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 and cover papers, 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, 2013, the Company purchased certain premium business paper brands from the Southworth Company (“Southworth”) for a payment of $7.0 million. See Note 3, “Acquisitions.”

Basis of Consolidation and Presentation

These 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, 2012 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”)

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 target awards of Restricted Stock Units (“RSUs”) with performance conditions (“Performance Units”) 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, 2013 approximately 10,000 and 600,000 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, 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.

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,
	2013			2012			2013			2012
Income from continuing operations	$	11.4		$	9.2		$	36.3		$	30.8
Distributed and undistributed amounts allocated to participating securities	(0.2		)	(0.2		)	(0.7		)	(1.0		)
Income from continuing operations available to common stockholders	11.2			9.0			35.6			29.8
Income (loss) from discontinued operations, net of income taxes	—			(0.1		)	2.6			(0.1		)
Net income available to common stockholders	$	11.2		$	8.9		$	38.2		$	29.7

Weighted-average basic shares outstanding	16,089			15,828			16,016			15,655

Basic
Continuing operations	$	0.69		$	0.56		$	2.22		$	1.90
Discontinued operations	—			—			0.16			—
	$	0.69		$	0.56		$	2.38		$	1.90

Earnings Per Diluted Common Share

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Income from continuing operations	$	11.4		$	9.2		$	36.3		$	30.8
Distributed and undistributed amounts allocated to participating securities	(0.2		)	(0.2		)	(0.6		)	(0.9		)
Income from continuing operations available to common stockholders	11.2			9.0			35.7			29.9
Income (loss) from discontinued operations, net of income taxes	—			(0.1		)	2.6			(0.1		)
Net income available to common stockholders	$	11.2		$	8.9		$	38.3		$	29.8

Weighted-average basic shares outstanding	16,089			15,828			16,016			15,655
Add: Assumed incremental shares under stock compensation plans	380			317			322			327

Weighted-average diluted shares	16,469			16,145			16,338			15,982

Diluted
Continuing operations	$	0.68		$	0.55		$	2.18		$	1.87
Discontinued operations				—			0.16			—
	$	0.68		$	0.55		$	2.34		$	1.87

Fair Value of Financial Instruments

The Company measures the fair value of financial instruments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) which establishes a framework for measuring fair value. ASC Topic 820 provides a fair value hierarchy that prioritizes the inputs to valuation techniques 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 the lowest priority to unobservable inputs (Level 3 measurements). 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.

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.

	September 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value (a)
2021 Senior Notes (5.25% fixed rate)	$	175.0	$	166.5	$	—	$	—
2014 Senior Notes (7.375% fixed rate)	—		—		90.0		90.0
Revolving bank credit facility (variable rates)	—		—		55.7		55.7
Term Loan (variable rates)	—		—		30.0		30.0
Neenah Germany project financing (3.8% fixed rate)	5.9		5.9		6.6		6.9
Second German Loan Agreement (2.5% fixed rate)	12.2		10.7		—		—
Total Debt	$	193.1	$	183.1	$	182.3	$	182.6

(a) Fair value for the 2014 Senior Notes was estimated from Level 1 measurements, the fair value for all other debt instruments was estimated from Level 2 measurements.

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”). As of September 30, 2013, the cost and fair value of the Company’s marketable securities was $2.6 million. Fair value for the Company’s marketable securities was estimated from Level 1 measurements. These marketable securities are classified as “Other Assets” on the condensed consolidated balance sheet and are restricted to the payment of benefits under the Company’s Supplemental Executive Retirement Plan (“SERP”).