LIBBEY INC. Forward Looking Statements
This document and supporting schedules contain statements that are not historical facts and constitute projections, forecasts or forward-looking statements. For a description of the forward-looking statements and risk factors that may affect our performance, see the " Risk Factors " section above.
Additionally, for an understanding of the significant factors that influenced our performance during the past two years, the following should be read in conjunction with the audited Consolidated Financial Statements and Notes.
General Overview Headquartered inToledo, Ohio , we believe that we have the largest manufacturing, distribution and service network among glass tableware manufacturers in the Western Hemisphere and that we are one of the largest glass tableware manufacturers in the world. Our tabletop product portfolio consists of an extensive line of high quality, machine-made glass tableware, including casual glass beverageware, in addition to ceramic dinnerware and metal flatware. We sell our products to foodservice, retail, and business-to-business customers in over 100 countries, with our sales to customers inNorth America accounting for approximately 78 percent of our total sales. We believe we are the largest manufacturer and marketer of casual glass beverageware inNorth America for the foodservice and retail channels. Additionally, we are a manufacturer and marketer of casual glass beverageware in the EMEA andAsia Pacific regions. Our reporting segments areU.S. &Canada ,Latin America , EMEA and Other. Segment results are based on the geographical destination of the sale. Our three reportable segments are defined below. Our operating segment that does not meet the criteria to be a reportable segment is disclosed as Other.
EMEA-includes primarily sales of manufactured and sourced glass tableware having
an end-market destination in
Other-includes primarily sales of manufactured and sourced glass tableware
having an end-market destination in
Executive Overview Throughout 2019, our business was impacted by global competition in all of our distribution channels, fluctuating business and consumer confidence in theU.S. andEurope as a result of increased economic and political uncertainty from various factors including ongoing trade tensions between theU.S. andChina and the potential for a no-deal Brexit inEurope , as well as slowing economies inEurope ,China and parts ofLatin America . Other factors impacting our business during the year were continued declines inU.S. &Canada foodservice traffic, as reported by third-party research firms Knapp-Track and Blackbox; continued migration of consumer purchasing from brick-and-mortar stores to online commerce, particularly in theU.S. &Canada andEurope ; shifting consumer preferences inEurope from mid-tier retailers (where sales of Royal Leerdam® products have been concentrated) to discounters; and increased competitive pressures inLatin America , as Chinese manufacturers divert sales of their products from the U.S. market toLatin America in order to avoid the increased tariffs imposed by theU.S. on Chinese imports into theU.S. Management expects these trends, and the challenging environment to continue into 2020, including in the business-to-business channel, which is dependent on customer demands. Growth is expected for theU.S. in 2020, as consumer confidence and household spending is expected to be high. The recently signed trade deal withChina and theU.S. , Mexico and Canada Agreement (USMCA) should reduce some uncertainty; however, any change in tariffs or policy could pose a risk to the expected growth. The overallLatin America economy struggled to grow in 2019 due to ongoing political and economic uncertainty, trade tensions and a weakening global economy. However, economic forecasters are showing the outlook for 2020 to rebound with an expected gradual pickup in global growth, continued monetary support, less economic uncertainty and a gradual recovery in stressed economies. Mexico's economy is also projected to grow in 2020 as conditions normalize, including the ratification of the USMCA trade agreement. The European economy is expected to gradually improve for 2020. The recent reduction in trade tensions between theU.S. andEurope have helped ease some of the uncertainties for business. However, debt levels within the region continue to be high, uncertainty surrounding the transition of theUnited Kingdom's decision to exit theEuropean Union ("Brexit") continues to persist and if trade tensions with theU.S. should resurface again, a recession could be triggered. Despite a phase-one trade deal with theU.S. that is projected by economic forecasters to increase consumer spending,China's projected outlook for 2020 is expected to decline yet again. Their competitive environment continues to be challenging, and a recent viral outbreak (known as the Coronavirus or COVID-19) has impacted businesses within the country and has caused some disruptions to supply chains and activity. 26
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With the intense global competition and various headwinds experienced in 2019, we had net sales of$782.4 million , 1.9 percent lower than the prior year, or 0.9 percent lower on a constant currency basis. The reduction in net sales compared to prior year was driven by unfavorable impacts in volume, channel mix and currency, partially offset by favorable price and mix of product sold, primarily in theU.S. &Canada segment. We recorded a net loss of$69.0 million for 2019, compared to a net loss of$8.0 million in 2018. Our 2019 net loss resulted primarily from$65.2 million of non-cash asset impairment charges, including$46.0 million in ourLatin America segment for goodwill and$19.2 million in our EMEA segment (see note 4 to our Consolidated Financial Statements for details). Our top-line performance during the year was challenged by macroeconomic uncertainty inEurope andLatin America , as well as continued declines inU.S. foodservice traffic; however, solid operational execution across our footprint and disciplined spending throughout the company enabled us to deliver a 30 basis point improvement in our gross margin as well as a$26.6 million increase in operating cash flows year over year. We made great progress with our initiatives throughout 2019, focusing the year on improving our cash generation, operating efficiencies and execution, as well as aligning our teams around critical plans to drive growth and stability.
During 2019, we accomplished the following:
• Made considerable progress on our organizational realignment plan that focuses
on transformational actions and structural changes to create a simplified
organization best positioned to deliver against its key financial and
operational priorities
• Made headway on our business transformation to simplify and improve
capabilities across many areas of the business, led by the on-going
implementation of a new enterprise resource planning system
•
buffetware products to the hospitality and catering sector of the
• Expanded our digital platform to support customers in our foodservice channel
with the launch of our foodservice website
• Implemented an enhanced inspection and repair process to further extend asset
lives, resulting in more time between furnace rebuilds and a reduction in
depreciation expense
• Upgraded our laser edge technology at our Shreveport manufacturing facility,
resulting in more efficient operations
• Invested in
power
While we are focused on taking advantage of opportunities we see in our markets
to drive long-term growth, we intend to continue to improve our operational and
organizational excellence. Therefore, in 2020, we intend to continue
our momentum in executing revenue growth, leveraging our new global functional
structure to drive significant operational improvement and keeping a disciplined
focus on cash generation.
Our current capital allocation strategy prioritizes debt reduction and continued
investments in strategic initiatives that are expected to increase long-term
shareholder returns.
Results of Operations
The following table presents key results of our operations for the years 2019 and 2018:
Year endedDecember 31 , (dollars in thousands, except percentages and per-share amounts) 2019 2018 Net sales$ 782,437 $ 797,858 Gross profit$ 154,209 $ 154,891 Gross profit margin 19.7 % 19.4 % Income (loss) from operations (IFO)$ (33,313 ) $ 27,040 IFO margin (4.3 )% 3.4 % Net loss$ (69,019 ) $ (7,956 ) Net loss margin (8.8 )% (1.0 )% Diluted net loss per share$ (3.08 ) $ (0.36 ) Adjusted EBITDA(1) (non-GAAP)$ 70,308 $ 70,950 Adjusted EBITDA margin (1) (non-GAAP) 9.0 % 8.9 % _____________________
(1) We believe that Adjusted EBITDA and the associated margin, non-GAAP
financial measures, are useful metrics for evaluating our financial
performance, as they are measures that we use internally to assess our
performance. For a reconciliation from net loss to Adjusted EBITDA, certain
limitations and reasons we believe these non-GAAP measures are useful, see
the "Reconciliation of Net Income (Loss) to Adjusted EBITDA" and "Non-GAAP
Measures" sections included in Part II , Item 6 of this Annual
Report , which is incorporated herein by reference.
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Discussion of 2019 vs. 2018 Results of Operations
Net Sales
The following table summarizes net sales by operating segment:
Year ended December 31, Increase/(Decrease) Currency Constant Currency Sales (dollars in thousands) 2019 2018 $ Change % Change Effects Growth (Decline) (1) U.S. & Canada$ 491,230 $ 483,741 $ 7,489 1.5 %$ (80 ) 1.6 % Latin America 141,584 148,091 (6,507 ) (4.4 )% (210 ) (4.3 )% EMEA 123,945 138,399 (14,454 ) (10.4 )% (6,517 ) (5.7 )% Other 25,678 27,627 (1,949 ) (7.1 )% (1,054 ) (3.2 )% Consolidated$ 782,437 $ 797,858 $ (15,421 ) (1.9 )%$ (7,861 ) (0.9 )% _____________________
(1) We believe constant currency sales growth (decline), a non-GAAP measure, is
a useful metric for evaluating our financial performance. See the "Non-GAAP
Measures" section included in Part II , Item 6 of this Annual Report ,
which is incorporated herein by reference, for the reasons we believe this
non-GAAP metric is useful and how it is derived.
Net Sales - U.S. & Canada
Net sales in U.S. & Canada were $491.2 million , compared to $483.7 million in
2018, an increase of 1.5 percent, driven by favorable price and mix of product
sold and higher volumes, partially offset by unfavorable channel mix. Net sales
in our business-to-business and retail channels increased $7.1 million and $3.4
million , respectively, in the current year primarily due to increased volume.
While net sales in our foodservice channel decreased $3.0 million compared to
the prior year, primarily due to lower volume, partially offset by favorable
price and mix of product sold, net sales in the second half of 2019 were higher
than the prior-year period. Part of the decline in foodservice volume was caused
by first-quarter 2019 events relating to the U.S. government shutdown and
unusually severe weather across much of the U.S. , as well as declines in
foodservice traffic as reported by third party research firms Knapp-Track and
Blackbox.
Net Sales - Latin America
Net sales in Latin America were $141.6 million , compared to $148.1 million in
2018, a decrease of 4.4 percent (a decrease of 4.3 percent excluding currency
fluctuation). Overall, Latin America was challenged in 2019 by the macroeconomic
uncertainty in the region. The decrease in net sales is primarily attributable
to unfavorable product mix in the business-to-business channel, as well as lower
volume across all three channels and unfavorable currency of $0.2 million . The
unfavorable items were partially offset by favorable pricing. In comparison to
2018, net sales in all three distribution channels decreased, including
business-to-business by $3.0 million , foodservice by $2.1 million and retail by
$1.5 million .
Net Sales - EMEA
Net sales in EMEA were
Gross Profit Gross profit was$154.2 million in 2019, compared to$154.9 million in the prior year. Gross profit as a percentage of net sales improved to 19.7 percent, compared to 19.4 percent in the prior year. Contributing to the$0.7 million decrease in gross profit were lower manufacturing activity of$10.0 million (including$11.6 million of production downtime) and a$1.3 million organizational realignment charge. Partially offsetting these unfavorable items were a favorable sales impact of$5.8 million , lower depreciation and amortization expense of$2.8 million , lower utility expense of$1.3 million and reduced benefit-related expenses of$0.3 million . Manufacturing activity includes the impact of fluctuating production activities from all facilities globally (including downtime, efficiency and utilization) and repairs and maintenance. The net sales impact equals net sales less the associated inventory at standard cost rates. Income (Loss) From Operations We recorded a loss from operations in 2019 of$(33.3) million , a$60.4 million decrease compared to income from operations of$27.0 million in 2018. Loss from operations as a percentage of net sales was (4.3) percent in 2019, compared to income from operations as a percentage of net sales of 3.4 percent in 2018. The unfavorable change in income (loss) from operations was driven by$65.2 million of non-cash asset impairment charges, including$46.0 million in ourLatin America segment for goodwill and$19.2 million in our EMEA segment ($13.0 million for property, plant and equipment,$5.3 million for operating lease right-of-use assets and$0.9 million for a trade name), as well as the$0.7 million decrease in gross profit discussed above. Partially offsetting the unfavorable items were reduced selling, general and administrative expenses of$5.5 million . The favorable change in selling, general and administrative expenses was driven by$2.8 million reduction in spend on discretionary expenses,$2.3 million of non-repeating fees associated with a strategic initiative that was terminated in the third quarter of 2018, less legal and professional fees of$1.7 million , a favorable currency impact of$0.9 million and less depreciation and amortization expense of$0.7 million . Partially offsetting the favorable items were$2.1 million of organizational realignment charges, primarily consisting of cash severance and other employee related costs, and increased healthcare expense of$1.0 million . In addition, reduced spend relating to our e-commerce initiative of$1.9 million was primarily offset by increased spend of$1.6 million on ERP implementation and related costs in 2019. 28
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Net Loss and Diluted Net Loss Per Share
We recorded a net loss of$(69.0) million , or$(3.08) per diluted share, in 2019, compared to a net loss of$(8.0) million , or$(0.36) per diluted share, in 2018. Net loss as a percentage of net sales was (8.8) percent in 2019, compared to (1.0) percent in 2018. The unfavorable change in net loss and diluted net loss per share is due to the factors discussed in Income (Loss) From Operations above, as well as an unfavorable change of$1.7 million in other income (expense) driven by foreign currency impacts, debt refinancing fees and higher interest expense of$0.5 million , partially offset by lower income tax expense of$1.5 million . The Company's effective tax rate was (14.5) percent for 2019, compared to 446.4 percent in 2018. The change in the effective tax rate was driven by several items, including differing levels of pretax income, the nondeductible asset impairments and nondeductible interest expense. The significantly smaller, absolute value of pretax income in 2018 compared with 2019 magnified the percentage impact on the effective tax rate of items such as non-deductible expenses and valuation allowances. Cash taxes paid for 2019 and 2018 were approximately$11.9 million and$8.5 million , respectively, with the increase primarily due to the 2010 tax audit inMexico . See note 7 , Income Taxes, to the Consolidated Financial Statements for further details.
Segment Earnings Before Interest and Income Taxes (Segment EBIT)
The following table summarizes Segment EBIT(1) by reporting segments:
Year ended December 31, Segment EBIT Margin (dollars in thousands) 2019 2018 $ Change 2019 2018 U.S. & Canada$ 54,072 $ 36,805 $ 17,267 11.0 % 7.6 % Latin America$ 6,208 $ 12,599 $ (6,391 ) 4.4 % 8.5 % EMEA$ 5,529 $ 7,219 $ (1,690 ) 4.5 % 5.2 % __________________
(1) Segment EBIT represents earnings before interest and taxes and excludes
amounts related to certain items we consider not representative of ongoing
operations as well as certain retained corporate costs and other allocations
that are not considered by management when evaluating performance. Segment
EBIT also includes an allocation of manufacturing costs for inventory
produced at a Libbey facility that is located in a region other than the end
market in which the inventory is sold. This allocation can fluctuate from
year to year based on the relative demands for products produced in regions
other than the end markets in which they are sold. See note 19 to the
Consolidated Financial Statements for a reconciliation of Segment EBIT to
net loss.
For 2019, Segment EBIT excludes the following:
of organizational realignment charges;
non-cash goodwill impairment charges; and EMEA -
asset impairment charges of
charges of $1.0 million ).
Segment EBIT - U.S. & Canada
Segment EBIT was $54.1 million in 2019, compared to $36.8 million in 2018.
Segment EBIT as a percentage of net sales increased to 11.0 percent for 2019,
compared to 7.6 percent in 2018. The $17.3 million increase in Segment EBIT was
driven by a favorable sales impact of $7.9 million , lower shipping and storage
expense of $2.9 million , favorable manufacturing activity of $2.6 million , a
$2.5 million decrease in selling, general and administrative spend (including a
$2.9 million decrease in e-commerce spend) and a $1.4 million decrease in
utilities.
Segment EBIT - Latin America
Segment EBIT decreased to $6.2 million in 2019, compared to $12.6 million in
2018. Segment EBIT as a percentage of net sales decreased to 4.4 percent for
2019, compared to 8.5 percent in 2018. The primary drivers of the $6.4 million
decrease were unfavorable manufacturing activity of $6.1 million (including $4.2
million of discretionary downtime), $3.3 million of increased shipping and
storage expenses and $1.0 million of increased selling, general and
administrative expenses (including $0.5 million of legal and professional
fees and $0.4 million of labor expense). Partially offsetting the unfavorable
items were less depreciation and amortization expense of $2.7 million and a
favorable currency impact of $1.3 million .
Segment EBIT - EMEA
Segment EBIT decreased to $5.5 million in 2019, compared to $7.2 million in
2018. Segment EBIT as a percentage of net sales decreased to 4.5 percent for
2019, compared to 5.2 percent in 2018. The primary drivers of the $1.7 million
decrease in Segment EBIT were unfavorable manufacturing activity of $1.8 million
(resulting from discretionary downtime) and an unfavorable sales impact of $1.0
million , partially offset by less utility expense of $0.9 million .
Adjusted EBITDA
Adjusted EBITDA decreased by $0.6 million in 2019, to $70.3 million , compared to
$71.0 million in 2018. As a percentage of net sales, Adjusted EBITDA was 9.0
percent for 2019, compared to 8.9 percent in 2018. The key contributors to the
decrease in Adjusted EBITDA were a $10.0 million unfavorable impact of
manufacturing activity (resulting from discretionary downtime) and higher
benefit-related expenses of $1.8 million . Partially offsetting the unfavorable
items were a favorable sales impact of $5.8 million , $4.3 million of reduced
selling, general and administrative expenses (including $3.2 million of legal
and professional fees and $1.7 million of marketing expense) and $1.3 million of
lower utility expenses. Adjusted EBITDA excludes special items that Libbey
believes are not reflective of our core operating performance as noted in the
"Reconciliation of Net Income (Loss) to Adjusted EBITDA" included in Part
II , Item 6 of this Annual Report , which is incorporated herein by
reference.
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Capital Resources and Liquidity
Under the ABL Facility atDecember 31, 2019 , we had$17.4 million of outstanding borrowings and$10.0 million in letters of credit and other reserves, resulting in$68.2 million of unused availability. OnJune 17, 2019 ,Libbey Mexico entered into a$3.0 million working capital line of credit to cover working capital needs; there were no borrowings under this line of credit atDecember 31, 2019 . In addition, we had$48.9 million of cash on hand atDecember 31, 2019 , compared to$25.1 million of cash on hand atDecember 31, 2018 . Of our total cash on hand atDecember 31, 2019 and 2018,$37.3 million and$21.7 million , respectively, were held in foreign subsidiaries. We plan to indefinitely reinvest the excess of the amount for financial reporting over the tax basis of investments in our European and Mexican operations to support ongoing operations, capital expenditures and debt service. All other earnings can be distributed as allowable under local laws. Our Chinese subsidiaries' cash balance was$20.2 million as ofDecember 31, 2019 . Local law currently limits distribution of this cash as a dividend; however, additional amounts may become distributable based on future income. For further information regarding potential dividends from our non-U.S. subsidiaries, see note 7 , Income Taxes, in the Consolidated Financial Statements. Our sales and operating income tend to be stronger in the last three quarters of each year and weaker in the first quarter of each year, primarily due to the impact of consumer buying patterns and production activity. This seasonal pattern causes cash provided by operating activities to be higher in the second half of the year and lower during the first half of the year. Based on our operating plans and current forecast expectations, we anticipate that our level of cash on hand, cash flows from operations and borrowing capacity under our ABL Facility will provide sufficient cash availability to meet our ongoing liquidity needs. The Term Loan B matures onApril 9, 2021 ; however, if it is not refinanced prior toJanuary 9, 2021 , the ABL Facility's springing maturity becomes effective and would be due at that time. The Company intends to refinance the Term Loan B prior to the ABL Facility springing maturity date, but there can be no assurance that the Company will be able to enter into an extended or replacement piece of debt prior toJanuary 9, 2021 . If we are unable to refinance the Term Loan B and we are unable to repay any outstanding balance on the ABL Facility, it may result in an event of default on our Term Loan B because of inability to meet all of our obligations under our credit agreements. Such a default, if not cured, would result in a cross default which would allow the lenders to accelerate the maturity of the Term Loan B, making it due and payable at that time. Balance Sheet and Cash Flows Cash and Equivalents
See the cash flow section below for a discussion of our cash balance.
Trade Working Capital
The following table presents our
December 31 , (dollars in thousands, except percentages and DSO, DIO, DPO and DWC) 2019 2018 Accounts receivable - net$ 81,307 $ 83,977 DSO (1) 37.9 38.4 Inventories - net$ 174,797 $ 192,103 DIO (2) 81.5 87.9 Accounts payable$ 79,262 $ 74,836 DPO (3) 37.0 34.2 Trade Working Capital (4) (non-GAAP)$ 176,842 $ 201,244 DWC (5) 82.5 92.1 Percentage of net sales 22.6 % 25.2 %
___________________________________________________
(1) Days sales outstanding (DSO) measures the number of days it takes to turn
receivables into cash.
(2) Days inventory outstanding (DIO) measures the number of days it takes to
turn inventory into net sales.
(3) Days payable outstanding (DPO) measures the number of days it takes to pay
the balances of our accounts payable.
(4)
inventories less accounts payable. See below for further discussion as to
the reasons we believe this non-GAAP financial measure is useful.
(5) Days trade working capital (DWC) measures the number of days it takes to
turn our Trade Working Capital into cash.
DSO, DIO, DPO and DWC are calculated using the last twelve months' net sales as the denominator and are based on a 365-day year.
We believe thatTrade Working Capital is important supplemental information for investors in evaluating liquidity in that it provides insight into the availability of net current resources to fund our ongoing operations.Trade Working Capital is a measure used by management in internal evaluations of cash availability and operational performance.Trade Working Capital is used in conjunction with and in addition to results presented in accordance withU.S. GAAP.Trade Working Capital is neither intended to represent nor be an alternative to any measure of liquidity and operational performance recorded underU.S. GAAP.Trade Working Capital may not be comparable to similarly titled measures reported by other companies. Trade working capital (as defined above) was$176.8 million atDecember 31, 2019 , a decrease of$24.4 million fromDecember 31, 2018 . The decrease in ourTrade Working Capital is primarily due to reduction in inventories (primarily resulting from downtime), decreased accounts receivable related to timing of collections, increased accounts payable and a favorable currency impact of$0.7 million (primarily the euro). As a result,Trade Working Capital as a percentage of the last twelve-month net sales was 22.6 percent atDecember 31, 2019 , a favorable change from the 25.2 percent atDecember 31, 2018 . 30
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Table of Contents Borrowings
The following table presents our total borrowings:
December 31 , (dollars in thousands) Interest Rate Maturity Date 2019 2018 December 7, Borrowings under ABL Facility floating (2) 2022 (1)$ 17,386 $ 19,868 Term Loan B floating (3) April 9, 2021 375,800 380,200 Total borrowings 393,186 400,068 Less - unamortized discount and finance fees 1,346 2,368 Total borrowings - net (4)$ 391,840 $ 397,700
____________________________________
(1) Maturity date will beJanuary 9, 2021 if Term Loan B is not refinanced by this date. (2) The interest rate on the ABL Facility borrowings was 1.75 percent atDecember 31, 2019 . (3) See "Derivatives" below and note 12 to the Consolidated Financial Statements. (4) Total borrowings -- net includes long-term debt due within one year and long-term debt as stated in our Consolidated Balance Sheets. We had total borrowings of$393.2 million atDecember 31, 2019 , compared to total borrowings of$400.1 million atDecember 31, 2018 . Contributing to the$6.9 million decrease in borrowings were$2.5 million in payments on ABL borrowings and$1.1 million of quarterly amortization payments (for a total of$4.4 million ) under our Term Loan B. Of our total borrowings,$173.2 million , or approximately 44.0 percent, were subject to variable interest rates atDecember 31, 2019 , as a result of converting$220.0 million of our Term Loan B debt to a fixed rate using an interest rate swap. The swap was effectiveJanuary 2016 throughJanuary 2020 and maintained a 4.85 percent fixed interest rate. We have executed additional swaps that convert$200.0 million of our debt from variable to fixed fromJanuary 2020 to January 2025. For further discussion on our interest rate swaps, see note 12 to the Consolidated Financial Statements. A change of one percentage point in such rates would result in a change in interest expense of approximately$1.7 million on an annual basis.
Included in interest expense are the amortization of discounts and other
financing fees. These items amounted to
Cash Flow Year endedDecember 31 , (dollars in thousands) 2019 2018 Net cash provided by operating activities$ 63,432 $
36,870
Net cash used in investing activities$ (31,159 ) $
(45,087 )
Net cash provided by (used in) financing activities
Our net cash provided by operating activities was$63.4 million in 2019, compared to$36.9 million in 2018, a favorable cash flow impact of$26.6 million . Contributing to the increase in cash flow from operations was a favorable impact of$34.1 million related toTrade Working Capital (accounts receivable, inventories, and accounts payable), partially offset by increased payments related to our ERP initiative, additional income tax payments of$3.4 million (primarily related to Mexico) and higher incentive compensation payments.
Our net cash used in investing activities was
Net cash provided by (used in) financing activities was($8.0) million in 2019, compared to$9.5 million in 2018. The primary drivers of this$17.5 million change include the($22.3) million net ABL Facility impact (2019 had net repayments of$2.4 million while 2018 had net borrowings of$19.9 million ) and$0.8 million in debt refinancing fees, partially offset by 2018 payments that did not repeat in 2019 (dividends of$2.6 million and other debt repayments of$3.1 million ).
At
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Table of Contents Free Cash Flow The following table presents key drivers to our Free Cash Flow for 2019 and 2018: Year endedDecember 31 , (dollars in thousands) 2019 2018
Net cash provided by operating activities
$ 32,273 $ (8,217 )
____________________________________
(1) We define Free Cash Flow as the sum of net cash provided by operating
activities and net cash used in investing activities. The most directly
comparable U.S. GAAP financial measure is net cash provided by (used in)
operating activities.
We believe that Free Cash Flow is important supplemental information for
investors in evaluating cash flow performance in that it provides insight into
the cash flow available to fund such things as debt service, acquisitions and
other strategic investment opportunities. It is a measure we use to internally
evaluate the overall liquidity of the business. Free Cash Flow does not
represent residual cash flows available for discretionary expenditures due to
our mandatory debt service requirements.
Free Cash Flow is used in conjunction with and in addition to results presented
in accordance with U.S. GAAP. Free Cash Flow is neither intended to represent
nor be an alternative to the measure of net cash provided by (used in) operating
activities recorded under U.S. GAAP. Free Cash Flow may not be comparable to
similarly titled measures reported by other companies.
Our Free Cash Flow was $32.3 million during 2019, compared to $(8.2) million in
2018, a favorable change of $40.5 million . The primary contributors to this
change are the same 1:1 relationship as the $26.6 million favorable cash flow
impact from operating activities and the favorable change of $13.9 million in
investing activities, as discussed above.
Derivatives
We use natural gas swap contracts related to forecasted future North American
natural gas requirements. The objective of these commodity contracts is to limit
the fluctuations in prices paid due to price movements in the underlying
commodity. We consider our forecasted natural gas requirements in determining
the quantity of natural gas to hedge. We combine the forecasts with historical
observations to establish the percentage of forecast eligible to be hedged,
typically ranging from 40 percent to 70 percent of our anticipated requirements,
and 18 months in the future, or more, depending on market conditions. The fair
values of these instruments are determined from market quotes. At December 31,
2019 , we had commodity contracts for 2,460,000 MMBTUs of natural gas with a fair
market value of a $0.8 million liability. We have hedged a portion of our
forecasted transactions through March 2021 . At December 31, 2018 , we had
commodity futures contracts for 3,150,000 MMBTUs of natural gas with a fair
market value of a $0.3 million asset. The counterparties for these derivatives
are well established financial institutions rated BBB+ or better as of
December 31, 2019 , by Standard & Poor's .
We have interest rate swap agreements in place to fix certain interest payments
of our current and future floating rate Term Loan B debt. The first interest
rate swap maintained a fixed interest rate of 4.85 percent, including the credit
spread, on $220.0 million of our current Term Loan B debt and matured on January
9, 2020 . Two additional interest rate swaps, with a combined notional amount of
$200.0 million , became effective in January 2020 , when the first swap matured.
These two swaps in essence extended the first swap, have a term of January 2020
to January 2025 , and carry a fixed interest rate of 6.19%, including credit
spread. In the event our Term Loan B is refinanced, the fixed interest rate will
be 3.19 percent plus the new refinanced credit spread. At December 31, 2019 , the
Term Loan B debt held a floating interest rate of 4.71 percent. If the
counterparties to the interest rate swap agreements were to fail to perform, the
interest rate swaps would no longer provide the desired results. However, we do
not anticipate nonperformance by the counterparties. The counterparties held a
Standard & Poor's rating of BBB+ or better as of December 31, 2019 .
The fair market value of our interest rate swaps is based on 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 fair market value of the interest rate swap agreements
was a $14.6 million liability at December 31, 2019 , and a $4.3 million liability
at December 31, 2018 .
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Table of Contents CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in their preparation. The areas described below are affected by critical accounting estimates and are impacted significantly by judgments and assumptions in the preparation of the Consolidated Financial Statements. Actual results could differ materially from the amounts reported based on these critical accounting estimates. Revenue Recognition Revenue is recognized at a point in time when control of the product has transferred to the customer. The transfer of control primarily takes place when risk of loss transfers in accordance with applicable shipping terms. Revenue is recognized based on the consideration specified in a contract with the customer, and is measured as the amount of consideration to which we expect to be entitled in exchange for transferring goods or providing services. When applicable, the transaction price includes estimates of variable consideration. We estimate provisions for rebates, customer incentives, allowances, returns and discounts based on the terms of the contracts, historical experience and anticipated customer purchases during the rebate period as sales occur. We continually evaluate the adequacy of these methods used, adjusting our estimates when the amount of consideration to which we expect to be entitled changes.
Slow-Moving and Obsolete Inventory
We identify slow-moving or obsolete inventories and estimate appropriate loss provisions accordingly. We recognize inventory loss provisions based upon excess and obsolete inventories driven primarily by future demand forecasts. AtDecember 31, 2019 , our inventories were$174.8 million , with loss provisions of$7.8 million , compared to inventories of$192.1 million and loss provisions of$9.5 million atDecember 31, 2018 . Asset Impairment Fixed Assets We assess our property, plant and equipment for possible impairment in accordance with FASB ASC Topic 360, "Property Plant and Equipment" ("FASB ASC 360"), whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable or a revision of remaining useful lives is necessary. Such indicators may include economic and competitive conditions, changes in our business plans or management's intentions regarding future utilization of the assets or changes in our commodity prices. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying value. The determination of fair value is based on an expected present value technique in which multiple cash flow scenarios that reflect a range of possible outcomes and a risk-free rate of interest are used to estimate fair value or on a market appraisal. Projections used in the fair value determination are based on internal estimates for sales and production levels, capital expenditures necessary to maintain the projected production levels, and remaining useful life of the assets. These projections are prepared at the lowest level at which we have access to cash flow information and complete financial data for our operations, which is generally at the plant level. Determination as to whether and how much an asset is impaired involves significant management judgment involving highly uncertain matters, including estimating the future success of product lines, future sales volumes, future selling prices and costs, alternative uses for the assets, and estimated proceeds from disposal of the assets. However, the impairment reviews and calculations are based on estimates and assumptions that take into account our business plans and long-term investment decisions. During the fourth quarter of 2019, management concluded an impairment assessment for the Libbey Holland asset group (within our EMEA segment) was necessary as the likelihood of asset recovery diminished during the fourth quarter. Therefore, a recoverability test was performed as ofDecember 31, 2019 , which failed. As a result, the asset group was written down to fair value. Certain property, plant and equipment and right-of-use assets were written down, resulting in a non-cash impairment charge of$18.3 million presented in the asset impairments line item on the Consolidated Statements of Operations. OnFebruary 18, 2019 , the Board of Directors of Libbey approved a plan to pursue strategic alternatives with respect to our business in the PRC, including the sale or closure of our manufacturing and distribution facility located in Langfang, PRC. The Board's decision supports our ongoing efforts to optimize our manufacturing and supply network to deliver customer value and achieve our strategic objectives, including deployment of our capital to better drive shareholder value. As this decision by the Board of Directors may result in changes in our business plans or management's intentions regarding future utilization of the related assets, a calculation was performed in accordance with FASB ASC 360 to determine if there was an indicator of impairment. The calculation considered all strategic alternatives that were being considered by management as ofDecember 31, 2019 , and the likelihood of each alternative. The resulting calculation did not indicate an impairment as ofDecember 31, 2019 , as the combined probability weighted average of the undiscounted cash flows associated with each alternative exceeded the carrying value of the assets. We continue to monitor the alternatives being considered by management as changes in strategy or alternatives available may result in future impairment charges. In accordance with FASB ASC 360, we also perform an impairment analysis for our definite useful lived intangible assets when factors indicating impairment are present. There were no indicators of impairment noted in 2019 or 2018 that would require an impairment analysis to be performed for our definite useful lived intangible assets. 33
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Goodwill atDecember 31, 2019 was$38.4 million , representing approximately 5.4 percent of total assets.Goodwill represents the excess of cost over fair value of assets acquired for each reporting unit. Our reporting units represent an operating segment or components of an operating segment (which is one level below the operating segment level). Also, components are aggregated into one reporting unit if they share similar economic characteristics, the determination of which requires management judgment.Goodwill impairment tests are completed for each reporting unit as ofOctober 1 of each year, or more frequently in certain circumstances where impairment indicators arise. When performing our test for impairment, we measure each reporting unit's fair value using a combination of "income" and "market" approaches on a shipping point basis. The income approach calculates the fair value of the reporting unit based on a discounted cash flow analysis, incorporating the weighted average cost of capital of a hypothetical third-party buyer. Significant estimates in the income approach include the following: discount rate; expected financial outlook and profitability of the reporting unit's business; and foreign currency impacts. Discount rates use the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors. The market approach uses the "Guideline Company " method, which calculates the fair value of the reporting unit based on a comparison of the reporting unit to comparable publicly traded companies. Significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, assessing comparable multiples, as well as consideration of control premiums. The blended approach assigns a 70 percent weighting to the income approach and 30 percent to the market approach. The higher weighting is given to the income approach due to some limitations of publicly available peer information used in the market approach. The blended fair value of both approaches is then compared to the carrying value, and to the extent that fair value exceeds the carrying value, no impairment exists. However, to the extent the carrying value exceeds the fair value, an impairment is recorded. As part of our on-going assessment of goodwill atJune 30, 2019 , it was noted that the significant reduction to the Company's share price throughout the quarter resulted in the market capitalization being less than the carrying value. As a result, we determined a triggering event had occurred and performed interim impairment tests of goodwill and other intangible assets as ofJune 30, 2019 . Additionally, during the second quarter, management updated its long-range plan which indicated lower sales and profitability within the Mexico reporting unit (within theLatin America reporting segment) as compared to the projections used in the most recent goodwill impairment testing performed as ofOctober 1, 2018 . As a result, the impairment testing indicated that the carrying value of the Mexico reporting unit exceeded its fair value, and we recorded a non-cash impairment charge of$46.0 million during the second quarter of 2019. After recording the impairment charge, there is no longer any goodwill on the balance sheet related to the Mexico acquisition. With respect to our reporting unit (within theU.S. &Canada reporting segment) that has goodwill, the results of ourOctober 1, 2019 annual impairment test indicated the estimated fair value exceeded the carrying value by approximately 50 percent, thus, no impairment exists. Individual indefinite life intangible assets are also evaluated for impairment on an annual basis, or more frequently in certain circumstances where impairment indicators arise. Total indefinite life intangible assets atDecember 31, 2019 were$11.1 million , representing 1.6 percent of total assets. When performing our test for impairment, we use a discounted cash flow method (based on a relief from royalty calculation) to compute the fair value, which is then compared to the carrying value of the indefinite life intangible asset. To the extent that fair value exceeds the carrying value, no impairment exists. Indefinite life intangible assets are tested for impairment as ofOctober 1 of each year, or more frequently in certain circumstances where impairment indicators arise. In conjunction with the goodwill impairment testing as ofJune 30, 2019 , we also testedLibbey Holland's indefinite life intangible asset (Royal Leerdam® trade name) for impairment. We used a relief from royalty method to determine the fair market value that was compared to the carrying value of the indefinite life intangible asset. The sales forecast for Royal Leerdam® branded product was lowered due to declining performance of mid-tier retailers as consumers in EMEA move to discount and on-line retailers. As a result, the estimated fair value was determined to be lower than the carrying value, and we recorded a non-cash impairment charge of$0.9 million during the second quarter of 2019 in our EMEA reporting segment. With the Royal Leerdam® trade name fair value equaling its carrying value atJune 30, 2019 , there is a potential of future impairment for the remaining intangible asset balance of$0.9 million if there is further degradation in the perceived value of the brand.
The results of the
Self-Insurance Reserves
We use self-insurance mechanisms to provide for potential liabilities related to
workers' compensation and employee healthcare benefits that are not covered by
third-party insurance. Workers' compensation accruals are recorded at the
estimated ultimate payout amounts based on individual case estimates. In
addition, we record estimates of incurred-but-not-reported losses based on
actuarial models.
Although we believe that the estimated liabilities for self-insurance are
adequate, the estimates described above may not be indicative of current and
future losses. In addition, the actuarial calculations used to estimate
self-insurance liabilities are based on numerous assumptions, some of which are
subjective. We will continue to adjust our estimated liabilities for
self-insurance, as deemed necessary, in the event that future loss experience
differs from historical loss patterns.
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Table of Contents Pension Assumptions
We have pension plans covering many of our employees. For a description of these plans, see note 8 to the Consolidated Financial Statements.
The assumptions used to determine net periodic pension expense for each year and
the benefit obligations at
U.S. Plans Non-U.S. Plans
2019 2018 2019 2018
Net periodic pension expense:
Discount rate 4.31% to 4.33% 3.64% to 3.69% 10.60% 9.40%
Expected long-term rate of return on
plan assets 6.50% 7.00% Not applicable Not applicable
Rate of compensation increase Not applicable Not applicable 4.30% 4.30%
Cash balance interest crediting rate 5.50% 5.50% Not applicable Not applicable
Benefit obligations:
Discount rate 3.45% to 3.50% 4.31% to 4.33% 8.80% 10.60%
Rate of compensation increase Not applicable Not applicable 4.30% 4.30%
Cash balance interest crediting rate 5.50% 5.50% Not applicable Not applicable
Two critical assumptions, discount rate and expected long-term rate of return on
plan assets, are important elements of plan expense and asset/liability
measurement. We evaluate these critical assumptions on our annual measurement
date of December 31st . Other assumptions involving demographic factors such as
retirement age, mortality and turnover are evaluated periodically and are
updated to reflect our experience. Actual results in any given year often will
differ from actuarial assumptions because of demographic, economic and other
factors.
The discount rate enables us to estimate the present value of expected future
cash flows on the measurement date. The rate used reflects a rate of return on
high-quality fixed income investments that match the duration of expected
benefit payments at our December 31 measurement date. The discount rate at
December 31st is used to measure the year-end benefit obligations and the
earnings effects for the subsequent year. A lower discount rate increases the
present value of benefit obligations and increases pension expense.
To determine the expected long-term rate of return on plan assets, we consider
the current and expected asset allocations, as well as historical and expected
returns on various categories of plan assets. Our determination of the
reasonableness of our expected long-term rate of return on plan assets at
December 31st is highly quantitative by nature and used to measure the earnings
effects for the subsequent year. We evaluate the current asset allocations and
expected returns under four sets of conditions: a maximum time available for
each asset class; a common history where all asset class returns are computed
with the same overall start date of January 1990 ; a 10-year historical return;
and forecasted returns using the Black-Litterman method. Based upon the current
asset allocation mix and the Black-Litterman method, the forecasted return is
5.40 percent. The actual return on plan assets from July 1, 1993 (inception)
through December 31, 2019 was 8.46 percent and 8.32 percent for the U.S. hourly
and salary pension plans, respectively.
Since over 75 percent of the plan assets are actively managed, we adjust the
baseline forecasted return for the anticipated return differential from active
over passive investment management and for any other items not already captured.
We believe that the combination of long-term historical returns, along with the
forecasted returns and manager alpha, supports the 6.5 percent rate of return
assumption for 2020 based on the current asset allocation.
Sensitivity to changes in key assumptions based on year-end data is as follows:
• A change of 1.0 percent in the discount rate would change our annual pretax
pension expense by approximately
• A change of 1.0 percent in the expected long-term rate of return on plan
assets would change annual pretax pension expense by approximately $3.2
million .
The cash balance interest crediting rate, which applies only to the U.S.
Salaried Plan, enables us to calculate the benefit obligation through projecting
future interest credits on cash balance accounts between the measurement date
and a participant's assumed retirement date. The rate adjusts annually and is
the 30-year Treasury rate in effect as of October in the preceding plan year,
subject to a minimum of 5 percent. A lower cash balance interest crediting rate
assumption decreases the benefit obligation and decreases pension expense.
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We use various actuarial assumptions, including the discount rate and the expected trend in healthcare costs, to estimate the costs and benefit obligations for our retiree welfare plan. The discount rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical benefits at ourDecember 31 measurement date. The discount rate atDecember 31 is used to measure the year-end benefit obligations and the earnings effects for the subsequent year.
The significant assumptions used at
U.S. Plans Non-U.S. Plans
2019 2018 2019 2018
Net periodic benefit expense
Discount rate 4.27 % 3.60 % 3.52 % 3.26 %
Non-pension post-retirement benefit
obligation
Discount rate 3.41 % 4.27 % 2.92 % 3.52 %
Weighted average assumed healthcare cost
trend rates
Healthcare cost trend rate assumed for
next year 6.00 % 6.25 % 6.00 % 6.25 %
Ultimate healthcare trend rate 4.50 % 5.00 % 5.00 % 5.00 %
Year the ultimate healthcare trend rate
is reached 2026 2024 2024 2024
Sensitivity to change in key assumptions is as follows:
• A change of 1.0 percent in the discount rate would not have a material impact
on the non-pension post-retirement expense.
• A change of 1.0 percent in the healthcare trend rate would not have a material
impact upon the non-pension post-retirement expense.
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Table of Contents Income Taxes We are subject to income taxes in theU.S. and various foreign jurisdictions. Management judgment is required in evaluating our tax positions and determining our provision for income taxes. Throughout the course of business, there are numerous transactions and calculations for which the ultimate tax determination is uncertain. When management believes certain tax positions may be challenged despite our belief that the tax return positions are supportable, we establish reserves for tax uncertainties based on estimates of whether additional taxes will be due. We adjust these reserves taking into consideration changing facts and circumstances, such as an outcome of a tax audit. The income tax provision includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the requirements of FASB ASC Topic 740 "Income Taxes". Income taxes are accounted for under the asset and liability method. Deferred income 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 attribute carry-forwards. Deferred income 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. FASB ASC 740 "Income Taxes," requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are determined separately for each tax jurisdiction in which we conduct our operations or otherwise incur taxable income or losses. Our European operations inthe Netherlands incurred an operating loss in 2019, continue to be in cumulative loss positions in recent years, and have a history of tax loss carry-forwards expiring unused. In addition, European economic conditions continue to be unfavorable. Accordingly, management believes it is not more likely than not that the net deferred tax assets related to these operations will be realized and a valuation allowance continues to be recorded as ofDecember 31, 2019 . Management's outlook regarding the future profitability of ourChina operations make it unlikely that any of its deferred tax assets will ever be utilized. As a result, a valuation allowance was recorded against the net deferred tax assets of our primaryChina subsidiary. Management concluded that it is not more likely than not that the disallowed interest expense for 2019 and 2018 can be fully utilized in future years. Accordingly, a partial valuation allowance has been recorded against the deferred tax asset related to the limitation on theU.S. deduction for interest expense. In addition, partial valuation allowances have been recorded against state operating loss carryforwards.
The Company and its subsidiaries are subject to examination by various countries' tax authorities. These examinations may lead to proposed or assessed adjustments to our taxes. See note 7 to our Consolidated Financial Statements for a detailed discussion on tax contingencies.
Legal and Other Contingencies We are involved from time to time in various legal proceedings and claims, including commercial or contractual disputes, product liability claims and environmental and other matters, that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes related to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. We have accrued for estimated losses in accordance withU.S. GAAP for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of the loss is reasonably estimable. The determination of the amount of such reserves is based on knowledge and experience with regard to past and current matters and consultation with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. The amount of such reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution. Although we cannot predict the ultimate outcome of any of our proceedings, we believe that they will not have a material adverse impact on our financial condition, results of operations or liquidity.
See note 17 of the Consolidated Financial Statements for a discussion of environmental and other litigation matters.
New Accounting Standards
See note 2 of the Consolidated Financial Statements for a summary of the new accounting standards.
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