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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, 2002
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
(Address of principal executive offices) (Zip Code)
419-325-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate 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 - 14,819,677 shares at November 6, 2002
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period and nine-month period ended September 30,
2002, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002.
The balance sheet at December 31, 2001, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
2
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Three months ended September 30,
Revenues: 2002 2001
---- ----
Net sales $ 103,607 $ 106,896
Freight billed to customers 344 482
Royalties and net technical assistance income 567 877
--------- ---------
Total revenues 104,518 108,255
Costs and expenses:
Cost of sales 74,883 76,092
Selling, general and administrative expenses 15,243 12,568
--------- ---------
90,126 88,660
--------- ---------
Income from operations 14,392 19,595
Other income (loss):
Pretax equity earnings 982 3,237
Expenses related to abandoned acquisition (27) --
Other - net (1,205) (200)
--------- ---------
(250) 3,037
--------- ---------
Earnings before interest and income taxes 14,142 22,632
Interest expense - net (2,113) (2,356)
--------- ---------
Income before income taxes 12,029 20,276
Provision for income taxes 1,249 6,219
--------- ---------
Net income $ 10,780 $ 14,057
========= =========
Net income per share
Basic $ 0.70 $ 0.92
========= =========
Diluted $ 0.69 $ 0.90
========= =========
Dividends per share $ 0.075 $ 0.075
========= =========
See accompanying notes
3
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Nine months ended September 30,
Revenues: 2002 2001
---- ----
Net sales $ 316,362 $ 307,511
Freight billed to customers 1,196 1,481
Royalties and net technical assistance income 2,104 2,769
--------- ---------
Total revenues 319,662 311,761
Costs and expenses:
Cost of sales 235,390 220,245
Selling, general and administrative expenses 42,860 40,079
--------- ---------
278,250 260,324
--------- ---------
Income from operations 41,412 51,437
Other income (loss):
Pretax equity earnings 5,152 6,078
Expenses related to abandoned acquisition (13,653) --
Other - net (1,365) (77)
--------- ---------
(9,866) 6,001
--------- ---------
Earnings before interest and income taxes 31,546 57,438
Interest expense - net (6,077) (7,316)
--------- ---------
Income before income taxes 25,469 50,122
Provision for income taxes 5,837 17,715
--------- ---------
Net income $ 19,632 $ 32,407
========= =========
Net income per share
Basic $ 1.28 $ 2.12
========= =========
Diluted $ 1.26 $ 2.08
========= =========
Dividends per share $ 0.225 $ 0.225
========= =========
See accompanying notes
4
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2002 2001
----- ----
(unaudited)
ASSETS
Current assets:
Cash $ 5,311 $ 3,860
Accounts receivable:
Trade, less allowances of $5,708 and $5,962 45,063 38,516
Other, less allowances of $1,065 and $0 3,460 5,550
-------- --------
48,523 44,066
Inventories
Finished goods 96,040 88,686
Work in process 4,641 5,095
Raw materials 2,669 2,627
Operating supplies 544 528
-------- --------
103,894 96,936
Prepaid expenses and deferred taxes 11,540 9,068
-------- --------
Total current assets 169,268 153,930
Other assets:
Repair parts inventories 5,292 5,248
Intangibles, net of accumulated amortization of $3,785 and $3,255 8,702 9,232
Pension assets 32,932 29,506
Deferred software, net of accumulated amortization of $11,427
and $10,510 2,581 3,639
Other assets 3,310 11,090
Investments 85,538 84,357
Goodwill 43,282 43,282
-------- --------
181,637 186,354
Property, plant and equipment, at cost 258,536 254,479
Less accumulated depreciation 135,902 126,681
-------- --------
Net property, plant and equipment 122,634 127,798
-------- --------
Total assets $473,539 $468,082
======== ========
See accompanying notes
5
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2002 2001
---- ----
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,425 $ 2,400
Accounts payable 26,686 33,125
Salaries and wages 13,567 11,671
Accrued liabilities 26,120 23,809
Income taxes 2,837 1,904
Long-term debt due within one year 115 143,115
--------- ---------
Total current liabilities 72,750 216,024
Long-term debt 140,432 2,517
Deferred taxes 23,512 23,512
Other long-term liabilities 13,096 12,533
Nonpension postretirement benefits 47,795 48,131
Shareholders' equity:
Common stock, par value $.01 per share, 50,000,000 shares authorized,
18,253,277 shares issued (18,025,843 shares
issued in 2001) 152 180
Capital in excess of par value 293,497 288,418
Treasury stock 3,018,800 shares (2,689,400 shares in 2001), at
cost (85,422) (75,369)
Deficit (26,725) (42,894)
Accumulated other comprehensive loss (5,548) (4,970)
--------- ---------
Total shareholders' equity 175,954 165,365
--------- ---------
Total liabilities and shareholders' equity $ 473,539 $ 468,082
========= =========
See accompanying notes
6
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine months ended September 30,
2002 2001
----- ----
Operating activities
Net income $ 19,632 $ 32,407
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation 13,023 12,300
Amortization 1,447 2,788
Gain on sale of land (376) --
Other non-cash charges 104 (844)
Net equity earnings (7,465) (3,966)
Net change in components of working capital and other assets (7,257) (28,281)
-------- --------
Net cash provided by operating activities 19,108 14,404
Investing activities
Additions to property, plant and equipment (10,712) (29,766)
Other 3,549 (1,563)
Dividends received from equity investment 4,659 4,918
-------- --------
Net cash used in investing activities (2,504) (26,411)
Financing activities
Net bank credit facility activity (5,000) 14,596
Payment of financing fees (815) --
Other net borrowings 940 836
Stock options exercised 3,269 1,984
Treasury shares purchased (10,084) (1,229)
Dividends (3,463) (3,439)
-------- --------
Net cash provided by (used in) financing activities (15,153) 12,748
-------- --------
Increase in cash 1,451 741
Cash at beginning of year 3,860 1,282
-------- --------
Cash at end of period $ 5,311 $ 2,023
======== ========
See accompanying notes
7
LIBBEY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
(unaudited)
1. LONG-TERM DEBT
The Company has an unsecured agreement ("Revolving 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 $250 million, maturing April 23, 2005, with an option to extend for two
additional one-year periods. Swing Line borrowings are limited to $25 million
with interest calculated at the prime rate minus the Facility Fee Percentage
("Facility Fee Percentage"). Interest rates on Revolving Credit are at the
Company's option at either the prime rate minus the Facility Fee Percentage or a
Eurodollar rate plus the Applicable Eurodollar Margin. The Facility Fee
Percentage and Applicable Eurodollar Margin vary depending on the Company's
performance against certain financial ratios. The Facility Fee Percentage and
the Applicable Eurodollar Margin were 0.175% and 0.70%, respectively, at
September 30, 2002. The Company may also elect to borrow under a Negotiated Rate
Loan alternative of the Revolving Credit and Swing Line Facility at floating
rates of interest, up to a maximum of $125 million. The Revolving Credit and
Swing Line Facility also provides for the issuance of $30 million of letters of
credit, with such usage applied against the $250 million limit. At September 30,
2002, the Company had $4.7 million in letters of credit outstanding under the
Facility.
The Company pays a 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.
The Company has entered into interest rate protection agreements ("Rate
Agreements") with respect to $100 million of debt under its Revolving Credit
Agreement as a means to manage its exposure to fluctuating interest rates. The
Rate Agreements effectively convert this portion of the Company's Revolving
Credit Agreement borrowings from variable rate debt to a fixed-rate basis, thus
reducing the impact of interest rate changes on future income. The average
interest rate including the Facility Fee and Applicable Eurodollar Margin for
the Company's borrowings related to the Rate Agreements at September 30, 2002,
was 6.72% for an average remaining period of 2.6 years. The remaining debt not
covered by the Rate Agreements has fluctuating interest rates with a weighted
average rate of 2.65% at September 30, 2002.
8
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.
2. SIGNIFICANT SUBSIDIARY
The Company is a 49% equity owner in Vitrocrisa, S. de R.L. de C.V. and related
Mexican companies ("Vitrocrisa") which manufacture, market, and sell glass
tableware (beverageware, plates, bowls, serveware, and accessories) and
industrial glassware (coffee pots, blender jars, meter covers, glass covers for
cooking ware, and lighting fixtures sold to original equipment manufacturers)
and a 49% equity owner in Crisa Industrial, L.L.C., a distributor of industrial
glassware for Vitrocrisa in the U.S. and Canada.
Summarized combined financial information for the Company's investments for 2002
and 2001, accounted for by the equity method, is as follows:
September 30, December 31,
2002 2001
---- ----
Current assets $107,576 $102,599
Non-current assets 117,435 130,295
-------- --------
Total assets 225,011 232,894
Current liabilities 85,946 74,924
Other liabilities and deferred items 113,910 135,396
-------- --------
Total liabilities and deferred items 199,856 210,320
-------- --------
Net assets $ 25,155 $ 22,574
======== ========
9
Three months ended
September 30,
-----------------------
2002 2001
---- ----
Net sales $ 46,680 $ 50,309
Cost of sales 39,358 39,595
-------- --------
Gross profit 7,322 10,714
Operating expenses 5,302 5,447
-------- --------
Income from operations 2,020 5,267
Other income 679 3,194
-------- --------
Earnings before finance costs and taxes 2,699 8,461
Interest expense 1,516 2,146
Translation gain 821 1,157
-------- --------
Earnings before income taxes 2,004 7,472
Income taxes (7,762) 1,011
-------- --------
Net income $ 9,766 $ 6,461
======== ========
Nine months ended
September 30,
-------------------------
2002 2001
---- ----
Net sales $ 142,986 $ 146,407
Cost of sales 116,055 112,154
--------- ---------
Gross profit 26,931 34,253
Operating expenses 16,233 15,955
--------- ---------
Income from operations 10,698 18,298
Other income 1,684 3,959
--------- ---------
Earnings before finance costs and taxes 12,382 22,257
Interest expense 4,473 6,480
Translation gain (loss) 2,605 (777)
--------- ---------
Earnings before income taxes 10,514 15,000
Income taxes (4,719) 4,308
--------- ---------
Net income $ 15,233 $ 10,692
========= =========
3. CASH FLOW INFORMATION
Interest paid in cash aggregated $6,020 and $8,218 for the first nine months of
2002 and 2001, respectively. Interest expense capitalized was $103 and $656 for
the first nine months of 2002 and 2001, respectively. Income taxes paid in cash
aggregated $6,778 and $4,497 for the first nine months of 2002 and 2001,
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
10
average number of shares of common stock outstanding and includes common share
equivalents.
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter ended September 30, 2002 2001
- --------------------------- ---- ----
Numerator for basic and diluted earnings per
share--net income which is available to common
shareholders $ 10,780 $ 14,057
Denominator for basic earnings per
share--weighted-average shares outstanding 15,392,645 15,321,922
Effect of dilutive securities--employee stock
options 176,621 322,752
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average shares and
assumed conversions 15,569,266 15,644,674
Basic earnings per share $ 0.70 $ 0.92
Diluted earnings per share $ 0.69 $ 0.90
Nine Months ended September 30, 2002 2001
- ------------------------------- ---- ----
Numerator for basic and diluted earnings per
share--net income which is available to common
shareholders $ 19,632 $ 32,407
Denominator for basic earnings per
share--weighted-average shares outstanding 15,384,693 15,286,098
Effect of dilutive securities--employee stock
options 219,530 292,202
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average shares and
assumed conversions 15,604,223 15,578,300
Basic earnings per share $ 1.28 $ 2.12
Diluted earnings per share $ 1.26 $ 2.08
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income are net income and adjustments
for the change in fair value of derivative instruments.
11
Total comprehensive income is as follows:
Three months ended
September 30,
-----------------------
2002 2001
---- ----
Net income $ 10,780 $ 14,057
Change in fair value of derivative instruments (1,484) (3,018)
-------- --------
Comprehensive income $ 9,296 $ 11,039
======== ========
Nine months ended
September 30,
-----------------------
2002 2001
---- ----
Net income $ 19,632 $ 32,407
Change in fair value of derivative
instruments (578) (5,047)
Cumulative effect of change in method of
accounting -- (673)
-------- --------
Comprehensive income $ 19,054 $ 26,687
======== ========
6. ACCOUNTING CHANGES
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations" ("SFAS No. 141"), which
eliminates the pooling-of-interests method and requires all business
combinations to be accounted for using the purchase method. SFAS No. 141 also
requires intangible assets that arise from contractual or other legal rights, or
that are capable of being separated or divided from the acquired entity be
recognized separately from goodwill. Existing intangible assets and goodwill
that were acquired in a prior purchase business combination must be evaluated,
and any necessary reclassifications must be made effective January 1, 2002, in
order to conform to the new criteria for recognition apart from goodwill. The
adoption of SFAS No. 141 had no material effect on the Company's consolidated
results of operations or financial position.
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets ("SFAS No. 142")," which requires goodwill and
indefinite-lived intangible assets to no longer be amortized but reviewed
annually for impairment, or more frequently if impairment indicators arise.
Intangible assets with lives restricted by contractual, legal or other means
will continue to be amortized over their useful lives. The Company determined
that certain trademarks had an indefinite life and ceased amortization of these
intangibles on January 1, 2002, and evaluated these indefinite-lived intangible
assets as not being impaired. The Company also determined that certain
12
technical assistance agreements should have their useful lives reduced to five
years.
At September 30, 2002, the carrying value and accumulated amortization of
amortized assets totaled $3,002 and $3,198, respectively, and the carrying value
of unamortized intangible assets totaled $5,418.
SFAS No. 142 requires goodwill to be evaluated for impairment within six months
of the date of adoption. The Company completed its test of goodwill impairment
during the second quarter of 2002, and no impairment was indicated.
The following table reflects the consolidated results adjusted as though the
adoption of SFAS No. 142 occurred as of January 1, 2001.
Three months ended Nine Months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Income:
Reported net income $10,780 $14,057 $19,632 $32,407
Goodwill amortization related to
equity investments -- 425 -- 1,273
Goodwill and trademark amortization -- 421 -- 1,263
Change in amortization of technical
assistance agreements -- (141) -- (423)
Tax effect -- (9) -- (27)
------- ------- ------- -------
Adjusted net income $10,780 $14,753 $19,632 $34,493
======= ======= ======= =======
Basic earnings-per-share:
Reported net income $ 0.70 $ 0.92 $ 1.28 $ 2.12
Goodwill amortization related to
equity investments -- .02 -- .08
Goodwill and trademark amortization -- .03 -- .08
Change in amortization of technical
assistance agreements -- (.01) -- (.03)
Tax effect -- -- -- --
------- ------- ------- -------
Adjusted basic earnings-per-share $ 0.70 $ 0.96 $ 1.28 $ 2.25
======= ======= ======= =======
Diluted earnings-per-share:
Reported net income $ 0.69 $ 0.90 $ 1.26 $ 2.08
Goodwill amortization related to
equity investments -- .03 -- .08
Goodwill and trademark amortization -- .03 -- .08
Change in amortization of technical
assistance agreements -- (.01) -- (.03)
Tax effect -- -- -- --
------- ------- ------- -------
Adjusted diluted earnings-per-share $ 0.69 $ 0.95 $ 1.26 $ 2.21
======= ======= ======= =======
13
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144")," which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," and provides a single accounting model for
long-lived assets which are to be disposed. The adoption of SFAS No. 144 had no
material effect on the Company's consolidated results of operations or financial
position.
7. DERIVATIVES
During the third quarter 2002, the Company decreased other comprehensive income
(loss) by $2,378 for net changes in the fair value of derivatives less tax of
$894, or $1,484, which results in accumulated other comprehensive income (loss)
related to derivatives at September 30, 2002, of $(7,960) less tax benefit of
$2,640, or $(5,320). During the third quarter 2001, an unrealized net loss
related to derivatives of $(4,634) less tax benefit of $1,616, or $(3,018) was
included in other comprehensive income, resulting in accumulated other
comprehensive income (loss) related to derivatives at September 30, 2001, of
$(8,822) less tax benefit of $3,101, or $(5,721), including a cumulative
transition adjustment as of January 1, 2001 of $(1,044) less tax benefit of
$371, or $(673).
As of September 30, 2002, the Company has Interest Rate Protection Agreements
for $100.0 million of its variable rate debt and commodity contracts for 1.4
million British Thermal Units (BTUs) of natural gas accounted for under hedge
accounting. The fair value of these derivatives are included in accrued
liabilities and other assets on the balance sheet for the Rate Agreements and
commodity contracts, respectively. At September 30, 2001, the Company had Rate
Agreements for $125.0 million of its variable rate debt, commodity contracts for
2.9 million BTUs of natural gas, and foreign currency forward contracts for 1.4
million Deutsche marks.
The Company does not believe it is exposed to more than a nominal amount of
credit risk in its interest rate, natural gas, and foreign currency hedges as
the counterparts are established financial institutions.
All of the Company's derivatives qualify and are designated as cash flow hedges
at September 30, 2002. Hedge accounting is only applied when the derivative is
deemed to be highly effective at offsetting changes in fair values or
anticipated cash flows of the hedged item or transaction. The ineffective
portion of the change in the fair value of a derivative designated as a cash
flow hedge is recognized in current earnings. Ineffectiveness recognized in
earnings during the third quarter of 2002 and 2001 was not material.
14
8. NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). For most
companies, SFAS No. 145 will require gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under Statement 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. Generally, the provisions of the new statement are effective for
transactions occurring after May 15, 2002 or for fiscal years beginning after
May 15, 2002. SFAS No. 145 is not expected to have a material impact on the
Company.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No.146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). SFAS NO. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost as generally defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that fair value is the objective for initial
measurement of the liability.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The new statement is not expected to
have a material impact on the Company.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER 2002 COMPARED WITH THIRD
QUARTER 2001
Three months ended
September 30,
-----------------------
(dollars in thousands)
2002 2001
---- ----
Net Sales $103,607 $106,896
Gross profit 29,068 31,286
As a percent of sales 28.1% 29.3%
Income from operations $ 14,392 $ 19,595
As a percent of sales 13.9% 18.3%
Earnings before interest and income taxes $ 14,142 $ 22,632
As a percent of sales 13.6% 21.2%
Net income $ 10,780 $ 14,057
As a percent of sales 10.4% 13.2%
For the quarter ended September 30, 2002, sales decreased 3.1% to $103.6 million
compared to $106.9 million in the year-ago quarter. Modest increases in sales to
retail customers partially offset declines in other channels of distribution,
principally as a result of sluggish economic conditions. Export sales decreased
13.9% to $10.5 million from $12.2 million in the year-ago period as a result of
weak economic conditions in export markets.
Gross profit (defined as net sales plus freight billed to customers less cost of
sales) was $29.1 million in the third quarter of 2002 compared to $31.3 million
in the third quarter of 2001 and as a percent of sales was 28.1% in the third
quarter of 2002 compared to 29.3% in the year-ago quarter. This was primarily a
result of higher manufacturing activity offset by higher manufacturing spending,
a less profitable sales mix, lower pension income and higher nonpension
postretirement expense compared to the prior year period. The lower pension
income and higher nonpension postretirement expense totaled $0.6 million, and
was due partly to additional benefits granted to certain of the company's
unionized workforce in labor negotiations completed during 2001. These changes
were partially offset by the favorable impact of $0.7 million of reduced natural
gas cost compared to the prior year period.
Income from operations was $14.4 million compared to $19.6 million in the third
quarter last year and as a percent of sales was 13.9% in the
16
third quarter of 2002 compared to 18.3% in the year-ago quarter. One-time higher
lease costs of $1.2 million related to the company's corporate offices
negatively impacted selling, general and administrative expenses. In addition,
higher benefit expenses and increased provisions for bad debts adversely
impacted selling, general and administrative expenses. Prior year comparisons
were favorably impacted by $0.3 million as a result of excluding goodwill and
trademark amortization and including additional amortization for the change in
useful lives of technical assistance agreements in the current period. The
reduction in pension income and increase in nonpension postretirement expense
negatively impacted selling, general and administrative expense by $0.1 million.
Earnings before interest and income taxes (EBIT) were $14.1 million compared
with $22.6 million in the third quarter last year. The company had earnings from
equity affiliates, which is primarily the company's investment in a joint
venture in Mexico, Vitrocrisa, of $1.0 million on a pretax basis compared to
$3.2 million pretax in the third quarter of 2001. Excluding goodwill
amortization in the third quarter of 2001, pretax equity earnings would have
been $3.7 million. Lower sales as a result of sluggish consumer markets in
Mexico and increased competition in Mexico impacted sales and operating profits.
In addition, Vitrocrisa, in the prior year period recorded a one-time benefit of
$5.3 million in other income associated with a reorganization at Vitrocrisa,
which was partly offset by a charge of $2.8 million related to severance costs,
that contributed to the decrease in earnings from equity affiliates. Other
expense increased to $1.2 million compared to $0.2 million in the third quarter
last year due to a partial write-down of an advance made to a supplier.
Net income was $10.8 million, or 69 cents per share on a diluted basis, compared
with $14.1 million or 90 cents per share on a diluted basis in the year-ago
period. A reduction in interest expense, as a result of lower debt and lower
interest rates contributed to net income. A reduction in the company's effective
tax rate to 10.4 percent from 30.7 percent in the year-ago quarter as a result
of lower Mexican tax, the elimination of non-deductible goodwill amortization,
and an adjustment to estimated U.S. income tax accruals positively contributed
to net income. The reduction in Mexican tax is primarily attributable to
deferred tax adjustments of $2.7 million and reduced statutory tax rates in
Mexico. Excluding goodwill amortization in the third quarter of 2001, net income
would have been $14.8 million, or 95 cents per share on a diluted basis.
17
RESULTS OF OPERATIONS - NINE MONTHS 2002 COMPARED WITH NINE MONTHS 2001
Nine months ended
September 30,
-----------------------
(dollars in thousands)
2002 2001
---- ----
Net Sales $316,362 $307,511
Gross profit 82,168 88,747
As a percent of sales 26.0% 28.9%
Income from operations $ 41,412 $ 51,437
As a percent of sales 13.1% 16.7%
Earnings before interest and income taxes $ 31,546 $ 57,438
As a percent of sales 10.0% 18.7%
Net income $ 19,632 $ 32,407
As a percent of sales 6.2% 10.5%
For the nine months ended September 30, 2002, sales increased 2.9% to $316.4
million compared to $307.5 million in the year-ago period. Strong growth in
glassware sales to retail customers coupled with increases in dinnerware sales
to foodservice customers contributed to the increase in sales. Export sales
decreased 6.0% to $32.7 million from $34.8 million in the year-ago period as a
result of weak economic conditions in export markets.
Gross profit (defined as net sales plus freight billed to customers less cost of
sales) was $82.2 million for the first nine months of 2002 compared to $88.7
million in the year-ago period and as a percent of sales was 26.0% compared to
28.9% in the year-ago quarter. This was primarily a result of higher
manufacturing labor and repair expense, a less profitable sales mix, lower
pension income and higher nonpension postretirement expense as compared to the
prior year period. The lower pension income and higher nonpension postretirement
expense totaled $2.8 million, and was due partly to additional benefits granted
to certain of the company's unionized workforce in labor negotiations completed
during 2001. These changes were partially offset by the favorable impact of $4.5
million of reduced natural gas cost compared to the prior year period.
Income from operations was $41.4 million compared to $51.4 million in the first
nine months last year and as a percent of sales was 13.1% compared to 16.7% in
the year-ago period. One-time higher lease costs of $1.2 million related to the
company's corporate offices negatively impacted selling, general and
administrative expenses. In addition,
18
higher benefit expenses and increased provisions for bad debts adversely
impacted selling, general and administrative expenses. Prior year comparisons
were favorably impacted by $0.8 million as a result of excluding goodwill and
trademark amortization and including additional amortization for the change in
useful lives of technical assistance agreements in the nine month period. The
reduction in pension income and increase in nonpension postretirement expense
negatively impacted selling, general, and administrative expense by $0.3
million.
Earnings before interest and income taxes (EBIT) were $31.5 million compared
with $57.4 million in the first nine months last year. In June 2002, after an
unfavorable ruling by the United States District Court, the company announced
that it had terminated its agreement to acquire the Anchor Hocking glassware
operations of Newell Rubbermaid Inc. The company charged year-to-date to
expense, acquisition costs totaling $13.7 million. These costs relate primarily
to legal, bank, accounting and consulting fees incurred in connection with the
proposed acquisition. Excluding the acquisition related expenses, the company's
earnings before interest and taxes would have been $45.2 million compared with
the $57.4 million in the year-ago period. The company had earnings from equity
affiliates, which is primarily the company's investment in a joint venture in
Mexico, Vitrocrisa, of $5.2 million on a pretax basis compared to $6.1 million
pretax in the year-ago period. Excluding goodwill amortization in the first nine
months of 2001, pretax equity earnings would have been $7.4 million.
Net income was $19.6 million, or $1.26 per share on a diluted basis, compared
with $32.4 million or $2.08 per share on a diluted basis in the year-ago period.
Excluding the expenses related to the abandoned acquisition, net income and
diluted earnings per share for the first nine months would have been $28.2
million and $1.80 per share on a diluted basis. A reduction in interest expense,
as a result of lower debt and lower interest rates, contributed to net income.
In addition, a lower effective tax rate of 22.9 percent compared to 35.3 percent
in the year-ago period as a result of the elimination of non-deductible goodwill
amortization, lower Mexican tax and an adjustment to estimated U.S. income tax
accruals also positively impacted net income. Excluding goodwill amortization in
the first nine months of 2001, net income would have been $34.5 million, or
$2.21 per share on a diluted basis.
CAPITAL RESOURCES AND LIQUIDITY
The company had total debt of $144.0 million at September 30, 2002, compared to
$148.0 million at December 31, 2001 or a reduction of $4.0 million. In the
year-ago period, debt increased $15.4 million during the first nine months. This
favorable comparison is due primarily to improved inventory management, lower
receivables and lower capital expenditures partially offset by share
repurchases. Inventories and
19
receivables declined $19.1 million compared to the year-ago quarter, as the
company continues to target improved working capital management. The company
incurred normal seasonal increases in receivables and inventory year-to-date
through September 30, 2002. In addition, capital expenditures totaled $10.7
million during the first nine months of 2002, primarily related to furnace
rebuild activity and investments in higher productivity machinery and equipment.
This compares to $29.8 million during the first nine months of 2001. The company
expects capital expenditures to total approximately $16 to $18 million for the
year ended December 31, 2002. Continued emphasis at the company will be placed
on the prudent management of working capital and increasing returns on the
capital employed in the business.
During the nine months of 2002, the company purchased 329,400 shares for $10.1
million pursuant to its share repurchase plan. Since mid-1998, the company has
repurchased 3,018,800 shares for $85.4 million. Board authorization remains for
the purchase of an additional 606,200 shares at September 30, 2002.
The company had additional debt capacity at September 30, 2002, under the Bank
Credit Agreement of $107.3 million. Of Libbey's outstanding indebtedness, $41.4
million was subject to fluctuating interest rates at September 30, 2002. A
change of one percent in such rates would have resulted in a change in interest
expense of approximately $0.4 million on an annual basis as of September 30,
2002.
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 facility is for a term of three years maturing April
23, 2005, with an option to extend for two additional one-year periods. The
company believes that its cash from operations and available borrowings under
the new Revolving 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 new Revolving Credit
Agreement.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risks due to changes in currency values,
although the majority of the company's revenues and expenses are denominated in
the U.S. dollar. The currency market risks include 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 impact of those changes on the earnings and cash flow
of the
20
company's joint venture in Mexico, Vitrocrisa, expressed under accounting
principles generally accepted in the United States.
The company is exposed to market risk associated with changes in interest rates
in the U.S. 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 including the Facility Fee and
Applicable Eurodollar Margin for the company's borrowings related to the Rate
Agreements at September 30, 2002, was 6.7% for an average remaining period of
2.6 years. Total remaining debt not covered by the Rate Agreements has
fluctuating interest rates with a weighted average rate of 2.6% at September 30,
2002. The company had $41.4 million of debt subject to fluctuating interest
rates at September 30, 2002. A change of one percent in such rates would result
in a change in interest expense of approximately $0.4 million on an annual
basis.
The interest rate differential to be received or paid under the Rate Agreements
is being recognized over the life of the Rate Agreements as an adjustment to
interest expense. If the counterparts to these Rate Agreements fail to perform,
the company would no longer be protected from interest rate fluctuations by
these Rate Agreements. However, the company does not anticipate nonperformance
by the counterparts.
The fair value of the company's Rate Agreements is determined using the market
standard methodology of netting the discounted expected future variable cash
receipts and the discounted future fixed cash payments. The variable cash
receipts are based on an expectation of future interest rates derived from
observed market interest rate forward curves. The company does not expect to
cancel these agreements and expects them to expire as originally contracted.
In addition to the Rate Agreements, the company has also entered into commodity
contracts to hedge the price of anticipated required purchases of natural gas.
The company has designated these derivative instruments as cash flow hedges. As
such, the changes in fair value of these derivative instruments are recorded in
accumulated other comprehensive income (loss) and reclassified into earnings as
the underlying hedged transaction or items affects earnings. At September 30,
2002, approximately $(5.3) million of unrealized net losses were recorded in
accumulated other comprehensive income (loss).
21
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 "goal," "expects," "believes," "will," "estimates,"
"anticipates," or similar phrases.
Investors are cautioned that forward-looking statements involve risks and
uncertainty, that actual results may differ materially from such statements and
that investors should not place undue reliance on such statements.
Important factors potentially affecting performance include major slowdowns in
the retail, travel, restaurant and bar or entertainment industries in the United
States, Canada or Mexico, including the impact of the terrorist attacks in the
United States of September 11, 2001, on the retail, travel, restaurant and bar
or entertainment industries; significant increases in interest rates that
increase the company's borrowing costs and per-unit increases in the costs for
natural gas, corrugated packaging and other purchased materials; devaluations
and other major currency fluctuations relative to the U.S. dollar that could
reduce the cost competitiveness of the company's products compared to foreign
competition; the effect of high inflation in Mexico and exchange rate changes to
the value of the Mexican peso and the earnings expressed under accounting
principles generally accepted in the United States and cash flow of the
company's joint venture in Mexico, Vitrocrisa; the inability to achieve savings
and profit improvements at targeted levels at the company and Vitrocrisa from
capacity realignment, re-engineering and operational restructuring programs or
within the intended time periods; protracted work stoppages related to
collective bargaining agreements; increased competition from foreign suppliers
endeavoring to sell glass tableware in the United States and Mexico, and the
impact of lower import tariffs in Mexico on competition and pricing; whether the
company completes any significant acquisition and whether such acquisitions can
operate profitably.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures: Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the company's principal executive officer and principal
financial officer have concluded that the company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act") are effective to ensure that
information required to be disclosed by the company in reports that it files or
submits under the Exchange Act is
22
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls: There were no significant changes in
the company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 9, 2002 the Federal Trade Commission commenced an administrative
proceeding challenging the company's proposed acquisition of a portion of the
Anchor Hocking business of Newell Rubbermaid Inc. The parties agreed upon a
consent decree that became final on October 15, 2002 following formal approval
by the Federal Trade Commission. The consent decree requires Libbey to provide
advance notice to the Federal Trade Commission of any acquisition, direct or
indirect, of any interest in the stock of Anchor Hocking or the assets of the
Anchor Hocking Food Service Business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation
of Libbey Inc. (filed as Exhibit 3.1 to
Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30,
1993 and incorporated herein by
reference).
3.2 Amended and Restated By-Laws of Libbey
Inc. (filed as Exhibit 3.2 to
Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30,
1993 and incorporated herein by
reference).
4.1 Restated Certificate of Incorporation
of Libbey Inc. (incorporated by
reference herein as Exhibit 3.1).
4.2 Amended and Restated By-Laws of Libbey
Inc. (incorporated by reference herein
as Exhibit 3.2).
23
(a.) Exhibits (cont.)
Exhibit
Number Description
------ -----------
4.3 Rights Agreement, dated January 5,
1995, between Libbey Inc. and The Bank
of New York, which includes the form of
Certificate of Designations of the
Series A Junior Participating Preferred
Stock of Libbey Inc. as Exhibit A, the
form of Right Certificate as Exhibit B
and the Summary of Rights to Purchase
Preferred Shares as Exhibit C, (filed
as Exhibit 1 to Registrant's
Registration Statement on Form 8-A
dated January 20, 1995 and incorporated
herein by reference).
4.4 First Amendment to Rights Agreement,
dated February 3, 1999, between Libbey
Inc. and The Bank of New York (filed as
Exhibit 4.4 to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1998 and incorporated
herein by reference).
(b.) A form 8-K was filed in the third quarter as follows:
A form 8-K was filed dated August 14, 2002, with respect to
the announcement that pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002,
the following officers certified that the information
contained in the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 for Libbey Inc.
presents fairly, in all material respects, the financial
condition and results of operations of the Company. Officer
certification by John F. Meier, Chief Executive Officer, and
Kenneth G. Wilkes, Chief Financial Officer.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBBEY INC.
Date November 14, 2002 By /s/ Kenneth G. Wilkes
---------------------- ---------------------------------
Kenneth G. Wilkes,
Vice President, Chief Financial Officer
(Principal Accounting Officer)
25
CERTIFICATIONS
I, John F. Meier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Libbey Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
26
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date November 14, 2002 By /s/ John F. Meier
------------------------ ----------------------------
John F. Meier,
Chief Executive Officer
27
I, Kenneth G. Wilkes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Libbey Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
27
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date November 14, 2002 By /s/ Kenneth G. Wilkes
------------------------ -------------------------
Kenneth G. Wilkes,
Chief Financial Officer
29