10-Q 1 lby-9302011x10q.htm FORM 10-Q LBY-9.30.2011-10Q
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12084
Libbey Inc.
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
(Exact name of registrant as specified in its charter)
Delaware
 
34-1559357
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

 
300 Madison Avenue, Toledo, Ohio 43604
 
(Address of principal executive offices) (Zip Code)
 
 
 
 
419-325-2100
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated Filer
þ
Non-Accelerated Filer
o
Smaller reporting company
o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 19,853,533 shares at November 2, 2011.
 


TABLE OF CONTENTS

 EX-31.1
 
 EX-31.2
 
 EX-32.1
 
 EX-32.2
 
 EX-101 INSTANCE DOCUMENT
 
 EX-101 SCHEMA DOCUMENT
 
 EX-101 CALCULATION LINKBASE DOCUMENT
 
 EX-101 LABELS LINKBASE DOCUMENT
 
 EX-101 PRESENTATION LINKBASE DOCUMENT
 
 EX-101 DEFINITION LINKBASE DOCUMENT
 

2


PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements of Libbey Inc. and all majority-owned subsidiaries (collectively, Libbey or the Company) have been prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Item 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.


3


LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share amounts)
(unaudited)

 
Three months ended September 30,
 
2011
 
2010
Net sales
$
207,246

 
$
200,007

Freight billed to customers
511

 
457

Total revenues
207,757

 
200,464

Cost of sales
162,873

 
158,779

Gross profit
44,884

 
41,685

Selling, general and administrative expenses
26,739

 
25,335

Special charges
(232
)
 
700

Income from operations
18,377

 
15,650

Other income
2,237

 
23

Earnings before interest and income taxes
20,614

 
15,673

Interest expense
10,559

 
11,855

Income before income taxes
10,055

 
3,818

Provision for income taxes
2,928

 
1,472

Net income
$
7,127

 
$
2,346

Net income per share:
 
 
 
Basic
$
0.35

 
$
0.13

Diluted
$
0.34

 
$
0.12

Dividends per share
$

 
$

See accompanying notes

4


LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share amounts)
(unaudited)

 
Nine months ended September 30,
 
2011
 
2010
Net sales
$
602,274

 
$
576,947

Freight billed to customers
1,760

 
1,311

Total revenues
604,034

 
578,258

Cost of sales
473,168

 
454,665

Gross profit
130,866

 
123,593

Selling, general and administrative expenses
77,365

 
72,878

Special charges
(281
)
 
1,088

Income from operations
53,782

 
49,627

(Loss) gain on redemption of debt
(2,803
)
 
56,792

Other income
8,307

 
916

Earnings before interest and income taxes
59,286

 
107,335

Interest expense
32,929

 
33,243

Income before income taxes
26,357

 
74,092

Provision for income taxes
4,825

 
6,769

Net income
$
21,532

 
$
67,323

Net income per share:
 
 
 
Basic
$
1.07

 
$
3.98

Diluted
$
1.04

 
$
3.26

Dividends per share
$

 
$

See accompanying notes

5


LIBBEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

 
September 30, 2011
 
December 31, 2010
 
(unaudited)
 
 
Assets:
 
 
 
Cash and cash equivalents
$
24,583

 
$
76,258

Accounts receivable — net
93,447

 
92,101

Inventories — net
171,217

 
148,146

Prepaid and other current assets
13,900

 
6,437

Total current assets
303,147

 
322,942

Pension asset
14,383

 
12,767

Purchased intangible assets — net
21,687

 
23,134

Goodwill
166,572

 
169,340

Derivative asset
4,075

 
2,589

Other assets
15,026

 
17,802

Total other assets
221,743

 
225,632

Property, plant and equipment — net
263,437

 
270,397

Total assets
$
788,327

 
$
818,971

 
 
 
 
Liabilities and Shareholders’ Equity:
 
 
 
Accounts payable
$
52,317

 
$
59,095

Salaries and wages
31,767

 
32,087

Accrued liabilities
54,216

 
51,211

Accrued special charges

 
768

Accrued income taxes

 
3,121

Pension liability (current portion)
5,975

 
2,330

Non-pension postretirement benefits (current portion)
5,017

 
5,017

Derivative liability
1,891

 
3,392

Long-term debt due within one year
3,219

 
3,142

Total current liabilities
154,402

 
160,163

Long-term debt
403,055

 
443,983

Pension liability
90,464

 
115,521

Non-pension postretirement benefits
68,389

 
67,737

Deferred income taxes
8,520

 
8,376

Other long-term liabilities
8,854

 
11,925

Total liabilities
733,684

 
807,705

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, par value $.01 per share, 50,000,000 shares authorized, 19,853,533 shares issued at September 30, 2011 and 19,682,506 at December 31, 2010
199

 
197

Capital in excess of par value (includes warrants of $1,034 based on 485,309 shares at September 30, 2011 and at December 31, 2010)
304,902

 
300,692

Retained deficit
(157,145
)
 
(178,677
)
Accumulated other comprehensive loss
(93,313
)
 
(110,946
)
Total shareholders’ equity
54,643

 
11,266

Total liabilities and shareholders’ equity
$
788,327

 
$
818,971


See accompanying notes

6


LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Three months ended September 30,
 
2011
 
2010
Operating activities:
 
 
 
Net income
$
7,127

 
$
2,346

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
10,357

 
10,040

Loss on asset sales
347

 
78

Change in accounts receivable
2,989

 
(15,355
)
Change in inventories
(5,084
)
 
(2,418
)
Change in accounts payable
(7,855
)
 
(15
)
Accrued interest and amortization of discounts, warrants and finance fees
(7,135
)
 
(8,996
)
Pension & non-pension postretirement benefits
(11,530
)
 
917

Restructuring charges
(262
)
 
627

Accrued liabilities & prepaid expenses
3,673

 
7,099

Income taxes
2,578

 
1,129

Share-based compensation expense
2,398

 
741

Other operating activities
(2,293
)
 
1,027

Net cash used in operating activities
(4,690
)
 
(2,780
)
 
 
 
 
Investing activities:
 
 
 
Additions to property, plant and equipment
(8,059
)
 
(7,743
)
Net proceeds from sale of Traex
158

 

Proceeds from asset sales and other
65

 

Net cash used in investing activities
(7,836
)
 
(7,743
)
 
 
 
 
Financing activities:
 
 
 
Net (repayments) on ABL credit facility
(2,105
)
 

Other repayments
(4,673
)
 
(878
)
Debt issuance costs and other
(19
)
 

Net cash used in financing activities
(6,797
)
 
(878
)
 
 
 
 
Effect of exchange rate fluctuations on cash
(403
)
 
796

Decrease in cash
(19,726
)
 
(10,605
)
Cash at beginning of period
44,309

 
46,173

Cash at end of period
$
24,583

 
$
35,568

 
 
 
 
Supplemental disclosure of cash flows information:
 
 
 
Cash paid during the period for interest
$
17,661

 
$
21,765

Cash paid (refunded) during the period for income taxes
$
1,001

 
$
(243
)
See accompanying notes

7


LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Nine months ended September 30,
 
2011
 
2010
Operating activities:
 
 
 
Net income
$
21,532

 
$
67,323

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
32,265

 
30,994

(Gain) loss on asset sales
(6,449
)
 
343

Change in accounts receivable
(1,813
)
 
(28,967
)
Change in inventories
(24,156
)
 
(17,218
)
Change in accounts payable
(7,183
)
 
773

Accrued interest and amortization of discounts, warrants and finance fees
(6,309
)
 
6,795

Gain on redemption of new PIK notes

 
(70,193
)
Payment of interest on new PIK notes

 
(29,400
)
Call premium on senior notes and floating rate notes
1,203

 
8,415

Write-off of finance fees & discounts on senior notes, old ABL and floating rate notes
1,600

 
4,986

Pension & non-pension postretirement benefits
(8,586
)
 
3,788

Restructuring charges
(828
)
 
3,023

Accrued liabilities & prepaid expenses
4,882

 
4,635

Income taxes
(7,168
)
 
890

Share-based compensation expense
4,365

 
2,572

Other operating activities
(1,211
)
 
408

Net cash provided by (used in) operating activities
2,144

 
(10,833
)
 
 
 
 
Investing activities:
 
 
 
Additions to property, plant and equipment
(26,457
)
 
(19,122
)
Net proceeds from sale of Traex
13,000

 

Proceeds from asset sales and other
5,264

 

Net cash used in investing activities
(8,193
)
 
(19,122
)
 
 
 
 
Financing activities:
 

 
 

Other repayments
(4,770
)
 
(969
)
Other borrowings

 
215

Floating rate note payments

 
(306,000
)
Senior note payments
(40,000
)
 

Call premium on senior notes and floating rate notes
(1,203
)
 
(8,415
)
PIK note payment

 
(51,031
)
Proceeds from senior secured notes

 
392,328

Stock options exercised
478

 
8

Debt issuance costs and other
(462
)
 
(15,496
)
Net cash (used in) provided by financing activities
(45,957
)
 
10,640

 
 
 
 
Effect of exchange rate fluctuations on cash
331

 
(206
)
Decrease in cash
(51,675
)
 
(19,521
)
Cash at beginning of period
76,258

 
55,089

Cash at end of period
$
24,583

 
$
35,568

 
 
 
 
Supplemental disclosure of cash flows information:
 
 
 
Cash paid during the period for interest
$
38,971

 
$
27,905

Cash paid during the period for income taxes
$
8,689

 
$
4,459


Supplemental disclosure of non-cash financing activities:
During the first quarter of 2010, we redeemed our PIK notes, resulting in the recognition of a gain of $70.2 million. The gain was offset by $13.4 million of expenses related to the refinancing of the floating rate notes, resulting in a net gain of $56.8 million on the Condensed Consolidated Statement of Operations. See note 4 for further information on this transaction.
See accompanying notes

8


LIBBEY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share data
(unaudited)

1.
Description of the Business
Libbey is the leading producer of glass tableware products in the Western Hemisphere, in addition to supplying key markets throughout the world. We produce glass tableware in five countries and sell to customers in over 100 countries. We have the largest manufacturing, distribution and service network among glass tableware manufacturers in the Western Hemisphere and are one of the largest glass tableware manufacturers in the world. We design and market an extensive line of high-quality glass tableware, ceramic dinnerware, metal flatware, hollowware and serveware to a broad group of customers in the foodservice, retail and business-to-business markets. We own and operate two glass tableware manufacturing plants in the United States as well as glass tableware manufacturing plants in the Netherlands, Portugal, China and Mexico. Until April 28, 2011, we also owned and operated a plastics plant in Wisconsin. On April 28, 2011, we sold substantially all of the assets of our plastics subsidiary, Traex, to the Vollrath Company. See note 14 for further discussion of this transaction. In addition, we import products from overseas in order to complement our line of manufactured items. The combination of manufacturing and procurement allows us to compete in the global tableware market by offering an extensive product line at competitive prices.
Our website can be found at www.libbey.com. We make available, free of charge, at this website all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of Securities Exchange Act of 1934, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, as well as amendments to those reports. These reports are made available on our website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission and can also be found at www.sec.gov.
Our shares are traded on the NYSE Amex exchange under the ticker symbol LBY.

2.
Significant Accounting Policies
See our Form 10-K for the year ended December 31, 2010 for a description of significant accounting policies not listed below.
Basis of Presentation
The Condensed Consolidated Financial Statements include Libbey Inc. and its majority-owned subsidiaries (collectively, Libbey or the Company). Our fiscal year end is December 31st. All material intercompany accounts and transactions have been eliminated. The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from management’s estimates.
Condensed Consolidated Statements of Operations
Net sales in our Condensed Consolidated Statements of Operations include revenue earned when products are shipped and title and risk of loss have passed to the customer. Revenue is recorded net of returns, discounts and incentives offered to customers. Cost of sales includes cost to manufacture and/or purchase products, warehouse, shipping and delivery costs and other costs.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at average exchange rates during the year. The effect of exchange rate changes on transactions denominated in currencies other than the functional currency is recorded in other income.
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. Financial Accounting Standards Board Accounting Standards Codification™ (FASB ASC) Topic 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. In the United States, China, the Netherlands and

9


Portugal we have recorded valuation allowances against our deferred income tax assets.
Stock-Based Compensation Expense
We account for stock-based compensation expense in accordance with FASB ASC Topic 718, “Compensation — Stock Compensation,” and FASB ASC Topic 505-50, “Equity — Equity-Based Payments to Non-Employees”. Stock-based compensation cost is measured based on the fair value of the equity instruments issued. FASB ASC Topics 718 and 505-50 apply to all of our outstanding unvested stock-based payment awards. Stock-based compensation expense charged to the Condensed Consolidated Statement of Operations for the three months and nine months ended September 30, 2011 was $2.4 million and $4.4 million, respectively. The third quarter of 2011 included non-cash compensation charges of $1.7 million related to accelerated vesting of previously issued equity compensation. Stock-based compensation expense charged to the Condensed Consolidated Statement of Operations for the three months and nine months ended September 30, 2010 was $0.7 million and $2.6 million, respectively.
New Accounting Standards
In December 2010, the FASB issued Accounting Standards Update 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)” (ASU 2010-28). ASU 2010-28 addresses the decision process involved in testing for impairment of goodwill when the carrying value of a reporting unit is zero or less. The provisions of this update are effective for periods beginning after December 15, 2010. We do not expect the provisions of this update to have any impact on our Condensed Consolidated Financial Statements or on our process of testing for potential impairment of goodwill.
In December 2010, the FASB issued Accounting Standards Update 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)” (ASU 2010-29). ASU 2010-29 clarifies the extent to which pro forma historical information must be prepared and presented in comparative financial statements for periods following a merger or acquisition. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. For Libbey, the required disclosures are effective for combinations with acquisition dates during or after 2011. The impact on our Condensed Consolidated Financial Statements will depend on the nature and timing of any potential future business combinations.
In May 2011, the FASB issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). ASU 2011-04 explains how to measure fair value and improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. ASU 2011-04 does not require additional fair value measurements, and it is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The provisions of this update are effective for periods beginning after December 15, 2011. We do not expect the provisions of this update to have any impact on our Condensed Consolidated Financial Statements.
In June 2011, the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 requires presentation of net income, other comprehensive income items and total comprehensive income to be in one continuous statement or two separate but consecutive statements. Other comprehensive income presentation in the statement of stockholders’ equity will no longer be permitted. This update is effective for periods beginning after December 15, 2011. Libbey will incorporate the required presentation changes in the Condensed Consolidated Financial Statements in the first quarter 2012.
In September 2011, the FASB issued Accounting Standards Update 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (ASU 2011-08). ASU 2011-08 allows for an option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If the qualitative factors results in the fair value exceeding the carrying value of a reporting unit, then performing the two-step impairment test is unnecessary. This update is effective for periods beginning after December 15, 2011, with early adoption permitted. We do not expect the provisions of this update to have any impact on our Condensed Consolidated Financial Statements.
Reclassifications
Certain amounts in the prior year’s financial statements may have been reclassified to conform to the presentation used in the current period financial statements. During the third quarter of 2011, the Company revised the classification of the call premium on the senior notes and the floating rate notes and included the cash flow effect within the financing activities.

10



3.
Balance Sheet Details
The following table provides detail of selected balance sheet items:
(dollars in thousands)
September 30, 2011
 
December 31, 2010
Accounts receivable:
 
 
 
Trade receivables
$
92,995

 
$
90,899

Other receivables
452

 
1,202

Total accounts receivable, less allowances of $5,236 and $5,518
$
93,447

 
$
92,101

Inventories:
 
 
 
Finished goods
$
154,665

 
$
132,169

Work in process
920

 
653

Raw materials
4,224

 
4,444

Repair parts
9,945

 
9,496

Operating supplies
1,463

 
1,384

Total inventories, less allowances of $5,003 and $4,658
$
171,217

 
$
148,146

Prepaid and other current assets:
 
 
 
Value added tax
$
2,641

 
$
1,332

Prepaid expenses
5,776

 
4,822

Refundable, deferred and prepaid income taxes
5,025

 
283

Derivative asset
458

 

Total prepaid and other current assets
$
13,900

 
$
6,437

Other assets:
 
 
 
Deposits
$
907

 
$
904

Finance fees — net of amortization
10,137

 
13,012

Other assets
3,982

 
3,886

Total other assets
$
15,026

 
$
17,802

Accrued liabilities:
 
 
 
Accrued incentives
$
24,275

 
$
15,060

Workers compensation
8,871

 
9,608

Medical liabilities
3,556

 
3,785

Interest
4,696

 
14,416

Commissions payable
1,292

 
904

Other accrued liabilities
11,526

 
7,438

Total accrued liabilities
$
54,216

 
$
51,211

Other long-term liabilities:
 
 
 
Deferred liability
$
3,723

 
$
4,622

Derivative liability
81

 

Other long-term liabilities
5,050

 
7,303

Total other long-term liabilities
$
8,854

 
$
11,925


4.
Borrowings
On March 25, 2011, Libbey Glass redeemed an aggregate principal amount of $40.0 million of its outstanding 10.0 percent Senior Secured Notes due 2015, on a pro rata basis in accordance with the terms of the New Notes Indenture. Pursuant to the terms of the New Notes Indenture, the redemption price for the Senior Secured Notes was 103.0 percent of the principal amount of the redeemed Senior Secured Notes, plus accrued and unpaid interest. At completion of the redemption, the aggregate principal amount of the Senior Secured Notes outstanding was $360.0 million. In conjunction with this redemption, we recorded $2.8 million of expense, representing $1.2 million for an early call premium and $1.6 million for the write off of a pro rata amount of financing fees and discounts.

11


On February 8, 2010, we completed the refinancing of substantially all of the existing indebtedness of our wholly-owned subsidiaries Libbey Glass and Libbey Europe B.V. The refinancing included:
the entry into an amended and restated credit agreement with respect to our ABL Facility;
the issuance of $400.0 million in aggregate principal amount of 10.0 percent Senior Secured Notes of Libbey Glass due 2015;
the repurchase and cancellation of all of Libbey Glass’s then outstanding $306.0 million in aggregate principal amount of floating rate notes; and
the redemption of all of Libbey Glass’s then outstanding $80.4 million in aggregate principal amount 16.0 percent payment-in-kind notes (New PIK Notes).
We used the proceeds of the offering of the Senior Secured Notes, together with cash on hand, to fund the repurchase of the floating rate notes, the redemption of the New PIK Notes and to pay certain related fees and expenses. Upon completion of the refinancing, we recorded a gain of $71.7 million related to the redemption of the New PIK Notes. $70.2 million of this gain was recorded in the three months ended March 31, 2010. This gain was partially offset by a $13.4 million write-off of bank fees, discounts and a call premium on the floating rate notes, resulting in a net gain of $58.3 million. $56.8 million of this net gain was recorded in the three months ended March 31, 2010, as shown on the Condensed Consolidated Statement of Operations.

As part of an exchange transaction in 2009 involving our 16.0 percent payment-in-kind notes, 933,145 shares were issued to Merrill Lynch PCG, Inc. in October, 2009 along with warrants conveying the right to purchase, for $0.01 per share, an additional 3,466,856 shares of our common stock. Please see note 6 to our Annual Report on Form 10-K for the year ended December 31, 2010 for further information regarding this transaction. The additional 3.5 million shares were issued in August, 2010 as the warrant holder chose to exercise these warrants, and on August 18, 2010, we announced the closing of a secondary offering of these 4.4 million shares of our common stock on behalf of Merrill Lynch PCG, Inc., the selling stockholder, at a price to the public of $10.25 per share. The total offering size reflects the underwriters' exercise of their option to purchase an additional 573,913 shares of common stock, on the same terms and conditions, to cover over-allotments. We did not receive any proceeds from the offering. The fees of approximately $1.1 million related to this transaction were recorded as Selling, General and Administrative expense in the Condensed Consolidated Statement of Operations and were reflected in our Glass Operations segment in the third quarter.
Borrowings consist of the following:
(dollars in thousands)
Interest Rate
 
Maturity Date
September 30,
2011
 
December 31,
2010
Borrowings under ABL Facility
floating
 
April 29, 2016
$

 
$

Senior Secured Notes
10.00%
(1)
February 15, 2015
360,000

 
400,000

Promissory Note
6.00%
 
October, 2011 to September, 2016
1,161

 
1,307

RMB Loan Contract
floating
 
December, 2012 to January, 2014
34,430

 
37,925

BES Euro Line
floating
 
December, 2011 to December, 2013
11,219

 
10,934

Total borrowings
 
 
 
406,810

 
450,166

Less — unamortized discount
 
 
 
4,644

 
6,307

Plus — carrying value adjustment on debt related to the Interest Rate Agreement (1)
4,108

 
3,266

Total borrowings — net
 
 
 
406,274

 
447,125

Less — long term debt due within one year
 
 
3,219

 
3,142

Total long-term portion of borrowings — net
 
 
$
403,055

 
$
443,983


(1)
See Interest Rate Agreements under “Senior Secured Notes” below and in note 9.
Amended and Restated ABL Credit Agreement
Pursuant to the refinancing, Libbey Glass and Libbey Europe entered into an Amended and Restated Credit Agreement, dated as of February 8, 2010 and amended on April 29, 2011 (ABL Facility), with a group of five financial institutions. The ABL Facility provides for borrowings of up to $100.0 million (reduced from $110.0 million per the amendment on April 29, 2011), subject to certain borrowing base limitations, reserves and outstanding letters of credit.
All borrowings under the ABL Facility are secured by:
a first-priority security interest in substantially all of the existing and future real and personal property of Libbey Glass and its domestic subsidiaries (Credit Agreement Priority Collateral);

12


a first-priority security interest in:
100 percent of the stock of Libbey Glass and 100 percent of the stock of substantially all of Libbey Glass’s present and future direct and indirect domestic subsidiaries;
100 percent of the non-voting stock of substantially all of Libbey Glass’s first-tier present and future foreign subsidiaries; and
65 percent of the voting stock of substantially all of Libbey Glass’s first-tier present and future foreign subsidiaries
a first priority security interest in substantially all proceeds and products of the property and assets described above; and
a second-priority security interest in substantially all of the owned real property, equipment and fixtures in the United States of Libbey Glass and its domestic subsidiaries, subject to certain exceptions and permitted liens (New Notes Priority Collateral).
Additionally, borrowings by Libbey Europe under the ABL Facility are secured by:
a first-priority lien on substantially all of the existing and future real and personal property of Libbey Europe and its Dutch subsidiaries; and
a first-priority security interest in:
100 percent of the stock of Libbey Europe and 100 percent of the stock of substantially all of the Dutch subsidiaries; and
100 percent (or a lesser percentage in certain circumstances) of the outstanding stock issued by the first tier foreign subsidiaries of Libbey Europe and its Dutch subsidiaries.
Swingline borrowings are limited to $15.0 million, with swing line borrowings for Libbey Europe being limited to the US equivalent of $7.5 million. Loans comprising each CBFR (CB Floating Rate) Borrowing, including each Swingline Loan, bear interest at the CB Floating Rate plus the Applicable Rate, and euro-denominated swing line borrowings (Eurocurrency Loans) bear interest calculated at the Netherlands swing line rate, as defined in the ABL Facility. The Applicable Rates for CBFR Loans and Eurocurrency Loans vary depending on our aggregate remaining availability. The Applicable Rates for CBFR Loans and Eurocurrency Loans were 0.75 percent and 1.75 percent, respectively, at September 30, 2011. Libbey pays a quarterly Commitment Fee, as defined by the ABL Facility, on the total credit provided under the ABL Facility. The Commitment Fee was 0.375 percent at September 30, 2011. No compensating balances are required by the Agreement. The Agreement does not require compliance with a fixed charge coverage ratio covenant, unless aggregate unused availability falls below $10.0 million. If our aggregate unused ABL availability were to fall below $10.0 million, the fixed charge coverage ratio requirement would be 1:10 to 1:00. Libbey Glass and Libbey Europe have the option to increase the ABL Facility by $10.0 million. There were no Libbey Glass or Libbey Europe borrowings under the facility at September 30, 2011, or at December 31, 2010. Interest is payable on the last day of the interest period, which can range from one month to six months depending on the maturity of each individual borrowing on the facility.
The borrowing base under the ABL Facility is determined by a monthly analysis of the eligible accounts receivable and inventory. The borrowing base is the sum of (a) 85 percent of eligible accounts receivable and (b) the lesser of (i) 85 percent of the net orderly liquidation value (NOLV) of eligible inventory, (ii) 65 percent of eligible inventory, or (iii) $75.0 million.
The available total borrowing base is offset by ERISA, rent and tax reserves totaling $2.7 million and mark-to-market reserves for natural gas contracts of $1.8 million as of September 30, 2011. The ABL Facility also provides for the issuance of $30.0 million of letters of credit, which are applied against the $100.0 million limit. At September 30, 2011, we had $10.5 million in letters of credit outstanding under the ABL Facility. Remaining unused availability under the ABL Facility was $85.0 million at September 30, 2011, compared to $65.2 million under the ABL Facility at December 31, 2010.
Senior Secured Notes
On February 8, 2010, Libbey Glass closed its offering of the $400.0 million Senior Secured Notes. The net proceeds of the offering of Senior Secured Notes were approximately $379.8 million, after the 1.918 percent original issue discount of $7.7 million, $10.0 million of commissions payable to the initial purchasers and $2.5 million of fees related to the offering. These fees will be amortized to interest expense over the life of the notes.
The Senior Secured Notes were issued pursuant to an Indenture, dated February 8, 2010 (New Notes Indenture), between Libbey Glass, the Company, the domestic subsidiaries of Libbey Glass listed as guarantors therein (Subsidiary Guarantors and together with the Company, Guarantors), and The Bank of New York Mellon Trust Company, N.A., as trustee (New Notes Trustee), and collateral agent. Under the terms of the New Notes Indenture, the Senior Secured Notes bear interest at a rate of 10.0 percent per year and will mature on February 15, 2015. The New Notes Indenture contains covenants that restrict the ability of Libbey Glass and the Guarantors to, among other things:
incur or guarantee additional indebtedness;
pay dividends, make certain investments or other restricted payments;

13


create liens;
enter into affiliate transactions;
merge or consolidate, or otherwise dispose of all or substantially all the assets of Libbey Glass and the Guarantors; and
transfer or sell assets.
The New Notes Indenture provides for customary events of default. In the case of an event of default arising from bankruptcy or insolvency as defined in the New Notes Indenture, all outstanding Senior Secured Notes will become due and payable immediately without further action or notice. If any other event of default under the Indenture occurs or is continuing, the New Notes Trustee or holders of at least 25 percent in aggregate principal amount of the then outstanding Senior Secured Notes may declare all the Senior Secured Notes to be due and payable immediately.
The Senior Secured Notes and the related guarantees under the New Notes Indenture are secured by (i) first priority liens on the New Notes Priority Collateral and (ii) second priority liens on the Credit Agreement Priority Collateral.
In connection with the sale of the Senior Secured Notes, Libbey Glass and the Guarantors entered into a registration rights agreement, dated February 8, 2010 (Registration Rights Agreement), under which they agreed to make an offer to exchange the Senior Secured Notes and the related guarantees for registered, publicly tradable notes and guarantees that have substantially identical terms to the Senior Secured Notes and the related guarantees, and in certain limited circumstances, to file a shelf registration statement that would allow certain holders of Senior Secured Notes to resell their respective Senior Secured Notes to the public. On January 25, 2011, we exchanged $400.0 million aggregate principal amount of 10.0 percent Senior Secured Notes due 2015 for an equal principal amount of a new issue of 10.0 percent Senior Secured Notes due 2015, which have been registered under the Securities act of 1933, as amended.
Prior to August 15, 2012, we may redeem in the aggregate up to 35 percent of the original principal amount of Senior Secured Notes with the net cash proceeds of one or more equity offerings at a redemption price of 110 percent of the principal amount, provided that at least 65 percent of the original principal amount of the Senior Secured Notes must remain outstanding after each redemption and that each redemption occurs within 90 days of the closing of the equity offering. In addition, prior to August 15, 2012, but not more than once in any twelve-month period, we may redeem up to 10 percent of the Senior Secured Notes at a redemption price of 103 percent plus accrued and unpaid interest. The Senior Secured Notes are redeemable at our option, in whole or in part, at any time on or after August 15, 2012 at set redemption prices together with accrued and unpaid interest.
On March 25, 2011, Libbey Glass redeemed an aggregate principal amount of $40.0 million of the Senior Secured Notes in accordance with the terms of the New Notes Indenture. Pursuant to the terms of the New Notes Indenture, the redemption price for the Senior Secured Notes was 103.0 percent of the principal amount of the redeemed Senior Secured Notes, plus accrued and unpaid interest. At completion of the redemption, the aggregate principal amount of the Senior Secured Notes outstanding was $360.0 million. In conjunction with this redemption, we recorded $2.8 million of expense, representing $1.2 million for an early call premium and $1.6 million for the write off of a pro rata amount of financing fees and discounts.
We have an Interest Rate Agreement (Rate Agreement) in place with respect to $80.0 million of debt as a means to manage our fixed to variable interest rate ratio. The Rate Agreement effectively converts this portion of our long-term borrowings from fixed rate debt to variable rate debt. Prior to August 15, 2012, but not more than once in any twelve-month period, the counterparty may call up to 10 percent of the Rate Agreement at a call price of 103 percent. The Rate Agreement originally covered $100.0 million of our fixed rate debt, but the counterparty called $10.0 million in August 2010 and another $10.0 in August 2011. The Rate Agreement is callable at the counterparty’s option, in whole or in part, at any time on or after August 15, 2012 at set call premiums. The variable interest rate for our borrowings related to the Rate Agreement at September 30, 2011, excluding applicable fees, is 7.57 percent. This Rate Agreement expires on February 15, 2015. Total remaining Senior Secured Notes not covered by the Rate Agreement have a fixed interest rate of 10.0 percent per year through February 15, 2015. If the counterparty to this Rate Agreement were to fail to perform, this Rate Agreement would no longer afford us a variable rate. However, we do not anticipate non-performance by the counterparty. The interest rate swap counterparty was rated AA, as of September 30, 2011, by Standard and Poor’s.
The fair market value and related carrying value adjustment are as follows:
(dollars in thousands)
September 30, 2011
 
December 31, 2010
Fair market value of Rate Agreement - asset
$
4,075

 
$
2,536

Adjustment to increase the carrying value of the related long-term debt
$
4,108

 
$
3,266


14


The net impact recorded in other income on the Condensed Consolidated Statement of Operations is as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2011
 
2010
 
2011
 
2010
Income (expense) on hedging activities in other income
 
$
205

 
$
(237
)
 
$
697

 
$
179

The fair value of the Rate Agreement is based on the market standard methodology of netting the discounted expected future fixed cash receipts and the discounted future variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observed market interest rate forward curves. We expect this agreement to expire as originally contracted. See note 9 for further discussion.
Promissory Note
In September 2001, we issued a $2.7 million promissory note at an interest rate of 6.0 percent in connection with the purchase of our Laredo, Texas warehouse facility. At September 30, 2011, we had $1.2 million outstanding on the promissory note. Principal and interest with respect to the promissory note are paid monthly.
Notes Payable
We have an overdraft line of credit for a maximum of €1.0 million. At September 30, 2011, there were no borrowings under the facility, which has an interest rate of 5.80 percent. Interest with respect to the note is paid monthly.
RMB Loan Contract
On January 23, 2006, Libbey Glassware (China) Co., Ltd. (Libbey China), an indirect wholly owned subsidiary of Libbey Inc., entered into an RMB Loan Contract (RMB Loan Contract) with China Construction Bank Corporation Langfang Economic Development Area Sub-Branch (CCB). Pursuant to the RMB Loan Contract, CCB agreed to lend to Libbey China RMB 250.0 million, or the equivalent of approximately $39.1 million, for the construction of our production facility in China and the purchase of related equipment, materials and services. The loan has a term of eight years and bears interest at a variable rate as announced by the People’s Bank of China. As of the date of the initial advance under the Loan Contract, the annual interest rate was 5.51 percent, and as of September 30, 2011, the annual interest rate was 6.12 percent. As of September 30, 2011, the outstanding balance was RMB 220.0 million (approximately $34.4 million). Interest is payable quarterly. We pre-paid the July 20, 2012 principal payment of 30.0 million RMB (approximately $4.7 million) in September 2011. Payments of principal in the amount of RMB 40.0 million (approximately $6.2 million) must be made on December 20, 2012, and three payments of principal in the amount of RMB 60.0 million (approximately $9.4 million) each must be made on July 20, 2013, December 20, 2013, and January 20, 2014, respectively. The obligations of Libbey China are secured by a guarantee executed by Libbey Inc. for the benefit of CCB and a mortgage lien on the Libbey China facility.
BES Euro Line
In January 2007, Crisal entered into a seven year, €11.0 million line of credit (approximately $15.0 million) with Banco Espírito Santo, S.A. (BES). The $11.2 million outstanding at September 30, 2011, was the U.S. dollar equivalent of the €8.3 million outstanding under the line at an interest rate of 3.77 percent. Payment of principal in the amount of €2.2 million (approximately $3.0 million) is due in December 2011, payment of €2.8 million (approximately $3.8 million) is due in December 2012 and payment of €3.3 million (approximately $4.4 million) is due in December 2013. Interest with respect to the line is paid every six months.
Fair Value of Borrowings
The fair value of our debt has been calculated based on quoted market prices for the same or similar issues. Our $360.0 million Senior Secured Notes due February 15, 2015 had an estimated fair value of $382.5 million at September 30, 2011. The fair value of the remainder of our debt approximates carrying value at September 30, 2011 due to variable rates.
Capital Resources and Liquidity
Historically, cash flows generated from operations and our borrowing capacity under our ABL Facility have enabled us to meet our cash requirements, including capital expenditures and working capital requirements. As of September 30, 2011 we had no borrowings under our ABL Facility, and we had $10.5 million of letters of credit issued under that facility. As a result, we had $85.0 million of unused availability remaining under the ABL Facility at September 30, 2011. In addition, we had $24.6 million of cash on hand at September 30, 2011.
Based on our operating plans and current forecast expectations, we anticipate that our level of cash on hand, cash flows from

15


operations and our borrowing capacity under our ABL Facility will provide sufficient cash availability to meet our ongoing liquidity needs.

5.
Special Charges
Facility Closures
In December 2008, we announced that our Syracuse China manufacturing facility and our Mira Loma, California distribution center would be shut down in early to mid-2009 in order to reduce costs. The Syracuse China facility was closed on April 9, 2009 and the Mira Loma distribution center was closed on May 31, 2009. See Form 10-K for the year ended December 31, 2010 for further discussion.
We incurred no additional charges for the three months ended September 30, 2011. We incurred charges of approximately $0.1 million in the nine months ended September 30, 2011 related to other costs net of building site clean-up adjustments in connection with the sale of the property in Syracuse, New York in March 2011. This amount was included in special charges on the Condensed Consolidated Statement of Operations in the Other Operations segment as detailed in the table below.
There were no additional charges related to these closures in the three months ended September 30, 2010. We incurred additional charges of approximately $0.5 million in the nine months ended September 30, 2010 related to these closures, including charges of $0.4 million primarily related to employee termination and building site cleanup costs. These amounts were included in special charges on the Condensed Consolidated Statement of Operations in the Glass Operations and Other Operations segment as detailed in the table below.
Other income on the Condensed Consolidated Statement of Operations included a charge of immaterial amounts for the three months ended September 30, 2010, and a charge of $0.1 million for the first nine months of 2010 for the change in fair value of ineffective natural gas hedges related to our Syracuse China operation. These amounts were included in the Other Operations segment.

The following table summarizes the facility closure charges in the first nine months of 2011 and 2010:
 
Nine months ended September 30, 2011
 
Nine months ended September 30, 2010
(dollars in thousands)
Glass Operations
 
Other Operations
 
Total
 
Glass Operations
 
Other Operations
 
Total
Employee termination cost & other
$

 
$
167

 
$
167

 
$
29

 
$
76

 
$
105

Building site clean-up & fixed asset write-down

 
(116
)
 
(116
)
 

 
283

 
283

Included in special charges

 
51

 
51

 
29

 
359

 
388

Ineffectiveness of natural gas hedge

 

 

 

 
(130
)
 
(130
)
Included in other (expense) income

 

 

 

 
(130
)
 
(130
)
Total pretax charge
$

 
$
51

 
$
51

 
$
29

 
$
489

 
$
518


The following reflects the balance sheet activity related to the facility closure charge for the period ended September 30, 2011:
 
Balances at
December 31, 2010
 
Total
Charge to Earnings
 
Cash
(payments) receipts
 
Inventory &
Fixed asset Write Downs
 
Non-cash Utilization
 
Balances at
September 30, 2011
(dollars in thousands)
 
 
 
 
 
Building site clean-up & fixed asset write-down
$
151

 
$
(116
)
 
$
(5
)
 
$
21

 
$
(51
)
 
$

Employee termination cost & other
301

 
167

 
(314
)
 

 
(154
)
 

Total
$
452

 
$
51

 
$
(319
)
 
$
21

 
$
(205
)
 
$



16


The activities related to our closure of the Syracuse China manufacturing facility and our Mira Loma, California distribution center are complete. The following reflects the total cumulative expenses to date (incurred from the fourth quarter of 2008 through the Balance Sheet date) related to the facility closure activity:

(dollars in thousands)
Glass Operations
 
Other Operations
 
Charges To Date
Inventory write-down
$
192

 
$
10,541

 
$
10,733

Pension & postretirement welfare

 
4,448

 
4,448

Fixed asset depreciation

 
966

 
966

Included in cost of sales
192

 
15,955

 
16,147

Employee termination cost & other
548

 
6,149

 
6,697

Building site clean-up & fixed asset write-down
177

 
10,418

 
10,595

Included in special charges
725

 
16,567

 
17,292

Ineffectiveness of natural gas hedge

 
745

 
745

Included in other (income) expense

 
745

 
745

Total pretax charge to date
$
917

 
$
33,267

 
$
34,184


Fixed Asset and Inventory Write-down
In August 2010, we wrote down decorating assets in our Shreveport, Louisiana facility as a result of our decision to outsource our U.S. decorating business. See Form 10-K for the year ended December 31, 2010 for further discussion.
During the three months and nine months ended September 30, 2011, we recorded a $0.2 million and $0.3 million income adjustment, respectively, to special charges on the Condensed Consolidated Statement of Operations in the Glass Operations segment. In the three months and nine months ended September 30, 2011, we recorded charges of $0.2 million and $0.2 million, respectively, to write down inventory and spare machine parts. These amounts were included in cost of sales on the Condensed Consolidated Statement of Operations in the Glass Operations segment.

In the third quarter of 2010, we recorded a charge of $0.6 million to write down inventory and spare machine parts. This amount was included in cost of sales on the Condensed Consolidated Statement of Operations in the Glass Operations segment. Charges of $0.7 million were recorded in the third quarter of 2010 for site cleanup and fixed assets write down. This amount was included in special charges on the Condensed Consolidated Statement of Operations in the Glass Operations segment. No employee related costs were incurred, as all employees were reassigned in the facility.
The following reflects the balance sheet activity related to the fixed asset and inventory write-down charge as of September 30, 2011:

 
Reserve
Balances at
December 31, 2010
 
Total
Charge to Earnings
 
Cash
(payments) receipts
 
Inventory &
Fixed asset Write Downs
 
Reserve
Balances at
September 30, 2011
(Dollars in thousands)
 
 
 
 
Building site clean-up & fixed asset write-down
$
316

 
$
(135
)
 
$
(39
)
 
$
(142
)
 
$

Total
$
316

 
$
(135
)
 
$
(39
)
 
$
(142
)

$


The activities related to our write-down of decorating fixed assets and inventory are complete.
During the second quarter of 2010, we wrote down certain after-processing equipment within our Glass Operations segment. The non-cash charge of $2.7 million was included in cost of sales on the Condensed Consolidated Statement of Operations. During the second quarter of 2011, we received a $1.0 million credit from the supplier of this equipment. This was recorded in selling, general and administrative expense and other income on the Condensed Consolidated Statements of Operations.

17


Summary of Total Special Charges
The following table summarizes the special charges mentioned above and their classifications in the Condensed Consolidated Statements of Operations:

 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
2011
 
2010
 
2011
 
2010
Cost of sales
$
154

 
$
578

 
$
197

 
$
3,265

Selling general & administrative

 

 
(805
)
 

Special charges (income)
(232
)
 
700

 
(281
)
 
1,088

Other (income) expense

 

 
(216
)
 
130

Total (income) expense
$
(78
)
 
$
1,278

 
$
(1,105
)
 
$
4,483


6.
Income Taxes
The Company’s effective tax rate differs from the United States statutory tax rate primarily due to valuation allowances, changes in the mix of earnings in countries with differing statutory tax rates, changes in accruals related to uncertain tax positions and tax planning structures. At September 30, 2011 and December 31, 2010 we had $1.3 million and $1.1 million, respectively, of gross unrecognized tax benefits, exclusive of interest and penalties.
Further, our current and future provision for income taxes for 2011 is significantly impacted by valuation allowances. In the United States, China, the Netherlands and Portugal we have recorded valuation allowances against our deferred income tax assets. For the three months and nine months ended September 30, 2011, we did not release any valuation allowance. For the three months and nine months ended September 30, 2010, we reduced our valuation allowance by $0 and $1.1 million. The release of the valuation allowance in 2010 was related to the utilization of net operating losses in Mexico. In assessing the need for recording a valuation allowance, we weigh all available positive and negative evidence. Examples of the evidence we consider are cumulative losses in recent years, losses expected in early future years, a history of potential tax benefits expiring unused, and whether there was an unusual, infrequent or extraordinary item to be considered. Based on our analysis of all available evidence, we intend to maintain these allowances until it is more likely than not that the deferred income tax assets will be realized.
Income tax payments consist of the following:
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
2011
 
2010
 
2011
 
2010
Total income tax payments (refunds), net
$
1,843

 
$
(160
)
 
$
13,029

 
$
5,379

Less: credits or offsets
842

 
83

 
4,340

 
920

Cash paid (refunded), net
$
1,001

 
$
(243
)
 
$
8,689

 
$
4,459


7.
Pension and Non-pension Postretirement Benefits
We have pension plans covering the majority of our employees. Benefits generally are based on compensation for salaried employees and job grade and length of service for hourly employees. Our policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements. In addition, we have an unfunded supplemental employee retirement plan (SERP) that covers salaried U.S.-based employees of Libbey hired before January 1, 2006. The U.S. pension plans cover the salaried U.S.-based employees of Libbey hired before January 1, 2006 and most hourly U.S.-based employees (excluding employees hired at Shreveport after 2008 and employees hired at Toledo after September 30, 2010). The non-U.S. pension plans cover the employees of our wholly owned subsidiaries in the Netherlands and Mexico. The plan in Mexico is not funded.

18


The components of our net pension expense, including the SERP, are as follows:

Three months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
1,372

 
$
1,106

 
$
390

 
$
383

 
$
1,762

 
$
1,489

Interest cost
4,014

 
3,800

 
1,190

 
1,103

 
5,204

 
4,903

Expected return on plan assets
(4,307
)
 
(4,141
)
 
(566
)
 
(612
)
 
(4,873
)
 
(4,753
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
540

 
582

 
77

 
30

 
617

 
612

Loss
1,166

 
760

 
113

 
98

 
1,279

 
858

Pension expense
$
2,785

 
$
2,107

 
$
1,204

 
$
1,002

 
$
3,989

 
$
3,109


Nine months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
4,118

 
$
4,006

 
$
1,275

 
$
1,184

 
$
5,393

 
$
5,190

Interest cost
12,042

 
11,922

 
3,811

 
3,348

 
15,853

 
15,270

Expected return on plan assets
(12,879
)
 
(12,513
)
 
(1,756
)
 
(1,795
)
 
(14,635
)
 
(14,308
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
1,622

 
1,746

 
249

 
92

 
1,871

 
1,838

Loss
3,496

 
2,716

 
373

 
308

 
3,869

 
3,024

Pension expense
$
8,399

 
$
7,877

 
$
3,952

 
$
3,137

 
$
12,351

 
$
11,014


We provide certain retiree health care and life insurance benefits covering our U.S and Canadian salaried and non-union hourly employees hired before January 1, 2004 and a majority of our U.S. union hourly employees (excluding employees hired at Shreveport after 2008 and employees hired at Toledo after September 30, 2010). Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Benefits for most hourly retirees are determined by collective bargaining. The U.S. non-pension postretirement plans cover the hourly and salaried U.S.-based employees of Libbey (excluding those mentioned above). The non-U.S. non-pension postretirement plans cover the retirees and active employees of Libbey who are located in Canada. The postretirement benefit plans are not funded.
The provision for our non-pension postretirement benefit expense consists of the following:
Three months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
340

 
$
242

 
$

 
$

 
$
340

 
$
242

Interest cost
908

 
877

 
30

 
30

 
938

 
907

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service gain
105

 
296

 

 

 
105

 
296

Loss / (gain)
277

 
299

 
(5
)
 
(8
)
 
272

 
291

Non-pension postretirement benefit expense
$
1,630

 
$
1,714

 
$
25

 
$
22

 
$
1,655

 
$
1,736


Nine months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
1,019

 
$
1,020

 
$
1

 
$
1

 
$
1,020

 
$
1,021

Interest cost
2,724

 
2,713

 
92

 
92

 
2,816

 
2,805

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service gain
316

 
292

 

 

 
316

 
292

Loss / (gain)
831

 
771

 
(13
)
 
(21
)
 
818

 
750

Non-pension postretirement benefit expense
$
4,890

 
$
4,796

 
$
80

 
$
72

 
$
4,970

 
$
4,868



19


In 2011, we expect to utilize approximately $31.7 million in cash to fund our pension plans and pay for non-pension postretirement benefits. Of that amount, $14.4 million and $24.6 million of cash were utilized in the three months and nine months ended September 30, 2011, respectively.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care Education and Affordability Reconciliation Act (the Acts) were signed into law. The Acts contain provisions that could impact our accounting for retiree medical benefits in future periods. Based on the analysis to date, the impact of provisions in the Acts that are reasonably determinable is not expected to have a material impact on our postretirement benefit plans. We will continue to assess the provisions of the Acts and may consider plan amendments and design changes in future periods to better align these plans with the provisions of the Acts.

8.
Net Income per Share of Common Stock
The following table sets forth the computation of basic and diluted earnings per share:
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands, except earnings per share)
2011
 
2010
 
2011
 
2010
Numerators for earnings per share —
 
 
 
 
 
 
 
—Net income that is available to common shareholders
$
7,127

 
$
2,346

 
$
21,532

 
$
67,323

Denominator for basic earnings per share —
 
 
 
 
 
Weighted average shares outstanding
20,181,558

 
18,148,127

 
20,079,412

 
16,927,812

Effect of stock options and restricted stock units
457,247

 
391,486

 
524,769

 
424,602

Effect of warrants
76,341

 
1,746,983

 
122,295

 
3,305,639

Total effect of dilutive securities
533,588

 
2,138,469

 
647,064

 
3,730,241

Denominator for diluted earnings per share —
 
 
 
 
 
 
 
—Adjusted weighted average shares and assumed conversions
20,715,146

 
20,286,596

 
20,726,476

 
20,658,053

Basic earnings per share:
$
0.35

 
$
0.13

 
$
1.07

 
$
3.98

Diluted earnings per share:
$
0.34

 
$
0.12

 
$
1.04

 
$
3.26


In October 2009, we entered into a transaction with Merrill Lynch PCG, Inc. to exchange existing 16.0 percent payment-in-kind notes due in December 2011, for a combination of debt and equity securities (Exchange Transaction). As part of the Exchange Transaction, we issued warrants conveying the right to purchase, for $0.01 per share, 3,466,856 shares of Libbey Inc. common stock. These warrants were exercised and shares were issued in August 2010.
When applicable, diluted shares outstanding include the dilutive impact of warrants and restricted stock units. Diluted shares also include the impact of in-the-money employee stock options, which are calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that hypothetically would be received from the exercise of all in-the-money options are assumed to be used to repurchase shares.

9.
Derivatives
We utilize derivative financial instruments to hedge certain interest rate risks associated with our long-term debt, commodity price risks associated with forecasted future natural gas requirements and foreign exchange rate risks associated with transactions denominated in a currency other than the U.S. dollar. Most of these derivatives, except for certain natural gas contracts originally designated to hedge expected purchases at Syracuse China and the foreign currency contracts, qualify for hedge accounting since the hedges are highly effective, and we have designated and documented contemporaneously the hedging relationships involving these derivative instruments. While we intend to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we do not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in our earnings. All of these contracts were accounted for under FASB ASC 815 “Derivatives and Hedging.”

20


Fair Values
The following table provides the fair values of our derivative financial instruments for the periods presented:

 
 
Asset Derivatives:
(dollars in thousands)
 
September 30, 2011
 
December 31, 2010
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate contract
 
Derivative asset
 
$
4,075

 
Derivative asset
 
$
2,536

Natural gas contracts
 
Derivative asset
 

 
Derivative asset
 
53

Total designated
 
 
 
4,075

 
 
 
2,589

Derivatives not designated as hedging
instruments under FASB ASC 815:
 
 
 
 
 
 
 
 
Currency contracts
 
Prepaid and other current assets
 
458

 
Prepaid and other current assets
 

Total undesignated
 
 
 
458

 
 
 

Total
 
 
 
$
4,533

 
 
 
$
2,589

 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives:
(dollars in thousands)
 
September 30, 2011
 
December 31, 2010
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Natural gas contracts
 
Derivative liability
 
$
1,891

 
Derivative liability
 
$
3,117

Natural gas contracts
 
Other long-term liabilities
 
81

 
Other long-term liabilities
 

Total designated
 
 
 
1,972

 
 
 
3,117

Derivatives not designated as hedging
instruments under FASB ASC 815:
 
 
 
 
 
 
 
 
Natural gas contracts
 
Derivative liability
 

 
Derivative liability
 
124

Currency contracts
 
Derivative liability
 

 
Derivative liability
 
151

Total undesignated
 
 
 

 
 
 
275

Total
 
 
 
$
1,972

 
 
 
$
3,392


Interest Rate Swaps as Fair Value Hedges
In the first quarter of 2010, we entered into an interest rate swap agreement with a notional amount of $100.0 million that is to mature in 2015. The swap was executed in order to convert a portion of the Senior Secured Note fixed rate debt into floating rate debt and maintain a capital structure containing appropriate amounts of fixed and floating rate debt. In August 2010, $10.0 million of the swap was called for a premium of $0.3 million. In August 2011, an additional $10.0 million of the swap was called for a premium of $0.3 million. As of September 30, 2011, the notional amount of the interest rate swap agreement is $80.0 million.
Our fixed-to-floating interest rate swap is designated and qualifies as a fair value hedge. The change in the fair value of the derivative instrument related to the future cash flows (gain or loss on the derivative), as well as the offsetting change in the fair value of the hedged long-term debt attributable to the hedged risk, are recognized in current earnings. We include the gain or loss on the hedged long-term debt in other income, along with the offsetting loss or gain on the related interest rate swap, on the Condensed Consolidated Statements of Operations.
Amount of gain (loss) recognized in other income
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2011
 
2010
 
2011
 
2010
Interest rate swap
 
$
740

 
$
1,740

 
$
1,539

 
$
3,229

Related long-term debt
 
(535
)
 
(1,977
)
 
(842
)
 
(3,050
)
Net impact on other income
 
$
205

 
$
(237
)
 
$
697

 
$
179


21



Commodity Future Contracts Designated as Cash Flow Hedges
We use commodity futures contracts related to forecasted future North American natural gas requirements. The objective of these futures contracts and other derivatives 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, up to eighteen months in the future. The fair values of these instruments are determined from market quotes. As of September 30, 2011, we had commodity contracts for 2,640,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2010, we had commodity contracts for 3,090,000 million BTUs of natural gas.
All of our natural gas derivatives qualify and are designated as cash flow hedges at September 30, 2011. Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses would be recorded to earnings immediately. Changes in the effective portion of the fair value of these hedges are recorded in other comprehensive income (loss). The ineffective portion of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings. As the natural gas contracts mature, the accumulated gains (losses) for the respective contracts are reclassified from accumulated other comprehensive loss to current expense in cost of sales in our Condensed Consolidated Statement of Operations. We paid additional cash of $1.3 million and $2.1 million in the three months ended September 30, 2011 and 2010, respectively, and $3.4 million and $5.2 million in the nine months ended September 30, 2011 and 2010, respectively, due to the difference between the fixed unit rate of our natural gas contracts and the variable unit rate of our natural gas cost from suppliers. Based on our current valuation, we estimate that accumulated losses currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in $1.9 million of expense in our Condensed Consolidated Statement of Operations.

Amount of derivative gain/(loss) recognized in OCI (effective portion)
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2011
 
2010
 
2011
 
2010
Derivatives in Cash Flow Hedging relationships:
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
(1,587
)
 
$
(2,667
)
 
$
(2,223
)
 
$
(6,816
)
Total
 
$
(1,587
)
 
$
(2,667
)
 
$
(2,223
)
 
$
(6,816
)

Gain / (loss) reclassified from Accumulated Other Comprehensive Loss
to Condensed Consolidated Statements of Operations (effective portion)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
 
2011
 
2010
 
2011
 
2010
Derivative:
Location:
 
 
 
 
 
 
 
 
Natural gas contracts
Cost of sales
 
$
(1,340
)
 
$
(2,097
)
 
$
(3,382
)
 
$
(5,213
)
Total impact on net (loss) income
 
$
(1,340
)
 
$
(2,097
)
 
$
(3,382
)
 
$
(5,213
)

Currency Contracts
Our foreign currency exposure arises from transactions denominated in a currency other than the U.S. dollar. During 2010, we entered into a series of foreign currency contracts to sell Canadian dollars. As of September 30, 2011 and December 31, 2010, we had contracts for C$8.2 million and C$18.7 million, respectively. The fair values of these instruments are determined from market quotes. The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change.

22


Gains and losses for derivatives that were not designated as hedging instruments are recorded in current earnings as follows:

 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
 
2011
 
2010
 
2011
 
2010
Derivative:
Location:
 
 

 
 

 
 

 
 

Currency contracts
Other income
 
$
934

 
$
(491
)
 
$
608

 
$
148

Total
 
 
$
934

 
$
(491
)
 
$
608

 
$
148


We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap, natural gas hedges and currency contracts as the counterparties are established financial institutions. The counterparty for the Interest Rate Agreement is rated AA and the counterparties for the other derivative agreements are rated BBB+ or better as of September 30, 2011, by Standard and Poor’s.

10.
Comprehensive Income
Components of comprehensive income (net of tax) are as follows:

 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2011
 
2010
 
2011
 
2010
Net income
 
$
7,127

 
$
2,346

 
$
21,532

 
$
67,323

Minimum pension and non-pension postretirement liability and intangible pension asset, net of tax
 
3,488

 
7,420

 
13,296

 
11,330

Effect of derivatives, net of tax
 
(254
)
 
(573
)
 
1,046

 
(289
)
Effect of exchange rate fluctuations
 
(5,949
)
 
10,221

 
3,291

 
(5,441
)
Total comprehensive income
 
$
4,412

 
$
19,414

 
$
39,165

 
$
72,923

Accumulated other comprehensive loss (net of tax) is as follows:
(dollars in thousands)
 
Effect of
Exchange
Rate Fluctuation
 
Cash Flow Derivatives
 
Minimum
Pension and
Non-Pension
Retirement Liability and
Intangible Pension Asset
 
Total
Accumulated
Comprehensive Loss
Balance on December 31, 2010
 
$
(2,661
)
 
$
(1,121
)
 
$
(107,164
)
 
$
(110,946
)
2011 change
 
3,291

 
1,131

 
12,480

 
16,902

Translation effect
 

 
(40
)
 
1,030

 
990

Tax effect
 

 
(45
)
 
(214
)
 
(259
)
Balance on September 30, 2011
 
$
630

 
$
(75
)
 
$
(93,868
)
 
$
(93,313
)

11.
Condensed Consolidated Guarantor Financial Statements
Libbey Glass is a direct, 100 percent owned subsidiary of Libbey Inc. and is the issuer of the Senior Secured Notes. The obligations of Libbey Glass under the Senior Secured Notes are fully and unconditionally and jointly and severally guaranteed by Libbey Inc. and by certain indirect, 100 percent owned domestic subsidiaries of Libbey Inc., as described below. All are related parties that are included in the Condensed Consolidated Financial Statements for the three months and nine months ended September 30, 2011 and September 30, 2010.
At September 30, 2011, December 31, 2010 and September 30, 2010, Libbey Inc.’s indirect, 100 percent owned domestic subsidiaries were Syracuse China Company, World Tableware Inc., LGA4 Corp., LGA3 Corp., The Drummond Glass Company, LGC Corp., Dane Holding Co. (known as Traex Company prior to April 28, 2011), Libbey.com LLC, LGFS Inc., and LGAC LLC (collectively, Subsidiary Guarantors). The following tables contain Condensed Consolidating Financial Statements of (a) the parent, Libbey Inc., (b) the issuer, Libbey Glass, (c) the Subsidiary Guarantors, (d) the indirect subsidiaries of Libbey Inc. that are not Subsidiary Guarantors (collectively, Non-Guarantor Subsidiaries), (e) the consolidating elimination entries, and (f) the consolidated totals.

23


Libbey Inc.
Condensed Consolidating Statement of Operations
(dollars in thousands)
(unaudited)
 
Three months ended September 30, 2011
 
Libbey
Inc.
(Parent)
 
Libbey
Glass
(Issuer)
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
104,363

 
$
17,393

 
$
106,831

 
$
(21,341
)
 
$
207,246

Freight billed to customers

 
137

 
174

 
200

 

 
511

Total revenues

 
104,500

 
17,567

 
107,031

 
(21,341
)
 
207,757

Cost of sales

 
85,442

 
12,783

 
85,989

 
(21,341
)
 
162,873

Gross profit

 
19,058

 
4,784

 
21,042

 

 
44,884

Selling, general and administrative expenses

 
15,587

 
1,704

 
9,448

 

 
26,739

Special charges

 
(232
)
 

 

 

 
(232
)
Income (loss) from operations

 
3,703

 
3,080

 
11,594

 

 
18,377

Other income (expense)

 
1,083

 
(101
)
 
1,255

 

 
2,237

Earnings (loss) before interest and income taxes

 
4,786

 
2,979

 
12,849

 

 
20,614

Interest expense

 
7,838

 

 
2,721

 

 
10,559

Income (loss) before income taxes

 
(3,052
)
 
2,979

 
10,128

 

 
10,055

Provision (benefit) for income taxes

 
134

 

 
2,794

 

 
2,928

Net income (loss)

 
(3,186
)
 
2,979

 
7,334

 

 
7,127

Equity in net income (loss) of subsidiaries
7,127

 
10,313

 

 

 
(17,440
)
 

Net income (loss)
$
7,127

 
$
7,127

 
$
2,979

 
$
7,334

 
$
(17,440
)
 
$
7,127


The following represents the total special items included in the above Condensed Consolidated Statement of Operations (see notes 5 and 14):

 
Three months ended September 30, 2011
 
Libbey
Inc.
(Parent)
 
Libbey
Glass
(Issuer)
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cost of sales
$

 
$
154

 
$

 
$

 
$

 
$
154

Selling, general and administrative expenses

 
2,091

 

 

 

 
2,091

Special charges

 
(232
)
 

 

 

 
(232
)
Other (income) expense

 

 
81

 

 

 
81

Total pretax special items
$

 
$
2,013

 
$
81

 
$

 
$

 
$
2,094

</