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Mixed 2Q for Neenah Paper

Zacks Equity Research

Neenah Paper, Inc. (NP) declared second-quarter 2012 adjusted earnings of 85 cents per share compared with the year-ago quarter’s earnings of 49 cents. Earnings surpassed the Zacks Consensus Estimate of 78 cents.

Adjusted earnings excluded integration costs of 8 cents per share in the reported quarter. Including the integration cost, earnings were 77 cents per share versus 49 cents in the year-ago quarter.

Total revenues increased 16% year over year to $211.7 million, missing the Zacks Consensus Estimate of $222 million. The improvement was primarily driven by double digit growth in the Fine Paper segment.

Cost and Margins

Cost of goods sold increased 12.4% to $167.9 million. Gross profit increased 30.7% to $43.8 million. Consequently, gross margin jumped 240 basis-points (bps) to 20.7% in the quarter.

Selling, general and administrative expenses increased 6% to $19.1 million. Adjusted operating income boosted 52% to $23.9 million. Operating margin also increased 270 bps to 11.3%.

Segment Performance
Technical Products segment’s total revenues decreased 7% to $106.9 million. Revenues increased 1% on a constant currency basis, driven by volume increase in filtration, label and non-woven wall cover products, partially offsetting the negative impact of lower tape shipments. Revenues also increased due to higher value mix and selling prices offsetting the unfavorable foreign currency translation.

Operating income rose 26% to $12.3 million in the quarter. Improvement came from growth in higher value products, soaring selling prices along with improvement in production efficiencies that more than offset the unfavorable currency translation and rising input costs. Operating margin expanded 290 bps to 11.5%.

Fine Paper segment’s total revenues jumped 41% to $96.3 million, driven by higher volumes emanating from Wausau brands and profits from luxury packaging, labels and international markets.

Adjusted operating income increased 52% year over year to $15.2 million in the quarter. Operating income was benefited by higher volume, production cost efficiencies and lower pulp prices. Operating margin increased 120 bps to 15.8%.

Operational Updates

Cash and cash equivalents amounted to $1.8 million as of June 30, 2012, compared to $12.8 million as of December 31, 2011. Long-term debt was $196.3 million as of June 30, 2012, versus $164.5 million as of December 31, 2011.

Cash used in operating activities were $10.2 million for the six months ended June 30, 2012, compared with cash provided from operating activities of $14.5 million for the six months ended June 30, 2011. Debt-to-capitalization ratio was 51.9% as of June 30, 2012, versus 52.8% as of December 31, 2011.

Our View

Neenah Paper is focusing on enhancing its production efficiencies and cost cutting efforts both in the Technical Products and Fine Paper segments. These initiatives will boost margins moving forward. However, ongoing weak global economic conditions may cause a hindrance to its healthy performance.

Neenah Paper retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

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