UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[ ] For Quarter Ended September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Libbey Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-12084 34-1559357
- ---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation or File No.) Identification No.)
organization)
00 Madison Avenue, Toledo, Ohio 43604
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(Address of principal executive offices) (Zip Code)
419-325-2100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $.01 par value - 15,310,443 shares at October 31, 2001
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Condensed Consolidated Financial Statements presented herein are unaudited
but, in the opinion of management, reflect all adjustments necessary to present
fairly such information for the periods and at the dates indicated. Since the
following condensed unaudited financial statements have been prepared in
accordance with Article 10 of Regulation S-X, they do not contain all
information and footnotes normally contained in annual consolidated financial
statements; accordingly, they should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.
The interim results of operations are not necessarily indicative of results for
the entire year.
1
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Three months ended September 30,
--------------------------------
2001 2000
-------- --------
Revenues:
Net sales $106,896 $108,089
Royalties, net technical assistance
income, and other revenues 1,359 1,652
-------- --------
Total revenues 108,255 109,741
Costs and expenses:
Cost of sales 76,092 71,825
Selling, general and administrative
expenses 12,568 14,192
-------- --------
88,660 86,017
-------- --------
Income from operations 19,595 23,724
Other income:
Pretax equity earnings 3,237 2,714
Other - net (200) 27
-------- --------
3,037 2,741
-------- --------
Earnings before interest and income taxes 22,632 26,465
Interest expense - net (2,356) (3,045)
-------- --------
Income before income taxes 20,276 23,420
Provision for income taxes 6,219 9,123
-------- --------
Net income $ 14,057 $ 14,297
======== ========
Net income per share
Basic $ 0.92 $ 0.94
======== ========
Diluted $ 0.90 $ 0.92
======== ========
Dividends per share $ 0.075 $ 0.075
======== ========
See accompanying notes.
2
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
-------- --------
Revenues:
Net sales $307,511 $318,143
Royalties and net technical
assistance income 4,250 5,213
-------- --------
Total revenues 311,761 323,356
Costs and expenses:
Cost of sales 220,245 217,280
Selling, general and administrative
expenses 40,079 45,166
-------- --------
260,324 262,446
-------- --------
Income from operations 51,437 60,910
Other income:
Pretax equity earnings 6,078 8,918
Other - net (77) (47)
-------- --------
6,001 8,871
-------- --------
Earnings before interest and income taxes 57,438 69,781
Interest expense - net (7,316) (9,235)
-------- --------
Income before income taxes 50,122 60,546
Provision for income taxes 17,715 25,508
-------- --------
Net income $ 32,407 $ 35,038
======== ========
Net income per share
Basic $ 2.12 $ 2.30
======== ========
Diluted $ 2.08 $ 2.25
======== ========
Dividends per share $ 0.225 $ 0.225
======== ========
See accompanying notes.
3
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2001 2000
------------- ------------
(unaudited) (Note)
ASSETS
Current assets:
Cash $ 2,023 $ 1,282
Accounts receivable:
Trade, less allowances of $6,240
and $6,788 53,703 47,747
Other 5,892 3,992
-------- --------
59,595 51,739
Inventories:
Finished goods 103,260 94,822
Work in process 5,202 6,060
Raw materials 2,921 3,021
Operating supplies 530 603
-------- --------
111,913 104,506
Prepaid expenses and deferred taxes 9,848 7,923
-------- --------
Total current assets 183,379 165,450
Other assets:
Repair parts inventories 5,442 8,027
Intangibles, net of accumulated
amortization of $3,179 and $2,951 9,026 9,254
Pension assets 27,124 21,638
Deferred software, net of accumulated
amortization of $10,069 and $8,651 3,750 4,286
Other assets 2,674 415
Equity investments 85,338 84,727
Goodwill, net of accumulated
amortization of $17,316 and $16,174 43,663 44,805
-------- --------
177,017 173,152
Property, plant and equipment, at cost 251,163 224,532
Less accumulated depreciation 125,820 116,427
-------- --------
Net property, plant and equipment 125,343 108,105
-------- --------
Total assets $485,739 $446,707
======== ========
Note: The condensed consolidated balance sheet at December 31, 2000, has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
4
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (cont'd.)
(dollars in thousands)
September 30, December 31,
2001 2000
------------- ------------
(unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 8,176 $ 10,000
Accounts payable 26,235 29,861
Salaries and wages 8,654 15,574
Accrued liabilities 26,646 23,884
Income taxes 7,629 954
Long-term debt due within one year 14,596 --
-------- -------
Total current liabilities 91,936 80,273
Long-term debt 154,064 151,404
Deferred taxes 20,499 19,413
Other long-term liabilities 12,513 12,670
Nonpension retirement benefits 48,483 49,676
Shareholders' equity:
Common stock, par value $.01
per share, 50,000,000 shares authorized,
17,999,843 shares issued and outstanding,
less 2,689,400 treasury shares (17,829,202
shares issued and outstanding, less
2,575,800 treasury shares in 2000) 153 152
Capital in excess of par value 287,882 284,930
Treasury stock (75,341) (74,113)
Deficit (48,730) (77,698)
Accumulated other comprehensive loss (5,720) --
-------- --------
Total shareholders' equity 158,244 133,271
-------- --------
Total liabilities and shareholders'
equity $485,739 $446,707
======== ========
Note: The condensed consolidated balance sheet at December 31, 2000, has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
5
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
-------- --------
Operating activities
Net income $ 32,407 $ 35,038
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 12,300 11,077
Amortization 2,788 3,169
Other non-cash charges (844) 6,342
Equity earnings (3,966) (3,334)
Net change in components of working
capital and other assets (28,281) (41,065)
-------- --------
Net cash provided by operating activities 14,404 11,227
Investing activities
Additions to property, plant and
equipment (29,766) (11,641)
Other (1,563) (63)
Dividends received from equity
investment 4,918 2,940
-------- --------
Net cash used in investing activities (26,411) (8,764)
Financing activities
Net bank credit facility activity 14,596 --
Other net payments 836 (270)
Stock options exercised 1,984 1,227
Treasury shares purchased (1,229) (2,076)
Dividends (3,439) (3,427)
-------- --------
Net cash provided by (used in) financing
activities 12,748 (4,546)
-------- --------
Effect of exchange rate fluctuations
on cash -- (49)
-------- --------
Increase (decrease) in cash 741 (2,132)
Cash at beginning of year 1,282 3,918
-------- --------
Cash at end of period $ 2,023 $ 1,786
======== ========
See accompanying notes.
6
LIBBEY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
(unaudited)
1. LONG-TERM DEBT
The Company and its Canadian subsidiary have an unsecured agreement ("Bank
Credit Agreement" or "Agreement") with a group of banks which provides for a
Revolving Credit and Swing Line Facility ("Facility") permitting borrowings up
to an aggregate total of $380 million, maturing May 1, 2002. Swing Line
borrowings are limited to $25 million with interest calculated at the prime rate
minus the Commitment Fee Percentage. Revolving Credit borrowings bear interest
at the Company's option at either the prime rate minus the Commitment Fee
Percentage, or a Eurodollar rate plus the Applicable Eurodollar Margin. The
Commitment Fee Percentage and Applicable Eurodollar Margin will vary depending
on the Company's performance against certain financial ratios. The Commitment
Fee Percentage and the Applicable Eurodollar Margin were 0.125% and 0.225%,
respectively, at September 30, 2001. The Company may also elect to borrow under
a Negotiated Rate Loan alternative of the Revolving Credit and Swing Line
Facility at floating rates of interest, up to a maximum of $190 million. The
Revolving Credit and Swing Line Facility also provides for the issuance of $35
million of letters of credit, with such usage applied against the $380 million
limit. At September 30, 2001, the Company had $4.8 million in letters of credit
outstanding under the Facility.
The Company has entered into interest rate protection agreements ("Rate
Agreements") with respect to $125 million of debt under its Bank Credit
Agreement as a means to manage its exposure to fluctuating interest rates. The
Rate Agreements effectively convert this portion of the Company's Bank Credit
Agreement borrowings from variable rate debt to a fixed rate basis, thus
reducing the impact of interest rate changes on future income. The average
interest rate for the Company's borrowings related to the Rate Agreements at
September 30, 2001, was 6.2% for an average remaining period of 2.9 years. The
remaining debt not covered by the Rate Agreements has fluctuating interest rates
with a weighted average rate of 3.2% at September 30, 2001.
The interest rate differential to be received or paid under the Rate Agreements
is being recognized over the life of the Rate Agreements as an adjustment to
interest expense. If the counterparts to these Rate Agreements fail to perform,
the Company would no longer be protected from interest rate fluctuations by
these Rate Agreements. However, the Company does not anticipate nonperformance
by the counterparts.
7
The Company must pay a commitment fee ("Commitment Fee Percentage") on the total
credit provided under the Bank Credit Agreement. No compensating balances are
required by the Agreement. The Agreement requires the maintenance of certain
financial ratios, restricts the incurrence of indebtedness and other contingent
financial obligations, and restricts certain types of business activities and
investments.
On June 15, 2001, the Company entered into an agreement with Bank of America;
Bank One; and Bear, Stearns & Co. for new senior credit facilities totaling $625
million related to the Company's announced acquisition of the Anchor Hocking
glassware operations of Newell Rubbermaid. When implemented, the new credit
facilities will replace the existing Bank Credit Agreement. The new credit
facilities are comprised of a $325 million Revolving Credit Facility that
matures five years from the initial funding, a $150 million Term Loan A Facility
that matures five years from the initial funding, and a $150 million Term Loan B
Facility that matures seven years from the initial funding. The Company expects
the initial funding to be in the fourth quarter, 2001.
2. SIGNIFICANT SUBSIDIARY
Summarized combined financial information for equity investments, which includes
the 49% ownership in Vitrocrisa, which manufactures, markets, and sells glass
tableware (e.g. beverageware, plates, bowls, serveware, and accessories) and
industrial glassware (e.g. coffee pots, blender jars, meter covers, glass covers
for cooking ware, and lighting fixtures sold to original equipment
manufacturers) and the 49% ownership in Crisa Industrial, L.L.C., which
distributes industrial glassware in the U.S. and Canada for Vitrocrisa, for 2001
and 2000 is as follows:
September 30, December 31,
2001 2000
------------- ------------
Current assets $ 95,245 $ 84,266
Non-current assets 130,478 140,644
-------- --------
Total assets 225,723 224,910
Current liabilities 71,312 65,496
Other liabilities and deferred items 130,009 134,884
-------- --------
Total liabilities and deferred items 201,321 200,380
-------- --------
Net assets $ 24,402 $ 24,530
======== ========
8
Three months ended
September 30,
----------------------
2001 2000
-------- --------
Net sales $ 50,309 $ 54,840
Cost of sales 39,595 37,003
-------- --------
Gross profit 10,714 17,837
Operating expenses 5,447 5,637
-------- --------
Income from operations 5,267 12,200
Other income (loss) 3,194 (2,653)
-------- --------
Earnings before finance costs and taxes 8,461 9,547
Interest expense 2,146 2,710
Translation gain (loss) 1,157 (435)
-------- --------
Earnings before income taxes and profit
sharing 7,472 6,402
-------- --------
Income taxes and profit sharing 1,011 2,550
-------- --------
Net income $ 6,461 $ 3,852
======== ========
Nine months ended
September 30,
----------------------
2001 2000
-------- --------
Net sales $146,407 $156,020
Cost of sales 112,154 108,853
-------- --------
Gross profit 34,253 47,167
Operating expenses 15,955 16,857
-------- --------
Income from operations 18,298 30,310
Other income (loss) 3,959 (1,762)
-------- --------
Earnings before finance costs and taxes 22,257 28,548
Interest expense 6,480 7,796
Translation gain (loss) (777) 43
-------- --------
Earnings before income taxes and profit
sharing 15,000 20,795
-------- --------
Income taxes and profit sharing 4,308 11,394
-------- --------
Net income $ 10,692 $ 9,401
======== ========
In 2001, the Company is reporting pre-tax equity earnings in condensed
consolidated statements of income with related Mexican taxes included in the
provision for income taxes. Prior to 2001, the Company reported equity earnings
as a single line item, which included Mexican taxes. As such, the Company has
reclassified its third quarter and year-to-date 2000 equity earnings to
correspond to the 2001 presentation. The equity earnings are as follows:
9
Three months ended
September 30,
--------------------
2001 2000
------- -------
Pre-tax equity earnings $ 3,237 $ 2,714
Mexican taxes (495) (1,250)
------- -------
Net equity earnings $ 2,742 $ 1,464
======= =======
Nine months ended
September 30,
---------------------
2001 2000
------- -------
Pre-tax equity earnings $ 6,078 $ 8,918
Mexican taxes (2,112) (5,584)
------- -------
Net equity earnings $ 3,966 $ 3,334
======= =======
3. CASH FLOW INFORMATION
Interest paid in cash by the Company aggregated $8,218 and $8,995 for the first
nine months of 2001 and 2000, respectively. Interest expense capitalized was
$656 and $0 for the first nine months of 2001 and 2000, respectively. Income
taxes paid in cash by the Company aggregated $4,497 and $22,362 for the first
nine months of 2001 and 2000, respectively.
4. NET INCOME PER SHARE OF COMMON STOCK
Basic net income per share of common stock is computed using the weighted
average number of shares of common stock outstanding. Diluted net income per
share of common stock is computed using the weighted average number of shares of
common stock outstanding and includes common share equivalents.
10
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter ended September 30, 2001 2000
- --------------------------- ---------- ----------
Numerator for basic and diluted
earnings per share -- net income
which is available to common
shareholders
$14,057 $14,297
Denominator for basic earnings per
share -- weighted-average shares
outstanding
15,321,922 15,244,918
Effect of dilutive securities --
employee stock options
322,752 329,105
---------- ----------
Denominator for diluted earnings
per share -- adjusted weighted-
average shares and assumed
conversions 15,644,674 15,574,023
Basic earnings per share $ 0.92 $ 0.94
Diluted earnings per share $ 0.90 $ 0.92
Nine months ended September 30, 2001 2000
- ------------------------------- ---------- ----------
Numerator for basic and diluted
earnings per share -- net income
which is available to common
shareholders
$32,407 $35,038
Denominator for basic earnings per
share -- weighted-average shares
outstanding
15,286,098 15,252,304
Effect of dilutive securities --
employee stock options 292,202 304,150
---------- ----------
Denominator for diluted earnings
per share -- adjusted weighted-average
shares and assumed conversions 15,578,300 15,556,454
Basic earnings per share $ 2.12 $ 2.30
Diluted earnings per share $ 2.08 $ 2.25
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income are net income, foreign
currency translation adjustments (2000), and change in fair value of derivative
adjustments (2001). During the third quarter of 2001 and 2000, total
comprehensive income amounted to $11,039 and
11
$14,241, respectively. For the first nine months of 2001 and 2000, comprehensive
income amounted to $26,687 and $35,187, respectively.
Total comprehensive income is as follows:
Three months ended
September 30,
----------------------
2001 2000
------- -------
Net income $14,057 $14,297
Change in fair value of derivative
instruments (3,018) --
Cumulative effect of change in method
of accounting -- --
Foreign currency translation adjustments -- (56)
------- -------
$11,039 $14,241
======= =======
Nine months ended
September 30,
----------------------
2001 2000
------- -------
Net income $32,407 $35,038
Change in fair value of derivative
instruments (5,047) --
Cumulative effect of change in method
of accounting (673) --
Foreign currency translation adjustments
-- 149
------- -------
$26,687 $35,187
======= =======
6. CHANGE IN METHOD OF ACCOUNTING
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"(Statement 133), as amended. Statement 133 requires that all
derivative instruments be recognized on the balance sheet and be measured at
fair value and that changes in fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In accordance with the
transition provisions of Statement 133, the Company recorded a cumulative
transition adjustment to decrease other comprehensive income by $0.7 million
(net of tax) to recognize the fair value of its derivative instruments at
January 1, 2001.
The Company uses derivative instruments, primarily interest rate swaps (Rate
Agreements as defined above), commodity futures contracts, and foreign currency
forward contracts, to manage certain of its interest rate, commodity price, and
foreign exchange rate risks, respectively.
12
The Company uses the Rate Agreements to manage its exposure to fluctuating
interest rates. These Rate Agreements effectively convert a portion of the
Company's borrowings from variable rate debt to a fixed-rate basis, thus
reducing the impact of interest rate changes on future income. The Company also
uses commodity futures contracts related to forecasted future natural gas
requirements. The objective of these futures contracts and other derivatives is
to limit the fluctuations in prices paid and potential losses in earnings or
cash flows from adverse price movements. The Company's foreign currency
exposures arise from occasional transactions denominated in a currency other
than the functional currency (U.S. dollar) primarily associated with anticipated
purchases of new equipment.
As of September 30, 2001, the Company has Rate Agreements for $125.0 million of
its variable rate debt, commodity futures contracts for 2.9 million BTUs of
natural gas, and foreign currency forward contracts for 1.4 million Deutsche
marks.
The Company recognizes all derivatives on the balance sheet at fair value. The
effective portion of changes in the fair value of a derivative that is
designated as and meets the required criteria for a cash flow hedge are recorded
in accumulated other comprehensive income (OCI) and reclassified into earnings
in the same period or periods during which the underlying hedged item affects
earnings. Amounts reclassified into earnings related to interest rate swap
agreements are included in interest expense, natural gas futures contracts in
natural gas expense in cost of sales, and foreign currency forward contracts for
the purchase of new equipment in capital expenditures.
All of the Company's derivatives qualify and are designated as cash flow hedges
at September 30, 2001. The derivatives were designated as cash flow hedges at
the time of adoption of Statement 133 or at the time they were executed, if
later than January 1, 2001. Hedge accounting is only applied when the derivative
is deemed to be highly effective at offsetting changes in fair values or
anticipated cash flows of the hedged item or transaction. For hedged forecasted
transactions, hedge accounting is discontinued if the forecasted transaction is
no longer probable to occur, and any previously deferred gains or losses would
be recorded to earnings immediately.
During the quarter ended September 30, 2001, an unrealized net loss of $2.5
million (net of tax) related to interest rate swap agreements was included in
OCI. An unrealized net loss of $0.5 million (net of tax) related to commodity
futures contracts was included in OCI. The amount recognized in OCI at September
30, 2001, for foreign currency forward contracts was not material. During the
first nine months of 2001, an unrealized net loss of $3.4 million (net of tax)
related to interest rate swap agreements was included in OCI, including a $(0.8)
million cumulative transition adjustment as of January 1, 2001. An
13
unrealized loss of $2.4 million (net of tax) related to commodity futures
contracts was included in OCI. The January 1, 2001, transition adjustment for
the commodity futures contracts and foreign currency forward contracts were not
material.
The ineffective portion of the change in the fair value of a derivative
designated as a cash flow hedge is recognized in current earnings.
Ineffectiveness recognized during the third quarter of 2001 was not material.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("Statement") No. 141, "Business
Combinations." Statement No. 141 changes the accounting for business
combinations to eliminate the pooling-of-interests method and requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. This statement also requires intangible assets that arise
from contractual or other legal rights, or that are capable of being separated
or divided from the acquired entity be recognized separately from goodwill.
Existing intangible assets and goodwill that were acquired in a prior purchase
business combination must be evaluated and any necessary reclassifications must
be made in order to conform with the new criteria in Statement No. 141 for
recognition apart from goodwill. The Company does not expect the adoption of
this statement to have a material effect on its consolidated results of
operations or financial position.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets." Statement No. 142 addresses the initial recognition and measurement of
intangible assets acquired (other than those acquired in a business combination,
which is addressed by Statement No. 141) and the subsequent accounting for
goodwill and other intangible assets after initial recognition. Statement No.
142 eliminates the amortization of goodwill and intangible assets with
indefinite lives. Intangible assets with lives restricted by contractual, legal,
or other means will continue to be amortized over their useful lives. Adoption
of this statement will also require the Company to reassess the useful lives of
all intangible assets acquired, and make any necessary amortization period
adjustments. Goodwill and other intangible assets not subject to amortization
will be tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. Statement No. 142
requires a two-step process for testing goodwill for impairment. First, the fair
value of each reporting unit will be compared to its carrying value to determine
whether an indication of impairment exists. If an impairment is indicated, then
the fair value of the reporting unit's goodwill will be determined by allocating
the
14
unit's fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill and other intangible assets
will be measured as the excess of its carrying value over its fair value.
Goodwill and intangible assets acquired after June 30, 2001, will be immediately
subject to the amortization provisions of this statement. For goodwill and other
intangible assets acquired on or before June 30, 2001, the Company is required
to adopt Statement No. 142 on January 1, 2002. The Company has not yet
determined the impact of the adoption of Statement No. 142.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset, and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required to
adopt the provisions of Statement No. 143 no later than the beginning of fiscal
year 2003, with early adoption permitted. The Company does not expect the
adoption of this statement to have a material effect on its consolidated results
of operations or financial position.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," it
retains many of the fundamental provisions of that Statement. Statement No. 144
becomes effective for fiscal years beginning after December 15, 2001, with early
applications encouraged. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or
financial position.
8. ACQUISITION OPPORTUNITY
On June 18, 2001, Libbey announced a definitive agreement to acquire the Anchor
Hocking glassware operations of Newell Rubbermaid. The
15
transaction valued at $332 million is to be paid in cash. On July 20, the
Federal Trade Commission began requesting additional information regarding
Libbey's proposed acquisition of the Anchor Hocking glassware operations of
Newell Rubbermaid Inc., which has extended the waiting period under the
Hart-Scott-Rodino Antitrust Improvement Act. Libbey is responding to the request
as quickly as practicable, and anticipates closing the transaction in the fourth
quarter of 2001.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER 2001 COMPARED WITH THIRD QUARTER 2000
Three months ended
September 30,
--------------------------
(dollars in thousands)
2001 2000
-------- --------
Net sales $106,896 $108,089
Gross profit 31,286 36,848
As a percent of sales 29.3% 34.1%
Income from operations $19,595 $23,724
As a percent of sales 18.3% 21.9%
Earnings before interest
and income taxes $22,632 $26,465
As a percent of sales 21.2% 24.5%
Net income $14,057 $14,297
As a percent of sales 13.2% 13.2%
For the quarter ended September 30, 2001, sales were $106.9 million compared to
$108.1 million in the year-ago quarter. Increased retail sales partially offset
declines in other channels of distribution, principally as a result of sluggish
economic conditions and the negative impact of the events of September 11, 2001,
on the economy. Export sales were down 9.6%, decreasing to $12.2 million from
$13.5 million in the year-ago period. Increased sales to Canadian customers
during the quarter only slightly offset the decrease in sales to other export
customers, primarily due to the economic downturn in key export markets combined
with the ongoing strengthening of the U.S. dollar.
Gross profit (defined as net sales plus freight billed to customers less cost of
sales) was $31.3 million in the third quarter of 2001 compared to $36.8 million
in the third quarter of 2000; and as a percent of sales was 29.3% in the third
quarter of 2001 compared to 34.1% in the year-ago quarter. Higher energy costs
and the effect of lower sales were the major factors impacting gross profit
during the third quarter 2001, as well as energy savings initiatives which were
realized in the prior year quarter.
Income from operations was $19.6 million compared to $23.7 million in the third
quarter last year. Lower selling, general, and administrative expenses,
primarily due to lower compensation expenses, partially offset the impact of
higher natural gas costs, lower sales,
17
and energy savings initiatives which were realized in the prior year quarter.
Earnings before interest and income taxes (EBIT) were $22.6 million compared
with $26.5 million in the third quarter last year. Equity earnings were $3.2
million on a pretax basis, an increase of 19.3% from $2.7 million pretax in the
third quarter of 2000. The increase in equity earnings is principally
attributable to operating expense benefits associated with a change in the legal
and tax status of Vitrocrisa in Mexico partially offset by sluggish end markets
in Mexico and the impact of a stronger Mexican peso at the company's joint
venture in Mexico, Vitrocrisa. The company expects equity earnings will
approximate $7 million pretax for 2001.
Net income was $14.1 million, or 90 cents per share on a diluted basis, compared
with $14.3 million or 92 cents per share on a diluted basis in the year-ago
period. Declining interest rates contributed to a reduction in interest expense.
A reduction in the company's effective tax rate to 30.7% from 39.0% in the
year-ago quarter contributed to net income. The reduction in the company's
effective tax rate is primarily attributable to lower Mexican taxes related to a
reorganization at Vitrocrisa which provided certain one-time tax benefits and a
reduction in tax on undistributed earnings. Increased state tax credits in the
United States also contributed. The company believes the nine month year-to-date
effective tax rate of 35.3% is representative of the expected effective tax rate
for the full year 2001.
RESULTS OF OPERATIONS - NINE MONTHS 2001 COMPARED WITH NINE MONTHS 2000
Nine months ended
September 30,
-----------------------
(dollars in thousands)
2001 2000
-------- --------
Net sales $307,511 $318,143
Gross profit 88,747 102,433
As a percentage of sales 28.9% 32.2%
Income from operations $51,437 $60,910
As a percentage of sales 16.7% 19.1%
Earnings before interest
and income taxes $57,438 $69,781
As a percentage of sales 18.7% 21.9%
Net income $32,407 $35,038
As a percentage of sales 10.5% 11.0%
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Net sales for the first nine months of 2001 were $307.5 million compared to net
sales of $318.1 million reported in the comparable period in 2000. Export sales,
including sales to Libbey's customers in Canada, were down 9.9%, decreasing to
$34.8 million from $38.6 million in the year-ago period reflecting the economic
downturn in key export markets combined with the ongoing strengthening of the
U.S. dollar.
Gross profit (defined as net sales including prepaid freight billed to customers
less cost of sales) was $88.7 million in the first nine months of 2001 compared
to $102.4 million in the first nine months of 2000 due to higher energy costs
and the effect of lower sales, as well as energy savings initiatives which were
realized in the prior year quarter.
Income from operations was $51.4 million compared to $60.9 million in the
year-ago period as a result of lower sales, higher energy costs, and energy
savings initiatives which were realized in the prior year quarter. Partially
offsetting these factors were lower administrative costs, including lower
compensation expenses.
Earnings before interest and income taxes (EBIT) were $57.4 million compared to
$69.8 million due to the lower income from operations and lower equity earnings.
Net income was $32.4 million, or $2.08 per diluted share, compared to $35.0
million, or $2.25 per diluted share, in the year-ago period. A reduction in the
company's effective tax rate to 30.7% from 39.0% in the year-ago quarter only
partially offset lower earnings before interest and income taxes.
CAPITAL RESOURCES AND LIQUIDITY
The Company had total debt of $176.8 million at September 30, 2001, compared to
$161.4 million at December 31, 2000. Inventories declined compared to the
year-ago quarter, as the company continues to target improved working capital
management. The Company incurred seasonal increases in receivables and inventory
year to date through September 30, 2001. Capital expenditures totaled $29.8
million year to date, as a result of furnace rebuild activity and investments in
new equipment. The Company expects capital expenditures to total approximately
$32 million for the year. Continued emphasis at the Company will be placed on
the prudent management of working capital and increasing returns on the capital
employed in the business. The seasonal increase in inventories and higher
capital expenditures through September 30, 2001, were also impacted by higher
accounts receivable and lower accounts payable. During the third quarter, the
Company purchased 38,000 shares pursuant to its share repurchase plan for $1.1
million. Board authorization remains for the purchase of an additional 935,600
shares. In addition, Libbey received dividends
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from its Vitrocrisa investments of $4.9 million in the first nine months of 2001
compared to a dividend of $2.9 million in the first nine months of 2000. The
Company had additional debt capacity at September 30, 2001, under the Bank
Credit Agreement of $209.2 million. Of Libbey's outstanding indebtedness, $49.2
million is subject to fluctuating interest rates at September 30, 2001. A change
of one percent in such rates would result in a change in interest expense of
approximately $0.5 million on an annual basis as of September 30, 2001.
The Company is not aware of any trends, demands, commitments, or uncertainties
which will result or which are reasonably likely to result in a material change
in Libbey's liquidity. The Company believes that its cash from operations and
available borrowings under the Bank Credit Agreement will be sufficient to fund
its operating requirements, capital expenditures, and all other obligations
(including debt service and dividends) throughout the remaining term of the Bank
Credit Agreement.
In addition, the Company anticipates refinancing the Bank Credit Agreement at or
prior to the maturity date of May 1, 2002, to meet the Company's longer term
funding requirements. On June 15, 2001, the Company entered into an agreement
with Bank of America; Bank One; and Bear, Stearns & Co. for new senior credit
facilities totaling $625 million related to the Company's announced acquisition
of the Anchor Hocking glassware operations of Newell Rubbermaid. When
implemented, the new credit facilities will replace the existing Bank Credit
Agreement. The new credit facilities are comprised of a $325 million Revolving
Credit Facility that matures five years from the initial funding, a $150 million
Term Loan A Facility that matures five years from the initial funding, and a
$150 million Term Loan B Facility that matures seven years from the initial
funding. The Company expects the initial funding to be in the fourth quarter,
2001.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in currency values,
although the majority of the Company's revenues and expenses are denominated in
the U.S. dollar. The currency market risks include devaluations and other major
currency fluctuations relative to the U.S. dollar that could reduce the cost
competitiveness of the Company's products compared to foreign competition; the
effect of high inflation in Mexico and exchange rate changes to the value of the
Mexican peso and the earnings and cash flow impact of those changes on the
earnings and cash flow of the Company's joint venture in Mexico, Vitrocrisa,
expressed under U.S. GAAP.
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The Company is exposed to market risk associated with changes in interest rates
in the U.S. However, the Company has entered into Interest Rate Protection
Agreements ("Rate Agreements") with respect to $125.0 million of debt as a means
to manage its exposure to fluctuating interest rates. The Rate Agreements
effectively convert this portion of the Company's borrowings from variable rate
debt to a fixed-rate basis, thus reducing the impact of interest rate changes on
future income. The average interest rate for the Company's borrowings related to
the Rate Agreements at September 30, 2001, was 6.2% for an average remaining
period of 2.9 years. Total remaining debt not covered by the Rate Agreements has
fluctuating interest rates with a weighted average rate of 3.2% at September 30,
2001. The Company had $49.2 million of debt subject to fluctuating interest
rates at September 30, 2001. A change of one percent in such rates would result
in a change in interest expense of approximately $0.5 million on an annual
basis.
The interest rate differential to be received or paid under the Rate Agreements
is being recognized over the life of the Rate Agreements as an adjustment to
interest expense. If the counterparts to these Rate Agreements fail to perform,
the Company would no longer be protected from interest rate fluctuations by
these Rate Agreements. However, the Company does not anticipate nonperformance
by the counterparts. At December 31, 2000, the carrying value of the long-term
debt approximates its fair value based on the Company's current incremental
borrowing rates. The fair market value for the Company's Rate Agreements at
December 31, 2000, was $(1.2) million. The fair value of long-term debt is
estimated based on borrowing rates currently available to the Company for loans
with similar terms and maturities. The fair value of the Company's Rate
Agreements is based on quotes from brokers for comparable contracts. The Company
does not expect to cancel these agreements and expects them to expire as
originally contracted.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"(Statement 133), as amended. In accordance with the provisions of
Statement 133, the Company recognizes all derivatives on the balance sheet at
fair value.
The Company's Rate Agreements are recorded at fair value. The Company has also
entered into commodity futures contracts to hedge the price of anticipated
required purchases of natural gas and foreign currency forward contracts to
hedge the purchase of equipment denominated in Deutsche marks. These instruments
are also recorded at fair value.
The Company has designated these derivative instruments as cash flow hedges. As
such, the changes in fair value of these derivative instruments are recorded in
accumulated other comprehensive income and
21
reclassified into earnings as the underlying hedged transaction or item affects
earnings. At September 30, 2001, approximately $5.7 million of unrealized net
loss was recorded in accumulated other comprehensive income (loss).
OTHER INFORMATION
On June 18, 2001, Libbey announced a definitive agreement to acquire the Anchor
Hocking glassware operations of Newell Rubbermaid. The transaction valued at
$332 million is to be paid in cash. On July 20, the Federal Trade Commission
began requesting additional information regarding Libbey's proposed acquisition
of the Anchor Hocking glassware operations of Newell Rubbermaid Inc., which has
extended the waiting period under the Hart-Scott-Rodino Antitrust Improvement
Act. Libbey is responding to the request as quickly as practicable, and
anticipates closing the transaction in the fourth quarter of this year.
This document and supporting schedules contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. Such statements
only reflect the Company's best assessment at this time, and are indicated by
words or phrases such as goal, expects, believes, will, estimates, anticipates,
or similar phrases.
Investors are cautioned that forward-looking statements involve risks and
uncertainty, that actual results may differ materially from such statements, and
that investors should not place undue reliance on such statements.
Important factors potentially affecting performance include major slowdowns in
the retail, travel, restaurant and bar, or entertainment industries in the
United States, Canada, or Mexico including the impact of the terrorist attacks
in the United States of September 11, 2001, on the retail, travel, restaurant
and bar, or entertainment industries; significant increases in interest rates
that increase the Company's borrowing costs and per unit increases in the costs
for natural gas, corrugated packaging, and other purchased materials;
devaluations and other major currency fluctuations relative to the U.S. dollar
that could reduce the cost competitiveness of the Company's products compared to
foreign competition; the effect of high inflation in Mexico and exchange rate
changes to the value of the Mexican peso and the earnings expressed under U.S.
GAAP and cash flow of the Company's joint venture in Mexico, Vitrocrisa; the
inability to achieve savings and profit improvements at targeted levels in the
Company and Vitrocrisa from capacity realignment, re-engineering, and
operational restructuring programs, or within the intended time periods;
protracted work stoppages related to collective bargaining agreements; increased
competition from foreign suppliers endeavoring
22
to sell glass tableware in the United States; whether the Company completes any
significant acquisition, including the Anchor Hocking acquisition, and whether
such acquisitions can operate profitably.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
(b.) No form 8-Ks were filed during the quarter
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBBEY INC.
Date November 14, 2001 By /s/ Kenneth G. Wilkes
---------------------- -------------------------------
Kenneth G. Wilkes,
Vice President, Chief Financial Officer
(Principal Accounting Officer)
23