10-Q for December 31, 2006

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 December 31, 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 o
Accelerated filer x
Non-accelerated filer o

As of February 2, 2007, there were outstanding 37,813,606 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, 2006 and 2005
3
     
 
Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2006
4
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2005
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
25
     
4.
Controls and Procedures
25
     
 
PART II - OTHER INFORMATION
 
     
4.
Submission of Matters to a Vote of Security Holders
26
     
6.
Exhibits
26
     
 
SIGNATURES
27
     


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
 
 
 
2006
 
2005
 
2006
 
2005
 
Net sales
 
$
184,730
 
$
188,254
 
$
376,136
 
$
353,710
 
Cost of goods sold
 
 
155,711
 
 
162,546
 
 
317,782
 
 
303,809
 
Gross margin
 
 
29,019
 
 
25,708
 
 
58,354
 
 
49,901
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, research and administrative expenses
 
 
11,163
 
 
11,354
 
 
22,367
 
 
22,760
 
Amortization of intangibles and other
 
 
507
 
 
477
 
 
1,138
 
 
1,008
 
Restructuring costs
 
 
11
 
 
1,141
 
 
24
 
 
3,092
 
Operating income
 
 
17,338
 
 
12,736
 
 
34,825
 
 
23,041
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest expense and amortization of debt costs
 
 
(10,440
)
 
(10,574
)
 
(21,191
)
 
(20,758
)
Gain on sale of assets held for sale
 
 
-
 
 
-
 
 
355
 
 
-
 
Loss on early extinguishment of debt
 
 
(96
)
 
-
 
 
(652
)
 
(151
)
Foreign exchange and other
 
 
246
 
 
(22
)
 
252
 
 
(390
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 
7,048
 
 
2,140
 
 
13,589
 
 
1,742
 
Income tax expense
 
 
3,228
 
 
286
 
 
5,962
 
 
177
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
3,820
 
$
1,854
 
$
7,627
 
$
1,565
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.10
 
$
0.05
 
$
0.20
 
$
0.04
 
Diluted
 
$
0.10
 
$
0.05
 
$
0.20
 
$
0.04
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares for basic earnings per share
 
 
37,702
 
 
37,592
 
 
37,682
 
 
37,590
 
Adjusted weighted average shares for diluted earnings per share
 
 
38,010
 
 
37,630
 
 
37,851
 
 
37,633
 

 

See accompanying notes.

3


BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

   
December 31
2006
 
June 30
2006
 
   
(Unaudited)
     
Assets
             
Current assets:
             
Cash and cash equivalents
 
$
12,693
 
$
8,734
 
Accounts receivable - net
   
111,055
   
114,098
 
Inventories
   
86,094
   
98,567
 
Deferred income taxes and other
   
7,078
   
8,473
 
Total current assets
   
216,920
   
229,872
 
               
Property, plant and equipment
   
970,466
   
957,677
 
Less accumulated depreciation
   
(448,632
)
 
(425,779
)
     
521,834
   
531,898
 
Goodwill
   
145,844
   
149,106
 
Intellectual property and other, net
   
36,461
   
38,677
 
Total assets
 
$
921,059
 
$
949,553
 
               
Liabilities and stockholders’ equity
             
Current liabilities:
             
Trade accounts payable
 
$
33,771
 
$
32,973
 
Accrued expenses
   
47,311
   
48,416
 
Current portion of capital lease obligation
   
383
   
627
 
Current portion of long-term debt
   
998
   
1,294
 
Total current liabilities
   
82,463
   
83,310
 
               
Long-term debt
   
482,749
   
519,414
 
Accrued postretirement benefits
   
19,542
   
19,367
 
Deferred income taxes
   
38,503
   
35,686
 
Capital lease obligation
   
560
   
755
 
Other liabilities
   
1,957
   
1,304
 
Stockholders’ equity
   
295,285
   
289,717
 
Total liabilities and stockholders’ equity
 
$
921,059
 
$
949,553
 

See accompanying notes.

4


BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
   
Six Months Ended
December 31
 
   
2006
 
2005
 
Operating activities
             
Net income
 
$
7,627
 
$
1,565
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation
   
24,311
   
23,385
 
Amortization
   
1,648
   
1,599
 
Deferred income taxes and other
   
3,913
   
(1,675
)
Gain on sale of assets held for sale
   
(355
)
 
-
 
Loss on disposal of equipment
   
215
   
-
 
Changes in operating assets and liabilities:
           
Accounts receivable
   
6,860
   
(3,130
)
Inventories
   
12,392
   
(12,387
)
Other assets
   
(2,857
)
 
(2,798
)
Accounts payable and other current liabilities
   
334
   
2,336
 
Net cash provided by operating activities
   
54,088
   
8,895
 
 
Investing activities
             
Purchases of property, plant and equipment
   
(14,325
)
 
(34,358
)
Proceeds from sale of assets
   
521
   
-
 
Other
   
(280
)
 
(276
)
Net cash used in investing activities
   
(14,084
)
 
(34,634
)
 
Financing activities
             
Net borrowings (payments) under lines of credit
   
(1,487
)
 
42,250
 
Payments on long-term debt and other
   
(35,689
)
 
(15,963
)
Net proceeds from sale of equity interests
   
1,099
   
66
 
Net cash provided by (used in) financing activities
   
(36,077
)
 
26,353
 
Effect of foreign currency rate fluctuations on cash
   
32
   
(63
)
Increase in cash and cash equivalents
   
3,959
   
551
 
Cash and cash equivalents at beginning of period
   
8,734
   
9,926
 
Cash and cash equivalents at end of period
 
$
12,693
 
$
10,477
 

See accompanying notes.

5


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 and six months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the 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. 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:
SEGMENT INFORMATION
 
We report results for two segments, specialty fibers and nonwoven materials. The specialty fiber segment is an aggregation of operating segments producing 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:
 

6



 
Three Months Ended
December 31
     
Specialty
Fibers
 
Nonwoven Materials
 
 
Corporate
 
 
Total
 
Net sales
   
2006
 
$
130,126
 
$
62,488
 
$
(7,884
)
$
184,730
 
     
2005
   
137,898
   
58,460
   
(8,104
)
 
188,254
 
Operating income (loss)
   
2006
   
13,194
   
4,846
   
(702
)
 
17,338
 
     
2005
   
11,559
   
2,739
   
(1,562
)
 
12,736
 
Depreciation and amortization of
   
2006
   
7,859
   
3,965
   
851
   
12,675
 
intangibles
   
2005
   
7,406
   
4,062
   
842
   
12,310
 
Capital expenditures
   
2006
   
6,083
   
580
   
1,057
   
7,720
 
     
2005
   
13,262
   
406
   
410
   
14,078
 
 
Six Months Ended
December 31
     
Specialty
Fibers
 
Nonwoven Materials
 
 
Corporate
 
 
Total
 
Net sales
   
2006
 
$
265,001
 
$
127,455
 
$
(16,320
)
$
376,136
 
     
2005
   
252,459
   
115,786
   
(14,535
)
 
353,710
 
Operating income (loss)
   
2006
   
25,482
   
10,825
   
(1,482
)
 
34,825
 
     
2005
   
21,722
   
5,299
   
(3,980
)
 
23,041
 
Depreciation and amortization of
   
2006
   
15,557
   
8,136
   
1,805
   
25,498
 
intangibles
   
2005
   
14,680
   
8,100
   
1,687
   
24,467
 
Capital expenditures
   
2006
   
11,656
   
997
   
1,672
   
14,325
 
     
2005
   
32,592
   
1,005
   
761
   
34,358
 
 
Management evaluates operating performance of the specialty fibers and nonwoven materials segments excluding amortization of intangibles, the impact of impairment of long-lived assets and charges related to restructuring. Therefore, the corporate segment includes operating elements such as segment eliminations, amortization of intangibles, impairment of long-lived assets and charges related to restructuring. Corporate net sales represent the elimination of intersegment sales included in the specialty fibers reporting segment. We account for intersegment sales as if the sales were made to third parties, that is, at current market prices. Corporate operating income in 2005 included $1,141 and $3,092 of restructuring cost for the three and six month periods, respectively.
 
 
NOTE 3: RESTRUCTURING COSTS AND ASSETS HELD FOR SALE
 
During the six months ended December 31, 2005, we incurred restructuring costs, related to the closure of our specialty fibers facility in Glueckstadt, Germany of $3,082. Severance and employee benefit costs comprised $2,583 of these costs. For the six months ending December 31, 2006, $24 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.
 
 
NOTE 4: 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.
 

7


The components of inventory consist of the following:
 
   
December 31
2006
 
June 30
2006
 
           
Raw materials
 
$
22,030
 
$
30,028
 
Finished goods
   
42,549
   
45,759
 
Storeroom and other supplies
   
21,515
   
22,780
 
   
$
86,094
 
$
98,567
 

NOTE 5:
DEBT

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

   
December 31
2006
 
June 30
2006
 
Senior Notes due:
         
2013
 
$
200,000
 
$
200,000
 
Senior Subordinated Notes due:
             
2008
   
64,923
   
64,902
 
2010
   
151,814
   
152,059
 
Credit facility
   
62,010
   
98,747
 
Other
   
5,000
   
5,000
 
     
483,747
   
520,708
 
Less current portion
   
998
   
1,294
 
   
$
482,749
 
$
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 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 year 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 subordinated notes and our senior notes, our ability to incur additional debt is limited. Under these indentures, additional debt must be incurred as so-called “Ratio Debt” or, alternatively, must be permitted in form and amount as “Permitted Indebtedness.” In order to incur Ratio Debt, a specified consolidated fixed charge coverage ratio (as defined in the indentures) must equal or exceed 2:1 (measured on a rolling four-quarter basis). Falling below the 2:1 ratio does not breach any covenant or constitute an event of default under any of our debt agreements. As of December 31, 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 six months ending December 31, 2006, we made an excess cash flow payment of $296 based on fiscal 2006 operating and cash flow performance.
 
We had $62,010 outstanding on this facility ($60,497 on the term loan and $1,513 on the revolver) at an average variable interest rate of 7.5% as of December 31, 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 December 31, 2006, we made additional voluntary prepayments on the term loan of $13,750, which makes the voluntary prepayments for the six months ended December 31, 2006 equal to $34,454. 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 $96 and $652 during the three and six months ended December 31, 2006, respectively.
 
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 December 31, 2006, we were in compliance with these financial covenants.
 
As of December 31, 2006, we had $63,455 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 December 31, 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 December 31, 2006, we have accrued interest on the note of $2,042.
 

8


NOTE 6:
COMPREHENSIVE INCOME
 
The components of comprehensive income consist of the following:
 
   
Three Months Ended
 
Six Months Ended
 
   
December 31
 
December 31
 
   
2006
 
2005
 
2006
 
2005
 
Net income
 
$
3,820
 
$
1,854
 
$
7,627
 
$
1,565
 
Foreign currency translation adjustments - net
   
(2,632
)
 
(4,032
)
 
(3,607
)
 
4,143
 
Comprehensive income (loss)
 
$
1,188
 
$
(2,178
)
$
4,020
 
$
5,708
 
 
    For the three and six months ended December 31, 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 European euro of $2,550 and $2,317 , the Brazilian real of $36 and $(254) and the Canadian dollar of $(5,345) and $(5,975).
 
For the three months and six months ended December 31, 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 European euro of $(1,622) and $(1,962), the Brazilian real of $(2,888) and $(1,617) and the Canadian dollar of $505 and $7,961.

NOTE 7:
INCOME TAXES
 
Our effective tax rates for the three and six month period ended December 31, 2006 were 45.8% and 43.9%. Our effective tax rates for the same periods of 2005 were 13.4% and 10.2%, respectively. 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 low level of our earnings before taxes for the six months ended December 31, 2005, these factors had a more significant impact on our effective tax rate in those periods. The rate increase for the six month period ended December 31, 2006 was also impacted by a change in estimate related to the valuation allowance for the Brazil net operating loss carryforwards. Our income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes due to the following:

 
   
Three Months Ended
 
Six Months Ended
 
   
December 31
 
December 31
 
   
2006
 
2005
 
2006
 
2005
 
Expected tax expense at 35%
 
$
2,467
 
$
748
 
$
4,756
 
$
609
 
Effect of foreign operations
   
200
   
341
   
(390
)
 
648
 
Extraterritorial income benefit
   
(117
)
 
(104
)
 
(213
)
 
(256
)
Brazilian valuation allowance
   
700
   
153
   
2,139
   
153
 
Adjustment of state deferred taxes
   
-
   
(595
)
 
-
   
(595
)
Other
   
(22
)
 
(257
)
 
(330
)
 
(382
)
Income tax expense
 
$
3,228
 
$
286
 
$
5,962
 
$
177
 

 

9


 
NOTE 8: 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 December 31
 
Six Months Ended
December 31
 
     
2006
   
2005
   
2006
   
2005
 
Service cost for benefits earned
 
$
150
 
$
157
 
$
299
 
$
314
 
Interest cost on benefit obligation
   
352
   
314
   
704
   
628
 
Amortization of unrecognized prior service credit
   
(251
)
 
(264
)
 
(501
)
 
(528
)
Actuarial loss
   
142
   
150
   
284
   
300
 
Total cost
 
$
393
 
$
357
 
$
786
 
$
714
 
 
NOTE 9: COMPUTATION OF EARNINGS PER SHARE
 
The calculation of basic and diluted earnings per common share was as follows:
 
   
Three Months Ended December 31
 
Six Months Ended
December 31
 
   
2006
 
2005
 
2006
 
2005
 
Net income applicable to common shareholders 
 
$
3,820
 
$
1,854
 
$
7,627
 
$
1,565
 
                           
Weighted-average shares of common stock
Outstanding
   
37,702
   
37,592
   
37,682
   
37,590
 
Effect of diluted shares
   
308
   
38
   
169
   
43
 
Weighted-average common and common equivalent
shares outstanding
   
38,010
   
37,630
   
37,851
   
37,633
 
                           
Earnings per share
                         
Basic
 
$
0.10
 
$
0.05
 
$
0.20
 
$
0.04
 
Diluted
 
$
0.10
 
$
0.05
 
$
0.20
 
$
0.04
 
 
NOTE 10: SUBSEQUENT EVENT
 
On January 23, 2007, we announced our intention to sell our Fiberline operation located in Lumberton, North Carolina. Our Fiberline operation, which is a part of our specialty fibers segment, has the capacity to produce 8,000 tons of fiber annually and is currently operating at about 90% capacity with annual sales revenue of approximately $14,000. If a suitable sales arrangement is not found, we intend to continue to operate and optimize this operation. We believe that there is no impairment of the carrying value of the Fiberline assets.

10


 
NOTE 11: 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 which 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.
 

11


 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2006

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
29,563
 
$
116,259
 
$
47,737
 
$
(8,829
)
$
184,730
 
Cost of goods sold
   
24,660
   
96,826
   
42,898
   
(8,673
)
 
155,711
 
Gross margin
   
4,903
   
19,433
   
4,839
   
(156
)
 
29,019
 
                                 
Selling, research and administrative expenses, and other
   
1,898
   
7,879
   
1,893
   
-
   
11,670
 
Restructuring and impairment costs
   
-
   
-
   
11
   
-
   
11
 
                                 
Operating income (loss)
   
3,005
   
11,554
   
2,935
   
(156
)
 
17,338
 
                                 
Other income (expense):
                               
Net interest income (expense) and amortization of debt
   
(10,453
)
 
(37
)
 
50
   
-
   
(10,440
)
Other income (expense), including equity income (loss) in affiliates
   
14,717
   
(75
)
 
559
   
(15,051
)
 
150
 
Intercompany interest income (expense)
   
7,092
   
(4,736
)
 
(2,356
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
14,361
   
6,706
   
1,188
   
(15,207
)
 
7,048
 
                                 
Income tax expense (benefit)
   
10,541
   
2,226
   
1,346
   
(10,885
)
 
3,228
 
                                 
Net income (loss)
 
$
3,820
 
$
4,480
 
$
(158
)
$
(4,322
)
$
3,820
 
 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2006
   
 
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
60,706
 
$
239,442
 
$
94,010
 
$
(18,022
)
$
376,136
 
Cost of goods sold
   
50,144
   
200,230
   
85,292
   
(17,884
)
 
317,782
 
Gross margin
   
10,562
   
39,212
   
8,718
   
(138
)
 
58,354
 
                                 
Selling, research and administrative expenses, and other
   
3,919
   
15,956
   
3,630
   
-
   
23,505
 
Restructuring and impairment costs
   
-
   
-
   
24
   
-
   
24
 
                                 
Operating income (loss)
   
6,643
   
23,256
   
5,064
   
(138
)
 
34,825
 
                                 
Other income (expense):
                               
Net interest income (expense) and amortization of debt
   
(21,162
)
 
(99
)
 
70
   
-
   
(21,191
)
Other income (expense), including equity income (loss) in affiliates
   
16,506
   
(70
)
 
866
   
(17,347
)
 
(45
)
Intercompany interest income (expense)
   
14,312
   
(9,729
)
 
(4,583
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
16,299
   
13,358
   
1,417
   
(17,485
)
 
13,589
 
                                 
Income tax expense (benefit)
   
8,672
   
4,432
   
2,125
   
(9,267
)
 
5,962
 
                                 
Net income (loss)
 
$
7,627
 
$
8,926
 
$
(708
)
$
(8,218
)
$
7,627
 


12


 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2005
                   
   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
27,604
 
$
118,965
 
$
50,181
 
$
(8,496
)
$
188,254
 
Cost of goods sold
   
23,793
   
101,621
   
45,722
   
(8,590
)
 
162,546
 
Gross margin
   
3,811
   
17,344
   
4,459
   
94
   
25,708
 
                                 
Selling, research and administrative
expenses, and other
   
3,063
   
7,188
   
1,580
   
-
   
11,831
 
Restructuring and impairment costs
   
-
   
-
   
1,141
   
-
   
1,141
 
                                 
Operating income
   
748
   
10,156
   
1,738
   
94
   
12,736
 
                                 
Other income (expense):
                               
Net interest income (expense) and
amortization of debt
   
(11,388
)
 
117
   
697
   
-
   
(10,574
)
Other income (expense), including equity
income (loss) in affiliates
   
6,376
   
(5
)
 
(127
)
 
(6,266
)
 
(22
)
Intercompany interest income (expense)
   
7,263
   
(5,117
)
 
(2,146
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
2,999
   
5,151
   
162
   
(6,172
)
 
2,140
 
                                 
Income tax expense (benefit)
   
1,145
   
1,116
   
185
   
(2,160
)
 
286
 
                                 
Net income (loss)
 
$
1,854
 
$
4,035
 
$
(23
)
$
(4,012
)
$
1,854
 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2005
                   
   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
50,063
 
$
218,961
 
$
100,216
 
$
(15,530
)
$
353,710
 
Cost of goods sold
   
43,004
   
186,631
   
89,912
   
(15,738
)
 
303,809
 
Gross margin
   
7,059
   
32,330
   
10,304
   
208
   
49,901
 
                                 
Selling, research and administrative
expenses, and other
   
6,020
   
14,226
   
3,522
   
-
   
23,768
 
Restructuring and impairment costs
   
-
   
-
   
3,092
   
-
   
3,092
 
                                 
Operating income
   
1,039
   
18,104
   
3,690
   
208
   
23,041
 
                                 
Other income (expense):
                               
Net interest income (expense) and
amortization of debt
   
(22,305
)
 
184
   
1,363
   
-
   
(20,758
)
Other income (expense), including equity
income (loss) in affiliates
   
9,482
   
37
   
(554
)
 
(9,506
)
 
(541
)
Intercompany interest income (expense)
   
14,389
   
(10,400
)
 
(3,989
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
2,605
   
7,925
   
510
   
(9,298
)
 
1,742
 
                                 
Income tax expense (benefit)
   
1,040
   
2,047
   
344
   
(3,254
)
 
177
 
                                 
Net income (loss)
 
$
1,565
 
$
5,878
 
$
166
 
$
(6,044
)
$
1,565
 
 


13


 
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2006

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Assets
                               
Current assets
                               
Cash and cash equivalents
 
$
542
 
$
720
 
$
11,431
   
-
 
$
12,693
 
Accounts receivable, net of allowance
   
17,064
   
62,016
   
31,975
   
-
   
111,055
 
Inventories
   
16,425
   
49,859
   
20,391
   
(581
)
 
86,094
 
Other current assets
   
2,589
   
4,278
   
211
   
-
   
7,078
 
Intercompany accounts receivable
   
-
   
74,595
   
-
   
(74,595
)
 
-
 
Total current assets
   
36,620
   
191,468
   
64,008
   
(75,176
)
 
216,920
 
                                 
Property, plant and equipment, net
   
55,516
   
323,046
   
143,272
   
-
   
521,834
 
Goodwill and intangibles, net
   
20,887
   
50,663
   
98,331
   
-
   
169,881
 
Intercompany notes receivable
   
335,824
   
-
   
-
   
(335,824
)
 
-
 
Other assets, including investment in subsidiaries
   
323,225
   
331,247
   
96,428
   
(738,476
)
 
12,424
 
Total assets
 
$
772,072
 
$
896,424
 
$
402,039
 
$
(1,149,476
)
$
921,059
 
                                 
Liabilities and stockholders’ equity
                               
Current liabilities
                               
Trade accounts payable
 
$
5,779
 
$
20,201
 
$
7,791
   
-
 
$
33,771
 
Other current liabilities
   
19,138
   
13,934
   
15,620
   
-
   
48,692
 
Intercompany accounts payable
   
67,967
   
-
   
6,627
   
(74,594
)
 
-
 
Total current liabilities
   
92,884
   
34,135
   
30,038
   
(74,594
)
 
82,463
 
                                 
Long-term debt
   
482,749
   
-
   
-
   
-
   
482,749
 
Deferred income taxes
   
(41,814
)
 
60,501
   
19,815
   
-
   
38,502
 
Other long-term liabilities
   
6,541
   
13,897
   
1,622
   
-
   
22,060
 
Intercompany notes payable
   
-
   
203,850
   
131,972
   
(335,822
)
 
-
 
Stockholders’/invested equity
   
231,712
   
584,041
   
218,592
   
(739,060
)
 
295,285
 
Total liabilities and stockholders’ equity
 
$
772,072
 
$
896,424
 
$
402,039
 
$
(1,149,476
)
$
921,059
 

14


 
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
 


15


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2006
               
   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
 
Consolidated
 
Net cash provided by (used in) operations 
 
$
44,129
 
$
13,016
 
$
(3,057
)
$
54,088
 
                           
Investing activities:
                         
Purchases of property, plant and equipment
   
(2,828
)
 
(9,882
)
 
(1,615
)
 
(14,325
)
Other
   
-
   
(279
)
 
520
   
241
 
Net cash used in investing activities
   
(2,828
)
 
(10,161
)
 
(1,095
)
 
(14,084
)
                           
Financing activities
                         
Net borrowings under revolving line of credit
   
(1,487
)
 
-
   
-
   
(1,487
)
Net borrowings (payments) on long-term debt and other
   
(41,906
)
 
(2,297
)
 
8,514
   
(35,689
)
Net proceeds from sale of equity interests
   
1,099
   
-
   
-
   
1,099
 
Net cash provided by (used in) financing activities
   
(42,294
)
 
(2,297
)
 
8,514
   
(36,077
)
                           
Effect of foreign currency rate fluctuations on cash
   
-
   
-
   
32
   
32
 
                           
Increase (decrease) in cash and cash equivalents
   
(993
)
 
558
   
4,394
   
3,959
 
Cash and cash equivalents at beginning of period
   
1,535
   
162
   
7,037
   
8,734
 
Cash and cash equivalents at end of period
 
$
542
 
$
720
 
$
11,431
 
$
12,693
 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2005
               
   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
 
Consolidated
 
Net cash provided by (used in) operations 
 
$
(11,971
)
$
15,857
 
$
5,009
 
$
8,895
 
                           
Investing activities:
                         
Purchases of property, plant and equipment
   
(3,885
)
 
(10,775
)
 
(19,698
)
 
(34,358
)
Other
   
-
   
(276
)
 
-
   
(276
)
Net cash used in investing activities
   
(3,885
)
 
(11,051
)
 
(19,698
)
 
(34,634
)
                           
Financing activities
                         
Net borrowings under revolving line of credit
   
42,250
   
-
   
-
   
42,250
 
Net borrowings (payments) on long-term debt and other
   
(26,223
)
 
(4,766
)
 
15,092
   
(15,897
)
Net cash provided by (used in) financing activities
   
16,027
   
(4,766
)
 
15,092
   
26,353
 
                           
Effect of foreign currency rate fluctuations on cash
   
-
   
-
   
(63
)
 
(63
)