================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
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Commission file number: 33-60032
Buckeye Technologies Inc.
incorporated pursuant to the Laws of Delaware
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Internal Revenue Service -- Employer Identification No. 62-1518973
1001 Tillman Street, Memphis, TN 38112
901-320-8100
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No ____
As of January 28, 2004, there were outstanding 37,066,369 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 and Six Months Ended December
31, 2003 and 2002...................................................................... 3
Condensed Consolidated Balance Sheets as of December 31, 2003 and June 30, 2003............. 4
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended December
31, 2003 and 2002...................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................ 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 17
3. Quantitative and Qualitative Disclosures About Market Risk.................................. 23
4. Controls and Procedures..................................................................... 23
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders......................................... 24
6. Exhibits and Reports on Form 8-K............................................................ 24
SIGNATURES 25
-2-
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31 December 31
------------------------------ ----------------------------
2003 2002 2003 2002
------------------------------ ----------------------------
Net sales.............................................. $160,279 $153,146 $316,110 $309,571
Cost of goods sold..................................... 143,993 131,351 277,863 267,395
------------------------------ ----------------------------
Gross margin........................................... 16,286 21,795 38,247 42,176
Selling, research and administrative expenses.......... 12,948 8,837 22,540 17,780
Impairment of long-lived assets........................ 942 - 942 -
Restructuring costs.................................... 2,691 - 3,729 -
------------------------------ ----------------------------
Operating income (loss)................................ (295) 12,958 11,036 24,396
Net interest expense and amortization of debt costs.... 12,510 11,683 23,687 23,809
Loss on early extinguishment of debt................... 1,640 - 4,940 -
Foreign exchange, amortization of intangibles and other 1,125 928 1,554 1,018
------------------------------ ----------------------------
Income (loss) before income taxes...................... (15,570) 347 (19,145) (431)
Income tax benefit..................................... (5,557) (193) (6,701) (452)
------------------------------ ----------------------------
Net income (loss)...................................... $ (10,013) $ 540 $(12,444) $ 21
============================== ============================
Earnings (loss) per share
Basic earnings (loss) per share........... $ (0.27) $ 0.01 $ (0.34) $ 0.00
Diluted earnings (loss) per share.......... $ (0.27) $ 0.01 $ (0.34) $ 0.00
Weighted average shares for basic earnings per share... 37,009 36,965 36,992 36,957
Effect of dilutive stock options....................... - - - 16
------------------------------ ----------------------------
Adjusted weighted average shares for diluted earnings
per share........................................ 37,009 36,965 36,992 36,973
============================== ============================
See accompanying notes.
-3-
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31 June 30
2003 2003
------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents............................ $ 15,269 $ 49,977
Cash, restricted..................................... - 3,375
Accounts receivable, net............................. 108,430 126,283
Inventories.......................................... 127,211 136,705
Deferred income taxes and other...................... 30,754 26,307
------------------------------
Total current assets........................ 281,664 342,647
Property, plant and equipment............................. 948,437 909,733
Less accumulated depreciation............................. (343,456) (315,595)
------------------------------
604,981 594,138
Goodwill, net............................................. 134,213 129,631
Intellectual property and other, net...................... 43,067 44,239
------------------------------
Total assets................................ $1,063,925 $1,110,655
==============================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable............................... $ 26,612 $ 37,007
Accrued expenses..................................... 41,498 48,360
Current portion of capital lease obligations......... 607 583
Current portion of long-term debt.................... 1,500 41,718
------------------------------
Total current liabilities................... 70,217 127,668
Long-term debt............................................ 619,710 619,474
Deferred income taxes..................................... 79,948 79,498
Capital lease obligations................................. 2,390 2,700
Other liabilities......................................... 19,631 19,431
Stockholders' equity...................................... 272,029 261,884
------------------------------
Total liabilities and stockholders' equity $1,063,925 $1,110,655
==============================
See accompanying notes.
-4-
BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
December 31
----------------------------
2003 2002
----------------------------
Operating activities
Net income (loss)................................................. $(12,444) $ 21
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Impairment of long-lived assets............................ 942 -
Depreciation............................................... 22,725 23,060
Amortization .............................................. 2,514 2,931
Loss on early extinguishment of debt....................... 4,940 -
Deferred income taxes and other............................ 3,342 2,371
Changes in operating assets and liabilities:
Accounts receivable.................................... 17,437 2,218
Inventories............................................ 13,256 (28)
Other assets........................................... (5,514) 1,733
Accounts payable and other current liabilities......... (19,302) (16,681)
----------------------------
Net cash provided by operating activities......................... 27,896 15,625
Investing activities
Purchases of property, plant and equipment........................ (21,190) (11,196)
Other............................................................. (293) (427)
----------------------------
Net cash used in investing activities............................. (21,483) (11,623)
Financing activities
Proceeds from exercise of stock options........................... 433 -
Net payments under revolving lines of credit...................... (212,715) (4,923)
Issuance of long term debt........................................ 350,000 -
Payments for debt issuance costs.................................. (9,228) (671)
Payments related to early extinguishment of debt.................. (2,115) -
Proceeds from termination of swap................................. 4,000 -
Payments on long-term debt and other.............................. (172,661) (22,264)
----------------------------
Net cash used in financing activities............................. (42,286) (27,858)
Effect of foreign currency rate fluctuations on cash.............. 1,165 105
----------------------------
Decrease in cash and cash equivalents............................. (34,708) (23,751)
Cash and cash equivalents at beginning of period.................. 49,977 56,006
----------------------------
Cash and cash equivalents at end of period........................ $15,269 $ 32,255
============================
See accompanying notes.
-5-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In thousands)
NOTE A -- BASIS OF PRESENTATION
Our accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(including normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended December 31, 2003 are not necessarily indicative of the results that may
be expected for the year ending June 30, 2004. 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, 2003. Except as otherwise specified, references
to years indicate our fiscal year ending June 30, 2004 or ended June 30 of the
year referenced and comparisons are to the corresponding period of the prior
year.
NOTE B -- SEGMENT INFORMATION
We report results for two segments, specialty fibers and nonwoven
materials. The specialty fiber segment is an aggregation of cellulosic fibers
based on both wood and cotton. Management makes financial decisions and
allocates resources based on the sales and operating income of each segment. We
allocate selling, research, and administration expenses to each segment and
management uses the resulting operating income to measure the performance of the
segments. The financial information attributed to these segments is included in
the following table:
Three Months Ended Specialty Nonwoven
December 31 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2003 $114,588 $51,185 $(5,494) $160,279
2002 113,880 45,853 (6,587) 153,146
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2003 2,822 1,149 (4,266) (295)
2002 12,745 312 (99) 12,958
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2003 6,897 4,467 837 12,201
intangibles 2002 7,462 3,762 1,177 12,401
------------------------------------------------------------------------------------------------------------
Capital expenditures 2003 10,767 543 155 11,465
2002 6,152 521 (64) 6,609
Six Months Ended Specialty Nonwoven
December 31 Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2003 $221,906 $104,395 $(10,191) $316,110
2002 226,225 93,241 (9,895) 309,571
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2003 13,113 3,636 (5,713) 11,036
2002 24,385 796 (785) 24,396
------------------------------------------------------------------------------------------------------------
Depreciation and amortization of 2003 13,601 8,735 1,662 23,998
intangibles 2002 14,995 7,553 2,138 24,686
------------------------------------------------------------------------------------------------------------
Capital expenditures 2003 19,856 1,142 192 21,190
2002 9,718 1,194 284 11,196
Management evaluates operating performance of the specialty fibers and nonwoven
materials segments excluding the impact of impairment of long-lived assets and
charges related to restructuring. Therefore, the corporate segment includes
operating elements such as segment eliminations, 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.
-6-
NOTE C -- RESTRUCTURING COSTS
During fiscal 2003 we initiated the first phase of our 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. During the six
months ended December 31, 2003, additional expenses of $781 were recorded and
$2,062 were paid for this phase of the program. These additional expenses
included $634 for miscellaneous costs associated with the partial closure of the
Lumberton facility. While we ceased producing cotton cellulose at our Lumberton
facility at the end of August 2003, we are still continuing to supply some of
our cotton-based specialty fiber customers with product previously produced at
Lumberton. We estimate the remaining expenses for this phase of the
restructuring program to be approximately $182, which we expect to be recognized
and paid in calendar year 2004.
During the first quarter of fiscal 2004, we entered into a second phase
of our restructuring program. This program was a continuation of the program
initiated in the fourth quarter of fiscal 2003 and will enable us to improve our
operating results through reduced salaries, benefits, other employee-related
expenses and operating expenses. As a result of this restructuring,
approximately 50 positions will be eliminated. These positions include
manufacturing, sales, product development and administrative functions
throughout the organization. Voluntary and involuntary termination benefits
related to this phase of the program of $2,948 were expensed and $357 were paid
during the six months ended December 31, 2003. We expect payments related to
this phase of the restructuring program to continue throughout fiscal 2004. The
total cost of this phase of the restructuring program is estimated to be
approximately $3,100 in fiscal 2004.
Restructuring expenses are included in "Restructuring Costs" in the
statements of operations. The following table summarizes the expenses and
accrual balances by reporting segments for the six months ended December 31,
2003.
Six Months Ended
December 31, 2003
-------------------------------------
Accrual Accrual
Balance as Impact Balance as
of of of Program Total
June 30, Additional Foreign December Charges Estimated
2003 Charges Currency Payments 31, 2003 to Date Charges
2002 Restructuring Program
------------------------------------------------------------------------------------------------------ ------------------------
Nonwoven materials 17 - - (17) - 1,605 1,605
2003 Restructuring Program-Phase 1
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty Fibers 1,437 147 - (1,297) 287 1,608 1,630
Nonwoven Materials 87 - - (49) 38 87 87
Other miscellaneous expenses
Specialty Fibers - 634 - (634) - 640 800
Nonwoven Materials 83 - - (82) 1 83 83
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 1 1,607 781 - (2,062) 326 2,418 2,600
2003 Restructuring Program-Phase 2
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers $ - $1,389 $59 $ (153) $1,295 $1,389 $1,500
Nonwoven materials - 39 - (39) - 39 40
Corporate - 1,520 - (165) 1,355 1,520 1,560
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 2 - 2,948 59 (357) 2,650 2,948 3,100
---------------------------------------------------------------- ------------------------
Total All Programs $1,624 $3,729 $59 $(2,436) $2,976 $6,971 $7,305
================================================================ ========================
-7-
NOTE D -- IMPAIRMENT COSTS
During the second quarter, we fully impaired engineering costs and
capitalized interest for a long delayed project at our Perry, Florida wood pulp
mill. Based on the significant length of time before the project would be
initiated, we determined that the engineering work had no remaining value and
was fully impaired. The carrying value of the asset was $942.
NOTE E -- INVENTORIES
The components of inventory consist of the following:
December 31 June 30
2003 2003
---------------------------
(In thousands)
Raw materials........................... $32,702 $36,827
Finished goods.......................... 69,221 75,394
Storeroom and other supplies............ 25,288 24,484
---------------------------
$127,211 $136,705
===========================
NOTE F -- DEBT
The components of long-term debt consist of the following:
December 31 June 30
2003 2003
---------------------------
Senior Notes due:
2013 $200,000 $ -
Senior Subordinated Notes due:
2005 - 149,816
2008 99,712 99,688
2010 153,314 155,470
Credit facilities 161,184 227,315
Notes payable - 21,903
Other 7,000 7,000
----------------------------
621,210 661,192
Less current portion 1,500 41,718
----------------------------
$619,710 $619,474
============================
Senior notes - On September 22, 2003 we placed privately $200,000 in
aggregate principal amount of 8.5% senior notes due October 1, 2013. The notes
are unsecured obligations and are senior to any of our subordinated debt. The
notes are guaranteed by our direct and indirect domestic subsidiaries that are
also guarantors on our senior secured indebtedness. 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
are estimated at $5,350 and will be amortized over the life of the 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 that have
been registered under the Securities Act of 1933, as amended.
-8-
During the first quarter of 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 - Under the indentures governing our senior
subordinated notes, as well as the indenture that governs the senior notes, our
ability to incur additional debt is limited. Under these indentures, additional
debt must be incurred as so-called "ratio debt" or, alternatively, must be
permitted in form and amount as "Permitted Indebtedness." In order to incur
ratio debt, a specified consolidated fixed charge coverage ratio (as defined in
the indentures) must equal or exceed 2:1 (measured on a rolling four-quarter
basis). At March 31, 2002, our fixed charge cover ratio fell below 2:1. This
development did not breach any covenant or constitute an event of default under
any of our debt agreements. However, until such time as the ratio again equals
or exceeds 2:1, we can only incur debt that is Permitted Indebtedness.
On October 16, 2003, we successfully completed a solicitation of
consents from holders of our notes due in 2008 (2008 notes) to amend this
indenture to conform certain provisions of the 2008 notes to the provisions in
our notes due in 2010 and to current market practice. This amendment allowed us
to refinance our revolving credit facility (discussed later in this note), while
we are still limited to Permitted Indebtedness as defined in the indentures.
Under each of these indentures, the fixed charge coverage ratio test is
measured on a rolling four-quarter basis. While we can offer no assurance in
this regard, we believe that our operating results will improve over the next
several quarters and that such improved results together with recent reductions
in our outstanding debt, will enable us to exceed the required 2:1 ratio
necessary to incur ratio debt under indentures governing the senior notes and
the senior subordinated notes.
Interest rate swap - In May 2001, we entered into an interest rate swap
on $100,000 of 8% fixed rate notes maturing in October 2010. The swap converted
interest payments from a fixed rate to a floating rate of LIBOR plus 1.97%. This
arrangement qualified as a fair value hedge under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. As such, the net effect from the
interest rate swap was recorded as part of interest expense. The swap agreement
settled quarterly. 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 using the effective
interest method as a reduction to interest expense through October 15, 2010. At
December 31, 2003 the unamortized portion of the termination fee was recorded as
an increase in debt of $3,881. During the three months ended December 31, 2003
and 2002, the swap reduced our interest expense by $324 and $1,084, respectively
and will continue to reduce interest expense through the amortization period of
the termination fee. Based upon interest rates for similar transactions, the
fair value of the interest rate swap agreement was recorded as an asset and a
corresponding increase in debt of $6,067 at June 30, 2003.
Revolving credit facility - We amended our revolving credit facility on
July 28, 2003 to modify the financial covenants from June 30, 2003 through March
31, 2005. Additionally, this amendment authorized the issuance of $200,000 of
senior notes (to refinance our $150,000 of senior subordinated notes due in
2005) and required a permanent reduction in the credit facility of $40,000.
On November 5, 2003, we established a $220,000 senior secured credit
facility, comprised of a $70,000 revolving credit facility (the revolver)
maturing on September 15, 2008 and a $150,000 term loan (the term loan) maturing
on October 15, 2010. This facility amends and restates our existing $215,000
revolving credit facility. We used the proceeds of the new credit facility to
pay the outstanding balance on the former revolving credit facility plus
transaction fees and expenses. The interest rate applicable to borrowings under
the revolver is the agent's prime rate plus 1.50% to 1.75% or a LIBOR-based rate
ranging from LIBOR plus 2.50% to LIBOR plus 3.25%. The interest rate applicable
to the term loan is the agent's prime rate plus 1.50% or a LIBOR-based rate plus
2.50%. The credit facility is secured by substantially all of our assets located
in the United States.
-9-
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 EBITDA, minimum ratio of consolidated EBITDA to
consolidated interest expense and minimum ratio of consolidated EBITDA minus
capital expenditures and taxes to consolidated fixed charges; as well as
limitations on capital expenditures. At December 31, 2003, we were in compliance
with these financial covenants.
As of December 31, 2003, we had $55,217 available on the revolving
credit facility. Total costs for the issuance of the new facility are estimated
at $3,350 and will be amortized using the effective interest method over the
life of the facility. During the three months ending December 31, 2003, $1,640
was expensed as early extinguishment of debt related to the write-off of
deferred financing costs for the former revolving credit facility.
Other credit facilities - On December 5, 2003, we paid off the
remaining balance on our receivables-based credit facility. We used cash on hand
and the restricted cash held as collateral for the facility to make the final
payment.
On September 30, 2003, we renewed our Canadian credit facility. The
renewal extended the maturity to November 30, 2004 and required a 20% reduction
of the principal to Canadian $16,000 (U.S. $12,363 equivalent based on exchange
rates in effect at December 31, 2003). As of December 31, 2003, we had Canadian
$10,300 (U.S. $7,959 equivalent) outstanding on this facility. Availability on
this facility is incorporated in the availability of our revolving credit
facility previously discussed. All other terms and conditions remained the same.
We intend to refinance this facility with available long-term credit facilities
and, therefore, have included the balance in long-term debt.
NOTE G -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) consist of the following:
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- -----------------------------
2003 2002 2003 2002
---------------------------- -----------------------------
(In thousands) (In thousands)
Net income (loss)............................... $(10,013) $ 540 $(12,444) $ 21
Foreign currency translation adjustments - net.. 18,150 9,838 22,057 (3,870)
---------------------------- -----------------------------
Comprehensive income (loss)..................... $8,137 $10,378 $ 9,613 $(3,849)
============================ =============================
The change in the foreign currency translation adjustment is primarily
due to fluctuations in the exchange rate of the US dollar and the Euro of
$17,158, the Brazilian real of $(224) and the Canadian dollar of $5,123 for the
six months ended December 31, 2003.
-10-
NOTE H - STOCK-BASED COMPENSATION
At December 31, 2003, the Company has stock-based compensation plans
which it accounts for under recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based compensation cost is reflected in the statements
of operations. The following table illustrates the effect on net loss and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based compensation.
Three Months Ended Six Months Ended
December 31 December 31
--------------------------- -------------------------
2003 2002 2003 2002
--------------------------- -------------------------
Net loss as reported $(10,013) $540 $(12,444) $ 21
Deduct: Total stock-based compensation expense determined
under fair value based method , net of related tax
effects (211) (772) (749) (1,650)
--------------------------- -------------------------
Pro forma net loss $(10,224) $ (232) $(13,193) $(1,629)
=========================== =========================
Basic earnings per share:
As reported $ (0.27) $0.01 $ (0.34) $(0.00)
Pro forma $ (0.28) $(0.01) $ (0.36) $(0.04)
Diluted earnings per share:
As reported $ (0.27) $ 0.01 $ (0.34) $ 0.00
Pro forma $ (0.28) $(0.01) $ (0.36) $ (0.04)
NOTE I - 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.
-11-
STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $ 22,244 $91,950 $52,394 $(6,309) $160,279
Cost of goods sold 18,794 83,075 47,936 (5,812) 143,993
-------------------------------------------------------------------------------
Gross margin 3,450 8,875 4,458 (497) 16,286
Selling, research and administrative expenses 6,067 4,764 2,117 - 12,948
Restructuring and impairment costs 1,471 1,815 347 - 3,633
-------------------------------------------------------------------------------
Operating income (loss) (4,088) 2,296 1,994 (497) (295)
Other income (expense):
Net interest expense and
amortization of debt (12,254) (94) (162) - (12,510)
Other income/(expense), including equity
income in affiliates (5,844) (370) (700) 4,149 (2,765)
Intercompany interest income/(expense) 8,519 (6,079) (2,440) - -
Intercompany miscellaneous
income/(expense) (126) (264) 390 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting (13,793) (4,511) (918) 3,652 (15,570)
-------------------------------------------------------------------------------
Income tax expense/(benefit) (3,780) (2,109) (797) 1,129 (5,557)
-------------------------------------------------------------------------------
Net income (loss) $(10,013) $(2,402) $(121) $ 2,523 $ (10,013)
===============================================================================
STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2002
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $19,370 $92,931 $47,649 $(6,804) $153,146
Cost of goods sold 14,740 81,876 41,401 (6,666) 131,351
-------------------------------------------------------------------------------
Gross margin 4,630 11,055 6,248 (138) 21,795
Selling, research and administrative expenses 2,038 5,203 1,596 - 8,837
-------------------------------------------------------------------------------
Operating income (loss) 2,592 5,852 4,652 (138) 12,958
Other income (expense):
Net interest expense and
amortization of debt (10,894) (57) (732) - (11,683)
Other income/(expense), including equity
income in affiliates 2,224 (939) 840 (3,053) (928)
Intercompany interest income/(expense) 7,516 (5,319) (2,197) - -
Intercompany miscellaneous
income/(expense) (379) (825) 1,204 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting 1,059 (1,288) 3,767 (3,191) 347
-------------------------------------------------------------------------------
Income tax expense/(benefit) 519 (1,022) 1,874 (1,564) (193)
-------------------------------------------------------------------------------
Net income (loss) $ 540 $ (266) $ 1,893 $(1,627) $ 540
===============================================================================
-12-
STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $ 40,985 $182,054 $106,927 $(13,856) $316,110
Cost of goods sold 33,572 160,472 97,104 (13,285) 277,863
-------------------------------------------------------------------------------
Gross margin 7,413 21,582 9,823 (571) 38,247
Selling, research and administrative expenses 8,661 9,515 4,364 - 22,540
Restructuring and impairment costs 1,685 2,407 579 - 4,671
-------------------------------------------------------------------------------
Operating income (loss) (2,933) 9,660 4,880 (571) 11,036
Other income (expense):
Net interest expense and
amortization of debt (22,771) (166) (750) - (23,687)
Other income/(expense), including equity
income in affiliates (8,442) (883) (569) 3,400 (6,494)
Intercompany interest income/(expense) 15,800 (11,001) (4,799) - -
Intercompany miscellaneous
income/(expense) (446) (950) 1,396 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting (18,792) (3,340) 158 2,829 (19,145)
-------------------------------------------------------------------------------
Income tax expense/(benefit) (6,348) (1,649) 167 1,129 (6,701)
-------------------------------------------------------------------------------
Net income (loss) $(12,444) $(1,691) $ (9) $ 1,700 $ (12,444)
===============================================================================
STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2002
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales $42,713 $183,886 $93,520 $(10,548) $309,571
Cost of goods sold 32,480 163,466 81,062 (9,613) 267,395
-------------------------------------------------------------------------------
Gross margin 10,233 20,420 12,458 (935) 42,176
Selling, research and administrative expenses 4,121 10,154 3,505 - 17,780
-------------------------------------------------------------------------------
Operating income (loss) 6,112 10,266 8,953 (935) 24,396
Other income (expense):
Net interest expense and
amortization of debt (21,875) (195) (1,739) - (23,809)
Other income/(expense), including equity
income in affiliates 1,713 (1,983) 2,903 (3,651) (1,018)
Intercompany interest income/(expense) 14,863 (10,224) (4,639) - -
Intercompany miscellaneous
income/(expense) (772) (1,812) 2,584 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting 41 (3,948) 8,062 (4,586) (431)
-------------------------------------------------------------------------------
Income tax expense/(benefit) 20 (1,661) 3,436 (2,247) (452)
-------------------------------------------------------------------------------
Net income (loss) $ 21 $(2,287) $4,626 $ (2,339) $ 21
===============================================================================
-13-
BALANCE SHEETS
As of December 31, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 165 $ 3,312 $11,792 $ - $ 15,269
Accounts receivable, net 11,805 54,539 42,086 - 108,430
Inventories 22,781 58,603 46,228 (401) 127,211
Other current assets 16,967 17,029 (3,242) - 30,754
Intercompany accounts receivable 15,602 - - (15,602) -
-------------------------------------------------------------------------------
Total current assets 67,320 133,483 96,864 (16,003) 281,664
Property, plant and equipment, net 55,072 353,901 196,008 - 604,981
Goodwill and intangibles, net 3,675 56,165 104,614 - 164,454
Intercompany notes receivable 397,661 - - (397,661) -
Other assets, including investment in
subsidiaries 333,408 333,790 117,985 (772,357) 12,826
-------------------------------------------------------------------------------
Total assets $857,136 $877,339 $515,471 $(1,186,021) $1,063,925
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable $ 5,550 $14,745 $ 6,317 $ - $ 26,612
Other current liabilities 19,979 13,907 9,719 - 43,605
Intercompany accounts payable - 6,676 8,926 (15,602) -
-------------------------------------------------------------------------------
Total current liabilities 25,529 35,328 24,962 (15,602) 70,217
Long-term debt 609,751 2,000 7,959 - 619,710
Deferred income taxes (7,102) 67,671 19,379 - 79,948
Other long-term liabilities 5,594 15,188 1,239 - 22,021
Intercompany notes payable - 234,412 163,249 (397,661) -
Stockholders'/invested equity 223,364 522,740 298,683 (772,758) 272,029
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $857,136 $877,339 $515,471 $(1,186,021) $1,063,925
===============================================================================
-14-
BALANCE SHEETS
As of June 30, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $26,075 $ 4,349 $19,553 $ - $ 49,977
Restricted cash and short-term investments - - 3,375 - 3,375
Accounts receivable, net 6,672 42,657 76,954 - 126,283
Inventories 28,711 61,532 46,291 171 136,705
Other current assets 9,573 18,913 (2,179) - 26,307
Intercompany accounts receivable 9,553 - - (9,553) -
-------------------------------------------------------------------------------
Total current assets 80,584 127,451 143,994 (9,382) 342,647
Property, plant and equipment, net 51,753 354,057 188,328 - 594,138
Goodwill and intangibles, net 3,698 56,575 100,036 - 160,309
Intercompany notes receivable 379,941 - - (379,941) -
Other assets, including investment in
subsidiaries 337,654 279,717 107,625 (711,435) 13,561
-------------------------------------------------------------------------------
Total assets $853,630 $817,800 $539,983 $(1,100,758) $1,110,655
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable $ 6,153 $20,659 $10,195 $ - $ 37,007
Other current liabilities 12,553 25,978 52,129 1 90,661
Intercompany accounts payable - 1,710 7,843 (9,553) -
-------------------------------------------------------------------------------
Total current liabilities 18,706 48,347 70,167 (9,552) 127,668
Long-term debt 617,474 2,000 - - 619,474
Deferred income taxes (6,320) 67,671 18,147 - 79,498
Other long-term liabilities 5,543 15,387 1,201 - 22,131
Intercompany notes payable - 211,392 168,549 (379,941) -
Stockholders'/invested equity 218,227 473,003 281,919 (711,265) 261,884
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $853,630 $817,800 $539,983 $(1,100,758) $1,110,655
===============================================================================
-15-
STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by operations $ 7,851 $ 12,228 $7,817 $ 27,896
Investing activities:
Purchases of property, plant and equipment (5,353) (14,683) (1,154) (21,190)
Other - (292) (1) (293)
---------------------------------------------------------------
Net cash used in investing activities (5,353) (14,975) (1,155) (21,483)
Financing activities
Net borrowings (payments) under revolving
line of credit (205,526) - (7,189) (212,715)
Payments for debt issuance and
extinguishment (9,228) - - (9,228)
Net issuance of (payments on) long-term
debt and other 186,346 1,710 (8,399) 179,657
---------------------------------------------------------------
Net cash provided by (used in)
financing activities (28,408) 1,710 (15,588) (42,286)
Effect of foreign currency rate fluctuations
on cash - - 1,165 1,165
Decrease in cash and cash equivalents (25,910) (1,037) (7,761) (34,708)
Cash and cash equivalents at beginning
of period 26,075 4,349 19,553 49,977
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 165 $3,312 $ 11,792 $ 15,269
===============================================================
STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2002
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used for)operations $(3,613) $9,546 $9,692 $15,625
Investing activities:
Purchases of property, plant and equipment (1,031) (9,045) (1,120) (11,196)
Other - (481) 54 (427)
---------------------------------------------------------------
Net cash used in investing activities (1,031) (9,526) (1,066) (11,623)
Financing activities
Net borrowings (payments) under revolving
lines of credit (4,923) - - (4,923)
Payments for debt issuance costs (256) - (415) (671)
Net issuance of (payments on) long-term
debt and other (15,597) 1,732 (8,399) (22,264)
---------------------------------------------------------------
Net cash provided by (used in) financing
activities (20,776) 1,732 (8,814) (27,858)
Effect of foreign currency rate fluctuations
on cash - (11) 116 105
Increase (decrease) in cash and cash
equivalents (25,420) 1,741 (72) (23,751)
Cash and cash equivalents at beginning
of period 36,443 1,358 18,205 56,006
---------------------------------------------------------------
Cash and cash equivalents at end of period $11,023 $3,099 $18,133 $32,255
===============================================================
-16-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis describes the
principal factors affecting the results of operations, liquidity and capital
resources, as well as the critical accounting policies and estimates of Buckeye.
This discussion should be read in conjunction with the accompanying financial
statements and our Annual Report on Form 10-K for the year ended June 30, 2003,
which include additional information about our practices and the transactions
that underlie our financial results.
Critical Accounting Policies
The preparation of our financial statements requires estimates,
assumptions and judgements that affect our assets, liabilities, revenues and
expenses. Our management bases these estimates and assumptions on historical
data and trends, current fact patterns, expectations and other sources of
information they believe are reasonable. Actual results may differ from these
estimates under different conditions. For a full description of our critical
accounting policies, see the Management's Discussion and Analysis in our 2003
Annual Report on Form 10-K.
Results of Operations
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.
Except as otherwise specified, references to years indicate our fiscal
year ending June 30, 2004 or ended June 30 of the year referenced and
comparisons are to the corresponding period of the prior year.
Volume and net sales
Net sales for the three months ended December 31, 2003 were $160.3
million compared to $153.1 million for the same period in 2002, an increase of
$7.2 million or 4.7%. Net sales for the six months ended December 31, 2003 were
$316.1 million compared to $309.6 million for the same period in 2002, an
increase of $6.5 million or 2.1%. Our sales increased over the prior year as a
result of improved performance in nonwoven materials. Net sales of nonwoven
materials increased by 11.5% versus the same three month period and 12.0% versus
the same six months of the prior year. See additional segment discussion below.
Operating income
Operating income (loss) for the three months ended December 31, 2003
was ($0.3) million compared to $13.0 million for the same period in the prior
year, a decrease of $13.3 million. Operating income for the six months ending
December 31, 2003 was $11.0 million, a decrease of $13.4 million from same
period in 2002. These decreases were the result of several factors, as described
in the segment results. We incurred additional charges related to unusual events
and special situations in the specialty fibers segment, which reduced operating
income during the quarter. The corporate segment was negatively impacted by an
additional $2.7 million of restructuring costs related to the 2003 restructuring
program and the impairment of certain assets totaling $0.9 million. All of these
items are discussed in more detail later in this discussion and analysis.
Additionally, the 26% and 16% strengthening of the Euro and Canadian dollar,
respectively, during the preceding eighteen months negatively impacted operating
income at our Glueckstadt, Germany facility and Delta, British Columbia facility
where sales are made in U.S. dollars and costs are incurred in Euros and
Canadian dollars.
-17-
Segment results
We report results in two segments: nonwoven materials and specialty
fibers. The specialty fiber segment is an aggregation of cellulosic fibers based
on both wood and cotton. We make financial decisions and allocate resources
based on the sales and operating income of each segment. We allocate selling,
research, and administration expense 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 restructuring
costs, asset impairment and certain financing and investing costs.
Specialty fibers
Net sales for the three months ended December 31, 2003 were $114.6
million compared to $113.9 million for the same period in 2002, an increase of
$0.7 million or 0.6%. This slight increase was the result of increased selling
prices of product produced at our Perry, Florida wood pulp facility, partially
offset by lower selling prices for cotton-based products. Net sales for the six
months ended December 31, 2003 decreased $4.3 million to $221.9 million from the
same period in 2002. The decrease in net sales during the six month period was
due primarily to lower selling prices for cotton-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 over the last year, we reduced our sales prices. The
selling prices for our cotton-based products decreased by approximately 6.1% for
the three months and 6.6% for the six months ended December 31, 2003 from the
same periods in 2002.
Market supply constraints, coupled with a weakening U.S. dollar and
higher energy costs, provided the basis for us to increase our list prices of
certain wood pulps by $40 - $50 per metric ton effective April 1, 2003. The
higher prices were partially implemented during the fiscal fourth quarter of
2003. The full impact of dissolving wood price increases will not be felt until
calendar 2004 when we renew our calendar year supply agreements.
Operating income for the three months ended December 31, 2003 was $2.8
million (2.4% of net sales) compared to $12.7 million (11.2% of net sales) for
the same period in 2002, a decrease of $9.9 million. Operating income for the
six months ended December 31, 2003 was $13.1 million (5.9% of net sales)
compared to $24.4 million (10.8% of net sales) for the same period in 2002. The
decrease in operating income, for both the three and six month periods, was the
result of several additional charges related to unusual events and special
situations discussed below:
- Lenzing Fibers, a specialty fibers customer which owes us $3.7 million, filed
for Chapter 11 reorganization bankruptcy during the three months ending December
31, 2003. Based on an evaluation of the potential to recover this debt from our
customer, we established a reserve of $3.2 million. The reserve represents our
best estimate at this time for the amounts we may not recover as a result of
this customer's bankruptcy.
- We incurred high manufacturing costs and reduced production at both our Perry,
Florida wood pulp mill and our Memphis, Tennessee cotton cellulose facility. The
poor operating results were related to maintenance work completed in October at
each location. The Perry, Florida plant had difficulty reestablishing stable
operations following the maintenance shutdown, and the Memphis plant was
impacted by the startup of new equipment and processes associated with the
production of paper grade products previously produced at the recently closed
Lumberton cotton cellulose plant. Although both plants have now returned to
normal operations, the reliability issues resulted in low production and
increased manufacturing costs for the three months ending December 31, 2003.
- On October 21, 2003, the union at our Perry, Florida plant, ratified a new
labor agreement effective through March 31, 2008. The agreement included a
one-time retroactive payment of approximately $0.8 million.
-18-
The decrease in operating income during the three and six month periods
ending December 31, 2003 was also the result of the continued strengthening of
the Euro as discussed previously under the operating income section of this
discussion and analysis. All of these decreases were partially offset by a more
favorable specialty wood fiber sales mix, higher fluff pulp prices, and
operating the Americana, Brazil facility for the entire six months in 2003.
Nonwoven materials
Net sales for the three months ended December 31, 2003 were $51.2
million compared to $45.9 million in the same period in 2002, an increase of
$5.3 million or 11.5%. Net sales for the six months ended December 31, 2003 were
$104.4 million compared to $93.2 million in the same period in 2002, an increase
of $11.2 million or 12.0%. The increases in net sales were primarily due to an
increase in shipments and strengthening of the Euro versus the U.S. dollar
during both periods.
Nonwoven materials operating income for the three months ended December
31, 2003 was $1.1 million (2.1% of net sales) compared to $0.3 million (0.7% of
net sales) during the same period in 2002, an improvement of $0.8 million.
Operating income for the six months ended December 31, 2003 was $3.6 million
compared to $0.8 million during the same period in 2002, an improvement of $2.8
million. Our increase in operating income is reflective of improvements in
reliability, cost reductions, changes in product mix and increased volume during
the three and six months ended December 31, 2003.
Restructuring costs
During fiscal 2003 we initiated the first phase of our 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. This phase of
the program continued into fiscal 2004. During the six months ended December 31,
2003, additional expenses of $0.8 million were recorded and $2.1 million were
paid for this phase of the program. These additional expenses included $0.6
million for miscellaneous costs associated with the partial closure of the
Lumberton facility. While we ceased producing cotton cellulose at our Lumberton
facility at the end of August 2003, we are still continuing to supply some of
our cotton-based specialty fiber customers with product previously produced at
Lumberton. We estimate the remaining expenses for this phase of the
restructuring program to be approximately $0.2 million, which we expect to be
recognized and paid in calendar year 2004.
During the first quarter of fiscal 2004, we entered into a second phase
of our restructuring program designed to deliver cost reductions through reduced
overhead expenses across the company. This program was a continuation of the
program initiated in the fourth quarter of fiscal 2003. This phase of the
program is expected to enable us to improve our operating results by
approximately $6.0 million annually through reduced salaries, benefits, other
employee related expenses and operating expenses. As a result of the
reorganization, approximately 50 positions will be eliminated. These positions
include manufacturing, sales, product development and administrative functions
throughout the organization. Voluntary and involuntary termination benefits
related to this phase of the program of $2.9 million were expensed and $0.4
million were paid during the six months ended December 31, 2003. We expect
payments related to this phase of the restructuring program to continue
throughout fiscal 2004. The total cost of this phase of the restructuring
program is estimated to be approximately $3.1 million in fiscal 2004.
Impairment costs
During the second quarter, we fully impaired engineering costs and
capitalized interest for a long delayed project at our Perry, Florida wood pulp
mill. Based on the significant length of time before the project would be
initiated we determined that the engineering work had no remaining value and was
fully impaired. The carrying value of the asset was $0.9 million.
-19-
Net interest expense and amortization of debt costs
We incurred net interest expense and amortization of debt costs of
$12.5 million for the three months ended December 31, 2003 compared to $11.7
million for the same period in 2002. This increase of $0.8 million was primarily
due to additional interest expense incurred during the first 22 days of October
when both the $150 million of senior subordinated notes due 2005 and the $200
million of senior notes due 2013 were outstanding.
Net interest expense and amortization of debt costs were $23.7 million
for the six months ended December 31, 2003 compared to $23.8 million for the
same period in the prior year. The consistency is the result of several
offsetting factors. Lower interest rates and average debt levels during the six
months ending December 31, 2003 offset both the negative impact of the
termination of the swap and the additional interest 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 six months of fiscal
2004.
Loss on early extinguishment of debt
During the first quarter of fiscal 2004, $3.3 million was expensed
related to the early extinguishment of the $150 million senior subordinated
notes due 2005. These expenses included a $2.1 million call premium and $1.2
million related to the write-off of deferred financing costs. During the three
months ending December 31, 2003, $1.6 million was expensed related to the
write-off of the deferred financing costs of the former revolving credit
facility. The total expense related to the early extinguishment of debt for the
six months ending December 31, 2003 was $4.9 million.
Foreign exchange, amortization of intangibles and other
Foreign exchange, amortization of intangibles and other for the three
months ended December 31, 2003 and 2002 were $1.1 million and $0.9 million,
respectively. Foreign exchange, amortization of intangibles and other for the
six months ended December 31, 2003 and 2002 were $1.6 million and $1.0 million,
respectively. The $0.6 million unfavorable variance for the six month period was
due primarily to a $1.8 million shift from foreign currency gains in fiscal 2003
to foreign currency losses in fiscal 2004. This was partially offset by the
absence of expenses related to the settlement of a lawsuit and the negative
impact of a natural gas forward contract recognized during the first quarter of
fiscal 2003.
Financial Condition
Cash flow
Cash flow provided by operating activities of $27.9 million for the six
months ended December 31, 2003 was $12.3 million higher than the same period in
the prior year. This improved cash flow was primarily due to a larger reduction
in accounts receivable in 2003 versus the same period in 2002 and reductions in
inventory partially offset by lower earnings. Approximately $10.0 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.
Cash provided from operations and cash on hand financed capital
expenditures of $21.2 million and were used to make debt payments net of
issuance proceeds of $35.4 million during the six months ended December 31,
2003. The $10.0 million increase in capital expenditures versus the same period
in 2002 is primarily attributable to capital expenditures at our Memphis,
Tennessee facility to provide the capability to manufacture cotton cellulose
products previously manufactured at our Lumberton, North Carolina facility and
the maintenance shutdown at the Perry, Florida plant during calendar 2003.
-20-
Contractual obligations
There have been no material changes to our contractual obligations
discussed in our June 30, 2003 Form 10-K other than those changes in long-term
debt discussed in the liquidity section which follows.
Liquidity and capital resources
We have the following major sources of financing: revolving credit
facility, senior notes and senior subordinated notes. Our revolving credit
facility, senior notes and senior subordinated notes contain various covenants.
At December 31, 2003, we were in compliance with such covenants and believe we
will remain in compliance throughout fiscal year 2004.
Senior notes - On September 22, 2003 we placed privately $200 million
in aggregate principal amount of 8.5% senior notes due October 1, 2013. The
notes are unsecured obligations and are senior to any of our subordinated debt.
The notes are guaranteed by our direct and indirect domestic subsidiaries that
are also guarantors on our senior secured indebtedness. We used the net proceeds
from the private placement to redeem our $150 million senior subordinated notes
due 2005, make a permanent reduction of $40 million to our revolving credit
facility and pay the related transaction costs. 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 these
privately placed unregistered senior notes for debt securities of like principal
amount that have been registered under the Securities Act of 1933, as amended.
We incurred an additional $1.1 million of interest expense associated
with maintaining the 2005 notes through the call period. Of the $1.1 million, we
expensed $0.3 million during the first three months of fiscal 2004 and recorded
the remaining $0.8 million during the three months ending December 31, 2003. The
total costs for the issuance of these notes are estimated at $5.4 million and
will be amortized over the life of the notes using the effective interest
method.
Senior subordinated notes - Under the indentures governing our senior
subordinated notes, as well as the indenture that governs the senior notes, our
ability to incur additional debt is limited. Under these indentures, additional
debt must be incurred as so-called "ratio" debt or, alternatively, must be
permitted in form and amount as "Permitted Indebtedness." In order to incur
ratio debt, a specified consolidated fixed charge coverage ratio (as defined in
the indentures) must equal or exceed 2:1 (measured on a rolling four-quarter
basis). At March 31, 2002, our fixed charge cover ratio fell below 2:1. This
development did not breach any covenant or constitute an event of default under
any of our debt agreements. However, until such time as the ratio again equals
or exceeds 2:1, we can only incur debt that is Permitted Indebtedness.
On October 16, 2003, we successfully completed a solicitation of
consents from holders of our notes due in 2008 (2008 notes) to amend this
indenture to conform certain provisions of the 2008 notes to the provisions in
our notes due in 2010 and to current market practice. This amendment allowed us
to refinance our revolving credit facility (discussed later in this note) while
we are still limited to Permitted Indebtedness as defined in the indentures.
Under each of these indentures, the fixed charge coverage ratio test is
measured on a rolling four-quarter basis. While we can offer no assurance in
this regard, we believe that our operating results will improve over the next
several quarters and that such improved results together with recent reductions
in our outstanding debt, will enable us to exceed the required 2:1 ratio
necessary to incur ratio debt under indentures governing the senior notes and
the senior subordinated notes.
Interest rate swap - In May 2001, we entered into an interest rate swap
on $100 million 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
-21-
effect from the interest rate swap was recorded as part of interest expense. The
swap agreement settled quarterly. 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 $4.0 million as an early termination fee, which is being amortized as a
reduction to interest expense through October 15, 2010. During the three months
ended December 31, 2003 and 2002, the swap reduced the Company's interest
expense by $0.3 million and $1.1 million, respectively and will continue to
reduce interest expense by $0.1 million per quarter through the amortization
period of the termination fee. Based upon interest rates for similar
transactions, the fair value of the interest rate swap agreement was recorded as
an asset and a corresponding increase in debt of $6.1 million at June 30, 2003.
Revolving credit facility - We amended our revolving credit facility on
July 28, 2003 to modify the financial covenants from June 30, 2003 through March
31, 2005. Additionally, this amendment authorized the issuance of $200 million
of senior notes (to refinance our $150 million of senior subordinated notes due
in 2005) and required a permanent reduction in the credit facility of $40
million.
On November 5, 2003, we established a $220 million senior secured
credit facility, comprised of a $70 million revolving credit facility (the
revolver) maturing on September 15, 2008 and a $150 million term loan (the term
loan) maturing on October 15, 2010. This facility amends and restates our
existing $215 million revolving credit facility. We used the proceeds of the new
credit facility to pay the outstanding balance on the revolving credit facility
plus transaction fees and expenses. The interest rate applicable to borrowings
under the revolver is the agent's prime rate plus 1.50% to 1.75% or a
LIBOR-based rate ranging from LIBOR plus 2.50% to LIBOR plus 3.25%. The interest
rate applicable to the term loan is the agent's prime rate plus 1.50% or a
LIBOR-based rate plus 2.50%. The credit facility is secured by substantially all
of our assets located in the United States.
The credit facility contains covenants customary for financing of this
type. The financial covenants include: maximum ratio of consolidated net senior
secured debt to consolidated 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.
As of December 31, 2003 we had $55.2 million available on the revolving
credit facility. Total costs for the issuance of the new facility are estimated
at $3.4 million and will be amortized using the effective interest method over
the life of the facility. During the three months ending December 31, 2003, $1.6
million was expensed as early extinguishment of debt related to the write-off of
deferred financing costs for the revolving credit facility.
Other credit facilities - On December 5, 2003 we paid off the remaining
balance on our receivables-based credit facility. We used cash on hand and the
restricted cash held as collateral for the facility to make the final payment.
On September 30, 2003, we renewed our Canadian credit facility. The
renewal extended the maturity to November 30, 2004 and required a 20% reduction
of the principal to Canadian $16.0 million (U.S. $12.4 million equivalent based
on exchange rates in effect at December 31, 2003). As of December 31, 2003, we
had Canadian $10.3 million (U.S. $8.0 million equivalent) outstanding on this
facility. Availability on this facility is incorporated in the availability of
our revolving credit facility previously discussed. All other terms and
conditions remained the same. We intend to refinance this facility with
available long-term credit facilities and, therefore, have included the balance
in long-term debt.
-22-
Forward-Looking Statements
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially,
including but not limited to, economic, competitive, governmental, and
technological factors affecting our operations, financing, markets, products,
services, prices, and other factors. 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. For additional factors that could impact
future results, please see our 2003 Annual Report on Form 10-K on file with the
Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the six months ending December 31, 2003, there have been no
material changes to our market risk except for the interest rate implications
caused by the changes in our debt structure. Our amended and restated revolving
credit facility improved our variable interest rates by over 1.0%. We also fixed
an additional $50 million of debt at 8.5% which was previously variable rate
debt. In addition, the early termination of the swap fixed $100 million of debt
at 8.0% that under the swap was effectively variable debt.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation as of December 31, 2003 of our disclosure controls and
procedures, as such term is defined under Rule 13-a14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on their
evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions
with regards to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On November 6, 2003 we held our Annual Meeting of Stockholders. At the
meeting, Red Cavaney and David B. Ferraro were each re-elected as Class II
directors to hold office for a three-year term or until their successors are
elected and qualified. For Mr. Cavaney, 34,186,528 votes were cast in favor and
794,944 votes were withheld. For Mr. Ferraro, 28,932,581 votes were cast in
favor and 6,048,891 were withheld.
Following the election, our Board of Directors consisted of George W.
Bryan, R. Howard Cannon, Robert E. Cannon, Red Cavaney, David B. Ferraro,
Henry F. Frigon, and Samuel M. Mencoff.
The stockholders also ratified the appointment of Ernst & Young LLP as
our independent auditors. 34,540,406 votes were cast in favor of the
ratification, 436,152 were cast against and 4,914 votes abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, signed by
David B. Ferraro, the Chief Executive Officer of Buckeye
Technologies Inc. on January 30, 2004.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, signed by
Kristopher J. Matula, the Chief Financial Officer of Buckeye
Technologies Inc. on January 30, 2004.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by David B. Ferraro, the Chief Executive Officer of
Buckeye Technologies Inc. on January 30, 2004.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Kristopher J. Matula, the Chief Financial Officer of
Buckeye Technologies Inc. on January 30, 2004.
(b) Reports on Form 8-K
During the three months ended December 31, 2003, the following reports
were filed on Form 8-K:
- Report dated October 2, 2003 announcing the conference call
regarding operating results for the quarter ended September
30, 2003.
- Report dated October 20, 2003 announcing the press release
regarding the results of operations for the quarter ended
September 30, 2003.
- Report dated October 21, 2003 replacing the corresponding
Supplemental Financial Data schedule included in the press
release dated October 20, 2003.
- Report dated December 16, 2003 announcing the press release
regarding the estimated loss of 27 - 30 cents per share for the
quarter ending December 31, 2003.
(c) Items 1, 2, 3, and 5 are not applicable and have been omitted.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Buckeye Technologies Inc.
By: /S/ DAVID B. FERRARO
-------------------------
David B. Ferraro, Chief Executive Officer
Date: January 30, 2004
By: /S/ KRISTOPHER J. MATULA
-------------------------
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
Date: January 30, 2004
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