The following is a discussion of our results of operations, current financial position and cash flows. This discussion should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and related notes and the selected financial data included in Item 6 of our Annual Report on Form 10-K for the year ended December 31, 2008, as updated by our Current Report on Form 8-K filed September 17, 2009. The discussion of our results of operations and financial position includes various forward-looking statements about our markets, the demand for our products and our future results. These statements are based on certain assumptions that we consider reasonable. For information about risks and exposures relating to our business and our company, you should read the section entitled "Factors That May Affect Future Results" included in our Annual Report on Form 10-K for the year ended December 31, 2008, as updated by our Current Report on Form 8-K filed September 17, 2009. Our website www.schweitzer-mauduit.com, allows access free of charge to our historical financial information, press releases, quarterly earnings conference calls and our Securities and Exchange Commission, or SEC, filings. Information from our website is not incorporated by reference into any SEC filing. Unless the context indicates otherwise, references to "we," "us," "our," or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

Executive Summary
(dollars in millions, except per share amounts)

                                       Three Months Ended September 30,                      Nine Months Ended September 30,
                                        2009                       2008                      2009                       2008
Net sales                      $   184.5        100.0 %    $ 199.2        100.0 %    $  551.9        100.0 %    $ 591.0        100.0 %
Gross profit                        51.7         28.0         32.5         16.3         137.9         25.0         76.7         13.0
Restructuring & impairment
expense                             26.9         14.6          2.6          1.3          40.5          7.3          8.3          1.4
Operating profit                     6.5          3.5         14.6          7.3          41.3          7.5         19.4          3.3
Interest expense                     1.0          0.5          3.1          1.6           4.1          0.7          8.3          1.4
Other income (expense), net          0.1          0.1         (0.6 )       (0.3 )        (0.3 )       (0.1 )       (1.6 )       (0.3 )
Income (loss) from equity
affiliates                           1.0          0.5         (1.6 )       (0.8 )        (1.4 )        0.3         (1.8 )       (0.3 )
Net income attributable to
SWM                            $     4.5          2.4 %    $   6.7          3.4 %        24.9          4.5 %    $   7.5          1.3 %
Diluted earnings per share     $    0.27                   $  0.43                   $   1.59                   $  0.48
Cash provided by operations    $    30.8                   $  15.7                   $   53.7                   $  28.0
Capital spending               $     3.1                   $   6.0                   $    7.7                   $  30.0

Third Quarter Highlights
Net sales were $184.5 million in the three month period ended September 30, 2009, a 7.4% decrease versus the prior-year quarter. Net sales decreased by $14.7 million as a result of $11.7 million from a 4% decrease in unit sales volumes, $9.1 million in unfavorable foreign currency exchange rate impacts from a stronger U.S. dollar compared to the euro and $8.8 million due to lower sales following announcement of the closure of our finished tipping facility in Malaucène, France. These declines were partially offset by $14.9 million in higher average selling prices, primarily due to an improved mix of products sold.
Gross profit was $51.7 million in the three month period ended September 30, 2009, an increase of $19.2 million from the prior-year quarter. The gross profit margin was 28.0%, increasing from 16.3% in the prior-year quarter. Restructuring and impairment expenses were $26.9 million and $2.6 million for the three months ended September 30, 2009 and 2008, respectively. The higher restructuring and impairment charges were due to the announced reduction of PDM employment levels, primarily among general staff, made possible by the installation of an enterprise resource planning computer system as well as the now nearly concluded closure of the Malaucène finished tipping facility, both of which reduced administrative requirements. During the third quarter evaluation of alternative courses of action related to recovering the carrying amount of our long-lived assets, management decided the most likely course of action was for our Spotswood operations to concentrate on the online LIP technology we operate for Philip Morris USA. We plan to transfer the remaining production of other cigarette papers from the affected Spotswood machine to our facilities in France and Brazil. As a result of this decision, we determined the machine's carrying value was not recoverable and the net book value exceeded its fair value by $9.2 million. We also recorded a $2.7 million impairment charge for an idled small paper machine in France.
Operating profit was $6.5 million in the three months ended September 30, 2009 versus $14.6 million in the prior-year quarter. The lower operating profit was primarily due to increased restructuring and impairment expense of $24.3 million and $3.0 million in higher non-manufacturing expenses, primarily due to higher incentive compensation accruals. These were partially offset by $20.3 million in benefits from a favorable mix of products sold and higher selling prices and $4.2 million from lower inflationary costs, primarily wood pulp.
In the third quarter of 2009, interest expense compared to prior-year quarter declined as a result of lower average debt levels and lower interest rates. SWM third quarter net income and diluted earnings per share declined versus the prior-year net income and diluted earnings per share by $2.2 million and $0.16 per share, respectively, due to higher restructuring and impairment expense. Year-to-Date Highlights
Net sales were $551.9 million during the nine months ended September 30, 2009, a 6.6% decrease versus the prior-year period. Net sales decreased by $39.1 million as a result of $42.5 million in unfavorable foreign currency exchange rate impacts, $41.1 million from a 10% decrease in sales volumes and $10.9 million in lower French tipping paper sales following announcement of the closure of our finished tipping facility in Malaucène, France. These declines were partially offset by $55.4 million in higher average selling prices, primarily due to an improved mix of products sold.
Gross profit was $137.9 million in the nine month period ended September 30, 2009, an increase of $61.2 million from the prior-year period. The gross profit margin was 25.0%, increasing from 13.0% in the prior-year period. Restructuring and impairment expenses were $40.5 million and $8.3 million for the nine months ended September 30, 2009 and 2008, respectively. Operating profit was $41.3 million in the nine months ended September 30, 2009 versus $19.4 million in the prior-year period. The higher gross profit and operating profit were both primarily due to $53.2 million in higher average selling prices and a favorable mix of products sold, $14.6 million in cost savings and mill operating efficiencies including the absence in 2009 of $11.7 million in machine start-up costs incurred in 2008 in connection with a paper machine rebuild in France, and $5.5 million lower inflationary costs due to lower wood pulp costs. These benefits were partially offset by $7.1 million in higher non-manufacturing expenses, primarily due to higher incentive compensation accruals, consulting expenses associated with strategic planning activities and severance expenses, and $4.1 million from decreased sales volumes.
Interest expense was lower by $4.2 million as a result of lower average debt levels and lower interest rates. Net income and diluted net income per share were higher than the comparable periods of the prior-year by $17.4 million and $1.11, respectively, even with the substantially higher restructuring and impairment expense.
Capital spending was $7.7 million and $30.0 million for the nine months ended September 30, 2009 and 2008, respectively. During the third quarter of 2009, we neared completion in France and began to implement an enterprise-wide resource planning computer system in our U.S. and Brazilian operations, which we expect to be operational by the third quarter of 2010. During the third quarter of 2009, we incurred and deferred $3.8 million in expenses associated with these projects.

Recent Developments
Proposed RTL Production Expansion
At a November 2, 2009 meeting, the board of directors authorized a project to build a new RTL production facility that will be located in the Philippines. This stand alone, single-machine facility, separate from our current cigarette paper mill in the Philippines, will be located near Manila and is expected to have approximately 30,000 metric tons of capacity which will increase our world-wide RTL production capacity by approximately 38% when completed. We expect operations to commence in late 2011. We already have entered into a seven-year supply agreement with one of our current customers and are in advanced supply discussions with another multinational cigarette manufacturer that, if an agreement is reached, would use approximately 50% of the new facility's total capacity.
We are exploring options to fund the expected $117 million total investment cost of the new RTL production facility in the Philippines, including using our existing credit agreement, cash from operations and potentially new sources of debt or equity capital.
Operational Changes - France
During September 2009, we announced a workforce reduction of our general and administrative staff in France as part of our continuing strategy to restructure our base tobacco-paper business to make it more cost competitive. Employees at PDM, located in Quimperlé, France were notified September 10, 2009 of the initiation of consultations with the unions and the Work's Council regarding intended reductions of employment levels by 106 people, or 15% of the current workforce. The contemplated reduction of PDM employment levels, among factory and general staff, is made possible by the installation of an enterprise resource planning computer system as well as the now nearly concluded closure of the Malaucène finished tipping facility, both of which reduce administrative requirements.
Meetings with the unions and the Work's Council must be completed before the amount of the restructuring expenses, timing and ongoing benefits of the changes can be definitively known. However, cash severance expenses associated with this action are expected to total approximately $14 million through the planned completion of the actions in the second quarter of 2010 and result in annual pre-tax savings of approximately $8 million, or $0.36 per share, with roughly half of this savings to be realized during 2010.
In April 2009, we announced a decision to close our finished tipping paper facility, Papeteries de Malaucène, located in France. Due to ongoing losses at the facility, the Company previously recorded a $13.5 million fixed asset impairment charge in the fourth quarter of 2008, which included the majority of the related fixed asset values. This mill closure is expected to result in severance of all of the approximately 210 employees. In the three and nine months ended September 30, 2009, we recorded $8.5 million and $19.9 million, respectively of estimated restructuring severance expense reduced by an estimate of employee-related benefit liabilities which are expected to be eliminated upon final termination of the employees. Additionally, $0.8 million of non-cash charges was also included in the nine month period. We expect additional expenses, net of reversals of employee-related accruals, related to this action of approximately $4 million through its planned completion in the first quarter of 2010. Payment of the cash severances is expected to be completed by the end of 2010, with approximately $6 million expected to be paid during 2009. Operating losses for the Malaucène facility will likely continue through the end of 2009 when all operations are expected to end. Incremental operating losses could negatively impact our operating profit by approximately $3 million, or $0.15 per share, during the fourth quarter of 2009 as these operations wind down by the end of December.
Lower Ignition Propensity Cigarettes
Based upon the states that have passed LIP regulations, demand for this product is expected to grow from the current level of approximately 58% of North American cigarette consumption to approximately 100% by early 2010. Additionally, states representing essentially all of North American consumption have either passed or proposed LIP regulations, and major cigarette producers have announced voluntary national distribution of this technology, supporting the likelihood that LIP cigarettes will be sold nationwide by late 2009 or early 2010. As a result, we expect to realize continued growth in demand for cigarette paper used in LIP cigarettes, which would continue to significantly benefit our U.S. business unit's results through 2010.

International LIP efforts continue, especially in the European Union, or EU. Australia will implement LIP regulations effective in March 2010 and Finland will follow with implementation in April 2010. The compliance test standards for Australia and Finland are consistent with test standards in Canada and the United States. In July 2009, SWM announced that the British American Tobacco affiliate in Australia, which has an approximate 60% share of that market, will exclusively use SWM's Alginex® banded papers.
In June 2008, the EU's Standardization European Committee, known as CEN, mandated development of an ignition propensity standard. This standard is currently under development by working groups within the International Organization for Standardization, known as ISO, with expectations that the standard will be published by late 2010 or early 2011. Implementation of LIP regulation in the EU is expected by 2012. Additionally, other countries including South Korea, South Africa and Brazil are discussing possible LIP regulation. These actions indicate that it is increasingly likely LIP cigarette regulations outside of North America will become effective in the next 1 to 3 years thus likely increasing demand for SWM's banded cigarette paper technology used in these cigarettes.
Accordingly, we have begun implementing plans to establish a first LIP production facility in Europe with a planned commencement of operations during 2010 and continue to work with our customers to finalize product developments and establish supply terms. We continue to study further LIP production capacity plans to meet the full extent of EU demand for cigarette paper used in LIP cigarettes and expect to select a location for a second production site in Europe. These legislative and capacity planning developments involving LIP requirements are positive for us given our leadership position in this technology with our Alginex® banded papers and ability to provide one or more commercially proven LIP solutions to cigarette manufacturers. Results of Operations
Three Months Ended September 30, 2009 Compared with the Three Months Ended September 30, 2008

Net Sales
(dollars in millions)

                                                                                                       Consolidated
                                     Three Months Ended                                                    Sales
                             September 30,         September 30,                       Percent            Volume
                                 2009                  2008             Change          Change            Change
France                      $         117.1       $         129.9      $   (12.8 )          (9.9 )%              2.8 %
United States                          58.0                  60.2           (2.2 )          (3.7 )             (54.8 )
Brazil                                 18.3                  15.6            2.7            17.3                14.3

Subtotal                              193.4                 205.7          (12.3 )
Intersegment                           (8.9 )                (6.5 )         (2.4 )

Total                       $         184.5       $         199.2      $   (14.7 )          (7.4 )%             (4.4 )%

Net sales were $184.5 million in the three months ended September 30, 2009 compared with $199.2 million in the prior-year quarter. The decrease of $14.7 million, or 7.4%, consisted of the following (dollars in millions):

                                                      Amount       Percent
          Changes in sales volumes                    $ (11.7 )        (5.9 )%
          Changes in currency exchange rates             (9.1 )        (4.6 )
          Changes due to Malaucène closure               (8.8 )        (4.4 )
          Changes in selling prices and product mix      14.9           7.5

          Total                                       $ (14.7 )        (7.4 )%

• Unit sales volumes decreased by 4.4% in the three months ended September 30, 2009 versus the prior-year quarter, resulting in an unfavorable effect on net sales of $11.7 million, or 5.9%.

• Sales volumes in the United States decreased by 54.8%, reflecting primarily a change to source certain products from SWM's Brazilian and French locations as well as reduced sales of certain tobacco-related products caused by lower market demand.

• Brazil experienced increased sales volumes of 14.3% as the result of higher printing and writing papers as well as higher volumes of tobacco-related papers.

• Sales volumes for the French segment increased by 2.8%, primarily as a result of higher sales of RTL, mostly offset by lower sales of tobacco-related papers.

• Changes in currency exchange rates had an unfavorable impact on net sales of $9.1 million, or 4.6%, in the three months ended September 30, 2009 and primarily reflected the impact of a weaker euro compared with the U.S. dollar in the third quarter of 2009 compared to the third quarter of 2008.

• Higher average selling prices had a favorable $14.9 million, or 7.5%, impact on the net sales comparison. The increase in average selling prices reflected an improved mix of products sold, especially in the United States primarily due to increased sales of cigarette paper for LIP cigarettes, as well as price increases realized since early 2009.

French segment net sales of $117.1 million in the three months ended September 30, 2009 decreased by $12.8 million, or 9.9%, from $129.9 million in the prior-year quarter. The decrease in net sales was primarily the result of a weaker euro relative to the U.S. dollar in the current year period as compared to the prior year period and $8.8 million in lower sales from the Malaucène finished tipping facility which is being shut down.
The U.S. segment net sales of $58.0 million in the three months ended September 30, 2009 decreased by $2.2 million, or 3.7%, from $60.2 million in the prior-year quarter. The decrease in net sales of the U.S. segment resulted from lower sales volume partially offset by an improved selling mix and higher prices.
The Brazil segment net sales of $18.3 million in the three months ended September 30, 2009 increased by $2.7 million, or 17.3%, from $15.6 million in the prior-year quarter. The change was primarily due to higher average selling prices and an improved mix of products sold.

Gross Profit
(dollars in millions)

                                    Three Months Ended
                            September 30,         September 30,                    Percent           Percent of Net Sales
                                2009                  2008            Change        Change           2009             2008
Net Sales                  $         184.5       $         199.2      $ (14.7 )        (7.4 )%
Cost of products sold                132.8                 166.7        (33.9 )       (20.3 )           72.0 %           83.7 %

Gross Profit               $          51.7       $          32.5      $  19.2          59.1 %           28.0 %           16.3 %

Gross profit was $51.7 million in the three months ended September 30, 2009, an increase of $19.2 million from $32.5 million in the prior-year quarter. The gross profit margin was 28.0% of net sales in the three months ended September 30, 2009, increasing from 16.3% in the prior-year quarter. Gross profit was favorably impacted by higher average selling prices, including a favorable mix of products sold, and lower inflationary costs. Inflationary cost decreases related to lower per ton wood pulp prices and energy were partially offset by higher materials prices and labor for a net favorable impact to operating results of $4.2 million during the three months ended September 30, 2009. Changes in per ton wood pulp prices increased operating profit by $3.9 million compared with the prior-year quarter. The average per ton list price of northern bleached softwood kraft pulp in the United States was $730 per metric ton during the three month period ended September 30, 2009 compared with $880 per metric ton during the prior-year quarter.

Nonmanufacturing Expenses
(dollars in millions)

                                      Three Months Ended
                              September 30,         September 30,                       Percent          Percent of Net Sales
                                  2009                  2008             Change         Change           2009            2008
Selling expense              $           4.8       $           5.5      $    (0.7 )        (12.7 )%          2.6 %           2.8 %
Research expense                         2.0                   1.9            0.1            5.3             1.1             0.9
General expense                         11.5                   7.9            3.6           45.6             6.2             4.0

Nonmanufacturing expenses    $          18.3       $          15.3      $     3.0           19.6 %           9.9 %           7.7 %

Nonmanufacturing expenses increased by $3.0 million, or 19.6%, to $18.3 million from $15.3 million in the prior-year quarter, primarily due to higher incentive compensation accruals due to improved results. Nonmanufacturing expenses were 9.9% and 7.7% of net sales in the three month periods ended September 30, 2009 and 2008, respectively.
Restructuring and Impairment Expense
Total restructuring and impairment expense of $26.9 million was recognized during the three months ended September 30, 2009, comprised of $15.0 million for severance related and other cash costs, $11.9 for asset impairment charges, net of reduction for estimated employee-related liabilities which are expected to be eliminated as a result of employee terminations. Total restructuring and impairment expense of $2.6 million was recognized during the prior-year quarter, comprised of $2.0 million for severance and other cash costs and $0.6 million for accelerated depreciation, asset impairments and loss on disposal of assets.

Operating Profit
(dollars in millions)

                                     Three Months Ended
                             September 30,         September 30,                           Return on Net Sales
                                 2009                  2008              Change           2009             2008

France                      $           5.8       $          15.1      $     (9.3 )           5.0 %            11.6 %
United States                           4.2                   6.7            (2.5 )           7.2              11.1
Brazil                                  1.5                  (3.7 )           5.2             8.2             (23.7 )

Subtotal                               11.5                  18.1            (6.6 )
Unallocated expenses                   (5.0 )                (3.5 )          (1.5 )

Total                       $           6.5       $          14.6      $     (8.1 )           3.5 %             7.3 %

Operating profit was $6.5 in the three months ended September 30, 2009 compared with $14.6 million during the prior-year quarter.
The French segment's operating profit was $5.8 million in the three months ended September 30, 2009, a decrease of $9.3 million from an operating profit of $15.1 million in the prior-year quarter. The decrease was primarily due to:
• Increased restructuring and impairment expenses of $16.7 million

• Higher losses at Malaucène of $3.4 million

• These negative factors were partially offset by $10.4 million from higher selling prices and improved mix as well as improved mill operations and benefits of prior strategic restructuring actions, including improved operations of a paper machine rebuilt in 2008.

The U.S. segment's operating profit was $4.2 million in the three months ended September 30, 2009, a $2.5 million decrease from $6.7 million in the prior-year quarter. Higher restructuring and impairment expenses of $9.0 million, were partially offset by higher selling prices and changes in the mix of products sold of $7.5 million, primarily due to higher sales of cigarette paper for LIP cigarettes.
Brazil's operating profit was $1.5 million during the three months ended September 30, 2009, compared with an operating loss of $3.7 million during the prior-year quarter. The increased operating profit was primarily due to:
• The weaker Brazilian real versus the U.S. dollar, which had a $2.6 million favorable impact, including a $1.2 million benefit from foreign currency hedges

• Higher selling prices and improved mix of products sold of $2.4 million

• The absence of the $1.4 million of restructuring expense in the prior-year quarter

Non-Operating Expenses
Interest expense of $1.0 million in the three months ended September 30, 2009 decreased from $3.1 million in the prior-year quarter. Average debt levels were significantly lower during the three months ended September 30, 2009 versus the prior-year quarter, and our weighted average effective interest rate was lower. The weighted average effective interest rates on our revolving debt facilities were approximately 1.7% and 5.1% for the three months ended September 30, 2009 and 2008, respectively.

Income Taxes
The provision for income taxes in the three months ended September 30, 2009 reflected an effective tax rate of 37.5% compared with 23.9% in the prior-year quarter. The difference in effective tax rates was primarily due to the lower income before income taxes in 2009 versus 2008, together with the tax benefits of our foreign holding company structure. . . .