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LBY > SEC Filings for LBY > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for LIBBEY INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes thereto appearing elsewhere in this report and in our Annual Report filed with the Securities and Exchange Commission. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result of many factors. Our risk factors are set forth in Part I, Item 1A. "Risk Factors" in our 2012 Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

While the Mexican economy appears to have stabilized, the other economies in which we operate continued to be challenging during the first quarter of 2013 and we expect them to remain as such for the balance of the year. The U.S. economy during the first quarter of 2013 experienced the negative effects of the increased 2.0 percent FICA tax, slower receipt by consumers of income tax refunds and a more severe winter season compared to the mild winter season in the first quarter of 2012. The European economy remains soft, and the rate of growth has slowed considerably in China as compared to the first half of 2012. As a result of these factors, our net sales declined 2.3 percent in the first quarter 2013 as compared to the first quarter of 2012. Despite these conditions, we achieved record first quarter Adjusted EBITDA of $26.2 million, an improvement of 5.2 percent over our previous best first quarter in 2012 of $24.9 million, as a result of our commitment to improving our cost structure while leveraging our leadership positions in key lines of business and strengthening our balance sheet.

Strengthening our balance sheet remains a high priority. As of March 31, 2013, we had available capacity of $73.3 million under our ABL credit facility, with no loans currently outstanding and $45.9 million in cash on hand. Libbey Glass Inc. redeemed $45.0 million of our Senior Secured Notes on May 7, 2013.

We continue to successfully implement "Libbey 2015", our comprehensive business strategy launched in the second half of 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 the Asia Pacific region and reducing our liabilities and the working capital required to operate the core business. In February 2013, we announced our plans to discontinue production of certain glassware in North America and reduce manufacturing capacity at our Shreveport, Louisiana manufacturing facility. As a result, on May 30, 2013, we will cease production of certain glassware in North America, discontinue the use of a furnace at our Shreveport, Louisiana manufacturing plant and relocate a portion of the production from the idled furnace to our Toledo, Ohio and Monterrey, Mexico locations. These activities are all within the Americas segment and are expected to be completed by the end of the first quarter of 2014. In connection with this plan, we expect to incur a pretax charge in the range of approximately $8.0 million to $10.0 million. Of that amount, we recorded a pretax charge of $4.9 million for the three months ended March 31, 2013, which included employee termination costs, fixed asset impairment charges and depreciation expense. (See note 5 to the Condensed Consolidated Financial Statements for a further discussion.)

Effective January 1, 2013, we revised our reporting segments to align with our previously announced regionally focused organizational structure which will enable us to better serve customers across the globe. Under this structure, we now report financial results for the Americas; Europe, the Middle East and Africa (EMEA); and Other. In addition, sales and segment EBIT reflect end market reporting pursuant to which sales and related costs are included in segment EBIT based on the geographical destination of the sale. The revised segment results do not affect any previously reported consolidated financial results. Our two reportable segments are defined below. Our operating segments that do not meet the criteria for reportable segments are disclosed as Other.

Americas-includes worldwide sales of manufactured and sourced glass tableware having an end market destination in North and South America.

EMEA-includes worldwide sales of manufactured and sourced glass tableware having an end market destination in Europe,
the Middle East and Africa.

Other -includes worldwide sales of manufactured and sourced glass tableware having an end market destination in
Asia Pacific and worldwide sales of sourced ceramic dinnerware, metal tableware, hollowware, and serveware.


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Results of Operations

The following table presents key results of our operations for the three months
ended March 31, 2013 and 2012:
                                                                Three months ended March 31,
(dollars in thousands, except percentages and per-share
amounts)                                                          2013                 2012
Net sales                                                   $      183,476       $      187,829
Gross profit  (2)                                           $       42,232       $       43,056
Gross profit margin                                                   23.0 %               22.9 %
Income from operations (IFO) (3)                            $       11,521       $       14,930
IFO margin                                                             6.3 %                7.9 %
Earnings before interest and income taxes(EBIT)(1)(2)(3)    $       11,086       $       14,339
EBIT margin                                                            6.0 %                7.6 %
Earnings before interest, taxes, depreciation and
amortization (EBITDA)(1)(3)                                 $       21,860       $       24,875
EBITDA margin                                                         11.9 %               13.2 %
Adjusted EBITDA(1)                                          $       26,174       $       24,875
Adjusted EBITDA margin                                                14.3 %               13.2 %
Net income (2)(3)                                           $        1,989       $          641
Net income margin                                                      1.1 %                0.3 %
Diluted net income per share                                $         0.09       $         0.03


__________________________________


(1) We believe that EBIT, EBITDA and Adjusted EBITDA, all 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" section below in the Discussion of First Quarter 2013 Compared to First Quarter 2012 and the reasons we believe these non-GAAP financial measures are useful.

(2) The three month period ended March 31, 2013 includes $0.6 million of accelerated depreciation on fixed assets that were impaired from discontinuing production of certain glassware in North America and reducing manufacturing capacity at our Shreveport, Louisiana, manufacturing facility. (See note 5 to the Condensed Consolidated Financial Statements.)

(3) In addition to item (2) above, the three month period ended March 31, 2013 includes $4.3 million in charges related to discontinuing production of certain glassware in North America and reducing manufacturing capacity at our Shreveport, Louisiana, manufacturing facility. (See note 5 to the Condensed Consolidated Financial Statements.)

Discussion of First Quarter 2013 Compared to First Quarter 2012
Net Sales
For the quarter ended March 31, 2013, net sales decreased 2.3 percent to $183.5
million, compared to $187.8 million in the year-ago quarter. When adjusted for
currency impact, net sales were down 2.8 percent. The decrease in net sales was
attributable to decreased sales of $6.1 million in the Americas, partially
offset by a $3.5 million increase in EMEA net sales.
                               Three months ended March 31,
(dollars in thousands)              2013                  2012
Americas                 $       123,535               $ 129,675
EMEA                              34,242                  30,792
Other                             25,699                  27,362
Consolidated             $       183,476               $ 187,829

Net Sales - Americas

Net sales in the Americas were $123.5 million, compared to $129.7 million in the first quarter of 2012, a decrease of 4.7 percent (a decrease of 5.2 percent excluding currency fluctuation). The primary contributor was an 8.6 percent decrease in sales within our US and Canadian end market due to weaker retail and foodservice sales. The negative impact was caused by the increased 2.0 percent FICA tax, slower receipt by consumers of income tax refunds and a more severe winter season, in the


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northern part of the country, compared to the mild winter season in the first quarter of 2012. Partially offsetting this was a 4.5 percent increase in sales to customers within our Mexican and Latin American end market driven by foodservice and retail sales resulting from a more favorable mix of product sold.

Net Sales - EMEA

Net sales in EMEA were $34.2 million, compared to $30.8 million in the first quarter of 2012, an increase of 11.2 percent (an increase of 10.4 percent excluding currency fluctuation). The primary contributor to the increased net sales was increased shipments to EMEA customers.

Gross Profit

Gross profit decreased to $42.2 million in the first quarter of 2013, compared to $43.1 million in the prior year quarter. Gross profit as a percentage of net sales remained flat as compared to the prior year period. The primary drivers of the $0.8 million gross profit decrease were $6.2 million attributable to decreased production activity net of volume-related production costs due to a significant furnace rebuild within the Americas and a $0.5 million impact of lower sales. Partially offsetting these are a favorable currency impact of $1.3 million and lower non-volume related production costs of $4.6 million.

Income From Operations

Income from operations for the quarter ended March 31, 2013 decreased $3.4 million, to $11.5 million, compared to $14.9 million in the prior year quarter. Income from operations as a percentage of net sales was 6.3 percent for the quarter ended March 31, 2013, compared to 7.9 percent in the prior year quarter. The decrease in income from operations is the result of the decrease in gross profit (discussed above) and the $4.3 million special charge related to discontinuing production of certain glassware in North America and reducing manufacturing capacity at our Shreveport, Louisiana, manufacturing facility, partially offset by a $1.7 million reduction in selling, general and administrative expenses. The reduction in selling, general and administrative expenses was driven in large part by the staffing reductions and benefit changes implemented in the second half of 2012.

Earnings Before Interest and Income Taxes (EBIT)

EBIT for the quarter ended March 31, 2013 decreased by $3.3 million, to $11.1 million from $14.3 million in the first quarter of 2012. EBIT as a percentage of net sales decreased to 6.0 percent in the first quarter of 2013, compared to 7.6 percent in the prior year quarter. The decrease in EBIT is a result of the decrease in income from operations (discussed above).

Segment EBIT

The following table summarizes the change in Segment EBIT(1) by reportable
segments:
                                                                Three months ended March 31,
(dollars in thousands)                                          Americas               EMEA
Segment EBIT, March 31, 2012                                $      15,674         $        (580 )
Sales, excluding currency                                             259                   267
Manufacturing and distribution                                       (806 )              (1,047 )
Selling, general, administrative and other income/expense           1,675                   (96 )
Effects of changing foreign currency rates                          1,350                   (27 )
Segment EBIT, March 31, 2013                                $      18,152         $      (1,483 )


____________________________________


(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 12 to the Condensed Consolidated Financial Statements for reconciliation of Segment EBIT to net income.

Segment EBIT - Americas

Segment EBIT increased to $18.2 million in the first quarter of 2013, compared to $15.7 million in the first quarter of 2012. Segment EBIT as a percentage of net sales for the Americas increased to 14.7 percent in the first quarter of 2013, compared to 12.1 percent in the prior year period. The primary drivers of the $2.5 million increase in Segment EBIT were a $1.4 million


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favorable currency impact and a $1.7 million favorable impact from changes in selling, general, administrative and other income (expense) primarily related to a decrease in labor and benefits expense and translation gains. An additional favorable impact came from lower non-volume related manufacturing and distribution costs of $4.9 million primarily within repairs and maintenance, labor and benefits and direct materials (primarily packaging). Partially offsetting these are a $5.9 million reduction to Segment EBIT attributable to decreased production activity net of volume-related production costs due to a significant furnace rebuild.

Segment EBIT - EMEA

Segment EBIT decreased to a loss of $1.5 million in the first quarter of 2013, compared to a loss of $0.6 million in the first quarter of 2012. Segment EBIT as a percentage of net sales for EMEA decreased to (4.3) percent in the first quarter of 2013, compared to (1.9) percent in the prior-year period. The primary driver of the $0.9 million decrease in Segment EBIT was the impact of our Libbey 2015 Strategy to improve cash generation in Europe.

Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)

EBITDA decreased by $3.0 million in the first quarter 2013, to $21.9 million, compared to $24.9 million in the year-ago quarter. As a percentage of net sales, EBITDA decreased to 11.9 percent in the first quarter of 2013, from 13.2 percent in the year-ago quarter. The key contributors to the decrease in EBITDA were those factors discussed above under Earnings Before Interest and Income Taxes (EBIT).

Adjusted EBITDA

Adjusted EBITDA increased by $1.3 million in the first quarter of 2013, to $26.2 million, compared to $24.9 million in the first quarter of 2012. As a percentage of net sales, Adjusted EBITDA was 14.3 percent for the first quarter of 2013, compared to 13.2 percent in the year-ago quarter. The key contributors to the increase in Adjusted EBITDA were those factors discussed above under Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) and the elimination of the special item noted below, in the reconciliation of net income to EBIT, EBITDA and Adjusted EBITDA, with respect to our decision to discontinue production of certain glassware in North America and reduce manufacturing capacity at our Shreveport Louisiana manufacturing facility.

                                                                Three months ended March 31,
(dollars in thousands)                                           2013                  2012
Net income                                                 $        1,989        $          641
Add: Interest expense                                               8,435                10,408
Add: Provision provision for income taxes                             662                 3,290
Earnings before interest and income taxes (EBIT)                   11,086                14,339
Add: Depreciation and amortization                                 10,774                10,536
Earnings before interest, taxes, deprecation and
amortization (EBITDA)                                              21,860                24,875
Add: Special item before interest and taxes:
Restructuring charges (1)                                           4,880                     -
Less: Accelerated depreciation expense included in
special items and also in depreciation and amortization
above                                                                (566 )                   -
Adjusted EBITDA                                            $       26,174        $       24,875


__________________________________


(1) Relates to discontinuing production of certain glassware in North America and reducing manufacturing capacity at our Shreveport, Louisiana, manufacturing facility.

We sometimes refer to data derived from condensed 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 certain 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.


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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.
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. 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.

Net Income and Diluted Net Income Per Share

We recorded net income of $2.0 million, or $0.09 per diluted share, in the first quarter of 2013, compared to net income of $0.6 million, or $0.03 per diluted share, in the year-ago quarter. Net income as a percentage of net sales was 1.1 percent in the first quarter of 2013, compared to 0.3 percent in the year-ago quarter. The increase in net income and diluted net income per share is due to a $2.0 million reduction in interest expense and $2.6 million decrease in the provision for income taxes, partially offset by factors discussed in Earnings Before Interest and Income Taxes (EBIT) above. The reduction in interest expense is primarily the result of lower interest rates resulting from our May 2012 refinancing. The effective tax rate was 25.0 percent for the first quarter of 2013, compared to 83.7 percent in year-ago quarter. The effective tax rate was influenced by jurisdictions with recorded valuation allowances, changes in the mix of earnings in countries with differing statutory tax rates and changes in accruals related to uncertain tax positions.

Capital Resources and Liquidity

Historically, cash flows generated from operations, cash on hand and our borrowing capacity under our ABL Facility have enabled us to meet our cash requirements, including capital expenditures and working capital requirements. At March 31, 2013,


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we had no borrowings outstanding under our ABL Facility, although we had $8.5 million of letters of credit issued under that facility. As a result, we had $73.3 million of unused availability remaining under the ABL Facility at March 31, 2013. In addition, we had $45.9 million of cash on hand at March 31, 2013.

Based on our operating plans and current forecast expectations, we anticipate that our level of cash on hand, cash flows from operations and our borrowing capacity under our ABL Facility will provide sufficient cash availability to meet our ongoing liquidity needs.

As previously announced on March 22, 2013, Libbey Glass Inc. redeemed, on May 7, 2013, an aggregate principal amount of $45.0 million of our outstanding Senior Secured Notes due 2020. We funded this redemption using cash on hand and borrowings under our ABL Facility.

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