Buckeye Technologies Inc. Reports Operating Results (10-Q)
Buckeye Technologies Inc. is a leading manufacturer and worldwide marketer of value-added cellulose-based specialty products. The company utilizes its expertise in polymer chemistry and its state-of-the-art manufacturing facilities to develop and produce innovative and proprietary products for its customers. The company sells its products to a wide array of technically demanding niche markets in which its proprietary products and commitment to customer technical service give it a competitive advantage. Buckeye Technologies Inc. has a market cap of $354.4 million; its shares were traded at around $9.15 with a P/E ratio of 15.2 and P/S ratio of 0.4. Buckeye Technologies Inc. had an annual average earning growth of 23.8% over the past 5 years. Highlight of Business Operations: Sales for the three months ended September 30, 2009 of $177 million were down $44 million or 20% versus the same period in 2008. Reduced shipment volume from our specialty cotton cellulose plants accounted for about $22 million of this sales reduction. Shipment demand for products supplied by these plants was off about 40% compared with the same quarter a year ago, as demand from end-markets supplied by these plants such as LCD screens, specialty paper, construction and automotive paints and laquers was more severely affected by the global economic slowdown than our other businesses. Shipment volumes for our wood specialty fibers facility and our nonwovens facilities were up compared to the same period in 2008. Lower selling prices accounted for another $15 million of the year over year reduction in net sales. Lower fluff pulp prices, which were down about 20%, accounted for about half of this amount. During the recent economic downturn, however, fluff pulp prices have held up better than most expected and have not descended to the levels experienced during earlier downturns. We believe this is due to growing demand for fluff pulp products, mainly in emerging markets, and we have seen several fluff pulp price increases announced in the past several months. A less favorable product mix in our Wood Specialty Fibers business accounted for another $8 million of the sales reduction. While sales of our wood specialty fibers are well-diversified among many end uses, we have seen demand weakness over the past two quarters even in markets that originally held up well at the start of the economic downturn, such as those for food casings and cigarette tow, in addition to markets like those for automotive applications, where demand has been down since the recession began. We were able to keep our wood specialty fibers facility sold out by shifting sales into other specialty markets to offset demand weakness in our traditional markets, but this negatively impacted our sales revenue due to the lower prices in these markets.
Operating income for the three months ended September 30, 2009 was $48.0 million, which was up $25.3 million compared to the same period in 2008. Income from the alternative fuel mixture credits was $35.8 million compared to zero in the year ago quarter. Assuming that the tax credit is not terminated by Congress prior to its scheduled expiration date of December 31, 2009, we would expect to realize a similar amount of income from these credits in the second quarter. Gross margin was down $11.2 million (13.6% of sales compared to 16.0%) and selling, research and administrative expenses were lower by $0.7 million. Raw materials, chemicals, energy and transportation costs were all down significantly compared to the year ago quarter, collectively accounting for an approximate $21 million reduction in cost of goods sold. This reduction, however, did not offset the combined $25 million unfavorable impact of lower selling prices and unfavorable product mix on gross margin. Lower shipment and production volumes accounted for the rest of the year over year drop in gross margin. We continue to take significant downtime at our Memphis and Americana plants to match production to shipment demand. During the three months ended September 30, 2009 we further reduced staffing at our Memphis Plant, aligning capacity utilization with current market conditions. There were approximately $0.8 million in severance costs recognized during the period relating to this staffing reduction. Over the past 12 months, we have reduced staffing at these two plants by a combined total of 70 employees.
Net earnings for the three months ended September 30, 2009 of $39.2 million or $1.00 per diluted share, were up $30.4 million or $0.77 per diluted share compared to the same period in 2008. The alternative fuel mixtures credits accounted for $35.1 million or $0.89 per share of this improvement. Net interest expense for the quarter was down $2.1 million, accounting for an additional earnings improvement of $1.4 million or $0.04 per share. The net impact of the lower gross margin and favorable selling, research and administrative expenses discussed above explain the rest of the year over year change in earnings.
Strong cash flow generation, including $7.7 million from alternative fuel mixture credits, enabled us to reduce debt by $32.5 million in the three months ended September 20, 2009. Net cash provided by operating activities was up $12.0 million compared to the year ago period and net cash used in investing activities was lower by $9.7 million due to the Florida grant of $7.4 million and lower capital expenditures by $2.3 million.
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 $35.8 million in alternative fuel mixture credits, which was net of expenses, in our consolidated statements of operations related to credits earned for the three months ended September 30, 2009. During the three months ended September 30, 2009 we received $2.8 million in cash related to these credits and $5.6 million related to prior period credits. We will be applying for an additional $35.6 million in income tax credits. We expect to use a portion of the alternative fuel mixture credits in 2010 to offset U.S. federal estimated income tax payments and to receive the balance in 2011 as a cash refund after filing our 2010 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 Internal Revenue Service (“IRS”).
During the three months ended September 30, 2009, lower sales volumes and prices along with production downtime at our specialty cotton fiber facilities accounted for most of the reduction in operating income compared to the three months ended September 30, 2008. Lower raw material costs ($5.4 million), primarily due to the decrease in cotton fibers costs, lower chemical costs ($1.5 million), lower energy costs ($5.1 million), lower transportation costs ($3.5 million), and lower direct cost spending ($3.7 million) partially offset the impact of lower sales.
Read the The complete ReportBKI is in the portfolios of NWQ Managers of NWQ Investment Management Co.