Annual Report on Form 10-K June 30, 2006
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended June 30, 2006
or
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Transition Period From ____ to ____
Commission
file number: 33-60032
Buckeye
Technologies Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
62-1518973
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
1001
Tillman Street, Memphis, Tennessee
|
|
38112
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (901) 320-8100
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 $0.1 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
¨
No
x
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
¨
No
x
Note
-
Checking the box above will not relieve any registrant required to file report
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under
those Sections.
Indicate
by check mark whether 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
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer” or “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one).
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will 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 a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No
x
As
of
December 31, 2005, the aggregate market value of the registrant’s voting common
equity held by non-affiliates, computed by reference to the price at which
the
common equity was last sold, was approximately $277.2 million.
As
of
August 25, 2006, there were outstanding 37,901,334 Common Shares of the
Registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of Buckeye Technologies Inc.’s 2006 Annual Proxy Statement to be filed with the
commission in connection with the 2006 Annual Meeting of Stockholders are
incorporated by reference into Part III and IV.
INDEX
BUCKEYE
TECHNOLOGIES INC.
ITEM
|
|
PAGE
|
|
PART
I
|
|
1.
|
Business
|
3
|
1a.
|
Risk
Factors
|
8
|
1b.
|
Unresolved
Staff Comments
|
10
|
2.
|
Properties
|
11
|
3.
|
Legal
Proceedings
|
11
|
4.
|
Submission
of Matters to a Vote of Security Holders
|
11
|
|
|
|
|
PART
II
|
|
5.
|
Market
for the Registrant’s Common Stock, Related Security Holder
Matters
|
13
|
6.
|
Selected
Financial Data
|
13
|
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
7a.
|
Qualitative
and Quantitative Disclosures About Market Risk
|
29
|
8.
|
Financial
Statements and Supplementary Data
|
30
|
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
30
|
9a.
|
Controls
and Procedures
|
30
|
9b.
|
Other
|
31
|
|
|
|
|
PART
III
|
|
10.
|
Directors
and Executive Officers of the Registrant
|
32
|
11.
|
Executive
Compensation
|
33
|
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
33
|
13.
|
Certain
Relationships and Related Transactions
|
33
|
14.
|
Principal
Accountant Fees and Services
|
33
|
|
|
|
|
PART
IV
|
|
15.
|
Exhibits
and Financial Statement Schedules
|
34
|
|
Signatures
|
35
|
|
|
|
|
OTHER
|
|
|
Index
to Consolidated Financial Statements and Schedules
|
F-1
|
|
|
|
PART
I
Item
1. Business
General
Buckeye
Technologies Inc. is a leading producer of value-added cellulose-based specialty
products, headquartered in Memphis, Tennessee. We believe that we have leading
positions in many of the high-end niche markets in which we compete. We utilize
our expertise in polymer chemistry, leading research and development and
advanced manufacturing facilities to develop and produce innovative and
proprietary products for our customers. We sell our products to a wide array
of
technically demanding niche markets in which we believe our proprietary
products, manufacturing processes and commitment to customer technical service
give us a competitive advantage. We are the only manufacturer in the world
offering cellulose-based specialty products made from both wood and cotton
and
utilizing wetlaid and airlaid technologies. As a result, we believe we produce
and market a broader range of cellulose-based specialty products than any of
our
competitors. We produce precisely tailored products designed to meet individual
customer requirements. Our focus on specialty niche markets allows us to
establish long-term supply positions with key customers. We operate
manufacturing facilities in the United States, Canada, Germany and Brazil.
Cellulose
is a natural fiber derived from trees and other plants that is used in the
manufacture of a wide array of products. The total cellulose market generally
can be divided into two categories: commodity and specialty. Manufacturers
use
commodity cellulose to produce bulk paper and packaging materials, the markets
for which are very large but highly cyclical. Specialty cellulose is used to
impart unique chemical or physical characteristics to a diverse range of highly
engineered products. Specialty cellulose generally commands higher prices,
and
demand for specialty cellulose is less cyclical than commodity cellulose. We
believe the more demanding performance requirements for products requiring
specialty cellulose limit the number of participants in our niche markets. Our
focus on niche specialty cellulose markets has enabled us to maintain positive
cash flows even during cyclical downturns in the commodity cellulose
markets.
Company
History
We
and
our predecessors have participated in the specialty cellulose market for over
80
years and have developed new uses for many cellulose-based products. We began
operations as an independent company on March 16, 1993, when we acquired the
cellulose manufacturing operations of Procter & Gamble located in Memphis,
Tennessee and Perry, Florida (the Foley Plant), with Procter & Gamble
retaining a 50% limited partnership interest in the Foley Plant. We became
a
public company in November of 1995 and simultaneously acquired and redeemed
Procter & Gamble’s remaining interest in the Foley Plant.
In
May
1996, we acquired the specialty cellulose business of Peter Temming AG located
in Glueckstadt, Germany. In September 1996, we acquired Alpha Cellulose
Holdings, Inc., a specialty cellulose producing facility located in Lumberton,
North Carolina. In May 1997, we acquired Merfin International Inc., a leading
manufacturer of airlaid nonwovens with facilities located in Canada, Ireland
and
the United States. In October 1999, we acquired essentially all of the assets
of
Walkisoft, UPM-Kymmene’s airlaid nonwovens business. The acquisition of
Walkisoft added manufacturing facilities in Steinfurt, Germany and Gaston
County, North Carolina. In March 2000, we acquired the intellectual property
rights to the Stac-Pac™ folding technology. In August 2000, we acquired the
cotton cellulose business of Fibra, S.A. located in Americana, Brazil. In
calendar 2001, we commenced operating the world’s largest airlaid nonwovens
machine at our Gaston, North Carolina facility and started up a cosmetic cotton
fiber line at our Lumberton, North Carolina facility.
Due
to a
decline in demand for cotton content paper, in August 2003, we closed the
specialty cotton papers portion of our Lumberton, North Carolina facility.
Due
to excess airlaid production capacity around the globe we closed our single-line
airlaid nonwovens facility in Cork, Ireland during July 2004. In December 2005,
we ceased production at our cotton linter pulp facility in Glueckstadt, Germany.
In conjunction with this closure, we upgraded the capability of our Americana,
Brazil manufacturing facility. This expansion was completed during fiscal year
2006. See Note 4, Impairment of Long-Lived Assets and Assets Held for Sale,
to
the Consolidated Financial Statements for further discussion of the Lumberton,
North Carolina; Cork, Ireland; and Glueckstadt, Germany closures.
We
are
incorporated in Delaware and our executive offices are located at 1001 Tillman
Street, Memphis, Tennessee. Our telephone number is (901) 320-8100.
Products
Our
product lines can be broadly grouped into four categories: chemical cellulose,
customized fibers, fluff pulp and nonwoven materials. We manage these products
within two reporting segments: specialty fibers and nonwoven materials. The
chemical cellulose and customized fibers are derived from wood and cotton
cellulose materials using wetlaid technologies. Fluff pulps are derived from
wood using wetlaid technology. Wetlaid technologies encompass cellulose
manufacturing processes in which fibers are deposited using water. Airlaid
nonwoven materials are derived from wood pulps, synthetic fibers and other
materials using airlaid technology. Airlaid technology utilizes air as a
depositing medium for fibers, one benefit of which is an increased ability
as
compared to wetlaid processes to mix additional feature-enhancing substances
into the material being produced. A breakdown of our major product categories,
percentage of sales, product attributes and applications is provided below.
Product
Groups
|
%
of Fiscal 2006 Sales
|
Value
Added Attributes
|
Market
for End Use Applications
|
Specialty
Fibers
Chemical
Cellulose
Food
casings
Rayon
industrial
cord
High
purity cotton
ethers
Film
for liquid
crystal
displays
|
32%
|
Purity
and strength
Strength
and heat stability
High
viscosity, purity and safety
Transparency/clarity,
strength and
purity
|
Hot
dog and sausage casings
High
performance tires and hose reinforcement
Personal
care products, low fat dairy products, pharmaceuticals and construction
materials
Laptop
and desktop computers and
television
screens
|
Customized
Fibers
Filters
Specialty
cotton
papers
Cosmetic
Cotton
Buckeye
UltraFiber 500â
|
17%
|
High
porosity and product life
Color
permanence and tear resistance
Absorbency,
strength and softness
Finishing
and crack reduction
|
Automotive,
laboratory and industrial filters
Personal
stationery, premium letterhead and currency
Cotton
balls and cotton swabs
Concrete
(residential slab on grade)
|
Fluff
Pulp
Fluff
pulp
|
18%
|
Absorbency
and fluid transport
|
Disposable
diapers, feminine hygiene products and adult incontinence
products
|
Nonwoven
Materials
Airlaid
nonwovens
|
33%
|
Absorbency,
fluid management and wet strength
|
Feminine
hygiene products, specialty wipes and mops, tablecloths, napkins,
placemats, incontinence products and food pads
|
See
Note
17, Segment Information, to the Consolidated Financial Statements for additional
information on products.
Raw
Materials
Slash
pine timber and cotton fibers are the principal raw materials used in the
manufacture of our specialty fibers products. These materials represent the
largest components of our variable costs of production. The region surrounding
the Foley Plant has a high concentration of slash pine timber, which enables
us
to purchase adequate supplies of a species well suited to our products at an
attractive cost. In order to be better assured of a secure source of wood at
reasonable prices, we have entered into timber purchase agreements which allow
us to purchase a portion of our wood at market prices that are fixed annually
or
current market prices as stated in the agreements. Additional information is
included in Note 19, Commitments, to the Consolidated Financial
Statements.
We
purchase cotton fiber either directly from cottonseed oil mills or indirectly
through agents or brokers. We purchase the majority of our requirements of
cotton fiber for the Memphis and Lumberton plants domestically. The majority
of
the cotton fiber processed in the Americana plant comes from within Brazil.
Fluff
pulp is the principal raw material used in the manufacture of our nonwoven
materials products. Approximately 60% of our fluff pulp usage is supplied
internally and the remainder is purchased from several other suppliers. In
addition to fluff pulp, these products are comprised of synthetic fibers, latex
polymers, absorbent powders and carrier tissue depending on grade
specifications. These materials are also purchased from multiple sources.
The
cost
and availability of slash pine timber, cotton fiber, and fluff pulp are subject
to market fluctuations caused by supply and demand factors. We do not foresee
material constraints from pricing or availability for any of our key raw
materials.
Our
manufacturing processes especially for specialty fibers, requires significant
amounts of fuel oil and natural gas. These manufacturing inputs are subject
to
significant changes in prices and availability, which could adversely impact
our
future operating results.
Sales
and Customers
Our
products are marketed and sold through a highly trained and technically skilled
in-house sales force. We maintain sales offices in the United States and Europe.
Our worldwide sales are diversified by geographic region as well as end-product
application. Our sales are distributed to customers in approximately 60
countries around the world. Our fiscal 2006 sales reflect this geographic
diversity, with 42% of sales in North America, 38% of sales in Europe, 10%
of
sales in Asia, 4% of sales in South America and 6% in other regions.
Approximately 83% of our worldwide sales, for fiscal 2006, were denominated
in
U.S. dollars. Our products are shipped by rail, truck and ocean carrier.
Geographic segment data and product sales data are included in Note 17, Segment
Information, to the Consolidated Financial Statements.
Sales
by
geographical destination for the three years ended June 30, 2006 were as
follows:
(in
millions)
Sales
by Destination
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
United
States
|
|
$
|
230
|
|
|
32
|
%
|
$
|
235
|
|
|
33
|
%
|
$
|
194
|
|
|
30
|
%
|
Italy
|
|
|
66
|
|
|
9
|
|
|
56
|
|
|
8
|
|
|
47
|
|
|
7
|
|
Germany
|
|
|
59
|
|
|
8
|
|
|
63
|
|
|
9
|
|
|
59
|
|
|
9
|
|
Canada
|
|
|
47
|
|
|
6
|
|
|
48
|
|
|
7
|
|
|
40
|
|
|
6
|
|
Japan
|
|
|
38
|
|
|
5
|
|
|
38
|
|
|
5
|
|
|
39
|
|
|
6
|
|
Spain
|
|
|
25
|
|
|
3
|
|
|
23
|
|
|
3
|
|
|
22
|
|
|
3
|
|
Mexico
|
|
|
25
|
|
|
3
|
|
|
16
|
|
|
2
|
|
|
21
|
|
|
3
|
|
France
|
|
|
22
|
|
|
3
|
|
|
19
|
|
|
3
|
|
|
21
|
|
|
3
|
|
Brazil
|
|
|
21
|
|
|
3
|
|
|
26
|
|
|
4
|
|
|
22
|
|
|
3
|
|
All
other
|
|
|
194
|
|
|
27
|
|
|
189
|
|
|
26
|
|
|
191
|
|
|
28
|
|
Total
|
|
$
|
728
|
|
|
100
|
%
|
$
|
713
|
|
|
100
|
%
|
$
|
657
|
|
|
100
|
%
|
The
high-end, technically demanding specialty niche markets that we serve require
a
higher level of sales and technical service support than do commodity product
sales. Our sales, product development and customer service professionals work
with customers in their plants to design products tailored precisely to their
product needs and manufacturing processes. In addition to an in-house sales
force, we also utilize outside sales agents in some parts of the world.
Procter
& Gamble is our largest customer, accounting for 13% of our fiscal 2006 net
sales. Nonwoven materials account for approximately 60% of the total sales
to
Procter & Gamble. No other customer accounted for greater than 6% of our
fiscal 2006 net sales.
Research
and Development
Our
research and development activities focus on developing new products, improving
existing products, and enhancing process technologies to further reduce costs
and respond to environmental needs. We have research and development pilot
plant
facilities in Memphis, and we employ engineers, scientists and technicians
who
are focused on advanced products and new applications to drive future growth.
Our pilot plant facilities allow us to produce, test and deliver breakthrough
products to the market place on a more cost-effective basis while minimizing
interruptions to the normal production cycles of our operating
plants.
Research
and development costs of $9.2, $8.8 million and $9.5 million were charged to
expense as incurred for the years ended June 30, 2006, 2005 and 2004,
respectively.
Competition
There
are
relatively few specialty fibers producers when compared with the much larger
commodity paper pulp markets. The technical demands and unique requirements
of
the high-purity chemical cellulose or customized fiber pulp user tend to
differentiate suppliers on the basis of their ability to meet the customer’s
particular set of needs, rather than focusing only on pricing. The high-purity
chemical cellulose and customized fiber markets are less subject to price
variation than commodity paper pulp markets. Major competitors include
Archer-Daniels-Midland, Borregaard, Rayonier, Tembec and Weyerhaeuser. A major
competitor closed its high-purity wood cellulose mill in July 2003, which we
estimate represented 18% of the high-purity wood cellulose market. This closure
provided us with an opportunity to increase our volume in these
markets.
We
believe that the number of producers is unlikely to grow significantly given
the
substantial investment to enter the mature specialty fibers market and
sufficient existing capacity.
Although
demand for fluff pulp is generally stable, fluff pulp prices tend to vary
together with commodity paper pulp prices because fluff pulp is often produced
in mills that also produce commodity paper pulp. Our strategy is to reduce
our
exposure to fluff pulp by increasing our sales of more specialized wood
cellulose into new and existing markets. We also use about 43,000 metric tons
of
fluff pulp from our Foley plant annually as a key raw material in our airlaid
nonwovens operations. We currently produce less than 10% of the world’s supply
of fluff pulp. Major competitors include Bowater, International Paper, Koch
Industries, Rayonier and Weyerhaeuser,
Demand
for airlaid nonwovens grew significantly in the 1990’s. Since then, significant
capacity expansion in 2001, primarily in North America, resulted in the market
being oversupplied. Buckeye is the leading supplier of airlaid nonwoven
materials worldwide. The markets we compete in also utilize nonwovens materials
produced with technologies other than airlaid such as spunlace. Major nonwovens
competitors include Ahlstrom, BBA Nonwovens, Concert Industries, Duni, Koch
Industries, Kimberly Clark and PGI.
The
closure of our Cork, Ireland plant in July 2004 improved airlaid industry
capacity utilization in Europe and improved our competitive position there.
We
successfully transitioned more than half of Cork's business to other airlaid
production sites. There is limited availability of airlaid nonwoven capacity
in
Europe, while the North American industry is operating in an environment of
excess supply.
Intellectual
Property
At
June
30, 2006 and 2005, we had intellectual property assets recorded totaling $25.2
and $27.6 million, respectively. These amounts include patents (including
application and defense costs), licenses, trademarks, and tradenames the
majority of which were obtained in the acquisition of airlaid nonwovens
businesses and Stac-Pacâ
technology. We intend to protect our patents and file applications for any
future inventions that are deemed to be important to our business operations.
The Stac-Pacâ
packaging technology, a proprietary system for packaging low-density nonwoven
materials in compressed cube-shaped bales, is an example of technology we
acquired to further differentiate us from our airlaid nonwovens competitors.
Stac-Pacâ
bales
facilitate our customers’ high-speed production lines with a continuous flow of
material. Stac-Pacâ
units
also reduce freight costs by compressing more material in a bale than can be
shipped in a traditional roll form, which enables us to ship the bales more
effectively in trucks and containers. Additional information is included in
Note
1, Accounting Policies, to our Consolidated Financial Statements.
Inflation
We
believe that inflation has not had a material effect on our results of
operations or on our financial condition during recent periods.
Seasonality
Our
business has generally not been seasonal to a substantial extent. However,
somewhat lower specialty fiber volume is shipped in the July - September
quarter.
Employees
As
of
August 25, 2006, we employed approximately 1,600 employees, of whom
approximately 1,130 are employed at our facilities in the United States.
Approximately 55% of the U.S. employees are represented by unions at two plants
in Perry, Florida; and Memphis, Tennessee. On October 21, 2003, the union at
our
Foley Plant ratified a new labor agreement effective through March 31, 2008.
The
agreement for the Memphis Plant is in effect through March 18, 2009. The union
at our Canadian facility ratified a new labor agreement effective through June
30, 2009. A national union provides employee representation for non-management
workers at our specialty fibers plant in Americana, Brazil.
During
fiscal 2003, the Lumberton Plant’s hourly employees elected to be represented by
a union. A two-year labor agreement was ratified on May 1, 2004. The employees
at the Lumberton plant petitioned the National Labor Relations Board and
effective May 3, 2006, revoked union certification. The Lumberton Plant hourly
employees are no longer represented by a union.
A
works
council provides employee representation for non-management workers at our
nonwoven materials plant in Steinfurt, Germany.
Our
plants in Gaston and King, North Carolina are not unionized.
None
of
our facilities has had labor disputes or work stoppages in recent history.
The
Foley and Memphis Plants have not experienced any work stoppages due to labor
disputes in over 30 years and 50 years, respectively. We consider our
relationships with our employees and their representative organizations to
be
good. An extended interruption of operations at any of our facilities could
have
a material adverse effect on our business.
Environmental
Regulations and Liabilities
Our
operations are subject to extensive general and industry-specific federal,
state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with such requirements. Because it is
difficult to predict the scope of future requirements, we can offer no assurance
that we will not incur material environmental compliance costs or liabilities
in
the future. Our failure to comply with environmental laws or regulations could
subject us to penalties or other sanctions which could materially affect our
business, results of operations or financial condition. Additional information
is included in Note 20, Contingencies, to the Consolidated Financial
Statements.
Other
Information
Our
website is www.bkitech.com.
We make
available, free of charge, through our website under the heading “Investor
Relations,” annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those filed or furnished,
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934. The information on our website is not part of or incorporated by reference
in this Annual Report on Form 10-K.
These
reports are also available as soon as reasonably practicable after we
electronically file such materials with, or furnish such materials to, the
Securities and Exchange Commission, or the SEC. The public may also read and
copy any materials we file with the SEC at the SEC’s Public Reference Room at
Station Place, 100 F Street NE, Washington, D.C. 20549. In addition, the SEC
maintains an internet site that contains reports, proxy and information
statements and other information filed electronically by us, which are available
at http://www.sec.gov.
Safe
Harbor Provisions
This
document contains both historical and forward-looking statements. All statements
other than statements of historical fact are, or may be deemed to be,
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. These forward-looking statements are not
based
on historical facts, but rather reflect management’s current expectations
concerning future results and events.
These
forward-looking statements generally can be identified by the use of statements
that include phrases such as "believe," "expect," "anticipate," "intend,"
"plan," "foresee," "likely," "will" or other similar words or phrases.
Similarly, statements that describe management’s objectives, plans or goals are
or may be forward-looking statements. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that are difficult
to
predict and which may cause the actual results, performance or achievements
to
be different from any future results, performance and achievements expressed
or
implied by these statements.
The
following important factors, among others, could affect future results, causing
these results to differ materially from those expressed in our forward-looking
statements: pricing fluctuations and worldwide economic conditions; dependence
on a single customer; fluctuation in the costs of raw materials; competition;
inability to predict the scope of future environmental compliance costs or
liabilities; and the ability to obtain additional capital, maintain adequate
cash flow to service debt as well as meet operating needs.
The
forward-looking statements included in this document are only made as of the
date of this document and we do not have any obligation to publicly update
any
forward-looking statements to reflect subsequent events or
circumstances.
Item
1a. Risk Factors
In
addition to the risks and uncertainties discussed elsewhere in this Annual
Report on Form 10-K (particularly in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations), the following are
some important factors that could materially impact our results of operations
and financial condition.
Risks
related to our business
Our
substantial indebtedness could adversely affect our financial
health.
As
of
June 30, 2006, our total debt was approximately $522 million and our total
debt,
as a percentage of total capitalization, was 64%. Our level of debt could have
a
significant adverse future effect on our business. For example:
- |
we
may have limited ability to borrow additional amounts for working
capital,
capital expenditures, acquisitions, debt service requirements, execution
of our growth strategy, research and development costs or other
purposes;
|
- |
a
substantial portion of our cash flow may be used to pay principal
and
interest on our debt, which will reduce the funds available for working
capital, capital expenditures, acquisitions and other
purposes;
|
- |
our
senior secured credit facility covenants require us to meet certain
financial objectives and impose other restrictions on business operations.
These covenants and the covenants contained in the indentures governing
our senior subordinated notes will limit our ability to borrow additional
funds or dispose of assets and limit our flexibility in planning
for and
reacting to changes in our
business;
|
- |
we
may be more vulnerable to adverse changes in general economic, industry
and competitive conditions and adverse changes in government
regulation;
|
- |
our
high debt level and the various covenants contained in the indentures
related to our senior notes, senior subordinated notes and the documents
governing our other existing indebtedness may place us at a relative
competitive disadvantage as compared to certain of our competitors;
|
- |
our
borrowings under our senior secured credit facility are at floating
rates
of interest, which could result in higher interest expense in the
event of
an increase in interest rates.
|
Our
ability to pay principal of and interest on our senior notes and senior
subordinated notes, to service our other debt and to refinance indebtedness
when
necessary depends on our financial and operating performance, each of which
is
subject to prevailing economic conditions and to financial, business and other
factors beyond our control.
We
cannot
assure you that we will generate sufficient cash flow from operations or that
we
will be able to obtain sufficient funding to satisfy all of our obligations.
If
we are unable to pay our debts, we will be required to pursue one or more
alternative strategies, such as selling assets, refinancing or restructuring
our
indebtedness or selling additional equity capital. However, we cannot assure
you
that any alternative strategies will be feasible at the time or prove adequate.
Also, certain alternative strategies will require the consent of our senior
secured lenders before we engage in any such strategy.
If
our significant customer changes its purchasing habits, our business could
be
adversely impacted.
Procter
& Gamble is our largest single customer. We supply Procter & Gamble with
fluff pulp and airlaid nonwovens. While Procter & Gamble has previously
accounted for a higher percentage of our total revenues, sales to Procter &
Gamble accounted for approximately 13% of our sales in fiscal year 2006. In
the
event that Procter & Gamble fails to continue to purchase these products
from us in substantial volume, our results of operations and financial condition
could be materially and adversely affected.
Compliance
with extensive general and industry specific environmental laws and regulations
requires significant resources, and the significant associated costs may
adversely impact our business.
Our
operations are subject to extensive general and industry specific federal,
state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with these requirements. Because it is
difficult to predict the scope of future requirements, there can be no assurance
that we will not in the future incur material environmental compliance costs
or
liabilities.
The
Foley
Plant, located in Perry, Florida, discharges treated wastewater into the
Fenholloway River. Under the terms of an agreement with the Florida Department
of Environmental Protection (“FDEP”), approved by the U. S. Environmental
Protection Agency (the “EPA”) in 1995, we agreed to a comprehensive plan to
attain Class III (“fishable/swimmable”) status for the Fenholloway River under
applicable Florida law (the “Fenholloway Agreement”). The Fenholloway Agreement
requires us, among other things, to (i) make process changes within the Foley
Plant to reduce the coloration of its wastewater discharge, (ii) restore certain
wetlands areas, (iii) relocate the wastewater discharge point into the
Fenholloway River to a point closer to the mouth of the river, and (iv) provide
oxygen enrichment to the treated wastewater prior to discharge at the new
location. We have completed the process changes within the Foley Plant as
required by the Fenholloway Agreement. In making these in-plant process changes,
we incurred significant expenditures, and, as discussed in the following
paragraph, we expect to incur significant additional capital expenditures to
comply with the remaining obligations under the Fenholloway
Agreement.
Based
on
the requirements, we expect to incur additional capital expenditures of
approximately $60 million over 8 to 10 years, possibly beginning as early as
fiscal year 2007. The amount and timing of these capital expenditures may vary
depending on a number of factors. For additional information on environmental
matters, see Note 20 to the Consolidated Financial Statements. These possible
expenditures could have a material adverse effect on our business, results
of
operations or financial condition.
Because
approximately 68% of our sales are to customers outside the United States,
we
are subject to the economic and political conditions of foreign
nations.
We
have
manufacturing facilities in four countries and sell products in approximately
60
countries. For the fiscal year ended June 30, 2006, sales of our products
outside the United States represented approximately 68% of our sales. The global
economy and relative strength or weakness of the U. S. dollar can have a
significant impact on our sales. In addition, although approximately 83% of
our
sales are denominated in U.S. dollars, it is possible that as we expand
globally, we will face increased risks associated with operating in foreign
countries, including:
- |
the
risk that foreign currencies will be devalued or that currency exchange
rates will fluctuate;
|
- |
the
risk that limitations will be imposed on our ability to convert foreign
currencies into U.S. dollars or on our foreign subsidiaries' ability
to
remit dividends and other payments to the United
States;
|
- |
the
risk that our foreign subsidiaries will be required to pay withholding
or
other taxes on remittances and other payments to the United States
or that
the amount of any such taxes will be
increased;
|
- |
the
risk that certain foreign countries may experience hyperinflation;
|
and
- |
the
risk that foreign governments may impose or increase investment or
other
restrictions affecting our
business.
|
Exposure
to commodity products creates volatility in pricing and
profits.
If
our
research and development efforts do not result in the commercialization of
new,
proprietary products, we will continue to have significant exposure to fluff
pulp, which could result in volatility in sales prices and profits.
Our
failure to maintain satisfactory labor relations could have a material adverse
effect on our business.
If
our
negotiations with the representatives of the unions, to which many of our
employees belong, are not successful, our operations could be subject to
interruptions at many of our facilities. As
of
August 25, 2006, we employed approximately 1,600 employees, of whom
approximately 1,130 are employed at our facilities in the United States.
Approximately 55% of the U.S. employees are represented by unions at two plants
in Perry, Florida; and Memphis, Tennessee. On October 21, 2003, the union at
our
Foley Plant ratified a new labor agreement effective through March 31, 2008.
The
agreement for the Memphis Plant is in effect through March 18, 2009. The union
at our Canadian facility ratified a new labor agreement effective through June
30, 2009.
Works
councils provide employee representation for non-management workers at our
specialty fibers plant in Americana, Brazil, and our nonwoven materials plant
in
Steinfurt, Germany. Our plants in Gaston, Lumberton and King, North Carolina
are
not unionized.
None
of
our facilities has had labor disputes or work stoppages in recent history.
The
Foley and Memphis Plants have not experienced any work stoppages due to labor
disputes in over 30 years and 50 years, respectively. We consider our
relationships with our employees and their representative organizations to
be
good. An extended interruption of operations at any of our facilities could
have
a material adverse effect on our business.
Risks
related to our industry
We
are subject to the cyclicality of our industry.
The
demand and pricing of our products, particularly fluff pulp, are influenced
by
the much larger market for papermaking pulps which is highly cyclical. The
markets for most cellulose and absorbent products are sensitive to both changes
in general global economic conditions and to changes in industry capacity.
Both
of these factors are beyond our control. The price of these products can
fluctuate significantly when supply and demand become imbalanced for any reason.
Our financial performance can be heavily influenced by these pricing
fluctuations and the general cyclicality of the industries in which we compete.
We cannot assure you that current prices will be maintained, that any price
increases will be achieved, or that industry capacity utilization will reach
favorable levels. The demand, cost and prices for our products may thus
fluctuate substantially in the future and downturns in market conditions could
have a material adverse effect on our business, results of operations and
financial condition.
Competition
and surplus capacity could adversely affect our operating results and financial
condition.
The
markets for our products are all competitive. Actions by competitors can affect
our ability to sell our products and can affect the volatility of the prices
at
which our products are sold. Other actions by competitors, such as reducing
costs or adding low-cost capacity, may adversely affect our competitive position
in the products we manufacture and, consequently, our sales, operating income
and cash flows.
Market
fluctuations in the availability and cost of energy and raw materials are beyond
our control and may adversely impact our business.
Energy,
chemicals, and raw material costs, including fuel oil, natural gas, electricity,
cotton linters, wood, and caustic and other chemicals are a significant
operating expense. The prices and availability of raw materials and energy
can
be volatile and are susceptible to rapid and substantial changes due to factors
beyond our control such as changing economic conditions, currency fluctuations,
weather conditions, political unrest and instability in energy-producing
nations, and supply and demand considerations. For example, energy and chemical
costs have increased substantially which has resulted in increased production
costs for our products. Increases in production costs could have a material
adverse effect on our business, financial condition and results of operations.
In addition to increased costs, it is possible that a disruption in supply
of
natural gas or other fossil fuels could limit our ability to operate our
facilities.
Market
fluctuations in the availability and cost of transportation are beyond our
control and may adversely impact our business.
Our
business depends on the transportation of a large number of products, both
domestically and internationally. In the United States, an increase in
transportation rates or fuel surcharges and/or a reduction in transport
availability in truck and rail could negatively impact our ability to provide
products to our customers in a timely manner. While we have had adequate
transportation availability, there is no assurance that such availability can
continue to be effectively managed in the future.
Item
1b. Unresolved Staff Comments
None.
Item
2. Properties
Corporate
Headquarters. Our
corporate headquarters, research and development laboratories, and pilot plants
are located in Memphis, Tennessee.
Specialty
Fiber Plants
Memphis
Plant.
The
Memphis Plant is located on approximately 75 acres adjacent to the headquarters
complex and has a capacity of approximately 100,000 annual metric tons of cotton
cellulose. The facility currently operates at approximately 80% of
capacity.
Foley
Plant.
The
Foley Plant is located at Perry, Florida, on a 2,900 acre site and has a
capacity of approximately 465,000 annual metric tons of wood cellulose. In
connection with the acquisition of the Foley Plant, we also own 13,000 acres
of
real property near the plant site. As of June 30, 2006, the Foley Plant operated
at 100% capacity.
Lumberton
Plant.
The
Lumberton Plant is located in Lumberton, North Carolina on a 65-acre site and
has a capacity of approximately 8,000 annual metric tons of cosmetic cotton
fiber. As of June 30, 2006, the Lumberton Plant is operated at 90% of
capacity.
Americana
Plant. The
Americana Plant is located in the city of Americana in the state of Sao Paulo,
Brazil on 27 acres and is part of a multi-business industrial site. As of June
30, 2006, it was operating at approximately 50% of capacity as we ramp up
production to its full capacity of approximately 40,000 annual metric tons
of
cotton cellulose.
Nonwovens
Plants
The
stated capacity of airlaid nonwovens machines is based upon an assumed mix
of
products. The flexible nature of the airlaid technology allows for a wide range
of materials to be produced. Machine production capability has typically been
lower than the stated capacity, often by factors of 10-20%, when adjusted to
reflect the actual product mix. Based on current product mix, utilization of
our
airlaid machines worldwide, as of June 30, 2006, was operating at approximately
75% of capacity.
All
of
our airlaid nonwovens sites have proprietary Stac-Pac™ folding technology, which
allows us to efficiently produce compressed bales that facilitate customers’
high-speed production lines with a continuous flow of materials and facilitate
more efficient shipping.
Delta
Plant.
The
Delta Plant is located in Delta, British Columbia on a 12-acre industrial park
site and has a total capacity of approximately 30,000 annual metric tons of
airlaid nonwovens (26,000 based on current production mix) from two production
lines.
Steinfurt
Plant.
The
Steinfurt Plant is located in Steinfurt, Germany on an 18-acre site and has
a
total capacity of approximately 30,000 annual metric tons of airlaid nonwovens
from two production lines.
Gaston
Plant.
The
Gaston Plant is located in Gaston County near Mt. Holly, North Carolina on
an
80-acre site and has a total capacity of approximately 60,000 annual metric
tons
of airlaid nonwovens (48,000 annual metric tons based on current production
mix)
from two production lines.
King
Plant.
The
King Plant is located in King, North Carolina and converts airlaid materials
and
wetlaid papers into wipes, towels and tissues for industrial and commercial
uses.
We
own
our corporate headquarters, the Memphis Plant, the Foley Plant, the Lumberton
Plant, the Gaston Plant, the Delta, Canada Plant, the Steinfurt, Germany Plant
and the Americana, Brazil Plant. We lease buildings that house the King, North
Carolina Plant, the sales offices in Europe and distribution facilities in
Savannah, Georgia. All of the facilities located in the United States are
pledged as collateral for certain debt agreements.
We
believe that our specialty fibers and nonwoven materials manufacturing
facilities and administrative buildings are adequate to meet current operating
demands.
Item
3. Legal Proceedings
We
are
involved in certain legal actions and claims arising in the ordinary course
of
business. We believe that such litigation and claims will be resolved without
material adverse effect on our financial position or results of
operation.
Item
4. Submission of Matters to a Vote of Security Holders
None
PART
II
Item
5. Market for the Registrant’s Common Stock and Related Security Holder
Matters
Buckeye
Technologies Inc.’s common stock is traded on the New York Stock Exchange under
the symbol BKI. There were approximately 4,400 shareholders on August 25, 2006,
based on the number of record holders of our common stock and an estimate of
the
number of individual participants represented by security position listings.
The
table below sets forth the high and low sales prices for our common
stock.
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
quarter (ended September 30)
|
|
$
|
10.08
|
|
$
|
7.75
|
|
$
|
11.93
|
|
$
|
9.40
|
|
Second
quarter (ended December 31)
|
|
|
8.33
|
|
|
7.18
|
|
|
13.30
|
|
|
9.66
|
|
Third
quarter (ended March 31)
|
|
|
10.27
|
|
|
7.89
|
|
|
13.30
|
|
|
10.22
|
|
Fourth
quarter (ended June 30)
|
|
|
9.10
|
|
|
6.97
|
|
|
10.97
|
|
|
7.38
|
|
We
did
not make any dividend payments during the fiscal years ended June 30, 2006
or
2005, and have no plans to pay dividends in the foreseeable future. We
repurchased no shares of our common stock during the fiscal years ended June
30,
2006 or 2005. Due to certain debt agreements we are limited in our ability
to
make dividend distributions and share repurchases in the future. The amount
available will depend on our financial results and ability to comply with
certain conditions under our most restrictive debt agreements at the time of
distribution or repurchase.
Item
6. Selected Financial Data
Selected
Financial Data
In
thousands, except per share data
|
|
Year
Ended June 30
|
|
|
|
2006(a)
|
|
2005(b)
|
|
2004
(c)
|
|
2003
(d)
|
|
2002
(e)
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
728,485
|
|
$
|
$712,782
|
|
$
|
656,913
|
|
$
|
641,082
|
|
$
|
635,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
44,420
|
|
|
57,601
|
|
|
(19,079
|
)
|
|
4,496
|
|
|
26,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of changes in accounting, net of tax
|
|
|
-
|
|
|
-
|
|
|
5,720
|
|
|
-
|
|
|
(11,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1,980
|
|
|
20,204
|
|
|
(38,190
|
)
|
|
(24,894
|
)
|
|
(26,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.03
|
)
|
$
|
(0.67
|
)
|
$
|
(0.74
|
)
|
Diluted
earnings (loss) per share
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.03
|
)
|
$
|
(0.67
|
)
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma amounts (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,980
|
|
$
|
20,204
|
|
$
|
(43,910
|
)
|
$
|
(23,513
|
)
|
$
|
(13,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.18
|
)
|
$
|
(0.64
|
)
|
$
|
(0.40
|
)
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.18
|
)
|
$
|
(0.64
|
)
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
949,553
|
|
$
|
949,737
|
|
$
|
970,823
|
|
$
|
1,097,855
|
|
$
|
1,134,737
|
|
Total
long-term debt (including current portion)
|
|
$
|
522,090
|
|
$
|
538,982
|
|
$
|
606,748
|
|
$
|
664,475
|
|
$
|
701,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges (g)
|
|
$
|
(497
|
)
|
|
1.4x
|
|
$
|
(69,522
|
)
|
$
|
(41,439
|
)
|
$
|
(24,167
|
)
|
(a) Includes
a pretax charge of $5,616 ($3,497 after tax) for restructuring and impairment
costs. (See Notes 4, Impairment of Long-lived Assets and Assets Held for Sale,
and Note 5, Restructuring Costs, to the Consolidated Financial Statements.).
Includes a pretax charge of $151 ($95 after tax) for loss on early
extinguishment of debt.
(
b)
Includes
a pretax charge of $16,905 ($9,392 after tax) for restructuring and impairment
costs. (See Notes 4, Impairment of Long-lived Assets and Assets Held for Sale,
and Note 5, Restructuring Costs, to the Consolidated Financial Statements.).
Includes a pretax charge of $242 ($153 after tax) for loss on early
extinguishment of debt. Includes a pretax gain of $7,203 ($4,682 after tax)
for
gain on sale of assets held for sale. During fiscal 2005, the IRS completed
an
audit of our tax return for fiscal year 2002. With the conclusion of this audit,
we released the reserve on a tax deduction we claimed relating to our investment
in our former facility in Cork, Ireland and recorded a non-cash tax benefit
of
$5,481 to our provision for income taxes.
(c) Includes
a pretax charge of $51,853 ($33,522 after tax) for restructuring and impairment
costs. (See Note 4, Impairment of Long-lived Assets and Assets Held for Sale,
and Note 5, Restructuring Costs, to the Consolidated Financial Statements.)
Includes $4,940 ($3,112 after tax) for loss on early extinguishment of debt.
Includes $5,720 ($0.15 per share), net of tax, cumulative effect of change in
accounting relating to a change in the way we account for planned maintenance
activities at our Perry, Florida facility. (See Note 3, Change in Accounting,
to
the Consolidated Financial Statements.)
(d) Includes
a pretax charge of $38,139 ($24,678 after tax) for restructuring and impairment
costs.
(e) Includes
a pretax charge of $11,589 ($7,596 after tax) for restructuring and impairment
costs. Includes $11,500 ($0.33 per share) cumulative effect of a change in
accounting relating to a goodwill impairment charge for our converting plant
at
King, North Carolina under the transition rules of Statement of Financial
Accounting Standard, No. 142, Goodwill
and Other Intangible Assets.
(f) Pro
forma
amounts reflect net income (loss) and earnings (loss) per share as if the
changes in accounting
methods
were applied retroactively.
(g) Earnings
were inadequate to cover fixed charges during fiscal years 2006, 2004, 2003
and
2002. Amounts reflect the deficit of earnings to fixed charges. See Exhibit
12.1
for computation.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following Management's Discussion and Analysis of Results of Operations and
Financial Condition ("MD&A") summarizes the significant factors affecting
our results of operations, liquidity, capital resources and contractual
obligations, as well as discussing our critical accounting policies. This
discussion should be read in conjunction with the Consolidated Financial
Statements, Notes to the Consolidated Financial Statements, and other sections
of this Annual Report on Form 10-K. Our MD&A is composed of four major
sections; Executive Summary, Results of Operations, Financial Condition and
Critical Accounting Policies.
Executive
Summary
Buckeye
manufactures and distributes value-added cellulose-based specialty products
used
in numerous applications, including disposable diapers, personal hygiene
products, engine, air and oil filters, concrete reinforcing fibers, food
casings, rayon filaments, acetate plastics, thickeners and papers. Our products
are produced in the United States, Canada, Germany and Brazil, and we sell
these
products in approximately 60 countries worldwide. We generate revenues,
operating income and cash flows from two reporting segments: specialty fibers
and nonwoven materials. Specialty fibers are derived from wood and cotton
cellulose materials using wetlaid technologies. Our nonwoven materials are
derived from wood pulps, synthetic fibers and other materials using an airlaid
process.
Our
strategy is to continue to strengthen our position as a leading supplier of
cellulose-based specialty products. We believe that we can continue to expand
market share, improve profitability and decrease our exposure to cyclical
downturns by pursuing the following strategic objectives: focus on technically
demanding niche markets, develop and commercialize innovative proprietary
products, strengthen long-term alliances with customers, provide our products
at
an attractive value, and significantly reduce our debt.
We
earned
net income of $2.0 million for fiscal year 2006. These operating results
included restructuring and impairment charges related to the closure of our
Glueckstadt, Germany specialty fiber facility, impairment expenses related
to
our closed facility in Lumberton, North Carolina, and early extinguishment
of
debt totaling of $5.8 million ($3.6 million after tax). Net sales for fiscal
year 2006 were $728.5 million, a 2.2% increase over the $712.8 million achieved
in fiscal year 2005.
During
fiscal year 2006, higher energy, chemical and transportation costs compressed
our margins. Although some energy-related costs have retreated recently, energy,
chemical and transportation costs were more than $32 million higher during
fiscal year 2006 than they were during the same period in 2005, offsetting
higher sales due to strong demand for specialty products. The hurricanes that
devastated the U.S. Gulf Coast had a large impact on our costs. While none
of
our operations suffered serious physical damage, the disruptions caused by
the
storms and the impact of already high energy, chemical and transportation costs
caused earnings to fall significantly below those earned during fiscal year
2005. Manufacturing
difficulties at our large specialty wood pulp facility in Perry, Florida and
transportation issues also negatively impacted our business during
fiscal year 2006.
As
a
result of these extraordinarily high costs, we implemented product price
surcharges of up to 5% on our products. This surcharge was effective for most
of
our products manufactured in the United States (excluding fluff pulp) from
October 1, 2005 through March 31, 2006. In addition to the surcharge, we
implemented further price increases in January of 2006 averaging
8% on specialty wood cellulose products.
We
removed the product price surcharge effective April 1, 2006 due
to the
return of natural gas pricing to more normal levels. Price increases for
specialty fibers and nonwoven materials were implemented effective April 1,
2006. These price increases and the reduced energy costs offset the reduction
in
revenue from the elimination of the product price surcharge.
Although
the price increases discussed above were sufficient to maintain our margins
in
the high end segments of our markets, pricing on fluff pulp for fiscal year
2006
was slightly below the level we achieved during fiscal year 2005. This
combination of low prices and higher costs during fiscal year 2006 resulted
in
our operating profit on fluff pulp being about $13 million below the levels
achieved in fiscal year 2005. This decline in operating profit for fluff pulp
more than offset the profitability improvements in our high end specialty wood
products and nonwoven materials.
During
fiscal year 2006, we completed the upgrade of our cotton cellulose manufacturing
facility in Americana, Brazil and are now producing product for market sales.
Prior to the transition of the facility to market production, we were
manufacturing product for an on-site customer under an arrangement in which
the
customer provided raw materials and paid us a manufacturing fee. We ceased
this
toll manufacturing arrangement in November 2005. The combination of start-up
costs incurred this fiscal year and the loss of the profitability from the
tolling operations we received during the same periods in fiscal 2005 resulted
in a negative impact of approximately $11 million before tax during fiscal
year
2006. Although we expect improvement, we believe that operating performance
for
the Americana facility during fiscal year 2007 will still compare negatively
to
the operating performance of our toll manufacturing configuration during the
same period in 2005.
In
spite
of the higher costs, we are encouraged by progress on several
fronts:
o |
We
continued to generate strong cash flows during the year with $58.7
million
cash generated from operations, enabling us to complete the upgrade
of the
Americana facility and reduce debt and capital leases by $16.9 million
during fiscal year 2006.
|
o |
In
January 2006, we established two new organizations within
Buckeye.
|
§ |
Marketing
- The mission of the organization is to bring new products to the
market
on an accelerated schedule. The new organization is focused on improving
our marketing capability and increasing the speed at which we
commercialize new products.
|
§ |
Lean
Enterprise - The mission is to lead our efforts in lowering costs,
reducing working capital and eliminating waste. This new organization
is
responsible for the implementation of the “Lean Enterprise” methodology
throughout our operations. The new organization is focused on improving
work processes to ensure that all activities bring value to our customers.
Our near-term objective is to improve gross margins by one percentage
point through lean improvements.
|
o |
We
continue to establish our global sales and distribution network for
UltraFiber 500TM,
a
revolutionary concrete-reinforcing fiber. UltraFiber 500TM
is
a niche product for the building industry and a great example of
the new
product initiatives we are undertaking to reduce our dependency on
fluff
pulp. Sales reached approximately $3 million in fiscal 2006 and our
goal
is to exceed $15 million in fiscal
2007.
|
o |
Our
plan to transition the specialty fibers production previously supplied
by
Glueckstadt, Germany to our lower-cost manufacturing facilities in
Memphis, Tennessee and Americana, Brazil is proceeding. We believe
we are
well-positioned to supply cotton-based specialty fiber products from
our
facilities in Memphis and Americana, with a significantly more favorable
cost structure once we reach full production at the Americana
facility.
|
The
combination of new product initiatives, strong demand in important markets,
and
an improved, lower cost manufacturing configuration gives us optimism that
we
can generate future growth in sales and profitability. Like other manufacturing
firms, we are still being negatively impacted by high costs for energy,
chemicals, transportation and other materials. These issues will slow progress
in the short-term, but our longer-term outlook remains
favorable.
Results
of Operations
Consolidated
results
The
following table compares the components of consolidated operating income (loss)
for the three fiscal years ended June 30, 2006.
(millions)
|
|
Year
Ended June 30
|
|
$
Change
|
|
Percent
Change
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006/
2005
|
|
2005/
2004
|
|
2006/
2005
|
|
2005/
2004
|
|
Net
sales
|
|
$
|
728.5
|
|
$
|
712.8
|
|
$
|
656.9
|
|
$
|
15.7
|
|
$
|
55.9
|
|
|
2
|
%
|
|
9
|
%
|
Cost
of goods sold
|
|
|
628.7
|
|
|
592.7
|
|
|
579.5
|
|
|
36.0
|
|
|
13.2
|
|
|
6
|
|
|
2
|
|
Gross
margin
|
|
|
99.8
|
|
|
120.1
|
|
|
77.4
|
|
|
(20.3
|
)
|
|
42.7
|
|
|
(17
|
)
|
|
55
|
|
Selling,
research and administrative expenses
|
|
|
47.8
|
|
|
43.3
|
|
|
42.4
|
|
|
4.5
|
|
|
0.9
|
|
|
10
|
|
|
2
|
|
Amortization
of intangibles and other
|
|
|
2.0
|
|
|
2.3
|
|
|
2.2
|
|
|
(0.3
|
)
|
|
0.1
|
|
|
(13
|
)
|
|
5
|
|
Impairment
and restructuring costs
|
|
|
5.6
|
|
|
16.9
|
|
|
51.9
|
|
|
(11.3
|
)
|
|
(35.0
|
)
|
|
67
|
|
|
67
|
|
Operating
income (loss)
|
|
$
|
44.4
|
|
$
|
57.6
|
|
$
|
(19.1
|
)
|
$
|
(13.2
|
)
|
$
|
76.7
|
|
|
(23
|
)%
|
|
*
|
%
|
*Percent
change is not meaningful.
Net
sales
increased during fiscal year 2006 primarily due to improved pricing and mix
on
our products. Demand for high-end specialty fibers helped drive prices higher
throughout the year. Higher shipment volumes and increased pricing drove sales
of nonwoven materials higher during fiscal year 2006. Additionally, the
implementation of the product price surcharge effective October 1, 2005 through
March 31, 2006 had a positive impact on revenues. The
product price surcharge improved revenues by $4.7 million for fiscal year 2006.
Net
sales
improved overall during fiscal 2005 due primarily to increased pricing and
improved mix in both specialty fibers and nonwoven materials.
As
mentioned in the executive summary, cost of goods sold and gross margins were
negatively impacted by high costs related to increases in the pricing of energy,
chemicals and transportation. During fiscal year 2006, these costs were higher
by approximately 28% versus fiscal year 2005.
During
fiscal 2005, cost of goods sold increased by 2% on an overall volume increase
of
approximately 2%. This consistency was the result of two offsetting factors.
Increased chemical and energy-related costs began impacting our facilities
during the year. These increases were offset by the absence of several
additional specialty fibers charges related to unusual events and special
circumstances, including an extended maintenance shutdown at our Perry, Florida
specialty fibers facility that occurred during fiscal 2004.
Increases
in selling, research and administrative expenses during fiscal 2006 also had
a
negative impact on our operating margins. Expenses related to the establishment
of an UltraFiber 500TM
sales
force and distribution network, the expensing of share-based payments and the
expensing of previously capitalized patent costs contributed to increased
costs.
During
fiscal 2005, selling, research and administrative expenses increased primarily
due to increased accounting and consulting fees related to the implementation
of
Sarbanes-Oxley. External costs related to the implementation of Sarbanes-Oxley
exceeded $2.0 million for fiscal 2005. This increase was partially offset by
the
absence of $3.3 million of bad debt expense incurred during fiscal 2004 as
a
result of the bankruptcy filing of a large specialty fibers customer.
As
part
of the announced closure of the Glueckstadt, Germany specialty fibers facility,
we continued to incur restructuring expenses during fiscal year 2006. We
incurred $3.5 million of expenses during fiscal year 2006. We expect to incur
only minimal additional costs related to this restructuring. During fiscal
year
2006, we reclassified the land, buildings and equipment at the Glueckstadt
facility to assets held for sale. Additionally, we reevaluated the fair value
less cost to sell and recognized an impairment charge of $1.6 million. During
June 2006, we sold the land, the buildings and a majority of the
equipment.
Further
discussion of revenue, operating trends, impairment and restructuring costs
can
be found later in this MD&A. Additional information on the impairment and
restructuring programs and charges may also be found in Note 4, Impairment
of
Long-lived Assets and Assets Held for Sale, and Note 5, Restructuring Costs,
to
the Consolidated Financial Statements of the accompanying consolidated financial
statements.
Segment
results
Although
nonwoven materials, processes, customers, distribution methods and regulatory
environment are very similar to specialty fibers, we believe it is appropriate
for nonwoven materials to be disclosed as a separate reporting segment from
specialty fibers. The specialty fibers segment is an aggregation of cellulosic
fibers based on both wood and cotton. We make separate financial decisions
and
allocate resources based on the sales and operating income of each segment.
We
allocate selling, research, and administration expense to each segment, and
we
use the resulting operating income to measure the performance of the two
segments. We exclude items that are not included in measuring business
performance, such as restructuring costs, asset impairment, amortization of
intangibles and certain financing and investing costs.
Specialty
fibers
The
following table compares specialty fibers net sales and operating income for
the
three years ended June 30, 2006.
(millions)
|
|
Year
Ended June 30
|
|
$
Change
|
|
Percent
Change
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006/
2005
|
|
2005/
2004
|
|
2006/
2005
|
|
2005/
2004
|
|
Net
sales
|
|
$
|
515.9
|
|
$
|
513.6
|
|
$
|
461.4
|
|
$
|
2.3
|
|
$
|
$52.2
|
|
|
0
|
%
|
|
11
|
%
|
Operating
income
|
|
|
35.8
|
|
|
64.1
|
|
|
28.2
|
|
|
(28.3
|
)
|
|
35.9
|
|
|
(44
|
)
|
|
127
|
|
Although
demand for our high-end specialty fibers products and the implementation of
a
product price surcharge pushed pricing higher during fiscal year 2006, the
favorable earnings impact of higher prices was offset by lower volumes due
to
the closure of our Glueckstadt, Germany cotton specialty fibers facility, the
start-up of market operations of our Americana, Brazil facility and production
and transportation issues at our Perry, Florida facility. Net
sales
increased during fiscal 2005 primarily due to an increase in specialty wood
shipment volume and higher selling prices for both wood and cotton based
products.
Average
fluff pulp pricing declined by less than 1% during fiscal year 2006 versus
fiscal year 2005. Although we experienced pricing softness for fluff pulp during
the year, in the most recently completed quarter fluff pulp prices trended
upward. For fiscal year 2006, fluff pulp sales accounted for 18% of our
consolidated sales.
Strong
demand in our high-end markets allowed us to raise prices during the year to
partially offset higher costs for energy, chemicals and transportation. However,
due to the rapid and continued increase in costs along with the slightly lower
prices for fluff pulp, we were unable to maintain our margins at the same level
as those realized during fiscal year 2005.
Our
specialty fibers manufacturing costs for chemicals, energy and transportation
increased by approximately $30.5 million during fiscal year 2006 as compared
to
fiscal year 2005. While we made some progress to recover a portion of these
costs through reductions in raw material usage, increased pricing for our
products and the implementation of a product price surcharge from October 1,
2005 through March 31, 2006, these abnormally high energy, chemical and
transportation prices will continue to put pressure on our margins during fiscal
2007. Although the natural gas component of our energy costs is returning to
normal pricing levels, our other energy related costs (including chemicals
and
transportation) still remain higher than normal.
In
addition to recovering margins through increased pricing, we are also working
on
ways to reduce manufacturing costs. When natural gas prices were abnormally
high, we transitioned our energy supply from natural gas to fuel oil where
possible. Although natural gas is a very efficient energy source, market price
volatility may make it more economical to purchase fuel oil at certain times.
We
will continue to look for alternatives to reduce costs and recover margins.
Our
new lean enterprise initiative, discussed in the executive summary, is focused
on reducing costs by focusing on efficient processes that add value for our
customers.
We
were
also negatively impacted by high manufacturing costs associated with maintenance
outages at our specialty fibers facility in Perry, Florida. We incurred an
unplanned lime kiln outage, requiring an increase in purchased materials.
Additionally, we installed new chemical recycling equipment to improve our
efficiency and further minimize our environmental impact. During these outages,
we lost production at the facility. In addition to the fixed costs of the
facility being spread over fewer tons of production, we also lost production
of
our high end specialty wood products, which impacted our sales volumes, both
of
which adversely affected our gross margins. The total impact of these outages
was approximately $3.0 million for the year.
We
are
continuing to make progress with developing our capability to supply a wider
range of products based on cotton cellulose to customers worldwide by upgrading
the capability of our Americana, Brazil manufacturing facility. Because Brazil
benefits from low manufacturing costs and a regional raw material supply, we
anticipate that, when we reach full capacity, this facility will be a
significant contributor to our profitability. We completed the upgrade and
began
the process of qualifying our facility with our customers during January of
2006. With the cessation of tolling production in late November to facilitate
the upgrade, we continued incurring pre-production expenses without offsetting
revenue. During fiscal year 2006, the net impact of the Americana startup
decreased before tax earnings by approximately $11 million versus fiscal year
2005. We expect to continue to incur start-up and transition costs during the
remainder of the calendar year as we qualify the plant and ramp up volume.
Based
on current progress, we believe the plant in Americana will be operating
profitably by the third quarter of fiscal year 2007.
During
fiscal year 2005, rising energy and chemical prices pushed manufacturing costs
higher. The allocation of sales, research and administrative costs related
to
the implementation of Sarbanes-Oxley regulations also offset the improvement
in
pricing, mix, and volume during fiscal 2005. In spite of the increase in costs,
operating income substantially improved during fiscal 2005 based on the strong
improvement in sales and the absence of several additional charges related
to
unusual events and special situations that occurred during fiscal 2004. These
unusual events and special situations included: the planned maintenance shutdown
of our Perry, Florida facility ($9.6 million), the bankruptcy of a large
customer ($3.3 million), the ratification of a new labor agreement that included
a one-time retroactive payment ($0.8 million), and higher costs associated
with
reduced production at our Perry, Florida and Memphis, Tennessee specialty fibers
facilities.
Nonwoven
materials
The
following table compares nonwoven materials net sales and operating income
for
the three years ended June 30, 2006.
(millions)
|
|
Year
Ended June 30
|
|
$
Change
|
|
Percent
Change
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006/
2005
|
|
2005/
2004
|
|
2006/
2005
|
|
2005/
2004
|
|
Net
sales
|
|
$
|
240.9
|
|
$
|
226.5
|
|
$
|
217.6
|
|
$
|
14.4
|
|
$
|
$8.9
|
|
|
6
|
%
|
|
4
|
%
|
Operating
income
|
|
|
15.9
|
|
|
13.0
|
|
|
7.6
|
|
|
2.9
|
|
|
5.4
|
|
|
22
|
|
|
71
|
|
Improvements
in the mix, selling prices and volumes for our nonwoven materials resulted
in an
increase in net sales during fiscal year 2006 versus fiscal year 2005. In an
effort to offset rising prices for raw materials and other manufacturing costs,
we implemented sales price increases during the year. Effective October 1,
2005,
we implemented a product pricing surcharge for most of our products manufactured
in the United States to offset higher energy related costs. Increased demand
for
high-end napkins and other tabletop products in our European markets contributed
to an improved mix. Due to a decline in the cost for natural gas, we removed
the
surcharge effective April 1, 2006. Decreased energy costs and the implementation
of permanent price increases effective April 1, 2006 allowed us to maintain
our
margins in spite of the removal of the surcharge. These improvements in net
sales were partially offset by the strengthening of the US dollar versus the
euro during fiscal year 2006 compared to fiscal year 2005. The majority of
products sold at our Steinfurt facility are denominated in euros and translated
to US dollars for consolidation.
The
increase in net sales during fiscal 2005 was due to improved pricing and mix,
and the relative strength of the euro versus the U.S. dollar. Although we ceased
production at our Cork, Ireland facility in July, 2004 we continued shipping
inventory from Cork through November and completed the transition of a majority
of Cork’s sales to our other nonwoven materials facilities.
Improved
pricing, mix and increased volumes overcame higher raw materials and other
manufacturing costs to improve operating margins during the year. Higher
revenues offset increased costs for energy, chemical and transportation, which
drove costs approximately $2.2 million higher for fiscal year 2006 than they
were during fiscal year 2005. Additionally, the stronger Canadian dollar created
further pressure on operating costs at our nonwoven materials facility in Delta,
British Columbia.
Operating
income improved significantly for fiscal 2005 versus fiscal year 2004. The
improvement was primarily due to higher selling prices and the closure of our
high cost Cork, Ireland facility. Overall, our nonwoven materials business
supported similar shipment and production volume with one less manufacturing
facility for the majority of the year. Our Gaston, North Carolina facility
continued to show improvement in its operating performance compared to the
prior
year due to significant increases in shipment volume and the resulting
improvement in capacity utilization. These improvements were partially offset
by
price increases on raw materials and other manufacturing costs. The cost of
fluff pulp, bi-component fibers, and binder materials increased during fiscal
2005.
Restructuring
and impairment activities
During
the three years ended June 30, 2006, we entered into various restructuring
programs, which resulted in restructuring and impairment charges. In order
to
continue to provide both specialty fibers and nonwoven materials at attractive
values, we will continue to look for ways to reduce costs and optimize our
operating structure. The following table summarizes restructuring expense by
program and impairment charges for the three years ended June 30, 2006.
Following the table is an explanation of the programs and the resulting
impairment charges. For further explanation of these charges, see Note 4,
Impairment of Long-lived Assets and Assets Held for Sale, and Note 5,
Restructuring Costs, to the Consolidated Financial Statements.
|
|
Year
Ended June 30
|
|
Total
|
(millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Charges
|
Impairment
charges
|
|
$
|
2.1
|
|
$
|
12.3
|
|
$
|
45.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Restructuring program
|
|
$
|
3.5
|
|
$
|
3.0
|
|
$
|
-
|
|
$
|
6.5
|
2004
Restructuring program
|
|
|
-
|
|
|
1.2
|
|
|
1.8
|
|
|
3.0
|
2003
Restructuring program - phase 2
|
|
|
-
|
|
|
0.3
|
|
|
3.2
|
|
|
3.5
|
2003
Restructuring program - phase 1
|
|
|
-
|
|
|
0.1
|
|
|
1.0
|
|
|
1.1
|
Total
restructuring costs
|
|
$
|
3.5
|
|
$
|
4.6
|
|
$
|
6.0
|
|
$
|
14.1
|
2005
Restructuring program and impairments
In
January 2005, we announced our decision to discontinue producing cotton linter
pulp at our Glueckstadt, Germany facility. Our decision was due to a combination
of factors that had increased the plant’s costs to a level at which it was
uneconomical to continue operations. The most significant factor impacting
cost
at the site was the substantial strengthening of the euro over calendar 2003
and
2004. Specialty fibers are normally priced and sold in U.S. dollars around
the
world. As a majority of Glueckstadt’s costs were denominated in euros, this
substantial strengthening had a negative impact on Glueckstadt’s cost position.
Additionally, Glueckstadt’s process water, waste treatment and energy costs were
more than twice the cost of these utilities at our Memphis, Tennessee
cotton-based specialty fibers facility.
Faced
with these difficulties, we reduced the number of employees at the facility
from
approximately 150 to approximately 100 and operated at 55% of capacity during
calendar year 2004. After careful consideration, we decided to close and cease
production at Glueckstadt in December 2005. We believe that the closure of
our
Glueckstadt facility and transfer of the majority of its cotton-based specialty
fiber production to our Memphis, Tennessee and Americana, Brazil facilities
will
yield a more competitive cost structure.
Based
on
our inability to recover the remaining value of the long-lived assets at the
Glueckstadt, Germany facility, we determined that these long-lived assets,
with
a carrying amount of $15.3 million, were impaired and wrote them down to their
estimated fair value of $3.0 million, resulting in an impairment charge of
$12.3
million ($6.5 million after tax), during fiscal year 2005.
During
fiscal year 2006, we began to actively market the land and buildings, and the
equipment which had carrying values of $1.6 million and $0.5 million,
respectively. Current markets and third party interest for the land and
buildings indicated we would not be able to recover the carrying value through
the sales process. Therefore, we wrote down the carrying value of the land
and
buildings to their fair value less costs to sell of $0.1 million and recorded
an
additional impairment charge of $1.5 million during fiscal year 2006. Subsequent
to this impairment, we sold the land and building for $0.1 million.
As
of
June 30, 2006, management reevaluated its estimate of fair value less the cost
to sell the remaining equipment and determined an additional impairment should
be recognized for equipment with a carrying value of $0.3 million. Therefore,
we
wrote down the carrying value of the remaining equipment to its fair value
less
costs to sell of $0.2 million and recorded an impairment charge of $0.1 million.
Although we believe the current carrying value less cost to sell represents
the
fair value of the equipment, it is possible the actual results of a sale could
materially differ from amounts estimated.
The
closure of the Glueckstadt facility resulted in the termination of 103
employees, and restructuring expenses related to the closure of $6.5 million
over fiscal year 2005 and 2006. We expect this consolidation to enable us to
improve our overall specialty fibers operating results by approximately $9
million annually.
In
anticipation of the closure of the facility, customers increased their
inventories to ensure a smooth transition as they qualified material supplied
from our Memphis, Tennessee facility. Due to the increased demand, we were
able
to increase pricing and make incremental sales from inventory. Additionally,
as
a result of the impairment of the Glueckstadt plant and equipment, there was
a
decrease in depreciation expense during fiscal year 2006.
2004
Restructuring program and impairments
During
March 2004, our Board of Directors approved the discontinuation of production
of
nonwoven materials at our Cork, Ireland facility. While the demand for nonwoven
products grew at a rate in the low to mid-single digits on an annualized basis,
the growth in demand was not sufficient to utilize the existing capacity fully.
As such, industry participants rationalized production by idling plants and
closing facilities.
Due
to
excess production capacity around the globe, we operated Cork below its
productive capacity from its inception in 1998. Because of its location and
small size, our cost to produce at Cork was higher than at our other locations.
Due to these issues, we decided to close the Cork facility and consolidate
production at our three other nonwoven manufacturing facilities. Production
at
Cork ceased in July 2004. Closing our Cork facility reduced our nonwovens
capacity by about 10%.
We
continued to meet customer needs for nonwoven materials by producing these
products at our facilities in Delta, British Columbia, Canada; Steinfurt,
Germany; and Gaston County, North Carolina. This consolidation reduced working
capital needs, and we began to realize fully the on-going cost benefit from
operating one less facility during the third quarter of fiscal 2005. The closure
of the Cork facility and related reorganization of the nonwoven materials
segment resulted in the termination of 89 employees and resulted in
restructuring expenses totaling $3.0 million. We do not expect additional
expenses related to this program.
Our
commitment to discontinue production represented an indicator of impairment,
and
subsequently we evaluated the value of the property, plant, and equipment
associated with the Cork facility. We determined that these long-lived assets,
with a carrying amount of $48.4 million were impaired and wrote them down to
their estimated fair value of $5.4 million, resulting in an impairment charge
of
$43.0 million. During fiscal 2004, we also impaired certain equipment and other
capitalized costs at other facilities of $2.9 million. In late December 2004,
we
completed the sale of the Cork facility building for $13.4 million (see
Gain
on sale of assets held for sale
for
further discussion).
2003
Restructuring programs (phase 1 and phase 2) and impairments
In
April
2003, we announced the discontinuation of production of cotton linter pulp
at
our specialty fibers Lumberton, North Carolina facility due to the decline
in
demand for cotton content paper. We completed this partial closure in August
2003 but continue to produce cosmetic cotton products at the Lumberton site.
This decision reflects a steady decline in demand in the cotton fiber paper
industry, which has contracted by more than one-third since the late 1990’s.
While cotton linter pulp is one of our core businesses, current demand did
not
economically justify operating a facility that could only produce products
for
paper applications.
To
meet
our customers’ needs, we consolidated our cotton linter pulp production at our
larger Memphis, Tennessee and Glueckstadt, Germany facilities. In conjunction
with the consolidation, we initiated the first phase of a restructuring program
designed to deliver cost reductions through reduced expenses across the company,
the main component of which was the partial closure of our Lumberton, North
Carolina facility. This phase of restructuring resulted in the elimination
of
approximately 100 positions within the specialty fibers segment. The resulting
increase in facility utilization enabled us to improve our operating results
by
approximately $6 million annually. This more efficient operating configuration
began to reduce our cost of goods sold beginning in January 2004. This closure
reduced our working capital needs by approximately $10 million.
During
the first quarter of fiscal 2004, we entered into a second phase of this
restructuring program. This phase of the program enabled us to improve our
operating results by approximately $6 million annually through reduced salaries,
benefits, other employee-related expenses and operating expenses. As a result
of
this restructuring, 78 positions were eliminated. These positions include
manufacturing, sales, product development and administrative functions
throughout the organization.
During
fiscal year 2006, we began to actively market idled cotton linter pulping
equipment which had a carrying value of $1.5 million. Management evaluated
its
estimate of fair value less the cost to sell the assets and determined an
impairment should be recognized for the equipment. We wrote down the carrying
value of the equipment to its fair value less costs to sell of $1.0 million
and
recorded an impairment charge of $0.5 million during fiscal year 2006.
Subsequent to this impairment, we sold the equipment for net proceeds of $1.0
million.
Interest
expense and amortization of debt costs
Interest
expense and amortization of debt costs decreased $1.2 million for fiscal year
2006 versus fiscal year 2005. Our decrease in average outstanding debt had
a
positive impact on interest expense during the period. Also contributing to
the
improvement was the impact of capitalizing interest for the Americana facility
capital improvements. The total amount of interest capitalized during fiscal
year 2006, related to the Americana project, was $1.3 million. These
improvements were
partially offset by higher variable interest rates. The weighted average
effective interest rate on our variable rate debt increased from 5.3% at June
30, 2005 to 7.2% at June 30, 2006. See
Note
9, Debt, in the Consolidated Financial Statements for further discussion of
variable interest rates.
We
incurred interest expense and amortization of debt costs of $45.1 million in
fiscal 2005, down $2.2 million from fiscal 2004. This improvement was primarily
the result of lower average debt levels during fiscal 2005 and the absence
of
interest costs from holding $150 million of senior subordinated notes due 2005
and $200 million of senior notes due 2013 concurrently for 30 days during the
first half of the fiscal 2004. These improvements were partially offset by
higher average variable interest rates during fiscal 2005.
Loss
on early extinguishment of debt costs
Fiscal
year 2006 -
On
September 26, 2005 we used borrowings on our revolving credit facility to redeem
$15 million of our senior
subordinated notes due in 2008.
As a
result of this partial extinguishment, we wrote-off a portion of deferred
financing costs, resulting in non-cash expense of $0.2 million during fiscal
year 2006.
Fiscal
year 2005
- On
March 23, 2005 we used cash on hand to redeem $20 million of our senior
subordinated notes due in 2008. As a result of this partial extinguishment,
we
wrote-off a portion of deferred financing costs, resulting in non-cash expense
of $0.2 million during fiscal year 2005.
Fiscal
year 2004
- On
November 5, 2003, we established a $220 million senior secured credit facility.
This facility amended and restated our then existing $215 million revolving
credit facility. We used the proceeds of the new credit facility to pay the
outstanding balance on the former revolving credit facility plus transaction
fees and expenses. During fiscal 2004, $1.6 million was expensed related to
the
early extinguishment of the previous credit facility.
On
September 22, 2003, we placed privately $200 million in aggregate principal
amount of 8.5% senior notes due in 2013. The notes are unsecured obligations
and
rank senior to any of our subordinated debt. The notes are guaranteed by our
direct and indirect domestic subsidiaries that are also guarantors on our senior
secured indebtedness. We used the net proceeds from the private placement to
redeem our $150 million senior subordinated notes due 2005. As a result of
the
extinguishment, $3.3 million was expensed during fiscal 2004. These expenses
included a $2.1 million call premium and $1.2 million related to the write-off
of deferred financing costs.
See
Note
9, Debt, in the Consolidated Financial Statements for further discussion of
the
debt issuance and related extinguishment.
Gain
on sale of assets held for sale
In
July
2004, we ceased production of nonwoven materials at our Cork, Ireland facility.
Subsequent to the July 2004 closure of the facility, we began to actively market
the building and equipment with carrying values of $4.5 million and $1.5
million, respectively. In late December of 2004, we completed the sale of the
Cork facility building to the Port of Cork Company for $13.4 million. Although
the carrying values of these assets were based on appraisals and available
market information at the time of the impairment in March of 2004, the purchase
of this building for strategic purposes by the Port of Cork Company was not
contemplated in those appraisals. As a result of the sale and disposition of
the
building and equipment for net proceeds after decommissioning and other expenses
of $13.1 million, we recognized a net gain of $7.2 million ($4.7 million net
of
tax) during fiscal year 2005.
Foreign
exchange and other
Foreign
exchange and other in fiscal 2006, 2005 and 2004 were $(0.4) million, $(0.6)
million and $0.3 million, respectively. The expense in fiscal 2006 was primarily
due to foreign currency losses as a result of the strengthening of the Canadian
dollar during the fiscal year. The expense in fiscal 2005 was primarily due
to
$0.5 million of expenses related to amending our senior secured credit facility
and other financing related costs.
Income
tax expense
Our
effective tax rate for 2006 was approximately (189%) versus (2%) in fiscal
2005
and 37% in fiscal 2004.
Effective
June 22, 2006, many of the tax measures introduced in the 2006 Canadian Federal
budget were passed into law. Included in the budget was a reduction in the
general corporate tax rate to 20.5% for 2008, 20% for 2009, and 19% for 2010
and
later years. As a result, the company remeasured its Canadian deferred tax
balances based on the reversal pattern of the company’s temporary differences,
resulting in a $0.8 million net tax benefit.
Our
Brazilian valuation allowance increased in 2006 due to larger losses associated
with the slower than expected start-up of the Americana, Brazil
operations.
Effective
for transactions occurring after September 30, 2000 the Internal Revenue Service
enacted the Extraterritorial Income Exclusion. The income exclusion
provides for a reduction of gross income by a percentage of qualifying foreign
trade income. In October 2004, the American Jobs Creation Act of 2004 (the
Act)
was signed into law. In order to comply with international trade rules, the
Act
repealed the current tax treatment for extraterritorial income. Effective for
transactions entered into after December 31, 2004, the extraterritorial income
exclusion is subject to a phase-out which will be completed on December 31,
2006. For transactions during calendar years 2005 and 2006, the income
exclusion will be 80% and 60% of the exclusion otherwise allowed, respectively.
Our extraterritorial income exclusion benefit was reduced in fiscal 2006 due
to
this phase-out and will continue to decrease through the final phase-out during
fiscal 2007.
The
Act
provides a tax deduction for domestic manufacturers. The deduction will be
phased in during fiscal years 2006 through 2010. Due to the company’s U.S. net
operating loss position, this deduction had no impact to fiscal year 2006.
See
Note 13, Income Taxes, in the Consolidated Financial Statements for further
discussion of income taxes.
During
the fourth quarter of fiscal 2005, the IRS completed an audit of our tax return
for fiscal year 2002. With the conclusion of this audit, we released the reserve
on a tax deduction we claimed relating to our investment in our former facility
in Cork, Ireland and recorded a non-cash tax benefit of $5.5 million to our
provision for income taxes.
Cumulative
effect of change in accounting
Historically,
we accrued in advance expenses related to planned extended maintenance shutdowns
at our Perry, Florida facility. However, as of July 1, 2003, we changed our
method of accounting from the accrue in advance method to the direct expense
method. The effect of applying the new method for the year ended June 30, 2004
was a decrease in net loss composed of a profit increase of $9.1 million pre-tax
($5.7 million net-of-tax reported as a cumulative effect of accounting change),
offset by $8.5 million ($5.4 million net-of-tax) in additional cost of goods
sold compared to what would have been expensed in fiscal 2004 under the accrue
in advance methodology.
The
total
cost of the related planned maintenance activity performed in 2004 was $9.6
million. Historically, we perform planned extended maintenance shutdowns at
our
Perry, Florida facility in two to five year intervals. Due to variability in
the
timing and activities associated with our planned extended maintenance
shutdowns, it is difficult to predict the future costs of these activities.
See
Note 3, Change in Accounting, in the Consolidated Financial Statements for
further discussion of this change in accounting.
Financial
Condition
Our
financial condition continued to improve during fiscal year 2006. We
are
committed to reducing our debt, strengthening our operations and continuing
to
improve our profitability and cash flow.
Liquidity
and capitalization
We
have
the following major sources of financing: senior secured credit facility, senior
notes and senior subordinated notes. Our senior secured credit facility, senior
notes and senior subordinated notes contain various covenants. We were in
compliance with these covenants as of June 30, 2006 and believe we will continue
to remain in compliance for the foreseeable future. These sources of financing
are described in detail in Note 9, Debt, to the Consolidated Financial
Statements.
Our
total
debt and capital leases decreased $16.9 million to $522.1 million at June 30,
2006 from $539.0 million at June 30, 2005. From June 30, 2004 to June 30, 2005,
total debt decreased by $67.7 million. Our total debt as a percentage of our
total capitalization was 64.3% at June 30, 2006 as compared to 66.7% at June
30,
2005 and 72.6% at June 30, 2004.
On
June
30, 2006, we had $8.7 million of cash and cash equivalents and $62.6 million
borrowing capacity on our revolving credit facility. The portion of this
capacity that we could borrow will depend on our financial results and ability
to comply with certain borrowing conditions under the revolving credit facility.
As of June 30, 2006, our liquidity, including available borrowings and cash
and
cash equivalents was approximately $71.3 million. Management believes this
is
sufficient liquidity to meet the needs of the business. We believe we will
continue to have positive cash flow and these borrowing conditions are not
expected to impact our operating or investing activities, or our ability to
service our debt obligations.
Treasury
stock
Our
Board
of Directors has authorized the repurchase of up to 6.0 million shares of our
common stock. Under this authorization, we will hold the repurchased shares
as
treasury stock and such shares will be available for general corporate purposes,
including the funding of employee benefit and stock-related plans. In fiscal
2006, we repurchased no shares of our common stock. Through June 30, 2006,
we
had repurchased a total of 5,009,300 shares under the current board authority.
Cash
Flow
While
we
can offer no assurances, we believe that our cash flow from operations, together
with current cash and cash equivalents, will be sufficient to fund necessary
capital expenditures, meet operating expenses and service our debt obligations
for the foreseeable future. Cash and cash equivalents totaled $8.7 million
at
June 30, 2006, compared to $9.9 million at June 30, 2005 and $27.2 million
at
June 30, 2004. The following table provides a summary of cash flows for the
three years ended June 30, 2006.
(millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2.0
|
|
$
|
20.2
|
|
$
|
(38.2
|
)
|
Noncash
charges and credits, net
|
|
|
49.3
|
|
|
58.3
|
|
|
72.6
|
|
Changes
in operating assets and liabilities, net
|
|
|
7.4
|
|
|
0.1
|
|
|
31.3
|
|
Net
cash provided by operating activities
|
|
|
58.7
|
|
|
78.6
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(45.6
|
)
|
|
(45.3
|
)
|
|
(31.9
|
)
|
Proceeds
from sales of assets
|
|
|
1.2
|
|
|
13.6
|
|
|
0.3
|
|
Other
investing activities
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(0.6
|
)
|
Net
cash used in investing activities
|
|
|
(44.9
|
)
|
|
(32.2
|
)
|
|
(32.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (payments) under lines of credit
|
|
|
0.4
|
|
|
0.4
|
|
|
(224.0
|
)
|
Proceeds
from debt issuances
|
|
|
-
|
|
|
-
|
|
|
350.0
|
|
Payments
on long-term debt and other
|
|
|
(16.8
|
)
|
|
(67.7
|
)
|
|
(178.3
|
)
|
Other
financing activities, net
|
|
|
0.5
|
|
|
2.4
|
|
|
(4.6
|
)
|
Net
cash used in financing activities
|
|
|
(15.9
|
)
|
|
(64.9
|
)
|
|
(56.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
0.9
|
|
|
1.2
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
$
|
(1.2
|
)
|
$
|
(17.3
|
)
|
$
|
(22.7
|
)
|
Cash
provided by operating activities
The
$19.9
million decrease in cash flows from operating activities in 2006 was primarily
the result of the decrease in net income in fiscal year 2006. This decrease
was
partially offset by general improvements in working capital during fiscal 2006.
Although the closure of our Glueckstadt, Germany cotton cellulose facility
improved working capital in fiscal 2006, this improvement was partially offset
by increased working capital requirements at our Americana, Brazil specialty
fibers facility as we moved away from the previous tolling arrangement toward
new market production. We believe there are still opportunities to reduce
working capital requirements and improve cash flow during fiscal year
2007.
The
$12.9
million improvement in cash flows from operating activities in 2005 was
primarily the result of improvements in net income in fiscal 2005. Due to an
overall reduction in working capital during fiscal 2004, there was limited
cash
generation ability from changes in operating assets and liabilities during
fiscal 2005.
Net
cash used in investing activities
Purchases
of property, plant and equipment were consistent during fiscal 2006 and 2005,
but were higher than fiscal year 2004, primarily due to expenditures related
to
the project to add full market capability to our Americana, Brazil cotton
cellulose facility. The total cost of this facility improvement excluding
capitalized interest was approximately $31 million, of which approximately
$20
million was spent during fiscal 2006 and $11 million was spent during fiscal
2005. We expect further spending related to the Americana facility upgrade
will
be minimal. Although the Americana project is completed, we expect efficiency
improvement and energy savings projects, maintenance capital, and environmental
spending will result in total capital expenditures of approximately $45 million
for fiscal 2007.
We
expect
to incur significant capital expenditures in the future to comply with remaining
environmental obligations at our Perry, Florida specialty fibers facility.
Based
on current estimates we expect expenditures of approximately $60 million over
8
- 10 years, possibly beginning as early as fiscal 2007. See Note 20,
Contingencies, to the Consolidated Financial Statements.
During
fiscal 2005, we sold the Cork, Ireland building and equipment for net proceeds
of $13.1 million. These proceeds offset the increase in capital expenditures
during the year.
During
fiscal 2004, in addition to our basic capital maintenance expenditures of
approximately $25 million, we made expenditures at our Foley plant for a planned
maintenance shutdown and capital expenditures at our Memphis, Tennessee facility
to provide the capability to manufacture cotton cellulose products previously
manufactured at our Lumberton, North Carolina facility. The low level of capital
spending achieved during 2004 was due to an overall effort to reduce capital
expenditures and the lack of any major construction projects during those
years.
Net
cash used in financing activities
During
fiscal year 2006 we used cash from operations to finance the capital investments
we made at our Americana, Brazil facility, and to redeem, at par, $15 million
principal amount of our high interest rate, 9.25%, senior subordinated notes
due
in 2008. We intend to continue to redeem portions of the remaining $65 million
of these notes ahead of their maturity in the fall of 2008. These partial
redemptions will be limited by available cash and our capacity to make
restricted cash payments under our other debt instruments. We are focused on
debt reduction with an intermediate term objective of a 50/50 debt to equity
balance in our capital structure.
During
fiscal year 2005, we used cash from operating activities to reduce the principal
balances on our debt and capital leases by $67.7 million. We called, at par,
$20
million of our high interest rate, 9.25%, senior subordinated notes due in
2008.
(See Note 9, Debt, to the Consolidated Financial Statements for further
information.)
Contractual
Obligations
The
following table summarizes our significant contractual cash obligations as
of
June 30, 2006. Certain of these contractual obligations are reflected in our
balance sheet, while others are disclosed as future obligations under accounting
principles generally accepted in the United States.
(millions)
|
|
Payments
Due by Period (6)
|
|
Contractual
Obligations
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
Greater
than
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations (1)
|
|
$
|
726.8
|
|
$
|
43.3
|
|
$
|
158.4
|
|
$
|
299.6
|
|
$
|
225.5
|
|
Capital
lease obligations (2)
|
|
|
1.5
|
|
|
0.7
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
Operating
lease obligations (2)
|
|
|
2.2
|
|
|
1.4
|
|
|
0.7
|
|
|
0.1
|
|
|
-
|
|
Timber
commitments (3)
|
|
|
58.6
|
|
|
13.1
|
|
|
25.3
|
|
|
20.2
|
|
|
-
|
|
Linter
commitments (4)
|
|
|
9.3
|
|
|
9.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
purchase commitments (5)
|
|
|
12.7
|
|
|
11.0
|
|
|
1.7
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
811.1
|
|
$
|
78.8
|
|
$
|
186.9
|
|
$
|
319.9
|
|
$
|
225.5
|
|
(1)
Amounts
include related interest payments. Interest payments for variable debt of $98.7
million are based on the effective rate as of June 30, 2006 of 7.2%. See Note
9,
Debt, to the Consolidated Financial Statements for further information on
interest rates.
(2)
Capital
lease obligations represent principal and interest payments. See Note 10,
Leases, to the Consolidated Financial Statements for further
information.
(3)
See Note
19, Commitments, to the Consolidated Financial Statements for further
information.
(4)
Linter
commitments are take-or-pay contracts made in the ordinary course of business
that usually are less than one year in length.
(5)
The
majority of other purchase commitments are take-or-pay contracts made in the
ordinary course of business related to utilities and raw material purchases.
(6)
Less
than one year references fiscal 2007; 1-3 years references fiscal 2008 and
2009;
3-5 years references fiscal 2010 and 2011.
Note:
|
Additionally,
the cash flow to fund postretirement benefit obligations has an expected
net present value of $22.5 million. The actuarially estimated annual
benefit payments net of retiree contributions are as follows: 2007
- $1.5
million; 2008-2009 - $3.3 million; 2010 - 2011 - $3.4 million; and
2012
through 2016 - $9.2 million. These obligations are not included in
the
table above as the total obligation is based on the present value
of the
payments and would not be consistent with the contractual cash obligations
disclosures included in the table above. See Note 15, Employee Benefit
Plans, to the Consolidated Financial Statements for further
information.
|
Critical
Accounting Policies and Estimates
This
discussion and analysis is based upon our consolidated financial statements.
Our
critical and significant accounting policies are more fully described in Note
1,
Accounting Policies, to our Consolidated Financial Statements. Some of our
accounting policies require us to make significant estimates and assumptions
about future events that affect the amounts reported in our financial statements
and the accompanying notes. Future events and their effects cannot be determined
with certainty. Therefore, the determination of estimates underlying our
financial statements requires the exercise of management’s judgment. Actual
results could differ from those estimates, and any such differences may be
material to our financial statements. Our management exercises critical judgment
in the application of our accounting policies in the following areas, which
significantly affect our financial condition and results of operation.
Management has discussed the development and selection of these critical
accounting policies and estimates with the Audit Committee of our Board of
Directors and with our independent auditors.
Allowance
for doubtful accounts
We
provide an allowance for receivables we believe we may not collect in full.
Management evaluates the collectibility of accounts based on a combination
of
factors. In circumstances in which we are aware of a specific customer’s
inability to meet its financial obligations (i.e., bankruptcy filings or
substantial downgrading of credit ratings), we record a specific reserve. For
all other customers, we recognize reserves for bad debts based on our historical
collection experience. If circumstances change (i.e., higher than expected
defaults or an unexpected material adverse change in a major customer’s ability
to meet its financial obligations), our estimates of the recoverability of
amounts due could be reduced by a material amount.
Bad
debt
expense for fiscal years 2006, 2005 and 2004 was $0.1 million, $1.4 million
and
$4.0 million, respectively. During fiscal 2004, a significant customer filed
for
bankruptcy protection. As a result, we recorded an increase in our estimate
for
bad debts of $3.3 million during fiscal 2004.
Deferred
income taxes and other liabilities
Deferred
income tax assets and liabilities are recognized based on the difference between
the financial statement and the tax law treatment of certain items. Realization
of certain components of deferred tax assets is dependent upon the occurrence
of
future events. We record a valuation allowance to reduce our net deferred tax
assets to the amount we believe is more likely than not to be realized. These
valuation allowances can be impacted by changes in tax laws, changes to
statutory tax rates, and future taxable income levels and are based on our
judgment, estimates and assumptions regarding those future events.
In
fiscal
2006, we increased the valuation allowances recorded against certain foreign
and
state net operating losses by approximately $3.8 million, since we believe
it
more likely than not that these assets will not result in a future tax
benefit.
In
the
event we were to determine that we would not be able to realize all or a portion
of the net deferred tax assets in the future, we would increase the valuation
allowance through a charge to income in the period that such determination
is
made. Conversely, if we were to determine that we would be able to realize
our
deferred tax assets in the future, in excess of the net carrying amounts, we
would decrease the recorded valuation allowance through an increase to income
in
the period that such determination is made.
We
record
our world-wide tax provision based on the tax rules and regulations in the
various jurisdictions in which we operate. Significant managerial judgment
is
required in determining our effective tax rate and evaluating our tax
positions. Where we believe that the deduction of an item is supportable
for income tax purposes, the item is deducted in our income tax returns.
However, where treatment of an item is uncertain, tax contingency reserves
are
recorded based upon the expected most probable outcome taking into consideration
the specific tax regulations and facts of each matter. These reserves are
recorded in the consolidated balance sheet in other liabilities. We adjust
these reserves when an identifiable event occurs that changes the most probable
outcome.
Depreciation
We
provide for depreciation on our production machinery and equipment at our cotton
cellulose and airlaid nonwovens plants using the units-of-production
depreciation method. Under this method, we calculate depreciation based on
the
expected total productive hours of the assets and, in any case, subject to
a
minimum level of depreciation. We review our estimate of total productive hours
at least annually. If the estimated productive hours of these assets change
based on changes in utilization and useful life assumptions, we adjust
depreciation expense per unit of production accordingly. We use the
straight-line method for determining depreciation on our other capital assets.
During fiscal 2004, based on changes in utilization estimates, we increased
depreciation expense by $0.2 million. We had no changes in estimates or
assumptions during fiscal 2006 or 2005.
Long-lived
assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are held and used,
recoverability is evaluated based on the undiscounted cash flows expected to
be
generated by the asset. If the carrying value of the assets are determined
not
be recoverable, then an impairment is recognized. If impairment exists, an
adjustment is made to write the asset down to its fair value. Estimated fair
values are determined based on quoted market values, discounted cash flows
or
internal and external appraisals, as applicable. Assets to be disposed of are
carried at the lower of carrying value or estimated net realizable value.
Based
on
the estimated fair values of long-lived assets, we have recorded impairment
charges of $2.1 million, $12.3 million, and $45.9 million for years ended June
30, 2006, 2005, and 2004, respectively. If circumstances change, our estimated
fair values may be impacted and have a material effect on our reported financial
position and results of operations. See Note 4, Impairment of Long-lived Assets
and Assets Held for Sale, of our Consolidated Financial Statements for further
information concerning impairment charges.
We
have
made acquisitions in the past that included a significant amount of goodwill
and
other intangible assets. We adopted Statement of Financial Accounting Standards
No. 142, Goodwill
and Other Intangible Assets
(SFAS
142), and, as a consequence, discontinued the amortization of goodwill. Under
the guidelines of SFAS 142, goodwill is subject to an annual impairment test
based on its estimated fair value. Unless circumstances otherwise dictate,
we
perform our annual impairment testing in the fourth quarter. We will continue
to
amortize other intangible assets that meet certain criteria over their useful
lives. We utilize the present value of expected net cash flows to determine
the
estimated fair value of our reporting units. This present value model requires
management to estimate future net cash flows, the timing of these cash flows
and
an appropriate discount rate (or weighted average cost of capital) representing
the time value of money and the inherent risk and uncertainty of future cash
flows. The discount rate, adjusted for inflation, is based on independently
calculated beta risks for a composite group of companies, our target capital
mix
and an estimated market risk premium. The assumptions used in estimating future
cash flows were consistent with the reporting unit’s internal planning. If the
estimated fair value of the reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not impaired. The determination of an impairment loss
is complex and requires that we make many assumptions and estimates. If our
estimates of future cash flows or the underlying assumptions and estimates
change, we may need to record impairment losses in the future. See Note 1,
“Accounting Policies,” to the Consolidated Financial Statements for further
information on long-lived assets.
Item
7a. Qualitative and Quantitative Disclosures About Market
Risk
We
are
exposed to market risk from changes in foreign exchange rates, interest rates,
raw material costs and the price of certain commodities used in our production
processes. To reduce such risks, we selectively use financial instruments.
All
hedging transactions are authorized and executed pursuant to clearly defined
policies and procedures. Further, we do not enter into financial instruments
for
trading purposes.
The
following risk management discussion and the estimated amounts generated from
the sensitivity analyses are forward-looking statements of market risk, assuming
that certain adverse market conditions occur. Actual results in the future
may
differ materially from those projected results due to actual developments in
the
global financial markets. The analysis methods used to assess and mitigate
risks
discussed below should not be considered projections of future events or
losses.
A
discussion of our accounting policies for risk management is included in Note
1,
Accounting Policies, in the Notes to the Consolidated Financial Statements.
Interest
Rates
The
fair
value of our long-term public debt is based on an average of the bid and offer
prices at year-end. The fair value of the credit facility approximates its
carrying value due to its variable interest rate. The carrying value of other
long-term debt approximates fair value based on our current incremental
borrowing rates for similar types of borrowing instruments. The carrying value
and fair value of long-term debt at June 30, 2006 were $522.1 million and $497.3
million and at June 30, 2005 were $539.0 million and $535.6 million,
respectively. Market risk is estimated as the potential change in fair value
resulting from a hypothetical 100 basis point decrease in interest rates and
would amount to $9.5 million increase in the fair value of long-term debt.
We
had
$98.7 million of variable rate long-term debt outstanding at June 30, 2006.
At
this borrowing level, a hypothetical 100 basis point increase in interest rates
would have a $1.0 million unfavorable impact on our pre-tax earnings and cash
flows. The primary interest rate exposures on floating rate debt are with
respect to European interbank rates and U.S. prime rates.
Foreign
Currency Exchange Rates
Foreign
currency exposures arising from transactions include firm commitments and
anticipated transactions denominated in a currency other than an entity’s
functional currency. Buckeye and our subsidiaries generally enter into
transactions denominated in their respective functional currencies. Our primary
foreign currency exposure arises from foreign-denominated revenues and costs
and
their translation into U.S. dollars. The primary currencies to which we are
exposed include the euro, Canadian dollar and the Brazilian real.
We
generally view as long-term our investments in foreign subsidiaries with a
functional currency other than the U.S. dollar. As a result, we do not generally
hedge these net investments. However, we use capital structuring techniques
to
manage our net investment in foreign currencies as considered necessary. The
net
investment in foreign subsidiaries translated into dollars using the year-end
exchange rates is $196.9 million and $185.1 million at June 30, 2006 and 2005,
respectively. The potential foreign currency translation loss from investment
in
foreign subsidiaries resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates amounts to approximately $17.9 million at June
30, 2006. This change would be reflected in the equity section of our
consolidated balance sheet in accumulated other comprehensive loss. The primary
foreign currency exposures on our long-term investments are with the euro,
Canadian dollar and the Brazilian real.
Cost
of Raw Materials
Amounts
paid by us for wood, cotton fiber and fluff pulp represent the largest component
of our variable costs of production. The availability and cost of these
materials are subject to market fluctuations caused by factors beyond our
control, including weather conditions. Significant decreases in availability
or
increases in the cost of wood or cotton fiber to the extent not reflected in
prices for our products, could materially and adversely affect our business,
results of operations and financial condition.
Commodities
We
are
dependent on commodities in our production process. Natural gas, electricity,
fuel oil, caustic and other chemicals are just some of the commodities that
our
processes rely upon. Exposure to these commodities can have a significant impact
on our operating performance.
In
order
to minimize market exposure, we may use forward contracts to reduce price
fluctuations in a desired percentage of forecasted purchases of fossil fuels
over a period of generally less than one year. There were no fossil fuel
contracts outstanding at June 30, 2006 or 2005 requiring fair value treatment.
Exposure
to commodity products also creates volatility in pricing. If our research and
development efforts do not result in the commercialization of new, proprietary
products, we will continue to have significant exposure to fluff pulp and other
commodity products, which could result in volatility in sales prices and
profits.
Industry
Cyclicality
The
demand and pricing of our products, particularly fluff pulp, are influenced
by
the much larger market for papermaking pulps which is highly cyclical. The
markets for most cellulose-based products are sensitive to both changes in
general global economic conditions and to changes in industry capacity. Both
of
these factors are beyond our control. The price of these products can fluctuate
significantly when supply and demand become imbalanced for any reason. Financial
performance can be heavily influenced by these pricing fluctuations and the
general cyclicality of the industries in which we compete. It is not certain
that current prices will be maintained, that any price increases will be
achieved, or that industry capacity utilization will reach favorable levels.
The
demand, cost and prices for our products may thus fluctuate substantially in
the
future and downturns in market conditions could have a material adverse effect
on our business, results of operations and financial condition.
Contingencies
Our
operations are subject to extensive general and industry-specific federal,
state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with such requirements. We
expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with such requirements. Given the
uncertainties associated with predicting the scope of future requirements,
there
can be no assurance that we will not in the future incur material environmental
compliance costs or liabilities. For additional information on environmental
matters, see Note 20 to the Consolidated Financial Statements.
Forward-Looking
Statements
Except
for the historical information contained herein, the matters discussed in this
Annual Report are forward-looking statements that involve risks and
uncertainties, including, but not limited to, economic, competitive,
governmental and technological factors affecting our operations, markets,
products, services and prices and other factors. The forward-looking statements
included in this document are only made as of date of this document and we
undertake no obligation to publicly release the result of any revisions to
these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Item
8. Financial Statements and Supplementary Data
See
Index
to Financial Statements on page F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
We
had no
changes in or disagreements with Ernst & Young LLP, our independent
auditors.
Item
9a. Controls and Procedures
Management’s
Evaluation of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we evaluated the
effectiveness of our disclosure controls and procedures in ensuring that the
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the
time periods specified in the Securities and Exchange Commission’s
rules and forms, including ensuring that such information is accumulated
and communicated to Buckeye management as appropriate to allow timely decisions
regarding required disclosure. Based on such evaluation, our principal executive
and financial officers have concluded that such disclosure controls and
procedures were effective, as of June 30, 2006 (the end of the period covered
by
this Annual Report on Form 10-K).
Assessment
of Internal Control Over Financial Reporting
Management’s
report on our internal control over financial reporting is presented on
page F-3 of this Annual Report on Form 10-K. The report of Ernst &
Young LLP with respect to management’s assessment of internal control over
financial reporting is presented on page F-4 of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
During
our fiscal quarter ended June 30, 2006, no change occurred in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item
9b. Other Information
None.
PART
III
Item
10. Directors and Executive Officers of the Registrant
Directors
and Executive Officers
Information
regarding members of the Board of Directors will be presented in our 2006 Annual
Proxy Statement for the 2006 annual meeting of stockholders and is incorporated
herein by reference.
Executive
Officers of the Registrant
The
names, ages and positions held by our executive officers on August 25, 2006
are:
Name
|
Age
|
Position
|
Elected
to Present Position
|
John
B. Crowe
|
59
|
Chairman
of the Board, Chief Executive Officer and Director
|
July
2006
|
Kristopher
J. Matula
|
43
|
President,
Chief Operating Officer
|
July
2006
|
Charles
S. Aiken
|
56
|
Sr.
Vice President, Manufacturing
|
October
2003
|
Jeffery
T. Cook
|
44
|
Sr.
Vice President, Marketing
|
February
2006
|
Sheila
Jordan Cunningham
|
54
|
Sr.
Vice President, General Counsel and Secretary
|
April
2000
|
Steven
G. Dean
|
50
|
Vice
President and Chief Financial Officer
|
July
2006
|
Douglas
L. Dowdell
|
48
|
Sr.
Vice President, Specialty Fibers
|
February
2006
|
William
M. Handel
|
60
|
Sr.
Vice President, Lean Enterprise
|
February
2006
|
Paul
N. Horne
|
51
|
Sr.
Vice President, Product and Market Development
|
February
2006
|
John
B. Crowe
Chairman
of the Board, Chief Executive Officer and Director
Mr.
Crowe
has served as Chairman of the Board and Chief Executive Officer since July
1,
2006. He served as President and Chief Operating Officer from April 2003 to
July
2006. Mr. Crowe was elected as a director of Buckeye in August 2004. He served
as Senior Vice President, Wood Cellulose from January 2001 to April 2003. He
served as Vice President, Wood Cellulose Manufacturing from January 1998 to
January 2001. Prior to joining the Company, he was Executive Vice
President/General Manager of Alabama River Pulp and Alabama Pine Pulp
Operations, a division of Parsons and Whittemore, Inc. and was Vice President
and Site Manager of Flint River Operations, a subsidiary of Weyerhauser Company.
From 1979 to 1992, he was an employee of Procter & Gamble.
Kristopher
J. Matula
President,
Chief Operating Officer
Mr.
Matula has served as President and Chief Operating Officer since July 1, 2006.
He served as Executive Vice President and Chief Financial Officer from October
2003 to July 2006. Mr. Matula served as Senior Vice President, Nonwovens and
Corporate Strategy from April 2003 to October 2003. He served as Senior Vice
President, Nonwovens from January 2001 to April 2003. He served as Senior Vice
President, Commercial - Absorbent Products from July 1997 to January 2001 and
as
Vice President, Corporate Strategy from April 1996 to July 1997. Prior to
joining Buckeye in 1994, he held various positions with Procter & Gamble and
General Electric.
Charles
S. Aiken
Senior
Vice President, Manufacturing
Mr.
Aiken
has served as Senior Vice President, Manufacturing since October 1, 2003. He
served as Senior Vice President, Nonwovens Manufacturing from April 2000 to
October 2003. He served as Vice President, Business Systems from April 1998
to
April 2000 and as Vice President, Foley Plant from June 1995 to April 1998.
He
was an employee of Procter & Gamble from 1977 to March 1993.
Jeffery
T. Cook
Senior
Vice President, Marketing
Mr.
Cook
has served as Senior Vice President, Marketing since February 1, 2006.
He served as Senior Vice President, Product and Market Development
from February 2005 to February 2006. Mr. Cook served as Vice President, Product
and Market Development from July 2003 to February 2005. He served as Vice
President of Research and Development, Wood Cellulose from August 1999 to July
2003. He was an employee of Procter and Gamble from 1988 to 1998.
Sheila
Jordan Cunningham
Senior
Vice President, General Counsel and Secretary
Ms.
Cunningham has served as Senior Vice President, General Counsel and Secretary
since April 2000. She served as Vice President, General Counsel and Secretary
from April 1998 to April 2000. She served as Assistant General Counsel from
March 1997 and as Secretary from July 1997 to April 1998. Prior to joining
the
Company, she was a partner in the law firm of Baker, Donelson, Bearman &
Caldwell from 1988 to March 1997.
Steven
G. Dean
Vice
President, Chief Financial Officer
Mr.
Dean
has served as Vice President and Chief Financial Officer since July 1, 2006.
He
served as Vice President and Controller from February 2006 to July 2006.
Mr.
Dean
served as Company Controller from December 2005 to February 2006. Previously,
he
served as Controller for Buckeye's Specialty Fibers Division from December
2004
to November 2005 and Controller for Buckeye's Nonwovens Division from August
2001 to November 2004. Prior to joining Buckeye in 1999, he held various
financial management positions with Thomas & Betts and
Hewlett-Packard.
Douglas
L. Dowdell
Senior
Vice President, Specialty Fibers
Mr.
Dowdell has served as Senior Vice President, Specialty Fibers since February
1,
2006. He served as Senior Vice President, Nonwovens from February 2005 to
February 2006. Mr. Dowdell served as Vice President, Nonwovens from October
2003
to February 2005. He served as Vice President, Absorbent Wood Fiber Sales from
February 2002 to October 2003. He served as Vice President, Nonwovens Business
Development from February 2001 to February 2002. He served as Vice President,
Absorbent Products Business Development from August 2000 to February 2001.
Prior
to August 2000 he held several positions in the Company including: Manager,
Absorbent Fiber Sales; Manager, Business Development; and Manager, Wood
Procurement. He was an employee of Procter & Gamble from 1988 to March
1993.
William
M. Handel
Senior
Vice President, Lean Enterprise
Mr.
Handel has served as Senior Vice President, Lean Enterprise since February
1,
2006. He served as Senior Vice President, Human Resources from April 2000
to February 2006. Mr. Handel served as Vice President, Human Resources from
November 1995 to April 2000 and as Human Resources Manager from March 1993
to
November 1995. He was an employee of Procter & Gamble from 1974 to March
1993.
Paul
N. Horne
Senior
Vice President, Product and Market Development
Mr.
Horne
has served as Senior Vice President, Product and Market Development since
February 1, 2006. He served as Senior Vice President, Cotton Cellulose
from January 2001 to February 2006. Mr. Horne served as Senior Vice President,
Commercial - Specialty Cellulose from July 1997 to January 2001 and as Vice
President, North and South American Sales from October 1995 to July 1997. He
was
an employee of Procter & Gamble from 1982 to March 1993.
Code
of Business Conduct & Ethics
We
have a
Code of Business Conduct & Ethics, which applies to all of our
directors, officers and employees, including our principal executive officer
and
senior financial officers. Our Code of Business Conduct & Ethics is
available in the corporate governance section of the investor relations
page of our website, www.bkitech.com.
In
addition, we intend to post in the corporate governance section of the investor
relations page of our website information regarding any amendment to, or
waiver from, the provisions of our Code of Business Conduct & Ethics to
the extent such disclosure is required. The information on our website, however,
does not form part of this Report.
Item
11. Executive Compensation
Information
relating to this item will be included in our 2006 Annual Proxy Statement and
is
incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and
Management
Information
relating to this item will be included under the captions “Buckeye Stock
Ownership”, “Executive Compensation” and “Equity Compensation Plan Information”
in our 2006 Annual Proxy Statement and is incorporated herein by
reference.
Item
13. Certain Relationships and Related Transactions
Information
relating to this item will be included in our 2006 Annual Proxy Statement and
is
incorporated herein by reference.
Item
14. Principal Accountant Fees and Services
Information
regarding principal accountant fees and services will be included in our 2006
Annual Proxy Statement and is incorporated by reference herein.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)
|
(1)
|
Financial
Statements
|
|
|
-
See Index to Consolidated Financial Statements and Schedule on page
F-1.
|
|
(2)
|
Financial
Statement Schedules
|
|
|
-
See Index to Consolidated Financial Statements and Schedule on page
F-1.
All other financial statement schedules are omitted as the information
is
not required or because the required information is presented in
the
financial statements or the notes thereto.
|
|
(3)
|
Listing
of Exhibits. See exhibits listed under Item 15
(b).
|
Exhibit
15 (b). Exhibits required by Item 601 of Regulation S-K
Exhibit
|
|
Incorporation
by Reference or
|
Numbers
|
Description
|
Filed
Herewith
|
|
|
|
3.1
|
Second
Amended and Restated Certificate of Incorporation
|
Exhibit
3.1 to Form 10-Q for quarter ended December 31, 1997
|
3.1(a)
|
Articles
of Amendment to the Second Amended and Restated Certificate of
Incorporation
|
Exhibit
3.1(a) to Form S-4 file no. 333-59267, filed on July 16,
1998
|
3.2
|
Amended
and Restated By-laws
|
Exhibit
3.2 to Form 10-Q dated March 31, 2006
|
4.1
|
First
Amendment to the Rights Agreement
|
Form
8-A to Form 10-K dated June 30, 1997
|
4.2
|
Indenture
for 9 ¼% Senior Subordinated Notes due 2008, dated July 12,
1996
|
Exhibit
4.2 to Form S-3 file no. 333-05139 filed on June 4,
1996
|
4.3
|
Indenture
for 8% Senior Subordinated Notes due 2010, dated June 11,
1998
|
Exhibit
4.3 to Form S-4 file no. 333-59267, filed on July 16,
1998
|
4.4
|
Indenture
for 8 ½%Senior Notes due 2013, dated September 22, 2003
|
Exhibit
4.4 to Form S-4, file no. 333-110091, filed on October 30,
2003
|
10.1
|
Amended
and Restated 1995 Management Stock Option Plan
|
Exhibit
10.1 to Form 10-K dated June 30, 1998
|
10.2
|
Second
Amended and Restated 1995 Incentive and Nonqualified Stock Option
Plan for
Management Employees
|
Exhibit
10.2 to Form S-4 file no. 333-59267, filed on July 16,
1998
|
10.3
|
Form
of Management Stock Option Subscription Agreement
|
Exhibit
10.3 to Form 10-K dated June 30, 1998
|
10.4
|
Form
of Stock Option Subscription Agreement
|
Exhibit
10.4 to Form 10-K dated June 30, 1998
|
10.5
|
Amended
and Restated Formula Plan for Non-Employee Directors
|
Exhibit
10.1 to Form 10-Q dated December 31, 2000
|
10.6
|
Amendment
No. 1 to Timberlands Agreement dated January 1, 1999 by and Between
Buckeye Florida, Limited Partnership and Foley Timber and Land Company.
Certain portions of the Agreement have been omitted pursuant to an
Application for Confidential Treatment dated October 30,
1995
|
Exhibit
10.1 to Form 10-Q/A dated March 31, 1999
|
10.7
|
Amended
and Restated Credit Agreement dated November 5, 2003 among the Registrant;
Fleet National Bank; Fleet Securities Inc.; Citigroup Global Markets
Inc.;
UBS Security LLC; Citibank N.A.; UBS, AG Stanford Branch; and the
other
lenders party thereto
|
Exhibit
10.1 to Form 10-Q dated September 30, 2003
|
10.8
|
Amended
and Restated Credit Agreement Amendment No. 1, dated March 15,
2005
|
Exhibit
10.1 to Form 10-Q dated March 31, 2005
|
10.9
|
Form
of Change in Control Agreement, dated August 8, 2006
|
Exhibit
10.1 to Form 8-K dated August 11, 2006
|
12.1
|
Computation
of Ratio of Earnings to Fixed Charges
|
Filed
herewith
|
21.1
|
Subsidiaries
|
Filed
herewith
|
23.1
|
Consent
of Ernst & Young LLP
|
Filed
herewith
|
31.1
|
Section
302 Certification of Chief Executive Officer
|
Filed
herewith
|
31.2
|
Section
302 Certification of Chief Financial Officer
|
Filed
herewith
|
32.1
|
Section
1350 Certification of Chief Executive Officer
|
Filed
herewith
|
32.2
|
Section
1350 Certification of Chief Financial Officer
|
Filed
herewith
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant
has
duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
Buckeye
Technologies Inc.
By:
|
/s/
John B. Crowe
|
|
John
B. Crowe, Director, Chairman of the Board and Chief Executive
Officer
|
Date:
|
August
31, 2006
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By:
|
|
|
John
B. Crowe, Director, Chairman of the Board and Chief Executive
Officer
|
Date:
|
August
31, 2006
|
By:
|
/s/
David B. Ferraro
|
|
David
B. Ferraro, Director
|
Date:
|
August
31, 2006
|
By:
|
/s/
Katherine Buckman Gibson
|
|
Katherine
Buckman Gibson, Director
|
Date:
|
August
31, 2006
|
By:
|
/s/
Henry F. Frigon
|
|
Henry
F. Frigon, Director
|
Date:
|
August
31, 2006
|
By:
|
|
|
Red
Cavaney, Director
|
Date:
|
August
31, 2006
|
By:
|
/s/
Lewis E. Holland
|
|
Lewis
E. Holland, Director
|
Date:
|
August
31, 2006
|
By:
|
/s/
Steven G. Dean
|
|
Steven
G. Dean, Vice President and Chief Financial Officer
|
Date:
|
August
31, 2006
|
By:
|
/s/
Elizabeth J. Welter
|
|
Elizabeth
J. Welter, Vice President and Chief Accounting Officer
|
Date:
|
August
31, 2006
|
BUCKEYE
TECHNOLOGIES INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
PAGE
|
|
|
Report
of Management
|
F-2
|
Management’s
Report on Internal Control Over Financial Reporting
|
F-3
|
Reports
of Independent Registered Public Accounting Firm
|
F-4
|
Financial
Statements as of June 30, 2006, June 30, 2005 and for the Three Years
Ended June 30, 2006:
|
|
Consolidated
Statements of Operations
|
F-6
|
Consolidated
Balance Sheets
|
F-7
|
Consolidated
Statements of Stockholders’ Equity
|
F-8
|
Consolidated
Statements of Cash Flows
|
F-9
|
Notes
to Consolidated Financial Statements
|
F-10
|
Schedule:
|
|
Report
of Independent Registered Public Accounting Firm, on Financial Statement
Schedule
|
F-37
|
Schedule
II - Valuation and Qualifying Accounts
|
F-38
|
Report
of Management
The
management of Buckeye Technologies Inc. is committed to providing financial
reports that are complete, accurate and easily understood.
The
consolidated financial statements and financial information included in this
report have been prepared in accordance with accounting principles generally
accepted in the United States and in the opinion of management fairly and
completely present the Company’s financial results. Our independent auditor,
Ernst & Young LLP, has examined our financial statements and expressed an
unqualified opinion.
Ensuring
the accuracy of financial statements starts at the top of the Company. Our
Board
of Directors provides oversight as the representative of the stockholders.
Our
Audit Committee, consisting entirely of independent Directors, meets regularly
with management, internal audit and the independent auditors to review our
financial reports.
The
Company’s senior management, our corporate leadership team, is actively involved
in all aspects of the business. This group understands key strategies and
monitors financial results. We maintain a system of internal control which
provides reasonable assurance that transactions are accurately recorded and
assets are safeguarded. All of the Company’s officers and financial executives
adhere to the Company’s Code of Business Conduct and Ethics and provide written
confirmation of their compliance annually.
Our
Company was built on a foundation of integrity and honesty. We take
responsibility for the quality and accuracy of our financial
reporting.
|
|
|
/s/
John B. Crowe
|
/s/
Kristopher J. Matula
|
/s/
Steven G. Dean
|
John
B. Crowe
|
Kristopher
J. Matula
|
Steven
G. Dean
|
Chairman
of the Board and
|
President
and
|
Vice
President and
|
Chief
Executive Officer
|
Chief
Operating Officer
|
Chief
Financial Officer
|
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended). Our internal control
over financial reporting includes, among other things: defined policies and
procedures for conducting and governing our business, a written Code of Business
Conduct and Ethics adopted by our Board of Directors and applicable to all
directors and all officers and employees of Buckeye and our subsidiaries,
sophisticated information systems for processing transactions and a properly
staffed and professional internal audit department. Mechanisms are in place
to
monitor the effectiveness of our internal control over financial reporting
and
actions are taken to correct identified deficiencies. Our procedures for
financial reporting include the active involvement of senior management, our
Audit Committee and a staff of highly qualified financial and legal
professionals.
Management,
with the participation of our principal executive and financial officers,
assessed our internal control over financial reporting as of June 30, 2006,
the
end of our fiscal year. Management based its assessment on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Based
on
this assessment, management has concluded that our internal control over
financial reporting was effective as of June 30, 2006.
Our
independent registered public accounting firm, Ernst & Young LLP,
audited management’s assessment and the effectiveness of our internal control
over financial reporting. Ernst & Young has issued their report
concurring with management’s assessment, which is included in this Annual Report
on Form 10 - K.
|
|
/s/
John B. Crowe
|
/s/
Steven G. Dean
|
John
B. Crowe
|
Steven
G. Dean
|
Chair
of the Board and
|
Vice
President and
|
Chief
Executive Officer
|
Chief
Financial Officer
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders of Buckeye Technologies Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Buckeye Technologies
Inc. maintained effective internal control over financial reporting as of June
30, 2006, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Buckeye Technologies Inc.’s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Buckeye Technologies Inc. maintained
effective internal control over financial reporting as of June 30, 2006, is
fairly stated, in all material respects, based on the COSO criteria. Also,
in
our opinion, Buckeye Technologies Inc. maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2006, based
on the COSO criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Buckeye
Technologies Inc. as of June 30, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended June 30, 2006 of Buckeye Technologies Inc.
and
our report dated August 31, 2006 expressed an unqualified opinion
thereon.
Memphis,
Tennessee /s/
Ernst
& Young LLP
August
31, 2006
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders of Buckeye Technologies Inc.
We
have
audited the accompanying consolidated balance sheets of Buckeye Technologies
Inc. as of June 30, 2006 and 2005 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in
the period ended June 30, 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Buckeye Technologies
Inc. as of June 30, 2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2006, in conformity with U. S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Buckeye Technologies
Inc.’s internal control over financial reporting as of June 30, 2006, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated August 31, 2006 expressed an unqualified opinion thereon.
As
discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for planned maintenance activities in
2004.
Memphis,
Tennessee /s/
Ernst
& Young LLP
August
31, 2006
Consolidated
Statements of Operations
(In
thousands, except per share data)
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
728,485
|
|
$
|
712,782
|
|
$
|
656,913
|
|
Cost
of goods sold
|
|
|
628,687
|
|
|
592,726
|
|
|
579,472
|
|
Gross
margin
|
|
|
99,798
|
|
|
120,056
|
|
|
77,441
|
|
Selling,
research and administrative expenses
|
|
|
47,762
|
|
|
43,270
|
|
|
42,423
|
|
Amortization
of intangibles and other
|
|
|
2,000
|
|
|
2,280
|
|
|
2,244
|
|
Impairment
of long-lived assets
|
|
|
2,090
|
|
|
12,326
|
|
|
45,908
|
|
Restructuring
costs
|
|
|
3,526
|
|
|
4,579
|
|
|
5,945
|
|
Operating
income (loss)
|
|
|
44,420
|
|
|
57,601
|
|
|
(19,079
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
635
|
|
|
943
|
|
|
923
|
|
Interest
expense and amortization of debt costs
|
|
|
(43,868
|
)
|
|
(45,142
|
)
|
|
(47,284
|
)
|
Loss
on early extinguishment of debt
|
|
|
(151
|
)
|
|
(242
|
)
|
|
(4,940
|
)
|
Gain
on sale of assets held for sale
|
|
|
-
|
|
|
7,203
|
|
|
-
|
|
Foreign
exchange and other
|
|
|
(352
|
)
|
|
(649
|
)
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and cumulative effect of change in
accounting
|
|
|
684
|
|
|
19,714
|
|
|
(70,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
(1,296
|
)
|
|
(490
|
)
|
|
(26,197
|
)
|
Income
(loss) before cumulative effect of change in accounting
|
|
|
1,980
|
|
|
20,204
|
|
|
(43,910
|
)
|
Cumulative
effect of change in accounting (net of tax of $3,359)
|
|
|
-
|
|
|
-
|
|
|
5,720
|
|
Net
income (loss)
|
|
$
|
1,980
|
|
$
|
20,204
|
|
$
|
(38,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before cumulative effect of change
in
accounting
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.18
|
)
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting per share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.03
|
)
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares for earnings per share
|
|
|
|
|
|
Basic
|
|
|
|
37,622
|
|
|
37,447
|
|
37,075
|
|
Diluted
|
|
|
37,658
|
|
|
37,598
|
|
37,075
|
|
See
accompanying notes.
Consolidated
Balance Sheets
(In
thousands, except share data)
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,734
|
|
$
|
$
9,926
|
|
Accounts
receivable - trade, net of allowance for doubtful accounts of $1,904
in
2006 and $5,602 in 2005
|
|
|
110,218
|
|
|
116,006
|
|
Accounts
receivable - other
|
|
|
3,880
|
|
|
2,209
|
|
Inventories
|
|
|
98,567
|
|
|
107,895
|
|
Deferred
income taxes
|
|
|
4,176
|
|
|
3,584
|
|
Prepaid
expenses and other
|
|
|
4,297
|
|
|
6,884
|
|
Total
current assets
|
|
|
229,872
|
|
|
246,504
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
531,898
|
|
|
525,931
|
|
Goodwill
|
|
|
149,106
|
|
|
139,430
|
|
Intellectual
property and other, net
|
|
|
38,677
|
|
|
37,872
|
|
Total
assets
|
|
$
|
949,553
|
|
$
|
$949,737
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
32,973
|
|
$
|
37,226
|
|
Accrued
expenses
|
|
|
48,416
|
|
|
48,401
|
|
Current
portion of capital lease obligation
|
|
|
627
|
|
|
685
|
|
Current
portion of long-term debt
|
|
|
1,294
|
|
|
1,376
|
|
Total
current liabilities
|
|
|
83,310
|
|
|
87,688
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
519,414
|
|
|
535,539
|
|
Accrued
postretirement benefits
|
|
|
19,367
|
|
|
19,206
|
|
Deferred
income taxes
|
|
|
35,686
|
|
|
34,660
|
|
Capital
lease obligation
|
|
|
755
|
|
|
1,382
|
|
Other
liabilities
|
|
|
1,304
|
|
|
1,673
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 10, 19, and 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 10,000,000 shares authorized; none issued
or
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.01 par value; 100,000,000 shares authorized; 43,142,770
shares
issued; 37,901,334 and 37,586,409 shares outstanding at June 30,
2006 and
2005, respectively
|
|
|
431
|
|
|
431
|
|
Additional
paid-in capital
|
|
|
49,274
|
|
|
52,446
|
|
Accumulated
other comprehensive income
|
|
|
33,819
|
|
|
16,791
|
|
Retained
earnings
|
|
|
277,733
|
|
|
275,753
|
|
Treasury
shares, 5,241,436 and 5,556,361 shares at June 30, 2006 and 2005,
respectively
|
|
|
(71,540
|
)
|
|
(75,832
|
)
|
Total
stockholders’ equity
|
|
|
289,717
|
|
|
269,589
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
949,553
|
|
$
|
949,737
|
|
See
accompanying notes.
Consolidated
Statements of Stockholders' Equity
(In
thousands, except share data)
|
|
Common
stock
|
|
Additional
paid-in
capital
|
|
Accumulated
other
comprehensive
income
(loss)
|
|
Retained
Earnings
|
|
Treasury
shares
|
|
Total
|
|
Balance
at June 30, 2003
|
|
$
|
431
|
|
$
|
55,235
|
|
$
|
(3,410
|
)
|
$
|
293,739
|
|
$
|
(84,111
|
)
|
$
|
261,884
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(38,190
|
)
|
|
-
|
|
|
(38,190
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
2,841
|
|
|
-
|
|
|
-
|
|
|
2,841
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 326,219 shares of common stock
|
|
|
-
|
|
|
(1,782
|
)
|
|
-
|
|
|
-
|
|
|
4,416
|
|
|
2,634
|
|
Tax
benefit from stock-based awards
|
|
|
-
|
|
|
105
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
105
|
|
Termination
of restricted stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
|
(5
|
)
|
Amortization
of deferred stock compensation
|
|
|
-
|
|
|
36
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36
|
|
Directors
stock compensation (4,469 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40
|
|
|
40
|
|
Balance
at June 30, 2004
|
|
$
|
431
|
|
$
|
53,594
|
|
$
|
(569
|
)
|
$
|
255,549
|
|
$
|
(79,660
|
)
|
$
|
229,345
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,204
|
|
|
-
|
|
|
20,204
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
17,360
|
|
|
-
|
|
|
-
|
|
|
17,360
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 279,698 shares of common stock
|
|
|
-
|
|
|
(1,470
|
)
|
|
-
|
|
|
-
|
|
|
3,791
|
|
|
2,321
|
|
Tax
benefit from stock-based awards
|
|
|
-
|
|
|
245
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
245
|
|
Termination
of restricted stock
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3
|
)
|
|
(3
|
)
|
Amortization
of deferred stock compensation
|
|
|
-
|
|
|
77
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
77
|
|
Directors
stock compensation (3,439 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40
|
|
|
40
|
|
Balance
at June 30, 2005
|
|
$
|
431
|
|
$
|
52,446
|
|
$
|
16,791
|
|
$
|
275,753
|
|
$
|
(75,832
|
)
|
$
|
269,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,980
|
|
|
-
|
|
|
1,980
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
17,028
|
|
|
-
|
|
|
-
|
|
|
17,028
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 313,670 shares of common stock
|
|
|
-
|
|
|
(3,733
|
)
|
|
-
|
|
|
-
|
|
|
4,282
|
|
|
549
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
561
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
561
|
|
Directors
stock compensation (1,255 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10
|
|
|
10
|
|
Balance
at June 30, 2006
|
|
$
|
431
|
|
$
|
49,274
|
|
$
|
33,819
|
|
$
|
277,733
|
|
$
|
(71,540
|
)
|
$
|
289,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,980
|
|
$
|
$20,204
|
|
$
|
(38,190
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
|
|
|
-
|
|
|
-
|
|
|
(5,720
|
)
|
Impairment
of long-lived assets
|
|
|
2,090
|
|
|
12,326
|
|
|
45,908
|
|
Depreciation
and depletion
|
|
|
46,903
|
|
|
45,964
|
|
|
45,675
|
|
Amortization
|
|
|
3,336
|
|
|
3,477
|
|
|
4,227
|
|
Loss
on early extinguishment of debt
|
|
|
151
|
|
|
242
|
|
|
4,940
|
|
Deferred
income taxes
|
|
|
(5,464
|
)
|
|
4,510
|
|
|
(27,340
|
)
|
Non-cash
tax benefit
|
|
|
-
|
|
|
(5,481
|
)
|
|
-
|
|
Gain
on sale of assets held for sale
|
|
|
-
|
|
|
(7,203
|
)
|
|
-
|
|
Provision
for bad debts
|
|
|
123
|
|
|
1,372
|
|
|
4,010
|
|
Other
|
|
|
2,192
|
|
|
3,150
|
|
|
867
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
8,535
|
|
|
(5,971
|
)
|
|
11,716
|
|
Inventories
|
|
|
10,900
|
|
|
(1,504
|
)
|
|
29,838
|
|
Other
assets
|
|
|
(5,954
|
)
|
|
463
|
|
|
(2,301
|
)
|
Accounts
payable and other current liabilities
|
|
|
(6,071
|
)
|
|
7,072
|
|
|
(7,974
|
)
|
Net
cash provided by operating activities
|
|
|
58,721
|
|
|
78,621
|
|
|
65,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(45,591
|
)
|
|
(45,329
|
)
|
|
(31,871
|
)
|
Proceeds
from sales of assets
|
|
|
1,163
|
|
|
13,648
|
|
|
309
|
|
Other
|
|
|
(467
|
)
|
|
(567
|
)
|
|
(683
|
)
|
Net
cash used in investing activities
|
|
|
(44,895
|
)
|
|
(32,248
|
)
|
|
(32,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (payments) under revolving line of credit
|
|
|
350
|
|
|
400
|
|
|
(224,026
|
)
|
Issuance
of long-term debt
|
|
|
-
|
|
|
-
|
|
|
350,000
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(16,813
|
)
|
|
(67,758
|
)
|
|
(178,333
|
)
|
Payments
for debt issuance costs
|
|
|
-
|
|
|
(5
|
)
|
|
(9,070
|
)
|
Payments
related to early extinguishment of debt
|
|
|
-
|
|
|
-
|
|
|
(2,115
|
)
|
Proceeds
from termination of swap
|
|
|
-
|
|
|
-
|
|
|
4,000
|
|
Net
proceeds from sale of equity interests
|
|
|
549
|
|
|
2,468
|
|
|
2,667
|
|
Net
cash used in financing activities
|
|
|
(15,914
|
)
|
|
(64,895
|
)
|
|
(56,877
|
)
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
896
|
|
|
1,213
|
|
|
724
|
|
Decrease
in cash and cash equivalents
|
|
|
(1,192
|
)
|
|
(17,309
|
)
|
|
(22,742
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
9,926
|
|
|
27,235
|
|
|
49,977
|
|
Cash
and cash equivalents at end of year
|
|
$
|
8,734
|
|
$
|
9,926
|
|
$
|
27,235
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
Notes
to Consolidated Financial Statements
(In
thousands, except share data)
NOTE
1: ACCOUNTING POLICIES
Business
Description and Basis of Presentation
Our
financial statements are consolidated financial statements of Buckeye
Technologies Inc. We manufacture and distribute value-added cellulose-based
specialty products used in numerous applications including disposable diapers,
personal hygiene products, engine air and oil filters, food casings, rayon
filament, acetate plastics, thickeners and papers.
Fiscal
Year
Except
as
otherwise specified, references to years indicate our fiscal year ended June
30,
2006 or ended June 30 of the year referenced.
Reclassifications
Certain
prior year amounts have been reclassified to conform to current year
classifications.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Buckeye Technologies
Inc. and our subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
Summary
of Significant Accounting Policies
Cash
and Cash Equivalents
We
consider cash equivalents to be temporary cash investments with a maturity
of
three months or less when purchased.
Inventories
Inventories
are valued at the lower of cost or market. The costs of manufactured
cotton-based specialty fibers and costs for nonwoven raw materials are generally
determined on the first-in, first-out (FIFO) basis. Other manufactured products
and raw materials are generally valued on an average cost basis. Manufactured
inventory costs include material, labor and manufacturing overhead. Slash pine
timber, cotton fibers and chemicals are the principal raw materials used in
the
manufacture of our specialty fiber products. Fluff pulp is the principal raw
material used in our nonwoven materials products. We take physical counts of
inventories at least annually, and we review periodically the provision for
potential losses from obsolete, excess or slow-moving inventories.
Allowance
for Doubtful Accounts
We
provide an allowance for receivables we believe we may not collect in full.
Management evaluates the collectibility of accounts based on a combination
of
factors. In circumstances where we are aware of a specific customer’s inability
to meet its financial obligations (i.e., bankruptcy filings or substantial
downgrading of credit ratings), we record a specific reserve. For all other
customers, we recognize reserves for bad debts based on our historical
collection experience. If circumstances change (i.e., higher than expected
defaults or an unexpected material adverse change in a major customer’s ability
to meet its financial obligations), our estimates of the recoverability of
amounts due could differ by a material amount.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Cost includes the interest cost
associated with significant capital additions. Interest capitalized for the
years ended June 30, 2006, 2005 and 2004 was $1,866, $418 and $67, respectively.
Depreciation on production machinery and equipment at the cotton cellulose
and
airlaid nonwovens plants is determined by the units-of-production method which
is based on the expected productive hours of the assets, subject to a minimum
level of depreciation. The straight line method is used for determining
depreciation on other capital assets. Depreciation under the straight-line
method is computed over the following estimated useful lives: buildings—30 to 40
years; machinery and equipment—3 to 20 years. Depreciation and amortization
expense includes the amortization of assets under capital
lease.
Long-Lived
Assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be held and
used, impairment is recognized when the estimated fair value is less than their
carrying value. If impairment exists, an adjustment is made to write the asset
down to its fair value, and a loss is recorded as the difference between the
carrying value and fair value. Fair values are determined based on quoted market
values, discounted cash flows or internal and external appraisals, as
applicable. Assets to be disposed of are carried at the lower of carrying value
or fair value. See Note 4 for information concerning impairment charges.
Goodwill
is recognized for the excess of the purchase price over the fair value of
tangible and identifiable intangible net assets of businesses acquired. Goodwill
of businesses acquired is specifically identified to the reporting units to
which the businesses belong. We have determined that our reporting units for
Goodwill are the same as our operating segments before aggregation. See Note
17,
“Segment Reporting,” for further discussion of our operating segments. Goodwill
is reviewed at least annually for impairment. Unless circumstances otherwise
dictate, we perform our annual impairment testing in the fourth quarter. No
impairment was recorded during the years ending June 30, 2006, 2005 and 2004.
The change in goodwill resulted from changes in foreign currency exchange rates.
Intellectual
Property and Other
At
June
30, 2006 and 2005, we had intellectual property totaling $25,173 and $27,576,
respectively, which includes patents (including application and defense costs),
licenses, trademarks, and tradenames, the majority of which were obtained in
the
acquisition of airlaid nonwovens businesses and Stac-Pac™ technology.
Intellectual property is amortized by the straight-line method over 5 to 20
years and is net of accumulated amortization of $14,519 and $12,288 at June
30,
2006 and 2005, respectively. Intellectual property amortization expense of
$2,000, $2,280 and $2,244 was recorded during the years June 30, 2006, 2005
and
2004, respectively. Estimated amortization expense for the five succeeding
fiscal years follows: $1,924 in 2007, $1,929 in 2008, $1,929 in 2009, $1,929
in
2010 and $1,929 in 2011.
Deferred
debt costs of $7,534 and $9,148 at June 30, 2006 and 2005, respectively are
amortized by the effective interest method over the life of the related debt
and
are net of accumulated amortization of $6,901 and $5,810 at June 30, 2006 and
2005, respectively. We recorded amortization of deferred debt costs of $1,487,
$1,556 and $1,960 during the years ending June 30, 2006, 2005 and 2004,
respectively.
Income
Taxes
We
provide for income taxes under the liability method. Accordingly, deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. No provision is made for U.S. income
taxes applicable to undistributed earnings of foreign subsidiaries that are
indefinitely reinvested in foreign operations. It is not practicable to compute
the potential deferred tax liability associated with these undistributed foreign
earnings.
Risk
Management
We
are
exposed to certain market risks as a part of our ongoing business operations
and
use derivative financial instruments, where appropriate, to manage these risks.
Derivatives are financial instruments whose value is derived from one or more
underlying financial instruments. Examples of underlying instruments are
currencies, commodities and interest rates. With the adoption of SFAS 133,
"Accounting
for Derivative Instruments and Hedging Activities,"
in
2001, we record the fair value of all outstanding derivatives in other assets
or
other liabilities. Gains and losses related to non-designated instruments or
the
ineffective portion of any hedge are recorded in various costs and expenses,
depending on the nature of the derivative.
We
periodically use derivatives and other financial instruments to hedge exposures
to fossil fuels, interest rates and currency risks. For hedges which meet the
Statement of Financial Accounting Standards No. (“SFAS”) 133, Accounting
for Derivative Instruments and Hedging Activities,
criteria, we formally designate and document the instrument as a hedge of a
specific underlying exposure, as well as the risk management objective and
strategy for undertaking each hedge transaction. Because of the high degree
of
effectiveness between the hedging instrument and the underlying exposure being
hedged, fluctuations in the value of the derivative instruments are generally
offset by changes in the value or cash flows of the underlying exposures being
hedged.
From
time
to time, we utilize forward foreign exchange contracts for the sale or purchase
of foreign currencies. These contracts are not designated as hedging instruments
and do not qualify for hedge accounting treatment under the provisions of
SFAS No. 133 and SFAS No. 138. Mark-to-market gains and
losses for forward foreign exchange contracts are recorded in foreign exchange
and other.
Derivatives
are recorded in the consolidated balance sheet at fair value. At June 30, 2006
and 2005, we had no derivatives outstanding.
Credit
Risk
We
have
established credit limits for each customer. We generally require the customer
to provide a letter of credit for export sales in high-risk countries. Credit
limits are monitored routinely.
Environmental
Costs
Liabilities
are recorded when environmental assessments are probable and the cost can be
reasonably estimated. Generally, the timing of these accruals coincides with
the
earlier of completion of a feasibility study or our commitment to a plan of
action based on the then known facts.
Revenue
Recognition
We
recognize revenue when the following criteria are met: persuasive evidence
of an
agreement exists, delivery has occurred, our price to the buyer is fixed and
determinable, and collectibility is reasonably assured. Delivery is not
considered to have occurred until the customer takes title and assumes the
risks
and rewards of ownership. The timing of revenue recognition is largely dependent
on shipping terms. Discounts and allowances reduce net sales and are comprised
of trade allowances, cash discounts and sales returns.
Shipping
and Handling Costs
Amounts
related to shipping and handling which are billed to a customer in a sale
transaction have been classified as revenue. Costs incurred for shipping and
handling have been classified as costs of goods sold.
Foreign
Currency Translation
Management
has determined that the local currency of our German, Canadian, and Brazilian
subsidiaries is the functional currency, and accordingly European euro, Canadian
dollar, and Brazilian real denominated balance sheet accounts are translated
into United States dollars at the rate of exchange in effect at fiscal year
end.
Income and expense activity for the period is translated at the weighted average
exchange rate during the period. Translation adjustments are included as a
separate component of stockholders' equity, and are the only component of other
comprehensive income.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the local functional currency are included
in “Other income (expense)” in the results of operations. Transaction gains and
(losses) of $(551), $(226), and $224 were recorded during the years ended June
30, 2006, 2005 and 2004, respectively.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in
the consolidated financial statements and accompanying notes. Actual results
could differ from the estimates and assumptions used.
Changes
in estimates are recognized in accordance with the accounting rules for the
estimate, which is typically in the period when new information becomes
available to management. Areas where the nature of the estimate makes it
reasonably possible that actual results could materially differ from amounts
estimated include: impairment assessments on long-lived assets (including
goodwill), allowance for doubtful accounts, inventory reserves, income tax
liabilities, and contingent liabilities.
Earnings
Per Share
Basic
earnings per share has been computed based on the average number of common
shares outstanding excluding restricted stock. Diluted earnings per share
reflects the increase in average common shares outstanding that would result
from the assumed exercise of outstanding stock options and restricted stock
awards calculated using the treasury stock method. Diluted loss per share
amounts for 2004 were calculated using the same denominator as used in the
basic
loss per share calculation as the inclusion of dilutive securities in the
denominator would have been anti-dilutive.
Stock-Based
Compensation
On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) 123 (revised 2004),
Share-Based
Payments
(“SFAS
123(R)”), which is a revision of SFAS 123, Accounting
for Stock Based Compensation
(“SFAS
123”). SFAS 123(R) supersedes Accounting Principles Bulletin 25 (“APB 25”),
Accounting
for Stock Issued to Employees,
and
amends SFAS 95, Statement
of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described
in
SFAS
123.
However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options and restricted stock awards, to
be
recognized in the income statement based on their fair values.
SFAS 123(R) eliminates the alternative to use the intrinsic value method of
accounting that was provided in SFAS 123, which generally resulted in no
compensation expense recorded in the financial statements related to the
issuance of share-based awards to employees. SFAS 123(R) requires that the
cost resulting from all share-based payment transactions be recognized in the
financial statements. SFAS 123(R) establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
companies to apply a fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees.
On
July
1, 2005 (the first day of our 2006 fiscal year), we adopted SFAS 123(R). We
adopted SFAS 123(R) using a modified prospective application, as permitted
under SFAS 123(R). Accordingly, prior period amounts have not been
restated. Under this application, we are required to record compensation expense
for all share-based awards granted after the date of adoption and for the
unvested portion of previously granted share-based awards that remain
outstanding at the date of adoption.
On
June
7, 2005, prior to our adoption of FSAS 123(R), the Compensation Committee of
our
Board of Directors approved the acceleration of vesting of out-of-the-money
options with an exercise price greater than $8.32 to purchase shares of our
common stock that remained unvested at June 30, 2005. The acceleration of
vesting of these out-of-the-money options was undertaken primarily to eliminate
any future compensation expense we would otherwise recognize in our income
statement with respect to these options with the implementation of SFAS 123(R).
We estimate the compensation expense, before tax, which was avoided as a result
of the acceleration, would have totaled approximately $4,900 (approximately
$2,100 in 2006, $1,400 in 2007, $800 in 2008 and $600 in 2009) based on fair
value calculations using the Black-Scholes methodology.
The
following table illustrates the effect on net income (loss) and earnings (loss)
per share had compensation expense for the employee stock-based awards been
recorded during fiscal year 2005 and fiscal year 2004 based on the fair value
method under SFAS 123(R).
|
|
Year
Ended June 30
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
Net
income (loss) as reported
|
|
|
$
|
$20,204
|
|
$
|
(38,190
|
)
|
Deduct:
Total stock-based compensation expense determined under fair value
based
method, net of related tax effect
|
|
|
|
(4,856
|
)
|
|
(1,511
|
)
|
Pro
forma net income (loss)
|
|
|
$
|
$15,348
|
|
$
|
(39,701
|
)
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
|
$
|
$
0.54
|
|
$
|
(1.03
|
)
|
Basic
- pro forma
|
|
|
$
|
$
0.41
|
|
$
|
(1.07
|
)
|
Diluted
- as reported
|
|
|
$
|
$
0.54
|
|
$
|
(1.03
|
)
|
Diluted
- pro forma
|
|
|
$
|
$
0.41
|
|
$
|
(1.07
|
)
|
Stock-based
compensation expense for fiscal year 2006 was $561 ($365 after tax and $0.01
per
share). See
Note
11 for a discussion of the assumptions underlying the pro forma calculations
above.
NOTE
2: RECENT ACCOUNTING PRONOUNCEMENTS
The
FASB
issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income
Taxes,” on July 13, 2006. The new rules will be effective for us in fiscal 2008.
The interpretation provides a consistent framework for accounting for tax
positions in accordance with SFAS 109 “Accounting
for Income Taxes.”
At
this
time, we have not completed our review and assessment of the impact of adoption
of FIN 48.
NOTE
3: CHANGE IN ACCOUNTING
Planned
Maintenance Activities
Through
June 30, 2003, we accounted for major planned maintenance activities at our
specialty fiber plant in Perry, Florida by accruing the cost of the maintenance
activities over the period between each planned maintenance activity (the accrue
in advance method), which ranged from two to five year intervals. All other
facilities expensed maintenance costs as incurred.
During
fiscal 2004, we re-evaluated this critical accounting policy and, effective
July
1, 2003, changed our method of accounting from the accrue in advance method
to
the direct expense method. Under the new accounting method, maintenance costs
are expensed as incurred. We believe the new method is preferable in this
circumstance because the maintenance liability is not recorded until there
is an
obligating event (when the maintenance event is actually being performed).
The
direct expense method eliminates significant estimates and judgments inherent
under the accrual method, and it is the predominant method used in the
industry.
The
effect of applying the new method for the year ended June 30, 2004 was a
decrease in net loss of $349 or $0.01 per share. This decrease in net loss
is
composed of a profit increase of $9,079 pre-tax ($5,720 net-of-tax reported
as a
cumulative effect of accounting change), offset by $8,525 ($5,371 net-of-tax)
in
additional cost of goods sold compared to what would have been expensed in
fiscal 2004 under the accrue in advance methodology. The total cost of the
related planned maintenance activity performed in 2004 was $9,582.
Reported
basic and diluted loss per share for fiscal 2004 was $(1.03). Excluding the
cumulative effect of the accounting change, the basic and diluted loss per
share
was $(1.18).
NOTE
4: IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR
SALE
Lumberton,
North Carolina Facility
During
fiscal year 2006, we began to actively market idled cotton linter pulping
equipment at our Lumberton, North Carolina facility which had a carrying value
of $1,451. Management determined that the classification as held for sale
criteria in SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets
(“SFAS
144”), had been met. Accordingly, management evaluated its estimate of fair
value less the cost to sell the assets and determined an impairment should
be
recognized for the equipment. Current markets and third party interest for
the
equipment indicated we would not be able to recover the carrying value through
the sales process. Therefore, we wrote down the carrying value of the equipment
to its fair value less costs to sell of $963 and recorded an impairment charge
of $488 during fiscal year 2006. Subsequent to this impairment, we sold the
equipment for net proceeds of $963.
Glueckstadt,
Germany Facility
In
January 2005, we announced our decision to discontinue producing cotton linter
pulp at our Glueckstadt, Germany facility. Our decision was due to a combination
of factors that had increased the plant’s costs to a level at which it is
uneconomical to continue operations. The most significant factor impacting
cost
at the site was the substantial strengthening of the euro over calendar 2003
and
2004. Specialty fibers are normally priced and sold in U.S. dollars around
the
world. As a majority of Glueckstadt’s costs were denominated in euros, this
substantial strengthening had a negative impact on Glueckstadt’s cost position.
Additionally, Glueckstadt’s process water, waste treatment and energy costs were
more than twice the cost of these utilities at our Memphis, Tennessee
cotton-based specialty fibers facility. Faced with these difficulties, we
reduced the number of employees at the facility from approximately 150 to
approximately 100 and operated at 55% of capacity during calendar year 2004.
Based on these factors, we ceased production at Glueckstadt in December of
2005.
We believe that the closure of our Glueckstadt facility and transfer of the
majority of its cotton-based specialty fiber production to our Memphis,
Tennessee and Americana, Brazil facilities will yield a more competitive cost
structure.
During
fiscal 2005 we evaluated the recoverability of the long-lived assets at the
Glueckstadt facility in accordance with SFAS 144. Based on this evaluation,
we
determined that these long-lived assets, with a carrying amount of $15,280
(net
of $2,977 of foreign currency translation adjustment), were impaired and wrote
them down to their estimated fair value of $2,954, resulting in an impairment
charge of $12,326. This fair value was based on the remaining service potential
of the facility through its expected closure in the second quarter of fiscal
2006, plus the estimated salvage value, as we did not believe the facility
could
be economically utilized for its intended purpose by us or a third party. The
fair value analysis used a discount rate incorporating time value of money,
expectations about timing and amount of future cash flows, and an appropriate
risk premium.
During
fiscal year 2006, we began to actively market the land and buildings, and the
equipment which had carrying values of $1,600 and $496, respectively. Management
determined that the classification as held for sale criteria in SFAS 144 had
been met. Accordingly, management reevaluated its estimate of fair value less
the cost to sell the assets and determined an additional impairment should
be
recognized for the land and buildings. Current markets and third party interest
for the land and buildings indicated we would not be able to recover the
carrying value through the sales process. Therefore, we wrote down the carrying
value of the land and buildings to their fair value less costs to sell of $121
and recorded an impairment charge of $1,469 during fiscal year 2006. Subsequent
to this impairment, we sold the land and building for $127. As of June 30,
2006,
management re-evaluated its estimate of fair value less the cost to sell the
remaining assets and determined an additional impairment should be recognized
for equipment with a carrying value of $297. Therefore, we wrote down the
carrying value of the remaining equipment to its fair value less costs to sell
of $165 and recorded an impairment charge of $132.
The
carrying value of the equipment was classified in property, plant and equipment
as of June 30, 2005 and has been reclassified to current assets held for sale
and is presented under the “Prepaid expenses and other” caption in the balance
sheet as of June 30, 2006.
Cork,
Ireland Facility
During
fiscal 2004, we initiated the discontinuation of production of nonwoven
materials at our Cork, Ireland facility. Due to excess production capacity
around the globe, we had operated Cork below its productive capacity since
the
plant started up in 1998. Because of its location and small size, our cost
to
produce at Cork was higher than it was at our other locations. Therefore,
management made the decision to close the Cork facility and consolidate
production at our three other nonwoven materials manufacturing facilities.
Production at Cork ceased during July of 2004. Closing our Cork facility reduced
our nonwovens capacity by about 10%.
In
accordance with SFAS 144 we evaluated the value of the property, plant, and
equipment associated with the Cork facility. Under this guidance, we determined
that those long-lived assets, with a carrying amount of $48,359 (net of $6,914
of foreign currency translation adjustment), were impaired and wrote them down
to their estimated fair value of $5,409, resulting in an impairment charge
of
$42,950 during fiscal 2004. Fair value was based on the estimated salvage value
of the Cork facility as we did not believe the facility could be utilized for
its intended purpose. The salvage value incorporated assumptions that
marketplace participants would likely use in estimating the fair value of the
Cork facility
Subsequent
to the July 2004 closure of the facility, we began to actively market the
building and equipment with carrying values of $4,494 and $1,505, respectively,
and reclassified them as assets held for sale. In late December of 2004, we
completed the sale of the building to the Port of Cork Company for $13,408.
Although the carrying values of these assets were based on appraisals and
available market information at the time of the impairment in March of 2004,
the
purchase of this building for strategic purposes by the Port of Cork Company
was
not contemplated in those appraisals. As a result of the sale and disposition
of
the building and equipment for net proceeds of $13,134 (net of $1,897 of
decommissioning and selling costs), we recognized a net gain of $7,203 ($4,682
net of tax and $0.12 per share net of tax) during fiscal 2005. The gain is
presented under the “Gain on sale of assets held for sale” caption in the
statement of operations.
Other
Facilities
During
fiscal 2004, we also impaired certain equipment and other capitalized costs
at
specialty fibers facilities in the United States. These assets consisted of
equipment that was replaced with more cost effective technology, engineering
costs and capitalized interest for a long delayed project, and assets related
to
idled equipment. In evaluating these assets with a total carrying amount of
$3,209, it was determined that the carrying value was not recoverable and the
estimated fair value was $251. We recognized an impairment charge of
$2,958.
NOTE
5: RESTRUCTURING COSTS
During
fiscal 2003 we initiated the first phase of a restructuring program designed
to
deliver cost reductions through reduced expenses across our company. During
the
first quarter of fiscal 2004, we entered into a second phase of our
restructuring program. This program was a continuation of the program initiated
in the fourth quarter of fiscal 2003 and enabled us to improve our operating
results through reduced salaries, benefits, other employee-related expenses
and
operating expenses. As a result of this restructuring, 78 positions were
eliminated. These positions included manufacturing, sales, product development
and administrative functions throughout the organization. We do not expect
any
additional payments related to this phase of the restructuring
program.
During
fiscal 2005, we entered into another restructuring program. As part of this
program, we discontinued production of cotton-based specialty fibers at our
Glueckstadt, Germany facility during December 2005. The closure of the
Glueckstadt facility resulted in the termination of 103 employees.
Restructuring
expenses are included in “Restructuring costs” in our consolidated statements of
operations. The additional charges below reflect severance and employee benefits
accrued over the retention period, and other miscellaneous expenses which are
expensed as incurred. Accrual balances are included in “Accrued expenses” in the
consolidated balance sheet. The following table summarizes the expenses and
accrual balances by reporting segments for the year ended June 30,
2006.
|
|
|
|
Year
Ended June 30, 2006
|
|
|
|
|
|
|
|
Accrual
Balance
as
of
June
30,
2005
|
|
|
Additional
Charges
|
|
|
Adjustments
|
|
|
Impact
of
Foreign
Currency
|
|
|
Payments
|
|
|
Accrual
Balance
as
of
June
30,
2006
|
|
|
Total
Program
Charges
to
Date
|
2003
Restructuring Program-Phase 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and employee benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
fibers
|
|
$
|
13
|
|
$
|
10
|
|
|
-
|
|
$
|
(1
|
)
|
$
|
(22
|
)
|
$
|
-
|
|
$
|
1,894
|
Nonwovens
materials
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39
|
Corporate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,514
|
Total
2003 Program-Phase 2
|
|
|
13
|
|
|
10
|
|
|
-
|
|
|
(1
|
)
|
|
(22
|
)
|
|
-
|
|
|
3,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
fibers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and employee benefits
|
|
|
2,311
|
|
|
2,624
|
|
|
-
|
|
|
20
|
|
|
(4,946
|
)
|
|
9
|
|
|
5,096
|
Other
miscellaneous expenses
|
|
|
147
|
|
|
1,018
|
|
|
(126
|
)
|
|
5
|
|
|
(1,033
|
)
|
|
11
|
|
|
1,497
|
Total
2005 Program
|
|
|
2,458
|
|
|
3,642
|
|
|
(126
|
)
|
|
25
|
|
|
(5,979
|
)
|
|
20
|
|
|
6,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
All Programs
|
|
$
|
2,471
|
|
$
|
3,652
|
|
$
|
(126
|
)
|
$
|
24
|
|
$
|
(6,001
|
)
|
$
|
20
|
|
$
|
10,040
|
NOTE
6: INVENTORIES
Components
of inventories
|
|
|
|
|
|
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
30,028
|
|
$
|
33,433
|
|
Finished
goods
|
|
|
45,759
|
|
|
53,353
|
|
Storeroom
and other supplies
|
|
|
22,780
|
|
|
21,109
|
|
|
|
$
|
98,567
|
|
$
|
107,895
|
|
NOTE
7: PROPERTY, PLANT AND EQUIPMENT
Components
of property, plant and equipment
|
|
|
|
|
|
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
16,209
|
|
$
|
16,521
|
|
Buildings
|
|
|
131,521
|
|
|
125,917
|
|
Machinery
and equipment
|
|
|
794,522
|
|
|
717,014
|
|
Construction
in progress
|
|
|
15,425
|
|
|
43,518
|
|
|
|
|
957,677
|
|
|
902,970
|
|
Accumulated
depreciation
|
|
|
(425,779
|
)
|
|
(377,039
|
)
|
|
|
$
|
531,898
|
|
$
|
525,931
|
|
NOTE
8: ACCRUED EXPENSES
Components
of accrued expenses
|
|
|
|
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
4,357
|
|
$
|
1,981
|
|
Interest
|
|
|
11,323
|
|
|
11,136
|
|
Retirement
plans
|
|
|
6,258
|
|
|
5,924
|
|
Salaries
and incentive pay
|
|
|
4,430
|
|
|
6,855
|
|
Customer
incentive programs
|
|
|
4,895
|
|
|
4,017
|
|
Vacation
pay
|
|
|
5,033
|
|
|
4,786
|
|
Other
|
|
|
12,120
|
|
|
13,702
|
|
|
|
$
|
48,416
|
|
$
|
48,401
|
|
NOTE
9: DEBT
Components
of long-term debt
|
|
|
|
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
Senior
Notes due:
|
|
|
|
|
|
2013
|
|
$
|
200,000
|
|
$
|
$200,000
|
|
Senior
Subordinated Notes due:
|
|
|
|
|
|
|
|
2008
|
|
|
64,902
|
|
|
79,832
|
|
2010
|
|
|
152,059
|
|
|
152,558
|
|
Credit
Facilities
|
|
|
98,747
|
|
|
99,525
|
|
Other
|
|
|
5,000
|
|
|
5,000
|
|
|
|
|
520,708
|
|
|
536,915
|
|
Less
current portion
|
|
|
1,294
|
|
|
1,376
|
|
|
|
$
|
519,414
|
|
$
|
$535,539
|
|
Senior
Notes
During
September 2003,
we
placed privately $200,000 in aggregate principal amount of 8.5% senior notes
due
October 1, 2013 (the “2013 Notes”). In
fiscal
year 2004, we exchanged these outstanding notes for public notes with the same
terms. The notes are unsecured obligations and are senior to any of our
subordinated debt. The notes are guaranteed by our direct and indirect domestic
subsidiaries that are also guarantors on our senior secured
indebtedness.
The
senior notes are redeemable at our option, in whole or part, at any time on
or
after October 1, 2008, at redemption prices varying from 104.25% of principal
amount to 100% of principal amount on or after October 1, 2011, together with
accrued and unpaid interest to the date of redemption. We used the net proceeds
from the private placement to redeem our $150,000 senior subordinated notes
due
2005, make a permanent reduction of $40,000 to our revolving credit facility
and
pay the related transaction costs. Total costs for the issuance of these notes
were $5,274 and will be amortized over the life of the senior notes using the
effective interest method.
On
September 22, 2003, we called the senior subordinated notes due in 2005. These
notes were redeemed on October 22, 2003. During fiscal 2004, $3,300 was expensed
related to the early extinguishment of the $150,000 senior subordinated notes
due 2005. These expenses included a $2,115 call premium and $1,185 related
to
the write-off of deferred financing costs.
Senior
Subordinated Notes
During
July 1996, we completed a public offering of $100,000 principal amount of 9.25%
unsecured Senior Subordinated Notes due September 15, 2008 (the “2008 Notes”).
These notes have been redeemable at our option, in whole or in part, at any
time
since September 15, 2004, at a redemption price of 100% of principal amount
together with accrued and unpaid interest to the date of
redemption.
During
fiscal year 2005, we redeemed $20,000 of the 2008 Notes. During fiscal year
2006, we called and redeemed an additional $15,000 of the 2008 Notes. As a
result of these redemptions, we wrote off a portion of the deferred financing
costs and unamortized discount related to the redeemed bonds. During fiscal
year
2006 and 2005, we recorded non-cash expenses of $151 and $242, respectively
related to the early extinguishment of debt.
On
October 16, 2003, we successfully completed a solicitation of consents from
holders of our 2008 Notes to amend this indenture to conform certain provisions
of the 2008 Notes to the provisions in our notes due in 2010 and to current
market practice. This amendment allowed us to refinance our revolving credit
facility in the fall of calendar 2003 (discussed later in this
note).
During
June 1998, we completed a private placement of $150,000 principal amount of
8%
unsecured Senior Subordinated Notes due October 15, 2010. In fiscal 1999, we
exchanged these outstanding notes for public notes with the same terms. These
notes are redeemable at our option, in whole or in part, at any time on or
after
October 15, 2003, at redemption prices varying from 104% of principal amount
to
100% of principal amount on or after October 15, 2006, together with accrued
and
unpaid interest to the date of redemption.
Under
the
indentures governing our senior subordinated notes, as well as the indenture
that governs our senior notes, our ability to incur additional debt is limited.
Under these indentures, additional debt must be incurred as so-called “ratio
debt” or, alternatively, must be permitted in form and amount as “Permitted
Indebtedness.” In order to incur ratio debt, a specified consolidated fixed
charge coverage ratio (as defined in the indentures) must equal or exceed 2:1
(measured on a rolling four-quarter basis). Falling below the 2:1 ratio does
not
breach any covenant or constitute an event of default under any of our debt
agreements. Currently, we exceed the required 2:1 ratio and as a result, are
not
limited to the “ratio debt” restrictions under the indentures governing the
senior notes and the senior subordinated notes.
Interest
Rate Swap
In
May
2001, we entered into an interest rate swap on $100,000 of 8% fixed rate notes
maturing in October 2010. The swap converted interest payments from a fixed
rate
to a floating rate of LIBOR plus 1.97%. This arrangement qualified as a fair
value hedge under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities.
As
such, the net effect from the interest rate swap was recorded as part of
interest expense. On October 15, 2003, the swap counter party exercised its
right to change the termination date of the swap from October 15, 2010 to
October 15, 2003. By exercising this right, the swap counter party paid us
$4,000 as an early termination fee, which is being amortized as a reduction
to
interest expense through October 15, 2010. At June 30, 2006 and 2005 the
unamortized portion of the termination fee was recorded as an increase in debt
of $2,452 and $3,024, respectively. During the years ended June 30, 2006, 2005
and 2004, the swap reduced our interest expense by $572, $571 and $1,848,
respectively and will continue to reduce interest expense through the
amortization period of the termination fee.
Revolving
Credit Facility
On
November 5, 2003, we established a $220,000 senior secured credit facility
(the
“credit facility”), comprised of a $70,000 revolving credit facility (the
“revolver”) maturing on September 15, 2008 and a $150,000 term loan (the “term
loan”) with serial maturities of $249 with final payment at maturity. The term
loan maturity date is March 15, 2008, unless we retire or refinance the 2008
Notes, with a due date after October 15, 2010, in which case the maturity date
would be April 15, 2010.
The
term
loan also requires an annual excess cash flow payment (as defined under the
credit agreement). Based on fiscal 2006 results, we are required to make an
excess cash flow payment during fiscal 2007 of $296. During fiscal 2006, we
made
an excess cash flow payment of $378 based on fiscal 2005 performance and
additional voluntary payments of $2,002. Total payments on the term loan,
including required principal payments, during fiscal 2006 were
$3,378.
We
had
$98,747 outstanding on this facility ($95,747 on the term loan and $3,000 on
the
revolving credit facility) at an average variable interest rate of 7.2% as
of
June 30, 2006. The interest rate applicable to borrowings under the revolver
is
the agent’s prime rate plus 1.50% to 1.75%, or a LIBOR-based rate ranging from
LIBOR plus 2.50% to LIBOR plus 3.25%. Effective March 15, 2005, the interest
rate applicable to the term loan is the agent’s prime rate plus 1.00% or a
LIBOR-based rate plus 2.00%. The credit facility is secured by substantially
all
of our assets located in the United States.
The
credit facility contains covenants customary for financing of this type. The
financial covenants include: maximum ratio of consolidated net senior secured
debt to consolidated earnings before interest, taxes, depreciation and
amortization (“EBITDA”), minimum ratio of consolidated EBITDA to consolidated
interest expense and minimum ratio of consolidated EBITDA minus capital
expenditures and taxes to consolidated fixed charges; as well as limitations
on
capital expenditures, share repurchases and dividend payments. During fiscal
year 2006, we were in compliance with these financial covenants.
As
of
June 30, 2006, we had $62,625 of borrowing capacity on our revolving credit
facility. The portion of this capacity that we could borrow on a particular
date
will depend on our financial results and ability to comply with certain
borrowing conditions under the revolving credit facility. The commitment fee,
on
the unused portion of the revolving credit facility, ranges from 0.40% to 0.50%
per annum. Total costs for the issuance of the new facility were approximately
$3,300 and are being amortized to interest expense using the effective interest
method over the life of the facility. The unamortized issuance costs are
presented under the “Intellectual property and other, net” caption on the
balance sheet. During fiscal 2004, $1,640 was expensed related to the early
extinguishment of the previous credit facility.
Other
Debt
On
March
1, 2000, we purchased certain technology from Stac-Pac Technologies Inc. In
connection with the purchase, we entered into an unsecured promissory note
with
Stac-Pac Technologies Inc. The principal amount of the note is $5,000 and bears
interest at a rate of 7%. In accordance with the purchase agreement, we are
entitled to withhold or retain the final installment of the purchase price
until
and unless there is final resolution of patent rights and to cancel the final
installment of the purchase price if the patent rights in certain jurisdictions
are not resolved according to the terms of the purchase agreement. As of June
30, 2006, these patent rights were not resolved. Therefore, the principal amount
of the note remains unpaid and has been classified as long-term debt. As of
June
30, 2006, we have accrued interest on the note of $1,867.
Aggregate
maturities of long-term debt for the next five fiscal years and beyond are
as
follows: 2007-$1,294, 2008-$5,998, 2009-$68,998, 2010-$92,457, 2011-$150,000
and
thereafter $200,000. The 2007 maturities consist of the term loan serial
maturities of $998 and an excess cash flow payment of $296. Terms of long-term
debt agreements require compliance with certain covenants including interest
coverage ratios, and limitations on restricted payments and levels of
indebtedness. At June 30, 2006, the amount available for the payment of
dividends and/or the acquisition of treasury stock was limited. Under our most
restrictive debt agreements the amount available for the payment of dividends
and/or the acquisition of treasury stock will depend on our financial results
and ability to comply with certain conditions.
Total
cash interest payments for the years ended June 30, 2006, 2005 and 2004 was
$44,303, $44,358 and $47,783, respectively.
We
had no
off-balance sheet financing except for operating leases as disclosed in Note
10.
NOTE
10: LEASES
Capital
Leases
In
October 2001, we entered into capital lease agreements for certain airlaid
nonwovens plant equipment. The total cost of the assets covered by these
agreements was $4,284. As of June 30, 2006, the accumulated depreciation on
these assets was $692. At June 30, 2006, our future minimum lease payments,
including interest totaling $152, for these assets were as follows: 2007—$717;
2008—$449; 2009—$368; 2010—$0. Amortization of assets recorded under capital
lease agreements is included in depreciation expense.
Operating
Leases
We
lease
office and warehouse facilities and equipment under various operating leases.
Operating lease expense was $2,940, 3,371 and $3,960 during the years ended
June
30, 2006, 2005 and 2004, respectively. The commitments under the operating
leases at June 30, 2006 were as follows: 2007—$1,421; 2008—$538; 2009—$182;
2010—$58; 2011—$47 and thereafter—$0.
NOTE
11: COMMON STOCKHOLDERS’ EQUITY
Stock
Compensation Plans
Our
stock
option plans provide for the granting of either incentive or nonqualified stock
options to employees and non-employee directors. Options are subject to terms
and conditions determined by the Compensation Committee of our Board of
Directors, and generally are exercisable in increments of 20% per year beginning
one year from date of grant and expire ten years from date of grant. During
fiscal year 2006, our employee stock option plans and our director plan expired,
and no further options can be granted under these plans.
On
June
7, 2005, the Compensation Committee of the Board of Directors of Buckeye
Technologies Inc. approved the acceleration of vesting of out-of-the-money
options with an exercise price greater than $8.32 to purchase shares of common
stock of Buckeye Technologies Inc. that remained unvested at June 30, 2005.
Options to purchase 898,150 shares of common stock were subject to this
acceleration (see Note 1).
We
use
the Black-Scholes option-pricing model to calculate the fair value of options
for determining our option related compensation expense. The key assumptions
for
this valuation method include the expected life of the option, stock price
volatility, risk-free interest rate, dividend yield and forfeiture rate. Many
of
these assumptions are judgmental and highly sensitive in the determination
of
compensation expense. The table below indicates the key assumptions used in
the
option valuation calculations for options granted during fiscal years 2006,
2005
and 2004 and a discussion of our methodology for developing each of the
assumptions used in the valuation model:
|
2006
|
2005
|
2004
|
Expected
lives
|
6.3
years
|
5.9
years
|
7.8
years
|
Expected
volatility
|
55%
|
49%
|
49%
|
Risk-free
interest rate
|
4.4%
|
3.7%
|
4.1%
|
Forfeiture
rate
|
11%
|
-
|
-
|
Expected
Lives -
This is the period of time over which the options granted are expected to remain
outstanding. Options granted have a maximum term of ten years. An increase
in
the expected life will increase compensation expense.
Expected
Volatility -
This is a measure of the amount by which a price has fluctuated or is expected
to fluctuate. We use actual changes in the market value of our stock to
calculate the volatility assumption. We calculate daily market value changes
from the date of grant over a past period representative of the expected life
of
the options to determine volatility. An increase in the expected volatility
will
increase compensation expense.
Risk-Free
Interest Rate -
This is the U.S. Treasury rate for the week of the grant having a term
approximating the expected life of the option. An increase in the risk-free
interest rate will increase compensation expense.
Dividend
Yield -
We did not make any dividend payments during the last five fiscal years and
we
have no plans to pay dividends in the foreseeable future. An increase in the
dividend yield will decrease compensation expense.
Forfeiture
Rate - This
is
the estimated percentage of options granted that are expected to be forfeited
or
canceled before becoming fully vested. An increase in the forfeiture rate will
decrease compensation expense. The forfeiture rate is based on our historic
forfeiture experience.
Prior to the implementation of SFAS 123(R), we accounted for forfeitures when
they occurred.
The
following table summarizes information about our stock option plans for the
years ended June 30:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding
at beginning of year
|
|
|
4,765,150
|
|
$
|
13.57
|
|
|
5,046,750
|
|
$
|
13.35
|
|
|
4,833,950
|
|
$
|
13.60
|
|
Granted
at market
|
|
|
358,000
|
|
|
7.64
|
|
|
100,000
|
|
|
10.57
|
|
|
845,000
|
|
|
10.72
|
|
Granted
below market
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36,000
|
|
|
7.60
|
|
Exercised
|
|
|
(73,500
|
)
|
|
7.47
|
|
|
(270,800
|
)
|
|
8.22
|
|
|
(318,200
|
)
|
|
8.04
|
|
Forfeited
|
|
|
(4,000
|
)
|
|
7.62
|
|
|
(67,600
|
)
|
|
11.98
|
|
|
(163,200
|
)
|
|
12.08
|
|
Expired
|
|
|
(805,250
|
)
|
|
12.75
|
|
|
(43,200
|
)
|
|
16.93
|
|
|
(186,800
|
)
|
|
16.89
|
|
Outstanding
at end of year
|
|
|
4,240,400
|
|
$
|
13.34
|
|
|
4,765,150
|
|
$
|
13.57
|
|
|
5,046,750
|
|
$
|
13.35
|
|
Exercisable
at end of year
|
|
|
3,854,800
|
|
$
|
13.91
|
|
|
4,716,350
|
|
$
|
13.64
|
|
|
3,638,484
|
|
$
|
14.13
|
|
Using
the
Black-Scholes valuation method calculated under the assumptions indicated above,
the weighted-average fair value of the grants at market was $4.37, $5.32 and
$6.24 per option in 2006, 2005 and 2004, respectively. The weighted-average
fair
value of the grants below market was $7.19 in 2004. As of June 30, 2006, the
total future compensation cost related to non-vested stock option grants was
$1,210 over a weighted average period of 1.8 years. The aggregate intrinsic
value of vested options outstanding at June 30, 2006 was $45.
Since
our
stock option plans expired during fiscal 2006, there are no options available
for grant at June 30, 2006. There were 319,200 and 308,400 shares reserved
for
grants of options at June 30, 2005 and 2004, respectively. The following summary
provides information about stock options outstanding and exercisable at June
30,
2006:
|
|
Outstanding
|
|
Exercisable
|
Exercise
Price
|
|
Options
|
|
Average
Exercise Price
|
|
Average
Remaining Life (Years)
|
|
Options
|
|
Average
Exercise Price
|
$
6.50-$12.00
|
|
|
2,291,400
|
|
$
|
10.24
|
|
|
7.1
|
|
|
1,905,800
|
|
$
|
10.76
|
$12.01-$18.00
|
|
|
1,897,792
|
|
|
16.83
|
|
|
2.1
|
|
|
1,897,792
|
|
|
16.83
|
$18.01-$24.00
|
|
|
51,208
|
|
|
23.04
|
|
|
3.5
|
|
|
51,208
|
|
|
23.04
|
Total
|
|
|
4,240,400
|
|
$
|
13.34
|
|
|
4.8
|
|
|
3,854,800
|
|
$
|
13.91
|
Stock
options and restricted stock awards that could potentially dilute basic earnings
per share in the future, which were not included in the fully diluted
computation because the grant prices were greater than the average market price
of common shares for the period, were 4,411,466, 4,245,071 and 3,801,640 for
the
years ended June 30, 2006, 2005 and 2004, respectively. In addition, during
2004
even those shares that ordinarily would have been included in diluted shares
were not, due to the net loss incurred during 2004, as the inclusion of dilutive
securities in the denominator for losses would have been
anti-dilutive.
Restricted
Stock Plan
The
following table summarizes information about our restricted stock plan for
the
years ended June 30:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Shares
|
|
Weighted-
Average
Price
|
|
Shares
|
|
Weighted-
Average
Price
|
|
Shares
|
|
Weighted-
Average
Price
|
|
Nonvested
at beginning of year
|
|
|
51,440
|
|
$
|
12.49
|
|
|
42,998
|
|
$
|
12.64
|
|
|
75,737
|
|
$
|
13.18
|
|
Granted
at market
|
|
|
240,170
|
|
|
7.31
|
|
|
8,898
|
|
|
11.79
|
|
|
8,019
|
|
|
9.80
|
|
Vested
|
|
|
-
|
|
|
-
|
|
|
(282
|
)
|
|
(10.94
|
)
|
|
(40,038
|
)
|
|
14.11
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
(174
|
)
|
|
(11.79
|
)
|
|
(720
|
)
|
|
8.54
|
|
Nonvested
at end of year
|
|
|
291,610
|
|
$
|
8.23
|
|
|
51,440
|
|
$
|
12.49
|
|
|
42,998
|
|
$
|
12.64
|
|
In
August
1997, the Board of Directors authorized a restricted stock plan and set aside
800,000 treasury shares to fund this plan. At June 30, 2006, 338,526 restricted
shares had been awarded since inception of the plan. The weighted-average fair
value of restricted stock awards is the closing price of the common stock on
the
New York Stock Exchange on the date of the grant. Although the restricted stock
may be voted by the recipient, the restricted stock may not be sold, pledged
or
otherwise transferred before the recipient’s death or the recipient’s retirement
from Buckeye. Therefore, the vesting period is from the date of grant to the
date each employee reaches age 62 (the retirement age defined in the plan).
Based on historic experience, the forfeiture rate used for employees whose
vesting period is greater than 10 years is 15% and no forfeiture rate is applied
for employees whose vesting period is less than 10 years. As of June 30, 2006,
the total future compensation cost related to non-vested restricted stock awards
was $1,640 over a weighted average period of 9.5 years.
Treasury
Shares
The
Board
of Directors has authorized the repurchase of 6,000,000 shares of common stock.
Repurchased shares will be held as treasury stock and will be available for
general corporate purposes, including the funding of employee benefit and
stock-related plans. No shares were repurchased during 2006, 2005 and 2004.
A
total of 5,009,300 shares have been repurchased through June 30,
2006.
NOTE
12: COMPUTATION OF EARNINGS PER SHARE
The
calculation of basic and diluted earnings per common share for the years June
30:
|
|
2006
|
|
2005
|
|
2004
|
|
Net
income (loss)
|
|
$
|
1,980
|
|
$
|
20,204
|
|
$
|
(38,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
37,622
|
|
|
37,447
|
|
|
37,075
|
|
Effect
of diluted shares
|
|
|
36
|
|
|
151
|
|
|
-
|
|
Weighted-average
common and common equivalent shares outstanding
|
|
|
37,658
|
|
|
37,598
|
|
|
37,075
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share before cumulative effect of change in
accounting
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.18
|
)
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.03
|
)
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
(1.03
|
)
|
NOTE
13: INCOME TAXES
The
components of income (loss) before income taxes and cumulative effect of change
in accounting were taxed under the following jurisdictions:
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
2,505
|
|
$
|
18,881
|
|
$
|
(76,210
|
)
|
Foreign
|
|
|
(1,821
|
)
|
|
833
|
|
|
6,103
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and cumulative effect of change in accounting
|
|
$
|
684
|
|
$
|
19,714
|
|
$
|
(70,107
|
)
|
Income
tax expense (benefit) before cumulative effect of change in
accounting:
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Current
tax expense (benefit):
|
|
|
|
|
|
|
|
Federal
|
|
$
|
435
|
|
$
|
503
|
|
$
|
(2,676
|
)
|
Foreign
|
|
|
4,458
|
|
|
185
|
|
|
4,695
|
|
State
and other
|
|
|
(120
|
)
|
|
41
|
|
|
(876
|
)
|
Current
tax expense
|
|
|
4,773
|
|
|
729
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,133
|
)
|
|
7,204
|
|
|
(24,861
|
)
|
Foreign
|
|
|
(2,048
|
)
|
|
(2,724
|
)
|
|
(1,057
|
)
|
State
and other
|
|
|
(1,381
|
)
|
|
515
|
|
|
(1,422
|
)
|
Deferred
tax expense
|
|
|
(5,562
|
)
|
|
4,995
|
|
|
(27,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
(507
|
)
|
|
(6,214
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
$
|
(1,296
|
)
|
$
|
(490
|
)
|
$
|
(26,197
|
)
|
Noncurrent
tax relates primarily to matters not resolved with various taxing
authorities.
The
difference between reported income tax expense (benefit) and a tax determined
by
applying the applicable U.S. federal statutory income tax rate to income (loss)
before income taxes and the cumulative effect of the change in accounting is
reconciled as follows:
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
tax expense (benefit)
|
|
$
|
239
|
|
|
35.0
|
%
|
$
|
6,900
|
|
|
35.0
|
%
|
$
|
(24,537
|
)
|
|
35.0
|
%
|
Extraterritorial
income exclusion
|
|
|
(1,542
|
)
|
|
(225.4
|
)
|
|
(1,034
|
)
|
|
(5.2
|
)
|
|
(1,155
|
)
|
|
1.6
|
|
Effect
of foreign operations
|
|
|
110
|
|
|
16.0
|
|
|
(1,851
|
)
|
|
(12.9
|
)
|
|
(713
|
)
|
|
1.0
|
|
Change
in tax reserves
|
|
|
362
|
|
|
52.9
|
|
|
(6,214
|
)
|
|
(31.5
|
)
|
|
-
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
3,842
|
|
|
561.7
|
|
|
1,145
|
|
|
9.3
|
|
|
1,746
|
|
|
(2.5
|
)
|
Correction
of prior year provision
|
|
|
(1,711
|
)
|
|
(250.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Canadian
tax rate change
|
|
|
(791
|
)
|
|
(115.6
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
State
taxes and other, net
|
|
|
(1,805
|
)
|
|
(263.9
|
)
|
|
564
|
|
|
2.8
|
|
|
(1,538
|
)
|
|
2.3
|
|
Income
tax benefit
|
|
$
|
(1,296
|
)
|
|
(189.4
|
)%
|
$
|
(490
|
)
|
|
(2.5
|
)%
|
$
|
(26,197
|
)
|
|
37.4
|
%
|
Effective
June 22, 2006, many of the tax measures introduced in the 2006 Canadian Federal
budget were passed into law. Included in the budget was a reduction in the
general corporate tax rate to 20.5% for 2008, 20% for 2009, and 19% for 2010
and
later years. As a result, the company remeasured its Canadian deferred tax
balances based on the reversal pattern of our temporary differences, resulting
in a $0.8 million net tax benefit.
The
increase for fiscal year 2006 in our valuation allowance is primarily due to
the
allowance for losses of the Americana, Brazil operations.
Effective
for transactions occurring after September 30, 2000 the Internal Revenue Service
enacted the Extraterritorial Income Exclusion. The income exclusion
provides for a reduction of gross income by a percentage of qualifying foreign
trade income. In October 2004, the American Jobs Creation Act of 2004 (the
Act)
was signed into law. In order to comply with international trade rules, the
Act
repealed the current tax treatment for extraterritorial income. Effective for
transactions entered into after December 31, 2004, the extraterritorial income
exclusion is subject to a phase-out which will be completed on December 31,
2006. For transactions during calendar years 2005 and 2006, the income
exclusion will be 80% and 60% of the exclusion otherwise allowed, respectively.
Our extraterritorial income exclusion benefit was reduced in fiscal 2006 due
to
this phase-out and will continue to decrease through the final phase-out during
fiscal 2007.
The
Act
provides a tax deduction for domestic manufacturers. The deduction will be
phased in during fiscal years 2006 through 2010. Due to the company’s U.S. net
operating loss position, this deduction had no impact to fiscal year
2006.
During
the fourth quarter of fiscal 2005, the IRS completed an audit of our tax return
for fiscal year 2002. With the conclusion of this audit, we released the reserve
on a tax deduction we claimed relating to our investment in our former facility
in Cork, Ireland and recorded a non-cash tax benefit of $5,481 to our provision
for income taxes.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets (liabilities) are as follows:
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
(88,606
|
)
|
$
|
(87,623
|
)
|
Inventory
|
|
|
(884
|
)
|
|
(467
|
)
|
Other
|
|
|
(17,108
|
)
|
|
(18,246
|
)
|
Total
deferred tax liabilities
|
|
|
(106,598
|
)
|
|
(106,336
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Postretirement
benefits
|
|
|
7,034
|
|
|
7,036
|
|
Inventory
costs
|
|
|
141
|
|
|
943
|
|
Net
operating losses
|
|
|
63,373
|
|
|
50,933
|
|
Nondeductible
reserves
|
|
|
1,960
|
|
|
2,692
|
|
Credit
carryforwards
|
|
|
9,810
|
|
|
10,510
|
|
Other
|
|
|
2,835
|
|
|
8,959
|
|
Total
deferred tax assets
|
|
|
85,153
|
|
|
81,073
|
|
Valuation
allowances
|
|
|
(10,065
|
)
|
|
(5,813
|
)
|
Deferred
tax assets, net of valuation allowances
|
|
|
75,088
|
|
|
75,260
|
|
Net
deferred tax liability
|
|
$
|
(31,510
|
)
|
$
|
(31,076
|
)
|
The
valuation allowances at June 30, 2006 and 2005 relate specifically to net
operating losses in certain state and foreign operations. Based on the future
reversal of deferred tax liabilities and the actions management has taken and
will continue to take to improve financial performance, management believes
it
is more likely than not that the net deferred tax assets recorded at June 30,
2006 will be fully utilized after consideration of the valuation allowance
recorded.
Taxes
paid net of refunds received resulted in no cash tax expense for fiscal year
2006. We paid cash income taxes of $3,075 and $3,828 during the years ended
June
30, 2005 and 2004, respectively.
At
June
30, 2006, the net operating loss asset is based on foreign net operating loss
carryforwards of approximately $35,298, which have no expiration date and
federal and state net operating loss carryforwards of approximately $127,872
and
$161,835, respectively which expire between 2017 and 2026. Additionally,
included in the credit carryforward asset of $9,810 at June 30, 2006, we have
a
minimum tax carryforward of $6,717 which has an indefinite life and general
business credits which will expire between 2020 and 2026.
NOTE
14: DERIVATIVES
We
periodically use derivative instruments to reduce financial risk in three areas:
interest rates, foreign currency and commodities. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties and, thus,
are not a measure of our exposure through our use of derivatives.
In
May
2001, we entered into an interest rate swap on $100,000 of 8% fixed rate notes
maturing in October 2010. The swap converted interest payments from a fixed
rate
to a floating rate of LIBOR plus 1.97%. The arrangement was considered a hedge
of a specific borrowing, and differences paid and received under the arrangement
were recognized as adjustments to interest expense. This agreement, which was
accounted for as a fair value hedge, decreased interest expense by $572, $571
and $1,848 for the years ended June 30, 2006, 2005 and 2004, respectively.
On
October 15, 2003, the swap counter party exercised its right to change the
termination date of the swap from October 15, 2010 to October 15, 2003. By
exercising this right, the swap counter party paid us $4,000 as an early
termination fee, which is being amortized as a reduction to interest expense
through October 15, 2010. At June 30, 2006 and 2005, the unamortized portion
of
the termination fee was recorded as an increase in debt of $2,452 and $3,024,
respectively.
From
time
to time, we utilize forward foreign exchange contracts for the sale or purchase
of foreign currencies. These contracts are not designated as hedging instruments
and do not qualify for hedge accounting treatment under the provisions of
SFAS No. 133 and SFAS No. 138. Mark-to-market gains and
losses for forward foreign exchange contracts are recorded in foreign exchange
and other. We had no outstanding forward sale or purchase contracts as of
June 30, 2006 and June 30, 2005. We had no mark-to-market adjustments for
forward foreign exchange contracts during fiscal years 2006, 2005, and
2004.
In
order
to minimize market exposure, at times we use forward contracts to reduce price
fluctuations in a desired percentage of forecasted purchases of fossil fuel
over
a period of generally less than one year. There were no fossil fuel contracts
outstanding at June 30, 2006, 2005 or 2004 requiring fair value
treatment.
We
may be
exposed to losses in the event of nonperformance of counterparties but do not
anticipate such nonperformance.
NOTE
15: EMPLOYEE BENEFIT PLANS
Defined
Contribution Plans
We
have
defined contribution retirement plans covering certain U.S. employees. We
contribute 1% of the employee's gross compensation plus 1/2% for each year
of
service up to a maximum of 11% of the employee's gross compensation. During
fiscal 2005 we implemented an additional retirement plan for U.S. employees.
We
match employees’ voluntary contributions to their retirement accounts up to the
lesser of $2,000 per year or 2% of their eligible gross earnings. Contribution
expense for the retirement plans for the years ended June 30, 2006, 2005 and
2004 was $7,153, $6,743 and $5,744, respectively.
Postretirement
Healthcare Plans
We
also
provide medical, dental, and life insurance postretirement plans covering
certain U.S. employees who meet specified age and service requirements. Certain
employees who met specified age and service requirements on March 15, 1993
are
covered by their previous employer and are not covered by these plans. Our
current policy is to fund the cost of these benefits as payments to participants
as required. We have established cost maximums to more effectively control
future medical costs. Effective July 1, 2002, we amended our postretirement
medical plan to among other things reduce the level of cost maximums per
eligible employee. Effective January 1, 2006, Medicare eligible retirees age
65
or older will not continue coverage under the self-funded plan. Instead they
are
provided a subsidy towards the purchase of supplemental insurance. This
amendment reduced the accumulated postretirement benefit obligation by $4,089.
The benefit is being amortized over 7.75 years.
The
components of net periodic benefit costs are as follows:
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned
|
|
$
|
629
|
|
$
|
703
|
|
$
|
753
|
|
Interest
cost on benefit obligation
|
|
|
1,258
|
|
|
1,432
|
|
|
1,252
|
|
Amortization
of unrecognized prior service credit
|
|
|
(1,055
|
)
|
|
(1,125
|
)
|
|
(1,125
|
)
|
Actuarial
loss
|
|
|
597
|
|
|
389
|
|
|
335
|
|
Total
cost
|
|
$
|
1,429
|
|
$
|
1,399
|
|
$
|
1,215
|
|
The
following table provides a reconciliation of the changes in the plans’ benefit
obligations over the two-year period ending June 30, 2006, and a statement
of
the plans’ funded status as of June 30, 2006 and 2005:
|
|
June
30
|
|
|
|
2006
|
|
2005
|
|
Change
in benefit obligation:
|
|
|
|
|
|
Obligation
at beginning of year
|
|
$
|
22,567
|
|
$
|
22,541
|
|
Service
cost
|
|
|
629
|
|
|
703
|
|
Interest
cost
|
|
|
1,258
|
|
|
1,432
|
|
Participant
contributions
|
|
|
328
|
|
|
320
|
|
Actuarial
loss
|
|
|
(703
|
)
|
|
2,927
|
|
Benefits
paid
|
|
|
(1,620
|
)
|
|
(1,267
|
)
|
Amendment
|
|
|
-
|
|
|
(4,089
|
)
|
Underfunded
status at end of year
|
|
|
22,459
|
|
|
22,567
|
|
|
|
|
|
|
|
|
|
Unrecognized
prior service credit
|
|
|
5,550
|
|
|
6,605
|
|
Unrecognized
loss
|
|
|
(8,643
|
)
|
|
(9,943
|
)
|
Other
|
|
|
1,536
|
|
|
1,358
|
|
Net
amount recognized in the consolidated balance sheet
|
|
$
|
20,902
|
|
$
|
20,587
|
|
The
amount recognized in the consolidated balance sheets as of June 30, 2006 and
2005 includes $1,535 and $1,381, respectively which is classified in accrued
expenses as the amount of benefits expected to be paid in fiscal year 2007
and
2006, respectively. Expected annual benefit payments net of retiree
contributions are as follows: 2007 - $1,535; 2008 - $1,627; 2009 - $1,665;
2010
- $1,655 and 2011 - $1,701. The measurement date used to perform the benefit
obligation analysis was May 1, 2006.
The
weighted average annual assumed rate of increase in the per capita cost of
covered benefits (i.e. health care cost trend rate) for the medical plans is
9.0% for 2007 and is assumed to decrease gradually to 5.0% in 2011 and remain
level thereafter. Due to the benefit cost limitations in the plan, the health
care cost trend rate assumption does not have a significant effect on the
amounts reported.
Weighted
average actuarial discount rate assumptions for our U.S. postretirement
healthcare plan, which comprise substantially all of our projected benefit
obligation, are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Discount
rate%
|
|
|
6.25
|
%
|
|
5.75
|
%
|
|
6.50
|
%
|
We
use
currently available high quality long-term corporate bond indices to determine
the appropriate discount rate. Due to the long-term nature of these indexes,
they have a similar maturity to expected benefit payments.
The
Medicare Modernization Act will provide prescription drug benefits to Medicare
eligible participants effective January 1, 2006. Since our plan only provides
a
subsidy toward supplemental Medicare insurance coverage, there is no impact
on
our plan as a result of the Medicare Modernization Act.
NOTE
16: SIGNIFICANT CUSTOMER
Net
sales
to The Procter & Gamble Company and its affiliates for the years ended June
30, 2006, 2005 and 2004 were 13%, 14% and 16%, respectively, of total net sales.
Nonwoven materials accounted for 60%, 56% and 48% of these sales in fiscal
years
2006, 2005 and 2004, respectively. The remainder of these sales were derived
from the specialty fiber segment.
NOTE
17: SEGMENT INFORMATION
We
report
results for two segments, specialty fibers and nonwoven materials. The specialty
fiber segment is an aggregation of cellulosic fibers based on both wood and
cotton. Management makes financial decisions and allocates resources based
on
the sales and operating income of each segment. We allocate selling, research,
and administration expenses to each segment and management uses the resulting
operating income to measure the performance of the segments. The financial
information attributed to these segments is included in the following
table:
|
|
|
|
Specialty
Fibers
|
|
Nonwoven
Materials
|
|
Corporate
|
|
Total
|
|
Net
sales
|
|
|
2006
|
|
$
|
515,855
|
|
$
|
240,873
|
|
$
|
(28,243
|
)
|
$
|
728,485
|
|
|
|
|
2005
|
|
|
513,588
|
|
|
226,492
|
|
|
(27,298
|
)
|
|
712,782
|
|
|
|
|
2004
|
|
|
461,360
|
|
|
217,641
|
|
|
(22,088
|
)
|
|
656,913
|
|
Operating
income (loss)
|
|
|
2006
|
|
|
35,842
|
|
|
15,919
|
|
|
(7,341
|
)
|
|
44,420
|
|
|
|
|
2005
|
|
|
64,148
|
|
|
12,963
|
|
|
(19,510
|
)
|
|
57,601
|
|
|
|
|
2004
|
|
|
28,198
|
|
|
7,580
|
|
|
(54,857
|
)
|
|
(19,079
|
)
|
Depreciation
and amortization
|
|
|
2006
|
|
|
29,945
|
|
|
15,835
|
|
|
3,398
|
|
|
49,178
|
|
of
intangibles
|
|
|
2005
|
|
|
28,159
|
|
|
16,904
|
|
|
3,388
|
|
|
48,451
|
|
|
|
|
2004
|
|
|
27,662
|
|
|
17,150
|
|
|
3,321
|
|
|
48,133
|
|
Total
assets
|
|
|
2006
|
|
|
473,899
|
|
|
276,589
|
|
|
199,065
|
|
|
949,553
|
|
|
|
|
2005
|
|
|
467,736
|
|
|
285,338
|
|
|
196,663
|
|
|
949,737
|
|
|
|
|
2004
|
|
|
464,294
|
|
|
297,864
|
|
|
208,665
|
|
|
970,823
|
|
Capital
expenditures
|
|
|
2006
|
|
|
42,410
|
|
|
1,939
|
|
|
1,242
|
|
|
45,591
|
|
|
|
|
2005
|
|
|
39,356
|
|
|
3,690
|
|
|
2,283
|
|
|
45,329
|
|
|
|
|
2004
|
|
|
28,909
|
|
|
2,662
|
|
|
300
|
|
|
31,871
|
|
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Management evaluates operating
performance of the specialty fibers and nonwoven materials segments, excluding
amortization of intangibles, the impact of impairment of long-lived assets
and
charges related to restructuring. Therefore, the corporate segment includes
operating elements such as segment eliminations, amortization of intangibles,
impairment of long-lived assets and charges related to restructuring. Corporate
net sales represents the elimination of intersegment sales included in the
specialty fibers reporting segment. We account for intersegment sales as if
the
sales were to third parties, that is, at current market prices. Certain
partially impaired assets are included in the total assets for the reporting
segments, but the associated asset impairment charges are included in the
corporate category. These asset impairment charges and the segments they relate
to are discussed further in Note 4. Corporate assets primarily include cash,
goodwill and intellectual property.
Operating
income in 2004 for specialty fibers includes $9,582 of expense related to an
extended maintenance shutdown at our Perry, Florida facility. This shutdown
was
the first in five years. Historically, we accrued expenses related to extended
maintenance shutdowns; however, as of July 1, 2003, we changed our method of
accounting from the accrue in advance method to the direct expense method.
See
Note 3 of the Consolidated Financial Statements for further
discussion.
Our
identifiable product lines are chemical cellulose, customized fibers, fluff
pulp
and nonwoven materials. Chemical cellulose is used to impart purity, strength
and viscosity in the manufacture of diverse products such as food casings,
rayon
filament, acetate fibers, thickeners for consumer products, cosmetics and
pharmaceuticals. Customized fibers are used to provide porosity, color
permanence, strength and tear resistance in filters, premium letterhead,
currency paper and personal stationery as well as absorbency and softness in
cotton balls and cotton swabs. Fluff pulp and nonwoven materials are used to
increase absorbency and fluid transport in products such as disposable diapers,
feminine hygiene products and adult incontinence products. Additionally,
nonwoven materials are used to enhance fluid management and strength in wipes,
tabletop items, food pads, household wipes and mops. The following provides
relative net sales to unaffiliated customers by product line:
|
|
Year
Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Chemical
cellulose
|
|
|
32
|
%
|
|
32
|
%
|
|
32
|
%
|
Customized
fibers
|
|
|
17
|
|
|
18
|
|
|
17
|
|
Fluff
pulp
|
|
|
18
|
|
|
18
|
|
|
18
|
|
Nonwoven
materials
|
|
|
33
|
|
|
32
|
|
|
33
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
We
are
domiciled in the United States and have manufacturing operations in the United
States, Canada, Germany and Brazil. The following provides a summary of net
sales to unaffiliated customers, based on point of origin, long-lived assets
by
geographic areas and net sales by point of destination:
|
|
Year
Ended June 30
|
|
Net
sales by point of origin:
|
|
2006
|
|
2005
|
|
2004
|
|
United
States
|
|
$
|
539,233
|
|
|
74
|
%
|
$
|
503,367
|
|
|
71
|
%
|
|
436,722
|
|
|
66
|
%
|
Germany
|
|
|
120,970
|
|
|
17
|
|
|
133,088
|
|
|
19
|
|
|
129,426
|
|
|
20
|
|
Other
|
|
|
68,282
|
|
|
9
|
|
|
76,327
|
|
|
10
|
|
|
90,765
|
|
|
14
|
|
Total
|
|
$
|
728,485
|
|
|
100
|
%
|
$
|
712,782
|
|
|
100
|
%
|
$
|
656,913
|
|
|
100
|
%
|
|
|
Year
Ended June 30
|
|
Net
sales by point of destination:
|
|
2006
|
|
2005
|
|
2004
|
|
Europe
|
|
$
|
274,157
|
|
|
38
|
%
|
$
|
271,806
|
|
|
38
|
%
|
|
261,137
|
|
|
40
|
%
|
North
America
|
|
|
302,527
|
|
|
42
|
|
|
299,192
|
|
|
42
|
|
|
255,427
|
|
|
39
|
|
Asia
|
|
|
76,851
|
|
|
10
|
|
|
70,390
|
|
|
10
|
|
|
75,882
|
|
|
11
|
|
South
America
|
|
|
25,865
|
|
|
4
|
|
|
29,091
|
|
|
4
|
|
|
27,018
|
|
|
4
|
|
Other
|
|
|
49,085
|
|
|
6
|
|
|
42,303
|
|
|
6
|
|
|
37,449
|
|
|
6
|
|
Total
|
|
$
|
728,485
|
|
|
100
|
%
|
$
|
712,782
|
|
|
100
|
%
|
$
|
656,913
|
|
|
100
|
%
|
|
As
of June 30
|
|
|
2006
|
|
2005
|
|
2004
|
Long-lived
assets by geographical area:
|
|
|
|
|
|
United
States
|
|
$
|
464,637
|
|
$
|
482,113
|
|
$
|
489,019
|
Canada
|
|
|
134,102
|
|
|
125,099
|
|
|
118,639
|
Germany
|
|
|
54,658
|
|
|
59,294
|
|
|
76,572
|
Brazil
|
|
|
66,195
|
|
|
36,633
|
|
|
19,133
|
Other
|
|
|
89
|
|
|
94
|
|
|
5,464
|
Total
long-lived assets
|
|
$
|
719,681
|
|
$
|
703,233
|
|
$
|
708,827
|
NOTE
18: RESEARCH AND DEVELOPMENT EXPENSES
Research
and development costs of $9,182, $8,785 and $9,457 were charged to expense
as
incurred for the years ended June 30, 2006, 2005 and 2004,
respectively.
NOTE
19: COMMITMENTS
Under
two
separate agreements expiring at various dates through December 31, 2010, we
are
required to purchase certain timber from specified tracts of land that is
available for harvest. The contract price under the terms of these agreements
are fixed annually based on market prices. At June 30, 2006, estimated annual
purchase obligations were as follows: 2007—$13,100; 2008—$12,300; 2009—$13,000;
2010—$13,400; 2011—$6,800. Purchases under these agreements for the years ended
June 30, 2006, 2005 and 2004 were $12,978; $13,672 and $9,166,
respectively.
NOTE
20: CONTINGENCIES
Our
operations are subject to extensive general and industry-specific federal,
state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with these requirements. Because it is
difficult to predict the scope of future requirements, there can be no assurance
that we will not incur material environmental compliance costs or liabilities
in
the future.
The
Foley
Plant, located in Perry, Florida, discharges treated wastewater into the
Fenholloway River. Under the terms of an agreement with the Florida Department
of Environmental Protection (“FDEP”), approved by the U. S. Environmental
Protection Agency (“the EPA”) in 1995, we agreed to a comprehensive plan to
attain Class III (“fishable/swimmable”) status for the Fenholloway River under
applicable Florida law (the “Fenholloway Agreement”). The Fenholloway Agreement
requires us, among other things, to (i) make process changes within the Foley
Plant to reduce the coloration of its wastewater discharge, (ii) restore certain
wetlands areas, (iii) relocate the wastewater discharge point into the
Fenholloway River to a point closer to the mouth of the river, and (iv) provide
oxygen enrichment to the treated wastewater prior to discharge at the new
location. We have completed the process changes within the Foley Plant as
required by the Fenholloway Agreement. In making these in-plant process changes,
we incurred significant expenditures, and, as discussed in the following
paragraph, we expect to incur significant additional capital expenditures to
comply with the remaining obligations under the Fenholloway
Agreement.
The
EPA
objected to the draft National Pollutant Discharge Elimination System (NPDES)
permit prepared in connection with the Fenholloway Agreement and requested
additional environmental studies to identify possible alternatives to the
relocation of the wastewater discharge point. The studies’ focus was to
determine if more cost effective technologies are available to address both
Class III water quality standards for the Fenholloway River and the anticipated
EPA “cluster rules” applicable to wastewater discharges from dissolving kraft
pulp mills, like the Foley Plant. While these studies were being conducted,
implementation of the non in-plant process changes required by the Fenholloway
Agreement was deferred. The studies have been completed, and the EPA provided
comments to FDEP on the steps that would be required to overcome the EPA’s
objections to the draft NPDES permit. In August 2005 FDEP redrafted the Buckeye
NPDES permit to address the EPA’s comments, and has completed the required
public review and comment process. The formal Notice of Intent to Issue Permit
was issued in November 2005. The proposed permit was subsequently challenged
by
some members of the public and an administrative hearing to address the issues
is expected to occur during the second or third quarter of fiscal 2007. The
redrafted permit recognizes that the in-plant process changes already completed
and the additional process changes planned as part of the draft NPDES permit
will satisfy the EPA’s cluster rule requirements applicable to dissolving kraft
pulp mills. Based on the requirements of the draft permit, we expect to incur
additional capital expenditures of approximately $60 million over 8 - 10 years,
possibly beginning as early as fiscal year 2007. The amount and timing of these
capital expenditures may vary depending on a number of factors including when
the permit is issued and whether the upcoming hearing results in changes to
the
proposed permit. A proposed permit condition requiring certain studies could
result in additional treatment costs beyond these expected under the draft
permit.
The
EPA
and FDEP have listed the Fenholloway River as impaired water (not meeting all
applicable water quality standards) under the Clean Water Act for certain
pollutants. The permitting proceedings discussed above are expected to address
these water-quality issues.
The
EPA
has issued air emission standards applicable to the Foley Plant. In addition,
the EPA has issued boiler air emission standards that are applicable to the
Foley Plant. Compliance plans have been developed and are currently undergoing
agency review. If the compliance plans are approved as proposed, these new
standards will not have a material adverse effect on our financial statements
as
a whole.
We
are
involved in certain legal actions and claims arising in the ordinary course
of
business. It is the opinion of management that such litigation and claims will
be resolved without a materially adverse effect on our financial statements
as a
whole.
NOTE
21: FAIR VALUES OF FINANCIAL INSTRUMENTS
For
certain of our financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable and accounts payable, the carrying
amounts approximate fair value due to their short maturities. The fair value
of
our long-term public debt is based on an average of the bid and offer prices.
The fair value of the credit facilities approximates its carrying value due
to
its variable interest rate. The carrying value of other long-term debt
approximates fair value based on our current incremental borrowing rates for
similar types of borrowing instruments. The carrying value and fair value of
long-term debt and capital leases at June 30, 2006 were $522,090 and $497,256,
respectively and at June 30, 2005 were $538,982 and $535,568,
respectively.
NOTE
22: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
165,456
|
|
$
|
188,254
|
|
$
|
181,407
|
|
$
|
193,368
|
|
Gross
margin
|
|
|
24,193
|
|
|
25,708
|
|
|
24,344
|
|
|
25,553
|
|
Operating
income
|
|
|
10,305
|
|
|
12,736
|
|
|
9,763
|
|
|
11,616
|
|
Net
income (loss)
|
|
|
(289
|
)
|
|
1,854
|
|
|
(795
|
)
|
|
1,210
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
0.05
|
|
$
|
(0.02
|
)
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
0.05
|
|
$
|
(0.02
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
167,323
|
|
$
|
180,622
|
|
$
|
180,910
|
|
$
|
183,927
|
|
Gross
margin
|
|
|
29,629
|
|
|
31,147
|
|
|
30,210
|
|
|
29,070
|
|
Operating
income
|
|
|
18,104
|
|
|
7,423
|
|
|
17,905
|
|
|
14,169
|
|
Net
income
|
|
|
4,415
|
|
|
2,913
|
|
|
4,094
|
|
|
8,782
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
$
|
0.08
|
|
$
|
0.11
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.12
|
|
$
|
0.08
|
|
$
|
0.11
|
|
$
|
0.23
|
|
(1) During
the second quarter of fiscal 2005, we incurred impairment charges of $12,010
related to the announced closure of our Glueckstadt, Germany facility. Also
during the quarter, we recorded a gain on sale of assets held for sale of
$7,203. See Note 4 for further information on both of these items.
(2) During
the fourth quarter of fiscal 2005, the IRS completed an audit of our tax return
for fiscal year 2002. With the conclusion of this audit, we released the reserve
on a tax deduction we claimed relating to our investment in our former facility
in Cork, Ireland and recorded a non-cash tax benefit of $5,481 to our provision
for income taxes. We also recorded an additional tax benefit of $733 resulting
from a net change in our contingency reserves.
NOTE
23: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The
guarantor subsidiaries presented below represent our subsidiaries that are
subject to the terms and conditions outlined in the indenture governing the
senior notes and that guarantee the notes, jointly and severally, on a senior
unsecured basis. The non-guarantor subsidiaries presented below represent the
foreign subsidiaries and the receivables subsidiary which do not guarantee
the
senior notes. Each subsidiary guarantor is 100% owned directly or indirectly
by
Buckeye Technologies Inc. and all guarantees are full and
unconditional.
Supplemental
financial information for Buckeye Technologies Inc. and our guarantor
subsidiaries and non-guarantor subsidiaries for the senior notes is presented
in
the following tables.
STATEMENTS
OF OPERATIONS
Year
ending June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
109,164
|
|
$
|
461,613
|
|
$
|
190,984
|
|
$
|
(33,276
|
)
|
$
|
728,485
|
|
Cost
of goods sold
|
|
|
94,527
|
|
|
395,369
|
|
|
172,403
|
|
|
(33,612
|
)
|
|
628,687
|
|
Gross
margin
|
|
|
14,637
|
|
|
66,244
|
|
|
18,581
|
|
|
336
|
|
|
99,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
12,977
|
|
|
29,021
|
|
|
7,764
|
|
|
-
|
|
|
49,762
|
|
Restructuring
and impairment costs
|
|
|
1
|
|
|
498
|
|
|
5,117
|
|
|
-
|
|
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,659
|
|
|
36,725
|
|
|
5,700
|
|
|
336
|
|
|
44,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense and amortization of debt
|
|
|
(45,187
|
)
|
|
311
|
|
|
1,643
|
|
|
-
|
|
|
(43,233
|
)
|
Other
income/(expense), including equity income in
affiliates
|
|
|
17,596
|
|
|
69
|
|
|
(632
|
)
|
|
(17,536
|
)
|
|
(503
|
)
|
Intercompany
interest income/(expense)
|
|
|
28,340
|
|
|
(19,809
|
)
|
|
(8,531
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before income taxes
|
|
|
2,408
|
|
|
17,296
|
|
|
(1,820
|
)
|
|
(17,200
|
)
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense/(benefit)
|
|
|
428
|
|
|
1,889
|
|
|
2,407
|
|
|
(6,020
|
)
|
|
(1,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,980
|
|
$
|
15,407
|
|
$
|
(4,227
|
)
|
$
|
(11,180
|
)
|
$
|
1,980
|
|
STATEMENTS
OF OPERATIONS
Year
ending June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
105,112
|
|
$
|
426,330
|
|
$
|
210,634
|
|
$
|
(29,294
|
)
|
$
|
712,782
|
|
Cost
of goods sold
|
|
|
86,203
|
|
|
350,516
|
|
|
185,078
|
|
|
(29,071
|
)
|
|
592,726
|
|
Gross
margin
|
|
|
18,909
|
|
|
75,814
|
|
|
25,556
|
|
|
(223
|
)
|
|
120,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
12,219
|
|
|
24,629
|
|
|
8,702
|
|
|
-
|
|
|
45,550
|
|
Restructuring
and impairment costs
|
|
|
-
|
|
|
166
|
|
|
16,739
|
|
|
-
|
|
|
16,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
6,690
|
|
|
51,019
|
|
|
115
|
|
|
(223
|
)
|
|
57,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense and amortization of debt
|
|
|
(44,997
|
)
|
|
118
|
|
|
680
|
|
|
-
|
|
|
(44,199
|
)
|
Other
income/(expense), including equity income in
affiliates
|
|
|
29,751
|
|
|
20
|
|
|
6,948
|
|
|
(30,407
|
)
|
|
6,312
|
|
Intercompany
interest income/(expense)
|
|
|
29,727
|
|
|
(22,817
|
)
|
|
(6,910
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before income taxes
|
|
|
21,171
|
|
|
28,340
|
|
|
833
|
|
|
(30,630
|
)
|
|
19,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense/(benefit)
|
|
|
967
|
|
|
10,514
|
|
|
(332
|
)
|
|
(11,639
|
)
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
20,204
|
|
$
|
17,826
|
|
$
|
1,165
|
|
$
|
(18,991
|
)
|
$
|
20,204
|
|
STATEMENTS
OF OPERATIONS
Year
ending June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
88,914
|
|
$
|
370,399
|
|
$
|
224,150
|
|
$
|
(26,550
|
)
|
$
|
656,913
|
|
Cost
of goods sold
|
|
|
71,623
|
|
|
330,153
|
|
|
203,521
|
|
|
(25,825
|
)
|
|
579,472
|
|
Gross
margin
|
|
|
17,291
|
|
|
40,246
|
|
|
20,629
|
|
|
(725
|
)
|
|
77,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
14,753
|
|
|
22,022
|
|
|
7,892
|
|
|
-
|
|
|
44,667
|
|
Restructuring
and impairment costs
|
|
|
1,596
|
|
|
4,533
|
|
|
45,724
|
|
|
-
|
|
|
51,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
942
|
|
|
13,691
|
|
|
(32,987
|
)
|
|
(725
|
)
|
|
(19,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense and amortization of debt
|
|
|
(45,554
|
)
|
|
(294
|
)
|
|
(513
|
)
|
|
-
|
|
|
(46,361
|
)
|
Other
income/(expense), including equity income in
affiliates
|
|
|
(49,884
|
)
|
|
279
|
|
|
198
|
|
|
44,740
|
|
|
(4,667
|
)
|
Intercompany
interest income/(expense)
|
|
|
32,135
|
|
|
(23,646
|
)
|
|
(8,489
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before income taxes and cumulative effect change in
accounting
|
|
|
(62,361
|
)
|
|
(9,970
|
)
|
|
(41,791
|
)
|
|
44,015
|
|
|
(70,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(24,171
|
)
|
|
(4,179
|
)
|
|
(14,907
|
)
|
|
17,060
|
|
|
(26,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before cumulative effect of change in
accounting
|
|
|
(38,190
|
)
|
|
(5,791
|
)
|
|
(26,884
|
)
|
|
26,955
|
|
|
(43,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting (net of tax)
|
|
|
-
|
|
|
5,720
|
|
|
-
|
|
|
-
|
|
|
5,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(38,190
|
)
|
$
|
(71
|
)
|
$
|
(26,884
|
)
|
$
|
26,955
|
|
$
|
(38,190
|
)
|
BALANCE
SHEETS
As
of
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,535
|
|
$
|
162
|
|
$
|
7,037
|
|
$
|
-
|
|
$
|
8,734
|
|
Accounts
receivable, net
|
|
|
17,395
|
|
|
66,207
|
|
|
30,496
|
|
|
-
|
|
|
114,098
|
|
Inventories
|
|
|
24,680
|
|
|
53,756
|
|
|
20,573
|
|
|
(442
|
)
|
|
98,567
|
|
Other
current assets
|
|
|
2,422
|
|
|
4,845
|
|
|
1,206
|
|
|
-
|
|
|
8,473
|
|
Intercompany
accounts receivable
|
|
|
-
|
|
|
57,105
|
|
|
-
|
|
|
(57,105
|
)
|
|
-
|
|
Total
current assets
|
|
|
46,032
|
|
|
182,075
|
|
|
59,312
|
|
|
(57,547
|
)
|
|
229,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
55,440
|
|
|
329,020
|
|
|
147,438
|
|
|
-
|
|
|
531,898
|
|
Goodwill
and intangibles, net
|
|
|
20,913
|
|
|
51,730
|
|
|
101,636
|
|
|
-
|
|
|
174,279
|
|
Intercompany
notes receivable
|
|
|
342,478
|
|
|
-
|
|
|
-
|
|
|
(342,478
|
)
|
|
-
|
|
Other
assets, including investment in subsidiaries
|
|
|
304,581
|
|
|
337,654
|
|
|
93,066
|
|
|
(721,797
|
)
|
|
13,504
|
|
Total
assets
|
|
$
|
769,444
|
|
$
|
900,479
|
|
$
|
401,452
|
|
$
|
(1,121,822
|
)
|
$
|
949,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
4,857
|
|
$
|
21,077
|
|
$
|
7,039
|
|
$
|
-
|
|
$
|
32,973
|
|
Other
current liabilities
|
|
|
20,416
|
|
|
17,390
|
|
|
12,530
|
|
|
1
|
|
|
50,337
|
|
Intercompany
accounts payable
|
|
|
52,297
|
|
|
-
|
|
|
4,808
|
|
|
(57,105
|
)
|
|
-
|
|
Total
current liabilities
|
|
|
77,570
|
|
|
38,467
|
|
|
24,377
|
|
|
(57,104
|
)
|
|
83,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
519,414
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
519,414
|
|
Deferred
income taxes
|
|
|
(48,099
|
)
|
|
64,030
|
|
|
19,755
|
|
|
-
|
|
|
35,686
|
|
Other
long-term liabilities
|
|
|
6,414
|
|
|
13,476
|
|
|
1,536
|
|
|
-
|
|
|
21,426
|
|
Intercompany
notes payable
|
|
|
-
|
|
|
201,993
|
|
|
140,485
|
|
|
(342,478
|
)
|
|
-
|
|
Stockholders’/invested
equity
|
|
|
214,145
|
|
|
582,513
|
|
|
215,299
|
|
|
(722,240
|
)
|
|
289,717
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
769,444
|
|
$
|
900,479
|
|
$
|
401,452
|
|
$
|
(1,121,822
|
)
|
$
|
949,553
|
|
BALANCE
SHEETS
As
of
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
860
|
|
$
|
151
|
|
$
|
8,915
|
|
$
|
-
|
|
$
|
9,926
|
|
Accounts
receivable, net
|
|
|
16,147
|
|
|
70,636
|
|
|
31,432
|
|
|
-
|
|
|
118,215
|
|
Inventories
|
|
|
21,745
|
|
|
57,932
|
|
|
28,997
|
|
|
(779
|
)
|
|
107,895
|
|
Other
current assets
|
|
|
4,521
|
|
|
3,995
|
|
|
1,952
|
|
|
-
|
|
|
10,468
|
|
Intercompany
accounts receivable
|
|
|
-
|
|
|
22,741
|
|
|
-
|
|
|
(22,741
|
)
|
|
-
|
|
Total
current assets
|
|
|
43,273
|
|
|
155,455
|
|
|
71,296
|
|
|
(23,520
|
)
|
|
246,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
55,720
|
|
|
342,455
|
|
|
127,756
|
|
|
-
|
|
|
525,931
|
|
Goodwill
and intangibles, net
|
|
|
20,962
|
|
|
53,827
|
|
|
92,217
|
|
|
-
|
|
|
167,006
|
|
Intercompany
notes receivable
|
|
|
333,295
|
|
|
-
|
|
|
-
|
|
|
(333,295
|
)
|
|
-
|
|
Other
assets, including investment in subsidiaries
|
|
|
301,239
|
|
|
323,095
|
|
|
113,840
|
|
|
(727,878
|
)
|
|
10,296
|
|
Total
assets
|
|
$
|
754,489
|
|
$
|
874,832
|
|
$
|
405,109
|
|
$
|
(1,084,693
|
)
|
$
|
949,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
7,213
|
|
$
|
20,841
|
|
$
|
9,172
|
|
$
|
-
|
|
$
|
37,226
|
|
Other
current liabilities
|
|
|
20,450
|
|
|
18,094
|
|
|
11,918
|
|
|
-
|
|
|
50,462
|
|
Intercompany
accounts payable
|
|
|
20,179
|
|
|
-
|
|
|
2,562
|
|
|
(22,741
|
)
|
|
-
|
|
Total
current liabilities
|
|
|
47,842
|
|
|
38,935
|
|
|
23,652
|
|
|
(22,741
|
)
|
|
87,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
535,539
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
535,539
|
|
Deferred
income taxes
|
|
|
(43,918
|
)
|
|
62,764
|
|
|
15,814
|
|
|
-
|
|
|
34,660
|
|
Other
long-term liabilities
|
|
|
6,822
|
|
|
14,081
|
|
|
1,358
|
|
|
-
|
|
|
22,261
|
|
Intercompany
notes payable
|
|
|
-
|
|
|
212,620
|
|
|
120,675
|
|
|
(333,295
|
)
|
|
-
|
|
Stockholders’/invested
equity
|
|
|
208,204
|
|
|
546,432
|
|
|
243,610
|
|
|
(728,657
|
)
|
|
269,589
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
754,489
|
|
$
|
874,832
|
|
$
|
405,109
|
|
$
|
(1,084,693
|
)
|
$
|
949,737
|
|
STATEMENTS
OF CASH FLOWS
Year
ending June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidated
|
|
Net
cash provided by (used in) operations
|
|
$
|
29,990
|
|
$
|
29,445
|
|
$
|
(714
|
)
|
$
|
58,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(4,899
|
)
|
|
(18,627
|
)
|
|
(22,065
|
)
|
|
(45,591
|
)
|
Other
|
|
|
-
|
|
|
505
|
|
|
191
|
|
|
696
|
|
Net
cash used in investing activities
|
|
|
(4,899
|
)
|
|
(18,122
|
)
|
|
(21,874
|
)
|
|
(44,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings under revolving line of credit
|
|
|
350
|
|
|
-
|
|
|
-
|
|
|
350
|
|
Net
borrowings (payments) on long-term debt and other
|
|
|
(24,766
|
)
|
|
(11,312
|
)
|
|
19,810
|
|
|
(16,268
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(24,416
|
)
|
|
(11,312
|
)
|
|
19,810
|
|
|
(15,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
-
|
|
|
-
|
|
|
900
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
675
|
|
|
11
|
|
|
(1,878
|
)
|
|
(1,192
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
860
|
|
|
151
|
|
|
8,915
|
|
|
9,926
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,535
|
|
$
|
162
|
|
$
|
7,037
|
|
$
|
8,734
|
|
STATEMENTS
OF CASH FLOWS
Year
ending June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidated
|
|
Net
cash provided by operations
|
|
$
|
20,746
|
|
$
|
50,824
|
|
$
|
7,051
|
|
$
|
78,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(6,354
|
)
|
|
(25,330
|
)
|
|
(13,645
|
)
|
|
(45,329
|
)
|
Other
|
|
|
-
|
|
|
(550
|
)
|
|
13,631
|
|
|
13,081
|
|
Net
cash used in investing activities
|
|
|
(6,354
|
)
|
|
(25,880
|
)
|
|
(14
|
)
|
|
(32,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings under revolving line of credit
|
|
|
400
|
|
|
-
|
|
|
-
|
|
|
400
|
|
Net
payments on long-term debt and other
|
|
|
(28,678
|
)
|
|
(24,896
|
)
|
|
(11,721
|
)
|
|
(65,295
|
)
|
Net
cash used in financing activities
|
|
|
(28,278
|
)
|
|
(24,896
|
)
|
|
(11,721
|
)
|
|
(64,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
-
|
|
|
-
|
|
|
1,213
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(13,886
|
)
|
|
48
|
|
|
(3,471
|
)
|
|
(17,309
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
14,746
|
|
|
103
|
|
|
12,386
|
|
|
27,235
|
|
Cash
and cash equivalents at end of period
|
|
$
|
860
|
|
$
|
151
|
|
$
|
8,915
|
|
$
|
9,926
|
|
STATEMENTS
OF CASH FLOWS
Year
ending June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidated
|
|
Net
cash provided by (used in) operations
|
|
$
|
3,925
|
|
$
|
(5,806
|
)
|
$
|
67,537
|
|
$
|
65,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(6,524
|
)
|
|
(22,971
|
)
|
|
(2,376
|
)
|
|
(31,871
|
)
|
Other
|
|
|
-
|
|
|
(377
|
)
|
|
3
|
|
|
(374
|
)
|
Net
cash used in investing activities
|
|
|
(6,524
|
)
|
|
(23,348
|
)
|
|
(2,373
|
)
|
|
(32,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments under revolving line of credit
|
|
|
(209,124
|
)
|
|
-
|
|
|
(14,902
|
)
|
|
(224,026
|
)
|
Payments
for debt issuance and extinguishment
|
|
|
(11,185
|
)
|
|
-
|
|
|
-
|
|
|
(11,185
|
)
|
Net
issuance of (payments on) long-term debt and other
|
|
|
211,579
|
|
|
24,908
|
|
|
(58,153
|
)
|
|
178,334
|
|
Net
cash provided by (used in) financing activities
|
|
|
(8,730
|
)
|
|
24,908
|
|
|
(73,055
|
)
|
|
(56,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
-
|
|
|
-
|
|
|
724
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(11,329
|
)
|
|
(4,246
|
)
|
|
(7,167
|
)
|
|
(22,742
|
)
|
Cash
and cash equivalents at beginning of
period
|
|
|
26,075
|
|
|
4,349
|
|
|
19,553
|
|
|
49,977
|
|
Cash
and cash equivalents at end of period
|
|
$
|
14,746
|
|
$
|
103
|
|
$
|
12,386
|
|
$
|
27,235
|
|
Report
of Independent Registered Public Accounting Firm on Financial Statement
Schedule
The
Board
of Directors and Stockholders of Buckeye Technologies Inc.
We
have
audited the consolidated financial statements of Buckeye Technologies Inc.
as of
June 30, 2006 and 2005, and for each of the three years in the period ended
June
30, 2006, and have issued our report thereon dated August 31, 2006 (included
elsewhere in this Annual Report on Form 10-K). Our audits also included the
financial statement schedule listed in Item 15(a) in this Annual Report on
Form
10-K. This schedule is the responsibility of the Company’s management. Our
responsibility is to express an opinion based on our audits.
In
our
opinion, the financial statement schedule referred to above, when considered
in
relation to the basic financial statements taken as a whole, presents fairly
in
all material respects the information set forth therein.
Memphis,
Tennessee /s/
Ernst
& Young LLP
August
31, 2006
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
|
|
Column
B
|
|
Column
C
|
|
Column
D
|
|
Column
E
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance
at
Beginning
of
Period
|
|
Additions
Charged
to
Expenses
|
|
Deductions
|
|
Balance
at
End
of
Period
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
|
Year
ended June 20, 2006
|
|
$
|
5,602
|
|
$
|
123
|
|
$
|
(3,821(a
|
)
|
$
|
1,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 20, 2005
|
|
$
|
4,240
|
|
$
|
1,372
|
|
$
|
(10)(a
|
)
|
$
|
5,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2004
|
|
$
|
721
|
|
$
|
4,010
|
|
$
|
(491)(a
|
)
|
$
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for maintenance shutdowns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 20, 2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-(d
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 20, 2005
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-(d
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2004
|
|
$
|
9,881
|
|
$
|
-
|
|
$
|
9,881(d
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
for restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 20, 2006
|
|
$
|
2,471
|
|
$
|
3,526
|
|
$
|
(6,103)(b
|
)
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 20, 2005
|
|
$
|
2,134
|
|
$
|
4,579
|
|
$
|
(4,242)(b
|
)
|
$
|
2,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2004
|
|
$
|
1,624
|
|
$
|
5,945
|
|
$
|
(5,435)(b
|
)
|
$
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2006
|
|
$
|
5,813
|
|
$
|
3,842
|
|
$
|
410(c
|
)
|
$
|
10,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2005
|
|
$
|
4,125
|
|
$
|
1,145
|
|
$
|
543(c
|
)
|
$
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2004
|
|
$
|
2,439
|
|
$
|
1,746
|
|
$
|
(60)(c
|
)
|
$
|
4,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Uncollectible
accounts written off, net of recoveries, translation adjustments and changes
in
quality claims. Quality claims are recorded as reduction in sales.
(b) Severance
payments, lease cancellations, relocation expenses, and miscellaneous other
expenses.
(c) Impact
of
change in exchange rate between Brazilian reals and US dollars.
(d) Payments
made during plant shut downs were $9,881 in 2004. Effective July 1, 2003, we
changed our method of accounting for planned maintenance activities from
the
accrue in
advance method to the direct expense method. For further discussion of this
change, see Note 3 of the Consolidated Financial Statements.