Table ofContents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND 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  June 30, 2010** |
|                                                   |       |                                                                                                    |
| **OR**                                                 |
|                                                   |       |                                                                                                    |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom          to         **

 

**CommissionFile Number: 001-32240**

 

**NEENAH PAPER, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**(678)566-6500**

(Registrant’s telephonenumber, including area code)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). YES oNO o

 

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

 

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

 

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

 

As of July 30, 2010, there wereapproximately 14,760,000 shares of the Company’s common stock outstanding.

 

 

 

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Table ofContents

 

**TABLE OFCONTENTS**

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

 

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Tableof 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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net sales**                                                             |       | $                                    | 168.6      |                               | $          | 135.2 |   | $ | 335.9 |   | $ | 269.3 |   |
| Cost  of products sold                                                    |       | 136.4                                |       | 111.0                              |       | 271.4 |   | 224.6 |   |
| **Gross profit**                                                          |       | 32.2                                 |       | 24.2                               |       | 64.5 |   | 44.7 |   |
| Selling,  general and administrative expenses                             |       | 18.7                                 |       | 16.6                               |       | 35.0 |   | 32.9 |   |
| Restructuring  costs (Note 4)                                             |       | —                               |       | 18.0                               |       | — |   | 18.0 |   |
| Other  (income) expense - net                                             |       | (0.2                                 | )          | 0.1                                |       | (0.6 | ) | (0.6 | ) |
| **Operating income (loss)**                                               |       | 13.7                                 |       | (10.5                              | )          | 30.1 |   | (5.6 | ) |
| Interest  expense - net                                                   |       | 5.0                                  |       | 5.3                                |       | 10.7 |   | 11.0 |   |
| **Income (loss) from continuing operations before income  taxes**         |       | 8.7                                  |       | (15.8                              | )          | 19.4 |   | (16.6 | ) |
| Provision  (benefit) for income taxes                                     |       | 2.4                                  |       | (7.2                               | )          | 5.8 |   | (7.3 | ) |
| **Income (loss) from continuing operations**                              |       | 6.3                                  |       | (8.6                               | )          | 13.6 |   | (9.3 | ) |
| Income  (loss) from discontinued operations, net of income taxes (Note 5) |       | —                               |       | (0.1                               | )          | 134.6 |   | — |   |
| **Net income (loss)**                                                     |       | $                                    | 6.3        |                               | $          | (8.7 | ) | $ | 148.2 |   | $ | (9.3 | ) |
|                                                                      |       |                                 |       |                               |       |   |   |   |   |
| **Earnings (Loss) Per Common Share**                                      |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                     |       |                                 |       |                               |       |   |   |   |   |
| Continuing  operations                                                    |       | $                                    | 0.43       |                               | $          | (0.58 | ) | $ | 0.92 |   | $ | (0.63 | ) |
| Discontinued  operations                                                  |       | —                               |       | (0.01                              | )          | 9.11 |   | — |   |
|                                                                      |       | $                                    |  0.43 |                               | $          | (0.59 | ) | $ | 10.03 |   | $ | (0.63 | ) |
| Diluted                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Continuing  operations                                                    |       | $                                    | 0.41       |                               | $          | (0.58 | ) | $ | 0.88 |   | $ | (0.63 | ) |
| Discontinued  operations                                                  |       | —                               |       | (0.01                              | )          | 8.73 |   | — |   |
|                                                                      |       | $                                    |  0.41 |                               | $          | (0.59 | ) | $ | 9.61 |   | $ | (0.63 | ) |
|                                                                      |       |                                 |       |                               |       |   |   |   |   |
| **Weighted Average Common Shares Outstanding (in thousands)**             |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                     |       | 14,735                               |       | 14,652                             |       | 14,715 |   | 14,651 |   |
| Diluted                                                                   |       | 15,527                               |       | 14,652                             |       | 15,367 |   | 14,651 |   |
| **Cash Dividends Declared Per Share of Common Stock**                     |       | $                                    | 0.10       |                               | $          | 0.10 |   | $ | 0.20 |   | $ | 0.20 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inmillions)**

**(Unaudited)**

 

 
| ** **                                                              | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **ASSETS**                                                              |       |              |       |                  |       |
| **Current  Assets**                                                     |       |              |       |                  |       |
| Cash and cash  equivalents                                              |       | $                 | 32.1       |                  | $          | 5.6 |   |
| Accounts  receivable (less allowances of $3.2 million and $1.9 million) |       | 80.0              |       | 67.7                  |       |
| Inventories                                                             |       | 65.7              |       | 70.7                  |       |
| Income taxes  receivable                                                |       | 0.2               |       | 0.8                   |       |
| Deferred income  taxes                                                  |       | 13.2              |       | 61.7                  |       |
| Prepaid and  other current assets                                       |       | 11.3              |       | 13.7                  |       |
| Assets held for  sale (Note 6)                                          |       | 6.2               |       | 10.0                  |       |
| Total Current  Assets                                                   |       | 208.7             |       | 230.2                 |       |
| **Property,  Plant and Equipment, at cost**                             |       | 541.3             |       | 569.6                 |       |
| Less accumulated  depreciation                                          |       | 291.0             |       | 285.2                 |       |
| Property, plant  and equipment—net                                 |       | 250.3             |       | 284.4                 |       |
| **Deferred  Income Taxes**                                              |       | 53.9              |       | 37.4                  |       |
| **Goodwill**                                                            |       | 38.2              |       | 44.9                  |       |
| **Intangible  Assets—net**                                         |       | 23.1              |       | 27.5                  |       |
| **Other  Assets**                                                       |       | 10.5              |       | 13.1                  |       |
| **TOTAL  ASSETS**                                                       |       | $                 | 584.7      |                  | $          | 637.5 |   |
|                                                                    |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**                               |       |              |       |                  |       |
| **Current  Liabilities**                                                |       |              |       |                  |       |
| Debt payable  within one year                                           |       | $                 | 9.5        |                  | $          | 55.6 |   |
| Accounts payable                                                        |       | 35.2              |       | 30.0                  |       |
| Accrued salaries  and employee benefits                                 |       | 20.5              |       | 18.2                  |       |
| Accrued expenses                                                        |       | 29.9              |       | 30.4                  |       |
| Total Current  Liabilities                                              |       | 95.1              |       | 134.2                 |       |
| **Long-term  Debt**                                                     |       | 233.5             |       | 263.6                 |       |
| **Deferred  Income Taxes**                                              |       | 19.6              |       | 23.7                  |       |
| **Noncurrent  Employee Benefits**                                       |       | 96.8              |       | 105.0                 |       |
| **Other  Noncurrent Obligations**                                       |       | 2.9               |       | 3.3                   |       |
| **TOTAL  LIABILITIES**                                                  |       | 447.9             |       | 529.8                 |       |
| **Commitments  and Contingencies (Note 11)**                            |       |              |       |                  |       |
| **TOTAL  STOCKHOLDERS' EQUITY**                                         |       | 136.8             |       | 107.7                 |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY**                         |       | $                 | 584.7      |                  | $          | 637.5 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**NEENAHPAPER, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inmillions)**

**(Unaudited)**

 

 
| ** **                                                                                                    | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| **OPERATING ACTIVITIES**                                                                                      |       |                                |       |   |   |
| Net  income (loss)                                                                                            |       | $                                   | 148.2      |   | $ | (9.3 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:                     |       |                                |       |   |   |
| Depreciation  and amortization                                                                                |       | 15.5                                |       | 16.8 |   |
| Stock-based  compensation                                                                                     |       | 2.5                                 |       | 1.8 |   |
| Deferred  income tax provision (benefit)                                                                      |       | 31.8                                |       | (8.0 | ) |
| Ripon  Mill non-cash charges                                                                                  |       | —                              |       | 6.7 |   |
| Gain  on sale of the Woodlands (Note 5)                                                                       |       | (74.1                               | )          | — |   |
| Reclassification  of cumulative translation adjustments related to investments in Canada (Note  3 and Note 5) |       | (87.9                               | )          | — |   |
| (Gain)  loss on asset dispositions                                                                            |       | 0.1                                 |       | (0.1 | ) |
| Decrease  (increase) in working capital                                                                       |       | (2.8                                | )          | 23.5 |   |
| Pension  and other postretirement benefits                                                                    |       | (4.1                                | )          | 4.5 |   |
| Other                                                                                                         |       | (0.5                                | )          | (0.7 | ) |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                                                 |       | 28.7                                |       | 35.2 |   |
| **INVESTING ACTIVITIES**                                                                                      |       |                                |       |   |   |
| Capital  expenditures                                                                                         |       | (4.7                                | )          | (4.2 | ) |
| Net  proceeds from sale of the Woodlands                                                                      |       | 78.0                                |       | — |   |
| Other                                                                                                         |       | 0.5                                 |       | (0.3 | ) |
| **NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**                                                       |       | 73.8                                |       | (4.5 | ) |
| **FINANCING ACTIVITIES**                                                                                      |       |                                |       |   |   |
| Proceeds  from issuance of long-term debt                                                                     |       | —                              |       | 5.5 |   |
| Repayments  of long-term debt                                                                                 |       | (68.6                               | )          | (25.6 | ) |
| Short-term  borrowings                                                                                        |       | 4.7                                 |       | 6.7 |   |
| Repayments  of short-term debt                                                                                |       | (9.3                                | )          | (12.3 | ) |
| Proceeds  from exercise of stock options                                                                      |       | 0.3                                 |       | — |   |
| Cash  dividends paid                                                                                          |       | (2.9                                | )          | (2.9 | ) |
| Other                                                                                                         |       | (0.2                                | )          | — |   |
| **NET CASH USED IN FINANCING ACTIVITIES**                                                                     |       | (76.0                               | )          | (28.6 | ) |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                                                 |       | 26.5                                |       | 2.1 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                                              |       | 5.6                                 |       | 3.3 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                                                  |       | $                                   | 32.1       |   | $ | 5.4 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:**                                                         |       |                                |       |   |   |
| Cash  paid during period for interest, net of interest expense capitalized                                    |       | $                                   | 9.8        |   | $ | 10.3 |   |
| Cash  received during period for income taxes                                                                 |       | $                                   | (0.1       | ) | $ | (7.9 | ) |
| Non-cash  investing activities:                                                                               |       |                                |       |   |   |
| Liability  for equipment acquired                                                                             |       | $                                   | 0.8        |   | $ | 0.4 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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

 

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

 

***Background***

 

Neenah Paper, Inc. (“Neenah” orthe “Company”), is a Delaware corporation incorporated in April 2004. TheCompany has two primary operations: its fine paper business and its technicalproducts business.

 

The fine paper business is a leadingproducer of premium writing, text, cover and specialty papers used in corporateidentity packages, corporate annual reports, invitations, personal stationeryand high-end packaging for point of sale advertising. The technical productsbusiness is a leading international producer of transportation and other filtermedia, durable, saturated and coated substrates for a variety of end uses and nonwovenwall coverings.

 

In March 2010, the Company’swholly owned subsidiary, Neenah Paper Company of Canada (“Neenah Canada”) soldapproximately 475,000 acres of woodland assets in Nova Scotia (the “Woodlands”)to Northern Timber Nova Scotia Corporation, an affiliate of Northern Pulp NovaScotia Corporation (collectively, “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 Accounting Standards Codification (“ASC”)Topic 830, *Foreign Currency Matters*(“ASC Topic 830”), $87.9 million of cumulative currency translation adjustmentsattributable to the Company’s Canadian subsidiaries have been reclassified intoearnings and recognized as part of the gain on sale of the Woodlands. Thetransaction did not generate a cash tax liability because the tax basis for theWoodlands was approximately equal to the sale price. See Note 5, “DiscontinuedOperations.”

 

For the three and six months ended June 30,2010, the results of operations, the gain on sale of the Woodlands ($74.1million) and the reclassification into earnings of cumulative currencytranslation adjustments attributable to the Company’s Canadian subsidiaries($87.9 million) are reported as discontinued operations in the condensedconsolidated statements of operations. The results of operations ofthe Woodlands are reported as discontinued operations for the three and sixmonths ended June 30, 2009. See Note 5, “Discontinued Operations.”

 

***Basis of Consolidation and Presentation***

 

These statements have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission (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 fairpresentation of the Company’s results of operations, financial position andcash flows. In the opinion of management, the condensed consolidated financialstatements reflect all adjustments, consisting only of normal recurringadjustments, necessary to present fairly the results of operations, financialposition and cash flows for the interim periods presented herein.  Thepreparation of condensed consolidated financial statements in conformity withGAAP requires management to make extensive use of estimates and assumptionsthat affect the reported amounts and disclosures.  Actual results may varyfrom these estimates.

 

These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s most recent AnnualReport on Form 10-K.  The results of operations for any interimperiod are not necessarily indicative of the results of operations to beexpected for the full year.

 

The condensed consolidated financialstatements of Neenah and its subsidiaries included herein are unaudited, exceptfor the December 31, 2009 condensed consolidated balance sheet, which wasderived from audited financial statements.  The condensed consolidatedfinancial statements include the financial statements of the Company and itswholly owned and majority owned subsidiaries. All significant intercompanybalances and transactions have been eliminated from the consolidated financialstatements.

 

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

 

The Company computes basic earnings(loss) per share (“EPS”) in accordance with ASC Topic 260, *Earnings Per Share* (“ASC Topic 260”).  In accordance with ASC Topic 260, share-basedawards with non-forfeitable dividends are classified as participatingsecurities. In calculating basic earnings per share, this method requires netincome to be reduced by the amount of dividends declared in the current periodfor each participating security and by the contractual amount of dividends orother participation payments that are paid or accumulated for the currentperiod. Undistributed earnings for the period are allocated to participatingsecurities based on the contractual participation rights of the security toshare in those current earnings assuming all earnings for the period are distributed.Holders of restricted stock, restricted stock units (“RSUs”) and targetperformance unit awards (“Performance Units”) have contractual participationrights that are equivalent to those of common stockholders. Therefore, theCompany allocates undistributed earnings to restricted stock, RSUs and commonstockholders based on their respective average ownership percentages for theperiod.

 

ASC Topic 260 also requirescompanies with participating securities to calculate diluted earnings per shareusing the “Two-Class” method. The “Two-Class” method requires the denominatorto include the weighted average participating securities along with theadditional 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 was calculated to giveeffect to all potentially dilutive common shares using the “Treasury Stock”method. Outstanding stock options, stock appreciation rights (“SARS”), restrictedstock units (“RSUs”) and target performance unit awards (“Performance Units”)represent the only potentially dilutive security effects on the Company’sweighted-average shares.  For the three and six months ended June 30,2010 approximately 1,510,000 and 1,565,000 potentially dilutive stock-basedcompensation awards, respectively, were excluded from the computation ofdilutive common shares because the exercise price of such awards exceeded theaverage market price of the Company’s common stock for the period the awardswere outstanding.  For the three and six months ended June 30, 2009approximately 1,620,000 and 1,790,000 such potentially dilutive stock-based compensation awards, respectively, wereexcluded from the computation of dilutive common shares.  In addition, asa result of the loss from continuing operations for the three and six monthsended June 30, 2009, approximately 70,000 and 60,000 incremental shares,respectively, resulting from the assumed vesting of potentially dilutivesecurities were excluded from the diluted earnings per share calculation, asthe effect would have been anti-dilutive.

 

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The following table presents thecomputation of basic and diluted EPS (dollars in millions except per shareamounts, shares in thousands):

 
| ** **                                                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                              | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income  (loss) from continuing operations                                               |       | $                                    | 6.3        |                               | $          | (8.6 | ) | $ | 13.6 |   | $ | (9.3 | ) |
| Less:  Distributed and undistributed amounts allocated to participating securities  (a) |       | —                               |       | —                             |       | 0.1 |   | — |   |
| Income  (loss) from continuing operations available to common stockholders              |       | 6.3                                  |       | (8.6                               | )          | 13.5 |   | (9.3 | ) |
| Income  (loss) from discontinued operations, net of income taxes                        |       | —                               |       | (0.1                               | )          | 134.6 |   | — |   |
| Less:  Undistributed amounts allocated to participating securities (a)                  |       | —                               |       | —                             |       | 0.5 |   | — |   |
| Net  income (loss) available to common stockholders                                     |       | $                                    | 6.3        |                               | $          | (8.7 | ) | $ | 147.6 |   | $ | (9.3 | ) |
|                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Weighted-average  basic shares outstanding                                              |       | 14,735                               |       | 14,652                             |       | 14,715 |   | 14,651 |   |
| Add:  Assumed incremental shares under stock compensation plans                         |       | 792                                  |       | —                             |       | 652 |   | — |   |
| Weighted-average  diluted shares                                                        |       | 15,527                               |       | 14,652                             |       | 15,367 |   | 14,651 |   |
|                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| **Earnings (Loss) Per Common Share**                                                    |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Continuing  operations                                                                  |       | $                                    | 0.43       |                               | $          | (0.58 | ) | $ | 0.92 |   | $ | (0.63 | ) |
| Discontinued  operations                                                                |       | —                               |       | (0.01                              | )          | 9.11 |   | — |   |
|                                                                                    |       | $                                    |  0.43 |                               | $          | (0.59 | ) | $ | 10.03 |   | $ | (0.63 | ) |
| Diluted                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Continuing  operations                                                                  |       | $                                    | 0.41       |                               | $          | (0.58 | ) | $ | 0.88 |   | $ | (0.63 | ) |
| Discontinued  operations                                                                |       | —                               |       | (0.01                              | )          | 8.73 |   | — |   |
|                                                                                    |       | $                                    |  0.41 |                               | $          | (0.59 | ) | $ | 9.61 |   | $ | (0.63 | ) |

 

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(a)   In accordance with ASC Topic260, for the three and six months ended June 30, 2009 undistributed losseshave been entirely allocated to common stockholders because the holders ofparticipating securities are not contractually obligated to share in the lossesof the Company.

 

**Note 2. Accounting Standard Changes**

 

As of June 30, 2010, noamendments to the ASC had been issued that will have or are reasonably likelyto have a material effect on the Company’s financial position, results ofoperations or cash flows.

 

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

 

Comprehensive income (loss)includes, in addition to net income (loss), gains and losses recorded directly intostockholders’ equity on the condensed consolidated balance sheet. These gainsand losses are referred to as other comprehensive income items. Accumulatedother comprehensive income (loss) consists of foreign currency translationgains and (losses) and adjustments related to pensions and other postretirementbenefits. The Company does not provide income taxes for foreign currencytranslation adjustments related to indefinite investments in foreignsubsidiaries.  The sale of the Woodlands resulted in the substantiallycomplete liquidation of the Company’s investment in Neenah Canada.  Inaccordance with ASC Topic 830, for the six months ended June 30, 2010,$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. There were no taxconsequences related to the repatriation of funds from the sale of theWoodlands.  As of June 30, 2010 and December 31, 2009, accumulatedother comprehensive income (loss) was $(27.3) million and $91.5 million,respectively.

 

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

 
| ** **                                                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                                                       |       | $                                    | 6.3        |                               | $          | (8.7 | ) | $ | 148.2 |   | $ | (9.3 | ) |
| Other  comprehensive income (loss):                                                      |       |                                 |       |                               |       |   |   |   |   |
| Unrealized  foreign currency translation gain (loss)                                     |       | (17.3                                | )          | 11.0                               |       | (29.9 | ) | 0.5 |   |
| Reclassification  of cumulative translation adjustments related to investments in Canada |       | —                               |       | —                             |       | (87.9 | ) | — |   |
| Adjustments  to pension and other post-employment benefit liabilities                    |       | (1.3                                 | )          | 0.9                                |       | (1.0 | ) | 1.3 |   |
| Total  other comprehensive income (loss)                                                 |       | (18.6                                | )          | 11.9                               |       | (118.8 | ) | 1.8 |   |
| Comprehensive  income (loss)                                                             |       | $                                    | (12.3      | )                                  | $          | 3.2 |   | $ | 29.4 |   | $ | (7.5 | ) |

 

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

 

In May 2009, the Companypermanently closed its fine paper mill located in Ripon, California (the “RiponMill”).  For the three and six months ended June 30, 2009, theclosure resulted in a pre-tax charge of $18.0 million.  The charge wascomprised of approximately $6.7 million in non-cash charges primarily for lossesrelated to the carrying value of property, plant and equipment, a curtailmentloss of $0.8 million related to postretirement benefit plans in which employeesof the Ripon Mill participated and cash payments for contract terminations andseverance and other employee costs of approximately $10.5 million.

 

As of June 30, 2010, theremaining long-lived assets of the Ripon Mill, primarily composed of land andbuildings, are classified as Assets held for sale on the condensed consolidatedbalance sheet.  The Companybelieves that the sale of such assets will be completed within 12 months. Assets held for sale are valued at the lower of cost or fairvalue less cost to sell. The assets of the Ripon Mill are reported attheir aggregate historical cost of $6.2 million.

 

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

 

| ** **                                                    | ** ** | **Severance  benefits** | ** ** | **Contract  termination and  other costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|-----------|------------|
| Amounts  accrued during the year ended December 31, 2009 |       | $                       | 1.8        |                                       | $          | 8.7       |       | $ | 10.5 |   |
| Payments  for the year ended December 31, 2009           |       | (1.7                    | )          | (4.8                                       | )          | (6.5      | )          |
| Accrued  exit costs at December 31, 2009                 |       | 0.1                     |       | 3.9                                        |       | 4.0       |       |
| Payments  for the six months ended June 30, 2010         |       | —                  |       | (3.3                                       | )          | (3.3      | )          |
| Accrued  exit costs at June 30, 2010                     |       | $                       | 0.1        |                                       | $          | 0.6       |       | $ | 0.7 |   |

 

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**Note 5. Discontinued Operations**

 

In March 2010, Neenah Canadasold 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 Topic 830, $87.9 million of cumulativecurrency translation adjustments attributable to the Company’s Canadiansubsidiaries have been reclassified into earnings and recognized as part of thegain on sale of the Woodlands. The sale of the Woodlands represented thecessation of the Company’s operating activities in Canada; however, the Companywill have certain continuing post-employment benefit obligations related to itsCanadian operations.  The transaction did not generate a cash tax liabilitybecause the tax basis for the Woodlands was approximately equal to the saleprice.

 

Net proceeds from the sale were usedto repay in full $40 million of outstanding term loan borrowings (the “TermLoan”) and repay approximately $26 million in outstanding revolving loans whichreduced the balance of such outstanding loans under the Company’s bank creditagreement (the “Bank Credit Agreement”) to zero. In addition, the Company madeapproximately $3.1 million in contract termination payments related to theclosure of the Ripon Mill that became due and payable upon the sale of theWoodlands.

 

In June 2008, Neenah Canadasold the Pictou Mill to Northern Pulp. Pursuant to the terms of thetransaction, Northern Pulp assumed all of the assets and liabilities associatedwith the Pictou Mill, as well as existing customer contracts, supplyagreements, labor agreements and pension obligations.

 

In conjunction with the sale of thePictou Mill, the Company entered into a stumpage agreement (the “Stumpage Agreement”)which allowed Northern Pulp to harvest softwood timber annually from theWoodlands. The Stumpage Agreement was terminated in March 2010 inconjunction with the sale of the Woodlands.  For the six months ended June 30,2010, the Company recognized revenue of approximately $1.4 million, related totimber sales pursuant to the Stumpage Agreement.  For the three andsix months ended June 30, 2009, the Company recognized revenue ofapproximately $0.5 million and $1.3 million, respectively, related to the Stumpage Agreement.

 

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

 
| ** **                                                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  sales (a)                                                                           |       | $                                    | —     |                               | $          | 0.5 |   | $ | 1.4 |   | $ | 1.3 |   |
| Discontinued  operations:                                                                |       |                                 |       |                               |       |   |   |   |   |
| Income  (loss) from operations before income taxes                                       |       | $                                    | (0.3       | )                                  | $          | 0.6 |   | $ | 1.1 |   | $ | 0.8 |   |
|                                                                                     |       |                                 |       |                               |       |   |   |   |   |
| Gain  on disposal of the Woodlands                                                       |       | —                               |       | —                             |       | 74.1 |   | — |   |
| Loss  on disposal of the Pictou Mill                                                     |       | —                               |       | (0.3                               | )          | — |   | (0.3 | ) |
| Reclassification  of cumulative translation adjustments related to investments in Canada |       | —                               |       | —                             |       | 87.9 |   | — |   |
| Gain  (loss) on disposal                                                                 |       | —                               |       | (0.3                               | )          | 162.0 |   | (0.3 | ) |
| Income  (loss) before income taxes                                                       |       | (0.3                                 | )          | 0.3                                |       | 163.1 |   | 0.5 |   |
| (Provision)  benefit for income taxes (b)                                                |       | 0.3                                  |       | (0.4                               | )          | (28.5 | ) | (0.5 | ) |
| Income  (loss) from discontinued operations, net of income taxes                         |       | $                                    | —     |                               | $          | (0.1 | ) | $ | 134.6 |   | $ | — |   |

 

----

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

(b)         Thereclassification of cumulative foreign currency translation gains had no taxconsequences.

 

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Table of Contents

 

**Note 6. Supplemental Balance Sheet Data**

 

The following table presentsinventories by major class:

 
| ** **                            | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Inventories  by major class:          | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Raw  materials                        |       | $                      | 16.7       |                       | $          | 16.6 |   |
| Work  in progress                     |       | 11.9                   |       | 11.7                       |       |
| Finished  goods                       |       | 45.9                   |       | 49.4                       |       |
| Supplies  and other                   |       | 1.7                    |       | 1.7                        |       |
|                                  |       | 76.2                   |       | 79.4                       |       |
| Adjust  FIFO inventories to LIFO cost |       | (10.5                  | )          | (8.7                       | )          |
| Total                                 |       | $                      | 65.7       |                       | $          | 70.7 |   |

 

The FIFO values of total inventoriesvalued on the LIFO method were $58.3 million and $58.2 million at June 30,2010 and December 31, 2009, respectively.

 

Thefollowing table presents the components of Assets Held for Sale on thecondensed consolidated balance sheet.

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

 

**Note 7. Debt**

 

Long-termdebt consisted of the following:

 
| ** **                                                                                                             | ** ** | **June 30, 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 |       | 9.9                    |       | 12.5                       |       |
| Neenah  Germany revolving line of credit (variable rates) due November 2010                                       |       | 8.0                    |       | 12.9                       |       |
| Other  debt (2.9% fixed rate)                                                                                          |       | 0.1                    |       | 0.9                        |       |
| Total  debt                                                                                                            |       | 243.0                  |       | 319.2                      |       |
| Less:  Debt payable within one year                                                                                    |       | 9.5                    |       | 55.6                       |       |
| Long-term  debt                                                                                                        |       | $                      | 233.5      |                       | $          | 263.6 |   |

 

***Senior Unsecured Notes***

 

In November 2004, theCompany completed an underwritten offering of ten-year senior unsecured notes(the “Senior Notes”) at an aggregate face amount of $225 million. TheSenior Notes bear interest at a rate of 7.375 percent, payable May 15 andNovember 15 of each year and mature on November 15, 2014. TheSenior Notes are fully and unconditionally guaranteed by all of the Company’ssubsidiaries, with the exception of Neenah Germany.

 

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

 

In November, 2009, the Companyamended and restated its Bank Credit Agreement.  As amended, the BankCredit Agreement consisted of a $100 million senior, secured revolving creditfacility (the “Revolver”) and (ii) a $40 million senior secured TermLoan. The Bank Credit Agreement terminates on November 30, 2013.  InMarch 2010, the Company used proceeds from the sale of the Woodlands torepay approximately $26 million in outstanding Revolver borrowings whichreduced the balance of such outstanding loans under the Bank Credit Agreementto zero. During the three months ended June 30, 2010, the Company usedapproximately $9.5 million of restricted proceeds from the sale of theWoodlands as permitted by the Bank Credit Agreement.  For the six monthsended June 30, 2010, the Company recognized within interest expense approximately$0.3 million of costs to write-off deferred financing costs associated with theTerm Loan.

 

As of June 30, 2010, theCompany had no outstanding Revolver borrowings.  Borrowing availabilityunder the Revolver varies over time depending on the value of the Company’sinventory, receivables and various capital assets.  As of June 30, 2010, borrowingavailability under the Revolver included $9.1 million for the collateral valueof the Ripon Mill. Borrowing availability under the Revolver is reduced by outstandingletters of credit and certain other items.  As of June 30, 2010, theCompany had approximately $1.8 million of letters of credit and other itemsoutstanding which reduced availability and $92.8 million of borrowingavailability under the Revolver.  As ofDecember 31, 2009, the Company had $27.9 million in outstanding Revolverborrowings at a weighted-average interest rate of 4.6 percent per annum.

 

In March 2010, the Company usedproceeds from the sale of the Woodlands to extinguish the Term Loan by repayingin full $40 million of outstanding Term Loan borrowings. As ofDecember 31, 2009, the Company had $40.0 million in outstanding Term Loanborrowings at a weighted-average interest rate of 4.5 percent per annum.

 

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

 

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

 

***OtherDebt***

 

In December 2006, ourwholly-owned subsidiary, Neenah Gessner GmbH (“Neenah Germany”) entered into a 10-year agreement withHypoVereinsbank and IKB Deutsche Industriebank AG to provide €10.0 million ofproject financing for the construction of a saturator (the “German LoanAgreement”). As of June 30, 2010, €8.1 million ($9.9 million, based onexchange rates at June 30, 2010) was outstanding under the German LoanAgreement.

 

Neenah Germany has a revolving lineof credit (the “German Line of Credit”) with HypoVereinsbank that provides forborrowings of up to €15 million for general corporate purposes. The German Lineof Credit is secured by the domestic accounts receivable of Neenah Germany. Asof June 30, 2010 and December 31, 2009, the weighted-average interestrate on outstanding German Line of Credit borrowings was 4.0 percent per annumand 4.1 percent per annum, respectively.  As of June 30, 2010, €6.6million ($8.0 million, based on exchange rates at June 30, 2010) wasoutstanding under the German Line of Credit and €8.4 million ($10.3 million,based on exchange rates at June 30, 2010) of credit was available. In November 2009, Neenah Germany extended the termination date for theGerman Line of Credit to November 30, 2010.

 

Neenah Germany’s ability to paydividends or transfer funds to the Company is limited under the terms of theGerman Line of Credit, to not exceed certain limits defined in theagreement without lender approval or repayment of the amount outstanding underthe line, which was €6.6 million ($8.0 million, based on exchange rates at June 30,2010) at June 30, 2010.  In addition, the terms of the German Line ofCredit require Neenah Germany to maintain a ratio of stockholder’s equity tototal assets equal to or greater than 45 percent.  Neenah Germany was incompliance with all provisions of the German Line of Credit as of June 30,2010.

 

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**Note8.  Pension and Other Postretirement Benefits**

 

***Pension Plans***

 

Substantially all active employeesof the Company’s U.S. paper operations participate in defined benefit pensionplans and/or defined contribution retirement plans. Neenah Germany has definedbenefit plans designed to provide a monthly pension upon retirement forsubstantially all its employees in Germany.  In addition, the Companymaintains a non-qualified supplemental defined benefit pension plan (the “SERP”).The Company provides benefits under the SERP to the extent necessary to fulfillthe intent of its defined benefit retirement plans without regard to thelimitations set by the Internal Revenue Code on qualified defined benefitplans.

 

In April 2010, the Company executeda reduction in force (“RIF”) plan at the Appleton, Wisconsin mill.  The RIF resulted in the elimination ofexpected years of future service for certain mill employees eligible toparticipate in the Company’s defined benefit pension plans and postretirementmedical plan.  In accordance with ASC Topic 715,*Compensation — Retirement Benefits*(ASC Topic 715), theCompany measured the assets and liabilities of the affected postretirementplans as of April 30, 2010 and recognized a curtailment loss ofapproximately $35 thousand for the three and six months ended June 30,2010.

 

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

 

The following table presents thecomponents of net periodic benefit cost:

 

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

*** ***
| ** **                                                  | ** ** | **Pension Benefits**                 | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                                                  | ** ** | **2010**                             | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                                               |       | $                                    | 1.0        |                                             | $          | 1.1 |   | $ | 0.4 |   | $ | 0.4 |   |
| Interest  cost                                              |       | 3.5                                  |       | 3.6                                              |       | 0.5 |   | 0.6 |   |
| Expected  return on plan assets (a)                         |       | (3.4                                 | )          | (2.9                                             | )          | — |   | — |   |
| Recognized  net actuarial loss                              |       | 0.3                                  |       | 0.4                                              |       | — |   | 0.1 |   |
| Amortization  of prior service cost                         |       | 0.1                                  |       | 0.1                                              |       | 0.1 |   | 0.1 |   |
| Amount  of curtailment loss recognized                      |       | —                               |       | 0.2                                              |       | — |   | 0.6 |   |
| Net  periodic benefit cost related to continuing operations |       | $                                    | 1.5        |                                             | $          | 2.5 |   | $ | 1.0 |   | $ | 1.8 |   |

 

 
| ** **                             | ** ** | **Pension Benefits**               | ** ** | **Postretirement Benefits  Other than Pensions** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                             | ** ** | **2010**                           | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                          |       | $                                  | 2.1        |                                             | $          | 2.3 |   | $ | 0.8 |   | $ | 0.9 |   |
| Interest  cost                         |       | 7.0                                |       | 7.1                                              |       | 1.1 |   | 1.2 |   |
| Expected  return on plan assets (a)    |       | (6.8                               | )          | (5.7                                             | )          | — |   | — |   |
| Recognized  net actuarial loss         |       | 0.6                                |       | 0.8                                              |       | — |   | 0.1 |   |
| Amortization  of prior service cost    |       | 0.1                                |       | 0.1                                              |       | 0.2 |   | 0.2 |   |
| Amount  of curtailment loss recognized |       | —                             |       | 0.2                                              |       | — |   | 0.6 |   |
| Net  periodic benefit cost             |       | $                                  | 3.0        |                                             | $          | 4.8 |   | $ | 2.1 |   | $ | 3.0 |   |

 

----

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

 

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The Company expects to makeaggregate contributions to qualified and non-qualified defined benefit pensiontrusts and pay benefits for unfunded defined benefit pension plans ofapproximately $17 million (based on exchange rates at June 30, 2010) incalendar 2010.  For the six months June 30, 2010, the Company madeapproximately $7.9 million of such contributions/payments.

 

**Note 9.  Stock Compensation Plan**

 

The Company reserved 3,500,000shares of $0.01 par value common stock (“Common Stock”) for issuance under the2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”).  As of June 30,2010, approximately 1,790,000 shares of Common Stock were reserved for futureissuance under the Omnibus Plan. As of June 30, 2010, the number of sharesavailable for future issuance was not reduced by outstanding SARs because theclosing market price for the Company’s common stock was less than the exerciseprice of all outstanding SARs. The Company accounts for stock-basedcompensation pursuant to the provisions of ASC Topic 718, *Compensation—Stock Compensation*(“ASCTopic 718”).

 

***Valuation and Expense Information***

 

Substantiallyall stock-based compensation expense is recorded in selling, general andadministrative expenses on the condensed consolidated statements ofoperations.  The following table summarizes stock-based compensationexpense and related income tax benefits.

 
| ** **                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Stock-based  compensation expense                    |       | $                                    | 1.3        |                               | $          | 0.8 | ** ** | $ | 2.5 |   | $ | 1.8 |   |
| Income  tax benefit                                  |       | (0.5                                 | )          | (0.4                               | )          | (1.0 | ) | (0.7 | ) |
| Stock-based  compensation, net of income tax benefit |       | $                                    | 0.8        |                               | $          | 0.4 |   | $ | 1.5 |   | $ | 1.1 |   |

 

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

 
| ** **                                                    | ** ** | **Stock Options** | ** ** | **Restricted Stock** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| Unrecognized  compensation cost — December 31, 2009 |       | $                 | 1.4        |                 | $          | 1.4 |   |
| Add:  Grant date fair value current year grants (a)           |       | 1.1               | ** ** | 4.4                  | ** ** |
| Less:  Compensation expense recognized                        |       | 0.9               |       | 1.6                  |       |
| Unrecognized  compensation cost — June 30, 2010     |       | $                 | 1.6        |                 | $          | 4.2 |   |
| Expected  amortization period (in years)                      |       | 2.0               |       | 2.2                  |       |

 

----

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

 

***StockOptions***

 

Forthe six months ended June 30, 2010, the Company awarded nonqualified stockoptions to Long-Term Incentive Plan (the “LTIP”) participants to purchaseapproximately 201,550 shares of common stock (subject to forfeiture due totermination of employment and other conditions). In addition, the Companyawarded to non-employee members of the board of directors nonqualified stockoptions to purchase 5,640 shares of Common Stock.  For the six monthsended June 30, 2010, the weighted-average exercise price of suchnonqualified stock option awards was $13.68 per share. The weighted-averagegrant date fair value for stock options granted during the six months endedJune 30, 2010 was $5.72 per share and was estimated using theBlack-Scholes option valuation model with the following assumptions:

 
| ** **               | ** ** | **Six  Months Ended  June 30, 2010** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|
| Expected  life in years  |       | 5.9                                            |       |
| Risk  free interest rate |       | 2.9                                            | %          |
| Volatility               |       | 55.3                                           | %          |
| Dividend  yield          |       | 2.9                                            | %          |

 

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Tableof Contents

 

For the three and six months endedJune 30, 2010, the aggregate pre-tax intrinsic value of stock optionsexercised was approximately $0.4 million.  No stock options were exercisedduring the three and six months ended June 30, 2009. The aggregateintrinsic value of approximately 1,490,000 stock options that were exercisableat June 30, 2010 was $1.4 million. The aggregate intrinsic value ofapproximately 1,365,000 stock options that were exercisable atDecember 31, 2009 was $0.1 million.

 

As of June 30, 2010, theaggregate intrinsic value of 2,380,000 stock options and SARs that were vestedor expected to vest was $7.7 million.  The weighted-average grant datefair value of such stock options was $8.22 per share. As of December 31,2009, the weighted-average grant date fair value and aggregate intrinsic valueof 2,250,000 stock options that were vested or expected to vest was $8.41 pershare and $4.1 million, respectively.

 

The aggregate grant date fair valueof approximately 200,000 stock options and SARs that vested during the sixmonths ended June 30, 2010, was $0.9 million. As of June 30, 2010,certain participants met age and service requirements that allowed their stockoptions to qualify for accelerated vesting upon retirement. As of June 30,2010, LTIP participants held options to purchase 280,000 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$1.1 million. Stock options subject to accelerated vesting for expenserecognition become exercisable according to the contract terms of thestock-based awards.

 

As of June 30, 2010, theCompany has approximately 865,000 unvested stock options with aweighted-average grant date fair value of $4.22 per share. As ofDecember 31, 2009, approximately 905,000 unvested stock options wereoutstanding with a weighted-average grant date fair value of $3.85 per share.

 

***PerformanceUnits***

 

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

 

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

 

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

 
| ** **                         | ** ** | **Gross  Amount** | ** ** | **Cumulative  Impairment  Losses** | ** ** | **Net** | ** ** |
|------------------------------------|------------|-------------------|------------|------------------------------------|------------|---------|------------|
| Balance  at December 31, 2009 |       | $                 | 98.9       |                               | $          | (54.0   | )          | $ | 44.9 |   |
| Foreign  currency translation      |       | (14.7             | )          | 8.0                                |       | (6.7    | )          |
|                               |       |              |       |                               |       |    |       |
| Balance  at June 30, 2010     |       | $                 | 84.2       |                               | $          | (46.0   | )          | $ | 38.2 |   |

 

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

 
| ** **                        | ** ** | **June 30, 2010** | ** ** | **December 31, 2009**    | ** ** |
|-----------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **Gross  Amount**      | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizable  intangible assets    |       |                   |       |                          |       |   |   |   |   |
| Customer  based intangibles       |       | $                      | 13.3       |                          | $          | (3.4 | ) | $ | 15.5 |   | $ | (3.4 | ) |
| Trade  names and trademarks       |       | 5.6                    | ** ** | (1.8                          | )          | 6.6 |   | (1.9 | ) |
| Acquired  technology              |       | 1.0                    |       | (0.4                          | )          | 1.2 |   | (0.4 | ) |
| Total                             |       | 19.9                   |       | (5.6                          | )          | 23.3 |   | (5.7 | ) |
| Unamortizable  intangible assets: |       |                   |       |                          |       |   |   |   |   |
| Trade  names                      |       | 8.8                    |       | —                        |       | 9.9 |   | — |   |
| Total                             |       | $                      | 28.7       |                          | $          | (5.6 | ) | $ | 33.2 |   | $ | (5.7 | ) |

 

**Note 11. Contingencies and Legal Matters**

 

***Litigation***

 

The Company is involved in certainlegal actions and claims arising in the ordinary course of business. While theoutcome of these legal actions and claims cannot be predicted with certainty,it is the opinion of management that the outcome of any such claim which ispending or threatened, either individually or on a combined basis, will nothave a material adverse effect on the consolidated financial condition, resultsof operations or liquidity of the Company.

 

***Employeesand Labor Relations***

 

Hourly employees at the Whiting,Neenah, Munising and Appleton paper mills are represented by the UnitedSteelworkers Union (the “USW”). The collective bargaining agreement for theAppleton paper mill expired on May 31, 2010. The Company is currentlynegotiating a new labor agreement for the mill with the USW. In May 2010,the Company and the USW signed a new collective bargaining agreement for the Munisingpaper mill that is effective through July 14, 2013. The collectivebargaining agreements for the Whiting and Neenah paper mills expire on January 31,2013 and June 30, 2013, respectively. Separately, the Neenah, Whiting andMunising paper mills have bargained jointly with the union on pension matters.The agreement on pension matters will remain in effect through 2019.

 

***Indemnifications***

 

Pursuant to a DistributionAgreement, an Employee Matters Agreement and a Tax Sharing Agreement, theCompany has agreed to indemnify Kimberly-Clark Corporation (“Kimberly-Clark”)for certain liabilities or risks related to the spin-off of the Company fromKimberly-Clark in November 2004. Many of the potential indemnification liabilities under these agreementsare unknown, remote or highly contingent. Furthermore, even in the event thatan indemnification claim is asserted, liability for indemnification is subjectto determination under the terms of the applicable agreement. For thesereasons, the Company is unable to estimate the maximum potential amount of thepossible future liability under the indemnity provisions of these agreements.However, the Company accrues for any potentially indemnifiable liability or riskunder these agreements for which it believes a future payment is probable and arange of loss can be reasonably estimated. As of June 30, 2010, managementbelieves the Company’s liability under such indemnification obligations was notmaterial to the condensed consolidated financial statements.

 

**Note 12. Business Segment Information**

 

The Company reports its operationsin two segments: Fine Paper and Technical Products. The fine paper business isa producer of premium writing, text, cover and specialty papers. The technicalproducts business is an international producer of filtration media, durable,saturated and coated substrates for a variety of end uses; and nonwoven wallcoverings.  Each segment employs different technologies and marketing strategies. Disclosure of segment information is on the same basis that management usesinternally for evaluating segment performance and allocating resources. Transactions between segments are executed at market prices and suchtransactions are eliminated in consolidation. The costs of shared services, andother administrative functions managed on a common basis, are allocated to thesegments based on usage, where possible, or other factors based on the natureof the activity.  General corporate expenses that do not directly supportthe operations of the business segments are shown as Unallocated corporatecosts.

 

F-14

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Table of Contents

 

The following table summarizes thenet sales, operating income (loss) and total assets for each of the Company’sbusiness segments.

 
| ** **          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **          | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net sales**       |       |                                 |       |                               |       |   |   |   |   |
| Fine  Paper         |       | $                                    | 68.9       |                               | $          | 61.3 |   | $ | 138.5 |   | $ | 126.1 |   |
| Technical  Products |       | 99.7                                 |       | 73.9                               |       | 197.4 |   | 143.2 |   |
| Consolidated        |       | $                                    | 168.6      |                               | $          | 135.2 |   | $ | 335.9 |   | $ | 269.3 |   |

 
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Operating income (loss)**  |       |                                 |       |                               |       |   |   |   |   |
| Fine  Paper                  |       | $                                    | 9.2        |                               | $          | (10.0 | ) | $ | 18.7 |   | $ | (1.4 | ) |
| Technical  Products          |       | 8.5                                  |       | 3.3                                |       | 17.8 |   | 2.7 |   |
| Unallocated  corporate costs |       | (4.0                                 | )          | (3.8                               | )          | (6.4 | ) | (6.9 | ) |
| Consolidated                 |       | $                                    | 13.7       |                               | $          | (10.5 | ) | $ | 30.1 |   | $ | (5.6 | ) |

 
| ** **            | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------|------------|------------------------|------------|----------------------------|------------|
| **Total Assets**      |       |                   |       |                       |       |
| Fine  Paper           |       | $                      | 162.5      |                       | $          | 166.3 |   |
| Technical  Products   |       | 321.9                  |       | 353.4                      |       |
| Assets  held for sale |       | 6.2                    |       | 10.0                       |       |
| Corporate  and other  |       | 94.1                   |       | 107.8                      |       |
| Total                 |       | $                      | 584.7      |                       | $          | 637.5 |   |

 

**Note13.  Condensed Consolidating Financial Information**

 

NeenahPaper Company of Canada, Neenah Paper Michigan, Inc. and Neenah PaperSales, Inc. (the “Guarantor Subsidiaries”) guarantee the Company’s SeniorNotes. The Guarantor Subsidiaries are 100 percent owned by the Company and allguarantees are full and unconditional.  The following condensedconsolidating financial information is presented in lieu of consolidatedfinancial statements for the Guarantor Subsidiaries as of June 30, 2010and December 31, 2009 and for the three and six months ended June 30,2010 and 2009.  Certain deferred tax assets presented in the GuarantorSubsidiaries column as of December 31, 2009 were presented in the NeenahPaper, Inc. column as of June 30, 2010 as such assets will ultimatelybe realized by Neenah Paper, Inc. due to the substantially completeliquidation of Neenah Canada.

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe Three Months Ended June 30, 2010**

 
| ** **                                                        | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                     |       | $                            | 66.9       |                        | $          | 40.6                            |       | $                              | 61.1       |                      | $          | — |   | $ | 168.6 |   |
| Cost  of products sold                                            |       | 50.0                         |       | 33.9                        |       | 52.5                            |       | —                         |       | 136.4                     |       |
| **Gross profit**                                                  |       | 16.9                         |       | 6.7                         |       | 8.6                             |       | —                         |       | 32.2                      |       |
| Selling,  general and administrative expenses                     |       | 12.1                         |       | 2.8                         |       | 3.8                             |       | —                         |       | 18.7                      |       |
| Other  (income) expense - net                                     |       | 0.1                          |       | 0.2                         |       | (0.5                            | )          | —                         |       | (0.2                      | )          |
| **Operating income (loss)**                                       |       | 4.7                          |       | 3.7                         |       | 5.3                             |       | —                         |       | 13.7                      |       |
| Equity  in earnings of subsidiaries                               |       | (6.7                         | )          | —                      |       | —                          |       | 6.7                            |       | —                    |       |
| Interest  expense-net                                             |       | 4.6                          |       | 0.1                         |       | 0.3                             |       | —                         |       | 5.0                       |       |
| **Income (loss) from continuing operations before income  taxes** |       | 6.8                          |       | 3.6                         |       | 5.0                             |       | (6.7                           | )          | 8.7                       |       |
| Benefit  for income taxes                                         |       | 0.5                          |       | 1.3                         |       | 0.6                             |       | —                         |       | 2.4                       |       |
| **Net income (loss)**                                             |       | $                            | 6.3        |                        | $          | 2.3                             |       | $                              | 4.4        |                      | $          | (6.7 | ) | $ | 6.3 |   |

 

F-15

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Tableof Contents

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

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

 
| ** **                                                        | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                     |       | $                            | 59.1       |                        | $          | 26.0                            |       | $                              | 50.1       |                      | $          | — |   | $ | 135.2 |   |
| Cost of  products sold                                            |       | 44.6                         |       | 21.9                        |       | 44.5                            |       | —                         |       | 111.0                     |       |
| **Gross profit**                                                  |       | 14.5                         |       | 4.1                         |       | 5.6                             |       | —                         |       | 24.2                      |       |
| Selling,  general and administrative expenses                     |       | 11.1                         |       | 2.3                         |       | 3.2                             |       | —                         |       | 16.6                      |       |
| Other  expense - net                                              |       | 0.1                          |       | —                      |       | —                          |       | —                         |       | 0.1                       |       |
| Restructuring  costs                                              |       | —                       |       | 18.0                        |       | —                          |       | —                         |       | 18.0                      |       |
| **Operating income (loss)**                                       |       | 3.3                          |       | (16.2                       | )          | 2.4                             |       | —                         |       | (10.5                     | )          |
| Equity  in losses of subsidiaries                                 |       | 7.2                          |       | —                      |       | —                          |       | (7.2                           | )          | —                    |       |
| Interest  expense-net                                             |       | 4.9                          |       | 0.2                         |       | 0.2                             |       | —                         |       | 5.3                       |       |
| **Income (loss) from continuing operations before income  taxes** |       | (8.8                         | )          | (16.4                       | )          | 2.2                             |       | 7.2                            |       | (15.8                     | )          |
| Benefit  for income taxes                                         |       | (0.1                         | )          | (6.8                        | )          | (0.3                            | )          | —                         |       | (7.2                      | )          |
| **Income (loss) from continuing operations**                      |       | (8.7                         | )          | (9.6                        | )          | 2.5                             |       | 7.2                            |       | (8.6                      | )          |
| Loss  from discontinued operations, net of income tax provision   |       | —                       |       | (0.1                        | )          | —                          |       | —                         |       | (0.1                      | )          |
| **Net income (loss)**                                             |       | $                            | (8.7       | )                           | $          | (9.7                            | )          | $                              | 2.5        |                      | $          | 7.2 |   | $ | (8.7 | ) |

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**Forthe Six Months Ended June 30, 2010**

 
| ** **                                                | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                             |       | $                            | 135.2      |                        | $          | 75.4                            |       | $                              | 125.3      |                      | $          | — |   | $ | 335.9 |   |
| Cost  of products sold                                    |       | 102.1                        |       | 61.8                        |       | 107.5                           |       | —                         |       | 271.4                     |       |
| **Gross profit**                                          |       | 33.1                         |       | 13.6                        |       | 17.8                            |       | —                         |       | 64.5                      |       |
| Selling,  general and administrative expenses             |       | 22.1                         |       | 5.1                         | ** ** | 7.8                             |       | —                         |       | 35.0                      |       |
| Other  (income) expense - net                             | ** ** | (0.3                         | )          | 0.5                         |       | (0.8                            | )          | —                         |       | (0.6                      | )          |
| **Operating income**                                      |       | 11.3                         |       | 8.0                         |       | 10.8                            |       | —                         |       | 30.1                      |       |
| Equity  in earnings of subsidiaries                       |       | (148.6                       | )          | —                      |       | —                          |       | 148.6                          |       | —                    |       |
| Interest  expense-net                                     |       | 9.9                          |       | 0.2                         |       | 0.6                             |       | —                         |       | 10.7                      |       |
| **Income from continuing operations before income taxes** |       | 150.0                        |       | 7.8                         |       | 10.2                            |       | (148.6                         | )          | 19.4                      |       |
| Provision  for income taxes                               |       | 1.8                          |       | 3.1                         |       | 0.9                             |       | —                         |       | 5.8                       |       |
| **Income from continuing operations**                     |       | 148.2                        |       | 4.7                         |       | 9.3                             |       | (148.6                         | )          | 13.6                      |       |
| Income  from discontinued operations, net of income taxes |       | —                       |       | 134.6                       |       | —                          |       | —                         |       | 134.6                     |       |
| **Net income**                                            |       | $                            | 148.2      |                        | $          | 139.3                           |       | $                              | 9.3        |                      | $          | (148.6 | ) | $ | 148.2 |   |

 

F-16

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Table ofContents

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the SixMonths Ended June 30, 2009**

 
| ** **                                                        | ** ** | **Neenah  Paper,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **Net sales**                                                     |       | $                        | 120.8      |                        | $          | 50.6                            |       | $                              | 97.9       |                      | $          | — |   | $ | 269.3 |   |
| Cost of  products sold                                            |       | 90.9                     |       | 43.4                        |       | 90.3                            |       | —                         |       | 224.6                     |       |
| **Gross profit**                                                  |       | 29.9                     |       | 7.2                         |       | 7.6                             |       | —                         |       | 44.7                      |       |
| Selling,  general and administrative expenses                     |       | 21.8                     |       | 4.9                         |       | 6.2                             |       | —                         |       | 32.9                      |       |
| Other  (income) expense - net                                     |       | (0.1                     | )          | 0.5                         |       | (1.0                            | )          | —                         |       | (0.6                      | )          |
| Restructuring  costs                                              |       | —                   |       | 18.0                        |       | —                          |       | —                         |       | 18.0                      |       |
| **Operating income (loss)**                                       |       | 8.2                      |       | (16.2                       | )          | 2.4                             |       | —                         |       | (5.6                      | )          |
| Equity  in losses of subsidiaries                                 |       | 7.6                      |       | —                      |       | —                          |       | (7.6                           | )          | —                    |       |
| Interest  expense-net                                             |       | 10.1                     |       | 0.4                         |       | 0.5                             |       | —                         |       | 11.0                      |       |
| **Income (loss) from continuing operations before income  taxes** |       | (9.5                     | )          | (16.6                       | )          | 1.9                             |       | 7.6                            |       | (16.6                     | )          |
| Benefit  for income taxes                                         |       | (0.2                     | )          | (5.9                        | )          | (1.2                            | )          | —                         |       | (7.3                      | )          |
| **Net income (loss)**                                             |       | $                        | (9.3       | )                           | $          | (10.7                           | )          | $                              | 3.1        |                      | $          | 7.6 |   | $ | (9.3 | ) |

 

F-17

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Tableof Contents

 

**CONDENSED CONSOLIDATING BALANCE SHEET**

**As of June 30, 2010**

 
| ** **                                          | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **ASSETS**                                          |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **Current assets**                                  |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Cash  and cash equivalents                          |       | $                            | 29.3       | ** **                  | $          | 2.3                             |       | $                              | 0.5        |                      | $          | — |   | $ | 32.1 |   |
| Accounts  receivable, net                           | ** ** | 23.1                         |       | 21.8                        |       | 35.1                            |       | —                         |       | 80.0                      |       |
| Inventories                                         |       | 35.8                         |       | 8.9                         |       | 21.0                            |       | —                         |       | 65.7                      |       |
| Income  taxes receivable                            |       | 0.1                          |       | 0.1                         |       | —                          |       | —                         |       | 0.2                       |       |
| Deferred  income taxes                              |       | 10.8                         |       | 1.7                         |       | 0.7                             |       | —                         |       | 13.2                      |       |
| Intercompany  amounts receivable                    |       | 16.2                         |       | 43.4                        |       | —                          |       | (59.6                          | )          | —                    |       |
| Prepaid  and other current assets                   |       | 3.9                          |       | 1.7                         |       | 5.7                             |       | —                         |       | 11.3                      |       |
| Assets  held for sale                               |       | —                       |       | 6.2                         |       | —                          |       | —                         |       | 6.2                       |       |
| Total  current assets                               |       | 119.2                        |       | 86.1                        |       | 63.0                            |       | (59.6                          | )          | 208.7                     |       |
| Property,  plant and equipment, at cost             |       | 262.6                        |       | 100.4                       |       | 178.3                           |       | —                         |       | 541.3                     |       |
| Less  accumulated depreciation                      |       | 185.3                        |       | 64.3                        |       | 41.4                            |       | —                         |       | 291.0                     |       |
| Property,  plant and equipment — net           |       | 77.3                         |       | 36.1                        |       | 136.9                           |       | —                         |       | 250.3                     |       |
| **Investments In Subsidiaries**                     |       | 228.5                        |       | —                      |       | —                          |       | (228.5                         | )          | —                    |       |
| **Deferred Income Taxes**                           |       | 50.1                         |       | 3.8                         |       | —                          |       | —                         |       | 53.9                      |       |
| **Goodwill**                                        |       | —                       |       | —                      |       | 38.2                            |       | —                         |       | 38.2                      |       |
| **Intangible Assets—net**                      |       | 2.9                          |       | —                      |       | 20.2                            |       | —                         |       | 23.1                      |       |
| **Other Assets**                                    | ** ** | 5.5                          |       | 0.1                         |       | 4.9                             |       | —                         |       | 10.5                      |       |
| **TOTAL ASSETS**                                    |       | $                            | 483.5      |                        | $          | 126.1                           |       | $                              | 263.2      |                      | $          | (288.1 | ) | $ | 584.7 |   |
|                                                |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| **Current liabilities**                             |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Debt  payable within one year                       |       | $                            | —     |                        | $          | —                          |       | $                              | 9.5        |                      | $          | — |   | $ | 9.5 |   |
| Accounts  payable                                   |       | 16.3                         |       | 8.3                         |       | 10.6                            |       | —                         |       | 35.2                      |       |
| Intercompany  amounts payable                       |       | 43.4                         |       | 16.2                        |       | —                          |       | (59.6                          | )          | —                    |       |
| Accrued  expenses                                   |       | 28.1                         |       | 9.3                         |       | 13.0                            |       | —                         |       | 50.4                      |       |
| Total  current liabilities                          |       | 87.8                         |       | 33.8                        |       | 33.1                            |       | (59.6                          | )          | 95.1                      |       |
| **Long-term Debt**                                  |       | 225.1                        |       | —                      |       | 8.4                             |       | —                         |       | 233.5                     |       |
| **Deferred Income Taxes**                           |       | —                       |       | —                      |       | 19.6                            |       | —                         |       | 19.6                      |       |
| **Noncurrent Employee Benefits and Other**          |       | 33.8                         |       | 36.5                        | ** ** | 29.4                            |       | —                         |       | 99.7                      |       |
| **TOTAL LIABILITIES**                               |       | 346.7                        |       | 70.3                        |       | 90.5                            |       | (59.6                          | )          | 447.9                     |       |
| **STOCKHOLDERS’ EQUITY**                       |       | 136.8                        |       | 55.8                        |       | 172.7                           |       | (228.5                         | )          | 136.8                     |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY** |       | $                            | 483.5      |                        | $          | 126.1                           |       | $                              | 263.2      |                      | $          | (288.1 | ) | $ | 584.7 |   |

 

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Tableof Contents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**As ofDecember 31, 2009**

 
| ** **                                             | ** ** | **Neenah  Paper, Inc** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **ASSETS**                                             |       |                        |       |                        |       |                            |       |                           |       |                      |       |
| **Current assets**                                     |       |                        |       |                        |       |                            |       |                           |       |                      |       |
| Cash and  cash equivalents                             |       | $                           | 2.1        |                        | $          | 2.0                             |       | $                              | 1.5        |                      | $          | — |   | $ | 5.6 |   |
| Accounts  receivable - net                             |       | 23.8                        |       | 16.1                        |       | 27.8                            |       | —                         |       | 67.7                      |       |
| Inventories                                            |       | 38.1                        |       | 8.9                         |       | 23.7                            |       | —                         |       | 70.7                      |       |
| Income  taxes receivable                               |       | 0.3                         |       | 0.5                         |       | —                          |       | —                         |       | 0.8                       |       |
| Deferred  income taxes                                 |       | 4.7                         |       | 57.0                        |       | —                          |       | —                         |       | 61.7                      |       |
| Intercompany  amounts receivable                       |       | 68.7                        |       | 49.4                        |       | —                          |       | (118.1                         | )          | —                    |       |
| Prepaid  and other current assets                      |       | 5.2                         |       | 1.7                         |       | 6.8                             |       | —                         |       | 13.7                      |       |
| Assets  held for sale                                  |       | —                      |       | 10.0                        |       | —                          |       | —                         |       | 10.0                      |       |
| Total  current assets                                  |       | 142.9                       |       | 145.6                       |       | 59.8                            |       | (118.1                         | )          | 230.2                     |       |
| Property,  plant and equipment at cost                 |       | 262.2                       |       | 99.5                        |       | 207.9                           |       | —                         |       | 569.6                     |       |
| Less  accumulated depreciation                         |       | 180.3                       |       | 62.9                        |       | 42.0                            |       | —                         |       | 285.2                     |       |
| Property,  plant and equipment — net              |       | 81.9                        |       | 36.6                        |       | 165.9                           |       | —                         |       | 284.4                     |       |
| **Investments in subsidiaries**                        |       | 280.5                       |       | —                      |       | —                          |       | (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 |   |

 

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Tableof Contents

 

**CONDENSED CONSOLIDATING STATEMENT OFCASH FLOWS**

**For the Six Months Ended June 30,2010**

 
| ** **                                                                               | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Net income                                                                               |       | $                            | 148.2      |                        | $          | 139.3                           |       | $                              | 9.3        |                      | $          | (148.6 | ) | $ | 148.2 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities        |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Depreciation and amortization                                                            |       | 6.5                          |       | 2.1                         |       | 6.9                             |       | —                         |       | 15.5                      |       |
| Stock-based compensation                                                                 |       | 2.5                          |       | —                      |       | —                          |       | —                         |       | 2.5                       |       |
| Deferred income tax provision (benefit)                                                  |       | 1.9                          |       | 31.3                        |       | (1.4                            | )          | —                         |       | 31.8                      |       |
| Gain on sale of the Woodlands                                                            |       | —                       |       | (74.1                       | )          | —                          |       | —                         |       | (74.1                     | )          |
| Reclassification of cumulative translation  adjustments related to investments in Canada |       | —                       |       | (87.9                       | )          | —                          |       | —                         |       | (87.9                     | )          |
| Loss on asset dispositions                                                               |       | 0.1                          |       | —                      |       | —                          |       | —                         |       | 0.1                       |       |
| (Increase) decrease in working capital                                                   |       | 5.8                          |       | (3.5                        | )          | (5.1                            | )          | —                         |       | (2.8                      | )          |
| Equity in earnings of subsidiaries                                                       |       | (148.6                       | )          | —                      |       | —                          |       | 148.6                          |       | —                    |       |
| Pension and other postretirement benefits                                                |       | (1.1                         | )          | (3.2                        | )          | 0.2                             |       | —                         |       | (4.1                      | )          |
| Other                                                                                    |       | (0.1                         | )          | (0.1                        | )          | (0.3                            | )          | —                         |       | (0.5                      | )          |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                                           |       | 15.2                         |       | 3.9                         |       | 9.6                             |       | —                         |       | 28.7                      |       |
| **INVESTING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Capital expenditures                                                                     |       | (1.9                         | )          | (1.4                        | )          | (1.4                            | )          | —                         |       | (4.7                      | )          |
| Net proceeds from sale of the Woodlands                                                  |       | —                       |       | 78.0                        |       | —                          |       | —                         |       | 78.0                      |       |
| Other                                                                                    |       | 0.1                          |       | (0.5                        | )          | 0.9                             |       | —                         |       | 0.5                       |       |
| **NET CASH PROVIDED BY (USED IN)  INVESTING ACTIVITIES**                                 |       | (1.8                         | )          | 76.1                        |       | (0.5                            | )          | —                         |       | 73.8                      |       |
| **FINANCING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Repayments of long-term debt                                                             |       | (67.8                        | )          | —                      |       | (0.8                            | )          | —                         |       | (68.6                     | )          |
| Short-term borrowings                                                                    |       | —                       |       | —                      |       | 4.7                             |       | —                         |       | 4.7                       |       |
| Repayments of short-term debt                                                            |       | (0.9                         | )          | —                      |       | (8.4                            | )          | —                         |       | (9.3                      | )          |
| Proceeds from exercise of stock options                                                  | ** ** | 0.3                          |       | —                      |       | —                          |       | —                         |       | 0.3                       |       |
| Cash dividends paid                                                                      |       | (2.9                         | )          | —                      |       | —                          |       | —                         |       | (2.9                      | )          |
| Intercompany transfers - net                                                             |       | 85.3                         |       | (79.7                       | )          | (5.6                            | )          | —                         |       | —                    |       |
| Other                                                                                    | ** ** | (0.2                         | **)**      | —                      |       | —                          |       | —                         |       | (0.2                      | )          |
| **NET CASH PROVIDED BY (USED) IN  FINANCING ACTIVITIES**                                 |       | 13.8                         |       | (79.7                       | )          | (10.1                           | )          | —                         |       | (76.0                     | )          |
| **NET INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS**                                |       | 27.2                         |       | 0.3                         |       | (1.0                            | )          | —                         |       | 26.5                      |       |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                        |       | 2.1                          |       | 2.0                         |       | 1.5                             |       | —                         |       | 5.6                       |       |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                            |       | $                            | 29.3       |                        | $          | 2.3                             |       | $                              | 0.5        |                      | $          | — |   | $ | 32.1 |   |

 

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** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the SixMonths Ended June 30, 2009**

 
| ** **                                                                               | ** ** | **Neenah  Paper, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Amounts** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| **OPERATING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Net  income (loss)                                                                       |       | $                            | (9.3       | )                           | $          | (10.7                           | )          | $                              | 3.1        |                      | $          | 7.6 |   | $ | (9.3 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Depreciation  and amortization                                                           |       | 7.3                          |       | 2.5                         |       | 7.0                             |       | —                         |       | 16.8                      |       |
| Stock-based  compensation                                                                |       | 1.8                          |       | —                      |       | —                          |       | —                         |       | 1.8                       |       |
| Deferred  income tax benefit                                                             |       | (0.7                         | )          | (5.8                        | )          | (1.5                            | )          | —                         |       | (8.0                      | )          |
| Ripon  Mill non-cash charges                                                             |       | —                       |       | 6.7                         |       | —                          |       | —                         |       | 6.7                       |       |
| Gain on  asset dispositions                                                              |       | —                       |       | (0.1                        | )          | —                          |       | —                         |       | (0.1                      | )          |
| Decrease  in working capital                                                             |       | 11.6                         |       | 6.4                         |       | 5.5                             |       | —                         |       | 23.5                      |       |
| Equity  in losses of subsidiaries                                                        |       | 7.6                          |       | —                      |       | —                          |       | (7.6                           | )          | —                    |       |
| Pension  and other postretirement benefits                                               |       | (1.2                         | )          | 5.4                         |       | 0.3                             |       | —                         |       | 4.5                       |       |
| Other                                                                                    |       | (0.1                         | )          | (0.6                        | )          | —                          |       | —                         |       | (0.7                      | )          |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                            |       | 17.0                         |       | 3.8                         |       | 14.4                            |       | —                         |       | 35.2                      |       |
| **INVESTING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Capital  expenditures                                                                    |       | (2.2                         | )          | (0.6                        | )          | (1.4                            | )          | —                         |       | (4.2                      | )          |
| Other                                                                                    |       | 0.9                          |       | (0.7                        | )          | (0.5                            | )          | —                         |       | (0.3                      | )          |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                |       | (1.3                         | )          | (1.3                        | )          | (1.9                            | )          | —                         |       | (4.5                      | )          |
| **FINANCING ACTIVITIES**                                                                 |       |                         |       |                        |       |                            |       |                           |       |                      |       |
| Proceeds  from issuance of long-term debt                                                |       | 5.5                          |       | —                      |       | —                          |       | —                         |       | 5.5                       |       |
| Repayments  of long-term debt                                                            |       | (24.7                        | )          | —                      |       | (0.9                            | )          | —                         |       | (25.6                     | )          |
| Short-term  borrowings                                                                   |       | —                       |       | —                      |       | 6.7                             |       | —                         |       | 6.7                       |       |
| Repayments  of short-term debt                                                           |       | —                       |       | —                      |       | (12.3                           | )          | —                         |       | (12.3                     | )          |
| Cash  dividends paid                                                                     |       | (2.9                         | )          | —                      |       | —                          |       | —                         |       | (2.9                      | )          |
| Intercompany  transfers - net                                                            |       | 7.7                          |       | (1.9                        | )          | (5.8                            | )          | —                         |       | —                    |       |
| **NET CASH USED IN FINANCING ACTIVITIES**                                                |       | (14.4                        | )          | (1.9                        | )          | (12.3                           | )          | —                         |       | (28.6                     | )          |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                            |       | 1.3                          |       | 0.6                         |       | 0.2                             |       | —                         |       | 2.1                       |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                         |       | 1.9                          |       | 1.1                         |       | 0.3                             |       | —                         |       | 3.3                       |       |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                             |       | $                            | 3.2        |                        | $          | 1.7                             |       | $                              | 0.5        |                      | $          | — |   | $ | 5.4 |   |

 

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

 

*The followingdiscussion and analysis presents the factors that had a material effect on ourfinancial position as of June 30, 2010 and our results of operations forthe three and six months ended June 30, 2010 and 2009. You should readthis discussion in conjunction with our consolidated financial statements andthe notes to those consolidated financial statements included in our mostrecent Annual Report on Form 10-K. This Management’s Discussion andAnalysis of Financial Condition and Results of Operations containsforward-looking statements. See “Forward-Looking Statements” for a discussionof the uncertainties, risks and assumptions associated with these statements.*

 

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

 

**Executive Summary**

 

Results of operations for the threemonths ended June 30, 2010 showed substantial improvement from thedepressed amounts reported in the prior year.  Operating results for thethree months ended June 30, 2009 include $18.0 million for costsassociated with closing the Ripon Mill. Results for the prior year period were also adversely affected bysharply reduced market demand due to severe global economic weakness in thefirst half of 2009.  In 2010, the benefits of a substantial rebound inmarket demand for our products in conjunction with a more efficient coststructure and higher selling prices allowed us to offset the impact of highermanufacturing input costs.

 

Duringthe three months ended June 30, 2010, we have seen an increase inmanufacturing input costs, particularly for pulp, due to tight global suppliesand increased demand.  As a result ofthese conditions and the terms of our supply contracts, we expect manufacturinginput costs in the near term to remain at or above the level recorded in the secondquarter of 2010 before falling.  While wehave increased selling prices and continue to benefit from cost controlinitiatives implemented in 2009, there can be no assurance that we will be ableto fully offset the near term increase in pulp costs.

 

For the three months ended June 30,2010, consolidated sales and earnings were adversely affected by the impact ofa weakening Euro relative to the U.S dollar on the translation of operatingresults for Neenah Germany.  In general,however, the operating performance of Neenah Germany is not materially affectedby volatility in exchange rates for the Euro because most of its revenue andexpenses are generated within the European Union. We do not believe that theweakening of the Euro has had a material effect on market demand.

 

***Resultsof Continuing Operations***

 

For the three months ended June 30,2010, consolidated net sales increased approximately $33 million from the prioryear period to $168.6 million primarily due to substantially higher shipmentsin our technical products business, as well as, increased volume and sellingprices in the fine paper business as both businesses benefited from improvedmarket conditions. The second quarter of 2010 represented our fifth consecutivequarter of sequential consolidated revenue growth.

 

Consolidated operating income of$13.7 million for the three months ended June 30, 2010 increased more than$24 million from an operating loss of $10.5 million in the prior yearperiod.  The operating loss in 2009 was due to $18.0 million of costsassociated with closing the Ripon Mill. Excluding such costs, consolidated operating income increased $6.2million, or more than 80 percent, due to increased volume, improved operatingperformance and paper machine utilization; and higher selling prices.  These favorable factors were only partiallyoffset by higher manufacturing input costs.

 

***Resultsof Discontinued Operations***

 

For the three months ended June 30,2009, timber sales to Northern Pulp pursuant to the Stumpage Agreementresulted in net sales from discontinued operations of $0.5 million.  For the three months ended June 30,2010, there were no net sales from discontinued operations following the saleof the Timberlands in the first quarter of 2010.  For the three monthsended June 30, 2010, the pre-tax loss from discontinued operations was$0.3 million compared to earnings from discontinued operations of $0.3 millionin the prior year period.

 

**Results ofOperations and Related Information**

 

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

 

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***Analysis of Net Sales—********Three and Six MonthsEnded June 30, 2010 and 2009***

 

The following table presents netsales by segment, expressed as a percentage of total net sales:

 
| ** **          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **          | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Fine  Paper         |       | 41                                   | %          | 45                                 | %          | 41 | % | 47 | % |
| Technical  Products |       | 59                                   | %          | 55                                 | %          | 59 | % | 53 | % |
| Total               |       | 100                                  | %          | 100                                | %          | 100 | % | 100 | % |

 

***Commentary:***

 

Thefollowing table presents our net sales by segment:

 
| ** **          | ** ** | ** **              | ** ** | ** ** | ** ** | **Change in Net Sales Compared to Prior Period** | ** ** |
|---------------------|------------|-------------------------|------------|------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **Three Months**        | ** ** | ** ** | ** ** | **Change Due To**                                | ** ** |
| ** **          | ** ** | **Ended June 30,** | ** ** | ** ** | ** ** | ** **                                       | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **          | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Total Change**                                 | ** ** | **Volume** | ** ** | **Net Price** | ** ** | **Currency** | ** ** |
| Fine  Paper         |       | $                       | 68.9       |       | $          | 61.3                                             |       | $ | 7.6 |   | $ | 5.7 |   | $ | 1.9 |   | $ | — |   |
| Technical  Products |       | 99.7                    |       | 73.9       |       | 25.8                                             |       | 25.0 |   | 4.8 |   | (4.0 | ) |
| Consolidated        |       | $                       | 168.6      |       | $          | 135.2                                            |       | $ | 33.4 |   | $ | 30.7 |   | $ | 6.7 |   | $ | (4.0 | ) |

 

Consolidated net sales for the threemonths ended June 30, 2010 were $33.4 million higher than the prior yearperiod due to increased volume in both segments whichbenefited from improved market conditions.

 

·      Net sales in our fine paperbusiness increased $7.6 million or 12 percent primarily due to a 9 percentincrease in shipments. The improved sales volume reflected higher sales of bothdomestic branded and non-branded products, which exceeded the increase in theuncoated free sheet market, and growth in international shipments.  Average prices for most branded products were3 to 5 percent higher than the prior year as a result of pricing actionsimplemented in 2009 and2010.  Higher prices were partiallyoffset by a less favorable sales mix resulting from higher growth rates forlower priced products relative to our premium products.

 

·      Netsales in our technical products business increased $25.8 millionor 35 percent primarily due to a 34 percent increase in shipments.  Higher sales volume reflected improvement forall Strategic Business Units, with particularly strong growth in tape, filtermedia and abrasive backing shipments. Average net selling prices increased as a result of a more favorableproduct mix and higher average selling prices. A weakening of the Euro versus the U.S. dollar reduced net sales byapproximately $4 million. The secondquarter of 2010 represented the fifth consecutive quarter of sequential revenuegrowth for our technical products business.

 

Thefollowing table presents our net sales by segment:

 
| ** **          | ** ** | ** **              | ** ** | ** ** | ** ** | **Change in Net Sales Compared to Prior Period** | ** ** |
|---------------------|------------|-------------------------|------------|------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **Six Months**          | ** ** | ** ** | ** ** | **Change Due To**                                | ** ** |
| ** **          | ** ** | **Ended June 30,** | ** ** | ** ** | ** ** | ** **                                       | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **          | ** ** | **2010**                | ** ** | **2009**   | ** ** | **Total Change**                                 | ** ** | **Volume** | ** ** | **Net Price** | ** ** | **Currency** | ** ** |
| Fine  Paper         |       | $                       | 138.5      |       | $          | 126.1                                            |       | $ | 12.4 |   | $ | 13.9 |   | $ | (1.5 | ) | $ | — |   |
| Technical  Products |       | 197.4                   |       | 143.2      |       | 54.2                                             |       | 51.5 |   | 3.0 |   | (0.3 | ) |
| Consolidated        |       | $                       | 335.9      |       | $          | 269.3                                            |       | $ | 66.6 |   | $ | 65.4 |   | $ | 1.5 |   | $ | (0.3 | ) |

 

Consolidated net sales for the sixmonths ended June 30, 2010 were $66.6 million higher than the prior yearperiod due to increased volume in both segments whichbenefited from improved market conditions and customers replenishing the supplychain.

 

·      Netsales in our fine paper business increased $12.4 million or 10percent due to an 11 percent increase in shipments. The improved sales volumereflected higher sales of domestic branded and non-branded products, whichexceeded the increase in the uncoated free sheet market.  Higher prices formost branded products were more than offset by a less favorable sales mix whichreflected higher growth rates for lower priced products relative to our brandedproducts.

 

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Table ofContents

 

·      Netsales in our technical products business increased $54.2 millionor 38 percent primarily due to a 36 percent increase in shipments.  Higher sales volume reflected strong growthin tape, filter media and abrasive backing shipments.  The improvement in average net selling priceswas primarily due to a more favorable product mix.

 

***Analysis of Operating Income—Three and Six Months Ended June 30,2010 and 2009***

 

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

 
| ** **                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                          |       |                                 |       |                               |       |   |   |   |   |
| Net  sales                                                    |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost  of products sold                                        |       | 80.9                                 |       | 82.1                               |       | 80.8 |   | 83.4 |   |
| Gross  profit                                                 |       | 19.1                                 |       | 17.9                               |       | 19.2 |   | 16.6 |   |
| Selling,  general and administrative expenses                 |       | 11.1                                 |       | 12.3                               |       | 10.4 |   | 12.2 |   |
| Restructuring  costs                                          |       | —                               |       | 13.3                               |       | — |   | 6.7 |   |
| Other  (income) expense - net                                 |       | (0.1                                 | )          | 0.1                                |       | (0.2 | ) | (0.2 | ) |
| Operating  income (loss)                                      |       | 8.1                                  |       | (7.8                               | )          | 9.0 |   | (2.1 | ) |
| Interest  expense-net                                         |       | 3.0                                  |       | 3.9                                |       | 3.2 |   | 4.1 |   |
| Income  (loss) from continuing operations before income taxes |       | 5.1                                  |       | (11.7                              | )          | 5.8 |   | (6.2 | ) |
| Provision  (benefit) for income taxes                         |       | 1.4                                  |       | (5.3                               | )          | 1.8 |   | (2.7 | ) |
| Income  (loss) from continuing operations                     |       | 3.7                                  | %          | (6.4                               | )%         | 4.0 | % | (3.5 | )% |

 

***Commentary:***

 

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

 
| ** **                   | ** ** | ** **              | ** ** | ** **        | ** ** | **Change in Operating Income (Loss) Compared to Prior Period** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------------------------------------|------------|
| ** **                   | ** ** | **Three Months**        | ** ** | **Change Due To** | ** ** |
| ** **                   | ** ** | **Ended June 30,** | ** ** | **Total**         | ** ** | ** **                                                     | ** ** | **Net** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **2010**                | ** ** | **2009**          | ** ** | **Change**                                                     | ** ** | **Volume (a)** | ** ** | **Price (b)** | ** ** | **Costs (c)** | ** ** | **Currency** | ** ** | **Other (d) (e)** | ** ** |
| Fine  Paper                  |       | $                       | 9.2        |              | $          | (10.0                                                          | )          | $ | 19.2 |   | $ | 2.8 |   | $ | 1.4 |   | $ | (3.2 | ) | $ | — |   | $ | 18.2 |   |
| Technical  Products          |       | 8.5                     |       | 3.3               |       | 5.2                                                            |       | 11.1 |   | 2.3 |   | (5.7 | ) | (0.2 | ) | (2.3 | ) |
| Unallocated  corporate costs |       | (4.0                    | )          | (3.8              | )          | (0.2                                                           | )          | — |   | — |   | — |   | — |   | (0.2 | ) |
| Consolidated                 |       | $                       | 13.7       |              | $          | (10.5                                                          | )          | $ | 24.2 |   | $ | 13.9 |   | $ | 3.7 |   | $ | (8.9 | ) | $ | (0.2 | ) | $ | 15.7 |   |

 

----

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

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

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

(d)         Results for the three months ended June 30, 2009include costs associated with the closure of the Ripon Mill of $18.0 million.

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

 

Consolidated operating incomeof $13.7 million for the three months ended June 30, 2010 increased $24.2million from the operating loss of $10.5 million in the prior year period. Theoperating loss for the three months ended June 30, 2009 was due to $18.0million of costs related to the closure of the Ripon Mill. Results for thethree months ended June 30, 2009 also reflected reduced market demandfollowing severe global economic weakness in the first half of 2009.  Excluding such closure costs, consolidatedoperating income for the current period increased $6.2 million or more than 80percent from the prior year. The favorable comparison was primarily due tohigher volume, improvedoperating performance, including the benefit of improved paper machineutilization and higher selling prices; partially offset by highermanufacturing input costs.

 

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·      Operating income for ourfine paper business increased $19.2 million from theprior year period.  Excluding costsrelated to closing the Ripon Mill, operating income increased $1.2 million fromthe prior year period primarily due to increased volume, higher selling pricesfor most branded products and a more efficient cost structure following costreduction initiatives implemented in 2009. These favorable variances were partially offset by higher manufacturinginput costs, principally for pulp, a less favorable product mix due to fastergrowth rates for relatively lower priced products and an increase in bad debtreserves due to a customer’s bankruptcy filing.

 

·      Operating income for ourtechnical products business increased $5.2 million from 2009 due to increasedvolume, higher selling prices and lower energy costs.  These favorable factors were partially offsetby higher manufacturing input costs for pulp and latex.

 

·      Unallocated corporateexpenses for the three months ended June 30, 2010 of $4.0 million were$0.2 million higher than the prior year.

 

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

 
| ** **                   | ** ** | ** **              | ** ** | ** **        | ** ** | **Change in Operating Income (Loss) Compared to Prior Period** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------------------------------------|------------|
| ** **                   | ** ** | **Six Months**          | ** ** | **Change Due To** | ** ** |
| ** **                   | ** ** | **Ended June 30,** | ** ** | **Total**         | ** ** | ** **                                                     | ** ** | **Net** | ** ** | **Material** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **2010**                | ** ** | **2009**          | ** ** | **Change**                                                     | ** ** | **Volume (a)** | ** ** | **Price (b)** | ** ** | **Costs (c)** | ** ** | **Currency** | ** ** | **Other (d) (e)** | ** ** |
| Fine  Paper                  |       | $                       | 18.7       |              | $          | (1.4                                                           | )          | $ | 20.1 |   | $ | 6.0 |   | $ | (1.0 | ) | $ | (4.6 | ) | $ | — |   | $ | 19.7 |   |
| Technical  Products          |       | 17.8                    |       | 2.7               |       | 15.1                                                           |       | 22.0 |   | (0.6 | ) | (6.2 | ) | 0.1 |   | (0.2 | ) |
| Unallocated  corporate costs |       | (6.4                    | )          | (6.9              | )          | 0.5                                                            |       | — |   | — |   | — |   | — |   | 0.5 |   |
| Consolidated                 |       | $                       | 30.1       |              | $          | (5.6                                                           | )          | $ | 35.7 |   | $ | 28.0 |   | $ | (1.6 | ) | $ | (10.8 | ) | $ | 0.1 |   | $ | 20.0 |   |

 

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

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

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

(d)         Results for the six months ended June 30, 2009 includecosts associated with the closure of the Ripon Mill of $18.0 million.

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

 

Consolidated operating incomeof $30.1 million for the six months ended June 30, 2010 increased $35.7million from the operating loss of $5.6 million in the prior year period.  The operating loss for the six months ended June 30,2009 was due to $18.0 million of costs related to the closure of the RiponMill. Results for the six months ended June 30, 2009 were also adverselyaffected by sharply reduced market demand following severe global economicweakness, particularly in the second half of 2008 and the first half of 2009.Excluding such closure costs, consolidated operating income for the currentperiod increased $17.7 million or more than 140 percent from the prior year.The favorable comparison for both segments was primarily due to favorablevolume, improved operatingperformance, including the benefit of improved paper machine utilization and ongoingbenefits from initiatives implemented in 2009 to reduce spending.  These favorable variances were partiallyoffset by higher manufacturing input costs and a less favorable product mix.

 

·      Operating income for ourfine paper business increased $20.1 million from theprior year period operating loss of $1.4 million due to costs associated withclosing the Ripon Mill in 2009. Excluding costs related to closing the Ripon Mill, operating incomeincreased $2.1 million from the prior period primarily due to higher volume anda more efficient cost structure following cost reduction initiativesimplemented in 2009.  These favorablevariances were partially offset by higher manufacturing input costs,principally for pulp, and a less favorable product mix due to faster growthrates for relatively lower priced products.

 

·      Operating income for ourtechnical products business increased $15.1 million from 2009 due to highervolume, improved paper machine utilization, and lower energy costs.  These favorable factors were partially offsetby higher manufacturing input costs for pulp and latex.

 

·      Unallocated corporateexpenses for the six months ended June 30, 2010 of $6.4 million were $0.5million lower than the prior year.

 

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

 

·      Selling, general andadministrative (“SG&A”) expense of $18.7 million for the three months endedJune 30, 2010 increased $2.1 million from the prior year period primarilyas a result of an increase in bad debt reserves due to a customer’s bankruptcyfiling. For the three months ended June 30, 2010, SG&A expense as apercentage of net sales was approximately 11.1 percent and was 1.2 percentagepoints lower than the prior year period due to higher net sales in 2010.

 

·      For the threemonths ended June 30, 2010 and 2009, we incurred net interest expense of$5.0 million which was $0.3 million favorable to the prior year.  Thefavorable comparison was due to lower average debt levels in 2010 due to therepayment of all Term Loan and Revolver borrowings with proceeds from the saleof the Woodlands.

 

·                  For the threemonths ended June 30, 2010, we recorded an income tax provision related tocontinuing operations of $2.4 million which resulted in an effective income taxrate of approximately 28 percent.  Forthe three months ended June 30, 2009, we recorded an income tax benefitrelated to continuing operations of $7.2 million which resulted in an effectiveincome tax benefit rate of approximately 46 percent.  The tax effects ofclosing the Ripon Mill were treated as a discrete item in determining our taxbenefit for the three months ended June 30, 2009.  In general, our effective tax rate differsfrom the U.S. statutory tax rate of 35 percent primarily due to the benefits ofour corporate tax structure and the proportion of pre-tax income injurisdictions with marginal tax rates that differ from the U.S. statutory taxrate.

 

**Liquidity and Capital Resources**

** **
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Net  cash flow provided by (used in): |       |                               |       |   |   |
| Operating  activities                 |       | $                                  | 28.7       |   | $ | 35.2 |   |
| Investing  activities:                |       |                               |       |   |   |
| Capital  expenditures                 |       | (4.7                               | )          | (4.2 | ) |
| Proceeds  from sale of the Woodlands  |       | 78.0                               |       | — |   |
| Other  investing activities           |       | 0.5                                |       | (0.3 | ) |
| Total                                 |       | 73.8                               |       | (4.5 | ) |
| Financing  activities                 |       | (76.0                              | )          | (28.6 | ) |
|                                       |            |                                    |            |  |  |  |  |

 

***Operating Cash Flow Commentary:***

 

·                  Cash provided by operating activities of $28.7 million forthe six months ended June 30, 2010 was $6.5 million less than cashprovided by operating activities of $35.2 million in the prior year period. Cashprovided by operations in the prior year period reflected a $23.5 milliondecrease in our investment in working capital, including the receipt of arefund of U.S. income taxes of approximately $10.9 million.  For the six months ended June 30, 2010,our investment in working capital increased $2.8 million primarily due to anincrease in accounts receivable reflecting improved sales. Excluding workingcapital changes, cash provided by operations for the current year increased$19.8 million from the prior year period primarily due to higher operatingearnings in the current year.

 

·                  As of June 30, 2010, we had more than $109 million ofU.S. federal and $102 million of state net operating losses that may be carriedforward to offset future taxable income through 2029.

 

·                  For the six months ended June 30, 2010, we madeaggregate contributions to qualified and non-qualified pension trusts andpayments of pension benefits for unfunded pension plans of approximately $7.9million. We expect to make aggregate contributions to qualified andnon-qualified pension trusts and benefit payments for unfunded pension plans ofapproximately $17 million (based on exchange rates at June 30, 2010) incalendar 2010.  This compared to paymentsin 2009 of $4.3 million and $12.5 million for the six months and full year,respectively.

 

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***Investing Commentary:***

 

·                  For the six months ended June 30, 2010, cash providedby investing activities was $73.8 million, compared to cash used by investingactivities of $4.5 million in the prior year period.  Cash provided byinvesting activities for the six months ended June 30, 2010 includes netproceeds from the sale of the Woodlands of $78.0 million.

 

·                  Capital expenditures for the six months ended June 30,2010 were $4.7 million compared to spending of $4.2 million in the prioryear.  We expect to have aggregatecapital expenditures for 2010 of approximately $15 million to $20 million. Thelevel of our capital expenditures for the next 12 months is not expected tohave a material adverse effect on our financial condition, results ofoperations or liquidity.

 

***Financing Commentary:***

 

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

 

·                  For the six months ended June 30, 2010, cash andequivalents increased $26.5 million to $32.1 million at June 30, 2010 from$5.6 million at December 31, 2009.

 

·                  For the six months ended June 30, 2010, debt decreased$76.2 million to $243.0 million at June 30, 2010 from $319.2 million at December 31,2009.

 

·                  Availability under our revolving credit facility varies overtime depending on the value of our inventory, receivables and various capitalassets. As of June 30, 2010, we had no amounts outstanding under ourRevolver and $92.8 million of available credit. In addition, we have €8.4million ($10.3 million, based on exchanges rates at June 30, 2010) ofavailable credit under our German Line of Credit.

 

·                  We paid aggregate cash dividends of $0.20 per share orapproximately $2.9 million for the six months ended June 30, 2010 and2009.

 

·                  We have required debt payments through June 30, 2011 of$9.5 million.  Such payments include required amortization payments on ourGerman Loan Agreement of approximately $1.5 million and $8.0 million on ourGerman Line of Credit which we expect to renew in November 2010.  In addition, from time to time we may bein the market for the purpose of repurchasing our Senior Notes.  Any such purchases are not expected have amaterial effect on our liquidity.

 

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

 

**CriticalAccounting Policies and Use of Estimates**

 

The preparation of financialstatements in conformity with 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 onForm 10-K have the greatest potential impact on our financial statements,so we consider these to be our critical accounting policies. The criticalaccounting policies used in the preparation of the consolidated financialstatements are those that are important both to the presentation of financialcondition and results of operations and require significant judgments withregard to estimates used. These critical judgments relate to the timing ofrecognizing sales revenue, the recoverability of deferred income tax assets,pension benefits and future cash flows associated with impairment testing oflong-lived assets. Actual results could differ from these estimates and changesin these estimates are recorded when known. We believe that the consistentapplication of these policies enables us to provide readers of our financialstatements with useful and reliable information about our operating results andfinancial condition.  There have been no significant changes in thesepolicies, or the estimates used in the application of the policies, since December 31,2009.

 

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**CautionaryNote Regarding Forward-Looking Statements**

 

Certain statements in this QuarterlyReport on Form 10-Q may constitute “forward-looking” statements as definedin Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21Eof the Securities Exchange Act of 1934 (the “Exchange Act”), the PrivateSecurities Litigation Reform Act of 1995 (the “PSLRA”), or in releases made bythe SEC, all as may be amended from time to time. Statements contained in thisquarterly report that are not historical facts may be forward-lookingstatements within the meaning of the PSLRA. Any such forward-looking statementsreflect our beliefs and assumptions and are based on information currentlyavailable to us. Forward-looking statements are only predictions and involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, performance or achievements, or industry results, to bematerially different from any future results, performance or achievements expressedor implied by such forward-looking statements. These cautionary statements arebeing made pursuant to the Securities Act, the Exchange Act and the PSLRA withthe intention of obtaining the benefits of the “safe harbor” provisions of suchlaws. The Company cautions investors that any forward-looking statements wemake are not guarantees or indicative of future performance. For additionalinformation regarding factors that may cause our results of operations todiffer materially from those presented herein, please see “Risk Factors”contained in our most recent Annual Report on Form 10-K and as aredetailed from time to time in other reports we file with the SEC.

 

You can identify forward-lookingstatements as those that are not historical in nature, particularly those thatuse terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “contemplate,”“estimate,” “believe,” “plan,” “project,” “predict,” “potential” or “continue,”or the negative of these, or similar terms. In evaluating these forward-lookingstatements, you should consider the following factors, as well as otherscontained in our public filings from time to time, which may cause our actualresults to differ materially from any forward-looking statement:

 

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

 

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

 

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

 

·                  the availability of raw materials and energy;

 

·                  the competitive environment;

 

·                  capital and credit market volatility;

 

·                  fluctuations in global equity and fixed-income markets;

 

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

 

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

 

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

 

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

 

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

 

·                  our existing and future indebtedness;

 

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

 

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

 

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

 

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

 

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

 

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**Item4.  Controls and Procedures**

 

***DisclosureControls and Procedures***

 

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

 

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

 

***InternalControls over Financial Reporting***

 

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

 

**PART II—OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

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

 

**Item1A.  Risk Factors**

 

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

 

**Item6.  Exhibits**

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

 

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**SIGNATURES**

 

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

 
|                |   |                                             |
|---------------------|--------|--------------------------------------------------|
|                |   | NEENAH PAPER, INC                           |
|                |   |                                             |
|                | By:    | /s/ Sean T. Erwin                                |
|                |   |      Sean  T. Erwin     |
|                |   | Chairman of the Board, President  and Chief      |
|                |   | Executive Officer (Principal  Executive Officer) |
|                |   |                                             |
|                |   | /s/ Bonnie C. Lind                               |
|                |   |      Bonnie  C. Lind    |
|                |   | Senior Vice President, Chief  Financial Officer  |
|                |   | and Treasurer (Principal Financial  Officer)     |
|                |   |                                             |
|                |   | /s/ Larry N. Brownlee                            |
|                |   |      Larry  N. Brownlee |
|                |   | Vice President — Controller  (Principal     |
|                |   | Accounting Officer)                              |
|                |   |                                             |
|                |   |                                             |
| August 9, 2010 |   |                                             |

 

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