Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549** 

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| x | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|--------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 30, 2010**

 

**OR**

 
| o | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period from            to            **

 

**CommissionFile Number: 001-32240**

** **

**NEENAH PAPER, INC.**

(Exact name of registrant asspecified 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)                            |

 

**(678)566-6500**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes oNo o

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                      |   | Accelerated filer x              |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer o                   |   | Smaller reporting company o |
| (Do not check if a smaller  reporting company) |   |                             |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o   No x

 

As of October 29, 2010, therewere approximately 14,760,000 shares of the Company’s common stock outstanding.

 

 

 

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**TABLE OFCONTENTS**

 
| Part I —  Financial Information                                                           |   |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |
| Item 1.  Financial Statements                                                                       | F-1    |
|                                                                                                |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | F-22   |
|                                                                                                |   |
| Item 3. Quantitative and Qualitative Disclosure About  Market Risk                                  | F-28   |
|                                                                                                |   |
| Item 4. Controls and Procedures                                                                     | F-29   |
|                                                                                                |   |
| Part II  — Other Information                                                              |   |
|                                                                                                |   |
| Item  1. Legal Proceedings                                                                          | F-29   |
|                                                                                                |   |
| Item  1A. Risk Factors                                                                              | F-29   |
|                                                                                                |   |
| Item 6.  Exhibits                                                                                   | F-29   |

 

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Table of Contents

 

 

**Part I—FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inmillions, except share and per share data)**

**(Unaudited)**

 
| ** **                                                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net sales**                                                             |       | $                                                        | 161.5      |                                                    | $          | 150.1 |   | $ | 497.4 |   | $ | 419.4 |   |
| Cost of products sold                                                     |       | 133.7                                                    |       | 121.8                                                   |       | 405.1 |   | 346.4 |   |
| **Gross profit**                                                          |       | 27.8                                                     |       | 28.3                                                    |       | 92.3 |   | 73.0 |   |
| Selling, general and administrative expenses                              |       | 16.6                                                     |       | 18.1                                                    |       | 51.6 |   | 51.0 |   |
| Restructuring costs (Note 4)                                              |       | —                                                   |       | (0.4                                                    | )          | — |   | 17.6 |   |
| Other income - net                                                        |       | (0.5                                                     | )          | (0.1                                                    | )          | (1.1 | ) | (0.7 | ) |
| **Operating income**                                                      |       | 11.7                                                     |       | 10.7                                                    |       | 41.8 |   | 5.1 |   |
| Interest expense - net                                                    |       | 4.8                                                      |       | 5.4                                                     |       | 15.5 |   | 16.4 |   |
| **Income (loss) from continuing  operations before income taxes**         |       | 6.9                                                      |       | 5.3                                                     |       | 26.3 |   | (11.3 | ) |
| Provision (benefit) for income taxes                                      |       | 2.2                                                      |       | 1.9                                                     |       | 8.0 |   | (5.4 | ) |
| **Income (loss) from continuing  operations**                             |       | 4.7                                                      |       | 3.4                                                     |       | 18.3 |   | (5.9 | ) |
| Income (loss) from discontinued operations, net of  income taxes (Note 5) |       | (0.6                                                     | )          | (0.2                                                    | )          | 134.0 |   | (0.2 | ) |
| **Net income (loss)**                                                     |       | $                                                        | 4.1        |                                                    | $          | 3.2 |   | $ | 152.3 |   | $ | (6.1 | ) |
|                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| **Earnings (Loss) Per Common Share**                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Continuing operations                                                     |       | $                                                        | 0.32       |                                                    | $          | 0.23 |   | $ | 1.24 |   | $ | (0.40 | ) |
| Discontinued operations                                                   |       | (0.04                                                    | )          | (0.01                                                   | )          | 9.06 |   | (0.01 | ) |
|                                                                      |       | $                                                        | 0.28       |                                                    | $          | 0.22 |   | $ | 10.30 |   | $ | (0.41 | ) |
| Diluted                                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Continuing operations                                                     |       | $                                                        | 0.30       |                                                    | $          | 0.23 |   | $ | 1.18 |   | $ | (0.40 | ) |
| Discontinued operations                                                   |       | (0.04                                                    | )          | (0.01                                                   | )          | 8.64 |   | (0.01 | ) |
|                                                                      |       | $                                                        | 0.26       |                                                    | $          | 0.22 |   | $ | 9.82 |   | $ | (0.41 | ) |
|                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| **Weighted Average Common Shares  Outstanding (in thousands)**            |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                     |       | 14,763                                                   |       | 14,656                                                  |       | 14,727 |   | 14,652 |   |
| Diluted                                                                   |       | 15,620                                                   |       | 14,850                                                  |       | 15,448 |   | 14,652 |   |
| **Cash Dividends Declared Per Share  of Common Stock**                    |       | $                                                        | 0.10       |                                                    | $          | 0.10 |   | $ | 0.30 |   | $ | 0.30 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**NEENAH PAPER, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In millions)**

**(Unaudited)**

 
| ** **                                                              | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                              |       |                             |       |                            |       |
| **Current Assets**                                                      |       |                             |       |                            |       |
| Cash and cash equivalents                                               |       | $                                | 38.7       |                            | $          | 5.6 |   |
| Accounts receivable (less allowances of $2.1  million and $1.9 million) |       | 81.1                             |       | 67.7                            |       |
| Inventories                                                             |       | 71.3                             |       | 70.7                            |       |
| Income taxes receivable                                                 |       | —                           |       | 0.8                             |       |
| Deferred income taxes                                                   |       | 14.7                             |       | 61.7                            |       |
| Prepaid and other current assets                                        |       | 12.0                             |       | 13.7                            |       |
| Assets held for sale (Note 6)                                           |       | 6.2                              |       | 10.0                            |       |
| Total Current Assets                                                    |       | 224.0                            |       | 230.2                           |       |
| **Property, Plant and Equipment, at  cost**                             |       | 568.2                            |       | 569.6                           |       |
| Less accumulated depreciation                                           |       | 302.8                            |       | 285.2                           |       |
| Property, plant and equipment—net                                  |       | 265.4                            |       | 284.4                           |       |
| **Deferred Income Taxes**                                               |       | 49.4                             |       | 36.5                            |       |
| **Goodwill**                                                            |       | 42.6                             |       | 44.9                            |       |
| **Intangible Assets—net**                                          |       | 25.0                             |       | 27.5                            |       |
| **Other Assets**                                                        |       | 12.0                             |       | 13.1                            |       |
| **TOTAL ASSETS**                                                        |       | $                                | 618.4      |                            | $          | 636.6 |   |
|                                                                    |       |                             |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                          |       |                             |       |                            |       |
| **Current Liabilities**                                                 |       |                             |       |                            |       |
| Debt payable within one year                                            |       | $                                | 14.0       |                            | $          | 55.6 |   |
| Accounts payable                                                        |       | 31.7                             |       | 27.2                            |       |
| Accrued expenses                                                        |       | 55.3                             |       | 48.6                            |       |
| Total Current Liabilities                                               |       | 101.0                            |       | 131.4                           |       |
| **Long-term Debt**                                                      |       | 232.4                            |       | 263.6                           |       |
| **Deferred Income Taxes**                                               |       | 21.5                             |       | 23.7                            |       |
| **Noncurrent Employee Benefits**                                        |       | 98.5                             |       | 105.0                           |       |
| **Other Noncurrent Obligations**                                        |       | 2.9                              |       | 3.3                             |       |
| **TOTAL LIABILITIES**                                                   |       | 456.3                            |       | 527.0                           |       |
| **Contingencies and Legal Matters  (Note 11)**                          |       |                             |       |                            |       |
| **TOTAL STOCKHOLDERS’ EQUITY**                                     |       | 162.1                            |       | 109.6                           |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                    |       | $                                | 618.4      |                            | $          | 636.6 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**NEENAH PAPER, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In millions)**

**(Unaudited)**

 
| ** **                                                                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| **OPERATING ACTIVITIES**                                                                                      |       |                                                    |       |   |   |
| Net income (loss)                                                                                             |       | $                                                       | 152.3      |   | $ | (6.1 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:                     |       |                                                    |       |   |   |
| Depreciation and amortization                                                                                 |       | 23.4                                                    |       | 25.5 |   |
| Stock-based compensation                                                                                      |       | 3.7                                                     |       | 3.5 |   |
| Deferred income tax provision (benefit)                                                                       |       | 33.8                                                    |       | (7.8 | ) |
| Ripon Mill non-cash charges                                                                                   |       | —                                                  |       | 6.3 |   |
| Gain on sale of the Woodlands (Note 5)                                                                        |       | (74.1                                                   | )          | — |   |
| Reclassification of cumulative translation  adjustments related to investments in  Canada (Note 3 and Note 5) |       | (87.9                                                   | )          | — |   |
| Decrease (increase) in working capital                                                                        |       | (1.9                                                    | )          | 29.8 |   |
| Pension and other postretirement benefits                                                                     |       | (6.1                                                    | )          | 4.2 |   |
| Other                                                                                                         |       | (0.8                                                    | )          | (1.0 | ) |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                                                                |       | 42.4                                                    |       | 54.4 |   |
| **INVESTING ACTIVITIES**                                                                                      |       |                                                    |       |   |   |
| Capital expenditures                                                                                          |       | (10.9                                                   | )          | (6.0 | ) |
| Increase in investments                                                                                       |       | (1.4                                                    | )          | — |   |
| Net proceeds from sale of the Woodlands                                                                       |       | 78.0                                                    |       | — |   |
| Proceeds from asset sales                                                                                     |       | 0.1                                                     |       | 0.7 |   |
| Other                                                                                                         |       | 1.0                                                     |       | (0.6 | ) |
| **NET CASH PROVIDED BY (USED IN)  INVESTING ACTIVITIES**                                                      |       | 66.8                                                    |       | (5.9 | ) |
| **FINANCING ACTIVITIES**                                                                                      |       |                                                    |       |   |   |
| Proceeds from issuance of long-term debt                                                                      |       | —                                                  |       | 5.5 |   |
| Repayments of long-term debt                                                                                  |       | (70.5                                                   | )          | (41.9 | ) |
| Short-term borrowings                                                                                         |       | 9.2                                                     |       | 7.0 |   |
| Repayments of short-term debt                                                                                 |       | (10.6                                                   | )          | (12.5 | ) |
| Proceeds from exercise of stock options                                                                       |       | 0.3                                                     |       | — |   |
| Cash dividends paid                                                                                           |       | (4.4                                                    | )          | (4.4 | ) |
| Other                                                                                                         |       | (0.2                                                    | )          | (0.1 | ) |
| **NET CASH USED IN FINANCING  ACTIVITIES**                                                                    |       | (76.2                                                   | )          | (46.4 | ) |
| **EFFECT OF EXCHANGE RATE CHANGES  ON CASH AND CASH EQUIVALENTS**                                             |       | 0.1                                                     |       | — |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                                                |       | 33.1                                                    |       | 2.1 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                                             |       | 5.6                                                     |       | 3.3 |   |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                                                 |       | $                                                       | 38.7       |   | $ | 5.4 |   |
|                                                                                                          |       |                                                    |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:**                                                        |       |                                                    |       |   |   |
| Cash paid during period for interest, net of  interest expense capitalized                                    |       | $                                                       | 10.7       |   | $ | 10.8 |   |
| Cash paid (received) during period for income  taxes                                                          |       | $                                                       | 0.1        |   | $ | (8.2 | ) |
| Non-cash investing activities:                                                                                |       |                                                    |       |   |   |
| Liability for equipment acquired                                                                              |       | $                                                       | 1.4        |   | $ | 0.6 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**NEENAH PAPER, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in millions, except as noted)**

 

**Note 1.  Background and Basisof Presentation**

 

***Background***

 

NeenahPaper, Inc. (“Neenah” or the “Company”), is a Delaware corporationincorporated in April 2004. The Company has two primary operations: itstechnical products business and its fine paper business.

 

Thetechnical products business is a leading international producer oftransportation and other filter media, durable, saturated and coated substratesfor a variety of end uses and nonwoven wall coverings. The fine paper businessis a leading producer of premium writing, text, cover and specialty papers usedin corporate identity packages, corporate annual reports, invitations, personalstationery and high-end packaging for point of sale advertising.

 

InMarch 2010, the Company’s wholly owned subsidiary, Neenah Paper Company ofCanada (“Neenah Canada”) sold approximately 475,000 acres of woodland assets inNova Scotia (the “Woodlands”) to Northern Timber Nova Scotia Corporation, anaffiliate of Northern Pulp Nova Scotia Corporation (collectively, “NorthernPulp”), for C$82.5 million ($78.6 million). The sale resulted in a pre-taxgain, net of fees and other transaction costs, of $74.1 million. The sale ofthe Woodlands resulted in the substantially complete liquidation of theCompany’s investment in Neenah Canada.  In accordance with AccountingStandards Codification (“ASC”) Topic 830, *ForeignCurrency Matters* (“ASC Topic 830”), $87.9 million of cumulativecurrency translation adjustments attributable to the Company’s Canadiansubsidiaries have been reclassified into earnings and recognized as part of thegain on sale of the Woodlands. The transaction did not generate a cash taxliability because the tax basis for the Woodlands was approximately equal tothe sale price. See Note 5, “Discontinued Operations.”

 

Forthe nine months ended September 30, 2010, the results of operations, thegain on sale of the Woodlands ($74.1 million) and the reclassification intoearnings of cumulative currency translation adjustments attributable to theCompany’s Canadian subsidiaries ($87.9 million) are reported as discontinuedoperations in the condensed consolidated statements of operations. Theresults of operations of the Woodlands are reported as discontinued operationsfor the three and nine months ended September 30, 2009.  See Note 5,“Discontinued Operations.”

 

***Basis ofConsolidation and Presentation***

 

Thesestatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”) and, in accordance with thoserules and regulations, do not include all information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America(“GAAP”).  Management believes that the disclosures made are adequate fora fair presentation of the Company’s results of operations, financial positionand cash flows. In the opinion of management, the condensed consolidatedfinancial statements reflect all adjustments, consisting only of normalrecurring adjustments, necessary to present fairly the results of operations,financial position and cash flows for the interim periods presentedherein.  The preparation of condensed consolidated financial statements inconformity with GAAP requires management to make extensive use of estimates andassumptions that affect the reported amounts and disclosures.  Actualresults may vary from these estimates.

 

Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in theCompany’s most recent Annual Report on Form 10-K.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations to be expected for the full year.

 

Thecondensed consolidated financial statements of Neenah and its subsidiariesincluded herein are unaudited, except for the December 31, 2009 condensedconsolidated balance sheet, which was derived from audited financialstatements.  The condensed consolidated financial statements include thefinancial statements of the Company and its wholly owned and majority ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated from the condensed consolidated financial statements.

 

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***Prior Period Adjustments***

 

Duringthe preparation of the interim financial statements for the three and ninemonths ended September 30, 2010, the Company identified a $2.8 millionoverstatement of accounts payable that was primarily the result of invalidinventory pricing adjustments beginning in 2006 and certain inventorytransactions in 2008.  These errorsresulted in an overstatement of accounts payable and cost of products sold of$0.3 million and $2.5 million for the years ended December 31, 2006 and2008, respectively.  The Company hasreflected the correction of the errors on the condensed consolidated balancesheet as of December 31, 2009 with a decrease in accounts payable of $2.8million, a decrease of $0.9 million in noncurrent deferred income tax assetsand an increase of $1.9 million in stockholders’ equity.  The errors inprior periods will be corrected in future filings when presented.  The Company believes the effects of theseprior period corrections are not material to any prior period consolidatedfinancial statements.

 

***Earnings (Loss) per Share (“EPS”)***

 

TheCompany computes basic earnings (loss) per share (“EPS”) in accordance with ASCTopic 260, *Earnings Per Share*(“ASC Topic 260”).  In accordance withASC Topic 260, share-based awards with non-forfeitable dividends are classifiedas participating securities. In calculating basic earnings per share, thismethod requires net income to be reduced by the amount of dividends declared inthe current period for each participating security and by the contractualamount of dividends or other participation payments that are paid oraccumulated for the current period. Undistributed earnings for the period areallocated to participating securities based on the contractual participationrights of the security to share in those current earnings assuming all earningsfor the period are distributed. Holders of restricted stock, restricted stockunits (“RSUs”) and target performance unit awards (“Performance Units”) havecontractual participation rights that are equivalent to those of commonstockholders. Therefore, the Company allocates undistributed earnings to restrictedstock, RSUs, Performance Units and common stockholders based on theirrespective average ownership percentages for the period.

 

ASCTopic 260 also requires companies with participating securities to calculatediluted earnings per share using the “Two-Class” method. The “Two-Class” methodrequires the denominator to include the weighted average participatingsecurities along with the additional share equivalents from the assumedconversion of stock options calculated using the “Treasury Stock” method,subject to the anti-dilution provisions of ASC Topic 260.

 

DilutedEPS was calculated to give effect to all potentially dilutive common sharesusing the “Treasury Stock” method. Outstanding stock options, stockappreciation rights (“SARs”), RSUs and Performance Units represent the onlypotentially dilutive security effects on the Company’s weighted-averageshares.  For the three and nine months ended September 30, 2010,approximately 1,705,000 and 1,610,000 potentially dilutive stock-basedcompensation awards, respectively, were excluded from the computation ofdilutive common shares because the exercise price of such awards exceeded theaverage market price of the Company’s common stock for the period the awardswere outstanding.  For the three and nine months ended September 30,2009, approximately 1,945,000 and 1,755,000 potentially dilutive stock-basedcompensation awards, respectively, were excluded from the computation ofdilutive common shares because the exercise price of such awards exceeded the averagemarket price of the Company’s common stock for the period the awards wereoutstanding.  In addition, as a result of the loss from continuingoperations for the nine months ended September 30, 2009, approximately105,000 incremental shares resulting from the assumed vesting of potentiallydilutive securities were excluded from the diluted earnings per sharecalculation, as the effect would have been anti-dilutive.

 

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Thefollowing table presents the computation of basic and diluted EPS (dollars inmillions except per share amounts, shares in thousands):

 
| ** **                                                                             | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income (loss) from continuing operations                                               |       | $                                                        | 4.7        |                                                    | $          | 3.4 |   | $ | 18.3 |   | $ | (5.9 | ) |
| Less: Distributed and undistributed amounts  allocated to participating securities (a) |       | —                                                   |       | —                                                  |       | 0.1 |   | — |   |
| Income (loss) from continuing operations available  to common stockholders             |       | 4.7                                                      |       | 3.4                                                     |       | 18.2 |   | (5.9 | ) |
| Income (loss) from discontinued operations, net of  income taxes                       |       | (0.6                                                     | )          | (0.2                                                    | )          | 134.0 |   | (0.2 | ) |
| Less: Undistributed amounts allocated to  participating securities (a)            |       | —                                                   |       | —                                                  |       | 0.5 |   | — |   |
| Net income (loss) available to common stockholders                                     |       | $                                                        | 4.1        |                                                    | $          | 3.2 |   | $ | 151.7 |   | $ | (6.1 | ) |
|                                                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted-average basic shares outstanding                                              |       | 14,763                                                   |       | 14,656                                                  |       | 14,727 |   | 14,652 |   |
| Add: Assumed incremental shares under stock  compensation plans                        |       | 857                                                      |       | 194                                                     |       | 721 |   | — |   |
| Weighted-average diluted shares                                                        |       | 15,620                                                   |       | 14,850                                                  |       | 15,448 |   | 14,652 |   |
|                                                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| **Earnings (Loss) Per Common Share**                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Continuing operations                                                                  |       | $                                                        | 0.32       |                                                    | $          | 0.23 |   | $ | 1.24 |   | $ | (0.40 | ) |
| Discontinued operations                                                                |       | (0.04                                                    | )          | (0.01                                                   | )          | 9.06 |   | (0.01 | ) |
|                                                                                   |       | $                                                        | 0.28       |                                                    | $          | 0.22 |   | $ | 10.30 | ** ** | $ | (0.41 | ) |
| Diluted                                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Continuing operations                                                                  |       | $                                                        | 0.30       |                                                    | $          | 0.23 |   | $ | 1.18 |   | $ | (0.40 | ) |
| Discontinued operations                                                                |       | (0.04                                                    | )          | (0.01                                                   | )          | 8.64 |   | (0.01 | ) |
|                                                                                   |       | $                                                        | 0.26       |                                                    | $          | 0.22 |   | $ | 9.82 | ** ** | $ | (0.41 | ) |

 

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(a)          In accordance with ASC Topic 260, for thenine months ended September 30, 2009, undistributed losses have been entirelyallocated to common stockholders because the holders of participatingsecurities are not contractually obligated to share in the losses of theCompany.

 

**Note 2.  Accounting Standard Changes**

 

Asof September 30, 2010, no amendments to the ASC had been issued that willhave or are reasonably likely to have a material effect on the Company’sfinancial position, results of operations or cash flows.

 

**Note 3.  ComprehensiveIncome (Loss)**

 

Comprehensiveincome (loss) includes, in addition to net income (loss), gains and lossesrecorded directly into stockholders’ equity on the condensed consolidatedbalance sheet. These gains and losses are referred to as other comprehensiveincome items. Accumulated other comprehensive income (loss) consists of foreigncurrency translation gains and (losses) and adjustments related to pensions andother postretirement benefits. The Company does not provide income taxes forforeign currency translation adjustments related to indefinite investments inforeign subsidiaries.  The sale of the Woodlands resulted in thesubstantially complete liquidation of the Company’s investment in NeenahCanada.  In accordance with ASC Topic 830, for the nine months endedSeptember 30, 2010, $87.9 million of cumulative currency translationadjustments attributable to the Company’s Canadian subsidiaries have beenreclassified into earnings and recognized as part of the gain on sale of theWoodlands. There were no tax consequences related to the repatriation offunds from the sale of the Woodlands.  As of September 30, 2010 andDecember 31, 2009, accumulated other comprehensive income (loss) was$(7.7) million and $91.5 million, respectively.

 

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Thefollowing table presents the components of comprehensive income (loss):

 
| ** **                                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                                                                          |       | $                                                        | 4.1        |                                                    | $          | 3.2 |   | $ | 152.3 |   | $ | (6.1 | ) |
| Other comprehensive income (loss):                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized foreign currency translation gain  (loss)                                       |       | 19.7                                                     |       | 7.6                                                     |       | (10.2 | ) | 8.1 |   |
| Reclassification of cumulative translation  adjustments related to investments in Canada   |       | —                                                   |       | —                                                  |       | (87.9 | ) | — |   |
| Adjustments to pension and other post-employment  benefit liabilities, net of income taxes |       | (0.1                                                     | )          | 0.1                                                     |       | (1.1 | ) | 1.4 |   |
| Total other comprehensive income (loss)                                                    |       | 19.6                                                     |       | 7.7                                                     |       | (99.2 | ) | 9.5 |   |
|                                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Comprehensive income                                                                       |       | $                                                        | 23.7       |                                                    | $          | 10.9 |   | $ | 53.1 |   | $ | 3.4 |   |

 

**Note 4.  Closure of the Ripon Mill**

 

InMay 2009, the Company permanently closed its fine paper mill located inRipon, California (the “Ripon Mill”).  For the nine months ended September 30,2009, the closure resulted in a pre-tax charge of $17.6 million.  Thecharge was comprised of approximately $6.3 million in non-cash chargesprimarily for losses related to the carrying value of property, plant andequipment, a curtailment loss of $0.8 million related to postretirement benefitplans in which employees of the Ripon Mill participated and cash payments forcontract terminations and severance and other employee costs of approximately$10.5 million.

 

Asof September 30, 2010, the remaining long-lived assets of the Ripon Mill,primarily composed of land and buildings, are classified as assets held forsale on the condensed consolidated balance sheet.  The Company believes that the sale of suchassets will be completed within 12 months. Assets held for sale are valued atthe lower of cost or fair value less cost to sell. The assets of the RiponMill are reported at their aggregate historical cost of $6.2 million.  On October 27, 2010, the Company soldthe remaining assets of the Ripon Mill for gross proceeds of approximately $9million. See Note 14, “Subsequent Event.”

 

TheCompany accounted for costs associated with the closure of the Ripon Mill inaccordance with ASC Topic 420, *Exit orDisposal Cost Obligations*. The Company expects the payments of all costs related to the closure ofthe Ripon Mill to be substantially complete by December 31, 2010. Thefollowing table presents the status of such closure costs as of September 30,2010:

 
| ** **                                                    | ** ** | **Severance  benefits** | ** ** | **Contract  termination and  other costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| Amounts accrued during the year ended December 31,  2009 |       | $                       | 1.8        |                                                 | $          | 8.7       |       | $ | 10.5 |   |
| Payments for the year ended December 31, 2009            |       | (1.7                    | )          | (4.8                                                 | )          | (6.5      | )          |
| Accrued exit costs at December 31, 2009                  |       | 0.1                     |       | 3.9                                                  |       | 4.0       |       |
| Payments for the nine months ended  September 30, 2010   |       | —                  |       | (3.4                                                 | )          | (3.4      | )          |
| Accrued exit costs at September 30, 2010                 |       | $                       | 0.1        |                                                 | $          | 0.5       |       | $ | 0.6 |   |

 

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**Note 5.  Discontinued Operations**

 

InMarch 2010, Neenah Canada sold the Woodlands to Northern Pulp for C$82.5million ($78.6 million). The sale resulted in a pre-tax gain, net of feesand other transaction costs, of $74.1 million. The sale of the Woodlandsresulted in the substantially complete liquidation of the Company’s investmentin Neenah Canada.  In accordance with ASC Topic 830, $87.9 million ofcumulative currency translation adjustments attributable to the Company’sCanadian subsidiaries have been reclassified into earnings and recognized aspart of the gain on sale of the Woodlands. The sale of the Woodlandsrepresented the cessation of the Company’s operating activities in Canada;however, the Company will have certain continuing post-employment benefitobligations related to its Canadian operations.  The transaction did notgenerate a cash tax liability because the tax basis for the Woodlands wasapproximately equal to the sale price.

 

Netproceeds from the sale were used to repay in full $40 million of outstandingterm loan borrowings (the “Term Loan”) and repay approximately $26 million inoutstanding revolving loans which reduced the balance of such outstanding loansunder the Company’s bank credit agreement (the “Bank Credit Agreement”) tozero. In addition, the Company made approximately $3.1 million in contracttermination payments related to the closure of the Ripon Mill that became dueand payable upon the sale of the Woodlands.

 

InJune 2008, Neenah Canada sold the Pictou Mill to Northern Pulp. Pursuantto the terms of the transaction, Northern Pulp assumed all of the assets andliabilities associated with the Pictou Mill, as well as existing customercontracts, supply agreements, labor agreements and pension obligations.

 

Inconjunction with the sale of the Pictou Mill, the Company entered into a stumpage agreement(the “Stumpage Agreement”) which allowed Northern Pulp to harvest softwoodtimber annually from the Woodlands. The Stumpage Agreement was terminatedin March 2010 in conjunction with the sale of the Woodlands.  For thenine months ended September 30, 2010, the Company recognized revenue ofapproximately $1.4 million, related to timber sales pursuant to theStumpage Agreement.  For the three and nine months ended September 30,2009, the Company recognized revenue of approximately $1.2 million and $2.5million, respectively, related to the Stumpage Agreement.

 

Theresults of operations of the Woodlands and the gain on sale of the Woodlandsare reported as discontinued operations in the condensed consolidatedstatements of operations for each period presented. The following tablesummarizes the results of discontinued operations:

 
| ** **                                                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales (a)                                                                            |       | $                                                        | —     |                                                    | $          | 1.2 |   | $ | 1.4 |   | $ | 2.5 |   |
|                                                                                     |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Income (loss) from discontinued operations:                                              |       |                                                     |       |                                                    |       |   |   |   |   |
| Income (loss) from operations before income taxes                                        |       | $                                                        | (0.1       | )                                                       | $          | 1.0 |   | $ | 1.0 |   | $ | 1.8 |   |
| Gain on disposal of the Woodlands                                                        |       | —                                                   |       | —                                                  |       | 74.1 |   | — |   |
| Loss on disposal of the Pictou Mill                                                      |       | —                                                   |       | —                                                  |       | — |   | (0.3 | ) |
| Reclassification of cumulative translation  adjustments related to investments in Canada |       | —                                                   |       | —                                                  |       | 87.9 |   | — |   |
| Gain (loss) on disposal                                                                  |       | —                                                   |       | —                                                  |       | 162.0 |   | (0.3 | ) |
| Income (loss) before income taxes                                                        |       | (0.1                                                     | )          | 1.0                                                     |       | 163.0 |   | 1.5 |   |
| Provision for income taxes (b)                                                           |       | (0.5                                                     | )          | (1.2                                                    | )          | (29.0 | ) | (1.7 | ) |
| Income (loss) from discontinued operations, net of  income taxes                         |       | $                                                        | (0.6       | )                                                       | $          | (0.2 | ) | $ | 134.0 |   | $ | (0.2 | ) |

 

----

(a)          Represent timber sales pursuant to the Stumpage Agreement.

(b)         The reclassification of cumulative foreign currencytranslation gains had no tax consequences.

 

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**Note 6. Supplemental Balance Sheet Data**

 

The following table presentsinventories by major class:

 
| ** **                           | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Inventories by major class:          | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Raw materials                        |       | $                                | 18.7       |                            | $          | 16.6 |   |
| Work in progress                     |       | 14.9                             |       | 11.7                            |       |
| Finished goods                       |       | 48.7                             |       | 49.4                            |       |
| Supplies and other                   |       | 1.6                              |       | 1.7                             |       |
|                                 |       | 83.9                             |       | 79.4                            |       |
| Adjust FIFO inventories to LIFO cost |       | (12.6                            | )          | (8.7                            | )          |
| Total                                |       | $                                | 71.3       |                            | $          | 70.7 |   |

 

The FIFO values of total inventoriesvalued on the LIFO method were $61.2 million and $58.2 million at September 30,2010 and December 31, 2009, respectively.

 

The following table presents thecomponents of assets held for sale on the condensed consolidated balance sheet.

 
| ** **                                   | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Assets Held for Sale**                     | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| The Woodlands (Note 5)                       |       | $                                | —     |                            | $          | 3.8 |   |
| Land and buildings - the Ripon Mill (Note 4) |       | 6.2                              |       | 6.2                             |       |
| Total                                        |       | $                                | 6.2        |                            | $          | 10.0 |   |

 

**Note 7. Debt**

 

Long-termdebt consisted of the following:

 
| ** **                                                                                                            | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Senior Notes (7.375% fixed rate) due  November 2014                                                              |       | $                                | 223.0      |                            | $          | 225.0 |   |
| Revolving bank credit facility (variable rates)  due November 2013                                               |       | —                           |       | 27.9                            |       |
| Term Loan (variable rates)                                                                                            |       | —                           |       | 40.0                            |       |
| Neenah Germany project financing (3.8% fixed rate)  due in 16 equal semi-annual installments beginning June 2009 |       | 11.1                             |       | 12.5                            |       |
| Neenah Germany revolving line of credit (variable  rates) due November 2010                                      |       | 12.3                             |       | 12.9                            |       |
| Other debt                                                                                                            |       | —                           |       | 0.9                             |       |
| Total debt                                                                                                            |       | 246.4                            |       | 319.2                           |       |
| Less: Debt payable within one year                                                                                    |       | 14.0                             |       | 55.6                            |       |
| Long-term debt                                                                                                        |       | $                                | 232.4      |                            | $          | 263.6 |   |

 

***Senior Unsecured Notes***

 

In November 2004, theCompany completed an underwritten offering of ten-year senior unsecured notes(the “Senior Notes”) at an aggregate face amount of $225 million. TheSenior Notes bear interest at a rate of 7.375 percent, payable May 15 andNovember 15 of each year and mature on November 15, 2014. TheSenior Notes are fully and unconditionally guaranteed by all of the Company’swholly-owned subsidiaries, with the exception of our non-Canadian internationalsubsidiaries. During the three months ended September 30, 2010, theCompany purchased $2 million principal amount of its Senior Notes for slightlyless than par value.  The Companyrecognized a pre-tax loss of approximately $25 thousand in connection withthese purchases, including the write-off of related unamortized debt issuancecosts.  The loss is recorded in Otherincome — net on the condensed consolidated statement of operations.  As of September 30, 2010, $223 millionof Senior Notes were issued and outstanding.

 

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***Amendedand Restated Secured Revolving Credit Facility***

 

In November, 2009, the Companyamended and restated the Bank Credit Agreement.  As amended, the BankCredit Agreement consisted of a $100 million senior, secured revolving creditfacility (the “Revolver”) and a $40 million senior secured Term Loan. TheBank Credit Agreement terminates on November 30, 2013.  InMarch 2010, the Company used proceeds from the sale of the Woodlands torepay approximately $26 million in outstanding Revolver borrowings whichreduced the balance of such outstanding loans under the Bank Credit Agreementto zero.  For the nine months ended September 30, 2010, the Companyrecognized within interest expense approximately $0.3 million of costs towrite-off deferred financing costs associated with the Term Loan.

 

As of September 30, 2010, theCompany had no outstanding Revolver borrowings.  Borrowing availabilityunder the Revolver varies over time depending on the value of the Company’sinventory, receivables and various capital assets (the “Borrowing Base”).  As of September 30, 2010, the Company’sBorrowing Base included $9.1 million for the collateral value of the RiponMill. Borrowing availability under the Revolver is reduced by outstandingletters of credit and certain other items.  As of September 30, 2010,the Company had approximately $1.6 million of letters of credit and other itemsoutstanding which reduced availability and $85.2 million of borrowingavailability under the Revolver.  As ofDecember 31, 2009, the Company had $27.9 million in outstanding Revolverborrowings at a weighted-average interest rate of 4.6 percent per annum.

 

In March 2010, theCompany used proceeds from the sale of the Woodlands to extinguish the TermLoan by repaying in full $40 million of outstanding Term Loan borrowings. As of December 31, 2009, the Company had $40.0 millionin outstanding Term Loan borrowings at a weighted-average interest rate of 4.5percent per annum.

 

The Bank Credit Agreement containsevents of default customary for financings of this type, including failure topay principal or interest, materially false representations or warranties,failure to observe covenants and other terms of the Bank Credit Agreement,cross-defaults to certain other indebtedness, bankruptcy, insolvency, variousERISA violations, the incurrence of material judgments and changes in control.

 

The Bank Credit Agreement containscovenants with which the Company must comply during the term of theagreement.  Among other things, such covenants restrict the Company’sability to incur certain additional debt, make specified restricted payments,including dividends, and capital expenditures, authorize or issue capitalstock, enter into transactions with affiliates, consolidate or merge with oracquire another business, sell certain of its assets, or dissolve or windup.  In addition, the terms of the Bank Credit Agreement require theCompany to achieve and maintain compliance with a fixed charge coverage ratioif availability under the Bank Credit Agreement is less than $20 million.At September 30, 2010, the Company was in compliance with all covenants.

 

***OtherDebt***

 

In December 2006, ourwholly-owned subsidiary, Neenah Gessner GmbH (“Neenah Germany”) entered into a 10-year agreement withHypoVereinsbank and IKB Deutsche Industriebank AG to provide €10.0 million ofproject financing for the construction of a saturator (the “German LoanAgreement”). As of September 30, 2010, €8.1 million ($11.1 million, basedon exchange rates at September 30, 2010) was outstanding under the GermanLoan Agreement. As of December 31, 2009, €8.8 million ($12.5 million, based onexchange rates at December 31, 2009) was outstanding under the German LoanAgreement.

 

Neenah Germany has a revolving lineof credit (the “German Line of Credit”) with HypoVereinsbank that provides forborrowings of up to €15 million for general corporate purposes. The German Lineof Credit is secured by the domestic accounts receivable of Neenah Germany. Asof September 30, 2010 and December 31, 2009, the weighted-averageinterest rate on outstanding German Line of Credit borrowings was 4.1 percentper annum.  As of September 30, 2010, €9.0 million ($12.3 million,based on exchange rates at September 30, 2010) was outstanding under theGerman Line of Credit and €6.0 million ($8.1 million, based on exchange ratesat September 30, 2010) of credit was available.  InNovember 2009, Neenah Germany extended the termination date for the GermanLine of Credit to November 30, 2010.

 

Neenah Germany’s ability to paydividends or transfer funds to the Company is limited under the terms of theGerman Line of Credit, to not exceed certain limits defined in theagreement without lender approval or repayment of the amount outstanding underthe line, which was €9.0 million ($12.3 million, based on exchange rates at September 30,2010) at September 30, 2010.  In addition, the terms of the GermanLine of Credit require Neenah Germany to maintain a ratio of stockholder’sequity to total assets equal to or greater than 45 percent.  NeenahGermany was in compliance with all provisions of the German Line of Credit asof September 30, 2010.

 

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Table of Contents

 

**Note8.  Pension and Other Postretirement Benefits**

 

***Pension Plans***

 

Substantially all active employeesof the Company’s U.S. paper operations participate in defined benefit pensionplans and/or defined contribution retirement plans. Neenah Germany has definedbenefit plans designed to provide a monthly pension upon retirement forsubstantially all its employees in Germany.  In addition, the Companymaintains a non-qualified supplemental defined benefit pension plan (the “SERPPlan”). The Company provides benefits under the SERP Plan to the extentnecessary to fulfill the intent of its defined benefit retirement plans withoutregard to the limitations set by the Internal Revenue Code on qualified definedbenefit plans.

 

For the nine months ended September 30,2010, benefit payments under the SERP Plan exceeded the sum of expected servicecost and interest costs for the plan for calendar 2010. In accordancewith ASC Topic 715,*Compensation — Retirement Benefits*(“ASC Topic 715”), the Companymeasured the liabilities of the SERP Plan as of September 30, 2010 andrecognized a settlement loss of $0.3 million for the three and nine monthsended September 30, 2010.

 

In April 2010, the Companyexecuted a reduction in force (“RIF”) plan at the Appleton, Wisconsinmill.  The RIF resulted in theelimination of expected years of future service for certain mill employeeseligible to participate in the Company’s defined benefit pension plans andpostretirement medical plan.  In accordance with ASC Topic 715, theCompany measured the assets and liabilities of the affected postretirementplans as of April 30, 2010 and recognized a curtailment loss ofapproximately $35 thousand for the nine months ended September 30, 2010.

 

Theclosure of the Ripon Mill (See Note 4, “Closure of the Ripon Mill”) resulted inthe elimination of expected years of future service for mill employees eligibleto participate in the Company’s defined benefit pension plans andpostretirement medical plan.  In accordance with ASC Topic 715, theCompany measured the assets and liabilities of the affected postretirementplans as of May 31, 2009 and recognized an aggregate curtailment loss ofapproximately $0.8 million for the nine months ended September 30, 2009.

 

The following table presents thecomponents of net periodic benefit cost:

 

***Components of Net Periodic Benefit Cost***

 
| ** **                                                  | ** ** | **Pension Benefits**                                | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Three Months Ended September 30,** | ** ** |
| ** **                                                  | ** ** | **2010**                                                 | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                                                |       | $                                                        | 1.1        |                                                            | $          | 1.1 |   | $ | 0.4 |   | $ | 0.5 |   |
| Interest cost                                               |       | 3.5                                                      |       | 3.6                                                             |       | 0.5 |   | 0.7 |   |
| Expected return on plan assets (a)                          |       | (3.5                                                     | )          | (2.8                                                            | )          | — |   | — |   |
| Recognized net actuarial loss                               |       | 0.3                                                      |       | 0.3                                                             |       | — |   | — |   |
| Amortization of prior service cost                          |       | —                                                   |       | —                                                          |       | 0.1 |   | 0.1 |   |
| Amount of settlement loss recognized                        |       | 0.3                                                      |       | —                                                          |       | — |   | — |   |
| Net periodic benefit cost related to continuing  operations |       | $                                                        | 1.7        |                                                            | $          | 2.2 |   | $ | 1.0 |   | $ | 1.3 |   |

 

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| ** **                            | ** ** | **Pension Benefits**                               | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                            | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                            | ** ** | **2010**                                                | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                          |       | $                                                       | 3.2        |                                                            | $          | 3.4 |   | $ | 1.2 |   | $ | 1.4 |   |
| Interest cost                         |       | 10.5                                                    |       | 10.7                                                            | ** ** | 1.6 |   | 1.9 |   |
| Expected return on plan assets (a)    |       | (10.3                                                   | )          | (8.5                                                            | )          | — |   | — |   |
| Recognized net actuarial loss         |       | 0.9                                                     |       | 1.1                                                             |       | — |   | 0.1 |   |
| Amortization of prior service cost    |       | 0.1                                                     |       | 0.1                                                             |       | 0.3 |   | 0.3 |   |
| Amount of settlement loss recognized  |       | 0.3                                                     |       | —                                                          |       | — |   | — |   |
| Amount of curtailment loss recognized |       | —                                                  |       | 0.2                                                             |       | — |   | 0.6 |   |
| Net periodic benefit cost             |       | $                                                       | 4.7        |                                                            | $          | 7.0 |   | $ | 3.1 |   | $ | 4.3 |   |

 

----

(a)                The expected return on plan assets is determined bymultiplying the fair value of plan assets at the prior year-end (adjusted forestimated current year cash benefit payments and contributions) by the expectedlong-term rate of return.

 

The Company expects to make aggregatecontributions to qualified and non-qualified defined benefit pension trusts andpay benefits for unfunded defined benefit pension plans of approximately $18million (based on exchange rates at September 30, 2010) in calendar2010.  For the nine months September 30, 2010, the Company madeapproximately $13.0 million of such contributions/payments.

 

**Note 9.  Stock Compensation Plan**

 

The Company reserved 3,500,000shares of $0.01 par value common stock (“Common Stock”) for issuance under the2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”).  As of September 30,2010, approximately 1,795,000 shares of Common Stock were reserved for futureissuance under the Omnibus Plan. As of September 30, 2010, the number ofshares available for future issuance was not reduced by outstanding SARsbecause the closing market price for the Company’s common stock was less thanthe exercise price of all outstanding SARs. The Company accounts forstock-based compensation costs in accordance with the provisions of ASC Topic718, *Compensation—Stock Compensation*(“ASCTopic 718”).

 

***Valuation and Expense Information***

 

Substantiallyall stock-based compensation expense is recorded in selling, general andadministrative expenses on the condensed consolidated statements of operations. The following table summarizes stock-based compensation expense and relatedincome tax benefits.

 
| ** **                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Stock-based compensation expense                     |       | $                                                        | 1.2        |                                                    | $          | 1.7 |   | $ | 3.7 |   | $ | 3.5 |   |
| Income tax benefit                                   |       | (0.4                                                     | )          | (0.6                                                    | )          | (1.4 | ) | (1.3 | ) |
| Stock-based compensation, net of income tax  benefit |       | $                                                        | 0.8        |                                                    | $          | 1.1 |   | $ | 2.3 |   | $ | 2.2 |   |

 

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The following table summarizes totalcompensation costs related to the Company’s equity awards and amountsrecognized in the nine months ended September 30, 2010.

 
| ** **                                                     | ** ** | **Stock Options** | ** ** | **Restricted Stock** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Unrecognized compensation cost — December 31,  2009  |       | $                      | 1.4        |                      | $          | 1.4 |   |
| Grant date fair value of current year grants                   |       | 1.2                    |       | 4.7                       |       |
| Compensation expense recognized                                |       | (1.3                   | )          | (2.4                      | )          |
| Estimated forfeitures for awards granted in prior  years       |       | —                 | ** ** | (0.4                      | )          |
| Unrecognized compensation cost — September 30,  2010 |       | $                      | 1.3        |                      | $          | 3.3 |   |
| Expected amortization period (in years)                        |       | 1.8                    |       | 2.0                       |       |

 

***StockOptions***

 

Forthe nine months ended September 30, 2010, the Company awarded nonqualifiedstock options to Long-Term Incentive Plan (the “LTIP”) participants to purchaseapproximately 201,550 shares of common stock (subject to forfeiture due totermination of employment and other conditions). In addition, the Companyawarded to non-employee members of the board of directors nonqualified stockoptions to purchase 5,640 shares of Common Stock.  For the nine monthsended September 30, 2010, the weighted-average exercise price andweighted-average grant date fair value of such nonqualified stock option awardswas $13.68 per share and $5.72 per share, respectively. The weighted-averagegrant date fair value was estimated using the Black-Scholes option valuationmodel with the following assumptions:

 
| ** **               | ** ** | **Nine months ended  September 30, 2010** | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|
| Expected  life in years  |       | 5.9                                                           |       |
| Risk  free interest rate |       | 2.9                                                           | %          |
| Volatility               |       | 55.3                                                          | %          |
| Dividend  yield          |       | 2.9                                                           | %          |

 

For the nine months ended September 30,2010, the aggregate pre-tax intrinsic value of stock options exercised wasapproximately $0.5 million.  No stock options were exercised during thethree and nine months ended September 30, 2009. The aggregate intrinsicvalue of approximately 1,660,000 stock options that were exercisable at September 30,2010 was $1.6 million. Theaggregate intrinsic value of approximately 1,365,000 stock options that wereexercisable at December 31, 2009 was $0.1 million.

 

As of September 30, 2010, theaggregate intrinsic value of 2,375,000 stock options and SARs that were vestedor expected to vest was $4.9 million.  The weighted-average grant datefair value of such stock options was $8.22 per share. As of December 31,2009, the weighted-average grant date fair value and aggregate intrinsic valueof 2,250,000 stock options that were vested or expected to vest was $8.41 pershare and $4.1 million, respectively.

 

The aggregate grant date fair valueof approximately 375,000 stock options and SARs that vested during the ninemonths ended September 30, 2010, was $1.8 million. As of September 30,2010, certain participants met age and service requirements that allowed theirstock options and SARs to qualify for accelerated vesting upon retirement. Asof September 30, 2010, LTIP participants held options to purchase 320,000shares of common stock that would have been exercisable if they had retired asof such date. The aggregate grant date fair value of options subject toaccelerated vesting was $1.2 million. Stock options and SARs subject toaccelerated vesting for expense recognition become exercisable according to thecontract terms of the stock-based awards.

 

As of September 30, 2010, the Company had approximately 690,000 unvested stockoptions with a weighted-average grant date fair value of $4.00 per share. As ofDecember 31, 2009, approximately 905,000 unvested stock options wereoutstanding with a weighted-average grant date fair value of $3.85 per share.

 

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***PerformanceUnits***

 

During the nine months ended September 30,2010, the Company granted target awards of 183,500 Performance Units to LTIPparticipants. The measurement period for the Performance Units isJanuary 1, 2010 through December 31, 2010. Common Stock equal tobetween 40 percent and 200 percent of the Performance Unit target will beawarded based on the Company’s return on invested capital, revenue growth forthe Technical Products segment, the level of cash flow for the Fine Papersegment and total return to shareholders relative to a peer group of companiesand the Russell 2000® Value small capitalization index. As of September 30,2010, the weighted-average grant date fair value for the Performance Units was$25.36 per share. Compensation cost is recognized pro rata over the vestingperiod.

 

**Note 10.  Goodwill and Other Intangible Assets**

 

The following table presents changesin the carrying amount of goodwill for the nine months ended September 30,2010.  All such goodwill is reported in the Technical Products segment.

 
| ** **                         | ** ** | **Gross  Amount** | ** ** | **Cumulative  Impairment  Losses** | ** ** | **Net** | ** ** |
|------------------------------------|------------|-------------------|------------|------------------------------------|------------|---------|------------|
| Balance at December 31, 2009  |       | $                 | 98.9       |                               | $          | (54.0   | )          | $ | 44.9 |   |
| Foreign currency translation       |       | (5.0              | )          | 2.7                                |       | (2.3    | )          |
|                               |       |              |       |                               |       |    |       |
| Balance at September 30, 2010 |       | $                 | 93.9       |                               | $          | (51.3   | )          | $ | 42.6 |   |

 

Thefollowing table presents the gross carrying amount of intangible assets and therelated accumulated amortization for intangible assets subject to amortization.

 
| ** **                       | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Gross  Amount**                | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizable intangible assets    |       |                             |       |                            |       |   |   |   |   |
| Customer based intangibles       |       | $                                | 14.8       |                            | $          | (4.0 | ) | $ | 15.5 |   | $ | (3.4 | ) |
| Trade names and trademarks       |       | 6.3                              | ** ** | (2.3                            | )          | 6.6 |   | (1.9 | ) |
| Acquired technology              |       | 1.1                              |       | (0.4                            | )          | 1.2 |   | (0.4 | ) |
| Total                            |       | 22.2                             |       | (6.7                            | )          | 23.3 |   | (5.7 | ) |
| Unamortizable intangible assets: |       |                             |       |                            |       |   |   |   |   |
| Trade names                      |       | 9.5                              |       | —                          |       | 9.9 |   | — |   |
| Total                            |       | $                                | 31.7       |                            | $          | (6.7 | ) | $ | 33.2 |   | $ | (5.7 | ) |

 

**Note 11. Contingencies and Legal Matters**

 

***Litigation***

 

The Company is involved in certainlegal actions and claims arising in the ordinary course of business. While theoutcome 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 ispending or threatened, either individually or on a combined basis, will nothave a material adverse effect on the consolidated financial condition, resultsof operations or liquidity of the Company.

 

***Employeesand Labor Relations***

 

Hourly employees at the Whiting,Neenah, Munising and Appleton paper mills are represented by the UnitedSteelworkers Union (the “USW”). In October 2010, the Company and the USWsigned a collective bargaining agreement for the Appleton paper mill that iseffective through May 31, 2014. In May 2010, the Company and the USWsigned a collective bargaining agreement for the Munising paper mill that iseffective through July 14, 2013. The collective bargaining agreements forthe Whiting and Neenah paper mills expire on January 31, 2013 and September 30,2013, respectively. Separately, the Appleton, Neenah, Whiting and Munisingpaper mills have bargained jointly with the union on pension matters. Theagreement on pension matters will remain in effect through 2019.

 

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Tableof Contents

 

Approximately 50 percent of salariedemployees and 80 percent of hourly employees of Neenah Germany are eligible tobe represented by the Mining, Chemicals and Energy Trade Union, IndustriegewerkschaftBergbau, Chemie and Energie (the “IG BCE”).  The collective bargainingagreement covering union employees of Neenah Germany is negotiated by the IGBCE and a national trade association representing all employers in theindustry. The collective bargaining agreement with the IG BCE expired inAugust 2010.  Union membership is voluntary and under German law doesnot need to be disclosed to the Company. As a result, the number of employeescovered by the collective bargaining agreement cannot be determined.

 

***Indemnifications***

 

Pursuant to a DistributionAgreement, an Employee Matters Agreement and a Tax Sharing Agreement, theCompany has agreed to indemnify Kimberly-Clark Corporation (“Kimberly-Clark”)for certain liabilities or risks related to the spin-off of the Company fromKimberly-Clark in November 2004. Many of the potential indemnification liabilities under these agreementsare unknown, remote or highly contingent. Furthermore, even in the event thatan indemnification claim is asserted, liability for indemnification is subjectto determination under the terms of the applicable agreement. For thesereasons, the Company is unable to estimate the maximum potential amount of thepossible future liability under the indemnity provisions of these agreements.However, the Company accrues for any potentially indemnifiable liability orrisk under these agreements for which it believes a future payment is probable anda range of loss can be reasonably estimated. As of September 30, 2010,management believes the Company’s liability under such indemnificationobligations was not material to the condensed consolidated financialstatements.

 

**Note 12. Business Segment Information**

 

The Company reports its operationsin two segments: Technical Products and Fine Paper. The technical productsbusiness is an international producer of filtration media, durable, saturatedand coated substrates for a variety of end uses; and nonwoven wall coverings.The fine paper business is a producer of premium writing, text, cover andspecialty papers.  Each segment employs different technologies andmarketing strategies.  Disclosure of segment information is on the samebasis that management uses internally for evaluating segment performance andallocating resources.  Transactions between segments are eliminated inconsolidation. The costs of shared services, and other administrative functionsmanaged on a common basis, are allocated to the segments based on usage, wherepossible, or other factors based on the nature of the activity.  Generalcorporate expenses that do not directly support the operations of the businesssegments are shown as Unallocated corporate costs.

 

The following table summarizes thenet sales, operating income and total assets for each of the Company’s businesssegments.

 
| ** **         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **         | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net sales**      |       |                                                     |       |                                                    |       |   |   |   |   |
| Technical Products |       | $                                                        | 94.8       |                                                    | $          | 87.1 |   | $ | 292.2 |   | $ | 230.3 |   |
| Fine Paper         |       | 66.7                                                     |       | 63.0                                                    |       | 205.2 |   | 189.1 |   |
| Consolidated       |       | $                                                        | 161.5      |                                                    | $          | 150.1 |   | $ | 497.4 |   | $ | 419.4 |   |

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Operating income**        |       |                                                     |       |                                                    |       |   |   |   |   |
| Technical Products          |       | $                                                        | 7.0        |                                                    | $          | 5.2 |   | $ | 24.8 |   | $ | 7.9 |   |
| Fine Paper                  |       | 8.7                                                      |       | 9.6                                                     |       | 27.4 |   | 8.2 |   |
| Unallocated corporate costs |       | (4.0                                                     | )          | (4.1                                                    | )          | (10.4 | ) | (11.0 | ) |
| Consolidated                |       | $                                                        | 11.7       |                                                    | $          | 10.7 |   | $ | 41.8 |   | $ | 5.1 |   |

 
| ** **           | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Total Assets**     |       |                             |       |                            |       |
| Technical Products   |       | $                                | 351.9      |                            | $          | 353.4 |   |
| Fine Paper           |       | 163.9                            |       | 166.3                           |       |
| Assets held for sale |       | 6.2                              |       | 10.0                            |       |
| Corporate and other  |       | 96.4                             |       | 106.9                           |       |
| Total                |       | $                                | 618.4      |                            | $          | 636.6 |   |

 

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Table of Contents

 

**Note13.  Condensed Consolidating Financial Information**

 

NeenahPaper Company of Canada, Neenah Paper Michigan, Inc. and Neenah PaperSales, Inc. (the “Guarantor Subsidiaries”) guarantee the Company’s SeniorNotes. The Guarantor Subsidiaries are 100 percent owned by the Company and allguarantees are full and unconditional.  The following condensedconsolidating financial information is presented in lieu of consolidated financialstatements for the Guarantor Subsidiaries as of September 30, 2010 andDecember 31, 2009 and for the three and nine months ended September 30,2010 and 2009.  Certain deferred tax assets presented in the GuarantorSubsidiaries column as of December 31, 2009 were presented in the NeenahPaper, Inc. column as of September 30, 2010 as such assets willultimately be realized by Neenah Paper, Inc. due to the substantiallycomplete liquidation of Neenah Canada.

 

**CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS**

**For the Three Months EndedSeptember 30, 2010**

 
| ** **                                                 | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                              |       | $                            | 66.0       |                        | $          | 37.3                            |       | $                              | 58.2       |                      | $          | — |   | $ | 161.5 |   |
| Cost of products sold                                      |       | 51.7                         |       | 29.1                        |       | 52.9                            |       | —                         |       | 133.7                     |       |
| **Gross profit**                                           |       | 14.3                         |       | 8.2                         |       | 5.3                             |       | —                         |       | 27.8                      |       |
| Selling, general and administrative expenses               |       | 10.5                         |       | 2.8                         |       | 3.3                             |       | —                         |       | 16.6                      |       |
| Other income - net                                         |       | (0.3                         | )          | —                      |       | (0.2                            | )          | —                         |       | (0.5                      | )          |
| **Operating income**                                       |       | 4.1                          |       | 5.4                         |       | 2.2                             |       | —                         |       | 11.7                      |       |
| Equity in earnings of subsidiaries                         |       | (4.1                         | )          | —                      |       | —                          |       | 4.1                            |       | —                    |       |
| Interest expense-net                                       |       | 4.6                          |       | —                      |       | 0.2                             |       | —                         |       | 4.8                       |       |
| **Income from continuing operations  before income taxes** |       | 3.6                          |       | 5.4                         |       | 2.0                             |       | (4.1                           | )          | 6.9                       |       |
| Provision (benefit) for income taxes                       |       | (0.5                         | )          | 2.1                         |       | 0.6                             |       | —                         |       | 2.2                       |       |
| **Income from continuing operations**                      |       | 4.1                          |       | 3.3                         |       | 1.4                             |       | (4.1                           | )          | 4.7                       |       |
| Loss from discontinued operations, net of income  taxes    |       | —                       |       | (0.6                        | )          | —                          |       | —                         |       | (0.6                      | )          |
| **Net income**                                             |       | $                            | 4.1        |                        | $          | 2.7                             |       | $                              | 1.4        |                      | $          | (4.1 | ) | $ | 4.1 |   |

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the Three Months Ended September 30,2009**

 
| ** **                                                      | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                   |       | $                            | 62.1       |                        | $          | 30.0                              |       | $                              | 58.0       |                      | $          | — |   | $ | 150.1 |   |
| Cost of  products sold                                          |       | 45.4                         |       | 24.3                        |       | 52.1                              |       | —                         |       | 121.8                     |       |
| **Gross profit**                                                |       | 16.7                         |       | 5.7                         |       | 5.9                               |       | —                         |       | 28.3                      |       |
| Selling,  general and administrative expenses                   |       | 11.9                         |       | 2.6                         |       | 3.6                               |       | —                         |       | 18.1                      |       |
| Restructuring  costs                                            |       | —                       |       | (0.4                        | )          | —                            |       | —                         |       | (0.4                      | )          |
| Other  (income) expense - net                                   |       | 0.1                          |       | 0.1                         |       | (0.3                              | )          | —                         |       | (0.1                      | )          |
| **Operating income**                                            |       | 4.7                          |       | 3.4                         |       | 2.6                               |       | —                         |       | 10.7                      |       |
| Equity  in earnings of subsidiaries                             |       | (3.0                         | )          | —                      |       | —                            |       | 3.0                            |       | —                    |       |
| Interest  expense-net                                           |       | 4.9                          |       | 0.2                         |       | 0.3                               |       | —                         |       | 5.4                       |       |
| **Income from continuing operations before income taxes**       |       | 2.8                          |       | 3.2                         |       | 2.3                               |       | (3.0                           | )          | 5.3                       |       |
| Provision  (benefit) for income taxes                           |       | (0.4                         | )          | 1.7                         |       | 0.6                               |       | —                         |       | 1.9                       |       |
| **Income from continuing operations**                           |       | 3.2                          |       | 1.5                         |       | 1.7                               |       | (3.0                           | )          | 3.4                       |       |
| Loss  from discontinued operations, net of income tax provision |       | —                       |       | (0.2                        | )          | —                            |       | —                         |       | (0.2                      | )          |
| **Net income**                                                  |       | $                            | 3.2        |                        | $          | 1.3                               |       | $                              | 1.7        |                      | $          | (3.0 | ) | $ | 3.2 |   |

 

F-16

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Table of Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Nine Months Ended September 30, 2010**

 
| ** **                                                 | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                              | ** ** | $                            | 201.2      |                        | $          | 112.7                           |       | $                              | 183.5      |                      | $          | — |   | $ | 497.4 |   |
| Cost of products sold                                      |       | 153.8                        |       | 90.9                        |       | 160.4                           |       | —                         |       | 405.1                     |       |
| **Gross profit**                                           |       | 47.4                         |       | 21.8                        |       | 23.1                            |       | —                         |       | 92.3                      |       |
| Selling, general and administrative expenses               | ** ** | 32.6                         |       | 7.9                         |       | 11.1                            |       | —                         |       | 51.6                      |       |
| Other (income) expense - net                               | ** ** | (0.6                         | )          | 0.5                         |       | (1.0                            | )          | —                         |       | (1.1                      | )          |
| **Operating income**                                       |       | 15.4                         |       | 13.4                        |       | 13.0                            |       | —                         |       | 41.8                      |       |
| Equity in earnings of subsidiaries                         |       | (152.7                       | )          | —                      |       | —                          |       | 152.7                          |       | —                    |       |
| Interest expense-net                                       |       | 14.5                         |       | 0.2                         |       | 0.8                             |       | —                         |       | 15.5                      |       |
| **Income from continuing operations  before income taxes** |       | 153.6                        |       | 13.2                        |       | 12.2                            |       | (152.7                         | )          | 26.3                      |       |
| Provision for income taxes                                 |       | 1.3                          |       | 5.2                         |       | 1.5                             |       | —                         |       | 8.0                       |       |
| **Income from continuing operations**                      |       | 152.3                        |       | 8.0                         |       | 10.7                            |       | (152.7                         | )          | 18.3                      |       |
| Income from discontinued operations, net of income  taxes  |       | —                       |       | 134.0                       |       | —                          |       | —                         |       | 134.0                     |       |
| **Net income**                                             |       | $                            | 152.3      |                        | $          | 142.0                           |       | $                              | 10.7       |                      | $          | (152.7 | ) | $ | 152.3 |   |

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the NineMonths Ended September 30, 2009**

 
| ** **                                                        | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                     |       | $                            | 182.9      |                        | $          | 80.6                              |       | $                              | 155.9      |                      | $          | — |   | $ | 419.4 |   |
| Cost of  products sold                                            |       | 136.3                        |       | 67.7                        |       | 142.4                             |       | —                         |       | 346.4                     |       |
| **Gross profit**                                                  |       | 46.6                         |       | 12.9                        |       | 13.5                              |       | —                         |       | 73.0                      |       |
| Selling,  general and administrative expenses                     |       | 33.7                         |       | 7.5                         |       | 9.8                               |       | —                         |       | 51.0                      |       |
| Restructuring  costs                                              |       | —                       |       | 17.6                        |       | —                            |       | —                         |       | 17.6                      |       |
| Other  (income) expense - net                                     |       | —                       |       | 0.6                         |       | (1.3                              | )          | —                         |       | (0.7                      | )          |
| **Operating income (loss)**                                       |       | 12.9                         |       | (12.8                       | )          | 5.0                               |       | —                         |       | 5.1                       |       |
| Equity  in losses of subsidiaries                                 |       | 4.6                          |       | —                      |       | —                            |       | (4.6                           | )          | —                    |       |
| Interest  expense-net                                             |       | 15.0                         |       | 0.6                         |       | 0.8                               |       | —                         |       | 16.4                      |       |
| **Income (loss) from continuing operations before income  taxes** |       | (6.7                         | )          | (13.4                       | )          | 4.2                               |       | 4.6                            |       | (11.3                     | )          |
| Benefit  for income taxes                                         |       | (0.6                         | )          | (4.2                        | )          | (0.6                              | )          | —                         |       | (5.4                      | )          |
| **Income (loss) from continuing operations**                      |       | (6.1                         | )          | (9.2                        | )          | 4.8                               |       | 4.6                            |       | (5.9                      | )          |
| Loss  from discontinued operations, net of income taxes           |       | —                       |       | (0.2                        | )          | —                            |       | —                         |       | (0.2                      | )          |
| **Net income (loss)**                                             |       | $                            | (6.1       | )                           | $          | (9.4                              | )          | $                              | 4.8        |                      | $          | 4.6 |   | $ | (6.1 | ) |

 

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Tableof Contents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**As ofSeptember 30, 2010**

 
| ** **                                           | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **ASSETS**                                           |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **Current assets**                                   |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Cash and cash equivalents                            |       | $                            | 35.3       |                        | $          | 2.1                             |       | $                              | 1.3        |                      | $          | — |   | $ | 38.7 |   |
| Accounts receivable, net                             |       | 25.2                         |       | 19.0                        |       | 36.9                            |       | —                         |       | 81.1                      |       |
| Inventories                                          |       | 33.4                         |       | 11.3                        |       | 26.6                            |       | —                         |       | 71.3                      |       |
| Deferred income taxes                                |       | 13.0                         |       | 1.6                         |       | 0.1                             |       | —                         |       | 14.7                      |       |
| Intercompany amounts receivable                      |       | 16.7                         |       | 41.7                        |       | —                          |       | (58.4                          | )          | —                    |       |
| Prepaid and other current assets                     |       | 3.6                          |       | 1.8                         |       | 6.6                             |       | —                         |       | 12.0                      |       |
| Assets held for sale                                 |       | —                       |       | 6.2                         |       | —                          |       | —                         |       | 6.2                       |       |
| Total current assets                                 |       | 127.2                        |       | 83.7                        |       | 71.5                            |       | (58.4                          | )          | 224.0                     |       |
| Property, plant and equipment, at cost               |       | 265.3                        |       | 100.2                       |       | 202.7                           |       | —                         |       | 568.2                     |       |
| Less accumulated depreciation                        |       | 188.1                        |       | 65.4                        |       | 49.3                            |       | —                         |       | 302.8                     |       |
| Property, plant and equipment — net             |       | 77.2                         |       | 34.8                        |       | 153.4                           |       | —                         |       | 265.4                     |       |
| **Investments In Subsidiaries**                      | ** ** | 248.5                        |       | —                      |       | —                          |       | (248.5                         | )          | —                    |       |
| **Deferred Income Taxes**                            | ** ** | 46.1                         |       | 3.3                         |       | —                          |       | —                         |       | 49.4                      |       |
| **Goodwill**                                         |       | —                       |       | —                      |       | 42.6                            |       | —                         |       | 42.6                      |       |
| **Intangible Assets—net**                       |       | 2.9                          |       | —                      |       | 22.1                            |       | —                         |       | 25.0                      |       |
| **Other Assets**                                     |       | 6.6                          |       | 0.2                         |       | 5.2                             |       | —                         |       | 12.0                      |       |
| **TOTAL ASSETS**                                     |       | $                            | 508.5      |                        | $          | 122.0                           |       | $                              | 294.8      |                      | $          | (306.9 | ) | $ | 618.4 |   |
|                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**       |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **Current liabilities**                              |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Debt payable within one year                         |       | $                            | —     |                        | $          | —                          |       | $                              | 14.0       |                      | $          | — |   | $ | 14.0 |   |
| Accounts payable                                     |       | 14.9                         |       | 6.7                         |       | 10.1                            |       | —                         |       | 31.7                      |       |
| Intercompany amounts payable                         |       | 41.7                         |       | 16.7                        |       | —                          |       | (58.4                          | )          | —                    |       |
| Accrued expenses                                     |       | 31.9                         |       | 7.6                         |       | 15.8                            |       | —                         |       | 55.3                      |       |
| Total current liabilities                            |       | 88.5                         |       | 31.0                        |       | 39.9                            |       | (58.4                          | )          | 101.0                     |       |
| **Long-term Debt**                                   |       | 223.1                        |       | —                      |       | 9.3                             |       | —                         |       | 232.4                     |       |
| **Deferred Income Taxes**                            |       | —                       |       | —                      |       | 21.5                            |       | —                         |       | 21.5                      |       |
| **Noncurrent Employee Benefits and  Other**          | ** ** | 34.8                         |       | 33.5                        |       | 33.1                            |       | —                         |       | 101.4                     |       |
| **TOTAL LIABILITIES**                                |       | 346.4                        |       | 64.5                        |       | 103.8                           |       | (58.4                          | )          | 456.3                     |       |
| **STOCKHOLDERS’ EQUITY**                        |       | 162.1                        |       | 57.5                        |       | 191.0                           |       | (248.5                         | )          | 162.1                     |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY** |       | $                            | 508.5      |                        | $          | 122.0                           |       | $                              | 294.8      |                      | $          | (306.9 | ) | $ | 618.4 |   |

 

F-18

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Tableof Contents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**As ofDecember 31, 2009**

 
| ** **                                             | ** ** | **Neenah  Paper, Inc** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **ASSETS**                                             |       |                        |       |                        |       |                              |       |                           |       |                      |       |
| **Current assets**                                     |       |                        |       |                        |       |                              |       |                           |       |                      |       |
| Cash and  cash equivalents                             |       | $                           | 2.1        |                        | $          | 2.0                               |       | $                              | 1.5        |                      | $          | — |   | $ | 5.6 |   |
| Accounts  receivable - net                             |       | 23.8                        |       | 16.1                        |       | 27.8                              |       | —                         |       | 67.7                      |       |
| Inventories                                            |       | 38.1                        |       | 8.9                         |       | 23.7                              |       | —                         |       | 70.7                      |       |
| Income  taxes receivable                               |       | 0.3                         |       | 0.5                         |       | —                            |       | —                         |       | 0.8                       |       |
| Deferred  income taxes                                 |       | 4.7                         |       | 57.0                        |       | —                            |       | —                         |       | 61.7                      |       |
| Intercompany  amounts receivable                       |       | 68.7                        |       | 49.4                        |       | —                            |       | (118.1                         | )          | —                    |       |
| Prepaid  and other current assets                      |       | 5.2                         |       | 1.7                         |       | 6.8                               |       | —                         |       | 13.7                      |       |
| Assets  held for sale                                  |       | —                      |       | 10.0                        |       | —                            |       | —                         |       | 10.0                      |       |
| Total  current assets                                  |       | 142.9                       |       | 145.6                       |       | 59.8                              |       | (118.1                         | )          | 230.2                     |       |
| Property,  plant and equipment at cost                 |       | 262.2                       |       | 99.5                        |       | 207.9                             |       | —                         |       | 569.6                     |       |
| Less  accumulated depreciation                         |       | 180.3                       |       | 62.9                        |       | 42.0                              |       | —                         |       | 285.2                     |       |
| Property,  plant and equipment — net              |       | 81.9                        |       | 36.6                        |       | 165.9                             |       | —                         |       | 284.4                     |       |
| **Investments in subsidiaries**                        |       | 280.4                       |       | —                      |       | —                            |       | (280.4                         | )          | —                    |       |
| **Deferred Income Taxes**                              |       | 10.9                        |       | 25.6                        |       | —                            |       | —                         |       | 36.5                      |       |
| **Goodwill**                                           |       | —                      |       | —                      |       | 44.9                              |       | —                         |       | 44.9                      |       |
| **Intangible assets**                                  |       | 2.9                         |       | —                      |       | 24.6                              |       | —                         |       | 27.5                      |       |
| **Other Assets**                                       |       | 6.5                         |       | 0.1                         |       | 6.5                               |       | —                         |       | 13.1                      |       |
| **TOTAL ASSETS**                                       |       | $                           | 525.5      |                        | $          | 207.9                             |       | $                              | 301.7      |                      | $          | (398.5 | ) | $ | 636.6 |   |
|                                                   |       |                        |       |                        |       |                              |       |                           |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**          |       |                        |       |                        |       |                              |       |                           |       |                      |       |
| **Current liabilities**                                |       |                        |       |                        |       |                              |       |                           |       |                      |       |
| Debt  payable within one year                          |       | $                           | 40.9       |                        | $          | —                            |       | $                              | 14.7       |                      | $          | — |   | $ | 55.6 |   |
| Accounts  payable                                      |       | 14.3                        |       | 4.5                         |       | 8.4                               |       | —                         |       | 27.2                      |       |
| Intercompany  amounts payable                          |       | 49.4                        |       | 68.7                        |       | —                            |       | (118.1                         | )          | —                    |       |
| Accrued  expenses                                      |       | 23.6                        |       | 14.8                        |       | 10.2                              |       | —                         |       | 48.6                      |       |
| Total  current liabilities                             |       | 128.2                       |       | 88.0                        |       | 33.3                              |       | (118.1                         | )          | 131.4                     |       |
| **Long-term Debt**                                     |       | 252.9                       |       | —                      |       | 10.7                              |       | —                         |       | 263.6                     |       |
| **Deferred Income Taxes**                              |       | —                      |       | —                      |       | 23.7                              |       | —                         |       | 23.7                      |       |
| **Noncurrent Employee Benefits and Other Obligations** |       | 34.8                        |       | 38.7                        |       | 34.8                              |       | —                         |       | 108.3                     |       |
| **TOTAL LIABILITIES**                                  |       | 415.9                       |       | 126.7                       |       | 102.5                             |       | (118.1                         | )          | 527.0                     |       |
| **STOCKHOLDERS’ EQUITY**                          |       | 109.6                       |       | 81.2                        |       | 199.2                             |       | (280.4                         | )          | 109.6                     |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       | $                           | 525.5      |                        | $          | 207.9                             |       | $                              | 301.7      |                      | $          | (398.5 | ) | $ | 636.6 |   |

 

F-19

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Table of Contents

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For theNine Months Ended September 30, 2010**

 
| ** **                                                                        | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                          |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Net income                                                                        |       | $                            | 152.3      |                        | $          | 142.0                           |       | $                              | 10.7       |                      | $          | (152.7 | ) | $ | 152.3 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Depreciation and amortization                                                     |       | 9.8                          | ** ** | 3.3                         |       | 10.3                            |       | —                         |       | 23.4                      |       |
| Stock-based compensation                                                          |       | 3.6                          |       | —                      |       | 0.1                             |       | —                         |       | 3.7                       |       |
| Deferred income tax provision (benefit)                                           |       | 1.4                          |       | 33.5                        |       | (1.1                            | )          | —                         |       | 33.8                      |       |
| Gain on sale of the Woodlands                                                     |       | —                       |       | (74.1                       | )          | —                          |       | —                         |       | (74.1                     | )          |
| Reclassification of cumulative Canadian  translation adjustments                  |       | —                       |       | (87.9                       | )          | —                          |       | —                         |       | (87.9                     | )          |
| (Increase) decrease in working capital                                            |       | 10.1                         |       | (4.9                        | )          | (7.1                            | )          | —                         |       | (1.9                      | )          |
| Equity in earnings of subsidiaries                                                |       | (152.7                       | )          | —                      |       | —                          |       | 152.7                          |       | —                    |       |
| Pension and other postretirement benefits                                         | ** ** | (0.5                         | )          | (5.9                        | )          | 0.3                             |       | —                         |       | (6.1                      | )          |
| Other                                                                             |       | (0.2                         | )          | (0.7                        | )          | 0.1                             |       | —                         |       | (0.8                      | )          |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                                    |       | 23.8                         |       | 5.3                         |       | 13.3                            |       | —                         |       | 42.4                      |       |
| **INVESTING ACTIVITIES**                                                          |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Capital expenditures                                                              |       | (4.6                         | )          | (1.7                        | )          | (4.6                            | )          | —                         |       | (10.9                     | )          |
| Increase in investments                                                           |       | (1.4                         | )          | —                      |       | —                          |       | —                         |       | (1.4                      | )          |
| Net proceeds from sale of the Woodlands                                           |       | —                       |       | 78.0                        |       | —                          |       | —                         |       | 78.0                      |       |
| Proceeds from asset sales                                                         |       | 0.1                          |       | —                      |       | —                          |       | —                         |       | 0.1                       |       |
| Other                                                                             |       | —                       |       | (0.1                        | )          | 1.1                             |       | —                         |       | 1.0                       |       |
| **NET CASH PROVIDED BY (USED IN)  INVESTING ACTIVITIES**                          |       | (5.9                         | )          | 76.2                        |       | (3.5                            | )          | —                         |       | 66.8                      |       |
| **FINANCING ACTIVITIES**                                                          |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Repayments of long-term debt                                                      |       | (69.8                        | )          | —                      | ** ** | (0.7                            | )          | —                         |       | (70.5                     | )          |
| Short-term borrowings                                                             |       | —                       |       | —                      |       | 9.2                             |       | —                         |       | 9.2                       |       |
| Repayments of short-term debt                                                     |       | (0.9                         | )          | —                      |       | (9.7                            | )          | —                         |       | (10.6                     | )          |
| Proceeds from exercise of stock options                                           |       | 0.3                          |       | —                      |       | —                          |       | —                         |       | 0.3                       |       |
| Cash dividends paid                                                               |       | (4.4                         | )          | —                      |       | —                          |       | —                         |       | (4.4                      | )          |
| Intercompany transfers - net                                                      |       | 90.3                         |       | (81.4                       | )          | (8.9                            | )          | —                         |       | —                    |       |
| Other                                                                             |       | (0.2                         | )          | —                      |       | —                          |       | —                         |       | (0.2                      | )          |
| **NET CASH PROVIDED BY (USED) IN  FINANCING ACTIVITIES**                          |       | 15.3                         |       | (81.4                       | )          | (10.1                           | )          | —                         |       | (76.2                     | )          |
| **EFFECT OF EXCHANGE RATE CHANGES  ON CASH AND CASH EQUIVALENTS**                 |       | —                       |       | —                      |       | 0.1                             |       | —                         |       | 0.1                       |       |
| **NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS**                         |       | 33.2                         |       | 0.1                         |       | (0.2                            | )          | —                         |       | 33.1                      |       |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                 |       | 2.1                          |       | 2.0                         |       | 1.5                             |       | —                         |       | 5.6                       |       |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                     |       | $                            | 35.3       |                        | $          | 2.1                             |       | $                              | 1.3        |                      | $          | — |   | $ | 38.7 |   |

 

F-20

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Table of Contents

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**For the NineMonths Ended September 30, 2009**

** **
| ** **                                                                               | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Net  income (loss)                                                                       |       | $                            | (6.1       | )                           | $          | (9.4                            | )          | $                              | 4.8        |                      | $          | 4.6 |   | $ | (6.1 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Depreciation  and amortization                                                           |       | 11.1                         |       | 3.6                         |       | 10.8                            |       | —                         |       | 25.5                      |       |
| Stock-based  compensation                                                                |       | 3.5                          |       | —                      |       | —                          |       | —                         |       | 3.5                       |       |
| Deferred  income tax benefit                                                             |       | (1.6                         | )          | (4.1                        | )          | (2.1                            | )          | —                         |       | (7.8                      | )          |
| Ripon  Mill non-cash charges                                                             |       | —                       |       | 6.3                         |       | —                          |       | —                         |       | 6.3                       |       |
| (Gain)  loss on asset dispositions                                                       |       | 0.1                          |       | (0.1                        | )          | —                          |       | —                         |       | —                    |       |
| Decrease  in working capital                                                             |       | 17.1                         |       | 8.9                         |       | 3.8                             |       | —                         |       | 29.8                      |       |
| Equity  in losses of subsidiaries                                                        |       | 4.6                          |       | —                      |       | —                          |       | (4.6                           | )          | —                    |       |
| Pension  and other postretirement benefits                                               |       | 0.5                          |       | 3.2                         |       | 0.5                             |       | —                         |       | 4.2                       |       |
| Other                                                                                    |       | —                       |       | (1.0                        | )          | —                          |       | —                         |       | (1.0                      | )          |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                            |       | 29.2                         |       | 7.4                         |       | 17.8                            |       | —                         |       | 54.4                      |       |
| **INVESTING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Capital  expenditures                                                                    |       | (3.0                         | )          | (0.9                        | )          | (2.1                            | )          | —                         |       | (6.0                      | )          |
| Proceeds  from asset sales                                                               |       | —                       |       | 0.7                         |       | —                          |       | —                         |       | 0.7                       |       |
| Other                                                                                    |       | 0.8                          |       | (0.8                        | )          | (0.6                            | )          | —                         |       | (0.6                      | )          |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                |       | (2.2                         | )          | (1.0                        | )          | (2.7                            | )          | —                         |       | (5.9                      | )          |
| **FINANCING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Proceeds  from issuance of long-term debt                                                |       | 5.5                          |       | —                      |       | —                          |       | —                         |       | 5.5                       |       |
| Repayments  of long-term debt                                                            |       | (41.0                        | )          | —                      |       | (0.9                            | )          | —                         |       | (41.9                     | )          |
| Short-term  borrowings                                                                   |       | —                       |       | —                      |       | 7.0                             |       | —                         |       | 7.0                       |       |
| Repayments  of short-term debt                                                           |       | —                       |       | —                      |       | (12.5                           | )          | —                         |       | (12.5                     | )          |
| Cash  dividends paid                                                                     |       | (4.4                         | )          | —                      |       | —                          |       | —                         |       | (4.4                      | )          |
| Intercompany  transfers - net                                                            |       | 14.0                         |       | (5.3                        | )          | (8.7                            | )          | —                         |       | —                    |       |
| Other                                                                                    |       | (0.1                         | )          | —                      |       | —                          |       | —                         |       | (0.1                      | )          |
| **NET CASH****USED IN FINANCING  ACTIVITIES**                                            |       | (26.0                        | )          | (5.3                        | )          | (15.1                           | )          | —                         |       | (46.4                     | )          |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                            |       | 1.0                          |       | 1.1                         |       | —                          |       | —                         |       | 2.1                       |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                         |       | 1.9                          |       | 1.1                         |       | 0.3                             |       | —                         |       | 3.3                       |       |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                             |       | $                            | 2.9        |                        | $          | 2.2                             |       | $                              | 0.3        |                      | $          | — |   | $ | 5.4 |   |

 

**Note 14. Subsequent Event**

 

On October 27, 2010, theCompany sold the remaining assets of the Ripon Mill to Diamond Pet FoodProcessors of Ripon, LLC. (“Diamond”) for gross proceeds of approximately $9million. Pursuant to the terms of the transaction, Diamond acquired all theassets and assumed responsibility for substantially all the remainingliabilities associated with the Ripon Mill. The Company will recognize a pre-tax gain on the sale of approximately$3 million in the fourth quarter of 2010.

 

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Table of Contents

 

**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*The followingdiscussion and analysis presents the factors that had a material effect on ourfinancial position as of  September 30,2010 and our results of operations for the three and nine months ended September 30,2010  and 2009. You should read this discussionin conjunction with our consolidated financial statements and the notes tothose consolidated financial statements included in our most recent AnnualReport on Form 10-K. This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains forward-lookingstatements. See “Forward-Looking Statements” for a discussion of theuncertainties, risks and assumptions associated with these statements.*

 

*In this report,unless the context requires otherwise, references to “we,” “us,” “our,” “Neenah”or the “Company” are intended to mean Neenah Paper, Inc. and itsconsolidated subsidiaries.******(Tabular amounts in millions, except as noted)*

 

**Executive Summary**

 

Results of operations for the threemonths ended September 30, 2010continued to show year-over-year growth in both sales and operating incomedespite significantly higher manufacturing input costs.  During thethree months ended September 30, 2010, manufacturing input costs increasedby approximately $12 million versus the prior year primarily as a resultof  higher pulp costs due to tight globalsupplies and increased demand.  Webelieve that pulp costs peaked during the third quarter of 2010 and that, inthe near term, pulp costs will decline at least moderately from these peak levels.  During the third quarter of 2010, we wereable to offset higher manufacturing input costs by increased selling prices, amore favorable product mix, higher shipment volumes and continuing cost controlinitiatives implemented in the past year.

 

For the three months ended September 30,2010, consolidated sales werereduced by approximately $6 million as a result of the effect of a weaker Eurorelative to the U.S dollar on the translation of operating results for NeenahGermany.  In the third quarter of 2009,the average Euro/U.S. dollar exchange rate was approximately 1.43 compared toapproximately 1.29 in the third quarter of 2010. In general, however, theoperating performance of Neenah Germany as reported in Euros is not materiallyaffected by volatility in exchange rates because most of its revenue andexpenses are generated within the European Union.

 

***Resultsof Continuing Operations***

 

For the three months ended September 30,2010, consolidated net salesincreased approximately $11 million or 8 percent from the prior year period to$161.5 million.  The improvement wasprimarily due to higher average net selling prices, including the benefit of amore favorable product mix, and increased shipment volume.

 

Consolidated operating income of$11.7 million for the three months ended September 30, 2010 increased 1.0 million from the prior year period primarilydue to higher average net selling prices, increased volume and improvedoperating performance and paper machine utilization.  These favorable factors were only partiallyoffset by higher manufacturing input costs, primarily for pulp.

 

***Resultsof Discontinued Operations***

 

For the three months ended September 30,2010, there were no net salesfrom discontinued operations following the sale of the Timberlands in the firstquarter of 2010.  For the three months ended September 30, 2009,timber sales to Northern Pulp pursuant to the Stumpage Agreement resultedin net sales from discontinued operations of $1.2 million.  For the threemonths ended September 30, 2010,the pre-tax loss from discontinued operations was $0.1 million compared toearnings from discontinued operations of $1.0 million in the prior year period.

 

**Results ofOperations and Related Information**

 

In thissection, we discuss and analyze our net sales, earnings before interest andtaxes (which we refer to as “operating income”) and other information relevantto an understanding of our results of operations for the three and nine monthsended September 30, 2010 and 2009.

 

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Table of Contents

 

***Analysis of Net Sales—********Three and nine monthsended September 30, 2010 and 2009***

 

Thefollowing table presents net sales by segment, expressed as a percentage oftotal net sales:

 
| ** **         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **         | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Technical Products |       | 59                                                       | %          | 58                                                      | %          | 59 | % | 55 | % |
| Fine Paper         |       | 41                                                       | %          | 42                                                      | %          | 41 | % | 45 | % |
| Total              |       | 100                                                      | %          | 100                                                     | %          | 100 | % | 100 | % |

 

***Commentary:***

 

Thefollowing table presents our net sales by segment:

 
| ** **         | ** ** | ** **                        | ** ** | ** ** | ** ** | **Change in Net Sales Compared to Prior Period** | ** ** |
|--------------------|------------|-----------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three Months**             | ** ** | ** ** | ** ** | **Change Due To**                                                         | ** ** |
| ** **         | ** ** | **Ended September 30,** | ** ** | ** ** | ** ** | ** **                                                                          | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **2010**                          | ** ** | **2009**   | ** ** | **Total Change**                                                               | ** ** | **Volume** | ** ** | **Net Price** | ** ** | **Currency** | ** ** |
| Technical Products |       | $                                 | 94.8       |       | $          | 87.1                                                                                |       | $ | 7.7 |   | $ | 4.9 |   | $ | 9.1 |   | $ | (6.3 | ) |
| Fine Paper         |       | 66.7                              |       | 63.0       |       | 3.7                                                                                 |       | 1.5 |   | 2.2 |   | — |   |
| Consolidated       |       | $                                 | 161.5      |       | $          | 150.1                                                                               |       | $ | 11.4 |   | $ | 6.4 |   | $ | 11.3 |   | $ | (6.3 | ) |

 

Consolidated net sales for the threemonths ended September 30, 2010were $11.4 million higher than the prior year period due to higher averageprices, including the benefit of a more favorable product mix, and increasedvolume in both segments.

 

·                  Net sales in our technical products business increased$7.7 million or 9 percent primarily due to higher average net prices and a6 percent increase in shipments which combined to offset a $6 million decreasein sales due to a weaker Euro.  Higheraverage net prices were due to a more favorable product mix and increasedaverage selling prices.  Higher salesvolumes were led by strong gains in abrasives and label product lines.

 

·      Net sales inour fine paper business increased $3.7 million or 6 percent primarily dueto higher average net selling prices and a 3 percent increase in shipmentvolume.  The increased shipment volume,compared to a reported 4 percent decline in overall uncoated free sheet marketdemand, was primarily due to market share gains, higher sales of brandedproducts and double-digit increases in targeted new markets such asinternational, label and packaging. Average prices for most branded products were 3 to 5 percent higher thanthe prior year as a result of pricing actions implemented in the second half of2009 and 2010.

 

Thefollowing table presents our net sales by segment:

 
| ** **         | ** ** | ** **                        | ** ** | ** ** | ** ** | **Change in Net Sales Compared to Prior Period** | ** ** |
|--------------------|------------|-----------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Nine Months**              | ** ** | ** ** | ** ** | **Change Due To**                                                         | ** ** |
| ** **         | ** ** | **Ended September 30,** | ** ** | ** ** | ** ** | ** **                                                                          | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **2010**                          | ** ** | **2009**   | ** ** | **Total Change**                                                               | ** ** | **Volume** | ** ** | **Net Price** | ** ** | **Currency** | ** ** |
| Technical Products |       | $                                 | 292.2      |       | $          | 230.3                                                                               |       | $ | 61.9 |   | $ | 56.4 |   | $ | 12.1 |   | $ | (6.6 | ) |
| Fine Paper         |       | 205.2                             |       | 189.1      |       | 16.1                                                                                |       | 15.5 |   | 0.6 |   | — |   |
| Consolidated       |       | $                                 | 497.4      |       | $          | 419.4                                                                               |       | $ | 78.0 |   | $ | 71.9 |   | $ | 12.7 |   | $ | (6.6 | ) |

 

Consolidated net sales for the ninemonths ended September 30, 2010 were $78.0 million higher than the prior year period due to increasedvolume in both segments which benefited from improved market conditions andhigher average net prices.

 

·      Net sales in our technical products business increased$61.9 million or 27 percent primarily due to a 25 percent increase inshipments.  Higher sales volume reflectedstrong growth in abrasive backing, filter media and tape shipments.  The improvement in average net selling priceswas due to a more favorable product mix and higher average selling prices.

 

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Table ofContents

 

·                  Net sales in our fine paper business increased$16.1 million or 9 percent primarily due to an 8 percent increase inshipments. The improved sales volume reflected higher sales of domestic brandedand non-branded products, which exceeded the increase in the uncoated freesheet market.  Higher prices for most branded products werepartially offset by a less favorable sales mix which reflected higher growthrates for lower priced products relative to our branded products.

 

***Analysis of Operating Income—Three and nine months ended******September 30, 2010and 2009***

 

The following table sets forth lineitems from our condensed consolidated statements of operations as a percentageof net sales for the periods indicated and is intended to provide a perspectiveof trends in our historical results:

 
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Net sales                                                     |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
| Cost of products sold                                         |       | 82.8                                                     |       | 81.1                                                    |       | 81.4 |   | 82.6 |   |
| Gross profit                                                  |       | 17.2                                                     |       | 18.9                                                    |       | 18.6 |   | 17.4 |   |
| Selling, general and administrative expenses                  |       | 10.2                                                     |       | 12.1                                                    |       | 10.4 |   | 12.2 |   |
| Restructuring costs                                           |       | —                                                   |       | (0.3                                                    | )          | — |   | 4.2 |   |
| Other income - net                                            |       | (0.3                                                     | )          | (0.1                                                    | )          | (0.2 | ) | (0.2 | ) |
| Operating income                                              |       | 7.3                                                      |       | 7.2                                                     |       | 8.4 |   | 1.2 |   |
| Interest expense-net                                          |       | 3.0                                                      |       | 3.6                                                     |       | 3.1 |   | 3.9 |   |
| Income (loss) from continuing operations before  income taxes |       | 4.3                                                      |       | 3.6                                                     |       | 5.3 |   | (2.7 | ) |
| Provision (benefit) for income taxes                          |       | 1.4                                                      |       | 1.3                                                     |       | 1.6 |   | (1.3 | ) |
| Income (loss) from continuing operations                      |       | 2.9                                                      | %          | 2.3                                                     | %          | 3.7 | % | (1.4 | )% |

 

***Commentary:***

 

Thefollowing table presents our operating income (loss) by segment:

 
| ** **                  | ** ** | ** **                        | ** ** | ** ** | ** ** | **Change in Operating Income Compared to Prior Period** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Three Months**             | ** ** | ** ** | ** ** | **Change Due To**                                                                | ** ** |
| ** **                  | ** ** | **Ended September 30,** | ** ** | **Total**  | ** ** | ** **                                                                                 | ** ** | **Net** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **2010**                          | ** ** | **2009**   | ** ** | **Change**                                                                                 | ** ** | **Volume (a)** | ** ** | **Price (b)** | ** ** | **Costs (c)** | ** ** | **Currency** | ** ** | **Other (d)** | ** ** |
| Technical Products          |       | $                                 | 7.0        |       | $          | 5.2                                                                                        |       | $ | 1.8 |   | $ | 2.7 |   | $ | 8.5 |   | $ | (7.4 | ) | $ | (0.2 | ) | $ | (1.8 | ) |
| Fine Paper                  |       | 8.7                               |       | 9.6        |       | (0.9                                                                                       | )          | 0.7 |   | 2.2 |   | (5.0 | ) | — |   | 1.2 |   |
| Unallocated corporate costs |       | (4.0                              | )          | (4.1       | )          | 0.1                                                                                        |       | — |   | — |   | — |   | — |   | 0.1 |   |
| Consolidated                |       | $                                 | 11.7       |       | $          | 10.7                                                                                       |       | $ | 1.0 |   | $ | 3.4 |   | $ | 10.7 |   | $ | (12.4 | ) | $ | (0.2 | ) | $ | (0.5 | ) |

 

----

(a)          Includes changes in unit volume and over (under) absorptionof fixed costs.

(b)         Includes changes in selling price and product mix.

(c)          Includes price changes for raw materials and energy.

(d)         Includes other manufacturing costs, distribution, selling,general and administrative expenses and gains and losses on asset sales.

 

Consolidated operating incomeof $11.7 million for the three months ended September 30, 2010 increased$1.0 million from the prior year period. The favorable comparison was primarilydue to higher selling prices and volume, and improved operating performance, partiallyoffset by higher manufacturing input costs.

 

·                  Operating income for our technical products businessincreased $1.8 million from 2009 due to an improved mix of more profitableproducts, higher selling prices and increased volume.  These favorable factors were partially offsetby higher manufacturing input costs for pulp and latex, and costs related toscheduled maintenance downtime at Neenah Germany.

 

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·                  Operating income for ourfine paper business decreased $0.9 million from the prior year periodas higher manufacturing input costs, principally for pulp, were only partiallyoffset by higher selling prices, increased volume and a more efficient coststructure following cost reduction initiatives implemented during the pastyear.

 

·                  Unallocated corporate expenses for the three months ended September 30,2010 of $4.0 million were $0.1million lower than the prior year.

 

Thefollowing table presents our operating income by segment:

 
| ** **                  | ** ** | ** **                        | ** ** | ** ** | ** ** | **Change in Operating Income Compared to Prior Period** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Nine Months**              | ** ** | ** ** | ** ** | **Change Due To**                                                                | ** ** |
| ** **                  | ** ** | **Ended September 30,** | ** ** | **Total**  | ** ** | ** **                                                                                 | ** ** | **Net** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **2010**                          | ** ** | **2009**   | ** ** | **Change**                                                                                 | ** ** | **Volume (a)** | ** ** | **Price (b)** | ** ** | **Costs (c)** | ** ** | **Currency** | ** ** | **Other (d) (e)** | ** ** |
| Technical Products          |       | $                                 | 24.8       |       | $          | 7.9                                                                                        |       | $ | 16.9 |   | $ | 24.7 |   | $ | 7.9 |   | $ | (13.6 | ) | $ | (0.1 | ) | $ | (2.0 | ) |
| Fine Paper                  |       | 27.4                              |       | 8.2        |       | 19.2                                                                                       |       | 6.7 |   | 1.2 |   | (9.6 | ) | — |   | 20.9 |   |
| Unallocated corporate costs |       | (10.4                             | )          | (11.0      | )          | 0.6                                                                                        |       | — |   | — |   | — |   | — |   | 0.6 |   |
| Consolidated                |       | $                                 | 41.8       |       | $          | 5.1                                                                                        |       | $ | 36.7 |   | $ | 31.4 |   | $ | 9.1 |   | $ | (23.2 | ) | $ | (0.1 | ) | $ | 19.5 |   |

 

----

(a)          Includes changes in unit volume and over (under) absorptionof fixed costs.

(b)         Includes changes in selling price and product mix.

(c)          Includes price changes for raw materials and energy.

(d)         Results of the Fine Paper segment for the nine months ended September 30,2009, include costs associated with the closure of the Ripon Mill of $17.6million.

(e)          Includes other manufacturing costs, distribution, selling,general and administrative expenses and gains and losses on asset sales.

 

Consolidated operating incomeof $41.8 million for the nine months ended September 30, 2010 increased$36.7 million from the prior year period. Operating income for the nine months ended September 30, 2009included $17.6 million of costs related to the closure of the Ripon Mill.Results for the nine months ended September 30, 2009, were also adverselyaffected by sharply reduced market demand following severe global economicweakness, particularly in the second half of 2008 and the first half of 2009.Excluding such closure costs, consolidated operating income for the currentperiod increased $19.1 million or more than 80 percent from the prior year. Thefavorable comparison for both segments was primarily due to favorable volume, higher average net selling prices, improved operatingperformance, including the benefit of improved paper machine utilization and ongoingbenefits from initiatives implemented in 2009 to reduce spending.  These favorable variances were partiallyoffset by higher manufacturing input costs and a less favorable product mix.

 

·                  Operating income for our technical products businessincreased $16.9 million from 2009 due to higher volume and average sellingprices, improved paper machine utilization, and lower energy costs.  These favorable factors were partially offsetby higher manufacturing input costs for pulp and latex.

 

·                  Operating income for ourfine paper business increased $19.2 million from the prior year perioddue to costs associated with closing the Ripon Mill in 2009.  Excluding costs related to closing the RiponMill, operating income increased $1.6 million from the prior period primarilydue to higher volume and average selling prices, and a more efficient coststructure following cost reduction initiatives implemented in 2009.  These favorable variances were partiallyoffset by higher manufacturing input costs, principally for pulp, and a lessfavorable product mix due to faster growth rates for relatively lower pricedproducts.

 

·                  Unallocated corporate expenses for the nine months ended September 30,2010  of $10.4 million were $0.6 millionlower than the prior year.

 

***Additional Statement of Operations Commentary:***

 

·                  Selling,general and administrative (“SG&A”) expense of $16.6 million for the threemonths ended September 30, 2010 decreased $1.5 million from the prior yearperiod primarily due to the benefit of cost control initiatives and the timingof certain expenses in 2009. For the three months ended September 30,2010, SG&A expense as a percentage of net sales was approximately 10.2percent and was 1.9 percentage points lower than the prior year period.

 

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·                  For the three months ended September 30, 2010, weincurred net interest expense of $4.8 million which was $0.6 million favorableto the prior year.  The favorable comparison was due to lower average debtlevels in 2010 as a result of the repayment of all Term Loan and Revolverborrowings with proceeds from the sale of the Woodlands.

 

·                  For the threemonths ended September 30, 2010, we recorded an income tax provisionrelated to continuing operations of $2.2 million which resulted in an effectiveincome tax rate of approximately 32 percent. For the three months ended September 30, 2009, we recorded anincome tax provision related to continuing operations of $1.9 million whichresulted in an effective income tax rate of approximately 36 percent.  In general, our effective tax rate differsfrom the U.S. statutory tax rate of 35 percent primarily due to the benefits ofour corporate tax structure and the proportion of pre-tax income injurisdictions with marginal tax rates that differ from the U.S. statutory taxrate.

 

**Liquidity and Capital Resources**

** **
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Net cash flow provided by (used in): |       |                                                    |       |   |   |
| Operating activities                 |       | $                                                       | 42.4       |   | $ | 54.4 |   |
| Investing activities:                |       |                                                    |       |   |   |
| Capital expenditures                 |       | (10.9                                                   | )          | (6.0 | ) |
| Proceeds from sale of the Woodlands  |       | 78.0                                                    |       | — |   |
| Other investing activities           |       | (0.3                                                    | )          | 0.1 |   |
| Total                                |       | 66.8                                                    |       | (5.9 | ) |
| Financing activities                 |       | (76.2                                                   | )          | (46.4 | ) |
|                                      |            |                                                         |            |  |  |  |  |

 

***Operating Cash Flow Commentary:***

 

·                  Cash provided by operating activities of $42.4 million forthe nine months ended September 30, 2010 was $12.0 million less than cashprovided by operating activities of $54.4 million in the prior year period.Cash provided by operations in the prior year period reflected a $29.8 milliondecrease in our investment in working capital, including the receipt of arefund of U.S. income taxes of approximately $10.9 million.  For the nine months ended September 30,2010, our investment in working capital increased $1.9 million primarily due toan increase in accounts receivable reflecting improved sales. Excluding workingcapital changes, cash provided by operations for the current year increased$19.7 million from the prior year period primarily due to the increase inoperating earnings in the current year.

 

·                  As of September 30, 2010, we had more than $103 million of U.S. federal and $99million of state net operating losses that may be carried forward to offsetfuture taxable income through 2029.

 

·                  For the nine months ended September 30, 2010, we madeaggregate contributions to qualified and non-qualified pension trusts andpayments of pension benefits for unfunded pension plans of approximately $13.0million. We expect to make aggregate contributions to qualified andnon-qualified pension trusts and benefit payments for unfunded pension plans ofapproximately $18 million (based on exchange rates at September 30,2010) in calendar 2010.  This compared to payments in 2009 of $7.9million and $12.5 million for the nine months and full year, respectively.

 

***Investing Commentary:***

 

·                  For the nine months ended September 30, 2010, cashprovided by investing activities was $66.8 million, compared to cash used byinvesting activities of $5.9 million in the prior year period.  Cashprovided by investing activities for the nine months ended September 30,2010 includes net proceeds from the sale of the Woodlands of $78.0 million.

 

·                  Capital expenditures for the nine months ended September 30,2010 were $10.9 million compared to spending of $6.0 million in the prioryear.  We expect to have aggregatecapital expenditures for 2010 of approximately $16 million to $18 million. Thelevel of our capital expenditures for the next 12 months is not expected tohave a material adverse effect on our financial condition, results ofoperations or liquidity.

 

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***Financing Commentary:***

 

·                  Our liquidity requirements are provided by cash generatedfrom operations, short- and long-term borrowings and proceeds from asset sales.We used the net proceeds of $78.0 million from the sale of theWoodlands to extinguish the Term Loan by repaying in full $40 million ofoutstanding Term Loan borrowings and repaying approximately $26 million inoutstanding Revolver borrowings which reduced the balance of outstandingRevolver borrowings to zero. In addition, we made $3.1 million in contracttermination payments related to the closure of the Ripon Mill that became dueand payable upon the sale of the Woodlands.

 

·                  For the nine months ended September 30, 2010, cash andequivalents increased $33.1 million from $5.6 million at December 31, 2009to $38.7 million at September 30, 2010.

 

·                  For the nine months ended September 30, 2010, debtdecreased $72.8 million from $319.2 million at December 31, 2009 to $246.4million at September 30, 2010.

 

·                  Availability under our revolving credit facility varies overtime depending on the value of our Borrowing Base. As of September 30,2010, no amounts were outstandingunder our Revolver and we had $85.2 million of borrowing avalability. Inaddition, we have €6.0 million ($8.1 million, based on exchanges rates at September 30,2010) of available credit underour German Line of Credit.

 

·                  We paid aggregate cash dividends of $0.30 per share orapproximately $4.4 million for the nine months ended September 30, 2010and 2009.

 

·                  For the three months ended September 30, 2010, wepurchased $2 million principal amount of our Senior Notes at slightly less thanpar value.  From time to time we maypurchase additional Senior Notes.  Anysuch purchases are not expected have a material effect on our liquidity.

 

·                  We have required debt payments through September 30,2011 of $14.0 million.  Such payments include required amortizationpayments on our German Loan Agreement of approximately $1.7 million and $12.3million on our German Line of Credit which we expect to renew in November 2010.

 

·                  On October 27, 2010, we sold the remaining assets ofthe Ripon Mill to Diamond Pet Food Processors of Ripon, LLC for gross proceedsof approximately $9 million. Pursuant to the terms of the transaction, Diamondacquired all the assets and assumed responsibility for substantially all theremaining liabilities associated with the Ripon Mill.

 

Management believes that our abilityto generate cash from operations and our borrowing capacity are adequate tofund working capital, capital spending and other cash needs for the next twelvemonths.

 

**CriticalAccounting Policies and Use of Estimates**

 

The preparation of financialstatements in conformity with GAAP requires estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of net sales and expenses duringthe reporting period. We believe that the estimates, assumptions and judgmentsdescribed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Critical Accounting Policies” of our most recent AnnualReport on Form 10-K have the greatest potential impact on our financialstatements, so we consider these to be our critical accounting policies. Thecritical accounting policies used in the preparation of the consolidatedfinancial statements are those that are important both to the presentation offinancial condition and results of operations and require significant judgmentswith regard to estimates used. These critical judgments include, but are notlimited to, the timing of recognizing sales revenue, the recoverability ofdeferred income tax assets, pension benefits and future cash flows associatedwith impairment testing of long-lived assets. Actual results could differ fromthese estimates and changes in these estimates are recorded when known. Webelieve that the consistent application of these policies enables us to providereaders of our financial statements with useful and reliable information about ouroperating results and financial condition.  There have been no significantchanges in these policies, or the estimates used in the application of thepolicies, since December 31, 2009.

 

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**CautionaryNote Regarding Forward-Looking Statements**

 

Certain statements in this QuarterlyReport on Form 10-Q may constitute “forward-looking” statements as definedin 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 inreleases made by the SEC, all as may be amended from time to time. Statementscontained in this quarterly report that are not historical facts may beforward-looking statements within the meaning of the PSLRA. Any suchforward-looking statements reflect our beliefs and assumptions and are based oninformation currently available to us. Forward-looking statements are onlypredictions and involve known and unknown risks, uncertainties and otherfactors that may cause our actual results, performance or achievements, orindustry results, to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. These cautionary statements are being made pursuant to theSecurities Act, the Exchange Act and the PSLRA with the intention of obtaining thebenefits of the “safe harbor” provisions of such laws. The Company cautionsinvestors that any forward-looking statements we make are not guarantees orindicative of future performance. For additional information regarding factorsthat may cause our results of operations to differ materially from thosepresented herein, please see “Risk Factors” contained in our most recent AnnualReport on Form 10-K and as are detailed from time to time in other reportswe file with the SEC.

 

You can identify forward-lookingstatements as those that are not historical in nature, particularly those thatuse 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-lookingstatements, you should consider the following factors, as well as otherscontained in our public filings from time to time, which may cause our actualresults to differ materially from any forward-looking statement:

 

·                  increases in commodity prices, (particularly for pulp,energy and latex) due to constrained global supplies or unexpected supplydisruptions;

 

·                  changes in market demand for our products due to globaleconomic conditions;

 

·                  fluctuations in (i) exchange rates (in particularchanges in the U.S. dollar/Euro currency exchange rates) and (ii) interestrates;

 

·                  the availability of raw materials and energy;

 

·                  the competitive environment;

 

·                  capital and credit market volatility;

 

·                  fluctuations in global equity and fixed-income markets;

 

·                  unanticipated expenditures related to the cost of compliancewith environmental and other governmental regulations;

 

·                  our ability to control costs and implement measures designedto enhance operating efficiencies;

 

·                  the loss of current customers or the inability to obtain newcustomers;

 

·                  increases in the funding requirements for our pension andpostretirement liabilities;

 

·                  changes in asset valuations including write-downs of assetsincluding fixed assets, inventory, accounts receivable, deferred tax assets orother assets for impairment or other reasons;

 

·                  our existing and future indebtedness;

 

·                  strikes, labor stoppages and changes in our collectivebargaining agreements and relations with our employees and unions; and

 

·                  other risks that are detailed from time to time in reportswe file with the SEC.

 

Any subsequent written or oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by the cautionary statements setforth or referred to above, as well as the risk factors contained in our mostrecent Annual Report on Form 10-K. Except as required by law, we disclaimany obligation to update such statements or to publicly announce the result ofany revisions to any of the forward-looking statements contained herein toreflect future events or developments.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

 

There have been no material changesto the disclosure on this matter made in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

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**Item4.  Controls and Procedures**

 

***DisclosureControls and Procedures***

 

We maintain disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports we file or submit under the Exchange Act, as amended,is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the SEC, and that such information isaccumulated and communicated to our management in a timely manner.

 

As of September 30, 2010, anevaluation was performed under the supervision and with the participation ofour management, including the Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on that evaluation, our management, includingthe Chief Executive Officer and Chief Financial Officer, concluded that ourdisclosure controls and procedures were effective as of September 30,2010.

 

***InternalControls over Financial Reporting***

 

There have been no changes in ourinternal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f))  during the threemonths ended September 30, 2010 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II—OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

See Note 11, “Contingencies andLegal Matters” of Notes to Condensed Consolidated Financial Statements of Item1 — Financial Statements.

 

**Item1A.  Risk Factors**

 

In addition to the other informationset forth in this report, you should carefully consider the factors discussedin Part I, “Item 1A. Risk Factors” in our most recent Annual Report onForm 10-K, which could materially affect our business, financial conditionor future results. The risks described in our Annual Report on Form 10-Kare not the only risks facing our Company. Additional risks and uncertaintiesnot currently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

 

**Item6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                       |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                              |
| 31.1                |       | Certification of the CEO pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                          |
|                |       |                                                                                                                                              |
| 31.2                |       | Certification of the CFO pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                          |
|                |       |                                                                                                                                              |
| 32                  |       | Certification of CEO and CFO  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                  |   |                                             |
|-----------------------|--------|--------------------------------------------------|
|                  |   | NEENAH PAPER, INC                           |
|                  |   |                                             |
|                  | By:    | /s/ Sean T. Erwin                                |
|                  |   |  Sean  T. Erwin                             |
|                  |   | Chairman of the Board, President  and Chief      |
|                  |   | Executive Officer (Principal  Executive Officer) |
|                  |   |                                             |
|                  |   | /s/ Bonnie C. Lind                               |
|                  |   |      Bonnie  C. Lind    |
|                  |   | Senior Vice President, Chief  Financial Officer  |
|                  |   | and Treasurer (Principal Financial  Officer)     |
|                  |   |                                             |
|                  |   | /s/ Larry N. Brownlee                            |
|                  |   |      Larry  N. Brownlee |
|                  |   | Vice President — Controller  (Principal     |
|                  |   | Accounting Officer)                              |
|                  |   |                                             |
|                  |   |                                             |
| November 5, 2010 |   |                                             |

 

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