The following Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations, as well as discussing our critical accounting policies. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements, and other sections of this Annual Report on Form 10-K. Our MD&A is composed of four major sections; Executive Summary, Results of Operations, Financial Condition and Critical Accounting Policies. Unless otherwise indicated, references to a year (e.g., "2009") refers to our fiscal year ended June 30 of that year.

Executive Summary

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

Our strategy is to continue to strengthen our position as a leading supplier of cellulose-based specialty products. The key focus areas for Buckeye over the next twelve months include living within our means by focusing on cash flow maximization to pay down debt, optimizing capacity utilization, restarting the Foley Energy Project and identifying new bio-energy initiatives that support profitable, sustainable growth, and accelerating the rate of change to a Lean Enterprise culture.

2009 was a challenge for Buckeye as the global economic recession impacted demand for many of our products. Sales of $755 million were down $71 million or 9% versus 2008, with the Specialty Fibers segment down 7% and sales in the Nonwoven Materials segment down 9%. Reduced shipment volume had a negative $101 million impact on sales compared to 2008, while higher selling prices added $44 million. Unfavorable product mix and currency made up the balance. Specialty fibers sales were negatively impacted by reduced demand for cotton specialty products, wood specialty fibers used in automotive and construction applications and fluff pulp. We took significant downtime at our Memphis and Americana plants during 2009 to match production to shipment demand. During 2009, we reduced staffing at our Memphis plant to adjust our capacity to match reduced demand levels for products supplied by this plant. Shipment volume for our airlaid nonwovens products was down 7% versus 2008 primarily because the business lost in January 2008 has not yet been completely replaced. Selling prices were up 13% on average year over year for our high-end specialty wood and cotton fibers products, but our fluff pulp prices were down by about 3% on average. Our nonwoven materials prices were up approximately 2%.

Our operating loss for 2009 was $23 million and included two major items. On December 31, 2008, based on the economic environment and the steep decline in the price of our stock at that time, which created a significant gap between the book and market value of our equity, we recorded a $138 million non-cash goodwill impairment charge. During the April - June quarter, we recorded $54 million of income from alternative fuel mixture credits. After accounting for these items, the remaining reduction in operating income from 2008 was $39 million which was due to the lower sales volume and associated market-related downtime, as increased selling prices were sufficient to offset increased input costs.

Strong cash flow generation, including $38 million from alternative fuel mixture credits, enabled us to reduce debt by $67.0 million during 2009. Our interest and amortization of debt costs decreased $4.3 million as compared to 2008 as the result of lower debt and lower average interest rates. On July 31, 2009 we redeemed the remaining $110 million of our 2010 senior subordinated notes using borrowings on our credit facility. For 2010, based on the current variable interest rate environment, we expect the combination of lower variable interest rates on our revolving credit facility versus the 8% bonds and lower debt levels to reduce net interest expense and amortization of debt costs to less than $20 million. We have also established a new debt target of $275 million by the end of 2010.

We are focused on reducing cost and maintaining a tight control on working capital. We continue to have a temporary wage freeze for all salaried employees and temporary salary reductions for all officers of the company in the range of 3.5% to 10.0%. We will evaluate the need for this cost reduction step each quarter but believe we will reverse the salary reductions and lift the wage freeze at the end of the calendar year as business results improve. In May, we further reduced staffing at our Memphis Plant, aligning capacity utilization with current market conditions. As of June 30, 2009, our year over year total headcount was down 5.0% to approximately 1450 total employees. We anticipate and have announced a 1.0% reduction in total headcount in the current quarter.

Our Foley Energy Project, which was based on a design goal of an annual equivalent reduction of over 200,000 barrels of oil, meets the criteria for several Federal and State grant funds. The alternative fuel mixture credits have helped us reduce our debt and improve our liquidity and with the help of a $7.4 million grant from the State of Florida we have resumed this project to avoid any further delays in achieving the benefits. In addition to improving our cost structure and cash flow by making the Foley Plant nearly energy self-sufficient, the project also lays the groundwork for potential additional revenue streams from energy sales. We have spent $18.2 million on this $45 million project through June 30, 2009. We anticipate spending an additional $17.5 million in 2010. We have been working to take advantage of the Foley Plant's bio-energy capabilities and recently announced that we are working on an agreement with the University of Florida for establishing a demonstration bio-refinery at Foley. The demonstration facility will explore processes to generate "green" bio-chemicals for a variety of end-market applications.

Results of Operations

Consolidated results

The following table compares the components of consolidated operating income for the three fiscal years ended June 30, 2009.

 (millions)                     Year Ended June 30            $ Change          Percent Change
                                                           2009/     2008/     2009/       2008/
                            2009       2008      2007       2008      2007      2008       2007
Net sales                  $ 754.5    $ 825.5   $ 769.3   $  (71.0 ) $ 56.2       (8.6 )%     7.3 %
Cost of goods sold           645.2      676.0     637.5      (30.8 )   38.5       (4.6 )      6.0
Gross margin                 109.3      149.5     131.8      (40.2 )   17.7      (26.9 )     13.4
Selling, research and
administrative expenses       46.3       47.3      47.0       (1.0 )    0.3       (2.1 )      0.6
Amortization of
intangibles and other          1.9        1.8       2.3        0.1     (0.5 )      5.6      (21.7 )
Impairment and
restructuring costs          138.0        0.1       1.3      137.9     (1.2 )      n/a      (92.3 )
Alternative fuel mixture
credits                      (54.2 )        -         -      (54.2 )      -      100.0          -
Operating income (loss)    $ (22.6 )  $ 100.3   $  81.2   $ (122.9 ) $ 19.1     (122.5 )%    23.5 %

The global economic downturn had an unfavorable impact on the demand for many of our products. Net sales decreased 8.6% for 2009 versus 2008, primarily due to lower shipment volume in both the specialty fibers and nonwoven materials segments. Lower shipment volume accounted for approximately $101.1 million of the decline. Higher selling prices for our products partially offset the lower volume, with selling prices being up approximately 6% on average compared to 2008 ($44.3 million).

Gross margin was lower for 2009 versus 2008 by $40.2 million. Lower shipment volume and associated market-related production downtime resulted in lost margin on reduced shipments and higher costs due to lower capacity utilization rates. Overall selling price increases have more than offset increases in raw material, chemical and energy prices over that same period. We started to see reductions in raw materials, energy and transportation costs in the January - March quarter and reductions in chemical costs in the April - June quarter.

Net sales increased 7.3% for 2008, primarily due to selling prices which were higher by approximately 10% on average compared to 2007, accounting for $69.4 million in incremental sales. Partially offsetting the impact of favorable price increases, 2008 sales volumes declined versus 2007, accounting for a reduction in sales of $27.4 million. Nonwovens accounted for the largest part of this sales volume impact ($18.7 million) as a result of the loss of business with a large customer in January. Lower sales volume at our two specialty cotton fiber mills due to raw material availability issues also negatively impacted sales by $7.1 million compared to the prior year.

Our gross margin improved by $17.7 million in 2008 versus 2007. Our selling price increases of $69.4 million more than offset the impact of higher costs for raw materials and the lower shipment and production volumes. Raw material costs were higher year over year ($29.8 million) mainly for cotton linter fibers ($18.6 million) and in our nonwoven materials ($8.2 million) business. Increased chemical costs ($5.2 million) overall were partially offset by lower usage at our specialty wood fibers facility. Higher energy costs had a negative impact of $5.8 million and higher transportation costs reduced our gross margin by $4.8 million compared to the prior year.

Selling, research and administrative expenses decreased $1.0 million in 2009. Selling, research and administrative expenses increased slightly in 2008. As a percentage of net sales these costs increased to 6.1% in 2009 versus 5.7% in 2008 and 6.1% in 2007.

Based on the economic environment and the steep decline in the price of our stock at that time, 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. During the three months ended March 31, 2009, we completed this analysis. We concluded that there was no change to the impairment loss of $138 million we recognized at December 31, 2008. Since this goodwill impairment charge is non-cash, it does not affect our liquidity or financial covenants.

The U.S. Internal Revenue Code permits 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 is equal to $.50 per gallon of alternative fuel contained in the mixture. We qualify 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. We recorded $54.2 million in alternative fuel mixture credits, which was net of expenses, in our consolidated statements of operations related to claims filed for the period from February 12, 2009 through June 30, 2009. As of June 30, 2009 we had received $38.4 million in cash related to these claims. We will be claiming an additional $13.8 million as income tax credits on our 2009 tax return. 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.

Further discussion of revenue and operating trends can be found later in this MD&A. Additional information on the goodwill impairment may also be found in Note 3, Goodwill, to the Consolidated Financial Statements.

Segment results

Although nonwoven materials, processes, customers, distribution methods and regulatory environment are very similar to specialty fibers, we believe it is appropriate for nonwoven materials to be disclosed as a separate reporting segment from specialty fibers. The specialty fibers segment consists of our chemical cellulose, customized fibers and fluff pulp product lines which are cellulosic fibers based on both wood and cotton. We make separate financial decisions and allocate resources based on the sales and operating income of each segment. We allocate selling, research, and administrative expenses to each segment, and we use the resulting operating income to measure the performance of the two segments. We exclude items that are not included in measuring business performance, such as restructuring costs, the impact of goodwill impairment loss, alternative fuel mixture credits, amortization of intangibles, and unallocated at-risk and stock-based compensation. We have reclassified the at-risk compensation and stock-based compensation from the specialty fibers and nonwovens segments for 2007 for comparability.

Specialty fibers

The following table compares specialty fibers net sales and operating income for the three years ended June 30, 2009.

(millions)              Year Ended June 30             $ Change          Percent Change
                                                   2009/      2008/     2009/      2008/
                    2009       2008      2007      2008       2007       2008       2007
Net sales          $ 551.6    $ 595.8   $ 543.8   $ (44.2 )   $ 52.0       (7.4 )%    9.6 %
Operating income      53.7       90.6      65.8     (36.9 )     24.8      (40.7 )    37.7

Specialty fibers net sales were down, primarily due to lower shipment volume for 2009 versus 2008 as the global economic downturn impacted demand for many of our products. Shipment volume for the specialty fibers segment was down 11% compared to 2008, with specialty wood fibers shipments off 7% and specialty cotton fibers off 29%. Specialty wood fibers sales were most negatively impacted by reduced demand for fluff pulp and specialty wood grades used in automotive and construction applications. Partially offsetting the lower volume were higher prices of approximately 13% on our wood specialty products (excluding fluff) and 15% on our cotton specialty products. Fluff pulp prices decreased approximately $23 per ton compared to 2008.

Operating income for 2009 versus 2008 was unfavorably affected by the lower sales volume and lower production volume. Higher raw material costs ($14.9 million), primarily due to the increase in cotton fibers, higher chemical costs ($16.0 million), higher energy costs ($5.4 million) and higher transportation costs ($3.0 million) contributed to the lower operating income. The higher specialty fibers prices, lower direct cost spending and favorable exchange rates in Brazil partially offset the unfavorable items.

Net sales increased 9.6% in 2008 versus 2007, primarily due to higher prices. Selling prices were up approximately 8% on our wood specialty products and 15% on our cotton specialty fibers products. In 2008, fluff pulp prices increased approximately $107 per ton compared to 2007. Shipment volume was down approximately 2%, partially offsetting the favorable price increases.

Operating income improved as a percentage of sales from 12.1% in 2007 to 15.2% in 2008. The favorable impact of higher selling prices ($66.9 million) was partially offset by higher raw material costs ($21.7 million), mainly due to the increase in cotton fibers for which costs were up 36% year over year. In addition, higher chemical, energy and transportation costs reduced the favorable impact of the higher selling prices.

Our operating loss at Americana was reduced by approximately 50% in 2008 versus 2007. Increased pricing (21%), higher production volume and reductions in fixed costs helped offset the higher cotton linter prices and the strengthening Brazilian currency (1.77 versus 2.11 BRL/USD).

Nonwoven materials

The following table compares nonwoven materials net sales and operating income for the three years ended June 30, 2009.

(millions)              Year Ended June 30            $ Change           Percent Change
                                                   2009/     2008/      2009/      2008/
                    2009       2008      2007       2008      2007      2008       2007
Net sales          $ 239.7    $ 263.6   $ 258.8    $ (23.9 ) $  4.8       (9.1 )%     1.9  %
Operating income      12.3       15.3      22.2       (3.0 )   (6.9 )    (19.6 )    (31.1 )

Nonwoven materials sales decreased in 2009 versus 2008, primarily due to lower shipment volume ($18.5 million) and a weakening of the euro versus the U.S. dollar ($8.2 million). Higher pricing of $5.4 million partially offset the impact of lower volumes. Shipment volumes for the nonwoven materials segment were down 7%. Part of this reduction is because we have not yet completely replaced the business lost in January 2008 and part is due to the global recession. Shipment volume for our airlaid nonwovens products used in wipes, however, our largest product category, was up year over year by about 1%. Selling prices were up about 2% on the average compared to the prior year.

Operating income decreased $3.0 million for the year ended June 30, 2009 versus the year ended June 30, 2008. The impact of lower sales volumes, unfavorable product mix and higher raw material prices were partially offset by higher selling prices, lower transportation costs, a weaker Canadian dollar and reduced selling, research, and administrative spending.

Nonwoven materials sales increased in 2008 versus 2007. Strong sales volume in the first half of 2008 was offset by weak volume in the second half of the year due to the loss of business with a long-time customer. Shipment volume year over year was down 8% from 2007 to 2008. Improved pricing and improved product mix contributed $6.4 million and $4.8 million, respectively, to the sales increase. The strengthening of the euro versus the U.S. dollar provided $12.2 million of the increased revenues.

Operating income decreased 31% in 2008 versus 2007. The impact of higher sales prices was more than offset by lower volume, higher raw material costs for fluff pulp, bi-component fiber and latex binder, and higher energy and transportation costs.

Corporate

Our intercompany net sales elimination represents intercompany sales from our Florida and Memphis specialty fiber facilities to our airlaid nonwovens plants. The unallocated at-risk compensation and unallocated stock-based compensation represent 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 2007 for comparability.

The following tables compare corporate net sales and operating loss for the three years ended June 30, 2009.

(millions)             Year Ended June 30                            $ Change                      Percent Change
                 2009         2008         2007            2009/ 2008        2008/ 2007       2009/ 2008         2008/ 2007
Net sales        $ (36.8 )    $ (33.8 )    $ (33.4 )     $       (3.0 )    $        0.4             (8.9 )%    $        1.2 %
Operating loss     (88.6 )       (5.6 )       (6.8 )            (83.0 )             1.2              N/A               17.6

The operating loss for the three years ended June 30 consists of:

(millions)                                2009        2008        2007
Unallocated at-risk compensation        $   (1.7 )   $ (2.6 )    $ (2.2 )
Unallocated stock-based compensation        (1.9 )     (0.9 )      (0.8 )
Intellectual property amortization          (1.9 )     (1.9 )      (2.3 )
Restructuring expenses                         -       (0.1 )      (1.2 )
Goodwill impairment loss                  (138.0 )        -           -
Gross margin on intercompany sales           0.7       (0.1 )      (0.3 )
Alternative fuel mixture credits            54.2          -           -
                                        $  (88.6 )   $ (5.6 )    $ (6.8 )

Restructuring activities

2007 Restructuring program

In January 2007, we entered into a restructuring program that complements our operations' consolidations and involves consolidation in our European sales offices, product and market development and corporate overhead operations. The total cost of this program was approximately $1.4 million and was completed during the first quarter of the 2008. As a result of this restructuring, 22 positions were eliminated.

Interest expense and amortization of debt costs

Interest expense and amortization of debt costs decreased $4.3 million for 2009 versus 2008. This improvement was the result of lower average debt levels and lower average interest rates during 2009. In addition, approximately $0.8 million more interest was capitalized on long-term projects in 2009 versus 2008.

Interest expense and amortization of debt costs decreased $5.6 million for 2008 versus 2007. This improvement was primarily the result of lower average debt levels during 2008 and lower average interest rates. This favorable impact was partially offset by the decrease in interest expense in 2007 due to the reversal of $1.9 million of interest related to the cancellation of a contingent note owed to Stac-Pac Technologies Inc.

Gain (loss) on early extinguishment of debt costs

2009 - During 2009, we used borrowings on our revolving credit facility to purchase $5 million of the 2010 notes at a discount of 8.5%. As a result of this extinguishment, we wrote off a portion of deferred financing costs. The net of the discount and the deferred financing costs resulted in a gain of $0.4 million.

2008 - During 2008, we used cash from operations and borrowings on our revolving credit facility to redeem the remaining $60 million of our 2008 notes and to redeem $35 million of the 2010 notes. As a result of these extinguishments, we wrote off a portion of deferred financing costs, resulting in non-cash expenses of $0.6 million during 2008.

2007 - During 2007 we used cash from operations to redeem $5 million of our senior subordinated notes due in 2008 and to make voluntary prepayments on our term loan of $60.8 million. As a result of these partial extinguishments, we wrote off a portion of deferred financing costs, resulting in non-cash expense of $0.8 million during 2007.

See Note 9, Debt, in the Consolidated Financial Statements for further discussion of the debt issuance and related extinguishment.

Gain on sale of assets held for sale

In September 2006, the remaining assets located at our Glueckstadt facility were sold for $0.5 million. Because we had previously written the value of these assets down to $0.2 million, we recorded a gain on sale of assets held for sale of $0.3 million during 2007.

Foreign exchange and other

Foreign exchange and other in 2009, 2008 and 2007 were $(0.4) million, $0.6 million and $1.9 million, respectively. The loss in 2009 was primarily due to a settlement fee in relation to the Stac-PacŪ litigation and a charge related to the termination of hedge accounting treatment on the interest rate swap. The income in 2008 was primarily due to foreign currency gains as a result of the strengthening of the Brazilian real. The income in 2007 was primarily due to $2.0 million from a water conservation partnership payment received pursuant to our reduction in the daily water permit limit at the Foley plant.

Income tax expense

Our effective tax rate for 2009 was approximately (26.5)% versus 30.0% in 2008 and 31.3% in 2007.

On December 31, 2008 we recorded a $138.0 million goodwill impairment charge and we recognized a tax benefit of $10.4 million in connection with the goodwill impairment charge.

During 2009, we claimed the alternative fuel mixture credits 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 the 2009 tax year. 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 nontaxable income. In 2009, we recorded a tax benefit of $4.8 million due to the nontaxable nature of the alternative fuel mixture credits claimed on the federal income tax return.

During 2009, we increased our valuation allowance from $13.4 million to $14.4 million. The valuation allowance relates to deferred tax assets for net operating losses of Americana, Brazil, net operating losses in Canada, and net operating losses in certain state tax jurisdictions. We reduced the valuation allowance related to state tax net operating losses by $0.1 million to reflect changes to the estimate of expected utilization.

We increased the valuation allowance in Brazil by $1.1 million to eliminate the tax benefit of current year losses. In addition to accounting for the current year losses, we reduced the valuation allowance in Brazil by $0.9 million to reflect favorable currency translation adjustments. The net increase to the valuation allowance recorded in Brazil was $0.2 million. During 2008, we decreased our valuation allowance related to deferred tax assets for net operating losses of the Americana, Brazil operations by $0.5 million due to tax planning associated with intercompany interest charges offsetting the operating losses. During 2007, we increased our valuation allowance related to deferred tax assets for net operating losses of the Americana, Brazil operations by $2.5 million. This was almost entirely offset by a reduction of valuation allowances in the amount of $2.5 million related to certain state net operating losses and tax credits due to tax planning efforts.

Due to the impairment of goodwill in 2009 and cumulative book losses net of intercompany charges in our Canadian operations over the past three years, we recorded a valuation allowance of $0.9 million related to net operating losses which we believe will expire unutilized. We also increased the valuation allowance in Canada by $0.1 million to reflect unfavorable currency translation adjustments. The total increase to the valuation allowance recorded in Canada was $0.9 million. Effective December 2007, Canada enacted Canada Bill C-28 which reduced its Canadian corporate tax rates to 19.5% for 2008, 19% for 2009, 18% for 2010, 16.5% for 2011 and 15% for 2012 and later years. This reduction in corporate rates resulted in a remeasurement of Canadian deferred tax balances with a net tax benefit of $0.2 million in 2008. Furthermore, changes in estimates and tax planning resulted in a net tax benefit of $0.4 million in fiscal 2008 related to utilization of Canadian net operating loss carryforwards.

. . .