Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
of Business
Chesapeake
is a leading European supplier of specialty paperboard packaging products and a
leading international supplier of plastic packaging products to niche end-use
markets. We focus on specific end-use packaging markets, where
customers demand creative designs, technical expertise and production
capabilities that include broad geographic coverage and appropriate supply chain
offerings.
Chesapeake
has two reportable business segments, Paperboard Packaging and Plastic
Packaging. In July 2007 we announced a reorganization that included
the realignment of our operating segments. As of September 30, 2007
we conduct our business in three operating segments: Plastic
Packaging, Pharmaceutical and Healthcare Packaging ("Pharma"), and Branded
Products Packaging ("Branded Products"). The Branded Products
operating segment now includes our former Tobacco operating
segment. The Pharma and Branded Products operating segments are
aggregated into the Paperboard Packaging reportable segment.
Paperboard
Packaging
The
Paperboard Packaging segment designs and manufactures folding cartons, spirally
wound composite tubes, leaflets, labels and other paper and paperboard packaging
products. Our primary end-use markets are pharmaceutical and
healthcare and branded products (such as alcoholic drinks, confectioneries,
foods and tobacco).
Plastic
Packaging
The
Plastic Packaging segment designs and manufactures plastic containers, bottles,
and preforms. The primary end-use markets are agrochemicals and other
specialty chemicals, and food and beverages.
Summary
of 2007
Our
operating income for fiscal 2007 was $26.7 million, and included gains or losses
on divestitures and restructuring expenses, asset impairments and other exit
costs of $14.3 million. Our operating income for fiscal 2006 was $0.3
million, and included goodwill impairments, gains or losses on divestitures and
restructuring expenses, asset impairments and other exit costs of $44.6
million.
Compared
to fiscal 2006, operating income in fiscal 2007 decreased due to the decreased
sales of tobacco packaging, start-up problems with the multi-shaped tubes for
U.K. drinks packaging, and reduced operating margins in pharmaceutical and
healthcare packaging. This was partially offset by increased sales of
specialty chemicals packaging, reduced pension expense and favorable effects of
changes in foreign currency exchange rates.
During
the fourth quarter of fiscal 2005, we announced plans for a two-year global cost
savings program which targeted combined pre-tax savings of $25 million on an
annualized basis. The scope of this program was extensive, and the
cost of these initiatives was expected to range from $30 million to $40 million
on a pre-tax basis, with the cash flow impact being less due to the sale of
related real estate and assets. Under this program, we have closed
three locations and sold two operations. We have also implemented broad-based
workforce reductions and general overhead cost savings initiatives throughout
the company. We have now completed the $25-million cost savings
program and over the course of fiscal years 2006 and 2007 we achieved cost
savings in excess of our $25-million goal. However, these savings
have been masked in 2007 due to the loss of tobacco volumes, start up costs
associated with the multi-shaped tube products, and pricing pressures primarily
in the Paperboard Packaging segment. We are now evaluating potential
additional restructuring and cost savings actions.
Review
of Consolidated Results of Operations
The
following consolidated results from continuing operations highlight major
year-to-year changes in our consolidated statements of
operations. More detail regarding these changes is found under the
caption “—Review of Segment Results” and information regarding discontinued
operations is found under the caption “—Discontinued
Operations.” All
per share amounts included in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations are presented on a diluted
basis.
The
consolidated financial statements were prepared in conformity with United States
generally accepted accounting principles (“GAAP”) and require management to make
extensive use of estimates and assumptions that affect the reported amounts and
disclosures (see discussion of Critical Accounting Policies). Actual
results could differ from these estimates.
The
consolidated statement of operations for fiscal 2007 includes adjustments from
prior periods that were recorded in the first quarter and fourth quarter of
fiscal 2007. The net impact of the adjustments recorded in the first
quarter of fiscal 2007 reduced net income from continuing operations before
taxes by $0.1 million, income from continuing operations by $0.7 million and net
income by $0.5 million. These adjustments included (1) an
understatement of taxable income in a non-U.S. tax jurisdiction related to
shared expenses of subsidiaries and (2) balance sheet adjustments on central
ledgers related to assets that had been previously disposed of or
impaired. The net impact of the adjustment recorded in the fourth
quarter of fiscal 2007 reduced net income from continuing operations before
taxes, income from continuing operations, and net income by $0.3
million. This adjustment was related to depreciation of assets that
were acquired in September 2005 with the purchase of CPHPNA. These adjustments
from prior periods that were recorded in the first quarter and fourth quarter of
fiscal 2007 were deemed immaterial to the current and prior
periods.
Our 52–53
week fiscal year ends on the Sunday nearest to December 31. Fiscal
years 2007, 2006 and 2005 each contain 52 weeks.
Segment
operating income excludes any goodwill impairment charges, restructuring
expenses, asset impairments and other exit costs and gains (losses) on
divestitures. Excluding these amounts from our calculation of segment
operating income is consistent with how our management reviews segment
performance and, we believe, affords the reader consistent measures of our
operating performance. Segment operating income is not, however,
intended as an alternative measure of operating results as determined in
accordance with U.S. GAAP. Our definition of segment operating income is not
necessarily comparable to similarly titled measures for other
companies.
2007
vs. 2006
Net
sales
: Chesapeake’s fiscal 2007 net sales of $1,059.6 million
were up $64.2 million, or 6.4 percent, compared to net sales in fiscal 2006 of
$995.4 million. Reduced sales volumes, especially of tobacco products
packaging, were more than offset by the positive effects of changes in foreign
currency exchange rates which increased net sales by $72.7 million.
Gross margin
: Gross
margin, which is defined as net sales less cost of products sold, was $179.2
million in fiscal 2007, compared to $175.3 million in fiscal
2006. Gross margin as a percentage of net sales for fiscal 2007
decreased from 17.6 percent in fiscal 2006 to 16.9 percent in fiscal 2007,
primarily due to pricing pressure especially within the Paperboard Packaging
segment.
Selling, general and administrative
(“SG&A”) expenses
: SG&A expenses as a percentage of
net sales were 13.4 percent in fiscal 2007 compared to 13.5 percent in fiscal
2006. Decreases in pension costs as well as cost savings under the
Company’s global cost savings program were offset by costs incurred in
connection with strategic initiatives.
Goodwill impairment
charge:
In fiscal 2006, we recorded a non-cash charge of $14.3
million ($14.3 million after tax), or $0.74 per share, related to impairment of
goodwill in our former tobacco reporting unit of the Paperboard Packaging
segment. The impairment resulted from an expectation of a significant
decline in tobacco packaging sales.
Restructuring expenses, asset
impairments and other exit costs:
In fiscal 2007, we recorded
losses of $15.8 million ($13.4 million after tax) for restructuring expenses,
asset impairments and other exit costs. These charges were primarily
related to general workforce reductions across our operations as part of our
$25-million global cost savings program, as well as the closure of our tobacco
manufacturing facility in Bremen, Germany. In
fiscal
2006, we recorded losses of $33.4 million ($27.4 million after tax) for
restructuring expenses, asset impairments and other exit costs. This
included an asset impairment charge of $24.9 million ($21.1 million after tax)
related to our former tobacco reporting unit of the Paperboard Packaging
segment. The remaining expenses of $8.5 million ($6.3 million after
tax) related to our $25-million global cost savings program. The
charges related to our cost savings program included the closure of our
facilities in Birmingham, England in 2005 and Bedford, England in 2006, as well
as other employee-related expenses for workforce reductions in both
years. More detail regarding these charges is found under the caption
“—Chesapeake’s $25-Million Cost Savings Program.”
Gains/Losses on divestitures
:
In fiscal 2007 we recorded a net gain on divestiture of $1.5 million ($1.5
million after tax) resulting from the reversal of a provision against a loan
note received in connection with our sale of our plastic packaging operation in
Northern Ireland in 2006. In fiscal 2006, we recorded a net gain on
divestitures of $3.1 million ($2.9 million after tax) also resulting from the
sale of this plastic packaging operation in Northern Ireland.
Other income,
net
: Other income, net was $4.2 million for fiscal 2007
compared to $3.7 million for fiscal 2006, and includes gain/loss on sale of
fixed assets and foreign currency translation gain/loss.
Operating income
(loss)
: Operating income was $26.7 million for fiscal 2007
compared to operating income of $0.3 million for fiscal 2006. The
increase in operating income in fiscal 2007 was primarily due to the net impact
of the goodwill impairment charges, losses on divestitures, and restructuring
expenses, asset impairments and other exit costs discussed above. Changes in
foreign currency exchange rates increased operating income for fiscal 2007 by
$2.8 million compared to fiscal 2006. More detail regarding segment
operating income is found under the caption “—Review of Segment
Results.”
Interest expense,
net
: Net interest expense for fiscal 2007 was $44.6 million,
compared to net interest expense of $39.8 million for fiscal
2006. The increase in net interest expense in fiscal 2007 was
primarily due to increased borrowing levels during fiscal 2007 as well as higher
average interest rates on borrowings under our lines of credit during fiscal
2007. Our borrowings include amounts denominated in the local
currencies of the countries in which we conduct substantial business, and serve
as a partial natural hedge against currency fluctuations affecting our
earnings. Changes in foreign currency exchange rates increased net
interest expense in fiscal 2007 by $2.3 million.
Loss on extinguishment of
debt
: In fiscal 2006, we recorded a pre-tax and after-tax loss
of $0.6 million on the early redemption of £5.0 million principal amount of our
10.375% senior subordinated notes due 2011.
Tax expense
: The
effective income tax rate from continuing operations for fiscal 2007 was 22.9
percent compared to an effective income tax rate of approximately 19.2 percent
in fiscal 2006. The comparability of our effective tax rate is
affected by the goodwill impairment charges, substantially all of which are not
deductible for income tax purposes, the inability to fully recognize a benefit
from our U.S. tax losses and the inability to recognize the benefit of losses in
certain non-U.S. tax jurisdictions. Additionally, the tax rate is
influenced by management’s expectations as to the recovery of our U.S. and
certain non-U.S. jurisdiction deferred income tax assets and any settlements of
income tax contingencies with U.K. tax authorities. We recorded
income tax benefits of approximately $3.8 million in fiscal 2007 and $3.4
million in fiscal 2006 related to the resolution of income tax
contingencies. In fiscal 2007 we also recorded an income tax benefit
of $1.2 million resulting from a re-evaluation of our deferred taxes for changes
in U.K. tax law and changes in statutory tax rates for the U.K. and
Germany.
Loss from continuing
operations
: The loss from continuing operations for fiscal
2007 was $13.8 million, or $0.71 per diluted share, while the loss from
continuing operations for fiscal 2006 was $32.4 million, or $1.67 per diluted
share.
2006
vs. 2005
Net
sales
: Chesapeake’s fiscal 2006 net sales of $995.4 million
were down $13.8 million, or 1.4 percent, compared to net sales in fiscal 2005 of
$1,009.2 million. Changes in foreign currency exchange rates
increased net sales by $4.1 million. The decrease in sales was
primarily due to a decrease in sales in the Plastic Packaging segment resulting
from the sale of our plastic packaging operation in Northern Ireland in the
first quarter of fiscal 2006. Sales in the Paperboard Packaging
segment increased over fiscal 2005 as a result of our acquisition of CPHPNA in
the third quarter of 2005. That increase in sales was largely offset
by lower sales of tobacco and branded products packaging.
Gross margin
: Gross
margin, which is defined as net sales less cost of products sold, was $175.3
million in fiscal 2006, compared to $181.4 million in fiscal
2005. Gross margin as a percentage of net sales for fiscal 2006
decreased from 18.0 percent in fiscal 2005 to 17.6 percent in fiscal
2006.
Selling, general and administrative
(“SG&A”) expenses
: SG&A expenses as a percentage of
net sales were 13.5 percent in fiscal 2006 compared to 13.4 percent in fiscal
2005. Increased pension expenses were partially offset by cost
savings initiatives undertaken as part of our $25-million global cost savings
program.
Goodwill impairment
charge:
In fiscal 2006, we recorded a non-cash charge of $14.3
million ($14.3 million after tax), or $0.74 per share, related to impairment of
goodwill in our former tobacco reporting unit of the Paperboard Packaging
segment. In fiscal 2005, as a result of competitive economic
conditions affecting the paperboard packaging markets and changes in our profile
relative to market capitalization and risks associated with the extent and
timing of savings anticipated under our $25-million global cost savings program,
we recorded a non-cash charge of $312.0 million ($311.7 million after tax)
related to the impairment of goodwill within the reporting units of our
Paperboard Packaging segment.
Restructuring expenses, asset
impairments and other exit costs:
In fiscal 2006, we recorded
losses of $33.4 million ($27.4 million after tax) for restructuring expenses,
asset impairments and other exit costs. This included an asset
impairment charge of $24.9 million ($21.1 million after tax) related to our
former tobacco reporting unit of the Paperboard Packaging
segment. The remaining expenses of $8.5 million ($6.3 million after
tax) related to our $25-million global cost savings program. In
fiscal 2005, we recorded losses of $10.7 million ($8.7 million after tax) for
restructuring expenses and other exit costs primarily related to our costs
savings program. The charges related to our cost savings program
included the closure of our facilities in Birmingham, England in 2005 and
Bedford, England in 2006, as well as other employee-related expenses for
workforce reductions in both years. More detail regarding these
charges is found under the caption “—Chesapeake’s $25-Million Cost Savings
Program.”
Gains/Losses on divestitures
:
In fiscal 2006, we recorded a net gain on divestitures of $3.1 million ($2.9
million after tax) resulting from the sale of our plastic packaging operation in
Northern Ireland. In fiscal 2005, we recorded a net loss of $2.8
million ($2.8 million after tax) related to the write-down and subsequent
settlement of promissory notes received in connection with the 2001 divestiture
of Consumer Promotions International, Inc. ("CPI"), a component of our former
Merchandising and Specialty Packaging segment resulting from a change in our
estimate as to the recovery of these notes.
Other income,
net
: Other income, net was $3.7 million for fiscal 2006
compared to $1.5 million for fiscal 2005, and primarily includes gain/loss on
sale of fixed assets.
Operating income
(loss)
: Operating income was $0.3 million for fiscal 2006
compared to an operating loss of $277.8 million for fiscal 2005. The
increase in operating income in fiscal 2006 was primarily due to the net impact
of the goodwill impairment charges, losses on divestitures, and restructuring
expenses, asset impairments and other exit costs discussed above. Changes in
foreign currency exchange rates did not have a significant effect on operating
income for fiscal 2006. More detail regarding segment operating
income is found under the caption “—Review of Segment Results.”
Interest expense,
net
: Net interest expense for fiscal 2006 was $39.8 million,
compared to net interest expense of $32.8 million for fiscal
2005. The increase in net interest expense in fiscal 2006 was
primarily due to
higher
residual borrowing levels during fiscal 2006 resulting from the funding of the
CPHPNA acquisition in the latter part of 2005, as well as higher average
interest rates on borrowings under lines of credit during fiscal
2006. Our borrowings include amounts denominated in the local
currencies of the countries in which we conduct substantial business, and serve
as a partial natural hedge against currency fluctuations affecting our
earnings. Changes in foreign currency exchange rates did not have a
significant impact on net interest expense in fiscal 2006.
Loss on extinguishment of
debt
: In fiscal 2006, we recorded a pre-tax and after-tax loss
of $0.6 million on the early redemption of £5.0 million principal amount of our
10.375% senior subordinated notes due 2011. In fiscal 2005, we
recorded a pre-tax and after-tax loss of $0.5 million on the early redemption
of £2.9 million principal amount of our 10.375% senior subordinated
notes due 2011.
Tax expense
: The
effective income tax rate from continuing operations for fiscal 2006 was 19.2
percent compared to an effective income tax rate of approximately 1.4 percent in
fiscal 2005. The comparability of our effective tax rate is affected
by the goodwill impairment charges, substantially all of which are not
deductible for income tax purposes, the inability to fully recognize a benefit
from our U.S. tax losses and the inability to recognize the benefit of losses in
certain non-U.S. tax jurisdictions. Additionally, the tax rate is
influenced by management’s expectations as to the recovery of our U.S. and
certain non-U.S. jurisdiction deferred income tax assets and any settlements of
income tax contingencies with U.K. tax authorities. The fiscal 2005
results included additional benefits related to deferred income tax asset
valuation allowances of $2.9 million when compared to fiscal 2006
results. We also recorded income tax benefits of approximately $3.4
million in fiscal 2006 and $1.9 million in fiscal 2005 related to the resolution
of income tax contingencies.
Loss from continuing
operations
: The loss from continuing operations for fiscal
2006 was $32.4 million, or $1.67 per diluted share, while the loss from
continuing operations for fiscal 2005 was $306.7 million, or $15.81 per diluted
share.
Review
of Segment Results
Paperboard
Packaging
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
879.7
|
|
|
$
|
840.4
|
|
|
$
|
827.4
|
|
Operating
income
|
|
|
36.9
|
|
|
|
42.9
|
|
|
|
49.8
|
|
Operating
income margin %
|
|
|
4.2
|
%
|
|
|
5.1
|
%
|
|
|
6.0
|
%
|
2007 vs. 2006
: Net
sales for fiscal 2007 were $879.7 million, an increase of $39.3 million, or 4.7
percent, over fiscal 2006. The increase in net sales for the year was
primarily attributable to changes in foreign currency exchange rates which
increased net sales by $66.2 million in fiscal 2007 partially offset by lower
sales of tobacco and other branded products packaging as well as lower sales of
pharmaceutical and healthcare packaging.
Operating
income for fiscal 2007 was $36.9 million versus $42.9 million for fiscal 2006, a
decrease of 14.0 percent. Changes in foreign currency exchange rates
increased operating income by $3.3 million. The decrease in operating income was
primarily due to reduced sales of tobacco packaging and start up problems with
the multi-shaped tubes for U.K. drinks packaging. The remaining
decline in operating earnings was primarily due to costs associated with recent
process improvement initiatives and reduced operating margins in pharmaceutical
and healthcare packaging.
2006 vs. 2005
: Net
sales for fiscal 2006 were $840.4 million, an increase of $13.0 million, or 1.6
percent, over fiscal 2005. Changes in foreign currency exchange rates
increased net sales by $8.3 million in fiscal 2006. The increase in
net sales for the year was primarily attributable to increased pharmaceutical
and healthcare sales resulting from the CPHPNA acquisition, largely offset by
lower sales of tobacco and branded products packaging.
Operating
income for fiscal 2006 was $42.9 million versus $49.8 million for fiscal 2005, a
decrease of 13.9 percent. Changes in foreign currency exchange rates
increased operating income by $0.6 million. The decrease in operating income was
primarily due to increased pension and energy costs and reduced sales of tobacco
packaging, partly offset by improved results in pharmaceutical and healthcare
packaging.
Plastic
Packaging
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
179.9
|
|
|
$
|
155.0
|
|
|
$
|
181.8
|
|
Operating
income
|
|
|
20.4
|
|
|
|
17.9
|
|
|
|
15.0
|
|
Operating
income margin %
|
|
|
11.3
|
%
|
|
|
11.5
|
%
|
|
|
8.3
|
%
|
2007 vs. 2006
: Net
sales for fiscal 2007 were $179.9 million, an increase of $24.9 million, or 16.1
percent, over fiscal 2006. Changes in foreign currency exchange rates
increased net sales by $6.5 million in fiscal 2007. The remaining increase in
net sales was due to increased sales volume, especially within the specialty
chemical and South African beverage operations and the partial pass through of
higher raw material costs.
Operating
income was $20.4 million for fiscal 2007, up $2.5 million compared to fiscal
2006, an increase of 14.0 percent. Changes in foreign currency
exchange rates increased operating income by $1.2 million. The
increase in operating income was primarily due to strong demand and improved
results related to specialty chemical packaging.
2006 vs. 2005
: Net
sales for fiscal 2006 were $155.0 million, a decrease of $26.8 million, or 14.7
percent, over fiscal 2005. Changes in foreign currency exchange rates
decreased net sales by $4.2 million in fiscal 2006. The decrease in net sales
primarily resulted from the sale of our plastic packaging operation in Northern
Ireland in the first quarter of fiscal 2006, partly offset by increased sales
prices throughout the segment resulting from the partial pass-through of higher
raw material costs and increased volume.
Operating
income was $17.9 million for fiscal 2006, up $2.9 million compared to fiscal
2005, an increase of 19.3 percent. Changes in foreign currency
exchange rates decreased operating income by $0.4 million. The
increase in operating income was primarily due to strong demand and improved
results in the specialty chemical packaging market and the Irish dairy market,
partly offset by lower operating earnings as a result of volume declines in
South Africa.
Chesapeake’s
$25-Million Cost Savings Program
During
the fourth quarter of fiscal 2005, we announced plans for a two-year global cost
savings program which targeted combined pre-tax savings of $25 million on an
annualized basis. While we routinely evaluate our operations for
improvement and rationalization opportunities, we believed that the development
of this comprehensive program would significantly improve our competitive
position and enhance value for our shareholders by focusing on three
goals:
·
|
increasing
our focus on business operations that are aligned with our global
strategic vision and that possess what we believe are the driving forces
that will enable us to achieve improved performance in the
market;
|
·
|
improving
our operational processes; and
|
·
|
reducing
our overall company-wide cost
structure.
|
The scope
of our restructuring program was extensive, and the cost of these initiatives
was expected to range from $30 million to $40 million on a pre-tax basis, with
the cash flow impact being less due to the sale of related real estate and
assets. Full implementation of this program was expected by the end
of 2007.
Under
this program, we have closed three locations and sold two operations. We have
also implemented broad-based workforce reductions and general overhead cost
savings initiatives throughout the Company. Since the program’s
inception, we have recorded net charges for divestitures and restructuring,
asset impairments and other exit costs of approximately $32.7 million ($7.7
million of which are included in discontinued operations) and made cash payments
related to program initiatives of approximately $32.0 million. In addition, we
have recovered approximately $26.7 million in cash sale proceeds on sales of
operations, land and other assets under this program. We have now completed the
$25-million cost savings program and over the course of fiscal years 2006 and
2007 we achieved cost savings in excess of our $25-million
goal. However, these savings have been masked in 2007 due to the loss
of tobacco volumes, start up costs associated with the multi-shaped tube
products, and pricing pressures primarily in the Paperboard Packaging
segment. We are now evaluating potential additional restructuring and
cost savings actions.
Other
Restructuring Expenses, Asset Impairments and Exit Costs
During
fiscal 2006 we recorded an asset impairment charge of $24.9 ($21.1 million after
tax) related to the fixed assets of our former tobacco reporting unit of the
Paperboard Packaging segment. This impairment was recorded as a
result of information provided by one of our major tobacco packaging customers,
British American Tobacco (“BAT”). BAT informed Chesapeake that they
planned to implement a supplier rationalization program that would substantially
reduce the role of Chesapeake as a packaging supplier to BAT. Also as
a result of reduced sales of tobacco packaging, during fiscal 2007 we recorded
restructuring costs related to the sale of our tobacco packaging manufacturing
facility in Bremen, Germany and other workforce reductions of approximately $5.9
million. During fiscal 2007 we made cash payments related to these
activities of approximately $1.3 million.
Discontinued
Operations
On July
31, 2006, we completed the sale of our French luxury packaging business which
was previously included in our Paperboard Packaging segment. In
addition, discontinued operations includes amounts related to our former Land
Development segment which was liquidated as of the end of the first quarter of
2004 and our former Merchandising and Specialty Packaging segment that was
divested in 2001. The impact of discontinued operations on reported
income (loss) is as follows:
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(in
millions, except per share data)
|
|
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|
|
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|
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|
|
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|
|
|
|
|
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Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Income
(loss) from discontinued operations
|
|
$
|
0.3
|
|
|
$
|
0.01
|
|
|
$
|
(4.4
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
(0.27
|
)
|
Loss
on disposal of discontinued operations
|
|
$
|
(2.0
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(2.4
|
)
|
|
$
|
(0.12
|
)
|
During
fiscal 2007 we recorded approximately $2.4 million of expense related to the tax
treatment of the disposition of assets of Wisconsin Tissue Mills Inc. in
1999.
The loss
from discontinued operations in fiscal 2006 included a pre-tax and after-tax
charge of $3.0 million related to an asset impairment charge for the remaining
long-lived assets of our French luxury packaging business, as well as $1.0
million for restructuring expenses and other exit costs related to our French
luxury packaging business, including the closure of our rigid box operation at
Ezy-sur-Eure, France. The loss from discontinued operations in fiscal
2005 included $2.4 million of restructuring expenses and other exit costs
related to the closure of Ezy-sur-Eure.
In fiscal
2005 we recorded a pre-tax and after-tax loss of $3.0 million on the sale of the
assets of our French wine and spirits label operation at Bourgeot Etiqso
Lesbats. In fiscal 2006 we recorded a pre-tax and after-tax loss of
$1.5 million on the sale of our remaining French luxury packaging
business.
Summarized
results of discontinued operations are shown separately in the accompanying
consolidated financial statements, except for the consolidated statements of
cash flows, which summarize the activities of continued and discontinued
operations together. Net sales from discontinued operations were
$16.7 million in fiscal 2006 and $32.9 million in fiscal 2005.
Seasonality
Our
Paperboard Packaging segment competes in several end-use markets, such as
alcoholic drinks and confectioneries, that are seasonal in nature. As
a result, our Paperboard Packaging segment earnings stream is seasonal, with
peak operational activity during the third and fourth quarters of the
year. Our Plastic Packaging segment’s markets include beverage and
agrochemical markets in the southern hemisphere, and agrochemical markets in the
northern hemisphere, that are seasonal in nature. As a result, our
Plastic Packaging segment earnings stream is also seasonal, with peak
operational activity during the first and fourth quarters of the
year.
Liquidity
and Capital Resources
Management
assesses Chesapeake’s liquidity in terms of our overall ability to generate cash
to fund our operating and investing activities. Significant factors
affecting the management of liquidity are cash flows from operating activities,
capital expenditures, access to bank lines of credit and our ability to attract
long-term capital with satisfactory terms. Chesapeake uses financial
markets worldwide for its financing needs. We are a party to public
and private long-term debt agreements, including various bank credit facilities
(see “Note 7 — Long Term Debt” of Item 8, incorporated herein by
reference). Chesapeake has no material “off-balance sheet”
liabilities or variable interest entities.
The
following tables summarize our contractual obligations and other commercial
commitments as of December 30, 2007:
Contractual
Obligations
|
|
Payments
Due by Period
(1)
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
(2)
|
|
$
|
512.4
|
|
|
$
|
7.0
|
|
|
$
|
172.1
|
|
|
$
|
136.2
|
|
|
$
|
197.1
|
|
Interest
(3)
|
|
|
164.9
|
|
|
|
28.0
|
|
|
|
55.0
|
|
|
|
40.8
|
|
|
|
41.1
|
|
Operating
leases
|
|
|
26.3
|
|
|
|
6.7
|
|
|
|
8.9
|
|
|
|
5.2
|
|
|
|
5.5
|
|
Other
commitments
(4)
|
|
|
16.5
|
|
|
|
15.5
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
720.1
|
|
|
$
|
57.2
|
|
|
$
|
236.6
|
|
|
$
|
182.6
|
|
|
$
|
243.7
|
|
(1)
|
Cash
requirements related to current liabilities reflected on the balance
sheet, such as accounts payable, income taxes payable, dividends payable
and accrued expenses, are payable within one year and are not included in
this table.
|
(2)
|
Amounts
exclude non-cash amortizing premiums or discounts classified in our
balance sheet as long-term debt. Borrowings under the senior
credit facility are classified as due at the facility’s maturity in
2009. Borrowings under uncommitted lines of credit are
classified as due in less than 1
year.
|
(3)
|
Contractual
interest payments are calculated using outstanding debt balances, interest
rates and foreign exchange rates in effect at December 30,
2007. Estimates do not include the effects of any potential
early redemptions or refinancings. Interest on amounts owed
under lines of credit is not
included.
|
(4)
|
Amounts
exclude required employer contributions which are expected to approximate
$21.1 million. This includes required supplementary employer
pension contributions under a pension recovery plan, which are expected to
approximate at least $12 million per year under current valuations and
will continue for an undetermined time period. Furthermore, future
supplementary employer pension contributions as provided under the pension
recovery plan may need to be materially increased if the funding level of
one of our U.K. pension plans is not at least 90% by April 5,
2008. In addition, amounts exclude $28.5 million of
unrecognized tax benefits related to uncertain tax
positions. The timing of settlement of these uncertain tax
positions is not estimable.
|
Other
Commercial Commitments
(in
millions)
|
|
|
|
|
Less
Than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed
lines of credit
(1)
|
|
$
|
250.0
|
|
|
$
|
—
|
|
|
$
|
250.0
|
|
|
$
|
—
|
|
Uncommitted
lines of credit
(2)
|
|
|
11.8
|
|
|
|
11.8
|
|
|
|
—
|
|
|
|
—
|
|
Standby
letters of credit
(3)
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
—
|
|
|
|
—
|
|
Total
commercial commitments
|
|
$
|
263.4
|
|
|
$
|
13.4
|
|
|
$
|
250.0
|
|
|
$
|
—
|
|
(1)
|
Borrowings
of $165.9 million under these lines of credit were included in long-term
debt at December 30, 2007. Amounts available to be borrowed
under the lines of credit are limited by the amount currently borrowed,
the amounts of outstanding letters of credit ($1.5 million at December 30,
2007) and any debt covenant
restrictions.
|
(2)
|
Borrowings
of $4.5 million under uncommitted lines of credit, were
included in long-term debt at December 30,
2007.
|
(3)
|
Includes
$0.1 million of back-up letters of
credit.
|
Financing
In December 2003 Chesapeake filed a
universal shelf registration statement with the SEC which permitted us to offer
and sell, from time to time, various types of securities, including debt
securities, preferred stock, depository shares, common stock, warrants, stock
purchase contracts and stock purchase units, having an aggregate offering price
of up to $300 million, or the equivalent amount in one or more non-U.S.
currencies. We completed both a common stock and debt security
offering under this shelf registration statement during 2004. In June
2005 $68.5 million of remaining availability under the shelf registration
statement filed December 2003 was carried forward into a new aggregate $300
million universal shelf registration filed with the SEC, having terms and
conditions substantially similar to the previous universal shelf
registration. No offerings have been made under the current shelf
registration statement.
In March
2004 we completed a public offering of approximately 4.05 million shares of our
common stock. Our net proceeds from the sale of these shares, after
deducting discounts, commissions and expenses, were approximately $92
million. In April 2004 we used a portion of the net proceeds to
redeem £40 million principal amount of our outstanding 10.375% senior
subordinated notes due 2011 at a redemption price of 110.375% of the principal
amount, plus accrued and unpaid interest to the redemption date, or an aggregate
redemption price of approximately $82.6 million. The redemption
resulted in a loss on extinguishment of debt of $8.4 million, or $5.4 million
net of income taxes. The remaining net proceeds of approximately $9.0
million from the offering of our common stock were used to repay outstanding
borrowings under our senior bank credit facility.
In
December 2004 we completed a public offering of €100 million principal amount of
7% senior subordinated notes due 2014. Our net proceeds from the sale
of these notes, after deducting discounts, commissions and expenses, were
approximately $130.8 million (using an exchange rate of €1 to
$1.342). The notes were offered to the public at par. The
net proceeds from the sale of these notes were used to retire $66.8 million
principal amount of our outstanding $85.0 million aggregate principal amount of
7.2% notes due March 2005. The retirement of these notes was
accomplished through a tender offer and consent
solicitation. Including fees, expenses, interest and premiums, the
redemption cost $69.1 million and resulted in a loss on extinguishment of debt
of $1.2 million, or $0.8 million net of income taxes. The remaining
net proceeds of approximately $61.7 million were used to repay outstanding
borrowings under our senior bank credit facility and for general corporate
purposes.
In
February 2005 we paid $38.8 million principal amount of loan note maturities and
we redeemed, at par, the remaining $18.2 million principal amount of the 7.2%
notes which also matured during the first quarter of fiscal 2005. In
August 2005, we redeemed £2.9 million principal amount of our 10.375% senior
subordinated notes due 2011 at a premium and recognized a loss of $0.5 million
associated with the debt extinguishment. In March 2006 we redeemed
£5.0 million principal amount of our 10.375% senior subordinated notes due 2011
at a premium and recognized a loss of $0.6 million associated with the debt
extinguishment.
In February 2004 our senior credit
facility, under which we can guarantee loan note balances and borrow up to $250
million, was amended and restated, and its maturity extended to February
2009. Amounts available to be borrowed under our senior credit
facility are limited by the amount currently borrowed and the amounts of
outstanding letters of credit ($1.5 million at December 30,
2007). Nominal facility fees are paid on the unutilized credit line
capacity, and interest is charged primarily at LIBOR plus a margin based on our
leverage ratio. We are required to pay a fee, which varies based on
our leverage ratio, on the outstanding balance of certain loan notes and letters
of credit. Subject to the terms of the agreement, a portion of the
borrowing capacity of the revolving credit facility and net proceeds of the term
debt component of the facility may be used to finance acquisitions and to
refinance other debt. The senior credit facility is collateralized by
a pledge of the inventory, receivables, intangible assets and other assets of
Chesapeake Corporation and certain U.S. subsidiaries. The facility is
guaranteed by Chesapeake Corporation, each material U.S. subsidiary and each
United Kingdom (U.K.) subsidiary borrower, although most U.K. subsidiary
borrowers only guarantee borrowings made by U.K.
subsidiaries. Obligations of our U.K. subsidiary borrowers under the
facility are collateralized by a pledge of the stock of our material U.K.
subsidiaries.
In February 2006, the senior credit
facility was amended to make certain technical corrections and amendments, add
provisions to accommodate strategic initiatives of the Company and adjust
certain financial maintenance covenants during 2006 and
2007. Subsequent amendments to the agreement were made effective in
June and December 2007 to further adjust certain financial maintenance covenants
through the end of 2007 and, among other things, to limit our ability to fund
acquisitions, repay subordinated debt or to pay dividends. On March 5, 2008, the
Company obtained agreement from its senior credit facility lenders to amend the
facility through the end of fiscal 2008. The amendment affects
financial maintenance covenants in all four quarters of fiscal 2008, providing
an increase in the total leverage ratios and a decrease in the interest coverage
ratios. In addition, interest rate margins were increased to 450
basis points over LIBOR and basket limitations were imposed for acquisitions,
dispositions, and other indebtedness, among other changes. In the
event that the senior credit facility is not fully refinanced prior to March 31,
2008, the Company has agreed to provide a security interest in substantially all
of its tangible European assets. Outstanding borrowings under the
senior credit facility as of December 30, 2007 totaled $165.9
million. Other lines of credit totaling $11.8 million are maintained
with several banks on an uncommitted basis, under which $4.5 million was
outstanding as of December 30, 2007.
Certain
of our loan agreements include provisions permitting the holder of the debt to
require us to repurchase all or a portion of such debt outstanding upon the
occurrence of specified events involving a change of control or
ownership. In addition, the loan agreements contain customary
restrictive covenants, including covenants restricting, among other things, our
ability, and our subsidiaries’ ability, to create liens, merge or consolidate,
dispose of assets, incur indebtedness and guarantees, repurchase or redeem
capital stock and indebtedness, pay dividends, make capital expenditures, make
certain investments or acquisitions, enter into certain transactions with
affiliates or change the nature of our business. The senior credit
facility also contains several financial maintenance covenants, including
covenants establishing a maximum leverage ratio, maximum senior leverage ratio
and a minimum interest coverage ratio. Noncompliance with any
material provision of our debt agreements could have a material adverse effect
on our liquidity, financial position and results of operations. After
obtaining an amendment to our senior credit facility effective December 28,
2007, which increased the total leverage ratio and decreased the interest
coverage ratio for the fourth quarter of 2007, we were in compliance with all of
our debt covenants as of the end of fiscal 2007. The senior
subordinated notes contain provisions allowing for early redemptions, under
certain circumstances, at premiums of up to 3.5 percent in addition to
outstanding principal and interest.
At
December 30, 2007, Chesapeake’s corporate family rating from Moody’s Investors
Service was B1. Our corporate credit rating from Standard &
Poor’s was BB-. Both agencies have the Company under review for
possible rating downgrade.
Guarantees
and Indemnifications
We have
entered into agreements for the sale of assets or businesses that contain
provisions in which we agree to indemnify the buyers or third parties involved
in the sale for certain liabilities or risks related to the sale. In
these sale agreements, we typically agree to indemnify the buyers or other
involved third parties against a broadly-defined range of potential “losses”
(typically including, but not limited to, claims, costs, damages, judgments,
liabilities, fines or penalties, and attorneys’ fees) arising
from: (i) a breach of our representations or warranties
in
the sale
agreement or ancillary documents; (ii) our failure to perform any of the
covenants or obligations of the sale agreement or ancillary documents; and (iii)
other liabilities expressly retained or assumed by us related to the
sale. Most of our indemnity obligations under these sale agreements
are: (i) limited to a maximum dollar value significantly less than
the final purchase price; (ii) limited by time within which indemnification
claims must be asserted (often between one and three years); and (iii) subject
to a deductible or “basket.” Many of the potential indemnification liabilities
under these sale agreements are unknown, remote or highly contingent, and most
are unlikely to ever require an indemnity payment. Furthermore, even
in the event that an indemnification claim is asserted, liability for
indemnification is subject to determination under the terms of the applicable
sale agreement, and any payments may be limited or barred by a monetary cap, a
time limitation, or a deductible or basket. For these reasons, we are
unable to estimate the maximum potential amount of the potential future
liability under the indemnity provisions of the sale
agreements. However, we accrue for any potentially indemnifiable
liability or risk under these sale agreements for which we believe a future
payment is probable and a range of loss can be reasonably
estimated. Such matters are discussed in “Note 14 — Commitments and
Contingencies” of Item 8, incorporated herein by reference.
In the
ordinary course of our business, we may enter into agreements for the supply of
goods or services to customers that provide warranties to the customer on one or
more of the following: (i) the quality of the goods and services
supplied by us; (ii) the performance of the goods supplied by us; and (iii) our
compliance with certain specifications and applicable laws and regulations in
supplying the goods and services. Liability under such warranties is
often limited to a maximum amount, by the nature of the claim or by the time
period within which a claim must be asserted. As of December 30,
2007, we believe our liability under such warranties was
immaterial.
In the
ordinary course of our business, we may enter into service agreements with
service providers in which we agree to indemnify the service provider against
certain losses and liabilities arising from the service provider’s performance
of the agreement. Generally, such indemnification obligations do not
apply in situations in which the service provider is grossly negligent, engages
in willful misconduct or acts in bad faith. As of December 30, 2007,
we believe our liability under such service agreements was
immaterial.
In the
ordinary course of our business, we may enter into supply agreements (such as
those discussed above), service agreements (such as those discussed above),
purchase agreements, leases, and other types of agreements in which we agree to
indemnify the party or parties with whom we are contracting against certain
losses and liabilities arising from, among other things: (i) our breach of the
agreement or representations or warranties under the agreement; (ii) our failure
to perform any of our obligations under the agreement; (iii) certain defined
actions or omissions by us; and (iv) our failure to comply with certain laws,
regulations, rules, policies, or specifications. As of December 30,
2007, we believe our liability under these agreements was
immaterial.
Cash Flows
Operating
activities
: Net cash provided by operating activities in
fiscal 2007 was $24.1 million compared to $21.7 million in fiscal 2006 and $44.6
million in fiscal 2005. Increased working capital requirements and
additional spending related to strategic initiatives in fiscal 2007 compared to
fiscal 2006 were more than offset by decreased spending associated with our
global cost savings program of $4.9 million, as well as decreased cash
contributions to our defined benefit pension plans of $4.6
million. The decrease in net cash provided by operating activities
for fiscal 2006 compared to fiscal 2005 primarily reflected an increase in
spending associated with our global cost savings program of $10.7 million, as
well as an increase in working capital usage.
Investing
activities
: Net cash used in investing activities in fiscal
2007 was $45.5 million compared to $6.7 million in fiscal 2006 and $110.6
million in fiscal 2005. Cash used in fiscal 2007 primarily
represented capital spending of $49.6 million. Cash used in fiscal 2006
reflected capital spending of $35.8 million, largely offset by cash proceeds of
$29.1 million from divestitures and sales of property, plant and
equipment. Of those proceeds, $26.7 million related to operations and
other assets divested under our cost savings program. Cash used in
fiscal 2005 was primarily for acquisitions of $78.4 million and capital spending
of $38.3 million. Acquisition spending related to our September 2005
acquisition of CPHPNA and our December 2005 acquisition of the outstanding
minority interest of our South African Plastic Packaging
operation. These expenditures were partially offset by $5.6 million
of proceeds from sales of property, plant and equipment.
Capital
projects in fiscal 2008 are expected to support our strategy of growing the
Paperboard Packaging and Plastic Packaging segments and reducing costs, focusing
on projects that are in the aggregate expected to generate a long-term return on
investment that exceeds our cost of capital.
Financing
activities
: Net cash provided by financing activities was
$22.9 million in fiscal 2007, compared to net cash used in financing activities
of $15.4 million in fiscal 2006 and net cash provided by financing activities of
$21.4 million in fiscal 2005. Cash provided by financing activities
in fiscal 2007 primarily reflected borrowings on our revolving lines of credit
to fund capital spending and spending associated with strategic
initiatives. Cash used in financing activities in fiscal 2006
primarily reflected dividend payments. Cash provided by financing
activities in fiscal 2005 reflected borrowings on our revolving lines of credit
of $116.5 million, primarily due to the acquisition of CPHPNA, partially offset
by net debt payments of $77.9 million, including the redemption of £2.9 million
principal amount of our 10.375% senior subordinated notes due
2011. More information regarding our financing activities is found
under the caption “—Financing.” We paid cash dividends of $0.44 per
share in fiscal 2007 and $0.88 per share in fiscal 2006 and fiscal 2005,
resulting in the use of cash of $8.5 million in fiscal 2007 and $17.1 million in
fiscal 2006 and fiscal 2005.
Our
anticipated cash requirements during 2008 are primarily to fund capital
expenditures and fund supplementary pension contributions. We expect
to fund our cash requirements in 2008 with cash generated from operations, and
by utilizing the borrowing capacity available under the senior credit
facility.
Capital
Structure
Our total
capitalization (consisting of debt and stockholders’ equity) was $796.5 million
at the end of fiscal 2007, compared to $701.5 million at the end of fiscal
2006. The year-end ratio of debt to total capital was 64.7 percent
for fiscal 2007, compared to 66.7 percent for fiscal 2006.
At the
end of 2007, we had 19.9 million shares of common stock
outstanding. (See “Note 11 — Stockholders’ Equity” of Item 8,
incorporated herein by reference for more details on capital stock.)
Stockholders’ equity at December 30, 2007 was $281.2 million, or $14.13 per
share, up $2.33 per share compared to year-end 2006.
The
market price for our common stock ranged from a low of $4.81 per share to a high
of $18.68 per share in 2007, with a year-end price of $5.53 per
share.
Risk
Management
Because
we currently conduct a significant amount of our business internationally,
fluctuations in currency exchange rates or changes in economic conditions in
foreign markets may have a significant impact on our financial
statements. Currency fluctuations have much less effect on local
operating results because we mostly sell our products in the same currency used
to pay local operating costs. Our currency exposures are cash, debt
and foreign currency transactions denominated primarily in the British pound,
the euro and the South African rand. We manage our foreign currency
exposures primarily by funding certain foreign currency denominated assets with
liabilities in the same currency and, as such, certain exposures are naturally
offset. The
€
100 million senior
notes issued in December of 2004 have been designated as a hedge of our net
investment in euro functional currency subsidiaries. At December 30,
2007, a debit of $15.2 million related to the revaluation of the debt from euro
to U.S. dollars was included as a cumulative translation
adjustment. As part of managing our foreign currency exposures, we
may enter into foreign currency forward exchange contracts for transactions that
are not denominated in the local currency. The use of these
agreements allows us to reduce our overall exposure to exchange rate
fluctuations, as the gains and losses on the agreements substantially offset the
gains and losses on the transactions being hedged. Forward exchange
agreements are viewed as risk management tools, involve little complexity and,
in accordance with company policy, are not used for trading or speculative
purposes. In 2003, we entered into a foreign currency forward
exchange contract in a notional principal amount of £50 million and having a
fair market value liability of $13.2 million at December 30,
2007. The contract matures in 2011. Chesapeake is not a
party to any leveraged derivatives.
From time
to time, we have entered into interest rate swaps to convert variable interest
rate debt to fixed interest rate debt and vice versa and to obtain an acceptable
level of interest rate risk. Amounts currently due to, or from,
interest swap counterparties are recorded in interest expense in the period they
accrue. The related amounts payable to, or receivable from, the
counterparties are included in other accrued liabilities. At December
30, 2007 and January 1, 2006, there were no interest rate swap agreements
outstanding. In January 2004, we terminated an interest rate swap and
received a cash settlement from the counterparty of $7.3 million. Of this
amount, approximately $6.3 million is being recognized as an interest rate yield
adjustment over the remaining life of the underlying debt.
At
December 30, 2007, 34 percent of our debt portfolio consisted of variable rate
debt. A sensitivity analysis to measure potential changes in the
interest expense from a change in interest rates indicated that a one percentage
point increase or decrease in interest rates would have changed our annual
interest expense by $1.7 million for fiscal 2007 and $1.4 million for fiscal
2006.
Our cash
position includes amounts denominated in foreign currencies. We
manage our worldwide cash requirements considering available funds held by our
subsidiaries and the cost effectiveness with which these funds can be
accessed. The repatriation of cash balances from some of our
subsidiaries could have adverse tax consequences. We examined the
potential impact of the American Jobs Creation Act of 2004 and determined it did
not provide a tax advantage to us.
We
continually evaluate risk retention and insurance levels for product liability,
property damage and other potential exposures to risk. We devote
significant effort to maintaining and improving safety and internal control
programs, which are intended to reduce our exposure to certain
risks. Management determines the amount of insurance coverage to
purchase and the appropriate amount of risk to retain based on the cost and
availability of insurance and the likelihood of a loss. Management
believes that the current levels of risk retention are consistent with those of
comparable companies in the industries in which we operate. There can
be no assurance that we will not incur losses beyond the limits, or outside the
coverage, of our insurance. However, our liquidity, financial
position and profitability are not expected to be materially affected by the
levels of risk retention that we accept.
Critical
Accounting Policies
We
describe the significant accounting policies employed in the Consolidated
Financial Statements and the notes thereto within the
footnotes. Chesapeake’s Consolidated Financial Statements have been
prepared by management in accordance with GAAP. GAAP sometimes
permits more than one method of accounting to be used. In addition,
the preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenue and expenses. Judgments and assessments
of uncertainties are required in applying our accounting policies in many
areas. Reported results could have been materially different under a
different set of assumptions and estimates.
The
following summary provides further information about the critical accounting
policies and should be read in conjunction with the notes to the Consolidated
Financial Statements. We believe that the consistent application of
our policies provides readers of Chesapeake’s financial statements with useful
and reliable information about our operating results and financial
condition.
We have
discussed the application of these critical accounting policies with our Board
of Directors and Audit Committee.
Goodwill
and Other Long-Lived Asset Valuations
Management
uses its judgment to assess whether current events or circumstances indicate
that the carrying value of goodwill and other long-lived assets to be held and
used may not be recoverable. Management performs impairment tests
that require estimates of factors such as sales volume, pricing, inflation,
discount rates, exchange rates, asset remaining lives and capital
spending. These projections are necessarily dependent upon
assumptions about our performance and the economy in general and could change
significantly from period to period.
Assumptions
used are consistent with our internal planning. If assumptions and estimates
change, it could result in non-cash charges that could have a material adverse
effect on our results of operations and financial position.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill and Other Intangible
Assets
(“SFAS 142”), management reviews the recorded value of our
goodwill annually, or sooner if events or changes in circumstances indicate that
the carrying amount may exceed fair value. With the assistance of a
third-party valuation firm, fair value of our reporting units is determined
using a discounted cash flow model and confirmed using a guideline public
companies model which uses peer group metrics to value a company. We performed
our annual evaluation of goodwill for our reporting units as of December 1,
2007. Based on our analysis, we concluded that the carrying amount of
our goodwill was realizable.
The
carrying value of long-lived assets other than goodwill is evaluated when
certain events or changes in circumstances indicate that the carrying amount may
not be recoverable. Asset groupings are considered to be impaired if
their carrying value is not recoverable from the estimated undiscounted cash
flows associated with the assets. If we determine an asset grouping
is impaired, an impairment is recognized in the amount by which the carrying
value exceeds fair market value based on estimated present value of its future
cash flows.
Environmental
and Other Contingencies
In
accordance with GAAP, management recognizes a liability for environmental
remediation and litigation costs when it believes it is probable that a
liability has been incurred and the amount can be reasonably
estimated. Due to the wide range of possible outcomes of any
environmental obligation, significant management judgment is required to
determine the amount of the environmental accrual. Management must make
estimates on items such as the remediation and restoration costs based on the
estimated contamination levels. Future expenditures for environmental
obligations are not discounted unless the aggregate amount of the obligations,
and the amount and timing of the cash payments, are fixed and readily
determinable. The accrual is not reduced for any possible future
insurance or indemnification recoveries. We periodically review the status of
all significant existing or potential environmental issues and adjust our
accrual as necessary. In the fourth quarter of fiscal 2007, we reviewed, and
increased, our estimate of our reasonably probable environmental costs based on
remediation activities to date and other developments. If any of the
estimates or their related assumptions change in the future, or if actual
outcomes are different than our estimates, we may be required to record material
adjustments to the accrual. (See “Note 14 – Commitments and Contingencies” of
Item 8, incorporated herein by reference.)
Pension
and Other Postretirement Employee Benefits
We have
significant pension and postretirement benefit costs and credits that are
developed from actuarial valuations. The actuarial valuations employ
key assumptions that are particularly important when determining our projected
liabilities for pension and other postretirement employee
benefits. Payments made by Chesapeake related to these benefits will
be made over a lengthy period and the projected liability will be affected by
assumptions regarding inflation, investment returns and market interest rates,
changes in the numbers of plan participants and changes in the benefit
obligations and laws and regulations covering the benefit
obligation. We have taken several steps to minimize our exposure to
the longer-term risks of defined benefit pension
arrangements. Specifically, during the fourth quarter of 2006 we
merged our U.S. pension plans for hourly and salaried employees and froze
certain benefits under our supplemental executive retirement
plan. During fiscal 2005, we froze benefits under certain
of our U.S. defined benefit plans and closed our principal U.K. defined benefit
plans to new entrants. The U.S. curtailment cost was not significant
and was recorded in fiscal 2006 as the plan closure occurred following the
measurement date in fiscal 2005. The key assumptions used in
developing our fiscal 2007 balances are detailed in “Note 10 — Employee
Retirement and Postretirement Benefits” of Item 8, incorporated herein by
reference.
Discount
rates are used to determine the present value of future payments. In
general, our liability increases as the discount rate decreases and vice
versa. A lower expected return on plan assets increases the amount of
pension expense and vice versa. Decreases in the level of actual plan
assets will also serve to increase the amount of pension
expense. Pension expense and liabilities would be higher with a
higher compensation increase. Management develops assumptions with
the assistance of independent actuaries. Discount rates are
determined from analyses provided by the actuary of Aa rated bonds for U.S.
plans and other relative bond indices for non-U.S. plans with cash flows
matching the expected payments to be made under the plans. If the
discount rate used in the
2007
valuation were decreased by 25 basis points, our projected benefit obligation
would have increased by approximately $23.0 million at December 30, 2007, and
the 2008 pension expense would increase by $2.2 million. If the
discount rate were increased by 25 basis points, our projected benefit
obligation would have decreased by approximately $21.6 million at December 30,
2007, and the 2008 pension expense would decrease by $ 2.0 million.
The
amortization of previously unrecognized actuarial losses is also a significant
element of our net periodic pension expense. Our unrecognized actuarial losses
result principally from historical declines in our discount rates as well as the
underperformance of plan assets relative to expected
returns. Unrecognized actuarial losses are amortized on a straight
line basis over the average remaining service lives of active participants
(generally 11-17 years) or over the average remaining life expectancy for plans
where substantially all participants are inactive. As a result of
permanently freezing benefits available under our principal U.S. defined benefit
plans, we changed the amortization period for unrecognized actuarial losses for
our U.S. plans to the average remaining life expectancy of inactive participants
effective January 2, 2006.
We
currently have a recovery plan in effect for one of our U.K. pension plans that
stipulates supplementary employer cash contributions of at least $12.0 million
per year above required levels in order to achieve a funding level of 100
percent by July, 2014. In addition, the recovery plan requires an
increase in future supplementary annual contributions if an interim funding
level of 90 percent is not achieved by April 8, 2008. The funded
level is dependent upon certain actuarial assumptions as prescribed in the
recovery plan and approved by the U.K. pension regulators. Changes to
these assumptions could have a significant impact on the calculation of the
funded level. This could result in annual supplementary employer cash
contributions to be materially in excess of $12.0 million per year.
To
improve the funded status of our pension plans, we made supplementary employer
cash contributions of $12.6 million in fiscal 2005, $15.1 million in fiscal
2006, and $12.2 million in fiscal 2007 over the required contributions, and we
anticipate fiscal 2008 supplementary funding to be at least $12.0 million above
required levels. We also expect pension expense in fiscal 2008 to
decrease by approximately $7.1 million over fiscal 2007 levels based on the
estimated aggregate funded status of our pension and postretirement
plans. On December 31, 2006 the Company adopted SFAS No. 158,
“Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”
(“SFAS 158”), which requires an
employer to recognize the over-funded or under-funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize the changes in
that funded status in the year in which the changes occur through comprehensive
income. This Statement also requires an employer to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. The measurement date provisions
are effective for fiscal years ending after December 15, 2008. For
the 2007, 2006 and 2005 fiscal years, the Company used a September 30
measurement date.
We
annually re-evaluate our assumptions used in projecting pension and other
postretirement liabilities and associated expense. Had we used
different assumptions in calculating the liabilities, the carrying value of the
liabilities and the impact on net earnings may have been different.
Income
Taxes
Many
deductions for tax return purposes cannot be taken until the expenses are
actually paid, rather than when the expenses are accrued under GAAP. Similarly,
certain items of income are not subject to tax when accrued for book
purposes. In addition, certain tax credits and tax loss
carryforwards cannot be used until future periods, and then only if sufficient
taxable income is generated. Companies accrue deferred tax assets and
liabilities for these temporary differences between income determined under GAAP
and income determined in accordance with applicable tax law. When a
company has accrued deferred tax assets, GAAP requires an assessment based on
the judgment of management as to whether, it is “more likely than not” that the
company will generate sufficient future taxable income in order to realize the
benefit of those deferred tax assets. On a quarterly basis,
management reviews its judgment regarding the likelihood that the benefits of
the deferred tax assets will be realized. During the periodic
reviews, management must consider a variety of factors, including the nature,
timing and amount of the expected items of taxable income and expense, current
tax statutes with respect to applicable carryforward expiration periods and the
company’s projected future earnings. If management determines it is
no longer “more likely than not” that a
deferred
tax asset will be utilized, an offsetting valuation allowance would be recorded
to reduce the asset to its net realizable value with a corresponding charge to
income tax expense in that period.
Our
accounting for U.S. deferred income taxes is further complicated by our U.S. tax
loss position. Our ability to project the recovery of U.S. deferred
income tax assets is heavily dependent on the assumptions related to the extent
and timing of reversals of taxable temporary differences (deferred income tax
liabilities).
Uncertain
Tax Positions are recorded under the guidance of FASB 48 Interpretation No. 48
(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The Interpretation requires that we
recognize in the financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the
technical merits for the position. FIN 48 also provides guidance on
derecognizing and classification of income tax related liabilities, interest and
penalties, accounting in interim periods and disclosure. The Company has adopted
a policy to recognize interest and penalties related to unrecognized tax
benefits in income tax expense. Uncertain tax positions are recorded and
classified in other current liabilities (if payment is due within twelve months)
and in other long term liabilities (if payment is expected in more than twelve
months). See “Note 9 – Income Taxes” of Item 8, incorporated herein by
reference.See "Note 9 - Income Taxes" of Item 8, incorporated herein by
reference.
Restructuring
and Other Exit Costs
In
connection with our $25-million cost savings program initiated in 2005 and other
restructuring activities, we have accrued liabilities associated with costs of
employee terminations and the consolidation of facilities, and have written off
assets that will no longer be used in
operations. Restructuring-related costs have been and will be
recorded in accordance with SFAS No. 112,
Employers’ Accounting for
Postemployment Benefits
(“SFAS 112”) or SFAS No. 146,
Accounting for the Costs Associated
with Exit or Disposal Activities
(“SFAS 146”), as
appropriate. SFAS 112 applies to post-employment benefits provided to
employees under ongoing benefit arrangements, determinable from either the
Company’s postemployment policies or from past practices. In
accordance with SFAS 112, the Company records such charges when the termination
benefits are probable, capable of estimation, the benefits are attributable to
services already rendered and the obligation relates to rights that vest or
accumulate. For termination benefits not otherwise provided under
ongoing benefit arrangements, SFAS 146 requires recognition of costs associated
with an exit or disposal activity when the liability is incurred and can be
measured at fair value. The recognition of these charges requires
management to make certain judgments regarding the nature, timing and amount
associated with the planned restructuring activities. At the end of
each reporting period, the Company evaluates the appropriateness of the
remaining accrued balances. Any change of estimates will be
recognized as an adjustment to the accrued liabilities in the period of
change.
New
Accounting Pronouncements
In
September 2006 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
157,
Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value in accordance with GAAP and expands disclosures about fair
value measurements. The provisions of SFAS 157 are effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008 the
FASB decided to partially defer the implementation of SFAS 157 for certain
nonfinancial assets and nonfinancial liabilities for one year and to remove
certain leasing transactions from the scope of SFAS 157. We are currently
evaluating the impact that SFAS 157 will have on our financial
statements.
In
February 2007 the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FAS 115
(“SFAS
159”). SFAS 159 allows companies to choose, at specified election dates,
to measure at fair value eligible financial assets and liabilities that are not
otherwise required to be measured at fair value. Unrealized gains and losses
shall be reported at each subsequent reporting date on items for which the fair
value option has been elected in earnings. SFAS 159 also establishes
presentation and disclosure requirements. SFAS 159 is effective for fiscal
years beginning after November 15, 2007 and will be applied prospectively.
We do not intend to exercise the fair value option available under SFAS 159, and
therefore do not expect that SFAS 159 will have a significant impact on our
financial statements.
In
December 2007, the FASB issued SFAS No. 141R,
Business Combinations
("SFAS
141R"). SFAS 141R amends SFAS 141 and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. It is effective
for fiscal years beginning on or after December 15, 2008 and will be
applied prospectively. We are currently evaluating the impact
that SFAS 141R will have on our financial statements.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51
("SFAS 160"). SFAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled, and presented in the consolidated financial
statements. It also requires that once a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value. Sufficient disclosures are required to clearly identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. It is effective for fiscal years beginning on or after
December 15, 2008 and requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
shall be applied prospectively. We are currently evaluating the impact that SFAS
160 will have on our 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,” “expect” 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: our inability to
realize the full extent of the expected savings or benefits from restructuring
or cost savings initiatives, and to complete such activities in accordance with
their planned timetables and within the cost ranges; the effects of competitive
products and pricing; changes in production costs, particularly for raw
materials such as folding carton and plastics materials, and our ability to pass
through increases in raw material costs to our customers; fluctuations in
demand; possible recessionary trends in U.S. and global economies; changes in
governmental policies and regulations; changes in interest rates and credit
availability; changes in actuarial assumptions related to our pension and
postretirement benefits plans; our ability to remain in compliance with our
current debt covenants and to refinance our senior credit facility; fluctuations
in foreign currency exchange rates; changes in our liabilities and cash funding
obligations associated with our defined benefit pension plans; and other risks
that are detailed from time to time in reports filed by Chesapeake with the
Securities and Exchange Commission.
Item
8.
|
Financial
Statements and Supplementary Data
|
INDEX
Consolidated
Balance Sheets as of December 30, 2007 and December 31,
2006
|
Consolidated
Statements of Operations for the years ended December 30, 2007, December
31, 2006, and January 1, 2006
|
Consolidated
Statements of Cash Flows for the years ended December 30, 2007, December
31, 2006, and January 1, 2006
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December
30, 2007, December 31, 2006, and January 1,
2006
|
Notes
to Consolidated Financial
Statements
|
Report
of Independent Registered Public Accounting
Firm
|
CHESAPEAKE
CORPORATION
Consolidated
Balance Sheets
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10.0
|
|
|
$
|
7.8
|
|
Accounts
receivable (less allowance of $3.6 and $3.9)
|
|
|
163.6
|
|
|
|
146.7
|
|
Inventories
|
|
|
121.4
|
|
|
|
109.4
|
|
Prepaid
expenses and other current assets
|
|
|
29.9
|
|
|
|
20.4
|
|
Income
taxes receivable
|
|
|
6.3
|
|
|
|
2.6
|
|
Total
current assets
|
|
|
331.2
|
|
|
|
286.9
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
Plant
sites and buildings
|
|
|
188.8
|
|
|
|
188.2
|
|
Machinery
and equipment
|
|
|
388.6
|
|
|
|
402.5
|
|
Construction
in progress
|
|
|
12.8
|
|
|
|
7.5
|
|
|
|
|
590.2
|
|
|
|
598.2
|
|
Less
accumulated depreciation
|
|
|
231.5
|
|
|
|
244.1
|
|
Net
property, plant and equipment
|
|
|
358.7
|
|
|
|
354.1
|
|
Goodwill
|
|
|
387.4
|
|
|
|
381.2
|
|
Other
assets
|
|
|
136.4
|
|
|
|
92.6
|
|
Total
assets
|
|
$
|
1,213.7
|
|
|
$
|
1,114.8
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
147.2
|
|
|
$
|
136.8
|
|
Accrued
expenses
|
|
|
81.4
|
|
|
|
83.9
|
|
Income
taxes payable
|
|
|
1.8
|
|
|
|
18.1
|
|
Current
portion of long-term debt
|
|
|
6.9
|
|
|
|
11.8
|
|
Dividends
payable
|
|
|
—
|
|
|
|
4.4
|
|
Total
current liabilities
|
|
|
237.3
|
|
|
|
255.0
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
508.4
|
|
|
|
456.0
|
|
Environmental
liabilities
|
|
|
58.9
|
|
|
|
43.6
|
|
Pensions
and postretirement benefits
|
|
|
38.5
|
|
|
|
102.7
|
|
Deferred
income taxes
|
|
|
43.8
|
|
|
|
9.6
|
|
Long-term
income taxes payable
|
|
|
28.5
|
|
|
|
—
|
|
Other
long-term liabilities
|
|
|
17.1
|
|
|
|
14.2
|
|
Total
liabilities
|
|
|
932.5
|
|
|
|
881.1
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $1 par value; authorized, 60 million shares; outstanding, 19.9
million shares and 19.8 million shares respectively
|
|
|
19.9
|
|
|
|
19.8
|
|
Additional
paid-in capital
|
|
|
94.2
|
|
|
|
93.6
|
|
Accumulated
other comprehensive income (loss)
|
|
|
47.9
|
|
|
|
(16.7
|
)
|
Retained
earnings
|
|
|
119.2
|
|
|
|
137.0
|
|
Total
stockholders’ equity
|
|
|
281.2
|
|
|
|
233.7
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,213.7
|
|
|
$
|
1,114.8
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
the financial statements.
CHESAPEAKE
CORPORATION
Consolidated
Statements of Operations
For
the fiscal years ended:
(
in
millions, except per share data
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,059.6
|
|
|
$
|
995.4
|
|
|
$
|
1,009.2
|
|
Cost
of products sold
|
|
|
880.4
|
|
|
|
820.1
|
|
|
|
827.8
|
|
Selling,
general and administrative expenses
|
|
|
142.4
|
|
|
|
134.1
|
|
|
|
135.2
|
|
Goodwill
impairment charge
|
|
|
-
|
|
|
|
14.3
|
|
|
|
312.0
|
|
Restructuring
expenses, asset impairments and other
exit
costs
|
|
|
15.8
|
|
|
|
33.4
|
|
|
|
10.7
|
|
(Gain)
loss on divestitures
|
|
|
(1.5
|
)
|
|
|
(3.1
|
)
|
|
|
2.8
|
|
Other
income, net
|
|
|
4.2
|
|
|
|
3.7
|
|
|
|
1.5
|
|
Operating
income (loss)
|
|
|
26.7
|
|
|
|
0.3
|
|
|
|
(277.8
|
)
|
Interest
expense, net
|
|
|
44.6
|
|
|
|
39.8
|
|
|
|
32.8
|
|
Loss
on extinguishment of debt
|
|
|
-
|
|
|
|
0.6
|
|
|
|
0.5
|
|
Loss
from continuing operations before taxes
|
|
|
(17.9
|
)
|
|
|
(40.1
|
)
|
|
|
(311.1
|
)
|
Income
tax benefit
|
|
|
(4.1
|
)
|
|
|
(7.7
|
)
|
|
|
(4.4
|
)
|
Loss
from continuing operations
|
|
|
(13.8
|
)
|
|
|
(32.4
|
)
|
|
|
(306.7
|
)
|
Income
(loss) from discontinued operations, net of income tax expense of $0.1,
$0.0 and $0.1
|
|
|
0.3
|
|
|
|
(4.4
|
)
|
|
|
(5.2
|
)
|
Loss
on disposal of discontinued operations, net of income tax expense of $1.6,
$0.0 and $0.0
|
|
|
(2.0
|
)
|
|
|
(2.8
|
)
|
|
|
(2.4
|
)
|
Net
loss
|
|
$
|
(15.5
|
)
|
|
$
|
(39.6
|
)
|
|
$
|
(314.3
|
)
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.71
|
)
|
|
$
|
(1.67
|
)
|
|
$
|
(15.81
|
)
|
Discontinued
operations, net of income taxes
|
|
|
(0.09
|
)
|
|
|
(0.37
|
)
|
|
|
(0.39
|
)
|
Basic
loss per share
|
|
$
|
(0.80
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
(16.20
|
)
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.71
|
)
|
|
$
|
(1.67
|
)
|
|
$
|
(15.81
|
)
|
Discontinued
operations, net of income taxes
|
|
|
(0.09
|
)
|
|
|
(0.37
|
)
|
|
|
(0.39
|
)
|
Diluted
loss per share
|
|
$
|
(0.80
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
(16.20
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(15.5
|
)
|
|
$
|
(39.6
|
)
|
|
$
|
(314.3
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and other postretirement benefit adjustments (net of deferred taxes of
$17.1, $15.6 and $1.4)
|
|
|
51.0
|
|
|
|
27.1
|
|
|
|
(3.1
|
)
|
Foreign
currency translation
|
|
|
12.1
|
|
|
|
40.2
|
|
|
|
(76.9
|
)
|
Change
in fair market value of derivatives
|
|
|
1.5
|
|
|
|
4.8
|
|
|
|
(5.8
|
)
|
Comprehensive
income (loss)
|
|
$
|
49.1
|
|
|
$
|
32.5
|
|
|
$
|
(400.1
|
)
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
the financial statements.
CHESAPEAKE
CORPORATION
Consolidated
Statements of Cash Flows
For
the fiscal years ended:
(
in
millions, except per share data
)
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(15.5
|
)
|
|
$
|
(39.6
|
)
|
|
$
|
(314.3
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
53.4
|
|
|
|
56.6
|
|
|
|
59.2
|
|
Goodwill
impairment charge
|
|
|
—
|
|
|
|
14.3
|
|
|
|
312.0
|
|
Asset
impairment charge
|
|
|
—
|
|
|
|
27.9
|
|
|
|
—
|
|
Deferred
income taxes
|
|
|
(6.2
|
)
|
|
|
(7.9
|
)
|
|
|
(11.4
|
)
|
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
0.6
|
|
|
|
0.5
|
|
Loss
(gain) on sale of property, plant and equipment
|
|
|
4.1
|
|
|
|
(2.9
|
)
|
|
|
(1.3
|
)
|
(Gain)
loss on divestitures
|
|
|
(1.5
|
)
|
|
|
(1.7
|
)
|
|
|
5.8
|
|
Non-cash
pension expense
|
|
|
15.3
|
|
|
|
20.6
|
|
|
|
13.6
|
|
Changes
in operating assets and liabilities, net of acquisitions and
dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
0.6
|
|
|
|
(10.6
|
)
|
|
|
0.8
|
|
Inventories
|
|
|
(5.5
|
)
|
|
|
0.7
|
|
|
|
(6.1
|
)
|
Other
assets
|
|
|
(2.3
|
)
|
|
|
3.2
|
|
|
|
0.6
|
|
Accounts
payable and accrued expenses
|
|
|
(12.8
|
)
|
|
|
(9.9
|
)
|
|
|
4.5
|
|
Income
taxes payable
|
|
|
6.1
|
|
|
|
(7.4
|
)
|
|
|
2.1
|
|
Premium
paid for early extinguishment of debt
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
|
(0.4
|
)
|
Contributions
to defined benefit pension plans
|
|
|
(19.2
|
)
|
|
|
(23.8
|
)
|
|
|
(21.4
|
)
|
Other
|
|
|
7.6
|
|
|
|
2.1
|
|
|
|
0.4
|
|
Net
cash provided by operating activities
|
|
|
24.1
|
|
|
|
21.7
|
|
|
|
44.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(49.6
|
)
|
|
|
(35.8
|
)
|
|
|
(38.3
|
)
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
(78.4
|
)
|
Divestitures
|
|
|
—
|
|
|
|
19.2
|
|
|
|
—
|
|
Proceeds
from sales of property, plant and equipment
|
|
|
4.1
|
|
|
|
9.9
|
|
|
|
5.6
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
0.5
|
|
Net
cash used in investing activities
|
|
|
(45.5
|
)
|
|
|
(6.7
|
)
|
|
|
(110.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings on credit lines
|
|
|
33.4
|
|
|
|
22.5
|
|
|
|
116.5
|
|
Payments
on long-term debt
|
|
|
(2.2
|
)
|
|
|
(23.5
|
)
|
|
|
(81.2
|
)
|
Proceeds
from long-term debt
|
|
|
—
|
|
|
|
3.6
|
|
|
|
3.3
|
|
Debt
issuance costs
|
|
|
(0.3
|
)
|
|
|
(0.9
|
)
|
|
|
—
|
|
Dividends
paid
|
|
|
(8.5
|
)
|
|
|
(17.1
|
)
|
|
|
(17.1
|
)
|
Other
|
|
|
0.5
|
|
|
|
—
|
|
|
|
(0.1
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
22.9
|
|
|
|
(15.4
|
)
|
|
|
21.4
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
0.7
|
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
Increase
(decrease) in cash and cash equivalents
|
|
|
2.2
|
|
|
|
(0.9
|
)
|
|
|
(45.6
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
7.8
|
|
|
|
8.7
|
|
|
|
54.3
|
|
Cash
and cash equivalents at end of year
|
|
$
|
10.0
|
|
|
$
|
7.8
|
|
|
$
|
8.7
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
the financial statements.
CHESAPEAKE
CORPORATION
Consolidated
Statements of Changes in Stockholders’ Equity
For
the fiscal years ended:
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
19.8
|
|
|
$
|
19.6
|
|
|
$
|
19.6
|
|
Issuance
from public stock offering
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
for employee stock plans
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
—
|
|
Balance,
end of year
|
|
|
19.9
|
|
|
|
19.8
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
93.6
|
|
|
|
96.6
|
|
|
|
96.1
|
|
Issuance
for employee stock plans, net of forfeitures
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.5
|
|
Elimination
of unearned compensation upon adoption of SFAS 123(R)
|
|
|
—
|
|
|
|
(3.9
|
)
|
|
|
—
|
|
Compensation
expense
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
—
|
|
Balance,
end of year
|
|
|
94.2
|
|
|
|
93.6
|
|
|
|
96.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
—
|
|
|
|
(3.9
|
)
|
|
|
(3.7
|
)
|
Compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Issuance
for employee stock plans, net of forfeitures
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.3
|
)
|
Elimination
of unearned compensation upon adoption of SFAS 123(R)
|
|
|
—
|
|
|
|
3.9
|
|
|
|
—
|
|
Balance,
end of year
|
|
|
—
|
|
|
|
—
|
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
(16.7
|
)
|
|
|
(10.9
|
)
|
|
|
74.9
|
|
Foreign
currency translation
|
|
|
12.1
|
|
|
|
40.2
|
|
|
|
(76.9
|
)
|
Pension
and other postretirement benefits adjustments
|
|
|
51.0
|
|
|
|
27.1
|
|
|
|
(3.1
|
)
|
Change
in fair market value of derivatives
|
|
|
1.5
|
|
|
|
4.8
|
|
|
|
(5.8
|
)
|
Adoption
of FASB Statement No. 158
|
|
|
—
|
|
|
|
(77.9
|
)
|
|
|
—
|
|
Balance,
end of year
|
|
|
47.9
|
|
|
|
(16.7
|
)
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
137.0
|
|
|
|
193.9
|
|
|
|
525.3
|
|
Net
loss
|
|
|
(15.5
|
)
|
|
|
(39.6
|
)
|
|
|
(314.3
|
)
|
Cash
dividends declared
|
|
|
(4.1
|
)
|
|
|
(17.3
|
)
|
|
|
(17.1
|
)
|
Adoption
of FIN 48
|
|
|
1.8
|
|
|
|
—
|
|
|
|
—
|
|
Balance,
end of year
|
|
|
119.2
|
|
|
|
137.0
|
|
|
|
193.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity, end of year
|
|
$
|
281.2
|
|
|
$
|
233.7
|
|
|
$
|
295.3
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
the financial statements.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
1
|
Summary
of Significant Accounting Policies
|
Financial
Statement Presentation
The
Consolidated Financial Statements include the accounts and operations of
Chesapeake Corporation and all of its subsidiaries (“Chesapeake”). In
2001, we sold our principal businesses included in the former Merchandising and
Specialty Packaging segment and our 5 percent equity interest in Georgia-Pacific
Tissue, LLC, which comprised our former Tissue segment. The remainder
of the Land Development segment was liquidated as of the end of the first
quarter of 2004. In 2006, we completed the sale of our French luxury
packaging business (“CLP”). These former businesses are accounted for
as discontinued operations (see “Note 2 – Discontinued
Operations”). Chesapeake now reports two segments – Paperboard
Packaging and Plastic Packaging. All significant inter-company
accounts and transactions have been eliminated.
The
consolidated statement of operation for the fiscal year ended December 30, 2007
includes adjustments from prior periods that were recorded in the first quarter
and fourth quarter of fiscal 2007. The net impact of the
adjustments recorded in the first quarter of fiscal 2007 increased loss from
continuing operations before taxes by $0.1 million, loss from continuing
operations by $0.7 million and net loss by $0.5 million. These
adjustments included (1) an understatement of taxable income in a non-U.S. tax
jurisdiction related to shared expenses of subsidiaries and (2) balance sheet
adjustments on central ledgers related to assets that had been previously
disposed of or impaired. The net impact of the adjustment recorded in
the fourth quarter of fiscal 2007 increased loss from continuing operations
before taxes, loss from continuing operations, and net loss by $0.3
million. This adjustment was related to depreciation of assets that
were acquired in September 2005 with the purchase of CPHPNA. These adjustments
from prior periods that were recorded in the first quarter and fourth quarter of
fiscal 2007 were deemed immaterial to the current and prior
periods.
Our 52–53
week fiscal year ends on the Sunday nearest to December 31. Fiscal
years 2005, 2006 and 2007 each contain 52 weeks.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with United
States generally accepted accounting principles (“GAAP”) requires management to
make extensive use of estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from these
estimates.
Revenue
Recognition
We
recognize revenue from our packaging businesses in accordance with Staff
Accounting Bulletin No. 104. Revenue from the sale of products is
recognized upon passage of title to the customer, which is at the time of
product acceptance by the customer provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed and determinable; and
collectibility is deemed probable. Sales are reported net of actual
returns received, estimated rebates and an amount established for anticipated
returns.
Foreign
Currency Translation
Our
Consolidated Financial Statements are reported in U.S.
dollars. Assets and liabilities of foreign subsidiaries are
translated using rates of exchange at the balance sheet date, and related
revenues and expenses are translated at average rates of exchange in effect
during the year. Resulting cumulative translation adjustments have
been recorded as a separate component within accumulated other comprehensive
income (loss) of stockholders’ equity. Realized gains and losses
resulting from foreign currency transactions are included in other
income.
Inventories
Inventories
are valued at the lower of cost or market, determined principally by the average
cost method. Unless specific circumstances warrant different
treatment, the cost bases of inventories six to twelve months old are reduced 50
percent while the cost bases of inventories older than twelve months are reduced
to zero.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Accounts
Receivable
Trade
accounts receivable do not bear interest. An allowance for doubtful
accounts is recorded for estimated losses resulting from the inability of our
customers to make required payments. We review the allowance for
doubtful accounts monthly. Any balances more than six months old are
fully reserved unless specific circumstances warrant different
treatment. An additional reserve is made for the potential impact of
credit notes issued after the period end. This reserve is based on
the historic level of credit notes experienced, and any known problems with
delivered product.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost, less accumulated
depreciation. The costs of major rebuilds and replacements of plant
and equipment are capitalized, and the costs of ordinary maintenance and repairs
are charged to expense as incurred. Certain costs of software
developed or obtained for internal use are capitalized. When
property, plant and equipment is sold or retired, the costs and the related
accumulated depreciation are removed from the accounts and the gains or losses
are reflected in other income. Depreciation for financial reporting
purposes is computed principally by the straight-line method over the estimated
useful asset lives, which range from 10 to 50 years for buildings and
improvements and 5 to 20 years for machinery and
equipment. Depreciation expense from continuing operations was $51.7
million in fiscal 2007, $54.7 million in fiscal 2006 and $57.8 million in fiscal
2005.
The
carrying value of long-lived assets other than goodwill is evaluated when
certain events or changes in circumstances indicate that the carrying amount may
not be recoverable. Asset groupings are considered to be impaired if
their carrying value is not recoverable from the estimated undiscounted cash
flows associated with the assets. If we determine an asset grouping
is impaired, an impairment is recognized in the amount by which the carrying
value exceeds fair market value based on estimated present value of its future
cash flows. In the fourth quarter of fiscal 2006 we recorded an asset impairment
charge in the amount of $24.9 million related to the fixed assets within the
tobacco reporting unit of the Paperboard Packaging reporting
segment. See “Note 5 — Restructuring Charges” for more
information.
Goodwill
Management
reviews the recorded value of our goodwill annually on December 1, or sooner if
events or changes in circumstances indicate that the carrying amount of our
reporting units may exceed their fair values. With the assistance of
a third-party valuation firm, fair value of our reporting units is determined
using a discounted cash flow model and confirmed using a guideline public
companies model which uses peer group metrics to value a company. For
the discounted cash flow model, management projects future cash flows produced
by the reporting units. The projections of future cash flows are
necessarily dependent upon assumptions about our operating performance and the
economy in general. During the fourth quarter of fiscal 2006, we
recorded an impairment charge of $14.3 million in the tobacco packaging
reporting unit. Based on our annual analysis as of December 1, 2005,
we recorded an impairment charge of $312.0 million. See “Note 4 —
Goodwill and Intangible Assets” for more information.
Financial
Instruments
Cash and
cash equivalents include highly liquid, temporary cash investments with original
maturities of three months or less. The carrying amounts of temporary
cash investments, trade receivables and trade payables approximate fair value
because of the short maturities of the instruments.
Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of temporary cash investments and trade receivables. We
place temporary cash investments in high-quality financial instruments and, by
policy, limit the amount of credit exposure related to any one
instrument. Concentrations of credit risk with regard to trade
receivables are limited due to the large number of customers and their
dispersion across different industries and countries.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Chesapeake
uses derivative instruments to manage exposures to foreign currency and interest
rate risks. We principally use forward exchange contracts and
interest rate swaps to hedge against these exposures. Derivative
instruments are recorded on the balance sheet as assets or liabilities and
measured at fair market value. Derivatives that are not designated as
hedges are adjusted to fair value through other income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings in the same
financial statement line item as the impact of the hedged item or recognized in
accumulated other comprehensive income until the hedged item is recognized in
earnings. If a derivative is used as a hedge of a net investment in a
foreign operation, changes in fair value, to the extent effective as a hedge,
are recorded in accumulated other comprehensive income. The
ineffective portion of any derivative’s change in fair value is immediately
recognized in other income. Cash flows resulting from the settlement
of derivatives used as hedging instruments are included in net cash flows from
operating activities. The contracts that have been designated as
hedges of anticipated future cash flows will be marked-to-market through
accumulated other comprehensive income (balance sheet adjustments) until such
time as the related forecasted transactions affect earnings. The fair
value estimates are based on relevant market information, including current
market rates and prices. Fair value estimates for derivative
instruments are provided to Chesapeake by banks known to be high-volume
participants in this market.
Income
Taxes
Income
taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes
,
which requires us to recognize deferred tax assets and liabilities for the
future tax consequences of events that have been included in the Consolidated
Financial Statements. Deferred tax liabilities and assets are
determined based on the differences between the book values and the tax basis of
particular assets and liabilities, using tax rates in effect for the years in
which the differences are expected to reverse. Valuation allowances
are recorded to reduce deferred tax assets when it is “more likely than not”
that a tax benefit will not be realized. When a company has accrued
deferred tax assets, GAAP requires an assessment based on the judgment of
management as to whether it is “more likely than not” that the company will
generate sufficient future taxable income in order to realize the benefit of
those deferred tax assets. On a quarterly basis, management reviews
its judgment regarding the likelihood the benefits of the deferred tax assets
will be realized. During the periodic reviews, management must
consider a variety of factors, including the nature, timing and amount of the
expected items of taxable income and expense, current tax statutes with respect
to applicable carryforward expiration periods and the company’s projected future
earnings. If management determines it is no longer “more likely than
not” that a deferred tax asset will be utilized, an offsetting valuation
allowance would be recorded to reduce the asset to its net realizable value with
a corresponding charge to income tax expense in that period. Uncertain Tax
Positions are recorded under the guidance of FASB 48 Interpretation No. 48 (“FIN
48”). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation requires that we
recognize in the financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the
technical merits for the position. FIN 48 also provides guidance on
derecognizing and classification of income tax related liabilities, interest and
penalties, accounting in interim periods and disclosure. The Company has adopted
a policy to recognize interest and penalties related to unrecognized tax
benefits in income tax expense. Uncertain tax positions are recorded and
classified in other current liabilities (if payment is due within twelve months)
and in other long term liabilities (if payment is expected in more than twelve
months).
Share-Based
Compensation
On
January 2, 2006 we adopted SFAS No. 123 (revised 2004),
Share-Based Payment
("SFAS
123(R)"). We elected to use the modified prospective transition
method, which requires the application of the accounting standard as of January
2, 2006, the first day of our fiscal year ending December 31,
2006. Under this transition method prior period results were not
restated. Prior to January 2, 2006 we accounted for share-based
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25,
Accounting for Stock Issued to
Employees, and Related Interpretations
(“APB 25”) as permitted by SFAS
No. 123,
Accounting for
Stock-Based Compensation
(“SFAS No. 123”). We elected to use
the intrinsic value method of accounting for employee and director share-based
compensation expense for our noncompensatory employee and director stock option
awards and did not recognize compensation expense for the issuance of options
with an exercise price equal to or greater than the market price of the
underlying common stock at the date of grant.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
SFAS
123(R) requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including employee
stock options and restricted stock awards, based on estimated fair
values. Under the modified prospective transition method, the
share-based compensation cost recognized beginning January 2, 2006 includes
compensation cost for (i) all share-based payments granted prior to, but not
vested as of, January 2, 2006 based on the grant date fair value originally
estimated in accordance with the provisions of SFAS No. 123, and (ii) all
share-based payments granted subsequent to January 1, 2006 based on the grant
date fair value estimated in accordance with the provisions of SFAS
123(R). In March 2005 the SEC issued Staff Accounting Bulletin
No. 107 ("SAB 107") relating to SFAS 123(R). We have applied the provisions
of SAB 107 in our adoption of SFAS 123(R).
Prior to
the adoption of SFAS 123(R) we presented the cash flow benefits for income tax
deductions resulting from the exercise of stock options as operating cash flows
in the statement of cash flows. Effective with the adoption of SFAS
123(R) we changed our cash flow presentation such that tax benefits arising from
tax deductions in excess of tax benefits recorded on the compensation costs
recognized for such options (excess tax benefits) are now classified as
financing cash flows. Also, effective with the adoption of SFAS
123(R), the amount previously classified within equity as "Unearned
compensation" was charged to "Additional paid-in-capital." As
permitted by SFAS 123(R) we elected to use the short cut method to calculate
windfall tax benefits available as of the adoption date of SFAS
123(R).
See “Note
12 — Stock Option and Award Plans” for more information regarding our
stock-based compensation plans.
Environmental
Liabilities
It is our
policy to accrue estimated future expenditures for environmental obligations
when it is probable such costs will be incurred and when a range of loss can be
reasonably estimated. Future expenditures for environmental
obligations are not discounted unless the aggregate amount of the obligations
and the amount and timing of the cash payments are fixed and readily
determinable. We periodically review the status of all significant
existing or potential environmental issues and adjust our accrual as
necessary. The accrual does not reflect any possible future insurance
or indemnification recoveries.
Accruals
Related to Restructuring Activities
Restructuring-related
costs have been and will be recorded in accordance with SFAS No. 112,
Employers’ Accounting for
Postemployment Benefits
(“SFAS 112”) or SFAS No. 146,
Accounting
for the Costs Associated with Exit
or Disposal Activities
(“SFAS 146”), as appropriate. SFAS 112
applies to post-employment benefits provided to employees under ongoing benefit
arrangements, determinable from either our post employment policies or from past
practices. In accordance with SFAS 112, we record such charges when
the termination benefits are probable, capable of estimation and attributable to
services already rendered and the obligation relates to rights that vest or
accumulate. For termination benefits not otherwise provided under
ongoing benefit arrangements SFAS 146 requires recognition of costs associated
with an exit or disposal activity when the liability is incurred and can be
measured at fair value. The recognition of restructuring charges
requires management to make certain judgments regarding the nature, timing and
amount associated with the planned restructuring activities. At the
end of each reporting period, we evaluate the appropriateness of the remaining
accrued balances. Any change of estimates will be recognized as an
adjustment to the accrued liabilities in the period of change.
New
Accounting Pronouncements
In
September 2006 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
157,
Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value in accordance with GAAP and expands disclosures about fair
value measurements. The provisions of SFAS 157 are effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008 the
FASB decided to partially defer the implementation of SFAS 157 for certain
nonfinancial assets and nonfinancial liabilities for one year and to remove
certain leasing transactions from the scope of SFAS 157. We are currently
evaluating the impact that SFAS 157 will have on our financial
statements.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
In
February 2007 the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FAS 115
(“SFAS
159”). SFAS 159 allows companies to choose, at specified election dates,
to measure at fair value eligible financial assets and liabilities that are not
otherwise required to be measured at fair value. Unrealized gains and losses
shall be reported at each subsequent reporting date on items for which the fair
value option has been elected in earnings. SFAS 159 also establishes
presentation and disclosure requirements. SFAS 159 is effective for fiscal
years beginning after November 15, 2007 and will be applied prospectively.
We do not intend to exercise the fair value option available under SFAS 159, and
therefore do not expect that SFAS 159 will have a significant impact on our
financial statements.
In
December 2007, the FASB issued SFAS No. 141R,
Business Combinations
("SFAS
141R"). SFAS 141R amends SFAS 141 and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. It is effective
for fiscal years beginning on or after December 15, 2008 and will be
applied prospectively. We are currently evaluating the impact that SFAS 141R
will have on our financial statements.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51
("SFAS 160"). SFAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled, and presented in the consolidated financial
statements. It also requires that once a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value. Sufficient disclosures are required to clearly identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. It is effective for fiscal years beginning on or after
December 15, 2008 and requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
shall be applied prospectively. We are currently evaluating the impact that SFAS
160 will have on our financial statements.
2
|
Discontinued
Operations
|
Summarized
results of discontinued operations are shown separately in the accompanying
consolidated financial statements, except for the consolidated statements of
cash flows, which summarize the activity of continued and discontinued
operations together. Results for the prior periods have been restated
for this presentation.
Discontinued
operations includes amounts related to our former French luxury packaging
operation, as well as former Land Development, Tissue and Merchandising and
Specialty Packaging segments.
On July
31, 2006 we completed the sale of our French luxury packaging business (“CLP”)
to Sofavie. CLP was included in our Paperboard Packaging
segment. The sale price was €0.5 million (approximately $0.6 million
at the sale date). The sale resulted in a pre-tax and after-tax loss
of $1.5 million in the third quarter of fiscal 2006, which is included in "Loss
on disposal of discontinued operations" in the accompanying consolidated
statements of operations. The financial position of the CLP business
was not material to our consolidated financial position on July 31,
2006. “Loss on disposal of discontinued operations” also includes the
loss on sale of our French wine and spirits label operation, Bourgeot Etiqso
Lesbats (“Bourgeot”) in fiscal 2005, which was part of CLP. On April
18, 2005, Chesapeake completed the sale of the assets of Bourgeot to Autajon
Group. The sale price was €1.16 million (approximately $1.5 million at the
sale date). We incurred a pre-tax and after-tax loss on the sale of $3.0
million in the second quarter of fiscal 2005. The transaction was a sale
of substantially all of the assets of the operation, including machinery,
equipment and inventory, and an assignment by Chesapeake of the rights, and an
assumption by the buyer of the obligations, under certain contracts related to
the Bourgeot operation, including a lease for the plant building and
substantially all of the post-closing employee obligations and contracts.
We retained the pre-closing trade accounts receivable and trade accounts payable
of Bourgeot, as well as employee obligations pertaining to the operations of
Bourgeot prior to the sale date. CLP's historical operating results
have been reclassified and presented within "income (loss) from discontinued
operations" in the accompanying consolidated statements of operations, as
follows:
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
(in
millions)
|
|
12
Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue
|
|
|
N/A
|
|
|
$
|
16.7
|
|
|
$
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
loss
|
|
|
N/A
|
|
|
$
|
(4.4
|
)
|
|
$
|
(5.2
|
)
|
In
accordance with Emerging Issues Task Force ("EITF") Issue No. 87-24, interest
has been allocated to CLP for all fiscal years presented. Interest
allocated did not have a significant impact on our results from continuing
operations for any of these years.
Our
former Land Development segment owned real estate that we retained when we sold
the timberland associated with our former pulp and paper
operations. The real estate was marketed to third parties for
residential and commercial development, real estate investment and land
conservation. As of the end of the first quarter of 2004, the
remainder of the Land Development segment was liquidated and, as a result, this
segment is accounted for as a discontinued operation.
In the
fourth quarter of 2000 we decided to sell the principal businesses that were
included in our former Merchandising and Specialty Packaging segment and the
remaining interest in our former Tissue segment, a 5 percent equity interest in
Georgia-Pacific Tissue, LLC (the “Tissue JV”). These segments are
accounted for as discontinued operations. We completed the sales of
all the components of these segments in 2001. In fiscal 2007 and
fiscal 2006 we recognized a pre- and after-tax charge related to an increase in
the accrued liability associated with the disposition of assets of Wisconsin
Tissue Mills Inc. in 1999 of $2.4 million and $1.1 million,
respectively. In fiscal 2005 we recognized a pre and after-tax
benefit of $0.7 million related to the reduction of the liability for
contractual obligations in our former Merchandising and Specialty Packaging
segment.
3
|
(Gain)
Loss on Divestitures
|
On March
23, 2006 we completed the sale of our plastic packaging operation in Lurgan,
Northern Ireland ("Lurgan") to a group led by existing management
("Buyer"). The cash proceeds on sale, net of transaction costs,
approximated $15 million. We also received a subordinated loan note
of £1.25 million (approximately $2.2 million at the sale date). At
the time of sale, the loan note was fully reserved given our subordinated
position and the extent of other acquisition indebtedness of the Buyer. The
purchase and sale agreement included customary warranties and indemnities
related to our operation of the business prior to the transaction closing date.
The purchase and sale agreement also provided for an arrangement whereby we
received additional proceeds from the Buyer upon the subsequent sale of certain
real property conveyed with the operation which occurred in the third quarter of
fiscal 2006. In fiscal 2006 the divestiture resulted in a pre-tax net
gain of $3.1 million ($2.9 million after tax). The net gain of $3.1
million included a pre-tax loss of $1.0 million on the sale recorded in the
first quarter, and a pre-tax gain of $4.1 million due to the receipt of
additional proceeds of $3.2 million and recovery of a portion of the
subordinated loan note of $0.9 million recorded in the third
quarter. Also during fiscal 2006, in connection with the divestiture,
we made a contribution of approximately $5.9 million to the non-U.S. defined
benefit pension plan which covered the employees of the Lurgan
facility. During the fourth quarter of fiscal 2007 we re-evaluated
the collectibility of the subordinated loan note, and based on this evaluation
we reversed the provision against it. The reversal of the provision
resulted in a pre and after tax gain of $1.5 million.
In
connection with the 2001 divestiture of Consumer Promotions International, Inc.
("CPI"), a component of our former Merchandising and Specialty Packaging
segment, Chesapeake provided seller financing for a portion of the purchase
price through receipt of subordinated promissory notes. Included in
the promissory notes were term notes of approximately $5.0 million, which were
recorded at fair value on the date of sale and, under the terms of the notes,
were adjusted to reflect accrued interest through December 31,
2003. CPI paid interest on the term notes on a timely basis during
2004 and through the first quarter of 2005. In July 2005, CPI
informed us of its inability to continue interest payments under the term
notes. Also, CPI provided us with updated financial information that
indicated a significant deterioration in the operating results of
CPI. These factors resulted in a change in our estimate as to the
recovery of these notes. Due to the subordinated nature of our
position as a creditor and the risks associated with pursuing recovery, the
notes were written down from $3.4 million to zero in the second quarter of
fiscal 2005. During the fourth quarter of fiscal 2005, we reached a
settlement with CPI in the amount of $0.6
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
million for the balance of the
outstanding notes. The second quarter charge and fourth quarter
recovery have been classified as "(gain) loss on divestitures" in the
accompanying consolidated statements of operations
.
4
|
Goodwill
and Intangible Assets
|
The
following table sets forth the details of our goodwill balance:
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2006
|
|
$
|
283.1
|
|
|
$
|
70.9
|
|
|
$
|
354.0
|
|
|
Goodwill purchase price
adjustment
|
|
|
(0.7
|
)
|
|
|
—
|
|
|
|
(0.7
|
)
|
|
Divestiture
|
|
|
—
|
|
|
|
(5.6
|
)
|
|
|
(5.6
|
)
|
|
Impairment loss
|
|
|
(14.3
|
)
|
|
|
—
|
|
|
|
(14.3
|
)
|
|
Foreign currency
translation
|
|
|
38.5
|
|
|
|
9.3
|
|
|
|
47.8
|
|
|
Balance
December 31, 2006
|
|
|
306.6
|
|
|
|
74.6
|
|
|
|
381.2
|
|
|
Foreign currency
translation
|
|
|
4.9
|
|
|
|
1.3
|
|
|
|
6.2
|
|
|
Balance
December 30, 2007
|
|
$
|
311.5
|
|
|
$
|
75.9
|
|
|
$
|
387.4
|
|
In
connection with our March 2006 divestiture of Lurgan, $5.6 million of goodwill
was allocated to Lurgan based on the relative fair value of the divested
business to the Plastic Packaging segment taken as a whole.
In
connection with our September 2005 acquisition of CPHPNA, a portion of the
purchase price was ascribed to certain finite-lived intangible assets, primarily
customer relationships. The cost and accumulated amortization of
customer relationships as of December 30, 2007 were $16.2 million and $3.7
million, respectively. The cost and accumulated amortization of
customer relationships as of December 31, 2006 were $16.2 million and $2.1
million, respectively. Amortization expense recorded during fiscal
2007 and fiscal 2006 for customer relationships was $1.6
million. Amortization expense recorded during fiscal 2005 for
customer relationships was $0.5 million.
Amortization
expense of our intangible assets for the next five fiscal years is estimated as
follows (in millions):
2008
|
$1.6
|
2009
|
1.6
|
2010
|
1.6
|
2011
|
1.6
|
2012
|
1.6
|
The
reporting units within our Paperboard Packaging and Plastic Packaging segments
are tested for impairment annually on December 1, or sooner if events or changes
in circumstances indicate that the carrying amount of our reporting units may
exceed their fair values. As a result of a change in our expectation
of a further decline in tobacco packaging sales, we recorded an impairment
charge of $14.3 million in the tobacco packaging reporting unit during the
fourth quarter of fiscal 2006. As a result of competitive economic
conditions affecting the paperboard packaging markets and changes in our profile
relative to market capitalization and risks associated with the extent and
timing of savings anticipated under our $25-million cost savings program, we
recorded an impairment charge of $312.0 million during the fourth quarter of
fiscal 2005. The fair values of the reporting units within the
Paperboard Packaging segment were determined using the discounted cash flow
model and confirmed using the guideline public companies model, which uses peer
group metrics to value a company.
During
the fourth quarter of fiscal 2005 Chesapeake announced plans for a two-year
global cost savings program. The scope of this program was extensive and
involved a number of locations being either sold, closed or downsized. The
program also involved broad-based workforce reductions and a general reduction
in overhead costs throughout the Company. Additionally, we targeted specific
improvements in operating processes. The cost of these
initiatives during the two-year program was expected to range from $30 million
to $40 million on a pre-tax
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
basis,
with the cash flow impact being less due to the sale of related real estate and
assets. Full implementation of this program was expected by the end
of fiscal 2007. The ultimate costs and timing of this program were
dependent on consultation and, in certain circumstances, negotiation with
European works councils or other employee representatives. Costs
associated with the program have been recorded in "restructuring expenses, asset
impairments and other exit costs” and “discontinued operations" in the
accompanying consolidated statements of operations. The Company
has now completed the $25-million cost savings program and over the course of
fiscal years 2006 and 2007 cost savings in excess of the $25-million goal was
achieved. The Company is now evaluating potential additional restructuring and
cost savings actions.
In
addition to charges related to the global cost savings program, in fiscal 2006
we recorded an asset impairment charge of $24.9 million related to the fixed
assets of our tobacco reporting unit of the Paperboard Packaging reporting
segment, which is also recorded in “restructuring expenses, asset impairments
and other exit costs” in the accompanying consolidated statements of
operations. This impairment was recorded as a result of information
provided by British American Tobacco (“BAT”), a major customer for Chesapeake’s
tobacco packaging products. BAT informed Chesapeake that it was
implementing a supplier rationalization program which would substantially reduce
the role of Chesapeake as a packaging supplier to BAT. In the first
quarter of 2007 we recorded a correction to reduce this impairment charge by
$0.5 million (see Note 1 – “Adjustments for Items Related to Prior Periods”),
which is also recorded in “restructuring expenses, asset impairments and other
exit costs” in the accompanying consolidated statements of
operations.
Charges
recorded during fiscal years 2006 and 2007 were primarily within the Paperboard
Packaging segment. Charges recorded during fiscal 2005 were primarily
recorded within the Paperboard Packaging and Corporate
segments. These charges are summarized as follows:
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related
costs
|
|
$
|
10.3
|
|
|
$
|
9.8
|
|
|
$
|
12.2
|
|
|
Asset
impairment
|
|
|
0.3
|
|
|
|
27.9
|
|
|
|
—
|
|
|
Loss
on asset sales, redeployment costs, and other
exit costs
|
|
|
5.0
|
|
|
|
(0.3
|
)
|
|
|
0.9
|
|
|
Total
restructuring expenses, asset impairment and other exit
costs
|
|
|
15.6
|
|
|
|
37.4
|
|
|
|
13.1
|
|
|
Less:
Restructuring expenses, asset impairments and other exit costs attributed
to discontinued operations
|
|
|
(0.2
|
)
|
|
|
4.0
|
|
|
|
2.4
|
|
|
Restructuring
expenses, asset impairments and other exit costs attributed to continuing
operations
|
|
$
|
15.8
|
|
|
$
|
33.4
|
|
|
$
|
10.7
|
|
During
the third quarter of fiscal 2005, Chesapeake initiated a manufacturing
reorganization within our branded products sector of the Paperboard Packaging
segment that included the closure of our carton operation at Oldbury, West
Midlands, in the United Kingdom (the “Birmingham” site). The closure
was substantially completed during the first quarter of fiscal
2006. The closure resulted in the termination of 190
employees. In connection with the closure, the Company recorded
expenses of $4.3 million, primarily related to employee severance costs of
approximately $3.4 million during fiscal 2005. During fiscal 2006, we
incurred an additional $0.4 million of employee-related costs and a gain of $0.5
million related to plant asset sales, redeployment and disposal costs, which
included the sale of the facility for approximately $4.7 million in October
2006.
During
the fourth quarter of fiscal 2005, Chesapeake began negotiations related to the
closure of our rigid box operation at Ezy-sur-Eure, France (the "Ezy”
site). Under this reorganization, production of the products
manufactured at the Ezy facility were transferred to other Company sites in
Europe. The closure, which took place over the first 6 months of 2006, resulted
in the termination or relocation of 59 employees. We recorded expenses of $2.4
million in the fourth quarter of fiscal 2005 of employee-related costs,
including severance and other termination costs, and an additional $0.3 million
in fiscal 2006. In addition, we recorded approximately $0.2 million in
additional expenses during fiscal 2006, primarily related to asset redeployment
and other exit costs. In fiscal 2007, we released approximately $0.2
million of accrued employee-related costs. Prior to its closure, the
Ezy facility formed part of the CLP operation. We completed the sale
of CLP on July 31, 2006. The historical operating results
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
of Ezy,
including restructuring activities associated with Ezy, have been reflected as
discontinued operations. See “Note 2 — Discontinued
Operations.”
During
the first quarter of fiscal 2006 we initiated the closure of our paperboard
packaging carton operation at Bedford in the United Kingdom. Under
the closure plan, production of products manufactured at the Bedford facility
was transferred to other Company sites in the United Kingdom. The
closure, which was completed in the third quarter of fiscal 2006, resulted in 89
employee terminations. We recognized approximately $2.2 million in
employee-related costs during fiscal 2006 associated with this
closure. In addition, we incurred costs of approximately $0.1 million
related to Bedford asset disposals and redeployments. During fiscal
2007 we incurred approximately $0.7 million of additional asset related
restructuring expenses associated with this facility. We expect to
complete the sale of the facility during fiscal 2008.
During
the second quarter of fiscal 2006 we recorded an asset impairment charge related
to the fixed assets of CLP in the amount of $3.0 million and employee severance
costs of $0.5 million. We completed the sale of CLP on July 31,
2006. The historical operating results of CLP, including
restructuring activities associated with CLP, have been reflected as
discontinued operations. See “Note 2 — Discontinued
Operations.”
During the second quarter of fiscal
2007, as a result of the reduced sales volume in our former tobacco operating
segment within our Paperboard Packaging segment, we began negotiations related
to the closure of our operation in Bremen, Germany (the “Bremen” site) as well
as negotiations of workforce reductions at other operations within the former
operating segment. The reduction in sales volumes was primarily as a
result of the previously announced supplier rationalization program by
BAT. During fiscal 2007, we recorded approximately $1.2 million of
employee-related costs related to workforce reductions within this former
operating segment. During the third quarter of fiscal 2007 we reached
agreement with a third party for the sale of the land, building and certain
equipment at Bremen for approximately €6.4 million. In addition, this
agreement included the assumption of the workforce and associated
employee-related liabilities by the third party. This transaction
closed during December 2007, and resulted in cash proceeds of €1.0 million in
fiscal 2007 and the remaining cash proceeds were received in January
2008. Restructuring charges of approximately $4.7 million were
recorded during fiscal 2007 associated with the sale of Bremen.
In
addition to the initiatives described above, we have recorded other
employee-related restructuring costs of $9.3 million during fiscal 2007, $6.4
million during fiscal 2006 and $6.4 million during fiscal 2005 for broad-based
workforce and overhead reductions.
The
following table displays the activity and balances of the restructuring charges,
asset impairments and other exit costs for fiscal years 2007 and
2006.
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2006
|
|
$
|
6.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6.9
|
|
|
Restructuring
charges, asset impairments and other exit costs (benefits), continuing
operations
|
|
|
9.0
|
|
|
|
24.9
|
|
|
|
(0.5
|
)
|
|
|
33.4
|
|
|
Restructuring
charges, asset impairments and other exit costs, discontinued
operations
|
|
|
0.8
|
|
|
|
3.0
|
|
|
|
0.2
|
|
|
|
4.0
|
|
|
Cash payments
|
|
|
(14.7
|
)
|
|
|
—
|
|
|
|
(1.6
|
)
|
|
|
(16.3
|
)
|
|
Asset
impairments
|
|
|
—
|
|
|
|
(27.9
|
)
|
|
|
—
|
|
|
|
(27.9
|
)
|
|
Gain on asset
sales
|
|
|
—
|
|
|
|
—
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
Other items – non
cash
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.5
|
|
|
Balance
December 31, 2006
|
|
|
2.5
|
|
|
|
—
|
|
|
|
0.5
|
|
|
|
3.0
|
|
|
Restructuring
charges, asset impairments and other exit costs, continuing
operations
|
|
|
10.5
|
|
|
|
0.3
|
|
|
|
5.0
|
|
|
|
15.8
|
|
|
Restructuring
charges, asset impairments and other exit benefits, discontinued
operations
|
|
|
(0.2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.2
|
)
|
|
Cash payments
|
|
|
(10.3
|
)
|
|
|
—
|
|
|
|
(1.1
|
)
|
|
|
(11.4
|
)
|
|
Asset
impairments
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
(Loss) on asset
sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(4.7
|
)
|
|
|
(4.7
|
)
|
|
Other items – non
cash
|
|
|
0.2
|
|
|
|
—
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
Balance
December 30, 2007
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
2.8
|
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Year-end
inventories consist of:
|
(
in
millions
)
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
70.4
|
|
|
$
|
59.5
|
|
|
Work-in-process
|
|
|
17.1
|
|
|
|
21.3
|
|
|
Materials
and supplies
|
|
|
33.9
|
|
|
|
28.6
|
|
|
Total
|
|
$
|
121.4
|
|
|
$
|
109.4
|
|
Long-term
debt at year-end consists of:
|
(
in
millions
)
|
|
2007
|
|
|
2006
|
|
|
Notes
payable – banks:
|
|
|
|
|
|
|
|
Credit
lines
|
|
$
|
170.4
|
|
|
$
|
138.6
|
|
|
Unsecured
notes:
|
|
|
|
|
|
|
|
|
|
10.375%
Senior Subordinated Notes, due 2011
|
|
|
133.7
|
|
|
|
131.4
|
|
|
7%
Senior Subordinated Notes, due 2014
|
|
|
147.1
|
|
|
|
132.0
|
|
|
IDA
notes, average interest 6.3%, due 2019
|
|
|
50.0
|
|
|
|
50.0
|
|
|
Other
debt, average interest 5.2%
|
|
|
14.1
|
|
|
|
15.8
|
|
|
Total
debt
|
|
|
515.3
|
|
|
|
467.8
|
|
|
Less
current portion
|
|
|
6.9
|
|
|
|
11.8
|
|
|
Total
long-term debt
|
|
$
|
508.4
|
|
|
$
|
456.0
|
|
As of
December 30, 2007, principal payments on debt for the next five years
were: 2008, $7.0 million; 2009, $168.5 million; 2010, $3.5 million;
2011, $135.1 million, and 2012, $1.1 million.
In December 2003 Chesapeake filed a
universal shelf registration statement with the SEC, which permitted us to offer
and sell, from time to time, various types of securities, including debt
securities, preferred stock, depository shares, common stock, warrants, stock
purchase contracts and stock purchase units, having an aggregate offering price
of up to $300 million, or the equivalent amount in one or more non-U.S.
currencies. We completed both a common stock and debt security
offering under this shelf registration statement during 2004. In June
2005, $68.5 million of remaining availability under the shelf registration
statement filed in December 2003 was carried forward into a new aggregate $300
million universal shelf registration filed with the SEC, having terms and
conditions substantially similar to the previous universal shelf
registration. No offerings have been made under the current shelf
registration statement.
In March
2004 we completed a public offering of 4.05 million shares of our common
stock. Our net proceeds from the sale of these shares, after
deducting discounts, commissions and expenses, were approximately $92
million. In April 2004 we used a portion of the net proceeds to
redeem £40 million principal amount of our outstanding 10.375% senior
subordinated notes due 2011 at a redemption price of 110.375% of the principal
amount, plus accrued and unpaid interest to the redemption date, or an aggregate
redemption price of approximately $82.6 million. The redemption
resulted in a loss on extinguishment of debt of $8.4 million, or $5.4 million
net of income taxes. The remaining net proceeds of approximately $9.0
million from the offering of our common stock were used to repay outstanding
borrowings under our senior bank credit facility.
In
December 2004 we completed a public offering of €100 million principal amount of
7% senior subordinated notes due 2014. Our net proceeds from the sale
of these notes, after deducting discounts, commissions
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
and
expenses, were approximately $130.8 million (using an exchange rate of €1 to
$1.342). The notes were offered to the public at par. The
net proceeds from the sale of these notes were used to retire $66.8 million
principal amount of our outstanding $85.0 million aggregate principal amount of
7.2% notes due March 2005. The retirement of these notes was
accomplished through a tender offer and consent
solicitation. Including fees, expenses, interest and premiums the
redemption cost $69.1 million and resulted in a loss on the extinguishment of
debt of $1.2 million, or $0.8 million net of income taxes. The
remaining net proceeds of approximately $61.7 million were used to repay
outstanding borrowings under our senior bank credit facility and for general
corporate purposes.
In
February 2005 we paid $38.8 million principal amount of loan note maturities and
we redeemed, at par, the remaining $18.2 million principal amount of the 7.2%
notes which also matured during the first quarter of fiscal 2005. In
August 2005 we redeemed £2.9 million principal amount of our 10.375% senior
subordinated notes due 2011 at a premium and recognized a loss of $0.5 million
associated with the debt extinguishment. In March 2006 we redeemed
£5.0 million principal amount of our 10.375% senior subordinated notes due 2011
at a premium and recognized a loss of $0.6 million associated with the debt
extinguishment.
In February 2004 our senior credit
facility, under which we can guarantee loan note balances and borrow up to $250
million, was amended and restated and its maturity extended to February
2009. Amounts available to be borrowed under our senior credit
facility are limited by the amount currently borrowed and the amounts of
outstanding letters of credit ($1.5 million at December 30,
2007). Nominal facility fees are paid on the unutilized credit line
capacity and interest is charged primarily at LIBOR plus a margin based on our
leverage ratio. We are required to pay a fee, which varies based on
our leverage ratio, on the outstanding balance of certain loan notes and letters
of credit. Subject to the terms of the agreement, a portion of the
borrowing capacity of the revolving credit facility and net proceeds of the term
debt component of the facility may be used to finance acquisitions and to
refinance other debt. The senior credit facility is collateralized by
a pledge of the inventory, receivables, intangible assets and other assets of
Chesapeake Corporation and certain U.S. subsidiaries, having a carrying value at
December 30, 2007 of approximately $585.7 million. The facility is
guaranteed by Chesapeake Corporation, each material U.S. subsidiary and each
United Kingdom (“U.K.”) subsidiary borrower, although most U.K. subsidiary
borrowers only guarantee borrowings made by U.K.
subsidiaries. Obligations of our U.K. subsidiary borrowers under the
facility are collateralized by a pledge of the stock of our material U.K.
subsidiaries.
In February 2006 the senior credit
facility was amended to make certain technical corrections and amendments, add
provisions to accommodate strategic initiatives of the Company and adjust
certain financial maintenance covenants during 2006 and
2007. Subsequent amendments to the agreement were made effective in
June and December 2007 to further adjust certain financial maintenance covenants
through the end of 2007 and, among other things, to limit our ability to fund
acquisitions, repay subordinated debt or to pay dividends. On March
5, 2008, the Company obtained agreement from a majority of its senior credit
facility lenders to amend the facility through the end of fiscal
2008. The amendment affects financial maintenance covenants in all
four quarters of fiscal 2008, providing an increase in the total leverage ratios
and for a decrease in the interest coverage ratios. In addition,
interest rate margins were increased to 450 basis points over LIBOR and basket
limitations were imposed for acquisitions, dispositions, and other indebtedness,
among other changes. In the event that the senior credit facility is
not fully refinanced prior to March 31, 2008, the Company has agreed to provide
a security interest in substantially all of its tangible European
assets. Outstanding borrowings under the senior credit facility as of
December 30, 2007 totaled $165.9 million. Other lines of credit
totaling $11.8 million are maintained with several banks on an uncommitted
basis, under which, $4.5 million was outstanding as of December 30,
2007.
Certain
of our loan agreements include provisions permitting the holder of the debt to
require us to repurchase all or a portion of such debt outstanding upon the
occurrence of specified events involving a change of control or
ownership. Our loan agreements also contain customary restrictive
covenants, including covenants restricting, among other things, our ability, and
our subsidiaries’ ability, to create liens, merge or consolidate, dispose of
assets, incur indebtedness and guarantees, repurchase or redeem capital stock
and indebtedness, pay dividends, make capital expenditures, make certain
investments or acquisitions, enter into certain transactions with affiliates or
change the nature of our business. The senior credit facility also
contains several financial maintenance covenants, including covenants
establishing a maximum leverage ratio, maximum senior leverage ratio and a
minimum interest coverage ratio. After obtaining an amendment to our
senior credit facility effective December 28, 2007, which increased the total
leverage ratio and decreased the interest coverage ratio for the fourth quarter
of 2007, we were in compliance with all of our debt covenants as of the end of
2007. The senior subordinated notes
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
contain
provisions allowing for early redemptions, under certain circumstances, at
premiums of up to 3.5 percent in addition to outstanding principal and
interest.
We have
estimated the fair value of long-term debt at December 30, 2007, and December
31, 2006, to be $444.5 million and $467.2 million, respectively, compared to
book values of $515.3 million and $467.8 million, respectively. The
fair value is based on the quoted market prices for similar issues or current
rates offered for debt of the same or similar maturities.
No
interest expense was capitalized in fiscal years 2005, 2006, or
2007.
8
|
Financial
Instruments and Risk Concentration
|
Chesapeake’s
strategy is to optimize the ratio of our fixed- to variable-rate financing to
maintain an acceptable level of exposure to the risk of interest and foreign
exchange rate fluctuation. From time to time, Chesapeake has entered
into interest rate swaps to convert variable interest rate debt to fixed
interest rate debt and vice versa and to obtain an acceptable level of interest
rate risk. Amounts currently due to, or from, interest swap
counterparties are recorded in interest expense in the period they
accrue. The related amounts payable to, or receivable from, the
counterparties are included in other accrued liabilities. At December
30, 2007 and January 1, 2006, there were no interest rate swap agreements
outstanding. In January 2004, Chesapeake terminated an interest rate
swap and received a cash settlement from the counterparty of $7.3 million. Of
this amount, approximately $6.3 million is being recognized as an interest rate
yield adjustment over the remaining life of the underlying debt.
In 2003,
Chesapeake entered into a foreign currency forward exchange contract, to hedge
an intercompany receivable, in a notional principal amount of £50 million and
having a fair market value liability of $13.2 million at December 30,
2007. The contract matures in 2011.
We manage
our foreign currency exposure primarily by funding certain foreign currency
denominated assets with liabilities in the same currency and, as such, certain
exposures are naturally offset. The
€
100 million senior
notes issued in December 2004 have been effectively designated as a hedge of our
net investment in euro functional currency subsidiaries. At December
30, 2007, $15.2 million related to the revaluation of the debt from euro to U.S.
dollars was included as a debit to cumulative translation
adjustment. At December 31, 2006, $13.7 million related to the
revaluation of the debt from euro to U.S. dollars was included as a debit to
cumulative translation adjustment.
Income
tax expense (benefit) from continuing operations consists of:
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Current
(benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3.5
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(2.1
|
)
|
|
State
|
|
|
0.1
|
|
|
|
—
|
|
|
|
(0.8
|
)
|
|
Foreign
|
|
|
5.5
|
|
|
|
2.9
|
|
|
|
9.9
|
|
|
Total current
|
|
$
|
2.1
|
|
|
$
|
0.2
|
|
|
$
|
7.0
|
|
|
Deferred
expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2.4
|
|
|
$
|
2.8
|
|
|
$
|
(2.8
|
)
|
|
State
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
Foreign
|
|
|
(8.7
|
)
|
|
|
(10.5
|
)
|
|
|
(8.2
|
)
|
|
Total deferred
|
|
$
|
(6.2
|
)
|
|
$
|
(7.9
|
)
|
|
$
|
(11.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
taxes
|
|
$
|
(4.1
|
)
|
|
$
|
(7.7
|
)
|
|
$
|
(4.4
|
)
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Significant components of the year-end
deferred income tax assets and liabilities are:
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
accrual
|
|
$
|
1.3
|
|
|
$
|
27.7
|
|
|
Accrued
liabilities
|
|
|
7.3
|
|
|
|
8.4
|
|
|
Tax
credit and net operating loss carryforward benefits
|
|
|
52.1
|
|
|
|
34.7
|
|
|
Deferred
income
|
|
|
1.1
|
|
|
|
1.4
|
|
|
Other
|
|
|
0.2
|
|
|
|
0.4
|
|
|
Total deferred tax
assets
|
|
|
62.0
|
|
|
|
72.6
|
|
|
Valuation
allowance
|
|
|
(47.0
|
)
|
|
|
(42.6
|
)
|
|
Net
deferred tax assets
|
|
|
15.0
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation/amortization
|
|
|
(32.4
|
)
|
|
|
(30.8
|
)
|
|
Other
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
Deferred tax
liabilities
|
|
|
(32.5
|
)
|
|
|
(30.9
|
)
|
|
Net deferred tax
liabilities
|
|
$
|
(17.5
|
)
|
|
$
|
(0.9
|
)
|
|
Balance
sheet presentation:
|
|
|
|
|
|
|
|
Current
deferred income tax assets (included within prepaid expenses and other
current assets)
|
|
$
|
0.9
|
|
|
$
|
0.4
|
|
|
Deferred
income tax assets (included within other assets)
|
|
|
25.4
|
|
|
|
8.3
|
|
|
Deferred
income tax liabilities
|
|
|
(43.8
|
)
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
|
|
|
The
valuation allowance relates to foreign income tax credit carryforwards that
expire in 2009, to U.S. tax losses that expire by 2027 and to deferred tax
assets that are deemed not to be realizable due to the inability to project
future taxable income with reasonable certainty within the applicable tax loss
carryforward periods. Our valuation allowance increased by $4.4
million in fiscal 2007 ($2.5 million recognized in expense, $0.3 million in
discontinued operations and $1.6 million recognized in accumulated other
comprehensive income), $25.2 million in fiscal 2006 ($15.1 million recognized in
expense, $0.5 million in discontinued operations and $9.6 million recognized in
accumulated other comprehensive income as a result of adoption of SFAS 158 – See
Note 10), and $7.3 million in fiscal 2005, substantially as a result of charges
to income tax expense.
A
reconciliation of income tax expense using the statutory U.S. income tax rate
compared with actual income tax benefit follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions, except percentages)
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
$
|
(17.9
|
)
|
|
$
|
(40.1
|
)
|
|
$
|
(311.1
|
)
|
|
Tax
benefit at U.S. statutory rate of 35%
|
|
|
(6.3
|
)
|
|
|
(14.0
|
)
|
|
|
(108.9
|
)
|
|
State
income taxes, net of federal benefit
|
|
|
(0.7
|
)
|
|
|
(1.0
|
)
|
|
|
(1.1
|
)
|
|
Foreign
income taxes rate differential
|
|
|
(2.5
|
)
|
|
|
(3.5
|
)
|
|
|
(4.8
|
)
|
|
Non-deductible
goodwill
|
|
|
—
|
|
|
|
5.0
|
|
|
|
105.0
|
|
|
Valuation
allowances
|
|
|
2.5
|
|
|
|
15.1
|
|
|
|
7.5
|
|
|
Tax
audit settlements and tax return adjustments
|
|
|
(3.3
|
)
|
|
|
(3.5
|
)
|
|
|
(2.1
|
)
|
|
Tax
rate adjustments
|
|
|
(1.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Tax/book
basis differences
|
|
|
6.7
|
|
|
|
(5.7
|
)
|
|
|
—
|
|
|
Other
permanent items
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
Total
tax benefit
|
|
$
|
(4.1
|
)
|
|
$
|
(7.7
|
)
|
|
$
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
22.9
|
%
|
|
|
19.2
|
%
|
|
|
1.4
|
%
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
The
components of loss from continuing operations before taxes are:
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(17.8
|
)
|
|
$
|
(16.0
|
)
|
|
$
|
(36.0
|
)
|
|
Foreign
|
|
|
(0.1
|
)
|
|
|
(24.1
|
)
|
|
|
(275.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
$
|
(17.9
|
)
|
|
$
|
(40.1
|
)
|
|
$
|
(311.1
|
)
|
Undistributed
earnings of our foreign subsidiaries amounted to approximately $150.3 million as
of December 30, 2007, and our intention is to permanently reinvest these
earnings. Accordingly, no provision has been made for taxes that may
be payable upon remittance of such earnings, nor is it practicable to determine
the amount of any liability.
Our
domestic and foreign tax filings are subject to periodic reviews by the
collecting agencies. We believe any potential adjustments resulting
from these examinations will not have a material effect on Chesapeake’s results
of operations or financial position. See “Note 14 — Commitments and
Contingencies.”
The
Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109, Accounting for Income
Taxes
, on January 1, 2007. As a result of the implementation
of Interpretation 48, the Company recognized a decrease in liabilities of
approximately $1.8 million, which was accounted for as an increase to the
January 1, 2007 balance of retained earnings. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows:
|
(in
millions)
|
|
|
|
|
Balance
at January 1, 2007
|
|
$
|
26.2
|
|
|
Gross
increases – Current period
|
|
|
2.6
|
|
|
Gross
decreases – Current period
|
|
|
—
|
|
|
Decreases
- Settlements
|
|
|
—
|
|
|
Reductions
– Statute of Limitations
|
|
|
(0.3
|
)
|
|
Unrecognized
tax benefits – Ending Balance
|
|
$
|
28.5
|
|
The
company has a total of $28.5 million of unrecognized tax benefits at December
30, 2007 of which $17.1 million is for potential interest that could be due on
unrecognized tax benefits. If these benefits of $28.5 million were
recognized they would have a positive effect on the Company’s effective tax
rate. The Company has adopted a policy to recognize interest and
penalties related to unrecognized tax benefits in income tax
expense. The Company does not expect any of its unrecognized tax
benefits to significantly increase or decrease within the next twelve
months.
The
Company’s US federal income tax returns are open for audit for the years 1999
and 2004 to 2006. The Company’s UK income tax returns remain open for
audit for the years 2002 to 2006.
10
|
Employee
Retirement and Postretirement
Benefits
|
Chesapeake
maintains noncontributory defined benefit retirement plans covering
substantially all U.S. employees. We also maintain several
contributory and noncontributory defined benefit retirement plans covering
certain foreign employees. Pension benefits are based primarily on
the employees’ compensation and/or years of service. We have taken
several steps to minimize our exposure to the longer-term risks of defined
benefit pension arrangements. Specifically, during the fourth quarter
of fiscal 2006 we merged our U.S. pension plans for hourly and salaried
employees and froze certain benefits under our supplemental executive retirement
plan.
We also
provide certain healthcare and life insurance benefits to certain U.S. hourly
and salaried employees who retire under the provisions of our retirement
plans. Healthcare benefits are contributory or noncontributory,
depending on retirement date, and life insurance benefits are
noncontributory. In December 2003, Congress approved the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
“Act”). During 2007,
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
the
Company implemented changes to certain of its postretirement benefits other than
pensions and as a result of these changes, these benefits are no longer
actuarially equivalent to Medicare Part D and are not eligible for a federal
subsidy. Despite not being eligible for a federal subsidy, the changes made
during 2007 had a favorable impact on net periodic postretirement benefit
cost.
On
December 31, 2006 the Company adopted SFAS No. 158,
Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(“SFAS 158”), which requires an
employer to recognize the over-funded or under-funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize the changes in
that funded status in the year in which the changes occur through comprehensive
income. This Statement also requires an employer to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. The measurement date provisions
are effective for fiscal years ending after December 15, 2008. The
Company will transition to a fiscal year- end measurement date for its fiscal
2008 year end using the second approach or fifteen-month approach as described
in SFAS 158. For the 2007, 2006 and 2005 fiscal years, the Company
used a September 30 measurement date. The provisions of SFAS 158
require prospective application.
The
following schedule presents the incremental effects at December 31, 2006 of
applying SFAS 158 to the individual line items within our consolidated balance
sheets:
|
|
|
|
|
SFAS
158 Adoption Adjustments
|
|
|
|
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
$
|
21.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
20.4
|
|
Other
assets
|
|
|
114.0
|
|
|
|
(21.4
|
)
|
|
|
92.6
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
82.9
|
|
|
|
1.0
|
|
|
|
83.9
|
|
Pension
and postretirement benefits
|
|
|
25.1
|
|
|
|
77.6
|
|
|
|
102.7
|
|
Deferred
income taxes
|
|
|
33.0
|
|
|
|
(23.4
|
)
|
|
|
9.6
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
61.2
|
|
|
|
(77.9
|
)
|
|
|
(16.7
|
)
|
The
amounts in accumulated other comprehensive income (loss) that are expected to be
recognized as components of net periodic pension benefit (cost) during the next
fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
$
|
(0.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.7
|
)
|
Net
loss
|
|
|
4.8
|
|
|
|
0.9
|
|
|
|
5.7
|
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
The
following schedules present the changes in the plans’ benefit obligations and
fair values of assets for fiscal years 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
69.7
|
|
|
$
|
71.7
|
|
|
$
|
450.6
|
|
|
$
|
409.6
|
|
|
$
|
14.9
|
|
|
$
|
14.3
|
|
Service
cost
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
6.5
|
|
|
|
7.2
|
|
|
|
—
|
|
|
|
—
|
|
Interest
cost
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
22.4
|
|
|
|
21.6
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Plan
participants’ contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
4.7
|
|
|
|
5.0
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Actuarial
(gain) loss
|
|
|
(3.8
|
)
|
|
|
(1.4
|
)
|
|
|
(44.6
|
)
|
|
|
(34.3
|
)
|
|
|
(0.6
|
)
|
|
|
2.9
|
|
Exchange
rate changes/other
|
|
|
—
|
|
|
|
—
|
|
|
|
21.9
|
|
|
|
56.6
|
|
|
|
—
|
|
|
|
—
|
|
Benefits
paid
|
|
|
(4.7
|
)
|
|
|
(4.7
|
)
|
|
|
(14.8
|
)
|
|
|
(15.1
|
)
|
|
|
(2.1
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at end of year
|
|
$
|
65.2
|
|
|
$
|
69.7
|
|
|
$
|
446.7
|
|
|
$
|
450.6
|
|
|
$
|
13.1
|
|
|
$
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
63.5
|
|
|
|
61.6
|
|
|
|
376.1
|
|
|
|
281.1
|
|
|
|
—
|
|
|
|
—
|
|
Actual
return on plan assets
|
|
|
9.3
|
|
|
|
5.1
|
|
|
|
33.4
|
|
|
|
37.9
|
|
|
|
—
|
|
|
|
—
|
|
Employer
contributions
|
|
|
0.9
|
|
|
|
1.5
|
|
|
|
18.3
|
|
|
|
23.2
|
|
|
|
1.9
|
|
|
|
3.0
|
|
Plan
participants’ contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
4.7
|
|
|
|
5.0
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Exchange
rate changes/other
|
|
|
—
|
|
|
|
—
|
|
|
|
20.2
|
|
|
|
44.0
|
|
|
|
—
|
|
|
|
—
|
|
Benefits
paid
|
|
|
(4.7
|
)
|
|
|
(4.7
|
)
|
|
|
(14.8
|
)
|
|
|
(15.1
|
)
|
|
|
(2.1
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
$
|
69.0
|
|
|
$
|
63.5
|
|
|
$
|
437.9
|
|
|
$
|
376.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded
status at end of year
|
|
$
|
3.8
|
|
|
$
|
(6.2
|
)
|
|
$
|
(8.8
|
)
|
|
$
|
(74.5
|
)
|
|
$
|
(13.1
|
)
|
|
$
|
(14.9
|
)
|
Amounts
recognized in accumulated other comprehensive income (loss) consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
23.0
|
|
|
$
|
31.5
|
|
|
$
|
58.8
|
|
|
$
|
117.8
|
|
|
$
|
10.9
|
|
|
$
|
7.7
|
|
Prior
service cost
|
|
|
(1.0
|
)
|
|
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
|
|
(4.0
|
)
|
|
|
—
|
|
Total
amount recognized
|
|
$
|
22.0
|
|
|
$
|
32.0
|
|
|
$
|
58.5
|
|
|
$
|
117.4
|
|
|
$
|
6.9
|
|
|
$
|
7.7
|
|
The
following table provides the amounts recognized in the consolidated balance
sheets as of each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$
|
12.4
|
|
|
$
|
5.9
|
|
|
$
|
8.7
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued
benefit liability
|
|
|
(8.6
|
)
|
|
|
(12.1
|
)
|
|
|
(17.6
|
)
|
|
|
(76.1
|
)
|
|
|
(13.1
|
)
|
|
|
(14.9
|
)
|
Accumulated
other comprehensive income
|
|
|
22.0
|
|
|
|
32.0
|
|
|
|
58.5
|
|
|
|
117.4
|
|
|
|
6.9
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
25.8
|
|
|
$
|
25.8
|
|
|
$
|
49.6
|
|
|
$
|
42.9
|
|
|
$
|
(6.2
|
)
|
|
$
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
plans in which accumulated benefit obligation exceeds plan assets at the
measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
8.6
|
|
|
$
|
19.2
|
|
|
$
|
7.3
|
|
|
$
|
396.1
|
|
Accumulated
benefit obligation
|
|
|
8.6
|
|
|
|
16.6
|
|
|
|
6.9
|
|
|
|
338.3
|
|
Fair
value of plan assets
|
|
$
|
—
|
|
|
$
|
7.1
|
|
|
$
|
—
|
|
|
$
|
322.9
|
|
The
accumulated benefit obligation for all defined benefit pension plans was $442.1
million at September 30, 2007, and $449.3 million at September 30,
2006.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
The
following table provides the assumptions used to calculate the benefit
obligations and amounts recognized in the balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25
|
%
|
|
|
5.88
|
%
|
|
|
5.80
|
%
|
|
|
5.00
|
%
|
|
|
6.25
|
%
|
|
|
5.88
|
%
|
Rate
of compensation increase
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
3.90
|
%
|
|
|
3.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
The
plans’ trustees select the expected return on plan assets by examining
probabilities of expected 20-year return rates calculated by investment
consulting companies using target asset allocations and expected inflation
rates.
Plan
Assets
Chesapeake’s
pension plans’ weighted-average asset allocations at September 30, 2007, and
2006, by asset category, were as follows:
|
|
Pension
Benefits
|
|
|
U.S.
Plans
|
|
Non
U.S. Plans
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Equity
securities*
|
|
|
68
|
%
|
|
|
66
|
%
|
|
|
52
|
%
|
|
|
65
|
%
|
Debt
securities*
|
|
|
32
|
|
|
|
33
|
|
|
|
44
|
|
|
|
34
|
|
Other
|
|
|
—
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
*
|
Plan
assets were not invested in Chesapeake securities during 2007 or
2006.
|
The
objectives of the U.S. investment policy for plan assets are: to meet
pension payment requirements; to achieve a rate of return above inflation to
preserve the purchasing power of the assets; and to attempt to maintain pension
costs in proportion to changes in total payroll and benefit
costs. Investment guidelines are established to assure a reasonable
opportunity of achieving the objectives without exposing the funds to excessive
or undue investment risk. The target asset allocation for our U.S.
pension plan is 67 percent equity securities and 33 percent debt
securities. The purpose of the equity investments is to provide
appreciation in principal, growth of income and current
income. Equity securities may include U.S. dollar denominated and
international stocks. Debt securities are U.S. fixed income
investments. The purpose of fixed income investments is to provide a
predictable and dependable source of income to reduce portfolio
volatility. The fixed income category may include U.S. dollar
denominated marketable bonds and convertible securities. All assets
will be of sufficient size and held in issues with sufficient trading activity
to facilitate transactions at minimum cost and accurate market
valuation. The aggregate portfolio should be well diversified to
avoid undue exposure to maturity, credit quality or any single economic sector,
industry group or individual security risk. We believe our investment
policy complies with the prudence standards and diversification requirements
prescribed by the Employee Retirement Income Security Act of 1974, as amended
and supplemented.
The
investment policy for non-U.S. plans is set with regard to the plans’
liabilities, financial strength and statutory funding
requirements. Long-term returns from equities are expected to keep
pace with salary growth in the long term. Due to the relatively low
proportion of retired members within the plans, the investment policy is
equity-oriented. The target asset allocations for the non-U.S. plans
are set separately for different investment portfolios with no rebalancing
between the portfolios. Therefore, there is no combined portfolio
target allocation.
In June
2006, $12.0 million was collected on an outstanding note receivable which has
been included in the pre-funding vehicle for postretirement benefits other than
pensions. The investments are presented in other assets in the
consolidated balance sheets due to the nature of the pre-funding
vehicle.
Contributions
to our pension and postretirement plans in fiscal 2007 were $21.0 million, which
included supplementary contributions to non-U.S. plans of $12.2
million. We expect to contribute at least $21.2 million
to
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
our
pension plans in fiscal 2008, which includes supplementary contributions to the
non-U.S. plans of at least $12.0 million, and we do not expect to make any
supplementary contributions to our other postretirement benefit plans in fiscal
2008.
The
supplementary contributions to non-U.S. plans are based on a recovery plan in
effect for one of the U.K. pension plans which stipulates supplementary employer
cash contributions of at least $12.0 million per year above required levels in
order to achieve a funding level of 100 percent by July, 2014. In
addition, the recovery plan requires an increase in future supplementary annual
contributions if an interim funding level of 90 percent is not achieved by April
8, 2008. The funded level is dependent upon certain actuarial
assumptions as prescribed in the recovery plan and approved by the U.K. pension
regulators. Changes to these assumptions could have a significant
impact on the calculation of the funded level. This could result in
annual supplementary employer cash contributions to be materially in excess of
$12.0 million per year.
The
following table provides the components of net pension costs and the assumptions
used to calculate net pension costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
6.5
|
|
|
$
|
7.2
|
|
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
3.8
|
|
|
|
22.4
|
|
|
|
21.6
|
|
|
|
19.2
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Expected
return on plan assets
|
|
|
(4.6
|
)
|
|
|
(4.5
|
)
|
|
|
(4.9
|
)
|
|
|
(23.2
|
)
|
|
|
(20.9
|
)
|
|
|
(19.9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
of prior service cost and actuarial loss
|
|
|
1.3
|
|
|
|
1.7
|
|
|
|
2.2
|
|
|
|
7.7
|
|
|
|
10.4
|
|
|
|
5.7
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Net
expense
|
|
$
|
0.7
|
|
|
$
|
1.3
|
|
|
$
|
1.6
|
|
|
$
|
13.4
|
|
|
$
|
18.3
|
|
|
$
|
10.7
|
|
|
$
|
1.2
|
|
|
$
|
1.1
|
|
|
$
|
1.3
|
|
Discount
rate
|
|
|
5.88
|
%
|
|
|
5.50
|
%
|
|
|
5.88
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.60
|
%
|
|
|
5.88
|
%
|
|
|
5.50
|
%
|
|
|
5.88
|
%
|
Expected
return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.25
|
%
|
|
|
6.60
|
%
|
|
|
6.90
|
%
|
|
|
7.40
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate
of compensation increase
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
3.50
|
%
|
|
|
3.90
|
%
|
|
|
3.90
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
Component
of Comprehensive Income
|
|
|
|
(
in
millions
)
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in minimum pension liability included in other comprehensive
income, net of taxes
|
|
|
N/A
|
|
|
$
|
27.1
|
|
|
$
|
(3.1
|
)
|
Future
Benefit Payments
The following benefit payments, which
reflect expected future service, as appropriate, are expected to be
paid:
|
|
Pension
Plans
|
|
Other
Benefits
|
(
in
millions
)
|
|
U.S.
Plans
|
|
Non
U.S.
Plans
|
|
|
2008
|
$
|
4.7
|
|
$
|
16.0
|
|
|
$
|
1.3
|
|
2009
|
|
4.6
|
|
|
17.2
|
|
|
|
1.2
|
|
2010
|
|
4.5
|
|
|
17.4
|
|
|
|
1.1
|
|
2011
|
|
4.6
|
|
|
18.0
|
|
|
|
1.1
|
|
2012
|
|
4.7
|
|
|
18.9
|
|
|
|
1.0
|
|
Years
2013-2017
|
|
23.5
|
|
|
97.2
|
|
|
|
4.0
|
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Assumed
Healthcare Cost Trend Rates
|
|
2007
|
|
|
2006
|
|
Healthcare
cost trend rate assumed for next year
|
|
|
8
|
%
|
|
|
9
|
%
|
Rate
to which the cost trend rate is assumed to decline (the ultimate trend
rate)
|
|
|
5
|
%
|
|
|
5
|
%
|
Year
that the rate reaches the ultimate trend rate
|
|
|
|
|
|
|
Assumed
healthcare cost trend rates have a significant effect on the amounts reported
for healthcare plans. A one percent change in assumed healthcare cost
trend rates would have the following effects:
(
in
millions
)
|
|
One
Percent
Increase
|
|
|
One
Percent
Decrease
|
|
Effect
on total of service and interest cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Effect
on postretirement benefit obligation
|
|
$
|
0.3
|
|
|
$
|
(0.3
|
)
|
Defined
Contribution Plans
Chesapeake
sponsors, in accordance with the provisions of Section 401(k) of the Internal
Revenue Code, pre-tax savings programs for eligible U.S. salaried and hourly
employees. Participants’ contributions are matched by Chesapeake in
cash up to designated contribution levels. Contributions are invested
in several investment options, which may include Chesapeake common stock, as
selected by the participating employee. At January 1, 2006, 300,000
shares of Chesapeake common stock are reserved for issuance under these
programs. We also maintain various defined contribution plans
covering certain foreign employees. Beginning in fiscal 2006 the
Company also makes non-elective contributions to certain of these domestic and
foreign defined contribution plans. Expense associated with these
plans was approximately $4.7 million in both fiscal 2007 and fiscal 2006, and
$3.4 million in fiscal 2005.
Chesapeake
currently has 60 million authorized shares of common stock, $1.00 par value, of
which 19,860,712 shares were outstanding as of December 30, 2007. We
declared dividends of $0.22 per share during fiscal 2007 and $0.88 per share
during fiscal years 2006 and 2005.
In
addition to our common stock, Chesapeake’s authorized capital includes 500,000
shares of preferred stock ($100.00 par), of which 100,000 shares are designated
as Series A Junior Participating Preferred Stock (“Series A
Preferred”). No preferred shares were outstanding during the three
years ended December 30, 2007.
Shareholder
Rights Plan
Under the
terms of a shareholder rights plan approved February 10, 1998, each outstanding
share of our common stock has attached to it one preferred share purchase right,
which entitles the shareholder to buy one unit (0.001 of a share) of Series A
Preferred at an exercise price of $120.00 per share, subject to
adjustment. The rights will separate from the common stock and become
exercisable only if a person or group acquires or announces a tender offer for
15 percent or more of Chesapeake’s common stock. When the rights are
exercisable, Chesapeake may issue a share of common stock in exchange for each
right other than those held by such person or group. If a person or
group acquires 15 percent or more of Chesapeake common stock, each right shall
entitle the holder, other than the acquiring party, upon payment of the exercise
price, to acquire Series A Preferred or, at the option of Chesapeake, common
stock, having a value equal to twice the right’s purchase price. If
Chesapeake is acquired in a merger or other business combination or if 50
percent of its earnings power is sold, each right will entitle the holder, other
than the acquiring person, to purchase securities of the surviving company
having a market value equal to twice the exercise price of the
rights. The rights will expire on March 15, 2008, and may be redeemed
by us at any time prior to the tenth day after an announcement that a 15 percent
position has been acquired, unless such period has been extended by the Board of
Directors.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Earnings
Per Share (“EPS”)
Basic EPS
is calculated using the weighted-average number of outstanding common shares for
the periods, which were 19,453,693 in fiscal 2007; 19,418,103 in fiscal 2006;
and 19,401,229 in fiscal 2005. Diluted EPS reflects the potential
dilution that could occur if securities are exercised or converted into common
stock, or result in the issuance of common stock that would then share in
earnings. Diluted EPS is calculated using the weighted-average number
of diluted outstanding common shares for the periods, which were 19,453,693 in
fiscal 2007; 19,418,103 in fiscal 2006; and 19,401,229 in fiscal
2005. The number of potentially dilutive shares excluded from the
calculation of diluted EPS was 1.3 million in fiscal 2007; 1.3 million in fiscal
2006; and 1.2 million in fiscal 2005.
12
|
Stock
Option and Award Plans
|
At
December 30, 2007, we had four stock compensation plans for employees and
officers: the 2005 Incentive Plan, the 1997 Incentive Plan, the 1993 Incentive
Plan, and the 1987 Stock Option Plan. All four plans have been
approved by our shareholders. The options outstanding as of January
1, 2007, were awarded under our 1993, 1997 and 2005 Incentive
Plans. Up to 4,325,985 additional shares may be issued pursuant to
all of the stock option and award plans; however, the Board of Directors has
stated that all future grants will be made only from those shares available
under the 2005 Incentive Plan, which had 1,251,329 additional shares available
for issuance at December 30, 2007. Under the 2005 Incentive Plan, we
may grant stock options, stock appreciation rights (“SARs”), stock awards,
performance shares or stock units, and may make incentive awards to our key
employees and officers. As to employees, the stock compensation plans
are administered by the Executive Compensation Committee of the Board of
Directors.
Stock
Options
Stock
options are generally granted with an exercise price equal to the market value
of our common stock on the date of the grant, expire 10 years from the date they
are granted and vest over a three-year service period. As permitted
by SFAS No. 123 and SFAS No. 123(R) the fair values of the options were
estimated using the Black-Scholes option-pricing model. The
Black-Scholes weighted-average assumptions were as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted-average
fair value of options at grant date
|
$
|
$3.86
|
|
|
$
|
$4.85
|
|
|
$
|
$6.51
|
|
|
Dividend
yield
|
|
5.3
|
%
|
|
|
6.0
|
%
|
|
|
4.1
|
%
|
|
Risk-free
interest rates
|
|
4.7
|
%
|
|
|
4.7
|
%
|
|
|
4.1
|
%
|
|
Volatility
|
|
34.7
|
%
|
|
|
57.4
|
%
|
|
|
44.6
|
%
|
|
Expected
option term (years)
|
|
6.0
|
|
|
|
5.8
|
|
|
|
5.0
|
|
As
part of the annual valuation process the Company reassesses the appropriateness
of the inputs into the Black-Scholes model used for option
valuation. The Company establishes the risk-free interest rate using
U.S. Treasury zero-coupon bonds with a remaining term equal to the expected
option life assumed at the date of grant. The dividend yield is set
based on the dividend rate approved by the Company's Board of Directors and the
stock price on the grant date. The expected volatility assumption is
set based primarily on historical volatility. The expected life
assumption is set based on an analysis of past exercise behavior by option
holders. In performing the option valuations the Company has not
stratified option holders as exercise behavior has historically been consistent
across all employee groups. The forfeiture rate used is based on
historical experience. As required by SFAS No. 123(R) the Company
will adjust the estimated forfeiture rate based upon actual
experience.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
The
following schedule summarizes stock option activity for the year ended December
30, 2007:
|
|
Number of
Stock
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-Average
Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
December 31, 2006
|
|
|
1,399,573
|
|
|
$
|
26.93
|
|
|
|
3.8
|
|
|
|
|
Granted
|
|
|
87,900
|
|
|
|
16.50
|
|
|
|
10.0
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
Forfeited/expired
|
|
|
(181,243
|
)
|
|
|
31.19
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 30, 2007
|
|
|
1,306,230
|
|
|
|
25.83
|
|
|
|
3.4
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
December 30, 2007
|
|
|
1,157,581
|
|
|
|
27.03
|
|
|
|
2.7
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following schedule summarizes information about stock options for the year ended
December 30, 2007:
|
|
|
Range
of Exercise Prices
|
|
Weighted
-
Average
Remaining
Contractual
Life
(Years)
|
Weighted -
Average
Exercise Price
|
|
Weighted -
Average
Exercise Price
|
|
|
|
|
|
|
$14.60
- $19.22
|
229,619
|
7.5
|
$15.86
|
97,520
|
$16.23
|
$19.23
- $23.07
|
211,168
|
4.0
|
$21.93
|
194,618
|
$21.95
|
$23.08
- $26.91
|
142,223
|
4.1
|
$25.45
|
142,223
|
$25.45
|
$26.92
- $30.76
|
605,967
|
2.0
|
$28.58
|
605,967
|
$28.58
|
$30.77
- $34.60
|
5,000
|
1.8
|
$31.78
|
5,000
|
$31.78
|
$34.61
- $38.45
|
|
0.6
|
$37.97
|
|
$37.97
|
|
|
|
|
|
|
For the year ended December 30, 2007
the total share-based compensation expense for stock options was $0.5
million. The total income tax benefit recognized in net income
related to this expense was $0.1 million. As of December 30, 2007
there was $0.3 million of total unrecognized compensation cost related to
non-vested stock options. The cost is to be recognized over a
weighted-average period of 2 years.
The following table summarizes the pro
forma effect of stock-based compensation for fiscal 2005 as if the fair value
method of accounting for stock compensation had been applied. Due to
the adoption of SFAS 123R in fiscal 2006, such pro forma information is not
required with respect to fiscal 2006 and 2007.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
(
in
millions, except per share data
)
|
|
2005
|
|
Stock-based
compensation expense, net of tax, included in net (loss) income as
reported
|
|
$
|
0.1
|
|
Net
(loss) income as reported
|
|
|
(314.3
|
)
|
Pro
forma stock-based compensation expense, net of tax
|
|
|
0.6
|
|
Pro
forma net (loss) income
|
|
|
(314.9
|
)
|
(Loss)
earnings per share
|
|
|
|
|
As
reported:
|
|
|
|
|
Basic
|
|
$
|
(16.20
|
)
|
Diluted
|
|
|
(16.20
|
)
|
Pro
forma:
|
|
|
|
|
Basic
|
|
$
|
(16.23
|
)
|
Diluted
|
|
|
(16.23
|
)
|
Non-employee
Directors
Chesapeake
has a Directors' Deferred Compensation Plan that provides for annual grants of
stock options or shares to non-employee directors. Up to 270,350
options for additional shares may be issued pursuant to the Directors' Plan;
however, any future awards of stock options (or other equity compensation) to
non-employee directors will be made under the 2005 Incentive
Plan. For the year ended December 30, 2007, there were no options
granted to non-employee directors. During 2007, 17,000 shares were
granted to non-employee directors.
Restricted
Stock
From time
to time the Executive Compensation Committee of the Board of Directors (or, as
to the CEO, the Committee of Independent Directors) will grant
performance-based, service-based, or market condition-based restricted stock to
Chesapeake's officers and certain managers under Chesapeake's Incentive
Plans. For the 2004-2006, 2005-2007 and 2006-2008 cycles of the
long-term incentive program, the performance criteria established by the
Executive Compensation Committee (and the Committee of Independent Directors, as
to the CEO) for the vesting of restricted stock was the achievement of specific
strategic goals for Chesapeake. For the 2007- 2009 cycle of the
long-term incentive program, the target criteria was based on total shareholder
return, which constitutes a market condition. If the performance targets or
market conditions are not achieved by the ends of the applicable cycles, the
related shares will be forfeited.
For
performance-based or service-based restricted stock, the fair value of each
share of restricted stock is based on the fair market value of the stock on the
date of grant. The probability of achieving the performance criteria
is assessed each quarter and compensation expense is adjusted
accordingly. For liability classified awards, compensation expense is
further adjusted based on the fair value of the award at the end of the
reporting quarter. If performance goals are not met no compensation
cost is recognized and any previously recognized compensation cost is
reversed. For market condition-based restricted stock, the fair value
of each share of restricted stock is calculated by a third party service
provider using a Lattice Option-Pricing Model. The fair value
captures the probability of achieving the market condition and is updated only
if the award program is modified. If the market condition is not met,
previously recognized compensation cost is not reversed. The
following schedule summarizes non-vested restricted stock activity for the year
ended December 30, 2007:
|
|
Shares
|
|
|
Weighted-Average
Grant
Date
Value
|
|
|
|
|
|
|
|
|
Outstanding
grants at December 31, 2006
|
|
|
382,550
|
|
|
|
$21.98
|
|
New
shares granted
|
|
|
196,100
|
|
|
|
16.50
|
|
Shares
forfeited
|
|
|
(167,066
|
)
|
|
|
22.77
|
|
Shares
vested
|
|
|
(600
|
)
|
|
|
19.64
|
|
Outstanding
grants at December 30, 2007
|
|
|
410,984
|
|
|
|
$19.05
|
|
For the
year ended December 30, 2007 there was no significant share-based compensation
expense for restricted stock. As of December 30, 2007 there was $1.4
million of total unrecognized compensation cost related to
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
non-vested
restricted stock. The cost is expected to be recognized over a
weighted-average period of 2 years, assuming achievement of the performance
criteria.
Stock
Purchase Plans
Chesapeake
has stock purchase plans for certain eligible salaried and hourly
employees. Shares of Chesapeake common stock are purchased based on
participant authorized payroll deductions and a company match of a portion of
the employee contributions. At December 30, 2007, 378,182 shares
remain available for issuance under these plans.
Stock-based
Compensation Expense
The
charges to income from continuing operations, net of forfeitures, for all
stock-based employee compensation plans approximated $0.5 million in fiscal
2007, $0.9 million in fiscal 2006, and $0.1 million in fiscal
2005. See "Note 1 - Summary of Significant Accounting Policies" for
additional information related to compensation expense for stock
options.
13
|
Supplemental
Balance Sheet and Cash Flow
Information
|
Balance
Sheet Information
(in
millions)
|
|
|
|
|
|
|
Accrued
expenses:
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$
|
28.2
|
|
|
$
|
28.2
|
|
Short-term
portion of environmental liability
|
|
|
16.2
|
|
|
|
9.9
|
|
Fixed
asset purchases
|
|
|
12.4
|
|
|
|
12.6
|
|
Restructuring
|
|
|
2.8
|
|
|
|
3.0
|
|
Interest
|
|
|
4.7
|
|
|
|
5.5
|
|
Accrued
other taxes
|
|
|
4.8
|
|
|
|
6.4
|
|
Sales
rebates
|
|
|
3.7
|
|
|
|
4.4
|
|
Government
Grants
|
|
|
4.8
|
|
|
|
5.5
|
|
Other
|
|
|
3.8
|
|
|
|
8.4
|
|
Total
|
|
$
|
81.4
|
|
|
$
|
83.9
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
$
|
108.3
|
|
|
$
|
96.2
|
|
Pension
and other postretirement benefits adjustments, net of
taxes
|
|
|
(66.9
|
)
|
|
|
(117.9
|
)
|
Fair
market value of derivatives, net of tax
|
|
|
6.5
|
|
|
|
5.0
|
|
Total
|
|
$
|
47.9
|
|
|
$
|
(16.7
|
)
|
Cash
Flow Information
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
$
|
44.1
|
|
|
$
|
38.9
|
|
|
$
|
33.1
|
|
Income
taxes
|
|
|
(1.3
|
)
|
|
|
4.6
|
|
|
|
13.1
|
|
Supplemental
investing and financing non-cash transactions:
Issuance
of common stock for long-term incentive and employee benefit plans (net of
forfeitures)
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
Dividends
declared not paid
|
|
|
—
|
|
|
|
4.4
|
|
|
|
4.3
|
|
Assets
obtained by capital lease
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
6.5
|
|
Assets
financed*
|
|
|
12.4
|
|
|
|
12.6
|
|
|
|
12.1
|
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
*
|
Amounts
reported as financed are recorded as purchases of property, plant and
equipment in the statement of cash flows in the year
paid.
|
14
|
Commitments
and Contingencies
|
Lease
Obligations
Chesapeake
leases certain assets (principally manufacturing equipment, office space,
transportation and information processing equipment) generally for three- to
five-year terms. Rental expense for operating leases for continuing
operations totaled $10.2 million in fiscal 2007, $9.5 million in fiscal 2006,
and $8.8 million in fiscal 2005. As of December 30, 2007, aggregate
minimum rental payments in future years on noncancelable operating leases
approximated $26.3 million. The amounts applying to future years
are: 2008, $6.7 million; 2009, $5.1 million; 2010, $3.8 million;
2011, $2.8 million; 2012, $2.4 million; and thereafter, $5.5
million.
Environmental
Matters
The costs
of compliance with existing environmental regulations are not expected to have a
material adverse effect on our financial position 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
remediation and restoration of contaminated property and 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 identified our subsidiary, Wisconsin
Tissue Mills Inc., now WTM I Company ("WT"), as a PRP for the Lower Fox River
site.
Except for the Fox River matter we have
not been identified as a PRP at any other CERCLA-related sites. However, there
can be no assurance that we 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 our financial position or results of operations.
In June 1994 the U.S. Department of
Interior, Fish and Wildlife Service ("FWS"), a federal natural resources
trustee, notified WT that it had identified WT as a PRP for natural resources
damage liability under CERCLA arising from alleged releases of
polychlorinatedbiphenyls ("PCBs") in the Fox River and Green Bay System in
Wisconsin from WT's former recycled tissue mill in Menasha, Wisconsin. In
addition to WT six other companies (Appleton Papers, Inc., Fort Howard
Corporation, P.H. Glatfelter Company ("Glatfelter"), NCR Corporation, Riverside
Paper Corporation and U.S. Paper Mills Corporation) have been identified as PRPs
for the Fox River site. The FWS and other governmental and tribal entities,
including the State of Wisconsin ("Wisconsin"), allege that natural resources,
including federal lands, state lands, endangered species, fish, birds, tribal
lands or lands held by the U.S. in trust for various Indian tribes, have been
exposed to PCBs that were released from facilities located along the Lower Fox
River. On January 31, 1997 the FWS notified WT of its intent to file suit,
subject to final approval by the U.S. Department of Justice ("DOJ"), against WT
to recover alleged natural resource damages, but the FWS has not yet instituted
such litigation. 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. On September 30, 2003 EPA and the Wisconsin Department of
Natural Resources ("DNR"), in connection with the issuance of General Notice
Letters under CERCLA to the PRPs requesting a good faith offer to conduct the
remedial design for downstream portions of the Lower Fox River site, also
notified Menasha Corporation and Sonoco Products Company that those companies
were also considered potentially liable for the cost of response activities at
the Lower Fox River site.
In
January 2003 DNR and EPA released a Record of Decision (the "OU1-2 ROD") for
Operable Units 1 and 2 ("OU1" and "OU2") of the Fox River site. OU1 is the reach
of the river that is the farthest upstream and is immediately adjacent to the
former WT mill. The OU1-2 ROD selected a remedy, consisting primarily of
dredging, to remove substantially all sediment in OU1 with concentrations of
PCBs of more than 1 part per million in order to
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
achieve a
surface weighted-average PCB concentration level ("SWAC") of not more than 0.25
parts per million. The OU1-2 ROD estimated the present-worth cost of the
proposed remedy for OU1 as $66.2 million. Present-worth cost as stated in the
OU1-2 ROD means capital costs in undiscounted 2001 dollars and long-term
operation, maintenance and monitoring costs discounted at 6 percent. This
estimate was an engineering cost estimate and the OU1-2 ROD stated that the
actual project cost was expected to be within +50 percent to -30 percent of the
estimate. The OU1-2 ROD estimated that the proposed dredging remedy for OU1
would be accomplished over a six-year period after commencement of dredging. For
OU2, the reach of the river covering approximately 20 miles downstream from OU1,
the OU1-2 ROD was amended as of June 2007 by a Record of Decision Amendment (the
“Amended OU2-5 ROD”) to provide for dredging and disposal of a single deposit in
OU2. The remainder of OU2 will be addressed by monitored natural
recovery as provided in the original OU1-2 ROD.
On July 1, 2003 DNR and EPA announced
that they had signed an agreement with WT under which WT will complete the
design work for the sediment clean-up in OU1. On April 12, 2004, a Consent
Decree (the "Consent Decree") regarding the remediation of OU1 by WT and
Glatfelter was entered by a federal court. Under the terms of the Consent
Decree, WT and Glatfelter agreed to perform appropriate remedial action in OU1
in accordance with the OU1-2 ROD under oversight by EPA and DNR. To fund the
remedial action, WT and Glatfelter each paid $25 million to an escrow account,
and EPA and Wisconsin obtained an additional $10 million from another source to
supplement the funding. Contributions and cooperation may also be obtained from
local municipalities, and additional assistance may be sought from other
potentially liable parties. As provided in the Consent Decree, WT has been
reimbursed from the escrow account for $2 million of OU1 design costs expended
under the July 1, 2003, design agreement.
Upon completion of the remedial action
for OU1 to the satisfaction of EPA and Wisconsin, WT and Glatfelter will receive
covenants not to sue from EPA and Wisconsin for OU1, subject to conditions
typical of settlements under CERCLA. In March 2007, as an alternative
to a determination by EPA and Wisconsin that the funds remaining in the Consent
Decree escrow account would be insufficient to complete the OU1 remedial action
described in the OU1-2 ROD, WT and Glatfelter agreed with EPA and Wisconsin on
an Agreed Supplement to Consent Decree (the “First Supplement”) which was filed
with the federal court on March 28, 2007. Under the provisions of the First
Supplement, WT has deposited an additional total of $6 million in the Consent
Decree escrow account as additional funding for remediation of OU1. Glatfelter
has also agreed to provide an additional $6 million for the Consent Decree
escrow account. In addition, Menasha Corporation has agreed to
provide $7 million for the Consent Decree escrow account pursuant to a Second
Agreed Supplement to Consent Decree (“Second Supplement”) filed with the federal
court on November 13, 2007. If the funding provided through the Consent Decree
escrow account is not adequate to pay for the required OU1 remedial action, WT
and Glatfelter have the option, but not the obligation, to again contribute
additional funds to complete the remedial action. WT remains
potentially liable for the additional costs necessary to achieve the performance
standards for OU1 specified in the OU1-2 ROD.
EPA and Wisconsin have proposed an
Amended Record of Decision for OU-1 (the “Proposed Amended OU1 ROD”) which
includes a balanced approach of capping, sand covering and dredging in
OU1. EPA and Wisconsin are receiving public comment on the Proposed
Amended OU1 ROD until January 31, 2008. Based on the assumption of
approval by EPA and Wisconsin of the Proposed Amended OU1 ROD, WT and Glatfelter
have indicated to EPA and Wisconsin their intent to agree to complete the
remediation of OU1 as required by an amended OU1-2 ROD, the estimated cost of
which is $11 million to $21 million in excess of funds already committed under
the Consent Decree and the First and Second Supplements. If the
Proposed Amended OU1 ROD is approved and the funding in the OU1 Consent Decree
escrow account and the funding committed by WT and others is not adequate to pay
for the required OU1 remedial action, WT would remain potentially liable for the
additional costs necessary to achieve the performance standards for OU1
specified in the Proposed Amended OU1 ROD.
Under
the terms of the Consent Decree WT also paid EPA and the State of Wisconsin
$375,000 for past response costs, and paid $1.5 million for natural resource
damages ("NRD") for the Fox River site and $150,000 for past NRD assessment
costs. These payments have been credited toward WT's potential liability for
response costs and NRD associated with the Fox River site as a whole. As
discussed later in this section we believe that WT is entitled to substantial
indemnification from a prior owner of WT with respect to these costs, and the
prior owner has reimbursed WT for the payments made as required in the Consent
Decree.
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
In July 2003 EPA and DNR announced a
Record of Decision (the "OU3-5 ROD") for Operable Units 3, 4 and 5 ("OU3," "OU4"
and "OU5," respectively), the remaining operable units for this site. The OU3-5
ROD requires primarily dredging and disposal of PCB contaminated sediments from
OU3 and OU4 (the downstream portion of the river) and monitored natural recovery
in OU5 (Green Bay). In June 2007 EPA and Wisconsin issued the Amended OU2-5
ROD. The Amended OU2-5 ROD modifies the remediation requirements for
OUs 3 and 4 by reducing the volume of sediment to be dredged and providing for
capping or sand cover as prescribed remediation where specific criteria are
met. For OUs 2 and 5 the remedy is unchanged except that dredging is
now required in a single deposit in OU2 and at the mouth of the Fox River in
OU5. The estimated cost of the amended OU2-5 ROD is $390.3 million in
2005 dollars, including the present worth of long-term maintenance and
monitoring over 100 years. On November 14, 2007 the six PRPs
identified above, including WT, and Menasha Corporation were issued a Unilateral
Administrative Order for Remedial Action by EPA under Section 106 of CERCLA to
perform and fund work required by the Amended OU2-5 ROD. WT has given
notice to EPA of its intent to comply with the terms of the order currently
applicable to WT and is involved negotiations with the other recipients of the
order on how they will comply with the order.
Based on information available to us at
this time we believe that the range of reasonable estimates of the remaining
total cost of remediation and restoration for the Fox River site is $500 million
to $1.0 billion. The low end of this range assumes that the remedy for OU1 will
be amended consistent with the Proposed Amended OU1 ROD and relies on the lower
estimates stated in the Proposed OU1 ROD for future OU1 costs. For
OU2-5, the low end of this range is based on the costs estimated in the Amended
OU2-5 ROD. The upper end of the range assumes the higher estimates in the range
of OU1 costs stated in the Proposed Amended OU1 ROD and costs substantially
exceeding those stated in the Amended 2-5 ROD. The active remediation
components of the alternative remedy proposed for OU1 are expected to take
approximately two more years, while the Amended OU2-5 ROD indicates that active
remediation is expected to take approximately nine years from the commencement
of substantial activity. Any enforcement of a definitive remedial action plan
may be subject to judicial review.
On October 25, 2000 the federal and tribal natural resources trustees released a
Restoration and Compensation Determination 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 at the Fox River site. The RCDP states that the final natural resource
damage claim (which is separate from, and in addition to, the remediation and
restoration costs that will be associated with remedial action plans) will
depend on the extent of PCB clean-up undertaken by EPA and DNR, but estimates
past interim damages to be $65 million, and, for illustrative purposes only,
estimates additional costs of restoration to address present and future PCB
damages in a range of $111 million to $268 million. To date Wisconsin has not
issued any estimate of natural resource damages. We believe, based on the
information currently available to us, that the estimate of natural resource
damages in the RCDP represents the reasonably likely upper limit of the total
natural resource damages. We believe that the alleged damages to natural
resources are overstated in the RCDP and joined in the PRP group comments on the
RCDP to that effect. No final assessment of natural resource damages has been
issued.
Under CERCLA each PRP generally will be
jointly and severally liable for the full amount of the remediation and
restoration costs and natural resource damages, subject to a right of
contribution from other PRPs. In practice PRPs generally negotiate among
themselves to determine their respective contributions to any multi-party
activities based upon factors including their respective contributions to the
alleged contamination, equitable considerations and their ability to pay. In
draft analyses by DNR and federal government consultants the volume of WT's PCB
discharges into the Fox River has been estimated to range from 2.72 percent to
10 percent of the total discharges of PCBs. This range may not be indicative of
the share of the cost of the remediation and restoration costs and natural
resource damages that ultimately will be allocated to WT because of:
inaccuracies or incompleteness of information about mill operations and
discharges; inadequate consideration of the nature and location of various
discharges of PCBs to the river, including discharges by persons other than the
named PRPs and the relationship of those discharges to identified contamination;
uncertainty of the geographic location of the remediation and restoration
eventually performed; uncertainty about the ability of other PRPs to participate
in paying the costs and damages; and uncertainty about the extent of
responsibility of the manufacturers of the carbonless paper recycled by WT which
contained the PCBs. We have evaluated the ability of other PRPs to participate
in paying the remediation and restoration costs and natural resource damages
based on our estimate of their reasonably possible shares of the liability and
on public financial information indicating their ability to pay such shares.
While we are unable to determine at this time what shares of the liability for
the Fox River costs will be paid by the other identified PRPs (or other entities
who are subsequently determined to have liability), based on
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
information
currently available to us and the analysis described above, we believe that most
of the other PRPs have the ability to pay their reasonably possible shares of
the liability.
The
ultimate cost to WT of remediation and restoration costs and natural resource
damages related to the Fox River site and the time periods over which the costs
and damages may be incurred cannot be predicted with certainty at this time due
to uncertainties with respect to: what remediation and restoration will be
implemented; the actual cost of that remediation and restoration; WT's share of
any multi-party remediation and restoration costs and natural resource damages;
the outcome of the federal and state natural resource damage assessments; the
timing of any remediation and restoration; the evolving nature of remediation
and restoration technologies and governmental regulations; controlling legal
precedent; the extent to which contributions will be available from other
parties; and the scope of potential recoveries from insurance carriers and prior
owners of WT. While such costs and damages cannot be predicted with certainty at
this time, we believe that WT's reasonably likely share of the ultimate
remediation and restoration costs and natural resource damages associated with
the Fox River site, including disbursement on behalf of WT of the remaining
amount deposited by WT under the terms of the Consent Decree, may fall within
the range of $36 million to $160 million, payable over a period of up to 40
years. In our estimate of the lower end of the range we have assumed
remediation and restoration costs as estimated by our consultants for OU1 and as
estimated in the Amended OU2-5 ROD, and the low end of the governments'
estimates of natural resource damages and WT's share of the aggregate liability.
In our estimate of the upper end of the range we have assumed higher costs in
all OUs and that our share of the ultimate aggregate liability for all PRPs will
be higher than we believe it will ultimately be determined to be. We have
accrued an amount for the Fox River liability based on our estimate of the
reasonably probable costs within the range as described above.
We believe that, pursuant to the terms
of a stock purchase agreement between Chesapeake and Philip Morris Incorporated
(now known as Philip Morris USA Inc., or "PM USA," a wholly owned subsidiary of
Altria Group, Inc.), a former owner of WT, we are entitled to substantial
indemnification from PM USA with respect to the liabilities related to this
matter. Based on the terms of that indemnity we believe that the probable costs
and damages should be indemnified by PM USA. We understand, however, that PM USA
is subject to certain risks (including litigation risk in cases relating to
health concerns regarding the use of tobacco products). Accordingly, there can
be no assurance that PM USA will be able to satisfy its indemnification
obligations in the future. However, PM USA is currently meeting its
indemnification obligations under the stock purchase agreement and, based on our
review of currently available financial information, we believe that PM USA has
the financial ability to continue to meet its indemnification
obligations.
Pursuant to the Joint Venture Agreement
with Georgia-Pacific Corporation for Georgia-Pacific Tissue, LLC, 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 currently available information we believe that if
remediation and restoration are done in an environmentally appropriate, cost
effective and responsible manner, and if natural resource damages are determined
in a reasonable manner, the matter is unlikely to have a material adverse effect
on our financial position or results of operations. However, because of the
uncertainties described above, there can be no assurance that the ultimate
liability with respect to the Lower Fox River site will not have a material
adverse effect on our financial position or results of operations.
In
the fourth quarter of fiscal 2007, we reviewed, and increased, our estimate of
our reasonably probable environmental costs based on remediation activities to
date and other developments. Our accrued environmental liabilities
totaled approximately $75.1 million as of December 30, 2007, of which $16.2
million was considered short-term, and $53.5 million as of December 31, 2006, of
which $9.9 million was considered short-term.
Legal
and Other Commitments
Chesapeake
is a party to various other legal actions and tax audits which are ordinary and
incidental to our business. While the outcome of environmental, tax and legal
actions cannot be predicted with certainty, we believe the outcome of any of
these proceedings, or all of them combined, will not have a material adverse
effect on our consolidated financial position or results of
operations.
The
Internal Revenue Service (“IRS”) has proposed Federal income tax adjustments
relating to a transfer of assets in 1999 by our subsidiary, WTM I Company, to a
joint venture with Georgia-Pacific Corporation. The
IRS issued a Notice of Deficiency based on those adjustments on May
25, 2006. Taking into account correlative
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
adjustments
to the Corporation’s tax liability in other years, the amount in dispute,
including interest through December 30, 2007, is approximately $35
million.
We intend
to defend our position vigorously with respect to the asserted
deficiency. We have estimated our maximum potential exposure with
respect to the matter to be approximately $35 million; however, we continue to
believe that our tax treatment of the transaction was appropriate and that we
should prevail in this dispute with the IRS. We do not expect that
the ultimate resolution of this matter will have a material adverse effect on
our financial condition or results of operation.
Guarantees
and Indemnifications
We have
entered into agreements for the sale of assets or businesses that contain
provisions in which we agree to indemnify the buyers or third parties involved
in the sale for certain liabilities or risks related to the sale. In these sale
agreements we typically agree to indemnify the buyers or other involved third
parties against a broadly-defined range of potential "losses" (typically
including, but not limited to, claims, costs, damages, judgments, liabilities,
fines or penalties, and attorneys' fees) arising from: (i) a breach
of our representations or warranties in the sale agreement or ancillary
documents; (ii) our failure to perform any of the covenants or obligations of
the sale agreement or ancillary documents; and (iii) other liabilities expressly
retained or assumed by us related to the sale. Most of our indemnity
obligations under these sale agreements are: (i) limited to a maximum
dollar value significantly less than the final purchase price; (ii) limited by
time within which indemnification claims must be asserted (often between one and
three years); and (iii) subject to a deductible or "basket." Many of the
potential indemnification liabilities under these sale agreements are unknown,
remote or highly contingent, and most are unlikely to ever require an indemnity
payment. Furthermore, even in the event that an indemnification claim
is asserted, liability for indemnification is subject to determination under the
terms of the applicable sale agreement, and any payments may be limited or
barred by a monetary cap, a time limitation or a deductible or
basket. For these reasons we are unable to estimate the maximum
potential amount of the potential future liability under the indemnity
provisions of the sale agreements. However, we accrue for any
potentially indemnifiable liability or risk under these sale agreements for
which we believe a future payment is probable and a range of loss can be
reasonably estimated. Other than the Fox River matter discussed in
Environmental Matters above, as of December 30, 2007, we believe our liability
under such indemnification obligations was immaterial.
In the
ordinary course of our business we may enter into agreements for the supply of
goods or services to customers that provide warranties to their customers on one
or more of the following: (i) the quality of the goods and services
supplied by us; (ii) the performance of the goods supplied by us; and (iii) our
compliance with certain specifications and applicable laws and regulations in
supplying the goods and services. Liability under such warranties
often is limited to a maximum amount by the nature of the claim or by the time
period within which a claim must be asserted. As of December 30, 2007
we believe our liability under such warranties was immaterial.
In the
ordinary course of our business we may enter into service agreements with
service providers in which we agree to indemnify the service provider against
certain losses and liabilities arising from the service provider's performance
of the agreement. Generally, such indemnification obligations do not
apply in situations in which the service provider is grossly negligent, engages
in willful misconduct or acts in bad faith. As of December 30, 2007
we believe our liability under such service agreements was
immaterial.
In the
ordinary course of our business, we may enter into supply agreements (such as
those discussed above), service agreements (such as those discussed above),
purchase agreements, leases, and other types of agreements in which we agree to
indemnify the party or parties with whom we are contracting against certain
losses and liabilities arising from, among other things: (i) our breach of the
agreement or representations or warranties under the agreement; (ii) our failure
to perform any of our obligations under the agreement; (iii) certain defined
actions or omissions by us; and (iv) our failure to comply with certain laws,
regulations, rules, policies, or specifications. As of December 30,
2007 we believe our liability under these agreements was
immaterial.
15
|
Business
Segment Information
|
During
July 2007 we announced a reorganization that included the realignment of
operating segments. As of September 30, 2007 we conduct our business
in three operating segments: Plastic Packaging, Pharmaceutical and
Healthcare Packaging ("Pharma"), and Branded Products Packaging ("Branded
Products"). The Branded Products
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
operating
segment includes the former Tobacco operating segment. The Pharma and
Branded Products operating segments are aggregated into the Paperboard Packaging
reportable segment. Our Paperboard Packaging segment designs and
manufactures folding cartons, spirally wound composite tubes, leaflets, labels
and other paper and paperboard packaging products. The primary
end-use markets for this segment are pharmaceutical and healthcare and branded
products (such as alcoholic drinks, confectioneries, foods and
tobacco). The Plastic Packaging segment designs and manufactures
plastic containers, bottles, and preforms. The primary end-use
markets for this segment are agrochemicals and other specialty chemicals, and
food and beverages. General corporate expenses are shown as
Corporate.
Segments
are determined by the “management approach” as described in SFAS No. 131,
Disclosures about Segments of an
Enterprise and Related Information
, which we adopted in
1998. Management assesses continuing operations based on operating
income before interest and taxes derived from similar groupings of products and
services. Consistent with management’s assessment of performance,
goodwill impairments, gains (losses) on divestitures and restructuring expenses,
asset impairments and other exit costs are excluded from segment operating
income.
There
were no material intersegment sales in fiscal years 2007, 2006 or
2005. No single customer represented more than 10 percent of total
net sales. Net sales are attributed to geographic areas based on the
location of the segment’s geographically managed operations. Segment
identifiable assets are those that are directly used in segment
operations. Corporate assets are cash and other assets. Long-lived
assets are primarily property, plant and equipment.
Financial
Information by Business Segment:
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Paperboard
Packaging
|
|
$
|
879.7
|
|
|
$
|
840.4
|
|
|
$
|
827.4
|
|
Plastic
Packaging
|
|
|
179.9
|
|
|
|
155.0
|
|
|
|
181.8
|
|
Consolidated
net sales
|
|
$
|
1,059.6
|
|
|
$
|
995.4
|
|
|
$
|
1,009.2
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Paperboard
Packaging
|
|
$
|
36.9
|
|
|
$
|
42.9
|
|
|
$
|
49.8
|
|
Plastic
Packaging
|
|
|
20.4
|
|
|
|
17.9
|
|
|
|
15.0
|
|
Corporate
|
|
|
(16.3
|
)
|
|
|
(15.9
|
)
|
|
|
(17.1
|
)
|
Goodwill
impairment charge
|
|
|
—
|
|
|
|
(14.3
|
)
|
|
|
(312.0
|
)
|
Restructuring
charges, asset impairments
and
other exit costs
|
|
|
(15.8
|
)
|
|
|
(33.4
|
)
|
|
|
(10.7
|
)
|
Gain
(loss) on divestitures
|
|
|
1.5
|
|
|
|
3.1
|
|
|
|
(2.8
|
)
|
Consolidated
operating income (loss)
|
|
$
|
26.7
|
|
|
$
|
0.3
|
|
|
$
|
(277.8
|
)
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard
Packaging
|
|
$
|
900.5
|
|
|
$
|
859.9
|
|
|
$
|
826.7
|
|
Plastic
Packaging
|
|
|
207.8
|
|
|
|
171.2
|
|
|
|
184.2
|
|
Corporate
|
|
|
105.4
|
|
|
|
83.7
|
|
|
|
112.1
|
|
Consolidated
assets
|
|
|
1,213.7
|
|
|
$
|
1,114.8
|
|
|
$
|
1,123.0
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard
Packaging
|
|
$
|
35.7
|
|
|
$
|
28.1
|
|
|
$
|
29.7
|
|
Plastic
Packaging
|
|
|
13.9
|
|
|
|
7.7
|
|
|
|
8.0
|
|
Corporate
|
|
|
—
|
|
|
|
—
|
|
|
|
0.6
|
|
Consolidated
capital expenditures
|
|
$
|
49.6
|
|
|
$
|
35.8
|
|
|
$
|
38.3
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard
Packaging
|
|
$
|
45.9
|
|
|
$
|
48.4
|
|
|
$
|
48.4
|
|
Plastic
Packaging
|
|
|
7.3
|
|
|
|
7.8
|
|
|
|
9.6
|
|
Corporate
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Discontinued
operations
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.9
|
|
Consolidated
depreciation and amortization
|
|
$
|
53.4
|
|
|
$
|
56.6
|
|
|
$
|
59.2
|
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Geographic
Information:
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
$
|
497.3
|
|
$
|
498.6
|
|
$
|
557.6
|
|
Germany
|
|
149.4
|
|
|
127.5
|
|
|
119.6
|
|
Ireland
|
|
103.1
|
|
|
90.6
|
|
|
79.8
|
|
France
|
|
91.3
|
|
|
82.1
|
|
|
78.9
|
|
U.S.
|
|
61.5
|
|
|
57.3
|
|
|
26.1
|
|
Belgium
|
|
52.6
|
|
|
53.1
|
|
|
61.2
|
|
South
Africa
|
|
53.0
|
|
|
40.8
|
|
|
42.8
|
|
Other
|
|
51.4
|
|
|
45.4
|
|
|
43.2
|
|
Total
|
$
|
1,059.6
|
|
$
|
995.4
|
|
$
|
1,009.2
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
$
|
185.0
|
|
$
|
172.3
|
|
$
|
186.4
|
|
U.S.
|
|
129.7
|
|
|
105.9
|
|
|
133.2
|
|
Germany
|
|
53.4
|
|
|
65.4
|
|
|
66.9
|
|
France
|
|
31.7
|
|
|
24.9
|
|
|
24.8
|
|
Ireland
|
|
29.2
|
|
|
25.5
|
|
|
23.4
|
|
Belgium
|
|
27.3
|
|
|
27.1
|
|
|
23.8
|
|
South
Africa
|
|
16.1
|
|
|
11.7
|
|
|
14.4
|
|
Other
|
|
32.8
|
|
|
13.7
|
|
|
16.5
|
|
Total
|
$
|
505.2
|
|
$
|
446.5
|
|
$
|
489.4
|
|
CHESAPEAKE
CORPORATION
Notes to
Consolidated Financial Statements
Recent
Quarterly Results (Unaudited)
(in
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share
|
Quarter
|
Net
Sales
|
|
Gross
Profit
|
|
Income
from
Continuing
Operations
|
|
Net
Income
|
|
Income
from
Continuing
Operations
Basic
Diluted
|
|
Earnings
Basic
Diluted
|
|
Dividends
Declared
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
(a)
|
$272.0
|
|
$
|
49.6
|
|
|
$
|
0.9
|
|
|
$
|
0.7
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.22
|
|
Second
(b)
|
250.9
|
|
|
43.0
|
|
|
|
(11.7
|
)
|
|
|
(12.6
|
)
|
|
|
(0.60
|
)
|
|
|
(0.60
|
)
|
|
|
(0.65
|
)
|
|
|
(0.65
|
)
|
|
|
-
|
|
Third
(c)
|
266.4
|
|
|
47.4
|
|
|
|
3.7
|
|
|
|
3.2
|
|
|
|
0.19
|
|
|
|
0.19
|
|
|
|
0.16
|
|
|
|
0.16
|
|
|
|
-
|
|
Fourth
(d)
|
270.3
|
|
|
39.2
|
|
|
|
(6.7
|
)
|
|
|
(6.8
|
)
|
|
|
(0.34
|
)
|
|
|
(0.34
|
)
|
|
|
(0.35
|
)
|
|
|
(0.35
|
)
|
|
|
-
|
|
Year
|
$1,059.6
|
|
$
|
179.2
|
|
|
$
|
(13.8
|
)
|
|
$
|
(15.5
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.80
|
)
|
|
$
|
(0.80
|
)
|
|
$
|
0.22
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
(e)
|
$253.2
|
|
$
|
44.6
|
|
|
$
|
(3.8
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.22
|
|
Second
(f)
|
236.3
|
|
|
41.5
|
|
|
|
(0.7
|
)
|
|
|
(4.8
|
)
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.25
|
)
|
|
|
(0.25
|
)
|
|
|
0.22
|
|
Third
(g)
|
247.9
|
|
|
42.7
|
|
|
|
5.4
|
|
|
|
4.1
|
|
|
|
0.28
|
|
|
|
0.28
|
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
-
|
|
Fourth
(h)
|
258.0
|
|
|
46.5
|
|
|
|
(33.3
|
)
|
|
|
(34.2
|
)
|
|
|
(1.72
|
)
|
|
|
(1.72
|
)
|
|
|
(1.76
|
)
|
|
|
(1.76
|
)
|
|
|
0.44
|
|
Year
|
$995.4
|
|
$
|
175.3
|
|
|
$
|
(32.4
|
)
|
|
$
|
(39.6
|
)
|
|
$
|
(1.67
|
)
|
|
$
|
(1.67
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
0.88
|
|
(a)
|
The
first quarter of fiscal 2007 included restructuring charges of $.7
million, net of income taxes.
|
(b)
|
The
second quarter of fiscal 2007 included restructuring charges of $9.3
million, net of income taxes.
|
(c)
|
The
third quarter of fiscal 2007 included restructuring charges of $2.9
million, net of income taxes; an income tax benefit of $3.5 million
related to the resolution of income tax contingencies; and an income tax
benefit of $1.2 million resulting from a re-evaluation of our deferred
taxes for changes in U.K. tax law and changes in statutory tax rates for
the U.K. and Germany.
|
(d)
|
The
fourth quarter of fiscal 2007 included restructuring charges of
$0.5 million, net of income taxes; and a gain on divestiture on
$1.5 million, net of income tax related to the sale of the Company’s
plastic packaging operation in Lurgan, Northern Ireland
(“Lurgan”).
|
(e)
|
The
first quarter of fiscal 2006 included restructuring charges of $2.8
million, net of income taxes; a loss on divestiture of $1.2 million, net
of income taxes, related to the sale of Lurgan; a loss of $0.6 million,
net of income taxes, for the redemption of £5.0 million principal amount
of the Company’s 10.375% senior subordinated notes due 2011; and a loss of
$0.9 million, net of income taxes, reported in discontinued operations
primarily related to the operating results of the Company’s French luxury
packaging business (“CLP”), which was sold in the third quarter of fiscal
2006.
|
(f)
|
The
second quarter of fiscal 2006 included restructuring charges of $1.6
million, net of income taxes and a loss of $4.1 million net of income
taxes, reported in discontinued operations primarily related to the
operating results of CLP.
|
(g)
|
The
third quarter of fiscal 2006 included restructuring charges of $1.3
million, net of income taxes; a gain on divestitures of $4.1 million, net
of income taxes related to the sale of Lurgan; an income tax benefit of
$4.1 million as a result of management’s reassessment of its valuation
allowance for deferred income tax assets in France following the sale of
CLP and a favorable settlement regarding an income tax contingency; and a
loss of $1.3 million net of income taxes, reported in discontinued
operations primarily related to the sale and operating results of
CLP.
|
(h)
|
The
fourth quarter of fiscal 2006 included a goodwill impairment charge of
$14.3 million, net of income taxes; an asset impairment charge
of $21.1 million, net of taxes, restructuring charges of $0.6 million, net
of income taxes; an income tax benefit of $1.6 million related to a
favorable settlement regarding an income tax contingency and a loss of
$0.9 million net of income taxes, reported in discontinued operations
primarily related to an increase in the liability associated with the
disposition of assets of Wisconsin Tissue Mills Inc. in
1999.
|
Report
of Independent Registered Public Accounting Firm
To Board
of Directors and Shareholders
Chesapeake
Corporation:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Chesapeake
Corporation and its subsidiaries at December 30, 2007 and December 31, 2006, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 30, 2007, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Annual Report on Form 10-K. Our responsibility is to express
opinions on these financial statements and on the Company's internal control
over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As
discussed in Note 9, “Income Taxes” and Note 10, “Employee Retirement and
Postretirement Benefits” to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions in 2007 and
defined benefit pension and other postretirement plans in
2006, respectively.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
/s/
PricewaterhouseCoopers LLP
|
PricewaterhouseCoopers
LLP
|
Richmond,
Virginia
|
March 6,
2008
|