive to our ability to pay dividends on or repurchase shares of our common stock.
Other Items:
As of December 31, 2016, we had $48.8 million of state NOLs. Our state NOLs may be used to offset approximately $2.3 million in state income taxes. If not used, substantially all of the state NOLs will expire in various amounts between 2017 and 2035. In addition, we had $25.2 million of U.S. federal and state R&D Credits which, if not used, will expire between 2027 and 2036 for the U.S. federal R&D Credits and between 2017 and 2031 for the state R&D Credits. As of December 31, 2016, we recorded a valuation allowance of $3.1 million against a portion of the R&D Credits.

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Management believes that our ability to generate cash from operations and our borrowing capacity are adequate to fund working capital, capital spending and other cash needs for the next 12 months. Our ability to generate adequate cash from operations beyond 2016 will depend on, among other things, our ability to successfully implement our business strategies, control costs in line with market conditions and manage the impact of changes in input prices and currencies. We can give no assurance we will be able to successfully implement these items.
Contractual Obligations
The following table presents the total contractual obligations for which cash flows are fixed or determinable as of December 31, 2016:

(In millions)
 
2017
 
2018
 
2019
 
2020
 
2021
 
Beyond
2021
 
Total
Long-term debt payments
 
$
1.2

 
$
1.2

 
$
44.1

 
$
1.2

 
$
176.2

 
$
0.8

 
$
224.7

Interest payments on long-term debt (a)
 
10.5

 
10.5

 
10.4

 
9.3

 
4.2

 

 
44.9

Open purchase orders (b)
 
69.4

 

 

 

 

 

 
69.4

Other post-employment benefit obligations (c)
 
4.3

 
3.5

 
3.8

 
4.1

 
4.1

 
16.9

 
36.7

Contributions to pension trusts
 
14.0

 

 

 

 

 

 
14.0

Minimum purchase commitments (d)
 
14.3

 
2.2

 
1.3

 

 

 

 
17.8

Operating leases
 
3.1

 
2.4

 
1.3

 
1.0

 
1.0

 
4.0

 
12.8

Total contractual obligations
 
$
116.8

 
$
19.8

 
$
60.9

 
$
15.6

 
$
185.5

 
$
21.7

 
$
420.3

_______________________

(a)
Interest payments on long-term debt includes interest on variable rate debt at December 31, 2016 weighted average interest rates.
(b)
The open purchase orders displayed in the table represent amounts we anticipate will become payable within the next 12 months for goods and services that we have negotiated for delivery.
(c)
The above table includes future payments that we will make for postretirement benefits other than pensions. Those amounts are estimated using actuarial assumptions, including expected future service, to project the future obligations.
(d)
The minimum purchase commitments in 2017 are primarily for coal and corn starch contracts. Although we are primarily liable for payments on the above operating leases and minimum purchase commitments, based on historic operating performance and forecasted future cash flows, we believe our exposure to losses, if any, under these arrangements is not material.

Adoption of New Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements, "Summary of Significant Accounting Policies — Recently Adopted Accounting Standards" for a description of accounting standards adopted in the year ended December 31, 2016.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with GAAP in the United States requires estimates and assumptions that affect the reported amounts and related disclosures of assets and liabilities at the date of the financial statements and net sales and expenses during the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used in the preparation of the consolidated financial statements are those that are important both to the presentation of financial condition and results of operations and require significant judgments with regard to estimates used. These critical judgments relate to the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of expenses.

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The following summary provides further information about the critical accounting policies and should be read in conjunction with the notes to the consolidated financial statements. We believe that the consistent application of our policies provides readers of our financial statements with useful and reliable information about our operating results and financial condition.
We have discussed the application of these critical accounting policies with our Board of Directors and Audit Committee.
Inventories
We value U.S. inventories at the lower of cost, using the Last-In, First-Out ("LIFO") method, or market. German inventories are valued at the lower of cost, using a weighted-average cost method, or market. The First-In, First-Out value of U.S. inventories valued on the LIFO method was $106.8 million and $118.2 million at December 31, 2016 and 2015, respectively and exceeded such LIFO value by $8.2 million and $10.0 million, respectively. Cost includes labor, materials and production overhead. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. Since we value most of our inventory utilizing the LIFO inventory costing methodology, rapid changes in raw material costs have an impact on our operating results.
Income Taxes
Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is less than certain. Our effective income tax rates include the tax effects of certain special items such as foreign tax rate differences, inter-company financing structures, research and development credits, and domestic production activities. While we believe that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts.
As of December 31, 2016, we have recorded aggregate deferred income tax assets of $6.1 million related to temporary differences, net operating losses and research and development and other tax credits. As of December 31, 2015, our aggregate deferred income tax assets were $20.0 million. As of December 31, 2016 and 2015, we recorded a valuation allowance of $3.1 million and $2.9 million, respectively, against a portion of our R&D Credits. In determining the need for a valuation allowance, we consider many factors, including specific taxing jurisdictions, sources of taxable income, income tax strategies and forecasted earnings for the entities in each jurisdiction. A valuation allowance would be recognized if, based on the weight of available evidence, we conclude that it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
As of December 31, 2016 and 2015, our liability for uncertain income taxes positions was $10.3 million and $12.9 million, respectively. In evaluating and estimating tax positions and tax benefits, we consider many factors which may result in periodic adjustments and which may not accurately anticipate actual outcomes.
Pension and Other Postretirement Benefits
Consolidated pension expense related to continuing operations for defined benefit pension plans was $9.5 million, $6.5 million and $10.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. Accounting for defined benefit pension plans requires various assumptions, including, but not limited to, discount rates, expected long-term rates of return on plan assets, future compensation growth rates and mortality rates. Accounting for our postretirement benefit plans also requires various assumptions, which include, but are not limited to, discount rates and annual rates of increase in the per capita costs of health care benefits.
The following chart summarizes the more significant assumptions used in the actuarial valuation of our defined benefit plans for each of the past three years:

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2016

 
2015

 
2014

Pension plans
  
 
 
 
 
 
Weighted average discount rate for benefit expense
  
4.54
%
 
3.91
%
 
4.88
%
Weighted average discount rate for benefit obligation
  
4.16
%
 
4.54
%
 
3.91
%
Expected long-term rate on plan assets
  
6.20
%
 
6.50
%
 
6.50
%
Rate of compensation increase
  
2.18
%
 
2.92
%
 
2.96
%
Postretirement benefit plans
  
 
 
 
 
 
Weighted average discount rate for benefit expense
  
4.07
%
 
4.05
%
 
4.84
%
Weighted average discount rate for benefit obligation
  
3.69
%
 
4.07
%
 
4.05
%
Health care cost trend rate assumed for next year
  
7.00
%
 
7.30
%
 
7.00
%
Ultimate cost trend rate
  
4.50
%
 
4.50
%
 
4.50
%
Year that the ultimate cost trend rate is reached
  
2037

 
2037

 
2027

The expected long-term rate of return on pension fund assets held by our pension trusts was determined based on several factors, including input from pension investment consultants and projected long-term returns of broad equity and bond indices. We also considered the plans' historical 10-year and 15-year compounded annual returns. We evaluate our investment strategy and long-term rate of return on pension asset assumptions at least annually.
The discount (or settlement) rate that is utilized for determining the present value of future pension obligations in the U.S. is generally based on the yield for a theoretical basket of AA-rated corporate bonds currently available in the market place, whose duration matches the timing of expected pension benefit payments. The discount (or settlement) rate that is utilized for determining the present value of future pension obligations in Germany is generally based on the IBOXX index of AA-rated corporate bonds adjusted to match the timing of expected pension benefit payments.
For the years ended December 31, 2016, 2015 and 2014, consolidated postretirement health care and life insurance plan benefit expense was $3.3 million, $3.4 million and $3.8 million, respectively. The discount (or settlement) rate that is utilized for determining the present value of future postretirement health care and life insurance plan benefit obligations in the U.S. is generally based on the yield for a theoretical basket of AA-rated corporate bonds currently available in the market place, whose duration matches the timing of expected postretirement health care and life insurance benefit payments. The discount (or settlement) rate that is utilized for determining the present value of future postretirement health care and life insurance obligations for our foreign benefit plans is generally based on an index of AA-rated corporate bonds adjusted to match the timing of expected benefit payments.
We evaluate these assumptions at least once each year or as facts and circumstances dictate and we make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported net periodic benefit expense, which will result in changes to the recorded benefit plan assets and liabilities.

Useful Life and Impairment of Long-Lived Assets
Property, Plant and Equipment
For financial reporting purposes, depreciation is principally computed on the straight-line method over estimated useful asset lives. The weighted average remaining useful lives for buildings, land improvements and machinery and equipment are approximately 18 years, 13 years and 10 years, respectively. We also use units-of-production method of depreciation for $68.6 million of production assets, which reflects the nature of the assets' utilization.
Property, plant and equipment are tested for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment("ASC Topic 360"), whenever events or changes in circumstances indicate that the carrying amounts of such long-lived assets may not be recoverable from future net pre-tax cash flows. Impairment testing requires significant management judgment including estimating the future success of product lines, future sales volumes, growth rates for selling prices and costs, alternative uses for the assets and estimated proceeds from disposal of the assets. Impairment testing is conducted at the lowest level where cash flows can be measured and are independent of cash flows of other assets. An asset impairment would be indicated if the sum of the expected future net pre-tax cash flows from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying amount. We determine fair value based on an expected present value technique using multiple cash flow scenarios that reflect a range of possible outcomes and a risk free rate of interest are used to estimate fair value.

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The estimates and assumptions used in the impairment analysis are consistent with the business plans and estimates we use to manage our business operations. The use of different assumptions would increase or decrease the estimated fair value of the asset and would increase or decrease the impairment charge. Actual outcomes may differ from the estimates.
Goodwill and Other Intangible Assets with Indefinite Lives
We test goodwill for impairment at least annually on November 30 in conjunction with preparation of Neenah's annual business plan, or more frequently if events or circumstances indicate it might be impaired.
We tested goodwill for impairment as of November 30, 2016. We elected the option under ASC Topic 350, Intangibles — Goodwill and Other, to perform a qualitative assessment of our reporting units to determine whether further impairment testing is necessary. In this qualitative assessment, we considered the following items for each of the reporting units: macroeconomic conditions, industry and market conditions, overall financial performance and other entity specific events. In addition, for each of these reporting units, the most recent fair value determination results in an amount that exceeds the carrying amount of the reporting units. Based on these assessments, we determined that the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is not more likely than not. As of November 30, 2016 no impairment was indicated.
Other Intangible Assets
Certain trade names are estimated to have indefinite useful lives and as such are not amortized. Intangible assets with indefinite lives are annually reviewed for impairment in accordance with ASC Topic 350.
Acquired intangible assets with finite useful lives are amortized on a straight-line basis over their respective estimated useful lives, and reviewed for impairment in accordance with ASC Topic 360. Intangible assets consist primarily of customer relationships, trade names and acquired intellectual property. Such intangible assets are amortized using the straight-line method over estimated useful lives of between 10 and 15 years.
Our annual test of other intangible assets for impairment at November 30, 2016, 2015 and 2014 indicated that the carrying amount of such assets was recoverable.

Acquisition Accounting
We account for acquisitions under ASC Topic 805, which requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition. The accounting for acquisitions involves a considerable amount of judgment and estimate, including the fair value of certain forms of consideration; fair value of acquired intangible assets involving projections of future revenues and cash flows that are then either discounted at an estimated discount rate or measured at an estimated royalty rate; fair value of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of the acquired assets. The assumptions used are determined at the time of the acquisition in accordance with accepted valuation models.  Projections are developed using internal forecasts, available industry and market data and estimates of long-term rates of growth for our business. The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.  Refer to Note 4, “Acquisitions”, of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for further discussion of business combination accounting valuation methodology and assumptions.  

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

As a multinational enterprise, we are exposed to risks such as changes in commodity prices, foreign currency exchange rates, interest rates and environmental regulation. A variety of practices are employed to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments. Derivative instruments are used only for risk management purposes and not for speculation or trading.
Presented below is a description of our most significant risks.
Foreign Currency Risk
Our reported operating results are affected by changes in the exchange rates of the local currencies of our non-U.S. operations relative to the U.S. dollar. For the year ended December 31, 2016, a hypothetical 10 percent strengthening of the U.S dollar

37


relative to the local currencies of our non-U.S. operations would have decreased our income before income taxes by approximately $3.3 million. We do not hedge our exposure to exchange risk on reported operating results.
The translation of the balance sheets of our non-U.S. operations from their local currencies into U.S. dollars is also sensitive to changes in the exchange rate of the U.S. dollar. Consequently, we performed a sensitivity test to determine if changes in the exchange rate would have a significant effect on the translation of the balance sheets of our non-U.S. operations into U.S. dollars. These translation gains or losses are recorded as unrealized translation adjustments ("UTA", a component of accumulated other comprehensive income) within stockholders' equity. The hypothetical change in UTA is calculated by multiplying the net assets of our non-U.S. operations by a 10 percent change in the exchange rate of their local currencies compared to the U.S. dollar. As of December 31, 2016, the net assets of our non-U.S. operations exceeded their net liabilities by approximately $113 million. As of December 31, 2016, a 10 percent strengthening of the U.S. dollar relative to the local currencies of our non-U.S. operations would have decreased our stockholders' equity by approximately $12 million.
Commodity Risk
Pulp
We purchase the wood pulp used to produce our products on the open market, and, as a result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply and demand and government regulation. We do not have significant influence over the price paid for our wood pulp purchases. Therefore, an increase in wood pulp prices could occur at the same time that prices for our products are decreasing and have an adverse effect on our results of operations, financial position and cash flows.
Based on 2016 pulp purchases, a $100 per ton increase in the average market price for pulp would have increased our annual costs for pulp purchases by approximately $23 million.
Other Manufacturing Inputs