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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 March 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 an accelerated filer(as defined
in Rule 12b-2 of the Exchange Act). Yes |X| No ____
As of April 21, 2005, there were outstanding 37,577,573 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 Nine Months Ended March
31, 2005 and 2004...................................................................... 3
Condensed Consolidated Balance Sheets as of March 31, 2005 and June 30, 2004................ 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2005
and 2004............................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................ 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 22
3. Quantitative and Qualitative Disclosures About Market Risk.................................. 34
4. Controls and Procedures..................................................................... 34
PART II - OTHER INFORMATION
6. Exhibits.................................................................................... 35
SIGNATURES 36
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 Nine Months Ended
March 31 March 31
------------------------------ ------------------------------
2005 2004 2005 2004
------------------------------ ------------------------------
Net sales.............................................. $180,910 $172,761 $528,855 $488,871
Cost of goods sold..................................... 150,700 151,031 437,869 437,419
------------------------------ ------------------------------
Gross margin........................................... 30,210 21,730 90,986 51,452
Selling, research and administrative expenses.......... 11,076 9,445 31,550 31,985
Impairment of long-lived assets........................ - 43,891 12,010 44,833
Restructuring costs.................................... 616 143 2,175 3,872
Amortization of intangibles and other.................. 613 563 1,819 1,692
------------------------------ ------------------------------
Operating income (loss)................................ 17,905 (32,312) 43,432 (30,930)
Net interest expense and amortization of debt costs.... (11,076) (11,369) (33,633) (35,056)
Loss on early extinguishment of debt................... (242) - (242) (4,940)
Gain on sale of assets held for sale................... 30 - 7,203 -
Foreign exchange and other............................. (971) 414 (737) (11)
------------------------------ ------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting.................... 5,646 (43,267) 16,023 (70,937)
Income tax expense (benefit)........................... 1,552 (15,762) 4,601 (25,617)
------------------------------ ------------------------------
Income (loss) before cumulative effect of change
in accounting..................................... 4,094 (27,505) 11,422 (45,320)
Cumulative effect of change in accounting (net of tax
$3,359)............................................ - - - 5,720
------------------------------ ------------------------------
Net income (loss)...................................... $ 4,094 $ (27,505) $11,422 $(39,600)
============================== ==============================
Earnings (loss) per share before cumulative effect of
change in accounting
Basic earnings (loss) per share........... $ 0.11 $ (0.74) $ 0.31 $ (1.22)
Diluted earnings (loss) per share.......... $ 0.11 $ (0.74) $ 0.30 $ (1.22)
Cumulative effect of change in accounting
Basic earnings (loss) per share........... $ - $ - $ - $ 0.15
Diluted earnings (loss) per share.......... $ - $ - $ - $ 0.15
Earnings (loss) per share
Basic earnings (loss) per share........... $ 0.11 $ (0.74) $ 0.31 $ 1.07
Diluted earnings (loss) per share.......... $ 0.11 $ (0.74) $ 0.30 $ (1.07)
Weighted average shares for basic earnings per share... 37,499 37,080 37,400 37,021
------------------------------ ------------------------------
Adjusted weighted average shares for diluted earnings
per share........................................ 37,723 37,080 37,595 37,021
============================== ==============================
See accompanying notes.
3
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 June 30
2005 2004
-------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents............................. $ 12,861 $ 27,235
Accounts receivable-net............................... 116,562 112,367
Inventories........................................... 112,749 107,439
Deferred income taxes and other....................... 11,577 10,207
-------------------------------
Total current assets.................... 253,749 257,248
Property, plant and equipment............................... 889,369 883,613
Less accumulated depreciation............................... (369,555) (345,981)
-------------------------------
519,814 537,632
Goodwill.................................................... 138,851 130,172
Intellectual property and other, net........................ 38,425 41,023
-------------------------------
Total assets.......................................... $950,839 $966,075
===============================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................ $ 30,355 $ 27,130
Accrued expenses...................................... 51,152 45,337
Current portion of capital lease obligation........... 672 632
Current portion of long-term debt..................... 998 16,972
-------------------------------
Total current liabilities................. 83,177 90,071
Long-term debt.............................................. $537,081 $587,076
Accrued post retirement benefits............................ 19,449 18,931
Deferred income taxes....................................... 44,392 37,956
Capital lease obligation.................................... 1,559 2,068
Other liabilities........................................... 192 628
Stockholders' equity........................................ 264,989 229,345
-------------------------------
Total liabilities and stockholders' equity............ $950,839 $966,075
===============================
See accompanying notes.
4
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
March 31
----------------------------------------
2005 2004
----------------------------------------
Operating activities
Net income (loss)................................................. $11,422 $(39,600)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting.................. - (5,720)
Impairment of long-lived assets............................ 12,010 44,833
Depreciation............................................... 34,703 34,796
Amortization .............................................. 2,699 3,335
Loss on early extinguishment of debt....................... 242 4,940
Deferred income taxes and other............................ 5,466 (11,943)
Gain on sale of assets held for sale....................... (7,203) -
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,752) 11,077
Inventories............................................ (4,786) 24,560
Other assets........................................... (4,027) (6,968)
Accounts payable and other current liabilities......... 9,021 (11,234)
----------------------------------------
Net cash provided by operating activities......................... 57,795 48,076
Investing activities
Purchases of property, plant and equipment.................... (23,014) (26,457)
Proceeds from sale of assets.................................. 13,662 -
Other......................................................... (401) (403)
----------------------------------------
Net cash used in investing activities............................. (9,753) (26,860)
Financing activities
Net borrowings (payments) under lines of credit.............. 1,200 (221,818)
Issuance of long term debt.................................... - 350,000
Payments on long-term debt and other.......................... (67,344) (173,182)
Payments for debt issuance costs.............................. (5) (9,102)
Payments related to early extinguishment of debt.............. - (2,115)
Proceeds from termination of swap............................. - 4,000
Net proceeds from sale of equity interests.................... 2,672 1,062
----------------------------------------
Net cash used in financing activities............................. (63,477) (51,155)
Effect of foreign currency rate fluctuations on cash.............. 1,061 1,028
----------------------------------------
Decrease in cash and cash equivalents............................. (14,374) (28,911)
Cash and cash equivalents at beginning of period.................. 27,235 49,977
----------------------------------------
Cash and cash equivalents at end of period........................ $12,861 $21,066
========================================
See accompanying notes.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In thousands)
NOTE A -- 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 and nine months
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2005. 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, as amended, for the year ended June 30, 2004. Except as otherwise
specified, references to years indicate our fiscal year ending June 30, 2005 or
ended June 30 of the year referenced and comparisons are to the corresponding
period of the prior year.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation. In fiscal 2005, amortization of intangibles is included in
operating income (loss). Previously, these expenses were in foreign exchange and
other. Amortization of intangibles was $613 and $1,819 for the three and nine
months ended March 31, 2005 and $563 and $1,692 for the same periods in 2004.
Translation adjustment
Management has determined that the local currency of our German, Irish,
Canadian, and Brazilian subsidiaries is the functional currency, and accordingly
European euro, Canadian dollar, and Brazilian real denominated balance sheet
accounts are translated into United States dollars at the rate of exchange in
effect at March 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 B -- CHANGE IN ACCOUNTING METHOD
Through June 30, 2003, we accounted for major planned maintenance
activities at our specialty fibers plant in Perry, Florida by accruing the cost
of the maintenance activities over the period between each planned maintenance
activity (the accrue in advance method), which ranged from two to five year
intervals. All other facilities expensed maintenance costs as incurred.
During the third quarter of fiscal 2004, we re-evaluated this critical
accounting policy and, effective July 1, 2003, changed our method of accounting
from the accrue-in-advance method to the direct expense method. Under the new
accounting method, maintenance costs are expensed as incurred. We believe the
new method is preferable in this circumstance because the maintenance liability
is not recorded until there is an obligating event (when the maintenance event
is actually being performed). The direct expense method eliminates significant
estimates and judgments inherent under the accrual method, and it is the
predominant method used in the industry.
The following table reflects the restated net income and earnings per
share as if the change in accounting for planned maintenance activities were
handled retroactively.
Three Months Ended Nine Months Ended
March 31 March 31
2005 2004 2005 2004
------------------------------------------------------
Net income (loss) as reported.......................... $4,094 $(27,505) $ 11,422 $(39,600)
Deduct: Cumulative effect of change in accounting for
planned maintenance costs, net of tax............. - - - 5,720
------------------------------------------------------
Pro forma net income (loss)............................ $4,094 $(27,505) $11,422 $(45,320)
======================================================
Earnings (loss) per share as reported
Basic......................................... $ 0.11 $ (0.74) $ 0.31 $ (1.07)
Diluted....................................... $ 0.11 $ (0.74) $ 0.30 $ (1.07)
Pro forma earnings (loss) per share
Basic......................................... $ 0.11 $ (0.74) $ 0.31 $ (1.22)
Diluted....................................... $ 0.11 $ (0.74) $ 0.30 $ (1.22)
NOTE C -- 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
March 31 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2005 $132,344 $56,617 $(8,051) $180,910
2004 121,289 57,259 (5,787) 172,761
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2005 15,192 3,552 (839) 17,905
2004 10,896 1,349 (44,557) (32,312)
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2005 6,931 4,412 893 12,236
intangibles 2004 7,037 4,782 831 12,650
------------------------------------------------------------------------------------------------------------
Capital expenditures 2005 9,566 943 726 11,235
2004 4,596 636 35 5,267
7
Nine Months Ended Specialty Nonwoven
March 31 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2005 $380,244 $170,604 $(21,993) $528,855
2004 343,195 161,654 (15,978) 488,871
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2005 49,140 10,568 (16,276) 43,432
2004 15,484 4,985 (51,399) (30,930)
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2005 21,015 13,038 2,636 36,689
intangibles 2004 20,638 13,517 2,493 36,648
------------------------------------------------------------------------------------------------------------
Capital expenditures 2005 19,768 2,180 1,066 23,014
2004 24,452 1,778 227 26,457
Management evaluates operating performance of the specialty fibers and
nonwoven materials segments excluding amortization of intangibles, the impact of
impairment of long-lived assets and charges related to restructuring. Therefore,
the corporate segment includes operating elements such as segment eliminations,
amortization of intangibles, impairment of long-lived assets and charges related
to restructuring. Corporate net sales represent the elimination of intersegment
sales included in the specialty fibers reporting segment. We account for
intersegment sales as if the sales were made to third parties, that is, at
current market prices.
NOTE D -- ASSETS HELD FOR SALE
In July 2004, we ceased production of nonwoven materials at our Cork,
Ireland facility. See Note F - Restructuring costs for more information on this
closure. Subsequent to the July 2004 closure of the facility, we began to
actively market the building and equipment with carrying values of $4,494 and
$1,505, respectively, and reclassified them as assets held for sale. In late
December of 2004, we completed the sale of the building to the Port of Cork
Company for $13,408. Although the carrying values of these assets were based on
appraisals and available market information at the time of the impairment in
March of 2004, the purchase of this building for strategic purposes by the Port
of Cork Company was not contemplated in those appraisals. As a result of the
sale and disposition of the building and equipment for net proceeds of $13,134
(net of $1,897 of decommissioning and selling costs), we recognized a net gain
of $7,203 ($4,688 net of tax and $0.12 per share net of tax) during the nine
months ended March 31, 2005. The gain is presented under the "Gain on sale of
assets held for sale" caption in the statement of operations.
NOTE E -- IMPAIRMENT COSTS
In January 2005, we announced our decision to discontinue producing
cotton linter pulp at our Glueckstadt, Germany facility. Our decision is due to
a combination of factors which have come together to increase the plant's costs
to a level at which it is uneconomical to continue operations. The most
significant factor impacting cost at the site has been the substantial
strengthening of the euro over the past two years. Specialty fibers are normally
priced and sold in U.S. dollars around the world. As most of Glueckstadt's costs
are denominated in euros, this substantial strengthening has had a negative
impact on Glueckstadt's cost position. Additionally, Glueckstadt's process
water, waste treatment and energy costs are more than twice the cost of these
utilities at our Memphis, Tennessee cotton-based specialty fibers facility.
Faced with these difficulties, we reduced the number of employees at the
facility from approximately 150 to approximately 100 and are currently operating
at 55% of capacity.
After careful consideration of all the options available, management
reached the decision to close the Glueckstadt facility and consolidate
production at our two other cotton-based specialty fibers manufacturing
facilities. We expect production at Glueckstadt to cease during the second
quarter of fiscal 2006. We believe that closing our Glueckstadt facility and
transferring a majority of its cotton-based specialty fiber production to our
Memphis, Tennessee and Americana, Brazil facilities later this calendar year
will yield a competitive cost structure.
8
During the second quarter of 2005 leading up to the decision to
discontinue production, we evaluated the recoverability of the long-lived assets
at the Glueckstadt facility in accordance with Statement of Financial Accounting
No. (SFAS) 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Based on this evaluation, we determined that these long-lived assets, with a
carrying amount of $15,280 (net of $3,215 of foreign currency translation
adjustment), were impaired and wrote them down to their estimated fair value of
$3,270, resulting in an impairment charge of $12,010. This fair value was based
on the remaining service potential of the facility through its expected closure
in the second quarter of fiscal 2006, plus the estimated salvage value, as we do
not believe the facility can be utilized for its intended purpose as it is
uneconomical for us or a third party to continue operations. We expect to
eventually sell the land, buildings and equipment.
NOTE F -- RESTRUCTURING COSTS
During fiscal 2003 we initiated the first phase of a restructuring
program designed to deliver cost reductions through reduced expenses across our
company. The main component of this phase was the partial closure of our
Lumberton, North Carolina facility, resulting in the consolidation of our U.S.
cotton linter pulp production at our Memphis, Tennessee facility and in the
elimination of approximately 100 positions within the specialty fibers segment.
We do not expect to incur any further expenses related to this program.
During the first quarter of fiscal 2004, we entered into a second phase
of our restructuring program. This program was a continuation of the program
initiated in the fourth quarter of fiscal 2003 and enabled us to improve our
operating results through reduced salaries, benefits, other employee-related
expenses and operating expenses. As a result of this restructuring, 76 positions
were eliminated and two additional positions will be eliminated over calendar
2005. These positions include manufacturing, sales, product development and
administrative functions throughout the organization. We expect payments related
to this phase of the restructuring program to continue through calendar 2005 and
expect costs to total approximately $3,500.
During the fourth quarter of fiscal 2004, we announced the cessation of
production of nonwoven materials at our Cork, Ireland facility. We have
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 by $4,000, and we expect will enable us to improve our overall
nonwoven materials operating results by about $7,000 annually. The closure of
the Cork facility and related reorganization of the nonwoven materials
organization resulted in the termination of 89 employees and expenses totaling
$3,046. We do not expect to incur any further expenses related to this program.
During January 2005, we announced that we will discontinue production
of cotton-based specialty fibers at our Glueckstadt, Germany facility during the
second quarter of fiscal 2006. We plan to continue to meet customer needs for
cotton-based specialty fibers by producing these products at our facilities in
Memphis, Tennessee and Americana, Brazil. We expect this consolidation will
enable us to improve our overall specialty fibers operating results by about
$9,000 annually and reduce working capital needs by approximately $6,000. The
closure of the Glueckstadt facility will result in the termination of 103
employees, and we expect restructuring expenses related to the closure to be
approximately $7,000 over the remainder of fiscal 2005 and 2006. We expect
payments related to this restructuring program to extend through the end of
fiscal 2006.
9
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 nine
months ended March 31, 2005.
Nine Months Ended
March 31, 2005
-------------------------------------
Accrual Accrual
Balance Impact Balance as
as of Of of Program Total
June 30, Additional Foreign March 31, Charges Estimated
2004 Charges Currency Payments 2005 to Date Charges
2003 Restructuring Program-Phase 1
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers............... $ - $ - $ - $ - $ - $1,656 $1,656
Nonwoven materials............. - - - - - 87 87
Other miscellaneous expenses
Specialty fibers............... - 111 - (111) - 901 901
Nonwoven materials............. - - - - - 83 83
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 1 - 111 (111) - 2,727 2,727
2003 Restructuring Program-Phase 2
Severance and employee benefits
Specialty fibers................. 263 278 7 (509) 39 1,884 1,947
Nonwoven materials............... - - - - - 39 39
Corporate........................ 121 - - (121) - 1,514 1,514
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 2 384 278 7 (630) 39 3,437 3,500
2004 Restructuring Program
Nonwoven materials
Severance and employee
Benefits....................... 1,750 1,007 16 (2,760) 13 2,774 2,774
Other miscellaneous expenses..... - 232 - (232) - 272 272
---------------------------------------------------------------- ------------------------
Total 2004 Program.................. 1,750 1,239 16 (2,992) 13 3,046 3,046
2005 Restructuring Program
Specialty fibers
Severance and employee
Benefits....................... - 491 - - 491 491 5,750
Other miscellaneous expenses..... - 56 - (56) - 56 1,250
---------------------------------------------------------------- ------------------------
Total 2005 Program.................. - 547 - (56) 491 547 7,000
---------------------------------------------------------------- ------------------------
Total All Programs.................. $2,134 $ 2,175 $23 $ (3,789) $543 $9,757 $16,273
NOTE G -- INVENTORIES
Inventories are valued at the lower of cost or market. The costs of
manufactured cotton-based specialty fibers and costs for nonwoven raw materials
are generally determined on the first-in, first-out (FIFO) basis. Other
manufactured products and raw materials are generally valued on an average cost
basis. Manufactured inventory costs include material, labor and manufacturing
overhead. Slash pine timber, cotton fibers and chemicals are the principal raw
materials used in the manufacture of our specialty fiber products. Fluff pulp is
10
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:
March 31 June 30
2005 2004
-----------------------------
Raw materials.......................... $35,844 $ 28,073
Finished goods......................... 55,475 57,118
Storeroom and other supplies........... 21,430 22,248
-----------------------------
$112,749 $107,439
=============================
NOTE H -- DEBT
The components of long-term debt consist of the following:
March 31 June 30
2005 2004
-----------------------------
Senior Notes due:
2013............................. $200,000 $200,000
Senior Subordinated Notes due:
2008............................. 79,822 99,737
2010............................. 152,682 153,061
Credit facility....................... 100,575 144,250
Other................................. 5,000 7,000
-----------------------------
538,079 604,048
Less current portion.................. 998 16,972
-----------------------------
$537,081 $587,076
=============================
Senior notes - On September 22, 2003, we placed privately $200,000 in
aggregate principal amount of 8.5% senior notes due October 1, 2013 (the "2013
Notes"). The notes are unsecured obligations and are senior to any of our
subordinated debt. The notes are guaranteed by our direct and indirect domestic
subsidiaries that are also guarantors on our senior secured indebtedness. The
senior notes are redeemable at our option, in whole or part, at any time on or
after October 1, 2008, at redemption prices varying from 104.25% of principal
amount to 100% of principal amount on or after October 1, 2011, together with
accrued and unpaid interest to the date of redemption. We used the net proceeds
from the private placement to redeem our $150,000 senior subordinated notes due
2005, make a permanent reduction of $40,000 to our revolving credit facility and
pay the related transaction costs. Total costs for the issuance of these notes
were $5,274 and will be amortized over the life of the senior notes using the
effective interest method. On September 22, 2003, we called the senior
subordinated notes due in 2005. These notes were redeemed on October 22, 2003.
On December 18, 2003, we completed our offer to exchange the privately placed
unregistered senior notes for debt securities of like principal amount of senior
notes that have been registered under the Securities Act of 1933, as amended.
During the nine months ended March 31, 2004, $3,300 was expensed
related to the early extinguishment of the $150,000 senior subordinated notes
due 2005. These expenses included a $2,115 call premium and $1,185 related to
the write-off of deferred financing costs.
Senior subordinated notes - During July 1996, we completed a public
offering of $100,000 principal amount of 9.25% unsecured Senior Subordinated
Notes due September 15, 2008 (the "2008 Notes"). These notes 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.
11
On February 21, 2005, we called $20,000 of the 2008 Notes. These 2008
Notes were redeemed on March 23, 2005. As a result of this redemption we wrote
off a portion of the deferred financing costs and unamortized discount related
to the redeemed bonds. During the three months ended March 31, 2005, we recorded
non-cash expenses of $242 related to the early extinguishment of debt.
On October 16, 2003, we successfully completed a solicitation of
consents from holders of our 2008 Notes to amend this indenture to conform
certain provisions of the 2008 Notes to the provisions in our notes due in 2010
and to current market practice. This amendment allowed us to refinance our
revolving credit facility in the fall of calendar 2003 (discussed later in this
note).
During June 1998, we completed a private placement of $150,000
principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010.
In fiscal 1999, we exchanged these outstanding notes for public notes with the
same terms. These notes are redeemable at our option, in whole or in part, at
any time on or after October 15, 2003, at redemption prices varying from 104% of
principal amount to 100% of principal amount on or after October 15, 2006,
together with accrued and unpaid interest to the date of redemption.
Under the indentures governing our senior subordinated notes, as well
as the indenture that governs our senior notes, our ability to incur additional
debt is limited. Under these indentures, additional debt must be incurred as
so-called "ratio debt" or, alternatively, must be permitted in form and amount
as "Permitted Indebtedness." In order to incur ratio debt, a specified
consolidated fixed charge coverage ratio (as defined in the indentures) must
equal or exceed 2:1 (measured on a rolling four-quarter basis). Falling below
the 2:1 ratio does not breach any covenant or constitute an event of default
under any of our debt agreements. Currently, we exceed the required 2:1 ratio
and as a result, are not limited to the "ratio debt" restrictions under the
indentures governing the senior notes and the senior subordinated notes. While
we can offer no assurance in this regard, we believe that our operating results
and recent reductions in our outstanding debt will enable us to continue to
exceed this ratio.
Interest rate swap - In May 2001, we entered into an interest rate swap
on $100,000 of 8% fixed rate notes maturing in October 2010. The swap converted
interest payments from a fixed rate to a floating rate of LIBOR plus 1.97%. This
arrangement qualified as a fair value hedge under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. As such, the net effect from the
interest rate swap was recorded as part of interest expense. On October 15,
2003, the swap counter party exercised its right to change the termination date
of the swap from October 15, 2010 to October 15, 2003. By exercising this right,
the swap counter party paid us $4,000 as an early termination fee, which is
being amortized as a reduction to interest expense through October 15, 2010. At
March 31, 2005, the unamortized portion of the termination fee was recorded as
an increase in debt of $3,167. During the three months ended March 31, 2005 and
2004, the swap reduced our interest expense by $143 and $143, respectively and
will continue to reduce interest expense through the amortization period of the
termination fee.
Revolving credit facility - On November 5, 2003, we established a
$220,000 senior secured credit facility (the "credit facility"), comprised of a
$70,000 revolving credit facility (the "revolver") maturing on September 15,
2008 and a $150,000 term loan (the "term loan") with serial maturities through
April 15, 2010. On March 15, 2005, we amended the credit facility in order to,
among other things, lower the applicable interest rate and modify the maturity
schedule. Effective March 15, 2005 the interest rate applicable to borrowings
under the term loan decreased 50 basis points. The amendment also reduced serial
maturities to $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 first nine months of fiscal
2005, we made an excess cash flow payment of $15,349 based on fiscal 2004
performance and additional voluntary payments of $28,401. Total payments on the
term loan, including required principal payments, during the nine months ended
March 31, 2005 were $44,875. Due to many contingent variables that affect
12
required excess cash flow payments under the credit facility, we are currently
unable to estimate a payment amount, if any, for the current fiscal year.
We had $100,575 outstanding on this facility ($99,375 on the term loan
and $1,200 on the revolver) at an average variable interest rate of 4.8% as of
March 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%. Effective March 15, 2005, the interest
rate applicable to the term loan is the agent's prime rate plus 1.00% or a
LIBOR-based rate plus 2.00%. The credit facility is secured by substantially all
of our assets located in the United States.
The credit facility contains covenants customary for financing of this
type. The financial covenants include: maximum ratio of consolidated net senior
secured debt to consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"), minimum ratio of consolidated EBITDA to consolidated
interest expense and minimum ratio of consolidated EBITDA minus capital
expenditures and taxes to consolidated fixed charges; as well as limitations on
capital expenditures, share repurchases and dividend payments. During the three
and nine months ended March 31, 2005, we were in compliance with these financial
covenants.
As of March 31, 2005, we had $66,084 of borrowing capacity on our
revolving credit facility. The portion of this capacity that we could borrow on
a particular date will depend on our financial results and ability to comply
with certain borrowing conditions under the revolving credit facility. The
commitment fee on the unused portion of the revolving credit facility is 0.40% -
0.50% per annum. Total costs for the issuance of the new facility were
approximately $3,300 and are being amortized using the effective interest method
over the life of the facility. The unamortized issuance costs are presented
under the "Intellectual property and other, net" caption on the balance sheet.
During the three months ended December 31, 2003, $1,640 was expensed related to
the early extinguishment of the previous credit facility. During the three
months ended March 31, 2005, $516 was expensed for costs incurred related to
the amendment of the senior secured credit facility and other financing
activities. These expenses are included in the foreign exchange and other
classification in the statement of operations.
NOTE I -- COMPREHENSIVE INCOME
The components of comprehensive income consist of the following:
Three Months Ended Nine Months Ended
March 31 March 31
---------------------------- -----------------------------
2005 2004 2005 2004
---------------------------- -----------------------------
Net income (loss)................................. $4,094 $(27,505) $11,422 $(39,600)
Foreign currency translation adjustments - net.... (5,284) (13,045) 21,470 9,012
---------------------------- -----------------------------
Comprehensive income (loss)....................... $ (1,190) $(40,550) $32,892 $(30,588)
============================ =============================
For the three and nine months ended March 31, 2005, the change in the
foreign currency translation adjustment is primarily due to fluctuations in the
exchange rate of the US dollar and the euro of $(4,202) and $5,197, the
Brazilian real of $(114) and $3,346 and the Canadian dollar of $(968) and
$12,927.
For the three and nine months ended March 31, 2004, the change in the
foreign currency translation adjustment is primarily due to fluctuations in the
exchange rate of the US dollar and the euro of $(11,840) and $5,318, the
Brazilian real of $(31) and $(255) and the Canadian dollar of $(1,174) and
$3,949.
13
NOTE J - INCOME TAXES
Our effective tax rates for the three and nine month periods ended
March 31, 2005 were 27.5% and 28.7%, respectively. Our effective tax rates for
the same periods of 2004 were 36.4% and 36.1%. The lower rates were primarily
due to the large tax benefit received as part of the impairment of the
Glueckstadt, Germany facility, which is in a high tax jurisdiction. Excluding
the tax benefit related to the impairment of long-lived assets, our effective
tax rates for the nine month period of 2005 would have been 32.7%. The lower
effective rate for the three months ended March 31, 2005 was due to the source
of our income shifting to lower tax rate jurisdictions and an increase in an
expected refund on amended tax returns. Our income tax expense (benefit) differs
from the amount computed by applying the statutory federal income tax rate of
35% to income (loss) before income taxes due to the following:
Three Months Ended Nine Months Ended
March 31 March 31
---------------------------- -----------------------------
2005 2004 2005 2004
---------------------------- -----------------------------
Expected tax expense (benefit) at 35%............. $1,976 $(15,143) $5,608 $(24,828)
Impairment of long-lived assets................... - - (360) -
Extraterritorial income benefit................... (305) (133) (796) (525)
Other............................................. (119) (486) 149 (264)
---------------------------- -----------------------------
$1,552 $(15,762) $4,601 $(25,617)
============================ =============================
NOTE K - STOCK-BASED COMPENSATION
At March 31, 2005, we have stock-based compensation plans which we
account for under the recognition and measurement principles of Accounting
Principle No. (APB) 25, Accounting for Stock Issued to Employees, and related
interpretations. The following table illustrates the effect on net income (loss)
and earnings (loss) per share if we had applied the fair value recognition
provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based
compensation.
Three Months Ended Nine Months Ended
March 31 March 31
--------------------------- -------------------------
2005 2004 2005 2004
--------------------------- -------------------------
Net income (loss) as reported $4,094 $(27,505) $11,422 $(39,600)
Deduct: Total stock-based compensation expense determined
under fair value based method, net of related tax
effects (372) (326) (1,345) (995)
--------------------------- -------------------------
Pro forma net income (loss) $3,722 $(27,831) $10,077 $(40,595)
=========================== =========================
Basic earnings (loss) per share:
As reported $ 0.11 $ (0.74) $ 0.31 $ (1.07)
Pro forma $ 0.10 $ (0.75) $ 0.27 $ (1.10)
Diluted earnings (loss) per share:
As reported $ 0.11 $ (0.74) $ 0.30 $ (1.07)
Pro forma $ 0.10 $ (0.75) $ 0.27 $ (1.10)
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 123 (revised 2004), Share-Based Payment, which is a revision of SFAS
123. SFAS 123(R) supersedes APB 25, Accounting for Stock Issued to Employees,
and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS
123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R)
requires all share-based payments to employees, including grants of employee
14
stock options, to be recognized in the income statement based on their fair
values. This revised standard will be effective for our reporting period
beginning July 1, 2005. SFAS 123(R) allows several adoption alternatives,
including retroactively applying the standard, or applying it prospectively.
We are currently assessing SFAS 12(R) to determine which transition method to
adopt.
As permitted by SFAS 123, the company currently accounts for
share-based payments to employees using APB 25 intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on our result of operations, although it is not expected to impact our overall
financial position. The impact of adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in
the future. However, had we adopted SFAS 123(R) in prior periods, the impact of
that standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share as shown in the table
above. SFAS 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. We cannot estimate what those amounts will be
in the future because they depend on, among other things, when employees
exercise stock options.
NOTE L - EMPLOYEE BENEFIT PLANS
We provide medical, dental and life insurance postretirement plans
covering certain U.S. employees who meet specified age and service requirements.
The components of net periodic benefit costs are as follows:
Three Months Ended Nine Months Ended
March 31 March 31
----------------------------- -----------------------------
2005 2004 2005 2004
----------------------------- -----------------------------
Service cost for benefits earned.................. $176 $188 $ 527 $565
Interest cost on benefit obligation............... 358 313 1,074 939
Amortization of unrecognized
prior service cost........................... (282) (282) (844) (844)
(Gain)/loss....................................... 97 84 292 251
----------------------------- -----------------------------
Total cost........................................ $349 $304 $1,049 $911
============================= =============================
We have evaluated the impact of FASB Staff Position (FSP) 106-2
Accounting and Disclosure Requirements related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act) and no amounts have
been recognized in the condensed consolidated financial statements related to
the Act as of March 31, 2005 due to its immateriality.
15
NOTE M -- COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share for the
three and nine month periods ended March 31, 2005 and 2004 was as follows:
Three Months Ended Nine Months Ended
March 31 March 31
--------------------------- -----------------------------
2005 2004 2005 2004
--------------------------- -----------------------------
Net income (loss)...................................... $4,094 $(27,505) $ 11,422 $(39,600)
=========================== =============================
Weighted-average shares of common stock outstanding.... 37,499 37,080 37,400 37,021
Effect of diluted shares............................... 224 - 195 -
--------------------------- -----------------------------
Weighted-average common and common equivalent
shares outstanding................................ 37,723 37,080 37,595 37,021
=========================== =============================
Earnings (loss) per share before cumulative effect of
change in accounting
Basic......................................... $ 0.11 $(0.74) $ 0.31 $(1.22)
Diluted....................................... $ 0.11 $(0.74) $ 0.30 $(1.22)
Cumulative effect of change in accounting
Basic......................................... - - - $(0.15)
Diluted....................................... - - - $(0.15)
Earnings (loss) per share
Basic......................................... $ 0.11 $(0.74) $ 0.31 $(1.07)
Diluted....................................... $ 0.11 $(0.74) $ 0.30 $(1.07)
NOTE N - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The guarantor subsidiaries presented below represent our subsidiaries
that are subject to the terms and conditions outlined in the indenture governing
the senior notes and that guarantee the notes, jointly and severally, on a
senior unsecured basis. The non-guarantor subsidiaries presented below represent
the foreign subsidiaries and the receivables subsidiary which do not guarantee
the senior notes. Each subsidiary guarantor is 100% owned directly or indirectly
by Buckeye Technologies Inc. and all guarantees are full and unconditional.
Supplemental financial information for Buckeye Technologies Inc. and
our guarantor subsidiaries and non-guarantor subsidiaries for the senior notes
is presented in the following tables.
16
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2005
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $25,840 $109,146 $54,292 $(8,368) $180,910
Cost of goods sold 21,912 90,291 46,838 (8,341) 150,700
-------------------------------------------------------------------------------
Gross margin 3,928 18,855 7,454 (27) 30,210
Selling, research and administrative
expenses, and other 1,543 8,120 2,026 - 11,689
Restructuring and impairment costs (1) 45 572 - 616
-------------------------------------------------------------------------------
Operating income (loss) 2,386 10,690 4,856 (27) 17,905
Other income (expense):
Net interest income (expense) and
amortization of debt costs (11,325) 41 208 - (11,076)
Other income (expense), including equity
income (loss) in affiliates 8,752 (13) (423) (9,499) (1,183)
Intercompany interest income (expense) 7,149 (5,429) (1,720) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes 6,962 5,289 2,921 (9,526) 5,646
-------------------------------------------------------------------------------
Income tax expense (benefit) 2,868 98 2,044 (3,459) 1,552
-------------------------------------------------------------------------------
Net income (loss) $ 4,094 $5,191 $ 877 $(6,067) $4,094
===============================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $ 22,672 $95,241 $61,164 $(6,316) $172,761
Cost of goods sold 17,518 82,292 57,503 (6,282) 151,031
-------------------------------------------------------------------------------
Gross margin 5,154 12,949 3,661 (34) 21,730
Selling, research and administrative
expenses, and other 2,326 5,304 2,378 - 10,008
Restructuring and impairment costs (96) 1,082 43,048 - 44,034
-------------------------------------------------------------------------------
Operating income (loss) 2,924 6,563 (41,765) (34) (32,312)
Other income (expense):
Net interest income (expense) and
amortization of debt costs (11,411) (77) 119 - (11,369)
Other income (expense), including equity
income (loss) in affiliates (36,932) 16 441 36,889 414
Intercompany interest income (expense) 8,420 (6,402) (2,018) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes (36,999) 100 (43,223) 36,855 (43,267)
-------------------------------------------------------------------------------
Income tax expense (benefit) (9,494) (3,640) (14,938) 12,310 (15,762)
-------------------------------------------------------------------------------
Net income (loss) $(27,505) $3,740 $(28,285) $24,545 $ (27,505)
===============================================================================
17
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2005
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $78,251 $317,195 $156,969 $(23,560) $528,855
Cost of goods sold 63,712 258,511 138,899 (23,253) 437,869
-------------------------------------------------------------------------------
Gross margin 14,539 58,684 18,070 (307) 90,986
Selling, research and administrative
expenses, and other 8,672 18,531 6,166 - 33,369
Restructuring and impairment costs - 166 14,019 - 14,185
-------------------------------------------------------------------------------
Operating income (loss) 5,867 39,987 (2,115) (307) 43,432
Other income (expense):
Net interest income (expense) and
amortization of debt costs (34,182) 65 484 - (33,633)
Other income (expense), including equity
income in affiliates 24,630 161 6,780 (25,347) 6,224
Intercompany interest income (expense) 22,660 (17,401) (5,259) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes 18,975 22,812 (110) (25,654) 16,023
-------------------------------------------------------------------------------
Income tax expense (benefit) 7,553 6,844 (47) (9,748) 4,601
-------------------------------------------------------------------------------
Net income (loss) $11,422 $ 15,968 $(63) $(15,905) $ 11,422
===============================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2004
Guarantors
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $ 63,657 $277,295 $168,091 $(20,172) $488,871
Cost of goods sold 51,090 251,289 154,607 (19,567) 437,419
-------------------------------------------------------------------------------
Gross margin 12,567 26,006 13,484 (605) 51,452
Selling, research and administrative
expenses, and other 10,987 15,948 6,742 - 33,677
Restructuring and impairment costs 1,589 3,489 43,627 - 48,705
-------------------------------------------------------------------------------
Operating income (loss) (9) 6,569 (36,885) (605) (30,930)
Other income (expense):
Net interest income (expense) and
amortization of debt costs (34,182) (243) (631) - (35,056)
Other income (expense), including equity
income in affiliates (50,041) 262 (128) 44,956 (4,951)
Intercompany interest income (expense) 24,220 (17,403) (6,817) - -
Intercompany miscellaneous
income (expense) (446) (950) 1,396 - -
-------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in accounting (60,458) (11,765) (43,065) 44,351 (70,937)
-------------------------------------------------------------------------------
Income tax expense (benefit) (20,858) (5,289) (14,771) 15,301 (25,617)
-------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting (39,600) (6,476) (28,294) 29,050 (45,320)
-------------------------------------------------------------------------------
Cumulative effect of change in accounting - 5,720 - - 5,720
-------------------------------------------------------------------------------
Net income (loss) $(39,600) $ (756) $ (28,294) $ 29,050 $ (39,600)
===============================================================================
18
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2005
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $2,101 $ 181 $10,579 $ - $ 12,861
Accounts receivable, net 13,848 71,173 31,541 - 116,562
Inventories 19,245 60,322 34,045 (863) 112,749
Other current assets 5,350 4,538 1,689 - 11,577
Intercompany accounts receivable - 14,468 - (14,468) -
-------------------------------------------------------------------------------
Total current assets 40,544 150,682 77,854 (15,331) 253,749
Property, plant and equipment, net 54,143 342,918 122,753 - 519,814
Goodwill and intangibles, net 20,975 54,042 91,715 - 166,732
Intercompany notes receivable 333,517 - - (333,517) -
Other assets, including investment in
subsidiaries 301,946 323,017 121,836 (736,255) 10,544
-------------------------------------------------------------------------------
Total assets $751,125 $870,659 $414,158 $(1,085,103) $ 950,839
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable $ 5,873 $17,822 $ 6,660 - $ 30,355
Other current liabilities 25,744 18,248 8,830 - 52,822
Intercompany accounts payable 10,500 - 3,968 (14,468) -
-------------------------------------------------------------------------------
Total current liabilities 42,117 36,070 19,458 (14,468) 83,177
Long-term debt 537,081 - - - 537,081
Deferred income taxes (38,403) 63,869 18,926 - 44,392
Other long-term liabilities 5,531 14,341 1,328 - 21,200
Intercompany notes payable - 213,293 120,224 (333,517) -
Stockholders'/invested equity 204,799 543,086 254,222 (737,118) 264,989
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $751,125 $870,659 $414,158 $(1,085,103) $950,839
===============================================================================
19
CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $14,746 $ 103 $12,386 $ - $ 27,235
Accounts receivable, net.................. 15,502 58,631 38,234 - 112,367
Inventories............................... 21,770 51,722 34,503 (556) 107,439
Other current assets...................... 9,408 5,008 (4,209) - 10,207
Intercompany accounts receivable.......... - 22,604 6,109 (28,713) -
-------------------------------------------------------------------------------
Total current assets 61,426 138,068 87,023 (29,269) 257,248
Property, plant and equipment, net.......... 54,042 347,782 135,808 - 537,632
Goodwill and intangibles, net............... 21,012 55,241 83,114 - 159,367
Intercompany notes receivable............... 369,279 - - (369,279) -
Other assets, including investment in
subsidiaries............................. 290,493 330,210 114,164 (723,039) 11,828
-------------------------------------------------------------------------------
Total assets $796,252 $871,301 $420,109 $(1,121,587) $966,075
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 5,860 $16,118 $ 5,152 $ - $ 27,130
Other current liabilities................. 34,493 17,390 11,058 - 62,941
Intercompany accounts payable............. 17,063 - 11,650 (28,713) -
-------------------------------------------------------------------------------
Total current liabilities 57,416 33,508 27,860 (28,713) 90,071
Long-term debt.............................. 585,076 2,000 - - 587,076
Deferred income taxes....................... (40,480) 61,732 16,704 - 37,956
Other long-term liabilities................. 5,385 14,657 1,585 - 21,627
Intercompany notes payable.................. - 236,883 132,396 (369,279) -
Stockholders'/invested equity............... 188,855 522,521 241,564 (723,595) 229,345
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $796,252 $871,301 $420,109 $(1,121,587) $966,075
===============================================================================
20
CONDENSED COSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2005
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $44,470 $18,345 $(5,020) $57,795
Investing activities:
Purchases of property, plant and equipment (3,490) (15,969) (3,555) (23,014)
Proceeds from sale of assets and other - (384) 13,645 13,261
---------------------------------------------------------------
Net cash provided by (used in) investing (3,490) (16,353) 10,090 (9,753)
activities
Financing activities
Net borrowings under
line of credit 1,200 - - 1,200
Payments for debt issuance and
extinguishment (5) - - (5)
Net payments on long-term
debt and other (54,820) (1,914) (7,938) (64,672)
---------------------------------------------------------------
Net cash used in
financing activities (53,625) (1,914) (7,938) (63,477)
Effect of foreign currency rate fluctuations
on cash - - 1,061 1,061
---------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (12,645) 78 (1,807) (14,374)
Cash and cash equivalents at beginning
of period 14,746 103 12,386 27,235
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,101 $181 $10,579 $12,861
===============================================================
CONDENSED COSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $ (650) $ (8,347) $57,073 $ 48,076
Investing activities:
Purchases of property, plant and equipment (6,356) (18,419) (1,682) (26,457)
Proceeds from sale of assets and other - (406) 3 (403)
---------------------------------------------------------------
Net cash used in investing activities (6,356) (18,825) (1,679) (26,860)
Financing activities
Net payments under
line of credit (209,125) - (12,693) (221,818)
Payments for debt issuance and
extinguishment (9,102) - - (9,102)
Net issuance of (payments on) long-term
debt and other 211,359 23,243 (54,837) 179,765
---------------------------------------------------------------
Net cash provided by (used in)
financing activities (6,868) 23,243 (67,530) (51,155)
Effect of foreign currency rate fluctuations
on cash - - 1,028 1,028
---------------------------------------------------------------
Decrease in cash and cash equivalents (13,874) (3,929) (11,108) (28,911)
Cash and cash equivalents at beginning
of period 26,075 4,349 19,553 49,977
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,201 $ 420 $ 8,445 $ 21,066
===============================================================
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Results of
Operations and Financial Condition ("MD&A") summarizes the significant factors
affecting our results of operations, liquidity, capital resources and
contractual obligations, as well as discussing our critical accounting policies.
This discussion should be read in conjunction with the accompanying unaudited
financial statements and our Annual Report on Form 10-K, as amended, for the
year ended June 30, 2004 ("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, 2005 or ended June 30 of the year referenced and
comparisons are to the corresponding period of the prior year. The following
discussion includes a comparison of the results of operations for the three and
nine months ended March 31, 2005 to the three and nine months ended March 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 months ended March 31, 2005 was both an encouraging and a
challenging period. Our specialty fibers markets remained strong. We continue to
have more sales opportunities than we have productive capacity for high end
specialty fibers, and our inventories are at extremely low levels. We are
carefully matching sales with production to optimize our product mix and move
product into higher value niche markets. Demand in areas such as rayon
industrial cord and acetate products for liquid crystal displays is very strong.
To accommodate demand for high end products, we have added a shift to
our Memphis, Tennessee cotton-based specialty fibers facility. We began
operating this facility on a four-shift schedule during March 2005. The
additional shift at Memphis will also help accommodate a smooth transition of
the business currently sourced at the Glueckstadt, Germany facility as we cease
production at our Glueckstadt facility during the second quarter of fiscal 2006.
The positive events in our markets and our ability to strengthen our
balance sheet are being dampened by rising costs for chemicals, energy, and
other materials. High costs in these areas are restraining our operating
margins. Since demand for our specialty fibers is sufficiently strong, we
believe we can implement price increases in the future. However, we are somewhat
restrained from doing this quickly due to existing commercial agreements.
We ceased producing airlaid nonwoven materials at our Cork, Ireland
facility in late July and successfully transitioned the majority of the product
previously produced at Cork to our larger dual-line plants in Europe and North
America. This increased the capacity utilization at our other airlaid nonwovens
facilities and as a result we have seen improved earnings in our nonwovens
22
segment. The full on-going benefit of these cost savings was realized during the
three months ending March 31, 2005 and will total approximately $7 million
annually. However, the recent slowing of sales growth for airlaid nonwoven
materials is a concern. Our sales for the three months ended March 31, 2005 were
slightly below the same period of the previous year.
Our cash flow during the three months ended March 31, 2005 remained
strong. During the period, we reduced the debt on our balance sheet by $32.5
million. Although we were not able to cost effectively obtain the consent of the
holders of our 2013 Notes to refinance our 2008 Notes with bank debt, we elected
to call a portion of our 2008 Notes. During the quarter we retired $20 million
of the relatively high cost 9.25% 2008 Notes from the market. We intend to call
the remainder of the 2008 Notes in advance of their maturity on September 15,
2008.
We are encouraged by progress on several fronts:
o We launched a new product, Ultra Fiber 500, a revolutionary concrete
reinforcement fiber at the World of Concrete exhibit in Las Vegas,
Nevada in January 2005. Ultra Fiber 500 was voted the most innovative
new product at the show. As we have previously reported, we are
currently establishing distribution for this product in the United
States as well as in foreign markets. All early signs continue to be
positive.
o The demand for liquid crystal display screens for laptop computers and
television sets continues to expand rapidly. Our cotton cellulose
fibers are a small but critical component of the construction of these
screens.
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 on
schedule. As mentioned, we have added a shift at our Memphis, Tennessee
facility and believe we are well- positioned to supply cotton-based
specialty fiber products from facilities with a significantly more
favorable cost structure in North and South America during the second
quarter of fiscal 2006.
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, and other materials. Additionally, the extra administrative expense
brought about by compliance with the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") is burdensome. 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 nine months ended March 31, 2005 and 2004.
---------------------------------------------------------------------------------------------------------------------------
(millions) Three Months Ended March 31 Nine Months Ended March 31
--------------------------- --------------------------
2005 2004 Change % Change 2005 2004 Change % Change
------------------------------------------- --------------------------------------------
Net sales $ 180.9 $172.8 $ 8.1 5% $ 528.9 $488.9 $40.0 8%
Cost of goods sold 150.7 151.1 (0.4) - 437.9 437.4 0.5 -
------------------------------------------- --------------------------------------------
Gross margin 30.2 21.7 8.5 39% 91.0 51.5 39.5 77%
Selling, research and
administrative expenses 11.1 9.4 1.7 18% 31.6 32.0 (0.4) (1)%
Impairment costs - 43.9 (43.9) * 12.0 44.8 (32.8) *
Restructuring costs 0.6 0.1 0.5 * 2.2 3.9 (1.7) *
Amortization of intangibles
and other 0.6 0.6 - - 1.8 1.7 0.1 6%
------------------------------------------- --------------------------------------------
Operating income (loss) $ 17.9 $ (32.3) $ 50.2 * $43.4 $(30.9) $74.3 *
=========================================== ============================================
* Percent change is not meaningful
23
Net sales continued to improve overall during the three and nine months
ended March 31, 2005 versus the same period in 2004 due primarily to increased
pricing in both specialty fibers and nonwoven materials. Improvements in the mix
of specialty fibers also contributed to the improvement in net sales during both
three and nine month periods. These improvements were partially offset by lower
nonwoven shipment volume during the three months ended March 31, 2005 versus
2004.
Gross margins for both the three and nine month periods were positively
impacted by the higher selling prices discussed in the previous paragraph.
Additionally, the results for the nine months ended March 31, 2005 were helped
by the absence of several additional specialty fibers charges related to unusual
events and special circumstances, including an extended maintenance shutdown at
our Perry, Florida specialty fiber facility that occurred during the nine months
ended March 31, 2004. These items are discussed further in the "Segment Results"
section of this discussion and analysis.
Selling, research and administrative expenses increased during the
three months ended March 31, 2005 versus 2004 primarily due to increased
accounting and consulting fees related to the implementation of Sarbanes-Oxley.
External costs related to the implementation of Sarbanes-Oxley totaled
approximately $1.5 million for the nine months ended March 31, 2005. Despite the
increase in expenses due to Sarbanes-Oxley, selling, research and administrative
expenses decreased during the nine month period ending March 31, 2005 versus the
same period of the previous year. This decrease was primarily due to the absence
of $3.2 million of bad debt expense incurred during the second quarter of fiscal
2004 as a result of the bankruptcy filing of a large specialty fibers customer.
In arriving at our decision to close our Glueckstadt, Germany,
cotton-based specialty fibers facility, we evaluated the recoverability of our
long-lived assets at the facility and recognized an impairment charge of $12.0
million in December 2004. As of March 31, 2005, we have incurred $0.5 million of
restructuring costs as part of this planned closure. The remaining restructuring
costs incurred during the nine months ended March 31, 2005 were primarily
related to the program initiated as part of the closure of our Cork, Ireland
facility.
Further discussion on revenue, operating trends, impairment and
restructuring costs are discussed later in this MD&A. Additional information on
the impairment and restructuring programs and charges may also be found in Note
E and Note F 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 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.
24
Specialty fibers
The following table compares specialty fibers net sales and operating
income for the three and nine months ended March 31, 2005 and 2004.
(millions) Three Months Ended March 31 Nine Months Ended March 31
--------------------------- --------------------------
2005 2004 Change % Change 2005 2004 Change % Change
---------------------------------------------------------------------------------------------------
Net sales $ 132.3 $121.3 $ 11.0 9% $ 380.2 $343.2 $37.0 11%
Operating income 15.2 10.9 4.3 39% 49.1 15.5 33.6 217%
Net sales increased during the three and nine months ended March 31,
2005 versus 2004 due primarily to improved pricing and mix. Improvements in
selling prices and mix were driven by several factors. Continued overall
strengthening of the economy increased demand for pulp and paper products,
driving up commodity pulp prices. While our average fluff pulp price increased
by 16.9% and 13.9% year over year for the three and nine month periods ending
March 31, 2005, we can offer no assurances that this increase in fluff pulp
pricing will continue or that this trend will not reverse direction during the
remainder of fiscal 2005. Also, the tight supply conditions due to facility
closures helped to increase overall specialty fibers pricing and improve the mix
of products during the three and nine month periods ended March 31, 2005 versus
2004.
Over the last year, we have improved the product mix of our wood-based
specialty fibers operations by transferring a portion of our wood cellulose
production away from fluff pulp into higher value chemical applications. Our
overall wood-based chemical cellulose and customized fibers volume increased
15.0% during the first nine months of fiscal 2005 versus the same period in
fiscal 2004. Although the price of commodity pulps has risen during the last
year, we continue to believe that over the long run we will be better served by
having more of our production in high value specialty grades and a smaller
exposure to the more volatile fluff pulp market.
Sales price increases and decreases for cotton-based products are
influenced by, among other things, the variability in the cost and supply of
cotton fibers. As the cost of these fibers increased, we increased our sales
prices. Although these price increases had a positive impact on revenue and
operating income during the first nine months of fiscal 2005, they were
partially offset by the higher fiber costs and the weaker U.S. dollar, which
negatively impacts manufacturing costs at our Glueckstadt, Germany facility.
Rising energy and chemical prices continued to push manufacturing costs
higher for the three and nine months ended March 31, 2005. The continued
increase of these prices during the period had a significantly larger impact on
the three months ended March 31, 2005 than it did in the previous quarters. We
expect the impact of these higher prices to be approximately $7 million for
fiscal 2005. While we were able to recover a portion of these costs through
raising the price for our products, we expect that rising energy and chemical
prices will continue to put pressure on our margins during the upcoming
quarters. The allocation of costs related to the implementation of
Sarbanes-Oxley also offset the improvement in pricing, mix, and volume during
the period. Similar to the increases in chemical and energy costs, the
Sarbanes-Oxley implementation costs had a greater impact on the three months
ended March 31, 2005 than they had earlier in the fiscal year.
In spite of the increase in costs, operating income substantially
improved during the three and nine months ending March 31, 2005 over the same
periods in the prior year based on the strong improvement in sales. The
improvement in the nine month period was also due to the absence of several
additional charges related to unusual events and special situations that
occurred during the quarter ended December 2003. These unusual events and
special situations included: the planned maintenance shutdown of our Perry,
Florida facility ($9.6 million), the bankruptcy of a large customer ($3.2
million), the ratification of a new labor agreement that included a one-time
retroactive payment ($0.8 million), and high costs associated with reduced
production at our Perry, Florida and Memphis, Tennessee specialty fibers
facilities.
25
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 expect that, when this upgrade is completed in the fall
of 2005, this production capability will be a significant contributor to our
profitability.
Nonwoven materials
The following table compares nonwoven materials net sales and operating
income for the three and nine months ended March 31, 2005 and 2004.
(millions) Three Months Ended March 31 Nine Months Ended March 31
--------------------------- --------------------------
2005 2004 Change % Change 2005 2004 Change % Change
--------------------------------------------------------------------------------------------
Net sales $ 56.6 $57.3 $(0.7) (1%) $170.6 $161.7 $ 8.9 6%
Operating income 3.6 1.3 2.3 177% 10.6 5.0 5.6 112%
The increase in net sales during the nine months ended March 31, 2005
was due to an increase in shipment volume, improved pricing, and the
strengthening of the euro versus the U.S. dollar. Although we ceased production
at our Cork, Ireland facility in July, we continued shipping inventory from Cork
through November and completed the transition of a majority of Cork's sales to
our other nonwoven materials facilities.
Net sales were down 1% for the three months ended March 31, 2005 as
lower volume offset improved prices and the impact of a stronger euro compared
to the prior year. Sales growth in airlaid nonwovens was impacted by the fact
that a North American competitor emerged from bankruptcy under new ownership and
aggressively sought new business in the over-supplied North American market. The
competitive action had an impact on volume in some price sensitive areas.
Operating income improved significantly for the three and nine months
ended March 31, 2005. The improvement was primarily due to higher selling prices
and the closure of our high cost Cork, Ireland facility, the benefit of this
closure was fully realized during the three months ended March 31, 2005.
Overall, our nonwoven materials business supported increased shipment and
production volume with one less manufacturing facility. Our Gaston, North
Carolina facility continued to show improvement in its operating performance
compared to the prior year due to significant increases in shipment volume and
the resulting improvement in capacity utilization. These improvements were
partially offset by price increases on raw materials. The cost of fluff pulp,
bi-component fibers, and binder materials increased for the three and nine
months ended March 31, 2005 versus the same periods in 2004.
26
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 nine month period ended March 31, 2005 and 2004.
-------------------------------------------------------------------------------------------------------
Nine Months Ended Total Estimate to
December 31 Estimated Complete
----------- Program at March 31,
(millions) 2005 2004 Charges 2005
-------------------------------------------------------------------------------------------------------
Restructuring costs
2005 Restructuring program............... $ 0.6 $ - $7.0 $6.4
2004 Restructuring program............... 1.2 - 3.1 -
2003 Restructuring program - phase 2..... 0.3 3.0 3.5 0.1
2003 Restructuring program - phase 1..... 0.1 0.9 2.7 -
-----------------------------------------------------
Total restructuring costs 2.2 3.9 16.3 6.5
Impairment charges....................... $12.0 $44.8
--------------------------------------------------------------------------
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 which came together to increase the plant's costs to a
level at which it is uneconomical to continue operations. The most significant
factor impacting cost at the site has been the substantial strengthening of the
euro over the past two years. Specialty fibers are normally priced and sold in
U.S. dollars around the world. As most of Glueckstadt's costs are denominated in
euros, this currency fluctuation has had a negative impact on Glueckstadt's cost
position. While we began to invoice many Glueckstadt customers in euros rather
than dollars during the period, our customers still benchmarked the euro prices
to the U.S. dollar equivalent level. We also raised the selling price of our
product by approximately 15% over the past year to partially offset our higher
costs. However, prices are now at a level that are negatively impacting our
volume.
We also attempted to address the situation by focusing on new high
value grades, offered at higher selling prices. While some of these new grades
such as extra high strength paper pulps developed considerable customer
interest, we have been unable to generate enough volume to make them economical.
Additionally, Glueckstadt's process water, waste treatment and energy costs are
supplied by a site partner through a supply agreement that expires at the end of
2005. The cost of the services provided under the current agreement is more than
twice what we pay for these utilities at our Memphis cotton-based specialty
fibers facility. The provider of these services has indicated that these costs
will likely increase in 2006 and beyond. Faced with these challenges, we reduced
the number of employees at Glueckstadt by about one-third over the past year
(from approximately 150 to approximately 100) and are currently operating the
Glueckstadt facility at 55% of capacity.
After careful consideration of all the options available, management
reached the decision to close the Glueckstadt facility and consolidate
production at our two other manufacturing facilities. We expect production at
Glueckstadt to cease during the second quarter of fiscal 2006. We expect the
closing our Glueckstadt facility and transfer of the cotton-based specialty
fiber production to our Memphis, Tennessee and Americana, Brazil facilities
later this calendar year, will yield a superior cost structure and improve
margins.
We expect this consolidation to enable us to improve our overall
specialty fibers operating results by approximately $9 million annually and
reduce working capital needs by approximately $6 million. The closure of the
Glueckstadt facility will result in the termination of approximately 100
employees, and we expect restructuring expenses related to the closure to be
27
approximately $7 million over the remainder of fiscal 2005 and 2006. We expect
payments related to this restructuring program will extend through the end of
fiscal 2006.
Based on our inability to recover the remaining value of the long-lived
assets at the Glueckstadt, Germany facility, we determined that these long-lived
assets, with a carrying amount of $15.3 million, were impaired and wrote them
down to their estimated fair value of $3.3 million, resulting in an impairment
charge of $12.0 million ($7.4 million after tax).
2004 Restructuring program
During March 2004, our Board of Directors approved the discontinuation
of production of nonwoven materials at our Cork, Ireland facility. While the
demand for nonwoven products grew at a rate in the low to mid-single digits on
an annualized basis, the growth in demand was not sufficient to fully utilize
the existing capacity. As such, industry participants rationalized production by
idling plants and closing facilities.
Due to excess production capacity around the globe, we operated Cork
below its productive capacity from its inception in 1998. Because of its
location and small size, our cost to produce at Cork was higher than it is at
our other locations. After careful consideration of all the options available,
management reached the decision 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 by $4 million, and we expect this will enable us to improve our
overall nonwoven materials operating results by approximately $7 million
annually. We began to fully realize this on-going benefit during the three
months ended March 31, 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 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 Lumberton, North Carolina facility due to
the decline in demand for cotton content paper. We completed this partial
closure in August 2003 but continue to produce cosmetic cotton products at the
Lumberton site. This decision reflects a steady decline in demand in the cotton
fiber paper industry, which contracted by about one-third since the late 1990's.
While cotton linter pulp is one of our core businesses, the demand did not
economically justify operating a facility that could only produce products for
paper applications.
To better meet our customers' needs, we consolidated our U.S. cotton
linter pulp production at our larger Memphis, Tennessee and Glueckstadt, Germany
facilities. In conjunction with the consolidation, we initiated the first phase
of a restructuring program designed to deliver cost reductions through reduced
expenses across the company, the main component of which was the partial closure
of our Lumberton, North Carolina facility. This phase of restructuring resulted
in the elimination of approximately 100 positions within the specialty fibers
segment. The resulting increase in facility utilization is enabling us to
improve our operating results by an estimated $6 million annually. This more
efficient operating configuration began to reduce our cost of goods sold
beginning in January 2004. This closure reduced our working capital needs by
approximately $10 million. We do not expect additional expenses related to this
phase of the program.
During the first quarter of fiscal 2004, we entered into a second phase
of this restructuring program. This phase of the program should enable 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, 76 positions have been eliminated,
and two additional positions will be eliminated during calendar year 2005. These
28
positions include manufacturing, sales, product development and administrative
functions throughout the organization. We expect the full benefit of this
restructuring will not be realized until the end of calendar 2005and that
payments related to this phase of the restructuring program to continue into
calendar 2005 and expect costs to total approximately $3.5 million.
Net interest expense and amortization of debt costs
Net interest expense and amortization of debt costs decreased $0.3
million and $1.5 million for the three and nine month periods ending March 31,
2005 versus the same periods in the prior year. Our decrease in outstanding debt
of $73.4 million since March 31, 2004 had a positive impact on interest expense
during both the three and nine month periods ending March 31, 2005. Also
contributing to the difference was the additional interest expense incurred as
part of our debt refinancing initiatives in the fall of 2003. During the 30-day
call period with respect to the 2005 Notes in September and October of 2003 both
the $150 million of senior subordinated notes due 2005 and the $200 million of
2013 Notes were outstanding. Also as part of the debt restructuring we
refinanced our senior secured credit facility in November 2003. The lower rates
achieved as part of the refinancing has helped to offset the increase in
variable market interest rates provided for under our senior secured credit
facility over the past year. For further information regarding our debt
restructuring, see Note H of the accompanying interim financial statements.
Income tax expense
Our effective tax rate for the three and nine months ended March 31,
2005 was 27.5% and 28.7% versus 36.4% and 36.1% for the same periods in 2004.
The lower rates were primarily due to the large tax benefit received as part of
the impairment of the Glueckstadt, Germany facility which is in a high tax
jurisdiction. Excluding the impact of the Glueckstadt impairment, the effective
tax rate for the nine months ended March 31, 2005 would have been 32.7% versus
36.1% for the same period of 2004. The lower effective tax rate for the three
months ended March 31, 2005 was due to the source of income shifting to lower
tax rate jurisdictions and an increase in an expected refund on amended tax
returns. Our effective tax rate may vary in future quarters due to the amount
and source of income, results of tax audits and changes in tax legislation. We
currently expect the effective tax rate for the remainder of the fiscal year to
be 33%, resulting in an overall estimated tax rate of 29% for fiscal 2005.
Gain on sale of assets held for sale
In July 2004, we ceased production of nonwoven materials at our Cork,
Ireland facility. Subsequent to the July 2004 closure of the facility, we began
to actively market the building and equipment with carrying values of $4.5
million and $1.5 million, respectively. In late December of 2004, we completed
the sale of the Cork facility building to the Port of Cork Company for $13.4
million. Although the carrying values of these assets were based on appraisals
and available market information at the time of the impairment in March of 2004,
the purchase of this building for strategic purposes by the Port of Cork Company
was not contemplated in those appraisals. As a result of the sale and
disposition of the building and equipment for net proceeds after decommissioning
and other expenses of $13.2 million, we recognized a net gain of $7.2 million
($4.7 million net of tax) during the nine months ended March 31, 2005.
Loss on early extinguishment of debt costs
On March 23, 2005 we used cash on hand to redeem $20 million of our
2008 Notes. As a result of this partial extinguishment, we wrote-off a portion
of deferred financing costs, resulting in non-cash expense of $0.2 million
during the three months ended March 31, 2005.
On September 22, 2003, we placed privately $200 million in aggregate
principal amount of 8.5% 2013 Notes. The notes are unsecured obligations and
rank senior to any of our subordinated debt. The notes are guaranteed by our
direct and indirect domestic subsidiaries that are also guarantors on our senior
29
secured indebtedness. We used the net proceeds from the private placement to
redeem our $150 million senior subordinated notes due 2005. As a result of the
extinguishment, $3.3 million was expensed during the three months ended
September 30, 2003. These expenses included a $2.1 million call premium and $1.2
million related to the write-off of deferred financing costs.
On November 5, 2003, we established a $220 million senior secured
credit facility. This facility amended and restated our then existing $215
million revolving credit facility. We used the proceeds of the new credit
facility to pay the outstanding balance on the former revolving credit facility
plus transaction fees and expenses. During the three months ended December 31,
2003, $1.6 million was expensed related to the early extinguishment of the
previous credit facility.
Foreign exchange and other
During the three months ended March 31, 2005, we incurred $0.5 million
of expenses related to amending our senior secured credit facility and other
financing related costs. These costs consisted primarily of legal and
transaction support fees. The amendment to the credit facility, among other
things, lowered the effective interest rate on our term loan by 50 basis points,
reduced the required quarterly principal payments to $0.2 million, changed the
final maturity of the term loan to one lump sum payment, and changed various
definitions. See Note H of the accompanying interim financial statements for
further discussion of these expenses. The remainder of the expenses in the
foreign exchange and other caption were primarily the result of the decrease in
the value of the euro during the three month period ending March 31, 2005.
Cumulative effect of change in accounting
Historically, we accrued expenses related to extended maintenance
shutdowns at our Perry, Florida facility. However, effective July 1, 2003, we
changed our method of accounting from the accrue in advance method to the direct
expense method. Based on this change, during the three months ended September
30, 2003 we reversed the planned maintenance shutdown accrual of $9.1 million
and recorded a cumulative effect of change in accounting adjustment of $5.7
million (net-of-taxes of $3.4 million). See Note B of the accompanying interim
financial statements for further discussion of this change in accounting.
Financial Condition
Cash flow
Net cash provided by operating activities
We generated cash from operating activities of $57.8 million and $48.1
million during the nine months ended March 31, 2005 and 2004, respectively.
During the nine months ended March 31, 2005, improved earnings were partially
offset by increases in accounts receivable and inventories. During 2004, cash
from operating activities benefited from a change in our cash management
strategy. We began discounting large letters of credit, enabling us to reduce
our debt and interest costs, resulting in a permanent decrease in account
receivables of approximately $10 million. During the nine months ended March 31,
2005, we used $4.8 million to build inventories primarily reflecting higher
costs for raw materials versus generating $24.6 million of cash through
reductions in finished goods inventories during the same period of 2004.
Net cash used in investing activities
During the nine months ended March 31, 2005, we used $9.8 million cash
in investing activities versus $26.9 million in the same period of 2004. This
decrease was primarily the result of selling the Cork, Ireland building and
equipment during December 2004 for net proceeds of $13.2 million.
Also contributing to the decrease were lower overall purchases of
property, plant and equipment. In addition to our normal level of capital
expenditures, we incurred $2.1 million during the nine months ended March 31,
30
2005 to upgrade our Americana, Brazil specialty fibers facility. During 2004, we
made incremental capital expenditures related to the planned maintenance
shutdown at our Perry, Florida specialty fibers facility and capital
expenditures at our Memphis, Tennessee specialty fibers facility to provide the
capability to manufacture cotton-based cellulose products previously
manufactured at our Lumberton, North Carolina facility.
In addition to $2.1 million we have incurred to upgrade our Americana,
Brazil specialty fibers facility, we expect to incur approximately $8 million
during the remaining three months of the fiscal 2005 and about an additional $8
million during fiscal 2006 related to the upgrade. We expect capital
expenditures for fiscal 2005 to total about $40 million.
Net cash provided by (used in) financing activities
We continued to use cash from operating activities to reduce our debt
during the nine months ended March 31, 2005. On March 23, 2005 we used cash
on-hand to redeem $20 million of our 2008 Notes. Under our senior secured credit
facility, we were required to make a payment on our term loan for our excess
cash flow (as defined under the credit agreement), based on fiscal 2004
performance. During the first nine months of fiscal 2005, we made an excess cash
flow payment of $15.3 million based on fiscal 2004 performance and additional
voluntary payments of $28.4 million. Total payments on the term loan, including
required principal payments, during the nine months ended March 31, 2005 were
$44.9 million. Due to many contingent variables that effect this payment, we are
currently unable to estimate an excess cash flow payment for the current fiscal
year.
During the first quarter of fiscal 2004, we began the restructuring of
our debt position by redeeming our $150 million senior subordinated notes due
2005 and making a permanent reduction on our revolving credit facility by
issuing $200 million of our 2013 Notes. Further information on this issuance can
be found in Note H to the financial statements of this quarterly report.
During the second quarter of fiscal 2004, we established a $220 million
senior secured credit facility, comprised of a $70 million revolving credit
facility and a $150 million term loan with serial maturities through September
2008. This facility amended and restated our then existing $215 million
revolving credit facility. We used the proceeds of the new credit facility to
pay the outstanding balance on the former revolving credit facility plus
transaction fees and expenses. We further amended this facility on March 15,
2005 to, among other things, reduce the effective interest rate on term loan
borrowings by 50 basis points. Further information on this issuance and
amendment can be found in Note H to the financial statements of this quarterly
report.
Our board of directors has authorized the repurchase of up to 6.0
million shares of our common stock. Under this authorization, we will hold the
repurchased shares as treasury stock and such shares will be available for
general corporate purposes, including the funding of employee benefit and
stock-related plans. We repurchased no shares of our common stock during the
first nine months of fiscal 2005. Through March 31, 2005, we had repurchased a
total of 5,009,300 shares under the current board authority. At March 31, 2005,
we were prohibited from repurchasing our common stock under the terms of our
senior secured credit facility.
31
Contractual obligations
There have been no material changes to our contractual obligations
discussed in our Annual Report. The following table summarizes our significant
contractual cash obligations as of March 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.
(In millions) Payments Due by Period
-----------------------------------------------------------------------------------------------------------------
Fiscal Fiscal 2006 Fiscal 2008
Contractual Obligations Total 2005 (1) and 2007 and 2009 Thereafter
-----------------------------------------------------------------------------------------------------------------
Long-term obligations (2)...... $816.7 $16.0 $ 91.4 $161.5 $547.8
Capital lease obligations (3).. 2.6 0.2 1.6 0.8 -
Operating leases .............. 3.8 0.6 2.7 0.5 -
Timber commitments ............ 75.3 3.6 25.4 25.8 20.5
Lint commitments .............. 18.9 17.1 1.8 - -
Other purchase commitments (4) 9.5 6.6 2.9 - -
----------------------------------------------------------------------------
Total contractual cash
obligations................. $926.8 $44.1 $125.8 $188.6 $568.3
============================================================================
(1) Cash obligations for the remainder of fiscal 2005.
(2) Amounts include related interest payments. Interest payments for variable
debt of $100.6 million are based on the effective rate as of March 31, 2005 of
4.9%.
(3) Capital lease obligations represent principal and interest payments.
(4) The majority of other purchase commitments are take-or-pay contracts made in
the ordinary course of business related to utilities and raw material purchases.
Liquidity and capital resources
We have the following major sources of financing: senior secured credit
facility, senior notes and senior subordinated notes. Our senior secured credit
facility, senior notes and senior subordinated notes contain various covenants.
We were in compliance with these covenants as of March 31, 2005 and believe we
will remain in compliance. These sources of financing are described in detail in
Note H of the accompanying interim financial statements.
On March 31, 2005, we had $12.9 million of cash and cash equivalents
and $66.1 million borrowing capacity on our revolving credit facility. The
portion of this capacity that we could borrow will depend on our financial
results and ability to comply with certain borrowing conditions under the
revolving credit facility. As of March 31, 2005, our liquidity, including
available borrowings and cash and cash equivalents was approximately $79.0
million. Management believes this is sufficient liquidity to meet the needs of
the business. 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.
On January 27, 2005 we announced the commencement of a solicitation of
consents from the holders of our 8.5% 2013 Notes to amend certain provisions of
the indenture governing those notes to permit us to redeem $100 million of our
2008 Notes. In conjunction with the redemption of our 2008 Notes, we intended to
amend our current credit facilities with, among other things, an incremental
increase in our term borrowings of $85 million to refinance the 2008 Notes. We
were unable to cost effectively solicit the necessary consents. Therefore, on
February 21, 2005, we called $20 million of our 9.25% 2008 Notes. These notes
were redeemed on March 23, 2005. We will continue to redeem portions of our 2008
Notes as we have availability under the restricted payments basket of our 2013
32
Notes. Since we only redeemed a portion of the 2008 Notes, there was no need to
increase our term borrowings. Instead, we amended our senior secured credit
facility on March 15, 2005 to among other things, lower our effective borrowing
rate on the term loan by 50 basis points, reduce our minimum principal payments
to $0.2 million per quarter, change the final maturity of the term loan to one
lump sum payment, and change various definitions.
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 five 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, inventory valuation, 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 G
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.
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 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 March 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.
34
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
(a) On January 27, 2005, we announced the solicitation of consents
from holders of our outstanding $200 million aggregate
principal amount of 8 1/2 Senior Notes due October 1, 2013.
Principal amount of 8 1/2%.
(c) The consent solicitation was to amend the indenture related to
the 2013 Notes to allow us to redeem $100 million in aggregate
principal amount of our 2008 Notes. The consent solicitation
expired on February 16, 2005 without the receipt of the
requisite majority. Subsequently, we opted to call $20 million
of the 2008 Notes.
Item 6. Exhibits
10.1 Amended and Restated Credit Agreement Amendment No. 1, dated
March 15, 2005
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
35
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BUCKEYE TECHNOLOGIES INC.
By: /S/ DAVID B. FERRARO
--------------------------
David B. Ferraro, Chief Executive Officer
Date: April 29, 2005
By: /S/ KRISTOPHER J. MATULA
-------------------------
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
Date: April 29, 2005
36