0000931148-13-000100.txt : 20131031 0000931148-13-000100.hdr.sgml : 20131031 20131031165627 ACCESSION NUMBER: 0000931148-13-000100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20130930 FILED AS OF DATE: 20131031 DATE AS OF CHANGE: 20131031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAFTECH INTERNATIONAL LTD CENTRAL INDEX KEY: 0000931148 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 061385548 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13888 FILM NUMBER: 131183358 BUSINESS ADDRESS: STREET 1: 12900 SNOW ROAD CITY: PARMA STATE: OH ZIP: 44130 BUSINESS PHONE: 2166762000 MAIL ADDRESS: STREET 1: 12900 SNOW ROAD CITY: PARMA STATE: OH ZIP: 44130 FORMER COMPANY: FORMER CONFORMED NAME: UCAR INTERNATIONAL INC DATE OF NAME CHANGE: 19941011 10-Q 1 q32013-10q.htm 10-Q Q3 2013 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from              to             
 
Commission file number: 1-13888
 
 

GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
 
Delaware
27-2496053
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
12900 Snow Road
44130
Parma, OH
(Zip code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (216) 676-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of October 15, 2013, 135,189,364 shares of common stock, par value $.01 per share, were outstanding.



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

2


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, 2012
 
As of September 30, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,317

 
$
11,470

Accounts and notes receivable, net of allowance for doubtful accounts of
   $7,573 as of December 31, 2012 and $7,203 as of September 30, 2013
236,429

 
205,427

Inventories
513,065

 
519,011

Prepaid expenses and other current assets
56,190

 
69,436

Total current assets
823,001

 
805,344

Property, plant and equipment
1,532,359

 
1,583,444

Less: accumulated depreciation
698,452

 
737,243

Net property, plant and equipment
833,907

 
846,201

Deferred income taxes
6,157

 
7,463

Goodwill
498,261

 
497,073

Other assets
136,589

 
119,540

Total assets
$
2,297,915

 
$
2,275,621

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
128,120

 
$
103,519

Short-term debt
8,426

 
4,344

Accrued income and other taxes
30,923

 
27,814

Rationalizations

 
14,129

Supply chain financing liability
26,962

 
12,540

Other accrued liabilities
50,953

 
52,953

Total current liabilities
245,384

 
215,299

Long-term debt
535,709

 
559,643

Other long-term obligations
125,005

 
117,847

Deferred income taxes
41,966

 
34,090

Contingencies – Note 13

 

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

 

Common stock, par value $.01, 225,000,000 shares authorized,
   150,869,227 shares issued as of December 31, 2012 and 151,763,001
   shares issued as of September 30, 2013
1,509

 
1,518

Additional paid-in capital
1,812,592

 
1,822,603

Accumulated other comprehensive loss
(280,678
)
 
(291,897
)
Retained earnings
66,884

 
67,846

Less: cost of common stock held in treasury, 16,418,710 shares as of
   December 31, 2012 and 16,525,938 shares as of September 30, 2013
(249,487
)
 
(250,331
)
Less: common stock held in employee benefit and compensation trusts,
   76,095 shares as of December 31, 2012 and 83,816 shares as of
   September 30, 2013
(969
)
 
(997
)
Total stockholders’ equity
1,349,851

 
1,348,742

Total liabilities and stockholders’ equity
$
2,297,915

 
$
2,275,621

 See accompanying Notes to Consolidated Financial Statements

3


GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
 
 
 
Net sales
$
320,716

 
$
303,084

 
$
877,265

 
$
858,172

Cost of sales
240,730

 
266,440

 
645,971

 
724,057

Gross profit
79,986

 
36,644

 
231,294

 
134,115

Research and development
2,778

 
2,994

 
9,919

 
8,874

Selling and administrative expenses
33,645

 
27,626

 
107,228

 
87,500

Rationalizations

 
14,593

 

 
14,593

Operating income (loss)
43,563

 
(8,569
)
 
114,147

 
23,148

 
 
 
 
 
 
 
 
Other expense (income), net
1,653

 
(772
)
 
(1,376
)
 
753

Interest expense
5,839

 
9,098

 
15,733

 
27,053

Interest income
(33
)
 
(49
)
 
(178
)
 
(162
)
Income (loss) before provision for income taxes
36,104

 
(16,846
)
 
99,968

 
(4,496
)
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
6,478

 
(9,216
)
 
10,966

 
(5,458
)
Net income (loss)
$
29,626

 
$
(7,630
)
 
$
89,002

 
$
962

 
 
 
 
 
 
 
 
Basic income per common share:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.22

 
$
(0.06
)
 
$
0.64

 
$
0.01

Weighted average common shares outstanding
134,347

 
135,134

 
139,939

 
134,949

 
 
 
 
 
 
 
 
Diluted income per common share:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.22

 
$
(0.06
)
 
$
0.63

 
$
0.01

Weighted average common shares outstanding
135,001

 
135,331

 
140,565

 
135,122

 
 
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income (loss)
$
29,626

 
$
(7,630
)
 
$
89,002

 
$
962

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
712

 
5,230

 
(11,963
)
 
(11,902
)
Commodities and foreign currency derivatives, net of tax of $249, ($170), ($144) and ($265) respectively
(3,952
)
 
476

 
(8,758
)
 
683

Other comprehensive (loss) income, net of tax:
(3,240
)
 
5,706

 
(20,721
)
 
(11,219
)
Comprehensive income (loss)
$
26,386

 
$
(1,924
)
 
$
68,281

 
$
(10,257
)

See accompanying Notes to Consolidated Financial Statements


4


GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Nine Months Ended
 
September 30,
 
2012
 
2013
Cash flow from operating activities:
 
 
 
Net income
$
89,002

 
$
962

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
58,232

 
71,770

Deferred income tax provision
1,906

 
(2,563
)
Post-retirement and pension plan changes
3,637

 
3,468

Currency impact
(3,351
)
 
(81
)
Stock-based compensation
8,096

 
5,938

Interest expense
9,221

 
10,459

Insurance recoveries
4,007

 

Other charges, net
(13,393
)
 
3,097

Increase in working capital*
(128,361
)
 
(20,403
)
Increase in long-term assets and liabilities
(15,390
)
 
(7,469
)
Net cash provided by operating activities
13,606

 
65,178

Cash flow from investing activities:
 
 
 
Capital expenditures
(92,827
)
 
(62,698
)
Proceeds from derivative instruments
6,807

 
852

Other
121

 
2,333

Net cash used in investing activities
(85,899
)
 
(59,513
)
Cash flow from financing activities:
 
 
 
Short-term debt reductions, net
(13,989
)
 
(4,082
)
Revolving Facility borrowings
343,000

 
134,000

Revolving Facility reductions
(145,000
)
 
(118,500
)
Principal payments on long-term debt
(182
)
 
(189
)
Supply chain financing
(3,719
)
 
(14,422
)
Proceeds from exercise of stock options
92

 
175

Purchase of treasury shares
(103,056
)
 
(844
)
Other
(542
)
 
(7,206
)
Net cash provided by (used in) financing activities
76,604

 
(11,068
)
Net increase (decrease) in cash and cash equivalents
4,311

 
(5,403
)
Effect of exchange rate changes on cash and cash equivalents
(547
)
 
(444
)
Cash and cash equivalents at beginning of period
12,429

 
17,317

Cash and cash equivalents at end of period
$
16,193

 
$
11,470

 
 
 
 
* Net change in working capital due to the following components:
 
 
 
Change in current assets:
 
 
 
Accounts and notes receivable, net
$
25,614

 
$
30,971

Inventories
(96,309
)
 
(11,981
)
Prepaid expenses and other current assets
(3,215
)
 
(11,049
)
Decrease in accounts payable and accruals
(54,373
)
 
(47,541
)
Rationalizations

 
14,129

(Decrease) increase in interest payable
(78
)
 
5,068

Increase in working capital
$
(128,361
)
 
$
(20,403
)

See accompanying Notes to Consolidated Financial Statements


5

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



(1)
Organization and Summary of Significant Accounting Policies
A. Organization
GrafTech International Ltd. is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. We have seven major product categories: graphite electrodes, refractory products, needle coke products, advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, which are reported in the following segments:
Industrial Materials includes graphite electrodes, refractory products, and needle coke products, and primarily serves the steel industry.
Engineered Solutions includes advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, and provides primary and specialty products to the advanced electronics, industrial, energy, transportation and defense industries.
B. Basis of Presentation
The interim Consolidated Financial Statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). December 31, 2012 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, 2012 (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. Certain amounts previously reported have been reclassified to conform to the current year presentation.
During the three months ended June 30, 2013, the Company recorded additional depreciation expense of $2.9 million ($1.9 million net of tax), to correct certain errors related to prior periods. The impact to the nine months ended September 30, 2013 was a net $2.7 million of additional expense ($1.8 million, net of tax). These charges were recorded primarily to release to cost of sales depreciation expenses that were previously incorrectly deferred to inventory. These adjustments were not material to any previously issued or the expected full year 2013 financial statements.
C. New Accounting Standards
In February 2013, the FASB issued guidance on reporting of amounts reclassified out of accumulated other comprehensive income (“AOCI”). The guidance requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. We disclose our reclassifications within Note 15 "Derivative Instruments", as these are the only material reclassifications out of AOCI. This guidance was adopted by the Company retrospectively as of January 1, 2013. As the accounting standard only impacts disclosures, the new standard does not have an impact on the Company's financial position, results of operations, or cash flows.
(2)
Rationalizations
We have announced a global initiative to reduce our Industrial Materials segment's cost base and improve our competitive position. This initiative will close, subject to applicable union and workforce negotiations, our two highest cost graphite electrode plants and machine shops, located in Brazil and South Africa, as well as a machine shop in Russia. Upon these closures, our graphite electrode capacity will be reduced by approximately 60,000 metric tons.

6

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


We have also adopted measures for additional overhead reductions in our Industrial Materials segment and in our corporate operations. These actions, along with the planned closures, are expected to reduce global headcount by approximately 600 people or approximately 20 percent of our global workforce.
The rationalization plan is targeted to be substantially complete by the end of the second quarter of 2014.
The accrual for severance liability related to these rationalizations is included as a current liability on the Consolidated Balance Sheet. The following table summarizes activity related to the accrual:
 
(in thousands)
Balance as of December 31, 2012
$

Rationalization charges
14,593

Change in estimates

Payments and settlements
(464
)
Effect of change in currency exchange rates

Balance as of September 30, 2013
$
14,129


Charges incurred related to these actions for the three and nine months ended September 30, 2013 are as follows:
 
For the Three and Nine Months Ended September 30, 2013
 
(dollars in thousands)
Severance and related costs
$
14,593

Accelerated depreciation
1,323

Inventory loss
1,631

   Total rationalization and related charges
$
17,547

These actions resulted in a $14.6 million charge for severance and related costs recognized as rationalization expense in the three and nine months ended September 30, 2013, substantially all of which relate to future cash outflows. We expect the majority of these cash outflows to occur by the end of the second quarter of 2014. The total expected cost of these actions is approximately $105 million, approximately $30 million of which will be cash outlays, the majority of which will be incurred in 2014, and funded through working capital improvements. The remaining $75 million are non-cash costs, which primarily reflect the write-off of assets, and will be expensed throughout the wind-down period. We incurred approximately $17.5 million of expense related to this initiative in the third quarter and we expect approximately $51 million of additional expense to be recognized in the fourth quarter.
We recorded accelerated depreciation charges of $1.3 million related to fixed assets in South Africa that are expected to be taken out of service during the fourth quarter of 2013. These accelerated depreciation charges were recorded as part of cost of sales. Additionally, certain raw material inventory in South Africa will not be used and cannot be transferred to other locations due to significant inventory shrinkage expected during transport. As such, we recorded a $1.6 million reserve for inventory losses, which was also recorded as part of cost of sales in three months ended September 30, 2013.
(3)
Stock-Based Compensation
For the three months ended September 30, 2012 and 2013, we recognized stock-based compensation expense of $1.7 million and $2.2 million, respectively. A majority of the expense, $1.6 million and $2.0 million, respectively, was recorded as selling and administrative expenses in the Consolidated Statements of Income, with the remaining expenses recorded as cost of sales and research and development.
For the nine months ended September 30, 2012 and 2013, we recognized stock-based compensation expense of $8.1 million and $5.9 million, respectively. A majority of the expense, $7.3 million and $5.4 million, respectively, was

7

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


recorded as selling and administrative expenses in the Consolidated Statements of Income, with the remaining expenses recorded as cost of sales and research and development.
As of September 30, 2013, the total compensation cost related to non-vested restricted stock, performance shares and stock options not yet recognized was $11.9 million, which will be recognized over the weighted average life of 1.3 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the nine months ended September 30, 2013 was:
 
Number of
Shares
 
Weighted-
Average
Grant  Date
Fair Value
Outstanding unvested as of January 1, 2013
1,851,919

 
$
13.30

Granted
96,942

 
8.80

Vested
(363,325
)
 
15.82

Forfeited/canceled/expired
(232,374
)
 
16.88

Outstanding unvested as of September 30, 2013
1,353,162

 
11.69

 
Stock Options
Stock option activity under the plans for the nine months ended September 30, 2013 was:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
Outstanding as of January 1, 2013
1,730,149

 
$
12.35

Granted
5,200

 
9.74

Forfeited/canceled/expired
(65,401
)
 
14.51

Exercised
(40,735
)
 
4.29

Outstanding as of September 30, 2013
1,629,213

 
12.46

(4)
Earnings per Share
The following table shows the information used in the calculation of our share counts for basic and diluted earnings per share:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
Weighted average common shares outstanding
    for basic calculation
134,347,199

 
135,134,144

 
139,938,771

 
134,948,507

Add: Effect of stock options and restricted stock
653,466

 
196,914

 
625,907

 
173,107

Weighted average common shares outstanding
    for diluted calculation
135,000,665

 
135,331,058

 
140,564,678

 
135,121,614

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income 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.

8

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 862,977 shares in both the three and nine months ended September 30, 2012, and 1,529,213 shares in both the three and nine months ended September 30, 2013, as the exercise prices were greater than the weighted average market price of our common stock for the applicable period.
(5)
Segment Reporting

We operate in two reportable segments: Industrial Materials and Engineered Solutions.
Industrial Materials. Our industrial materials segment manufactures and delivers high quality graphite electrodes, refractory products and needle coke products. Electrodes are key components of the conductive power systems used to produce steel and other non-ferrous metals. Refractory products are used in blast furnaces and submerged arc furnaces due to their high thermal conductivity and the ease with which they can be machined to large or complex shapes. Needle coke, a crystalline form of carbon derived from decant oil, is the key ingredient in, and is used primarily in, the production of graphite electrodes.
Engineered Solutions. The Engineered Solutions segment includes advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials. Advanced electronics technologies products consist of electronic thermal management solutions, fuel cell components, and sealing materials. Advanced graphite materials are highly engineered synthetic graphite products used in many areas due to their unique properties and the ability to tailor them to specific solutions. These products are used in transportation, alternative energy, metallurgical, chemical, oil and gas exploration and various other industries. Advanced composite materials are highly engineered carbon products that are woven into various shapes primarily to support the aerospace and defense industries. Advanced materials use carbon and graphite powders as components or additives in a variety of industries, including metallurgical processing, battery and fuel cell components, and polymer additives.
We continue to evaluate the performance of our segments based on segment operating income. Intersegment sales and transfers are not material and the accounting policies of the reportable segments are the same as those for our Consolidated Financial Statements as a whole. Corporate expenses are allocated to segments based on each segment’s percentage of consolidated sales.
The following tables summarize financial information concerning our reportable segments:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
 
(Dollars in thousands)
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
 
 
 
Industrial Materials
$
260,180

 
$
233,277

 
$
715,461

 
$
673,394

Engineered Solutions
60,536

 
69,807

 
161,804

 
184,778

Total net sales
$
320,716

 
$
303,084

 
$
877,265

 
$
858,172

Segment operating income:
 
 
 
 
 
 
 
Industrial Materials
$
37,301

 
$
(12,945
)
 
$
104,103

 
$
10,663

Engineered Solutions
6,262

 
4,376

 
10,044

 
12,485

Total segment operating income
$
43,563

 
$
(8,569
)
 
$
114,147

 
$
23,148

 
 
 
 
 
 
 
 
Reconciliation of segment operating income to
    income before provision for income taxes
 
 
 
 
 
 
 
Other expense (income), net
1,653

 
(772
)
 
(1,376
)
 
753

Interest expense
5,839

 
9,098

 
15,733

 
27,053

Interest income
(33
)
 
(49
)
 
(178
)
 
(162
)
Income (loss) before provision for income taxes
$
36,104

 
$
(16,846
)
 
$
99,968

 
$
(4,496
)


9

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


(6)
Other Expense (Income), Net
Other income for the nine months ended September 30, 2012 includes $4.0 million of insurance reimbursements for claims made related to flood damages incurred at our Clarksburg, West Virginia facility during 2011. Other income for the three months ended September 30, 2013 includes a $2.0 million gain due to the favorable resolution of a previously recorded loss contingency.
(7)
Benefit Plans
The components of our consolidated net pension costs are set forth in the following table:
 
 
For the Three
Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
 
(Dollars in thousands)
 
(Dollars in thousands)
Service cost
$
426

 
$
489

 
$
1,278

 
$
1,467

Interest cost
2,150

 
1,985

 
6,450

 
5,955

Expected return on plan assets
(2,195
)
 
(1,706
)
 
(6,585
)
 
(5,118
)
Amortization of prior service cost
6

 
6

 
18

 
18

Net cost
$
387

 
$
774

 
$
1,161

 
$
2,322


The components of our consolidated net postretirement costs are set forth in the following table: 
 
For the Three
Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
 
(Dollars in thousands)
 
(Dollars in thousands)
Service cost
$
46

 
$
28

 
$
138

 
$
84

Interest cost
381

 
331

 
1,143

 
993

Amortization of prior service benefit
(49
)
 
(50
)
 
(147
)
 
(150
)
Plan amendment

 

 
1,147

 

Net cost
$
378

 
$
309

 
$
2,281

 
$
927


(8)
Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived acquired 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, 2012. The estimated fair values of our reporting units were based on discounted cash flow models derived from internal earnings forecasts and assumptions. The assumptions and estimates used in these valuations incorporated the current and expected economic environment. Our model was based on our internally developed forecast and based on these valuations, the fair value substantially exceeded our net asset value. In addition to the quantitative analysis, we qualitatively assessed our reporting units and we believe that the quantitative analysis supporting the fair value in excess of the carrying value is appropriate.
As a result of the rationalization activities in Note 2, we performed an interim impairment analysis as of September 30, 2013. Similar to the testing done as of December 31, 2012, our discounted cash flow model was based on our internally developed forecasts, and based on these valuations, the fair value substantially exceeded the carrying value of the reporting unit our net asset value as of September 30, 2013. In addition to the quantitative analysis, we

10

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


qualitatively assessed our reporting units and we believe that the quantitative analysis supporting the fair value in excess of the carrying value continues to be appropriate. However, a further significant deterioration in the global economic environment or in any of the input assumptions in our calculation could adversely affect the fair value of our reporting units and result in an impairment of some or all of the goodwill on the balance sheet.

The changes in the carrying value of goodwill during the nine months ended September 30, 2013 are as follows:
 
Total
 
(Dollars in
Thousands)
Balance as of December 31, 2012
$
498,261

Currency translation effect
(1,188
)
Balance as of September 30, 2013
$
497,073


The following table summarizes acquired intangible assets with determinable useful lives by major category as of December 31, 2012 and September 30, 2013:
 
As of December 31, 2012
 
As of September 30, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(Dollars in Thousands)
Trade name
7,900

 
(2,870
)
 
5,030

 
7,900

 
(3,676
)
 
4,224

Technological know-how
43,349

 
(12,554
)
 
30,795

 
43,349

 
(17,075
)
 
26,274

Customer –related
    intangible
110,798

 
(31,233
)
 
79,565

 
110,798

 
(41,324
)
 
69,474

Total finite-lived
    intangible assets
$
162,047

 
$
(46,657
)
 
$
115,390

 
$
162,047

 
$
(62,075
)
 
$
99,972

Amortization expense of acquired intangible assets was $5.6 million and $5.0 million in the three months ended September 30, 2012 and September 30, 2013, respectively, and $16.7 million and $15.4 million in the nine months ended September 30, 2012 and September 30, 2013, respectively. Estimated amortization expense will approximate $5.1 million in the fourth quarter of 2013, $19.0 million in 2014, $17.3 million in 2015, $13.2 million in 2016 and $14.4 million in 2017.
(9)
Long-Term Debt and Liquidity
The following table presents our long-term debt: 
 
As of December 31, 2012
 
As of September 30, 2013
 
(Dollars in thousands)
Revolving Facility
$
69,500

 
$
85,000

Senior Notes
300,000

 
300,000

Senior Subordinated Notes
164,183

 
172,729

Other debt
2,026

 
1,914

Total
$
535,709

 
$
559,643

 
The fair value of long-term debt, which was determined using Level 2 inputs, was $546.3 million, versus a book value of $535.7 million as of December 31, 2012. As of September 30, 2013 the fair value of our long-term debt approximated book value.

11

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


Revolving Facility
On October 7, 2011, we successfully completed the refinancing of our principal revolving credit facility (“Revolving Facility”). Borrowers under the Revolving Facility were GrafTech Finance Inc. (“GrafTech Finance”) and GrafTech Switzerland S.A. (“Swissco”), both wholly-owned subsidiaries. On April 20, 2012, as permitted by Section 9.19 of the Revolving Facility, we entered into an Amended and Restated Credit Agreement pursuant to which, on August 28, 2012, GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco”) replaced Swissco as a Borrower. Swissco is no longer entitled to borrow under the Revolving Facility although it is entitled to request letters of credit thereunder only for its own use.
The interest rate applicable to the Revolving Facility is, at GrafTech’s option, either LIBOR plus a margin ranging from 1.5% to 2.25% (depending on our total net leverage ratio) or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.50% to 1.25% (depending upon such ratio). The alternate base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, N.A., (ii) the federal fund effective rate plus one-half of 1.0% and (iii) the London interbank offering rate (as adjusted) for a one-month period plus 1.0%. The borrowers pay a per annum fee ranging from 0.25% to 0.40% (depending on such ratio) on the undrawn portion of the commitments under the Revolving Facility.
The financial covenants require us to maintain a minimum cash interest coverage ratio of 3.00 to 1.00 and a maximum senior secured leverage ratio of 2.25 to 1.00, subject to adjustment for certain events. As of September 30, 2013, we were in compliance with all financial and other covenants contained in the Revolving Facility, as applicable.
Senior Notes
On November 20, 2012, GrafTech International Ltd. issued $300 million principal amount of 6.375% Senior Notes due 2020. These Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
 
The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2013. The Senior Notes mature on November 15, 2020.
 
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the Indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the Indenture. The Company is also entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes before November 15, 2015 with the net proceeds from certain equity offerings at a redemption price of 106.375% of the principal amount plus accrued and unpaid interest, if any.

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

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

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

12

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


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.
The original offering of the Senior Notes was not registered under the Securities Act of 1933, as amended (the "Securities Act"). At the time of the original offering, however, the Company agreed to file a registration statement under the Securities Act to permit the exchange of the original Senior Notes for registered Senior Notes having terms substantially identical to the original Senior Notes. The Company filed the required exchange offer registration statement during the second quarter 2013 and the exchange offer was consummated during the third quarter, fulfilling the Company's obligation with respect thereto.
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 $164.2 million as of December 31, 2012 and $172.7 million as of September 30, 2013.
(10)
Inventories
Inventories are comprised of the following: 
 
As of December 31, 2012
 
As of
September 30,
2013
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
230,057

 
$
202,161

Work in process
213,948

 
241,096

Finished goods
73,293

 
87,381

 
517,298

 
530,638

Reserves
(4,233
)
 
(11,627
)
         Total
$
513,065

 
$
519,011

As noted in Note 2, due to the actions announced, we recorded an additional inventory reserve related to raw materials at our South Africa facility in the three months ended September 30, 2013. The remaining increase in inventory reserves resulted from decreased pricing for certain products in certain markets.
(11) Interest Expense
The following table presents an analysis of interest expense: 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
 
(Dollars in thousands)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Interest incurred on debt
$
2,577

 
$
5,372

 
$
6,100

 
$
16,255

Amortization of discount on Senior Subordinated Notes
2,707

 
2,897

 
7,987

 
8,546

Amortization of debt issuance costs
427

 
729

 
1,197

 
1,872

Supply Chain Financing mark-up
128

 
100

 
449

 
380

Total interest expense
$
5,839

 
$
9,098

 
$
15,733

 
$
27,053


13

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


Interest Rates
The Revolving Facility had an effective interest rate of 2.21% and 2.18% as of December 31, 2012 and September 30, 2013, respectively. The Senior Subordinated Notes have an implied interest rate of 7.00%. The Senior Notes have a fixed interest rate of 6.375%
(12)
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 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 may 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 $27.0 million and $12.5 million as of December 31, 2012 and September 30, 2013, respectively. We recognized Mark-Up of $0.4 million as interest expense in both the nine months ended September 30, 2012 and the nine months ended September 30, 2013.
(13)
Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the nine months ended September 30, 2013, are presented below (dollars in thousands): 
 
 
Balance as of December 31, 2012
$
1,485

Product warranty adjustments
804

Payments and settlements
(827
)
Balance as of September 30, 2013
$
1,462

(14)
Income Taxes
We compute an estimated annual effective tax rate on a quarterly basis, considering ordinary income and related income tax expense. 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. 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.

14

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


The following table summarizes the provision for income taxes for the three and nine months ended September 30, 2012 and September 30, 2013:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2013
 
2012
 
2013
 
(Dollars in thousands)
 
(Dollars in thousands)
Tax expense (benefit)
$
6,478

 
$
(9,216
)
 
$
10,966

 
$
(5,458
)
Pretax income (loss)
$
36,104

 
$
(16,846
)
 
$
99,968

 
$
(4,496
)
Effective tax rates
17.9
%
 
54.7
%
 
11.0
%
 
121.4
%
During the three months ended September 30, 2013, we announced a global initiative to reduce our Industrial Materials’ cost base and improve our competitive position. These actions resulted in $14.6 million of rationalization charges for the three months ended September 30, 2013. As a result, the effective tax rate for the three months ended September 30, 2013 differs from the U.S statutory rate of 35% primarily due to the jurisdictional mix of income driven by the rationalization charges. In addition, our tax rate for the three months ended September 30, 2013 was favorably impacted by the effective resolution of uncertain tax positions from prior years and by tax credits that were recognized in support of the research and development efforts of our Engineered Solutions products. For the three months ended September 30, 2012, the effective tax rates differs from the U.S statutory tax rate of 35% due to jurisdictional mix of income and by tax credits that were recognized in support of our research and development efforts of our Engineered Solutions products, which positively impacted the tax rate for the quarter.
The effective tax rate for the nine months ended September 30, 2013 differs from the U.S. statutory rate of 35% primarily due to the jurisdictional mix of income, which was driven by the rationalization charges associated with the global initiative to reduce our Industrial Materials’ cost base and improve our competitive position. In addition, our tax rate for the nine months ended September 30, 2013 was favorably impacted by the effective resolution of uncertain tax positions from prior years and by tax credits that were recognized in support of the research and development efforts of our Engineered Solutions products. During the nine months ended September 30, 2012 our unrecognized tax benefits decreased by $10.5 million due to the effective resolutions of uncertain tax positions from prior years, which had a favorable impact on our effective tax rate. In addition, the effective tax rate for the nine months ended September 30, 2012 differs from the U.S statutory tax rate of 35% due to jurisdictional mix of income and by tax credits that were recognized in support of our research and development efforts of our Engineered Solutions products, which positively impacted our tax rate.
During the three months ended September 30, 2013, our unrecognized tax benefits decreased by approximately $1.8 million due to the effective resolution of uncertain tax positions from prior years. As of September 30, 2013, we had unrecognized tax benefits of $7.1 million, $4.6 million of 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 $2.7 million may occur within 12 months due to settlements with taxing authorities and/or expirations of statutes of limitations, $0.6 million of which, if recognized, would have 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. We are currently under federal audit in the U.S. for tax year 2010. All U.S. tax years prior to 2010 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. We have one issue outstanding from the 2008 U.S. federal audit, which is under appeal. All other non-U.S. jurisdictions are still open to examination beginning after 2007.

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 significant positive evidence does not yet outweigh negative evidence, we have maintained valuation allowances on those deferred tax assets.

15

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


(15)
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 nine months ended September 30, 2012 and 2013.
In 2012 and 2013, we entered into foreign forward currency derivatives denominated in the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from such transactions may be adversely affected by changes in exchange rates between the US dollar and the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. As of September 30, 2013, we had outstanding Mexican peso, South African rand, Brazilian real, euro, and Japanese yen currency contracts with aggregate notional amounts of $237.1 million. The foreign currency derivatives outstanding as of September 30, 2013 have several maturity dates ranging from October 2013 to June 2014.
Commodity derivative contracts
We periodically enter into derivative contracts for certain refined oil products and natural gas. These contracts are entered into to protect against the risk that eventual cash flows related to these products may be adversely affected by future changes in prices. There was no ineffectiveness on these contracts during the three or nine months ended September 30, 2013. As of September 30, 2013, we had outstanding derivative swap contracts for refined oil products with aggregate notional amounts of $29.8 million. These contracts have maturity dates ranging from October 2013 to March 2014.
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, 2012 and September 30, 2013:
 

16

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


 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2012
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
1,062

 
Other payables
 
$
2,374

Commodity derivative contracts
Other current assets
 

 
Other current liabilities
 
31

Total fair value
 
 
$
1,062

 
 
 
$
2,405

 
 
 
 
 
 
 
 
As of September 30, 2013
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
683

 
Other payables
 
$
2,246

Commodity derivative contracts
Other current assets
 
319

 
Other current liabilities
 
26

Total fair value
 
 
$
1,002

 
 
 
$
2,272

 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2012
(Dollars in Thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
242

 
Other payables
 
$

Total fair value
 
 
$
242

 
 
 
$

 
 
 
 
 
 
 
 
As of September 30, 2013
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
346

 
Other payables
 
$
285

Total fair value
 
 
$
346

 
 
 
$
285

The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Income when the hedged item impacts earnings and are as follows for three and nine months ended September 30, 2012 and 2013:
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Three Months Ended September 30,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2012
 
2013
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of $235 and ($23), respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
(2,347
)
 
$
228

Commodity forward derivatives, excluding
  tax of $1,278 and ($164), respectively
 
Cost of goods sold / Revenue
 
(3,531
)
 
454

 
 
 
 
 
 
 


17

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


 
 
 
 
Amount of (Gain)/Loss
Recognized
Three Months Ended September 30,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Income
 
2012
 
2013
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
1,097

 
$
509

 
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Nine Months Ended September 30,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2012
 
2013
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of $471 and ($4), respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
(4,706
)
 
$
38

Commodity forward derivatives, excluding
  tax of $3,084 and ($214), respectively
 
Cost of goods sold / Revenue
 
$
(8,518
)
 
$
591

 
 
 
 
 
 
 
 
 
 
 
Amount of (Gain)/Loss
Recognized
Nine Months Ended September 30,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Income
 
2012
 
2013
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
297

 
$
(912
)
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”. 
(16)
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

18

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


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

Investments in subsidiaries are recorded on the equity basis.

    The following tables set forth condensed consolidating balance sheets as of December 31, 2012 and September 30, 2013 and condensed consolidating statements of income and comprehensive income for the three and nine months ended September 30, 2012 and 2013 and condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2013 of the Parent, Guarantors and the Non-Guarantors.


19

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


CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2012
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
4,425

 
$
12,892

 
$

 
$
17,317

    Accounts receivable - affiliates
 
26,399

 
38,116

 
29,177

 
(93,692
)
 

    Accounts receivable - trade
 

 
78,053

 
158,376

 

 
236,429

    Inventories
 

 
159,217

 
353,848

 

 
513,065

    Prepaid and other current assets
 

 
13,681

 
42,509

 

 
56,190

      Total current assets
 
26,399

 
293,492

 
596,802

 
(93,692
)
 
823,001

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,728,316

 
868,063

 

 
(2,596,379
)
 

 Property, plant and equipment
 

 
523,818

 
310,089

 

 
833,907

 Deferred income taxes
 

 

 
6,157

 

 
6,157

 Goodwill
 

 
293,162

 
205,099

 

 
498,261

 Notes receivable - affiliate
 
66,869

 
22,413

 

 
(89,282
)
 

 Other assets
 
5,218

 
65,269

 
66,102

 

 
136,589

      Total Assets
 
$
1,826,802

 
$
2,066,217

 
$
1,184,249

 
$
(2,779,353
)
 
$
2,297,915

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

 
$
55,349

 
$
38,343

 
$
(93,692
)
 
$

    Accounts payable - trade
 
273

 
33,126

 
94,721

 

 
128,120

    Short-term debt
 

 
171

 
8,255

 

 
8,426

    Accrued income and other taxes
 
597

 
3,948

 
26,378

 

 
30,923

    Supply chain financing liability
 

 

 
26,962

 

 
26,962

    Other accrued liabilities
 
2,178

 
15,597

 
33,178

 

 
50,953

         Total current liabilities
 
3,048

 
108,191

 
227,837

 
(93,692
)
 
245,384

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
66,869

 
22,413

 
(89,282
)
 

 Long-term debt - third party
 
464,183

 
70,190

 
1,336

 

 
535,709

 Other long-term obligations
 

 
86,026

 
38,979

 

 
125,005

 Deferred income taxes
 
9,720

 
6,625

 
25,621

 

 
41,966

 Stockholders' equity
 
1,349,851

 
1,728,316

 
868,063

 
(2,596,379
)
 
1,349,851

   Total Liabilities and Stockholders' Equity
 
$
1,826,802

 
$
2,066,217

 
$
1,184,249

 
$
(2,779,353
)
 
$
2,297,915

 
 
 
 
 
 
 
 
 
 
 


20

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


CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30,2013
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
4,184

 
$
7,286

 
$

 
$
11,470

    Accounts receivable - affiliates
 
43,145

 
33,813

 
22,225

 
(99,183
)
 

    Accounts receivable - trade
 

 
63,726

 
141,701

 

 
205,427

    Inventories
 

 
164,058

 
354,953

 

 
519,011

    Prepaid and other current assets
 

 
29,226

 
40,210

 

 
69,436

      Total current assets
 
43,145

 
295,007

 
566,375

 
(99,183
)
 
805,344

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,734,786

 
864,370

 

 
(2,599,156
)
 

 Property, plant and equipment
 

 
533,083

 
313,118

 

 
846,201

 Deferred income taxes
 

 

 
7,463

 

 
7,463

 Goodwill
 

 
293,163

 
203,910

 

 
497,073

 Notes receivable - affiliate
 
59,853

 
22,413

 

 
(82,266
)
 

 Other assets
 
4,921

 
56,162

 
58,457

 

 
119,540

      Total Assets
 
$
1,842,705

 
$
2,064,198

 
$
1,149,323

 
$
(2,780,605
)
 
$
2,275,621

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 
$
19

 
$
65,349

 
$
33,815

 
$
(99,183
)
 
$

    Accounts payable - trade
 
35

 
40,321

 
63,163

 

 
103,519

    Short-term debt
 

 
174

 
4,170

 

 
4,344

    Accrued income and other taxes
 
4,235

 
2,781

 
20,798

 

 
27,814

    Rationalizations
 

 
1,951

 
12,178

 

 
14,129

    Supply chain financing liability
 

 

 
12,540

 

 
12,540

    Other accrued liabilities
 
7,225

 
14,432

 
31,296

 

 
52,953

         Total current liabilities
 
11,514

 
125,008

 
177,960

 
(99,183
)
 
215,299

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
59,853

 
22,413

 
(82,266
)
 

 Long-term debt - third party
 
472,729

 
63,558

 
23,356

 

 
559,643

 Other long-term obligations
 

 
80,316

 
37,531

 

 
117,847

 Deferred income taxes
 
9,720

 
677

 
23,693

 

 
34,090

 Stockholders' equity
 
1,348,742

 
1,734,786

 
864,370

 
(2,599,156
)
 
1,348,742

    Total Liabilities and Stockholders' Equity
 
$
1,842,705

 
$
2,064,198

 
$
1,149,323

 
$
(2,780,605
)
 
$
2,275,621

 
 
 
 
 
 
 
 
 
 
 


21

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 September 30, 2012
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
41,160

 
$
53,579

 
$
(94,739
)
 
$

 Sales - third party
 

 
140,927

 
179,789

 

 
320,716

    Net sales
 

 
182,087

 
233,368

 
(94,739
)
 
320,716

 Cost of sales
 

 
151,181

 
184,288

 
(94,739
)
 
240,730

      Gross profit
 

 
30,906

 
49,080

 

 
79,986

 Research and development
 

 
2,778

 

 

 
2,778

 Selling and administrative expenses
 

 
13,994

 
19,651

 

 
33,645

      Operating income
 

 
14,134

 
29,429

 

 
43,563

 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 

 
480

 
1,173

 

 
1,653

 Interest expense - affiliate
 
1,330

 

 
192

 
(1,522
)
 

 Interest expense - third party
 
2,707

 
2,468

 
664

 

 
5,839

 Interest income - affiliate
 

 
(1,522
)
 

 
1,522

 

 Interest income - third party
 

 

 
(33
)
 

 
(33
)
 (Loss) income before income taxes
 
(4,037
)
 
12,708

 
27,433

 

 `
36,104

 
 
 
 
 
 
 
 
 
 
 
 (Benefit) provision for income taxes
 
(1,464
)
 
3,011

 
4,931

 

 
6,478

 Equity in earnings of subsidiary
 
32,199

 
22,502

 

 
(54,701
)
 

      Net income
 
$
29,626

 
$
32,199

 
$
22,502

 
$
(54,701
)
 
$
29,626

 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
29,626

 
$
32,199

 
$
22,502

 
$
(54,701
)
 
$
29,626

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
  Foreign currency translation
 
712

 

 
712

 
(712
)
 
712

  Commodities and foreign
    currency derivatives
 
(3,952
)
 
(1,064
)
 
(2,888
)
 
3,952

 
(3,952
)
Other comprehensive (loss) income
 
(3,240
)
 
(1,064
)