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Neenah Paper, Inc.’s (NP) third-quarter 2012 adjusted earnings of 56 cents per share improved 33% from the year-ago quarter’s earnings of 42 cents. Earnings surpassed the Zacks Consensus Estimate of 54 cents.

In the reported quarter, adjusted earnings excluded integration costs of 1 cent per share. Including the cost, earnings were 55 cents per share versus 42 cents in the year-ago quarter.

Total revenue improved 18% year over year to $206.3 million, missing the Zacks Consensus Estimate of $211 million. The improvement was primarily driven by double digit growth in the Fine Paper segment.

Cost and Margins

Cost of goods sold soared 15.7% to $170.6 million. Gross profit inflated 30.3% to $35.7 million. Consequently, gross margin rose 160 basis-points (bps) to 17.3% in the quarter.

Selling, general and administrative expenses increased 22.5% to $18.5 million. Adjusted operating income boosted 32.8% to $16.6 million. Adjusted operating margin also increased 90 bps to 8%.

Segment Performance
Technical Products segment’s total revenues dropped 8% to $98.7 million. Revenues were flat year over year on a constant currency basis as benefits from an improved mix were offset by a reduced volume by 2%, reflecting weaker economic conditions abroad.

Operating income increased 14% year over year to $6.4 million in the quarter. Operating income was benefited by a mix of products sold and lower raw material costs. Operating margin increased 130 bps to 6.5%.

Fine Paper segment’s total revenues jumped 46% to $99.1 million, driven by higher volumes emanating from Wausau brands and growth in luxury packaging, labels and international markets.

Adjusted operating income rose 38% to $13.1 million in the quarter. Improvement came from higher sales as well as production cost efficiencies, along with lower pulp price, offsetting the negative impacts of higher expenses related to advertising and selling. Adjusted operating margin contracted 80 bps to 13.2%.

Operational Updates

Cash and cash equivalents amounted to $6.6 million as of September 30, 2012, compared to $12.8 million as of December 31, 2011. Long-term debt was $181.5 million as of September 30, 2012, versus $164.5 million as of December 31, 2011.

Cash used in operating activities were $21.9 million in the nine months ended September 30, 2012, compared with $39.5 million in the year-ago comparable period. Debt-to-capitalization ratio improved to 47% as of September 30, 2012, from 51.9% as of June 30, 2012, and 52.8% as of December 31, 2011.

Our View

The company aims at focusing on high value, performance oriented Technical Products along with finding growth opportunities for Fine Paper business. However, Neenah Paper faces tough competition from P.H. Glatfelter Company (GLT - Snapshot Report) and KapStone Paper and Packaging Corporation (KS - Snapshot Report).

Neenah Paper retains a short-term Zacks #4 Rank (Sell). Based in Alpharetta, Georgia, Neenah Paper is a leader in premium image and performance-based products, including filtration, specialized substrates used for tapes, labels and other products, and high-end printing papers.

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