tenq123108.htm


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, 2008

¨ 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 ¨

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 February 9, 2009, there were outstanding 38,649,503 Common Shares of the Registrant.



 
1
 


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, 2008 and 2007
3
     
 
Condensed Consolidated Balance Sheets as of December 31, 2008 and June 30, 2008
4
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2008 and 2007
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
     
3.
Quantitative and Qualitative Disclosures About Market Risk
27
     
4.
Controls and Procedures
27
     
 
PART II - OTHER INFORMATION
  
     
     
1.
Legal Proceedings
28
     
4.
Submission of Matters to a Vote of Security Holders
28
     
6.
Exhibits
28
     
 
SIGNATURES
29
     



 
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
 December 31
  
Six Months Ended
December 31
  
   
2008
  
2007
  
2008
  
2007
  
Net sales
  
$
184,665
  
$
210,922
  
$
405,958
  
$
408,321
  
Cost of goods sold
    
161,533
    
168,943
    
347,488
    
325,687
  
Gross margin
    
23,132
    
41,979
    
58,470
    
82,634
  
                           
Selling, research and administrative expenses
    
11,266
    
11,796
    
23,476
    
23,270
  
Goodwill impairment loss
    
138,008
    
-
    
138,008
    
-
  
Amortization of intangibles and other
    
471
    
361
    
940
    
922
  
Restructuring costs
    
-
    
-
    
-
    
96
  
Operating income (loss)
    
(126,613
)
  
29,822
    
(103,954
) 
  
58,346
  
                           
Net interest expense and amortization of debt costs
    
(7,469
)
  
(8,524
) 
  
(14,907
)
  
(17,681
)
Gain (loss) on early extinguishment of debt
    
401
    
251
    
401
    
(535
)
Gain (loss) on foreign exchange and other
    
213
    
(94
) 
  
(618
) 
  
(262
)
                           
Income (loss) before income taxes
    
(133,468
)
  
21,455
    
(119,078
) 
  
39,868
  
Income tax expense (benefit)
    
(8,484
)
  
7,589
    
(2,944
) 
  
12,505
  
                           
Net income (loss)
  
$
(124,984
)
$
13,866
  
$
(116,134
) 
$
27,363
  
                           
Earnings (loss) per share
                          
Basic
  
$
(3.23
)
$
0.36
  
$
(3.00
) 
$
0.70
  
Diluted
  
$
(3.23
)
$
0.35
  
$
(3.00
) 
$
0.70
  
                           
Weighted average shares for earnings per share
                          
Basic
    
38,670
    
38,953
    
38,688
    
38,848
  
Effect of diluted shares
    
-
    
495
    
-
    
506
  
Diluted
    
38,670
    
39,448
    
38,688
    
39,354
  


See accompanying notes.


 
3
 


BUCKEYE TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

   
December 31
2008
  
June 30
2008
  
   
(Unaudited)
      
Assets
    
 2008
   
 2007
  
Current assets:
              
Cash and cash equivalents
  
$
8,491
  
$
10,393
  
Accounts receivable – net
    
108,111
    
127,521
  
Inventories – net
    
115,548
    
110,254
  
Deferred income taxes and other
    
11,186
    
11,530
  
Total current assets
    
243,336
    
259,698
  
               
Property, plant and equipment
    
1,060,538
    
1,093,759
  
Less accumulated depreciation
    
(537,753
)
  
(538,051
)
     
522,785
    
555,708
  
Goodwill
    
2,425
    
163,622
  
Intellectual property and other, net
    
26,088
    
30,197
  
Total assets
  
$
794,634
  
$
1,009,225
  
               
Liabilities and stockholders’ equity
              
Current liabilities:
              
Trade accounts payable
  
$
33,678
  
$
49,157
  
Accrued expenses
    
42,892
    
50,451
  
Current portion of capital lease obligation
    
-
    
358
  
Short-term debt
    
-
    
207
  
Total current liabilities
    
76,570
    
100,173
  
               
Long-term debt
    
391,311
    
393,910
  
Accrued postretirement benefits
    
22,468
    
23,868
  
Deferred income taxes
    
48,531
    
57,963
  
Other liabilities
    
2,962
    
3,754
  
Stockholders’ equity
    
252,792
    
429,557
  
Total liabilities and stockholders’ equity
  
$
794,634
  
$
1,009,225
  

See accompanying notes.


 
4
 


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

   
Six Months Ended
December 31
  
   
2008
  
2007
  
Operating activities
              
Net income (loss)
  
$
(116,134
) 
$
27,363
  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
              
Depreciation
    
24,769
    
25,409
  
Amortization
    
1,252
    
1,126
  
(Gain) loss on early extinguishment of debt
    
(401
) 
  
535
  
Deferred income taxes and other
    
(5,861
) 
  
11,560
  
Goodwill impairment loss
    
138,008
    
-
  
Excess tax benefit from stock based compensation
    
-
    
(44
)
Changes in operating assets and liabilities:
              
Accounts receivable
    
11,580
    
(775
)
Inventories
    
(9,381
) 
  
(3,405
)
Other assets
    
323
    
336
  
Accounts payable and other current liabilities
    
(15,615
) 
  
(7,970
)
Net cash provided by operating activities
    
28,540
    
54,135
  
Investing activities
              
Purchases of property, plant and equipment
    
(25,011
)
  
(18,692
)
Other
    
(73
)
  
(135
)
Net cash used in investing activities
    
(25,084
)
  
(18,827
)
 Financing activities
              
Net borrowings under lines of credit
    
2,541
    
82,000
  
Payments on long-term debt and other
    
(5,358
)
  
(113,817
)
Purchase of treasury shares
    
(494
)
  
-
  
Payments for debt issuance costs
    
-
    
(1,401
)
Net proceeds from sale of equity interests
    
-
    
5,742
  
Excess tax benefit from stock based compensation
    
-
    
44
  
Net cash used in financing activities
    
(3,311
)
  
(27,432
)
Effect of foreign currency rate fluctuations on cash
    
(2,047
)
  
900
  
Increase (decrease) in cash and cash equivalents
    
(1,902
) 
  
8,776
  
Cash and cash equivalents at beginning of period
    
10,393
    
14,790
  
Cash and cash equivalents at end of period
  
$
8,491
  
$
23,566
  

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 six months ended December 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2009.  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, 2008, which was filed with the Securities and Exchange Commission on August 27, 2008 (“Annual Report”).  Except as otherwise specified, references to years indicate our fiscal year ending June 30, 2009 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 fibers segment consists of our chemical cellulose, customized fibers and fluff pulp product lines which are 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 tables:

Three Months Ended
December 31
      
Specialty
Fibers
  
Nonwoven
Materials
  
 
Corporate
  
 
Total
  
Net sales
    
2008
  
$
137,739
  
$
56,841
  
$
(9,915
)
$
184,665
  
     
2007
    
148,208
    
71,966
    
(9,252
)
  
210,922
  
Operating income (loss)
    
2008
    
11,339
    
1,506
    
(139,458
)
  
(126,613
)
     
2007
    
26,117
    
5,383
    
(1,678
)
  
29,822
  
Depreciation and amortization of
    
2008
    
8,060
    
3,497
    
940
    
12,497
  
Intangibles
    
2007
    
8,157
    
4,241
    
744
    
13,142
  
Capital expenditures
    
2008
    
11,855
    
1,558
    
516
    
13,929
  
     
2007
    
8,468
    
737
    
497
    
9,702
  


 
6
 


Six Months Ended
December 31
      
Specialty
Fibers
  
Nonwoven
Materials
  
 
Corporate
  
 
Total
  
Net sales
    
2008
  
$
302,718
  
$
122,703
  
$
(19,463
)
$
405,958
  
     
2007
    
283,909
    
143,596
    
(19,184
)
  
408,321
  
Operating income (loss)
    
2008
    
31,457
    
5,099
    
(140,510
)
  
(103,954
)
     
2007
    
48,088
    
13,291
    
(3,033
)
  
58,346
  
Depreciation and amortization of
    
2008
    
16,408
    
7,542
    
1,759
    
25,709
  
Intangibles
    
2007
    
16,172
    
8,473
    
1,688
    
26,333
  
Capital expenditures
    
2008
    
21,952
    
2,336
    
723
    
25,011
  
     
2007
    
16,388
    
1,444
    
860
    
18,692
  
 
Management evaluates operating performance of the specialty fibers and nonwoven materials segments excluding amortization of intangibles, the impact of impairment of long-lived assets, the impact of goodwill impairment, charges related to restructuring, unallocated at-risk compensation and unallocated stock-based compensation for executive officers and certain other employees.  Therefore, the corporate segment includes operating elements such as segment eliminations, amortization of intangibles, impairment of long-lived assets, goodwill impairment, charges related to restructuring, unallocated at-risk compensation and unallocated stock-based compensation for executive officers and certain other employees.  We have reclassified the at-risk compensation and stock-based compensation from the specialty fibers and nonwovens segments for the three and six months ended December 31, 2007 for comparability. Corporate net sales represent the elimination of intersegment sales included in the specialty fibers reporting segment.  Intersegment sales are at current market prices.

NOTE 3: RESTRUCTURING COSTS AND ASSETS HELD FOR SALE
 
During fiscal 2007, we entered into a restructuring program that complemented our operations’ consolidations and involved consolidation in our European sales offices, product and market development and corporate overhead.  The total cost of this program was $1,358 and was completed during the first quarter of the 2008 fiscal year.  The remaining accrual of $102 will be paid in fiscal year 2009.  As a result of this restructuring, 22 positions were eliminated.
  
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.
 
The components of inventory consist of the following:
 
   
December 31
2008
  
June 30
2008
  
           
Raw materials
  
$
37,448
  
$
40,758
  
Finished goods
    
53,824
    
45,184
  
Storeroom and other supplies
    
24,276
    
24,312
  
   
$
115,548
  
$
110,254
  


 
7
 

NOTE 5: GOODWILL

In accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142), 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 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.

Based on the current economic environment and the recent 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 analysis as of December 31, 2008.  We engaged an independent valuation firm to assist with the testing of the carrying value of goodwill.  For purposes of this analysis, estimates of fair value were based on a combination of the income approach, which estimates the fair value of our reporting units based on future discounted cash flows, and the market approach, which estimates the fair value of our reporting units on comparable market prices.  As of this filing, we have not completed this analysis, due to the complexities involved in determining the implied fair value of the goodwill of each reporting unit.  However, based on the work performed to date, we have concluded that an impairment loss is probable and can be reasonably estimated.  Accordingly, we recorded a $138,008 non-cash goodwill impairment charge, representing our best estimate of the impairment loss, during the three months ended December 31, 2008.  Since this goodwill impairment charge is non-cash, it does not affect our liquidity or financial covenants.

We expect to finalize our goodwill impairment analysis during the third quarter of fiscal 2009.  There could be adjustments to the goodwill impairment charge when the goodwill impairment analysis is completed.  Any adjustment to our preliminary estimates will be recorded in our financial statements for the quarter ending March 31, 2009.

The changes in the carrying amount of goodwill for the six months ended December 31, 2008 are as follows:

 
Specialty Fibers
  
Nonwovens
      
 
Segment
  
Segment
  
Total
  
Balance as of June 30, 2008
$
49,759
  
$
113,863
  
$
163,622
  
Change due to fluctuation in foreign currency exchange rate
  
(7,007
)
  
(16,182
)
  
(23,189
)
Impairment losses
  
(42,752
)
  
(95,256
)
  
(138,008
)
Balance as of December 31, 2008
$
-
  
$
2,425
  
$
2,425
  

NOTE 6:  DEBT

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

   
December 31
2008
  
June 30
2008
  
Senior Notes due:
          
2013
  
$
200,000
  
$
200,000
  
Senior Subordinated Notes due:
              
2010
    
110,620
    
115,830
  
Credit facility
    
80,691
    
78,080
  
   
$
391,311
  
$
393,910
  

Senior Notes

During September 2003, we placed privately $200,000 in aggregate principal amount of 8.5% senior notes due October 1, 2013 (the “2013 Notes”).  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.  The senior notes are redeemable at our option, in whole or part, at any time on or after October 1, 2008, at redemption prices varying from 104.25% of principal amount to 100% of principal amount on or after October 1, 2011, together with accrued and unpaid interest to the date of redemption.


 
8
 

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 were redeemable at our option, in whole or in part, at any time after September 15, 2004, at a redemption price of 100% of principal amount together with accrued and unpaid interest to the date of redemption.

Through fiscal year 2007, we redeemed $40,000 of the 2008 Notes.  During the six months ended December 31, 2007, we redeemed the remaining $60,000 of the 2008 Notes.  As a result of this redemption, we wrote off the remaining balance of deferred financing costs and unamortized discount related to the 2008 Notes.  During the six months ended December 31, 2007, we recorded non-cash expenses of $205 related to the early extinguishment of this debt.

During June 1998, we completed a private placement of $150,000 principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010 (the “2010 Notes”).  In fiscal 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.

On December 1, 2008, we redeemed $5,000 of the 2010 Notes.  During the six months ended December 31, 2007, we redeemed $20,000 of these notes.  In fiscal year 2008, we redeemed a total of $35,000 of these notes.  As a result of these redemptions, we wrote off a portion of the deferred financing costs and unamortized discount related to the 2010 notes.  During the three and six months ended December 31, 2008, we recorded non-cash gains of $401 related to the early extinguishment of this debt and during the six months ended December 31, 2007 we recorded non-cash expenses of $153 related to the early extinguishment of this debt.

Revolving Credit Facility

On July 25, 2007, we established a $200,000 senior secured revolving credit facility with a maturity date of July 25, 2012.  This facility amended and restated the Company's old credit facility.  Initially, we used the proceeds from this new credit facility to pay the outstanding balance on the former credit facility plus fees and expenses.  The interest rate applicable to borrowings under the revolver 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%.  We used the proceeds from this facility to redeem the remaining $60,000 of our 2008 notes, to redeem $20,000 of the 2010 notes in mid-September 2007, and for general corporate purposes.  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 December 31, 2008, we were in compliance with the financial covenants under our credit facility.
 
On December 31, 2008, we had $8,491 of cash and cash equivalents and we had $113,957 borrowing capacity on our credit facility.  The credit facility also contains a $50,000 increase option.  Our credit facility allows for a sublimit on letters of credit of $50,000.  As of December 31, 2008, $44,648 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.  Total costs for the issuance of the facility were approximately $1,300 and are being amortized to interest expense using the effective interest method over the life of the facility.  During the six months ended December 31, 2007, $177 was expensed as early extinguishment of debt related to the write-off of deferred financing costs for the term loan portion of the former credit facility.

On September 17, 2007, we entered into an interest rate swap agreement for $30,000 of debt under our revolving credit facility maturing on September 17, 2009.  The swap involves 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 qualifies as a cash flow hedge under SFAS 133.  Therefore, the net effect from the interest rate swap is being recorded as part of interest expense.  During the three and six months ended December 31, 2008, the swap increased our interest expense by $163 and $315, respectively.  During the three and six months ended December 31, 2007, the swap reduced our interest expense by $61 and $71, respectively.  At December 31, 2008, our liability on the interest rate swap agreement was $781.


 
9
 

 
NOTE 7:  FAIR VALUE MEASURMENTS
 
    In accordance with the provisions of FASB Staff Position FAS 157-2, we have partially applied the provisions of SFAS No. 157 only to our financial assets and liabilities recorded at fair value, which consist of derivative contracts, including interest rate swaps, foreign currency forward contracts, and other financial instruments that are used to hedge exposures to interest rate, commodity and currency risks.  For these financial instruments, 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 estimated fair values under the hierarchy defined in SFAS No. 157:
 
   
Fair Value Measurements at December 31, 2008
  
   
 
 
Total
    
Quoted prices in active markets for identical assets (Level 1)
    
Significant other observable inputs (Level 2)
    
Significant unobservable inputs (Level 3)
  
Assets:
                        
Foreign currency hedge
   $ 654     $ -     $ 654     $ -  
Total
     654       -       654       -  
                                 
Liabilities:
                                
Natural gas hedge
     236       -       236       -  
Interest rate swap
     781       -       781       -  
Total
   $ 1,017     $ -     $ 1,017     $ -  

 
NOTE 8:  STOCKHOLDERS' EQUITY
 
The change in stockholders' equity was due mainly to the change in comprehensive income as shown in the chart below.  The components of comprehensive income consist of the following:
 
   
Three Months Ended
December 31
  
Six Months Ended
December 31
  
   
2008
  
2007
  
2008
  
2007
  
                       
Net income
  
$
(124,984
)
$
13,866
  
$
(116,134
) 
$
27,363
  
Foreign currency translation adjustments – net
    
(35,449
)
  
7,513
    
(61,540
)
  
22,422
  
Unrealized losses on hedging activities
    
(177
)
  
(485
)
  
(255
)
  
(485
)
Comprehensive income (loss)
  
$
(160,610
)
$
20,894
  
$
(177,929
) 
$
49,300
  
 
For the three and six months ended December 31, 2008, 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 ($2,466) and ($11,468), the Brazilian real of ($12,029) and ($24,114) and the Canadian dollar of ($20,954) and ($25,958), respectively.
 
For the three and six months ended December 31, 2007, the change in the foreign currency translation adjustment was primarily due to fluctuations in the exchange rate of the U.S. dollar against the euro of $3,109 and $6,827, the Brazilian real of $2,147 and $4,640 and the Canadian dollar of $2,257 and $10,955, respectively.

NOTE 9:
INCOME TAXES

 On July 1, 2007, we adopted the provisions of FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes.”  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  As a result of the adoption, we recorded an adjustment of approximately $878 to reduce retained earnings at July 1, 2007.  At adoption, our unrecognized tax benefits totaled $1,806.  Cumulative potential interest and penalties accrued related to unrecognized tax benefits at the date of adoption totaled $164.  We include interest and penalties related to income tax matters as a component of income before income taxes.  All unrecognized tax benefits at adoption would affect the effective tax rate, if recognized.  During the three months ended December 31, 2008, as a result of the resolution of a North Carolina audit, we were able to reduce our unrecognized tax benefits by $228 and our related interest and penalties by $101.  These reductions leave a balance in unrecognized tax benefits and our related interest and penalties of $1,578 and $63, respectively.

10
We file income tax returns with federal, state, local and foreign jurisdictions.  As of December 31, 2008, we remain subject to examinations of our United States federal and state income tax returns for the years 2003 through 2007, Canadian income tax returns for the years 2001 through 2007 and German tax filings for the years 2002 through 2007. 

Our effective tax rates for the three and six month periods ended December 31, 2008 were 6.4% and 2.5%, respectively.  Our effective tax rates for the same periods of 2007 were 35.4% and 31.4%, respectively.  We recorded a $138,008 goodwill impairment charge in the three months ended December 31, 2008.  Accordingly, we recognized a tax benefit of $10,410 in connection with the goodwill impairment charge.  In addition, the rate change for the three month period ended December 31, 2008 was the result of a correction to our deferred taxes and the resolution of the North Carolina audit (mentioned above) which together had a net unfavorable impact of $300 during the three months ended December 31, 2008.  The increase, before the goodwill impairment charge, in the effective tax rate for the six month period over the same period in 2007 was affected by the items which impacted the three months ended December 31, 2008 comparison plus a German tax rate law change which reduced our taxes by approximately $2,200 during the six months ended December 31, 2007.  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
December 31
  
Six Months Ended
December 31
  
   
2008
  
2007
  
2008
  
2007
  
                       
Expected tax expense at 35%
  
$
(46,714
)
$
7,509
  
$
(41,677
)
$
13,953
  
Nondeductible goodwill impairment charge
    
37,892
    
-
    
37,892
    
-
  
German tax rate change
    
-
    
-
    
-
    
(2,245
)
Effect of foreign operations
    
(301
)
  
(397
) 
  
10
    
(78
)
Brazilian valuation allowance
    
692
    
404
    
1,157
    
847
  
Other
    
(53
)
  
73
    
(326
)
  
28
  
Income tax expense
  
$
(8,484
)
$
7,589
  
$
(2,944
)
$
12,505
  

NOTE 10: EMPLOYEE BENEFIT PLANS
 
In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158).  On July 1, 2008, we adopted the measurement date provisions of SFAS No. 158.  SFAS No. 158 requires the measurement date of the plan’s funded status to be the same as our fiscal year end.  The adoption of the measurement date provisions of SFAS No. 158 resulted in a decrease in accrued postretirement benefits of $1,175, an increase in deferred tax liabilities of $435, an increase in accumulated other comprehensive income of $882 and a decrease in the opening balance of retained earnings of $142.  The adoption of the measurement date provisions of SFAS No. 158 had no material effect on our consolidated statement of income for the six months ended December 31, 2008 or for any prior period presented, and it will not materially affect our operating results in future periods.

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
  
   
2008
  
2007
  
2008
  
2007
  
Service cost for benefits earned
  
$
121
  
$
151
  
$
241
  
$
302
  
Interest cost on benefit obligation
    
374
    
350
    
747
    
700
  
Amortization of unrecognized prior service cost
    
(251
)
  
(250
)
  
(502
)
  
(501
)
Actuarial loss
    
69
    
146
    
139
    
292
  
Total cost
  
$
313
  
$
397
  
$
625
  
$
793
  


 
11
 

NOTE 11: CONTINGENCIES

On January 3, 2008, K.T. Equipment (International) Inc., (K.T.), filed a claim in the United States District Court, Western District of Tennessee, against us, in which K.T. alleged that we breached our obligation under the Stac-Pac® acquisition agreement to pay K.T. a contingent promissory note in the principal amount of $5,000 plus accrued interest of approximately $2,830 as of December 31, 2008.  Payment of the contingent note was dependent on the satisfaction of certain specified conditions relating to the rights obtained by us with regard to the intellectual property assets.  When these conditions were not met pursuant to the terms of the Stac-Pac® acquisition agreement, we canceled the contingent note in the year ended June 30, 2007, as reported in our 10-K filed September 7, 2007.  We believe we have meritorious defenses to K.T.’s claim and intend to vigorously defend against the claim.

The Foley Plant, located in Perry, Florida, discharges treated wastewater into the Fenholloway River.  Under the terms of an agreement with the Florida Department of Environmental Protection (“FDEP”), approved by the U. S. Environmental Protection Agency (“the EPA”) in 1995, we agreed to a comprehensive plan to attain Class III (“fishable/swimmable”) status for the Fenholloway River under applicable Florida law (the “Fenholloway Agreement”).  The Fenholloway Agreement requires us, among other things, to (i) make process changes within the Foley Plant to reduce the coloration of its wastewater discharge, (ii) restore certain wetlands areas, (iii) relocate the wastewater discharge point into the Fenholloway River to a point closer to the mouth of the river, and (iv) provide oxygen enrichment to the treated wastewater prior to discharge at the new location.  We have completed the process changes within the Foley Plant as required by the Fenholloway Agreement.  In making these in-plant process changes, we incurred significant expenditures, and, as discussed in the following paragraph, we expect to incur significant additional capital expenditures to comply with the remaining obligations under the Fenholloway Agreement.

      The EPA objected to the draft National Pollutant Discharge Elimination System (NPDES) permit prepared in connection with the Fenholloway Agreement and requested additional environmental studies to identify possible alternatives to the relocation of the wastewater discharge point, and some members of the public have also challenged the permit.  Based on the requirements anticipated in the proposed permit, we expect to incur capital expenditures of approximately $9,500 dollars over the four year period that began in fiscal year 2009 on in-plant process changes, and additional capital expenditures of at least $50,000 dollars over at least five years, possibly beginning as early as fiscal year 2015.  See Note 17 “Contingencies” to the financial statements included in our Annual Report for the year ended June 30, 2008.
 



 
12
 

NOTE 12: 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 that do not guarantee the senior notes. Each subsidiary guarantor is 100% owned directly or indirectly by us and all guarantees are full and unconditional.
 
Our supplemental financial information and our guarantor subsidiaries and non-guarantor subsidiaries for the senior notes are presented in the following tables.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2008

   
Buckeye Technologies Inc.
  
Guarantors
US
Subsidiaries
  
Non-
Guarantor
Subsidiaries
  
 
Consolidating
Adjustments
  
 
 
Consolidated
  
Net sales
  
$
26,414
  
$
132,816
  
$
36,355
  
$
(10,920
)
$
184,665
  
Cost of goods sold
    
25,652
    
112,160
    
34,515
    
(10,794
)
  
161,533
  
Gross margin
    
762
    
20,656
    
1,840
    
(126
)
  
23,132
  
                                 
Selling, research and administrative expenses, and other
    
(3,528
)
  
12,991
    
2,274
    
-
    
11,737
  
Goodwill impairment loss
    
20,230
    
24,922
    
92,856
          
138,008
  
                                 
Operating loss
    
(15,940
)
  
(17,257
)
  
(93,290
)
  
(126
)
  
(126,613
)
                                 
Other income (expense):
                                
Net interest income (expense) and amortization of debt costs
    
(7,889
)
  
358
    
62
    
-
    
(7,469
)
Other income (expense), including equity income (loss) in affiliates
    
(205,966
)
  
(197
)
  
343
    
206,434
    
614
  
Intercompany interest income (expense)
    
7,719
    
(6,703
)
  
(1,016
)
  
-
    
-
  
                                 
Income (loss) before income taxes
    
(222,076
)
  
(23,799
)
  
(93,901
)
  
206,308
    
(133,468
)
                                 
Income tax expense (benefit)
    
(96,890
)
  
639
    
(4,357
)
  
92,124
    
(8,484
)
                                 
Net income (loss)
  
$
(125,186
)
$
(24,438
)
$
(89,544
)
$
114,184
  
$
(124,984
)
 

 
13
 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2008

   
Buckeye Technologies Inc.
  
Guarantors
US
Subsidiaries
  
Non-
Guarantor
Subsidiaries
  
 
Consolidating
Adjustments
  
 
 
Consolidated
  
Net sales
  
$
62,685
  
$
277,341
  
$
87,548
  
$
(21,616
)
$
405,958
  
Cost of goods sold
    
59,456
    
228,125
    
81,897
    
(21,990
)
  
347,488
  
Gross margin
    
3,229
    
49,216
    
5,651
    
374
    
58,470
  
                                 
Selling, research and administrative expenses, and other
    
(7,665
)
  
26,748
    
5,333
    
-
    
24,416
  
Goodwill impairment loss
    
20,230
    
24,922
    
92,856
          
138,008
  
                                 
Operating income (loss)
    
(9,336
)
  
(2,454
)
  
(92,538
)
  
374
    
(103,954
)
                                 
Other income (expense):
                                
Net interest income (expense) and amortization of debt costs
    
(15,646
)
  
639
    
100
    
-
    
(14,907
)
Other income (expense), including equity income (loss) in affiliates
    
(199,234
)
  
(273
)
  
(444
)
  
199,734
    
(217
)
Intercompany interest income (expense)
    
15,437
    
(13,244
)
  
(2,193
)
  
-
    
-
  
                                 
Income (loss) before income taxes
    
(208,779
)
  
(15,332
)
  
(95,075
)
  
200,108
    
(119,078
)
                                 
Income tax expense (benefit)
    
(92,442
)
  
3,434
    
(3,985
)
  
90,049
    
(2,944
)
                                 
Net income (loss)
  
$
(116,337
)
$
(18,766
)
$
(91,090
)
$
110,059
  
$
(116,134
)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2007
                   
   
Buckeye Technologies Inc.
  
Guarantors
US
Subsidiaries
  
Non-
Guarantor
Subsidiaries
  
 
Consolidating
Adjustments
  
 
 
Consolidated
  
Net sales
  
$
28,124
  
$
138,312
  
$
54,866
  
$
(10,380
)
$
210,922
  
Cost of goods sold
    
24,815
    
105,566
    
48,989
    
(10,427
)
  
168,943
  
Gross margin
    
3,309
    
32,746
    
5,877
    
47
    
41,979
  
                                 
Selling, research and administrative expenses, and other
    
(5,271
)
  
14,271
    
3,157
    
-
    
12,157
  
                                 
Operating income
    
8,580
    
18,475
    
2,720
    
47
    
29,822
  
                                 
Other income (expense):
                                
Net interest income (expense) and amortization of debt costs
    
(8,631
)
  
(48
)
  
155
    
-
    
(8,524
)
Other income (expense), including equity income
    (loss) in affiliates
    
10,866
    
21
    
(145
)
  
(10,585
)
  
157
  
     Intercompany interest income (expense)
    
8,332
    
(6,468
)
  
(1,864
)
  
-
    
-
  
Income (loss) before income taxes
    
19,147
    
11,980
    
866
    
(10,538
)
  
21,455
  
                                 
Income tax expense (benefit)
    
5,281
    
4,297
    
530
    
(2,519
)
  
7,589
  
                                 
Net income (loss)
  
$
13,866
  
$
7,683
  
$
336
  
$
(8,019
)
$
13,866
  



 
14
 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2007
                   
   
Buckeye Technologies Inc.
  
Guarantors
US
Subsidiaries
  
Non-
Guarantor
Subsidiaries
  
 
Consolidating
Adjustments
  
 
 
Consolidated
  
Net sales
  
$
55,727
  
$
266,039
  
$
108,094
  
$
(21,539
)
$
408,321
  
Cost of goods sold
    
47,848
    
204,252
    
95,128
    
(21,541
)
  
325,687
  
Gross margin
    
7,879
    
61,787
    
12,966
    
2
    
82,634
  
                                 
Selling, research and administrative expenses, and other
    
(9,517
)
  
27,453
    
6,256
    
-
    
24,192
  
Restructuring and impairment costs
    
69
    
-
    
27
    
-
    
96
  
                                 
Operating income
    
17,327
    
34,334
    
6,683
    
2
    
58,346
  
                                 
Other income (expense):
                                
Net interest income (expense) and amortization of debt costs
    
(17,770
)
  
(116
)
  
205
    
-
    
(17,681
)
Other income (expense), including equity income
(loss) in affiliates
    
27,444
    
191
    
(640
)
  
(27,792
)
  
(797
)
     Intercompany interest income (expense)
    
16,663
    
(13,014
)
  
(3,649
)
  
-
    
-
  
                                 
Income (loss) before income taxes
    
43,664
    
21,395
    
2,599
    
(27,790
)
  
39,868
  
                                 
Income tax expense (benefit)
    
16,301
    
7,294
    
(807
)
  
(10,283
)
  
12,505
  
                                 
Net income (loss)
  
$
27,363
  
$
14,101
  
$
3,406
  
$
(17,507
)
$
27,363
  
 

 
15
 

CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2008

   
Buckeye Technologies Inc.
  
Guarantors
US
Subsidiaries
  
Non-
Guarantor
Subsidiaries
  
 
Consolidating
Adjustments
  
 
 
Consolidated
  
Assets
                      
Current assets
                      
Cash and cash equivalents
  
$
362
  
$
3
  
$
8,126
  
$
-
  
$
8,491
  
Accounts receivable, net
    
10,435
    
70,988
    
26,688
    
-
    
108,111
  
Inventories, net
    
32,399
    
65,019
    
18,860
    
(730
)
  
115,548
  
Other current assets
    
5,476
    
5,281
    
429
    
-
    
11,186
  
Intercompany accounts receivable
    
-
    
69,978
    
-
    
(69,978
)
  
-
  
Total current assets
    
48,672
    
211,269
    
54,103
    
(70,708
)
  
243,336
  
                                 
Property, plant and equipment, net
    
59,265
    
338,703
    
124,817