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LBY > SEC Filings for LBY > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for LIBBEY INC


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
This document and supporting schedules contain statements that are not historical facts and constitute projections, forecasts or forward-looking statements. For a description of the forward-looking statements and risk factors that may affect our performance, see the "Risk Factors" section above.

Additionally, for an understanding of the significant factors that influenced our performance during the past three years, the following should be read in conjunction with the audited Consolidated Financial Statements and Notes.

General Overview

Headquartered in Toledo, Ohio, we believe that we have the largest manufacturing, distribution and service network among glass tableware manufacturers in the Western Hemisphere and that we are one of the largest glass tableware manufacturers in the world. Our product portfolio consists of an extensive line of high quality, machine-made glass tableware, including casual glass beverageware, in addition to ceramic dinnerware, metal flatware, hollowware and serveware. We sell our products to foodservice, retail, and business-to-business customers in over 100 countries, with our sales to customers within North America accounting for approximately 74 percent of our total sales. We are the largest manufacturer and marketer of casual glass beverageware in North America for the foodservice and retail channels. Additionally, we believe we are a leading manufacturer and marketer of casual glass beverageware in EMEA and have a growing presence in Asia Pacific.

We have two reportable segments defined as follows:
Glass Operations - includes worldwide sales of manufactured and sourced glass tableware and other glass products from domestic and international subsidiaries.

Other Operations - includes worldwide sales of sourced ceramic dinnerware, metal tableware, hollowware and serveware and plastic items. Plastic items were included in this segment until we sold substantially all of the assets of our Traex subsidiary on April 28, 2011.

When discussing sales by region throughout this section, region is defined as our sales force's regional sales accountability.


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Executive Overview

Overall, the economies in which we operate continued to be challenging during 2012 and we expect them to remain fragile into 2013. North America's economy was fragile with political and global economic uncertainties continuing to lead to relatively weak demand. The European economy continued to soften throughout 2012. In addition, political uncertainty existed in China as a result of the leadership change there, and although the economy in China continues to grow, the rate of growth has slowed considerably in the latter half of 2012. Despite these conditions, we achieved a number of financial highlights in 2012 resulting from our commitment to improving our cost structure while leveraging our leadership positions in key lines of business and strengthening our balance sheet. Among them are the following, all of which are Company records:

• 2012 net sales were $825.3 million.

• 2012 gross profit of $195.2 million surpassed 2011 gross profit by 15.7 percent.

• 2012 income from operations of $81.3 million, an increase of 28.1 percent over 2011.

• 2012 Adjusted EBITDA of $132.4 million, surpassing our previous best in 2007 of $116.5 million.

Working capital (defined as net accounts receivable and inventory less accounts payable) was $172.7 million at December 31, 2012, compared to $175.1 million at December 31, 2011. Working capital as a percent of net sales was 20.9 percent at December 31, 2012, an all-time record low, as compared to 21.4 percent at December 31, 2011.

Strengthening our balance sheet remains a high priority. On May 18, 2012, we completed the refinancing of substantially all of the existing indebtedness of our wholly-owned subsidiaries Libbey Glass and Libbey Europe. We used the proceeds of the offering of the $450.0 million New Senior Secured Notes to fund the repurchase and redemption of $320.0 million of the Old Senior Secured Notes, pay related fees and expenses, and contribute $79.7 million to our U.S. pension plans to fully fund our target obligations under ERISA. On June 29, 2012, we used the remaining proceeds of the New Senior Secured Notes, together with cash on hand, to redeem the remaining $40.0 million of Old Senior Secured Notes and to pay related fees. In April and September of 2012, Libbey China pre-paid the respective July and December 2013 scheduled principal payments of RMB 60.0 million (approximately $9.5 million) each. In addition we repaid €2.8 million (approximately $3.5 million) on our loan in Portugal. As of December 31, 2012, we had available capacity of $68.6 million under our ABL credit facility, with no loans currently outstanding and $67.2 million in cash on hand. We plan for Libbey Glass Inc. to redeem $45.0 million of our 6.875 percent New Senior Secured Notes during the second quarter of 2013.

Libbey continues to successfully implement "Libbey 2015", our comprehensive business strategy launched in 2012 to improve our financial position and our ability to compete effectively in the market today and into the future. Libbey 2015 is centered on reducing our costs and boosting efficiency, reinforcing our leadership position in key channels (particularly U.S. foodservice and Mexico foodservice and retail), accelerating growth in China and reducing our liabilities and the working capital required to operate the core business. In February 2013, we announced our plan to exit sales of certain glassware items, realign production in North America and reduce manufacturing capacity at our Shreveport, Louisiana facility. Some production will be relocated to our facilities in Toledo, Ohio and Monterrey, Mexico. Existing staff will handle the relocated production in Toledo and Monterrey. (See note 21 to the Consolidated Financial Statements for a further discussion.) The implementation of the strategic plan is an ongoing process. In the first quarter of 2013, we have planned significant rebuilds and capacity expansion at our Mexico facility along with associated under-utilization of capacity. However, for the full year 2013 we expect to realize year-over-year revenue growth in the low-to-mid single-digit range and EBITDA improvements that will reflect the benefits of the cost reductions put in place in the second half of 2012.


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Results of Operations
The following table presents key results of our operations for the years 2012, 2011 and 2010:

Year ended December 31,
(dollars in thousands, except percentages
and per-share amounts)                              2012            2011            2010
Net sales                                       $  825,287      $  817,056      $  799,794
Gross profit (2)                                $  195,185      $  168,739      $  168,013
Gross profit margin                                   23.7 %          20.7 %          21.0 %
Income from operations (IFO) (2)(3)             $   81,289      $   63,475      $   68,821
IFO margin                                             9.8 %           7.8 %           8.6 %
Earnings before interest and income taxes
(EBIT)(1)(2)(3)(4)                              $   50,402      $   68,703      $  126,839
EBIT margin                                            6.1 %           8.4 %          15.9 %
Earnings before interest, taxes,
depreciation and amortization
(EBITDA)(1)(2)(3)(4)                            $   91,873      $  110,891      $  167,954
EBITDA margin                                         11.1 %          13.6 %          21.0 %
Adjusted EBITDA(1)                              $  132,404      $  113,089      $  114,958
Adjusted EBITDA margin                                16.0 %          13.8 %          14.4 %
Net income (2)(3)(4)                            $    6,966      $   23,641      $   70,086
Net income margin                                      0.8 %           2.9 %           8.8 %
Diluted net income per share                    $     0.33      $     1.14      $     3.51


________________


(1) We believe that EBIT, EBITDA and Adjusted EBITDA, non-GAAP financial measures, are useful metrics for evaluating our financial performance, as they are measures that we use internally to assess our performance. For a reconciliation from net income to EBIT, EBITDA, and Adjusted EBITDA, see the "Adjusted EBITDA" sections below in the Discussion of Results of Operations and the reasons we believe these non-GAAP financial measures are useful.

(2) 2012 includes severance charges of $3.3 million resulting from the implementation of our new strategic plan. 2011 includes a $1.8 million accrual for an on-going unclaimed property audit, a $0.8 million write-down of unutilized fixed assets in our Glass Operations segment and $0.2 million of restructuring charges. 2010 includes fixed asset write-downs of $2.7 million related to after-processing equipment in our Glass Operations segment and $0.6 million related to the closure of the decorating operations at our Shreveport manufacturing facility, net of a $0.9 million insurance claim recovery. (See notes 5, 7 and 18 to the Consolidated Financial Statements.)

(3) In addition to item (2) above, 2012 includes $1.9 million of severance resulting from implementation of our new strategic plan and $4.3 million of pension curtailment and settlement charges related to the U.S. plans. 2011 includes $2.7 million of CEO transition expenses ($1.7 million of non-cash charges related to accelerated vesting of previously issued equity compensation, with the remainder related to relocation expenses, search fees and other), $0.9 million for an on-going unclaimed property audit, $1.1 million for severance, offset by an equipment credit of $0.8 million and a restructuring credit of $0.3 million related to the closure of the decorating operations at our Shreveport manufacturing facility. 2010 includes a charge of $1.0 million related to our secondary stock offering, restructuring charges of $1.1 million related to the closure of our Syracuse, New York, manufacturing facility and our Mira Loma, California distribution center, and a $0.7 million write-off of the decorating assets at our Shreveport manufacturing facility. (See notes 5, 6, 7, 9 and 18 to the Consolidated Financial Statements.)

(4) In addition to item (3) above, 2012 includes a loss of $31.1 million for the write-off of unamortized finance fees and discounts and call premium payments on the ABL Facility and $360.0 million of Old Senior Secured Notes redeemed in May and June 2012, partially offset by the write-off of the debt carrying value adjustment related to the termination of the $80.0 million interest rate swap. 2011 includes a net gain of $3.4 million related to the gain on the sale of substantially all of the assets of Traex, income of $3.4 million related to the gain on the sale of land at our Libbey Holland facility, a loss of $2.8 million related to the redemption of $40.0 million of Old Senior Secured Notes and an equipment credit of $0.2 million. 2010 includes income of $58.3 million related to the gain on redemption of the PIK Notes and restructuring charges of $0.1 million related to the closure of our Syracuse China manufacturing facility and our Mira Loma distribution center. (See notes 5, 6, 7 and 17 to the Consolidated Financial Statements).


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Discussion of 2012 vs. 2011 Results of Operations
Net Sales
For the year ended December 31, 2012, net sales increased 1.0 percent to $825.3
million, compared to $817.1 million in the prior year. The increase in net sales
was attributable to increased sales in both our Glass Operations and Other
Operations segments.
The following table summarizes net sales by operating segment:
Year ended December 31,
(dollars in thousands)       2012          2011
Glass Operations          $ 753,006     $ 746,581
Other Operations             72,965        71,183
Eliminations                   (684 )        (708 )
Consolidated              $ 825,287     $ 817,056

Net Sales - Glass Operations
Net sales in the Glass Operations segment were $753.0 million, an increase of 0.9 percent (3.1 percent excluding the impact of currency on net sales), compared to $746.6 million in 2011. Primary contributors to the increased net sales were a 24.0 percent increase in net sales within our China sales region (21.3 percent excluding the impact of currency), a 4.1 percent increase in net sales within our U.S. and Canadian sales region, partially offset by an 8.3 percent decrease in the European sales region (0.6 percent decrease excluding the euro effect), a 1.6 percent decrease within our Mexico sales region (3.1 percent increase excluding the peso impact), and a 2.5 percent decrease within our International sales region, compared to the prior year. The increase in our China sales region is the result of our change in our go-to-market strategy in the domestic Chinese market. Net sales to U.S. and Canadian foodservice glassware and business-to-business customers increased 5.1 percent and 3.1 percent, respectively, as compared to the prior year due to increased shipments. Net sales to U.S. and Canadian retail customers increased 3.6 percent compared to the prior year due to a more favorable product mix sold. The decrease in our European sales region, excluding the impact of currency, is a result of decreased shipments attributable to the uncertain European economic conditions. Excluding the effects of currency, the Mexican sales region increase in sales was driven by a more favorable mix of product sold. The net sales decline in the International sales region was due to decreased shipments. Net Sales - Other Operations
Net sales in the Other Operations segment were $73.0 million, compared to $71.2 million in the prior year, an increase of 2.5 percent. Net sales to World Tableware customers and Syracuse China customers increased 9.0 percent and 12.6 percent, respectively, due to increased shipments. Offsetting this increase was a decrease of $4.8 million in net sales from Traexฎ products because of the sale of substantially all of the assets of Traex in late April 2011. Gross Profit
Gross profit increased to $195.2 million in 2012, compared to $168.7 million in the prior year. Gross profit as a percentage of net sales increased to 23.7 percent, compared to 20.7 percent in the prior year. The primary drivers of the $26.4 million gross profit increase were a $22.5 million impact from changes in sales volume and mix, increased production activity net of volume-related production costs of $3.3 million, lower natural gas costs of $3.6 million, lower direct material costs (primarily packaging) of $2.6 million and lower freight costs of $1.0 million in 2012 compared to 2011, offset by $3.3 million in severance, $2.6 million from increased employee incentive accruals and a $1.9 million adverse currency impact due to the changes in the value of the Mexican peso and euro. Further, 2011 included an $1.8 million expense for an unclaimed property audit and an asset write-down of $0.8 million. 2011 also included gross profit of $1.0 million related to Traex, substantially all of the assets of which were sold in late April 2011.
Income From Operations
Income from operations for the year ended December 31, 2012 increased $17.8 million, to $81.3 million, compared to $63.5 million in the prior year. Income from operations as a percentage of net sales was 9.8 percent for the year ended December 31, 2012, compared to 7.8 percent in the prior year. The increase in income from operations is a result of gross profit fluctuations (discussed above), net of an $8.4 million increase in selling, general and administrative expenses. The increase in selling, general and administrative expense is attributable to $4.5 million of pension settlement and curtailment charges, $3.1 million of severance expense related to organizational changes and implementation of our new strategy, $2.1 million of additional legal and professional fees, $1.1 million of additional selling and marketing expenses and $2.0 million from increased employee


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incentive accruals, offset by a favorable currency impact of $1.5 million as well as $2.7 million in CEO transition expenses in 2011 that did not repeat in 2012.
Earnings Before Interest and Income Taxes (EBIT) EBIT for the year ended December 31, 2012 decreased by $18.3 million, or 26.6 percent, to $50.4 million in 2012 from $68.7 million in 2011. EBIT as a percentage of net sales decreased to 6.1 percent in 2012, compared to 8.4 percent in the prior year. The decrease in EBIT is a result of a $28.3 million increase in loss on redemption of debt from the debt refinancing (write-off of unamortized finance fees and discounts and call premium payments related to the redemption of Old Senior Secured Notes), partially offset by an increase in income from operations (discussed above). 2011 also included a $3.4 million gain on the sale of land at our Libbey Holland facility and a $3.4 million gain on the sale of substantially all of the assets of Traex. Segment EBIT
The following table summarizes Segment EBIT(1) by operating segments:

Year ended December 31,
(dollars in thousands)       2012        2011
Glass Operations          $ 118,470    $ 96,716
Other Operations          $  14,047    $ 11,974

(1) Segment EBIT represents earnings before interest and taxes and excludes amounts related to certain items we consider not representative of ongoing operations as well as certain retained corporate costs. See note 19 to the Consolidated Financial Statements for reconciliation of Segment EBIT to net income.

Segment EBIT - Glass Operations
Segment EBIT increased to $118.5 million in 2012, compared to $96.7 million in 2011. Segment EBIT as a percentage of net sales increased to 15.7 percent in 2012, compared to 13.0 percent in 2011. The primary drivers of the $21.8 million increase in Segment EBIT were a $23.1 million favorable impact from changes in sales volume and mix, a $3.4 million increase attributable to increased production activity net of volume-related production costs, lower natural gas costs of $3.6 million and lower direct material costs (primarily packaging) of $2.6 million. Offsetting these favorable items were a $10.2 million increase in costs primarily related to labor and benefits, repair and maintenance, selling and marketing costs, internally allocated costs, and electricity costs and a $0.4 million adverse currency impact due to the changes in the value of the Mexican peso.
Segment EBIT - Other Operations
Segment EBIT increased by $2.1 million, or 17.3 percent, to $14.0 million for the year ended December 31, 2012, compared to $12.0 million in the prior year. Segment EBIT as a percentage of net sales increased to 19.3 percent for the year ended December 31, 2012, compared to 16.8 percent in the prior year. Increased sales to World Tableware and Syracuse China customers, partially offset by $0.6 million of Segment EBIT related to Traex included in 2011, contributed to the increased Segment EBIT.
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) EBITDA decreased by $19.0 million in 2012, to $91.9 million, compared to $110.9 million in 2011. As a percentage of net sales, EBITDA decreased to 11.1 percent in 2012, from 13.6 percent in 2011. The key contributors to the decrease in EBITDA were those factors discussed above under EBIT. Adjusted EBITDA
Adjusted EBITDA increased by $19.3 million in 2012, to $132.4 million, compared to $113.1 million. As a percentage of net sales, Adjusted EBITDA was 16.0 percent for 2012, compared to 13.8 percent in 2011. The key contributors to the increase in Adjusted EBITDA were those factors discussed above under EBITDA and the elimination of the special items noted below in the reconciliation of net income to EBIT, EBITDA and Adjusted EBITDA.


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Year ended December 31,
(dollars in thousands)                                         2012             2011
Net income                                                 $    6,966       $   23,641
Add: Interest expense                                          37,727           43,419
Add: Provision for income taxes                                 5,709            1,643
Earnings before interest and income taxes (EBIT)               50,402           68,703
Add: Depreciation and amortization                             41,471           42,188
Earnings before interest, taxes, deprecation and
amortization (EBITDA)                                          91,873          110,891
Add: Special items before interest and taxes:
Loss on redemption of debt (see note 6) (1)                    31,075            2,803
Severance (2)                                                   5,150            1,105
Pension curtailment and settlement charge (see note 9)
(3)                                                             4,306                -
Gain on sale of land at Libbey Holland facility                     -           (3,445 )
Gain on sale of Traex (see note 17)                                 -           (3,418 )
CEO transition expenses                                             -            2,722
Abandoned property (see note 18)                                    -            2,719
Equipment credit                                                    -           (1,021 )
Fixed asset write-down (see note 5) (4)                             -              817
Facility closure credit (see note 7) (5)                            -              (84 )
Adjusted EBITDA                                            $  132,404       $  113,089


____________________________________


(1) Loss on redemption of debt relates to the write-off of unamortized finance fees and discounts and call premium payments on the ABL Facility and $360.0 million senior notes redeemed in May and June 2012, partially offset by the write-off of the debt carrying value adjustment related to the termination of the $80.0 million interest rate swap. 2011 includes the write-off of unamortized finance fees and discounts and call premium payments on the $40.0 million senior notes redeemed in March 2011.

(2) The 2012 severance charges relate to the implementation of our new strategic plan.

(3) The pension settlement charge relates to excess lump sum distributions from the U.S. plans. The pension curtailment charge resulted from the third quarter announcement that, as of January 1, 2013, we are ceasing annual company contribution credits to the cash balance accounts in our Libbey U.S. Salaried Pension Plans and SERP.

(4) Fixed asset impairment charges are related to unutilized fixed assets in our Glass Operations segment.

(5) Facility closure credit is related to the closure of our Syracuse, New York, manufacturing facility and the decorating operations at our Shreveport manufacturing facility.

We sometimes refer to data derived from consolidated financial information but not required by GAAP to be presented in financial statements. Certain of these data are considered "non-GAAP financial measures" under Securities and Exchange Commission (SEC) Regulation G. We believe that non-GAAP data provide investors with a more complete understanding of underlying results in our core business and trends. In addition, we use non-GAAP data internally to assess performance. Although we believe that the non-GAAP financial measures presented enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered an alternative to GAAP.
We define EBIT as net income before interest expense and income taxes. The most directly comparable U.S. GAAP financial measure is net income. We believe that EBIT is an important supplemental measure for investors in evaluating operating performance in that it provides insight into company profitability. Libbey's senior management uses this measure internally to measure profitability. EBIT also allows for a measure of comparability to other companies with different capital and legal structures, which accordingly may be subject to different interest rates and effective tax rates.
The non-GAAP measure of EBIT does have certain limitations. It does not include interest expense, which is a necessary and ongoing part of our cost structure resulting from debt incurred to expand operations. Because this is a material and recurring item, any measure that excludes it has a material limitation. EBIT may not be comparable to similarly titled measures reported by other companies. We define EBITDA as net income before interest expense, income taxes, depreciation and amortization. The most directly comparable U.S. GAAP financial measure is net income.


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We believe that EBITDA is an important supplemental measure for investors in evaluating operating performance in that it provides insight into company profitability and cash flow. Libbey's senior management uses this measure internally to measure profitability and to set performance targets for managers. EBITDA also allows for a measure of comparability to other companies with different capital and legal structures, which accordingly may be subject to different interest rates and effective tax rates, and to companies that may incur different depreciation and amortization expenses or impairment charges. The non-GAAP measure of EBITDA does have certain limitations. It does not include interest expense, which is a necessary and ongoing part of our cost structure resulting from debt incurred to expand operations. EBITDA also excludes depreciation and amortization expenses. Because these are material and recurring items, any measure that excludes them has a material limitation. EBITDA may not be comparable to similarly titled measures reported by other companies.
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA internally to measure profitability and to set performance targets for managers.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

• Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

• Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

• Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. . . .

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