UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended December 31, 2008
¨ 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.
Delaware
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(state
or other jurisdiction of
incorporation)
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Internal
Revenue Service — Employer Identification No. 62-1518973
1001
Tillman Street, Memphis, TN 38112
901-320-8100
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “accelerated filer,” “large accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one).
Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As of
February 9, 2009, there were outstanding 38,649,503 Common Shares of the
Registrant.
INDEX
BUCKEYE
TECHNOLOGIES INC.
ITEM
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PAGE
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PART
I - FINANCIAL INFORMATION
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1.
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Financial
Statements:
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Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
December 31, 2008 and 2007
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3
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Condensed
Consolidated Balance Sheets as of December 31, 2008 and June 30,
2008
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4
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Condensed
Consolidated Statements of Cash Flows for the Six Months Ended December
31, 2008 and 2007
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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3.
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Quantitative
and Qualitative Disclosures About Market Risk
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27
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4.
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Controls
and Procedures
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27
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PART
II - OTHER INFORMATION
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1.
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Legal
Proceedings
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28
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4.
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Submission
of Matters to a Vote of Security Holders
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28
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6.
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Exhibits
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28
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SIGNATURES
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29
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Item
1.
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Financial
Statements
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PART
I - FINANCIAL INFORMATION
BUCKEYE
TECHNOLOGIES INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share data)
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Three
Months Ended
December
31
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Six
Months Ended
December
31
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2008
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2007
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2008
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2007
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Selling,
research and administrative expenses
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Amortization
of intangibles and other
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Net
interest expense and amortization of debt costs
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Gain
(loss) on early extinguishment of debt
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Gain
(loss) on foreign exchange and other
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Income
(loss) before income taxes
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Income
tax expense (benefit)
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Earnings
(loss) per share
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Weighted
average shares for earnings per share
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See
accompanying notes.
BUCKEYE
TECHNOLOGIES INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
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December
31
2008
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June
30
2008
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(Unaudited)
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2008
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2007
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Cash
and cash equivalents
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Accounts
receivable – net
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Deferred
income taxes and other
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Property,
plant and equipment
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Less
accumulated depreciation
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Intellectual
property and other, net
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Liabilities
and stockholders’ equity
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Current
portion of capital lease obligation
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Total
current liabilities
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Accrued
postretirement benefits
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Total
liabilities and stockholders’ equity
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See
accompanying notes.
BUCKEYE
TECHNOLOGIES INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
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Six
Months Ended
December
31
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2008
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2007
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Operating
activities
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Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
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(Gain)
loss on early extinguishment of debt
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Deferred
income taxes and other
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Excess
tax benefit from stock based compensation
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Changes
in operating assets and liabilities:
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Accounts
payable and other current liabilities
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Net
cash provided by operating activities
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Purchases
of property, plant and equipment
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Net
cash used in investing activities
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Net
borrowings under lines of credit
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Payments
on long-term debt and other
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Purchase
of treasury shares
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Payments
for debt issuance costs
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Net
proceeds from sale of equity interests
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Excess
tax benefit from stock based compensation
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Net
cash used in financing activities
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Effect
of foreign currency rate fluctuations on cash
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Increase
(decrease) in cash and cash equivalents
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Cash
and cash equivalents at beginning of period
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Cash
and cash equivalents at end of period
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See
accompanying notes.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
thousands)
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NOTE
1: BASIS OF PRESENTATION
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Our
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(including normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months
ended December 31, 2008 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2009. All significant
intercompany accounts and transactions have been eliminated in consolidation.
For further information and a listing of our significant accounting
policies, refer to the financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended June 30, 2008, which was filed
with the Securities and Exchange Commission on August 27, 2008 (“Annual
Report”). Except as otherwise specified, references to years indicate our
fiscal year ending June 30, 2009 or ended June 30 of the year referenced and
comparisons are to the corresponding period of the prior year.
Translation
adjustment
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 U.S. dollars at the rate of exchange in effect at the balance sheet date.
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.
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.
NOTE
2:
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SEGMENT
INFORMATION
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We report
results for two segments, specialty fibers and nonwoven materials. The
specialty fibers segment consists of our chemical cellulose, customized fibers
and fluff pulp product lines which are 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 administrative 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
tables:
Three
Months Ended
December
31
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Specialty
Fibers
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Nonwoven
Materials
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Corporate
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Total
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Depreciation
and amortization of
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Six
Months Ended
December
31
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Specialty
Fibers
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Nonwoven
Materials
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Corporate
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Total
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Depreciation
and amortization of
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Management
evaluates operating performance of the specialty fibers and nonwoven materials
segments excluding amortization of intangibles, the impact of impairment of
long-lived assets, the impact of goodwill impairment, charges related to
restructuring, unallocated at-risk compensation and unallocated stock-based
compensation for executive officers and certain other
employees. Therefore, the corporate segment includes operating
elements such as segment eliminations, amortization of intangibles, impairment
of long-lived assets, goodwill impairment, charges related to restructuring,
unallocated at-risk compensation and unallocated stock-based compensation for
executive officers and certain other employees. We have reclassified the
at-risk compensation and stock-based compensation from the specialty fibers and
nonwovens segments for the three and six months ended December 31, 2007 for
comparability. Corporate net sales represent the elimination of intersegment
sales included in the specialty fibers reporting segment. Intersegment
sales are at current market prices.
NOTE
3: RESTRUCTURING COSTS AND ASSETS HELD FOR SALE
During
fiscal 2007, we entered into a restructuring program that complemented our
operations’ consolidations and involved consolidation in our European sales
offices, product and market development and corporate overhead. The
total cost of this program was $1,358 and was completed during the first quarter
of the 2008 fiscal year. The remaining accrual of $102 will be paid
in fiscal year 2009. As a result of this restructuring, 22 positions
were eliminated.
NOTE
4: 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 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.
The
components of inventory consist of the following:
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December
31
2008
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June
30
2008
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Storeroom
and other supplies
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NOTE
5: GOODWILL
In
accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets
(SFAS 142), we perform a goodwill impairment analysis on an annual basis
and, if certain events or circumstances indicate that an impairment loss may
have been incurred, on an interim basis. Goodwill is measured at the
reporting unit level by comparing the reporting unit’s carrying amount,
including goodwill, to the fair market value of the reporting
unit. The analysis of potential impairment of goodwill requires a
two-step process. The first step is the estimation of fair
value. If step one indicates that impairment potentially exists, the
second step is performed to measure the amount of impairment, if
any. Goodwill impairment exists when the implied fair value of
goodwill is less than its carrying value.
Based on
the current economic environment and the recent steep decline in the price of
our stock, which created a significant gap between the book and market value of
our equity, we concluded that there were sufficient indicators to require us to
perform an interim goodwill impairment analysis as of December 31,
2008. We engaged an independent valuation firm to assist with the
testing of the carrying value of goodwill. For purposes of this
analysis, estimates of fair value were based on a combination of the income
approach, which estimates the fair value of our reporting units based on future
discounted cash flows, and the market approach, which estimates the fair value
of our reporting units on comparable market prices. As of this
filing, we have not completed this analysis, due to the complexities involved in
determining the implied fair value of the goodwill of each reporting
unit. However, based on the work performed to date, we have concluded
that an impairment loss is probable and can be reasonably
estimated. Accordingly, we recorded a $138,008 non-cash goodwill
impairment charge, representing our best estimate of the impairment loss, during
the three months ended December 31, 2008. Since this goodwill
impairment charge is non-cash, it does not affect our liquidity or financial
covenants.
We expect
to finalize our goodwill impairment analysis during the third quarter of fiscal
2009. There could be adjustments to the goodwill impairment charge
when the goodwill impairment analysis is completed. Any adjustment to
our preliminary estimates will be recorded in our financial statements for the
quarter ending March 31, 2009.
The
changes in the carrying amount of goodwill for the six months ended December 31,
2008 are as follows:
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Specialty
Fibers
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Nonwovens
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Segment
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Segment
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Total
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Balance
as of June 30, 2008
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Change
due to fluctuation in foreign currency exchange rate
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Balance
as of December 31, 2008
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NOTE
6: DEBT
The
components of long-term debt consist of the following:
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December
31
2008
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June
30
2008
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Senior
Notes due:
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Senior
Subordinated Notes due:
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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.
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 were redeemable at our option, in whole or in
part, at any time after September 15, 2004, at a redemption price of 100% of
principal amount together with accrued and unpaid interest to the date of
redemption.
Through
fiscal year 2007, we redeemed $40,000 of the 2008 Notes. During the
six months ended December 31, 2007, we redeemed the remaining $60,000 of the
2008 Notes. As a result of this redemption, we wrote off the
remaining balance of deferred financing costs and unamortized discount related
to the 2008 Notes. During the six months ended December 31, 2007, we
recorded non-cash expenses of $205 related to the early extinguishment of this
debt.
During
June 1998, we completed a private placement of $150,000 principal amount of 8%
unsecured Senior Subordinated Notes due October 15, 2010 (the “2010
Notes”). In fiscal 1999, we exchanged these outstanding notes for public
notes with the same terms. These notes have been redeemable at our option,
in whole or in part, at any time since October 15, 2006, at a redemption price
of 100% of principal amount together with accrued and unpaid interest to the
date of redemption.
On
December 1, 2008, we redeemed $5,000 of the 2010 Notes. During the
six months ended December 31, 2007, we redeemed $20,000 of these
notes. In fiscal year 2008, we redeemed a total of $35,000 of these
notes. As a result of these redemptions, we wrote off a portion of
the deferred financing costs and unamortized discount related to the 2010
notes. During the three and six months ended December 31, 2008, we
recorded non-cash gains of $401 related to the early extinguishment of this debt
and during the six months ended December 31, 2007 we recorded non-cash expenses
of $153 related to the early extinguishment of this debt.
Revolving
Credit Facility
On July
25, 2007, we established a $200,000 senior secured revolving credit facility
with a maturity date of July 25, 2012. This facility amended and
restated the Company's old credit facility. Initially, we used the
proceeds from this new credit facility to pay the outstanding balance on the
former credit facility plus fees and expenses. The interest rate
applicable to borrowings under the revolver is the agent’s prime rate plus 0.25%
to 1.00% or a LIBOR-based rate ranging from LIBOR plus 1.25% to LIBOR plus
2.00%. We used the proceeds from this facility to redeem the
remaining $60,000 of our 2008 notes, to redeem $20,000 of the 2010 notes in
mid-September 2007, and for general corporate purposes. 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 total leverage ratio
of consolidated total debt to consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”), and minimum ratio of consolidated
EBITDA to consolidated interest expense. At December 31, 2008, we
were in compliance with the financial covenants under our credit
facility.
On
December 31, 2008, we had $8,491 of cash and cash equivalents and we had
$113,957 borrowing capacity on our credit facility. The credit facility
also contains a $50,000 increase option. Our credit facility allows
for a sublimit on letters of credit of $50,000. As of December 31,
2008, $44,648 of the sublimit was unused.
The
commitment fee on the unused portion of the revolving credit facility ranges
from 0.25% to 0.40% per annum based on a grid related to our leverage
ratio. Total costs for the issuance of the facility were
approximately $1,300 and are being amortized to interest expense using the
effective interest method over the life of the facility. During the
six months ended December 31, 2007, $177 was expensed as early extinguishment of
debt related to the write-off of deferred financing costs for the term loan
portion of the former credit facility.
On
September 17, 2007, we entered into an interest rate swap agreement for $30,000
of debt under our revolving credit facility maturing on September 17,
2009. The swap involves the exchange of interest payments from a
floating-rate three month LIBOR plus the applicable margin on the revolving
credit facility to a fixed rate of 4.79% plus the same applicable
margin. This arrangement qualifies as a cash flow hedge under SFAS
133. Therefore, the net effect from the interest rate swap is being
recorded as part of interest expense. During the three and six months
ended December 31, 2008, the swap increased our interest expense by $163 and
$315, respectively. During the three and six months ended December
31, 2007, the swap reduced our interest expense by $61 and $71,
respectively. At December 31, 2008, our liability on the interest
rate swap agreement was $781.
|
NOTE
7: FAIR VALUE
MEASURMENTS
|
In accordance
with the provisions of FASB Staff Position FAS 157-2, we have partially applied
the provisions of SFAS No. 157 only to our financial assets and liabilities
recorded at fair value, which consist of derivative contracts, including
interest rate swaps, foreign currency forward contracts, and other financial
instruments that are used to hedge exposures to interest rate, commodity and
currency risks. For these financial instruments, fair value is
determined at each balance sheet date using an income approach, which consists
of a discounted cash flow model that takes into account the present value of
future cash flows under the terms of the contracts using current market
information as of the reporting date, such as prevailing interest rates and
foreign currency spot and forward rates. The following table provides
a summary of the inputs used to develop these estimated fair values under the
hierarchy defined in SFAS No. 157:
|
|
Fair
Value Measurements at December 31, 2008
|
|
|
|
Total
|
|
|
Quoted
prices in active markets for identical assets (Level 1)
|
|
|
Significant
other observable inputs (Level 2)
|
|
|
Significant
unobservable inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency hedge
|
|
$ |
654 |
|
|
$ |
- |
|
|
$ |
654 |
|
|
$ |
- |
|
Total
|
|
|
654 |
|
|
|
- |
|
|
|
654 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas hedge
|
|
|
236 |
|
|
|
- |
|
|
|
236 |
|
|
|
- |
|
Interest
rate swap
|
|
|
781 |
|
|
|
- |
|
|
|
781 |
|
|
|
- |
|
Total
|
|
$ |
1,017 |
|
|
$ |
- |
|
|
$ |
1,017 |
|
|
$ |
- |
|
|
NOTE
8: STOCKHOLDERS' EQUITY
|
The
change in stockholders' equity was due mainly to the change in comprehensive
income as shown in the chart below. The components of comprehensive income
consist of the following:
|
|
Three
Months Ended
December
31
|
|
Six
Months Ended
December
31
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments – net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on hedging activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three and six months ended December 31, 2008, the change in the foreign currency
translation adjustment was due to fluctuations in the exchange rate of the U.S.
dollar against the euro of ($2,466) and ($11,468), the Brazilian real of
($12,029) and ($24,114) and the Canadian dollar of ($20,954) and ($25,958),
respectively.
For the
three and six months ended December 31, 2007, the change in the foreign currency
translation adjustment was primarily due to fluctuations in the exchange rate of
the U.S. dollar against the euro of $3,109 and $6,827, the Brazilian real of
$2,147 and $4,640 and the Canadian dollar of $2,257 and $10,955,
respectively.
On
July 1, 2007, we adopted the provisions of FASB Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty
in Income
Taxes.” FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. As a result of
the adoption, we recorded an adjustment of approximately $878 to reduce retained
earnings at July 1, 2007. At adoption, our unrecognized tax benefits
totaled $1,806. Cumulative potential interest and penalties accrued
related to unrecognized tax benefits at the date of adoption totaled
$164. We include interest and penalties related to income tax matters
as a component of income before income taxes. All unrecognized tax
benefits at adoption would affect the effective tax rate, if
recognized. During the three months ended December 31, 2008, as a
result of the resolution of a North Carolina audit, we were able to reduce our
unrecognized tax benefits by $228 and our related interest and penalties by
$101. These reductions leave a balance in unrecognized tax benefits
and our related interest and penalties of $1,578 and $63,
respectively.
We file
income tax returns with federal, state, local and foreign jurisdictions.
As of December 31, 2008, we remain subject to examinations of our United
States federal and state income tax returns for the years 2003
through 2007, Canadian income tax returns for the years 2001 through
2007 and German tax filings for the years 2002 through
2007.
Our
effective tax rates for the three and six month periods ended December 31, 2008
were 6.4% and 2.5%, respectively. Our effective tax rates for the
same periods of 2007 were 35.4% and 31.4%, respectively. We
recorded a $138,008 goodwill impairment charge in the three months ended
December 31, 2008. Accordingly, we recognized a tax benefit of
$10,410 in connection with the goodwill impairment charge. In
addition, the rate change for the three month period ended December 31, 2008 was
the result of a correction to our deferred taxes and the resolution of the North
Carolina audit (mentioned above) which together had a net unfavorable impact of
$300 during the three months ended December 31, 2008. The increase, before
the goodwill impairment charge, in the effective tax rate for the six month
period over the same period in 2007 was affected by the items which impacted the
three months ended December 31, 2008 comparison plus a German tax rate law
change which reduced our taxes by approximately $2,200 during the six months
ended December 31, 2007. Our income tax expense differs from the
amount computed by applying the statutory federal income tax rate of 35% to
income before income taxes due to the following:
|
|
Three
Months Ended
December
31
|
|
Six
Months Ended
December
31
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
tax expense at 35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible
goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
10: EMPLOYEE BENEFIT PLANS
In
September 2006, the FASB issued SFAS 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (SFAS 158). On July 1, 2008, we
adopted the measurement date provisions of SFAS No. 158. SFAS No. 158
requires the measurement date of the plan’s funded status to be the same as our
fiscal year end. The adoption of the measurement date provisions of
SFAS No. 158 resulted in a decrease in accrued postretirement benefits of
$1,175, an increase in deferred tax liabilities of $435, an increase in
accumulated other comprehensive income of $882 and a decrease in the opening
balance of retained earnings of $142. The adoption of the measurement
date provisions of SFAS No. 158 had no material effect on our consolidated
statement of income for the six months ended December 31, 2008 or for any prior
period presented, and it will not materially affect our operating results in
future periods.
We
provide medical, dental and life insurance postretirement plans covering certain
U.S. employees who meet specified age and service requirements. Pursuant to an
amendment, effective January 1, 2006, Medicare eligible retirees age 65 or older
are no longer covered under the self-funded plan. Instead, they are provided a
subsidy towards the purchase of supplemental insurance. The components of net
periodic benefit costs are as follows:
|
|
Three
Months Ended
December
31
|
|
Six
Months Ended
December
31
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service
cost for benefits earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost on benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
11: CONTINGENCIES
On
January 3, 2008, K.T. Equipment (International) Inc., (K.T.), filed a claim in
the United States District Court, Western District of Tennessee, against us, in
which K.T. alleged that we breached our obligation under the Stac-Pac®
acquisition agreement to pay K.T. a contingent promissory note in the principal
amount of $5,000 plus accrued interest of approximately $2,830 as of December
31, 2008. Payment of the contingent note was dependent on the
satisfaction of certain specified conditions relating to the rights obtained by
us with regard to the intellectual property assets. When these
conditions were not met pursuant to the terms of the Stac-Pac® acquisition
agreement, we canceled the contingent note in the year ended June 30, 2007, as
reported in our 10-K filed September 7, 2007. We believe we have
meritorious defenses to K.T.’s claim and intend to vigorously defend against the
claim.
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, and some members of the public
have also challenged the permit. Based on the requirements
anticipated in the proposed permit, we expect to incur capital expenditures of
approximately $9,500 dollars over the four year period that began in fiscal year
2009 on in-plant process changes, and additional capital expenditures of at
least $50,000 dollars over at least five years, possibly beginning as early as
fiscal year 2015. See Note 17 “Contingencies” to the financial
statements included in our Annual Report for the year ended June 30,
2008.
NOTE
12: 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 that do not guarantee the senior notes. Each subsidiary
guarantor is 100% owned directly or indirectly by us and all guarantees are full
and unconditional.
Our
supplemental financial information and our guarantor subsidiaries and
non-guarantor subsidiaries for the senior notes are presented in the following
tables.
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
Three
Months Ended December 31, 2008
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) and amortization of debt
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), including equity income (loss) in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
interest income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
Six
Months Ended December 31, 2008
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) and amortization of debt
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), including equity income (loss) in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
interest income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
Three
Months Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) and amortization of debt
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), including equity income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
interest income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
Six
Months Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses, and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
and impairment costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense) and amortization of debt
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), including equity income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
interest income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING BALANCE SHEETS
As of
December 31, 2008
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets, including investment in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’/invested
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING BALANCE SHEETS
As of
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets, including investment in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’/invested
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six
Months Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidated
|
|
Net cash provided by
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (payments) under lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments on long-term debt and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six
Months Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidated
|
|
Net
cash provided by operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings under line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments on long-term debt and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from sale of equity interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("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 accompanying unaudited
financial statements and our Annual Report on Form 10-K for the year ended June
30, 2008 ("Annual Report"), which include additional information about our
significant accounting policies, practices and transactions that underlie our
financial results. Our MD&A is composed of four major sections: Executive
Summary, Results of Operations, Financial Condition, and Critical Accounting
Policies.
Except as
otherwise specified, references to years indicate our fiscal year ending June
30, 2009 or ended June 30 of the year referenced and comparisons are to the
corresponding period of the prior year. The following discussion includes a
comparison of the results of operations for the three and six months ended
December 31, 2008 to the three and six months ended December 31,
2007.
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, food casings, cigarette filters, 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. The key focus areas for Buckeye over
the next twelve months include “living within our means,” generating free cash
flow and paying down debt. 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, evaluate external growth opportunities that match our
specialty market focus and continue to reduce debt.
The
October – December period was a challenging quarter for Buckeye as the global
economic recession began to impact demand for some of our
products. Sales for the three months ended December 31, 2008 of $185
million were down $26 million or 12.4% versus the same period in
2007. Reduced shipment volume had a negative $42 million impact
on sales compared to the year ago quarter while increased selling prices added
$18 million. While the demand for most of our specialty wood fibers
products has held up well, aside from some weakness in fluff pulp and the auto
filtration markets, demand for specialty cotton fibers has weakened
significantly. We took market downtime at our Foley facility,
primarily in fluff pulp, and at our Memphis and Americana plants in cotton pulp
during the quarter to match production to shipments and to control working
capital. We are committed to matching production with sales to ensure
we minimize our cash investment in inventories. Shipment volume for
our airlaid nonwovens products was down 21% versus the same quarter a year ago
partly due to the loss of a significant piece of business with a major customer
in January 2008, which has not been completely replaced, and partly due to
reduced demand in the quarter primarily caused by customer inventory
reductions. The key end-market segments into which we sell
airlaid nonwovens products are store brand baby wipes, feminine care products
and tabletop products. We believe that demand in all of these
segments is holding up well. Selling prices were up year over year
across both segments of the business in response to sharply higher costs,
particularly in the specialty fibers segment.
The
operating loss for the three months ended December 31, 2008 was $156.4 million
worse when compared to the same period in 2007. A goodwill impairment
loss of $138.0 million was the primary cause of the reduction. The
remaining reduction of $18.4 million was almost entirely due to the lower sales
volume and associated market-related downtime taken during the
quarter. Selling price increases were sufficient to offset
substantial increases in costs for raw materials, chemicals, energy and
transportation costs. During the quarter, we began to see a reversal
of some of these rising cost trends as raw material costs were flat and energy
and transportation costs declined compared to the July-September 2008
period. Chemical costs continued to move higher during the
October-December quarter, and this upward trend is expected to continue for the
January-March quarter. We expect to see our chemical costs,
particularly caustic, begin to decline in the April-June
quarter. While our variable costs are starting to decrease, they are
still significantly higher than they were in the October-December 2007
period.
The net
loss for the three months ended December 31, 2008 of ($125.0) million was
unfavorable by $138.9 million compared to the same period in
2007. The decrease in operating income versus the three months ended
December 31, 2007 was partially offset by $1.1 million reduction in interest
expense. The effective tax rate decreased from 35.4% for the three
months ended December 31, 2007 to 6.4% for the three months ended December 31,
2008. The main driver of the lower tax rate was that a large portion
of the goodwill impairment did not produce a tax benefit. In
addition, we recorded a correction to our deferred taxes partially offsetting a
favorable tax ruling which together had a net unfavorable impact of $0.3 million
during the three months ended December 31, 2008.
Cash from
operations for the six months ended December 31, 2008 was $28.5 million,
which was down $25.6 million compared to the six months ended December 31,
2007. This reduction was primarily driven by lower gross margin (down
$24.2 million), which was partially offset by a reduction of $2.8 million in
interest expense. In addition, there was a small increase in cash
taxes paid ($0.4 million), as we utilized all of our United States net operating
losses. Our inventory also increased by $9.4 million during the
period, which was $6.0 million more than the inventory increase during the prior
year period. The increase in inventory was in finished goods in the
specialty fibers segment and we plan to reduce both our finished goods and raw
materials inventories significantly over the remaining two quarters of the
fiscal year. Compared to the same six month period in 2007, both
accounts receivable and accounts payable decreased by a larger amount due to
lower production and sales volumes for a net decrease in cash usage of $4.7
million. Capital expenditures for the six months ended December 31,
2008 were $25.0 million compared to $18.7 million in the same period in 2007 due
to increased expenditures on the Foley Energy Project, which totaled $8.2
million for the period.
We are
focused on reducing cost, maintaining a tight control on working capital and
building sales. This makes our focus on Lean Enterprise Methods all
the more crucial as we continue the work to reduce cost by eliminating waste
throughout our operations.
In
addition to our focus on cost reduction, we have reduced our planned capital
spending for the fiscal year from $64 million to $40 million in order to
accelerate debt reduction efforts. We remain committed to the energy
cost reduction project at Foley and are teaming with local and State of Florida
public officials to help us obtain funding for the necessary capital
investments.
We have
established a goal of paying down our debt to $350 million by December 31,
2009. By doing so we believe that we will have sufficient borrowing
capacity on our $200 million revolving credit facility to pay off the $110
million in bonds that mature in October 2010 without going to the credit markets
for new financing.
Results
of Operations
Consolidated
results
The
following table compares components of operating income for the three and six
months ended December 31, 2008 and 2007.
(millions)
|
Three
Months Ended December 31
|
|
Six
Months Ended December 31
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
2008
|
2007
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses
|
|
|
|
|
|
|
|
|
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|
|
Amortization
of intangibles and other
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
for the three months ended December 31, 2008 were lower than the same period in
2007 due to lower shipment volume in both segments of our
business. Higher prices for all of our products partially offset the
lower volume. For the six months ended December 31, 2008, net sales
were slightly lower than the same period in the prior year. The
impact of lower shipment volume was mostly offset by higher prices across all of
our plants.
Gross
margin was lower for the three and six months ended December 31, 2008 versus the
same periods in 2007. For the three and six months ended December 31,
2008, the lower shipment volume and associated market-related production
downtime, resulted in lost margin on reduced shipments and higher costs due to
lower capacity utilization rates. For both the three and six month
periods, selling price increases were sufficient to offset substantial increases
in costs for raw materials, chemicals, energy and transportation costs compared
to the year-ago periods.
Selling,
research and administrative expenses decreased slightly for the three months
ended December 31, 2008 and increased slightly for the six months
ended December 31, 2008 versus the same periods in the prior year.
Based on
the current economic environment and the recent steep decline in the price of
our stock, which created a significant gap between the book and market value of
our equity, we concluded that there were sufficient indicators to require us to
perform an interim goodwill impairment analysis as of December 31,
2008. Although we have not completed this analysis, we have concluded
that an impairment loss is probable and can be reasonably
estimated. Accordingly, we recorded a $138.0 million non-cash
goodwill impairment charge during the three months ended December 31,
2008. Since this goodwill impairment charge is non-cash, it does not
affect our liquidity or financial covenants.
We expect to finalize our goodwill
impairment analysis during the third quarter of fiscal 2009. There
could be adjustments to the goodwill impairment charge when the goodwill
impairment test is completed.
Segment
results
Although
nonwoven materials, processes, customers, distribution methods and regulatory
environment are 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 consists of our
chemical cellulose, customized fibers and fluff pulp product lines which are
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
administrative 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, goodwill impairment, amortization of
intangibles, certain financing and investing costs and unallocated at-risk and
stock-based compensation. We have reclassified the at-risk compensation
and stock-based compensation from the specialty fibers and nonwovens segments
for the three and six months ended December 31, 2007 for
comparability.
Specialty
fibers
The
following table compares specialty fibers net sales and operating income
for the three and six months ended December 31, 2008 and 2007.
(millions)
|
|
Three
Months Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Six
Months Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
were down due to lower shipment volumes for the three months ended December 31,
2008 versus the same period in 2007 as the global economic downturn began to
impact demand for some of our products. Shipment volume for the
specialty fibers segment was down 17% compared to the same quarter a year ago,
with specialty wood fibers shipments off 14% and specialty cotton fibers
shipments off 28%. Demand for most of our specialty wood fibers
products has held up well, but we have seen some weakness in the fluff pulp and
auto filtration markets. The recession has had a more severe impact
on demand for our specialty cotton fibers products, particularly on the end
market for LCD TV screens. The impact of lower volume was partially offset
by higher prices. Prices were up about 20% on our cotton and wood
specialty products as a result of price increases implemented over the last
twelve months. Fluff pulp pricing increased by $32 per ton compared
to the same period a year ago.
For the
six months ended December 31, 2008, higher prices were more than sufficient to
offset the impact of lower shipment volume on sales. Specialty
products prices were up approximately 19% over the same six month period last
year and fluff pulp prices increased $47 per ton.
During the three months ended December
31, 2008, lower sales volumes and associated production downtime accounted for
most of the $15 million reduction in operating income compared to the three
months ended December 31, 2007. Price increases implemented over the
course of the past 12 months added $16 million to earnings for the quarter and
offset significant increases in input costs incurred during that same
period. Increased prices on cotton linters accounted for
approximately $5 million of the cost increase. In addition, chemical
and energy prices increased significantly along with higher transportation
costs, accounting for additional cost of approximately $9
million.
Operating
income for the six months ended December 31, 2008 decreased versus the six
months ended December 31, 2007. Higher sales prices were sufficient
to offset higher costs for raw material, chemicals, energy and transportation,
but earnings were down year over year primarily due to lower sales volumes and
associated production downtime.
Going
into our third fiscal quarter, energy and transportation costs should trend down
compared to the second quarter. We expect caustic prices to start coming
down in February from peak levels in January, but our third quarter costs for
caustic will still be higher than our costs in the second quarter and we won’t
see any sequential reduction in these costs until our fiscal fourth
quarter. With lower diesel prices and increasing amount of announced
pulp mill downtime, we also expect some relief in wood prices. The
cost of cotton fiber, both in Brazil and the United States, is also falling, but
we won’t see the benefit of that in the United States until the fourth quarter
after we work through current fiber inventories.
Nonwoven
materials
The
following tables compare nonwoven materials net sales and operating income for
the three and six months ended December 31, 2008 and 2007.
(millions)
|
|
Three
Months Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
Net
sales
|
|
$
|
56.8
|
|
$
|
72.0
|
|
$
|
(15.2
|
)
|
|
(21.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Six
Months Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
Net
sales
|
|
$
|
122.7
|
|
$
|
143.6
|
|
$
|
(20.9
|
)
|
|
(14.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonwoven
material sales decreased during the three and six months ended December 31, 2008
versus the same periods in 2007. Sales were down due to lower
shipment volume, mainly because of the loss of a significant piece of business
with a major customer in January 2008 which has not been completely replaced,
and also partly due to some customer inventory reductions during the three
months ended December 31, 2008. We expect an increase in sales for
this segment in the three months ended March 31, 2009 compared to the three
months ended December 31, 2008 after the seasonally weak December quarter in
Europe.
Operating
income decreased for the three and six months ended December 31, 2008 versus the
same periods in 2007, primarily due to the loss of business mentioned above and
the resulting drop in capacity utilization.
Corporate
The
following tables compare corporate net sales and operating loss for the three
and six months ended December 31, 2008 and 2007.
(millions)
|
|
Three
Months Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
Net
sales
|
|
$
|
(9.9
|
)
|
$
|
(9.3
|
)
|
$
|
(0.6
|
)
|
|
(6.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Six
Months Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
Net
sales
|
|
$
|
(19.5
|
)
|
$
|
(19.2
|
)
|
$
|
(0.3
|
)
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
operating loss for the three and six months ended December 31 consists
of:
|
Three
Months Ended December 31
|
|
Six
Months Ended December 31
|
|
(millions)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Unallocated
at-risk compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual
property amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin on intercompany sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense and amortization of debt costs
Net
interest expense and amortization of debt costs decreased $1.1 million and $2.8
million for the three and six months ending December 31, 2008, respectively,
versus the same period in the prior year. Net interest expense decreased
primarily due to debt reduction of $22 million at December 31, 2008 versus
December 31, 2007. The weighted average effective interest rate on
our variable rate debt, which totaled $80.7 million at December 31,
2008 decreased from 6.1% at December 31, 2007 to 4.6% at December 31,
2008.
Income
tax
On July
1, 2007, we adopted the provisions of FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty
in Income
Taxes.” FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. As a result of
the adoption, we recorded an adjustment of approximately $0.9 million to reduce
retained earnings at July 1, 2007. At adoption, our unrecognized tax
benefits totaled $1.8 million. Cumulative potential interest and
penalties accrued related to unrecognized tax benefits at the date of adoption
totaled $0.2 million. We include interest and penalties related to
income tax matters as a component of income before income taxes. All
unrecognized tax benefits at adoption would affect the effective tax rate, if
recognized. During the three months ended December 31, 2008, as a
result of the resolution of a North Carolina audit, we were able to reduce our
unrecognized tax benefits by $0.2 million and our related interest and penalties
by $0.1 million. These reductions leave a balance in unrecognized tax
benefits and our related interest and penalties of $1.6 million and $0.1
million, respectively.
We file
income tax returns with federal, state, local and foreign jurisdictions.
As of December 31, 2008, we remain subject to examinations of our United
States federal and state income tax returns for the years 2003
through 2007, Canadian income tax returns for the years 2001 through
2007 and German tax filings for the years 2002 through
2007.
Our
effective tax rates for the three and six month periods ended December 31, 2008
were 6.4% and 2.5%, respectively. Our effective tax rates for the
same periods of 2007 were 35.4% and 31.4%, respectively. We
recorded a $138.0 million goodwill impairment charge in the three months ended
December 31, 2008. Accordingly, we recognized a tax benefit of $10.4
million in connection with the goodwill impairment charge. In
addition, the rate change for the three month period ended December 31, 2008 was
the result of a correction to our deferred taxes and the resolution of the North
Carolina audit (mentioned above) which together had a net unfavorable impact of
$0.3 million during the three months ended December 31, 2008. The
increase, before the goodwill impairment charge, in the effective tax rate for
the six month period over the same period in 2007 was affected by the items
which impacted the three months ended December 31, 2008 comparison plus a German
tax rate law change which reduced our taxes by approximately $2.2 million during
the six months ended December 31, 2007.
Financial
Condition
Liquidity
and capital resources
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 December 31,
2008, and believe we will continue to remain in compliance for the foreseeable
future. Our senior notes limit the amount of funds we can use to make
dividend payments, repurchase stock or retire our 2010 notes prior to October
2009. The amount of funds available includes fifty percent of net
income or losses since October 2003. Since we recorded a $138.0
million non-cash goodwill impairment, our net losses over this period restrict
us from these activities.
On
December 31, 2008, we had $8.5 million of cash and cash equivalents and $114.0
million borrowing capacity on our revolving credit facility. As of
December 31, 2008, our liquidity, including available borrowings and cash and
cash equivalents, was approximately $122.5 million.
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
Flow
The
following table provides a summary of cash flows for the six month periods ended
December 31, 2008 and December 31, 2007.
|
|
Six
Months Ended
December
31
|
|
(millions)
|
|
2008
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
charges and credits, net
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
|
|
|
|
|
Other
investing activities
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings under lines of credit
|
|
|
|
|
|
|
|
Net
payments on long-term debt and other
|
|
|
|
|
|
|
|
Net
proceeds from sale of equity interests
|
|
|
|
|
|
|
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
Payments
for debt issuance costs
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
|
|
|
|
|
Cash
provided by operating activities
Cash provided by operating activities
for the six months ended December 31, 2008 was $25.6 million less than for the
same period in 2007. The majority of the decrease was due to lower
gross margin (down $24.2 million), which was partially offset by a reduction of
$2.8 million in interest expense. In addition, there was a small
increase in cash taxes paid ($0.4 million), as we utilized all of our United
States net operating losses. Our inventory also increased by $9.4
million during the period, which was $6.0 million more than the inventory
increase during the prior year period. The increase in inventory was
in finished goods in the specialty fibers segment and we plan to reduce both our
finished goods and raw materials inventories significantly over the remaining
two quarters of the fiscal year. Compared to the same six month
period in 2007, both accounts receivable and accounts payable decreased by a
larger amount due to lower production and sales volumes for a net decrease in
cash usage of $4.7 million.
Net
cash used in investing activities
Purchases
of property, plant and equipment increased to $25.0 million during the six
months ended December 31, 2008 versus $18.7 million during the same period in
2007 primarily due to spending at our Perry, Florida specialty fibers
facility. Spending on the Foley Energy Project accounted for $8.2
million of our capital spending for the six months ended December 31, 2008.
Due to the current economic conditions, we have reduced our planned
capital spending, for fiscal 2009, from $64 million to $40 million in order to
accelerate debt reduction efforts. We remain committed to the energy
cost reduction project at Foley and are teaming with local and State of Florida
public officials to help us obtain funding for the necessary capital
investments.
Net cash used in financing
activities
During
the six months ended December 31, 2007, we established a $200 million senior
secured revolving credit facility with a maturity date of July 25,
2012. Initially, we used the proceeds from this new credit facility
to pay the outstanding balance on the former credit facility plus fees and
expenses. We also used proceeds from this facility to redeem the
remaining $60 million of our 2008 notes and to redeem $20 million of the 2010
notes in mid-September 2007.
Treasury
stock
During
fiscal years 1997 to 2001 the Board of Directors authorized total repurchases of
6.0 million shares of common stock. At December 31, 2008, a total of
5.4 million shares have been repurchased under these authorizations. On
August 8, 2008 the Board of Directors authorized the repurchase of 5.0
million shares of common stock in addition to the 6.0 million shares of common
stock previously authorized. 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.
Contractual
obligations
There
have been no material changes to our contractual obligations since our
disclosure in our Annual Report on Form 10-K. The following table
summarizes our significant contractual cash obligations as of December 31, 2008.
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.
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
Total
|
|
Fiscal
2009 (1)
|
|
Fiscal
2010
and
2011
|
|
Fiscal
2012
and
2013
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations (2)
|
|
|
|
|
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Operating
lease obligations
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Other
purchase commitments (4)
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Total
contractual cash obligations
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(1)
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Cash obligations for the
remainder of fiscal 2009.
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(2)
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Amounts include related interest
payments. Interest payments for variable debt of $80.7 million are
based on the effective rate as of December 31, 2008 of 4.6% per
annum.
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(3)
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Linter commitments are
take-or-pay contracts made in the ordinary course of business that usually
are less than one year in
length.
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(4)
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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.
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Note:
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The cash flow to fund
post-retirement benefit obligations has not materially changed since June
30, 2008. 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 12, Employee Benefit
Plans, to the Consolidated Financial Statements in our Annual Report for
further information.
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Critical
Accounting Policies
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The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to adopt accounting
policies and make significant judgments and estimates to develop amounts
reflected and disclosed in the financial statements. Management bases
these estimates and assumptions on historical data and trends, current fact
patterns, expectations and other sources of information they believe are
reasonable. In many cases, there are alternative policies or estimation
techniques that could be used. We maintain a thorough process to review
the application of our accounting policies and to evaluate the appropriateness
of the many estimates that are required to prepare the financial statements.
However, even under optimal circumstances, estimates routinely require
adjustment based on changing circumstances and the receipt of new or better
information.
The four
critical accounting policies that we believe either require the most managerial
judgment, or involve the selection or application of alternative accounting
policies, and that are material to our financial statements are those relating
to allowance for doubtful accounts, deferred income taxes, depreciation and
long-lived assets. Further information regarding our “Critical Accounting
Policies” can be found in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report. 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 registered public accounting firm. In addition, Note 1 to the
financial statements in our Annual Report contains a summary of our significant
accounting policies.
Forward-Looking
Statements
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 and energy resources; competition; changes in fair values of
long-lived assets; inability to predict the scope of future environmental
compliance costs or liabilities; inability to predict the scope of future
restructuring 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. For additional factors that could impact future results,
please see our Annual Report.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
As of
December 31, 2008, there were a few areas where circumstances merit an update to
our annual report.
Foreign Currency Exchange
Rates: While we have global operations, the majority of our
transactions are denominated in U.S. dollars. The principal foreign
currency exchange rate risks to which we are exposed are the Canadian dollar,
Brazilian real and European euro. We currently have two minor hedges
in place which will not have a material effect on the company.
Availability and Cost of Raw
Materials: The amounts we pay for wood, cotton fiber and fluff
pulp represent the largest components of our variable costs of
production. Significant decreases in availability or increases in the
cost of wood or cotton fiber to the extent not reflected in the prices for our
products could materially affect our business results. During the
July to September 2008 quarter, our production was constrained at two of our
plants by the availability of cotton fibers. We have experienced
significant increases in the cost of cotton fibers, which we passed on to our
customers through increased selling prices. In the October to
December 2008 quarter, prices for cotton linters have moderated due to the
global economic recession and reduction in global demand for cotton
fibers. Currently, our production is not constrained by fiber
availability, but is instead constrained by reduced demand for our specialty
cotton fiber products. Long-term, cotton fiber availability and cost
remain risks for the business.
Industry
Cyclicality: The recent downturn in the global economy has
impacted demand in some of the markets we serve. The cyclicality of
the fluff pulp market was highlighted in our Annual Report, and the index price
for fluff pulp delivered to both North America and Europe has dropped by $80 per
ton, or nine percent, between October 2008 and January 2009. We have
seen some demand weakness in the three months ended December 31, 2008 in the
fluff pulp market, but we believe that supply and demand is still relatively in
balance in this market. Buckeye’s selling price for fluff pulp only
dropped by $9 per ton between the three months ended September 30, 2008 and the
three months ended December 31, 2008, but it is possible that over the next six
months we will see further price decreases. Demand for our high-end
specialty wood products has held up well aside from some weakness in the auto
filtration markets, but demand for our specialty cotton fibers has been impacted
by the recession, particularly in the LCD, ethers, plastics and nitrates
markets.
Item
4.
|
Controls
and Procedures
|
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation as of
December 31, 2008 of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures were effective.
No
changes in our internal control over financial reporting occurred during the
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Items
1A, 2, 3, and 5 are not applicable and have been omitted.
Item
1.
|
Legal
Proceedings
|
On
January 3, 2008, K.T. Equipment (International) (K.T.), Inc. filed a claim in
the United States District Court, Western District of Tennessee, against us, in
which K.T. alleged that we breached our obligation under the Stac-Pac®
acquisition agreement to pay K.T. a contingent promissory note in the principal
amount of $5 million plus accrued interest of approximately $2.8 million as of
December 31, 2008. Payment of the contingent note was dependent on
the satisfaction of certain specified conditions relating to the rights obtained
by us with regard to the intellectual property assets. When
these conditions were not met pursuant to the terms of the Stac-Pac® acquisition
agreement, we canceled the contingent note in the year ended June 30, 2007, as
reported in our 10-K filed September 7, 2007. We believe we have
meritorious defenses to K.T.’s claim and intend to vigorously defend against the
claim.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
On November 5, 2008, we held our Annual
Meeting of Stockholders. At the meeting George W. Bryan, R. Howard
Cannon, and Katherine Buckman Gibson were each re-elected as Class I directors
to hold office for a three-year term or until their successors are elected and
qualified. For Mr. Bryan, 36,188,973 votes were cast in favor and
274,812 votes were withheld. For Mr. Cannon, 32,253,034 votes were
cast in favor and 4,210,751 were withheld. For Ms. Gibson, 35,734,123
votes were cast in favor and 729,662 were withheld.
Following
the election, our Board of Directors consisted of George W. Bryan, R. Howard
Cannon, Katherine Buckman Gibson, Red Cavaney, John B. Crowe, David B. Ferraro,
Lewis E. Holland, Kristopher J. Matula, and Virginia B. Wetherell.
The
stockholders also ratified the appointment of Ernst & Young LLP, as our
independent auditors. 35,448,356 votes were cast in favor of the ratification,
1,010,614 were cast against and 4,815 votes abstained.
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
Section
1350 Certification of Chief Executive Officer
|
32.2
|
Section
1350 Certification of Chief Financial
Officer
|
SIGNATURES
Pursuant
to the requirements 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. Crorwe |
|
|
|
John
B. Crowe, Chairman of the Board and Chief Executive
Officer
|
|
|
|
Date:
February 9, 2009
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Steven G. Dean |
|
|
|
Steven
G. Dean, Senior Vice President and Chief Financial Officer
|
|
|
|
Date:
February 9, 2009
|
|
|
|