Background and Basis of Presentation

9 Months Ended

Sep. 30, 2012

Background and Basis of Presentation

Background and Basis of Presentation

Note 1.  Background and Basis of Presentation

Background

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

The technical products business is an international producer of transportation and other filter media and durable, saturated and coated substrates for industrial products backings and a variety of other end markets. The fine paper business is a supplier of premium writing, text and cover papers, bright papers and specialty papers primarily in North America. The Company’s premium writing, text, cover and specialty papers are used in commercial printing and imaging applications for corporate identity packages, invitations, personal stationery and high-end advertising, as well as, premium labels and luxury packaging.

On January 31, 2012, the Company purchased certain premium paper brands and other assets from Wausau Paper Mills, LLC, a subsidiary of Wausau Paper Corp. (“Wausau”) for approximately $21 million. See Note 3, “Acquisitions.”

Basis of Consolidation and Presentation

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented herein.  The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make extensive use of estimates and assumptions that affect the reported amounts and disclosures.  Actual results may vary from these estimates.

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

The condensed consolidated financial statements of Neenah and its subsidiaries included herein are unaudited, except for the December 31, 2011 condensed consolidated balance sheet, which was derived from audited financial statements.  The condensed consolidated financial statements include the financial statements of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated from the condensed consolidated financial statements.

Earnings per Share (“EPS”)

The Company computes basic earnings 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 earnings 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 and restricted stock units (“RSUs”) have contractual participation rights that are equivalent to those of common stockholders. Therefore, the Company allocates undistributed earnings to restricted stock, RSUs and common stockholders based on their respective ownership percentage, as of the end of the period.

ASC Topic 260 also requires companies with participating securities to calculate diluted earnings per share using the “Two Class” method. The “Two Class” method requires first calculating diluted earnings per share using a denominator that includes the weighted average share equivalents from the assumed conversion of dilutive securities. Diluted earnings per share is then calculated using net income reduced by the amount of distributed and undistributed earnings allocated to participating securities calculated using the “Treasury Stock” method and a denominator that includes the weighted average share equivalents from the assumed conversion of dilutive securities excluding participating securities. Companies are required to report the lowest diluted earnings per share amount under the two calculations subject to the anti-dilution provisions of ASC Topic 260.

Diluted EPS was calculated to give effect to all potentially dilutive non-participating common share equivalents using the “Treasury Stock” method. Outstanding stock options, stock appreciation 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 three and nine months ended September 30, 2012 approximately 980,000 and 1,030,000 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. For the three and nine months ended September 30, 2011 approximately 1,015,000 and 1,358,000 potentially dilutive options, respectively, were excluded from the computation of dilutive common shares.

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

Earnings Per Basic Common Share

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Income from continuing operations	$	9.2		$	6.8		$	30.8		$	21.6
Distributed and undistributed amounts allocated to participating securities	(0.2		)	(0.1		)	(1.0		)	(0.3		)
Income from continuing operations available to common stockholders	9.0			6.7			29.8			21.3
Loss from discontinued operations, net of income taxes	(0.1		)	(0.1		)	(0.1		)	(0.2		)
Net income available to common stockholders	$	8.9		$	6.6		$	29.7		$	21.1
Weighted-average basic shares outstanding	15,828			15,011			15,655			14,933
Basic
Continuing operations	$	0.56		$	0.44		$	1.90		$	1.42
Discontinued operations				—			—			(0.01		)
	$	0.56		$	0.44		$	1.90		$	1.41

Earnings Per Diluted Common Share

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Income from continuing operations	$	9.2		$	6.8		$	30.8		$	21.6
Distributed and undistributed amounts allocated to participating securities	(0.2		)	(0.1		)	(0.9		)	(0.4		)
Income from continuing operations available to common stockholders	9.0			6.7			29.9			21.2
Loss from discontinued operations, net of income taxes	(0.1		)	(0.1		)	(0.1		)	(0.2		)
Net income available to common stockholders	$	8.9		$	6.6		$	29.8		$	21.0
Weighted-average basic shares outstanding	15,828			15,011			15,655			14,933
Add: Assumed incremental shares under stock compensation plans	317			642			327			735
Weighted-average diluted shares	16,145			15,653			15,982			15,668
Diluted
Continuing operations	$	0.55		$	0.42		$	1.87		$	1.35
Discontinued operations	—			—			—			(0.01		)
	$	0.55		$	0.42		$	1.87		$	1.34

Fair Value of Financial Instruments

The Company’s investments in marketable securities are accounted for as “available-for-sale securities” in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments—Debt and Equity Securities (“ASC Topic 320”).  Pursuant to ASC Topic 320, marketable securities are reported at fair value on the condensed consolidated balance sheet and unrealized holding gains and losses are reported in other comprehensive income until realized upon sale. As of September 30, 2012, the cost and fair value of the Company’s marketable securities was $2.4 million and $2.5 million, respectively.  These marketable securities are classified as “Other Assets” on the condensed consolidated balance sheet and will be used for the payment of certain employee benefits.