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 Securities Exchange Act of 1934.  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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):

 

 

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

 

The aggregate market value (based on the consolidated tape closing price on June 30, 2008) of the voting stock beneficially held by non-affiliates of the registrant was approximately $107,136,156. 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, 2009 was 14,741,087.

 

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 7, 2009 (“Proxy Statement”).

 

Certain information required by Part II of this Form 10-K is incorporated by reference from registrant’s 2008 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 all of our products to the global marketplace in a coordinated fashion. 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 Automátic S.A. (Crisal), we manufacture glass tableware in Portugal for our worldwide customer base. We also market ceramic dinnerware under the Syracuse^® China brand name through our subsidiary Syracuse China. Through our 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. 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. We have a state-of-the-art glass tableware manufacturing facility in China that has been operational since the first quarter of 2007. See note 20 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.

 

Growth Strategy

 

Our vision is to be the premier provider of tabletop glassware and related products worldwide. To achieve this vision, we have a growth strategy that emphasizes internal growth as well as growth in low-cost countries through acquired businesses and green meadow facilities. Having completed the acquisition of Crisa in 2006 and

manufacturing at our glass tableware manufacturing facility in China in 2007, our focus for 2008 was on internal growth and improving our liquidity and capital structure.

 

We continue to focus on our strong brand recognition and identity. We understand that our customers are key to our success. Therefore, we continue to assist our customers by providing new product development and improved service and support. New product development continues to be an essential competency of the Company, creating excitement for our customers in all trade areas, around the world. Libbey introduced over 250 distinct new shapes worldwide in 2008, coupled with many additional sizes, decorations, color variations and packaging alternatives for our discriminating customers. In addition, our expanded manufacturing platform in Mexico, Portugal and China provides a cost-competitive source of glass tableware, enabling us to grow our tableware business in North American and International markets, including in Asia-Pacific markets, where we expect to continue to grow.

 

Products

 

Our tableware products consist of glass tableware, 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 products include blender jars, washing machine windows, meter covers and other glass products sold principally to original equipment manufacturers. 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. Through our Traex subsidiary, we sell a wide range of plastic products. These include warewashing and storage racks, trays, dispensers and organizers for 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 U.S. and Canada 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 U.S. and Canada. In the retail market, we sell to mass merchants, department stores, retail distributors, national retail chains and specialty housewares stores. In addition, our business-to-business market 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 and approximately 150 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

 

Approximately 70 percent of our sales are to customers located in North America, and 30 percent of our sales are to customers located outside of North America. For segment information for the last three fiscal years, see note 20 to the Consolidated Financial Statements. 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.

We also have a marketing staff located at our corporate headquarters in Toledo, Ohio, as well as in Mexico, 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 Crisa-supplied products in Laredo, Texas; and for our World Tableware and Traex products in West Chicago, Illinois. Our Syracuse China products will begin moving through the West Chicago distribution center throughout 2009. We also operate a distribution center for many of our products at Gorinchem, in the Netherlands. The glass tableware manufacturing and distribution centers are strategically located (geographically) 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 markets, 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 market. Syracuse China, World Tableware and Traex are recognized as long-established suppliers of high-quality ceramic dinnerware, metal flatware, hollowware and serveware, and plastic items, respectively. They are among the leading suppliers of their respective product categories to foodservice end users. The 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 market are national and international mass merchants. In recent years, we have been able to increase our retail sales by increasing our sales to specialty housewares stores and value-oriented retailers. This year, we were recognized for increasing our overall U.S. market share in the casual glass beverageware market to over 40%. Royal Leerdam and Crisa sell to similar retail clients 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 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, floral applications and blender jars, as well as washing machine windows and meter covers. 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 charges, tends to be stronger in the second and fourth quarters and weaker in the first and third quarters of each year. In addition, our cash flow from operations tends to be stronger in the second half of the year and weaker in the first half of the year due to seasonal working capital needs.

 

Backlog

 

As of December 31, 2008, our backlog was approximately $31.1 million, compared to approximately $41.4 million at December 31, 2007. The decrease was the result of the significant de-stocking by our distributors that took place in the fourth quarter of 2008 as well as the Company’s ability to turn incoming orders at a faster pace

given the overall slower business conditions we experienced in the fourth quarter. 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 two non-glass facilities in the USA, including a plastics plant in Dane, Wisconsin and a ceramic dinnerware plant in Syracuse, New York. The Syracuse manufacturing plant will cease production in April 2009. 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 continue to be adequate for our needs in the foreseeable future, but we continue to invest in ways to further improve our production efficiency 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 also produced through the forming of raw materials into the desired product shape and is either manufactured at our Syracuse, New York, production facility (through April, 2009) or imported primarily from China and Bangladesh. We source all metal flatware and metal hollowware through our World Tableware subsidiary, primarily from China. 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 Taiwan and China.

 

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, clay, 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 a primary source of energy in most of our production processes, and 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 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 $1.7 million in 2008, $1.5 million in 2007, and $2.3 million in 2006. 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^® 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, and delivery time.

 

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. We also may be subject to proposed laws and governmental regulations as they become finalized. 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. (Fifty-nine companies were named in the complaint as potentially responsible parties.) In the lawsuit, which was filed in the United States District Court for the Northern District of Ohio, the Board of Commissioners sought to recover contribution for past and future costs incurred by the County in response to the release or threatened release of hazardous substances at the King Road landfill formerly operated and closed by the County. The Board of Commissioners dismissed the lawsuit without prejudice in October 2000. At the time of the dismissal, the parties to the lawsuit anticipated that the Board of Commissioners would re-file the lawsuit after obtaining more information as to the appropriate environmental remedy. As of this date, it does not appear that re-filing of the lawsuit is imminent. In view of the uncertainty as to re-filing of the suit, the numerous defenses that may be available against the County on the merits of its claim for contribution, the uncertainty as to the environmental remedy, and the uncertainty as to the number of potentially responsible parties, it currently is not possible to quantify any exposure that Libbey may have with respect to the King Road landfill.

 

Subsequent to June 24, 1993, we have been named a potentially responsible party at four other sites. In each case, the claims have been settled for immaterial amounts. We do not anticipate that we will be required to pay any further sums with respect to these sites unless unusual and unanticipated contingencies occur.

 

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 (DEC) entered into an Order on Consent effective November 1, 1994, that required Pfaltzgraff to prepare a Remedial Investigation and Feasibility Study (RI/FS) to develop a remedial action plan for the site (which includes among other items a landfill and wastewater and sludge ponds and adjacent wetlands located on the property purchased by Syracuse China Company) and to remediate the site. Although Syracuse China Company was not a party to the Order on Consent, as part of the Asset Purchase Agreement with The Pfaltzgraff Co. Syracuse China Company agreed to share a part of the remediation and related expense up to the lesser of 50 percent of such costs or $1,350,000. Construction of the approved remedy began in 2000 and was substantially completed in 2003. Accordingly, Syracuse China Company’s obligation with respect to the associated costs has been satisfied.

 

In addition, Syracuse China Company 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 a superfund site. We believe that any contamination of the sub-site was caused by and will be remediated by other parties at no

cost to Syracuse China Company. Those other parties have acquired ownership of the sub-site, and their acquisition of the sub-site should end any responsibility of Syracuse China with respect to the sub-site. We believe that, even if Syracuse China Company were deemed to be responsible for any expense in connection with the contamination of the sub-site, it is likely the expense would be shared with Pfaltzgraff pursuant to the Asset Purchase Agreement.

 

By letter dated October 31, 2008, the DEC and United States Environmental Protection Agency (EPA) made a demand upon Syracuse China Company 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. The numerous recipients of the demand are in the process of reviewing information provided by DEC and EPA to substantiate the demand. At this time it is not certain that the operations on Syracuse China’s Court Street property had any connection with the problems at this Superfund site. There is an indemnification agreement with The Pfaltzgraff Co. that contemplates that the parties will share any costs for off-premise liability up to an aggregate of $7,500,000. The Company has no reason to believe that the indemnification would not be honored if it became necessary for the Company to draw upon that indemnification.

 

In connection with the closure of our City of Industry, California, glassware manufacturing facility, on December 30, 2004, we sold the property on which the facility was located to an entity affiliated with Sares-Regis Group, a large real estate development and investment firm. Pursuant to the purchase agreement, the buyer leased the property back to us in order to enable us to cease operations, to relocate equipment to our other glassware manufacturing facilities, to demolish the improvements on the property and to remediate certain environmental conditions affecting the property. All demolition and required remediation were completed by December 31, 2005, and the lease was terminated on that date. We have agreed to indemnify the buyer for hazardous substances located on, in, or under, or migrating from, the property prior to December 31, 2005. We do not expect to incur any significant future losses related to this site.

 

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 believe that our share of the remediation costs at the various sites, 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, will not be material to us. There can be no assurance, however, that our future expenditures in such regard 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.

 

Capital expenditures for property, plant and equipment for environmental control activities were not material during 2008. 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 are expected to have a material effect on our products or operations.

 

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 7,306 persons at December 31, 2008. Approximately 60 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. 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, 2010. 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. Royal Leerdam’s collective bargaining agreement with its unionized employees expires on July 1, 2009.

 

 

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.

 

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 and prevent us from fulfilling our obligations.

 

We have a high degree of financial leverage. As of December 31, 2008, we had $550.3 million of debt outstanding, net of unamortized discounts and warrants, of which approximately $34.5 million consisted of debt secured by a first-priority lien on our assets and $450.3 million consisted of the Senior Secured Notes, which are secured by a second-priority lien on our collateral, and the PIK Notes, which are secured by a third-priority lien on our collateral. Our ABL Facility provides for borrowings up to $150.0 million by Libbey Glass and Libbey Europe B.V. (a non-guarantor subsidiary), of which, as of December 31, 2008, we had borrowed $34.5 million, with another $8.4 million of availability being used for outstanding letters of credit. As a result of borrowing base limitations, an additional $44.6 million was immediately available for borrowing. We have a loan (“RMB Loan Contract”) in the amount of RMB 250 million (approximately $36.7 million) from China Construction Bank Corporation Langfang Economic Development Area Sub-Branch (“CCBC”). We used the proceeds of the RMB Loan Contract to finance the construction of our greenfield facility in China. As of December 31, 2008, we had borrowed the entire amount available under that line of credit. We also have a loan in the amount of RMB 50 million (approximately $7.3 million) from CCBC to finance the working capital needs of our China facility (“RMB Working Capital Loan”). As of December 31, 2008, we had borrowed the entire amount available under that line of credit. In January 2007, we entered into an 11 million euro loan (approximately $15.5 million) with Banco Espirito Santo, S.A. (“BES Euro Line”). As of December 31, 2008, we had borrowed the entire amount available under that line of credit. Our ABL Facility, the indenture governing the Senior Secured Notes and the indenture governing the PIK Notes require us to comply with certain covenants, including limits on additional indebtedness, certain business activities and investments and, under certain circumstances in the case of our ABL Facility, the maintenance of financial ratios. See “Management’s Discussion and Analysis; Capital Resources and Liquidity — Borrowings” below. We may 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 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, the indenture governing the Senior Secured Notes and the indenture governing the PIK Notes contain restrictive covenants that 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 indebtedness.

 

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.

 

Slowdowns in the retail, travel, restaurant and bar, or entertainment industries, such as those caused by general economic downturns, terrorism, 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, 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 events of September 11, 2001 and the global economic recession of 2008, particularly in the fourth quarter.

 

Recent volatility in financial markets and the deterioration of national and global economic conditions could materially 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 of 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.

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

 

We have $192.9 million of goodwill and intangible assets recorded on the Consolidated Balance Sheets as of December 31, 2008. We are required to periodically determine if our goodwill or intangible assets have become impaired, in which case we would write down the impaired portion of these assets. We recorded a charge of $11.9 million in 2008 to write down a portion of our goodwill and intangible assets. If we were required to write down all or a significant portion of our goodwill or intangible assets, our net earnings and net worth could be materially adversely affected.

 

We face intense competition and competitive pressures that 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, and delivery time. 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, tableware made of other materials such as plastics competes with glassware.

 

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 may also 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 programs 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, and 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.

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, reducing and eventually phasing out all forms of export subsidies and substantially reducing trade-distorting domestic support. The current trade-weighted tariff rate applicable to glass tableware products that are imported into the U.S. and are of the type we manufacture in North America is approximately 18.4 percent. However, any negative changes to international agreements that lower duties or improve access to U.S. markets for our competitors, particularly changes arising out of the World Trade Organization’s Doha round of negotiations (although none are expected in 2009), 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.

 

We may not be able to effectively integrate future businesses we acquire.

 

Any future acquisitions are subject to various risks and uncertainties, including:

 

 

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

 

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

 

Our strategy contemplates significant growth in international markets in which we have significantly less experience than we have in our domestic operations. 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.

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 are therefore 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, 2008, we had forward contracts in place to hedge approximately 76 percent of our estimated 2009 natural gas needs with respect to our North American manufacturing facilities and approximately 44 percent of our estimated 2009 natural gas needs with respect to our International manufacturing facilities. For the years ended December 31, 2008 and 2007, we spent approximately $69.6 million and $60.6 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 we are unable to obtain sourced products or materials at favorable prices, our operating performance may be adversely affected.

 

Sand, soda ash, lime, corrugated packaging and resins are the principal materials we use. In addition, we obtain glass tableware, ceramic dinnerware, metal flatware and hollowware from third parties. We may experience temporary shortages due to disruptions in supply caused by weather, transportation, production delays or other factors that would require us to secure our sourced products or raw materials from sources other than our current suppliers. If we are forced to procure sourced products or materials from alternative suppliers, we may not be able to do so on terms as favorable as our current terms or at all. 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. Material increases in the cost of any of these items on an industry-wide basis may have an adverse impact on our operating performance and cash flows if we are unable to pass on these increased costs to our customers.

 

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 $19.0 million and $14.4 million for the years ended December 31, 2008 and 2007, respectively. Changes in the equity and debt securities markets affect our pension plan asset performance and related pension expense. Based on year-end data, sensitivity to these key market risk factors is as follows:

 

 

As part of our total expense, we incurred pension curtailment charges of $1.1 million and nonpension postretirement impairment charges of $3.1 million during 2008. The charges in 2008 were triggered by our announcement in December 2008 that our Syracuse China manufacturing plant will be shut down in April 2009. For further discussion, see notes 9, 11 and 12 to our Consolidated Financial Statements. To the extent that we experience additional headcount shifts or changes as we continue to implement our capacity realignment programs, 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.

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 $45.7 million for the year ended December 31, 2008, and $43.1 million for the year ended December 31, 2007.

 

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.

 

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

 

The high levels of fixed costs associated with 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, 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.

 

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. We may in the future experience facility shutdowns or periods of reduced production as a result of these equipment failures. 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.

 

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.

 

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 Libbey’s 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 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. 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, 2010. 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. Royal Leerdam’s collective bargaining agreement with its unionized employees expires on July 1, 2009.

 

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 could also 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 the 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.

 

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.

High levels of inflation and high interest rates in Mexico could adversely affect the operating results and cash flows of Crisa.

 

Although the annual rate of inflation, as measured by changes in the Mexican National Consumer Price Index, was only 5.1 percent for 2008 and 3.8 percent for 2007, Mexico has historically 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.

 

Fluctuation of the currencies in which we conduct operations could adversely affect our financial condition and results of operations.

 

Changes in the value of the various currencies in which we conduct operations relative to the U.S. dollar, including the euro, the Mexican peso and the Chinese Yuan (“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 U.S. GAAP, and will continue to affect our financial income and expense, our revenues from international settlements.

 

Fluctuations in the value of the foreign currencies in which we operate relative to the U.S. dollar could reduce the cost competitiveness of our products or those of our subsidiaries.

 

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 reduce the cost competitiveness of our products or those of our subsidiaries, as compared to foreign competition. For example, if the U.S. dollar has appreciated relative to the euro, the Mexican peso or the RMB, reducing the purchasing power of those currencies compared to the U.S. dollar and making our U.S.-manufactured products more expensive in the euro zone, Mexico and China, respectively, compared to the products of local competitors. An appreciation of the U.S. dollar against the euro, the Mexican peso or the RMB also increases the cost of U.S. dollar-denominated purchases for our operations in the euro zone, Mexico and China, respectively, including purchases of 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.

 

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.

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 variation in our operating results due to commodity price fluctuations, we have derivative financial instruments that hedge certain of our interest rate risks associated with long-term debt, commodity price risks associated with forecasted future natural gas requirements and foreign exchange rate risks associated with transactions denominated in a currency other than the U.S. dollar. 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 SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos. 137 and 138. 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.

 

We are subject to various environmental and 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 U.S. 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 legal requirements, or the failure to comply with these requirements, may have a material adverse effect on our operations.

 

We have incurred, and expect to incur, costs to comply with environmental legal requirements, 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. 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 the Company 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.

 

We have received notice from the New York Stock Exchange (NYSE) that we are not in compliance with the exchange’s continued listing standards because our market capitalization and stockholders’ equity are less than $75 million.

 

The listing of our common stock on the NYSE is at risk because we do not comply with the NYSE’s continued listing standards. Those standards require that our average market capitalization not be less than $75 million over a consecutive 30 trading-day period and that our stockholders’ equity not be less than $75 million. We were notified by the NYSE on February 17, 2009 that Libbey’s market capitalization and stockholders’ equity are below those criteria. While Libbey has a period of eighteen months from the date it received notice to cure this non-compliance, and we have a number of options to cure under consideration, there can be no assurance that we will be able to cure this deficiency in the time permitted. In addition, there can be no guarantee that the Company will remain in compliance with other continued listing requirements related to market capitalization and minimum stock price.

 

In the current environment there can be no assurance that we will not be in violation of other NYSE listing standards, some of which may not be curable.

 

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.

 

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 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.

 

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 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 and have a material adverse effect on our financial condition.

 

We may face a risk when we return to the market to refinance our debt as a result of the recent downgrade of the Company’s debt by Moody’s Investor Service.

 

In February 2009 Moody’s Investors Service downgraded Libbey Glass Inc.’s (“Libbey Glass”) debt ratings, including its corporate family and probability of default ratings to B3 from B2, and the rating on its second lien senior secured notes to B3 from B2. Libbey’s SGL-3 speculative grade liquidity rating was unchanged.

 

According to Moody’s, the SGL-3 rating reflects adequate liquidity, supported by the expectation that planned cash flow improvement, moderate cash balances, and availability under its asset-based revolver, although declining, should be sufficient to fund internal needs over the next twelve months.

 

 

None.

 

At December 31, 2008 the Company had the following square footage at plants and warehouse/distribution facilities:

 

 

 

 

These facilities have an aggregate floor space of 8.5 million square feet. We own approximately 64% and lease approximately 36% of this floor space. In addition to the facilities listed above, our headquarters (Toledo, Ohio), some warehouses (various locations), sales offices (various locations), showrooms (various locations) 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 properties are currently being utilized for their intended purpose. In the opinion of management, all of our 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.

 

 

None

 

Our executive officers have a wealth of business knowledge, experience and commitment to Libbey. In 2008, each of Mr. Meier, Chairman of the Board and Chief Executive Officer, and Mr. Reynolds, Executive Vice President and Chief Operating Officer, celebrated 38 years of service with Libbey. In addition, the average years of service of all of our executive officers is 18 years.

 

 

 

Common Stock and Dividends

 

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

 

 

The closing market price of our common stock on March 2, 2009 was $0.81 per share.

 

On March 2, 2009, there were 829 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 Standard & Poor’s SmallCap 600 Index (“S&P SmallCap 600”), a broad market index; the Russell 2000 Index (“Russell 2000”), a small-cap index to which Libbey was added as component in June 2007; 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”); and our peer group. 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.

 

There are no other glass tableware manufacturers with stock that is publicly traded in the United States. Accordingly, we chose the companies in our peer group because they are manufacturers with revenues comparable to ours. The peer group is limited to those companies for whom market quotations are available and consists of Ameron International Corporation, Ametek Inc., Blyth Inc., Brady Corporation, Church & Dwight Inc., EnPro Industries Inc., ESCO Technologies Inc., Graco Inc., Jarden Corporation, Johnson Outdoors, Inc., Lancaster Colony Corporation, Milacron Inc., Polaris Industries Inc., Sypris Solutions Inc., Teradyne Inc., Thermadyne Holdings Corporation, Tupperware Brands Corporation, Waters Corporation, and Woodward Governor Company.

The graph assumes a $100 investment in our common stock on January 1, 2004, and also assumes investments of $100 in each of the S&P SmallCap 600, the Russell 2000, the Housewares-Small index and the peer group, respectively, on January 1, 2004. The value of these investments on December 31 of each year from 2004 through 2008 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, 2008:

 

 

 

 

Issuer Purchases of Equity Securities

 

Following is a summary of the 2008 fourth quarter activity in our share repurchase program:

 

 

 

 

 

Information with respect to Selected Financial Data is incorporated by reference to our 2008 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. We also import metal flatware, hollowware, serveware and ceramic dinnerware for resale. In addition, we design, manufacture and distribute an extensive line of plastic items for the foodservice industry.

 

EXECUTIVE OVERVIEW

 

Through the third quarter, we experienced strong net sales and operating earnings. However, the growing global economic and financial crisis in the later part of 2008 resulted in considerable weakening in overall consumer confidence. This reached beyond our North American markets and affected the global markets for our products as well. Our net sales for 2008 were $810.2 million as compared to $814.2 million for 2007 and income from operations was a loss of $5.5 million as compared to $66.1 million for 2007. The $71.6 million reduction in income from operations was primarily driven by the following factors:

 

 

Despite the difficult year we had a number of highlights in 2008 among them are the following:

 

 

We have taken the following actions to reduce our costs, right size our capacity and conserve cash to withstand the global economic downturn:

 

 

 

If, in 2009, consumer confidence and the global economy continue to weaken, additional actions may be necessary. Conversely, if the global economy recovers, we are well positioned to respond to increased demand.

 

RESULTS OF OPERATIONS

 

The following table presents key results of our operations for the years 2008, 2007 and 2006:

 

 

NM = Not meaningful

 

Discussion of 2008 vs. 2007 Results of Operations

 

Net Sales

 

In 2008, net sales decreased 0.5 percent including a favorable currency impact of 1.2 percent, to $810.2 million from $814.2 million in 2007. The decrease in net sales was primarily attributable to decreased sales within the North American Glass and North American Other segments. Within North American Glass, shipments to foodservice customers declined over 10.0 percent and net sales of Crisa product in Mexican pesos experienced an unfavorable currency impact of $2.1 million. Partially offsetting the decrease in net sales was an increase of more than 4.0 percent in shipments to U.S. retail glassware customers. Within North American Other, shipments of Syracuse China products declined 17.9 percent, shipments of World Tableware products declined 3.9 percent and Traex net sales were flat compared to the prior year period. International net sales grew 12.3 percent on the strength of increased shipments of Libbey China product of 171.3 percent, a 7.5 percent increase of Crisal product, a modest increase in shipments at Royal Leerdam and a favorable currency impact of 7.9 percent.

 

Gross Profit

 

Gross profit decreased in 2008 by $48.3 million, or 30.7 percent, compared to 2007. Gross profit as a percentage of net sales decreased to 13.5 percent in 2008, compared to 19.4 percent in 2007. Contributing to the decrease in gross profit and gross profit margin were $18.7 million of special charges (see note 9 to the Consolidated Financial Statements). Of that amount, $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. In addition, 2008 gross profit includes $13.9 million for higher natural gas and electricity costs, $4.9 million for increased carton costs, $3.4 million of additional depreciation and an unfavorable mix of net sales. Partially offsetting these higher costs were lower distribution costs.

 

(Loss) Income from operations

 

Income from operations was a loss of $(5.5) million in 2008, compared to income from operations of $66.1 million in 2007. Income from operations as a percentage of net sales decreased to (0.7) percent in 2008, compared to 8.1 percent in 2007. Contributing to the decrease in income from operations and income from operations margin are the lower gross profit and gross profit margin (discussed above), the special charges related to the announced closure of our Syracuse China manufacturing facility ($13.9 million) and the closure of our Mira Loma distribution center ($0.7 million) and the impairment charge on goodwill and other intangibles within our International segment of $11.9 million (see note 9 to the Consolidated Financial Statements). Partially offsetting these were lower selling, general and administrative expenses.

 

(Loss) earnings before interest and income taxes after minority interest (EBIT)

 

Earnings before interest and income taxes decreased by $79.3 million, or 105.9 percent, from earnings of $74.9 million in 2007 to a loss of $(4.4) million in 2008. EBIT as a percentage of net sales decreased to (0.5) percent in 2008, compared to 9.2 percent in 2007. The reduced EBIT was mostly a result of the reduction in income from operations (discussed above), $5.5 million non-recurring gain on the land sales at Royal Leerdam and Syracuse China in 2007, and higher prior-year foreign currency translation gains of $1.3 million.

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

 

EBITDA decreased by $76.5 million, or 65.6 percent, from $116.5 million in 2007 to $40.0 million in 2008. As a percentage of net sales, EBITDA was 4.9 percent in 2008, compared to 14.3 percent in 2007. The key contributors to the reduction in EBITDA were those factors discussed above under “(Loss) earnings before interest and income taxes after minority interest (EBIT).” Depreciation and amortization increased $2.9 million to $44.4 million, primarily due to a full year of depreciation related to our facility in China.

 

Net loss and diluted loss per share

 

We reported a net loss of $80.5 million, or loss of $5.48 per diluted share, in 2008, compared to a net loss of $2.3 million, or loss of $0.16 per diluted share, in 2007. The net loss as a percentage of net sales was 9.9 percent, compared to 0.3 percent in 2007. The increase in net loss was driven primarily by the items discussed above under “(Loss) earnings before interest and income taxes after minority interest (EBIT),” in addition to a $3.8 million increase in interest expense. These were partially offset by a $5.0 million decrease in income tax provision. The $3.8 million increase in interest expense is the result of higher debt, partially offset by slightly lower variable interest rates compared to 2007. Income tax provision decreased $5.0 million and the effective tax rate decreased from 125.7 percent in 2007 to a negative 8.5 percent in 2008. The change in the effective tax rate is primarily due to our provision for income taxes being significantly impacted by the recognition of valuation allowances in the United States, the Netherlands and Portugal. Changes in the mix of earnings in countries with differing statutory tax rates, changes in accruals related to uncertain tax positions, tax planning structures and changes in tax laws have also impacted the effective tax rate.

 

Discussion of 2007 vs. 2006 Results of Operations

 

Net Sales

 

In 2007, net sales increased 18.1 percent, including a favorable currency impact of 1.4 percent, to $814.2 million from $689.5 million in 2006. The increase in net sales was primarily attributable to the full year consolidation of Crisa, the Company’s former joint venture in Mexico, and an 11.3 percent increase in shipments to U.S. and Canadian retail glassware customers in North American Glass. International net sales grew 28.0 percent, reflecting the commencement of shipments from Libbey’s new factory in China. Net sales from Royal Leerdam and Crisal customers increased over 21.0 percent compared to 2006, including a favorable currency impact of 9.1 percent. North American Other net sales increased 5.8 percent, as shipments of World Tableware products increased 9.0 percent while shipments of Syracuse China products were up 5.0 percent.

 

Gross Profit

 

Gross profit increased in 2007 by $34.5 million, or 28.0 percent, compared to 2006. Gross profit as a percentage of net sales increased to 19.4 percent in 2007, compared to 17.9 percent in 2006. Contributing to the increase in gross profit and gross profit margin were the full year consolidation of Crisa, higher sales and higher production activity, including the benefit of Crisa’s capacity rationalization — “Project Tiger.” In addition, 2006 gross profit included an inventory write-down of $2.2 million related to “Project Tiger.” Partially offsetting these improvements were higher distribution expenses, higher natural gas expense and expenses related to the start-up of our new facility in China.

 

Income from operations

 

Income from operations was $66.1 million in 2007, compared to income from operations of $19.3 million in 2006. Income from operations as a percentage of net sales increased to 8.1 percent in 2007, compared to 2.8 percent in 2006. Contributing to the increase in income from operations and income from operations margin is the higher gross profit and gross profit margin (discussed above), the non-recurrence of $16.3 million of special charges related to “Project Tiger,” offset by an increase in selling, general and administrative expenses primarily due to the full year consolidation of Crisa.

Earnings before interest and income taxes (EBIT)

 

Earnings before interest and income taxes increased by $56.9 million, or 317.2 percent, from $17.9 million in 2006 to $74.9 million in 2007. EBIT as a percentage of net sales increased to 9.2 percent in 2007, compared to 2.6 percent in 2006. The contributors to the improvement in EBIT compared to the prior period are the same as those discussed above under “Income from Operations.” In addition, we recognized a $4.3 million gain on the sale of land in the Netherlands and a $1.1 million gain on the sale of excess land in Syracuse, N.Y. We also recorded a currency translation gain of $2.0 million in 2007, compared to a currency translation loss of $1.0 million in 2006, and a decrease of approximately $2.8 million in charges related to the ineffectiveness on our natural gas contracts as compared to 2006.

 

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

 

EBITDA increased by $62.9 million, or 117.6 percent, from $53.5 million in 2006 to $116.5 million in 2007. As a percentage of net sales, EBITDA was 14.3 percent in 2007, compared to 7.8 percent in 2006. The key contributors to the increase in EBITDA were those factors discussed above under “Earnings before interest and income taxes (EBIT).” Depreciation and amortization, adjusted for minority interest in 2006, increased $5.9 million to $41.6 million, primarily due to the consolidation of Crisa and depreciation related to our new facility in China.

 

Net loss and diluted loss per share

 

We reported a net loss of $2.3 million, or loss of $0.16 per diluted share, in 2007, compared to a net loss of $20.9 million, or loss of $1.47 per diluted share, in 2006. The net loss as a percentage of net sales was 0.3 percent, compared to 3.0 percent in 2006. The decrease in net loss was driven primarily by the items discussed above under “Earnings before interest and income taxes (EBIT),” offset by a $19.3 million increase in interest expense and a $19.0 million increase in income taxes. The $19.3 million increase in interest expense is the result of the refinancing consummated on June 16, 2006, which resulted in higher debt and higher average interest rates. Income taxes increased $19.0 million and the effective tax rate increased from 27.1 percent in 2006 to 125.7 percent in 2007. The increase in income taxes and the effective tax rate was primarily driven by a non-cash tax charge of $15.3 million to establish a full valuation allowance against the net deferred income tax asset balance in the U.S.

SEGMENT RESULTS OF OPERATIONS

 

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

 

 

 

Discussion of 2008 vs. 2007 Segment Results of Operations

 

North American Glass

 

Net sales decreased 2.5 percent from $568.5 million in 2007 to $554.1 million in 2008. Of the total decrease in net sales, approximately 4.5 percent is attributable to reduced shipments to foodservice and business-to-business glassware customers. Partially offsetting this decline are increased shipments to U.S. and Canadian retail glassware customers, representing 1.0 percent of the change, and increased shipments of Crisa products to Crisa customers, representing 0.8 percent of the change offset by an unfavorable currency impact of 0.3 percent.

EBIT decreased by $29.0 million to $25.5 million in 2008, compared to $54.5 million in 2007. EBIT as a percentage of net sales decreased to 4.6 percent in 2008, compared to 9.6 percent in 2007. The key contributors to the reduction in EBIT were special charges recorded in 2008 related to the announced closing of the Mira Loma distribution center of $0.9 million and the fixed asset impairment charges of $4.5 million (see note 9 to the consolidated financial statements); the impact of lower net sales and reduced operating activity in North American Glass operations of $16.6 million; higher natural gas and electricity charges of $8.5 million; increased carton costs of $1.5 million; and an approximately $2.3 million decrease in non-operating income primarily related to foreign currency translation losses and non-recurring gains on the prior-year sale of environmental credits. Partially offsetting the EBIT reduction is a decrease of $5.3 million in North American Glass selling, general and administrative expense primarily resulting from lower incentive-based compensation and favorable rulings in connection with an outstanding dispute regarding a warehouse lease in Mexico.

 

North American Other

 

Net sales decreased 8.4 percent to $111.0 million in 2008 from $121.2 million in 2007. Of the total decline in net sales, approximately 6.4 percent is attributed to a reduction in shipments of Syracuse China products and 1.7 percent is attributed to a reduction in shipments of World Tableware products. Shipments of Traex products were flat in 2008 as compared to 2007.

 

EBIT declined by $33.4 million to a loss of $(17.7) million in 2008, compared to income of $15.7 million in 2007. EBIT as a percentage of net sales decreased to (15.9) percent in 2008, compared to 12.9 percent in 2007. The key contributors to the reduction in EBIT were lower net sales and operating activity at Syracuse China of $4.4 million and special charges recorded related to the announced closing of the Syracuse China manufacturing facility in early April 2009 of $28.3 million (see note 9 to the Consolidated Financial Statements). A non-recurring gain on the sale of excess land at Syracuse China was recorded in 2007 in other income (expense) of $1.1 million. Partially offsetting these were lower North American Other selling, general and administrative expenses of $0.4 million primarily resulting from lower incentive-based compensation.

 

International

 

In 2008, net sales increased 12.3 percent to $153.5 million from $136.7 million in 2007. Of the total increase in net sales, approximately 8.8 percent is attributed to an increase in shipments to Libbey China customers and a favorable currency impact of 1.2 percent. On a constant currency basis, shipments to Royal Leerdam and Crisal customers declined by 4.2 percent offset by a favorable currency impact of 6.8 percent.

 

EBIT decreased by $16.9 million to a loss of $(12.2) million in 2008, compared to income of $4.7 million in 2007. EBIT as a percentage of net sales decreased to (8.0) percent in 2008, compared to 3.4 percent in 2007. The key contributors to the reduction in EBIT were the goodwill and other intangibles impairment charge of $11.9 million (see note 9 to the Consolidated Financial Statements); increased natural gas and electricity costs of approximately $5.7 million; increased carton costs of $3.4 million; increased depreciation expense of $2.8 million (a result of Libbey China having a full year of production in 2008); and a $2.2 million increase in selling, general and administrative expenses primarily related to the increased net sales. A non-recurring gain on the sale of excess land at Royal Leerdam was recorded in 2007 in other income (expense) of $4.3 million. Partially offsetting these costs was the impact of higher net sales and operating activity of $8.6 million at our Libbey China facility and $3.9 million at our European facilities.

 

Discussion of 2007 vs. 2006 Segment Results of Operations

 

North American Glass

 

Net sales increased 19.3 percent from $476.7 million in 2006 to $568.5 million in 2007. Of the total increase in net sales, approximately 14.5 percent is attributable to the consolidation of Crisa, 2.7 percent relates to shipments to retail glassware customers, approximately 1.1 percent relates to shipments to foodservice and industrial glassware customers and approximately 0.7 percent relates to shipments to export customers outside of North America.

EBIT increased by $49.0 million to $54.5 million in 2007, compared to $5.5 million in 2006. EBIT as a percentage of net sales increased to 9.6 percent in 2007, compared to 1.1 percent in 2006. The key contributors to the improvement in EBIT were the impact of higher net sales and operating activity in North American Glass operations of $11.6 million, the full year consolidation of Crisa of approximately $9.1 million and an approximately $6.2 million increase in non-operating income primarily related to foreign currency translation gains, non-recurring charges on Crisa’s prior year natural gas contracts and the sale of environmental credits. In addition, EBIT increased due to a $4.7 million reduction in North American Glass selling, general and administrative expense primarily resulting from lower incentive-based compensation. The prior year included a fixed asset charge and inventory write-down of $18.5 million related to Crisa’s capacity rationalization (“Project Tiger”). Offsetting these improvements was an increase in natural gas expense of $1.9 million.

 

North American Other

 

Net sales increased 5.8 percent to $121.2 million in 2007 from $114.6 million in 2006. Of the total increase in net sales, approximately 3.7 percent is attributed to an increase in shipments of World Tableware products and approximately 1.8 percent is attributed to an increase in shipments of Syracuse China products.

 

EBIT increased by $6.3 million to $15.7 million in 2007, compared to $9.4 million in 2006. EBIT as a percentage of net sales increased to 12.9 percent in 2007, compared to 8.2 percent in 2006. The key contributors to the increased EBIT were higher net sales and operating activity at Syracuse China of $3.6 million, higher net sales of World Tableware products of approximately $2.7 million, higher net sales and operating activity at Traex of $0.3 million and a $1.1 million gain on the sale of excess land at Syracuse China. Partially offsetting these improvements were higher North American Other selling, general and administrative expenses of $1.8 million primarily resulting from the increased net sales.

 

International

 

In 2007, net sales increased 28.0 percent to $136.7 million from $106.8 million in 2006. Of the total increase in net sales, approximately 12.7 percent is attributed to an increase in shipments to Royal Leerdam and Crisal customers, approximately 7.4 percent relates to shipments from Libbey China, and approximately 9.1 percent relates to a stronger euro compared to the prior year.

 

EBIT increased by $1.6 million to $4.7 million in 2007, compared to $3.2 million in 2006. EBIT as a percentage of net sales increased to 3.4 percent in 2007, compared to 3.0 percent in 2006. The key contributors to the increased EBIT were increased net sales and operating activity at Royal Leerdam and Crisal of $5.8 million and a $4.3 million gain on the sale of excess land in the Netherlands. Partially offsetting these improvements were start-up costs at Libbey China of approximately $2.4 million, higher natural gas expense in Europe of approximately $3.4 million, a $2.0 million reduction in equity earnings from our 49 percent ownership of Crisa prior to the acquisition of the remaining 51 percent in June of 2006 and a $0.7 million increase in selling, general and administrative expenses primarily related to the increased net sales.

 

CAPITAL RESOURCES AND LIQUIDITY

 

Balance Sheet and Cash flows

 

Cash and Equivalents

 

At December 31, 2008, our cash balance decreased to $13.3 million from $36.5 million at December 31, 2007. The $23.2 million decrease was primarily due to a $19.6 million payment to Vitro S.A. de C.V in January, 2008 and to fund our operating requirements.

Working Capital

 

The following table presents working capital components for 2008 and 2007:

 

 

 

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, decreased by $6.9 million in 2008, compared to 2007. As a percentage of net sales, working capital decreased to 25.5 percent in 2008, compared to 26.3 percent in 2007. The decrease in working capital is primarily the result of our continued efforts to increase cash flow through reductions in working capital.

Borrowings

 

The following table presents our total borrowings:

 

 

 

 

We had total net borrowings of $550.3 million at December 31, 2008, compared to total net borrowings of $496.6 million at December 31, 2007. The $53.6 million increase in borrowings was the result of additional PIK notes issued on June 1 and December 1 and additional borrowings under our ABL facility.

 

Of our total indebtedness, $204.3 million is subject to fluctuating interest rates at December 31, 2008. A change of one percentage point in such rates would result in a change in interest expense of approximately $2.0 million on an annual basis.

 

Included in interest expense is the amortization of discounts and warrants on the Senior Notes and PIK Notes and financing fees of $5.0 million, $5.1 million and $1.6 million for December 31, 2008, December 31, 2007 and December 31, 2006, respectively.

Cash Flow

 

The following table presents key drivers to free cash flow for 2008, 2007 and 2006:

 

 

 

 

Discussion of 2008 vs. 2007 Cash Flow

 

Our net cash used in operating activities was $1.0 million in 2008, compared to net cash provided by operating activities of $51.5 million in 2007, or a decrease of $52.5 million. The decrease is primarily related to a decrease in earnings, higher uses of cash for pension contributions and a $19.6 million payment to Vitro related to the 2006 acquisition of Crisa, offset by improved working capital management.

 

Net cash used in investing activities was $45.6 million in 2008, compared to $34.9 million in 2007, or an increase of $10.7 million. The primary contributors to this increase were the non-recurring proceeds from asset sales and other items of $8.2 million in 2007, primarily attributable to the sale of excess land in Syracuse, N.Y. and the Netherlands.

 

Free cash flow was $(46.6) million in 2008, compared to 16.5 million in 2007, a decrease of $63.2 million. The primary contributors to this decrease are the result of the changes in net cash (used in) provided by operating activities and the non-recurring proceeds from asset sales and other items of $8.2 million in 2007 as discussed above.

 

Net cash provided by financing activities was $25.8 million in 2008, compared to $22.4 million net cash used in financing activities in 2007. The 2008 net cash provided by financing activities resulted from the reduction in free cash flow and the change in cash and cash equivalents discussed above.

 

Discussion of 2007 vs. 2006 Cash Flow

 

Our net cash provided by operating activities was $51.5 million in 2007, compared to net cash provided by operating activities of $54.9 million in 2006, or a decrease of $3.4 million. The decrease is primarily related to an increase in earnings more than offset by higher uses of cash for inventory and pension contributions.

 

Net cash used in investing activities was $34.9 million in 2007, compared to $152.0 million in 2006, or a decrease of $117.1 million. The primary contributors to this reduction were the purchase of Crisa in 2006 for $78.4 million, a $30.5 million decrease in capital expenditures (driven by a reduction in spending resulting from the completion of the construction of our new facility in China in 2006), and proceeds from asset sales and other items of $8.2 million in 2007, primarily attributable to the sale of excess land in Syracuse, N.Y. and the Netherlands.

 

Net cash used by financing activities was $22.4 million in 2007, compared to $135.3 million net cash provided by financing activities in 2006. The net cash used by financing activities in 2007 is primarily attributable to the

repayment of borrowings under our ABL facility, partially offset by new working capital facilities in Europe and China. The 2006 net cash provided by financing activities resulted from the additional debt incurred in connection with the acquisition of Crisa and the construction of our production facility in China.

 

Free cash flow was $16.5 million in 2007, compared to $(97.2) million in 2006, an improvement of $113.7 million. The primary contributors to this improvement are the result of the changes in net cash used in investing activities discussed above. These were partially offset by a decrease in cash flow from operating activities as discussed above.

 

Derivatives

 

We have Interest Rate Protection Agreements (Rate Agreements) with respect to $200 million of debt as a means to manage our exposure to variable interest rates. The Rate Agreements effectively convert this portion of our long-term borrowings from variable rate debt to fixed-rate debt, thus reducing the impact of interest rate changes on future results. The fixed interest rate for our borrowings related to the Rate Agreements at December 31, 2008, excluding applicable fees, is 5.24 percent per year and the total interest rate, including applicable fees, is 12.24 percent per year. The average maturity of these Rate Agreements is 0.9 years at December 31, 2008. Total remaining debt not covered by the Rate Agreements has fluctuating interest rates with a weighted average rate of 9.57 percent per year at December 31, 2008. The fair market value for the Rate Agreements at December 31, 2008 and 2007, respectively, was $(6.8) million and $(5.3) million.

 

We also use commodity futures contracts related to forecasted future 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, generally six or more months in the future. At December 31, 2008, we had commodity futures contracts for 5,280,000 million British Thermal Units (BTU’s) of natural gas with a fair market value of $(14.9) million. We have hedged a portion of our forecasted transactions through December 2011. At December 31, 2007, we had commodity futures contracts for 2,820,000 million BTU’s of natural gas with a fair market value of $(1.8) million.

 

During December 2008, we announced the closing of the Syracuse China facility in early April 2009 (see note 9 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 has rendered the forecasted transactions related to these contracts not probable of occurring. Under FASB Statement No. 133, Accounting for Derivative Instrument and Hedging Activities (FAS 133), when the forecasted transactions of a hedging relationship become not probable of occurring, the gains or losses that have been classified in Other Comprehensive Income in prior periods for those contracts effected should be reclassified into earnings. We recognized $0.4 million in other income (expense) on the Consolidated Statement of Operations relating to these contracts.

 

In January 2008, we entered into a series of foreign currency contracts to sell Canadian dollars. As of December 31, 2008, all of these contracts have expired. During 2007, we entered into a foreign currency contract for 212.0 million pesos for a contractual payment due to Vitro in January 2008, related to the Crisa acquisition. The fair market value of the foreign currency contract at December 31, 2007 was $0.4 million.

 

Share Repurchase Program

 

Since mid-1998, we have repurchased 5,125,000 shares for $140.7 million, as authorized by our Board of Directors. As of December 31, 2008, authorization remains for the purchase of an additional 1,000,000 shares. During 2008 and 2007, we did not repurchase any common stock. Our ABL Facility and the indentures governing the Senior Secured Notes and the PIK Notes significantly restrict our ability to repurchase additional shares.

 

We are using a portion of the repurchased common stock to fund our Employee Stock Benefit Plans. See note 14 to the Consolidated Financial Statements for further discussion.

Contractual Obligations

 

The following table presents our existing contractual obligations at December 31, 2008 and related future cash requirements:

 

 

 

 

In addition to the above, we have commercial commitments secured by letters of credit and guarantees. Our letters of credit outstanding at December 31, 2008, totaled $8.4 million.

 

The Company is unable to make a reasonably reliable estimate as to when cash settlement with taxing authorities may occur for our unrecognized tax benefits. Therefore, our liability for unrecognized tax benefits is not included in the table above. See note 10 to the Consolidated Financial Statements for additional information.

 

Capital Resources and Liquidity

 

Historically, cash flows generated from operations and our borrowing capacity under our ABL facility have allowed us to meet our cash requirements, including capital expenditures and working capital needs. Remaining unused availability on the ABL Facility was $44.6 million at December 31, 2008 and $89.7 million at December 31, 2007. However, we were greatly impacted by recessionary pressures in 2008, especially during the fourth quarter of the year, and we anticipate that the global economic recession will continue throughout 2009 and perhaps beyond. In addition, interest on our PIK Notes will be payable in cash beginning December 1, 2009. Although we have taken a number of steps to enhance our liquidity in 2008 and to date in 2009 (including those announced in February, 2009), if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The credit and capital markets have become exceedingly distressed. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions, have made it difficult, and will likely continue to make it difficult, to obtain funding in future periods. If cash from operations and cash available from our ABL Facility are not sufficient to meet our needs, we cannot assure you that we will be able to obtain additional financing in sufficient amounts and/or on acceptable terms in the near future or when our ABL Facility expires in December 2010. Furthermore, because of the current price of our stock, we cannot anticipate that it would be desirable to sell additional equity, even if we were able to do so.

 

Off-Balance Sheet Arrangements

 

Until June 16, 2006, we were a joint venture partner owning 49% in Vitrocrisa Holding, S. de R.L. de C.V. and related companies, the largest glass tableware manufacturer in Latin America. On June 16, 2006, we purchased the remaining 51 percent equity interest in the joint venture (see note 4 to the Consolidated Financial Statements). Through June 15, 2006, we recorded our 49 percent interest in the joint venture using the equity method of accounting. From this joint venture, we recorded equity earnings (loss), dividends and certain technical assistance

income. We also had a reciprocal distribution agreement with our joint venture partner that gave us exclusive distribution rights with respect to the joint venture’s glass tableware products in the U.S. and Canada, and gave the joint venture the exclusive distribution rights with respect to our glass tableware products in Latin America. In addition, we guaranteed a portion of the joint venture’s bank debt. While we owned 49 percent of the joint venture, we evaluated this investment and related arrangements in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46R, “Consolidation of Variable Interest Entities” (FIN 46R), and determined that the joint venture was a Variable Interest Entity (VIE), as defined by FIN 46R; however, we were not considered the primary beneficiary, as we did not absorb the majority of expected losses or receive the majority of expected residual returns. Therefore, the joint venture was not consolidated in our Consolidated Financial Statements through June 15, 2006. Since we acquired the remaining 51 percent of the joint venture on June 16, 2006, we have consolidated its financial results. See notes 4 and 5 to the Consolidated Financial Statements for disclosure regarding financial information relating to Crisa.

 

Reconciliation of Non-GAAP Financial Measures

 

We sometimes refer to data derived from consolidated financial information but not required by GAAP to be presented in financial statements. Certain of these data are considered “non-GAAP financial measures” under Securities and Exchange Commission (SEC) Regulation G. We believe that non-GAAP data provide investors with a more complete understanding of underlying results in our core business and trends. In addition, we use non-GAAP data internally to assess performance. Although we believe that the non-GAAP financial measures presented enhance investors’ understanding of our business and performance, these non-GAAP measures should not be considered an alternative to GAAP.

 

Reconciliation of net loss to EBIT and EBITDA