RICHMOND, Va., Aug. 1 /PRNewswire-FirstCall/ -- Chesapeake Corporation (NYSE: CSK) today reported financial results for the second quarter of 2008.

Second-Quarter 2008 Consolidated Results

-- Net sales of $251.4 million were comparable to net sales for second quarter of 2007, and declined 6 percent excluding the effect of changes in foreign currency exchange rates.

-- Operating loss was $216.2 million compared to $1.1 million for the second quarter of 2007. The company recorded a goodwill impairment charge of $215.5 million in its Paperboard Packaging reporting segment in the second quarter of fiscal 2008. Operating income exclusive of goodwill impairments, gains or losses on divestitures and restructuring expenses, asset impairments and other exit costs (collectively 'special items') was $3.3 million, down $6.5 million when compared to the second quarter of 2007, and, excluding the effect of changes in foreign currency exchange rates, down $7.4 million compared to the second quarter of 2007.

-- Loss from continuing operations was $227.7 million, or $11.67 per share, compared to loss from continuing operations of $10.6 million, or $0.54 per share, for the second quarter of 2007. Excluding special items, loss from continuing operations was $8.7 million, or $0.44 per share, compared to loss from continuing operations of $1.3 million, or $0.06 per share, for the second quarter of 2007.

-- Loss on discontinued operations, net of taxes, for the second quarter of 2008 was $33.3 million compared to $0.9 million for the same period in 2007. The loss for the second quarter of 2008 primarily related to our environmental indemnification resulting from the acquisition of the former Wisconsin Tissue Mills Inc.

'We remain focused on two items, successfully refinancing our debt to provide us with additional liquidity and financial flexibility and achieving operational improvements for improved financial results in the second half of the year,' said Andrew J. Kohut, Chesapeake's president & chief executive officer. 'In addition to new business, we expect a seasonal pick up in demand in most of our key markets. Serving the needs of our customers is paramount and key to our success, and we fully expect to be able to respond to our customers' needs during the seasonal peak of the year. We continue to expect second-half operating results to improve over the first half but improvement for the full year will be more challenging given rising costs.'

Segment Results

The following discussion compares the results of the business segments for the second quarter of 2008 with the second quarter of 2007 and excludes the effect of changes in foreign currency exchange rates and special items.

Paperboard Packaging

Net sales for the second quarter of 2008 decreased 6 percent, or $13.0 million, compared to the same period in 2007. The decline in net sales was due to lower sales of both branded products and pharmaceutical and healthcare packaging. The sales decline in branded products packaging was approximately 9 percent and was primarily due to decreased sales of tobacco packaging related to the previously announced loss of business with British American Tobacco, partially offset by increased sales of U.K. drinks packaging and German confectionery packaging. The decline in pharmaceutical and healthcare packaging sales was approximately 5 percent and was a result of lower customer demand and a competitive price environment.

Operating income for the second quarter of 2008 was unfavorable compared to the same period in 2007 by $4.5 million. The decrease in operating results was largely due to decreased sales volumes, competitive pricing, start-up costs associated with new products and rising energy and related costs.

Plastic Packaging

Net sales for the second quarter of 2008 decreased 2 percent, or $0.8 million, over the comparable quarter in 2007. The decrease in net sales during the second quarter was primarily due to decreased sales in the South African beverage operation partially offset by increased sales of specialty chemical packaging in the U.K. and Hungary.

Operating income for the second quarter of 2008 declined 53 percent, or $3.2 million, compared to the same period in 2007. The decrease in operating income for the second quarter was primarily due to competitive market conditions and increased raw material costs throughout the segment.

Liquidity

Net cash used in operating activities was $28.8 million for the first six months of 2008, compared to net cash provided by operating activities of $15.4 million for the first six months of 2007. This unfavorable comparison was primarily due to the decline in operating results and increased working capital requirements compared to the same period in 2007. Exclusive of restructuring spending, net cash used in operating activities was $25.6 million for the first six months of 2008 compared to net cash provided by operating activities of $19.6 million for the first six months of 2007.

Total debt at June 29, 2008 was $574.1 million, of which $222.8 million was designated as current, compared to total debt of $515.3 million at December 30, 2007, of which $6.9 million was designated as current. The increase in the current portion of long-term debt resulted primarily from the reclassification from non-current of the company's 2004 senior revolving credit facility, which matures in February 2009. Changes in foreign currency exchange rates increased total debt approximately $11.6 million at the end of the first six months of 2008 compared to the end of 2007.

On July 15, 2008, the company obtained agreement from a majority of the lenders under its senior revolving credit facility to amend the facility, which increased the total leverage ratio to 7.00:1 and the senior leverage ratio to 3.40:1, each for the second fiscal quarter of 2008. The amendment also provided for agreement on the amended recovery plan for one of the company's U.K. subsidiaries and its defined benefit pension plan, discussed below, which provides for an intercreditor agreement among the senior revolving credit facility lenders, the company and the trustee of the U.K. pension plan; places a limit on the future borrowing of the U.S. borrower under the senior revolving credit facility; and provides for a new event of default if the Pensions Regulator in the U.K. issues a Contribution Notice or Financial Support Direction. The company was in compliance with all of its amended debt covenants as of the end of the second quarter of fiscal 2008.

The company has announced today that it has developed a comprehensive refinancing plan to address the upcoming maturity of its senior revolving credit facility and its general liquidity needs. As previously disclosed, the company expects that, as of the end of the third fiscal quarter of 2008, it may not be in compliance with the financial covenants set forth in the senior revolving credit facility. The company expects to address compliance issues with these financial covenants (i) through the proposed refinancing plan, or (ii) by reducing outstanding indebtedness, amending the senior revolving credit facility or obtaining waivers from its lenders. There can be no assurances that the proposed refinancing plan or these other alternatives will be successfully implemented in the amounts and timeframe contemplated herein, if at all. Failure to successfully implement the refinancing plan or otherwise address anticipated compliance issues under the senior revolving credit facility would have a material adverse effect on the company's business, results of operations and financial position.

U.K. Pension Recovery Plan

On July 15, 2008, one of the company's U.K. subsidiaries agreed with the trustee of its defined benefit pension plan on an amended recovery plan. Under the terms of the amended recovery plan, the plan trustee agreed to accept annual supplemental payments of pounds sterling 6 million over and above those needed to cover benefits and expenses until the earlier of (a) 2021 or (b) the plan attaining 100% funding on an on-going basis after 2014, and has waived the requirement for an additional cash payment due on or before July 15, 2008, to achieve an interim funding level of 90%. The April 2008 valuation of the pension plan's assets and liabilities had indicated that the required supplementary contribution to the pension plan to achieve 90 percent funding as of that date under the terms of the former recovery plan, would have been pounds sterling 35.6 million. The U.K. subsidiary has agreed, subject to certain terms and conditions, to grant to the pension plan fixed equitable and floating charges on assets of the U.K. subsidiary and its subsidiaries in the United Kingdom and the Republic of Ireland securing an amount not to exceed the pension plan funding deficit on a scheme-specific basis. The security being granted to the pension plan trustee will be subordinated to the security given to the lenders under the company's senior revolving credit facility. The U.K. subsidiary's agreement with the pension plan trustee also includes provisions for releases of the pension plan trustee's security interest under certain conditions in the event of the sale, transfer or other disposal of assets over which the pension plan trustee holds a security interest or upon the pension plan trustee's receipt of agreed cash payments to the pension plan in addition to those described above. The U.K. subsidiary has made the pounds sterling 6 million supplemental payment to the pension plan due for 2008.

Income Taxes

The company's effective income tax rate is heavily influenced by the relationship of U.S. to non-U.S. pre-tax income (losses), as well as by management's expectations as to the recovery of its U.S. and certain foreign jurisdiction deferred income tax assets and any settlements of income tax contingencies with income tax authorities.