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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
|_| 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 January 25, 2005, there were outstanding 37,458,812 Common Shares of the
Registrant.
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INDEX
BUCKEYE TECHNOLOGIES INC.
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ITEM PAGE
PART I - FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December
31, 2004 and 2003...................................................................... 3
Condensed Consolidated Balance Sheets as of December 31, 2004 and June 30, 2004............. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2004
and 2003............................................................................... 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.................................. 33
4. Controls and Procedures..................................................................... 33
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders......................................... 34
6. Exhibits.................................................................................... 34
SIGNATURES 35
2
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31 December 31
------------------------------ ------------------------------
2004 2003 (1) 2004 2003 (1)
------------------------------ ------------------------------
Net sales.............................................. $180,622 $160,279 $347,945 $316,110
Cost of goods sold..................................... 149,475 152,148 287,169 286,388
------------------------------ ------------------------------
Gross margin........................................... 31,147 8,131 60,776 29,722
Selling, research and administrative expenses.......... 10,748 12,948 20,474 22,540
Impairment of long-lived assets........................ 12,010 942 12,010 942
Restructuring costs.................................... 363 2,691 1,559 3,729
Amortization of intangibles and other.................. 603 569 1,206 1,129
------------------------------ ------------------------------
Operating income (loss)................................ 7,423 (9,019) 25,527 1,382
Net interest expense and amortization of debt costs.... (11,279) (12,510) (22,557) (23,687)
Loss on early extinguishment of debt................... - (1,640) - (4,940)
Gain on sale of assets held for sale................... 7,173 - 7,173 -
Foreign exchange and other............................. 267 (556) 234 (425)
------------------------------ ------------------------------
Income (loss) before income taxes...................... 3,584 (23,725) 10,377 (27,670)
Income tax expense (benefit)........................... 671 (8,574) 3,049 (9,855)
------------------------------ ------------------------------
Income (loss) before cumulative effect of change
in accounting..................................... 2,913 (15,151) 7,328 (17,815)
Cumulative effect of change in accounting (net of tax
$3,359)............................................ - - - 5,720
------------------------------ ------------------------------
Net income (loss)...................................... $ 2,913 $ (15,151) $ 7,328 $(12,095)
============================== ==============================
Earnings (loss) per share before cumulative effect of
change in accounting
Basic earnings (loss) per share........... $ 0.08 $(0.41) $ 0.20 $ (0.48)
Diluted earnings (loss) per share.......... $ 0.08 $(0.41) $ 0.20 $ (0.48)
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........... $ 0.08 $(0.41) $ 0.20 $ (0.33)
Diluted earnings (loss) per share.......... $ 0.08 $(0.41) $ 0.20 $ (0.33)
Weighted average shares for basic earnings per share... 37,390 36,975 37,351 36,992
------------------------------ ------------------------------
Adjusted weighted average shares for diluted earnings
per share........................................ 37,605 36,975 37,532 36,992
============================== ==============================
(1) Restated based on change in accounting
See accompanying notes.
3
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31 June 30
2004 2004
------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................................. $ 28,115 $ 27,235
Accounts receivable-net................................... 117,892 112,367
Inventories............................................... 109,436 107,439
Deferred income taxes and other........................... 7,785 10,207
-----------------------
Total current assets........................ 263,228 257,248
Property, plant and equipment................................... 884,764 883,613
Less accumulated depreciation................................... (360,756) (345,981)
-----------------------
524,008 537,632
Goodwill........................................................ 140,334 130,172
Intellectual property and other, net............................ 39,490 41,023
-----------------------
Total assets.............................................. $967,060 $966,075
=======================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable.................................... $ 24,764 $ 27,130
Accrued expenses.......................................... 43,143 45,337
Current portion of capital lease obligation............ 658 632
Current portion of long-term debt......................... 1,500 16,972
-----------------------
Total current liabilities..................... 70,065 90,071
Long-term debt.................................................. 569,046 587,076
Accrued post retirement benefits................................ 19,520 18,931
Deferred income taxes........................................... 41,763 37,956
Capital lease obligation........................................ 1,732 2,068
Other liabilities............................................... 193 628
Stockholders' equity............................................ 264,741 229,345
------------------------
Total liabilities and stockholders' equity................ $967,060 $966,075
========================
See accompanying notes.
4
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
December 31
-------------------------------
2004 2003 (1)
-------------------------------
Operating activities
Net income (loss)................................................. $ 7,328 $(12,095)
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............................ 12,010 942
Depreciation............................................... 23,136 22,725
Amortization .............................................. 1,674 2,514
Loss on early extinguishment of debt....................... - 4,940
Deferred income taxes and other............................ 3,196 3,342
Gain on sale of assets held for sale....................... (7,173) -
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,048) 17,437
Inventories............................................ (336) 13,256
Other assets........................................... (245) (5,514)
Accounts payable and other current liabilities......... (7,977) (13,931)
-------------------------------
Net cash provided by operating activities......................... 29,565 27,896
Investing activities
Purchases of property, plant and equipment.................... (11,779) (21,190)
Proceeds from sale of assets.................................. 13,811 309
Other......................................................... (236) (602)
-------------------------------
Net cash provided by (used in) investing activities............... 1,796 (21,483)
Financing activities
Proceeds from exercise of stock options....................... 1,250 433
Net payments under revolving lines of credit.................. - (212,715)
Issuance of long term debt.................................... - 350,000
Payments for debt issuance costs.............................. (5) (9,228)
Payments related to early extinguishment of debt.............. - (2,115)
Proceeds from termination of swap............................. - 4,000
Payments on long-term debt and other.......................... (33,585) (172,661)
-------------------------------
Net cash used in financing activities............................. (32,340) (42,286)
Effect of foreign currency rate fluctuations on cash.............. 1,859 1,165
-------------------------------
Increase (decrease) in cash and cash equivalents.................. 880 (34,708)
Cash and cash equivalents at beginning of period.................. 27,235 49,977
-------------------------------
Cash and cash equivalents at end of period........................ $28,115 $15,269
===============================
(1) Restated based on change in accounting.
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 six months
ended December 31, 2004 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 for the year ended June 30, 2004 and Form 10-K/A 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. Certain amounts
for the three and six months ended December 31, 2003 have been restated based on
the application of the change in accounting made in the third quarter of fiscal
2004 which was effective as of July 1, 2003.
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. Previously, these expenses were in foreign exchange and other.
Amortization of intangibles was $603 and $1,206 for the three and six months
ended December 31, 2004 and $569 and $1,129 for the same periods in 2003.
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 December 31, 2004. 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, assets held for
sale, 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 Six Months Ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------
Net income (loss) as reported.......................... $2,913 $(15,151) $7,328 $(12,095)
Deduct: Cumulative effect of change in accounting for
planned maintenance costs, net of tax............. - - - (5,720)
------------------------------------------------------
Pro forma net income (loss)............................ $2,913 $(15,151) $7,328 $(17,815)
======================================================
Earnings (loss) per share as reported
Basic......................................... $0.08 $(0.41) $0.20 $(0.33)
Diluted....................................... $0.08 $(0.41) $0.20 $(0.33)
Pro forma earnings (loss) per share
Basic......................................... $0.08 $(0.41) $0.20 $(0.48)
Diluted....................................... $0.08 $(0.41) $0.20 $(0.48)
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
December 31 Fibers Materials Corporate Total
- ------------------------------------------------------------------------------------------------------------
Net sales 2004 $129,854 $58,065 $(7,297) $180,622
2003 114,588 51,185 (5,494) 160,279
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) 2004 17,050 3,448 (13,075) 7,423
2003 (5,333) 1,149 (4,835) (9,019)
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Depreciation and amortization of 2004 7,123 4,403 877 12,403
intangibles 2003 6,897 4,467 837 12,201
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Capital expenditures 2004 6,288 261 260 6,809
2003 10,767 543 155 11,465
7
Six Months Ended Specialty Nonwoven
December 31 Fibers Materials Corporate Total
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Net sales 2004 $247,900 $113,987 $(13,942) $347,945
2003 221,906 104,395 (10,191) 316,110
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) 2004 33,948 7,016 (15,437) 25,527
2003 4,588 3,636 (6,842) 1,382
- ------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2004 14,084 8,626 1,743 24,453
intangibles 2003 13,601 8,735 1,662 23,998
- ------------------------------------------------------------------------------------------------------------
Capital expenditures 2004 10,202 1,237 340 11,779
2003 19,856 1,142 192 21,190
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 $13,172
(net of $1,965 of decommissioning and selling costs), we recognized a net gain
of $7,173 ($4,662 net of tax and $0.12 per share net of tax) during the quarter
ended December 31, 2004. 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 manufacturing facilities. We expect production at
Glueckstadt to cease during the second quarter of fiscal 2006. 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 SFAS No. 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. 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 will 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 included
the elimination of approximately 100 positions within the specialty fibers
segment. We expect this phase will be completed this fiscal year.
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 will enable 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 the next
year. 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 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 will 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
approximately 100 employees, and we expect restructuring expenses related to the
closure to be approximately $10,000 over the remainder of fiscal 2005 and 2006.
We expect payments related to this restructuring program will 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 six
months ended December 31, 2004.
Six Months Ended
December 31, 2004
-------------------------------------
Accrual Accrual
Balance Impact Balance as
as of Of of Program Total
June 30, Additional Foreign December Charges Estimated
2004 Charges Currency Payments 31, 2004 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............... - 64 - (64) - 854 924
Nonwoven materials............. - - - - - 83 83
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 1 - 64 - (64) - 2,680 2,750
2003 Restructuring Program-Phase 2
- ------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers................. 263 256 17 (494) 42 1,862 1,947
Nonwoven materials............... - - - - - 39 39
Corporate........................ 121 - - (121) - 1,514 1,514
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 2 384 256 17 (615) 42 3,415 3,500
2004 Restructuring Program
- ------------------------------------------------------------------------------------------------------ ------------------------
Nonwoven materials
Severance and employee
benefits....................... 1,750 1,007 16 (2,739) 34 2,774 2,774
Other miscellaneous expenses..... - 232 - (232) - 272 272
---------------------------------------------------------------- ------------------------
Total 2004 Program.................. 1,750 1,239 16 (2,971) 34 3,046 3,046
2005 Restructuring Program
- ------------------------------------------------------------------------------------------------------ ------------------------
Specialty fibers
Severance and employee
benefits....................... - - - - - - 9,600
Other miscellaneous expenses..... - - - - - - 400
---------------------------------------------------------------- ------------------------
Total 2005 Program.................. - - - - - - 10,000
---------------------------------------------------------------- ------------------------
Total All Programs.................. $2,134 $1,559 $33 $(3,650) $76 $9,141 $19,296
================================================================ ========================
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
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.
10
The components of inventory consist of the following:
December 31 June 30
2004 2004
----------------------------
Raw materials......................... $ 28,887 $ 28,073
Finished goods........................ 58,718 57,118
Storeroom and other supplies.......... 21,831 22,248
----------------------------
$109,436 $107,439
============================
NOTE H -- DEBT
The components of long-term debt consist of the following:
December 31 June 30
2004 2004
---------------------------
Senior Notes due:
2013............................. $200,000 $200,000
Senior Subordinated Notes due:
2008............................. 99,762 99,737
2010............................. 152,809 153,061
Credit facilities..................... 110,975 144,250
Other................................. 7,000 7,000
----------------------------
570,546 604,048
Less current portion.................. 1,500 16,972
----------------------------
$569,046 $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 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 six months ended December 31, 2003, $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 ("2008 notes"). These notes are redeemable at our
option, in whole or in part, at any time after September 15, 2002, at redemption
prices varying from 103.8% of principal amount to 100% of principal amount on or
after September 15, 2004, together with accrued and unpaid interest to the date
of redemption.
11
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 the 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). At March 31,
2002, our fixed charge coverage ratio fell below 2:1. This development did not
breach any covenant or constitute an event of default under any of our debt
agreements. As of December 31, 2004 we exceeded the required 2:1 ratio and are
no longer 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 in the coming quarters.
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 (discussed later in this note).
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
December 31, 2004 the unamortized portion of the termination fee was recorded as
an increase in debt of $3,310. During the three months ended December 31, 2004
and 2003, the swap reduced our interest expense by $143 and $324, 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, comprised of a $70,000 revolving credit
facility (the "revolver") maturing on September 15, 2008 and a $150,000 term
loan (the "term loan") with serial maturities of $375 quarterly through
September 2008, $71,250 maturing March 31, 2009 and final maturity on April 15,
2010. The term loan also requires an annual excess cash flow payment (as defined
under the credit agreement). During the first six months of fiscal 2005, we made
an excess cash flow payment of $15,472 based on fiscal 2004 performance and
additional voluntary payments of $17,803 for total payments of $33,275 during
the period. Due to many contingent variables that effect this payment, we are
currently unable to estimate an excess cash flow payment, if any, for the
current fiscal year. We had $110,975 outstanding on this facility at an average
variable interest rate of 4.8% as of December 31, 2004. This facility amended
and restated our then existing $215,000 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. The interest rate
applicable to borrowings under the revolver is the agent's prime rate plus 1.50%
to 1.75% or a LIBOR-based rate ranging from LIBOR plus 2.50% to LIBOR plus
3.25%. The interest rate applicable to the term loan is the agent's prime rate
plus 1.50% or a LIBOR-based rate plus 2.50%. The credit facility is secured by
substantially all of our assets located in the United States.
12
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. During the three and six months ended December 31, 2004,
we were in compliance with these financial covenants.
As of December 31, 2004, we had $67,272 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. 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. During the three months ended December 31, 2003, $1,640 was expensed
related to the early extinguishment of the previous credit facility.
Other credit facilities - On December 5, 2003, we paid off the
remaining balance on our receivables-based credit facility. We used cash on hand
and the restricted cash held as collateral for the facility to make the final
payment. Effective October 1, 2004, we cancelled our Canadian credit facility
which did not have an outstanding balance.
NOTE I -- COMPREHENSIVE INCOME
The components of comprehensive income consist of the following:
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- -----------------------------
2004 2003 2004 2003
---------------------------- -----------------------------
Net income (loss)................................. $ 2,913 $(15,151) $ 7,328 $(12,095)
Foreign currency translation adjustments - net.... 15,562 18,150 26,754 22,057
---------------------------- -----------------------------
Comprehensive income.............................. $18,475 $ 2,999 $34,082 $ 9,962
============================ =============================
For the three and six months ended December 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 $7,235 and $9,399, the Brazilian
real of $1,604 and $3,460 and the Canadian dollar of $6,723 and $13,895.
For the three and six months ended December 31, 2003, 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 $12,961 and $17,158, the
Brazilian real of $201 and $(224) and the Canadian dollar of $4,988 and $5,123.
13
NOTE J - INCOME TAXES
Our effective tax rates for the three and six month periods ended
December 31, 2004 were 18.7% and 29.4%, respectively. Our effective tax rates
for the same periods of 2003 were 35.7% and 35.0%. 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 of the impairment of long-lived assets, our effective tax rates for
the three and six month periods of 2004 would have been 34.2% and 34.0%. 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 Six Months Ended
December 31 December 31
---------------------------- -----------------------------
2004 2003 2004 2003
---------------------------- -----------------------------
Expected tax expense (benefit) at 35%............. $1,254 $(8,304) $3,632 $(9,685)
Impairment of long-lived assets................... (360) - (360) -
Extraterritorial income benefit................... (245) (196) (490) (392)
Other............................................. 22 (74) 267 222
---------------------------- -----------------------------
$ 671 $(8,574) $3,049 $(9,855)
============================ =============================
NOTE K - STOCK-BASED COMPENSATION
At December 31, 2004, we have stock-based compensation plans which we
account for under the recognition and measurement principles of 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 Six Months Ended
December 31 December 31
--------------------------- -------------------------
2004 2003 2004 2003
--------------------------- -------------------------
Net income (loss) as reported $2,913 $(15,151) $7,328 $(12,095)
Deduct: Total stock-based compensation expense determined
under fair value based method , net of related tax
effects (449) (211) (974) (749)
--------------------------- -------------------------
Pro forma net income (loss) $2,464 $(15,362) $6,354 $(12,844)
=========================== =========================
Basic earnings (loss) per share:
As reported $ 0.08 $ (0.41) $ 0.20 $ (0.33)
Pro forma $ 0.07 $ (0.42) $ 0.17 $ (0.35)
Diluted earnings (loss) per share:
As reported $ 0.08 $ (0.41) $ 0.20 $ (0.33)
Pro forma $ 0.07 $ (0.42) $ 0.17 $ (0.35)
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
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.
14
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 will have no impact on 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 Six Months Ended
December 31 December 31
----------------------------- -----------------------------
2004 2003 2004 2003
Service cost for benefits earned.................. $175 $188 $351 $376
Interest cost on benefit obligation............... 358 313 716 626
Amortization of unrecognized
prior service cost........................... (281) (281) (562) (562)
(Gain)/loss....................................... 98 84 195 168
----------------------------- -----------------------------
Total cost........................................ $350 $304 $700 $608
============================= =============================
In accordance with Financial Staff Position No. FAS 160-1, the impact
of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has
been evaluated and has not been recognized in the condensed consolidated
financial statements as of December 31, 2004 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 six month periods ended December 31, 2004 and 2003 was as follows:
Three Months Ended Six Months Ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------
Net income (loss) applicable to common shareholders.... $2,913 $(15,151) $7,328 $(12,095)
======================================================
Weighted-average shares of common stock outstanding.... 37,390 36,975 37,351 36,992
Effect of diluted shares............................... 215 - 181 -
------------------------------------------------------
Weighted-average common and common equivalent
shares outstanding................................ 37,605 36,975 37,532 36,992
======================================================
Earnings (loss) per share before cumulative effect of
change in accounting
Basic......................................... $0.08 $(0.41) $0.20 $(0.48)
Diluted....................................... $0.08 $(0.41) $0.20 $(0.48)
Cumulative effect of change in accounting
Basic......................................... $ - $ - $ - $0.15
Diluted....................................... $ - $ - $ - $0.15
Earnings (loss) per share
Basic......................................... $0.08 $(0.41) $0.20 $(0.33)
Diluted....................................... $0.08 $(0.41) $0.20 $(0.33)
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 December 31, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $29,129 $108,060 $51,366 $(7,933) $180,622
Cost of goods sold 23,189 87,550 46,551 (7,815) 149,475
-------------------------------------------------------------------------------
Gross margin 5,940 20,510 4,815 (118) 31,147
Selling, research and administrative
expenses, and other 4,034 5,075 2,242 - 11,351
Restructuring and impairment costs - 1 12,372 - 12,373
-------------------------------------------------------------------------------
Operating income (loss) 1,906 15,434 (9,799) (118) 7,423
Other income (expense):
Net interest expense and
amortization of debt (11,526) 63 184 - (11,279)
Other income (expense), including equity
income (loss) in affiliates 6,962 20 7,322 (6,864) 7,440
Intercompany interest income (expense) 7,663 (5,824) (1,838) (1) -
-------------------------------------------------------------------------------
Income (loss) before income taxes 5,005 9,693 (4,131) (6,983) 3,584
-------------------------------------------------------------------------------
Income tax expense (benefit) 2,092 4,086 (2,601) (2,906) 671
-------------------------------------------------------------------------------
Net income (loss) $2,913 $5,607 $ (1,530) $(4,077) $ 2,913
===============================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $ 22,244 $91,950 $52,394 $(6,309) $160,279
Cost of goods sold 18,794 91,230 47,936 (5,812) 152,148
-------------------------------------------------------------------------------
Gross margin 3,450 720 4,458 (497) 8,131
Selling, research and administrative 6,067 5,333 2,117 - 13,517
expenses, and other
Restructuring and impairment costs 1,471 1,815 347 - 3,633
-------------------------------------------------------------------------------
Operating income (loss) (4,088) (6,428) 1,994 (497) (9,019)
Other income (expense):
Net interest expense and
amortization of debt (12,254) (94) (162) - (12,510)
Other income (expense), including equity
income (loss) in affiliates (14,914) 199 (700) 13,219 (2,196)
Intercompany interest income (expense) 8,519 (6,079) (2,440) - -
Intercompany miscellaneous
income (expense) (126) (264) 390 - -
-------------------------------------------------------------------------------
Income (loss) before income taxes (22,863) (12,666) (918) 12,722 (23,725)
-------------------------------------------------------------------------------
Income tax expense (benefit) (7,712) (4,834) (376) 4,348 (8,574)
-------------------------------------------------------------------------------
Net income (loss) $(15,151) $(7,832) $(542) $ 8,374 $ (15,151)
===============================================================================
17
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $52,411 $208,049 $102,677 $(15,192) $347,945
Cost of goods sold 41,800 168,220 92,061 (14,912) 287,169
-------------------------------------------------------------------------------
Gross margin 10,611 39,829 10,616 (280) 60,776
Selling, research and administrative
expenses, and other 7,129 10,411 4,140 - 21,680
Restructuring and impairment costs 1 121 13,447 - 13,569
-------------------------------------------------------------------------------
Operating income (loss) 3,481 29,297 (6,971) (280) 25,527
Other income (expense):
Net interest expense and
amortization of debt (22,857) 24 276 - (22,557)
Other income (expense), including equity
income in affiliates 15,878 174 7,203 (15,848) 7,407
Intercompany interest income (expense) 15,511 (11,972) (3,539) - -
-------------------------------------------------------------------------------
Income (loss) before income taxes 12,013 17,523 (3,031) (16,128) 10,377
-------------------------------------------------------------------------------
Income tax expense (benefit) 4,685 6,745 (2,091) (6,290) 3,049
-------------------------------------------------------------------------------
Net income (loss) $ 7,328 $ 10,778 $ (940) $ (9,838) $7,328
===============================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2003
Guarantors
-----------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
Net sales $ 40,985 $182,054 $106,927 $(13,856) $316,110
Cost of goods sold 33,572 168,997 97,104 (13,285) 286,388
-------------------------------------------------------------------------------
Gross margin 7,413 13,057 9,823 (571) 29,722
Selling, research and administrative
expenses, and other 8,661 10,644 4,364 - 23,669
Restructuring and impairment costs 1,685 2,407 579 - 4,671
-------------------------------------------------------------------------------
Operating income (loss) (2,933) 6 4,880 (571) 1,382
Other income (expense):
Net interest expense and
amortization of debt (22,771) (166) (750) - (23,687)
Other income (expense), including equity
income in affiliates (7,861) 246 (569) 2,819 (5,365)
Intercompany interest income (expense) 15,800 (11,001) (4,799) - -
Intercompany miscellaneous
income (expense) (446) (950) 1,396 - -
-------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in accounting (18,211) (11,865) 158 2,248 (27,670)
-------------------------------------------------------------------------------
Income tax expense (benefit) (6,116) (4,559) 65 755 (9,855)
-------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting (12,095) (7,306) 93 1,493 (17,815)
-------------------------------------------------------------------------------
Cumulative effect of change in accounting - 5,720 - - 5,720
-------------------------------------------------------------------------------
Net income (loss) $(12,095) $ (1,586) $ 93 $ 1,493 $ (12,095)
===============================================================================
18
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 704 $ 253 $27,158 $ $28,115
-
Accounts receivable, net 17,933 69,655 30,304 - 117,892
Inventories 17,196 60,442 32,635 (837) 109,436
Other current assets 3,596 3,975 214 - 7,785
Intercompany accounts receivable 9,964 6,460 - (16,424) -
-------------------------------------------------------------------------------
Total current assets 49,393 140,785 90,311 (17,261) 263,228
Property, plant and equipment, net 53,206 343,326 127,476 - 524,008
Goodwill and intangibles, net 21,032 54,368 93,273 - 168,673
Intercompany notes receivable 341,518 - - (341,518) -
Other assets, including investment in
subsidiaries 301,188 322,417 127,971 (740,425) 11,151
-------------------------------------------------------------------------------
Total assets $766,337 $860,896 $439,031 $(1,099,204) $967,060
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable $ 5,369 $ 15,176 $ 4,219 $ - $ 24,764
Other current liabilities 21,031 15,114 9,156 - 45,301
Intercompany accounts payable - - 16,424 (16,424) -
-------------------------------------------------------------------------------
Total current liabilities 26,400 30,290 29,799 (16,424) 70,065
Long-term debt 567,046 2,000 - - 569,046
Deferred income taxes (37,213) 62,672 16,304 - 41,763
Other long-term liabilities 5,526 14,545 1,374 - 21,445
Intercompany notes payable - 212,790 128,728 (341,518) -
Stockholders'/invested equity 204,578 538,599 262,826 (741,262) 264,741
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $766,337 $860,896 $439,031 $(1,099,204) $967,060
===============================================================================
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
Six Months Ended December 31, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $(8,413) $33,761 $4,217 $29,565
Investing activities:
Purchases of property, plant and equipment (1,361) (8,989) (1,429) (11,779)
Proceeds from sale of assets and other - (219) 13,794 13,575
---------------------------------------------------------------
Net cash used in investing activities (1,361) (9,208) 12,365 1,796
Financing activities
Payments for debt issuance and
extinguishment (5) - - (5)
Net issuance of (payments on) long-term
debt and other (4,263) (24,403) (3,669) (32,335)
---------------------------------------------------------------
Net cash provided by (used in)
financing activities (4,268) (24,403) (3,669) (32,340)
Effect of foreign currency rate fluctuations
on cash - - 1,859 1,859
Increase (decrease) in cash and
cash equivalents (14,042) 150 14,772 880
Cash and cash equivalents at beginning
of period 14,746 103 12,386 27,235
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 704 $ 253 $27,158 $28,115
===============================================================
STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by operations $ 7,851 $ 12,228 $7,817 $ 27,896
Investing activities:
Purchases of property, plant and equipment (5,353) (14,683) (1,154) (21,190)
Proceeds from sale of assets and other - (292) (1) (293)
---------------------------------------------------------------
Net cash used in investing activities (5,353) (14,975) (1,155) (21,483)
Financing activities
Net borrowings (payments) under revolving
line of credit (205,526) - (7,189) (212,715)
Payments for debt issuance and
extinguishment (9,228) - - (9,228)
Net issuance of (payments on) long-term
debt and other 186,346 1,710 (8,399) 179,657
---------------------------------------------------------------
Net cash provided by (used in)
financing activities (28,408) 1,710 (15,588) (42,286)
Effect of foreign currency rate fluctuations
on cash - - 1,165 1,165
Decrease in cash and cash equivalents (25,910) (1,037) (7,761) (34,708)
Cash and cash equivalents at beginning
of period 26,075 4,349 19,553 49,977
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 165 $3,312 $ 11,792 $ 15,269
===============================================================
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 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
six months ended December 31, 2004 to the three and six months ended December
31, 2003.
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. While we are
still not satisfied with our current financial performance, we are pleased with
the progress made during the six months ended December 31, 2004 in improving the
financial results of our business. Revenue and profitability continued to
improve in both our specialty fibers and nonwoven materials segments. The
changes we made to improve our operations are continuing to have a positive
impact.
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 has increased the capacity utilization at our other airlaid
nonwovens facilities. As part of this closure, we completed the sale of the
facility's building and equipment during the three months ended December 31,
2004 and recognized a gain on the sale of $7.2 million.
Over the last year, we have improved the product mix of our wood-based
specialty fibers by transferring a portion of our wood cellulose production away
from fluff pulp into higher value chemical applications. Our overall wood-based
specialty volume increased 22% during the first six months of fiscal 2005 versus
the same period in fiscal 2004. Although the price of commodity pulps is
reported to have declined during the six-month period, the price of fluff pulp
has remained steady. 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.
We are encouraged by favorable trends in our markets. Demand for our
products remains strong. However, we remain concerned about the sizeable price
increases currently impacting both fuel and chemicals. Both of these areas have
the potential to negatively impact our short term financial results. Although
22
contractual obligations have limited our ability to increase the prices of our
specialty wood pulps, we have been implementing price increases for our
specialty fibers and nonwoven materials not under contract since July 1, 2004.
We are hopeful that these price increases, combined with continued strong
demand, will offset rising chemical and energy prices.
In early January 2005, we announced the planned closure of our
Glueckstadt, Germany specialty fibers facility during the second quarter of
fiscal 2006. Although cotton linter pulp remains an important part of the
specialty fibers business, we can no longer economically justify operating this
high fixed cost facility. We will retain most of the volume currently produced
at Glueckstadt by more completely utilizing our Memphis, Tennessee facility and
bringing the Americana, Brazil facility, which we expect will have market
capability by the fall of 2005, to near capacity levels on an accelerated
schedule. The inability to recover the remaining value of these long-lived
assets resulted in an impairment charge of $12.0 million in the second quarter
of fiscal 2005 and will result in restructuring charges and payments of
approximately $10 million during fiscal 2005 and 2006.
We continued to make debt reductions during the second quarter of
fiscal 2005 as we believe strengthening our balance sheet is important to our
business. We made payments on our senior secured credit facility of $13.3
million during the second quarter of fiscal 2005 and a total of $33.3 million
for the six months ending December 31, 2004.
Results of Operations
Consolidated results
The following table compares components of operating income for the
three and six months ended December 31, 2004 and 2003.
- ---------------------------------------------------------------------------------------------------------------------------
(millions) Three Months Ended December 31 Six Months Ended December 31
2004 2003 Change & Change 2004 2003 Change % Change
----------------------------------------------------------------------------------------
Net sales $180.6 $160.3 $20.3 13% $347.9 $316.1 $31.8 10%
Cost of goods sold 149.5 152.2 (2.7) (2)% 287.1 286.4 0.7 -
----------------------------------------------------------------------------------------
Gross margin 31.1 8.1 23.0 284% 60.8 29.7 31.1 105%
Selling, research and
administrative expenses 10.7 12.9 (2.2) (17)% 20.5 22.6 (2.1) (9)%
Impairment costs 12.0 0.9 11.1 * 12.0 0.9 11.1 *
Restructuring costs 0.4 2.7 (2.3) (85)% 1.6 3.7 (2.1) (57)%
Amortization of intangibles
and other 0.6 0.6 - - 1.2 1.1 0.1 9%
----------------------------------------------------------------------------------------
Operating income (loss) $ 7.4 $(9.0) $16.4 * $25.5 $ 1.4 $24.1 *
=========================================== ============================================
* Percent change is not meaningful
Net sales improved during the three and six months ended December 31,
2004 versus the same period in 2003 due to increased sales in both specialty
fibers and nonwoven materials. Increases in both shipments and pricing during
the period contributed to the improvement.
Gross margin improvements were primarily the result of 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 six months ended
December 31, 2003. These items are discussed further in the "Segment Results"
section of this discussion and analysis.
Selling, research and administrative expenses decreased for the three
and six months ending December 31, 2004 versus 2003. This decrease is primarily
due to $3.2 million bad debt reserve established as a result of the bankruptcy
filing of a large specialty fibers customer during the second quarter of fiscal
2004. This improvement was partially offset by increased accounting and
consulting fees related to the implementation of the Sarbanes-Oxley Act of 2002.
23
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 during the three months ended December 31, 2004. As of December 31,
2004, we had not incurred any restructuring costs as part of this planned
closure. The restructuring costs incurred during the three and six months ended
December 31, 2004 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.
Specialty fibers
The following table compares specialty fibers net sales and operating
income for the three and six months ended December 31, 2004 and 2003.
(millions) Three Months Ended December 31 Six Months Ended December 31
------------------------------ ----------------------------
2004 2003 Change % Change 2004 2003 Change % Change
----------------------------------------------------------------------------------------------------
Net sales $129.9 $114.6 $15.3 13% $247.9 $221.9 $26.0 12%
Operating income
(loss) 17.1 (5.3) 22.4 * 33.9 4.6 29.3 *
* Percent change not meaningful.
Net sales increased during the three and six months ended December 31,
2004 versus 2003 due to improved pricing, mix and volume. Improvements in
selling prices and mix were driven by several factors. Continued overall
strengthening of the economy increased the demand for pulp and paper products,
driving up commodity pulp prices. While our average fluff pulp price increased
by 14.4% and 12.4% year over year for the three and six month periods ending
December 31, 2004, we can offer no assurances that this increasein fluff pulp
pricing will continue or that this trend will not reverse direction during
fiscal 2005. Also, the tight supply conditions due to facility closures helped
to increase overall specialty fibers volume by 2.5% and 3.4% during the three
and six-month periods ended December 31, 2004 versus 2003.
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 six months of fiscal 2005, they were partially
offset by the higher fiber costs, low utilization rates at our Glueckstadt,
Germany cotton-based specialty fibers facility, and the weaker U.S. dollar which
negatively impacts manufacturing costs at our Glueckstadt, Germany facility.
Operating income substantially improved during the three and six months
ending December 31, 2004 over the same periods in the prior year based on the
strong improvement in sales and the absence of several additional charges
related to unusual events and special situations that occurred during the three
months ended December 31, 2003. These unusual events and special situations
included; the planned maintenance shutdown of our Perry, Florida facility
24
($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.
Rising energy and chemical costs continued to push manufacturing costs
higher for the three and six months ended December 31, 2004. While we were able
to recover these costs through increased revenues, we expect that rising energy
and chemical costs will continue to put pressure on our margins during the
upcoming quarters.
We are moving forward with the important step of further 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 conversion
is completed in the fall of 2005, it 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 six months ended December 31, 2004 and 2003.
(millions) Three Months Ended December 31 Six Months Ended December 31
------------------------------ ----------------------------
2004 2003 Change % Change 2004 2003 Change % Change
---------------------------------------------------------------------------------------------
Net sales $58.1 $51.2 6.9 13% $114.0 $104.4 $9.6 9%
Operating income 3.4 1.1 2.3 209% 7.0 3.6 3.4 94%
The increase in net sales during the three and six months ended
December 31, 2004 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 sales to
our other nonwoven materials facilities.
Operating income improved significantly for the three and six months
ended December 31, 2004. The improvement was due to higher revenues and the
closure of our high cost Cork, Ireland plant. Overall, our nonwoven materials
business was able to support increased shipment and production volume with one
less manufacturing location for most of the period, and we successfully
transitioned a majority of Cork's business to other manufacturing sites. Our
Gaston, North Carolina facility continued to show improvement in their 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.
25
Restructuring and impairment activities
During fiscal years 2004 and 2003, we entered into various
restructuring programs, which resulted in restructuring and impairment charges.
In order to continue to provide both specialty fibers and nonwoven materials at
attractive values, we will continue to look for ways to reduce costs and
optimize our operating structure. The following table summarizes restructuring
expense by program for the six-month periods ended December 31, 2004 and 2003.
- -------------------------------------------------------------------------------------------------------------
Six Months Ended Total Estimate to
December 31 Estimated Complete
----------- Program at December 31,
(millions) 2004 2003 Charges 2004
- -------------------------------------------------------------------------------------------------------------
Restructuring costs
2005 Restructuring program............... $ - $ - $10.0 $10.0
2004 Restructuring program............... 1.2 - 3.0 -
2003 Restructuring program - phase 2..... 0.3 2.9 3.5 0.1
2003 Restructuring program - phase 1..... 0.1 0.8 2.8 0.1
-----------------------------------------------------------
Total restructuring costs $ 1.6 $3.7 $19.3 $10.2
Impairment charges....................... $12.0 $0.9
- --------------------------------------------------------------------------
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 substantial strengthening has had a negative impact on Glueckstadt's
cost position. While we began to invoice many Glueckstadt customers in euros
rather than dollars, 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 the 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 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. Closing our
Glueckstadt facility and transferring 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 will 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
26
employees, and we expect restructuring expenses related to the closure to be
approximately $10 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 the 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 ($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 is growing in the low to mid-single digits, the
growth in demand has not been sufficient to fully utilize existing capacity. As
such, industry participants have been rationalizing production by taking down
time, reducing operating shifts and closing facilities.
Due to excess production capacity around the globe, we operated Cork
below its productive capacity since the plant started up 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 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 million and we expect will enable us to
improve our overall nonwoven materials operating results by approximately $7
million annually. 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 and continue to produce cosmetic cotton products at the
Lumberton site. This decision reflects a steady decline in demand in the cotton
fiber paper industry, which has contracted by about one-third since the late
1990's. While cotton linter pulp is one of our core businesses, current demand
did not economically justify operating a facility that could only produce
products for paper applications.
To better meet our customers' needs, we consolidated our U.S. cotton
linter pulp production at our larger Memphis, Tennessee and Glueckstadt, Germany
facilities. In conjunction with the consolidation, we initiated the first phase
of a restructuring program designed to deliver cost reductions through reduced
expenses across the company, the main component of which was the partial closure
of our Lumberton, North Carolina facility. This phase of restructuring resulted
in the elimination of approximately 100 positions within the specialty fibers
segment. The resulting increase in facility utilization 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 expect this phase to be completed this fiscal
year.
During the first quarter of fiscal 2004, we entered into a second phase
of this restructuring program. This phase of the program will 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 over the next year. These
positions include manufacturing, sales, product development and administrative
27
functions throughout the organization. The full benefit of this restructuring
will not be realized until the end of calendar 2005. We expect 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 $1.2
million and $1.1 million for the three and six month periods ending December 31,
2004 versus the same periods in the prior year. These decreases were primarily
due to the additional interest expense incurred during the last 8 days of
September 2003 and the first 22 days of October 2003 when both the $150 million
of senior subordinated notes due 2005 and the $200 million of senior noted due
2013 were outstanding. Our decrease in outstanding debt of $50.7 million since
December 31, 2003 also had a positive impact on interest expense during both the
three and six month periods ending December 31, 2004. Additionally, we were able
to more than offset the impact of the increase in variable market interest rates
during the year through the restructuring of our senior secured credit facility
in November 2003. 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 six months ended December 31,
2004 was 18.7% and 29.4% versus 35.7% and 35.0% for the same periods in 2003.
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 six months ended December 31, 2004 would have been 34.0% versus
35.0% for the same period of 2003. The slightly lower effective tax rate for the
period was due primarily to the source of income shifting to lower tax rate
jurisdictions. 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 34% resulting in an overall estimated tax rate of 32% for
fiscal 2005.
Loss on early extinguishment of debt costs
On September 22, 2003, we placed privately $200 million in aggregate
principal amount of 8.5% senior notes due October 1, 2013. The notes are
unsecured obligations and are senior to any of our subordinated debt. The notes
are guaranteed by our direct and indirect domestic subsidiaries that are also
guarantors on our senior secured indebtedness. 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.
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 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
28
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 quarter ended December 31, 2004.
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 $29.6 million and $27.9
million during the six months ended December 31, 2004 and 2003, respectively.
During the six months ended December 31, 2004, improved earnings were partially
offset by increases in accounts receivable and inventories. During the six
months ended December 31, 2003, 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 six months ended December 31, 2004, we used $0.3 million to build
inventories versus generating $13.3 million of cash through reductions in
inventories during the same period of 2003.
Net cash provided by (used in) investing activities
During the six months ended December 31, 2004, we generated $1.8
million cash in investing activities, as compared to using $21.5 million in the
same period of 2003. The unusual generation of cash through investing activities
is the result of selling the Cork, Ireland building and equipment during
December of 2004 for net proceeds of $13.2 million. The higher capital
expenditures during 2003 included capital improvements made during 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 our normal level of capital expenditures to construct,
purchase, modernize, and upgrade our production equipment and facilities, we
expect to incur about $10 million of capital expenditures in the remaining six
months of fiscal 2005 and an additional $8 million during fiscal 2006 related to
the upgrade of our Americana, Brazil specialty fibers facility.
Net cash provided by (used in) financing activities
We used cash from operating activities to reduce our debt during the
six months ended December 31, 2004. 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 six months of fiscal 2005, we made an excess cash flow payment of
$15.5 million based on fiscal 2004 performance and additional voluntary payments
of $17.8 million for total payments of $33.3 million during the period. 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.
29
Due to the timing of the cash receipts from the sale of the Cork,
Ireland building and equipment, we were unable to utilize the cash received from
the sale to make further debt reductions until after December 31, 2004. During
January 2005, we made additional payments totaling $13.0 million to reduce our
outstanding long-term debt.
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 senior notes due 2013. 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. Further information on this issuance 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 six months of fiscal 2005. Through December 31, 2004, we had repurchased a
total of 5,009,300 shares under the current board authority. At December 31,
2004, we were prohibited from repurchasing our common stock under the terms of
our senior secured credit facility.
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 December 31, 2004. 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)...... $858.5 $22.6 $ 96.9 $254.2 $484.8
Capital lease obligations (3).. 2.8 0.4 1.6 0.8 -
Operating leases .............. 3.8 1.1 2.3 0.4 -
Timber commitments ............ 81.8 11.6 24.6 25.4 20.2
Lint commitments .............. 22.8 22.8 - - -
Other purchase commitments (4) 7.9 7.1 0.8 - -
----------------------------------------------------------------------------
Total contractual cash
obligations................. $977.6 $65.6 $126.2 $280.8 $505.0
============================================================================
(1) Cash obligations for the remainder of fiscal 2005.
(2) Amounts include related interest payments. Interest payments for variable
debt of $112.0 million are based on the effective rate as of December 31, 2004
of 4.8%.
(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.
30
Liquidity and capital resources
We have the following major sources of financing: senior secured credit
facility, senior notes and senior subordinated notes. Our senior secured credit
facility, senior notes and senior subordinated notes contain various covenants.
We were in compliance with these covenants as of December 31, 2004 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 December 31, 2004, we had $28.1 million of cash and cash equivalents
and $67.3 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 December 31, 2004, our liquidity, including
available borrowings and cash and cash equivalents was approximately $95.4
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% senior notes due October 1, 2013 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 intend to amend our current credit facilities with, among other
things, an incremental increase in our term borrowings of $85 million.
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.
31
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.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2004, there have been no material changes in our
market risk since the disclosure in our Annual Report. While we have global
operations, the majority of our transactions are denominated in U.S. dollars.
The distribution of our foreign currency denominated transactions is such that
foreign currency declines in some areas of the world are often offset by foreign
currency gains of equal magnitude in other areas of the world. The principal
foreign currency exchange rate risks to which we are exposed are in the Canadian
dollar, Brazilian real and European euro.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation as of December 31, 2004 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.
33
PART II - OTHER INFORMATION
Items 1, 2, 3 and 5 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
On October 28, 2004, we held our Annual Meeting of Stockholders.
At the meeting, Robert E. Cannon, Henry F. Frigon and Samuel M. Mencoff were
each re-elected as Class III directors to hold office for a three-year term
or until their successors are elected and qualified. For Mr. Cannon,
34,973,828 votes were cast in favor and 1,003,390 votes were withheld. For
Mr. Frigon, 35,167,789 votes were cast in favor and 809,429 were withheld.
For Mr. Mencoff, 35,013,483 votes were cast in favor and 963,735 were
withheld.
Following the election, our Board of Directors consisted of George W.
Bryan, R. Howard Cannon, Robert E. Cannon, Red Cavaney, John B. Crowe, Kathy
Buckman Davis, David B. Ferraro, Henry F. Frigon, and Samuel M. Mencoff.
The stockholders also ratified the appointment of Ernst & Young LLP as
our independent auditors. 35,386,759 votes were cast in favor of the
ratification, 587,827 were cast against and 2,632 votes abstained.
Item 6. Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
34
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: January 27, 2005
By: /s/ Kristopher J. Matula
-------------------------------------
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
Date: January 27, 2005
35