The following is a discussion of our results of operations and financial condition. This discussion should be read in conjunction with our 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, 2011. The discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and our future prospects. These statements are based on certain assumptions that we consider reasonable. For information about risks and exposures relating to us and our business, you should read the section entitled "Factors That May Affect Future Results," in our Annual Report on Form 10-K for the year ended December 31, 2011. Unless the context indicates otherwise, references to "SWM", "we", "us", "our", or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

Summary
 ($ in millions, except per share amounts)                  Three Months Ended
                                                 March 31, 2012             March 31, 2011
Net sales                                   $   202.1        100.0 %   $  180.7        100.0  %
Gross profit                                     64.4         31.9         47.2         26.1
Restructuring & impairment expense               18.7          9.3          1.0          0.5
Operating profit                                 24.4         12.1         26.4         14.6
Interest expense                                  0.9          0.4            -            -
Income from continuing operations                14.6          7.2         16.6          9.2
Loss from discontinued operations                   -            -         (0.4 )       (0.2 )
Net income                                       14.6          7.2 %       16.2          9.0  %
Diluted earnings per share from continuing
operations                                  $    0.90                  $   0.93
Diluted earnings per share                  $    0.90                  $   0.91
Cash provided by (used in) operations       $    48.4                  $   (0.2 )
Capital spending                            $     7.8                  $   27.7

First Quarter Highlights

Net sales were $202.1 million in the three months ended March 31, 2012, a $21.4 million increase from $180.7 million in the prior-year quarter. The increase was primarily due to the implementation of LIP regulations in the EU which began during the fourth quarter of 2011.

Gross profit was $64.4 million in the three months ended March 31, 2012, a $17.2 million increase from $47.2 million in the prior-year quarter. In the first quarter 2012, gross margin improved to 31.9% from 26.1% in the prior-year quarter. The higher gross profit was primarily due to $13.9 million in favorable volume impacts and $3.9 million in royalty income. During the first quarter 2012, SWM incurred $18.7 million in restructuring and impairment expenses. In the Paper segment, a $16.9 million impairment charge was recorded to reduce the carrying value of certain North American paper manufacturing assets to fair value.

Cash provided by operations was $48.4 million in the first quarter 2012, compared to a cash use of $0.2 million in the prior year. The higher cash generation during 2012 was largely due to improved sales, more efficient manufacturing and a net working capital reduction.

Recent Developments

During the first quarter SWM amended its cost-plus based contract for banded cigarette papers with Philip Morris-USA, a subsidiary of Altria Group Inc. Among other items, this amendment removed our contractual commitment to stand ready to produce commercial quantities of banded cigarette papers, even in the absence of firm orders. Philip Morris-USA has also withdrawn its dispute related to the manner in which the Company calculated costs and invoiced Philip Morris-USA for banded cigarette papers during 2009 and 2010.

Administrative and Court Proceedings Relating to Papers for Lower Ignition Propensity Cigarettes

In December 2009, Miquel y Costas S.A., delfortgroup AG, and Societe Papeterie Leman SAS filed Notices of Opposition to the European Patent Office's, or EPO, grant of European Patent EP 1482815. The oppositions filed by Societe Papeterie Leman and delfortgroup contend that the claim language regarding the film-forming material to have a certain viscosity was not sufficiently described, that the claims were not patentable due to a prior art reference, a reference that was disclosed by SWM to the examiner and cited by him in granting the patent, and lack of inventive step. Societe Papeterie Leman further alleged that claim 1 is not sufficiently definite and is therefore invalid. Miquel y Costas claims that the patent lacks novelty as to the film-former gum Arabic, that claim 1 of the patent lacks sufficient disclosure and that claim 1 also lacks novelty. The Company will continue to defend the grant of this patent by taking necessary actions including responding to further submissions by the opponents. Once the EPO considers that all positions have been fully briefed, it may hold a hearing to assist it in reaching a final conclusion on the oppositions. There is no mandated timetable by which the EPO must reach a decision. The outcome of this dispute would not prevent the Company from practicing its Alginex® LIP solution. The patent remains in effect and fully enforceable while the opposition proceedings are pending. As a result of the world-wide LIP license agreement with SWM, delfortgroup has withdrawn from this proceeding. The action remains open with the other parties.

On November 12, 2010, the EPO issued a Notice of Decision to Grant SWM European Patent No. 1333729. On December 8, 2010, Julius Glatz GmbH filed a Notice of Opposition to the grant of this patent. In September 2011, Societe Papeterie Leman, Miquel y Costas and delfortgroup each filed opposition papers and Glatz supplemented its previous filing. The EPO opened an an opposition proceeding and the Company's response to the Notices of Opposition is due on June 20, 2012 and will be timely filed. The Company believes that the EPO properly granted the patent and it intends to vigorously defend the patent. As a result of the world-wide LIP license agreement with SWM, delfortgroup has withdrawn from this proceeding. The action remains open with the other parties.

The Company filed an infringement action on February 8, 2010 in the United States District Court for South Carolina, Charleston Division, against multiple defendants alleging infringement of the Company's United States Patent Number 6,725,867 and a First Amended Complaint on June 1, 2010 which added claims of alleged infringement under United States Patent Number 5,878,753 and further specifies products we believe violate our patents. Adversarial proceedings present uncertainties and risks, which could include invalidation of the patent in dispute, a change in the scope of the patent claims, or an adverse determination on the question of infringement, among others. As was their right under the applicable statute, the defendants requested and the court granted a motion staying this civil action until completion of the International Trade Commission, or ITC, proceedings. The civil action may be restarted once the ITC action is concluded. We believe the outcome of this dispute would not prevent the Company from practicing its Alginex® LIP solution. As a result of the world-wide LIP license agreement, delfortgroup has been dismissed from this action. The case is expected to remain open with the other parties, but will remain stayed pending the final determination of the ITC proceeding.

On December 17, 2010, the Company filed a complaint with the ITC against multiple respondents, including Julius Glatz, delfortgroup, Astra Tobacco and LipTEC based on their unlawful importation into the United States, the sale for importation, and the sale within the United States after importation of certain paper wrappers used in manufacture of reduced ignition proclivity cigarettes and products that infringe, are made or produced under, or by means of, a process covered by, one or more of claims 36, 43, and 45 of United States Patent No. 6,725,867 and claims 1-6, 10-18, and 22-25 of United States Patent No. 5,878,753. The ITC opened an investigation in January 2011, and a hearing before the Administrative Law Judge resulted in an Initial Decision published on February 1, 2012, that held that the '753 patent was valid but the asserted claims were not infringed by the respondents and the respondents infringed the asserted claims of the '867 but those claims were invalid. The Company petitioned for and the ITC decided to review certain aspects of the Initial Decision. We expect the ITC to issue its further ruling in early June. Any of the parties to the ITC proceeding may appeal the final determination to the Circuit Court of Appeal for the Federal Circuit. The outcome of this action will have no legal effect outside of the U.S. and will not impact the Company's right to produce and sell its flagship Alginex® papers for LIP cigarettes.

Three Months Ended March 31, 2012 Compared with the Three Months Ended March 31,

2011

Net Sales
(dollars in millions)

                                    Three Months Ended                                           Consolidated
                                                                                   Percent       Sales Volume
                           March 31, 2012        March 31, 2011       Change       Change           Change
Paper                    $       142.2         $          125.1     $    17.1        13.7 %            (5 )%
Reconstituted Tobacco             59.9                     55.6           4.3         7.7              13
Total                    $       202.1         $          180.7     $    21.4        11.8 %             2  %

Net sales were $202.1 million in the three months ended March 31, 2012 compared with $180.7 million in the comparable prior-year period. The increase in net sales consisted of the following (dollars in millions):

                                           Amount    Percent
Changes due to sales volume               $ 22.7      14.3  %
Changes due to royalty income                3.9       2.1
Changes in product mix and selling prices   (1.0 )    (0.6 )
Changes in currency exchange rates          (4.2 )    (4.0 )
Total                                     $ 21.4      11.8  %

• Unit sales volumes decreased by 2% in the three months ended March 31, 2012 versus the prior-year period. Despite lower overall volumes, the $22.7 million impact of sales volume changes was favorable since the dollar impact of higher-value products offset the dollar impact of traditional products.

?         Sales volumes for the Paper segment decreased by 5%. Sales volume for
          traditional tobacco-related paper products declined in certain markets
          partially offset by a 47% increase in LIP paper sales volume. The
          dollar impact of increased LIP volumes more than offset the dollar
          impact of the decline in traditional paper volume.


?         Sales volumes in the Reconstituted Tobacco segment increased by 13%
          primarily due to higher demand of certain reconstituted tobacco leaf
          products.


•     Changes in currency exchange rates decreased net sales by $4.2 million, or
      4.0%, in the three months ended March 31, 2012, and primarily reflected the
      impact of changes in the value of the euro compared with the U.S. dollar in
      2012 versus the prior year.


•     Unfavorable changes in selling prices and sales mix negatively impacted net
      sales by $1.0 million.

Paper segment net sales during the three months ended March 31, 2012 of $142.2 million increased by $17.1 million, or 13.7%, versus $125.1 million in the prior-year quarter. The increase in net sales was primarily the result of $16.2 million impact of increased volumes of high-value products and $3.9 million of royalty income. These positives were partially offset by $2.9 million in unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar.

Reconstituted Tobacco segment net sales during the three months ended March 31, 2012 of $59.9 million increased by $4.3 million, or 7.7%, compared with $55.6 million in the prior-year quarter. The increase in net sales of the Reconstituted Tobacco segment resulted from $6.5 million favorable impact of sales volumes, which was partially offset by $1.3 million of unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar.

Operating Expenses
(dollars in millions)
                                  Three Months Ended                                                   Percent of Net Sales
                        March 31, 2012           March 31, 2011       Change       Percent Change       2012           2011
Net Sales             $          202.1         $          180.7     $    21.4             11.8 %        100.0 %        100.0 %

Cost of products sold            137.7                    133.5           4.2              3.1           68.1           73.9
Gross Profit          $           64.4         $           47.2     $    17.2             36.4 %         31.9 %         26.1 %

The increase in gross profit for the three months ended March 31, 2012 versus the prior-year quarter was primarily due to $13.9 million favorable impact of higher sales volumes. LIP regulations in the EU, which became effective during the fourth quarter of 2011, drove higher demand for LIP cigarette papers. Gross profit was also favorably impacted by $3.5 million in improved manufacturing costs and $3.9 million of royalty income from third-party license agreements. Pulp list prices were lower during the first quarter of 2012 at $835 per metric ton of northern bleached softwood kraft compared to $970 during the prior-year quarter. However, changes in other inflationary costs, including other materials prices, energy and labor, substantially offset this favorable impact on first quarter 2012 results compared to the prior-year quarter.

Nonmanufacturing Expenses
(dollars in millions)
                                    Three Months Ended                                                 Percent of Net Sales
                            March 31, 2012       March 31, 2011       Change       Percent Change       2012           2011
Selling expense           $            6.0     $            5.1     $     0.9             17.6 %          2.9 %          2.8 %
Research expense                       2.2                  2.0           0.2             10.0            1.1            1.1
General expense                       13.1                 12.7           0.4              3.1            6.5            7.0
Nonmanufacturing expenses $           21.3     $           19.8     $     1.5              7.6 %         10.5 %         10.9 %

Nonmanufacturing expenses in the three months ended March 31, 2012 increased by $1.5 million to $21.3 million from $19.8 million in the prior-year quarter.

The Company incurred total restructuring and impairment expense of $18.7 million in the three months ended March 31, 2012. During the first quarter, the Company amended a supply agreement with Philip Morris-USA, a subsidiary of Altria Group Inc. The amended agreement eliminated a contractual commitment to stand ready to produce commercial quantities of banded cigarette paper. The Company considered these new terms to be a triggering event requiring evaluation of the recoverability of our Spotswood mill's banded cigarette paper production assets. Based on this analysis, which reflected management's assessment of the most likely future utilization of the mill, the Company recorded a $16.9 million impairment charge to reduce the carrying value of these assets to their fair value. Other Paper segment restructuring expenses of $1.0 million were due to preretirement program expense accruals in France. In the prior-year quarter, the Company's restructuring and impairment expense was $1.0 million related to costs to suspend the construction of the RTL Philippines facility and employee severance accruals in France.

Operating Profit
(dollars in millions)
                                 Three Months Ended                                                Return on Net Sales
                        March 31, 2012         March 31, 2011       Change     Percent Change       2012         2011
Paper                 $            4.3       $           10.2     $   (5.9 )        (57.8 )%         3.0 %         8.2 %
Reconstituted Tobacco             24.7                   20.0          4.7           23.5           41.2          36.0
Unallocated expenses              (4.6 )                 (3.8 )       (0.8 )
Total                 $           24.4       $           26.4     $   (2.0 )         (7.6 )%        12.1 %        14.6 %

Operating profit was $24.4 million in the three months ended March 31, 2012 compared with $26.4 million during the prior-year quarter.

The Paper segment's first quarter 2012 operating profit was $4.3 million, a decrease of $5.9 million from the prior-year period. The decrease was primarily due to the following factors:

• $17.7 million in higher restructuring and impairment expenses

• $1.5 million in unfavorable mix and lower selling prices

• These negative factors were partially offset by $11.0 million in favorable sales volumes and $3.9 million in royalty income.

The Reconstituted Tobacco segment's first quarter 2012 operating profit was $24.7 million, a $4.7 million increase from $20.0 million in the prior-year period. The increase was primarily due to $2.9 million in favorable impacts from higher sales volumes and $2.8 million in improved manufacturing costs.

Non-Operating Expenses

Interest expense was $0.9 million in the three months ended March 31, 2012, an increase from zero in the comparable 2011 period. The increase in interest expense is due to higher average outstanding debt balances, higher interest rates and lack of interest capitalization on construction projects in 2012. The Company capitalized $0.4 million of interest expense in the first quarter of 2011 related to the construction of the RTL facility in the Philippines and the EU LIP facility in Poland. The weighted average effective interest rates on our debt facilities were approximately 2.0% and 1.7% for the three months ended March 31, 2012 and 2011, respectively.

Other income, net was $0.3 million and $0.2 million during the three months ended March 31, 2012 and 2011, respectively, primarily due to interest income in both periods.

Income Taxes

A $9.7 million provision for income taxes in the three months ended March 31, 2012 resulted in an effective tax rate of 40.8% compared with 41.0% in the prior-year quarter. The first quarter 2012 effective tax rate was higher than the 35% statutory rate primarily due to a $2.0 million valuation allowance recorded to fully reserve its net deferred tax assets related to net operating loss carryforwards in the Philippines' paper manufacturing operations. Also, no income tax benefits have been recorded for losses incurred by the RTL Philippines facility, including restructuring expenses. During the first quarter of 2011, the effective tax rate reflected start-up expenses at the Polish operation and restructuring expenses of RTL Philippines for which no income tax benefits were recorded. Excluding the above-mentioned impacts, the Company's effective income tax rates for the three month periods ended March 31, 2012 and 2011 would have been 32.4% and 36.5%, respectively.

Income from equity affiliates was $0.5 million in the three months ended March 31, 2012 compared with $0.9 million during the prior-year quarter. These results reflected the operations of our joint venture in China to produce cigarette papers.

Discontinued Operations

Operations at our Malaucène mill were reported as discontinued operations for all periods presented. Consequently, results of the Malaucène mill have been removed from each line of the statements of income and the operating activities section of the statements of cash flow. In each case, a separate line has been added for the net results of the discontinued operation, including previously reported restructuring and impairment amounts. During the fourth quarter of 2011, a Malaucène liquidation petition resulted in a loss of control. Consequently, consolidated results for 2012 do not include that entity's results.

Net Income and Income per Share

Net income in the first quarter of 2012 was $14.6 million, or $0.90 per diluted share, compared with $16.2 million, or $0.91 per diluted share, during the prior-year period. The decrease in net income was primarily due to higher restructuring and impairment expenses which were partially offset by the benefits of increased sales of LIP cigarette paper volumes in Europe and higher reconstituted tobacco volumes.

Liquidity and Capital Resources

A major factor in our liquidity and capital resource planning is our generation of cash flow from operations, which is sensitive to changes in the sales mix, volume and pricing of our products, as well as changes in our production volumes, costs and working capital. Our liquidity is supplemented by funds available under our revolving credit facility with a syndicate of banks that is used as either operating conditions or strategic opportunities warrant. As of March 31, 2012, $83.7 million of the Company's $85.3 million of cash and cash equivalents was held by foreign subsidiaries. Movement of cash balances may have significant tax consequences. The Company considers the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested and currently plans to repatriate such earnings only when tax effective to do so. We believe that we are able to maintain a sufficient level of liquidity for our domestic operations and commitments without repatriation of the cash held by these foreign subsidiaries.

Capital spending for full year 2012 is currently projected to be approximately $35 million. Under the current $50.0 million authorization for 2012 share repurchases, the Company purchased 672,727 shares for $45.6 million as of April 27, 2012. Other cash needs for full year 2012 are currently projected to range between $30 and $40 million, including funding of the RTL joint venture in China and shareholder dividends. We plan to fund our capital projects using cash on-hand, cash generated from operations and our existing credit facilities