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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended June 30, 1999
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 (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation or
organization)
300 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 - 16,258,503 shares at July 31, 1999
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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, 1998.
The interim results of operations are not necessarily indicative of results for
the entire year.
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LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Three months ended June 30,
Revenues: 1999 1998
---- ----
Net sales $ 112,923 $ 113,673
Royalties and net technical
assistance income 578 751
--------- ---------
Total revenues 113,501 114,424
Costs and expenses:
Cost of sales 72,694 79,569
Selling, general and administrative
expenses 16,915 12,795
--------- ---------
89,609 92,364
--------- ---------
Income from operations 23,892 22,060
Other income:
Equity earnings 676 3,727
Other - net 379 (175)
--------- ---------
1,055 3,552
--------- ---------
Earnings before interest and income taxes 24,947 25,612
Interest expense - net (3,124) (3,260)
--------- ---------
Income before income taxes 21,823 22,352
Provision for income taxes 8,184 8,605
--------- ---------
Net income $ 13,639 $ 13,747
========= =========
Net income per share
Basic $ 0.84 $ 0.78
========= =========
Diluted $ 0.82 $ 0.76
========= =========
Dividends per share $ 0.075 $ 0.075
========= =========
See accompanying notes.
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LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Six months ended June 30,
Revenues: 1999 1998
---- ----
Net sales $ 208,203 $ 203,761
Royalties and net technical
assistance income 1,343 1,520
--------- ---------
Total revenues 209,546 205,281
Costs and expenses:
Cost of sales 144,038 146,929
Selling, general and administrative
expenses 30,383 25,504
Capacity realignment charge 2,227 --
--------- ---------
176,648 172,433
--------- ---------
Income from operations 32,898 32,848
Other income:
Equity earnings 1,152 6,035
Other - net 371 80
--------- ---------
1,523 6,115
--------- ---------
Earnings before interest and income taxes 34,421 38,963
Interest expense - net (6,225) (6,683)
--------- ---------
Income before income taxes 28,196 32,280
Provision for income taxes 10,574 12,428
--------- ---------
Net income $ 17,622 $ 19,852
========= =========
Net income per share
Basic $ 1.08 $ 1.13
========= =========
Diluted $ 1.06 $ 1.10
========= =========
Dividends per share $ 0.15 $ 0.15
========= =========
See accompanying notes.
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LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
1999 1998
---- ----
(unaudited) (Note)
ASSETS
Current assets:
Cash $ 2,352 $ 3,312
Accounts receivable:
Trade, less allowances of $4,337
and $3,636 50,653 48,474
Other 1,407 1,323
-------- --------
52,060 49,797
Inventories:
Finished goods 91,868 81,770
Work in process 5,784 5,763
Raw materials 3,013 3,134
Operating supplies 615 695
-------- --------
101,280 91,362
Prepaid expenses and deferred taxes 9,530 11,108
-------- --------
Total current assets 165,222 155,579
Other assets:
Repair parts inventories 6,834 8,633
Intangibles, net of accumulated
amortization of $2,495 and $2,343 9,710 9,862
Pension assets 12,111 10,701
Deferred software, net of accumulated
amortization of $4,982 and $3,974 5,589 6,299
Other assets 653 754
Equity investments 81,072 80,437
Goodwill, net of accumulated
amortization of $13,888 and $13,126 47,173 47,935
-------- --------
163,142 164,621
Property, plant and equipment, at cost 239,985 235,713
Less accumulated depreciation 124,155 116,242
-------- --------
Net property, plant and equipment 115,830 119,471
-------- --------
Total assets $444,194 $439,671
======== ========
Note: The condensed consolidated balance sheet at December 31, 1998 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.
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LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
1999 1998
---- ----
(unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 12,716 $ 14,932
Accounts payable 15,945 22,605
Salaries and wages 10,475 14,413
Capacity realignment reserve 14,810 19,929
Accrued liabilities 29,370 22,702
Income taxes 9,046 --
Long-term debt due within one year 7,052 --
--------- ---------
Total current liabilities 99,414 94,581
Long-term debt 176,300 176,300
Deferred taxes 15,441 16,184
Other long-term liabilities 7,437 6,689
Nonpension retirement benefits 50,451 51,057
Shareholders' equity:
Common stock, par value $.01
per share, 50,000,000 shares
authorized, 17,726,303 shares
issued and outstanding, less
1,472,800 treasury shares
(17,707,570 shares issued and
outstanding, less 875,000 treasury
shares in 1998) 162 168
Capital in excess of par value 282,317 281,956
Treasury stock (42,707) (27,250)
Deficit (143,421) (158,602)
Accumulated other comprehensive
loss (1,200) (1,412)
--------- ---------
Total shareholders' equity 95,151 94,860
--------- ---------
Total liabilities and shareholders'
equity $ 444,194 $ 439,671
========= =========
Note: The condensed consolidated balance sheet at December 31, 1998 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.
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LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six months ended June 30,
1999 1998
---- ----
Operating activities
Net income $ 17,622 $ 19,852
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 8,178 8,755
Amortization 1,922 1,708
Other non-cash charges (1,807) 1,160
Equity earnings (1,152) (6,035)
Capacity realignment charge 2,227 --
Net change in components of working
capital and other assets (11,501) (12,394)
-------- --------
Net cash provided by operating activities 15,489 13,046
Investing activities
Additions to property, plant and
equipment (4,299) (11,073)
Dividends received from equity
investment 517 14,232
-------- --------
Net cash provided by (used in)
investing activities (3,782) 3,159
Financing activities
Net bank credit facility activity 7,052 (14,482)
Other net borrowings (2,216) 1,129
Stock options exercised 361 851
Treasury shares purchased (15,463) --
Dividends (2,441) (2,640)
-------- --------
Net cash used in financing activities (12,707) (15,142)
-------- --------
Effect of exchange rate fluctuations
on cash 40 7
-------- --------
Increase(decrease) in cash (960) 1,070
Cash at beginning of year 3,312 2,634
-------- --------
Cash at end of period $ 2,352 $ 3,704
======== ========
See accompanying notes.
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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 0.15% and 0.275%,
respectively, at June 30, 1999. 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
June 30, 1999 the Company had $5.2 million in letters of credit outstanding
under the Facility.
The Company has entered into interest rate protection agreements ("Rate
Agreements") with respect to $100 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
June 30, 1999 was 6.56% for an average remaining period of 2.2 years. The
remaining debt not covered by the Rate Agreements has fluctuating interest rates
with a weighted average rate of 5.5% at June 30, 1999.
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.
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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.
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 1999 and 1998 is as
follows:
June 30, December 31,
1999 1998
-------- ------------
Current assets $ 70,846 $ 61,457
Non-current assets 132,856 134,208
- ------------------------------------------------------------------ ------------------------- ------------------------
Total assets 203,702 195,665
Current liabilities 104,139 90,037
Other liabilities and deferred items 87,174 96,068
- ------------------------------------------------------------------ ------------------------- ------------------------
Total liabilities and deferred items 191,313 186,105
- ------------------------------------------------------------------ ------------------------- ------------------------
Net assets $ 12,389 $ 9,560
================================================================== ========================= ========================
For three months ending
June 30,
--------------------------------------------------
1999 1998
---- ----
Net sales $ 48,055 $ 53,217
Cost of sales 33,276 33,297
------------------------- ------------------------
Gross profit 14,779 19,920
General expenses 5,000 8,512
------------------------- ------------------------
Earnings before finance costs 9,779 11,408
Integral financing costs 3,062 2,420
Other income (loss) (731) 764
Income taxes and profit sharing 3,741 1,289
- ------------------------------------------------------------------ ------------------------- ------------------------
Net income $ 2,245 $ 8,463
================================================================== ========================= ========================
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For six months ending
June 30,
--------------------------------------------------
1999 1998
---- ----
Net sales $ 89,410 $ 93,835
Cost of sales 63,221 55,997
------------------------- ------------------------
Gross profit 26,189 37,838
General expenses 9,323 16,807
------------------------- ------------------------
Earnings before finance costs 16,866 21,031
Integral financing costs 6,578 4,547
Other income (loss) (1,375) 918
Income taxes and profit sharing 4,832 3,518
- ------------------------------------------------------------------ ------------------------- ------------------------
Net income $ 4,081 $ 13,884
================================================================== ========================= ========================
3. CASH FLOW INFORMATION
Interest paid in cash aggregated $5,802 and $6,345 for the first six months of
1999 and 1998, respectively. Income taxes paid in cash aggregated $1,272 and
$6,489 for the first six months of 1999 and 1998, 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.
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The following table sets forth the computation of basic and diluted earnings per
share (dollars in thousands, except per-share amounts):
Quarter ended June 30, 1999 1998
- ----------------------------------- ---- ----
Numerator for basic and diluted
earnings per share--net income
which is available to common
shareholders $ 13,639 $ 13,747
Denominator for basic earnings per
share--weighted-average shares
outstanding 16,247,497 17,607,457
Effect of dilutive securities--
employee stock options 345,486 455,679
----------- -----------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 16,592,983 18,063,136
Basic earnings per share $ 0.84 $ 0.78
Diluted earnings per share $ 0.82 $ 0.76
Six Months ended June 30, 1999 1998
- ----------------------------------- ---- ----
Numerator for basic and diluted
earnings per share--net income
which is available to common
shareholders $ 17,622 $ 19,852
Denominator for basic earnings per
share--weighted-average shares
outstanding 16,323,970 17,596,621
Effect of dilutive securities--
employee stock options 334,966 447,573
----------- -----------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 16,658,936 18,044,194
Basic earnings per share $ 1.08 $ 1.13
Diluted earnings per share $ 1.06 $ 1.10
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5. COMPREHENSIVE INCOME
The Company's components of comprehensive income are net income and foreign
currency translation adjustments. During the second quarter of 1999 and 1998,
total comprehensive income amounted to $13,743 and $13,276 respectively. For the
first six months of 1999 and 1998 comprehensive income amounted to $17,834 and
$19,484 respectively.
6. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133)
which establishes new procedures for accounting for derivatives and hedging
activities and supersedes and amends a number of existing standards. Statement
133 is effective for fiscal years beginning after June 15, 2000, and the Company
has not determined its impact.
7. CAPACITY REALIGNMENT CHARGE
On December 31, 1998 the Board of Directors of the Company approved a capacity
realignment plan, which includes reallocating a portion of the current
production of the Company's Wallaceburg, Ontario facility to its glassware
facilities in the United States to improve its cost structure and more fully
utilize available capacity. A portion of Wallaceburg's production is being
absorbed by the Company's joint venture in Mexico, Vitrocrisa. The Company is
servicing its Canadian glass tableware customers from its remaining
manufacturing and distribution network, which includes locations in Toledo,
Ohio; Shreveport, Louisiana and City of Industry, California. The Company also
announced that it will exit the production of bottleware, a niche, low-margin
business for the Company. In connection with this plan, the Company recorded a
capacity realignment charge in the fourth quarter of 1998 of $20.0 million which
includes $10.0 million for severance and related employee costs, $7.6 million
for write off of fixed assets (primarily equipment) and $2.4 million for supply
inventories, repair parts and other costs. An additional charge was recorded in
the first quarter 1999 of $2.2 million, which includes $1.5 million for enhanced
severance and related employee costs, $.3 million for write-off of fixed assets
(primarily equipment) and $.4 million for write-off of inventories and other
costs.
The Wallaceburg facility ceased production in May, 1999, and the warehouse
operations will terminate later in 1999. The fixed assets, supply inventories
and repair parts not being transferred have been written down to a nominal
amount. The Wallaceburg facility is presently held for sale; however, if a buyer
is not located it will
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be abandoned. The Company terminated the employment of virtually all of its 560
salary and hourly employees at Wallaceburg and included severance and related
employee costs in its capacity realignment charge at the time when such
severance amounts were disclosed to the employees. These severance and related
employee costs primarily were paid when production ceased.
The following table sets forth the details and activity of the various
components of the capacity realignment reserve for the first six months of 1999.
Write-
Balance Provision off of Balance
as of charged Assets Effect of as of
December to to Cash Translation June 30,
Activity 31, 1998 Expense Reserve Payments Adjustments 1999
- -------- -------- ------- ------- -------- ----------- ----
Severance
and related
employee
cost $9,946 $1,502 -- $(7,936) $450 $ 3,962
Asset write-
downs:
Fixed
assets 7,619 323 $ 13 -- 242 8,197
Inventories
and other 2,364 402 (54) (138) 77 2,651
- ----------------------- ---------------- ---------------- ---------------- --------------- -------------------- ------------------
Total $19,929 $2,227 $(41) $(8,074) $769 $14,810
======================= ================ ================ ================ =============== ==================== ==================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
Three months ended
June 30,
----------------------------
(dollars in thousands)
1999 1998
-------- ------
Net sales $112,923 $113,673
Gross profit 40,229 34,104
As a percentage of sales 35.6% 30.0%
Income from operations $ 23,892 $ 22,060
As a percentage of sales 21.2% 19.4%
Earnings before interest and
income taxes $ 24,947 $ 25,612
As a percentage of sales 22.1% 22.5%
Net income $ 13,639 $ 13,747
As a percentage of sales 12.1% 12.1%
Net sales for the second quarter of 1999 of $112.9 million decreased 0.7% from
net sales of $113.7 million reported in the comparable period in 1998. Lower
sales of low-margin bottleware were slightly offset by increased sales of
glassware and dinnerware to foodservice customers offset. As part of its
capacity realignment program approved at the end of 1998, the Company decided to
close its Wallaceburg, Ontario, Canada plant and ceased manufacturing low-margin
glass bottleware for industrial applications on May 31, 1999. Sales of these
products totaled approximately $8 million for the full year 1998. Export sales,
which include sales to Libbey's customers in Canada, were down 13.4%, decreasing
to $13.2 million from $15.3 million in the year-ago period reflecting the lower
bottleware sales to Canadian customers.
Gross profit increased 18.0% to $40.2 million in the second quarter of 1999
compared to $34.1 million in the second quarter of 1998, and increased as a
percentage of sales to 35.6% from 30.0% due to higher sales of more profitable
products and lower costs due to improved utilization of the Company's glassware
plants.
Income from operations increased to $23.9 million from $22.1 million in the
year-ago period. The gross profit improvement offset increases in selling,
general and administrative expenses of $4.1 million. Increases in legal
expenses, primarily due to litigation brought against Oneida Ltd. to enforce the
Company's intellectual
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property, bad debt provisions and higher sales commission expense totaled
approximately $3.4 million and were major contributors to the increase in
selling, general and administrative expenses.
Earnings before interest and income taxes (EBIT) were $24.9 million compared
with $25.6 million in the second quarter last year. Higher income from
operations only partially offset a decline in equity earnings to $0.7 million
from $3.7 million in the year-ago period. Equity earnings, primarily
attributable to the Company's joint venture in Mexico, Vitrocrisa, declined due
to Vitrocrisa's lower operating earnings and the impact of a stronger Mexican
peso compared with the year-ago quarter.
Net income was $13.6 million compared with $13.7 million in the year-ago period.
A reduction in the Company's effective tax rate to 37.5 percent from 38.5
percent in the year-ago quarter offset lower EBIT.
RESULTS OF OPERATIONS - SIX MONTHS 1999 COMPARED WITH SIX MONTHS 1998
Six months ended
June 30,
-----------------------------
(dollars in thousands)
1999 1998
-------- --------
Net sales $208,203 $203,761
Gross profit 64,165 56,832
As a percentage of sales 30.8% 27.9%
Income from operations - excluding
capacity realignment charge 35,125 32,848
As a percentage of sales 16.9% 16.1%
Income from operations $ 32,898 $ 32,848
As a percentage of sales 15.8% 16.1%
Earnings before interest and
income taxes $ 34,421 $ 38,963
As a percentage of sales 16.5% 19.1%
Net income $ 17,622 $ 19,852
As a percentage of sales 8.5% 9.7%
Net sales for the first six months of 1999 of $208.2 million increased 2.2% from
net sales of $203.8 million reported in the comparable period in 1998. Export
sales, which include sales to Libbey's customers in Canada, were down 3.4%,
decreasing to $26.4 million from $27.3 million in the year-ago period reflecting
lower bottleware sales to Canadian customers. In addition, the Company is
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aware of the potential of increased competition from foreign suppliers
endeavoring to sell glass tableware into the United States market, including the
foodservice channel of distribution. The Company is in the process of assessing
the effect, if any, of such increased competition on the Company.
Gross profit increased 12.9% to $64.2 million in the first six months of 1999
compared to $56.8 million in the first six months of 1998, and increased as a
percentage of sales to 30.8% from 27.6% due to higher sales of more profitable
products and lower costs due to improved utilization of the Company's glassware
plants.
Income from operations increased to $32.9 million from $32.8 million in the
year-ago period. The reason for the increase was higher gross margin offset by
higher selling reflecting higher planned commission expense, general and
administrative expenses as a percent of sales and a $2.2 million capacity
realignment charge made in the first quarter related to the Company's plan to
realign its glass tableware production. Increases in legal expenses, primarily
due to litigation brought against Oneida Ltd. to enforce the Company's
intellectual property, bad debt provisions and higher sales commission were
major contributors to the increase in selling, general and administrative
expenses. Excluding the capacity realignment charge, income from operations
increased 6.9%
The capacity realignment charge primarily related to costs associated with the
May, 1999, closure of the Company's Wallaceburg, Ontario, glassware plant,
including employee severance payments and the disposition of assets. On December
31, 1998 the Board of Directors of the Company approved the capacity realignment
plan, and established a reserve in the fourth quarter of 1998 of $20.0 for
expenses related to the plan. The Company also announced its expectation to add
approximately $2.0 million to the reserve in the quarter ending March 31, 1999,
primarily related to enhanced severance benefits. The additional charge actually
recorded in the first quarter 1999 was $2.2 million, which includes $1.5 million
for enhanced severance and related employee costs, $.3 million for the write-off
of fixed assets (primarily equipment) and $.4 million for the write-off of
inventories and other costs. The Company expects that the capacity realignment
will provide savings of approximately $4.5 million in 1999, primarily as a
result of lower costs and improved capacity utilization.
Earnings before interest and income taxes (EBIT) declined to $34.4 million from
$39.0 million due to lower equity earnings, resulting from the impact of a
stronger Mexican peso and lower operating profits at the Company's joint venture
in Mexico.
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Net income was $17.6 million compared to $19.9 million in the year-ago period
due to items discussed above partially offset by a decrease in the Company's
effective tax rate from 38.5% in 1998 to 37.5% reflecting lower state income
taxes, and lower interest expense from lower debt levels.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company had total debt of $196.1 million at June 30, 1999, compared to
$191.2 million at December 31, 1998. Seasonal increases in accounts receivable
and inventory in 1999 account for the increase in the borrowings necessary.
During the first quarter, the Company purchased 597,800 shares pursuant to its
share repurchase plan for $15.5 million. No additional shares were repurchased
during the second quarter. Since mid 1998, the Company has repurchased 1,472,800
shares for $42.7 million. Board authorization remains for the purchase of an
additional 277,200 shares. In addition, Libbey received a dividend from its
investment in Crisa Industrial of $.5 million in first quarter 1999 compared to
a dividend from Vitrocrisa of $14.2 million late in first quarter 1998. The
Company had additional debt capacity at June 30, 1999 under the Bank Credit
Agreement of $188.7 million. Of Libbey's outstanding indebtedness, $96.1 million
is subject to fluctuating interest rates at June 30, 1999. A change of one
percentage point in such rates would result in a change in interest expense of
approximately $1.0 million on an annual basis as of June 30, 1999.
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.
YEAR 2000
- ---------
Libbey has developed and initiated its plans to address the possible exposures
related to the impact of the Year 2000 on its computer systems, equipment,
business and operations. The Company has recognized that the Year 2000 problem
may cause many of its systems to fail or perform incorrectly because they will
not properly
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recognize a year beginning with "20" instead of the familiar "19". If a computer
system, software application or other operational or manufacturing system used
by the Company or by a third party dealing with the Company fails because of the
inability of the system to properly read the year "2000", this failure could
have a material adverse effect on the Company.
Organizational Effort
Since August 1997, a corporate committee comprised of key information systems,
financial and operations managers meet bimonthly to review the state of
readiness of the Company's systems for the year 2000. The Company has appointed
the Chief Information Officer (CIO), reporting to and with the full support of
the Chairman and Chief Executive Officer, to provide oversight to the
implementation of the Year 2000 compliance program. The CIO has appointed a Year
2000 project manager, who has been engaged in determining compliance and
remediation requirements Company-wide since 1997. Key financial and operational
systems have been assessed and detailed plans have been implemented to address
modifications required prior to December 31, 1999. The Company's Year 2000
compliance and remediation efforts have not resulted in the deferral of any
projects material to the operation of the business.
Independent Review
The Company engaged an independent consultant to assist in assessing Year 2000
readiness and remediation plans at its manufacturing facilities. The independent
consultant validated the Company's Year 2000 compliance process and findings
to-date, utilizing its Year 2000 review process and systems. The review has been
completed. Two of the Company's manufacturing facilities, believed to be
representative of all facilities were reviewed, and no material compliance
issues were reported.
Contingency Plans
Each of the Company's manufacturing facilities and other operations material to
the functioning of the business has established Year 2000 compliance steering
committees to address the issue. Each committee has established contingency
plans should the Company experience business interruption due to the Year 2000
issue.
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State of Readiness
The Company is monitoring the Year 2000 issue in four phases, including
assessment, remediation, testing and implementation. The state of readiness in
each of these areas as well as the definition of each phase are presented below:
Project
Segment Assessment Remediation Testing Implementation
------- ---------- ----------- ------- --------------
IT areas:
Mainframe 100% complete 95% complete 95% complete 95% complete
Other 100% complete 95% complete 95% complete 95% complete
Non-IT areas 100% complete 95% complete 95% complete 95% complete
Suppliers 100% complete 85% complete - -
Assessment = an inventory of Information Technology (IT), non-IT and third-party
reliance affected by the Year 2000 issue.
Remediation = the changes to the code, obtaining compliant vendor software or
obtaining reliance from third parties that the Year 2000 issue has been
addressed.
Testing = the test of the changes to internally developed and vendor-upgraded
software.
Implementation = the rollout of tested or vendor-certified Year 2000 compliant
software into production. Selected testing with respect to implemented software
that has been certified by the vendor to be Year 2000 compliant has been
independently performed in an attempt to verify the vendor's certification.
The estimated percentage of completion is based upon the level of effort spent
to date on the task compared with the anticipated level of effort to complete
the task except with respect to suppliers. The anticipated level of effort to
complete the task may change as the Year 2000 compliance program proceeds. The
level of effort with respect to suppliers is based upon their replies to the
Company's inquiries.
Major portions of the Company's information technology are currently on Year
2000 compliant software. In 1998, the Company upgraded its enterprise resource
planning system to a version certified by the vendor as Year 2000 compliant. In
addition, the main computer systems supporting the Company's Syracuse China and
World Tableware operations, which were acquired in 1995 and 1997, respectively,
have been also converted to the upgraded software. The remaining portions
18
20
of the Company's other systems are planned to be migrated or converted by
year-end 1999.
Financial Impact
The financial impact of making the required changes, excluding the cost of
internal Company employee time and the costs required to upgrade and replace
systems and equipment in the normal course of business, is expected to be less
than $500,000, representing a small portion of the budget for information
technology expenses, and has been and will be charged to expense as incurred and
funded from internally generated cash flow. To date, approximately $185,000 has
been expensed. With respect to capital expenditures, approximately an additional
$1.7 million has been spent and another $.4 million has been contractually
committed on upgrades to the Company's enterprise resource planning system,
other systems and desktop and laptop computers that also address Year 2000
compliance.
Suppliers
The Company has communicated with its significant suppliers and 85% responded
they are currently or plan to be Year 2000 compliant by June 30, 1999, 97%
expected compliance by December 31, 1999, and 3% have not yet replied.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted, contingency plans have
been developed to cover any major failures of suppliers, customers and/or
systems. However, certain risk factors may affect the Company's ability to be
fully Year 2000 compliant by December 31, 1999, and its information systems to
operate properly into the next century. These risk factors include, but are not
limited to, the availability of necessary resources, both internal and external,
to install new purchased software or reprogram existing systems and complete the
necessary testing.
In addition, the Company cannot predict the ability of its suppliers and
customers to achieve Year 2000 compliance by the end of 1999, nor the impact of
either on the future operating results of the Company. The Company is dependent
upon the availability of electricity, natural gas, water, certain raw materials,
including sand and soda ash for glassware and clay for ceramic dinnerware
manufacturing, to operate its factories. In addition, to operate its business,
the Company is dependent upon the availability of transportation services,
telecommunications services and packaging. Any interruptions in the availability
of these or other key materials or services could have a material impact on the
Company.
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21
The Company cannot predict the ability of its equity investments, Vitrocrisa
and/or Crisa Industrial L.L.C., to achieve Year 2000 compliance by the end of
1999, nor the impact on the future operating results of the Company. Vitrocrisa
and Crisa Industrial L.L.C. currently have plans and programs in place to review
and address Year 2000 compliance as part of the Vitro S.A., our partner in the
equity investments, program. This program is being conducted independently from
Libbey.
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 and
the effect of exchange rate changes to the value of the Mexican peso relative to
the U.S. dollar and the impact of those changes on the earnings and cash flow of
the Company's joint venture in Mexico, Vitrocrisa, expressed under U.S. GAAP.
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 $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 interest rate for the Company's borrowings related to
the Rate Agreements at June 30, 1999, was 6.56% for an average remaining period
of 2.2 years. Total remaining debt not covered by the Rate Agreements has
fluctuating interest rates with a weighted average rate of 5.46% at June 30,
1999. The Company had $96.1 million of debt subject to fluctuating interest
rates at June 30, 1999. A change of one percentage point in such rates would
result in a change in interest expense of approximately $1.0 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, 1998, the carrying value of the long-term
debt approximates its fair value based on the Company's current
20
22
incremental borrowing rates. There was a negative fair market value for the
Company's Interest Rate Protection Agreements at December 31, 1998 of $2.6
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.
OTHER INFORMATION
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 "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 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 of the Company's
joint venture in Mexico, Vitrocrisa, expressed under U.S. GAAP; the inability to
achieve savings and profit improvements at targeted levels in the Company's
glassware sales from its capacity realignment efforts and re-engineering
programs, or within the intended time periods; inability to achieve targeted
manufacturing efficiencies at Syracuse China and cost synergies between World
Tableware and the Company's other operations; 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;
protracted work stoppages related to collective bargaining agreements; increased
competition from foreign suppliers endeavoring to sell glass tableware in the
United States; major slowdowns in the retail, travel or entertainment industries
in the United States or Canada; and whether the Company completes any
significant acquisition, and whether such acquisitions can operate profitably.
21
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiary Libbey Glass Inc. are defendants in
an antitrust suit filed on April 27, 1999 by Oneida Ltd. in the
United States District Court for the Northern District of New York
alleging anticompetitive and exclusionary actions by the
defendants to restrain competition in the sale of glass tableware
to the foodservice industry in the United States. The complaint
seeks treble the damages allegedly sustained by Oneida Ltd. in an
unspecified amount and injunctive relief. The case is in its
preliminary stages; the pleadings are not completed, and discovery
has not taken place. Although the outcome of the litigation is not
determinable at this time, the Company believes that it has
material factual and legal defenses to Oneida's claims and intends
to vigorously defend this lawsuit.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1999, at the annual meeting of stockholders, Messrs.
William A. Foley and Terence P. Stewart were elected as members of
Class III of the board of directors for three year terms expiring
on the date of the 2002 annual meeting. The results of the voting
were:
Directors
Name For Withheld
---- --- --------
Mr. Foley 12,241,348 337,808
Mr. Stewart 11,984,123 595,033
A proposal to approve The 1999 Equity Participation Plan of Libbey
Inc. was submitted to the meeting and approved. The results of the
voting were:
For Against Abstain
--- ------- -------
10,973,575 937,679 17,091
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
Exhibit
Number Description
10.48 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and L. F. Ashton.
10.49 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and John F. Meier.
10.50 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Arthur H. Smith.
10.51 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Richard I.
Reynolds.
10.52 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Kenneth G.
Wilkes.
10.53 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Timothy T. Paige.
10.54 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and John A. Zarb.
10.55 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Daniel P. Ibele.
10.56 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Dave Brown.
10.57 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Willie Purvis.
23
25
10.58 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Robert Dunton.
10.59 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and William Herb.
10.60 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Wayne Zitkus.
10.61 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and John P. Pranckun.
10.62 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Kenneth Boerger.
10.63 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Pete Kasper.
10.64 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Scott Sellick.
10.65 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Rob Bules.
10.66 Amendment dated May 21, 1999 to the Change of Control Agreement
dated as of May 27, 1998 between Libbey Inc. and Terry Hartman.
27 Other Financial Information
(b.) No form 8-K's were filed during the quarter.
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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 August 16, 1999 By /s/ Kenneth G. Wilkes
------------------- --------------------------------------
Kenneth G. Wilkes,
Vice President, Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
10.48 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and L. F. Ashton.
10.49 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and John F. Meier.
10.50 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Arthur H. Smith.
10.51 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Richard I. Reynolds.
10.52 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Kenneth G. Wilkes.
10.53 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Timothy T. Paige.
10.54 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and John A. Zarb.
10.55 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Daniel P. Ibele.
10.56 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Dave Brown.
10.57 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Willie Purvis.
E-1
28
EXHIBIT
NO. DESCRIPTION
--- -----------
10.58 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Robert Dunton.
10.59 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and William Herb.
10.60 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Wayne Zitkus.
10.61 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and John P. Pranckun.
10.62 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Kenneth Boerger.
10.63 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Pete Kasper.
10.64 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Scott Sellick.
10.65 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Rob Bules.
10.66 Amendment dated May 21, 1999 to the Change of
Control Agreement dated as of May 27, 1998 between
Libbey Inc. and Terry Hartman.
27 Other Financial Information
E-2