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BKI > SEC Filings for BKI > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for BUCKEYE TECHNOLOGIES INC


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations, as well as discusses our critical accounting policies. This discussion should be read in conjunction with the accompanying unaudited financial statements and our Annual Report on Form 10-K for the year ended June 30, 2012, filed with the Securities and Exchange Commission (the "SEC") on August 29, 2012 ("Annual Report"), which include additional information about our significant accounting policies, practices and transactions that underlie our financial results. Our MD&A is composed of four major sections: Executive Summary, Results of Operations, Financial Condition, and Critical Accounting Policies.

Except as otherwise specified, references to years (e.g., "2013") indicate our fiscal year ending June 30 of the year referenced and comparisons are to the corresponding period of the prior year. The following discussion includes a comparison of the results of operations for the three and nine month periods ended March 31, 2013, to the three- and nine-month periods ended March 31, 2012.

Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or future financial condition. The forward-looking statements contained in this report involve risks and uncertainties, including statements that may express or imply projections of revenues, expenditures, or other financial metrics, plans and objectives for future operations, growth or initiatives, expected future economic performance, expected word economic conditions, or the expected outcome or impact of pending or threatened litigation. All forward-looking information is provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these risks, uncertainties and other factors. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "trends," "assumptions," "target," "guidance," "outlook," "opportunity," "future," "plans," "goals," "objectives," "expectations," "near-term," "long-term," "projection," "may," "might," "will," "would," "could," "can," "expect," "intend," "estimate," "anticipate," "believe," "potential," "regular," "should," "project," "predict," "forecast" or "continue" (or the negative or other derivatives of each of these terms) or similar terminology.

The forward-looking statements contained in this report involve risks, uncertainties and other factors which may cause our actual results and performance to differ materially from those expressed or implied by those statements. We have based the forward-looking statements in this report on information available to use as of the date of this report, and we believe the assumptions underlying any forward-looking statements are reasonable. However, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements or from historical performance. The following important factors, among others, could affect future results, causing these results to differ materially from those expressed in our forward-looking statements:

the impact of our pending acquisition by Georgia-Pacific LLC and related developments, including the potential for management's attention, loss of key personnel and disruption to our operations as well as the possibility that regulatory approval and, if required, approval of the merger agreement by our stockholders may not be obtained as planned, which could delay or prevent the transaction;

pricing fluctuations and worldwide economic conditions;

variations in demand for our products;

fluctuation in the costs and availability of raw materials, including specialty wood pulp and fluff pulp, commodities and energy and transportation resources;

competition and changes in industry production capacity;

gain or loss of large customers;

the ability to execute our business plans, including those related to acquisitions and divestitures and new product development;

the ability to obtain additional capital, maintain adequate cash flow to service debt as well as meet operating needs;

changes in fair values of long-lived assets;

capital improvement plans;

the ability to transfer our Delta facility's historic sales volume to our other nonwovens plants;

changes in the timing of and net benefit realized from the alternative fuel mixture credit, cellulosic biofuel credit and other tax credits;

inability to predict the scope of future environmental compliance costs or liabilities and future restructuring costs or liabilities;

scheduled and unscheduled maintenance requirements at our plants and labor disputes; and

fluctuations in currency exchange rates.


Other factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to, those contained in Part I, Item 1A of the Annual Report, which is incorporated herein by this reference, or from time to time, in our filings with the SEC, press releases and other communications.

Readers are cautioned not to place undue reliance on forward-looking statements made in this report, since the statements speak only as of the report's date. Except as may be required by law, we have no obligation, and do not intend, to publicly update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any future public disclosures that we may make on related subjects in reports that we file with or furnish to the SEC or in our other public disclosures.

Executive Summary

We manufacture and distribute 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 and Germany, 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 renewable cellulose-based specialty products. Our key focus areas over the next twelve months include maximizing cash flow, optimizing capacity utilization, successful execution of the high-end specialty wood pulp expansion project, identifying new profitable, sustainable growth opportunities, improving our return on invested capital for all assets, and continuing our progress to a Lean Enterprise culture. We plan to take a balanced approach in allocating capital between debt reduction, investment in high rate of return projects, and returning cash to stockholders.

Net sales for the three months ended March 31, 2013, were $195.5 million, a decrease of $21.5 million, or 10%, compared to net sales of $217.0 million for the same period in 2012. Shipment volume was down 3% with nonwovens volume up 11% and specialty fibers volume off 4%. We continued to experience weak demand in some of our high-end specialty fiber markets, particularly from the European tire cord market, resulting in an unfavorable product mix as we shipped approximately 5,500 tons this quarter into the commodity viscose staple fiber market. Selling prices were down year over year in the fluff pulp market. Cotton specialty fibers selling prices were also lower as we passed through reductions in raw cotton linter costs to our customers.

During the nine months ended March 31, 2013, net sales were $596.8 million, a decrease of $73.1 million, or 11%, compared to the nine months ended March 31, 2012. Lower shipment volume had a negative impact due to lost sales in our specialty fibers segment resulting from the June steam drum failure outage at our Foley facility and weaker demand in some of our wood and cotton specialty fibers markets, partly offset by the impact of increased shipment volume from our nonwovens plants. We also realized a negative impact in product mix and lower selling prices compared to the year-ago. Year-to-date shipment volume, excluding the King divestiture, was down 3% compared to the same period a year ago, with specialty fibers shipments down 5% while nonwovens shipment volume was up 5%. The King divestiture accounted for $10.1 million of the year over year reduction in net sales. On a year-to-date basis, average selling prices on our high-end wood pulp, excluding shipments into the viscose staple fiber market, were up 5%, while fluff pulp prices decreased by $105 per ton compared to the same period a year ago.

Operating income for the three months ended March 31, 2013, was $29.8 million, down $11.8 million from the same period in 2012, due to lower volume, selling prices and unfavorable product mix in our specialty fibers segment. Nonwovens operating income improved by $2.8 million, an increase of 93%, compared to the year-ago quarter due to increased sales and increased capacity utilization. Asset impairment and restructuring charges (related to the Delta nonwovens plant closure) totaled $1.5 million compared to $0.3 million in the year-ago quarter (related to the divestiture of the Merfin Systems converting business).

For the nine months ended March 31, 2013, operating income was $93.5 million, which was $30.6 million lower than the nine months ended March 31, 2012. Restructuring and impairment losses totaled $13.2 million during the period compared to losses of only $4.4 million in the year-ago period. Gross margin decreased $23.6 million compared to the same period in 2012. Negative impacts of lower shipment and production volume, lower selling prices and unfavorable product mix were partially offset by lower raw material costs, primarily lower raw cotton linter prices. Gross margin as a percentage of sales was lower at 23.6% for the nine months ended March 31, 2013 compared to 24.5% in the same period a year ago.


Net income for the three months ended March 31, 2013 of $28.3 million, or $0.71 per diluted share, was up $2.5 million, or $0.07 per diluted share compared to the same period a year ago. An after-tax gain of $7.3 million on the sale of the land and building at our Delta nonwovens facility combined with a lower effective tax rate more than offset the impact of lower sales and operating income compared to the year ago quarter.

Net income for the nine months ended March 31, 2013, of $70.7 million or $1.78 per diluted share, was up $9.2 million or $0.26 per diluted share compared to the nine months ended March 31, 2012. A favorable change in the results from discontinued operations of $28.4 million contributed to an improvement in net income. This was partially offset by lower operating income as mentioned above.

Net cash provided by operating activities was $46.1 million for the quarter. Capital expenditures, at $27.2 million, remained at a high level as Buckeye continues work on the specialty conversion and oxygen delignification projects at its Foley Mill. Long-term debt has decreased by 37.0 million since December 31, 2012.

Net cash provided by operating activities for the nine months ended March 31, 2013 of $74.8 was lower by $9.6 million compared to $84.4 million the same period a year ago mainly due to lower net sales and margins compared to the year ago period. Capital expenditures, at $79.1 million, were up $32.9 million compared to the year ago period due to work on the specialty conversion and oxygen delignification projects at the Foley Mill. Proceeds from sale of assets, at $19.9 million, were up $14.2 million compared to the prior-year period primarily due to proceeds from the sale of the land and building at our closed Delta, B.C., Canada nonwovens plant in the third quarter. Buckeye also benefited from $4.3 million in insurance proceeds applied to capital investments required to replace equipment damaged in the June steam drum failure outage at our Foley mill.

Recent Developments

We and Georgia-Pacific LLC announced on April 24, 2013 that we have reached a definitive agreement for Georgia-Pacific to acquire all of the outstanding shares of our common stock for $37.50 per share in cash. The transaction, subject to completion, is valued at approximately $1.5 billion, including debt. Georgia-Pacific has launched a cash tender offer for all outstanding shares of our common stock. The tender offer, which is presently scheduled to expire at 12:00 am Eastern time on June 4, 2013, is subject to the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, other regulatory approvals and other customary closing conditions, and requires at least 75 percent of the outstanding shares of our common stock to be tendered, consistent with the threshold for approval of a merger specified in our certificate of incorporation. The transaction is not conditioned on financing. In certain circumstances, the parties have agreed to complete the transaction through a merger, subject to receipt of stockholder approval. Upon termination of the merger agreement with Georgia-Pacific LLC and GP Cellulose Group LLC under specified circumstances, Buckeye will be required to pay Georgia-Pacific LLC a termination fee of $48.6 million.

On May 1, 2013, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned James Beckett, Jr. v. Buckeye Technologies Inc., et. al., Case No. 8519-. The complaint names as defendants Buckeye, each member of the Buckeye board of directors (the "Individual Defendants"), Georgia-Pacific LLC and GP Cellulose Group LLC. The complaint generally alleges that the Individual Defendants breached their fiduciary duties and that Georgia-Pacific LLC and GP Cellulose Group aided and abetted these purported breaches of fiduciary duties. The complaint includes, among other allegations, that the Individual Defendants failed to act in good faith and with due care to maximize the value of Buckeye to its stockholders. The relief sought includes, among other things, an injunction prohibiting the completion of the proposed transaction, rescission (to the extent the proposed transaction has been completed), and the payment of plaintiff's attorneys' fees and costs. Buckeye believes the complaint is without merit and intends to vigorously defend the action. Additional lawsuits may be filed against Buckeye in connection with the proposed merger with Georgia-Pacific.


Results of Operations

Consolidated results

The following tables compare components of operating income for the three and
nine months ended March 31, 2013 and 2012.

 (millions)                                         Three Months Ended March 31
                                               2013      2012     Change     % Change
Net sales                                     $ 195.5   $ 217.0   $ (21.5 )       (9.9 )%
Cost of goods sold                              152.2     163.9     (11.7 )       (7.1 )%
Gross margin                                     43.3      53.1      (9.8 )      (18.4 )%
Selling, research and administrative expenses    11.4      10.7       0.7          6.5 %
Asset impairment loss                             0.7       0.1       0.6        600.0 %
Amortization of intangibles and other             0.5       0.5         -            -
Restructuring costs                               0.8       0.2       0.6        300.0 %
Other operating income                              -         -         -            -
 Operating income                             $  29.9   $  41.6   $ (11.7 )      (28.1 )%




 (millions)                                         Nine Months Ended March 31
                                               2013      2012     Change    % Change
Net sales                                     $ 596.8   $ 669.9   $ (73.1 )     (10.9 )%
Cost of goods sold                              456.0     505.5     (49.5 )      (9.8 )%
Gross margin                                    140.8     164.4     (23.6 )     (14.4 )%
Selling, research and administrative expenses    36.8      34.4       2.4         7.0 %
Asset impairment loss                             3.6       1.8       1.8       100.0 %
Goodwill impairment loss                            -       2.4      (2.4 )    (100.0 )%
Amortization of intangibles and other             1.5       1.5         -           -
Restructuring costs                               9.6       0.2       9.4          NM
Other operating income                           (4.2 )       -      (4.2 )    (100.0 )%
 Operating income                             $  93.5   $ 124.1   $ (30.6 )     (24.7 )%

Net sales for the three months ended March 31, 2013 were $21.5 million, or 9.9%, lower than in the comparable prior-year period. Shipments in our specialty fiber segment were down 4%, negatively impacting net sales $10.9 million while nonwovens volume was up 11%, adding $5.1 million. Sales mix was unfavorable $5.0 million driven by the weakness in the high-end specialty fiber markets, resulting in increased sales into the commodity viscose staple fiber market. Additionally, lower sales prices in all segments reduced net sales by approximately $9.6 million. The divestiture of our King, North Carolina converting business lowered net sales in the nonwoven materials segment by $1.3 million compared to the same period a year ago.

Net sales for the nine months ended March 31, 2013 were $73.1 million, or 10.9%, lower than in the comparable prior-year period. Lower shipment volume had a negative impact of approximately $22.0 million largely due to lost sales in our specialty fibers segment resulting from the June steam drum failure outage at our Foley facility. Shipment volume in our nonwovens segment was strong, adding $8.6 million in net sales compared to the prior year. Unfavorable changes in product mix and lower selling prices had unfavorable impacts of approximately $20.0 million and $16.8 million, respectively. The King divestiture accounted for $10.1 million of the year over year reduction in net sales. In addition, exchange rates in Europe unfavorably impacted net sales for the nonwoven materials segment by $4.2 million.

Gross margin was lower for the three months and nine months ended March 31, 2013, compared to the comparable prior-year periods primarily driven by unfavorable changes in sales mix, lower sales prices and reduced volumes in our specialty fibers segment. For the nine-month period ended March 31, 2013, gross margin decreased $23.6 million compared to the same period in 2012, as unfavorable product mix, lower sales prices and reduced volume reduced gross margin by approximately $11.9 million, $12.0 million and $15.2 million, respectively. These impacts were partially offset as lower raw materials costs, primarily lower raw cotton linter prices, had a favorable impact of approximately $15.4 million on gross margin.


In June 2011, we announced our decision to cease production at our Delta airlaid nonwovens facility by the end of calendar 2012. The plant ceased production in November 2012, and, as a result, we evaluated the recoverability of the long-lived assets at the Delta facility as of November 30, 2012. Based on this evaluation we determined that certain long-lived assets associated with this operation having a carrying value of $4.7 million were impaired and wrote them down to their estimated fair value of $1.1 million, resulting in an impairment charge of $3.6 million, which is recorded in asset impairment loss on the consolidated statements of operations for the nine months ended March 31, 2013. The sale of the land and buildings was completed in the third quarter of 2013 resulting in a gain of $7.3 million. For the three and nine months ended March 31, 2013, we recognized $0.8 million and $8.6 million in restructuring cost, respectively, as we reduced the carrying value of certain other assets, and recognized severance and employee benefit costs and other miscellaneous costs (see Note 5, Restructuring Costs for additional detail).

During the quarter ended December 31, 2011, we made the decision to pursue the sale of the nonwovens materials Merfin Systems converting business in King, North Carolina and after reducing the value of certain other assets by $0.4 million, we determined that the long-lived assets associated with this operation were impaired and wrote them down to their fair value of $0.2 million, resulting in an impairment charge of $1.3 million. In addition, we recorded a goodwill impairment charge of $2.4 million. In the three months ended March 31, 2013, we recorded miscellaneous income of $0.3 million from the resolution of an earn-out provision in the sale agreement.

Selling, research and administrative expenses increased for the three and nine months ended March 31, 2013, versus the comparable periods in the prior year primarily due to an increase in consulting and legal fees related to our ongoing efforts to identify new growth opportunities and higher bad debt and stock compensation expense.

In the nine-months ended March 31, 2013, we recorded other operating income of $4.2 million to recognize the gain from the insurance proceeds received related to the insured value of fixed assets retired as a result of the June 2012 steam drum failure at our Foley Plant. These proceeds were used to fund capital expenditures to replace the damaged equipment.

Segment results

Although nonwoven materials, processes, customers, distribution methods and regulatory environment are 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. The nonwovens materials segment currently consists of our three airlaid plants. Our converting plant, which was sold in January 2012, is included in the prior-year period results. We make separate financial decisions and allocate resources based on the sales and operating income of each segment. We allocate selling, research, and administrative expense 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, amortization of intangibles, and unallocated at-risk and stock-based compensation.

Specialty fibers

The following tables compare specialty fibers net sales and operating income for the three and nine months ended March 31, 2013 and 2012.

(millions)               Three Months Ended March 31
                    2013      2012     Change     % Change
Net sales          $ 142.6   $ 170.0   $ (27.4 )      (16.1 )%
Operating income      27.7      40.6     (12.9 )      (31.8 )%




(millions)                Nine Months Ended March 31
                    2013      2012     Change     % Change
Net sales          $ 439.3   $ 515.8   $ (76.5 )      (14.8 )%
Operating income      99.9     126.4     (26.5 )      (21.0 )%

Net sales were lower for the three and nine months ended March 31, 2012, versus the comparable prior-year periods. For the three-month period, lower sales volume reduced net sales by approximately $10.9 million, product mix unfavorably impacted net sales by approximately $6.9 million and lower selling prices reduced net sales by approximately $9.6 million, as fluff pulp prices decreased $58 per ton while high-end specialty wood (excluding viscose staple fiber) and cotton linter pulp prices declined approximately 3% and 12%, respectively, compared to the prior year. For the nine-month period, lower shipment volume reduced net sales by approximately $36.1 million, including the effects of approximately $22 million in lost sales resulting from the June 2012 steam drum failure outage at our Foley Plant. Unfavorable changes in product mix and lower selling prices had unfavorable impacts of approximately $24.5 million and $15.8 million, respectively. Average selling prices on our high-end specialty wood (excluding viscose staple fiber) and cotton linter pulp, were up 5% and down 7%, respectively, for the nine-month period ended March 31, 2013 versus the comparable prior-year period.


Operating income decreased $12.9 million and $26.5 million, respectively, for the three and nine months ended March 31, 2013, compared to the prior year comparable periods. During the three months ended March 31, 2013 lower selling prices, reduced sales volume, and unfavorable changes in product mix reduced operating income by approximately $9.6 million, $5.0 million and $3.8 million, respectively. Raw material costs decreased approximately $6.4 million for our cotton specialty fibers compared to the year-ago quarter and offset modest increases in direct costs compared the same period a year ago. For the nine-month period, lower selling prices, unfavorable changes in product mix, and reduced sales volume had unfavorable impacts of approximately $15.4 million, $12.6 million and $12.7 million, respectively, while raw material costs for our cotton specialty fibers decreased approximately $14.6 million compared to the same period a year ago.

Nonwoven materials

The following tables compare nonwoven materials net sales and operating income for the three and nine months ended March 31, 2013 and 2012.

(millions)                 Three Months Ended March 31
                     2013        2012      Change     % Change
Net sales          $   57.4    $   54.1   $    3.3          6.1 %
Operating income        5.8         3.0        2.8         93.3 %



(millions)                Nine Months Ended March 31
                     2013      2012     Change     % Change
Net sales          $  170.0   $ 177.1   $  (7.1 )       (4.0 )%
Operating income       15.0       8.1       6.9         85.2 %

Nonwoven materials sales for the three months ended March 31, 2013, increased $3.3 million versus the prior year while sales for the nine-month period ended March 31, 2013 declined $7.1 million versus the prior comparable period. The divestiture of the King, North Carolina converting business in January 2012 reduced net sales in the nonwoven materials segment by $1.3 million and $10.1 million for the three and nine month periods ended March 31, 2013, respectively. Shipment volume, excluding the King divestiture, was up 11%, or approximately $5.1 million, for the three-month period and was up 5%, or approximately $8.6 million, for the nine-month period compared to the prior year. For the nine month period, sales were negatively impacted $4.2 million versus the prior year comparable period by foreign currency rate fluctuations.

Operating income increased $2.8 million and $6.9 million, respectively, for the . . .

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