FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 / /.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of October 31, 1998: 21,450,976
shares.
CHESAPEAKE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings-
Quarter and Nine Months Ended September 30, 1998
and September 30, 1997 3
Condensed Consolidated Balance Sheets
at September 30, 1998 and December 31, 1997 5
Consolidated Statements of Cash Flows-
Nine months ended September 30, 1998
and September 30, 1997 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
-2-
PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Net sales $260.7 $233.7 $714.5 $792.5
Costs and expenses:
Cost of products sold 189.9 165.6 516.1 590.5
Depreciation and cost of
timber harvested 13.6 14.2 43.2 60.7
Selling, general and
administrative expenses 34.2 36.4 99.5 118.9
Restructuring/special charges - - - 18.9
------ ------ ------ ------
Earnings from operations 23.0 17.5 55.7 3.5
Gain on sale of businesses - - - 86.3
Other income and expenses, net 2.5 (0.8) 8.5 2.3
Interest expense, net (4.7) (2.2) (14.0) (18.5)
------ ------ ------ ------
Earnings before taxes and
extraordinary item 20.8 14.5 50.2 73.6
Income taxes 7.8 4.8 18.8 30.3
------ ------ ------ ------
Income before extraordinary
item 13.0 9.7 31.4 43.3
Extraordinary item, net of
income tax - - - (2.3)
------ ------ ------ ------
Net earnings $ 13.0 $ 9.7 $ 31.4 $ 41.0
====== ====== ====== ======
-3-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, Continued
(In millions, except per share data)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Basic earnings per share
Earnings before
extraordinary item $ .61 $ .41 $ 1.48 $ 1.84
Extraordinary item, net of
income taxes - - - (.10)
------ ------ ------ ------
Earnings $ .61 $ .41 $ 1.48 $ 1.74
====== ====== ====== ======
Weighted average number of
common shares 21.2 23.4 21.2 23.5
====== ====== ====== ======
Diluted earnings per share
Earnings before
extraordinary item $ .60 $ .41 $ 1.46 $ 1.82
Extraordinary item,
net of income taxes - - - (.10)
------ ------ ------ ------
Earnings $ .60 $ .41 $ 1.46 $ 1.72
====== ====== ====== ======
Weighted average number of
common shares and equivalents
outstanding, assuming dilution 21.6 23.7 21.5 23.6
====== ====== ====== ======
Cash dividends declared per
share of common stock $ .20 $ .20 $ .60 $ .60
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
-4-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 53.7 $ 73.3
Accounts receivable, less allowance for
doubtful accounts (1998-$4.8; 1997-$5.9) 148.4 111.8
Inventories, at lower of cost or market 103.7 98.8
Deferred income taxes 17.9 17.8
Other 7.5 6.6
------ ------
Total current assets 331.2 308.3
------ ------
Property, plant and equipment, at cost 869.2 818.6
Less accumulated depreciation 389.2 350.1
------ ------
480.0 468.5
Timber and timberlands, net 39.6 39.8
------ ------
Net property, plant and equipment 519.6 508.3
------ ------
Goodwill, net 45.5 44.0
Other non-current assets 53.0 52.4
------ ------
Total assets $949.3 $913.0
====== ======
-5-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(Millions of dollars, except share data)
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61.2 $ 52.1
Accrued liabilities 80.1 74.5
Current maturities of long-term debt 2.1 0.6
Dividends payable 4.3 4.3
Income taxes payable 2.5 1.9
------ ------
Total current liabilities 150.2 133.4
------ ------
Long-term debt 268.7 264.3
Other long-term liabilities 5.7 5.8
Postretirement benefits other than pensions 20.9 19.1
Deferred income taxes 68.9 68.4
------ ------
Total liabilities 514.4 491.0
------ ------
Shareholders' 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 21,449,715
in 1998 and 21,330,232 shares in 1997,
respectively 21.4 21.3
Additional paid-in capital 16.2 21.9
Retained earnings 397.3 378.8
------ ------
Total shareholders' equity 434.9 422.0
------ ------
Total liabilities and shareholders'
equity $949.3 $913.0
====== ======
See accompanying notes to consolidated financial statements.
-6-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
------ -------
Operating activities
Net earnings $ 31.4 $ 41.0
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation, cost of timber harvested and
amortization of intangibles 45.1 63.4
Deferred income taxes .3 (62.5)
Gain on sale of property, plant and equipment (.9) .3
Gain on sale of business - (86.3)
Loss on foreign exchange (.2) -
Restructuring/special charges - 18.9
Extraordinary item - 4.0
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (35.6) (23.9)
Inventories (4.3) (3.4)
Other assets (2.7) 3.7
Accounts payable 9.0 6.4
Accrued liabilities 5.5 -
Income taxes payable .6 5.7
Other current liabilities 2.9 3.3
------ ------
Net cash provided by (used in)
operating activities 51.1 (29.4)
------ ------
Investing activities
Purchases of property, plant and equipment (55.1) (53.8)
Acquisitions and proceeds from sale of
property, plant and equipment (2.9) -
Proceeds from sale of businesses, net of
disposition expenses - 472.1
Other, net (.3) (.4)
------ ------
Net cash (used in) provided by investing
activities (58.3) 417.9
------ ------
-7-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
----- -----
Financing activities
Net borrowings (payments) on lines of credit 4.7 (169.2)
Payments on long-term debt (.5) (64.5)
Proceeds from long-term debt .5 .5
Proceeds from issuances of common stock 1.7 1.3
Purchases of outstanding common stock (6.9) (16.6)
Dividends paid (12.8) (14.1)
Other, net .9 -
------ ------
Net cash used in financing activities (12.4) (262.6)
------ ------
(Decrease) increase in cash and cash
equivalents (19.6) 125.9
Cash and cash equivalents at beginning of
period 73.3 9.8
------ ------
Cash and cash equivalents at end of period $ 53.7 $135.7
====== ======
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
The condensed consolidated financial statements of
Chesapeake Corporation and subsidiaries (the "Company") included
herein are unaudited, except for the December 31, 1997
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 condensed
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 and cash flows for the interim periods reported
hereon.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates in reporting the amounts of certain revenues and
expenses during the reporting period of the financial statements
and certain assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the
notes thereto included or incorporated by reference in the
Company's latest Annual Report on Form 10-K. The results of
operations for the 1998 interim period should not be regarded as
necessarily indicative of the results that may be expected for
the entire year.
Certain prior-year data have been reclassified to conform to
the 1998 presentation.
Note 2. Adoption of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which is effective for all fiscal periods beginning after
December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full
set of general-purpose financial statements, either in the
statements of operations or in a separate statement.
Additionally, SFAS 130 requires the display
-9-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited),continued
Note 2. Adoption of Accounting Pronouncements, continued
of the accumulated balance of other comprehensive income. For
the quarter and nine months ended September 30, 1998 and 1997,
comprehensive income is as follows:
Quarter Ended Nine Months Ended
September 30, September 30,--
- -------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Net earnings $13.0 $ 9.7 $31.4 $41.0
Foreign currency translation
(Net of tax) (.6) - (1.5) (.9)
----- ----- ----- -----
Comprehensive income $12.4 $ 9.7 $29.9 $40.1
===== ===== ===== =====
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS
131"), Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132") and Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 131 establishes standards
for the way that public business enterprises report information
about operating segments. The Company expects to adopt this
standard by the end of 1998. SFAS 132, which is effective for
fiscal years beginning after December 31, 1997, requires
revisions to disclosures for pensions and other postretirement
benefits. SFAS 133, which is effective for fiscal years
beginning after June 15, 1999, requires companies to record
derivatives on the balance sheet as assets or liabilities,
measured at fair market value. These standards are not expected
to have a material impact on the Company's financial statements.
The American Institute of Certified Public Accountants has issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and SOP
98-5, "Reporting on the Costs of Start-up Activities." SOP 98-1
and SOP 98-5 are effective for fiscal years beginning after
December 15, 1998. The Company has adopted these pronouncements,
and there was no material impact for the interim period.
-10-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 3. Acquisitions and Dispositions
On June 24, 1998, Chesapeake Corporation signed a letter of
intent to acquire all of the outstanding capital stock of Capitol
Packaging Corporation, a specialty packaging company located in
Denver, Co. This transaction is anticipated to close in the
fourth quarter of 1998.
On February 2, 1998, Chesapeake Packaging Co. purchased
substantially all of the assets, and assumed certain liabilities,
of Rock City Box Co., Inc., located in Utica, NY. This operation
manufactures corrugated containers, trays, and pallets, as well
as wood and foam packaging products.
On May 23, 1997, the Company completed the sale to St.
Laurent Paperboard (U.S.) Inc. ("St. Laurent (U.S.)"), a wholly-
owned subsidiary of St. Laurent Paperboard Inc. (Toronto and
Montreal:(SPI)), of: (i) the sole membership interest in
Chesapeake Paper Products Company LLC (successor to Chesapeake
Paper Products Company), a wholly-owned subsidiary of Chesapeake
which, as of the closing date, owned and operated Chesapeake's
kraft products mill located in West Point, VA (the "West Point
Mill"); (ii) all of the capital stock of Chesapeake Box Company
which, as of the closing date, owned and operated directly or
through a subsidiary substantially all of the assets of four of
Chesapeake's corrugated box plants. The four box plants involved
in the transaction are located in Richmond, VA; Roanoke, VA;
Baltimore, MD; and North Tonawanda, NY; and (iii) all of the
capital stock of Chesapeake Fiber Company which, as of the
closing date, owned and operated directly or through a subsidiary
certain assets related to the West Point Mill's wood procurement
operations.
The purchase price of approximately $500.0 million was paid
in cash at closing, with a post-closing purchase price adjustment
of approximately $10 million paid to the buyer. The transaction
resulted in an after-tax gain for Chesapeake of $49.1 million, or
$2.07 per diluted share, recorded in the second quarter of 1997.
Chesapeake used approximately $250 million of net after-tax
proceeds to reduce debt, $79 million to repurchase common stock,
and plans to use the remainder of the net after-tax proceeds for
further repurchases of its common stock and to finance growth
opportunities internally and through acquisitions.
-11-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 4. Inventories
Sept. 30, Dec. 31,
1998 1997
-------- --------
(In millions)
Inventories consist of:
Finished goods $ 35.4 $ 26.7
Work in process 24.4 36.2
Materials and supplies 43.9 35.9
------ ------
Totals $103.7 $ 98.8
====== ======
Note 5. Commitments
At September 30, 1998, commitments, primarily for capital
expenditures, approximated $40 million. These commitments
include anticipated expenditures of $1.5 million in 1998 for
environmental protection related to the Company's tissue mills.
The remaining commitments of $38.5 million are related to various
capital projects, none of which is individually material.
Additional non-determinable environmental protection
expenditures could be required in the future if facilities are
expanded or if more stringent standards become applicable. See
Note 8.
Note 6. Litigation
Wisconsin Tissue ("WT"), a wholly-owned subsidiary of the
Company, has been identified by the federal government and the
State of Wisconsin as a potentially responsible party with
respect to possible natural resource damages and Superfund
liability in the Fox River and Green Bay System. See Note 8 for
further information regarding this matter.
On May 13, 1997, the Attorney General of Florida filed a
civil complaint against WT alleging violations of antitrust laws.
The complaint also names nine other commercial and industrial
tissue manufacturers and seeks compensatory monetary damages,
civil penalties, and injunctive relief. Other private and state
civil antitrust class actions have also been filed against WT (or
against the Company, identifying WT as a "division" of the
Company) and against the other defendants. WT and the Company
believe that WT has valid defenses to the plaintiffs' claims and
intend to defend the actions vigorously.
-12-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 6. Litigation, continued
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 materially
adverse effect on its consolidated financial position, results of
operations, or cash flows.
Note 7. Income Taxes
The Company's effective income tax rate was 37.5% for the
first three quarters of 1998 and 41.2% for the first three
quarters of 1997. The difference between the Company's effective
income tax rate and the statutory federal income tax rate are
primarily due to state income taxes and purchase accounting
adjustments resulting from the sale to St. Laurent in the second
quarter of 1997.
Note 8. 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 Company is committed to abiding by the environmental,
health and safety principles of the American Forest & Paper
Association. Each expansion project has been planned to comply
with applicable environmental regulations and to enhance
environmental protection at existing facilities. The Company
faces increasing capital expenditures and operating costs to
comply with expanding and more stringent environmental
regulations, although compliance with existing environmental
regulations is not expected to have a materially adverse effect
on the Company's earnings, financial position, or competitive
position.
-13-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
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
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 position or results of operation.
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 notice 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
FWS is 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
-14-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
alleged natural resource damages. WT and other PRPs are 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.
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. Under an interim agreement with the
State of Wisconsin, the PRPs are providing funds for an interim
phase of resource damage assessment and restoration work. WT's
obligation under the agreement is not material to the Company's
financial position or results of operations.
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. The EPA and the State of Wisconsin
are proceeding with a remedial investigation/ feasibility study
of the lower Fox River site.
The ultimate cost to WT, if any, associated with these
matters cannot be predicted with certainty at this time due to
the inability to determine the outcome of pending settlement
discussions or, if a settlement cannot be reached, WT's share of
any multi-party clean-up expenses; the uncertain extent of any
contamination; the varying costs of alternative restoration
methods; the evolving nature of clean-up technologies and
governmental regulations; the lack of 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. Based on presently
available information, the Company believes that there are
additional parties, some of which may have substantial resources,
that may also be identified as PRPs with respect to this matter
and could be expected to participate in any final
settlement. The Company believes that it is entitled to
indemnification from a prior owner of WT, pursuant to a stock
purchase agreement between the parties, with respect to
liabilities related to this matter. The prior owner has
reimbursed WT for out-of-pocket costs and attorneys' fees related
to investigation of the matter. The Company believes that the
prior owner intends to, and has the financial ability
-15-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
to, honor its indemnification obligation under the stock purchase
agreement.
The EPA has stated its intent to develop additional draft
rules under the Clean Water Act and the Clean Air Act which would
impose new air and water quality standards for pulp and paper
mills (the "Cluster Rules"). The eventual capital cost impact on
the Company of compliance with the additional Cluster Rules is
not presently determinable and will depend on a number of
factors, including the scope of the standards imposed and time
permitted for compliance; the Company's strategic decisions
related to compliance, including potential changes in product mix
and market; and development in compliance technology.
In March 1998, WT's Chicago, IL tissue mill received a
Notice of Violation from EPA alleging violation of the Illinois
State Implementation Plan as adopted pursuant to the Clean Air
Act. The alleged violation involves the emission of volatile
organic material. WT is in the process of negotiating a possible
resolution of the alleged violation with EPA. The ultimate cost
to WT, if any, associated with the alleged violation cannot be
determined with certainty at this time due to the absence of a
determination that there has been a violation, and, if a
violation is found to have occurred, a determination of the
appropriate capture and control techniques or other corrective
action and the cost thereof, and the amount of any penalties
imposed by EPA. WT believes that it is entitled to significant
indemnification for any costs or expenses incurred with regard to
this matter from the prior owner of the Chicago mill and that the
prior owner has the financial ability to honor its
indemnification obligation.
On July 17, 1998, WT's Menasha, WI tissue mill received a
Notice of Violation from the Wisconsin Department of Natural
Resources ("WDNR") alleging violations of Wisconsin's Air
Management Rules. The alleged violations involve the emission of
volatile organic material and the failure to comply with
reporting requirements. WT is in the process of negotiating a
possible resolution of the alleged violations with WDNR. The
ultimate cost to WT, if any, associated with the alleged
violations cannot be determined with certainty at this time due
to the absence of a determination that there have been violations
and, if violations are found to have occurred, a determination of
the appropriate corrective action and the cost thereof and the
amount of any penalties imposed by WDNR.
-16-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
Chesapeake operates under, and believes it is in substantial
compliance with, the terms of various air emission and water and
effluent discharge permits and other environmental regulations.
-17-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
BUSINESS SEGMENT HIGHLIGHTS
Third Quarter Year-to-Date
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales:
Tissue $116.1 $108.8 $331.3 $305.5
Specialty packaging 133.5 114.3 349.2 305.2
Forest products/land development 11.1 10.6 34.0 26.3
------ ------ ------ ------
Ongoing operations 260.7 233.7 714.5 637.0
Divested businesses - - - 155.5
------ ------ ------ ------
$260.7 $233.7 $714.5 $792.5
====== ====== ====== ======
Earnings before interest and
taxes ("EBIT"):
Tissue $ 19.3 $ 14.3 $ 53.1 $ 41.0
Specialty packaging 5.4 4.7 7.9 2.1
Forest products/land development 4.2 3.0 12.6 8.6
Corporate (3.4) (5.3) (9.4) (12.7)
------ ------ ------ ------
Ongoing operations 25.5 16.7 64.2 39.0
Divested businesses - - - (14.3)
Gain on sale of business - - - 86.3
Restructuring/special charges - - - (18.9)
------ ------ ------ ------
$ 25.5 $ 16.7 $ 64.2 $ 92.1
====== ====== ====== ======
Third Quarter 1998 vs. Third Quarter 1997
Net earnings for the three months ended September 30, 1998,
were $13.0 million, or $.60 per diluted share, compared with the
1997 third quarter reported net earnings of $9.7 million, or $.41
a share. The increase in net earnings was primarily the result
of higher sales volume and reduced SG&A expenses. Net sales for
the three months ended September 30, 1998, were $260.7 million,
up 12% compared with third quarter 1997 reported net sales of
$233.7 million.
-18-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Net sales for the Tissue segment of $116.1 million for the
third quarter of 1998 were up 7% from segment net sales of $108.8
million for the third quarter of 1997 due to increased converted
and jumbo roll volume partially offset by modestly lower pricing.
Earnings before interest and taxes ("EBIT") for the Tissue
segment for the third quarter of 1998 of $19.3 million increased
35% compared to EBIT of $14.3 million for the third quarter of
1997, due primarily to growth in converted and jumbo roll volume
and improved converting efficiencies.
Net sales for the Specialty Packaging segment for the third
quarter of 1998 of $133.5 million were up 17% compared to net
sales of $114.3 million for the segment during the third quarter
of 1997, due primarily to display and graphic packaging volume
growth and higher corrugated container prices. For the third
quarter of 1998, segment EBIT was $5.4 million, a $.7 million
improvement over segment EBIT of $4.7 million for the third
quarter of 1997. The increase was driven by volume growth,
partially offset by lower corrugated container margins.
Net sales for the Forest Products/Land Development segment
for the third quarter of 1998 were $11.1 million, up 5% from net
sales of $10.6 million in the third quarter of 1997. Segment
EBIT for the third quarter of 1998 was $4.2 million, up 40%
compared to segment EBIT of $3.0 million for the third quarter
last year. The sales and EBIT increases were primarily due to
increased land sales and higher pine lumber volume, offset in
part by lower pine lumber prices.
Third Quarter Year-to-date 1998 vs. Third Quarter Year-to-date
1997
Net income for the nine months ended September 30, 1998 was
$31.4 million, or $1.46 per diluted share, compared with pro
forma net income from ongoing operations of $18.7 million, or
$.79 per diluted share, for the first nine months of 1997. Pro
forma results give effect to the May 23, 1997, sale of the West
Point Mill and four corrugated container plants to St. Laurent
Paperboard Inc. and the application of the net proceeds to reduce
long-term debt and generate interest income as if it had occurred
at the beginning of the earliest period presented. Reported net
income for the first nine months of 1997 was $41.0 million, or
$1.72 per diluted share. Reported net income for the first three
quarters of 1997 included: an after-tax gain of
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
$49.1 million, or $2.07 per share, on the sale of the West Point
Mill and four box plants to St. Laurent Paperboard Inc.;
restructuring charges of $10.8 million after tax, or $.45 per
share; and an extraordinary loss of $2.3 million, or $.10 per
share, net of income taxes, related to the repurchase of debt.
Net sales for the nine months ended September 30, 1998, were
$714.5 million, compared with pro forma net sales of $637.0
million from ongoing operations for the third quarter 1997 year-
to-date. Reported sales for the first nine months of last year,
including divested businesses, were $792.5 million.
Net sales for the Tissue segment of $331.3 million for the
first nine months of 1998 were up 8% from segment net sales of
$305.5 million for the first nine months of 1997 due to growth in
converted and jumbo roll volume. EBIT for the Tissue segment of
$53.1 million for the first nine months of 1998 was up 30%
compared to EBIT of $41.0 million for the first nine months of
1997. The increase in EBIT was due primarily to growth in
converted sales volume, higher sales of jumbo rolls, and improved
operating efficiencies.
Net sales for the Specialty Packaging segment for the first
nine months of 1998 were $349.2 million, up 14% compared to net
sales from ongoing operations of $305.2 million in 1997, due
primarily to higher display volume and higher corrugated
container prices. Segment year-to-date 1998 EBIT was $7.9
million, up $5.8 million from pro forma EBIT from ongoing
operations of $2.1 million in 1997, driven by volume growth
partially offset by lower corrugated container margins.
Net sales for the Forest Products/Land Development segment
of $34.0 million for the first nine months of 1998 were up 29%
from net sales of $26.3 million from ongoing operations for the
first nine months of 1997. EBIT for the first nine months of
1998 was $12.6 million, or 47% higher than year-to-date 1997's
EBIT from ongoing operations of $8.6 million. The increases in
sales and EBIT were primarily due to higher pine lumber volume,
the addition of external pulpwood shipments, and higher land
sales partially offset by lower pine lumber prices.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Financial Position
Management assesses the Corporation's liquidity in terms of
its overall ability to generate cash to fund its operating and
investing activities. Significant factors affecting liquidity
are cash flows generated from operating activities, capital
expenditures, acquisitions, common stock repurchases, the
availability of adequate bank lines of credit, and the ability to
attract long-term capital, as needed, on satisfactory terms.
Net cash provided by operating activities for the third
quarter was $18.4 million, up from $75.6 million of net cash used
in operating activities for the third quarter of 1997. Net cash
provided by operating activities during the first nine months of
1998 was $51.1 million compared to $29.4 million used by
operating activities for the first nine months of 1997. The
increase resulted from tax payments late in the third quarter of
1997 resulting from the sale of the West Point Mill and related
assets.
Net cash used in investing activities was $58.3 million
during the first nine months of 1998 compared to net cash
provided by investing activities of $417.9 million in the first
nine months of 1997. Capital expenditures for the nine months
ended September 30, 1998 and 1997 totaled $55.1 million and $53.8
million, respectively, and related primarily to strategic
initiatives in the packaging and tissue businesses. Capital
expenditures for the full year 1998 are expected to be
approximately $70 to $75 million. These initiatives include new
tissue converting equipment at the Menasha, WI, Bellemont, AZ,
and Greenwich, NY, facilities; implementation of several new
information systems throughout the company; and expansion and
modernization of the West Point, VA, sawmill. Capital
expenditures for 1998 are expected to be financed with internally
generated cash. These projects are consistent with Chesapeake's
strategy of expanding its core businesses, reducing costs, and
focusing capital spending on projects that are expected to
generate a high return on investment. No other 1998 capital
project is expected to account for more than 5% of the total
planned spending.
The Corporation repurchased $.2 million shares of its common
stock in the first nine months of 1998 under previously announced
stock repurchase programs. Share repurchase continues
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
to be a significant use of the Corporation's cash flow and serves
to offset the dilutive effect resulting from the issuance of
stock under stock-based employee benefit programs.
Working capital increased $6.0 million at September 30, 1998
compared to December 31, 1997. The increase was primarily due to
an increase in accounts receivable driven by higher sales. The
average accounts receivable collection period for the first nine
months of 1998 decreased slightly compared to the first nine
months of 1997. The inventory turnover rate for the first nine
months of 1998 was up slightly compared to the first nine months
of last year. The ratio of current assets to current liabilities
was 2.2 at the end of the third quarter of 1998 and 2.4 at the
end of the third quarter of 1997.
EBITDA, a measure of internal cash flow combining earnings
before interest and income taxes plus non-cash charges for
depreciation, cost of timber harvested and amortization, was
$39.6 million for the third quarter of 1998, 17% higher than
EBITDA of $33.9 million for the third quarter of 1997 due to tax
payments.
At the end of the third quarter of 1998, long-term debt
totaled $268.7 million, compared to long-term debt of $266.0
million at the end of the third quarter of 1997. The ratio of
long-term debt to total capital was 35% at the end of the third
quarter of 1998, an increase of 3 points from the end of the same
period last year. The ratio of long-term debt to shareholders'
equity was 62% at the end of the third quarter of 1998 compared
to 55% at the end of the third quarter of 1997. Out of a total
of $69 million committed and $105 million uncommitted domestic
and foreign credit lines available at the end of the third
quarter of 1998, none of the domestic lines and $10 million of
foreign lines were utilized.
Management believes that its existing cash position and
other available sources of liquidity are sufficient to meet
current and anticipated requirements for the foreseeable future.
Management anticipates that the Company's debt-to-capital ratio
will increase during 1999 in order to satisfy its various cash
flow requirements, including anticipated acquisition spending and
share repurchases.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Year 2000 Planning
Until recently, many computer systems and software products
used only two digit entries to define a year. As a result,
computer programs that have date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000.
Unless remedied, this "Year 2000" problem could result in
disruptions of normal business operations due to system failures,
miscalculations or the inability to process necessary
transactions. In addition to computer systems, any equipment
using embedded chips with date sensitive functions, such as
switchgear, machinery and process control systems and telephone
exchanges, could also be at risk.
In 1997, Chesapeake established a plan intended to address
the impact of the Year 2000 on its internal systems, facilities,
as well as its key suppliers and customers. The project consists
of the following four phases:
-Phase 1 - inventory and analysis of key business systems and
infrastructure for Year 2000 problems. Phase 1 was completed in
July 1997.
-Phase 2 - remediation of non-compliant systems. As discussed
below, this phase is underway and should be completed by mid-
1999.
-Phase 3 - testing of mission critical systems - has begun and is
scheduled to be completed by mid-1999.
-Phase 4 - development of contingency plans - has also begun. As
discussed below, the Company expects that its contingency plans
will be fully developed by mid-1999.
The Company's Year 2000 team consists of location and
business unit Year 2000 coordinators and project managers who,
for the purpose of this project, report and are accountable to
the Company's Chief Financial Officer.
Most of the Company's mission critical business systems
utilize packaged applications, which are purchased from third
party software vendors. As part of its overall business
strategy, the Company is installing new integrated Enterprise
Resource Planning ("ERP") software that is expected to provide
enhanced reporting and operational benefits as well as Year 2000
compliance. The installation of Year 2000 compliant ERP software
is the principal element of the Company's Year 2000 remediation
plan. The Company's Tissue segment is scheduled to implement
Year 2000 compliant ERP software during the first
-23-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
quarter of 1999. Chesapeake's other business segments and
corporate headquarters are in the process of installing Year 2000
compliant ERP software. Those installations are approximately
30% complete, and are scheduled to be completed at all locations
by mid-1999.
In addition to the installation of Year 2000 compliant ERP
software, the Company's remediation efforts include the upgrading
or replacement of proprietary computer software systems
(primarily in the Tissue segment), and the upgrading or
replacement of computer hardware, machinery and equipment,
process control systems, security systems and telecommunications
equipment. The Company has begun the process of upgrading or
replacing these systems and equipment, if necessary, for Year
2000 compliance and expects the process to be completed by mid-
1999.
The cost of installing the new ERP software, no material
portion of which relates specifically to achieving Year 2000
compliance, is expected to be approximately $19.5 million. Of
this amount, approximately $16 million is expected to be
capitalized in accordance with AICPA SOP 98-1, with approximately
$10 million capitalized during the Company's fiscal year ending
December 31, 1998. To date, the Company has incurred
approximately $8.5 million of the expected ERP implementation
cost. Other specifically identifiable costs related to Year 2000
compliance are in the range of $1-$2 million, approximately $.5
million of which has been incurred to date. The Company expects
to fund the costs associated with its Year 2000 compliance
program with operating cash flows that would normally be budgeted
for the corporation's information systems and production
equipment. Management does not believe that any of Chesapeake's
material information technology projects have been deferred due
to the Company's Year 2000 compliance efforts.
Because of the interdependence of information systems today,
Year 2000 compliant companies may be affected by the Year 2000
readiness of their material suppliers, customers and other third
parties. As part of Chesapeake's evaluation of the Year 2000
readiness of its suppliers, customers and other third parties,
the Company has contacted substantially all of its critical
suppliers to request written assurance that they have Year 2000
readiness programs in place as well as an affirmation that they
will be compliant when necessary. Responses to these inquiries
are currently being gathered and reviewed. To date, no such
parties have informed the Company that they do not
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
expect to be Year 2000 compliant in a timeframe that would expose
Chesapeake to material business risks. Further analysis will be
conducted as necessary. Although management has not yet
determined the risk associated with the failure of any such party
to become Year 2000 compliant, the corporation can provide no
assurance that such failure would not have a material adverse
effect on the Company's results of operation and financial
condition. In an effort to minimize such risks, in most cases
(with utilities and banking institutions as notable exceptions),
the Company utilizes multiple suppliers of goods and services and
is prepared to substitute suppliers if one or more have Year 2000
related difficulties.
The ultimate effects on the corporation or its suppliers or
customers of not being fully Year 2000 compliant is not
reasonably estimable. While Chesapeake believes its efforts are
adequate to address its Year 2000 concerns, the Company could
experience a material adverse effect on its results of operations
and financial condition if its Year 2000 compliance schedule is
not met, if the costs to remediate the Company's Year 2000 issues
materially exceed current estimates or if material suppliers,
customers and other businesses encounter serious problems in
their Year 2000 remediation efforts. Therefore, the Company is
in the process of developing plans to address such contingencies,
with a focus on mission critical applications and material
suppliers. Such contingency plans may include the development of
back-up procedures, the purchase of additional inventory and
utilization of alternate suppliers. The Company expects to
complete its contingency plans in mid-1999.
Accounting Pronouncements
The Financial Accounting Standards Board has issued several
new pronouncements, including standards on capital structure,
comprehensive income, business segment reporting, pensions and
other post-retirement benefits, and derivatives. In addition, the
American Institute of Certified Public Accountants has issued
several new standards on accounting for computer software and
reporting the cost of start-up activities. These standards are
not expected to have a material impact on the Company's financial
statements. See Note 2 of the notes to consolidated financial
statements for more information on these standards.
-25-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Other
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" may include "forward-looking
statements" that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements are identified by the use of the words
or phrases including, without limitation, "will likely result",
"and expected to", "will continue", "is anticipated"",
"estimated", "project", "believe" and words or phrases of similar
impact. Changes in the following important factors, among
others, could cause Chesapeake's actual results to differ
materially from those expressed in the forward-looking
statements: competitive products and pricing; production costs,
particularly for raw materials such as waste paper and corrugated
box and display materials; fluctuations in demand; governmental
policies and regulations affecting the environment; interest
rates; currency translation movements; Year 2000 compliance
issues; and other risks that are detailed from time to time in
reports filed by the Company with the Securities and Exchange
Commission.
-26-
PART II
Item 1. Legal Proceedings
Reference is made to Note 6 of the Notes to
Consolidated Financial Statements included herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10 - Amendment to Agreement
Exhibit 27 - Financial Data Schedule - 1998
(g) Reports on Form 8-K:
None.
-27-
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 12, 1998 BY: /s/ William T. Tolley
William T. Tolley
Senior Vice President -
Finance & Chief
Financial Officer
-28-
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- --------------------
10 Amendment to Agreement *
27 Financial Data Schedule - 1998 *
* Filed herewith electronically
-1-