FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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
Incorporated under the I.R.S. Employer
laws of Virginia Identification
No. 54-0166880
1021 East Cary Street
P. O. Box 2350
Richmond, Virginia 23218-2350
Telephone Number (804) 697-1000
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 .
The number of shares outstanding of each of the issuer's classes
of common stock, as of the close of period covered by this
report:
Common stock of $1 par value, 23,488,199 shares.
Page 1 of 21 Pages.
<TABLE> PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE SECOND QUARTER AND YEAR TO DATE ENDED
JUNE 30, 1996 AND 1995
<CAPTION>
Second Quarter Year to Date
1996 1995 1996 1995
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $276.6 $315.1 $554.3 $606.2
Costs and expenses:
Cost of products sold 203.2 225.2 405.2 426.9
Depreciation and cost
of timber harvested 21.9 18.5 43.8 37.4
Selling, general and
administrative expenses 37.8 32.6 74.3 64.5
Income from operations 13.7 38.8 31.0 77.4
Other income and expenses, net 1.2 (1.3) 4.1 1.1
Interest expense (8.4) (8.1) (16.2) (16.1)
Income before taxes 6.5 29.4 18.9 62.4
Income taxes 2.6 10.9 7.1 23.1
Net income $ 3.9 $ 18.5 $ 11.8 $ 39.3
Earnings per share $ .17 $ .77 $ .50 $ 1.64
Weighted average number of
common shares and
equivalents outstanding 23.7 24.0 23.8 24.0
Cash dividends declared per
share of common stock $ .20 $ .20 $ .40 $ .38
<TABLE/)
See accompanying notes.
</TABLE>
<TABLE>
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
June 30, 1996 Dec. 31, 1995
(In millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5.0 $ 5.2
Accounts receivable, less
allowances for doubtful
accounts of $3.5 and $3.2 147.1 140.4
Inventories, at lower of cost
or market 108.3 112.5
Deferred income taxes 16.6 16.6
Other 10.0 6.9
Total current assets 287.0 281.6
Property, plant and equipment, at cost:
Land, buildings, machinery
and equipment 1,504.5 1,416.4
Less accumulated depreciation (716.9) (675.5)
787.6 740.9
Timber and timberlands, net 39.8 40.0
Net property, plant and equipment 827.4 780.9
Goodwill, net 55.3 41.5
Other assets 42.8 42.3
$1,212.5 $1,146.3
<TABLE/>
</TABLE>
<TABLE>
June 30, 1996 Dec. 31, 1995
(In millions)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 139.5 $ 130.2
Current maturities of long-term debt .9 .9
Dividends payable 4.7 4.8
Income taxes payable (1.9) 3.4
Total current liabilities 143.2 139.3
Long-term debt 457.2 393.6
Postretirement benefits other than pensions 27.8 26.5
Deferred income taxes 121.9 118.6
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 23,488,199 and
23,792,433 shares 23.5 23.8
Additional paid-in capital 99.3 107.3
Retained earnings 339.6 337.2
462.4 468.3
$1,212.5 $1,146.3
<TABLE/>
See accompanying notes.
</TABLE>
<TABLE>
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR TO DATE ENDED JUNE 30, 1996 AND 1995
<CAPTION>
1996 1995
(In millions)
<S> <C> <C>
Operating activities
Net income $11.8 $39.3
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, cost of timber harvested and
amortization of intangibles 45.2 38.5
Deferred income taxes 3.3 5.0
Gain on sale of property, plant and equipment (.1) (1.4)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (2.3) (20.2)
Inventories 5.0 (21.9)
Other assets - 2.7
Accounts payable and accrued expenses 8.9 13.5
Income taxes payable (5.3) (2.4)
Other payables 1.3 2.6
Net cash provided by operating activities 67.8 55.7
Investing activities
Purchases of property, plant and equipment (75.7) (67.1)
Acquisition (30.8) (10.5)
Proceeds from sale of property, plant and equipment .2 1.6
Other .9 -
Net cash used in investing activities (105.4) (76.0)
Financing activities
Net borrowings on credit lines 62.7 5.4
Payments on long-term debt (4.0) (10.7)
Proceeds from long-term debt .3 .3
Proceeds from issuances of common stock - 2.2
Purchase of outstanding common stock (12.1) -
Dividends (9.5) (8.6)
Other - (.9)
Net cash provided by (used in) financing activities 37.4 (12.3)
Increase (decrease) in cash ( .2) (32.6)
Cash at beginning of period 5.2 33.2
Cash at end of period $ 5.0 $ .6
Supplemental cash flow information:
Interest payments $15.9 $15.4
Income tax payments, net of refunds $ 8.9 $20.4
<TABLE/>
See accompanying notes.
</TABLE>
<TABLE>
CHESAPEAKE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein are
unaudited, except for the December 31, 1995 consolidated balance
sheet, have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission, and, in the
opinion of management, reflect all adjustments, all of a normal
recurring nature, necessary to present fairly the Company's
consolidated financial position, results of operations and cash flows.
It is suggested that these condensed consolidated financial statements
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 1996 interim periods should not be regarded as
necessarily indicative of the results that may be expected for the
entire year.
<CAPTION>
2. Inventories:
June 30, 1996 Dec. 31, 1995
(In millions)
<S> <C> <C>
Inventories consist of:
Finished goods $ 39.2 $ 33.7
Work in process 22.5 33.3
Materials and supplies 46.6 45.5
Totals $108.3 $112.5
<TABLE/>
3. Commitments and Other Matters:
At June 30, 1996, commitments, primarily for capital expenditures,
approximated $74 million. These commitments include anticipated
expenditures of $11 million in 1996 related to environmental
protection in connection with planned expansions and upgrades mainly
at the Company's paper mills in Arizona, Virginia and Wisconsin. The
remaining commitments of $63 million are primarily for various capital
projects, none of which is individually material.
Additional non-determinable environmental protection expenditures
could be required in the future when facilities are expanded or if
more stringent standards become applicable. See Note 6.
3. Commitments and Other Matters:
In April 1996, Chesapeake Display and Packaging Company and Chesapeake
Display and Packaging (Canada) Limited, its Ontario subsidiary,
completed the purchase of substantially all assets associated with the
Display Division of Dyment Limited. The Display Division, which has
operations in Erlanger, Ky., and Toronto, Canada, had sales of
approximately $35 million in 1995.
On August 5, 1996, Chesapeake completed its acquisition of the point-of-sale
display and packaging businesses of Sailliard S.A., with 10
locations in France and nearly $100 million of sales in 1995. These
businesses specialize in the design and manufacture of permanent and
temporary point-of-sale displays; rigid boxes, for perfume, champagne
and specialty products customers; and folding cartons for luxury goods
and pharmaceutical industries. They also include a design firm
specializing in development of creative packaging and marketing
materials for the fine spirits industry. This acquisition is
Chesapeake's first investment in an operating company in Europe.
On August 8, 1996, Chesapeake announced it had signed a letter of
intent to acquire the assets of Triad Packaging Co., Inc. in
Richmond, Va.
In June 1996, Chesapeake signed a letter of intent to purchase certain
tissue converting assets of Jokel Desarrollos, S. A. De C.V. and
Ambitec, S.A. de C.V., both in Mexico. The acquisition will include a
headquarters in Mexico City, tissue converting operations in Monterey
and Puebla that convert 12,000 tons of tissue a year and distribution
facilities in all three cities plus Guadalajara, Mexico. This
transaction will be the Company's first tissue acquisition outside the
United States and is subject to due diligence and negotiation of a
definitive purchase and sale agreement.
4. Litigation:
In May, 1996, Wisconsin Tissue Mills Inc. ("WT"), a wholly-owned
subsidiary of the Company, received a subpoena from a grand jury of
the United States District Court for the Northern District of Ohio
requesting documents in connection with an investigation of alleged
antitrust violations in commercial and industrial tissue markets. The
subpoena primarily requests documents supplementing the materials
produced by WT in response to a Civil Investigative Demand ("CID")
received by WT in late 1994. WT has substantially responded to the
grand jury's subpoena.
4. Litigation (continued):
WT has received a notice from the United States Fish and
Wildlife Service that WT has been identified as a potentially
responsible party with respect to possible natural resource damages in
the Fox River and Green Bay System. See Note 6 "Environmental Matters"
for further information regarding this notice.
The Company is a party to various 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 5. them combined, will not have a
materially adverse effect on its consolidated financial position or
results of operations.
5. Income Taxes:
The Company's effective income tax rate was 37.5% in 1996 compared to
37.0% for the first two quarters of 1995. The differences 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 acquisitions.
6. Environmental Matters:
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 a hazardous
substance 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 the Company even if contamination is attributable
entirely to prior owners. While joint and several liability is
authorized under CERCLA, as a practical matter the cost of clean-up or
other remediation is generally allocated among the waste generators.
Except for the United States Department of Interior, Fish and Wildlife
Service ("FWS") assessment of the Fox River discussed below, the Company
is not presently named 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 operations.
In June 1994, the 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. The FWS alleges 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 Fox River. The notice
invites the PRPs to participate in the development and performance of
a natural resource damage assessment with respect to the alleged
discharges. WT and the four other PRPs are engaged in negotiations
with FWS concerning the proposed damage assessment and restoration
plans.
WT and the four other PRPs are also engaged in discussions with the
Wisconsin Department of Natural Resources ("WDNR") with respect to
resolving possible state claims concerning remediation, restoration
and natural resource damage related to the alleged discharge of PCBs
into the Fox River and Green Bay System. The PRPs have proposed a
settlement to WDNR, and are engaged with WDNR in continuing discussion
of the settlement proposal. WT's obligation under the proposed
settlement would not be material to the Company's financial position
or results of operations. Based upon 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 settlement.
The ultimate cost to WT, if any, associated with this matter 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, the Company's share of any multi-party
clean-up; the unknown magnitude of any contamination; the varying cost
of alternative clean-up methods; the evolving nature of clean-up
technologies and governmental regulations; 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.
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 all liabilities related to this matter. That
prior owner has reimbursed the Company for out-of-pocket costs and
attorneys'
fees related to investigation of the matter. The Company believes
that such prior owner intends to, and has the financial ability to,
honor its indemnification obligation under the stock purchase
agreement.
In March 1995, the United States Environmental Protection Agency
("EPA") issued "Final Guidance" for basin-wide water quality standards
pursuant to the Great Lakes Water Quality Agreement between the U.S.
and Canada regarding the development of water quality standards for
the Great Lakes and their tributaries. Under federal law, the
affected states will be required within two years to implement
specific regulations that are consistent with the provisions of the
Final Guidance. Dischargers would then have an additional period of
up to five years during which to comply with any new, more stringent,
permit limits derived under the Final Guidance. The Final Guidance is
currently the subject of administrative and judicial challenges by the
paper industry and other groups, and of pending legislation in the
U.S. Congress. The WDNR is currently developing regulations to
implement the Final Guidance by a March 1997 deadline. WT is
evaluating the potential effects of the Final Guidance and regulations
on its operations and results, which effects cannot be predicted with
certainty at this time. However, based on the Company's initial review
of the Final Guidance and proposed regulations, the Company believes
that compliance would not have a material adverse effect on its
financial position or results of operations.
The EPA has published 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 definitive Cluster Rules,
when proposed, are expected to require compliance within three years
after the date of adoption. Based on the Company's preliminary
estimates, if the Cluster Rules were adopted in substantially their
present form, compliance would require capital expenditures totaling
approximately $55 million at the Company's two paper mills in West
Point, Va., and Menasha, Wis. The Company has joined with the American
Forest & Paper Association and most of its members in stating that they
believe that the Cluster Rules, as proposed, are inappropriate, unjustified
and do not comply with applicable law. The eventual capital expense impact
on the Company of compliance with the definitive 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 markets; and developments in compliance
technology.
6. Environmental Matters (continued):
The additional effect, if any, on the Company's business of compliance
with the definitive Cluster Rules will depend on a number of other
factors, including: the domestic and international competitive effects
of compliance; and the effect of evolving consumer demands related to
environmental issues on the Company and its competitors.
Chesapeake operates under, and believes that it is in substantial
compliance with, the terms of various air emission and water and
effluent discharge permits and other environmental regulations.
</TABLE>
<TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
2nd Quarter 1996 vs. 2nd Quarter 1995
Net sales for second quarter 1996 were $276.6 million, down 12% from
the record net sales of $315.1 million for the second quarter of last year.
Continued weak market conditions for certain commodity products in the
kraft business were primarily responsible for the decrease.
Net income for second quarter 1996 was $3.9 million, or $.17 a share,
a decrease of 79% compared to second quarter 1995 net income of $18.5
million, or $.77 a share. Included in second quarter 1995 results were
pre-tax charges of approximately $8 million, or $.21 a share after tax,
associated with an enhanced retirement package for hourly employees at
Chesapeake Paper Products and with certain post-closing obligations related
to Chesapeake's former wood treating operations. Cost of products sold as
a percentage of net sales increased by 2% compared to second quarter 1995
primarily due to lower net sales. Selling, general and administrative
expenses as a percentage of net sales were up 3%. Expenses were impacted
by the start-up of various growth initiatives in the packaging and tissue
businesses. Depreciation increased because of acquisitions and capital
expenditures. Other income and expenses, net in 1995 included the charge
for the wood treating post-closing obligations. Interest expense for the
quarter was slightly higher than second quarter 1995.
<CAPTION>
BUSINESS SEGMENT HIGHLIGHTS
Second Quarter First Quarter Year-to-date
1996 1995 1996 1996 1995
<S> <C> <C> <C> <C> <C>
Net Sales:
Packaging $106.3 $112.7 $109.2 $215.5 $219.6
Tissue 100.6 90.6 93.8 194.4 168.8
Kraft products 68.2 109.8 73.2 141.4 214.5
Corporate 1.5 2.0 1.5 3.0 3.3
$276.6 $315.1 $277.7 $554.3 $606.2
EBIT:
Packaging $ 4.2 $ 8.8 $ 4.8 $ 9.0 $16.8
Tissue 20.1 11.4 12.5 32.6 20.3
Kraft products (6.2) 20.0 7.3 1.1 46.7
Corporate (3.2) (2.7) (4.4) (7.6) (5.3)
$14.9 $37.5 $20.2 $35.1 $78.5
<TABLE/>
Overall packaging segment shipments for second quarter 1996 declined
1% and net sales declined 6% compared to second quarter 1995. Shipments of
corrugated shipping containers were up slightly, but net sales were down
14%. Shipments of point-of-sale displays were about the same as second
quarter 1995, but sales improved 22%. Shipments and sales of consumer
graphic packaging were down 12% and 14%, respectively. "EBIT" (earnings
before interest and taxes) for second quarter 1996 was down 52% compared to
second quarter 1995. Start-up costs associated with growth initiatives
were approximately $4 million during the quarter. These initiatives
included: the acquisition of the Display Division of Dyment Limited with
locations in Erlanger, Ky., and Toronto, Canada; a new custom packing
facility in Memphis, Tenn.; and costs associated with a two-year plan to
double the corporation's manufacturing capability for its consumer graphic
packaging business.
The tissue segment had record sales and earnings in the second
quarter. Tissue shipments were 78,000 tons, a 36% increase over the second
quarter of last year. Second quarter 1996 sales were up 11% from second
quarter 1995, as sales from new facilities more than offset the loss of
sales from the Consumer Products business sold in the fourth quarter of
last year. Approximately 20% of shipments were from new facilities in
northern Arizona and Chicago, Ill. Average selling prices of converted
products were about the same as second quarter 1995. Earnings were
impacted favorably by significantly lower recovered paper costs in 1996
compared to 1995. EBIT of $20.1 million was up 76% from last year.
Kraft products net sales for second quarter 1996 declined 38%
compared to the record second quarter net sales experienced in 1995 for
this segment. Average selling prices were nearly 40% lower than in the
second quarter of 1995, negatively impacting EBIT by about $49 million
compared to second quarter last year. This decline in selling prices was
the primary cause for the loss experienced in the quarter by this segment.
Shipments for the second quarter of 1996 were 216,000 tons, or 8% higher
than second quarter 1995, due primarily to extensive planned maintenance in
the prior year.
2nd Quarter Year-to-date 1996 vs. 2nd Quarter Year-to-date 1995.
Net sales for the six months ended June 30, 1996, were $554.3
million, down 9% from net sales of $606.2 million for the first six months
of 1995. Lower sales prices for certain commodity kraft products were the
primary cause for the decline.
Year-to-date net income was $11.8 million, or $.50 a share, down 70%
from $39.3 million, or $1.64 a share, earned in the first half of 1995.
Included in 1995 results were pre-tax charges of approximately $8 million
for the enhanced hourly retirement program in the kraft products segment
and post-closing obligations related to Chesapeake's former wood treating
business. Cost of products sold as a percentage of net sales increased to
73% in 1996 from 70% in 1995 as a result of lower sales. Selling, general
and administrative expenses as a percentage of net sales was 13% in 1996
and 11% in 1995. Depreciation was up $6.4 million over 1995 due to capital
expenditures and acquisitions. Other income was down $3.0 million from
last year, as 1995 included the charge relating to the wood treating
post-closing obligations. Interest expense approximated prior year levels.
During 1993, the bottom of the last down cycle in the paper industry,
Chesapeake earned only $.02 a share in the first half of the year. During
the first half of 1996, with margins similar to 1993, Chesapeake earned
$.50 a share. This improvement is primarily due to the packaging and
tissue businesses becoming larger and more important parts of the
corporation, a strategy that Chesapeake is continuing to implement.
Year-to-date packaging segment net sales for 1996 were down 2%
compared to 1995. Net sales of point-of-sales displays were up 19%, while
sales of corrugated shipping containers and graphic packaging were down 10%
and 5%, respectively. Shipments were down 3% for the packaging segment.
EBIT of $9.0 million for 1996 was down $7.8 million, or 46%, compared to
the first six months of 1995, as margins have been under pressure for most
of 1996. Packaging segment earnings were also impacted by about $5 million
of start-up costs associated with various growth initiatives.
First half tissue shipments of 151,000 tons were 38% higher than
1995, due in part to sales from new facilities. Approximately 20% of
shipments were from new facilities. Net sales were a record, up 15% from
last year's record first half, as a result of higher shipments and improved
product mix. The stronger sales and lower recovered paper costs resulted
in record EBIT for this segment for the first half, up 61% from the prior
year.
Kraft products net sales for 1996 were down 34% compared to the first
six months of 1995. Year-to-date shipments were 409,000 tons, down 1% from
the previous year. The average selling price for kraft products in the
first half was 29% lower than in the first half of 1995, resulting in an
approximately $62 million negative impact on EBIT. EBIT of $1.1 million
was down $45.6 million from last year as lower recovered paper prices
partially offset the negative price impact.
2nd Quarter 1996 vs 1st Quarter 1996
Net sales for the second quarter of 1996 of $276.6 million were about
flat compared to net sales of $277.7 million for the first quarter of 1996.
This slight decline was due to further weakening of market conditions for
certain commodity products in the kraft business, offset in part by
increased sales by the tissue segment.
Net income for the second quarter of 1996 was down $4.0 million from
net income of $7.9 million in the first quarter due to the lower selling
prices for certain kraft products and start-up costs associated with
strategic growth initiatives in the packaging and tissue businesses.
Net sales for the packaging segment were down 3% from the first
quarter of this year. Shipments were up 4% from first quarter levels.
EBIT was $.6 million, or 12%, lower than in the first quarter, as margins
continued to be under pressure for most of the second quarter. Also,
start-up costs associated with growth initiatives were about $4 million in
the second quarter compared to $1 million in the first quarter. The
corporation recently completed the acquisition of the point-of-sale and
packaging business of Sailliard S.A. in France as part of its strategy to
grow its business globally.
Net sales for the tissue segment were up 7% compared to the first
quarter of this year. Total second quarter tissue shipments were up 6% and
sales of converted products were up 15%, as volume increased at the new
converting site in Bellemont, Ariz. Average sales prices were about the
same. EBIT for the tissue segment was up $7.6 million, or 61%, compared to
first quarter 1996. Additional growth is planned in value-adding
converting capacity in the second half of 1996, with the start-up of
converting operations in Greenwich, NY, and the plan to purchase certain
tissue converting assets in Mexico for which a letter of intent has been
signed.
Net sales for the kraft products segment were 7% lower than in the
first quarter due to lower average sales prices for its commodity products.
Shipments of kraft products improved 12% over first quarter, as production
improved on the recently rebuilt paper machine during the second quarter
and some market-related downtime was taken in the first quarter. Average
selling prices dropped another 20% during the second quarter, negatively
impacting EBIT by about $19 million compared to the first quarter.
Weak market conditions in kraft products are expected to continue to
put pressure on earnings in the third quarter. However, selling prices for
kraft products appear to have bottomed out and modest price increases have
been realized recently for bleached market pulp. Start-up costs associated
with growth initiatives in the packaging and tissue businesses are expected
to put some pressure on earnings as the corporation moves into its
strongest season of the year, but those initiatives are expected to better
position the corporation for the future.
Capital Expenditures
Capital expenditures for the first six months of 1996 totaled $106.5
million and related primarily to strategic initiatives in the packaging and
tissue businesses, including the acquisition of the Display Division of
Dyment Limited. Capital expenditures in the first six months of 1995
totaled $77.6 million and related primarily to expansions in the packaging
and kraft businesses, including approximately $10 million for the purchase
of a tissue mill in Flagstaff, Ariz. Capital expenditures and acquisitions
for 1996 are expected to be approximately $200 million, of which about one-half
relates to strategic initiatives in the packaging and tissue
businesses. Identified initiatives include: the second phase of the
Visalia, Calif., manufacturing plant for the Company's Color-Box graphic
packaging business; a new consumer graphic packaging manufacturing plant
in Pelahatchie, Miss.; the recent acquisition of the Display Division of
Dyment Limited; new tissue converting equipment at the Bellemont, Ariz.,
and Greenwich, N.Y. facilities; the recent acquisition of the point-of-sale
display and packaging businesses of Sailliard S.A. in France; and the
announced acquisitions of certain tissue converting assets from Jokel
Desarrollos, S.A. de C.V. and Ambitec, S.A. de C.V., in Mexico and the
assets of Triad Packaging Co., Inc. in Richmond, Va. These projects are
consistent with Chesapeake's strategy of expanding the packaging and tissue
businesses, lowering costs and focusing capital spending on projects that
are expected to have a high return on investment. No other 1996 capital
projects are expected to account for more than 5% of the total planned
spending. Capital expenditures for 1996 are expected to be financed with
internally generated cash supplemented by proceeds from borrowings.
Liquidity and Capital Structure
Working capital decreased $2.5 million during the second quarter of
1996. Accounts receivable increased $3.3 million during the second
quarter and $6.7 million for the first half. The average collection period
for the first half was up 6 days compared to the first half average of
1995. Inventories have declined since year-end due to increases in LIFO
reserves and lower valuations resulting from lower selling prices. The
inventory turnover rate for the first half of 1996 was slightly lower than
the first half of last year. Accounts payable and accrued expenses
increased $15.3 million during the quarter as a result of acquisitions and
the timing of payments. The ratio of current assets to current liabilities
was 2.0 at the end of the second quarter 1996 compared to 2.1 at the end of
the first quarter of 1996 and 2.0 at year end 1995.
"EBIT + D" (earnings before interest and income taxes plus non-cash
charges for depreciation, cost of timber harvested and amortization) was
$37.1 million for the second quarter of 1996, or 34% lower than EBIT +D of
$56.5 million for the second quarter of 1995. Lower income was primarily
responsible for this decrease. Year-to-date EBIT + D was $79.6 million, or
32% lower than EBIT +D of $116.9 million in 1995. Net cash provided by
operating activities for the second quarter of 1996 was $36.4 million, up
from $18.6 million for the second quarter of 1995, primarily because
increases in accounts receivable and inventories in 1995 offset that
quarter's higher net income. For the year-to-date, net cash provided by
operating activities was $67.8 million, or 22% higher than $55.7 million
for the first half of 1995.
At the end of the second quarter, long-term debt totaled $457.2
million, or $63.6 million higher than long-term debt at year-end 1995. The
increased borrowings were primarily used to finance capital investments
during the first half of the year. The ratio of long-term debt to total
capital was 44% at the end of the second quarter, compared to 41% at the
end of the first quarter of 1996 and 40% at the end of the second quarter
of 1995.
PART II
Item 1. Legal Proceedings
Reference is made to Note 4 of the Notes to Consolidated Financial
Statements included herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.1 - Computation of Net Income Per Share of Common Stock
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
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: August 12, 1996 BY: /s/Christopher R. Burgess
Christopher R. Burgess
Controller
Date: August 12, 1996 BY: /s/Andrew J. Kohut
Andrew J. Kohut
Group Vice President - Specialty
Packaging & Merchandising
Services & Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Page
Exhibit 11.1
Computation of Net Income per Share of
Common Stock 21
</TABLE>
<TABLE>
EXHIBIT 11.1
CHESAPEAKE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
FOR THE SECOND QUARTER AND YEAR TO DATE
ENDED JUNE 30, 1996 AND 1995
(Share amounts in thousands, dollar amounts in millions,
except for per share amounts)
<CAPTION>
Second Quarter Year to Date
<S> 1996 1995 1996 1995
Primary:
Weighted average number of common <C> <C> <C> <C>
shares outstanding 23,625 23,823 23,674 23,791
Net additions to common shares
assuming exercise of dilutive
options, determined by treasury
stock method 113 226 115 241
Common shares and equivalents 23,738 24,049 23,789 24,032
Net Income $ 3.9 $ 18.5 $ 11.8 $ 39.3
Per share amount $ .17 $ .77 $ .50 $ 1.64
Fully diluted:
Common shares and equivalents 23,738 24,049 23,789 24,032
Net additional common shares
issuable upon exercise of
dilutive options, determined
by treasury stock method using
period end market price, if
higher than average price - 8 19 4
Common shares, equivalents and
other potentially dilutive
securities 23,738 24,057 23,808 24,036
Net income for fully diluted
computation $ 3.9 $ 18.5 $ 11.8 $ 39.3
Per share amount $ .17 $ .77 $ .50 $ 1.64
<TABLE/>
NOTE: (a) Dilution is less than 3%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000019731
<NAME> CHESAPEAKE CORP
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,000,000
<SECURITIES> 0
<RECEIVABLES> 147,100,000
<ALLOWANCES> 3,500,000
<INVENTORY> 108,300,000
<CURRENT-ASSETS> 287,000,000
<PP&E> 1,544,300,000
<DEPRECIATION> 716,900,000
<TOTAL-ASSETS> 1,212,500,000
<CURRENT-LIABILITIES> 143,200,000
<BONDS> 457,200,000
0
0
<COMMON> 23,500,000
<OTHER-SE> 438,900,000
<TOTAL-LIABILITY-AND-EQUITY> 1,212,500,000
<SALES> 554,300,000
<TOTAL-REVENUES> 560,100,000
<CGS> 405,200,000
<TOTAL-COSTS> 519,800,000
<OTHER-EXPENSES> 1,700,000
<LOSS-PROVISION> 3,500,000
<INTEREST-EXPENSE> 16,200,000
<INCOME-PRETAX> 18,900,000
<INCOME-TAX> 7,100,000
<INCOME-CONTINUING> 11,800,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,800,000
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
