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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the transition period from          to         

Commission File Number: 001-32240

NEENAH PAPER, INC.

(Exact name of registrant as specified in its charter)

(678) 566-6500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o

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

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

As of October 30, 2009, there were approximately 14,665,000 shares of the Company’s common stock outstanding.

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Part I—FINANCIAL INFORMATION

Item 1.  Financial Statements

NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share data)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 See Notes to Condensed Consolidated Financial Statements

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NEENAH PAPER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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

Note 1.  Background and Basis of Presentation

Background

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

The 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 and high-end packaging for point of sale advertising. The 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.

In May 2009, the Company permanently closed its fine paper mill located in Ripon, California (the “Ripon Mill”).  The Ripon Mill had one paper machine with an annual capacity of approximately 35,000 tons.  The Company’s other premium fine paper mills have absorbed production previously made at the Ripon Mill. The decision to close the Ripon Mill reflects the Company’s strategy to drive consolidation in the premium fine paper category through leading brands and a cost efficient manufacturing platform. See Note 4, “Closure of the Ripon Mill.”

In February 2008, the Company committed to a plan to sell its pulp mill in Pictou, Nova Scotia (the “Pictou Mill”) and approximately 500,000 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”) completed the sale of the Pictou Mill to Northern Pulp Nova Scotia Corporation (“Northern Pulp”), a new operating company jointly owned by Atlas Holdings LLC and Blue Wolf Capital Management LLC (collectively, “Atlas”).

The Company believes it is probable that the sale of the Woodlands will be completed within twelve months.  As of September 30, 2009, the assets of the Woodlands are reported on the condensed consolidated balance sheet as assets held for sale.  For the three and nine months ended September 30, 2009, the results of operations of the Woodlands are reported as discontinued operations in the condensed consolidated statements of operations. 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 three and nine months ended September 30, 2008.  See Note 5, “Discontinued Operations.”

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 interim 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 interim financial statements of Neenah and its subsidiaries included herein are unaudited, except for the December 31, 2008 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 consolidated financial statements.

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Prior Period Adjustments

During the three months ended September 30, 2009, the Company identified and restated the accompanying December 31, 2008 condensed consolidated balance sheet for the following errors: (i) a $7.3 million overstatement of Canadian deferred tax assets and unrealized foreign currency translation gains within stockholders’ equity and (ii) a $12.7 million understatement of the liability for uncertain tax positions and deferred tax assets as a result of errors identified in prior year income tax returns.  The net effect of these corrections on the condensed consolidated balance sheet as of December 31, 2008 is an increase in current deferred tax assets of $12.1 million, a decrease in long-term deferred tax assets of $6.7 million, an increase of $12.7 million in accrued expenses and a decrease of $7.3 million in stockholders’ equity.  Interest associated with the uncertain tax positions noted above was immaterial for all historical periods.  In addition, the Company adjusted $5.3 million from accounts payable to accrued expenses ($2.9 million) and accrued salaries and employee benefits ($2.4 million) in the accompanying December 31, 2008 condensed consolidated balance sheet to provide consistency in the reporting of certain liabilities between its U.S. and European operations and to conform to the current period presentation.  The Company believes the effects of these prior period corrections individually and in the aggregate are immaterial to any prior period consolidated financial statements.

Earnings (Loss) per Share (“EPS”)

The Company computes basic earnings (loss) per share (“EPS”) in accordance with Financial Accounting Standards Board (“FASB”) 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. Recipients of restricted stock and restricted stock unit (“RSU”) awards 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 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.  The Company adopted the “Two-Class” method on January 1, 2009.  For the three and nine months ended September 30, 2008, EPS has been restated to reflect the retroactive application of the “Two Class” method.

Diluted EPS was calculated to give effect to all potentially dilutive common shares using the “Treasury Stock” method. Outstanding stock options, stock appreciation rights (“SARs”), RSUs and 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, 2009 approximately 1,945,000 and 1,755,000 potentially dilutive stock-based compensation awards, respectively, were excluded from the computation of dilutive common shares.  For the three and nine months ended September 30, 2008, approximately 1,565,000 and 1,470,000 potentially dilutive stock-based compensation awards, respectively, were excluded from the computation of dilutive common shares.  In addition, as a result of the loss from continuing operations for the nine months ended September 30, 2009, approximately 105,000 incremental shares resulting from the assumed vesting of RSUs and RSUs with performance conditions were excluded from the diluted earnings per share calculation, as the effect would have been anti-dilutive.

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

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Note 2.  Accounting Standard Changes

On July 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS No. 168”).  SFAS No. 168 established the ASC as the source of authoritative U.S. GAAP to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 supersedes all existing non-SEC accounting and reporting standards.  All non-SEC accounting literature not included in the ASC is non authoritative. The Company’s adoption of SFAS No. 168 did not have an effect on its financial position, results of operation or cash flows.

As of September 30, 2009, 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 operations, financial position or cash flows.

Note 3.  Comprehensive Income (Loss)

Comprehensive income (loss) includes, in addition to net income (loss), gains and losses recorded directly into stockholders’ equity on the condensed 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 cash flow hedges and adjustments related to pensions and other postretirement benefits. Income taxes are not provided for foreign currency translation adjustments because they relate to indefinite investments in Neenah Germany. The Company also does not provide for income taxes on foreign currency translation adjustments for its Canadian operations.  For the three and nine months ended September 30, 2009, the Company did not record deferred taxes related to future funds expected to be repatriated upon the sale of the Woodlands because there are no expected tax consequences considering the anticipated proceeds from the disposal of the Woodlands.  As of September 30, 2009 and December 31, 2008, accumulated other comprehensive income was $93.9 million and $84.4 million, respectively.

The following table presents the components of comprehensive income (loss):

Note 4.  Closure of the Ripon Mill

In May 2009, the Company permanently closed the Ripon Mill.  The closure resulted in a pre-tax charge of $17.6 million for the nine months ended September 30, 2009.  The charge was comprised of approximately $6.3 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 employees of the Ripon Mill participated (see Note 10) and cash payments for contract terminations, severances and other employee costs of approximately $10.5 million.  The Company expects to pay approximately $7 million of such costs in 2009, with the remaining payments in 2010 and beyond.

As of September 30, 2009, the remaining long-lived assets of the Ripon Mill, primarily composed of land and buildings, are classified as Assets held for sale on the condensed consolidated balance sheet.  The Company believes that the sale of such assets will be completed within 12 months. Assets held for sale are valued at the lower of cost or fair value less cost to sell. The assets of the Ripon Mill are reported on the condensed consolidated balance sheet at their aggregate cost of $6.2 million.

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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.  As of September 30, 2009, approximately $1.7 million in severance benefits had been paid to 96 former employees of the Ripon Mill and severance benefits of approximately $0.1 million due to one former employee of the Ripon Mill remained unpaid. The following table presents the status of such closure costs as of and for the three months ended September 30, 2009:

Note 5.  Discontinued Operations

In June 2008, Neenah Canada sold the Pictou Mill to Northern Pulp, a new operating company formed by Atlas.  In connection with the transfer of the Pictou Mill, Neenah Canada made payments of approximately $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, as well as existing customer contracts, supply agreements, labor agreements and pension obligations.

The Company accounted for the transfer of all pension and other post-employment benefit obligations for active and retired employees of the Pictou Mill to Northern Pulp as a settlement of post-employment benefit obligations pursuant to ASC Topic 715, Compensation—Retirement Benefits (“ASC Topic 715”).  For the nine months ended September 30, 2008, the Company recognized a non-cash, pre-tax settlement loss of $53.7 million due to the reclassification of deferred adjustments related to pensions and other post-employment benefits from accumulated other comprehensive income to loss from discontinued operations in the condensed consolidated statement of operations.

During the first quarter of 2008, the Company 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. For the nine months ended September 30, 2008, the Company recognized a non-cash, pre-tax impairment charge of $91.2 million to write-off the carrying value of the Pictou Mill’s long-lived assets.  In addition, for the three and nine months ended September 30, 2008, the Company recorded pre-tax income (expense) of $0.4 million and $(29.3) million, respectively, to recognize the loss on disposal of the Pictou Mill. At September 30, 2009, the Woodlands are reported as Assets held for sale on the condensed consolidated balance sheet at their historic book value net of accumulated depletion of $3.7 million.  The Company believes it is probable that the sale of the Woodlands will be completed within twelve months.

In conjunction with the sale of the Pictou Mill, the Company entered into a stumpage agreement (the “Stumpage Agreement”) which allows Northern Pulp to harvest an average of approximately 400,000 metric tons of softwood timber annually from the Woodlands. The Stumpage Agreement is for a term of ten years and Northern Pulp has the option to extend the agreement for an additional three years.  For calendar 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 three and nine months ended September 30, 2008, the Company recognized $2.0 million of such deferred revenue. For timber purchases during calendar year 2009, Northern Pulp is paying the stumpage rate charged by the Nova Scotia provincial government for harvesting on government licensed lands. The price paid for timber purchases during the remainder of the Stumpage Agreement will be based on an agreed upon formula for estimating market prices. The Company believes the Stumpage Agreement prices for calendar year 2009 and beyond represent market rates.  Northern Pulp has agreed to pay substantially all costs associated with maintaining the Woodlands and harvesting the timber.  An agreement to sell the Woodlands will require the buyer to assume the Stumpage Agreement.

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The results of operations of the Pictou Mill and the Woodlands and the estimated loss on sale of the Pictou Mill are reported as discontinued operations in the condensed consolidated statements of operations for each period presented. The following table summarizes the results of discontinued operations:

Note 6. Other Income - Net

In August 2006, Neenah Canada transferred the Terrace Bay, Ontario pulp mill and related woodlands operations (“Terrace Bay”) to certain affiliates of Buchanan Forest Products, Ltd. (“Buchanan”).  Buchanan assumed responsibility for substantially all liabilities related to the future operation of Terrace Bay.  At closing, Neenah Canada retained pension and long-term disability obligations for current and former mill employees and postretirement medical and life insurance obligations for current retirees. During the first quarter of 2008, Neenah Canada paid approximately $5.0 million to settle litigation related to the reduction and/or elimination of certain retiree benefits following Neenah Canada’s transfer of Terrace Bay to Buchanan.  In conjunction with the settlement, Neenah Canada agreed to continue certain retiree life insurance benefits at a reduced rate in the future.  As a result of the settlement, for the nine months ended September 30, 2008, Neenah Canada recorded a curtailment gain of approximately $4.3 million which is recorded in Other income-net on the condensed consolidated statement of operations.

For the three and nine months ended September 30, 2008, the Company recognized gains of approximately $3.5 million and $6.4 million, respectively, primarily from the sale of fixed assets acquired in the Fox River acquisition.

The Company recognized (gains) losses of $0.1 million and $(29) thousand, respectively, from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) for the three and nine months ended September 30, 2009.  For the three and nine months ended September 30, 2008, the Company recognized foreign currency transactions (gains) of $(0.1) million.  For the three and nine months ended September 30, 2008, losses from foreign currency transactions related to the operations of the Pictou Mill were approximately $0.1 million and $0.7 million, respectively, and are recorded in loss from discontinued operations on the condensed consolidated statements of operations.  For the nine months ended September 30, 2008, the Company realized (gains) on foreign currency forward exchange contracts of approximately $(0.5) million.  All such foreign currency forward exchange contracts gains related to the operations of the Pictou Mill and are recorded in loss from discontinued operations on the condensed consolidated statements of operations.

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The following table presents the components of “Other income — net” on the condensed consolidated statement of operations:

Note 7. Income Taxes

The Company accounts for income taxes recognized in an enterprise’s financial statements in accordance with ASC Topic 740, Income Taxes.  The following is a tabular reconciliation of the total amounts of the Company’s uncertain tax positions as of and for the nine months ended September 30, 2009:

For the nine months ended September 30, 2009, the increase in the Company’s liability for uncertain income tax positions was the result of the accrual of interest expense on potential adjustments to prior year income tax returns.  For the three and nine months ended September 30, 2009,  the Company recognized income tax expense of approximately $0.5 million for interest expense related to continuing operations.  In addition, for the three and nine months ended September 30, 2009, the Company recognized income tax expense of approximately $0.5 million and $0.8 million, respectively, related to discontinued operations.  If the Company’s liability for uncertain tax positions as of September 30, 2009 is not realized, its provision for income taxes in future periods would be favorably affected by approximately $1.5 million.

The Company anticipates that it will make income tax payments in the fourth quarter of 2009 and the first quarter of 2010 of approximately $6.2 million and $1.0 million, respectively, as a result of the completion of Internal Revenue Service audits for tax years 2004 through 2006.

In accordance with ASC Topic 270, Interim Reporting, the Company excluded the tax effects of the costs associated with closing the Ripon Mill as an infrequent and/or unusual item in estimating its full year effective tax rate.  See Note 4, “Closure of the Ripon Mill.” The tax effects of closing the Ripon Mill were treated as a discrete item in determining the tax benefit for the nine months ended September 30, 2009.  Therefore, the effective tax rate for the nine months ended September 30, 2009 is not necessarily indicative of the tax rate the Company expects to record for the remainder of 2009.

Note 8. Supplemental Balance Sheet Data

The following presents inventories by major class:

The FIFO values of total inventories valued on the LIFO method were $56.9 million and $66.5 million at September 30, 2009 and December 31, 2008, respectively.  For the three and nine months ended September 30, 2009, the Company recognized income (expense) of approximately $0.2 million and $(0.2) million, respectively, due to the liquidation of LIFO inventories.

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

Note 9. Debt

Long-term debt consisted of the following:

Senior Unsecured Notes

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

Secured Revolving Credit Facility

On November 30, 2004, the Company entered into a Credit Agreement by and among the Company, certain of its subsidiaries, the lenders listed in the Credit Agreement and JP Morgan Chase Bank, N.A. as agent for the lenders (the “Initial Credit Agreement”). Under the Initial Credit Agreement, the Company had a secured revolving credit facility that provided for borrowings of up to $150 million.

In May 2008, the Company entered into the Sixth Amendment to the Initial Credit Agreement (the “Sixth Amendment”). In the Sixth Amendment, the Lenders consented to consummation of the sale of the Pictou Mill. As of September 30, 2009, the Initial Credit Agreement (as amended, the “Amended Credit Agreement”) provides for a secured revolving credit facility (the “Revolver”) to provide for borrowings of up to $210 million. The Company’s ability to borrow under the Revolver is limited to the lowest of (a) $210 million, (b) the Company’s borrowing base (as determined in accordance with the Amended Credit Agreement) and (c) the applicable cap on the amount of “credit facilities” under the indenture for the Senior Notes. The Amended Credit Agreement is currently scheduled to terminate on November 30, 2010.

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The weighted-average interest rate on outstanding Revolver borrowings as of September 30, 2009 and December 31, 2008 was 2.1 percent per annum and 3.6 percent per annum, respectively. Borrowing availability under the Revolver is reduced by outstanding letters of credit and reserves for certain other items as defined in the Amended Credit Agreement. Availability under the Amended Credit Agreement will fluctuate over time depending on the value of the Company’s inventory, receivables and various capital assets. As of September 30, 2009, the Company had approximately $1.0 million of letters of credit outstanding and $62.5 million of borrowing availability under the Revolver. As of September 30, 2009, the Company had approximately $69.3 million in outstanding Revolver borrowings. Approximately $14.2 million of such Revolver borrowings are due within the next 12 months.  The Company has the ability and intent to refinance such borrowings and therefore has excluded these amounts from current liabilities.  See, “Amendment and Restatement of the Bank Credit Agreement”, below.

The Amended Credit Agreement contains events of default customary for financings of this type, including failure to pay principal or interest, materially false representations or warranties, failure to observe covenants and other terms of the Amended Credit Agreement, cross-defaults to other indebtedness, bankruptcy, insolvency, various ERISA violations, the incurrence of material judgments and changes in control. As of September 30, 2009, no events of default had occurred.

Term Loan

In March 2007, the Company entered into an agreement by and among the Company, certain of its subsidiaries and JP Morgan Chase Bank, N.A. (the “Term Loan Agreement”) to borrow up to $25 million (the “Term Loan”). The weighted-average interest rate on outstanding Term Loan borrowings as of September 30, 2009 and December 31, 2008, was 2.0 percent per annum and 3.6 percent per annum, respectively. Borrowings under the Term Loan are being repaid in equal quarterly installments which began in November 2007.  As of September 30, 2009, required Term Loan amortization payments are $1.25 million per quarter.  The Term Loan Agreement will terminate on the earlier of November 30, 2010 or when no Term Loan borrowings are outstanding.  All amounts outstanding under the Term Loan are scheduled to be repaid by May 2010.

Other Financing

In December 2006, Neenah Germany entered into agreements with HypoVereinsbank and IKB Deutsche Industriebank AG to provide a total of €10.0 million of project financing for the construction of a saturator (the “German Loan Agreement”). The German Loan Agreement bears interest at a rate of 3.8 percent per annum and matures in December 2016.  As of September 30, 2009, €9.4 million ($13.7 million, based on exchange rates at September 30, 2009) was outstanding under this agreement.

Neenah Germany has an unsecured revolving line of credit (the “German Line of Credit”) with HypoVereinsbank that provides for borrowings of up to €15 million for general corporate purposes.  The Line of Credit matures on November 30, 2009.  The weighted-average interest rate on outstanding Line of Credit borrowings as of September 30, 2009 and December 31, 2008 was 2.3 percent and 5.7 percent per annum, respectively.  As of September 30, 2009, the Company had €8.0 million ($11.7 million, based on exchange rates at September 30, 2009) outstanding under the Line of Credit and €7.0 million ($10.2 million, based on exchanges rates at September 30, 2009) of available credit.

Amendment and Restatement of the Bank Credit Agreement

On November 5, 2009, the Company renewed and modified its Amended 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 “New Revolver”) and (ii) a $40 million senior secured term loan (the “New Term Loan”).  A portion of the New Term Loan proceeds were used to repay in full the Term Loan. The Company’s ability to borrow under the New Revolver is limited to the lowest 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 New Revolver by up to $50 million.  The total amount outstanding under the Restated Credit Agreement cannot exceed $150 million.

The Restated Credit Facilities mature on November 30, 2013.  Commencing April 30, 2010, the Company will be required to make quarterly principal payments on the New Term Loan of $1.25 million per quarter with a final payment of $22.5 million in November 2013.

The New Revolver bears interest at either (1) a prime rate-based index plus a percentage ranging from 2.00% to 2.50%, or (2) LIBOR plus a percentage ranging from 3.50% to 4.00%, depending upon the amount of availability under the New Revolver.  The New Term Loan will bear interest at either (A) a prime rate-based index plus 2.75%, or (B) LIBOR plus 4.25%.  Interest is computed based on actual days elapsed in a 360-day year, payable monthly in arrears for prime-rate based loans, or for LIBOR loans, payable monthly in arrears and at the end of the applicable interest period.  The Company is also required to pay a monthly facility fee on the unused amount of the New Revolver commitment, calculated at the per annum rate of 0.50% while the New Term Loan remains outstanding, and after the New Term Loan has been repaid in full, at a per annum rate ranging between 0.50% and 0.75%, depending upon usage under the New Revolver.

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The Restated Credit Agreement is secured by substantially all of the assets of the Company and the subsidiary borrowers, including the capital stock of such subsidiaries, 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 guarantor; 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.

The Restated Credit Agreement contains events of default customary for financings of this type, including failure to pay principal or interest, materially false representations 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 covenants with which the Company must comply during the term of the Agreements.  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.

Note 10.  Pension and Other Postretirement Benefits

Pension Plans

Substantially all active employees of the Company’s U.S. paper operations participate in defined benefit pension plans and/or defined contribution retirement plans. Neenah Germany has defined benefit plans designed to provide a monthly pension upon retirement for all its employees in Germany. There is no legal or governmental obligation to fund Neenah Germany’s benefit plans and as such the plans are currently unfunded.

The closure of the Ripon Mill (See Note 4, “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 accordance 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 curtailment loss of approximately $0.8 million for the nine months ended September 30, 2009.

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.  The Company accounted for the transfer of these liabilities as a settlement of postretirement benefit obligations pursuant to ASC Topic 715.

The following table presents the components of net periodic benefit cost:

Components of Net Periodic Benefit Cost

The Company expects to make aggregate contributions to pension trusts and payments of pension benefits for unfunded pension plans of approximately $11 million (based on exchange rates at September 30, 2009) in calendar 2009.  For the nine months September 30, 2009, the Company made approximately $7.9 million of such payments.

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Note 11.  Stock Compensation Plan

The Company established the 2004 Omnibus Stock and Incentive Plan (the “Omnibus Plan”) in December 2004. The Company 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 compensation 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, restricted stock units 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 September 30, 2009, approximately 1,960,000 shares of Common Stock (based on the closing market price for Common Stock at September 30, 2009) were reserved for future issuance under the Omnibus Plan.  The Company accounts for stock-based compensation pursuant to the fair value recognition provisions of ASC Topic 718, Compensation—Stock Compensation.

Valuation and Expense Information

Substantially all stock-based compensation expense is recorded in selling, general and administrative expenses on the condensed consolidated statements of operations.  The following table summarizes stock-based compensation expense and related income tax benefits for the three months ended September 30, 2009 and 2008.

The following table summarizes total compensation costs related to the Company’s equity awards and amounts recognized in the nine months ended September 30, 2009.

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Stock Options

For the nine months ended September 30, 2009, the Company awarded nonqualified stock options to Long-Term Incentive Plan (the “LTIP”) participants to purchase approximately 698,000 shares of common stock (subject to forfeiture due to termination of employment and other conditions).  In addition, the Company awarded to non-employee members of its board of directors nonqualified stock options to purchase 32,000 shares of Common Stock. For the nine months ended September 30, 2009, the weighted-average exercise price of such nonqualified stock option awards was $8.19 per share. The exercise price of the options was equal to the market price of the Company’s common stock on the date of grant.  In general, the options expire in ten years and one-third vest on each of the first three anniversaries of the date of grant.  For options awarded to non-employee members of the board of directors, options 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 during the nine months ended September 30, 2009 was $2.67 per share and was estimated using the Black-Scholes option valuation model with the following assumptions:

The expected term was estimated based upon historical data for Kimberly-Clark stock option awards. The expected volatility was based on the Company’s historical stock price performance.  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.

No stock options were exercised during the nine months ended September 30, 2009 and 2008. The aggregate intrinsic value of approximately 1,330,000 stock options and 1,207,000 stock options that were exercisable at September 30, 2009 and December 31, 2008, respectively, was zero.

The aggregate grant date fair value of approximately 190,000 stock options and SARs that vested during the nine months ended September 30, 2009, was $1.8 million. As of September 30, 2009, certain participants met age and service requirements that allowed their stock options to qualify for accelerated vesting upon retirement. As of September 30, 2009, LTIP participants held options to purchase 295,000 shares of common stock that would have been exercisable if they had retired as of such date. The aggregate grant date fair value of options subject to accelerated vesting was $1.2 million. Stock options subject to accelerated vesting for expense recognition become exercisable according to the contract terms of the stock option grant.

As of September 30, 2009, the aggregate intrinsic value of 2,250,000 stock options and SARs that were vested or expected to vest was $2.6 million.  The weighted-average grant date fair value of such stock options was $8.41 per share. As of December 31, 2008, the weighted-average grant date fair value and aggregate intrinsic value of 1,619,000 stock options that were vested or expected to vest was $11.10 per share and zero, respectively.

As of September 30, 2009, the Company has approximately 945,000 unvested stock options with a weighted-average grant date fair value of $3.93 per share. As of December 31, 2008, approximately 415,000 unvested stock options were outstanding with a weighted-average grant date fair value of $6.98 per share.

Performance Shares

For the nine months ended September 30, 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 target will be awarded based on the Company’s growth in earnings before interest, taxes, depreciation and amortization (“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-average grant date fair value for the Performance Shares was $8.91 per share (which represents the grant date market price of the Company’s Common Stock of $7.41 per share multiplied by the probability weighted expected payout of approximately 1.20 shares of Common Stock for each Performance Share) and was estimated using a “Monte Carlo” simulation technique. Compensation cost is recognized pro rata over the vesting period.

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Note 12.  Goodwill and Other Intangible Assets

The following table presents changes in the carrying amount of goodwill for the nine months ended September 30, 2009.  All such goodwill is reported in the Technical Products segment.

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