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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 September 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 - 16,017,753 shares at October 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 September 30,
1999 1998
Revenues: ---- ----
Net sales $ 112,017 $ 109,604
Royalties and net technical
assistance income 2,701 751
--------- ---------
Total revenues 114,718 110,355
Costs and expenses:
Cost of sales 74,808 76,801
Selling, general and administrative
expenses 15,410 12,986
--------- ---------
90,218 89,787
--------- ---------
Income from operations 24,500 20,568
Other income:
Equity earnings 656 4,733
Other - net (173) 946
--------- ---------
483 5,679
--------- ---------
Earnings before interest and income taxes 24,983 26,247
Interest expense - net (3,162) (3,070)
--------- ---------
Income before income taxes 21,821 23,177
Provision for income taxes 7,933 8,923
--------- ---------
Net income $ 13,888 $ 14,254
========= =========
Net income per share
Basic $ 0.85 $ 0.81
========= =========
Diluted $ 0.84 $ 0.79
========= =========
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)
Nine months ended September 30,
Revenues: 1999 1998
---- ----
Net sales $ 320,220 $ 313,365
Royalties and net technical
assistance income 4,044 2,271
--------- ---------
Total revenues 324,264 315,636
Costs and expenses:
Cost of sales 218,846 223,730
Selling, general and administrative
expenses 45,793 38,490
Capacity realignment charge 2,227 --
--------- ---------
266,866 262,220
--------- ---------
Income from operations 57,398 53,416
Other income:
Equity earnings 1,808 10,768
Other - net 198 1,026
--------- ---------
2,006 11,794
--------- ---------
Earnings before interest and income taxes 59,404 65,210
Interest expense - net (9,387) (9,753)
--------- ---------
Income before income taxes 50,017 55,457
Provision for income taxes 18,507 21,351
--------- ---------
Net income $ 31,510 $ 34,106
========= =========
Net income per share
Basic $ 1.93 $ 1.94
========= =========
Diluted $ 1.89 $ 1.89
========= =========
Dividends per share $ 0.225 $ 0.225
========= =========
See accompanying notes.
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LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
1999 1998
---- ----
(unaudited) (Note)
ASSETS
Current assets:
Cash $ 2,541 $ 3,312
Accounts receivable:
Trade, less allowances of $3,786
and $3,636 63,479 49,797
Inventories:
Finished goods 95,574 81,770
Work in process 5,786 5,763
Raw materials 3,380 3,134
Operating supplies 531 695
-------- --------
105,271 91,362
Prepaid expenses and deferred taxes 11,907 11,108
-------- --------
Total current assets 183,198 155,579
Other assets:
Repair parts inventories 6,666 8,633
Intangibles, net of accumulated
amortization of $2,521 and $2,343 9,634 9,862
Pension assets 12,817 10,701
Deferred software, net of accumulated
amortization of $5,487 and $3,974 5,214 6,299
Other assets 403 754
Equity investments 81,729 80,437
Goodwill, net of accumulated
amortization of $14,270 and $13,126 46,791 47,935
-------- --------
163,254 164,621
Property, plant and equipment, at cost 224,870 235,713
Less accumulated depreciation 117,664 116,242
-------- --------
Net property, plant and equipment 107,206 119,471
-------- --------
Total assets $453,658 $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)
September 30, December 31,
1999 1998
---- ----
(unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,550 $ 14,932
Accounts payable 20,132 22,605
Salaries and wages 12,813 14,413
Capacity realignment reserve 7,112 19,929
Accrued liabilities 23,541 22,702
Income taxes 11,749 --
Long-term debt due within one year 15,800 --
--------- ---------
Total current liabilities 97,697 94,581
Long-term debt 176,300 176,300
Deferred taxes 15,069 16,184
Other long-term liabilities 6,384 6,689
Nonpension retirement benefits 53,661 51,057
Shareholders' equity:
Common stock, par value $.01
per share, 50,000,000 shares
authorized, 17,747,753 shares
issued and outstanding, less
1,597,800 treasury shares
(17,707,570 shares issued and
outstanding, less 875,000 treasury
shares in 1998) 161 168
Capital in excess of par value 282,734 281,956
Treasury stock (46,413) (27,250)
Deficit (130,751) (158,602)
Accumulated other comprehensive
loss (1,184) (1,412)
Total shareholders' equity 104,547 94,860
--------- ---------
Total liabilities and shareholders'
equity $ 453,658 $ 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)
Nine months ended September 30,
1999 1998
---- ----
Operating activities
Net income $ 31,510 $ 34,106
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 11,516 12,794
Amortization 2,885 2,563
Other non-cash charges 967 (900)
Equity earnings (1,808) (10,768)
Capacity realignment charge 2,227 --
Net change in components of working
capital and other assets (27,207) (19,821)
-------- --------
Net cash provided by operating activities 20,090 17,974
Investing activities
Additions to property, plant and
equipment (6,848) (15,186)
Dividends received from equity
investment 517 14,232
-------- --------
Net cash used in investing activities (6,331) (954)
Financing activities
Net bank credit facility activity 15,860 (19,482)
Other net borrowings (repayments) (8,382) 4,715
Stock options exercised 779 1,872
Treasury shares purchased (19,171) --
Dividends (3,660) (3,965)
-------- --------
Net cash used in financing activities (14,574) (16,860)
-------- --------
Effect of exchange rate fluctuations
on cash 44 (20)
-------- --------
Increase(decrease) in cash (771) 140
Cash at beginning of year 3,312 2,634
-------- --------
Cash at end of period $ 2,541 $ 2,774
======== ========
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 September 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 September 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
September 30, 1999 was 6.56% for an average remaining period of 1.9 years. The
remaining debt not covered by the Rate Agreements has fluctuating interest rates
with a weighted average rate of 5.6% at September 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.
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However, the Company does not anticipate nonperformance by the counterparts.
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:
September 30, December 31,
1999 1998
---- ----
Current assets $ 71,638 $ 61,457
Non-current assets 132,089 134,208
- ---------------------------------------------------------------------------
Total assets 203,727 195,665
Current liabilities 112,010 90,037
Other liabilities and deferred items 77,217 96,068
- ---------------------------------------------------------------------------
Total liabilities and deferred items 189,227 186,105
- ---------------------------------------------------------------------------
Net assets $ 14,500 $ 9,560
===========================================================================
For three months ending
September 30,
----------------------------
1999 1998
---- ----
Net sales $ 48,497 $ 40,542
Cost of sales 32,963 26,599
----------------------------
Gross profit 15,534 13,943
General expenses 5,404 4,319
----------------------------
Earnings before finance costs 10,130 9,624
Integral financing costs 2,406 3,859
Other income (loss) (948) 2,451
Income taxes and profit sharing 4,570 (2,545)
- --------------------------------------------------------------------------
Net income $ 2,206 $ 10,761
==========================================================================
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For nine months ending
September 30,
-------------------------------
1999 1998
---- ----
Net sales $ 132,998 $ 128,477
Cost of sales 91,274 83,117
-------------------------------
Gross profit 41,724 45,360
General expenses 15,330 15,524
-------------------------------
Earnings before finance costs 26,394 29,836
Integral financing costs 8,281 10,606
Other income (loss) (2,423) 6,354
Income taxes and profit sharing 9,402 2,883
- ----------------------------------------------------------------------------
Net income $ 6,288 $ 22,701
============================================================================
3. CASH FLOW INFORMATION
Interest paid in cash aggregated $8,788 and $9,248 for the first nine months of
1999 and 1998, respectively. Income taxes paid in cash aggregated $7,540 and
$10,307 for the first nine 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 September 30, 1999 1998
- --------------------------- ---- ----
Numerator for basic and diluted
earnings per share--net income
which is available to common
shareholders $ 13,888 $ 14,254
Denominator for basic earnings per
share--weighted-average shares
outstanding 16,261,960 17,649,966
Effect of dilutive securities--
employee stock options 340,715 390,851
----------- -----------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 16,602,675 18,040,817
Basic earnings per share $ 0.85 $ 0.81
Diluted earnings per share $ 0.84 $ 0.79
Nine Months ended September 30, 1999 1998
- ------------------------------- ---- ----
Numerator for basic and diluted
earnings per share--net income
which is available to common
shareholders $ 31,510 $ 34,106
Denominator for basic earnings per
share--weighted-average shares
outstanding 16,304,059 17,614,598
Effect of dilutive securities--
employee stock options 331,932 419,757
----------- -----------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 16,635,992 18,034,355
Basic earnings per share $ 1.93 $ 1.94
Diluted earnings per share $ 1.89 $ 1.89
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5. COMPREHENSIVE INCOME
The Company's components of comprehensive income are net income and foreign
currency translation adjustments. During the third quarter of 1999 and 1998,
total comprehensive income amounted to $13,904 and $13,628 respectively. For the
first nine months of 1999 and 1998 comprehensive income amounted to $31,738 and
$33,112 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 nine months of
1999.
Write-
Balance Provision off of Balance
as of charged Assets Effect of as of
December to to Cash Translation September
Activity 31, 1998 Expense Reserve Payments Adjustments 30, 1999
- -------- -------- ------- ------- -------- ----------- --------
Severance
and related
employee
cost $ 9,946 $ 1,502 -- $ (8,831) $ 327 $ 2,944
Asset write-
downs:
Fixed
assets 7,619 323 $ (5,602) (50) 162 2,452
Inventories
and other 2,364 402 210 (1,428) 168 1,716
- ------------------------------------------------------------------------------------------------
Total $ 19,929 $ 2,227 $ (5,392) $(10,309) $ 657 $ 7,112
================================================================================================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
Three months ended
September 30,
---------------------------
(dollars in thousands)
1999 1998
-------- --------
Net sales $112,017 $109,604
Gross profit 37,209 32,803
As a percentage of sales 33.2% 29.9%
Income from operations $ 24,500 $ 20,568
As a percentage of sales 21.9% 18.8%
Earnings before interest and
income taxes $ 24,983 $ 26,247
As a percentage of sales 22.3% 23.9%
Net income $ 13,888 $ 14,254
As a percentage of sales 12.4% 13.0%
Net sales for the third quarter of 1999 of $112.0 million increased 2.2% from
net sales of $109.6 million reported in the comparable period in 1998. Increased
sales of glassware, dinnerware, and flat-ware to foodservice customers was the
major reason for the sales increase that more than offset the loss of bottleware
sales. As part of its capacity realignment program announced earlier this year,
the Company decided to close its Wallaceburg, Ontario, Canada plant and cease
manufacturing low-margin glass bottleware for industrial applications by
mid-1999. Sales of these products totaled approximately $8 million in 1998. The
Wallaceburg plant was closed as scheduled at the end of May. Export sales, which
include sales to Libbey's customers in Canada, were down 8.1%, decreasing to
$14.2 million from $15.4 million in the year-ago period reflecting the lower
bottleware sales to Canadian customers.
Gross profit increased 13.4% to $37.2 million in the third quarter of 1999
compared to $32.8 million in the third quarter of 1998, and increased as a
percentage of sales to 33.2% from 29.9% 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 19.1% to $24.5 million from $20.6 million in
the third quarter last year. Higher sales of more profitable products and
improved utilization of the Company's glassware plants were contributing
factors, more than offsetting higher sales
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commission expenses. In addition, during the quarter the Company recorded income
from the proceeds of a settlement of litigation involving Oneida Ltd. in excess
of expenses incurred related to the litigation. The Company also recorded a
charge associated with post-retirement welfare benefits. The net favorable
impact of these two non-recurring items on income from operations during the
third quarter was $1.3 million.
Earnings before interest and income taxes (EBIT) were $25.0 million compared
with $26.2 million in the third quarter last year. Higher income from operations
only partially offset a combination of lower equity earnings and a one-time gain
on the sale of assets in the third quarter of 1998. Equity earnings, primarily
attributable to the Company's joint venture in Mexico, Vitrocrisa, declined to
$0.7 million from $4.7 million in the year-ago period due to Vitrocrisa's lower
operating earnings and the impact of a stronger Mexican peso.
Net income was $13.9 million or 84 cents per share on a diluted basis, compared
with $14.3 million or 79 cents per share on a diluted basis in the year-ago
period. A reduction in the Company's effective tax rate to 36.4 percent (37.0
percent on a year-to-date basis) from 38.5 percent in the year-ago quarter
partially offset lower EBIT. In addition, diluted shares outstanding declined to
16.6 million from 18.0 million in the year-ago period primarily due to the
Company's share repurchase programs. As of September 30, 1999, the Company has
repurchased 1.6 million shares.
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RESULTS OF OPERATIONS - NINE MONTHS 1999 COMPARED WITH NINE MONTHS 1998
Nine months ended
September 30,
----------------------
(dollars in thousands)
1999 1998
-------- --------
Net sales $320,220 $313,365
Gross profit 101,374 89,635
As a percentage of sales 31.7% 28.6%
Income from operations - excluding
capacity realignment charge 59,625 53,416
As a percentage of sales 18.6% 17.0%
Income from operations $ 57,398 $ 53,416
As a percentage of sales 17.9% 17.0%
Earnings before interest and
income taxes $ 59,404 $ 65,210
As a percentage of sales 18.6% 20.8%
Net income $ 31,510 $ 34,106
As a percentage of sales 9.8% 10.9%
Net sales for the first nine months of 1999 of $320.2 million increased 2.2%
from net sales of $313.4 million reported in the comparable period in 1998.
Export sales, which include sales to Libbey's customers in Canada, were down
3.2%, decreasing to $41.5 million from $42.9 million in the year-ago period
reflecting lower bottleware sales to Canadian customers.
Gross profit increased 13.1% to $101.4 million in the first nine months of 1999
compared to $89.6 million in the first nine months of 1998, and increased as a
percentage of sales to 31.7% from 28.6% 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 $57.4 million from $53.4 million in the
year-ago period. The reason for the increase was higher gross margin offset by
higher selling expenses 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. The Company recorded income from the
proceeds of a settlement of litigation involving Oneida Ltd. in excess of
expenses incurred related to the litigation. This partially offset
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the increase in selling, general and administrative expenses due to a charge
associated with post-retirement welfare benefits, bad debt provisions and higher
sales commission. Excluding the capacity realignment charge, income from
operations increased 11.6% to $59.6 million.
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 $59.4 million from
$65.2 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.
Net income was $31.5 million compared to $34.1 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 37.0% reflect-ing lower state income
taxes, and lower interest expense from lower debt levels.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company had total debt of $198.7 million at September 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 third quarter, the Company purchased 125,000 shares pursuant to its
share repurchase plan for $3.7 million. In the first nine months of 1999, the
Company repurchased 722,800 shares for $19.2 million. Since mid 1998, the
Company has repurchased 1,597,800 shares for $46.4 million. Board authorization
remains for the purchase of an additional 152,200 shares. During October, the
Company repurchased 131,600 shares. A new authorization was granted by the Board
for an additional 875,000
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shares. As of October 31, 1999, Board authorization remains for the purchase of
an additional 895,600 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 September 30, 1999 under the Bank Credit
Agreement of $182.7 million. Of Libbey's outstanding indebtedness, $98.7 million
is subject to fluctuating interest rates at September 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 September 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 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
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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 of 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.
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:
100% complete 100% complete 100% 99% complete
Mainframe complete
Other 100% complete 99% complete 99% 99% complete
complete
Non-IT 100% complete 100% complete 100% 100% complete
areas complete
Suppliers 100% complete 86% complete - -
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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 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 $235,000 has
been expensed. With respect to capital expenditures, approximately an additional
$2.0 million has been spent and another $.1 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.
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Suppliers
The Company has communicated with its significant suppliers and 86% responded
they are currently or plan to be Year 2000 compliant by September 30, 1999, 99%
expected compliance by December 31, 1999, and 1% 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.
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
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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 September 30, 1999, was 6.56% for an average remaining
period of 1.9 years. Total remaining debt not covered by the Rate Agreements has
fluctuating interest rates with a weighted average rate of 5.61% at September
30, 1999. The Company had $98.7 million of debt subject to fluctuating interest
rates at Septem-ber 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 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.
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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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings arising in
the ordinary course of its business, but there are no legal proceedings
pending against the Company would be deemed to be material to the
Company. The litigation filed against the Company and its subsidiary
Libbey Glass Inc. on April 27, 1999 by Oneida Ltd. in the United States
District Court for the Northern District of New York has been dismissed
with prejudice.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
10.67 Employment Agreement dated as of August 1, 1999 between Libbey
Inc. and Kenneth A. Boerger
10.68 Change of Control Agreement dated as of August 1, 1999 between
Libbey Inc. and Kenneth A. Boerger
10.69 Form of Non-Qualified Stock Option Agreement between Libby Inc.
and certain key employees participating in The 1999 Equity
Participation Plan of Libbey Inc.
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 November 15, 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
--- -----------
10.67 Employment Agreement dated as of August 1, 1999 between Libbey
Inc. and Kenneth A. Boerger
10.68 Change of Control Agreement dated as of August 1, 1999 between
Libbey Inc. and Kenneth A. Boerger
10.69 Form of Non-Qualified Stock Option Agreement between
Libby Inc. and certain key employees participating in
The 1999 Equity Participation Plan of Libbey Inc.
27 Other Financial Information
1