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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
incorporated pursuant to the Laws of Delaware
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Internal Revenue Service -- Employer Identification No. 62-1518973
1001 Tillman Street, Memphis, TN 38112
901-320-8100
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No ____
As of October 29, 2004, there were outstanding 37,337,729 Common Shares of the
Registrant.
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INDEX
BUCKEYE TECHNOLOGIES INC.
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ITEM PAGE
PART I - FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Operations for the Three Months Ended September 30,
2004 and 2003.......................................................................... 3
Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004............ 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30,
2004 and 2003.......................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................ 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 19
3. Quantitative and Qualitative Disclosures About Market Risk.................................. 27
4. Controls and Procedures..................................................................... 27
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K............................................................ 28
SIGNATURES 29
2
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30
2004 2003 (1)
-------------------------------
Net sales.............................................................. $167,323 $155,831
Cost of goods sold..................................................... 137,694 134,240
-------------------------------
Gross margin........................................................... 29,629 21,591
Selling, research and administrative expenses.......................... 9,726 9,592
Restructuring costs.................................................... 1,196 1,038
Amortization of intangibles and other.................................. 603 560
-------------------------------
Operating income....................................................... 18,104 10,401
Net interest expense and amortization of debt costs.................... 11,278 11,177
Loss on early extinguishment of debt................................... - 3,300
Foreign exchange and other............................................. 33 (131)
-------------------------------
Income (loss) before income taxes...................................... 6,793 (3,945)
Income tax expense (benefit)........................................... 2,378 (1,281)
-------------------------------
Income (loss) before cumulative effect of change in accounting......... 4,415 (2,664)
Cumulative effect of change in accounting (net of tax of $3,359)...... - 5,720
-------------------------------
Net income............................................................. $4,415 $3,056
===============================
Earnings (loss) per share before cumulative effect of change in accounting
Basic earnings per share.................................... $ 0.12 $ (0.07)
Diluted earnings per share.................................. $ 0.12 $ (0.07)
Cumulative effect of change in accounting
Basic earnings per share.................................... $ - $ 0.15
Diluted earnings per share.................................. $ - $ 0.15
Earnings per share
Basic earnings per share.................................... $ 0.12 $ 0.08
Diluted earnings per share.................................. $ 0.12 $ 0.08
Weighted average shares for basic earnings per share................... 37,312 36,975
Adjusted weighted average shares of diluted earnings per share......... 37,458 36,995
(1) Restated based on change in accounting.
See accompanying notes.
3
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 June 30
2004 2004
---------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................................ $ 23,836 $27,235
Accounts receivable-net.................................. 111,306 112,367
Inventories.............................................. 114,552 107,439
Deferred income taxes and other.......................... 14,521 10,207
---------------------------
Total current assets....................... 264,215 257,248
Property, plant and equipment.................................. 890,290 883,613
Less accumulated depreciation.................................. (360,089) (345,981)
---------------------------
530,201 537,632
Goodwill....................................................... 135,450 130,172
Intellectual property and other, net........................... 40,265 41,023
---------------------------
Total assets............................................. $970,131 $966,075
===========================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................... $27,253 $27,130
Accrued expenses......................................... 51,970 45,337
Current portion of capital lease obligation.............. 652 632
Current portion of long-term debt........................ 1,500 16,972
---------------------------
Total current liabilities.................... 81,375 90,071
Long-term debt................................................. 582,434 587,076
Accrued post retirement benefits............................... 19,149 18,931
Deferred income taxes.......................................... 39,924 37,956
Capital lease obligation....................................... 1,818 2,068
Other liabilities.............................................. 193 628
Stockholders' equity........................................... 245,238 229,345
---------------------------
Total liabilities and stockholders' equity............... $970,131 $966,075
===========================
See accompanying notes.
4
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
September 30
2004 2003 (1)
----------------------------
Operating activities
Net income..................................................... $ 4,415 $3,056
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting............... - (5,720)
Depreciation............................................ 11,393 11,186
Amortization............................................ 922 1,441
Loss on early extinguishment of debt.................... - 3,300
Deferred income taxes and other......................... 1,813 1,359
Changes in operating assets and liabilities:
Accounts receivable................................. 2,059 16,169
Inventories......................................... (6,093) (1,615)
Other assets........................................ 837 (3,603)
Accounts payable and other current liabilities...... 5,651 (18)
----------------------------
Net cash provided by operating activities......................... 20,997 25,555
Investing activities
Purchases of property, plant and equipment..................... (4,970) (9,725)
Other.......................................................... 84 (303)
----------------------------
Net cash used in investing activities............................. (4,886) (10,028)
Financing activities
Proceeds from exercise of options.............................. 248 -
Net payments under revolving line of credit.................... - (55,250)
Issuance of long term debt..................................... - 200,000
Payments for debt issuance costs............................... (4) (6,029)
Payments related to early extinguishment of debt............... - (2,115)
Payments on long term debt and other........................... (20,230) (175,001)
----------------------------
Net cash used in financing activities............................. (19,986) (38,395)
Effect of foreign currency rate fluctuations on cash.............. 476 (827)
---------------------------
Decrease in cash and cash equivalents............................. (3,399) (23,695)
Cash and cash equivalents at beginning of period.................. 27,235 49,977
---------------------------
Cash and cash equivalents at end of period........................ $23,836 $26,282
===========================
(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 months ended
September 30, 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. 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 months ended September 30, 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 for the three months ended September 30,
2004 and $560 for the same period 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 September 30, 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.
NOTE B -- CHANGE IN ACCOUNTING
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.
6
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 September 30
2004 2003
----------------------------------------
Net income as reported................................. $4,415 $ 3,056
Deduct: Cumulative effect of change in accounting for
planned maintenance costs, net of tax............. - 5,720
-----------------------------------------
Proforma net income (loss)............................. $4,415 $(2,664)
=========================================
Earnings (loss) per share as reported
Basic......................................... $ 0.12 $ 0.08
Diluted....................................... $ 0.12 $ 0.08
Proforma earnings (loss) per share
Basic......................................... $ 0.12 $ (0.07)
Diluted....................................... $ 0.12 $ (0.07)
NOTE C -- SEGMENT INFORMATION
We report results for two segments, specialty fibers and nonwoven
materials. The specialty fibers segment is an aggregation of cellulosic fibers
based on both wood and cotton. Management makes financial decisions and
allocates resources based on the sales and operating income of each segment. We
allocate selling, research, and administration expenses to each segment and
management uses the resulting operating income to measure the performance of the
segments. The financial information attributed to these segments is included in
the following table:
Three Months Ended Specialty Nonwoven
September 30 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2004 $118,046 $55,922 $(6,645) $167,323
2003 107,318 53,210 (4,697) 155,831
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Operating income (loss) 2004 16,898 3,568 (2,362) 18,104
2003 9,921 2,487 (2,007) 10,401
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2004 6,961 4,223 866 12,050
intangibles 2003 6,704 4,268 825 11,797
------------------------------------------------------------------------------------------------------------
Capital expenditures 2004 3,914 976 80 4,970
2003 9,089 599 37 9,725
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.
7
NOTE D -- ASSETS HELD FOR SALE
In July 2004, we ceased production of nonwoven materials at our Cork,
Ireland facility. See Note E - 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 $4,028 and
$1,349, respectively. Current markets and third party interest for the building
and equipment indicate we should be able to meet or exceed these values through
the sales process. We anticipate the sale of the building and equipment will be
completed during fiscal 2005. During the three months ended September 30, 2004,
management determined that the plan of sale criteria in SFAS No. 144, Accounting
for Impairment or Disposal of Long-lived Assets, had been met. Accordingly,
management reevaluated its estimate of fair value less the cost to sell the
assets and determined no additional gain or loss should be recognized. Although
we believe the current carrying value less cost to sell best represent the fair
value of the building and equipment, it is reasonably possible the actual
results could materially differ from amounts estimated.
The carrying value of the building and equipment was classified in
property, plant and equipment as of June 30, 2004 and has been reclassified to
current assets and are presented under the "Deferred income taxes and other"
caption in the balance sheet as of September 30, 2004.
NOTE E -- 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, 65 positions
have been eliminated and approximately 13 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
into 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. We expect this consolidation will
enable us to improve our overall nonwoven materials operating results by about
$7,000 annually and reduce working capital needs by $4,000. The closure of the
Cork facility and related reorganization of the nonwoven materials organization
resulted in the termination of 81 employees as of September 30, 2004 and will
include the termination of an additional eight employees during the second
quarter of fiscal 2005. We expect total restructuring expenses and payments
related to the closure to be approximately $3,000 and completed by the end of
calendar 2004.
8
Restructuring expenses are included in "Restructuring costs" in our
condensed consolidated statements of operations. Accrual balances are included
in "Accrued expenses" in the balance sheet. The following table summarizes the
expenses and accrual balances by reporting segments for the three months ended
September 30, 2004.
Three Months Ended
September 30, 2004
-------------------------------------
Accrual Accrual
Balance Impact Balance as
as of Of of Program Total
June 30, Additional Foreign September Charges Estimated
2004 Charges Currency Payments 30, 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................. 263 169 4 (216) 220 1,775 1,947
Nonwoven materials............... - - - - - 39 39
Corporate........................ 121 - (121) - 1,514 1,514
-------------------------------------------------------------------------------------------
Total 2003 Program-Phase 2 384 169 4 (337) 220 3,328 3,500
2004 Restructuring Program
---------------------------------------------------------------------------------------------------------------------------------
Nonwoven materials
Severance and employee
benefits....................... 1,750 734 (2) (2,332) 150 2,500 2,663
Other miscellaneous expenses..... - 229 - (229) - 269 337
-------------------------------------------------------------------------------------------
Total 2004 Program.................. 1,750 963 (2) (2,561) 150 2,769 3,000
-------------------------------------------------------------------------------------------
Total All Programs.................. $2,134 $1,196 $(2) $(2,962) $370 $8,777 $9,250
===========================================================================================
NOTE F -- INVENTORIES
The components of inventory consist of the following:
September 30 June 30
2004 2004
--------------------------------
Raw materials........................ $27,986 $28,073
Finished goods....................... 63,864 57,118
Storeroom and other.................. 22,702 22,248
--------------------------------
$114,552 $107,439
================================
9
NOTE G -- DEBT
The components of long-term debt consist of the following:
September 30 June 30
2004 2004
-------------------------------
Senior Notes due:
2013.............................. $200,000 $200,000
Senior Subordinated Notes due:
2008.............................. 99,750 99,737
2010.............................. 152,934 153,061
Credit facilities...................... 124,250 144,250
Other.................................. 7,000 7,000
-------------------------------
583,934 604,048
Less current portion................... 1,500 16,972
-------------------------------
$582,434 $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 was
$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 three months ended September 30, 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. 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.
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
10
breach any covenant or constitute an event of default under any of our debt
agreements. However, until such time as the ratio again equals or exceeds 2:1,
we can only incur debt that is Permitted Indebtedness.
On October 16, 2003, we successfully completed a solicitation of
consents from holders of our notes due in 2008 (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), while
we are still limited to Permitted Indebtedness as defined in the indentures.
Under each of these indentures, the fixed charge coverage ratio test is
measured on a rolling four-quarter basis. While we can offer no assurance in
this regard, we believe that our operating results will improve over the next
several quarters and that such improved results together with recent reductions
in our outstanding debt, will enable us to exceed the required 2:1 ratio
necessary to incur ratio debt under indentures governing the senior notes and
the senior subordinated notes.
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
September 30, 2004 the unamortized portion of the termination fee was recorded
as an increase in debt of $3,452. During the three months ended September 30,
2004 and 2003, the swap reduced our interest expense by $143 and $1,238,
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 October 15, 2010. The term
loan also requires an annual excess cash flow payment (as defined under the
credit agreement). During the first quarter of fiscal 2005, we made an excess
cash flow payment of $15,472 based on fiscal 2004 performance and an additional
payment of $4,528 for total payments of $20,000 during the quarter. 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. We had
$124,250 outstanding on this facility at an average variable interest rate of
4.4% as of September 30, 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.
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. At September 30, 2004, we were in compliance with these
financial covenants.
11
As of September 30, 2004, we had $67,692 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.
As of September 30, 2004, we had approximately $75 million of liquidity
including available borrowings and cash and cash equivalents. 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.
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.
On September 30, 2003, we renewed our Canadian credit facility. The
renewal extended the maturity to November 30, 2004 and required a 20% reduction
of the principal to Canadian $16,000 (U.S. $12,614 equivalent based on exchange
rates in effect at September 30, 2004). As of September 30, 2004, we had $0
outstanding on this facility. Effective October 1, 2004 we cancelled this
facility.
NOTE H -- COMPREHENSIVE INCOME
The components of comprehensive income consist of the following:
Three Months Ended September 30
2004 2003
-------------------------------------------
Net income........................................... $ 4,415 $3,056
Foreign currency translation adjustments - net....... 11,192 3,907
-------------------------------------------
Comprehensive income................................. $15,607 $6,963
===========================================
For the three months ended September 30, 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 $2,164, the Brazilian real of
$1,856 and the Canadian dollar of $7,172.
For the three months ended September 30, 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 $4,197, the Brazilian real of
$(425) and the Canadian dollar of $135.
NOTE I - STOCK-BASED COMPENSATION
At September 30, 2004, the Company has stock-based compensation plans
which we account for under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition provisions of
SFAS 123, Accounting for Stock-Based Compensation, to stock-based compensation.
12
Three Months Ended September 30
2004 2003
---------------------------------------
Net income as reported............................ $4,415 $ 3,056
Deduct: Total stock-based compensation expense determined
under fair value based method , net of related tax
effects...................................... (538) (525)
---------------------------------------
Pro forma net income......................... $3,890 $ 2,518
=======================================
Basic earnings per share:
As reported.................................. $ 0.12 $ 0.08
Pro forma.................................... $ 0.10 $ 0.07
Diluted earnings per share:
As reported.................................. $ 0.12 $ 0.08
Pro forma.................................... $ 0.10 $ 0.07
NOTE J - 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 September 30
2004 2003
--------------------------------------
Service cost for benefits earned.................. $ 176 $ 188
Interest cost on benefit obligation............... 358 313
Amortization of unrecognized prior service cost... (281) (281)
(Gain)/loss....................................... 97 84
--------------------------------------
Total cost........................................ $ 350 $ 304
======================================
In accordance with Financial Staff Position No. FAS 160-1 (FSP 106-1),
the impact, of the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the Act) has been evaluated and has not been recognized in the
condensed consolidated financial statements as of September 30, 2004 due to its
immateriality.
NOTE K - 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.
13
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004
Guarantors
--------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-----------------------------------------------------------------------
Net sales............................................ $ 23,282 $99,989 $51,311 $(7,259) $167,323
Cost of goods sold................................... 18,611 80,670 45,510 (7,097) 137,694
-----------------------------------------------------------------------
Gross margin......................................... 4,671 19,319 5,801 (162) 29,629
Selling, research and administrative expenses, and
other............................................ 3,095 5,336 1,898 - 10,329
Restructuring costs.................................. 1 120 1,075 - 1,196
-----------------------------------------------------------------------
Operating income (loss).............................. 1,575 13,863 2,828 (162) 18,104
Other income (expense):
Interest income/(expense) and amortization of debt
costs......................................... (11,331) (39) 92 - (11,278)
Other income/(expense), including equity
income in affiliates.......................... 8,916 154 (119) (8,984) (33)
Intercompany interest income/(expense)........... 7,848 (6,148) (1,701) 1 -
-----------------------------------------------------------------------
Income/(loss) before income taxes.................... 7,008 7,830 1,100 (9,145) 6,793
Income tax expense/(benefit)......................... 2,593 2,659 509 (3,383) 2,378
-----------------------------------------------------------------------
Net income (loss).................................... $4,415 $ 5,171 $ 591 $(5,762) $ 4,415
=======================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (1)
Three Months Ended September 30, 2003
Guarantors
--------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
----------------------------------------------------------------------
Net sales............................................ $18,741 $90,104 $54,533 $(7,547) $155,831
Cost of goods sold................................... 14,778 77,767 49,168 (7,473) 134,240
----------------------------------------------------------------------
Gross margin......................................... 3,963 12,337 5,365 (74) 21,591
Selling, research and administrative expenses, and
other............................................ 2,594 5,311 2,247 - 10,152
Restructuring costs.................................. 214 592 232 - 1,038
----------------------------------------------------------------------
Operating income (loss).............................. 1,155 6,434 2,886 (74) 10,401
Other income (expense):
Interest income/(expense) and amortization of debt
costs......................................... (10,517) (72) (588) - (11,177)
Other income/(expense), including equity
income in affiliates.......................... 7,053 47 131 (10,400) (3,169)
Intercompany interest income/(expense)........... 7,281 (4,922) (2,359) - -
Intercompany miscellaneous income/(expense)..... (320) (686) 1,006 - -
----------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting.......... 4,652 801 1,076 (10,474) (3,945)
Income tax expense/(benefit)......................... 1,596 275 441 (3,593) (1,281)
----------------------------------------------------------------------
Income/(loss) before cumulative effect
of change in accounting........................... 3,056 526 635 (6,881) (2,664)
Cumulative effect of change in accounting............ - 5,720 - - 5,720
----------------------------------------------------------------------
Net income (loss).................................... $ 3,056 $6,246 $ 635 $(6,881) $ 3,056
======================================================================
(1) Restated based on change in accounting.
14
CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $12,354 $ 144 $11,338 $ - $ 23,836
Accounts receivable, net of allowance..... 13,313 62,409 35,584 - 111,306
Inventories............................... 22,327 59,213 33,730 (718) 114,552
Other current assets...................... 3,965 4,253 6,303 - 14,521
Intercompany accounts receivable.......... - 26,731 6,109 (32,840) -
-------------------------------------------------------------------------------
Total current assets........................ 51,959 152,750 93,064 (33,558) 264,215
Property, plant and equipment, net.......... 53,391 344,237 132,573 - 530,201
Goodwill and intangibles, net............... 21,000 54,865 88,363 - 164,228
Intercompany notes receivable............... 364,279 - - (364,279) -
Other assets, including investment in
subsidiaries............................. 311,300 321,704 116,605 (738,122) 11,487
-------------------------------------------------------------------------------
Total assets................................ $801,929 $873,556 $430,605 $(1,135,959) $970,131
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 5,588 $15,960 $ 5,705 $ - $27,253
Other current liabilities................. 23,557 20,195 10,370 - 54,122
Intercompany accounts payable............. 21,379 - 11,461 (32,840) -
-------------------------------------------------------------------------------
Total current liabilities................... 50,524 36,155 27,536 (32,840) 81,375
Long-term debt.............................. 580,434 2,000 - - 582,434
Deferred income taxes....................... (39,862) 62,135 17,651 - 39,924
Other long-term liabilities................. 5,415 14,512 1,233 - 21,160
Intercompany notes payable.................. - 233,073 131,206 (364,279) -
Stockholders'/invested equity............... 205,418 525,681 252,979 (738,840) 245,238
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity.. $801,929 $873,556 $430,605 $(1,135,959) $970,131
===============================================================================
15
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
===============================================================================
16
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by operations............... $ 12,775 $ 7,778 $ 444 $ 20,997
Investing activities:
Purchases of property, plant and equipment.... (411) (3,558) (1,001) (4,970)
Other......................................... - (139) 223 84
---------------------------------------------------------------
Net cash used in investing activities......... (411) (3,697) (778) (4,886)
Financing activities
Net borrowings (payments on) long-term
debt and other............................ (14,756) (4,040) (1,190) (19,986)
---------------------------------------------------------------
Net cash used in financing activities......... (14,756) (4,040) (1,190) (19,986)
Effect of foreign currency rate fluctuations
on cash.................................. - - 476 476
Increase (decrease) in cash and cash
equivalents.............................. (2,392) 41 (1,048) (3,399)
Cash and cash equivalents at beginning
of period................................ 14,746 103 12,386 27,235
---------------------------------------------------------------
Cash and cash equivalents at end of period.... $ 12,354 $ 144 $11,338 $ 23,836
===============================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in)operations...... $25,636 $(19,126) $19,045 $25,555
Investing activities:
Purchases of property, plant and equipment.... (2,319) (6,774) (632) (9,725)
Other......................................... - (303) - (303)
---------------------------------------------------------------
Net cash used in investing activities......... (2,319) (7,077) (632) (10,028)
Financing activities
Net borrowings (payments) under revolving
line of credit............................ (55,250) - - (55,250)
Payments for debt issuance and
extinguishment............................ (8,144) - - (8,144)
Net issuance of (payments on) long-term
debt and other............................ 15,012 24,816 (14,829) 24,999
---------------------------------------------------------------
Net cash provided by (used in)
financing activities..................... (48,382) 24,816 (14,829) (38,395)
Effect of foreign currency rate fluctuations
on cash.................................. - - (827) (827)
---------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents.............................. (25,065) (1,387) 2,757 (23,695)
Cash and cash equivalents at beginning
of period................................ 26,075 4,349 19,553 49,977
---------------------------------------------------------------
Cash and cash equivalents at end of period.... $1,010 $ 2,962 $22,310 $ 26,282
===============================================================
17
NOTE L - SUBSEQUENT EVENT
On October 22, 2004, the President signed H.R. 4520, the American Jobs
Creation Act of 2004, thereby setting the date of enactment and the effective
date for many of the provisions in the Act. The centerpiece of the Act is a
repeal of the extraterritorial income (ETI) exclusion and the replacement of ETI
with a domestic manufacturing deduction. We are currently assessing the impact
this legislation may have on our effective tax rate, cash flows and financial
statements.
18
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
months ended September 30, 2004 to the three months ended September 30, 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 made progress
during the three months ended September 30, 2004 in improving the financial
results of our business. Revenue and profitability increased in both our
specialty fibers and nonwoven materials segments. The changes we made to improve
our operations are having 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.
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 during the first quarter of fiscal 2005, even as we
reduced external fluff pulp shipments by 10% versus the same period in fiscal
2004. Although the price of commodity pulps are reported to have recently
declined, the price of fluff pulp has remained steady. While we cannot rule out
the possibility that we will experience some short-term deterioration in fluff
pulp prices, we have not experienced any weakness during the quarter. 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 are concerned about the sizeable price
increases that are currently impacting both fuel and chemicals. Both of these
areas have the potential to negatively impact our short term financial results.
On July 1, 2004 we increased the prices of our cotton-based specialty fibers,
and we are currently implementing price increases averaging about 5% on nonwoven
materials not under contract. Although contractual obligations limit our ability
19
to increase the prices of our specialty wood pulps until after January 1, 2005,
we are hopeful that our other price increases, combined with continued strong
demand, will offset rising chemical and energy prices.
We continued to make debt reductions during the first quarter of fiscal
2005 as we believe strengthening our balance sheet is important to our business.
We made $20 million of debt payments on our senior secured credit facility
during the period.
Results of Operations
Consolidated results
The following table compares components of operating income for the
three months ended September 30, 2004 and 2003.
------------------------------------------------------------------------------------------------------------------
(millions) Three Months Ended September 30
-------------------------------
2004 2003 Change % Change
-------------------------------------------------------
Net sales $167.3 $155.8 $11.5 7%
Cost of goods sold 137.7 134.2 3.5 3%
-------------------------------------------------------
Gross margin 29.6 21.6 8.0 37%
Selling, research and administrative expenses 9.7 9.6 0.1 1%
Restructuring costs 1.2 1.0 0.2 20%
Amortization of intangibles and other 0.6 0.6 - -
-------------------------------------------------------
Operating income $ 18.1 $ 10.4 $ 7.7 74%
=======================================================
Net sales improved during the three months ended September 30, 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. Overall, our gross margin percentage
improved to 18% during the period, an increase of 400 basis points over the
prior year primarily a result of improved pricing and mix.
We continued to incur restructuring charges related to programs that we
began in fiscal 2003 and 2004. The costs incurred during the three months ended
September 30, 2004 were primarily related to the program initiated as part of
the closure of our Cork, Ireland facility.
Further discussion on revenue, operating trends, and restructuring
costs are discussed later in this MD&A. Additional information on the
restructuring programs and charges taken may also be found in Note E 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.
20
Specialty fibers
The following table compares specialty fibers net sales and operating
income for the three months ended September 30, 2004 and 2003.
--------------------------------------------------------------------------------
($ millions) Three Months Ended September 30
-------------------------------
2004 2003 Change % Change
---------------------------------------------------
Net sales $118.0 $107.3 $10.7 10%
Operating income 16.9 9.9 7.0 71%
Net sales increased during the three months ended September 30, 2004
versus 2003 due to improved mix and volume for wood-based specialty products and
increased pricing for both wood and cotton-based specialty products. These
improvements were partially offset by decreases in the volume of cotton-based
specialty products.
Improvements in selling prices and mix of our wood-based products were
driven by several factors. 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 11% year over year, we can offer no
assurances that this increase in fluff pulp pricing will continue or that this
trend will not reverse direction during fiscal 2005. Also the weakening of the
U.S. dollar year over year made our products more attractive to export customers
helping to increase overall specialty wood volume by 10%.
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. Pricing has increased on average, approximately 6% on most of our
cotton-based specialty products. Although these price increases had a positive
impact on revenue and operating income during the first quarter, they were
offset by the higher fiber costs and the weaker U.S. dollar which negatively
impacts manufacturing costs at our Glueckstadt, Germany cotton-based specialty
fibers facility.
The overall improvement in cotton-based specialty pricing was also
offset by a decline in volume based on the year over year impact of the partial
closure of our Lumberton, North Carolina facility. Although a majority of
products manufactured at Lumberton were transitioned to our Memphis, Tennessee,
plant there was still an overall decrease in volume due to the partial closure
of the facility. In a continuation of our strategy to manage inventories, our
Glueckstadt, Germany cotton facility operates at approximately 55% of capacity
using a reduced shift system.
Operating income substantially improved during the quarter based on the
strong improvement in sales. Although manufacturing costs edged higher for the
three months ended September 30, 2004 for both wood and cotton-based specialty
products, they did not increase enough to offset the strong gains from increased
pricing and volume.
A record four hurricanes that hit Florida and the southeastern United
States during the first quarter challenged the operating environment at our
wood-based specialty fibers facility in Perry, Florida. Although our operations
were subjected to extensive rainfall and high winds, none of the storms caused
major interruptions at our facilities. We did experience some short-term
curtailment due to power outages, but our technicians quickly restored services,
and we were able to achieve production targets. The extensive rainfall has
threatened our wood supply, but we are confident that our production will not be
limited by wood shortages during the coming 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 are confident that, when this
conversion is completed in the fall of 2005, it will be a significant
contributor to our profitability. We expect to spend approximately $10 million
during the remainder of fiscal 2005 and an additional $8 million in fiscal 2006
on this project.
21
Nonwoven materials
The following table compares nonwoven materials net sales and operating
income for the three months ended September 30, 2004 and 2003.
-----------------------------------------------------------------------------
($ millions) Three Months Ended September 30
-------------------------------
2004 2003 Change % Change
-----------------------------------------------------
Net sales $55.9 $53.2 $2.7 5%
Operating income 3.6 2.5 1.1 44%
The increase in net sales during the three months ended September 30,
2004 was primarily due to an increase in shipment volume and the strengthening
of the euro versus the U.S. dollar. These improvements were partially offset by
minor mix and price changes. Although we ceased production at our Cork, Ireland
facility in July, we continued shipping inventory from Cork through the
remainder of the period and began transitioning sales to our other nonwoven
materials facilities.
Operating income for the three months ended September 30, 2004 was our
best quarterly performance in more than four years. The improvement was
primarily due to the closure of our Cork, Ireland plant. While Cork's shipments
were only down 18% compared to the same quarter a year ago, labor and overhead
costs were down 49%. Overall, our nonwoven materials business was able to
support increased shipment and production volume with one less manufacturing
location for most of the quarter, and we successfully transitioned more than
half of Cork's business to other manufacturing sites. Our Gaston, North Carolina
facility continued to show improvement in its operating performance compared to
the prior year due to a significant increase in shipment volume and the
resulting improvement in capacity utilization.
Restructuring 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 three-month periods ended September 30, 2004 and
2003.
----------------------------------------------------------------------------------------------------------
Three months ended Estimate to
September 30 Total Complete
Estimated at September 30,
(millions) 2004 2003 Charges 2004
----------------------------------------------------------------------------------------------------------
Restructuring costs
2004 Restructuring program............... $ 0.9 $ - $ 3.0 $ 0.2
2003 Restructuring program - phase 2..... 0.2 0.8 3.5 0.2
2003 Restructuring program - phase 1..... 0.1 0.2 2.8 0.1
--------------------------------------------------------
Total restructuring costs $ 1.2 $ 1.0 $ 9.3 $ 0.5
----------------------------------------------------------------------------------------------------------
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 have 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 is 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 manufacturing facilities. Production
at Cork ceased in July 2004. Closing our Cork facility reduced our nonwovens
capacity by about 10%. Subsequent to the July closure of the facility, we began
22
to actively market the building and equipment with carrying values of $4.0
million and $1.3 million, respectively. Current markets and third party interest
for the building and equipment indicate we should be able to meet or exceed
these values through the sales process.
We will continue 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. We expect this
consolidation will enable us to improve our overall nonwoven materials operating
results by about $7 million annually and reduce working capital needs by $4
million. The closure of the Cork facility and related reorganization of the
nonwoven materials organization resulted in the termination of 81 employees and
will include the termination of an additional eight employees by the end of
calendar year 2004. We expect restructuring expenses and payments related to the
closure to be approximately $3 million of which $2.8 million has been incurred
and with the remaining $0.2 million to occur over the remainder of calendar
2004.
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 over $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, 65 positions have been eliminated
and approximately 13 additional positions will be eliminated over the next year.
These positions include manufacturing, sales, product development and
administrative 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
We incurred net interest expense and amortization of debt costs of
$11.3 million in the three months ended September 30, 2004 compared to $11.2
million for the prior year. The consistency is the result of several offsetting
factors. Our decrease in outstanding debt of $45.3 million since September 30,
2003 had a positive impact on interest expense, but was offset by the conversion
of $50 million of variable rate debt to higher fixed rate debt. We were also
able to 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 G of the accompanying interim financial statements.
23
Income tax expense
Our effective tax rate for the three months ended September 30, 2004
was 35.0% versus 32.5% for the same period in 2003. The higher tax rate was due
primarily to the source of income shifting to higher tax 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.
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.
Cumulative effect of change in accounting
Historically, we accrued expenses related to extended maintenance
shutdowns at our Perry, Florida facility. However, as of 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 $21.0 million and $25.6
million during the three months ended September 30, 2004 and 2003, respectively.
During the three months ended September 30, 2004, improved earnings and timing
of interest payments were partially offset by an increase in inventories of $6.1
million during the period. During the three months ended September 30, 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.
Net cash used in investing activities
During the three months ended September 30, 2004, we used $4.9 million
cash in investing activities, as compared to $10.0 million in the same period of
2003. The higher expenditures during 2003 were the result of our expenditure for
a 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 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 nine months of fiscal 2005 and
$8 million during fiscal 2006 primarily related to the upgrade of our Americana,
Brazil specialty fibers facility.
Net cash provided by (used in) financing activities
Under our senior secured credit facility, during the first quarter of
fiscal 2005 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
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performance. Payments totaling approximately $15.4 million were made during July
and August of 2004. The total reduction of our senior secured credit facility
during the three months ended September 30, 2004 was $20.0 million.
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. See Note G- Debt for further
information on this issuance.
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 three months of fiscal 2005. Through September 30, 2004, we had
repurchased a total of 5,009,300 shares under the current board authority. At
September 30, 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 September 30, 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)...... $891.6 $ 39.5 $ 98.8 $ 256.2 $ 497.1
Capital lease obligations (3).. 3.0 0.6 1.6 0.8 -
Operating leases .............. 4.7 2.1 2.2 0.4 -
Timber commitments ............ 81.8 11.6 24.6 25.4 20.2
Lint commitments .............. 22.8 22.8 - - -
Other purchase commitments (4) 12.5 9.3 3.2 - -
----------------------------------------------------------------------------
Total contractual cash
obligations................. $1,016.4 $ 85.9 $ 130.4 $ 282.8 $ 517.3
============================================================================
(1) Cash obligations for the remainder of fiscal 2005.
(2) Amounts include related interest payments. Interest payments for variable
debt of $125.3 million are based on the effective rate as of September 30, 2004
of 4.4%.
(3) Capital lease obligations represent principal and interest payments.
(4) The majority of other purchase commitments are take-or-pay contracts made in
the ordinary course of business related to utilities and raw material purchases.
Liquidity and capital resources
We have the following major sources of financing: senior secured credit
facility, senior notes and senior subordinated notes. Our senior secured credit
facility, senior notes and senior subordinated notes contain various covenants.
We were in compliance with these covenants as of September 30, 2004 and believe
we will remain in compliance. These sources of financing are described in detail
in Note G of the accompanying interim financial statements.
On September 30, 2004, we had $67.7 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 September 30,
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2004, our liquidity, including available borrowings and cash and cash
equivalents was approximately $75 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.
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. Management has discussed the development and selection of these
critical accounting policies and estimates with the Audit Committee of our Board
of Directors and with our independent registered public accounting firm. In
addition, Note 1 to the financial statements in our Annual Report contains a
summary of our significant accounting policies.
Forward-Looking Statements
This document contains both historical and forward-looking statements.
All statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements within the meaning of section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are not based on
historical facts, but rather reflect management's current expectations
concerning future results and events. These forward-looking statements generally
can be identified by the use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will"
or other similar words or phrases. Similarly, statements that describe
management's objectives, plans or goals are or may be forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that are difficult to predict and which may
cause the actual results, performance or achievements to be different from any
future results, performance and achievements expressed or implied by these
statements. The following important factors, among others, could affect future
results, causing these results to differ materially from those expressed in our
forward-looking statements: pricing fluctuations and worldwide economic
conditions; dependence on a single customer; fluctuation in the costs of raw
materials; competition; inability to predict the scope of future environmental
compliance 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.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 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. Foreign currency fluctuations during
the three-month period ended September 30, 2004 did not have a material effect
on our results of operations.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation as of September 30, 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.
27
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits
31.1 Certification of the Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, signed by David B.
Ferraro, Chief Executive Officer of Buckeye Technologies Inc. on
October 29, 2004.
31.2 Certification of the Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, signed by Kristopher
J. Matula, Chief Financial Officer of Buckeye Technologies Inc. on
October 29, 2004.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, signed by David B.
Ferraro, Chief Executive Officer of Buckeye Technologies Inc. on
October 29, 2004.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Kristopher
J. Matula, Chief Financial Officer of Buckeye Technologies Inc. on
October 29, 2004.
(b) Reports on Form 8-K
During the three months ended September 30, 2004, the following reports
were filed or furnished on Form 8-K:
- Report dated July 13, 2004 announcing the conference call
regarding operating results for the year ended June 30, 2004.
- Report dated August 3, 2004 announcing the press release
regarding the results of operations for the year ended June 30, 2004.
- Report dated August 17, 2004 announcing the election of new
board members.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Buckeye Tchnologies Inc.
By: /S/ DAVID B. FERRARO
-------------------------------------
David B. Ferraro, Chief Executive Officer
Date: October 29, 2004
By: /S/ KRISTOPHER J. MATULA
-------------------------------------
Kristopher J. Matula, Executive Vice
President and Chief Financial Officer
Date: October 29, 2004
29