Employee Stock Benefit Plans

We have a stock-based employee compensation plan. We account for stock-based compensation in accordance with FASB ASC Topic 718, “Compensation - Stock Compensation” and FASB ASC Topic 505-50, “Equity - Equity Based Payment to Non-Employees”, which requires the measurement and recognition of compensation expense for all share-based awards to our employees and directors. Share-based compensation cost is measured based on the fair value of the equity or liability instruments issued. FASB ASC 718 and FASB ASC 505-50 apply to all of our outstanding unvested share-based payment awards.

Equity Participation Plan Program Description

We have an equity participation plan, the Amended and Restated Libbey Inc. 2006 Omnibus Incentive Plan, which we refer to as the Omnibus Plan. Up to a total of 2,960,000 shares of Libbey Inc. common stock are authorized for issuance as equity-based compensation under the Omnibus Plan. Under the Omnibus Plan, grants of equity-based compensation may take the form of stock options, stock appreciation rights, performance shares or units, restricted stock or restricted stock units or other stock-based awards. Employees and directors are eligible for awards under this plan. During 2013, there were grants of 203,825 stock options, 131,555 restricted stock units and 244,229 stock appreciation rights. During 2012, there were grants of 163,042 stock options, 215,180 restricted stock units and 3,000 stock appreciation rights. All option grants have an exercise price equal to the fair market value of the underlying stock on the grant date. The vesting period of options, stock appreciation rights and restricted stock units outstanding as of December 31, 2013, is generally four years. These instruments do not participate in dividends. All grants of equity-based compensation are amortized over the vesting period in accordance FASB ASC 718 expense attribution methodology. The impact of applying the provisions of FASB ASC 718 is a pre-tax compensation expense of $5.1 million, $3.3 million and $5.0 million in selling, general and administrative expenses in the Consolidated Statements of Operations for 2013, 2012 and 2011, respectively. During 2013 and 2011, there were non-cash compensation charges of $0.7 million and $1.7 million, respectively, related to accelerated vesting of previously issued equity compensation.

Non-Qualified Stock Option Information

The Black-Scholes option-pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes option-pricing model was used to estimate the grant-date fair value. The following table summarizes non-qualified stock option disclosures for 2013, 2012 and 2011:



Year ended December 31, (dollars in thousands, except options and assumptions)	2013		2012		2011
Stock options granted	203,825		163,042		168,939
Stock option compensation expense included in the Consolidated Statements of Operations	$	1,689	$	1,443	$	2,189
Weighted-average grant-date fair value of options granted using the Black-Scholes model	$	8.42	$	9.33	$	12.58
Weighted average assumptions for stock option grants:
Risk-free interest	1.12%		1.08%		2.74%
Expected term	6.3 years		6.3 years		6.3 years
Expected volatility	44.51%		77.94%		88.15%
Dividend yield	0.00%		0.00%		0.00%


•	The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant and has a term equal to the expected life.

•

The expected term represents the period of time the options are expected to be outstanding. Prior to October 2013, the expected term was developed based on the Simplified Method defined by the SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107) due to limited exercise activity over the past years given the volatility in the stock price. As a result of market stabilization and increased exercise activity, we changed our method for determining the expected term and now use the actual historical exercise activity.

•

Prior to June 2012, the expected volatility was developed based on historic stock prices commensurate with the expected term of the option. We use projected data for expected volatility of our stock options based on the average of daily, weekly and monthly historical volatilities of our stock price over the expected term of the option and other economic data trended into future years. As a result of our May 2012 debt refinancing, we changed our method for determining expected volatility. Expected volatility is calculated based on a rolling average of the daily stock closing prices of a peer group of companies with a period equal to the expected life of the award. The peer group was used due to the Company having a period of history when we were more highly leveraged which is not relevant in evaluating expected volatility. The peer group was established using the criteria of similar industry, size, leverage and length of history. The impact of this change was immaterial.


•	The dividend yield is calculated as the ratio based on our most recent historical dividend payments per share of common stock at the grant date to the stock price on the date of grant.

Information with respect to our stock option activity for 2013, 2012 and 2011 is as follows:



Stock Options	Shares		Weighted-Average Exercise Price per Share		Weighted-Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (in thousands)
Outstanding balance at January 1, 2011	1,714,934		$	15.58	6	$	6,710
Granted	168,939		$	16.72
Exercised	(69,327	)	$	6.95		$	681
Canceled	(188,840	)	$	27.90
Outstanding balance at December 31, 2011	1,625,706		$	14.63	4	$	3,957
Granted	163,042		$	13.96
Exercised	(223,382	)	$	5.52		$	2,694
Canceled	(253,732	)	$	22.75
Outstanding balance at December 31, 2012	1,311,634		$	14.47	4	$	7,651
Granted	203,825		$	19.05
Exercised	(397,369	)	$	13.56		$	3,257
Canceled	(129,310	)	$	27.58
Outstanding balance at December 31, 2013	988,780		$	14.07	5	$	6,856
Exercisable at December 31, 2013	646,504		$	12.61		$	5,422

Intrinsic value for share-based instruments is defined as the difference between the current market value and the exercise price. FASB ASC Topic 718 requires the benefits of tax deductions in excess of the compensation cost recognized for those stock options (excess tax benefit) to be classified as financing cash flows.

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Libbey Inc. closing stock price of $21.00 as of December 31, 2013, which would have been received by the option holders had all option holders exercised their options as of that date. The number of outstanding options exercisable and weighted average exercise price is as follows:



December 31,	2013		2012		2011
Outstanding options exercisable	646,504		964,043		1,202,949
Weighted average exercise price	$	12.61	$	15.06	$	16.14

As of December 31, 2013, $1.3 million of total unrecognized compensation expense related to nonvested stock options is expected to be recognized within the next 2.8 years on a weighted-average basis. The total fair value of shares vested during 2013, 2012 and 2011 is $1.7 million, $1.2 million and $1.9 million, respectively. Shares issued for exercised options are issued from newly issued stock.

The following table summarizes our nonvested stock option activity for 2013, 2012 and 2011:



Nonvested Stock Options	Shares		Weighted-Average Value (per Share)
Nonvested at January 1, 2011	550,120		$	4.81
Granted	168,939		$	12.58
Vested	(283,185	)	$	6.87
Forfeited	(13,117	)	$	7.02
Nonvested at December 31, 2011	422,757		$	7.53
Granted	163,042		$	9.33
Vested	(202,115	)	$	5.76
Forfeited	(36,093	)	$	10.40
Nonvested at December 31, 2012	347,591		$	9.11
Granted	203,825		$	8.42
Vested	(201,865	)	$	8.47
Forfeited	(7,275	)	$	9.78
Nonvested at December 31, 2013	342,276		$	9.07

Stock Appreciation Rights Information

The exercise price of each stock appreciation right equals the closing market price of our common stock on the date of grant. Stock appreciation rights generally vest over four years and their maximum term is ten years. Stock appreciation rights are settled in cash for the difference between the market price on the date of exercise and the exercise price. Awards that are settled in cash are subject to liability accounting. Accordingly, the fair value of such awards is remeasured at the end of each reporting period until settled or expired. The Company entered into a CEO Retention Award Agreement pursuant to which the Company issued 240,829 stock appreciation rights to our CEO on December 16, 2013. These awards cliff vest on December 31, 2018.



Year ended December 31, (dollars in thousands, except stock appreciation rights and assumptions)	2013
Stock appreciation rights granted	244,229
Stock appreciation rights compensation expense included in the Consolidated Statements of Operations	$	59
Weighted-average grant-date fair value of stock appreciation rights granted using the Black-Scholes model	$	10.35
Weighted average assumptions for stock appreciation rights granted:
Risk-free interest	1.95%
Expected term	6.5 years
Expected volatility	43.52%
Dividend yield	0.00%

The risk-free interest rate, expected term, expected volatility and dividend yield assumptions are calculated consistent with our non-qualified stock option awards.

Information with respect to our stock appreciation right activity for 2013 is as follows:



Stock Appreciation Rights	Shares	Weighted Average Exercise Price		Weighted-Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (in thousands)
Outstanding balance at January 1, 2013	6,750	$	14.37
Granted	244,229	$	21.26
Outstanding balance at December 31, 2013	250,979	$	21.07	10	$	—
Exercisable at December 31, 2013	2,938	$	14.03		$	20

The number of outstanding stock appreciation rights exercisable and weighted average exercise price is as follows:



December 31,	2013
Outstanding Stock Appreciation Rights exercisable	2,938
Weighted average exercise price	$	14.03

As of December 31, 2013, $2.3 million of total unrecognized compensation expense related to nonvested stock appreciation rights is expected to be recognized within the next 5.0 years on a weighted-average basis. The total fair value of shares vested during 2013 was immaterial.

The following table summarizes our non-vested stock appreciation rights for 2013:



Nonvested Stock Appreciation Rights	Shares		Weighted-Average Value (per Share)
Nonvested at January 1, 2013	5,500		$	10.86
Granted	244,229		$	10.35
Vested	(1,688	)	$	10.73
Nonvested at December 31, 2013	248,041		$	10.36

Stock and Restricted Stock Unit Information

Under the Omnibus Plan, we grant non-employee members of our Board of Directors shares of unrestricted stock. The shares granted to Directors are immediately vested and all compensation expense is recognized in our Consolidated Statements of Operations in the year the grants are made. In addition, we grant restricted stock units to select executives, and we grant shares of restricted stock to key employees. The restricted stock units granted to select executives vest over four years. The restricted stock units granted to key employees generally vest on the first anniversary of the grant date.

A summary of the activity for restricted stock units under the Omnibus Plan for 2013, 2012 and 2011 is presented below:



Year ended December 31, (dollars in thousands, except share amounts)	2013			2012			2011
Beginning nonvested balance	263,181			245,359			404,415
Granted	131,555			215,180			165,253
Vested	(186,276		)	(152,340		)	(301,308		)
Forfeited	—			(45,018		)	(23,001		)
Ending nonvested balance	208,460			263,181			245,359

Weighted-average grant-date fair value per restricted stock unit	$	19.33		$	13.99		$	16.44

Compensation expense	$	3,315		$	1,878		$	2,956

As of December 31, 2013, there was $1.5 million of total unrecognized compensation cost related to nonvested restricted stock units granted. That cost is expected to be recognized over a weighted average period of 1.9 years. Shares issued for restricted stock unit awards are issued from newly issued shares.

Employee 401(k) Plan Retirement Fund and Non-Qualified Deferred Executive Compensation Plans

We sponsor the Libbey Inc. salary and hourly 401(k) plans (the Plan) to provide retirement benefits for our U.S. employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible employees.

For the Salary Plan, employees can contribute from 1 percent to 50 percent of their annual salary, up to the annual IRS limits. Through December 31, 2012, we matched 100 percent on the first 1 percent and matched 50 percent on the next 5 percent of pretax contributions to a maximum of 3.5 percent of compensation. Effective January 1, 2013, we matched 100 percent on the first 6 percent of eligible compensation. For the Hourly Plan, employees can contribute from 1 percent to 25 percent of their annual pay up to the annual IRS limits. We match 50 percent of the first 6 percent of eligible earnings that are contributed by employees on a pretax basis. Therefore, the maximum matching contribution that we may allocate to each participant's account did not exceed $15,300 for the Salary Plan or $7,650 for the Hourly Plan for the 2013 calendar year due to the $255,000 annual limit on eligible earnings imposed by the Internal Revenue Code. All matching contributions are invested according to the employees' deferral elections and vest immediately.

At the end of 2008, the non-qualified Executive Savings Plan (ESP) was frozen. The ESP was for those employees whose salary exceeded the IRS limit. Libbey matched employee contributions under the ESP in the same manner as we provided matching contributions under our 401(k) Salary Plan.

Effective January 1, 2009, we have a non-qualified Executive Deferred Compensation Plan (EDCP). Under the EDCP, executives and other members of senior management may elect to defer base salary, annual incentive compensation and equity-based compensation. We provide matching contributions on excess contributions (above the qualified 401(k) plan limits) in the same manner as we provide matching contributions under our 401(k) plan.

Our matching contributions to all Plans totaled $3.1 million, $2.3 million and $2.4 million in 2013, 2012 and 2011, respectively.