LIBBEY INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes thereto appearing elsewhere in this report and in our Annual Report filed with theSecurities and Exchange Commission . This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result of many factors. Our risk factors are set forth in Part I, Item 1A. "Risk Factors" in our 2019 Annual Report on Form 10-K for the year endedDecember 31, 2019 and supplemented in Part II, Item 1A. "Risk Factors" of this report.
Voluntary Reorganization under Chapter 11
On the Petition Date, the Debtors filed Bankruptcy Petitions with the
We are currently operating our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and pursuant to orders of theBankruptcy Court . After we filed our Chapter 11 petitions, theBankruptcy Court granted certain relief requested by the Debtors enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders of theBankruptcy Court , authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the prepetition claims of certain of our vendors. For goods and services provided following the Petition Date, we intend to pay vendors in full under normal terms. Subject to certain exceptions, under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined or stayed the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Accordingly, although the filing of the Bankruptcy Petitions triggered defaults under the Debtors' funded debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. For the duration of the Debtors' Chapter 11 Cases, the Debtors' operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process, as described in Part II, Item 1A. "Risk Factors." As a result of these risks and uncertainties, the amount and composition of the Company's assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of the Company's operations, assets, and liquidity and capital resources included in this quarterly report may not accurately reflect its operations, assets, and liquidity and capital resources following the Chapter 11 process. The Debtors' Chapter 11 Cases are being jointly administered under the caption In reLibbey Glass Inc. , et al., Case No. 20-11439 (LSS). Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://cases.primeclerk.com/libbey. 22
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Exclusivity; Plan of Reorganization
Under the Bankruptcy Code, we currently have the exclusive right to file a plan of reorganization under Chapter 11 through and including 120 days after the Petition Date, and to solicit acceptances of such plan through and including 180 days after the Petition Date. These deadlines may be extended with the approval of theBankruptcy Court . We plan to emerge from our Chapter 11 Cases after we obtain approval from the Bankruptcy Court for a Chapter 11 plan of reorganization. Among other things, a Chapter 11 plan of reorganization will determine the rights and satisfy the claims of our creditors and security holders. The terms and conditions of a Chapter 11 plan of reorganization will be determined through negotiations with our creditors and, possibly, decisions by theBankruptcy Court . Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our prepetition liabilities and postpetition liabilities must be satisfied in full before the holders of our existing common stock can receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors or shareholders. The Company expects that the existing common stock of the Company will be extinguished upon the Company's emergence from Chapter 11 and that existing equity holders will not receive consideration in respect of their equity interests. Moreover, under the Bankruptcy Code, a plan of reorganization can be confirmed by theBankruptcy Court , even if the holders of our common stock vote against the plan of reorganization and even if the plan of reorganization provides that the holders of our common stock receive no distribution on account of their equity interests.
For more information on the Chapter 11 Cases and related matters, refer to note 2 , Subsequent Event - Chapter 11 Bankruptcy Filing, and note 5 , Borrowings, in the Condensed Consolidated Financial Statements.
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Table of Contents
Results of Consolidated Operations
Overview The first half of 2020 has been challenging for a majority of businesses throughout the world, including Libbey. The coronavirus 2019 (COVID-19) pandemic began in late 2019 and has since resulted in a global health crisis that has negatively impacted businesses, economies and financial markets worldwide. Global economies are facing record-high unemployment levels, collapsing business and consumer confidence, and historic recession levels driven by quarantines and lockdowns instituted throughout the world.The United States has entered into a recession as a result of COVID-19, with consumer spending expected to remain low as social distancing and high unemployment continue.China's outlook continues to decline as a result of economic uncertainties, trade disputes withthe United States and lower consumer confidence as consumers are concerned with a second wave of COVID-19 infections.Europe's and Mexico's economies have also declined as COVID-19 has negatively hit their tourist sectors, as well as severely impacted supply chains and reduced both domestic and external demand. Management expects these trends, and the challenging environment experienced to date, to continue through the second half of 2020 and likely beyond. As a result of the volatile conditions we experienced in the first quarter of 2020, our net sales were$150.5 million , 14.0 percent lower than the prior-year quarter, or 13.2 percent lower on a constant currency basis. The reduction in net sales was driven by lower volume, and unfavorable impacts from channel mix and currency, partially offset by favorable price and mix of product sold. We recorded a net loss of$78.7 million for the three months endedMarch 31, 2020 , compared to a net loss of$4.5 million in the prior-year quarter. The$74.2 million increase in net loss for the current quarter was primarily driven by a$38.4 million non-cash goodwill impairment charge in ourU.S. andCanada segment, an additional$21.7 million of income tax expense primarily due to recording valuation allowances against net deferred tax assets in all jurisdictions, and$12.9 million of loss on derivatives de-designated as hedging instruments. In addition, we experienced reduced profitability throughout the Company as a result of COVID-19 related closures of our manufacturing and distribution operations and demand reductions; the negative impacts on our sales margins and manufacturing activity were partially offset by lower selling, general and administrative spend as a result of controlled spending. As a result of the effect of COVID-19 on our expected future operating cash flows, we drew$40.0 million on our Prepetition ABL Credit Facility, furloughed certain employees, implemented temporary salary reductions for non-furloughed employees, and adjusted our capital spending to align with the needs of the business, including the delaying of some work on our enterprise resource planning implementation, to address liquidity concerns. In addition, we have temporarily reduced or suspended our manufacturing and distribution operations at several of our facilities inNorth America & elsewhere to comply with government orders and to protect the safety of our employees. Given the dynamic nature of the COVID-19 pandemic and related market conditions, the Company cannot reasonably estimate the period of time that these events will persist or the full extent of the impact they will have on the business. The Company continues to take actions, subject to approval of theBankruptcy Court , designed to mitigate the adverse effects of this rapidly changing market environment. OnMarch 27, 2020 , theU.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company's payment of employer payroll taxes after enactment, otherwise due in 2020, will be delayed, with 50 percent due byDecember 31, 2021 , and the remaining 50 percent byDecember 31, 2022 . The Company continues to evaluate the potential applicability and related impact of the CARES Act. The CARES Act did not have a material impact on the Company's condensed consolidated financial statements as ofMarch 31, 2020 . See note 11 , Segments, for details on how we report and define our segments. 24
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Table of Contents Results of Operations
The following table presents key results of our operations for the three months
ended
Three months ended March 31,
(dollars in thousands, except percentages and per-share
amounts) 2020 2019
Net sales $ 150,521 $ 174,966
Gross profit $ 22,923 $ 33,958
Gross profit margin 15.2 % 19.4 %
Income (loss) from operations (IFO) $ (42,126 ) $ 1,378
IFO margin (28.0 )% 0.8 %
Net loss $ (78,748 ) $ (4,542 )
Net loss margin (52.3 )% (2.6 )%
Diluted net loss per share $ (3.45
)
$ 10,084 $ 9,725 Adjusted EBITDA margin (1) (non-GAAP) 6.7 % 5.6 % _________________________
(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 Loss to Adjusted EBITDA" and "Non-GAAP
Measures" sections below in the Discussion of First Quarter 2020 Compared to
First Quarter 2019.
Discussion of First Quarter 2020 Compared to First Quarter 2019
Net Sales
The following table summarizes net sales by operating segment:
Three months ended March 31, Increase/(Decrease) Constant Currency Sales (dollars in thousands) 2020 2019 $ Change
% Change Currency Effects Growth (Decline) (1) U.S. & Canada$ 95,876 $ 109,906 $ (14,030 ) (12.8 )% $ (6 ) (12.8 )% Latin America 26,643 30,401 (3,758 ) (12.4 )% (474 ) (10.8 )% EMEA 25,280 28,042 (2,762 ) (9.8 )% (748 ) (7.2 )% Other 2,722 6,617 (3,895 ) (58.9 )% (83 ) (57.6 )% Consolidated$ 150,521 $ 174,966 $ (24,445 ) (14.0 )% $ (1,311 ) (13.2 )% _________________________
(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 below for the reasons we believe this non-GAAP metric is
useful and how it is derived.
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Table of ContentsNet Sales -U.S. &Canada Net sales inU.S. &Canada in the first quarter of 2020 were$95.9 million , compared to$109.9 million in the first quarter of 2019, a decrease of 12.8 percent. The decrease in net sales was driven by lower volume and unfavorable channel mix, partially offset by favorable price and mix of product sold versus the prior-year quarter. Net sales in all three channels decreased in the first quarter of 2020 compared to prior year, as impacts from the COVID-19 pandemic resulted in the closure of many retail stores and restaurants by the middle of March, resulting in many customers delaying or cancelling purchases. Knapp-Track and Blackbox (third-party research firms) reported approximately 30 percent declines in foodservice traffic in the month of March, and as a result, our foodservice channel net sales decreased$9.9 million versus the prior-year quarter. Our business-to-business and retail channel net sales also declined$3.7 million and$0.4 million , respectively.Net Sales -Latin America Net sales inLatin America in the first quarter of 2020 were$26.6 million , compared to$30.4 million in the first quarter of 2019, a decrease of 12.4 percent (a decrease of 10.8 percent excluding currency fluctuation). The decrease in net sales is primarily attributable to lower volumes as a result of COVID-19, partially offset by favorable price and mix of product sold. Net sales decreased across all three channels in the first quarter of 2020 compared to the prior-year quarter, as retail channel net sales decreased$2.3 million , foodservice channel net sales decreased$0.9 million and business-to-business channel net sales decreased$0.5 million .Net Sales - EMEA Net sales in EMEA in the first quarter of 2020 were$25.3 million , compared to$28.0 million in the first quarter of 2019, a decrease of 9.8 percent (a decrease of 7.2 percent excluding currency fluctuation). The net sales decrease is primarily attributable to lower volumes and an unfavorable currency impact of$0.7 million , partially offset by favorable price and mix of product sold. Net sales in the retail channel decreased$1.9 million , and net sales in foodservice decreased$1.4 million , both attributable to lower volumes as a result of COVID-19. The business-to-business channel experienced higher sales volumes, driving a net sales increase of$0.6 million versus the prior-year quarter. Gross Profit Gross profit decreased to$22.9 million in the first quarter of 2020, compared to$34.0 million in the prior-year quarter. The primary drivers of the$11.0 million reduction were an unfavorable net sales impact of$6.1 million , and unfavorable manufacturing activity of$4.8 million (primarily related to furnace rebuilds in bothToledo and Holland, as well as discretionary downtime taken to control inventories). 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
Income (loss) from operations for the quarter endedMarch 31, 2020 , decreased$43.5 million to($42.1) million , compared to$1.4 million in the prior-year quarter. The unfavorable change in income (loss) from operations was primarily driven by the$38.4 million non-cash goodwill impairment charge in theU.S. andCanada segment, as well as the$11.0 million reduction in gross profit (discussed above), partially offset by reduced selling, general and administrative expenses of$6.1 million . The favorable change in selling, general and administrative expenses was driven by reduced spend in the following areas: marketing expense of$2.0 million , incentive and equity-based compensation of$1.7 million , salaries of$0.9 million and research and development expenses of$0.6 million .
Net Loss and Diluted Net Loss Per Share
We recorded a net loss of($78.7) million , or ($3.45 ) per diluted share, in the first quarter of 2020, compared to a net loss of($4.5) million , or ($0.20 ) per diluted share, in the prior-year quarter. 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, additional income tax expenses of$21.7 million ,$12.9 million of loss on derivatives de-designated as hedging instruments and$3.4 million of debt refinancing and prepetition reorganization charges. Partially offsetting this was a favorable change of$5.9 million in other income (expense) attributable to foreign currency impacts. The Company's effective tax rate was (34.9) percent for the first quarter of 2020, compared to 22.2 percent in the prior-year quarter. The key driver of the change in the effective tax rate was the establishment of valuation allowances against all net deferred tax asset balances in all jurisdictions during the first quarter of 2020. Management determined that there is substantial doubt that Libbey will continue as a going concern within one year of the financial statement date which led to a judgement that the Company is not more likely than not to realize tax benefits from these deferred tax assets. 26
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Segment Earnings Before Interest and Income Taxes (Segment EBIT)
The following table summarizes Segment EBIT(1) by operating segments:
Three months ended March 31, Segment EBIT Margin (dollars in thousands) 2020 2019 $ Change 2020 2019 U.S. & Canada$ 6,898 $ 9,797 $ (2,899 ) 7.2 % 8.9 % Latin America$ 4,521 $ 649 $ 3,872 17.0 % 2.1 % EMEA$ (1,610 ) $ (50 ) $ (1,560 ) (6.4 % ) (0.2 %) _________________________
(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 11 to the
Condensed Consolidated Financial Statements for a reconciliation of Segment
EBIT to net loss.
For the three months ended
of loss on derivatives de-designated as hedging instruments, and
employee benefit liability adjustment;
derivatives de-designated as hedging instruments; and EMEA -$0.1 million non-cash asset impairment charge.
Segment EBIT -
Segment EBIT was$6.9 million in the first quarter of 2020, compared to$9.8 million in the first quarter of 2019. Segment EBIT as a percentage of net sales decreased to 7.2 percent for 2020, compared to 8.9 percent in 2019. The$2.9 million decrease in Segment EBIT was driven primarily by an unfavorable sales impact of$3.6 million , largely attributed to the impact of the COVID-19 pandemic, and unfavorable manufacturing activity of$2.7 million (including downtime of$4.1 million primarily related to a furnace rebuild inToledo ), partially offset by reduced selling, general and administration expense of$2.6 million (including$1.1 million of less marketing expense) and$1.3 million less in warehousing and other distribution costs.
Segment EBIT -
Segment EBIT increased to$4.5 million in the first quarter of 2020, from$0.6 million in the first quarter of 2019. Segment EBIT as a percentage of net sales increased to 17.0 percent for 2020, compared to 2.1 percent in 2019. The primary drivers of the$3.9 million increase were favorable impacts of$4.4 million from currency and$0.4 million from utilities, partially offset by$1.1 million unfavorable sales impact. Segment EBIT - EMEA Segment EBIT decreased to($1.6) million in the first quarter of 2020, compared to($0.1) million in the first quarter of 2019. Segment EBIT as a percentage of net sales decreased to (6.4) percent for 2020, from (0.2) percent in 2019. The majority of the$1.6 million decrease in Segment EBIT was driven by unfavorable manufacturing activity of$2.1 million (primarily due to a furnace rebuild inHolland ), partially offset by reduced selling, general and administrative expense of$0.7 million .
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA increased by$0.4 million to$10.1 million in the first quarter of 2020, compared to$9.7 million in the first quarter of 2019. As a percentage of net sales, our Adjusted EBITDA margin was 6.7 percent for the first quarter of 2020, compared to 5.6 percent in the year-ago quarter. The key contributors to the increase in Adjusted EBITDA were reduced selling, general and administrative spend of$6.1 million (including$2.0 million less of marketing expense,$1.7 million of less incentive and equity-based compensation, and$0.9 million less of labor costs), a favorable currency impact of$5.2 million and less warehousing and distribution costs of$1.4 million . Partially offsetting the favorable items are an unfavorable sales impact of$6.1 million and$5.6 million of unfavorable manufacturing activity (primarily related to furnace rebuilds). Adjusted EBITDA excludes special items that Libbey believes are not reflective of our core operating performance as noted below in the "Reconciliation of Net Loss to Adjusted EBITDA." 27
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Reconciliation of Net Loss to Adjusted EBITDA
Three months ended March 31,
(dollars in thousands) 2020 2019
Net loss (U.S. GAAP) $ (78,748 ) $ (4,542 )
Add:
Interest expense 5,591 5,632
Provision (benefit) for income taxes 20,379 (1,296 )
Depreciation and amortization 8,845 9,931
Add: Special items before interest and taxes:
Fees associated with strategic initiative 406 -
Asset impairments (see note 17 ) 38,535 -
Workforce reduction 517 -
Debt refinancing & prepetition reorganization charges 3,356 -
Loss on derivatives de-designated as hedging instruments 12,923 -
Employee benefit liability adjustment (1,720 ) -
Adjusted EBITDA (non-GAAP) $ 10,084 $ 9,725
Net sales $ 150,521 $ 174,966
Net loss margin (U.S. GAAP) (52.3 )% (2.6 )%
Adjusted EBITDA margin (non-GAAP) 6.7 % 5.6 %
Non-GAAP Measures
We sometimes refer to amounts, associated margins and other data derived from
condensed consolidated financial information but not required by GAAP to be
presented in financial statements. Certain of these data are considered
"non-GAAP financial measures" under SEC Regulation G. Our non-GAAP measures are
used by analysts, investors and other interested parties to compare our
performance with the performance of other companies that report similar non-GAAP
measures. Libbey believes these non-GAAP measures provide meaningful
supplemental information regarding financial performance by excluding certain
expenses and benefits that may not be indicative of core business operating
results. We believe the non-GAAP measures, when viewed in conjunction with U.S.
GAAP results and the accompanying reconciliations, enhance the comparability of
results against prior periods and allow for greater transparency of financial
results and business outlook. In addition, we use non-GAAP data internally to
assess performance and facilitate management's internal comparison of our
financial performance to that of prior periods, as well as trend analysis for
budgeting and planning purposes. The presentation of our non-GAAP measures is
not intended to be considered in isolation or as a substitute for, or superior
to, the financial information prepared and presented in accordance with U.S.
GAAP. Furthermore, our non-GAAP measures may not be comparable to similarly
titled measures reported by other companies and may have limitations as an
analytical tool.
We define Adjusted EBITDA as net income (loss) plus interest expense, provision
for income taxes, depreciation and amortization, and special items that Libbey
believes are not reflective of our core operating performance. The most directly
comparable U.S. GAAP financial measure is net income (loss).
We present Adjusted EBITDA because we believe it is used by analysts, investors
and other interested parties in comparing our performance across reporting
periods on a consistent basis by excluding items that we do not believe are
indicative of our core business operating results. Adjusted EBITDA also allows
for a measure of comparability to other companies with different capital and
legal structures, which accordingly may be subject to different interest rates
and effective tax rates, and to companies that may incur different depreciation
and amortization expenses or impairment charges. In addition, we use Adjusted
EBITDA internally to measure profitability.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
• Adjusted EBITDA does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts;
• Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
Adjusted EBITDA does not reflect any cash requirements for such replacements
of capital expenditures or contractual commitments;
• Adjusted EBITDA does not reflect the impact of certain cash charges resulting
from matters we consider not to be indicative of our ongoing operations; and
• Other companies in our industry may calculate Adjusted EBITDA differently than
we do, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered in
isolation or as a substitute for performance measures calculated in accordance
with
28
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Table of Contents Constant Currency We translate revenue and expense accounts in our non-U.S. operations at current average exchange rates during the year. References to "constant currency," "excluding currency impact" and "adjusted for currency" are considered non-GAAP measures. Constant currency references regarding net sales reflect a simple mathematical translation of local currency results using the comparable prior period's currency conversion rate. Constant currency references regarding Segment EBIT and Adjusted EBITDA comprise a simple mathematical translation of local currency results using the comparable prior period's currency conversion rate plus the transactional impact of changes in exchange rates from revenues, expenses and assets and liabilities that are denominated in a currency other than the functional currency. We believe this non-GAAP constant currency information provides valuable supplemental information regarding our core operating results, better identifies operating trends that may otherwise be masked or distorted by exchange rate changes and provides a higher degree of transparency of information used by management in its evaluation of our ongoing operations. These non-GAAP measures should be viewed in addition to, and not as an alternative to, the reported results prepared in accordance with GAAP. Our currency market risks include currency fluctuations relative to theU.S. dollar, Canadian dollar, Mexican peso, euro and Chinese renminbi.
Capital Resources and Liquidity
Prepetition Overview Historically, cash flows generated from operations, cash on hand and our borrowing capacity under our Prepetition ABL Credit Facility have enabled us to meet our cash requirements, including capital expenditures and working capital requirements. Under the Prepetition ABL Credit Facility atMarch 31, 2020 , we had$68.1 million of outstanding borrowings, including$40.0 million of borrowings onMarch 19, 2020 , and$15.0 million outstanding in letters of credit and other reserves, resulting in$5.4 million of unused availability. The Mexico working capital line of credit had borrowings of$2.0 million atMarch 31, 2020 and was subsequently repaid and terminated onJune 2, 2020 . In addition, we had$66.1 million of cash on hand atMarch 31, 2020 , compared to$48.9 million of cash on hand atDecember 31, 2019 . Of our total cash on hand atMarch 31, 2020 , andDecember 31, 2019 ,$31.5 million and$37.3 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 may be distributed to the extent allowable under local laws. Our Chinese subsidiaries' cash and cash equivalents balance was$17.4 million as ofMarch 31, 2020 . LocalPeople's Republic of China ("PRC") 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 our 2019 Annual Report on Form 10-K for the year endedDecember 31, 2019 . Postpetition Overview As a result of the commencement of the Chapter 11 Cases onJune 1, 2020 , we are operating as debtors-in-possession pursuant to orders issued by theBankruptcy Court and under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 filings, we intend to de-lever our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as debtors-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee we will successfully agree upon a viable plan of reorganization with our various stakeholders or reach any such agreement in the time frame that is acceptable to the Bankruptcy Court. See note 2 for additional information. The filing of the Bankruptcy Petitions constituted an event of default with respect to our existing debt obligations. However, subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined or stayed the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors' property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a prepetition claim are enjoined unless and until theBankruptcy Court lifts the automatic stay. Contemporaneous with the filing of the Chapter 11 Cases on the Petition Date, the Prepetition ABL Lenders agreed to forbear from exercising their rights and remedies under the Prepetition ABL Credit Agreement against the subsidiaries of the Company organized inthe Netherlands party thereto.The Bankruptcy Court has approved payment of certain prepetition obligations, including payments for employee wages, salaries and certain other benefits, customer programs, taxes, utilities, insurance, as well as payments to certain vendors. Despite the liquidity provided by our existing cash on hand, our ability to maintain normal credit terms with our suppliers may become impaired. We may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would further reduce our liquidity. If liquidity problems persist, our suppliers could refuse to provide key products and services in the future. In addition, due to the public perception of our financial condition and results of operations, in particular with regard to our potential failure to meet our debt obligations, some vendors could be reluctant to enter into long-term agreements with us.The Bankruptcy Court approved interim orders onJune 2, 2020 authorizing us to access interim relief in connection with the DIP Financing and to pay certain fees in connection with the DIP Financing, as described in more detail in note 5 to our Condensed Consolidated Financial Statements entitled "Borrowings." The DIP Financing provides for$160.0 million in senior secured, super-priority financing, exclusive of a portion of prepetition term loans to be rolled up in accordance with the terms of the DIP Term Loan. We cannot be certain that theBankruptcy Court will approve final orders authorizing entry into future DIP financing arrangements. 29
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In addition to the cash requirements necessary to fund ongoing operations, we have incurred professional fees and other costs in connection with our Chapter 11 proceedings. During the quarter endedMarch 31, 2020 , the Company recognized$1.3 million in prepetition restructuring expenses related to the Chapter 11 Cases. We are unable to predict when we will emerge from Chapter 11 because it is contingent upon numerous factors, many of which are out of our control. Major factors include obtaining theBankruptcy Court's approval of a Chapter 11 plan of reorganization, which will enable us to transition from Chapter 11 into ordinary course operations outside of bankruptcy. We also may need to obtain a new credit facility, or "exit financing." Our ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Chapter 11 Cases as well as the general global economic downturn due to the recent outbreak of COVID-19. The Chapter 11 plan of reorganization will determine the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations andBankruptcy Court decisions ongoing through the date on which such plan is confirmed. Our primary sources of liquidity are cash flows generated from operations and availability under our DIP Facilities. Subsequent to and during pendency of the Chapter 11 Cases, we expect that our primary liquidity requirements will be to fund operations and make required payments under our DIP Facilities. Our ability to meet the requirements of our DIP Credit Agreements will be dependent on our ability to generate sufficient cash flows from operations. Our sales and operating results 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 current financial projections, we expect to be able to continue to generate cash flows from operations in amounts sufficient to fund our operations, satisfy our interest and principal payment obligations on our DIP Facilities and pay administrative expenses, including professional fees while under Chapter 11. However, should the Chapter 11 Cases take longer than anticipated or should our financial results be materially and negatively impacted by the COVID-19 pandemic, we may be required to seek additional sources of liquidity. There can be no assurance that we will be able to obtain such liquidity on terms favorable to us, if at all. Our ability to obtain liquidity may also be impacted by our obligation to comply with certain covenants under the DIP Facilities, including restrictions on incurring additional indebtedness. Supply Chain FinancingLibbey Mexico has an agreement with a third-party administrator to allow participating suppliers that voluntarily decide to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. We have no economic interest in the sale of these receivables and no direct relationship with financial institutions regarding this service. Our obligations to suppliers, including amounts due and scheduled payment terms, are not impacted. All outstanding balances under the program are recorded in accounts payable on our condensed consolidated balance sheets.
In
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 summarizes our
December 31,
(dollars in thousands) March 31, 2020 2019 March 31, 2019
Accounts receivable - net $ 61,919 $ 81,307 $ 81,917
Inventories - net 189,490 174,797 209,868
Less: Accounts payable 74,723 79,262 75,366
Trade Working Capital (1) (non-GAAP) $ 176,686 $
176,842
_________________________
(1)Trade Working Capital is defined as net accounts receivable plus net inventories less accounts payable. 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$176.7 million atMarch 31, 2020 , a decrease of$0.2 million fromDecember 31, 2019 . Inventories increased$14.7 million during the first quarter of 2020 driven by the normal seasonality of our business and by softer sales experienced during the month of March as a result of the COVID-19 pandemic. In addition, accounts receivable was also affected by softer sales in the latter half of the quarter, decreasing$19.4 million . Accounts payable was$74.7 million atMarch 31, 2020 , or a decrease of$4.5 million . In addition, the impact of currency (primarily driven by the peso) has decreased totalTrade Working Capital by$1.9 million atMarch 31, 2020 in comparison toDecember 31, 2019 .
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Table of Contents Borrowings Prepetition Debt We had total borrowings of$444.8 million and$393.2 million atMarch 31, 2020 , andDecember 31, 2019 , respectively. Contributing to the$51.6 million increase in borrowings were a$50.7 million increase in borrowings under our Prepetition ABL Credit Facility and$2.0 million in borrowings under the Mexico working capital line of credit, partially offset by$1.1 million in a quarterly amortization payment under our Prepetition Term Loan B. During the quarter endedMarch 31, 2020 , there were no significant events that occurred with respect to our debt structure. The filing of the Bankruptcy Petitions constituted an event of default with respect to our existing debt obligations. However, subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined or stayed the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors' property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a prepetition claim are enjoined unless and until theBankruptcy Court lifts the automatic stay. Refer to note 2 in our Condensed Consolidated Financial Statements entitled "Subsequent Event - Bankruptcy Filing" and note 5 entitled "Borrowings" for further details regarding our prepetition debt.
The following table presents our total prepetition borrowings:
Interest December 31,
(dollars in thousands) Rate Maturity Date (1) March 31, 2020 2019
Prepetition ABL Credit floating
Facility (2) December 7, 2022 $ 68,052 $ 17,386
floating
Prepetition Term Loan B (3) April 9, 2021 374,700 375,800
Mexico working capital line LIBOR + December 14, 2020 2,000 -
of credit 3.2% (4)
Total borrowings 444,752 393,186
Less - unamortized discount
and finance fees 1,084 1,346
Total borrowings - net (5) $ 443,668 $ 391,840
_________________________
(1) The filing of our Bankruptcy Petitions constituted an event of default with
respect to our Prepetition Term Loan B and Prepetition ABL Credit Facility.
See "Subsequent Event - Debtor-in-Possession Financing" in note 5 to the
Condensed Consolidated Financial Statements. The Mexico working capital line
of credit was fully repaid and terminated on
(2) The interest rate for the Prepetition ABL Credit Facility is comprised of
several different borrowings at various rates. The weighted average rate of
all Prepetition ABL Credit Facility borrowings was 2.37 percent at
2020.
(3) See "Derivatives" below and note 9 to the Condensed Consolidated
Financial Statements.
(4) The interest rate at March 31, 2020 was 4.27 percent.
(5) Total borrowings - net includes long-term debt due within one year and
long-term debt as stated in our Condensed Consolidated Balance Sheets.
Of our total borrowings, $244.8 million , or approximately 55.0 percent, were
subject to variable interest rates at March 31, 2020 , as a result of converting
$200.0 million of Prepetition Term Loan B debt to a fixed rate using interest
rate swaps. The swaps became effective in January 2020 and maintain a 6.19
percent fixed interest rate. The swaps were terminated as part of the Chapter 11
Cases. For further discussion on our interest rate swaps, see note 9 to the
Condensed Consolidated Financial Statements. A change of one percentage point in
such rates would result in a change in interest expense of approximately
$2.4 million on an annual basis.
Cash Flow
Three months ended March 31,
(dollars in thousands) 2020 2019
Net cash used in operating activities $ (25,896 ) $ (23,905 )
Net cash used in investing activities $ (6,408 ) $ (10,361 )
Net cash provided by financing activities $ 50,377 $ 24,083
Our net cash used in operating activities was ($25.9) million in the first three
months of 2020, compared to ($23.9) million in the first three months of 2019,
an unfavorable cash flow impact of $2.0 million . Contributing to the reduction
in cash flow from operations were an unfavorable change in operating earnings
and higher incentive compensation and customer incentive payments, partially
offset by a favorable impact of $13.1 million related to Trade Working Capital
(accounts receivable, inventories and accounts payable).
Our net cash used in investing activities was $6.4 million and $10.4 million in
the first three months of 2020 and 2019, respectively, in each case representing
capital expenditures.
Net cash provided by financing activities was $50.4 million in the first three
months of 2020, compared to $24.1 million in the year-ago quarter. The primary
driver of the $26.3 million change was the increase in the net proceeds drawn on
the Prepetition ABL Credit Facility of $25.5 million in the first three months
of 2020, including $40.0 million drawn in response to the effect of COVID-19 on
our expected future operating cash flows.
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Free Cash Flow
The following table presents key drivers to our non-GAAP Free Cash Flow for the
periods presented:
Three months ended March 31,
(dollars in thousands) 2020 2019
Net cash used in operating activities
(6,408 ) (10,361 )
Free Cash Flow (1) (non-GAAP) $ (32,304 ) $ (34,266 )
_________________________
(1) We define Free Cash Flow as the sum of net cash provided by (used in)
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 the first three months of 2020,
compared to ($34.3) million in the first three months of 2019, a favorable
change of $2.0 million . The primary contributors to this change are the same 1:1
relationship as the comparable cash flow impact from operating activities and
the favorable change of $4.0 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,
18 months in the future, or more, depending on market conditions. The fair
values of these instruments are determined from market quotes, and credit risk
of both the counterparties and the Company. At March 31, 2020 , we had commodity
contracts for 3,060,000 MMBTUs of natural gas with a fair market value of a
$0.4 million liability. We have hedged a portion of our forecasted transactions
through December 2021 . At December 31, 2019 , we had commodity forward contracts
for 2,460,000 MMBTUs of natural gas with a fair market value of a $0.8 million
liability. The counterparties for these derivatives are well established
financial institutions rated BBB+ or better as of March 31, 2020 , by Standard &
Poor's .
We have interest rate swap agreements in place to fix certain interest payments
of our current and future floating rate Prepetition 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 Prepetition 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 new 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 percent, including credit spread. At March 31, 2020 , the
Prepetition Term Loan B debt held a floating interest rate of 4.01 percent. The
counterparties held a Standard & Poor's rating of BBB+ or better as of March 31,
2020 .
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, the discounted future fixed cash payments, and credit risk of both
the counterparties and the Company. 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
$12.5 million liability at March 31, 2020 , and a $14.6 million liability at
December 31, 2019 .
Due to the Company's credit risk profile and changes in the probability of the
forecasted transactions being hedged, we concluded we no longer met the criteria
for the application of hedge accounting as of March 31, 2020 . As a result,
amounts related to the hedging relationship previously recorded in AOCI were
reclassified to earnings. All derivative contracts were terminated due to our
Chapter 11 filing.
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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, remaining useful
lives of 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 first quarter of 2020, management decided to perform an impairment
assessment for each asset group of Libbey due to the decrease in demand over the
course of the quarter and resulting lowering of the 2020 forecast in each
business unit primarily due to the market disruptions caused by COVID-19. The
resulting assessments did not indicate any asset group was impaired.
On February 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. 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. We continue to monitor the alternatives being considered by
management as changes in strategy or alternatives available may result in future
impairment charges.
We also tested the Libbey Holland reporting unit's fixed assets under FASB ASC
360, as of March 31, 2020 , as this reporting unit has a history of operating
losses and our long-term plan indicates this trend will continue in the near
term before turning positive. While the current long-term forecast does not
indicate an impairment, the forecast is dependent on specific management
actions. We continue to monitor this reporting unit. Should management decide
not to take these actions, or the returns derived from such actions be less
favorable than forecasted, there could be an impairment trigger which may result
in an impairment charge.
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In the first quarter of 2020, the Company performed its ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value. The significant reduction in demand during the quarter and the high level of near-term macroeconomic uncertainty in addition to the valuation limitations from the Company's low share price and lower trading value of the Prepetition Term Loan B caused the Company to perform an interim goodwill impairment test as ofMarch 31, 2020 . 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 estimated 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, adjusted for specific company risk premium factors. 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. For our interim test, the cash flow forecasts of the reporting unit were based upon management's near-term and long-term views of our markets and represent the forecasts used by senior management and the Board of Directors to operate the business during the COVID-19 pandemic and evaluate operating performance. The terminal business value is determined by applying the long-term growth rate to the latest year for which a forecast exists. 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 estimated fair value exceeds the carrying value, no impairment exists. However, to the extent the carrying value exceeds the estimated fair value, an impairment is recorded. As a result, the impairment testing indicated that the carrying value of theU.S. &Canada reporting unit exceeded its estimated fair value, and we recorded a non-cash impairment charge of$38.4 million during the first quarter of 2020. After recording the impairment charge, there is no longer any goodwill on the balance sheet. In conjunction with the goodwill impairment testing as ofMarch 31, 2020 , we also tested our indefinite life intangible assets for impairment. We used a relief from royalty method to determine the fair market value that was then compared to the carrying value of the indefinite life intangible asset. The estimated fair value ofLibbey Holland's Royal Leerdam® trade name was determined to be lower than the carrying value, and we recorded a non-cash impairment charge of$0.1 million during the first quarter of 2020 in our EMEA reporting segment. With the Royal Leerdam® trade name fair value equaling its carrying value atMarch 31, 2020 , there is a potential of future impairment for the remaining intangible asset balance of$0.8 million if there is further degradation in the estimated value of the brand.
No impairments were indicated for the other indefinite lived trade names
recorded on the balance sheet as of
Allowance for Doubtful Accounts
We maintain an allowance for doubtful receivables for estimated losses resulting from the inability of our customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide an allowance for customer deductions based on historical collection and write-off experience. Additional allowances would be required if the financial conditions of our customers deteriorated. This evaluation is inherently subjective, as it requires estimates that are susceptible to revision as more information becomes available. The potential for bad debt write-offs has increased in the current economic environment due to the negative impacts of the COVID-19 pandemic. While no significant increases to the allowance for doubtful accounts were made in the first quarter of 2020, we continue to monitor the collection of customer receivables and the potential need for additional reserves and write-offs. Inventory Valuation We establish inventory reserves for excess and obsolete inventory. We regularly review inventory to evaluate continued demand and identify any obsolete or excess quantities of inventory. We record a provision for the difference between excess and obsolete inventory and its estimated net realizable value. This evaluation is inherently subjective, as it requires estimates that are susceptible to revision as more information becomes available. The potential for excess inventory provisions have increased in the current economic environment due to the negative impacts of the COVID-19 pandemic. While no significant excess or obsolete inventory provisions were recorded in the first quarter of 2020, as inventory levels are being actively managed to levels currently deemed appropriate, we continue to monitor the reasonableness of the reserve levels. Income Taxes
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 6 , Income Taxes, to the Condensed Consolidated Financial Statements for a detailed discussion on tax contingencies.
New Accounting Standards
See note 3 of the Condensed Consolidated Financial Statements for a summary of the new accounting standards.
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