LIBBEY INC, 10-Q filed on 8/5/2011
Quarterly Report
Document and Entity Information (USD $)
6 Months Ended
Jun. 30, 2011
Jul. 29, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
LIBBEY INC 
 
 
Entity Central Index Key
0000902274 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Jun. 30, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q2 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 202,506,432 
Entity Common Stock, Shares Outstanding
 
19,853,533 
 
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Condensed Consolidated Statements of Operations [Abstract]
 
 
 
 
Net sales
$ 214,013 
$ 203,036 
$ 395,028 
$ 376,940 
Freight billed to customers
838 
420 
1,249 
854 
Total revenues
214,851 
203,456 
396,277 
377,794 
Cost of sales
165,015 
155,425 
310,295 
295,886 
Gross profit
49,836 
48,031 
85,982 
81,908 
Selling, general and administrative expenses
25,224 
24,719 
50,626 
47,543 
Special charges
(100)
156 
(49)
388 
Income from operations
24,712 
23,156 
35,405 
33,977 
(Loss) gain on redemption of debt
 
 
(2,803)
56,792 
Other income
3,064 
1,656 
6,070 
893 
Earnings before interest and income taxes
27,776 
24,812 
38,672 
91,662 
Interest expense
10,787 
11,768 
22,370 
21,388 
Income before income taxes
16,989 
13,044 
16,302 
70,274 
Provision for income taxes
1,583 
3,477 
1,897 
5,297 
Net income
$ 15,406 
$ 9,567 
$ 14,405 
$ 64,977 
Net income per share:
 
 
 
 
Basic:
$ 0.77 
$ 0.59 
$ 0.72 
$ 3.98 
Diluted:
$ 0.74 
$ 0.47 
$ 0.69 
$ 3.21 
Dividends per share
$ 0 
$ 0 
$ 0 
$ 0 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Jun. 30, 2011
Dec. 31, 2010
Assets:
 
 
Cash and cash equivalents
$ 44,309 
$ 76,258 
Accounts receivable - net
97,687 
92,101 
Inventories - net
168,197 
148,146 
Prepaid and other current assets
13,548 
6,437 
Total current assets
323,741 
322,942 
Pension asset
14,738 
12,767 
Purchased intangible assets - net
22,229 
23,134 
Goodwill
166,572 
169,340 
Derivative asset
3,356 
2,589 
Other assets
15,518 
17,802 
Total other assets
222,413 
225,632 
Property, plant and equipment - net
269,097 
270,397 
Total assets
815,251 
818,971 
Liabilities and Shareholders' Equity:
 
 
Accounts payable
61,612 
59,095 
Salaries and wages
29,957 
32,087 
Accrued liabilities
58,352 
51,211 
Accrued special charges
202 
768 
Accrued income taxes
3,121 
Pension liability (current portion)
6,132 
2,330 
Non-pension postretirement benefits (current portion)
5,017 
5,017 
Derivative liability
2,220 
3,392 
Long-term debt due within one year
3,393 
3,142 
Total current liabilities
166,885 
160,163 
Long-term debt
409,109 
443,983 
Pension liability
105,800 
115,521 
Non-pension postretirement benefits
67,910 
67,737 
Deferred income taxes
8,769 
8,376 
Other long-term liabilities
8,924 
11,925 
Total liabilities
767,397 
807,705 
Shareholders' equity:
 
 
Common stock, par value $.01 per share, 50,000,000 shares authorized, 19,850,879 shares issued at June 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 June 30, 2011 and at December 31, 2010)
302,525 
300,692 
Retained deficit
(164,272)
(178,677)
Accumulated other comprehensive loss
(90,598)
(110,946)
Total shareholders' equity
47,854 
11,266 
Total liabilities and shareholders' equity
$ 815,251 
$ 818,971 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data
Jun. 30, 2011
Dec. 31, 2010
Shareholders' equity:
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
50,000,000 
50,000,000 
Common stock, shares issued
19,850,879 
19,682,506 
Capital in excess of par value, amount received on warrants issued
$ 1,034 
$ 1,034 
Capital in excess of par value, warrants based shares
485,309 
485,309 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Operating activities:
 
 
 
 
Net income
$ 15,406 
$ 9,567 
$ 14,405 
$ 64,977 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
11,027 
10,568 
21,908 
20,954 
(Gain) loss on asset sales
(3,436)
185 
(6,796)
265 
Change in accounts receivable
(4,216)
(7,096)
(4,802)
(13,612)
Change in inventories
(4,331)
(3,896)
(19,072)
(14,800)
Change in accounts payable
1,339 
5,190 
672 
788 
Accrued interest and amortization of discounts, warrants and finance fees
9,479 
10,585 
826 
15,791 
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
(507)
(134)
2,944 
2,871 
Restructuring charges
(421)
2,827 
(566)
2,396 
Accrued liabilities & prepaid expenses
9,476 
6,843 
1,209 
(2,464)
Income taxes
(5,443)
3,405 
(9,746)
(239)
Share-based compensation expense
1,140 
1,385 
1,967 
1,831 
Other operating activities
401 
(1,317)
1,082 
(619)
Net cash provided by (Used in) operating activities
29,914 
38,112 
6,834 
(8,053)
Investing activities:
 
 
 
 
Additions to property, plant and equipment
(9,892)
(7,231)
(18,398)
(11,379)
Net proceeds from sale of Traex
12,842 
 
12,842 
 
Call premium on senior notes and floating rate notes
 
 
(1,203)
(8,415)
Proceeds from asset sales and other
597 
 
5,199 
 
Net cash provided by (used in) investing activities
3,547 
(7,231)
(1,560)
(19,794)
Financing activities:
 
 
 
 
Net (repayments) borrowings on ABL credit facility
(2,245)
 
2,105 
 
Other repayments
(49)
(632)
(97)
(91)
Other borrowings
 
 
 
215 
PIK note payment
 
 
 
(51,031)
Proceeds from senior secured notes
 
 
 
392,328 
Stock options exercised
478 
Debt issuance costs and other
(327)
(1,463)
(443)
(15,496)
Net cash (used in) financing activities
(2,618)
(2,087)
(37,957)
19,933 
Effect of exchange rate fluctuations on cash
354 
(648)
734 
(1,002)
Increase (Decrease) in cash
31,197 
28,146 
(31,949)
(8,916)
Cash at beginning of period
13,112 
18,027 
76,258 
55,089 
Cash at end of period
44,309 
46,173 
44,309 
46,173 
Supplemental disclosure of cash flows information:
 
 
 
 
Cash paid during the period for interest
1,139 
1,123 
21,310 
6,140 
Cash paid (refunded) during the period for income taxes
3,208 
(232)
7,688 
4,702 
Floating rate note payments
 
 
 
 
Note payments
 
 
 
(306,000)
Senior note payments
 
 
 
 
Note payments
 
 
$ (40,000)
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (Parenthetical) (USD $)
3 Months Ended
Mar. 31, 2010
Condensed Consolidated Statements of Cash Flows [Abstract]
 
Gross gain on redemption of PIK notes
$ 70,193,000 
Expenses related to redemption of PIK notes
13,400,000 
Gain on redemption of PIK notes, net of expenses
$ 56,792,000 
Description of the Business
Description of the Business
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.
Significant Accounting Policies
Significant Accounting Policies
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 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 six months ended June 30, 2011 was $1.1 million and $1.9 million, respectively. Stock-based compensation expense charged to the Condensed Consolidated Statement of Operations for the three months and six months ended June 30, 2010 was $1.4 million and $1.8 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.
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.
Balance Sheet Details
Balance Sheet Details
3. Balance Sheet Details
The following table provides detail of selected balance sheet items:
                 
(dollars in thousands)   June 30, 2011   December 31, 2010
 
Accounts receivable:
               
Trade receivables
  $ 97,083     $ 90,899  
Other receivables
    604       1,202  
 
Total accounts receivable, less allowances of $5,320 and $5,518
  $ 97,687     $ 92,101  
 
Inventories:
               
Finished goods
  $ 151,717     $ 132,169  
Work in process
    692       653  
Raw materials
    3,981       4,444  
Repair parts
    10,253       9,496  
Operating supplies
    1,554       1,384  
 
Total inventories, less allowances of $4,934 and $4,658
  $ 168,197     $ 148,146  
 
Prepaid and other current assets:
               
Value added tax
  $ 2,136     $ 1,332  
Prepaid expenses
    4,009       4,822  
Refundable, deferred and prepaid income taxes
    7,403       283  
 
Total prepaid and other current assets
  $ 13,548     $ 6,437  
 
Other assets:
               
Deposits
  $ 928     $ 904  
Finance fees — net of amortization
    10,827       13,012  
Other assets
    3,763       3,886  
 
Total other assets
  $ 15,518     $ 17,802  
 
Accrued liabilities:
               
Accrued incentives
  $ 22,202     $ 15,060  
Workers compensation
    9,352       9,608  
Medical liabilities
    3,494       3,785  
Interest
    12,891       14,416  
Commissions payable
    1,101       904  
Other accrued liabilities
    9,312       7,438  
 
Total accrued liabilities
  $ 58,352     $ 51,211  
 
Other long-term liabilities:
               
Deferred liability
  $ 4,146     $ 4,622  
Other long-term liabilities
    4,778       7,303  
 
Total other long-term liabilities
  $ 8,924     $ 11,925  
 
Borrowings
Borrowings
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 of an early call premium and $1.6 million for the write off of a pro rata amount of financing fees and discounts.
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 PIK 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.
Borrowings consist of the following:
                                 
                    June 30,   December 31,
(dollars in thousands)   Interest Rate   Maturity Date   2011   2010
 
Borrowings under ABL facility
  floating   April 29, 2016   $ 2,159     $  
Senior Secured Notes
    10.00%  (1)   February 15, 2015     360,000       400,000  
Promissory note
    6.00 %   July, 2011 to September, 2016     1,210       1,307  
RMB loan contract
  floating   July, 2012 to January, 2014     38,675       37,925  
BES Euro line
  floating   December, 2011 to December, 2013     11,873       10,934  
 
Total borrowings
                    413,917       450,166  
Less — unamortized discount
                    4,988       6,307  
Plus — Carrying value adjustment on debt related to the Interest Rate Agreement (1)
                    3,573       3,266  
 
Total borrowings — net
                    412,502       447,125  
Less — long term debt due within one year
                    3,393       3,142  
 
Total long-term portion of borrowings — net
                  $ 409,109     $ 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 (the “Credit Agreement 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’ present and future direct and indirect domestic subsidiaries;
 
    100 percent of the non-voting stock of substantially all of Libbey Glass’ first-tier present and future foreign subsidiaries; and
 
    65 percent of the voting stock of substantially all of Libbey Glass’ 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 (the “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 June 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 June 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. Libbey Glass had no borrowings under the facility at June 30, 2011, while Libbey Europe had outstanding borrowings of $2.2 million at an interest rate of 3.51 percent. There were no Libbey Glass or Libbey Europe borrowings under the facility 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 $3.7 million and mark-to-market reserves for natural gas contracts of $1.2 million. 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 June 30, 2011, we had $10.5 million in letters of credit outstanding under the ABL Facility. Remaining unused availability on the new ABL Facility was $69.3 million at June 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 (the “New Notes Indenture”), between Libbey Glass, the Company, the domestic subsidiaries of Libbey Glass listed as guarantors therein (the “Subsidiary Guarantors” and together with the Company, the “Guarantors”), and The Bank of New York Mellon Trust Company, N.A., as trustee (the “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;
 
    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 (the “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 its outstanding 10.0 percent Senior Secured Notes due 2015, 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 of 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 $90.0 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 is callable at the counterparty’s option, in whole or in part, at anytime on or after August 15, 2012 at set call premiums. The variable interest rate for our borrowings related to the Rate Agreement at June 30, 2011, excluding applicable fees, is 7.55 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 June 30, 2011, by Standard and Poor’s.
The fair market value for the Rate Agreement at June 30, 2011 and December 31, 2010 was a $3.3 million asset and a $2.5 million asset, respectively. An adjustment of $3.6 million and $3.3 million was recorded to increase the carrying value of the related long-term debt as of June 30, 2011 and December 31, 2010, respectively. The net impact of $0.1 million expense and $0.5 million income, and $0.6 million income and $0.4 million income, is recorded in other income on the Condensed Consolidated Statement of Operations for the three months and six months ended June 30, 2011 and June 30, 2010, respectively. See note 9 for further discussion. 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.
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 June 30, 2011, we had $1.2 million outstanding on the promissory note. Interest with respect to the promissory note is paid monthly.
Notes Payable
We have an overdraft line of credit for a maximum of €1.0 million. At June 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 $38.7 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 June 30, 2011, the annual interest rate was 5.67 percent. As of June 30, 2011, the outstanding balance was RMB 250.0 million (approximately $38.7 million). Interest is payable quarterly. Payments of principal in the amount of RMB 30.0 million (approximately $4.6 million) and RMB 40.0 million (approximately $6.2 million) must be made on July 20, 2012, and December 20, 2012, respectively, and three payments of principal in the amount of RMB 60.0 million (approximately $9.3 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 $15.8 million) with Banco Espírito Santo, S.A. (BES). The $11.9 million outstanding at June 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 $3.2 million) is due in December 2011, payment of €2.8 million (approximately $4.0 million) is due in December 2012 and payment of €3.3 million (approximately $4.7 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 $388.8 million at June 30, 2011. The fair value of the remainder of our debt approximates carrying value at June 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 June 30, 2011 we had $2.2 million outstanding under our ABL Facility, and we had $10.5 million of letters of credit issued under that facility. As a result, we had $69.3 million of unused availability remaining under the ABL Facility at June 30, 2011. In addition, we had $44.3 million of cash on hand at June 30, 2011.
Based on our operating plans and current forecast expectations, we anticipate that our level of cash on hand, cash flows from operations and our borrowing capacity under our ABL Facility will provide sufficient cash availability to meet our ongoing liquidity needs.
Special Charges
Special Charges
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 June 30, 2011. We incurred charges of approximately $0.1 million in the six months ended June 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.
We incurred additional charges of approximately $0.2 million and $0.5 million in the three months and six months ended June 30, 2010 related to these planned closures. Special charges of $0.2 million and $0.4 million were primarily related to employee termination and building site clean up costs in the three months and six months ended June 30, 2010, respectively. 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 $0.1 million for the first six months of 2010 for the change in fair value of ineffective natural gas hedges related to our Syracuse China operation. This amount was included in the Other Operations segment.
The following table summarizes the facility closure charges in the second quarter of 2011 and 2010:
                                                 
    Three months ended June 30, 2011     Three months ended June 30, 2010  
    Glass     Other             Glass     Other        
(dollars in thousands)   Operations     Operations     Total     Operations     Operations     Total  
Building site clean-up & fixed asset write-down
  $     $     $     $     $ 156     $ 156  
 
                                   
Included in special charges
                            156       156  
 
                                   
Total pretax charge
  $     $     $     $     $ 156     $ 156  
 
                                   
The following table summarizes the facility closure charges in the first six months of 2011 and 2010:
                                                 
    Six months ended June 30, 2011     Six months ended June 30, 2010  
    Glass     Other             Glass     Other        
(dollars in thousands)   Operations     Operations     Total     Operations     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 June 30, 2011:
                                                 
    Balances     Total     Cash     Inventory &             Balances at  
    at December 31,     Charge to     (payments)     Fixed asset     Non-cash     June 30,  
(dollars in thousands)   2010     Earnings     receipts     Write Downs     Utilization     2011  
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 )   $  
 
                                   
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:
                         
    Glass     Other     Charges  
(dollars in thousands)   Operations     Operations     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 six months ended June 30, 2011, we recorded a $0.1 million income adjustment to special charges in the Glass Operations segment.
The following reflects the balance sheet activity related to the fixed asset and inventory write-down charge as of June 30, 2011:
                                         
    Reserve                             Reserve  
    Balances at     Total     Cash     Inventory &     Balances at  
    December 31,     Charge to     (payments)     Fixed asset     June 30,  
(Dollars in thousands)   2010     Earnings     receipts     Write Downs     2011  
Building site clean-up & fixed asset write-down
  $ 316     $ (57 )   $ (13 )   $ (44 )   $ 202  
 
                             
Total
  $ 316     $ (57 )   $ (13 )   $ (44 )   $ 202  
 
                             
The ending balance of $0.2 million at June 30, 2011 was included in accrued special charges on the Condensed Consolidated Balance Sheets; we expect this to result in cash payments during the remainder of 2011.
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.
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 June 30,     Six months ended June 30,  
(dollars in thousands)   2011     2010     2011     2010  
Cost of sales
  $ 43     $ 2,687     $ 43     $ 2,687  
Selling general & administrative
    (805 )           (805 )      
Special charges (income)
    (100 )     156       (49 )     388  
Other (income) expense
    (216 )           (216 )     130  
 
                       
Total (income) expense
  $ (1,078 )   $ 2,843     $ (1,027 )   $ 3,205  
 
                       
Income Taxes
Income Taxes
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 June 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.
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. In 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. There is no tax benefit included in our income tax provision for the three months and six months ended June 30, 2011. There was a $0.4 million tax benefit recorded for the three months and six months ended June 30, 2010. Depending upon the level of our future earnings and losses and their impact on other comprehensive income, it is possible that these tax adjustments may change or even reverse in future periods.
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 six months ended June 30, 2011, we did not release any valuation allowance. During the first quarter of 2010, we reduced our valuation allowance by $1.1 million. The release of the valuation allowance in 2010 was related to net operating losses in Mexico that were utilized. 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. We intend to maintain these allowances until it is more likely than not that the deferred income tax assets will be realized.
Total income tax payments for the three months ended June 30, 2011, were $4.6 million, including $3.2 million in cash and $1.4 million in credits or offsets. Total income tax payments for the three months ended June 30, 2010, were refunds of $0.1 million, including a refund of $0.2 million in cash and $0.1 million in credits or offsets. Total income tax payments for the six months ended June 30, 2011, were $11.2 million, including $7.7 million in cash and $3.5 million in credits or offsets. Total income tax payments for the six months ended June 30, 2010, were $5.5 million, including $4.7 million in cash and $0.8 million in credits or offsets.
Pension and Non-pension Postretirement Benefits
Pension and Non-pension Postretirement Benefits
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 Royal Leerdam and Crisa. The Crisa plan is not funded.
The components of our net pension expense, including the SERP, are as follows:
                                                 
Three months ended June 30,   U.S. Plans   Non-U.S. Plans   Total
(dollars in thousands)   2011   2010   2011   2010   2011   2010
 
Service cost
  $ 1,314     $ 1,450     $ 457     $ 405     $ 1,771     $ 1,855  
Interest cost
    3,940       4,061       1,361       1,083       5,301       5,144  
Expected return on plan assets
    (4,259 )     (4,186 )     (625 )     (518 )     (4,884 )     (4,704 )
Amortization of unrecognized:
                                               
Prior service cost
    541       582       90       32       631       614  
Loss
    1,112       978       134       109       1,246       1,087  
 
Pension expense
  $ 2,648     $ 2,885     $ 1,417     $ 1,111     $ 4,065     $ 3,996  
 
                                                 
Six months ended June 30,   U.S. Plans   Non-U.S. Plans   Total
(dollars in thousands)   2011   2010   2011   2010   2011   2010
 
Service cost
  $ 2,746     $ 2,900     $ 885     $ 801     $ 3,631     $ 3,701  
Interest cost
    8,028       8,122       2,621       2,245       10,649       10,367  
Expected return on plan assets
    (8,572 )     (8,372 )     (1,190 )     (1,183 )     (9,762 )     (9,555 )
Amortization of unrecognized:
                                               
Prior service cost
    1,082       1,164       172       62       1,254       1,226  
Loss
    2,330       1,956       260       210       2,590       2,166  
 
Pension expense
  $ 5,614     $ 5,770     $ 2,748     $ 2,135     $ 8,362     $ 7,905  
 
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 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 June 30,   U.S. Plans   Non-U.S. Plans   Total
(dollars in thousands)   2011   2010   2011   2010   2011   2010
 
Service cost
  $ 306     $ 389     $ 1     $ 1     $ 307     $ 390  
Interest cost
    891       918       33       31       924       949  
Amortization of unrecognized:
                                               
Prior service gain
    106       (2 )                 106       (2 )
Loss / (Gain)
    264       236       (4 )     (6 )     260       230  
 
Non-pension postretirement benefit expense
  $ 1,567     $ 1,541     $ 30     $ 26     $ 1,597     $ 1,567  
 
                                                 
Six months ended June 30,   U.S. Plans   Non-U.S. Plans   Total
(dollars in thousands)   2011   2010   2011   2010   2011   2010
 
Service cost
  $ 679     $ 778     $ 1     $ 1     $ 680     $ 779  
Interest cost
    1,816       1,836       62       62       1,878       1,898  
Amortization of unrecognized:
                                               
Prior service gain
    211       (4 )                 211       (4 )
Loss / (Gain)
    554       472       (8 )     (13 )     546       459  
 
Non-pension postretirement benefit expense
  $ 3,260     $ 3,082     $ 55     $ 50     $ 3,315     $ 3,132  
 
In 2011, we expect to utilize approximately $31.5 million in cash to fund our pension plans and pay for non-pension postretirement benefits. Of that amount, $6.7 million and $10.2 million of cash were utilized in the three months and six months ended June 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 which could impact our accounting for retiree medical benefits in future periods. Based on the analysis to date, the impact of provisions in the Acts which 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.
Net Income per Share of Common Stock
Net Income per Share of Common Stock
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 June 30,   Six months Ended June 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
  $ 15,406     $ 9,567     $ 14,405     $ 64,977  
 
Denominator for basic earnings per share —
                               
Weighted average shares outstanding
    20,099,003       16,352,049       20,027,493       16,307,955  
 
Effect of stock options and restricted stock units
    627,566       535,143       642,300       430,018  
 
Effect of warrants
    134,877       3,553,443       142,577       3,506,553  
 
Total effect of dilutive securities
    762,443       4,088,586       784,877       3,936,571  
 
Denominator for diluted earnings per share —
                               
—Adjusted weighted average shares and assumed conversions
    20,861,446       20,440,635       20,812,370       20,244,526  
 
Basic earnings per share:
  $ 0.77     $ 0.59     $ 0.72     $ 3.98  
 
Diluted earnings per share:
  $ 0.74     $ 0.47     $ 0.69     $ 3.21  
 
In October 2009, we entered into a transaction with Merrill Lynch PCG, Inc. (the “Investor”) to exchange the existing 16.0 percent Old PIK 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.
Derivatives
Derivatives
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.”
Fair Values
The following table provides the fair values of our derivative financial instruments for the periods presented:
                                 
    Asset Derivatives:  
(dollars in thousands)   June 30, 2011     December 31, 2010  
Derivatives designated as hedging   Balance Sheet     Fair     Balance Sheet     Fair  
instruments under FASB ASC 815:   Location     Value     Location     Value  
Interest rate contract
  Derivative asset   $ 3,334     Derivative asset   $ 2,536  
Natural gas contracts
  Derivative asset     22     Derivative asset     53  
 
                           
Total designated
          $ 3,356             $ 2,589  
 
                           
 
    Liability Derivatives:  
(dollars in thousands)   June 30, 2011     December 31, 2010  
Derivatives designated as hedging   Balance Sheet     Fair     Balance Sheet     Fair  
instruments under FASB ASC 815:   Location     Value     Location     Value  
Natural gas contracts
  Derivative liability   $ 1,679     Derivative liability   $ 3,117  
 
                           
Total designated
            1,679               3,117  
 
                               
Derivatives not designated as hedging
instruments under FASB ASC 815:
                               
Natural gas contracts
  Derivative liability     64     Derivative liability     124  
Currency contracts
  Derivative liability     477     Derivative liability     151  
 
                           
Total undesignated
            541               275  
 
                           
Total
          $ 2,220             $ 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. As of June 30, 2011 the notional amount of the interest rate swap agreement is $90.0 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 on the Condensed Consolidated Statements of Operations along with the offsetting loss or gain on the related interest rate swap.
Amount of gain (loss) recognized in other income
                                 
    Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)   2011     2010     2011     2010  
Interest rate swap
  $ (1,587 )   $ 2,374     $ (2,231 )   $ 1,489  
Related long-term debt
    1,443       (1,795 )     2,723       (1,073 )
 
                       
Net impact on other income
  $ (144 )   $ 579     $ 492     $ 416  
 
                       
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. Certain of our natural gas futures contracts are now classified as ineffective, as the forecasted transactions are not probable of occurring due to the closure of our Syracuse China facility in April 2009. Under FASB ASC 815, “Derivatives and Hedging”, when the forecasted transactions of a hedging relationship become not probable of occurring, the gains or losses that have been classified in accumulated other comprehensive loss in prior periods for those contracts affected should be reclassified into earnings. We recognized immaterial amounts for both three month periods and an immaterial amount and $0.1 million for the six months ended June 30, 2011 and 2010, respectively, in other income on the Condensed Consolidated Statements of Operations relating to these contracts. As of June 30, 2011, we had commodity contracts for 2,370,000 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.
Most of our natural gas derivatives qualify and are designated as cash flow hedges (except certain contracts originally designated to expected purchases at Syracuse China) at June 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 income to current expense in cost of sales in our Condensed Consolidated Statement of Operations. We paid additional cash of $1.2 million and $2.4 million in the three months ended June 30, 2011 and 2010, respectively, and $2.0 million and $3.1 million in the six months ended June 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 $1.7 million of expense in our Condensed Consolidated Statement of Operations.
Amount of derivative gain/(loss) recognized in OCI (effective portion)
                                 
    Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)   2011     2010     2011     2010  
Derivatives in Cash Flow Hedging relationships:
                               
Natural gas contracts
  $ (487 )   $ 272     $ (636 )   $ (4,149 )
 
                       
Total
  $ (487 )   $ 272     $ (636 )   $ (4,149 )
 
                       
Gain / (loss) reclassified from Accumulated Other Comprehensive Loss
to Condensed Consolidated Statements of Operations (effective portion)
                                         
            Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)           2011     2010     2011     2010  
Derivative:
  Location:                                
Natural gas contracts
  Cost of sales   $ (1,213 )   $ (2,357 )   $ (2,042 )   $ (3,116 )
 
                             
Total impact on net (loss) income
          $ (1,213 )   $ (2,357 )   $ (2,042 )   $ (3,116 )
 
                             
The following table provides the impact on the Condensed Consolidated Statement of Operations from derivatives no longer designated as cash flow hedges, primarily related to the closure of our Syracuse China facility:
Gain (loss) recognized in income
(ineffective portion and amount excluded from effectiveness testing)
                                         
            Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)           2011     2010     2011     2010  
Derivative:
  Location:                                
Natural gas contracts
  Other income   $ (4 )   $ 29     $ (5 )   $ (101 )
 
                             
Total
          $ (4 )   $ 29     $ (5 )   $ (101 )
 
                             
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. 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. During 2010, we entered into a series of foreign currency contracts to sell Canadian dollars. As of June 30, 2011 and December 31, 2010 we had contracts for $15.1 million Canadian dollars and $18.7 million Canadian dollars, respectively.
Gains and losses for derivatives which were not designated as hedging instruments are recorded in current earnings as follows:
                                     
        Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)       2011     2010     2011     2010  
Derivative:
  Location:                                
Currency contracts
  Other income   $ 128     $ 639     $ (326 )   $ 639  
 
                           
Total
      $ 128     $ 639     $ (326 )   $ 639  
 
                         
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate and natural gas hedges, as the counterparties are established financial institutions. The counterparty is rated AA- for the Interest Rate Agreement and BBB+ or better for the counterparties to the other derivative agreements as of June 30, 2011, by Standard and Poor’s.
Comprehensive Income
Comprehensive Income
10. Comprehensive Income
Components of comprehensive income (net of tax) are as follows:
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
(dollars in thousands)   2011     2010     2011     2010  
Net income
  $ 15,406     $ 9,567     $ 14,405     $ 64,977  
Minimum pension and non-pension postretirement liability and intangible pension asset, net of tax
    7,696       2,332       9,808       3,910  
Effect of derivatives, net of tax
    686       2,442       1,300       284  
Effect of exchange rate fluctuations
    2,644       (9,148 )     9,240       (15,662 )
 
                       
Total comprehensive income
  $ 26,432     $ 5,193     $ 34,753     $ 53,509  
 
                       
Accumulated other comprehensive loss (net of tax) is as follows:
                                 
                  Minimum Pension        
    Effect of             and Non-Pension     Total  
    Exchange             Retirement Liability     Accumulated  
    Rate     Cash Flow     and Intangible     Comprehensive  
(dollars in thousands)   Fluctuation     Derivatives     Pension Asset     Loss  
Balance on December 31, 2010
  $ (2,661 )   $ (1,121 )   $ (107,164 )   $ (110,946 )
2011 change
    9,240       1,455       10,132       20,827  
Translation effect
          (49 )     (545 )     (594 )
Tax effect
          (106 )     221       115  
 
                       
Balance on June 30, 2011
  $ 6,579     $ 179     $ (97,356 )   $ (90,598 )
 
                       
Condensed Consolidated Guarantor Financial Statements
Condensed Consolidated Guarantor Financial Statements
11. Condensed Consolidated Guarantor Financial Statements
Libbey Glass is a direct, 100 percent owned subsidiary of Libbey Inc. and 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 month and six month periods ended June 30, 2011 and June 30, 2010.
At June 30, 2011, December 31, 2010 and June 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, the “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.
Libbey Inc.
Condensed Consolidating Statement of Operations
(dollars in thousands)
(unaudited)
                                                 
    Three months ended June 30, 2011
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 104,355       20,431       107,408       (18,181 )   $ 214,013  
Freight billed to customers
          203       376       259             838  
 
Total revenues
          104,558       20,807       107,667       (18,181 )     214,851  
Cost of sales
          80,588       14,968       87,640       (18,181 )     165,015  
 
Gross profit
          23,970       5,839       20,027             49,836  
Selling, general and administrative expenses
          13,655       2,143       9,426             25,224  
Special charges
          (100 )                       (100 )
 
Income (loss) from operations
          10,415       3,696       10,601             24,712  
Other income (expense)
          (222 )     3,320       (34 )           3,064  
 
Earnings (loss) before interest and income taxes
          10,193       7,016       10,567             27,776  
Interest expense
          7,897             2,890             10,787  
 
Earnings (loss) before income taxes
          2,296       7,016       7,677             16,989  
Provision (benefit) for income taxes
          1,252       (17 )     348             1,583  
 
Net income (loss)
          1,044       7,033       7,329             15,406  
Equity in net income (loss) of subsidiaries
    15,406       14,362                   (29,768 )      
 
Net income (loss)
  $ 15,406     $ 15,406     $ 7,033     $ 7,329     $ (29,768 )   $ 15,406  
 
The following represents the total special items included in the above Condensed Consolidated Statement of Operations (see notes 5 and 14):
                                                 
    Three months ended June 30, 2011
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Cost of sales
  $     $ 43     $     $     $     $ 43  
Selling, general and administrative expenses
          (385 )                       (385 )
Special charges
          (100 )                       (100 )
Other (income) expense
                (3,321 )     (216 )           (3,537 )
 
Total pretax special items
          (442 )     (3,321 )     (216 )           (3,979 )
 
Provision for income taxes
                      (922 )           (922 )
 
Special items net of tax
  $     $ (442 )   $ (3,321 )   $ (1,138 )   $     $ (4,901 )
 
Condensed Consolidating Statement of Operations
(dollars in thousands)
(unaudited)
                                                 
    Three months ended June 30, 2010
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 103,534     $ 23,158     $ 91,728     $ (15,384 )   $ 203,036  
Freight billed to customers
          159       215       46             420  
 
Total revenues
          103,693       23,373       91,774       (15,384 )     203,456  
Cost of sales
          78,792       16,235       75,782       (15,384 )     155,425  
 
Gross profit
          24,901       7,138       15,992             48,031  
Selling, general and administrative expenses
          13,845       2,422       8,452             24,719  
Special charges
                156                   156  
 
Income (loss) from operations
          11,056       4,560       7,540             23,156  
Other income (expense)
          399       6       1,251             1,656  
 
Earnings (loss) before interest and income taxes
          11,455       4,566       8,791             24,812  
Interest expense
          10,656       (6 )     1,118             11,768  
 
Earnings (loss) before income taxes
          799       4,572       7,673             13,044  
Provision (benefit) for income taxes
          (763 )     (86 )     4,326             3,477  
 
Net income (loss)
          1,562       4,658       3,347             9,567  
Equity in net income (loss) of subsidiaries
    9,567       8,005                   (17,572 )      
 
Net income (loss)
  $ 9,567     $ 9,567     $ 4,658     $ 3,347     $ (17,572 )   $ 9,567  
 
The following represents the total special items included in the above Condensed Consolidated Statement of Operations (see note 5):
                                                 
    Three months ended June 30, 2010
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Cost of sales
  $     $ (945 )   $     $ 2,687     $     $ 1,742  
Special charges
                156                   156  
Other income (expense)
                                   
 
Total pretax special items
  $     $ (945 )   $ 156     $ 2,687     $     $ 1,898  
 
Special items net of tax
  $     $ (945 )   $ 156     $ 2,687     $     $ 1,898  
 
Condensed Consolidating Statement of Operations
(dollars in thousands)
                                                 
    Six months ended June 30, 2011
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 194,924       40,187       190,752       (30,835 )   $ 395,028  
Freight billed to customers
          354       570       325             1,249  
 
Total revenues
          195,278       40,757       191,077       (30,835 )     396,277  
Cost of sales
          155,451       29,838       155,841       (30,835 )     310,295  
 
Gross profit
          39,827       10,919       35,236             85,982  
Selling, general and administrative expenses
          27,595       4,425       18,606             50,626  
Special charges
          (100 )     51                   (49 )
 
Income (loss) from operations
          12,332       6,443       16,630             35,405  
Other income (expense)
          (2,777 )     3,354       2,690             3,267  
 
Earnings (loss) before interest and income taxes
          9,555       9,797       19,320             38,672  
Interest expense
          16,690             5,680             22,370  
 
Earnings (loss) before income taxes
          (7,135 )     9,797       13,640             16,302  
Provision (benefit) for income taxes
          630       55       1,212             1,897  
 
Net income (loss)
          (7,765 )     9,742       12,428             14,405  
Equity in net income (loss) of subsidiaries
    14,405       22,170                   (36,575 )      
 
Net income (loss)
  $ 14,405     $ 14,405     $ 9,742     $ 12,428     $ (36,575 )   $ 14,405  
 
The following represents the total special items included in the above Condensed Consolidated Statement of Operations (see notes 4, 5 and 14):
                                                 
    Six months ended June 30, 2011
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Cost of sales
  $     $ 43     $     $     $     $ 43  
Selling, general and administrative expenses
          (385 )                       (385 )
Special charges
          (100 )     51                   (49 )
Other expense (income)
          2,803       (3,321 )     (3,661 )           (4,179 )
 
Total pretax special items
          2,361       (3,270 )     (3,661 )           (4,570 )
 
Special items net of tax
  $     $ 2,361     $ (3,270 )   $ (3,661 )   $     $ (4,570 )
 
Condensed Consolidating Statement of Operations
(dollars in thousands)
(unaudited)
                                                 
    Six months ended June 30, 2010
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Net sales
  $     $ 189,697     $ 42,720     $ 172,795     $ (28,272 )   $ 376,940  
Freight billed to customers
          325       429       100             854  
 
Total revenues
          190,022       43,149       172,895       (28,272 )     377,794  
Cost of sales
          150,348       30,342       143,468       (28,272 )     295,886  
 
Gross profit
          39,674       12,807       29,427             81,908  
Selling, general and administrative expenses
          26,251       4,588       16,704             47,543  
Special charges
          29       359                   388  
 
Income (loss) from operations
          13,394       7,860       12,723             33,977  
Other income (expense)
          56,391       (142 )     1,436             57,685  
 
Earnings (loss) before interest and income taxes
          69,785       7,718       14,159             91,662  
Interest expense
          19,134       (6 )     2,260             21,388  
 
Earnings (loss) before income taxes
          50,651       7,724       11,899             70,274  
Provision (benefit) for income taxes
          (743 )     58       5,982             5,297  
 
Net income (loss)
          51,394       7,666       5,917             64,977  
Equity in net income (loss) of subsidiaries
    64,977       13,583                   (78,560 )      
 
Net income (loss)
  $ 64,977     $ 64,977     $ 7,666     $ 5,917     $ (78,560 )   $ 64,977  
 
The following represents the total special items included in the above Condensed Consolidated Statement of Operations (see note 4 and 5):
                                                 
    Six months ended June 30, 2010
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Cost of sales
  $     $ (945 )   $     $ 2,687     $     $ 1,742  
Special charges
          29       359                   388  
Other expense (income)
          (56,792 )     130                   (56,662 )
 
Total pretax special items
  $     $ (57,708 )   $ 489     $ 2,687     $     $ (54,532 )
 
Special items net of tax
  $     $ (57,708 )   $ 489     $ 2,687     $     $ (54,532 )
 
Condensed Consolidating Balance Sheets
(dollars in thousands)
                                                 
    June 30, 2011 (unaudited)
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Cash and equivalents
  $     $ 25,772       367       18,170     $     $ 44,309  
Accounts receivable — net
          36,961       4,998       55,728             97,687  
Inventories — net
          58,272       19,439       90,486             168,197  
Other current assets
          18,160       3,421       14,314       (22,347 )     13,548  
 
Total current assets
          139,165       28,225       178,698       (22,347 )     323,741  
Other non-current assets
          18,510       8       34,233       (19,139 )     33,612  
Investments in and advances to subsidiaries
    47,854       349,797       207,256       (34,749 )     (570,158 )      
Goodwill and purchased intangible assets — net
          26,833       12,347       149,621             188,801  
 
Total other assets
    47,854       395,140       219,611       149,105       (589,297 )     222,413  
Property, plant and equipment — net
          69,140       391       199,566             269,097  
 
Total assets
  $ 47,854     $ 603,445     $ 248,227     $ 527,369     $ (611,644 )   $ 815,251  
 
Accounts payable
  $     $ 13,182       2,350       46,080             $ 61,612  
Accrued and other current liabilities
          64,188       25,566       36,031       (23,905 )     101,880  
Notes payable and long-term debt due within one year
          227             3,166             3,393  
 
Total current liabilities
          77,597       27,916       85,277       (23,905 )     166,885  
Long-term debt
          359,568             49,541             409,109  
Other long-term liabilities
          138,201       14,194       56,589       (17,581 )     191,403  
 
Total liabilities
          575,366       42,110       191,407       (41,486 )     767,397  
Total shareholders’ equity (deficit)
    47,854       28,079       206,117       335,962       (570,158 )     47,854  
 
Total liabilities and shareholders’ equity (deficit)
  $ 47,854     $ 603,445     $ 248,227     $ 527,369     $ (611,644 )   $ 815,251  
 
                                                 
    December 31, 2010
    Libbey   Libbey           Non-        
    Inc.   Glass   Subsidiary   Guarantor        
    (Parent)   (Issuer)   Guarantors   Subsidiaries   Eliminations   Consolidated
 
Cash and equivalents
  $     $ 58,277       293       17,688           $ 76,258  
Accounts receivable — net
          37,099       5,360       49,642             92,101  
Inventories — net
          52,398       19,902       75,846             148,146  
Other current assets
          (2,634 )     10,960       10,518       (12,407 )     6,437  
 
Total current assets
          145,140       36,515       153,694       (12,407 )     322,942  
Other non-current assets
            8,344       2,779       41,169       (19,134 )     33,158  
Investments in and advances to subsidiaries
    11,266       360,784       189,171       (32,151 )     (529,070 )      
Goodwill and purchased intangible assets — net
            26,833       15,761       149,880             192,474  
 
Total other assets
    11,266       395,961       207,711       158,898       (548,204 )     225,632  
Property, plant and equipment — net
          72,892       4,862       192,643             270,397  
 
Total assets
  $ 11,266     $ 613,993     $ 249,088     $ 505,235     $ (560,611 )   $ 818,971  
 
Accounts payable
  $     $ 13,514       2,926       42,655           $ 59,095  
Accrued and other current liabilities
          48,092       27,811       34,430       (12,407 )     97,926  
Notes payable and long-term debt due within one year
          227             2,915             3,142  
 
Total current liabilities
          61,833       30,737       80,000       (12,407 )     160,163  
Long-term debt
          398,039             45,944             443,983  
Other long-term liabilities
          131,100       21,964       69,629       (19,134 )     203,559  
 
Total liabilities
          590,972       52,701       195,573       (31,541 )     807,705  
Total shareholders’ equity (deficit)
    11,266       23,021       196,387       309,662       (529,070 )     11,266  
 
Total liabilities and shareholders’ equity (deficit)
  $ 11,266     $ 613,993     $ 249,088     $ 505,235     $ (560,611 )   $ 818,971  
 
Condensed Consolidating Statements of Cash Flows
(dollars in thousands)
(unaudited)
                                                 
    Three months ended June 30, 2011  
    Libbey     Libbey             Non-              
    Inc.     Glass     Subsidiary     Guarantor              
    (Parent)     (Issuer)     Guarantors     Subsidiaries     Eliminations     Consolidated  
 
Net income (loss)
  $ 15,406     $ 15,406     $ 7,033     $ 7,329     $ (29,768 )   $ 15,406  
Depreciation and amortization
          3,767       61       7,199             11,027  
Other operating activities
    (15,406 )     13,791       (19,756 )     (4,916 )     29,768       3,481  
 
Net cash provided by (used in) operating activities
          32,964       (12,662 )     9,612             29,914  
Additions to property, plant & equipment
          (2,273 )           (7,619 )           (9,892 )
Other investing activities
          33       12,842       564             13,439  
 
Net cash (used in) investing activities
          (2,240 )     12,842       (7,055 )           3,547  
Net borrowings
          (4,399 )           2,105             (2,294 )
Other financing activities
          (324 )                       (324 )
 
Net cash provided by (used in) financing activities
          (4,723 )           2,105             (2,618 )
Exchange effect on cash
                      354             354  
 
Increase (decrease) in cash
          26,001       180       5,016             31,197  
Cash at beginning of period
          (229 )     187       13,154             13,112  
 
Cash at end of period
  $     $ 25,772     $ 367     $ 18,170     $     $ 44,309  
 
                                                 
    Three months ended June 30, 2010  
    Libbey     Libbey             Non-              
    Inc.     Glass     Subsidiary     Guarantor              
    (Parent)     (Issuer)     Guarantors     Subsidiaries     Eliminations     Consolidated  
 
Net income (loss)
  $ 9,567     $ 9,567     $ 4,658     $ 3,347     $ (17,572 )   $ 9,567  
Depreciation and amortization
          3,862       192       6,514             10,568  
Other operating activities
    (9,567 )     11,514       (4,860 )     3,318       17,572       17,977  
 
Net cash provided by (used in) operating activities
          24,943       (10 )     13,179             38,112  
Additions to property, plant & equipment
          (1,945 )     (14 )     (5,272 )           (7,231 )
Other investing activities
                                   
 
Net cash (used in) investing activities
          (1,945 )     (14 )     (5,272 )           (7,231 )
Net borrowings
          (46 )           (586 )           (632 )
Other financing activities
          (1,455 )                       (1,455 )
 
Net cash provided by (used in) financing activities
          (1,501 )           (586 )           (2,087 )
Exchange effect on cash
                      (648 )           (648 )
 
Increase (decrease) in cash
          21,497       (24 )     6,673             28,146  
Cash at beginning of period
          11,640       270       6,117             18,027  
 
Cash at end of period
  $     $ 33,137     $ 246     $ 12,790     $     $ 46,173  
 
Condensed Consolidating Statements of Cash Flows
(dollars in thousands)
(unaudited)
                                                 
    Six months ended June 30, 2011  
    Libbey     Libbey             Non-              
    Inc.     Glass     Subsidiary     Guarantor              
    (Parent)     (Issuer)     Guarantors     Subsidiaries     Eliminations     Consolidated  
 
Net income (loss)
  $ 14,405     $ 14,405     $ 9,742     $ 12,428     $ (36,575 )   $ 14,405  
Depreciation and amortization
          7,575       259       14,074             21,908  
Other operating activities
    (14,405 )     (9,168 )     (23,266 )     (19,215 )     36,575       (29,479 )
 
Net cash provided by (used in) operating activities
          12,812       (13,265 )     7,287             6,834  
Additions to property, plant & equipment
          (4,085 )     (3 )     (14,310 )           (18,398 )
Other investing activities
          (1,170 )     13,342       4,666             16,838  
 
Net cash (used in) investing activities
          (5,255 )     13,339       (9,644 )           (1,560 )
Net borrowings
          (40,097 )           2,105             (37,992 )
Other financing activities
          35                         35  
 
Net cash provided by (used in) financing activities
          (40,062 )           2,105             (37,957 )
Exchange effect on cash
                      734             734  
 
Increase (decrease) in cash
          (32,505 )     74       482             (31,949 )
Cash at beginning of period
          58,277       293       17,688             76,258  
 
Cash at end of period
  $     $ 25,772     $ 367     $ 18,170     $     $ 44,309  
 
                                                 
    Six months ended June 30, 2010  
    Libbey     Libbey             Non-              
    Inc.     Glass     Subsidiary     Guarantor              
    (Parent)     (Issuer)     Guarantors     Subsidiaries     Eliminations     Consolidated  
 
Net income (loss)
  $ 64,977     $ 64,977     $ 7,666     $ 5,917     $ (78,560 )   $ 64,977  
Depreciation and amortization
          7,711       386       12,857             20,954  
Other operating activities
    (64,977 )     (85,196 )     (8,211 )     (14,160 )     78,560       (93,984 )
 
Net cash provided by (used in) operating activities
          (12,508 )     (159 )     4,614             (8,053 )
Additions to property, plant & equipment
          (3,044 )     (14 )     (8,321 )           (11,379 )
Other investing activities
          (8,415 )                       (8,415 )
 
Net cash (used in) investing activities
          (11,459 )     (14 )     (8,321 )           (19,794 )
Net borrowings
          35,206             215             35,421  
Other financing activities
          (15,488 )                       (15,488 )
 
Net cash provided by (used in) financing activities
          19,718             215             19,933  
Exchange effect on cash
                      (1,002 )           (1,002 )
 
Increase (decrease) in cash
          (4,249 )     (173 )     (4,494 )           (8,916 )
Cash at beginning of period
          37,386       419       17,284             55,089  
 
Cash at end of period
  $     $ 33,137     $ 246     $ 12,790     $     $ 46,173  
 
Segments
Segments
12. Segments
We have revised our segment structure to reflect our reorganization from geographical regions to one global company. Under this new structure, we have two reportable segments: Glass Operations and Other Operations. The classifications are defined as follows:
Glass Operations — includes worldwide sales of glass tableware and other glass products from domestic and international subsidiaries.
Other Operations — includes worldwide sales of ceramic dinnerware, metal tableware, hollowware and serveware and plastic items. Plastic items were sold through April 28, 2011.
Our measure of profit for our reportable segments is Segment Earnings before Interest and Taxes (EBIT) and excludes amounts related to certain items we consider not representative of ongoing operations as well as certain retained corporate costs. 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 both a percentage of sales and direct billings 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. Corporate assets primarily include finance fees, capitalized software, and income tax assets.
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 in eliminations below.
                                 
    Three months ended June 30,   Six months ended June 30,
(dollars in thousands)   2011   2010   2011   2010
 
Net Sales:
                               
Glass Operations
  $ 194,487     $ 180,815     $ 356,540     $ 335,959  
Other Operations
    19,690       22,376       38,851       41,250  
Eliminations
    (164 )     (155 )     (363 )     (269 )
 
Consolidated
  $ 214,013     $ 203,036     $ 395,028     $ 376,940  
 
Segment EBIT:
                               
Glass Operations
  $ 29,973       31,188       47,364       46,614  
Other Operations
    3,762       4,754       6,641       8,239  
 
Total Segment EBIT
  $ 33,735     $ 35,942     $ 54,005     $ 54,853  
 
Reconciliation of Segment EBIT to Net Income:
                               
Segment EBIT
  $ 33,735     $ 35,942     $ 54,005     $ 54,853  
Retained corporate costs
    (9,938 )     (9,232 )     (19,903 )     (17,723 )
(Loss) gain on redemption of debt (note 4)
                (2,803 )     56,792  
Gain on sale of Traex
    3,321             3,321        
Gain on sale of land (1)
                3,445        
Restructuring and other charges (note 5)
    1,078       (2,843 )     1,027       (3,205 )
Other special income (charges) (2)
    (420 )     945       (420 )     945  
Interest expense
    (10,787 )     (11,768 )     (22,370 )     (21,388 )
Income taxes
    (1,583 )     (3,477 )     (1,897 )     (5,297 )
 
Net income
  $ 15,406     $ 9,567     $ 14,405     $ 64,977  
 
Depreciation & Amortization:
                               
Glass Operations
  $ 10,531     $ 10,025     $ 20,780     $ 19,869  
Other Operations
    54       184       246       371  
Corporate
    442       359       882       714  
 
Consolidated
  $ 11,027     $ 10,568     $ 21,908     $ 20,954  
 
Capital Expenditures:
                               
Glass Operations
  $ 9,347     $ 6,962     $ 17,769     $ 10,801  
Other Operations
          14       3       14  
Corporate
    545       255       626       564  
 
Consolidated
  $ 9,892     $ 7,231     $ 18,398     $ 11,379  
 
                 
    June 30,   December 31,
(dollars in thousands)   2011   2010
 
Segment Assets:
               
Glass Operations
  $ 755,753     $ 752,058  
Other Operations
    36,930       45,944  
Corporate
    22,568       20,969  
 
Consolidated
  $ 815,251     $ 818,971  
 
 
(1)   Net gain on the sale of land at our Royal Leerdam facility.
 
(2)   For 2011 this represents CEO transition expenses and for 2010 this is an insurance claim recovery.
Fair Value
Fair Value
13. Fair Value
FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
    Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
    Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
 
    Level 3 — Unobservable inputs based on our own assumptions.
                                                                 
Asset / (Liability)   Fair Value at June 30, 2011     Fair Value at December 31, 2010  
(dollars in thousands)   Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
     
Commodity futures natural gas contracts
  $     $ (1,721 )   $     $ (1,721 )   $     $ (3,188 )   $     $ (3,188 )
Currency contracts
          (477 )           (477 )           (151 )           (151 )
Interest rate agreements
          3,334             3,334             2,536             2,536  
     
Net derivative liability
  $     $ 1,136     $     $ 1,136     $     $ (803 )   $     $ (803 )
     
The fair values of our commodity futures natural gas contracts and currency contracts are determined using observable market inputs. The fair value of our interest 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. Since these inputs are observable in active markets over the terms that the instruments are held, the derivatives are classified as Level 2 in the hierarchy. We also evaluate Company and counterparty risk in determining fair values. The total derivative position is recorded on the Condensed Consolidated Balance Sheets with $3.4 million in derivative asset and $2.2 million in derivative liability as of June 30, 2011. As of December 31, 2010, $2.6 million was recorded in derivative asset and $3.4 million in derivative liability on the Condensed Consolidated Balance Sheets.
The commodity futures natural gas contracts and interest rate agreements are hedges of either recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the above table.
Other Income
Other Income
14. Other Income
Items included in other income in the Condensed Consolidated Statements of Operations are as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)   2011     2010     2011     2010  
 
Gain on sale of land at Royal Leerdam
  $             3,445        
Gain on sale of Traex (1)
    3,321             3,321        
Loss on currency translation
    (409 )     963       (1,575 )     433  
Income (expense) on hedging activities
    (148 )     608       487       315  
Other non-operating income
    300       85       392       145  
         
Other income
  $ 3,064     $ 1,656     $ 6,070     $ 893  
         
(1) On April 28, 2011, substantially all of the assets of our Traex subsidiary (now known as Dane Holding Co.) were sold to the Vollrath Company for $12.8 million, resulting in a gain of $3.3 million.