2015 - Q1 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 March 31, 2015
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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Suite 300 Park Center I | 44131 |
6100 Oak Tree Boulevard | (Zip code) |
Independence, OH | |
(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 April 17, 2015, 137,179,692 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, 2014 | | As of March 31, 2015 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 17,550 |
| | $ | 10,961 |
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Accounts and notes receivable, net of allowance for doubtful accounts of $7,471 as of December 31, 2014 and $6,582 as of March 31, 2015 | 162,919 |
| | 155,108 |
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Inventories | 382,903 |
| | 364,152 |
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Prepaid expenses and other current assets | 81,623 |
| | 70,475 |
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Total current assets | 644,995 |
| | 600,696 |
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Property, plant and equipment | 1,500,821 |
| | 1,453,080 |
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Less: accumulated depreciation | 846,781 |
| | 819,741 |
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Net property, plant and equipment | 654,040 |
| | 633,339 |
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Deferred income taxes | 16,819 |
| | 14,819 |
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Goodwill | 420,129 |
| | 384,436 |
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Other assets | 97,822 |
| | 92,373 |
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Total assets | $ | 1,833,805 |
| | $ | 1,725,663 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 86,409 |
| | $ | 79,756 |
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Short-term debt | 188,104 |
| | 191,446 |
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Accrued income and other taxes | 24,506 |
| | 17,321 |
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Rationalizations | 9,563 |
| | 8,632 |
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Other accrued liabilities | 43,319 |
| | 41,946 |
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Total current liabilities | 351,901 |
| | 339,101 |
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Long-term debt | 341,615 |
| | 336,321 |
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Other long-term obligations | 107,566 |
| | 100,983 |
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Deferred income taxes | 28,197 |
| | 26,507 |
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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, 152,821,011 shares issued as of December 31, 2014 and 153,050,285 shares issued as of March 31, 2015 | 1,528 |
| | 1,535 |
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Additional paid-in capital | 1,825,880 |
| | 1,827,672 |
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Accumulated other comprehensive loss | (336,524 | ) | | (365,290 | ) |
Retained earnings (deficit) | (245,751 | ) | | (301,359 | ) |
Less: cost of common stock held in treasury, 15,922,729 shares as of December 31, 2014 and 15,877,371 shares as of March 31, 2015 | (239,811 | ) | | (239,107 | ) |
Less: common stock held in employee benefit and compensation trusts, 80,967 shares as of December 31, 2014 and 72,679 shares as of March 31, 2015 | (796 | ) | | (700 | ) |
Total stockholders’ equity | 1,004,526 |
| | 922,751 |
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Total liabilities and stockholders’ equity | $ | 1,833,805 |
| | $ | 1,725,663 |
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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 |
| March 31, |
| 2014 | | 2015 |
CONSOLIDATED STATEMENTS OF OPERATIONS | | | |
Net sales | $ | 280,791 |
| | $ | 207,211 |
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Cost of sales | 255,097 |
| | 186,448 |
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Gross profit | 25,694 |
| | 20,763 |
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Research and development | 2,770 |
| | 2,431 |
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Selling and administrative expenses | 29,907 |
| | 26,290 |
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Rationalizations | 86 |
| | 2,494 |
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Impairments | — |
| | 35,381 |
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Operating loss | (7,069 | ) | | (45,833 | ) |
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Other expense (income), net | 794 |
| | 393 |
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Interest expense | 8,999 |
| | 8,921 |
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Interest income | (58 | ) | | (73 | ) |
Loss before provision for income taxes | (16,804 | ) | | (55,074 | ) |
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(Benefit) provision for income taxes | (5,287 | ) | | 534 |
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Net loss | $ | (11,517 | ) | | $ | (55,608 | ) |
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Basic loss per common share: | | | |
Net loss per share | $ | (0.08 | ) | | $ | (0.41 | ) |
Weighted average common shares outstanding | 135,730 |
| | 136,981 |
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Diluted loss income per common share: | | | |
Net loss per share | $ | (0.08 | ) | | $ | (0.41 | ) |
Weighted average common shares outstanding | 135,730 |
| | 136,981 |
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STATEMENTS OF COMPREHENSIVE INCOME | | | |
Net loss | $ | (11,517 | ) | | $ | (55,608 | ) |
Other comprehensive income: | | | |
Foreign currency translation adjustments | 2,387 |
| | (29,611 | ) |
Commodities and foreign currency derivatives and other, net of tax of $116 and ($154), respectively | (315 | ) | | 845 |
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Other comprehensive income (loss), net of tax: | 2,072 |
| | (28,766 | ) |
Comprehensive loss | $ | (9,445 | ) | | $ | (84,374 | ) |
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 Three Months Ended |
| March 31, |
| 2014 | | 2015 |
Cash flow from operating activities: | | | |
Net loss | $ | (11,517 | ) | | $ | (55,608 | ) |
Adjustments to reconcile net income to cash provided by operations: | | | |
Depreciation and amortization | 39,661 |
| | 20,570 |
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Impairments | — |
| | 35,381 |
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Deferred income tax provision | (1,222 | ) | | 2,973 |
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Post-retirement and pension plan changes | 1,012 |
| | 1,262 |
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Stock-based compensation | 522 |
| | 1,572 |
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Interest expense | 3,645 |
| | 3,764 |
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Other charges, net | (1,593 | ) | | (2,757 | ) |
(Increase) decrease in working capital* | (6,665 | ) | | 21,991 |
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Increase in long-term assets and liabilities | (1,753 | ) | | (6,430 | ) |
Net cash provided by operating activities | 22,090 |
| | 22,718 |
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Cash flow from investing activities: | | | |
Capital expenditures | (21,728 | ) | | (13,601 | ) |
Proceeds from the sale of assets | 1,895 |
| | 521 |
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Payments for derivative instruments | (367 | ) | | (7,603 | ) |
Insurance recoveries | 3,057 |
| | — |
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Net cash used in investing activities | (17,143 | ) | | (20,683 | ) |
Cash flow from financing activities: | | | |
Short-term debt, net | (994 | ) | | 1 |
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Revolving Facility borrowings | 75,000 |
| | 27,000 |
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Revolving Facility reductions | (65,000 | ) | | (32,000 | ) |
Principal payments on long-term debt | (92 | ) | | (33 | ) |
Supply chain financing | (9,455 | ) | | — |
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Proceeds from exercise of stock options | 82 |
| | — |
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Purchase of treasury shares | (141 | ) | | (41 | ) |
Revolving Facility refinancing fees | — |
| | (2,247 | ) |
Other | 918 |
| | (54 | ) |
Net cash provided by (used in) financing activities | 318 |
| | (7,374 | ) |
Net increase (decrease) in cash and cash equivalents | 5,265 |
| | (5,339 | ) |
Effect of exchange rate changes on cash and cash equivalents | 171 |
| | (1,250 | ) |
Cash and cash equivalents at beginning of period | 11,888 |
| | 17,550 |
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Cash and cash equivalents at end of period | $ | 17,324 |
| | $ | 10,961 |
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* Net change in working capital due to the following components: | | | |
Change in current assets: | | | |
Accounts and notes receivable, net | $ | (5,684 | ) | | $ | 1,040 |
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Inventories | 955 |
| | 11,978 |
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Prepaid expenses and other current assets | (4,670 | ) | | 7,525 |
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Increase (decrease) in accounts payable and accruals | 6,506 |
| | (2,483 | ) |
Rationalizations | (8,580 | ) | | (846 | ) |
Increase in interest payable | 4,808 |
| | 4,777 |
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(Increase) decrease in working capital | $ | (6,665 | ) | | $ | 21,991 |
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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. (the "Company") 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”). The December 31, 2014 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, 2014 (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 May 2014, 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. This ASU 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 entity expects to be entitled in exchange for those goods or services. This ASU is supposed to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. On April 1, 2015, the FASB proposed a one year deferral of the effective date to fiscal years beginning after December 15, 2017. This proposal is not a final decision and subject to the FASB's approval process, which includes a public comment period. We are in the process of assessing the impact of the adoption of ASU 2014-09 on the Company's financial position, results of operations and cash flows.
On April 7, 2015, FASB issued ASU 2015-3, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015. The Company had $9.7 million and $11.9 million of capitalized bank fees included within "Other Assets" on our consolidated balance sheets as of December 31, 2014 and March 31, 2015, respectively.
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(2) | Rationalizations and Impairments |
Throughout 2013, 2014 and 2015 the Company undertook rationalization plans in order to streamline our organization and lower our production costs. The total rationalization and related charges incurred during the three months ended March 31, 2014 and 2015 are as follows:
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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All Plans | For the Three Months Ended March 31, 2014 |
| Industrial Materials Segment | | Engineered Solutions Segment | | Corporate, R&D and Other | | Total |
| (Dollars in thousands) |
Accelerated depreciation (recorded in Cost of sales) | $ | 17,020 |
| | $ | 413 |
| | $ | — |
| | $ | 17,433 |
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Inventory loss (recorded in Cost of sales) | 815 |
| | (10 | ) | | — |
| | 805 |
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Fixed asset write-offs and other(recorded in Cost of sales) | (494 | ) | | | | — |
| | (494 | ) |
Other (recorded in Selling and administrative) | 25 |
| | — |
| | — |
| | 25 |
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Severance and related costs (recorded in Rationalizations) | 114 |
| | (28 | ) | | — |
| | 86 |
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Total | $ | 17,480 |
| | $ | 375 |
| | $ | — |
| | $ | 17,855 |
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All Plans | For the Three Months Ended March 31, 2015 |
| Industrial Materials Segment | | Engineered Solutions Segment | | Corporate, R&D and Other | | Total |
| (Dollars in thousands) |
Accelerated depreciation (recorded in Cost of sales) | $ | 433 |
| | $ | — |
| | $ | — |
| | $ | 433 |
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Inventory loss (recorded in Cost of sales) | (61 | ) | | 803 |
| | — |
| | 742 |
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Fixed asset write-offs and other(recorded in Cost of sales) | 1,243 |
| | (99 | ) | | — |
| | 1,144 |
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Accelerated depreciation (recorded in Research and development) | — |
| | — |
| | 621 |
| | 621 |
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Other (recorded in Selling and administrative) | — |
| | 3 |
| | 1,066 |
| | 1,069 |
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Severance and related costs (recorded in Rationalizations) | 53 |
| | 2,366 |
| | — |
| | 2,419 |
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Contract terminations (recorded in Rationalizations) | 25 |
| | 50 |
| | — |
| | 75 |
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Total | $ | 1,693 |
| | $ | 3,123 |
| | $ | 1,687 |
| | $ | 6,503 |
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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. 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 reduced global headcount by approximately 600 people, or approximately 20 percent of our global workforce. These actions were substantially completed during the first half of 2014.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 reduced global headcount by approximately 40 people and were substantially completed during 2014.
Total 2013 Rationalization Initiatives Impact to Financial Results
Charges incurred related to the 2013 rationalization initiatives for the three months ended March 31, 2014 and March 31, 2015 are as follows:
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2013 Plan | For the Three Months Ended March 31, 2014 |
| Industrial Materials Segment | | Engineered Solutions Segment | | Corporate, R&D and Other | | Total |
| (Dollars in thousands) |
Accelerated depreciation (recorded in Cost of sales) | $ | 17,020 |
| | $ | 413 |
| | $ | — |
| | $ | 17,433 |
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Inventory loss (recorded in Cost of sales) | 815 |
| | (10 | ) | | — |
| | 805 |
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Fixed asset write-offs and other(recorded in Cost of sales) | (494 | ) | | — |
| | — |
| | (494 | ) |
Other (recorded in Selling and administrative) | 25 |
| | — |
| | — |
| | 25 |
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Severance and related costs (recorded in Rationalizations) | 114 |
| | (28 | ) | | — |
| | 86 |
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Total | $ | 17,480 |
| | $ | 375 |
| | $ | — |
| | $ | 17,855 |
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2013 Plan | For the Three Months Ended March 31, 2015 |
| Industrial Materials Segment | | Engineered Solutions Segment | | Corporate, R&D and Other | | Total |
| (Dollars in thousands) |
Accelerated depreciation (recorded in Cost of sales) | $ | 433 |
| | $ | — |
| | $ | — |
| | $ | 433 |
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Inventory loss (recorded in Cost of sales) | (61 | ) | | — |
| | — |
| | (61 | ) |
Fixed asset write-offs and other(recorded in Cost of sales) | 1,243 |
| | 9 |
| | — |
| | 1,252 |
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Severance and related costs (recorded in Rationalizations) | 87 |
| | — |
| | — |
| | 87 |
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Contract terminations (recorded in Rationalizations) | 25 |
| | — |
| | — |
| | 25 |
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Total | $ | 1,727 |
| | $ | 9 |
| | $ | — |
| | $ | 1,736 |
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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 the rationalization initiatives described above. This liability is recorded as a current liability on the 2013 Consolidated Balance Sheet.
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2013 Plan |
| (Dollars in thousands) |
Balance as of December 31, 2013 | $ | 18,421 |
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Charges incurred | 613 |
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Change in estimates | 153 |
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Payments and settlements | (16,494 | ) |
Effect of change in currency exchange rates | (1,658 | ) |
Balance as of December 31, 2014 | 1,035 |
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Charges incurred | — |
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Change in estimates | 112 |
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Payments and settlements | (549 | ) |
Effect of change in currency exchange rates | (108 | ) |
Balance as of March 31, 2015 | $ | 490 |
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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, solar product demand continued to erode, with polysilicon, silicon and silicon wafer production migrating to China. New competitors servicing this industry commenced production in China at pricing levels making the market now unprofitable. As a result of these conditions, the Company decided to cease isomolded production and pursue alternative supply chain relationships in our isomolded product line.
Charges incurred related to the 2014 Engineered Solutions rationalization initiatives in 2015 are as follows:
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2014 Engineered Solutions Plan | | For the Three Months Ended March 31, 2015 |
| | (Dollars in thousands) |
Inventory loss (recorded in Cost of sales) | | 434 |
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Fixed asset write-offs and other(recorded in Cost of sales) | | (3 | ) |
Severance and related costs (recorded in Rationalizations) | | (16 | ) |
Contract terminations (recorded in Rationalizations) | | 50 |
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Total | | $ | 465 |
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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 2014 Engineered Solutions rationalization initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
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2014 Engineered Solutions Plan |
| (Dollars in thousands) |
Balance as of December 31, 2013 | $ | — |
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Charges incurred | 2,611 |
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Change in estimates | (40 | ) |
Payments and settlements | (916 | ) |
Balance as of December 31, 2014 | 1,655 |
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Charges incurred | 50 |
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Change in estimates | (16 | ) |
Payments and settlements | (434 | ) |
Balance as of March 31, 2015 | $ | 1,255 |
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2014 Corporate and Research & Development Rationalization
During the third quarter of 2014, we announced the conclusion of another phase of our on-going company-wide cost savings assessment. This resulted in changes to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. These actions are designed to reduce costs by a combination of reduced contractor costs, attrition, early retirements and layoffs. Additionally, the Company downsized its corporate functions by approximately 25 percent, relocated to a smaller, more cost effective corporate headquarters and established a new Technology and Innovation Center. The 2014 Corporate and Research and Development rationalization plan will result in approximately $20 million of charges consisting of severance, accelerated depreciation and other related costs. Approximately $12 million of these costs will be cash outlays, the majority of which are expected to be disbursed in 2015.
Charges incurred related to the 2014 Corporate and Research & Development rationalization initiatives for 2015 are as follows:
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2014 Corporate and R&D Plan | For the Three Months Ended March 31, 2015 |
| Industrial Materials Segment | | Corporate, R&D and Other |
| (Dollars in thousands) | | (Dollars in thousands) |
Accelerated depreciation (recorded in Research and development) | $ | — |
| | $ | 621 |
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Other (recorded in Selling and administrative) | — |
| | 1,066 |
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Severance and related costs (recorded in Rationalizations) | (34 | ) | | — |
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Total | $ | (34 | ) | | $ | 1,687 |
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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 2014 Corporate and Research & Development rationalization initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
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2014 Corporate and R&D Plan |
| (Dollars in thousands) |
Balance as of December 31, 2013 | $ | — |
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Charges incurred | 8,159 |
|
Change in estimates | 21 |
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Payments and settlements | (1,155 | ) |
Effect of change in currency exchange rates | (152 | ) |
Balance as of December 31, 2014 | 6,873 |
|
Charges incurred | (2 | ) |
Change in estimates | (34 | ) |
Payments and settlements | (2,231 | ) |
Effect of change in currency exchange rates | (48 | ) |
Balance as of March 31, 2015 | $ | 4,558 |
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2015 Advanced Graphite Materials Rationalization
On March 2, 2015, GrafTech announced plans to further optimize the production platform for its advanced graphite materials business. These actions included the closure of our Notre Dame, France facility and further reductions in force in our Columbia, Tennessee facility and other locations totaling approximately 85 people. The 2015 Advanced Graphite Materials rationalization plan will result in approximately $10 million of charges consisting of severance, inventory losses and other related costs. Approximately $8 million of these costs will be cash outlays, the majority of which are expected to be disbursed in 2015.
Charges incurred related to the 2015 Advanced Graphite Materials rationalization initiative for the three months ended March 31, 2015 are as follows:
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2015 Advanced Graphite Materials Rationalization | For the Three Months Ended March 31, 2015 |
| (Dollars in thousands) |
Inventory loss (recorded in Cost of sales) | $ | 369 |
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Fixed asset write-offs and other(recorded in Cost of sales) | (105 | ) |
Other (recorded in Selling and administrative) | 3 |
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Severance and related costs (recorded in Rationalizations) | 2,382 |
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Total | $ | 2,649 |
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The following table represents the roll-forward of the liability incurred for employee termination benefits and contract termination costs incurred in connection with the 2015 Advanced Graphite Materials rationalization initiative described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
|
| | | |
2015 Advanced Graphite Materials Rationalization |
| (Dollars in thousands) |
Balance as of December 31, 2014 | $ | — |
|
Charges incurred | 2,382 |
|
Payments and settlements
| (36 | ) |
Effect of change in currency exchange rates
| (17 | ) |
Balance as of March 31, 2015 | $ | 2,329 |
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
(3) | Stock-Based Compensation |
For the three months ended March 31, 2014 and 2015, we recognized stock-based compensation expense of $0.5 million and $1.6 million, respectively. Substantially all of the expense, $0.5 million and $1.5 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, 2015, the total compensation cost related to non-vested restricted stock, performance shares based on current forecasts, and stock options not yet recognized was $10.6 million, which will be recognized over the remaining weighted average life of 1.75 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the three months ended March 31, 2015 was:
|
| | | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value |
Outstanding unvested as of January 1, 2015 | 1,814,130 |
| | $ | 6.31 |
|
Granted | 3,000 |
| | 4.02 |
|
Vested | (44,922 | ) | | 9.90 |
|
Forfeited/canceled/expired | (41,836 | ) | | 6.68 |
|
Outstanding unvested as of March 31, 2015 | 1,730,372 |
| | 6.20 |
|
Stock Options
Stock option activity under the plans for the three months ended March 31, 2015 was: |
| | | | | | |
| Number of Shares | | Weighted- Average Exercise Price |
Outstanding as of January 1, 2015 | 2,042,074 |
| | $ | 10.93 |
|
Forfeited/canceled/expired | (61,468 | ) | | 16.14 |
|
Outstanding as of March 31, 2015 | 1,980,606 |
| | 10.77 |
|
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, |
| 2014 | | 2015 |
Weighted average common shares outstanding for basic calculation | 135,729,809 |
| | 136,981,193 |
|
Add: Effect of stock options and restricted stock | — |
| | — |
|
Weighted average common shares outstanding for diluted calculation | 135,729,809 |
| | 136,981,193 |
|
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.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of stock options covering 1,131,088 and 1,980,607 shares in the three months ended March 31, 2014 and 2015 respectively, as these shares are anti-dilutive.
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. Prior to 2014, certain global expenses such as research and development, shared IT and accounting services as well as corporate headquarter’s finance, HR, legal and executive management were allocated to the segments mostly based on each segment’s contribution to consolidated sales. During 2014, as part of our initiative to decentralize the organization and reduce the costs of the global headquarter functions, the performance measure of our existing segments was changed to reflect our new management and operating structure. We currently exclude such expenses from the segment operating income measure and report them under “Corporate, R&D and Other Expenses” in order to reconcile to the consolidated operating income of the Company.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize financial information concerning our reportable segments and all prior periods have been recast to reflect our new methodology:
|
| | | | | | | | |
| | For the Three Months Ended |
| | March 31, |
| | 2014 | | 2015 |
| | (Dollars in thousands) |
Net sales to external customers: | | | | |
Industrial Materials | | $ | 218,776 |
| | $ | 165,037 |
|
Engineered Solutions | | 62,015 |
| | 42,174 |
|
Total net sales | | $ | 280,791 |
| | $ | 207,211 |
|
Operating (loss) income: | | | | |
Industrial Materials | | $ | 1,600 |
| | $ | (25,898 | ) |
Engineered Solutions | | 5,406 |
| | (4,393 | ) |
Corporate, R&D and Other expenses | | (14,075 | ) | | (15,542 | ) |
Total operating loss | | $ | (7,069 | ) | | $ | (45,833 | ) |
| | | | |
Reconciliation of segment operating loss to loss before provision for income taxes | | | | |
Other expense (income), net | | $ | 794 |
| | $ | 393 |
|
Interest expense | | 8,999 |
| | 8,921 |
|
Interest income | | (58 | ) | | (73 | ) |
Loss before provision for income taxes | | $ | (16,804 | ) | | $ | (55,074 | ) |
The components of our consolidated net pension costs are set forth in the following table:
|
| | | | | | | | |
| | For the Three Months Ended |
| | March 31, |
| | 2014 | | 2015 |
| | (Dollars in thousands) |
Service cost | | $ | 473 |
| | $ | 827 |
|
Interest cost | | 2,169 |
| | 1,526 |
|
Expected return on plan assets | | (1,938 | ) | | (1,354 | ) |
Amortization of prior service cost | | 1 |
| | 1 |
|
Net cost | | $ | 705 |
| | $ | 1,000 |
|
The components of our consolidated net postretirement costs are set forth in the following table:
|
| | | | | | | | |
| | For the Three Months Ended |
| | March 31, |
| | 2014 | | 2015 |
| | (Dollars in thousands) |
Service cost | | $ | 19 |
| | $ | 4 |
|
Interest cost | | 352 |
| | 315 |
|
Amortization of prior service benefit | | (47 | ) | | (43 | ) |
Net cost | | $ | 324 |
| | $ | 276 |
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 27, 2015, we settled $59.0 million of projected benefit obligations through the purchase of a group annuity contract. The purchase was fully funded with pension assets. The obligation associated with this transaction will require no additional cash contributions by the company. The results of this settlement were not material to our operations.
| |
(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 (graphite electrodes, needle coke and advanced graphite materials) 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, 2014 for all reporting units. The estimated fair values of our reporting units were based on discounted cash flow ("DCF") models derived from internal earnings forecasts and assumptions. The assumptions and estimates used in these valuations incorporated the then current and expected economic environment. Based on these valuations, the fair value for the needle coke reporting unit was below the carrying value resulting in a step two analysis and consequently a goodwill impairment charge of $75.7 million for the year ended December 31, 2014.
We received notice in March, 2015, that the market prices for needle coke were decreasing by an additional 18%, effective for the second quarter of 2015. This decline is further compressing our margins for needle coke products versus our annual plan. We determined that this change, which is driven by over capacity in the market indicated that the needle coke industry is facing a deeper and longer trough than previously expected. As such we considered the additional price change as a triggering event and tested our needle coke goodwill for impairment as of March 31, 2015.
In the first step of the analysis, we compared the estimated fair value of the reporting unit to its carrying value, including goodwill. The fair value of the reporting units was determined based on an income approach, using discounted cash flow ("DCF") models from a market participant’s perspective. The DCF model included seventeen years of forecasted cash flows, plus an estimated terminal value. For the first several years in the models, the cash flows were based upon the current operating and capital plans as prepared by management and approved by executive management, adjusted to reflect the perspective of potential market participants.. Beyond the first several years, the DCF model reflects known trends of cycles in the industry and incorporates them in the terminal value. Actual results may differ from those assumed in the Company’s forecast. A discount rate of 10.5% was applied to the forecasted cash-flows and is based on a weighted average cost of capital ("WACC"). Company specific beta and mix of debt to equity are inputs into the determination of the discount rate, which is then qualitatively assessed from the standpoint of potential market participants.
As a result of the step one analysis described earlier, the fair value of the Needle Coke reporting unit was less than its carrying value. Consequently, we performed the second step of the impairment analysis in order to determine the implied fair value of the goodwill associated with the reporting unit. The implied fair value of goodwill represents the excess of the fair value of the reporting unit over the sum of the fair value amounts assigned to all of the assets and liabilities of the reporting unit as if it were to be acquired in a business combination and the current fair value of the reporting unit (as calculated in the first step) was the purchase consideration. The implied fair value of goodwill was then compared to the carrying value of the goodwill to determine the impairment charge. The Needle coke goodwill was fully impaired, resulting in a charge of $35.4 million. The full impairment of the Needle Coke reporting unit‘s goodwill was a result of our reassessment of the estimated future cash-flows, triggered by the pricing decline in the needle coke market effective April 1, 2015. Due to these factors, we decreased the short and mid-term estimates of the cash-flows of the Needle Coke reporting unit that are utilized in assessing goodwill for impairment.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The changes in the carrying value of goodwill during the three months ended March 31, 2015 is as follows:
|
| | | |
| Total |
| (Dollars in Thousands) |
Balance as of December 31, 2014 | $ | 420,129 |
|
Impairment | (35,381 | ) |
Currency translation effect | (312 | ) |
Balance as of March 31, 2015 | $ | 384,436 |
|
The following table summarizes acquired intangible assets with determinable useful lives by major category as of December 31, 2014 and March 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| Gross Carrying Amount | | Accumulated Amortization & Impairment | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization & Impairment | | Net Carrying Amount |
| (Dollars in Thousands) |
Trade name | $ | 7,900 |
| | $ | (4,817 | ) | | $ | 3,083 |
| | $ | 7,900 |
| | $ | (4,986 | ) | | $ | 2,914 |
|
Technological know-how | 43,349 |
| | (24,940 | ) | | 18,409 |
| | 43,349 |
| | (26,433 | ) | | 16,916 |
|
Customer –related intangible | 110,798 |
| | (57,192 | ) | | 53,606 |
| | 110,798 |
| | (59,874 | ) | | 50,924 |
|
Total finite-lived intangible assets | $ | 162,047 |
| | $ | (86,949 | ) | | $ | 75,098 |
| | $ | 162,047 |
| | $ | (91,293 | ) | | $ | 70,754 |
|
Amortization expense of acquired intangible assets was $4.8 million and $4.3 million in the three months ended March 31, 2014 and March 31, 2015, respectively. Estimated amortization expense will approximate $12.8 million in the remainder of 2015, $13.1 million in 2016, $11.8 million in 2017, $10.7 million in 2018 and $9.2 million in 2019.
The following table presents our long-term debt:
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| (Dollars in thousands) |
Revolving Facility | $ | 40,000 |
| | $ | 35,000 |
|
Senior Notes | 300,000 |
| | 300,000 |
|
Other Debt | 1,615 |
| | 1,321 |
|
Total | $ | 341,615 |
| | $ | 336,321 |
|
The following table presents our short-term debt:
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| (Dollars in thousands) |
Senior Subordinated Notes | 187,973 |
| | 191,314 |
|
Other debt | 131 |
| | 132 |
|
Total Short-Term Debt | $ | 188,104 |
| | $ | 191,446 |
|
The fair value of debt, which was determined using Level 2 inputs, was $473.3 million, versus a book value of $529.7 million as of December 31, 2014. As of March 31, 2015, the fair value of our long-term debt was $459.8 million versus a book value of 527.8 million. As of March 31, 2015, we were in compliance with all of our debt covenants.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revolving Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into an Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a new $40 million senior secured delayed draw term loan facility.The Revolving Facility has a borrowing capacity of $400 million and matures in April 2019.
As of March 31, 2015, we had $329 million of unused borrowing capacity under the revolving credit facility (after considering financial covenants restrictions and the outstanding letters of credit of approximately $5.4 million).
The additional $40 million delayed draw term loan facility is to be used connection with the repayment of the Senior Subordinated Notes.
The interest rate applicable to the Amended and Restated Credit Facility is LIBOR plus a margin ranging from 2.25% to 3.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.50% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility. The new financial covenants require us to maintain a minimum cash interest coverage ratio of 2.50 to 1.00 and a maximum senior secured leverage ratio ranging from 3.75 to 1.00 to 3.00 to 1.00, subject to adjustment for certain events.
Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of 6.375% Senior Notes due 2020 (the "Senior Notes"). The 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. 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 indenture for the Senior Notes also contains 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 indenture for 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 (each, 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
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
any Subsidiary Guarantee (as defined in the indenture) 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 the acquisitions of Seadrift Coke LP and C/G Electrodes, LLC, we issued Senior Subordinated Notes for an aggregate total face amount of $200 million. These Senior Subordinated Notes are non-interest bearing and mature in 2015. Because the promissory 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 promissory notes and their present value is recorded as debt discount. The debt discount will be amortized to income using the interest method, over the life of the promissory notes. The loan balance, net of unamortized discount, was $191.3 million as of March 31, 2015. This balance was reclassified in November 2014 to short-term debt on our balance sheet as the maturity date is within one year.
Inventories are comprised of the following:
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| (Dollars in thousands) |
Inventories: | | | |
Raw materials and supplies | $ | 122,218 |
| | $ | 112,416 |
|
Work in process | 176,141 |
| | 172,737 |
|
Finished goods | 84,544 |
| | 78,999 |
|
Total | $ | 382,903 |
| | $ | 364,152 |
|
(10) Interest Expense
The following table presents an analysis of interest expense:
|
| | | | | | | |
| For the Three Months Ended |
| March 31, |
| 2014 | | 2015 |
| (Dollars in thousands) |
| | | |
Interest incurred on debt | $ | 5,322 |
| | $ | 5,171 |
|
Amortization of discount on Senior Subordinated Notes | 2,997 |
| | 3,207 |
|
Amortization of debt issuance costs | 633 |
| | 543 |
|
Supply Chain Financing mark-up | 47 |
| | — |
|
Total interest expense | $ | 8,999 |
| | $ | 8,921 |
|
Interest Rates
The Revolving Facility had an effective interest rate of 2.17% and 2.44% as of December 31, 2014 and March 31, 2015, respectively. The Senior Subordinated Notes have an implied interest rate of 7.00%. The Senior Notes have a fixed interest rate of 6.375%.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2015, are presented below:
|
| | | |
| (Dollars in thousands) |
Balance as of December 31, 2014 | $ | 923 |
|
Product warranty adjustments | 335 |
|
Payments and settlements | (315 | ) |
Balance as of March 31, 2015 | $ | 943 |
|
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.
The following table summarizes the provision for income taxes for the three months ended March 31, 2014 and March 31, 2015:
|
| | | | | | | | |
| | For the Three Months Ended |
| | March 31, |
| | 2014 | | 2015 |
| | (Dollars in thousands) |
Tax (benefit) expense | | $ | (5,287 | ) | | $ | 534 |
|
Pretax loss | | $ | (16,804 | ) | | $ | (55,074 | ) |
Effective tax rates | | 31.5 | % | | (1.0 | )% |
For the three months ended March 31, 2015, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future. 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%. 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. Discrete items of tax included in the three month periods ended March 31, 2014 and 2015 were not material.
As of March 31, 2015, we had unrecognized tax benefits of $3.7 million, $2.7 million of which, if recognized, would have a favorable impact on our effective tax rate.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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.
| |
(13) | 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 U.S. 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 three months ended March 31, 2014 and 2015, respectively.
In 2014 and 2015, we entered into foreign 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 U.S. dollar and the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. As of March 31, 2015, we had outstanding Mexican peso, South Afican rand, euro, and Japanese yen currency contracts with an aggregate notional amount of $108.7 million. The foreign currency derivatives outstanding as of March 31, 2015 have several maturity dates ranging from April 2015 to December 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 three months ended March 31, 2015. As of March 31, 2015, we had outstanding derivative swap contracts for refined oil products with an aggregate notional amount of $4.4 million. These contracts mature in April 2015.
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 denominated in foreign currency and designated as a non-derivative net investment hedging instrument was $15.8 million and $15.1 million as of December 31, 2014 and March 31, 2015, respectively. Within the currency translation adjustment portion of other comprehensive income, we recorded gains of $0.1 million and $0.7 million in three months ended March 31, 2014 and March 31, 2015, respectively, resulting from these net investment hedges.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2014 and March 31, 2015:
|
| | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| Location | | Fair Value | | Location | | Fair Value |
As of December 31, 2014 | (Dollars in Thousands) |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign currency derivatives | Prepaid and other current assets | | $ | 722 |
| | Other current liabilities | | $ | 1,234 |
|
Commodity derivative contracts | Prepaid and other current assets | | — |
| | Other current liabilities | | 7,067 |
|
Total fair value | | | $ | 722 |
| | | | $ | 8,301 |
|
| | | | | | | |
As of March 31, 2015 | | | | | | | |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign currency derivatives | Prepaid and other current assets | | $ | 2,211 |
| | Other current liabilities | | $ | 1,108 |
|
Commodity derivative contracts | Prepaid and other current assets | | 44 |
| | Other current liabilities | | 1 |
|
Total fair value | | | $ | 2,255 |
| | | | $ | 1,109 |
|
|
| | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| Location | | Fair Value | | Location | | Fair Value |
As of December 31, 2014 | (Dollars in Thousands) |
Derivatives not designated as hedges: | | | | | | | |
Foreign currency derivatives | Prepaid and other current assets | | $ | 80 |
| | Other current liabilities | | $ | 428 |
|
Total fair value | | | $ | 80 |
| | | | $ | 428 |
|
| | | | | | | |
As of March 31, 2015 | | | | | | | |
Derivatives not designated as hedges: | | | | | | | |
Foreign currency derivatives | Prepaid and other current assets | | $ | 17 |
| | Other current liabilities | | $ | 325 |
|
Total fair value | | | $ | 17 |
| | | | $ | 325 |
|
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 three months ended March 31, 2014 and 2015:
|
| | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized (Effective Portion) |
Three Months Ended March 31, | | Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion) | | 2014 | | 2015 |
(Dollars in Thousands) |
Derivatives designated as cash flow hedges: | | | | | | |
Foreign currency derivatives, excluding tax of ($4) and $71, respectively | | Cost of goods sold/Other expense / (income) / Revenue | | $ | 301 |
| | $ | (712 | ) |
Commodity forward derivatives, excluding tax of ($190) and ($97), respectively | | Cost of goods sold / Revenue | | $ | 529 |
| | $ | 265 |
|
|
| | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized |
Three Months Ended March 31, | | Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations | | 2014 | | 2015 |
(Dollars in thousands) |
Derivatives not designated as hedges: | | | | | | |
Foreign currency derivatives | | Cost of goods sold/Other expense (income) | | $ | (191 | ) | | $ | 889 |
|
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”.
| |
(14) | 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
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2014 and March 31, 2015 and condensed consolidating statements of operations and comprehensive income for the three months ended March 31, 2014 and 2015 and condensed consolidating statements of cash flows for the three months ended March 31, 2014 and 2015 of the Parent Guarantors and the Non-Guarantors.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEETS |
As of December 31, 2014 |
(in thousands) |
| | | | | | | | | | |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | |
Current Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 5,503 |
| | $ | 12,047 |
| | $ | — |
| | $ | 17,550 |
|
Accounts receivable - affiliates | | 40,474 |
| | 35,618 |
| | 40,185 |
| | (116,277 | ) | | — |
|
Accounts receivable - trade | | — |
| | 45,861 |
| | 117,058 |
| | — |
| | 162,919 |
|
Inventories | | — |
| | 148,080 |
| | 234,823 |
| | — |
| | 382,903 |
|
Prepaid and other current assets | | — |
| | 17,336 |
| | 64,287 |
| | — |
| | 81,623 |
|
Total current assets | | 40,474 |
| | 252,398 |
| | 468,400 |
| | (116,277 | ) | | 644,995 |
|
| | | | | | | | | | |
Investment in affiliates | | 1,414,278 |
| | 762,251 |
| | — |
| | (2,176,529 | ) | | — |
|
Property, plant and equipment | | — |
| | 431,602 |
| | 222,438 |
| | — |
| | 654,040 |
|
Deferred income taxes | | — |
| | — |
| | 16,819 |
| | — |
| | 16,819 |
|
Goodwill | | — |
| | 217,099 |
| | 203,030 |
| | — |
| | 420,129 |
|
Notes receivable - affiliate | | 35,722 |
| | 7,413 |
| | — |
| | (43,135 | ) | | — |
|
Other assets | | 4,110 |
| | 45,617 |
| | 48,095 |
| | — |
| | 97,822 |
|
Total Assets | | $ | 1,494,584 |
| | $ | 1,716,380 |
| | $ | 958,782 |
| | $ | (2,335,941 | ) | | $ | 1,833,805 |
|
| | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | |
Accounts payable - affiliate | | $ | — |
| | $ | 80,659 |
| | $ | 35,618 |
| | $ | (116,277 | ) | | $ | — |
|
Accounts payable - trade | | 47 |
| | 35,435 |
| | 50,927 |
| | — |
| | 86,409 |
|
Short-term debt | | 187,973 |
| | 131 |
| | — |
| | — |
| | 188,104 |
|
Accrued income and other taxes | | 344 |
| | 3,380 |
| | 20,782 |
| | — |
| | 24,506 |
|
Rationalizations | | — |
| | 7,538 |
| | 2,025 |
| | — |
| | 9,563 |
|
Supply chain financing liability | | — |
| | — |
| | — |
| | — |
| | — |
|
Other accrued liabilities | | 2,444 |
| | 15,252 |
| | 25,623 |
| | — |
| | 43,319 |
|
Total current liabilities | | 190,808 |
| | 142,395 |
| | 134,975 |
| | (116,277 | ) | | 351,901 |
|
| | | | | | | | | | |
Long-term debt - affiliate | | — |
| | 35,722 |
| | 7,413 |
| | (43,135 | ) | | — |
|
Long-term debt - third party | | 300,000 |
| | 40,393 |
| | 1,222 |
| | — |
| | 341,615 |
|
Other long-term obligations | | — |
| | 77,724 |
| | 29,842 |
| | — |
| | 107,566 |
|
Deferred income taxes | | — |
| | 5,118 |
| | 23,079 |
| | — |
| | 28,197 |
|
Stockholders' equity | | 1,003,776 |
| | 1,415,028 |
| | 762,251 |
| | (2,176,529 | ) | | 1,004,526 |
|
Total Liabilities and Stockholders' Equity | | $ | 1,494,584 |
| | $ | 1,716,380 |
| | $ | 958,782 |
| | $ | (2,335,941 | ) | | $ | 1,833,805 |
|
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEETS |
As of March 31, 2015 |
(in thousands) |
| | | | | | | | | | |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | |
Current Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 1,837 |
| | $ | 9,124 |
| | $ | — |
| | $ | 10,961 |
|
Accounts receivable - affiliates | | 41,988 |
| | 18,786 |
| | 30,911 |
| | (91,685 | ) | | — |
|
Accounts receivable - trade | | — |
| | 36,890 |
| | 118,218 |
| | — |
| | 155,108 |
|
Inventories | | — |
| | 145,506 |
| | 218,646 |
| | — |
| | 364,152 |
|
Prepaid and other current assets | | — |
| | 13,091 |
| | 57,384 |
| | — |
| | 70,475 |
|
Total current assets | | 41,988 |
| | 216,110 |
| | 434,283 |
| | (91,685 | ) | | 600,696 |
|
| | | | | | | | | | |
Investment in affiliates | | 1,338,408 |
| | 735,037 |
| | — |
| | (2,073,445 | ) | | — |
|
Property, plant and equipment | | — |
| | 427,681 |
| | 205,658 |
| | — |
| | 633,339 |
|
Deferred income taxes | | — |
| | — |
| | 14,819 |
| | — |
| | 14,819 |
|
Goodwill | | — |
| | 181,718 |
| | 202,718 |
| | — |
| | 384,436 |
|
Notes receivable - affiliate | | 36,817 |
| | 7,413 |
| | — |
| | (44,230 | ) | | — |
|
Other assets | | 3,985 |
| | 44,190 |
| | 44,198 |
| | — |
| | 92,373 |
|
Total Assets | | $ | 1,421,198 |
| | $ | 1,612,149 |
| | $ | 901,676 |
| | $ | (2,209,360 | ) | | $ | 1,725,663 |
|
| | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | |
Accounts payable - affiliate | | $ | — |
| | $ | 72,904 |
| | $ | 18,781 |
| | $ | (91,685 | ) | | $ | — |
|
Accounts payable - trade | | 43 |
| | 33,527 |
| | 46,186 |
| | — |
| | 79,756 |
|
Short-term debt | | 191,179 |
| | 132 |
| | 135 |
| | — |
| | 191,446 |
|
Accrued income and other taxes | | — |
| | 2,070 |
| | 15,251 |
| | — |
| | 17,321 |
|
Rationalizations | | — |
| | 5,820 |
| | 2,812 |
| | — |
| | 8,632 |
|
Supply chain financing liability | | — |
| | — |
| | — |
| | — |
| | — |
|
Other accrued liabilities | | 7,225 |
| | 10,930 |
| | 23,791 |
| | — |
| | 41,946 |
|
Total current liabilities | | 198,447 |
| | 125,383 |
| | 106,956 |
| | (91,685 | ) | | 339,101 |
|
| | | | | | | | | | |
Long-term debt - affiliate | | — |
| | 36,817 |
| | 7,413 |
| | (44,230 | ) | | — |
|
Long-term debt - third party | | 300,000 |
| | 35,360 |
| | 961 |
| | — |
| | 336,321 |
|
Other long-term obligations | | — |
| | 71,051 |
| | 29,932 |
| | — |
| | 100,983 |
|
Deferred income taxes | | — |
| | 5,130 |
| | 21,377 |
| | — |
| | 26,507 |
|
Stockholders' equity | | 922,751 |
| | 1,338,408 |
| | 735,037 |
| | (2,073,445 | ) | | 922,751 |
|
Total Liabilities and Stockholders' Equity | | $ | 1,421,198 |
| | $ | 1,612,149 |
| | $ | 901,676 |
| | $ | (2,209,360 | ) | | $ | 1,725,663 |
|
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF INCOME 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 (income) expense, 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 | ) |
Income (loss) before income taxes | | (7,726 | ) | | 9,989 |
| | (19,067 | ) | | — |
| ` | (16,804 | ) |
| | | | | | | | | | |
Provision for income taxes | | (2,781 | ) | | 4,552 |
| | (7,058 | ) | | — |
| | (5,287 | ) |
Equity in earnings of subsidiary | | (6,572 | |