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                            Six Months Ended
                        June 30, 2012         June 30, 2011          June 30, 2012         June 30, 2011
Net sales            $ 198.8     100.0 %   $ 206.2     100.0  %   $ 400.9     100.0 %   $ 386.9     100.0  %
Gross profit            62.5      31.4        55.1      26.7        126.9      31.7       102.3      26.4
Restructuring &
impairment expense       5.3       2.7         0.7       0.2         24.0       6.0         1.7       0.4
Operating profit        35.5      17.9        31.6      15.3         59.9      14.9        58.0      15.0
Interest expense         0.9       0.5         0.7       0.3          1.8       0.4         0.7       0.2
Income from
continuing
operations              21.0      10.6        20.3       9.8         35.6       8.9        36.9       9.5
Loss from
discontinued
operations                 -         -        (0.5 )    (0.2 )          -         -        (0.9 )    (0.2 )
Net income              21.0      10.6 %      19.8       9.6  %      35.6       8.9 %      36.0       9.3  %
Diluted earnings per
share from
continuing
operations           $  1.32               $  1.17                $  2.22               $  2.10
Diluted earnings per
share                $  1.32               $  1.14                $  2.22               $  2.05
Cash provided by
operations           $  23.9               $  12.4                $  72.3               $  12.2
Capital spending     $   6.2               $  14.4                $  14.0               $  42.1

Second Quarter Highlights

Net sales were $198.8 million in the three months ended June 30, 2012, a $7.4 million decrease from $206.2 million in the prior-year quarter. The decrease was primarily due to the unfavorable $24.0 million currency impact of a declining euro compared to the U.S. dollar which was mostly offset by higher average selling prices resulting from a favorable mix of products sold.

Gross profit was $62.5 million in the three months ended June 30, 2012, a $7.4 million increase from $55.1 million in the prior-year quarter. In the second quarter 2012, gross margin improved to 31.4% from 26.7% in the prior-year quarter. The higher gross profit was primarily due to a favorable product sales mix and $3.2 million in royalty income. During the second quarter 2012, SWM incurred $5.3 million in restructuring and impairment expenses.

Cash provided by operations was $23.9 million in the second quarter 2012, compared to a $12.4 million in the prior-year quarter. The higher cash generation during 2012 was largely due to higher net income excluding non-cash impairment charges driven by sales of higher-value products and improved manufacturing efficiencies.

Year-to-Date Highlights

Compared to the prior year-to-date period, net sales increased $14.0 million due to favorable impacts of higher average selling prices resulting from an improved mix of products sold. Gross profit was $126.9 million in the six months ended June 30, 2012, an increase of $24.6 million from the prior-year period. The gross profit margin of 31.7% increased from 26.4% in the prior-year period. The higher gross profit was primarily due to increased sales of LIP products and $7.1 million in royalty revenue in 2012. Restructuring and impairment expenses were $24.0 million and $1.7 million for the six months ended June 30, 2012 and 2011, respectively. Operating profit was $59.9 million for the six months ended June 30, 2012 versus $58.0 million in the prior-year period.

Recent Developments

On August 1, 2012, the Company announced a two-for-one stock split to be distributed August 21, 2012 to shareholders of record August 13, 2012. The Company also announced its dividend will be $0.15 per share to shareholders of record August 30, 2012 to be payable September 28, 2012. The newly distributed shares from the stock split will receive the quarterly dividend payable on September 28, 2012, effectively doubling SWM's quarterly dividend payout on pre-split share holding positions.

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 was 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 No. 6,725,867 and a First Amended Complaint on June 1, 2010 which added claims of alleged infringement under United States Patent No. 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 has been stayed during the pendency of the ITC action. As part of our evaluation on whether or not to appeal the Final Determination by the ITC, discussed below, we will also evaluate whether to continue to prosecute or move to terminate the action in South Carolina.

On June 27, 2012, the European Patent Office granted the Company's applications for two LIP related patents, EP 2127545 and EP 2127544, that are divisional applications related to European Patent No. 1333729. Julius Glatz GmbH filed Notices of Opposition to the grants of these patents on June 28 and June 29, 2012. We do not expect the EPO to proceed with these oppositions prior to the end of the opposition term on March 27, 2013.

On December 17, 2010, the Company filed a complaint with the International Trade Commission, or ITC, against multiple respondents 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 infringed one or more of SWM's patents. 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 SWM's U.S. Patent No. 5,878,753 was valid but the asserted claims were not infringed by the respondents and the respondents infringed the asserted claims of SWM's U.S. Patent No. 6,725,867 but those claims were invalid. On June 5, 2012, the full ITC reviewed the initial decision and decided to terminate the investigation with a final determination of no violation by the defendants.

The effect of this determination is limited to the outcome of the trade practices at issue before the ITC and has no legal effect outside the U.S. Even within the U.S., the legal effect of the final determination is minimal. The ITC is an Article I administrative agency that adjudicates trade practices. As such, the factual and legal conclusions of the Final Determination are not binding on the Article III courts, such as the U.S. District Courts, or on the United States Patent and Trademark Office. The decision does not render the '867 patent invalid before the U.S. District Courts or before the U.S. Patent and Trademark office. Should facts and circumstances warrant, the Company could in the future institute an infringement action based on the '867 and other patents in the U.S. District Courts against infringers, including Glatz and LipTec.

Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30,

2011

Net Sales
(dollars in millions)

                              Three Months Ended                                  Consolidated
                                                                       Percent    Sales Volume
                       June 30, 2012      June 30, 2011      Change     Change       Change
Paper                 $    141.9         $         143.2    $ (1.3 )    (0.9 )%       (9 )%
Reconstituted Tobacco       56.9                    63.0      (6.1 )    (9.7 )        (2 )
Total                 $    198.8         $         206.2    $ (7.4 )    (3.6 )%       (6 )%

Net sales were $198.8 million in the three months ended June 30, 2012 compared with $206.2 million in the comparable prior-year period. The decrease in net sales consisted of the following (dollars in millions):

                                           Amount     Percent
Changes in currency exchange rates        $ (24.0 )   (11.6 )%
Changes due to sales volume                  (3.4 )    (1.6 )
Changes due to royalty income                 3.2       1.5
Changes in product mix and selling prices    16.8       8.1
Total                                     $  (7.4 )    (3.6 )%

• Changes in currency exchange rates decreased net sales by $24.0 million, or 11.6%, in the three months ended June 30, 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.

• Unit sales volumes decreased by 6% in the three months ended June 30, 2012 versus the prior-year period.

?         Sales volumes for the Paper segment decreased by 9%. Sales volume for
          traditional tobacco-related paper products declined in certain markets
          partially offset by a 19% increase in LIP paper sales volume.


?         Sales volumes in the Reconstituted Tobacco segment decreased by 2%
          primarily due to timing of orders.


•     Favorable changes in average selling prices due to improved product sales
      mix positively impacted net sales by $16.8 million.

Paper segment net sales during the three months ended June 30, 2012 of $141.9 million decreased by $1.3 million, or 0.9%, versus $143.2 million in the prior-year quarter. The decrease in net sales was primarily the result of $18.3 million in unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar and $1.8 million impact of lower volumes. These negatives were partially offset by $15.6 million favorable impact of higher average selling prices due to improved product sales mix and $3.2 million of royalty income.

Reconstituted Tobacco segment net sales during the three months ended June 30, 2012 of $56.9 million decreased by $6.1 million, or 9.7%, compared with $63.0 million in the prior-year quarter. The decrease in net sales of the Reconstituted Tobacco segment resulted from $5.7 million of unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar and $1.6 million due to lower sales volumes. These negatives were partially offset by $1.2 million in favorable product mix and higher selling prices.

Operating Expenses
(dollars in millions)
                                 Three Months Ended                                                 Percent of Net Sales
                        June 30, 2012           June 30, 2011       Change      Percent Change       2012           2011
Net Sales             $         198.8         $         206.2     $   (7.4 )         (3.6 )%         100.0 %        100.0 %

Cost of products sold           136.3                   151.1        (14.8 )         (9.8 )           68.6           73.3
Gross Profit          $          62.5         $          55.1     $    7.4           13.4  %          31.4 %         26.7 %

The increase in gross profit for the three months ended June 30, 2012 versus the prior-year quarter was primarily due to $11.1 million favorable impact of higher sales volumes of certain higher-value products. 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 $6.7 million in improved manufacturing costs and $3.2 million of royalty income from third-party license agreements. Pulp list prices were lower during the second quarter of 2012 at $900 per metric ton of northern bleached softwood kraft compared to $1,025 per metric ton during the prior-year quarter. However, changes in other inflationary costs, including other materials prices, energy and labor, contributed to an unfavorable impact of $4.6 million on second quarter 2012 results compared to the prior-year quarter.

Nonmanufacturing Expenses
(dollars in millions)
                                   Three Months Ended                                              Percent of Net Sales
                            June 30, 2012       June 30, 2011       Change     Percent Change       2012           2011
Selling expense           $           5.7     $           5.5     $    0.2            3.6  %          2.9 %          2.7 %
Research expense                      2.6                 2.4          0.2            8.3             1.3            1.2
General expense                      13.4                14.9         (1.5 )        (10.1 )           6.7            7.2
Nonmanufacturing expenses $          21.7     $          22.8     $   (1.1 )         (4.8 )%         10.9 %         11.1 %

Nonmanufacturing expenses in the three months ended June 30, 2012 decreased by $1.1 million to $21.7 million from $22.8 million in the prior-year quarter.

The Company incurred total restructuring and impairment expense of $5.3 million in the three months ended June 30, 2012.

During the second quarter, the Reconstituted Tobacco segment incurred $3.2 million of restructuring and impairment expense primarily due to an additional non-cash impairment charge for the expected costs to ship and transfer certain equipment from the RTL Philippines site to our Chinese RTL joint venture CTS.

The Paper segment second quarter restructuring expenses of $2.1 million was primarily due to $1.3 million for breakage fees to exit a third-party printing contract in the U.S.

Operating Profit
(dollars in millions)
                                Three Months Ended                                               Return on Net Sales
                        June 30, 2012         June 30, 2011       Change     Percent Change       2012         2011
Paper                 $          20.8       $          10.6     $   10.2           96.2  %        14.7 %         7.4 %
Reconstituted Tobacco            20.1                  26.3         (6.2 )        (23.6 )         35.3          41.7
Unallocated expenses             (5.4 )                (5.3 )       (0.1 )
Total                 $          35.5       $          31.6     $    3.9           12.3  %        17.9 %        15.3 %

Operating profit was $35.5 million in the three months ended June 30, 2012 compared with $31.6 million during the prior-year quarter.

The Paper segment's second quarter 2012 operating profit was $20.8 million, an increase of $10.2 million from the prior-year period. The increase was primarily due to the following factors:

• $11.2 million in favorable impacts from higher sales volumes of certain higher-value products

• $6.9 million in improved manufacturing costs

• $3.2 million in royalty income

• These positive factors were partially offset by $4.6 million in unfavorable currency impacts, $4.2 million in increased inflationary costs and $1.8 million in higher restructuring and impairment expenses

The Reconstituted Tobacco segment's second quarter 2012 operating profit was $20.1 million, a $6.2 million decrease from $26.3 million in the prior-year period. The decrease was primarily due to $2.8 million in higher restructuring and impairment expenses and $2.5 million in unfavorable currency impacts.

Non-Operating Expenses

Interest expense was $0.9 million in the three months ended June 30, 2012, an increase from $0.7 million in the comparable 2011 period. The increase in interest expense is due to higher average outstanding debt balances due to the share buyback program and lack of interest capitalization on construction projects in 2012. The Company capitalized $0.5 million of interest expense in the second 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 1.7% and 2.1% for the three months ended June 30, 2012 and 2011, respectively.

Other expense, net was $0.5 million and $0.1 million during the three months ended June 30, 2012 and 2011, respectively, primarily due to foreign exchange losses in both periods.

Income Taxes

A $13.5 million provision for income taxes in the three months ended June 30, 2012 resulted in an effective tax rate of 39.6% compared with 37.7% in the prior-year quarter. The second quarter 2012 effective tax rate was higher than the 35% statutory rate due to a $0.5 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 second 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.

Income from equity affiliates was $0.4 million in the three months ended June 30, 2012 compared with $1.1 million during the prior-year quarter. These results reflected the operations of the joint venture in China to produce cigarette papers, CTM, and the start-up operations of the Chinese reconstituted tobacco joint venture, CTS.

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 second quarter of 2012 was $21.0 million, or $1.32 per diluted share, compared with $19.8 million, or $1.14 per diluted share, during the prior-year period. The increase in net income was primarily due to the benefits of increased sales of LIP cigarette paper volumes in Europe.

Six Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011

Net Sales
(dollars in millions)

                               Six Months Ended                                   Consolidated
                                                                       Percent    Sales Volume
                       June 30, 2012      June 30, 2011      Change     Change       Change
Paper                 $         284.1    $         268.3    $ 15.8       5.9  %       (7 )%
Reconstituted Tobacco           116.8              118.6      (1.8 )    (1.5 )         5
Total                 $         400.9    $         386.9    $ 14.0       3.6  %       (2 )%

Net sales were $400.9 million in six months ended June 30, 2012 compared with $386.9 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               $ 19.3       5.0  %
Changes in product mix and selling prices   15.8       4.1
Changes due to royalty income                7.1       1.8
Changes in currency exchange rates         (28.2 )    (7.3 )
Total                                     $ 14.0       3.6  %

• Unit sales volumes decreased by 2% in the six months ended June 30, 2012 versus the prior-year period. Despite lower overall volumes, the $19.3 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 7%. Sales volume for
          traditional tobacco-related paper products declined in certain markets
          partially offset by a 31% 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 5%
          primarily due to higher demand of certain reconstituted tobacco leaf
          products.


•     Favorable changes in average selling prices due to improved sales mix
      positively impacted net sales by $15.8 million.


•     Changes in currency exchange rates decreased net sales by $28.2 million, or
      7.3%, in the six months ended June 30, 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.

Paper segment net sales during the six months ended June 30, 2012 of $284.1 million increased by $15.8 million, or 5.9%, versus $268.3 million in the prior-year period. The increase in net sales was primarily the result of $15.5 million favorable impact of higher average selling prices due to an improved mix of products sold, $14.4 million impact of increased volumes of high-value products and $7.1 million of royalty income. These positives were partially offset by $21.2 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 six months ended June 30, 2012 of $116.8 million decreased by $1.8 million, or 1.5%, compared with $118.6 million in the prior-year period. The decrease in net sales of the Reconstituted Tobacco segment resulted from $7.0 million in unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar and was mostly offset by $4.9 million favorable impact of sales volumes.

Operating Expenses
(dollars in millions)
                                Six Months Ended                                                Percent of Net Sales
. . .