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 October 1, 2000
OR
/ / 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: 1-3203
_______________________
CHESAPEAKE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0166880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 East Cary Street
Richmond, Virginia 23218-2350
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: 804-697-1000
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
_______________________
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 / /.
Number of shares of $1.00 par value common stock outstanding as of
October 30, 2000: 15,110,666 shares.
CHESAPEAKE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Earnings-
Quarter and Nine Months ended October 1, 2000
and September 30, 1999 3
Consolidated Balance Sheets
at October 1, 2000 and December 31, 1999 5
Consolidated Statements of Cash Flows-
Nine Months ended October 1, 2000
and September 30, 1999 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
-2-
PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
Quarter Ended Nine Months Ended
---------------------------------
Oct. 1, Sep. 30, Oct. 1, Sep. 30,
2000 1999 2000 1999
------ ------ ------ ------
Net sales $273.5 $350.2 $768.5 $916.8
Costs and expenses:
Cost of products sold 218.0 270.2 617.0 714.7
Selling, general and
administrative expenses 45.9 48.0 134.0 132.2
Restructuring/special charges 5.1 - 5.1 -
------ ------ ------ ------
Income from operations 4.5 32.0 12.4 69.9
Gain on sales of businesses - 85.9 - 85.9
Other income and expenses, net 3.4 1.6 6.4 7.0
Interest expense, net (11.3) (11.8) (26.1) (29.2)
------ ------ ------ ------
(Loss) income before taxes
and extraordinary item (3.4) 107.7 (7.3) 133.6
Income tax (benefit) expense (1.7) 41.9 (4.8) 50.9
------ ------ ------ ------
(Loss) income before
extraordinary item (1.7) 65.8 (2.5) 82.7
Extraordinary item, net of
income taxes of $0.9 - - 1.5 -
------ ------ ------ ------
Net (loss) income $ (1.7) $ 65.8 $ (4.0) $ 82.7
====== ====== ====== ======
-3-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, Continued
(In millions, except per share data)
(Unaudited)
Quarter Ended Nine Months Ended
---------------------------------
Oct. 1, Sep. 30, Oct. 1, Sep. 30,
2000 1999 2000 1999
------ ------ ------ ------
Basic (loss) earnings per share:
(Loss) earnings before
extraordinary item $(0.11) $ 3.21 $ (0.16) $ 3.92
Extraordinary item, net of
income taxes - - (0.09) -
------ ------ ------ ------
Basic (loss) earnings per share $(0.11) $ 3.21 $ (0.25) $ 3.92
====== ====== ====== ======
Weighted average number of
common shares 15.1 20.5 16.0 21.1
====== ====== ====== ======
Diluted (loss) earnings per share:
(Loss) earnings before
extraordinary item $(0.11) $ 3.16 $ (0.16) $ 3.87
Extraordinary item, net of
of income taxes - - (0.09) -
------ ------ ------ ------
Diluted (loss) earnings
per share $(0.11) $ 3.16 $ (0.25) $ 3.87
====== ====== ====== ======
Weighted average number of
common shares and equivalents
outstanding, assuming dilution 15.1 20.8 16.0 21.3
====== ====== ====== ======
Cash dividends declared per
share of common stock $ 0.22 $ 0.22 $ 0.66 $ 0.66
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
-4-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(Unaudited)
Oct. 1, Dec. 31,
2000 1999
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5.4 $ 306.6
Accounts receivable (less allowance
of $4.5 and $4.1) 194.0 170.5
Inventories:
Finished goods 50.1 41.8
Work in process 24.4 28.2
Materials and supplies 44.1 36.7
-------- --------
Total inventories 118.6 106.7
Deferred income taxes 22.4 22.4
Other 14.1 4.7
-------- --------
Total current assets 354.5 610.9
-------- --------
Property, plant and equipment, at cost 594.4 520.4
Less accumulated depreciation 162.9 164.7
-------- --------
431.5 355.7
-------- --------
Goodwill, net 524.6 296.4
Investment in affiliates 71.6 1.5
Other assets 97.3 108.7
-------- --------
Total assets $1,479.5 $1,373.2
======== ========
-5-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Millions of dollars, except share data)
(Unaudited)
Oct. 1, Dec. 31,
2000 1999
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 137.7 $ 92.5
Accrued expenses 103.8 111.6
Current maturities of long-term debt 1.9 91.3
Dividends payable 3.3 3.9
Income taxes payable - 20.6
-------- --------
Total current liabilities 246.7 319.9
-------- --------
Long-term debt 529.2 224.4
Other long-term liabilities 45.7 44.4
Postretirement benefits other than pensions 15.8 16.5
Deferred income taxes 233.0 216.3
-------- --------
Total liabilities 1,070.4 821.5
-------- --------
Stockholders' equity:
Preferred stock, $100 par value, issuable
in series; authorized, 500,000 shares;
issued, none - -
Common stock, $1 par value; authorized,
60,000,000 shares; outstanding 15,144,666
in 2000 and 17,509,064 shares in 1999,
respectively 15.1 17.5
Unearned compensation (3.6) (4.8)
Accumulated other comprehensive loss (68.5) (7.2)
Retained earnings 466.1 546.2
-------- --------
Total stockholders' equity 409.1 551.7
-------- --------
Total liabilities and stockholders'
equity $1,479.5 $1,373.2
======== ========
See accompanying notes to consolidated financial statements.
-6-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(Unaudited)
Nine Months Ended
Oct. 1, Sep. 30,
2000 1999
------ -------
Operating activities:
Net (loss) income $ (4.0) $ 82.7
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Gain on sale of businesses - (85.9)
Extraordinary item 2.4 -
Depreciation, cost of timber harvested and
amortization of intangibles 53.9 65.4
Undistributed earnings of affiliates (0.9) -
Deferred income taxes 9.5 (5.7)
Gain on sale of property, plant
and equipment - (0.2)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable, net (6.0) (39.2)
Inventories (19.0) (13.9)
Other assets (6.4) 1.6
Accounts payable 18.1 7.5
Accrued expenses 8.7 (14.9)
Income taxes payable (24.0) 47.7
Other, net (6.4) 4.0
------ ------
Net cash provided by operating activities 25.9 49.1
------ ------
Investing activities:
Purchases of property, plant and equipment (57.7) (66.8)
Acquisitions (363.7) (374.3)
Proceeds from sale of businesses 2.0 185.3
Proceeds from sale of
property, plant and equipment - 1.1
Other, net (0.7) (6.4)
------ ------
Net cash used in investing activities (420.1) (261.1)
------ ------
-7-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Millions of dollars)
(Unaudited)
Nine Months Ended
Oct. 1, Sep. 30,
2000 1999
----- -----
Financing activities:
Net borrowings on lines of credit 133.6 317.2
Payments on long-term debt (43.6) (21.7)
Proceeds from long-term debt 87.6 23.1
Purchases of outstanding common stock (70.7) (117.6)
Dividends paid (10.6) (14.0)
Debt issuance costs (4.0) (2.5)
Other 0.7 1.1
------ ------
Net cash provided by financing
activities 93.0 185.6
------ ------
Decrease in cash and cash equivalents (301.2) (26.4)
Cash and cash equivalents at beginning of
period 306.6 62.4
------ ------
Cash and cash equivalents at end of period $ 5.4 $ 36.0
====== ======
See accompanying notes to consolidated financial statements.
-8-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of Chesapeake
Corporation and subsidiaries ("Chesapeake" or the "Company")
included herein are unaudited, except for the December 31, 1999,
consolidated balance sheet, and have been prepared by the Company
pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the
consolidated financial statements reflect all adjustments, all of
a normal recurring nature, necessary to present fairly the
Company's consolidated financial position and results of
operations for the interim periods presented herein. These
consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto
incorporated by reference in the Company's latest Annual Report on
Form 10-K. The results of operations for the 2000 interim period
should not be regarded as necessarily indicative of the results
that may be expected for the entire year.
Effective January 1, 2000, the Company changed its fiscal
year end for financial statement purposes from a calendar year to
a 52/53 week fiscal year. Beginning with fiscal year 2000, the
Company's fiscal year will end on the Sunday closest to December
31. Additionally, the Company now reports its quarterly periods
on a 13-week basis ending on a Sunday. The effect of this change
was not material to the Company's financial condition or results
of operations.
Certain prior-year data have been reclassified to conform to
the 2000 presentation.
Revenue Recognition
The Company recognizes revenue in the packaging businesses
upon passage of title to the customer, which is generally at the
time of product shipment. The Company recognizes sales of land
when all conditions have occurred, as set forth in Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate."
Restatement
In November 2000, following a detailed review by its internal
staff and independent accountants, the Company restated the
previously reported results of its U.S. point-of-purchase Display
business ("Display"), which is included in its Merchandising and
-9-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 1. Summary of Significant Accounting Policies, continued
Restatement, continued
Specialty Packaging segment. The restatement had the effect of
reducing net income by $4.7 million in the first quarter of 2000
and reducing net income by $0.3 million in the second quarter of
2000. The adjustments in the first half of 2000 related to:
revaluation of inventory standards; lower-than-expected full-year
sales volume; inventory obsolescence; and allowance for doubtful
accounts. In the aggregate the restatements reduced operating
income by $7.6 million in the first half of 2000.
Note 2. Adoption of Accounting Pronouncements
As of July 1, 2000, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 44, "Accounting of
Certain Transactions involving Stock Compensation," an
interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 clarifies
the application of APB Opinion No. 25 as to (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 did not have
a material impact on the Company's financial results.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulleting No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue
recognition policies. SAB 101 will be adopted in the fourth
quarter of 2000 and is not expected to have a material impact on
the Company's financial statements.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 2000,
the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS
138"). SFAS 133 requires companies to record derivative
instruments on the balance sheet as assets or liabilities,
-10-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 2. Adoption of Accounting Pronouncements, continued
measured at fair market value. Statement of Financial Accounting
Standards No. 137, which was issued in July 1999, defers the
Company's required adoption of SFAS 133 until fiscal year 2001.
The adoption of SFAS 133, as amended by SFAS 138, is not expected
to have a material impact on the Company's financial statements.
Note 3. Comprehensive Income
Comprehensive income (loss) was $(17.8) million and $(65.3)
million for the quarter and the nine months ended October 1, 2000,
and $83.5 million and $95.0 million for the quarter and nine
months ended September 30, 1999, respectively. The difference
between net income (loss) and comprehensive income (loss) is due
to foreign currency translation.
Note 4. Acquisitions and Dispositions
On October 10, 2000, the Company completed the acquisition of
First Carton Group Ltd. ("First Carton"), a European specialty
packaging supplier for the food and drinks markets, for
approximately $118 million. First Carton has operations in six
locations in the United Kingdom and Germany. The purchase price
for the acquisition was paid through borrowings under the
Company's existing senior credit facility. See Note 7 to the
Consolidated Financial Statements for a discussion regarding debt.
Additionally, on September 1, 2000, the Company acquired
Lithoprint Holdings Limited ("Lithoprint"). Lithoprint is a
Scottish supplier of wet-applied labels and commercial printing.
On February 24, 2000, the Company completed its acquisition
of substantially all of the outstanding capital shares of Boxmore
International PLC ("Boxmore"), a European specialty packaging
company headquartered in Belfast, Northern Ireland. The
acquisition was effected through a tender offer by Chesapeake UK
Acquisitions II PLC ("Chesapeake UK II"), a wholly-owned
subsidiary of Chesapeake, for all of the outstanding capital
shares of Boxmore at a purchase price of approximately (pound)2.65
per share. The tender offer represented a value of approximately
$319 million for Boxmore's outstanding share capital. Including
assumed debt of approximately $64 million, the tender offer
reflected a total enterprise value for Boxmore of approximately
$383 million. The purchase price for Boxmore's capital shares was
paid in cash of approximately $234 million, and approximately $85
million in unsecured loan notes ("Loan Notes") issued to certain
Boxmore shareholders by Chesapeake UK II and guaranteed by First
-11-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
Union National Bank, London Branch ("First Union, London"). The
Loan Notes bear interest at a variable rate per annum equal to the
LIBOR rate for six month sterling deposits less one-half of one
percent, are redeemable in whole or part at the option of the
holders on each biannual interest payment date commencing February
28, 2001, and, if not earlier redeemed, mature on February 28,
2005. Under the terms of its current credit facility, Chesapeake
is required to pay First Union, London a 1.125% loan guarantee fee
on the outstanding loan note balance.
During the first quarter of 2000, the Company also completed
the acquisitions of Green Printing Company, Inc., a specialty
packaging producer and printer in Lexington, North Carolina, and a
corrugated container facility in Warren County, North Carolina,
and finalized the formation of a joint venture with Georgia-
Pacific Corporation ("G-P"), in which the two companies combined
their litho-laminated graphic packaging businesses.
Effective October 3, 1999, Wisconsin Tissue Mills Inc.,
renamed WTM I Company ("WT"), a wholly owned subsidiary of the
Company, completed the formation of a joint venture with G-P
through which the companies combined their commercial tissue
businesses. WT contributed substantially all of the assets and
liabilities of the Company's tissue business to the joint venture,
known as Georgia-Pacific Tissue, LLC, and received a 5% equity
interest in the joint venture and a tax deferred cash distribution
of approximately $755.0 million.
On September 10, 1999, the Company completed the sale of
approximately 278,000 acres of timberland in Virginia, Maryland
and Delaware, and on July 30, 1999, the Company completed the sale
of its building products business (two sawmills, a lumber
processing plant and a wood-chip mill) for combined cash proceeds
of approximately $185 million. The 1999 third quarter results
include a non-recurring after-tax gain on sales of these
businesses of $51.7, net of a revision of $11.7 million after-tax
cost associated with the disposal of the kraft products business
segment.
On May 5, 1999, the Company acquired Berry's (Holding)
Limited of Ireland ("Berry's"). Berry's is one of Ireland's
largest suppliers of printed pharmaceutical leaflets and self-
adhesive labels and has annual net sales of approximately $9
million.
-12-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
On March 18, 1999, Chesapeake completed its acquisition of
substantially all of the outstanding capital shares of Field Group
plc ("Field Group"), a European specialty packaging company
headquartered in the United Kingdom. The acquisition was effected
through a tender offer by Chesapeake UK Acquisitions PLC, a wholly-
owned subsidiary of Chesapeake, for all of the outstanding capital
shares of Field Group at a purchase price of (pound) 3.60 per
share. As of April 30, 1999, Chesapeake acquired compulsorily all
remaining outstanding shares of Field Group. The final purchase
price of approximately $373.3 million was funded through a
combination of approximately $316.1 million in borrowings under a
credit facility, $22.2 million in unsecured loan notes issued to
certain Field Group shareholders, and $35.0 million in cash.
Each of the acquisitions has been accounted for using the
purchase method and is included in the results of operations
since the purchase date. As of the acquisition date of Boxmore,
the Company initiated plans to eliminate duplicate functions and
processes at Boxmore and restructure capacity at certain acquired
facilities. Approximately $8 million was recorded in the opening
balance sheet for restructuring reserves, consisting primarily of
$5 million related to severance and $3 million related to closure
costs. The remaining estimated payments for severance, relocation
and restructuring costs associated with these plans is expected to
be in the range of $6 million to $10 million. These restructuring
plans are expected to be completed within one year after
completion/closing.
The purchase price amounts for the acquisitions which
occurred during the nine months ending October 1, 2000, and
September 30, 1999, have been allocated to the acquired net assets
as summarized below (in millions):
Oct. 1, Sep. 30,
2000 1999
------ ------
Fair value of assets acquired $517.5 $553.5
Liabilities assumed or created (149.2) (167.5)
Cash acquired (4.6) (11.7)
------ ------
Cash paid for acquisitions, net $363.7 $374.3
====== ======
-13-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
Pro forma financial information reflecting the results of the
Company as if the Boxmore and Field Group acquisitions occurred on
January 1, 1999, is as follows (in millions, except per share
amounts):
Nine Months Ended
Oct. 1, Sept. 30,
2000 1999
Net sales $ 803.1 $ 1,132.1
Income before
extraordinary item (3.0) 77.8
Net income (4.5) 77.8
Earnings per share
before
extraordinary item:
Basic $(0.19) $3.69
Diluted $(0.19) $3.65
Net income per
share:
Basic $(0.28) $3.69
Diluted $(0.28) $3.65
Note 5. Restructuring/Special Charges
In the fourth quarter of 1999, the Company recognized a
pretax restructuring/special charge of $38 million related to
employment reduction, the closure of one facility, impairment of
assets in the Company's French operations and defense costs
incurred to respond to an unsolicited proposal by Shorewood
Packaging Corporation ("Shorewood") to acquire Chesapeake. The
cash portion of the restructuring/special charges was $23 million.
Announced workforce reductions included approximately 300
employees in the Merchandising and Specialty Packaging segment,
170 employees in the European Specialty Packaging segment and 10
corporate employees. Payments made through the third quarter for
employment reduction included approximately 246 employees in the
Merchandising and Specialty Packaging segment, 120 employees in
the European Specialty Packaging Segment and 10 corporate
employees. In the third quarter of 2000, the Company revised its
estimate of defense costs by $5.1 million, $2.7 million after
taxes, to reflect additional defense fees associated with the
Shorewood transaction. The Company anticipates completing the
above restructuring activities as planned by the end of the year.
-14-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 5. Restructuring/Special Charges, continued
An analysis of the restructuring reserve as of and for the
nine months ended October 1, 2000, is as follows (in millions):
Employment Facility Defense
Reduction Closure Fees Total
--------- -------- -------- -------
Restructuring charge $12.6 $1.2 $9.2 $23.0
Cash payments in 1999 (1.1) - (2.5) (3.6)
----- ----- ----- -----
Balance, December
31, 1999 11.5 1.2 6.7 19.4
Cash payments in 2000 (7.2) (1.0) (4.4) (12.6)
Foreign currency
translation (0.4) - - (0.4)
Restructuring charge - - 5.1 5.1
----- ----- ----- -----
Balance, October 1, 2000 $3.9 $0.2 $7.4 $11.5
===== ===== ===== =====
Note 6. Income Taxes
Excluding the non-recurring impact of the Shorewood
transaction costs in the first quarter of 2000 and the gains on
sales of businesses in 1999, the Company's effective income tax
rate was 46.1% for the nine months ended October 1, 2000 and 35%
for the nine months ended September 30, 1999. The increase in the
Company's effective income tax rate is primarily due to lower U.S.-
based income in relation to income from foreign sources.
Note 7. Debt
On June 15, 2000, Chesapeake terminated its six month $250
million senior credit facility, which resulted in an extraordinary
charge of $1.5 million after taxes, and entered into a five year
$450 million senior credit facility. Interest accrues on the
outstanding balance of the loan based upon Chesapeake's choice of
the following rates: (i) an alternative base rate, which is equal
to the higher of the administrative agent's base rate or the
federal funds rate plus 1/2 of 1%, plus a margin determined by
reference to the Company's leverage ratios; (ii) LIBOR, based on
U.S. dollars, pounds or Euros, plus a margin, based on the
Company's leverage ratios; or (iii) a fixed interest rate per
annum. The Company is required to pay a 1.125% loan guarantee fee,
-15-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 7. Debt, continued
which varies based on the Company's leverage ratios, on the
outstanding loan note balance issued in connection with the
Boxmore acquisition. In addition, the Company is required to pay
a fee based on the total facility commitment and the Company's
leverage ratio. The facility has customary covenants, including
debt and acquisition limits, interest coverage and a minimum net
worth requirement. Chesapeake's foreign subsidiary obligations
under this facility are collateralized by a pledge of the stock of
its principal foreign subsidiaries.
The Company is in compliance with all of its debt covenants
as of the end of the third quarter of 2000. However, due to the
lower than anticipated profitability of Display, the Company may
not achieve compliance with certain financial covenants contained
in its five year $450 million senior credit facility as of the end
of the fourth quarter of 2000. The Company is in discussions with
the administrative agent for the credit facility and is confident
that any necessary waiver or amendment will be obtained, which may
include increased interest costs, before the end of the fourth
quarter to ensure continued availability of adequate financial
resources to support anticipated long-term and short-term capital
needs and commitments.
Note 8. Commitments and Contingencies
Environmental Matters
Chesapeake has a strong commitment to protecting the
environment. The Company has an environmental audit program to
monitor compliance with environmental laws and regulations. The
costs of compliance with existing environmental regulations are
not expected to have a material adverse effect on the Company's
financial condition or results of operations.
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and similar state "Superfund" laws impose
liability, without regard to fault or to the legality of the
original action, on certain classes of persons (referred to as
potentially responsible parties or "PRPs") associated with a
release or threat of a release of hazardous substances into the
environment. Financial responsibility for the clean-up or other
remediation of contaminated property or for natural resource
damages can extend to previously owned or used properties,
waterways, and properties owned by third parties, as well as to
properties currently owned and used by a company even if
contamination is attributable entirely to prior owners. As
-16-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Commitments and Contingencies, continued
discussed below, the U.S. Environmental Protection Agency ("EPA")
has given notice of its intent to list the lower Fox River in
Wisconsin on the National Priorities List under CERCLA and has
identified WT as a PRP.
Except for the Fox River matter, the Company has not been
identified as a PRP at any CERCLA-related sites. However, there
can be no assurance that the Company will not be named as a PRP at
any other sites in the future, or that the costs associated with
additional sites would not be material to the Company's
financial condition or results of operations.
In June 1994, the United States Department of Interior,
Fish and Wildlife Service ("FWS"), a federal natural resources
trustee, notified WT that it had identified WT and four other
companies located along the lower Fox River in northeast Wisconsin
as PRPs for purposes of natural resources liability under CERCLA
arising from alleged releases of polychlorinated-biphenyls
("PCBs") in the Fox River and Green Bay System. Two other
companies subsequently received similar notices from the FWS. The
FWS and other governmental and tribal entities, including the
State of Wisconsin, allege that natural resources, including
endangered species, fish, birds, tribal lands, or lands held by
the United States in trust for various Indian tribes, have been
exposed to PCBs that were released from facilities located along
the lower Fox River. The governmental and tribal agencies are
proceeding with a natural resource damage assessment with respect
to the alleged discharges. On January 31, 1997, the FWS notified
WT of its intent to file suit, subject to final approval by the
Department of Justice, against WT to recover alleged natural
resource damages. WT and other PRPs have engaged in discussions
with the parties asserting trusteeship of the natural resources
concerning the damage assessment and the basis for resolution of
the natural resource damage claims. In addition, the PRPs have
been cooperating with DNR in its preparation of a natural resource
damage assessment. WT and other PRPs are also engaged in
discussions with the State of Wisconsin with respect to resolving
possible state claims concerning remediation, restoration and
natural resource damages related to the alleged discharge of PCBs
into the Fox River and Green Bay System.
On June 18, 1997, the EPA announced that it was initiating
the process of listing the lower Fox River on the CERCLA National
Priorities List of hazardous waste sites. The EPA identified
several PRPs, including WT.
On February 26, 1999, the Wisconsin Department of Natural
Resources ("DNR") released for public comment a draft remedial
-17-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Commitments and Contingencies, continued
investigation/feasibility study ("RI/FS") for the lower Fox River
site. In the draft RI/FS, the DNR reviewed and summarized several
categories of possible remedial alternatives for the site,
estimated to cost in the range of $143 million to $721 million,
but did not identify a preferred remedy. (As required by
applicable regulations, the draft RI/FS also includes a "no
action" alternative that does not entail remediation costs, but WT
does not believe that the "no action" alternative will be
selected). There can be no assurance that many of the cost
estimates in the draft RI/FS will not differ significantly from
actual costs. WT submitted timely comments on the draft RI/FS
both individually and in conjunction with other PRPs. After
finalizing the RI/FS, the DNR and the EPA are expected to announce
a preferred remedial alternative in a Proposed Remedial Action
Plan. The Proposed Remedial Action Plan will be subject to a
public comment period, and enforcement of any definitive Remedial
Action Plan may be subject to judicial review.
The largest components of the costs of the more expensive
clean-up alternatives presented in the draft RI/FS are
attributable to large-scale sediment removal, treatment and
disposal. Based on current information and advice from its
environmental consultants, WT believes that an aggressive effort
to remove substantial amounts of PCB-contaminated sediments (most
of which are buried under cleaner material or are otherwise
unlikely to move), as contemplated by certain alternatives
presented in the draft RI/FS, would be environmentally detrimental
and therefore inappropriate. Instead, WT believes that less
intrusive alternatives are more environmentally appropriate, cost
effective and responsible methods of managing risks attributable
to sediment contamination.
On October 25, 2000, the federal and tribal natural resources
trustees released a proposed Restoration and Compensation Plan
("RCDP") presenting the federal and tribal trustees' planned
approach for restoring injured federal and tribal natural
resources and compensating the public for losses caused by the
release of PCBs. The RCDP will not be finalized until the
conclusion of a 45 day public comment period. The RCDP states that
the final natural resource damage claim will depend on the extent
of PCB cleanup undertaken by EPA and DNR, but estimates past
interim damages to be $65 million, and, for illustrative purposes
only, estimates costs of restoration to address present and future
PCB injuries in a range of $111 million to $268 million. WT
believes that the alleged damages to natural resources are
overstated and intends to provide comments to that effect on the
RCDP.
The ultimate cost to WT associated with this matter cannot be
predicted with certainty at this time, due to uncertainties with
respect to: which, if any, of the remedial alternatives presented
in the draft RI/FS will be implemented, and uncertainties
associated with the actual costs of each of the potential
-18-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Commitments and Contingencies, continued
alternatives; the outcome of the federal and state natural
resource damage assessments; WT's share of any multi- party clean-
up/restoration expenses; the timing of any clean-up/restoration;
the evolving nature of clean-up/restoration technologies and
governmental regulations; controlling legal precedent; the extent
to which contribution will be available from other parties; and
the scope of potential recoveries from insurance carriers and
prior owners of WT. While such costs cannot be predicted with
certainty at this time, WT believes that the ultimate clean-
up/restoration costs associated with the lower Fox River site may
exceed $100 million for all PRPs in the aggregate. Under CERCLA,
each PRP generally will be jointly and severally liable for the
full amount of the clean-up costs, subject to a right of
contribution from the other PRPs. In practice, PRPs generally
negotiate among themselves to determine their respective
contributions to any multi-party cleanup/restoration, based upon
factors including their respective contributions to the alleged
contamination and their ability to pay. Based on presently
available information, WT believes that several of the named PRPs
will be able to pay substantial shares toward remediation and
restoration, and that there are additional parties, some of which
have substantial resources, that may also be jointly and severally
liable.
WT also believes that it is entitled to substantial
indemnification from a prior owner of WT, pursuant to a stock
purchase agreement between the parties, with respect to
liabilities related to this matter. WT believes that the prior
owner intends to, and has the financial ability to, honor its
indemnification obligation under the stock purchase agreement.
Pursuant to the Joint Venture Agreement for the Georgia-
Pacific Tissue joint venture (the "Tissue JV"), WT has retained
liability for, and the third party indemnity rights associated
with, the discharge of PCBs and other hazardous materials in the
Fox River and Green Bay System. Based on presently available
information, WT believes that if any remediation/restoration is
done in an environmentally appropriate, cost effective and
responsible manner, the matter is unlikely to have a material
adverse effect on the Company's financial condition or results of
operations. However, because of the uncertainties described
above, there can be no assurance that WT's ultimate liability with
respect to the lower Fox River site will not have a material
adverse effect on the Company's financial condition or results of
operations.
On April 19, 1999, the EPA and the Virginia Department of
Environmental Quality ("DEQ") each issued Notices of Violation
-19-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Commitments and Contingencies, continued
("NOVs") under the Clean Air Act Amendments of 1990 ("CAA")
against St. Laurent Paper Products Corp. ("St. Laurent") (and,
in the case of EPA's NOV, Chesapeake) relating to St. Laurent's
kraft products mill located in West Point, Virginia (the "West
Point Mill") formerly owned and operated by Chesapeake Paper
Products, L.L.C. Chesapeake Paper Products, L.L.C. was sold by
Chesapeake to St. Laurent Paperboard (U.S.) Inc. ("St. Laurent
(U.S.)") in May 1997, pursuant to a Purchase Agreement dated as
of April 30, 1997, by and among Chesapeake Corporation, St.
Laurent Paperboard Inc. and St. Laurent (U.S.) (the "Purchase
Agreement"). In general, the NOVs allege that from 1984 through
the date of the NOVs, the West Point Mill installed certain
equipment and modified certain production processes without
obtaining required permits. Under applicable law, the EPA and DEQ
may commence a court action with respect to the matters alleged in
the NOVs seeking injunctive relief to compel compliance with the
CAA, and a court may impose civil penalties of up to $25,000 per
day of violation ($27,500 per day for violations after January 30,
1997) for violations of the CAA (provided that a court, in
determining the amount of any penalty to be assessed, shall take
into consideration, among other things, the size of the business,
the economic impact of the penalty on the business, the business'
compliance history and good faith efforts to comply, the economic
benefit to the business of noncompliance and the seriousness of
the violation). The Purchase Agreement provides that Chesapeake
may be required to indemnify St. Laurent against certain
violations of applicable environmental laws (including the CAA)
that were identified as of the May 1997 closing date (and other
such violations that existed prior to such date as to which
Chesapeake had "knowledge," as defined in the Purchase Agreement).
Chesapeake's indemnification obligation to St. Laurent with
respect to such matters is subject to certain limitations,
including a cap of $50 million and, in certain circumstances, a
$2.0 million deductible. The Company and St. Laurent have jointly
responded to and are defending against the matters alleged in the
NOVs, and have presented an initial settlement offer, consisting
primarily of engineering measures, to the EPA and DEQ. Based upon
a review of the NOVs and an analysis of the applicable law and
facts, the Company believes that both it and St. Laurent have
substantial defenses against the alleged violations and intend to
vigorously defend against the alleged violations. The Company and
St. Laurent are negotiating with EPA, the United States Department
of Justice and DEQ to address the matters that are the subject of
the NOVs. The ultimate cost, if any, to the Company relating to
matters alleged in the NOVs cannot be determined with certainty at
this time, due to the absence of a determination whether any
violations of the CAA occurred and, if any violations are
-20-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Commitments and Contingencies, continued
ultimately found to have occurred, a determination of (i) any
required remediation costs and penalties, and (ii) whether St.
Laurent would be entitled to indemnification from the Company
under the Purchase Agreement and, if so, to what extent.
Litigation
The Company is a party to various other legal actions, which are
ordinary and incidental to its business. While the outcome of
legal actions cannot be predicted with certainty, the Company
believes the outcome of any of these proceedings, or all of them
combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
Note 9. Segment Disclosure
Third Quarter Year-to-Date
-------------- -------------
(In millions) (In millions)
2000 1999 2000 1999
Net sales: ---- ---- ---- ----
European Specialty Packaging $126.4 $102.1 $369.8 $207.1
Merchandising and Specialty
Packaging 114.6 124.4 321.9 351.8
Plastic Packaging 25.1 - 62.3 -
Tissue - 112.6 - 319.6
Forest Products/Land Development 7.4 11.1 14.5 38.3
------ ------ ------ ------
$273.5 $350.2 $768.5 $916.8
====== ====== ====== ======
Earnings (losses) before interest and
taxes (EBIT):
European Specialty Packaging $ 14.6 $ 9.6 $ 34.4 $ 16.0
Merchandising and Specialty
Packaging (5.3) 4.4 (11.1) 8.3
Plastic Packaging 1.8 - 5.3 -
Tissue - 17.8 - 51.1
Forest Products/Land Development 4.8 5.1 10.2 13.2
Corporate/other (8.0) (3.3) (20.0) (11.7)
------ ------ ------ ------
7.9 33.6 18.8 76.9
Gain on sale of businesses - 85.9 - 85.9
------ ------ ------ ------
$ 7.9 $119.5 $ 18.8 $162.8
====== ====== ====== ======
-21-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Segment Disclosure, continued
Oct. 1, Sep. 30,
2000 1999
(In Millions)
Identifiable assets: -------- --------
European Specialty Packaging $ 765.4 $ 568.1
Plastic Packaging 187.2 -
Merchandising and Specialty Packaging 408.0 355.9
Tissue - 465.7
Forest Products/Land Development 37.2 34.8
Corporate/other 81.7 66.9
-------- --------
$1,479.5 $1,491.4
======== ========
Chesapeake currently conducts its business in four segments.
The Company's European Specialty Packaging segment, which is
comprised of the Field Group operations and the paper-based
specialty packaging operations of Boxmore, produces folding
cartons, labels, and leaflets, primarily for consumer products and
pharmaceutical/healthcare companies. The results of the operations
of Field Group and Boxmore are included in the consolidated
segment results since their respective acquisition dates of March
18, 1999, and February 24, 2000 (see Note 4). The Merchandising
and Specialty Packaging segment produces and sells point-of-sale
displays, merchandising services, graphic packaging and corrugated
shipping containers (see Note 1 regarding restatement). The
Plastic Packaging segment is comprised of the plastic-based
specialty packaging operations of Boxmore, which produce plastic
containers for food/drink and agricultural/industrial markets.
The Forest Products/Land Development segment manages the Company's
real estate holdings. The Company's Tissue segment was composed
of the commercial and industrial tissue operations of WT and
Wisconsin Tissue de Mexico, which were contributed to a joint
venture with Georgia-Pacific Corporation effective October 3,
1999. There were no material intersegment sales for the nine
months ended October 1, 2000, and September 30, 1999.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Restatement
In November 2000, following a detailed review by its internal
staff and independent accountants, the Company has restated the
previously reported results of Display, which is included in its
Merchandising and Specialty Packaging segment. The resulting
revisions had the effect of reducing the previously reported net
income for the first quarter of 2000 by approximately $4.7
million, or $0.27 per share, and reducing previously reported
earnings for the second quarter of 2000 by approximately $0.3
million, or $0.02 per share. As a result, the Company has restated
its previously issued consolidated financial statements to reflect
adjustments related to: allowance for doubtful accounts; inventory
obsolescence; lower-than-expected full-year sales volume; and the
revaluation of inventory standards.
The review described above indicated no adjustments were
necessary to the 1999 audited results as reported.
The Company has retained both Goldman, Sachs & Co. and McKinsey & Co
mpany to assist in exploring strategic alternatives for Display.
Overview
Net sales were $273.5 million for the quarter ended October
1, 2000, compared to net sales of $350.2 million for the third
quarter of 1999, or a decrease of $76.7 million. Net sales for the
nine months ended October 1, 2000, were $768.5 million compared to
net sales for the nine months ended September 30, 1999, of $916.8
million. The decreases in net sales for the third quarter and
first nine months of 2000 primarily reflect the elimination of
sales from the Company's former Tissue segment, lower Display
sales, and the impact of unfavorable foreign exchange translation
rates against the U.S. dollar, offset, in part, by sales generated
by acquired businesses (Boxmore, Green Printing, Consumer
Promotions International, and Lithoprint).
Net loss for the quarter ended October 1, 2000, was $(1.7)
million, or $(0.11) per diluted share, compared with 1999 third
quarter net income of $65.8 million, or $3.16 per diluted share.
Net loss for the nine months ended October 1, 2000, was $(4.0)
million, or $(0.25) per diluted share, compared with net income
for the nine months ended September 30, 1999, of $82.7 million,
-23-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Overview, continued
or $3.87 per diluted share. Results for 1999 included a non-
recurring gain of $51.7 million after tax, or $2.48 per diluted
share for the third quarter and $2.43 per diluted share for the
nine months, on the sale of the Company's building products
business and approximately 278,000 acres of timberland, net of a
revision of estimated costs associated with the disposal of the
kraft products business segment. Excluding the effect of
nonrecurring items for the third quarter and nine months ended
September 30, 1999, the decreases in operating results reflect
lower sales and operating margins in the Display business, which
was impacted by product mix and a general slowdown in promotional
programs and new product launches by several major U.S. consumer
products companies, the contribution of the Company's tissue
operations to a joint venture with Georgia-Pacific at the end of
the third quarter of 1999, and the impact of unfavorable foreign
exchange translation rates in Europe against the U.S. dollar.
Selling, general and administrative expenses (SG&A) as a
percentage of net sales was approximately 17% for the quarter and
nine months ended October 1, 2000, and approximately 14% for the
same periods in the prior year. The increase in SG&A as a
percentage of net sales was due to increased depreciation related
to the implementation late in 1999 of an Enterprise Resource
Planning system and the changes in the Company's business
portfolio.
Other income and expenses, net, increased $1.8 million for
the quarter ended October 1, 2000, compared to the same period
in 1999, due to higher income from unconsolidated subsidiaries and
the acquisition of Boxmore. During the first quarter of 2000, the
Company announced the expiration of its offer to acquire Shorewood
Packaging Corporation ("Shorewood") after International Paper
Company entered into a definitive agreement to acquire Shorewood.
Other income and expenses, net, for the first nine months of 2000
includes nonrecurring expenses associated with the Shorewood
tender offer of $10.3 million, which were largely offset by a $7.7
million gain on Chesapeake's sale of 4.1 million shares of
Shorewood common stock.
In the fourth quarter of 1999, the Company recognized a
pretax restructuring/special charge of $38 million related to
employment reduction, the closure of one facility, impairment of
assets in the Company's French operations and defense fees
incurred to respond to an unsolicited proposal by Shorewood to
acquire Chesapeake (see Note 5 to Consolidated Financial
Statements for discussion regarding restructuring charges).
-24-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Overview, continued
Ongoing annual operating savings of approximately $11 million upon
full implementation of the program are expected in the form of
reduced salaries and benefit expenses (approximately $7.5
million), reduced manufacturing costs (approximately $1.0 million)
and reduced depreciation expense (approximately $2.5 million). The
Company estimates that actions implemented under the plan resulted
in pre-tax savings of approximately $2.0 million and $5.1 million
for the quarter and nine months ended October 1, 2000,
respectively. In the third quarter of 2000, the Company revised
its estimate of defense cost by $5.1 million, $2.7 million net of
taxes, or $.18 per share, to reflect additional defense fees
associated with the Shorewood transaction.
Tax expense for the nine months ended October 1, 2000,
includes the tax effect of the transaction costs associated with
the Shorewood tender offer and the reversal of an estimated tax
provision on the 1999 accrual of Shorewood defense costs that
totaled $2.6 million. Tax expense for the third quarter and nine
months ended September 30, 1999, included a gain on the sale of
the building products business and approximately 278,000 acres of
timberland of approximately $34.2 million. Excluding these
nonrecurring items, the Company's effective tax rate for the nine
months ended October 1, 2000, was approximately 46.1% compared to
approximately 35% for the nine months ended September 30, 1999
(see Note 6 to Consolidated Financial Statements). The increase in
the Company's effective tax rate is primarily due to lower U.S.
based income in relation to income from foreign sources.
Lower debt levels and increased cash balances, partially
offset by higher interest rates, decreased net interest expense by
$0.5 million and $3.1 million for the quarter and nine months
ended October 1, 2000, respectively, compared to the same periods
ended September 30, 1999.
-25-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Segment Information
European Specialty Packaging
Increase/(Decrease)
(Dollars in millions) 2000 1999 $ %
- ----------------------------------------------------------------
Third quarter:
Net sales $126.4 $102.1 $24.3 23.8%
EBIT 14.6 9.6 5.0 52.1%
Operating margin 11.6% 9.4% - 23.4%
Nine months:
Net sales 369.8 207.1 162.7 78.6%
EBIT 34.4 16.0 18.4 115.0%
Operating margin 9.3% 7.7% - 20.8%
================================================================
The European Specialty Packaging segment consists of Field
Group, acquired in March 1999, and the paper-based specialty
packaging operations of Boxmore, acquired in February 2000. These
operations have been consolidated since their respective
acquisition dates. Net sales for the third quarter and nine months
ended October 1, 2000, increased 23.8% and 78.6% over the
comparable periods in 1999, due to the addition of the paperboard
packaging business of Boxmore. On a pro forma basis, assuming
Field Group and Boxmore were acquired as of January 1, 1999, net
sales were down 8% for the third quarter of 2000 and flat for the
nine months ended October 1, 2000, versus pro forma results for
the comparable periods in 1999. The fluctuations in pro forma
sales were due to increases in business volume offset by the
impact of unfavorable foreign exchange translation rates.
Earnings before interest and taxes ("EBIT") for this segment
for the third quarter and nine months ended October 1, 2000,
increased over the corresponding 1999 periods largely due to the
addition of the Boxmore business and productivity improvements in
the Field Group. On a pro forma basis, EBIT was up 32% and 34% for
the quarter and nine months ended October 1, 2000, respectively,
compared to the same pro forma periods in 1999. The increase in
pro forma EBIT was largely due to volume growth and productivity
improvements in the Field Group, offset in part by the effects of
unfavorable foreign exchange translation rates.
-26-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Segment Information, continued
Merchandising and Specialty Packaging
Increase/(Decrease)
(Dollars in millions) 2000 1999 $ %
- ----------------------------------------------------------------
Third Quarter:
Net sales $114.6 $124.4 $(9.8) (7.9)%
EBIT (5.3) 4.4 (9.7) (220.4)%
Operating margin (4.6)% 3.5% - (231.4)%
Nine months:
Net sales 321.9 351.8 (29.9) (8.5)%
EBIT (11.1) 8.3 (19.4) (233.7)%
Operating margin (3.4)% 2.4% - (241.7)%
================================================================
Net sales for the Merchandising and Specialty Packaging
segment for the third quarter and first nine months of 2000
decreased 7.9% and 8.5%, respectively, primarily due to lower
sales volumes, which were impacted by delays in new product
rollouts and a general slowdown in promotional activities within
Display's customer base, comprised largely of consumer products
companies. Also reducing this segment's sales was the
deconsolidation of sales of the Company's former Color-Box
business after the formation of the litho-laminated joint
venture with Georgia-Pacific Corporation in February 2000, offset,
in part, by sales generated by Consumer Promotions International
(acquired in October 1999) and Green Printing (acquired in
February 2000). The quarter-over-quarter and year-over-year EBIT
declines resulted primarily from lower operating margins in
Display due to sales reductions and product-mix changes and start-
up costs at the Company's Warren County, North Carolina,
corrugated container facility, offset, in part, by the equity pick
up related to Color-Box which is accounted for by the equity
method.
Plastic Packaging
The Plastic Packaging segment is comprised of the plastic-
based packaging operations of Boxmore, acquired in February
2000. Net sales and EBIT for the segment were $25.1 million and
$1.8 million for the quarter ended October 1, 2000, and $62.3
million and $5.3 million for the nine months ended October 1,
2000, respectively. On a pro forma basis, assuming Boxmore was
acquired as of January 1, 1999, net sales and EBIT were up
approximately 22.4% and more than 100%, respectively, for the
third quarter and 21.4% and 62.9% for the nine months ended
-27-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Segment Information, continued
October 1, 2000, compared to the pro forma 1999 third quarter and
year-to-date. These improvements were generated from volume
increases and improved production efficiencies, partially offset
by the impact of unfavorable foreign currency exchange rates.
Forest Products/Land Development
Increase/(Decrease)
(Dollars in millions) 2000 1999 $ %
- ----------------------------------------------------------------
Third quarter:
Net sales $7.4 $11.1 $(3.7) (33.3)%
EBIT 4.8 5.1 (0.3) (5.9)%
Operating margin 64.9% 45.9% - 41.4%
Nine months:
Net sales 14.5 38.3 (23.8) (62.1)%
EBIT 10.2 13.2 (3.0) (22.7)%
Operating margin 70.3% 34.5% - 103.8%
================================================================
The decrease in sales and earnings, and the increase in
operating margins, for the quarter and nine months ended October
1, 2000, compared to corresponding 1999 periods, reflects the
impact of the sale of a substantial portion of the Company's
timberland and its Building Products business in the third quarter
of 1999, offset in part by increased land sales.
Tissue
The Tissue segment was eliminated from separate reporting
after the formation of the Tissue JV with Georgia-Pacific on
October 4, 1999. The results of Chesapeake's 5% equity interest
in the Tissue JV are included in the Corporate/Other segment.
Liquidity and Financial Position
Net cash provided by operating activities decreased 47.3%, to
$25.9 million, for the nine months ended October 1, 2000, compared
to $49.1 million for the nine months ended September 30, 1999,
primarily due to a decrease in EBITDA offset, in part,
by decreases in working capital. EBITDA, a measure of internal
cash flow, which combines earnings before nonrecurring charges,
interest, income taxes and non-cash charges for depreciation, cost
of timber harvested, and amortization, was $80.4 million for the
first nine months of 2000, compared to EBITDA of $142.3 million
for the first nine months of 1999. This decrease in EBITDA was
due primarily to the shift in the Company's business
-28-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Liquidity and Financial Position, continued
portfolio and lower profitability at Display.
Net cash used in investing activities for the first nine
months of 2000 was $420.1 million, compared to $261.1 million in
the first nine months of 1999, which primarily reflects the cash
utilized or received for acquisitions and divestitures in each
period (see Note 4 to the Consolidated Financial Statements).
Net cash provided by financing activities in the first nine
months of 2000 was $93.0 million, compared to $185.6 million in
the first nine months of 1999. The decrease in net cash provided
by financing activities was primarily due to higher borrowings
under the Company's lines of credit to finance acquisitions in
1999 and 2000. Chesapeake's net debt-to-capital ratio was 45% as
of October 1, 2000, compared to 55% as of September 30, 1999. The
decrease in the net debt-to-capital ratio was the result of
applying cash received from the formation of the Tissue JV to
repay debt, partially offset by the use of cash to fund
acquisitions and share repurchases.
During the third quarter of 2000, the Company purchased
approximately 450,000 shares of its common stock in open market
transactions at an average price of approximately $28 per share.
During the first three quarters of 2000, the Company purchased
approximately 2.5 million shares of its common stock, or about 14%
of the outstanding shares at December 31, 1999, at an average
price of approximately $28.50 per share. The Company has
substantially completed its share repurchase program as of October
1, 2000. At the end of the third quarter of 2000, the Company had
15.1 million shares outstanding.
On February 23, 2000, Chesapeake terminated a commitment to
enter into a long-term $1.075 billion senior credit facility
(which it had obtained in connection with the anticipated
acquisition of Boxmore and its efforts to acquire Shorewood), and
entered into a six-month $250 million senior credit facility to
satisfy short-term liquidity requirements. On June 15, 2000,
Chesapeake terminated its six-month $250 million senior credit
facility, which resulted in an extraordinary charge of $1.5
million after taxes, and entered into a five year $450 million
senior credit facility. Interest accrues on the outstanding
balance of the loan based upon Chesapeake's choice of the
following rates: (i) an alternative base rate, which is equal to
the higher of the administrative agent's base rate or the federal
funds rate plus 1/2 of 1%, plus a margin determined by reference
to the Company's leverage ratios; (ii) LIBOR, based on
-29-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Liquidity and Financial Position, continued
U.S. dollars, pounds or Euros, plus a margin, based on the
Company's leverage ratios; or (iii) a fixed interest rate per
annum. The Company is required to pay a 1.125% loan guarantee fee,
which varies based on the Company's leverage ratios, on the
outstanding loan note balance issued in connection with the
Boxmore acquisition. In addition, the Company is required to pay
a fee based on the total facility commitment and the Company's
leverage ratio. The facility has customary covenants, including
debt and acquisition limits, interest coverage and a minimum net
worth requirement. Chesapeake's foreign subsidiary obligations
under this facility are collateralized by a pledge of the stock of
its principal foreign subsidiaries.
The Company is in compliance with all of its debt covenants
as of the end of the third quarter of 2000. However, due to the
lower than anticipated profitability of Display, the Company may
not achieve compliance with certain financial covenants contained
in its five year $450 million senior credit facility as of the end
of the fourth quarter of 2000. The Company is in discussions with
the administrative agent for the credit facility and is confident
that any necessary waiver or amendment will be obtained, which may
include increased interest costs, before the end of the fourth
quarter to ensure continued availability of adequate financial
resources to support anticipated long-term and short-term capital
needs and commitments.
Outlook
The following statements reflect management's outlook for the
Company as of November 20, 2000. Except as otherwise indicated,
the following forward-looking statements do not reflect the
potential impact of any acquisitions, divestitures, or other
structural changes in the Company's business that may be completed
during the remainder of 2000. The following statements are
subject to certain risks and uncertainties, including those listed
under the caption "Forward-Looking Statements" on page 31 of this
report:
- -The Company expects revenue for 2000 to be in the $1.0 billion to
$1.1 billion range, excluding unconsolidated affiliates.
- -Depreciation and amortization is expected to be in the range of
$70 million to $75 million in 2000.
- -Capital spending, excluding acquisitions, for 2000 is expected to
be approximately $70 million to $80 million.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Outlook, continued
- -The Company continues to expect full year 2000 earnings
improvement in the European Specialty Packaging, Plastics
Packaging and Land Development segments, when compared to 1999.
- -The Company continues to review the U.S. Display business and its
cost structure. Therefore the fourth quarter earnings for the
Merchandising and Specialty Packaging segment cannot be reasonably
estimated at this time.
- -The Company's effective income tax rate for 2000 is uncertain at
this time because it is highly dependent on the amount of U.S.-
based income generated in 2000.
- -Full year 2000 EBITDA on a pro forma basis, excluding the U.S.
Display business, is expected to be in the range of $135 million
to $145 million.
Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements.
Forward-Looking Statements
Forward-looking statements in the foregoing Management's
Discussion and Analysis of Financial Condition and Results of
Operations include statements that are identified by the use of
words or phrases including, but not limited to, the following:
"will likely result", "expected to", "will continue", "is
anticipated", "estimated", "project", "believe" and words or
phrases of similar import. Changes in the following important
factors, among others, could cause Chesapeake's actual results to
differ materially from those expressed in any such forward-looking
statements: competitive products and pricing; production costs,
particularly for raw materials such as folding carton and
corrugated box and display materials; fluctuations in demand;
governmental policies and regulations affecting the environment;
interest rates; currency translation movements; and other risks
that are detailed from time to time in reports filed by the
Company with the Securities and Exchange Commission.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
There are no material changes to the disclosure on this
matter made in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
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PART II
Item 1. Legal Proceedings
Reference is made to Note 8 of the Notes to
Consolidated Financial Statements included herein.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
27.1 - Financial Data Schedule - 2000
27.2 - Restated Financial Data Schedule - 1999
(b)Reports on Form 8-K:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CHESAPEAKE CORPORATION
(Registrant)
Date: November 20, 2000 BY: /s/ William T. Tolley
William T. Tolley
Senior Vice President -
Finance & Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT
- -------
27.1 Financial Data Schedule - 2000*
27.2 Restated Financial Data Schedule - 1999*
* Filed herewith
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