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 the quarterly period ended  March 31, 2010** |
|                                                    |
| **OR**                                                  |
|                                                    |                                                                                                     |
| **o**                                                   | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the transition periodfrom            to            **

 

**Commission File Number: 001-32240**

 

**NEENAH PAPER, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **20-1308307**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **3460 Preston Ridge Road  Alpharetta, Georgia**                | ** ** | **30005**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(678) 566-6500**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every

InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the

preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange 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 the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of April 30, 2010, there were approximately14,710,000 shares of the Company’s common stock outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| 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-20   |
|                                                                                                 |   |
| Item 3.  Quantitative and Qualitative Disclosure About Market Risk                                   | F-26   |
|                                                                                                 |   |
| Item 4. Controls and  Procedures                                                                     | F-26   |
|                                                                                                 |   |
|                                                                                                 |   |
| Part II — Other  Information                                                               |   |
|                                                                                                 |   |
| Item 1. Legal Proceedings                                                                            | F-27   |
|                                                                                                 |   |
| Item 1A. Risk Factors                                                                                | F-27   |
|                                                                                                 |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |
|                                                                                                 |   |
| Item 6. Exhibits                                                                                     | F-27   |

 

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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 March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| **Net sales**                                                      |       | $                                                    | 167.3      |   | $ | 134.1 |   |
| Cost  of products sold                                             |       | 135.0                                                |       | 113.6 |   |
| **Gross profit**                                                   |       | 32.3                                                 |       | 20.5 |   |
| Selling,  general and administrative expenses                      |       | 16.3                                                 |       | 16.3 |   |
| Other  income - net                                                |       | (0.4                                                 | )          | (0.7 | ) |
| **Operating income**                                               |       | 16.4                                                 |       | 4.9 |   |
| Interest  expense - net                                            |       | 5.7                                                  |       | 5.7 |   |
| **Income (loss) from continuing operations before income  taxes**  |       | 10.7                                                 |       | (0.8 | ) |
| Provision  (benefit) for income taxes                              |       | 3.4                                                  |       | (0.1 | ) |
| **Income (loss) from continuing operations**                       |       | 7.3                                                  |       | (0.7 | ) |
| Income  from discontinued operations, net of income taxes (Note 5) |       | 134.6                                                |       | 0.1 |   |
| **Net income (loss)**                                              |       | $                                                    | 141.9      |   | $ | (0.6 | ) |
|                                                               |       |                                                 |       |   |   |
| **Earnings (Loss) Per Common Share**                               |       |                                                 |       |   |   |
| Basic                                                              |       |                                                 |       |   |   |
| Continuing  operations                                             |       | $                                                    | 0.50       |   | $ | (0.05 | ) |
| Discontinued  operations                                           |       | 9.12                                                 |       | 0.01 |   |
|                                                               |       | $                                                    | 9.62       |   | $ | (0.04 | ) |
| Diluted                                                            |       |                                                 |       |   |   |
| Continuing  operations                                             |       | $                                                    | 0.48       |   | $ | (0.05 | ) |
| Discontinued  operations                                           |       | 8.81                                                 |       | 0.01 |   |
|                                                               |       | $                                                    | 9.29       |   | $ | (0.04 | ) |
|                                                               |       |                                                 |       |   |   |
| **Weighted Average Common Shares Outstanding (in thousands)**      |       |                                                 |       |   |   |
| Basic                                                              |       | 14,692                                               |       | 14,672 |   |
| Diluted                                                            |       | 15,204                                               |       | 14,672 |   |
| **Cash Dividends Declared Per Share of Common Stock**              |       | $                                                    | 0.10       |   | $ | 0.10 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

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**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inmillions)**

**(Unaudited)**

 
| ** **                                                              | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                              |       |                         |       |                            |       |
| **Current Assets**                                                      |       |                         |       |                            |       |
| Cash  and cash equivalents                                              |       | $                            | 14.4       |                            | $          | 5.6 |   |
| Restricted  cash (Note 7)                                               |       | 9.5                          |       | —                          |       |
| Accounts  receivable (less allowances of $2.0 million and $1.9 million) |       | 77.2                         |       | 67.7                            |       |
| Inventories                                                             |       | 69.0                         |       | 70.7                            |       |
| Income  taxes receivable                                                |       | 0.7                          |       | 0.8                             |       |
| Deferred  income taxes                                                  |       | 12.7                         |       | 61.7                            |       |
| Prepaid  and other current assets                                       |       | 11.7                         |       | 13.7                            |       |
| Assets  held for sale (Note 6)                                          |       | 6.2                          |       | 10.0                            |       |
| Total  Current Assets                                                   |       | 201.4                        |       | 230.2                           |       |
| **Property, Plant and Equipment, at cost**                              |       | 556.8                        |       | 569.6                           |       |
| Less  accumulated depreciation                                          |       | 288.6                        |       | 285.2                           |       |
| Property,  plant and equipment—net                                 |       | 268.2                        |       | 284.4                           |       |
| **Deferred Income Taxes**                                               |       | 54.9                         |       | 37.4                            |       |
| **Goodwill**                                                            |       | 42.1                         |       | 44.9                            |       |
| **Intangible Assets—net**                                          |       | 25.6                         |       | 27.5                            |       |
| **Other Assets**                                                        |       | 11.3                         |       | 13.1                            |       |
| **TOTAL ASSETS**                                                        |       | $                            | 603.5      |                            | $          | 637.5 |   |
|                                                                    |       |                         |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                          |       |                         |       |                            |       |
| **Current Liabilities**                                                 |       |                         |       |                            |       |
| Debt  payable within one year                                           |       | $                            | 11.6       |                            | $          | 55.6 |   |
| Accounts  payable                                                       |       | 33.2                         |       | 30.0                            |       |
| Accrued  salaries and employee benefits                                 |       | 18.4                         |       | 18.2                            |       |
| Accrued  expenses                                                       |       | 31.7                         |       | 30.4                            |       |
| Total  Current Liabilities                                              |       | 94.9                         |       | 134.2                           |       |
| **Long-term Debt**                                                      |       | 235.1                        |       | 263.6                           |       |
| **Deferred Income Taxes**                                               |       | 21.9                         |       | 23.7                            |       |
| **Noncurrent Employee Benefits**                                        |       | 99.6                         |       | 105.0                           |       |
| **Other Noncurrent Obligations**                                        |       | 3.0                          |       | 3.3                             |       |
| **TOTAL LIABILITIES**                                                   |       | 454.5                        |       | 529.8                           |       |
| **Commitments and Contingencies (Note 11)**                             |       |                         |       |                            |       |
| **TOTAL STOCKHOLDERS’ EQUITY**                                     |       | 149.0                        |       | 107.7                           |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                     |       | $                            | 603.5      |                            | $          | 637.5 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

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**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inmillions)**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| **OPERATING ACTIVITIES**                                                                               |       |                                                 |       |   |   |
| Net  income (loss)                                                                                     |       | $                                                    | 141.9      |   | $ | (0.6 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:              |       |                                                 |       |   |   |
| Depreciation  and amortization                                                                         |       | 8.0                                                  |       | 8.4 |   |
| Stock-based  compensation                                                                              |       | 1.2                                                  |       | 1.0 |   |
| Deferred  income tax provision (benefit)                                                               |       | 30.8                                                 |       | (0.4 | ) |
| Gain  on sale of the Woodlands (Note 5)                                                                |       | (74.1                                                | )          | — |   |
| Reclassification  of cumulative translation adjustments related to investments in Canada (Note 3) |       | (87.9                                                | )          | — |   |
| Loss  on asset dispositions                                                                            |       | —                                               |       | 0.3 |   |
| Decrease  (increase) in working capital                                                                |       | (2.3                                                 | )          | 21.3 |   |
| Pension  and other postretirement benefits                                                             |       | (3.2                                                 | )          | (0.3 | ) |
| Other                                                                                                  |       | (0.1                                                 | )          | (0.3 | ) |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                                          |       | 14.3                                                 |       | 29.4 |   |
| **INVESTING ACTIVITIES**                                                                               |       |                                                 |       |   |   |
| Capital  expenditures                                                                                  |       | (2.3                                                 | )          | (2.8 | ) |
| Net  proceeds from sale of the Woodlands                                                               |       | 78.0                                                 |       | — |   |
| Increase  in restricted cash                                                                           |       | (9.5                                                 | )          | — |   |
| Other                                                                                                  |       | 1.0                                                  |       | (0.2 | ) |
| **NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**                                                |       | 67.2                                                 |       | (3.0 | ) |
| **FINANCING ACTIVITIES**                                                                               |       |                                                 |       |   |   |
| Repayments  of long-term debt                                                                          |       | (67.8                                                | )          | (17.3 | ) |
| Short-term  borrowings                                                                                 |       | 1.1                                                  |       | 0.6 |   |
| Repayments  of short-term debt                                                                         |       | (4.4                                                 | )          | (5.4 | ) |
| Cash  dividends paid                                                                                   |       | (1.4                                                 | )          | (1.5 | ) |
| Other                                                                                                  |       | (0.2                                                 | )          | — |   |
| **NET CASH USED IN FINANCING ACTIVITIES**                                                              |       | (72.7                                                | )          | (23.6 | ) |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                                          |       | 8.8                                                  |       | 2.8 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                                       |       | 5.6                                                  |       | 3.3 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                                           |       | $                                                    | 14.4       |   | $ | 6.1 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:**                                                  |       |                                                 |       |   |   |
| Cash  paid during period for interest, net of interest expense capitalized                             |       | $                                                    | 0.9        |   | $ | 1.0 |   |
| Cash  paid (received) during period for income taxes                                                   |       | $                                                    | 0.3        |   | $ | (11.4 | ) |
| Non-cash  investing activities:                                                                        |       |                                                 |       |   |   |
| Liability  for equipment acquired                                                                      |       | $                                                    | 0.5        |   | $ | 0.8 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

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**NEENAH PAPER, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Tabular amounts in millions, except asnoted)**

 

**Note 1. Background and Basis of Presentation**

 

***Background***

 

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

 

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. The technicalproducts business is a leading international producer of transportation andother filter media, durable, saturated and coated substrates for a variety ofend uses and nonwoven wall coverings.

 

In March 2010, theCompany’s wholly owned subsidiary, Neenah Paper Company of Canada (“NeenahCanada”) sold approximately 475,000 acres of woodland assets in Nova Scotia(the “Woodlands”) to Northern Timber Nova Scotia Corporation, an affiliate ofNorthern Pulp Nova Scotia Corporation (collectively, “Northern Pulp”), forC$82.5 million ($78.6 million). The sale resulted in a pre-tax gain, netof fees and other transaction costs, of $74.1 million. The sale of theWoodlands resulted in the substantially complete liquidation of the Company’sinvestment in Neenah Canada.  In accordancewith Accounting Standards Codification (“ASC”) Topic 830, *Foreign Currency Matters* (“ASC Topic 830”),$87.9 million of cumulative currency translation adjustments attributable tothe Company’s Canadian subsidiaries have been reclassified into earnings andrecognized as part of the gain on sale of the Woodlands. The transaction didnot generate a cash tax liability because the tax basis for the Woodlands wasapproximately equal to the sale price. See Note 5, “Discontinued Operations.”

 

For the three monthsended March 31, 2010, the results of operations, the gain on sale of theWoodlands ($74.1 million) and the reclassification of cumulative currencytranslation adjustments attributable to the Company’s Canadian subsidiariesinto earnings ($87.9 million) are reported as discontinued operations in thecondensed consolidated statements of operations. The results of operations ofthe Woodlands are reported as discontinued operations for the three monthsended March 31, 2009.  See Note 5, “Discontinued Operations.”

 

***Basis of Consolidation and Presentation***

 

These statements havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission (the “SEC”) and, in accordance with those rules andregulations, do not include all information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair presentationof the Company’s results of operations, financial position and cash flows. Inthe opinion of management, the condensed consolidated financial statementsreflect all adjustments, consisting only of normal recurring adjustments,necessary to present fairly the results of operations, financial position andcash flows for the interim periods presented herein.  The preparation ofcondensed consolidated financial statements in conformity with GAAP requiresmanagement to make extensive use of estimates and assumptions that affect thereported amounts and disclosures.  Actual results may vary from theseestimates.

 

These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’smost recent Annual Report on Form 10-K.  The results of operationsfor any interim period are not necessarily indicative of the results ofoperations to be expected for the full year.

 

The condensedconsolidated financial statements of Neenah and its subsidiaries includedherein 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 consolidated financial statements.

 

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

 

The Company computesbasic earnings (loss) per share (“EPS”) in accordance with ASC Topic 260, *Earnings Per Share* (“ASC Topic 260”).  In accordance with ASC Topic 260, share-based awards with non-forfeitabledividends are classified as participating securities. In calculating basicearnings per share, this method requires net income to be reduced by the amountof dividends declared in the current period for each participating security andby the contractual amount of dividends or other participation payments that arepaid or accumulated for the current period. Undistributed earnings for theperiod are allocated to participating securities based on the contractualparticipation rights of the security to share in those current earningsassuming all earnings for the period are distributed. Holders of restrictedstock, restricted stock units (“RSUs”) and target performance unit awards (“PerformanceUnits”) have contractual participation rights that are equivalent to those ofcommon stockholders. Therefore, the Company allocates undistributed earnings torestricted stock, RSUs and common stockholders based on their respectiveaverage ownership percentages for the period.

 

ASC Topic 260 alsorequires companies with participating securities to calculate diluted earningsper share using the “Two-Class” method. The “Two-Class” method requires thedenominator to include the weighted average participating securities along withthe additional share equivalents from the assumed conversion of stock optionscalculated using the “Treasury Stock” method, subject to the anti-dilutionprovisions of ASC Topic 260.

 

Diluted EPS wascalculated to give effect to all potentially dilutive common shares using the “TreasuryStock” method. Outstanding stock options, stock appreciation rights (“SARS”),RSUs and Performance Units represent the only potentially dilutivenon-participating security effects on the Company’s weighted-averageshares.  For the three months ended March 31, 2010 and 2009approximately 1,620,000 and 1,790,000 potentially dilutive stock-basedcompensation awards, respectively, were excluded from the computation ofdilutive common shares because the exercise price of such options exceeded theaverage market price of the Company’s common stock for the period the optionswere outstanding.  In addition, as a result of the loss from continuingoperations for the three months ended March 31, 2009, approximately 40,000incremental shares resulting from the assumed vesting of potentially dilutivesecurities were excluded from the diluted earnings per share calculation, asthe effect would have been anti-dilutive.

 

The following table presents the computation of basic anddiluted EPS (dollars in millions except per share amounts, shares inthousands):

 
| ** **                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Income  (loss) from continuing operations                                               |       | $                                                    | 7.3        |   | $ | (0.7 | ) |
| Less:  Distributed and undistributed amounts allocated to participating securities  (a) |       | —                                               |       | — |   |
| Income  (loss) from continuing operations available to common stockholders              |       | 7.3                                                  |       | (0.7 | ) |
| Income  from discontinued operations, net of income taxes                               |       | 134.6                                                |       | 0.1 |   |
| Less:  Undistributed amounts allocated to participating securities                      |       | 0.6                                                  |       | — |   |
| Net  income (loss) available to common stockholders                                     |       | $                                                    | 141.3      |   | $ | (0.6 | ) |
|                                                                                    |       |                                                 |       |   |   |
| Weighted-average  basic shares outstanding                                              |       | 14,692                                               |       | 14,672 |   |
| Add:  Assumed incremental shares under stock compensation plans                         |       | 512                                                  |       | — |   |
| Weighted-average  diluted shares                                                        |       | 15,204                                               |       | 14,672 |   |
|                                                                                    |       |                                                 |       |   |   |
| **Earnings (Loss) Per Common Share**                                                    |       |                                                 |       |   |   |
| Basic                                                                                   |       |                                                 |       |   |   |
| Continuing  operations                                                                  |       | $                                                    | 0.50       |   | $ | (0.05 | ) |
| Discontinued  operations                                                                |       | 9.12                                                 |       | 0.01 |   |
|                                                                                    |       | $                                                    | 9.62       |   | $ | (0.04 | ) |
| Diluted                                                                                 |       |                                                 |       |   |   |
| Continuing  operations                                                                  |       | $                                                    | 0.48       |   | $ | (0.05 | ) |
| Discontinued  operations                                                                |       | 8.81                                                 |       | 0.01 |   |
|                                                                                    |       | $                                                    | 9.29       |   | $ | (0.04 | ) |

 

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(a)   In accordance with ASC Topic 260, for thethree months ended March 31, 2009 undistributed losses have been entirelyallocated to common stockholders due to the fact that the holders ofparticipating securities are not contractually obligated to share in the lossesof the Company.

 

**Note 2.  Accounting StandardChanges**

 

As of March 31, 2010, no amendments to the ASC had beenissued that will have or are reasonably likely to have a material effect on theCompany’s financial position, results of operations or cash flows.

 

**Note 3. Comprehensive Income (Loss)**

 

Comprehensive income (loss) includes, in addition to net income(loss), gains and losses recorded directly into stockholders’ equity on thecondensed consolidated balance sheet. These gains and losses are referred to asother comprehensive income items. Accumulated other comprehensive income (loss)consists of foreign currency translation gains and (losses) and adjustmentsrelated to pensions and other postretirement benefits. The Company does notprovide income taxes for foreign currency translation adjustments related toindefinite investments in international subsidiaries.  The sale of the Woodlands resulted in thesubstantially complete liquidation of the Company’s investment in NeenahCanada.  In accordance with ASC Topic830, $87.9 million of cumulative currency translation adjustments attributableto the Company’s Canadian subsidiaries have been reclassified into earnings andrecognized as part of the gain on sale of the Woodlands. There were no taxconsequences related to the repatriation of funds from the sale of theWoodlands.  As of March 31,2010 and December 31, 2009, accumulated other comprehensive income (loss)was $(8.7) million and $91.5 million, respectively.

 

The following table presents the components of comprehensiveincome (loss):

 
| ** **                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Net  income (loss)                                                                       |       | $                                                    | 141.9      |   | $ | (0.6 | ) |
| Other  comprehensive income (loss):                                                      |       |                                                 |       |   |   |
| Unrealized  foreign currency translation loss                                            |       | (12.6                                                | )          | (10.5 | ) |
| Reclassification  of cumulative translation adjustments related to investments in Canada |       | (87.9                                                | )          | — |   |
| Adjustments  to pension and other post-employment benefit liabilities                    |       | 0.3                                                  |       | 0.4 |   |
| Total  other comprehensive loss                                                          |       | (100.2                                               | )          | (10.1 | ) |
| Comprehensive  income (loss)                                                             |       | $                                                    | 41.7       |   | $ | (10.7 | ) |

 

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

 

In May 2009, theCompany permanently closed its fine paper mill located in Ripon, California(the “Ripon Mill”).  The Ripon Mill had one paper machine with an annualcapacity of approximately 35,000 tons.  For the year ended December 31,2009, the closure resulted in a pre-tax charge of $17.1 million.  Thecharge was comprised of approximately $5.8 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.  The Company paid approximately $6.5 million of such costsin 2009.

 

As of March 31,2010, the remaining long-lived assets of the Ripon Mill, primarily composed ofland and buildings, are classified as Assets held for sale on the condensedconsolidated 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.

 

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The Company accounted forthe costs associated with the closure of the Ripon Mill in accordance with ASCTopic 420, *Exit or Disposal CostObligations.*  As of March 31, 2010, approximately $1.7million in severance benefits had been paid to 96 former employees of the RiponMill and severance benefits of approximately $0.1 million due to one formeremployee of the Ripon Mill remained unpaid. For the three months ended March 31, 2010, the Company madecontract termination payments related to the closure of the Ripon Mill ofapproximately $3.1 million that became due and payable upon the sale of theWoodlands. The following table presents the status of such closure costs as of March 31,2010:

 
| ** **                                                    | ** ** | **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 three months ended March 31, 2010      |       | —                  |       | (3.1                                                 | )          | (3.1      | )          |
| Accrued  exit costs at March 31, 2010                    |       | $                       | 0.1        |                                                 | $          | 0.8       |       | $ | 0.9 |   |

 

**Note 5.  Discontinued Operations**

 

In March 2010,Neenah Canada sold the Woodlands to Northern Pulp, for C$82.5 million ($78.6million). The sale resulted in a pre-tax gain, net of fees and othertransaction costs, of $74.1 million. The sale of the Woodlands resulted in thesubstantially complete liquidation of the Company’s investment in NeenahCanada.  In accordance with ASC Topic830, $87.9 million of cumulative currency translation adjustments attributableto the Company’s Canadian subsidiaries have been reclassified into earnings andrecognized as part of the gain on sale of the Woodlands. The sale of theWoodlands represented the cessation of the Company’s operating activities inCanada; however, the Company will have certain continuing post-employmentbenefit obligations related to its Canadian operations.  The transactiondid not generate a cash tax liability because the tax basis for the Woodlandswas approximately equal to the sale price.

 

Proceedsfrom the sale were used to repay in full $40 million of outstanding term loanborrowings (the “Term Loan”) and repay approximately $26 million in outstandingrevolving loans which reduced the balance of such outstanding loans under theCompany’s bank credit agreement (the “Bank Credit Agreement”) to zero. Inaddition, the Company made approximately $3.1 million in contract terminationpayments related to the closure of the Ripon Mill that became due and payableupon the sale of the Woodlands.

 

In June 2008,Neenah Canada sold the Pictou Mill to Northern Pulp. Pursuant to the terms ofthe transaction, Northern Pulp assumed all of the assets and liabilitiesassociated with the Pictou Mill, as well as existing customer contracts, supplyagreements, labor agreements and pension obligations.

 

In conjunction with thesale of the Pictou Mill, the Company entered into a stumpage agreement(the “Stumpage Agreement”) which allowed Northern Pulp to harvest anaverage of approximately 400,000 metric tons of softwood timber annually fromthe Woodlands. Northern Pulp agreed to pay substantially all costs associatedwith maintaining the Woodlands and harvesting the timber.  The Stumpage Agreementwas terminated in March 2010 in conjunction with the sale of theWoodlands.  For the three months ended March 31,2010 and 2009, the Company recognized revenue of approximately $1.4 million and$0.8 million, respectively, related to timber sales pursuant to the Stumpage Agreement.

 

F-7

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Table of Contents

 

The results of operations of the Woodlands and the gain onsale of the Woodlands are reported as discontinued operations in the condensedconsolidated statements of operations for each period presented. The followingtable summarizes the results of discontinued operations:

 
| ** **                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Net  sales (a)                                                                           |       | $                                                    | 1.4        |   | $ | 0.8 |   |
|                                                                                     |       |                                                 |       |   |   |
| Income  from operations before income taxes                                              |       | $                                                    | 1.4        |   | $ | 0.2 |   |
| Gain  on disposal of the Woodlands                                                       |       | 74.1                                                 |       | — |   |
| Reclassification  of cumulative translation adjustments related to investments in Canada |       | 87.9                                                 |       | — |   |
| Gain  on disposal                                                                        |       | 162.0                                                |       | — |   |
| Income  before income taxes                                                              |       | 163.4                                                |       | 0.2 |   |
| Provision  for income taxes (b)                                                          |       | (28.8                                                | )          | (0.1 | ) |
| Income  from discontinued operations, net of income taxes                                |       | $                                                    | 134.6      |   | $ | 0.1 |   |

 

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(a)   Representtimber sales pursuant to the Stumpage Agreement.

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

 

**Note 6.Supplemental Balance Sheet Data**

 

The following presents inventories by major class:

 
| ** **                            | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Inventories  by major class:          | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Raw  materials                        |       | $                            | 16.1       |                            | $          | 16.6 |   |
| Work  in progress                     |       | 12.0                         |       | 11.7                            |       |
| Finished  goods                       |       | 48.3                         |       | 49.4                            |       |
| Supplies  and other                   |       | 1.8                          |       | 1.7                             |       |
|                                  |       | 78.2                         |       | 79.4                            |       |
| Adjust  FIFO inventories to LIFO cost |       | (9.2                         | )          | (8.7                            | )          |
| Total                                 |       | $                            | 69.0       |                            | $          | 70.7 |   |

 

The FIFO values of total inventories valued on the LIFOmethod were $59.9 million and $58.2 million at March 31, 2010 and December 31,2009, respectively.

 

The following table presents the components of Assets Heldfor Sale on the condensed consolidated balance sheet.

 
| ** **                                    | ** ** | **March 31, 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 |   |

 

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Table of Contents

 

**Note 7. Debt**

 

Long-term debt consisted of thefollowing:

 
| ** **                                                                                                             | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Senior  Notes (7.375% fixed rate) due November 2014                                                               |       | $                            | 225.0      |                            | $          | 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 |       | 11.8                         |       | 12.5                            |       |
| Neenah  Germany revolving line of credit (variable rates) due November 2010                                       |       | 9.9                          |       | 12.9                            |       |
| Other  debt (2.9% fixed rate)                                                                                          |       | —                       |       | 0.9                             |       |
| Total  debt                                                                                                            |       | 246.7                        |       | 319.2                           |       |
| Less:  Debt payable within one year                                                                                    |       | 11.6                         |       | 55.6                            |       |
| Long-term  debt                                                                                                        |       | $                            | 235.1      |                            | $          | 263.6 |   |

 

***Senior Unsecured Notes***

 

In November 2004, the Company completed anunderwritten offering of ten-year senior unsecured notes (the “Senior Notes”)at an aggregate face amount of $225 million. The Senior Notes bearinterest at a rate of 7.375 percent, payable May 15 and November 15of each year and mature on November 15, 2014. The Senior Notes arefully and unconditionally guaranteed by all of the Company’s subsidiaries, withthe exception of Neenah Germany.

 

***Amended and Restated Secured Revolving Credit Facility***

 

In November, 2009, theCompany amended and restated its Bank Credit Agreement.  As amended, theBank Credit Agreement consisted of a $100 million senior, secured revolvingcredit facility (the “Revolver”) and (ii) a $40 million seniorsecured Term Loan. The Bank Credit Agreement terminates on November 30,2013.  In March 2010, the Companyused proceeds from the sale of the Woodlands to repay in full $40 million ofoutstanding Term Loan borrowings and repay approximately $26 million inoutstanding revolving loans which reduced the balance of such outstanding loansunder the Bank Credit Agreement to zero. As of March 31, 2010,approximately $9.5 million of proceeds from the sale of the Woodlands wasrestricted under the terms of the Bank Credit Agreement. Such restricted cashmay be used for any purpose not specifically prohibited by the Bank CreditAgreement. The Company expects such restricted cash to be fully utilized duringthe second quarter of 2010. For the three months ended March 31, 2010, theCompany recognized within interest expense approximately $0.3 million of coststo write-off deferred financing costs associated with the Term Loan. 

 

As of March 31,2010, the Company had no outstanding Revolver borrowings and $90.3 million ofborrowing availability under the Revolver.  Borrowing availability under the Revolver isreduced by outstanding letters of credit and certain other items.  As of March 31, 2010, the Company hadapproximately $1.5 million of letters of credit and other items outstandingwhich reduced availability.  The Company’s borrowing availability will bereduced by approximately $9.1 million upon the sale of the remaining assets ofthe Ripon Mill. As of December 31, 2009, the Company had $27.9 million inoutstanding Revolver borrowings at a weighted-average interest rate of 4.6percent per annum.

 

As of March 31,2010, the Company had no Term Loan borrowings outstanding. As of December 31,2009, the Company had $40.0 million in outstanding Term Loan borrowings at aweighted-average interest rate of 4.5 percent per annum.

 

The Bank Credit Agreementcontains events of default customary for financings of this type, includingfailure to pay principal or interest, materially false representations orwarranties, failure to observe covenants and other terms of the Bank CreditAgreement, cross-defaults to certain other indebtedness, bankruptcy,insolvency, various ERISA violations, the incurrence of material judgments andchanges in control.

 

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Table of Contents

 

The Bank Credit Agreementcontains covenants 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 March 31, 2010, the Company was in compliance with all covenants.

 

***Other Debt***

 

In December 2006,Neenah Germany entered into a 10-year agreement with HypoVereinsbank and IKBDeutsche Industriebank AG to provide €10.0 million of project financing for theconstruction of a saturator (the “German Loan Agreement”). As of March 31,2010, €8.8 million ($11.8 million, based on exchange rates at March 31,2010) was outstanding under the German Loan Agreement.

 

Neenah Germany has arevolving line of credit (the “German Line of Credit”) with HypoVereinsbankthat provides for borrowings of up to €15 million for general corporatepurposes. The German Line of Credit is secured by the domestic accountsreceivable of Neenah Germany. As of March 31, 2010 and December 31,2009, the weighted-average interest rate on outstanding German Line of Creditborrowings was 4.0 percent per annum and 4.1 percent per annum,respectively.  As of March 31, 2010, €7.3 million ($9.9 million,based on exchange rates at March 31, 2010) was outstanding under theGerman Line of Credit and €7.7 million ($10.3 million, based on exchange ratesat March 31, 2010) of credit was available.  In November 2009,Neenah Germany extended the termination date for the German Line of Credit to November 30,2010.

 

Neenah Germany’s abilityto pay dividends or transfer funds to the Company is limited under the terms ofthe German Line of Credit, to not exceed certain limits defined in theagreement without lender approval or repayment of the amount outstanding underthe line, which was $ €7.3 million ($9.9 million, based on exchange rates at March 31,2010) at March 31, 2010.  In addition, the terms of the German Lineof Credit require Neenah Germany to maintain a ratio of stockholder’s equity tototal assets equal to or greater than 45 percent.  The Company was incompliance with all provisions of the German Line of Credit as of March 31,2010.

 

**Note 8. Pension and Other Postretirement Benefits**

 

***PensionPlans***

 

Substantially all activeemployees of the Company’s U.S. paper operations participate in defined benefitpension plans and/or defined contribution retirement plans. Neenah Germany hasdefined benefit plans designed to provide a monthly pension upon retirement forsubstantially all its employees in Germany.  In addition, the Company maintainsa supplemental defined benefit pension plan (the “SERP”) which is anon-qualified defined benefit plan. The Company provides benefits under theSERP to the extent necessary to fulfill the intent of its defined benefitretirement plans without regard to the limitations set by the Internal RevenueCode on qualified defined benefit plans.

 

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Table of Contents

 

The following table presents the components of net periodicbenefit cost:

 

***Componentsof Net Periodic Benefit Cost***

 
| ** **                          | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **                          | ** ** | **2010**                                             | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                       |       | $                                                    | 1.1        |                                                            | $          | 1.2 |   | $ | 0.4 |   | $ | 0.5 |   |
| Interest  cost                      |       | 3.5                                                  |       | 3.5                                                             |       | 0.6 |   | 0.6 |   |
| Expected  return on plan assets (a) |       | (3.4                                                 | )          | (2.8                                                            | )          | — |   | — |   |
| Recognized  net actuarial loss      |       | 0.3                                                  |       | 0.4                                                             |       | — |   | — |   |
| Amortization  of prior service cost |       | —                                               |       |                                                            |       | 0.1 |   |   |   |
| Amortization  of acturial loss      |       | —                                               |       | —                                                          |       | — |   | 0.1 |   |
| Net  periodic benefit cost          |       | $                                                    | 1.5        |                                                            | $          | 2.3 |   | $ | 1.1 |   | $ | 1.2 |   |

 

----

(a)     The expectedreturn on plan assets is determined by multiplying the fair value of planassets at the prior year-end (adjusted for estimated current year cash benefitpayments and contributions) by the expected long-term rate of return.

 

The Company expects to make aggregate contributions todefined benefit pension trusts and pay benefits for unfunded defined benefitpension plans of approximately $14 million (based on exchange rates at March 31,2010) in calendar 2010.  For the threemonths March 31, 2010, the Company made approximately $4.5 million of suchpayments.

 

**Note 9.  StockCompensation Plan**

 

The Company reserved3,500,000 shares of $0.01 par value common stock (“Common Stock”) for issuanceunder the 2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”).  As of March 31, 2010, approximately1,810,000 shares of Common Stock were reserved for future issuance under theOmnibus Plan. As of March 31, 2010, the number of shares available forfuture issuance was not reduced by outstanding SARs because the closing marketprice for the Company’s common stock was less than the exercise price of alloutstanding SARs. The Company accounts for stock-based compensation pursuant tothe fair value recognition provisions of ASC Topic 718, *Compensation—Stock Compensation*(“ASCTopic 718”).

 

***Valuationand Expense Information***

 

Substantially all stock-based compensation expense isrecorded in selling, general and administrative expenses on the condensedconsolidated statements of operations.  The following table summarizesstock-based compensation expense and related income tax benefits.

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Stock-based  compensation expense                    |       | $                                                    | 1.2        |   | $ | 1.0 |   |
| Income  tax benefit                                  |       | (0.5                                                 | )          | (0.3 | ) |
| Stock-based  compensation, net of income tax benefit |       | $                                                    | 0.7        |   | $ | 0.7 |   |

 

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Table of Contents

 

The following table summarizes total compensation costsrelated to the Company’s equity awards and amounts recognized in the threemonths ended March 31, 2010.

 
| ** **                                                    | ** ** | **Stock Options** | ** ** | **Restricted Stock** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Unrecognized  compensation cost — December 31, 2009 |       | $                      | 1.4        |                      | $          | 1.4 |   |
| Add:  Grant date fair value current year grants (a)           |       | 0.9                    |       | 4.3                       |       |
| Less:  Compensation expense recognized                        |       | 0.5                    |       | 0.7                       |       |
| Unrecognized  compensation cost — March 31, 2010    |       | $                      | 1.8        |                      | $          | 5.0 |   |
| Expected  amortization period (in years)                      |       | 2.1                    |       | 2.5                       |       |

 

----

(a)   The fair value of current year stock optionand restricted stock awards includes $0.1 million and $0.2 million,respectively, related to a change in the Company’s estimate of forfeitures forawards granted in prior years.

 

***StockOptions***

 

For the three monthsended March 31, 2010, the Company awarded nonqualified stock options toLong-Term Incentive Plan (the “LTIP”) participants to purchase approximately190,850 shares of common stock (subject to forfeiture due to termination ofemployment and other conditions). For the three months ended March 31,2010, the weighted-average exercise price of such nonqualified stock optionawards was $13.38 per share. The weighted-average grant date fair value forstock options granted during the three months ended March 31, 2010 was$5.57 per share and was estimated using the Black-Scholes option valuationmodel with the following assumptions:

 
| ** **              | ** ** | **Three Months Ended  March 31, 2010** | ** ** |
|-------------------------|------------|------------------------------------------------------------|------------|
| Expected life in years  |       | 5.9                                                        |       |
| Risk free interest rate |       | 2.9                                                        | %          |
| Volatility              |       | 55.3                                                       | %          |
| Dividend yield          |       | 3.0                                                        | %          |

 

For the three monthsended March 31, 2010, the aggregate pre-tax intrinsic value of stockoptions exercised was approximately $30 thousand.  No stock options were exercised during thethree months ended March 31, 2009. The aggregate intrinsic value ofapproximately 1,495,000 stock options that were exercisable at March 31,2010 was $1.1 million. The aggregate intrinsic value of approximately 1,365,000stock options that were exercisable at December 31, 2009 was $0.1 million.

 

The aggregate grant datefair value of approximately 170,000 stock options and SARs that vested duringthe three months ended March 31, 2010, was $0.8 million. As of March 31,2010, certain participants met age and service requirements that allowed theirstock options to qualify for accelerated vesting upon retirement. As of March 31,2010, LTIP participants held options to purchase 260,000 shares of common stockthat would have been exercisable if they had retired as of such date. Theaggregate grant date fair value of options subject to accelerated vesting was$1.0 million. Stock options subject to accelerated vesting for expenserecognition become exercisable according to the contract terms of the stock-based awards.

 

As of March 31,2010, the aggregate intrinsic value of 2,400,000 stock options and SARs thatwere vested or expected to vest was $5.7 million.  The weighted-averagegrant date fair value of such stock options was $8.15 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.

 

As of March 31,2010, the Company has approximately 920,000 unvested stock options with aweighted-average grant date fair value of $4.04 per share. As of December 31,2009, approximately 905,000 unvested stock options were outstanding with aweighted-average grant date fair value of $3.85 per share.

 

***Performance Units***

 

During the three monthsended March 31, 2010, the Company granted target awards of 183,500Performance Units to LTIP participants. The measurement period for thePerformance Units is January 1, 2010 through December 31, 2010.Common Stock equal to between 40 percent and 200 percent of the PerformanceUnit target will be awarded based on the Company’s return on invested capital,revenue growth for the Technical Products segment, the level of cash flow forthe Fine Paper segment and total return to shareholders relative to a peergroup of companies and the Russell 2000® Value small cap index. Theweighted-average grant date fair value for the Performance Units was $25.36 pershare. Compensation cost is recognized pro rata over the vesting period.

 

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Table of Contents

 

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

 

The following table presents changes in the carrying amountof goodwill for the three months ended March 31, 2010.  All suchgoodwill 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      |       | (6.1              | )          | 3.3                                |       | (2.8    | )          |
|                               |       |              |       |                               |       |    |       |
| Balance  at March 31, 2010    |       | $                 | 92.8       |                               | $          | (50.7   | )          | $ | 42.1 |   |

 

The following table presents the gross carrying amount ofintangible assets and the related accumulated amortization for intangibleassets subject to amortization.

 
| ** **                        | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross  Amount**            | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizable  intangible assets    |       |                         |       |                            |       |   |   |   |   |
| Customer  based intangibles       |       | $                            | 14.6       |                            | $          | (3.4 | ) | $ | 15.5 |   | $ | (3.4 | ) |
| Trade  names and trademarks       |       | 6.2                          |       | (1.9                            | )          | 6.6 |   | (1.9 | ) |
| Acquired  technology              |       | 1.1                          |       | (0.4                            | )          | 1.2 |   | (0.4 | ) |
| Total                             |       | 21.9                         |       | (5.7                            | )          | 23.3 |   | (5.7 | ) |
| Unamortizable  intangible assets: |       |                         |       |                            |       |   |   |   |   |
| Trade  names                      |       | 9.4                          |       | —                          |       | 9.9 |   | — |   |
| Total                             |       | $                            | 31.3       |                            | $          | (5.7 | ) | $ | 33.2 |   | $ | (5.7 | ) |

 

**Note 11.  Contingencies and LegalMatters**

 

***Litigation***

 

The Company is involved in certain legal actions and claimsarising in the ordinary course of business. While the outcome of these legalactions and claims cannot be predicted with certainty, it is the opinion ofmanagement that the outcome of any such claim which is pending or threatened,either individually or on a combined basis, will not have a material adverseeffect on the consolidated financial condition, results of operations orliquidity of the Company.

 

***Indemnifications***

 

Pursuant to aDistribution Agreement, an Employee Matters Agreement and a Tax SharingAgreement, the Company has agreed to indemnify Kimberly-Clark Corporation forcertain liabilities or risks related to the spin-off. Many of the potentialindemnification liabilities under these agreements are unknown, remote orhighly contingent. Furthermore, even in the event that an indemnification claimis asserted, liability for indemnification is subject to determination underthe terms of the applicable agreement. For these reasons, the Company is unableto estimate the maximum potential amount of the possible future liability underthe indemnity provisions of these agreements. However, the Company accrues forany potentially indemnifiable liability or risk under these agreements forwhich it believes a future payment is probable and a range of loss can bereasonably estimated. As of March 31, 2010, management believes theCompany’s liability under such indemnification obligations was not material tothe condensed consolidated financial statements.

 

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Table of Contents

 

**Note 12.  Business SegmentInformation**

 

The Company reports itsoperations in two segments: Fine Paper and Technical Products. The fine paperbusiness is a producer of premium writing, text, cover and specialty papers.The technical products business is an international producer of filtrationmedia, durable, saturated and coated substrates for a variety of end uses; andnonwoven wall coverings.  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 executed atmarket prices and such transactions are eliminated in consolidation. The costsof shared services, and other administrative functions managed on a commonbasis, are allocated to the segments based on usage, where possible, or otherfactors based on the nature of the activity.  General corporate expensesthat do not directly support the operations of the business segments are shownas Unallocated corporate costs.

 

The following table summarizes the net sales, operatingincome (loss) and total assets for each of the Company’s business segments.

 
| ** **          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------|------------|------------------------------------------------------|------------|
| ** **          | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| **Net sales**       |       |                                                 |       |   |   |
| Fine  Paper         |       | $                                                    | 69.6       |   | $ | 64.8 |   |
| Technical  Products |       | 97.7                                                 |       | 69.3 |   |
| Consolidated        |       | $                                                    | 167.3      |   | $ | 134.1 |   |

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| **Operating income (loss)**  |       |                                                 |       |   |   |
| Fine  Paper                  |       | $                                                    | 9.5        |   | $ | 8.6 |   |
| Technical  Products          |       | 9.3                                                  |       | (0.6 | ) |
| Unallocated  corporate costs |       | (2.4                                                 | )          | (3.1 | ) |
| Consolidated                 |       | $                                                    | 16.4       |   | $ | 4.9 |   |

 
| ** **            | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Total Assets**      |       |                         |       |                            |       |
| Fine  Paper           |       | $                            | 162.8      |                            | $          | 166.3 |   |
| Technical  Products   |       | 341.5                        |       | 353.4                           |       |
| Assets  held for sale |       | 6.2                          |       | 10.0                            |       |
| Corporate  and other  |       | 93.0                         |       | 107.8                           |       |
| Total                 |       | $                            | 603.5      |                            | $          | 637.5 |   |

 

**Note 13.  Condensed ConsolidatingFinancial Information**

 

Neenah Paper Company ofCanada, Neenah Paper Michigan, Inc. and Neenah Paper Sales, Inc. (the“Guarantor Subsidiaries”) guarantee the Company’s Senior Notes. The GuarantorSubsidiaries are 100 percent owned by the Company and all guarantees are fulland unconditional.  The following condensedconsolidating financial information is presented in lieu of consolidatedfinancial statements for the Guarantor Subsidiaries as of March 31, 2010and December 31, 2009 and for the three months ended March 31, 2010and 2009.  Certain deferred tax assetspresented in the Guarantor Subsidiaries column as of December 31, 2009were presented in the Neenah Paper, Inc. column as of March 31, 2010as such assets will ultimately be realized by Neenah Paper, Inc. due tothe substantially complete liquidation of Neenah Canada.

 

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe Three Months Ended March 31, 2010**

 
| ** **                                                | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                             |       | $                            | 68.3       |                        | $          | 34.8                            |       | $                              | 64.2       |                      | $          | — |   | $ | 167.3 |   |
| Cost  of products sold                                    |       | 52.1                         |       | 27.9                        |       | 55.0                            |       | —                         |       | 135.0                     |       |
| **Gross profit**                                          |       | 16.2                         |       | 6.9                         |       | 9.2                             |       | —                         |       | 32.3                      |       |
| Selling,  general and administrative expenses             |       | 10.0                         |       | 2.3                         |       | 4.0                             |       | —                         |       | 16.3                      |       |
| Other  (income) expense - net                             |       | (0.4                         | )          | 0.3                         |       | (0.3                            | )          | —                         |       | (0.4                      | )          |
| **Operating income**                                      |       | 6.6                          |       | 4.3                         |       | 5.5                             |       | —                         |       | 16.4                      |       |
| Equity  in earnings of subsidiaries                       |       | (141.9                       | )          | —                      |       | —                          |       | 141.9                          |       | —                    |       |
| Interest  expense-net                                     |       | 5.3                          |       | 0.1                         |       | 0.3                             |       | —                         |       | 5.7                       |       |
| **Income from continuing operations before income taxes** |       | 143.2                        |       | 4.2                         |       | 5.2                             |       | (141.9                         | )          | 10.7                      |       |
| Provision  for income taxes                               |       | 1.3                          |       | 1.8                         |       | 0.3                             |       | —                         |       | 3.4                       |       |
| **Income from continuing operations**                     |       | 141.9                        |       | 2.4                         |       | 4.9                             |       | (141.9                         | )          | 7.3                       |       |
| Income  from discontinued operations, net of income taxes |       | —                       |       | 134.6                       |       | —                          |       | —                         |       | 134.6                     |       |
| **Net income**                                            |       | $                            | 141.9      |                        | $          | 137.0                           |       | $                              | 4.9        |                      | $          | (141.9 | ) | $ | 141.9 |   |

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Three Months Ended March 31, 2009**

 
| ** **                                                        | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                     |       | $                            | 61.7       |                        | $          | 24.6                            |       | $                              | 47.8       |                      | $          | — |   | $ | 134.1 |   |
| Cost of  products sold                                            |       | 46.3                         |       | 21.5                        |       | 45.8                            |       | —                         |       | 113.6                     |       |
| **Gross profit**                                                  |       | 15.4                         |       | 3.1                         |       | 2.0                             |       | —                         |       | 20.5                      |       |
| Selling,  general and administrative expenses                     |       | 10.7                         |       | 2.6                         |       | 3.0                             |       | —                         |       | 16.3                      |       |
| Other  (income) expense - net                                     |       | (0.2                         | )          | 0.5                         |       | (1.0                            | )          | —                         |       | (0.7                      | )          |
| **Operating income**                                              |       | 4.9                          |       | —                      |       | —                          |       | —                         |       | 4.9                       |       |
| Equity in  losses of subsidiaries                                 |       | 0.4                          |       | —                      |       | —                          |       | (0.4                           | )          | —                    |       |
| Interest  expense-net                                             |       | 5.2                          |       | 0.2                         |       | 0.3                             |       | —                         |       | 5.7                       |       |
| **Income (loss) from continuing operations before income taxes**  |       | (0.7                         | )          | (0.2                        | )          | (0.3                            | )          | 0.4                            |       | (0.8                      | )          |
| Provision  (benefit) for income taxes                             |       | (0.1                         | )          | 0.9                         |       | (0.9                            | )          | —                         |       | (0.1                      | )          |
| **Income (loss) from continuing operations**                      |       | (0.6                         | )          | (1.1                        | )          | 0.6                             |       | 0.4                            |       | (0.7                      | )          |
| Income from discontinued  operations, net of income tax provision |       | —                       |       | 0.1                         |       | —                          |       | —                         |       | 0.1                       |       |
| **Net income (loss)**                                             |       | $                            | (0.6       | )                           | $          | (1.0                            | )          | $                              | 0.6        |                      | $          | 0.4 |   | $ | (0.6 | ) |

 

F-15

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Table of Contents

 

**CONDENSED CONSOLIDATING BALANCE SHEET**

**As of March 31, 2010**

 
| ** **                                          | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **ASSETS**                                          |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **Current assets**                                  |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Cash  and cash equivalents                          |       | $                            | 11.3       |                        | $          | 2.1                             |       | $                              | 1.0        |                      | $          | — |   | $ | 14.4 |   |
| Restricted  cash                                    |       | 9.5                          |       | —                      |       | —                          |       | —                         |       | 9.5                       |       |
| Accounts  receivable, net                           |       | 26.2                         |       | 17.4                        |       | 33.6                            |       | —                         |       | 77.2                      |       |
| Inventories                                         |       | 36.2                         |       | 11.5                        |       | 21.3                            |       | —                         |       | 69.0                      |       |
| Income  taxes receivable                            |       | 0.3                          |       | 0.4                         |       | —                          |       | —                         |       | 0.7                       |       |
| Deferred  income taxes                              |       | 10.7                         |       | 1.4                         |       | 0.6                             |       | —                         |       | 12.7                      |       |
| Intercompany  amounts receivable                    |       | 16.6                         |       | 46.7                        |       | —                          |       | (63.3                          | )          | —                    |       |
| Prepaid  and other current assets                   |       | 4.1                          |       | 1.7                         |       | 5.9                             |       | —                         |       | 11.7                      |       |
| Assets  held for sale                               |       | —                       |       | 6.2                         |       | —                          |       | —                         |       | 6.2                       |       |
| Total  current assets                               |       | 114.9                        |       | 87.4                        |       | 62.4                            |       | (63.3                          | )          | 201.4                     |       |
| Property,  plant and equipment, at cost             |       | 261.7                        |       | 99.5                        |       | 195.6                           |       | —                         |       | 556.8                     |       |
| Less  accumulated depreciation                      |       | 182.7                        |       | 63.3                        |       | 42.6                            |       | —                         |       | 288.6                     |       |
| Property,  plant and equipment — net           |       | 79.0                         |       | 36.2                        |       | 153.0                           |       | —                         |       | 268.2                     |       |
| **Investments In Subsidiaries**                     |       | 244.4                        |       | —                      |       | —                          |       | (244.4                         | )          | —                    |       |
| **Deferred Income Taxes**                           |       | 51.1                         |       | 3.8                         |       | —                          |       | —                         |       | 54.9                      |       |
| **Goodwill**                                        |       | —                       |       | —                      |       | 42.1                            |       | —                         |       | 42.1                      |       |
| **Intangible Assets—net**                      |       | 2.9                          |       | —                      |       | 22.7                            |       | —                         |       | 25.6                      |       |
| **Other Assets**                                    |       | 6.0                          |       | 0.1                         |       | 5.2                             |       | —                         |       | 11.3                      |       |
| **TOTAL ASSETS**                                    |       | $                            | 498.3      |                        | $          | 127.5                           |       | $                              | 285.4      |                      | $          | (307.7 | ) | $ | 603.5 |   |
|                                                |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **Current liabilities**                             |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Debt  payable within one year                       |       | $                            | —     |                        | $          | —                          |       | $                              | 11.6       |                      | $          | — |   | $ | 11.6 |   |
| Accounts  payable                                   |       | 16.4                         |       | 8.4                         |       | 8.4                             |       | —                         |       | 33.2                      |       |
| Intercompany  amounts payable                       |       | 46.7                         |       | 16.6                        |       | —                          |       | (63.3                          | )          | —                    |       |
| Accrued  expenses                                   |       | 30.1                         |       | 8.0                         |       | 12.0                            |       | —                         |       | 50.1                      |       |
| Total  current liabilities                          |       | 93.2                         |       | 33.0                        |       | 32.0                            |       | (63.3                          | )          | 94.9                      |       |
| **Long-term Debt**                                  |       | 225.0                        |       | —                      |       | 10.1                            |       | —                         |       | 235.1                     |       |
| **Deferred Income Taxes**                           |       | —                       |       | —                      |       | 21.9                            |       | —                         |       | 21.9                      |       |
| **Noncurrent Employee Benefits and Other**          |       | 31.1                         |       | 39.0                        |       | 32.5                            |       | —                         |       | 102.6                     |       |
| **TOTAL LIABILITIES**                               |       | 349.3                        |       | 72.0                        |       | 96.5                            |       | (63.3                          | )          | 454.5                     |       |
| **STOCKHOLDERS’ EQUITY**                       |       | 149.0                        |       | 55.5                        |       | 188.9                           |       | (244.4                         | )          | 149.0                     |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY** |       | $                            | 498.3      |                        | $          | 127.5                           |       | $                              | 285.4      |                      | $          | (307.7 | ) | $ | 603.5 |   |

 

F-16

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Table of Contents

 

**CONDENSED CONSOLIDATING BALANCE SHEET**

**As of December 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**                        |       | 280.5                  |       | —                      |       | —                          |       | (280.5                         | )          | —                    |       |
| **Deferred Income  Taxes**                              |       | 10.9                   |       | 26.5                        |       | —                          |       | —                         |       | 37.4                      |       |
| **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**                                        |       | $                      | 525.6      |                        | $          | 208.8                           |       | $                              | 301.7      |                      | $          | (398.6 | ) | $ | 637.5 |   |
|                                                    |       |                   |       |                        |       |                            |       |                           |       |                      |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**          |       |                   |       |                        |       |                            |       |                           |       |                      |       |
| **Current  liabilities**                                |       |                   |       |                        |       |                            |       |                           |       |                      |       |
| Debt payable within one year                            |       | $                      | 40.9       |                        | $          | —                          |       | $                              | 14.7       |                      | $          | — |   | $ | 55.6 |   |
| Accounts payable                                        |       | 16.3                   |       | 5.3                         |       | 8.4                             |       | —                         |       | 30.0                      |       |
| Intercompany amounts payable                            |       | 49.4                   |       | 68.7                        |       | —                          |       | (118.1                         | )          | —                    |       |
| Accrued expenses                                        |       | 23.6                   |       | 14.8                        |       | 10.2                            |       | —                         |       | 48.6                      |       |
| Total current liabilities                               |       | 130.2                  |       | 88.8                        |       | 33.3                            |       | (118.1                         | )          | 134.2                     |       |
| **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**                                   |       | 417.9                  |       | 127.5                       |       | 102.5                           |       | (118.1                         | )          | 529.8                     |       |
| **STOCKHOLDERS’  EQUITY**                          |       | 107.7                  |       | 81.3                        |       | 199.2                           |       | (280.5                         | )          | 107.7                     |       |
| **TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY**    |       | $                      | 525.6      |                        | $          | 208.8                           |       | $                              | 301.7      |                      | $          | (398.6 | ) | $ | 637.5 |   |

 

F-17

----

Table of Contents

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**Forthe Three Months Ended March 31, 2010**

 
| ** **                                                                               | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Net  income                                                                              |       | $                            | 141.9      |                        | $          | 137.0                           |       | $                              | 4.9        |                      | $          | (141.9 | ) | $ | 141.9 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities        |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Depreciation  and amortization                                                           |       | 3.4                          |       | 1.0                         |       | 3.6                             |       | —                         |       | 8.0                       |       |
| Stock-based  compensation                                                                |       | 1.2                          |       | —                      |       | —                          |       | —                         |       | 1.2                       |       |
| Deferred  income tax provision (benefit)                                                 |       | 1.2                          |       | 30.5                        |       | (0.9                            | )          | —                         |       | 30.8                      |       |
| Gain  on sale of the Woodlands                                                           |       | —                       |       | (74.1                       | )          | —                          |       | —                         |       | (74.1                     | )          |
| Reclassification  of cumulative translation adjustments related to investments in Canada |       | —                       |       | (87.9                       | )          | —                          |       | —                         |       | (87.9                     | )          |
| (Increase)  decrease in working capital                                                  |       | 4.2                          |       | (3.4                        | )          | (3.1                            | )          | —                         |       | (2.3                      | )          |
| Equity  in earnings of subsidiaries                                                      |       | (141.9                       | )          | —                      |       | —                          |       | 141.9                          |       | —                    |       |
| Pension  and other postretirement benefits                                               |       | (3.5                         | )          | 0.4                         |       | (0.1                            | )          | —                         |       | (3.2                      | )          |
| Other                                                                                    |       | (0.1                         | )          | —                      |       | —                          |       | —                         |       | (0.1                      | )          |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                            |       | 6.4                          |       | 3.5                         |       | 4.4                             |       | —                         |       | 14.3                      |       |
| **INVESTING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Capital  expenditures                                                                    |       | (1.2                         | )          | (0.7                        | )          | (0.4                            | )          | —                         |       | (2.3                      | )          |
| Net  proceeds from sale of the Woodlands                                                 |       | —                       |       | 78.0                        |       | —                          |       | —                         |       | 78.0                      |       |
| Increase  in restricted cash                                                             |       | (9.5                         | )          | —                      |       | —                          |       | —                         |       | (9.5                      | )          |
| Other                                                                                    |       | 0.4                          |       | (0.1                        | )          | 0.7                             |       | —                         |       | 1.0                       |       |
| **NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**                                  |       | (10.3                        | )          | 77.2                        |       | 0.3                             |       | —                         |       | 67.2                      |       |
| **FINANCING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Repayments  of long-term debt                                                            |       | (67.8                        | )          | —                      |       | —                          |       | —                         |       | (67.8                     | )          |
| Short-term  borrowings                                                                   |       | —                       |       | —                      |       | 1.1                             |       | —                         |       | 1.1                       |       |
| Repayments  of short-term debt                                                           |       | (0.9                         | )          | —                      |       | (3.5                            | )          | —                         |       | (4.4                      | )          |
| Cash  dividends paid                                                                     |       | (1.4                         | )          | —                      |       | —                          |       | —                         |       | (1.4                      | )          |
| Intercompany  transfers - net                                                            |       | 83.4                         |       | (80.6                       | )          | (2.8                            | )          | —                         |       | —                    |       |
| Other                                                                                    |       | (0.2                         | )          | —                      |       | —                          |       | —                         |       | (0.2                      | )          |
| **NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES**                                  |       | 13.1                         |       | (80.6                       | )          | (5.2                            | )          | —                         |       | (72.7                     | )          |
| **NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                 |       | 9.2                          |       | 0.1                         |       | (0.5                            | )          | —                         |       | 8.8                       |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF****YEAR**                                      |       | 2.1                          |       | 2.0                         |       | 1.5                             |       | —                         |       | 5.6                       |       |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                             |       | $                            | 11.3       |                        | $          | 2.1                             |       | $                              | 1.0        |                      | $          | — |   | $ | 14.4 |   |

 

F-18

----

Table ofContents

 

**CONDENSED CONSOLIDATING STATEMENT OFCASH FLOWS**

**For the Three Months Ended March 31,2009**

 
| ** **                                                                               | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                 |       |                    |       |                        |       |                            |       |                           |       |                      |       |
| Net  income (loss)                                                                       |       | $                       | (0.6       | )                           | $          | (1.0                            | )          | $                              | 0.6        |                      | $          | 0.4 |   | $ | (0.6 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities |       |                    |       |                        |       |                            |       |                           |       |                      |       |
| Depreciation  and amortization                                                           |       | 3.9                     |       | 1.1                         |       | 3.4                             |       | —                         |       | 8.4                       |       |
| Stock-based  compensation                                                                |       | 1.0                     |       | —                      |       | —                          |       | —                         |       | 1.0                       |       |
| Deferred  income tax provision (benefit)                                                 |       | —                  |       | 0.5                         |       | (0.9                            | )          | —                         |       | (0.4                      | )          |
| Loss  on asset dispositions                                                              |       | —                  |       | 0.3                         |       | —                          |       | —                         |       | 0.3                       |       |
| Decrease  in working capital                                                             |       | 12.6                    |       | 2.2                         |       | 6.5                             |       | —                         |       | 21.3                      |       |
| Equity  in losses of subsidiaries                                                        |       | 0.4                     |       | —                      |       | —                          |       | (0.4                           | )          | —                    |       |
| Pension  and other postretirement benefits                                               |       | (0.5                    | )          | 0.5                         |       | (0.3                            | )          | —                         |       | (0.3                      | )          |
| Other                                                                                    |       | 0.1                     |       | (0.4                        | )          | —                          |       | —                         |       | (0.3                      | )          |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                            |       | 16.9                    |       | 3.2                         |       | 9.3                             |       | —                         |       | 29.4                      |       |
| **INVESTING ACTIVITIES**                                                                 |       |                    |       |                        |       |                            |       |                           |       |                      |       |
| Capital  expenditures                                                                    |       | (1.5                    | )          | (0.4                        | )          | (0.9                            | )          | —                         |       | (2.8                      | )          |
| Other                                                                                    |       | 0.8                     |       | (0.6                        | )          | (0.4                            | )          | —                         |       | (0.2                      | )          |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                |       | (0.7                    | )          | (1.0                        | )          | (1.3                            | )          | —                         |       | (3.0                      | )          |
| **FINANCING ACTIVITIES**                                                                 |       |                    |       |                        |       |                            |       |                           |       |                      |       |
| Repayments  of long-term debt                                                            |       | (17.3                   | )          | —                      |       | —                          |       | —                         |       | (17.3                     | )          |
| Short-term  borrowings                                                                   |       | —                  |       | —                      |       | 0.6                             |       | —                         |       | 0.6                       |       |
| Repayments  of short-term debt                                                           |       | —                  |       | —                      |       | (5.4                            | )          | —                         |       | (5.4                      | )          |
| Cash  dividends paid                                                                     |       | (1.5                    | )          | —                      |       | —                          |       | —                         |       | (1.5                      | )          |
| Intercompany  transfers - net                                                            |       | 5.0                     |       | (2.3                        | )          | (2.7                            | )          | —                         |       | —                    |       |
| **NET CASH USED IN FINANCING ACTIVITIES**                                                |       | (13.8                   | )          | (2.3                        | )          | (7.5                            | )          | —                         |       | (23.6                     | )          |
| **NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                 |       | 2.4                     |       | (0.1                        | )          | 0.5                             |       | —                         |       | 2.8                       |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                         |       | 1.9                     |       | 1.1                         |       | 0.3                             |       | —                         |       | 3.3                       |       |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                             |       | $                       | 4.3        |                        | $          | 1.0                             |       | $                              | 0.8        |                      | $          | — |   | $ | 6.1 |   |

 

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**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*The following discussion and analysispresents the factors that had a material effect on our financial position as ofMarch 31, 2010 and our results of operations for the three months ended March 31,2010 and 2009. You should read this discussion in conjunction with ourconsolidated financial statements and the notes to those consolidated financialstatements included in our most recent Annual Report on Form 10-K. ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements. See “Forward-Looking Statements”for a discussion of the uncertainties, risks and assumptions associated withthese statements.*

 

*In this report, unless the contextrequires otherwise, references to “we,” “us,” “our,” “Neenah” or the “Company”are intended to mean Neenah Paper, Inc. and its consolidated subsidiaries.******(Tabularamounts in millions, except as noted)*

 

**Executive Summary**

 

Results of operations forthe three months ended March 31, 2010 showed substantial improvement fromthe depressed amounts reported in the prior year.  Results for the three months ended March 31,2009 reflected sharply reduced market demand due to severe global economicweakness, particularly in the second half of 2008 and the first half of2009.  The benefits of cost reductioninitiatives implemented in 2009 allowed us to offset the impact of highermanufacturing input costs.

 

In March 2010,Neenah Canada sold the Woodlands to Northern Pulp for C$82.5 million ($78.6million). The sale of the Woodlands completed our transformation from anintegrated pulp and paper company into a premium fine paper and technicalproducts company.  We used the proceedsfrom the sale to repay in full $40 million of outstanding Term Loan borrowingsand repay approximately $26 million in outstanding Revolver borrowings whichreduced the balance of outstanding Revolver borrowings to zero.

 

***Results of Continuing Operations***

 

For the three monthsended March 31, 2010, consolidated net sales increased approximately $33million from the prior year period to $167.3 million primarily due to substantiallyhigher shipments in both paper businesses which benefited from improved marketconditions and customers replenishing the supply chain. The first quarter of2010 represented our fifth consecutive quarter of sequential consolidatedrevenue growth.

 

Consolidated operatingincome of $16.4 million for the three months ended March 31, 2010increased more than three-fold from the prior year period.  The favorable comparison was primarily due toincreased volume, including the benefit of improved paper machine utilization,and continuing benefits from initiatives implemented in 2009 to reducespending, which more than offset the effect of higher manufacturing inputcosts.

 

***Results of DiscontinuedOperations***

 

The sale of the Woodlands resulted in a pre-tax gain, net of fees andother transaction costs, of $74.1 million. The sale of the Woodlands resultedin the substantially complete liquidation of our investment in NeenahCanada.  In accordance with ASC Topic830, $87.9 million of cumulative currency translation adjustments attributableto our Canadian subsidiaries have been reclassified into earnings andrecognized as part of the gain on sale of the Woodlands. The sale did notgenerate a cash tax liability because the tax basis for the Woodlands was approximatelyequal to the sale price. There were no tax consequences related to therepatriation of funds from the sale of the Woodlands.

 

Forthe three months ended March 31, 2010, timber sales to Northern Pulppursuant to the Stumpage Agreement resulted in net sales from discontinuedoperations of $1.4 million compared to net sales of $0.8 million in the prioryear period.  For the three months ended March 31,2010, pre-tax income from discontinued operations, excluding the gain on saleof the Woodlands, was $1.4 million compared to earnings from discontinuedoperations of $0.2 million in the prior year period.

 

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**Resultsof Operations and Related Information**

 

In this section, we discuss and analyze our net sales,earnings before interest and taxes (which we refer to as “operating income”)and other information relevant to an understanding of our results of operationsfor the three months ended March 31, 2010 and 2009.

 

***Analysis of Net Sales—********Three Months Ended March 31, 2010 and2009***

 

The following table presents net sales by segment, expressedas a percentage of total net sales:

 
| ** **          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Fine  Paper         |       | 42                                    | %          | 48 | % |
| Technical  Products |       | 58                                    | %          | 52 | % |
| Total               |       | 100                                   | %          | 100 | % |

 

***Commentary:***

 

Thefollowing table presents our net sales by segment:

 
| ** **          | ** ** | ** **             | ** ** | **Change in Net Sales Compared to Prior Period** | ** ** |
|---------------------|------------|------------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended** | ** ** | ** **                                       | ** ** | **Change Due To** | ** ** |
| ** **          | ** ** | **March 31,**     | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **          | ** ** | **2010**               | ** ** | **2009**                                         | ** ** | **Total Change** | ** ** | **Volume** | ** ** | **Net Price** | ** ** | **Currency** | ** ** |
| Fine  Paper         |       | $                      | 69.6       |                                             | $          | 64.8 |   | $ | 4.8 |   | $ | 8.3 |   | $ | (3.5 | ) | $ | — |   |
| Technical  Products |       | 97.7                   |       | 69.3                                             |       | 28.4 |   | 26.5 |   | (1.9 | ) | 3.8 |   |
| Consolidated        |       | $                      | 167.3      |                                             | $          | 134.1 |   | $ | 33.2 |   | $ | 34.8 |   | $ | (5.4 | ) | $ | 3.8 |   |

 

Consolidated net sales forthe three months ended March 31, 2010 were $33.2 million higher than theprior year period due to increased volume in both segments which benefited from improved marketconditions and customers replenishing the supply chain.

 

·                  Net sales increased $4.8 million or 7percent primarily due to a 13 percent increase in shipments. The improved salesvolume reflected higher sales of both branded and non-branded products, whichexceeded the increase in the uncoated free sheet market.  Average prices for most branded products were3 — 5 percent higher than the prior year as a result of pricing actionsimplemented in 2009 and 2010.  Higher prices for branded products were morethan offset by a less favorable sales mix which reflected higher growth ratesfor lower priced products relative to our branded products. The first quarter of 2010 represented thethird consecutive quarter of sequential revenue growth for our fine paperbusiness.

 

·                  Net sales increased $28.4 million or 41percent primarily due to a 38 percent increase in shipments.  Higher sales volume reflected strong growthin tape, filter media and abrasive backing shipments.  Net sales also benefited from higherEuro/U.S.$ exchange rates.  Average netselling prices decreased as a result of a challenging pricing environment forour European filtration and wall covering strategic business units, includingthe effect of a stronger Euro. The first quarter of 2010 represented the fourthconsecutive quarter of sequential revenue growth for our technical productsbusiness.

 

The following table sets forth line items from our condensedconsolidated statements of operations as a percentage of net sales for theperiods indicated and is intended to provide a perspective of trends in ourhistorical results:

 

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| ** **                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                                                          |       |                                  |       |   |   |
| Net  sales                                                    |       | 100.0                                 | %          | 100.0 | % |
| Cost  of products sold                                        |       | 80.7                                  |       | 84.7 |   |
| Gross  profit                                                 |       | 19.3                                  |       | 15.3 |   |
| Selling,  general and administrative expenses                 |       | 9.7                                   |       | 12.1 |   |
| Other  income - net                                           |       | (0.2                                  | )          | (0.5 | ) |
| Operating  income                                             |       | 9.8                                   |       | 3.7 |   |
| Interest  expense-net                                         |       | 3.4                                   |       | 4.3 |   |
| Income  (loss) from continuing operations before income taxes |       | 6.4                                   |       | (0.6 | ) |
| Provision  (benefit) for income taxes                         |       | 2.0                                   |       | (0.1 | ) |
| Income  (loss) from continuing operations                     |       | 4.4                                   | %          | (0.5 | )% |

 

***Analysis of Operating Income—Three Months Ended March 31,2010 and 2009***

 

***Commentary:***

 

The following table presents ouroperating income (loss) by segment:

 
| ** **                   | ** ** | ** **             | ** ** | ** **        | ** ** | **Change in Operating Income (Loss) Compared to Prior Period** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------|------------|----------------------------------------------------------------|------------|
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Change Due To** | ** ** |
| ** **                   | ** ** | **March 31,**     | ** ** | **Total**         | ** ** | ** **                                                     | ** ** | **Net** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **2010**               | ** ** | **2009**          | ** ** | **Change**                                                     | ** ** | **Volume (a)** | ** ** | **Price (b)** | ** ** | **Costs (c)** | ** ** | **Currency** | ** ** | **Other (d)** | ** ** |
| Fine  Paper                  |       | $                      | 9.5        |              | $          | 8.6                                                            |       | $ | 0.9 |   | $ | 3.3 |   | $ | (2.4 | ) | $ | (1.4 | ) | $ | — |   | $ | 1.4 |   |
| Technical  Products          |       | 9.3                    |       | (0.6              | )          | 9.9                                                            |       | 9.5 |   | (2.8 | ) | (0.5 | ) | 0.3 |   | 3.4 |   |
| Unallocated  corporate costs |       | (2.4                   | )          | (3.1              | )          | 0.7                                                            |       | — |   | — |   | — |   | — |   | 0.7 |   |
| Consolidated                 |       | $                      | 16.4       |              | $          | 4.9                                                            |       | $ | 11.5 |   | $ | 12.8 |   | $ | (5.2 | ) | $ | (1.9 | ) | $ | 0.3 |   | $ | 5.5 |   |

 

----

| (a) | Includes changes in unit volume and over (under)  absorption of 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 income of $16.4 million for thethree months ended March 31, 2010 increased $11.5 million, or more thanthree-fold, from the depressed amounts reported in 2009.  Results for the three months ended March 31,2009 reflected sharply reduced market demand following severe global economicweakness, particularly in the second half of 2008 and the first half of 2009.The favorable comparison for both segments was primarily due to favorablevolume, including the benefit of improved paper machine utilization, andongoing benefits from initiatives implemented in 2009 to reduce spending;partially offset by a less favorable product mix and higher manufacturing inputcosts.

 

·                  Operating income for ourfine paper business increased $0.9million from the prior year period primarily due to higher volume and a moreefficient cost structure following cost reduction initiatives implemented in2009.  These favorable variances were partiallyoffset by a less favorable product mix due to faster growth rates forrelatively lower priced products and higher manufacturing input costs,principally for hardwood pulp.

 

·                  Operatingincome for ourtechnical products business increased $9.9 million from 2009 primarily due tohigher volume and benefits from initiatives implemented in 2009 to reduceoperating and administrative spending. These favorable factors were partially offset by a less favorable productmix and higher manufacturing input costs for pulp and latex that were partiallyoffset by lower energy costs.

 

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·                  Unallocatedcorporate expenses for the three months ended March 31, 2010 and 2009 wererelatively low compared to other quarters due to the timing of expenses.  Spending in 2010 decreased by $0.7 millioncompared to the prior year due to ongoing benefits from initiatives implemented in 2009to reduce spending and lower post employment benefits costs in 2010.

 

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

 

·                  During thethree months ended March 31, 2010, we have seen an increase inmanufacturing input costs, particularly for pulp, due to tight global suppliesand unexpected events, such as the Chilean earthquake, that temporarilydisrupted manufacturing supply.  As aresult of these conditions and the terms of our supply contracts, we expectmanufacturing inputs costs in the next few quarters to remain at or above thelevel recorded in the first quarter of 2010 before falling.  While we continue to increase selling prices,we do not expect the near term spike in pulp costs will be fully recoveredthrough pricing actions.

 

·                  Selling, general and administrative (“SG&A”)expense of $16.3 million for the three months ended March 31, 2010 wasunchanged from the prior year period. For the three months ended March 31,2010, SG&A expense as a percentage of net sales was approximately 9.7percent and was 2.4 percentage points lower than the prior year period duehigher net sales in 2010.

 

·                  For the three months ended March 31,2010 and 2009, we incurred net interest expense of $5.7 million.  Netinterest expense for the three months ended March 31, 2010 includesapproximately $0.3 million of costs to write-off deferred financing costsassociated with our Term Loan which was repaid in full in conjunction with thesale of the Woodlands in March.  Interestexpense in future quarters will reflect the lower debt levels following thesale of the Woodlands.

 

·                  For the three months ended March 31,2010, we recorded an income tax provision related to continuing operations of$3.4 million which resulted in an effective income tax rate of approximately 32percent.  Our tax provision for the three months ended March 31,2010, includes approximately $0.5 million of income tax expense related to thevesting of stock-based compensation awards where the expense recognized is inexcess of  amounts that are deductiblefor income tax purposes.  Excluding suchamounts, our effective income tax rate for the three months ended March 31,2010 was approximately 27 percent.  Forthe three months ended March 31, 2009, we recorded an income tax benefitrelated to continuing operations of $0.1 million which resulted in an effectiveincome tax benefit rate of approximately 13 percent.  In general, oureffective tax rate differs from the U.S. statutory tax rate of 35 percentprimarily due to the benefits of our corporate tax structure and the proportionof pre-tax income in jurisdictions with marginal tax rates that differ from theU.S. statutory tax rate.

 

**Liquidity and Capital Resources**

** **
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Net  cash flow provided by (used in):    |       |                                  |       |   |   |
| Operating  activities                    |       | $                                     | 14.3       |   | $ | 29.4 |   |
| Investing  activities:                   |       |                                  |       |   |   |
| Capital  expenditures                    |       | (2.3                                  | )          | (2.8 | ) |
| Net  proceeds from sale of the Woodlands |       | 78.0                                  |       | — |   |
| Increase  in restricted cash             |       | (9.5                                  | )          | — |   |
| Other  investing activities              |       | 1.0                                   |       | (0.2 | ) |
| Total                                    |       | 67.2                                  |       | (3.0 | ) |
| Financing  activities                    |       | (72.7                                 | )          | (23.6 | ) |
|                                          |            |                                       |            |  |  |  |  |

 

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***Operating Cash Flow Commentary:***

 

·                  Cashprovided by operating activities of $14.3 million for the three months ended March 31,2010 was $15.1 million less than cash provided by operating activities of $29.4million in the prior year period. Cash provided by operations in the prior yearreflected a $21.3 million decrease in our investment in working capital,including the receipt of a refund of U.S. income taxes of approximately $10.9million.  For the three months ended March 31,2010, our investment in working capital increased $2.3 million primarily due toan increase in accounts receivable reflecting improved sales. Excluding workingcapital changes, cash provided by operations for the current year increased$8.5 million from the prior year period primarily due to higher operating earningsin the current year.

 

·                  As of March 31,2010, we had more than $114 million of U.S. federal and $124 million of statenet operating losses that may be carried forward to offset future taxableincome through 2029.

 

·                  Forthe three months March 31, 2010, we made aggregate contributions todefined benefit pension trusts and paid of pension benefits for unfundeddefined benefit pension plans of approximately $4.5 million. We expect to makeaggregate contributions to defined benefit pension trusts and pay benefits forunfunded defined benefit pension plans of approximately $14 million (based onexchange rates at March 31, 2010) in calendar 2010.  This compared to payments in 2009 of $2.1million and $12.5 million for the first quarter and full year, respectively.

 

***Investing Commentary:***

 

·                  Forthe three months ended March 31, 2010, cash provided by investingactivities was $67.2 million, compared to cash used by operating activities of$3.0 million in the prior year period.  Cash provided by investingactivities for the three months ended March 31, 2010 includes net proceedsfrom the sale of the Woodlands of $78.0 million. As of March 31, 2010, approximately $9.5million of proceeds from the sale of the Woodlands was restricted under theterms of the Bank Credit Agreement. Such restricted cash may be used for anypurpose not specifically prohibited by the Bank Credit Agreement. We expectsuch restricted cash to be fully utilized during the second quarter of 2010.

 

·                  Capitalexpenditures for the three months ended March 31, 2010 were $2.3 millioncompared to spending of $2.8 million in the prior year.  We have aggregate planned capitalexpenditures for 2010 of approximately $15 million to $20 million. The level ofour capital expenditures for the next 12 months is not expected to have amaterial adverse effect on our financial condition, results of operations orliquidity.

 

***Financing Commentary:***

 

·                  Ourliquidity requirements are provided by cash generated from operations, short-and long-term borrowings and proceeds from asset sales. We used the proceeds of $78.0 millionfrom the sale of the Woodlands to repay in full $40 million of outstanding TermLoan borrowings and repay approximately $26 million in outstanding Revolverborrowings which reduced the balance of outstanding Revolver borrowings tozero.

 

·                  For thethree months ended March 31, 2010, cash and equivalents increased $8.8million to $14.4 million at March 31, 2010 from $5.6 million at December 31,2009.

 

·                  For thethree months ended March 31, 2010, debt decreased $72.5 million to $246.7million at March 31, 2010 from $319.2 million at December 31, 2009.

 

·                  Availabilityunder our revolving credit facility varies over time depending on the value ofour inventory, receivables and various capital assets. As of March 31,2010, we had no amounts outstanding under our Revolver, outstanding letters ofcredit and other items which reduce availability of $1.5 million and $90.3million of available credit. In addition, we have €7.7 million ($10.3 million,based on exchanges rates at March 31, 2010) of available credit under ourGerman Line of Credit.

 

·                  We paidaggregate cash dividends of $0.10 per share or approximately $1.4 million and$1.5 million for the three months ended March 31, 2010 and 2009,respectively.

 

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·                  We haverequired debt payments through March 31, 2011 of $11.6 million.  Suchpayments include required amortization payments on our German Loan Agreement ofapproximately $1.7 million and $9.9 million on our German Line of Credit whichwe expect to renew in November 2010.

 

Management believes that our ability to generate cash fromoperations and our borrowing capacity are adequate to fund working capital,capital spending and other cash needs for the next twelve months.

 

**Critical Accounting Policies and Use of Estimates**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of net sales and expenses during the reporting period. Webelieve that the estimates, assumptions and judgments described in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Critical Accounting Policies” of our most recent Annual Report on Form 10-Khave the greatest potential impact on our financial statements, so we considerthese to be our critical accounting policies. The critical accounting policiesused in the preparation of the consolidated financial statements are those thatare important both to the presentation of financial condition and results ofoperations and require significant judgments with regard to estimates used.These critical judgments relate to the timing of recognizing sales revenue, therecoverability of deferred income tax assets, pension benefits and future cashflows associated with impairment testing of long-lived assets. Actual resultscould differ from these estimates and changes in these estimates are recordedwhen known. We believe that the consistent application of these policiesenables us to provide readers of our financial statements with useful andreliable information about our operating results and financial condition. There have been no significant changes in these policies, or the estimates usedin the application of the policies, since December 31, 2009.

 

**Cautionary Note Regarding Forward-Looking Statements**

 

Certain statements in thisQuarterly Report on Form 10-Q may constitute “forward-looking” statementsas defined in Section 27A of the Securities Act of 1933 (the “SecuritiesAct”), Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), orin releases made by the SEC, all as may be amended from time to time.Statements contained in this quarterly report that are not historical facts maybe forward-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 obtainingthe benefits 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 identifyforward-looking statements as those that are not historical in nature,particularly those that use terminology such as “may,” “will,” “should,” “expect,”“anticipate,” “contemplate,” “estimate,” “believe,” “plan,” “project,” “predict,”“potential” or “continue,” or the negative of these, or similar terms. Inevaluating these forward-looking statements, you should consider the followingfactors, as well as others contained in our public filings from time to time,which may cause our actual results to differ materially from anyforward-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 toglobal economic 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;

 

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·                  capital and credit market volatility;

 

·                  fluctuations in global equity and fixed-incomemarkets;

 

·                  unanticipated expenditures related to the cost ofcompliance with environmental and other governmental regulations;

 

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

 

·                  the loss of current customers or the inability toobtain new customers;

 

·                  increases in the funding requirements for our pensionand postretirement liabilities;

 

·                  changes in asset valuations including write-downs ofassets including fixed assets, inventory, accounts receivable, deferred taxassets or other assets for impairment or other reasons;

 

·                  our existing and future indebtedness;

 

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

 

·                  other risks that are detailed from time to time inreports we file with the SEC.

 

Any subsequent written or oral forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by the cautionary statements set forth or referred to above, aswell as the risk factors contained in our most recent Annual Report on Form 10-K.Except as required by law, we disclaim any obligation to update such statementsor to publicly announce the result of any revisions to any of theforward-looking statements contained herein to reflect future events ordevelopments.

 

**Item 3.  Quantitative and QualitativeDisclosures About Market Risk**

 

There have been nomaterial changes to the disclosure on this matter made in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

**Item 4.  Controls and Procedures**

 

***Disclosure Controls and Procedures***

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports we file or submit under the Exchange Act, asamended, is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the SEC, and that suchinformation is accumulated and communicated to our management in a timelymanner.

 

As of March 31,2010, an evaluation was performed under the supervision and with theparticipation of our management, including the Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures. Based on that evaluation, ourmanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that our disclosure controls and procedures were effective as of March 31,2010.

 

***Internal Controls over Financial Reporting***

 

There have been nochanges in our internal control over financial reporting (as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f))  during the three months ended March 31,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

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

 

**Item 1A.  Risk Factors**

 

In additionto the other information set forth in this report, you should carefullyconsider the factors discussed in Part I, “Item 1A. Risk Factors” in ourmost recent Annual Report on Form 10-K, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing our Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

**Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

***Purchases of Equity Securities:***

 

Thefollowing table contains information about our purchases of our equitysecurities for the three months ended March 31, 2010.

 
| **Period**                                           | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under  Publicly Announced  Plans or Programs** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| January 1,  2010 — January 31, 2010   |       | 14,898                                |       | $                                 | 13.92      |                                                                                    | —     |                                                                                                  | —     |   |
| February 1,  2010 — February 28, 2010 |       | —                                |       | —                            |       | —                                                                                  |       | —                                                                                                |       |
| March 1,  2010 — March 31, 2010       |       | —                                |       | —                            |       | —                                                                                  |       | —                                                                                                |       |
|                                                      |            |                                       |            |                                   |            |                                                                                         |            |                                                                                                       |            |  |

 

Transactionsrepresent the purchase of common shares from employees to satisfy taxwithholding requirements upon the vesting of stock-based awards. None of thesetransactions were made in the open market. The average price paid is based uponthe closing sales price on the New York Stock Exchange on the date of thetransaction.

 

**Item 6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                             |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                    |
| 10.1                |       | Timberland Purchase and Sale  Agreement dated as of February 26, 2010 by and between Neenah Paper  Company of Canada and Northern Timber Nova Scotia Corporation (filed herewith). |
|                |       |                                                                                                                                                                                    |
| 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 tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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)                              |

 

 

May 10,2010

 

F-28

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