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 selected financial data included in Item 6. 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

The Management's Discussion and Analysis of Financial Condition and Results of Operation is designed to provide a reader of our financial statements with an understanding of our recent performance, our financial condition and our prospects. The following will be discussed and analyzed:

Summary

Recent Developments

Critical Accounting Policies and Estimates

Recent Accounting Pronouncements

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

Results of Operations

Liquidity and Capital Resources

Other Factors Affecting Liquidity and Capital Resources

Outlook

Forward-Looking Statements

Summary

In 2012, SWM reported net income of $79.8 million on total net sales of $788.1 million. Compared to the prior year, net sales decreased $12.9 million due to unfavorable impacts of currency exchange rates and the effect of prior period royalties paid in 2011, partially offset by favorable impacts of higher sales volume and an increase in average selling price which included an improved mix of products sold.

Cash provided by operations was $174.6 million in 2012, compared to $81.5 million in 2011 due to increased profitability net of non-cash impairment charges and deferred income taxes, and a favorable net change in working capital. Uses of cash during 2012 included share repurchases of $50.0 million, $27.2 million of capital spending, $21.0 million in contributions to our joint ventures in China and $14.1 million in cash dividends paid to SWM stockholders.

Return on invested capital (ROIC), adjusted to exclude the impact of restructuring related costs and significant non-cash business tax charges, was 21.2 percent in 2012, compared to 18.7 percent in 2011. This measure reflects our determination to invest in products, projects and businesses that consistently yield returns in excess of our underlying cost of capital.

Recent Developments

In the fourth quarter of 2012, the Company decided to concentrate its Asian strategy on its two joint ventures in China. As a result, the Company is closing its Philippine paper mill and selling its Indonesian paper mill. The sale of the Indonesian mill is pending final regulatory approval and is expected to close during the first half of 2013, however as of December 31, 2012 our Indonesian mill met criterion to be treated as assets held for sale and to be classified as discontinued operations. As a result, in the statements of income and in the statements of cash flow for 2012 and all prior periods presented, the results of our Indonesian mill have been included in the results of discontinued operations. In the consolidated balance sheets, the assets and liabilities of the Medan, Indonesia mill are classified as Held-for-Sale as of December 31, 2012 and therefore, except for cash and cash equivalents, assets and liabilities of the Indonesian mill are included in other current assets and accrued expenses, respectively, as of December 31, 2012. Prior year balances have not been reclassified in the consolidated balance sheets. With respect to our Philippine paper mill, run-off operations are expected to end during early 2013; therefore, while it did not meet the criterion for classification as discontinued operations as of December 31, 2012, we expect that it will likely meet the criterion in early 2013 at which time the results of the Philippine paper mill will also begin to be presented as a discontinued operation.

In the Paper segment, restructuring expenses included $6.5 million to shutdown a paper machine at the Company's Philippine mill of which $5.3 million was related to non-cash accelerated depreciation and impairment charges.

The Company has created a long-term capital allocation strategy which is focused on the following three areas:

• Reinvest capital in core businesses through a disciplined approach to meet global demand for value-adding solutions

• Return at least one third of annual free cash flow to shareholders via balanced dividends and share repurchase programs

• Retain flexibility to explore growth opportunities in current and adjacent markets with economic returns similar to or better than SWM's existing business

On February 6, 2013, the Company announced a 100% increase in the quarterly dividend effective with the dividend payable on March 21, 2013 to stockholders of record on February 28, 2013. This represents a 400% increase of the quarterly dividend compared to returns prior to our August 2012 stock split.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates that affect the amounts of revenues, expenses, assets and

liabilities reported and disclosure of contingencies. Changes in these estimates could have a significant impact on our results of operations, financial position, or cash flows. We discussed with the Audit Committee of the Board of Directors the estimates and judgments made for each of the following items and our accounting for and presentation of these items in the accompanying financial statements:

Accounting for Income Taxes

We must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred income tax assets and liabilities and any valuation allowance to be recorded against a deferred income tax asset. Our judgments, assumptions and estimates take into account our interpretation of current tax laws. Changes in tax law or our interpretation of tax laws could significantly impact the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account projections of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position, results of operations and cash flows.

We have available net operating loss carryforwards, or NOLs, and other various tax credits in the jurisdictions in which we operate, for which we have recorded deferred tax assets totaling $37.8 million and $8.7 million, respectively, as of December 31, 2012. We record and maintain income tax valuation allowances to reduce deferred tax assets to an amount we estimate will be realizable more likely than not. Our deferred tax asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards for certain entities. As a result, at December 31, 2012, we have $20.0 million of valuation allowances against certain of the deferred tax assets.

Expiration periods vary for our NOLs depending on the tax laws governing the jurisdiction where the NOL was generated. Under current tax laws, remaining NOLs in France and Brazil carry forward indefinitely, and NOLs in Spain expire in 15 years subsequent to the year generated. We have recorded a valuation allowance to fully reserve certain deferred tax assets in Brazil , since we believe that we will not generate sufficient taxable income in Brazil within an acceptable period of time given the annual utilization limitation of 30% of taxable income. We have also recorded a valuation allowance to fully reserve the net deferred tax asset balance in the Philippines as that paper mill is planned to be closed down and we do not expect to utilize those assets.

We expect sufficient future taxable income in France to fully utilize the respective French NOL carryforward deferred tax assets, and plan to utilize available tax planning strategies in France. The Company's assumptions, judgments and estimates relative to the valuation of these net deferred tax assets take into account available positive and negative evidence of realizability, including recent financial performance, the ability to realize benefits of restructuring and other recent actions, projections of the amount and category of future taxable income and tax planning strategies. Actual future operating results and the underlying amount and category of income in future periods could differ from the Company's current assumptions, judgments and estimates. Although realization is not assured, the Company believes it is more likely than not that these net deferred tax assets at December 31, 2012, will be realized. Future operating losses in Brazil and the Company's paper operations in France could result in recording additional valuation allowance in a future period which could be material to our results of operations in the period that such valuation allowance was recorded. If at a future date the Company determines that the weight of the positive evidence is not sufficient to overcome the negative evidence, additional valuation allowances against these deferred tax assets to reduce the net deferred tax asset to an amount we believe will more likely than not be realizable would be recorded in the period such determination is made.

The Company was granted certain tax incentives in Poland for investment in a special economic zone. These incentives are in the form of credits granted in 2011 that are available to offset qualified taxable income through 2020. Based on granted incentives, commitments achieved, including maintaining certain employment levels, and qualified investment through December 31, 2012, the Company has a $7.7 million deferred tax asset at December 31, 2012. We expect to be able to fully utilize these credits in 2013.

At December 31, 2012, we had unrecognized tax benefits related to income taxes of $1.8 million. We had no material unrecognized tax benefits related to income taxes at December 31, 2011. Changes in tax laws or interpretations of tax laws, as well as outcomes of current and future audits conducted by foreign and domestic tax authorities, could materially impact the amounts provided for income taxes in our consolidated financial statements.

For additional information regarding income taxes and valuation allowances, see Note 13, Income Taxes, of the Notes to Consolidated Financial Statements.

Accounting for Contingencies

We accrue an estimated loss by taking a charge to income when the likelihood that a future event, such as a legal proceeding, will result in a loss or the incurrence of a liability is probable and the amount of loss can be reasonably estimated. We disclose material contingencies if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our results of operations, financial position, or our cash flows.

For further information, please see "Litigation" in Part I, Item 3, "Legal Proceedings" and Note 16, Commitments and Contingencies, of the Notes to Consolidated Financial Statements.

Property, Plant and Equipment Valuation

Paper manufacturing, which is our primary manufacturing process, is a capital intensive process. As a result, we make substantial investments in property, plant and equipment which are recorded at cost. Net property, plant and equipment comprised 45% of our total assets as of December 31, 2012. Property, plant and equipment is depreciated on the straight-line method over the estimated useful lives of the assets. Paper machines and related equipment are not subject to substantial technological changes rendering them obsolete and are generally depreciated over estimated useful lives of 20 years. In the United States, banded cigarette paper production assets at the Spotswood Mill are generally depreciated over estimated useful lives of 5 years. When indications of impairment exist, we assess the likelihood of recovering the cost of long-lived assets based on our expectation of future profitability and undiscounted cash flow of the related asset group. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property, plant and equipment. Changes in management's estimates and plans could significantly impact our results of operations, financial position or cash flows.

As a result of excess capacity in the tobacco-related papers industry and increased purchased material and operating costs experienced in the last several years, competitive selling prices for certain of our products are not sufficient to cover our costs with a reasonable margin. Such competitive pressures have resulted in downtime of certain paper machines and, in some cases, accelerated depreciation or impairment of certain equipment. Over the past five years, we have restructured our operations to improve our competitiveness and profitability. As a result, we incurred significant charges related to asset impairments, accelerated depreciation and employee severances. Due to the closure of our mill in Malaucène, France, the activities of Malaucène have been retrospectively presented as a discontinued operation and as a result of filing for liquidation in December 2011, the financial position of Malaucène has been deconsolidated. The results of Company's Indonesian mill have been retrospectively presented as a discontinued operation due to the mill's pending sale.

In 2011, the Company revised its Asian RTL expansion plans and suspended the construction of the Philippine greenfield site. Due to this change, the carrying value of partially constructed assets is evaluated for impairment at each reporting period by assessing the recoverability of the costs based on the undiscounted cash flows of the operation, likelihood of its reactivation and alternative uses for the equipment. The net book value of the RTL Philippines property, plant and equipment was $74.6 million as of December 31, 2012. During 2012, the Company expected a portion of the equipment would be sold to its RTL joint venture in China. As a result, that portion of the assets was determined to be a separate group of assets for purposes of the impairment analysis, and a separate impairment analysis was performed based on the expected cash flows of the projected sale and estimated costs to be incurred in connection with that sale.

Based on the analysis that was performed, the expected proceeds net of the expected costs to be incurred was less than the carrying value of that equipment and an impairment loss of $3.1 million was recorded in 2012. As of December 31, 2012, that equipment is no longer expected to be sold and thus the equipment was included with the remainder of the assets as one group of assets again for purposes of the impairment analysis.

Management continues to evaluate how to operate our production facilities more effectively with reduced tobacco-related papers volumes. Further restructuring actions are possible that might require additional write-offs or accelerated depreciation of some equipment.

Recent Accounting Pronouncements

For a discussion regarding recent accounting pronouncements, see "Recent Accounting Pronouncements" included in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements.

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 infringement action filed 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 United States Patent No. 5,878,753 was dismissed without prejudice as to the remaining defendants on August 31, 2012.

A petition to re-exam United States Patent No. 6,725,867 filed by delfortgroup in 2010 is still pending. As a result of the worldwide LIP license agreement with SWM, delfortgroup has withdrawn from this proceeding. There are no other petitioners in the action.

On June 27, 2012, the EPO 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.

Results of Operations

                                                           For the Years Ended December 31,
                                                      2012                  2011              2010
                                                      ($ in millions, except per share amounts)
Net Sales                                       $       788.1         $       801.0       $    727.3
Cost of products sold                                   537.2                 562.1            532.1
Gross Profit                                            250.9                 238.9            195.2
Selling expense                                          22.4                  21.9             19.2
Research expense                                         10.0                   9.3              8.5
General expense                                          55.0                  58.8             45.1
Total nonmanufacturing expenses                          87.4                  90.0             72.8
Provision for losses on business tax credits              2.1                  15.9                -
Restructuring and impairment expense                     28.0                  14.0             11.6
Operating Profit                                        133.4                 119.0            110.8
Interest expense                                          3.4                   2.6              1.7
Other income (expense), net                               1.6                  (2.5 )            0.3
Income from Continuing Operations before Income
Taxes and Income from Equity Affiliates                 131.6                 113.9            109.4
Provision for income taxes                               51.9                  30.8             39.7
Income from equity affiliates                             4.0                   4.7              3.2
Income from Continuing Operations                        83.7                  87.8             72.9
(Loss) income from Discontinued Operations               (3.9 )                 4.8             (7.6 )
Net Income                                      $        79.8         $        92.6       $     65.3

Net Income (Loss) Per Share - Basic:
Income per share from continuing operations     $        2.67         $        2.61       $     2.01
(Loss) income per share from discontinued
operations                                              (0.13 )                0.14            (0.21 )
Net income per share - basic                    $        2.54         $        2.75       $     1.80

Net Income (Loss) Per Share - Diluted:
Income per share from continuing operations     $        2.64         $        2.59       $     1.97
(Loss) income per share from discontinued
operations                                              (0.13 )                0.14            (0.21 )
Net Income per share - diluted                  $        2.51         $        2.73       $     1.76

Discontinued Operations

The results of the closed tipping mill in Malaucène, France and the Indonesian paper mill have been classified as discontinued operations. As a result, all periods presented have been retrospectively recast to exclude the discontinued operations. During 2012, the Company entered into an agreement to sell the Indonesian mill. The sale is pending final regulatory approval. The 2012 loss from discontinued operations is primarily due to an impairment charge on the long-lived assets of the Indonesian mill based on estimated future cash flows, being the expected selling price of the business. During 2011, the Malaucène mill entered liquidation resulting in a loss of control for accounting consolidation purposes. The net deficit of Malaucène was removed from the consolidated accounts resulting in the 2011 recognition of a $6.4 million net gain. Malaucène's results of operations were included in the Company's discontinued operations through the date of the 2011 liquidation filing. The $6.1 million loss in 2010 from discontinued operations of Malaucène was the result of severance being accrued over the remaining service period of the affected employees, impairment losses on certain assets and accruals for certain site clean-up costs.

Year Ended December 31, 2012 Compared with the Year Ended December 31, 2011

Net Sales
(dollars in millions)
                                                                                             Consolidated Sales
                              2012             2011          Change      Percent Change         Volume Change
Paper                    $      554.6     $      564.1     $   (9.5 )         (1.7 )%                    (4 )%
Reconstituted Tobacco           233.5            236.9         (3.4 )         (1.4 )                      6
Total                    $      788.1     $      801.0     $  (12.9 )         (1.6 )%                     -  %

Net sales were $788.1 million in 2012 compared with $801.0 million in 2011. The decrease in net sales consisted of the following (dollars in millions):

                                           Amount     Percent
Changes in currency exchange rates        $ (55.8 )    (7.0 )%
Changes due to royalty income                (4.6 )    (0.5 )
Changes in product mix and selling prices    14.7       1.8
Changes due to sales volume                  32.8       4.1
Total                                     $ (12.9 )    (1.6 )%

• Changes in currency exchange rates decreased net sales by $55.8 million, or 7.0%, in 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.

• Royalty revenue declined by $4.6 million in 2012 primarily due to the initiation of a license agreement during 2011 for which prior-period royalties were paid.

• Favorable changes in average selling prices and mix of products sold increased net sales by $14.7 million.

• Total unit sales volumes were unchanged in 2012 versus the prior year.

? Sales volumes for the Paper segment decreased by 4%

? Sales volumes in the Reconstituted Tobacco segment increased by 6%

Paper segment net sales during 2012 of $554.6 million decreased by $9.5 million, or 1.7%, versus $564.1 million in the prior year. The decrease in net sales was primarily the result of $40.4 million in unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar and $4.6 million impact from lower royalty revenue. These negative impacts were partially offset by a $18.0 million favorable impact of higher sales volumes, $15.8 million favorable impact of average selling prices and mix of products sold and $1.8 million tax credit gain recognized upon successful legal resolution of a business tax case in Brazil.

Reconstituted Tobacco segment net sales during 2012 of $233.5 million decreased by $3.4 million, or 1.4%, compared with $236.9 million in the prior year. The decrease in net sales of the Reconstituted Tobacco segment resulted from the $16.4 million unfavorable foreign exchange impacts mostly due to changes in the value of the euro compared to the U.S. dollar which was partially offset by a $12.8 million favorable impact of higher sales volumes.

Operating Expenses
. . .