Neenah
Annual Report 2010

Plain-text annual report

WE AUTOMOBILE MAKE WALLPAPER PAPER MAP THAT MAKES ESPRESSO ITS WAY MASKING TAPE INTO SANDPAPER MANY PASSPORT THINGS NOTEBOOK NEENAH PAPER, INC. WINE LABEL 2010 ANNUAL REPORT PACKAGING BLUE JEANS BLUE JEANS SKI LIFT TICKET CATALOG LETTERHEAD COASTER BUSINESS CARD MENU GREETING CARD VENEER SHOPPING BAG HANG TAG BOOK BOURBON MAGAZINE GARMENT LABEL INVITATION WALL DECAL ACOUSTIC CEILING PACKING TAPE SUSTAINABILITY REPORT PART I: STRATEGIC REVIEW Building on our strengths in diverse products, markets and regions AT NEENAH PAPER, WE MAKE PRODUCTS THAT MAKE THEIR WAY INTO MANY THINGS. IN FACT, DESPITE OUR NAME, A LOT OF OUR PRODUCTS AREN’T “PAPER” AT ALL – AT LEAST NOT IN THE TRADITIONAL SENSE. 2 Neenah Paper, Inc. 2010 Annual Report Thanks to the expertise of our technical teams and process capabilities in areas such as formation, saturation, coating and meltblown nonwovens, you may experience our products as the filters in your car, the patch on the pocket of your jeans, the base material in an abrasive disk, the label or package that drew you to a premium bottle of wine or perfume, the backing to exotic hardwood veneer furniture, or the sterile packaging for a disposable medical device. At the same time, we are the leader in our traditional markets for fine printing and writing papers, and the choice for premium communications by individuals, businesses and, occasionally, the President of the United States. We have changed a lot in the six years since Neenah has been an independent public company. From a domestic business that depended on commodity pulp for more than half of its revenue, we built a company whose focus is now directed toward global markets and specialty products, where our technical knowledge and process expertise provide a competitive edge. Today, our ability to deliver value for customers – and performance for shareholders – derives from a wide range of products beyond paper. Maybe it’s time to just call us “Neenah.” Neenah Paper, Inc. 2010 Annual Report 3 OUR LONG-TERM POTENTIAL WILL BE DEFINED BY OUR LONG-TERM POTENTIAL WILL BE DEFINED BY INNOVATION AND TECHNICAL INNOVATION AND TECHNICAL OUR ABILITY TO SOLVE COMPLEX CUSTOMER NEEDS OUR ABILITY TO SOLVE COMPLEX CUSTOMER NEEDS EXPERTISE DETERMINE SUCCESS EXPERTISE DETERMINE SUCCESS One of Neenah’s strengths is our command of One of Neenah’s strengths is our command of specialized processes and chemistries that enhance specialized processes and chemistries that enhance a product’s performance to meet customer needs. a product’s performance to meet customer needs. For example, we have unique capabilities and exper- For example, we have unique capabilities and exper- tise in saturation, coatings and nonwoven materials tise in saturation, coatings and nonwoven materials that permit us to satisfy exacting customer demands that permit us to satisfy exacting customer demands in such diverse in such diverse applications as applications as filtration, sterile filtration, sterile packaging and packaging and coated abrasives. coated abrasives. We also have We also have significant skills significant skills in image trans- in image trans- fer technology, fer technology, used primarily in the placement of graphics on textiles. used primarily in the placement of graphics on textiles. By combining these capabilities with our ability to By combining these capabilities with our ability to innovate, we continue to expand our portfolio with innovate, we continue to expand our portfolio with products that in some cases are new to the market – products that in some cases are new to the market – and generate strong margins by delivering high value and generate strong margins by delivering high value to the customer. to the customer. A recent example of our ability to put innovation A recent example of our ability to put innovation to work for a customer is a name-badge product to work for a customer is a name-badge product for Avery Dennison. Avery was looking for a material for Avery Dennison. Avery was looking for a material that adhered better and avoided the wrinkling that adhered better and avoided the wrinkling and curling typical of traditional paper badges. They and curling typical of traditional paper badges. They turned to Neenah because of our specialized print turned to Neenah because of our specialized print coating expertise and ability to provide a customized coating expertise and ability to provide a customized solution with an extremely quick turnaround. For solution with an extremely quick turnaround. For Neenah, which had previously received both the Neenah, which had previously received both the “Growth and Innovation Excellence” and “Supplier “Growth and Innovation Excellence” and “Supplier of the Year” awards from Avery Dennison’s office of the Year” awards from Avery Dennison’s office products division, the name-badge product was products division, the name-badge product was further proof of our commitment to customer solutions. further proof of our commitment to customer solutions. Also during the past year, we developed a Also during the past year, we developed a product that offers a more environmentally friendly product that offers a more environmentally friendly and easier method of creating the stencil used in the and easier method of creating the stencil used in the screen printing of items such as imprinted t-shirts. screen printing of items such as imprinted t-shirts. Our process, which was introduced Our process, which was introduced to the market in early 2011, can to the market in early 2011, can deposit an image on a screen in a deposit an image on a screen in a manner that is capable of printing manner that is capable of printing relatively large runs, while reducing relatively large runs, while reducing the extensive preparation and the extensive preparation and cleanup traditionally associated with cleanup traditionally associated with the screen printing process. the screen printing process. In other illustrations of our In other illustrations of our innovative approach, we have expanded our filtration innovative approach, we have expanded our filtration end markets, developed products that can be used end markets, developed products that can be used for sterile medical packaging, as well as packaging for sterile medical packaging, as well as packaging that can help protect electronic components against that can help protect electronic components against electrostatic discharge, and labels for chemicals and electrostatic discharge, and labels for chemicals and that require compatibility with digital imaging pro- that require compatibility with digital imaging pro- cesses and can still stand up under harsh environments. cesses and can still stand up under harsh environments. Our teams also work with other partner companies Our teams also work with other partner companies in exploring and applying new technologies such as in exploring and applying new technologies such as e-beam coating and carbon fiber formation. e-beam coating and carbon fiber formation. To maintain our technical edge, we continually To maintain our technical edge, we continually invest in research and development. We will further invest in research and development. We will further strengthen our product development efforts in strengthen our product development efforts in 2011, when we open a new Innovation Center based 2011, when we open a new Innovation Center based at our facility south of Munich, Germany. The Center at our facility south of Munich, Germany. The Center will bring together many of our R&D resources in a will bring together many of our R&D resources in a single location, further driving our innovation efforts. single location, further driving our innovation efforts. 4 4 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report WE SERVE SPECIALIZED MARKETS TARGETING HIGH-VALUE WHERE OUR PRODUCT PERFORMANCE NICHES TO DRIVE GROWTH IS A DIFFERENTIATING STRENGTH Neenah’s long-term success will be driven by our ability to identify and serve new markets that map to our specialized capabilities. We continually ask ourselves how our expertise can best serve customers’ needs, and actively seek to market our products for use in those areas where we can be differentiated through value-added features, superior performance, or best-in-class execution and service. In Technical Products, we are building on our expertise in filtration for the transportation indus- try, where our products have long been employed in engine and cabin air, oil and fuel filtration. For example, we are now making triple-layer filter media for the next generation of high-efficiency engines, including a wet-laid micro glass layer that meets the highest efficiency standards and customer require- ments. We have increased our nonwoven meltblown capacity, and can not only serve the growing demand for high-end transportation filters, but also expand into new markets where specialized filtration needs are mission-critical. These new end markets are as diverse as beverage processing, industrial manu- facturing, medical and health applications. Our Fine Paper business provides many exam- communicating a prestigious image is most important. We are now building a growing business providing labels for products such as premium wines and beverages, gourmet and natural foods. Additionally, we are growing the pack- aging of luxury consumer products such as fine jewelry and fragrances, as well as retailers’ gift card enclosures and shopping bags. We have also captured new revenue and profit pools from existing markets. An expanded relationship with Crane & Company allows us not only to exclusively manufacture, but also to sell and distribute their products to our customers. In envelopes, we are taking an active role in direct sales, whereas we previously relied on third- party converters to produce and sell those papers to customers. Our enve- lopes can now be purchased directly from Neenah, bundled together with other fine paper orders, enhancing cus- tomer convenience in a sizeable market. As we seek additional growth opportunities, we will follow a disci- plined approach: identifying promising ples of this successful focus on specialized market opportunities. Neenah’s position as the leader in premium printing and writing paper was built on pro- viding the highest quality, best finishes and broadest color selection, appealing to customers for whom market segments that offer volume growth and attractive financial returns, setting well-defined objectives, allocating resources, and giving our teams the authority and responsibility to extend our leadership to new areas. Neenah Paper, Inc. 2010 Annual Report 5 WE ARE DEVOTING GREATER RESOURCES OUR EMERGING OPPORTUNITIES TO EXPAND OUR BUSINESS INTERNATIONALLY SPAN THE GLOBE Neenah’s reputation for high quality, performance and custom-tailored solutions has helped to drive growing demand for our products around the world. Our products are currently sold in some 70 countries, with about 45 percent of our sales generated outside of North America. Sales to Europe, Asia and Latin America combined increased by approximately 23 percent in 2010. As we seek to broaden our opportunities, we are aligned with global customers that can employ our products in multiple regions, while also strengthening resources such as marketing, sales and logistical support that we dedicate to international markets. Europe accounted for some 30 percent of our sales in 2010, as our manufacturing facilities in Germany have given us a strong presence among major customers based in the region. Many top European auto manufacturers, as well as makers of industrial equipment, home appliances and construc- tion materials, use our substrates in their products and manufacturing processes. Among our growth initiatives in the region, we are enjoying success in expanding our nonwoven wall covering business in Eastern Europe, and we are building on our heat transfer capabilities with a program of direct sales of heat transfer products in Europe. Asia is an increasingly important region for Neenah, accounting for approximately 8 percent of sales and growing approximately 18 percent over the prior year. One of the areas in which we have expanded recently is the Asian abrasives industry, where we have grown by tailoring products specifically to local market needs. We also are serving the filtration market with products for such applications as flame-retardant air filtration and high-pressure injection diesel filtration. With the rising affluence of local populations, we also are experiencing growing demand for fine paper products. We have relaunched our STARWHITE® and SUNDANCE® brands in Asia to serve this market, and are building our presence through a strong network of fine paper merchants. North America remains an important market, delivering approximately 55 percent of sales last year. Our Fine Paper brands, such as CLASSIC® and ENVIRONMENT® Papers, are among the most recognized and preferred in North America, and we are expanding on that position with a broad range of new papers for commercial digital printing. In the Technical Products area, we actively serve the North American market for materials used in the manufacture of industrial consumable products, digitally imaged transfer papers and durable label materials. In Latin America and the rest of the world, which account for about 7 per- cent of total sales, we are growing with our international customers and looking for ways to accelerate this growth. For example, we see opportunities to work with global companies that have manufacturing in the region and desire a locally based source of advanced, high- performance products. 6 Neenah Paper, Inc. 2010 Annual Report WE ENGAGE WITH CUSTOMERS OUR LEADERSHIP IS BUILT ON A SOLID COMMITMENT AND STAND BEHIND OUR PRODUCTS TO EXCELLENCE IN SERVICE AND SUPPLY CHAIN TO CREATE EXCEPTIONAL VALUE Customer engagement and quality service are essential ingredients in Neenah’s success, and these skills will support our growth. Illustrations of this commitment to service range from our flexibility in tailoring solutions to meet specific product perfor- mance requirements, to using our supply chain tools to strengthen our customers’ inventory management, to guaranteeing our brand performance. For example, our Technical Products business units work closely with customers to understand and respond to their needs for today’s and tomorrow’s advanced solutions. Among other initiatives, this has led us to invest in additional meltblown capacity in our German operations to meet rapidly growing customer demands for our more advanced filtration products. Reflecting our efforts to build our confidence in our brands. In 2010, we expanded this effort with a new 110 percent print guarantee on CLASSIC CREST® Paper, our best-selling brand, where we will refund 110 percent of a customer’s paper costs if they are not satisfied with the print quality. We also introduced our Personal ProofSM, providing a free sample print of the customer’s artwork on a variety of our fine papers. Technology is a major con- tributor to our customer outreach. Our recently rede- signed www. neenahpaper.com website, our close relationships with customers, our U.S. Technical Products group invites customer teams each year to visit our Munising mill and participate in “Paper School.” The customer groups spend time in the labo- ratory learning how to saturate and coat base papers to achieve different properties, thus increasing their understanding of Neenah’s customized solutions and how we can work together on future product developments. In Fine Paper, we were the first in our industry to offer the combination of both service and product performance guarantees to demonstrate Against the Grain blog, and our use of social media help us to actively engage customers. We also offer our Strategic Planning and Optimization Tool (SPOT) program, in which we use data gathered through our own supply chain systems to help cus- tomers order the right products and quantities to stay “in stock” on the highest velocity items – saving them money and increasing their turns, while making it easy for them to order with Neenah. Through these and many other initiatives, we stay engaged with our customers, helping to build their business – and ours. Neenah Paper, Inc. 2010 Annual Report 7 SUSTAINABILITY IS A VITAL ELEMENT SUSTAINABILITY IS A VITAL ELEMENT WE AIM FOR THE HIGHEST STANDARDS WE AIM FOR THE HIGHEST STANDARDS OF THE PRODUCTS WE MAKE OF THE PRODUCTS WE MAKE OF ENVIRONMENTAL RESPONSIBILITY OF ENVIRONMENTAL RESPONSIBILITY AND THE WAY WE MAKE THEM AND THE WAY WE MAKE THEM In our products, as well as our manufacturing processes, Neenah strives to maintain the highest standards of environmental sustainability. We have the most extensive line of carbon neutral premium writing, text and cover papers in our industry. Our CLASSIC CREST®, CLASSIC® Linen, ENVIRONMENT® and STARWHITE® Papers are all FSC certified, and our major CLASSIC brands are also Carbon Neutral Plus, with offerings made from 100 percent post-consumer fiber and processed chlorine free. Using the ECO Calculator on our website, customers can instantly calculate the environmental savings they can achieve by using paper made with post-consumer fiber, as well as the savings from using paper made with 100 percent renewable electricity. We also have increased our use of FSC certified pulps in Technical Products, when we are able to do so while still meeting customers’ performance specifications. In addition, we created a masking tape using recycled fibers, which is finding wide use in construction projects in Europe due to local green procurement requirements. We introduced several green product innovations in Fine Paper during the past year, includ- ing a new CONSERVATION® brand that was created to complement our industry-leading ENVIRONMENT® brand. We introduced a 100 percent post-consumer folding board for packaging cosmetics and other luxury items. Several years ago we defined an ambitious set of standards for our manufacturing operations, involving responsible procurement, reduction in water usage, increased energy efficiency, reduction in greenhouse gas emissions, wastewater treatment and effluent quality, and other tangible areas. Today, many of our plants are 100 percent landfill-free for manu- facturing waste, and make use of renewable power sources such as hydroelectricity and wind. One of our recent environmental initiatives is the Osa Project, a part- nership to preserve an important bird habitat on Costa Rica’s Osa peninsula. As the Osa provides shelter for migratory birds – including those from Wisconsin – during the winter months, it is crucial to safeguard the region’s forests. Neenah has partnered with the Wisconsin Department of Natural Resources (DNR), Friends of the Osa, and other public and private organizations in this vital project. 8 Neenah Paper, Inc. 2010 Annual Report PART II: LETTER TO SHAREHOLDERS Creating value and opportunity through strategic transformation Neenah Paper, Inc. 2010 Annual Report 9 TO NEENAH PAPER SHAREHOLDERS Neenah Paper is stronger today than at any time since our founding six years ago – a fact that is reflected in our 2010 performance. Our businesses are more broadly diversified in higher-value products and focused on high- potential global markets. We have built strong market positions and a reputation for leadership in innovation and supply chain. As discussed in this letter and annual report to you, these changes have resulted in a product portfolio that can support top-line increases and improved margins, a de-levered capital structure, consistent free cash flow, and the capacity to produce profitable growth and attractive returns for shareholders. We arrived at this position because our people – at all levels – drove a major transformation of the Company over the past several years. We divested our commodity pulp operations, culminating in the sale of our remaining timberlands in March 2010. We expanded the scale and growth potential of our Technical Products and Fine Paper businesses with important acquisitions and strategic capital investments. In addition, we aggressively reduced our costs and operating footprint. Because of these efforts, we entered this year confident in our ability to produce strong financial results, and we are pleased to report on our success in delivering against this commitment in 2010. 10 Neenah Paper, Inc. 2010 Annual Report DELIVERING FINANCIAL PERFORMANCE Neenah’s results for 2010 demonstrate solid execution of our business strategies. Net sales increased 15 percent, to $658 million. The increase was achieved in spite of the almost $12 million impact of a weaker Euro. Our businesses realized higher volumes, an improved product mix and increased pricing. Technical Products grew more than 20 percent and now accounts for almost 60 percent of consolidated sales. We also expanded our international presence, and sales outside North America now represent approximately 45 percent of total sales. Income from continuing operations grew to $55 million in 2010 from $16 million in 2009. Excluding the one-time impact of a $3 million gain on the sale of the Ripon mill in 2010 and a $17 million charge for the closure of that facility in 2009, operating income increased by almost $19 million, or more than 50 percent. This improvement was achieved in spite of record high fiber prices during the year. Our teams did an excellent job of countering the more than $32 million rise in fiber prices, as we continued to benefit from the cost reductions implemented during the financial crisis, significantly higher volumes, price increases, and a more profitable mix of products. We remained focused on increasing our operating margins, which improved to almost 8 percent of sales in 2010, from 6 percent in 2009, excluding Ripon related items. Earnings per share, adjusted for special items such as the Woodlands sale and the closure of the Ripon mill, were $1.47 in 2010, nearly double the adjusted earnings per share of $0.76 in 2009. Neenah Paper, Inc. 2010 Annual Report 11 STRONG BALANCE SHEET Our business performance and strong cash flow generation, supplemented by almost $86 million in proceeds from the sale of the Woodlands and Ripon mill, enabled us to increase our cash position by more than $40 million while reducing debt by approxi- mately $75 million. Our performance was recognized by the major credit rating agencies, which upgraded the rating of Neenah Paper debt in March of 2010. We announced early in 2011 that we will further reduce our debt and call approximately $65 million of our bonds. With this action, we will have reduced our debt levels by more than $165 million since the third quarter of 2008, when the financial crisis hit. More importantly, through our stronger operating performance, along with non-core asset sales, we have improved our capital structure significantly. And, with a revolving credit facility of $100 million, we have ample liquidity and flexibility for growth. GROWING SHAREHOLDER VALUE AND DIVIDEND Our share price increased in concert with the strong performance of the business during the past year, rising 41 percent during 2010, on top of the 58 percent increase in 2009. In both years, Neenah’s perfor- mance outpaced both broad market indices and peer companies. $28 million. Another key contributor to the improve- ment was a reduction in working capital levels across all of our businesses. We ended the year with working capital at 14 percent of sales, versus 16 percent last year. All of this also contributed to free cash flow of more than $35 million. We have mentioned in past years that Return We, along with our Board of Directors, believe on Invested Capital is a key metric against which we measure our performance, as well as an important benchmark for shareholders. During 2010 we raised our return level to above 8 percent from just below 6 percent for the prior year. While improvements in our top line and margins were the primary drivers, we remain disciplined in our capital spending, which at $17 million was well below our depreciation of that an attractive dividend is a priority and a key component of delivering shareholder value. That is why we maintained our dividend in 2009, when many companies reduced or suspended dividends due to economic conditions. In November 2010, the Board voted to increase our quarterly dividend 10 percent, to $0.11 per share from $0.10 per share, effective with the dividend payable in March 2011. 12 Neenah Paper, Inc. 2010 Annual Report TECHNICAL PRODUCTS WINNING THROUGH SPECIALIZATION Success in our Technical Products business is determined by the ways in which we use Neenah’s exceptional technical knowledge and process capabilities to bring unique solutions to our custom- ers and the market. This solution-oriented approach creates a strong long-term partnership, and provides the basis for serving specialized market segments and applications. Over time, this has enabled us to move to a mix of higher performing and, therefore, higher margin products. Focus on innovation remains a priority, both to grow the business and to replace our more mature products. In our Technical Products business, new products contributed more than $10 million to sales last year. In 2010, we were very pleased to receive both the “Growth and Innovation Excellence” and “Supplier of the Year” awards from Avery Dennison’s office products division. While we are proud to receive awards and accolades, the most important “win” is the ability to create new business opportu- nities such as helping Avery bring to market a new name-badge product, which will support growth in 2011. In another example of innovation, we provided a specialized base for a customer’s new premium tape product, which now has national distribution at a retail level. In Europe, we used our saturation capabilities to create a new masking tape from recycled fibers, which satisfies local requirements for sustainable materials in publicly funded construc- tion projects. For the Asian market, we developed abrasive products that are making strong inroads in the markets, by substituting an engineered, better- performing solution for traditional silica-on-kraft paper products. During the year we announced a $10 million investment to expand our meltblown nonwoven capacity in Germany. The meltblown process enables us to combine specialized nonwoven polymers onto other substrates, enhancing our ability to meet complex performance needs, ranging from automo- tive and industrial filtration to filters in high-end single-serving coffee makers. The new capacity came online as planned in the first quarter of 2011 and will allow us to continue to support the growth of our higher value filtration products. Net sales of Technical Products increased 21 percent in 2010, to $384 million. Volumes increased in most product lines, including our largest product group, transportation filtration, which rose more than 20 percent and reflected growing demand in markets outside of our European base. In addition to higher volumes, we realized a more profitable product mix, higher average selling prices and continued improvements in cost efficiencies. These factors helped us make progress toward our key objective of double-digit operating margins in Technical Products, with an improvement to 8 per- cent in 2010, versus 5 percent last year. Operating income of $29 million set an all-time record and more than doubled from the prior year, overcoming more than $20 million of higher input costs. Neenah Paper, Inc. 2010 Annual Report 13 FINE PAPER LEVERAGING OUR LEADERSHIP Neenah’s competitive strength in Fine Paper starts with our industry-leading brands – such as CLASSIC®, ENVIRONMENT®, ESSE® and SUNDANCE® Papers – which have the strongest name recognition in the marketplace, reinforced by our unparalleled commit- ment to quality, marketing support and service. By building on our traditional strong position in text and cover products, while expanding in promising new areas, we met our objective to deliver growth in excess of the overall fine paper market. Revenues in growth areas such as packaging, labels and interna- tional markets were up 18 percent year-over-year. In 2010, we continued to refine our text and cover product lines to build on our market leadership. Neenah launched the industry’s most comprehensive range of papers for digital printing, featuring 16 different colors and 13 textures. A new brand, CONSERVATION® Paper, was introduced to offer a value alternative in the 100 percent post consumer category. Late in the year, we began to supply envelopes in Neenah Paper grades directly to our customers. And we have continued to build on our partnership with Crane & Co. to exclusively manu- facture, market and sell their highly regarded line of fine business papers. An element of our strategy is to move beyond the traditional printing environment, where our paper is used to present printed content in a premium manner, into applications where paper quality and characteristics become part of the essence of a customer’s brand itself. This focus on “image-making” opens up new revenue streams and growth potential, as reflected in the expansion of our labels and packaging solutions, which are becoming a larger part of our business. Many brands of wines and spirits, organic foods and other premium consumer products now include labeling provided by Neenah. We also have introduced packaging for cosmetics and other high-end consumer products, using a 100 per- cent post-consumer content folding board. International markets are a growing part of our Fine Paper business. Our team has focused on selected regions such as Asia and South America, expanding our presence in a cost-effective manner by redeploying sales, marketing, logistics and other resources to those markets. In Asia, for example, where the increasing affluence of the population is creating demand for fine writing papers, we relaunched our STARWHITE® and SUNDANCE® brands and are emphasizing our breadth of color and texture offerings. We achieved growth in excess of 18 percent in our international business in 2010 and we will continue to resource and focus on this opportunity. Innovative marketing and service initiatives continue to be key drivers of our progress in Fine Paper. Our redesigned neenahpaper.com website has been very well received by the design community. It features an expanded Personal Proof program, which enables designers to order a custom print of their artwork on a wide range of Neenah papers. In cus- tomer service, we have enhanced our industry leading quality and delivery guarantees. An example of our confidence in Neenah quality – and our willingness to stand behind our products – is our new 110 percent print guarantee on CLASSIC CREST® Papers. Net sales for Fine Paper were $273 million in 2010, an increase of 7 percent, driven primarily by volume growth, as our teams continue to show that they can outperform the market. Operating income for the business was $37 million, increasing 7 percent from 2009 after excluding the impact of the Ripon mill closure and sale. The increase was achieved despite more than $15 million in higher pulp costs, reflecting the power of our brands and the success of our teams in delivering benefits from higher volume, increased selling prices and cost efficiencies. 14 Neenah Paper, Inc. 2010 Annual Report SAFETY AND SUSTAINABILITY We are proud of our continuing progress in the area We are proud of our continuing progress in the area of safety, which remains a top priority. In 2010, our of safety, which remains a top priority. In 2010, our reportable safety incident rate improved 14 percent. reportable safety incident rate improved 14 percent. We are pleased with our ongoing improvement in We are pleased with our ongoing improvement in safety, and we continue to work toward our goal of safety, and we continue to work toward our goal of world-class performance. world-class performance. In 2010, we maintained our commitment to In 2010, we maintained our commitment to environmental sustainability, both in our products environmental sustainability, both in our products and our processes. With our new CONSERVATION® and our processes. With our new CONSERVATION® brand of fine papers, we have expanded our offer- brand of fine papers, we have expanded our offer- ing of 100 percent post-consumer fiber products. ing of 100 percent post-consumer fiber products. We continue to use more FSC-certified pulp in our We continue to use more FSC-certified pulp in our products, including our new “green” masking tape. products, including our new “green” masking tape. Operationally, we continue to make progress against Operationally, we continue to make progress against our environmental objectives, including reduced our environmental objectives, including reduced water usage and improved water treatment, eliminat- water usage and improved water treatment, eliminat- ing solid waste, and expanding the use of renewable ing solid waste, and expanding the use of renewable energy sources. energy sources. MANAGEMENT SUCCESSION The Board of Directors announced an executive succession plan in late 2010, under which John O’Donnell, Senior Vice President and Chief Operating Officer, will succeed me as President and Chief Executive Officer in May 2011. At that time, I will retire as CEO, but continue in the capacity of Non- Executive Chairman of the Board. John is well suited and prepared for the role. He has more than two decades of experience in the industry, has led major global businesses, and has been a principal driver of the progress of our Fine Paper business since late 2007, when we recruited him to Neenah. The Board of Directors has worked for more than a year, both internally and with outside advisors, to ensure that this transition will be seamless and successful. The Board and I are excited about working with John, and we are confident that he and the entire Neenah team are well equipped to achieve great success in the future. Neenah Paper, Inc. 2010 Annual Report 15 FOCUSED ON GROWTH Neenah has come through the challenging economic Neenah has come through the challenging economic cycle in a strong position. We are leaders in our cycle in a strong position. We are leaders in our traditional markets and are penetrating new specialty traditional markets and are penetrating new specialty areas where we can produce increasing value. At areas where we can produce increasing value. At the same time, we have demonstrated our ability to the same time, we have demonstrated our ability to improve the efficiency of our operations, produce improve the efficiency of our operations, produce sustainable and significant cash flows, and achieve a sustainable and significant cash flows, and achieve a capital structure that offers the flexibility to pursue capital structure that offers the flexibility to pursue future growth opportunities. We worked very hard to future growth opportunities. We worked very hard to enhance both the product composition and risk pro- enhance both the product composition and risk pro- file of the Company by divesting pulp, and we expect file of the Company by divesting pulp, and we expect to maintain this improved profile and build on the to maintain this improved profile and build on the core businesses we have today. core businesses we have today. Going forward, we will build on this solid Going forward, we will build on this solid foundation. We will use our technical, supply chain foundation. We will use our technical, supply chain and marketing expertise to capture new opportunities. and marketing expertise to capture new opportunities. We will expand our market share by making Neenah We will expand our market share by making Neenah increasingly valuable and relevant to our customers. increasingly valuable and relevant to our customers. We will continue to pursue growth in the international We will continue to pursue growth in the international marketplace. We will ensure that the company has a marketplace. We will ensure that the company has a talented, capable and motivated team to lead Neenah talented, capable and motivated team to lead Neenah toward an exciting future. And we will operate in toward an exciting future. And we will operate in a disciplined manner, staying focused on delivering a disciplined manner, staying focused on delivering attractive returns on invested capital and rising attractive returns on invested capital and rising shareholder value. shareholder value. I would like to express my thanks for the hard I would like to express my thanks for the hard work and energy of our people, the loyalty of our work and energy of our people, the loyalty of our customers, the guidance of our Board of Directors and customers, the guidance of our Board of Directors and the support of our shareholders. It has been a privi- the support of our shareholders. It has been a privi- lege to work with the Neenah team as we spun off lege to work with the Neenah team as we spun off from Kimberly-Clark and then successfully trans- from Kimberly-Clark and then successfully trans- formed the Company into a leader in our Technical formed the Company into a leader in our Technical Products and Fine Paper markets. We have achieved Products and Fine Paper markets. We have achieved our objective of creating a transformed company, our objective of creating a transformed company, focused on profitable markets, that is supported focused on profitable markets, that is supported by our strong financial base, and a great team with a by our strong financial base, and a great team with a commitment to quality and service and an innovative, commitment to quality and service and an innovative, “can do” spirit. I am confident that Neenah Paper “can do” spirit. I am confident that Neenah Paper will continue to deliver on its exciting potential in the will continue to deliver on its exciting potential in the years ahead. years ahead. ABOUT THAT ANNUAL REPORT... ABOUT THAT ANNUAL REPORT... I would be remiss if I ended without mentioning last I would be remiss if I ended without mentioning last year’s “hardcover” annual report. I received a few year’s “hardcover” annual report. I received a few letters from shareholders commenting on the beauty letters from shareholders commenting on the beauty of it, but some also questioned the cost and the need of it, but some also questioned the cost and the need for what one shareholder referred to as a “bullet- for what one shareholder referred to as a “bullet- proof” cover. I’m glad it got your attention, as this proof” cover. I’m glad it got your attention, as this is what we do for a living with our products! We work is what we do for a living with our products! We work hard to manage spending, and the total cost did hard to manage spending, and the total cost did not exceed the prior year’s level. The cover material not exceed the prior year’s level. The cover material was one of the Technical Products grades, so it was was one of the Technical Products grades, so it was a great showcase for our capabilities. We are proud a great showcase for our capabilities. We are proud to say that the report got the attention of others to say that the report got the attention of others too – as it won the overall “Best in Class” award at too – as it won the overall “Best in Class” award at the leading international annual report competi- the leading international annual report competi- tion conducted by the graphic design industry, and tion conducted by the graphic design industry, and more importantly was recognized by our customers more importantly was recognized by our customers throughout the year. We are proud of what we make throughout the year. We are proud of what we make and sell, and our annual reports reflect it. Thanks. and sell, and our annual reports reflect it. Thanks. Sincerely, Sincerely, Sean T. Erwin Sean T. Erwin Chairman, President and Chairman, President and Chief Executive Officer Chief Executive Officer 16 Neenah Paper, Inc. 2010 Annual Report PART III: NEENAH PAPER AT A GLANCE PART III: NEENAH PAPER AT A GLANCE Superior products and strong performance Superior products and strong performance working together working together Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report 17 17 NEENAH PAPER AT A GLANCE NEENAH PAPER AT A GLANCE AT NEENAH, OUR MISSION AT NEENAH, OUR MISSION IS TO BE IS TO BE THE FIRST CHOICE THE FIRST CHOICE FOR PREMIUM BRANDED FOR PREMIUM BRANDED AND CUSTOMIZED PRODUCTS. AND CUSTOMIZED PRODUCTS. OUR GOAL OUR GOAL IS TO CREATE VALUE IS TO CREATE VALUE FOR OUR CUSTOMERS AND FOR OUR CUSTOMERS AND STOCKHOLDERS STOCKHOLDERS THROUGH INNOVATION, SERVICE THROUGH INNOVATION, SERVICE AND EXCELLENCE AND EXCELLENCE IN EXECUTION. IN EXECUTION. IT IS OUR EMPLOYEES WHO IT IS OUR EMPLOYEES WHO DRIVE THIS VALUE. DRIVE THIS VALUE. 18 18 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report NEENAH NEENAH TECHNICAL PRODUCTS TECHNICAL PRODUCTS NEENAH NEENAH FINE PAPER FINE PAPER Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report 19 19 NEENAH TECHNICAL PRODUCTS NEENAH TECHNICAL PRODUCTS Neenah is a leading producer of Technical Neenah is a leading producer of Technical Products, using paper, film, nonwovens Products, using paper, film, nonwovens and other substrates to produce specialized, and other substrates to produce specialized, industrial and graphic materials that industrial and graphic materials that employ saturation, coating and other employ saturation, coating and other function-enhancing processes to deliver function-enhancing processes to deliver specified performance. specified performance. Our products include filtration media, Our products include filtration media, specialty tape and coated abrasive specialty tape and coated abrasive backings, as well as durable tag, label and backings, as well as durable tag, label and wall coverings. Specific end uses include wall coverings. Specific end uses include transportation, household and industrial transportation, household and industrial applications, medical packaging, retail image applications, medical packaging, retail image transfer papers and many others. transfer papers and many others. The Technical Products group serves The Technical Products group serves customers in as many as 70 countries through customers in as many as 70 countries through manufacturing facilities in the U.S. and manufacturing facilities in the U.S. and Germany, supported by R&D efforts focused Germany, supported by R&D efforts focused on developing the new processes on developing the new processes and products that will meet customers’ and products that will meet customers’ needs and drive our growth. needs and drive our growth. 20 20 20 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report Filtration Filtration Specialty Specialty Tape Tape Technical Products Technical Products Component Component Materials Materials Graphics & Graphics & Wall Wall Covering Covering Air Filter Media Air Filter Media Oil Filter Media Oil Filter Media Fuel Filter Media Fuel Filter Media Cabin Filter Media Cabin Filter Media Power Tool Filters Power Tool Filters Vacuum Cleaner Bags Vacuum Cleaner Bags Blood Filtration Blood Filtration Industrial Filtration Industrial Filtration Beverage Filtration Beverage Filtration Indoor Painting Indoor Painting Outdoor Painting Outdoor Painting Automotive Lacquering Automotive Lacquering Carton Sealing Tapes Carton Sealing Tapes Color Coding Color Coding Protective Surface Covering Protective Surface Covering Adhesive Coated Adhesive Coated Vinyl Graphics Transfer Vinyl Graphics Transfer Packaging Packaging Coated Abrasives Coated Abrasives Medical Packaging Medical Packaging Veneer Backing Veneer Backing Automotive Dashboards Automotive Dashboards Printing Blankets Printing Blankets Furniture Surface Overlay Furniture Surface Overlay Release Papers Release Papers Screen Printing Plates Screen Printing Plates Carbon Fiber Base Carbon Fiber Base Heat Transfer Heat Transfer Bookcovering Material Bookcovering Material Outdoor Maps Outdoor Maps Hospital ID Bracelets Hospital ID Bracelets Passport Covers Passport Covers Pressure Sensitive Labels Pressure Sensitive Labels Pharmaceutical Labels Pharmaceutical Labels Garment Brand Labeling Garment Brand Labeling Racing Numbers Racing Numbers Finished Wallpapers Finished Wallpapers Paintable Wallpapers Paintable Wallpapers Embossed Wallpapers Embossed Wallpapers Wallpapers on Demand Wallpapers on Demand Wall Decals Wall Decals Digitally Printed Wallpapers Digitally Printed Wallpapers Liner for Glazing Liner for Glazing Backing for Flexible Flooring Backing for Flexible Flooring Acoustic Ceilings Acoustic Ceilings Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report 21 21 NEENAH FINE PAPER NEENAH FINE PAPER Neenah is the leader in the North American Neenah is the leader in the North American Fine Paper market. We are a world-class Fine Paper market. We are a world-class manufacturer of premium writing, text and manufacturer of premium writing, text and cover materials, cotton fiber papers and cover materials, cotton fiber papers and specialty items. specialty items. Built on a tradition of quality and service, Built on a tradition of quality and service, we market some of the most recognized and we market some of the most recognized and preferred premium papers in North America, preferred premium papers in North America, with distinguished brands including CLASSIC®, with distinguished brands including CLASSIC®, CLASSIC CREST®, ESSE®, SUNDANCE® and CLASSIC CREST®, ESSE®, SUNDANCE® and ENVIRONMENT® Papers. ENVIRONMENT® Papers. A pioneer in eco-friendly paper products, A pioneer in eco-friendly paper products, our ENVIRONMENT® Paper is the premier our ENVIRONMENT® Paper is the premier offering of recycled content papers offering of recycled content papers in the market. Neenah’s leadership role is in the market. Neenah’s leadership role is supported by our broad range of colors, supported by our broad range of colors, textures and other product features. textures and other product features. Our products are in demand wherever Our products are in demand wherever image counts: for high-end printing needs, image counts: for high-end printing needs, business identification materials, private business identification materials, private watermark stationery, marketing and watermark stationery, marketing and promotional materials, reports, brochures promotional materials, reports, brochures and specialized uses such as upscale and specialized uses such as upscale packaging and labels. packaging and labels. 22 22 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report Stationery Stationery Business Cards Business Cards Annual Reports Annual Reports Brochures Brochures Luxury Retail Packaging Luxury Retail Packaging Wine Labels Wine Labels Pocket Folders Pocket Folders Direct-Mail Advertising Direct-Mail Advertising Shopping Bags Shopping Bags Menus Menus Sustainability Reports Sustainability Reports Music Packaging Music Packaging Greeting Cards Greeting Cards Coasters Coasters Fine Paper Fine Paper CLASSIC CREST® Papers CLASSIC CREST® Papers CLASSIC® Linen Papers CLASSIC® Linen Papers CLASSIC® Laid Papers CLASSIC® Laid Papers CLASSIC COLUMNS® Papers CLASSIC COLUMNS® Papers CLASSIC COTTON® Papers CLASSIC COTTON® Papers CONSERVATION® Papers CONSERVATION® Papers CRANE® Papers CRANE® Papers ENVIRONMENT® Papers ENVIRONMENT® Papers STARWHITE® Papers STARWHITE® Papers SUNDANCE® Papers SUNDANCE® Papers EAMES™ Papers EAMES™ Papers ESSE® Papers ESSE® Papers OXFORD® Papers OXFORD® Papers UV/ULTRA® II Translucent Papers UV/ULTRA® II Translucent Papers CLEARFOLD® Translucent Papers CLEARFOLD® Translucent Papers CAPITOL BOND® Papers CAPITOL BOND® Papers Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report 23 23 NEENAH FACILITIES NEENAH FACILITIES Customer Service Customer Service Center Center Research and Research and Development Development Finishing Finishing Center Center Manufacturing Manufacturing Corporate Corporate Headquarters Headquarters Alpharetta, Alpharetta, Georgia Georgia Weidach, Weidach, Germany Germany Whiting, Whiting, Wisconsin Wisconsin Appleton, Appleton, Wisconsin Wisconsin Neenah, Neenah, Wisconsin Wisconsin Munising, Munising, Michigan Michigan Lahnstein, Lahnstein, Germany Germany Bruckmuehl, Bruckmuehl, Germany Germany 24 24 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report FINANCIAL INFORMATION 26 51 Business Summary Consolidated Balance Sheets 29 Selected Financial Data 32 Management’s Discussion and Analysis of Financial Condition and Results of Operations 47 Management’s Annual Report on Internal Control Over Financial Reporting 48 Reports of Independent Registered Public Accounting Firm  50 Consolidated Statements of Operations 52 Consolidated Statements of Changes in Stockholders’ Equity  53 Consolidated Statements of Cash Flows 54 Notes to Consolidated Financial Statements 90 Leadership 91 Shareholder Information Neenah Paper, Inc. 2010 Annual Report 25 BUSINESS SUMMARY In this report, unless the context requires otherwise, refer- ences to “we,” “us,” “our,” “Neenah” or the “Company” are intended to mean Neenah Paper, Inc. and its consolidated subsidiaries. OV E R V I E W We are a leading producer of technical products and pre- mium fine papers. We have two primary operations: our technical products business and our fine paper business. Our technical products business is a leading international producer of transportation and other filter media, durable, saturated and coated substrates for a variety of end uses, and nonwoven wall coverings. Our technical products business is organized into five global strategic business units (“SBUs”) which sell into 17 prod- uct categories. We focus on categories where we believe we are a market leader or have a competitive advantage, which include, among others, transportation and other filter media, specialty tape, label, abrasive, medical packag- ing, nonwoven wall coverings and image transfer technical products markets. We are also a global supplier of mate- rials used for customer-specific applications in furniture and book covers. Our customers are located in more than 70 countries. Our technical products manufacturing facili- ties are located in Munising, Michigan and near Munich and Frankfurt, Germany. Our fine paper business is a leading producer of premium writing, text, cover and specialty papers used in corporate identity packages, corporate annual reports, invitations, personal stationery, labels and high-end packaging for point of purchase advertising. Our products include some of the most recognized and preferred papers in North America, where we enjoy leading market positions in many of our product categories. We sell our products pri- marily to authorized paper distributors, converters and specialty businesses. Our fine paper manufacturing facilities are located in Appleton, Neenah and Whiting, Wisconsin. P R O D U C T S T E C H N I C A L P R O D U C T S . The technical products busi- ness is a leading producer of filtration media and durable, saturated and coated substrates for a variety of end uses, including tapes, premask, abrasives, labels, medical pack- aging, decorative components, wall covering, and image transfer papers. Our technical products business had net sales of approximately $384 million, $318 million and $397 million in 2010, 2009 and 2008, respectively. JET- PRO®, SofStretch™, KIMDURA®, MUNISING LP®, PREVAIL™, NEENAH®, Gessner® and varitess® are brands of our techni- cal products business. In general, the products of our technical prod- ucts business are sold to other manufacturers as key com- ponents for their finished products. The technical products business is organized into five SBUs: Filtration; Tape; Component Materials, Graphics and Identification; and Wall Covering to sell its products into major market seg- ments. Several of the key market segments served, including tape and abrasives, are global in scope. The Filtration SBU produces filtration media pri- marily for induction air, fuel, oil, and cabin air applications in automotive transportation. Transportation filtration media are sold to suppliers of automotive companies as original equipment on new cars and trucks as well as to the auto- motive aftermarket. This business is primarily in Europe. The Tape SBU produces both saturated and unsaturated crepe and flat paper tapes and sells them to manufacturers to produce finished pressure sensitive products for sale in automotive, automotive aftermarket, transportation, manufacturing, building construction, and industrial general purpose applications. The Component Materials SBU is a leading pro- ducer of latex saturated and coated papers for use by a wide variety of manufacturers. Finished lightweight sand- paper is sold in the automotive, automotive aftermarket, construction, metal and woodworking industries for both waterproof and dry sanding applications. Premask paper is used as a protective over wrap for products during the manufacturing process and for applying signs, labeling and other finished products. Medical packaging paper is a polymer impregnated base sheet that provides a breathable sterilization barrier. When sealed together with film, this paper becomes a medical packaging material that allows sterilization from steam, ethylene oxide, or gamma radia- tion and at the same time provides unique barrier proper- ties. The Component Materials SBU also produces a line of release papers and furniture backers. The Graphics and Identification SBU produces label and tag products from saturated (latex impregnated) base label stock and purchased synthetic base label stock. Top coatings are applied to the base label stock to allow 26 Neenah Paper, Inc. 2010 Annual Report B U S I N E S S S U M M A R Y for high quality variable and digital printing. The synthetic label stock is recognized as a high quality, UV (ultra-violet) stable product used for outdoor applications. The business sells its label and tag stock to pressure sensitive coaters , who in turn sell the coated label and tag stock to the label printing community. Image transfer papers are used to transfer an image from paper to tee shirts, hats, coffee mugs, and other surfaces. The Graphics and Identification SBU produces and applies a proprietary imaging coating to its image transfer papers for use in digital printing applica- tions. Image transfer papers are primarily sold through large retail outlets and through master distributors. Decorative components papers are made from light and medium weight latex saturated papers which can then be coated for printability. Decorative components papers are primarily sold to coater converters, distributors, publishers and print- ers for use in book covers, stationery and fancy packaging. The Graphics and Identification SBU also produces and sells clean room papers and durable printing papers into their respective markets. The Wall Covering SBU produces a line of sub- strates made from saturated and coated wet-laid non wovens and markets to converters serving primarily European com- mercial and do-it-yourself markets. F I N E PA P E R . The fine paper business manu- factures and sells world-class branded premium writing, text, cover and specialty papers used in corporate identity packages, corporate annual reports, invitations, personal stationery, labels and high-end packaging for point of pur- chase advertising. Our fine paper business had net sales of approximately $273 million, $256 million and $336 million in 2010, 2009 and 2008, respectively. Premium writing papers are used for business and personal stationery, corporate identity packages, enve- lopes and similar end-use applications. Market leading writ- ing papers are sold by the fine paper business under the CLASSIC®, ENVIRONMENT®, NEENAH®, CAPITOL BOND® and NEUTECH® trademarks, which are denoted by a brand watermark in each sheet of writing paper. Our fine paper business has an exclusive agreement to manufacture, market and distribute Crane & Co.’s CRANE’S CREST®, CRANE’S BOND®, CRANE’S LETTRA®, CRANE’S PALETTE™ and CRANE’S® Choice Papers branded fine papers. The fine paper business also sells private watermarked paper and other specialty writing papers. Text and cover papers are used in applications such as corporate brochures, pocket folders, corporate annual reports, advertising inserts, direct mail, business cards, hang tags, scrapbooks, and a variety of other uses where colors, textured finishes or heavier weight papers are desired. Our brands in this category include CLASSIC®, CLASSIC CREST®, STARWHITE®, SUNDANCE®, ESSE® and ENVIRONMENT®. We also sell a variety of custom colors, paper finishes, and duplex/laminated papers. The fine paper business also produces and sells other specialty papers, includ- ing translucent papers, art papers, papers for optical scanning and other specialized applications, under the UV/ ULTRA® II translucent paper trademark and other brands. M A R K E T S A N D C U S T O M E R S T E C H N I C A L P R O D U C T S . The technical products business relies on five SBUs to sell its products globally into 17 prod- uct categories. Such categories, broadly defined as polymer impregnated and synthetic paper, include papers used as raw materials in the following applications: filtration, tape, component materials for manufactured products, graphics and identification, and wall covering. Several products (filtration media, wall coverings, abrasives, tapes, labels) are used in markets that are directly affected by economic business cycles. Other market seg- ments such as image transfer papers used in small/home office and consumer applications are relatively stable. Price competition is common in most of the segments served by the technical products business and has increased due to a trend of using film and other lower cost substrates instead of paper in some applications. The technical products business relies on a team of direct sales representatives and customer service repre- sentatives to market and sell approximately 95 percent of its sales volume directly to customers and converters. Less than five percent of the sales of the technical products busi- ness are sold through industrial distributors. The technical products business has over 500 customers worldwide. The distribution of sales in 2010 was approximately 55 percent in Europe, 25 percent in North America and 20 percent in Latin America and Asia. Customers typically convert and transform base papers Neenah Paper, Inc. 2010 Annual Report 27 B U S I N E S S S U M M A R Y and film into finished rolls and sheets by adding adhesives, coatings and finishes. These transformed products are then sold to end-users. F I N E PA P E R . Premium writing, text and cover papers represent approximately three percent of the North American uncoated free sheet market. The uncoated free sheet market has been declining two to four percent annually due to the increasing use of electronic media for communication. For 2010, the American Forestry and Paper Associations (the “AF&PA”) reported a six percent year- over-year industry decline in the premium text and cover uncoated free sheet paper category. Lower industry volume reflected a decline in consumption for a number of key end- use market segments, including real estate, hospitality and advertising. The stationery segment of the uncoated free sheet market is divided into cotton and sulfite grades. The text and cover paper segment of the market, used in cor- porate identification applications, is split between smooth papers and textured papers. Text papers have traditionally been utilized for special, high-end collateral material such as corporate brochures, annual reports and special-edition books. Cover papers are primarily used for business cards, pocket folders, brochures and report covers, including cor- porate annual reports. The fine paper business sells its products through our sales and marketing organizations primarily in three channels: authorized paper distributors, converters and direct sales. Sales to distributors, including distributor owned paper stores, account for approximately 70 per- cent of revenue in the fine paper business. Approximately six percent of the sales of our fine paper business are exported to international distributors. Sales to the fine paper business’s two largest customers (both of which are distributors) represented approximately 30 percent of its total sales in 2010. We prac- tice limited distribution to improve our ability to control the marketing of our products. Although a complete loss of either of these customers would cause a temporary decline in the business’s sales volume, the decline could be partially offset by expanding sales to existing distributors, and fur- ther offset over a several month period with the addition of new distributors. C O N C E N T R AT I O N . For the years ended December 31, 2010, 2009 and 2008, no customer accounted for more than ten percent of our consolidated net sales. The following tables present further informa- tion about our businesses by geographic area (dollars in millions): Net sales United States Europe Consolidated Total Assets United States Canada Europe Total Year Ended December 31, 2010 2009 2008 $413.6 244.1 $657.7 $360.9 213.0 $573.9 $467.3 265.0 $732.3 December 31, 2010 2009 2008 $308.9 0.1 297.7 $606.7 $330.0 5.4 301.2 $636.6 $371.8 3.3 314.9 $690.0 Net sales and total assets are attributed to geo- graphic areas based on the physical location of the selling entities and the physical location of the assets. See Note 14 of Notes to Consolidated Financial Statements, “Business Segment and Geographic Information,” for information with respect to net sales, profits (losses) and total assets by busi- ness segment. 28 Neenah Paper, Inc. 2010 Annual Report SELECTED FINANCIAL DATA The following table sets forth our selected historical financial and other data. You should read the information set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Annual Report. The statement of operations data for the years ended December 31, 2010, 2009 and 2008 and the balance sheet data as of December 31, 2010 and 2009 set forth below are derived from our audited historical consolidated financial statements included elsewhere in this Annual Report. The balance sheet data as of December 31, 2008, 2007 and 2006 and the statement of operations data for the years ended December 31, 2007 and 2006 set forth below are derived from our historical consolidated financial statements not included in this Annual Report. During the preparation of the interim finan- cial statements for the three and nine months ended September 30, 2010, the Company identified a $2.8 million overstatement of accounts payable that was primarily the result of invalid inventory pricing adjustments beginning in 2006 and certain inventory transactions in 2008. These errors resulted in an overstatement of accounts payable and cost of products sold of $0.4 million and $2.4 million for the years ended December 31, 2006 and 2008, respectively. The net effect of these corrections on the statement of operations for the years ended December 31, 2008 and 2006 and on the consolidated balance sheet data as of December 31, 2006, 2007, 2008 and 2009 is presented in the following table. We believe the effects of these prior period corrections are not material to any prior period consolidated financial statements. See Note 1 of Notes to Consolidated Financial Statements, “Background and Basis of Presentation – Prior Year Adjustments.” (Dollars in millions, except per share data) 2010 2009 2008 2007 2006 Year Ended December 31, Consolidated Statement of Operations Data Cost of products sold Operating income Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Net income Earnings from continuing operations per basic share Earnings from continuing operations per diluted share (Dollars in millions) Consolidated Balance Sheet Data Working capital Total assets Total liabilities Total stockholders’ equity $ – – – – – – – – $ – – – – – – – – $ (2.4) 2.4 2.4 0.9 1.5 1.5 0.10 0.10 December 31, $ – – – – – – – – $ (0.4) 0.4 0.4 – 0.4 0.4 0.02 0.02 2010 2009 2008 2007 2006 $ – – – – $ 2.8 (0.9) (2.8) 1.9 $ 2.8 (0.9) (2.8) 1.9 $ 0.4 – (0.4) 0.4 $ 0.4 – (0.4) 0.4 Neenah Paper, Inc. 2010 Annual Report 29 S E L E C T E D F I N A N C I A L D A T A (Dollars in millions, except per share data) 2010 2009 2008 2007 (f) 2006 (g) Year Ended December 31, Consolidated Statement of Operations Data Net sales Cost of products sold Gross profit Selling, general and administrative expenses Other income – net Loss (gain) on closure and sale of the Ripon Mill (b) Goodwill and other intangible asset impairment charge (c) Operating income (loss) Interest expense – net Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Income (loss) from continuing operations Income (loss) from discontinued operations, net of taxes (a) (d) (e) (j) Net income (loss) $657.7 537.7 120.0 69.3 (1.0) (3.4) – 55.1 20.3 34.8 9.8 25.0 134.1 $159.1 $573.9 472.3 101.6 69.1 (1.0) 17.1 – 16.4 23.2 (6.8) (5.0) (1.8) 0.6 $ (1.2) $ 732.3 630.8 101.5 75.2 (11.3) – 54.5 (16.9) 25.0 (41.9) 3.9 (45.8) (111.2) $(157.0) $767.0 635.5 131.5 79.3 (1.7) – – 53.9 25.4 28.5 (3.7) 32.2 (22.0) $ 10.2 $405.0 305.0 100.0 54.4 (0.5) – – 46.1 16.9 29.2 9.4 19.8 43.1 $ 62.9 Earnings (loss) from continuing operations per basic share $ 1.69 $ (0.12) $ (3.14) $ 2.15 $ 1.33 Earnings (loss) from continuing operations per diluted share $ 1.61 $ (0.12) $ (3.14) $ 2.11 $ 1.33 Cash dividends per common share $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 Other Financial Data Net cash flow provided by (used for): Operating activities Capital expenditures Other investing activities (a) (d) (f) (g) Financing activities (f) (g) Ratio of earnings to fixed charges (h) (i) (Dollars in millions) Consolidated Balance Sheet Data Working capital Total assets Long-term debt Total liabilities Total stockholders’ equity (a) (a) In March 2010, Neenah Canada sold approximately 475,000 acres of woodland assets in Nova Scotia (the “Woodlands”) to Northern Pulp, for C$82.5 million ($78.6 million). The sale resulted in a pre-tax gain, net of fees and other transaction costs, of $74.1 million. The sale of the Woodlands resulted in the substantially complete liquidation of the Company’s investment in Neenah Canada. In accordance with Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters (“ASC Topic 830”), $87.9 million of cumulative currency transla- tion adjustments attributable to the Company’s Canadian subsidiaries have been reclassified into earnings and recognized as part of the gain on sale of the Woodlands. The transaction did not generate a cash tax liability because the tax basis for the Woodlands was approximately equal to the sale price. See Note 5 of Notes to Consolidated Financial Statements, “Discontinued Operations.” 30 Neenah Paper, Inc. 2010 Annual Report $ 54.5 (17.4) 83.9 (78.3) 2.6x $ 64.9 (8.4) 0.1 (54.2) – $ 13.1 (30.0) (0.4) 18.2 – $ 69.5 (58.3) (55.1) 43.8 2.1x $ 65.8 (25.1) (102.6) 50.8 2.5x 2010 2009 2008 2007 (f) 2006 (g) December 31, $129.9 606.7 231.3 447.5 159.2 $ 98.8 636.6 263.6 527.0 109.6 $147.1 689.1 340.5 584.1 105.0 $120.9 937.8 321.2 656.7 281.1 $ 93.3 742.5 282.3 559.4 183.1 (b) In October 2010, we sold the remaining assets of the Ripon Mill to Diamond Pet Food Processors of Ripon, LLC (“Diamond”) for gross proceeds of approximately $9 million. Pursuant to the terms of the transaction, Diamond acquired all the assets and assumed responsibility for substantially all the remaining liabilities associated with the Ripon Mill. We recognized a pre-tax gain on the sale of $3.4 million in the fourth quarter of 2010. In May 2009, we permanently closed the Ripon Mill. The closure resulted in a pre-tax charge of $17.1 million, comprised of approximately $5.8 million in non-cash charges primarily for losses related to the car- rying value of property, plant and equipment, a curtailment loss of $0.8 million related to postretirement benefit plans in which employ- ees of the Ripon Mill participated and cash payments for contract terminations, severances and other employee costs of approximately $10.5 million. S E L E C T E D F I N A N C I A L D A T A (1) In March 2010, Neenah Canada sold the Woodlands to Northern Pulp for C$82.5 million ($78.6 million) resulting in a pre-tax gain of $74.1 million. The substantially complete liquidation of the Company’s investment in Neenah Canada resulted in the reclassifica- tion of $87.9 million of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries in accordance with ASC Topic 830. See Note 5 of Notes to Consolidated Financial Statements, “Discontinued Operations.” (2) During the first quarter of 2008, we determined that the estimated value we would receive from a sale of the Pictou Mill indicated that we would not recover the carrying value of the mill’s long-lived assets. As a result, for the year ended December 31, 2008, we recognized aggregate non-cash, pre-tax impairment charges of $91.2 million to write off the carrying value of the Pictou Mill’s long- lived assets. In addition, for the year ended December 31, 2008, we recorded a pre-tax loss of $29.4 million to recognize the loss on dis- posal of the Pictou Mill. (3) In conjunction with the sale of the Pictou Mill, Northern Pulp assumed responsibility for all pension and other postretirement benefit obligations for active and retired employees of the mill. We accounted for the transfer of the Nova Scotia, Canada, defined benefit pension plan (the “Nova Scotia Plan”) to Northern Pulp as a settlement of postretirement benefit obligations pursuant to ASC Topic 715, Compensation – Retirement Benefits (“ASC Topic 715”). For the year ended December 31, 2008, we recognized a non-cash, pre-tax settlement loss of $53.7 million for the reclassification of deferred pension and other postretirement benefit adjustments related to the Nova Scotia Plan from accumulated other comprehen- sive income to the loss on disposal of the Pictou Mill. (4) In December 2007, the Ontario Plan was terminated and all out- standing pension obligations for active employees were settled through the purchase of annuity contracts or lump-sum payments pursuant to participant elections. For the year ended December 31, 2008, Neenah Canada recognized a non-cash pre-tax settlement loss of $38.7 million upon termination of the Ontario Plan. (5) In August 2006, Neenah Canada made a payment to the pension trust of approximately $10.8 million for the purchase of annuity con- tracts to settle its pension liability for current retirees. As a result, Neenah Canada recognized a pension curtailment and settlement loss of approximately $26.4 million in the year ended December 31, 2006. (6) In June 2006, Neenah Canada sold approximately 500,000 acres of woodlands in Nova Scotia for gross proceeds of $139.1 million. The transaction resulted in a net pre-tax gain of $131.7 million. Neenah Canada immediately recognized approximately $122.6 mil- lion of such gain and deferred approximately $9.1 million which was recognized in income pro-rata through December 2007. For the years ended December 31, 2007 and 2006, Neenah Canada recog- nized $6.2 million and $2.9 million, respectively, of such deferred gain in income. (c) For the year ended December 31, 2008, we recognized a pre-tax loss of $52.7 million (we did not recognize a tax benefit related to the non-tax- deductible loss) to write off the excess of the carrying value of goodwill assigned to Neenah Germany over the estimated fair value of goodwill. In addition, for the year ended December 31, 2008, we recognized a non-cash pre-tax charge of approximately $1.8 million for the impair- ment of certain trade names and customer-based intangible assets acquired in the Neenah Germany acquisition. (d) In February 2008, we committed to a plan to sell our pulp mill in Pictou, Nova Scotia (the “Pictou Mill”) and the Woodlands. In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp. Neenah Canada made a payment of approximately $10.3 million to Northern Pulp in connection with the sale of the Pictou Mill. In addition, we paid approxi- mately $3.3 million of transaction costs. In August 2006, we transferred our Terrace Bay mill and related woodlands operations to Buchanan in exchange for a payment of approximately $18.6 million. (e) For the years ended December 31, 2010, 2009 and 2008, the results of operations of the Pictou Mill and the Woodlands and the loss on dis- posal of the Pictou Mill are reported as discontinued operations in the Consolidated Statement of Operations Data. The consolidated results of operations for all other periods presented have been restated to reflect the results of operations of the Terrace Bay mill, the Pictou Mill and the Woodlands and the loss on transfer of the Terrace Bay mill as discontinued operations. (f) In March 2007, we acquired the stock of Fox Valley Corporation and its subsidiary, Fox River, for approximately $54.7 million in cash. We financed the acquisition through a combination of cash and debt drawn against our existing revolving credit facility. The results of Fox River are being reported as part of our Fine Paper segment and have been included in our consolidated financial results since the acquisition date. (g) In October 2006, we purchased the outstanding interests of Neenah Germany from FiberMark, Inc. and FiberMark International Holdings LLC for approximately $220.1 million in cash. We financed the acquisition through a combination of cash and debt drawn against our existing revolving credit facility. The results of Neenah Germany are being reported as part of our Technical Products segment and have been included in our consolidated financial results since the acquisition date. (h) For purposes of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes (less interest) plus fixed charges. Fixed charges consist of interest expense, including amor- tization of debt issuance costs, and the estimated interest portion of rental expense. For the years ended December 31, 2009 and 2008, fixed charges exceeded earnings by $6.8 million and $41.9 million, respectively. The following table presents the results of discontinued operations: (i) (j) (Dollars in millions) 2010 2009 2008 2007 2006 Year Ended December 31, Discontinued operations: Income (loss) from operations (2)(4)(5)(6) $ 1.0 $ 2.8 $ (97.8) $(31.6) $ 76.3 Gain on disposal of the Woodlands (1) Reclassification of cumulative translation adjustments related to investments in Canada (1) Loss on disposal – Terrace Bay Mill Loss on disposal – Pictou Mill (2) 74.1 87.9 – – – – – – – – (0.3) (29.4) Loss on settlement of post-employment benefit plans (3) Gain (loss) on disposal Income (loss) before income taxes (Provision) benefit for income taxes – 162.0 – (0.3) (53.7) (83.1) 163.0 2.5 (180.9) (31.6) 69.8 (28.9) (1.9) 69.7 9.6 (26.7) – – – – – – – – (6.5) – – (6.5) Income (loss) from discontinued operations, net of taxes $134.1 $ 0.6 $(111.2) $(22.0) $ 43.1 Neenah Paper, Inc. 2010 Annual Report 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis presents the factors that had a material effect on our results of operations dur- ing the years ended December 31, 2010, 2009 and 2008. Also discussed is our financial position as of the end of those periods. You should read this discussion in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Annual Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. I N T R O D U C T I O N This Management’s Discussion and Analysis of Financial Condition is intended to provide investors with an under- standing of the historical performance of our business, its financial condition and its prospects. We will discuss and provide our analysis of the following: • Overview of Business; • Business Segments; • Results of Operations and Related Information; • Liquidity and Capital Resources; • Adoption of New Accounting Pronouncements; and • Critical Accounting Policies and Use of Estimates. OV E R V I E W O F B U S I N E S S We are a leading producer of technical products and pre- mium fine papers. We have two primary operations: our technical products business and our fine paper business. In managing our businesses, we believe that achieving and maintaining a leadership position in our markets, responding effectively to competitive challenges, employing capital optimally, controlling costs and manag- ing risks are important to long-term success. Changes in input costs and general economic conditions also impact our results. In this discussion and analysis, we will refer to these factors. • M A R K E T L E A D E R S H I P. Achieving and maintaining mar- ket leadership through strong brands, product quality and performance, innovation and supply chain manage- ment is an important factor in our results. Our fine paper business, with its well-known brands, has long been recognized as a leading manufacturer of world-class pre- mium writing, text and cover papers used in corporate identity packages, corporate annual reports, invitations, personal stationery, labels and high-end packaging. Our technical products business is also recognized as a leading international supplier in the tape, filtration, com- ponent materials, graphics and identification and wall covering markets with products that meet unique and exacting customer requirements. • C O M P E T I T I V E E N V I R O N M E N T. Our past results have been and our future prospects will be significantly affected by the competitive environment in which we operate. In most of our markets, our businesses compete directly with well-known competitors, some of which are larger and more diversified. Our businesses also face competitive pressures from lower value products. • E C O N O M I C C O N D I T I O N A N D I N P U T C O S T S . The markets for all of our products are affected to a signifi- cant degree by economic conditions, including fluctua- tions in exchange rates, particularly for the Euro. Rapid changes in input costs, particularly for pulp, latex and natural gas, also affect our results. B U S I N E S S S E G M E N T S Our technical products business is a leading international producer of transportation and other filter media; durable, saturated and coated base papers for a variety of end uses and nonwoven wall coverings. We sell our technical prod- ucts globally in 17 product categories through five SBUs. We focus on categories where we believe we are, or can be, a market leader, which include, among others, the tape, abrasive, transportation and other filtration media, nonwo- ven wall coverings, medical packaging and image transfer technical products markets. We are also a global supplier of materials used for customer-specific applications in fur- niture and book covers. Our customers are located in more than 70 countries. Our technical products manufacturing facilities are located in Munising, Michigan and near Munich and Frankfurt, Germany. Our fine paper business is a leading producer of premium writing, text, cover and specialty papers used in corporate identity packages, corporate annual reports, invitations, personal stationery, labels and high-end pack- aging. Our products include some of the most recognized and preferred papers in North America, where we enjoy leading market positions in many of our product categories. We sell our products primarily to authorized paper distribu- tors, converters and specialty businesses, with sales to 32 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S distributors and distributor-owned paper stores accounting for more than two-thirds of sales. We believe that our fine paper manufacturing facilities located in Appleton, Neenah and Whiting, Wisconsin are among the most efficient in their markets and make us one of the lowest cost producers in the product categories in which we compete. R E S U LT S O F O P E R AT I O N S A N D R E L AT E D  I N F O R M AT I O N In this section, we discuss and analyze our net sales, income before interest and income taxes (which we refer to as “operating income” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations) and other information relevant to an understanding of our results of operations. E X E C U T I V E S U M M A R Y Results of operations for the year ended December 31, 2010 showed substantial improvement from the depressed amounts reported in the prior year due to increased volume. Results for the year ended December 31, 2009 reflected sharply reduced market demand due to severe global economic weakness, particularly in the first half of 2009. In addition, higher selling prices and the benefits of cost reduction initiatives implemented in 2009 and 2010 allowed us to partially offset the impact of higher manu- facturing input costs. In March 2010, Neenah Canada sold the Woodlands to Northern Pulp for C$82.5 million ($78.6 million). The sale of the Woodlands completed our transformation from an inte- grated pulp and paper company into a technical products and premium fine paper company. Proceeds from the sale were used to repay in full $40 million of outstanding term loan borrowings and repay approximately $26 million in outstanding revolving credit borrowings which reduced the balance of outstanding revolving credit borrowings to zero. R E S U LT S O F C O N T I N U I N G O P E R A T I O N S For the year ended December 31, 2010, consolidated net sales increased approximately $84 million from the prior year to $657.7 million primarily due to substantially higher shipments in both paper businesses which benefited from improved market conditions higher selling prices, the suc- cessful execution of strategic initiatives and by our direct customers replenishing the supply chain. For the year ended December 31, 2010, average net selling prices were $25.9 million higher than the prior year period due to an approximately three percent increase in average selling prices and a more favorable sales mix in our Technical Products business. These favorable variances were partially offset by an $11.7 million decrease in sales in 2010 due to a weakening of exchange rates for the Euro versus the U.S. dollar. Consolidated operating income of $55.1 million for the year ended December 31, 2010 more than tripled from the prior year. Consolidated operating income for the years ended December 31, 2010 and 2009 include gains (losses) related to the closure of the Ripon Mill of $3.4 mil- lion and $(17.1) million, respectively. Excluding these items, consolidated operating income increased $18.2 million or 54 percent primarily due to increased volume, including the benefit of improved paper machine utilization, and continu- ing benefits from initiatives implemented in 2009 to reduce spending, which more than offset the effect of higher man- ufacturing input costs. For the year ended December 31, 2010, consolidated operating margins, excluding items related to the closure and sale of the Ripon Mill, of 7.9 per- cent increased more than two percentage points from the prior year. R E S U LT S O F D I S C O N T I N U E D O P E R A T I O N S The sale of the Woodlands resulted in a pre-tax gain, net of fees and other transaction costs, of $74.1 million. The sale of the Woodlands resulted in the substantially complete liquidation of our investment in Neenah Canada. In accor- dance with ASC Topic 830, $87.9 million of cumulative cur- rency translation adjustments attributable to our Canadian subsidiaries were reclassified into earnings and recognized as part of the gain on sale of the Woodlands. The sale did not generate a cash tax liability because the tax basis for the Woodlands was approximately equal to the sale price. In addition, there were no tax consequences related to the repatriation of funds from the sale of the Woodlands. For the year ended December 31, 2010, timber sales to Northern Pulp pursuant to a stumpage agreement resulted in net sales from discontinued operations of $1.4 mil- lion compared to net sales of $3.7 million in the prior year. For the year ended December 31, 2010, pre-tax income from discontinued operations, excluding the gain on sale of the Woodlands, was $1.0 million compared to earnings from dis- continued operations of $2.8 million in the prior year. Neenah Paper, Inc. 2010 Annual Report 33 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S A N A LY S I S O F N E T S A L E S – Y E A R S E N D E D The following table presents our net sales by seg- ment for the periods indicated: D E C E M B E R   3 1 , 2 0 1 0 , 2 0 0 9 A N D 2 0 0 8 The following table presents net sales by segment, expressed as a percentage of total net sales before inter- segment eliminations: Year Ended December 31, 2010 2009 2008 58% 42% 100% 55% 45% 100% 54% 46% 100% Net sales Technical Products Fine Paper Consolidated Year Ended December 31, 2010 2009 2008 $384.3 273.4 $657.7 $318.3 255.6 $573.9 $396.8 335.5 $732.3 Technical Products Fine Paper Total C O M M E N T A R Y : Y E A R 2 0 1 0 V E R S U S 2 0 0 9 Technical Products Fine Paper Consolidated Year Ended December 31, 2010 2009 $384.3 273.4 $657.7 $318.3 255.6 $573.9 Change in Net Sales Compared to the Prior Year Change Due To Total Change $66.0 17.8 $83.8 Volume $57.7 11.9 $69.6 Average Net Price $20.0 5.9 $25.9 Currency $(11.7) – $(11.7) Consolidated net sales of $657.7 million for the year ended December 31, 2010 were $83.8 million higher than the prior year primarily due to increased volume in both segments which benefited from improved market condi- tions and our direct customers replenishing the supply chain. For the year ended December 31, 2010, average net selling prices were $25.9 million higher than the prior year period due to an approximately three percent increase in average selling prices and a more favorable sales mix in our technical products business. • Net sales in our technical products business of $384.3 mil- lion increased $66.0 million or 21 percent primarily due to an 18 percent increase in shipments. Higher sales volume reflected strong growth in transportation filter media, abrasive backing, wall covering and tape ship- ments. Average net selling prices increased due to a more favorable product mix and a two percent improvement in average selling prices. These favorable variances were partially offset by an $11.7 million decrease in sales due to a weakening of exchange rates for the Euro versus the U.S. dollar. • Net sales in our fine paper business of $273.4 million increased $17.8 million or seven percent due to a five per- cent increase in shipments and higher average net sell- ing prices. The improved sales volume reflected higher shipments of both premium and value specialty papers, as well as non-branded products. In addition, we benefit- ted from increased export sales to markets outside North America and strong growth in label, packaging and enve- lope shipments, which in the aggregate grew by more than 20 percent in 2010. We believe that we were able to improve our market share position based on the AF&PA report of a six percent year-over-year industry decline in the premium writing, text and cover uncoated free sheet paper category. Average selling prices were approxi- mately four percent higher than the prior year primarily as a result of pricing actions implemented in the second half of 2009 and throughout 2010 for both branded and non- branded products. Higher average selling prices were par- tially offset by a less favorable sales mix which reflected higher growth rates for lower-priced products relative to our branded products. 34 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Y E A R 2 0 0 9 V E R S U S 2 0 0 8 Technical Products Fine Paper Consolidated Year Ended December 31, Change in Net Sales Compared to the Prior Year Change Due To 2009 2008 $318.3 255.6 $573.9 $396.8 335.5 $732.3 Total Change $ (78.5) (79.9) $(158.4) Volume $ (64.5) (84.4) $(148.9) Average Net Price $(3.0) 4.5 $ 1.5 Currency $(11.0) – $(11.0) Consolidated net sales of $573.9 million for the year ended December 31, 2009 were $158.4 million lower than the prior year primarily due to lower volumes. In addi- tion, results reflected unfavorable currency translation effects due to the weakening of the Euro versus the U.S. dollar. • Net sales in our technical products business of $318.3 million decreased $78.5 million, or 20 percent, primarily due to a 16 percent decrease in shipments. Lower sales volume reflected decreased demand in most markets due to weaker economic conditions and inven- tory destocking by our direct customers, particularly in the first half of 2009. Sales were also lower as a result of unfavorable currency translation effects due to average Euro/U.S. dollar exchange rates that were five percent lower in 2009 than in the prior year. Net sales were also adversely affected by lower selling prices for certain products in our European business, particularly in the Tape and Wall Cover SBUs, which were influenced by currency factors for export prices and additional market capacity, respectively. Net sales in our fine paper business of $255.6 million decreased $79.9 million, or 24 percent, primarily due to a 25 percent decrease in shipments. We believe that we were able to improve our market share position based on the AF&PA report of a 27 percent year-over-year industry decline in the premium writing, text and cover uncoated free sheet paper category. Lower sales volume reflected a sharp decline in consumption for a number of key end-use market segments, including advertising, financial institu- tions and the transportation and real estate segments. Market demand began to decline in late 2008 and con- tinued throughout 2009. The increase in average net price reflected the realization of price increases on branded • and non-branded products that were implemented in 2008. Price increases of approximately three percent on branded products announced late in 2009 did not mean- ingfully impact results until 2010. A N A LY S I S O F O P E R A T I N G I N C O M E – Y E A R S E N D E D D E C E M B E R   3 1 , 2 0 1 0 , 2 0 0 9 A N D 2 0 0 8 The following table sets forth line items from our consoli- dated statements of operations as a percentage of net sales for the periods indicated and is intended to provide a per- spective of trends in our historical results: Net sales Cost of products sold Gross profit Selling, general and administrative expenses Other income – net Loss (gain) on closure and sale of the Ripon Mill Goodwill and other intangible asset impairment charge Operating income (loss) Interest expense – net Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Income (loss) from Year Ended December 31, 2010 2009 2008 100.0% 81.8 18.2 100.0% 82.3 17.7 100.0% 86.1 13.9 10.5 (0.2) (0.5) – 8.4 3.1 5.3 1.5 12.1 (0.2) 3.0 – 2.8 4.0 10.3 (1.5) – 7.4 (2.3) 3.4 (1.2) (5.7) (0.9) 0.6 continuing operations 3.8% (0.3)% (6.3)% Neenah Paper, Inc. 2010 Annual Report 35 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The following table sets forth our operating In accordance with Generally Accepted income (loss) by segment for the periods indicated: Operating income (loss) Technical Products Fine Paper Unallocated corporate costs Consolidated operating Year Ended December 31, 2010 2009 2008 $ 29.2 40.5 (14.6) $ 14.4 17.5 (15.5) $(41.7) 35.8 (11.0) income (loss) as reported 55.1 16.4 (16.9) Adjustments for Unusual Items Fine Paper adjustments Loss (gain) on closure and sale of the Ripon Mill Gain on sale of Fox River assets Total Technical Products adjustment Goodwill impairment charge Unallocated corporate costs adjustment Settlement of Terrace Bay retiree litigation Total Adjustments Consolidated operating (3.4) 17.1 – (3.4) – 17.1 – (6.3) (6.3) – – 54.5 – (3.4) – 17.1 (4.3) 43.9 income as adjusted $ 51.7 $ 33.5 $ 27.0 Accounting Principles in the United States (“GAAP”), consolidated operating income (loss) includes the pre- tax effects of unusual items. We believe that by adjusting reported operating income (loss) to exclude the effects of these items, the resulting adjusted operating income is on a basis that reflects the results of our ongoing operations. We believe that investors gain additional perspective of under- lying business trends and results by providing a measure of operating results that excludes certain gains and losses that are not expected to affect future consolidated or segment operating performance. Adjusted operating income is not a recognized term under GAAP and should not be considered in isolation or as a substitute for operating income derived in accordance with GAAP. Other companies may use differ- ent methodologies for calculating their non-GAAP financial measures and, accordingly, our non-GAAP financial mea- sures may not be comparable to their measures. C O M M E N T A R Y : Y E A R 2 0 1 0 V E R S U S 2 0 0 9 Technical Products Fine Paper(c) Unallocated corporate costs Consolidated Year Ended December 31, 2010 2009 $ 29.2 40.5 (14.6) $ 55.1 $ 14.4 17.5 (15.5) $ 16.4 Total Change $14.8 23.0 0.9 $38.7 Change in Operating Income Compared to the Prior Year Change Due To Material Volume Net Price(a) Costs(b) Currency Other(c) $24.1 5.4 – $29.5 $13.1 4.0 – $17.1 $(20.2) (12.7) – $(32.9) $(0.2) – – $(0.2) $ (2.0) 26.3 0.9 $25.2 (a) Includes price changes, net of changes in product mix. (b) Includes price changes for raw materials and energy. (c) For the year ended December 31, 2010 and 2009, results for the Fine Paper segment include gains (losses) of $3.4 million and $(17.1) million, respectively, related to the closure and sale of the Ripon Mill. Consolidated operating income of $55.1 mil- lion for the year ended December 31, 2010 increased $38.7 million compared to the prior year. Operating results for the years ended December 31, 2010 and 2009 include gains (losses) of $3.4 million and $(17.1) million, respec- tively, related to the closure of the Ripon Mill in May 2009. Excluding these items, consolidated operating income for the year ended December 31, 2010 increased $18.2 mil- lion from the prior year due to favorable volume (including the benefit of improved paper machine utilization), higher selling prices and the benefits of actions taken across all businesses to reduce costs and control spending. These favorable factors were only partially offset by higher manu- facturing input costs, particularly for pulp and latex. 36 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S • Operating income for our technical products business of $29.2 million increased $14.8 million compared to the prior year due to favorable volume (including the benefit of improved paper machine utilization) and higher sell- ing prices. These favorable factors were partially offset by higher manufacturing input costs, principally for pulp and latex volume. For the year ended December 31, 2010, operating margins in our Technical Products segment of 7.6 percent increased more than three percentage points from the prior year. • Operating income for our fine paper business of $40.5 million increased $23.0 million from the prior year period. Operating results for the years ended December 31, 2010 and 2009 include gains (losses) of $3.4 million and $(17.1) million, respectively, related to the closure of the Ripon Mill in May 2009. Excluding these items, operating income increased $2.5 million from the prior year primarily due to higher selling prices, favorable volume and a more efficient cost structure fol- lowing cost reduction initiatives implemented in 2009 and 2010. These favorable variances more than offset approximately $12.7 million in higher manufacturing input costs, including for hardwood pulp; and a less favorable product mix due to faster growth rates for relatively lower priced products. For the year ended December 31, 2010, operating margins in our Fine Paper segment, excluding unusual items, of approxi- mately 13.6 percent were essentially unchanged from the prior year. • Unallocated corporate expenses decreased $0.9 million compared to the prior year due to the benefits of cost control initiatives implemented in 2009. Y E A R 2 0 0 9 V E R S U S 2 0 0 8 Technical Products(e) Fine Paper(d) Unallocated corporate costs(f) Consolidated Year Ended December 31, 2009 2008 $ 14.4 17.5 (15.5) $ 16.4 $(41.7) 35.8 (11.0) $(16.9) Total Change $ 56.1 (18.3) (4.5) $ 33.3 Change in Operating Income (Loss) Compared to the Prior Year Change Due To Material Volume Net Price(a) Costs(b) Currency Other(c) $(23.2) (23.4) – $(46.6) $(6.3) 5.4 – $(0.9) $12.6 13.3 – $25.9 $(0.1) – – $(0.1) $ 73.1 (13.6) (4.5) $ 55.0 (a) Includes price changes, net of changes in product mix. (b) Includes price changes for raw materials and energy. (c) Includes $30.7 million of improvements from reductions in other manufacturing costs, distribution, selling, general and administrative expenses and net improvements of $26.8 million related to items described in notes (d), (e) and (f). (d) For the year ended December 31, 2009, results for the Fine Paper segment include a pre-tax charge of $17.1 million related to the closure of the Ripon Mill. For the year ended December 31, 2008 results for the Fine Paper segment include gains of $6.3 million from the sale of certain Fox River assets. (e) For the year ended December 31, 2008, results for the Technical Products segment include a non-cash pre-tax goodwill and other intangible asset impairment charge of $54.5 million. (f) For the year ended December 31, 2008, unallocated corporate costs include a gain of $4.3 million for a settlement of certain benefits earned by Terrace Bay retirees. Consolidated operating income of $16.4 million for the year ended December 31, 2009 increased $33.3 mil- lion compared to the prior year. Operating results for the year ended December 31, 2009 include costs of $17.1 mil- lion related to the closure of the Ripon Mill in May 2009. Operating results for the year ended December 31, 2008, include a charge of $54.5 million related to the impair- ment of goodwill and other intangible assets, and gains of approximately $6.3 million from the sale of certain Fox River assets and $4.3 million the settlement of certain Terrace Bay postretirement benefits. Excluding such items, consoli- dated operating income for the year ended December 31, 2009 increased $6.5 million from the prior year due to actions taken across all businesses to reduce costs and con- trol spending and from lower manufacturing input costs, particularly for pulp and latex. These favorable factors were partially offset by lower volume and reductions in paper machine operating schedules. • Operating income for our technical products business of $14.4 million increased $56.1 million compared to the prior year. Excluding the asset impairment charge, operating income for our technical products business increased $1.6 million from the prior year primarily due to lower spending resulting from the implementation of cost reduction initiatives and from lower manufac- turing input costs, principally for pulp and latex. These favorable factors were partially offset by lower volume, reduced paper machine operating schedules and, to a lesser extent, lower average net selling prices. Neenah Paper, Inc. 2010 Annual Report 37 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S • Operating income for our fine paper business of • In general, our effective tax rate differs from the U.S. statutory tax rate of 35 percent primarily due to the benefits of our corporate tax structure and the pro- portion of pre-tax income in jurisdictions with marginal tax rates that differ from the U.S. statutory tax rate. For the year ended December 31, 2010, we recorded an income tax provision related to continuing operations of $9.8 million which resulted in an effective income tax rate of approximately 28 percent. For the year ended December 31, 2009, we recorded an income tax benefit related to continuing operations of $5.0 million which resulted in an effective income tax (benefit) rate of approximately (74) percent. Our effective tax benefit rate for the year ended December 31, 2009 was signifi- cantly affected by the proportion of earnings generated in tax jurisdictions with tax rates that differ from the 35 percent statutory tax rate in the United States, the effects of accruals for uncertain tax positions and the level of pretax losses. For the year ended December 31, 2008, we recorded an income tax provision related to continuing operations of $3.9 million which resulted in an effective income tax rate of approximately nine percent. Our effective tax rate for the year ended December 31, 2008 was significantly affected by the non tax deduct- ible nature of the goodwill impairment charge and an increase in the limitation on available tax benefits acquired in the Fox River acquisition. Excluding such items, our effective income tax rate for the year ended December 31, 2008 was approximately 36 percent. For a reconciliation of effective tax provision (benefit) rate to the U.S. federal statutory provision (benefit) tax rate, see Note 6 of Notes to Consolidated Financial Statements, “Income Taxes.” L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S Net cash flow provided by (used in): Operating activities Investing activities Capital expenditures Proceeds from asset sales Other investing activities Total Year Ended December 31, 2010 2009 2008 $ 54.5 $ 64.9 $ 13.1 (17.4) 86.7 (2.8) 66.5 (8.4) 0.8 (0.7) (8.3) (30.0) 0.2 (0.6) (30.4) Financing activities (78.3) (54.2) 18.2 $17.5 million decreased $18.3 million compared to the prior year. Excluding costs of $17.1 million associated with closing the Ripon Mill and the gain of approximately $6.3 million in 2008 from assets sales, operating income for our fine paper business increased $5.1 million primar- ily due to lower manufacturing input costs, principally for hardwood pulp, lower operating and administrative spending due to cost reduction initiatives, including clos- ing the Ripon Mill, and higher average net selling prices due to the realization of price increases implemented in 2008. These favorable factors were partially offset by the effects of lower volume and reductions in paper machine operating schedules. • Unallocated corporate expenses increased $4.5 mil- lion compared to the prior year. Unallocated corporate expense for the year ended December 31, 2008 included a non-cash gain of approximately $4.3 million related to the settlement of certain postretirement benefits we retained following the sale of our Terrace Bay pulp mill. Excluding this gain, unallocated corporate expenses were essentially unchanged from the prior year. A D D I T I O N A L S TAT E M E N T O F O P E R AT I O N S C O M M E N TA R Y: • Selling, general and administrative (“SG&A”) expense of $69.3 million for the year ended December 31, 2010 was essentially unchanged from the prior year. For the year ended December 31, 2010, SG&A expense as a percent- age of net sales was approximately 10.5 percent and was 1.6 percentage points lower than the prior year. For the year ended December 31, 2009, SG&A expense of $69.1 million was $6.1 million lower than the prior year primarily due to cost control initiatives implemented in 2009. • For the years ended December 31, 2010, 2009 and 2008, we incurred $20.5 million, $23.4 million and $25.0 mil- lion, respectively, of interest expense. The decrease in interest expense for 2010 as compared to 2009 was primarily due to lower average debt levels in 2010 as a result of the repayment of all term loan and U.S. revolv- ing credit borrowings with proceeds from the sale of the Woodlands. The decrease in interest expense for 2009 as compared to 2008 was due to lower average borrow- ings and lower average interest rates. In addition, during the fourth quarter of 2009, we recognized additional interest expense of approximately $1.4 million for costs incurred in conjunction with amending and restating our bank credit agreement and to write-off deferred financing costs associated with our previous bank credit agreement. 38 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O P E R A T I N G C A S H F L O W C O M M E N T A R Y : • Cash provided by operating activities of $54.5 million for the year ended December 31, 2010 was $10.4 million less than cash provided by operating activities of $64.9 mil- lion in the prior year. Cash provided by operations in the prior year reflected a $27.4 million decrease in our invest- ment in working capital, including the receipt of a refund of U.S. income taxes of approximately $10.9 million. For the year ended December 31, 2010, our investment in working capital increased $3.9 million. Excluding work- ing capital changes, cash provided by operations for the current year increased $20.9 million from the prior year primarily due to higher operating earnings in the current year. • Cash provided by operating activities of $64.9 million for the year ended December 31, 2009 was $51.8 mil- lion favorable to cash provided by operating activities of $13.1 million in the prior year. The favorable comparison to the prior year reflected a $27.4 million decrease in our investment in working capital, including a refund of U.S. income taxes. For the year ended December 31, 2008, our investments in working capital increased $22.6 mil- lion. Excluding working capital changes, cash provided by operations for 2009 increased $1.8 million from the prior year. • As of December 31, 2010, we had approximately $96.7 million of U.S. Federal and $95.4 million of U.S. State NOLs that may be carried forward to offset future taxable income through 2030. I N V E S T I N G C O M M E N T A R Y : • For the year ended December 31, 2010, cash provided by investing activities was $66.5 million, compared to cash used by investing activities of $8.3 million in the prior year. Cash provided by investing activities for the year ended December 31, 2010 includes net proceeds from the sale of the Woodlands and the Ripon Mill of $78.0 million and $8.7 million, respectively. • Capital expenditures for the year ended December 31, 2010 were $17.4 million compared to spending of $8.4 million in the prior year. We have aggregate planned capital expenditures for 2011 of approximately $20 mil- lion to $25 million. We believe that the level of our capital spending for 2011 will allow us to expand capa- bilities to successfully pursue strategic initiatives and to maintain the efficiency and cost effectiveness of our manufacturing assets. • For the year ended December 31, 2010, we invested $3.5 million in long-term marketable securities. • For the year ended December 31, 2009, cash used in investing activities was $8.3 million, a decrease of $22.1 million versus the prior year due to a reduction in capital spending of $21.6 million. • For the year ended December 31, 2008, cash used in investing activities includes payments by Neenah Canada of approximately $10.3 million to Northern Pulp in con- nection with the transfer of the Pictou Mill. In addition, we paid approximately $3.3 million in transaction costs. Such payments were more than offset by proceeds from asset sales of $13.8 million, primarily from the sale of certain Fox River assets. F I N A N C I N G C O M M E N T A R Y : Our liquidity requirements are provided by cash generated from operations and short- and long-term borrowings. We used the net proceeds of $78.0 million from the sale of the Woodlands to extinguish our senior secured term loan (the “Term Loan”) by repaying in full $40 million of out- standing Term Loan borrowings and repaying approxi- mately $26 million in outstanding revolving credit borrowings which reduced the balance of outstanding revolving credit borrowings to zero. In addition, we made $3.1 million in contract termination payments related to the closure of the Ripon Mill that became due and payable upon the sale of the Woodlands. • For the year ended December 31, 2010, cash and equivalents increased $42.7 million from $5.6 mil- lion at December 31, 2009 to $48.3 million at December 31, 2010. • For the year ended December 31, 2010, debt decreased $74.3 million from $319.2 million at December 31, 2009 to $244.9 million at December 31, 2010. • Availability under our revolving credit facility varies over time depending on the value of our inventory, receiv- ables and various capital assets. As of December 31, 2010, no amounts were outstanding under our revolving credit agreement and we had $81.5 million of borrowing availability. In addition, we have €6.0 million ($8.0 million, based on exchange rates at December 31, 2010) of avail- able credit under our German revolving line of credit. In November 2010, Neenah Germany renewed the German revolving line of credit on an “evergreen” basis. Subsequent to November 2011, the agreement may be terminated by either the Company or HypoVereinsbank upon giving proper notice. Neenah Paper, Inc. 2010 Annual Report 39 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S • We paid aggregate annual cash dividends of $0.40 per share or approximately $5.9 million, $5.9 million and $6.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. In November 2010, we announced a ten percent increase in the annual cash dividend to $0.44 per share. Dividends will be paid in four equal quarterly installments effective with the March 2011 dividend payment. • For the year ended December 31, 2010, we purchased $2 million principal amount of our Senior Notes at slightly less than par value. From time to time we may purchase additional Senior Notes. In February 2011, we elected to conduct an early redemption on March 10, 2011 (the “Partial Redemption”) of $65 million in aggregate principal amount of our Senior Notes. There are $223 million of Senior Notes out- standing with a call premium of 2.458% as of the date of the Partial Redemption. The Partial Redemption is expected to be financed by approximately $40 million of cash on hand, with the remainder to be provided by borrowings under our existing revolving credit facility. Following the Partial Redemption, $158 million in Senior Notes will be outstanding and interest expense on the Senior Notes will be reduced by approximately $5 million per year. Following the Partial Redemption, we expect to continue to have adequate liquidity to satisfy our cash needs. • We have required debt payments through December 31, 2011 of $13.6 million. Such payments include required amortization payments on our German Loan Agreement of approximately $1.7 million and $11.9 million on our German Line of Credit which was extended for an addi- tional 12 months in November 2010. As a result of the Partial Redemption, debt payments for the year ending December 31, 2011 will be $78.6 million. Management believes that our ability to generate cash from operations and our borrowing capacity are ade- quate to fund working capital, capital spending and other cash needs for the next 12 months. Our ability to generate adequate cash from operations beyond 2011 will depend on, among other things, our ability to successfully imple- ment our business strategies, control costs in line with mar- ket conditions and manage the impact of changes in input prices and currencies. We can give no assurance we will be able to successfully implement these items. C O N T R A C T U A L O B L I G A T I O N S The following table presents the total contractual obligations for which cash flows are fixed or determinable as of December 31, 2010: (In millions) Long-term debt payments (a) Interest payments on long-term debt (a)(b) Open purchase orders (c) Other post-employment benefit obligations (d) Contributions to pension trusts Liability for uncertain tax positions Operating leases Minimum purchase commitments (e) Total contractual obligations 2011 $ 13.6 17.3 59.2 2.9 3.3 8.6 1.4 4.8 $111.1 2012 $ 1.7 16.7 – 2.3 3.3 – 0.9 1.6 $26.5 2013 $ 1.6 16.7 – 2.6 3.4 – 0.8 0.1 $25.2 2014 $224.7 15.9 – 2.9 3.3 – 0.6 – $247.4 2015 $1.7 0.1 – 3.0 – – 0.5 – $5.3 Beyond 2015 $ 1.6 – – 18.1 – – 0.7 – $20.4 Total $244.9 66.7 59.2 31.8 13.3 8.6 4.9 6.5 $435.9 (a) In February 2011, we elected to conduct a Partial Redemption of $65 million in aggregate principal amount of our Senior Notes. The Partial Redemption is expected to be financed by approximately $40 million of cash on hand, with the remainder to be provided by borrowings under our existing revolving credit facility. Following the Partial Redemption, $158 million in Senior Notes will be outstanding and required debt payments of approximately $159.7 mil- lion during the year ending December 31, 2014. (b) Interest payments on long-term debt include interest on variable-rate debt at December 31, 2010 weighted-average interest rates. (c) The open purchase orders displayed in the table represent amounts we anticipate will become payable within the next 12 months for goods and services that we have negotiated for delivery. (d) The above table includes future payments that we will make for postretirement benefits other than pensions. Those amounts are estimated using actuarial assumptions, including expected future service, to project the future obligations. (e) The minimum purchase commitments in 2011 are primarily for natural gas contracts. Although we are primarily liable for payments on the above operat- ing leases and minimum purchase commitments, based on historic operating performance and forecasted future cash flows, we believe our exposure to losses, if any, under these arrangements is not material. 40 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S A D O P T I O N O F N E W AC C O U N T I N G P R O N O U N C E M E N T S For the year ended December 31, 2010, we did not adopt any amendments to the ASC that had a material effect on our financial position, results of operations, cash flows or financial statement disclosures. C R I T I C A L AC C O U N T I N G P O L I C I E S A N D U S E  O F E S T I M AT E S The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States requires estimates and assumptions that affect the reported amounts and related disclosures of assets and liabilities at the date of the financial state- ments and net sales and expenses during the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used in the preparation of the consolidated financial statements are those that are important both to the presentation of financial condition and results of operations and require significant judgments with regard to estimates used. These critical judgments relate to the reported amounts of assets and liabilities, dis- closure of contingent assets and liabilities, and the reported amounts of expenses. The following summary provides further infor- mation about the critical accounting policies and should be read in conjunction with the notes to the Consolidated Financial Statements. We believe that the consistent appli- cation of our policies provides readers of our financial statements with useful and reliable information about our operating results and financial condition. We have discussed the application of these criti- cal accounting policies with our Board of Directors and Audit Committee. I N V E N T O R I E S We value U.S. inventories at the lower of cost, using the Last-In, First-Out (“LIFO”) method for financial reporting purposes, or market. German inventories are valued at the lower of cost, using a weighted-average cost method, or market. The First-In, First-Out value of U.S. inventories valued on the LIFO method was $57.0 million and $58.2 mil- lion at December 31, 2010 and 2009, respectively and exceeded such LIFO value by $12.3 million and $8.7 mil- lion, respectively. Cost includes labor, materials and production overhead. I N C O M E T A X E S As of December 31, 2010, we have recorded aggregate deferred income tax assets of $64.3 million related to temporary differences, net operating losses and credits. We have established a valuation allowance of $1.7 million against certain state deferred income tax assets in states where we no longer have operations. As of December 31, 2009, our aggregate deferred income tax assets were $99.7 million and had a valuation allowance against such deferred income tax assets of $1.5 million. In determining the need for valuation allowances, we consider many fac- tors, including specific taxing jurisdictions, sources of tax- able income, income tax strategies and forecasted earnings for the entities in each jurisdiction. A valuation allowance would be recognized if, based on the weight of available evidence, we conclude that it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As of December 31, 2010 and 2009, our liability for uncertain income taxes positions was $8.6 million and $10.5 million, respectively. In evaluating and estimating tax positions and tax benefits, we consider many factors which may result in periodic adjustments and which may not accu- rately anticipate actual outcomes. P E N S I O N B E N E F I T S Substantially all active employees of our U.S. paper opera- tions participate in defined benefit pension plans and/or defined contribution retirement plans. Neenah Germany has defined benefit plans designed to provide a monthly pension benefit upon retirement to substantially all of its employees in Germany. In addition, we maintain a supple- mental retirement contribution plan (the “SERP”) which is a non-qualified defined benefit plan. We provide benefits under the SERP to the extent necessary to fulfill the intent of its defined benefit retirement plans without regard to the limitations set by the IRS on qualified defined benefit plans. Our funding policy for qualified defined benefit plans is to contribute assets to fully fund the accumulated benefit obligation, as required by the Pension Protection Act of 2006. Subject to regulatory and tax deductibil- ity limits, any funding shortfall is to be eliminated over a Neenah Paper, Inc. 2010 Annual Report 41 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S reasonable number of years. Nonqualified plans providing pension benefits in excess of limitations imposed by the tax- ing authorities are not funded. There is no legal or govern- mental obligation to fund Neenah Germany’s benefit plans and, as such, the plans are currently unfunded. factors, including reduced pension liabilities arising from higher discount rates used to calculate our pension obliga- tions or (iii) other actuarial gains, including whether such accumulated actuarial losses at each measurement date exceed the “corridor” determined under ASC Topic 715. Consolidated pension expense for defined benefit pension plans was $6.3 million, $9.2 million and $7.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The weighted-average expected long-term rate of return on pension fund assets used to calculate pension expense was 8.00 percent, 7.92 percent and 8.02 percent for the years ended December 31, 2010, 2009 and 2008, respectively. The expected long-term rate of return on pension fund assets held by our pension trusts was determined based on several factors, including input from pension investment consultants and projected long- term returns of broad equity and bond indices. We also considered the plans’ historical ten-year and 15-year com- pounded annual returns. We anticipate that, on average, actively managed U.S. pension plan assets will generate annual long-term rates of return of at least eight percent. Our expected long-term rate of return on the assets in the plans is based on an asset allocation assumption of about 60 percent with equity managers, with expected long-term rates of return of approximately ten percent, and 40 percent with fixed income managers, with an expected long-term rate of return of about six percent. The actual asset alloca- tion is regularly reviewed and periodically rebalanced to the targeted allocation when considered appropriate. We eval- uate our investment strategy and long-term rate of return on pension asset assumptions at least annually. Pension expense is estimated based on the fair value of assets rather than a market-related value that aver- ages gains and losses over a period of years. Investment gains or losses represent the difference between the expected return calculated using the fair value of the assets and the actual return based on the fair value of assets. The variance between the actual and the expected gains and losses on pension assets is recognized in pension expense more rapidly than it would be if a market-related value for plan assets was used. As of December 31, 2010, our pension plans had cumulative unrecognized investment losses and other actuarial losses of approximately $33.3 million. These unrecognized net losses may increase our future pen- sion expense if not offset by (i) actual investment returns that exceed the assumed investment returns, (ii) other The discount (or settlement) rate that is utilized for determining the present value of future pension obliga- tions in the United States is generally based on the yield for a theoretical basket of AA-rated corporate bonds currently available in the market place, whose duration matches the timing of expected pension benefit payments. The discount (or settlement) rate that is utilized for determining the pres- ent value of future pension obligations in Germany is gener- ally based on the IBOXX index of AA-rated corporate bonds adjusted to match the timing of expected pension benefit payments. The weighted-average discount rate utilized to determine the present value of future pension obliga- tions at December 31, 2010 and 2009 was 5.86 percent and 6.17 percent, respectively. Our consolidated pension expense in 2011 is based on the expected weighted-average long-term rate of return on assets and the weighted-average discount rate described above and various other assumptions. Pension expense beyond 2011 will depend on future investment per- formance, our contributions to the pension trusts, changes in discount rates and various other factors related to the covered employees in the plans. The fair value of the assets in our defined benefit plans at December 31, 2010 of approximately $192 million increased approximately $24 million from the fair value of about $168 million at December 31, 2009, as investment gains and employer contributions exceeded benefit pay- ments. At December 31, 2010, the projected benefit obliga- tions of our defined benefit plans exceeded the fair value of plan assets by approximately $60 million, which was approximately $6 million smaller than the $66 million deficit at December 31, 2009. The accumulated benefit obligation exceeded the fair value of plan assets by approximately $48.2 million and $51.3 million at December 31, 2010 and 2009, respectively. Contributions to pension trusts for the year ended December 31, 2010 were $12.6 million, com- pared with $10.2 million for the year ended December 31, 2009. In addition, we made direct benefit payments for unfunded supplemental retirement benefits of approxi- mately $2.5 million and $2.3 million for the years ended December 31, 2010 and 2009, respectively. 42 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S I M P A I R M E N T O F L O N G - L I V E D A S S E T S P R O P E R T Y, P L A N T A N D E Q U I P M E N T Property, plant and equipment are tested for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC Topic 360”), whenever events or changes in circumstances indicate that the carrying amounts of such long-lived assets may not be recoverable from future net pre-tax cash flows. Impairment testing requires significant management judgment including estimating the future suc- cess of product lines, future sales volumes, growth rates for selling prices and costs, alternative uses for the assets and estimated proceeds from disposal of the assets. Impairment testing is conducted at the lowest level where cash flows can be measured and are independent of cash flows of other assets. An asset impairment would be indicated if the sum of the expected future net pre-tax cash flows from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying amount. We determine fair value based on an expected present value technique using multiple cash flow scenarios that reflect a range of possible outcomes and a risk free rate of interest are used to estimate fair value. The estimates and assumptions used in the impairment analysis are consistent with the business plans and estimates we use to manage our business opera- tions. The use of different assumptions would increase or decrease the estimated fair value of the asset and would increase or decrease the impairment charge. Actual out- comes may differ from the estimates. G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S W I T H I N D E F I N I T E L I V E S Goodwill arising from a business combination is recorded as the excess of purchase price and related costs over the fair value of identifiable assets acquired and liabilities assumed in accordance with ASC Topic 805, Business Combinations (“ASC Topic 805”). All of our goodwill was acquired in conjunction with the acquisition of Neenah Germany in October 2006. Under ASC Topic 350, Intangibles – Goodwill and Other (“ASC Topic 350”), goodwill is subject to impair- ment testing at least annually. A fair-value-based test is applied at the reporting unit level, which is generally one level below the operating segment level. The test compares the fair value of an entity’s reporting units to the carrying value of those reporting units. This test requires various judgments and estimates. We estimate the fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. We record an adjustment to goodwill for any goodwill that is determined to be impaired. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized assets and liabilities of the reporting unit. We test goodwill for impairment at least annually on November 30 in conjunction with preparation of our annual business plan, or more frequently if events or circumstances indicate it might be impaired. Certain trade names are estimated to have indefi- nite useful lives and as such are not amortized. Intangible assets with indefinite lives are annually reviewed for impair- ment in accordance with ASC Topic 350. Our annual test of goodwill for impairment at November 30, 2010 and 2009 indicated that the carrying amount of goodwill assigned to Neenah Germany was con- sidered recoverable. Significant assumptions used in devel- oping the discounted operating cash flow approach were revenue growth rates and pricing, costs for manufacturing inputs, levels of capital investment and estimated cost of capital for high, medium and low growth environments. Our annual test of goodwill for impairment at November 30, 2008, indicated that the carrying value of Neenah Germany exceeded its estimated fair value. For the year ended December 31, 2008, we recognized a non-cash pre-tax loss of $52.7 million (we did not recognize a tax ben- efit related to the non tax deductible loss) for the excess of the carrying value of goodwill assigned to Neenah Germany over the estimated fair value of goodwill. The impairment loss was primarily due to a substantial increase in the esti- mated cost of capital we used to calculate the present value of Neenah Germany’s estimated future cash flows which resulted in a substantially lower estimated fair value. The higher estimated cost of capital reflected market/finan- cial conditions at the time the annual impairment test was performed which indicated higher risk premiums for debt and equity. As of December 31, 2010, a one percentage point increase in the estimate for our cost of capital used in the impairment test would result in an approximately $35 million change in the estimated fair value of the Neenah Paper, Inc. 2010 Annual Report 43 F O R E I G N C U R R E N C Y R I S K Our reported operating results are affected by changes in the exchange rates of the Euro relative to the U.S. dol- lar. For the year ended December 31, 2010, a hypothetical ten percent decrease in the exchange rates of the Euro relative to the U.S dollar would have decreased our income before income taxes by approximately $1.4 million. We do not hedge our exposure to exchange risk on reported oper- ating results. Currency transactional exposures are sensitive to changes in the exchange rate of the U.S. dollar against the Euro. We performed a sensitivity test to quantify the effects that possible changes in the exchange rate of the U.S. dollar would have on pre-tax comprehensive income based on the transactional exposure at December 31, 2010. The effect is calculated by multiplying our net monetary asset or liability position by a ten percent change in the exchange rate of the Euro versus the U.S. dollar. As of December 31, 2010, a ten percent unfavorable change in the exchange rate of the U.S. dollar against the Euro involving balance sheet transac- tional exposures would have resulted in net pre-tax losses of approximately $3 million. The translation of the balance sheets of our German operations from Euros into U.S. dollars is also sensitive to changes in the exchange rate of the U.S. dollar against the Euro. Consequently, we performed a sensitiv- ity test to determine if changes in the exchange rate would have a significant effect on the translation of the balance sheets of our German operations into U.S. dollars. These translation gains or losses are recorded as unrealized trans- lation adjustments (“UTA,” a component of comprehensive income) within stockholders’ equity. The hypothetical change in UTA is calculated by multiplying the net assets of our German operations by a ten percent change in the exchange rate of the Euro versus the U.S. dollar. As of December 31, 2010, a ten percent unfavorable change in the exchange rate of the U.S. dollar against the Euro would have decreased our stockholders’ equity by approximately $18 million. The hypothetical decrease in UTA is based on the difference between the December 31, 2010 exchange rate and the assumed exchange rate. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Neenah Germany and a corresponding reduction in the implied value of goodwill but would not result in an impair- ment of goodwill. O T H E R I N T A N G I B L E A S S E T S W I T H F I N I T E L I V E S Acquired intangible assets with finite useful lives are amor- tized on a straight-line basis over their respective esti- mated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360. Intangible assets consist primarily of customer relationships, trade names and acquired intellectual property. Such intan- gible assets are amortized using the straight-line method over estimated useful lives of between ten and 15 years. Our annual test of other intangible assets for impairment at November 30, 2010 and 2009 indicated that the carrying amount of such assets was recoverable. During our annual test of other intangible assets for impair- ment at November 30, 2008, we determined that certain trade names and customer based intangible assets were impaired. For the year ended December 31, 2008, we recognized a non-cash pre-tax charge of approximately $1.8 million for the impairment of such assets. S T O C K - B A S E D C O M P E N S A T I O N We account for stock-based compensation in accordance with the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”). The amount of stock-based compensation cost recognized is based on the fair value of grants that are ultimately expected to vest and is recognized pro-rata over the requi- site service period for the entire award. Q UA N T I TAT I V E A N D Q UA L I TAT I V E D I S C LO S U R E S A B O U T M A R K E T R I S K As a multinational enterprise, we are exposed to risks such as changes in commodity prices, foreign currency exchange rates, interest rates and environmental regulation. A variety of practices are employed to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments. Derivative instruments are used only for risk management purposes and not for speculation or trading. Following is a description of our most signifi- cant risks. 44 Neenah Paper, Inc. 2010 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S C O M M O D I T Y R I S K P U L P We purchase the wood pulp used to produce our products on the open market, and, as a result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply and demand and govern- ment regulation. We do not have significant influence over the price paid for our wood pulp purchases. Therefore, an increase in wood pulp prices could occur at the same time that prices for our products are decreasing and have an adverse effect on our results of operations, financial posi- tion and cash flows. Based on 2010 pulp purchases, a ten percent increase in the average market price for pulp (approximately $90 per ton) would have increased our annual costs for pulp purchases by approximately $15 million. O T H E R M A N U F A C T U R I N G I N P U T S We purchase a substantial portion of the other manufac- turing inputs necessary to produce our products on the open market, and, as a result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply and demand and government regulation. We do not have significant influence over our costs for such manufacturing inputs. Therefore, an increase in other manufacturing inputs could occur at the same time that prices for our products are decreasing and have an adverse effect on our results of operations, financial posi- tion and cash flows. While we believe that alternative sources of criti- cal supplies would be available, an interruption in supply of single source specialty grade latex or specialty softwood pulp to our technical products business or cotton fiber for our fine paper business could disrupt and eventually cause a shutdown of production of certain technical products and fine paper products. We generate substantially all of the electrical energy used by our Munising mill and approximately 40 per- cent and 20 percent of the electrical energy at our Appleton and Bruckmühl mills, respectively. Availability of energy is not expected to be a problem in the foreseeable future, but the purchase price of such energy can and likely will fluctu- ate significantly based on fluctuations in demand and other factors. There is no assurance that we will be able to obtain electricity or natural gas purchases on favorable terms in the future. I N T E R E S T R A T E R I S K We are exposed to interest rate risk on our fixed rate debt and our variable-rate bank debt. At December 31, 2010, we had $233.0 million of fixed rate debt outstanding and $11.9 million of variable-rate borrowings outstanding. We are exposed to fluctuations in the fair value of our fixed rate long-term debt resulting from changes in market interest rates, but not to fluctuations in our earnings or cash flows. At December 31, 2010, the estimated fair market value of our fixed rate debt was $237.1 million based upon the quoted market price of the Senior Notes or rates currently available to us for debt of the same remaining maturities. A 100 basis point increase in interest rates would increase our annual interest expense on outstanding variable-rate borrowings by approximately $0.1 million. We could in the future, reduce our exposure to interest rate fluctuations on our variable-rate debt by enter- ing into interest rate hedging arrangements, although those arrangements could result in us incurring higher costs than we would incur without the arrangements. E N V I R O N M E N T A L R E G U L A T I O N / C L I M A T E C H A N G E L E G I S L A T I O N Our manufacturing operations are subject to extensive regulation primarily by U.S., German and other international authorities. We have made significant capital expenditures to comply with environmental laws, rules and regulations. Due to changes in environmental laws and regulations, including potential future legislation to limit GHG emissions, the application of such regulations and changes in envi- ronmental control technology, we are not able to predict with certainty the amount of future capital spending to be incurred for environmental purposes. Taking these uncer- tainties into account, we have planned capital expenditures for environmental projects during the period 2011 through 2013 of approximately $1 million to $2 million annually. We believe these risks can be managed and will not have a material adverse effect on our business or our consolidated financial position, results of operations or cash flows. Neenah Paper, Inc. 2010 Annual Report 45 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S F O R WA R D - LO O K I N G S TAT E M E N T S Certain statements in this annual report may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), or in releases made by the Securities Exchange Commission (“SEC”), all as may be amended from time to time. Statements contained in this annual report that are not historical facts may be forward-looking state- ments within the meaning of the PSLRA. Any such forward- looking statements reflect our beliefs and assumptions and are based on information currently available to us and are subject to risks, uncertainties and other factors that may cause actual results to be materially different from those presented herein including but not limited to: (i) increases in commodity prices, (particularly for pulp, energy and latex) due to constrained global supplies or unexpected supply disruptions; (ii) the cost and/or availability of raw materials and energy; (iii) changes in market demand for our prod- ucts due to global economic conditions; (iv) fluctuations in exchange rates (in particular changes in the U.S. dollar/ Euro currency exchange rates) and interest rates; (v) the competitive environment; (vi) capital and credit market volatility; (vii) fluctuations in global equity and fixed-income markets; (viii) unanticipated expenditures related to the cost of compliance with environmental and other governmental regulations; (ix) our ability to control costs and implement measures designed to enhance operating efficiencies; (x) the loss of current customers or the inability to obtain new customers; (xi) increases in the funding requirements for our pension and postretirement liabilities; (xii) changes in asset valuations including write-downs of assets includ- ing fixed assets, inventory, accounts receivable, deferred tax assets or other assets for impairment or other reasons; (xiii) our existing and future indebtedness; (xiv) strikes, labor stoppages and changes in our collective bargaining agree- ments and relations with our employees and unions; and (xv) other risks that are detailed from time to time in reports we file with the SEC. These and other factors could cause or contribute to actual results differing materially from any forward-looking statements are discussed in more detail in our filings with the SEC. Forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, per- formance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements we make are not guar- antees or indicative of future performance. 46 Neenah Paper, Inc. 2010 Annual Report MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Company’s management is responsible for establish- ing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) or 15a-15(f) under the Securities Exchange Act of 1934. The Company’s inter- nal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair pre- sentation of published financial statements. Because of its inherent limitations, internal con- trol over financial reporting may not prevent or detect misstatements. Therefore, even those systems deter- mined to be effective can provide only reasonable assur- ance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. The scope of management’s assess- ment of the effectiveness of internal control over financial reporting includes all of the Company’s businesses. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based upon its assessment, management believes that as of December 31, 2010, the Company’s internal controls over financial reporting were effective. The effectiveness of internal control over financial reporting as of December 31, 2010, has been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also audited the Company’s consoli- dated financial statements. Deloitte & Touche’s attestation report on the Company’s internal control over financial reporting follows. Neenah Paper, Inc March 9, 2011 Neenah Paper, Inc. 2010 Annual Report 47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Neenah Paper, Inc., Alpharetta, Georgia We have audited the internal control over financial reporting of Neenah Paper, Inc. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over finan- cial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervi- sion of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, manage- ment, and other personnel to provide reasonable assur- ance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting prin- ciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accu- rately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with gen- erally accepted accounting principles, and that receipts and expenditures of the company are being made only in accor- dance with authorizations of management and directors of the company; and (3) provide reasonable assurance regard- ing prevention or timely detection of unauthorized acquisi- tion, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the stan- dards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated March 9, 2011 expressed an unqualified opinion on those consolidated financial statements. Atlanta, Georgia March 9, 2011 48 Neenah Paper, Inc. 2010 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Neenah Paper, Inc., Alpharetta, Georgia We have audited the accompanying consolidated balance sheets of Neenah Paper, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These finan- cial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial state- ments present fairly, in all material respects, the finan- cial position of Neenah Paper, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting. Atlanta, Georgia March 9, 2011 Neenah Paper, Inc. 2010 Annual Report 49 TT CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except share and per share data) Net sales Cost of products sold Gross profit Selling, general and administrative expenses Other income – net Loss (gain) on closure and sale of the Ripon Mill Goodwill and other intangible asset impairment charge Operating income (loss) Interest expense Interest income Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Income (loss) from continuing operations Income (loss) from discontinued operations, net of taxes (Note 5) Net income (loss) Earnings (Loss) Per Common Share Basic Continuing operations Discontinued operations Diluted Continuing operations Discontinued operations Weighted-Average Common Shares Outstanding (in thousands) Basic Diluted See Notes to Consolidated Financial Statements Year Ended December 31, 2010 2009 2008 $657.7 537.7 120.0 69.3 (1.0) (3.4) – 55.1 20.5 (0.2) 34.8 9.8 25.0 134.1 $159.1 $ 1.69 9.05 $10.74 $ 1.61 8.60 $10.21 $573.9 472.3 101.6 69.1 (1.0) 17.1 – 16.4 23.4 (0.2) (6.8) (5.0) (1.8) 0.6 $ (1.2) $ (0.12) 0.04 $ (0.08) $ (0.12) 0.04 $ (0.08) $ 732.3 630.8 101.5 75.2 (11.3) – 54.5 (16.9) 25.0 – (41.9) 3.9 (45.8) (111.2) $(157.0) $ (3.14) (7.59) $(10.73) $ (3.14) (7.59) $(10.73) 14,744 15,512 14,655 14,655 14,642 14,642 50 50 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report CONSOLIDATED BALANCE SHEETS (In millions, except share data) ASSETS Current Assets Cash and cash equivalents Accounts receivable, net Inventories Income taxes receivable Deferred income taxes Prepaid and other current assets Assets held for sale (Note 4 and Note 5) Total Current Assets Property, Plant and Equipment – net Deferred Income Taxes Goodwill (Note 4) Intangible assets – net (Note 4) Other Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Debt payable within one year Accounts payable Accrued expenses Total Current Liabilities Long-term Debt Deferred Income Taxes Noncurrent Employee Benefits and Other Obligations TOTAL LIABILITIES Contingencies and Legal Matters (Notes 12) Stockholders’ Equity Common stock, par value $0.01 – authorized: 100,000,000 shares; issued and outstanding: 15,237,203 shares and 15,085,709 shares Treasury stock, at cost: 426,201 shares and 410,654 shares Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Total Stockholders’ Equity TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY See Notes to Consolidated Financial Statements December 31, 2010 2009 $ 48.3 70.7 69.4 – 19.5 14.1 – 222.0 261.9 43.1 41.5 24.0 14.2 $606.7 $ 13.6 30.4 48.1 92.1 231.3 19.4 104.7 447.5 $ 5.6 67.7 70.7 0.8 61.7 13.7 10.0 230.2 284.4 36.5 44.9 27.5 13.1 $ 636.6 $ 55.6 27.2 48.6 131.4 263.6 23.7 108.3 527.0 0.1 (10.4) 249.0 (62.0) (17.5) 159.2 $606.7 0.1 (10.2) 243.4 (215.2) 91.5 109.6 $ 636.6 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report 51 51 CONSOLIDATED STATEMENTS OF CHANGES IN TT STOCKHOLDERS’ EQUITY (In millions, shares in thousands) December 31, 2007 Net loss Other comprehensive income (loss) Unrealized foreign currency translation Adjustment to pension and other benefit liabilities Loss on cash flow hedges Dividends declared Excess tax benefits from stock- based compensation Share purchases Restricted stock vesting (Note 10) Stock-based compensation December 31, 2008 Net loss Other comprehensive income (loss) Unrealized foreign currency translation Adjustment to pension and other benefit liabilities Dividends declared Restricted stock vesting (Note 10) Stock-based compensation December 31, 2009 Net income Other comprehensive loss Unrealized foreign currency translation Adjustment to pension and other benefit liabilities Reclassification of cumulative translation adjustments related to investments in Canada Dividends declared Stock options exercised Restricted stock vesting (Note 10) Stock-based compensation December 31, 2010 Common Stock Shares Amount Treasury Stock Additional Accumulated Other Paid-In Accumulated Comprehensive Comprehensive Income/(Loss) Capital Income Deficit 14,969 $0.1 $ (0.4) $235.3 $ (45.1) (157.0) $ 98.5 $(157.0) 86 (9.4) (0.3) 15,055 0.1 (10.1) (0.6) 4.0 238.7 31 (0.1) 15,086 0.1 (10.2) 4.7 243.4 (6.0) (208.1) (1.2) (5.9) (215.2) 159.1 (30.1) (30.1) 16.3 (0.3) 16.3 (0.3) $(171.1) 84.4 4.1 3.0 91.5 $ (1.2) 4.1 3.0 $ 5.9 $ 159.1 (15.1) (15.1) (6.0) (6.0) 86 65 (0.2) 15,237 $0.1 $(10.4) 0.7 4.9 $249.0 $ (62.0) $(17.5) (5.9) (87.9) (87.9) $ 50.1 See Notes to Consolidated Financial Statements 52 52 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Year Ended December 31, 2010 2009 2008 $159.1 $(1.2) $(157.0) Depreciation and amortization Stock-based compensation Deferred income tax provision (benefit) Gain on sale of the Woodlands (Note 5) Reclassification of cumulative translation adjustments related to investments in Canada (Note 1 and Note 5) Goodwill and other intangible asset impairment charge (Note 4) Asset impairment loss Loss on disposal – transfer of the Pictou Mill Amortization of deferred revenue – transfer of the Pictou Mill Loss on disposal – transfer of the Pictou Mill post-employment benefit plans Ripon Mill (gain) on sale and non-cash closure charges Gain on curtailment of post employment benefit plan (Gain) loss on other asset dispositions Net cash provided by (used in) changes in operating working capital (Note 15) Pension and other post-employment benefits Other NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Net proceeds from sale of the Woodlands (Note 5) Increase in investments Proceeds from asset sales Payments in conjunction with the transfer of the Pictou Mill Other NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from issuance of long-term debt Debt issuance costs Repayments of long-term debt Short-term borrowings Repayments of short-term borrowings Cash dividends paid Share purchases (Note 10) Proceeds from exercise of stock options Other NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR See Notes to Consolidated Financial Statements 31.3 4.9 37.0 (74.1) (87.9) – – – – – (3.4) – 0.2 (3.9) (7.8) (0.9) 54.5 (17.4) 78.0 (3.5) 8.7 – 0.7 66.5 0.1 – (71.5) 13.3 (14.8) (5.9) – 0.7 (0.2) (78.3) – 42.7 5.6 $ 48.3 34.5 4.7 (9.4) – – – – – – – 6.3 – 0.2 27.4 2.4 – 64.9 (8.4) – – 0.8 – (0.7) (8.3) 45.5 (2.9) (87.6) 12.2 (15.4) (5.9) – – (0.1) (54.2) (0.1) 2.3 3.3 $ 5.6 38.6 4.0 (56.1) – – 54.5 91.2 29.4 (2.8) 53.7 – (4.3) (6.3) (22.6) (7.6) (1.6) 13.1 (30.0) – – 13.8 (13.6) (0.6) (30.4) 53.7 – (34.6) 18.7 (3.3) (6.0) (9.4) – (0.9) 18.2 – 0.9 2.4 $ 3.3 Neenah Paper, Inc. 2010 Annual Report Neenah Paper, Inc. 2010 Annual Report 53 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted) ONE Background and Basis of Presentation B A C K G R O U N D Neenah Paper, Inc. (“Neenah” or the “Company”) is a Delaware corporation incorporated in April 2004. The Company has two primary operations: its technical products business and its fine paper business. The technical products business is an inter national producer of transportation and other filter media, durable, saturated and coated substrates for a variety of end uses and nonwoven wall coverings. The fine paper business is a producer of premium writing, text, cover and specialty papers used in corporate identity packages, corporate annual reports, invitations, personal stationery, labels and high-end packaging for point of sale advertising. In February 2008, the Company commit- ted to a plan to sell its pulp mill in Pictou, Nova Scotia (the “Pictou Mill”) and approximately 475,000 acres of woodland assets in Nova Scotia (the “Woodlands”). In June 2008, the Company’s wholly owned subsidiary, Neenah Paper Company of Canada (“Neenah Canada”) sold the Pictou Mill to Northern Pulp Nova Scotia Corporation (“Northern Pulp”), a new operating company jointly owned by Atlas Holdings LLC (“Atlas”) and Blue Wolf Capital Management LLC (“Blue Wolf”). Pursuant to the terms of the transaction, Northern Pulp assumed all of the assets and liabilities associated with the Pictou Mill, as well as exist- ing customer contracts, supply agreements, labor agree- ments and pension obligations. The sale did not include the Woodlands. In March 2010, Neenah Canada sold the Woodlands to Northern Timber Nova Scotia Corporation, an affiliate of Northern Pulp, for C$82.5 million ($78.6 mil- lion). The sale resulted in a pre-tax gain, net of fees and other transaction costs, of $74.1 million. The sale of the Woodlands resulted in the substantially complete liquida- tion of the Company’s investment in Neenah Canada. In accordance with Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters (“ASC Topic 830”), $87.9 million of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries have been reclassified into earnings and recognized as part of the gain on sale of the Woodlands. The transaction did not generate a cash tax liability because the tax basis for the Woodlands was approximately equal to the sale price. For the year ended December 31, 2010, the results of opera- tions, the gain on sale of the Woodlands ($74.1 million) and the reclassification into earnings of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries ($87.9 million) are reported as discon- tinued operations in the consolidated statement of opera- tions. The results of operations of the Pictou Mill and the Woodlands and the loss on disposal of the Pictou Mill are reported as discontinued operations for the years ended December 31, 2009 and 2008. See Note 5, “Discontinued Operations – Sale of the Pictou Mill and the Woodlands.” B A S I S O F P R E S E N T A T I O N The consolidated financial statements include the financial statements of the Company and its wholly owned and major- ity owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. P R I O R Y E A R A D J U S T M E N T S During the preparation of the interim financial statements for the three and nine months ended September 30, 2010, the Company identified a $2.8 million overstatement of accounts payable that was primarily the result of invalid inventory pricing adjustments beginning in 2006 and cer- tain inventory transactions in 2008. These errors resulted in an overstatement of accounts payable and cost of products sold of $0.4 million and $2.4 million for the years ended December 31, 2006 and 2008, respectively. The Company has restated the statement of operations for the year ended December 31, 2008 for the $2.4 million overstatement of cost of products sold. The Company has reflected the cor- rection of the errors on the consolidated balance sheet as of December 31, 2009 with a decrease in accounts pay- able of $2.8 million, a decrease of $0.9 million in noncurrent deferred income taxes and an increase of $1.9 million in stockholders’ equity. The Company believes the effects of these prior period corrections are not material to any prior period consolidated financial statements. 54 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S TWO Summary of Significant Accounting Policies U S E O F E S T I M A T E S The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Actual results could differ from these estimates, and changes in these estimates are recorded when known. Significant management judgment is required in determining the accounting for, among other things, pen- sion and postretirement benefits, retained insurable risks, allowances for doubtful accounts and reserves for sales returns and cash discounts, purchase price allocations, use- ful lives for depreciation and amortization, future cash flows associated with impairment testing for tangible and intan- gible long-lived assets, income taxes, contingencies, inven- tory obsolescence and market reserves and the valuation of stock-based compensation. R E V E N U E R E C O G N I T I O N The Company recognizes sales revenue when all of the following have occurred: (1) delivery has occurred, (2) per- suasive evidence of an agreement exists, (3) pricing is fixed or determinable, and (4) collection is reasonably assured. Delivery is not considered to have occurred until the cus- tomer takes title and assumes the risks and rewards of ownership. The timing of revenue recognition is largely dependent on shipping terms. In general, the Company’s shipments are designated free on board shipping point and revenue is recognized at the time of shipment. Sales are reported net of allowable discounts and estimated returns. Reserves for cash discounts, trade allowances and sales returns are estimated using historical experience. E A R N I N G S P E R S H A R E ( “ E P S ” ) The Company computes basic earnings (loss) per share (“EPS”) in accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC Topic 260”). In accordance with ASC Topic 260, share-based awards with non-forfeitable dividends are classified as participating securities. In calculating basic earnings per share, this method requires net income to be reduced by the amount of dividends declared in the current period for each participating security and by the contractual amount of dividends or other participation payments that are paid or accumulated for the current period. Undistributed earn- ings for the period are allocated to participating securities based on the contractual participation rights of the security to share in those current earnings assuming all earnings for the period are distributed. Holders of restricted stock, restricted stock units (“RSUs”) and RSUs with performance conditions have contractual participation rights that are equivalent to those of common stockholders. Therefore, the Company allocates undistributed earnings to restricted stock, RSUs, RSUs with performance conditions and com- mon stockholders based on their respective ownership per- centage, as of the end of the period. ASC Topic 260 also requires companies with par- ticipating securities to calculate diluted earnings per share using the “Two Class” method. The “Two Class” method requires the denominator to include the weighted-average participating securities along with the additional share equivalents from the assumed conversion of stock options calculated using the “Treasury Stock” method, subject to the anti-dilution provisions of ASC Topic 260. Diluted EPS was calculated to give effect to all potentially dilutive common shares using the “Treasury Stock” method. Outstanding stock options, stock appre- ciation rights (“SARs”) and certain RSUs with performance conditions represent the only potentially dilutive non- participating security effects on the Company’s weighted- average shares. For the years ended December 31, 2010, 2009 and 2008, approximately 1,590,000, 1,700,000 and 1,510,000 potentially dilutive options, respectively, were excluded from the computation of dilutive common shares because the exercise price of such options exceeded the average market price of the Company’s common stock for the period the options were outstanding. In addition, as a result of the loss from continuing operations for the years ended December 31, 2009 and 2008, approximately 160,000 and 130,000 incremental shares resulting from the assumed exercise or vesting of potentially dilutive securities were excluded from the diluted earnings per share calcula- tion, as the effect would have been anti-dilutive. Neenah Paper, Inc. 2010 Annual Report 55 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following table presents the computation of basic and diluted shares of common stock used in the cal- culation of EPS (amounts in millions, except share and per share amounts): Income (loss) from continuing operations Distributed and undistributed amounts allocated to participating securities (a) Income (loss) from continuing operations available to common stockholders Income (loss) from discontinued operations, net of income taxes Distributed and undistributed Year Ended December 31, 2010 2009 2008 $ 25.0 $ (1.8) $ (45.8) (0.1) – (0.1) 24.9 (1.8) (45.9) 134.1 0.6 (111.2) amounts allocated to participating securities (a) Net income (loss) available to common stockholders Weighted-average basic shares outstanding Add: Assumed incremental shares under stock compensation plans Assuming dilution Earnings (Loss) Per Common Share Basic Continuing operations Discontinued operations Diluted Continuing operations Discontinued operations (0.6) – – $158.4 $ (1.2) $(157.1) 14,744 14,655 14,642 768 15,512 – 14,655 – 14,642 $ 1.69 9.05 $10.74 $ 1.61 8.60 $10.21 $(0.12) 0.04 $(0.08) $(0.12) 0.04 $(0.08) $ (3.14) (7.59) $(10.73) $ (3.14) (7.59) $(10.73) (a) In accordance with ASC Topic 260, for the years ended December 31, 2009 and 2008, undistributed losses have been allocated entirely to common stockholders due to the fact that the holders of participat- ing securities are not contractually obligated to share in the losses of the Company. 56 Neenah Paper, Inc. 2010 Annual Report F I N A N C I A L I N S T R U M E N T S Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. The Company places its temporary cash investments with high credit quality financial institu- tions. As of December 31, 2010 and 2009, $0.7 million and $0.8 million, respectively, of the Company’s cash and cash equivalent is restricted to the payment of postretirement benefits for certain former Fox River executives. I N V E N T O R I E S U.S. inventories are valued at the lower of cost, using the Last-In, First-Out (LIFO) method for financial report- ing purposes, or market. German inventories are val- ued at the lower of cost, using a weighted-average cost method, or market. The FIFO value of inventories valued on the LIFO method was $57.0 million and $58.2 million at December 31, 2010 and 2009, respectively. Cost includes labor, materials and production overhead. For the years ended December 31, 2009 and 2008, the Company rec- ognized income (expense) of approximately $0.1 million and $(0.1) million, respectively, due to the liquidation of LIFO inventories. F O R E I G N C U R R E N C Y Balance sheet accounts of Neenah Germany and Neenah Canada are translated from Euros and Canadian dollars, respectively, into U.S. dollars at period-end exchange rates, and income and expense accounts are translated at average exchange rates during the period. Translation gains or losses related to net assets located in Germany and Canada are recorded as unrealized foreign currency trans lation adjustments within accumulated other comprehensive income (loss) in stockholders’ equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in Other income – net in the consolidated statements of operations. P R O P E R T Y A N D D E P R E C I A T I O N Property, plant and equipment are stated at cost, less accu- mulated depreciation. Certain costs of software developed or obtained for internal use are capitalized. When property, plant and equipment are sold or retired, the costs and the related accumulated depreciation are removed from the N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S accounts, and the gains or losses are recorded in other (income) expense – net. For financial reporting purposes, depreciation is principally computed on the straight-line method over the estimated useful asset lives. Weighted- average useful lives are approximately 33 years for build- ings, nine years for land improvements and 17 years for machinery and equipment. For income tax purposes, accel- erated methods of depreciation are used. Estimated useful lives are periodically reviewed and changed when warranted. Long-lived assets are reviewed for impairment whenever events or changes in cir- cumstances indicate that their cost may not be recoverable. An impairment loss would be recognized when estimated undiscounted future pre-tax cash flows from the use of the asset are less than its carrying amount. Measurement of an impairment loss is based on the excess of the carrying amount of the asset over its fair value. Fair value is generally measured using discounted cash flows. The costs of major rebuilds and replacements of plant and equipment are capitalized, and the cost of maintenance performed on manufacturing facilities, com- posed of labor, materials and other incremental costs, is charged to operations as incurred. Start-up costs for new or expanded facilities are expensed as incurred. The Company accounts for asset retirement obli- gations (“AROs”) in accordance with ASC Topic 410, Asset Retirements and Environmental Obligations, which requires companies to make estimates regarding future events in order to record a liability for AROs in the period in which a legal obligation is created. Such liabilities are recorded at fair value, with an offsetting increase to the carrying value of the related long-lived asset. As of December 31, 2010, the Company is unable to estimate its AROs for environ- mental liabilities at its manufacturing facilities. G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S The Company follows the guidance of ASC Topic 805, Business Combinations (“ASC Topic 805”), in recording goodwill arising from a business combination as the excess of purchase price and related costs over the fair value of identifiable assets acquired and liabilities assumed. All of the Company’s goodwill was acquired in conjunction with the acquisition of the stock of FiberMark Services GmbH & Co. KG and the stock of FiberMark Beteiligungs GmbH (collec- tively, “Neenah Germany”) in October 2006. Under ASC Topic 350, Intangibles – Goodwill and Other (“ASC Topic 350”), goodwill is subject to impairment testing at least annually. A fair-value-based test is applied at the reporting unit level, which is generally one level below the operating segment level. The test compares the fair value of an entity’s reporting units to the carrying value of those reporting units. This test requires various judgments and estimates. The Company estimates the fair value of the reporting unit using a market approach in com- bination with a discounted operating cash flow approach. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of rec- ognized and unrecognized assets and liabilities of the reporting unit. An adjustment to goodwill will be recorded for any goodwill that is determined to be impaired. The Company tests goodwill for impairment at least annually on November 30 in conjunction with preparation of its annual business plan, or more frequently if events or circumstances indicate it might be impaired. The Company last tested goodwill for impairment as of November 30, 2010 and no impairment was indicated. The Company’s test of good- will for impairment as of November 30, 2008 indicated an impairment of goodwill. See Note 4, “Goodwill and Other Intangible Assets.” Intangible assets with finite useful lives are amor- tized on a straight-line basis over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment. Intangible assets consist primar- ily of customer relationships, trade names and acquired intellectual property. Such intangible assets are amortized using the straight-line method over estimated useful lives of between ten and 15 years. Certain trade names are esti- mated to have indefinite useful lives and as such are not amortized. Intangible assets with indefinite lives are reviewed for impairment at least annually in accordance with ASC Topic 350. See Note 4, “Goodwill and Other Intangible Assets.” R E S E A R C H E X P E N S E Research and development costs are charged to expense as incurred and are recorded in “Selling, general and adminis- trative expenses” on the consolidated statement of opera- tions. See Note 15, “Supplemental Data – Supplemental Statement of Operations Data.” Neenah Paper, Inc. 2010 Annual Report 57 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The fair value of short and long-term debt is estimated using current market prices for the Company’s publicly traded debt or rates currently available to the Company for debt of the same remaining maturities. The following table presents the carrying value and the fair value of the Company’s debt at December 31, 2010 and 2009. Senior Notes (7.375% fixed rate) Neenah Germany project financing (3.8% fixed rate) Revolving bank credit facility (variable rates) Term Loan (variable rates) Neenah Germany revolving line of credit (variable rates) Other debt (2.9% fixed rate) Long-term debt December 31, 2010 2009 Carrying Value Fair Value Carrying Value $223.0 10.0 – – 11.9 – $244.9 $227.5 9.6 – – 11.9 – $249.0 $225.0 12.5 27.9 40.0 12.9 0.9 $319.2 Fair Value $208.6 12.0 27.9 40.0 12.9 0.9 $302.3 O T H E R C O M P R E H E N S I V E I N C O M E ( L O S S ) Comprehensive income (loss) includes, in addition to net income (loss), gains and losses recorded directly into stockhold- ers’ equity on the consolidated balance sheet. These gains and losses are referred to as other comprehensive income items. Accumulated other comprehensive income (loss) consists of foreign currency translation gains and (losses), deferred gains and (losses) on “available-for-sale” securities and cash flow hedges, and adjustments related to pensions and other post- retirement benefits. The Company does not provide income taxes for foreign currency translation adjustments related to indefinite investments in foreign subsidiaries. The sale of the Woodlands resulted in the substantially complete liquidation of the Company’s investment in Neenah Canada. In accordance with ASC Topic 830, for the year ended December 31, 2010, $87.9 million of cumulative currency translation adjustments attributable to the Company’s Canadian subsidiaries have been reclassified into earnings and recognized as part of the gain on sale of the Woodlands. There were no tax consequences related to the repatriation of funds from the sale of the Woodlands. Changes in the components of other comprehensive income (loss) are as follows: Pretax Amount 2010 Tax Effect Net Amount Pretax Amount 2009 Tax Effect Net Amount Pretax Amount 2008 Tax Effect Net Amount Year Ended December 31, $ (15.1) $ – $ (15.1) $4.1 $ – $4.1 $(30.1) $ – $(30.1) (9.0) 3.0 (6.0) 4.6 (1.6) 3.0 26.4 (10.1) 16.3 Foreign currency translation Adjustment to pension and other benefit liabilities Reclassification of cumulative translation adjustments related to investments in Canada Deferred loss on cash flow hedges Other comprehensive (87.9) – – – (87.9) – – – – – – – – – – (0.5) 0.2 (0.3) income (loss) $(112.0) $3.0 $(109.0) $8.7 $(1.6) $7.1 $ (4.2) $ (9.9) $(14.1) 58 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The components of accumulated other compre- hensive income (loss), net of applicable income taxes are as follows: Company paid approximately $3.5 million and $6.5 million of such costs during the years ended December 31, 2010 and 2009, respectively. Foreign currency translation Adjustment to pension and other benefit liabilities (net of income tax benefits of $17.0 million and $14.0 million, respectively) Accumulated other comprehensive December 31, 2010 2009 $ 9.8 $112.8 (27.3) (21.3) income (loss) $(17.5) $ 91.5 A C C O U N T I N G S T A N D A R D S C H A N G E S As of December 31, 2010, no amendments to the ASC had been issued but not adopted by the Company that will have or are reasonably likely to have a material effect on its results of operations, financial position or cash flows. THREE Closure of the Ripon Mill In May 2009, the Company permanently closed its Fine Paper mill located in Ripon, California (the “Ripon Mill”). The closure resulted in a pre-tax charge of $17.1 million for the year ended December 31, 2009. The charge was com- prised of approximately $5.8 million in non-cash charges, primarily for losses related to the carrying value of property, plant and equipment, a curtailment loss of $0.8 million related to postretirement benefit plans in which employ- ees of the Ripon Mill participated (see Note 8) and cash payments for contract terminations and severance and other employee costs of approximately $10.5 million. The In October 2010, the Company sold the remain- ing long-lived assets of the Ripon Mill, primarily composed of land and buildings, to Diamond Pet Food Processors of Ripon, LLC (“Diamond”) for gross proceeds of approxi- mately $9 million. Pursuant to the terms of the transaction, Diamond acquired all the assets and assumed responsibility for substantially all the remaining liabilities associated with the Ripon Mill. The Company recognized a pre-tax gain on the sale of approximately $3.4 million. The Company accounted for the costs associated with the closure of the Ripon Mill in accordance with ASC Topic 420, Exit or Disposal Cost Obligations. The Company paid approximately $1.8 million in severance benefits to 97 former employees of the Ripon Mill. The following table presents the status of such closure costs as of and for the years ended December 31, 2010 and 2009: Contract termination and other costs Severance benefits Total $ 1.8 $ 8.7 $10.5 (1.7) (4.8) (6.5) 0.1 3.9 4.0 (0.1) (3.4) (3.5) Amounts accrued during the year ended December 31, 2009 Payments for the year ended December 31, 2009 Accrued exit costs at December 31, 2009 Payments for the year ended December 31, 2010 Change in estimates recognized in income – (0.5) (0.5) Accrued exit costs at December 31, 2010 $ – $ – $ – Neenah Paper, Inc. 2010 Annual Report 59 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S FOUR Goodwill and Other Intangible Assets As of December 31, 2010, the Company had goodwill of $41.5 million which is not amortized. The following table presents changes in goodwill (all of which relates to the Company’s Technical Products segment) for the years ended December 31, 2010, 2009 and 2008: Accumulated Impairment Losses Gross Amount Balance at December 31, 2007 Goodwill impairment charge Foreign currency translation Balance at December 31, 2008 Foreign currency translation Balance at December 31, 2009 Foreign currency translation $106.6 – (10.1) 96.5 2.4 98.9 (7.5) Balance at December 31, 2010 $ 91.4 $ – (52.7) – (52.7) (1.3) (54.0) 4.1 $(49.9) Net $106.6 (52.7) (10.1) 43.8 1.1 44.9 (3.4) $ 41.5 I M P A I R M E N T As of December 31, 2010 and 2009, the carrying amount of goodwill assigned to Neenah Germany was considered recoverable. As of December 31, 2010, a one percent- age point increase in the Company’s estimate for its cost of capital used in the impairment test would result in an approximately $35 million change in the estimated fair value of Neenah Germany and a corresponding reduction in the implied value of goodwill but would not result in an impair- ment of goodwill. The Company’s annual test of goodwill for impair- ment at November 30, 2008, indicated that the carrying value of Neenah Germany exceeded its estimated fair value. The Company estimated fair value using a market approach in combination with a probability-weighted- discounted operating cash flow approach for a number of scenarios representing differing operating and economic assumptions. Significant assumptions used in developing the discounted operating cash flow approach were revenue growth rates and pricing, costs for manufacturing inputs, levels of capital investment and estimated cost of capital for high, medium and low growth environments. The Company measured the estimated fair value of goodwill as the excess of the carrying amount of Neenah Germany over the fair values of recognized assets and liabilities of the reporting unit. The Company recorded an impairment adjustment to goodwill for the excess of the carrying value of goodwill assigned to Neenah Germany over the estimated fair value of goodwill. For the year ended December 31, 2008, the Company recognized a pre-tax loss of $52.7 million (the Company did not recognize a tax benefit related to the non tax deductible loss) for the impairment of goodwill assigned to Neenah Germany. The impairment loss was primar- ily due to a substantial increase in the estimated cost of capital the Company used to calculate the present value of Neenah Germany’s estimated future cash flows which resulted in a substantially lower estimated fair value. The higher estimated cost of capital reflected market/finan- cial conditions at the time the annual impairment test was performed which indicated higher risk premiums for debt and equity. 60 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S O T H E R I N T A N G I B L E A S S E T S As of December 31, 2010, the Company had net identifiable intangible assets of $24.0 million. All such intangible assets were acquired in the Neenah Germany and Fox River acquisitions. The following table details amounts related to those assets. Amortizable intangible assets Customer based Intangibles Trade names and Trademarks Acquired Technology Unamortizable intangible assets Trade names Total Weighted-average amortization period (years) 15 10 10 10 Not amortized December 31, 2010 2009 Gross Accumulated Amount Amortization Gross Accumulated Amount Amortization $14.4 6.1 1.1 21.6 9.3 $30.9 $(4.1) (2.3) (0.5) (6.9) – $(6.9) $15.5 6.6 1.2 23.3 9.9 $33.2 $(3.4) (1.9) (0.4) (5.7) – $(5.7) As of December 31, 2010, $21.1 million and $2.9 million of such intangible assets are reported within the Technical Products and Fine Paper seg- ments, respectively. See Note 14, “Business Segment and Geographic Information.” Aggregate amortization expense of acquired intangible assets for the years ended December 31, 2010, 2009 and 2008 was $1.6 mil- lion, $1.8 million and $1.9 million, respectively and was reported in Cost of Products Sold on the Consolidated Statement of Operations. Estimated annual amortiza- tion expense for each of the next five years is approxi- mately $1.6 million. The Company’s annual test of other intan- gible assets for impairment at November 30, 2010 and 2009 indicated that the carrying amount of such intangible assets was recoverable. The Company deter- mined during its annual test of intangible assets for impairment at November 30, 2008 that certain trade names and customer based intangible assets acquired in the Neenah Germany acquisition were impaired at December 31, 2008. For the year ended December 31, 2008, the Company recognized a non-cash pre-tax charge of approximately $1.8 million for the impairment of such intangible assets. FIVE Discontinued Operations S A L E O F T H E P I C T O U M I L L A N D T H E W O O D L A N D S In March 2010, Neenah Canada sold the Woodlands to Northern Pulp for C$82.5 million ($78.6 million). The sale resulted in a pre-tax gain, net of fees and other transaction costs, of $74.1 million. The sale of the Woodlands resulted in the substantially com- plete liquidation of the Company’s investment in Neenah Canada. In accordance with ASC Topic 830, $87.9 million of cumulative currency translation adjust- ments attributable to the Company’s Canadian subsid- iaries were reclassified into earnings and recognized as part of the gain on sale of the Woodlands. The sale of the Woodlands represented the cessation of the Company’s operating activities in Canada; however, the Company will have certain continuing post-employment benefit obligations related to its Canadian operations. The transaction did not generate a cash tax liability because the tax basis for the Woodlands was approxi- mately equal to the sale price. Neenah Paper, Inc. 2010 Annual Report 61 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Net proceeds from the sale were used to repay in full $40 million of outstanding term loan bor- rowings and repay approximately $26 million in out- standing revolving loans which reduced the balance of such outstanding loans under the Company’s bank credit agreement to zero. In addition, the Company made approximately $3.1 million in contract termi- nation payments related to the closure of the Ripon Mill that became due and payable upon the sale of the Woodlands. In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp, an operating company jointly owned by Atlas Holdings LLC and Blue Wolf Capital Management LLC. In connection with the transfer of the Pictou Mill, Neenah Canada made payments of approxi- mately $10.3 million to Northern Pulp. In addition, the Company incurred transaction costs of approximately $3.3 million. Pursuant to the terms of the transaction, Northern Pulp assumed all of the assets and liabilities associated with the Pictou Mill. In conjunction with the sale of the Pictou Mill, the Company entered into a stumpage agreement (the “Stumpage Agreement”) which allowed Northern Pulp to harvest softwood timber from the Woodlands. For calen- dar year 2008, Northern Pulp paid a nominal amount for approximately 236,000 metric tons of softwood timber harvested under the Stumpage Agreement. As a result, the Company recorded $2.8 million in deferred revenue for the estimated fair value of the timber to be harvested by Northern Pulp in calendar 2008. For the year ended December 31, 2008, the Company recognized all of such deferred revenue. For timber purchases during calendar year 2009, Northern Pulp paid the stumpage rate charged by the Nova Scotia provincial government for harvesting on government licensed lands. The Stumpage Agreement was terminated in March 2010 in conjunction with the sale of the Woodlands. For the years ended December 31, 2010 and 2009, the Company recognized revenue of approximately $1.4 million and $3.7 million, respectively, related to timber sales pursuant to the Stumpage Agreement. During the first quarter of 2008, the Company The following table presents the results of discon- determined that the estimated value it would receive from a sale of the Pictou Mill indicated that it would not recover the carrying value of the mill’s long-lived assets. As a result, the Company recognized aggregate non-cash, pre-tax impairment charges of $91.2 mil- lion to write-off the carrying value of the Pictou Mill’s long-lived assets. In addition, for the year ended December 31, 2008, the Company recorded a pre-tax loss of $29.4 million to recognize the loss on disposal of the Pictou Mill. In conjunction with the sale of the Pictou Mill, Northern Pulp assumed responsibility for all pen- sion and other postretirement benefit obligations for active and retired employees of the mill. The Company accounted for the transfer of the Nova Scotia, Canada defined benefit pension plan (the “Nova Scotia Plan”) as a settlement of postretirement benefit obligations pursuant to ASC Topic 715, Compensation–Retirement Benefits (“ASC Topic 715”). For the year ended December 31, 2008, the Company recognized a non- cash, pre-tax settlement loss of $53.7 million for the reclassification of deferred pension and other postre- tirement benefit adjustments related to the Nova Scotia Plan from accumulated other comprehensive income to loss from discontinued operations in the consolidated state- ment of operations. 62 Neenah Paper, Inc. 2010 Annual Report tinued operations: Net sales, net of Year Ended December 31, 2010 2009 2008 $ 1.4 intersegment sales Discontinued operations: Income (loss) from operations $ 1.0 Gain on disposal of the Woodlands Reclassification of 74.1 $ 3.7 $ 101.9 $ 2.8 $ (97.8) – – cumulative translation adjustments related to investments in Canada (a) Loss on disposal – Pictou Mill (b) Loss on settlement of post- employment benefit plans Gain (loss) on disposal Income (loss) before income taxes (Provision) benefit for income taxes Income (loss) from discontinued 87.9 – – 162.0 – (0.3) – (0.3) – (29.4) (53.7) (83.1) 163.0 2.5 (180.9) (28.9) (1.9) 69.7 operations, net of income taxes $134.1 $ 0.6 $(111.2) (a) The reclassification of cumulative foreign currency translation gains had no tax consequences. (b) For the year ended December 31, 2008, the loss from operations includes aggregate non-cash, pre-tax impairment charges of $91.2 mil- lion to write-off the carrying value of the Pictou Mill’s long-lived assets. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S SIX Income Taxes The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Income tax expense (benefit) represented 28.2 percent, (73.5) percent and 9.3 percent of income (loss) from continuing operations before income taxes for the years ended December 31, 2010, 2009 and 2008, respectively. The following table presents the principal reasons for the difference between the effective income tax provision (benefit) rate and the U.S. federal statutory income tax provision (benefit) rate: U.S. federal statutory income tax (benefit) rate U.S. state income taxes, net of federal income tax effect Uncertain income tax positions Nondeductible goodwill and other intangible asset impairment charge Limitation on tax benefits available to Fox River Foreign tax rate and structure differences Other differences – net Effective income tax (benefit) rate Year Ended December 31, 2010 2009 2008 35.0% 1.9% (1.1)% – – (10.3)% 2.7% 28.2% $12.2 0.7 (0.4) – – (3.6) 0.9 $ 9.8 (35.0)% (3.3)% 39.1% – – (47.2)% (27.1)% (73.5)% $(2.4) (0.2) 2.7 – – (3.2) (1.9) $(5.0) (35.0)% 0.6% – 35.0% 9.3% 1.1% (1.7)% 9.3% $(14.6) 0.3 – 14.6 3.9 0.4 (0.7) $ 3.9 The Company’s effective income tax (benefit) rate The following table presents the components of can be affected by many factors, including, but not limited to, changes in the mix of earnings in taxing jurisdictions with differing statutory rates, changes in corporate structure as a result of business acquisitions and dispositions, changes in the valuation of deferred tax assets and liabilities, the results of audit examinations of previously filed tax returns and changes in tax laws. The following table presents the U.S. and foreign components of income (loss) from continuing operations before income taxes: Income (loss) from continuing operations before income taxes: U.S. Foreign Total 2010 2009 2008 $20.6 14.2 $34.8 $(13.3) 6.5 $ (6.8) $ 5.5 (47.4) $(41.9) Year Ended December 31, Deferred: the provision (benefit) for income taxes: Year Ended December 31, 2010 2009 2008 Provision (benefit) for income taxes: Current: Federal State Foreign Total current tax provision $(0.4) (0.1) 3.6 3.1 $ 2.5 1.0 1.9 5.4 (7.5) (0.6) (2.3) $ 1.7 (0.3) 1.2 2.6 3.9 1.3 (3.9) 1.3 Federal State Foreign Total deferred tax provision (benefit) Total provision (benefit) for 7.2 1.2 (1.7) 6.7 (10.4) income taxes $ 9.8 $ (5.0) $ 3.9 The Company has elected to treat its Canadian operations as a branch for U.S. income tax purposes. Therefore, the amount of income (loss) before income taxes from Canadian operations are included in the Company’s consolidated U.S. income tax returns, and such amounts are subject to U.S. income taxes. Neenah Paper, Inc. 2010 Annual Report 63 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The asset and liability approach is used to rec- As of December 31, 2010, the Company had ognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabili- ties. The components of deferred tax assets and liabilities are as follows: December 31, 2010 2009 Net current deferred income tax assets Canadian timberlands Intangible assets Net operating losses Accrued liabilities Employee benefits Inventory Other $ – – 14.3 2.4 1.1 1.0 1.0 Net current deferred income tax assets before valuation allowance Valuation allowance Net current deferred income 19.8 (0.3) $ 28.2 20.1 7.7 3.9 1.3 (0.1) 1.3 62.4 (0.7) tax assets 19.5 61.7 Net noncurrent deferred income tax assets Net operating losses and credits Employee benefits Other long-term obligations Accumulated depreciation Other Net noncurrent deferred income tax assets before valuation allowance Valuation allowance Net noncurrent deferred income 32.9 32.5 0.2 (21.0) (0.1) 44.5 (1.4) tax assets Total deferred income tax assets 43.1 $ 62.6 Net noncurrent deferred income tax liability Accumulated depreciation Intangibles Interest limitation Employee benefits Other $ 20.4 5.4 (4.0) (2.3) (0.1) 27.1 32.3 0.6 (22.7) – 37.3 (0.8) 36.5 $ 98.2 $ 22.8 6.2 (3.2) (1.7) (0.4) Net noncurrent deferred income tax liabilities $ 19.4 $ 23.7 As of December 31, 2010, a valuation allowance of $1.7 million has been provided against certain state deferred income tax assets in states where the Company no longer has operations. In determining the need for valuation allowances, the Company considers many factors, includ- ing specific taxing jurisdictions, sources of taxable income, income tax strategies and forecasted earnings for the enti- ties in each jurisdiction. A valuation allowance is recognized if, based on the weight of available evidence, the Company concludes that it is more likely than not that some portion or all of the deferred income tax asset will not be realized. 64 Neenah Paper, Inc. 2010 Annual Report $96.7 million of U.S. Federal and $95.4 million of U.S. State net operating losses (“NOLs”). If not used, substantially all of the NOLs will expire in various amounts between 2028 and 2030. The Company also has preacquisition and rec- ognized built-in carryovers of approximately $15.1 million, net of expected limitations. In addition, the Company has $2.8 million of AMT carryovers, which can be carried for- ward indefinitely. No provision for U.S. income taxes has been made for undistributed earnings of certain of the Company’s foreign subsidiaries which have been indefinitely rein- vested. The Company is unable to estimate the amount of U.S. income taxes that would be payable if such undistrib- uted foreign earnings were repatriated. The following is a tabular reconciliation of the total amounts of uncertain tax positions as of and for the years ended December 31, 2010, 2009 and 2008: Balance at January 1, Increases in prior period Year Ended December 31, 2010 $10.5 2009 $13.9 2008 $13.3 tax positions 1.7 4.2 0.2 Decreases in prior period tax positions (3.5) (0.1) (1.0) Increases in current period tax positions – 0.5 1.4 Decreases due to settlements with tax authorities Balance at December 31, (0.1) $ 8.6 (8.0) $10.5 – $13.9 If recognized, approximately $3.8 million of the benefit for uncertain tax positions at December 31, 2010 would favorably affect the Company’s effective tax rate in future periods. While the timing is uncertain, the Company expects the settlement of audits in the next 12 months will result in the elimination of substantially all of the liabilities for uncertain income tax positions that were accrued as of December 31, 2010. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, vari- ous U.S. state jurisdictions and foreign jurisdictions. The Company is no longer subject to U.S. federal examination for years before 2007 and with few exceptions, state and local examinations for years before 2000 and non-U.S. income tax examinations for years before 2004. As of December 31, 2010, the 2007 and 2008 tax years were being audited by the U.S. Internal Revenue Service (“IRS”) and the 2004 through 2007 tax years were being audited by N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S the German tax authorities. For a discussion of uncertain- ties related to tax matters see Note 12, “Contingencies and Legal Matters.” the condensed consolidated statement of operations. As of December 31, 2010, $223 million of Senior Notes were issued and outstanding. The Company recognizes accrued interest and penalties related to uncertain income tax positions in the Provision (benefit) for income taxes on the consolidated statements of operations. As of December 31, 2010 and 2009, the Company had $0.7 million accrued for interest related to uncertain income tax positions. SEVEN Debt Long-term debt consisted of the following: Senior Notes (7.375% fixed rate) due 2014 Revolving bank credit facility (variable rates), due 2013 Term Loan (variable rates), due 2013 (a) Neenah Germany project financing (3.8% fixed rate) due in 16 equal semi-annual installments beginning June 2009 Neenah Germany revolving line of credit (variable rates) Other debt Total Debt Less: Debt payable within one year Long-term debt December 31, 2010 2009 $223.0 $225.0 – – 27.9 40.0 10.0 12.5 11.9 – 244.9 13.6 $231.3 12.9 0.9 319.2 55.6 $263.6 (a) The Company extinguished the Term Loan in March 2010 by repaying in full $40 million of outstanding Term Loan borrowings with proceeds from the sale of the Woodlands. S E N I O R U N S E C U R E D N O T E S On November 30, 2004, the Company completed an under- written offering of ten-year senior unsecured notes (the “Senior Notes”) at an aggregate face amount of $225 mil- lion. Interest on the Senior Notes is payable May 15 and November 15 of each year. The Senior Notes are fully and unconditionally guaranteed by substantially all of the Company’s subsidiaries, with the exception of our non- Canadian international subsidiaries. During the year ended December 31, 2010, the Company purchased $2 million principal amount of Senior Notes for slightly less than par value. The Company recognized a pre-tax loss of approxi- mately $25 thousand in connection with these purchases, including the write-off of related unamortized debt issu- ance costs. The loss is recorded in Other income – net on In February 2011, the Company elected to con- duct an early redemption on March 10, 2011 (the “Partial Redemption”) of $65 million in aggregate principal amount of the Senior Notes. The Company expects to finance the Partial Redemption with approximately $40 million of cash on hand, with the remainder to be provided by borrow- ings under our existing revolving credit facility. Following the Partial Redemption, $158 million in Senior Notes will be outstanding. A M E N D E D A N D R E S T A T E D S E C U R E D R E V O LV I N G C R E D I T F A C I L I T Y On November 5, 2009, the Company renewed and modified its Bank Credit Agreement by entering into an amended and restated credit agreement (as amended and restated, the “Restated Credit Agreement”) by and among the Company, certain of its subsidiaries as co- borrowers, Neenah Canada, as guarantor, the lenders listed in the Restated Credit Agreement and JPMorgan Chase Bank, N.A., as agent for the lenders. The Restated Credit Agreement consists of a $100 million senior, secured revolving credit facility (the “Revolver”) and (ii) a $40 million senior secured term loan (the “Term Loan”). The Company’s ability to borrow under the Revolver is limited to the low- est of (a) $100 million; (b) the Company’s borrowing base (as determined in accordance with the Restated Credit Agreement) and (c) the applicable cap on the amount of “credit facilities” under the indenture for the Senior Notes. In addition, under certain conditions, the Company has the ability to increase the size of the Revolver by up to $50 mil- lion. The total commitment under the Restated Credit Agreement cannot exceed $150 million. The Restated Credit Agreement terminates on November 30, 2013. In March 2010, the Company used proceeds from the sale of the Woodlands to extinguish the Term Loan by repaying in full $40 million of outstanding Term Loan borrowings. As of December 31, 2009, the Company had $40.0 million in outstanding Term Loan borrowings at a weighted-average interest rate of 4.5 percent per annum. The Revolver bears interest at either (1) a prime rate-based index plus a percentage ranging from 1.50% to 2.00%, or (2) LIBOR plus a percentage ranging from 3.00% to 3.50%, depending upon the amount of availability under the Revolver. The Company is also required to pay a monthly facility fee on the unused amount of the Revolver commitment at a per annum rate ranging between 0.50% and 0.75%, depending upon usage under the Revolver. Neenah Paper, Inc. 2010 Annual Report 65 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The Restated Credit Agreement is secured by substantially all of the assets of the Company and the sub- sidiary borrowers, including the capital stock of such subsidiar- ies, and is guaranteed by Neenah Canada. Neenah Canada’s guaranty is secured by substantially all of that subsidiary’s assets. Neenah Germany is not obligated with respect to the Restated Credit Agreement, either as a borrower or a guaran- tor; however, the Company has directly or indirectly pledged 65% of its equity interest in Neenah Germany as security for the obligations of the Company and its subsidiaries under the Restated Credit Agreement. As of December 31, 2009, the weighted-average interest rate on outstanding Revolver borrowings was 4.6 percent per annum. Interest on amounts borrowed under the Revolver is paid monthly. Amounts outstanding under the Revolver may be repaid, in whole or in part, at any time without premium or penalty except for specified make-whole payments on LIBOR-based loans. All principal amounts out- standing under the Revolver are due and payable on the date of termination of the Restated Credit Agreement. Borrowing availability under the Revolver varies over time depending on the value of the Company’s inventory, receivables and various capital assets (the “Borrowing Base”). Borrowing availability under the Revolver is reduced by outstanding letters of credit and reserves for certain other items as defined in the Restated Credit Agreement. As of December 31, 2010, the Company had approximately $0.8 million of letters of credit and other items outstanding which reduced availability and $81.5 million of borrowing availability under the Revolver. The Restated Credit Agreement contains events of default customary for financings of this type, including failure to pay principal or interest, materially false represen- tations or warranties, failure to observe covenants and other terms of the Restated Credit Agreement, cross-defaults to certain other indebtedness, bankruptcy, insolvency, various ERISA violations, the incurrence of material judgments and changes in control. The Restated Credit Agreement contains cov- enants with which the Company must comply during the term of the agreement. Among other things, such covenants restrict the Company’s ability to incur certain additional debt, make specified restricted payments and capital expenditures, authorize or issue capital stock, enter into transactions with affiliates, consolidate or merge with or acquire another business, sell certain of its assets, or dissolve or wind up. In addition, the terms of the Restated Credit Agreement require the Company to achieve and maintain compliance with a fixed charge coverage ratio if availability under the Restated Credit Agreement is less than $20 million. At December 31, 2010, the Company was in compliance with all covenants. The Company’s ability to pay cash dividends on its common stock is limited under the terms of both the Restated Credit Agreement and the Senior Notes. At December 31, 2010, under the most restrictive terms of these agreements, the Company’s ability to pay cash divi- dends on its common stock is limited to a total of $8 million in a 12-month period. O T H E R D E B T In December 2006, Neenah Germany entered into an agreement with HypoVereinsbank and IKB Deutsche Industriebank AG to provide €10.0 million of project financ- ing with a term of ten years for the construction of a satu- rator. Principal outstanding under the agreement may be repaid at any time without penalty. Interest on amounts outstanding is based on actual days elapsed in a 360-day year and is payable semi-annually. As of December 31, 2010, €7.5 million ($10.0 million, based on exchanges rates at December 31, 2010) was outstanding under this agreement. Neenah Germany has a revolving line of credit (the “German Line of Credit”) with HypoVereinsbank that provides for borrowings of up to €15 million for general cor- porate purposes. The German Line of Credit is secured by the domestic accounts receivable of Neenah Germany. As of December 31, 2010 and 2009, the weighted-average interest rate on outstanding Line of Credit borrowings was 3.8 per- cent per annum and 4.1 percent per annum, respectively. In November 2010, Neenah Germany renewed the German Line of Credit on an “evergreen” basis. Subsequent to November 2011, the agreement may be terminated by either the Company or HypoVereinsbank upon giving proper notice. Neenah Germany has the ability to borrow in either Euros or U.S. dollars. Interest is computed on U.S. dollars loans at the rate of 8.5 percent per annum and on Euro loans at EURIBOR plus a margin of 1.5 percent. Interest is payable quarterly and principal may be repaid at any time without penalty. As of December 31, 2010, €9.0 million ($11.9 million, based on exchange rates at December 31, 2010) was outstanding under the Line of Credit and €6.0 million ($8.0 million, based on exchanges rates at December 31, 2010) of credit was avail- able. Neenah Germany’s ability to pay dividends or transfer funds to the Company is limited under the terms of the German Line of Credit, to not exceed certain limits defined in the agreement without lender approval or repayment of the amount outstanding under the line, which was €9.0 mil- lion ($11.9 million, based on exchange rates at December 31, 2010) at December 31, 2010. In addition, the terms of the German Line of Credit require Neenah Germany to maintain a ratio of stockholder’s equity to total assets equal to or greater than 45 percent. The Company was in compliance with all provisions of the agreement as of December 31, 2010. 66 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S P R I N C I P A L P AY M E N T S The following table presents the Company’s required debt payments: Debt payments 2011(b) $13.6 2012 $1.7 2013(a) 2014(a)(c) 2015 Thereafter Total $1.6 $224.7 $1.7 $1.6 $244.9 (a) Includes principal payments on the Senior Notes of $223 million. (b) As a result of the Partial Redemption, debt payments for the year ending December 31, 2011 will be $78.6 million. (c) The Company believes the Partial Redemption will reduce required debt payments in the year ending December 31, 2014 by approximately $65 million. EIGHT Pension and Other Postretirement Benefits P E N S I O N P L A N S Substantially all active employees of the Company’s U.S. paper operations participate in defined benefit pen- sion plans and/or defined contribution retirement plans. Neenah Germany has defined benefit plans designed to provide a monthly pension upon retirement for substantially all its employees in Germany. In addition, the Company maintains a supplemental retirement contribution plan (the “SERP”), which is a nonqualified defined benefit plan. The Company provides benefits under the SERP to the extent necessary to fulfill the intent of its defined benefit retirement plans without regard to the limitations set by the Internal Revenue Code on qualified defined benefit plans. For the year ended December 31, 2010, benefit payments under the SERP exceeded the sum of expected service cost and interest costs for the plan for calendar 2010. In accordance with ASC Topic 715, Compensation – Retirement Benefits (“ASC Topic 715”), the Company mea- sured the liabilities of the SERP as of September 30, 2010 and recognized a settlement loss of $0.3 million. The closure of the Ripon Mill (see Note 3, “Closure of the Ripon Mill”) resulted in the elimination of expected years of future service for mill employees eligible to participate in the Company’s defined benefit pension plans and postretirement medical plan. In accor- dance with ASC Topic 715, the Company measured the assets and liabilities of the affected postretirement plans as of May 31, 2009 and recognized an aggregate curtail- ment loss of approximately $0.8 million for the year ended December 31, 2010. The Company’s funding policy for qualified defined benefit plans for its U.S. paper operations is to contribute assets to fully fund the accumulated benefit obli- gation. Subject to regulatory and tax deductibility limits, any funding shortfall is to be eliminated over a reasonable number of years. Nonqualified plans providing pension benefits in excess of limitations imposed by taxing authori- ties are not funded. There is no legal or governmental obligation to fund Neenah Germany’s benefit plans and as such the Neenah Germany defined benefit plans are currently unfunded. The Company uses the fair value of pension plan assets to determine pension expense, rather than averaging gains and losses over a period of years. Investment gains or losses represent the difference between the expected return calculated using the fair value of the assets and the actual return based on the fair value of assets. The Company’s pension obligations are measured annually as of December 31. As of December 31, 2010, the Company’s pension plans had cumulative unrecognized investment losses and other actuarial losses of approximately $33.3 mil- lion recorded in accumulated other comprehensive income. O T H E R P O S T R E T I R E M E N T B E N E F I T P L A N S The Company maintains health care and life insurance ben- efit plans for active employees of the Company and former employees of the Canadian pulp operations. The plans are generally noncontributory for employees who were eligible to retired on or before December 31, 1992 and contributory for most employees who became eligible to retire on or after January 1, 1993. The Company does not provide a sub- sidized benefit to most employees hired after 2003. The Company’s obligations for postretirement benefits other than pensions are measured annually as of December 31. At December 31, 2010, the assumed inflation- ary health care cost trend rates used to determine obliga- tions at December 31, 2010 and costs for the year ended December 31, 2011 were 8.4 percent gradually decreasing to an ultimate rate of 4.5 percent in 2027. The assumed inflationary health care cost trend rates used to determine obligations at December 31, 2009 and cost for the year ended December 31, 2010 were 8.7 percent gradually decreasing to an ultimate rate of 4.5 percent in 2027. Neenah Paper, Inc. 2010 Annual Report 67 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following table reconciles the benefit obligations, plan assets, funded status and net liability information of the Company’s pension and other postretirement benefit plans. Change in Benefit Obligation: Benefit obligation at beginning of year Service cost Interest cost Currency Actuarial loss (gain) Benefit payments from plans Plan participant contributions Plan amendments (Gain) loss on plan curtailment Gain on plan settlement Benefit obligation at end of year Change in Plan Assets: Fair value of plan assets at beginning of year Actual gain (loss) on plan assets Employer contributions Benefit payments Settlement payments Fair value of plan assets at end of year Funded Status: Reconciliation of Funded Status Fair value of plan assets Projected benefit obligation Net liability recognized in statement of financial position Amounts recognized in statement of financial position consist of: Current liabilities Noncurrent liabilities Net amount recognized Pension Benefits Postretirement Benefits Other than Pensions Year Ended December 31, 2010 2009 2010 2009 $234.7 4.4 14.0 (2.6) 13.0 (10.8) – 0.9 (0.2) (0.7) $252.7 $168.2 20.5 12.6 (8.4) (0.7) $192.2 $192.2 252.7 $ (60.5) $ (2.1) (58.4) $ (60.5) $214.2 4.5 14.3 0.9 11.9 (10.6) – – (0.5) – $234.7 $142.9 23.3 10.2 (8.2) – $168.2 $168.2 234.7 $ (66.5) $ (2.2) (64.3) $ (66.5) $ 37.9 1.6 2.2 (0.2) 3.7 (3.4) 0.2 – – – $ 42.0 $ – – – – – $ – $ – 42.0 $ 42.0 $ (2.9) (39.1) $(42.0) $ 36.8 1.9 2.5 0.5 (1.5) (2.9) 0.2 – 0.4 – $ 37.9 $ – – – – – $ – $ – 37.9 $(37.9) $ (2.6) (35.3) $(37.9) Amounts recognized in accumulated other comprehensive income consist of: Accumulated actuarial loss Prior service cost Total recognized in accumulated other comprehensive income Pension Benefits Postretirement Benefits Other than Pensions December 31, 2010 $33.3 1.3 $34.6 2009 $28.3 0.6 $28.9 2010 $7.0 2.0 $9.0 2009 $3.3 2.4 $5.7 68 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Summary disaggregated information about the pension plans follows: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets C O M P O N E N T S O F N E T P E R I O D I C B E N E F I T C O S T Assets Exceed ABO ABO Exceeds Assets December 31, Total 2010 $101.4 91.1 95.2 2009 $94.6 82.0 82.9 2010 2009 2010 2009 $151.3 149.3 97.0 $140.1 137.5 85.3 $252.7 240.4 192.2 $234.7 219.5 168.2 Pension Benefits Postretirement Benefits Other than Pensions Year Ended December 31, Service cost Interest cost Expected return on plan assets (a) Recognized net actuarial loss Amortization of unrecognized transition asset Amortization of prior service cost Amount of curtailment (gain) loss recognized Amount of settlement loss recognized Net periodic benefit cost Less: Cost related to discontinued operations 2010 2009 2008 $ 4.4 14.0 (13.8) 1.3 – 0.1 – 0.3 6.3 – $ 4.5 14.3 (11.3) 1.4 – 0.1 0.2 – 9.2 – $ 6.8 18.5 (19.8) 1.4 (0.1) 1.0 – – 7.8 1.9 2010 $1.6 2.2 – 0.1 – 0.4 – – 4.3 – Net periodic benefit cost related to continuing operations $ 6.3 $ 9.2 $ 5.9 $4.3 2009 $1.9 2.5 – 0.3 – 0.4 0.6 – 5.7 – $5.7 2008 $ 2.2 2.5 – 1.3 – (5.0) – – 1.0 0.6 $ 0.4 (a) The expected return on plan assets is determined by multiplying the fair value of plan assets at the prior year-end (adjusted for estimated current year cash benefit payments and contributions) by the expected long-term rate of return. O T H E R C H A N G E S I N P L A N A S S E T S A N D B E N E F I T O B L I G A T I O N S I N O T H E R C O M P R E H E N S I V E I N C O M E Net periodic benefit expense Accumulated actuarial gain Prior service cost (credit) Transition asset Total recognized in other comprehensive income Total recognized in net periodic benefit cost and other comprehensive income Pension Benefits Postretirement Benefits Other than Pensions 2010 $ 6.3 5.0 0.7 – 5.7 Year Ended December 31, 2009 $ 9.2 (2.6) (0.3) – (2.9) 2008 $ 7.8 (14.5) (9.6) 0.1 (24.0) 2010 $ 4.3 3.7 (0.4) – 3.3 2009 $ 5.7 (1.7) (0.7) – (2.4) 2008 $ 1.0 (7.6) 5.3 – (2.3) $12.0 $ 6.3 $(16.2) $ 7.6 $ 3.3 $(1.3) The estimated net actuarial loss and prior service cost for the defined benefit pension plans expected to be amor- tized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $1.6 million and $0.2 million, respectively. The estimated net actuarial loss and prior service cost for postretirement benefits other than pension expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $0.2 million and $0.4 million, respectively. Neenah Paper, Inc. 2010 Annual Report 69 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S W E I G H T E D - A V E R A G E A S S U M P T I O N S U S E D T O D E T E R M I N E B E N E F I T O B L I G A T I O N S A T D E C E M B E R   3 1 Discount rate Rate of compensation increase W E I G H T E D - AV E R A G E A S S U M P T I O N S U S E D T O D E T E R M I N E N E T P E R I O D I C B E N E F I T C O S T F O R Y E A R S E N D E D D E C E M B E R   3 1 Pension Benefits Postretirement Benefits Other than Pensions 2010 5.86% 3.91% December 31, 2009 6.17% 3.91% 2010 5.70% – 2009 5.92% – Pension Benefits Postretirement Benefits Other than Pensions Year Ended December 31, 2010 2009 2008 2010 6.06% 8.00% 3.91% 6.80% 7.92% 3.43% 6.10% 8.02% 3.30% 5.92% – – 2009 6.00% – – 2008 6.00% – – the lowest priority to unobservable inputs (Level 3 measure- ments). The three levels of the fair value hierarchy under ASC Topic 820 are described below: Level 1 – Inputs to the valuation methodology are unad- justed quoted prices for identical assets or liabilities in active markets that the plan has the ability to access. Level 2 – Inputs to the valuation methodology include: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • Inputs other than quoted prices that are observable for the asset or liability; • Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 – Inputs to the valuation methodology are unobserv- able and significant to the fair value measurement. The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. Discount rate Expected long-term return on plan assets Rate of compensation increase E X P E C T E D L O N G - T E R M R A T E O F R E T U R N A N D I N V E S T M E N T   S T R A T E G I E S The expected long-term rate of return on pension fund assets held by the Company’s pension trusts was deter- mined based on several factors, including input from pension investment consultants and projected long-term returns of broad equity and bond indices. Also considered were the plans’ historical ten-year and 15-year compounded annual returns. It is anticipated that, on average, actively managed U.S. pension plan assets will generate annual long- term rates of return of at least eight percent. The expected long-term rate of return on the assets in the plans was based on an asset allocation assumption of approximately 60 percent with equity managers, with expected long-term rates of return of approximately ten percent, and 40 percent with fixed income managers, with an expected long-term rate of return of about six percent. The actual asset alloca- tion is regularly reviewed and periodically rebalanced to the targeted allocation when considered appropriate. P L A N A S S E T S – F A I R V A L U E M E A S U R E M E N T S The Company measures the fair value of pension plan assets in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) which establishes a frame- work for measuring fair value. ASC Topic 820 provides a fair value hierarchy that prioritizes the inputs to valuation tech- niques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and 70 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following table sets forth by level, within the fair value hierarchy, the fair value of the Company’s pension plan assets as of December 31, 2010: Equity securities: Domestic International Debt securities Cash and equivalents Total assets at fair value Assets at Fair Value as of December 31, 2010 Level 1 Level 2 Level 3 Total $ – – – 1.9 $1.9 $ 84.3 34.3 71.7 – $190.3 $ – – – – $ – $ 84.3 34.3 71.7 1.9 $192.2 Pension plan asset allocations are as follows: Percentage of Plan Assets at December 31, 2010 2009 2008 Asset Category Equity securities Debt securities Cash and money-market funds Total 62% 37% 1% 100% 59% 37% 4% 100% 55% 44% 1% 100% The Company’s investment objectives for pension plan assets is to ensure, over the long-term life of the pen- sion plans, an adequate pool of assets to support the benefit obligations to participants, retirees and beneficiaries. Specifically, these objectives include the desire to: (a) invest assets in a manner such that future assets are available to fund liabilities, (b) maintain liquidity sufficient to pay current benefits when due and (c) diversify, over time, among asset classes so assets earn a reasonable return with acceptable risk to capital. The target investment allocation and permissible allocation range for plan assets by category are as follows: Asset Category Equity securities Debt securities / Fixed Income Strategic Target Permitted Range 65% 35% 60–70% 30–40% As of December 31, 2010, no company or group of companies in a single industry represented more than five percent of plan assets. The Company’s investment assumptions are established by an investment committee composed of members of senior management and are validated periodically against actual investment returns. As of December 31, 2010, the Company’s investment assumptions are as follows: (a) the plan should be substantially fully invested at all times because substantial cash holdings will reduce long-term rates of return; (b) equity investments will provide greater long-term returns than fixed income investments, although with greater short-term volatility; (c) it is prudent to diversify the plan investment across major asset classes; (d) allocating a portion of plan assets to foreign equities will increase portfolio diversification, decrease portfolio risk and provide the potential for long-term returns; (e) investment managers with active mandates can reduce portfolio risk below market risk and potentially add value through security selection strategies, and a substan- tial portion of plan assets should be allocated to such active mandates; (f) a component of passive, indexed management can ben- efit the plans through greater diversification and lower cost, and a portion of the plan assets should be allocated to such passive mandates; and (g) it is appropriate to retain more than one investment manager, given the size of the plans, provided that such managers offer asset class or style diversification. For the years ended December 31, 2010, 2009 and 2008, no plan assets were invested in the Company’s securities. C A S H F L O W S At December 31, 2010, the Company expects to make aggregate contributions to qualified and nonqualified pen- sion trusts and payments of pension benefits for unfunded pension plans of approximately $20 million (based on exchange rates at December 31, 2010). Neenah Paper, Inc. 2010 Annual Report 71 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S F U T U R E B E N E F I T P AY M E N T S The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Pension Plans Postretirement Benefits Other than Pensions 2011 2012 2013 2014 2015 Years 2016–2020 $11.9 19.4 13.0 13.2 13.8 84.7 $2.9 2.3 2.6 2.9 3.0 18.1 H E A LT H C A R E C O S T T R E N D S Assumed health care cost trend rates affect the amounts reported for postretirement health care benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: Effect on total of service and interest cost components Effect on postretirement benefit obligation One Percentage-Point Increase Decrease $0.7 $(0.8) 1.6 (2.8) D E F I N E D C O N T R I B U T I O N R E T I R E M E N T P L A N S Company contributions to defined contribution retirement plans are primarily based on the age and compensation of covered employees. Contributions to these plans, all of which were charged to expense, were $1.5 million in 2010, $1.4 million in 2009 and $1.6 million in 2008. In addition, the Company maintains a supplemental retirement contribu- tion plan (the “SRCP”) which is a non-qualified, unfunded defined contribution plan. The Company provides benefits under the SRCP to the extent necessary to fulfill the intent of its defined contribution retirement plans without regard to the limitations set by the Internal Revenue Code on quali- fied defined contribution plans. For each of the years ended December 31, 2010, 2009 and 2008, the Company recog- nized expense related to the SRCP of less than $0.1 million. I N V E S T M E N T P L A N S The Company provides voluntary contribution investment plans to substantially all North American employees. Under the plans, the Company matches a portion of employee contributions. For the years ended December 31, 2010, 2009 and 2008, costs charged to expense for company matching contributions under these plans were $1.3 million, $1.5 million and $1.8 million, respectively. NINE Stock Compensation Plans The Company established the 2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”) in December 2004 and reserved 3,500,000 shares of $0.01 par value common stock (“Common Stock”) for issuance under the Omnibus Plan. Pursuant to the terms of the Omnibus Plan, the compensa- tion committee of the Company’s Board of Directors may grant various types of equity-based compensation awards, including incentive and nonqualified stock options, SARs, restricted stock, RSUs, RSUs with performance conditions (“Performance Shares”) and performance units, in addition to certain cash-based awards. All grants under the Omnibus Plan will be made at fair market value and no grant may be repriced. In general, the options expire ten years from the date of grant and vest over a three-year service period. As of December 31, 2010, approximately 1,300,000 shares of Common Stock were reserved for future issuance under the Omnibus Plan. As of December 31, 2010, the number of shares available for future issuance was not reduced by outstanding SARs because the closing market price for the Company’s common stock was less than the exercise price of all outstanding SARs. The Company accounts for stock-based compensation pursuant to the fair value recog- nition provisions of ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”). For the years ended December 31, 2010, 2009 and 2008, the Company recognized in its provision (benefit) for income taxes on the consolidated statement of opera- tions excess tax benefits (costs) related to the exercise or vesting of stock-based awards of approximately $(0.2) mil- lion, $(0.7) million and $0.5 million, respectively. 72 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S price of the Company’s common stock on the date of grant. Options awarded to LTIP participants expire in ten years and one-third vest on each of the first three anniversaries of the date of grant. Options awarded to nonemployee mem- bers of the Board of Directors expire in ten years and vest on the first anniversary of the date of grant. The weighted- average grant date fair value for stock options granted for the years ended December 31, 2010 and 2009 was $5.72 per share and $2.67 per share, respectively, and was estimated using the Black-Scholes option valuation model with the fol- lowing assumptions: V A L U A T I O N A N D E X P E N S E I N F O R M A T I O N U N D E R A S C T O P I C   7 1 8 Substantially all stock-based compensation expense has been recorded in selling, general and administrative expenses. The following table summarizes stock-based compensation costs and related income tax benefits. Stock-based compensation expense Income tax benefit Stock-based compensation, net of income tax benefit Year Ended December 31, 2010 2009 2008 $ 4.9 (1.9) $ 4.7 (1.8) $ 4.0 (1.5) $ 3.0 $ 2.9 $ 2.5 Year Ended December 31, 2010 5.9 2.9% 55.3% 2.9% 2009 5.9 2.4% 51.6% 4.9% The following table summarizes total compen- sation costs related to the Company’s equity awards and amounts recognized in the year ended December 31, 2010. Expected life in years Interest rate Volatility Dividend yield Unrecognized compensation cost – December 31, 2009 Grant date fair value current year grants Compensation expense recognized Grant date fair value of shares forfeited Unrecognized compensation cost – December 31, 2010 Expected amortization period (in years) Stock Options Restricted Stock $ 1.4 1.1 (1.5) – $ 1.0 1.7 $ 1.4 4.7 (3.4) (0.3) $ 2.4 1.8 S T O C K O P T I O N S For the year ended December 31, 2010, the Company awarded nonqualified stock options to Long-Term Incentive Plan (the “LTIP”) participants to purchase approximately 202,000 shares of common stock (subject to forfeiture due to termination of employment and other conditions). In addition, the Company awarded to nonemployee members of its Board of Directors nonqualified stock options to pur- chase 5,600 shares of common stock. For the year ended December 31, 2010, the weighted-average exercise price of such nonqualified stock option awards was $13.68 per share. The exercise price of the options was equal to the market Expected volatility was estimated by refer- ence to the historical stock price performance of a peer group of companies. The expected term was estimated based upon historical data for Kimberly-Clark stock option awards. The risk-free interest rate was based on the yield on U.S. Treasury bonds with a remaining term approximately equivalent to the expected term of the stock option award. Forfeitures were estimated at the date of grant. The following table summarizes stock option activity under the Omnibus Plan for the year ended December 31, 2010: Options outstanding – December 31, 2009 Add: Options granted Less: Options exercised Less: Options forfeited/cancelled Options outstanding – December 31, 2010 Number of Stock Options Weighted- Average Exercise Price 2,269,848 207,190 86,071 50,330 $ 23.60 $13.68 $ 8.03 $ 6.14 2,340,637 $23.23 Neenah Paper, Inc. 2010 Annual Report 73 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The status of outstanding and exercisable stock options as of December 31, 2010, summarized by exercise price, follows: Options Vested or Expected to Vest Options Exercisable Exercise Price $ 7.41–$21.13 $24.01–$29.43 $30.15–$34.61 $35.92–$42.24 Remaining Number of Contractual Life (Years) Weighted-Average Weighted- Average Exercise Price Options 961,970 345,886 686,080 328,943 2,322,879 8.4 5.1 3.4 3.2 5.7 $10.79 $26.29 $32.71 $37.34 $23.33 Aggregate Intrinsic Value(a) $8.6 – – – $8.6 Number of Options 290,637 308,634 686,080 328,943 1,614,294 Weighted- Average Exercise Price $11.68 $26.36 $32.71 $37.34 $28.65 Aggregate Intrinsic Value(a) $2.3 – – – $2.3 (a) Represents the total pre-tax intrinsic value as of December 31, 2010 that option holders would have received had they exercised their options as of such date. The pre-tax intrinsic value is based on the closing market price for the Company’s common stock of $19.68 on December 31, 2010. The aggregate pre-tax intrinsic value of stock options exercised for the year ended December 31, 2010 was $0.9 million. No stock options were exercised for the years ended December 31, 2009 and 2008. The following table summarizes the status of the Company’s unvested stock options as of December 31, 2010 and activity for the year then ended: Number of Weighted- Average Stock Grant Date Fair Value Options Outstanding – December 31, 2009 Add: Options granted Less: Options vested Less: Options forfeited/cancelled Outstanding – December 31, 2010 906,051 207,190 375,657 11,241 726,343 $3.85 $5.72 $4.76 $6.35 $3.88 As of December 31, 2010, certain participants met age and service requirements that allowed their options to qualify for accelerated vesting upon retire- ment. As of December 31, 2010, there were approximately 235,000 stock options subject to accelerated vesting that such participants would have been eligible to exercise if they had retired as of such date. The aggregate grant date fair value of options subject to accelerated vesting was $0.9 million. For the year ended December 31, 2010, stock- based compensation expense for such options was $0.4 mil- lion. For the year ended December 31, 2010, the aggregate grant date fair value of options vested, including options subject to accelerated vesting, was $2.7 million. Stock options that reflect accelerated vesting for expense recog- nition become exercisable according to the contract terms of the stock option grant. 74 Neenah Paper, Inc. 2010 Annual Report P E R F O R M A N C E S H A R E S For the year ended December 31, 2010, the Company granted target awards of 183,500 Performance Units to LTIP participants. The measurement period for the Performance Units was January 1, 2010 through December 31, 2010. On December 31, 2010, approximately 298,200 RSUs equal to 163 percent of the Performance Unit target were awarded based on the Company’s return on invested capital, rev- enue growth for the Technical Products segment, the level of cash flow for the Fine Paper segment and total return to shareholders relative to a peer group of companies and the Russell 2000® Value small capitalization index during the measurement period. The RSUs will vest on December 31, 2012. During the vesting period, the holders of such RSUs are entitled to dividends-in-kind in the form of additional RSUs, but the shares do not have voting rights and are for- feited in the event the holder’s employment is terminated for a reason other than death, disability or retirement. The weighted-average grant date fair value for the Performance Units was $23.03 per share. Compensation cost is recog- nized pro rata over the vesting period. For the year ended December 31, 2009, the Company granted target awards of 216,400 Performance Shares to LTIP participants. The measurement period for the Performance Shares is January 1, 2009 through December 31, 2011. Common Stock equal to between 30 percent and 250 percent of the performance share tar- get will be awarded based on the Company’s growth in earnings before interest, taxes, depreciation and amortiza- tion (“EBITDA”) minus a capital charge and total return to shareholders relative to a peer group of companies and the Russell 2000® Value small cap index. The weighted-aver- age grant date fair value for the Performance Shares was $10.59 per share. For the year ended December 31, 2008, the Company granted target awards of 72,025 Performance Units (net of awards forfeited due to termination of N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S employment) to LTIP participants. The measurement period for the Performance Units was January 1, 2008 through December 31, 2010. On December 31, 2010, 79,349 shares of Common Stock equal to 100 percent of the Performance Unit target plus dividends-in-kind were awarded based on the Company’s growth in earnings before interest, taxes, depreciation and amortization (“EDITDA”) minus a capital charge and total return to shareholders relative to a peer group of companies and the Russell 2000® Value small cap index. The weighted-average grant date fair value for the Performance Shares was $13.75 per share. R S U S For the year ended December 31, 2010, the Company awarded 8,910 RSUs to nonemployee members of the Company’s Board of Directors (“Director Awards”). The weighted-average grant date fair value of such awards was $18.90 per share. Director Awards vest one year from the date of grant. During the vesting period, the holders of Director Awards are entitled to dividends, but the shares do not have voting rights and are forfeited in the event the holder is no longer a member of the Board of Directors. In addition, the Company issued 39 RSUs in lieu of dividends on RSUs held by a non-U.S. member of the Board of Directors. The following table summarizes the activity of the Company’s unvested stock-based awards (other than stock options) for the year ended December 31, 2010: Outstanding – December 31, 2009 Add: Shares granted(a) Shares vested Performance Shares vested Shares expired or cancelled Outstanding – December 31, 2010(b) Weighted-Average Grant Date Fair Value RSUs Performance Shares Weighted-Average Grant Date Fair Value 66,497 8,949 (65,423) 377,537 – 387,560 $ 35.70 $18.88 $35.87 $13.82 – $13.97 279,425 183,500 – (255,525) (1,600) 205,800 $ 11.41 $23.03 – $20.42 $11.52 $10.59 (a) Includes 39 RSUs granted to directors in lieu of cash dividends. Such dividends-in-kind vest concurrently with the underlying RSU. (b) The aggregate pre-tax intrinsic value of RSUs and Performance Shares as of December 31, 2010 was $5.9 million and $10.1 million, respectively. The aggregate pre-tax intrinsic value of Performance Shares was calculated on the shares that would be issued based on the Company’s achievement of performance targets if the performance period ended at December 31, 2010. The aggregate pre-tax intrinsic value of On March 12, 2008, the Company’s sharehold- restricted stock and RSUs that vested for the years ended December 31, 2010, 2009 and 2008 was $2.5 million, $0.4 million and $1.1 million, respectively. TEN Stockholders’ Equity C O M M O N S T O C K The Company has authorized 100 million shares of Common Stock. Holders of the Company’s Common Stock are enti- tled to one vote per share. For the years ended December 31, 2010, 2009 and 2008, the Company acquired 15,547 shares, 4,910 shares and 31,652 shares of Common Stock, respectively, at a cost of approximately $0.2 million, $0.1 million and $0.3 million, respectively, for shares surrendered by employ- ees to pay taxes due on vested restricted stock awards. ers approved a reverse/forward split of the issued and outstanding shares of Common Stock. The reverse/forward split consisted of a 1-for-50 reverse split of Common Stock followed immediately by a 50-for-1 forward split of Common Stock. Holdings of stockholders with fewer than 50 shares of Common Stock prior to the split were converted into fractional shares. Such fractional shares were purchased by the Company for $24.99 per share. The Company purchased 360,548 shares of Common Stock at a total cost of approxi- mately $9.4 million including transaction costs. The reverse/ forward split resulted in a significant reduction in share- holder record keeping and mailing expenses and provided holders of fewer than 50 shares with a cost-effective way to efficiently dispose of their investment. Each share of Common Stock contains a pre- ferred stock purchase right that is associated with the share. These preferred stock purchase rights are transferred only with shares of Common Stock. The preferred stock pur- chase rights become exercisable and separately certificated Neenah Paper, Inc. 2010 Annual Report 75 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S only upon a “Rights Distribution Date” as that term is defined in the stockholder rights agreement adopted by the Company at the time of the Spin-Off. In general, a Rights Distribution Date occurs ten business days following either of these events: (i) a person or group has acquired or obtained the right to acquire beneficial ownership of 15 per- cent or more of the outstanding shares of our Common Stock then outstanding or (ii) a tender offer or exchange offer is commenced that would result in a person or group acquiring 15 percent or more of the outstanding shares of our Common Stock then outstanding. P R E F E R R E D S T O C K The Company has authorized 20 million shares of $0.01 par value preferred stock. The preferred stock may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolu- tions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. No shares of preferred stock have been issued by the Company. ELEVEN Commitments L E A S E S The future minimum obligations under operating leases having a noncancelable term in excess of one year as of December 31, 2010, are as follows: 2011 2012 2013 2014 2015 Thereafter Future minimum lease obligations 76 Neenah Paper, Inc. 2010 Annual Report The following table presents the Company’s rent expense under operating leases for the years ended December 31, 2010, 2009 and 2008: Rent expense Less: Amounts related to discontinued operations Rent expense related to continuing operations Year Ended December 31, 2010 $3.5 2009 $2.5 – – 2008 $3.3 0.5 $3.5 $2.5 $2.8 P U R C H A S E C O M M I T M E N T S The Company has certain minimum purchase commitments, none of which are individually material, that extend beyond December 31, 2010. Commitments under these contracts are approximately $4.8 million in 2011, $1.6 million in 2012 and $0.1 million in 2013. Although the Company is primarily liable for payments on the above-mentioned leases and purchase commitments, management believes exposure to losses, if any, under these arrangements is not material. TWELVE Contingencies and Legal Matters L I T I G A T I O N The Company is involved in certain legal actions and claims arising in the ordinary course of business. While the out- come 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 is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condi- tion, results of operations or liquidity of the Company. I N C O M E T A X E S The Company is continuously undergoing examination by the IRS as well as various state and foreign jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and credits reported by the Company on its income tax returns. See Note 6, “Income Taxes,” for addi- tional detail. $1.4 0.9 0.8 0.6 0.5 0.7 $4.9 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S U S T A X A U D I T – T A X Y E A R S 2 0 0 7 A N D 2 0 0 8 In December 2010, the IRS issued a Revenue Agent’s Report for the 2007 and 2008 tax years. In January 2011, the Company submitted a protest to the Appeals Division of the IRS with respect to certain unresolved issues which involve a proposed IRS adjustment with respect to dual con- solidated losses (“DCLs”) and the recapture of NOLs ema- nating from the Company’s former Canadian operations. The Company’s protest asserts that the IRS examination team made several errors in its assessment of the DCL rules and, as such, the proposed adjustment is erroneous. As of December 31, 2010, no amounts were reserved related to these issues. Management intends to vigorously contest this proposed adjustment, however, the outcome is uncertain and, should the Company not prevail, the outcome could have a material adverse effect on the Company’s results of operations, cash flows and financial position. Although it is reasonably possible that these matters could be resolved during the next 12 months, the timing is uncertain. G E R M A N T A X A U D I T – T A X Y E A R S 2 0 0 4 T O 2 0 0 7 In November 2010, the Company received a tax examina- tion report from the German tax authorities challenging certain interest expense deductions claimed on the Company’s tax returns for the years 2004 through 2007. The Company believes that the finding in the report is improper and will be rejected on appeal. As of December 31, 2010, no amounts were reserved related to these issues. Management intends to vigorously contest the finding in the report, however, the outcome is uncertain and, should the Company not prevail, the outcome could have a material adverse effect on the Company’s results of operations, cash flows and financial position. Although it is reasonably possible that these matters could be resolved during the next 12 months, the timing is uncertain. I N D E M N I F I C A T I O N S Pursuant to a Distribution Agreement, an Employee Matters Agreement and a Tax Sharing Agreement, the Company has agreed to indemnify Kimberly-Clark for certain liabilities or risks related to the Spin-Off. Many of the potential indem- nification liabilities under these agreements are unknown, remote or highly contingent. Furthermore, even in the event that an indemnification claim is asserted, liability for indemnification is subject to determination under the terms of the applicable agreement. For these reasons, the Company is unable to estimate the maximum potential amount of the possible future liability under the indemnity provisions of these agreements. However, the Company accrues for any potentially indemnifiable liability or risk under these agreements for which it believes a future pay- ment is probable and a range of loss can be reasonably estimated. As of December 2009, management believes the Company’s liability under such indemnification obligations was not material to the consolidated financial statements. E N V I R O N M E N T A L , H E A LT H A N D S A F E T Y M A T T E R S The Company is subject to federal, state and local laws, reg- ulations and ordinances relating to various environmental, health and safety matters. The Company is in compliance with, or is taking actions designed to ensure compliance with, these laws, regulations and ordinances. However, the nature of the Company’s business exposes it to the risk of claims with respect to environmental, health and safety mat- ters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Except for certain orders issued by environmental, health and safety regulatory agencies, with which management believes the Company is in compliance and which manage- ment believes are immaterial to the results of operations of the Company’s business, Neenah is not currently named as a party in any judicial or administrative proceeding relating to environmental, health and safety matters. While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental, health and safety laws, regulations and ordinances, man- agement believes that the Company’s future cost of compliance with environmental, health and safety laws, regulations and ordinances, and its exposure to liability for environmental, health and safety claims will not have a material adverse effect on its financial condition, results of operations or liquidity. However, future events, such as changes in existing laws and regulations or contamination of sites owned, operated or used for waste disposal by the Company (including currently unknown contamination and contamination caused by prior owners and operators of such sites or other waste generators) may give rise to Neenah Paper, Inc. 2010 Annual Report 77 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S additional costs which could have a material adverse effect on the Company’s financial condition, results of operations or liquidity. The Company incurs capital expenditures necessary to meet legal requirements and otherwise relat- ing to the protection of the environment at its facilities in the United States and internationally. For these purposes, the Company has planned capital expenditures for environmen- tal projects during the period 2010 through 2012 of approx- imately $1 million to $2 million annually. The Company’s anticipated capital expenditures for environmental projects are not expected to have a material adverse effect on our financial condition, results of operations or liquidity. E M P L O Y E E S A N D L A B O R R E L A T I O N S As of December 31, 2010, the Company had approximately 1,660 regular full-time employees of whom 630 hourly and 310 salaried employees were located in the United States and 480 hourly and 240 salaried employees were located in Germany. Hourly employees at the Whiting, Neenah, Munising and Appleton paper mills are represented by the United Steelworkers Union (the “USW”). In October 2010, the Company and the USW signed a collective bargaining agreement for the Appleton paper mill that is effective through May 31, 2014. In May 2010, the Company and the USW signed a collective bargaining agreement for the Munising paper mill that is effective through July 14, 2013. The collective bargaining agreements for the Whiting and Neenah paper mills expire on January 31, 2013 and June 30, 2013, respectively. Separately, the Appleton, Neenah, Whiting and Munising paper mills have bargained jointly with the union on pension matters. The agreement on pen- sion matters will remain in effect through 2019. Approximately 50 percent of salaried employees and 80 percent of hourly employees of Neenah Germany are eligible to be represented by the Mining, Chemicals and Energy Trade Union, Industriegewerkschaft Bergbau, Chemie and Energie (the “IG BCE”). In December 2010, the IG BCE and a national trade association represent- ing all employers in the industry signed a new collec- tive bargaining agreement covering union employees of Neenah Germany that expires in November 2011. As of December 31, 2010, no hourly employees in the United States were covered by collective bargain- ing agreements that have expired or will expire within the next 12-months. Union membership is voluntary and under German law does not need to be disclosed to the Company. As a result, the number of employees covered by the col- lective bargaining agreement with the IG BCE that expires in November 2011 cannot be determined. The Company believes it has satisfactory relations with its employees cov- ered by such collective bargaining agreements and does not expect the negotiation of new collective bargaining agreements to have a material effect on its results of opera- tions or cash flows. THIRTEEN Transactions with Kimberly-Clark For the year ended December 31, 2008, the Company sold softwood and hardwood pulp to Kimberly-Clark Corporation (“Kimberly-Clark”) from the Pictou Mill. Net sales for the pulp sold to Kimberly-Clark for the year ended December 31, 2008 $37 million. All such revenue is reported as results of discontinued operations on the consolidated statements of operations. P U L P S U P P LY A G R E E M E N T In conjunction with the sale of the Pictou Mill, Northern Pulp assumed responsibility for pulp sales to Kimberly-Clark pursuant to a pulp supply agreement (the “Pulp Supply Agreement”). The Company guaranteed certain obligations under the Pulp Supply Agreement; however, in the event that Northern Pulp and Kimberly-Clark entered into an amended agreement or made other material changes to the Pulp Supply Agreement, the Company’s guarantee obliga- tions cease. In January 2009, Northern Pulp and Kimberly- Clark entered into a new pulp supply agreement thereby terminating the Company’s guarantee obligations. O T H E R A G R E E M E N T S W I T H K I M B E R LY - C L A R K In 2004, the Company also entered into a (i) Distribution Agreement, (ii) Employee Matters Agreement, (iii) Corporate Services Agreement and (iv) Tax Sharing Agreement with Kimberly-Clark in connection with the spin-off by Kimberly-Clark of its technical products and fine paper businesses in the United States and its Canadian pulp business (collectively, the “Pulp and Paper Business”). These agreements provided for, among other things, (i) the 78 Neenah Paper, Inc. 2010 Annual Report principal corporate transactions required to effect the sepa- ration of the Pulp and Paper Business from Kimberly-Clark, cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Pulp and Paper Business with the Company and financial respon- sibility for the obligations and liabilities of Kimberly-Clark’s retained businesses with Kimberly-Clark, (ii) employee liability transfers to the Company and retention of certain employment liabilities by Kimberly-Clark, (iii) various tran- sitional corporate support services and (iv) the Company’s and Kimberly-Clark’s respective rights, responsibilities and obligations after the Spin-Off with respect to taxes attributable to the Company’s business, as well as any taxes incurred by Kimberly-Clark as a result of the failure of the Spin-Off to qualify for tax-free treatment under Section 355 of the Code. The descriptions above are summaries of the principal provisions of the various agreements and are qual- ified in their entirety by the respective agreements. FOURTEEN Business Segment and Geographic Information The Company reports its operations in two segments: Technical Products and Fine Paper. The technical products business is an international producer of filtration media, durable, saturated and coated substrates for a variety of end uses, and nonwoven wall coverings. The fine paper business is a producer of premium writing, text, cover and specialty papers. Each segment employs different tech- nologies and marketing strategies. Disclosure of segment information is on the same basis that management uses internally for evaluating segment performance and allocat- ing resources. Transactions between segments eliminated in consolidation. The costs of shared services, and other administrative functions managed on a common basis, are allocated to the segments based on usage, where possible, or other factors based on the nature of the activity. General corporate expenses that do not directly support the opera- tions of the business segments are shown as Unallocated corporate costs. The accounting policies of the reportable operating segments are the same as those described in Note 2, “Summary of Significant Accounting Policies.” N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S B U S I N E S S S E G M E N T S Net sales Technical Products Fine Paper Consolidated Year Ended December 31, 2010 2009 2008 $384.3 273.4 $657.7 $318.3 255.6 $573.9 $396.8 335.5 $732.3 Year Ended December 31, 2010 2009 2008 Operating income (loss) Technical Products (b) Fine Paper (a) Unallocated corporate costs (c) Consolidated $ 29.2 40.5 (14.6) $ 55.1 $ 14.4 17.5 (15.5) $ 16.4 $(41.7) 35.8 (11.0) $(16.9) (a) Operating earnings for the years ended December 31, 2010 and 2009 include gains (losses) related to the closure and sale of the Ripon Mill of $3.4 million and $(17.1) million, respectively. (b) The operating loss for the year ended December 31, 2008 includes a non-cash pre-tax goodwill and other intangible asset impairment charge of $54.5 million. (c) Unallocated corporate costs for the year ended December 31, 2008 include a gain of approximately $4.3 million related to the settlement certain post-employment obligations for Terrace Bay retirees. Year Ended December 31, 2010 2009 2008 Depreciation and amortization Technical Products Fine Paper Corporate Total Continuing Operations Discontinued operations Consolidated $16.9 9.7 4.7 31.3 – $31.3 $17.8 10.7 6.0 34.5 – $34.5 $18.9 11.4 6.4 36.7 1.9 $38.6 Year Ended December 31, 2010 2009 2008 Capital expenditures Technical Products Fine Paper Corporate Total Continuing Operations Discontinued operations Consolidated $10.7 6.7 – 17.4 – $17.4 Total assets Technical Products Fine Paper Assets held for sale Corporate and other Total $4.3 4.0 0.1 8.4 – $8.4 $15.0 8.9 4.7 28.6 1.4 $30.0 December 31, 2010 2009 $337.9 162.2 – 106.6 $606.7 $353.2 165.6 10.0 107.8 $636.6 Neenah Paper, Inc. 2010 Annual Report 79 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S G E O G R A P H I C I N F O R M A T I O N FIFTEEN Year Ended December 31, 2010 2009 2008 Supplemental Data Net sales United States Europe Consolidated Total assets United States Canada Europe Total $413.6 244.1 $657.7 $360.9 213.0 $573.9 $467.3 265.0 $732.3 S U P P L E M E N T A L S T A T E M E N T O F O P E R A T I O N S D A T A S U M M A R Y O F A D V E R T I S I N G A N D R E S E A R C H E X P E N S E S December 31, 2010 2009 $308.9 0.1 297.7 $606.7 $330.0 5.4 301.2 $636.6 Advertising expense Research expense Year Ended December 31, 2010 $6.1 5.3 2009 $6.5 5.5 2008 $8.7 6.5 S U M M A R Y O F O T H E R I N C O M E – N E T Year Ended December 31, Net sales are attributed to geographic areas based on the physical location of the entities. Segment identifiable assets are those that are directly used in the segments operations. Corporate assets are primarily cash, deferred income taxes and deferred financing costs. C O N C E N T R A T I O N S For the years ended December 31, 2010, 2009 and 2008, sales to the fine paper business’s two largest customers (both of which are distributors) represented approxi- mately 30 percent of its total sales. For the years ended December 31, 2010, 2009 and 2008, no single customer accounted for more than ten percent of the Company’s con- solidated revenue. Except for certain specialty latex grades and specialty softwood pulp used by Technical Products, management is not aware of any significant concentration of business transacted with a particular supplier that could, if suddenly eliminated, have a material adverse affect on its operations. An interruption in supply of a latex specialty grade or of specialty softwood pulp to our technical prod- ucts business or cotton fiber to our fine paper business could disrupt and eventually cause a shutdown of produc- tion of certain technical products and fine paper products. 80 Neenah Paper, Inc. 2010 Annual Report (Gain) loss on property disposals $ 0.2 Net realized and unrealized foreign currency gains Litigation settlement Terrace Bay employee benefits Other income – net Total other income – net Less: (Income) expense related to discontinued operations Other income – net related to continuing operations 2010 (0.2) (0.3) 0.6 (1.3) (1.0) 2009 $ 0.2 2008 $ (6.3) (0.1) – 0.7 (1.0) (0.2) (0.7) – (4.4) (1.4) (12.8) – 0.8 (1.5) $(1.0) $(1.0) $(11.3) S U P P L E M E N T A L B A L A N C E S H E E T D A T A S U M M A R Y O F A C C O U N T S R E C E I V A B L E – N E T Accounts Receivable: From customers Other Less allowance for doubtful accounts and sales discounts Total S U M M A R Y O F I N V E N T O R I E S Inventories by Major Class: Raw materials Work in progress Finished goods Supplies and other Excess of FIFO over LIFO cost Total December 31, 2010 2009 $71.6 1.0 (1.9) $70.7 $69.4 0.2 (1.9) $67.7 December 31, 2010 2009 $ 18.5 13.3 48.2 1.7 81.7 (12.3) $ 69.4 $16.6 11.7 49.4 1.7 79.4 (8.7) $70.7 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S S U M M A R Y O F P R E P A I D A N D O T H E R C U R R E N T A S S E T S S U M M A R Y O F N O N C U R R E N T E M P L O Y E E B E N E F I T S Prepaid and other current assets Spare parts Receivable from FiberMark for German taxes Total A S S E T S H E L D F O R S A L E December 31, 2010 $ 8.0 5.6 0.5 $14.1 2009 $ 7.6 5.5 0.6 $13.7 A N D O T H E R O B L I G A T I O N S Pension benefits Post-employment benefits other than pensions (a) Other Total December 31, 2010 2009 $ 58.4 $ 64.3 44.3 2.0 $104.7 40.7 3.3 $108.3 December 31, (a) Includes $5.0 million and $5.4 million in long-term disability benefits due to Terrace Bay retirees as of December 31, 2010 and 2009, respectively. The Woodlands (Note 5) Ripon Mill property, plant and equipment – net (Note 3) Total 2010 $ – – $ – 2009 $ 3.8 6.2 $10.0 S U M M A R Y O F P R O P E R T Y, P L A N T A N D E Q U I P M E N T – N E T Land and land improvements Buildings Machinery and equipment Construction in progress Less accumulated depreciation Net Property, Plant and Equipment December 31, 2010 2009 $ 20.8 96.2 439.6 11.9 568.5 306.6 $261.9 $ 21.9 97.8 445.1 4.8 569.6 285.2 $284.4 Depreciation expense for the years ended December 31, 2010, 2009 and 2008 was $28.0 million, $30.1 million and $34.7 million, respectively. For the year ended December 31, 2010, less than $0.1 million in inter- est expense was capitalized as part of the cost of capital projects. Interest expense capitalized as part of the costs of capital projects for the years ended December 31, 2010, 2009 and 2008 was $0.1 million, $12 thousand and $0.5 mil- lion, respectively. S U M M A R Y O F A C C R U E D E X P E N S E S Accrued salaries and employee benefits Liability for uncertain income tax positions Accrued interest Accrued restructuring costs Accrued income taxes Other Total December 31, 2010 $21.5 8.6 2.1 0.2 2.4 13.3 $48.1 2009 $18.2 9.5 2.1 4.0 0.4 14.4 $48.6 S U P P L E M E N T A L C A S H F L O W D A T A N E T C A S H P R O V I D E D B Y ( U S E D I N ) C H A N G E S I N W O R K I N G C A P I T A L Year Ended December 31, 2010 2009 2008 $(3.0) Accounts receivable 1.3 Inventories Income taxes receivable (payable) 2.8 (0.4) Prepaid and other current assets 2.0 Accounts payable (3.5) Accrued expenses Foreign currency effects on working capital (3.1) $(3.9) Total $ (4.5) 17.7 9.8 1.4 (4.5) 6.6 0.9 $27.4 $ 48.7 (2.4) (10.6) 2.6 (35.8) (22.6) (2.5) $(22.6) S U P P L E M E N T A L D I S C L O S U R E O F C A S H F L O W I N F O R M A T I O N Year Ended December 31, 2010 2009 2008 Cash paid during the year for interest, net of interest expense capitalized Cash paid (received) during the year for income taxes, net of refunds Non-cash investing activities: Liability for equipment acquired $18.9 $20.2 $23.0 0.5 (7.7) 6.6 2.9 1.8 2.7 Neenah Paper, Inc. 2010 Annual Report 81 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S SIXTEEN Condensed Consolidating Financial Information Neenah Paper Company of Canada, Neenah Paper Michigan, Inc. and Neenah Paper Sales, Inc. (the “Guarantor Subsidiaries”) guarantee the Company’s Senior Notes. The Guarantor Subsidiaries are 100 percent owned by the Company and all guar- antees are full and unconditional. The following condensed consolidating financial information is presented in lieu of consolidated financial statements for the Guarantor Subsidiaries as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008. Certain deferred tax assets presented in the Guarantor Subsidiaries column as of December 31, 2009 were presented in the Neenah Paper, Inc. column as of December 31, 2010 as such assets will ultimately be realized by Neenah Paper, Inc. due to the substantially complete liquidation of Neenah Canada. C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F O P E R A T I O N S Year Ended December 31, 2010 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts Net sales Cost of products sold Gross profit Selling, general and administrative expenses Gain on sale of the Ripon Mill Other (income) expense – net Operating income Equity in earnings of subsidiaries Interest expense – net Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income from discontinued operations, net of income tax provision Net income $269.4 204.9 64.5 44.2 – (0.4) 20.7 (157.5) 19.0 159.2 0.1 159.1 – $159.1 $144.2 117.1 27.1 10.7 (3.4) 0.6 19.2 – 0.3 18.9 7.9 11.0 134.1 $145.1 $244.1 215.7 28.4 14.4 – (1.2) 15.2 – 1.0 14.2 1.8 12.4 – $ 12.4 $ – – – – – – – 157.5 – (157.5) – (157.5) – $(157.5) $657.7 537.7 120.0 69.3 (3.4) (1.0) 55.1 – 20.3 34.8 9.8 25.0 134.1 $159.1 82 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F O P E R A T I O N S Year Ended December 31, 2009 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts Net sales Cost of products sold Gross profit Selling, general and administrative expenses Restructuring costs Other (income) expense – net Operating income (loss) Equity in earnings of subsidiaries Interest expense – net Income (loss) from continuing operations before income taxes Benefit for income taxes Income (loss) from continuing operations Income from discontinued operations, net of income tax provision Net income (loss) $248.2 186.2 62.0 45.4 (0.4) 0.1 16.9 (2.5) 21.4 (2.0) (0.8) (1.2) – $ (1.2) C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F O P E R A T I O N S $112.4 92.6 19.8 10.0 17.1 0.9 (8.2) – 0.8 (9.0) (4.0) (5.0) 0.6 $ (4.4) $213.3 193.5 19.8 13.7 0.4 (2.0) 7.7 – 1.0 6.7 (0.2) 6.9 – $ 6.9 $ – – – – – – – 2.5 – (2.5) – (2.5) – $(2.5) $573.9 472.3 101.6 69.1 17.1 (1.0) 16.4 – 23.2 (6.8) (5.0) (1.8) 0.6 $ (1.2) Year Ended December 31, 2008 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts Net sales Cost of products sold Gross profit Selling, general and administrative expenses Goodwill and other intangible asset impairment charge Other (income) expense – net Operating income (loss) Equity in losses of subsidiaries Interest expense – net Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Income (loss) from continuing operations Loss from discontinued operations, net of income tax benefit Net income (loss) $ 284.2 228.3 55.9 47.6 – 0.6 7.7 146.3 21.6 (160.2) (3.2) (157.0) – $(157.0) $ 183.1 160.5 22.6 12.3 – (10.9) 21.2 – 1.9 19.3 9.7 9.6 (111.2) $(101.6) $265.0 242.0 23.0 15.3 54.5 (1.0) (45.8) – 1.5 (47.3) (2.6) (44.7) – $ (44.7) $ – – – – – – – (146.3) – 146.3 – 146.3 – $146.3 $ 732.3 630.8 101.5 75.2 54.5 (11.3) (16.9) – 25.0 (41.9) 3.9 (45.8) (111.2) $(157.0) Neenah Paper, Inc. 2010 Annual Report 83 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O N D E N S E D C O N S O L I D A T I N G B A L A N C E S H E E T ASSETS Current assets Cash and cash equivalents Accounts receivable – net Inventories Deferred income taxes Intercompany amounts receivable Prepaid and other current assets Total current assets Property, plant and equipment at cost Less accumulated depreciation Property, plant and equipment – net Investments in subsidiaries Deferred Income Taxes Goodwill Intangible assets, net Other Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Debt payable within one year Accounts payable Intercompany amounts payable Accrued expenses Total current liabilities Long-term Debt Deferred Income Taxes Noncurrent Employee Benefits and Other Obligations TOTAL LIABILITIES STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY December 31, 2010 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts $ 45.0 24.2 33.7 17.1 17.3 5.1 142.4 266.0 189.5 76.5 237.1 39.3 – 2.8 8.4 $506.5 $ – 14.5 47.5 27.5 89.5 223.0 – 34.8 347.3 159.2 $506.5 $ 2.4 16.5 9.0 2.4 47.5 1.8 79.6 101.5 66.3 35.2 – 3.8 – – 0.1 $118.7 $ – 5.2 17.3 7.7 30.2 – – 34.2 64.4 54.3 $118.7 $ 0.9 30.0 26.7 – – 7.2 64.8 201.0 50.8 150.2 – – 41.5 21.2 5.7 $283.4 $ 13.6 10.7 – 12.9 37.2 8.3 19.4 35.7 100.6 182.8 $283.4 $ – – – – (64.8) – (64.8) – – – (237.1) – – – – $(301.9) $ – – (64.8) – (64.8) – – – (64.8) (237.1) $(301.9) $ 48.3 70.7 69.4 19.5 – 14.1 222.0 568.5 306.6 261.9 – 43.1 41.5 24.0 14.2 $606.7 $ 13.6 30.4 – 48.1 92.1 231.3 19.4 104.7 447.5 159.2 $606.7 84 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O N D E N S E D C O N S O L I D A T I N G B A L A N C E S H E E T ASSETS Current assets Cash and cash equivalents Accounts receivable – net Inventories Income taxes receivable Deferred income taxes Intercompany amounts receivable Prepaid and other current assets Assets held for sale Total current assets Property, plant and equipment at cost Less accumulated depreciation Property, plant and equipment – net Investments in subsidiaries Deferred Income Taxes Goodwill Intangible assets Other Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Debt payable within one year Accounts payable Intercompany amounts payable Accrued expenses Total current liabilities Long-term Debt Deferred Income Taxes Noncurrent Employee Benefits and Other Obligations TOTAL LIABILITIES STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY December 31, 2009 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts $ 2.1 23.8 38.1 0.3 4.7 68.7 5.2 – 142.9 262.2 180.3 81.9 281.1 10.2 – 2.9 6.5 $525.5 $ 40.9 14.3 49.4 23.6 128.2 252.9 – 34.8 415.9 109.6 $525.5 $ 2.0 16.1 8.9 0.5 57.0 49.4 1.7 10.0 145.6 99.5 62.9 36.6 – 26.3 – – 0.1 $208.6 $ – 4.5 68.7 14.8 88.0 – – 38.7 126.7 81.9 $208.6 $ 1.5 27.8 23.7 – – – 6.8 – 59.8 207.9 42.0 165.9 – – 44.9 24.6 6.5 $301.7 $ 14.7 8.4 – 10.2 33.3 10.7 23.7 34.8 102.5 199.2 $301.7 $ – – – – – (118.1) – – (118.1) – – – (281.1) – – – – $(399.2) $ – – (118.1) – (118.1) – – – (118.1) (281.1) $(399.2) $ 5.6 67.7 70.7 0.8 61.7 – 13.7 10.0 230.2 569.6 285.2 284.4 – 36.5 44.9 27.5 13.1 $636.6 $ 55.6 27.2 – 48.6 131.4 263.6 23.7 108.3 527.0 109.6 $636.6 Neenah Paper, Inc. 2010 Annual Report 85 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F C A S H F L O W S OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Stock-based compensation Deferred income tax provision (benefit) Gain on sale of the Woodlands Reclassification of cumulative translation adjustments related to investments in Canada Gain on sale of Ripon Mill Loss on other asset dispositions Net cash provided by (used in) changes in operating working capital Equity in earnings of subsidiaries Pension and other post-employment benefits Other NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Net proceeds from sale of the Woodlands Increase in investments Proceeds from asset sales Other NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from issuance of long-term debt Repayments of long-term debt Short-term borrowings Repayments of short-term borrowings Cash dividends paid Proceeds from exercise of stock options Other Intercompany transfers – net NET CASH USED IN FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR Year Ended December 31, 2010 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts $ 159.1 $145.1 $ 12.4 $(157.5) $159.1 13.1 4.8 2.2 – – – 0.2 (0.3) (157.5) (0.9) 0.8 21.5 (6.7) – (3.5) 8.7 (0.3) (1.8) 0.1 (69.9) – (1.0) (5.9) 0.7 (0.2) 99.4 23.2 42.9 2.1 $ 45.0 4.4 – 36.5 (74.1) (87.9) (3.4) – 1.0 – (6.9) (1.6) 13.1 (2.6) 78.0 – – – 75.4 – – – – – – – (88.1) (88.1) 0.4 2.0 $ 2.4 13.8 0.1 (1.7) – – – – (4.6) – – (0.1) 19.9 (8.1) – – – 1.0 (7.1) – (1.6) 13.3 (13.8) – – – (11.3) (13.4) (0.6) 1.5 $ 0.9 – – – – – – – – 157.5 – – – – – – – – – – – – – – – – – – – – $ – 31.3 4.9 37.0 (74.1) (87.9) (3.4) 0.2 (3.9) – (7.8) (0.9) 54.5 (17.4) 78.0 (3.5) 8.7 0.7 66.5 0.1 (71.5) 13.3 (14.8) (5.9) 0.7 (0.2) – (78.3) 42.7 5.6 $ 48.3 86 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F C A S H F L O W S Year Ended December 31, 2009 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization Stock-based compensation Deferred income tax benefit Ripon Mill non-cash charges Loss on other asset dispositions Net cash provided by changes in operating working capital Equity in earnings of subsidiaries Pension and other post-employment benefits Other NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Proceeds from asset sales Other NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from issuance of long-term debt Repayments of long-term debt Short-term borrowings Repayments of short-term borrowings Cash dividends paid Other Intercompany transfers – net NET CASH USED IN FINANCING ACTIVITIES EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR $ (1.2) $(4.4) $ 6.9 $(2.5) $ (1.2) 15.2 4.7 (2.8) – 0.2 19.9 (2.5) 4.5 (0.9) 37.1 (3.4) – 0.8 (2.6) 42.6 (85.8) 0.9 – (5.9) (0.1) 14.0 (34.3) 4.6 – (4.4) 6.3 – 4.7 – (2.9) 1.0 4.9 (1.4) 0.8 (0.3) (0.9) – – – – – – (3.1) (3.1) 14.7 – (2.2) – – 2.8 – 0.8 (0.1) 22.9 (3.6) – (1.2) (4.8) – (1.8) 11.3 (15.4) – – (10.9) (16.8) – – – – – – 2.5 – – – – – – – – – – – – – – – 34.5 4.7 (9.4) 6.3 0.2 27.4 – 2.4 – 64.9 (8.4) 0.8 (0.7) (8.3) 42.6 (87.6) 12.2 (15.4) (5.9) (0.1) – (54.2) – 0.2 1.9 $ 2.1 – 0.9 1.1 $ 2.0 (0.1) 1.2 0.3 $ 1.5 – – – $ – (0.1) 2.3 3.3 $ 5.6 Neenah Paper, Inc. 2010 Annual Report 87 Year Ended December 31, 2008 Neenah Paper, Inc. Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidating Adjustments Consolidated Amounts $(157.0) $(101.6) $(44.7) $ 146.3 $(157.0) 7.4 – (55.2) – 91.2 29.4 (2.8) 53.7 (4.3) (6.7) 7.5 – (4.6) (1.1) 12.9 (7.4) (13.6) 13.8 0.8 (6.4) – – – – – – (0.6) (7.6) (8.2) (1.7) 2.8 $ 1.1 15.8 – (4.0) 54.5 – – – – – – (8.8) – 0.8 (0.1) 13.5 (11.4) – – (0.1) (11.5) – – 18.7 (3.3) – – – (17.6) (2.2) (0.2) 0.5 $ 0.3 – – – – – – – – – – – (146.3) – – – – – – – – – – – – – – – – – – – $ – 38.6 4.0 (56.1) 54.5 91.2 29.4 (2.8) 53.7 (4.3) (6.3) (22.6) – (7.6) (1.6) 13.1 (30.0) (13.6) 13.8 (0.6) (30.4) 53.7 (34.6) 18.7 (3.3) (6.0) (9.4) (0.9) – 18.2 0.9 2.4 $ 3.3 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O N D E N S E D C O N S O L I D A T I N G S T A T E M E N T O F C A S H F L O W S 15.4 4.0 3.1 – – – – – – 0.4 (21.3) 146.3 (3.8) (0.4) (13.3) (11.2) – – (1.3) (12.5) 53.7 (34.6) – – (6.0) (9.4) (0.3) 25.2 28.6 2.8 (0.9) $ 1.9 OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization Stock-based compensation Deferred income tax provision (benefit) Goodwill and other intangible asset impairment charge Asset impairment loss Loss on disposal – transfer of the Pictou Mill Amortization of deferred revenue – transfer of the Pictou Mill Loss on disposal – transfer of the Pictou Mill postretirement benefit plans Gain on curtailment of postretirement benefit plan (Gain) loss on other asset dispositions Increase (decrease) in working capital Equity in losses of subsidiaries Pension and other postretirement benefits Other NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Payments in conjunction with transfer of the Pictou Mill Proceeds from asset sales Other NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from issuance of long-term debt Repayments of long-term debt Short-term borrowings Repayments of short-term debt Cash dividends paid Share purchases Other Intercompany transfers – net NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR 88 Neenah Paper, Inc. 2010 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S SEVENTEEN Unaudited Quarterly Data Net Sales Gross Profit Operating Income Income From Continuing Operations Earnings Per Common Share From Continuing Operations: Basic Diluted Net Sales Gross Profit Operating Income (Loss) Income (Loss) From Continuing Operations Earnings (Loss) Per Common Share From Continuing Operations: Basic Diluted (a) Includes a gain of $3.3 million on disposal of the Ripon Mill. (b) Includes costs related to the closure of the Ripon Mill of $17.1 million. First $167.3 32.3 16.4 7.3 $ 0.50 $ 0.48 First $134.1 20.5 4.9 (0.7) $ (0.05) $ (0.05) Second $168.6 32.2 13.7 6.3 $ 0.43 $ 0.41 Second (b) $135.2 24.2 (10.5) (8.6) $ (0.58) $ (0.58) 2010 Quarters Third $161.5 27.8 11.7 4.7 $ 0.32 $ 0.30 2009 Quarters Third $150.1 28.3 10.7 3.4 $ 0.23 $ 0.23 Fourth (a) Year (a) $160.3 27.7 13.3 6.7 $ 0.45 $ 0.43 Fourth $154.5 28.6 11.3 4.1 $ 0.28 $ 0.28 $657.7 120.0 55.1 25.0 $ 1.69 $ 1.61 Year (b) $573.9 101.6 16.4 (1.8) $ (0.12) $ (0.12) Neenah Paper, Inc. 2010 Annual Report 89 LEADERSHIP E X E C U T I V E T E A M B OA R D O F D I R E C T O R S Sean T. Erwin Chairman of the Board, President and Chief Executive Officer John P. O’Donnell Senior Vice President and Chief Operating Officer Bonnie C. Lind Senior Vice President, Chief Financial Officer and Treasurer Steven S. Heinrichs Senior Vice President, General Counsel and Secretary Dennis P. Runsten President, Technical Products – U.S. Julie A. Schertell President, Fine Paper Armin S. Schwinn Managing Director, Neenah Germany Sean T. Erwin Chairman of the Board, President and Chief Executive Officer, Neenah Paper, Inc. Edward Grzedzinski Former Chief Executive Officer, NOVA Information Systems Mary Ann Leeper, Ph.D. Senior Strategic Advisor, Female Health Company and Former President and Chief Operating Officer, Female Health Company Timothy S. Lucas, CPA Independent Consultant, Lucas Financial Reporting and Former Director of Research, FASB John F. McGovern Partner, Aurora Capital LLC and Former Executive Vice President and Chief Financial Officer, Georgia Pacific Corporation Philip C. Moore Partner, McCarthy Tétrault, L.L.P. John P. O’Donnell Senior Vice President and Chief Operating Officer, Neenah Paper, Inc. Stephen M. Wood, Ph.D. President and Chief Executive Officer, FiberVisions Corporation 90 Neenah Paper, Inc. 2010 Annual Report SHAREHOLDER INFORMATION C O R P O R AT E R E G I S T R A R A N D H E A D Q UA R T E R S Neenah Paper, Inc. 3460 Preston Ridge Road Suite 600 Alpharetta, GA 30005 678.566.6500 www.neenah.com A N N UA L M E E T I N G O F S H A R E H O L D E R S The 2011 annual meeting of the shareholders of Neenah Paper, Inc. will be held Wednesday, May 18, 2011, at 10:00 a.m., Eastern time at Neenah’s headquarters in Alpharetta, Georgia. As of February 28, 2011, Neenah had approximately 2,100 holders of record of its common stock. T R A N S F E R AG E N T BNY Mellon Shareowner Services P.O. Box 358010 Pittsburgh, PA 15252 Contact Center: Toll Free U.S. and Canada: 877.498.8847 International callers: 201.680.6578 Toll Free TDD for hearing impaired: 800.231.5469 www.bnymellon.com/ shareowner/equityaccess F I N A N C I A L A N D O T H E R C O M PA N Y I N F O R M AT I O N Our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 is available on our website at www.neenah.com. In addition, financial reports, recent filings with the Securities and Exchange Commission (SEC), news releases and other informa- tion are available on our website. For a printed copy of our Form 10-K, without charge, please contact: Neenah Paper, Inc. Attn: Stockholder Services 3460 Preston Ridge Road Suite 600 Alpharetta, GA 30005 866.548.6569 or via e-mail to investors@ neenahpaper.com C E R T I F I C AT I O N S Neenah has included as exhibits to its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC, certifications of Neenah’s Chief Executive Officer and Chief Financial Officer certifying the quality of our public disclosure. T R A D E M A R K S Brand names mentioned in this report are trade- marks of Neenah Paper, Inc. Crane is a registered trademark of Crane and Co., Inc. S T O C K E XC H A N G E Neenah Paper’s common stock is traded on the New York Stock Exchange under the symbol NP. I N D E P E N D E N T R E G I S T E R E D P U B L I C AC C O U N T I N G F I R M Deloitte & Touche LLP 191 Peachtree Street Suite 1500 Atlanta, GA 30303 C O M PA R I S O N O F F I V E Y E A R C U M U L AT I V E T O TA L R E T U R N * Among Neenah Paper, Inc., the Russell 2000 Value Index, an Old Peer Group and a New Peer Group $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 12 05 12 06 12 07 12 08 12 09 12 10 Neenah Paper, Inc. Russell 2000 Value Old Peer Group: AbitibiBowater Inc., International Paper Company, P.H. Glatfelter Company, Schweitzer-Mauduit International, Inc. and Wausau Paper Corp. The peer group average is weighted by market capitalization. New Peer Group: AEP Industries Inc., Boise Inc., Buckeye Technologies Inc., CSS Industries, Inc., P.H. Glatfelter Company, KapStone Paper and Packaging Corporation, Minerals Technologies Inc., OMNOVA Solutions Inc., Polypore International, Inc., Schweitzer-Mauduit International, Inc., Verso Paper Corp. and Wausau Paper Corp. The peer group average is weighted by market capitalization. * $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Neenah Paper, Inc. 2010 Annual Report 91 COLOPHON To minimize our environmental impact, the Neenah Paper, Inc. 2010 Annual Report was printed on papers containing fibers from environmentally appropriate, socially beneficial and economically viable forest resources. SW-COC-000885 FSC Trademark © 1996 Forest Stewardship Council A.C. The mark of responsible forestr y. PA P E R C R E D I T S Design and Production Addison www.addison.com Copywriting Edward Nebb Printing Classic Color I L LU S T R AT I O N Dust Jacket: Marcos Chin Cover: Mike Perry Page 1: MVM Page 9: Mario Hugo Page 16: Micah Lidberg Dust Jacket CLASSIC CREST® Paper Solar White 24 lb. writing Cover CLASSIC CREST® Paper Solar White 165 lb. double thick cover End Papers ESSE® Paper Pearlized Juniper 80 lb. text Pages 1–8 CLASSIC CREST® Paper Classic Natural White 100 lb. text Pages 9–16 ESSE® Paper Willow 80 lb. text Pages 17–24 CLASSIC CREST® Paper Epic Black 80 lb. text Pages 25–92 SUNDANCE® Paper Warm White 80 lb. text 92 Neenah Paper, Inc. 2010 Annual Report VINYL GRAPHIC LABEL STICKER PACKING PERFUME TESTER FOLDER POSTCARD FACE MASK POSTER FOOD CARTON TAPE STATIONERY RACE NUMBER CD POWER TOOL VIEWBOOK SILKSCREEN PRINTING BLANKET BROCHURE I D BRACELET I.D. BRACELET GIFT BOX DIRECT MAIL SCRAPBOOK ENVELOPE PACKAGING MEMBERSHIP CARD FURNITURE SYRINGE CHECKBOOK TAPE PASSPORT COSMETICS VINYL RECORD T-SHIRT PHARMACEUTICAL BEER LABEL VACUUM CLEANER CEREAL BOX ROADMAP CARBON FIBER NEENAH PAPER, INC. 3460 PRESTON RIDGE ROAD SUITE 600 ALPHARETTA, GA 30005 678.566.6500 

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