GTI 3.31.2014-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended March 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from              to             
 
Commission file number: 1-13888
 

GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
 
Delaware
27-2496053
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
12900 Snow Road
44130
Parma, OH
(Zip code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (216) 676-2000
 
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  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
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.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of April 15, 2014, 135,690,960 shares of common stock, par value $.01 per share, were outstanding.


Table of Contents

TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION:
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
 
As of December 31, 2013
 
As of
March 31,
 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,888

 
$
17,324

Accounts and notes receivable, net of allowance for doubtful accounts of
   $6,718 as of December 31, 2013 and $8,629 as of March 31, 2014
199,566

 
205,685

Inventories
490,414

 
491,275

Prepaid expenses and other current assets
73,790

 
81,281

Total current assets
775,658

 
795,565

Property, plant and equipment
1,588,880

 
1,596,006

Less: accumulated depreciation
767,895

 
797,627

Net property, plant and equipment
820,985

 
798,379

Deferred income taxes
10,334

 
10,117

Goodwill
496,810

 
496,801

Other assets
114,061

 
108,629

Total assets
$
2,217,848

 
$
2,209,491

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
115,212

 
$
118,865

Short-term debt
1,161

 
168

Accrued income and other taxes
30,687

 
26,317

Rationalizations
18,421

 
10,010

Supply chain financing liability
9,455

 

Other accrued liabilities
40,939

 
46,335

Total current liabilities
215,875

 
201,695

Long-term debt
541,593

 
554,512

Other long-term obligations
97,947

 
96,740

Deferred income taxes
41,684

 
42,732

Contingencies – Note 12

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued

 

Common stock, par value $.01, 225,000,000 shares authorized,
   151,929,565 shares issued as of December 31, 2013 and 152,051,994
   shares issued as of March 31, 2014
1,519

 
1,521

Additional paid-in capital
1,820,451

 
1,822,082

Accumulated other comprehensive loss
(292,624
)
 
(290,552
)
Retained earnings
39,625

 
28,108

Less: cost of common stock held in treasury, 16,341,311 shares as of
   December 31, 2013 and 16,287,128 shares as of March 31, 2014
(247,190
)
 
(246,294
)
Less: common stock held in employee benefit and compensation trusts,
   87,206 shares as of December 31, 2013 and 89,087 shares as of
   March 31, 2014
(1,032
)
 
(1,053
)
Total stockholders’ equity
1,320,749

 
1,313,812

Total liabilities and stockholders’ equity
$
2,217,848

 
$
2,209,491

 See accompanying Notes to Consolidated Financial Statements

3

Table of Contents

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended
 
March 31,
 
2013
 
2014
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Net sales
$
253,727

 
$
280,791

Cost of sales
205,177

 
255,097

Gross profit
48,550

 
25,694

Research and development
3,093

 
2,770

Selling and administrative expenses
29,713

 
29,907

Rationalizations

 
86

Operating income (loss)
15,744

 
(7,069
)
 
 
 
 
Other expense, net
550

 
794

Interest expense
9,008

 
8,999

Interest income
(64
)
 
(58
)
Income (loss) before provision for income taxes
6,250

 
(16,804
)
 
 
 
 
Provision (benefit) for income taxes
2,040

 
(5,287
)
Net income (loss)
$
4,210

 
$
(11,517
)
 
 
 
 
Basic income (loss) per common share:
 
 
 
Net income (loss) per share
$
0.03

 
$
(0.08
)
Weighted average common shares outstanding
134,646

 
135,730

 
 
 
 
Diluted income (loss) per common share:
 
 
 
Net income (loss) per share
$
0.03

 
$
(0.08
)
Weighted average common shares outstanding
134,833

 
135,730

 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Net income (loss)
$
4,210

 
$
(11,517
)
Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(7,309
)
 
2,387

Commodities and foreign currency derivatives and other, net of tax of ($307) and $116, respectively
3,533

 
(315
)
Other comprehensive (loss) income, net of tax:
(3,776
)
 
2,072

Comprehensive income (loss)
$
434

 
$
(9,445
)

See accompanying Notes to Consolidated Financial Statements


4

Table of Contents

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended
 
March 31,
 
2013
 
2014
Cash flow from operating activities:
 
 
 
Net income (loss)
$
4,210

 
$
(11,517
)
Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
20,376

 
39,661

Deferred income tax provision
(1,660
)
 
(1,222
)
Post-retirement and pension plan changes
1,141

 
1,012

Stock-based compensation
2,366

 
522

Interest expense
3,433

 
3,645

Other charges, net
285

 
(1,593
)
Increase in working capital*
(8,934
)
 
(6,665
)
Increase in long-term assets and liabilities
(3,218
)
 
(1,753
)
Net cash provided by operating activities
17,999

 
22,090

Cash flow from investing activities:
 
 
 
Capital expenditures
(13,156
)
 
(21,728
)
Proceeds from the sale of assets

 
1,895

Proceeds from (payments for) derivative instruments
2,181

 
(367
)
Insurance recoveries

 
3,057

Net cash used in investing activities
(10,975
)
 
(17,143
)
Cash flow from financing activities:
 
 
 
Short-term debt reductions, net
(6,324
)
 
(994
)
Revolving Facility borrowings
66,000

 
75,000

Revolving Facility reductions
(52,500
)
 
(65,000
)
Principal payments on long-term debt
(99
)
 
(92
)
Supply chain financing
(14,304
)
 
(9,455
)
Proceeds from exercise of stock options
132

 
82

Purchase of treasury shares
(181
)
 
(141
)
Other
(5,647
)
 
918

Net cash (used in) provided by financing activities
(12,923
)
 
318

Net (decrease) increase in cash and cash equivalents
(5,899
)
 
5,265

Effect of exchange rate changes on cash and cash equivalents
(114
)
 
171

Cash and cash equivalents at beginning of period
17,317

 
11,888

Cash and cash equivalents at end of period
$
11,304

 
$
17,324

 
 
 
 
* Net change in working capital due to the following components:
 
 
 
      Change in current assets:
 
 
 
Accounts and notes receivable, net
$
47,767

 
$
(5,684
)
Inventories
(23,789
)
 
955

Prepaid expenses and other current assets
(1,186
)
 
(4,670
)
(Decrease) increase in accounts payable and accruals
(36,596
)
 
6,506

Rationalizations

 
(8,580
)
Increase in interest payable
4,870

 
4,808

Increase in working capital
$
(8,934
)
 
$
(6,665
)

See accompanying Notes to Consolidated Financial Statements

5

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



(1)
Organization and Summary of Significant Accounting Policies
A. Organization
GrafTech International Ltd. is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. We have seven major product categories: graphite electrodes, refractory products, needle coke products, advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, which are reported in the following segments:
Industrial Materials includes graphite electrodes, refractory products, and needle coke products, and primarily serves the steel industry.
Engineered Solutions includes advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, and provides primary and specialty products to the advanced electronics, industrial, energy, transportation and defense industries.
B. Basis of Presentation
The interim Consolidated Financial Statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). December 31, 2013 financial position data included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”) but does not include all disclosures required by GAAP. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, including the accompanying Notes, contained in the Annual Report.
The unaudited consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for the interim period presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued guidance on Income Taxes for “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This guidance requires that financial statements reflect a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward as reduced by any unrecognized tax benefit, or a portion of an unrecognized tax benefit. The updated guidance is effective for the Company's interim and annual periods beginning after December 15, 2013. We adopted the guidance effective January 1, 2014 and its implementation did not have a material impact to our financial statements.
(2)
Rationalizations
Industrial Materials Rationalization
On October 31, 2013, we announced a global initiative to reduce our Industrial Materials segment's cost base and improve our competitive position. As part of this initiative, we will close our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. Upon these closures, our graphite electrode capacity will be reduced by approximately 60,000 metric tons. In parallel, we adopted measures for reductions in overhead and related corporate operations. These actions in total are expected to reduce global headcount by approximately 600 people or approximately 20 percent of our global workforce. The rationalization plan is targeted to be substantially complete by the end of the second quarter of 2014.

This rationalization initiative will result in approximately $95 million of pre-tax charges, of which approximately $25 million will be cash outlays, the majority of which will be incurred in 2014, and funded through working capital improvements. The remaining $70 million are non-cash costs, which primarily reflects the accelerated depreciation of

6

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


assets, and will be expensed throughout the wind-down period. We incurred $61.8 million of expense related to this initiative in 2013.

Impact to 2014 financial results

In the three months ended March 31, 2014, as a result of the Industrial Materials rationalization, we incurred $0.1 million in charges for post-employment benefits (including corporate charges) in Rationalizations. As a result of the planned shut-down, certain assets in progress were written off and the estimated useful life of productive assets changed. Consequently, we incurred non-cash charges of $17.0 million of accelerated depreciation, recorded in Cost of sales. We also recorded in Cost of sales $0.3 million of other charges, including cleaning and dismantling costs, loss reserves for inventory of products. These costs were partially offset by proceeds from the sale of assets and scrap.

Engineered Solutions Rationalization

In order to optimize our Engineered Solutions platform and improve our cost structure, we initiated actions to centralize certain operations and reduce overhead. These actions are expected to reduce global headcount by approximately 40 people. The total expected cost of these actions is approximately $4.5 million, approximately $1.0 million of which will be cash outlays, the majority of which will be incurred in 2014. The remaining $3.5 million are non-cash costs, which primarily reflect the write-off of assets. We incurred $3.9 million of expense related to this initiative in 2013 and we expect the remainder to be incurred in 2014.

Impact to 2014 financial results

In the three months ended March 31, 2014, as a result of the Engineered Solutions Rationalization we incurred non-cash charges of $0.4 million for accelerated depreciation, recorded in Cost of sales.

The following table represents the roll-forward of the liability incurred for employee termination benefits and contract termination costs incurred in connection with the two initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
 
(dollars in thousands)
Balance as of December 31, 2013
$
18,421

Charges incurred
123

Change in estimates
(37
)
Payments and settlements
(8,665
)
Effect of change in currency exchange rates
168

Balance as of March 31, 2014
$
10,010



7

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Charges incurred related to these plans for the year ended March 31, 2014 are as follows:
 
For the Three Months Ended
March 31, 2014
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Total
 
(dollars in thousands)
Accelerated depreciation (recorded in Cost of sales)
17,020

 
413

 
17,433

Other (recorded in Cost of sales)
321

 

 
321

Other (recorded Selling and administrative)
25

 
(10
)
 
15

Severance and related costs (recorded in Rationalizations)
114

 
(28
)
 
86

   Total rationalization and related charges
$
17,480

 
$
375

 
$
17,855

(3)
Stock-Based Compensation
For the three months ended March 31, 2013 and 2014, we recognized stock-based compensation expense of $2.4 million and $0.5 million, respectively. A majority of the expense, $2.1 million and $0.5 million, respectively, was recorded as selling and administrative expenses in the Consolidated Statements of Operations, with the remaining expenses recorded as cost of sales and research and development.
As of March 31, 2014, the total compensation cost related to non-vested restricted stock, performance shares and stock options not yet recognized was $15.1 million, which will be recognized over the weighted average life of 1.7 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the three months ended March 31, 2014 was:
 
Number of
Shares
 
Weighted-
Average
Grant  Date
Fair Value
Outstanding unvested as of January 1, 2014
1,633,491

 
$
10.98

Granted
136,600

 
10.33

Vested
(48,049
)
 
15.16

Forfeited/canceled/expired
(525,337
)
 
9.61

Outstanding as of March 31, 2014
1,196,705

 
11.34

 
Stock Options
Stock option activity under the plans for the three months ended March 31, 2014 was:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
Outstanding as of January 1, 2014
1,916,718

 
$
12.47

Granted
67,800

 
10.33

Forfeited/canceled/expired
(49,203
)
 
12.11

Exercised
15,000

 
5.46

Outstanding as of March 31, 2014
1,950,315

 
12.46


8

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(4)
Earnings per Share
The following table shows the information used in the calculation of our share counts for basic and diluted earnings per share:
 
 
For the Three Months Ended
 
 
March 31,
 
 
2013
 
2014
Weighted average common shares outstanding
    for basic calculation
 
134,645,729

 
135,729,809

Add: Effect of stock options and restricted stock
 
186,829

 

Weighted average common shares outstanding
    for diluted calculation
 
134,832,558

 
135,729,809

Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of stock options covering 1,594,615 shares in the three months ended March 31, 2013, and 1,131,088 shares in the three months ended March 31, 2014, as the exercise prices were greater than the weighted average market price of our common stock for the applicable period.
(5)
Segment Reporting

We operate in two reportable segments: Industrial Materials and Engineered Solutions.
Industrial Materials. Our industrial materials segment manufactures and delivers high quality graphite electrodes, refractory products and needle coke products. Electrodes are key components of the conductive power systems used to produce steel and other non-ferrous metals. Refractory products are used in blast furnaces and submerged arc furnaces due to their high thermal conductivity and the ease with which they can be machined to large or complex shapes. Needle coke, a crystalline form of carbon derived from decant oil, is the key ingredient in, and is used primarily in, the production of graphite electrodes.
Engineered Solutions. The Engineered Solutions segment includes advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials. Advanced electronics technologies products consist of electronic thermal management solutions, fuel cell components, and sealing materials. Advanced graphite materials are highly engineered synthetic graphite products used in many areas due to their unique properties and the ability to tailor them to specific solutions. These products are used in transportation, alternative energy, metallurgical, chemical, oil and gas exploration and various other industries. Advanced composite materials are highly engineered carbon products that are woven into various shapes primarily to support the aerospace and defense industries. Advanced materials use carbon and graphite powders as components or additives in a variety of industries, including metallurgical processing, battery and fuel cell components, and polymer additives.
We continue to evaluate the performance of our segments based on segment operating income. Intersegment sales and transfers are not material and the accounting policies of the reportable segments are the same as those for our Consolidated Financial Statements as a whole. Corporate expenses are allocated to segments based on each segment’s percentage of consolidated sales.
The following tables summarize financial information concerning our reportable segments:

9

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
For the Three Months Ended
 
March 31,
 
2013
 
2014
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
Industrial Materials
$
208,777

 
$
218,776

Engineered Solutions
44,950

 
62,015

Total net sales
$
253,727

 
$
280,791

Segment operating income:
 
 
 
Industrial Materials
$
16,078

 
$
(9,423
)
Engineered Solutions
(334
)
 
2,354

Total segment operating income (loss)
$
15,744

 
$
(7,069
)
 
 
 
 
Reconciliation of segment operating income to
    income before provision for income taxes
 
 
 
Other expense, net
550

 
794

Interest expense
9,008

 
8,999

Interest income
(64
)
 
(58
)
Income (loss) before provision for income taxes
$
6,250

 
$
(16,804
)

(6)
Benefit Plans
The components of our consolidated net pension costs are set forth in the following table:
 
 
For the Three Months Ended
 
March 31,
 
2013
 
2014
 
(Dollars in thousands)
Service cost
$
489

 
$
473

Interest cost
1,985

 
2,169

Expected return on plan assets
(1,706
)
 
(1,938
)
Amortization of prior service cost
6

 
1

Net cost
$
774

 
$
705


The components of our consolidated net postretirement costs are set forth in the following table: 
 
For the Three Months Ended
 
March 31,
 
2013
 
2014
 
(Dollars in thousands)
Service cost
$
28

 
$
19

Interest cost
331

 
352

Amortization of prior service benefit
(50
)
 
(47
)
Net cost
$
309

 
$
324



10

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(7)
Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Our annual impairment test of goodwill was performed as of December 31, 2013. The estimated fair values of our reporting units were based on discounted cash flow models derived from internal earnings forecasts and assumptions. The assumptions and estimates used in these valuations incorporated the current and expected economic environment. Our model was based on our internally developed forecast and based on these valuations, the fair value substantially exceeded our net asset value. In addition to the quantitative analysis, we qualitatively assessed our reporting units and we believe that the quantitative analysis supporting the fair value in excess of the carrying value is appropriate. However, a further deterioration in the global economic environments or in any of the input assumptions in our calculation could adversely affect the fair value of our reporting units and result in an impairment of some or all of the goodwill on the balance sheet.
The changes in the carrying value of goodwill during the three months ended March 31, 2014 are as follows:
 
Total
 
(Dollars in
Thousands)
Balance as of December 31, 2013
$
496,810

Currency translation effect
(9
)
Balance as of March 31, 2014
$
496,801

The following table summarizes acquired intangible assets with determinable useful lives by major category as of December 31, 2013 and March 31, 2014:
 
As of December 31, 2013
 
As of March 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(Dollars in Thousands)
Trade name
7,900

 
(3,944
)
 
3,956

 
7,900

 
(4,163
)
 
3,737

Technological know-how
43,349

 
(18,582
)
 
24,767

 
43,349

 
(20,089
)
 
23,260

Customer –related
    intangible
110,798

 
(44,664
)
 
66,134

 
110,798

 
(47,691
)
 
63,107

Total finite-lived
    intangible assets
$
162,047

 
$
(67,190
)
 
$
94,857

 
$
162,047

 
$
(71,943
)
 
$
90,104

Amortization expense of acquired intangible assets was $5.2 million and $4.8 million in the three months ended March 31, 2013 and March 31, 2014, respectively. Estimated amortization expense will approximate $14.3 million in the remainder of 2014, $17.3 million in 2015, $13.2 million in 2016, $14.4 million in 2017 and $10.7 million in 2018.
(8)
Long-Term Debt and Liquidity
The following table presents our long-term debt: 
 
As of December 31, 2013
 
As of March 31, 2014
 
(Dollars in thousands)
Revolving Facility
$
64,000

 
$
74,000

Senior Notes
300,000

 
300,000

Senior Subordinated Notes
175,675

 
178,672

Other Debt
1,918

 
1,840

Total
$
541,593

 
$
554,512


11

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
The fair value of long-term debt, which was determined using Level 2 inputs, was $549.8 million, versus a book value of $541.6 million as of December 31, 2013. As of March 31, 2014, the fair value of our long-term debt was $566.4 million versus a book value of $554.5 million.
Revolving Facility
On October 7, 2011, we successfully completed the refinancing of our principal revolving credit facility (“Revolving Facility”). Borrowers under the Revolving Facility were GrafTech Finance Inc. (“GrafTech Finance”) and GrafTech Switzerland S.A. (“Swissco”), both wholly-owned subsidiaries. On April 20, 2012, as permitted by Section 9.19 of the Revolving Facility, we entered into an Amended and Restated Credit Agreement pursuant to which, on August 28, 2012, GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco”) replaced Swissco as a Borrower. Swissco is no longer entitled to borrow under the Revolving Facility although it is entitled to request letters of credit thereunder only for its own use.
The interest rate applicable to the Revolving Facility is, at GrafTech’s option, either LIBOR plus a margin ranging from 1.5% to 2.25% (depending on our total net leverage ratio) or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.50% to 1.25% (depending upon such ratio). The alternate base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, N.A., (ii) the federal fund effective rate plus one-half of 1.0% and (iii) the London interbank offering rate (as adjusted) for a one-month period plus 1.0%. The borrowers pay a per annum fee ranging from 0.25% to 0.40% (depending on our total leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
The financial covenants require us to maintain a minimum cash interest coverage ratio of 3.00 to 1.00 and a maximum senior secured leverage ratio of 2.25 to 1.00, subject to adjustment for certain events. As of March 31, 2014, we were in compliance with all financial and other covenants contained in the Revolving Facility, as applicable.
Senior Notes
On November 20, 2012, GrafTech International Ltd. issued $300 million principal amount of 6.375% Senior Notes due 2020. These Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
 
The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2013. The Senior Notes mature on November 15, 2020.
 
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the Indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the Indenture. The Company is also entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes before November 15, 2015 with the net proceeds from certain equity offerings at a redemption price of 106.375% of the principal amount plus accrued and unpaid interest, if any.

If, prior to maturity, a change in control (as defined in the Indenture) of the Company occurs and thereafter certain downgrades of the ratings of the Senior Notes as specified in the Indenture occur, the Company will be required to offer to repurchase any or all of the Senior Notes at a repurchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus any accrued and unpaid interest.

The Senior Notes also contain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to: (i) create liens or use assets as security in other transactions; (ii) engage in certain sale/leaseback transactions; and (iii) merge, consolidate or sell, transfer, lease or dispose of substantially all of their assets.

The Senior Notes also contain customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the Indenture or

12

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


the Senior Notes which failures are not cured or waived as provided in the Indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (as defined in the Indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $50.0 million, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $50.0 million against the Company, any Subsidiary Guarantor or any Significant Subsidiary that is not discharged, waived or stayed as provided in the Indenture, (vi) cessation of any subsidiary guarantee to be in full force and effect or denial or disaffirmance by any Subsidiary Guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.
Senior Subordinated Notes
On November 30, 2010, in connection with our acquisitions of Seadrift Coke L.P. and C/G Electrodes LLC, we issued Senior Subordinated Notes for an aggregate face amount of $200 million. These Senior Subordinated Notes are non-interest bearing and mature in 2015. Because these notes are non-interest bearing, we were required to record them at their present value (determined using an interest rate of 7%). The difference between the face amount of the notes and their present value is recorded as debt discount. The debt discount is amortized to income using the interest method, over the life of the notes. The loan balance, net of unamortized discount, was $175.7 million as of December 31, 2013 and $178.7 million as of March 31, 2014.
(9)
Inventories
Inventories are comprised of the following: 
 
As of December 31, 2013
 
As of March 31, 2014
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
184,420

 
$
174,255

Work in process
245,160

 
251,485

Finished goods
78,446

 
83,426

 
508,026

 
509,166

Reserves
(17,612
)
 
(17,891
)
         Total
$
490,414

 
$
491,275


(10) Interest Expense
The following table presents an analysis of interest expense: 
 
For the Three Months Ended
 
March 31,
 
2013
 
2014
 
(Dollars in thousands)
 
 
 
 
Interest incurred on debt
$
5,449

 
$
5,322

Amortization of discount on Senior Subordinated Notes
2,801

 
2,997

Amortization of debt issuance costs
555

 
633

Supply Chain Financing mark-up
203

 
47

Total interest expense
$
9,008

 
$
8,999

Interest Rates

13

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The Revolving Facility had an effective interest rate of 2.42% and 2.40% as of December 31, 2013 and March 31, 2014, respectively. The Senior Subordinated Notes have an implied interest rate of 7.00%. The Senior Notes have a fixed interest rate of 6.375%
(11)
Supply Chain Financing

We have a supply chain financing arrangement with a financing party. Under this arrangement, we essentially assign our rights to purchase needle coke from a supplier to the financing party. The financing party purchases the product from a supplier under the supplier's standard payment terms and then immediately resells it to us under longer payment terms. The financing party pays the supplier the purchase price for the product and then we pay the financing party. Our payment to the financing party for this needle coke includes a mark-up (the “Mark-Up”). The Mark-Up is a premium expressed as a percentage of the purchase price. The Mark-Up is subject to quarterly reviews. This arrangement helps us to maintain a balanced cash conversion cycle between inventory payments and the collection of receivables. Based on the terms of the arrangement, the total amount that we owe to the financing party can not exceed $49.3 million at any point in time.
We record the inventory once title and risk of loss transfers from the supplier to the financing party. We record our liability to the financing party as an accrued liability. Our liability under this arrangement was $9.5 million as of December 31, 2013. We recognized Mark-Up of $0.2 million as interest expense in the three months ended March 31, 2013. We had minimal borrowings under this arrangement during the three months ended March 31, 2014 and as such, we incurred negligible Mark-Up.
(12)
Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the three months ended March 31, 2014, are presented below (dollars in thousands): 
 
 
Balance as of December 31, 2013
$
1,050

Product warranty adjustments
(452
)
Payments and settlements
(78
)
Balance as of March 31, 2014
$
520

(13)
Income Taxes
We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax. These items may include the cumulative effect of changes in tax laws or rates, impairment charges, adjustments to prior period uncertain tax positions, or adjustments to our valuation allowance due to changes in judgment of the realizability of deferred tax assets. We assess this approach each quarter to determine if there are any mitigating circumstances where a discrete tax rate computation would be more appropriate.


14

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes the provision for income taxes for the three months ended March 31, 2013 and March 31, 2014:
 
For the Three Months Ended
 
March 31,
 
2013
 
2014
 
(Dollars in thousands)
Tax expense (benefit)
$
2,040

 
$
(5,287
)
Pretax income (loss)
$
6,250

 
$
(16,804
)
Effective tax rates
32.6
%
 
31.5
%
    
The provision for income taxes for the three months ended March 31, 2014 reflects a discrete period effective tax rate applied to ordinary income of 31.5%. The annual effective tax rate computed for the three months ended March 31, 2013 was 32.6%. These rates differ from the statutory rate of 35% due to jurisdictional mix. Discrete items of tax included in the three month periods ended March 31, 2013 and 2014 were not material.

A discrete period calculation was used to report the tax provision for the first three months of 2014 rather than an estimated annual effective tax rate because the estimated range of forecasted annual profit before tax produces significant variability and makes it difficult to reasonably estimate the annual effective tax rate. We are expected to be at a near break-even level of forecasted income for the year. However, due to the $17.9 million million of rationalization and related charges for the quarter relating to the global initiative announced on October 31, 2013 to reduce our Industrial Materials’ cost base and improve our competitive position, we incurred a loss for the quarter. The rationalization plan is targeted to be substantially complete by the end of the second quarter of 2014, after which time we expect to return to overall profitability in the second half of the year. See Note 2 for more information on Rationalizations.

As of March 31, 2014, we had unrecognized tax benefits of $4.7 million, which, if recognized, would have a favorable impact on our effective tax rate. It is reasonably possible that a reduction of unrecognized tax benefits of $2.5 million may occur within 12 months due to the expiration of statutes of limitation.

During the three months ended March 31, 2014, we settled our audits with the U.S. federal tax authorities for the tax years ended 2008 and 2010-2011 reducing our unrecognized tax benefits by $2.7 million, of which $0.3 million had a favorable impact on our effective tax rate.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2012 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2008.

We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In circumstances where the significant positive evidence does not yet outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have maintained valuation allowances on those deferred tax assets.
(14)
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the US dollar.
Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we

15

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-parties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was no ineffectiveness on these contracts designated as hedging instruments during the three months ended March 31, 2013 and 2014.
In 2013 and 2014, we entered into foreign forward currency derivatives denominated in the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from such transactions may be adversely affected by changes in exchange rates between the US dollar and the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. As of March 31, 2014, we had outstanding Mexican peso, South African rand, Brazilian real, euro, and Japanese yen currency contracts with aggregate notional amounts of $151.0 million. The foreign currency derivatives outstanding as of March 31, 2014 have several maturity dates ranging from April 2014 to December 2014.
Commodity derivative contracts
We periodically enter into derivative contracts for certain refined oil products and natural gas. These contracts are entered into to protect against the risk that eventual cash flows related to these products may be adversely affected by future changes in prices. There was no ineffectiveness on these contracts during the three months ended March 31, 2014. As of March 31, 2014, we had outstanding derivative swap contracts for refined oil products with aggregate notional amounts of $23.2 million. These contracts have maturity dates ranging from April 2014 to June 2014.
Net Investment Hedges
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was $25.2 million and $18.6 million as of December 31, 2013 and March 31, 2014, respectively. Within our currency translation adjustment portion of other comprehensive income, we recorded a gain of $1.6 million in three months ended March 31, 2013 and a gain of $0.1 million in the three months ended March 31, 2014 resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. The following tables present the fair values of our derivatives and their respective balance sheet locations as of December 31, 2013 and March 31, 2014:
 

16

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2013
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
772

 
Other payables
 
$
1,185

Commodity derivative contracts
Other current assets
 
834

 
Other current liabilities
 

Total fair value
 
 
$
1,606

 
 
 
$
1,185

 
 
 
 
 
 
 
 
As of March 31, 2014
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
621

 
Other payables
 
$
796

Commodity derivative contracts
Other current assets
 
27

 
Other current liabilities
 

Total fair value
 
 
$
648

 
 
 
$
796

 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2013
(Dollars in Thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
328

 
Other payables
 
$
24

Total fair value
 
 
$
328

 
 
 
$
24

 
 
 
 
 
 
 
 
As of March 31, 2014
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
254

 
Other payables
 
$
221

Total fair value
 
 
$
254

 
 
 
$
221

The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations when the hedged item impacts earnings and are as follows for the three months ended March 31, 2013 and 2014:
 
 
 
 
 
 
 

 
 
 
 
 
 
 

17

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Three Months Ended March 31,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2013
 
2014
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of ($9) and ($4), respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
94

 
$
301

Commodity forward derivatives, excluding
  tax of $116 and ($190), respectively.
 
Cost of goods sold / Revenue
 
$
(323
)
 
$
529

 
 
 
 
 
 
 
 
 
 
 
Amount of (Gain)/Loss
Recognized
Three Months Ended March 31,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
 
2013
 
2014
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
(1,782
)
 
$
(191
)
Our foreign currency and commodity derivatives are treated as hedges and are required to be measured at fair value on a recurring basis. With respect to the inputs used to determine the fair value, we use observable, quoted rates that are determined by active markets and, therefore, classify the contracts as Level 2”. 
(15)
Guarantor Information

On November 20, 2012, GrafTech International Ltd. (the “Parent”), issued $300 million aggregate principal amount of Senior Notes. The Senior Notes mature on November 15, 2020 and bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes have been guaranteed on a senior basis by the following wholly-owned direct and indirect subsidiaries of the Parent: GrafTech Finance Inc., GrafTech Holdings Inc., GrafTech USA LLC, Seadrift Coke LLP, Fiber Materials, Inc., Intermat, GrafTech Global Enterprises Inc., GrafTech International Holdings Inc., GrafTech DE LLC, GrafTech Seadrift Holding Corp, GrafTech International Trading Inc., GrafTech Technology LLC, GrafTech NY Inc., and Graphite Electrode Network LLC.

    The guarantors of the Senior Notes, solely in their respective capacities as such, are collectively called the “Guarantors.” Our other subsidiaries, which are not guarantors of the Senior Notes, are called the “Non-Guarantors.”
 
    All of the guarantees are unsecured. All of the guarantees are full, unconditional (subject to limited exceptions described below) and joint and several. Each of the Guarantors are 100% owned, directly or indirectly, by the Parent. All of the guarantees of the Senior Notes continue until the Senior Notes have been paid in full, and payment under such guarantees could be required immediately upon the occurrence of an event of default under the Senior Notes. If a Guarantor makes a payment under its guarantee of the Senior Notes, it would have the right under certain circumstances to seek contribution from the other Guarantors.

The Guarantors will be released from the guarantees upon the occurrence of certain events, including the following:  the unconditional release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Notes by such Guarantor; the sale or other disposition, including by way of merger or consolidation or the sale of its capital stock, following which such Guarantor is no longer a subsidiary of the Parent; or the Parent's exercise of its legal defeasance option or its covenant defeasance option as described in the indenture applicable to the Senior Notes.  If any Guarantor is released, no holder of the Senior Notes will have a claim as a

18

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


creditor against such Guarantor and the indebtedness and other liabilities, including trade payables and preferred stock, if any, of such Guarantor will be effectively senior to the claim of any holders of the Senior Notes.

Investments in subsidiaries are recorded on the equity basis.

    The following tables set forth condensed consolidating balance sheets as of December 31, 2013 and March 31, 2014 and condensed consolidating statements of operations and comprehensive income for the three months ended March 31, 2013 and 2014 and condensed consolidating statements of cash flows for the three months ended March 31, 2013 and 2014 of the Parent, Guarantors and the Non-Guarantors.

Amounts presented in comprehensive income for the three months ended March 31, 2013 have been revised.  Previously the Company did not present comprehensive income of subsidiaries in the guarantor column. This amount has been revised to present $5,195 in comprehensive income for the guarantor.  


19

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2013
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
4,752

 
$
7,136

 
$

 
$
11,888

    Accounts receivable - affiliates
 
42,410

 
28,551

 
15,824

 
(86,785
)
 

    Accounts receivable - trade
 

 
48,998

 
150,568

 

 
199,566

    Inventories
 

 
174,935

 
315,479

 

 
490,414

    Prepaid and other current assets
 

 
22,555

 
51,235

 

 
73,790

      Total current assets
 
42,410

 
279,791

 
540,242

 
(86,785
)
 
775,658

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,709,914

 
828,012

 

 
(2,537,926
)
 

 Property, plant and equipment
 

 
540,273

 
280,712

 

 
820,985

 Deferred income taxes
 

 

 
10,334

 

 
10,334

 Goodwill
 

 
293,162

 
203,648

 

 
496,810

 Notes receivable - affiliate
 
51,090

 
7,413

 

 
(58,503
)
 

 Other assets
 
4,752

 
53,447

 
55,862

 

 
114,061

      Total assets
 
$
1,808,166

 
$
2,002,098

 
$
1,090,798

 
$
(2,683,214
)
 
$
2,217,848

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 
$

 
$
58,206

 
$
28,579

 
$
(86,785
)
 
$

    Accounts payable - trade
 

 
41,971

 
73,241

 

 
115,212

    Short-term debt
 

 
165

 
996

 

 
1,161

    Accrued income and other taxes
 
2,678

 
4,736

 
23,273

 

 
30,687

    Rationalizations
 

 
1,890

 
16,531

 

 
18,421

    Supply chain financing liability
 

 

 
9,455

 

 
9,455

    Other accrued liabilities
 
2,444

 
12,404

 
26,091

 

 
40,939

         Total current liabilities
 
5,122

 
119,372

 
178,166

 
(86,785
)
 
215,875

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
51,090

 
7,413

 
(58,503
)
 

 Long-term debt - third party
 
475,675

 
50,525

 
15,393

 

 
541,593

 Other long-term obligations
 

 
66,590

 
31,357

 

 
97,947

 Deferred income taxes
 
6,620

 
4,607

 
30,457

 

 
41,684

 Stockholders' equity
 
1,320,749

 
1,709,914

 
828,012

 
(2,537,926
)
 
1,320,749

   Total liabilities and stockholders' equity
 
$
1,808,166

 
$
2,002,098

 
$
1,090,798

 
$
(2,683,214
)
 
$
2,217,848

 
 
 
 
 
 
 
 
 
 
 


20

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2014
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
5,782

 
$
11,542

 
$

 
$
17,324

    Accounts receivable - affiliates
 
43,730

 
25,271

 
23,489

 
(92,490
)
 

    Accounts receivable - trade
 

 
57,341

 
148,344

 

 
205,685

    Inventories
 

 
182,594

 
308,681

 

 
491,275

    Prepaid and other current assets
 

 
25,118

 
56,163

 

 
81,281

      Total current assets
 
43,730

 
296,106

 
548,219

 
(92,490
)
 
795,565

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,706,171

 
809,466

 

 
(2,515,637
)
 

 Property, plant and equipment
 

 
537,165

 
261,214

 

 
798,379

 Deferred income taxes
 

 

 
10,117

 

 
10,117

 Goodwill
 

 
293,162

 
203,639

 

 
496,801

 Notes receivable - affiliate
 
52,445

 
7,413

 

 
(59,858
)
 

 Other assets
 
4,600

 
50,306

 
53,723

 

 
108,629

      Total assets
 
$
1,806,946

 
$
1,993,618

 
$
1,076,912

 
$
(2,667,985
)
 
$
2,209,491

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 

 
67,470

 
25,020

 
(92,490
)
 

    Accounts payable - trade
 
17

 
47,017

 
71,831

 

 
118,865

    Short-term debt
 

 
154

 
14

 

 
168

    Accrued income and other taxes
 
600

 

 
25,717

 

 
26,317

    Rationalizations
 

 
1,314

 
8,696

 

 
10,010

    Other accrued liabilities
 
7,225

 
13,231

 
25,879

 

 
46,335

         Total current liabilities
 
7,842

 
129,186

 
157,157

 
(92,490
)
 
201,695

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
52,445

 
7,413

 
(59,858
)
 

 Long-term debt - third party
 
478,672

 
34,492

 
41,348

 

 
554,512

 Other long-term obligations
 

 
65,300

 
31,440

 

 
96,740

 Deferred income taxes
 
6,620

 
6,024

 
30,088

 

 
42,732

 Stockholders' equity
 
1,313,812

 
1,706,171

 
809,466

 
(2,515,637
)
 
1,313,812

    Total liabilities and stockholders' equity
 
$
1,806,946

 
$
1,993,618

 
$
1,076,912

 
$
(2,667,985
)
 
$
2,209,491

 
 
 
 
 
 
 
 
 
 
 


21

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2013
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
45,267

 
$
36,152

 
$
(81,419
)
 
$

 Sales - third party
 

 
98,196

 
155,531

 

 
253,727

    Net sales
 

 
143,463

 
191,683

 
(81,419
)
 
253,727

 Cost of sales
 

 
122,826

 
163,770

 
(81,419
)
 
205,177

      Gross profit
 

 
20,637

 
27,913

 

 
48,550

 Research and development
 

 
3,093

 

 

 
3,093

 Selling and administrative expenses
 

 
12,494

 
17,219

 

 
29,713

      Operating income
 

 
5,050

 
10,694

 

 
15,744

 
 
 
 
 
 
 
 
 
 
 
 Other expense, net
 

 
43

 
507

 

 
550

 Interest expense - affiliate
 

 
399

 
188

 
(587
)
 

 Interest expense - third party
 
7,745

 
805

 
458

 

 
9,008

 Interest income - affiliate
 
(364
)
 
(188
)
 
(35
)
 
587

 

 Interest income - third party
 

 

 
(64
)
 

 
(64
)
 (Loss) income before income taxes
 
(7,381
)
 
3,991

 
9,640

 

 `
6,250

 
 
 
 
 
 
 
 
 
 
 
 (Benefit) provision for income taxes
 
(2,620
)
 
1,443

 
3,217

 

 
2,040

 Equity in earnings of subsidiary
 
8,971

 
6,423

 

 
(15,394
)
 

      Net income (loss)
 
$
4,210

 
$
8,971

 
$
6,423

 
$
(15,394
)
 
$
4,210

 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
4,210

 
$
8,971

 
$
6,423

 
$
(15,394
)
 
$
4,210

Other comprehensive (loss) income
 
(3,776
)
 
(3,776
)
 
(4,351
)
 
8,127

 
(3,776
)
Comprehensive (loss) income
 
$
434

 
$
5,195

 
$
2,072

 
$
(7,267
)
 
$
434

 
 
 
 
 
 
 
 
 
 
 


22

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2014
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
70,357

 
$
35,207

 
$
(105,564
)
 
$

 Sales - third party
 

 
111,124

 
169,667

 

 
280,791

    Net sales
 

 
181,481

 
204,874

 
(105,564
)
 
280,791

 Cost of sales
 

 
157,029

 
203,632

 
(105,564
)
 
255,097

      Gross profit
 

 
24,452

 
1,242

 

 
25,694

 Research and development
 

 
2,770

 

 

 
2,770

 Selling and administrative expenses
 

 
9,867

 
20,040

 

 
29,907

 Rationalizations
 

 
36

 
50

 

 
86

      Operating income (loss)
 

 
11,779

 
(18,848
)
 

 
(7,069
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 

 
824

 
(30
)
 

 
794

 Interest expense - affiliate
 

 
226

 

 
(226
)
 

 Interest expense - third party
 
7,952

 
740

 
307

 

 
8,999

 Interest income - affiliate
 
(226
)
 

 

 
226

 

 Interest income - third party
 

 

 
(58
)
 

 
(58
)
   (Loss) income before income taxes
 
(7,726
)
 
9,989

 
(19,067
)
 

 `
(16,804
)
 
 
 
 
 
 
 
 
 
 
 
(Benefit) provision for income taxes
 
(2,781
)
 
4,552

 
(7,058
)
 

 
(5,287
)
Equity in losses of subsidiary
 
(6,572
)
 
(12,009
)
 

 
18,581

 

      Net (loss) income
 
$
(11,517
)
 
$
(6,572
)
 
$
(12,009
)
 
$
18,581

 
$
(11,517
)
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(11,517
)
 
$
(6,572
)
 
$
(12,009
)
 
$
18,581

 
$
(11,517
)
Other comprehensive income (loss)
 
2,072

 
2,072

 
2,477

 
(4,549
)
 
2,072

Comprehensive (loss) income
 
$
(9,445
)
 
$
(4,500
)
 
$
(9,532
)
 
$
14,032

 
$
(9,445
)
 
 
 
 
 
 
 
 
 
 
 


23

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2013
(in thousands)
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by
 operating activities:
$
455

 
$
14,863