march3109-10q.htm
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 March 31, 2009
¨ 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
(state or
other jurisdiction of incorporation)
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
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
April 29, 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 Nine Months Ended
March 31, 2009 and 2008
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3
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Condensed
Consolidated Balance Sheets as of March 31, 2009 and June 30,
2008
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4
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Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended March 31,
2009 and 2008
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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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21
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3.
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Quantitative
and Qualitative Disclosures About Market Risk
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28
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4.
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Controls
and Procedures
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28
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PART
II - OTHER INFORMATION
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1.
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Legal
Proceedings
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29
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6.
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Exhibits
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29
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SIGNATURES
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30
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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
March
31
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Nine
Months Ended
March
31
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2009
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2008
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2009
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2008
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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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March
31
2009
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June
30
2008
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(Unaudited)
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Assets
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Current
assets:
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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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Nine
Months Ended
March
31
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2009
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2008
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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
(payments) 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
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)
NOTE
1: BASIS OF PRESENTATION
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 nine months
ended March 31, 2009 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: RECENT ACCOUNTING PRONOUNCEMENTS
In March
2008, the FASB issued statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (SFAS 161). SFAS 161 requires entities that use derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. SFAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 have been applied, and the
impact that hedges have on an entity’s financial position, financial
performance, and cash flows. We adopted the provisions of SFAS 161
effective January 1, 2009. See Note 9 for our disclosures about derivative
instruments and hedging activities.
In April
2009, the FASB issued Financial Staff Position SFAS 107-1 and Accounting
Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (SFAS 107-1 and APB 28-1). This
statement amends FASB Statement No. 107, “Disclosures about Fair
Values of Financial Instruments,” to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. The statement also amends APB Opinion No. 28,
“Interim Financial Reporting,” to require those disclosures in all interim
financial statements. This statement is effective for interim periods
ending after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009. We plan to adopt SFAS 107-1 and APB 28-1
and provide the additional disclosure requirements for the first interim period
in fiscal 2010.
NOTE
3: SEGMENT INFORMATION
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
March
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 intangibles
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Nine
Months Ended
March
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 intangibles
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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 column 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 nine months ended March 31, 2008 for
comparability. Corporate net sales represent the elimination of intersegment
sales included in the specialty fibers reporting segment. Intersegment
sales are recorded at current market prices.
NOTE
4: RESTRUCTURING COSTS
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 $59 will be paid in
fiscal year 2009. As a result of this restructuring, 22 positions
were eliminated.
NOTE
5: 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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March
31
2009
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June
30
2008
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Storeroom
and other supplies
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NOTE
6: 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 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. Goodwill is reviewed annually for
impairment in the fourth fiscal quarter. We estimate fair value based
on a combination of the income approach and the market approach. The
income approach 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 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. The market approach, estimates
the fair value of our reporting units on comparable market
prices. 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.
During
our quarter ended December 31, 2008, based on the economic environment at that
time 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 test as of December 31, 2008. As a result, during
the three months ended December 31, 2008, we recorded an impairment charge of
$138,008 which represented our best estimate of the resulting goodwill
impairment. We completed our interim goodwill impairment testing
during the three months ended March 31, 2009. We engaged an
independent valuation firm to assist with this impairment testing by expressing
opinions as of December 31, 2008 of the fair values of the business enterprises
of Buckeye’s four reporting units. The results of step one indicated
goodwill was impaired at three of our reporting units as the estimated fair
value was less than the carrying value of the reporting units. As
such, step two of the goodwill impairment test was performed to determine the
actual amount of goodwill impairment. In this step, we were required
to allocate the fair value of the reporting unit, as determined in step one, to
all of the reporting unit’s assets and liabilities in a hypothetical purchase
price allocation as if these reporting units had been acquired on the date of
the test. Upon completion of this step, our original estimate did not
change and therefore no change was required in the three months ended March 31,
2009 to the $138,008 non-cash goodwill impairment charge estimated and recorded
in the second quarter of fiscal 2009. We reviewed our long-lived
tangible and intangible assets within the impaired reporting units under SFAS
144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” We determined that the forecasted undiscounted cash flows
related to these assets or asset groups were in excess of their carrying values,
and therefore these assets were not impaired.
The
changes in the carrying amount of goodwill for the nine months ended March 31,
2009 are as follows:
|
|
Balance
as of
June
30, 2008
|
|
Change
due to fluctuation in foreign currency exchange rate
|
|
Impairment
|
|
Balance
as of March 31, 2009
|
|
Specialty
Wood Fibers Reporting Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
Cotton Fibers Reporting Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airlaid
Nonwovens Reporting Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
Converting
Reporting Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonwoven
Materials Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
7: DEBT
The
components of long-term debt consist of the following:
|
|
March
31
2009
|
|
June
30
2008
|
|
Senior
Notes due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Subordinated Notes due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
fiscal year 2008, 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 nine months ended March 31, 2008, 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. Our 2013 Notes limit the amount of funds we can
use to retire our 2010 Notes and we are currently restricted from this
activity.
During
fiscal year 2008, we redeemed a total of $35,000 of the 2010
notes. On December 1, 2008, we redeemed $5,000 of the 2010
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 nine months ended March 31, 2009, we recorded
non-cash gains of $401 related to the early extinguishment of this debt and
during the nine months ended March 31, 2008 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 our former credit facility. 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 March 31, 2009, we were
in compliance with the financial covenants under our credit
facility.
On March
31, 2009, we had $18,879 of cash and cash equivalents and we had $116,617
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 March 31, 2009,
$44,648 of the sublimit was unused.
The
annual commitment fee on the unused portion of the revolving credit facility
ranges from 0.25% to 0.40% 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
nine months ended March 31, 2008, $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 nine months ended
March 31, 2009, the swap increased our interest expense by $226 and $544,
respectively. During the three and nine months ended March 31, 2008,
the swap reduced our interest expense by $6 and $77, respectively. At
March 31, 2009, our liability on the interest rate swap agreement was
$547.
NOTE
8: FAIR VALUE MEASUREMENTS
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 on a recurring basis, 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. Also in accordance with the provisions of FAS 157-2,
we have not applied the provision of SFAS No. 157 to our financial assets and
liabilities recorded at fair value on a non-recurring basis, which consists
primarily of goodwill. For the financial instruments disclosed below,
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 March 31, 2009
|
|
|
|
|
Total
|
|
|
Quoted
prices in active markets for identical assets (Level 1)
|
|
|
Significant
other observable inputs (Level 2)
|
|
|
Significant
unobservable inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
9: FINANCIAL DERIVATIVE INSTRUMENTS
As part of our risk management program,
we use a variety of financial instruments such as foreign currency forwards and
options, interest rate swaps, and natural gas contracts as cash flow hedges to
mitigate risk. We do not hold or issue derivative financial
instruments for trading purposes.
Foreign
Currency Hedging
We
periodically use hedging to address the risk associated with non-functional
currency (primarily real and euro) financial statement
exposures. Fluctuations in exchange rates can change our foreign
currency equivalent revenue and hence our foreign currency
earnings. When conditions warrant, our foreign subsidiaries hedge a
portion of forecasted U.S. dollar denominated sales/receivables utilizing
foreign exchange forward and option contracts. These contracts are
designated as cash flow hedges and we account for these hedge instruments in
accordance with FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities, as amended” (SFAS 133), which
requires that every derivative instrument be recorded on the balance sheet as
either an asset or a liability measured at its fair value as of the reporting
date. The effective portion of the hedge gain or loss is reported as
a component of accumulated other comprehensive income (loss) and subsequently
reclassified into gain (loss) on exchange rates when the hedged exposure affects
earnings. Any ineffective portions of related gains or losses are recorded
in the statements of operations immediately. In the event the underlying
forecasted transaction does not occur, or it becomes probable that it will not
occur, we will reclassify the gain or loss on the related cash flow hedge from
accumulated other comprehensive income (loss) to gain (loss) on exchange rates
on our consolidated statement of income. As of March 31, 2009 and
June 30, 2008, we did not have any material foreign currency hedges in
place.
Interest
Rate Swap
In order
to manage our interest rate risk exposure, on September 17, 2007, we entered
into an interest rate swap agreement for $30,000 of debt under our $200,000
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.
Commodity
Hedging
We have entered into contracts for the
purchase of natural gas at a fixed rate to manage the price risk associated with
a portion of our forecasted purchases. The objective of these hedges
is to provide supply assurance for contracted volumes at a pre-determined price;
provide a systemic method of purchasing commodities which enables us the
opportunity to take advantage of forward price trends based on historical data;
provide a methodology to bring price stability that will contribute to improved
price forecasting and budgeting assumptions; and reduce the variability of cash
flows associated with the purchase of natural gas at certain
plants. These contracts are designated as cash flow hedges under SFAS
133. As of March 31, 2009 we had contracts in place to purchase
443,352 million BTUs of natural gas at various fixed prices through May
2010. At June 30, 2008 we had no commodity hedges in
place.
Fair
Value of Derivative Instruments
In the
next twelve months, we intend to reclassify into earnings $1,019, in
net losses incurred in respect of cash flow hedges.
All cash
flows associated with purchasing and selling derivatives are classified as
operating cash flows in the unaudited condensed consolidated statement of cash
flows. The following table presents the location of all assets and
liabilities associated with our hedging instruments within the unaudited
condensed consolidated balance sheet:
|
|
|
Asset
Derivatives
|
|
|
Liability
Derivatives
|
|
Derivatives
designated as hedging instruments under SFAS 133
|
Balance
Sheet Location
|
|
Fair
Value at 3/31/09
|
|
|
Fair
Value at
6/30/08
|
|
|
Fair
Value at
3/31/09
|
|
|
Fair
Value at 6/30/08
|
|
Natural
gas hedge
|
Accrued
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
Interest
rate swap
|
Accrued
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
547
|
|
|
|
-
|
|
Interest
rate swap
|
Other
non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
613
|
|
Total
derivatives designated as hedging instruments under SFAS
133
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,019
|
|
|
$
|
613
|
|
The
following tables present the impact of derivative instruments, net of tax, and
their location within the unaudited condensed consolidated statement of
operations:
Derivatives
in SFAS 133 Cash Flow Hedging Relationships
|
|
|
|
Amount
of (Gain) Loss Recognized in AOCI on Derivative (Effective
Portion)
|
|
|
Amount
of (Gain) Loss Reclassified from AOCI into Income (Effective
Portion)(a)
|
|
|
Amount
of (Gain) Loss Recognized in Income on Derivatives (ineffective portion)
(b)
|
|
|
|
Three
months ended March 31,
|
|
|
Three
months ended March 31,
|
|
|
Three
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Natural
gas hedge
|
|
$
|
(38
|
)
|
|
$
|
16
|
|
|
$
|
187
|
|
|
$
|
(38
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
rate swap
|
|
|
(366
|
)
|
|
|
628
|
|
|
|
219
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
(404
|
)
|
|
$
|
644
|
|
|
$
|
406
|
|
|
$
|
(53
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
(a)
Amounts related to natural gas contract and interest rate swap are
included in Gain (loss) on foreign exchange and other and Net interest
expense and amortization of debt costs, respectively.
|
|
(b) Amounts are included in gain
(loss) on foreign exchange and other.
NOTE
10: COMPREHENSIVE INCOME
The components of comprehensive income consist of the following:
|
|
Three
Months Ended
March
31
|
|
Nine
Months Ended
March
31
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments – net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on hedging activities - net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three and nine months ended March 31, 2009, 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 $(3,793) and $(15,261), the Brazilian real of $1,235
and $(22,879) and the Canadian dollar of $(1,206) and $(27,164),
respectively.
For the
three and nine months ended December 31, 2008, 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 $6,624 and $13,450, the
Brazilian real of $(533) and $4,108 and the Canadian dollar of $(6,766) and
$4,189, respectively.
A rollforward of the amounts included
in Accumulated Other Comprehensive Income, net of taxes is shown
below:
|
|
Hedging
Activities
|
|
Foreign
Currency Translation
|
|
Post-Employment
Healthcare
|
|
Accumulated
Other Comprehensive Income
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
into earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11: INCOME TAXES
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 nine months ended March 31, 2009, 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 March 31, 2009, we remain subject to examinations of our U.S. federal and
state income tax returns for the tax years ending June 30, 2002 through 2008,
Canadian income tax returns for the tax years ending June 30, 2002 through 2008
and German tax filings for the tax years ending June 30, 2004
through 2008.
Our
effective tax rates for the three and nine month periods ended March 31, 2009
were 24.8% and 1.4%, respectively. Our effective tax rates for the
same periods of 2008 were 29.4% and 30.8%, 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. The
decrease in the effective tax rate for the nine month period over the same
period in 2008 was affected by a German tax law change that reduced the
statutory tax rate and reduced our taxes by approximately $2,200 and the net tax
cost associated with the nondeductible goodwill impairment of approximately
$38,000. 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
March
31
|
|
Nine
Months Ended
March
31
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Expected
tax expense at 35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible
goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
12: 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 operations for the nine months ended March 31, 2009 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
March
31
|
|
Nine
Months Ended
March
31
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Service
cost for benefits earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost on benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
13: CONTINGENCIES
On
January 3, 2008, K.T. Equipment (International) Inc., (K.T.), filed a claim in
the U.S. 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 March 31,
2009. 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, 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. The additional studies necessary to
support revisions to the proposed permit have been completed, and we have
submitted the information necessary to complete the revisions. As a result, we
expect that FDEP will issue a revised proposed permit and pursue the requisite
public notice and review process sometime in the near future. Based
on the requirements anticipated in the proposed permit, we expect to incur
capital expenditures of approximately $9,500 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 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
14: SUBSEQUENT EVENT
We burn
alternative fuel mixtures at our Foley plant, a wood cellulose manufacturing
facility located near Perry, Florida in order to produce renewable energy and
help manage our exposure to high energy costs. The federal government
has implemented a program that provides incentive payments under certain
circumstances for the use of alternative fuels and alternative fuel mixtures in
lieu of fossil-based fuels. In early February 2009, we filed an
application with the Internal Revenue Service for certification of our
eligibility to receive incentive payments for our use of black liquor in
alternative fuel mixtures in the recovery boilers at the Foley
plant. On March 20, 2009 we received a registration number from the
Internal Revenue Service registering our wood cellulose manufacturing facility
as an alternative fueler. During April 2009, we received three payments
totaling $25,351 in alternative fuels tax credit refunds for operations at the
Foley mill between February 12, 2009 and April 14, 2009.
The
federal regulations relating to the alternative fuels mixture incentive program
are complex, and we are seeking further clarification prior to the recognition
in the statement of operations of any payment received for financial reporting
purposes. Based on our current understanding of the program, only our
Foley facility is eligible for participation in the incentive
program. Depending on the quantity of alternative fuel mixtures
burned, the federal incentive payments that we may receive could be
material. At the same time, there can be no assurance that the
federal incentive program for alternative fuel mixtures will continue in effect
through its current expiration date of December 31, 2009, that its provisions
will not be changed in a manner that impacts us, that our operations will remain
qualified to receive the incentive payments, or that our claims for
the incentive payments will continue to be approved and paid.
NOTE
15: 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 2013
Notes and that guarantee the 2013 Notes, jointly and severally, on a senior
unsecured basis. The non-guarantor subsidiaries presented below
represent the foreign subsidiaries that do not guarantee the 2013
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 2013 Notes are presented in the following
tables.
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
Three
Months Ended March 31, 2009
|
|
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
Nine
Months Ended March 31, 2009
|
|
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 March 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine
Months Ended March 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 BALANCE SHEETS
As of
March 31, 2009
|
|
Buckeye
Technologies Inc.
|
|
Guarantors
US
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
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
|
|
|
|
|
|
|
|
|
|
|
|
Current
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
|
|
|
|
|
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’/invested
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
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
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(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
Nine
Months Ended March 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 under line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
payments on long-term debt and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months
ended March 31, 2009 to the three and nine months ended March 31,
2008.
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 by focusing on cash flow
maximization to pay down debt, optimizing capacity utilization, developing an
approach to restarting the Foley Energy Project and identifying new bio-energy
initiatives that support profitable, sustainable growth, and accelerating the
rate of change to a Lean Enterprise culture.
The
January – March 2009 period continued to be a challenge for Buckeye as the
global economic recession continued to impact demand for many of our
products. Sales for the three months ended March 31, 2009 of $172
million were down $30 million or 15% versus the same period in 2008, with sales
in the Specialty Fibers segment down 18% and sales in the Nonwoven Materials
segment off 2%. Reduced shipment volume had a negative $33 million
impact on sales compared to the year ago quarter while increased selling prices
added $8 million with product mix and currency making up the
balance. Specialty Fibers sales were negatively impacted by reduced
demand for cotton specialty fibers, wood specialty fibers used in automotive
applications, and fluff pulp. We continued to take market downtime at
our Foley, Memphis and Americana plants during the quarter to match production
to shipment demand, and effective May 1, 2009, we intend to further reduce
staffing at our Memphis Plant to adjust our capacity to match reduced demand
levels for products supplied by this plant. Shipment volume for our
airlaid nonwovens products increased by 7% versus the same quarter a year ago,
as we regained in June 2008 a significant portion of the business we lost with a
major customer in January 2008. Selling prices were up 17% on average
year over year for our high-end specialty wood and cotton fibers products, but
our fluff pulp prices were down by about 6% on average.
Operating
income for the three months ended March 31, 2009 was $9.5 million less than in
the same period in 2008, with operating income for the Specialty Fibers segment
down by $11.3 million and operating income for the Nonwoven Materials segment up
by $1.7 million. This decline in operating income for the total
Company was almost entirely due to the lower sales volume and associated
market-related downtime taken during the quarter in our Specialty Fibers
segment. Overall selling price increases over the past 12 months have
more than offset increases in raw material and chemicals prices over that same
period, and we started to see reductions in raw materials, energy and
transportation costs during the quarter. We also believe that our
chemical costs peaked during the January-March quarter and we expect them to
start decreasing in the April-June quarter. The favorable impact of
the weaker Canadian Dollar and Brazilian Real on costs at our Canadian airlaid
plant and Brazilian specialty cotton fibers plant, along with a reduction in
selling, research and administrative expenses also had a positive impact on
earnings compared to the year ago quarter. We have implemented
formula-based pricing on our high-end specialty wood fibers products in our 2009
contracts, which will result in our passing through cost changes in chemicals
and energy costs to our customers in the form of selling price changes beginning
in the April-June quarter. This resulted in price reductions of about
5% effective April 1st on these products.
Fiscal
2009 year-to-date net sales of $578 million were $33 million or 5% lower than
fiscal 2008 year-to-date net sales. Sales in the first quarter were
up 12% while sales in the second and third quarter were down 12% and 15%,
respectively, as the global recession started to impact our
business. The operating loss for the nine months ended March 31, 2009
of $91 million was $172 million worse when compared to the same period in
2008. In the October-December quarter, based on the economic
environment at that time 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 recorded a $138 million non-cash goodwill impairment charge. This
goodwill impairment charge was the primary cause of the
reduction. The remaining reduction of $34 million was due to the
lower sales volume and associated market-related downtime. Selling
price increases have been sufficient to offset the increases in costs on a
year-to-date basis.
Cash from
operations for the three months ended March 31, 2009 was $21.3 million,
which was down $5.3 million compared to the three months ended March 31,
2008. This reduction was primarily driven by a reduction in net
income (down $6.1 million). We were successful in reducing our net
working capital by $2.1 million during the January – March quarter (driven by
lower inventories), versus a $0.8 million increase during the prior year
period. Purchases of property, plant and equipment in the quarter
were $9.0 million, which was $3.5 million lower than in the year ago
quarter, reflecting the reduction in our planned capital spending for this
fiscal year from $64 to $40 million. We have put a number of capital
projects on hold in order to accomplish this objective, including the Foley
Energy Project, which we intend to restart as soon as we are confident that we
will meet our debt reduction goal.
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 2010 Notes that mature in October 2010 without accessing the credit
markets for new financing. One factor that could help us achieve this
goal more quickly is the extent to which we continue to receive refunds from the
alternative fuels tax credit. While we did not receive any refunds
under this program during the three months ended March 31, 2009, we have
received $25.4 million in refunds during the month of April for the period
between February 12 and April 14, 2009. We are also exploring several other
alternative financing sources allowed under our credit agreements and bond
indentures, such as borrowing against our foreign assets and capital lease
financing, which could allow us to further expand our potential borrowing
capacity once the 2010 Notes are retired. To the extent we are able
to retire these bonds, which have a coupon rate of 8.0%, using free cash flow
and borrowings under our bank revolver, the annual interest savings at current
borrowing rates would be significant (in the $6 – 7 million per year
range). We could begin to realize a portion of those savings as early
as October-December 2009 when we will be free of payment restrictions per our
2013 Notes .
Results
of Operations
Consolidated
results
The
following table compares components of operating income for the three and nine
months ended March 31, 2009 and 2008.
(millions)
|
Three
Months Ended March 31
|
|
Nine
Months Ended March 31
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
Change
|
|
2009
|
2008
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
research and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangibles and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
for the three months ended March 31, 2009 were lower than the same period in
2008 due to lower shipment volume in specialty fibers, partially offset by
higher nonwovens volume. Higher prices for all of our products
partially offset the lower volume. For the nine months ended March
31, 2009, net sales were lower than the same nine months in the prior
year. The impact of lower shipment volume in both segments was
partially offset by higher selling prices across all of our plants.
Gross
margin was lower for the three and nine months ended March 31, 2009 versus the
same periods in 2008. For the three and nine months ended March 31,
2009, 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. Overall selling price increases have more
than offset increases in raw material and chemicals prices over that same
period. We started to see reductions in raw materials, energy and
transportation costs during the January – March quarter. For the
nine-month period, 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 $0.9 million for the three months
ended March 31, 2009 and decreased $0.7 million for the nine months ended
March 31, 2009 versus the same periods in the prior year. The primary
reasons for the decrease were lower at risk compensation and bonus
expenses.
Based on
the 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. During the three months ended March 31, 2009, we completed this
analysis. We concluded that there was no change to the impairment
loss of $138 million we recognized at December 31, 2008. Since this
goodwill impairment charge is non-cash, it does not affect our liquidity or
financial covenants.
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 nine months ended March 31, 2008 for
comparability.
Specialty
fibers
The
following table compares specialty fibers net sales and operating income
for the three and nine months ended March 31, 2009 and 2008.
(millions)
|
|
Three
Months Ended March 31
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Nine
Months Ended March 31
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
were down due to lower shipment volumes for the three months ended March 31,
2009 versus the same period in 2008 as the global economic downturn continued to
impact demand for many of our products. Shipment volume for the
specialty fibers segment was down 19% compared to the same quarter a year ago,
with specialty wood fibers shipments off 11% and specialty cotton fibers
shipments off 50%. Specialty wood fibers sales were most negatively
impacted by reduced demand for fluff pulp and specialty wood grades used in
automotive applications. The impact of lower volume was
partially offset by higher prices. Specialty fibers prices, excluding
fluff pulp, were up about 17% as a result of price increases implemented over
the last twelve months. Fluff pulp pricing decreased by $42 per ton
compared to the same period a year ago.
For the
nine months ended March 31, 2009, net sales were lower than the same period in
2008 due to higher prices not being sufficient to offset the impact of lower
shipment volume. Specialty fibers shipments volume was down 11%
compared to the same nine months a year ago. Specialty wood fibers
shipments were off 8% and specialty cotton fibers shipments were off
23%. Specialty fibers prices, excluding fluff pulp, were up
approximately 19% over the same nine month period last year and fluff pulp
prices increased $18 per ton.
During
the three months ended March 31, 2009, lower sales volumes and associated
production downtime accounted for most of the reduction in operating income
compared to the three months ended March 31, 2008. Overall price
increases, excluding fluff pulp, added $9 million to earnings for the quarter
and offset increases in chemical and raw material prices. Direct cost
spending was also lower.
Operating
income for the nine months ended March 31, 2009 decreased versus the nine months
ended March 31, 2008. 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.
During
the third fiscal quarter, energy, transportation and raw material costs trended
down compared to the second quarter. Caustic prices have declined from
peak levels in January 2009, but our third quarter costs for caustic were higher
than our costs in the second quarter. Due to lower diesel prices and
an increasing amount of announced pulp mill downtime, we saw our wood prices
decrease. The cost of cotton fiber, both in Brazil and the United
States, is also falling, but we do not expect to see any significant benefit in
the United States until next fiscal year after we work through current higher
cost fiber inventories.
Nonwoven
materials
The
following tables compare nonwoven materials net sales and operating income for
the three and nine months ended March 31, 2009 and 2008.
(millions)
|
|
Three
Months Ended March 31
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Nine
Months Ended March 31
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonwoven
materials sales decreased during the three months ended March 31, 2009 versus
the same period in 2008. Sales volume was higher during the period
but was more than offset by unfavorable product mix and foreign currency
exchange rates. Sales for the nine months ended March 31, 2009 were
down versus the same period in 2008 due to lower shipment volume, mainly because
of the loss of a significant piece of business with a major customer in January
2008, which volume has not been completely replaced.
Operating
income increased for the three months ended March 31, 2009 versus the three
months ended March 31, 2008, primarily due to higher production, lower
transportation costs and the favorable impact of the weaker Canadian dollar on
costs at our Canadian airlaid plant.
Operating
income decreased for the nine months ended March 31, 2009 versus the same
periods in 2008, 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 nine months ended March 31, 2009 and 2008.
(millions)
|
|
Three
Months Ended March 31
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
%
Change
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(millions)
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Nine
Months Ended March 31
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2009
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2008
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Change
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%
Change
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The
operating loss for the three and nine months ended March 31 consists
of:
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Three
Months Ended March 31
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Nine
Months Ended March 31
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(millions)
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2009
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2008
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2009
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2008
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Unallocated
at-risk compensation
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Unallocated
stock based compensation
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Intellectual
property amortization
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Gross
margin on intercompany sales
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Net
interest expense and amortization of debt costs
Net
interest expense and amortization of debt costs decreased $0.6 million and $3.4
million for the three and nine months ending March 31, 2009, respectively,
versus the same period in the prior year. Net interest expense decreased
due to debt reduction of $7.0 million at March 31, 2009 versus March 31, 2008
and lower average interest rates. The weighted average effective
interest rate on our variable rate debt, which totaled $78.0 million at March
31, 2009 decreased from 5.2% at March 31, 2008 to 3.8% at March 31,
2009.
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 treatment 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 of FIN 48, 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 nine months ended March 31, 2009, 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 March 31, 2009, we remain subject to examinations of our United States
federal and state income tax returns for the tax years ending June 30, 2002
through 2008, Canadian income tax returns for the tax years ending June 30, 2002
through 2008 and German tax filings for the tax years ending June
30, 2004 through 2008.
Our
effective tax rates for the three and nine month periods ended March 31, 2009
were 24.8% and 1.4%, respectively. Our effective tax rates for the
same periods of 2008 were 29.4% and 30.8%, 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. The
decrease in the effective tax rate for the nine month period over the same
period in 2008 was affected by a German tax law change that reduced the
statutory tax rate and reduced our taxes by approximately $2.2 million and the
net tax cost associated with the nondeductible goodwill impairment by
approximately $38.0 million.
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 March 31,
2009, and believe we will continue to remain in compliance for the foreseeable
future. Our 2013 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 for these purposes includes 50%
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 March
31, 2009, we had $18.9 million of cash and cash equivalents and $116.6 million
in borrowing capacity on our revolving credit facility. As of March 31,
2009, our liquidity, including available borrowings and cash and cash
equivalents, was $135.5 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.
Cash
Flow
The
following table provides a summary of cash flows for the nine month periods
ended March 31, 2009 and March 31, 2008.
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Nine
Months Ended
March
31
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(millions)
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2009
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2008
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Operating
activities:
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Noncash
charges and credits, net
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Changes
in operating assets and liabilities, net
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Net
cash provided by operating activities
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Purchases
of property, plant and equipment
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Other
investing activities
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Net
cash used in investing activities
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Net
borrowings (payments) under lines of credit
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Net
payments on long-term debt and other
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Net
proceeds from sale of equity interests
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Purchase
of treasury shares
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Payments
for debt issuance costs
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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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Net
increase in cash and cash equivalents
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Cash
provided by operating activities
Cash
provided by operating activities for the nine months ended March 31, 2009 was
$30.9 million less than for the same period in 2008. The majority of
the decrease was due to lower gross margin (down $34.5 million), which was
partially offset by a reduction of $3.4 million in interest
expense. Our net working capital increased by $11.0 million during
the period versus a $12.6 million increase during the prior year
period.
Net
cash used in investing activities
Purchases
of property, plant and equipment for the three months ended March 31, 2009
decreased to $9.0 million compared to $12.5 million in the same quarter a year
ago, reflecting a reduction in our capital spending plans for the
year. Due to the current economic conditions, we announced in January
2009 that we had reduced our planned capital spending for fiscal 2009, from $64
million to $40 million in order to accelerate our debt reduction
efforts. Purchases of property, plant and equipment increased to
$34.0 million during the nine months ended March 31, 2009 versus $31.2 million
during the same period in 2008 primarily due to spending at our Perry, Florida
specialty fibers facility. Spending on the Foley Energy Project
accounted for $9.4 million of our capital spending for the nine months ended
March 31, 2009. Through March 31, 2009, we have spent $16.4 million
of this three-year, $45 million project, which involves the installation of a
new steam turbine generator and upgrade of two recovery boilers, and is expected
to save the equivalent of 200,000 barrels of oil per year in fossil fuel, and
improve the energy self-sufficiency of our Foley mill from about 85% to about
95%. 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
In July
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 our
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 our Board of Directors authorized total repurchases of
6.0 million shares of common stock. At March 31, 2009, 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, if any, will be held as
treasury stock and will be available for general corporate purposes, including
the funding of employee benefit and stock-related plans. Our 2013
Notes limit the funds available to repurchase stock and currently we are
restricted from this activity.
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 March 31, 2009.
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)
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Payments
Due by Period
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Contractual
Obligations
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Total
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Fiscal
2009 (1)
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Fiscal
2010
and
2011
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Fiscal
2012
and
2013
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Thereafter
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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 $78.0 million are based on the effective annual rate as of March
31, 2009 of 3.8%.
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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 amounts necessary to fund post-retirement benefit obligations have
not changed materially 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 regarding 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" section of 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 the net benefit
realized from the alternative energy tax credit; 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.
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Quantitative
and Qualitative Disclosures About Market
Risk
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As of
March 31, 2009, 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 one minor
currency hedge agreement in place which should not have a material effect on
us.
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 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 many 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 $130
per ton, or 14%, between October 2008 and March 2009. We have seen
some demand weakness 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 $70 per ton between the three
months ended September 30, 2008 and the three months ended March 31,
2009. We expect 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 automotive markets, but demand for
our specialty cotton fibers in most markets has been adversely impacted by the
recession. On the other hand, reductions in demand for raw materials
chemicals, energy and transportation during an economic downturn such as the one
we are currently experiencing puts downward pressure on these cost
elements. During the three months ended March 31, 2009, Buckeye
experienced a total decline in costs for these items of $5.1 million compared to
the immediately preceding quarter.
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, 4 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 U.S. 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 March 31,
2009. 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.
31.1
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Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
31.2
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Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
Section
1350 Certification of Chief Executive Officer
|
32.2
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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.
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By:
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/s/ John B. Crowe |
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John
B. Crowe, Chairman of the Board and Chief Executive
Officer
|
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Date: April
29, 2009
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By:
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/s/ Steven G. Dean |
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Steven
G. Dean, Senior Vice President and Chief Financial Officer
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Date: April
29, 2009
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