| LIBBEY INC ITEM 1A RISK FACTORS The following factors are the most significant factors that can impact year-to-year comparisons and may affect the future performance of our businesses |
| New risks may emerge and management cannot predict those risks or estimate the extent to which they may affect our financial performance |
| Slowdowns in the retail, travel, restaurant and bar or entertainment industries, such as those caused by general economic downturns, terrorism, health concerns or strikes or bankruptcies within those industries could reduce our revenues and production activity levels |
| Our business is affected by the health of the retail, travel, restaurant and bar or entertainment industries |
| Expenditures in these industries are sensitive to business and personal discretionary spending levels and tend to 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 |
| The long-term effects of events such as these could include, among other things, a protracted decrease in demand for our products |
| These effects, depending on their scope and duration, which we cannot predict at this time, could significantly impact our results of operations and financial condition |
| We face intense competition and competitive pressures, which could adversely affect our results of operations and financial condition |
| Our business is highly competitive, with the principal competitive factors being customer service, price, product quality, new product development, brand name, and delivery time |
| Advantages or disadvantages in any of these competitive factors may be sufficient to cause the customer to consider changing suppliers |
| Competitors in glass tableware include, among others: Arc International (a private French company), which manufactures and distributes glass tableware worldwide; Pasabahce (a unit of Sisecam, a Turkish company), which manufactures glass tableware in various sites throughout the world and sells to retail and foodservice customers worldwide; Indiana Glass Company (a unit of Lancaster Colony Corporation), which manufactures in the US and sells glassware; Oneida Ltd, which sources glass tableware from foreign and domestic manufacturers and recently filed a petition for relief under Chapter 11 of the United States Bankruptcy Code; Anchor Hocking (a unit of Global Home Products), which manufactures and distributes glass beverageware, industrial products and bakeware primarily to retail, foodservice and industrial markets; Bormioli Rocco Group, which manufactures glass tableware in Europe, where the majority of their sales are to retail and foodservice customers; and numerous other sourcing companies |
| In addition, other materials such as plastics compete with glassware |
| Competitors in the US market for ceramic dinnerware include, among others: Homer Laughlin; Oneida Ltd |
| Competitors in metalware include, among others: Oneida Ltd |
| ; and various sourcing companies |
| Competitors in plastic products include, among others: Cambro Manufacturing Company; Carlisle Companies Incorporated; and various sourcing companies |
| 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 which could impact our financial condition and results of operations |
| Our operations may be affected by actions of foreign governments and global or regional economic developments |
| Global economic events, such as foreign import/export policy, the cost of complying with environmental regulations or currency fluctuations, could also affect the level of US imports and exports, thereby affecting our sales |
| Foreign subsidies, foreign trade agreements and each countryapstas adherence to the terms of such agreements can raise or lower demand for our products |
| National and international boycotts and embargoes of other countries &apos or US imports and/or exports together with the raising or lowering of tariff rates could affect the level of competition between us and our foreign competitors |
| 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 substantial reductions in trade-distorting domestic support |
| Our current range of tariff rates for all products is approximately 12dtta5prca to 28dtta5prca |
| However, any negative changes to international agreements that lower duties or improve access to US markets for our competitors, particularly changes arising out of the World Trade Organizationapstas ongoing discussions in Doha, could have a material adverse effect on our financial condition and results of operations |
| Such actions or developments could have a material adverse effect on our business, financial condition and result of operations |
| Natural gas, the principal fuel we use to manufacture our products, is subject to widely fluctuating prices, which could adversely affect our results of operations and financial condition |
| Increases in the price of natural gas adversely affect our costs and margins |
| We have no way of predicting to what extent natural gas prices will rise in the future |
| Any significant increase could adversely impact our margins and operating performance |
| If we are unable to obtain sourced products or raw materials at favorable prices, it could adversely impact our operating performance |
| Sand, soda ash, lime, corrugated packaging materials, resin and energy are the principal raw materials we use |
| In addition, we obtain glass tableware, metal flatware and hollowware from third parties with glass tableware being sourced primarily from Vitrocrisa |
| If temporary shortages due to disruptions in supply caused by weather, transportation, production delays or other factors require us to secure our sourced products or raw materials from sources other than our current suppliers, we may not be able to do so on terms as favorable as our current terms or at all |
| In addition, material increases in the cost of any of these items on an industry-wide basis could have an adverse impact on our operating performance and cash flows if we are unable to pass on these increased costs to our customers |
| 9 _________________________________________________________________ [72]Table of Contents Charges related to our employee pension plans resulting from market risk and headcount realignment may adversely affect our results of operations and financial condition |
| In connection with our employee pension 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 pension benefit obligations and related pension expense |
| Changes in the equity and debt securities markets affect the performance of our pension plan asset performance and related pension expense |
| Sensitivity to these key market risk factors is as follows: • A change of 1prca in the expected long-term rate of return on plan assets would change total pension expense by approximately dlra2dtta2 million based on year-end data |
| • A change of 1prca in the discount rate would change our total pension expense by approximately dlra3dtta8 million |
| In addition, we incurred pension settlement charges of dlra4dtta9 million in 2005 and pension curtailment charges of dlra4dtta0 million during 2004 |
| These charges were triggered by excess lump sum distributions taken by employees in connection with headcount reductions related to our capacity realignment and salary reduction programs and by headcount reductions related to the closure of our City of Industry manufacturing facility |
| See notes 10 and 12 to the Consolidated Financial Statements for further discussion of these charges |
| 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 plans, which could have a material adverse effect on our results of operations and financial condition |
| If Congress fails to extend temporary funding regulations affecting employee pension plans, our near-term cash contributions to these plans could increase significantly |
| In 2004, President Bush signed the Pension Funding Equity Act of 2004 (PFEA) |
| PFEA specified temporary funding regulations for pension plan years 2004 and 2005 that allowed us to delay the cash contributions we are required to make to our employee pension plans |
| Absent an extension of PFEA for plan years beginning January 1, 2006, our near-term cash contributions would increase significantly |
| In addition, legislative proposals that would permanently revise current pension funding regulations have been developed by the Bush Administration, the House of Representatives, and the Senate |
| While the exact form, timing and impact of any final legislation is not currently known, preliminary indications are that any final legislation based on the proposals could substantially increase near-term contributions |
| A failure to extend PFEA or the enactment of any proposed permanent funding legislation could increase the costs related to our employee benefit funding plans, which could have a adverse effect on our results of operations and financial condition |
| If our investments in new technology and other capital expenditures do not yield expected returns, our results of operations could be reduced |
| The manufacture of our tableware products involves the use of automated processes and technologies |
| We designed much of our glass tableware production machinery internally and have continued to develop and refine this equipment to incorporate advancements in technology |
| We will continue to invest in equipment and make other capital expenditures to further improve our production efficiency and reduce our cost profile |
| To the extent that these investments do not generate targeted levels of returns in terms of efficiency or improved cost profile, our financial condition and results of operations could be adversely affected |
| Our high level of debt, as well as incurrences of additional debt, may limit our operating flexibility, which could adversely affect our results of operations and financial condition |
| We have a high degree of financial leverage |
| As of December 31, 2005, we had total borrowings of dlra261dtta7 million, the bulk of which was incurred under a revolving credit agreement entered into by Libbey Glass Inc |
| We may also incur additional debt in the future |
| In December 2005, we amended the terms of the revolving credit facility and the senior notes to reduce the borrowing capacity under the revolving credit facility and to increase the maximum permissible leverage ratio under the revolving credit facility and the senior notes |
| The revolving credit facility requires us to comply with certain covenants, including the maintenance of financial ratios and limits on additional indebtedness and certain business activities and investments |
| The revolving credit facility is described in more detail in Item 7 of this Form 10-K 10 _________________________________________________________________ [73]Table of Contents Our high degree of leverage, as well as the incurrence of additional debt, could have important consequences for our business, such as: • limiting our ability to make capital investments in order to expand our business; • limiting our ability to borrow additional amounts for working capital, debt service requirements or other purposes; • limiting our ability to invest operating cash flow in our business, because we use a substantial portion of these funds to service debt and because our covenants restrict the amount of our investments; • limiting our ability to withstand business and economic downturns, because of the high percentage of our operating cash flow that is dedicated to servicing our debt; and • limiting our ability to pay dividends |
| 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 |
| An inability to access financial markets could adversely affect our financial condition and results of operations and the execution of our business plan |
| We rely on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital and operating requirements not satisfied by the cash flows from our operations |
| Disruptions outside of our control or events of default under our debt agreements, such as an economic downturn or our inability to comply with our financial covenants, may increase our cost of borrowing or restrict our ability to access one or more financial markets |
| In December 2005, we amended our revolving credit agreement and senior notes |
| Under the amended revolving credit agreement and senior notes, we granted to the lenders security interests in substantially all of our assets and pledged our equity interests in certain foreign subsidiaries |
| We also agreed to modify limitations on our ability to make additional investments, dispose of assets and incur additional indebtedness or liens |
| In addition, we agreed to provide additional reporting and information to the lenders under these agreements, and to increase the interest rate payable on the debt, if we have not, by May 31, 2006, paid in full our obligations to these lenders |
| We anticipate refinancing substantially all of our existing debt in the first half of 2006 |
| We anticipate that the refinancing will provide us with greater flexibility to enable us to pursue our strategic initiatives, including the potential acquisition of the remaining 51prca investment in Vitrocrisa, our Mexican joint venture |
| Restrictions on our ability to access financial markets may affect our ability to execute this business plan as scheduled and could adversely affect our financial condition and results of operations |
| Significant increases in interest rates that increase our borrowing costs could adversely affect our results of operations and financial condition |
| We are exposed to market risk associated with changes in interest rates on our floating debt and have entered into Interest Rate Protection Agreements (Rate Agreements) with respect to dlra25 million of debt as a means to manage our exposure to fluctuating interest rates |
| The Rate Agreements effectively convert a portion of our long-term borrowings from variable rate debt to fixed-rate debt, thus reducing the impact of interest rate changes on future income |
| If the counterparties to these Rate Agreements were to fail to perform, we would no longer be protected from interest rate fluctuations by these Rate Agreements, which could adversely affect our results of operations and financial condition |
| We had dlra154dtta5 million of debt subject to fluctuating interest rates at December 31, 2005 |
| A change of one percentage point in such rates would result in a change in interest expense of approximately dlra1dtta5 million on an annual basis |
| 11 _________________________________________________________________ [74]Table of Contents We may not be able to effectively integrate Crisal or future businesses we acquire |
| In addition to the acquisition of Crisal in Portugal, we are considering strategic transactions, including acquisitions, that will complement, strengthen and enhance growth in our worldwide glass tableware operations, including the possible purchase of the remaining 51prca of the shares of Vitrocrisa from Vitro SA The acquisition of Crisal and other strategic transactions, including any future acquisitions, are subject to various risks and uncertainties, including: • the inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which are located in diverse geographic regions) and to achieve expected synergies; • the potential disruption of existing business and diversion of management’s attention from day-to-day operations; • the inability to maintain uniform standards, controls, procedures and policies; • the need or obligation to divest portions of the acquired companies; and • the potential impairment of relationships with customers |
| In addition, we cannot assure you that the integration and consolidation of newly acquired businesses, including Crisal, will achieve any anticipated cost savings and operating synergies |
| Delays and budget increases related to the construction of our new production facility in China, or an inability to meet targeted production and profit margin goals after construction, could result in lost sales or significant additional costs |
| We began construction on our new production facility in China during the third quarter of 2005 |
| We intend to use this facility to better access the Chinese and Asia-Pacific markets and to improve our competitive position in that region |
| Currently, we plan to begin production of glass tableware from this facility in early 2007 |
| If we are unable to expand our manufacturing capacity in Asia as planned, we may be unable to satisfy demand for our products in those markets, which may result in lost future sales |
| In addition, if we are unable to meet targeted production and profit margin goals in connection with the operation of our Chinese production facility after construction, our profits could be reduced, which would adversely affect our results of operations and financial condition |
| Construction delays, regulatory approvals and other factors beyond our control could delay the start-up of operations in our Chinese facility or significantly increase the costs of its construction |
| If we are unable to expand our manufacturing capacity in Asia as planned, we may be unable to satisfy demand for our products in those markets, which may result in lost future sales and could adversely affect our results of operations and financial condition |
| 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 substantially all of our manufacturing employees |
| Collective bargaining agreements with respect to our Syracuse China facility expire in 2006 |
| If our unionized employees were to engage in a strike or other work stoppage prior to expiration of the existing collective bargaining agreements, or if we are unable to negotiate acceptable extensions of those agreements with labor unions resulting in a strike or other work stoppage by the affected workers, we could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could have an adverse impact on our operating performance and financial condition |
| We are subject to risks associated with operating in foreign countries which could adversely affect our results of operations and financial condition |
| We operate manufacturing and other facilities throughout the world |
| In addition, we are building a new glassware manufacturing facility in the Peoples Republic of China |
| As a result of our international operations, we are subject to risks associated with operating in foreign countries, including: • political, social and economic instability; • war, civil disturbance or acts of terrorism; • taking of property by nationalization or expropriation without fair compensation; • changes in government policies and regulations; 12 _________________________________________________________________ [75]Table of Contents • devaluations and fluctuations in currency exchange rates; • imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries; • imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; • hyperinflation in certain foreign countries; and • impositions or increase of investment and other restrictions or requirements by foreign governments |
| 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 Vitrocrisa |
| Mexico has experienced high levels of inflation and high domestic interest rates |
| The annual rate of inflation, as measured by changes in the Mexican National Consumer Price Index, was 3dtta3prca for 2005 and 5dtta2prca for 2004 |
| If Mexico experiences high levels of inflation, Vitrocrisa’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 Vitrocrisa’s glass tableware products |
| Inflation in Mexico and increases in Mexican interest rates could adversely affect Vitrocrisa’s financing costs and adversely affect 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 against the US dollar, including the euro and the Mexican peso, may result in significant changes in the indebtedness of our non-US subsidiaries |
| Currency fluctuations between the US dollar and the currencies of our non-US subsidiaries affect our results as reported in US dollars, particularly the earnings of Vitrocrisa as expressed under US GAAP, and may continue to affect our financial income and expense, our revenues from international settlements and the calculation of financial covenants related to our US dollar-denominated debt |
| Fluctuations in the value of the foreign currencies in which we operate relative to the US 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 Chinese yuan relative to the US dollar and other major currencies could reduce the cost competitiveness of our products or those of our subsidiaries, including our operations in the euro zone, Mexico and China, as compared to foreign competition |
| For example, if the US dollar appreciates against the euro, the Mexican peso or the Chinese yuan, the purchasing power of those currencies would be effectively reduced against the US dollar, making our products more expensive in euro zone, Mexico and China compared to local competitors |
| An appreciation of the US dollar against the euro, the Mexican peso or the Chinese yuan would also increase the cost of US dollar-denominated purchases for our operations in the euro zone, Mexico and China, including raw materials, which they would be forced to deduct from their profit margin or pass 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 US 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 Vitrocrisa’s Mexican peso earnings into US dollars and other currencies for the purpose of making timely payments of interest and principal on Vitrocrisa’s indebtedness |
| 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 US dollars or to transfer other currencies out of Mexico, the government could institute restrictive exchange rate policies in the future, which could adversely affect our results of operations and financial condition |
| 13 _________________________________________________________________ [76]Table of Contents In addition, the government of the Peoples Republic of China imposes controls on the convertibility of Chinese yuan 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, or otherwise satisfy their foreign currency-denominated debt |
| 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 Chinese yuan 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 |
| The Chinese government could also institute restrictive exchange rate policies in the future for current account transactions, which could adversely affect our results of operations and financial condition |
| Goodwill and indefinite life intangibles impairment charges could negatively affect our earnings |
| We complete goodwill and indefinite life intangibles impairment tests in accordance with SFAS Nodtta 142 for each reporting unit on October 1 of each year, or more frequently in certain circumstances where impairment indicators arise |
| As part of this analysis, SFAS Nodtta 142 requires that we estimate the fair value and compare to book value |
| If the estimated fair value is less than the book value, then an impairment is deemed to have occurred |
| Based on this analysis, we concluded that goodwill of dlra5dtta4 million and intangible assets of dlra3dtta7 million, associated with Syracuse China, was impaired in 2005 |
| See note 7 to the Consolidated Financial Statements for further discussion of impairments |
| To the extent that we experience goodwill and/or indefinite life intangibles impairment charges in the future, our financial condition and results of operations could be adversely affected |
| 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 |
| We account for derivatives in accordance with SFAS Nodtta 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos |
| We hold derivative financial instruments to 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 occasional transactions denominated in a currency other than the US dollar |
| 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 |
| 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 could significantly impact our earnings |
| We are subject to various environmental legal requirements and may be subject to new legal requirements in the future, which could have a material adverse effect on our operations |
| Our operations and properties, both in the US 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 |
| Our operations and properties, both in the US and abroad, must comply with these legal requirements |
| 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 |
| 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 |