LIBBEY INC, 10-Q filed on 11/8/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 31, 2012
Entity Information [Line Items]
 
 
Entity Registrant Name
LIBBEY INC 
 
Entity Central Index Key
0000902274 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
20,687,934 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net sales
$ 209,150 
$ 207,246 
$ 606,226 
$ 602,274 
Freight billed to customers
1,015 
511 
2,482 
1,760 
Total revenues
210,165 
207,757 
608,708 
604,034 
Cost of sales
158,956 
162,873 
458,096 
473,168 
Gross profit
51,209 
44,884 
150,612 
130,866 
Selling, general and administrative expenses
26,887 
26,739 
82,391 
77,365 
Special charges
(232)
(281)
Income (loss) from operations
24,322 
18,377 
68,221 
53,782 
Loss on redemption of debt
(31,075)
(2,803)
Other income (expense)
(195)
2,237 
(359)
8,307 
Earnings (loss) before interest and income taxes
24,127 
20,614 
36,787 
59,286 
Interest expense
8,720 
10,559 
29,085 
32,929 
Income (loss) before income taxes
15,407 
10,055 
7,702 
26,357 
Provision (benefit) for income taxes
546 
2,928 
2,343 
4,825 
Net income (loss)
14,861 
7,127 
5,359 
21,532 
Net income (loss) per share:
 
 
 
 
Basic
$ 0.71 
$ 0.35 
$ 0.26 
$ 1.07 
Diluted
$ 0.70 
$ 0.34 
$ 0.25 
$ 1.04 
Dividends per share
$ 0 
$ 0 
$ 0 
$ 0 
Comprehensive income (loss)
$ 21,630 
$ 4,412 
$ 17,763 
$ 39,165 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Assets:
 
 
Cash and cash equivalents
$ 33,347 
$ 58,291 
Accounts receivable - net
93,962 
88,045 
Inventories - net
170,814 
145,859 
Prepaid and other current assets
8,202 
9,701 
Total current assets
306,325 
301,896 
Pension asset
25,842 
17,485 
Purchased intangible assets - net
20,372 
21,200 
Goodwill
166,572 
166,572 
Derivative asset
430 
3,606 
Other assets
19,167 
14,674 
Total other assets
232,383 
223,537 
Property, plant and equipment - net
251,518 
264,718 
Total assets
790,226 
790,151 
Liabilities and Shareholders' Equity:
 
 
Notes payable
339 
Accounts payable
46,650 
58,759 
Salaries and wages
37,047 
34,834 
Accrued liabilities
60,741 
53,927 
Accrued income taxes
703 
Pension liability (current portion)
2,037 
5,990 
Non-pension postretirement benefits (current portion)
4,721 
4,721 
Derivative liability
431 
3,390 
Deferred income taxes
3,294 
3,340 
Long-term debt due within one year
3,819 
3,853 
Total current liabilities
159,443 
169,153 
Long-term debt
466,858 
393,168 
Pension liability
37,707 
122,145 
Non-pension postretirement benefits
70,130 
68,496 
Other long-term liabilities
9,942 
9,409 
Total liabilities
744,080 
762,371 
Shareholders' equity:
 
 
Common stock, par value $.01 per share, 50,000,000 shares authorized, 20,681,539 shares issued at September 30, 2012 and 20,342,342 at December 31, 2011
207 
203 
Capital in excess of par value
311,584 
310,985 
Retained deficit
(149,677)
(155,036)
Accumulated other comprehensive loss
(115,968)
(128,372)
Total shareholders' equity
46,146 
27,780 
Total liabilities and shareholders' equity
$ 790,226 
$ 790,151 
Condensed Consolidated Balance Sheets Parenthetical (USD $)
Sep. 30, 2012
Dec. 31, 2011
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
50,000,000 
50,000,000 
Common stock, shares issued
20,681,539 
20,342,342 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Operating activities:
 
 
 
 
Net income (loss)
$ 14,861 
$ 7,127 
$ 5,359 
$ 21,532 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
10,073 
10,357 
30,897 
32,265 
(Gain) loss on asset sales and disposals
127 
347 
294 
(6,449)
Change in accounts receivable
(6,023)
2,989 
(6,497)
(1,813)
Change in inventories
(3,006)
(5,084)
(25,097)
(24,156)
Change in accounts payable
(7,499)
(7,855)
(12,087)
(7,183)
Accrued interest and amortization of discounts, warrants and finance fees
8,186 
(7,135)
532 
(6,309)
Call premium on 10% senior notes
 
 
23,602 
1,203 
Write-off of finance fees & discounts on senior notes and ABL
 
 
10,975 
1,600 
Pension & non-pension postretirement benefits
1,241 
(11,530)
(81,338)
(8,586)
Restructuring charges
(262)
(828)
Accrued liabilities & prepaid expenses
9,770 
3,673 
7,742 
4,882 
Income taxes
(921)
2,578 
(1,041)
(7,168)
Share-based compensation expense
601 
2,398 
2,466 
4,365 
Other operating activities
479 
(2,293)
563 
(1,211)
Net cash provided by (used in) operating activities
27,889 
(4,690)
(43,630)
2,144 
Investing activities:
 
 
 
 
Additions to property, plant and equipment
(5,412)
(8,059)
(17,244)
(26,457)
Net proceeds from sale of Traex
158 
13,000 
Proceeds from asset sales and other
131 
65 
550 
5,264 
Net cash provided by (used in) investing activities
(5,281)
(7,836)
(16,694)
(8,193)
Financing activities:
 
 
 
 
Net borrowings (repayments) on ABL credit facility
(2,105)
 
 
Other repayments
(9,551)
(4,673)
(19,513)
(4,770)
Other borrowings
1,234 
1,234 
Proceeds from 6.875% senior notes
 
 
450,000 
Payments on 10% senior notes
 
 
(360,000)
(40,000)
Call premium on 10% senior notes
 
 
(23,602)
(1,203)
Stock options exercised
253 
293 
478 
Debt issuance costs and other
(880)
(19)
(13,034)
(462)
Net cash provided by (used in) financing activities
(8,944)
(6,797)
35,378 
(45,957)
Effect of exchange rate fluctuations on cash
106 
(403)
331 
Increase (decrease) in cash
13,770 
(19,726)
(24,944)
(51,675)
Cash at beginning of period
19,577 
44,309 
58,291 
76,258 
Cash at end of period
33,347 
24,583 
33,347 
24,583 
Supplemental disclosure of cash flows information:
 
 
 
 
Cash paid during the period for interest
376 
17,661 
28,601 
38,971 
Cash paid during the period for income taxes
$ 875 
$ 1,001 
$ 2,066 
$ 8,689 
Condensed Consolidated Statements of Cash Flows Condensed Consolidated Cash Flows Parentheticals (Senior Notes [Member], Subsidiary, Libbey Glass [Member])
Jun. 29, 2012
Old Senior Secured Notes [Member]
Sep. 30, 2012
New Senior Secured Notes [Member]
Interest rate
10.00% 
6.875% 1
Description of the Business
Description of the Business
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 (Libbey Holland), Portugal (Libbey Portugal), China (Libbey China) and Mexico (Libbey 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 the Traex® plastics product line, including the Traex name®, to the Vollrath Company. 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, 2011 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 Comprehensive Income

Net sales in our Condensed Consolidated Statements of Comprehensive Income 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, China, the Netherlands and Portugal, 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 Comprehensive Income is as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Stock-based compensation expense
 
$
601

 
$
2,398

 
$
2,466

 
$
4,365

The third quarter of 2011 included non-cash compensation charges of $1.7 million related to accelerated vesting of previously issued equity compensation.

New Accounting Standards

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 interim and annual periods beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material 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). This ASU requires companies to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate but consecutive statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. In December 2011, ASU 2011-05 was modified by the issuance of Accounting Standards Update 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (ASU 2011-12), which defers certain paragraphs of ASU 2011-05 that would require reclassifications of items from other comprehensive income to net income by component of net income and by component of other comprehensive income. Required interim disclosures have been made in our Condensed Consolidated Financial Statements at September 30, 2012.

In September 2011, the FASB issued Accounting Standards Update 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (ASU 2011-08). ASU 2011-08 allows for an option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If the qualitative factors result in the fair value exceeding the carrying value of a reporting unit, then performing the two-step impairment test is unnecessary. This update is effective for periods beginning after December 15, 2011. The provisions of this update did not have any impact on our Condensed Consolidated Financial Statements.

In July 2012, the FASB issued Accounting Standards Update 2012-02, “Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02). ASU 2012-02 allows for an option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds its carrying amount. If the qualitative factors result in the fair value exceeding the carrying value of the indefinite-lived intangible asset, then the fair value does not need to be calculated. This update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect the provisions of the update to have any impact on our Condensed Consolidated Financial Statements.
Balance Sheet Details
Balance Sheet Details
Balance Sheet Details

The following table provides detail of selected balance sheet items:
(dollars in thousands)
September 30, 2012
 
December 31, 2011
Accounts receivable:
 
 
 
Trade receivables
$
92,848

 
$
86,523

Other receivables
1,114

 
1,522

Total accounts receivable, less allowances of $5,734 and $5,307
$
93,962

 
$
88,045

 
 
 
 
Inventories:
 
 
 
Finished goods
$
153,581

 
$
129,091

Work in process
1,033

 
1,132

Raw materials
4,755

 
4,369

Repair parts
10,182

 
9,778

Operating supplies
1,263

 
1,489

Total inventories, less allowances of $3,911 and $4,808
$
170,814

 
$
145,859

 
 
 
 
Prepaid and other current assets:
 
 
 
Value added tax
$
2,707

 
$
1,834

Prepaid expenses
5,495

 
4,653

Refundable and prepaid income taxes

 
3,107

Derivative asset

 
107

Total prepaid and other current assets
$
8,202

 
$
9,701

 
 
 
 
Other assets:
 
 
 
Deposits
$
921

 
$
733

Finance fees — net of amortization
13,794

 
9,427

Deferred taxes
596

 
567

Other assets
3,856

 
3,947

Total other assets
$
19,167

 
$
14,674

 
 
 
 
Accrued liabilities:
 
 
 
Accrued incentives
$
25,300

 
$
16,621

Workers compensation
7,524

 
8,484

Medical liabilities
3,534

 
3,607

Interest
11,247

 
13,008

Commissions payable
1,954

 
1,137

Contingency liability
2,719

 
2,719

Other accrued liabilities
8,463

 
8,351

Total accrued liabilities
$
60,741

 
$
53,927

 
 
 
 
Other long-term liabilities:
 
 
 
Deferred liability
$
5,273

 
$
4,070

Derivative liability

 
298

Other long-term liabilities
4,669

 
5,041

Total other long-term liabilities
$
9,942

 
$
9,409



Borrowings
Borrowings
Borrowings

On May 18, 2012, we completed the refinancing of substantially all of the existing indebtedness of our wholly-owned subsidiaries Libbey Glass Inc. (Libbey Glass) and Libbey Europe B.V. (Libbey Europe). The refinancing included:

the entry into an amended and restated credit agreement with respect to our ABL Facility;
the issuance of $450.0 million in aggregate principal amount of 6.875 percent Senior Secured Notes of Libbey Glass due 2020 (New Senior Secured Notes);
the repurchase and cancellation of $320.0 million of Libbey Glass’s then outstanding 10.0 percent Senior Secured Notes due 2015 (Old Senior Secured Notes); and
the redemption of $40.0 million of Libbey Glass's then outstanding 10.0 percent Old Senior Secured Notes (completed June 29, 2012).

We used the proceeds of the offering of the New Senior Secured Notes to fund the repurchase and redemption of $320.0 million of the Old Senior Secured Notes, pay related fees and expenses, and contribute $79.7 million to our U.S. pension plans to fully fund our target obligations under ERISA.

On June 29, 2012, we used the remaining proceeds of the New Senior Secured Notes, together with cash on hand, to redeem the remaining $40.0 million of Old Senior Secured Notes and to pay related fees.

The above transactions 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 Old Senior Secured Notes and were considered in the computation of the loss on redemption of debt.

Borrowings consist of the following:
(dollars in thousands)
Interest Rate
 
Maturity Date
September 30,
2012
 
December 31,
2011
Borrowings under ABL Facility
floating
 
May 18, 2017
$

 
$

New Senior Secured Notes
6.875%
(1)
May 15, 2020
450,000

 

Old Senior Secured Notes
10.00%
 
February 15, 2015

 
360,000

Promissory Note
6.00%
 
October, 2012 to September, 2016
956

 
1,111

Notes Payable
floating
 
October, 2012

 
339

RMB Loan Contract
floating
 
January, 2014
9,498

 
28,332

BES Euro Line
floating
 
December, 2012 to December, 2013
7,780

 
7,835

AICEP Loan
0.00%
 
July 30, 2018
1,238

 

Total borrowings
 
 
 
469,472

 
397,617

Less — unamortized discount
 
 
 

 
4,300

Plus — carrying value adjustment on debt related to the Interest Rate Agreement (1)
1,205

 
4,043

Total borrowings — net
 
 
 
470,677

 
397,360

Less — long term debt due within one year
 
 
3,819

 
4,192

Total long-term portion of borrowings — net
 
$
466,858

 
$
393,168

_____________________________
(1)
See Interest Rate Agreements under “New 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 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 (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 1.50 percent, respectively, at September 30, 2012. Libbey pays a quarterly Commitment Fee, as defined by the ABL Facility, on the total credit provided under the ABL Facility. The Commitment Fee was 0.375 percent at September 30, 2012. 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 no Libbey Glass or Libbey Europe borrowings under the facility at September 30, 2012, or at December 31, 2011. 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 mark-to-market reserves for natural gas contracts of $0.5 million as of September 30, 2012. The ABL Facility also provides for the issuance of $30.0 million of letters of credit, which are applied against the $100.0 million limit. At September 30, 2012, we had $9.4 million in letters of credit outstanding under the ABL Facility. Remaining unused availability under the ABL Facility was $87.8 million at September 30, 2012, compared to $63.8 million under the ABL Facility at December 31, 2011.

New Senior Secured Notes

On May 18, 2012, Libbey Glass closed its offering of the $450.0 million New Senior Secured Notes. The notes offering was issued at par and had related fees of approximately $13.3 million. These fees will be amortized to interest expense over the life of the notes.

The New Senior Secured Notes were issued pursuant to an Indenture, dated May 18, 2012 (New Notes Indenture), between Libbey Glass, the Company, the domestic subsidiaries of Libbey Glass listed as guarantors therein (Subsidiary Guarantors and together with the Company, Guarantors), and The Bank of New York Mellon Trust Company, N.A., as trustee (New Notes Trustee) and collateral agent. Under the terms of the New Notes Indenture, the New Senior Secured Notes bear interest at a rate of 6.875 percent per year and will mature on May 15, 2020. Although the New Notes Indenture does not contain financial covenants, the New 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 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 New Senior Secured Notes will become due and payable immediately without further action or notice. If any other event of default under the New Notes Indenture occurs or is continuing, the New Notes Trustee or holders of at least 25 percent in aggregate principal amount of the then outstanding New Senior Secured Notes may declare all the New Senior Secured Notes to be due and payable immediately.

The New 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 New Senior Secured Notes, Libbey Glass and the Guarantors entered into a registration rights agreement, dated May 18, 2012 (Registration Rights Agreement), under which they agreed to make an offer to exchange the New Senior Secured Notes and the related guarantees for registered, publicly tradable notes and guarantees that have substantially identical terms to the New Senior Secured Notes and the related guarantees, and in certain limited circumstances, to file a shelf registration statement that would allow certain holders of New Senior Secured Notes to resell their respective New Senior Secured Notes to the public.

Prior to May 15, 2015, we may redeem in the aggregate up to 35 percent of the New 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 New 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 New Senior Secured Notes at a redemption price of 103 percent plus accrued and unpaid interest. The New 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.

We had an Interest Rate Agreement (Old Rate Agreement) in place through April 18, 2012 with respect to $80.0 million of our Old 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 Old 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, $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 Old 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 Comprehensive Income.

On June 18, 2012, we entered into an Interest Rate Agreement (New Rate Agreement) with respect to $45.0 million of our New 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 September 30, 2012, excluding applicable fees, is 5.70 percent. This New Rate Agreement expires on May 15, 2020. Total remaining New 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 September 30, 2012, by Standard and Poor’s.






The fair market value and related carrying value adjustment are as follows:
(dollars in thousands)
September 30, 2012
 
December 31, 2011
Fair market value of Rate Agreements - asset (liability)
$
394

 
$
3,606

Adjustment to increase (decrease) carrying value of the related long-term debt
$
1,205

 
$
4,043

The net impact recorded on the Condensed Consolidated Statements of Comprehensive Income is as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Income (expense) on hedging activities in other income (expense)
 
$
(666
)
 
$
205

 
$
(420
)
 
$
697

Income on hedging activities in loss on redemption of debt
 
$

 
$

 
$
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 September 30, 2012, we had $1.0 million outstanding on the promissory note. Principal and interest with respect to the promissory note are paid monthly.

Notes Payable

We have an overdraft line of credit for a maximum of €1.0 million. At September 30, 2012, there were no borrowings under the facility, which has an interest rate of 5.80 percent. Interest with respect to the note is paid monthly.

RMB Loan Contract

On January 23, 2006, Libbey Glassware (China) Co., Ltd. (Libbey China), an indirect wholly owned subsidiary of Libbey Inc., entered into an RMB Loan Contract (RMB Loan Contract) with China Construction Bank Corporation Langfang Economic Development Area Sub-Branch (CCB). Pursuant to the RMB Loan Contract, CCB agreed to lend to Libbey China RMB 250.0 million, or the equivalent of approximately $39.6 million, for the construction of our production facility in China and the purchase of related equipment, materials and services. The loan has a term of eight years and bears interest at a variable rate as announced by the People’s Bank of China. As of the date of the initial advance under the Loan Contract, the annual interest rate was 5.51 percent, and as of September 30, 2012, the annual interest rate was 6.12 percent. As of September 30, 2012, the outstanding balance was RMB 60.0 million (approximately $9.5 million). Interest is payable quarterly. We pre-paid the July 20, 2012 principal payment of RMB 30.0 million (approximately $4.8 million) in September 2011, the December 20, 2012 principal payment of RMB 40.0 million (approximately $6.3 million) in November 2011, the July 20, 2013 principal payment of RMB 60.0 million (approximately $9.5 million) in April 2012 and the December 20, 2013 principal payment of RMB 60.0 million (approximately $9.5 million) in September 2012. A principal payment in the amount of RMB 60.0 million (approximately $9.5 million) is due on January 20, 2014. 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 $14.1 million) with Banco Espírito Santo, S.A. (BES). The $7.8 million outstanding at September 30, 2012, was the U.S. dollar equivalent of the €6.1 million outstanding under the line at an interest rate of 3.77 percent. Payment of principal in the amount of €2.8 million (approximately $3.6 million) is due in December 2012 and payment of €3.3 million (approximately $4.2 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%. 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 2 in the fair value hierarchy) for the same or similar issues. Our $450.0 million New Senior Secured Notes had an estimated fair value of $483.8 million at September 30, 2012. The Old Senior Secured Notes had an estimated fair value of $385.2 million at December 31, 2011. The fair value of the remainder of our debt approximates carrying value at September 30, 2012 and December 31, 2011 due to variable rates.

Capital Resources and Liquidity

Historically, cash flows generated from operations, cash on hand and our borrowing capacity under our ABL Facility have enabled us to meet our cash requirements, including capital expenditures and working capital requirements. At September 30, 2012 we had no borrowings under our ABL Facility, although we had $9.4 million of letters of credit issued under that facility. As a result, we had $87.8 million of unused availability remaining under the ABL Facility at September 30, 2012. In addition, we had $33.3 million of cash on hand at September 30, 2012.

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

Facility Closures

In December 2008, we announced that our Syracuse China manufacturing facility would be shut down in early to mid-2009 in order to reduce costs. The facility was closed on April 9, 2009. See Form 10-K for the year ended December 31, 2011 for further discussion.

Since the activities related to our closure of the Syracuse China manufacturing facility were complete as of March 31, 2011, no additional charges were incurred for the three months ended September 30, 2011. We incurred charges of approximately $0.1 million in the nine months ended September 30, 2011 related to other costs net of building site clean-up adjustments in connection with the sale of the property in Syracuse, New York in March 2011. This amount was included in special charges on the Condensed Consolidated Statement of Comprehensive Income as detailed in the table below.
 
 
Nine months ended September 30, 2011
(dollars in thousands)
 
Glass Operations
 
Other Operations
 
Total
Employee termination cost & other
 
$

 
$
167

 
$
167

Building site clean-up & fixed asset write-down
 

 
(116
)
 
(116
)
Included in special charges
 

 
51

 
51

Total pretax charge
 
$

 
$
51

 
$
51



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, 2011 for further discussion.

During the three months and nine months ended September 30, 2011, we recorded a $0.2 million and $0.3 million income adjustment, respectively, to special charges on the Condensed Consolidated Statements of Comprehensive Income in the Glass Operations segment. In the three and nine months ended September 30, 2011, we recorded charges of $0.2 million and $0.2 million, respectively, to write down inventory and spare machine parts. These amounts were included in cost of sales on the Condensed Consolidated Statements of Comprehensive Income in the Glass Operations segment.

The activities related to our write-down of decorating fixed assets and inventory were complete in the third quarter of 2011.
Income Taxes
Income Taxes
Income Taxes

Our effective tax rate differs from the United States statutory tax rate primarily due to valuation allowances, changes in the mix of earnings in countries with differing statutory tax rates, changes in accruals related to uncertain tax positions and tax planning structures. At September 30, 2012 and December 31, 2011, we had $1.5 million and $1.3 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. A tax benefit of $4.2 million was recorded in our income tax provision for the nine months ended September 30, 2012. There was no similar tax benefit recorded for the three months ended September 30, 2012 or the three months and nine months ended September 30, 2011. Depending upon the level of our future earnings and losses and their impact on other comprehensive income, it is possible that a tax benefit may be recorded, changed, or reversed in future periods.

Further, our current and future provision for income taxes for 2012 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. We did not release any valuation allowance for the three months and nine months ended September 30, 2012, or the three months and nine months ended September 30, 2011. In assessing the need for recording a valuation allowance, we weigh all available positive and negative evidence. Examples of the evidence we consider are cumulative losses in recent years, losses expected in early future years, a history of potential tax benefits expiring unused, and whether there was an unusual, infrequent or extraordinary item to be considered. Based on our analysis of all available evidence, we intend to maintain these allowances until it is more likely than not that the deferred income tax assets will be realized; however, based upon management's assessment, a release of the valuation allowance in China could occur.

Income tax payments consisted of the following:
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
2012
 
2011
 
2012
 
2011
Total income tax payments, net of refunds
$
1,366

 
$
1,843

 
$
3,981

 
$
13,029

Less: credits or offsets
491

 
842

 
1,915

 
4,340

Cash paid, net
$
875

 
$
1,001

 
$
2,066

 
$
8,689



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). U.S. salaried employees will not be eligible for additional company contribution credits beginning January 1, 2013. 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 September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
1,543

 
$
1,372

 
$
118

 
$
390

 
$
1,661

 
$
1,762

Interest cost
3,702

 
4,014

 
1,327

 
1,190

 
5,029

 
5,204

Expected return on plan assets
(4,939
)
 
(4,307
)
 
(596
)
 
(566
)
 
(5,535
)
 
(4,873
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
494

 
540

 
70

 
77

 
564

 
617

Loss
1,302

 
1,166

 
149

 
113

 
1,451

 
1,279

Settlement charge

 

 
93

 

 
93

 

Curtailment charge (credit)
(125
)
 

 

 

 
(125
)
 

Pension expense
$
1,977

 
$
2,785

 
$
1,161

 
$
1,204

 
$
3,138

 
$
3,989

 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
4,468

 
$
4,118

 
$
1,108

 
$
1,275

 
$
5,576

 
$
5,393

Interest cost
11,548

 
12,042

 
3,761

 
3,811

 
15,309

 
15,853

Expected return on plan assets
(13,885
)
 
(12,879
)
 
(1,786
)
 
(1,756
)
 
(15,671
)
 
(14,635
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
1,537

 
1,622

 
198

 
249

 
1,735

 
1,871

Loss
4,822

 
3,496

 
408

 
373

 
5,230

 
3,869

Settlement charge
457

 

 
93

 

 
550

 

Curtailment charge (credit)
(125
)
 

 

 

 
(125
)
 

Pension expense
$
8,822

 
$
8,399

 
$
3,782

 
$
3,952

 
$
12,604

 
$
12,351

 
 
 
 
 
 
 
 
 
 
 
 


During the first nine months of 2012, we incurred pension settlement and curtailment charges totaling $0.4 million. The pension settlement charges were triggered by excess lump sum distributions, which required us to record unrecognized gains and losses. The curtailment charges resulted from the third quarter announcement that as of January 1, 2013, we are ceasing annual company contribution credits to the cash balance accounts in our Libbey U.S. Salaried Pension Plan and SERP. As a result, these plans were remeasured as of July 31, 2012. At that time the discount rate was reduced from 5.00 percent to 3.87 percent. The re-measurement resulted in a reduction in pension expense of $1.1 million in the third quarter of 2012 compared to what our expense would have been for the nine months ended September 30, 2012 had these events not occurred. This amount is included in the above table. In May 2012, we used a portion of the proceeds of our debt refinancing to contribute $79.7 million to our U.S. pension plans to fully fund our target obligations under ERISA. During the second quarter of 2012, the pension expense calculation was not adjusted as a result of this discretionary contribution as it was not contemplated in the assumption set used for the expense determination for the year. As a result of the U.S. salaried pension plan re-measurement on July 31, 2012, the portion of this contribution related to this plan did affect the pension expense calculation. We have contributed $3.9 million and $98.7 million of cash into our pension plans (including the $79.7 million contribution made to the U.S. pension plans in May 2012) for the three months and nine months ended September 30, 2012, respectively. Pension contributions for the remainder of 2012 are estimated to be $4.2 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). Effective January 1, 2013, we are ending our existing healthcare benefit for salaried retirees age 65 and older and will instead provide a Retiree Health Reimbursement Arrangement (RHRA) that supports retirees in purchasing a Medicare plan that meets their needs. Also effective January 1, 2013, the life insurance benefit will be 20.0 percent of the retiree's final salary, with a maximum benefit of $10,000. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Benefits for most hourly retirees are determined by collective bargaining. The U.S. non-pension postretirement plans cover the hourly and salaried U.S.-based employees of Libbey (excluding those mentioned above). The non-U.S. non-pension postretirement plans cover the retirees and active employees of Libbey who are located in Canada. The postretirement benefit plans are not funded.

The provision for our non-pension postretirement benefit expense consists of the following:
Three months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
368

 
$
340

 
$

 
$

 
$
368

 
$
340

Interest cost
857

 
908

 
28

 
30

 
885

 
938

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
105

 
105

 

 

 
105

 
105

Loss / (gain)
229

 
277

 

 
(5
)
 
229

 
272

Non-pension postretirement benefit expense
$
1,559

 
$
1,630

 
$
28

 
$
25

 
$
1,587

 
$
1,655

 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
U.S. Plans
 
Non-U.S. Plans
 
Total
(dollars in thousands)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
1,103

 
$
1,019

 
$
1

 
$
1

 
$
1,104

 
$
1,020

Interest cost
2,570

 
2,724

 
80

 
92

 
2,650

 
2,816

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
316

 
316

 

 

 
316

 
316

Loss / (gain)
687

 
831

 
(1
)
 
(13
)
 
686

 
818

Non-pension postretirement benefit expense
$
4,676

 
$
4,890

 
$
80

 
$
80

 
$
4,756

 
$
4,970

 
 
 
 
 
 
 
 
 
 
 
 


Our 2012 estimate of non-pension payments was $4.7 million, and we have paid $1.0 million and $3.0 million for the three and nine months ended September 30, 2012, respectively.

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

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands, except earnings per share)
2012
 
2011
 
2012
 
2011
Numerators for earnings per share —
 
 
 
 
 
 
 
—Net income (loss) that is available to common shareholders
$
14,861

 
$
7,127

 
$
5,359

 
$
21,532

Denominator for basic earnings per share —
 
 
 
 
 
 
 
Weighted average shares outstanding
20,896,291

 
20,181,558

 
20,834,742

 
20,079,412

Effect of stock options and restricted stock units
464,195

 
457,247

 
432,535

 
524,769

Effect of warrants

 
76,341

 

 
122,295

Total effect of dilutive securities
464,195

 
533,588

 
432,535

 
647,064

Denominator for diluted earnings per share —
 
 
 
 
 
 
 
—Adjusted weighted average shares and assumed conversions
21,360,486

 
20,715,146

 
21,267,277

 
20,726,476

Basic earnings (loss) per share
$
0.71

 
$
0.35

 
$
0.26

 
$
1.07

Diluted earnings (loss) per share
$
0.70

 
$
0.34

 
$
0.25

 
$
1.04


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.

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)
 
September 30, 2012
 
December 31, 2011
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate contract
 
Derivative asset
 
$
394

 
Derivative asset
 
$
3,606

Natural gas contracts
 
Derivative asset
 
36

 
Derivative asset
 

Total designated
 
 
 
430

 
 
 
3,606

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

 
Prepaid and other current assets
 
107

Total undesignated
 
 
 

 
 
 
107

Total
 
 
 
$
430

 
 
 
$
3,713

 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives:
(dollars in thousands)
 
September 30, 2012
 
December 31, 2011
Derivatives designated as hedging
instruments under FASB ASC 815:
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Natural gas contracts
 
Derivative liability
 
$
276

 
Derivative liability
 
$
3,390

Natural gas contracts
 
Other long-term liabilities
 

 
Other long-term liabilities
 
298

Total designated
 
 
 
276

 
 
 
3,688

Derivatives not designated as hedging
instruments under FASB ASC 815:
 
 
 
 
 
 
 
 
Currency contracts
 
Derivative liability
 
155

 
Derivative liability
 

Total undesignated
 
 
 
155

 
 
 

Total
 
 
 
$
431

 
 
 
$
3,688



Interest Rate Swaps as Fair Value Hedges

We had an interest rate swap agreement in place through April 18, 2012 (Old Rate Agreement) with a notional amount of $80.0 million. On April 18, 2012, the Old Rate Agreement was called at fair value. We received proceeds of $3.6 million. During the second quarter, $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 Old 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 Comprehensive Income.

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 New Senior Secured Notes fixed rate debt into floating rate debt and maintain a capital structure containing fixed and floating rate debt.

Our fixed-to-floating interest rate swaps are designated and qualify as a fair value hedges. 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 Comprehensive Income.

The following table provides a summary of the gain (loss) recognized on the Condensed Consolidated Statements of Comprehensive Income:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Interest rate swap
 
$
582

 
$
740

 
$
243

 
$
1,539

Related long-term debt
 
(1,248
)
 
(535
)
 
2,839

 
(842
)
Net impact
 
$
(666
)
 
$
205

 
$
3,082

 
$
697


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 Comprehensive Income as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Loss on redemption of debt
 
$

 
$

 
$
3,502

 
$

Other income (expense)
 
(666
)
 
205

 
(420
)
 
697

Net impact
 
$
(666
)
 
$
205

 
$
3,082

 
$
697



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 September 30, 2012, we had commodity contracts for 2,430,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2011, we had commodity contracts for 3,070,000 million BTUs of natural gas.

All of our natural gas derivatives qualify and are designated as cash flow hedges at September 30, 2012. 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 Comprehensive Income. We paid additional cash of $1.1 million and $1.3 million in the three months ended September 30, 2012 and 2011, respectively, and $4.3 million and $3.4 million in the nine months ended September 30, 2012 and 2011, 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 $0.2 million of expense in our Condensed Consolidated Statements of Comprehensive Income.

The following table provides a summary of the effective portion of derivative gain (loss) recognized in other comprehensive income (loss):
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Derivatives in Cash Flow Hedging relationships:
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
682

 
$
(1,587
)
 
$
(836
)
 
$
(2,223
)
Total
 
$
682

 
$
(1,587
)
 
$
(836
)
 
$
(2,223
)


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 Comprehensive Income:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
 
2012
 
2011
 
2012
 
2011
Derivative:
Location:
 
 
 
 
 
 
 
 
Natural gas contracts
Cost of sales
 
$
(1,088
)
 
$
(1,340
)
 
$
(4,284
)
 
$
(3,382
)
Total impact on net income (loss)
 
 
$
(1,088
)
 
$
(1,340
)
 
$
(4,284
)
 
$
(3,382
)


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 September 30, 2012 and December 31, 2011, we had contracts for C$19.2 million and C$3.9 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 September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
 
2012
 
2011
 
2012
 
2011
Derivative:
Location:
 
 

 
 

 
 

 
 

Currency contracts
Other income (expense)
 
$
(190
)
 
$
934

 
$
(220
)
 
$
608

Total
 
 
$
(190
)
 
$
934

 
$
(220
)
 
$
608



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 September 30, 2012, by Standard and Poor’s.
Comprehensive Income (Loss)
Comprehensive Income
Comprehensive Income (Loss)

Components of comprehensive income (loss), net of tax, are as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Net income (loss)
 
$
14,861

 
$
7,127

 
$
5,359

 
$
21,532

Pension and other postretirement benefits, net of tax
 
3,028

 
3,488

 
9,865

 
13,296

Derivative instruments, net of tax
 
1,545

 
(254
)
 
3,022

 
1,046

Foreign currency translation
 
2,196

 
(5,949
)
 
(483
)
 
3,291

Total comprehensive income (loss)
 
$
21,630

 
$
4,412

 
$
17,763

 
$
39,165



Accumulated other comprehensive loss, net of tax, is as follows:
(dollars in thousands)
 
Foreign Currency Translation
 
Derivative Instruments
 
Pension and Other Postretirement Benefits
 
Total
Accumulated
Comprehensive Loss
Balance on December 31, 2011
 
$
(4,005
)
 
$
(2,370
)
 
$
(121,997
)
 
$
(128,372
)
Change
 
(483
)
 
3,448

 
13,869

 
16,834

Tax effect
 

 
(426
)
 
(4,004
)
 
(4,430
)
Balance on September 30, 2012
 
$
(4,488
)
 
$
652

 
$
(112,132
)
 
$
(115,968
)


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 New Senior Secured Notes. The obligations of Libbey Glass under the New Senior Secured Notes are fully and unconditionally and jointly and severally guaranteed by Libbey Inc. and by certain indirect, 100 percent owned domestic subsidiaries of Libbey Inc., as described below. All are related parties that are included in the Condensed Consolidated Financial Statements for the three months and nine months ended September 30, 2012 and September 30, 2011.

At September 30, 2012, December 31, 2011 and September 30, 2011, 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. (dissolved in June of 2012 and known as Traex Company prior to April 28, 2011), Libbey.com LLC, LGFS Inc., and LGAC LLC (collectively, Subsidiary Guarantors). The following tables contain Condensed Consolidating Financial Statements of (a) the parent, Libbey Inc., (b) the issuer, Libbey Glass, (c) the Subsidiary Guarantors, (d) the indirect subsidiaries of Libbey Inc. that are not Subsidiary Guarantors (collectively, Non-Guarantor Subsidiaries), (e) the consolidating elimination entries, and (f) the consolidated totals.
Libbey Inc.
Condensed Consolidating Statements of Comprehensive Income
(unaudited)
 
Three months ended September 30, 2012
(dollars in thousands)
Libbey
Inc.
(Parent)
 
Libbey
Glass
(Issuer)
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
104,840

 
$
20,210

 
$
104,166

 
$
(20,066
)
 
$
209,150

Freight billed to customers

 
140

 
158

 
717

 

 
1,015

Total revenues

 
104,980

 
20,368

 
104,883

 
(20,066
)
 
210,165

Cost of sales

 
79,164

 
14,483

 
85,375

 
(20,066
)
 
158,956

Gross profit

 
25,816

 
5,885

 
19,508

 

 
51,209

Selling, general and administrative expenses

 
17,261

 
1,495

 
8,131

 

 
26,887

Special charges

 

 

 

 

 

Income (loss) from operations

 
8,555

 
4,390

 
11,377

 

 
24,322

Other income (expense)

 
(541
)
 
9

 
337

 

 
(195
)
Earnings (loss) before interest and income taxes

 
8,014

 
4,399

 
11,714

 

 
24,127

Interest expense

 
6,719

 

 
2,001

 

 
8,720

Income (loss) before income taxes

 
1,295

 
4,399

 
9,713

 

 
15,407

Provision (benefit) for income taxes

 
(1,536
)
 

 
2,082

 

 
546

Net income (loss)

 
2,831

 
4,399

 
7,631

 

 
14,861

Equity in net income (loss) of subsidiaries
14,861

 
12,030

 

 

 
(26,891
)
 

Net income (loss)
$
14,861

 
$
14,861

 
$
4,399

 
$
7,631

 
$
(26,891
)
 
$
14,861

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
21,630

 
$
21,630

 
$
4,522

 
$
10,244

 
$
(36,396
)
 
$
21,630

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

 
$
104,363

 
$
17,393

 
$
106,831

 
$
(21,341
)
 
$
207,246

Freight billed to customers

 
137

 
174

 
200

 

 
511

Total revenues

 
104,500

 
17,567

 
107,031

 
(21,341
)
 
207,757

Cost of sales

 
85,442

 
12,783

 
85,989

 
(21,341
)
 
162,873

Gross profit

 
19,058

 
4,784

 
21,042

 

 
44,884

Selling, general and administrative expenses

 
15,587

 
1,704

 
9,448

 

 
26,739

Special charges

 
(232
)
 

 

 

 
(232
)
Income (loss) from operations

 
3,703

 
3,080

 
11,594

 

 
18,377

Other income (expense)

 
1,083

 
(101
)
 
1,255

 

 
2,237

Earnings (loss) before interest and income taxes

 
4,786

 
2,979

 
12,849

 

 
20,614

Interest expense

 
7,838

 

 
2,721

 

 
10,559

Income (loss) before income taxes

 
(3,052
)
 
2,979

 
10,128

 

 
10,055

Provision (benefit) for income taxes

 
134

 

 
2,794

 

 
2,928

Net income (loss)

 
(3,186
)
 
2,979

 
7,334

 

 
7,127

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

 
10,313

 

 

 
(17,440
)
 

Net income (loss)
$
7,127

 
$
7,127

 
$
2,979

 
$
7,334

 
$
(17,440
)
 
$
7,127

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
4,412

 
$
4,412

 
$
3,066

 
$
2,490

 
$
(9,968
)
 
$
4,412


Libbey Inc.
Condensed Consolidating Statements of Comprehensive Income
(unaudited)
 
Nine months ended September 30, 2012
(dollars in thousands)
Libbey
Inc.
(Parent)
 
Libbey
Glass
(Issuer)
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
308,017

 
57,420

 
294,175

 
(53,386
)
 
$
606,226

Freight billed to customers