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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
or
| | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-12084
LIBBEY INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1559357
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
300 Madison Avenue, Toledo, Ohio 43604
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (419) 325-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 | |
(Cover page 1 of 2 pages)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No | |
The aggregate market value (based on the consolidated tape closing price on June
30, 2002) of the voting stock beneficially held by non-affiliates of the
registrant was approximately $533,227,292. For the sole purpose of making this
calculation, the term "non-affiliate" has been interpreted to exclude directors
and executive officers of the registrant. Such interpretation is not intended to
be, and should not be construed to be, an admission by the registrant or such
directors or executive officers that any such persons are "affiliates" of the
registrant, as that term is defined under the Securities Act of 1934.
The number of shares of common stock, $.01 par value, of the registrant
outstanding as of March 25, 2003 was 13,132,277.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's Proxy
Statement for The Annual Meeting of Shareholders to be held Thursday, May 1,
2003 ("Proxy Statement").
(Cover page 2 of 2 pages)
TABLE OF CONTENTS
-----------------
PART I
ITEM 1. BUSINESS............................................................................................... 1
ITEM 2. PROPERTIES............................................................................................. 10
ITEM 3. LEGAL PROCEEDINGS...................................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................... 10
EXECUTIVE OFFICERS OF THE REGISTRANT............................................................................... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................................................ 12
ITEM 6. SELECTED FINANCIAL DATA................................................................................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................................... 15
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................................ 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................................... 62
ITEM 11. EXECUTIVE COMPENSATION................................................................................. 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS......... 62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................... 62
ITEM 14. CONTROLS AND PROCEDURES................................................................................ 63
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K.................................................................................... 64
SIGNATURES......................................................................................................... 65
CERTIFICATIONS .................................................................................................... 67
INDEX TO FINANCIAL STATEMENT SCHEDULE.............................................................................. 71
EXHIBIT INDEX...................................................................................................... E-1
PART I
ITEM 1. BUSINESS
GENERAL
Libbey Inc. (the Company) is a leading supplier of tableware products in the
U.S. and Canada. The products are also exported to more than 75 countries.
Libbey designs and markets, under the LIBBEY(R) brand name, an extensive line of
high-quality glass tableware, ceramic dinnerware and metal flatware. Through its
subsidiary Royal Leerdam (B.V. Koninklijke Nederlandsche Glasfabriek Leerdam),
Libbey manufactures and markets high-quality glass stemware under the Royal
Leerdam(R) brand name. Libbey also manufactures and markets ceramic dinnerware
under the Syracuse(R) China brand name through its subsidiary Syracuse China.
Through its World Tableware subsidiary, Libbey imports and sells flatware,
holloware and ceramic dinnerware. Libbey designs, manufactures and distributes
an extensive line of plastic items for the foodservice industry under the
Traex(R) brand name through its subsidiary Traex Company. Through its joint
venture, Vitrocrisa, the Company has established reciprocal distribution
agreements giving Libbey exclusive distribution rights for Vitrocrisa's glass
tableware products under the Crisa(R) brand name in the U.S. and Canada, and
Vitrocrisa the exclusive distribution rights for Libbey's glass tableware
products in Latin America.
Libbey also has an agreement to be the exclusive distributor of Luigi Bormioli
glassware in the U.S. and Canada to foodservice users. Luigi Bormioli is a
highly regarded supplier of high-end glassware which is used in the finest
eating and drinking establishments.
Acquisitions have been and will be an important part of the strategy to grow
sales and profits. The Company's strategy is to be a more global provider of
glass tableware and a provider of a broader supply of products to the
foodservice industry. This strategy is primarily focused on two fronts: 1)
acquiring foodservice supply companies, enabling Libbey to become a broader
supplier of products to its foodservice distributors and 2) leveraging its
proprietary glass-making technology through joint ventures, outright
acquisitions and new green meadow facilities for international glass tableware
manufacturing.
In December 2002, the Company completed two acquisitions. Libbey acquired Traex
Company, a manufacturer and marketer of a wide-range of plastic products,
including glassware washing and storage racks, trays, dispensers and organizers
for the foodservice industry. In a separate transaction, the Company acquired
Royal Leerdam (B.V. Koninklijke Nederlandsche Glasfabriek Leerdam) a
manufacturer and marketer of high quality glass stemware. Royal Leerdam is a
leading producer of stemware in the world.
The acquisitions of the business of Libbey Canada (1993) and the joint venture
investment in Vitrocrisa (1997) have made Libbey a leading supplier of glass
tableware in North America.
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The acquisitions of Syracuse China (1995), World Tableware (1997) and Traex
(2002) have expanded the Company's portfolio of foodservice supply products. The
acquisition of Royal Leerdam (2002) will increase Libbey's global presence for
glass stemware.
PRODUCTS
Libbey's tableware products consist of glass tableware, ceramic dinnerware,
metal flatware, metal holloware and plastic items. Libbey's glass tableware
includes tumblers, stemware (which includes wine glasses), mugs, plates, bowls,
ashtrays, bud vases, salt and pepper shakers, canisters, candle holders and
various other items. The Company's plastic items include trays, dispensers,
beverage pitchers and various other items.
Vitrocrisa's glass tableware product assortment includes, in addition to the
product types produced by Libbey, glass bakeware and handmade glass tableware.
In addition, Vitrocrisa products include glass coffee pots, blender jars, meter
covers and other industrial glassware sold principally to original equipment
manufacturers.
Libbey sells high-quality stemware, including wine glasses, through its
subsidiary, Royal Leerdam. In addition, through its distribution agreement with
Luigi Bormioli, Libbey is a supplier of high-end glassware, which is used in the
finest eating and drinking establishments. Through its Syracuse China and World
Tableware subsidiaries, Libbey sells a wide range of ceramic dinnerware
products. These include plates, bowls, platters, cups, saucers and other
tableware accessories. Its World Tableware subsidiary provides Libbey an
extensive selection of metal flatware. These include knives, forks, spoons and
serving utensils. In addition, World Tableware sells metal holloware, which
includes serving trays, chafing dishes, pitchers and other metal tableware
accessories. Through its Traex subsidiary, Libbey sells a wide range of plastic
products. These include glassware washing and storage racks, trays, dispensers
and organizers for the foodservice industry.
DOMESTIC SALES
Approximately 89% of Libbey's sales are to domestic customers and are sold
domestically for a broad range of uses (see Note 13 to the consolidated
financial statements). Libbey sells both directly to end users of the product
and through networks of distributors and utilizes both a direct sales force and
manufacturers' representatives. Libbey has the largest manufacturing,
distribution and service network among North American glass tableware
manufacturers.
Libbey defines the U.S. glass tableware market to include glass beverageware,
ovenware, cookware, dinnerware, serveware, floral items, items used for
specialized packaging, handmade glassware and lead crystal valued at less than
$5 per piece. Libbey has, according to management
2
estimates, the leading market share in glass tableware sales in U.S. foodservice
applications. The majority of Libbey's tableware sales to foodservice end users
are made through a network of approximately 500 foodservice distributors. The
distributors, in turn, sell to a wide variety of foodservice establishments,
including national and regional hotel chains, national restaurant chains,
independently owned bars, restaurants and casinos. Syracuse China and World
Tableware are recognized as long-established suppliers of high quality ceramic
dinnerware and flatware, respectively. They are both among the leading suppliers
of their respective product categories to foodservice end users.
Libbey's leading customers in retail are national discount retailers. In recent
years, Libbey has been able to increase its total sales by increasing its sales
to traditional department stores and specialty housewares stores. With this
expanded retail representation, Libbey is better positioned to successfully
introduce profitable new products. Libbey also sells imported dinnerware and
metal flatware to retailers in the United States and Canada under the LIBBEY(R)
brand name. Libbey sources this ceramic dinnerware and metal flatware by
leveraging the relationships it has with its existing suppliers for World
Tableware products for foodservice applications. Libbey operates four factory
outlet stores located at or near each of its United States manufacturing
locations.
Libbey is a major supplier of glassware for industrial applications in the U.S.,
according to management estimates. Industrial uses include candle and gift
packaging, floral purposes and lighting. The craft industries and gourmet food
packing companies are also industrial consumers of glassware. Libbey has
expanded its sales to industrial users by offering ceramic items. Libbey
believes that its success with industrial applications is based on its extensive
manufacturing and distribution network, which enables it to provide superior
service, and its broad product offering, which allows Libbey to meet its
customers' desire for differentiated glassware products. The production
capabilities and broad product portfolio of Vitrocrisa enabled Libbey to expand
its product offering for its industrial customers.
Another application of Libbey's products is for use as a premium. Fast-food
restaurant chains use glassware as incentives or premiums, as an example. Libbey
believes that its success with premium customers is dependent upon custom
design, varied production capabilities and the ability to produce large
quantities of product in a short period of time.
INTERNATIONAL EXPANSION AND EXPORT SALES
Libbey exports its products through independent agents and distributors to over
75 countries around the world, competing in the tableware markets of Latin
America, Asia and Europe. Through its export operation, Libbey sells its
tableware product to foodservice, retail and premium customers internationally.
3
Libbey's export sales, which include sales to customers in Canada, represent
approximately 11% of total sales in 2002. Libbey believes that expanding its
sales to export markets represents an important growth opportunity for the
future. The information set forth in Note 13 to the Consolidated Financial
Statements under "Industry Segment Information" on page 60.
The acquisition of Royal Leerdam is expected to increase Libbey's penetration in
the global market for glass stemware and, in addition, expand the selection of
glass tableware products offered by Libbey to customers world-wide.
Libbey currently has technical service agreements with foreign glass tableware
companies. These agreements cover areas ranging from manufacturing and
engineering assistance to support in functions such as marketing, sales and
administration. During 2002, Libbey's technical assistance agreements and
licenses produced royalties of $2.4 million. Libbey also sells machinery,
primarily glass-forming machinery, to various parties.
MANUFACTURING
Libbey owns and operates three glass tableware manufacturing plants in the
United States located in Toledo, Ohio; Shreveport, Louisiana and City of
Industry, California and a glass tableware manufacturing plant in Leerdam,
Netherlands. Libbey owns and operates a ceramic dinnerware plant in Syracuse,
New York, and a plastics plant in Dane, Wisconsin. Libbey operates distribution
centers located at or near each of its manufacturing facilities (See
"Properties"). In addition, Libbey operates distribution centers for its
Vitrocrisa-supplied products in Laredo, Texas and World Tableware products near
Chicago, Illinois.
The glass tableware manufacturing and distribution centers are strategically
located (geographically) to enable Libbey to supply significant quantities of
its product to virtually all of its customers in a short period of time. Libbey
is the only glass tableware producer operating more than two manufacturing
facilities in the United States.
The manufacture of Libbey's glass tableware products involves the use of
automated processes and technologies. Much of Libbey's glass tableware
production machinery was designed by Libbey and has evolved and been
continuously refined to incorporate technology advancements. During 2002, Libbey
fully installed new production equipment that uses new technology in the
glassmaking arena. In addition, Libbey has installed robotics technology in
certain of its labor-intensive manufacturing and warehousing processes. Libbey
believes that its production machinery and equipment continue to be adequate for
its needs in the foreseeable future. The Company continues to invest in
equipment to further increase its production and distribution efficiency and
streamline its cost profile. In addition, the Company invested $60.9 million in
the acquisitions of Traex and Royal Leerdam.
4
Libbey's glass tableware products are generally produced using one of two
manufacturing methods or, in the case of certain stemware, a combination of such
methods. Most of Libbey's tumblers and stemware and certain other glass
tableware products are produced by forming molten glass in molds with the use of
compressed air and are known as "blown" glass products. Libbey's other glass
tableware products and the stems of certain of its stemware are "pressware"
products, which are produced by pressing molten glass into the desired product
shape.
Ceramic dinnerware is also produced through the forming of raw materials into
the desired product shape and is either manufactured at Libbey's Syracuse, New
York production facility or imported by World Tableware primarily from China,
Malaysia and Bangladesh. Libbey installed a new fast-fire kiln technology at
Syracuse China during 2001, resulting in increased production speeds and yields,
lower operating costs and a faster new product development cycle. The investment
was the single largest capital project at Syracuse China since Libbey purchased
the business in 1995. All metal flatware and metal holloware are sourced by
Libbey's World Tableware subsidiary primarily from China. Plastic products are
also produced through the forming of raw materials into the desired shape and
are manufactured at Libbey's Dane, Wisconsin production facility or imported
primarily from Taiwan, China and Malaysia.
Libbey employs a team of engineers whose responsibilities include efforts to
improve and upgrade Libbey's manufacturing facilities, equipment and processes.
In addition, they provide engineering required to manufacture new products and
implement the large number of innovative changes continuously being made to
Libbey's product designs, sizes and shapes.
The raw materials used by Libbey, which are principally, sand, lime, soda ash,
clay, resins and colorants, have historically been available in adequate supply
from multiple sources. However, for certain raw materials, there may be
temporary shortages due to weather or other factors, including disruptions in
supply caused by raw material transportation or production delays. Such
shortages have not previously had, and are not expected to have, a material
adverse effect on Libbey's operations in the future. Natural gas is a primary
source of energy in Libbey's production processes, and variability in the price
for natural gas can have an impact on its profitability. Historically, the
Company has used natural gas hedging contracts to partially mitigate this
impact.
SALES AND MARKETING
Libbey has its own sales staff of over 80 Libbey sales professionals located in
various metropolitan areas throughout the U.S., Canada and the Netherlands who
call on customers and distributors. In addition, Libbey retains the services of
manufacturing representatives' organizations to assist in selling its products.
Libbey also maintains an export sales group covering other geographic markets.
The vast majority of Libbey's tableware sales to foodservice end users are made
through approximately 500 distributors, who serve a vital function in the
distribution of Libbey's products and
5
with whom Libbey works closely in connection with marketing and selling efforts.
Most of Libbey's retail, industrial and premium market sales are made directly
by Libbey's sales force.
Libbey also has a marketing staff located at its corporate headquarters in
Toledo, Ohio, engaged in developing strategies relating to product development,
pricing, distribution, advertising and sales promotion.
CUSTOMERS
The customers for Libbey's tableware products include approximately 500
foodservice distributors. In addition, Libbey sells to mass merchants,
department stores, retail distributors, national retail chains and specialty
housewares stores, supermarkets and industrial companies and others who use
Libbey's products for promotional and other private uses. No single customer
accounts for 10% or more of Libbey's sales, although the loss of any of Libbey's
major customers could have a meaningful effect on Libbey. Sales for premium
applications, which totaled 2% of net sales in 2002, tend to be more
unpredictable from year to year; and Libbey is less dependent on such business
than it is on sales to foodservice, retail and industrial customers.
COMPETITORS
Libbey's business is highly competitive, with the principal competitive factors
being customer service, brand name, product quality, new product development,
delivery time and price. Competitors in glass tableware include among others Arc
International, a private French company; Indiana Glass Company (a unit of
Lancaster Colony Corporation); Oneida Ltd., Anchor Hocking (a unit of Newell
Rubbermaid Inc.) and Bormioli Rocco Group. Arc International distributes glass
tableware to U.S. foodservice customers through Cardinal International, Inc.
Indiana Glass Company manufactures in the United States and sells a wide variety
of glassware. Oneida Ltd. operates by sourcing glass tableware from foreign
manufacturers, including Pasabahce (Turkey), Schott (Germany) and Calp (Italy).
Anchor Hocking is primarily a supplier of glass beverageware and bakeware to
retail markets in the U.S. Bormioli Rocco Group manufactures glass tableware in
Europe and most of its sales are to retail and foodservice customers in Europe.
In recent years, Libbey has experienced increasing competition from foreign
glass tableware manufacturers, including Arc International (France), Kedaung
(Indonesia), and Pasabahce (Turkey) as well as various factories from the
People's Republic of China. In addition, other materials, such as plastics, also
compete with glassware.
Competitors in U.S. ceramic dinnerware include among others Homer Laughlin (a
private U.S. company) and Rego China and Buffalo China (units of Oneida Ltd.).
Competitors in metal flatware are Oneida Ltd. and various importing companies.
Competitors in plastic products are among others Cambro Manufacturing Company (a
private U.S. company) and Carlisle Companies
6
Incorporated. Some of Libbey's competitors have substantially greater financial
and other resources than Libbey.
PATENTS, TRADEMARKS AND LICENSES
Based upon market research and market surveys, Libbey believes its Libbey trade
name as well as product shapes and styles enjoy a high degree of consumer
recognition and are valuable assets. Libbey believes that the Libbey, Syracuse
China, World Tableware, Royal Leerdam and Traex trade names are material to its
business.
Libbey has rights under a number of patents which relate to a variety of
products and processes. Libbey does not consider that any patent or group of
patents relating to a particular product or process is of material importance to
its business as a whole.
SEASONALITY
Due primarily to the impact of consumer buying patterns and production activity,
Libbey's profits tend to be strongest in the third quarter and weakest in the
first quarter of each year. As a consequence, profits typically range between
32% and 47% in the first half of each year and 53% to 68% in the second half of
the year.
ENVIRONMENTAL MATTERS
Libbey's operations, in common with those of industry generally, are subject to
numerous existing and proposed laws and governmental regulations designed to
protect the environment, particularly regarding plant wastes and emissions and
solid waste disposal. Libbey has shipped, and continues to ship, waste materials
for off-site disposal. However, Libbey is not named as a potentially responsible
party with respect to any waste disposal site matters pending prior to June 24,
1993, the date of Libbey's initial public offering and separation from
Owens-Illinois, Inc. ("Owens-Illinois"), Owens-Illinois has been named as a
potentially responsible party or other participant in connection with certain
waste disposal sites to which Libbey may also have shipped wastes and bears some
responsibility. Owens-Illinois has agreed to defend and hold harmless the
Company against any costs or liabilities it may incur in connection with any
such matters identified and pending as of June 24, 1993 and to indemnify it for
any liability which results from these matters in excess of $3 million. Libbey
believes that if it is necessary to draw upon this indemnification, collection
is probable.
Pursuant to this indemnification agreement, Owens-Illinois is defending the
Company with respect to the King Road landfill. In January 1999, a suit was
instituted by the Board of Lucas County Ohio
7
Commissioners against Owens-Illinois, the Company and numerous other defendants
(59 companies named in the complaint as potentially responsible parties) in the
United States District Court for the Northern District of Ohio seeking to
recover contribution for past and future costs incurred by the County in
response to the release or threatened release of hazardous substances at the
King Road landfill formerly operated and closed by the County. The complaint was
dismissed without prejudice in October 2000; and at the time of the dismissal,
it was anticipated the suit would be refiled at a future date when more
information as to the appropriate environmental remedy becomes available.
However, as of this date, refiling of the suit does not appear imminent, and the
attorneys for the Lucas County Commissioners and the attorneys for the Ohio
Environmental Protection Agency are still discussing remedies. In view of the
uncertainty as to refiling of the suit, the numerous defenses which may be
available against the County on the merits of its claim for contribution, the
uncertainty as to the environmental remedy, and the uncertainty as to the number
of potentially responsible parties, at the present time it is not possible to
quantify any exposure the Company may have at King Road.
Subsequent to June 24, 1993, Libbey has been named a potentially responsible
party at four other sites, all of which have been settled for immaterial
amounts. No further sums are expected to be paid with respect to these sites
unless unusual and unanticipated contingencies occur.
On October 10, 1995, Syracuse China Company, a wholly owned subsidiary of the
Company, acquired from The Pfaltzgraff Co. and certain of its subsidiary
corporations, the assets operated by them as Syracuse China. The Pfaltzgraff Co.
entered into an Order on Consent effective November 1, 1994, with the New York
State Department of Environmental Conservation (DEC) which requires Pfaltzgraff
to prepare a Remedial Investigation and Feasibility Study (RI/FS) to develop a
remedial action plan for the site (which includes among other items a landfill
and wastewater and sludge ponds and adjacent wetlands located on the property
purchased by Syracuse China Company) and to remediate the site. As part of the
Asset Purchase Agreement, the Syracuse China Company agreed to share a part of
the remediation and related expense up to a maximum of fifty percent of such
costs with a maximum limit for Syracuse China Company of $1,350,000 that has
been paid. Notwithstanding the foregoing Syracuse China Company is not a party
to the decree. Construction of the approved remedy began in 2000 and is expected
to be completed in 2003.
In addition, Syracuse China Company has been named as a potentially responsible
party by reason of its potential ownership of certain property adjoining its
plant, which has been designated a sub-site of a superfund site. Libbey believes
that any contamination of such sub-site was caused by and will be remediated by
other parties at no cost to Syracuse China. Such other parties have acquired
ownership of the sub-site which should end any responsibility of Syracuse China
with respect to the sub-site. In any event, any expense with respect to such
sub-site for which Syracuse China may be deemed responsible would likely be
shared with Pfaltzgraff pursuant to the Asset Purchase Agreement.
8
Libbey regularly reviews the facts and circumstances of the various
environmental matters affecting Libbey, including those which are covered by
indemnification. Although not free of uncertainties, Libbey believes that its
share of the remediation costs at the various sites, based upon the number of
parties involved at the sites and the estimated cost of undisputed work
necessary for remediation based upon known technology and the experience of
others, will not be material to Libbey. There can be no assurance, however, that
Libbey's future expenditures in such regard will not have a material adverse
effect on Libbey's financial position or results of operations.
In addition, occasionally the federal government and various state authorities
have investigated possible health issues that may arise from the use of lead or
other ingredients in enamels such as those used by Libbey on the exterior
surface of its decorated products. Capital expenditures for property, plant and
equipment for environmental control activities were not material during 2002.
Libbey believes that it is in material compliance with all federal, state and
local environmental laws, and Libbey is not aware of any regulatory initiatives
that would be expected to have a material effect on Libbey's products or
operations.
NUMBER OF EMPLOYEES
Libbey employed approximately 3,800 persons at December 31, 2002. A majority of
the glass tableware employees are U.S.-based hourly workers covered by six
collective bargaining agreements, which were entered into in the fourth quarter
of 2001 and expire at various times during the fourth quarter of 2004 at two
manufacturing locations and the fourth quarter of 2006 at a third manufacturing
location. Substantially all Royal Leerdam employees are covered by a collective
bargaining agreement expiring in July 2004. The ceramic dinnerware hourly
employees are covered by a collective bargaining agreement, which expires in
March 2006. Libbey considers its employee relations to be good.
PUBLIC FILINGS
Copies of the Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports are available
for no charge through the Company's website at www.libbey.com.
9
ITEM 2. PROPERTIES
The following information sets forth the location of the Company's principal
manufacturing and distribution facilities at December 31, 2002. The Company also
operates distribution facilities at or near each of its manufacturing facilities
as well as at the distribution centers set forth below:
Manufacturing and Distribution Facilities
-----------------------------------------
Syracuse, New York
Toledo, Ohio
Shreveport, Louisiana
City of Industry, California
Dane, Wisconsin
Leerdam, Netherlands
Distribution Centers
--------------------
Laredo, Texas
West Chicago, Illinois
The Company's headquarters, some warehouses, sales offices and an outlet store
are located in leased space.
All of the Company's operating properties are currently being utilized for their
intended purpose and are owned in fee. The Company believes that its facilities
are well maintained and adequate for its planned production requirements at
those facilities over the next three to five years.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings arising in the
ordinary course of its business. No pending legal proceeding is deemed to be
material to the Company.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and the ages, positions and offices held (as of
the date hereof), and a brief account of the business experience of each
executive officer of the Company.
NAME AGE POSITION
John F. Meier 55 Chairman of the Board and Chief Executive Officer since June
Chairman and Chief 1993; Executive Vice President and General Manager from December
Executive Officer 1990 to June 1993.
56 Executive Vice President and Chief Operating Officer since
Richard I. Reynolds November 1995; Vice President and Chief Financial Officer from
Executive Vice President and June 1993 to November 1995; Vice President and Director of
Chief Operating Officer Finance and Administration from January 1989 to June 1993.
Arthur H. Smith 67 Vice President, General Counsel and Secretary since June 1993;
Vice President, General Secretary of the Company since 1987 and Senior Counsel and
Counsel and Secretary Assistant Secretary of Owens-Illinois, Inc. from 1987 to June 1993.
Kenneth G. Wilkes 45 Vice President, Chief Financial Officer and Head-International
Vice President, Chief Financial Operations since January 2003; Vice President and Chief
Officer and Head-International Financial Officer from November 1995 to January 2003; Vice
Operations President and Treasurer from August 1993 to November 1995.
Previously employed as Senior Corporate Banker, Vice President
with The First National Bank of Chicago from 1981.
Kenneth A. Boerger 45 Vice President and Treasurer since July 1999. From 1994 to July
Vice President and Treasurer 1999 was Corporate Controller and Assistant Treasurer. From
1980 to 1994 held various financial and accounting positions.
11
John A. Zarb 51 Vice President and Chief Information Officer since April 1996.
Vice President and Chief From 1991 to April 1996 employed by AlliedSignal Inc. in
Information Officer information technology senior management positions in Europe
and the U.S.
Daniel P. Ibele 42 Vice President, General Sales Manager since March 2002; Vice
Vice President, General Sales Manager President, Marketing and Specialty Operations from September
1997 to March 2002; Vice President and Director of Marketing
from 1995 to 1997. From 1983 to 1995 held various marketing and
sales positions.
Timothy T. Paige 45 Vice President-Administration since December 2002; Vice President and
Vice President-Administration Director of Human Resources from January 1997 to December 2002;
Director of Human Resources from May 1995 to January 1997. From 1985
to May 1995 employed by Frito-Lay, Inc. in human resources management
positions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Libbey Inc. common stock is listed for trading on the New York Stock Exchange
under the symbol LBY. The price range for the Company's common stock on the New
York Stock Exchange as reported by the New York Stock Exchange was as follows:
--------------------- ------------------------- ----------------------------
2002 2001
High Low High Low
--------------------- ------------ ----------- ------------- -------------
First Quarter $40.10 $31.35 $33.56 $27.80
Second Quarter $40.00 $32.88 $42.20 $27.80
Third Quarter $34.08 $26.80 $39.95 $28.20
Fourth Quarter $31.86 $23.72 $35.60 $27.00
--------------------- ------------ ----------- ------------- -------------
12
On March 1, 2003, there were 1,055 registered common shareholders of record. The
Company has paid a regular quarterly cash dividend of $.075 per share beginning
with the fourth quarter of 1993. On January 10, 2003, the Company announced that
it has increased its regular quarterly dividend from $.075 per share to $.10 per
share in 2003. However, the declaration of future dividends is within the
discretion of the Board of Directors of the Company and will depend upon, among
other things, business conditions, earnings and the financial condition of the
Company.
EQUITY COMPENSATION PLAN INFORMATION:
------------------------------------ ---------------------------- ------------------------------- ---------------------------
Plan Category Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding options, remaining available for
warrants and rights warrants and rights future issuance
------------------------------------ ---------------------------- ------------------------------- ---------------------------
(a) (b) (c)
------------------------------------ ---------------------------- ------------------------------- ---------------------------
Equity compensation plans approved
by security holders 1,646,799 $25.73 546,924*
Equity compensation plans not
approved by security holders 0 0 0
------------------------------------ ---------------------------- ------------------------------- ---------------------------
Total 1,646,799 $25.73 546,924*
------------------------------------ ---------------------------- ------------------------------- ---------------------------
* This total includes 350,000 securities available for future issuance under the
Libbey Inc 2002. Employee Stock Purchase Plan (ESPP) as of December 31, 2002.
The amount of securities available for issue under this plan will increase each
year by up to 100,000 common shares commencing January 1, 2003 and ending
January 1, 2012 to an aggregate maximum of 1,350,000 common shares subject to
issuance under the plan. At of December 31, 2002, there were no options,
warrants or rights outstanding to purchase securities under this plan.
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 8. Financial Statements and Supplementary
Data.
Dollars in thousands, except per-share amounts 2002(d) 2001 2000 1999 1998
- ------------------------------------------------- --------- --------- --------- -------- --------
Operating Results
Net sales $433,761 $419,594 $441,828 $460,592 $436,522
Freight billed to customers 1,732 2,085 2,274 2,609 1,191
Total revenues 437,897 425,420 448,786 467,598 440,739
Cost of sales 327,565 307,255 306,003 324,242 323,140
Selling, general and administrative expenses 56,631 55,716 61,185 64,131 54,191
Capacity realignment charges -- -- -- 991 20,046
Income from operations 53,701 62,449 81,598 78,234 43,362
Equity earnings - pretax 6,379 6,384 12,016 8,857 12,300
Expenses related to abandoned acquisition (13,634) -- -- -- --
Other income (expenses) -- net (1,510) (241) (919) 13 1,493
Earnings before interest and income taxes (EBIT) 44,936 68,592 92,695 87,104 57,155
Interest expense -- net 8,263 9,360 12,216 12,501 12,674
Income before income taxes 36,673 59,232 80,479 74,603 44,481
Provision for income taxes 8,618 19,840 33,613 31,175 19,038
Net income (loss) (d) 28,055 39,392 46,866 43,428 25,443
Net cash provided by operating activities 54,205 51,308 36,898 68,956 52,232
Per-Share Amounts
Basic net income 1.84 2.58 3.07 2.69 1.45
Diluted net income 1.82 2.53 3.01 2.64 1.42
Dividends paid 0.30 0.30 0.30 0.30 0.30
Other Information
EBIT 44,936 68,592 92,695 87,104 57,155
EBITDA 64,079 87,435 111,047 105,857 76,661
Depreciation 17,262 15,157 14,055 14,717 15,852
Amortization (d) 1,881 3,686 4,297 4,036 3,654
Capital expenditures 16,739 35,241 18,096 9,428 17,486
Dividends paid 4,574 4,588 4,569 4,821 5,253
Employees (average) (c) 3,510 3,218 3,270 3,552 3,969
Balance Sheet Data
Total assets 524,527 468,082 446,707 434,395 439,671
Working capital (a) 83,260 83,421 95,177 77,794 75,930
Long-term debt (b) 188,403 2,517 151,404 170,000 176,300
Shareholders' equity 140,218 165,365 133,271 91,843 94,860
(a) Current assets less current liabilities excluding short-term debt.
(b) At December 31, 2001, the company classified $143.0 million of debt
outstanding under its bank facility as short term which was refinanced on a
long-term basis in April 2002.
(c) In 2002, includes Traex and Royal Leerdam employees.
(d) Effective January 1, 2002, the company adopted SFAS 142, "Goodwill and
Other Intangible Assets." The detail of the impact of the adoption are
identified in Footnote 2 of the Notes to Consolidated Financial Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HISTORICAL FINANCIAL DATA
- -------------------------
The following table presents certain results of operations data for Libbey for
the periods indicated:
YEAR ENDED DECEMBER 31,
(dollars in thousands) 2002 2001 2000
- ---------------------------------------------- ------------- -------------- --------------
Net sales $433,761 $419,594 $441,828
Gross profit $107,928 $114,424 $138,099
As a percent of sales 24.9% 27.3% 31.3%
Income from operations $53,701 $62,449 $81,598
As a percent of sales 12.4% 14.9% 18.5%
Earnings before interest and
income taxes before write off of
acquisition related expenses $58,570 $68,592 $92,695
As a percent of sales 13.5% 16.3% 21.0%
Earnings before interest
and income taxes $44,936 $68,592 $92,695
As a percent of sales 10.4% 16.3% 21.0%
Net income $28,055 $39,392 $46,866
As a percent of sales 6.5% 9.4% 10.6%
- ---------------------------------------------- ------------- -------------- --------------
Management is not aware of any events or uncertainties that are likely to have a
material impact on the company's prospective results of operations or financial
condition; however, major slowdowns in the retail, travel, or entertainment
industries could result from the impact of armed hostilities or any other
international or national calamity, including any act of terrorism. Additional
risk factors are discussed in Other Information in the section "Qualitative and
Quantitative Disclosures about Market Risk."
RESULTS OF OPERATIONS
COMPARISON OF 2002 WITH 2001 Net sales for 2002 increased 3.4% to $433.8 million
from $419.6 million in 2001. A 19% increase in sales to retail customers was a
key contributor. This increase more than offset lower sales to industrial
customers which are primarily candle companies. Foodservice sales were up
slightly for the year and showed solid growth in the fourth quarter. Libbey's
export sales, which include sales to Canada, were $46.1 million, a decrease of
3.4% compared to 2001.
GROSS PROFIT (defined as net sales plus freight billed to customers less cost of
sales) declined 5.7% to $107.9 million compared to $114.4 million in 2001 and as
a percent of net sales was 24.9% in
15
2002 as compared to 27.3% in 2001. The decline in gross profit margin is
primarily due to greater sales of products with lower profit margins, lower
pension income, higher nonpension postretirement expense and higher
manufacturing labor expenses. Lower pension income and higher nonpension
postretirement expense reduced gross profit by $4.1 million in 2002 compared to
the prior year.
INCOME FROM OPERATIONS decreased to $53.7 million in 2002 from $62.4 million in
2001 and as a percent of net sales was 12.4% in 2002 compared to 14.9% in 2001.
This reduction was the result of lower gross profit, higher lease cost of $1.2
million related to the company's corporate offices in 2002 and higher general
and administrative expenses. Lower pension income and an increase in nonpension
postretirement expense were the primary factors in the increase in general and
administrative expenses which reduced income from operations by $0.3 million. In
2002, the company recorded lower expenses related to the amortization of
intangibles pursuant to the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142)
of $1.1 million, which partially offset the higher general and administration
expenses.
EARNINGS BEFORE INTEREST AND INCOME TAXES (EBIT) were $44.9 million compared to
$68.6 million in 2001 and as a percent of net sales were 10.4% as compared to
16.3% in the year-ago period. In addition to the lower income from operations,
the most significant factor in the reduction was a $13.6 million pretax expense
related to the legal, advisory and financing fees associated with the abandoned
acquisition of Anchor Hocking. Excluding these expenses, the company's EBIT, as
a percent of net sales, would have been 13.5% compared to 16.3% in 2001. Due to
the unusual nature and magnitude of these expenses related to the abandoned
acquisition, management believes exclusion of these expenses is necessary for a
more meaningful comparison of EBIT as a percent of net sales in 2001. The
company's earnings from equity affiliates remained flat at $6.4 million pretax
compared to 2001. The company's equity affiliates are primarily its investment
in Vitrocrisa, the company's joint venture in Mexico. Vitrocrisa's performance
was impacted by a sluggish economy in Mexico and increased competition from
foreign markets. Other expenses increased to $1.5 million from $0.2 million in
the prior-year period, largely as a result of a write-down in the value of an
advance made to a supplier.
NET INCOME was $28.1 million, or $1.82 per share on a diluted basis, compared to
$39.4 million or $2.53 per share on a diluted basis in the year-ago period. As a
percent of net sales, net income was 6.5% in 2002 compared to 9.4% in 2001.
Excluding the expenses related to the abandoned acquisition, net income and
diluted earnings per share for 2002 would have been $36.6 million and $2.37,
respectively. Due to the unusual nature and magnitude of the expenses related to
the abandoned acquisition, management believes exclusion of these expenses is
necessary for a more meaningful comparison of net income to 2001. The company
experienced lower interest expense and income taxes in 2002 compared to prior
year. Interest expense was due to lower average debt levels and a decline in
interest rates. The company's effective tax rate declined to 23.5% in 2002 from
33.5% in 2001. The reduction was primarily attributable to lower Mexican tax,
the elimination
16
of non-deductible goodwill amortization and an adjustment to estimated U.S.
income tax accruals. The reduction in Mexican tax is primarily attributable to
deferred tax adjustments and reduced statutory tax rates in Mexico.
COMPARISON OF 2001 WITH 2000 Net sales for 2001 were $419.6 million compared to
net sales of $441.8 million in 2000. Solid growth in retail sales only partially
offset lower sales to industrial customers, as a result of sluggish economic
conditions, and the negative impact on sales to foodservice customers related to
the events of September 11, 2001. Libbey's export sales, which include sales in
Canada, decreased to $47.7 million from $51.8 million in 2000. This decrease was
the result of the impact of a strong U.S. dollar on the price competitiveness of
the company's products and weak economic conditions in key export markets.
GROSS PROFIT (defined as net sales plus freight billed to customers less cost of
sales) was $114.4 million in 2001 compared to $138.1 million in 2000 and as a
percent of net sales was 27.3% in 2001 compared to 31.3% in 2000. Reduced sales,
an unfavorable sales mix, higher energy costs and lower utilization of the
company's glassware plants related to efforts to control inventories were the
primary contributors to lower gross profit.
INCOME FROM OPERATIONS was $62.4 million in 2001 compared to $81.6 million in
2000 and as a percent of net sales was 14.9% compared to 18.5% in the year-ago
period. An 8.9% reduction in selling, general and administrative expenses to
$55.7 million from $61.2 million only partially offset the reduction in gross
profit.
EARNINGS BEFORE INTEREST AND INCOME TAXES (EBIT) was $68.6 million in 2001
compared to $92.7 million in 2000 and as a percent of net sales was 16.3%
compared to 21.0% in the year-ago period. The decrease was attributable to a
decline in income from operations and lower equity earnings due to lower
operating profits at Vitrocrisa, the company's joint venture in Mexico.
Vitrocrisa's lower profits were attributable to lower sales resulting from a
weaker economy in Mexico and the negative impact of a strong Mexican peso on
domestic and international sales, higher energy costs and lower factory
utilization.
NET INCOME was $39.4 million in 2001 compared with $46.9 million in 2000, and as
a percent of net sales was 9.4% compared to 10.6% in the year-ago period. Lower
interest expense and a reduction in the effective tax rate to 33.5% from 41.8%
in the year-ago period only partially offset reduced income from operations and
lower equity earnings. The reduction in the company's effective tax rate is
primarily attributable to lower foreign taxes and state tax credits related to
capital expansion programs.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Libbey's financial condition at year-end 2002 reflects the effects of the
company's strong cash flow from operations. Net cash provided by operating
activities increased to $54.2 million from $51.3 million in 2001. The company
recorded another year of efficient use of working capital. Excluding
17
the
acquisitions, inventories remained at $96.9 million in 2002, equal to the 2001
year-end balance and accounts receivable were $41.5 million in 2002 compared to
$44.1 million in 2001. Compared to the year-ago period, inventories increased by
$12.7 million and accounts receivable increased by $5.9 million, both entirely
attributable to the acquisitions of Traex and Royal Leerdam in 2002. Accounts
payable decreased by $1.5 million compared to 2001.
Capital expenditures were $16.7 million in 2002 compared with $35.2 million in
2001. Capital expenditures for 2003 are expected to be in the range of $35 to
$40 million as the company increases its investment in higher productivity and
labor saving machinery and equipment. The company repurchased 935,600 shares of
its common stock in 2002 for $26.8 million. Since mid-1998, the company has
repurchased 3,625,000 shares for $102.2 million. At year-end 2002, authorization
from the company's Board of Directors remained for the purchase of an additional
2,500,000 shares. On February 18, 2003, the company announced commencement of a
modified Dutch Auction tender offer to purchase up to 1,500,000 shares of its
outstanding common stock pursuant to the previously mentioned 2,500,000 share
authorization. The company purchased 1,500,000 shares at a purchase price of
$25.50 per share. This purchase was funded through the company's Amended and
Restated Revolving Credit Agreement (Revolving Credit Agreement or Agreement).
Libbey had total debt of $191.2 million at December 31, 2002, compared with
$148.0 million at December 31, 2001. The increase was primarily attributable to
the purchase of Traex and Royal Leerdam partially offset by the net cash
provided from operations. Libbey had additional debt capacity of $59.3 million
at December 31, 2002, under its Revolving Credit Agreement. Libbey has entered
into interest rate protection agreements with respect to $100 million of its
debt. The average fixed rate of interest under these interest rate protection
agreements is 5.8% and the total interest rate, including applicable fees, is
6.8%. The average maturity of these interest rate protection agreements is 2.3
years at December 31, 2002.
Of Libbey's outstanding indebtedness, $88.7 million is subject to fluctuating
interest rates at December 31, 2002. A change of one percentage point in such
rates would result in a change in interest expense of approximately $0.9 million
on an annual basis. The company is not aware of any trends, demands, commitments
or uncertainties that will result or that are reasonably likely to result in a
material change in Libbey's liquidity. The company believes that its cash from
operations and available borrowings under the Revolving Credit Agreement and
other short-term lines of credit will be sufficient to fund its operating
requirements, capital expenditures and all other obligations (including debt
service and dividends) throughout the remaining term of the Revolving Credit
Agreement.
In September 2001, the company issued a $2.7 million promissory note in
connection with the purchase of a warehouse facility. At December 31, 2002, the
company had $2.5 million outstanding on the promissory note. During 2003, $0.1
million of the principal is payable.
18
The following table presents the company's existing contractual obligations and
commercial commitments:
Payments Due by Period
Contractual 2 - 3 4 - 5 After 5
Obligations Total 1 Year Years Years Years
----------- ------ ------ ------ ----- ------
Debt $188.5 $0.1 $186.3 $0.3 $1.8
Operating Leases 15.3 4.4 5.4 2.5 3.0
------ ------ ------ ----- ------
Total Obligations $203.8 $4.5 $191.7 $2.8 $4.8
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
company believes that of its significant accounting policies (see Note 2 to the
consolidated financial statements), the following may involve a higher degree of
judgment and complexity. As part of the Audit Committee of the Board of
Directors' regular review of the financial reporting of the company, senior
management has reviewed the Critical Accounting Policies and Management's
Discussion and Analysis of Financial Condition and Results of Operations with
the Audit Committee of the Board of Directors.
DERIVATIVES
The company holds derivative financial instruments to hedge certain of its
interest rate risks associated with long-term debt, commodity price risks
associated with forecasted future natural gas requirements and foreign exchange
rate risks associated with transactions denominated in a currency other than the
U.S. dollar. These derivatives have been designated as cash flow hedges and
qualify for hedge accounting as discussed in detail in Notes 2 and 9 to the
consolidated financial statements. As such, the fair value of these cash flow
hedges are recorded on the balance sheet at fair value with a corresponding
change in accumulated other comprehensive income (loss), net of related tax
effects. The company does not participate in speculative derivatives trading.
While the company intends to continue to meet the conditions for hedge
accounting, if hedges do not qualify as highly effective or if the company does
not believe that forecasted transactions would occur, the changes in the fair
value of the derivatives used as hedges would be reflected in earnings.
Information about fair values, notional amounts and contractual terms of these
instruments can be found in Notes 2 and 9 to the company's consolidated
financial statements and the section titled "Qualitative and Quantitative
Disclosures About Market Risk."
19
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.
PENSION PLANS AND NONPENSION POSTRETIREMENT BENEFITS
The company accounts for its defined benefit pension plans in accordance with
SFAS No. 87, "Employers' Accounting for Pensions" (SFAS No. 87), which requires
that amounts recognized in financial statements be determined on an actuarial
basis.
A significant element in determining the company's pension expense (income) in
accordance with SFAS No. 87 is the expected return on plan assets. The company
assumes that the expected long-term rate of return on plan assets will be 9.0%.
Since the pension plans' inception in 1993, the company's pension plan assets
have earned an average annual return of 9.2%. A change of .50% in the expected
long-term rate of return on plan assets will change pension expense (income) by
approximately $1.0 million based on year-end data. The assumed long-term rate of
return on assets is applied to a calculated value of plan assets, which
recognizes gains and losses in the fair value of plan assets compared to
expected returns over the next five years. This produces the expected return on
plan assets that is included in pension expense (income). The difference between
the expected return and the actual return on plan assets is deferred and
amortized over five years. The net deferral of past asset gains (losses) affects
the calculated value of plan assets and, ultimately, future pension expense
(income). The plan assets have earned an actual rate of return of less than 9.0%
in the last two years. Pension expense (income) in 2003 is expected to be $2.2
million (excluding expenses for Royal Leerdam which was acquired in December
2002) compared to $(3.7) million in 2002 and $(7.1) million in 2001. This is a
result of the lower return on plan assets, additional benefits granted to
unionized employees during labor negotiations in 2001 and a change in the
discount rate discussed below.
At the end of each year, the company determines the discount rate to be used to
discount plan liabilities. The discount rate reflects the current rate at which
the pension liabilities could be effectively settled at the end of the current
year. In estimating this rate, the company reviews rates of return on high
quality, fixed-income investments as a benchmark. At December 31, 2002, the
company determined this rate to be 6.75%. The discount rate used in 2001 was
7.50%. The effect of each .25% change in the discount rate would effect pension
expense by approximately $0.2 million.
The company has not made contributions to the pension plans since their
inception in 1993. And the company does not anticipate making cash contributions
in 2003. However, if weak investment returns related to depressed global stock
markets and historically low discount rates persist, cash contributions may be
required after 2003. It is difficult to estimate potential cash contributions,
as such amounts are a function of actual investment returns, withdrawals from
the plans, changes in interest rates and other factors uncertain at this time.
However, the company believes it is likely that any cash contribution in 2004
would not be material.
20
At December 31, 2002, the fair value of the company's pension assets was $172.8
million down from $198.4 million at the end of 2001.
The company also provides certain postretirement health care and life insurance
benefits covering substantially all salaried and hourly employees which are
accounted for in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." Employees are generally eligible
for benefits upon retirement and completion of a specified number of years of
creditable service. Benefits for most hourly retirees are determined by
collective bargaining. Under a cross-indemnity agreement, Owens-Illinois, Inc.
assumed liability for the nonpension postretirement benefits of company retirees
who had retired as of June 18, 1993.
The company uses various actuarial assumptions including the discount rate and
the expected trend in health care costs to estimate the costs and benefit
obligations for its retiree health plan. In estimating the discount rate, the
company reviews rates of return on high quality, fixed-income investments as a
benchmark. At December 31, 2002, the company determined this rate to be 6.75%.
The discount rate used in 2001 was 7.50%. The effect of a .25% change in the
discount rate would have no material change to health care expense. Assumed
health care cost inflation is based on an initial rate of 10.0% decreasing to an
ultimate rate of 5.0% over five years. A 1% percent change in these rates would
have changed the nonpension postretirement expense by $0.1 million.
In 2002, the company recorded expense (income) for nonpension postretirement
benefit costs of $0.9 million, as compared to $(0.04) million in 2001. The
company expects to record an expense of $2.0 million (excluding expenses for
Royal Leerdam which was acquired in December 2002) in 2003 for nonpension
postretirement benefit costs.
SALES INCENTIVE PROGRAMS
The company offers various sales incentive programs to a broad base of
customers. These programs typically offer incentives for purchase activities by
customers that include growth objectives. The company records accruals for these
incentives as sales occur. Criteria for payment include customers achieving
certain purchase targets and purchasing particular product types. Management
regularly reviews the adequacy of the accruals based on current customer
purchases, targeted purchases and payout levels. The majority of amounts paid to
customers typically occur in the third quarter.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risks due to changes in currency values,
although the majority of the company's revenues and expenses are denominated in
the U.S. dollar. The currency market risks include devaluations and other major
currency fluctuations relative to the U.S. dollar, euro or
21
Mexican peso that could reduce the cost competitiveness of the company's
products or that of Vitrocrisa compared to foreign competition; the effect of
high inflation in Mexico and exchange rate changes to the value of the Mexican
peso and impact of those changes on the earnings and cash flow of Vitrocrisa,
expressed under accounting principles generally accepted in the United States.
The company is exposed to market risk associated with changes in interest rates
in the U.S. and has entered into Interest Rate Protection Agreements (Rate
Agreements) with respect to $100 million of debt as a means to manage its
exposure to fluctuating interest rates. The Rate Agreements effectively convert
this portion of the company's borrowings from variable rate debt to a fixed-rate
basis, thus reducing the impact of interest rate changes on future income. The
average fixed rate of interest for the company's borrowings related to the Rate
Agreements at December 31, 2002 is 5.8% and the total interest rate, including
applicable fees, is 6.8%. The average maturity of these Rate Agreements is 2.3
years at December 31, 2002. Total remaining debt not covered by the Rate
Agreements has fluctuating interest rates with a weighted average rate of 2.4%
at December 31, 2002. The company had $88.7 million of debt subject to
fluctuating interest rates at December 31, 2002. A change of one percentage
point in such rates would result in a change in interest expense of
approximately $0.9 million on an annual basis. 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. The
fair market value for the company's Rate Agreements at December 31, 2002, was
$(8.8) million.
In addition to the Rate Agreements, the company has other derivatives as
discussed below and in Note 2 to the consolidated financial statements. 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 item affects earnings. At December 31,
2002, approximately $5.2 million of unrealized net loss was recorded in
accumulated other comprehensive income (loss).
OTHER INFORMATION
- -----------------
This document and supporting schedules contains statements that are not
historical facts and constitute projections, forecasts or forward-looking
statements. Such statements only reflect the
22
company's best assessment at this time, and may be identified by the use of
forward-looking words or phrases such as "anticipate," "believe," "expect,"
"intend," "may," "planned," "potential," "should," "will," "would" or similar
phrases. Such forward-looking statements involve risks and uncertainty and
actual results may differ materially from such statements and undue reliance
should not be placed on such statements. Important factors potentially affecting
the company's performance include, but are not limited to:
- - major slowdowns in the retail, travel, restaurant and bar or entertainment
industries, including the impact of armed hostilities or any other
international or national calamity, including any act of terrorism, on the
retail, travel, restaurant and bar or entertainment industries;
- - significant increases in interest rates that increase the company's
borrowing costs;
- - significant increases in per-unit costs for natural gas, electricity,
corrugated packaging and other purchased materials; - increases in
expenses associated with higher medical costs, reduced pension income
associated with lower returns on pension investments and increased pension
obligations;
- - devaluations and other major currency fluctuations relative to the U.S.
dollar, euro or Mexican peso that could reduce the cost competitiveness of
the company's or Vitrocrisa's products compared to foreign competition;
- - the effect of high inflation in Mexico and exchange rate changes to the
value of the Mexican peso and the earnings expressed under accounting
principles generally accepted in the United States and cash flow
Vitrocrisa;
- - the inability to achieve savings and profit improvements at targeted
levels at the company and Vitrocrisa from capacity realignment,
re-engineering and operational restructuring programs or within the
intended time periods;
- - protracted work stoppages related to collective bargaining agreements; -
increased competition from foreign suppliers endeavoring to sell glass
tableware in the United States and Mexico, including the impact of lower
duties for imported products;
- - whether the company completes any significant acquisitions and whether
such acquisitions can operate profitably.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Management 25
Report of Independent Auditors 26
Consolidated Balance Sheets at December 31, 2002 and 2001 27
For the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Income 29
Consolidated Statements of Shareholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
Selected Quarterly Financial Data 61
24
REPORT OF MANAGEMENT
The management of Libbey Inc. is responsible for the contents of the financial
statements, which are prepared in conformity with accounting principles
generally accepted in the United States. The consolidated financial statements
necessarily include amounts based on judgments and estimates. Financial
information elsewhere in the Form 10-K is consistent with that in the financial
statements.
The company maintains a comprehensive accounting system, which includes controls
designed to provide reasonable assurance as to the integrity and reliability of
the financial records and the protection of assets. However, there are inherent
limitations in the effectiveness of any system of internal controls, and,
therefore, the company takes other steps to maintain an effective internal
control structure. These steps include an organization with clearly defined
lines of responsibility and delegation of authority and comprehensive systems
and control procedures. The role of the independent auditors is to provide an
objective review of the financial statements and the underlying transactions in
accordance with auditing standards generally accepted in the United States.
The Audit Committee of the Board of Directors, comprised solely of Directors who
are not members of management, meets regularly with management and the
independent auditors to ensure that their respective responsibilities are
properly discharged. The independent auditors have full and free access to the
Audit Committee.
/s/ John F. Meier
John F. Meier
Chairman of the Board and
Chief Executive Officer
/s/ Kenneth G. Wilkes
Kenneth G. Wilkes
Vice President, Chief Financial Officer and
Head-International Operations
February 10, 2003
25
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
LIBBEY INC.
We have audited the accompanying consolidated balance sheets of Libbey Inc. as
of December 31, 2002 and 2001, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2002. Our audits also included the financial statement
schedule listed in the index at Item 15(a). These financial statements and
schedule are the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the consolidated and combined financial statements of
Vitrocrisa Holding, S. de R.L. de C.V. and Subsidiaries and Crisa Libbey, S.A.
de C.V. (companies in which the Company has 49% equity interests) which have
been audited by other auditors whose report has been furnished to us; insofar as
our opinion on the consolidated financial statements relates to the amounts
included for Vitrocrisa Holding, S. de R.L. de C.V. and Subsidiaries and Crisa
Libbey, S.A. de C.V., it is based solely on their report.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Libbey Inc. at December 31, 2002 and
2001, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the financial statements, in 2002 the company changed
its method of accounting for goodwill.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
January 31, 2003 except for Notes 9 and 14 as to which the date is February 18,
2003.
26
Libbey Inc. Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------
December 31, 2002 2001
- ------------------------------------------------------------------------------------------------------
Dollars in thousands
ASSETS
Current assets:
Cash $1,683 $3,860
Accounts receivable:
Trade, less allowances of $6,310 and $5,962 46,308 38,516
Other, less allowances of $1,482 in 2002 3,636 5,550
- ------------------------------------------------------------------------------ --------- --------
49,944 44,066
Inventories:
Finished goods 100,405 88,686
Work in process 4,512 5,095
Raw materials 3,169 2,627
Operating supplies 1,548 528
- ------------------------------------------------------------------------------ --------- --------
109,634 96,936
Prepaid expenses and deferred taxes 13,487 9,068
- ------------------------------------------------------------------------------ --------- --------
Total current assets 174,748 153,930
Other assets:
Repair parts inventories 5,603 5,248
Intangibles, net of accumulated amortization of $3,380 and $2,668 26,375 9,232
Pension assets -- 29,506
Deferred software, net of accumulated amortization of $11,679 and $10,510 2,585 3,639
Other assets 4,453 11,090
Investments 87,847 84,357
Goodwill 59,795 43,282
- ------------------------------------------------------------------------------ --------- --------
186,658 186,354
Property, plant and equipment at cost 300,690 254,479
Less accumulated depreciation 137,569 126,681
- ------------------------------------------------------------------------------ --------- --------
Net property, plant and equipment 163,121 127,798
- ------------------------------------------------------------------------------ --------- --------
Total assets $524,527 $468,082
- ------------------------------------------------------------------------------ --------- --------
See accompanying notes.
27
Libbey Inc. Consolidated Balance Sheets (cont.)
- ------------------------------------------------------------------------------------------------
December 31, 2002 2001
- ------------------------------------------------------------------------------------------------
Dollars in thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $2,660 $2,400
Accounts payable 31,633 33,125
Salaries and wages 14,670 11,671
Accrued liabilities 39,687 23,809
Income taxes 5,498 1,904
Long-term debt due within one year 115 143,115
- ------------------------------------------------------------------------ -------- --------
Total current liabilities 94,263 216,024
Long-term debt 188,403 2,517
Deferred taxes 11,780 23,512
Pension liability 28,655 --
Other long-term liabilities 14,015 12,533
Nonpension postretirement benefits 47,193 48,131
Shareholders' equity:
Common stock, par value $.01 per share, 50,000,000 shares authorized,
18,256,277 shares issued (18,025,843 shares issued in 2001) 183 180
Capital in excess of par value 293,537 288,418
Treasury stock, at cost, 3,625,000 shares (2,689,400 in 2001) (102,206) (75,369)
Deficit (19,413) (42,894)
Accumulated other comprehensive loss (31,883) (4,970)
- ------------------------------------------------------------------------ -------- --------
Total shareholders' equity 140,218 165,365
- ------------------------------------------------------------------------ -------- --------
Total liabilities and shareholders' equity $524,527 $468,082
- ------------------------------------------------------------------------ -------- --------
See accompanying notes.
28
Libbey Inc. Consolidated Statements of Income
- -----------------------------------------------------------------------------------
December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------
Dollars in thousands, except per-share amounts
REVENUES
Net sales $433,761 $419,594 $441,828
Freight billed to customers 1,732 2,085 2,274
Royalties and net technical assistance income 2,404 3,741 4,684
- ------------------------------------------------ -------- -------- --------
Total revenues 437,897 425,420 448,786
Costs and expenses:
Cost of sales 327,565 307,255 306,003
Selling, general and administrative expenses 56,631 55,716 61,185
- ------------------------------------------------ -------- -------- --------
384,196 362,971 367,188
- ------------------------------------------------ -------- -------- --------
INCOME FROM OPERATIONS 53,701 62,449 81,598
Other income (expense):
Equity earnings - pretax 6,379 6,384 12,016
Expenses related to abandoned acquisition (13,634) -- --
Other - net (1,510) (241) (919)
- ------------------------------------------------ -------- -------- --------
(8,765) 6,143 11,097
- ------------------------------------------------ -------- -------- --------
Earnings before interest and income taxes 44,936 68,592 92,695
Interest expense - net (8,263) (9,360) (12,216)
- ------------------------------------------------ -------- -------- --------
Income before income taxes 36,673 59,232 80,479
Provision for income taxes 8,618 19,840 33,613
- ------------------------------------------------ -------- -------- --------
NET INCOME $28,055 $39,392 $46,866
================================================ ======== ======== ========
NET INCOME PER SHARE
Basic $1.84 $2.58 $3.07
Diluted $1.82 $2.53 $3.01
================================================ ======== ======== =========
See accompanying notes
29
LIBBEY INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Capital in Cost of Other
Dollars in thousands, except Stock Excess of Treasury Comprehensive
per-share amounts Shares Amount Par Value Stock Deficit Income (Loss) Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2000 17,747,753 $178 $282,734 $(70,087) $ (119,995) $(987) $91,843
Comprehensive income:
Net income 46,866 46,866
Effect of exchange rate fluctuation (154) (154)
Closure of exchange rate fluctuation 1,141 1,141
--------
Total comprehensive income 47,853
Stock options exercised 110,349 1 1,602 1,603
Income tax benefit on stock options 594 594
Purchase of 149,400 shares for
treasury (4,053) (4,053)
Dividends -- $0.30 per share (4,569) (4,569)
- --------------------------------------------------- ------ ---------- --------- ----------- -------------- --------
Balance December 31, 2000 17,858,102 179 284,930 (74,140) (77,698) -- 133,271
Comprehensive income:
Net income 39,392 39,392
Effect of derivatives, net
of $2,292 tax effect (4,742) (4,742)
Minimum pension liability, net
of $137 tax effect (228) (228)
--------
Total comprehensive income 34,422
Stock options exercised 167,741 1 2,344 2,345
Income tax benefit on stock options 1,144 1,144
Purchase of 42,000 shares for
treasury (1,229) (1,229)
Dividends -- $0.30 per share (4,588) (4,588)
- --------------------------------------------------- ------ ---------- --------- ----------- -------------- --------
Balance December 31, 2001 18,025,843 180 288,418 (75,369) (42,894) (4,970) 165,365
Comprehensive income:
Net income 28,055 28,055
Effect of derivatives, net
of $297 tax effect (493) (493)
Minimum pension liability, net
of $15,919 tax effect (26,419) (26,419)
Effect of exchange rate fluctuation (1) (1)
--------
Total comprehensive income 1,142
Stock options exercised 230,434 3 3,298 3,301
Income tax benefit on stock options 1,821 1,821
Purchase of 935,600 shares for
treasury (26,837) (26,837)
Dividends -- $0.30 per share (4,574) (4,574)
- --------------------------------------------------- ------ ---------- --------- ----------- -------------- --------
BALANCE DECEMBER 31, 2002 18,256,277 $183 $293,537 $(102,206) $ (19,413) $(31,883) $140,218
=================================================== ====== ========== ========= =========== ============== ========
See accompanying notes
30
Libbey Inc. Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------
December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Dollars in thousands
OPERATING ACTIVITIES
Net income $28,055 $39,392 $46,866
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 17,262 15,157 14,055
Amortization 1,881 3,686 4,297
Net equity earnings (9,774) (2,665) (4,769)
Nonpension postretirement benefit cost in excess of payments (938) (1,545) (2,735)
Gain on sale of land (381) -- --
Deferred income taxes, less equity earnings portion 4,040 7,394 6,349
Other 354 (385) 3,189
Changes in operating assets and liabilities:
Accounts receivable 3,495 7,673 10,440
Inventories (91) 7,570 (15,185)
Prepaid expenses (186) (469) (329)
Other assets 5,330 (16,976) (10,420)
Accounts payable (6,095) 3,264 762
Accrued liabilities 5,886 (7,117) (2,474)
Other liabilities 5,367 (3,671) (13,148)
- ---------------------------------------------------------------------- ------- ------- --------
Net cash provided by operating activities 54,205 51,308 36,898
INVESTING ACTIVITIES
Additions to property, plant and equipment (16,739) (35,241) (18,096)
Dividends received from equity investments 4,659 4,918 2,940
Acquisitions (including acquisition-related costs, less cash acquired) (62,046) -- --
Other 3,523 (1,563) (63)
- ---------------------------------------------------------------------- ------- ------- --------
Net cash used in investing activities (70,603) (31,886) (15,219)
FINANCING ACTIVITIES
Net bank credit facility activity 43,001 (8,404) (18,596)
Payment of finance fees (815) -- --
Other net borrowings 145 (4,968) 1,345
Stock options exercised 3,301 2,345 1,603
Treasury shares purchased (26,837) (1,229) (4,053)
Dividends (4,574) (4,588) (4,569)
- ---------------------------------------------------------------------- ------- ------- --------
Net cash provided by (used in) financing activities 14,221 (16,844) (24,270)
Effect of exchange rate fluctuations on cash -- -- (45)
- ---------------------------------------------------------------------- ------- ------- --------
(Decrease) increase in cash (2,177) 2,578 (2,636)
Cash at beginning of year 3,860 1,282 3,918
- ---------------------------------------------------------------------- ------- ------- --------
CASH AT END OF YEAR $1,683 $3,860 $1,282
- ---------------------------------------------------------------------- ------- ------- --------
See accompanying notes
31
LIBBEY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER-SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Libbey Inc. and
all wholly owned subsidiaries (the Company). The Company records its 49%
interest in certain companies using the equity method. All material intercompany
accounts and transactions have been eliminated. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Company operates in one business segment, tableware products. The
Company designs, manufactures and markets an extensive line of high-quality,
machine-made glass beverageware, other glass tableware, ceramic dinnerware and
plastic items to a broad group of customers in the foodservice, retail,
industrial and premium areas. Most of the Company's sales are to customers in
North America. The Company also imports and distributes ceramic dinnerware and
flatware and has a 49% interest in Vitrocrisa, a glass tableware manufacturer in
Mexico.
ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts is
established through charges to the provision for bad debts. The Company
evaluates the adequacy of the allowance for doubtful accounts on a periodic
basis. The evaluation includes historical trends in collections and write-offs,
management's judgement of the probability of collecting accounts and
management's evaluation of business risk. This evaluation is inherently
subjective, as it requires estimates that are susceptible to revision as more
information becomes available. Accounts are determined to be uncollectible when
the debt is deemed to be worthless or only recoverable in part, and are written
off at that time through a charge against the allowance.
INVENTORY VALUATION The Company uses the last-in, first-out (LIFO) cost method
of inventory valuation for 57.1% of its inventories in 2002 and 61.1% in 2001.
If inventories valued on the LIFO method had been valued at standard or average
costs, which approximate current costs, inventories would be higher than
reported by $9,632 and $10,535 at December 31, 2002 and 2001, respectively. The
remaining inventories are valued at either standard or average cost, which
approximate current costs.
32
GOODWILL AND INTANGIBLES Goodwill results from the excess of purchase cost over
the fair value of net assets acquired. Goodwill resulting from business
combinations completed prior to December 31, 2001 was being amortized over 40
years.
Intangibles result from valuations assigned by independent appraisers for future
revenues from technical assistance agreements and trademarks acquired, as well
as the pension intangible assets discussed in Note 8.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142)
and SFAS No. 141, "Business Combinations" (SFAS No. 141). SFAS No. 142 requires
goodwill and indefinite-lived intangible assets to no longer be amortized but
reviewed annually for impairment, or more frequently if impairment indicators
arise. Accounting Principles Board (APB) Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock" (APB 18), requires the Company's
goodwill associated with equity method investees to be reviewed for impairment.
Intangible assets with lives restricted by contractual, legal or other means
will continue to be amortized over their useful lives. As required by SFAS No.
142, 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 technical assistance agreements should have their useful
lives reduced to five years.
At December 31, 2002, the carrying value and accumulated amortization of
amortized intangible assets totaled $3,183 and $3,380, respectively, and the
carrying value of indefinite-lived intangible assets totaled $5,984. Future
estimated amortization expense of amortizable intangibles is as follows: 2003 --
$775; 2004 -- $762; 2005 -- $762; 2006 -- $762 and 2007 -- $55.
Goodwill and other intangible assets were evaluated for impairment as of January
1, 2002 and October 1, 2002, and no impairment was indicated at either date.
33
The following table reflects the consolidated results adjusted as though the
adoption of SFAS No. 142 occurred as of January 1, 2000.
- --------------------------------------------- ------------- ------------ -----------
Year ended December 31, 2002 2001 2000
- --------------------------------------------- ------------- ------------ -----------
Net Income:
Reported net income $28,055 $39,392 $46,866
Goodwill amortization related to
equity investments -- 1,698 1,698
Goodwill and trademark amortization -- 1,684 1,684
Change in amortization of technical
assistance agreements -- (564) (564)
Tax effect -- (38) (38)
- --------------------------------------------- ------------- ------------ -----------
Adjusted net income $28,055 $42,172 $49,646
- --------------------------------------------- ------------- ------------ -----------
Basic earnings per share:
Reported net income $1.84 $2.58 $3.07
Goodwill amortization related to
equity investments -- 0.11 0.11
Goodwill and trademark amortization -- 0.11 0.11
Change in amortization of technical
assistance agreements -- (0.04) (0.04)
Tax effect -- -- --
- --------------------------------------------- ------------- ------------ -----------
Adjusted basic earnings per share $1.84 $2.76 $3.25
- --------------------------------------------- ------------- ------------ -----------
Diluted earnings per share:
Reported net income $1.82 $2.53 $3.01
Goodwill amortization related to
equity investments -- 0.11 0.11
Goodwill and trademark amortization -- 0.11 0.11
Change in amortization of technical
assistance agreements -- (0.04) (0.04)
Tax effect -- -- --
- --------------------------------------------- ------------- ------------ -----------
Adjusted diluted earnings per share $1.82 $2.71 $3.19
- --------------------------------------------- ------------- ------------ -----------
DEFERRED SOFTWARE Deferred software represents the costs of internally developed
and purchased software packages for internal use plus the costs associated with
the installation of software. These costs are amortized over five years. The
Company periodically reviews software to assess plans to replace the existing
programs before the five years, in which case the amortization would be
accelerated.
34
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at
cost. Major improvements are capitalized. Maintenance and repairs are expensed
as incurred. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, generally 3 to 14 years for equipment and
furnishings and 10 to 40 years for buildings and improvements.
SELF-INSURANCE RESERVES Self-Insurance reserves reflect the estimated cost for
group health and workers' compensation claims not covered by third-party
insurance. Workers' compensation accruals are recorded at the estimated ultimate
payout amounts based on individual case estimates and estimates of
incurred-but-not-reported losses developed from past experience. Group health
accruals are based on estimates of incurred-but-not-reported estimates received
from a third party administrator of the plan.
35
STOCK OPTIONS The Company has two stock-based employee compensation plans, which
are described more fully in Note 10. The Company accounts for the plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provision of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), to stock-based
employee compensation.
- --------------------------------------------------- ------------- ------------- -------------
Year ended December 31, 2002 2001 2000
- --------------------------------------------------- ------------- ------------- -------------
Net Income:
Reported net income $28,055 $39,392 $46,866
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 1,511 1,277 1,241
- --------------------------------------------------- ------------- ------------- -------------
Pro forma net income $26,544 $38,115 $45,625
- --------------------------------------------------- ------------- ------------- -------------
Basic earnings per share:
Reported net income $1.84 $2.58 $3.07
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 0.10 0.09 0.08
- --------------------------------------------------- ------------- ------------- -------------
Adjusted basic earnings per share $1.74 $2.49 $2.99
- --------------------------------------------------- ------------- ------------- -------------
Diluted earnings per share:
Reported net income $1.82 $2.53 $3.01
Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 0.10 0.08 0.08
- --------------------------------------------------- ------------- ------------- -------------
Adjusted diluted earnings per share $1.72 $2.45 $2.93
- --------------------------------------------------- ------------- ------------- -------------
36
INCOME TAXES Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
REVENUE RECOGNITION Revenue is recognized when products are shipped and title
and risk of loss has passed to the customer. Revenue is recorded net of returns
and discounts and allowances offered to customers. The Company estimates returns
and discounts at the time of sale based on the terms of the agreements and
historical experience. The Company continually evaluates the adequacy of these
methods used to estimate returns and discounts.
ROYALTIES AND NET TECHNICAL ASSISTANCE Royalties and net technical assistance
income are accrued based on the terms of the respective agreements, which
typically specify that a percentage of the licensee's sales be paid to the
Company monthly, quarterly or semi-annually in exchange for the Company's
assistance with manufacturing and engineering and support in functions such as
marketing, sales and administration. On January 1, 2002, the Company reduced the
useful lives of certain technical assistance agreements to five years based on
the implementation of SFAS No. 142.
DERIVATIVES The Company holds derivative financial instruments to hedge certain
of its interest rate risks associated with long-term debt, commodity price risks
associated with forecasted future natural gas requirements and foreign exchange
rate risks associated with occasional transactions denominated in a currency
other than the U.S. dollar. These derivatives qualify for hedge accounting since
the hedges are highly effective, and the Company has designated
contemporaneously and documented the hedging relationships involving these
derivative instruments. While the Company intends to continue to meet the
conditions for hedge accounting, if hedges do not qualify as highly effective or
if the Company does not believe that forecasted transactions would occur, the
changes in the fair value of the derivatives used as hedges would be reflected
in earnings.
The Company uses Interest Rate Protection Agreements (Rate Agreements) to manage
its exposure to fluctuating interest rates, which effectively convert a 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. These instruments
are valued 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 also uses commodity futures contracts related to forecasted future
natural gas requirements. The objective of these futures contracts and other
derivatives is to limit the fluctuations in prices paid and potential losses in
earnings or cash flows from adverse price movements in the underlying commodity.
The
37
Company considers its forecasted natural gas requirements in determining the
quantity of its natural gas to hedge. The Company combines the forecasts with
historical observations to establish the percentage of its forecast eligible to
be hedged, typically ranging from 40% to 60% of the anticipated requirements,
generally two or more months in the future. In some cases hedges are for
requirements as long as two years into the future. The fair values of these
instruments are determined from market quotes. The Company's foreign currency
exposures arise from occasional transactions denominated in a currency other
than the U.S. dollar primarily associated with anticipated purchases of new
equipment or net investment in a foreign operation. The fair values of these
instruments are determined from market quotes. The Company has not changed its
methods of calculating these values or developing underlying assumptions. The
values of these derivatives will change over time as cash receipts and payments
are made and as market conditions change.
As of December 31, 2002, the Company has Rate Agreements for $100.0 million of
its variable rate debt, commodity futures contracts for 0.8 million British
Thermal Units (BTUs) of natural gas, and foreign currency forward contracts for
42.3 million euros. The fair value of these derivatives are included on the
balance sheet in prepaid expenses for the natural gas futures and accrued
liabilities for the Rate Agreements and foreign currency forwards.
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.
The effective portion of changes in the fair value of a derivative that is
designated as and meets the required criteria for a cash flow hedge is recorded
in accumulated other comprehensive income (loss) and reclassified into earnings
in the same period or periods during which the underlying hedged item affects
earnings. Amounts reclassified into earnings related to Rate Agreements are
included in interest expense, natural gas futures contracts in natural gas
expense included in cost of sales, and foreign currency forward contracts for
the purchase of new equipment in capital expenditures and for net investments in
fo