LIBBEY INC, 10-Q filed on 11/5/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Oct. 31, 2014
Entity Information [Line Items]
 
 
Entity Registrant Name
LIBBEY INC 
 
Entity Central Index Key
0000902274 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
21,665,457 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Net sales
$ 215,957 
$ 204,386 
$ 621,074 
$ 597,766 
Freight billed to customers
931 
924 
2,638 
2,447 
Total revenues
216,888 
205,310 
623,712 
600,213 
Cost of sales
166,573 
165,405 
480,791 
460,614 
Gross profit
50,315 
39,905 
142,921 
139,599 
Selling, general and administrative expenses
29,573 
25,519 
89,177 
81,551 
Special charges
390 
4,619 
Income from operations
20,742 
13,996 
53,744 
53,429 
Loss on redemption of debt
(47,191)
(2,518)
Other income (expense)
1,340 
(706)
1,340 
(1,090)
Earnings before interest and income taxes
22,082 
13,290 
7,893 
49,821 
Interest expense
4,797 
7,706 
17,984 
24,267 
Income (loss) before income taxes
17,285 
5,584 
(10,091)
25,554 
Provision for income taxes
3,527 
835 
4,703 
6,380 
Net income (loss)
$ 13,758 
$ 4,749 
$ (14,794)
$ 19,174 
Net income (loss) per share:
 
 
 
 
Basic
$ 0.63 
$ 0.22 
$ (0.68)
$ 0.90 
Diluted
$ 0.62 
$ 0.21 
$ (0.68)
$ 0.87 
Dividends per share
$ 0 
$ 0 
$ 0 
$ 0 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Net income (loss)
$ 13,758 
$ 4,749 
$ (14,794)
$ 19,174 
Other comprehensive income (loss):
 
 
 
 
Pension and other postretirement benefit adjustments, net of tax
2,301 
3,577 
5,734 
12,660 
Change in fair value of derivative instruments, net of tax
(525)
(27)
(799)
509 
Foreign currency translation adjustments
(8,022)
4,528 
(9,395)
3,938 
Other comprehensive income, net of tax
(6,246)
8,078 
(4,460)
17,107 
Comprehensive income (loss)
$ 7,512 
$ 12,827 
$ (19,254)
$ 36,281 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Assets:
 
 
Cash and cash equivalents
$ 24,089 
$ 42,208 
Accounts receivable - net
106,459 
94,549 
Inventories - net
189,221 
163,121 
Prepaid and other current assets
33,168 
24,838 
Total current assets
352,937 
324,716 
Pension asset
34,364 
33,615 
Purchased intangible assets - net
18,194 
19,325 
Goodwill
167,379 
167,379 
Deferred income taxes
5,727 
5,759 
Other assets
10,507 
13,534 
Total other assets
236,171 
239,612 
Property, plant and equipment - net
268,830 
265,662 
Total assets
857,938 
829,990 
Liabilities and Shareholders' Equity:
 
 
Accounts payable
78,895 
79,620 
Salaries and wages
28,991 
32,403 
Accrued liabilities
50,728 
41,418 
Accrued income taxes
1,374 
Pension liability (current portion)
3,100 
3,161 
Non-pension postretirement benefits (current portion)
4,758 
4,758 
Long-term debt due within one year
7,896 
5,391 
Total current liabilities
174,368 
168,125 
Long-term debt
446,653 
406,512 
Pension liability
37,861 
40,033 
Non-pension postretirement benefits
58,137 
59,065 
Deferred income taxes
11,532 
11,672 
Other long-term liabilities
11,994 
13,774 
Total liabilities
740,545 
699,181 
Shareholders' equity:
 
 
Common stock, par value $.01 per share, 50,000,000 shares authorized, 21,661,557 shares issued in 2014 (21,316,480 shares issued in 2013)
217 
213 
Capital in excess of par value
329,201 
323,367 
Retained deficit
(134,405)
(119,611)
Accumulated other comprehensive loss
(77,620)
(73,160)
Total shareholders' equity
117,393 
130,809 
Total liabilities and shareholders' equity
$ 857,938 
$ 829,990 
Condensed Consolidated Balance Sheets Parenthetical (USD $)
Sep. 30, 2014
Dec. 31, 2013
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
50,000,000 
50,000,000 
Common stock, shares issued
21,661,557 
21,316,480 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Operating activities:
 
 
 
 
Net income (loss)
$ 13,758 
$ 4,749 
$ (14,794)
$ 19,174 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
9,569 
11,773 
30,837 
34,170 
Loss on asset sales and disposals
234 
481 
247 
514 
Change in accounts receivable
(1,926)
732 
(18,325)
(10,147)
Change in inventories
(9,460)
3,722 
(28,823)
(14,770)
Change in accounts payable
767 
318 
2,119 
(5,999)
Accrued interest and amortization of discounts and finance fees
384 
7,266 
1,729 
7,876 
Call premium on senior notes
 
 
37,348 
1,350 
Write-off of finance fees on senior notes
 
 
9,086 
1,168 
Pension & non-pension postretirement benefits
(349)
3,118 
2,420 
8,322 
Restructuring
(797)
(289)
2,858 
Accrued liabilities & prepaid expenses
4,105 
3,533 
(3,617)
(13,052)
Income taxes
1,498 
(2,106)
(2,425)
(6,285)
Share-based compensation expense
1,109 
990 
3,746 
3,299 
Other operating activities
(616)
988 
(2,202)
2,994 
Net cash provided by operating activities
19,073 
34,767 
17,057 
31,472 
Investing activities:
 
 
 
 
Additions to property, plant and equipment
(16,693)
(10,381)
(38,528)
(30,152)
Proceeds from furnace malfunction insurance recovery
 
 
4,346 
Proceeds from asset sales and other
73 
81 
Net cash used in investing activities
(16,690)
(10,308)
(34,175)
(30,071)
Financing activities:
 
 
 
 
Borrowing on ABL credit facility
33,400 
12,400 
54,700 
42,800 
Repayments on ABL credit facility
(31,500)
(22,200)
(45,800)
(42,800)
Other repayments
(5,201)
(4,397)
(5,316)
(4,511)
Other borrowings
3,250 
6,094 
5,214 
6,094 
Payments on 6.875% senior notes
 
 
(405,000)
(45,000)
Proceeds from Term Loan B
 
 
438,900 
Repayments on Term Loan B
(1,100)
(1,100)
Call premium on senior notes
 
 
(37,348)
(1,350)
Stock options exercised
759 
2,059 
2,881 
5,107 
Debt issuance costs and other
(91)
(6,959)
Net cash provided by (used in) financing activities
(483)
(6,044)
172 
(39,660)
Effect of exchange rate fluctuations on cash
(1,020)
507 
(1,173)
517 
Increase (decrease) in cash
880 
18,922 
(18,119)
(37,742)
Cash at beginning of period
23,209 
10,544 
42,208 
67,208 
Cash at end of period
24,089 
29,466 
24,089 
29,466 
Supplemental disclosure of cash flows information:
 
 
 
 
Cash paid during the period for interest, net of capitalized interest
4,160 
271 
15,827 
16,119 
Cash paid during the period for income taxes
$ 2,591 
$ 2,280 
$ 5,884 
$ 10,095 
Condensed Consolidated Statements of Cash Flows Parenthetical (Libbey Glass, Senior Notes)
May 9, 2014
Libbey Glass |
Senior Notes
 
Interest rate
6.875% 1
Description of the Business
Description of the Business
Description of the Business

Libbey is a leading global manufacturer and marketer of glass tableware products. We believe we have the largest manufacturing, distribution and service network among glass tableware manufacturers in the Western Hemisphere, in addition to supplying to key markets throughout the world. We produce glass tableware in five countries and sell to customers in over 100 countries. We design and market, under our Libbey®, Crisa®, Royal Leerdam®, World® Tableware, Syracuse® China and Crisal Glass® brand names (among others), an extensive line of high-quality glass tableware, ceramic dinnerware, metal flatware, hollowware and serveware items for sale primarily in the foodservice, retail and business-to-business markets. Our sales force presents our products to the global marketplace in a coordinated fashion. We own and operate two glass tableware manufacturing plants in the United States as well as glass tableware manufacturing plants in the Netherlands (Libbey Holland), Portugal (Libbey Portugal), China (Libbey China) and Mexico (Libbey Mexico). 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 MKT exchange under the ticker symbol LBY.
Significant Accounting Policies
Significant Accounting Policies
Significant Accounting Policies

See our Form 10-K for the year ended December 31, 2013 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 (expense).

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, Portugal and the Netherlands, we have recorded valuation allowances against our deferred income tax assets. See note 6 for further discussion.

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. Under the terms of the CEO retention award agreement, 115,687 cash settled restricted stock units were granted during the first quarter of 2014. These awards cliff vest on December 31, 2018. Accordingly, awards that will be settled in cash are subject to liability accounting and the fair value of such awards will be remeasured at the end of each reporting period until settled or expired. Stock-based compensation expense charged to the Condensed Consolidated Statements of Operations is as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Stock-based compensation expense
 
$
1,109

 
$
990

 
$
3,746

 
$
3,299


Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

New Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue From Contracts With Customers" (ASU 2014-09), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. This update is effective for interim and annual reporting periods beginning after December 15, 2016; early adoption is not permitted. We are currently assessing the impact that this standard will have on our condensed consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements-Going Concern" (ASU 2014-15), which establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. ASU 2014-15 also provides guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. This update is effective for interim and annual reporting periods beginning after December 15, 2016; early adoption is permitted. We are currently evaluating the impact that this standard will have on our condensed consolidated financial statements.
Balance Sheet Details
Balance Sheet Details
Balance Sheet Details

The following table provides detail of selected balance sheet items:
(dollars in thousands)
September 30, 2014
 
December 31, 2013
Accounts receivable:
 
 
 
Trade receivables
$
104,493

 
$
87,499

Other receivables (see note 14)
1,966

 
7,050

Total accounts receivable, less allowances of $5,910 and $5,846
$
106,459

 
$
94,549

 
 
 
 
Inventories:
 
 
 
Finished goods
$
170,505

 
$
144,945

Work in process
1,321

 
1,615

Raw materials
4,869

 
4,558

Repair parts
11,122

 
10,550

Operating supplies
1,404

 
1,453

Total inventories, less loss provisions of $4,675 and $4,913
$
189,221

 
$
163,121

 
 
 
 
Prepaid and other current assets:
 
 
 
Value added tax
$
14,821

 
$
6,697

Prepaid expenses
8,826

 
8,396

Deferred income taxes
5,837

 
5,840

Prepaid income taxes
3,410

 
3,511

Derivative asset
274

 
394

Total prepaid and other current assets
$
33,168

 
$
24,838

 
 
 
 
Other assets:
 
 
 
Deposits
$
912

 
$
919

Finance fees — net of amortization
7,261

 
10,472

Other assets
2,334

 
2,143

Total other assets
$
10,507

 
$
13,534

 
 
 
 
Accrued liabilities:
 
 
 
Accrued incentives
$
25,451

 
$
17,830

Workers compensation
6,838

 
7,108

Medical liabilities
3,718

 
3,433

Interest
3,905

 
3,331

Commissions payable
1,079

 
1,067

Withholdings and other non-income tax accruals
2,396

 
1,929

Other accrued liabilities
7,341

 
6,720

Total accrued liabilities
$
50,728

 
$
41,418

 
 
 
 
Other long-term liabilities:
 
 
 
Deferred liability
$
7,001

 
$
7,424

Derivative liability
68

 
2,073

Other long-term liabilities
4,925

 
4,277

Total other long-term liabilities
$
11,994

 
$
13,774



Borrowings
Borrowings
Borrowings

On April 9, 2014, 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 $440.0 million in aggregate principal amount of Senior Secured Term Loan B facility of Libbey Glass due 2021 (Term Loan B); and
the repurchase and cancellation of all Libbey Glass's then outstanding $405.0 million in aggregate principal amount Senior Secured Notes ($360.0 million on April 9, 2014 and $45.0 million on May 9, 2014).

We used the proceeds of the Term Loan B, together with cash on hand and borrowings under the ABL Facility, to repurchase $360.0 million of the Senior Secured Notes, redeem the remaining $45.0 million of the Senior Secured Notes, and pay certain related fees and expenses.

The above transactions included charges of $37.3 million for an early call premium and $9.1 million for the write off of the remaining financing fees from the Senior Secured Notes. These charges were considered in the computation of the loss on redemption of debt.

Borrowings consist of the following:
(dollars in thousands)
Interest Rate
 
Maturity Date
September 30,
2014
 
December 31,
2013
Borrowings under ABL Facility
floating
 
April 9, 2019
$
8,900

 
$

Term Loan B
floating
 
April 9, 2021
438,900

 

Senior Secured Notes
6.875%
(1)
May 15, 2020

 
405,000

Promissory Note
6.00%
 
October, 2014 to September, 2016
506

 
681

RMB Working Capital Loan
floating
 
September, 2014

 
5,157

RMB Working Capital Loan
6.78%
 
July, 2015
3,250

 

AICEP Loan
0.00%
 
January, 2016 to July 30, 2018
4,015

 
2,389

Total borrowings
 
 
 
455,571

 
413,227

Less — unamortized discount
 
 
 
1,022

 

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

 
(1,324
)
Total borrowings — net
 
 
 
454,549

 
411,903

Less — long term debt due within one year
 
 
7,896

 
5,391

Total long-term portion of borrowings — net
 
$
446,653

 
$
406,512

_____________________________
(1)
See Interest Rate Agreement under “Term Loan B and Senior Secured Notes” below and in note 9.

Amended and Restated ABL Credit Agreement

Libbey Glass and Libbey Europe entered into an Amended and Restated Credit Agreement, dated as of February 8, 2010 and amended as of April 29, 2011, May 18, 2012 and April 9, 2014 (as amended, the ABL Facility), with a group of four financial institutions. The ABL Facility provides for borrowings of up to $100.0 million, 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 personal property of Libbey Glass and its domestic subsidiaries (ABL Priority Collateral);
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 (Term 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 swingline borrowings for Libbey Europe being limited to the U.S. 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 swingline borrowings (Eurocurrency Loans) bear interest calculated at the Netherlands swingline 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 0.50 percent and 1.50 percent, respectively, at September 30, 2014. 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 0.25 percent at September 30, 2014. No compensating balances are required by the ABL Facility. The ABL Facility 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 Facility availability were to fall below $10.0 million, the fixed charge coverage ratio requirement would be 1:00 to 1:00. Libbey Glass and Libbey Europe have the option to increase the ABL Facility by $25.0 million. There were borrowings of $8.9 million under the ABL Facility at September 30, 2014. There were no Libbey Glass or Libbey Europe borrowings under the ABL Facility at December 31, 2013. 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 ABL 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 rent reserves totaling $0.7 million. There were $0.6 million mark-to-market reserves for natural gas contracts offsetting the borrowing base as of September 30, 2014. 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, 2014, we had $6.8 million in letters of credit outstanding under the ABL Facility. Remaining unused availability under the ABL Facility was $83.1 million at September 30, 2014, compared to $70.5 million under the ABL Facility at December 31, 2013.

Term Loan B and Senior Secured Notes

On April 9, 2014, Libbey Glass consummated its $440.0 million Term Loan B. The net proceeds of the Term Loan B were $438.9 million, after the 0.25 percent original issue discount of $1.1 million. The Term Loan B had related fees of approximately $6.7 million that will be amortized to interest expense over the life of the loan.

The Term Loan B is evidenced by a Senior Secured Credit Agreement, dated April 9, 2014 (Credit Agreement), 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 lenders. Under the terms of the Credit Agreement, aggregate principal of $1.1 million is due on the last business day of each quarter beginning September 30, 2014. The Term Loan B bears interest at the rate of LIBOR plus 3.0 percent, subject to a LIBOR "floor" of 0.75 percent. The interest rate was 3.75 percent per year at September 30, 2014, and will mature on April 9, 2021. We may voluntarily prepay, in whole or in part, the Term Loan B without premium or penalty but with accrued interest. Although the Credit Agreement does not contain financial covenants, the Credit Agreement contains other covenants that restrict the ability of Libbey Glass and the Guarantors to, among other things:

incur, assume or guarantee additional indebtedness;
pay dividends, make certain investments or other restricted payments;
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 Credit Agreement provides for customary events of default. In the case of an event of default as defined in the Credit Agreement, all of the outstanding Term Loan B will become due and payable immediately without further action or notice.

The Term Loan B and the related guarantees under the Credit Agreement are secured by (i) first priority liens on the Term Priority Collateral and (ii) second priority liens on the ABL Collateral.

We had an Interest Rate Agreement in place through May 9, 2014 with respect to $45.0 million of our Senior Secured Notes as a means to manage our fixed to variable interest rate ratio. The Interest Rate Agreement effectively converted this portion of our long-term borrowings from fixed rate debt to variable rate debt. The variable interest rate for our borrowings related to the Interest Rate Agreement at May 9, 2014, excluding applicable fees, was 5.5 percent. Total remaining Senior Secured Notes not covered by the Interest Rate Agreement had a fixed interest rate of 6.875 percent per year. We settled the swap at fair value, resulting in a payment of $1.1 million on May 13, 2014. Upon the redemption of the Senior Secured Notes, the unamortized balance of $0.8 million of the carrying value adjustment on debt related to the Interest Rate Agreement was recognized as expense in loss on redemption of debt on the Condensed Consolidated Statements of Operations.

The fair market value and related carrying value adjustment are as follows:
(dollars in thousands)
September 30, 2014
 
December 31, 2013
Fair market value of Rate Agreement - asset (liability)
$

 
$
(2,073
)
Adjustment to increase (decrease) carrying value of the related long-term debt
$

 
$
(1,324
)

The fair value of the Interest Rate Agreement was 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 were based on an expectation of future interest rates derived from observed market interest rate forward curves. See note 9 for further discussion and the net impact recorded on the Condensed Consolidated Statements of Operations.

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, 2014, we had $0.5 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, 2014, 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 Working Capital Loan

On September 2, 2013, Libbey China entered into a RMB 31.5 million (approximately $5.2 million) working capital loan with China Construction Bank (CCB) to cover seasonal working capital needs. The 364-day loan was set to mature on September 1, 2014, and had a variable interest rate as announced by the People's Bank of China. On July 14, 2014, Libbey China prepaid the working capital loan along with accrued and unpaid interest. The loan held an annual interest rate of 6.3 percent at the repayment date. This obligation was secured by a mortgage lien on the Libbey China facility.

On July 24, 2014, Libbey China entered into a new RMB 20.0 million (approximately $3.3 million) working capital loan with CCB to cover seasonal working capital needs. The new working capital loan will mature on July 23, 2015, and has a fixed interest rate of 6.78 percent, which is paid monthly. This obligation is secured by a mortgage lien on the Libbey China facility.

AICEP Loan

In July 2012, Libbey Portugal entered into a loan agreement with Agencia para Investmento Comercio Externo de Portugal, EPE (AICEP), the Portuguese Agency for investment and external trade. The amount of the loan is €3.2 million (approximately $4.0 million) at September 30, 2014, and has an interest rate of 0.0 percent. Semi-annual installments of principal are due beginning in January 2016 through the maturity date in July 2018.

Fair Value of Borrowings

The fair value of our debt has been calculated based on quoted market prices (Level 2 in the fair value hierarchy) for the same or similar issues. The $438.9 million outstanding on the Term Loan B had an estimated fair value of $431.2 million at September 30, 2014. At December 31, 2013, the Senior Secured Notes had an estimated fair value of $437.4 million. The fair value of the remainder of our debt approximates carrying value at September 30, 2014 and December 31, 2013 due to variable rates.

Capital Resources and Liquidity

Historically, cash flows generated from operations, cash on hand and our borrowing capacity under our ABL Facility have enabled us to meet our cash requirements, including capital expenditures and working capital requirements. At September 30, 2014, we had $8.9 million borrowings under our ABL Facility and $6.8 million in letters of credit issued under that facility. As a result, we had $83.1 million of unused availability remaining under the ABL Facility at September 30, 2014. In addition, at September 30, 2014, we had $24.1 million of cash on hand.

Based on our operating plans and current forecast expectations, we anticipate that our level of cash on hand, cash flows from operations and borrowing capacity under our ABL Facility will provide sufficient cash availability to meet our ongoing liquidity needs.
Restructuring Charges
Restructuring Charges
Restructuring Charges

Capacity Realignment

In February 2013, we announced plans to discontinue production of certain glassware in North America and reduce manufacturing capacity at our Shreveport, Louisiana, manufacturing facility. As a result, on May 30, 2013, we ceased production of certain glassware in North America, discontinued the use of a furnace at our Shreveport, Louisiana, manufacturing plant and began relocating a portion of the production from the idled furnace to our Toledo, Ohio, and Monterrey, Mexico, locations. In connection with this plan, we incurred pretax charges of approximately $7.5 million. For the three months ended September 30, 2013, we recorded a pretax charge of $0.4 million. For the nine months ended September 30, 2014 and 2013, we recorded a pretax charge of $1.0 million and $6.3 million, respectively. These charges included employee termination costs, fixed asset impairment charges, depreciation expense and other restructuring expenses. Employee termination costs include severance, medical benefits and outplacement services for the terminated employees. The write-down of fixed assets was to adjust certain machinery and equipment to the estimated fair market value. These activities are all within the Americas segment and were completed by March 31, 2014.

The following table summarizes the pretax charges incurred in 2014 and 2013:
 
Three months ended September 30,
 
Nine months ended September 30,
 
Total
Charges
to Date
(dollars in thousands)
2014
 
2013
 
2014
 
2013
 
Accelerated depreciation & other
$

 
$

 
$

 
$
1,699

 
$
1,685

Other restructuring expenses

 

 
985

 

 
985

Included in cost of sales

 

 
985

 
1,699

 
2,670

 
 
 
 
 
 
 
 
 
 
Employee termination cost & other

 
(23
)
 

 
1,887

 
1,794

Fixed asset write-down

 

 

 
1,992

 
1,924

Other restructuring expenses

 
413

 

 
740

 
1,141

Included in special charges

 
390

 

 
4,619

 
4,859

Total pretax charge
$

 
$
390

 
$
985

 
$
6,318

 
$
7,529


The following is the capacity realignment reserve activity for the nine months ended September 30, 2014:
(dollars in thousands)
Reserve
Balance at
January 1, 2014
 
Total
Charge to Earnings
 
Cash
(payments) receipts
 
Non-cash Utilization
 
Reserve
Balance at
September 30, 2014
Employee termination cost & other
$
289

 
$

 
$
(289
)
 
$

 
$

Other restructuring expenses

 
985

 
(985
)
 

 

Total
$
289

 
$
985

 
$
(1,274
)
 
$

 
$

Income Taxes
Income Taxes
Income Taxes

Our effective tax rate was (46.6) percent for the nine months ended September 30, 2014, compared to 25.0 percent for the nine months ended September 30, 2013. Our effective tax rate differs from the United States statutory tax rate primarily due to valuation allowances, earnings in countries with differing statutory tax rates, accruals related to uncertain tax positions, intraperiod tax allocation, and tax planning structures. At September 30, 2014 and December 31, 2013, we had $0.8 million and $1.3 million, respectively, of gross unrecognized tax benefits, exclusive of interest and penalties. Tax benefits, exclusive of interest and penalties, of zero and $0.6 million were recorded in our income tax provision for the three months and the nine months ended September 30, 2014, respectively, due to expirations of statutes of limitations. During the three months and the nine months ended September 30, 2013, we recorded tax benefits, exclusive of interest and penalties, of zero and $0.5 million, respectively.

FASB ASC 740-20, "Income Taxes - Intraperiod Tax Allocation," requires that the provision for income taxes be allocated between continuing operations and other categories of earnings (such as discontinued operations or other comprehensive income) for each tax jurisdiction. For periods in which there is a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, the tax provision is first allocated to the other categories of earnings. A related tax benefit is then recorded in continuing operations. Tax benefits of $0.3 million and $1.9 million were recorded in our income tax provision for the three months and nine months ended September 30, 2014, respectively. There were no similar benefits recorded for the three months and nine months ended September 30, 2013.

Our current and future provision for income taxes for 2014 is impacted by valuation allowances. In the United States, the Netherlands and Portugal, we have recorded valuation allowances against our deferred income tax assets. We review the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required, in order to assess the likelihood of the realization of our deferred tax assets. In assessing the need for recording or reversing 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, prudent and feasible tax planning strategies that could be implemented, and whether there were unusual, infrequent or extraordinary items to be considered.

Despite our 2013 improvement in financial results in the U.S., management has concluded that in consideration of our projected 2014 loss, the duration and magnitude of our U.S. operating losses, and the current U.S. economic environment and competitive landscape, we have not yet achieved profitability of a duration and magnitude sufficient to release our valuation allowance against our deferred tax assets. Accordingly, we continue to maintain a valuation allowance related to our net deferred tax assets in the U.S.

The valuation allowance in the Netherlands has been maintained since 2006 and a significant piece of evidence used in our assessment has been a history of cumulative losses through 2013. The weight applied to other subjective evidence, such as projected financial results, has been limited. Despite its historical losses, the Netherlands is forecasted to move into a small three year cumulative income position in 2014. Before we would change our judgment of the need for a full valuation allowance, a sustained period of operating profitability is required. Considering the duration and magnitude of our Netherlands operating losses, the current European economic environment and the competitive landscape, it is our judgment that we have not yet achieved profitability of a duration and magnitude sufficient to release our valuation allowance against deferred tax assets in the Netherlands. If we generate significant pre-tax earnings in the Netherlands in 2014 and plans for 2015 and beyond show continued profitability, we may have sufficient evidence to release all or a portion of our valuation allowance on our Netherlands deferred tax assets in the foreseeable future. At December 31, 2013, the valuation allowance in the Netherlands was $9.2 million. We will continue to monitor and assess the need for a valuation allowance in all our jurisdictions in the upcoming quarters.

Income tax payments consisted of the following:
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Total income tax payments, net of refunds
$
3,525

 
$
2,715

 
$
8,678

 
$
12,254

Less: credits or offsets
934

 
435

 
2,794

 
2,159

Cash paid, net
$
2,591

 
$
2,280

 
$
5,884

 
$
10,095

Pension and Non-pension Postretirement Benefits
Pension and Non-pension Postretirement Benefits
Pension and Non-pension Postretirement Benefits

We have pension plans covering the majority of our employees. Benefits generally are based on compensation and service 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 certain 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 at Toledo after September 30, 2010). Effective January 1, 2013, we ceased annual company contribution credits to the cash balance accounts in our Libbey U.S. Salaried Pension Plan and SERP. The non-U.S. pension plans cover the employees of our wholly owned subsidiaries in the Netherlands and Mexico. The plan in Mexico is primarily unfunded.

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)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
916

 
$
1,184

 
$
567

 
$
729

 
$
1,483

 
$
1,913

Interest cost
3,845

 
3,582

 
1,396

 
1,271

 
5,241

 
4,853

Expected return on plan assets
(5,597
)
 
(5,571
)
 
(616
)
 
(547
)
 
(6,213
)
 
(6,118
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
265

 
293

 
55

 
65

 
320

 
358

Loss
1,014

 
2,095

 
253

 
223

 
1,267

 
2,318

Settlement charge

 
424

 

 
336

 

 
760

Pension expense
$
443

 
$
2,007

 
$
1,655

 
$
2,077

 
$
2,098

 
$
4,084

 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
2,748

 
$
3,554

 
$
1,724

 
$
2,137

 
$
4,472

 
$
5,691

Interest cost
11,534

 
10,564

 
4,242

 
3,722

 
15,776

 
14,286

Expected return on plan assets
(16,790
)
 
(16,775
)
 
(1,872
)
 
(1,524
)
 
(18,662
)
 
(18,299
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
794

 
879

 
170

 
187

 
964

 
1,066

Loss
3,043

 
6,445

 
770

 
676

 
3,813

 
7,121

Settlement charge

 
1,139

 

 
336

 

 
1,475

Pension expense
$
1,329

 
$
5,806

 
$
5,034

 
$
5,534

 
$
6,363

 
$
11,340

 
 
 
 
 
 
 
 
 
 
 
 


During the three and nine months ended September 30, 2013, we incurred pension settlement charges totaling $0.8 million and $1.5 million, respectively. The pension settlement charges were triggered by excess lump sum distributions, which required us to record unrecognized gains and losses in our pension plan accounts. We have contributed $1.2 million and $3.1 million of cash into our pension plans for the three and nine months ended September 30, 2014, respectively. Pension contributions for the remainder of 2014 are estimated to be $3.2 million.

We provide certain retiree health care and life insurance benefits covering our U.S and Canadian salaried employees hired before January 1, 2004 and a majority of our union hourly employees (excluding employees hired at Shreveport after 2008 and 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. Effective January 1, 2013, we ended our existing healthcare benefit for salaried retirees age 65 and older and instead provide a Retiree Health Reimbursement Arrangement (RHRA) that supports retirees in purchasing a Medicare plan that meets their needs. Also effective January 1, 2013, we reduced the maximum life insurance benefit for salaried retirees to $10,000. 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 unfunded.

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)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
252

 
$
298

 
$

 
$

 
$
252

 
$
298

Interest cost
710

 
655

 
26

 
29

 
736

 
684

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
35

 
35

 

 

 
35

 
35

Loss / (gain)
66

 
214

 

 

 
66

 
214

Non-pension postretirement benefit expense
$
1,063

 
$
1,202

 
$
26

 
$
29

 
$
1,089

 
$
1,231

 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
755

 
$
893

 
$
1

 
$
1

 
$
756

 
$
894

Interest cost
2,130

 
1,966

 
82

 
83

 
2,212

 
2,049

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
105

 
105

 

 

 
105

 
105

Loss / (gain)
200

 
643

 

 

 
200

 
643

Non-pension postretirement benefit expense
$
3,190

 
$
3,607

 
$
83

 
$
84

 
$
3,273

 
$
3,691

 
 
 
 
 
 
 
 
 
 
 
 


Our 2014 estimate of non-pension cash payments is $4.8 million, and we have paid $1.8 million and $3.9 million for the three and nine months ended September 30, 2014, respectively.
Net Income (Loss) per Share of Common Stock
Net Income per Share of Common Stock
Net Income (Loss) per Share of Common Stock

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands, except earnings per share)
2014
 
2013
 
2014
 
2013
Numerators for earnings per share:
 
 
 
 
 
 
 
Net income (loss) that is available to common shareholders
$
13,758

 
$
4,749

 
$
(14,794
)
 
$
19,174

 
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding
21,799,782

 
21,492,625

 
21,667,408

 
21,300,212

 
 
 
 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Effect of stock options and restricted stock units
440,531

 
730,697

 

 
629,200

Adjusted weighted average shares and assumed conversions
22,240,313

 
22,223,322

 
21,667,408

 
21,929,412

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.63

 
$
0.22

 
$
(0.68
)
 
$
0.90

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
0.62

 
$
0.21

 
$
(0.68
)
 
$
0.87

 
 
 
 
 
 
 
 
Shares excluded from diluted earnings (loss) per share due to:
 
 
 
 
 
 
 
Net loss position (excluded from denominator)

 

 
458,658

 

Inclusion would have been anti-dilutive (excluded from calculation)
192,090

 
319,288

 
151,732

 
280,859



When applicable, diluted shares outstanding includes the dilutive impact of restricted stock units. Diluted shares also include the impact of eligible 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.

Derivatives
Derivatives
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 the foreign currency contracts and a portion of our former interest rate swap, 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.”

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, 2014
 
December 31, 2013
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Natural gas contracts
 
Prepaid and other current assets
 
$

 
Prepaid and other current assets
 
$
394

Natural gas contracts
 
Other assets
 

 
Other assets
 
19

Total designated
 
 
 

 
 
 
413

Derivatives not designated as hedging
instruments under FASB ASC 815:
 
 
 
 
 
 
 
 
Currency contracts
 
Prepaid and other current assets
 
274

 
Prepaid and other current assets
 

Total undesignated
 
 
 
274

 
 
 

Total
 
 
 
$
274

 
 
 
$
413

 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives:
(dollars in thousands)
 
September 30, 2014
 
December 31, 2013
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Natural gas contracts
 
Accrued liabilities
 
$
438

 
Accrued liabilities
 
$

Natural gas contracts
 
Other long-term liabilities
 
68

 
Other long-term liabilities
 

Interest rate contract
 
Other long-term liabilities
 

 
Other long-term liabilities
 
1,866

Total designated
 
 
 
506

 
 
 
1,866

Derivatives not designated as hedging
instruments under FASB ASC 815:
 
 
 
 
 
 
 
 
Interest rate contract
 
Other long-term liabilities
 

 
Other long-term liabilities
 
207

Total undesignated
 
 
 

 
 
 
207

Total
 
 
 
$
506

 
 
 
$
2,073



Interest Rate Swaps as Fair Value Hedges

In 2012, we entered into an interest rate swap agreement (Rate Agreement) with a notional amount of $45.0 million that was to mature in 2020. The Rate Agreement was executed in order to convert a portion of the fixed rate debt under the Senior Secured Notes into floating rate debt and maintain a capital structure containing fixed and floating rate debt. Upon the refinancing of the Senior Secured Notes, the Rate Agreement was called at fair value on May 9, 2014, resulting in a subsequent payment of $1.1 million. The remaining balance of the carrying value adjustment on debt related to the Rate Agreement was recognized as a loss in loss on redemption of debt on the Condensed Consolidated Statements of Operations. See note 4 for further discussion.

Prior to the refinancing of the Senior Secured Notes, $40.5 million of our Rate Agreement was designated and qualified 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) and the offsetting change in the fair value of the hedged long-term debt attributable to the hedged risk were recognized in current earnings. We included the gain or loss on the hedged long-term debt, along with the offsetting loss or gain on the related interest rate swap, in other income (expense) on the Condensed Consolidated Statements of Operations.

As of July 1, 2013, we de-designated 10 percent, or $4.5 million, of our Rate Agreement. As a result, the mark-to-market of the $4.5 million portion of the Rate Agreement is recorded in other income (expense) on the Condensed Consolidated Statements of Operations.

The following table provides a summary of the gain (loss) recognized on the Condensed Consolidated Statements of Operations from the de-designated portion of our Rate Agreement:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Interest rate swap
 
$

 
$
(163
)
 
$
140

 
$
(163
)
Related long-term debt
 

 

 
(589
)
 

Net impact
 
$

 
$
(163
)
 
$
(449
)
 
$
(163
)

The following table provides a summary of the gain (loss) recognized on the Condensed Consolidated Statements of Operations from the designated portion of our Rate Agreement:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Interest rate swap
 
$

 
$
330

 
$
497

 
$
(1,749
)
Related long-term debt
 

 
(245
)
 
(735
)
 
1,265

Net impact
 
$

 
$
85

 
$
(238
)
 
$
(484
)

The gain or loss on the hedged long-term debt netted with the offsetting gain or loss on the related designated and de-designated interest rate swap was recorded on the Condensed Consolidated Statements of Operations as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Loss on redemption of debt
 
$

 
$

 
$
(757
)
 
$

Other income (expense)
 

 
(78
)
 
70

 
(647
)
Net impact
 
$

 
$
(78
)
 
$
(687
)
 
$
(647
)


Commodity Futures 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 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, 2014, we had commodity contracts for 3,650,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2013, we had commodity contracts for 1,520,000 million BTUs of natural gas.

All of our natural gas derivatives qualify and are designated as cash flow hedges at September 30, 2014. 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 Statements of Operations. We recognized in the nine months ended September 30, 2013 $(0.3) million of ineffectiveness in other income (expense) in the Condensed Consolidated Statements of Operations for certain contracts at our Mexico facility. This ineffectiveness was related to a change in pricing caused by the Mexican government instituting a surcharge. The ineffectiveness was not expected to continue so the contracts have been treated as effective under FASB ASC 815 "Derivatives and Hedging." We paid (received) additional cash of $0.1 million and $(0.8) million in the three and nine months ended September 30, 2014, respectively, (comparable 2013 amounts were immaterial), 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 $0.4 million of loss in our Condensed Consolidated Statements of Operations.

The following table provides a summary of the effective portion of derivative gain (loss) recognized in other comprehensive income (loss):
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Derivatives in Cash Flow Hedging relationships:
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
(670
)
 
$
(78
)
 
$
(164
)
 
$
512

Total
 
$
(670
)
 
$
(78
)
 
$
(164
)
 
$
512



The following table provides a summary of the effective portion of derivative gain (loss) reclassified from accumulated other comprehensive loss to the Condensed Consolidated Statements of Operations:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
 
2014
 
2013
 
2014
 
2013
Derivative:
Location:
 
 
 
 
 
 
 
 
Natural gas contracts
Cost of sales
 
$
(58
)
 
$
26

 
$
756

 
$
32

Total impact on net income (loss)
 
 
$
(58
)
 
$
26

 
$
756

 
$
32



Currency Contracts

Our foreign currency exposure arises from transactions denominated in a currency other than the U.S. dollar primarily associated with our Canadian dollar denominated accounts receivable. We enter into a series of foreign currency contracts to sell Canadian dollars. At September 30, 2014, we had C$9.6 million in foreign currency contracts. At December 31, 2013, we had no active foreign currency contracts. 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.

Gains (losses) on 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)
 
 
2014
 
2013
 
2014
 
2013
Derivative:
Location:
 
 

 
 

 
 

 
 

Currency contracts
Other income (expense)
 
$
461

 
$
(273
)
 
$
274

 
$
144

Total
 
 
$
461

 
$
(273
)
 
$
274

 
$
144



We do not believe we are exposed to more than a nominal amount of credit risk in our natural gas hedges and currency contracts as the counterparties are established financial institutions. The counterparties for the derivative agreements are rated BBB+ or better as of September 30, 2014, by Standard and Poor’s.
Comprehensive Income (Loss)
Comprehensive Income (Loss)
Comprehensive Income (Loss)

Accumulated other comprehensive loss, net of tax, is as follows:
Three months ended September 30, 2014
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on June 30, 2014
 
$
3,181

 
$
947

 
$
(75,502
)
 
$
(71,374
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
(8,022
)
 
(670
)
 

 
(8,692
)
Currency impact
 

 

 
933

 
933

 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
    Amortization of actuarial loss (1)
 

 

 
1,333

 
1,333

    Amortization of prior service cost (1)
 

 

 
355

 
355

    Cost of sales
 

 
58

 

 
58

Current-period other comprehensive income (loss)
 
(8,022
)
 
(612
)
 
2,621

 
(6,013
)
Tax effect
 

 
87

 
(320
)
 
(233
)
Balance on September 30, 2014
 
$
(4,841
)
 
$
422

 
$
(73,201
)
 
$
(77,620
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on December 31, 2013
 
$
4,554

 
$
1,221

 
$
(78,935
)
 
$
(73,160
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
(9,395
)
 
(164
)
 
1,292

 
(8,267
)
Currency impact
 

 

 
1,243

 
1,243

 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
    Amortization of actuarial loss (1)
 

 

 
4,013

 
4,013

    Amortization of prior service cost (1)
 

 

 
1,069

 
1,069

    Cost of sales
 

 
(756
)
 

 
(756
)
Current-period other comprehensive income (loss)
 
(9,395
)
 
(920
)
 
7,617

 
(2,698
)
Tax effect
 

 
121

 
(1,883
)
 
(1,762
)
Balance on September 30, 2014
 
$
(4,841
)
 
$
422

 
$
(73,201
)
 
$
(77,620
)



Three months ended September 30, 2013
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on June 30, 2013
 
$
(2,231
)
 
$
1,025

 
$
(130,805
)
 
$
(132,011
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
4,528

 
(78
)
 
760

 
5,210

Currency impact
 

 

 
(33
)
 
(33
)
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
    Amortization of actuarial loss (1)
 

 

 
2,532

 
2,532

    Amortization of prior service cost (1)
 

 

 
393

 
393

    Cost of sales
 

 
(26
)
 

 
(26
)
Current-period other comprehensive income (loss)
 
4,528

 
(104
)
 
3,652

 
8,076

Tax effect
 

 
77

 
(75
)
 
2

Balance on September 30, 2013
 
$
2,297

 
$
998

 
$
(127,228
)
 
$
(123,933
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on December 31, 2012
 
$
(1,641
)
 
$
489

 
$
(139,888
)
 
$
(141,040
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
3,938

 
512

 
3,819

 
8,269

Currency impact
 

 

 
(108
)
 
(108
)
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
    Amortization of actuarial loss (1)
 

 

 
7,764

 
7,764

    Amortization of prior service cost (1)
 

 

 
1,171

 
1,171

    Cost of sales
 

 
(32
)
 

 
(32
)
Current-period other comprehensive income (loss)
 
3,938

 
480

 
12,646

 
17,064

Tax effect
 

 
29

 
14

 
43

Balance on September 30, 2013
 
$
2,297

 
$
998

 
$
(127,228
)
 
$
(123,933
)
___________________________
(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost within the cost of sales and selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
Segments
Segments
Segments

Our reporting segments align with our regionally focused organizational structure, which we believe enables us to better serve customers across the globe. Under this structure, we report financial results for the Americas; Europe, the Middle East and Africa (EMEA); U.S. Sourcing; and Other. In addition, sales and segment EBIT reflect end market reporting pursuant to which sales and related costs are included in segment EBIT based on the geographical destination of the sale. Our three reportable segments are defined below. Our operating segment that does not meet the criteria to be a reportable segment is disclosed as Other.

Americas—includes worldwide sales of manufactured and sourced glass tableware having an end market destination in North and South America.

EMEA—includes worldwide sales of manufactured and sourced glass tableware having an end market destination in Europe, the Middle East and Africa.

U.S. Sourcing—includes U.S. sales of sourced ceramic dinnerware, metal tableware, hollowware, and serveware.

Other —includes worldwide sales of manufactured and sourced glass tableware having an end market destination in Asia Pacific.

Our measure of profit for our reportable segments is Segment Earnings before Interest and Taxes (Segment EBIT) 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. We use Segment EBIT, along with net sales and selected cash flow information, to evaluate performance and to allocate resources. Segment EBIT for reportable segments includes an allocation of some corporate expenses based on the costs of services performed.

Certain activities not related to any particular reportable segment are reported within retained corporate costs. These costs include certain headquarter, administrative and facility costs, and other costs that are global in nature and are not allocable to the reporting segments.

The accounting policies of the reportable segments are the same as those described in note 2. We do not have any customers who represent 10 percent or more of total sales. Inter-segment sales are consummated at arm’s length and are reflected at end market reporting below.
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Net Sales:
 
 
 
 
 
 
 
Americas
$
149,366

 
$
141,390

 
$
425,741

 
$
406,740

EMEA
37,684

 
35,491

 
111,413

 
107,714

U.S. Sourcing
20,574

 
19,868