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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
Or
|_| 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 in the state 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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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[x]
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of December 31, 2004, the aggregate market value of the registrant's voting
common equity held by non-affiliates, computed by reference to the price at
which the common equity was last sold, was approximately $436.9 million.
As of August 30, 2005, there were outstanding 37,587,664 Common Shares of the
Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Buckeye Technologies Inc.'s 2005 Annual Proxy Statement to be filed
with the commission in connection with the 2005 Annual Meeting of Stockholders
are incorporated by reference into Part III and IV.
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INDEX
BUCKEYE TECHNOLOGIES INC.
ITEM PAGE
PART I
1. Business............................................................................ 3
2. Properties........................................................................ 8
3. Legal Proceedings................................................................. 9
4. Submission of Matters to a Vote of Security Holders............................... 9
PART II
5. Market for the Registrant's Common Stock, Related Security Holder Matters......... 10
6. Selected Financial Data........................................................... 10
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 12
7a. Qualitative and Quantitative Disclosures About Market Risk........................ 26
8. Financial Statements and Supplementary Data....................................... 28
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................. 28
9a. Controls and Procedures........................................................... 28
9b. Other............................................................................... 28
PART III
10. Directors and Executive Officers of the Registrant................................ 29
11. Executive Compensation............................................................ 31
12. Security Ownership of Certain Beneficial Owners and Management.................... 31
13. Certain Relationships and Related Transactions.................................... 31
14. Principal Accountant Fees and Services............................................ 31
PART IV
15. Exhibits and Financial Statement Schedules........................................ 32
Signatures........................................................................ 34
OTHER
Index to Consolidated Financial Statements and Schedules.......................... F-1
2
PART I
Item 1. Business
General
Buckeye Technologies Inc. is a leading producer of value-added
cellulose-based specialty products, headquartered in Memphis, Tennessee. We
believe that we have leading positions in many of the high-end niche markets in
which we compete. We utilize our expertise in polymer chemistry, leading
research and development and advanced manufacturing facilities to develop and
produce innovative and proprietary products for our customers. We sell our
products to a wide array of technically demanding niche markets in which we
believe our proprietary products, manufacturing processes and commitment to
customer technical service give us a competitive advantage. We are the only
manufacturer in the world offering cellulose-based specialty products made from
both wood and cotton and utilizing wetlaid and airlaid technologies. As a
result, we believe we produce and market a broader range of cellulose-based
specialty products than any of our competitors. We produce uniquely tailored
products designed to meet individual customer requirements. Our focus on
specialty niche markets allows us to establish long-term supply positions with
key customers. We operate manufacturing facilities in the United States, Canada,
Germany and Brazil.
Cellulose is a natural fiber derived from trees and other plants that
is used in the manufacture of a wide array of products. The total cellulose
market generally can be divided into two categories: commodity and specialty.
Manufacturers use commodity cellulose to produce bulk paper and packaging
materials, the markets for which are very large but highly cyclical. Specialty
cellulose is used to impart unique chemical or physical characteristics to a
diverse range of highly engineered products. Specialty cellulose generally
commands higher prices, and demand for specialty cellulose is less cyclical than
commodity cellulose. We believe the more demanding performance requirements for
products requiring specialty cellulose limit the number of participants in our
niche markets. Our focus on niche specialty cellulose markets has enabled us to
maintain positive cash flows even during cyclical downturns in the commodity
cellulose markets.
Company History
We and our predecessors have participated in the specialty cellulose
market for over 80 years and have developed new uses for many cellulose-based
products. We began operations as an independent company on March 16, 1993, when
we acquired the cellulose manufacturing operations of Procter & Gamble located
in Memphis, Tennessee and Perry, Florida (the Foley Plant), with Procter &
Gamble retaining a 50% limited partnership interest in the Foley Plant. We
became a public company in November of 1995 and simultaneously acquired and
redeemed Procter & Gamble's remaining interest in the Foley Plant.
In May 1996, we acquired the specialty cellulose business of Peter
Temming AG located in Glueckstadt, Germany. In September 1996, we acquired Alpha
Cellulose Holdings, Inc., a specialty cellulose producing facility located in
Lumberton, North Carolina. In May 1997, we acquired Merfin International Inc., a
leading manufacturer of airlaid nonwovens with facilities located in Canada,
Ireland and the United States. In October 1999, we acquired essentially all of
the assets of Walkisoft, UPM-Kymmene's airlaid nonwovens business. The
acquisition of Walkisoft added manufacturing facilities in Steinfurt, Germany
and Gaston County, North Carolina. In March 2000, we acquired the intellectual
property rights to the Stac-Pac(TM) folding technology. In August 2000, we
acquired the cotton cellulose business of Fibra, S.A. located in Americana,
Brazil. In calendar 2001, we commenced operating the world's largest airlaid
nonwovens machine at our Gaston, North Carolina facility and started up a
cosmetic cotton fiber line at our Lumberton, North Carolina facility.
Due to a decline in demand for cotton content paper, in August 2003, we
closed the specialty cotton papers portion of our Lumberton, North Carolina
facility. Due to excess airlaid production capacity around the globe we closed
our single-line airlaid nonwovens facility in Cork, Ireland during July 2004. In
January 2005, we announced our decision to close our cotton linter pulp facility
in Glueckstadt, Germany. We expect to cease production at the end of this
calendar year. In conjunction with this closure, we are upgrading the capability
of our Americana, Brazil manufacturing facility. We expect this expansion will
be completed near the end of calendar 2005 and will cost approximately $26
million. See Note 4, Impairment of Long-Lived Assets, to the Consolidated
Financial Statements for further discussion of the Lumberton, North Carolina;
Cork, Ireland; and Glueckstadt, Germany closures.
We are incorporated in Delaware and our executive offices are located
at 1001 Tillman Street, Memphis, Tennessee. Our telephone number is (901)
320-8100.
3
Products
Our product lines can be broadly grouped into four categories: chemical
cellulose, customized fibers, fluff pulp and nonwoven materials. We manage these
products within two reporting segments: specialty fibers and nonwoven materials.
The chemical cellulose and customized fibers are derived from wood and cotton
cellulose materials using wetlaid technologies. Fluff pulps are derived from
wood using wetlaid technology. Wetlaid technologies encompass cellulose
manufacturing processes in which fibers are deposited using water. Airlaid
nonwoven materials are derived from wood pulps, synthetic fibers and other
materials using airlaid technology. Airlaid technology utilizes air as a
depositing medium for fibers, one benefit of which is an increased ability as
compared to wetlaid processes to mix additional feature-enhancing substances
into the material being produced. A breakdown of our major product categories,
percentage of sales, product attributes and applications is provided below.
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% of
Fiscal
Product Groups 2005 Sales Value Added Attributes Market for End Use Applications
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Specialty Fibers
Chemical Cellulose 32%
Food casings Purity and strength Hot dog and sausage casings
Rayon industrial Strength and heat stability High performance tires and hose
cord reinforcement
High purity cotton High viscosity, purity and safety Personal care products, low fat dairy
ethers products, pharmaceuticals and
construction materials
Film for liquid Transparency/clarity, strength and Laptop and desktop computers and
crystal displays Purity television screens
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Customized Fibers 18%
Filters High porosity and product life Automotive, laboratory and industrial
filters
Specialty cotton Color permanence and tear Personal stationery, premium letterhead
papers resistance and currency
Cosmetic Cotton Absorbency, strength and softness Cotton balls and cotton swabs
Buckeye UltraFiber Finishing and crack reduction Concrete (residential slab on grade)
500tm
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Fluff Pulp 18%
Fluff pulp Absorbency and fluid transport Disposable diapers, feminine hygiene
products and adult incontinence products
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Nonwoven Materials 32%
Airlaid nonwovens Absorbency, fluid management and Feminine hygiene products, specialty
wet strength wipes and mops, tablecloths, napkins,
placemats, incontinence products and
food pads
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See Note 17, Segment Information, to the Consolidated Financial
Statements for additional information on products.
4
Raw Materials
Slash pine timber and cotton fibers are the principal raw materials
used in the manufacture of our specialty fibers products. These materials
represent the largest components of our variable costs of production. The region
surrounding the Foley Plant has a high concentration of slash pine timber, which
enables us to purchase adequate supplies of a species well suited to our
products at an attractive cost. In order to be better assured of a secure source
of wood at reasonable prices, we have entered into timber purchase agreements
which allow us to purchase a portion of our wood at current market or fixed
prices as stated in the agreements. Additional information is included in Note
19, Commitments, to the Consolidated Financial Statements.
We purchase cotton fiber either directly from cottonseed oil mills or
indirectly through agents or brokers. We purchase the majority of our
requirements of cotton fiber for the Memphis and Lumberton plants domestically.
The majority of the cotton fiber processed in the Americana plant comes from
within Brazil. The Glueckstadt plant will continue to purchase cotton fiber
principally from suppliers in Central Asia and the Middle East until the closure
at the end of calendar year 2005.
Fluff pulp is the principal raw material used in the manufacture of our
nonwoven materials products. More than 50% of our fluff pulp usage is supplied
internally and the remainder is purchased from several other suppliers. In
addition to fluff pulp, these products are comprised of synthetic fibers, latex
polymers, absorbent powders and carrier tissue depending on grade
specifications. These materials are also purchased from multiple sources.
The cost of slash pine timber, cotton fiber, and fluff pulp are subject
to market fluctuations caused by supply and demand factors. We do not foresee
material constraints from pricing or availability for any of our key raw
materials.
Sales and Customers
Our products are marketed and sold through a highly trained and
technically skilled in-house sales force. We maintain sales offices in the
United States and Europe. Our worldwide sales are diversified by geographic
region as well as end-product application. Our sales are distributed to
customers in approximately 60 countries around the world. Our fiscal 2005 sales
reflect this geographic diversity, with 42% of sales in North America, 38% of
sales in Europe, 10% of sales in Asia, 4% of sales in South America and 6% in
other regions. Approximately 86% of our worldwide sales, for fiscal 2005, were
denominated in U.S. dollars. Our products are shipped by rail, truck and ocean
carrier. Geographic segment data and product sales data are included in Note 17,
Segment Information, to the Consolidated Financial Statements.
The high-end, technically demanding specialty niche markets that we
serve require a higher level of sales and technical service support than do
commodity product sales. Our sales, product development and customer service
professionals work with customers in their plants to design products tailored
precisely to their product needs and manufacturing processes. In addition to an
in-house sales force, we also utilize outside sales agents in some parts of the
world.
Procter & Gamble is our largest customer, accounting for 14% of our
fiscal 2005 net sales. Nonwoven materials accounts for slightly more than half
of the total sales to Procter & Gamble. No other customer accounted for greater
than 5% of our fiscal 2005 net sales.
Research and Development
Our research and development activities focus on developing new
products, improving existing products, and enhancing process technologies to
further reduce costs and respond to environmental needs. We have research and
development pilot plant facilities in Memphis, and we employ engineers,
scientists and technicians who are focused on advanced products and new
applications to drive future growth. Our pilot plant facilities allow us to
produce, test and deliver breakthrough products to the market place on a more
cost-effective basis while minimizing interruptions to the normal production
cycles of our operating plants.
Research and development costs of $8.8 million, $9.5 million and $9.3
million were charged to expense as incurred for the years ended June 30, 2005,
2004 and 2003, respectively.
5
Competition
There are relatively few specialty fibers producers when compared with
the much larger commodity paper pulp markets. The technical demands and unique
requirements of the high-purity chemical cellulose or customized fiber pulp user
tend to differentiate suppliers on the basis of their ability to meet the
customer's particular set of needs, rather than focusing only on pricing. The
high-purity chemical cellulose and customized fiber markets are less subject to
price variation than commodity paper pulp markets. Major competitors include
Archer-Daniels-Midland, Borregaard, Rayonier, Tembec and Weyerhaeuser. A major
competitor closed its high-purity wood cellulose mill in July 2003, which we
estimate represented 18% of the high-purity wood cellulose market. This closure
provided us with an opportunity to increase our volume in these markets.
We believe that the number of producers is unlikely to grow
significantly given the substantial investment to enter the mature specialty
fibers market and sufficient existing capacity.
Although demand for fluff pulp is generally stable, fluff pulp prices
tend to vary together with commodity paper pulp prices because fluff pulp is
often produced in mills that also produce commodity paper pulp. Our strategy is
to reduce our exposure to fluff pulp by increasing our sales of more specialized
wood cellulose into new and existing markets. We also use about 40,000 metric
tons of fluff pulp from our Foley plant annually as a key raw material in our
airlaid nonwovens operations. We currently produce less than 10% of the world's
supply of fluff pulp. Major competitors include Bowater, International Paper,
Koch Industries, Rayonier, and Weyerhaeuser,
Demand for airlaid nonwovens grew significantly in the 1990's. Since
then, significant capacity expansion in 2001, primarily in North America,
resulted in the market being oversupplied. Buckeye is the leading supplier of
airlaid nonwoven materials worldwide. The markets we compete in also utilize
nonwovens materials produced with technologies other than airlaid such as
spunlaced. Major nonwovens competitors include Ahlstrom, BBA Nonwovens, Concert
Industries, Duni, Georgia-Pacific, Kimberly Clark and PGI.
In August 2003, Concert Industries filed for protection under Canada's
Companies' Creditors Arrangement Act. During fiscal 2005, Concert Industries
emerged from bankruptcy protection under new ownership and aggressively sought
new business in the over-supplied North American market.
The closure of our Cork, Ireland plant in July 2004 improved airlaid
industry capacity utilization in Europe and improved our competitive position
there. We successfully transitioned more than half of Cork's business to other
airlaid sites. There is limited availability of airlaid nonwoven capacity in
Europe, while the North American industry is operating in an environment of
significant over supply.
Intellectual Property
At June 30, 2005 and 2004, we recorded intellectual property assets
totaling $27.6 and $29.2 million, respectively. These amounts include patents
(including application and defense costs), licenses, trademarks, and tradenames
the majority of which were obtained in the acquisition of airlaid nonwovens
businesses and Stac-Pac(TM) technology. We intend to protect our patents and
file applications for any future inventions that are deemed to be important to
our business operations. The Stac-Pac(TM) packaging technology, a proprietary
system for packaging low-density nonwoven materials in compressed cube-shaped
bales, is an example of technology acquired by us to further differentiate us
from our airlaid nonwovens competitors. Stac-Pac(TM) bales facilitate our
customers' high-speed production lines with a continuous flow of material.
Stac-Pac(TM) units also reduce freight costs by compressing more material in a
bale than can be shipped in a traditional roll form, which enables us to ship
the bales more effectively in trucks and containers. Additional information is
included in Note 1, Accounting Policies, to our Consolidated Financial
Statements.
Inflation
We believe that inflation has neither had a material effect on our
results of operations nor on our financial condition during recent periods.
6
Seasonality
Our business has generally not been seasonal to a substantial extent.
However, somewhat lower specialty fiber volume is shipped in the July -
September quarter. Historically, nonwoven materials volume is lower during the
October - December quarter, however, we did not experience this decrease in
volume during the October - December quarter of fiscal 2005.
Employees
As of August 30, 2005, we employed approximately 1,700 employees, of
whom approximately 1,150 are employed at our facilities in the United States.
Approximately 60% of the U.S. employees are represented by unions at three
plants in Perry, Florida; Lumberton, North Carolina; and Memphis, Tennessee. On
October 21, 2003, the union at our Foley Plant ratified a new labor agreement
effective through March 31, 2008. The agreement for the Memphis Plant was signed
on April 28, 2003 and remains in effect through March 18, 2006. During fiscal
2003, the Lumberton Plant's hourly employees elected to be represented by a
union. A two-year labor agreement was ratified on May 1, 2004. On December 4,
2003 the union at our Canadian facility ratified a new labor agreement effective
through June 30, 2006.
Works councils provide employee representation for non-management
workers at our specialty fibers plants in Glueckstadt, Germany and Americana,
Brazil, and our nonwoven materials plant in Steinfurt, Germany.
Our plants in Gaston, and King, North Carolina are not unionized.
None of our facilities has had labor disputes or work stoppages in
recent history. The Foley and Memphis Plants have not experienced any work
stoppages due to labor disputes in over 30 years and 50 years, respectively. We
completed severance negotiations with the works council at our Glueckstadt,
Germany facility during the third quarter of fiscal 2005, and we do not expect
any labor issues as a result of the planned closure of that plant. We consider
our relationships with our employees and their representative organizations to
be good. An extended interruption of operations at any of our facilities could
have a material adverse effect on our business.
Environmental Regulations and Liabilities
Our operations are subject to extensive general and industry-specific
federal, state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with such requirements. Because it is
difficult to predict the scope of future requirements, we can offer no assurance
that we will not incur material environmental compliance costs or liabilities in
the future. Our failure to comply with environmental laws or regulations could
subject us to penalties or other sanctions which could materially affect our
business, results of operations or financial condition. Additional information
is included in Note 20, Contingencies, to the Consolidated Financial Statements.
Other Information
Our website is www.bkitech.com. We make available, free of charge,
through our website under the heading "Investor Relations," annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
any amendments to those filed or furnished, pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934. The information on our
website is not part of or incorporated by reference in this Annual Report on
Form 10-K.
These reports are also available as soon as reasonably practicable
after we electronically file such materials with, or furnish such materials
to, the Securities and Exchange Commission, or the SEC. The public may also
read and copy any materials we file with the SEC at the SEC's Public Reference
Room at Station Place, 100 F Street NE, Washington, D.C. 20549. In addition,
the SEC maintains an internet site that contains reports, proxy and
information statements and other information filed electronically by us, which
are available at http://www.sec.gov.
7
Safe Harbor Provisions
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.
Item 2. Properties
Corporate Headquarters. Our corporate headquarters, research and
development laboratories, and pilot plants are located in Memphis, Tennessee.
Specialty Fiber Plants
Memphis Plant. The Memphis Plant is located on approximately 75 acres
adjacent to the headquarters complex and has a capacity of approximately 100,000
annual metric tons of cotton cellulose. The facility currently operates at
approximately 90% of capacity.
Foley Plant. The Foley Plant is located at Perry, Florida, on a 2,900
acre site and has a capacity of approximately 465,000 annual metric tons of wood
cellulose. In connection with the acquisition of the Foley Plant, we also own
13,000 acres of real property near the plant site. The Foley Plant operates near
100% capacity.
Glueckstadt Plant. The Glueckstadt Plant is located in Glueckstadt,
Germany. The site is adjacent to the paper plant of Steinbeis Temming Papier
GmbH. Some utilities, including steam, power, water and waste treatment, are
shared between the plants pursuant to various utility agreements. The
Glueckstadt Plant has a capacity of approximately 50,000 annual metric tons. The
Glueckstadt plant operates at approximately 55% of capacity using a reduced
shift system. We expect to cease production at the Glueckstadt plant in December
of 2005.
Lumberton Plant. The Lumberton Plant is located in Lumberton, North
Carolina on a 65-acre site and has a capacity of approximately 8,000 annual
metric tons of cosmetic cotton fiber. The Lumberton Plant is operating near 90%
of capacity.
Americana Plant. The Americana Plant is located in the city of
Americana in the state of Sao Paulo, Brazil on 27 acres and is part of a
multi-business industrial site. It is operating at its full capacity of
approximately 40,000 annual metric tons of cotton cellulose.
Nonwovens Plants
The stated capacity of airlaid nonwovens machines is based upon an
assumed mix of products. The flexible nature of the airlaid technology allows
for a wide range of materials to be produced. Machine production capability has
typically been lower than the stated capacity, often by factors of 10-20%, when
adjusted to reflect the actual product mix. Based on current product mix,
utilization of our airlaid machines worldwide is running approximately 75%.
8
All of our airlaid nonwovens sites have proprietary Stac-Pac(TM)
folding technology, which allows us to efficiently produce compressed bales that
facilitate customers' high-speed production lines with a continuous flow of
materials and facilitate more efficient shipping.
Delta Plant. The Delta Plant is located in Delta, British Columbia on a
12-acre industrial park site and has a total capacity of approximately 30,000
annual metric tons of airlaid nonwovens (26,000 based on current production mix)
from two production lines.
Steinfurt Plant. The Steinfurt Plant is located in Steinfurt, Germany
on an 18-acre site and has a total capacity of approximately 30,000 annual
metric tons of airlaid nonwovens from two production lines.
Gaston Plant. The Gaston Plant is located in Gaston County near Mt.
Holly, North Carolina on an 80-acre site and has a total capacity of
approximately 60,000 annual metric tons of airlaid nonwovens (48,000 annual
metric tons based on current production mix) from two production lines.
King Plant. The King Plant is located in King, North Carolina and
converts airlaid materials and wetlaid papers into wipes, towels and tissues for
industrial and commercial uses.
We own our corporate headquarters, the Memphis Plant, the Foley Plant,
the Lumberton Plant, the Gaston Plant, the Delta, Canada Plant, the Glueckstadt,
Germany Plant, the Steinfurt, Germany Plant and the Americana, Brazil Plant. We
lease buildings that house the King, North Carolina Plant, the sales offices in
Europe and distribution facilities in Savannah, Georgia. All of the facilities
located in the United States are pledged as collateral for certain debt
agreements.
We believe that our specialty fibers and nonwoven materials
manufacturing facilities and administrative buildings are adequate to meet
current operating demands.
Item 3. Legal Proceedings
We are involved in certain legal actions and claims arising in the
ordinary course of business. We believe that such litigation and claims will be
resolved without material adverse effect on our financial position or results of
operation.
Item 4. Submission of Matters to a Vote of Security Holders
None
9
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Buckeye Technologies Inc. is traded on the New York Stock Exchange
under the symbol BKI. There were approximately 4,600 shareholders on August 30,
2005, based on the number of record holders of our common stock and an estimate
of the number of individual participants represented by security position
listings. The table below sets forth the high and low sales prices for our
common stock.
Year Ended June 30
2005 2004
High Low High Low
--------------------- -----------------------
First quarter (ended September 30)................. $11.93 $9.40 $9.24 $6.72
Second quarter (ended December 31)................. 13.30 9.66 11.05 8.55
Third quarter (ended March 31)..................... 13.30 10.22 11.40 8.00
Fourth quarter (ended June 30)..................... 10.97 7.38 12.10 9.35
We did not make any dividend payments during the fiscal years ended
June 30, 2005 or 2004, and have no plans to pay dividends in the foreseeable
future. We repurchased no shares of our common stock during the fiscal years
ended June 30, 2005 or 2004. Due to certain debt agreements we are limited in
our ability to make dividend distributions and share repurchases in the future.
The amount available will depend on our financial results and ability to comply
with certain conditions under our most restrictive debt agreements at the time
of distribution or repurchase.
Item 6. Selected Financial Data
Selected Financial Data
(In thousands, except per share data)
Year Ended June 30
2005(a) 2004 (b) 2003 (c) 2002 (d) 2001 (e)
Operating Data:
Net sales............................ $712,782 $656,913 $ 641,082 $ 635,218 $ 731,528
Operating income (loss).............. 57,601 (19,079) 4,496 26,429 109,074
Cumulative effect of changes in
accounting, net of tax............ - 5,720 - (11,500) 3,249
Net income (loss).................... 20,204 (38,190) (24,894) (26,004) 46,523
Basic earnings (loss) per share...... $ 0.54 $ (1.03) $ (0.67) $ (0.74) $ 1.35
Diluted earnings (loss) per share.... $ 0.54 $ (1.03) $ (0.67) $ (0.74) $ 1.32
Pro forma amounts (f)
Net income (loss)................. $ 20,204 $(43,910) $ (23,513) $ (13,899) $ 43,138
Earnings (loss) per share
Basic......................... $ 0.54 $ (1.18) $ (0.64) $ (0.40) $ 1.25
Diluted....................... $ 0.54 $ (1.18) $ (0.64) $ (0.40) $ 1.22
Balance sheet data:
Total assets....................... $949,737 $970,823 $1,097,855 $1,134,737 $1,075,550
Total long-term debt (including
current portion)............... 538,982 606,748 664,475 701,218 654,679
(a) Includes a pretax charge of $16,905 ($9,392 after tax) for
restructuring and impairment costs. (See Notes 4, Impairment of Long-lived
Assets, and Note 5, Restructuring Costs, to the Consolidated Financial
Statements.). Includes a pretax charge of $242 ($153 after tax) for loss on
early extinguishment of debt. Includes a pretax gain of $7,203 ($4,682
after tax) for gain on sale of assets held for sale. During fiscal 2005,
the IRS completed an audit of our tax return for fiscal year 2002. With the
conclusion of this audit, we released the reserve on a tax deduction we
claimed relating to our investment in our former facility in Cork, Ireland
and recorded a non-cash tax benefit of $5,481 to our provision for income
taxes.
10
(b) Includes a pretax charge of $51,853 ($33,522 after tax) for restructuring
and impairment costs. (See Note 4, Impairment of Long-lived Assets, and
Note 5, Restructuring Costs, to the Consolidated Financial Statements.)
Includes $4,940 ($3,112 after tax) for loss on early extinguishment of
debt. Includes $5,720 ($0.15 per share), net of tax, cumulative effect of
change in accounting relating to a change in the way we account for planned
maintenance activities at our Perry, Florida facility. (See Note 3, Changes
in Accounting, to the Consolidated Financial Statements.)
(c) Includes a pretax charge of $38,139 ($24,678 after tax) for restructuring
and impairment costs. (See Note 4, Impairment of Long-lived Assets, and
Note 5, Restructuring Costs, to the Consolidated Financial Statements.)
(d) Includes a pretax charge of $11,589 ($7,596 after tax) for restructuring
and impairment costs. Includes $11,500 ($0.33 per share) cumulative effect
of a change in accounting relating to a goodwill impairment charge for our
converting plant at King, North Carolina under the transition rules of
Statement of Financial Accounting Standard, No. 142, Goodwill and Other
Intangible Assets.
(e) Includes the operations of Americana from August 1, 2000, its date of
acquisition. Includes the $3,249 ($0.09 per share), net of tax, cumulative
effect of a change in accounting relating to a change in depreciation
methods from straight-line to units-of-production for some cotton cellulose
and airlaid nonwovens equipment.
(f) Pro forma amounts reflect net income (loss) and earnings (loss) per share
as if the changes in accounting methods were applied retroactively.
11
Item 7. 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 Consolidated Financial
Statements, Notes to the Consolidated Financial Statements, and other sections
of this Annual Report on Form 10-K. Our MD&A is composed of four major sections;
Executive Summary, Results of Operations, Financial Condition and Critical
Accounting Policies.
Executive Summary
Buckeye Technologies Inc. and its subsidiaries manufacture value-added
cellulose-based specialty products in the United States, Canada, Germany, and
Brazil and sell these products in over 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. See "Item 1: Business" for a more detailed description of these
segments and processes.
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.
Fiscal 2005 was a year of improvement and recovery for Buckeye. We made
considerable progress in restoring profitability and strengthened our balance
sheet. Our specialty fibers markets remained strong. As our inventories are at
historically low levels, we are carefully matching sales with production to
optimize our product mix and move product into higher value niche markets. While
the nonwoven materials segment posted improvements during fiscal 2005 they are
still operating in an environment of significant over supply in North America.
o Net income reached $20.2 million ($0.54 per share) last year. This
compares to a loss of $38.2 million ($1.03 per share) in fiscal 2004
and a loss of $24.9 million ($0.67 per share) in fiscal 2003.
o Net sales for fiscal year 2005 were $712.8 million, 8.5% above the
$656.9 million achieved in fiscal 2004 and 11% above the $641.1 million
achieved in fiscal 2003.
o Our gross margin in fiscal year 2005 reached 17%, higher than the
12% achieved in fiscal 2004 and the 13% achieved in fiscal 2003.
o Net cash provided by operating activities totaled $78.6 million. We
reduced the debt on our balance sheet by $67.7 million (from $606.7
million to $539.0 million).
The positive events in our markets were dampened by rising costs for
chemicals, energy and other materials. We expect high costs in these areas to
continue pressuring our operating margins. Since demand for our specialty fibers
is sufficiently strong, we believe we can implement price increases in these
markets in the future. However, we are restrained from doing this quickly due to
existing commercial agreements.
In early January 2005, we announced a plan to close 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 could no longer economically justify operating this high fixed cost
facility. We expect to retain most of the volume currently produced at
Glueckstadt through improved utilization of 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 the Glueckstadt,
Germany assets resulted in an impairment charge of $12.3 million and should
result in restructuring charges and related payments of approximately $6.5
million during fiscal 2005 and 2006.
To accommodate demand for high-end products and a smooth transition of
the business currently sourced at the Glueckstadt, Germany facility, we added a
shift to our Memphis, Tennessee cotton-based specialty fibers facility. We began
operating this facility on a four-shift schedule during March 2005.
12
Our North American airlaid nonwovens business made significant progress
this fiscal year, achieving 23% growth in revenue. This improvement offset the
closure of our Cork, Ireland facility, allowing us to maintain year over year
shipment volumes while improving earnings. We ceased producing airlaid nonwoven
materials at our Cork, Ireland facility in July, 2004 and successfully
transitioned the majority of the product previously produced at Cork to our
larger dual-line plants in Europe and North America. This increased the capacity
utilization at our other airlaid nonwovens facilities and, as a result, we have
seen improved earnings in our nonwovens segment. The full on-going benefit of
cost savings from the closure was realized during the last six months of fiscal
2005 and we expect going forward will total approximately $7 million annually.
With our Steinfurt, Germany plant running at near capacity in fiscal
year 2006, we plan to focus on further improving capacity utilization in North
America, where we still have excess capacity. However, we expect the over-supply
situation in North America and the high costs for raw materials will continue to
present challenges for the nonwoven materials segment in fiscal 2006.
Our cash flow during fiscal 2005 was strong. During the year, we
reduced the debt, including capital leases, on our balance sheet by $67.7
million. Although we were not able to cost effectively obtain the consent of the
holders of our notes due in 2013 to fully refinance our notes due in 2008 with
bank debt, we elected to call a portion of our notes due in 2008. During the
year, we retired $20 million of the relatively high cost 9.25% 2008 notes from
the market. We intend to call the remainder of the 2008 notes over the next
several years in advance of their maturity on September 15, 2008.
Our operating margins were negatively impacted during the second half
of fiscal 2005 by high costs for chemicals and energy, and extra expenses
related to compliance with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).
Re-establishing margin improvement is a key goal for fiscal year 2006.
We are encouraged by progress on several fronts:
o We launched a new product, Buckeye UltraFiber 500(TM), a revolutionary
concrete reinforcing fiber at the World of Concrete exhibit in Las
Vegas, Nevada in January 2005. Buckeye UltraFiber 500(TM) was voted the
most innovative new product at the show. As we have previously
reported, we are currently establishing distribution for this product
in the United States as well as in foreign markets. All early signs
continue to be positive.
o The demand for liquid crystal display screens for laptop computers and
television sets continues to expand rapidly. Our cotton cellulose
fibers are a small but critical component of the construction of these
screens.
o Our plan to transition the specialty fibers production currently
supplied by Glueckstadt, Germany to our lower cost manufacturing
facilities in Memphis, Tennessee and Americana, Brazil is proceeding on
schedule. We expect to complete our project to add full market
capability to our Americana, Brazil facility by the end of this
calendar year. This, coupled with the additional production shift at
our Memphis, Tennessee facility, positions us to supply cotton-based
specialty fiber products from facilities with a significantly more
favorable cost structure during the second half of fiscal 2006.
The combination of new product initiatives, strong demand in important
markets and an improved manufacturing configuration gives us optimism that we
can generate future growth in sales and profitability. Like other manufacturing
firms, we are currently being negatively impacted by high costs for energy,
chemicals, and other materials. Additionally, the extra administrative expense
brought about by compliance with Sarbanes-Oxley was and will continue to be
burdensome. These issues will slow progress in the short-term, but we believe
our longer-term outlook continues to be favorable.
13
Results of Operations
Consolidated results
The following table compares the components of consolidated operating
income (loss) for the three fiscal years ended June 30, 2005.
-------------------------------------------------------------------------------------------------------------------
(millions) Year Ended June 30 $ Change Percent Change
------------------ -------- --------------
2005/ 2004/ 2005/ 2004/
2005 2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------------
Net sales $712.8 $656.9 $641.1 $55.9 $15.8 9% 2%
Cost of goods sold 592.7 579.5 558.2 13.2 21.3 2% 4%
-------------------------------------------------------------------------------
Gross margin 120.1 77.4 82.9 42.7 (5.5) 55% (7)%
Selling, research and
administrative expenses 43.3 42.4 37.9 0.9 4.5 2% 12%
Amortization of intangibles and
other 2.3 2.2 2.3 0.1 (0.1) 5% (4)%
Impairment and
restructuring costs 16.9 51.9 38.2 (35.0) 13.7 (67)% 36%
-------------------------------------------------------------------------------
Operating income (loss) $57.6 $ (19.1) $ 4.5 $76.6 $(23.6) * *
-------------------------------------------------------------------------------------------------------------------
*Percent change is not meaningful.
Net sales continued to improve overall during fiscal 2005 due primarily
to increased pricing and improved mix in both specialty fibers and nonwoven
materials. Net sales growth in fiscal 2004 was due to strong performance by the
nonwoven materials segment, primarily the result of increased volume and the
strengthening of the euro. The increase in nonwoven materials sales was only
slightly offset by a decline in net sales of specialty fibers products during
fiscal 2004.
Cost of goods sold increased by 2% on an overall volume increase of
approximately 2% during fiscal 2005. This consistency was the result of two
offsetting factors. During fiscal 2005 there was a significant increase in
chemical, energy and other raw material costs that impacted all of our plants.
This increase was offset by the absence of several additional specialty fibers
charges related to unusual events and special circumstances, including a planned
extended maintenance shutdown at our Perry, Florida specialty fibers facility
that occurred during fiscal 2004.
Gross margins were positively impacted by the higher selling prices
discussed previously. The unusual events and special circumstances during fiscal
2004 also contributed to the decrease in gross margin versus fiscal 2003. These
items are discussed further in the "Segment Results" section of this discussion
and analysis.
Selling, research and administrative expenses increased during fiscal
2005 primarily due to increased accounting and consulting fees related to the
implementation of Sarbanes-Oxley. External costs related to the implementation
of Sarbanes-Oxley exceeded $2.0 million for fiscal 2005. We expect the costs
related to compliance with Sarbanes-Oxley will decrease in fiscal 2006. This
increase was partially offset by the absence of $3.3 million of bad debt expense
incurred during fiscal 2004 as a result of the bankruptcy filing of a large
specialty fibers customer.
In arriving at our decision to close our Glueckstadt, Germany,
cotton-based specialty fibers facility, we evaluated the recoverability of our
long-lived assets at the facility and recognized an impairment charge of $12.3
million in fiscal 2005. As of June 30, 2005, we had incurred $3.0 million of
restructuring costs as part of this planned closure. The remaining restructuring
costs incurred during fiscal 2005 were primarily related to the program
initiated as part of the closure of our Cork, Ireland facility. We experienced
an operating loss in 2004 primarily as a result of $51.9 million of
restructuring and impairment costs related to the closure of our Cork, Ireland
facility and other organizational restructuring.
Further discussion of revenue, operating trends, impairment and
restructuring costs can be found later in this MD&A. Additional information on
the impairment and restructuring programs and charges may also be found in Note
4, Impairment of Long-lived Assets, and Note 5, Restructuring Costs, to the
Consolidated Financial Statements of the accompanying consolidated financial
statements.
14
Segment results
Although nonwoven materials, processes, customers, distribution methods
and regulatory environment are very similar to specialty fibers, we believe it
is appropriate for nonwoven materials to be disclosed as a separate reporting
segment from specialty fibers. The specialty fibers segment is an aggregation of
cellulosic fibers based on both wood and cotton. We make separate financial
decisions and allocate resources based on the sales and operating income of each
segment. We allocate selling, research, and administration expense to each
segment, and we use the resulting operating income to measure the performance of
the two segments. We exclude items that are not included in measuring business
performance, such as restructuring costs, asset impairment, amortization of
intangibles and certain financing and investing costs.
Specialty fibers
The following table compares specialty fibers net sales and operating
income for the three years ended June 30, 2005.
------------------------------------------------------------------------------------------------------------------
(millions) Year Ended June 30 $ Change Percent Change
-------- --------------
2005/ 2004/ 2005/ 2004/
2005 2004 2003 2004 2003 2004 2003
------------------------------------------------------------------------------
Net sales $513.6 $461.4 $466.5 $52.2 $(5.1) 11% -1%
Operating income 64.1 28.2 41.9 35.9 (13.7) 127% -33%
------------------------------------------------------------------------------------------------------------------
Net sales increased during fiscal 2005 primarily due to an increase in
specialty wood shipment volume and higher selling prices for both wood and
cotton based products. Improvements in volume, selling prices and mix of our
specialty fibers products were driven by several complementary factors:
o Market supply constraints caused by the closure of one of the world's
largest dissolving wood cellulose mills in calendar 2003 significantly
tightened the market for high purity dissolving wood pulps. This
development presented us with opportunities to increase our shipments
of high purity dissolving wood pulps and to reduce our shipments of
fluff pulp during fiscal 2005 and 2004.
In fiscal 2005, shipment volume for specialty pulp grades increased 13%
over the prior year. This demand was met partially by reducing our
finished goods inventory of specialty pulp grades. Strong demand and
constrained supply in the market for high purity dissolving wood pulps
also allowed us to raise the average prices on our specialty grades by
approximately 5%. We are currently limited in our ability to raise
specialty pulp pricing further by calendar year supply agreements with
a number of our customers.
o Continued strengthening of the world-wide economy increased the
overall demand for pulp and paper products, driving up commodity pulp
prices. Fluff pulp pricing steadily increased over the last two fiscal
years until they plateaued earlier this calendar year. Average fluff
pulp prices increased 13% during fiscal 2005 and 4% during fiscal 2004.
Although fluff pulp pricing remains steady, current fluff pulp pricing
may not continue to hold and may be negatively impacted by recent
weakness in commodity pulp markets.
Regardless of the rise in price of commodity pulps during the last two
years, 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. Fluff
pulp shipment volume (including internal shipments to our airlaid
plants) was down about 1% compared to the previous year.
o Even though there was a strengthening of the U.S. dollar against the
euro during the last half of fiscal 2005, the relative overall weakness
of the U.S. dollar continues to make our products more attractive to
export customers. Although the U.S. dollar ended fiscal 2005 at
approximately the same exchange rate versus the euro as it ended fiscal
2004, the dollar was on average 6% weaker during fiscal 2005 than it
was in the previous year. Changes in exchange rates may have a material
impact on the demand and selling prices of our products in the future.
o Net sales for cotton-based specialty fibers increased approximately 4%
due to higher selling prices. Selling prices increased by an average of
9% in an effort to pass through higher costs of cotton fibers,
chemicals, fossil fuels and freight. Although these price increases had
a positive impact on revenue and operating income during fiscal 2005,
they were partially offset by a 5% decrease in shipment volume for
cotton-based products.
15
During fiscal 2004, net sales decreased primarily due to lower selling
prices and mix changes for our cotton-based products and lower unit wood volume,
partially offset by improvements in selling prices and mix of wood-based
products. Sales price increases and decreases for cotton-based products are
influenced by the variability in the cost and supply of cotton fibers. As the
cost of these fibers fell during calendar year 2003, we reduced our sales
prices. Our cotton sales prices did not recover until calendar year 2004. Sales
volume at our Americana, Brazil facility, increased by 23% in fiscal 2004, which
contributed to the mix change as the selling price of this product is
significantly lower due to our tolling arrangement with the customer.
Rising energy and chemical prices pushed manufacturing costs higher for
fiscal 2005. While we were able to recover a portion of these costs through
raising the price for our products, we expect that rising energy and chemical
prices will continue to put pressure on our operating margins during fiscal
2006. The allocation of sales, research and administrative costs related to the
implementation of Sarbanes-Oxley also offset the improvement in pricing, mix,
and volume during fiscal 2005.
In spite of the increase in costs, operating income substantially
improved during fiscal 2005 based on the strong improvement in sales and the
absence of several additional charges related to unusual events and special
situations that occurred during fiscal 2004. These unusual events and special
situations included: the planned maintenance shutdown of our Perry, Florida
facility ($9.6 million), the bankruptcy of a large customer ($3.3 million), the
ratification of a new labor agreement that included a one-time retroactive
payment ($0.8 million), and higher costs associated with reduced production at
our Perry, Florida and Memphis, Tennessee specialty fibers facilities.
These additional charges related to unusual events and special
situations reduced operating income for fiscal 2004 by 33% from the same period
in 2003. Operating income during fiscal 2004 was also negatively impacted by
currency driven manufacturing cost increases at our Glueckstadt, Germany cotton
facility due to the weakening of the U.S. dollar. All of these decreases were
partially offset by a more favorable specialty wood pulp sales mix, higher
specialty wood pulp prices, and operating the Americana, Brazil facility at
capacity for the entire year ending June 30, 2004.
As mentioned previously, we continue to move forward with developing
our capability to supply a wide range of products based on cotton cellulose to
customers worldwide by upgrading the capability of our Americana, Brazil
manufacturing facility. Because Brazil benefits from low manufacturing costs and
a large and increasing raw material supply, we expect that, when this upgrade is
completed in the fall of 2005 and we fully transition to market sales, this
facility will be a significant contributor to our profitability.
Nonwoven materials
The following table compares nonwoven materials net sales and operating
income for the three years ended June 30, 2005.
----------------------------------------------------------------------------------------------------------------
(millions) Year Ended June 30 $ Change Percent Change
-------- --------------
2005/ 2004/ 2005/ 2004/
2005 2004 2003 2004 2003 2004 2003
----------------------------------------------------------------------------
Net sales $226.5 $217.6 $195.9 $8.9 $21.7 4% 11%
Operating income 13.0 7.6 4.0 5.4 3.6 71% 90%
----------------------------------------------------------------------------------------------------------------
The increase in net sales during fiscal 2005 was due to improved
pricing and mix, and the relative strength of the euro versus the U.S. dollar.
Although we ceased production at our Cork, Ireland facility in July, 2004 we
continued shipping inventory from Cork through November and completed the
transition of a majority of Cork's sales to our other nonwoven materials
facilities. Our increase in net sales in fiscal 2004 was primarily due to a 5%
increase in shipment volume and the strengthening of the euro versus the U.S.
dollar. These improvements were partially offset by minor price and mix changes.
During fiscal 2005, a competitor in North America emerged from
bankruptcy protection. Under new management, they aggressively sought new
business in the over-supplied North American market. Although we benefited from
this competitor's difficulties during the first half of fiscal 2005, their
competitive actions impacted our pricing and volume in the second half of fiscal
2005. We expect the over-supply situation in North America will continue to
present challenges for the nonwoven materials segment into fiscal 2006.
Operating income improved significantly for fiscal 2005. The
improvement was primarily due to higher selling prices and the closure of our
high cost Cork, Ireland facility. Overall, our nonwoven materials business
supported similar shipment and production volume with one less manufacturing
facility for the majority of the year. Our Gaston, North Carolina facility
continued to show improvement in its operating performance compared to the prior
year due to significant increases in shipment volume and the resulting
16
improvement in capacity utilization. These improvements were partially offset by
price increases on raw materials and other manufacturing costs. The cost of
fluff pulp, bi-component fibers, and binder materials increased during fiscal
2005. We expect these higher costs will continue to put pressure on operating
margins in fiscal 2006.
Improvement in operating income in fiscal 2004 reflects the increase in
sales volume. Additionally, improved waste, reliability and other cost
reductions along with the favorable net impact of changes in exchange rates
offset some modest selling price reductions, unfavorable changes to product mix
and increases in raw material prices. Our Cork facility recorded improved
earnings performance in the fourth quarter of fiscal 2004 primarily due to a
reduction in depreciation expense after the facility's fixed assets were
impaired at the end of the third quarter. For further discussion of this closure
see Note 4, Impairment of Long-lived Assets, and Note 5, Restructuring Costs, to
the Consolidated Financial Statements.
Restructuring and impairment activities
During the three years ended June 30, 2005, 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 and impairment charges for the three years ended June 30,
2005. Following the table is an explanation of the programs and the resulting
impairment charges. For further explanation of these charges, see Note 4,
Impairment of Long-lived Assets, and Note 5, Restructuring Costs, to the
Consolidated Financial Statements.
-------------------------------------------------------------------------------------------------------------------
Year Ended June 30 Total
Estimated
(millions) Charges
----------------------------------------------------------------------------------------------------
(estimate)
2006 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------
Impairment charges.......................... $12.3 $45.9 $36.5
Restructuring costs
2005 Restructuring program............... $3.5 $ 3.0 $ - $ - $ 6.5
2004 Restructuring program............... - 1.2 1.8 - 3.0
2003 Restructuring program - phase 2..... - 0.3 3.2 - 3.5
2003 Restructuring program - phase 1..... - 0.1 1.0 1.6 2.7
-----------------------------------------------------------------
Total restructuring costs................... $3.5 $ 4.6 $ 6.0 $ 1.6 $15.7
-------------------------------------------------------------------------------------------------------------------
2005 Restructuring program and impairments
In January 2005, we announced our decision to discontinue producing
cotton linter pulp at our Glueckstadt, Germany facility. Our decision was due
to a combination of factors that had increased the plant's costs to a level
at which it was uneconomical to continue operations. The most significant
factor impacting cost at the site was the substantial strengthening of the euro
over calendar 2003 and 2004. Specialty fibers are normally priced and sold in
U.S. dollars around the world. As a majority of Glueckstadt's costs are
denominated in euros, this substantial strengthening had a negative impact on
Glueckstadt's cost position and margin. Additionally, Glueckstadt's process
water, waste treatment and energy costs are more than twice the cost of these
utilities at our Memphis, Tennessee cotton-based specialty fibers facility.
Faced with these difficulties, we reduced the number of employees at the
facility from approximately 150 to approximately 100 and operated at 55%
of capacity during calendar year 2004.
After careful consideration of all the options available, we decided to
close the Glueckstadt facility and consolidate production at our two other
specialty fibers manufacturing facilities. We expect production at
Glueckstadt to cease during the second quarter of fiscal 2006. We expect the
closing of our Glueckstadt facility and the transfer of the cotton-based
specialty fiber production to our Memphis, Tennessee and Americana, Brazil
facilities, later this calendar year, will yield a superior cost structure and
improve margins.
Based on our inability to recover the remaining value of the long-lived
assets at the Glueckstadt, Germany facility, we determined that these long-lived
assets, with a carrying amount of $15.3 million, were impaired and wrote them
down to their estimated fair value of $3.0 million, resulting in an impairment
charge of $12.3 million ($6.5 million after tax).
17
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 $6.5 million over fiscal 2005 and 2006 period.
We further expect payments related to this restructuring program will extend
through the end of fiscal 2006. We expect this consolidation to enable us to
improve our overall specialty fibers operating results by approximately $9
million annually and to reduce working capital needs by approximately $6
million.
In anticipation of the closure of the facility, customers increased
their inventories to ensure a smooth transition as they qualified material
supplied from our Memphis, Tennessee facility. Due to the increased demand, we
were able to increase pricing and make incremental sales from inventory.
Additionally, as a result of the impairment of the Glueckstadt plant and
equipment, there was a decrease in depreciation expense during the period.
Although we are recognizing some of the benefit of the closure, we do not expect
to realize the full on-going benefit of the closure until calendar year 2006.
2004 Restructuring program and impairments
During March 2004, our Board of Directors approved the discontinuation
of production of nonwoven materials at our Cork, Ireland facility. While the
demand for nonwoven products grew at a rate in the low to mid-single digits on
an annualized basis, the growth in demand was not sufficient to fully utilize
the existing capacity. As such, industry participants rationalized production
by idling plants and closing facilities.
Due to excess production capacity around the globe, we operated Cork
below its productive capacity from its inception in 1998. Because of its
location and small size, our cost to produce at Cork was higher than at
our other locations. Due to these issues, we decided to close the Cork
facility and consolidate production at our three other nonwoven manufacturing
facilities. Production at Cork ceased in July 2004. Closing our Cork
facility reduced our nonwovens capacity by about 10%.
We continued to meet customer needs for nonwoven materials by producing
these products at our facilities in Delta, British Columbia, Canada; Steinfurt,
Germany; and Gaston County, North Carolina. This consolidation reduced working
capital needs, and we began to fully realize the on-going cost benefit from
operating one less facility during the third quarter of fiscal 2005. The
closure of the Cork facility and related reorganization of the nonwoven
materials segment resulted in the termination of 89 employees and resulted in
restructuring expenses totaling $3.0 million. We do not expect additional
expenses related to this program.
Our commitment to discontinue production represented an indicator of
impairment, and subsequently we evaluated the value of the property, plant, and
equipment associated with the Cork facility. We determined that these long-lived
assets, with a carrying amount of $48.4 million were impaired and wrote them
down to their estimated fair value of $5.4 million, resulting in an impairment
charge of $43.0 million. During fiscal 2004, we also impaired certain equipment
and other capitalized costs at other facilities of $2.9 million. In late
December 2004, we completed the sale of the Cork facility building for $13.4
million (see Gain on sale of assets held for sale for further discussion).
2003 Restructuring programs (phase 1 and phase 2) and impairments
In April 2003, we announced the discontinuation of production of cotton
linter pulp at our specialty fibers Lumberton, North Carolina facility due to
the decline in demand for cotton content paper. We completed this partial
closure in August 2003 but continue to produce cosmetic cotton products at the
Lumberton site. This decision reflects a steady decline in demand in the cotton
fiber paper industry, which has contracted by more than one-third since the late
1990's. While cotton linter pulp is one of our core businesses, current demand
did not economically justify operating a facility that could only produce
products for paper applications.
To better meet our customers' needs, we consolidated our U.S. cotton
linter pulp production at our larger Memphis, Tennessee and Glueckstadt, Germany
facilities. In conjunction with the consolidation, we initiated the first phase
of a restructuring program designed to deliver cost reductions through reduced
expenses across the company, the main component of which was the partial closure
of our Lumberton, North Carolina facility. This phase of restructuring resulted
in the elimination of approximately 100 positions within the specialty fibers
segment. The resulting increase in facility utilization enabled us to improve
our operating results by approximately $6 million annually. 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.
As part of the closure, we evaluated the ongoing value of the property,
plant and equipment associated with the Lumberton facility. We determined that
long-lived assets (property, plant and equipment) with a carrying amount of
$36.5 million were impaired and wrote them down to their estimated fair value of
18
$7.9 million. The resulting impairment charge of $28.6 million was reflected in
the statement of operations during fiscal 2003. During fiscal 2003, we also
impaired certain equipment and other capitalized costs at other facilities of
$7.9 million.
During the first quarter of fiscal 2004, we entered into a second phase
of this restructuring program. This phase of the program enabled us to improve
our operating results by approximately $6 million annually through reduced
salaries, benefits, other employee-related expenses and operating expenses. As a
result of this restructuring, 78 positions were eliminated. These positions
include manufacturing, sales, product development and administrative functions
throughout the organization.
Net interest expense and amortization of debt costs
We incurred interest expense and amortization of debt costs of $45.1
million in fiscal 2005, down $2.2 million from fiscal 2004. This improvement was
primarily the result of lower average debt levels during fiscal 2005 and the
absence of interest costs from holding $150 million of senior subordinated notes
due 2005 and $200 million of senior notes due 2013 concurrently for 30 days
during the first half of the fiscal 2004. These improvements were partially
offset by higher average variable interest rates during fiscal 2005. See Note 9,
Debt, in the Consolidated Financial Statements for further discussion of
variable interest rates.
We incurred interest expense and amortization of debt costs of $47.3
million in fiscal 2004 compared to $47.5 million for fiscal 2003. The
consistency is the result of several offsetting factors. Lower interest rates
and average debt levels during fiscal 2004 offset both the negative impact of
the termination of the interest rate swap and the additional expense of holding
the $150 million of senior subordinated notes due 2005 and the $200 million of
senior notes due 2013 concurrently for 30 days during the first half of fiscal
2004.
Loss on early extinguishment of debt costs
On March 23, 2005 we used cash on hand to redeem $20 million of our
senior subordinated notes due in 2008. As a result of this partial
extinguishment, we wrote-off a portion of deferred financing costs, resulting
in non-cash expense of $0.2 million during fiscal 2005.
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 fiscal 2004, $1.6 million was expensed
related to the early extinguishment of the previous credit facility.
On September 22, 2003, we placed privately $200 million in aggregate
principal amount of 8.5% senior notes due in 2013. The notes are unsecured
obligations and rank senior to any of our subordinated debt. The notes are
guaranteed by our direct and indirect domestic subsidiaries that are also
guarantors on our senior 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
fiscal 2004. These expenses included a $2.1 million call premium and $1.2
million related to the write-off of deferred financing costs.
See Note 9, Debt, in the Consolidated Financial Statements for further
discussion of the debt issuance and related extinguishment.
Gain on sale of assets held for sale
In July 2004, we ceased production of nonwoven materials at our Cork,
Ireland facility. Subsequent to the July 2004 closure of the facility, we
began to actively market the building and equipment with carrying values of
$4.5 million and $1.5 million, respectively. In late December of 2004, we
completed the sale of the Cork facility building to the Port of Cork Company
for $13.4 million. Although the carrying values of these assets were based on
appraisals and available market information at the time of the impairment in
March of 2004, the purchase of this building for strategic purposes by the Port
of Cork Company was not contemplated in those appraisals. As a result of the
sale and disposition of the building and equipment for net proceeds after
decommissioning and other expenses of $13.2 million, we recognized a net gain
of $7.2 million ($4.7 million net of tax) during fiscal 2005.
19
Foreign exchange and other
Foreign exchange and other in fiscal 2005, 2004 and 2003 were $(0.6)
million, $0.3 million and $(0.0) million, respectively. The expense in fiscal
2005 was primarily due to $0.5 million of expenses related to amending our
senior secured credit facility and other financing related costs. These costs
consisted primarily of legal and transaction support fees. The amendment to the
credit facility, among other things, lowered the effective interest rate on our
term loan by 50 basis points, reduced the required quarterly principal payments
to $0.2 million, changed the final maturity of the term loan to one lump sum
payment, and changed various covenant definitions.
The improvement in fiscal 2004 was due primarily to the absence of
expenses related to the settlement of a lawsuit and the negative impact of a
natural gas forward contract recognized in fiscal 2003, partially offset by
lower foreign currency gains.
Income taxes
Our effective tax rate for 2005 was approximately (2%) versus 37% in
fiscal 2004 and 41% in fiscal 2003. During the fourth quarter of fiscal 2005,
the IRS completed an audit of our tax return for fiscal year 2002. With the
conclusion of this audit, we released the reserve on a tax deduction we claimed
relating to our investment in our former facility in Cork, Ireland and recorded
a non-cash tax benefit of $5.5 million to our provision for income taxes.
Excluding this benefit, our effective tax rate for 2005 would have been
approximately 25%. The additional improvement in our effective tax rate in 2005
was the result of a number of factors including:
o We continue to receive benefits from the extraterritorial income
exclusion. Although the dollar magnitude of the benefit declined
slightly in fiscal 2005, it had a more significant impact on the
effective rate due to the absolute value of our earnings before taxes.
o The favorable foreign currency translation adjustment of $3.0 million
recorded on the impairment of the long-lived assets at our Glueckstadt
facility is not taxable. Therefore, the tax benefit realized on the
impairment was $1.0 million greater than the statutory rate would
indicate.
o We recorded a tax benefit of $0.7 million resulting from a net change
in our contingency reserves.
Effective for transactions occurring after September 30, 2000, the
Internal Revenue Service enacted the Extraterritorial Income Exclusion. The
income exclusion provides for a reduction of gross income by a percentage of
qualifying foreign trade income. In order to comply with international trade
rules, the American Jobs Creation Act of 2004, or the Jobs Act, repealed the
current tax treatment for extraterritorial income. Effective for transactions
entered into after December 31, 2004, the extraterritorial income exclusion is
subject to a phase-out which will be completed by calendar year end 2006. For
transactions during calendar years 2005 and 2006, the income exclusion will be
80% and 60% of the exclusion otherwise allowed, respectively. Our
extraterritorial income exclusion benefit was reduced in fiscal 2005 due to this
phase-out and will continue to decrease through the final phase-out during
fiscal 2007.
In October 2004, the Jobs Act was signed into law. The Jobs Act
provides a tax deduction for domestic manufacturers. The deduction will be
phased in during fiscal years 2006 through 2010. We are in the process of
evaluating the potential impact of this deduction to our business. The benefit
from this deduction in calendar 2005 is expected to be immaterial. In addition,
the Jobs Act also provides a temporary incentive for U.S. multinationals to
repatriate certain foreign earnings at an effective tax rate of 5.25%. Based on
our assessment of the repatriation provision, we do not plan on repatriating
additional funds and will continue our current policy of permanently reinvesting
all foreign earnings outside the United States.
Cumulative effect of change in accounting
Historically, we accrued in advance expenses related to planned
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. The effect of applying the new method for
the year ended June 30, 2004 was a decrease in net loss composed of a profit
increase of $9.1 million pre-tax ($5.7 million net-of-tax reported as a
cumulative effect of accounting change), offset by $8.5 million ($5.4 million
net-of-tax) in additional cost of goods sold compared to what would have been
expensed in fiscal 2004 under the accrue in advance methodology.
20
The total cost of the related planned maintenance activity performed in
2004 was $9.6 million. Historically, we perform planned extended maintenance
shutdowns at our Perry, Florida facility in two to five year intervals. Due to
variability in the timing and activities associated with our planned extended
maintenance shutdowns, it is difficult to predict the future costs of these
activities. See Note 3, Changes in Accounting, in the Consolidated Financial
Statements for further discussion of this change in accounting.
Financial Condition
Our financial condition improved during the current fiscal year as a
result of improved earnings. We are committed to reducing our debt,
strengthening our operations and continuing to improve our profitability and
cash flow.
Liquidity and capitalization
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 June 30, 2005 and believe we
will continue to remain in compliance. These sources of financing are described
in detail in Note 9, Debt, to the Consolidated Financial Statements.
Our total debt decreased $67.7 million to $539.0 million at June 30,
2005 from $606.7 million at June 30, 2004. From June 30, 2003 to June 30, 2004,
total debt decreased by $57.8 million. Our total debt as a percentage of our
total capitalization was 66.7% at June 30, 2005 as compared to 72.6% at June 30,
2004 and 71.7% at June 30, 2003.
On June 30, 2005, we had $9.9 million of cash and cash equivalents and
$65.6 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 June 30, 2005, our liquidity, including available borrowings and
cash and cash equivalents was approximately $75.5 million. Management believes
this is sufficient liquidity to meet the needs of the business. We believe we
will continue to have positive cash flow and these borrowing conditions are not
expected to impact our operating or investing activities, or our ability to
service our debt obligations.
Shelf Registration
On March 15, 2002, we filed a shelf registration statement on Form S-3.
By its terms, the shelf registration statement allows us to issue from time to
time various types of securities, including common stock, preferred stock and
debt securities, up to an aggregate amount of $300 million. We filed the
registration statement to gain additional flexibility in accessing capital
markets for general corporate purposes. This S-3 registration statement became
effective on April 18, 2002.
Treasury stock
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. In fiscal 2005, we repurchased no shares of our common
stock. Through June 30, 2005, we had repurchased a total of 5,009,300 shares
under the current board authority.
21
Cash Flow
While we can offer no assurances, we believe that our cash flow from
operations, together with current cash and cash equivalents, will be sufficient
to fund necessary capital expenditures, meet operating expenses and service our
debt obligations for the foreseeable future. Cash and cash equivalents totaled
$9.9 million at June 30, 2005, compared to $27.2 million at June 30, 2004 and
$50.0 million at June 30, 2003. The following table provides a summary of cash
flows for the three years ended June 30, 2005.
(millions) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------
Operating activities:
Net income (loss)................................. $ 20.2 $ (38.2) $ (24.9)
Noncash charges and credits, net.................. 58.3 72.6 75.7
Changes in operating assets and liabilities, net.. 0.1 31.3 4.4
-------------------------------------------
Net cash provided by operating activities............ 78.6 65.7 55.2
Investing activities:
Purchases of property, plant and equipment........ (45.3) (31.9) (28.4)
Proceeds from sales of assets..................... 13.6 0.3 -
Other investing activities........................ (0.5) (0.6) 8.0
-------------------------------------------
Net cash used in investing activities................ (32.2) (32.2) (20.4)
Financing activities:
Net borrowings (payments) under lines of credit... 0.4 (224.0) (19.9)
Proceeds from debt issuances...................... - 350.0 -
Payments on long-term debt and other.............. (67.7) (178.3) (22.5)
Other financing activities, net................... 2.4 (4.6) (0.7)
-------------------------------------------
Net cash used in financing activities................ (64.9) (56.9) (43.1)
Effect of foreign currency rate fluctuations on cash 1.2 0.7 2.3
-------------------------------------------
Net decrease in cash and cash equivalents $ (17.3) $ (22.7) $ (6.0)
-----------------------------------------------------------------------------------------------------------
Cash provided by operating activities
.........The $12.9 million improvement in cash flows from operating activities
in 2005 was primarily the result of improvements in net income in fiscal 2005.
Due to the overall reduction in working capital during fiscal 2004, there was
limited cash generation ability from changes in operating assets and liabilities
during fiscal 2005. Although the closure of our Glueckstadt, Germany cotton
cellulose facility will improve working capital in fiscal 2006, this improvement
will be offset by the increased working capital requirements at our Americana,
Brazil specialty fibers facility as we move away from the current tolling
arrangement to the new market production at the end of calendar year 2005. We do
not expect changes in operating assets and liabilities will be significant
contributors to operating cash flow in fiscal 2006.
The $10.5 million improvement in operating cash flows during fiscal
2004 versus fiscal 2003 was primarily due to a targeted decrease in inventories
and decreased accounts receivable. Approximately $10 million of the accounts
receivable decrease was a permanent reduction due to a change in our cash
management strategy, as we began discounting large letters of credit, enabling
us to reduce our debt and interest costs. These improvements in cash from
operating activities were partially offset by lower accounts payable and the
expenditures at our Foley plant for a planned maintenance shutdown.
Net cash used in investing activities
Purchases of property, plant and equipment increased during fiscal 2005
versus fiscal 2004 and 2003 primarily due to expenditures related to a project
to add full market capability to our Americana, Brazil cotton cellulose
facility. We estimate the total cost of this facility improvement to be
approximately $26 million, of which approximately $11.3 million was spent in
fiscal 2005. We expect the remaining $14.7 million will be spent during the
first six months of fiscal 2006. We previously estimated total capital
expenditures for this facility enhancement to total approximately $18 million.
The increase in this estimate is due to a number of factors, including our
decision to build additional capability into the manufacturing facility and a
strengthening of the Brazilian real relative to the U.S. dollar. With the
22
remaining capital expenditures required to complete the Americana, Brazil
facility, we expect total capital expenditures for fiscal 2006 to approximate
the level of spending in fiscal 2005.
We expect to incur significant capital expenditures in the future to
comply with remaining environmental obligations at our Perry, Florida specialty
fibers facility. Based on current estimates we expect expenditures of
approximately $60 million over several years possibly beginning as early as
fiscal 2007. See Note 20, Contingencies, to the Consolidated Financial
Statements.
During fiscal 2005, we sold the Cork, Ireland building and equipment
for net proceeds of $13.2 million. These proceeds offset the increase in capital
expenditures during the year.
During fiscal 2004, in addition to our basic capital maintenance
expenditures of approximately $25 million, we made expenditures at our Foley
plant for a planned maintenance shutdown and capital expenditures at our
Memphis, Tennessee facility to provide the capability to manufacture cotton
cellulose products previously manufactured at our Lumberton, North Carolina
facility. The low level of capital spending achieved during 2004 and 2003 was
due to an overall effort to reduce capital expenditures and the lack of any
major construction projects during those years.
Net cash used in financing activities
We used cash from operating activities to reduce the principal balances
on our debt and capital leases by $67.7 million during fiscal 2005. We are
focused on debt reduction with a target of a 50/50 debt to equity balance in our
capital structure. As part of this debt reduction strategy, in February of 2005
we called, at par, $20 million of our high interest rate, 9.25%, senior
subordinated notes due in 2008. Subsequent to June 30, 2005 we initiated an
additional partial call of these notes in the amount of $15 million. We expect
to complete this transaction in September 2005 using available borrowings on our
revolving credit facility. We intend to continue to call portions of the
remaining $65 million of these notes over the next several years ahead of their
maturity in the fall of 2008. These partial calls will be limited by available
cash and our capacity to make restricted cash payments under our other debt
instruments.
In fiscal 2004, we restructured our debt position by refinancing debt
that came due in calendar 2005. We redeemed our $150 million senior subordinated
notes due 2005 and made a permanent reduction on our revolving credit facility
by issuing $200 million of senior notes due 2013. In addition, we established a
$220 million senior secured credit facility, of which $70 million matures in
2008, and $150 million matures in 2010. This facility amended our revolving
credit facility due in 2005. (See Note 9, Debt, to the Consolidated Financial
Statements for further information.)
In fiscal 2003, we used cash to repay $42.5 million in debt including a
$22.0 million note payment to UPM-Kymmene incurred in connection with the
purchase of Walkisoft.
Contractual Obligations
The following table summarizes our significant contractual cash
obligations as of June 30, 2005. Certain of these contractual obligations are
reflected in our balance sheet, while others are disclosed as future obligations
under accounting principles generally accepted in the United States.
-----------------------------------------------------------------------------------------------------------------
(millions) Payments Due by Period (7)
------------------------------------------------------------------------
Less than Greater than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
-----------------------------------------------------------------------------------------------------------------
Long-term obligations (1)...... $797.4 $43.0 $ 92.3 $246.7 $415.4
Capital lease obligations (2).. 2.4 0.8 1.2 0.4 -
Operating lease obligations (2) 3.1 1.6 1.4 0.1 -
Timber commitments (3)......... 71.7 13.1 24.8 26.9 6.9
Lint commitments (4)........... 12.8 12.8 - - -
Other purchase commitments (5). 7.9 7.5 0.4 - -
Postretirement benefit obligations(6) 20.6 1.4 3.2 3.3 12.7
------------------------------------------------------------------------
Total contractual cash obligations $915.9 $80.2 $123.3 $277.4 $435.0
-----------------------------------------------------------------------------------------------------------------
(1) Amounts include related interest payments. Interest payments for variable
debt of $99.5 million are based on the effective rate as of June 30, 2005 of
5.3%. See Note 9, Debt, to the Consolidated Financial Statements for further
information on interest rates.
(2) Capital lease obligations represent principal and interest payments. See
Note 10, Leases, to the Consolidated Financial Statements for further
information.
23
(3) See Note 19, Commitments, to the Consolidated Financial Statements for
further information.
(4) Lint commitments are take-or-pay contracts made in the ordinary course of
business that usually are less than one year in length.
(5) 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.
(6) See Note 15, Employee Benefit Plans, to the Consolidated Financial
Statements for further information.
(7) Less than one year references fiscal 2006; 1-3 years references fiscal 2007
and 2008; 3-5 years references fiscal 2009 and 2010.
Critical Accounting Policies and Estimates
This discussion and analysis is based upon our consolidated financial
statements. Our critical and significant accounting policies are more fully
described in Note 1, Accounting Policies, to our Consolidated Financial
Statements. Some of our accounting policies require us to make significant
estimates and assumptions about future events that affect the amounts reported
in our financial statements and the accompanying notes. Future events and their
effects cannot be determined with certainty. Therefore, the determination of
estimates underlying our financial statements requires the exercise of
management's judgment. Actual results could differ from those estimates, and any
such differences may be material to our financial statements. Our management
exercises critical judgment in the application of our accounting policies in the
following areas, which significantly affect our financial condition and results
of operation. 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 auditors.
Allowance for doubtful accounts
We provide an allowance for receivables we believe we may not collect
in full. Management evaluates the collectibility of accounts based on a
combination of factors. In circumstances in which we are aware of a specific
customer's inability to meet its financial obligations (i.e., bankruptcy filings
or substantial downgrading of credit ratings), we record a specific reserve. For
all other customers, we recognize reserves for bad debts based on our historical
collection experience. If circumstances change (i.e., higher than expected
defaults or an unexpected material adverse change in a major customer's ability
to meet its financial obligations), our estimates of the recoverability of
amounts due could be reduced by a material amount.
Historically, bad debt expense for fiscal years 2005, 2004 and 2003
have been $1.4 million, $4.0 million and $0.3 million, respectively. During
fiscal 2004, a significant customer filed for bankruptcy protection. As a
result, we recorded an increase in our estimate for bad debts of $3.3 million
during fiscal 2004.
Deferred income taxes and other liabilities
Deferred income tax assets and liabilities are recognized based on the
difference between the financial statement and the tax law treatment of certain
items. Realization of certain components of deferred tax assets is dependent
upon the occurrence of future events. We record a valuation allowance to reduce
our net deferred tax assets to the amount we believe is more likely than not to
be realized. These valuation allowances can be impacted by changes in tax laws,
changes to statutory tax rates, and future taxable income levels and are based
on our judgment, estimates and assumptions regarding those future events.
In fiscal 2005, we increased the valuation allowances recorded against
certain foreign and state net operating losses by approximately $1.1 million,
since we believe it more likely than not that these assets will not result in a
future tax benefit.
In fiscal 2003, we utilized a $1.0 million foreign net operating loss
carryforward that had been fully reserved. In fiscal 2002, we realized a $0.6
million benefit in Canada and in fiscal 2001, we realized a $0.5 million benefit
in Germany, both due to changes in tax laws.
In the event we were to determine that we would not be able to realize
all or a portion of the net deferred tax assets in the future, we would increase
the valuation allowance through a charge to income in the period that such
24
determination is made. Conversely, if we were to determine that we would be able
to realize our deferred tax assets in the future, in excess of the net carrying
amounts, we would decrease the recorded valuation allowance through an increase
to income in the period that such determination is made.
We record our world-wide tax provision based on the tax rules and
regulations in the various jurisdictions in which we operate. Significant
managerial judgment is required in determining our effective tax rate and
evaluating our tax positions. Where we believe that the deduction of an item is
supportable for income tax purposes, the item is deducted in our income tax
returns. However, where treatment of an item is uncertain, tax contingency
reserves are recorded based upon the expected most probable outcome taking into
consideration the specific tax regulations and facts of each matter. These
reserves are recorded in the consolidated balance sheet in other liabilities. We
adjust these reserves when an identifiable event occurs that changes the most
probable outcome. In fiscal 2005, the contingency reserves were reduced by $6.2
million. During fiscal 2005, the IRS completed an audit of our tax return for
fiscal year 2002. With the conclusion of this audit, we released the reserve on
a tax deduction we claimed relating to our investment in our former facility in
Cork, Ireland and recorded a non-cash tax benefit of $5.5 million to our
provision for income taxes. We also recorded an additional tax benefit of $0.7
million resulting from a net change in our contingency reserves.
Depreciation
We provide for depreciation on our production machinery and equipment
at our cotton cellulose and airlaid nonwovens plants using the
units-of-production depreciation method. Under this method, we calculate
depreciation based on the expected total productive hours of the assets and, in
any case, subject to a minimum level of depreciation. We review our estimate of
total productive hours at least annually. If the estimated productive hours of
these assets change based on changes in utilization and useful life assumptions,
we adjust depreciation expense per unit of production accordingly. We use the
straight-line method for determining depreciation on our other capital assets.
During fiscal 2004, based on changes in utilization estimates, we increased
depreciation expense by $0.2 million. We had no changes in estimates or
assumptions during fiscal 2005 or 2003.
Long-lived assets
Long-lived assets are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. For assets that
are held and used, recoverability is evaluated based on the undiscounted cash
flows expected to be generated by the asset. If the carrying value of the assets
are determined not be recoverable, then an impairment is recognized. If
impairment exists, an adjustment is made to write the asset down to its fair
value. Estimated fair values are determined based on quoted market values,
discounted cash flows or internal and external appraisals, as applicable. Assets
to be disposed of are carried at the lower of carrying value or estimated net
realizable value. During fiscal 2005, we announced the closure of the
Glueckstadt, Germany facility. As a result of this change in circumstances, we
estimated the fair value of the long-lived assets resulting in an impairment
charge of $12.3 million. Based on the estimated fair values of long-lived
assets, we have recorded impairment charges of $12.3 million, $45.9 million, and
$36.5 million for years ended June 30, 2005, 2004, and 2003, respectively. If
circumstances change, our estimated fair values may be impacted and have a
material effect on our reported financial position and results of operations.
See Note 4, Impairment of Long-lived Assets, of our Consolidated Financial
Statements for further information concerning impairment charges.
We have made acquisitions in the past that included a significant
amount of goodwill and other intangible assets. We adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142), and, as a consequence, discontinued the amortization of goodwill.
Under the guidelines of SFAS 142, goodwill is subject to an annual impairment
test based on its estimated fair value. Unless circumstances otherwise dictate,
we perform our annual impairment testing in the fourth quarter. We will continue
to amortize other intangible assets that meet certain criteria over their useful
lives. We utilize the present value of expected net cash flows to determine the
estimated fair value of our reporting units. This present value model requires
management to estimate future net cash flows, the timing of these cash flows and
an appropriate discount rate (or weighted average cost of capital) representing
the time value of money and the inherent risk and uncertainly of future cash
flows. The discount rate, adjusted for inflation, is based on independently
calculated beta risks for a composite group of companies, our target capital mix
and an estimated market risk premium. The assumptions used in estimating future
cash flows were consistent with the reporting unit's internal planning. If the
estimated fair value of the reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not impaired. The determination of an impairment loss
is complex and requires that we make many assumptions and estimates. If our
estimates of future cash flows or the underlying assumptions and estimates
change, we may need to record impairment losses in the future.
25
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign exchange rates,
interest rates, raw material costs and the price of certain commodities used in
our production processes. To reduce such risks, we selectively use financial
instruments. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures. Further, we do not enter into financial
instruments for trading purposes.
The following risk management discussion and the estimated amounts
generated from the sensitivity analyses are forward-looking statements of market
risk, assuming that certain adverse market conditions occur. Actual results in
the future may differ materially from those projected results due to actual
developments in the global financial markets. The analysis methods used to
assess and mitigate risks discussed below should not be considered projections
of future events or losses.
A discussion of our accounting policies for risk management is included
in Note 1, Accounting Policies, in the Notes to the Consolidated Financial
Statements.
Interest Rates
The fair value of our long-term public debt is based on an average of
the bid and offer prices at year-end. The fair value of the credit facility
approximates its carrying value due to its variable interest rate. The carrying
value of other long-term debt approximates fair value based on our current
incremental borrowing rates for similar types of borrowing instruments. The
carrying value and fair value of long-term debt at June 30, 2005 were $539.0 and
$535.6 and at June 30, 2004, $606.7 million and $604.0 million, respectively.
Market risk is estimated as the potential change in fair value resulting from a
hypothetical 100 basis point decrease in interest rates and would amount to
$10.3 million increase in the fair value of long-term debt.
We had $99.5 million of variable rate long-term debt outstanding at
June 30, 2005. At this borrowing level, a hypothetical 100 basis point increase
in interest rates would have a $1.0 million unfavorable impact on our pre-tax
earnings and cash flows. The primary interest rate exposures on floating rate
debt are with respect to European interbank rates and U.S. prime rates.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than an
entity's functional currency. Buckeye and our subsidiaries generally enter into
transactions denominated in their respective functional currencies. Our primary
foreign currency exposure arises from foreign-denominated revenues and costs and
their translation into U.S. dollars. The primary currencies to which we are
exposed include the euro, Canadian dollar and the Brazilian real.
26
We generally view as long-term our investments in foreign subsidiaries
with a functional currency other than the U.S. dollar. As a result, we do not
generally hedge these net investments. However, we use capital structuring
techniques to manage our net investment in foreign currencies as considered
necessary. The net investment in foreign subsidiaries translated into dollars
using the year-end exchange rates is $185.1 and $174.9 million at June 30, 2005
and 2004, respectively. The potential foreign currency translation loss from
investment in foreign subsidiaries resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates amounts to approximately $17
million at June 30, 2005. This change would be reflected in the equity section
of our consolidated balance sheet in accumulated other comprehensive loss. The
primary foreign currency exposures on our long-term investments are with the
euro, Canadian dollar and the Brazilian real.
Cost of Raw Materials
Amounts paid by us for wood, cotton fiber and fluff pulp represent the
largest component of our variable costs of production. The availability and cost
of these materials are subject to market fluctuations caused by factors beyond
our control, including weather conditions. Significant decreases in availability
or increases in the cost of wood or cotton fiber to the extent not reflected in
prices for our products, could materially and adversely affect our business,
results of operations and financial condition.
Commodities
We are dependent on commodities in our production process. Natural gas,
electricity, fuel oil, caustic and other chemicals are just some of the
commodities that our processes rely upon. Exposure to these commodities can have
a significant impact on our operating performance.
In order to minimize market exposure, we use forward contracts to
reduce price fluctuations in a desired percentage of forecasted purchases of
natural gas over a period of generally less than one year. There were no natural
gas contracts outstanding at June 30, 2005 or 2004 requiring fair value
treatment.
Exposure to commodity products also creates volatility in pricing. If
our research and development efforts do not result in the commercialization of
new, proprietary products, we will continue to have significant exposure to
fluff pulp and other commodity products, which could result in volatility in
sales prices and profits.
Industry Cyclicality
The demand and pricing of our products, particularly fluff pulp, are
influenced by the much larger market for papermaking pulps which is highly
cyclical. The markets for most cellulose-based products are sensitive to both
changes in general global economic conditions and to changes in industry
capacity. Both of these factors are beyond our control. The price of these
products can fluctuate significantly when supply and demand become imbalanced
for any reason. Financial performance can be heavily influenced by these pricing
fluctuations and the general cyclicality of the industries in which we compete.
It is not certain that current prices will be maintained, that any price
increases will be achieved, or that industry capacity utilization will reach
favorable levels. The demand, cost and prices for our products may thus
fluctuate substantially in the future and downturns in market conditions could
have a material adverse effect on our business, results of operations and
financial condition.
Contingencies
Our operations are subject to extensive general and industry-specific
federal, state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with such requirements. We
expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with such requirements. Given the
uncertainties associated with predicting the scope of future requirements, there
can be no assurance that we will not in the future incur material environmental
compliance costs or liabilities. For additional information on environmental
matters, see Note 20 to the Consolidated Financial Statements.
27
Forward-Looking Statements
Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements that involve
risks and uncertainties, including, but not limited to, economic, competitive,
governmental and technological factors affecting our operations, markets,
products, services and prices and other factors. The forward-looking statements
included in this document are only made as of date of this document and we
undertake no obligation to publicly release the result of any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
We had no changes in or disagreements with Ernst & Young LLP, our
independent auditors.
Item 9a. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of our disclosure controls and procedures in
ensuring that the information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, including ensuring that such information is accumulated and
communicated to Buckeye management as appropriate to allow timely decisions
regarding required disclosure. Based on such evaluation, our principal executive
and financial officers have concluded that such disclosure controls and
procedures were effective, as of June 30, 2005 (the end of the period covered by
this Annual Report on Form 10-K).
Assessment of Internal Control Over Financial Reporting
Management's report on our internal control over financial reporting is
presented on page F-3 of this Annual Report on Form 10-K. The report of Ernst &
Young LLP with respect to management's assessment of internal control over
financial reporting is presented on page F-4 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During our fiscal quarter ended June 30, 2005, no change occurred in
our internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9b. Other Information
None.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
Information regarding members of the Board of Directors will be
presented in our 2005 Annual Proxy Statement for the 2005 annual meeting of
stockholders and is incorporated herein by reference.
Executive Officers of the Registrant
The names, ages and positions held by our executive officers on August
30, 2005 are:
Elected to
Name Age Position Present Position
David B. Ferraro 67 Chairman of the Board, Chief Executive Officer and April 2003
Director
John B. Crowe 58 President, Chief Operating Officer and Director April 2003
Kristopher J. Matula 42 Executive Vice President and Chief Financial October 2003
Officer
Charles S. Aiken 55 Sr. Vice President, Manufacturing October 2003
Christian G. Chavassieu 51 Sr. Vice President, Wood Cellulose April 2005
Jeffery T. Cook 43 Sr. Vice President, Product and Market Development February 2005
Sheila Jordan Cunningham 53 Sr. Vice President, General Counsel and Secretary April 2000
Douglas L. Dowdell 47 Sr. Vice President, Nonwovens February 2005
William M. Handel 59 Sr. Vice President, Human Resources April 2000
Paul N. Horne 50 Sr. Vice President, Cotton Cellulose January 2001
----------------------------------
David B. Ferraro
Chairman of the Board, Chief Executive Officer and Director
Mr. Ferraro has served as Chairman of the Board and Chief Executive
Officer since April 1, 2003. From March 1993 until he was named Chairman and
CEO, he served as President and Chief Operating Officer. He has been a director
of Buckeye since March 1993. He was Manager of Strategic Planning of Procter &
Gamble from 1991 through 1992. He served as President of our predecessor,
Buckeye Cellulose Corporation, then a subsidiary of Procter & Gamble, from 1989
through 1991, as its Executive Vice President and Manager of Commercial
Operations from 1987 through 1989, and as its Comptroller from 1973 through
1986.
John B. Crowe
President, Chief Operating Officer and Director
Mr. Crowe has served as President and Chief Operating Officer since
April 1, 2003. He was elected as a director of Buckeye in August 2004. He served
as Senior Vice President, Wood Cellulose from January 2001 to April 2003. He
served as Vice President, Wood Cellulose Manufacturing from December 1997 to
January 2001. Prior to joining the Company, he was Executive Vice
President/General Manager of Alabama River Pulp and Alabama Pine Pulp
29
Operations, a division of Parsons and Whittemore, Inc. and was Vice President
and Site Manager of Flint River Operations, a subsidiary of Weyerhauser Company.
From 1979 to 1992, he was an employee of Procter & Gamble.
Kristopher J. Matula
Executive Vice President and Chief Financial Officer
Mr. Matula has served as Executive Vice President and Chief Financial
Officer since October 2003. He served as Senior Vice President, Nonwovens and
Corporate Strategy from April 2003 to October 2003. He served as Senior Vice
President, Nonwovens from January 2001 to April 2003. He served as Senior Vice
President, Commercial - Absorbent Products from July 1997 to January 2001 and as
Vice President, Corporate Strategy from April 1996 to July 1997. Prior to
joining Buckeye in 1994, he held various positions with Procter & Gamble and
General Electric.
Charles S. Aiken
Senior Vice President, Manufacturing
Mr. Aiken has served as Senior Vice President, Manufacturing since
October 1, 2003. He served as Senior Vice President, Nonwovens Manufacturing
from April 2000 to October 2003. He served as Vice President, Business Systems
from April 1998 to April 2000 and as Vice President, Foley Plant from June 1995
to April 1998. He was an employee of Procter & Gamble from 1977 to March 1993.
Christian G. Chavassieu
Senior Vice President, Wood Cellulose
Mr. Chavassieu has served as Senior Vice President, Wood Cellulose
since April 1, 2005. He served as Vice President, Specialty Wood Cellulose Sales
from April 1998 to April 2005. He served as a Sales Manager of Specialty
Cellulose from January 1996 to April 1998. Prior to joining Buckeye in 1996, he
held positions with Chavassieu & Cie SA, Apple Computer, Dowell Schlumberger and
Corning-Europe.
Jeffery T. Cook
Senior Vice President, Product and Market Development
Mr. Cook has served as Senior Vice President, Product and Market
Development since February 4, 2005. He served as Vice President, Product and
Market Development from July 2003 to February 2005. He served as Vice President
of Research and Development, Wood Cellulose from August 1999 to July 2003. He
was an employee of Procter and Gamble from 1988 to 1998.
Sheila Jordan Cunningham
Senior Vice President, General Counsel and Secretary
Ms. Cunningham has served as Senior Vice President, General Counsel and
Secretary since April 2000. She served as Vice President, General Counsel and
Secretary from April 1998 to April 2000. She served as Assistant General Counsel
from March 1997 and as Secretary from July 1997 to April 1998. Prior to joining
the Company, she was a partner in the law firm of Baker, Donelson, Bearman &
Caldwell from 1988 to March 1997.
Douglas L. Dowdell
Senior Vice President, Nonwovens
Mr. Dowdell has served as Senior Vice President, Nonwovens since
February 4, 2005. He served as Vice President, Nonwovens from October 2003 to
February 2005. He served as Vice President, Absorbent Fiber Sales from February
2002 to October 2003. He served as Vice President, Nonwovens Business
Development from February 2001 to February 2002. He served as Vice President,
Absorbent Products Business Development from August 2000 to February 2001. Prior
to August 2000 he held several positions in the Company including: Manager,
Absorbent Fiber Sales; Manager, Business Development; and Manager, Wood
Procurement. He was an employee of Procter & Gamble from 1988 to March 1993.
William M. Handel
Senior Vice President, Human Resources
Mr. Handel has served as Senior Vice President, Human Resources since
April 2000. He served as Vice President, Human Resources from November 1995 to
April 2000 and as Human Resources Manager from March 1993 to November 1995. He
was an employee of Procter & Gamble from 1974 to March 1993.
30
Paul N. Horne
Senior Vice President, Cotton Cellulose
Mr. Horne has served as Senior Vice President, Cotton Cellulose since
January 2001. He served as Senior Vice President, Commercial - Specialty
Cellulose from July 1997 to January 2001 and as Vice President, North and South
American Sales from October 1995 to July 1997. He was an employee of Procter &
Gamble from 1982 to March 1993.
Code of Business Conduct & Ethics
We have a Code of Business Conduct & Ethics, which applies to all of
our directors, officers and employees, including our principal executive officer
and senior financial officers. Our Code of Business Conduct & Ethics is
available in the corporate governance section of the investor relations page of
our website, www.bkitech.com. In addition, we intend to post in the corporate
governance section of the investor relations page of our website information
regarding any amendment to, or waiver from, the provisions of our Code of
Business Conduct & Ethics to the extent such disclosure is required. The
information on our website, however, does not form part of this Report.
Item 11. Executive Compensation
Information relating to this item will be included in our 2005 Annual
Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to this item will be included under the captions
"Buckeye Stock Ownership" and "Executive Compensation" in our 2005 Annual Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information relating to this item will be included in our 2005 Annual
Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services will be
included in our 2005 Annual Proxy Statement and is incorporated by reference
herein.
31
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
- See Index to Consolidated Financial Statements and Schedule on
page F-1.
(2) Financial Statement Schedules
- See Index to Consolidated Financial Statements and Schedule on
page F-1. All other financial statement schedules are omitted as
the information is not required or because the required
information is presented in the financial statements or the
notes thereto.
(3) Listing of Exhibits. See exhibits listed under Item 15 (b).
(b) Exhibits required by Item 601 of Regulation S-K. Exhibit
Number
Description
3.1 Second Amended and Restated Certificate of Incorporation
(4)
3.1 (a) Articles of Amendment to the Second Amended and Restated
Certificate of Incorporation of Registrant (5)
3.2 Amended and Restated By-laws of the Registrant. (8)
4.1 First Amendment to the Rights Agreement. (The Rights
Agreement was filed on Form 8-A, November 20, 1995). (2)
4.2 Indenture for 9 1/4% Senior Subordinated Notes due
2008, dated July 2,1996 (1)
4.3 Indenture for 8% Senior Subordinated Notes due 2010,
dated June 11, 1998(5)
4.4 Indenture for 8 1/2% Senior Notes due 2013, dated
September 22, 2003(10)
10.1 Amended and Restated 1995 Management Stock Option Plan
of the Registrant(6)
10.2 Second Amended and Restated 1995 Incentive and
Nonqualified Stock Option Plan for Management Employees
of the Registrant.(9)
10.3 Form of Management Stock Option Subscription Agreement(6)
10.4 Form of Stock Option Subscription Agreement(6)
10.5 Amended and Restated Formula Plan for Non-Employee
Directors(3)
10.6 Amendment No. 1 to Timberlands Agreement dated January 1,
1999 by and between Buckeye Florida, Limited Partnership
and Foley Timber and Land Company. Certain portions of
the Agreement have been omitted pursuant to an
Application for Confidential Treatment dated October 30,
1995.(7)
10.7 Amended and Restated Credit Agreement dated November 5,
2003 among the Registrant; Fleet National Bank; Fleet
Securities Inc.; Citigroup Global Markets Inc.; UBS
Security LLC; Citibank N.A.; UBS, AG Stanford Branch;
and the other lenders party thereto. (11)
10.8 Amended and Restated Credit Agreement Amendment No. 1,
dated March 15, 2005. (12)
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32
32.1* Section 1350 Certification of Chief Executive Officer
32.2* Section 1350 Certification of Chief Financial Officer
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-3 file no. 333-05139, as filed with the Securities and
Exchange Commission on June 4, 1996 and as amended on June 11, 1996
and June 27, 1996.
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-K dated June 30, 1997 (3) Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for quarterly
period ended December 31, 2000.
(4) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended December 31, 1997.
(5) Incorporated by reference to the Registrant's Registration Statement
on Form S-4, file no. 333-59267, as filed with the Securities and
Exchange Commission on July 16, 1998.
(6) Incorporated by reference to the Registrant's Annual Report on Form
10-K dated June 30, 1998.
(7) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q/A for quarterly period ended March 31, 1999.
(8) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 2000.
(9) Incorporated by reference to the Registrant's Annual Report on Form
10-K dated June 30, 2001.
(10) Incorporated by reference to the Registrant's Registration Statement
Form S-4, file no. 333-110091, as filed with the Securities and
Exchange Commission on October 30, 2003.
(11) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended September 30, 2003.
(12) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended March 31, 2005.
* This certification accompanies the Periodic Report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall be deemed
"filed" by the Registrant for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
33
SIGNATURES
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, Director, Chairman of the Board and Chief Executive Officer
Date: September 9, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /S/ DAVID B. FERRARO
--------------------------------------------------------------------------------
David B. Ferraro, Director, Chairman of the Board and Chief Executive Officer
Date: September 9, 2005
By: /S/ SAMUEL M. MENCOFF
--------------------------------------------------------------------------------
Samuel M. Mencoff, Director
Date: September 9, 2005
By: /S/ HENRY F. FRIGON
--------------------------------------------------------------------------------
Henry F. Frigon, Director
Date: September 9, 2005
By: /S/ RED CAVANEY
--------------------------------------------------------------------------------
Red Cavaney, Director
Date: September 9, 2005
By: /S/ KRISTOPHER J. MATULA
--------------------------------------------------------------------------------
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: September 9, 2005
34
BUCKEYE TECHNOLOGIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Report of Management................................................................ F-2
Management's Report on Internal Control Over Financial Reporting.................... F-3
Reports of Independent Registered Public Accounting Firm............................ F-4
Financial Statements as of June 30, 2005, June 30, 2004 and for the Three Years
Ended June 30, 2005:
Consolidated Statements of Operations.......................................... F-6
Consolidated Balance Sheets.................................................... F-7
Consolidated Statements of Stockholders' Equity................................ F-8
Consolidated Statements of Cash Flows.......................................... F-9
Notes to Consolidated Financial Statements..................................... F-10
Schedule:
Report of Independent Registered Public Accounting Firm, on Financial Statement
Schedule............................................................... F-37
Schedule II - Valuation and Qualifying Accounts.............................. F-38
F-1
Report of Management
The management of Buckeye Technologies Inc. is committed to providing
financial reports that are complete, accurate and easily understood.
The consolidated financial statements and financial information
included in this report have been prepared in accordance with accounting
principles generally accepted in the United States and in the opinion of
management fairly and completely present the Company's financial results. Our
independent auditor, Ernst & Young LLP, has examined our financial statements
and expressed an unqualified opinion.
Ensuring the accuracy of financial statements starts at the top of the
Company. Our Board of Directors provides oversight as the representative of the
stockholders. Our Audit Committee, consisting entirely of independent Directors,
meets regularly with management and the independent auditors to review our
financial reports.
The Company's senior management, our corporate leadership team, is
actively involved in all aspects of the business. This group understands key
strategies and monitors financial results. We maintain a system of internal
control which provides reasonable assurance that transactions are accurately
recorded and assets are safeguarded. All of the Company's officers and financial
executives adhere to the Company's Code of Business Conduct and Ethics and
provide written confirmation of their compliance annually.
Our Company was built on a foundation of integrity and honesty. We take
responsibility for the quality and accuracy of our financial reporting.
/s/ David B. Ferraro /s/ John B. Crowe /s/ Kristopher J. Matula
Chairman of the Board and President and Executive Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
F-2
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal
control over financial reporting includes, among other things: defined policies
and procedures for conducting and governing our business, a written Code of
Business Conduct and Ethics adopted by our Board of Directors and applicable to
all directors and all officers and employees of Buckeye and our subsidiaries,
sophisticated information systems for processing transactions and a properly
staffed and professional internal audit department. Mechanisms are in place to
monitor the effectiveness of our internal control over financial reporting and
actions are taken to correct identified deficiencies. Our procedures for
financial reporting include the active involvement of senior management, our
Audit Committee and a staff of highly qualified financial and legal
professionals.
Management, with the participation of our principal executive and
financial officers, assessed our internal control over financial reporting as of
June 30, 2005, the end of our fiscal year. Management based its assessment on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria).
Based on this assessment, management has concluded that our internal
control over financial reporting was effective as of June 30, 2005.
Our independent registered public accounting firm, Ernst & Young LLP,
audited management's assessment and the effectiveness of our internal control
over financial reporting. Ernst & Young has issued their report concurring with
management's assessment, which is included in this Annual Report on Form 10 - K.
/s/ David B. Ferraro /s/ Kristopher J. Matula
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Buckeye Technologies Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Buckeye
Technologies Inc. maintained effective internal control over financial reporting
as of June 30, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Buckeye
Technologies Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Buckeye Technologies Inc.
maintained effective internal control over financial reporting as of June 30,
2005, is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Buckeye Technologies Inc. maintained, in all material
respects, effective internal control over financial reporting as of June 30,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Buckeye Technologies Inc. as of June 30, 2005 and 2004, and related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2005 of Buckeye
Technologies Inc. and our report dated September 7, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 7, 2005
F-4
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Buckeye Technologies Inc.
We have audited the accompanying consolidated balance sheets of Buckeye
Technologies Inc. as of June 30, 2005 and 2004 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Buckeye
Technologies Inc. as of June 30, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2005, in conformity with U. S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Buckeye
Technologies Inc.'s internal control over financial reporting as of June 30,
2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated September 7, 2005 expressed an unqualified opinion thereon.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for planned maintenance activities in
2004.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 7, 2005
F-5
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended June 30
2005 2004 2003
----------------------------------------------
Net sales................................................. $712,782 $656,913 $641,082
Cost of goods sold........................................ 592,726 579,472 558,221
----------------------------------------------
Gross margin.............................................. 120,056 77,441 82,861
Selling, research and administrative expenses............. 43,270 42,423 37,896
Amortization of intangibles and other..................... 2,280 2,244 2,330
Impairment of long-lived assets........................... 12,326 45,908 36,503
Restructuring costs....................................... 4,579 5,945 1,636
----------------------------------------------
Operating income (loss) 57,601 (19,079) 4,496
Other income (expense):
Interest income...................................... 943 923 1,062
Interest expense and amortization of debt costs...... (45,142) (47,284) (47,526)
Loss on early extinguishment of debt................. (242) (4,940) -
Gain on sale of assets held for sale................. 7,203 - -
Foreign exchange and other........................... (649) 273 (48)
----------------------------------------------
Income (loss) before income taxes and cumulative effect
of change in accounting............................... 19,714 (70,107) (42,016)
Income tax benefit........................................ (490) (26,197) (17,122)
----------------------------------------------
Income (loss) before cumulative effect of change in
accounting..................................... 20,204 (43,910) (24,894)
Cumulative effect of change in accounting (net of
tax of $3,359)................................. - 5,720 -
----------------------------------------------
Net income (loss).................................... $ 20,204 $(38,190) $ (24,894)
==============================================
Earnings (loss) per share before cumulative effect of
change in accounting
Basic.......................................... $ 0.54 $ (1.18) $ (0.67)
Diluted........................................ $ 0.54 $ (1.18) $ (0.67)
Cumulative effect of change in accounting per share
Basic.......................................... $ - $ 0.15 $ -
Diluted........................................ $ - $ 0.15 $ -
Earnings (loss) per share
Basic.......................................... $ 0.54 $ (1.03) $ (0.67)
Diluted........................................ $ 0.54 $ (1.03) $ (0.67)
Pro forma amounts, assuming change in accounting
method for planned maintenance activities
applied retroactively:
Net income (loss)........................... $ 20,204 $(43,910) $(23,513)
Basic income (loss) per share............... $ 0.54 $ (1.18) $ (0.64)
Diluted income (loss) per share............. $ 0.54 $ (1.18) $ (0.64)
Weighted average shares for earnings per share
Basic........................................... 37,447 37,075 36,965
Diluted......................................... 37,598 37,075 36,965
See accompanying notes.
F-6
Consolidated Balance Sheets
(In thousands, except share data)
June 30
2005 2004
----------------------------------------
Assets
Current assets:
Cash and cash equivalents................................ $ 9,926 $ 27,235
Accounts receivable - trade, net of allowance for doubtful
accounts of $5,602 in 2005 and $4,240 in 2004........ 116,006 110,209
Accounts receivable - other.............................. 2,209 2,158
Inventories.............................................. 107,895 107,439
Deferred income taxes.................................... 3,584 3,655
Prepaid expenses and other............................... 6,884 11,300
----------------------------------------
Total current assets.......................................... 246,504 261,996
Property, plant and equipment, net............................ 525,931 537,632
Goodwill...................................................... 139,430 130,172
Intellectual property and other, net.......................... 37,872 41,023
----------------------------------------
Total assets.................................................. $949,737 $970,823
========================================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................... $ 37,226 $ 27,130
Accrued expenses......................................... 48,401 50,085
Current portion of capital lease obligation............ 685 632
Current portion of long-term debt........................ 1,376 16,972
----------------------------------------
Total current liabilities..................................... 87,688 94,819
Long-term debt................................................ 535,539 587,076
Accrued postretirement benefits............................... 19,206 18,931
Deferred income taxes......................................... 34,660 30,288
Capital lease obligation...................................... 1,382 2,068
Other liabilities............................................. 1,673 8,296
Commitments and contingencies (Notes 9, 10, 14, 19, and 20)...
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
None issued or outstanding............................. - -
Common stock, $.01 par value; 100,000,000 shares authorized; 43,142,770
shares issued and 37,586,409 and 37,303,508
shares outstanding at June 30, 2005 and 2004, respectively 431 431
Additional paid-in capital.................................... 52,599 53,824
Deferred stock compensation................................... (153) (230)
Accumulated other comprehensive income (loss)................. 16,791 (569)
Retained earnings............................................. 275,753 255,549
Treasury shares, 5,556,361 and 5,839,262 shares at
June 30, 2005 and 2004, respectively..................... (75,832) (79,660)
----------------------------------------
Total stockholders' equity.................................... 269,589 229,345
----------------------------------------
Total liabilities and stockholders' equity.................... $949,737 $970,823
========================================
See accompanying notes.
F-7
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Accumulated
Additional Deferred other
Common paid-in stock comprehensive Retained Treasury
stock capital compensation income (loss) Earnings shares Total
--------------------------------------------------------------------------------------
Balance at June 30, 2002 $431 $ 55,517 $(282) $(36,381) $318,633 $(84,258) $253,660
==== ======== ====== ========= ========= ========== =========
Comprehensive income (loss):
Net loss....................... - - - - (24,894) - (24,894)
Other comprehensive income:
Foreign currency translation adjustment - - - 32,971 - - 32,971
------
Comprehensive income................ 8,077
Issuance of 24,578 shares of common stock - - - - - 147 147
------ --------- ------- -------- -------- -------- ------
Balance at June 30, 2003 $431 $ 55,517 $(282) $(3,410) $293,739 $(84,111) $261,884
==== ========= ====== ======== ======== ========= ========
Comprehensive income (loss):
Net loss....................... - - - - $(38,190) - $(38,190)
Other comprehensive income:
Foreign currency translation adjustment - - - 2,841 - - 2,841
------
Comprehensive loss ................. (35,349)
Issuance of 326,219 shares of common stock - (1,782) - - - 4,416 2,634
Tax benefit on option exercise...... - 105 - - - - 105
Termination of restricted stock..... - - - - - (5) (5)
Deferred stock compensation......... - (16) 16 - - - -
Amortization of deferred stock compensation - - 36 - - - 36
Directors stock compensation (4,469 shares) - - - - - 40 40
------ ---------- ------- --------- --------- --------- ------
Balance at June 30, 2004 $431 $53,824 $(230) $(569) $255,549 $(79,660) $229,345
====== ======== ======= ========= ========= ========= =======
Comprehensive income (loss):
Net income..................... - - - - 20,204 - 20,204
Other comprehensive income
Foreign currency translation adjustment - - - 17,360 - - 17,360
------
Comprehensive income ............... 37,564
Issuance of 279,698 shares of common stock - (1,470) - - - 3,791 2,321
Tax benefit on option exercise...... - 245 - - - - 245
Termination of restricted stock..... - - - - - (3) (3)
Amortization of deferred stock compensation - - 77 - - - 77
Directors stock compensation (3,439 shares) - - - - - 40 40
----- ------- ------ ------- --------- ------- -------
Balance at June 30, 2005 $431 $52,599 $(153) $16,791 $275,753 $(75,832) $269,589
===== ======= ====== ======== ========= ======= ========
See accompanying notes.
F-8
Consolidated Statements of Cash Flows
(In thousands)
Year Ended June 30
2005 2004 2003
------------------------------------------------------
Operating activities
Net income (loss).................................... $20,204 $ (38,190) $ (24,894)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting....... - (5,720) -
Impairment of long-lived assets................. 12,326 45,908 36,503
Depreciation and depletion...................... 45,964 45,675 46,500
Amortization.................................... 3,477 4,227 5,588
Loss on early extinguishment of debt............ 242 4,940 -
Deferred income taxes........................... 4,510 (27,340) (13,489)
Non-cash tax benefit............................ (5,481) - -
Gain on sale of assets held for sale............ (7,203) - -
Provision for bad debts......................... 1,372 4,010 296
Other........................................... 3,150 867 289
Changes in operating assets and liabilities:
Accounts receivable......................... (5,971) 11,716 (25,267)
Inventories................................. (1,504) 29,838 14,284
Other assets................................ 463 (2,301) 13,827
Accounts payable and other current liabilities 7,072 (7,974) 1,569
------------------------------------------------------
Net cash provided by operating activities............ 78,621 65,656 55,206
Investing activities
Purchases of property, plant and equipment........... (45,329) (31,871) (28,424)
Redemptions (purchases) of short term investments.... - - 8,863
Proceeds from sales of assets........................ 13,648 309 -
Other................................................ (567) (683) (872)
------------------------------------------------------
Net cash used in investing activities................ (32,248) (32,245) (20,433)
Financing activities
Net borrowings (payments) under revolving line of
credit............................................ 400 (224,026) (19,923)
Issuance of long-term debt........................... - 350,000 -
Payments on long-term debt and capital lease obligations (67,758) (178,333) (22,539)
Payments for debt issuance costs..................... (5) (9,070) (671)
Payments related to early extinguishment of debt..... - (2,115) -
Proceeds from termination of swap.................... - 4,000 -
Net proceeds from sale of equity interests........... 2,468 2,667 -
------------------------------------------------------
Net cash used in financing activities................ (64,895) (56,877) (43,133)
Effect of foreign currency rate fluctuations on cash 1,213 724 2,331
------------------------------------------------------
Decrease in cash and cash equivalents................ (17,309) (22,742) (6,029)
Cash and cash equivalents at beginning of year....... 27,235 49,977 56,006
------------------------------------------------------
Cash and cash equivalents at end of year............. $9,926 $ 27,235 $ 49,977
======================================================
See accompanying notes.
F-9
Notes to Consolidated Financial Statements
(In thousands, except share data)
NOTE 1: ACCOUNTING POLICIES
Business Description and Basis of Presentation
Our financial statements are consolidated financial statements of
Buckeye Technologies Inc. We manufacture and distribute value-added
cellulose-based specialty products used in numerous applications including
disposable diapers, personal hygiene products, engine air and oil filters, food
casings, rayon filament, acetate plastics, thickeners and papers.
Fiscal Year
Except as otherwise specified, references to years indicate our fiscal
year ended June 30, 2005 or ended June 30 of the year referenced.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year classifications.
Principles of Consolidation
The consolidated financial statements include the accounts of Buckeye
Technologies Inc. and our subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
We consider cash equivalents to be temporary cash investments with
maturity of three months or less when purchased.
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.
Allowance for Doubtful Accounts
We provide an allowance for receivables we believe we may not collect
in full. Management evaluates the collectibility of accounts based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations (i.e., bankruptcy filings
or substantial downgrading of credit ratings), we record a specific reserve.
For all other customers, we recognize reserves for bad debts based on our
historical collection experience. If circumstances change (i.e., higher than
expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligations), our estimates of the
recoverability of amounts due could differ by a material amount.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Cost includes the
interest cost associated with significant capital additions. Interest
capitalized for the years ended June 30, 2005, 2004 and 2003 was $418, $67 and
$70, respectively. Depreciation on production machinery and equipment at the
cotton cellulose and airlaid nonwovens plants is determined by the
units-of-production method which is based on the expected productive hours of
the assets, subject to a minimum level of depreciation. Other capital assets use
the straight-line method for determining depreciation. Depreciation under the
straight-line method is computed over the following estimated useful lives:
buildings--30 to 40 years; machinery and equipment--3 to 20 years. Depreciation
and amortization expense includes the amortization of assets under capital
lease.
F-10
Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. For assets that
are to be held and used, impairment is recognized when the estimated fair value
is less than their carrying value. If impairment exists, an adjustment is made
to write the asset down to its fair value, and a loss is recorded as the
difference between the carrying value and fair value. Fair values are determined
based on quoted market values, discounted cash flows or internal and external
appraisals, as applicable. Assets to be disposed of are carried at the lower of
carrying value or fair value. See Note 4 for information concerning impairment
charges.
Goodwill is recognized for the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets of businesses
acquired. Goodwill is reviewed at least annually for impairment. Unless
circumstances otherwise dictate, we perform our annual impairment testing in the
fourth quarter. No impairment was recorded during the year ending June 30, 2005.
The change in goodwill resulted from changes in foreign currency exchange rates
offset by adjustments related to favorable resolution of pre-acquisition tax
contingencies and reductions in deferred taxes associated with the amortization
of tax deductible goodwill during the period.
Intellectual Property and Other
At June 30, 2005 and 2004, we had intellectual property totaling
$27,576 and $29,195, respectively, which includes patents (including application
and defense costs), licenses, trademarks, and tradenames the majority of which
were obtained in the acquisition of airlaid nonwovens businesses and
Stac-Pac(TM) technology. Intellectual property is amortized by the straight-line
method over 5 to 20 years and is net of accumulated amortization of $12,288 and
$10,112 at June 30, 2005 and 2004, respectively. Intellectual property
amortization expense of $2,280, $2,244 and $2,329 was recorded during the years
June 30, 2005, 2004 and 2003, respectively. Estimated amortization expense for
the five succeeding fiscal years follows: $1,945 in 2006, $1,970 in 2007, $1,990
in 2008, $1,990 in 2009 and $1,990 in 2010.
Deferred debt costs of $9,148 and $10,898 at June 30, 2005 and 2004,
respectively are amortized by the effective interest method over the life of the
related debt and are net of accumulated amortization of $5,810 and $5,755 at
June 30, 2005 and 2004, respectively. We recorded amortization of deferred debt
costs of $1,556, $1,960, and $2,500 during the years ending June 30, 2005, 2004
and 2003, respectively.
Income Taxes
We provide for income taxes under the liability method. Accordingly,
deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. No provision is made for
U.S. income taxes applicable to undistributed earnings of foreign subsidiaries
that are indefinitely reinvested in foreign operations. It is not practicable to
compute the potential deferred tax liability associated with these undistributed
foreign earnings.
Risk Management
We periodically use derivatives and other financial instruments to
hedge exposures to natural gas, interest rates and currency risks. For hedges
which meet the Statement of Financial Accounting Standards No. ("SFAS") 133,
Accounting for Derivative Instruments and Hedging Activities, criteria, we
formally designate and document the instrument as a hedge of a specific
underlying exposure, as well as the risk management objective and strategy for
undertaking each hedge transaction. Because of the high degree of effectiveness
between the hedging instrument and the underlying exposure being hedged,
fluctuations in the value of the derivative instruments are generally offset by
changes in the value or cash flows of the underlying exposures being hedged.
Derivatives are recorded in the consolidated balance sheet at fair value. At
June 30, 2005, we had no derivatives.
Credit Risk
We have established credit limits for each customer. We generally
require the customer to provide a letter of credit for export sales in high-risk
countries. Credit limits are monitored routinely.
Environmental Costs
Liabilities are recorded when environmental assessments are probable
and the cost can be reasonably estimated. Generally, the timing of these
accruals coincides with the earlier of completion of a feasibility study or our
commitment to a plan of action based on the then known facts.
F-11
Revenue Recognition
We recognize revenue when the following criteria are met: persuasive
evidence of an agreement exists, delivery has occurred, our price to the buyer
is fixed and determinable, and collectibility is reasonably assured. Delivery is
not considered to have occurred until the customer takes title and assumes the
risks and rewards of ownership. The timing of revenue recognition is largely
dependent on shipping terms. Discounts and allowances are comprised of trade
allowances, cash discounts and sales returns.
Shipping and Handling Costs
Amounts related to shipping and handling which are billed to a customer
in a sale transaction have been classified as revenue. Costs incurred for
shipping and handling have been classified as costs of goods sold.
Foreign Currency Translation
Management has determined that the local currency of our German,
Canadian, and Brazilian subsidiaries is the functional currency, and accordingly
European euro, Canadian dollar, and Brazilian real denominated balance sheet
accounts are translated into United States dollars at the rate of exchange in
effect at fiscal year end. 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.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the local functional
currency are included in "Other income (expense)" in the results of operations.
Transaction gains and (losses) of $(226), $224 and $1,095 were recorded during
the years ended June 30, 2005, 2004 and 2003, respectively.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from the estimates and assumptions used.
Changes in estimates are recognized in accordance with the accounting
rules for the estimate, which is typically in the period when new information
becomes available to management. Areas where the nature of the estimate makes it
reasonably possible that actual results could materially differ from amounts
estimated include: impairment assessments on long-lived assets (including
goodwill), allowance for doubtful accounts, inventory reserves, income tax
liabilities, and contingent liabilities.
Earnings Per Share
Basic earnings per share has been computed based on the average number
of common shares outstanding. Diluted earnings per share reflects the increase
in average common shares outstanding that would result from the assumed exercise
of outstanding stock options calculated using the treasury stock method. Diluted
loss per share amounts for 2004 and 2003 have been calculated using the same
denominator as used in the basic loss per share calculation as the inclusion of
dilutive securities in the denominator would have been anti-dilutive.
Stock-Based Compensation
We currently apply Accounting Principles Board Opinion No. ("APB") 25,
"Accounting for Stock Issued to Employees," and its related interpretations to
measure compensation expense for stock-based compensation plans. As a result, no
compensation expense is recorded for stock options when the exercise price is
equal to or greater than the market price of our common stock at the date of
grant. For awards of restricted stock and to determine the pro forma effects of
stock options set forth below, we recognize the fair value of the awards ratably
over their requisite service period.
On June 7, 2005, the Compensation Committee of the Board of Directors
of Buckeye Technologies Inc. approved the acceleration of vesting of
out-of-the-money options with an exercise price greater than $8.32 to purchase
shares of common stock of Buckeye Technologies Inc. that remained unvested at
June 30, 2005. These options were previously awarded to non-employee directors,
executive officers, and other employees under our Amended and Restated 1995
Incentive and Nonqualified Stock Option Plan for Management Employees and our
Amended and Restated Formula Plan for Non-Employee Directors. Options to
purchase 898,150 shares of common stock were subject to this acceleration. The
closing price of Buckeye Technologies stock on June 7, 2005 was $8.32.
F-12
The following table summarizes the options subject to acceleration:
Aggregate Number of Weighted Average
Shares Issuable Under Exercise Price Per
Accelerated Options Share
----------------------------------------------
Non-employee directors 70,000 $10.54
Executive officers as a group 422,550 $11.03
Other employees 405,600 $11.05
----------------------------------------------
898,150 $11.00
----------------------------------------------
The acceleration of vesting of these out-of-the money options was
undertaken primarily to eliminate any future compensation expense we would
otherwise recognize in our income statement with respect to these options with
the implementation of SFAS 123 (revised 2004), Share-Based Payments ("SFAS
123(R)"), which is a revision of SFAS 123, Accounting for Stock Based
Compensation ("SFAS 123"). SFAS 123(R) is effective July 1, 2005. We estimate
this compensation expense, before tax, would have totaled approximately $4,900
(approximately $2,100 in 2006, $1,400 in 2007, $800 in 2008 and $600 in 2009)
based on value calculations using the Black-Scholes methodology.
If compensation cost for stock-based compensation plans had been
determined under SFAS 123, stock option compensation expense, pro forma net
income and basic and diluted earnings per common share for 2005, 2004 and 2003
assuming all options granted were valued at fair value using the Black-Scholes
method, would have been as follows:.
Year Ended June 30
2005 2004 2003
----------------------------------------------------------
Net income (loss) as reported............... $20,204 $(38,190) $ (24,894)
Deduct: Total stock-based compensation
expense determined under fair value
based method, net of related tax
effect.......................... (4,856) (1,511) (3,089)
----------------------------------------------------------
Pro forma net income (loss)................. $15,348 $(39,701) $(27,983)
==========================================================
Earnings (loss) per share:
Basic - as reported................... $ 0.54 $ (1.03) $ (0.67)
Basic - pro forma...................... $ 0.41 $ (1.07) $ (0.76)
Diluted - as reported.................. $ 0.54 $ (1.03) $ (0.67)
Diluted - pro forma.................... $ 0.41 $ (1.07) $ (0.76)
See Note 11 for a discussion of the assumptions underlying the pro
forma calculations above.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 123 (R). 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. SFAS 123(R) allows several adoption alternatives,
including retroactively applying the standard, or applying it prospectively. We
plan to adopt this standard using the modified prospective basis.
The impact of the 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, the market value of our common stock, as well as the assumptions within
the Black-Scholes methodology used to value them. If applied to 2005, 2004 and
2003, the impact of that standard would have materially approximated that of
SFAS 123 as presented in Note 1 (reducing earnings per diluted share in 2005,
2004 and 2003 by $0.13, $0.04 and $0.09, respectively.) SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow. Based on historical experience, we
do not expect the impact of adopting SFAS 123(R) to be material to our reported
cash flows.
F-13
In November 2004, the FASB issued SFAS No. 151, Inventory Costs--an
Amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"), which is the result of the
FASB's efforts to converge U.S. accounting standards for inventory with
International Accounting Standards. SFAS No. 151 requires abnormal amounts of
idle facility expense, freight, handling costs, and wasted material to be
recognized as current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not expect the
adoption of SFAS No. 151 to have a material impact on our results of operations.
NOTE 3: CHANGES IN ACCOUNTING
Planned Maintenance Activities
Through June 30, 2003, we accounted for major planned maintenance
activities at our specialty fiber 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 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 effect of applying the new method for the year ended June 30, 2004
was a decrease in net loss of $349 or $0.01 per share. This decrease in net loss
is composed of a profit increase of $9,079 pre-tax ($5,720 net-of-tax reported
as a cumulative effect of accounting change), offset by $8,525 ($5,371
net-of-tax) in additional cost of goods sold compared to what would have been
expensed in fiscal 2004 under the accrue in advance methodology. The total cost
of the related planned maintenance activity performed in 2004 was $9,582.
The following table reflects the restated net income as if the change
in accounting for planned maintenance activities were handled retroactively.
Year Ended June 30
2005 2004 2003
---------------------------------------------
Net income (loss) as reported.......................... $20,204 $(38,190) $(24,894)
Deduct: Cumulative effect of change in accounting for
planned maintenance costs, net of tax............. - 5,720 -
Add: Major planned maintenance costs accrued and
deducted from net income, net of tax.............. - - 1,381
---------------------------------------------
Proforma net income (loss)............................. $20,204 $(43,910) $(23,513)
=============================================
Earnings (loss) per share as reported:
Basic......................................... $ 0.54 $ (1.03) $ (0.67)
Diluted....................................... $ 0.54 $ (1.03) $ (0.67)
Pro forma earnings (loss) per share
Basic......................................... $ 0.54 $ (1.18) $ (0.64)
Diluted....................................... $ 0.54 $ (1.18) $ (0.64)
NOTE 4: IMPAIRMENT OF LONG-LIVED ASSETS
Glueckstadt, Germany Facility
In January 2005, we announced our decision to discontinue producing
cotton linter pulp at our Glueckstadt, Germany facility. Our decision was due to
a combination of factors that had increased the plant's costs to a level at
which it is uneconomical to continue operations. The most significant factor
impacting cost at the site was the substantial strengthening of the euro over
calendar 2003 and 2004. Specialty fibers are normally priced and sold in U.S.
F-14
dollars around the world. As a majority of Glueckstadt's costs are denominated
in euros, this substantial strengthening 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 operated at 55% of capacity during calendar year 2004.
After careful consideration of all the options available, management
reached the decision to close the Glueckstadt facility and consolidate
production at our two other cotton-based specialty fibers manufacturing
facilities. We expect production at Glueckstadt will cease during the second
quarter of fiscal 2006. We believe that closing our Glueckstadt facility and
transferring a majority of its cotton-based specialty fiber production to our
Memphis, Tennessee and Americana, Brazil facilities later this calendar year
will yield a more competitive cost structure.
During fiscal 2005 we evaluated the recoverability of the long-lived
assets at the Glueckstadt facility in accordance with SFAS 144, Accounting for
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). Based on this
evaluation, we determined that these long-lived assets, with a carrying amount
of $15,280 (net of $2,977 of foreign currency translation adjustment), were
impaired and wrote them down to their estimated fair value of $2,954, resulting
in an impairment charge of $12,326. This fair value was based on the remaining
service potential of the facility through its expected closure in the second
quarter of fiscal 2006, plus the estimated salvage value, as we do not believe
the facility can be utilized for its intended purpose as it is uneconomical for
us or a third party to continue operations. The fair value analysis used a
discount rate incorporating time value of money, expectations about timing and
amount of future cash flows, and an appropriate risk premium. We expect to
eventually sell the land, buildings and equipment.
Cork, Ireland Facility
During fiscal 2004, we initiated the discontinuation of production of
nonwoven materials at our Cork, Ireland facility. Due to excess production
capacity around the globe, we had 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 was at our other locations.
Therefore, management made the decision to close the Cork facility and
consolidate production at our three other nonwoven materials manufacturing
facilities. Production at Cork ceased during July of 2004. Closing our Cork
facility reduced our nonwovens capacity by about 10%.
In accordance with SFAS 144 we evaluated the value of the property,
plant, and equipment associated with the Cork facility. Under this guidance, we
determined that those long-lived assets, with a carrying amount of $48,359 (net
of $6,914 of foreign currency translation adjustment), were impaired and wrote
them down to their estimated fair value of $5,409, resulting in an impairment
charge of $42,950 during fiscal 2004. Fair value was based on the estimated
salvage value of the Cork facility as we did not believe the facility could be
utilized for its intended purpose. The salvage value incorporated assumptions
that marketplace participants would likely use in estimating the fair value of
the Cork facility
Subsequent to the July 2004 closure of the facility, we began to
actively market the building and equipment with carrying values of $4,494 and
$1,505, respectively, and reclassified them as assets held for sale. In late
December of 2004, we completed the sale of the building to the Port of Cork
Company for $13,408. Although the carrying values of these assets were based on
appraisals and available market information at the time of the impairment in
March of 2004, the purchase of this building for strategic purposes by the Port
of Cork Company was not contemplated in those appraisals. As a result of the
sale and disposition of the building and equipment for net proceeds of $13,134
(net of $1,897 of decommissioning and selling costs), we recognized a net gain
of $7,203 ($4,682 net of tax and $0.12 per share net of tax) during fiscal 2005.
The gain is presented under the "Gain on sale of assets held for sale" caption
in the statement of operations.
Lumberton, North Carolina Facility
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 over the five years leading up to
the closure. We have continued to produce cosmetic cotton products at the
Lumberton site. Accordingly, management evaluated the ongoing value of the
property, plant and equipment associated with the Lumberton facility. Using the
guidance issued under SFAS 144, management determined that long-lived assets
(property, plant and equipment) with a carrying amount of $36,462 were impaired
and wrote them down to their estimated fair value of $7,866. The resulting
impairment charge of $28,596 is reflected in the statement of operations during
2003. Fair value was based on the present value method of estimating future cash
flows and incorporated assumptions that marketplace participants would likely
use in estimating fair value for the Lumberton facility, using a discount rate
incorporating time value of money, expectations about timing and amount of
future cash flows, and an appropriate risk premium.
F-15
Other Facilities
During fiscal 2004, we also impaired certain equipment and other
capitalized costs at specialty fibers facilities in the United States. These
assets consisted of equipment that was replaced with more cost effective
technology, engineering costs and capitalized interest for a long delayed
project, and assets related to idled equipment. In evaluating these assets with
a total carrying amount of $3,209, it was determined that the carrying value was
not recoverable and the estimated fair value was $251. Management recognized an
impairment charge of $2,958.
During fiscal 2003, we decided to abandon certain waste removal
equipment at airlaid nonwovens facilities, which had a carrying value of $2,859.
Management has determined that the estimated fair value of the abandoned
equipment, which did not operate as intended, was $104. The resulting impairment
charge of $2,755 is reflected in the statement of operations during 2003. We
also decided to impair an idled airlaid nonwovens machine after determining the
additional capacity will not be needed in the foreseeable future. Therefore, we
fully impaired the asset with a carrying value of $4,767.
Additionally, during fiscal 2003 we impaired certain engineering costs
incurred for use at the Florida specialty fibers plant. The carrying value of
these engineering costs was $385. Since we abandoned the portion of a project
that relied on these drawings, the asset had no remaining value and was fully
impaired.
NOTE 5: 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 do not expect to incur any further expenses related to this program.
During the first quarter of fiscal 2004, we entered into a second phase
of our restructuring program. This program was a continuation of the program
initiated in the fourth quarter of fiscal 2003 and enabled us to improve our
operating results through reduced salaries, benefits, other employee-related
expenses and operating expenses. As a result of this restructuring, 78 positions
were eliminated. These positions included manufacturing, sales, product
development and administrative functions throughout the organization. We expect
payments related to this phase of the restructuring program to be completed
during the first quarter of fiscal 2006 and expect costs to total approximately
$3,447.
During the fourth quarter of fiscal 2004, we announced the cessation of
production of nonwoven materials at our Cork, Ireland facility. We continued
to meet customer needs for nonwoven materials by producing these
products at our facilities in Delta, British Columbia, Canada; Steinfurt,
Germany; and Gaston County, North Carolina. This consolidation reduced working
capital needs by $4,000, and will enable us to improve our overall
nonwoven materials operating results by about $7,000 annually. We began
realizing the full impact of these savings during the third quarter of fiscal
2005. The closure of the Cork facility and related reorganization of the
nonwoven materials organization resulted in the termination of 89 employees and
expenses totaling $3,046. We do not expect to incur any further expenses related
to this program.
During January 2005, we announced that we will discontinue production
of cotton-based specialty fibers at our Glueckstadt, Germany facility during the
second quarter of fiscal 2006. We plan to continue to meet customer needs for
cotton-based specialty fibers by producing these products at our facilities in
Memphis, Tennessee and Americana, Brazil. We expect this consolidation will
enable us to improve our overall specialty fibers operating results by about
$9,000 annually and reduce working capital needs by approximately $6,000. The
closure of the Glueckstadt facility will result in the termination of 103
employees, and we expect restructuring expenses related to the closure to be
approximately $6,500 over the remainder of fiscal 2005 and 2006. We expect
payments related to this restructuring program to extend through the end of
fiscal 2006.
F-16
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 year
ended June 30, 2005.
Year Ended
June 30, 2005
-------------------------------------
Accrual Accrual
Balance Impact Balance as
as of Of of Program Total
June 30, Additional Foreign June 30, Charges Estimated
2004 Charges Currency Payments 2005 to Date Charges
2003 Restructuring Program-Phase 1
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers............... $ - $ - $ - $ - $ - $ 1,656 $ 1,656
Nonwoven materials............. - - - - - 87 87
Other miscellaneous expenses
Specialty fibers............... - 111 - (111) - 901 901
Nonwoven materials............. - - - - - 83 83
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 1 - 111 (111) - 2,727 2,727
2003 Restructuring Program-Phase 2
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers................. 263 278 5 (533) 13 1,884 1,894
Nonwoven materials............... - - - - - 39 39
Corporate........................ 121 - - (121) - 1,514 1,514
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 2 384 278 5 (654) 13 3,437 3,447
2004 Restructuring Program
------------------------------------------------------------------------------------------------------ ------------------------
Nonwoven materials
Severance and employee
Benefits....................... 1,750 1,007 16 (2,773) - 2,774 2,774
Other miscellaneous expenses..... - 232 - (232) - 272 272
---------------------------------------------------------------- ------------------------
Total 2004 Program.................. 1,750 1,239 16 (3,005) - 3,046 3,046
2005 Restructuring Program
------------------------------------------------------------------------------------------------------ ------------------------
Specialty fibers
Severance and employee
Benefits....................... - 2,472 (161) - 2,311 2,472 5,300
Other miscellaneous expenses..... - 479 (1) (331) 147 479 1,200
---------------------------------------------------------------- ------------------------
Total 2005 Program.................. - 2,951 (162) (331) 2,458 2,951 6,500
---------------------------------------------------------------- ------------------------
Total All Programs.................. $2,134 $ 4,579 $(141) $(4,101) $2,471 $12,161 $15,720
================================================================ ========================
NOTE 6: INVENTORIES
Components of inventories
June 30
2005 2004
------------------------------
Raw materials............................. $ 33,433 $ 28,073
Finished goods............................ 53,353 57,118
Storeroom and other supplies.............. 21,109 22,248
------------------------------
$107,895 $107,439
==============================
F-17
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment
June 30
2005 2004
------------------------------
Land and land improvements................. $ 16,521 $ 17,243
Buildings.................................. 125,917 132,504
Machinery and equipment.................... 717,014 713,937
Construction in progress................... 43,518 19,929
------------------------------
902,970 883,613
Accumulated depreciation................... (377,039) (345,981)
------------------------------
$525,931 $537,632
==============================
NOTE 8: ACCRUED EXPENSES
Components of accrued expenses
June 30
2005 2004
------------------------------------
Income taxes........................... $ 1,981 $ 4,748
Interest............................... 11,136 11,130
Property taxes......................... 3,389 2,819
Restructuring.......................... 2,471 2,134
Retirement plans....................... 5,924 5,825
Salaries and incentive pay............. 6,855 3,284
Customer incentive programs............ 4,017 5,641
Vacation pay........................... 4,786 4,546
Other.................................. 7,842 9,958
------------------------------------
$48,401 $50,085
====================================
NOTE 9: DEBT
Components of long-term debt
June 30
2005 2004
-------------------------------
Senior Notes due:
2013................................. $200,000 $200,000
Senior Subordinated Notes due:
2008.................................. 79,832 99,737
2010.................................. 152,558 153,061
Credit Facilities........................ 99,525 144,250
Other.................................... 5,000 7,000
-------------------------------
536,915 604,048
Less current portion .................... 1,376 16,972
-------------------------------
$535,539 $587,076
===============================
Senior Notes
On September 22, 2003, we placed privately $200,000 in aggregate
principal amount of 8.5% senior notes due October 1, 2013 (the "2013 Notes").
The notes are unsecured obligations and are senior to any of our subordinated
debt. The notes are guaranteed by our direct and indirect domestic subsidiaries
that are also guarantors on our senior secured indebtedness. The senior notes
are redeemable at our option, in whole or part, at any time on or after October
1, 2008, at redemption prices varying from 104.25% of principal amount to 100%
of principal amount on or after October 1, 2011, together with accrued and
unpaid interest to the date of redemption. We used the net proceeds from the
private placement to redeem our $150,000 senior subordinated notes due 2005,
make a permanent reduction of $40,000 to our revolving credit facility and pay
the related transaction costs. Total costs for the issuance of these notes were
$5,274 and will be amortized over the life of the senior notes using the
effective interest method. On September 22, 2003, we called the senior
subordinated notes due in 2005. These notes were redeemed on October 22, 2003.
On December 18, 2003, we completed our offer to exchange the privately placed
unregistered senior notes for debt securities of like principal amount of senior
notes that have been registered under the Securities Act of 1933, as amended.
F-18
During fiscal 2004, $3,300 was expensed related to the early
extinguishment of the $150,000 senior subordinated notes due 2005. These
expenses included a $2,115 call premium and $1,185 related to the write-off
of deferred financing costs.
Senior Subordinated Notes
During July 1996, we completed a public offering of $100,000 principal
amount of 9.25% unsecured Senior Subordinated Notes due September 15, 2008 (the
"2008 Notes"). These notes are redeemable at our option, in whole or in part, at
any time after September 15, 2004, at a redemption price of 100% of principal
amount together with accrued and unpaid interest to the date of redemption.
On February 21, 2005, we called $20,000 of the 2008 Notes. These 2008
Notes were redeemed on March 23, 2005. As a result of this redemption we
wrote off a portion of the deferred financing costs and unamortized discount
related to the redeemed bonds. During fiscal 2005, we recorded non-cash
expenses of $242 related to the early extinguishment of debt.
On October 16, 2003, we successfully completed a solicitation of
consents from holders of our 2008 Notes to amend this indenture to conform
certain provisions of the 2008 Notes to the provisions in our notes due in 2010
and to current market practice. This amendment allowed us to refinance our
revolving credit facility in the fall of calendar 2003 (discussed later in this
note).
During June 1998, we completed a private placement of $150,000
principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010.
In fiscal 1999, we exchanged these outstanding notes for public notes with the
same terms. These notes are redeemable at our option, in whole or in part, at
any time on or after October 15, 2003, at redemption prices varying from 104% of
principal amount to 100% of principal amount on or after October 15, 2006,
together with accrued and unpaid interest to the date of redemption.
Under the indentures governing our senior subordinated notes, as well
as the indenture that governs our senior notes, our ability to incur additional
debt is limited. Under these indentures, additional debt must be incurred as
so-called "ratio debt" or, alternatively, must be permitted in form and amount
as "Permitted Indebtedness." In order to incur ratio debt, a specified
consolidated fixed charge coverage ratio (as defined in the indentures) must
equal or exceed 2:1 (measured on a rolling four-quarter basis). Falling below
the 2:1 ratio does not breach any covenant or constitute an event of default
under any of our debt agreements. Currently, we exceed the required 2:1 ratio
and as a result, are not limited to the "ratio debt" restrictions under the
indentures governing the senior notes and the senior subordinated notes. While
we can offer no assurance in this regard, we believe that our operating results
and recent reductions in our outstanding debt will enable us to continue to
exceed this ratio.
Interest Rate Swap
In May 2001, we entered into an interest rate swap on $100,000 of 8%
fixed rate notes maturing in October 2010. The swap converted interest payments
from a fixed rate to a floating rate of LIBOR plus 1.97%. This arrangement
qualified as a fair value hedge under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. As such, the net effect from the interest
rate swap was recorded as part of interest expense. On October 15, 2003, the
swap counter party exercised its right to change the termination date of the
swap from October 15, 2010 to October 15, 2003. By exercising this right, the
swap counter party paid us $4,000 as an early termination fee, which is being
amortized as a reduction to interest expense through October 15, 2010. At June
30, 2005 and 2004 the unamortized portion of the termination fee was recorded as
an increase in debt of $3,024 and $3,595, respectively. During the year ended
June 30, 2005 and 2004, the swap reduced our interest expense by $571 and
$1,848, respectively and will continue to reduce interest expense through the
amortization period of the termination fee.
Revolving Credit Facility
On November 5, 2003, we established a $220,000 senior secured credit
facility (the "credit facility"), comprised of a $70,000 revolving credit
facility (the "revolver") maturing on September 15, 2008 and a $150,000 term
loan (the "term loan") with serial maturities through April 15, 2010. On March
15, 2005, we amended the credit facility in order to, among other things, lower
the applicable interest rate and modify the maturity schedule. Effective March
15, 2005 the interest rate applicable to borrowings under the term loan
decreased 50 basis points. The amendment also reduced serial maturities to $249
quarterly through March 31, 2010 with final maturity remaining on April 15,
2010.
The term loan also requires an annual excess cash flow payment (as
defined under the credit agreement). Based on fiscal 2005 results, we are
required to make an excess cash flow payment during fiscal 2006 of $378.
During fiscal 2005, we made an excess cash flow payment of $15,349 based on
fiscal 2004 performance and additional voluntary payments of $28,401. Total
payments on the term loan, including required principal payments, during fiscal
2005 were $45,125.
F-19
We had $99,525 outstanding on this facility ($99,125 on the term loan
and $400 on the revolving credit facility) at an average variable interest rate
of 5.3% as of June 30, 2005. The interest rate applicable to borrowings under
the revolver is the agent's prime rate plus 1.50% to 1.75%, or a LIBOR-based
rate ranging from LIBOR plus 2.50% to LIBOR plus 3.25%. Effective March 15,
2005, the interest rate applicable to the term loan is the agent's prime rate
plus 1.00% or a LIBOR-based rate plus 2.00%. The credit facility is secured by
substantially all of our assets located in the United States.
The credit facility contains covenants customary for financing of this
type. The financial covenants include: maximum ratio of consolidated net
senior secured debt to consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA"), minimum ratio of consolidated EBITDA
to consolidated interest expense and minimum ratio of consolidated EBITDA minus
capital expenditures and taxes to consolidated fixed charges; as well as
limitations on capital expenditures, share repurchases and dividend payments.
During fiscal 2005, we were in compliance with these financial covenants.
As of June 30, 2005, we had $65,580 of borrowing capacity on our
revolving credit facility. The portion of this capacity that we could borrow
on a particular date will depend on our financial results and ability to
comply with certain borrowing conditions under the revolving credit facility.
The commitment fee, on the unused portion of the revolving credit facility,
ranges from 0.40% to 0.50% per annum. Total costs for the issuance of
the new facility were approximately $3,300 and are being amortized to
interest expense using the effective interest method over the life of the
facility. The unamortized issuance costs are presented under the
"Intellectual property and other, net" caption on the balance sheet. During
fiscal 2004, $1,640 was expensed related to the early extinguishment of the
previous credit facility.
During fiscal 2005, $516 was expensed for costs incurred related to the
amendment of the senior secured credit facility and other financing activities.
These expenses are included in the foreign exchange and other classification in
the statement of operations.
Other Credit Facilities
In addition, we have a credit facility in Germany providing for
availability of $7,418. Letters of credit issued through this credit facility of
$2,461 were outstanding at June 30, 2005. The amount available for borrowing
under this facility was $4,957 at June 30, 2005.
Aggregate maturities of long-term debt are as follows: 2006-$1,376,
2007-$5,998, 2008-$998, 2009-$80,998, 2010-$95,157 and thereafter $350,000. The
2006 maturities consist of the term loan serial maturities of $998 and an excess
cash flow payment of $378. Terms of long-term debt agreements require compliance
with certain covenants including interest coverage ratios, and limitations on
restricted payments and levels of indebtedness. At June 30, 2005, the amount
available for the payment of dividends and/or the acquisition of treasury stock
was limited. Under our most restrictive debt agreements the amount available for
the payment of dividends and/or the acquisition of treasury stock will depend on
our financial results and ability to comply with certain conditions.
Total cash interest payments for the years ended June 30, 2005, 2004
and 2003 was $44,358, $47,783 and $49,225, respectively.
We had no off-balance sheet financing except for operating leases as
disclosed in Note 10.
NOTE 10: LEASES
Capital Leases
In October 2001, we entered into capital lease agreements for certain
airlaid nonwovens plant equipment. The total cost of the assets covered by these
agreements was $4,284. As of June 30, 2005 the accumulated depreciation on these
assets was $589. At June 30, 2005, our future minimum lease payments, including
interest totaling $302, for these assets were as follows: 2006--$834;
2007--$717; 2008--$449; 2009--$369; 2010--$0. Amortization of assets recorded
under capital lease agreements is included in depreciation expense.
Operating Leases
We lease office and warehouse facilities and equipment under various
operating leases. Operating lease expense was $3,371, $3,960 and $4,463 during
the years ended June 30, 2005, 2004 and 2003, respectively. The commitments
under the operating leases at June 30, 2005 were as follows: 2006--$1,615;
2007--$1,019; 2008--$346; 2009--$115; 2010--$18 and thereafter--$0.
F-20
NOTE 11: COMMON STOCKHOLDERS' EQUITY
Stock Compensation Plans
Our stock option plans provide for the granting of either incentive or
nonqualified stock options to employees and non-employee directors. Options are
subject to terms and conditions determined by the Compensation Committee of the
Board of Directors, and generally are exercisable in increments of 20% per year
beginning one year from date of grant and expire ten years from date of grant.
On June 7, 2005, the Compensation Committee of the Board of Directors
of Buckeye Technologies Inc. approved the acceleration of vesting of
out-of-the-money options with an exercise price greater than $8.32 to purchase
shares of common stock of Buckeye Technologies Inc. that remained unvested at
June 30, 2005. Options to purchase 898,150 shares of common stock were subject
to this acceleration (see Note 1).
We use the Black-Scholes option-pricing model to calculate the fair
value of options for our pro forma disclosures. We are required to disclose the
pro forma effect of accounting for stock options using such a valuation method
for all options granted in 1996 and thereafter (see Note 1). The key assumptions
for this valuation method include the expected life of the option, stock price
volatility, risk-free interest rate, dividend yield and exercise price. Many of
these assumptions are judgmental and highly sensitive in the determination of
pro forma compensation expense. Following is a table of the key assumptions used
in the option valuation calculations for the options granted in the three years
ended June 30, and a discussion of our methodology for developing each of the
assumptions used in the valuation model:
2005 2004 2003
---------------------------------------------------
Expected lives 5.9 years 7.8 years 5 years*
Expected volatility 49% 49% 49%
Risk-free interest rate 3.7% 4.1% 3.9%
* Grant only made to non-employee directors.
Expected Lives - This is the period of time over which the options granted
are expected to remain outstanding. Options granted have a maximum term of ten
years. We examine actual stock option exercises to determine the expected life
of the options. In general, options granted to non-employee directors have an
expected term of 5 years and options granted to employees have an expected term
of 8 years. An increase in the expected term will increase compensation expense.
Expected Volatility - This is a measure of the amount by which a price has
fluctuated or is expected to fluctuate. We use actual changes in the market
value of our stock to calculate the volatility assumption. We calculate daily
market value changes from the date of grant over a past period representative of
the expected life of the options to determine volatility. An increase in the
expected volatility will increase compensation expense.
Risk-Free Interest Rate - This is the average of the U.S. Treasury rates
for the month of the grant having a term equal to the expected life of the
option. An increase in the risk-free interest rate will increase compensation
expense.
Dividend Yield - We did not make any dividend payments during the years
ended June 30, 2005, 2004 and 2003. We have no plans to pay dividends in the
foreseeable future. An increase in the dividend yield will decrease compensation
expense.
The following table summarizes information about our stock option plans for
the years ended June 30:
2005 2004 2003
--------------------------- ------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------------
Outstanding at beginning of year 5,046,750 $13.35 4,833,950 $13.60 4,842,950 $13.65
Granted at market 100,000 10.57 845,000 10.72 40,000 6.64
Granted below market - - 36,000 7.60 - -
Exercised (270,800) 8.22 (318,200) 8.04 - -
Terminated (110,800) 13.86 (350,000) 14.64 (49,000) 12.53
--------------------------- ------------------------- --------------------------
Outstanding at end of year 4,765,150 $13.57 5,046,750 $13.35 4,833,950 $13.60
=========================== ========================= ==========================
Exercisable at end of year 4,716,350 $13.64 3,638,484 $14.13 3,744,617 $13.91
Using the Black-Scholes valuation method calculated under the
assumptions indicated above, the weighted-average fair value of the grants at
market was $5.32, $6.24 and $3.13 per option in 2005, 2004 and 2003,
respectively. The weighted-average fair value of the grants below market was
$7.19 in 2004.
F-21
There were 319,200, 308,400, and 839,400 shares reserved for grants of
options at June 30, 2005, 2004 and 2003, respectively. The following summary
provides information about stock options outstanding and exercisable at June 30,
2005:
Outstanding Exercisable
-------------------------------------------------- ------------------------
Average Average Average
Exercise Remaining Life Exercise
Exercise Price Options Price (Years) Options Price
------------------------------------------------------------------------------------------------------------------
$ 6.50-$12.00.............. 2,445,150 $10.40 6.5 2,396,350 $10.46
$12.01-$18.00.............. 2,157,792 16.55 2.9 2,157,792 16.55
$18.01-$24.00.............. 162,208 21.81 3.7 162,208 21.81
------------------------------------------------------------------------------------------------------------------
Total 4,765,150 $13.57 4.8 4,716,350 $13.64
------------------------------------------------------------------------------------------------------------------
Stock options that could potentially dilute basic earnings per share in
the future, which were not included in the fully diluted computation because
they would have been anti-dilutive, were 4,245,071, 3,801,640, and 4,833,950 for
the years ended June 30, 2005, 2004 and 2003, respectively. In addition, during
2004 even those shares that ordinarily would have been included in diluted
shares were not, due to the net loss incurred during 2004, as the inclusion of
dilutive securities in the denominator for losses would have been anti-dilutive.
Restricted Stock Plan
In August 1997, the Board of Directors authorized a restricted stock
plan and set aside 800,000 treasury shares to fund this plan. We awarded 8,898,
8,019 and 24,578 restricted shares during fiscal years 2005, 2004 and 2003,
respectively. At June 30, 2005, 98,356 restricted shares had been awarded since
inception of the plan.
Treasury Shares
The Board of Directors has authorized the repurchase of 6,000,000
shares of common stock. Repurchased shares will be held as treasury stock and
will be available for general corporate purposes, including the funding of
employee benefit and stock-related plans. No shares were repurchased during
2005, 2004 and 2003. A total of 5,009,300 shares have been repurchased through
June 30, 2005.
NOTE 12: COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share for the
years June 30:
------------------------------------------
2005 2004 2003
------------------------------------------
Net income (loss)...................................... $20,204 $(38,190) $(24,894)
==========================================
Weighted-average shares of common stock outstanding.... 37,477 37,075 36,965
Effect of diluted shares............................... 121 - -
------------------------------------------
Weighted-average common and common equivalent
shares outstanding................................ 37,598 37,075 36,965
==========================================
Earnings (loss) per share before cumulative effect of
change in accounting
Basic......................................... $0.54 $(1.18) $(0.67)
Diluted....................................... $0.54 $(1.18) $(0.67)
Cumulative effect of change in accounting
Basic......................................... - $ 0.15 -
Diluted....................................... - $ 0.15 -
Earnings (loss) per share
Basic......................................... $0.54 $(1.03) $(0.67)
Diluted....................................... $0.54 $(1.03) $(0.67)
F-22
NOTE 13: INCOME TAXES
The components of income (loss) before income taxes and cumulative effect of
change in accounting were taxed under the following jurisdictions:
Year Ended June 30
2005 2004 2003
---------------------------------------------------
Domestic.................................... $18,881 $ (76,210) $ (54,343)
Foreign..................................... 833 6,103 12,327
---------------------------------------------------
Loss before income taxes and cumulative
effect of change in accounting............. $19,714 $ (70,107) $ (42,016)
===================================================
Income tax expense (benefit) before cumulative effect of change in accounting:
Year Ended June 30
2005 2004 2003
---------------------------------------------------
Current tax expense (benefit):
Federal................................ $ 503 $(2,676) $(6,630)
Foreign................................ 185 4,695 2,958
State and other........................ 41 (876) 39
---------------------------------------------------
Current tax expense (benefit) 729 1,143 (3,633)
Deferred tax expense (benefit):
Federal................................ 7,204 (24,861) (14,592)
Foreign................................ (2,724) (1,057) 1,972
State and other........................ 515 (1,422) (869)
---------------------------------------------------
Deferred tax expense................... 4,995 (27,340) (13,489)
Change in tax reserves (6,214) - -
===================================================
Income tax benefit.......................... $ (490) $(26,197) $(17,122)
===================================================
The difference between reported income tax expense (benefit) and a tax
determined by applying the applicable U.S. federal statutory income tax rate to
income (loss) before income taxes and the cumulative effect of the change in
accounting is reconciled as follows:
Year Ended June 30
2005 2004 2003
----------------------------------------------------------------------------
Expected tax expense (benefit)..............$ 6,900 35.0% $(24,537) 35.0% $(14,706) 35.0%
Extraterritorial income exclusion........... (1,034) (5.2) (1,155) 1.6 (1,171) 2.8
Effect of foreign operations................ (809) (7.6) (713) 1.0 (1,046) 2.5
Change in tax reserves...................... (6,214) (31.5) - - - -
Change in valuation allowance............... 1,145 9.3 1,746 (2.5) 1,529 (3.6)
Currency translation adjustment............. (1,042) (5.3) - - - -
State taxes and other, net.................. 564 2.8 (1,538) 2.3 (1,728) 4.1
----------------------------------------------------------------------------
Income tax benefit.......................... $ (490) (2.5)% $(26,197) 37.4% $(17,122) 40.8%
============================================================================
During the fourth quarter of fiscal 2005, the IRS completed an audit of
our tax return for fiscal year 2002. With the conclusion of this audit, we
released the reserve on a tax deduction we claimed relating to our investment in
our former facility in Cork, Ireland and recorded a non-cash tax benefit of
$5,481 to our provision for income taxes. Excluding this benefit, our effective
tax rate for 2005 would have been approximately 25%. The additional improvement
in our effective tax rate in 2005 was the result of a number of factors
including:
o We continue to receive benefits from the extraterritorial income
exclusion. Although the dollar magnitude of the benefit declined
slightly in fiscal 2005, it had a more significant impact on the
effective rate due to the absolute value of our earnings before taxes.
o A favorable foreign currency translation adjustment of $2,977 was
recorded on the impairment of the long-lived assets at our Glueckstadt
facility. The taxable loss in Germany was higher since it did not
include this adjustment, resulting in a tax benefit of $1,042.
o We recorded a tax benefit of $733 resulting from a net change in our
contingency reserves.
F-23
Effective for transactions occurring after September 30, 2000 the
Internal Revenue Service enacted the Extraterritorial Income Exclusion. The
income exclusion provides for a reduction of gross income by a percentage of
qualifying foreign trade income. In order to comply with international trade
rules, the American Jobs Creation Act of 2004 repealed the current tax treatment
for extraterritorial income. Effective for transactions entered into after
December 31, 2004, the extraterritorial income exclusion is subject to a
phase-out which will be completed in calendar 2007. For transactions during
calendar years 2005 and 2006, the income exclusion will be 80% and 60% of the
exclusion otherwise allowed, respectively. Our extraterritorial income exclusion
benefit was reduced in fiscal 2005 due to this phase-out and will continue to
decrease through the final phase-out during fiscal 2007.
In October 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. The Act provides a tax deduction for domestic manufacturers.
The deduction will be phased in during fiscal years 2006 through 2010. We are in
the process of evaluating the potential impact of this deduction to our
business. The benefit from this deduction in calendar 2005 is expected to be
immaterial. In addition, the Act also provides a temporary incentive for US
multinationals to repatriate certain foreign earnings at an effective tax rate
of 5.25%. Based on our assessment of the repatriation provision, we do not plan
on repatriating additional funds and will continue our current policy of
permanently reinvesting all foreign earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are as follows:
June 30
2005 2004
----------------------------------
Deferred tax liabilities:
Property, plant and
equipment............. $ (87,580) $(74,808)
Inventory............... (467) (1,382)
Other................... (18,231) (14,090)
----------------------------------
Total deferred tax liabilities (106,278) (90,280)
Deferred tax assets:
Postretirement benefits. 7,036 7,081
Inventory costs......... 943 1,457
Net operating losses.... 50,933 38,233
Nondeductible reserves.. 2,687 2,452
Credit carryforwards.... 10,510 10,243
Other................... 8,906 8,306
----------------------------------
Total deferred tax assets.. 81,015 67,772
Valuation allowances....... (5,813) (4,125)
----------------------------------
Deferred tax assets, net of
valuation allowances..... 75,202 63,647
----------------------------------
Net deferred tax liability. $ (31,076) $(26,633)
==================================
The valuation allowances at June 30, 2005 and 2004 relate specifically
to net operating losses in certain state and foreign operations. Based on the
future reversal of deferred tax liabilities and the actions management has taken
and will continue to take to improve financial performance, management believes
it is more likely than not that the net deferred tax assets recorded at June 30,
2005 will be fully utilized after consideration of the valuation allowance
recorded.
We paid cash income taxes of $3,075 and $3,828 during the year ended
June 30, 2005 and 2004, respectively. We received a net refund of $18,594 during
the year ended June 30, 2003.
At June 30, 2005, we have foreign net operating loss carryforwards of
approximately $60,505, which have no expiration date and federal and state net
operating loss carryforwards of approximately $108,861 and $117,105,
respectively which expire between 2017 and 2025. Additionally, we have a minimum
tax carryforward of $6,648 at June 30, 2005 which has an indefinite life.
NOTE 14: DERIVATIVES
We are exposed to certain market risks as a part of our ongoing
business operations and use derivative financial instruments, where appropriate,
to manage these risks. Derivatives are financial instruments whose value is
derived from one or more underlying financial instruments. Examples of
underlying instruments are currencies, commodities and interest rates.
F-24
With the adoption of SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," in 2001, we record the fair value of all outstanding
derivatives in other assets or other liabilities. Gains and losses related to
non-designated instruments or the ineffective portion of any hedge are recorded
in various costs and expenses, depending on the nature of the derivative.
We do not utilize derivatives for speculative purposes. Derivatives are
transaction specific so that a specific debt instrument, contract or invoice
determines the amount, maturity and other specifics of the hedge. We formally
document all relations between hedging instruments and the hedged items, as well
as its risk-management objectives and strategy for undertaking various hedge
transactions. We formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in the hedged items.
We periodically use derivative instruments to reduce financial risk in
three areas: interest rates, foreign currency and commodities. The notional
amounts of derivatives do not represent actual amounts exchanged by the parties
and, thus, are not a measure of our exposure through our use of derivatives.
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%. The arrangement was
considered a hedge of a specific borrowing, and differences paid and received
under the arrangement were recognized as adjustments to interest expense. This
agreement, which was accounted for as a fair value hedge, decreased interest
expense by $571 and $1,848 for the years ended June 30, 2005 and 2004,
respectively. 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 June 30, 2005 and 2004 the unamortized
portion of the termination fee was recorded as an increase in debt of $3,024 and
$3,595, respectively.
In order to minimize market exposure, at times we use forward contracts
to reduce price fluctuations in a desired percentage of forecasted purchases of
natural gas over a period of generally less than one year. There were no natural
gas contracts outstanding at June 30, 2005 or June 30, 2004 requiring fair value
treatment.
We may be exposed to losses in the event of nonperformance of
counterparties but do not anticipate such nonperformance.
NOTE 15: EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
We have defined contribution retirement plans covering U.S. employees.
We contribute 1% of the employee's gross compensation plus 1/2% for each year of
service up to a maximum of 11% of the employee's gross compensation. During
fiscal 2005 we implemented an additional retirement plan for U.S. employees. We
match employees' voluntary contributions to their retirement accounts up to the
lesser of $2,000 per year or 2% of their eligible gross earnings. Contribution
expense for the retirement plans for the years ended June 30, 2005, 2004 and
2003 was $6,743, $5,744 and $5,824, respectively.
Postretirement Healthcare Plans
We also provide medical, dental, and life insurance postretirement
plans covering certain U.S. employees who meet specified age and service
requirements. Certain employees who met specified age and service requirements
on March 15, 1993 are covered by their previous employer and are not covered by
these plans. Our current policy is to fund the cost of these benefits as
payments to participants as required. We have established cost maximums to more
effectively control future medical costs. Effective July 1, 2002, we amended our
postretirement medical plan to among other things reduce the level of cost
maximums per eligible employee. Effective January 1, 2006, Medicare eligible
retirees age 65 or older will not continue coverage under the self-funded plan.
Instead they will be provided a subsidy towards the purchase of supplemental
insurance. This amendment reduces the accumulated postretirement benefit
obligation by $4,089. The benefit will be amortized over 7.75 years.
The components of net periodic benefit costs are as follows:
Year Ended June 30
2005 2004 2003
-----------------------------------------------------
Service cost for benefits earned............ $ 703 $ 753 $ 660
Interest cost on benefit obligation......... 1,432 1,252 1,132
Amortization of unrecognized prior service credit (1,125) (1,125) (1,125)
(Gain)/loss................................. 389 335 96
-----------------------------------------------------
Total cost.................................. $1,399 $1,215 $ 763
=====================================================
F-25
The following table provides a reconciliation of the changes in the
plans' benefit obligations over the two-year period ending June 30, 2005, and a
statement of the plans' funded status as of June 30, 2005 and 2004:
June 30
2005 2004
-----------------------------------
Change in benefit obligation:
Obligation at beginning of year.......................... $ 22,541 $20,361
Service cost............................................. 703 753
Interest cost............................................ 1,432 1,252
Participant contributions................................ 320 235
Actuarial loss........................................... 2,927 1,231
Benefits paid............................................ (1,267) (1,291)
Amendment................................................ (4,089) -
-----------------------------------
Underfunded status at end of year........................ 22,567 22,541
Unrecognized prior service credit........................ 6,605 3,641
Unrecognized loss........................................ (9,943) (7,407)
Other.................................................... 1,358 1,184
-----------------------------------
Net amount recognized in the consolidated balance sheet....... $ 20,587 $19,959
===================================
The amount recognized in the consolidated balance sheets as of June 30,
2005 and 2004 includes $1,381 and $1,028, respectively which is classified in
accrued expenses as the amount of benefits expected to be paid in fiscal year
2006 and 2005, respectively. Expected annual benefit payments net of retiree
contributions are as follows: 2006 - $1,381; 2007 - $1,572; 2008 - $1,665;
2009 - $1,709; 2010 - $1,697; and 2011 through 2015 - $9,117. The measurement
date used to perform the benefit obligation analysis was May 1, 2005.
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) for the medical
plans is 10.0% for 2006 and is assumed to decrease gradually to 5.0% in 2011 and
remain level thereafter. Due to the benefit cost limitations in the plan, the
health care cost trend rate assumption does not have a significant effect on the
amounts reported.
Weighted average actuarial discount rate assumptions for our U.S.
postretirement healthcare plan, which comprise substantially all of our
projected benefit obligation, are as follows:
2005 2004 2003
-----------------------------------------
Discount rate 5.75% 6.50% 6.25%
We use currently available high quality long-term corporate bond
indices to determine the appropriate discount rate. Due to the long-term nature
of these indexes they have a similar maturity to expected benefit payments.
The Medicare Modernization Act will provide prescription drug benefits
to Medicare eligible participants effective January 1, 2006. Since our plan only
provides a subsidy toward supplemental Medicare insurance coverage, there is no
impact on our plan as a result of the Medicare Modernization Act.
NOTE 16: SIGNIFICANT CUSTOMER
Net sales to The Procter & Gamble Company and its affiliates for the
years ended June 30, 2005, 2004 and 2003 were 14%, 16% and 20%, respectively, of
total net sales. Slightly more than half of these sales were generated by our
nonwoven materials segment with the balance derived from the specialty fibers
segment.
F-26
NOTE 17: 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:
Specialty Nonwoven
Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2005 $513,588 $226,492 $(27,298) $712,782
2004 461,360 217,641 (22,088) 656,913
2003 466,524 195,860 (21,302) 641,082
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2005 64,148 12,963 (19,510) 57,601
2004 28,198 7,580 (54,857) (19,079)
2003 41,935 3,978 (41,417) 4,496
------------------------------------------------------------------------------------------------------------
Depreciation and amortization 2005 28,159 16,904 3,388 48,451
of intangibles 2004 27,662 17,150 3,321 48,133
2003 29,344 16,096 3,589 49,029
------------------------------------------------------------------------------------------------------------
Total assets 2005 467,736 285,338 196,663 949,737
2004 464,294 297,864 208,665 970,823
2003 516,118 360,574 233,963 1,110,655
------------------------------------------------------------------------------------------------------------
Capital expenditures 2005 39,356 3,690 2,283 45,329
2004 28,909 2,662 300 31,871
2003 24,670 3,194 560 28,424
------------------------------------------------------------------------------------------------------------
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. 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 represents the elimination of intersegment
sales included in the specialty fibers reporting segment. We account for
intersegment sales as if the sales were to third parties, that is, at current
market prices. Certain partially impaired assets are included in the total
assets for the reporting segments, but the associated asset impairment charges
are included in the corporate category. These asset impairment charges and the
segments they relate to are discussed further in Note 4. Corporate assets
primarily include cash, goodwill and intellectual property.
Operating income in 2004 for specialty fibers, includes $9,582 of
expense related to an extended maintenance shutdown at our Perry, Florida
facility. This shutdown was the first in five years. Historically, we accrued
expenses related to extended maintenance shutdowns; however, as of July 1, 2003,
we changed our method of accounting from the accrue in advance method to the
direct expense method. Fiscal 2003 includes $1,381 of extended maintenance
shutdown expense that was accrued in advance. See Note 3 of the Consolidated
Financial Statements for further discussion.
Our identifiable product lines are chemical cellulose, customized
fibers, fluff pulp and nonwoven materials. Chemical cellulose is used to impart
purity, strength and viscosity in the manufacture of diverse products such as
food casings, rayon filament, acetate fibers, thickeners for consumer products,
cosmetics and pharmaceuticals. Customized fibers are used to provide porosity,
color permanence, strength and tear resistance in filters, premium letterhead,
currency paper and personal stationery as well as absorbency and softness in
cotton balls and cotton swabs. Fluff pulp and nonwoven materials are used to
increase absorbency and fluid transport in products such as disposable diapers,
feminine hygiene products and adult incontinence products. Additionally,
nonwoven materials are used to enhance fluid management and strength in wipes,
tabletop items, food pads, household wipes and mops. The following provides
relative net sales to unaffiliated customers by product line:
Year Ended June 30
2005 2004 2003
------------------------------------------------
Chemical cellulose......... 32% 32% 30%
Customized fibers.......... 18% 17% 17%
Fluff pulp................. 18% 18% 22%
Nonwoven materials......... 32% 33% 31%
-------------------------------------------------
100% 100% 100%
=================================================
F-27
We are domiciled in the United States and have manufacturing operations
in the United States, Canada, Germany and Brazil. The following provides a
summary of net sales to unaffiliated customers, based on point of origin, and
long-lived assets by geographic areas:
Year Ended June 30
2005 2004 2003
---------------------------------------------------
Net sales:
United States........ $503,367 $436,722 $442,643
Germany.............. 133,088 129,426 116,828
Other................ 76,327 90,765 81,611
---------------------------------------------------
Total net sales............ $712,782 $656,913 $641,082
===================================================
Long-lived assets:
United States....... $482,113 $489,019 $465,967
Canada.............. 125,099 118,639 123,349
Germany............. 59,294 76,572 76,754
Other............... 36,727 24,597 87,645
--------------------------------------------------
Total long-lived assets.... $703,233 $708,827 $753,715
==================================================
For the year ended June 30, 2005, our net sales by destination were
concentrated in the following geographic markets: North America - 42%, Europe -
38%, Asia - 10%, South America - 4% and Other - 6%.
NOTE 18: RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs of $8,785, $9,457 and $9,291 were
charged to expense as incurred for the years ended June 30, 2005, 2004 and 2003,
respectively.
NOTE 19: COMMITMENTS
Under two separate agreements expiring at various dates through
December 31, 2010, we are required to purchase certain timber from specified
tracts of land that is available for harvest. The contract price under the terms
of these agreements is either at the then current market price or at fixed
prices as stated in the contract. At June 30, 2005, estimated annual purchase
obligations were as follows: 2006--$13,000; 2007--$12,500; 2008--$12,500;
2009--$13,000; 2010--$13,500 and thereafter--$7,000. Purchases under these
agreements for the years ended June 30, 2005, 2004 and 2003 were $13,672, $9,166
and $13,450, respectively.
During fiscal 2005 we began the process of upgrading our specialty
fibers facility in Americana, Brazil. We spent approximately $11,300 on the
facility improvements during fiscal 2005 and we plan on completing the project
during the first six months of fiscal 2006. We expect the total cost of the
facility will be approximately $26,000.
NOTE 20: CONTINGENCIES
Our operations are subject to extensive general and industry-specific
federal, state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we will be subject to
increasingly stringent environmental requirements (including standards
applicable to wastewater discharges and air emissions) and will continue to
incur substantial costs to comply with these requirements. Because it is
difficult to predict the scope of future requirements, there can be no assurance
that we will not incur material environmental compliance costs or liabilities in
the future.
The Foley Plant, located in Perry, Florida, discharges treated
wastewater into the Fenholloway River. Under the terms of an agreement with the
Florida Department of Environmental Protection ("FDEP"), approved by the U. S.
Environmental Protection Agency ("the EPA") in 1995, we agreed to a
comprehensive plan to attain Class III ("fishable/swimmable") status for the
Fenholloway River under applicable Florida law (the "Fenholloway Agreement").
The Fenholloway Agreement requires us, among other things, to (i) make process
changes within the Foley Plant to reduce the coloration of its wastewater
discharge, (ii) restore certain wetlands areas, (iii) relocate the wastewater
discharge point into the Fenholloway River to a point closer to the mouth of the
river, and (iv) provide oxygen enrichment to the treated wastewater prior to
discharge at the new location. We have completed the process changes within the
Foley Plant as required by the Fenholloway Agreement. In making these in-plant
process changes, we incurred significant expenditures, and, as discussed in the
following paragraph, we expect to incur significant additional capital
expenditures to comply with the remaining obligations under the Fenholloway
Agreement.
F-28
The EPA objected to the draft National Pollutant Discharge Elimination
System (NPDES) permit prepared in connection with the Fenholloway Agreement and
requested additional environmental studies to identify possible alternatives to
the relocation of the wastewater discharge point. The studies' focus was to
determine if more cost effective technologies are available to address both
Class III water quality standards for the Fenholloway River and the anticipated
the EPA "cluster rules" applicable to wastewater discharges from dissolving
kraft pulp mills, like the Foley Plant. While these studies were being
conducted, implementation of the non in-plant process changes required by the
Fenholloway Agreement was deferred. The studies have been completed, and the EPA
provided comments to FDEP on the steps that would be required to overcome the
EPA's objections to the draft NPDES permit. In August 2005 FDEP redrafted the
Buckeye NPDES permit to address the EPA's comments, and the draft permit is now
undergoing public comment prior to formal Notice of Intent to Issue Permit. The
redrafted permit recognizes that the in-plant process changes already completed
and the additional process changes planned as part of the draft NPDES permit
will satisfy the EPA's cluster rule requirements applicable to dissolving kraft
pulp mills. Based on the requirements of the draft permit, we expect to incur
additional capital expenditures of approximately $60 million over several years,
possibly beginning as early as fiscal year 2007. The amount and timing of these
capital expenditures may vary depending on a number of factors including when
the permit is issued, whether members of the public who are substantially
affected by the permit request a hearing on the proposed permit, and whether any
hearing results in changes to the draft permit.
The EPA and FDEP have listed the Fenholloway River as an impaired water
(not meeting all applicable water quality standards) under the Clean Water Act
for certain pollutants. While the permitting proceedings discussed above are
expected to address these water-quality issues, additional costs could be
imposed for additional water treatment as a result of that listing of the
Fenholloway River as impaired.
The EPA has issued air emission standards applicable to the Foley
Plant. In addition, the EPA has issued boiler air emission standards that are
applicable to the Foley Plant. It is not possible to accurately estimate the
cost of future compliance, but it is possible that substantial capital
expenditures could be required sometime after fiscal year 2007, which could have
a material adverse effect on our business, results of operations or financial
condition.
We are involved in certain legal actions and claims arising in the
ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without a materially adverse effect on
our financial position or results of operations.
NOTE 21: FAIR VALUES OF FINANCIAL INSTRUMENTS
For certain of our financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts payable,
the carrying amounts approximate fair value due to their short maturities. The
fair value of our long-term public debt is based on an average of the bid and
offer prices at short maturities. The fair value of the credit facilities
approximates its carrying value due to its variable interest rate. The carrying
value of other long-term debt approximates fair value based on our current
incremental borrowing rates for similar types of borrowing instruments. The
carrying value and fair value of long-term debt at June 30, 2005 were $538,984
and $535,568, respectively and at June 30, 2004 were $606,748 and $604,045,
respectively.
F-29
NOTE 22: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------------------------------------------------------------------
Year ended June 30, 2005
Net sales.................... $167,323 $180,622 $180,910 $183,927
Gross margin................. 29,629 31,147 30,210 29,070
Operating income............. 18,104 7,423 17,905 14,169
Net income................... 4,415 2,913 4,094 8,782
Earnings per share
Basic.................... $0.12 $0.08 $0.11 $0.23
Diluted.................. $0.12 $0.08 $0.11 $0.23
Year ended June 30, 2004
Net sales.................... $155,831 $160,279 $172,761 $168,042
Gross margin................. 21,591 8,131 21,730 25,989
Operating income (loss)...... 10,401 (9,019) (32,312) 11,851
Income (loss) before cumulative
effect of change in accounting (2,664) (15,151) (27,505) 1,410
Cumulative effect of change in
accounting for planned
maintenance costs 5,720 - - -
Net income (loss)............ 3,056 (15,151) (27,505) 1,410
Earnings (loss) per share before
cumulative effect of change in
accounting
Basic and diluted........ (0.07) (0.41) (0.74) 0.04
Earnings (loss) per share
Basic and diluted........ 0.08 (0.41) (0.74) 0.04
(1) The sums of the quarterly earnings per share do not equal annual amounts
due to differences in the weighted-average number of shares outstanding during
the respective periods.
(2) During the second quarter of fiscal 2005, we incurred impairment charges of
$12,010 related to the announced closure of our Glueckstadt, Germany facility.
See Note 4 for further information.
(3) During the fourth quarter of fiscal 2005, the IRS completed an audit of our
tax return for fiscal year 2002. With the conclusion of this audit, we released
the reserve on a tax deduction we claimed relating to our investment in our
former facility in Cork, Ireland and recorded a non-cash tax benefit of $5,481
to our provision for income taxes. We also recorded an additional tax benefit of
$733 resulting from a net change in our contingency reserves.
(4) During fiscal 2004, we incurred $9,582 of expense related to planned
maintenance activities. The majority of these expenses were incurred during the
second quarter.
(5) During the third quarter of fiscal 2004, we incurred impairment charges of
$43,891 related to the announced closure of our Cork, Ireland facility. See Note
4 for further information.
(6) During the fourth quarter of 2004, we recorded a tax benefit of $773
resulting from changes in estimates used in our prior year end tax provision to
the actual amounts utilized in filing our 2003 tax return.
NOTE 23: 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.
F-30
STATEMENTS OF OPERATIONS
Year ending June 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
------------------------------------------------------------------------------
Net sales................................... $105,112 $426,330 $210,634 $(29,294) $712,782
Cost of goods sold.......................... 86,203 350,516 185,078 (29,071) 592,726
------------------------------------------------------------------------------
Gross margin................................ 18,909 75,814 25,556 (223) 120,056
Selling, research and administrative
expenses, and other...................... 12,219 24,629 8,702 - 45,550
Restructuring and impairment costs.......... - 166 16,739 - 16,905
-------------------------------------------------------------------------------
Operating income (loss)..................... 6,690 51,019 115 (223) 57,601
Other income (expense):
Net interest expense and
amortization of debt.................. (44,997) 118 680 - (44,199)
Other income/(expense), including equity
income in affiliates................. 29,751 20 6,948 (30,407) 6,312
Intercompany interest income/(expense).. 29,727 (22,817) (6,910) - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes ...... 21,171 28,340 833 (30,630) 19,714
Income tax expense/(benefit)................ 967 10,514 (332) (11,639) (490)
-------------------------------------------------------------------------------
Net income (loss)........................... $ 20,204 $ 17,826 $ 1,165 $(18,991) $ 20,204
===============================================================================
STATEMENTS OF OPERATIONS
Year ending June 30, 2004
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $ 88,914 $370,399 $224,150 $(26,550) $656,913
Cost of goods sold.......................... 71,623 330,153 203,521 (25,825) 579,472
-------------------------------------------------------------------------------
Gross margin................................ 17,291 40,246 20,629 (725) 77,441
Selling, research and administrative
expenses, and other....................... 14,753 22,022 7,892 - 44,667
Restructuring and impairment costs.......... 1,596 4,533 45,724 - 51,853
-------------------------------------------------------------------------------
Operating income (loss)..................... 942 13,691 (32,987) (725) (19,079)
Other income (expense):
Net interest expense and
amortization of debt.................. (45,554) (294) (513) - (46,361)
Other income/(expense), including equity
income in affiliates................. (49,884) 279 198 44,740 (4,667)
Intercompany interest income/(expense).. 32,135 (23,646) (8,489) - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting (62,361) (9,970) (41,791) 44,015 (70,107)
Income tax expense (benefit)................ (24,171) (4,179) (14,907) 17,060 (26,197)
-------------------------------------------------------------------------------
Income/(loss) before cumulative effect
of change in accounting.................. (38,190) (5,791) (26,884) 26,955 (43,910)
Cumulative effect of change in accounting
(net of tax)............................. - 5,720 - - 5,720
-------------------------------------------------------------------------------
Net income (loss)........................... $(38,190) $ (71) $(26,884) $ 26,955 $ (38,190)
===============================================================================
F-31
STATEMENTS OF OPERATIONS
Year ending June 30, 2003
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $ 81,433 $382,630 $202,046 $(25,027) $641,082
Cost of goods sold.......................... 62,923 340,278 179,079 (24,059) 558,221
-------------------------------------------------------------------------------
Gross margin................................ 18,510 42,352 22,967 (968) 82,861
Selling, research and administrative
expenses, and other 10,850 26,634 2,742 - 40,226
Restructuring and impairment costs.......... 5,189 31,889 1,061 - 38,139
-------------------------------------------------------------------------------
Operating income (loss)..................... 2,471 (16,171) 19,164 (968) 4,496
Other income (expense):
Net interest expense and
amortization of debt.................. (43,165) (337) (2,962) - (46,464)
Other income/(expense), including equity
income in affiliates................. (34,782) 121 979 33,634 (48)
Intercompany interest income/(expense).. 28,621 (19,810) (8,811) - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes........... (46,855) (36,197) 8,370 32,666 (42,016)
Income tax expense/(benefit)................ (21,961) (15,332) 4,860 15,311 (17,122)
-------------------------------------------------------------------------------
Net income (loss)........................... $(24,894) $ (20,865) $ 3,510 $ 17,355 $(24,894)
===============================================================================
F-32
BALANCE SHEETS
As of June 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $ 860 $ 151 $ 8,915 $ - $ 9,926
Accounts receivable, net.................. 16,147 70,636 31,432 - 118,215
Inventories............................... 21,745 57,932 28,997 (779) 107,895
Other current assets...................... 4,521 3,995 1,952 - 10,468
Intercompany accounts receivable.......... - 22,741 - (22,741) -
-------------------------------------------------------------------------------
Total current assets 43,273 155,455 71,296 (23,520) 246,504
Property, plant and equipment, net.......... 55,720 342,455 127,756 - 525,931
Goodwill and intangibles, net............... 20,962 53,827 92,217 - 167,006
Intercompany notes receivable............... 333,295 - - (333,295) -
Other assets, including investment in
subsidiaries............................. 301,239 323,095 113,840 (727,878) 10,296
-------------------------------------------------------------------------------
Total assets $754,489 $874,832 $405,109 $(1,084,693) $949,737
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 7,213 $ 20,841 $ 9,172 $ - $ 37,226
Other current liabilities................. 20,450 18,094 11,918 - 50,462
Intercompany accounts payable............. 20,179 - 2,562 (22,741) -
-------------------------------------------------------------------------------
Total current liabilities 47,842 38,935 23,652 (22,741) 87,688
Long-term debt.............................. 535,539 - - - 535,539
Deferred income taxes....................... (43,918) 62,764 15,814 - 34,660
Other long-term liabilities................. 6,822 14,081 1,358 - 22,261
Intercompany notes payable.................. - 212,620 120,675 (333,295) -
Stockholders'/invested equity............... 208,204 546,432 243,610 (728,657) 269,589
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $754,489 $874,832 $405,109 $(1,084,693) $949,737
===============================================================================
F-33
BALANCE SHEETS
As of June 30, 2004
Buckeye Guarantors 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...................... 14,156 5,008 (4,209) - 14,955
Intercompany accounts receivable.......... - 22,604 6,109 (28,713) -
------------------------------------------------------------------------------
Total current assets 66,174 138,068 87,023 (29,269) 261,996
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 $801,000 $871,301 $420,109 $(1,121,587) $970,823
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 5,860 $16,118 $ 5,152 $ - $27,130
Other current liabilities................. 39,241 17,390 11,058 - 67,689
Intercompany accounts payable............. 17,063 - 11,650 (28,713) -
-------------------------------------------------------------------------------
Total current liabilities 62,164 33,508 27,860 (28,713) 94,819
Long-term debt.............................. 585,076 2,000 - - 587,076
Deferred income taxes....................... (40,480) 61,732 9,036 - 30,288
Other long-term liabilities................. 5,385 14,657 9,253 - 29,295
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 $801,000 $871,301 $420,109 $(1,121,587) $970,823
===============================================================================
F-34
STATEMENTS OF CASH FLOWS
Year ending June 30, 2005
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $ 20,746 $ 50,824 $ 7,051 $ 78,621
Investing activities:
Purchases of property, plant and equipment (6,354) (25,330) (13,645) (45,329)
Other....................................... - (550) 13,631 13,081
---------------------------------------------------------------
Net cash used in investing activities (6,354) (25,880) (14) (32,248)
Financing activities
Net borrowings (payments) under
revolving line of credit................ 400 - - 400
Payments for debt issuance and
extinguishment.......................... (5) - - (5)
Net borrowings (payments) on long-term
debt and other......................... (28,673) (24,896) (11,721) (65,290)
---------------------------------------------------------------
Net cash provided by (used in)
financing activities (28,278) (24,896) (11,721) (64,895)
Effect of foreign currency rate fluctuations
on cash................................ - - 1,213 1,213
---------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (13,886) 48 (3,471) (17,309)
Cash and cash equivalents at beginning
of period 14,746 103 12,386 27,235
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 860 $ 151 $ 8,915 $ 9,926
===============================================================
STATEMENTS OF CASH FLOWS
Year ending June 30, 2004
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
--------------------------------------------------------------
Net cash provided by (used in) operations $ 3,925 $ (5,806) $ 67,537 $ 65,656
Investing activities:
Purchases of property, plant and equipment (6,524) (22,971) (2,376) (31,871)
Other....................................... - (377) 3 (374)
--------------------------------------------------------------
Net cash used in investing activities (6,524) (23,348) (2,373) (32,245)
Financing activities
Net payments under revolving line of credit (209,124) - (14,902) (224,026)
Payments for debt issuance and
Extinguishment.......................... (9,070) - - (9,070)
Net issuance of (payments on) long-term
debt and other.......................... 209,464 24,908 (58,153) 176,219
--------------------------------------------------------------
Net cash provided by (used in)
financing activities (8,730) 24,908 (73,055) (56,877)
Effect of foreign currency rate fluctuations
on cash................................ - - 724 724
--------------------------------------------------------------
Decrease in cash and cash equivalents (11,329) (4,246) (7,167) (22,742)
Cash and cash equivalents at beginning
of period 26,075 4,349 19,553 49,977
--------------------------------------------------------------
Cash and cash equivalents at end of period $ 14,746 $ 103 $ 12,386 $ 27,235
==============================================================
F-35
STATEMENTS OF CASH FLOWS
Year ending June 30, 2003
Buckeye Guarantors Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
--------------------------------------------------------------
Net cash provided by (used in) operations $ (1,681) $ 37,614 $ 19,273 $ 55,206
Investing activities:
Purchases of property, plant and equipment.. (3,037) (21,840) (3,547) (28,424)
Redemptions of short term investments....... 8,863 - - 8,863
Other....................................... - (926) 54 (872)
--------------------------------------------------------------
Net cash provided by (used in) investing
Activities 5,826 (22,766) (3,493) (20,433)
Financing activities
Net borrowings (payments) under revolving
lines of credit......................... (6,000) - (13,923) (19,923)
Payments for debt issuance costs............ (256) - (415) (671)
Net issuance of (payments on) long-term
debt and other.......................... (8,257) (11,857) (2,425) (22,539)
--------------------------------------------------------------
Net cash provided by (used in) financing
activities (14,513) (11,857) (16,763) (43,133)
Effect of foreign currency rate fluctuations
on cash................................ - - 2,331 2,331
--------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (10,368) 2,991 1,348 (6,029)
Cash and cash equivalents at beginning
of period 36,443 1,358 18,205 56,006
--------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,075 $ 4,349 $ 19,553 $ 49,977
==============================================================
F-36
Report of Independent Registered Public Accounting Firm on Financial Statement
Schedule
To the Board of Directors and Stockholders of Buckeye Technologies Inc.
We have audited the consolidated financial statements of Buckeye Technologies
Inc. as of June 30, 2005 and 2004, and for each of the three years in the period
ended June 30, 2005, and have issued our report thereon dated September 7, 2005
(included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule listed in Item 15(a) in this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 7, 2005
F-37
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Column B Column C Column D Column E
-----------------------------------------------------------------
Balance Balance
at Additions at
Beginning Charged End
of to of
Description Period Expenses Deductions Period
---------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
Year ended June 20, 2005 $4,240 $1,372 $ (10) (a) $5,602
===== ===== ========= =====
Year ended June 30, 2004 $ 721 $4,010 $ (491) (a) $4,240
====== ===== ======== =====
Year ended June 30, 2003 $1,947 $ 296 $(1,522) (a) $ 721
===== ====== ======= ======
Reserve for maintenance shutdowns
Year ended June 30, 2005 $ - $ - $ - $ -
Year ended June 30, 2004 $9,881 $ - $ 9,881 (b) $ -
===== ========= ======= ======
Year ended June 30, 2003 $7,699 $4,234 $(2,052) (b) $ 9,881
===== ===== ======= ======
Accrual for restructuring
Year ended June 20, 2005 $2,134 $4,579 $(4,242) (c) $2,471
===== ===== ======= =====
Year ended June 30, 2004 $1,624 $5,945 $(5,435) (c) $2,134
===== ===== ======= =====
Year ended June 30, 2003 $ 601 $1,636 $ (613) (c) $1,624
====== ====== ======= =====
Deferred tax assets valuation allowance
Year ended June 30, 2005 $4,125 $1,145 $ 543 (d) $5,813
====== ====== ======= ======
Year ended June 30, 2004 $2,439 $1,746 $ (60) (d) $4,125
====== ====== ======== ======
Year ended June 30, 2003 $ 910 $1,529 $ - $2,439
===== ====== ======== ======
(a) Uncollectible accounts written off, net of recoveries, translation
adjustments and changes in quality claims. Quality claims are recorded as
reduction in sales
(b) Payments made during plant shutdowns were $9,881 in 2004 and $732 in
2003. An adjustment of $53 was made in 2003. Effective July 1, 2003, we
changed our method of accounting for planned maintenance activities from
the accrue in advance method to the direct expense method. For further
discussion of this change, see Note 3 of the Consolidated Financial
Statements.
(c) Severance payments, lease cancellations, relocation expenses, and
miscellaneous other expenses. (d) Impact of change in exchange rate
between Brazilian reals and US dollars.
F-38