UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

 

Commission File Number 1-12084

LIBBEY INC.

(Exact name of registrant as specified in its charter)

 

 

 

(419) 325-2100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value (based on the consolidated tape closing price on June 30, 2010) of the voting stock beneficially held by non-affiliates of the registrant was approximately $202,506,432. For the sole purpose of making this calculation, the term “non-affiliate” has been interpreted to exclude directors and executive officers of the registrant. Such interpretation is not intended to be, and should not be construed to be, an admission by the registrant or such directors or executive officers that any such persons are “affiliates” of the registrant, as that term is defined under the Securities Act of 1934.

 

The number of shares of common stock, $.01 par value, of the registrant outstanding as of February 28, 2011 was 19,728,383.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 2011 (“Proxy Statement”).

 

Certain information required by Part II of this Form 10-K is incorporated by reference from registrant’s 2010 Annual Report to Shareholders where indicated.

 

 

TABLE OF CONTENTS

 

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Libbey desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “believe,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would,” variations of such words, and similar expressions are intended to identify these forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

 

General

 

Libbey Inc. (Libbey or the Company) is the leading producer of glass tableware products in the Western Hemisphere, in addition to supplying to key markets throughout the world. 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 produce glass tableware in five countries and sell to over 100 countries. We design and market, under our LIBBEY^®, Crisa^®, Royal Leerdam^®, World^® Tableware, Syracuse^® China and Traex^® brand names, an extensive line of high-quality glass tableware, ceramic dinnerware, metal flatware, hollowware and serveware, and plastic items for sale primarily in the foodservice, retail and business-to-business markets. Our global sales force presents our products to the global marketplace in a coordinated fashion. We are the largest glass tableware manufacturer in Latin America through our subsidiary Crisa Libbey Commercial, S. de R.L. de C.V. (Crisa) which goes to market under the Crisa^® brand name. Through our subsidiary Libbey Glassware (China), Co., Ltd. (Libbey China) we have a state-of-the-art glass tableware manufacturing facility in China that has been operational since the first quarter of 2007. Through our subsidiary B.V. Koninklijke Nederlandsche Glasfabriek Leerdam (Royal Leerdam), we manufacture high-quality glass stemware under the Royal Leerdam^® brand name. Through our subsidiary Crisal-Cristalaria Automática S.A. (Crisal), we manufacture glass tableware in Portugal for our worldwide customer base. We import and market ceramic dinnerware under the Syracuse^® China brand name through our subsidiary Syracuse China Company (Syracuse China). Through our World Tableware Inc. (World Tableware) subsidiary, we import metal flatware, hollowware, serveware and ceramic dinnerware for resale. We design, manufacture and distribute an extensive line of plastic items for the foodservice industry under the Traex^® brand name through our subsidiary Traex Company (Traex). See note 17 to the Consolidated Financial Statements for segment information.

 

Libbey was incorporated in Delaware in 1987, but traces its roots back to The W. L. Libbey & Son Company, an Ohio corporation formed in 1888, when it began operations in Toledo, Ohio.

 

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 the Securities Exchange Act of 1934, including our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as amendments to those reports. These reports are made available on our website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission and can also be found at www.sec.gov.

 

Our shares are traded on the NYSE Amex exchange under the ticker symbol LBY.

Growth Strategy

 

Our strategic vision is to be the premier provider of glass tableware and related products worldwide. We seek to continue to increase our share of our core North American market in the foodservice, retail and business-to-business channels through our diverse product offering by leveraging our brands and leading market positions in the foodservice and retail channels, superior product development capabilities, consistently high customer service levels and broad distribution network. In International markets, we seek to increase our presence in all trade areas of the European glass tableware market; foodservice, retail and business-to-business, with specific emphasis on a broadened reach in the business-to-business sector. We also believe that we have significant opportunities for continued growth in China and throughout the Pacific Rim due to our state of the art manufacturing facility in China as well as our growing sales force and distribution network.

 

In addition to our focus on top-line growth, the concurrent improvement in profitability and cash flow generation is a key element of our strategy. To this end, we continue to focus on a number of initiatives aimed at creating additional operating efficiencies, including eliminating waste, reducing working capital and instilling a culture of continuous improvement in all aspects of our operations. We also believe that by leveraging all of our production capabilities, particularly in low-cost countries such as Mexico, China and Portugal, our business can achieve greater profitability and generate increased cash flow through our ability to sell our products at price points that enable us to compete more profitably.

 

We expect that the period of 2011 through 2012 will continue to present a fragile and challenged world marketplace, and, as a result, recovery will be modest at best. Accordingly, Libbey will maintain its focus during that time on strengthening our balance sheet, with an eye to refinancing in the latter part of 2012 with the goal of lowering our interest expense and extending the maturities.

 

We view the period from 2013 through 2015 as presenting increased opportunity for growth, and we expect various expansion opportunities in some key global markets. We expect that, by strengthening our balance sheet and refinancing our debt before then, we will be positioned to avail ourselves of some of those strategic opportunities when they arise.

 

Products

 

Our tableware products consist of glass tableware (including casual glass beverageware), ceramic dinnerware, metal flatware, hollowware and serveware and plastic items. Our glass tableware includes tumblers, stemware (including wine glasses), mugs, bowls, ashtrays, bud vases, salt and pepper shakers, shot glasses, canisters, candleholders and various other items. Royal Leerdam produces high-quality stemware. Crisal produces glass tableware, mainly tumblers, stemware and glassware accessories. Crisa’s glass tableware product assortment includes the product types produced by Libbey, as well as glass bakeware and handmade glass tableware. In addition, Crisa’s products include blender jars, washing machine windows and other glass products sold principally to original equipment manufacturers (OEMs). Through our Syracuse China and World Tableware subsidiaries, we offer a wide range of ceramic dinnerware products. These include plates, bowls, platters, cups, saucers and other tableware accessories. Our World Tableware subsidiary provides an extensive selection of metal flatware, including knives, forks, spoons and serving utensils. In addition, World Tableware sells metal hollowware, including serving trays, chafing dishes, pitchers and other metal tableware accessories, as well as an extensive line of dinnerware. Through our Traex subsidiary, we produce and sell a wide range of plastic products, including tabletop warewashing and storage racks, trays, dispensers and organizers, to the foodservice industry. Our global sales force presents all of our products to the global marketplace in a coordinated fashion.

 

We also have an agreement to be the exclusive distributor of Luigi Bormioli glassware in the United States, Canada and Mexico to foodservice users. Luigi Bormioli, based in Italy, is a highly regarded supplier of high-end glassware used in many of the finest eating and drinking establishments.

 

Customers

 

The customers for our tableware products include approximately 500 foodservice distributors in the United States and Canada. In the retail channel, we sell to mass merchants, department stores, retail distributors,

national retail chains and specialty housewares stores. In addition, our business-to-business channel primarily includes customers that use glass containers for candle and floral applications, gourmet food packaging companies, and various OEM applications. In Mexico, we sell to retail mass merchants and wholesale distributors, as well as candle and food packers, and various OEM users of custom molded glass. In Europe, we market glassware to retailers, distributors and decorators that service the retail, foodservice and highly developed business-to-business channel, which includes large breweries and distilleries, for which products are decorated with company logos for promotional and resale purposes. We also have other customers who use our products for promotional or other private uses. In China, we sell to distributors and wholesalers. No single customer accounts for 10 percent or more of our sales, although the loss of any of our major customers could have a meaningful effect on us.

 

Sales, Marketing and Distribution

 

In 2010, approximately 75 percent of our sales were to customers located in North America, and approximately 25 percent of our sales were to customers located outside of North America. We sell our products to over 100 countries around the world, competing in the tableware markets of Latin America, Asia and Europe, as well as North America.

 

We have our own sales staff of professionals who call on customers and distributors. In addition, we retain the services of manufacturing representative organizations to assist in selling our products in select countries.

 

We also have marketing staff located at our corporate headquarters in Toledo, Ohio, as well as in Mexico, Portugal, the Netherlands and China. They engage in developing strategies relating to product development, pricing, distribution, advertising and sales promotion.

 

We operate distribution centers located at or near each of our manufacturing facilities (see “Properties” section). In addition, we operate distribution centers for our products produced in Mexico in Laredo, Texas, and for our Syracuse^® China, World^® Tableware and Traex^® products in West Chicago, Illinois. The glass tableware manufacturing and distribution centers are strategically located to enable us to supply significant quantities of our product to virtually all of our customers on a timely and cost effective basis.

 

The majority of our sales are in the foodservice, retail and business-to-business channels, which are further detailed below.

 

Foodservice

 

We have, according to our estimates, the leading market share in glass tableware sales in the U.S. and Canadian foodservice channel. Our Syracuse^® China, World^® Tableware and Traex^® brands are long-established brands of high-quality ceramic dinnerware, metal flatware, hollowware and serveware, and plastic items, respectively. We are among the leading suppliers of these product categories to foodservice end users. Our glass tableware manufacturing facility in China has experienced significant growth in this market channel as it supplies products to key markets worldwide. A significant majority of our tableware sales to foodservice end users are made through a network of foodservice distributors. The distributors in turn sell to a wide variety of foodservice establishments, including national and regional hotel chains, national and regional restaurant chains, independently owned bars and restaurants and casinos.

 

Retail

 

Our primary customers in the retail channel include national and international mass merchants. In recent years, we have increased our retail sales by increasing our sales to specialty housewares stores and value-oriented retailers. In 2011, we were recognized by the Retail Tracking Services of NPD Group for increasing our overall U.S. market share in the casual glass beverageware market in 2010 to approximately 47 percent from approximately 42 percent in 2009. Royal Leerdam and Crisa sell to similar retail customers in Europe and Mexico, while Crisal is increasingly positioned with retailers on the Iberian Peninsula. With this retail representation, we are positioned to successfully introduce profitable new products. We also operate outlet stores located at or near the majority of our manufacturing locations. In addition, we sell selected items in the United States on the internet at www.libbey.com.

Business-to-Business

 

Royal Leerdam and Crisal supply glassware to the business-to-business channel of distribution in Europe. Customers in this channel include marketers who decorate our glassware with company logos and resell these products to large breweries and distilleries, which redistribute the glassware for promotional purposes and resale. Our business-to-business channel in North America includes candle and floral applications, blender jars and washing machine windows. The craft industries and gourmet food-packing companies are also business-to-business consumers of glassware.

 

Seasonality

 

Primarily due to the impact of consumer buying patterns and production activity, our sales and operating income, excluding special items, tends to be stronger in the second half and weaker in the first half of each year. In addition, our cash flow from operating activities tends to be stronger in the second half of the year and weaker in the first half of the year due to these seasonal working capital trends. In particular, our inventory levels typically reach their highest levels in the third quarter of the year, and decrease in the following quarter due to seasonally higher sales that typically peak in the fourth quarter of the year. In addition, our receivables typically peak during the third and early fourth quarters and begin to decrease by the end of the year as cash collections continue through the end of December, but limited shipments occur during the final week of the year. Our payables normally peak during the third and fourth quarters of the year as a result of our increased production levels going into those quarters, but are not significant enough to provide relief for total working capital needs caused by increased investment in inventories. Accordingly, our overall investment in working capital will normally reach higher levels through the summer months as we build inventory during slower sales periods in order to allow for optimum customer service and timely delivery during the higher sales periods in the second half of the year, when sales typically exceed short-term production capabilities. Although little information with respect to our competitors is publicly available, we believe that our experience with working capital is generally consistent with the experience for the industry as a whole.

 

Backlog

 

As of December 31, 2010, our backlog was approximately $62.8 million, compared to approximately $54.9 million at December 31, 2009. The increase was caused by increased demand by our customers, as orders have reached more traditional levels due to the continuing economic recovery. Backlog includes orders confirmed with a purchase order for products scheduled to be shipped to customers in a future period. Because orders may be changed and/or cancelled, we do not believe that our backlog is necessarily indicative of actual sales for any future period.

 

Manufacturing and Sourcing

 

In North America, we currently own and operate three glass tableware manufacturing plants - two in the United States (one in Toledo, Ohio and one in Shreveport, Louisiana) and one in Monterrey, Mexico. We also own and operate one facility in Dane, Wisconsin that produces plastic products for the foodservice industry. In Europe, we own and operate two glass tableware manufacturing plants — one in Leerdam, the Netherlands, and the other in Marinha Grande, Portugal. In Asia, we own and operate a glass tableware production facility in Langfang, China.

 

The manufacture of our tableware products involves the use of automated processes and technologies. We design much of our glass tableware production machinery, and we continuously refine it to incorporate technological advances to create a competitive advantage. We believe that our production machinery and equipment continues to be adequate for our needs in the foreseeable future, but we continue to invest in ways to further improve our product offering and production efficiencies and reduce our cost profile.

 

Our glass tableware products generally are produced using one of two manufacturing methods or, in the case of certain stemware, a combination of such methods. Most of our tumblers, stemware and other glass tableware products are produced by forming molten glass in molds with the use of compressed air. These products are known as “blown” glass products. Our other glass tableware products and the stems of certain stemware are “pressware” products, which are produced by pressing molten glass into the desired product shape.

Ceramic dinnerware is imported primarily from Asia. We source metal flatware and metal hollowware through our World Tableware subsidiary, primarily from Asia. Plastic products are also produced through the injection molding of raw materials into the desired shape and are manufactured at our Dane, Wisconsin production facility or imported primarily from Asia.

 

To assist in the manufacturing process, we employ a team of engineers whose responsibilities include efforts to improve and upgrade our manufacturing facilities, equipment and processes. In addition, they provide engineering required to manufacture new products and implement the large number of innovative changes continuously being made to our product designs, sizes and shapes. See “Research and Development” below for additional information.

 

Materials

 

Our primary materials are sand, lime, soda ash, corrugated packaging, resins and colorants. Historically, these materials have been available in adequate supply from multiple sources. However, there may be temporary shortages of certain materials due to weather or other factors, including disruptions in supply caused by material transportation or production delays. Such shortages have not previously had, and are not expected in the future to have, a material adverse effect on our operations. Natural gas is the primary source of energy in most of our production processes, and periodic variability in the price for natural gas has had and could continue to have an impact on our profitability. Historically, we have used natural gas hedging contracts for a portion of our expected purchases to partially mitigate this impact. In addition, resins are a primary source of materials for our Traex operation, and historically the price for resins has fluctuated, directly impacting our profitability. We also experience fluctuations in the cost to deliver materials to our facilities, and such changes may affect our earnings and cash flow.

 

Research and Development

 

Our core competencies include our engineering excellence and world-class manufacturing techniques. Our focus is to increase the quality of our products and enhance the profitability of our business through research and development. We will continue to invest in strategic research and development projects that will further enhance our ability to compete in our core business.

 

We employ a team of engineers, in addition to external consultants, to conduct research and development. Our expenditures on research and development activities related to new and/or improved products and processes were $2.6 million in 2010, $2.0 million in 2009 and $1.7 million in 2008. These costs were expensed as incurred.

 

Patents, Trademarks and Licenses

 

Based upon market research and surveys, we believe that our trade names and trademarks, as well as our product shapes and styles, enjoy a high degree of consumer recognition and are valuable assets. We believe that the Libbey^®, Syracuse^® China, World^® Tableware, Crisa^®, Royal Leerdam^®, Crisal Glass^® and Traex^® trade names and trademarks are material to our business.

 

We have rights under a number of patents that relate to a variety of products and processes. However, we do not consider that any patent or group of patents relating to a particular product or process is of material importance to our business as a whole.

 

Competitors

 

Our business is highly competitive, with the principal competitive factors being customer service, price, product quality, new product development, brand name, delivery time and breadth of product offerings.

 

Competitors in glass tableware include, among others:

 

 

 

Other materials such as plastics also compete with glassware.

 

Competitors in U.S. ceramic dinnerware include, among others:

 

 

Competitors in metalware include:

 

 

Competitors in plastic products are, among others:

 

 

Environmental Matters

 

Our operations, in common with those of industry generally, are subject to numerous existing laws and governmental regulations designed to protect the environment, particularly regarding plant wastes and emissions and solid waste disposal and remediation of contaminated sites. We believe that we are in material compliance with applicable federal, state and local environmental laws, and we are not aware of any regulatory initiatives that we expect will have a material effect on our products or operations. See “Risk Factors — We are subject to various environmental legal requirements and may be subject to new legal requirements in the future; these requirements could have a material adverse effect on our operations.”

 

We have shipped, and we continue to ship, waste materials for off-site disposal. However, we are not named as a potentially responsible party with respect to any waste disposal site matters pending prior to June 24, 1993, the date of Libbey’s initial public offering and separation from Owens-Illinois, Inc. (Owens-Illinois). Owens-Illinois has been named as a potentially responsible party or other participant in connection with certain waste disposal sites to which we also may have shipped wastes prior to June 24, 1993. We may bear some responsibility in connection with those shipments. Pursuant to an indemnification agreement between Owens-Illinois and Libbey, Owens-Illinois has agreed to defend and hold us harmless against any costs or liabilities we may incur in connection with any such matters identified and pending as of June 24, 1993, and to indemnify us for any liability that results from these matters in excess of $3 million. We believe that if it is necessary to draw upon this indemnification, collection is probable.

 

Pursuant to the indemnification agreement referred to above, Owens-Illinois is defending us with respect to the King Road landfill. In January 1999, the Board of Commissioners of Lucas County, Ohio instituted a lawsuit against Owens-Illinois, Libbey and numerous other defendants in the U.S. District Court for the Northern District of Ohio

to recover costs incurred to address contamination from the King Road landfill formerly operated by the County. The Board of Commissioners dismissed the lawsuit without prejudice in October 2000. In view of the uncertainty as to any re-filing of the suit, the remedy, and the number of potentially responsible parties and potential defenses, we are unable to quantify our exposure with respect to the King Road landfill.

 

On October 10, 1995, Syracuse China Company, our wholly-owned subsidiary, acquired from The Pfaltzgraff Co. and certain of its subsidiary corporations, the assets operated by them as Syracuse China. The Pfaltzgraff Co. and the New York State Department of Environmental Conservation, which we refer to as the DEC, entered into an Order on Consent effective November 1, 1994 that required Pfaltzgraff to develop a remedial action plan for and to remediate a landfill, as well as wastewater sludge ponds and adjacent wetlands located on property that Syracuse China Company purchased. Although Syracuse China was not a party to the Order on Consent, as part of the Asset Purchase Agreement with The Pfaltzgraff Co., which we refer to as the APA, Syracuse China agreed to share a part of the remediation and related expense up to the lesser of 50 percent of such costs or $1.35 million. The approved remedy has been implemented and Syracuse China’s payment obligation under the APA has been satisfied.

 

In addition, Syracuse China has been named as a potentially responsible party by reason of its potential ownership of certain property that adjoins its plant and that has been designated a sub-site of the Onondaga Lake Superfund Site. We believe that any contamination of the sub-site was caused by and will be remediated by owners of this site at no cost to Syracuse China. We believe that, even if Syracuse China were deemed to be responsible for any expense in connection with the contamination of the sub-site, it is likely that a portion of the expense would be paid by Pfaltzgraff pursuant to the APA.

 

By letter dated October 31, 2008, the DEC and U.S. Environmental Protection Agency, which we refer to as the EPA, made a demand upon Syracuse China and several other companies for recovery of approximately $12.5 million of direct and indirect costs allegedly expended by the DEC and EPA in connection with the clean-up of the Onondaga Lake Superfund Site. By letter dated October 30, 2009, the EPA notified Syracuse China and several other companies that they are potentially responsible parties in connection with the Lower Ley Creek sub-site of the Onondaga Lake Superfund Site. At this time it is not certain that there is a nexus between Syracuse China and the Superfund Site. Under the APA, we and The Pfaltzgraff Co. will share any costs for off-premise liability of this kind up to an aggregate of $7.5 million. We have no reason to believe that the indemnification would not be honored if it were to become necessary for us to draw upon that indemnification.

 

We regularly review the facts and circumstances of the various environmental matters affecting us, including those covered by indemnification. Although not free of uncertainties, we do not expect, based upon the number of parties involved at the sites and the estimated cost of undisputed work necessary for remediation based upon known technology and the experience of others, to incur material loss for new matters in the future. There can be no assurance, however, that indemnification agreements will be performed or our future expenditures for environmental matters will not have a material adverse effect on our financial position or results of operations.

 

In addition, occasionally the federal government and various state authorities have investigated possible health issues that may arise from the use of lead or other ingredients in enamels such as those used by us on the exterior surface of our decorated products. In that connection, Libbey Glass Inc. and numerous other glass tableware manufacturers, distributors and importers entered into a consent judgment on August 31, 2004 in connection with an action, Leeman v. Arc International North America, Inc. et al, Case No. CGC-003-418025 (Superior Court of California, San Francisco County) brought under California’s so-called “Proposition 65.” Proposition 65 requires businesses with ten or more employees to give a “clear and reasonable warning” prior to exposing any person to a detectable amount of a chemical listed by the state as covered by this statute. Lead is one of the chemicals covered by that statute. Pursuant to the consent judgment, Libbey Glass Inc. and the other defendants (including Anchor Hocking and Arc International North America, Inc.) agreed, over a period of time, to reformulate the enamels used to decorate the external surface of certain glass tableware items to reduce the lead content of those enamels. We have complied with this requirement.

 

Although we have modified and continue to modify our manufacturing processes and technologies in an effort to reduce our emissions and increase energy efficiency, capital expenditures for property, plant and equipment for environmental control activities were not material during 2010 or 2009 and are not expected to increase significantly in 2011.

Employees

 

Our employees are vital to achieving our vision to be “the premier provider of tabletop glassware and related products worldwide” and our mission “to create value by delivering quality products, great service and strong financial results through the power of our people worldwide.” We strive to achieve our vision and mission through our values of customer focus, performance, continuous improvement, teamwork, respect and development.

 

We employed 7,005 persons at December 31, 2010. Approximately 66 percent of our employees are employed outside the U.S., and the majority of our employees are paid hourly and covered by collective bargaining agreements. Royal Leerdam’s collective bargaining agreement with its unionized employees expires on July 1, 2011. The agreement with our unionized employees in Shreveport, Louisiana expires on December 15, 2011. Agreements with our unionized employees in Toledo, Ohio expire on September 30, 2013. Crisa’s collective bargaining agreements with its unionized employees have no expiration, but wages are reviewed annually and benefits are reviewed every two years. Crisal does not have a written collective bargaining agreement with its unionized employees but does have an oral agreement that is revisited annually.

 

Our executive officers have a wealth of business knowledge, experience and commitment to Libbey. In 2011, each of Mr. Meier, Chairman of the Board and Chief Executive Officer, and Mr. Reynolds, Executive Vice President and Chief Financial Officer, will celebrate 41 years of service with Libbey. In addition, the average years of industry experience of all of our executive officers is 22 years.

 

 

 

The following factors are the most significant factors that can impact year-to-year comparisons and may affect the future performance of our businesses. New risks may emerge, and management cannot predict those risks or estimate the extent to which they may affect our financial performance.

 

Slowdowns in the retail, travel, restaurant and bar or entertainment industries, such as those caused by general economic downturns, terrorism or political or social unrest, health concerns or strikes or bankruptcies within those industries, could reduce our revenues and production activity levels.

 

Our business is affected by the health of the retail, travel, restaurant and bar or entertainment industries. Expenditures in these industries are sensitive to business and personal discretionary spending levels and may decline during general economic downturns. Additionally, travel is sensitive to safety concerns, and thus may decline after incidents of terrorism, during periods of geopolitical conflict in which travelers become concerned

about safety issues, or when travel might involve health-related risks. For example, demand for our products in the foodservice industry, which is critical to our success, was significantly impacted by the global economic recession beginning in the third quarter of 2008. Similarly, the increase in violent crime caused by infighting among, and the Mexican government’s crackdown on, drug cartels in Mexico may impact the health of the restaurant and bar and tourism industries in Mexico.

 

Ongoing volatility in financial markets and the weak national and global economic conditions could materially and adversely impact our operations, financial results and/or liquidity, including as follows:

 

 

Uncertainty about current global economic conditions may cause consumers of our products to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values. This could have a material adverse impact on the demand for our products and on our financial condition and operating results. A further deterioration in economic conditions would likely exacerbate these adverse effects and could result in a wide-ranging and prolonged impact on general business conditions, thereby negatively impacting our operations, financial results and/or liquidity.

 

Our high level of debt, as well as incurrence of additional debt, may limit our operating flexibility, which could adversely affect our results of operations and financial condition.

 

We have a high degree of financial leverage. As of December 31, 2010, we had $450.2 million aggregate principal amount of debt outstanding. Of that amount:

 

 

Although neither our amended and restated ABL Facility nor the indenture governing our Senior Secured Notes contains financial covenants, they do contain other covenants that limit our operational and financial flexibility, such as by limiting the additional indebtedness that we may incur, limiting certain business activities,

investments and payments, and limiting our ability to dispose of certain assets. These covenants may limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt.

 

We are permitted, subject to limitations contained in the agreements relating to our existing debt, to incur additional debt in the future. Our high degree of leverage, as well as the incurrence of additional debt, could have important consequences for our business, such as:

 

 

If cash generated from operations is insufficient to satisfy our liquidity requirements, if we cannot service our debt, or if we fail to meet our covenants, we could have substantial liquidity problems. In those circumstances, we might have to sell assets, delay planned investments, obtain additional equity capital or restructure our debt. Depending on the circumstances at the time, we may not be able to accomplish any of these actions on favorable terms or at all.

 

In addition, our failure to comply with the covenants contained in our loan agreements could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness.

 

International economic and political factors could affect demand for imports and exports, and our financial condition and results of operations could be adversely impacted as a result.

 

Our operations may be affected by actions of foreign governments and global or regional economic developments. Global economic events, such as changes in foreign import/export policy, the cost of complying with environmental regulations or currency fluctuations, could also affect the level of U.S. imports and exports, thereby affecting our sales. Foreign subsidies, foreign trade agreements and each country’s adherence to the terms of these agreements can raise or lower demand for our products. National and international boycotts and embargoes of other countries’ or U.S. imports and/or exports, together with the raising or lowering of tariff rates, could affect the level of competition between our foreign competitors and us. Foreign competition has, in the past, and may, in the future, result in increased low-cost imports that drive prices downward. The World Trade Organization met in November 2001 in Doha, Qatar, where members launched new multilateral trade negotiations aimed at improving market access and substantially reducing trade-distorting domestic support. These negotiations are ongoing and may result in further agreements in the future. As of December 31, 2010, the trade-weighted tariff rate applicable to glass tableware products that are imported into the United States and are of the type we manufacture in North America was approximately 21 percent. However, any changes to international agreements that lower duties or improve access to U.S. markets for our competitors, particularly changes arising out of the ongoing World Trade Organization’s Doha round of negotiations, could have an adverse effect on our financial condition and results of operations. As we execute our strategy of acquiring manufacturing platforms in lower cost regions and increasing our volume of sales in overseas markets, our dependence on international markets and our ability to effectively manage these risks has increased and will continue to increase significantly.

Fluctuation of the currencies in which we conduct operations could adversely affect our financial condition and results of operations or reduce the cost competitiveness of our products or those of our subsidiaries.

 

Changes in the value, relative to the U.S. dollar, of the various currencies in which we conduct operations, including the euro, the Mexican peso and the Chinese yuan, which we refer to as the RMB, may result in significant changes in the indebtedness of our non-U.S. subsidiaries.

 

Currency fluctuations between the U.S. dollar and the currencies of our non-U.S. subsidiaries affect our results as reported in U.S. dollars, particularly the earnings of Crisa as expressed under GAAP, and will continue to affect our financial income and expense and our revenues from international settlements.

 

Major fluctuations in the value of the euro, the Mexican peso or the RMB relative to the U.S. dollar and other major currencies could also reduce the cost competitiveness of our products or those of our subsidiaries, as compared to foreign competition. For example, if the U.S. dollar appreciates against the euro, the Mexican peso or the RMB, the purchasing power of those currencies effectively would be reduced compared to the U.S. dollar, making our U.S.-manufactured products more expensive in the euro zone, Mexico and China, respectively, compared to the products of local competitors and making products manufactured by our foreign competitors in those locations more cost-competitive with our U.S. manufactured products. An appreciation of the U.S. dollar against the euro, the Mexican peso or the RMB also would increase the cost of U.S. dollar-denominated purchases for our operations in the euro zone, Mexico and China, respectively, including raw materials. We would be forced to deduct these cost increases from our profit margin or attempt to pass them along to consumers. These fluctuations could adversely affect our results of operations and financial condition.

 

Our business requires us to maintain a large fixed-cost base that can affect our profitability.

 

The high levels of fixed costs of operating glass production plants encourage high levels of output, even during periods of reduced demand, which can lead to excess inventory levels and exacerbate the pressure on profit margins. Our profitability is dependent, in part, on our ability to spread fixed costs over an increasing number of products sold and shipped, and if we reduce our rate of production, as we did in 2009, our costs per unit increase, negatively impacting our gross margins. Decreased demand or the need to reduce inventories can lower our ability to absorb fixed costs and materially impact our results of operations.

 

We may not be able to achieve the international growth contemplated by our strategy.

 

Our strategy contemplates growth in international markets in which we have significantly less experience than we do in North America. Since we intend to benefit from our international initiatives primarily by expanding our sales in the local markets of other countries, our success depends on continued growth in these markets, including Europe, Latin America and Asia-Pacific.

 

We face intense competition and competitive pressures, which could adversely affect our results of operations and financial condition.

 

Our business is highly competitive, with the principal competitive factors being customer service, price, product quality, new product development, brand name, delivery time and breadth of product offerings. Advantages or disadvantages in any of these competitive factors may be sufficient to cause the customer to consider changing manufacturers.

 

Competitors in glass tableware include, among others:

 

 

 

In addition, makers of tableware produced with other materials such as plastics compete to a certain extent with glassware manufacturers.

 

Some of our competitors have greater financial and capital resources than we do and continue to invest heavily to achieve increased production efficiencies. Competitors may have incorporated more advanced technology in their manufacturing processes, including more advanced automation techniques. Our labor and energy costs also may be higher than those of some foreign producers of glass tableware. We may not be successful in managing our labor and energy costs or gaining operating efficiencies that may be necessary to remain competitive. In addition, our products may be subject to competition from low-cost imports that intensify the price competition we face in our markets. Finally, we may need to increase incentive payments in our marketing incentive program in order to remain competitive. Increases in these payments would adversely affect our operating margins.

 

Competitors in the U.S. market for ceramic dinnerware include, among others: Homer Laughlin; Oneida Ltd.; Steelite; and various sourcing companies. Competitors in metalware include, among others: Oneida Ltd.; Walco, Inc.; and various sourcing companies. Competitors in plastic products include, among others: Cambro Manufacturing Company; Carlisle Companies Incorporated; and various sourcing companies. In Mexico, where a larger portion of our sales are in the retail market, our primary competitors include imports from foreign manufacturers located in countries such as China, France, Italy and Colombia, as well as Vidriera Santos and Vitro Par in the candle category. Competitive pressures from these competitors and producers could adversely affect our results of operations and financial condition.

 

We conduct significant operations at our facility in Monterrey, Mexico, which could be materially adversely affected as a result of the increased levels of drug-related violence in that city.

 

To date, the drug-related violence in Mexico has had little effect on our operations. Recently, however, fighting among rival drug cartels has led to unprecedented levels of violent crime in Monterrey, Mexico despite increased law-enforcement efforts by the Mexican government. This situation presents several risks to our operations, including, among others, that our employees may be directly affected by the violence, that our employees may elect to relocate out of the Monterrey region in order to avoid the risk of violent crime to themselves or their families, that other multi-national companies who have withdrawn their expatriate employees from their operations in the Monterrey vicinity may attempt to lure our Monterrey-based executives with tempting job offers, and that our customers may become increasingly reluctant to visit our Monterrey facility, which could delay new business opportunities and other important aspects of our business. If any of these risks materializes, our business may be materially adversely affected.

 

We may not be able to renegotiate collective bargaining agreements successfully when they expire; organized strikes or work stoppages by unionized employees may have an adverse effect on our operating performance.

 

We are party to collective bargaining agreements that cover most of our manufacturing employees. Royal Leerdam’s collective bargaining agreement with its unionized employees expires on July 1, 2011. The agreement with our unionized employees in Shreveport, Louisiana expires on December 15, 2011, and the agreements with our unionized employees in Toledo, Ohio expire on September 30, 2013. Crisa’s collective bargaining agreements with its unionized employees have no expiration, but wages are reviewed annually and benefits are reviewed every two years. Crisal does not have a written collective bargaining agreement with its unionized employees but does have an oral agreement that is revisited annually.

 

We may not be able to successfully negotiate new collective bargaining agreements without any labor disruption. If any of our unionized employees were to engage in a strike or work stoppage prior to expiration of their existing collective bargaining agreements, or if we are unable in the future to negotiate acceptable agreements with

our unionized employees in a timely manner, we could experience a significant disruption of operations. In addition, we could experience increased operating costs as a result of higher wages or benefits paid to union members upon the execution of new agreements with our labor unions. We also could experience operating inefficiencies as a result of preparations for disruptions in production, such as increasing production and inventories. Finally, companies upon which we are dependent for raw materials, transportation or other services could be affected by labor difficulties. These factors and any such disruptions or difficulties could have an adverse impact on our operating performance and financial condition.

 

In addition, we are dependent on the cooperation of our largely unionized workforce to implement and adopt Lean initiatives that are critical to our ability to improve our production efficiency. The effect of strikes and other slowdowns may adversely affect the degree and speed with which we can adopt Lean optimization objectives and the success of that program.

 

The inability to extend or refinance debt of our foreign subsidiaries, or the calling of that debt before scheduled maturity, could adversely impact our liquidity and financial condition.

 

Our subsidiaries in Portugal and China have outstanding debt under credit facilities provided to them by local financial institutions. As of December 31, 2010, our subsidiary in China had an RMB 250 million (approximately $37.9 million at December 31, 2010) construction loan extended by CCB, and our subsidiary in Portugal had an €8.3 million (approximately $10.9 million at December 31, 2010) line of credit extended by Banco Espirito Santo, S.A.. If CCB were to call the construction loan before maturity, or if Banco Espirito Santo, S.A. were to call the BES Euro line before maturity, our liquidity and financial condition may be adversely impacted.

 

If either CCB or Banco Espirito Santo, S.A. were to call these loans for repayment prior to their respective scheduled maturities, we may be required to pursue one or more alternative strategies to repay these loans, such as selling assets, refinancing or restructuring these loans or selling additional debt or equity securities. We may not, however, be able to refinance these loans or sell additional debt or equity securities on favorable terms, if at all, and if we are required to sell our assets, it may negatively affect our ability to generate revenues.

 

Our cost-reduction projects may not result in anticipated savings in operating costs.

 

We may not be able to achieve anticipated cost reductions. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition and results of operations could be adversely impacted.

 

We are subject to risks associated with operating in foreign countries. These risks could adversely affect our results of operations and financial condition.

 

We operate manufacturing and other facilities throughout the world. As a result of our International operations, we are subject to risks associated with operating in foreign countries, including:

 

 

 

The risks associated with operating in foreign countries may have a material adverse effect on our results of operations and financial condition.

 

If we have a fair value impairment in a business segment, our net earnings and net worth could be materially and adversely affected by a write-down of goodwill, intangible assets or fixed assets.

 

We have recorded a significant amount of goodwill, which represents the excess of cost over the fair value of the net assets of the business acquired; other identifiable intangible assets, including trademarks and trade names; and fixed assets. Impairment of goodwill, identifiable intangible assets or fixed assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business, and a variety of other factors. Under U.S. GAAP, we are required to charge the amount of any impairment immediately to operating income. In 2010 and 2009, we did not have an impairment related to goodwill or intangible assets. During 2010, we further wrote down the carrying value of the Syracuse land, fixed assets related to our decision to outsource our U.S. decorating business and certain after-processing equipment totaling $3.7 million. During 2009, we did not have an impairment related to fixed assets. In 2008, we wrote down goodwill and other identifiable intangible assets by $11.9 million related to the decline in the capital markets, and we wrote down fixed assets by $9.7 million related to the announcement of the closure of our Syracuse China manufacturing facility and our Mira Loma, California distribution center. After that adjustment, as of December 31, 2008, we had goodwill and other identifiable intangible assets of $192.9 million and net fixed assets of $314.8 million. As of December 31, 2010, we had goodwill and other identifiable intangible assets of $192.5 million and net fixed assets of $270.4 million.

 

We conduct an impairment analysis at least annually related to goodwill and other indefinite lived intangible assets. This analysis requires our management to make significant judgments and estimates, primarily regarding expected growth rates, the terminal value calculation for cash flow and the discount rate. We determine expected growth rates based on internally developed forecasts considering our future financial plans. We establish the terminal cash flow value based on expected growth rates, capital spending trends and investment in working capital to support anticipated sales growth. We estimate the discount rate used based on an analysis of comparable company weighted average costs of capital that considered market assumptions obtained from independent sources. The estimates that our management uses in this analysis could be materially impacted by factors such as specific industry conditions, changes in cash flow from operations and changes in growth trends. In addition, the assumptions our management uses are management’s best estimates based on projected results and market conditions as of the date of testing. Significant changes in these key assumptions could result in indicators of impairment when completing the annual impairment analysis. We assess our fixed assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. We remain subject to future financial statement risk in the event that goodwill, other identifiable intangible assets or fixed assets become further impaired. For further discussion of key assumptions in our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates.”

 

A severe outbreak, epidemic or pandemic of the H1N1 virus or other contagious disease in a location where we have a facility could adversely impact our results of operations and financial condition.

 

Our facilities may be impacted by the outbreak of certain public health issues, including epidemics, pandemics and other contagious diseases such as the H1N1 virus, commonly referred to as the “swine flu.” If a severe outbreak were to occur where we have facilities, it could adversely impact our results of operations and financial condition.

We are subject to various environmental legal requirements and may be subject to new legal requirements in the future; these requirements could have a material adverse effect on our operations.

 

Our operations and properties, both in the United States and abroad, are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean-up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety. These legal requirements frequently change and vary among jurisdictions. Compliance with these requirements, or the failure to comply with these requirements, may have a material adverse effect on operations.

 

We have incurred, and expect to incur, costs to comply with environmental legal requirements, including requirements limiting greenhouse gas emissions, and these costs could increase in the future. Many environmental legal requirements provide for substantial fines, orders (including orders to cease operations) and criminal sanctions for violations. Also, certain environmental laws impose strict liability and, under certain circumstances, joint and several liability on current and prior owners and operators of these sites, as well as persons who sent waste to them, for costs to investigate and remediate contaminated sites. These legal requirements may apply to conditions at properties that we presently or formerly owned or operated, as well as at other properties for which we may be responsible, including those at which wastes attributable to us were disposed. A significant order or judgment against us, the loss of a significant permit or license or the imposition of a significant fine may have a material adverse effect on operations.

 

If we are unable to obtain raw materials or sourced products or utilities at favorable prices, or at all, our operating performance may be adversely affected.

 

Sand, soda ash, lime, corrugated packaging materials and resin are the principal materials we use. We also rely on natural gas, electricity, water and other utilities. In addition, we obtain glass tableware, ceramic dinnerware, metal flatware and hollowware and select plastic products from third parties. We may experience temporary shortages due to disruptions in supply caused by weather, transportation, production delays or other factors. In addition, resins are a primary material for our Traex operation and historically the price for resins has fluctuated with the price of oil, directly impacting our profitability. If we experience shortages in raw materials or sourced products, we may be forced to procure sourced products or materials from alternative suppliers, and we may not be able to do so on terms as favorable as our current terms or at all. In addition, material increases in the cost of any of these items on an industry-wide basis would have an adverse impact on our operating performance and cash flows if we were unable to pass on these increased costs to our customers.

 

Unexpected equipment failures may lead to production curtailments or shutdowns.

 

Our manufacturing processes are dependent upon critical glass-producing equipment, such as furnaces, forming machines and lehrs. This equipment may incur downtime as a result of unanticipated failures, accidents, natural disasters or other force majeure events. We may in the future experience facility shutdowns or periods of reduced production as a result of such failures or events. Unexpected interruptions in our production capabilities would adversely affect our productivity and results of operations for the affected period. We also may face shutdowns if we are unable to obtain enough energy in the peak heating seasons.

 

High levels of inflation and high interest rates in Mexico and China could adversely affect the operating results and cash flows of our operations there.

 

Although the annual rate of inflation in Mexico, as measured by changes in the Mexican National Consumer Price Index, was only 4.4 percent for the year ended December 31, 2010 and 6.53 percent for the year ended December 31, 2009, Mexico historically has experienced high levels of inflation and high domestic interest rates. If Mexico experiences high levels of inflation, Crisa’s operating results and cash flows could be adversely affected, and, more generally, high inflation might result in lower demand or lower growth in demand for our products, thereby adversely affecting our results of operations and financial condition. The annual rate of inflation in China, as measured by changes in the Consumer Price Index, has shown volatility. While inflation during 2010 was less

than 4.0 percent, it has steadily increased. If this trend were to continue, our China facility’s operating results and cash flows could be adversely affected, thereby adversely affecting our results of operations and financial condition.

 

Charges related to our employee pension and postretirement welfare plans resulting from market risk and headcount realignment may adversely affect our results of operations and financial condition.

 

In connection with our employee pension and postretirement welfare plans, we are exposed to market risks associated with changes in the various capital markets. Changes in long-term interest rates affect the discount rate that is used to measure our obligations and related expense. Our total pension and postretirement welfare expense, including pension settlement and curtailment charges, for all U.S. and non-U.S. plans was $21.2 million and $18.7 million for the fiscal years ended December 31, 2010 and 2009, respectively. We expect our total pension and postretirement welfare expense for all U.S. and non-U.S. plans to increase to $24.0 million in 2011. Volatility in the capital markets affects the performance of our pension plan asset performance and related pension expense. Based on 2010 year-end data, sensitivity to these key market risk factors is as follows:

 

 

As part of our pension expense, we incurred pension settlement charges of $3.7 million during 2009. These charges were triggered by excess lump sum distributions to retirees. For further discussion of these charges, see note 9 to our Consolidated Financial Statements. To the extent that we experience additional headcount shifts or changes, we may incur further expenses related to our employee pension and postretirement welfare plans, which could have a material adverse effect on our results of operations and financial condition.

 

If our 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.

 

In order to mitigate the variation in our operating results due to commodity price fluctuations, we have derivative financial instruments that hedge certain commodity price risks associated with forecasted future natural gas requirements. The results of our hedging practices could be positive, neutral or negative in any period depending on price changes of the hedged exposures. We account for derivatives in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 815, “Derivatives and Hedging”. These derivatives qualify for hedge accounting if the hedges are highly effective and we have designated and documented contemporaneously the hedging relationships involving these derivative instruments. If our 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 will impact our results of operations and could significantly impact our earnings.

 

If counterparties to our hedge agreements fail to perform, the hedge agreements would not protect us from fluctuations in certain commodity pricing.

 

We utilize derivative financial instruments to protect us from fluctuations in currency exchange, interest rates and the price of natural gas. The objective of the currency and natural gas agreements is to limit the fluctuations in prices paid for the underlying commodity. If the counterparties to these agreements were to fail to perform, we would no longer be protected from fluctuations in the pricing of these commodities and the impact of pricing fluctuations would impact our results of operations and financial condition.

 

Our business may suffer if we do not retain our senior management.

 

We depend on our senior management. The loss of services of any of the members of our senior management team for any reason, including resignation or retirement, could adversely affect our business until a suitable replacement can be found. There may be a limited number of persons with the requisite skills to serve in these positions, and we may be unable to locate or employ such qualified personnel on acceptable terms. In June 2010, the Securities and Exchange Commission filed a civil complaint against Gregory Geswein, our Vice President,

Strategic Planning and Business Development. The allegations contained in the complaint relate solely to one of Mr. Geswein’s prior employers, Diebold, Inc. and do not involve Libbey. If the civil action were determined adversely to Mr. Geswein, it is possible that we could lose his services.

 

In addition, John Meier, our Chairman and CEO, recently announced his plans to retire after 41 years of service to Libbey. His retirement is expected to occur by the end of 2011. Our Board of Directors, assisted by an internationally recognized executive search firm, has begun a comprehensive search process to determine Mr. Meier’s successor, with both internal and external candidates being considered.

 

We rely on increasingly complex information systems for management of our manufacturing, distribution, sales and other functions. If our information systems fail to perform these functions adequately, or if we experience an interruption in their operation, our business and results of operations could suffer.

 

All of our major operations, including manufacturing, distribution, sales and accounting are dependent upon our complex information systems. Our information systems are vulnerable to damage or interruption from:

 

 

Any damage or significant disruption in the operation of such systems or the failure of our information systems to perform as expected could disrupt our business; result in decreased sales, increased overhead costs, excess inventory and product shortages; and otherwise adversely affect our operations, financial performance and condition. We take significant steps to mitigate the potential impact of each of these risks, but there can be no assurance that these procedures would be completely successful.

 

We may not be able to effectively integrate future businesses we acquire or joint ventures we enter into.

 

Any future acquisitions that we might make or joint ventures into which we might enter are subject to various risks and uncertainties, including:

 

 

In addition, we cannot provide assurance that the integration and consolidation of newly acquired businesses or joint ventures will achieve any anticipated cost savings and operating synergies. The inability to integrate and consolidate operations and improve operating efficiencies at newly acquired businesses or joint ventures could have a material adverse effect on our business, financial condition and results of operations.

Our business requires significant capital investment and maintenance expenditures that we may be unable to fulfill.

 

Our operations are capital intensive, requiring us to maintain a large fixed cost base. Our total capital expenditures were $28.2 million and $17.0 million for the years ended December 31, 2010 and 2009, respectively.

 

Our business may not generate sufficient operating cash flow and external financing sources may not be available in an amount sufficient to enable us to make anticipated capital expenditures.

 

Natural gas, the principal fuel we use to manufacture our products, is subject to fluctuating prices; fluctuations in natural gas prices could adversely affect our results of operations and financial condition.

 

Natural gas is the primary source of energy in most of our production processes. We do not have long-term contracts for natural gas and therefore are subject to market variables and widely fluctuating prices. Consequently, our operating results are strongly linked to the cost of natural gas. As of December 31, 2010, we had fixed price contracts in place for approximately 63.0 percent of our estimated 2011 natural gas needs with respect to our North American manufacturing facilities and approximately 22.0 percent of our estimated 2011 natural gas needs with respect to our International manufacturing facilities. For the years ended December 31, 2010 and 2009, we spent $47.3 million and $53.4 million, respectively, on natural gas. We have no way of predicting to what extent natural gas prices will rise in the future. To the extent that we are not able to offset increases in natural gas prices, such as by passing along the cost to our customers, these increases could adversely impact our margins and operating performance.

 

If our investments in new technology and other capital expenditures do not yield expected returns, our results of operations could be reduced.

 

The manufacture of our tableware products involves the use of automated processes and technologies. We designed much of our glass tableware production machinery internally and have continued to develop and refine this equipment to incorporate advancements in technology. We will continue to invest in equipment and make other capital expenditures to further improve our production efficiency and reduce our cost profile. To the extent that these investments do not generate targeted levels of returns in terms of efficiency or improved cost profile, our financial condition and results of operations could be adversely affected.

 

Our failure to protect our intellectual property or prevail in any intellectual property litigation could materially and adversely affect our competitive position, reduce revenue or otherwise harm our business.

 

Our success depends in part on our ability to protect our intellectual property rights. We rely on a combination of patent, trademark, copyright and trade secret laws, licenses, confidentiality and other agreements to protect our intellectual property rights. However, this protection may not be fully adequate. Our intellectual property rights may be challenged or invalidated, an infringement suit by us against a third party may not be successful and/or third parties could adopt trademarks similar to our own. In particular, third parties could design around or copy our proprietary furnace, manufacturing and mold technologies, which are important contributors to our competitive position in the glass tableware industry. We may be particularly susceptible to these challenges in countries where protection of intellectual property is not strong. In addition, we may be accused of infringing or violating the intellectual property rights of third parties. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Our failure to protect our intellectual property or prevail in any intellectual property litigation could materially and adversely affect our competitive position, reduce revenue or otherwise harm our business.

 

Devaluation or depreciation of, or governmental conversion controls over, the foreign currencies in which we operate could affect our ability to convert the earnings of our foreign subsidiaries into U.S. dollars.

 

Major devaluation or depreciation of the Mexican peso could result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Crisa’s Mexican peso earnings into U.S. dollars and other currencies upon which we will rely in part to satisfy our debt obligations. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or

entities to convert pesos into U.S. dollars or to transfer other currencies out of Mexico, the government could institute restrictive exchange rate policies in the future. Restrictive exchange rate policies could adversely affect our results of operations and financial condition.

 

In addition, the government of China imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in the availability of foreign currency may restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to make payments to us. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the Chinese State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB are to be converted into foreign currencies and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. In the future, the Chinese government could institute restrictive exchange rate policies for current account transactions. These policies could adversely affect our results of operations and financial condition.

 

Payment of severance or retirement benefits earlier than anticipated could strain our cash flow.

 

Certain members of our senior management have employment and change in control agreements that provide for substantial severance payments and retirement benefits. We are required to fund a certain portion of these payments according to a predetermined schedule, but some of our nonqualified obligations are currently unfunded. Should several of these senior managers leave our employ under circumstances entitling them to severance or retirement benefits, or become disabled or die, before we have funded these payments, the need to pay these severance or retirement benefits ahead of their anticipated schedule could put a strain on our cash flow.

 

We are involved in litigation from time to time in the ordinary course of business.

 

We are involved in various routine legal proceedings arising in the ordinary course of our business. We do not consider any pending legal proceeding as material. However, we could be adversely affected by legal proceedings in the future, including products liability claims related to the products we manufacture.

 

Our products are subject to various health and safety requirements and may be subject to new health and safety requirements in the future; these requirements could have a material adverse effect on our operations.

 

Our glass tableware, ceramic dinnerware, metal flatware, hollowware and serveware and plastic products are subject to certain legal requirements relating to health and safety. These legal requirements frequently change and vary among jurisdictions. Compliance with these requirements, or the failure to comply with these requirements, may have a material adverse effect on our operations. If any of our products becomes subject to new regulations, or if any of our products becomes specifically regulated by additional governmental or other regulatory entities, the cost of compliance could be material. For example, the U.S. Consumer Product Safety Commission, or CPSC, regulates many consumer products, including glass tableware products that are externally decorated with certain ceramic enamels. New regulations or policies by the CPSC could require us to change our manufacturing processes, which could materially raise our manufacturing costs. In addition, such new regulations could reduce sales of our glass tableware products. Furthermore, a significant order or judgment against us by any such governmental or regulatory entity relating to health or safety matters, or the imposition of a significant fine relating to such matters, may have a material adverse effect on our operations.

 

 

None.

 

At December 31, 2010 the Company had the following square footage at plants and warehouse/distribution facilities:

 

 

 

 

These facilities have an aggregate floor space of 7.8 million square feet. We own approximately 63 percent and lease approximately 37 percent of this floor space. In addition to the facilities listed above, our headquarters (Toledo, Ohio), some warehouses (various locations), sales offices (various locations), showrooms (in Toledo, Ohio and New York) and various outlet stores are located in leased space. We also utilize various warehouses as needed on a month-to-month basis.

 

All of our principal facilities are currently being utilized for their intended purpose. In the opinion of management, all of these facilities are well maintained and adequate for our planned operational requirements.

 

 

We are involved in various routine legal proceedings arising in the ordinary course of our business. No pending legal proceeding is deemed to be material.

 

 

 

Common Stock and Dividends

 

Libbey Inc. common stock is listed for trading on the NYSE Amex exchange under the symbol LBY. The price range for the Company’s common stock as reported by the NYSE Amex exchange and dividends declared for our common stock were as follows:

 

 

The closing market price of our common stock on March 1, 2011 was $16.82 per share.

 

On March 1, 2011, there were 900 registered common shareholders of record. We paid a regular quarterly cash dividend from the time of Initial Public Offering in 1993 until we suspended the dividend in February 2009. The declaration of future dividends is within the discretion of the Board of Directors of Libbey and depends upon, among other things, business conditions, earnings and the financial condition of Libbey.

 

Comparison of Cumulative Total Returns

 

The graph below compares the total stockholder return on our common stock to the cumulative total return for the Russell 2000 Index (“Russell 2000”), a small-cap index, and the Standard & Poor’s Housewares & Specialties Index, a capitalization-weighted index that measures the performance of the housewares sector of the Standard & Poor’s SmallCap Index (“Housewares-Small”). We selected the Housewares — Small index because there are no other glass tableware manufacturers with stock that is publicly traded in the U.S. The indices reflect the year-end market value of an investment in the stock of each company in the index, including additional shares assumed to have been acquired with cash dividends, if any.

The graph assumes a $100 investment in our common stock on January 1, 2004, and also assumes investments of $100 in each of the Russell 2000, and the Housewares-Small index, respectively, on January 1, 2004. The value of these investments on December 31 of each year from 2005 through 2010 is shown in the table below the graph.

 

TOTAL SHAREHOLDER RETURN

 

 

 

Equity Compensation Plan Information

 

Following are the number of securities and weighted average exercise price thereof under our compensation plans approved and not approved by security holders as of December 31, 2010:

 

 

Issuer Purchases of Equity Securities

 

Following is a summary of the 2010 fourth quarter activity in our share repurchase program:

 

 

 

 

 

Information with respect to Selected Financial Data is incorporated by reference to our 2010 Annual Report to Shareholders.

 

 

FORWARD LOOKING STATEMENTS

 

This document and supporting schedules contain statements that are not historical facts and constitute projections, forecasts or forward-looking statements. For a description of the forward-looking statements and risk factors that may affect our performance, see the “Risk Factors” section above.

 

Additionally, for an understanding of the significant factors that influenced our performance during the past three years, the following should be read in conjunction with the audited Consolidated Financial Statements and Notes.

OVERVIEW

 

GENERAL

 

Headquartered in Toledo, Ohio, Libbey has the largest manufacturing, distribution and service network among glass tableware manufacturers in the Western Hemisphere and is one of the largest glass tableware manufacturers in the world. Our product portfolio consists of an extensive line of high quality, machine-made glass tableware, including casual glass beverageware, in addition to ceramic dinnerware, metalware and plasticware. We sell our products to foodservice, retail, and business-to-business customers in over 100 countries, with our sales to customers within North America accounting for approximately 75 percent of our total sales. We are the largest manufacturer and marketer of casual glass beverageware in North America for the foodservice and retail channels. Additionally, we believe we are a leading manufacturer and marketer of casual glass beverageware in Europe and have a growing presence in Asia.

 

We report our results of operations in the following three segments:

 

 

EXECUTIVE OVERVIEW

 

Throughout 2010, economic market conditions continued to be very fragile, with unemployment in the United Sates remaining at high levels and sovereign debt issues confronting select countries. Despite this economy, Libbey net sales grew 6.8 percent to $799.8 million in 2010 compared to net sales of $748.6 million in 2009. Our income from operations for 2010 was $68.8 million, as compared to $36.6 million for 2009. The $32.2 million increase in income from operations was primarily driven by the following factors:

 

 

Our Adjusted EBITDA for 2010 was $115.0 million, compared to $90.1 million during 2009. This resulted in an Adjusted EBITDA margin of 14.4 percent, which was the highest Adjusted EBITDA margin since 2003. We also had record Free Cash Flow generation of $49.4 million in the fourth quarter of 2010.

 

In addition, in 2010 we completed a two-step debt restructuring, which enhanced our capital structure and liquidity position. As a result we reduced our weighted average cost of capital and extended loan maturities. See note 6 to our Consolidated Financial Statements for further details. The two-step restructuring consisted of the following:

 

 

In addition to the completion of the two-step debt restructuring, in late 2010 we paid down approximately $10.0 million of debt in China and Portugal. As of December 31, 2010, we had nothing drawn on our ABL Facility. Further, in February 2011, we announced plans to redeem $40.0 million of our $400.0 million Senior Secured Notes.

 

In addition to making significant progress in addressing our debt, we achieved a number of sales highlights in 2010. Among them are the following:

 

 

RESULTS OF OPERATIONS

 

The following table presents key results of our operations for the years 2010, 2009 and 2008:

 

 

NM = Not meaningful

 

 

Discussion of 2010 vs. 2009 Results of Operations

 

Net Sales

 

In 2010, net sales increased 6.8 percent to $799.8 million from $748.6 million in 2009. The increase in net sales was attributable to increased sales in our North American Glass and International business segments, partially offset by sales decreasing slightly in our North American Other business segment. Within North American Glass, where sales increased 7.7 percent to $562.7 million in 2010 from $522.6 million in 2009, Crisa sales increased 21.9 percent, including a favorable $7.0 million or 3.9 percent impact from movement in the value of the Mexican peso. Sales to U.S. and Canadian retail glassware customers increased 6.2 percent, while sales to U.S. and Canadian foodservice customers were essentially flat when compared to the previous year. Within North American Other, sales declined 1.2 percent to $86.0 million in 2010 from $87.0 million in 2009, as sales declined by 14.1 percent at Syracuse China (primarily due to the closure of the Syracuse China facility in April 2009 and the decision to reduce the Syracuse^® China product offering), offset by a 6.4 percent increase in World Tableware sales. Sales to Traex customers were even with the prior year. International net sales increased 12.2 percent to $162.7 million in 2010 from $145.0 million in 2009 in spite of an $8.1 million unfavorable currency exchange impact in Europe. Excluding the currency exchange impact, sales increased 17.5 percent at Royal Leerdam and 18.6 percent at Crisal. In addition, customer sales increased 29.4 percent from our facility in China.

 

Gross Profit

 

Gross profit increased in 2010 by $34.9 million, or 26.2 percent, to $168.0 million in 2010, compared to $133.1 million in 2009. Gross profit as a percentage of net sales increased to 21.0 percent in 2010, compared to 17.8 percent in 2009. The primary contributor to the increase in gross profit and gross profit margin was an increase in sales, excluding the effects of currency of $51.4 million (see discussion of Net Sales above). In addition, an increase in production activity, net of volume related production and sales cost increases of $10.8 million, excluding the impact of currency, contributed to the increase in EBIT. Favorable currency impact contributed $8.8 million to the margin, primarily from the Mexican peso. These improvements were offset by a $33.0 million increase in costs, primarily driven by labor and benefits, packaging costs, freight and repair costs, offset by natural gas savings. Gross profit was also unfavorably impacted by a $4.0 million variance related to last-in first out (LIFO) and other inventory adjustments which occurred in 2009 and did not repeat in 2010.

Income (loss) from operations

 

Income from operations increased 88.0 percent, to $68.8 million in 2010, compared to $36.6 million in 2009. Income from operations as a percentage of net sales increased to 8.6 percent in 2010, compared to 4.9 percent in 2009. Contributing to the increase in income from operations and income from operations margin are the improved gross profit and gross profit margin (discussed above) offset by a $2.5 million increase in selling, general and administrative expenses. The selling, general and administrative expense increase was caused by a $1.4 million increase in labor and benefit costs (net of a $5.6 million reduction in bonus expense), $1.0 million in fees related to the secondary stock offering in 2010, a $1.5 million increase in legal and professional fees, a $0.6 million increase in research and development expenses and a $0.7 million increase in supplies and selling and marketing expenses partially offset by a $3.2 million pension settlement charge in 2009 that did not repeat in 2010.

 

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

 

Earnings before interest and income taxes increased by $86.2 million, or 211.9 percent, to $126.8 million in 2010 from $40.7 million in 2009. EBIT as a percentage of net sales increased to 15.9 percent in 2010, compared to 5.4 percent in 2009. The improved EBIT was mostly a result of a $58.3 million gain on redemption of debt in 2010, along with the improvement in income from operations discussed above, offset by a decrease of $4.3 million in other (expense) income primarily related to a reduction in foreign exchange gains versus the prior year.

 

Earnings before interest, taxes, depreciation and amortization (EBITDA)

 

EBITDA increased by $84.1 million, or 100.3 percent, to $168.0 million in 2010 from $83.8 million in 2009. As a percentage of net sales, EBITDA was 21.0 percent in 2010, compared to 11.2 percent in 2009. The key contributors to the increase in EBITDA were those factors discussed above under “Earnings (loss) before interest and income taxes (EBIT)”, however, it is not impacted by the benefit of a $2.1 million decrease in depreciation and amortization expense.

 

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)

 

Adjusted EBITDA increased by $24.8 million, or 27.5 percent, to $115.0 million in 2010 from $90.1 million in 2009. As a percentage of net sales, Adjusted EBITDA was 14.4 percent in 2010, compared to 12.0 percent in 2009. The key contributors to the increase in Adjusted EBITDA were those factors discussed above under Earnings before interest, taxes, depreciation and amortization (EBITDA). Impacting Adjusted EBITDA for 2010 were the exclusion of a $58.3 million gain on redemption of debt and a $0.9 million insurance claim recovery in 2010, a $1.0 million charge for fees related to a secondary equity offering in 2010, a $2.7 million fixed asset write down of after-processing equipment in our North American Glass segment in 2010, a $1.3 million charge to write off decorating assets at our Shreveport, Louisiana facility in 2010 and a $1.2 million facility closure charge in 2010 (see note 7 to the Consolidated Financial Statements). Impacting Adjusted EBITDA in 2009 were pension settlement charges of $3.2 million and facility closure charges of $3.8 million less $0.7 million of accelerated depreciation included in those charges in 2009 (see note 7 to the Consolidated Financial Statements).

 

Net income (loss) and diluted net income (loss) per share

 

We reported net income of $70.1 million, or $3.51 per diluted share, in 2010, compared to a net loss of $(28.8) million, or loss of $(1.90) per diluted share, in 2009. Net income (loss) as a percentage of net sales was income of 8.8 percent of sales in 2010, compared to a net loss of (3.8) percent of sales in 2009. The improvement in net income (loss) and diluted net income (loss) per share is generally due to the factors discussed in EBIT above, together with a $21.5 million reduction in interest expense offset by an $8.8 million increase in provision for income taxes. Interest expense for 2009 included $2.7 million of finance fees related to the October 2009 debt exchange transaction. Excluding these finance fees, interest expense decreased $18.8 million as a result of lower debt levels and the impact of the debt refinancing completed in February 2010. The effective tax rate was a 14.2 percent expense for 2010 compared to a negative 10.6 percent for 2009, primarily due to changes in valuation allowances, changes in the mix of earnings with differing statutory rates, changes in tax laws and tax planning structures and changes in accruals related to uncertain tax positions.

Discussion of 2009 vs. 2008 Results of Operations

 

Net Sales

 

In 2009, net sales decreased 7.6 percent to $748.6 million from $810.2 million in 2008. The decrease in net sales was attributable to reduced sales within all three of our business segments. Within North American Glass, where sales declined 5.7 percent overall, shipments to U.S. and Canadian foodservice customers declined over 10.0 percent and net sales of Crisa product declined 14.7 percent. Nearly half of the sales decline at Crisa was due to an unfavorable currency impact from the Mexican peso. Partially offsetting these decreases in net sales was an increase of more than 7.0 percent in shipments to U.S. and Canadian retail glassware customers. Within North American Other, sales declined 21.6 percent to $87.0 million in 2009 from $111.0 million in 2008, as shipments declined by 37.2 percent at Syracuse China (primarily due to the closure of the Syracuse China facility in April 2009 and the decision to reduce the Syracuse^® China product offering), 11.3 percent at World Tableware and 24.2 percent at Traex. International net sales decreased 5.5 percent primarily due to an unfavorable currency exchange impact in Europe. Excluding currency exchange impact, a decline in shipments of more than 2.5 percent at Royal Leerdam was more than offset by an 11.7 percent increase in shipments from our facility in China.

 

Gross Profit

 

Gross profit increased in 2009 by $23.8 million, or 21.8 percent, compared to 2008. Gross profit as a percentage of net sales increased to 17.8 percent in 2009, compared to 13.5 percent in 2008. Contributing to the increase in gross profit and gross profit margin was a decrease of $16.7 million in special charges, to $2.0 million in 2009 from $18.7 million in 2008 (see note 7 to the Consolidated Financial Statements). The 2009 amounts are primarily attributable to the closing of our Syracuse China facility. Included in the 2008 amount were $14.0 million of special charges related to the announced closing of our Syracuse China manufacturing facility, $0.2 million related to the announced closure of our Mira Loma distribution center and $4.5 million related to fixed asset impairment charges in our North American Glass segment. Excluding the impact from special charges and currency, 2009 gross profit benefited from an improvement of $12.1 million due to lower manufacturing costs, primarily labor and benefits, natural gas, electricity and cartons, offset by reduced production activity, a reduction of $23.6 million in distribution costs and a reduction of $1.1 million in depreciation expense. The reduction in distribution costs was the result of lower net sales and lower inventory levels. These improvements were partially offset by a $20.4 million decrease due to an unfavorable mix and lower level of net sales, and a $10.6 million negative currency impact.

 

Income (loss) from operations

 

Income from operations was $36.6 million in 2009, compared to a loss from operations of $(5.5) million in 2008. Income from operations as a percentage of net sales increased to 4.9 percent in 2009, compared to (0.7) percent in 2008. Contributing to the increase in income from operations and income from operations margin are the improved gross profit and gross profit margin (discussed above), a decrease of $24.8 million in special charges partially offset by a $6.4 million increase in selling, general and administrative expenses. The reduction in special charges related to the closures of our Syracuse China manufacturing facility ($12.2 million), our Mira Loma distribution center ($0.7 million) and the impairment charge on goodwill and other intangible assets within our International segment ($11.9 million) which occurred in 2008 and a similar charge did not occur in 2009 (see note 7 to the Consolidated Financial Statements). The $6.4 million increase in selling, general and administrative expenses was caused by a $12.8 million increase in expense for our annual incentive compensation plan, a $3.2 million pension settlement charge arising from lump sum payments to retirees during 2009 and a one-time 2008 accrual reversal of $1.3 million related to favorable rulings in connection with an outstanding dispute regarding a warehouse lease in Mexico. These increases in selling, general and administrative expenses were offset by a favorable currency impact of $2.8 million and decreases of $4.3 million and $4.2 million in labor and benefit costs and selling and marketing costs, respectively.

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

 

Earnings before interest and income taxes increased by $45.1 million, to earnings of $40.7 million in 2009 from a loss of $(4.4) million in 2008. EBIT as a percentage of net sales increased to 5.4 percent in 2009, compared to (0.5) percent in 2008. The improved EBIT was mostly a result of the improvement in income from operations (discussed above), and an increase of $2.9 million in other (expense) income primarily related to a favorable swing in foreign currency translation gains versus the prior year.

 

Earnings before interest, taxes, depreciation and amortization (EBITDA)

 

EBITDA increased by $43.8 million, or 109.6 percent, to $83.8 million in 2009 from $40.0 million in 2008. As a percentage of net sales, EBITDA was 11.2 percent in 2009, compared to 4.9 percent in 2008. The key contributors to the increase in EBITDA were those factors discussed above under “Earnings (loss) before interest and income taxes (EBIT)”, however, it is not impacted by the benefit of a $1.3 million decrease in depreciation and amortization expense.

 

Adjusted Earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)

 

Adjusted EBITDA increased by $4.9 million, or 5.8 percent, to $90.1 million in 2009 from $85.2 million in 2008. As a percentage of net sales, Adjusted EBITDA was 12.0 percent in 2009, compared to 10.5 percent in 2008. Excluding the impact of currency, the key contributors in the increase in Adjusted EBIDTA were a $23.6 million reduction in distribution costs, a $12.1 million benefit from lower manufacturing costs offset by reduced production activity and an increase of $2.9 million in other (expense) income primarily related to a favorable swing in foreign currency translation gains versus the prior year. These improvements were offset by a $20.4 million impact from unfavorable mix and lower level of net sales, a $6.0 million increase in selling, general and administrative expenses (see Income (loss) from operations above for details) and $7.8 million of unfavorable impact from currency movement.

 

Net loss and diluted loss per share

 

We reported a net loss of $(28.8) million, or loss of $(1.90) per diluted share, in 2009, compared to a net loss of $(80.5) million, or loss of $(5.48) per diluted share, in 2008. The net loss as a percentage of net sales was (3.8) percent in 2009, compared to (9.9) percent in 2008. The reduction in net loss was driven primarily by the items discussed above under “Earnings (loss) before interest and income taxes (EBIT),” in addition to a $3.0 million decrease in interest expense and a $3.6 million decrease in income tax provision. Interest expense for 2009 included $2.7 million of finance fees related to the October 2009 debt exchange transaction. (See note 6 to the Consolidated Financial Statements for a further discussion of this transaction). Excluding these finance fees, interest expense declined by $5.7 million during the year as the result of lower variable rates and lower levels of debt carried in 2009. The effective tax rate was a negative 10.6 percent for 2009, compared to a negative 8.5 percent for 2008. The rate was influenced by valuation allowances, changes in the mix of earnings with differing statutory rates, changes in tax laws and tax planning structures and changes in accruals related to uncertain tax positions.

SEGMENT RESULTS OF OPERATIONS

 

The following table summarizes the results of operations for our three segments described as follows:

 

 

 

NM = Not meaningful

 

Discussion of 2010 vs. 2009 Segment Results of Operations

 

North American Glass

 

Net sales increased 7.7 percent to $562.7 million in 2010 from $522.6 million in 2009. The increase in net sales was mainly attributable to a 21.9 percent increase in Crisa sales (including a favorable currency impact of

$7.0 million or 3.9 percent) and a 6.2 percent increase in sales to U.S. and Canadian retail glassware customers. Sales to U.S. and Canadian foodservice customers were essentially flat when compared to the previous year.

 

EBIT increased by $75.3 million to $109.1 million in 2010, compared to $33.7 million in 2009. EBIT as a percentage of net sales increased to 19.4 percent in 2010, compared to 6.5 percent in 2009. The key contributors to the improvement in EBIT were a $58.3 million gain on redemption of debt in 2010 and an increase in sales excluding the effects of currency of $33.1 million (see discussion of Net Sales above). In addition, an increase in production activity, net of volume related production and sales cost increases of $7.8 million, excluding the impact of currency, contributed to the increase in EBIT. Favorable currency impact from the Mexican peso contributed $9.4 million. These improvements were offset by a $21.9 million increase in costs of goods sold, primarily driven by labor and benefits, packaging costs, freight and repair costs, offset by natural gas savings. EBIT was also unfavorably impacted by a $4.0 million variance related to accounting gains for LIFO and other inventory adjustments which occurred in 2009 and did not repeat in 2010. Cost of sales also included a $2.7 million charge for a write-down of certain after-processing equipment and an additional $0.6 million for a write-down of decorating inventory in our Shreveport manufacturing facility (see Note 7 to the Consolidated Financial Statements). Selling, general and administrative costs included a $1.0 million charge for fees related to the secondary offering in 2010, offset by a $3.2 million pension settlement charge in 2009 that did not repeat in 2010. Excluding the impact of these two items, selling, general and administrative expenses increased $3.1 million in 2010 due primarily to a $1.4 million increase in legal and professional fees, a $0.6 million increase in research and development expenses and a $0.7 million increase in selling, marketing and other expenses. Within selling, general and administrative costs, we had a reduction in bonus expense of $6.0 million which was offset by increases in other salary and benefit expenses. Other (expense) income decreased $3.6 million related to an unfavorable swing in foreign currency translation gains versus the prior-year period.

 

North American Other

 

Net sales decreased 1.2 percent to $86.0 million in 2010 from $87.0 million in 2009. The decrease was caused by a 14.1 percent decline in sales to Syracuse China customers related to the closure of the Syracuse China facility in 2009 and the related decision to reduce the Syracuse China product offering, offset by a 6.4 percent increase in sales of World Tableware products. Sales to Traex customers were even with the prior year.

 

EBIT improved by $4.1 million to $13.9 million in 2010 from $9.8 million in 2009. EBIT as a percentage of net sales increased to 16.2 percent in 2010, compared to 11.3 percent in 2009. The key contributors to the improvement in EBIT were an improvement of $5.2 million due to improved sales mix and the April 2009 closure of our Syracuse China production facility (see note 7 to the Consolidated Financial Statements). In addition, we benefited from a decrease of $2.7 million in special charges. These improvements were offset by a $2.5 million increase in costs of purchased finished goods, as products previously manufactured at Syracuse China are now sourced, and a $1.2 million increase in selling, general and administrative expenses.

 

International

 

In 2010, net sales increased 12.2 percent to $162.7 million from $145.0 million in 2009 in spite of an $8.1 million unfavorable currency exchange impact in Europe. Excluding currency exchange impact, sales increased 17.5 percent at Royal Leerdam and 18.6 percent at Crisal. In addition, customer sales increased 29.4 percent from our facility in China.

 

EBIT increased by $6.7 million to income of $3.9 million in 2010 from a loss of $(2.9) million in 2009. EBIT as a percentage of net sales improved to income of 2.4 percent in 2010 compared to a loss of (2.0) percent in 2009. The primary contributor to the increase in EBIT was improved sales of $24.9 million, excluding the impact of currency. Offsetting the increase in sales was an increase in production activity, net of volume related production and sales cost increases of $8.7 million, excluding the impact of currency, $8.8 million in increases costs, primarily driven by labor and benefits, packaging costs, freight and repair costs, and an unfavorable currency impact of $0.6 million.

Discussion of 2009 vs. 2008 Segment Results of Operations

 

North American Glass

 

Net sales declined 5.7 percent to $522.6 million in 2009 from $554.1 million in 2008. Key factors in the reduction in net sales were a 14.7 percent decline in shipments to Crisa’s customers and a 10.7 percent reduction in shipments to U.S. and Canadian foodservice glassware customers. The primary offset to these declines was a 7.3 percent increase in sales from the U.S. and Canadian retail glassware channel. Nearly half of the 14.7 percent reduction attributable to decreased sales of Crisa product was related to an unfavorable currency impact.

 

EBIT increased by $8.2 million to $33.7 million in 2009, compared to $25.5 million in 2008. EBIT as a percentage of net sales increased to 6.5 percent in 2009, compared to 4.6 percent in 2008. The key contributors to the improvement in EBIT were an $11.2 million decline in distribution costs, a $9.3 million reduction due to lower manufacturing costs, primarily labor and benefits, natural gas, electricity and cartons, offset by lower production activity, a $5.3 million reduction in special charges related to a fixed asset impairment charge and the announced closing of our Mira Loma distribution center in 2008 which did not recur in 2009 (see note 7 to the Consolidated Financial Statements), a $2.4 million increase in other (expense) income and a decrease of $1.2 million in depreciation expense. The reduction in distribution costs was the result of lower net sales and lower inventory levels. The increase in other (expense) income was entirely attributable to favorable foreign currency translation gains. These improvements were partially offset by an $11.0 million increase in selling, general & administrative expenses, a $7.9 million impact from lower sales volume and unfavorable sales mix and unfavorable currency impact of $2.3 million. The increase in selling, general & administrative expenses was attributable to increased accruals for incentive compensation payments of $13.2 million, a pension settlement charge of $3.2 million arising from lump sum payments to retirees during 2009 and a one-time 2008 accrual reversal of $1.3 million related to favorable rulings in connection with an outstanding dispute regarding a warehouse lease in Mexico. These increases in selling, general and administrative expenses were offset by decreases of $4.3 million and $2.7 million in labor and benefit costs and selling and marketing costs, respectively.

 

North American Other

 

Net sales decreased 21.6 percent to $87.0 million in 2009 from $111.0 million in 2008. The decline in net sales was felt throughout the segment, with a 37.2 percent reduction in shipments to Syracuse China customers resulting from the closure of the Syracuse China facility in 2009 and the related decision to reduce the Syracuse China product offering, an 11.3 percent reduction in shipments of World Tableware products and a 24.2 percent reduction in shipments of Traex products.

 

EBIT improved by $27.5 million to income of $9.8 million in 2009, compared to a loss of $(17.7) million in 2008. EBIT as a percentage of net sales increased to 11.3 percent in 2009, compared to (15.9) percent in 2008. The key contributors to the improvement in EBIT were a $24.4 million reduction in special charges related to the closing of our Syracuse China facility (see note 7 to the Consolidated Financial Statements), a $10.6 million reduction in distribution costs, a $3.1 million reduction in selling, general and administrative expenses, a $1.1 million decline in depreciation expense, a $0.5 million impact from lower manufacturing costs offset by reduced production activity and a $0.2 million improvement in other (expense) income. The reduction in distribution costs was the result of lower net sales, lower inventory levels and the discontinuation of shipping from the Syracuse China facility. The reduction in selling, general and administrative expense is primarily attributable to reduced selling & marketing expenses. These improvements in EBIT were partially offset by a $12.9 million impact from reduced sales volume.

 

International

 

In 2009, net sales decreased 5.5 percent to $145.0 million from $153.5 million in 2008. The largest factor in the decline in net sales was the unfavorable currency impact from the euro, which caused a 4.7 percent decline in euro-denominated sales. On a constant currency basis, the impact of reduced shipments to Royal Leerdam customers was 2.5 percent, which was offset by an increase of 11.7 percent in shipments to customers of our facility in China, while shipments to Crisal customers were essentially flat when compared to the prior year.

EBIT increased by $9.4 million to a loss of $(2.9) million in 2009 from a loss of $(12.2) million in 2008. EBIT as a percentage of net sales improved to (2.0) percent in 2009, compared to (8.0) percent in 2008. The key contributors to the improvement in EBIT were a reduction of $11.9 million in special charges related to an impairment charge against goodwill and other intangibles in 2008 which did not recur in 2009 (see note 7 to the Consolidated Financial Statements), a $2.3 million favorable impact from lower manufacturing costs, primarily labor and benefits, natural gas, electricity and cartons, offset by reduced production activity, a reduction of $1.8 million in distribution costs, a $0.4 million benefit from sales as improved product mix overcame the reduction in overall sales volume, and an increase of $0.1 million in other (expense) income. Partially offsetting these improvements were an unfavorable currency impact of $5.5 million, an increase of $1.0 million in depreciation expense and a $0.6 million increase in selling, general and administrative expenses.

 

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 December 31, 2010 we had no amounts outstanding under our $110 million ABL Facility, although we had $10.4 million of letters of credit issued under that facility. As a result, we had $65.2 million of unused availability remaining under the ABL Facility at December 31, 2010, as compared to $79.2 million of unused availability at December 31, 2009 under the prior $150 million ABL Facility. In addition, we had $76.3 million of cash on hand at December 31, 2010, compared to $55.1 million of cash on hand at December 31, 2009.

 

On February 8, 2010, we used the $379.8 million of net proceeds of a debt offering of $400.0 million of senior secured notes due 2015, together with cash on hand, to redeem the $80.4 million face amount of New PIK Notes that were outstanding at that date and to repurchase the $306.0 million of floating rate notes due 2011. See note 6 to the Consolidated Financial Statements for more information regarding the proceeds of the debt offering. We also amended and restated our ABL Facility to, among other things, extend the maturity to 2014 and reduce the amount that we can borrow under that facility from $150.0 million to $110.0 million. In addition, on November 30, 2010, we fully paid off our RMB 50.0 million working capital loan due January 2011.

 

As previously announced on February 9, 2011, we intend to redeem, on March 25, 2011, an aggregate principal amount of $40.0 million of our outstanding Senior Secured Notes due 2015.

 

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 amended and restated ABL Facility will provide sufficient cash availability to meet our ongoing liquidity needs.

 

Balance Sheet and Cash flows

 

Cash and Equivalents

 

See the cash flow section below for a discussion of our cash balance.

Working Capital

 

The following table presents working capital components for 2010 and 2009:

 

 

DSO, DIO, DPO and DWC are all calculated using net sales as the denominator and a 365-day calendar year.

 

 

Working capital, defined as net accounts receivable plus net inventories less accounts payable, increased by $10.3 million in 2010, compared to 2009. However, as a percentage of net sales, working capital decreased to 22.6 percent in 2010, compared to 22.8 percent in 2009. This increase in working capital is primarily the result of higher accounts receivable related to higher sales in the final quarter of the year. We also saw an increase in inventories as our production levels increased to provide for optimal customer service during a time of steadily increasing customer demand. The increase in inventories was partially offset by an increase in accounts payable, which is also related to higher production levels. Our DSO also increased 4.5 percent compared to year-end 2009, which is attributable to the 6.8 percent increase in sales over the course of the year. While our inventory levels increased 2.9 percent compared to year-end 2009, we achieved a 3.7 percent reduction in our DIO compared to the prior year.

 

Borrowings

 

On February 8, 2010, we completed the refinancing of substantially all of the existing indebtedness of our wholly-owned subsidiaries Libbey Glass and Libbey Europe B.V. The refinancing included:

 

 

We used the proceeds of the offering of the Senior Secured Notes, together with cash on hand, to fund the repurchase of the floating rate notes, the redemption of the New PIK Notes and to pay certain related fees and expenses. Upon completion of the refinancing, we recorded a gain of $71.7 million related to the redemption of the New PIK Notes. This gain was partially offset by $13.4 million representing a write-off of bank fees, discounts and a call premium on the floating rate notes, resulting in a net gain of $58.3 million as shown on the Consolidated Statements of Operations.

 

The following table presents our total borrowings:

 

 

 

 

We had total borrowings of $450.2 million at December 31, 2010, compared to total borrowings of $446.8 million at December 31, 2009. The $3.4 million increase in borrowings was the result of the debt refinancing completed on February 8, 2010, when we used the proceeds of a $400.0 million debt offering and cash on hand to redeem the New PIK Notes and repurchase the $306.0 million Floating Rate notes. We also amended and restated the credit agreement relating to our ABL facility. See note 6 to the Consolidated Financial Statements for further details.

Of our total borrowings, $138.9 million, or approximately 30.8 percent, was subject to variable interest rates at December 31, 2010. A change of one percentage point in such rates would result in a change in interest expense of approximately $1.4 million on an annual basis.

 

Interest expense in 2009 included a $2.7 million charge for finance fees related to the debt exchange. Also included in interest expense is the amortization of discounts, warrants and other financing fees. Excluding the $2.7 million previously mentioned for 2009, these items amounted to $4.3 million, $4.9 million and $5.0 million for the annual periods ended December 31, 2010, December 31, 2009 and December 31, 2008, respectively.

 

Cash Flow

 

The following table presents key drivers to Free Cash Flow for 2010, 2009 and 2008:

 

 

 

NM — Not Meaningful

 

 

Discussion of 2010 vs. 2009 Cash Flow

 

Our net cash provided by operating activities was $47.7 million in 2010, compared to $102.1 million in 2009, or a decrease of $54.4 million. The major factors impacting cash flow from operating activities were the $98.9 million improvement in net income (loss) offset by $87.7 million of items related to our debt transactions, change in cash flow impact of $51.1 million from working capital related to increased sales and production in 2010 (discussed above), an $11.6 million impact from a decrease in accrued liabilities net of prepaid expenses primarily the result of incentive compensation payments in the first quarter of 2010 and a $2.1 million decrease in non-cash depreciation and amortization that is included in the benefit from improved net income (loss). We also experienced the benefit of lower cash interest payments as a result of lower debt and improved interest rates, offset by higher cash payment of taxes as our income has improved.

 

Net cash used in investing activities was $36.7 million in 2010, compared to $16.7 million in 2009, or an increase of $19.9 million. This change was attributable to an $11.2 million increase in capital spending and payment of an $8.4 million call premium on floating rate notes as part of our debt refinancing.

 

Net cash provided by (used in) financing activities was a source of $10.7 million in 2010, compared to a use of $(43.6) million in 2009, or a swing of $54.3 million. During 2010, our proceeds from the Senior Secured Notes were only partially offset by the repurchase of our floating rate notes, the redemption of the New PIK notes and payment of debt issuance costs. The increase in cash provided by financing activities, along with cash on hand, was used to pay interest on the New PIK notes and the call premium on the floating rate notes.

At December 31, 2010, our cash balance was $76.3 million, an increase of $21.2 million from $55.1 million at December 31, 2009.

 

Free Cash Flow was $48.9 million in 2010, compared to $85.4 million in 2009, or a decrease of $36.6 million. The primary contributors to this increase were the changes in net cash provided by operating activities excluding the payment of interest on the New PIK Notes and the increase in capital spending as discussed above.

 

Discussion of 2009 vs. 2008 Cash Flow

 

Our net cash provided by operating activities was $102.1 million in 2009, compared to net cash used in operating activities of $1.1 million in 2008, or an increase of $103.2 million. The increase is primarily related to improvements in our results of operations, lower cash interest, higher non-cash expenses, a positive cash flow impact of $42.9 million from inventory and $24.9 million from accounts payable, and a 2008 payment of $19.6 million to Vitro related to the 2006 acquisition of Crisa which did not recur in 2009, offset by a negative cash flow impact of $22.9 million from accounts receivable when compared to 2008, and lower uses of cash for pension contributions. The cash generated from these cash flow improvements was utilized to pay down debt and increase our cash balance.

 

Net cash used in investing activities was $16.7 million in 2009, compared to $45.6 million in 2008, or a decrease of $28.9 million. This change was completely attributable to a reduction in capital spending.

 

Net cash (used in) provided by financing activities was a use of $(43.6) million in 2009, compared to a source of $25.8 million in 2008, or a swing of $69.4 million. During 2008, we utilized $28.7 million more of our capacity on the ABL Facility to fund our operations, while we made $34.2 million of repayments on that facility in 2009.

 

Free Cash Flow was $85.4 million in 2009, compared to $(46.6) million in 2008, or an increase of $132.0 million. The primary contributors to this increase were the changes in net cash provided by (used in) operating activities and the decrease in capital spending as discussed above.

 

Derivatives

 

In March 2010, we entered into an Interest Rate Protection Agreement (Rate Agreement) with respect to $100.0 million of debt in order to convert a portion of the Senior Secured Note fixed rate debt into floating rate debt and maintain a capital structure containing appropriate amounts of fixed and floating rate debt. In August 2010, Wells Fargo, the counterparty to the Rate Agreement, called 10 percent of the balance reducing the amount to $90.0 million. The interest rate for our borrowings related to the Rate Agreement at December 31, 2010 was 7.57 percent per year. This Rate Agreement expires on February 15, 2015. Total remaining Senior Secured Notes not covered by the Rate Agreement have a fixed interest rate of 10.0 percent. If the counterparty to this Rate Agreement was to fail to perform, the rate Agreement would no longer provide the desired result. However, we do not anticipate nonperformance by the counterparty. The counterparty was rated AA- as of December 31, 2010, by Standard and Poor’s.

 

The fair market value for the Rate Agreement at December 31, 2010 was a $2.5 million asset. The fair value of the Rate Agreement is based on the market standard methodology of netting the discounted expected future fixed cash receipts and the discounted future variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observed market interest rate forward curves. We do not expect to cancel this agreement and expect it to mature as originally contracted.

 

We also use commodity futures contracts related to forecasted future North American natural gas requirements. The objective of these futures contracts is to limit the fluctuations in prices paid from adverse 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. At December 31, 2010, we had commodity futures contracts for 3,090,000 million British Thermal Units (BTU’s) of natural gas. The fair market value for these contracts at December 31, 2010 was a $(3.2) million liability. We have hedged a portion of our forecasted transactions through June 2012. At December 31, 2009, we had commodity

futures contracts for 3,610,000 million BTU’s of natural gas. On that date, the fair market value of these contracts was a $(5.4) million liability. The counterparties for these derivatives were rated BBB+ or better as of December 31, 2010, by Standard & Poor’s.

 

During December 2008, we announced the planned closure of the Syracuse China facility in early April 2009 (see note 7 to the Consolidated Financial Statements). At the time of the announcement we held natural gas contracts for the Syracuse China facility with a settlement date after March 2009 of 165,000 million British Thermal Units (BTU’s). The closure of this facility rendered the forecasted transactions related to these contracts not probable of occurring. Under FASB ASC Topic 815, Derivatives and Hedging, when the forecasted transactions of a hedging relationship become not probable of occurring, the gains or losses that have been classified in Other Accumulated Comprehensive Loss in prior periods for those contracts affected should be reclassified into earnings. We recognized expense of $0.1 million and $0.2 million for the year ended December 31, 2010 and 2009, respectively, in other (expense) income on the Consolidated Statements of Operations relating to these contracts.

 

We use foreign currency contracts to manage our currency exposure, which arises from transactions denominated in a currency other than U.S. dollar, primarily associated with our Canadian dollar denominated accounts receivable. The fair values of these instruments are determined from market quotes. The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change. As of December 31, 2010, we had currency contracts for $18.7 million Canadian dollars. On that date, the fair market value of these contracts was a $(0.2) million liability.

 

Share Repurchase Program

 

Since mid-1998, we have repurchased 5,125,000 shares for $141.1 million, as authorized by our Board of Directors. As of December 31, 2010, authorization remains for the purchase of an additional 1,000,000 shares. During 2010 and 2009, we did not repurchase any common stock. Our debt agreements significantly restrict our ability to repurchase additional shares.

 

We used a portion of the repurchased common stock to issue shares on the warrants exercised by Merrill Lynch PCG, Inc. in 2010. As of December 31, 2010, all of the repurchased shares have been issued. See notes 5, 6 and 12 to the Consolidated Financial Statements for further discussion.

 

Contractual Obligations

 

The following table presents our existing contractual obligations at December 31, 2010 and related future cash requirements: