UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12084
Libbey Inc.
(Exact name of registrant as specified in its charter)
Delaware 34-1559357
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 Madison Avenue, Toledo, Ohio 43604
(Address of principal executive offices) (Zip Code)
419-325-2100
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 - 13,210,317 shares at May 9, 2003
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Libbey
Inc. and all wholly owned subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2003, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003.
The balance sheet at December 31, 2002, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
2
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Three months ended March 31,
2003 2002
--------- ---------
Revenues:
Net sales $ 111,903 $ 98,669
Freight billed to customers 478 418
Royalties and net technical assistance income 750 799
--------- ---------
Total revenues 113,131 99,886
Costs and expenses:
Cost of sales 90,823 77,016
Selling, general and administrative expenses 16,766 14,254
--------- ---------
107,589 91,270
--------- ---------
Income from operations 5,542 8,616
Other income (loss):
Pretax equity earnings (loss) (150) (376)
Other - net 126 (182)
--------- ---------
(24) (558)
--------- ---------
Earnings before interest and income taxes 5,518 8,058
Interest expense - net (2,541) (1,883)
--------- ---------
Income before income taxes 2,977 6,175
Provision for income taxes 976 2,223
--------- ---------
Net income $ 2,001 $ 3,952
========= =========
Net income per share
Basic $ 0.14 $ 0.26
========= =========
Diluted $ 0.14 $ 0.25
========= =========
Dividends per share $ 0.10 $ 0.075
========= =========
See accompanying notes
3
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2003 2002
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash $ 5,459 $ 1,683
Accounts receivable:
Trade, less allowances of $5,451 and $6,310 49,061 46,308
Other, less allowances of $1,501 and $1,482 4,352 3,636
-------- --------
53,413 49,944
Inventories
Finished goods 106,422 100,405
Work in process 5,800 4,512
Raw materials 3,390 3,169
Operating supplies 889 1,548
-------- --------
116,501 109,634
Prepaid expenses and deferred taxes 12,657 13,487
-------- --------
Total current assets 188,030 174,748
Other assets:
Repair parts inventories 5,629 5,603
Intangibles, net of accumulated
amortization of $3,574 and $3,380 26,181 26,375
Deferred software, net of accumulated
amortization of $11,968 and $11,679 2,377 2,585
Other assets 4,927 4,453
Investments 87,924 87,847
Goodwill 60,412 59,795
-------- --------
187,450 186,658
Property, plant and equipment, at cost 306,338 300,690
Less accumulated depreciation 143,682 137,569
-------- --------
Net property, plant and equipment 162,656 163,121
-------- --------
Total assets $538,136 $524,527
======== ========
See accompanying notes
4
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2003 2002
----------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,325 $ 2,660
Accounts payable 29,328 31,633
Salaries and wages 12,046 14,670
Accrued liabilities 38,898 39,687
Income taxes 1,275 5,498
Long-term debt due within one year 115 115
--------- ---------
Total current liabilities 83,987 94,263
Long-term debt 248,476 188,403
Deferred taxes 12,044 11,780
Other long-term liabilities 13,777 14,015
Pension liability 29,388 28,655
Nonpension postretirement benefits 47,459 47,193
Shareholders' equity:
Common stock, par value $.01 per
share, 50,000,000 shares authorized,
18,261,875 shares issued (18,256,277
shares issued in 2002) 183 183
Capital in excess of par value 293,635 293,537
Treasury stock 5,125,000 shares
(3,625,000 shares in 2002), at cost (140,454) (102,206)
Deficit (18,876) (19,413)
Accumulated other comprehensive loss (31,483) (31,883)
--------- ---------
Total shareholders' equity 103,005 140,218
--------- ---------
Total liabilities and shareholders' equity $ 538,136 $ 524,527
========= =========
See accompanying notes
5
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Three months ended March 31,
2003 2002
--------- ---------
Operating activities
Net income $ 2,001 $ 3,952
Adjustments to reconcile net income to
net cash used in operating
activities:
Depreciation 6,423 4,452
Amortization 484 494
Other non-cash charges 217 (875)
Net equity (earnings) loss (8) 177
Net change in components of working
capital and other assets (18,220) (14,861)
--------- ---------
Net cash used in operating activities (9,103) (6,661)
Investing activities
Additions to property, plant and equipment (4,633) (4,878)
--------- ---------
Net cash used in investing activities (4,633) (4,878)
Financing activities
Net bank credit facility activity (41,872) 10,336
Payment of financing fees (663) --
Senior notes 100,000 --
Other net borrowings (365) 73
Stock options exercised 76 432
Treasury shares purchased (38,248) --
Dividends (1,463) (1,150)
--------- ---------
Net cash provided by financing activities 17,465 9,691
--------- ---------
Effect of exchange rate fluctuations on cash 47 --
--------- ---------
Increase (decrease) in cash 3,776 (1,848)
Cash at beginning of year 1,683 3,860
--------- ---------
Cash at end of period $ 5,459 $ 2,012
========= =========
See accompanying notes
6
LIBBEY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
(unaudited)
1. LONG-TERM DEBT
On February 10, 2003, the Company entered into an unsecured agreement for an
Amended and Restated Revolving Credit Agreement (Revolving Credit Agreement or
Agreement) among Libbey Glass Inc. and Libbey Europe B.V., as borrowers. This
amended the previous Revolving Credit and Swing Line Facility that had named
Libbey Glass Inc. as borrower. The amendment was primarily for the Company to
borrow euros. The Agreement is with a group of banks that provides for a
Revolving Credit and Swing Line Facility (Facility) permitting borrowings up to
an aggregate total of $250 million, maturing April 23, 2005, with an option to
extend for two additional one-year periods. Swing Line borrowings are limited to
$25 million with interest calculated at the prime rate minus the Facility Fee
Percentage (Facility Fee Percentage) as defined in the Agreement. Revolving
Credit Agreement U.S. dollar borrowings bear interest at the Company's option at
either the prime rate minus the Facility Fee Percentage or a Eurodollar rate
plus the Applicable Eurodollar Margin (Applicable Eurodollar Margin) as defined
in the Agreement. The Facility Fee Percentage and Applicable Eurodollar Margin
vary depending on the Company's performance against certain financial ratios.
The Facility Fee Percentage and the Applicable Eurodollar Margin were 0.25% and
0.75%, respectively, at March 31, 2003.
Under the Agreement, 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 $125 million. The Revolving
Credit and Swing Line Facility also provides for the issuance of $30 million of
letters of credit, with such usage applied against the $250 million limit. At
March 31, 2003, the Company had $4.7 million in letters of credit outstanding
under the Facility.
Libbey Europe B.V. may have euro-denominated borrowings under the Revolving
Credit Agreement in an amount not to exceed the Offshore Currency equivalent of
$60 million. Offshore Currency Swing Line borrowings are currently limited to
$10 million of the $25 million total Swing Line borrowing. Interest is
calculated at the Offshore Currency Swing Line rate plus applicable Offshore
Currency Swing Line Margin, as defined in the Agreement. Revolving Offshore
Currency Borrowings bear interest at the Offshore Currency Rate plus applicable
spread, as defined in the Agreement.
The Company pays a Commitment Fee Percentage on the total credit provided under
the Revolving Credit Agreement. No compensating balances are
7
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. The Company was in compliance with the convenants at March 31,
2003.
Libbey Inc. and the subsidiaries of Libbey Glass Inc. guarantee the debt of
Libbey Glass Inc., and Libbey Glass Inc. guarantees the debt of Libbey Europe
B.V. (all related parties which are included in the Consolidated Financial
Statements).
The Company has entered into interest rate protection agreements (Rate
Agreements) with respect to $100 million of debt under its Revolving Credit
Agreement as a means to manage its exposure to fluctuating interest rates. The
Rate Agreements effectively convert this portion of the Company's Revolving
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 fixed
rate of interest for the Company's borrowings related to the Rate Agreements at
March 31, 2003 is 5.8% and the total interest rate, including applicable fees,
is 6.8%. The average maturity of these Rate Agreements is 2.1 years. The
remaining debt under the Revolving Credit Agreement not covered by the Rate
Agreements has fluctuating interest rates with a weighted average rate of 2.3%
at March 31, 2003.
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.
On March 31, 2003, the Company completed the issuance of $100 million of
privately placed senior notes. Eighty million dollars of the notes have a fixed
interest rate with $25 million at an interest rate of 3.69% due March 31, 2008
and the other $55 million at an interest rate of 5.08% due March 31, 2010. The
remaining $20 million has a floating interest rate at a margin over the London
Interbank Offer Rate (LIBOR) that is set quarterly. The interest rate at March
31, 2003 on the $20 million debt was 2.34%. The proceeds of the note issuance
were used to retire debt outstanding under the Revolving Credit Agreement.
Libbey Inc. and the subsidiaries of Libbey Glass Inc. guarantee the debt of
Libbey Glass Inc. secured by these notes.
2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company is a 49% equity owner in Vitrocrisa, S. de R.L. de C.V. and related
Mexican companies (Vitrocrisa) which manufacture, market, and sell glass
tableware (beverageware, plates, bowls, serveware, and
8
accessories) and industrial glassware (coffee pots, blender jars, meter covers,
glass covers for cooking ware, and lighting fixtures sold to original equipment
manufacturers) and a 49% equity owner in Crisa Industrial, L.L.C., a distributor
of industrial glassware for Vitrocrisa in the U.S. and Canada.
Libbey Glass Inc. guaranteed the payment by Vitrocrisa of its obligation to
purchase electricity. The guarantee is based on the provisions of a Power
Purchase Agreement to which Vitrocrisa is a party. The guarantee is limited to
49% of any such obligation of Vitrocrisa, limited to an aggregate amount of $5.0
million. The guarantee was entered into in October 2000 and continues for 15
years from the initial date of electricity generation, which commenced on
April 12, 2003.
Summarized combined financial information for the Company's investments for 2003
and 2002, accounted for by the equity method, is as follows:
March 31, December 31,
2003 2002
-------- --------
Current assets $ 83,569 $ 93,311
Non-current assets 112,673 115,054
-------- --------
Total assets 196,242 208,365
Current liabilities 78,178 78,547
Other liabilities and deferred items 88,377 100,063
-------- --------
Total liabilities and deferred items 166,555 178,610
-------- --------
Net assets $ 29,687 $ 29,755
======== ========
Three months ended
March 31,
----------------------
2003 2002
-------- --------
Total Revenues $ 38,287 $ 43,607
Cost of sales 32,999 36,916
-------- --------
Gross profit 5,288 6,691
Operating expenses 4,856 5,249
-------- --------
Income from operations 432 1,442
Other income 8 68
-------- --------
Earnings before finance costs and taxes 440 1,510
Interest expense 1,394 1,645
Translation gain (loss) 647 (487)
-------- --------
Loss before income taxes (307) (622)
Income taxes (325) (344)
-------- --------
Net income (loss) $ 18 $ (278)
======== ========
9
3. CASH FLOW INFORMATION
Interest paid in cash aggregated $2,264 and $1,939 for the first three months of
2003 and 2002, respectively. Income taxes paid in cash aggregated $5,169 and
$6,344 for the first three months of 2003 and 2002, 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.
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter ended March 31, 2003 2002
- ----------------------- ----------- -----------
Numerator for basic and diluted
earnings per share--net income
which is available to common shareholders $ 2,001 $ 3,952
Denominator for basic earnings per
share--weighted-average shares outstanding 14,469,861 15,343,514
Effect of dilutive securities--
employee stock options 129,448 300,620
----------- -----------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed conversions 14,599,309 15,644,134
Basic earnings per share $ 0.14 $ 0.26
Diluted earnings per share $ 0.14 $ 0.25
10
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income are net income and adjustments
for the change in fair value of derivative instruments.
Total comprehensive income is as follows:
Three months ended
March 31,
-------------------
2003 2002
------- -------
Net income $ 2,001 $ 3,952
Change in fair value of derivative instruments
398 2,288
------- -------
Comprehensive income $ 2,399 $ 6,240
======= =======
Accumulated other comprehensive loss primarily includes $4,837 and $5,235 for
effect of derivatives and $26,647 and $26,647 for minimum pension liability as
of March 31, 2003 and December 31, 2002, respectively.
6. DERIVATIVES
During the first quarter 2003, the Company decreased other comprehensive loss by
$638 for net changes in the fair value of derivatives less income tax expense of
$240, or $398, which results in accumulated other comprehensive loss related to
derivatives at March 31, 2003, of $7,186 less income tax benefit of $2,349, or
$4,837. During the first quarter 2002, unrealized net income related to
derivatives of $3,667 less income tax expense of $1,379, or net income of $2,288
was included in other comprehensive income, resulting in accumulated other
comprehensive loss related to derivatives at March 31, 2002, of $3,367 less
income tax benefit of $913, or net loss of $2,454.
As of March 31, 2003, the Company has Interest Rate Protection Agreements for
$100.0 million of its variable rate debt and commodity contracts for 0.9 million
British Thermal Units (BTUs) of natural gas accounted for under hedge
accounting. The fair value of these derivatives are included in accrued
liabilities and other assets on the balance sheet for the Rate Agreements and
commodity contracts, respectively. At March 31, 2002, the Company had Rate
Agreements for $100.0 million of its variable rate debt and commodity contracts
for 2.0 million BTUs of natural gas.
The Company does not believe it is exposed to more than a nominal amount of
credit risk in its interest rate and natural gas hedges as the counterparts are
established financial institutions.
All of the Company's derivatives qualify and are designated as cash flow hedges
at March 31, 2003. Hedge accounting is only applied when the derivative is
deemed to be highly effective at offsetting changes in
11
fair values or anticipated cash flows of the hedged item or transaction. 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 in earnings during the first quarter of 2003 and 2002 was not
material.
7. NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). For most companies, SFAS No. 145 will require gains
and losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. Generally, the provisions of
the new statement are effective for transactions occurring after May 15, 2002 or
for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145
on January 1, 2003. The adoption did not have an impact on the Company.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No.146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
No. 146). SFAS NO. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. A liability for an exit
cost as generally defined in Issue 94-3 was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The provisions
of SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003.
The adoption did not have an impact on the Company.
In December 2002, the FASB issued a SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS No. 148). This statement
addresses the transition methods for entities that adopt the fair value method
of accounting for stock-based employee compensation and also improves the
prominence and clarity of the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), by prescribing a
specific tabular format and by requiring disclosure in the Significant
Accounting Policies note to the financial statement. In addition, this statement
requires disclosures in financial reports for interim periods. The Company
12
adopted the disclosure requirements of SFAS No. 148 in December 2002, the
effective date of the Standard.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation will significantly change current
practices in the accounting for and disclosure of guarantees. Guarantees meeting
the characteristics described in the Interpretation are required to be initially
recorded at fair value. The Interpretation's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Interpretation also requires a
guarantor to make significant new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote. The Interpretation's disclosure requirements are effective for this
year's financial statements. The Company included appropriate disclosure in
"Long-Term Debt" and "Investments in Unconsolidated Affiliates" of the Notes
to the Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." The Interpretation addresses the requirements for
business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interests. The Interpretation is intended to provide guidance in judging
multiple economic interests in an entity and in determining the primary
beneficiary. The Interpretation outlines disclosure requirements for variable
interest entities in existence prior to January 31, 2003 and requires
consolidation of variable interest entities created after January 31, 2003. In
addition, the Interpretation requires consolidation of variable interest
entities created prior to January 31, 2003 for fiscal periods beginning after
June 15, 2003. The Company is evaluating the impact of the Interpretation.
13
8. STOCK OPTIONS
The Company has two stock-based employee compensation plans. The Company
accounts for the plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provision of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), to stock-based employee compensation.
Three months ended March 31, 2003 2002
------ ------
Net Income:
Reported net income $2,001 $3,952
------ ------
Stock-based employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects 403 410
------ ------
Pro forma net income $1,598 $3,542
------ ------
Basic earnings per share:
Reported net income $0.14 $0.26
Stock-based employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects 0.03 0.03
------ ------
Pro forma basic earnings per share $0.11 $0.23
------ ------
Diluted earnings per share:
Reported net income $0.14 $0.25
Stock-based employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects 0.03 0.03
------ ------
Pro forma diluted earnings per share $0.11 $0.22
------ ------
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - FIRST QUARTER 2003 COMPARED WITH FIRST QUARTER 2002
Three months ended
March 31,
-------------------------
(dollars in thousands)
-------------------------
2003 2002
-------- --------
Net Sales $111,903 $ 98,669
Gross profit 21,558 22,071
As a percent of sales 19.3% 22.4%
Income from operations $ 5,542 $ 8,616
As a percent of sales 5.0% 8.7%
Earnings before interest and income taxes $ 5,518 $ 8,058
As a percent of sales 4.9% 8.2%
Net income $ 2,001 $ 3,952
As a percent of sales 1.8% 4.0%
Management is not aware of any events or uncertainties that are likely to have a
material impact on the company's prospective results of operations or financial
condition; however, major slowdowns in the retail, travel, or entertainment
industries could result from the impact of armed hostilities or any other
international or national calamity, including any act of terrorism. Additional
risk factors are discussed in Other Information in the section "Qualitative and
Quantitative Disclosures About Market Risk."
For the quarter ended March 31, 2003, sales increased 13.4% to $111.9 million
from $98.7 million in the year-ago quarter. The increase in sales was
attributable to the inclusion in 2003 of the sales of Royal Leerdam and Traex,
both acquired in December 2002. Excluding these acquisitions, sales declined
3.8%, as sales to retail and foodservice customers declined in the low single
digits on a percentage basis as compared to the year-ago period. Sales to
customers located outside of the United States, increased to $23.6 million from
$10.6 million in the year-ago period. This is primarily due to the acquisition
of Royal Leerdam. Excluding Royal Leerdam sales, sales outside of the United
States increased 4.1% over the year-ago period.
15
Gross profit (defined as net sales plus freight billed to customers less cost of
sales) was $21.6 million and as a percent of sales was 19.3% in the first
quarter of 2003 compared to $22.1 million and as a percent of sales was 22.4% in
the first quarter of 2002. Factors contributing to the decline, in addition to
lower sales excluding acquisitions, were higher natural gas costs of
approximately $1.8 million and additional costs for pension and postretirement
medical benefits of $1.3 million, the latter being mainly non-cash items. In
addition, higher costs for repairs and maintenance as well as higher warehouse
and distribution expenses in the company's glassware operations negatively
affected gross profit by $2.0 million. These costs were partially offset by
gross profit of the acquisitions completed in December of 2002.
Income from operations was $5.5 million compared to $8.6 million in the first
quarter last year and as a percent of sales was 5.0% in the first quarter of
2003 compared to 8.7% in the year-ago quarter. Contributing to this decrease in
income from operations was an increase in selling, general and administrative
expenses mainly attributable to the acquisitions of Royal Leerdam and Traex.
Earnings before interest and income taxes (EBIT) were $5.5 million compared to
$8.1 million in the year-ago quarter. Equity earnings from Vitrocrisa (the
company's 49% equity ownership in Crisa Industrial, L.L.C., Vitrocrisa Holding,
S. de R.L. de C.V. and related Mexican companies), were a loss of $0.2 million
on a pretax basis, slightly better than $0.4 million pretax loss in the first
quarter of 2002. A substantial reduction in production activity occurred during
the quarter at Vitrocrisa, to control inventory growth and improve cash flow.
The reduction relates to furnace rebuild activity and the impact of weak
economic conditions on sales demand. This production curtailment was unusually
severe and created an under absorption of fixed costs that did not occur in
2002. A portion of the resulting costs related to this volume variance were
added to inventory at Vitrocrisa as they are expected to be offset by over
absorption of fixed costs by the end of 2003. The impact of this allocation was
to increase pretax equity earnings by $1.7 million in the quarter.
Net income was $2.0 million, or 14 cents per diluted share, compared with net
income of $4.0 million, or 25 cents per diluted share, in the year-ago period.
Interest expense increased $0.7 million as a result of an increase of debt to
$250.9 million from $158.4 million in the year-ago period. Debt increased after
funding $62.0 million for the acquisitions of Traex and Royal Leerdam in late
2002 and the repurchase of 2,435,600 shares for $65.1 million since the year-ago
period. The company's effective tax rate declined to 32.8% from 36.0% in the
year-ago period as the result of lower state and local taxes and lower taxes on
equity earnings.
16
CAPITAL RESOURCES AND LIQUIDITY
The company had total debt of $250.9 million at March 31, 2003, compared to
$191.2 million at December 31, 2002. This increase in debt is attributable to
the repurchase of 1,500,000 million shares for $38.2 million pursuant to the
company's modified Dutch Auction tender offer and seasonal increased working
capital requirements during the first quarter of 2003. Since mid-1998, the
company has repurchased 5,125,000 shares for $140.5 million. Board authorization
remains at March 31, 2003 for the purchase of an additional 1,000,000 shares.
During the first quarter of 2003, the company had capital expenditures of $4.6
million compared to $4.9 million in the year-ago period. These expenditures
primarily relate to furnace rebuild activity and investments in higher
productivity machinery and equipment. The company expects to spend $25 to $30
million for capital expenditures for the year 2003.
The company had additional debt capacity at March 31, 2003, under the Revolving
Credit Agreement (Agreement) of $99.9 million. Of Libbey's total outstanding
indebtedness, $67.7 million was subject to fluctuating interest rates at March
31, 2003. A change of one percent in such rates would have resulted in a change
in interest expense of approximately $0.7 million on an annual basis as of March
31, 2003. The Agreement is for a term of three years maturing April 23, 2005,
with an option to extend for two additional one-year periods. The company is not
aware of any trends, demands, commitments, or uncertainties that will result or
that are reasonably likely to result in a material change in Libbey's liquidity
On March 31, 2003, the company completed the issuance of $100 million of
privately placed senior notes. Eighty million dollars of the notes have an
average interest rate of 4.65% with an average maturity of 8.4 years. The
additional $20 million has a floating interest rate at a margin over the London
Interbank Offer Rate (LIBOR). The proceeds of the note issuance were used to
retire debt outstanding under the Revolving Credit Agreement. The company
believes that its cash from operations and available borrowings under the
Revolving Credit Agreement, private placement senior notes and other short-term
lines of credit 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 Revolving Credit Agreement.
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
17
devaluations and other major currency fluctuations relative to the U.S. dollar,
euro or Mexican peso that could reduce the cost competitiveness of the company's
products or that of Vitrocrisa's compared to foreign competition; the effect of
high inflation in Mexico and exchange rate changes to the value of the Mexican
peso and impact of those changes on the earnings and cash flow of Vitrocrisa,
expressed under accounting principles generally accepted in the United States.
The company is exposed to market risk associated with changes in interest rates
in the U.S. and has entered into Interest Rate Protection Agreements (Rate
Agreements) with respect to $100.0 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 fixed rate of interest for the company's borrowings related to the Rate
Agreements at March 31, 2003 is 5.8% and the total interest rate, including
applicable fees, is 6.8%. The average maturity of these Rate Agreements is 2.1
years at March 31, 2003. Total remaining debt not covered by the Rate Agreements
has fluctuating interest rates with a weighted average rate of 3.6% at March 31,
2003. The company had $67.7 million of debt subject to fluctuating interest
rates at March 31, 2003. A change of one percent in such rates would result in a
change in interest expense of approximately $0.7 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.
The fair value of the company's Rate Agreements is determined using the market
standard methodology of netting the discounted expected future variable cash
receipts and the discounted future fixed cash payments. The variable cash
receipts are based on an expectation of future interest rates derived from
observed market interest rate forward curves. The company does not expect to
cancel these agreements and expects them to expire as originally contracted.
In addition to the Rate Agreements, the company has also entered into commodity
contracts to hedge the price of anticipated required purchases of natural gas.
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 (loss) and reclassified into earnings as
the underlying hedged transaction or items affects earnings. At March 31, 2003,
approximately $4.8 million of unrealized net losses were recorded in accumulated
other comprehensive loss.
18
OTHER INFORMATION
This document and supporting schedules contains statements that are not
historical facts and constitute projections, forecasts or forward-looking
statements. Such statements only reflect the company's best assessment at this
time, and may be identified by the use of forward-looking words or phrases such
as "anticipate," "believe," "expect," "intend," "may," "planned," "potential,"
"should," "will," "would" or similar phrases. Such forward-looking statements
involve risks and uncertainty and actual results may differ materially from such
statements and undue reliance should not be placed on such statements. Important
factors potentially affecting the company's performance include, but are not
limited to:
- major slowdowns in the retail, travel, restaurant and bar or
entertainment industries, including the impact of armed hostilities
or any other international or national calamity, including any act
of terrorism, on the retail, travel, restaurant and bar or
entertainment industries;
- significant increases in interest rates that increase the company's
borrowing costs;
- significant increases in per-unit costs for natural gas,
electricity, corrugated packaging and other purchased materials;
- increases in expenses associated with higher medical costs, reduced
pension income associated with lower returns on pension investments
and increased pension obligations;
- devaluations and other major currency fluctuations relative to the
U.S. dollar, euro or Mexican peso that could reduce the cost
competitiveness of the company's or Vitrocrisa'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
accounting principles generally accepted in the United States and
cash flow Vitrocrisa;
- the inability to achieve savings and profit improvements at targeted
levels at 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 to sell
glass tableware in the United States and Mexico, including the
impact of lower duties for imported products;
- whether the company completes any significant acquisitions and
whether such acquisitions can operate profitably.
19
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures: Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the company's principal executive officer and principal
financial officer have concluded that the company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act") are effective to ensure that
information required to be disclosed by the company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls: There were no significant changes in the
company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits listed in the accompanying "Exhibit Index"
are filed as part of this report.
(b) Reports on Form 8-K:
A report under Item 5 was filed dated January 6, 2003, with respect
to the announcement that the Company acquired the stock of B.V.
Koninklijke Nederlandsche Glasfabriek Leerdam (Royal Leerdam) from
BSN Glasspack.
A report under Item 5 was filed dated January 10, 2003, with respect
to the announcement that the Company will increase its regular
quarterly dividend and the Company's financial plan for 2003.
20
A report under Item 5 was filed dated February 6, 2003, reporting
the diluted earnings per share for the fourth quarter ended December
31, 2002.
A report under Item 5 was filed dated March 18, 2003, announcing
preliminary results of the Company's modified dutch aution tender
offer.
21
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Libbey Inc. (filed as
Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993 and incorporated herein by reference).
3.2 Amended and Restated By-Laws of Libbey Inc. (filed as Exhibit 3.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 and incorporated herein by reference).
4.1 Restated Certificate of Incorporation of Libbey Inc. (incorporated
by reference herein as Exhibit 3.1).
4.2 Amended and Restated By-Laws of Libbey Inc. (incorporated by
reference herein as Exhibit 3.2).
4.3 Rights Agreement, dated January 5, 1995, between Libbey Inc. and The
Bank of New York, which includes the form of Certificate of
Designations of the Series A Junior Participating Preferred Stock of
Libbey Inc. as Exhibit A, the form of Right Certificate as Exhibit B
and the Summary of Rights to Purchase Preferred Shares as Exhibit C,
(filed as Exhibit 1 to Registrant's Registration Statement on Form
8-A dated January 20, 1995 and incorporated herein by reference).
4.4 First Amendment to Rights Agreement, dated February 3, 1999, between
Libbey Inc. and The Bank of New York (filed as Exhibit 4.4 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998 and incorporated herein by reference).
10.1 Amended and Restated Credit Agreement, dated February 10, 2003,
among Libbey Glass Inc. and Libbey Europe B.V., as the borrowers,
Bank of America, N.A., as the administrative agent, swing line
lender and letter of credit issuer, Bank One, N.A. and Fleet
National Bank, as syndication agents and the other lenders party
thereto (filed as
22
Exhibit (b) to Registrant's Tender Offer Statement on Schedule TO
incorporated herein by reference).
10.2 Note Purchase Agreement, dated March 31, 2003, among Libbey Glass
Inc. and Purchasers of the notes (filed herein).
10.3 Guaranty Agreement, dated March 31, 2003, among Libbey Glass Inc.,
and the Purchasers of the notes referenced in 10.2 above (filed
herein).
10.4 Subsidiary Guaranty dated as of March 31, 2003, among Libbey Inc.
and wholly-owned subsidiaries of Libbey Glass Inc. and the
Purchasers of the notes referenced in 10.2 above (filed herein).
99.1* Chief Executive Officer Certification Pursuant To 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
of 2002 (filed herein).
99.2* Chief Financial Officer Certification Pursuant To 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
of 2002 (filed herein).
*Exhibit being "furnished", not filed, and thus not incorporated by reference
into any 1933 Act registration statement.
23
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 May 15, 2003 By /s/ Scott M. Sellick
------------------------------------
Scott M. Sellick,
Vice President, Chief Financial Officer
(Principal Accounting Officer)
24
CERTIFICATIONS
I, John F. Meier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Libbey Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
25
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date May 15, 2003 By /s/ John F. Meier
-----------------------------
John F. Meier,
Chief Executive Officer
26
I, Scott M. Sellick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Libbey Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
27
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date May 15, 2003 By /s/ Scott M. Sellick
---------------- -------------------------
Scott M. Sellick,
Chief Financial Officer
28