Edgar Filing: BUCKEYE TECHNOLOGIES INC

September 30, 2006 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____ to ____

Commission file number: 33-60032

Buckeye Technologies Inc.

Delaware

(state or other jurisdiction of incorporation)

Internal Revenue Service — Employer Identification No. 62-1518973

1001 Tillman Street, Memphis, TN 38112

901-320-8100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” or “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

As of October 25, 2006, there were outstanding 37,662,764 Common Shares of the Registrant.

INDEX

BUCKEYE TECHNOLOGIES INC.

ITEM		PAGE

	PART I - FINANCIAL INFORMATION

1.	Financial Statements:

	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005	3

	Condensed Consolidated Balance Sheets as of September 30, 2006 and June 30, 2006	4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2006 and 2005	5

	Notes to Condensed Consolidated Financial Statements	6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

3.	Quantitative and Qualitative Disclosures About Market Risk	21

4.	Controls and Procedures	21

	PART II - OTHER INFORMATION


6.	Exhibits	22

	SIGNATURES	23

Item 1.

Financial Statements

PART I - FINANCIAL INFORMATION

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended September 30
	2006			2005
Net sales	$	191,406		$	165,456
Cost of goods sold		162,071			141,263
Gross margin		29,335			24,193

Selling, research and administrative expenses		11,204			11,406
Amortization of intangibles and other		631			531
Restructuring costs		13			1,951
Operating income		17,487			10,305

Net interest expense and amortization of debt costs		(10,751	)		(10,184	)
Gain on sale of assets held for sale		355			-
Loss on early extinguishment of debt		(556	)		(151	)
Foreign exchange and other		6			(368	)

Income (loss) before income taxes		6,541			(398	)
Income tax expense (benefit)		2,734			(109	)

Net income (loss)	$	3,807		$	(289	)

Earnings (loss) per share
Basic	$	0.10		$	(0.01	)
Diluted	$	0.10		$	(0.01	)

Weighted average shares for basic earnings per share		37,661			37,588
Weighted average shares for diluted earnings per share		37,692			37,588

See accompanying notes.

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30 2006			June 30 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	18,058		$	8,734
Accounts receivable - net		113,073			114,098
Inventories		91,798			98,567
Deferred income taxes and other		8,158			8,473
Total current assets		231,087			229,872

Property, plant and equipment		962,911			957,677
Less accumulated depreciation		(437,345	)		(425,779	)
		525,566			531,898
Goodwill		148,868			149,106
Intellectual property and other, net		37,203			38,677
Total assets	$	942,724		$	949,553

Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	37,278		$	32,973
Accrued expenses		57,793			48,416
Current portion of capital lease obligation		544			627
Current portion of long-term debt		998			1,294
Total current liabilities		96,613			83,310

Long-term debt		495,348			519,414
Accrued postretirement benefits		19,480			19,367
Deferred income taxes		36,508			35,686
Capital lease obligation		659			755
Other liabilities		1,309			1,304
Stockholders’ equity		292,807			289,717
Total liabilities and stockholders’ equity	$	942,724		$	949,553

See accompanying notes.

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Three Months Ended September 30
	2006			2005
Operating activities
Net income (loss)	$	3,807		$	(289	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		12,146			11,589
Amortization		937			831
Loss on early extinguishment of debt		556			151
Deferred income taxes and other		1,276			(1,639	)
Gain on sale of assets held for sale		(355	)		-
Changes in operating assets and liabilities:
Accounts receivable		2,745			12,199
Inventories		6,681			(15,257	)
Other assets		(1,294	)		(1,094	)
Accounts payable and other current liabilities		13,465			8,288
Net cash provided by operating activities		39,964			14,779
Investing activities
Purchases of property, plant and equipment		(6,605	)		(20,280	)
Proceeds from sale of assets		521			-
Other		(124	)		(178	)
Net cash used in investing activities		(6,208	)		(20,458	)
Financing activities
Net borrowings (payments) under lines of credit		(3,000	)		23,100
Payments on long-term debt and other		(21,429	)		(15,794	)
Net cash provided by (used in) financing activities		(24,429	)		7,306
Effect of foreign currency rate fluctuations on cash		(3	)		257
Increase in cash and cash equivalents		9,324			1,884
Cash and cash equivalents at beginning of period		8,734			9,926
Cash and cash equivalents at end of period	$	18,058		$	11,810

See accompanying notes.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands)

NOTE 1:

BASIS OF PRESENTATION

Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007. All significant intercompany accounts and transactions have been eliminated in consolidation. For further information and a listing of our significant accounting policies, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2006, which was filed with the Securities and Exchange Commission on September 1, 2006 (“Annual Report”). Except as otherwise specified, references to years indicate our fiscal year ending June 30, 2007 or ended June 30 of the year referenced and comparisons are to the corresponding period of the prior year.

Translation adjustment

Management has determined that the local currency of our German, Canadian, and Brazilian subsidiaries is the functional currency, and accordingly European euro, Canadian dollar, and Brazilian real denominated balance sheet accounts are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense activity for the period is translated at the weighted average exchange rate during the period. Translation adjustments are included as a separate component of stockholders' equity.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used.

Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: impairment assessments on long-lived assets (including goodwill), allowance for doubtful accounts, inventory reserves, income tax liabilities and contingent liabilities.

NOTE 2:

COMPUTATION OF EARNINGS PER SHARE

The calculation of basic and diluted earnings per common share was as follows:

	Three Months Ended September 30
	2006		2005
Net income (loss)	$	3,807	$	(289	)

Weighted average shares of common stock outstanding		37,661		37,588
Effect of diluted shares		31		-
Weighted average common and common equivalent shares outstanding		37,692		37,588

Earnings (loss) per share
Basic	$	0.10	$	(0.01	)
Diluted	$	0.10	$	(0.01	)

NOTE 3:

SEGMENT INFORMATION

We report results for two segments, specialty fibers and nonwoven materials. The specialty fiber segment is an aggregation of cellulosic fibers based on both wood and cotton. Management makes financial decisions and allocates resources based on the sales and operating income of each segment. We allocate selling, research and administrative expenses to each segment, and management uses the resulting operating income to measure the performance of the segments. The financial information attributed to these segments is included in the following table:

Three Months Ended September 30		Specialty Fibers		Nonwoven Materials		Corporate			Total
Net sales	2006	$	134,875	$	64,967	$	(8,436	)	$	191,406
	2005		114,561		57,326		(6,431	)		165,456
Operating income (loss)	2006		12,288		5,979		(780	)		17,487
	2005		10,163		2,560		(2,418	)		10,305
Depreciation and amortization of	2006		7,698		4,171		954			12,823
intangibles	2005		7,274		4,038		845			12,157
Capital expenditures	2006		5,573		417		615			6,605
	2005		19,330		599		351			20,280

Management evaluates operating performance of the specialty fibers and nonwoven materials segments excluding amortization of intangibles, the impact of impairment of long-lived assets and charges related to restructuring. Therefore, the corporate segment includes operating elements such as segment eliminations, amortization of intangibles, impairment of long-lived assets and charges related to restructuring. Corporate net sales represent the elimination of intersegment sales included in the specialty fibers reporting segment. Intersegment sales are at current market prices.

NOTE 4: RESTRUCTURING COSTS AND ASSETS HELD FOR SALE

During the three months ended September 30, 2005, we incurred restructuring costs of $1,951 primarily related to the closure of our Glueckstadt facility. Severance and employee benefit costs comprised $1,796 of these costs. For the three months ending September 30, 2006, $13 was recorded.

In September 2006, the remaining assets located at our Glueckstadt facility were sold for $520. Since we previously had written the value of these assets down to $165, we recorded a gain on sale of assets held for sale of $355 during the three months ended September 30, 2006.

NOTE 5:

INVENTORIES

Inventories are valued at the lower of cost or market. The costs of manufactured cotton-based specialty fibers and costs for nonwoven raw materials are generally determined on the first-in, first-out basis. Other manufactured products and raw materials are generally valued on an average cost basis. Manufactured inventory costs include material, labor and manufacturing overhead. Slash pine timber, cotton fibers and chemicals are the principal raw materials used in the manufacture of our specialty fiber products. Fluff pulp is the principal raw material used in our nonwoven materials products. We take physical counts of inventories at least annually, and we review periodically the provision for potential losses from obsolete, excess or slow-moving inventories.

The components of inventory consist of the following:

	September 30 2006		June 30 2006

Raw materials	$	29,250	$	30,028
Finished goods		40,751		45,759
Storeroom and other supplies		21,797		22,780
	$	91,798	$	98,567

NOTE 6:

DEBT

The components of long-term debt consist of the following:

	September 30 2006		June 30 2006
Senior Notes due:
2013	$	200,000	$	200,000
Senior Subordinated Notes due:
2008		64,913		64,902
2010		151,936		152,059
Credit facility		74,497		98,747
Other		5,000		5,000
		496,346		520,708
Less current portion		998		1,294
	$	495,348	$	519,414

Senior Notes - During September 2003, we placed privately $200,000 in aggregate principal amount of 8.5% Senior Notes due October 1, 2013. In fiscal year 2004, we exchanged these outstanding notes for public notes with the same terms. The notes are unsecured obligations and are senior to any of our subordinated debt. The notes are guaranteed by our direct and indirect domestic subsidiaries that are also guarantors on our senior secured indebtedness.

Senior Subordinated Notes - During July 1996, we completed a public offering of $100,000 in aggregate principal amount of 9.25% unsecured Senior Subordinated Notes due September 15, 2008 (the “2008 Notes”). These notes have been redeemable at our option, in whole or in part, at any time since September 15, 2004, at a redemption price of 100% of principal amount together with accrued and unpaid interest to the date of redemption.

Through fiscal years 2006, we redeemed $35,000 of the 2008 Notes. As a result of these redemptions, we wrote off a portion of the deferred financing costs and unamortized discount related to the redeemed bonds.

During June 1998, we completed a private placement of $150,000 principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010. In fiscal year 1999, we exchanged these outstanding notes for public notes with the same terms. These notes have been redeemable at our option, in whole or in part, at any time since October 15, 2006, at a redemption price of 100% of principal amount together with accrued and unpaid interest to the date of redemption.

Under the indentures governing our senior notes and each series of our senior subordinated notes, our ability to incur additional debt is limited. Under these indentures, additional debt must be incurred as “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. As of September 30, 2006 we exceeded 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 each series of the senior subordinated notes.

Revolving credit facility - On November 5, 2003, we established a $220,000 senior secured credit facility (the “credit facility”), comprised of a $70,000 revolving credit facility (the “revolver”) maturing on September 15, 2008 and a $150,000 term loan (the “term loan”) with serial maturities of $249 quarterly with final payment at maturity. The term loan maturity date is March 15, 2008, unless we retire or refinance the 2008 Notes, with a due date after October 15, 2010, in which case the maturity date would be April 15, 2010. The term loan also requires an annual excess cash flow payment (as defined under the credit agreement). During the three months ending September 30, 2006, we made an excess cash flow payment of $296 based on fiscal 2006 operating and cash flow performance.

We had $74,497 outstanding on this facility ($74,497 on the term loan and $0 on the revolver) at an average variable interest rate of 7.3% as of September 30, 2006. The interest rate applicable to borrowings under the revolver is the agent’s prime rate plus 1.50% to 1.75%, or a LIBOR-based rate ranging from LIBOR plus 2.50% to LIBOR plus 3.25%. The interest rate applicable to the term loan is the agent’s prime rate plus 1.00% or a LIBOR-based rate plus 2.00%. The credit facility is secured by substantially all of our assets located in the United States.

During the three months ended September 30, 2006, we made additional voluntary prepayments on the term loan of $20,704. As a result of these prepayments, we wrote off a portion of the deferred financing costs related to the term loan. The non-cash charges, related to early extinguishment of debt, were $556 during the three months ended September 30, 2006.

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. As of September 30, 2006, we were in compliance with these financial covenants.

As of September 30, 2006, we had $65,125 of borrowing capacity on our revolving credit facility. The portion of this capacity that we could borrow on a particular date will depend on our financial results and ability to comply with certain borrowing conditions under the revolving credit facility.

Other long-term debt - On March 1, 2000, we purchased certain technology from Stac-Pac Technologies Inc. In connection with the purchase, we entered into an unsecured promissory note with Stac-Pac Technologies Inc. The principal amount of the note is $5,000 and bears interest at a rate of 7%. In accordance with the purchase agreement, we are entitled to withhold or retain the final installment of the purchase price until and unless there is final resolution of patent rights and to cancel the final installment of the purchase price if the patent rights in certain jurisdictions are not resolved according to the terms of the purchase agreement. As of September 30, 2006, these patent rights were not resolved. Therefore, the principal amount of the note remains unpaid and has been classified as long-term debt. As of September 30, 2006, we have accrued interest on the note of $1,954.

NOTE 7:

COMPREHENSIVE INCOME

The components of comprehensive income consist of the following:

	Three Months Ended September 30
	2006			2005

Net income (loss)	$	3,807		$	(289	)
Foreign currency translation adjustments - net		(975	)		8,175
Comprehensive income	$	2,832		$	7,886

For the three months ended September 30, 2006, the change in the foreign currency translation adjustment is primarily due to fluctuations in the exchange rate of the U.S. dollar against the euro of $(233), the Brazilian real of $(291) and the Canadian dollar of $(630).

For the three months ended September 30, 2005, the change in the foreign currency translation adjustment was primarily due to fluctuations in the exchange rate of the U.S. dollar against the euro of $(339), the Brazilian real of $1,271 and the Canadian dollar of $7,456.

NOTE 8:

INCOME TAXES

Our effective tax rate for the three month period ended September 30, 2006 was 41.8%. Our effective tax rate for the same period of 2005 was 27.4%. Our tax rate is impacted by several factors including operations in jurisdictions with varying tax rates and the extraterritorial income tax exclusion. Due to the absolute value of our earnings (loss) before taxes for the three months ended September 30, 2005, these factors had a more significant impact on our effective tax rate. The rate increase for the three month period ended September 30, 2006 results from a change in assumptions used to calculate the valuation allowance for the Brazil net operating loss carryforwards. Our income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate of 35% to income (loss) before income taxes (benefit) due to the following:

	Three Months Ended September 30
	2006			2005

Expected tax expense at 35%	$	2,289		$	(139	)
Effect of foreign operations		849			307
Extraterritorial income benefit		(96	)		(152	)
Other		(308	)		(125	)
Income tax expense (benefit)	$	2,734		$	(109	)

NOTE 9: EMPLOYEE BENEFIT PLANS

We provide medical, dental and life insurance postretirement plans covering certain U.S. employees who meet specified age and service requirements. Pursuant to an amendment, effective January 1, 2006, Medicare eligible retirees age 65 or older are no longer covered under the self-funded plan. Instead they are provided a subsidy towards the purchase of supplemental insurance. The components of net periodic benefit costs are as follows:

	Three Months Ended September 30
	2006			2005
Service cost for benefits earned	$	149		$	157
Interest cost on benefit obligation		352			314
Amortization of unrecognized prior service cost		(250	)		(264	)
Actuarial loss		142			150
Total cost	$	393		$	357

NOTE 10: ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157) and SFAS 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 157 provides enhanced guidance for using fair value measurements. It establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. We are currently evaluating the provisions of SFAS 157.

SFAS 158 requires recognition of the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognition of changes in that funded status in the year in which the change occurs through comprehensive income. SFAS 158 also requires measurement of the funded status of a plan as of the fiscal year end. This statement requires initial recognition of the funded status of a defined benefit postretirement plan as of the end of the fiscal year ending after December 15, 2006. The requirements to measure plan assets and benefit obligations as of the fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. We are currently evaluating the provisions of SFAS 158.

NOTE 11: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The guarantor US 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 that do not guarantee the senior notes. Each subsidiary guarantor is 100% owned directly or indirectly by us and all guarantees are full and unconditional.

Our supplemental financial information and our guarantor subsidiaries and non-guarantor subsidiaries for the senior notes is presented in the following tables.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	31,143		$	123,183		$	46,273		$	(9,193	)	$	191,406
Cost of goods sold		25,484			103,404			42,394			(9,211	)		162,071
Gross margin		5,659			19,779			3,879			18			29,335

Selling, research and administrative expenses, and other		2,021			8,077			1,737			-			11,835
Restructuring and impairment costs		-			-			13			-			13

Operating income		3,638			11,702			2,129			18			17,487

Other income (expense):
Net interest income (expense) and amortization of debt		(10,709	)		(62	)		20			-			(10,751	)
Other income (expense), including equity income (loss) in affiliates		1,789			5			307			(2,296	)		(195	)
Intercompany interest income (expense)		7,220			(4,993	)		(2,227	)		-			-

Income (loss) before income taxes		1,938			6,652			229			(2,278	)		6,541

Income tax expense (benefit)		(1,869	)		2,206			780			1,617			2,734

Net income (loss)	$	3,807		$	4,446		$	(551	)	$	(3,895	)	$	3,807

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2005


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	22,459		$	99,996		$	50,035		$	(7,034	)	$	165,456
Cost of goods sold		19,211			85,010			44,190			(7,148	)		141,263
Gross margin		3,248			14,986			5,845			114			24,193

Selling, research and administrative expenses, and other		2,957			7,038			1,942			-			11,937
Restructuring costs		-			-			1,951			-			1,951

Operating income		291			7,948			1,952			114			10,305

Other income (expense):
Interest income/(expense) and amortization of debt costs		(10,917	)		67			666			-			(10,184	)
Other income/(expense), including equity income in affiliates		3,107			42			(427	)		(3,241	)		(519	)
Intercompany interest income/(expense)		7,126			(5,283	)		(1,843	)		-			-

Income/(loss) before income taxes		(393	)		2,774			348			(3,127	)		(398	)

Income tax expense/(benefit)		(104	)		931			159			(1,095	)		(109	)

Net income (loss)	$	(289	)	$	1,843		$	189		$	(2,032	)	$	(289	)

CONDENSED CONSOLIDATING BALANCE SHEETS

As of September 30, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries		Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	9,453		$	243	$	8,362	$	-		$	18,058
Accounts receivable, net of allowance		17,146			66,112		29,815		-			113,073
Inventories		20,202			51,531		20,489		(424	)		91,798
Other current assets		2,178			5,386		594		-			8,158
Intercompany accounts receivable		-			72,910		-		(72,910	)		-
Total current assets		48,979			196,182		59,260		(73,334	)		231,087

Property, plant and equipment, net		55,217			325,883		144,466		-			525,566
Goodwill and intangibles, net		20,899			51,055		101,351		-			173,305
Intercompany notes receivable		338,181			-		-		(338,181	)		-
Other assets, including investment in subsidiaries		321,099			338,749		92,864		(739,946	)		12,766
Total assets	$	784,375		$	911,869	$	397,941	$	(1,151,461	)	$	942,724

Liabilities and stockholders’ equity
Current liabilities
Trade accounts payable	$	5,072		$	23,160	$	9,046	$	-		$	37,278
Other current liabilities		25,932			20,313		13,090		-			59,335
Intercompany accounts payable		68,521			-		4,387		(72,908	)		-
Total current liabilities		99,525			43,473		26,523		(72,908	)		96,613

Long-term debt		495,348			-		-		-			495,348
Deferred income taxes		(47,472	)		64,370		19,610		-			36,508
Other long-term liabilities		6,532			13,372		1,544		-			21,448
Intercompany notes payable		-			201,836		136,344		(338,180	)		-
Stockholders’/invested equity		230,442			588,818		213,920		(740,373	)		292,807
Total liabilities and stockholders’ equity	$	784,375		$	911,869	$	397,941	$	(1,151,461	)	$	942,724

CONDENSED CONSOLIDATING BALANCE SHEETS

As of June 30, 2006


	Buckeye Technologies Inc.			Guarantors US Subsidiaries		Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	1,535		$	162	$	7,037	$	-		$	8,734
Accounts receivable, net		17,395			66,207		30,496		-			114,098
Inventories		24,680			53,756		20,573		(442	)		98,567
Other current assets		2,422			4,845		1,206		-			8,473
Intercompany accounts receivable		-			57,105		-		(57,105	)		-
Total current assets		46,032			182,075		59,312		(57,547	)		229,872

Property, plant and equipment, net		55,440			329,020		147,438		-			531,898
Goodwill and intangibles, net		20,913			51,730		101,636		-			174,279
Intercompany notes receivable		342,478			-		-		(342,478	)		-
Other assets, including investment in subsidiaries		304,581			337,654		93,066		(721,797	)		13,504
Total assets	$	769,444		$	900,479	$	401,452	$	(1,121,822	)	$	949,553

Liabilities and stockholders’ equity
Current liabilities
Trade accounts payable	$	4,857		$	21,077	$	7,039	$	-		$	32,973
Other current liabilities		20,416			17,390		12,530		1			50,337
Intercompany accounts payable		52,297			-		4,808		(57,105	)		-
Total current liabilities		77,570			38,467		24,377		(57,104	)		83,310

Long-term debt		519,414			-		-		-			519,414
Deferred income taxes		(48,099	)		64,030		19,755		-			35,686
Other long-term liabilities		6,414			13,476		1,536		-			21,426
Intercompany notes payable		-			201,993		140,485		(342,478	)		-
Stockholders’/invested equity		214,145			582,513		215,299		(722,240	)		289,717
Total liabilities and stockholders’ equity	$	769,444		$	900,479	$	401,452	$	(1,121,822	)	$	949,553

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Three Months Ended September 30, 2006


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidated
Net cash provided by (used in) operations	$	37,601		$	5,033		$	(2,670	)	$	39,964

Investing activities:
Purchases of property, plant and equipment		(1,135	)		(4,807	)		(663	)		(6,605	)
Other		-			(123	)		520			397
Net cash used in investing activities		(1,135	)		(4,930	)		(143	)		(6,208	)

Financing activities
Net payments under line of credit		(3,000	)		-			-			(3,000	)
Net borrowings (payments) on long-term debt and other		(25,548	)		(22	)		4,141			(21,429	)
Net cash provided by (used in) financing activities		(28,548	)		(22	)		4,141			(24,429	)

Effect of foreign currency rate fluctuations on cash		-			-			(3	)		(3	)

Increase in cash and cash equivalents		7,918			81			1,325			9,324
Cash and cash equivalents at beginning of period		1,535			162			7,037			8,734
Cash and cash equivalents at end of period	$	9,453		$	243		$	8,362		$	18,058

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Three Months Ended September 30, 2005


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidated
Net cash provided by operations	$	1,558		$	10,958		$	2,263		$	14,779

Investing activities:
Purchases of property, plant and equipment		(1,965	)		(6,866	)		(11,449	)		(20,280	)
Other		-			(178	)		-			(178	)
Net cash used in investing activities		(1,965	)		(7,044	)		(11,449	)		(20,458	)

Financing activities
Net borrowings under revolving line of credit		23,100			-			-			23,100
Net borrowings (payments on) long-term debt and other		(23,128	)		(3,985	)		11,319			(15,794	)
Net cash provided by (used in) financing activities		(28	)		(3,985	)		11,319			7,306

Effect of foreign currency rate fluctuations on cash		-			-			257			257

Increase (decrease) in cash and cash equivalents		(435	)		(71	)		2,390			1,884
Cash and cash equivalents at beginning of period		860			151			8,915			9,926
Cash and cash equivalents at end of period	$	425		$	80		$	11,305		$	11,810

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations, as well as discussing our critical accounting policies. This discussion should be read in conjunction with the accompanying unaudited financial statements and our Annual Report on Form 10-K for the year ended June 30, 2006 ("Annual Report"), which include additional information about our significant accounting policies, practices and transactions that underlie our financial results. Our MD&A is composed of four major sections: Executive Summary, Results of Operations, Financial Condition, and Critical Accounting Policies.

Except as otherwise specified, references to years indicate our fiscal year ending June 30, 2007 or ended June 30 of the year referenced and comparisons are to the corresponding period of the prior year. The following discussion includes a comparison of the results of operations for the three months ended September 30, 2006 to the three months ended September 30, 2005.

Executive Summary

Buckeye manufactures and distributes value-added cellulose-based specialty products used in numerous applications, including disposable diapers, personal hygiene products, engine, air and oil filters, food casings, rayon filaments, acetate plastics, thickeners and papers. Our products are produced in the United States, Canada, Germany and Brazil, and we sell these products in approximately 60 countries worldwide. We generate revenues, operating income and cash flows from two reporting segments: specialty fibers and nonwoven materials. Specialty fibers are derived from wood and cotton cellulose materials using wetlaid technologies. Our nonwoven materials are derived from wood pulps, synthetic fibers and other materials using an airlaid process.

Our strategy is to continue to strengthen our position as a leading supplier of cellulose-based specialty products. We believe that we can continue to expand market share, improve profitability and decrease our exposure to cyclical downturns by pursuing the following strategic objectives: focus on technically demanding niche markets, develop and commercialize innovative proprietary products, strengthen long-term alliances with customers, provide our products at an attractive value, and significantly reduce our debt.

We earned net income of $3.8 million for the three months ended September 30, 2006 versus a net loss of $0.3 million during the same period in 2005. Last year’s earnings were negatively impacted by $2.0 million in restructuring costs relating to the closure of our Glueckstadt, Germany specialty fibers facility. The improvement in earnings was driven primarily by increased shipment volumes and higher selling prices in both our specialty fibers and nonwoven materials business segments.

Net sales during the three months ended September 30, 2006 increased by 16% versus the same period in 2005. Demand for high-end specialty fibers helped drive prices higher during the past year. Fluff pulp sales were particularly strong compared to the period ended September 30, 2005 due to higher shipment volume. Higher shipment volumes (particularly in North America) and increased pricing drove increased sales of nonwoven materials during the quarter. We also experienced sales increases from our Americana plant and our UltraFiber 500â business.

We are making progress with the ramp-up of our cotton cellulose manufacturing facility in Americana, Brazil, but we did not improve our results there by as much as we had expected. We reduced our operating loss at this facility by approximately $0.6 million during the three months ended September 30, 2006 compared to the three months ended June 30, 2006. The comparison to the three months ended September 30, 2005 is negative $2.2 million because we were still profiting from our tolling operations during that period. Sales from the Americana facility in the period ended September 30, 2006 increased by approximately 30% versus the three months ending June 30, 2006. Production rates and reliability have improved, raising our capacity utilization to about 55% in the quarter ended September 30, 2006. We expect an accelerated rate of improvement in the three months ending December 31, 2006 and expect to generate positive operating income during the period ending March 31, 2007.

We continue to establish our global sales and distribution network for UltraFiber 500â, a revolutionary concrete-reinforcing fiber. UltraFiber 500â is a niche product for the building industry and an example of the new product initiatives we are undertaking to reduce our dependency on fluff pulp. Sales for the three months ended September 30, 2006 were $1.5 million compared to $0.6 million in the same period in 2005. While this is a significant increase in sales, it fell short of our initial expectations.

We continued to generate strong cash flows during the quarter with $40.0 million cash generated from operations, enabling us to fund $6.6 million in capital expenditures and reduce debt and capital leases by $24.4 million during the quarter. Total inventory reduction during the quarter was $6.7 million and capital spending decreased by $13.7 million compared to the three months ended September 30, 2005 as spending on the Americana project has been completed.

The combination of new product initiatives, strong demand in important markets and an improved, lower cost manufacturing configuration gives us optimism that we can generate future growth in sales and profitability. Like other manufacturing firms, we are still being negatively impacted by high costs for energy, chemicals, transportation and other materials, but we are encouraged by recent downward trends in oil and natural gas prices, which should also positively impact our results. We are committed to our strategy of implementing Lean methods to reduce waste, spending and working capital and expect this effort will begin to yield positive financial results as the year progresses.

Results of Operations

Consolidated results

The following table compares components of operating income for the three months ended September 30, 2006 and 2005.

(millions)	Three Months Ended September 30
	2006		2005		Change			% Change
Net sales	$	191.4	$	165.5	$	25.9			16	%
Cost of goods sold		162.1		141.3		20.8			15	%
Gross margin		29.3		24.2		5.1			21	%
Selling, research and administrative expenses		11.2		11.4		(0.2	)		(2)	%
Restructuring costs		-		2.0		(2.0	)		*
Amortization of intangibles and other		0.6		0.5		0.1			20	%
Operating income	$	17.5	$	10.3	$	7.2			70	%

* Percent change not meaningful

Net sales for the three months ended September 30, 2006 were $191.4 million, a 15.7% increase over the $165.5 million achieved in the same period in 2005. Demand was strong for all our businesses during the quarter. Higher shipment volume accounted for approximately 55% of the sales increase and higher product pricing and improved sales mix accounted for the balance of the increase.

Fluff pulp sales growth was particularly strong (+30%) compared to the unusually low sales level in the three months ended September 30, 2005. Selling prices for fluff pulp were down approximately 2% over the same period but increased as the period progressed. Fluff pulp sales represented 16% of total sales for the three months ended September 30, 2006. Selling prices were higher for both our specialty products and nonwoven materials. In January of 2006 we implemented price increases averaging 8% on specialty wood cellulose products. On April 1, 2006 additional price increases were implemented for specialty fibers products and nonwoven materials.

Combined energy, chemicals and transportation costs for the three months ended September 30, 2006 were at approximately the same level as the same period a year ago which were already at high levels. While the price of natural gas has decreased significantly compared to the three months ended September 30, 2005, the price of oil has increased, chemical prices have remained fairly stable and transportation costs are higher. Also, we have seen increases in the prices of our raw materials, which are partly the result of these same cost trends.

Gross margin improved from 14.6% of sales in the three months ended September 30, 2005 to 15.3% in the same period in 2006. Selling prices were up and the favorable impact of increased production volumes and lower energy costs offset the unfavorable impacts of higher raw material costs, chemical usage and transportation costs.

Selling, research and administrative expenses decreased slightly in the three months ended September 30, 2006 as compared to the same period in 2005, and, as a percent of sales, were down significantly from 6.9% to 5.9%. We were able to increase sales without incurring additional costs related to sales, research and administration.

The costs associated with the closure of the Glueckstadt, Germany specialty fibers facility are materially complete. During the three months ended September 30, 2005, we incurred $2.0 million of restructuring costs. In September 2006, the remaining assets located at the Glueckstadt facility were sold for $0.5 million. The value of these assets had been reduced to $0.2 million during the previous fiscal year. We, therefore, recorded a gain on sales of assets held for sale of $0.4 million.

Segment results

Although nonwoven materials, processes, customers, distribution methods and regulatory environment are very similar to specialty fibers, we believe it is appropriate for nonwoven materials to be disclosed as a separate reporting segment from specialty fibers. The specialty fibers segment is an aggregation of cellulosic fibers based on both wood and cotton. We make separate financial decisions and allocate resources based on the sales and operating income of each segment. We allocate selling, research, and administrative expenses to each segment, and we use the resulting operating income to measure the performance of the segments. We exclude items that are not included in measuring business performance, such as amortization of intangibles, restructuring costs, asset impairment and certain financing and investing costs.

Specialty fibers

The following table compares specialty fibers net sales and operating income for the three months ended September 30, 2006 and 2005.

(millions)	Three Months Ended September 30
	2006		2005	Change	% Change
Net sales	$	134.9