LIBBEY INC, 10-Q filed on 8/9/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Jul. 31, 2013
Entity Information [Line Items]
 
 
Entity Registrant Name
LIBBEY INC 
 
Entity Central Index Key
0000902274 
 
Current Fiscal Year End Date
--06-30 
 
Entity Filer Category
Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q2 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
21,236,031 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Net sales
$ 209,904 
$ 209,247 
$ 393,380 
$ 397,076 
Freight billed to customers
771 
759 
1,523 
1,467 
Total revenues
210,675 
210,006 
394,903 
398,543 
Cost of sales
153,213 
153,659 
295,209 
299,140 
Gross profit
57,462 
56,347 
99,694 
99,403 
Selling, general and administrative expenses
29,635 
27,378 
56,032 
55,504 
Special charges
(85)
4,229 
Income from operations
27,912 
28,969 
39,433 
43,899 
Loss on redemption of debt
(2,518)
(31,075)
(2,518)
(31,075)
Other income (expense)
51 
427 
(384)
(164)
Earnings (loss) before interest and income taxes
25,445 
(1,679)
36,531 
12,660 
Interest expense
8,126 
9,957 
16,561 
20,365 
Income (loss) before income taxes
17,319 
(11,636)
19,970 
(7,705)
Provision (benefit) for income taxes
4,883 
(1,493)
5,545 
1,797 
Net income (loss)
$ 12,436 
$ (10,143)
$ 14,425 
$ (9,502)
Net income (loss) per share:
 
 
 
 
Basic
$ 0.58 
$ (0.49)
$ 0.68 
$ (0.46)
Diluted
$ 0.57 
$ (0.49)
$ 0.66 
$ (0.46)
Dividends per share
$ 0 
$ 0 
$ 0 
$ 0 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Net income (loss)
$ 12,436 
$ (10,143)
$ 14,425 
$ (9,502)
Other comprehensive income (loss):
 
 
 
 
Pension and other postretirement benefit adjustments, net of tax
6,412 
4,630 
9,083 
6,837 
Change in fair value of derivative instruments, net of tax
(509)
2,009 
536 
1,477 
Foreign currency translation adjustments
2,335 
(6,116)
(590)
(2,679)
Other comprehensive income (loss), net of tax
8,238 
523 
9,029 
5,635 
Comprehensive income (loss)
$ 20,674 
$ (9,620)
$ 23,454 
$ (3,867)
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Assets:
 
 
Cash and cash equivalents
$ 10,544 
$ 67,208 
Accounts receivable - net
91,482 
80,850 
Inventories - net
175,911 
157,549 
Prepaid and other current assets
20,000 
12,997 
Total current assets
297,937 
318,604 
Pension asset
10,525 
10,196 
Purchased intangible assets - net
19,623 
20,222 
Goodwill
167,162 
166,572 
Deferred income taxes
9,793 
9,830 
Derivative asset
298 
Other assets
14,340 
18,300 
Total other assets
221,443 
225,418 
Property, plant and equipment - net
253,800 
258,154 
Total assets
773,180 
802,176 
Liabilities and Shareholders' Equity:
 
 
Accounts payable
59,309 
65,712 
Salaries and wages
28,316 
41,405 
Accrued liabilities
46,182 
42,863 
Accrued income taxes
2,282 
Pension liability (current portion)
602 
613 
Non-pension postretirement benefits (current portion)
4,739 
4,739 
Derivative liability
69 
420 
Deferred income taxes
3,223 
3,213 
Long-term debt due within one year
14,242 
4,583 
Total current liabilities
156,682 
165,830 
Long-term debt
415,506 
461,884 
Pension liability
61,794 
60,909 
Non-pension postretirement benefits
67,314 
71,468 
Deferred income taxes
6,898 
7,537 
Other long-term liabilities
12,104 
10,072 
Total liabilities
720,298 
777,700 
Shareholders' equity:
 
 
Common stock, par value $.01 per share, 50,000,000 shares authorized, 21,146,434 shares issued at June 30, 2013 (20,835,489 shares issued in 2012)
211 
209 
Capital in excess of par value
318,327 
313,377 
Retained deficit
(133,645)
(148,070)
Accumulated other comprehensive loss
(132,011)
(141,040)
Total shareholders' equity
52,882 
24,476 
Total liabilities and shareholders' equity
$ 773,180 
$ 802,176 
Condensed Consolidated Balance Sheets Parenthetical (USD $)
Jun. 30, 2013
Dec. 31, 2012
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
50,000,000 
50,000,000 
Common stock, shares issued
21,146,434 
20,835,489 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Operating activities:
 
 
 
 
Net income (loss)
$ 12,436 
$ (10,143)
$ 14,425 
$ (9,502)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
11,623 
10,288 
22,397 
20,824 
Loss on asset sales and disposals
31 
168 
33 
167 
Change in accounts receivable
(4,836)
(2,078)
(10,879)
(474)
Change in inventories
(7,857)
(9,925)
(18,492)
(22,091)
Change in accounts payable
1,428 
630 
(6,317)
(4,588)
Accrued interest and amortization of discounts and finance fees
(7,521)
(279)
610 
(7,654)
Call premium on senior notes
1,350 
23,602 
1,350 
23,602 
Write-off of finance fee & discounts on senior notes and ABL
1,168 
10,975 
1,168 
10,975 
Pension & non-pension postretirement benefits
1,504 
(82,019)
5,204 
(82,579)
Restructuring charges
(659)
3,655 
Accrued liabilities & prepaid expenses
(793)
7,308 
(16,585)
(2,028)
Income taxes
(2,553)
(2,097)
(4,179)
(120)
Share-based compensation expense
1,485 
1,138 
2,309 
1,865 
Other operating activities
2,579 
11 
2,006 
84 
Net cash provided by (used in) operating activities
9,385 
(52,421)
(3,295)
(71,519)
Investing activities:
 
 
 
 
Additions to property, plant and equipment
(10,889)
(5,386)
(19,771)
(11,832)
Proceeds from asset sales and other
239 
419 
Net cash (used in) investing activities
(10,885)
(5,147)
(19,763)
(11,413)
Financing activities:
 
 
 
 
Borrowings on ABL credit facility
30,400 
30,400 
Repayments on ABL credit facility
(20,600)
(20,600)
Other repayments
(55)
(9,568)
(114)
(9,962)
Proceeds from (payments on) 6.875% senior notes
(45,000)
450,000 
(45,000)
450,000 
Payments on 10% senior notes
(360,000)
(360,000)
Call premium on senior notes
(1,350)
(23,602)
(1,350)
(23,602)
Stock options exercised
2,511 
12 
3,048 
40 
Debt issuance costs and other
(12,154)
(12,154)
Net cash provided by (used in) financing activities
(34,094)
44,688 
(33,616)
44,322 
Effect of exchange rate fluctuations on cash
189 
(361)
10 
(104)
Increase (decrease) in cash
(35,405)
(13,241)
(56,664)
(38,714)
Cash at beginning of period
45,949 
32,818 
67,208 
58,291 
Cash at end of period
10,544 
19,577 
10,544 
19,577 
Supplemental disclosure of cash flows information:
 
 
 
 
Cash paid during the period for interest
15,560 
10,494 
15,848 
28,225 
Cash paid during the period for income taxes
$ 5,931 
$ 306 
$ 7,815 
$ 1,191 
Condensed Consolidated Statements of Cash Flows Parenthetical (Subsidiary, Libbey Glass [Member], Senior Notes [Member])
Jun. 30, 2013
Jun. 29, 2012
Subsidiary, Libbey Glass [Member] |
Senior Notes [Member]
 
 
Interest rate
6.875% 
10.00% 
Description of the Business
Description of the Business
Description of the Business

Libbey is a leading global manufacturer and marketer of glass tableware products. We believe we have the largest manufacturing, distribution and service network among glass tableware manufacturers in the Western Hemisphere, in addition to supplying to key markets throughout the world. We produce glass tableware in five countries and sell to customers in over 100 countries. We design and market, under our Libbey®, Crisa®, Royal Leerdam®, World® Tableware, Syracuse® China and Crisal Glass® brand names (among others), an extensive line of high-quality glass tableware, ceramic dinnerware, metal flatware, hollowware and serveware items for sale primarily in the foodservice, retail and business-to-business markets. Our sales force presents our products to the global marketplace in a coordinated fashion. We own and operate two glass tableware manufacturing plants in the United States as well as glass tableware manufacturing plants in the Netherlands (Libbey Holland), Portugal (Libbey Portugal), China (Libbey China) and Mexico (Libbey Mexico). In addition, we import products from overseas in order to complement our line of manufactured items. The combination of manufacturing and procurement allows us to compete in the global tableware market by offering an extensive product line at competitive prices.

Our website can be found at www.libbey.com. We make available, free of charge, at this website all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of Securities Exchange Act of 1934, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, as well as amendments to those reports. These reports are made available on our website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission and can also be found at www.sec.gov.

Our shares are traded on the NYSE MKT exchange under the ticker symbol LBY.
Significant Accounting Policies
Significant Accounting Policies
Significant Accounting Policies

See our Form 10-K for the year ended December 31, 2012 for a description of significant accounting policies not listed below.

Basis of Presentation

The Condensed Consolidated Financial Statements include Libbey Inc. and its majority-owned subsidiaries (collectively, Libbey or the Company). Our fiscal year end is December 31st. All material intercompany accounts and transactions have been eliminated. The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from management’s estimates.

Condensed Consolidated Statements of Operations

Net sales in our Condensed Consolidated Statements of Operations include revenue earned when products are shipped and title and risk of loss have passed to the customer. Revenue is recorded net of returns, discounts and incentives offered to customers. Cost of sales includes cost to manufacture and/or purchase products, warehouse, shipping and delivery costs and other costs.

Foreign Currency Translation

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at average exchange rates during the year. The effect of exchange rate changes on transactions denominated in currencies other than the functional currency is recorded in other income (expense).

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax attribute carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Financial Accounting Standards Board Accounting Standards Codification™ (FASB ASC) Topic 740, “Income Taxes,” requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are determined separately for each tax jurisdiction in which we conduct our operations or otherwise incur taxable income or losses. In the United States, Portugal and the Netherlands, we have recorded valuation allowances against our deferred income tax assets. See note 6 for further discussion.

Stock-Based Compensation Expense

We account for stock-based compensation expense in accordance with FASB ASC Topic 718, “Compensation — Stock Compensation,” and FASB ASC Topic 505-50, “Equity — Equity-Based Payments to Non-Employees”. Stock-based compensation cost is measured based on the fair value of the equity instruments issued. FASB ASC Topics 718 and 505-50 apply to all of our outstanding unvested stock-based payment awards. Stock-based compensation expense charged to the Condensed Consolidated Statements of Operations is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Stock-based compensation expense
 
$
1,485

 
$
1,138

 
$
2,309

 
$
1,865


New Accounting Standards

In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02). ASU 2013-02 requires companies to present, either in a note or parenthetically on the face of the financial statements, the effect of amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. This update is effective for interim and annual reporting periods beginning after December 15, 2012. Required interim disclosures have been made in our Condensed Consolidated Financial Statements at June 30, 2013.
Balance Sheet Details
Balance Sheet Details
Balance Sheet Details

The following table provides detail of selected balance sheet items:
(dollars in thousands)
June 30, 2013
 
December 31, 2012
Accounts receivable:
 
 
 
Trade receivables
$
90,189

 
$
79,624

Other receivables
1,293

 
1,226

Total accounts receivable, less allowances of $5,834 and $5,703
$
91,482

 
$
80,850

 
 
 
 
Inventories:
 
 
 
Finished goods
$
157,364

 
$
139,888

Work in process
1,660

 
1,188

Raw materials
4,709

 
4,828

Repair parts
10,589

 
10,283

Operating supplies
1,589

 
1,362

Total inventories, less allowances of $4,606 and $4,091
$
175,911

 
$
157,549

 
 
 
 
Prepaid and other current assets:
 
 
 
Value added tax
$
7,062

 
$
3,850

Prepaid expenses
6,744

 
5,036

Deferred and prepaid income taxes
5,736

 
4,070

Derivative asset
458

 
41

Total prepaid and other current assets
$
20,000

 
$
12,997

 
 
 
 
Other assets:
 
 
 
Deposits
$
880

 
$
936

Finance fees — net of amortization
11,388

 
13,539

Other assets
2,072

 
3,825

Total other assets
$
14,340

 
$
18,300

 
 
 
 
Accrued liabilities:
 
 
 
Accrued incentives
$
21,304

 
$
17,783

Workers compensation
6,607

 
7,128

Medical liabilities
3,790

 
3,537

Interest
3,365

 
3,732

Commissions payable
1,366

 
1,478

Contingency liability

 
2,719

Restructuring liability
1,523

 

Other accrued liabilities
8,227

 
6,486

Total accrued liabilities
$
46,182

 
$
42,863

 
 
 
 
Other long-term liabilities:
 
 
 
Deferred liability
$
6,266

 
$
5,591

Derivative liability
1,824

 

Other long-term liabilities
4,014

 
4,481

Total other long-term liabilities
$
12,104

 
$
10,072



Borrowings
Borrowings
Borrowings

Borrowings consist of the following:
(dollars in thousands)
Interest Rate
 
Maturity Date
June 30,
2013
 
December 31,
2012
Borrowings under ABL Facility
floating
 
May 18, 2017
$
9,800

 
$

Senior Secured Notes
6.875%
(1)
May 15, 2020
405,000

 
450,000

Promissory Note
6.00%
 
July, 2013 to September, 2016
793

 
903

RMB Loan Contract
floating
 
January, 2014
9,720

 
9,522

BES Euro Line
floating
 
December, 2013
4,294

 
4,362

AICEP Loan
0.00%
 
January, 2016 to July 30, 2018
1,243

 
1,272

Total borrowings
 
 
 
430,850

 
466,059

Plus — carrying value adjustment on debt related to the Interest Rate Agreement (1)
(1,102
)
 
408

Total borrowings — net
 
 
 
429,748

 
466,467

Less — long term debt due within one year
 
 
14,242

 
4,583

Total long-term portion of borrowings — net
 
$
415,506

 
$
461,884

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

Amended and Restated ABL Credit Agreement

Libbey Glass and Libbey Europe entered into an Amended and Restated Credit Agreement, dated as of February 8, 2010 and amended as of April 29, 2011 and May 18, 2012 (as amended, the ABL Facility), with a group of four financial institutions. The ABL Facility provides for borrowings of up to $100.0 million, subject to certain borrowing base limitations, reserves and outstanding letters of credit.

All borrowings under the ABL Facility are secured by:
a first-priority security interest in substantially all of the existing and future personal property of Libbey Glass and its domestic subsidiaries (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’s present and future direct and indirect domestic subsidiaries;
100 percent of the non-voting stock of substantially all of Libbey Glass’s first-tier present and future foreign subsidiaries; and
65 percent of the voting stock of substantially all of Libbey Glass’s first-tier present and future foreign subsidiaries
a first priority security interest in substantially all proceeds and products of the property and assets described above; and
a second-priority security interest in substantially all of the owned real property, equipment and fixtures in the United States of Libbey Glass and its domestic subsidiaries, subject to certain exceptions and permitted liens (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 swingline 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 swingline borrowings (Eurocurrency Loans) bear interest calculated at the Netherlands swingline rate, as defined in the ABL Facility. The Applicable Rates for CBFR Loans and Eurocurrency Loans vary depending on our aggregate remaining availability. The Applicable Rates for CBFR Loans and Eurocurrency Loans were 0.50 percent and 1.50 percent, respectively, at June 30, 2013. 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, 2013. 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 1:00 to 1:00. Libbey Glass and Libbey Europe have the option to increase the ABL Facility by $25.0 million. There were borrowings of $9.8 million under the facility at June 30, 2013. There were no Libbey Glass or Libbey Europe borrowings under the facility at December 31, 2012. 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 rent reserves totaling $0.7 million and natural gas reserves totaling $0.1 million as of June 30, 2013. 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, 2013, we had $8.7 million in letters of credit outstanding under the ABL Facility. Remaining unused availability under the ABL Facility was $68.8 million at June 30, 2013, compared to $68.6 million under the ABL Facility at December 31, 2012.

Senior Secured Notes

On May 18, 2012, Libbey Glass closed its offering of the $450.0 million Senior Secured Notes. The notes offering was issued at par and had related fees of approximately $13.2 million. 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 May 18, 2012 (Notes Indenture), between Libbey Glass, the Company, the domestic subsidiaries of Libbey Glass listed as guarantors therein (Subsidiary Guarantors and together with the Company, Guarantors), and The Bank of New York Mellon Trust Company, N.A., as trustee (Notes Trustee) and collateral agent. Under the terms of the Notes Indenture, the Senior Secured Notes bear interest at a rate of 6.875 percent per year and will mature on May 15, 2020. Although the Notes Indenture does not contain financial covenants, the Notes Indenture contains other covenants that restrict the ability of Libbey Glass and the Guarantors to, among other things:

incur, assume or guarantee additional indebtedness;
pay dividends, make certain investments or other restricted payments;
create liens;
enter into affiliate transactions;
merge or consolidate, or otherwise dispose of all or substantially all the assets of Libbey Glass and the Guarantors; and
transfer or sell assets.

The 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 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 Notes Indenture occurs or is continuing, the 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 Notes Indenture are secured by (i) first priority liens on the Notes Priority Collateral and (ii) second priority liens on the Credit Agreement Priority Collateral.

Prior to May 15, 2015, we may redeem in the aggregate up to 35 percent of the Senior Secured Notes with the net cash proceeds of one or more equity offerings at a redemption price of 106.875 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 May 15, 2015, 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 May 15, 2015 at set redemption prices together with accrued and unpaid interest.

On May 7, 2013, Libbey Glass redeemed an aggregate principal amount of $45.0 million of the Senior Secured Notes in accordance with the terms of the Notes Indenture. Pursuant to the terms of the Notes Indenture, the redemption price for the Senior Secured Notes was 103 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 $405.0 million. In conjunction with this redemption, we recorded $2.5 million of expense, representing $1.3 million for an early call premium and $1.2 million for the write off of a pro rata amount of financing fees.

For the three and six months ended June 30, 2012, loss on redemption of debt included charges of $23.6 million for an early call premium and $11.0 million for the write off of the remaining financing fees and discounts from the former Senior Secured Notes.

We had an Interest Rate Agreement (Old Rate Agreement) in place through April 18, 2012 with respect to $80.0 million of our former Senior Secured Notes as a means to manage our fixed to variable interest rate ratio. The Old Rate Agreement effectively converted this portion of our long-term borrowings from fixed rate debt to variable rate debt. The variable interest rate for our borrowings related to the Old Rate Agreement at April 18, 2012, excluding applicable fees, was 7.79 percent. Total remaining Senior Secured Notes not covered by the Old Rate Agreement had a fixed interest rate of 10.0 percent per year. On April 18, 2012, the swap was called at fair value. We received proceeds of $3.6 million. During the second quarter of 2012, $0.1 million of the carrying value adjustment on debt related to the Old Rate Agreement was amortized into interest expense. Upon the refinancing of the former Senior Secured Notes, the remaining unamortized balance of $3.5 million of the carrying value adjustment on debt related to the Old Rate Agreement was recognized as a gain in the loss on redemption of debt on the Condensed Consolidated Statements of Operations.

On June 18, 2012, we entered into an Interest Rate Agreement (New Rate Agreement) with respect to $45.0 million of our Senior Secured Notes as a means to manage our fixed to variable interest rate ratio. The New Rate Agreement effectively converts this portion of our long-term borrowings from fixed rate debt to variable rate debt. Prior to May 15, 2015, but not more than once in any twelve-month period, the counterparty may call up to 10 percent of the New Rate Agreement at a call price of 103 percent. The New Rate Agreement is callable at the counterparty’s option, in whole or in part, at any time on or after May 15, 2015 at set call premiums. The variable interest rate for our borrowings related to the New Rate Agreement at June 30, 2013, excluding applicable fees, is 5.5 percent. The New Rate Agreement expires on May 15, 2020. Total remaining Senior Secured Notes not covered by the New Rate Agreement have a fixed interest rate of 6.875 percent per year through May 15, 2020. If the counterparty to this New Rate Agreement were to fail to perform, this New 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 A+, as of June 30, 2013, by Standard and Poor’s.

The fair market value and related carrying value adjustment are as follows:
(dollars in thousands)
June 30, 2013
 
December 31, 2012
Fair market value of Rate Agreements - asset (liability)
$
(1,781
)
 
$
298

Adjustment to increase (decrease) carrying value of the related long-term debt
$
(1,102
)
 
$
408

The net impact recorded on the Condensed Consolidated Statements of Operations is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Income (expense) on hedging activities in other income (expense)
 
$
(347
)
 
$
(173
)
 
$
(569
)
 
$
246

Income on hedging activities in loss on redemption of debt
 
$

 
$
3,502

 
$

 
$
3,502



The fair value of the Old and New Rate Agreements are 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. See note 9 for further discussion.

Promissory Note

In September 2001, we issued a $2.7 million promissory note at an interest rate of 6.0 percent in connection with the purchase of our Laredo, Texas warehouse facility. At June 30, 2013, we had $0.8 million outstanding on the promissory note. Principal and interest with respect to the promissory note are paid monthly.

Notes Payable

We have an overdraft line of credit for a maximum of €1.0 million. At June 30, 2013, 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 $40.5 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, 2013, the annual interest rate was 5.90 percent. As of June 30, 2013, the outstanding balance was RMB 60.0 million (approximately $9.7 million) which is due on January 20, 2014. Interest is payable quarterly. 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 (Libbey Portugal) entered into a seven-year €11.0 million line of credit (approximately $14.3 million) with Banco Espírito Santo, S.A. (BES). The $4.3 million outstanding at June 30, 2013, was the U.S. dollar equivalent of the €3.3 million outstanding under the line at an interest rate of 5.32 percent. Payment of principal in the amount of €3.3 million (approximately $4.3 million) is due in December 2013. Interest with respect to the line is paid semi-annually.

AICEP Loan

In July 2012, Libbey Portugal entered into a loan agreement with Agencia para Investmento Comercio Externo de Portugal, EPE (AICEP), the Portuguese Agency for investment and external trade. The amount of the loan is €1.0 million (approximately $1.2 million) and has an interest rate of 0.0 percent. Semi-annual installments of principal are due beginning in January 2016 through the maturity date of July 2018.

Fair Value of Borrowings

The fair value of our debt has been calculated based on quoted market prices (Level 1 in the fair value hierarchy) for the same or similar issues. Our $405.0 million Senior Secured Notes had an estimated fair value of $423.2 million at June 30, 2013. At December 31, 2012, the $450.0 million outstanding Senior Secured Notes had an estimated fair value of $488.3 million. The fair value of the remainder of our debt approximates carrying value at June 30, 2013 and December 31, 2012 due to variable rates.

Capital Resources and Liquidity

Historically, cash flows generated from operations, cash on hand and our borrowing capacity under our ABL Facility have enabled us to meet our cash requirements, including capital expenditures and working capital requirements. At June 30, 2013 we had $9.8 million borrowings under our ABL Facility and $8.7 million of letters of credit issued under that facility. As a result, we had $68.8 million of unused availability remaining under the ABL Facility at June 30, 2013. In addition, we had $10.5 million of cash on hand at June 30, 2013.

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.

Restructuring Charges
Restructuring Charges
Restructuring Charges

Capacity Realignment

In February 2013, we announced our plans to discontinue production of certain glassware in North America and reduce manufacturing capacity at our Shreveport, Louisiana manufacturing facility. As a result, on May 30, 2013, we ceased production of certain glassware in North America, discontinued the use of a furnace at our Shreveport, Louisiana manufacturing plant and began relocating a portion of the production from the idled furnace to our Toledo, Ohio and Monterrey, Mexico locations. These activities are all within the Americas segment and are expected to be completed by the end of the first quarter of 2014. In connection with this plan, we expect to incur pretax charges in the range of approximately $8.0 million to $10.0 million. This estimate consists of: (i) up to $4.0 million in fixed asset impairment charges, (ii) up to $2.0 million in severance and other employee related costs and (iii) up to $4.0 million in production transfer expenses. We expect approximately $5.5 million of the pretax charge to result in cash expenditures, most of which is expected to be paid throughout the remainder of 2013. For the three and six months ended June 30, 2013, we recorded a pretax charge of $1.0 million and $5.9 million respectively, which included employee termination costs, fixed asset impairment charges and depreciation expense. Employee termination costs include severance, medical benefits and outplacement services for the terminated employees. The write-down of fixed assets is to adjust certain machinery and equipment to the estimated fair market value.

The following table summarizes the pretax charge incurred for the three and six months ended June 30, 2013:
(dollars in thousands)
Three months ended June 30, 2013
 
Six months ended June 30, 2013
Accelerated depreciation
$
1,133

 
$
1,699

Included in cost of sales
1,133

 
1,699

Employee termination cost & other
(412
)
 
1,910

Fixed asset write-down

 
1,992

Production transfer expenses
327

 
327

Included in special charges
(85
)
 
4,229

Total pretax charge
$
1,048

 
$
5,928


The following is the capacity realignment reserve activity for the six months ended June 30, 2013:
(dollars in thousands)
Reserve
Balance at
January 1, 2013
 
Total
Charge to Earnings
 
Cash
(payments) receipts
 
Non-cash Utilization
 
Reserve
Balance at
June 30, 2013
Accelerated depreciation
$

 
$
1,699

 
$

 
$
(1,699
)
 
$

Employee termination cost & other

 
1,910

 
(387
)
 

 
1,523

Fixed asset write-down

 
1,992

 

 
(1,992
)
 

Production transfer expenses

 
327

 
(327
)
 

 

Total
$

 
$
5,928

 
$
(714
)
 
$
(3,691
)
 
$
1,523

Income Taxes
Income Taxes
Income Taxes

Our effective tax rate was 27.8 percent for the six months ended June 30, 2013, compared to (23.3) percent for the six months ended June 30, 2012. Our effective tax rate differs from the United States statutory tax rate primarily due to valuation allowances, earnings in countries with differing statutory tax rates, accruals related to uncertain tax positions and tax planning structures. At June 30, 2013 and December 31, 2012, we had $1.0 million and $1.5 million, respectively, of gross unrecognized tax benefits, exclusive of interest and penalties. During the three months ended June 30, 2013, we recorded no additional income tax benefit. During the six months ended June 30, 2013, we recorded an income tax benefit, exclusive of interest and penalties, of $0.5 million due to the reversal of an accrual for an uncertain tax position that expired under the statute of limitations.

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. A tax benefit of $4.2 million was recorded in our income tax provision for the three months and six months ended June 30, 2012. There was no similar benefit recorded for the three months and six months ended June 30, 2013.

Our current and future provision for income taxes for 2013 is impacted by valuation allowances. In the United States, the Netherlands and Portugal, we have recorded valuation allowances against our deferred income tax assets. We did not change our conclusion related to entities with a recorded valuation allowance for the six months ended June 30, 2013, or the six months ended June 30, 2012. In assessing the need for recording or releasing a valuation allowance, we weigh all available positive and negative evidence. Examples of the evidence we consider are cumulative losses in recent years, losses expected in early future years, a history of potential tax benefits expiring unused, prudent and feasible tax planning strategies that could be implemented, and whether there was an unusual, infrequent or extraordinary item to be considered. Based on our analysis of all available evidence, we intend to maintain these allowances until it is more likely than not that the deferred income tax assets will be realized. We will continue to monitor and assess the need for these allowances quarterly in each jurisdiction.

Income tax payments consisted of the following:
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
2013
 
2012
 
2013
 
2012
Total income tax payments, net of refunds
$
7,270

 
$
1,122

 
$
9,539

 
$
2,615

Less: credits or offsets
1,339

 
816

 
1,724

 
1,424

Cash paid, net
$
5,931

 
$
306

 
$
7,815

 
$
1,191


Cash paid for income taxes has increased for the three and six months ended June 30, 2013 due to net operating loss carryforwards being fully utilized in 2012 in China and timing of payments in Mexico.
Pension and Non-pension Postretirement Benefits
Pension and Non-pension Postretirement Benefits
Pension and Non-pension Postretirement Benefits

We have pension plans covering the majority of our employees. Benefits generally are based on compensation for salaried employees and job grade and length of service for hourly employees. Our policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements. In addition, we have an unfunded supplemental employee retirement plan (SERP) that covers certain salaried U.S.-based employees of Libbey hired before January 1, 2006. The U.S. pension plans cover the salaried U.S.-based employees of Libbey hired before January 1, 2006 and most hourly U.S.-based employees (excluding employees hired at Shreveport after 2008 and at Toledo after September 30, 2010). Effective January 1, 2013, we ceased annual company contribution credits to the cash balance accounts in our Libbey U.S. Salaried Pension Plan and SERP. The non-U.S. pension plans cover the employees of our wholly owned subsidiaries in the Netherlands and Mexico. The plan in Mexico is 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)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
1,092

 
$
1,370

 
$
686

 
$
548

 
$
1,778

 
$
1,918

Interest cost
3,501

 
3,827

 
1,195

 
1,178

 
4,696

 
5,005

Expected return on plan assets
(5,605
)
 
(4,461
)
 
(496
)
 
(583
)
 
(6,101
)
 
(5,044
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
293

 
522

 
60

 
62

 
353

 
584

Loss
2,263

 
1,719

 
215

 
124

 
2,478

 
1,843

Settlement charge
715

 
37

 

 

 
715

 
37

Pension expense
$
2,259

 
$
3,014

 
$
1,660

 
$
1,329

 
$
3,919

 
$
4,343

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
2,370

 
$
2,925

 
$
1,408

 
$
990

 
$
3,778

 
$
3,915

Interest cost
6,982

 
7,846

 
2,451

 
2,434

 
9,433

 
10,280

Expected return on plan assets
(11,204
)
 
(8,946
)
 
(977
)
 
(1,190
)
 
(12,181
)
 
(10,136
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
586

 
1,043

 
122

 
128

 
708

 
1,171

Loss
4,350

 
3,520

 
453

 
259

 
4,803

 
3,779

Settlement charge
715

 
457

 

 

 
715

 
457

Pension expense
$
3,799

 
$
6,845

 
$
3,457

 
$
2,621

 
$
7,256

 
$
9,466

 
 
 
 
 
 
 
 
 
 
 
 


During the second quarter of 2013 and the first half of 2012, we incurred pension settlement charges totaling $0.7 million and $0.5 million, respectively. The pension settlement charges were triggered by excess lump sum distributions, which required us to record unrecognized gains and losses in our pension plan accounts. We have contributed $2.1 million and $2.8 million of cash into our pension plans for the three and six months ended June 30, 2013, respectively. Pension contributions for the remainder of 2013 are estimated to be $3.6 million.

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 at Toledo after September 30, 2010). Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Effective January 1, 2013, we ended our existing healthcare benefit for salaried retirees age 65 and older and are now providing a Retiree Health Reimbursement Arrangement (RHRA) that supports retirees in purchasing a Medicare plan that meets their needs. Also effective January 1, 2013, we reduced the maximum life insurance benefit for salaried retirees to $10,000. Benefits for most hourly retirees are determined by collective bargaining. The U.S. non-pension postretirement plans cover the hourly and salaried U.S.-based employees of Libbey (excluding those mentioned above). The non-U.S. non-pension postretirement plans cover the retirees and active employees of Libbey who are located in Canada. The postretirement benefit plans are 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)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
203

 
$
367

 
$
1

 
$
1

 
$
204

 
$
368

Interest cost
610

 
856

 
31

 
26

 
641

 
882

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
36

 
106

 

 

 
36

 
106

Loss / (gain)
138

 
229

 
1

 
(1
)
 
139

 
228

Non-pension postretirement benefit expense
$
987

 
$
1,558

 
$
33

 
$
26

 
$
1,020

 
$
1,584

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
595

 
$
735

 
$
1

 
$
1

 
$
596

 
$
736

Interest cost
1,311

 
1,713

 
54

 
52

 
1,365

 
1,765

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
70

 
211

 

 

 
70

 
211

Loss / (gain)
429

 
458

 

 
(1
)
 
429

 
457

Non-pension postretirement benefit expense
$
2,405

 
$
3,117

 
$
55

 
$
52

 
$
2,460

 
$
3,169

 
 
 
 
 
 
 
 
 
 
 
 


Our 2013 estimate of non-pension cash payments is $4.7 million, and we have paid $1.2 million and $2.2 million for the three and six months ended June 30, 2013, respectively.

Net Income (Loss) per Share of Common Stock
Net Income per Share of Common Stock
Net Income (Loss) per Share of Common Stock

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands, except earnings per share)
2013
 
2012
 
2013
 
2012
Numerators for earnings per share:
 
 
 
 
 
 
 
Net income (loss) that is available to common shareholders
$
12,436

 
$
(10,143
)
 
$
14,425

 
$
(9,502
)
 
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding
21,288,897

 
20,837,843

 
21,202,411

 
20,803,629

 
 
 
 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Effect of stock options and restricted stock units (1)
654,388

 

 
504,622

 

Adjusted weighted average shares and assumed conversions
21,943,285

 
20,837,843

 
21,707,033

 
20,803,629

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.58

 
$
(0.49
)
 
$
0.68

 
$
(0.46
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
0.57

 
$
(0.49
)
 
$
0.66

 
$
(0.46
)

(1) The effect of employee stock options and restricted stock units, 437,680 and 424,483 shares for the three months and six months ended June 30, 2012, respectively, were anti-dilutive and thus not included in the earnings per share calculation. This amount would have been dilutive if not for the net loss.

When applicable, diluted shares outstanding include the dilutive impact of 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
Derivatives

We utilize derivative financial instruments to hedge certain interest rate risks associated with our long-term debt, commodity price risks associated with forecasted future natural gas requirements and foreign exchange rate risks associated with transactions denominated in a currency other than the U.S. dollar. Most of these derivatives, except for the foreign currency contracts, 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, 2013
 
December 31, 2012
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate contract
 
Derivative asset
 
$

 
Derivative asset
 
$
298

Total designated
 
 
 

 
 
 
298

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

 
Prepaid and other current assets
 
41

Total undesignated
 
 
 
458

 
 
 
41

Total
 
 
 
$
458

 
 
 
$
339

 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives:
(dollars in thousands)
 
June 30, 2013
 
December 31, 2012
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Natural gas contracts
 
Derivative liability
 
$
69

 
Derivative liability
 
$
420

Natural gas contracts
 
Other long-term liabilities
 
43

 
Other long-term liabilities
 

Interest rate contract
 
Other long-term liabilities
 
1,781

 
Other long-term liabilities
 

Total designated
 
 
 
1,893

 
 
 
420

Total
 
 
 
$
1,893

 
 
 
$
420



Interest Rate Swaps as Fair Value Hedges

On June 18, 2012, we entered into an interest rate swap agreement (New Rate Agreement) with a notional amount of $45.0 million that is to mature in 2020. The New Rate Agreement was executed in order to convert a portion of the Senior Secured Notes fixed rate debt into floating rate debt and maintain a capital structure containing fixed and floating rate debt.

Upon the refinancing of the former Senior Secured Notes, the remaining unamortized balance of the carrying value adjustment on debt related to the Old Rate Agreement was recognized as a gain in the loss on redemption of debt on the Condensed Consolidated Statements of Operations, refer to the Borrowings footnote for further discussion.

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 (expense), along with the offsetting loss or gain on the related interest rate swap on the Condensed Consolidated Statements of Operations.
The following table provides a summary of the gain (loss) recognized on the Condensed Consolidated Statements of Operations:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Interest rate swap
 
$
(1,723
)
 
$
(352
)
 
$
(2,079
)
 
$
(339
)
Related long-term debt
 
1,376

 
3,681

 
1,510

 
4,087

Net impact
 
$
(347
)
 
$
3,329

 
$
(569
)
 
$
3,748


The gain or loss on the hedged long-term debt netted with the offsetting gain or loss on the related interest rate swap was recorded on the Condensed Consolidated Statements of Operations as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Loss on redemption of debt
 
$

 
$
3,502

 
$

 
$
3,502

Other income (expense)
 
(347
)
 
(173
)
 
(569
)
 
246

Net impact
 
$
(347
)
 
$
3,329

 
$
(569
)
 
$
3,748



Commodity Futures Contracts Designated as Cash Flow Hedges

We use commodity futures contracts related to forecasted future North American natural gas requirements. The objective of these futures contracts and other derivatives is to limit the fluctuations in prices paid due to price movements in the underlying commodity. We consider our forecasted natural gas requirements in determining the quantity of natural gas to hedge. We combine the forecasts with historical observations to establish the percentage of forecast eligible to be hedged, typically ranging from 40 percent to 70 percent of our anticipated requirements, up to eighteen months in the future. The fair values of these instruments are determined from market quotes. As of June 30, 2013, we had commodity contracts for 1,550,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2012, we had commodity contracts for 2,400,000 million BTUs of natural gas.

All of our natural gas derivatives qualify and are designated as cash flow hedges at June 30, 2013. Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses would be recorded to earnings immediately. Changes in the effective portion of the fair value of these hedges are recorded in other comprehensive income (loss). The ineffective portion of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings. As the natural gas contracts mature, the accumulated gains (losses) for the respective contracts are reclassified from accumulated other comprehensive loss to current expense in cost of sales in our Condensed Consolidated Statements of Operations. We recognized in the three and six months ended June 30, 2013 $0.3 million of ineffectiveness in Other Income (Expense) in the Condensed Consolidated Statements of Operations for certain contracts at our Mexico facility. This ineffectiveness was related to a change in pricing caused by the Mexican government instituting a fixed surcharge. The ineffectiveness is not expected to continue so we have continued to consider the contracts effective as appropriate under FASB ASC 815 "Derivatives and Hedging." We paid (received) additional cash of $(0.3) million and $1.7 million in the three months ended June 30, 2013 and 2012, respectively, and a nil amount and $3.2 million in the six months ended June 30, 2013 and 2012, 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 $0.1 million of loss in our Condensed Consolidated Statements of Operations.

The following table provides a summary of the effective portion of derivative gain (loss) recognized in other comprehensive income (loss):
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Derivatives in Cash Flow Hedging relationships:
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
(377
)
 
$
586

 
$
590

 
$
(1,518
)
Total
 
$
(377
)
 
$
586

 
$
590

 
$
(1,518
)


The following table provides a summary of the effective portion of derivative gain (loss) reclassified from accumulated other comprehensive loss to the Condensed Consolidated Statements of Operations:
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(dollars in thousands)
 
 
2013
 
2012
 
2013
 
2012
Derivative:
Location:
 
 
 
 
 
 
 
 
Natural gas contracts
Cost of sales
 
$
252

 
$
(1,736
)
 
$
6

 
$
(3,196
)
Total impact on net income (loss)
 
 
$
252

 
$
(1,736
)
 
$
6

 
$
(3,196
)


Currency Contracts

Our foreign currency exposure arises from transactions denominated in a currency other than the U.S. dollar primarily associated with our Canadian dollar denominated accounts receivable. We enter into a series of foreign currency contracts to sell Canadian dollars. As of June 30, 2013 and December 31, 2012, we had contracts for C$7.9 million and C$14.8 million, respectively. The fair values of these instruments are determined from market quotes. The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change.

Gains (losses) for derivatives that 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)
 
 
2013
 
2012
 
2013
 
2012
Derivative:
Location:
 
 

 
 

 
 

 
 

Currency contracts
Other income (expense)
 
$
166

 
$
132

 
$
417

 
$
(30
)
Total
 
 
$
166

 
$
132

 
$
417

 
$
(30
)


We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap, natural gas hedges and currency contracts as the counterparties are established financial institutions. The counterparty for the New Rate Agreement is rated A+ and the counterparties for the other derivative agreements are rated BBB+ or better as of June 30, 2013, by Standard and Poor’s.
Comprehensive Income (Loss)
Comprehensive Income
Comprehensive Income (Loss)

Accumulated other comprehensive loss, net of tax, is as follows:
Three months ended June 30, 2013
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on March 31, 2013
 
$
(4,566
)
 
$
1,534

 
$
(137,217
)
 
$
(140,249
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
2,335

 
(377
)
 
3,059

 
5,017

Currency impact
 

 

 
307

 
307

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

 

 
2,600

 
2,600

    Amortization of prior service cost (1)
 

 

 
369

 
369

    Amortization of transition obligation (1)
 

 

 
21

 
21

    Cost of sales
 

 
(252
)
 

 
(252
)
Current-period other comprehensive income (loss)
 
2,335

 
(629
)
 
6,356

 
8,062

Tax effect
 

 
120

 
56

 
176

Balance on June 30, 2013
 
$
(2,231
)
 
$
1,025

 
$
(130,805
)
 
$
(132,011
)
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on December 31, 2012
 
$
(1,641
)
 
$
489

 
$
(139,888
)
 
$
(141,040
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
(590
)
 
590

 
3,059

 
3,059

Currency impact
 

 

 
(45
)
 
(45
)
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
    Amortization of actuarial loss (1)
 

 

 
5,200

 
5,200

    Amortization of prior service cost (1)
 

 

 
738

 
738

    Amortization of transition obligation (1)
 

 

 
42

 
42

    Cost of sales
 

 
(6
)
 

 
(6
)
Current-period other comprehensive income (loss)
 
(590
)
 
584

 
8,994

 
8,988

Tax effect
 

 
(48
)
 
89

 
41

Balance on June 30, 2013
 
$
(2,231
)
 
$
1,025

 
$
(130,805
)
 
$
(132,011
)
___________________________
(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost within the cost of sales and selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
Condensed Consolidated Guarantor Financial Statements
Condensed Consolidated Guarantor Financial Statements
Condensed Consolidated Guarantor Financial Statements

Libbey Glass is a direct, 100 percent owned subsidiary of Libbey Inc. and is the issuer of the Senior Secured Notes. The obligations of Libbey Glass under the Senior Secured Notes are fully and unconditionally and jointly and severally guaranteed by Libbey Inc. and by certain indirect, 100 percent owned domestic subsidiaries of Libbey Inc., as described below. All are related parties that are included in the Condensed Consolidated Financial Statements for the three months and six months ended June 30, 2013 and June 30, 2012.

At June 30, 2013, December 31, 2012 and June 30, 2012, 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., Libbey.com LLC, LGFS Inc., and LGAC LLC (collectively, Subsidiary Guarantors). The following tables contain Condensed Consolidating Financial Statements of (a) the parent, Libbey Inc., (b) the issuer, Libbey Glass, (c) the Subsidiary Guarantors, (d) the indirect subsidiaries of Libbey Inc. that are not Subsidiary Guarantors (collectively, Non-Guarantor Subsidiaries), (e) the consolidating elimination entries, and (f) the consolidated totals.
Libbey Inc.
Condensed Consolidating Statements of Comprehensive Income (Loss)
(unaudited)
 
Three months ended June 30, 2013
(dollars in thousands)
Libbey
Inc.
(Parent)
 
Libbey
Glass
(Issuer)
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
101,406

 
$
22,056

 
$
99,492

 
$
(13,050
)
 
$
209,904

Freight billed to customers

 
132

 
194

 
445

 

 
771

Total revenues

 
101,538

 
22,250

 
99,937

 
(13,050
)
 
210,675

Cost of sales

 
66,605

 
16,140

 
83,518

 
(13,050
)
 
153,213

Gross profit

 
34,933

 
6,110

 
16,419

 

 
57,462

Selling, general and administrative expenses

 
18,188

 
2,484

 
8,963

 

 
29,635

Special charges

 
(85
)
 

 

 

 
(85
)
Income (loss) from operations

 
16,830

 
3,626

 
7,456

 

 
27,912

Other income (expense)

 
(2,506
)
 
(3
)
 
42

 

 
(2,467
)
Earnings (loss) before interest and income taxes

 
14,324

 
3,623

 
7,498

 

 
25,445

Interest expense

 
5,996

 

 
2,130

 

 
8,126

Income (loss) before income taxes

 
8,328

 
3,623

 
5,368

 

 
17,319

Provision (benefit) for income taxes

 
1,519

 
147

 
3,217

 

 
4,883

Net income (loss)

 
6,809

 
3,476

 
2,151

 

 
12,436

Equity in net income (loss) of subsidiaries
12,436

 
5,627

 

 

 
(18,063
)
 

Net income (loss)
$
12,436

 
$
12,436

 
$
3,476

 
$
2,151

 
$
(18,063
)
 
$
12,436

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
20,674

 
$
20,674

 
$
3,303

 
$
4,352

 
$
(28,329
)
 
$
20,674

 
Three months ended June 30, 2012
(dollars in thousands)
Libbey
Inc.
(Parent)
 
Libbey
Glass
(Issuer)
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
109,697

 
$
19,765

 
$
96,850

 
$
(17,065
)
 
$
209,247

Freight billed to customers

 
130

 
191

 
438

 

 
759

Total revenues

 
109,827

 
19,956

 
97,288

 
(17,065
)
 
210,006

Cost of sales

 
75,608

 
14,342

 
80,774

 
(17,065
)
 
153,659

Gross profit

 
34,219

 
5,614

 
16,514

 

 
56,347

Selling, general and administrative expenses

 
17,482

 
1,886

 
8,010

 

 
27,378

Special charges

 

 

 

 

 

Income (loss) from operations

 
16,737

 
3,728

 
8,504

 

 
28,969

Other income (expense)

 
(31,259
)
 
(19
)
 
630

 

 
(30,648
)
Earnings (loss) before interest and income taxes

 
(14,522
)
 
3,709

 
9,134

 

 
(1,679
)
Interest expense