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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
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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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No ____
As of October 21, 2005, there were outstanding 37,587,664 Common Shares of the
Registrant.
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INDEX
BUCKEYE TECHNOLOGIES INC.
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ITEM PAGE
PART I - FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 2005 and 2004........................................................... 3
Condensed Consolidated Balance Sheets as of September 30, 2005 and June 30, 2005............ 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended 5
September 30, 2005 and 2004...........................................................
Notes to Condensed Consolidated Financial Statements........................................ 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20
3. Quantitative and Qualitative Disclosures About Market Risk.................................. 31
4. Controls and Procedures..................................................................... 31
PART II - OTHER INFORMATION
6. Exhibits.................................................................................... 32
SIGNATURES 33
2
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30
---------------------------------------
2005 2004
---------------------------------------
Net sales.............................................................. $165,456 $167,323
Cost of goods sold..................................................... 141,263 137,694
---------------------------------------
Gross margin........................................................... 24,193 29,629
Selling, research and administrative expenses.......................... 11,406 9,726
Restructuring costs.................................................... 1,951 1,196
Amortization of intangibles and other.................................. 531 603
---------------------------------------
Operating income....................................................... 10,305 18,104
Net interest expense and amortization of debt costs.................... (10,184) (11,278)
Loss on early extinguishment of debt................................... (151) -
Foreign exchange and other............................................. (368) (33)
---------------------------------------
Income (loss) before income taxes...................................... (398) 6,793
Income tax expense (benefit)........................................... (109) 2,378
---------------------------------------
Net income (loss)...................................................... $ (289) $ 4,415
=======================================
Earnings (loss) per share
Basic...................................................... $(0.01) $ 0.12
Diluted.................................................... $(0.01) $ 0.12
Weighted average shares for basic earnings per share................... 37,588 37,312
=======================================
Adjusted weighted average shares for diluted earnings per share........ 37,588 37,458
See accompanying notes.
3
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 June 30
2005 2005
--------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................... $11,810 $ 9,926
Accounts receivable, net............................ 106,432 118,215
Inventories......................................... 123,632 107,895
Deferred income taxes and other..................... 11,683 10,468
--------------------------------
Total current assets.................. 253,557 246,504
Property, plant and equipment............................. 956,626 902,970
Less accumulated depreciation............................. (417,296) (377,039)
--------------------------------
539,330 525,931
Goodwill.................................................. 143,065 139,430
Intellectual property and other, net...................... 36,694 37,872
--------------------------------
Total assets........................................ $972,646 $949,737
================================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable.............................. $ 35,715 $ 37,226
Accrued expenses.................................... 58,978 48,401
Current portion of capital lease obligation...... 699 685
Current portion of long-term debt................... 998 1,376
--------------------------------
Total current liabilities............... 96,390 87,688
Long-term debt............................................ 543,299 535,539
Accrued postretirement benefits........................... 19,393 19,206
Deferred income taxes..................................... 32,882 34,660
Capital lease obligation.................................. 1,202 1,382
Other liabilities......................................... 1,978 1,673
Stockholders' equity...................................... 277,502 269,589
--------------------------------
Total liabilities and stockholders' equity.......... $972,646 $949,737
================================
See accompanying notes.
4
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
September 30
--------------------------------
2005 2004
--------------------------------
Operating activities
Net income (loss)................................................. $ (289) $ 4,415
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation............................................... 11,589 11,393
Amortization .............................................. 831 922
Loss on early extinguishment of debt....................... 151 -
Deferred income taxes and other............................ (1,639) 1,813
Changes in operating assets and liabilities:
Accounts receivable.................................... 12,199 2,059
Inventories............................................ (15,257) (6,093)
Other assets........................................... (1,094) 837
Accounts payable and other current liabilities......... 8,288 5,651
--------------------------------
Net cash provided by operating activities......................... 14,779 20,997
Investing activities
Purchases of property, plant and equipment.................... (20,280) (4,970)
Other......................................................... (178) 84
--------------------------------
Net cash used in investing activities............................. (20,458) (4,886)
Financing activities
Net borrowings under lines of credit.......................... 23,100 -
Payments on long-term debt and other.......................... (15,794) (20,230)
Net proceeds from sale of equity interests and other.......... - 244
--------------------------------
Net cash provided by (used in) financing activities............... 7,306 (19,986)
Effect of foreign currency rate fluctuations on cash.............. 257 476
--------------------------------
Increase (decrease) in cash and cash equivalents.................. 1,884 (3,399)
Cash and cash equivalents at beginning of period.................. 9,926 27,235
--------------------------------
Cash and cash equivalents at end of period........................ $11,810 $23,836
================================
See accompanying notes.
5
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 three months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2006. 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, 2005. Except as otherwise specified, references
to years indicate our fiscal year ending June 30, 2006 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
September 30, 2005. 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
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") 123 (revised 2004),
Share-Based Payments ("SFAS 123(R)"), which is a revision of SFAS 123,
Accounting for Stock Based Compensation ("SFAS 123"). SFAS 123(R) supersedes APB
25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of
Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach
described in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. This revised standard was effective
for our reporting period ending September 30, 2005. SFAS 123(R) allowed several
adoption alternatives, including retroactively applying the standard, or
applying it prospectively. We have adopted this standard using the modified
prospective basis. See Note 9 of these interim financial statements for further
information.
6
In November 2004, the FASB issued SFAS No. 151, Inventory Costs--an
Amendment of ARB No. 43, Chapter 4 ("SFAS 151"), which is the result of the
FASB's efforts to converge U.S. accounting standards for inventory with
International Accounting Standards. SFAS 151 requires abnormal amounts of idle
facility expense, freight, handling costs, and wasted material to be recognized
as current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 was effective for our reporting period ending on
September 30, 2005. The adoption of SFAS 151 did not have a material impact on
our results of operations.
NOTE 3: SEGMENT INFORMATION
We report results for two segments, specialty fibers and nonwoven
materials. The specialty fiber segment is an aggregation of cellulosic fibers
based on both wood and cotton. Management makes financial decisions and
allocates resources based on the sales and operating income of each segment. We
allocate selling, research, and administration expenses to each segment, and
management uses the resulting operating income to measure the performance of the
segments. The financial information attributed to these segments is included in
the following table:
Three Months Ended Specialty Nonwoven
September 30 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2005 $114,561 $57,326 $(6,431) $165,456
2004 118,046 55,922 (6,645) 167,323
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2005 10,163 2,560 (2,418) 10,305
2004 16,898 3,568 (2,362) 18,104
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2005 7,274 4,038 845 12,157
Intangibles 2004 6,961 4,223 866 12,050
------------------------------------------------------------------------------------------------------------
Capital expenditures 2005 19,330 599 351 20,280
2004 3,914 976 80 4,970
Management evaluates operating performance of the specialty fibers and
nonwoven materials segments excluding amortization of intangibles, the impact of
impairment of long-lived assets and charges related to restructuring. Therefore,
the corporate segment includes operating elements such as segment eliminations,
amortization of intangibles, impairment of long-lived assets and charges related
to restructuring. Corporate net sales represent the elimination of intersegment
sales included in the specialty fibers reporting segment. We account for
intersegment sales as if the sales were made to third parties, that is, at
current market prices.
NOTE 4: RESTRUCTURING COSTS
During fiscal year 2003 we initiated the first phase of a restructuring
program designed to deliver cost reductions through reduced expenses across our
company. During fiscal year 2004, we entered into a second phase of that
restructuring program. This program was a continuation of the program initiated
in fiscal year 2003 and enabled us to improve our operating results through
reduced salaries, benefits, other employee-related expenses and operating
expenses. As a result of this restructuring, 78 positions were eliminated. These
positions included manufacturing, sales, product development and administrative
functions throughout the organization. We do not expect any further expenses
related to this program.
7
During January 2005, we announced that we will discontinue production
of cotton-based specialty fibers at our Glueckstadt, Germany facility during the
second quarter of fiscal 2006. The closure of the Glueckstadt facility will
result in the termination of 103 employees, and we expect restructuring expenses
related to the closure to be approximately $6,000. We expect payments related to
this restructuring program to extend through the end of fiscal 2006.
Restructuring expenses are included in "Restructuring costs" in our
condensed consolidated statements of operations. The additional charges below
reflect severance and employee benefits accrued over the retention period, and
other miscellaneous expenses which are expensed as incurred. Accrual balances
are included in "Accrued expenses" in the balance sheet. The following table
summarizes the expenses and accrual balances by reporting segments for the three
months ended September 30, 2005.
Three Months Ended
September 30, 2005
---------------------------------------------------------------
Accrual Accrual
Balance Impact Balance as
as of Of of Program Total
June 30, Additional Foreign September Charges Estimated
2005 Charges Currency Payments 30, 2005 to Date Charges
--------------------------------------------------------------- ------------------------
2003 Restructuring Program-Phase 2
Severance and employee benefits
Specialty fibers................. $ 13 $ 10 $ (1) $ (22) $ - $1,894 $1,894
Nonwoven materials............... - - - - - 39 39
Corporate........................ - - - - - 1,514 1,514
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 2 13 10 (1) (22) - 3,447 3,447
2005 Restructuring Program
Specialty fibers
Severance and employee
benefits....................... 2,311 1,796 5 - 4,112 4,268 5,150
Other miscellaneous expenses..... 147 145 (1) (147) 144 624 850
---------------------------------------------------------------- ------------------------
Total 2005 Program.................. 2,458 1,941 4 (147) 4,256 4,892 6,000
---------------------------------------------------------------- ------------------------
Total All Programs.................. $2,471 $1,951 $ 3 $ (169) $4,256 $8,339 $9,447
================================================================ ========================
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:
September 30 June 30
2005 2005
-----------------------------
Raw materials.......................... $34,284 $33,433
Finished goods......................... 67,958 53,353
Storeroom and other supplies........... 21,390 21,109
-----------------------------
$123,632 $107,895
=============================
8
NOTE 6: DEBT
The components of long-term debt consist of the following:
September 30 June 30
2005 2005
-----------------------------
Senior Notes due:
2013.................................. $200,000 $200,000
Senior Subordinated Notes due:
2008.................................. 64,868 79,832
2010.................................. 152,432 152,558
Credit facility............................ 121,997 99,525
Other...................................... 5,000 5,000
-----------------------------
544,297 536,915
Less current portion....................... 998 1,376
-----------------------------
$543,299 $535,539
=============================
Senior Notes - During September 2003, we placed privately $200,000 in
aggregate principal amount of 8.5% Senior Notes due October 1, 2013. The 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.
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 are 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.
During fiscal year 2005, we redeemed $20,000 of the 2008 Notes. Also
during the three months ended September 30, 2005, we called and redeemed an
additional $15,000 of the 2008 Notes. As a result of this redemption we wrote
off a portion of the deferred financing costs and unamortized discount related
to the redeemed bonds. During the three months ended September 30, 2005, we
recorded non-cash expenses of $151 related to the early extinguishment of debt.
During June 1998, we completed a private placement of $150,000
principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010.
In fiscal year 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, 2003, at redemption prices varying from 104%
of principal amount to 100% of principal amount on or after October 15, 2006,
together with accrued and unpaid interest to the date of redemption.
Under the indentures governing our senior subordinated notes, as well
as the indenture that governs our senior notes, our ability to incur additional
debt is limited. Under these indentures, additional debt must be incurred as
so-called "ratio debt" or, alternatively, must be permitted in form and amount
as "Permitted Indebtedness." In order to incur ratio debt, a specified
consolidated fixed charge coverage ratio (as defined in the indentures) must
equal or exceed 2:1 (measured on a rolling four-quarter basis). Falling below
the 2:1 ratio does not breach any covenant or constitute an event of default
under any of our debt agreements. Currently, we exceed the required 2:1 ratio
and as a result, are not limited to the "ratio debt" restrictions under the
indentures governing the senior notes and the senior subordinated notes to the
extent that any future incurrence of debt would not cause us to exceed the 2:1
threshold.
9
Revolving credit facility - On November 5, 2003, we established a
$220,000 senior secured credit facility (the "credit facility"), comprised of a
$70,000 revolving credit facility (the "revolver") maturing on September 15,
2008 and a $150,000 term loan (the "term loan") with serial maturities of $249
quarterly through March 31, 2010 with final maturity remaining on April 15,
2010.
The term loan also requires an annual excess cash flow payment (as
defined under the credit agreement). During the three months ending September
30, 2005, we made an excess cash flow payment of $378 based on fiscal 2005
operating and cash flow performance.
We had $121,997 outstanding on this facility ($98,497 on the term loan
and $23,500 on the revolver) at an average variable interest rate of 5.9% as of
September 30, 2005. The interest rate applicable to borrowings under the
revolver is the agent's prime rate plus 1.50% to 1.75%, or a LIBOR-based rate
ranging from LIBOR plus 2.50% to LIBOR plus 3.25%. The interest rate applicable
to the term loan is the agent's prime rate plus 1.00% or a LIBOR-based rate plus
2.00%. The credit facility is secured by substantially all of our assets located
in the United States.
The credit facility contains covenants customary for financing of this
type. The financial covenants include: maximum ratio of consolidated net senior
secured debt to consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"), minimum ratio of consolidated EBITDA to consolidated
interest expense and minimum ratio of consolidated EBITDA minus capital
expenditures and taxes to consolidated fixed charges; as well as limitations on
capital expenditures, share repurchases and dividend payments. During the three
months ended September 30, 2005, we were in compliance with these financial
covenants.
As of September 30, 2005, we had $42,480 of borrowing capacity on our
revolving credit facility. The portion of this capacity that we could borrow on
a particular date will depend on our financial results and ability to comply
with certain borrowing conditions under the revolving credit facility.
Other long-term debt - On March 1, 2000, we purchased certain
technology from Stac-Pac Technologies Inc. In connection with the purchase, we
entered into an unsecured promissory note with Stac-Pac Technologies Inc. The
principal amount of the note is $5,000 and bears interest at a rate of 7%. In
accordance with the purchase agreement, we are entitled to withhold or retain
the final installment of the purchase price until and unless there is final
resolution of patent rights and to cancel the final installment of the purchase
price if the patent rights in certain jurisdictions are not resolved according
to the terms of the purchase agreement. As of September 30, 2005, resolution of
these patent rights was not completed. Therefore, the principal amount of the
note remains unpaid and has been classified as long-term debt. As of September
30, 2005, we have accrued interest on the note of $1,604.
NOTE 7: COMPREHENSIVE INCOME
The components of comprehensive income consist of the following:
Three Months Ended
September 30
---------------------
2005 2004
---------------------
Net income (loss)................................. $(289) $4,415
Foreign currency translation adjustments - net.... 8,175 11,192
---------------------
Comprehensive income.............................. $7,886 $15,607
=====================
For the three months ended September 30, 2005, the change in the
foreign currency translation adjustment is primarily due to fluctuations in the
exchange rate of the U.S. dollar against the euro of $(552), the Brazilian real
of $1,271 and the Canadian dollar of $7,456.
10
For the three months ended September 30, 2004, 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 $2,164, the Brazilian real
of $1,856 and the Canadian dollar of $7,172.
NOTE 8: INCOME TAXES
Our effective tax rate for the three month period ended September 30,
2005 was 27%. Our effective tax rate for the same period of 2004 was 35%. Our
tax rate is impacted by several factors including operations in jurisdictions
with varying tax rates and the extraterritorial income tax exclusion. Due to the
absolute value of our earnings (loss) before taxes for the three months ended
September 30, 2005, these factors had a more significant impact on our effective
tax rate. Our income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate of 35% to income (loss) before
income taxes due to the following:
Three Months Ended
September 30
----------------------------
2005 2004
----------------------------
Expected tax expense (benefit) at 35%...... $(139) $2,378
Effect of foreign operations............... 307 597
Extraterritorial income benefit............ (152) (219)
Other...................................... (125) (378)
----------------------------
$(109) $2,378
============================
NOTE 9: STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS 123(R). SFAS 123(R) eliminates
the alternative to use the intrinsic value method of accounting that was
provided in SFAS 123, which generally resulted in no compensation expense
recorded in the financial statements related to the issuance of equity awards to
employees. SFAS 123(R) requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. SFAS 123(R)
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for generally all share-based
payment transactions with employees.
On July 1, 2005 (the first day of our 2006 fiscal year), we adopted
SFAS 123(R). The provisions of SFAS 123(R) became effective the first annual
reporting period beginning after June 15, 2005. We adopted SFAS 123(R) using a
modified prospective application, as permitted under SFAS 123(R). Accordingly,
prior period amounts have not been restated. Under this application, we are
required to record compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption.
On June 7, 2005, prior to the adoption of SFAS 123(R), the Compensation
Committee of our Board of Directors approved the acceleration of vesting of
out-of-the-money options with an exercise price greater than $8.32 to purchase
shares of our common stock that remained unvested at June 30, 2005. These
options were previously awarded to non-employee directors, executive officers,
and other employees under our Amended and Restated 1995 Incentive and
Nonqualified Stock Option Plan for Management Employees and our Amended and
Restated Formula Plan for Non-Employee Directors. Options to purchase 898,150
shares of common stock were subject to this acceleration. The closing price of
our common stock on June 7, 2005 was $8.32.
11
The following table summarizes the options subject to acceleration:
Aggregate Number Weighted
Shares Issuable Average Exercise
Under Accelerated Price
Options Per Share
------------------------------------------
Non-employee directors................. 70,000 $10.54
Executive officers as a group.......... 422,550 $11.03
Other employees........................ 405,600 $11.05
------------------------------------------
898,150 $11.00
The acceleration of vesting of these out-of-the money options was
undertaken primarily to eliminate any future compensation expense we would
otherwise recognize in our income statement with respect to these options upon
the implementation of SFAS 123(R). We estimate the compensation expense, before
tax, would have totaled approximately $4,900 (approximately $2,100 in 2006,
$1,400 in 2007, $800 in 2008 and $600 in 2009) based on fair value calculations
using the Black-Scholes methodology.
The following table details the effect on net income and earnings per
share had compensation expense for the Employee Stock-Based Awards been recorded
in the three months ended September 30, 2004 based on the fair value method
under SFAS 123. The reported and pro forma net income and earnings per share for
the three months ended September 30, 2005 are the same since stock-based
compensation expense is calculated under the provisions of SFAS 123(R). The
amounts for the three months ended September 30, 2005 are included in the table
below only to provide the detail for a comparative presentation to the period of
the previous year.
Three Months Ended
September 30
------------------------------
2005 2004
------------------------------
Net income (loss) as reported.......................................... $(289) $4,415
Add: Total stock-based compensation expense included in reported
net income, net of related tax effects........................... 22 18
Deduct: Total stock-based compensation expense determined under fair value
based method, net of related tax effects.......................... (22) (543)
------------------------------
Pro forma net income (loss)............................................ $(289) $3,890
==============================
Earnings (loss) per share:
Basic as reported................................................. $(0.01) $0.12
Basic pro forma................................................... $(0.01) $0.10
Diluted as reported............................................... $(0.01) $0.12
Diluted pro forma................................................. $(0.01) $0.10
Prior to the adoption of SFAS 123(R), we applied APB 25 to account for
our stock-based awards. Beginning with our 2006 fiscal year, with the adoption
of SFAS 123(R), we recorded stock-based compensation expense for the cost of
stock options. Stock-based compensation expense for the three months ended
September 30, 2005 was $34 ($22 after tax).
Stock Compensation Plans
Our stock option plans provide for the granting of either incentive or
nonqualified stock options to employees and non-employee directors. Options are
subject to terms and conditions determined by the Compensation Committee of our
Board of Directors, and generally are exercisable in increments of 20% per year
beginning one year from date of grant and expire ten years from date of grant.
12
We use the Black-Scholes option-pricing model to calculate the fair
value of options for our disclosures. The key assumptions for this valuation
method include the expected life of the option, stock price volatility,
risk-free interest rate, dividend yield, exercise price and forfeiture rate.
Many of these assumptions are judgmental and highly sensitive in the
determination of compensation expense. The table below indicates the key
assumptions used in the option valuation calculations for options granted in the
three months ended September 30, 2005 and a discussion of our methodology for
developing each of the assumptions used in the valuation model:
Expected lives................................................ 5.5 years
Expected volatility........................................... 56.5%
Risk-free interest rate....................................... 4.0%
Forfeiture rate............................................... Zero
Expected Lives - This is the period of time over which the options
granted are expected to remain outstanding. Options granted have a maximum term
of ten years. An increase in the expected life will increase compensation
expense.
Expected Volatility - This is a measure of the amount by which a price
has fluctuated or is expected to fluctuate. We use actual changes in the market
value of our stock to calculate the volatility assumption. We calculate daily
market value changes from the date of grant over a past period representative of
the expected life of the options to determine volatility. An increase in the
expected volatility will increase compensation expense.
Risk-Free Interest Rate - This is the U.S. Treasury rate for the week
of the grant having a term equal to the expected life of the option. An increase
in the risk-free interest rate will increase compensation expense.
Dividend Yield - We did not make any dividend payments during the last
five fiscal years and we have no plans to pay dividends in the foreseeable
future. An increase in the dividend yield will decrease compensation expense.
Forfeiture Rate - This is the estimated percentage of options granted
that are expected to be forfeited or canceled before becoming fully vested. An
increase in the forfeiture rate will decrease compensation expense. Due to the
limited number of options that were not vested at September 30, 2005, we assumed
a forfeiture rate of zero.
The following table summarizes information about our stock option plans for
the three months ended September 30, 2005.
Number of Weighted Average
Options Exercise Price
--------------------------------------
Options outstanding, beginning of year........................ 4,765,150 $13.57
Granted....................................................... 10,000 8.48
Exercised..................................................... - -
Forfeited..................................................... (116,000) 21.05
---------------------------------------
Options outstanding, end of quarter........................... 4,659,150 13.38
Options exercisable, end of quarter........................... 4,600,350 13.45
Using the Black-Scholes valuation method calculated under the
assumptions indicated above, the weighted-average fair value of the grant at
market was $4.63.
13
NOTE 10: EMPLOYEE BENEFIT PLANS
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 will not continue coverage under the self-funded plan. Instead
they will be provided a subsidy towards the purchase of supplemental insurance.
This amendment reduces the accumulated postretirement benefit obligation by
$4,089. The benefit will be amortized over 7.75 years. The components of net
periodic benefit costs are as follows:
Three Months Ended
September 30
-----------------------------
2005 2004
-----------------------------
Service cost for benefits earned...................... $157 $176
Interest cost on benefit obligation................... 314 358
Amortization of unrecognized prior service cost...... (264) (281)
(Gain)/loss........................................... 150 97
-----------------------------
Total cost............................................ $357 $350
=============================
The Medicare Modernization Act will provide prescription drug benefits
to Medicare eligible participants effective January 1, 2006. Since our plan only
provides a subsidy toward supplemental Medicare insurance coverage, the Medicare
Modernization Act does not impact our plan.
NOTE 11: COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share was as
follows:
Three Months Ended
September 30
------------------------------
2005 2004
------------------------------
Net income (loss)............................................. $(289) $4,415
==============================
Weighted-average shares of common stock outstanding........... 37,588 37,312
Effect of diluted shares...................................... - 146
------------------------------
Weighted-average common and common equivalent shares
outstanding.............................................. 37,588 37,458
==============================
Earnings (loss) per share
Basic................................................ $(0.01) $0.12
Diluted.............................................. $(0.01) $0.12
14
NOTE 12: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The guarantor subsidiaries presented below represent our subsidiaries
that are subject to the terms and conditions outlined in the indenture governing
the senior notes and that guarantee the notes, jointly and severally, on a
senior unsecured basis. The non-guarantor subsidiaries presented below represent
the foreign subsidiaries which do not guarantee the senior notes. Each
subsidiary guarantor is 100% owned directly or indirectly by us and all
guarantees are full and unconditional.
Our supplemental financial information and our guarantor subsidiaries
and non-guarantor subsidiaries for the senior notes is presented in the
following tables.
15
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-----------------------------------------------------------------------
Net sales............................................ $22,459 $99,996 $50,035 $(7,034) $165,456
Cost of goods sold................................... 19,211 85,010 44,190 (7,148) 141,263
-----------------------------------------------------------------------
Gross margin......................................... 3,248 14,986 5,845 114 24,193
Selling, research and administrative expenses, and
other............................................ 2,957 7,038 1,942 - 11,937
Restructuring costs.................................. - - 1,951 - 1,951
-----------------------------------------------------------------------
Operating income..................................... 291 7,948 1,952 114 10,305
Other income (expense):
Interest income/(expense) and amortization of debt
costs......................................... (10,917) 67 666 - (10,184)
Other income/(expense), including equity
income in affiliates.......................... 3,107 42 (427) (3,241) (519)
Intercompany interest income/(expense)........... 7,126 (5,283) (1,843) - -
-----------------------------------------------------------------------
Income/(loss) before income taxes.................... (393) 2,774 348 (3,127) (398)
Income tax expense/(benefit)......................... (104) 931 159 (1,095) (109)
-----------------------------------------------------------------------
Net income (loss).................................... $ (289) $1,843 $ 189 $(2,032) $ (289)
=======================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-----------------------------------------------------------------------
Net sales............................................ $ 23,282 $99,989 $51,311 $(7,259) $167,323
Cost of goods sold................................... 18,611 80,670 45,510 (7,097) 137,694
-----------------------------------------------------------------------
Gross margin......................................... 4,671 19,319 5,801 (162) 29,629
Selling, research and administrative expenses, and
other............................................ 3,095 5,336 1,898 - 10,329
Restructuring costs.................................. 1 120 1,075 - 1,196
-----------------------------------------------------------------------
Operating income (loss).............................. 1,575 13,863 2,828 (162) 18,104
Other income (expense):
Interest income/(expense) and amortization of debt
costs......................................... (11,331) (39) 92 - (11,278)
Other income/(expense), including equity
income in affiliates.......................... 8,916 154 (119) (8,984) (33)
Intercompany interest income/(expense)........... 7,848 (6,148) (1,701) 1 -
-----------------------------------------------------------------------
Income/(loss) before income taxes.................... 7,008 7,830 1,100 (9,145) 6,793
Income tax expense/(benefit)......................... 2,593 2,659 509 (3,383) 2,378
-----------------------------------------------------------------------
Net income (loss).................................... $4,415 $ 5,171 $ 591 $(5,762) $ 4,415
=======================================================================
16
CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $ 425 $ 80 $11,305 $ - $ 11,810
Accounts receivable, net of allowance..... 14,104 62,248 30,080 - 106,432
Inventories............................... 30,245 68,067 25,984 (664) 123,632
Other current assets...................... 4,167 4,031 3,485 - 11,683
Intercompany accounts receivable.......... - 24,423 - (24,423) -
-------------------------------------------------------------------------------
Total current assets........................ 48,941 158,849 70,854 (25,087) 253,557
Property, plant and equipment, net.......... 56,394 341,980 140,956 - 539,330
Goodwill and intangibles, net............... 20,950 53,147 95,812 - 169,909
Intercompany notes receivable............... 340,796 - - (340,796) -
Other assets, including investment in
subsidiaries............................. 317,751 344,233 113,430 (765,564) 9,850
-------------------------------------------------------------------------------
Total assets................................ $784,832 $898,209 $421,052 $(1,131,447) $972,646
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 7,424 $19,412 $ 8,879 $ - $ 35,715
Other current liabilities................. 25,164 20,116 15,394 1 60,675
Intercompany accounts payable............. 22,209 - 2,214 (24,423) -
-------------------------------------------------------------------------------
Total current liabilities................... 54,797 39,528 26,487 (24,422) 96,390
Long-term debt.............................. 543,299 - - - 543,299
Deferred income taxes....................... (44,262) 62,582 14,562 - 32,882
Other long-term liabilities................. 7,184 13,965 1,424 - 22,573
Intercompany notes payable.................. - 208,801 131,995 (340,796) -
Stockholders'/invested equity............... 223,814 573,333 246,584 (766,229) 277,502
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity.. $784,832 $898,209 $421,052 $(1,131,447) $972,646
===============================================================================
17
CONDENSED CONSOLIDATING BALANCE SHEETS
BALANCE SHEETS
As of June 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $ 860 $ 151 $ 8,915 $ - $ 9,926
Accounts receivable, net.................. 16,147 70,636 31,432 - 118,215
Inventories............................... 21,745 57,932 28,997 (779) 107,895
Other current assets...................... 4,521 3,995 1,952 - 10,468
Intercompany accounts receivable.......... - 22,741 - (22,741) -
-------------------------------------------------------------------------------
Total current assets 43,273 155,455 71,296 (23,520) 246,504
Property, plant and equipment, net.......... 55,720 342,455 127,756 - 525,931
Goodwill and intangibles, net............... 20,962 53,827 92,217 - 167,006
Intercompany notes receivable............... 333,295 - - (333,295) -
Other assets, including investment in
subsidiaries............................. 301,239 323,095 113,840 (727,878) 10,296
-------------------------------------------------------------------------------
Total assets $754,489 $874,832 $405,109 $(1,084,693) $949,737
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 7,213 $ 20,841 $ 9,172 $ - $ 37,226
Other current liabilities................. 20,450 18,094 11,918 - 50,462
Intercompany accounts payable............. 20,179 - 2,562 (22,741) -
-------------------------------------------------------------------------------
Total current liabilities 47,842 38,935 23,652 (22,741) 87,688
Long-term debt.............................. 535,539 - - - 535,539
Deferred income taxes....................... (43,918) 62,764 15,814 - 34,660
Other long-term liabilities................. 6,822 14,081 1,358 - 22,261
Intercompany notes payable.................. - 212,620 120,675 (333,295) -
Stockholders'/invested equity............... 208,204 546,432 243,610 (728,657) 269,589
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $754,489 $874,832 $405,109 $(1,084,693) $949,737
===============================================================================
18
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by operations...................... $1,558 $10,958 $ 2,263 $14,779
Investing activities:
Purchases of property, plant and equipment........... (1,965) (6,866) (11,449) (20,280)
Other................................................ - (178) - (178)
---------------------------------------------------------------
Net cash used in investing activities................ (1,965) (7,044) (11,449) (20,458)
Financing activities
Net borrowings under revolving
line of credit 23,100 - - 23,100
Net borrowings (payments on) long-term
debt and other................................... (23,128) (3,985) 11,319 (15,794)
---------------------------------------------------------------
Net cash provided by (used in) financing
activities....................................... (28) (3,985) 11,319 7,306
Effect of foreign currency rate fluctuations
on cash......................................... - - 257 257
---------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents..................................... (435) (71) 2,390 1,884
Cash and cash equivalents at beginning
of period....................................... 860 151 8,915 9,926
---------------------------------------------------------------
Cash and cash equivalents at end of period........... $425 $ 80 $ 11,305 $11,810
===============================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2004
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by operations...................... $ 12,775 $ 7,778 $ 444 $ 20,997
Investing activities:
Purchases of property, plant and equipment........... (411) (3,558) (1,001) (4,970)
Other................................................ - (139) 223 84
---------------------------------------------------------------
Net cash used in investing activities................ (411) (3,697) (778) (4,886)
Financing activities
Net borrowings (payments on) long-term
debt and other................................... (14,756) (4,040) (1,190) (19,986)
---------------------------------------------------------------
Net cash used in financing activities................ (14,756) (4,040) (1,190) (19,986)
Effect of foreign currency rate fluctuations
on cash......................................... - - 476 476
---------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents..................................... (2,392) 41 (1,048) (3,399)
Cash and cash equivalents at beginning
of period....................................... 14,746 103 12,386 27,235
---------------------------------------------------------------
Cash and cash equivalents at end of period........... $ 12,354 $ 144 $11,338 $ 23,836
===============================================================
19
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, 2005 ("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, 2006 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
months ended September 30, 2005 to the three months ended September 30, 2004.
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, rayon
filaments, acetate plastics, thickeners and papers. Our products are produced in
the United States, Canada, Germany and Brazil, and we sell these products in
approximately 60 countries worldwide. We generate revenues, operating income and
cash flows from two reporting segments: specialty fibers and nonwoven materials.
Specialty fibers are derived from wood and cotton cellulose materials using
wetlaid technologies. Our nonwoven materials are derived from wood pulps,
synthetic fibers and other materials using an airlaid process.
Our strategy is to continue to strengthen our position as a leading
supplier of cellulose-based specialty products. We believe that we can continue
to expand market share, improve profitability and decrease our exposure to
cyclical downturns by pursuing the following strategic objectives: focus on
technically demanding niche markets, develop and commercialize innovative
proprietary products, strengthen long-term alliances with customers, provide our
products at an attractive value, and significantly reduce our debt.
The three months ended September 30, 2005 was a challenging period for
us. While none of our operations suffered serious physical damage from Hurricane
Katrina, the disruptions caused by the storm and the impact of already high
energy, chemical and transportation costs caused our earnings to fall
significantly below those earned during the same period in 2004. We incurred a
net loss of $0.3 million during the three months ended September 30, 2005 versus
net income of $4.4 million during the same period of 2004.
Hurricane Katrina followed by Hurricane Rita drove already high energy
and chemical costs even higher and forced transportation providers to increase
their pricing. Our energy, chemical, and transportation costs increased by about
$8 million during the three months ended September 30, 2005 versus the same
period of the prior year and now account for approximately 26% of our overall
operating costs. This major change in pricing for these items had a significant
adverse impact on our earnings. In addition, the demand for domestic
transportation, especially in the Southeastern United States, is very tight as
trucks and railcars are being diverted to supply the hurricane-ravaged Gulf
Coast with needed supplies for cleanup and rebuilding. Although to date this has
not had a significant impact on our sales, the limited supply of transportation
vehicles has put additional pressure on our operations.
As a result of the extraordinary and unprecedented high costs, we announced
the implementation of product price surcharges of up to 5% on our products. This
surcharge was effective over most of our products starting October 1, 2005 and
will be reevaluated on a quarterly basis.
20
While demand for our high-end specialty products remains good, the
timing of shipments led to a decline in fluff pulp sales during the three months
ended September 30, 2005 versus the same period in 2004.
The positive events in our markets and our ability to strengthen our
balance sheet are being dampened by higher costs for energy, chemicals and other
materials. High costs in these areas are impacting our operating margins. Since
demand for our specialty fibers is sufficiently strong, we are implementing
price increases as our sales contracts renew. A majority of our annual sales
agreements is renewed on a calendar year basis; therefore, we expect to
implement significant price increases beginning January 1, 2006.
In spite of the higher costs, we are encouraged by progress on several
fronts:
o We are continuing to establish our sales and distribution network for
UltraFiber 500TM, a revolutionary concrete reinforcing fiber.
UltraFiber 500TM is a niche product for the building industry and a
great example of the new product initiatives we are undertaking to
reduce our dependency on fluff pulp. Each sale of UltraFiber 500(TM)
advances us toward our goal of reducing our dependency on fluff pulp.
o Our plan to transition the specialty fibers production currently
supplied by Glueckstadt, Germany to our lower-cost manufacturing
facilities in Memphis, Tennessee and Americana, Brazil is proceeding as
planned. We added a shift at our Memphis, Tennessee facility and
believe we are well-positioned to supply cotton-based specialty fiber
products from these facilities with a significantly more favorable cost
structure in North and South America once the transition is complete.
o During the quarter we were able to take advantage of the availability
on our lower rate revolving credit facility to retire an additional $15
million of the relatively high cost 9.25% 2008 Notes from the market.
We intend to continue to call the remaining $65 million of the 2008
Notes in advance of their maturity on September 15, 2008.
The combination of new product initiatives, strong demand in important
markets, and an improved manufacturing configuration gives us optimism that we
can generate future growth in sales and profitability. Like other manufacturing
firms, we are currently being negatively impacted by high costs for energy,
chemicals, transportation and other materials. These issues will slow progress
in the short-term, but our longer-term outlook continues to be favorable.
Results of Operations
Consolidated results
The following table compares components of operating income for the
three months ended September 30, 2005 and 2004.
-----------------------------------------------------------------------------------------------------------
(millions) Three Months Ended September 30
-------------------------------
2005 2004 Change % Change
--------------------------------------------------
Net sales............................................ $165.5 $167.3 $(1.8) (1)%
Cost of goods sold................................... 141.3 137.7 3.6 3%
--------------------------------------------------
Gross margin......................................... 24.2 29.6 (5.4) (18)%
Selling, research and administrative expenses....... 11.4 9.7 1.7 18%
Restructuring costs.................................. 2.0 1.2 0.8 67%
Amortization of intangibles and other............... 0.5 0.6 (0.1) (17)%
--------------------------------------------------
Operating income (loss).............................. $10.3 $18.1 (7.8) (43)%
==================================================
21
Net sales declined during the three months ended September 30, 2005
versus the same period in 2004 due to a 20% decline in fluff pulp sales.
Although fluff pulp sales declined, we expect overall sales of fluff pulp for
the first six months of fiscal year 2006 to be similar to the first six months
of fiscal year 2005. An improvement in nonwoven materials sales and the overall
strength of our high-end specialty fibers markets largely offset the decline in
fluff pulp sales.
As mentioned in the executive summary, high costs related to increases
in the pricing of energy and chemicals continued to have a negative impact on
our margins over the past fiscal year. During the three months ended September
30, 2005, energy and chemical costs were higher by approximately 34% and 45%,
respectively, versus the same period in 2004. In addition, due to increases in
energy costs, we saw transportation related expenses increase by approximately
19% over the same period.
Increases in selling, research and administrative expenses also had a
negative impact on our operating margins. The impact of accounting and
consulting fees related to the implementation of Sarbanes-Oxley continued to
have a negative impact as a significant portion of the audit and consulting
costs related to the implementation were incurred subsequent to the fiscal year
end. Expenses related to the establishment of an UltraFiber 500TM sales force
and distribution network as well as the expensing of previously capitalized
patent costs also contributed to the increased costs.
As part of the announced closure of the Glueckstadt, Germany specialty
fibers facility, we continued to incur restructuring related expenses. We
incurred $2.0 million of expenses during the three months ended September 30,
2005 and expect to incur an additional $1.1 million related to this
restructuring during the remainder of fiscal year 2006. As of September 30,
2005, we have incurred $4.9 million of restructuring costs as part of this
planned closure.
Further discussion of revenue, operating trends and restructuring costs
are discussed later in this MD&A. Additional information on the restructuring
programs and charges may also be found in Note 4 of the accompanying interim
financial statements.
Segment results
Although nonwoven materials, processes, customers, distribution methods
and regulatory environment are very similar to specialty fibers, we believe it
is appropriate for nonwoven materials to be disclosed as a separate reporting
segment from specialty fibers. The specialty fibers segment is an aggregation of
cellulosic fibers based on both wood and cotton. We make separate financial
decisions and allocate resources based on the sales and operating income of each
segment. We allocate selling, research, and administrative expenses to each
segment, and we use the resulting operating income to measure the performance of
the segments. We exclude items that are not included in measuring business
performance, such as amortization of intangibles, restructuring costs, asset
impairment and certain financing and investing costs.
Specialty fibers
The following table compares specialty fibers net sales and operating
income for the three months ended September 30, 2005 and 2004.
(millions) Three Months September 30
-------------------------
2005 2004 Change % Change
----------------------------------------------------------
Net sales................................... $114.6 $118.0 $(3.4) (2.9)%
Operating income............................ 10.2 16.9 (6.7) (39.6)%
22
In spite of good demand for our high-end specialty fibers products, net
sales decreased during the three months ended September 30, 2005 versus 2004 due
to a 20% decline in sales for fluff pulp. Although shipments for the remaining
specialty fibers products were relatively flat, improvements in selling prices
in almost all specialty fibers product areas offset some of the decline in fluff
pulp sales.
Improvements in price were driven by several factors.
o Higher costs for energy, chemicals and transportation combined
with strong demand in our high-end markets allowed us to raise
prices during the year. However, due to the rapid and
continued increase in costs we were not able to maintain our
margins at the same level as those realized during the three
months ended September 30, 2004.
o While our overall sales of fluff pulp declined 20%, our
average fluff pulp price increased by 5.9% year over year for
the three month period ending September 30, 2005. We can offer
no assurance that this increase in fluff pulp pricing will
continue or that this trend will not reverse direction during
the remainder of fiscal year 2006.
o Tight supply conditions due to industry facility closures
continued to help increase overall specialty fibers demand and
allowed us to improve our mix of products during the three
month period ended September 30, 2005 versus the same period
in 2004.
As previously mentioned, rising energy and chemical prices continued to
push manufacturing costs higher for the three months ended September 30, 2005.
Our manufacturing costs for specialty fibers, chemicals, energy and
transportation increased by approximately $7 million as compared to the three
months ended September 30, 2004. While we will be able to recover a portion of
these costs through reductions in usage, increased pricing for our products and
the implementation of a product price surcharge that went into effect on October
1, 2005, we expect that these abnormally high energy and chemical prices will
continue to put pressure on our margins during the upcoming quarters.
In addition to recovering margins through increased pricing, we are
also working on ways to reduce manufacturing costs. Where possible, we are
transitioning our energy supply from natural gas to fuel oil. Although natural
gas is a very efficient energy source, the current market prices make it more
economical to purchase lower cost fuel oil. We continue to look for alternatives
to reduce costs and recover margins.
Overall our specialty fibers inventories increased during the three
months ended September 30, 2005. However, our inventories for high-end specialty
wood products remain at very low levels. We are still faced with the challenge
of matching sales and production for those products. Due to a decline in fluff
pulp sales volume, our inventories for fluff pulp increased during the three
months ended September 30, 2005. We expect fluff pulp sales to exceed production
during the second quarter of fiscal year 2006 and, therefore, we expect fluff
pulp inventories to decline in the next quarter. A portion of the increase in
our high-end specialty cotton inventories was in preparation for the final
transition of production from Glueckstadt, Germany to our Memphis, Tennessee and
Americana, Brazil facilities. We expect to cease production at our Glueckstadt,
Germany facility in December of this calendar year.
We continue to move forward with developing our capability to supply a
wide range of products based on cotton cellulose to customers worldwide by
upgrading the capability of our Americana, Brazil manufacturing facility.
Because Brazil benefits from low manufacturing costs and a large and increasing
raw material supply, we anticipate that, when this upgrade is completed and we
reach full capacity, this facility will be a significant contributor to our
profitability. We expect to complete the upgrade and begin qualifying customers
by the end of this calendar year. We are now incurring pre-production expenses
without offsetting revenue increases in advance of the startup of the upgraded
facility and we expect we will continue to incur startup and transition costs
during the upcoming quarters.
23
Nonwoven materials
The following table compares nonwoven materials net sales and operating
income for the three months ended September 30, 2005 and 2004.
(millions) Three Months Ended September 30
-------------------------------
2005 2004 Change % Change
-----------------------------------------------------------
Net sales................................... $57.3 $55.9 $1.4 2.5%
Operating income............................ 2.6 3.6 (1.0) (27.8)%
Improvements in the mix and selling prices for our nonwoven materials
resulted in an increase in net sales during the three months ended September 30,
2005 versus the same period in 2004. Sales price increases were implemented
during the year in an effort to offset rising prices for raw materials and other
manufacturing costs. Increased demand for tabletop products in our European
markets contributed to an improved mix. These improvements were partially offset
by the emergence from bankruptcy protection of a competitor in North America
during fiscal year 2005. Under new management, they aggressively sought new
business in the over-supplied North American market. Although we benefited from
this competitor's difficulties during the three months ended September 30, 2004,
their competitive actions adversely impacted our volumes during the three months
ended September 30, 2005.
In spite of the improvement in sales, operating income declined during
the three months ended September 30, 2005 versus the same period in 2004.
Declining operating margins were caused by the continued escalation of prices
for raw materials and other manufacturing costs. Impacts from Hurricane Katrina
exacerbated the problem and drove energy-related costs even higher.
Additionally, the continued strengthening of the Canadian dollar created further
pressure on operating costs at our nonwoven materials facility in Delta, British
Columbia.
We have implemented an optimization plan to reduce the cost of our
North American operations. We reduced staffing and operating shifts at our
Canadian facility. These changes will allow us to improve the overall cost
efficiency of our North American operations and allow us the capability to scale
back up to full production once additional sustained business returns.
Restructuring and impairment activities
During fiscal years 2005, 2004 and 2003, we entered into various
restructuring programs, which resulted in restructuring and impairment charges.
In order to continue to provide both specialty fibers and nonwoven materials at
attractive values, we will continue to look for ways to reduce costs and
optimize our operating structure. The following table summarizes restructuring
expense by program for the three month period ended September 30, 2005 and 2004.
-------------------------------------------------------------------------------------------------------------
Total Estimate to
Three Months Ended Program Complete at
September 30 Charges September 30,
(millions) 2005 2004 To Date 2005
-------------------------------------------------------------------------------------------------------------
Restructuring costs
2005 Restructuring program............... $2.0 $ - $ 4.9 $1.1
2004 Restructuring program............... - 0.9 3.0 -
2003 Restructuring program - phase 2..... - 0.2 3.4 -
2003 Restructuring program - phase 1..... - 0.1 2.7 -
--------------------------------------------------------
Total restructuring costs $2.0 $1.2 $14.0 $1.1
========================================================
24
2005 Restructuring program
In January 2005, we announced our decision to discontinue producing
cotton linter pulp at our Glueckstadt, Germany facility. Our decision was due to
a combination of factors that had increased the plant's costs to a level at
which it was uneconomical to continue operations. The most significant factor
impacting cost at the site was the substantial strengthening of the euro over
calendar year 2003 and 2004. Specialty fibers are normally priced and sold in
U.S. dollars around the world. As a majority of Glueckstadt's costs is
denominated in euros, this substantial strengthening had a negative impact on
Glueckstadt's cost position and margin. Additionally, Glueckstadt's process
water, waste treatment and energy costs are more than twice the cost of these
utilities at our Memphis, Tennessee cotton-based specialty fibers facility.
Faced with these difficulties, we reduced the number of employees at the
facility from approximately 150 to approximately 100 and operated at 55% of
capacity during calendar year 2004.
After careful consideration of all the options available, we decided to
close the Glueckstadt facility and consolidate production at our two other
specialty fibers manufacturing facilities. We expect production at Glueckstadt
to cease during the second quarter of fiscal year 2006. We expect the closing of
our Glueckstadt facility and the transfer of the cotton-based specialty fiber
production to our Memphis, Tennessee and Americana, Brazil facilities, at the
end of this calendar year, will yield a superior cost structure and improve
margins.
The closure of the Glueckstadt facility will result in the termination
of approximately 100 employees, and we expect restructuring expenses related to
the closure to total approximately $6.0 million. We expect payments related to
this restructuring program will extend through the end of fiscal year 2006. We
expect this consolidation to enable us to improve our overall specialty fibers
operating results by approximately $9 million annually and to reduce working
capital needs by approximately $6 million.
In anticipation of the closure of the facility, customers increased
their inventories to ensure a smooth transition as they qualified material
supplied from our Memphis, Tennessee facility. Due to the increased demand, we
were able to increase pricing and make incremental sales from inventory.
Additionally, as a result of the impairment of the Glueckstadt plant and
equipment, our depreciation expense decreased during the period. Although we are
recognizing some of the benefit of the closure, we do not expect to realize the
full on-going benefit of the closure until calendar year 2006.
2004 Restructuring program
During March 2004, our Board of Directors approved the discontinuation
of production of nonwoven materials at our Cork, Ireland facility. While the
demand for nonwoven products grew at a rate in the low to mid-single digits on
an annualized basis, the growth in demand was not sufficient to utilize fully
the existing capacity. As such, industry participants rationalized production by
idling plants and closing facilities.
Due to excess production capacity around the globe, we operated Cork
below its productive capacity from its inception in 1998. Because of its
location and small size, our cost to produce at Cork was higher than at our
other locations. Due to these issues, we decided to close the Cork facility and
consolidate production at our three other nonwoven manufacturing facilities.
Production at Cork ceased in July 2004. Closing our Cork facility reduced our
nonwovens capacity by about 10%.
We continued to meet customer needs for nonwoven materials by producing
these products at our facilities in Delta, British Columbia, Canada; Steinfurt,
Germany; and Gaston County, North Carolina. This consolidation reduced working
capital needs, and we began to realize fully the on-going cost benefit from
operating one less facility during the third quarter of fiscal 2005. The closure
of the Cork facility and related reorganization of the nonwoven materials
segment resulted in the termination of 89 employees and resulted in
restructuring expenses totaling $3.0 million. We do not expect additional
expenses related to this program.
25
2003 Restructuring programs (phase 1 and phase 2)
In April 2003, we announced the discontinuation of production of cotton
linter pulp at our specialty fibers facility in Lumberton, North Carolina due to
the decline in demand for cotton content paper. We completed this partial
closure in August 2003 but continue to produce cosmetic cotton products at the
Lumberton site. This decision reflects a steady decline in demand in the cotton
fiber paper industry, which has contracted by more than one-third since the late
1990's. While cotton linter pulp is one of our core businesses, current demand
did not economically justify operating a facility that could only produce
products for paper applications.
To better meet our customers' needs, we consolidated our U.S. cotton
linter pulp production at our larger Memphis, Tennessee and Glueckstadt, Germany
facilities. In conjunction with the consolidation, we initiated the first phase
of a restructuring program designed to deliver cost reductions through reduced
expenses across the company, the main component of which was the partial closure
of our Lumberton, North Carolina facility. This phase of restructuring resulted
in the elimination of approximately 100 positions within the specialty fibers
segment. The resulting increase in facility utilization enabled us to improve
our operating results by approximately $6 million annually.
During the first quarter of fiscal year 2004, we entered into a second
phase of this restructuring program. This phase of the program enabled us to
improve our operating results by approximately $6 million annually through
reduced salaries, benefits, other employee-related expenses and operating
expenses. As a result of this restructuring, 78 positions were eliminated. These
positions include manufacturing, sales, product development and administrative
functions throughout the organization. We do not expect any further expenses
related to this restructuring.
Net interest expense and amortization of debt costs
Net interest expense and amortization of debt costs decreased $1.1
million for the three month period ending September 30, 2005 versus the same
period in the prior year. Our decrease in outstanding debt of $40.2 million
since September 30, 2004 had a positive impact on interest expense during the
three month period ending September 30, 2005. Also contributing to the
improvement was the impact of capitalizing interest for the Americana facility
capital improvements. The total amount of interest capitalized during the
period, related to the Americana project, was $0.5 million. These improvements
were partially offset by higher variable interest rates. The weighted average
effective interest rate on our variable rate debt increased from 4.4% at
September 30, 2004 to 5.9% at September 30, 2005.
Income tax expense
Our effective tax rate for the three months ended September 30, 2005
was 27% versus 35% for the same period in 2004. Our effective tax rate may vary
in future quarters due to the amount and source of income, results of tax audits
and changes in tax legislation. We currently expect the effective tax rate for
the remainder of the fiscal year to be 35%, resulting in an overall estimated
tax rate of 35% for fiscal year 2006.
Loss on early extinguishment of debt costs
On September 26, 2005 we used borrowings on our revolving credit
facility to redeem $15 million of our 9.25% 2008 Notes. As a result of this
partial extinguishment, we wrote-off a portion of deferred financing costs,
resulting in non-cash expense of $0.2 million during the three months ended
September 30, 2005.
Foreign exchange and other
The Canadian dollar continued strengthening against the U.S. dollar
during the three months ended September 30, 2005, increasing 6% during the
period. We incurred foreign exchange losses and other expense of $0.4 million,
due primarily to this strengthening.
26
Financial Condition
Liquidity and capital resources
We have the following major sources of financing: 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 September 30, 2005 and believe we will
continue to remain in compliance.
On September 30, 2005, we had $11.8 million of cash and cash
equivalents and $42.5 million borrowing capacity on our revolver defined in Note
6. The portion of this capacity that we could borrow will depend on our
financial results and ability to comply with certain borrowing conditions under
the revolving credit facility. As of September 30, 2005, our liquidity,
including available borrowings and cash and cash equivalents was approximately
$54.3 million.
While we can offer no assurances, we believe that our cash flow from
operations, together with current cash and cash equivalents, will be sufficient
to fund necessary capital expenditures, meet operating expenses and service our
debt obligations for the foreseeable future.
Cash Flow
The following table provides a summary of cash flows for the three
month periods ended September 30, 2005 and September 30, 2004.
Three Months Ended
September 30
----------------------------
(millions) 2005 2004
----------------------------
Operating activities:
Net income (loss)................................. $ (0.3) $4.4
Noncash charges and credits, net.................. 10.9 14.1
Changes in operating assets and liabilities, net.. 4.2 2.5
----------------------------
Net cash provided by operating activities............ 14.8 21.0
Investing activities:
Purchases of property, plant and equipment........ (20.3) (5.0)
Other investing activities........................ (0.2) 0.1
----------------------------
Net cash used in investing activities................ (20.5) (4.9)
Financing activities:
Net borrowings under lines of credit.............. 23.1 -
Payments on long-term debt and other.............. (15.8) (20.0)
----------------------------
Net cash provided by (used in) financing activities.. 7.3 (20.0)
Effect of foreign currency rate fluctuations on cash 0.3 0.5
----------------------------
Net increase (decrease) in cash and cash equivalents $1.9 $(3.4)
============================
Cash provided by operating activities
The $6.2 million decrease in cash flows from operating activities
during the three months ended September 30, 2005 was primarily the result of
moving from an income position in fiscal 2005 to a net loss position in fiscal
2006. Although the closure of our Glueckstadt, Germany cotton cellulose facility
will improve working capital in fiscal year 2006, this improvement will be
largely offset by the increased working capital requirements at our Americana,
Brazil specialty fibers facility as we move away from the current tolling
27
arrangement to market production during calendar year 2006. We do not expect
changes in operating assets and liabilities will be significant contributors to
operating cash flow in fiscal year 2006.
Net cash used in investing activities
Purchases of property, plant and equipment increased during the three
months ended September 30, 2005 versus the same period in 2004 primarily due to
expenditures related to the project to add full market capability to our
Americana, Brazil cotton cellulose facility. We estimate the total cost of this
facility improvement to be approximately $26 million, of which approximately
$11.2 million was spent during the three months ended September 30, 2005. We
expect the remaining $3.5 million related to the Americana facility upgrade will
be spent during the three months ending December 31, 2005. We expect that our
total capital expenditures will be approximately $45 million for fiscal 2006.
We expect to incur significant capital expenditures in the future to
comply with remaining environmental obligations at our Perry, Florida specialty
fibers facility. Based on current estimates we expect expenditures of
approximately $60 million over several years possibly beginning as early as
fiscal year 2007. See Note 20, Contingencies, to the Consolidated Financial
Statements in our fiscal 2005 Annual Report filed on Form 10-K.
Net cash provided by ( used in) financing activities
During the three months ended September 30, 2005, we used net
borrowings on our revolving credit facility to finance the capital investments
we are making in our Americana, Brazil facility. We also used net borrowings on
the revolver to redeem, at par, $15 million of our high interest rate, 9.25%,
senior subordinated notes due in 2008. We are focused on debt reduction with a
target of a 50/50 debt to equity balance in our capital structure. We intend to
continue to call portions of the remaining $65 million of these notes over the
next several years ahead of their maturity in the fall of 2008. These partial
calls will be limited by available cash and our capacity to make restricted cash
payments under our other debt instruments.
Treasury Stock
Our board of directors has authorized the repurchase of up to 6 million
shares of our common stock. Under this authorization, we will hold the
repurchased shares as treasury stock and such shares will be available for
general corporate purposes, including the funding of employee benefit and
stock-related plans. We repurchased no shares of our common stock during the
three months ended September 30, 2005. Through September 30, 2005, we had
repurchased a total of 5,009,300 shares under the current board authority.
28
Contractual obligations
There have been no material changes to our contractual obligations
since our disclosure in our Annual Report. The following table summarizes our
significant contractual cash obligations as of September 30, 2005. Certain of
these contractual obligations are reflected in our balance sheet, while others
are disclosed as future obligations under accounting principles generally
accepted in the United States.
(millions) Payments Due by Period
-----------------------------------------------------------------------------------------------------------------
Fiscal Fiscal 2007 Fiscal 2009
Contractual Obligations Total 2006 (1) and 2008 and 2010 Thereafter
-----------------------------------------------------------------------------------------------------------------
Long-term obligations (2)...... $807.5 $42.1 $93.4 $256.5 $415.5
Capital lease obligations (3).. 2.2 0.6 1.2 0.4 -
Operating leases .............. 4.4 1.7 2.5 0.2 -
Timber commitments ............ 72.8 13.7 25.1 27.1 6.9
Lint commitments .............. 11.2 11.2 - - -
Other purchase commitments (4) 11.5 9.0 2.5 - -
----------------------------------------------------------------------------
Total contractual cash
obligations................. $909.6 $78.3 $124.7 $284.2 $422.4
============================================================================
(1) Cash obligations for the remainder of fiscal 2006.
(2) Amounts include related interest payments. Interest payments for variable
debt of $122.0 million are based on the effective rate as of September 30, 2005
of 5.9%.
(3) Capital lease obligations represent principal and interest payments.
(4) 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.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to adopt
accounting policies and make significant judgments and estimates to develop
amounts reflected and disclosed in the financial statements. Management bases
these estimates and assumptions on historical data and trends, current fact
patterns, expectations and other sources of information they believe are
reasonable. In many cases, there are alternative policies or estimation
techniques that could be used. We maintain a thorough process to review the
application of our accounting policies and to evaluate the appropriateness of
the many estimates that are required to prepare the financial statements.
However, even under optimal circumstances, estimates routinely require
adjustment based on changing circumstances and the receipt of new or better
information.
The four critical accounting policies that we believe are either the
most judgmental, or involve the selection or application of alternative
accounting policies, and are material to our financial statements are those
relating to allowance for doubtful accounts, deferred income taxes, depreciation
and long-lived assets. Further information regarding our "Critical Accounting
Policies" can be found in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report. Further information
regarding inventories may be found in Note 5 to the financial statements of this
quarterly 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.
29
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; competition; changes in fair values of long-lived assets; inability
to predict the scope of future environmental compliance costs or liabilities;
inability to predict the scope of future restructuring costs or liabilities; and
the ability to obtain additional capital, maintain adequate cash flow to service
debt as well as meet operating needs. The forward-looking statements included in
this document are only made as of the date of this document and we do not have
any obligation to publicly update any forward-looking statements to reflect
subsequent events or circumstances. For additional factors that could impact
future results, please see our Annual Report.
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2005, there have been no material changes in our
market risk since the disclosure in our Annual Report. While we have global
operations, the majority of our transactions are denominated in U.S. dollars.
The distribution of our foreign currency denominated transactions is such that
foreign currency declines in some areas of the world are often offset by foreign
currency gains of equal magnitude in other areas of the world. The principal
foreign currency exchange rate risks to which we are exposed are in the Canadian
dollar, Brazilian real and European euro.
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 September 30, 2005 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.
31
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
Item 6. Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BUCKEYE TECHNOLOGIES INC.
By: /S/ DAVID B. FERRARO
--------------------
David B. Ferraro, Chief Executive Officer
Date: October 25, 2005
By: /S/ KRISTOPHER J. MATULA
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
Date: October 25, 2005
32