| Neenah Paper Inc 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 others relate principally to our separation from Kimberly-Clark |
| 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 adversely 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 pulp business operates in a cyclical industry which can have an impact on our operating results |
| Wood pulp is a commodity for which there are multiple other suppliers |
| Typically, commodities businesses compete primarily on the basis of price and availability |
| The revenues from producing a commodity tend to be cyclical, with periods of shortage and rapidly rising prices leading to increased production and increased industry investment until supply exceeds demand |
| Those periods are then typically followed by periods of reduced prices and excess and idled capacity until the cycle is repeated |
| 13 ______________________________________________________________________ The following chart shows price information for northern bleached softwood kraft pulp from 1980 to 2005 and illustrates the cyclical nature of the pulp industry: Pulp Price Trends Northern Bleached Softwood Kraft Pulp GRAPHIC Source: Resource Information Systems, Inc |
| The markets and profitability of pulp have been, and are likely to continue to be, cyclical |
| Accordingly, we must continuously and effectively manage our production and capacity to be able to respond effectively to business cycles in the pulp industry |
| We use hedging arrangements to reduce our exposure to pulp price fluctuations, although these arrangements could result in us incurring higher costs than we would incur without the arrangements |
| If we are unable to effectively respond to the significant challenges faced by our pulp business, which has experienced losses in recent periods, our financial condition and results of operations will be materially and adversely affected |
| We expect that our pulp business will continue to face a number of significant challenges relating to, among other things, the cyclical nature of the pulp industry (as described in the risk factor above), our cost structure, particularly at our Terrace Bay mill, and other factors |
| Because our pulp business competes primarily on the basis of price and availability, the financial success of our pulp mills depends on their ability to produce pulp at a competitive cost |
| Our ability to contain or reduce costs at our pulp mills is significant to our business |
| We believe that our Terrace Bay mill currently has an unfavorable cost structure, with the cost of wood at Terrace Bay being the single most important contributing factor |
| In February 2006, we suspended pulp manufacturing activities at our Terrace Bay pulp mill as a result of a lack of wood fiber for its operations |
| The mill’s fiber supply has been exhausted as a result of a strike 14 ______________________________________________________________________ by the approximately 250 woodlands workers who are employed by our forestry operations that supply wood fiber to the mill (See “Employee and Labor Relations”) |
| Most of the approximately 400 hourly and salaried workers employed at the mill were laid off for an indefinite period during the two weeks following the commencement of closure activities |
| A small group of hourly and salaried employees are expected to remain at the facility for security operations, boiler and related equipment operation and maintenance during the warm shutdown |
| An extended work stoppage at the mill could have a material impact on our liquidity and results of operations |
| If our pulp business had been operated on a stand-alone basis during 2004 (prior to the Spin-Off) and 2003 and if transfers of pulp to Kimberly-Clark in those years had reflected the prices at which we are selling pulp to Kimberly-Clark after the Spin-Off, we estimate that our pulp business would have reported gross profit (losses) of approximately dlra19 million and dlra21 million in 2004 and 2003, respectively |
| Those pro forma gross profit (losses) would have represented in 2004 and 2003 a decrease in our gross profit of about dlra26 million and about dlra25 million, respectively |
| The decrease in gross profit would have resulted primarily from lower market prices for pulp during those years, the resulting prices at which we would have transferred pulp to Kimberly-Clark during those years, the high costs at our Terrace Bay mill and the impact of a weakening US dollar relative to the Canadian dollar in 2004 and 2003 |
| For our pulp business to be profitable, we must reduce costs at our Terrace Bay mill even if pulp prices increase |
| Although we are attempting to implement strategies to reduce costs at the mill, we can give no assurance that we will be able to reduce those costs to a level at which we can profitably sell pulp produced by our Terrace Bay mill |
| Fluctuations in currency exchange rates could adversely affect our results |
| Changes in the Canadian dollar exchange rate relative to the US dollar have an effect on our results of operations and cash flows |
| Exchange rate fluctuations can have a material impact on our financial results because substantially all of our pulp mills’ expenses are incurred in Canadian dollars and our pulp revenues are denominated in US dollars |
| For example, in 2005, a hypothetical dlra0dtta01 increase in the Canadian dollar relative to the US dollar would have decreased our income before income taxes by more than dlra5 million, excluding additional currency remeasurement losses |
| We anticipate continued strength for the Canadian dollar relative to the US dollar |
| We use hedging arrangements to reduce our exposure to exchange rate fluctuations, although these arrangements could result in us incurring higher costs than we would incur without the arrangements |
| 15 ______________________________________________________________________ The following chart shows changes in the US/Canadian dollar exchange rate from 1980 to 2005: US $/Canadian $ Exchange Rate History GRAPHIC Source: Resource Information Systems, Inc |
| 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 income before income taxes |
| 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 generally do not possess enough power to pass increases in those prices along to purchasers of our products, 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 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 |
| We obtain most of the wood fiber we require for our Terrace Bay pulp mill and a portion of the wood fiber required for our Pictou pulp mill from timberland areas licensed by the Ontario and Nova Scotia provincial governments, respectively |
| These governments have granted us non-exclusive licenses for substantial timberland areas from which we obtain fiber, and we also obtain fiber harvested from 16 ______________________________________________________________________ timberland areas licensed to others by these governments |
| There can be no assurance that the amount of fiber that we are allowed to harvest from these licensed areas will not be decreased, or that our licenses will continue to be renewed or extended by the governments on acceptable terms |
| In each of the areas where our Canadian pulp mills are located, there is increasing competition for wood fiber from various other users |
| Concerns over the sustainability of forestry practices, particularly in the “boreal forest” area of northern Canada, may also lead to reductions in the timberlands available for harvest to supply our pulp mills |
| A number of North American non-governmental environmental organizations have launched a campaign to permanently set aside and protect from harvesting significant portions of boreal forest, including portions of the timberlands that supply wood to the Terrace Bay mill |
| In addition, aboriginal groups have made land claims against various levels of government which, if successful, would further reduce the timberlands from which wood could be harvested for our mills |
| Changes in governmental practices and policies as they apply to us and to others from whom we obtain fiber also may result in less fiber being available, increased costs to obtain the fiber and additional expense in meeting forestry and silvicultural standards |
| These results could have a material adverse effect upon our financial position, liquidity and results of operations |
| In addition, in 2005, two suppliers provided over 70prca of the wood chips used by the Pictou mill and three suppliers provided approximately 50prca of the wood chips used by the Terrace Bay mill |
| While we believe that alternative sources of critical supplies, such as wood chips, would be available, disruption of our primary sources could create a temporary, adverse effect on product shipments |
| Also, an interruption in supply of a latex specialty grade to our technical products business, which we currently obtain from a single source, could disrupt and eventually cause a shutdown of production of certain technical products |
| Our mills may experience unexpected or prolonged shutdowns, which would adversely affect our financial position and results of operations |
| Our pulp mills require annual shutdowns to perform major maintenance because they normally operate continuously |
| We generally schedule shutdowns of two weeks each year at our mills |
| The annual scheduled shutdown of our pulp mills impacts our profitability and cash flow in the fiscal quarter in which the shutdown occurs |
| The annual pulp mill maintenance shutdowns at Terrace Bay and Pictou occurred in September and October 2005, which resulted in substantially lower operating results and lower production volumes for those months |
| In addition to scheduled shutdowns, as described above, depressed pulp prices may cause pulp mills to shut down for a period of time if pulp prices fall to a level where it would be uneconomic to operate the mill |
| Unexpected production disruptions could also cause us to shut down any of our mills |
| Those disruptions could occur due to any number of circumstances, including shortages of raw materials, disruptions in the availability of transportation, labor disputes and mechanical or process failures |
| Specifically, the failure of any of our recovery boilers would result in a significant disruption to our business |
| If our mills are shut down, they may experience prolonged startup periods, regardless of the reason for the shutdown |
| Those startup periods could range from several days to several weeks, depending on the reason for the shutdown and other factors |
| The annual pulp mill maintenance shutdowns at Terrace Bay and Pictou are scheduled to occur in May and September 2006, respectively |
| The shutdown of any of our mills for a substantial period of time for any reason could have a material adverse effect on our financial position and results of operations |
| 17 ______________________________________________________________________ The results of our pulp business will depend on our pulp supply agreement with Kimberly-Clark and our ability to supply other customers |
| The results of our pulp business prior to the Spin-Off were based almost entirely on pulp transfers to Kimberly-Clark |
| Kimberly-Clark is our largest customer and purchases pulp from us pursuant to the terms of a pulp supply agreement |
| If the pulp supply agreement were to be terminated, our financial condition and results of operations would be materially and adversely affected |
| We have begun to supply increasing quantities of pulp to customers other than Kimberly-Clark |
| The success of our pulp business will depend in part upon our ability to effectively market our pulp to new customers, to earn customer acceptance of our pulp and to continue to effectively supply those new customers |
| If we are unable to effectively market our pulp to customers other than Kimberly-Clark, our financial condition, results of operations and liquidity would be materially and adversely affected |
| Our business will suffer if we are unable to effectively respond to decreased demand for some of our products |
| We have experienced and may continue to experience decreased demand for some of our existing products |
| For example, our fine paper business has experienced decreased demand as a result of the growing use of digital and electronic communications media, while our technical products business must cope with a trend to replace durable papers with synthetic films |
| Our pulp business, and in particular the northern bleached hardwood kraft pulp produced at our Terrace Bay mill, must compete with an increasing supply of, and in some cases customer preference for, lower priced eucalyptus pulps produced by competitors in the southern hemisphere |
| If we are unable to implement our business strategies to develop new sources of demand to effectively respond to decreased demand for our existing products, our financial position and results of operations would be adversely affected |
| The terms of our pulp supply agreement with Kimberly-Clark may require us, at times, to sell pulp at prices that are lower than the prices at which we may be able to sell pulp to other customers |
| Our pulp supply agreement with Kimberly-Clark requires us to supply and Kimberly-Clark to purchase pulp from our pulp mills through 2008 |
| The prices at which we sell pulp to Kimberly-Clark under the supply agreement reflect a discount from published industry index prices that may be greater or less than the discount reflected in sales to other customers |
| The pulp supply agreement also contains minimum and maximum prices for northern bleached softwood kraft pulp shipped to North America prior to December 31, 2007 which may result in us charging Kimberly-Clark prices that are lower than those we could obtain from other customers |
| On January 17, 2006, the Company and Kimberly-Clark entered into an amendment (the “PSA Amendment”) to the Pulp Supply Agreement |
| The PSA Amendment provides the Company with the option to reduce its annual softwood and hardwood supply obligation to Kimberly-Clark to 235cmam000 air dried metric tons (“ADMT”) in 2006, 235cmam000 ADMT in 2007 and 215cmam000 ADMT in 2008 |
| The Company can only exercise such option by giving Kimberly-Clark advance written notice of its election to do so prior to June 30, 2007 |
| The Company’s right to give such notice is also subject to certain limitations that affect the timing and the effective date of the notice |
| Additionally, the PSA Amendment provides Kimberly-Clark with the option to reduce its annual purchase obligation for North American northern bleached softwood kraft pulp during 2006 by up to 50cmam000 ADMT The PSA Amendment also permits Kimberly-Clark to reduce its purchase obligation from the Company’s Terrace Bay, Ontario pulp operations (“Terrace Bay”), on one occasion only, by up to an additional 80cmam000 ADMT in the event that Terrace Bay resumes operations following a Terrace Bay Force Majeure Event (as defined in the PSA Amendment) |
| 18 ______________________________________________________________________ The preceding description is a summary of principal provisions of the PSA Amendment and is qualified in its entirety by the PSA Amendment |
| Further, our pulp supply agreement is a supply-or-pay arrangement |
| Accordingly, if we do not supply the required minimum quantities of pulp to Kimberly-Clark, we must pay Kimberly-Clark for the shortfall based on the difference between the contract price and any higher price that Kimberly-Clark otherwise pays to purchase the pulp, plus 10prca of the difference |
| If such an event were to occur, our business could be materially adversely affected |
| 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, provincial and local laws, regulations and ordinances in both the United States and Canada 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 |
| For example, the ratification of the Kyoto Protocol by Canada may result in lower limits for the emission of carbon dioxide and other greenhouse gases |
| The specific limitations with respect to our Canadian operations are unknown and uncertain and may result in increased costs |
| 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 |
| The legal actions and claims against us could have a material adverse effect on our financial condition, results of operations and liquidity |
| We have significant pension liabilities |
| We have significant pension liabilities which could require future funding beyond that which we have funded in the past or which we currently anticipate |
| At December 31, 2005, our projected pension benefit obligations exceeded the fair value of pension plan assets by approximately dlra75 million |
| In 2005 total contributions to our pension trust were dlra20dtta3 million, including dlra1dtta6 million for special termination benefits related to the closure of the Nodtta 1 Mill |
| A material increase in funding requirements could have a material adverse effect on our cash flows and liquidity |
| Labor interruptions would adversely affect our business |
| In addition, some of our key customers and suppliers are also unionized |
| The labor agreement with hourly employees at our Longlac, Ontario woodlands operation has expired |
| On January 30, 2006, the hourly employees working in the Company’s Longlac, Ontario woodlands operations commenced a strike |
| In February 2006, we suspended pulp manufacturing activities at our Terrace Bay pulp mill as a result of a lack of wood fiber for its operations |
| (See 19 ______________________________________________________________________ “Business—Recent Developments”) |
| Strikes, lockouts or other work stoppages or slow downs involving our unionized employees could have a material adverse effect on us |
| Our operating results are subject to substantial quarterly and annual fluctuations due to a number of factors, many of which are beyond our control |
| Such factors may include, among others, the relative strength of the Canadian dollar versus the US dollar, changes in the market price of pulp, the effects of competitive pricing pressures, decreases in average selling prices of our products, 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 and environmental costs |
| Operating results also could be adversely affected by increasing interest rates and other general economic conditions causing a downturn in the market for paper products |
| The foregoing factors are difficult to forecast, 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 alternative products that customers may use instead of our products |
| Many 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 |
| Risks Relating to Our Indebtedness We incurred significant indebtedness in connection with the Spin-Off, which subjected us to restrictive covenants relating to the operation of our business |
| As of December 31, 2005, we had dlra225 million of senior notes outstanding |
| In addition, we had dlra150 million of capacity on our revolving credit agreement, with no amounts outstanding |
| 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 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 the revolving credit facility and the indenture governing the notes, contain covenants restricting our ability to, among other things, incur certain additional debt, make specified restricted payments and capital expenditures, authorize or issue capital stock, enter into 20 ______________________________________________________________________ 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 |
| In addition, the terms of our revolving credit facility require us to achieve and maintain certain specified financial ratios |
| These restrictions may limit our ability to engage in activities which could expand our business, including obtaining future financing, making needed capital expenditures or taking advantage of business opportunities such as strategic acquisitions and dispositions |
| Our revolving credit facility accrues interest at variable rates |
| As of December 31, 2005, we had dlra150dtta0 million of capacity under our revolving credit facility that was reduced by dlra5dtta2 million of outstanding letters of credit to dlra144dtta8 million of availability |
| 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources |
| ” Our revolving credit agreement is secured by substantially all of our assets |
| As of December 31, 2005, we had dlra150 million of capacity on our revolving credit agreement, with no amounts outstanding |
| Availability under the credit facility will fluctuate over time depending on the value of our inventory, receivables and various capital assets |
| An extended work stoppage could result in a decrease in the value of the assets securing our credit facility |
| A reduction in availability under the revolving credit facility could have a material adverse effect on our liquidity |
| Our failure to comply with the covenants contained in our revolving credit facility or the indenture governing the 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 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 revolving credit facility and the indenture governing the 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 now face may intensify |
| We may not be able to generate a sufficient amount of cash flow to meet our debt obligations, including the notes |
| Our ability to make scheduled payments or to refinance our obligations with respect to the 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 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 21 ______________________________________________________________________ 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 the revolving credit facility, we may need to obtain waivers from the required lenders under our revolving credit facility to avoid being in default |
| If this occurs, we would be in default under the revolving credit facility |
| We depend on our subsidiaries to generate cash flow to meet our debt service obligations, including payments on the notes |
| We conduct a substantial portion of our business through our subsidiaries |
| Consequently, our cash flow and ability to service our debt obligations, including the notes, 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 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, including the notes, 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 |
| If our subsidiaries do not generate sufficient cash flow from operations to help us satisfy our debt obligations, including payments on the notes, 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 capital |
| Refinancing may not be possible, and any assets may not be able to be sold, 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 ability to issue additional stock will be constrained because such an issuance of additional stock could cause the Spin-Off to be taxable to Kimberly-Clark, and we would be required to indemnify Kimberly-Clark against that tax |
| 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, as well as on our ability to satisfy our obligations on the notes |
| The earnings of our operating subsidiaries and the amount that they are able to distribute to us as dividends or otherwise may not be adequate for us to service our debt obligations, including the notes |
| 22 ______________________________________________________________________ Risks Related to the Spin-Off and Our Separation from Kimberly-Clark Our historical financial data, prior to the Spin-Off, is not representative of our results as a separate company and, therefore, will not be reliable as an indicator of our future performance |
| The historical combined financial data we have included in this Annual Report present the results of operations and financial position of the businesses transferred to us as they were historically operated by Kimberly-Clark |
| Accordingly, this data is not indicative of our future performance, nor does it reflect what our financial position and results of operations would have been had we operated as a separate, independent company during the periods presented |
| This is because, among other things: · our pulp mills now supply pulp to Kimberly-Clark on terms that are significantly different than those in place prior to the Spin-Off ; · we now supply pulp to other customers instead of supplying more than 90prca of our production to Kimberly-Clark; · for periods presented prior to the Spin-Off, we have made adjustments and allocations, primarily with respect to corporate and administrative costs, because Kimberly-Clark did not account for us as, and we were not operated as, a single, stand-alone business; · the information does not reflect changes resulting from our separation from Kimberly-Clark, including taxes, capital spending projects, employee and transition services matters, the establishment of new offices and certain ongoing incremental expenses such as selling, general and administrative expenses; and · we are incurring interest expense related to the issuance of dlra225 million principal amount of 7dtta375prca senior notes due 2014 and our entry into a credit agreement that provides for up to dlra150 million of secured borrowings |
| For additional information about our past financial performance, see “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited historical consolidated and combined financial statements included elsewhere in this Annual Report |
| We could incur significant tax liabilities if the Spin-Off becomes a taxable event |
| Kimberly-Clark received a private letter ruling from the US Internal Revenue Service regarding the US federal income tax consequences of the Spin-Off substantially to the effect that, for US federal income tax purposes, the transfer of the Pulp and Paper business to us by Kimberly-Clark and the distribution of our common stock qualified as a tax-free transaction under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of 1986, as amended |
| Although the private letter ruling is generally binding on the Internal Revenue Service, if the factual representations and assumptions made in the private letter ruling were incorrect in any material respect at the time of the Spin-Off, the private letter ruling could be retroactively revoked or modified by the Internal Revenue Service |
| If, notwithstanding the private letter ruling, the Spin-Off is determined to be a taxable transaction, our stockholders and Kimberly-Clark could be subject to significant US federal income tax liability |
| The Spin-Off could become taxable as a result of actions or events that occur after the Spin-Off |
| In that case, we and Kimberly-Clark could be liable for, and we could be required to indemnify and pay Kimberly-Clark for, taxes and resulting liabilities imposed upon Kimberly-Clark stockholders with respect to the Spin-Off |
| As part of the Spin-Off, we entered into a tax sharing agreement with Kimberly-Clark that allocated between Kimberly-Clark and us the taxes and liabilities relating to any failure of the Spin-Off to be tax-free |
| 23 ______________________________________________________________________ The Spin-Off could become taxable to Kimberly-Clark (but not its stockholders) under Section 355(e) of the Internal Revenue Code if, pursuant to a plan or series of transactions related to the Spin-Off, we engage in, or enter into an agreement to engage in, a transaction that would result in a 50prca or greater change by vote or value in our stock ownership, or if Kimberly-Clark engages in, or enters into an agreement to engage in, a transaction that would result in a 50prca or greater change by vote or value in its stock ownership |
| Such transactions are presumed to occur pursuant to a plan or series of transactions related to the Spin-Off if they occur during the four-year period beginning on the date that begins two years before the date of the Spin-Off, unless it is established that such transactions did not occur pursuant to a plan or series of transactions related to the Spin-Off |
| If an acquisition or issuance of our stock causes the Spin-Off to be taxable to Kimberly-Clark under Section 355(e), we would be required to indemnify Kimberly-Clark against that tax |
| Both Kimberly-Clark and its stockholders could be taxed on the Spin-Off if the Spin-Off were to not qualify for tax-free treatment for US federal income tax purposes for other reasons |
| Although the taxes described above generally would be imposed on Kimberly-Clark and its stockholders, under the tax sharing agreement, we may be required to indemnify Kimberly-Clark for all or a portion of these taxes |
| In addition, under US federal income tax laws, we and Kimberly-Clark would both be liable for Kimberly-Clark’s US federal income taxes resulting from the Spin-Off being taxable even though Kimberly-Clark may be required under the tax sharing agreement to indemnify us for such taxes |
| If we were to be required to indemnify Kimberly-Clark for taxes incurred as a result of the Spin-Off being taxable, or were otherwise liable for and required to pay such taxes and were not indemnified for such taxes, it would have a material adverse effect on our profitability and financial condition |
| We may not realize potential benefits from our separation from Kimberly-Clark |
| We cannot assure that we will realize the potential benefits that we expected from our separation from Kimberly-Clark |
| In addition, we will incur significant costs, which may be greater than those for which we have planned, and we will bear the negative effects of our separation from Kimberly-Clark, including loss of access to the financial, managerial and professional resources from which we have benefited in the past |
| In January 2006, we terminated a corporate services agreement with Kimberly-Clark pursuant to which Kimberly-Clark provided to us, and we were dependent upon them as an outsourced service provider, certain transition services |
| These services included, among others, certain employee benefits administration and payroll, management information systems, purchasing and certain accounting functions |
| Substantially all of the services formerly provided by Kimberly-Clark are now being performed by Neenah personnel |
| These include, but are not limited to, management information systems, purchasing and certain accounting functions |
| To facilitate this transition, we acquired and implemented enterprise resource planning software |
| In addition, certain employee benefits administration and payroll services have been outsourced to a third party service provider |
| Failure to successfully transition these services from Kimberly-Clark could have a material adverse effect on our operations |
| 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 that financing will be available on favorable terms, if at all |
| 24 ______________________________________________________________________ We may experience increased costs resulting from decreased purchasing power, which could decrease our overall profitability |
| Prior to our Spin-Off, we were able to take advantage of Kimberly-Clark’s size and purchasing power in procuring goods, services and technology, such as management information services, health insurance, pension and other employee benefits, payroll administration, risk management, tax and other services |
| As a separate, stand-alone entity, we may be unable to obtain similar goods, services and technology at prices or on terms as favorable as those obtained prior to the Spin-Off |
| FORWARD-LOOKING STATEMENTS Certain statements in 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 Securities and Exchange Commission or the SEC, all as may be amended from time to time |
| Statements contained in this annual report 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 |
| The Company cautions 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: · general economic conditions, particularly in the United States and Canada; · fluctuations in global equity and fixed-income markets; · the competitive environment; · fluctuations in commodity prices, exchange rates (in particular changes in the US/Canadian dollar currency exchange rate) and interest rates; · the cost or availability of wood, other raw materials and energy; · 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; · the cyclical nature of our pulp business; 25 ______________________________________________________________________ · increases in the funding requirements for our pension liabilities; · changes in asset valuations including write-downs of assets including fixed assets, inventory, accounts receivable or other assets for impairment or other reasons; · our existing and future indebtedness; · strikes, labor stoppages and changes in our collective bargaining agreements and relations with our employees and unions; · other risks that are detailed from time to time in reports we file with the SEC; and · the other factors described under “Risk Factors |