march3110-10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549




FORM 10-Q


                                                          (Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨ 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.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)

IRS — Employer Identification No. 62-1518973

1001 Tillman Street, Memphis, TN                                                                 38112                      901-320-8100
                                  (Address of principal executive offices)                                                         (Zip Code)                   (Registrant’s telephone number,
                                                                                  including area code)


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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨
No ¨

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

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨
No x

As of April 28, 2010, there were outstanding 39,241,498 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 Nine Months Ended March 31, 2010 and 2009
3
     
 
Condensed Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009
4
     
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2010 and 2009
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
     
3.
Quantitative and Qualitative Disclosures About Market Risk
31
     
4.
Controls and Procedures
31
     
     
 
PART II - OTHER INFORMATION
 
     
1A.
Risk Factors
32
     
6.
Exhibits
32
     
 
SIGNATURES
33
     




 
 
 
2

 
 


PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements

BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(In thousands, except per share data)

   
Three Months Ended
March 31
 
Nine Months Ended
March 31
 
   
2010
 
2009
 
2010
 
2009
 
Net sales
 
$
190,714
 
$
171,635
 
$
551,296
 
$
577,593
 
Cost of goods sold
   
157,567
   
147,765
   
463,028
   
495,253
 
Gross margin
   
33,147
   
23,870
   
88,268
   
82,340
 
                           
Selling, research and administrative expenses
   
11,985
   
10,601
   
34,666
   
34,077
 
Amortization of intangibles and other
   
472
   
465
   
1,422
   
1,405
 
Goodwill impairment loss
   
-
   
-
   
-
   
138,008
 
Restructuring costs
   
2,395
   
-
   
3,209
   
-
 
Alternative fuel mixture credits
   
(4,762
)
 
-
   
(77,677
)
 
-
 
Other operating income
   
(633
)
 
-
   
(724
)
 
-
 
Operating income (loss)
   
23,690
   
12,804
   
127,372
   
(91,150
)
                           
Net interest expense and amortization of debt costs
   
(3,920
)
 
(7,206
)
 
(13,830
)
 
(22,113
)
Gain (loss) on early extinguishment of debt
   
(1,537
)
 
-
   
(1,372
)
 
401
 
Gain (loss) on foreign exchange and other
   
(421
)
 
100
   
(720
)
 
(518
)
                           
Income (loss) before income taxes
   
17,812
   
5,698
   
111,450
   
(113,380
)
Income tax expense (benefit)
   
(1,531
)
 
1,412
   
6,592
   
(1,532
)
                           
Net income (loss)
 
$
19,343
 
$
4,286
 
$
104,858
 
$
(111,848
)
                           
Earnings (loss) per share
                         
Basic
 
$
0.50
 
$
0.11
 
$
2.71
 
$
(2.89
)
Diluted
 
$
0.49
 
$
0.11
 
$
2.66
 
$
(2.89
)
                           
Weighted average shares for earnings per share
                         
Basic
   
38,785
   
38,672
   
38,754
   
38,682
 
Effect of diluted shares
   
853
   
93
   
598
   
-
 
Diluted
   
39,638
   
38,765
   
39,352
   
38,682
 


See accompanying notes.



 
 
 
3

 
 



BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

   
March 31
2010
 
June 30
2009
 
   
(Unaudited)
     
Assets
             
Current assets:
             
  Cash and cash equivalents
 
$
26,935
 
$
22,061
 
  Accounts receivable – net
   
126,981
   
111,292
 
  Income tax and alternative fuel mixture credits receivable
   
73,809
   
9,374
 
  Inventories – net
   
83,147
   
87,637
 
  Deferred income taxes and other
   
6,166
   
6,507
 
    Total current assets
   
317,038
   
236,871
 
               
  Property, plant and equipment
   
1,130,402
   
1,091,313
 
  Less accumulated depreciation
   
(604,201
)
 
(564,724
)
     
526,201
   
526,589
 
  Goodwill
   
2,425
   
2,425
 
  Intellectual property and other, net
   
18,886
   
26,499
 
Total assets
 
$
864,550
 
$
792,384
 
               
Liabilities and stockholders’ equity
             
Current liabilities:
             
  Trade accounts payable
 
$
32,814
 
$
30,882
 
  Accrued expenses
   
43,190
   
40,804
 
    Total current liabilities
   
76,004
   
71,686
 
               
  Long-term debt
   
273,476
   
327,465
 
  Accrued postretirement benefits
   
22,183
   
23,235
 
  Deferred income taxes
   
48,120
   
48,399
 
  Other liabilities
   
10,810
   
3,568
 
  Stockholders’ equity
   
433,957
   
318,031
 
Total liabilities and stockholders’ equity
 
$
864,550
 
$
792,384
 

See accompanying notes.



 
 
 
4

 
 



BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

   
Nine Months Ended
March 31
 
   
2010
 
2009
 
Operating activities
       
 
   
Net income (loss)
 
$
104,858
 
$
(111,848
)
Adjustments to reconcile net income (loss) to net cash provided by operating
  activities:
             
    Depreciation
   
34,324
   
36,593
 
    Amortization
   
2,187
   
1,886
 
    Loss (gain) on early extinguishment of debt
   
1,372
   
(401
)
    Deferred income taxes and other
   
(597
)
 
(3,399
)
    Goodwill impairment loss
   
-
   
138,008
 
    Excess tax benefit from stock based compensation
   
(19
)
 
-
 
    Changes in operating assets and liabilities:
             
      Accounts receivable
   
(8,363
)
 
6,797
 
      Income tax and alternative fuel mixture credits receivable
   
(64,435
)
 
-
 
      Inventories
   
5,247
   
4,086
 
      Other assets
   
960
   
1,189
 
      Accounts payable and other current liabilities
   
(1,135
)
 
(23,100
)
Net cash provided by operating activities
   
74,399
   
49,811
 
Investing activities
             
Purchases of property, plant and equipment
   
(29,769
)
 
(34,005
)
Proceeds from State of Florida grant
   
7,381
   
-
 
Other
   
(311
)
 
(171
)
Net cash used in investing activities
   
(22,699
)
 
(34,176
)
Financing activities
             
Net borrowings under lines of credit
   
90,999
   
(114
)
Payments on long-term debt and other
   
(145,000
)
 
(5,358
)
Excess tax benefit from stock based compensation
   
19
   
-
 
Purchase of treasury shares
   
-
   
(494
)
Net proceeds from sale of equity interests
   
694
   
-
 
Net cash used in financing activities
   
(53,288
)
 
(5,966
)
Effect of foreign currency rate fluctuations on cash
   
6,462
   
(1,183
)
Decrease in cash and cash equivalents
   
4,874
   
8,486
 
Cash and cash equivalents at beginning of period
   
22,061
   
10,393
 
Cash and cash equivalents at end of period
 
$
26,935
 
$
18,879
 

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 United States generally accepted accounting principles (“GAAP”) 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 GAAP 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 nine months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010.  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, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on August 27, 2009 (“Annual Report”).  Except as otherwise specified, references to a year indicate our fiscal year ending on 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 GAAP 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 in which 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.

Dilutive stock options

Stock options that could potentially dilute basic earnings per share in the future, which were not included in the fully diluted computation because the grant prices were greater than the average market price of common shares for the period, were 81,322 and 776,308  for the three and nine months ended March 31, 2010, respectively and 2,216,700 and 2,093,746 for the three and nine months ended March 31, 2009, respectively.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period classifications.

NOTE 2:  RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-06, “Fair Value Measures and Disclosures,” (“ASU 2010-06”).  ASU 2010-06 amends the Codification to require new disclosures as follows:  (1) Transfers in and out of Levels 1 and 2.  (2) Activity in Level 3 fair value measurements.  ASU 2010-06 further provides amendments to the Codification that clarify existing disclosures as follows:  (1) Level of disaggregation.  (2) Disclosures about inputs and valuation techniques.  We adopted ASU 2010-06 and it did not have a material effect on our current financial statements.


 
 
 
6

 
 

In January 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent Events (Topic 855),” (“ASU 2010-09”).  As a result of ASU 2010-09, SEC registrants will no longer disclose the date through which management evaluated subsequent events in the financial statements, either in originally issued financial statements or reissued financial statements.  The guidance in ASU 2010-09 is effective immediately.  We adopted ASU 2010-09 and it did not have a material effect on our current financial statements.

NOTE 3:  SEGMENT INFORMATION

We report results for two segments, specialty fibers and nonwoven materials.  The specialty fibers segment consists of our chemical cellulose, customized fibers and fluff pulp product lines which are cellulosic fibers based on both wood and cotton.  The nonwovens materials segment consists of our airlaid plants and our converting plant.  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 tables:

Three Months Ended
March 31
     
Specialty
Fibers
 
Nonwoven
Materials
 
 
Corporate
 
 
Total
 
Net sales
   
2010
 
$
137,049
 
$
59,922
 
$
(6,257
)
$
190,714
 
     
2009
   
123,853
   
57,210
   
(9,428
)
 
171,635
 
Operating income (loss)
   
2010
   
20,345
   
3,347
   
(2
)
 
23,690
 
     
2009
   
10,861
   
2,912
   
(969
)
 
12,804
 
Depreciation and amortization of
   
2010
   
7,393
   
3,653
   
926
   
11,972
 
  intangibles
   
2009
   
7,793
   
3,577
   
919
   
12,289
 
Capital expenditures
   
2010
   
10,335
   
663
   
99
   
11,097
 
     
2009
   
7,789
   
866
   
339
   
8,994
 


Nine Months Ended
March 31
     
Specialty
Fibers
 
Nonwoven
Materials
 
 
Corporate
 
 
Total
 
Net sales
   
2010
 
$
388,793
 
$
182,891
 
$
(20,388
)
$
551,296
 
     
2009
   
426,571
   
179,913
   
(28,891
)
 
577,593
 
Operating income (loss)
   
2010
   
45,943
   
13,051
   
68,378
   
127,372
 
     
2009
   
42,271
   
7,948
   
(141,369
)
 
(91,150
)
Depreciation and amortization of
   
2010
   
21,844
   
11,128
   
2,776
   
35,748
 
  intangibles
   
2009
   
24,201
   
11,119
   
2,678
   
37,998
 
Capital expenditures
   
2010
   
26,565
   
2,526
   
678
   
29,769
 
     
2009
   
29,741
   
3,202
   
1,062
   
34,005
 

Management evaluates operating performance of the specialty fibers and nonwoven materials segments excluding amortization of intangibles, the impact of goodwill impairment loss, alternative fuel mixture credits, charges related to restructuring, unallocated at-risk compensation and unallocated stock-based compensation for executive officers and certain other employees.  Therefore, the corporate column includes operating elements such as segment eliminations, amortization of intangibles, goodwill impairment loss, alternative fuel mixture credits, charges related to restructuring, unallocated at-risk compensation and unallocated stock-based compensation for executive officers and certain other employees.  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 to third parties.


 
 
 
7

 
 

NOTE 4: RESTRUCTURING COSTS
 
During 2010, we entered into a restructuring program to sharpen our focus on key priorities which included restructuring our Ultra Fiber sales force, aligning capacity utilization with current market conditions at our Memphis Plant, and reducing selling, research and administrative expenses.  The total cost of this program is estimated to be $3,337 and will be completed during the fourth quarter of 2010.  The remaining accrual of $1,743 will be paid over the next nine months.  As a result of this restructuring, 31 positions will be eliminated and 8 employees were transferred from selling, research and administrative positions to management positions at our Florida facility.

Restructuring expenses are included in “Restructuring costs” in our condensed consolidated statements of operations.  The charges below reflect severance and employee benefits accrued over the retention period, relocation expenses and other miscellaneous expenses.  Accrual balances are included in “Accrued expenses” in the balance sheet.  The following table summarizes the expenses and accrual balances by reporting segment for the three months ended March 31, 2010.

   
Period Ended March 31, 2010
     
 
 
 
2010 Restructuring Program
 
Accrual Balance as of December 31, 2009
 
 
 
Additional Charges
 
 
 
 
Payments
 
Accrual Balance as of March 31, 2010
 
 
Program Charges to Date
 
 
Total Estimated Charges
 
Severance and employee benefits
                                     
  Specialty fibers
 
$
134
 
$
182
 
$
(214
)
$
102
 
$
997
 
$
997
 
  Corporate
   
-
   
1,364
   
(103
)
 
1,261
   
1,364
   
1,433
 
Other miscellaneous expenses
                                     
  Specialty fibers
   
-
   
848
   
(468
)
 
380
   
848
   
907
 
Total 2010 Program
 
$
134
 
$
2,394
 
$
(785
)
$
1,743
 
$
3,209
 
$
3,337
 

 
NOTE 5: ALTERNATIVE FUEL MIXTURE CREDITS

The U.S. Internal Revenue Code of 1986, as amended (“the Code”) permitted a refundable excise tax credit under certain circumstances for the production and use of alternative fuels and alternative fuel mixtures in lieu of fossil-based fuels.  The credit was equal to $.50 per gallon of alternative fuel contained in the mixture.  We qualified for the alternative fuel mixture credit because we produce liquid fuels derived from biomass, byproducts of our wood pulping process, and utilize those fuels to power our Foley Plant in Perry, Florida.

On March 19, 2009 the U.S. Internal Revenue Service (“IRS”) accepted our application to be registered as an alternative fuel mixer.  We began producing and consuming alternative fuel mixtures on February 12, 2009.  We recorded $4,762 and $77,677 in alternative fuel mixture credits, which was net of expenses, in our consolidated statements of operations for the three and nine months ended March 31, 2010, respectively.  During the three months ended March 31, 2010, a clarification of the rules by the IRS, allowed us to reverse reserves related to the inorganic content of the fuel mixture.  During the nine months ended March 31, 2010 we received $2,868 in cash related to these credits and $5,581 related to prior period credits.  Of the $75,224 in income tax credits accumulated in 2010, approximately $20,000 will be realized in the current fiscal year as an offset to taxes due on income earned in the U.S., eliminating the need for quarterly estimated federal tax payments this fiscal year.  The remainder will be realized when we apply for our tax refund in the latter half of calendar year 2010.  We have treated the credits received in cash as taxable income and the income tax credits as non-taxable income.  The alternative fuel mixture credits are subject to audit by the IRS.  The credit expired on December 31, 2009.

NOTE 6:  MITIGATION BANK
 
In February 2002, we were issued a mitigation bank/environmental resource permit by the State of Florida to restore approximately 6,748 acres of property to wetlands.  As the three phases of the project are completed under this permit, credits are released that can be sold under the mitigation bank and an obligation is created to maintain the property as wetlands in perpetuity.

In 2005, we began construction on the first phase of the mitigation bank.  Since that time, we have completed two of the 3 phases covered under the permit.  Phase III will not commence before 2013.  During 2006 through 2009, we sold approximately 17 credits for $417.  As of March 31, 2010 we have recorded a long-term asset of $565 for mitigation bank credits and a long-term perpetual maintenance liability of $157.  The asset includes all costs associated with the construction required to return the property to wetlands, hydrologic monitoring, vegetation monitoring and the present value of the perpetual maintenance.  During the three and nine months ended March 31, 2010, we recorded $633 and $724, respectively, which was net of expenses, in mitigation bank sales which are shown as other operating income on our consolidated statements of operations.


 
 
 
8

 
 

NOTE 7:  INVENTORIES
 
Inventories are valued at the lower of cost or market.  The costs of manufactured cotton-based specialty fibers and costs for nonwoven raw materials are generally determined on the first-in, first-out basis.  Other manufactured products and raw materials are generally valued on an average cost basis.  Manufactured inventory costs include material, labor and manufacturing overhead.  Slash pine timber, cotton fibers and chemicals are the principal raw materials used in the manufacture of our specialty fiber products.  Fluff pulp is the principal raw material used in our nonwoven materials products.  We take physical counts of inventories at least annually, and we review periodically the provision for potential losses from obsolete, excess or slow-moving inventories.
 
The components of inventory consist of the following:
 
   
March 31
2010
 
June 30
2009
 
           
Raw materials
 
$
19,563
 
$
20,004
 
Finished goods
   
38,444
   
42,599
 
Storeroom and other supplies
   
25,140
   
25,034
 
   
$
83,147
 
$
87,637
 

NOTE 8: GOODWILL

In accordance with GAAP, we perform a goodwill impairment analysis on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis.  Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired.  Goodwill of businesses acquired is specifically identified to the reporting units to which the businesses belong.  Goodwill is reviewed annually for impairment in the fourth fiscal quarter.  We estimate fair value based on a combination of the income approach and the market approach.  The income approach requires management to estimate future net cash flows, the timing of these cash flows and an appropriate discount rate (or weighted average cost of capital) representing the time value of money and the inherent risk and uncertainty of future cash flows.  The discount rate is based on independently calculated beta risks for a composite group of companies, our target capital mix and an estimated market risk premium.  The assumptions used in estimating future cash flows are consistent with the reporting unit’s internal planning.  The market approach estimates the fair value of our reporting units on comparable market prices.  Goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit.  The analysis of potential impairment of goodwill requires a two-step process.  The first step is the estimation of fair value.  If step one indicates that impairment potentially exists, the second step is performed to measure the amount of impairment, if any.  Goodwill impairment exists when the implied fair value of goodwill is less than its carrying value.

During our quarter ended December 31, 2008, based on the economic environment at that time and the steep decline in the price of our stock, which created a significant gap between the book and market value of our equity, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment test as of December 31, 2008.  As a result, during the three months ended December 31, 2008, we recorded an impairment charge of $138,008 which represented our best estimate of the resulting goodwill impairment.  We engaged an independent valuation firm to assist with this impairment testing by expressing opinions as of December 31, 2008 of the fair values of the business enterprises of our four reporting units. The results of step one indicated goodwill was impaired at three of our reporting units as the estimated fair value was less than the carrying value of the reporting units.  As such, step two of the goodwill impairment test was performed to determine the actual amount of goodwill impairment.  In this step, we were required to allocate the fair value of the reporting unit, as determined in step one, to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if these reporting units had been acquired on the date of the test.  Upon completion of this step, our original estimate did not change and therefore no change was required to the $138,008 non-cash goodwill impairment charge estimated and recorded in the second quarter of 2009.  We reviewed our long-lived tangible and intangible assets within the impaired reporting units and determined that the forecasted undiscounted cash flows related to these assets or asset groups were in excess of their carrying values, and therefore these assets were not impaired.  There were no changes in the carrying amount of goodwill for the nine months ended March 31, 2010.


 
 
 
9

 
 

NOTE 9:  DEBT

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

   
March 31
2010
 
June 30
2009
 
           
Senior Notes due 2013
 
$
165,000
 
$
200,000
 
Senior Subordinated Notes due 2010
   
-
   
110,444
 
Credit facility
   
108,476
   
17,021
 
   
273,476
 
327,465
 

Senior Notes

Our 8.5% senior notes due October 1, 2013 (the “2013 Notes”) are unsecured obligations and are senior to any of our subordinated debt.  The 2013 Notes are guaranteed by our direct and indirect domestic subsidiaries that are also guarantors on our credit facility.  The 2013 Notes became redeemable at our option, in whole or part, at any time on or after October 1, 2008, at redemption prices varying from 104.25% to 100% of principal amount on or after October 1, 2011 (102.833% at March 31, 2010), together with accrued and unpaid interest to the date of redemption.

On June 30, 2009 we amended the 2013 Notes to permit the redemption, repurchase or retirement of subordinated indebtedness, including our 8% senior subordinated notes due 2010 (the “2010 Notes” and, with the 2013 Notes, the “Notes”), up to sixteen months prior to maturity, which represented an increase of four months compared to the prior terms of the indentures pursuant to which the Notes were issued.  We paid a consent fee of $650 in the aggregate to all consenting holders.  We recorded this consent fee as a deferred financing cost and will amortize it over the remaining term of the 2013 Notes using the effective interest rate method.

On January 4, 2010, we redeemed $35,000 of the 2013 Notes using a combination of $19,000 cash on hand and $16,000 in borrowings on our revolving credit facility.  During the three months ended March 31, 2010, we recorded a $1,537 loss related to the extinguishment of this debt which included the redemption price premium of $992 and the write-off of the related deferred financing costs of $545.

On April 19, 2010, we redeemed $25,000 of the 2013 Notes using borrowings on our revolving credit facility.  See Note 17.

Senior Subordinated Notes

On July 31, 2009 we redeemed the remaining $110,000 then outstanding of 2010 Notes using borrowings on our revolving credit facility.  During the nine months ended March 31, 2010 we recorded a $165 gain related to the early extinguishment of this debt, which was the net of the write-off of the related deferred financing costs and the remaining unamortized interest rate swap early termination fee.

Revolving Credit Facility

Our $200,000 senior secured revolving credit facility (the “Credit Facility”) currently has a maturity date of July 25, 2012.   The interest rate applicable to borrowings under the Credit Facility is the agent’s prime rate plus 0.25% to 1.00% or a LIBOR-based rate ranging from LIBOR plus 1.25% to LIBOR plus 2.00%.  The Credit Facility is secured by substantially all of our assets located in the United States. 

The Credit Facility contains covenants customary for financing of this type.  The financial covenants include: maximum total leverage ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), and minimum ratio of consolidated EBITDA to consolidated interest expense.  At March 31, 2010, we were in compliance with the financial covenants under the Credit Facility.
 
At March 31, 2010, we had $26,935 of cash and cash equivalents and we had $86,606 borrowing capacity under the Credit Facility.  The Credit Facility allows for a sublimit on letters of credit of $50,000.  As of March 31, 2010, $45,082 of the sublimit was unused.  The commitment fee on the unused portion of the revolving credit facility ranges from 0.25% to 0.40% per annum based on a grid related to our leverage ratio.


 
 
 
10

 
 

NOTE 10:  FAIR VALUE MEASUREMENTS
 
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable,  the carrying amounts approximate fair value due to their short maturities.  The fair value of our long-term public debt is based on an average of the bid and offer prices.  The carrying value and fair value of long-term debt at March 31, 2010, were $273,476 and $277,395, respectively, and at June 30, 2009 were $327,465 and $311,362, respectively.  The fair value of the Credit Facility approximates its carrying value due to its variable interest rate.  

For the financial instruments disclosed below, fair value is determined at each balance sheet date using an income approach, which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using current market information as of the reporting date, such as prevailing interest rates and foreign currency spot and forward rates.  The following table provides a summary of the inputs used to develop these estimates under the fair value hierarchy:
 
   
Fair Value Measurements at March 31, 2010
 
   
 
 
Total
   
Quoted prices in active markets for identical assets (Level 1)
   
Significant other observable inputs
 (Level 2)
   
Significant unobservable inputs
 (Level 3)
 
Assets:
                               
  Natural gas hedge
 
$
12
   
$
-
   
$
12
   
$
-
 
    Total assets
 
$
12
   
$
-
   
$
12
   
$
-
 
                                 
Liabilities:
                               
  Natural gas hedge
 
$
80
   
$
-
   
$
80
   
$
-
 
    Total liabilities
 
$
80
   
$
-
   
$
80
   
$
-
 

NOTE 11:  FINANCIAL DERIVATIVE INSTRUMENTS

As part of our risk management program, we use a variety of financial instruments such as foreign currency forwards and options, interest rate swaps, and natural gas contracts as cash flow hedges to mitigate risk.  We do not hold or issue derivative financial instruments for trading purposes. 

Foreign Currency Hedging

We periodically use hedging to address the risk associated with non-functional currency (primarily Brazilian real and European euro) financial statement exposures.  Fluctuations in exchange rates can change our foreign currency equivalent revenue and hence our foreign currency earnings.  When conditions warrant, our foreign subsidiaries hedge a portion of forecasted U.S. dollar denominated sales/receivables utilizing foreign exchange forward and option contracts.  These contracts are designated as cash flow hedges and accounting for these hedge instruments requires that they be recorded on the balance sheet as either an asset or a liability measured at fair value as of the reporting date.  The effective portion of the hedge gain or loss is reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into gain (loss) on exchange rates when the hedged exposure affects earnings.  Any ineffective portions of related gains or losses are recorded in the statements of operations immediately.  In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to gain (loss) on exchange rates on our consolidated statement of operations.  As of June 30, 2009 we had a foreign currency contract that did not qualify for hedge accounting treatment with a value of $320 recorded in prepaid expenses and other on the balance sheet.

Interest Rate Swaps

In May 2001, we entered into an interest rate swap relative to $100,000 of our 2010 notes.  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.  As such, the net effect from the interest rate swap was recorded as part of interest expense.  On October 15, 2003, the swap counter party exercised its right to terminate the swap and paid us $4,000 as an early termination fee, which was being amortized as a reduction to interest expense through October 15, 2010.  At June 30, 2009, the unamortized portion of the termination fee was recorded as an increase in debt of $541.  On July 31, 2009, the remaining $506 was recorded as a gain on early extinguishment of debt when we redeemed the remaining 2010 Notes.  During the three and nine months ended March 31, 2009, the swap reduced our interest expense by $105 and $358, respectively.


 
 
 
11

 
 

On September 17, 2007 we entered into an interest rate swap agreement that matured on September 19, 2009 relative to $30,000 of debt under our Credit Facility.  The swap involved the exchange of interest payments from a floating-rate three month LIBOR plus the applicable margin on the revolving credit facility to a fixed rate of 4.79% plus the same applicable margin.  This arrangement qualified as a cash flow hedge; therefore, the net effect from the interest rate swap was recorded as  interest expense.  On June 17, 2009 we retired the $30,000 of variable rate debt that had been hedged.  As a result of the extinguishment of the underlying debt, hedge accounting on the interest rate swap was no longer appropriate.  During the three and nine months ended March 31, 2009, the swap increased our interest expense by $226 and $544, respectively.

Commodity Hedging

We have entered into contracts for the purchase of natural gas at a fixed rate to manage the price risk associated with a portion of our forecasted purchases.  The objective of these hedges is to provide supply assurance for contracted volumes at a pre-determined price; provide a systemic method of purchasing commodities which enables us the opportunity to take advantage of forward price trends based on historical data; provide a methodology to bring price stability that will contribute to improved price forecasting and budgeting assumptions; and reduce the variability of cash flows associated with the purchase of natural gas at certain plants.  These contracts are designated as cash flow hedges.  As of March 31, 2010 and June 30, 2009 we had contracts in place to purchase186,532 MMBTUs and 359,220 MMBTUs of natural gas at various fixed prices through December 2010, respectively.  Additionally, as of March 31, 2010 we had options in place to purchase 132,000 MMBTUs of natural gas at prices ranging from $6 to $7 per MMBTU through November 2010.

Fair Value of Derivative Instruments

In the next twelve months, we intend to reclassify into earnings $68 in net losses in respect of cash flow hedges.

All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the unaudited condensed consolidated statements of cash flows.  The following table presents the location of all assets and liabilities associated with our hedging instruments within the unaudited condensed consolidated balance sheets:

   
Asset Derivatives
 
Liability Derivatives
 
Derivatives designated as hedging instruments
Balance Sheet Location
Fair Value at 3/31/10
 
Fair Value at 6/30/09
 
Fair Value at 3/31/10
 
Fair Value at 6/30/09
 
Natural gas hedges
Accrued expenses
$
12
 
$
-
 
$
80
 
$
234
 
Interest rate swap
Accrued expenses
 
-
   
-
   
-
   
320
 
Total derivatives designated as hedging instruments
$
12
 
$
-
 
$
80
 
$
                    554
 
 
The following tables present the impact of derivative instruments, net of tax, and their location within the unaudited condensed consolidated statements of operations:

Derivatives in Cash Flow Hedging Relationships:
 
Amount of (Gain) Loss
Recognized in AOCI on
Derivative (Effective Portion)
 
Amount of (Gain) Loss
Reclassified from AOCI into
Income (Effective Portion)(a)
 
Amount of (Gain) Loss
Recognized in Income on
Derivatives (Ineffective Portion)
 
 
Nine months ended
March 31,
 
Nine months ended
March 31,
 
Nine months ended
March 31,
 
 
2010
 
2009
 
2010
 
2009
 
2010
 
2009
 
Natural gas hedges
$
263
 
$
1,032
 
$
(351
)
$
(735
)
$
-
 
$
-
 
Interest rate swap
 
-
   
(482
)
 
-
   
441
   
-
   
-
 
Total
$
263
 
$
550
 
$
(351
)
$
(294
)
$
-
 
$
-
 
(a) Amounts related to natural gas contracts are included in cost of goods sold and amounts related to interest rate swaps are included in net interest expense and amortization of debt costs.


Derivatives not Designated as Cash Flow Hedges:
     
Nine months ended March 31,
 
 
Classification of (gains) or losses
 
2010
 
2009
 
Foreign currency swap
Foreign exchange and other
 
$
(287
)
$
-
 


 
 
 
12

 
 

NOTE 12:  COMPREHENSIVE INCOME
 
  The components of comprehensive income consist of the following:
 
   
Three Months Ended
March 31
 
Nine Months Ended
March 31
 
   
2010
 
2009
 
2010
 
2009
 
                       
Net income
 
$
19,343
 
$
4,286
 
$
104,858
 
$
(111,848
)
Foreign currency translation adjustments – net
   
(4,624
)
 
(3,764
)
 
8,359
   
(65,304
)
Unrealized gains (losses) on hedging activities - net
   
(60
)
 
(2
)
 
88
   
(256
)
Comprehensive income (loss), net of tax
 
$
14,659
 
$
520
 
$
113,305
 
$
(177,408
)
 
For the three and nine months ended March 31, 2010, the change in the foreign currency translation adjustment was due to fluctuations in the exchange rate of the U.S. dollar against the euro of $(6,178) and $(4,444), the Brazilian real of $(221) and $6,324 and the Canadian dollar of $1,775 and $6,479, respectively.
 
For the three and nine months ended March 31, 2009, the change in the foreign currency translation adjustment was due to fluctuations in the exchange rate of the U.S. dollar against the euro of $(3,793) and $(15,261), the Brazilian real of $1,235 and $(22,879) and the Canadian dollar of $(1,206) and $(27,164), respectively.

A rollforward of the amounts included in Accumulated Other Comprehensive Income, net of taxes is shown below:
 
   
Hedging Activities
 
Foreign Currency Translation
 
Post-Employment Healthcare
 
Accumulated Other Comprehensive Income
 
Balance at June 30, 2009
$
(147
)
$
35,637
 
$
(1,789
)
$
33,701
 
Changes in value
 
(263
)
 
8,359
   
-
   
8,096
 
Reclassification into earnings
 
351
   
-
   
-
   
351
 
Balance at March 31, 2010
$
(59
)
$
43,996
 
$
(1,789
)
$
42,148
 
 
NOTE 13:  INCOME TAXES

We file income tax returns with federal, state, local and foreign jurisdictions.  As of March 31, 2010, we remain subject to examinations of our U.S. federal and state income tax returns for 2002 through 2009, Canadian income tax returns for 2002 through 2009 and German tax filings for 2004 through 2009. 

During the nine months ended March 31, 2010, we claimed the alternative fuel mixture credits for the period July 1, 2009 to the credit expiration date of December 31, 2009 as cash refunds through the filing of periodic excise tax refund claims and as income tax credits on the federal income tax return to be filed for 2010.  For purposes of calculating federal and state income taxes, we treat the credits claimed as cash refunds of excise tax as taxable income and the credits claimed on the federal income tax return as non-taxable income.  During the three and nine months ended March 31, 2010, we recorded a tax benefit of $1,093 and $26,300, respectively, due to the non-taxable nature of the alternative fuel mixture credits claimed on the federal income tax return.

The American Recovery and Reinvestment Act of 2009 expanded the IRC Section 48 energy investment tax credit to include qualified property for facilities producing electricity using open-loop biomass.   During the three months ended March 31, 2010, new information and better insight obtained from an energy tax specialist and an engineering firm enabled management to evaluate the qualification for the tax credit and to make a decision to elect Section 48 energy investment credit for qualified expenditures.  The company calculated the energy investment tax credit on qualified capital expenditures as follows:
 
Expenditures prior to June 30, 2009
       
$
5,415
 
Expenditures subsequent to June 30, 2009
         
2,025
 
Total energy investment tax credit
       
$
7,440
 

The company is accounting for the investment tax credit as a reduction of federal income taxes in the year in which the credit arises by utilizing the flow-through method of accounting.


 
 
 
13

 
 

Our effective tax rates for the three and nine month periods ended March 31, 2010 were (8.6)% and 5.9%, respectively.  Our effective tax rates for the same periods in 2009 were 24.8% and 1.4%, respectively.  We recorded a $138,008 goodwill impairment charge in the nine months ended March 31, 2009.  Accordingly, we recognized a tax benefit of $10,410 in connection with the goodwill impairment charge.  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
March 31
 
Nine Months Ended
March 31
 
   
2010
 
2009
 
2010
 
2009
 
Expected tax expense (benefit) at 35%
 
6,234
 
1,995
 
39,008
 
(39,682
)
Nondeductible goodwill impairment charge
   
-
   
-
   
-
   
37,892
 
Alternative fuel mixture credits
   
(1,093
)
 
-
   
(26,300
)
 
-
 
Energy investment tax credits
   
(7,440
)
 
-
   
(7,440
)
 
-
 
Effect of foreign operations
   
775
   
42
   
1,534
   
1,209
 
Other
   
(7
)
 
(625
)
 
(210
)
 
(951
)
Income tax expense (benefit)
 
$
(1,531
)
$
1,412
 
$
6,592
 
$
(1,532
)

NOTE 14:  EMPLOYEE BENEFIT PLANS
 
We provide medical, dental and life insurance postretirement plans covering certain U.S. employees who meet specified age and service requirements.  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
March 31
 
Nine Months Ended
March 31
 
   
2010
 
2009
 
2010
 
2009
 
Service cost for benefits earned
 
$
101
 
$
121
 
$
303
 
$
362
 
Interest cost on benefit obligation
   
350
   
374
   
1,050
   
1,121
 
Amortization of unrecognized prior service cost
   
(247
)
 
(251
)
 
(741
)
 
(753
)
Actuarial loss
   
31
   
69
   
93
   
208
 
Total cost
 
$
235
 
$
313
 
$
705
 
$
938
 

On July 1, 2008, we changed our measurement date of the plan’s funded status to be the same as our fiscal year end.  The change in the measurement date resulted in a decrease in accrued postretirement benefits of $1,175, an increase in deferred tax liabilities of $433, an increase in accumulated other comprehensive income of $882 and a decrease in the opening balance of retained earnings of $140.
 
NOTE 15:  STATE OF FLORIDA GRANT

On August 11, 2009 we announced that we had qualified to receive up to $7,381 from the State of Florida Quick Action Closing Fund.  This performance-based incentive provides up-front cash for approved economic development projects.  On September 30, 2009, we received the $7,381 as an incentive to complete our $45,000 Foley Energy Project which had been suspended in March 2009.  We have committed to invest $32,300 on this and other related energy projects after the date of the grant, and to maintain at least 555 jobs, at a specified average wage, at our Florida facility.  We are required to make the investment by December 31, 2012 and to maintain the jobs and specified wage level through December 31, 2015.  If we fail to make at least 80% of the investment or if we fall below the 555 jobs or specified wage level in any of the next six years, we would be required to repay a prorated portion of the award.  We have recorded this cash incentive in the long-term liability section of our condensed consolidated balance sheets.  As we invest in the Foley Energy Project, we are reclassifying this liability as a reduction in the cost of equipment.  For the three and nine months ended March 31, 2010 we have reclassified $745 and $2,274, respectively.  When the project is complete, we will amortize the $7,381 over the life of the equipment.


 
 
 
14

 
 

NOTE 16:  CONTINGENCIES

Our operations are subject to extensive general and industry-specific federal, state, local and foreign environmental laws and regulations, particularly those relating to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater. We devote significant resources to maintaining compliance with these laws and regulations.  Such environmental laws and regulations at the federal level include the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Clean Air Act of 1990, as amended, the Clean Water Act of 1972, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Toxic Substances Control Act of 1976, as amended, and the Safe Drinking Water Act of 1974, as amended.  These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency (“EPA”).  In addition, the individual states and foreign countries in which we operate have adopted and may adopt in the future equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs.  We closely monitor our compliance with current environmental requirements and believe that we are in substantial compliance.

We expect that, due to the nature of our operations, we will be subject to increasingly stringent environmental requirements, including standards applicable to wastewater discharges and air emissions, such as emissions of greenhouse gases, and general permitting requirements for our manufacturing facilities.  We also expect that we will continue to incur substantial costs to comply with such requirements.  Any failure on our part to comply with environmental laws or regulations could subject us to penalties or other sanctions that could materially affect our business, results of operations or financial condition.  We cannot currently assess, however, the impact that more stringent environmental requirements may have on our operations or capital expenditure requirements.

The Foley Plant, located in Perry, Florida, discharges treated wastewater into the Fenholloway River.  Under the terms of an agreement with the Florida Department of Environmental Protection (“FDEP”), approved by the EPA in 1995, we agreed to a comprehensive plan to attain Class III (“fishable/swimmable”) status for the Fenholloway River under applicable Florida law (the “Fenholloway Agreement”).  The Fenholloway Agreement established a schedule for the filing of necessary permit applications and approvals to implement the following activities, among others: (i) make process changes within the Foley Plant to reduce the coloration of its wastewater discharge, (ii) restore certain wetlands areas, (iii) install a pipeline to relocate the wastewater discharge point into the Fenholloway River to a point closer to the mouth of the river, and (iv) provide oxygen enrichment to the treated wastewater prior to discharge at the new location.  We have completed the process changes within the Foley Plant as required by the Fenholloway Agreement.  In making these in-plant process changes, we incurred significant capital expenditures.  Based on the anticipated permit conditions, we expect to incur significant additional capital expenditures once final permits are issued.  

In August 2005, FDEP drafted a proposed renewal of the Buckeye National Pollutant Discharge Elimination System (“NPDES”) permit. The FDEP completed the required public notice, review and comment process and issued the formal Notice of Intent to Issue Permit in November 2005.  The proposed permit was challenged by some members of the public.  In January 2008, the pending administrative hearing was dismissed due to anticipated revisions to the permit based on additional studies and development of a total maximum daily load (“TMDL”) for the Fenholloway River.  The development of the TMDL is necessary because the EPA and FDEP have listed the Fenholloway River as an impaired water (not meeting all water quality standards) under the Clean Water Act for certain pollutants.  In addition, we also have filed petitions with the FDEP for the establishment of Site-Specific Alternative Water Quality Criteria (“SSAC”), which petitions must be approved by the EPA. The additional studies necessary to support revisions to the permit have been completed.  The revised draft NPDES permit to be issued by FDEP will be based upon modeling performed in conjunction with the EPA and the FDEP, will address the TMDL established for the Fenholloway River by the EPA and will also contain Water Quality Based Effluent Limits.  When the FDEP issues the revised draft permit it will be subject to public comment and opportunity for requesting a hearing.

We expect to incur additional capital expenditures related to our wastewater treatment and discharge of between $40 million and $60 million over at least five years, possibly beginning as early as 2012.  The amount and timing of these capital expenditures may vary depending on a number of factors including when the final NPDES permit is issued and its final terms and conditions.
  
On November 4, 2009, our Americana, Brazil facility received an Infraction Document from the São Paulo State Tax Authority related to Brazilian state value-added taxes (“ICMS Taxes”) for the period of January 1, 2005 through December 31, 2008.  On December 4, 2009, we filed our objection to 2,624 real ($1,473 at March 31, 2010 exchange rates) of the taxes and penalties that were assessed.  The process for defending our objection will involve a lengthy appeals process and it could be several years before we reach resolution.  We believe we have meritorious defenses to this assessment and intend to defend our position vigorously.


 
 
 
15

 
 

We are involved in certain legal actions and claims arising in the ordinary course of business.  In the opinion of management, however, based upon information currently available, the ultimate liability with respect to these actions will not materially affect our consolidated results of operations or financial position.  We review outstanding claims and proceedings internally and with external counsel as necessary to assess probability of loss and for the ability to estimate loss.  These assessments are re-evaluated each quarter or as new information becomes available to determine whether a reserve should be established or if any existing reserve should be adjusted.  The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded reserve.  In addition, because it is not permissible under GAAP to establish a litigation reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).

NOTE 17:  SUBSEQUENT EVENT

On April 19, 2010, we redeemed $25,000 of the 2013 Notes using borrowings on our revolving credit facility.  We recorded a $1,233 loss related to the extinguishment of this debt which included the redemption price premium of $708 and the write-off of the related deferred financing costs of $525.

NOTE 18:  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 2013 Notes and that guarantee the 2013 Notes, jointly and severally, on a senior unsecured basis.  The non-guarantor subsidiaries presented below represent the foreign subsidiaries that do not guarantee the 2013 Notes.  Each subsidiary guarantor is 100% owned directly or indirectly by us and all guarantees are full and unconditional.
 
The supplemental financial information for our guarantor subsidiaries and non-guarantor subsidiaries for the 2013 Notes is presented in the following tables.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2010

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
24,233
 
$
135,302
 
$
38,250
 
$
(7,071
)
$
190,714
 
Cost of goods sold
   
19,689
   
108,681
   
36,104
   
(6,907
)
 
157,567
 
Gross margin
   
4,544
   
26,621
   
2,146
   
(164
)
 
33,147
 
                                 
Selling, research and administrative expenses, and other
   
 
(2,692
 
)
 
 
12,092
   
 
2,424
   
 
-
   
 
11,824
 
Alternative fuel mixture credits
   
-
   
(4,762
)
 
-
   
-
   
(4,762
)
Restructuring costs
   
2,395
   
-
   
-
   
-
   
2,395
 
                                 
Operating income (loss)
   
4,841
   
19,291
   
(278
)
 
(164
)
 
23,690
 
                                 
Other income (expense):
                               
    Net interest income (expense) and amortization
       of debt costs
   
(4,295
)
 
359
   
16
   
-
   
(3,920
)
    Other income (expense), including equity in
       income (loss) in affiliates
   
100,355
   
6
   
(492
)
 
(101,827
)
 
(1,958
)
    Intercompany interest income (expense)
   
6,838
   
(6,860
)
 
22
   
-
   
-
 
                                 
Income (loss) before income taxes
   
107,739
   
12,796
   
(732
)
 
(101,991
)
 
17,812
 
                                 
Income tax expense (benefit)
   
88,396
   
(48,117
)
 
414
   
(42,224
)
 
(1,531
)
                                 
Net income (loss)
 
$
19,343
 
$
60,913
 
$
(1,146
)
$
(59,767
)
$
19,343
 
 

 
 
 
16

 
 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2010

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
64,906
 
$
386,142
 
$
123,438
 
$
(23,190
)
$
551,296
 
Cost of goods sold
   
56,615
   
315,694
   
113,153
   
(22,434
)
 
463,028
 
Gross margin
   
8,291
   
70,448
   
10,285
   
(756
)
 
88,268
 
                                 
Selling, research and administrative expenses, and other
   
(10,190
 
)
 
37,849
   
7,705
   
-
   
35,364
 
Alternative fuel mixture credits
   
-
   
(77,677
)
 
-
   
-
   
(77,677
)
Restructuring costs
   
3,209
   
-
   
-
   
-
   
3,209
 
                                 
Operating income (loss)
   
15,272
   
110,276
   
2,580
   
(756
)
 
127,372
 
                                 
Other income (expense):
                               
    Net interest income (expense) and amortization
       of debt costs
   
(14,932
)
 
1,100
   
2
   
-
   
(13,830
)
    Other income (expense), including equity in
       income (loss) in affiliates
   
181,698
   
37
   
(931
)
 
(182,896
)
 
(2,092
)
    Intercompany interest income (expense)
   
20,538
   
(19,096
)
 
(1,442
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
202,576
   
92,317
   
209
   
(183,652
)
 
111,450
 
                                 
Income tax expense (benefit)
   
97,718
   
(20,817
)
 
1,316
   
(71,625
)
 
6,592
 
                                 
Net income (loss)
 
$
104,858
 
$
113,134
 
$
(1,107
)
$
(112,027
)
$
104,858
 
 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2009

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
15,698
 
$
129,079
 
$
36,779
 
$
(9,921
)
$
171,635
 
Cost of goods sold
   
17,896
   
106,784
   
32,976
   
(9,891
)
 
147,765
 
Gross margin
   
(2,198
)
 
22,295
   
3,803
   
(30
)
 
23,870
 
                                 
Selling, research and administrative expenses, and other
   
(4,224
)
 
13,044
   
2,246
   
-
   
11,066
 
                                 
Operating income (loss)
   
2,026
   
9,251
   
1,557
   
(30
)
 
12,804
 
                                 
Other income (expense):
                               
    Net interest income (expense) and amortization
       of debt costs
   
(7,525
)
 
290
   
29
   
-
   
(7,206
)
    Other income (expense), including equity
       income (loss) in affiliates
   
54,194
   
(67
)
 
176
   
(54,203
)
 
100
 
    Intercompany interest income (expense)
   
7,674
   
(6,733
)
 
(941
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
56,369
   
2,741
   
821
   
(54,233
)
 
5,698
 
                                 
Income tax expense (benefit)
   
52,083
   
1,212
   
168
   
(52,051
)
 
1,412
 
                                 
Net income (loss)
 
$
4,286
 
$
1,529
 
$
653
 
$
(2,182
)
$
4,286
 
 

 
 
 
17

 
 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2009

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Net sales
 
$
78,383
 
$
406,420
 
$
124,327
 
$
(31,537
)
$
577,593
 
Cost of goods sold
   
77,352
   
334,909
   
114,873
   
(31,881
)
 
495,253
 
Gross margin
   
1,031
   
71,511
   
9,454
   
344
   
82,340
 
                                 
Selling, research and administrative expenses, and other
   
(11,889
)
 
39,792
   
7,579
   
-
   
35,482
 
Goodwill impairment loss
   
20,230
   
24,922
   
92,856
   
-
   
138,008
 
                                 
Operating income (loss)
   
(7,310
)
 
6,797
   
(90,981
)
 
344
   
(91,150
)
                                 
Other income (expense):
                               
        Net interest income (expense) and amortization
           of debt costs
   
(23,171
)
 
929
   
129
   
-
   
(22,113
)
      Other income (expense), including equity
         income (loss) in affiliates
   
(144,671
)
 
(340
)
 
(268
)
 
145,162
   
(117
)
      Intercompany interest income (expense)
   
23,111
   
(19,977
)
 
(3,134
)
 
-
   
-
 
                                 
Income (loss) before income taxes
   
(152,041
)
 
(12,591
)
 
(94,254
)
 
145,506
   
(113,380
)
                                 
Income tax expense (benefit)
   
(40,193
)
 
4,646
   
(3,817
)
 
37,832
   
(1,532
)
                                 
Net income (loss)
 
$
(111,848
)
$
(17,237
)
$
(90,437
)
$
107,674
 
$
(111,848
)


 
 
 
18

 
 

CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2010

   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Assets
                     
Current assets
                     
Cash and cash equivalents
 
$
296
 
$
3
 
$
26,636
 
$
-
 
$
26,935
 
Accounts receivable, net
   
44,247
   
48,855
   
33,879
   
-
   
126,981
 
    Income tax and alternative fuel mixture
      credits receivable
 
 
 
 
-
   
 
73,809
   
 
-
   
 
-
   
 
73,809
 
Inventories, net
   
10,143
   
53,900
   
19,594
   
(490
)
 
83,147
 
Other current assets
   
(224
)
 
4,571
   
1,819
   
-
   
6,166
 
Intercompany accounts receivable
   
-
   
227,052
   
-
   
(227,052
)
 
-
 
Total current assets
   
54,462
   
408,190
   
81,928
   
(227,542
)
 
317,038
 
                                 
Property, plant and equipment, net
   
56,589
   
338,632
   
130,980
   
-
   
526,201
 
Goodwill and intangibles, net
   
13,555
   
2,425
   
-
   
-
   
15,980
 
Intercompany notes receivable
   
363,717
   
-
   
-
   
(363,717
)
 
-
 
Other assets, including investment in subsidiaries
   
398,795
   
301,766
   
92,599
   
(787,829
)
 
5,331
 
Total assets
 
$
887,118
 
$
1,051,013
 
$
305,507
 
$
(1,379,088
)
$
864,550
 
                                 
Liabilities and stockholders’ equity
                               
Current liabilities
                               
Trade accounts payable
 
$
4,054
 
$
21,559
 
$
7,201
 
$
-
 
$
32,814
 
Other current liabilities
   
(55,060
)
 
94,430
   
3,821
   
(1
)
 
43,190
 
Intercompany accounts payable
   
225,408
   
-
   
1,644
   
(227,052
)
 
-
 
Total current liabilities
   
174,402
   
115,989
   
12,666
   
(227,053
)
 
76,004
 
                                 
Long-term debt
   
273,476
   
-
   
-
   
-
   
273,476
 
Deferred income taxes
   
(3,679
)
 
44,654
   
7,145
   
-
   
48,120
 
Other long-term liabilities
   
8,962
   
22,248
   
1,783
   
-
   
32,993
 
Intercompany notes payable
   
-
   
259,069
   
104,648
   
(363,717
)
 
-
 
Stockholders’/invested equity
   
433,957
   
609,053
   
179,265
   
(788,318
)
 
433,957
 
Total liabilities and stockholders’ equity
 
$
887,118
 
$
1,051,013
 
$
305,507
 
$
(1,379,088
)
$
864,550
 


 
 
 
19

 
 

CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2009

                       
   
Buckeye Technologies Inc.
 
Guarantors
US
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
 
Consolidating
Adjustments
 
 
 
Consolidated
 
Assets
                     
Current assets
                               
Cash and cash equivalents
 
$
1,138
$
 
4
 
$
20,919
 
$
-
 
$
22,061
 
Accounts receivable, net
   
18,644
   
63,522
   
29,126
   
-
   
111,292
 
Income tax and alternative fuel mixture credits receivable
   
9,374
   
-
   
-
   
-
   
9,374
 
Inventories, net
   
17,325
   
53,722
   
16,931
   
(341
)
 
87,637
 
Other current assets
   
332
   
5,156
   
1,019
   
-
   
6,507
 
Intercompany accounts receivable
   
-
   
131,302
   
-
   
(131,302
)
 
-
 
Total current assets
   
46,813
   
253,706
   
67,995
   
(131,643
)
 
236,871
 
                                 
Property, plant and equipment, net
   
58,821
   
336,836
   
130,932
   
-
   
526,589
 
Goodwill and intangibles, net
   
14,845
   
2,425
   
-
   
-
   
17,270
 
Intercompany notes receivable
   
363,717
   
-
   
-
   
(363,717
)
 
-
 
Other assets, including investment in
     subsidiaries
   
328,471
   
267,118
   
103,781
   
(687,716
)
 
11,654