GTI 6.30.2014 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended June 30, 2014
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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for the transition period from to |
Commission file number: 1-13888
GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
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Delaware | 27-2496053 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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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.
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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 July 15, 2014, 136,177,470 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION: | |
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Item 1. Financial Statements | |
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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 June 30, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 11,888 |
| | $ | 20,728 |
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Accounts and notes receivable, net of allowance for doubtful accounts of $6,718 as of December 31, 2013 and $8,563 as of June 30, 2014 | 199,566 |
| | 177,541 |
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Inventories | 490,414 |
| | 450,421 |
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Prepaid expenses and other current assets | 73,790 |
| | 93,693 |
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Total current assets | 775,658 |
| | 742,383 |
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Property, plant and equipment | 1,588,880 |
| | 1,621,461 |
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Less: accumulated depreciation | 767,895 |
| | 938,677 |
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Net property, plant and equipment | 820,985 |
| | 682,784 |
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Deferred income taxes | 10,334 |
| | 12,059 |
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Goodwill | 496,810 |
| | 496,335 |
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Other assets | 114,061 |
| | 110,277 |
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Total assets | $ | 2,217,848 |
| | $ | 2,043,838 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 115,212 |
| | $ | 122,428 |
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Short-term debt | 1,161 |
| | 142 |
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Accrued income and other taxes | 30,687 |
| | 23,019 |
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Rationalizations | 18,421 |
| | 3,592 |
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Supply chain financing liability | 9,455 |
| | — |
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Other accrued liabilities | 40,939 |
| | 38,447 |
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Total current liabilities | 215,875 |
| | 187,628 |
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Long-term debt | 541,593 |
| | 551,533 |
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Other long-term obligations | 97,947 |
| | 95,892 |
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Deferred income taxes | 41,684 |
| | 44,403 |
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Contingencies – Note 12 |
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Stockholders’ equity: | | | |
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued | — |
| | — |
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Common stock, par value $.01, 225,000,000 shares authorized, 151,929,565 shares issued as of December 31, 2013 and 152,450,629 shares issued as of June 30, 2014 | 1,519 |
| | 1,525 |
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Additional paid-in capital | 1,820,451 |
| | 1,826,776 |
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Accumulated other comprehensive loss | (292,624 | ) | | (290,313 | ) |
Retained earnings | 39,625 |
| | (127,325 | ) |
Less: cost of common stock held in treasury, 16,341,311 shares as of December 31, 2013 and 16,223,318 shares as of June 30, 2014 | (247,190 | ) | | (245,221 | ) |
Less: common stock held in employee benefit and compensation trusts, 87,206 shares as of December 31, 2013 and 89,703 shares as of June 30, 2014 | (1,032 | ) | | (1,060 | ) |
Total stockholders’ equity | 1,320,749 |
| | 1,164,382 |
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Total liabilities and stockholders’ equity | $ | 2,217,848 |
| | $ | 2,043,838 |
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See accompanying Notes to Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
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| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
CONSOLIDATED STATEMENTS OF OPERATIONS | | | | | | | |
Net sales | $ | 301,361 |
| | $ | 284,184 |
| | $ | 555,088 |
| | $ | 564,975 |
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Cost of sales | 252,440 |
| | 266,231 |
| | 457,617 |
| | 521,328 |
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Gross profit | 48,921 |
| | 17,953 |
| | 97,471 |
| | 43,647 |
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Research and development | 2,787 |
| | 2,903 |
| | 5,880 |
| | 5,673 |
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Selling and administrative expenses | 30,161 |
| | 32,137 |
| | 59,874 |
| | 62,044 |
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Rationalizations | — |
| | 831 |
| | — |
| | 917 |
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Impairments | — |
| | 121,570 |
| | — |
| | 121,570 |
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Operating income (loss) | 15,973 |
| | (139,488 | ) | | 31,717 |
| | (146,557 | ) |
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Other expense, net | 975 |
| | (41 | ) | | 1,525 |
| | 753 |
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Interest expense | 8,947 |
| | 9,155 |
| | 17,955 |
| | 18,154 |
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Interest income | (49 | ) | | (55 | ) | | (113 | ) | | (113 | ) |
Income (loss) before provision for income taxes | 6,100 |
| | (148,547 | ) | | 12,350 |
| | (165,351 | ) |
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Provision for income taxes | 1,718 |
| | 6,886 |
| | 3,758 |
| | 1,599 |
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Net income (loss) | $ | 4,382 |
| | $ | (155,433 | ) | | $ | 8,592 |
| | $ | (166,950 | ) |
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Basic income (loss) per common share: | | | | | | | |
Net income (loss) per share | $ | 0.03 |
| | $ | (1.14 | ) | | $ | 0.06 |
| | $ | (1.23 | ) |
Weighted average common shares outstanding | 134,854 |
| | 135,963 |
| | 134,816 |
| | 135,713 |
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Diluted income (loss) per common share: | | | | | | | |
Net income (loss) per share | $ | 0.03 |
| | $ | (1.14 | ) | | $ | 0.06 |
| | $ | (1.23 | ) |
Weighted average common shares outstanding | 135,056 |
| | 135,963 |
| | 134,988 |
| | 135,713 |
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STATEMENTS OF COMPREHENSIVE INCOME | | | | | | | |
Net income (loss) | $ | 4,382 |
| | $ | (155,433 | ) | | $ | 8,592 |
| | $ | (166,950 | ) |
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustments | (9,823 | ) | | (240 | ) | | (17,132 | ) | | 2,147 |
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Commodities and foreign currency derivatives and other, net of tax of ($307), ($169), $116 and ($53), respectively | (3,326 | ) | | 479 |
| | 207 |
| | 164 |
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Other comprehensive (loss) income, net of tax: | (13,149 | ) | | 239 |
| | (16,925 | ) | | 2,311 |
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Comprehensive income (loss) | $ | (8,767 | ) | | $ | (155,194 | ) | | $ | (8,333 | ) | | $ | (164,639 | ) |
See accompanying Notes to Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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| For the Six Months Ended |
| June 30, |
| 2013 | | 2014 |
Cash flow from operating activities: | | | |
Net income (loss) | $ | 8,592 |
| | $ | (166,950 | ) |
Adjustments to reconcile net income to cash provided by operations: | | | |
Depreciation and amortization | 44,868 |
| | 66,507 |
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Impairments | — |
| | 121,570 |
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Deferred income tax provision | 277 |
| | (1,724 | ) |
Post-retirement and pension plan changes | 2,242 |
| | 3,093 |
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Stock-based compensation | 3,745 |
| | 2,752 |
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Interest expense | 6,919 |
| | 7,471 |
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Other charges, net | 1,420 |
| | 2,783 |
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(Increase) decrease in working capital* | (51,016 | ) | | 30,416 |
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Increase in long-term assets and liabilities | (5,401 | ) | | (10,018 | ) |
Net cash provided by operating activities | 11,646 |
| | 55,900 |
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Cash flow from investing activities: | | | |
Capital expenditures | (38,518 | ) | | (46,464 | ) |
Proceeds from the sale of assets | — |
| | 2,523 |
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Proceeds from (payments for) derivative instruments | 1,472 |
| | (194 | ) |
Insurance recoveries | 284 |
| | 2,834 |
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Net cash used in investing activities | (36,762 | ) | | (41,301 | ) |
Cash flow from financing activities: | | | |
Short-term debt reductions, net | (5,649 | ) | | (1,019 | ) |
Revolving Facility borrowings | 111,000 |
| | 209,000 |
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Revolving Facility reductions | (70,500 | ) | | (205,000 | ) |
Principal payments on long-term debt | (140 | ) | | (126 | ) |
Supply chain financing | (8,369 | ) | | (9,455 | ) |
Proceeds from exercise of stock options | 175 |
| | 2,813 |
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Purchase of treasury shares | (709 | ) | | (435 | ) |
Revolver facility refinancing | — |
| | (2,636 | ) |
Other | (6,440 | ) | | 918 |
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Net cash provided by (used in) financing activities | 19,368 |
| | (5,940 | ) |
Net (decrease) increase in cash and cash equivalents | (5,748 | ) | | 8,659 |
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Effect of exchange rate changes on cash and cash equivalents | (583 | ) | | 181 |
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Cash and cash equivalents at beginning of period | 17,317 |
| | 11,888 |
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Cash and cash equivalents at end of period | $ | 10,986 |
| | $ | 20,728 |
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* Net change in working capital due to the following components: | | | |
Change in current assets: | | | |
Accounts and notes receivable, net | $ | 28,076 |
| | $ | 22,158 |
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Inventories | (33,384 | ) | | 42,298 |
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Prepaid expenses and other current assets | (16,362 | ) | | (18,660 | ) |
Decrease in accounts payable and accruals | (29,741 | ) | | (284 | ) |
Rationalizations | — |
| | (15,076 | ) |
Increase (decrease) in interest payable | 395 |
| | (20 | ) |
(Increase) decrease in working capital | $ | (51,016 | ) | | $ | 30,416 |
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See accompanying Notes to Consolidated Financial Statements
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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(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 titled “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 became 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.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2014-09 on its financial position, results of operations and cash flows.
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(2) | Rationalizations and Impairments |
2013 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 ceased production at our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. These actions are substantially
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
complete as of June 30, 2014. Our graphite electrode capacity was reduced by approximately 60,000 metric tons as a result of these actions. In parallel, we adopted measures for reductions in overhead and related corporate operations. These actions and measures are expected to reduce global headcount by approximately 600 people or approximately 20 percent of our global workforce.
2013 Engineered Solutions Rationalization
In order to optimize our Engineered Solutions platform and improve our cost structure, we also initiated actions to centralize certain operations and reduce overhead in our Engineered Solutions segment. These actions are expected to reduce global headcount by approximately 40 people and be substantially completed during 2014.
Total 2013 Rationalization Initiatives Impact to 2014 Financial Results
In the three and six months ended June 30, 2014, as a result of the 2013 rationalization initiatives we incurred rationalization charges of $0.8 million and $0.9 million, primarily related to contract termination costs. We also incurred non-cash accelerated depreciation charges of $4.2 million and $21.7 million in the three and six months ended June 30, 2014, respectively. Other rationalization-related charges recorded in cost of sales in the three and six months ended June 30, 2014 were $4.9 million and $5.2 million, respectively, and included cleaning and dismantling costs and loss reserves for inventory.
Charges incurred related to the 2013 rationalization initiatives for the three and six months ended June 30, 2014 are as follows:
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| For the Three Months Ended June 30, 2014 | | For the Six Months Ended June 30, 2014 |
| Industrial Materials Segment | | Engineered Solutions Segment | | Total | | Industrial Materials Segment | | Engineered Solutions Segment | | Total |
| (Dollars in thousands) | | (Dollars in thousands) |
Accelerated depreciation (recorded in Cost of sales) | $ | 3,832 |
| | $ | 413 |
| | $ | 4,245 |
| | $ | 20,852 |
| | $ | 826 |
| | $ | 21,678 |
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Other (recorded in Cost of sales) | 4,255 |
| | 625 |
| | 4,880 |
| | 4,576 |
| | 615 |
| | 5,191 |
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Other (recorded in Selling and administrative) | 54 |
| | — |
| | 54 |
| | 79 |
| | — |
| | 79 |
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Severance and related costs (recorded in Rationalizations) | 831 |
| | — |
| | 831 |
| | 945 |
| | (28 | ) | | 917 |
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Total rationalization and related charges | $ | 8,972 |
| | $ | 1,038 |
| | $ | 10,010 |
| | $ | 26,452 |
| | $ | 1,413 |
| | $ | 27,865 |
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The 2013 rationalization initiatives will result in approximately $95 million of pre-tax charges, of which approximately $25 million will be cash outlays (net of cash inflows). Through June 30, 2014, we incurred $93.6 million of expense related to these initiatives.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table represents the roll-forward of the liability incurred for employee termination benefits and contract termination costs incurred in connection with the 2013 rationalization initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
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| (Dollars in thousands) |
Balance as of December 31, 2013 | $ | 18,421 |
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Charges incurred | 609 |
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Change in estimates | 308 |
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Payments and settlements | (15,993 | ) |
Effect of change in currency exchange rates | 247 |
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Balance as of June 30, 2014 | $ | 3,592 |
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2014 Engineered Solutions Rationalization
On July 29, 2014, we announced additional rationalization initiatives to increase profitability, reduce cost and improve global competitiveness in our Engineered Solutions segment. During the second quarter of 2014, worldwide pricing of our isomolded graphite products ("isomolded") within our Advanced Graphite Material ("AGM") product group, as well as our expectation of future pricing significantly eroded, driven by significant over-capacity and recent competitor responses. In addition, the solar production has continued to erode with poly-silicone, silicone and silicone wafer production migrating to China. New competitors servicing this industry have commenced production in China at pricing levels making the market now unprofitable. As a result of these conditions, the Company has decided to cease isomolded production and pursue an alternative supply chain relationships in our isomolded product line.
As a result of the above, we tested our long-lived assets used to produce advanced graphite materials for recovery, based on undiscounted cash flows from the use and eventual disposition of these assets. The carrying value of the assets exceeded these undiscounted cash flows, and accordingly, we estimated the fair-value of long-lived assets based on a market participant view. This impairment charge totaled $121.6 million in the three months ended June 30, 2014, and included the impairment of certain acquired customer relationship and technology intangible assets. Goodwill associated with this line of business of $0.4 million was fully impaired, and included in the $121.6 million charge. Other impairment related charges, primarily inventory write-downs, were $10.6 million in the three months ended June 30, 2014. If business conditions and plans do not achieve our expected returns in the Engineered Solutions segment, we may undertake additional restructurings, rationalizations or similar actions which could result in additional charges, write-offs and impairments.
Severance and other related expected costs of these actions, including the costs to relocate certain fixed assets, are expected to result in approximately $12 million of additional charges. Approximately $7 million of these additional costs will be cash outlays, the majority of which will be incurred in 2014.
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| For the Three and Six Months Ended June 30, 2014 | |
| (Dollars in thousands) | |
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Impairments (recorded in Impairments) | $ | 121,570 |
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Other (recorded in Cost of sales) | 10,563 |
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Total 2014 Engineered Solutions rationalization and related charges | $ | 132,133 |
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(3) | Stock-Based Compensation |
For the three months ended June 30, 2013 and 2014, we recognized stock-based compensation expense totaling $1.4 million and $2.2 million, respectively. A majority of the expense, $1.3 million and $1.6 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. Stock-based compensation expense in the three
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
months ended June 30, 2013 was positively impacted by a $1.3 million adjustment to compensation expense due to changes in share multiples for certain performance share units.
For the six months ended June 30, 2013 and 2014, we recognized stock-based compensation expense of $3.7 million and $2.8 million, respectively. A majority of the expense, $3.4 million and $2.1 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 June 30, 2014, the total compensation cost related to non-vested restricted stock, performance shares and stock options not yet recognized was $10.9 million, which will be recognized over the remaining weighted average life of 1.5 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the six months ended June 30, 2014 was:
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| Number of Shares | | Weighted- Average Grant Date Fair Value |
Outstanding unvested as of January 1, 2014 | 1,633,491 |
| | $ | 10.98 |
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Granted | 209,600 |
| | 10.60 |
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Vested | (125,434 | ) | | 12.92 |
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Forfeited/canceled/expired | (725,136 | ) | | 10.07 |
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Outstanding unvested as of June 30, 2014 | 992,521 |
| | 11.32 |
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Stock Options
Stock option activity under the plans for the six months ended June 30, 2014 was: |
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| Number of Shares | | Weighted- Average Exercise Price |
Outstanding as of January 1, 2014 | 1,916,718 |
| | $ | 12.47 |
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Granted | 145,034 |
| | 11.56 |
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Forfeited/canceled/expired | (164,572 | ) | | 11.60 |
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Exercised | (316,733 | ) | | 8.88 |
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Outstanding unvested as of June 30, 2014 | 1,580,447 |
| | 13.19 |
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The following table shows the information used in the calculation of our share counts for basic and diluted earnings per share:
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| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Weighted average common shares outstanding for basic calculation | 134,854,024 |
| | 135,963,054 |
| | 134,816,074 |
| | 135,713,004 |
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Add: Effect of stock options and restricted stock | 201,809 |
| | — |
| | 171,517 |
| | — |
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Weighted average common shares outstanding for diluted calculation | 135,055,833 |
| | 135,963,054 |
| | 134,987,591 |
| | 135,713,004 |
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 870,657 shares and 1,590,814 shares in the three and six months ended June 30, 2013, respectively.
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 net sales.
The following tables summarize financial information concerning our reportable segments:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
| (Dollars in thousands) | | (Dollars in thousands) |
Net sales to external customers: | | | | | | | |
Industrial Materials | $ | 231,339 |
| | $ | 206,655 |
| | $ | 440,116 |
| | $ | 425,431 |
|
Engineered Solutions | 70,022 |
| | 77,529 |
| | 114,972 |
| | 139,544 |
|
Total net sales | $ | 301,361 |
| | $ | 284,184 |
| | $ | 555,088 |
| | $ | 564,975 |
|
Segment operating income (loss): | | | | | | | |
Industrial Materials | $ | 7,530 |
| | $ | (11,366 | ) | | $ | 23,608 |
| | $ | (20,790 | ) |
Engineered Solutions | 8,443 |
| | (128,122 | ) | | 8,109 |
| | (125,767 | ) |
Total segment operating income (loss) | $ | 15,973 |
| | $ | (139,488 | ) | | $ | 31,717 |
| | $ | (146,557 | ) |
| | | | | | | |
Reconciliation of segment operating income (loss) to income (loss) before provision for income taxes | | | | | | | |
Other expense (income), net | $ | 975 |
| | $ | (41 | ) | | $ | 1,525 |
| | $ | 753 |
|
Interest expense | 8,947 |
| | 9,155 |
| | 17,955 |
| | 18,154 |
|
Interest income | (49 | ) | | (55 | ) | | (113 | ) | | (113 | ) |
Income (loss) before provision for income taxes | $ | 6,100 |
| | $ | (148,547 | ) | | $ | 12,350 |
| | $ | (165,351 | ) |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets are managed based on geographic location because certain reportable segments share certain facilities. Assets by reportable segment are estimated based on the value of long-lived assets at each location and the activities performed at the location. As a result of the rationalization initiatives and related impairments discussed in Note 2, the carrying value of our long-lived assets has changed significantly since December 31, 2013, particularly in our Engineered Solutions segment. The following is a summary of long-lived assets by reportable segment.
|
| | | | | | | |
| As of December 31, 2013 | | As of June 30, 2014 |
| (Dollars in thousands) |
Long-lived assets (a): | | | |
Industrial Materials. | $ | 601,322 |
| | $ | 586,305 |
|
Engineered Solutions | 219,663 |
| | 96,479 |
|
Total long-lived assets | $ | 820,985 |
| | $ | 682,784 |
|
The components of our consolidated net pension costs are set forth in the following table:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
| (Dollars in thousands) | | (Dollars in thousands) |
Service cost | $ | 489 |
| | $ | 473 |
| | $ | 978 |
| | $ | 946 |
|
Interest cost | 1,985 |
| | 2,169 |
| | 3,970 |
| | 4,338 |
|
Expected return on plan assets | (1,706 | ) | | (1,938 | ) | | (3,412 | ) | | (3,876 | ) |
Amortization of prior service cost | 6 |
| | 1 |
| | 12 |
| | 2 |
|
Net cost | $ | 774 |
| | $ | 705 |
| | $ | 1,548 |
| | $ | 1,410 |
|
The components of our consolidated net postretirement costs are set forth in the following table:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
| (Dollars in thousands) | | (Dollars in thousands) |
Service cost | $ | 28 |
| | $ | 19 |
| | $ | 56 |
| | $ | 38 |
|
Interest cost | 331 |
| | 352 |
| | 662 |
| | 704 |
|
Curtailment loss | — |
| | 1,048 |
| | — |
| | 1,048 |
|
Amortization of prior service benefit | (50 | ) | | (47 | ) | | (100 | ) | | (94 | ) |
Net cost | $ | 309 |
| | $ | 1,372 |
| | $ | 618 |
| | $ | 1,696 |
|
| |
(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 for all reporting units. 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. Based on these valuations, the fair value substantially exceeded our net asset value.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to the quantitative analysis, we qualitatively assessed our reporting units and believe that the quantitative analysis supporting the fair value in excess of the carrying value was appropriate.
As a result of the deteriorating market conditions impacting our AGM product group, as discussed in Note 2, we performed a goodwill impairment test as of June 30, 2014 for the $0.4 million of goodwill assigned to our AGM reporting unit. As a result of this test, it was determined that the full $0.4 million of goodwill was impaired, and thus written off.
We evaluated other potential triggering events and did not note any events which would indicate that it is more likely than not that the carrying value of the remaining goodwill would be greater than fair value as of June 30, 2014. 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 that remains on the consolidated balance sheet.
The changes in the carrying value of goodwill during the six months ended June 30, 2014 is as follows:
|
| | | |
| Total |
| (Dollars in Thousands) |
Balance as of December 31, 2013 | $ | 496,810 |
|
Impairment | (413 | ) |
Currency translation effect | (62 | ) |
Balance as of June 30, 2014 | $ | 496,335 |
|
The following table summarizes acquired intangible assets with determinable useful lives by major category as of December 31, 2013 and June 30, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2013 | | As of June 30, 2014 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization & Impairment | | Net Carrying Amount |
| (Dollars in Thousands) |
Trade name | $ | 7,900 |
| | $ | (3,944 | ) | | $ | 3,956 |
| | $ | 7,900 |
| | $ | (4,264 | ) | | $ | 3,636 |
|
Technological know-how | 43,349 |
| | (18,582 | ) | | 24,767 |
| | 43,349 |
| | (21,953 | ) | | 21,396 |
|
Customer –related intangible | 110,798 |
| | (44,664 | ) | | 66,134 |
| | 110,798 |
| | (51,197 | ) | | 59,601 |
|
Total finite-lived intangible assets | $ | 162,047 |
| | $ | (67,190 | ) | | $ | 94,857 |
| | $ | 162,047 |
| | $ | (77,414 | ) | | $ | 84,633 |
|
Accumulated amortization as of June 30, 2014 included impairment charges related to our rationalization initiatives discussed in Note 2. The impairments represented charges of $0.4 million to Customer-related intangible and $0.3 million to Technological know-how.
Amortization expense of acquired intangible assets was $5.2 million and $5.5 million in the three months ended June 30, 2013 and June 30, 2014, respectively. Estimated amortization expense will approximate $9.5 million in the remainder of 2014, $17.1 million in 2015, $13.1 million in 2016, $11.8 million in 2017 and $10.7 million in 2018.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
(8) | Long-Term Debt and Liquidity |
The following table presents our long-term debt:
|
| | | | | | | |
| As of December 31, 2013 | | As of June 30, 2014 |
| (Dollars in thousands) |
Revolving Facility | $ | 64,000 |
| | $ | 68,000 |
|
Senior Notes | 300,000 |
| | 300,000 |
|
Senior Subordinated Notes | 175,675 |
| | 181,720 |
|
Other Debt | 1,918 |
| | 1,813 |
|
Total | $ | 541,593 |
| | $ | 551,533 |
|
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 June 30, 2014, the fair value of our long-term debt was $559.9 million versus a book value of $551.5 million.
Revolving Facility
On April 23, 2014, GrafTech and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the "Revolving Facility") that provides for, among other things, a five-year tenor, reduced borrowing spreads and greater financial flexibility. This amended facility has a borrowing capacity of $470 million and matures in April 2019.
The interest rate applicable to the Amended and Restated Credit Facility is, at GrafTech’s option, either LIBOR plus a margin ranging from 1.25% to 2.00% (depending on our total net leverage ratio) or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.25% to 1.00% (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 0.20% to 0.35% (depending on our total leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
The financial covenants under this amended facility require us to maintain a minimum cash interest coverage ratio of 2.50 to 1.00 and a maximum senior secured leverage ratio of 3.00 to 1.00, subject to adjustment for certain events.
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.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 $181.7 million as of June 30, 2014.
Inventories are comprised of the following:
|
| | | | | | | |
| As of December 31, 2013 | | As of June 30, 2014 |
| (Dollars in thousands) |
Inventories: | | | |
Raw materials and supplies | $ | 184,420 |
| | $ | 168,232 |
|
Work in process | 245,160 |
| | 222,281 |
|
Finished goods | 78,446 |
| | 85,785 |
|
| 508,026 |
| | 476,298 |
|
Reserves | (17,612 | ) | | (25,877 | ) |
Total | $ | 490,414 |
| | $ | 450,421 |
|
Additions to the reserve during the second quarter of 2014 included $10.6 million related to the Engineered Solutions rationalization initiatives discussed in Note 2.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) Interest Expense
The following table presents an analysis of interest expense:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
| (Dollars in thousands) | | (Dollars in thousands) |
| | | | | | | |
Interest incurred on debt | $ | 5,434 |
| | $ | 5,345 |
| | $ | 10,883 |
| | $ | 10,667 |
|
Amortization of discount on Senior Subordinated Notes | 2,848 |
| | 3,048 |
| | 5,649 |
| | 6,045 |
|
Amortization of debt issuance costs | 588 |
| | 762 |
| | 1,143 |
| | 1,395 |
|
Supply Chain Financing mark-up | 77 |
| | — |
| | 280 |
| | 47 |
|
Total interest expense | $ | 8,947 |
| | $ | 9,155 |
| | $ | 17,955 |
| | $ | 18,154 |
|
Interest Rates
The Revolving Facility had an effective interest rate of 2.42% and 2.16% as of December 31, 2013 and June 30, 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 $0.3 million as interest expense in the six months ended June 30, 2013. We had minimal borrowings under this arrangement during the six months ended June 30, 2014 and we incurred negligible Mark-Up.
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.
As a result of its audit of the Company’s Seadrift Coke, L.P. subsidiary, the U.S. Environmental Protection Agency (“EPA”) in the 2014 second quarter alleged that the subsidiary failed to accurately report emissions under the Emergency Planning and Community Right-to-Know Act. The subsidiary is in settlement negotiations with the EPA. Any fines or penalties are not expected to be material to our financial condition, 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
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the six months ended June 30, 2014, are presented below:
|
| | | |
| (Dollars in thousands) |
Balance as of December 31, 2013 | $ | 1,050 |
|
Product warranty adjustments | (258 | ) |
Payments and settlements | (141 | ) |
Balance as of June 30, 2014 | $ | 651 |
|
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.
The following table summarizes the provision for income taxes for the three and six months ended June 30, 2013 and June 30, 2014:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
| (Dollars in thousands) | | (Dollars in thousands) |
Tax expense | $ | 1,718 |
| | $ | 6,886 |
| | $ | 3,758 |
| | $ | 1,599 |
|
Pretax income (loss) | $ | 6,100 |
| | $ | (148,547 | ) | | $ | 12,350 |
| | $ | (165,351 | ) |
Effective tax rates | 28.2 | % | | (4.6 | )% | | 30.4 | % | | (1.0 | )% |
During the second quarter of 2014, we impaired the long-lived assets of, and announced the exiting of certain product lines in our Advanced Graphite Material product group which is described in more detail in Note 2. The impairment charges and other impairment related charges were incurred primarily in the U.S. jurisdiction. As a result, we determined that it is no longer “more likely than not” that we will generate sufficient future U.S. taxable income to realize our deferred tax assets related to the U.S., foreign tax credit and state net operating loss carryforwards, as well as against our net U.S. deferred tax assets. As a result of the significant negative evidence of recent losses, the Company recognized a $57.0 million non-cash charge in the second quarter of 2014 to increase the valuation allowance against these deferred income tax assets. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
For the three and six months ended June 30, 2014, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to the recording of a valuation allowance against U.S. net deferred tax assets.
As of June 30, 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 $2.6 million may occur within 12 months due to the expiration of statutes of limitation.
During the six months ended June 30, 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.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have maintained valuation allowances on those net deferred tax assets. We established a valuation allowance against our U.S. net deferred tax assets in the second quarter of 2014, as described in more detail above.
| |
(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 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 six months ended June 30, 2013 and 2014, respectively.
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 commercial and business 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 June 30, 2014, we had outstanding Mexican peso, Brazilian real, euro, and Japanese yen currency contracts with an aggregate notional amount of $98.2 million. The foreign currency derivatives outstanding as of June 30, 2014 have several maturity dates ranging from July 2014 to February 2015.
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 six months ended June 30, 2014. As of June 30, 2014, we had outstanding derivative swap contracts for refined oil products with an aggregate notional amount of $8.5 million. These contracts have maturity dates ranging from July 2014 to August 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 $12.2 million as of December 31, 2013 and June 30, 2014, respectively. Within our currency translation adjustment portion of other comprehensive income, we
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
recorded gains of $1.8 million and $0.2 million in three months ended June 30, 2013 and June 30, 2014, respectively, 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 June 30, 2014:
|
| | | | | | | | | | | |
| 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 June 30, 2014 | | | | | | | |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign currency derivatives | Other receivables | | $ | 364 |
| | Other payables | | $ | 198 |
|
Commodity derivative contracts | Other current assets | | 314 |
| | Other current liabilities | | — |
|
Total fair value | | | $ | 678 |
| | | | $ | 198 |
|
|
| | | | | | | | | | | |
| 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 June 30, 2014 | | | | | | | |
Derivatives not designated as hedges: | | | | | | | |
Foreign currency derivatives | Other receivables | | $ | 230 |
| | Other payables | | $ | 200 |
|
Total fair value | | | $ | 230 |
| | | | $ | 200 |
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and six months ended June 30, 2013 and 2014:
|
| | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized (Effective Portion) |
Three Months Ended June 30, | | 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 $28 and ($3), respectively | | Cost of goods sold/Other expense / (income) / Revenue | | $ | (284 | ) | | $ | 27 |
|
Commodity forward derivatives, excluding tax of ($167) and $181, respectively | | Cost of goods sold / Revenue | | $ | 460 |
| | $ | (503 | ) |
| | | | | | |
|
| | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized |
Three Months Ended June 30, | | 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) | | $ | 360 |
| | $ | 130 |
|
| | | | | | |
|
| | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized (Effective Portion) |
Six Months Ended June 30, | | 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 $19 and ($33), respectively | | Cost of goods sold/Other expense / (income) / Revenue | | $ | (190 | ) | | $ | 328 |
|
Commodity forward derivatives, excluding tax of ($50) and ($9), respectively. | | Cost of goods sold / Revenue | | $ | 137 |
| | $ | 26 |
|
| | | | | | |
|
| | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized |
Six Months Ended June 30, | | 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) | | $ | (1,421 | ) | | $ | (61 | ) |
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”.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
(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 creditor against such Guarantor. The indebtedness and other liabilities, including trade payables and preferred stock, if any, of each Guarantor are 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 June 30, 2014 and condensed consolidating statements of operations and comprehensive income for the three and six months ended June 30, 2013 and 2014 and condensed consolidating statements of cash flows for the six months ended June 30, 2013 and 2014 of the Parent, Guarantors and the Non-Guarantors.
Amounts presented in comprehensive income for the three and six months ended June 30, 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 $4.1 million in comprehensive loss for the guarantors during the three months ended June 30, 2013 and $1.1 million in comprehensive income during the six months ended June 30, 2013.
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 |
|
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEETS |
As of June 30, 2014 |
(in thousands) |
| | | | | | | | | | |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 2,506 |
| | $ | 18,222 |
| | $ | — |
| | $ | 20,728 |
|
Accounts receivable - affiliates | | 37,979 |
| | 33,667 |
| | 26,143 |
| | (97,789 | ) | | — |
|
Accounts receivable - trade | | — |
| | 48,287 |
| | 129,254 |
| | — |
| | 177,541 |
|
Inventories | | — |
| | 175,040 |
| | 275,381 |
| | — |
| | 450,421 |
|
Prepaid and other current assets | | — |
| | 23,468 |
| | 70,225 |
| | — |
| | 93,693 |
|
Total current assets | | 37,979 |
| | 282,968 |
| | 519,225 |
| | (97,789 | ) | | 742,383 |
|
| | | | | | | | | | |
Investment in affiliates | | 1,563,399 |
| | 808,923 |
| | — |
| | (2,372,322 | ) | | — |
|
Property, plant and equipment | | — |
| | 426,710 |
| | 256,074 |
| | — |
| | 682,784 |
|
Deferred income taxes | | — |
| | — |
| | 12,059 |
| | — |
| | 12,059 |
|
Goodwill | | — |
| | 292,749 |
| | 203,586 |
| | — |
| | 496,335 |
|
Notes receivable - affiliate | | 42,906 |
| | 7,413 |
| | — |
| | (50,319 | ) | | — |
|
Other assets | | 4,437 |
| | 53,862 |
| | 51,978 |
| | — |
| | 110,277 |
|
Total assets | | $ | 1,648,721 |
| | $ | 1,872,625 |
| | $ | 1,042,922 |
| | $ | (2,520,430 | ) | | $ | 2,043,838 |
|
| | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable - affiliate | | $ | — |
| | $ | 64,124 |
| | $ | 33,665 |
| | $ | (97,789 | ) | | $ | — |
|
Accounts payable - trade | | 28 |
| | 54,390 |
| | 68,010 |
| | — |
| | 122,428 |
|
Short-term debt | | — |
| | 142 |
| | — |
| | — |
| | 142 |
|
Accrued income and other taxes | | 147 |
| | 1,685 |
| | 21,187 |
| | — |
| | 23,019 |
|
Rationalizations | | — |
| | 805 |
| | 2,787 |
| | — |
| | 3,592 |
|
Other accrued liabilities | | 2,444 |
| | 10,217 |
| | 25,786 |
| | — |
| | 38,447 |
|
Total current liabilities | | 2,619 |
| | 131,363 |
| | 151,435 |
| | (97,789 | ) | | 187,628 |
|
| | | | | | | | | | |
Long-term debt - affiliate | | — |
| | 42,906 |
| | 7,413 |
| | (50,319 | ) | | — |
|
Long-term debt - third party | | 481,720 |
| | 57,459 |
| | 12,354 |
| | — |
| | 551,533 |
|
Other long-term obligations | | — |
| | 63,829 |
| | 32,063 |
| | — |
| | 95,892 |
|
Deferred income taxes | | — |
| | 13,669 |
| | 30,734 |
| | — |
| | 44,403 |
|
Stockholders' equity | | 1,164,382 |
| | 1,563,399 |
| | 808,923 |
| | (2,372,322 | ) | | 1,164,382 |
|
Total liabilities and stockholders' equity | | $ | 1,648,721 |
| | $ | 1,872,625 |
| | $ | 1,042,922 |
| | $ | (2,520,430 | ) | | $ | 2,043,838 |
|
| | | | | | | | | | |
| | | | | | | | | | |
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 June 30, 2013 |
(in thousands) |
| | | | | | | | | | |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | |
Sales - affiliates | | $ | — |
| | $ | 52,679 |
| | $ | 36,487 |
| | $ | (89,166 | ) | | $ | — |
|
Sales - third party | | — |
| | 127,592 |
| | 173,769 |
| | — |
| | 301,361 |
|
Net sales | | — |
| | 180,271 |
| | 210,256 |
| | (89,166 | ) | | 301,361 |
|
Cost of sales | | — |
| | 152,517 |
| | 189,089 |
| | (89,166 | ) | | 252,440 |
|
Gross profit | | — |
| | 27,754 |
| | 21,167 |
| | — |
| | 48,921 |
|
| | | | | | | | | | |
Research and development | | — |
| | 2,787 |
| | — |
| | — |
| | 2,787 |
|
Selling and administrative expenses | | — |
| | 10,588 |
| | 19,573 |
| | — |
| | 30,161 |
|
Operating income | | — |
| | 14,379 |
| | 1,594 |
| | — |
| | 15,973 |
|
| | | | | | | | | | |
Other expense, net | | — |
| | 671 | |