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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-12084
LIBBEY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1559357
-------- ----------
(State or other (IRS Employer
jurisdiction of 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 13,652,766 shares at April 30, 2004
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Libbey
Inc. and all wholly owned subsidiaries (Libbey or the Company) have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2004, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
The balance sheet at December 31, 2003, 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, 2003.
2
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share amounts)
(unaudited)
Three months ended March 31,
2004 2003
---- ----
Revenues:
Net sales $ 123,123 $ 111,903
Freight billed to customers 491 434
Royalties and net technical assistance income 692 750
--------- ---------
Total revenues 124,306 113,087
Cost of sales 101,298 90,779
--------- ---------
Gross profit (1) 22,316 21,558
Selling, general and administrative expenses 16,993 16,766
--------- ---------
Income from operations (2) 6,015 5,542
Other income (loss):
Pretax equity (loss) (1,389) (150)
Other - net (193) 126
--------- ---------
(1,582) (24)
--------- ---------
Earnings before interest and income taxes 4,433 5,518
Interest expense - net 3,576 2,541
--------- ---------
Income before income taxes 857 2,977
Provision for income taxes 292 976
--------- ---------
Net income $ 565 $ 2,001
========= =========
Net income per share:
Basic $ 0.04 $ 0.14
========= =========
Diluted $ 0.04 $ 0.14
========= =========
Dividends per share $ 0.10 $ 0.10
========= =========
See accompanying notes
(1) Net sales plus Freight billed to customers less Cost of sales
(2) Gross profit plus Royalties and net technical assistance income less
Selling, general and administrative expenses
3
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
Current assets:
Cash $ 1,250 $ 2,750
Accounts receivable:
Trade, less allowances of $5,586 and $5,604 53,186 53,333
Other, less allowances of $911 and $1,556 3,089 3,789
-------- --------
56,275 57,122
Inventories:
Finished goods 117,552 116,408
Work in process 6,450 4,590
Raw materials 4,055 3,859
Operating supplies 808 839
-------- --------
128,865 125,696
Deferred taxes 7,402 7,402
Other current assets 4,022 3,208
-------- --------
Total current assets 197,814 196,178
Other assets:
Repair parts inventories 6,992 7,058
Intangibles, net of accumulated amortization of $5,159 and $4,956 28,039 28,346
Software, net of accumulated amortization of $13,018 and $12,755 2,291 2,354
Other assets 2,607 2,987
Investments 86,782 87,574
Goodwill 52,977 53,133
-------- --------
179,688 181,452
Property, plant and equipment at cost 335,231 327,741
Less accumulated depreciation 161,413 154,255
-------- --------
Net property, plant and equipment 173,818 173,486
-------- --------
Total assets $551,320 $551,116
======== ========
See accompanying notes
4
LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2004 2003
---- ----
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 7,779 $ 611
Accounts payable 34,842 40,280
Salaries and wages 11,853 14,096
Accrued liabilities 33,645 33,555
Income taxes 221 185
Long-term debt due within one year 115 115
--------- ---------
Total current liabilities 88,455 88,842
Long-term debt 229,123 230,207
Deferred taxes 15,433 15,469
Pension liability 17,626 17,092
Other long-term liabilities 12,182 12,404
Nonpension postretirement benefits 47,558 47,245
--------- ---------
Total liabilities 410,377 411,259
Shareholders' equity:
Common stock, par value $.01 per share, 50,000,000 shares authorized,
18,670,610 shares issued (18,660,960 shares issued in 2003) 187 187
Capital in excess of par value 300,618 300,378
Treasury stock, at cost, 5,024,973 shares (5,046,597 shares issued
in 2003) (138,842) (139,449)
Retained earnings 3,357 4,154
Accumulated other comprehensive loss (24,377) (25,413)
--------- ---------
Total shareholders' equity 140,943 139,857
--------- ---------
Total liabilities and shareholders' equity $ 551,320 $ 551,116
========= =========
See accompanying notes
5
LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Three months ended March 31,
2004 2003
---- ----
Operating activities:
Net income $ 565 $ 2,001
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,812 6,907
Equity loss (earnings) - net of tax 931 (8)
Accrued and deferred income taxes (496) (4,280)
Change in accounts receivable 104 (3,214)
Change in inventories (3,454) (6,399)
Change in accounts payable (4,555) (2,560)
Other operating activities (454) (1,550)
--------- ---------
Net cash provided by (used in) operating activities 453 (9,103)
Investing activities:
Additions to property, plant and equipment (7,966) (4,633)
--------- ---------
Net cash used in investing activities (7,966) (4,633)
Financing activities:
Net bank credit facility activity --- (41,872)
Payment of financing fees --- (663)
Senior notes --- 100,000
Other net borrowings 7,136 (365)
Stock options exercised 240 76
Treasury shares purchased --- (38,248)
Dividends (1,362) (1,463)
--------- ---------
Net cash provided by financing activities 6,014 17,465
Effect of exchange rate fluctuations on cash (1) 47
--------- ---------
(Decrease) increase in cash (1,500) 3,776
Cash at beginning of year 2,750 1,683
--------- ---------
Cash at end of period $ 1,250 $ 5,459
========= =========
See accompanying notes
6
LIBBEY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
(unaudited)
1. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2004 2003
--------- ------------
Borrowings under credit facility, due April 23, 2005 $126,874 $127,926
Senior notes, 3.69%, due March 31, 2008 25,000 25,000
Senior notes, 5.08%, due March 31, 2013 55,000 55,000
Senior notes, floating interest, due March 31, 2010 20,000 20,000
Promissory Note, 6%, due April, 2004 through September, 2016 2,364 2,396
Notes payable, floating interest 7,779 611
-------- --------
Total debt 237,017 230,933
Less -- current portion of debt 7,894 726
-------- --------
Total long-term portion of debt $229,123 $230,207
======== ========
The Company was in compliance with the covenants of all debt agreements as of
March 31, 2004 and December 31, 2003.
REVOLVING CREDIT FACILITY
On February 10, 2003, the Company entered into an unsecured agreement for an
Amended and Restated Revolving Credit Agreement (Revolving Credit Agreement or
Agreement) among Libbey Glass Inc. and Libbey Europe B.V., as borrowers. This
amended the previous Revolving Credit and Swing Line Facility naming Libbey
Glass Inc. as borrower. The amendment was primarily for the Company to borrow
euros. The Agreement is with a group of banks that provides for a Revolving
Credit and Swing Line Facility (Facility) permitting borrowings up to an
aggregate total of $250 million, maturing April 23, 2005, with an option to
extend for two additional one-year periods. Swing Line borrowings are limited to
$25 million with interest calculated at the prime rate minus the facility fee
percentage (Facility Fee Percentage) as defined in the Agreement. Revolving
Credit Agreement U.S. dollar borrowings bear interest at the Company's option at
either the prime rate minus the Facility Fee Percentage or a Eurodollar rate
plus the Applicable Eurodollar Margin (Applicable Eurodollar Margin) as defined
in the Agreement. The Facility Fee Percentage and Applicable Eurodollar Margin
vary depending on the Company's performance against certain financial ratios.
The Facility Fee Percentage and the Applicable Eurodollar Margin were 0.375% and
1.375%, respectively, at March 31, 2004.
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 Facility also provides for the issuance of $30
million of letters of credit, with such usage applied against the $250 million
limit. At March 31, 2004, the Company had $4.6 million in letters of credit
outstanding under the Facility.
Libbey Europe B.V. may have euro-denominated borrowings under the Revolving
Credit Agreement in an amount not to exceed the Offshore Currency equivalent of
$60 million. Offshore Currency Swing Line borrowings are currently limited to
$10 million of the $25 million
7
total Swing Line borrowing. Interest is calculated at the Offshore Currency
Swing Line rate plus applicable Offshore Currency Swing Line Margin, as defined
in the Agreement. Revolving Offshore Currency Borrowings bear interest at the
Offshore Currency Rate plus applicable spread, as defined in the Agreement.
The Company pays the Commitment Fee Percentage on the total credit provided
under the Revolving Credit Agreement. No compensating balances are required by
the Agreement, which does require 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.
SENIOR NOTES
On March 31, 2003, the Company completed the issuance of $100 million of
privately placed senior notes. Twenty million dollars of the senior notes have a
floating interest rate at a margin over the London Interbank Offer Rate (LIBOR)
that is set quarterly. The floating interest rate at March 31, 2004, on the $20
million debt was 2.2%. The proceeds of the note issuance were used to retire
debt outstanding under the Revolving Credit Agreement.
INTEREST RATE PROTECTION AGREEMENTS
The Company has Interest Rate Protection Agreements (Rate Agreements) with
respect to $100 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 fixed
interest rate for the Company's borrowings related to the Rate Agreements at
March 31, 2004, is 5.8% and the total interest rate, including applicable fees,
is 7.6%. The average maturity of these Rate Agreements is 1.1 years at March 31,
2004. Total remaining debt not covered by the Rate Agreements has fluctuating
interest rates with a weighted average rate of 3.8% at March 31, 2004. 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. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company is a 49% equity owner in Vitrocrisa Holding, 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.
8
Summarized combined financial information for the Company's investments for 2004
and 2003, accounted for by the equity method under accounting principles
generally accepted in the United States (U.S. GAAP), is as follows:
March 31, December 31,
2004 2003
--------- ------------
Current assets $ 78,941 $ 82,060
Non-current assets 99,348 101,722
-------- --------
Total assets 178,289 183,782
Current liabilities 104,258 117,941
Non-current liabilities 47,092 37,093
-------- --------
Total liabilities 151,350 155,034
-------- --------
Net assets $ 26,939 $ 28,748
======== ========
Three months ended March 31, 2004 2003
- ---------------------------------------------- -------- --------
Net sales $ 42,478 $ 38,287
Cost of sales 38,318 32,999
-------- --------
Gross profit 4,160 5,288
Selling, general and administrative expenses 5,366 4,856
-------- --------
(Loss) income from operations (1,206) 432
Translation (loss) gain (181) 647
Other (expense) income (101) 8
-------- --------
(Loss) earnings before finance costs and taxes (1,488) 1,087
Interest expense 1,347 1,394
-------- --------
Loss before income taxes (2,835) (307)
Income taxes (934) (325)
-------- --------
Net (loss) income $ (1,901) $ 18
======== ========
3. CASH FLOW INFORMATION
Interest paid in cash was $2,295 and $2,264 for the first three months of 2004
and 2003, respectively. Income taxes paid in cash were $1,234 and $5,169 for the
first three months of 2004 and 2003, 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.
9
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended March 31, 2004 2003
- ------------------------------------------------------------ ----------- -----------
Numerator for basic and diluted earnings per share--net
income which is available to common shareholders $ 565 $ 2,001
Denominator for basic earnings per share--weighted-average
shares outstanding 13,629,203 14,469,861
Effect of dilutive securities--employee stock options 48,151 129,448
----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 13,677,354 14,599,309
Basic earnings per share $ 0.04 $ 0.14
Diluted earnings per share $ 0.04 $ 0.14
=========== ===========
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income are as follows:
Three months ended March 31, 2004 2003
- ---------------------------------------------- ------ ------
Net income $ 565 $2,001
Change in fair value of derivative instruments 944 398
Effect of exchange rate fluctuation 92 --
------ ------
Comprehensive income $1,601 $2,399
====== ======
Accumulated other comprehensive loss primarily includes $2,420 and $3,364 for
effect of derivatives and $22,080 and $22,080 for minimum pension liability as
of March 31, 2004, and December 31, 2003, respectively.
The change in other comprehensive income for the Company is as follows:
Three months ended March 31, 2004 2003
- ------------------------------------------------- ------- -------
Change in fair value of derivative instruments $ 1,512 $ 638
Less:
Income tax expense (568) (240)
------- -------
Other comprehensive income related to derivatives $ 944 $ 398
======= =======
6. DERIVATIVES
As of March 31, 2004, the Company had 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 is included in accrued
liabilities and other assets on the balance sheet for the Rate Agreements and
commodity contracts, respectively. At March 31, 2003, the Company had Rate
Agreements for
10
$100.0 million of its variable rate debt and commodity contracts for 0.9 million
BTUs of natural gas.
The Company does not believe it is exposed to more than a nominal amount of
credit risk in its interest rate and natural gas hedges as the counterparts are
established financial institutions.
All of the Company's derivatives qualify and are designated as cash flow hedges
at March 31, 2004. Hedge accounting is only applied when the derivative is
deemed to be highly effective at offsetting changes in anticipated cash flows of
the hedged item or transaction. The ineffective portion of the change in the
fair value of a derivative designated as a cash flow hedge is recognized in
current earnings. Ineffectiveness recognized in earnings during the first
quarter of 2004 and 2003 was not material.
7. NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." The
Interpretation addresses the requirements for business enterprises to
consolidate related entities in which they are determined to be the primary
beneficiary as a result of their variable economic interests. The Interpretation
is intended to provide guidance in judging multiple economic interests in an
entity and in determining the primary beneficiary. The Interpretation outlines
disclosure requirements for variable interest entities in existence prior to
January 31, 2003, and requires consolidation of variable interest entities
created after January 31, 2003. In addition, the Interpretation requires
consolidation of variable interest entities created prior to January 31, 2003,
for fiscal periods beginning after December 15, 2003. The Interpretation was
effective for all variable interest entities during the Company's first quarter
of 2004. This Interpretation had no impact on the Company's financial
statements.
In December 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132-revised), which requires additional
disclosures about the assets, obligations, cash flows and net periodic benefit
costs of defined benefit pension plans and defined benefit other post retirement
plans. The Company adopted the disclosure requirements of SFAS No. 132-revised
as shown in Note 9.
In January 2004, the FASB issued FASB Staff Position (FSP) No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the Act), which permits a
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act. The Company has elected to defer accounting for the effects of the Act
pending further consideration of the underlying accounting issues.
8. STOCK OPTIONS
The Company has two stock-based employee compensation plans. The Company
accounts for the plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provision of
11
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), to
stock-based employee compensation.
Three months ended March 31, 2004 2003
- --------------------------------------------------- ------- ---------
Net Income:
Reported net income $ 565 $ 2,001
Stock-based employee compensation
expense determined under fair value-based
method for all awards, net of related tax effects 279 403
------- ---------
Pro forma net income $ 286 $ 1,598
======= =========
Basic earnings per share:
Reported net income $ 0.04 $ 0.14
Stock-based employee compensation
expense determined under fair value-based
method for all awards, net of related tax
effects 0.02 0.03
------- ---------
Pro forma basic earnings per share $ 0.02 $ 0.11
======= =========
Diluted earnings per share:
Reported net income $ 0.04 $ 0.14
Stock-based employee compensation
expense determined under fair value-based
method for all awards, net of related tax effects 0.02 0.03
------- ---------
Pro forma diluted earnings per share $ 0.02 $ 0.11
======= =========
9. PENSION PLANS AND NONPENSION POSTRETIREMENT BENEFITS
Net pension expense / postretirement expense for the Company's United States
(US) plans for the three months ended March 31, 2004 and 2003 includes the
following components:
Other Postretirement
US Plans Pension Plans Benefit Plan
- ------------------------------ ------------------------------ ------------------------------
Three months ended March 31, 2004 2003 2004 2003
- ------------------------------ ------- ------- ------- -------
Service cost $ 1,590 $ 1,360 $ 265 $ 228
Interest cost 3,586 3,590 618 565
Expected return on plan assets (4,680) (4,794) -- --
Amortization of unrecognized:
Prior service cost 372 372 (479) (479)
Recognized loss 232 29 21 16
------- ------- ------- -------
Net periodic benefit cost $ 1,100 $ 557 $ 425 $ 330
======= ======= ======= =======
The Company expects to contribute $140 to its US pension plans in 2004. Through
the first quarter, $0 has been contributed.
12
Net pension expense (income) / postretirement expense for the Company's
non-United States plans for the three months ended March 31, 2004 and 2003
includes the following components:
Other Postretirement
Non-US Plans Pension Plans Benefit Plan
- --------------------------------------------------------------------------------------------------
Three months ended March 31, 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------
Service cost $ 151 $ 146 $ -- $ --
Interest cost 384 319 41 32
Expected return on plan assets (456) (375) -- --
Amortization of unrecognized:
Prior service cost (90) (41) -- --
Recognized (gain) -- -- -- (5)
-------- -------- -------- --------
Net periodic benefit (income) cost $ (11) $ 49 $ 41 $ 27
======== ======== ======== ========
The Company expects to contribute $1,400 to its non-US pension plans in 2004.
Through the first quarter, $359 has been contributed.
During January 2004, the FASB issued FSP 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" (the Act), which permits a sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Act. In
accordance with FSP 106-1, the Company has elected to defer accounting for the
effects of the Act and accordingly, the measures of the accumulated
postretirement benefit obligation and the net postretirement benefit costs do
not reflect the effects of the Act.
The Company's election to defer accounting for the effects of the Act may not be
changed and the deferral will continue to apply until authoritative guidance on
the accounting for the federal subsidy is issued.
10. GUARANTEES
The debt of Libbey Glass Inc. and Libbey Europe B.V, pursuant to the Amended and
Restated Revolving Credit Agreement and privately placed senior notes are
guaranteed by Libbey Inc. and by certain subsidiaries of Libbey Glass Inc. Also,
Libbey Glass Inc. guarantees a(euro)10 million working capital facility of
Libbey Europe B.V. and Royal Leerdam. All are related parties that are included
in the Consolidated Financial Statements. See Note 1 for further disclosure on
debt of the Company.
In addition, Libbey Inc. guarantees the payment of Vitrocrisa Holding, S. de
R.L. de C.V. (Vitrocrisa) of its obligation to purchase electricity. The
guarantee is based on the provisions of a Power Purchase Agreement to which
Vitrocrisa is a party. The guarantee is limited to 49% of any such obligation of
Vitrocrisa and limited to an aggregate amount of $5.0 million. The guarantee was
entered into in October 2000 and continues for 15 years from the initial date of
electricity generation, which commenced on April 12, 2003.
In October 1995, Libbey Inc. guaranteed the obligations of Syracuse China
Company and Libbey Canada Inc. under the Asset Purchase Agreement for the
acquisition of Syracuse China. The guarantee is limited to $5.0 million expiring
on the fifteenth anniversary of the Closing Date (October 10, 1995). The
guarantee is in favor of The Pfaltzgraff Co., The Pfaltzgraff Outlet Co. and
Syracuse China Company of Canada Ltd.
13
On April 2, 2004, Libbey Inc. and Libbey Glass Inc. guaranteed the obligations
of Vitrocrisa Comercial, S. de R.L. de C.V. (Comercial) and Vitrocrisa under
Tranche B loans pursuant to a certain Credit Agreement. Libbey's portion of the
guarantee is for 31% of the total guarantee, up to a maximum amount of $23.0
million. Tranche B loans of the Credit Agreement is for a three year term,
expiring April 2007. Libbey would be obligated in the event of default by
Comercial or Vitrocrisa, as outlined in the guarantee agreement. Since the
guarantee was entered into after March 31, 2004, the guarantee is not included
in the Consolidated Financial Statements for the first quarter of 2004. The
guarantee will be recorded at the fair market value on the Consolidated
Financial Statements during the second quarter of 2004.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - FIRST QUARTER 2004 COMPARED WITH FIRST QUARTER 2003
(dollars in thousands)
Three months ended March 31, 2004 2003
- ------------------------------------------------------------------------
Net Sales $ 123,123 $ 111,903
Gross profit 22,316 21,558
As a percent of sales 18.1% 19.3%
Income from operations $ 6,015 $ 5,542
As a percent of sales 4.9% 5.0%
Earnings before interest and income taxes $ 4,433 $ 5,518
As a percent of sales 3.6% 4.9%
Net income $ 565 $ 2,001
As a percent of sales 0.5% 1.8%
Management is not aware of any events or uncertainties that are likely to have a
material impact on the Company's prospective results of operations or financial
condition; however, major slowdowns in the retail, travel, or entertainment
industries could result from the impact of armed hostilities or any other
international or national calamity, including any act of terrorism. Additional
risk factors are discussed in Other Information in the section "Qualitative and
Quantitative Disclosures About Market Risk."
For the quarter ended March 31, 2004, sales increased 10.0 percent to $123.1
million from $111.9 million in the year-ago quarter. The increase in sales was
largely attributable to solid growth in sales to foodservice customers.
Shipments of Libbey glassware, Syracuse China dinnerware and World Tableware
products to foodservice customers were all at least 10 percent higher than the
year-ago period. Sales to retail customers increased approximately 5 percent as
compared to the year-ago first quarter, while sales to industrial customers
were up more than 15 percent. Sales to customers located outside of the United
States, increased 15.7 percent to $27.3 million from $23.6 million in the
year-ago period. The primary reason for this increase is the impact of a weaker
U.S. dollar and the more favorable exchange of the euro currency expressed in
U.S. dollars.
Gross profit (defined as net sales plus freight billed to customers less cost of
sales) was $22.3 million and as a percent of sales was 18.1 percent in the first
quarter of 2004 compared to $21.6 million and as a percent of sales was 19.3
percent in the first quarter of 2003. Factors contributing to the increase in
gross profit were higher sales and improved mix of sales partially offset by
additional costs (mostly non-cash) for pension and nonpension postretirement
benefits of $0.6 million and higher distribution costs of $1.3 million related
to the increased sales.
Income from operations was $6.0 million compared to $5.5 million in the first
quarter last year and as a percent of sales was 4.9 percent in the first quarter
of 2004 compared to 5.0 percent in
15
the year-ago quarter. Contributing to the increase in income from operations was
the increase in gross profit. Selling, general and administrative expenses only
increased $0.2 million compared to the prior year period, while sales increased
$11.2 million.
Earnings before interest and income taxes (EBIT) were $4.4 million compared to
$5.5 million in the year-ago quarter. Pretax equity loss from Vitrocrisa (the
Company's 49% equity ownership in Crisa Industrial, L.L.C., Vitrocrisa Holding,
S. de R.L. de C.V. and related Mexican companies), was $1.4 million on a pretax
basis, as compared with a pretax loss of $0.2 million in the first quarter of
2003 as the result of higher natural gas costs, increased repair expenses, and a
translation loss.
Net income was $0.6 million, or 4 cents per diluted share, compared with net
income of $2.0 million, or 14 cents per diluted share, in the year-ago period.
Interest expense increased $1.0 million as a result of higher average debt
during the quarter and higher interest rates compared with the year-ago period.
Debt increased by $38.2 million in March of 2003 due to the repurchase of
1,500,000 shares pursuant to the Company's modified Dutch Auction tender offer.
The Company's effective tax rate was 34.0 percent for the quarter as compared to
32.8 percent in the year-ago period as the result of lower federal and state
income tax credits.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities was $0.5 million during the first
quarter of 2004, compared to cash used of $9.1 million during the year ago
period. The increase of operating cash was primarily the result of the change in
working capital. Total inventories increased $3.2 million during the first
quarter of 2004 to $128.9 million, as compared to the first quarter of 2003,
when total inventories increased by $6.9 million. Accounts receivable decreased
by $0.8 million during the first quarter of 2004 compared to an increase of $3.5
million during the year-ago period.
The Company had total debt, including notes payable, of $237.0 million at March
31, 2004, compared to $230.9 million at December 31, 2003. This increase in debt
is attributable to seasonal increased working capital requirements during the
first quarter of 2004. In early 2003, the Company entered into an unsecured
agreement for an Amended and Restated Revolving Credit Agreement (Revolving
Credit Agreement or Agreement) as detailed in Note 1 to the Consolidated
Financial Statements. The Agreement matures April 23, 2005, with an option to
extend for two additional one-year periods. Libbey anticipates refinancing the
Revolving Credit Agreement during the second quarter of 2004. The Company had
additional debt capacity at March 31, 2004, under the Revolving Credit Agreement
(Agreement) of $118.5 million. Of Libbey's total outstanding indebtedness, $54.6
million was subject to fluctuating interest rates at March 31, 2004. A change of
one percent in such rates would have resulted in a change in interest expense of
approximately $0.5 million on an annual basis as of March 31, 2004.
On March 31, 2003, Libbey completed the issuance of $100 million of privately
placed senior notes. Eighty million dollars of the notes have an average
interest rate of 4.65% with an initial average maturity of 8.4 years and a
remaining average maturity of 7.4 years. The additional $20 million has a
floating interest rate at a margin over the London Interbank Offer Rate (LIBOR).
The proceeds of the note issuance were used to retire debt outstanding under the
Revolving Credit Agreement.
Libbey has entered into Interest Rate Protection Agreements with respect to $100
million of its debt. The average fixed rate of interest under these Interest
Rate Protection Agreements is
16
5.8%, and the total interest rate, including applicable fees, is 7.6%. The
average maturity of these Interest Rate Protection Agreements is 1.1 years at
March 31, 2004. The Company is not aware of any trends, demands, commitments, or
uncertainties that will result or that are reasonably likely to result in a
material change in Libbey's liquidity.
The Company believes that its cash from operations and available borrowings
under the Revolving Credit Agreement, private placement senior notes and other
short-term lines of credit will be sufficient to fund its operating
requirements, capital expenditures, and all other obligations (including debt
service and dividends) throughout the remaining term of the Revolving Credit
Agreement.
Since mid-1998, the Company has repurchased 5,125,000 shares for $140.7 million.
Board authorization remains at March 31, 2004 for the purchase of an additional
1,000,000 shares. Starting in 2003, the repurchased common stock is being used
by the Company to fund the Employee Stock Purchase Plan (ESPP) and the Company
match contributions for its employee 401(k) plans.
During the first quarter of 2004, the Company had capital expenditures of $8.0
million compared to $4.6 million in the year-ago period. These expenditures
primarily relate to furnace and machine rebuild activity and investments in
higher productivity and laborsaving machinery and equipment. The Company expects
to spend $35 to $40 million for capital expenditures for the year 2004.
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, euro or Mexican peso that
could reduce the cost competitiveness of the Company's products or that of
Vitrocrisa compared to foreign competition; the effect of high inflation in
Mexico and exchange rate changes to the value of the Mexican peso and impact of
those changes on the earnings and cash flow of Vitrocrisa, expressed under
accounting principles generally accepted in the United States.
The Company is exposed to market risk associated with changes in interest rates
in the U.S. and has entered into Interest Rate Protection Agreements (Rate
Agreements) with respect to $100.0 million of debt as a means to manage its
exposure to fluctuating interest rates. The Rate Agreements effectively convert
this portion of the Company's borrowings from variable rate debt to a fixed-rate
basis, thus reducing the impact of interest rate changes on future income. The
average fixed rate of interest for the Company's borrowings related to the Rate
Agreements at March 31, 2004 is 5.8% and the total interest rate, including
applicable fees, is 7.6%. The average maturity of these Rate Agreements is 1.1
years at March 31, 2004. Total remaining debt not covered by the Rate Agreements
has fluctuating interest rates with a weighted average rate of 3.8% at March 31,
2004. The Company had $54.6 million of debt subject to fluctuating interest
rates at March 31, 2004. A change of one percent in such rates would result in a
change in interest expense of approximately $0.5 million on an annual basis.
The interest rate differential to be received or paid under the Rate Agreements
is being recognized over the life of the Rate Agreements as an adjustment to
interest expense. If the counterparts to these Rate Agreements were to fail to
perform, the Company would no longer be
17
protected from interest rate fluctuations by these Rate Agreements. However, the
Company does not anticipate nonperformance by the counterparts.
The fair value of the Company's Rate Agreements is determined using the market
standard methodology of netting the discounted expected future variable cash
receipts and the discounted future fixed cash payments. The variable cash
receipts are based on an expectation of future interest rates derived from
observed market interest rate forward curves. The Company does not expect to
cancel these agreements and expects them to expire as originally contracted.
In addition to the Rate Agreements, the Company has also entered into commodity
contracts to hedge the price of anticipated required purchases of natural gas.
The Company has designated these derivative instruments as cash flow hedges. As
such, the changes in fair value of these derivative instruments are recorded in
accumulated other comprehensive income (loss) and reclassified into earnings as
the underlying hedged transaction or items affects earnings. At March 31, 2004,
approximately $2.4 million of unrealized net losses were recorded in accumulated
other comprehensive loss.
OTHER INFORMATION
This document and supporting schedules contains statements that are not
historical facts and constitute projections, forecasts or forward-looking
statements. Such statements only reflect the Company's best assessment at this
time, and may be identified by the use of forward-looking words or phrases such
as "anticipate," "believe," "expect," "intend," "may," "planned," "potential,"
"should," "will," "would" or similar phrases. Such forward-looking statements
involve risks and uncertainty; actual results may differ materially from such
statements, and undue reliance should not be placed on such statements.
Important factors potentially affecting the Company's performance include, but
are not limited to:
- major slowdowns in the retail, travel, restaurant and bar or
entertainment industries, including the impact of armed hostilities
or any other international or national calamity, including any act
of terrorism, on the retail, travel, restaurant and bar or
entertainment industries;
- significant increases in interest rates that increase the Company's
borrowing costs;
- significant increases in per-unit costs for natural gas,
electricity, corrugated packaging and other purchased materials;
- increases in expenses associated with higher medical costs,
increased pension expense associated with lower returns on pension
investments and increased pension obligations;
- devaluations and other major currency fluctuations relative to the
U.S. dollar, euro or Mexican peso that could reduce the cost
competitiveness of the Company's or Vitrocrisa's products compared
to foreign competition;
- the effect of high inflation in Mexico and exchange rate changes to
the value of the Mexican peso and the earnings expressed under
accounting principles generally accepted in the United States and
cash flow Vitrocrisa;
- the inability to achieve savings and profit improvements at targeted
levels at the Company and Vitrocrisa from capacity realignment,
re-engineering and operational restructuring programs or within the
intended time periods;
- protracted work stoppages related to collective bargaining
agreements;
- increased competition from foreign suppliers endeavoring to sell
glass tableware in the United States, Mexico and Europe, including
the impact of lower duties for imported products;
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- whether the Company completes any significant acquisitions and
whether such acquisitions can operate profitably.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Securities
Exchange Act of 1934 (the "Exchange Act") reports are recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well-designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, we have investments in certain
unconsolidated entities. As we do not control or manage these entities, our
disclosure controls and procedures with respect to such entities are necessarily
substantially more limited than those we maintain with respect to our
consolidated subsidiaries.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid per Share or Programs Programs (1)
- ---------------------------------------------------------------------------------------------------------------------
January 1 to
January 31, 2004 -- -- -- 1,000,000
February 1, to
February 29, 2004 -- -- -- 1,000,000
March 1, to
March 31, 2004 -- -- -- 1,000,000
---------------------------------------------------------------------------------
Total -- -- --
---------------------------------------------------------------------------------
(1) Libbey announced on December 10, 2002 that its Board of Directors authorized
the purchase of up to 2,500,000 shares of the Company's common stock in the open
market and negotiated purchases. The timing of the purchases will depend on
financial and market conditions. There is no expiration date for the plan.
ITEM 5. OTHER INFORMATION
(a) There has been no material change to the procedures by which
security holders may recommend nominees to the Company's board
of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits listed in the accompanying "Exhibit
Index" are filed as part of this report.
(b) Reports on Form 8-K:
A report under Item 12 was filed dated February 5, 2004,
announcing financial results for the quarter and year ended
December 31, 2003.
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Libbey Inc. (filed as
Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993 and incorporated herein by reference).
3.2 Amended and Restated By-Laws of Libbey Inc. (filed as Exhibit 3.2
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 and incorporated herein by reference).
4.1 Restated Certificate of Incorporation of Libbey Inc. (incorporated
by reference herein as Exhibit 3.1).
4.2 Amended and Restated By-Laws of Libbey Inc. (incorporated by
reference herein as Exhibit 3.2).
4.3 Rights Agreement, dated January 5, 1995, between Libbey Inc. and
The Bank of New York, which includes the form of Certificate of
Designations of the Series A Junior Participating Preferred Stock
of Libbey Inc. as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares
as Exhibit C, (filed as Exhibit 1 to Registrant's Registration
Statement on Form 8-A dated January 20, 1995 and incorporated
herein by reference).
4.4 First Amendment to Rights Agreement, dated February 3, 1999,
between Libbey Inc. and The Bank of New York (filed as Exhibit 4.4
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
10.1 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Kenneth A. Boerger (filed herein).
10.2 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Daniel P. Ibele (filed herein).
10.3 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Susan Allene Kovach (filed herein).
10.4 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and John F. Meier (filed herein).
10.5 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Timothy T. Paige (filed herein).
10.6 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Richard I. Reynolds (filed herein).
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10.7 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Scott M. Sellick (filed herein).
10.8 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and Kenneth G. Wilkes (filed herein).
10.9 Employment Agreement dated as of March 22, 2004 between Libbey
Inc. and John A. Zarb (filed herein).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) (filed herein).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) (filed herein).
32.1 Chief Executive Officer Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act of 2002 (filed herein).
32.2 Chief Financial Officer Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act of 2002 (filed herein).
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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 May 10, 2004 By /s/ Scott M. Sellick
----------------------------------
Scott M. Sellick,
Vice President, Chief Financial Officer
(duly authorized principal financial officer)
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