Chesapeake Corp. swings to loss, but says belt-tightening plan on track; eyes bond refinancing

By Paul Deckelman

New York, April 25 - Chesapeake Corp. tumbled into the red in the latest quarter, posting net and operating losses for the 2006 fiscal first period ended April 2, versus year-earlier profits. However, executives of the Richmond, Va.-based maker of paper and plastic packaging materials told analysts on a conference call Tuesday that the loss was largely attributable to steep increases in energy costs and pension obligations; absent those items, they said, the company's performance was about in line with its year-ago results.

Company president and chief executive officer Andrew J. Kohut and chief financial officer Joel K. Mostrum also said that Chesapeake's ongoing operational restructuring, including plant closings and other cost-cutting tactics, is continuing on schedule.

And the CFO said that Chesapeake is "currently evaluating options for refinancing" its £116 million of outstanding sterling-denominated 10 3/8% senior subordinated notes due Nov. 15, 2011, which become callable this November. The bonds were originally sold in the fall of 2001.

As of the end of the fiscal first quarter, Chesapeake's balance sheet showed the equivalent of $426.1 million of long-term debt, up from $410.1 million at the end of the previous period, the 2005 fiscal fourth quarter ended Jan. 1. Besides the sterling bonds, the debt obligations included €100 million of 7% senior subordinated notes due Dec. 15, 2014 and two small series of dollar-denominated waste disposal revenue bonds coming due in 2019. Mostrum also noted that as of the end of the quarter the company had utilized $118 million of availability under its $250 million revolving credit facility.

He also pointed out that Chesapeake's net interest expense rose by about $500,000 to $9.4 million from $8.9 million in the year-earlier quarter primarily due to increased borrowing levels stemming from the company's $65 million acquisition last year of Arlington Press, a producer of printed leaflets, pressure-sensitive labels and folding cartons for the pharmaceutical industry; the funding requirements of Chesapeake's global cost savings program; and higher average interest rates in its short-term borrowing. These were offset, in part, by changes in foreign currency exchange rates.

During the first quarter of 2006, the company recognized a pre-tax and after-tax loss of $600,0000, or three cents per share, on the early redemption of £5 million principal amount of the 10 3/8% notes.

In December, Chesapeake successfully tendered for most of its $85 million of then-outstanding 7.20% 2005 debentures, buying all $66.8 million of the notes that were tendered under the offer, or 78.5% of the originally outstanding amount. The tender was funded from the proceeds of the 7% notes sale and bank borrowings.

$4.6 loss from continuing operations

For the latest quarter, Chesapeake reported a loss from continuing operations of $4.6 million (24 cents per share), versus income from continuing operations for the 2005 first quarter of $1.5 million (eight cents per share).

Those results included a net after-tax losses of $4.2 million (22 cents per share) for divestitures, restructuring expenses and other exit costs, principally attributable to activities under the company's $25 million global cost savings program, which includes the closing of the company's facilities in Birmingham and Bedford, England., and in Ezy, France, as well as other broad-based workforce reductions. The company last month separately announced the sale of its plastic packaging operation in Lurgan, Northern Ireland, which resulted in an after-tax loss on divestiture of $1.2 million (seven cents per share).

The latest results also include the loss connected to the early extinguishment of debt. Excluding those items, income from continuing operations in the latest quarter was actually in the black, at $200,000, or a penny per share.

On a net income basis, including discontinued operations, the company reported a loss for the 2006 first quarter of $4.7 million (24 cents per share) - a reversal from net income of $2.2 million (11 cents per share) for the 2005 first quarter.

Energy, pensions pull down earnings

However, the CFO pointed out that the latest results were negatively impacted by about $2 million of additional energy costs and a like amount of pension obligations. He said that excluding the drag on results from those two negatives, the results were "comparable" to the year-earlier first quarter.

Chesapeake will realize some $12 million of annualized pre-tax savings - about halfway to its global goal - from the plant closings and other belt-tightening measures taken in the quarter, causing CEO Kohut to pronounce himself "very pleased" with the progress that the company is making on that front, even though the impact of the downsizing won't really be reflected in the results until the second half of the year.

When questioned by analysts during the question-and-answer portion of the call, following the official company presentation, Kohut declined to lay out a timetable for the anticipated completion of cost-cutting initiatives now under way, although he did say that other possible facilities closings or other transactions were "under consideration."

The company's cost-savings plan was announced in the face of an industrywide slump caused by sagging demand for products and a glut of manufacturing capacity. "The cost savings program," Kohut declared "is critical to our success."

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