10-Q 1 l96759ae10vq.txt LIBBEY INC. 10-Q 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