Table of Contents

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-12084

Libbey Inc.

(Exact name of registrant as specified in its charter)

Delaware		34-1559357
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

	300 Madison Avenue, Toledo, Ohio 43604
(Address of principal executive offices) (Zip Code)
	419-325-2100
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $.01 par value	LBY	NYSE American

 

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 ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

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

 

Large Accelerated Filer	☐		Accelerated Filer	☑		Non-Accelerated Filer	☐
Smaller reporting company	☑		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 

 

Common Stock, $.01 par value 22,355,997 shares at October 23, 2019

 

 

 

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TABLE OF CONTENTS

 

	Page
Item 1. Financial Statements	3
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	5
Condensed Consolidated Balance Sheets	6
Condensed Consolidated Statements of Shareholders' Equity (Deficit)	7
Condensed Consolidated Statements of Cash Flows	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Qualitative and Quantitative Disclosures about Market Risk	33
Item 4. Controls and Procedures	33
PART II — OTHER INFORMATION	33
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6. Exhibits	34
EXHIBIT INDEX	34
SIGNATURES	35
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

 

 

 

		Three months ended September 30,
		2019				2018
Net sales		$	192,418			$	190,775
Freight billed to customers			804				780
Total revenues			193,222				191,555
Cost of sales			158,836				154,315
Gross profit			34,386				37,240
Selling, general and administrative expenses			30,982				33,336
Income from operations			3,404				3,904
Other income (expense)			346				(1,453	)
Earnings before interest and income taxes			3,750				2,451
Interest expense			5,699				5,652
Loss before income taxes			(1,949	)			(3,201	)
Provision for income taxes			1,508				1,758
Net loss		$	(3,457	)		$	(4,959	)
Net loss per share:
Basic		$	(0.15	)		$	(0.22	)
Diluted		$	(0.15	)		$	(0.22	)
Dividends declared per share		$	—			$	—

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		Nine months ended September 30,
		2019				2018
Net sales		$	573,542			$	586,222
Freight billed to customers			2,298				2,475
Total revenues			575,840				588,697
Cost of sales			460,771				471,294
Gross profit			115,069				117,403
Selling, general and administrative expenses			94,375				98,396
Impairment of goodwill and other intangible assets			46,881				—
Income (loss) from operations			(26,187	)			19,007
Other income (expense)			(1,858	)			(980	)
Earnings (loss) before interest and income taxes			(28,045	)			18,027
Interest expense			17,210				16,192
Income (loss) before income taxes			(45,255	)			1,835
Provision for income taxes			6,511				5,767
Net loss		$	(51,766	)		$	(3,932	)
Net loss per share:
Basic		$	(2.31	)		$	(0.18	)
Diluted		$	(2.31	)		$	(0.18	)
Dividends declared per share		$	—			$	0.1175

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		Three months ended September 30,								Nine months ended September 30,
		2019				2018				2019				2018
Net loss		$	(3,457	)		$	(4,959	)		$	(51,766	)		$	(3,932	)
Other comprehensive income (loss):
Pension and other post-retirement benefit adjustments, net of tax			790				874				3,077				4,508
Change in fair value of derivative instruments, net of tax			(1,811	)			(734	)			(9,695	)			1,208
Foreign currency translation adjustments, net of tax			(4,343	)			(2,707	)			(4,640	)			(5,766	)
Other comprehensive income (loss), net of tax			(5,364	)			(2,567	)			(11,258	)			(50	)
Comprehensive income (loss)		$	(8,821	)		$	(7,526	)		$	(63,024	)		$	(3,982	)

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		September 30, 2019				December 31, 2018
		(unaudited)
ASSETS
Cash and cash equivalents		$	27,668			$	25,066
Accounts receivable — net			90,745				83,977
Inventories — net			195,669				192,103
Prepaid and other current assets			20,709				16,522
Total current assets			334,791				317,668
Purchased intangible assets — net			11,868				13,385
Goodwill			38,431				84,412
Deferred income taxes			29,346				26,090
Other assets			14,670				7,660
Operating lease right-of-use assets			62,052				—
Property, plant and equipment — net			249,734				264,960
Total assets		$	740,892			$	714,175
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable		$	74,963			$	74,836
Salaries and wages			28,409				27,924
Accrued liabilities			48,433				43,728
Accrued income taxes			4,424				3,639
Pension liability (current portion)			3,479				3,282
Non-pension post-retirement benefits (current portion)			3,956				3,951
Operating lease liabilities (current portion)			12,465				—
Long-term debt due within one year			4,400				4,400
Total current liabilities			180,529				161,760
Long-term debt			411,906				393,300
Pension liability			42,513				45,206
Non-pension post-retirement benefits			39,719				43,015
Noncurrent operating lease liabilities			50,325				—
Deferred income taxes			2,429				2,755
Other long-term liabilities			24,019				18,246
Total liabilities			751,440				664,282
Contingencies (Note 15)
Shareholders’ equity (deficit):
Common stock, par value $.01 per share, 50,000,000 shares authorized, 22,355,997 shares issued in 2019 (22,157,220 shares issued in 2018)			224				222
Capital in excess of par value			338,098				335,517
Retained deficit			(223,207	)			(171,441	)
Accumulated other comprehensive loss			(125,663	)			(114,405	)
Total shareholders' equity (deficit)			(10,548	)			49,893
Total liabilities and shareholders' equity (deficit)		$	740,892			$	714,175

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Nine months ended September 30, 2019		Common Stock Shares				Common Stock Amount				Capital in Excess of Par Value				Retained Deficit				Accumulated Other Comprehensive Loss				Total
Balance December 31, 2018			22,157,220			$	222			$	335,517			$	(171,441	)		$	(114,405	)		$	49,893
Net income (loss)															(4,542	)							(4,542	)
Other comprehensive income (loss)																			(2,303	)			(2,303	)
Stock compensation expense											937												937
Stock withheld for employee taxes											(317	)											(317	)
Stock issued			116,348				1				(8	)											(7	)
Balance March 31, 2019			22,273,568				223				336,129				(175,983	)			(116,708	)			43,661
Net income (loss)															(43,767	)							(43,767	)
Other comprehensive income (loss)																			(3,591	)			(3,591	)
Stock compensation expense											1,117												1,117
Stock withheld for employee taxes											(92	)											(92	)
Stock issued			73,518				—				1												1
Balance June 30, 2019			22,347,086				223				337,155				(219,750	)			(120,299	)			(2,671	)
Net income (loss)															(3,457	)							(3,457	)
Other comprehensive income (loss)																			(5,364	)			(5,364	)
Stock compensation expense											950												950
Stock withheld for employee taxes											(7	)											(7	)
Stock issued			8,911				1				—												1
Balance September 30, 2019			22,355,997			$	224			$	338,098			$	(223,207	)		$	(125,663	)		$	(10,548	)

Nine months ended September 30, 2018		Common Stock Shares				Common Stock Amount				Capital in Excess of Par Value				Retained Deficit				Accumulated Other Comprehensive Loss				Total
Balance December 31, 2017			22,018,010			$	220			$	333,011			$	(161,165	)		$	(105,172	)		$	66,894
Cumulative-effect adjustment for the adoption of ASU 2017-12															275				(275	)			—
Net income (loss)															(2,961	)							(2,961	)
Other comprehensive income (loss)																			6,558				6,558
Stock compensation expense											270												270
Dividends															(2,595	)							(2,595	)
Stock withheld for employee taxes											(203	)											(203	)
Stock issued			63,582				1				91												92
Balance March 31, 2018			22,081,592				221				333,169				(166,446	)			(98,889	)			68,055
Net income (loss)															3,988								3,988
Other comprehensive income (loss)																			(4,041	)			(4,041	)
Stock compensation expense											1,131												1,131
Stock withheld for employee taxes											(11	)											(11	)
Stock issued			50,816				—				—												—
Balance June 30, 2018			22,132,408				221				334,289				(162,458	)			(102,930	)			69,122
Net income (loss)															(4,959	)							(4,959	)
Other comprehensive income (loss)																			(2,567	)			(2,567	)
Stock compensation expense											658												658
Stock withheld for employee taxes											(90	)											(90	)
Stock issued			12,892				—				5												5
Balance September 30, 2018			22,145,300			$	221			$	334,862			$	(167,417	)		$	(105,497	)		$	62,169

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		Nine months ended September 30,
		2019				2018
Operating activities:
Net loss		$	(51,766	)		$	(3,932	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			29,465				34,389
Impairment of goodwill and other intangible assets			46,881				—
Change in accounts receivable			(7,575	)			(1,688	)
Change in inventories			(5,452	)			(24,445	)
Change in accounts payable			5,987				(5,139	)
Accrued interest and amortization of discounts and finance fees			868				801
Pension & non-pension post-retirement benefits, net			(1,765	)			1,154
Accrued liabilities & prepaid expenses			277				6,938
Income taxes			(3,066	)			(1,662	)
Cloud computing costs			(3,647	)			—
Share-based compensation expense			2,888				2,127
Other operating activities			(429	)			(957	)
Net cash provided by operating activities			12,666				7,586
Investing activities:
Additions to property, plant and equipment			(26,903	)			(35,123	)
Net cash used in investing activities			(26,903	)			(35,123	)
Financing activities:
Borrowings on ABL credit facility			81,971				78,850
Repayments on ABL credit facility			(60,305	)			(46,876	)
Other repayments			—				(3,077	)
Repayments on Term Loan B			(3,300	)			(3,300	)
Stock options exercised			—				5
Taxes paid on distribution of equity awards			(416	)			(304	)
Dividends			—				(2,595	)
Net cash provided by financing activities			17,950				22,703
Effect of exchange rate fluctuations on cash			(1,111	)			(774	)
Increase (decrease) in cash			2,602				(5,608	)
Cash & cash equivalents at beginning of period			25,066				24,696
Cash & cash equivalents at end of period		$	27,668			$	19,088
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	15,853			$	14,868
Cash paid during the period for income taxes		$	7,139			$	7,219

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1.    Description of the Business

 

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

 

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

 

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

 

 

2.    Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements of Libbey Inc. and its majority-owned subsidiaries (collectively, Libbey or the Company) have been prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Item 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended September 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

The balance sheet at December 31, 2018, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial information included herein should be read in conjunction with our Consolidated Financial Statements in Item 8 of our Form 10-K for the year ended December 31, 2018.

 

Software We account for software in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350. Software represents the costs of internally developed and/or purchased software for internal use. Capitalized costs include software packages, installation and internal labor costs of employees devoted to the software development project. Costs incurred to modify existing software, providing significant enhancements and creating additional functionality are also capitalized. Once a project is complete, we estimate the useful life of the internal-use software, generally amortizing these costs over a 3 to 10 year period. Software is classified on the balance sheet in property, plant and equipment, and the related cash flows are shown as cash outflows from investing activities.

 

Cloud Computing Arrangements We account for implementation costs for software that we gain access to in hosted cloud computing arrangements in accordance with FASB ASC 350. Capitalized costs of hosted cloud computing arrangements include configuration, installation, other upfront costs and internal labor costs of employees devoted to the cloud computing software implementation project. Once a project is complete, amortization is computed using the straight-line method over the term of the associated hosting arrangement, generally 3 to 10 years. In connection with our adoption of Accounting Standards Update (ASU) 2018-15 on January 1, 2019, these implementation costs are now classified on the balance sheet in prepaid and other current assets and other assets, and the related cash flows are presented as cash outflows from operations. Prior to January 1, 2019, implementation costs were included in property, plant and equipment, and the related cash flows were shown as cash outflows from investing activities. See New Accounting Standards - Adopted below. Our cloud computing arrangements primarily relate to our new global enterprise resource planning (ERP) system. At September 30, 2019, the net book value of these implementation costs included $0.3 million in prepaid and other current assets and $6.0 million in other assets on the Condensed Consolidated Balance Sheet. Amortization expense for the three and nine-month periods were both immaterial.

 

Leases We determine if an arrangement is a lease at inception. As of January 1, 2019, operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and noncurrent operating lease liabilities in our balance sheet; related payments are included in operating activities on the statement of cash flows. We currently do not have any finance leases; but, if we do in the future, we will include them in property, plant and equipment, long-term debt due within one year and long-term debt within our balance sheet.

 

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

 

 

When our leases do not provide an implicit rate, we use our incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to our secured borrowing rates as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.

 

The operating lease ROU asset also includes any lease prepayments made before commencement or in advance of the payment due date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less (short-term leases) are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease costs represent the incremental change in lease payments associated with an indexed rate (i.e. Consumers Price Index), and these costs are not included in the lease liability on the balance sheet because they are unknown at commencement date.

 

We have lease agreements with lease and non-lease components. Non-lease components for real estate leases relate primarily to common area maintenance, insurance, taxes and utilities associated with the properties. For real estate leases and a limited class of equipment leases, we account for the lease and non-lease components separately. Non-lease components are not recorded on the balance sheet as a ROU asset and lease liability and are not included in lease costs. For all other equipment leases, we account for the lease and non-lease components as a single lease component.

 

See New Accounting Standards - Adopted below for the adoption impact of this lease accounting standard.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense charged to the Condensed Consolidated Statements of Operations is as follows:

 

 

New Accounting Standards - Adopted

 

Each change to U.S. GAAP is established by the FASB in the form of an ASU to the FASB’s ASC. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and either were determined to be not applicable or are expected to have minimal impact on the Company’s Condensed Consolidated Financial Statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize on the balance sheet ROU assets and corresponding liabilities for both finance and operating leases with lease terms greater than 12 months. On January 1, 2019, we adopted this standard using the optional transition method of applying the modified retrospective approach at our adoption date. Under this method, previously reported comparative periods prior to 2019 have not been restated. We have elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our prior conclusions on existing contracts for lease identification, lease classification and initial direct costs. In addition, for most of our classes of equipment leases, we elected the practical expedient to not separate lease and non-lease components. We also made an accounting policy election to keep leases with a term of 12 months or less off of the balance sheet for all classes of underlying assets. At adoption, we had operating leases which resulted in us recognizing operating ROU assets and lease liabilities on the balance sheet of approximately $69 million. The adoption of this ASU did not have a material impact on our condensed consolidated results of operations or cash flows, and there was no cumulative effect adjustment to retained earnings. The new standard also required additional disclosures which are included in note 13.

 

On January 1, 2019, we early adopted ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for internal-use software. The new guidance also prescribes the balance sheet, income statement and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. Prior to January 1, 2019, implementation costs for cloud computing arrangements were capitalized into property, plant and equipment and amortized on a straight-line basis. Upon adoption of this new standard, we reclassed $2.8 million from construction in progress within property, plant, and equipment to other assets. When implementation projects are completed and amortization of capitalized costs begins, a portion is recorded in prepaids and other current assets. Results and disclosures for reporting periods beginning on or after January 1, 2019, are presented under the new guidance within ASU 2018-15, while prior period amounts and disclosures are not adjusted and continue to be reported in accordance with our previous accounting.

 

New Accounting Standards - Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard introduces a new approach to estimating credit losses on certain types of financial instruments, including trade receivables, and modifies the impairment model for available-for-sale debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early application permitted. In October of 2019, the FASB approved a delayed effective date for Smaller Reporting Company filers; thus, our effective date is now for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Although we are still evaluating the impact of this standard, we believe it will not have a material impact on our Condensed Consolidated Financial Statements.

 

 

 

3.    Balance Sheet Details

 

The following table provides detail of selected balance sheet items:

 

 

4.    Borrowings

 

Borrowings consist of the following:

 

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(1)	Maturity date will be January 9, 2021, if Term Loan B is not refinanced by this date.

(2)	The interest rate for the ABL Facility is comprised of several different borrowings at various rates. The weighted average rate of all ABL Facility borrowings was 2.91 percent at September 30, 2019.

(3)	We have entered into interest rate swaps that effectively fix a series of our future interest payments on a portion of the Term Loan B debt. See interest rate swaps in note 8 for additional details. The Term Loan B floating interest rate was 5.04 percent at September 30, 2019.

    

The ABL Facility also provides for the issuance of up to $15.0 million of letters of credit that, when outstanding, are applied against the $100.0 million limit. At September 30, 2019, $9.6 million in letters of credit and other reserves were outstanding. Remaining unused availability under the ABL Facility was $49.4 million at September 30, 2019, compared to $71.6 million at December 31, 2018.

 

On June 17, 2019, Crisa Libbey Mexico S. de R.L. de C.V. entered into a $3.0 million working capital line of credit with Banco Santander Mexico to cover seasonal working capital needs, guaranteed by its parent company, Libbey Mexico, S. de R.L. de C.V. The line of credit matures on December 14, 2020, and has a floating interest rate of LIBOR plus 3.20 percent. At September 30, 2019, there were no borrowings under this line of credit. Interest with respect to borrowings on the line of credit is due monthly.

 

 

5.    Income Taxes

 

For interim tax reporting, we estimate our annual effective tax rate and apply it to our year-to-date ordinary income. Tax jurisdictions with a projected or year-to-date loss for which a tax benefit cannot be realized are excluded from the annualized effective tax rate. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.

 

Our effective tax rate was (14.4) percent for the nine months ended September 30, 2019, compared to 314.3 percent for the nine months ended September 30, 2018. Our effective tax rate for the nine months ended September 30, 2019, was negative because the company recorded positive tax expense despite incurring an overall pretax loss. This occurred because the pretax loss was driven by nondeductible expenses, principally the nondeductible goodwill impairment recorded in the second quarter of the year and nondeductible interest.

 

The Company and its subsidiaries are subject to examination by various countries' tax authorities. These examinations may lead to proposed or assessed adjustments to our taxes. In August 2016, the Mexican tax authority (SAT) assessed one of our Mexican subsidiaries related to the audit of its 2010 tax year. The amount assessed was approximately 3 billion Mexican pesos, which was equivalent to approximately $157 million U.S. dollars as of the date of the assessment. The Company has filed an administrative appeal with SAT requesting that the assessment be fully nullified. We are awaiting the outcome of the appeal. Management, in consultation with external legal counsel, believes that if contested in the Mexican court system, it is more likely than not that the Company would prevail on all significant components of the assessment. Management intends to continue to vigorously contest in the Mexican courts all significant components of the assessment that are not nullified at the administrative appeal level. We believe that our tax reserves related to uncertain tax positions are adequate at this time.

 

 

 

6.    Pension and Non-pension Post-retirement Benefits

 

The components of our net pension expense, including the SERP (supplemental employee retirement plan), are as follows:

 

 

 

We have contributed $0.8 million and $2.5 million of cash to our pension plans for the three months and nine months ended September 30, 2019, respectively. Pension contributions for the remainder of 2019 are estimated to be $0.9 million.

 

The provision for our non-pension, post-retirement, benefit expense consists of the following:

 

 

 

Our 2019 estimate of non-pension cash payments is $5.2 million, of which we have paid $0.8 million and $4.3 million for the three months and nine months ended September 30, 2019, respectively.

 

 

 

7.    Net Loss per Share of Common Stock

 

The following table sets forth the computation of basic and diluted loss per share:

 

 

When applicable, diluted shares outstanding is calculated using the weighted-average number of common shares outstanding plus the dilutive effects of equity-based compensation outstanding during the period using the treasury stock method.

 

 

8.    Derivatives

 

We utilize derivative financial instruments to hedge certain interest rate risks associated with our long-term debt and commodity price risks associated with forecasted future natural gas requirements. These derivatives qualify for hedge accounting since the hedges are highly effective, and we have designated and documented contemporaneously the hedging relationships involving these derivative instruments. While we intend to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we do not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in our earnings. Our contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce our exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is our policy to offset on the Condensed Consolidated Balance Sheets the amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement.

 

We do not believe we are exposed to more than a nominal amount of credit risk in our natural gas hedges and interest rate swaps as the counterparties are established financial institutions. The counterparties for the derivative agreements are rated BBB+ or better as of September 30, 2019, by Standard and Poor’s.

 

Fair Values

 

The following table provides the fair values of our derivative financial instruments for the periods presented, all of which are cash flow hedges:

 

 

 

The following table presents cash settlements (paid) received related to the below derivatives:

 

 

 

The following table provides a summary of the impacts of derivative gain (loss) of our cash flow hedges on the Condensed Consolidated Statements of Operations and other comprehensive income (OCI):

 

 

Natural Gas Contracts

 

We use natural gas swap contracts related to forecasted future North American natural gas requirements. The objective of these commodity contracts is to limit the fluctuations in prices paid due to price movements in the underlying commodity. We consider our forecasted natural gas requirements in determining the quantity of natural gas to hedge. We combine the forecasts with historical observations to establish the percentage of forecast eligible to be hedged, typically ranging from 40 percent to 70 percent of our anticipated requirements, 18 months in the future, or more, depending on market conditions. The fair values of these instruments are determined from market quotes.

 

The following table presents the notional amount of our natural gas derivatives on the Condensed Consolidated Balance Sheets:

 

 

Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses would be recorded to earnings immediately. Changes in the fair value of these hedges are recorded in other comprehensive income (loss). As the natural gas contracts mature, the accumulated gains (losses) for the respective contracts are reclassified from accumulated other comprehensive loss to current expense in cost of sales in our Condensed Consolidated Statement of Operations.

 

Based on our current valuation, we estimate that accumulated losses for natural gas contracts currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in a loss of $0.7 million in our Condensed Consolidated Statements of Operations.

 

Interest Rate Swaps

 

The table below lists the interest rate swaps we executed as part of our risk management strategy to mitigate the risks associated with the fluctuating interest rates under our Term Loan B. The interest rate swaps effectively convert a portion of our Term Loan B debt from a variable interest rate to a fixed interest rate, thus reducing the impact of interest rate changes on future income.

 

________________________

(1)	Upon refinancing our Term Loan B, the fixed interest rate will be 3.19 percent plus the new refinanced credit spread.

 

Our interest rate swaps are valued using the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves.

 

Our interest rate swaps qualify and are designated as cash flow hedges at September 30, 2019, and are accounted for under FASB ASC 815, "Derivatives and Hedging." Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses are recorded to earnings immediately. Changes in the fair value of these hedges are recorded in other comprehensive income (loss). Based on our current valuation, we estimate that accumulated losses currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in an increase to interest expense of $2.1 million in our Condensed Consolidated Statements of Operations.

 

 

 

9.    Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) (AOCI), net of tax, is as follows:

 

 

 

 

_________________________

(1)	We reclassified natural gas contracts through cost of sales and the interest rate swaps through interest expense on the Condensed Consolidated Statements of Operations. See note 8 for additional information.

(2)	We reclassified the net pension and non-pension post-retirement benefits amortization and settlement charges through other income (expense) on the Condensed Consolidated Statements of Operations. See note 6 for additional information.

 

 

 

10.    Segments

 

Our reporting segments align with our regionally focused organizational structure, which we believe enables us to better serve customers across the globe. Under this structure, we report financial results for U.S. and Canada; Latin America; Europe, the Middle East and Africa (EMEA); and Other. Segment results are based primarily on the geographical destination of the sale. Our three reportable segments are defined below. Our operating segment that does not meet the criteria to be a reportable segment is disclosed as Other.

 

U.S. & Canada—includes sales of manufactured and sourced tableware having an end-market destination in the U.S and Canada, excluding glass products for Original Equipment Manufacturers (OEM), which remain in the Latin America segment.

 

Latin America—includes primarily sales of manufactured and sourced glass tableware having an end-market destination in Latin America, as well as glass products for OEMs regardless of end–market destination.

 

EMEA—includes primarily sales of manufactured and sourced glass tableware having an end-market destination in Europe, the Middle East and Africa.

 

Other—includes primarily sales of manufactured and sourced glass tableware having an end-market destination in Asia Pacific.

 

Our measure of profit for our reportable segments is Segment Earnings before Interest and Taxes (Segment EBIT) and excludes amounts related to certain items we consider not representative of ongoing operations as well as certain retained corporate costs and other allocations that are not considered by management when evaluating performance. Segment EBIT also includes an allocation of manufacturing costs for inventory produced at a Libbey facility that is located in a region other than the end market in which the inventory is sold. This allocation can fluctuate from year to year based on the relative demands for products produced in regions other than the end markets in which they are sold. We use Segment EBIT, along with net sales and selected cash flow information, to evaluate performance and to allocate resources. Segment EBIT for reportable segments includes an allocation of some corporate expenses based on the costs of services performed.

 

Certain activities not related to any particular reportable segment are reported within retained corporate costs. These costs include certain headquarter, administrative and facility costs, and other costs that are global in nature and are not allocable to the reporting segments.

 

The accounting policies of the reportable segments are the same as those described in note 2. We do not have any customers who represent 10 percent or more of total sales. Inter-segment sales are consummated at arm’s length and are reflected at end-market reporting below.

 

 

 

 

11.    Revenue

 

Our primary source of revenue is the sale of glass tableware products manufactured within a Libbey facility as well as globally sourced tabletop products, including glassware, ceramicware, metalware and others. Adjustments related to revenue recognized in prior periods was not material for the three months and nine months ended September 30, 2019 and 2018. There were no material contract assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

 

Disaggregation of Revenue:

 

The following table presents our net sales disaggregated by business channel:

 

Each operating segment has revenues across all our business channels. Each channel has a different marketing strategy, customer base and product composition. For all periods presented, over 75 percent of each segment's revenue is derived from the following business channels: U.S. and Canada from foodservice and retail; Latin America from retail and business-to-business; and EMEA from business-to-business and retail.

 

 

12.    Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

	•	Level 1 — Quoted prices in active markets for identical assets or liabilities;
	•	Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	•	Level 3 — Unobservable inputs based on our own assumptions.

 

The fair value of our derivative financial instruments by level is as follows:

 

The fair values of our commodity futures natural gas contracts are determined using observable market inputs. The fair value of our interest rate swaps is based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active markets over the terms that the instruments are held, the derivatives are classified as Level 2 in the hierarchy. We also evaluate Company and counterparty risk in determining fair values. The commodity futures natural gas contracts and interest rate swaps are hedges of either recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the above table.

 

Financial instruments carried at cost on the Condensed Consolidated Balance Sheets, as well as the related fair values, are as follows:

 

 

The fair value of our Term Loan B has been calculated based on quoted market prices for the same or similar issues, and the fair value of our ABL Facility approximates carrying value due to variable rates. The fair value of our cash and cash equivalents, accounts receivable and accounts payable approximate their carrying value due to their short-term nature.