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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 December 31, 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" or large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one).
Large accelerated filer ___ Accelerated filer X Non-accelerated filer ___
--
As of January 20, 2006, there were outstanding 37,597,664 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 and Six Months Ended
December 31, 2005 and 2004............................................................ 3
Condensed Consolidated Balance Sheets as of December 31, 2005 and June 30, 2005............. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended 5
December 31, 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.................................. 30
4. Controls and Procedures..................................................................... 30
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders......................................... 31
6. Exhibits.................................................................................... 31
SIGNATURES 32
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 Six Months Ended
December 31 December 31
------------------------------ -----------------------------
2005 2004 2005 2004
------------------------------ -----------------------------
Net sales..................................................... $188,254 $180,622 $353,710 $347,945
Cost of goods sold............................................ 162,546 149,475 303,809 287,169
------------------------------ -----------------------------
Gross margin.................................................. 25,708 31,147 49,901 60,776
Selling, research and administrative expenses................. 11,354 10,748 22,760 20,474
Amortization of intangibles and other......................... 477 603 1,008 1,206
Impairment of long-lived assets............................... - 12,010 - 12,010
Restructuring costs........................................... 1,141 363 3,092 1,559
------------------------------ -----------------------------
Operating income.............................................. 12,736 7,423 23,041 25,527
Net interest expense and amortization of debt costs........... (10,574) (11,279) (20,758) (22,557)
Gain on sale of assets held for sale.......................... - 7,173 - 7,173
Loss on early extinguishment of debt.......................... - - (151) -
Foreign exchange and other.................................... (22) 267 (390) 234
------------------------------ -----------------------------
Income before income taxes.................................... 2,140 3,584 1,742 10,377
Income tax expense............................................ 286 671 177 3,049
------------------------------ -----------------------------
Net income ................................................... $ 1,854 $2,913 $ 1,565 $ 7,328
============================== =============================
Earnings per share
Basic............................................. $ 0.05 $ 0.08 $ 0.04 $ 0.20
Diluted........................................... $ 0.05 $ 0.08 $ 0.04 $ 0.20
Weighted average shares for basic earnings per share.......... 37,592 37,390 37,590 37,351
------------------------------ ------------------------------
Adjusted weighted average shares for diluted earnings per share 37,630 37,605 37,633 37,532
============================== ==============================
See accompanying notes.
3
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31 June 30
2005 2005
----------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................................ $10,477 $ 9,926
Accounts receivable, net................................. 121,338 118,215
Inventories.............................................. 120,488 107,895
Deferred income taxes and other.......................... 7,152 10,468
----------------------------------
Total current assets....................... 259,455 246,504
Property, plant and equipment.................................. 940,020 902,970
Less accumulated depreciation.................................. (401,003) (377,039)
-----------------------------------
539,017 525,931
Goodwill....................................................... 142,615 139,430
Intellectual property and other, net........................... 40,571 37,872
-----------------------------------
Total assets............................................. $981,658 $949,737
===================================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................... $ 35,984 $ 37,226
Accrued expenses......................................... 51,800 48,401
Current portion of capital lease obligation.............. 789 685
Current portion of long-term debt........................ 998 1,376
-----------------------------------
Total current liabilities.................... 89,571 87,688
Long-term debt................................................. 562,336 535,539
Accrued postretirement benefits................................ 19,434 19,206
Deferred income taxes.......................................... 31,919 34,660
Capital lease obligation....................................... 943 1,382
Other liabilities.............................................. 1,916 1,673
Stockholders' equity........................................... 275,539 269,589
-----------------------------------
Total liabilities and stockholders' equity............... $981,658 $949,737
===================================
See accompanying notes.
4
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
December 31
------------------------------
2005 2004
------------------------------
Operating activities
Net income.................................................... $ 1,565 $7,328
Adjustments to reconcile net income to net cash provided by
operating activities:
Impairment of long-lived assets........................ - 12,010
Depreciation........................................... 23,385 23,136
Amortization .......................................... 1,599 1,674
Deferred income taxes and other........................ (1,675) 3,196
Gain on sale of assets held for sale................... - (7,173)
Changes in operating assets and liabilities:
Accounts receivable................................ (3,130) (2,048)
Inventories........................................ (12,387) (336)
Other assets....................................... (2,798) (245)
Accounts payable and other current liabilities..... 2,336 (7,977)
------------------------------
Net cash provided by operating activities..................... 8,895 29,565
Investing activities
Purchases of property, plant and equipment................ (34,358) (11,779)
Proceeds from sale of assets.............................. - 13,811
Other..................................................... (276) (236)
------------------------------
Net cash provided by (used in) investing activities........... (34,634) 1,796
Financing activities
Net borrowings under lines of credit...................... 42,250 -
Payments for debt issuance costs.......................... - (5)
Payments on long-term debt and other...................... (15,963) (33,585)
Net proceeds from sale of equity interests and other 66 1,250
------------------------------
Net cash provided by (used in) financing activities........... 26,353 (32,340)
Effect of foreign currency rate fluctuations on cash.......... (63) 1,859
------------------------------
Increase in cash and cash equivalents......................... 551 880
Cash and cash equivalents at beginning of period.............. 9,926 27,235
------------------------------
Cash and cash equivalents at end of period.................... $10,477 $28,115
==============================
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 and six
months ended December 31, 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
December 31, 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.
6
NOTE 2: COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share was as
follows:
Three Months Ended Six Months Ended
December 31 December 31
2005 2004 2005 2004
------------------------------ ------------------------------
Net income applicable to common shareholders $1,854 $2,913 $ 1,565 $7,328
============================== ==============================
Weighted-average shares of common stock
outstanding.................................. 37,592 37,390 37,590 37,351
Effect of diluted shares.......................... 38 215 43 181
------------------------------ ------------------------------
Weighted-average common and common equivalent
shares outstanding........................... 37,630 37,605 37,633 37,532
============================== ==============================
Earnings per share
Basic.................................... $0.05 $0.08 $0.04 $0.20
Diluted.................................. $0.05 $0.08 $0.04 $0.20
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
December 31 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2005 $137,898 $58,460 $ (8,104) $188,254
2004 129,854 58,065 (7,297) 180,622
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2005 11,559 2,739 (1,562) 12,736
2004 17,050 3,448 (13,075) 7,423
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2005 7,406 4,062 842 12,310
intangibles 2004 7,123 4,403 877 12,043
------------------------------------------------------------------------------------------------------------
Capital expenditures 2005 13,262 406 410 14,078
2004 6,288 261 260 6,809
Six Months Ended Specialty Nonwoven
December 31 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2005 $252,459 $115,786 $(14,535) $353,710
2004 247,900 113,987 (13,942) 347,945
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2005 21,722 5,299 (3,980) 23,041
2004 33,948 7,016 (15,437) 25,527
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2005 14,680 8,100 1,687 24,467
intangibles 2004 14,084 8,626 1,743 24,453
------------------------------------------------------------------------------------------------------------
Capital expenditures 2005 32,592 1,005 761 34,358
2004 10,202 1,237 340 11,779
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
7
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.
During fiscal 2005, we entered into another restructuring program. As
part of this program, we discontinued production of cotton-based specialty
fibers at our Glueckstadt, Germany facility during December 2005. The closure of
the Glueckstadt facility resulted in the termination of 98 employees as of
December 31, 2005 and will result in an additional 5 terminations during the
remainder of fiscal year 2006. We expect restructuring expenses related to the
closure to be approximately $6,500 and payments related to the restructuring
program to extend through the end of fiscal year 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 six
months ended December 31, 2005.
Six Months Ended
December 31, 2005
--------------------------------------------------------------
Accrual Accrual
Balance Impact Balance as
as of Of of Program Total
June 30, Additional Foreign December Charges Estimated
2005 Charges Currency Payments 31, 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 2,583 (78) (1,424) 3,392 5,055 5,100
Other miscellaneous expenses..... 147 499 (4) (524) 118 978 1,400
----------------------------------------------------------------- ------------------------
Total 2005 Program.................. 2,458 3,082 (82) (1,948) 3,510 6,033 6,500
----------------------------------------------------------------- ------------------------
Total All Programs.................. $2,471 $3,092 $(83) $ (1,970) $3,510 $9,480 $9,947
================================================================ ========================
8
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:
December 31 June 30
2005 2005
------------------------------
Raw materials........................... $32,036 $33,433
Finished goods.......................... 66,737 53,353
Storeroom and other supplies............ 21,715 21,109
------------------------------
$120,488 $107,895
==============================
NOTE 6: DEBT
The components of long-term debt consist of the following:
December 31 June 30
2005 2005
--------------------------------
Senior Notes due:
2013............................... $200,000 $200,000
Senior Subordinated Notes due:
2008............................... 64,879 79,832
2010............................... 152,308 152,558
Credit facility......................... 141,147 99,525
Other................................... 5,000 5,000
--------------------------------
563,334 536,915
Less current portion.................... 998 1,376
--------------------------------
$562,336 $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 six months ended December 31, 2005, we called and redeemed an
additional $15,000 of the 2008 Notes. As a result of these redemptions, we wrote
off a portion of the deferred financing costs and unamortized discount related
to the redeemed bonds. During the six months ended December 31, 2005, we
recorded non-cash expenses of $151 related to the early extinguishment of debt.
9
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.
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 six months ending December 31,
2005, we made an excess cash flow payment of $378 based on fiscal 2005 operating
and cash flow performance.
We had $141,147 outstanding on this facility ($98,247 on the term loan
and $42,900 on the revolver) at an average variable interest rate of 6.6% as of
December 31, 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 six
months ended December 31, 2005, we were in compliance with these financial
covenants.
As of December 31, 2005, we had $22,725 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 December 31, 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 December
31, 2005, we have accrued interest on the note of $1,692.
10
NOTE 7: COMPREHENSIVE INCOME
The components of comprehensive income consist of the following:
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- -----------------------------
2005 2004 2005 2004
---------------------------- -----------------------------
Net income........................................ $ 1,854 $ 2,913 $1,565 $ 7,328
Foreign currency translation adjustments - net.... (4,032) 15,562 4,143 26,754
---------------------------- -----------------------------
Comprehensive income (loss)....................... $(2,178) $ 18,475 $5,708 $ 34,082
============================ =============================
For the three and six months ended December 31, 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 $(1,649) and $(2,201), the
Brazilian real of $(2,888) and $(1,617) and the Canadian dollar of $505 and
$7,961.
For the three and six months ended December 31, 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 $7,235 and $9,399, the
Brazilian real of $1,604 and $3,460 and the Canadian dollar of $6,723 and
$13,895.
NOTE 8: INCOME TAXES
Our effective tax rates for the three and six month periods ended
December 31, 2005 were 13% and 10%, respectively. Our effective tax rates for
the same periods of 2004 were 19% and 29%, respectively. Our tax rate is
impacted by several factors including operations in jurisdictions with varying
tax rates and the extraterritorial income tax exclusion. During the three months
ended December 31, 2005, we analyzed and corrected the rates and methodology
used to value our state deferred taxes. The resulting adjustment was a $595 net
tax benefit. Our income tax expense differs from the amount computed by applying
the statutory federal income tax rate of 35% to income before income taxes due
to the following:
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- -----------------------------
2005 2004 2005 2004
---------------------------- -----------------------------
Expected tax expense at 35%................ $ 748 $1,254 $ 609 $3,632
Effect of foreign operations............... 494 (360) 801 237
Extraterritorial income benefit............ (104) (271) (256) (490)
Adjustment of state deferred taxes......... (595) - (595) -
Other...................................... (257) 48 (382) (330)
---------------------------- -----------------------------
Income tax expense......................... $ 286 $ 671 $ 177 $3,049
============================ =============================
NOTE 9: STOCK-BASED COMPENSATION
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") 123 (revised 2004),
Share-Based Payments ("SFAS 123(R)"), which is a revision of SFAS 123,
Accounting for Stock Based Compensation ("SFAS 123"). SFAS 123(R) supersedes
Accounting Principles Bulletin 25 ("APB 25"), Accounting for Stock Issued to
Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach
in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. SFAS 123(R) eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS 123, which generally resulted in
11
no compensation expense recorded in the financial statements related to the
issuance of share-based awards to employees. SFAS 123(R) requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS 123(R) establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
companies to apply a fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees.
On July 1, 2005 (the first day of our 2006 fiscal year), we adopted
SFAS 123(R). 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 share-based awards granted after
the date of adoption and for the unvested portion of previously granted
stock-based awards that remain outstanding at the date of adoption.
On June 7, 2005, prior to the adoption FSAS 123(R), the Compensation
Committee of our Board of Directors approved the acceleration of vesting of
out-of-the-money options with an exercise price greater than $8.32 to purchase
shares of our common stock that remained unvested at June 30, 2005. 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 illustrates the effect on net income and earnings
per share had compensation expense for the employee stock-based awards been
recorded in the three and six months ended December 31, 2004 based on the fair
value method under SFAS 123(R).
December 31, 2004
-----------------------------------
Three Months Six Months
Ended Ended
---------------- ---------------
Net income as reported........................................ $2,913 $7,328
Deduct: Total stock-based compensation expense determined under fair
value based method, net of related tax effects........... (449) (974)
---------------- ---------------
Pro forma net income.......................................... $2,464 $6,354
================ ===============
Basic earnings per share:
As reported.............................................. $0.08 $ 0.20
Pro forma................................................ $0.07 $ 0.17
Diluted earnings per share:
As reported.............................................. $0.08 $ 0.20
Pro forma................................................ $0.07 $ 0.17
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 and six months
ended December 31, 2005 was $132 ($86 after tax) and $166 ($108 after tax),
respectively.
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
During the three months ended December 31, 2005, our employee stock option plans
expired and no further options can be granted under these plans. We are
evaluating a new employee stock compensation plan, but no decision has been
reached.
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 and six months ended December 31, 2005 and a discussion of our methodology
for developing each of the assumptions used in the valuation model:
Expected lives................................. 6.3 years
Expected volatility............................ 54.8%
Risk-free interest rate........................ 4.4%
Forfeiture rate................................ 12%
Expected Lives - This is the period of time over which the options
granted are expected to remain outstanding. Options granted have a maximum term
of ten years. An increase in the expected life will increase compensation
expense.
Expected Volatility - This is a measure of the amount by which a price
has fluctuated or is expected to fluctuate. We use actual changes in the market
value of our stock to calculate the volatility assumption. We calculate daily
market value changes from the date of grant over a past period representative of
the expected life of the options to determine volatility. An increase in the
expected volatility will increase compensation expense.
Risk-Free Interest Rate - This is the U.S. Treasury rate for the week
of the grant having a term approximating the expected life of the option. An
increase in the risk-free interest rate will increase compensation expense.
Dividend Yield - We did not make any dividend payments during the last
five fiscal years and we have no plans to pay dividends in the foreseeable
future. An increase in the dividend yield will decrease compensation expense.
Forfeiture Rate - This is the estimated percentage of options granted
that are expected to be forfeited or canceled before becoming fully vested. An
increase in the forfeiture rate will decrease compensation expense. The
forfeiture rate is based on our historic forfeiture experience.
The following table summarizes information about our stock option plans
for the three and six months ended December 31, 2005.
Three Months Ended Six Months Ended
December 31, 2005 December 31, 2005
--------------------------------- --------------------------------
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
--------------------------------- --------------------------------
Options outstanding, beginning of period... 4,659,150 $13.38 4,765,150 $13.57
Granted..................................... 338,000 7.61 348,000 7.64
Exercised................................... (10,000) 6.64 (10,000) 6.64
Forfeited................................... (507,250) 10.62 (623,250) 12.56
--------------------------------- --------------------------------
Options outstanding, end of period.......... 4,479,900 $13.27 4,479,900 $13.27
================================= ================================
Options exercisable, end of period.......... 4,083,100 $13.82 4,083,100 $13.82
13
Using the Black-Scholes valuation method calculated under the
assumptions indicated above, the weighted-average fair value of the grants at
market was $4.37 for a total expense, net of estimated forfeitures, of $1,343
that will be expensed over the options respective vesting period.
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 Six Months Ended
December 31 December 31
2005 2004 2005 2004
----------------------------- -----------------------------
Service cost for benefits earned.................. $ 157 $175 $ 314 $351
Interest cost on benefit obligation............... 314 358 628 716
Amortization of unrecognized
prior service cost........................... (264) (281) (528) (562)
Loss.............................................. 150 98 300 195
----------------------------- -----------------------------
Total cost........................................ $ 357 $350 $ 714 $700
============================= =============================
The Medicare Modernization Act provides 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 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.
14
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $ 27,604 $118,965 $50,181 $(8,496) $188,254
Cost of goods sold.......................... 23,793 101,621 45,722 (8,590) 162,546
-------------------------------------------------------------------------------
Gross margin................................ 3,811 17,344 4,459 94 25,708
Selling, research and administrative
expenses, and other...................... 3,063 7,188 1,580 - 11,831
Restructuring and impairment costs.......... - - 1,141 - 1,141
-------------------------------------------------------------------------------
Operating income............................ 748 10,156 1,738 94 12,736
Other income (expense):
Net interest income (expense) and
amortization of debt.................. (11,388) 117 697 - (10,574)
Other income (expense), including equity
income (loss) in affiliates.......... 6,376 (5) (127) (6,266) (22)
Intercompany interest income (expense).. 7,263 (5,117) (2,146) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes........... 2,999 5,151 162 (6,172) 2,140
-------------------------------------------------------------------------------
Income tax expense (benefit)................ 1,145 1,116 185 (2,160) 286
-------------------------------------------------------------------------------
Net income (loss)........................... $ 1,854 $4,035 $ (23) $(4,012) $ 1,854
===============================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $50,063 $218,961 $100,216 $(15,530) $353,710
Cost of goods sold.......................... 43,004 186,631 89,912 (15,738) 303,809
-------------------------------------------------------------------------------
Gross margin................................ 7,059 32,330 10,304 208 49,901
Selling, research and administrative
expenses, and other..................... 6,020 14,226 3,522 - 23,768
Restructuring and impairment costs.......... - - 3,092 - 3,092
-------------------------------------------------------------------------------
Operating income............................ 1,039 18,104 3,690 208 23,041
Other income (expense):
Net interest income (expense) and
amortization of debt.................. (22,305) 184 1,363 - (20,758)
Other income (expense), including equity
income in affiliates................. 9,482 37 (554) (9,506) (541)
Intercompany interest income (expense).. 14,389 (10,400) (3,989) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes........... 2,605 7,925 510 (9,298) 1,742
-------------------------------------------------------------------------------
Income tax expense (benefit)................ 1,040 2,047 344 (3,254) 177
-------------------------------------------------------------------------------
Net income (loss)........................... $ 1,565 $ 5,878 $ 166 $(6,044) $ 1,565
===============================================================================
15
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2004
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $29,129 $108,060 $51,366 $(7,933) $180,622
Cost of goods sold.......................... 23,189 87,550 46,551 (7,815) 149,475
-------------------------------------------------------------------------------
Gross margin................................ 5,940 20,510 4,815 (118) 31,147
Selling, research and administrative
expenses, and other...................... 4,034 5,075 2,242 - 11,351
Restructuring and impairment costs.......... - 1 12,372 - 12,373
-------------------------------------------------------------------------------
Operating income (loss)..................... 1,906 15,434 (9,799) (118) 7,423
Other income (expense):
Net interest income (expense) and
amortization of debt.................. (11,526) 63 184 - (11,279)
Other income (expense), including equity
income (loss) in affiliates.......... 6,962 20 7,322 (6,864) 7,440
Intercompany interest income (expense).. 7,663 (5,824) (1,838) (1) -
-------------------------------------------------------------------------------
Income (loss) before income taxes........... 5,005 9,693 (4,131) (6,983) 3,584
-------------------------------------------------------------------------------
Income tax expense (benefit)................ 2,092 4,086 (2,601) (2,906) 671
-------------------------------------------------------------------------------
Net income (loss)........................... $2,913 $5,607 $ (1,530) $(4,077) $ 2,913
===============================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2004
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $52,411 $208,049 $102,677 $(15,192) $347,945
Cost of goods sold.......................... 41,800 168,220 92,061 (14,912) 287,169
-------------------------------------------------------------------------------
Gross margin................................ 10,611 39,829 10,616 (280) 60,776
Selling, research and administrative
expenses, and other..................... 7,129 10,411 4,140 - 21,680
Restructuring and impairment costs.......... 1 121 13,447 - 13,569
-------------------------------------------------------------------------------
Operating income (loss)..................... 3,481 29,297 (6,971) (280) 25,527
Other income (expense):
Net interest income (expense) and
amortization of debt.................. (22,857) 24 276 - (22,557)
Other income (expense), including equity
income in affiliates................. 15,878 174 7,203 (15,848) 7,407
Intercompany interest income (expense).. 15,511 (11,972) (3,539) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes........... 12,013 17,523 (3,031) (16,128) 10,377
-------------------------------------------------------------------------------
Income tax expense (benefit)................ 4,685 6,745 (2,091) (6,290) 3,049
-------------------------------------------------------------------------------
Net income (loss)........................... $ 7,328 $ 10,778 $ (940) $ (9,838) $7,328
===============================================================================
16
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $ 1,031 $ 191 $ 9,255 $ - $10,477
Accounts receivable, net of allowance..... 18,985 73,152 29,201 - 121,338
Inventories............................... 30,855 68,117 22,086 (570) 120,488
Other current assets...................... 3,042 3,410 700 - 7,152
Intercompany accounts receivable.......... - 19,339 - (19,339) -
-------------------------------------------------------------------------------
Total current assets........................ 53,913 164,209 61,242 (19,909) 259,455
Property, plant and equipment, net.......... 57,056 338,263 143,698 - 539,017
Goodwill and intangibles, net............... 20,937 52,683 95,316 - 168,936
Intercompany notes receivable............... 343,956 - - (343,956) -
Other assets, including investment in
subsidiaries............................. 315,620 342,037 115,918 (759,325) 14,250
-------------------------------------------------------------------------------
Total assets................................ $791,482 $897,192 $416,174 $(1,123,190) $981,658
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 6,390 $ 19,890 $ 9,704 $ - $ 35,984
Other current liabilities................. 20,657 18,229 14,701 - 53,587
Intercompany accounts payable............. 15,921 - 3,418 (19,339) -
-------------------------------------------------------------------------------
Total current liabilities................... 42,968 38,119 27,823 (19,339) 89,571
Long-term debt.............................. 562,336 - - - 562,336
Deferred income taxes....................... (43,370) 61,736 13,553 - 31,919
Other long-term liabilities................. 7,212 13,740 1,341 - 22,293
Intercompany notes payable.................. - 208,189 135,767 (343,956) -
Stockholders'/invested equity............... 222,336 575,408 237,690 (759,895) 275,539
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity.. $791,482 $897,192 $416,174 $(1,123,190) $981,658
===============================================================================
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
Six Months Ended December 31, 2005
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $(11,971) $ 15,857 $5,009 $ 8,895
Investing activities:
Purchases of property, plant and equipment.. (3,885) (10,775) (19,698) (34,358)
Other....................................... - (276) - (276)
---------------------------------------------------------------
Net cash used in investing activities....... (3,885) (11,051) (19,698) (34,634)
Financing activities
Net borrowings under revolving
line of credit........................ 42,250 - - 42,250
Net borrowings (payments) on long-term
debt and other......................... (26,223) (4,766) 15,092 (15,897)
---------------------------------------------------------------
Net cash provided by (used in) financing
activities............................. 16,027 (4,766) 15,092 26,353
Effect of foreign currency rate fluctuations
on cash................................ - - (63) (63)
---------------------------------------------------------------
Increase in cash and cash equivalents....... 171 40 340 551
Cash and cash equivalents at beginning
of period.............................. 860 151 8,915 9,926
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,031 $ 191 $9,255 $10,477
===============================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2004
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $(8,413) $33,761 $4,217 $29,565
Investing activities:
Purchases of property, plant and equipment.. (1,361) (8,989) (1,429) (11,779)
Proceeds from sale of assets and other...... - (219) 13,794 13,575
---------------------------------------------------------------
Net cash provided by (used in) investing
activities.............................. (1,361) (9,208) 12,365 1,796
Financing activities
Payments for debt issuance.................. (5) - - (5)
Net payments on long-term debt and other.... (4,263) (24,403) (3,669) (32,335)
---------------------------------------------------------------
Net cash used in financing activities....... (4,268) (24,403) (3,669) (32,340)
Effect of foreign currency rate fluctuations
on cash................................ - - 1,859 1,859
---------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents........................ (14,042) 150 14,772 880
Cash and cash equivalents at beginning
of period.............................. 14,746 103 12,386 27,235
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 704 $ 253 $27,158 $28,115
===============================================================
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 and
six months ended December 31, 2005 to the three and six months ended December
31, 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 and six months ended December 31, 2005 were challenging
periods 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 periods in 2004. Net
income was $1.9 million and $1.6 million for the three and six months ended
December 31, 2005 versus net income of $2.9 million and $7.3 million during the
same periods 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
approximately $10 million and $18 million during the three and six months ended
December 31, 2005 versus the same periods of the prior year. 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, remains 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 manufactured in the United
States (excluding fluff pulp) starting October 1, 2005. The product price
surcharge improved revenues by $2.4 million for the three months ended December
31, 2005. The surcharge will remain in place for the quarter ending March 31,
2006 and we will continue to evaluate the product price surcharge on a quarterly
basis.
20
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 high-end specialty fibers is sufficiently strong, we have
implemented price increases as our sales contracts renewed. A majority of our
annual sales agreements are renewed on a calendar year basis; therefore, we have
implemented price increases beginning January 1, 2006.
In spite of the higher costs, we are encouraged by progress on several
fronts:
o In January 2006, we established a new organization within Buckeye whose
mission is to bring new products to the market on an accelerated
schedule. The new organization will be focused on improving our
marketing capability and increasing the speed at which we commercialize
new products.
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.
During November 2005, we ceased tolling production at our Americana,
Brazil facility in order to complete the upgrade of the facility. In
December, we permanently ceased production at our Glueckstadt facility.
In January 2006, we began the process of qualifying products produced
at our Americana facility with our customers. We believe we are
well-positioned to supply cotton-based specialty fiber products from
our facilities in Memphis, Tennessee and Americana, Brazil with a
significantly more favorable cost structure once we reach full
production at the Americana facility.
The combination of new product initiatives, strong demand in important
markets, and an improved 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 and six months ended December 31, 2005 and 2004.
---------------------------------------------------------------------------------------------------------------------------
(millions) Three Months Ended December 31 Six Months Ended December 31
2005 2004 Change % Change 2005 2004 Change % Change
------------------------------------------- -------------------------------------------
Net sales $188.3 $180.6 $ 7.7 4% $353.7 $347.9 $ 5.8 2%
Cost of goods sold 162.6 149.6 13.0 9% 303.8 287.1 16.7 6%
------------------------------------------- -------------------------------------------
Gross margin 25.7 31.0 (5.3) (17%) 49.9 60.8 (10.9) (18%)
Selling, research and
administrative expenses 11.4 10.7 0.7 7% 22.8 20.5 2.3 11%
Impairment costs - 12.0 (12.0) * - 12.0 (12.0) *
Restructuring costs 1.1 0.3 0.8 * 3.1 1.6 1.5 *
Amortization of intangibles
and other 0.5 0.6 (0.1) (17%) 1.0 1.2 (0.2) (17%)
------------------------------------------- --------------------------------------------
Operating income $12.7 $ 7.4 $ 5.3 72% $23.0 $ 25.5 $ (2.5) (10%)
=========================================== ============================================
* Percent change not meaningful
21
Net sales increased primarily due to improved pricing on our products
during the three and six months ended December 31, 2005. Demand for high-end
specialty fibers helped drive prices higher throughout the year. Additionally,
the implementation of the product price surcharge effective October 1, 2005 had
a positive impact on revenues.
As mentioned in the executive summary, margins were negatively impacted
by high costs related to increases in the pricing of energy, chemicals and
transportation. During the three and six months ended December 31, 2005, these
costs were higher by approximately 32% and 31%, respectively, versus the same
periods in 2004.
Increases in selling, research and administrative expenses also had a
negative impact on our operating margins. Expenses related to the establishment
of an UltraFiber 500TM sales force and distribution network, the expensing of
share-based payments and the expensing of previously capitalized patent costs
contributed to the increased costs.
As part of the announced closure of the Glueckstadt, Germany specialty
fibers facility, we continued to incur restructuring related expenses in the
three months ended December 31, 2005. We incurred $1.1 million and $3.1 million
of expenses during the three and six months ended December 31, 2005,
respectively, and expect to incur an additional $0.5 million related to this
restructuring during the remainder of fiscal year 2006. As of December 31, 2005,
we have incurred $6.0 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 and six months ended December 31, 2005 and 2004.
(millions) Three Months Ended December 31 Six Months Ended December 31
------------------------------ ----------------------------
2005 2004 Change % Change 2005 2004 Change % Change
------------------------------------------------- --------------------------------------------------
Net sales $137.9 $129.9 $ 8.0 6% $252.5 $247.9 $ 4.6 2%
Operating income 11.6 17.1 (5.5) (32%) 21.7 33.9 (12.2) (36%)
Demand for our high-end specialty fibers products and the
implementation of a product price surcharge pushed pricing and net sales higher
during the three and six months ended December 31, 2005 versus 2004. The quarter
ended December 31, 2005 was also positively impacted by a 21% increase in fluff
pulp sales versus the same quarter in 2004. This additional quarterly increase
was primarily related to the timing of fluff pulp shipments during the six
months ended December 31, 2005. For the six months ended December 31, 2005,
fluff pulp sales were about equal to the same period in 2004. Our average fluff
pulp price increased by 2% year over year for the six month period ending
December 31, 2005 and fluff pulp sales accounted for 16.1% of our sales for the
period.
22
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 unable
to maintain our margins at the same level as those realized during the three and
six months ended December 31, 2004.
Our specialty fibers manufacturing costs for chemicals, energy and
transportation increased by approximately $9 million for the three months and
$16 million for the six months ended December 31, 2005 as compared to the same
periods in 2004, respectively. While we have made some progress 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, chemical
and transportation 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
transitioned 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 six
months ended December 31, 2005. However, our inventories for high-end specialty
wood products remain at very low levels. 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 ceased production at our Glueckstadt, Germany
facility in December of 2005.
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 we reach full capacity, this
facility will be a significant contributor to our profitability. We completed
the upgrade and began the process of qualifying our facility with our customers
during January of 2006. With the cessation of tolling production in late
November to facilitate the upgrade, we continued incurring pre-production
expenses without offsetting revenue. During the three months ended December 31,
2005, the net impact of these pre-production expenses without offsetting
revenues decreased earnings by approximately $2.4 million versus the same period
in 2004. We expect to continue to incur startup and transition costs during the
remainder of the fiscal year as we qualify the plant and ramp up volume.
Nonwoven materials
The following table compares nonwoven materials net sales and operating
income for the three and six months ended December 31, 2005 and 2004.
(millions) Three Months Ended December 31 Six Months Ended December 31
------------------------------ ----------------------------
2005 2004 Change % Change 2005 2004 Change % Change
-------------------------------------------------------------------------------------------
Net sales $58.5 $58.1 $ 0.4 1% $115.8 $114.0 $ 1.8 2%
Operating income 2.7 3.4 (0.7) (21%) 5.3 7.0 (1.7) (24%)
Improvements in the mix and selling prices for our nonwoven materials
resulted in an increase in net sales during the three and six months ended
December 31, 2005 versus the same periods in 2004. In an effort to offset rising
prices for raw materials and other manufacturing costs, sales price increases
were implemented during the year. Effective October 1, 2005 a product pricing
surcharge for most of our products manufactured in the United States was
implemented to offset higher energy related costs. Increased demand for tabletop
products in our European markets contributed to an improved mix. These
improvements were offset by the 13% weakening of the euro since December 31,
2004. A majority of our products produced and sold at our Steinfurt, Germany
facility are priced in euros and the weakening of the euro had a negative impact
on the translation of these revenues.
23
Operating income declined during the three and six months ended
December 31, 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. Energy, chemical and transportation
costs were approximately $1 million and $2 million higher for the three and six
months ended December 31, 2005 versus the same periods in 2004. Additionally,
the continued strengthening of the Canadian dollar created further pressure on
operating costs at our nonwoven materials facility in Delta, British Columbia.
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 six month period ended December 31, 2005 and 2004.
-------------------------------------------------------------------------------------------------------------
Six Months Ended Total Estimate to
December 31 Program Complete at
----------- Charges December 31,
(millions) 2005 2004 To Date 2005
-------------------------------------------------------------------------------------------------------------
Restructuring costs
2005 Restructuring program............... $3.1 $ - $ 6.0 $0.5
2004 Restructuring program............... - 1.2 3.0 -
2003 Restructuring program - phase 2..... - 0.3 3.4 -
2003 Restructuring program - phase 1..... - 0.1 2.7 -
--------------------------------------------------------
Total restructuring costs $3.1 $1.6 $15.1 $0.5
========================================================
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 were
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 were more than twice the cost of these
utilities at our Memphis, Tennessee cotton-based specialty fibers facility.
Faced with these difficulties, we reduced the number of employees at the
facility from approximately 150 to approximately 100 and operated at 55% of
capacity during calendar year 2004.
After careful consideration of all the options available, we decided to
close the Glueckstadt facility and consolidate production at our two other
specialty fibers manufacturing facilities. Production at Glueckstadt ceased in
December 2005. We expect the closure of our Glueckstadt facility and the
transfer of the cotton-based specialty fiber production to our Memphis,
Tennessee and Americana, Brazil facilities will ultimately yield a superior cost
structure and improve margins.
The closure of the Glueckstadt facility resulted in the termination of
98 employees as of December 31, 2005 and will result in an additional five
terminations during the remainder of fiscal 2006. We expect restructuring
expenses related to the closure to total approximately $6.5 million and payments
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.
24
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, and will recognize further
benefit subsequent to the cessation of production, we do not expect to realize
the full on-going benefit of the closure until fiscal year 2007.
2004 Restructuring program
Due to excess production capacity around the globe, we operated our
Cork, Ireland nonwoven materials facility 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 year 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.
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. 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 $0.7
million and $1.8 million for the three and six month periods ending December 31,
2005 versus the same periods in the prior year. Our decrease in average
outstanding debt had a positive impact on interest expense during the periods.
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 $0.6
million and $1.1 million for the three and six months ended December 31, 2005.
These improvements were partially offset by higher variable interest rates. The
weighted average effective interest rate on our variable rate debt increased
from 4.8% at December 31, 2004 to 6.6% at December 31, 2005.
25
Income tax expense
Our effective tax rates for the three and six months ended December 31,
2005 were 13% and 10% versus 19% and 29% for the same periods 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. During the three
months ended December 31, 2005, we analyzed and corrected the rates and
methodology used to value our state deferred taxes. The resulting adjustment was
a $0.6 million net tax benefit. 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 31% 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 six months ended
December 31, 2005.
Foreign exchange and other
The Canadian dollar strengthened against the U.S. dollar during the six
months ended December 31, 2005, increasing 6% during the period. We incurred
foreign exchange losses and other expense of $0.4 million, due primarily to this
strengthening.
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 December 31, 2005 and believe we will
continue to remain in compliance.
On December 31, 2005, we had $10.5 million of cash and cash equivalents
and $22.7 million borrowing capacity on our revolver as 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 December 31, 2005, our liquidity, including
available borrowings and cash and cash equivalents was approximately $33.2
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.
26
Cash Flow
The following table provides a summary of cash flows for the six month
periods ended December 31, 2005 and December 31, 2004.
Six Months Ended
December 31
----------------------------
(millions) 2005 2004
----------------------------
Operating activities:
Net income........................................ $ 1.6 $ 7.3
Noncash charges and credits, net.................. 23.3 32.9
Changes in operating assets and liabilities, net.. (16.0) (10.6)
----------------------------
Net cash provided by operating activities............ 8.9 29.6
Investing activities:
Purchases of property, plant and equipment........ (34.4) (11.8)
Other investing activities........................ (0.3) 13.6
----------------------------
Net cash provided by (used in) investing activities.. (34.7) 1.8
Financing activities:
Net borrowings under lines of credit.............. 42.3 -
Payments on long-term debt and other.............. (15.8) (32.3)
----------------------------
Net cash provided by (used in) financing activities.. 26.5 (32.3)
Effect of foreign currency rate fluctuations on cash (0.1) 1.8
----------------------------
Net increase in cash and cash equivalents $ 0.6 $0.9
============================
Cash provided by operating activities
The $20.6 million decrease in cash flows from operating activities
during the six months ended December 31, 2005 was partially the result of a
decrease in earnings. Additionally, net income for the six months ended December
31, 2004 included non-cash impairment expenses of $12.0 million that were not
repeated for the six months ended December 31, 2005. The combination of decrease
in net earnings and absence on the non-cash impairment charges account for $17.7
million of the decrease.
Additionally, changes in operating assets and liabilities had a more
significant negative impact on operating cash flows due to the $12.4 million
increase in inventories during the six months ended December 31, 2005. 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 arrangement to market
production during calendar year 2006. Overall, we do not expect changes in
operating assets and liabilities will be significant contributors to operating
cash flow in fiscal year 2006.
Net cash provided by (used in) investing activities
Purchases of property, plant and equipment increased during the six
months ended December 31, 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 $31 million, of which approximately
$7.0 million and $18.2 million was spent during the six months ended December
31, 2005. This increase of $5 million over our previous estimate was primarily
driven by higher than expected construction and installation costs and the
continued strength of the Brazilian real. We expect the remaining $1.5 million
related to the Americana facility upgrade will be spent during the remainder of
fiscal 2006. We expect that our total capital expenditures will be approximately
$45 million for fiscal 2006.
27
The generation of cash through investing activities during the six
months ended December 31, 2004 was the result of selling the Cork, Ireland
building and equipment during December 2004 for net proceeds of $13.2 million.
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 six months ended December 31, 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 principal amount of our high interest
rate, 9.25%, senior subordinated notes due in 2008. 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. We are focused on debt reduction with a target
of a 50/50 debt to equity balance in our capital structure.
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 December 31, 2005. Through December 31, 2005, we had
repurchased a total of 5,009,300 shares under the current board authority.
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 December 31, 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)...... $816.4 $22.7 $97.7 $280.5 $415.5
Capital lease obligations (3).. 2.0 0.4 1.2 0.4 -
Operating leases .............. 4.0 1.2 2.6 0.2 -
Timber commitments ............ 73.5 14.2 25.1 27.2 7.0
Lint commitments .............. 17.0 17.0 - - -
Other purchase commitments (4) 12.8 10.1 2.7 - -
----------------------------------------------------------------------------
Total contractual cash
obligations................. $925.7 $65.6 $129.3 $308.3 $422.5
============================================================================
(1) Cash obligations for the remainder of fiscal 2006.
(2) Amounts include related interest payments. Interest payments for variable
debt of $141.1 million are based on the effective rate as of December 31, 2005
of 6.6%.
(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.
28
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.
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.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 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 December 31, 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.
30
PART II - OTHER INFORMATION
Items 1, 2, 3, and 5 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
On November 3, 2005, we held our Annual Meeting of Stockholders. At
the meeting, George W. Bryan, R. Howard Cannon and Katherine Buckman Gibson
were each re-elected as Class I directors to hold office for a three-year term
or until their successors are elected and qualified. For Mr. Bryan, 34,878,024
votes were cast in favor and 581,339 votes were withheld. For Mr. Cannon,
30,359,983 votes were cast in favor and 5,099,380 were withheld. For Ms.
Gibson, 35,267,792 votes were cast in favor and 191,571 were withheld.
Following the election, our Board of Directors consisted of George W.
Bryan, R. Howard Cannon, Robert E. Cannon, Red Cavaney, John B. Crowe, Kathy
Buckman Gibson, David B. Ferraro, Henry F. Frigon, and Lewis E. Holland.
The stockholders also ratified the appointment of Ernst & Young LLP as
our independent auditors. 35,152,203 votes were cast in favor of the
ratification, 303,053 were cast against and 4,107 votes abstained.
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
31
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: January 24, 2006
By: /S/ KRISTOPHER J. MATULA
-------------------------
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
Date: January 24, 2006
32