10-K 1 swmform10-k12312015.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
  OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to __________________
1-13948
(Commission file number)
 
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
62-1612879
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
100 North Point Center East, Suite 600
Alpharetta, Georgia
30022
(Address of principal executive offices)
(Zip Code)
1-800-514-0186
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.10 per share
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x     No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer  o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No  x
 
The aggregate market value of the outstanding common stock, par value $0.10 per share (the "Common Stock"), of the registrant held by non-affiliates as of June 30, 2015 (the last business day of the registrant's most recently completed second fiscal quarter) was $1.2 billion, based on the last sale price for the Common Stock of $39.88 per share as reported on the New York Stock Exchange on said date. For purposes of the foregoing sentence only, all directors and executive officers are assumed to be affiliates.

There were 30,541,598 shares of Common Stock issued and outstanding as of February 26, 2016.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's definitive Proxy Statement relating to its 2016 Annual Meeting of Stockholders scheduled to be held on April 21, 2016 (the "2016 Proxy Statement") and filed pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K.





SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

TABLE OF CONTENTS
 
 
 
Page
 
 
Part I.
 
Item 1.
 
Business
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
Item 1B.
 
Unresolved Staff Comments
 
 
 
 
Item 2.
 
Properties
 
 
 
 
Item 3.
 
Legal Proceedings
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
 
Part II.
 
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
 
Item 6.
 
Selected Financial Data
 
 
 
 
Item 7.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
Item 8.
 
Financial Statements and Supplementary Data
 
 
 
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
 
 
Item 9A.
 
Controls and Procedures
 
 
 
 
Item 9B.
 
Other Information
 
 
Part III.
 
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
 
 
 
Item 11.
 
Executive Compensation
 
 
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
 
Item 13.
 
Certain Relationships and Related Transactions and Director Independence
 
 
 
 
Item 14.
 
Principal Accountant Fees and Services
 
 
Part IV.
 
Item 15.
 
Exhibits and Financial Statement Schedules
 
 
Signatures
 
 
Glossary of Terms




PART I.
Item 1. Business

Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result of a number of risks, uncertainties, and other factors. For a discussion of important factors that could cause our results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by our forward-looking statements, please refer to Part I, Item 1A “Risk Factors” and Part I, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

GENERAL

Background

Schweitzer-Mauduit International, Inc. (referred to, with its consolidated subsidiaries, as "we", "us", "our", the "Company", "SWM INTL" or "SWM" unless the context indicates otherwise) is a multinational producer of specialty papers and resin-based products headquartered in the United States of America.

The Company was incorporated in Delaware in 1995 as a wholly-owned subsidiary of Kimberly-Clark Corporation ("Kimberly-Clark"). On November 30, 1995, Kimberly-Clark transferred its tobacco-related paper and other specialty paper products businesses conducted in the United States, France and Canada to the Company and distributed all of the outstanding shares of common stock of the Company to its stockholders (the "spin-off"). As a result, the Company became an independent public company.
We conduct business in over 90 countries and operate 18 production locations worldwide, with facilities in the United States, United Kingdom, Canada, France, Luxembourg, Russia, Brazil, China and Poland. We also have a 50% equity interest in two joint ventures in China: China Tobacco Mauduit (Jiangmen) Paper Industry Ltd. ("CTM"), which produces cigarette papers, and China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. Ltd. ("CTS"), which produces reconstituted tobacco leaf products. Effective October 2015, the Company operates under two reportable segments: Engineered Papers ("EP"), which produces cigarette papers, reconstituted tobacco leaf, and wrapper and binder products for sale to cigarette and cigar manufacturers, as well as other non-tobacco specialized commercial and industrial paper products, and Advanced Materials & Structures ("AMS", formerly known as the Filtration segment), which manufactures resin-based products for filtration, surface protection, medical, and industrial applications.

Our principal executive office is located at 100 North Point Center East, Suite 600, Alpharetta, Georgia 30022-8246 and our telephone number is (800) 514-0186. Our stock is traded on the New York Stock Exchange ("NYSE") under the symbol "SWM".

Strategic Transformation - Philosophy and Approach

Through 2013, the Company largely operated as a tobacco-centric paper operation, almost exclusively serving the demands of cigarette and cigar manufacturers. In 2012, SWM's management and Board of Directors elected to pursue a strategic transformation and diversify the business by increasing sales and profit streams outside the tobacco industry, primarily through acquisitions, while carefully managing the profitable but mature tobacco operations to maximize the Company's cash flow. Management believes that, over time, this strategy will prove effective in counterbalancing the expected long-term secular declines of the tobacco industry and transform SWM into a more growth-oriented enterprise. The Company began selectively targeting acquisition candidates serving attractive end segments with high-value technologies and commensurate margins, defensible competitive positions, and strong growth prospects. In addition, management believes many acquisition targets can have unique synergy opportunities when combined with the assets and capabilities of SWM, such as a global infrastructure, specialized paper-making technologies, and a robust program for operational excellence and cost management.

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As a result of the Company's strategic actions to date, non-tobacco sales as a percentage of total Company net sales have grown from approximately 6% in 2013 to approximately 30% in 2015. Through our diversification process over the past several years, the tobacco industry has remained challenging; however the Company's cash flow has remained solid. In 2015, SWM generated approximately $120 million in free cash flow, calculated by deducting capital expenditures of approximately $24 million and capitalized software costs of approximately $1 million from operating cash provided by continuing operations of approximately $145 million, as shown on the company's consolidated statement of cash flows. Management uses free cash flow, along with liquidity available through our current credit facility, as a metric to support continued merger and acquisition activity and internal growth-oriented investments. The EP segment, which still primarily services the tobacco industry, is the Company's principal source of cash flow, enabling growth-oriented investments in the AMS segment.

Strategic Transformation - Execution

In early 2013, the Company announced a capital allocation strategy to return at least one-third of its free cash flow to investors through dividends and share buybacks, while also deploying free cash flow and balance sheet capacity to fund the diversification investments needed to improve SWM's long-term growth outlook. Pursuant to this capital allocation strategy, since the beginning of 2013, the Company has paid more than $130 million in dividends and spent $50 million on a share buyback, returning approximately 46% of free cash flow to investors in the aggregate during the three year period. The Company has also invested a total of approximately $540 million over the same period in diversification through acquisitions.

In December 2013, SWM acquired DelStar, Inc. ("DelStar"), a manufacturer of resin-based plastic nets, films and non-wovens, focused on water and other liquid filtration, medical, and industrial applications. DelStar established SWM's presence in new end-segments and added a portfolio of high-value technologies and manufacturing capabilities. Management considered DelStar an attractive independent asset which stood to benefit from SWM's global operations, capabilities in Lean Six Sigma/Operational Excellence disciplines, and its ability to fund bolt-on acquisitions and make other strategic capital investments. In December 2014, the Company executed two bolt-on transactions, acquiring assets from Pronamic Industries, Inc. ("Pronamic") and Smith & Nephew ("SNN"). The Pronamic assets added new technologies to DelStar's filtration business, enhancing our presence in air filtration, while the SNN transaction approximately doubled the DelStar medical business and expanded the Company's wound care product offerings. In October 2015, the Company acquired Argotec Intermediate Holdings LLC ("Argotec"), a manufacturer of urethane films for specialty applications in high-growth surface protection applications such as automotive paint protection, as well as glass lamination, medical and industrial products. Argotec added to SWM's growing resin-based technology capabilities and added scale to the AMS growth platform.

The acquisitions described above comprise our newly formed AMS segment. The Company believes that these businesses offer long-term growth opportunities across a diverse set of end-segments, advancing SWM's goal of diversifying its revenue stream, while maintaining consistency with many attributes of SWM. These core attributes include a focus on highly engineered specialty materials, profitability associated with premium differentiated products, strong customer relationships, and the value proposition of selling a relatively low-cost yet critical component of an end-product.

AVAILABLE INFORMATION

Our filings with the Securities and Exchange Commission ("SEC"), which filings include this Annual Report on Form 10-K, Proxy Statements, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all related amendments, are available, free of charge, on the Investor Relations section of our web site at www.swmintl.com. Information from our web site is not incorporated by reference into this Annual Report on Form 10-K. These reports are available soon after they are filed electronically with, or furnished to, the SEC. The web site allows access to historical financial information, press releases and quarterly earnings conference calls, our Code of Conduct, corporate governance guidelines, Board of Directors committee charters, as well as disclosure of any amendment to or waivers of our Code of Conduct granted to any of the principal executive officer, principal financial officer or principal accounting officer. The web site provides additional background information about us including information on our history, products and

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locations. Requests for information, requests to contact our audit committee chairman, lead non-management director or the independent directors as a group, or requests to report concerns about accounting or other issues can be made in writing and sent to the Investor Relations Department at our principal executive office address listed above.

Our quarterly earnings conference calls are typically held the morning after our quarterly earnings releases and are available through our web site via a webcast. The tentative dates for our quarterly earnings conference calls related to 2016 financial results are May 5, 2016, August 4, 2016, November 3, 2016 and February 16, 2017. These dates are subject to change. Instructions on how to listen to the webcasts and updated information on times and actual dates are available through our web site at www.swmintl.com.

We have provided a Glossary of Terms at the end of this Annual Report on Form 10-K.


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DESCRIPTION OF BUSINESS

Segment Financial Information. We operate and manage two reportable segments based on our product lines: Engineered Papers and Advanced Materials & Structures. In October 2015, the Company consolidated its former Paper and Reconstituted Tobacco segments into one reportable segment, Engineered Papers, conforming to the new organizational structure and strategic management of the former Paper and Reconstituted Tobacco segments, which largely supply the tobacco industry. The other reportable segment is Advanced Materials & Structures, which manufactures resin-based products for filtration, surface protection, medical, and industrial applications. This segment is comprised of the four businesses we acquired since 2013: DelStar, the Pronamic and SNN acquisitions, and Argotec.

Additional information regarding "Segment Performance" is included in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation. In addition, selected financial data for our segments is available in Note 19, Segment Information, of the Notes to Consolidated Financial Statements and a discussion regarding the risks associated with foreign operations is available in Part I, Item 1A, Risk Factors, Market Risk. In conjunction with the change in reportable segments, corresponding information for all prior periods presented has been restated to correspond to the presentation in the current year.

Financial information about foreign and domestic operations, contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" appearing in Part II, Item 7 herein and in Notes 11, 12, 15 and 19 ("Restructuring and Impairment Activities," "Debt," "Income Taxes" and "Segment Information," respectively) to the Consolidated Financial Statements contained in "Financial Statements and Supplementary Data" in Part II, Item 8 herein, is incorporated in this Item 1 by reference.

Engineered Papers

Products. Our EP segment produces both tobacco-related papers and non-tobacco-related papers. Our tobacco-related papers, which comprise a large majority of EP's sales, include various porous papers used to wrap parts of a cigarette (i.e, tobacco column, filter) and reconstituted tobacco leaf ("RTL"), which is often blended with virgin tobacco in a cigarette.

One of our key cigarette paper products is low ignition propensity ("LIP") cigarette paper. LIP cigarettes are designed to self-extinguish when they are not actively being smoked, thus offering a fire-safety feature. The U.S., the E.U., and several other smaller jurisdictions have mandated the use of LIP papers. The mandated design and quality standards used in the U.S. and the E.U. were largely based on SWM's technology, for which the Company maintains an extensive and active intellectual property portfolio. We operate in the LIP marketplace using our registered trademarks ALGINEX® and GLUCIGENTM. Our solutions pioneered this cigarette paper category, and we remain a leader in this cigarette paper sub-segment through either direct sales or through licensing agreements.

RTL is another key product line, accounting for a significant portion of EP's total sales and profits. Cigarette manufacturers primarily use RTL to blend with virgin tobacco to achieve certain attributes in the finished cigarettes, such as taste characteristics or reduced delivery of tar, nicotine, or other tobacco-related smoking constituents. Historically, the production of RTL has often been a cost-effective use for tobacco leaf scraps, though virgin leaf price volatility can shift that cost relationship during periods of high or low leaf prices. For the majority of our RTL products, we operate under "tolling" arrangements, through which our customers supply raw materials (tobacco scraps) for us to process into RTL and return. We also produce a similar line of reconstituted tobacco products, wrappers and binders, for use in machine-made cigars.

Our non-tobacco paper products include a mix of lightweight papers including low-volume, high-value, engineered materials such as alkaline battery separator papers, as well as high-volume commodity paper grades for printing and writing, flooring laminates, and food service packaging, which are intended to maximize machine utilization. We intend to make continued diversification investments in our EP segment to broaden its offerings. Specifically, we are exploring further end-segments that may represent attractive uses of our existing machine capacity, and/or may allow us to further monetize our paper making and reconstitution technologies.


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Our wet-laid paper making technologies can be broadly classified into two main production processes: flat-wire production and incline wire production. Generally, our machines are flat-wire, meaning a liquid slurry of short pulp fibers and water are laid onto flat-wire conveyor belts, with the water draining through the wire as the fibers (wood, flax, tobacco, etc.) bond together to form a paper sheet. Incline-wire machines allow for increased drainage, enabling the use of longer fibers which bond into a more open web, increasing the porosity. Incline wire machines are typically associated with higher-value products given this added porosity, which is important in filtration and other specialty applications that tend to justify premium pricing.

Markets and Customers. Our EP segment is heavily influenced by the global trends in cigarette consumption, particularly in the U.S., Brazil and the E.U., where we have the majority of our operations and highest share of the category's volume. Historically, mature geographic regions, such as the U.S. and the E.U. have exhibited a steady decline in smoking rates, often to the low-to-mid single digits. Smoking rates in Asia, especially China, and other developing economies have generally performed better, with some regions/countries showing consumption stability or growth. However, global cigarette consumption has been relatively flat over the past several years. We expect global cigarette consumption to be largely influenced by Chinese consumption, as China now represents nearly 45% of global cigarette consumption. The Chinese economy is closed to international tobacco companies, and is controlled by China National Tobacco Corporation ("CNTC"), which regulates and manages all Chinese cigarette producers. We participate in the Chinese tobacco marketplace through two unconsolidated joint ventures with CNTC, in which our 50/50 joint venture partners are either the monopoly itself and/or our customers. These results are not consolidated into our net sales and operating profits; instead, rather SWM's share of the joint ventures' net income is classified as equity income from affiliates on our income statement.

We supply the major, and many of the smaller, cigarette and cigar manufacturers, including international tobacco companies, regional tobacco manufacturers, and government monopolies. We sell our products directly to the major tobacco companies or their designated converters in the Americas, Europe, Asia and elsewhere. Philip Morris-USA, a subsidiary of Altria Group Inc., Japan Tobacco Inc. ("JT"), and British American Tobacco ("BAT"), are our three largest customers and, together with their respective affiliates and designated converters, accounted for 42%, 46% and 57% of our 2015, 2014 and 2013 consolidated net sales, respectively. Although the total loss of one or more of these large customers could have a material adverse effect on our results of operations, we do not believe that such a loss is likely given the significance of our share to the total worldwide supply available to meet the demand for cigarette-related fine papers.

Sales and Distribution. Our internal marketing, sales and customer service organizations sell most of our tobacco-related products manufactured in the EP segment directly to cigarette manufacturers or their designated converters. Most of our EP segment's non-tobacco related products, which in 2013 through 2015 represented approximately 10% to 12% of its net sales, are sold directly to manufacturers. In some geographic regions, we use sales agents to assist us in the sales process. We do not sell our products directly to consumers or advertise our products in consumer media. We typically deliver our products to customers by truck, rail and ocean-going vessels. As is typical in our industry, ownership of the product generally transfers to our customer upon shipment from our mills, except for certain export sales where ownership typically transfers at the foreign port or customer facility.

Competition. The specialized nature of our tobacco-related papers requires unique research and development capability and special papermaking equipment and skills to meet exacting customer specifications. These factors have limited the number of competitors capable of servicing global cigarette manufacturers.

We estimate that our share of global sales of cigarette paper is more than 30%, excluding China. As the sole domestic producer of cigarette papers in North America, we believe that we have a significant majority of the category share in that region. Our paper assets in Brazil support a similarly strong competitive position in Brazil and the rest of Latin America. Our paper mills in France and LIP printing facility in Poland sell a large amount of their products in the E.U. We estimate that we have a direct share of more than 40% of cigarette paper sales in the E.U., and a key competitor to which we have licensed our LIP technology has another approximately 40% share of cigarette paper sales in the E.U.; thus, we believe we are able to monetize to some degree more than 80% of the LIP-compliant E.U. cigarette market. Our principal competitors include delfortgroup AG (" delfort"), which licenses our LIP technology, Miquel y Costas & Miquel S.A. ("Miquel y Costas"), Julius Glatz GmbH and PT Bukit Muria Jaya ("BMJ"). We believe that the basis

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of cigarette and our non-tobacco papers competition is price, consistent quality, security of supply, and level of technical service.

Outside of China, SWM is the only non-cigarette company that produces RTL through a paper-making process. We estimate that our share of global RTL usage in 2014, excluding China, was approximately 45%. Some cigarette companies such as Philip Morris-USA, R.J. Reynolds Tobacco Company, JT and STMA (China) produce RTL primarily for their own internal use. Huabao International Holdings Ltd, a Hong Kong company, produces reconstituted tobacco in China. We believe that the basis of competition in this geographic region is primarily quality and price. Sales volumes are influenced by worldwide virgin tobacco prices and supply as well as cigarette producers' various in-house tobacco reconstitution processes and blending decisions, as lower prices of virgin tobacco or other reprocessed tobacco forms may compete against our RTL products.

Raw Materials and Energy. Wood pulp is the primary fiber used in our EP operations. Our operations consumed approximately 72,000 and 70,000 metric tons of wood pulp in 2015 and 2014, respectively, all of which we purchased. Our operations also use other cellulose fibers, the most significant of which are flax fiber and tobacco leaf by-products, which are the primary raw materials for certain cigarette papers and reconstituted tobacco products, respectively. We believe that our purchased raw materials for our EP segment are generally available from several sources.

The papermaking processes use significant amounts of energy, primarily electricity, natural gas and fuel oil to run the paper machines and other equipment used in the manufacture of pulp and paper. In France, Brazil, Poland and in the U.S., we believe that energy supply is generally reliable, although prices can fluctuate significantly based on variations in overall demand. We enter into agreements to procure a portion of our energy requirements for future periods in order to reduce the uncertainty of future energy costs.

Additional information regarding agreements for the supply of certain raw materials and energy is included in Note 18, Commitments and Contingencies, of the Notes to Consolidated Financial Statements.

Backlog and Seasonality. We have historically experienced a steady flow of orders for our products. Our facilities typically receive and ship orders within a 30-day period, except for RTL, for which orders are generally placed longer in advance of delivery. We base our manufacturing schedules and raw material purchases on our evaluation of customer forecasts and current market conditions. While U.S., Polish and Brazilian EP operations do not calculate or maintain records of order backlogs, we typically receive forecasts of future demands in advance from certain larger customers which are used to manage production and ensure a sufficient supply for their anticipated requirements. Our Spay, France facility's order backlog for RTL was approximately $111 million and $121 million on December 31, 2015 and 2014, respectively, and is typically filled within one fiscal year. Our French cigarette papers order backlog was approximately $21 million and $35 million on December 31, 2015 and 2014, respectively.

Although not the case in the fourth quarter of 2015 due to large customer inventory builds of LIP papers in Europe ahead of an approaching regulatory change, sales of our paper and reconstituted tobacco products are generally subject to seasonal fluctuations due to periodic machine downtime and typically lower order volumes in the fourth quarter. In the United States and Europe, customer shutdowns of one to two weeks in duration typically occur in July and December. In Brazil, customer orders are typically lower in December due to a January and February holiday season.

Advanced Materials & Structures

Products. We manufacture and sell a variety of highly engineered resin-based, rolled goods such as films, nets, foams and other non-wovens. These products are used in high-performance filtration, surface protection, medical, and other industrial applications. Most of our production technologies. including those used to produce resin-based plastic netting, are extrusion-based, meaning resin pellets are heated, softened, and forced through a metal die to form continuous sheets or strands. We also produce certain meltblown products, machined plastic core tubes, and resin-based rolled products. We have significant technological expertise in proprietary die construction, which our competitors often outsource, and we consider this an advantage in protecting our technology and competitive position. However, unlike the EP segment which relies primarily on patent protection for key innovation protection, AMS relies more heavily on trade secrets and manufacturing "know-how".

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We manufacture our thermoplastic polyurethane films ("TPU") to have combinations of the following attributes; UV, scratch, and water resistance, "breathability" (e.g., to allow air flow in a skin-contact medical application) and ultra-clarity. The ability to demonstrate these rare combinations make them ideally suited for demanding surface protection applications, primarily automotive paint protection and security reinforced glass, medical, and certain industrial applications such as graphics and laminated textiles. Other films, including apertured film products, are used in the wound care application sub-segment of the medical industry, such as finger bandages, wound dressings, and other hospital-setting products. Our apertured film products are also used in products for the filtration industry and niche applications in areas such as semiconductor manufacturing and food packaging.

Our thermoplastic nets are used in a variety of applications, the most prominent of which is as spacer netting in spiral wound reverse osmosis water filtration devices. We have established a strong presence in this niche application by customizing products to meet demanding customer specifications, such as thickness/weight, aperture performance, and heat and pressure resistance. Our nets are also used in a variety of industrial and life science filter applications such as fuel and hydraulic fluid filters, pharmaceutical filters, semiconductor filters, and food and beverage filters. They can also be found in a variety of packaging and protection applications.

Our non-wovens are resin fiber-based materials typically used in air and liquid filtration applications, and our foams are mainly sold as components in wound care products. In addition to rolled goods, SWM also manufactures rigid core tubing, an extruded resin product that also is primarily used in reverse osmosis water filtration devices.

Markets and Customers. The AMS segment supplies niche products mainly to customers producing finished goods for the filtration, surface protection, medical, and industrial end-segments. These products are highly engineered and often customized. In some cases, we are the sole supplier of certain products to our top customers. No customer represents more than 10% of our consolidated net sales.

Generally the industries and customers the AMS segment serves are in growth industries, which acts to counterbalance smoking attrition and its impact on our consolidated sales. Reverse osmosis water filtration ("RO filtration") has exhibited long-term growth, and we expect it to continue to do so due to current and expected global demand for drinkable water. Many countries rely on RO filtration as their primary water desalination technology to produce drinkable water, and we expect infrastructure investments in the U.S. and overseas to continue long-term. Sales of our other filtration products, particularly those used in the oil, gas, and mining sectors, have historically exhibited steady growth; however, they are subject to cyclicality and commodity price volatility and were particularly adversely impacted by significant declines in global commodity markets starting in 2015. While our products do not filter oil and gas, they are used in heavy equipment and machinery used in the oil and gas industries, often filtering fuel and other hydraulic liquids, as well as serving other functions in the exploration, processing, and transport of oil and gas.

The majority of our TPU film sales is for surface protection products used in automotive paint protection and are concentrated in the U.S. As a result, they are impacted by the U.S. auto industry. Other aspects of surface protection, such as bulletproof and security glass are heavily impacted by government and military contracts. Our medical products largely serve the wound care management sub-segment of the healthcare industry, while our industrial applications are spread across a variety of other industries, such as apparel, food manufacturing, graphics, and energy.

Sales and Distribution. AMS products are primarily sold to customers by the marketing, sales and customer service organizations of our AMS operations directly to manufacturers and in some geographic regions, we use sales agents assist us in the sales process. Similar to the EP segment, we typically deliver our products to customers by truck, rail and ocean-going vessels. As is typical in the industries in which we operate, ownership of the product generally transfers to our customer upon shipment from our manufacturing facilities, except for certain export sales where ownership typically transfers at the foreign port or customer facility. In certain instances, we produce and hold or consign products for a limited number of customers for which title does not transfer until shipment from our manufacturing facility or the products are used by the customer. In these instances, we defer recognition of revenue related to these products until the products are shipped, or the product is used, as the case may be, and ownership of the product transfers to the customer.


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Competition. Our AMS products are typically leaders in their respective categories and compete against niche products made by competitors such as Marshall Manufacturing Company, Johns Manville, a subsidiary of Berkshire Hathaway Inc., Shaoxing Naite Plastics Co. Ltd., 3M Company, Covestro AG, and Hollingsworth and Vose Company. We believe our AMS products compete primarily on product features, innovations and customer service across our filtration, surface protection, medical, and industrial end-segments. Of these segments, our industrial end-segment is generally the most price competitive due to a higher portion of commodity-type products, that we often sell in order to maximize our machine utilization.

Raw Materials and Energy. The primary raw material used in our AMS products is plastic resin, and we rely on a variety of commodity grade and specialty resins, including Polypropylene, Polyurethane, Polyethylene, Polyamide (nylon) and a selection of specialized high temperature engineering grade resins. Our TPU films are produced using specialty resins which are significantly more expensive than commodity grade resins. Our thermoplastic nets and apertured films are produced using a blend of specialty resins and commodity grade resins like polypropylene. Resin prices fluctuate significantly and can impact profitability. To partially mitigate the effects of such fluctuations, we have contractual pricing adjustment mechanisms with certain customers. Commodity grade resin prices typically correlate with crude oil prices while specialty resin prices often do not.

We have multiple sources for most of our resin needs. However, some of our resins are supplied by one or a few manufacturers. We believe that our purchased raw materials are generally available from several sources and that the loss of a single supplier would not likely have a material adverse effect on our ability to procure needed raw materials from other suppliers. Our total resin purchases in 2015 and 2014 totaled $54 million and $43 million, respectively.

Backlog and Seasonality. In the AMS segment, customer orders are generally manufactured and shipped within 30 days or, in certain instances, within three months. Sales of our products within AMS are generally not subject to seasonal fluctuations. As of December 31, 2015 and 2014, the AMS segment order backlog was approximately $44 million and $20 million, respectively.

Research and Development

We employ approximately 70 research and development employees in research and laboratory facilities in France, Luxembourg, the United Kingdom, Brazil, Poland, and the U.S. We are dedicated to developing product innovations and improvements to meet the needs of individual customers. We expensed $14.0 million in 2015, $15.7 million in 2014 and $15.3 million in 2013 on research and development. We believe that our research and product development capabilities have played an important role in establishing our reputation for high quality, superior products in both our EP and AMS segments. Within EP, our research and development has enabled us to establish and sustain leading shares in various cigarette paper products, specifically LIP paper. We also are working with customers to meet potential future demand for reduced-harm tobacco products. Within AMS, we have a history of finding innovative design solutions, including developing products that improve the performance of customers' products and manufacturing operations. We believe that our commitment to research and development, coupled with our investment in new technology and equipment, has positioned us to take advantage of growth opportunities in many places around the world.

Patents and Trademarks

As of December 31, 2015, we owned 241 patents and had 117 pending patent applications covering a variety of cigarette papers, RTL, cigar wrapper and binder and other products and processes in the U.S., Western Europe and several other countries. We believe that our patents, together with our papermaking expertise and technical sales support, have been instrumental in establishing us as the leading worldwide supplier of cigarette papers. We believe that patents have contributed to our position as the world's leading independent producer of papers used for LIP cigarettes.

Management believes that in the EP segment, our "ALGINEX®" water-based technology trademark, our "GLUCIGENTM" trademark for use in banded papers for the production of LIP cigarettes, and the "SWM" logo and trade names have been important contributors to the marketing of our products. In our AMS segment, "DELSTAR®," "NALTEX®", "DELNET®", "DELPORE®", "STRATEX®", and "CORETEC®", "ARGOTEC®" are important trade names which have high industry acceptance for marketing our products.

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Management and direction for a large portion of SWM's research and development activities are provided from our Luxembourg City, Luxembourg operation ("SWM Luxembourg"). These activities are often performed at other SWM locations under contract by SWM Luxembourg, and funded by SWM Luxembourg. SWM Luxembourg has the authority to initiate and manage research and development projects in areas such as, but not limited to, LIP, our non-tobacco products unit (Advanced Fibers and Materials) and AMS. This operation also provides global oversight and active management for much of the Company's intellectual property rights.

We have developed, individually or in conjunction with customers, technologies to address the demand for cigarette paper for LIP cigarettes in the U.S., Canada, Australia and the E.U. We have licensed to others the right to use certain of our LIP intellectual property, excluding ALGINEX® related intellectual properties.

Administrative and Court Proceedings Regarding Papers for Lower Ignition Propensity Cigarettes

In December 2009, Miquel y Costas, Société Papéteries du Léman SAS (“PdL”), and delfortgroup AG filed Notices of Opposition to the European Patent Office's ("EPO"), grant of our European Patent EP 1482815. The opponents contend that the claimed invention is not disclosed in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art and that the claims were either not novel or lacked inventive step due to prior art references (including, among others, two earlier patents of SWM cited by the Examiner prior to granting the patent).  In connection with its entrance into a worldwide LIP license agreement with SWM, delfortgroup has withdrawn its opposition and is no longer a party to these proceedings (although delfortgroup's arguments and evidence presented remain in the proceedings). On September 15, 2014, Miquel y Costas & Miquel S.A. withdrew its opposition and is no longer a party to the proceedings. On September 12, 2014, SWM amended the patent claims. On October 27, 2014, the Opposition Division of the EPO decided to maintain the patent in amended form. The EPO's written decision was issued on January 23, 2015 and was appealed by PdL and Julius Glatz GmbH (“Glatz”) intervened in the appeal. The final outcome of this dispute could remove the legal barriers preventing competitors from practicing the ALGINEX® LIP solution.  The patent remains in effect and is enforceable even while opposition appeal proceedings are pending.

On November 11, 2010, the EPO issued a Decision to Grant SWM European Patent No. 1333729.  On December 8, 2010, Glatz filed a Notice of Opposition to the grant of this patent.  In September 2011, PdL, delfortgroup, and Miquel y Costas each filed opposition papers and Glatz supplemented its previous filing. However, PdL failed to pay the opposition fee and consequently is not a party to the opposition proceedings. It subsequently refiled its opposition papers as third-party observations. In connection with its entrance into a worldwide LIP license agreement with SWM, delfortgroup has withdrawn its opposition and is no longer a party to these proceedings (though delfortgroup's arguments and evidence presented will remain in the proceedings). In its hearing on January 21, 2015, the Opposition Division of the EPO decided to revoke the patent for claim 10 allegedly containing subject-matter that goes beyond the application as originally filed. The Company believes that the EPO properly granted the patent and intends to vigorously defend the patent. Accordingly, SWM has appealed the decision. The patent remains in effect and enforceable while opposition appeal proceedings are pending.

On June 27, 2012, the EPO granted the Company's applications for two LIP-related patents, EP 2127544 and EP 2127545, that are based on divisional applications related to European Patent No. 1333729. Glatz and Miquel y Costas each filed Notices of Opposition to the grant of EP 2127544.  Glatz, Miquel y Costas and PdL each filed Notices of Opposition to the grant of EP 2127545. SWM filed its responses to the Notices of Opposition on March 7, 2014. In its hearing on February 22, 2016, the Opposition Division of the EPO decided to revoke the EP 2127545 patent for claim 1 allegedly containing subject-matter that goes beyond the application as originally filed. The Company believes that the EPO properly granted the patent and intends to vigorously defend the patent. Accordingly, SWM will appeal the decision. The patent remains in effect and enforceable while opposition appeal proceedings are pending. The Company believes that the EPO properly granted the patents, and intends to vigorously defend the patents.

On September 12, 2012, the EPO granted the Company's LIP-related patent, EP 2127543, which is based on a divisional application related to European Patent No. 1333729. PdL, Glatz and Miquel y Costas each filed Notices of Opposition, and SWM filed its responses to the Notice of Opposition on March 21, 2014. In its hearing on February 26, 2016, the Opposition Division of the EPO decided to revoke the EP 2127543 patent for claim 1 allegedly containing subject-

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matter that goes beyond the application as originally filed.  The Company believes that the EPO properly granted the patent and intends to vigorously defend the patent.  Accordingly, SWM will appeal the decision.  The patent remains in effect and enforceable while opposition appeal proceedings are pending.

On April 16, 2014, the EPO granted the Company's LIP-related patent, EP 2319333, that is based on a divisional application related to European Patent No. 1845810. Glatz filed a Notice of Opposition on January 16, 2015, and SWM filed its response to the Notice of Opposition on September 4, 2015. The Company believes that the EPO properly granted the patent and it intends to vigorously defend the patent.

In January 2015, the Company initiated patent infringement proceedings in Germany against a competitor under multiple LIP-related patents. In partial response to the infringement action, the defendant initiated a nullity action against the German part of EP 0870437, one of the four patents asserted by the Company in the lawsuit. The Company believes that the EP 0870437 patent is valid and intends to vigorously defend the patent. The cost, timing and outcome of intellectual property litigation can be unpredictable and thus no assurances can be given as to the outcome or impact on us of such litigation.

Employees

As of December 31, 2015, we had approximately 3,100 regular, full-time, active employees.

North American Operations. Hourly employees at the Spotswood, New Jersey, and Ancram, New York mills are represented by locals of the United Steel Workers Union. The three-year collective bargaining agreement with employees at our Spotswood mill is a three-year agreement which is effective through July 28, 2016. The three-year collective bargaining agreement with employees at our Ancram mill is effective through September 30, 2017. We believe employee and union relations continue to be positive at the Spotswood and Ancram mills.

The fiber operations of our Canadian subsidiary, Newberry, South Carolina facility, Argotec facility, and DelStar facilities are non-union. We believe that employee relations are positive.

French Operations. Hourly employees at our Quimperlé, Spay, and Saint-Girons, France mills are union represented. From time to time, we undertake certain restructuring activities in France and elsewhere that can impact our employee relations. For instance, in the fourth quarter of 2014, we incurred a work disruption at our Spay facility in connection with certain restructuring activities. We believe that our employee relations in these locations are generally as positive as other similarly situated French manufacturing operations under similar circumstances.

Luxembourg Operations. Employees at our Luxembourg facility are non-union. We believe that employee relations in Luxembourg are positive.

Brazilian Operations. Hourly employees at the Pirahy, Brazil mill are represented by a union. The one-year collective bargaining agreement with employees at SWM-B is effective through May 31, 2016. We believe that employee relations are generally positive and comparable to those of other similarly situated Brazilian manufacturing operations.

Polish Operations. Employees at our Strykow, Poland facility are non-union. We believe that employee relations in Poland are positive.

Chinese Operations. Employees at our Suzhou, China facility are non-union. We believe that employee relations in China are positive.

English Operations. Some hourly employees at our Gilberdyke, England facility are represented by a union. We believe that employee relations are positive.

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Environmental Matters

Capital expenditures for environmental controls to meet legal requirements and those relating to the protection of the environment at our facilities in the U.S., United Kingdom, France, Brazil, Poland, China and Canada were $2.6 million in 2015, no material amount of which was the result of environmental fines or settlements. We expect such expenditures to be $2.0 million or less in each of the next two years, of which no material amounts are expected to be the result of environmental fines or settlements. These expenditures are not expected to have a material adverse effect on our financial condition, results of operations or competitive position; however, these estimates could be modified as a result of changes in our plans, changes in legal requirements or other factors.

Working Capital

We normally maintain approximately 60 to 90 days of inventories to support our operations. Our sales terms average between 15 and 60 days for payment by our customers, dependent upon the products and market segment served. With respect to our accounts payable, we typically carry approximately 30 to 60 days outstanding, in accordance with our purchasing terms, which vary by business location. The accounts payable balance varies in relation to changes in our manufacturing operations, particularly due to changes in prices of wood pulp, resins and purchased energy and the level and timing of capital expenditures related to projects in progress.

Executive Officers of the Registrant

The names and ages of our executive officers as of February 26, 2016, together with certain biographical information, are as follows:
Name
 
Age
 
Position
Frédéric P. Villoutreix
 
51

 
Chairman of the Board and Chief Executive Officer
Allison Aden
 
54

 
Executive Vice President, Finance and Chief Financial Officer
Michel Fievez
 
58

 
Executive Vice President, Engineered Papers
Greerson McMullen
 
53

 
General Counsel and Secretary
Don Meltzer
 
61

 
Executive Vice President, Advanced Materials & Structures
Robert Cardin
 
52

 
Corporate Controller

There are no family relationships between any of the directors, or any of our executive officers. None of our officers were selected pursuant to any arrangement or understanding between the officer and any person other than the Company. Our executive officers serve at the discretion of the Board of Directors and are elected annually by the Board.

Frédéric P. Villoutreix was elected Chairman of the Board and Chief Executive Officer effective January 1, 2009. Mr. Villoutreix joined the Company on December 7, 2005, was elected Chief Operating Officer in February 2006, and served as interim President, French Operations from December 2006 to June 2007. Mr. Villoutreix joined us in December 2005 from Compagnie de Saint-Gobain, a leading French multi-national manufacturer of engineered materials and products, where he worked since 1990. From 2001 to 2005, Mr. Villoutreix held key manufacturing positions in Europe and the United States with Saint-Gobain, including General Manager, World Construction Products and Stone, Luxembourg and Vice President, Abrasives Europe and Coated Abrasives World with 33 operating locations.

Allison Aden was appointed Executive Vice President, Finance and Chief Financial Officer in November 2015. Prior to joining SWM, she served as Executive Vice President and Chief Financial Officer at Americold Logistics, LLC, a global leader in temperature-controlled warehousing and logistics in the food industry, from 2012 to 2015. Prior to that, Ms. Aden served as the Chief Financial Officer at Recall Holdings Limited, a global provider of information management solutions, from 2007 to 2012.

Michel Fievez was appointed Executive Vice President, Engineered Papers in December 2014. He previously held the title of Executive Vice President, Reconstituted Tobacco at the Company since March 2010. Prior to that, he held

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the position of President - European Operations from June 2007 to March 2010. From 2003 to May 2007, Mr. Fievez served as General Manager One Side Coated Papers and then Vice President and General Manager Packaging, Metalizing and Office and Graphic with Ahlstrom Corporation, a fiber-based materials company. From 1998 to 2003, he held key management positions, including Managing Director, with Chesapeake Display and Packaging in Europe, and from 1994 to 1998, held the position of Vice President Manufacturing and Technology with Mead Packaging Europe. Before that, he worked for 5 years as Associate and Engagement Manager with McKinsey & Company.

Greerson McMullen has served as General Counsel and Secretary since May 2013. Previously, Mr. McMullen served as the Senior Vice President, General Counsel, Government Affairs & Secretary of the ServiceMaster Company since November 2007 (holding the Government Affairs title since March 2010). The ServiceMaster Company is a residential services company.

Don Meltzer was appointed Executive Vice President, Advanced Materials & Structures in July 2015. Previously, Mr. Meltzer served as CEO of Tensar Corporation, a manufacturer of construction site development products and solutions, from October 2010 to April 2015, and as President & CEO of American Pad & Paper LLC, a manufacturer of office products, including writing pads, specialty papers, filing products and envelopes, from September 2005 to June 2010.

Robert Cardin has served as our Corporate Controller since November 2013. Previously, Mr. Cardin served as Controller for Syncreon International Group, a specialized provider of integrated logistics services to global industries, since 2011. Prior to that time he was employed by DENTSPLY International Inc., a worldwide manufacturer of dental products, as Assistant Corporate Controller from 2010 to 2011 and as Group Controller - Dental Consumables Business from 2004 to 2010. Mr. Cardin served as the Company's Interim Chief Financial Officer and Treasurer from April 2015 until Ms. Aden was hired in November 2015, at which point Mr. Cardin resumed his previous role as Corporate Controller.

Item 1A. Risk Factors

Factors That May Affect Future Results

Many risk factors both within and outside of our control could have an adverse impact on our business, financial condition, results of operations and cash flows and on the market price of our common stock. While not an exhaustive list, the following important risk factors could affect our future results, including our actual results for 2015 and thereafter and could also cause our actual results to differ materially from those expressed in any forward-looking statements we have made or may make.

We expect our business to continue to be adversely impacted by governmental actions relating to tobacco products, as well as by decreased demand for tobacco products due to declining social acceptance of smoking, new smoking technologies, and litigation in the United States and other countries.

In 2015, approximately 70% of our net sales were from products used by the tobacco industry in making cigarettes or other tobacco products. Cigarette consumption outside Asia has generally declined due to, among other things, the diminishing social acceptance of smoking, public reports with respect to the possible harmful effects of smoking, including effects of second-hand smoke, the use of other tobacco products, the development and use of new tobacco-related or substitute products or technologies, such as e-cigarettes, that do not use our products, and, particularly in the United States, to litigation and actions on the part of private parties to restrict smoking. For instance, litigation is continuing against major U.S. manufacturers of consumer tobacco products seeking damages for health problems allegedly resulting from the use of tobacco in various forms. It is not possible to predict the outcome of such litigation or the effect adverse developments in pending and future litigation may have on the tobacco industry or its demand for our products, but in the past litigation has adversely affected demand for consumer tobacco products. These factors have led, and could lead, to certain merchants deciding not to sell tobacco products (e.g., CVS drug stores in the United States). As a result, the overall demand for conventional tobacco cigarettes outside Asia has generally been declining in terms of volume of sales. These declines have had an adverse effect on demand for our products in these regions. We expect these trends to accelerate and thus to continue to reduce smoking levels and adversely affect demand for

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our products, which could have a material adverse impact on our future financial condition, results of operations and cash flows.

In recent years, governmental entities around the world, particularly in the United States, Brazil, Russia, Australia and Western Europe, have taken, or have proposed, actions that had, or are likely to have, the effect of reducing consumption of tobacco products which, in turn, reduces demand for our products. These actions, including efforts to regulate, restrict or prohibit the sale, advertisement and promotion of tobacco products and their components, to limit smoking in public places, to control or restrict additives that may be used in tobacco products and to increase taxes on such products, are intended to discourage the consumption of cigarettes and other tobacco products. For example, in the U.S., the regulatory jurisdiction of the federal Food and Drug Administration was extended in 2009 to include tobacco products, which products are now subject to product component disclosure regulations, new controls on ingredients and design changes, and additional restrictions relating to marketing and labeling. The federal Food and Drug Administration could promulgate additional regulations with respect to areas it has not to date regulated or has only lightly regulated, such as certain cigars. In Brazil, regulations limit the use of additives to cigarettes. In the E.U., the Tobacco Products Directive regulates the content, effects, marketing and labeling of tobacco products, and both revisions to the Directive and the ongoing phase-in of the Registration, Evaluation, Authorization, and Restriction of Chemical Substances regulation ("REACH") may further restrict product ingredients. Additionally, the World Health Organization is actively promoting tobacco regulation, and other countries worldwide are in the process of adopting some or all of these restrictions. It is not possible to predict the additional legislation or regulations relating to tobacco products that may be instituted, or additional countries that may adopt such legislation or regulations, or the extent to which such legislation or regulations may impact the design or formulation of our customers' products. Such legislation or regulation may adversely impact the demand for traditional cigarettes and cigars, with corresponding impacts on our sales of cigarette papers, RTL and associated items, which could have a material adverse effect on our future financial condition, results of operations and cash flows.

Cigarette consumption in Asia, particularly premium brands in China, appears to have leveled off and is no longer growing. China represents nearly 45% of the world’s cigarette consumption. If this trend toward stable consumption turns into a decline in cigarette consumption, it could have a material adverse effect on our future financial condition, results of operations and cash flows, including our CTS and CTM joint ventures.

Our technological advantages are unlikely to continue indefinitely.

We consider our intellectual property and patents to be a material asset. We have been at the forefront of developing new products and technology within our industries and have patented several of our innovations, particularly with regard to cigarette paper used to produce LIP cigarettes. This has enhanced our ability to sell products and to provide added functionality and other value to the products we sell allowing them to command higher margins. This advantage has also enabled us to license certain of our patents and know-how to, and earn royalty income from, third parties. Presently, we are seeing evidence of increasing efforts and activity by our competitors and some customers to develop and sell competitive products, particularly in the area of papers used for LIP applications and e-cigarettes, with the effect of creating pricing pressure on our LIP products. Over time, we expect our competitors to develop competitive products that are designed to avoid our intellectual property or to license our innovations. Ultimately, our patents will expire (generally before 2022) and some may be held invalid in certain jurisdictions before their expiration dates. In addition to protecting certain of our technological advantages through patenting, we also protect a significant amount of our technological advantages as trade secrets, especially with regard to our AMS segment and our RTL products. As we expand our production of LIP papers, RTL and our AMS operations to more locations and countries, the risk of the loss of proprietary trade secrets will increase, and any significant loss would result in the loss of the competitive advantages provided by such trade secrets. While we cannot predict the impact or the timing of these trends and eventualities, they likely will reduce our sales and margins from the levels that we otherwise would have achieved.

Furthermore, the extent to which LIP regulations will be adopted in additional regions is uncertain, as is the timing of such adoptions and the technical standards that would be implemented. The absence of such adoptions or the failure to implement standards consistent with those in the U.S. and Western Europe could have an adverse impact on our future financial condition, results of operations and cash flows.


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Effectively policing our domestic and international intellectual property and patent rights is costly and may not be successful.

Our portfolio of granted patents varies by country, which could have an impact on any competitive advantage provided by patents in individual countries. We rely on patent, trademark, and other intellectual property laws of the United States and other countries to protect our intellectual property rights. In order to maintain the benefits of our patents, we may need to enforce certain of our patents against infringement through judicial or administrative actions. For example, in early 2015 we initiated patent infringement proceedings in Germany against a competitor under multiple LIP-related patents. The cost, timing and outcome of intellectual property litigation can be unpredictable and thus no assurances can be given as to the outcome or impact on us of such litigation. There can be no assurances that we will be able, or that it will be economic for us, to prevent third parties from using our intellectual property or infringing our patents without our authorization, which may reduce any competitive advantage we have developed. Litigation to protect these rights is often costly and time consuming and could divert management resources with an uncertain outcome. We cannot guarantee that any United States or foreign patents, issued or pending, will provide us with any continued competitive advantage.

Effectively policing our intellectual property and patents is time-consuming and costly, and the steps taken by us may not prevent infringement of our intellectual property, patents or other proprietary rights in our products, technology and trademarks, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States.

Furthermore, we cannot guarantee that one or more of our patents will not be challenged by third parties and/or ultimately held invalid by courts or patent agencies of competent jurisdiction, which could remove the legal barriers preventing competitors from practicing our LIP technology among others. For example, in December 2009, Miquel y Costas & Miquel S.A., Société Papéteries du Léman SAS (“PdL”), and delfortgroup AG filed Notices of Opposition to the EPO's grant of our European Patent EP 1482815. The opponents contend that the claimed invention is not disclosed in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art and that the claims were either not novel or lacked inventive step due to prior art references (including, among others, two earlier patents of SWM cited by the Examiner prior to granting the patent).  In connection with its entrance into a worldwide LIP license agreement with SWM, delfortgroup has withdrawn its opposition and is no longer a party to these proceedings (though delfortgroup's arguments and evidence presented remain in the proceedings). On September 15, 2014, Miquel y Costas & Miquel S.A. withdrew its opposition and is no longer a party to the proceedings and SWM amended the patent claims. In its hearing on October 27, 2014, the Opposition Division of the EPO decided to maintain the patent in amended form. The EPO's written decision was issued on January 23, 2015 and was appealed by PdL and Julius Glatz GmbH (“Glatz”) intervened in the appeal. The final outcome of this dispute could remove the legal barriers preventing competitors from practicing the ALGINEX® LIP solution.  The patent remains in effect and is enforceable even while opposition appeal proceedings are pending.

On November 11, 2010, the EPO issued a Decision to Grant SWM European Patent No. 1333729.  On December 8, 2010, Glatz filed a Notice of Opposition to the grant of this patent.  In September 2011, PdL, delfortgroup AG, and Miquel y Costas & Miquel S.A. each filed opposition papers and Glatz supplemented its previous filing. However, PdL failed to pay the opposition fee and consequently is not a party to the opposition proceedings. It subsequently refiled its opposition papers as third-party observations. In connection with its entrance into a worldwide LIP license agreement with SWM, delfortgroup has withdrawn its opposition and is no longer a party to these proceedings (though delfortgroup's arguments and evidence presented will remain in the proceedings). In its hearing on January 21, 2015, the Opposition Division of the EPO decided to revoke the patent for claim 10 allegedly containing subject-matter that goes beyond the application as originally filed. The Company believes that the EPO properly granted the patent and intends to vigorously defend the patent. Accordingly, SWM has appealed the decision. The patent remains in effect and enforceable while opposition appeal proceedings are pending.

On June 27, 2012, the EPO granted the Company's applications for two LIP-related patents, EP 2127544 and EP 2127545, that are based on divisional applications related to European Patent No. 1333729. Glatz and Miquel y Costas & Miquel S.A. each filed Notices of Opposition to the grant of EP 2127544.  Glatz, Miquel y Costas & Miquel S.A. and PdL each filed Notices of Opposition to the grant of EP 2127545. SWM filed its responses to the Notices of

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Opposition on March 7, 2014. In its hearing on February 22, 2016, the Opposition Division of the EPO decided to revoke the EP 2127545 patent for claim 1 allegedly containing subject-matter that goes beyond the application as originally filed. The Company believes that the EPO properly granted the patent and intends to vigorously defend the patent. Accordingly, SWM will appeal the decision. The patent remains in effect and enforceable while opposition appeal proceedings are pending. The Company believes that the EPO properly granted the patents, and intends to vigorously defend the patents.

On September 12, 2012, the EPO granted the Company's LIP patent, EP 2127543, that is based on a divisional application related to European Patent No. 1333729. PdL, Glatz and Miquel y Costas & Miquel S.A. each filed Notices of Opposition, and SWM filed its responses to the Notice of Opposition on March 21, 2014. In its hearing on February 26, 2016, the Opposition Division of the EPO decided to revoke the EP 2127543 patent for claim 1 allegedly containing subject-matter that goes beyond the application as originally filed.  The Company believes that the EPO properly granted the patent and intends to vigorously defend the patent.  Accordingly, SWM will appeal the decision.  The patent remains in effect and enforceable while opposition appeal proceedings are pending.

On April 16, 2014, the EPO granted the Company's LIP related patent, EP 2319333, that is based on a divisional application related to European Patent No. 1845810. Glatz filed a Notice of Opposition on January 16, 2015, and SWM filed its response to the Notice of Opposition on September 4, 2015. The Company believes that the EPO properly granted the patent and it intends to vigorously defend the patent.

As referenced above, in January 2015, the Company initiated patent infringement proceedings in Germany against a competitor under multiple LIP-related patents. In partial response to the infringement action, the defendant initiated a nullity action against the German part of EP 0870437, one of the four patents asserted by the Company in the lawsuit. The Company believes that the EP 0870437 patent is valid and intends to vigorously defend the patent. The cost, timing and outcome of intellectual property litigation can be unpredictable and thus no assurances can be given as to the outcome or impact on us of such litigation.

We do not believe that any of our products infringe the valid intellectual property rights of third parties. However, we may be unaware of intellectual property rights of others that may cover some of our products or services or a court or other governmental body may come to a different conclusion from ours. In that event, we may be subject to significant claims for damages or disruptions to our operations.

Because of the geographic diversity of our business, we are subject to a range of international risks.

We have manufacturing facilities in seven countries and two joint ventures in China and sell products in over 90 countries, many of which are emerging and undeveloped markets. Our manufacturing operations, sales and results, depending on their location, are subject to various international business risks, including the following:

Foreign countries can impose significant import, export, excise and income tax and other regulatory restrictions on our business, including limitations on repatriation of profits and proceeds of liquidated assets. While we attempt to manage our operations and international movements of cash from and amongst our foreign subsidiaries in a tax-efficient manner, unanticipated international movement of funds due to unexpected changes in our business or changes in tax and associated regulatory schemes could result in a material adverse impact on our financial condition, results of operations and cash flows;

We are exposed to global as well as regional macroeconomic and microeconomic factors, which can affect demand and pricing for our products, including: unsettled political and economic conditions, including as they relate to Brazil, Russia and the Ukraine; expropriation; import and export tariffs; regulatory controls and restrictions; and inflationary and deflationary economies. These factors together with risks inherent in international operations, including risks associated with any non-compliance with the U.S. Foreign Corrupt Practices Act, the 2013 Brazilian Clean Companies Act, the U.K. Bribery Act of 2010, the 2013 Russian Law on Preventing Corruption and other non-U.S. anti-bribery law compliance, could adversely affect our financial condition, results of operations and cash flows;
    

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We participate in two joint ventures and have one manufacturing facility in China. One joint venture sells our products primarily to Chinese tobacco companies. The second joint venture has built a new reconstituted tobacco mill in China, which began operations in September 2014. Operations in China entail a number of risks including international and domestic political risks, the need to obtain operating and other permits from the government, adverse changes in the policies or in our relations with government-owned or run customers and any ability to operate within an evolving legal and economic system. There are also risks inherent with 50% joint ventures, such as a lack of an ability to control, and visibility with respect to, operations, customer relations and compliance practice, among others. Our operations are located in many countries around the World and operate, to a degree, in a decentralized manner. There are inherent control and fraud risks in such a structure; and

Changes or increases in international trade sanctions or quotas may restrict or prohibit us from transacting business with established customers or securing new ones, including as to Russia and the Ukraine.

Changes in the laws and regulations described above, adverse interpretations or applications of such laws and regulations, and the outcome of various court and regulatory proceedings, including in Europe and Brazil, could adversely impact the Company's business in a variety of ways, including increasing expenses, increasing liabilities, decreasing sales, limiting its ability to repatriate funds and generally limiting its ability to conduct business, all of which could adversely affect our financial condition, results of operations and cash flows.

Fluctuations in foreign currency exchange rates could adversely impact our financial condition, results of operations and cash flows.
A significant portion of our revenues are generated from operations outside the United States. In addition, we maintain significant operations and acquire or manufacture many of our products outside the United States. The functional currency of our international subsidiaries is generally the local currency in which each subsidiary operates. In particular, a large portion of our commercial business is denominated in euros. Our consolidated financial statements are presented in U.S. dollars. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. As a result, our future revenues, costs, results of operations and earnings could be significantly affected by changes in foreign currency exchange rates, especially the euro to U.S. dollar exchange rate.
In addition, some of our sale and purchase transactions are denominated in a currency other than the local currency of our operations. As a result, changes in exchange rates between the currencies in which the transaction is denominated versus the local currency of our operation into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenue or cost related to such transaction and thus have an effect on our operating profit. Our Brazilian and Polish operations are more fully exposed to currency transaction risk, especially as a result of U.S. dollar sales in Brazil and euro denominated sales in Poland We also hold a significant amount of our cash balances in euros, thus any weakening of the euro versus the U.S. Dollar would reduce the amount of U.S. Dollars for which such balances could be exchanged.
Changes in foreign currency exchange rates also impact the amount reported in other income (expense), net. For instance, when a non-local currency receivable or payable is not settled in the period in which it is incurred, we are required to record a gain or loss, as applicable, to reflect the impact of any change in the exchange rate as of the end of the period. We also have to reflect the translation rate impact on the carrying value of our foreign assets and liabilities as of the end of each period, which is recorded as Unrealized Translation Adjustment in Other Comprehensive Income.

We utilize a variety of practices to manage this risk, including operating and financing activities and, where considered appropriate, derivative instruments. All derivative instruments we use are either exchange traded or entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. Counterparty risk cannot be eliminated and there can be no assurance that our efforts will be successful. We generally hedge foreign currency transactions risk primarily through the use of derivative instruments, including forward and swap contracts and, to a lesser extent, option contracts. The use of derivative instruments is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. If our future revenues,

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costs and results of operations are significantly affected by economic conditions abroad and/or we are unable to effectively hedge these risks, they could materially adversely affect our financial condition, results of operations and cash flows.


We face competition from several established competitors and, in our RTL business from tobacco leaf; We have limited market transparency.

Our four largest competitors for our EP business are delfortgroup AG ("Delfort"), Julius Glatz GmbH ("Glatz"), Miquel y Costas & Miquel S.A. ("Miquel y Costas") and PT BUKIT Muria Jaya ("BMJ"). All four primarily operate from modern and cost-effective mills in Western Europe and Asia and are capable and long-standing suppliers to the tobacco industry. Further, three such competitors, Delfort, Glatz and BMJ, are privately held and the third, Miquel y Costas, is a closely held public company. Thus, their financial results and other business developments and strategies are not disclosed to the same extent as ours, which provides them some advantage in dealing with customers. Given the concentration of most of our competitors in Western Europe, which has seen declining demand for tobacco products and has labor laws that make reducing capacity expensive and slow, excess capacity exists and therefore price competition is acute. We believe that all four competitors have good relationships with the multinational cigarette companies, as does the Company. The multinational cigarette companies have been known to use these close relationships to encourage the development of enhanced competition through supporting competitive products and facilities, especially when confronted with new, high-value technologies such as porous plug wrap in the past and LIP today. We believe our Engineered Paper products compete primarily on product features, price, innovations and customer service. Due to many of the factors described above, we have a limited ability to predict trends in the industry and there may be a time lag before we become aware of developing trends in the industry.

Our AMS segment products compete to some degree against niche products made by Marshall Manufacturing Company, Johns Manville, a subsidiary of Berkshire Hathaway Inc., Shaoxing Naite Plastics Co. Ltd., 3M Company, Covestro AG, and Hollingsworth and Vose Company. We believe our AMS products compete primarily on product features, innovations and customer service. Some of these competitors are larger than we are and have more resources, thus the actions of these competitors could have an impact on the results of our AMS segment operations.

As a result of the foregoing, the Company faces significant selling price, sales volume and new product risks from its competitors, especially during periods (often annually) in which the Company's contracts with its major customers are subject to renewal or renegotiation.

Currently, fine papers used to produce cigarettes are only exported on a limited basis from available capacity in China and other Asian locations to western multinational cigarette companies due to government taxes and tariffs, which limit price competitiveness, as well as due to customer preferences. Should conditions change in this regard, capacity that currently is operating in China and elsewhere in Asia would present a risk to our competitive position outside Asia and place further pressure on our legacy paper production platforms. Similarly, we are starting to see increased competition for some of our AMS products from companies in China, which, we believe, may have lower operating costs than us, resulting in a potential price advantage for such companies.

In the RTL end-market segment, demand is a function, among other things, of smoke delivery regulations, the cigarette manufacturer's desire for a uniform and consistent product, the taste profile sought by cigarette manufacturers and the cost of recycling the tobacco by-product scraps relative to the cost of virgin tobacco products. Thus, our RTL business is also subject to competitive risk from lower cost virgin tobacco leaf or other, cheaper, cigarette fillers. These factors have resulted, and are likely to continue to result, in materially lower sales volumes for our RTL business, resulting in downtime of certain production machines and, in some cases, accelerated depreciation or impairment charges for certain equipment as well as employee severance expenses associated with downsizing or restructuring activities.


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Further, as a result of excess capacity in the tobacco-related papers industry and increased operating costs, competitive levels of selling prices for certain of the Company's products are not sufficient to cover those costs with a margin that the Company considers reasonable. Such competitive pressures have resulted, and could result in the future, in downtime of certain paper production machines and, in some cases, accelerated depreciation or impairment charges for certain equipment as well as employee severance expenses associated with downsizing or restructuring activities.

We are dependent upon a small number of customers for a significant portion of our sales; the loss of one or more of these customers, or changes in their cigarette blending approaches, could have a material adverse effect on our business.

Three customers accounted for over 42% of our net sales in 2015. The loss of one or more of these customers, or a significant reduction in their purchases, particularly those that impact our sales of LIP papers or reconstituted tobacco, could have a material adverse effect on our financial condition, results of operations and cash flows. The enhanced capabilities provided by RTL in the area of product design and regulatory compliance are important to our customers. However, future RTL results could be adversely affected by fluctuations in customer inventories, changes in the cigarette tobacco blending approaches by our customers, changes in regulations and tariffs and the price of virgin tobacco leaf.

In addition, significant consolidation has occurred among our tobacco customers, thereby increasing our dependence upon a fewer number of tobacco industry customers and increasing the negotiating leverage of those customers that remain. If any of our customers were to change suppliers, in-source production of reconstituted tobacco or cigarette papers (including those used to produce LIP cigarettes), institute significant cost-cutting measures or experience financial difficulty, then these customers may substantially reduce their purchases from us, which could adversely impact our financial condition, results of operations and cash flows. In addition, adverse results in the negotiation of any of our significant customer contracts, the terms of which are typically negotiated every one to three years, could significantly impact our financial condition, results of operations and cash flows.

Our internal and external expansion plans and asset dispositions entail different and additional risks relative to the rest of our business.

From time to time, we consider acquisitions either within the tobacco industry or outside the industry in connection with our diversification initiatives, such as our acquisitions of DelStar Technologies, Inc. and Argotec LLC. This acquisition activity could involve confidential negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. It is possible that an acquisition could adversely impact our results, credit ratings or the outlook of our business, due to, among other things, integration and employee retention challenges, contrasting company cultures and different information technology and reporting systems. Also, acquisition opportunities are limited and present risks of failing to achieve strategic objectives, smooth integrations or anticipated synergies or returns. There can be no assurance that we will be able to acquire attractive businesses on favorable terms, that we will realize the anticipated benefits or profits through acquisitions or that acquisitions will be accretive to our earnings. Changes in our portfolio of businesses, assets and products, whether through acquisition (such as our acquisitions of DelStar and Argotec), disposition or internal growth, present additional risks, including causing us to incur unknown or new types of liabilities, subjecting us to new regulatory frameworks and new market risks, and acquiring operations in new geographic regions with challenging labor, regulatory and tax regimes. The potential future expansion of our AMS business unit or other operations could cause these operations to face additional competition from larger and more established competitors than is currently the case.

Our ability to dispose of idled assets and the value that may be obtained relative to their book value can result in significant impairment charges. Some of these risks manifested themselves in early 2011 when we announced suspension of construction of a wholly-owned reconstituted tobacco mill in the Philippines and could be encountered in other forms to the extent that we construct new facilities or enter into new joint ventures. Building a new mill or other facility or relocating, rebuilding or otherwise modifying existing production machinery is a major undertaking and entails a number of risks, including the possibility that the contractors and sub-contractors who are expected to build the facility or rebuild the machine and supply the necessary equipment do not perform as expected, the possibility of cost overruns and delays, or that design defects or omissions cause the facility or machine to perform at less than projected efficiency

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or at less than projected capacity. In addition, commencement of production at a new site or at a rebuilt or relocated machine is time consuming and requires testing and acceptance by customers and potentially by regulators, of the facility and the products that are produced. Also, while we anticipate sufficient demand for the facility's or machine's output, there can be no assurances that the expected demand will materialize. For more information on our expansion plans, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation" of this report.

We also expect to continue to expend resources to diversify and expand our product portfolio, including with respect to our LeafLab vegetable reconstitution incubator at our Spay facility. Research and development and product diversification have inherent risks, including technical success, market acceptance, new regulations and potential liabilities. We cannot guarantee that such efforts will succeed, that we will not incur new or different liabilities or that we will achieve a satisfactory return on such expenditures.

We may not successfully integrate acquisitions or integrate other SWM operations into AMS and we may be unable to achieve anticipated cost savings or other synergies.

The integration of the operations of acquired companies involves a number of risks and presents financial, managerial, reporting, legal and operational challenges. We may have difficulty, and may incur unanticipated expenses related to, integrating information systems, financial reporting activities, employee retention and integrating and retaining management and personnel from acquired companies. Additionally with respect to the acquisitions of DelStar, the two associated acquisitions we made in December 2014 and of Argotec, we may not be able to achieve anticipated cost savings or commercial or growth synergies, for a number of reasons, including contractual constraints and obligations or an inability to take advantage of expected commercial opportunities, inability to achieve increased operating efficiencies or commercial expansion of key technologies. In the second half of 2015, we formed our AMS business unit comprised of these operations and certain other SWM resources. The future success of AMS depends, in part, on our ability to attract additional management, retain key employees, integrate new personnel, operating and reporting systems as well as execute AMS’ growth strategy. Failure to successfully integrate acquired companies or organize AMS may have an adverse effect on our business, financial condition, results of operations, and cash flows.

Our restructuring activities are time-consuming and expensive and could significantly disrupt our business.
We have initiated significant restructuring activities in recent years, including restructurings in 2014 and 2015 in France and the United States, during 2014 in Brazil and during 2012 in the Philippines, that have become part of an overall effort to improve an imbalance between demand for our products and our production capacity as well as improve our profitability and the quality of our products. We expect to continue these restructuring efforts from time to time. Restructuring of our existing operations, or as a result of acquisitions, involves issues that are complex, time-consuming and expensive and could significantly disrupt our business. The challenges involved in executing the actions that are part of our ongoing and, potentially future, restructuring plans include:

demonstrating to customers that the restructuring activities will not result in adverse changes in service standards or business focus;

consolidating administrative infrastructure and manufacturing operations while maintaining adequate controls throughout the execution of the restructuring;

preserving distribution, sales and other important relationships and resolving potential conflicts that may arise;

estimating, managing and minimizing the cost of the restructuring activities;

minimizing the diversion of management attention from ongoing business activities;

maintaining employee morale, retaining key employees, maintaining reasonable collective bargaining agreements and avoiding strikes, work stoppages or other forms of labor unrest while implementing restructuring programs that often include reductions in the workforce;

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securing government approval of such plans, where necessary, and managing the litigation and associated liabilities that often are associated with restructuring actions;

incurring costs associated with delays in restructuring activities caused by labor negotiations and/or governmental approvals;

coordinating and combining operations, which may be subject to additional constraints imposed by collective bargaining agreements and local laws and regulations; and

achieving the anticipated levels of net cost savings and efficiency as a result of the restructuring activities.

If we do not achieve future and continued expected benefits as a result of our legal entity realignment, the ability to achieve our financial guidance for operating results and our financial condition, results of operations and cash-flow could be adversely affected.

In 2014, we re-examined and re-aligned certain internal business operations and our legal entity structure in order to improve our cash-flows, have easier access to our foreign cash, centralize, enhance the management of our intellectual property and streamline certain internal business activities. This has resulted in a reduction of our overall effective tax rate, among other things. Steps to accomplish these objectives have been taken and additional steps may be taken later as we continue to grow certain of our operations, repatriate our foreign cash, diversify our business and continue our business analyses. We anticipate that there could be further realignment activities in the future.

Realignments can present significant potential risks of events occurring that could delay, halt or adversely affect the success of a project, including delays encountered in finalizing the scope of, and implementing, the realignment, the failure to achieve targeted benefits or savings, the failure to follow appropriate regulatory requirements or internal processes and procedures and a potential decrease in employee morale. Further, there can be no assurance that the taxing authorities of the jurisdictions in which we operate, or to which we are otherwise deemed to have sufficient tax activity, will not challenge our interpretation of tax laws and regulations or the tax benefits that we expect to realize as a result of the realignment. Any such challenges (including our response thereto) can be time consuming or expensive with potentially uncertain outcomes, including as to additional interest, penalties or increase in back taxes that could be payable by us. In addition, changes to U.S. or non-U.S. tax laws and regulations may adversely impact the anticipated benefits of our legal entity structure and any potential future realignments. Any future impact to our effective tax rate will also depend on our ability to operate our business in a manner consistent with the regulatory requirements for such a realignment including applicable taxing provisions, as well as us realizing our anticipated profits as well as the countries in which such profits are realized. Further, we have incurred certain costs in connection with the realignment and we may incur additional costs, including ones that are not currently expected to be incurred. There also can be significant costs and complexities around meeting the necessary tax accounting rules as required by our realignment structure and regulations applicable to us and it is possible that the authorities might disagree with our accounting treatment or that there may be a disagreement or dispute regarding our calculations. It is also possible that the authorities might change, either prospectively or retrospectively, certain complex tax rulings that would have potentially significant impacts to our financial results. Additionally, due to the complex nature of some of the accounting and taxation calculations, the Company may incur significant costs in defending its interpretation of positions in regards to certain tax legislation, rulings and inquiries.

To the extent these risks or circumstances occur, we may fail to achieve the future financial and business benefits that we anticipate as a result of the realignments, our tax rate may increase and our future operating results, financial condition and cash flows may be negatively impacted. Thus, there can also be no assurance that we will realize the expected future benefits of the restructurings.





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Our financial performance can be significantly impacted by the cost and availability of raw materials and energy and we may have limited ability to pass through increases in costs to our customers.

Raw materials are a significant component of the cost of the products that we manufacture. The cost of wood pulp, which is the largest component of the raw materials that we use, and some resins used by our AMS segment are highly cyclical and can be more volatile than general consumer or producer inflationary changes in the general economy. For instance, during the period from January 2013 through December 2015, the U.S. list price of northern bleached softwood kraft pulp ("NBSK") a representative pulp grade that we purchase, ranged from a low of $890 per metric ton in January 2013 to a high of $1,030 per metric ton in March 2014. Also, over the last five years, the cost of polypropylene has fluctuated from 66 cents per pound to 117 cents per pound. As we periodically enter into agreements with customers under which we agree to supply products at fixed prices, unanticipated increases in the costs of raw materials, or the lack of availability of such raw materials (due to force majeure or other reasons), can significantly impact our financial performance. Even where we do not have fixed-price agreements, we generally cannot pass through increases in raw material costs in a timely manner and in many instances are not able to pass through the entire increase to our customers. Further, some of the resins we use in our AMS segment are only available from a single supplier, or a limited number of suppliers. Consequently, such supplier(s) can control the availability and thus the cost of the resins we use, notwithstanding any changes in the cost of oil. It can be time consuming and costly, and occasionally impractical, to find replacement resins where such suppliers limit the availability or increase the cost of resins we use.

Paper manufacturing is energy-intensive. In France, Poland and in the United States, availability of energy generally is reliable, although prices can fluctuate significantly based on variations in overall demand. Western Europe is becoming significantly dependent on energy supplies from the Commonwealth of Independent States, which in the past has demonstrated a willingness to restrict or cut off supplies of energy to certain customers. The volume of oil or gas flowing through pipeline systems that ultimately connect to Western Europe also has been cut off or restricted in the past, and such actions can adversely impact the supply of energy to Western Europe and, consequently, the cost and availability of electricity to our European operations. In Brazil, because production of electricity is heavily reliant upon hydroelectric plants, availability of electricity can be, and has been in the past, affected by rain variations. Electricity in Brazil is also heavily taxed. Due to the competitive pricing for most of our products, we typically are unable to fully pass through higher energy costs to our customers. Periodically, when we believe it is advantageous to do so, we enter into agreements to procure a portion of our energy for future periods in order to reduce the uncertainty of future energy costs. However, in recent years this has only marginally slowed the increase in energy costs due to the volatile changes in energy prices we have experienced.

We are dependent upon the availability of credit, and changes in interest rates can impact our business.

We supplement operating cash flow with bank borrowings under a secured credit agreement with a syndicate of banks, which will mature in October 2020 and October 2022. To date, we have been able to access credit when needed and on commercially reasonable terms. However, deterioration of credit markets, including an economic crisis in the U.S. or elsewhere, whether or not caused by the U.S. or European debt ceiling, deficits and budget issues, could have an adverse impact on our ability to negotiate new credit facilities or access or renew our existing one. Constraints on the availability of credit, or the unavailability of credit at reasonable interest rates, would negatively impact our business, including potentially impairing our ability to declare dividends, conduct share buy-backs and make acquisitions.

Our secured credit facility contains certain financial covenants. In the event of material unforeseen events that impact our financial performance, particularly during a time when we have material amounts of debt, a situation could arise where we are unable to fully draw from our existing credit facility notwithstanding that there is otherwise available capacity.

Our credit facilities are secured by substantially all of the personal property of the Company and its domestic subsidiaries. In the event of a default on these agreements, substantially all of the assets of the Company could be subject to foreclosure or liquidation by the secured creditors.

We have a combination of variable and fixed-rate debt consisting of short-term and long-term instruments. We selectively hedge our exposure to interest rate increases on our variable rate long-term debt when we believe that it is

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practical to do so. We have utilized various forms of interest rate hedge agreements, including interest rate swap agreements and forward rate agreements. There are inherent risks associated with interest rate hedges, including those associated with the movement of interest rates, counterparty risk and unexpected need to refinance debt, thus there can be no certainty that our hedging activities will be successful or fully protect us from interest rate exposure.

A failure of, or a security breach in, a key information technology system or process or other unusual events could compromise our information and expose us to liability, which could adversely affect our business; IT project delays and overruns are possible.

We rely extensively on information technology systems, some of which are managed by third-party service providers, to analyze, process and manage transactions and sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees. The secure processing and maintenance of this information is critical to our operations and business strategy and we rely heavily on the integrity of this data in managing our business. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or be breached due to employee or third party error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, regulatory penalties, including the loss of EU Safe Harbor certification, and disrupt our operations. There are further risks associated with the information systems of companies we acquire, both in terms of systems compatibility, level of security and functionality. It may cost us significant money and resources to address these risks and we may fail to address them successfully, adversely impacting our financial condition, results of operations and cash flows.

From time to time, we undertake significant information technology systems projects, including enterprise resource planning updates, modifications and roll-outs. These projects are subject to cost overruns and delays. Not only could these cost overruns and delays impact our financial statements but a delay in the completion of a needed IT project could adversely impact our ability to run our business and make fully informed decisions.

We rely on a limited number of key employees, have had significant personnel turnover and have had difficulty in attracting and hiring qualified new personnel in some areas of our business.

The loss of any of our key employees, including our CEO and his direct reports, due to retirement, difference in culture with acquired businesses, the demands of our business, our tobacco-related operations or otherwise could adversely affect our business and thus our financial condition, results of operations and cash flows. Because a large part of our business is tied to the tobacco industry, we may also experience difficulty in retaining and hiring qualified executives and other personnel at our AMS segment, at corporate and/or in EP. This may be caused by the health and social issues associated with the tobacco industry. We not only compete for talent with consumer products and other companies that enjoy greater social acceptance but also with larger, more established companies within the tobacco industry.

As we diversify through acquisitions outside our tobacco-related operations, we run the risk of turnover of key personnel within the businesses we acquire as well as difficulty in finding and attracting first class talent in industry segments that are new to us. This could slow the growth of these businesses and impede our ability to find and complete synergistic acquisitions.
Since early 2015, our former CFO retired and our former Chief Operation Officer resigned and we have also experienced some personnel departures within the businesses we have acquired and elsewhere. The loss of services of key employees, including in our AMS business, or our inability to attract, hire and retain personnel with requisite skills could also restrict our ability to develop new products, enhance existing products in a timely manner, sell products or manage our business effectively. These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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Our business is subject to seasonal or cyclical market and industry fluctuations which may result in reduced net sales and operating profits during certain periods.

Sales of our EP products in the United States, Europe and Brazil are subject to seasonal fluctuations. In the United States and Europe, customer shutdowns typically occur in July and December and historically have resulted in reduced net sales and operating profit during those two months. Additionally, our facilities occasionally shut down equipment to perform additional maintenance during these months or as a result of slow demand, resulting in higher product costs, higher maintenance expenses and reduced operating profit. In Brazil, customer orders are typically lower in December due to a holiday season during much of January and February. The oil & gas, mining and automotive industries are important to sales in our AMS segment and these and other industries tend to be cyclical, which could adversely impact our business, financial condition, results of operations and cash flows during the duration of their down cycles.

Our business depends upon good relations with our employees; work stoppages, slowdowns or legal action by our unionized employees may have a material adverse effect on our business, financial condition, results of operations and cash flows.
We employ approximately 3,100 employees, including manufacturing employees represented by unions. Although we believe that employee and union relations are generally positive, there is no assurance that this will continue in the future. We may experience difficulties in maintaining appropriate relations with unions and employees in certain locations. We had a business interruption in one of our mills in late 2014 due to labor unrest. Problems or changes affecting employees in certain locations may affect relations with our employees at other locations. The risk of labor disputes, work stoppages or other disruptions in production could adversely affect us, especially in conjunction with potential restructuring activities. If we cannot successfully negotiate or renegotiate collective bargaining agreements, or if negotiations take an excessive amount of time, there may be a heightened risk of work stoppages and we may be unable to achieve planned operational efficiencies. Work stoppages may be caused by the inability of national unions and the governments of countries in which the Company operates from reaching agreement, and are outside the control of the Company. Any work stoppage or failure to reach agreements with our unions could have a material adverse effect on our customer relations, our productivity, the profitability of a manufacturing facility, our ability to develop new products and on our operations as a whole, resulting in an adverse impact on our business, financial condition, results of operations and cash flows.

Our business is subject to various environmental laws, regulations and related litigation that could impose substantial costs or other liabilities on us.

Our facilities are subject to significant federal, state, local and foreign environmental protection laws with respect to air, water and emissions as well as the disposal of solid waste. We believe that we are operating in substantial compliance with these laws and regularly incur capital and operating expenditures in order to achieve future compliance. However, these laws may change, which could require changes in our practices, additional capital expenditures or loss of carbon credits, and we may discover aspects of our business that are not in compliance. Violation of these laws can result in the imposition of significant fines and remediation costs. In France, we presently have sufficient authorized capacity for our emissions of carbon dioxide. However, this authorization must be renewed every five years and was last renewed in 2013. We cannot predict whether we will have sufficient authorized capacity to conduct our operations in France as presently conducted or to do so without having to make substantial capital expenditures in future years. There also is the possibility of further regulation of carbon dioxide emissions in the U.S. It is not presently possible to assess what, if any, impact such regulations might have on our domestic U.S. operations.

We are a member of a potentially responsible party group ("Global PRP Group") that entered into a settlement with the State of New Jersey in 1993 concerning the remediation of a landfill site in Middlesex County, New Jersey. The landfill remediation has been completed. We have established a reserve of approximately $0.4 million that we believe is adequate to cover our ongoing liability, but we remain exposed to post-closure operating costs over an extended period of years that cannot be fully known or estimated at this time.


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Although we are not aware of any environmental conditions at any of our facilities that could have a material adverse effect on our financial condition, results of operations and cash flows, we own facilities in France, the U.S. and elsewhere that have been operated over the course of many decades. We may face higher disposal and clean-up costs to replace equipment or facilities containing materials that were compliant when installed, but are now considered contaminants. Additionally, as we sell closed or other facilities, we may be required to perform additional environmental evaluations that could identify items that might require remediation or other action, the nature, extent and cost of which are not presently known. We may also incur environmental liabilities in connection with assets or businesses we may purchase in the future.

Increases in costs of pension benefits may reduce our profitability.
Our results of operations may be negatively affected by expenses we record for our defined benefit pension plans. Generally accepted accounting principles in the United States, ("GAAP"), require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets, longevity of our current and former employees and other economic conditions, which may change based on changes in key economic indicators and mortality tables. We are required to make an annual measurement of plan assets and liabilities, which may result in increased funding obligations or negative changes in our stockholder equity. At the end of 2015, the combined projected benefit obligation of our U.S. and French pension and other postretirement healthcare plans was underfunded by $32.2 million. For a discussion regarding our pension obligations, see Note 16, Postretirement and Other Benefits of the Notes to Consolidated Financial Statements in Part II, Item 8 and "Other Factors Affecting Liquidity and Capital Resources" in Part II, Item 7. Although expense and pension funding contributions are not directly related, key economic factors that affect expense would also likely affect the amount of cash we would contribute to pension plans as required under the Employee Retirement Income Security Act ("ERISA") for U.S. plans. Failure to achieve expected returns on plan assets driven by various factors, which could include a continued environment of low interest rates or sustained market volatility, could also result in an increase to the amount of cash we would be required to contribute to pension plans.

We are subject to various legal actions and other claims.

We regularly are involved in legal actions and other claims arising in the ordinary course of business and otherwise. We are also subject to many laws and regulations around the world. Despite our efforts, we cannot guarantee that we are in compliance with every such law or regulation. Because of the complexity of Brazilian tax laws and court systems, legal actions are a particular risk that affect our Brazilian operations.  Although we believe that our positions in pending disputes about state and federal taxes are correct and will ultimately be upheld by Brazilian courts, the outcome of legal proceedings is difficult to predict. An adverse result in one or more of these tax disputes could have a material adverse impact on our financial condition, results of operations and cash flows. We are also subject to other litigation in Brazil, including labor and workplace safety claims. Although we do not believe that any of the currently pending actions or claims against us will have a material adverse impact on our financial condition, results of operations and cash flows, we cannot provide any assurances in this regard. Information concerning some of these actions that currently are pending is contained in Note 18, Commitments and Contingencies, of the Notes to Consolidated Financial Statements and in Part I, Item 3, “Legal Proceedings” of this report. We also cannot give any assurances as to any litigation that might be filed against us in the future, including any claims relating to the alleged harmful effect of tobacco use on human health.

Significant impairment charges could result from our evaluation of the Philippines RTL manufacturing site.

The Company suspended construction of its Philippines RTL manufacturing site during 2011. During 2015, as a result of management's intent and ability to dispose of these assets, the amounts were reclassified from property, plant and equipment to assets held for sale in the Company's balance sheet. The carrying value of these assets is based on estimated fair value less cost to sell. During 2015, the Company compared the estimated fair value less cost to sell to the net book value of the assets which resulted in the Company recording an impairment charge of $5.2 million.

In previous years, the carrying value of the assets was evaluated for impairment at each reporting period by assessing the recoverability of the costs based on the undiscounted cash flows of the operation, the likelihood of its reactivation

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and any alternative uses for the equipment. This evaluation, along with declines in our RTL volumes, resulted in 2013 in an impairment of $37.2 million. Further declines in the estimated fair value of these assets could result in a decision to record a further impairment of some or a substantial portion of the remaining outstanding balance of these assets, which was $20.9 million at December 31, 2015.

One portion of our business is dependent upon a single mill; further, we have limited cross redundancy across our facilities.

Sales of reconstituted tobacco leaf products represent a substantial portion of our revenues and profits. We presently produce reconstituted tobacco leaf at only one facility located in France and wrapper and binder products at only one facility located in Ancram, New York. In our AMS business, in order to enhance the protection of our trade secrets, critical proprietary dyes used in a significant portion of our extruding operations are made at only one facility with very limited personnel trained to manufacture them. Further, in order to achieve operational efficiencies, among other reasons, we have limited ability to shift production across our various facilities, thus the loss of production at one facility may not be able to be mitigated by increased production at another. Consequently, natural disasters, pandemics and other unusual events could cause the loss of, or interruption of operations for a significant length of time at one or more of our facilities in six different countries, or at our newly operational CTS joint venture facility, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Historically, we have experienced significant cost savings and productivity benefits relating to our ongoing Operational Excellence program; however, these benefits may not continue indefinitely.

Historically, we have experienced significant cost savings and productivity benefits relating to our ongoing Operational Excellence program as it relates to our tobacco operations that have supported our margins during periods of significant attrition in the tobacco industry. We expect to continue to achieve significant savings and benefits from this program; however, in light of continued industry attrition, execution risks and other factors, we may be unable to continue in the future to obtain these savings and benefits in line with historical achievements, and our profitability and financial results could be adversely affected.

Similarly, though we anticipate extending this program to our AMS business operations in order to achieve margin improvements, due to the different company cultures of the acquisitions that make up a significant part of AMS and our continuing integration of these acquisitions, we may not be able to achieve the desired margin improvements through our operational excellence program at AMS.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

As of December 31, 2015, we operated a total of 18 production facilities on four continents and owned two other facilities which were marketed for sale.

During 2015 we acquired two of our properties in conjunction with our acquisition of Argotec and completed construction of our DelStar Poland site to support the manufacturing operations of our AMS segment. Additionally, in 2014 we acquired two of our operating facilities for our AMS segment in connection with our acquisition of assets from SNN and Pronamic.

The following are the locations of our principal production facilities as of December 31, 2015. Except as otherwise noted, we own the facilities listed below:
Engineered Papers
Segment Production Locations
 
Advanced Materials & Structures Segment Production Locations
Spotswood Mill
 
Middletown Manufacturing Site
Spotswood, New Jersey
 
Middletown, Delaware
 
 
 
Papeteries de Saint-Girons Mill
 
U.S. Netting Manufacturing Site*
Saint-Girons, France
 
Austin, Texas
 
 
 
PDM Industries Mill
 
Tubing Operations*
Quimperlé, France
 
Richland, Pennsylvania
 
 
 
Pirahy Mill
 
Tubing Operations*
Piraí, Brazil
 
El Cajon, California
 
 
 
Poland Mill*
 
Suzhou Manufacturing Site*
Strykow, Poland
 
Suzhou, China
 
 
 
Newberry Operation
 
Poland Manufacturing Site*
Newberry, South Carolina
 
Strykow, Poland
 
 
 
Fiber Operation
 
Gilberdyke Manufacturing Site
Manitoba, Canada
 
Gilberdyke, United Kingdom
 
 
 
LTR Industries Mill
 
Wilson Manufacturing Site*
Spay, France
 
Wilson, North Carolina
 
 
 
Ancram Mill
 
Argotec Manufacturing Operations*
Ancram, New York
 
Greenfield, Massachusetts
 
 
 
RTL Philippines Mill (currently marketed for sale)
 
Argotec-Stevens Manufacturing Site (currently marketed for sale)
Sto. Tomas, Philippines
 
Easthampton, Massachusetts
 
 
 
* Leased properties
 
 

As of December 31, 2015, we had approximately 187,000 metric tons of annual paper production capacity, dependent upon the production mix. Capacity utilization increased in 2015 to 86% for EP products compared with 81% in 2014. AMS product manufacturing lines operated at 72% capacity as of December 31, 2015 compared to 76% capacity as of December 31, 2014. We also operate flax fiber processing operations in Canada and printing operations in France, Poland and the United States. We own each of these facilities and the associated operating equipment except for a flax tow storage facility in Winkler, Manitoba and the mill building in Strykow, Poland, which are leased.

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We maintain administrative and/or sales offices in Alpharetta, Georgia; Quimperlé, France; Spay, France; Shanghai, China; Piraí, Brazil; Moscow, Russia; Strykow, Poland; Middletown, Delaware; Greenfield, Massachusetts; Luxembourg City, Luxembourg; and Bristol, England. Our world headquarters are located in Alpharetta. All of these offices are owned except for those located in Alpharetta, Shanghai, Moscow, Strykow, Greenfield, Luxembourg City, and Bristol which are leased.

We consider all of our facilities to be well-maintained, suitable for conducting our operations and business, and adequately insured, except for the RTL Philippines facility in Sto. Tomas, Philippines, which is currently being marketed for sale and the Argotec-Stevens facility in Easthampton, Massachusetts, which, as of December 2015, is under contract for sale to a third party. These properties are classified as assets held for sale in the Company's consolidated balance sheet as of December 31, 2015.

Item 3. Legal Proceedings
 
General

We are involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers' compensation claims, product liability and other matters. We periodically review the status of these proceedings with both inside and outside counsel. We believe that the ultimate disposition of these matters will not have a material effect on the results of operations in a given quarter or year, but no assurances can be given in this regard. Below is a summary of major outstanding litigation.

Litigation
 
Imposto sobre Circulação de Mercadorias e Serviços ("ICMS") a form of value-added tax in Brazil, was assessed to our Brazilian subsidiary, Schweitzer-Mauduit do Brasil Indústria e Comércio de Papel Ltda. ("SWM-B"), in December of 2000. SWM-B received two assessments from the tax authorities of the State of Rio de Janeiro for unpaid ICMS taxes on certain raw materials from January 1995 through November 2000 (collectively, the "Raw Materials Assessments").
 
The Raw Materials Assessments concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically. SWM-B has contested the Raw Materials Assessments based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers intended for printing books, newspapers and periodicals, or immune papers, and thus to the raw material inputs used to produce immune papers. One of the two assessments, or Assessment 1 (case number 2001.001.115144-5), related in part to tax periods that predated our acquisition of the Pirahy mill in Pirai, Brazil.  In October 2015, the Federal Supreme Court of Brazil denied the State’s appeal of Assessment 1, in the amount of approximately $16.0 million, a decision which is now final.  The second assessment, or Assessment 2 (case number 2001.001.064544-6), pertains exclusively to periods that SWM-B owned the Pirahy mill.  Assessment 2 in the amount of approximately $11.0 million remains pending before the Federal Supreme Court of Brazil on SWM-B’s appeal on the merits and is likely to be finally decided by the action of the chamber of the court hearing the matter.  No docket entry has been made yet regarding argument on Assessment 2.
 
SWM-B received assessments from the tax authorities of the State of Rio de Janeiro for unpaid ICMS and Fundo Estadual de Combate à Pobreza ("FECP", a value-added tax similar to ICMS) taxes on interstate purchases of electricity.  The state issued three sets of assessments against SWM-B, one for May 2006 - November 2007, a second for January 2008 - December 2010, and a third for September 2011 - September 2013 (collectively the "Electricity Assessments").  SWM-B has challenged all three Electricity Assessments in administrative proceedings before the state tax council (in the first-level court Junta de Revisão Fiscal and the appellate court Conselho de Contribuintes) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer."  In October and November 2014, a majority of the Conselho de Contribuintes sitting en banc ruled against SWM-B in each of the first and second electricity assessments. The State issued notices to SWM-B to pay approximately $4.0 million in connection with the first electricity assessment and $6.0 million in connection with the second electricity assessment, in each case

27


based on the foreign currency exchange rate at December 31, 2015.  SWM-B filed separate challenges to these electricity assessments in further court proceedings in the state judicial system, and different chambers of the judicial court granted SWM-B preliminary injunctions against enforcement.  SWM-B's challenge to the third electricity assessment (approximately $3.0 million as of December 31, 2015) remains pending at the first administrative level (Junta de Revisão Fiscal). 

SWM-B believes that both the remaining Raw Materials Assessment and the Electricity Assessments will ultimately be resolved in its favor. No liability has been recorded in our consolidated financial statements for these assessments based on our evaluation of these matters under the facts and law as presently understood. The Company can give no assurance as to the ultimate outcome of such proceedings.

Environmental Matters
 
Our operations are subject to various federal, state and local laws, regulations and ordinances in various nations relating to environmental matters. The nature of our operations exposes us to the risk of claims with respect to various environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. While we have incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental laws and regulations, we believe that the future cost of compliance with environmental laws, regulations and ordinances, and our exposure to liability for environmental claims and our obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material effect on our financial condition or results of operations. However, future events, such as changes in existing laws and regulations, or unknown contamination of sites owned, operated or used for waste disposal by us (including contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material effect on our financial condition or results of operations.

Indemnification Matters

In connection with our spin-off from Kimberly-Clark in 1995, we undertook to indemnify and hold Kimberly-Clark harmless from claims and liabilities related to the businesses transferred to us that were not identified as excluded liabilities in the related agreements. As of December 31, 2015, there are no material claims pending under this indemnification.

Item 4. Mine Safety Disclosures

Not applicable.


28


PART II.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. Since November 30, 1995, our common stock, $0.10 par value per share ("Common Stock") has been listed on the New York Stock Exchange, trading under the symbol "SWM". On February 25, 2016, our stock closed at $30.59 per share.

The table below presents the high and low sales prices of our Common Stock on the New York Stock Exchange - Composite Transactions reporting system for the periods indicated.

 
High
 
Low
2016
 
 
 
First Quarter (through February 25, 2016)
$
42.16

 
$
29.57

 
 
 
 
2015
 
 
 
Fourth Quarter
$
43.47

 
$
34.07

Third Quarter
41.00

 
32.50

Second Quarter
46.60

 
38.05

First Quarter
47.50

 
38.50

 
 
 
 
2014
 
 
 
Fourth Quarter
$
44.38

 
$
35.48

Third Quarter
44.87

 
40.82

Second Quarter
44.34

 
38.88

First Quarter
51.23

 
41.29


29


Performance Graph. The following graph compares the total cumulative stockholder return on our Common Stock during the period from December 31, 2010 through December 31, 2015, with the comparable cumulative total returns of the S&P 500 Index and a self-constructed peer group which reflects, but is not exactly comparable to, the Dow Jones Paper Products Index, which we expect reflects the performance of one of primary industry in which we operate. We have selected the following companies as our peer group: Neenah Paper Inc., P.H. Glatfelter Co., and Wausau Paper Corp.

The graph assumes that the value of the investments in the Common Stock and each index were $100 on December 31, 2010 and that all dividends were reinvested. The returns of the companies in the peer group have been weighted according to their market capitalization. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

Comparison of Cumulative Five Year Return
Holders. As of February 25, 2016, there were 1,942 stockholders of record.

Dividends. We have declared and paid cash dividends on our Common Stock every fiscal quarter since the second quarter of 1996. In 2015, 2014 and 2013, we declared and paid cash dividends totaling $1.54 per share, $1.46 per share, and $1.26 per share, respectively. We announced in February 2016 a dividend of $0.40 per share payable on March 25, 2016 to stockholders of record as of the close of business on February 26, 2016. Our Credit Agreement covenants require that we maintain certain financial ratios, as disclosed in Note 12, Debt, of the Notes to Consolidated Financial Statements, none of which under normal business conditions materially limit our ability to pay such dividends. We will continue to assess our dividend policy in light of our capital allocation strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.

Recent Sales of Unregistered Securities. We had no unregistered sales of equity securities during the fiscal year ended December 31, 2015.


30


Repurchases of Equity Securities. The following table indicates the cost of and number of shares of our Common Stock we have repurchased during 2015 and the remaining amount of share repurchases currently authorized by our Board of Directors as of December 31, 2015:

Issuer Purchases of Equity Securities
Period
 
Total
Number of
Shares
Purchased
 
Average
Price
Paid per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Programs
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs
 
 
 
 
 
 
(# shares)
 
($ in millions)
 
($ in millions)
First Quarter 2015
 
63,220

 
$
46.30

 

 
$

 
$

Second Quarter 2015
 
145

 
46.00

 

 

 

Third Quarter 2015
 

 

 

 

 

Fourth Quarter 2015
 
 
 
 
 
 
 
 
 
 
October 2015
 

 

 

 

 

November 2015
 

 

 

 

 

December 2015
 

 

 

 

 

Total 2015
 
63,365

 
$
46.30

 

 
$

 
$


We sometimes use corporate 10b5-1 plans to allow for share repurchases to be made at predetermined stock price levels, without restricting such repurchases to specific windows of time.  Any future common stock repurchases will be dependent upon various factors, including the stock price of our Common Stock, strategic opportunities, capital allocation strategy, strategic outlook and cash availability. From time-to-time, certain of our officers and directors may sell shares pursuant to personal 10b5-1 plans.


31


Item 6. Selected Financial Data
 
The following selected financial data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes within this Annual Report on Form 10-K. The results of our San Pedro, Philippines, Medan, Indonesia and Malaucène, France mills have been retrospectively presented as discontinued operations for all periods, the first two of which were sold in 2013. The results for 2015 and 2013 include results of operations of Argotec and DelStar from the date of their acquisitions of October 28, 2015 and December 12, 2013, respectively. All dollar amounts are in millions except per share amounts, statistical data and ratios.
 
For the Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Results of Operations
 
 
 
 
 
 
 
 
 
Net Sales
$
764.1

 
$
794.3

 
$
772.8

 
$
778.5

 
$
788.3

Cost of products sold
539.7

 
575.5

 
520.1

 
519.0

 
545.3

Gross Profit
224.4

 
218.8

 
252.7

 
259.5

 
243.0

Nonmanufacturing expenses
106.8

 
99.6

 
86.5

 
86.4

 
88.0

Provision for losses on business tax credits

 

 

 

 
15.9

Restructuring & impairment expense
14.6

 
13.1

 
41.3

 
21.4

 
14.0

Operating Profit
103.0

 
106.1

 
124.9

 
151.7

 
125.1

Income from Continuing Operations
90.5

 
89.7

 
78.5

 
104.1

 
92.1

(Loss) income from Discontinued Operations
(0.8
)
 

 
(2.4
)
 
(24.3
)
 
0.5

Net Income
$
89.7

 
$
89.7

 
$
76.1

 
$
79.8

 
$
92.6

 
 
 
 
 
 
 
 
 
 
Net Income (Loss) Per Share- Basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
2.97

 
$
2.94

 
$
2.51

 
$
3.33

 
$
2.73

(Loss) income from discontinued operations
(0.02
)
 

 
(0.08
)
 
(0.79
)
 
0.02

Net income per share - Basic
$
2.95

 
$
2.94

 
$
2.43

 
$
2.54

 
$
2.75

 
 
 
 
 
 
 
 
 
 
Net Income (Loss) Per Share - Diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
2.96

 
$
2.93

 
$
2.49

 
$
3.29

 
$
2.71

(Loss) income from discontinued operations
(0.02
)
 

 
(0.07
)
 
(0.78
)
 
0.02

Net income per share - Diluted
$
2.94

 
$
2.93

 
$
2.42

 
$
2.51

 
$
2.73

 
 
 
 
 
 
 
 
 
 
Cash Dividends Declared and Paid Per Share
$
1.54

 
$
1.46

 
$
1.26

 
$
0.45

 
$
0.30

EBITDA from Continuing Operations(1) 
$
162.8

 
$
162.5

 
$
171.7

 
$
195.4

 
$
163.3

Adjusted EBITDA from Continuing Operations (1) 
$
177.4

 
$
177.7

 
$
213.0

 
$
216.8

 
$
193.2

Percent of Net Sales
 
 
 
 
 
 
 
 
 
Gross Profit
29.4
%
 
27.5
%
 
32.7
%
 
33.3
%
 
30.8
%
Nonmanufacturing expenses
14.0
%
 
12.5
%
 
11.2
%
 
11.1
%
 
11.2
%
Financial Position
 
 
 
 
 
 
 
 
 
Capital spending
$
24.2

 
$
35.1

 
$
29.1

 
$
27.2

 
$
60.9

Depreciation and amortization
41.0

 
45.1

 
37.3

 
38.5

 
42.1

Total Assets
1,290.0

 
1,185.0

 
1,224.1

 
885.7

 
841.9

Total Debt
571.5

 
437.9

 
382.7

 
155.0

 
146.0

Total debt to capital ratio
55.0
%
 
47.2
%
 
43.7
%
 
23.2
%
 
23.5
%


32


(1)
Earnings before interest, taxes, depreciation and amortization ("EBITDA") from Continuing Operations is a non-GAAP financial measure that is calculated by adding interest expense, income tax provision and depreciation and amortization expense to income from continuing operations, reduced by amortization of deferred revenue. Adjusted EBITDA from Continuing Operations is a non-GAAP financial measure that is calculated by adding provision for losses on business tax credits, restructuring and impairment expense and start-up expenses from our CTS joint venture in China to EBITDA from continuing operations. The Company believes investors' understanding of the Company's performance is enhanced by disclosing these non-GAAP financial measures as a reasonable basis for comparison of the Company's ongoing results of operations. However, non-GAAP financial measures should not be considered in isolation or as a substitute for financial information derived in accordance with GAAP. Reconciliations to income from continuing operations are as follows ($ in millions):
 
For the Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Income from Continuing Operations
$
90.5

 
$
89.7

 
$
78.5

 
$
104.1

 
$
92.1

Plus: Interest expense
9.7

 
7.2

 
2.9

 
3.3

 
2.3

Plus: Income tax provision
21.6

 
20.5

 
53.0

 
49.5

 
32.8

Plus: Depreciation and amortization
41.0

 
45.1

 
37.3

 
38.5

 
42.1

Less: Amortization of deferred revenue

 

 

 

 
(6.0
)
EBITDA from Continuing Operations
162.8

 
162.5

 
171.7

 
195.4

 
163.3

Plus: Provision for losses on business tax credits

 

 

 

 
15.9

Plus: Restructuring and impairment expense
14.6

 
13.1

 
41.3

 
21.4

 
14.0

Plus: CTS start-up expenses

 
2.1

 

 

 

Adjusted EBITDA from Continuing Operations
$
177.4

 
$
177.7

 
$
213.0

 
$
216.8

 
$
193.2




33


Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion of our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the selected financial data included in Part II, Item 6, "Selected Financial Data" of this Annual Report on Form 10-K. The discussion of our financial condition and results of operations 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 sections entitled "Factors That May Affect Future Results," in Part I, Item 1A of this Annual Report on Form 10-K and "Forward Looking Statements" at the end of this Item 7. Unless the context indicates otherwise, references to "SWM", the "Company", "we", "us", "our", or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

This Management's Discussion and Analysis of Financial Condition and Results of Operations 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
    Results of Operations
    Liquidity and Capital Resources
    Other Factors Affecting Liquidity and Capital Resources
Contractual Obligations
Outlook
    Forward-Looking Statements


Summary
 
In 2015, SWM reported net income of $89.7 million on total net sales of $764.1 million. Compared to the prior year, net sales decreased $30.2 million due to $73.6 million in unfavorable net foreign currency translation impacts, mainly from a weaker euro and a weaker Brazilian real, and lower average selling prices in our EP segment; these factors were partially offset by $53.8 million of incremental net sales from our October 2015 and December 2014 AMS segment business acquisitions and a favorable mix of products sold in EP. Net income remained consistent at $89.7 million in 2015 compared to $89.7 million in 2014 and was impacted by lower average selling prices and unfavorable foreign currency translation impacts, offset by lower manufacturing costs and improved factory utilization, a favorable mix of products sold in EP, as well as net income generated by the December 2014 business acquisitions and the October 2015 acquisition of Argotec.

Cash provided by operations was $144.7 million in 2015 compared to $165.9 million in 2014. The $21.2 million decrease was due primarily to the impact of certain non-cash adjustments to net income, including $4.6 million in higher income from equity affiliates generated by the late 2014 startup of China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. Ltd. ("CTS"), our RTL joint venture in China, a $4.3 million net gain from the recognition of the sale of water rights at our Spotswood, New Jersey facility, a non-cash impact of excess tax credits of $7.9 million on deferred taxes and a $5.8 million unfavorable year over year net change in operating working capital. Uses of cash during 2015 included $280.0 million for the Argotec acquisition net of cash acquired, $24.2 million of capital spending, $149.1 million in net borrowings, in part to fund the Argotec acquisition, and $46.9 million in cash dividends paid to SWM stockholders.





34


Recent Developments

In December 2015, the Company repatriated $148 million of its overseas cash, which was used to repay a portion of the borrowings related to the Argotec acquisition.

On November 4, 2015, we announced an increase of our quarterly dividend to $0.40 per share. The increase is part of our long-term capital allocation strategy which is focused on reinvesting in our businesses, returning at least one-third of free cash flow to stockholders via dividends and share repurchases while retaining flexibility to explore growth and diversification opportunities, including in industries in which we currently do business and in adjacent industries.

On November 2, 2015, we announced that Allison Aden joined the Company as Executive Vice President, Finance and Chief Financial Officer. Ms. Aden was appointed effective November 1, 2015. Ms. Aden replaced Robert Cardin, who served as interim Chief Financial Officer since March 2015 and has resumed his role as Corporate Controller. Prior to joining us, Ms. Aden served as Executive Vice President and Chief Financial Officer at Americold Logistics, LLC, a global leader in temperature-controlled warehousing and logistics in the food industry, from 2012 to 2015. Prior to that, Ms. Aden served as the Chief Financial Officer at Recall Holdings Limited, a global provider of information management solutions, from 2007 to 2012.

On October 28, 2015, we acquired Argotec Intermediate Holdings LLC for a purchase price of $282.7 million, subject to certain working capital and other post-closing adjustments. Argotec manufactures urethane films for specialty applications in high-growth surface protection, applications such as automotive paint protection, as well as glass lamination, medical and industrial products. It is a part of our AMS segment. As part of the transaction, we acquired Argotec's Greenfield, Massachusetts facility. At the time of acquisition, Argotec had approximately $96 million of annual revenue in 2015.

On October 28, 2015, in conjunction with the Argotec acquisition, we entered into a Second Amended and Restated Credit Agreement ("Amended Credit Agreement") with JPMorgan Chase Bank, N.A. as administrative agent, which provides for credit facilities in the aggregate principal amount of $1 billion. The credit facilities consist of a secured $650 million revolving credit facility available to us and certain of our European subsidiaries as well as a $100 million Term Loan A-1 and a $250 million Term Loan A-2 made to us. The Revolving Credit Facility and Term Loan A-1 mature on October 28, 2020 while Term Loan A-2 matures on October 28, 2022. The Amended Credit Agreement amends and restates the Company’s Amended and Restated Credit Agreement, dated as of December 11, 2013, which provided for a $500 million unsecured revolving credit facility which was scheduled to mature on December 11, 2018.


35


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 financial position, results of operations, and 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

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

As of December 31, 2015, we have certain foreign jurisdiction income tax net operating loss (NOL) carryforwards of $16.7 million which will expire on various dates from 2016 through 2034 as follows:

2016-2018
$
1.7

2022-2033
0.4

2016-2034
9.7

Indefinite
4.9

 
16.7


We believe that it is more likely than not that the benefit from certain foreign NOL carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $16.3 million on the deferred tax assets related to these foreign NOL carryforwards.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We (1) record unrecognized tax benefits as liabilities in accordance with ASC 740 and (2) adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.


36


We believe that it is reasonably possible that approximately $0.5 million of our currently remaining unrecognized tax benefits, each of which are individually insignificant, may be recognized by the end of 2016 as a result of a lapse of the statute of limitations.

We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We have not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. If we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.

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 financial condition, results of operations, and our cash flows.

For further information, please see "Litigation" in Part I, Item 3, "Legal Proceedings" and Note 18, Commitments and Contingencies, of the Notes to Consolidated Financial Statements.

Property, Plant and Equipment Valuation

Our manufacturing processes are capital intensive; as a result, we make substantial investments in property, plant and equipment which are recorded at cost. Net property, plant and equipment comprised 24% of our total assets as of December 31, 2015. Property, plant and equipment is depreciated on the straight-line method over the estimated useful lives of the assets. Production machines and related equipment are not subject to substantial technological changes rendering them obsolete and are generally depreciated over estimated useful lives of 10 to 20 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 financial condition, results of operations and 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. The results of our Indonesian and Philippines paper mills, which were sold during 2013, have been retrospectively presented as discontinued operations.


37


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. 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. However, as of December 31, 2012, that equipment was no longer expected to be sold and the equipment was again included with the remainder of the assets as one group of assets for purposes of the impairment analysis. During 2013, it was determined that the undiscounted cash flows were less than the carrying value of the assets. Management used significant judgment to develop assumptions, including forecasted sales volumes and projected operational performance. Based on an evaluation of the fair value at December 31, 2013, which used independent appraisals of certain assets, the Company recorded a $37.2 million impairment charge during 2013. There were no additional impairment charges recorded during 2014. However, in 2015, based on an updated estimate of the fair value of the equipment, the Company recorded an additional impairment charge of $5.2 million. The net book value of the RTL Philippines property, plant and equipment was $20.9 million as of December 31, 2015, all of which is classified as assets held for sale in the Company's consolidated balance sheet as of that date.

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.

Business Combinations

Accounting for business combinations requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed ("net assets") at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the net assets acquired at their respective fair values as of the acquisition date. The estimated fair values are based upon quoted market prices and widely accepted valuation techniques, which require significant estimates and assumptions including, but not limited to, estimating future cash flows and developing appropriate discount rates. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill, based on new information obtained about the facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period or final determination of the values of net assets acquired, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. See Note 3, Business Acquisitions, of the Notes to Consolidated Financial Statements for additional information.

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.



38


Results of Operations
 
For the Years Ended December 31,
 
2015(1)
 
2014
 
2013(2)
 
($ in millions, except per share amounts)
Net Sales
$
764.1

 
$
794.3

 
$
772.8

Cost of products sold
539.7

 
575.5

 
520.1

Gross Profit
224.4

 
218.8

 
252.7

Selling expense
22.2

 
22.0

 
20.9

Research expense
14.0

 
15.7

 
15.3

General expense
70.6

 
61.9

 
50.3

Total nonmanufacturing expenses
106.8

 
99.6

 
86.5

Restructuring and impairment expense
14.6

 
13.1

 
41.3

Operating Profit
103.0

 
106.1

 
124.9

Interest expense
9.7

 
7.2

 
2.9

Other income (expense), net
12.2

 
9.3

 
5.7

Income from Continuing Operations before Income Taxes and Income from Equity Affiliates
105.5

 
108.2

 
127.7

Provision for income taxes
21.6

 
20.5

 
53.0

Income from equity affiliates, net of income taxes
6.6

 
2.0

 
3.8

Income from Continuing Operations
90.5

 
89.7

 
78.5

(Loss) income from Discontinued Operations
(0.8
)
 

 
(2.4
)
Net Income
$
89.7

 
$
89.7

 
$
76.1

 
 
 
 
 
 
Net Income (Loss) Per Share - Basic:
 
 
 
 
 
Income per share from continuing operations
$
2.97

 
$
2.94

 
$
2.51

(Loss) income per share from discontinued operations
(0.02
)
 

 
(0.08
)
Net income per share - basic
$
2.95

 
$
2.94

 
$
2.43

 
 
 
 
 
 
Net Income (Loss) Per Share - Diluted:
 
 
 
 
 
Income per share from continuing operations
$
2.96

 
$
2.93

 
$
2.49

(Loss) income per share from discontinued operations
(0.02
)
 

 
(0.07
)
Net Income per share - diluted
$
2.94

 
$
2.93

 
$
2.42

(1) Results during the year ended December 31, 2015 include the results of Argotec since it was acquired on October 28, 2015..
(2) Results during the year ended December 31, 2013 include the results of DelStar, Inc. since it was acquired on December 12, 2013.

Discontinued Operations

The results of the Medan, Indonesia mill ("Indonesia mill") and San Pedro, Philippines mill ("Philippines mill") have been classified as discontinued operations. As a result, all periods presented have been retrospectively recast to exclude them. During 2013, the Company sold the Indonesia mill and the Philippines mill. The 2015 loss from discontinued operations is primarily due to write-downs to estimated recoverable value of certain assets at our closed Philippines entity as well as recognition of estimated taxes due to the local taxing authority. The 2013 loss from discontinued operations is primarily due to restructuring-related severance charges at the Philippines mill.

39



Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
 
Net Sales
(dollars in millions)
 
2015
 
2014
 
Change
 
Percent Change
Engineered Papers
$
583.9

 
$
666.9

 
$
(83.0
)
 
(12.4
)%
Advanced Materials & Structures
180.2

 
127.4

 
52.8

 
41.4

Total
$
764.1

 
$
794.3

 
$
(30.2
)
 
(3.8
)%
N.M. - Not meaningful
 
Net sales were $764.1 million in 2015 compared with $794.3 million in 2014. The decrease in net sales consisted of the following (dollars in millions):

 
Amount
 
Percent
Changes in currency exchange rates
$
(73.6
)
 
(9.3
)%
Changes in product mix and selling prices and sales volumes
(9.2
)
 
(1.2
)
Changes in royalties
(1.5
)
 
(0.2
)
Incremental AMS segment revenue from acquisitions
53.8

 
6.8

Changes in freight and discounts, returns & allowances
0.3

 
0.1

Total
$
(30.2
)
 
(3.8
)%

The EP segment net sales during the year ended December 31, 2015 of $583.9 million decreased by $83.0 million, or 12.4%, versus net sales of $666.9 million in the prior year.  The decrease in net sales was primarily the result of the net combined impact of lower average selling prices from pricing concessions and favorable mix of products sold of $9.2 million along with unfavorable net foreign currency translation impacts, mainly from a weaker euro and Brazilian real, of $72.6 million, in each case compared to the prior year.
 
AMS segment net sales were $180.2 million for 2015 compared to $127.4 million during 2014. The increase of $52.8 million or 41.4% was due primarily to $31.7 million in net sales generated by the businesses SWM acquired in December 2014 and $22.1 million in incremental net sales generated by Argotec, which was acquired in October 2015, partially offset by $1.0 million of unfavorable net foreign currency translation impacts, mainly from a weaker euro. The segment was also impacted by an unfavorable mix of products sold due to lower sales to oil, gas, and mining related customers.

Operating Expenses
(dollars in millions)
 
 
 
 

 
Percent Change
 
Percent of Net Sales
 
2015
 
2014
 
Change
 
 
2015
 
2014
Net Sales
$
764.1

 
$
794.3

 
$
(30.2
)
 
(3.8
)%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
539.7

 
575.5

 
(35.8
)
 
(6.2
)
 
70.6

 
72.5

Gross Profit
$
224.4

 
$
218.8

 
$
5.6

 
2.6
 %
 
29.4
%
 
27.5
%
 
Gross profit for the year ended December 31, 2015 increased by $5.6 million to $224.4 million from $218.8 million in the prior year.

40



The Engineered Paper segment was impacted by a net combined decrease of $10.8 million in lower average selling prices, higher sales volumes and a favorable mix of products sold, along with $19.4 million in unfavorable net foreign currency translation impacts mainly from a weaker euro and Brazilian real, increased inflationary costs and decreases in royalties. These factors were partially offset by improved factory utilization of $10.1 million and improved overhead absorption of $4.6 million, in each case compared to the prior year period.

The AMS segment benefited from higher sales volumes associated with the October 2015 acquisition of Argotec as well as the businesses acquired in December 2014, lower raw material costs of $3.8 million, and favorable overhead absorption of $8.5 million, in each case compared to the prior year. These factors were partially offset by unfavorable product mix of $0.6 million due to lower sales to oil, gas, and mining related customers and unfavorable net foreign currency translation impacts of $0.7 million.

Nonmanufacturing Expenses
(dollars in millions)
 
 
 
 

 
Percent Change
 
Percent of Net Sales
 
2015
 
2014
 
Change
 
 
2015
 
2014
Selling expense
$
22.2

 
$
22.0

 
$
0.2

 
0.9
 %
 
2.9
%
 
2.8
%
Research expense
14.0

 
15.7

 
(1.7
)
 
(10.8
)
 
1.8

 
2.0

General expense
70.6

 
61.9

 
8.7

 
14.1

 
9.2

 
7.8

Nonmanufacturing expenses
$
106.8

 
$
99.6

 
$
7.2

 
7.2
 %
 
13.9
%
 
12.6
%
 
Nonmanufacturing expenses in the year ended December 31, 2015 increased by $7.2 million to $106.8 million from $99.6 million in the prior year due primarily to $3.2 million in higher incremental costs from the Argotec acquisition, $4.6 million in higher incremental costs from the December 2014 AMS acquisitions, $2.6 million of incremental costs from the operations of our Luxembourg office established in late 2014 and the timing of expenses year over year, in each case compared to the prior year. These factors were partially offset by approximately $6.4 million in favorable net foreign currency translation impacts, mainly from a weaker euro, and $1.4 million in lower expenditures resulting from reorganization measures taken in our research and development and sales and marketing units.

Restructuring and Impairment Expense
 
The Company incurred total restructuring and impairment expense of $14.6 million in the year ended December 31, 2015, compared to $13.1 million in the year ended December 31, 2014, an increase of $1.5 million. In 2015, restructuring and impairment expenses consisted of $8.0 million related to severance expenses in the French, Brazilian and U.S. operations for ongoing accruals over the remaining service lives of affected employees related to previously announced actions as well as $1.4 million of impairment charges to certain of our Polish manufacturing equipment and $5.2 million of loss recognized to adjust the recorded value of equipment at our Philippines RTL location to its net realizable value.

In the year ended December 31, 2014, the Company's restructuring and impairment expense of $13.1 million was primarily due to $11.2 million in severance expenses in the French, Brazilian and U.S. operations for ongoing accruals over the remaining service lives of affected employees related to new as well as previously announced actions, losses on disposal of our Lee Mills and Golden Hills manufacturing facilities of $1.0 million and asset impairment expenses at our Canadian manufacturing facility of $0.9 million.

41



Operating Profit
(dollars in millions)
 
 
 
 
 
Percent Change
 
Return on Net Sales
 
2015
 
2014
 
Change
 
 
2015
 
2014
Engineered Papers
$
121.5

 
$
124.5

 
$
(3.0
)
 
(2.4
)%
 
20.8
%
 
18.7
%
Advanced Materials & Structures
16.7

 
10.2

 
6.5

 
63.7

 
9.3

 
8.0

Unallocated expenses
(35.2
)
 
(28.6
)
 
(6.6
)
 
23.1

 
 
 
 
Total
$
103.0

 
$
106.1

 
$
(3.1
)
 
(2.9
)%
 
13.5
%
 
13.4
%


Operating profit was $103.0 million in the year ended December 31, 2015 compared with $106.1 million during the prior year.
 
The EP segment's operating profit in the year ended December 31, 2015 was $121.5 million, a decrease of $3.0 million from $124.5 million in the prior year.  The decrease was primarily due to an overall favorable mix of products sold, $10.1 million of decreased overall manufacturing and overhead costs as a result of restructuring actions, improved factory utilization and other production efficiencies, and $1.4 million in lower selling, research and development, and general and administrative costs from the prior year, which were partially offset by the impact of lower average selling prices combined with $13.0 million unfavorable net foreign currency translation impacts, primarily due to a weaker euro and Brazilian real, and $3.2 million in higher restructuring costs.

The AMS segment's operating profit in the year ended December 31, 2015 was $16.7 million compared to $10.2 million in the prior year period. The increase of $6.5 million in the AMS segment's operating profit during the year ended December 31, 2015 compared to the prior-year period was positively impacted by $1.4 million lower amortization associated with the inventory step up value from Advanced Materials & Structures segment acquisitions in October 2015 and December 2014 compared to December 2013. Operating profit in this segment was also impacted by incremental operating profit resulting from the October 2015 acquisition of Argotec as well as the acquisitions made in December 2014. Additionally, the combined approximately $3.2 million impact of lower material costs, partially offset by unfavorable mix of products sold associated with lower sales to oil, gas, and mining related customers contributed to the increase in AMS operating profit in 2015 compared to the prior year.

Unallocated expenses in the year ended December 31, 2015 were $35.2 million compared to $28.6 million in the prior year period. The increase of $6.6 million in unallocated expenses during the year ended December 31, 2015 compared to the prior year was primarily due to $2.6 million of incremental costs from the operations of our Luxembourg office which was established in late 2014, increased transaction and integration costs, modestly higher legal costs relating to intellectual property litigation and proceedings in Europe and general increases in compensation accruals and other expenses.

Non-Operating Expenses
 
Interest expense was $9.7 million in the year ended December 31, 2015, an increase of $2.5 million from $7.2 million in the year ended December 31, 2014.  The increase in interest expense is primarily due to higher average debt balances in 2015 versus 2014 as a result of borrowings to fund the fourth quarter 2015 acquisition of Argotec.  The weighted average effective interest rate on our debt facilities was approximately 1.76% and 1.49% for the year ended December 31, 2015 and 2014, respectively.
 
Other income, net was $12.2 million during the year ended December 31, 2015 compared to $9.3 million during the year ended December 31, 2014. The $2.9 million increase in other income, net, was due primarily to the recognition of a gain of $4.3 million related to the sale of water rights at our Spotswood, New Jersey facility as well as $1.7 million in higher royalty and fee income from our China joint ventures and a $1.0 million reversal of accrued contingent

42


consideration related to an acquisition made in the AMS segment in December 2014. These factors were partially offset by lower transactional foreign currency gains of $0.7 million, and $2.7 million in lower interest income in 2015 versus the prior year period.
 
Income Taxes
 
A $21.6 million and $20.5 million provision for income taxes in the years ended December 31, 2015 and 2014, respectively, resulted in an effective tax rate of 20.5% compared with 18.9% in the prior year.  The Company’s effective tax rates differ from the statutory federal income tax rate of 35% due to varying tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S. Other tax rate differences result from discrete items that may occur in any given year but are not consistent from year to year.

Income from Equity Affiliates
 
Income from equity affiliates, net of income taxes, was $6.6 million in the year ended December 31, 2015 compared with $2.0 million during the prior year.  These results reflected the operations of CTM, our joint venture in China that produces cigarette papers, and higher income from CTS our reconstituted tobacco joint venture in China which continued its production ramp-up in 2015.
  
Discontinued Operations
 
Because we closed our Philippines mill as previously reported, the results of this mill were reported as discontinued operations for all periods presented. Consequently, this mill's results 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. The loss from discontinued operations of $0.8 million incurred in the year ended December 31, 2015 related to the write down to estimated recoverable value of certain assets at our closed Philippines mill as well as recognition of estimated taxes due to the local taxing authority.

Net Income and Income per Share
 
Net income in the year ended December 31, 2015 was $89.7 million, or $2.94 per diluted share, compared with $89.7 million, or $2.93 per diluted share, during the prior year.  Net income was impacted primarily by lower average selling prices as well as higher restructuring costs and unfavorable net foreign currency translation impacts of approximately $11.3 million, or $0.37 per diluted share. These factors were mainly offset by a favorable mix of products sold in EP, lower manufacturing costs, favorable cost absorption and improved factory utilization in our EP segment, combined with higher sales volumes generated by our October 2015 acquisition of Argotec and December 2014 business acquisitions as well as lower raw material costs in the AMS segment.



43


Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013
 
Net Sales
(dollars in millions)
 
2014
 
2013
 
Change
 
Percent Change
Engineered Papers
$
666.9

 
$
768.6

 
$
(101.7
)
 
(13.2
)%
Advanced Materials & Structures
127.4

 
4.2

 
123.2

 
N.M.

Total
$
794.3

 
$
772.8

 
$
21.5

 
2.8
 %
N.M. - Not meaningful 

Net sales were $794.3 million in 2014 compared with $772.8 million in 2013. The increase in net sales consisted of the following (dollars in millions):

 
Amount
 
Percent
Changes in mix of products sold and selling prices
$
(28.1
)
 
(3.6
)%
Changes due to sales volume
(71.5
)
 
(9.2
)
AMS segment revenue
123.2

 
15.9

Changes in currency exchange rates
(2.1
)
 
(0.3
)
Total
$
21.5

 
2.8
 %

The EP segment net sales during the year ended December 31, 2014 of $666.9 million decreased by $101.7 million, or 13.2%, versus $768.6 million in the prior year.  The decrease in net sales was primarily the result of the combined impact of unfavorable mix of products sold, lower volumes due to lower customer demand and work stoppage disruptions to sales during the fourth quarter of 2014 at our French LTR manufacturing facility, and lower average selling prices of $99.5 million and unfavorable net foreign currency translation impacts, mainly from a weaker euro, of $2.2 million.
 
AMS segment net sales were $127.4 million for 2014 compared to $4.2 million during the stub period from the closing of the DelStar acquisition on December 12, 2013 through December 31, 2013.

Operating Expenses
(dollars in millions)
 
 
 
 
 
Percent Change
 
Percent of Net Sales
 
2014
 
2013
 
Change
 
 
2014
 
2013
Net Sales
$
794.3

 
$
772.8

 
$
21.5

 
2.8
 %
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
575.5

 
520.1

 
55.4

 
10.7

 
72.5

 
67.3

Gross Profit
$
218.8

 
$
252.7

 
$
(33.9
)
 
(13.4
)%
 
27.5
%
 
32.7
%
 
Gross profit for the year ended December 31, 2014 decreased by $33.9 million to $218.8 million from $252.7 million in the prior year primarily due to the $39.5 million negative impact of lower volume, lower average selling prices and an unfavorable mix of products sold, which included more non-tobacco volumes at lower margins. Other factors contributing to the decrease included $18.6 million in unfavorable absorption of plant overhead driven by the lower volumes and unfavorable mix of products sold, $7.5 million in higher manufacturing and other costs, and $1.2 million in accelerated depreciation of machinery at our Brazil manufacturing facility in connection with restructuring activities.

44


The negative impacts were partially offset by $1.3 million in favorable foreign currency impacts, $0.8 million in lower claims and freight costs, and a $30.8 million increase in gross profit from our AMS segment.

Nonmanufacturing Expenses
(dollars in millions)
 
 
 
 
 
Percent Change
 
Percent of Net Sales
 
2014
 
2013
 
Change
 
 
2014
 
2013
Selling expense
$
22.0

 
$
20.9

 
$
1.1

 
5.3
%
 
2.8
%
 
2.7
%
Research expense
15.7

 
15.3

 
0.4

 
2.6

 
2.0

 
2.0

General expense
61.9

 
50.3

 
11.6

 
23.1

 
7.8

 
6.5

Nonmanufacturing expenses
$
99.6

 
$
86.5

 
$
13.1

 
15.1
%
 
12.6
%
 
11.2
%
 
Nonmanufacturing expenses in the year ended December 31, 2014 increased by $13.1 million to $99.6 million from $86.5 million in the prior year due to $20.4 million in expenses related to our new AMS segment and expenses relating to our global asset realignment and other growth initiatives.

Restructuring and Impairment Expense
 
The Company incurred total restructuring and impairment expense of $13.1 million in the year ended December 31, 2014, compared to $41.3 million in the year ended December 31, 2013, a decrease of $28.2 million. Restructuring expense in 2014 was primarily due to $11.2 million in severance expenses in the French, Brazilian, and U.S. operations for ongoing accruals over the remaining service lives of affected employees related to a new as well as previously announced actions and losses on disposal of our Lee Mills and Golden Hills manufacturing facilities of $1.0 million and asset impairment expenses at our Canada manufacturing facility of $0.9 million.

In the year ended December 31, 2013, the Company's restructuring and impairment expense of $41.3 million was primarily due to a $37.2 million impairment charge to reduce the carrying value of the Company's mothballed RTL-Philippines facility following decreased in our then near term RTL volume expectations. Other 2013 restructuring expenses included $2.7 million of severance and early retirement expenses in the French operations for ongoing accruals over the remaining service lives of affected employees associated with previously announced actions and $0.7 million of termination fees to exit third-party service contracts in the U.S. and Europe.

Operating Profit
(dollars in millions)
 
 
 
 
 
Percent Change
 
Return on Net Sales
 
2014
 
2013
 
Change
 
 
2014
 
2013
Engineered Papers
124.5

 
148.9

 
(24.4
)
 
(16.4
)
 
18.7

 
19.4

Advanced Materials & Structures
10.2

 
(1.1
)
 
11.3

 
N.M.

 
8.0

 
N.M.

Unallocated expenses
(28.6
)
 
(22.9
)
 
(5.7
)
 
24.9

 
 
 
 
Total
$
106.1

 
$
124.9

 
$
(18.8
)
 
(15.1
)%
 
13.4
%
 
16.2
%
N.M. - Not meaningful

Operating profit was $106.1 million in the year ended December 31, 2014 compared with $124.9 million during the prior year.
 
The EP segment's operating profit in the year ended December 31, 2014 was $124.5 million, a decrease of $24.4 million from the prior year.  The decrease was primarily due to the $39.5 million combined impact of lower volumes, unfavorable mix of products sold and lower average selling prices combined with $23.5 million impact of unfavorable fixed cost

45


and plant overhead absorption due to lower production volumes and higher manufacturing costs. This was partially offset by a $27.9 decrease in restructuring expense, of which $37.2 million related to a non-cash impairment charge on the RTL-Philippines facility in 2013, as well as $8.6 million in lower selling, research and development, and general and administrative costs, $0.5 million in favorable net foreign currency translation impacts, and $1.6 million in lower freight and other costs from the prior year.

Non-Operating Expenses
 
Interest expense was $7.2 million in the year ended December 31, 2014, an increase from $2.9 million in the year ended December 31, 2013.  The increase in interest expense is primarily due to higher average debt balances in 2014 versus 2013 as a result of borrowings to fund the fourth quarter 2013 acquisition of DelStar and to fund share repurchases in the first quarter of 2014. The weighted average effective interest rate on our debt facilities was approximately 1.49% and 1.50% for the years ended December 31, 2014 and 2013, respectively.
 
Other income, net was $9.3 million during the year ended December 31, 2014 compared to $5.7 million during the year ended December 31, 2013. The $3.6 million increase in other income, net is due primarily to higher foreign currency transaction gains and higher interest income versus the prior year.
 
Income Taxes
 
A $20.5 million and $53.0 million provision for income taxes in the years ended December 31, 2014 and 2013, respectively, resulted in an effective tax rate of 18.9% compared with 41.5% in the prior year.  The Company’s effective tax rates differ from the statutory federal income tax rate of 35% due to 2014 geographical mix of income, the concentration of earnings in lower tax jurisdictions and the 2013 foreign income tax rate differential including the effect of not recognizing $13.4 million of tax benefits attributable to asset impairment charges due to a tax holiday at the RTL Philippines location. The RTL Philippines tax holiday expired in December 2013. The effect of not recognizing a tax benefit due to the tax holiday on net income per share (diluted) was $0.43 for 2013. During 2013, the Company increased its valuation allowances by $1.2 million primarily attributed to partially reserving the net deferred tax assets in Poland.

Income from Equity Affiliates
 
Income from equity affiliates, net of income taxes, was $2.0 million in the year ended December 31, 2014 compared with $3.8 million during the prior year.  These results reflected the operations of CTM, our joint venture in China that produces cigarette papers, and startup expenses of CTS, our reconstituted tobacco joint venture in China, which began operations in September 2014.
  
Discontinued Operations
 
Due to our decisions to sell our Indonesia mill and our Philippines mill, the results of these entities were reported as discontinued operations for all periods presented.  Consequently, their results 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 2013, the Company completed the sale of the Indonesia mill and the Philippines mill and incurred a $1.6 million loss and a $1.6 million gain on the sales, respectively, which are presented in discontinued operations.


46


Net Income and Income per Share
 
Net income in the year ended December 31, 2014 was $89.7 million, or $2.93 per diluted share, compared with $76.1 million, or $2.42 per diluted share, during the prior year.  The increase in net income was primarily due to $28.2 million of lower restructuring and impairment expenses, decreased losses from discontinued operations, net income generated by DelStar and a lower effective tax rate, partially offset by lower sales volumes and lower average selling prices. The increase in income per share was a result of the factors described above as well as the impact of our share repurchases in the first quarter of 2014.

Liquidity and Capital Resources
 
We have created a long-term capital allocation strategy focused on the following three areas:

Reinvesting capital in our businesses through a disciplined approach to meet global demand for value-adding solutions;

Returning at least one-third of annual free cash flow to stockholders via dividends and share repurchase programs; and

Retaining flexibility to execute growth opportunities in current and adjacent industries.

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 mix of products sold, 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 December 31, 2015, $172.4 million of our $186.5 million of cash and cash equivalents was held by foreign subsidiaries. Movement of cash balances may have significant tax consequences. We established a holding company in Luxembourg in 2014. As a result of the new holding company structure, some of the foreign earnings flow directly to the U.S., and these earnings are no longer considered to be permanently reinvested overseas. We consider the undistributed earnings of certain other of its foreign subsidiaries to be indefinitely reinvested and currently plans to repatriate such earnings only when it is tax efficient 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 other foreign subsidiaries. Certain global business realignments and other activities have been implemented that could permit the eventual repatriation of certain of these funds.

Capital spending for 2016 is projected to be approximately $30 million. We generally fund our capital projects using cash on-hand, cash generated from operations and our existing credit facilities, including the Credit Agreement.

Cash Requirements
 
As of December 31, 2015, we had net operating working capital of $118.5 million and cash and cash equivalents of $186.5 million, compared with net operating working capital of $98.7 million and cash and cash equivalents of $290.3 million as of December 31, 2014.  The 2015 year-over-year increase in net operating working capital is primarily due to reclassification of fixed assets with a net book value of $20.9 million at our mothballed RTL facility in the Philippines from property, plant and equipment to assets held for sale, as well as increases in our accounts receivable and inventories associated with 2014 and 2015 business acquisitions. These factors were partially offset by corresponding increases in accounts payable and accrued expenses outstanding at December 31, 2015 and decreases in income taxes receivable from refunds received in 2015.

Changes in the amounts that make up these balances reflect the impacts of changes in currency exchange rates, reclassifications of property, plant and equipment to assets held for sale, and excess tax benefits of stock-based awards, none of which are included in the changes in operating working capital presented on the consolidated statements of cash flow.

47



Cash Flows from Operating Activities ($ in millions)
For the Years Ended December 31,
2015
 
2014
 
2013
Net Income
$
89.7

 
$
89.7

 
$
76.1

Less: (Loss) income from discontinued operations
(0.8
)
 

 
(2.4
)
Income from continuing operations
90.5

 
89.7

 
78.5

Non-cash items included in net income:
 
 
 
 
 
Depreciation and amortization
41.0

 
45.1

 
37.3

Impairment
6.7

 

 
37.2

Deferred income tax provision (benefit)
(6.7
)
 
3.3

 
17.3

Pension and other postretirement benefits
4.2

 
1.2

 
1.1

Stock-based compensation
3.5

 
5.9

 
3.2

Income from equity affiliates
(6.6
)
 
(2.0
)
 
(3.8
)
Gain on sale of intangible assets
(4.3
)
 

 

Excess tax benefits of stock-based awards
(0.5
)
 
(0.6
)
 
(0.5
)
Cash dividends received from equity affiliates
3.9

 
4.4

 
3.7

Other items
0.1

 
0.8

 
1.0

Net changes in operating working capital
12.8

 
18.6

 
0.8

Net cash provided (used) by operating activities of:
 
 
 
 
 
Continuing operations
144.6

 
166.4

 
175.8

Discontinued operations
0.1

 
(0.5
)
 
2.3

Cash Provided by Operations
$
144.7

 
$
165.9

 
$
178.1

 
Net cash provided by operations was $144.7 million in the year ended December 31, 2015 compared with $165.9 million in the prior year. Our net cash provided by operations decreased due primarily to higher non-cash adjustments for income from Chinese joint ventures of $4.6 million, gain on the sale of intangibles of $4.3 million, change in deferred taxes of $10.0 million and a decrease in operating working capital of $5.8 million.

Net cash provided by operations was $165.9 million in 2014 compared with $178.1 million in 2013.  Our net cash provided by operations decreased due to lower net income from continuing operations excluding non-cash impairment charges in 2014 and the lower impact of deferred taxes partially offset by a favorable net change in working capital.
Operating Working Capital ($ in millions)
For the Years Ended December 31,
2015
 
2014
 
2013
Changes in operating working capital
 
 
 
 
 
Accounts receivable
$
(18.0
)
 
$
13.3

 
$
4.4

Inventories
1.3

 
14.9

 
(1.0
)
Prepaid expenses
1.1

 
(0.6
)
 
0.1

Accounts payable
6.5

 
3.1

 
(1.5
)
Accrued expenses
3.7

 
(8.0
)
 
3.4

Accrued income taxes
18.2

 
(4.1
)
 
(4.6
)
Net changes in operating working capital
$
12.8

 
$
18.6

 
$
0.8


In 2015, net changes in operating working capital provided cash flow of $12.8 million compared with $18.6 million in the prior year. The 2015 unfavorable net change in working capital was driven by increases in inventory and accounts receivable from acquisitions, partially offset by higher accrued expenses and accrued taxes.


48


In 2014, net changes in operating working capital provided cash flow of $18.6 million compared $0.8 million in the prior year. The 2014 favorable change in working capital was driven by the timing of collection of certain payments during 2014, reduced inventory levels, as well as timing of purchases versus payments of accounts payable.

In 2013, net changes in operating working capital provided cash flow of $0.8 million compared with cash usage of $3.2 million in the prior year. The 2013 favorable change in working capital was driven by the collection of certain advance payments during late 2012, timing of purchases versus payments of accounts payable, as well as timing of income tax installments.
Cash Flows from Investing Activities ($ in millions)
For the Years Ended December 31,
2015
 
2014
 
2013
Capital spending
$
(24.2
)
 
$
(35.1
)
 
$
(29.1
)
Capitalized software costs
(0.9
)
 
(1.0
)
 
(0.5
)
Acquisitions, net of cash acquired
(280.6
)
 
(32.6
)
 
(229.7
)
Investment in equity affiliates

 
(8.8
)
 

Other
(8.0
)
 
3.0

 
5.6

Cash Used for Investing
$
(313.7
)
 
$
(74.5
)
 
$
(253.7
)
 
Cash used for investing activities during 2015 was $313.7 million and consisted primarily of funds used in the Argotec acquisition as well as capital spending, including expansion of DelStar both within its existing facilities as well as the new site in Poland.

Cash used for investing activities during 2014 was $74.5 million and consisted primarily of funds used in business acquisitions as well as capital spending, including expansion of DelStar at its new site in Poland, and investments in CTS, our RTL joint venture in China which began operations in September 2014.

Cash used for investing activities during 2013 was $253.7 million and consisted primarily of funds used to purchase DelStar and capital spending, including a $3.1 million purchase of a LIP printing press in connection with the termination of an outside printing services contract. The Company received cash proceeds of $7.1 million from the sale of its Philippine mill.

Capital Spending

Capital spending was $24.2 million, $35.1 million and $29.1 million in 2015, 2014 and 2013, respectively.  During 2015, 2014 and 2013, capital spending was primarily related to maintenance capital spending, expansion of DelStar, and the rebuild of certain paper manufacturing lines.

We incur capital spending as necessary to meet legal requirements and otherwise in connection with the protection of the environment at our facilities in the United States, United Kingdom, France, Brazil, Canada, China and Poland.  For these purposes, we expect to incur capital expenditures of less than $2.0 million in each of 2016 and 2017, of which no material amount is expected to be the result of environmental fines or settlements.  The foregoing capital expenditures are not expected to reduce our ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on our financial condition or results of operations.



49


Cash Flows from Financing Activities ($ in millions)
For the Years Ended December 31,
2015
 
2014
 
2013
Cash dividends paid to SWM stockholders
$
(46.9
)
 
$
(44.5
)
 
$
(39.5
)
Net proceeds from borrowings
149.1

 
57.3

 
227.5

Payments for debt issuance costs
(7.4
)
 

 

Purchases of common stock
(2.9
)
 
(52.5
)
 
(1.7
)
Proceeds from exercises of stock options

 

 
0.5

Excess tax benefits of stock-based awards
0.5

 
0.6

 
0.5

Cash (Used in) Provided by Financing
$
92.4

 
$
(39.1
)
 
$
187.3


During 2015, financing activities consisted primarily of net proceeds from borrowings of $149.1 million offset by cash dividends of $46.9 million paid to SWM stockholders, payments for debt issuance costs related to the Company's Amended Credit Agreement of $7.4 million and share repurchases of $2.9 million.

During 2014, financing activities consisted primarily of net proceeds from borrowings of $57.3 million offset by cash dividends of $44.5 million paid to SWM stockholders and share repurchases of $52.5 million.

During 2013, financing activities consisted primarily of net proceeds from borrowings of $227.5 million used to acquire DelStar partially offset by cash dividends of $39.5 million paid to SWM stockholders and share repurchases of $1.7 million.
 
Dividend Payments
 
We have declared and paid cash dividends on our common stock every fiscal quarter since the second quarter of 1996. On February 17, 2016, we announced a cash dividend of $0.40 per share payable on March 25, 2016 to stockholders of record as of the close of business on February 26, 2016. Our Amended Credit Agreement covenants require that we maintain certain financial ratios, as disclosed in Note 12, Debt, of the Notes to Consolidated Financial Statements, none of which under normal business conditions materially limit our ability to pay such dividends. We will continue to assess our dividend policy in light of our capital allocation strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.

Share Repurchases
 
In 2015, 2014 and 2013, we repurchased 63,365 shares, 54,032 shares, and 43,458 shares, respectively, of our common stock at a cost of $2.9 million, $2.6 million and $1.7 million, respectively, for the value of employees' stock-based compensation share awards surrendered to satisfy their personal statutory income tax withholding obligations.

In September 2013, our Board of Directors authorized the repurchase of up to $50.0 million of our Common Stock during the period from November 8, 2013 to December 31, 2014. In 2014, we repurchased a total of 1,107,780 shares of our common stock at a cost of $50.0 million pursuant to such Board action. See Part II, Item 5, Repurchases of Equity Securities.  

Debt Instruments and Related Covenants
Debt Instruments and Related Covenants ($ in millions)
For the Years Ended December 31,
2015
 
2014
 
2013
Changes in short-term debt
$
(0.4
)
 
$
(0.4
)
 
$

Proceeds from issuances of long-term debt
488.2

 
228.3

 
455.6

Payments on long-term debt
(338.7
)
 
(170.6
)
 
(228.1
)
Net (payments on) proceeds from borrowings
$
149.1

 
$
57.3

 
$
227.5

 

50


Net proceeds of long-term debt were $149.5 million during 2015. Absent substantial acquisition(s) or any share repurchases, the Company does not expect to incur any significant additional net borrowings during 2016.
 
In October 2015, Schweitzer-Mauduit International, Inc. entered into the Amended Credit Agreement, which provides an aggregate principal amount of $1 billion, consisting of a $650 million revolving credit facility maturing in October 2020, a $100 million Term Loan A-1 maturing in October 2020, and a $250 million Term Loan A-2 maturing in October 2022. The Term Loans are generally subject to mandatory repayment out of the net cash proceeds of asset sales which are not reinvested in operating assets. The credit facilities are secured by substantially all of the personal property of the Company and its domestic subsidiaries. Availability under the Amended Credit Agreement was $390.2 million as of December 31, 2015. We also had availability under our bank overdraft facilities and lines of credit of $28.8 million as of December 31, 2015.

The Amended Credit Agreement also contains representations and warranties which are customary for facilities of this type and covenants and provisions that, among other things, require the Company to maintain (a) a maximum net debt to EBITDA ratio of 3.50, reducing to 3.00 after September 30, 2016 and (b) minimum interest coverage of 3.00. The Amended Credit Agreement contains provisions allowing the Company to increase the leverage ratio upon the occurrence of a material acquisition or the occurrence of unsecured indebtedness. The Company was in compliance with all of its covenants under the Amended Credit Agreement at December 31, 2015. With the current level of borrowing and forecasted results, we expect to remain in compliance with our Amended Credit Agreement financial covenants.

Our total debt to capital ratios at December 31, 2015 and December 31, 2014 were 55.0% and 47.2%, respectively.

Off-Balance Sheet Arrangements

As of December 31, 2015, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Other Factors Affecting Liquidity and Capital Resources

The following table represents our future contractual cash requirements for the next five years and thereafter for our long-term debt obligations and other commitments ($ in millions):
 
Payments due for the years ended
Contractual Obligations
Total
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Current debt (1)
$
5.0

 
$
5.0

 
$

 
$

 
$

 
$

 
$

Long-term debt (2)
575.2

 

 
4.9

 
5.4

 
5.1

 
322.9

 
236.9

Debt interest (3)
89.2

 
14.0

 
13.9

 
13.8

 
13.0

 
12.7

 
21.8

Restructuring obligations (4)
7.7

 
5.9

 
0.6

 
1.2

 

 

 

Minimum operating lease
payments (5)
29.4

 
4.5

 
3.6

 
2.7

 
2.7

 
2.7

 
13.2

Purchase obligations - raw
materials (6)
26.9

 
14.6

 
2.3

 
1.7

 
1.7

 
1.7

 
4.9

Purchase obligations - energy (7)
79.4

 
25.9

 
17.8

 
9.4

 
7.7

 
5.5

 
13.1

Other long-term liabilities (8) (9) (10) (11)
3.2

 
3.2

 

 

 

 

 

Total
$
816.0