0000931148-14-000125.txt : 20140811 0000931148-14-000125.hdr.sgml : 20140811 20140811144820 ACCESSION NUMBER: 0000931148-14-000125 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20140630 FILED AS OF DATE: 20140811 DATE AS OF CHANGE: 20140811 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: 141030175 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 gti6302014-10q.htm 10-Q GTI 6.30.2014 - 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 June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from              to             
 
Commission file number: 1-13888
 

GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
 
Delaware
27-2496053
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
12900 Snow Road
44130
Parma, OH
(Zip code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (216) 676-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of July 15, 2014, 136,177,470 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, 2013
 
As of
June 30,
 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,888

 
$
20,728

Accounts and notes receivable, net of allowance for doubtful accounts of
   $6,718 as of December 31, 2013 and $8,563 as of June 30, 2014
199,566

 
177,541

Inventories
490,414

 
450,421

Prepaid expenses and other current assets
73,790

 
93,693

Total current assets
775,658

 
742,383

Property, plant and equipment
1,588,880

 
1,621,461

Less: accumulated depreciation
767,895

 
938,677

Net property, plant and equipment
820,985

 
682,784

Deferred income taxes
10,334

 
12,059

Goodwill
496,810

 
496,335

Other assets
114,061

 
110,277

Total assets
$
2,217,848

 
$
2,043,838

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

 
$
122,428

Short-term debt
1,161

 
142

Accrued income and other taxes
30,687

 
23,019

Rationalizations
18,421

 
3,592

Supply chain financing liability
9,455

 

Other accrued liabilities
40,939

 
38,447

Total current liabilities
215,875

 
187,628

Long-term debt
541,593

 
551,533

Other long-term obligations
97,947

 
95,892

Deferred income taxes
41,684

 
44,403

Contingencies – Note 12

 

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

 

Common stock, par value $.01, 225,000,000 shares authorized,
   151,929,565 shares issued as of December 31, 2013 and 152,450,629
   shares issued as of June 30, 2014
1,519

 
1,525

Additional paid-in capital
1,820,451

 
1,826,776

Accumulated other comprehensive loss
(292,624
)
 
(290,313
)
Retained earnings
39,625

 
(127,325
)
Less: cost of common stock held in treasury, 16,341,311 shares as of
   December 31, 2013 and 16,223,318 shares as of June 30, 2014
(247,190
)
 
(245,221
)
Less: common stock held in employee benefit and compensation trusts,
   87,206 shares as of December 31, 2013 and 89,703 shares as of
   June 30, 2014
(1,032
)
 
(1,060
)
Total stockholders’ equity
1,320,749

 
1,164,382

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

 
$
2,043,838

 See accompanying Notes to Consolidated Financial Statements

3


GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
Net sales
$
301,361

 
$
284,184

 
$
555,088

 
$
564,975

Cost of sales
252,440

 
266,231

 
457,617

 
521,328

Gross profit
48,921

 
17,953

 
97,471

 
43,647

Research and development
2,787

 
2,903

 
5,880

 
5,673

Selling and administrative expenses
30,161

 
32,137

 
59,874

 
62,044

Rationalizations

 
831

 

 
917

Impairments

 
121,570

 

 
121,570

Operating income (loss)
15,973

 
(139,488
)
 
31,717

 
(146,557
)
 
 
 
 
 
 
 
 
Other expense, net
975

 
(41
)
 
1,525

 
753

Interest expense
8,947

 
9,155

 
17,955

 
18,154

Interest income
(49
)
 
(55
)
 
(113
)
 
(113
)
Income (loss) before provision for income taxes
6,100

 
(148,547
)
 
12,350

 
(165,351
)
 
 
 
 
 
 
 
 
Provision for income taxes
1,718

 
6,886

 
3,758

 
1,599

Net income (loss)
$
4,382

 
$
(155,433
)
 
$
8,592

 
$
(166,950
)
 
 
 
 
 
 
 
 
Basic income (loss) per common share:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.03

 
$
(1.14
)
 
$
0.06

 
$
(1.23
)
Weighted average common shares outstanding
134,854

 
135,963

 
134,816

 
135,713

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

 
$
(1.14
)
 
$
0.06

 
$
(1.23
)
Weighted average common shares outstanding
135,056

 
135,963

 
134,988

 
135,713

 
 
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income (loss)
$
4,382

 
$
(155,433
)
 
$
8,592

 
$
(166,950
)
Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9,823
)
 
(240
)
 
(17,132
)
 
2,147

Commodities and foreign currency derivatives and other, net of tax of ($307), ($169), $116 and ($53), respectively
(3,326
)
 
479

 
207

 
164

Other comprehensive (loss) income, net of tax:
(13,149
)
 
239

 
(16,925
)
 
2,311

Comprehensive income (loss)
$
(8,767
)
 
$
(155,194
)
 
$
(8,333
)
 
$
(164,639
)

See accompanying Notes to Consolidated Financial Statements


4


GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Six Months Ended
 
June 30,
 
2013
 
2014
Cash flow from operating activities:
 
 
 
Net income (loss)
$
8,592

 
$
(166,950
)
Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
44,868

 
66,507

Impairments

 
121,570

Deferred income tax provision
277

 
(1,724
)
Post-retirement and pension plan changes
2,242

 
3,093

Stock-based compensation
3,745

 
2,752

Interest expense
6,919

 
7,471

Other charges, net
1,420

 
2,783

(Increase) decrease in working capital*
(51,016
)
 
30,416

Increase in long-term assets and liabilities
(5,401
)
 
(10,018
)
Net cash provided by operating activities
11,646

 
55,900

Cash flow from investing activities:
 
 
 
Capital expenditures
(38,518
)
 
(46,464
)
Proceeds from the sale of assets

 
2,523

Proceeds from (payments for) derivative instruments
1,472

 
(194
)
Insurance recoveries
284

 
2,834

Net cash used in investing activities
(36,762
)
 
(41,301
)
Cash flow from financing activities:
 
 
 
Short-term debt reductions, net
(5,649
)
 
(1,019
)
Revolving Facility borrowings
111,000

 
209,000

Revolving Facility reductions
(70,500
)
 
(205,000
)
Principal payments on long-term debt
(140
)
 
(126
)
Supply chain financing
(8,369
)
 
(9,455
)
Proceeds from exercise of stock options
175

 
2,813

Purchase of treasury shares
(709
)
 
(435
)
Revolver facility refinancing

 
(2,636
)
Other
(6,440
)
 
918

Net cash provided by (used in) financing activities
19,368

 
(5,940
)
Net (decrease) increase in cash and cash equivalents
(5,748
)
 
8,659

Effect of exchange rate changes on cash and cash equivalents
(583
)
 
181

Cash and cash equivalents at beginning of period
17,317

 
11,888

Cash and cash equivalents at end of period
$
10,986

 
$
20,728

 
 
 
 
* Net change in working capital due to the following components:
 
 
 
      Change in current assets:
 
 
 
Accounts and notes receivable, net
$
28,076

 
$
22,158

Inventories
(33,384
)
 
42,298

Prepaid expenses and other current assets
(16,362
)
 
(18,660
)
Decrease in accounts payable and accruals
(29,741
)
 
(284
)
Rationalizations

 
(15,076
)
Increase (decrease) in interest payable
395

 
(20
)
(Increase) decrease in working capital
$
(51,016
)
 
$
30,416


See accompanying Notes to Consolidated Financial Statements

5

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



(1)
Organization and Summary of Significant Accounting Policies
A. Organization
GrafTech International Ltd. is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. We have seven major product categories: graphite electrodes, refractory products, needle coke products, advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, which are reported in the following segments:
Industrial Materials includes graphite electrodes, refractory products, and needle coke products, and primarily serves the steel industry.
Engineered Solutions includes advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, and provides primary and specialty products to the advanced electronics, industrial, energy, transportation and defense industries.
B. Basis of Presentation
The interim Consolidated Financial Statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). December 31, 2013 financial position data included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”) but does not include all disclosures required by GAAP. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, contained in the Annual Report.
The unaudited consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for the interim period presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued guidance on Income Taxes titled “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This guidance requires that financial statements reflect a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward as reduced by any unrecognized tax benefit, or a portion of an unrecognized tax benefit. The updated guidance became effective for the Company's interim and annual periods beginning after December 15, 2013. We adopted the guidance effective January 1, 2014 and its implementation did not have a material impact to our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2014-09 on its financial position, results of operations and cash flows.
(2)
Rationalizations and Impairments
2013 Industrial Materials Rationalization
On October 31, 2013, we announced a global initiative to reduce our Industrial Materials segment's cost base and improve our competitive position. As part of this initiative, we ceased production at our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. These actions are substantially

6

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


complete as of June 30, 2014. Our graphite electrode capacity was reduced by approximately 60,000 metric tons as a result of these actions. In parallel, we adopted measures for reductions in overhead and related corporate operations. These actions and measures are expected to reduce global headcount by approximately 600 people or approximately 20 percent of our global workforce.

2013 Engineered Solutions Rationalization
 
In order to optimize our Engineered Solutions platform and improve our cost structure, we also initiated actions to centralize certain operations and reduce overhead in our Engineered Solutions segment. These actions are expected to reduce global headcount by approximately 40 people and be substantially completed during 2014.

Total 2013 Rationalization Initiatives Impact to 2014 Financial Results
In the three and six months ended June 30, 2014, as a result of the 2013 rationalization initiatives we incurred rationalization charges of $0.8 million and $0.9 million, primarily related to contract termination costs. We also incurred non-cash accelerated depreciation charges of $4.2 million and $21.7 million in the three and six months ended June 30, 2014, respectively. Other rationalization-related charges recorded in cost of sales in the three and six months ended June 30, 2014 were $4.9 million and $5.2 million, respectively, and included cleaning and dismantling costs and loss reserves for inventory.

Charges incurred related to the 2013 rationalization initiatives for the three and six months ended June 30, 2014 are as follows:
 
For the Three Months Ended
June 30, 2014
 
For the Six Months Ended
June 30, 2014
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Total
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Total
 
(Dollars in thousands)
 
(Dollars in thousands)
Accelerated depreciation
    (recorded in Cost of sales)
$
3,832

 
$
413

 
$
4,245

 
$
20,852

 
$
826

 
$
21,678

Other (recorded in Cost
    of sales)
4,255

 
625

 
4,880

 
4,576

 
615

 
5,191

Other (recorded in Selling
    and administrative)
54

 

 
54

 
79

 

 
79

Severance and related costs
    (recorded in Rationalizations)
831

 

 
831

 
945

 
(28
)
 
917

   Total rationalization
    and related charges
$
8,972

 
$
1,038

 
$
10,010

 
$
26,452

 
$
1,413

 
$
27,865


The 2013 rationalization initiatives will result in approximately $95 million of pre-tax charges, of which approximately $25 million will be cash outlays (net of cash inflows). Through June 30, 2014, we incurred $93.6 million of expense related to these initiatives.


7

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


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

Charges incurred
609

Change in estimates
308

Payments and settlements
(15,993
)
Effect of change in currency exchange rates
247

Balance as of June 30, 2014
$
3,592


2014 Engineered Solutions Rationalization
    
On July 29, 2014, we announced additional rationalization initiatives to increase profitability, reduce cost and improve global competitiveness in our Engineered Solutions segment. During the second quarter of 2014, worldwide pricing of our isomolded graphite products ("isomolded") within our Advanced Graphite Material ("AGM") product group, as well as our expectation of future pricing significantly eroded, driven by significant over-capacity and recent competitor responses. In addition, the solar production has continued to erode with poly-silicone, silicone and silicone wafer production migrating to China. New competitors servicing this industry have commenced production in China at pricing levels making the market now unprofitable. As a result of these conditions, the Company has decided to cease isomolded production and pursue an alternative supply chain relationships in our isomolded product line.

As a result of the above, we tested our long-lived assets used to produce advanced graphite materials for recovery, based on undiscounted cash flows from the use and eventual disposition of these assets. The carrying value of the assets exceeded these undiscounted cash flows, and accordingly, we estimated the fair-value of long-lived assets based on a market participant view. This impairment charge totaled $121.6 million in the three months ended June 30, 2014, and included the impairment of certain acquired customer relationship and technology intangible assets. Goodwill associated with this line of business of $0.4 million was fully impaired, and included in the $121.6 million charge. Other impairment related charges, primarily inventory write-downs, were $10.6 million in the three months ended June 30, 2014. If business conditions and plans do not achieve our expected returns in the Engineered Solutions segment, we may undertake additional restructurings, rationalizations or similar actions which could result in additional charges, write-offs and impairments.

Severance and other related expected costs of these actions, including the costs to relocate certain fixed assets, are expected to result in approximately $12 million of additional charges. Approximately $7 million of these additional costs will be cash outlays, the majority of which will be incurred in 2014.
 
For the Three and Six Months Ended
June 30, 2014
 
 
(Dollars in thousands)
 
 
 
 
Impairments (recorded in Impairments)
$
121,570

 
Other (recorded in Cost of sales)
10,563

 
   Total 2014 Engineered Solutions rationalization
        and related charges
$
132,133

 
 
 
 
(3)
Stock-Based Compensation
For the three months ended June 30, 2013 and 2014, we recognized stock-based compensation expense totaling $1.4 million and $2.2 million, respectively. A majority of the expense, $1.3 million and $1.6 million, respectively, was recorded as selling and administrative expenses in the Consolidated Statements of Operations, with the remaining expenses recorded as cost of sales and research and development. Stock-based compensation expense in the three

8

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


months ended June 30, 2013 was positively impacted by a $1.3 million adjustment to compensation expense due to changes in share multiples for certain performance share units.
For the six months ended June 30, 2013 and 2014, we recognized stock-based compensation expense of $3.7 million and $2.8 million, respectively. A majority of the expense, $3.4 million and $2.1 million, respectively, was recorded as selling and administrative expenses in the Consolidated Statements of Operations, with the remaining expenses recorded as cost of sales and research and development.
As of June 30, 2014, the total compensation cost related to non-vested restricted stock, performance shares and stock options not yet recognized was $10.9 million, which will be recognized over the remaining weighted average life of 1.5 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the six months ended June 30, 2014 was:
 
Number of
Shares
 
Weighted-
Average
Grant  Date
Fair Value
Outstanding unvested as of January 1, 2014
1,633,491

 
$
10.98

Granted
209,600

 
10.60

Vested
(125,434
)
 
12.92

Forfeited/canceled/expired
(725,136
)
 
10.07

Outstanding unvested as of June 30, 2014
992,521

 
11.32

 
Stock Options
Stock option activity under the plans for the six months ended June 30, 2014 was:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
Outstanding as of January 1, 2014
1,916,718

 
$
12.47

Granted
145,034

 
11.56

Forfeited/canceled/expired
(164,572
)
 
11.60

Exercised
(316,733
)
 
8.88

Outstanding unvested as of June 30, 2014
1,580,447

 
13.19

(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 Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
Weighted average common shares outstanding
    for basic calculation
134,854,024

 
135,963,054

 
134,816,074

 
135,713,004

Add: Effect of stock options and restricted stock
201,809

 

 
171,517

 

Weighted average common shares outstanding
    for diluted calculation
135,055,833

 
135,963,054

 
134,987,591

 
135,713,004


9

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


Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of stock options covering 870,657 shares and 1,590,814 shares in the three and six months ended June 30, 2013, respectively.
(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 net sales.
The following tables summarize financial information concerning our reportable segments:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
 
 
 
Industrial Materials
$
231,339

 
$
206,655

 
$
440,116

 
$
425,431

Engineered Solutions
70,022

 
77,529

 
114,972

 
139,544

Total net sales
$
301,361

 
$
284,184

 
$
555,088

 
$
564,975

Segment operating income (loss):
 
 
 
 
 
 
 
Industrial Materials
$
7,530

 
$
(11,366
)
 
$
23,608

 
$
(20,790
)
Engineered Solutions
8,443

 
(128,122
)
 
8,109

 
(125,767
)
Total segment operating income (loss)
$
15,973

 
$
(139,488
)
 
$
31,717

 
$
(146,557
)
 
 
 
 
 
 
 
 
Reconciliation of segment operating income (loss) to
    income (loss) before provision for income taxes
 
 
 
 
 
 
 
Other expense (income), net
$
975

 
$
(41
)
 
$
1,525

 
$
753

Interest expense
8,947

 
9,155

 
17,955

 
18,154

Interest income
(49
)
 
(55
)
 
(113
)
 
(113
)
Income (loss) before provision for income taxes
$
6,100

 
$
(148,547
)
 
$
12,350

 
$
(165,351
)

10

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


Assets are managed based on geographic location because certain reportable segments share certain facilities. Assets by reportable segment are estimated based on the value of long-lived assets at each location and the activities performed at the location.  As a result of the rationalization initiatives and related impairments discussed in Note 2, the carrying value of our long-lived assets has changed significantly since December 31, 2013, particularly in our Engineered Solutions segment. The following is a summary of long-lived assets by reportable segment.
 
As of
December 31, 2013
 
As of
June 30, 2014
 
(Dollars in thousands)
Long-lived assets (a):
 
 
 
Industrial Materials.
$
601,322

 
$
586,305

Engineered Solutions
219,663

 
96,479

Total long-lived assets
$
820,985

 
$
682,784

(6)
Benefit Plans
The components of our consolidated net pension costs are set forth in the following table:
 
 
For the Three
Months Ended
 
For the Six
Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
Service cost
$
489

 
$
473

 
$
978

 
$
946

Interest cost
1,985

 
2,169

 
3,970

 
4,338

Expected return on plan assets
(1,706
)
 
(1,938
)
 
(3,412
)
 
(3,876
)
Amortization of prior service cost
6

 
1

 
12

 
2

Net cost
$
774

 
$
705

 
$
1,548

 
$
1,410


The components of our consolidated net postretirement costs are set forth in the following table: 
 
For the Three
Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
Service cost
$
28

 
$
19

 
$
56

 
$
38

Interest cost
331

 
352

 
662

 
704

Curtailment loss

 
1,048

 

 
1,048

Amortization of prior service benefit
(50
)
 
(47
)
 
(100
)
 
(94
)
Net cost
$
309

 
$
1,372

 
$
618

 
$
1,696


(7)
Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Our annual impairment test of goodwill was performed as of December 31, 2013 for all reporting units. The estimated fair values of our reporting units were based on discounted cash flow models derived from internal earnings forecasts and assumptions. The assumptions and estimates used in these valuations incorporated the current and expected economic environment. Based on these valuations, the fair value substantially exceeded our net asset value.

11

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


In addition to the quantitative analysis, we qualitatively assessed our reporting units and believe that the quantitative analysis supporting the fair value in excess of the carrying value was appropriate.
As a result of the deteriorating market conditions impacting our AGM product group, as discussed in Note 2, we performed a goodwill impairment test as of June 30, 2014 for the $0.4 million of goodwill assigned to our AGM reporting unit. As a result of this test, it was determined that the full $0.4 million of goodwill was impaired, and thus written off.
We evaluated other potential triggering events and did not note any events which would indicate that it is more likely than not that the carrying value of the remaining goodwill would be greater than fair value as of June 30, 2014. However, a further deterioration in the global economic environments or in any of the input assumptions in our calculation could adversely affect the fair value of our reporting units and result in an impairment of some or all of the goodwill that remains on the consolidated balance sheet.
The changes in the carrying value of goodwill during the six months ended June 30, 2014 is as follows:
 
Total
 
(Dollars in
Thousands)
Balance as of December 31, 2013
$
496,810

Impairment
(413
)
Currency translation effect
(62
)
Balance as of June 30, 2014
$
496,335

The following table summarizes acquired intangible assets with determinable useful lives by major category as of December 31, 2013 and June 30, 2014:
 
As of December 31, 2013
 
As of June 30, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
(Dollars in Thousands)
Trade name
$
7,900

 
$
(3,944
)
 
$
3,956

 
$
7,900

 
$
(4,264
)
 
$
3,636

Technological know-how
43,349

 
(18,582
)
 
24,767

 
43,349

 
(21,953
)
 
21,396

Customer –related
    intangible
110,798

 
(44,664
)
 
66,134

 
110,798

 
(51,197
)
 
59,601

Total finite-lived
    intangible assets
$
162,047

 
$
(67,190
)
 
$
94,857

 
$
162,047

 
$
(77,414
)
 
$
84,633

Accumulated amortization as of June 30, 2014 included impairment charges related to our rationalization initiatives discussed in Note 2. The impairments represented charges of $0.4 million to Customer-related intangible and $0.3 million to Technological know-how.
Amortization expense of acquired intangible assets was $5.2 million and $5.5 million in the three months ended June 30, 2013 and June 30, 2014, respectively. Estimated amortization expense will approximate $9.5 million in the remainder of 2014, $17.1 million in 2015, $13.1 million in 2016, $11.8 million in 2017 and $10.7 million in 2018.

12

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


(8)
Long-Term Debt and Liquidity
The following table presents our long-term debt: 
 
As of December 31, 2013
 
As of June 30, 2014
 
(Dollars in thousands)
Revolving Facility
$
64,000

 
$
68,000

Senior Notes
300,000

 
300,000

Senior Subordinated Notes
175,675

 
181,720

Other Debt
1,918

 
1,813

Total
$
541,593

 
$
551,533

 
The fair value of long-term debt, which was determined using Level 2 inputs, was $549.8 million, versus a book value of $541.6 million as of December 31, 2013. As of June 30, 2014, the fair value of our long-term debt was $559.9 million versus a book value of $551.5 million.
Revolving Facility
On April 23, 2014, GrafTech and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the "Revolving Facility") that provides for, among other things, a five-year tenor, reduced borrowing spreads and greater financial flexibility. This amended facility has a borrowing capacity of $470 million and matures in April 2019.
The interest rate applicable to the Amended and Restated Credit Facility is, at GrafTech’s option, either LIBOR plus a margin ranging from 1.25% to 2.00% (depending on our total net leverage ratio) or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.25% to 1.00% (depending upon such ratio). The alternate base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, N.A., (ii) the federal fund effective rate plus one-half of 1.0% and (iii) the London interbank offering rate (as adjusted) for a one-month period plus 1.0%. The borrowers pay a per annum fee ranging from 0.20% to 0.35% (depending on our total leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
The financial covenants under this amended facility require us to maintain a minimum cash interest coverage ratio of 2.50 to 1.00 and a maximum senior secured leverage ratio of 3.00 to 1.00, subject to adjustment for certain events.
Senior Notes
On November 20, 2012, GrafTech International Ltd. issued $300 million principal amount of 6.375% Senior Notes due 2020. These Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
 
The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2013. The Senior Notes mature on November 15, 2020.
 
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the Indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the Indenture. The Company is also entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes before November 15, 2015 with the net proceeds from certain equity offerings at a redemption price of 106.375% of the principal amount plus accrued and unpaid interest, if any.


13

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


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

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

The Senior Notes also contain customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the Indenture or the Senior Notes which failures are not cured or waived as provided in the Indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (as defined in the Indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $50.0 million, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $50.0 million against the Company, any Subsidiary Guarantor or any Significant Subsidiary that is not discharged, waived or stayed as provided in the Indenture, (vi) cessation of any subsidiary guarantee to be in full force and effect or denial or disaffirmance by any Subsidiary Guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.
Senior Subordinated Notes
On November 30, 2010, in connection with our acquisitions of Seadrift Coke L.P. and C/G Electrodes LLC, we issued Senior Subordinated Notes for an aggregate face amount of $200 million. These Senior Subordinated Notes are non-interest bearing and mature in 2015. Because these notes are non-interest bearing, we were required to record them at their present value (determined using an interest rate of 7%). The difference between the face amount of the notes and their present value is recorded as debt discount. The debt discount is amortized to income using the interest method, over the life of the notes. The loan balance, net of unamortized discount, was $175.7 million as of December 31, 2013 and $181.7 million as of June 30, 2014.
(9)
Inventories
Inventories are comprised of the following: 
 
As of December 31, 2013
 
As of June 30, 2014
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
184,420

 
$
168,232

Work in process
245,160

 
222,281

Finished goods
78,446

 
85,785

 
508,026

 
476,298

Reserves
(17,612
)
 
(25,877
)
         Total
$
490,414

 
$
450,421

Additions to the reserve during the second quarter of 2014 included $10.6 million related to the Engineered Solutions rationalization initiatives discussed in Note 2.

14

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


(10) Interest Expense
The following table presents an analysis of interest expense: 
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Interest incurred on debt
$
5,434

 
$
5,345

 
$
10,883

 
$
10,667

Amortization of discount on Senior Subordinated Notes
2,848

 
3,048

 
5,649

 
6,045

Amortization of debt issuance costs
588

 
762

 
1,143

 
1,395

Supply Chain Financing mark-up
77

 

 
280

 
47

Total interest expense
$
8,947

 
$
9,155

 
$
17,955

 
$
18,154

Interest Rates
The Revolving Facility had an effective interest rate of 2.42% and 2.16% as of December 31, 2013 and June 30, 2014, respectively. The Senior Subordinated Notes have an implied interest rate of 7.00%. The Senior Notes have a fixed interest rate of 6.375%
(11)
Supply Chain Financing

We have a supply chain financing arrangement with a financing party. Under this arrangement, we essentially assign our rights to purchase needle coke from a supplier to the financing party. The financing party purchases the product from a supplier under the supplier's standard payment terms and then immediately resells it to us under longer payment terms. The financing party pays the supplier the purchase price for the product and then we pay the financing party. Our payment to the financing party for this needle coke includes a mark-up (the “Mark-Up”). The Mark-Up is a premium expressed as a percentage of the purchase price. The Mark-Up is subject to quarterly reviews. This arrangement helps us to maintain a balanced cash conversion cycle between inventory payments and the collection of receivables. Based on the terms of the arrangement, the total amount that we owe to the financing party can not exceed $49.3 million at any point in time.
We record the inventory once title and risk of loss transfers from the supplier to the financing party. We record our liability to the financing party as an accrued liability. Our liability under this arrangement was $9.5 million as of December 31, 2013. We recognized Mark-Up of $0.3 million as interest expense in the six months ended June 30, 2013. We had minimal borrowings under this arrangement during the six months ended June 30, 2014 and we incurred negligible Mark-Up.
(12)
Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
As a result of its audit of the Company’s Seadrift Coke, L.P. subsidiary, the U.S. Environmental Protection Agency (“EPA”) in the 2014 second quarter alleged that the subsidiary failed to accurately report emissions under the Emergency Planning and Community Right-to-Know Act.  The subsidiary is in settlement negotiations with the EPA.  Any fines or penalties are not expected to be material to our financial condition, results of operations or cash flows.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims

15

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


charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the six months ended June 30, 2014, are presented below: 
 
(Dollars in thousands)
Balance as of December 31, 2013
$
1,050

Product warranty adjustments
(258
)
Payments and settlements
(141
)
Balance as of June 30, 2014
$
651

(13)
Income Taxes
We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax. These items may include the cumulative effect of changes in tax laws or rates, impairment charges, adjustments to prior period uncertain tax positions, or adjustments to our valuation allowance due to changes in judgment of the realizability of deferred tax assets. We assess this approach each quarter to determine if there are any mitigating circumstances where a discrete tax rate computation would be more appropriate.
The following table summarizes the provision for income taxes for the three and six months ended June 30, 2013 and June 30, 2014:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
Tax expense
$
1,718

 
$
6,886

 
$
3,758

 
$
1,599

Pretax income (loss)
$
6,100

 
$
(148,547
)
 
$
12,350

 
$
(165,351
)
Effective tax rates
28.2
%
 
(4.6
)%
 
30.4
%
 
(1.0
)%
During the second quarter of 2014, we impaired the long-lived assets of, and announced the exiting of certain product lines in our Advanced Graphite Material product group which is described in more detail in Note 2. The impairment charges and other impairment related charges were incurred primarily in the U.S. jurisdiction. As a result, we determined that it is no longer “more likely than not” that we will generate sufficient future U.S. taxable income to realize our deferred tax assets related to the U.S., foreign tax credit and state net operating loss carryforwards, as well as against our net U.S. deferred tax assets. As a result of the significant negative evidence of recent losses, the Company recognized a $57.0 million non-cash charge in the second quarter of 2014 to increase the valuation allowance against these deferred income tax assets. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
For the three and six months ended June 30, 2014, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to the recording of a valuation allowance against U.S. net deferred tax assets.

As of June 30, 2014, we had unrecognized tax benefits of $4.7 million, which, if recognized, would have a favorable impact on our effective tax rate. It is reasonably possible that a reduction of unrecognized tax benefits of $2.6 million may occur within 12 months due to the expiration of statutes of limitation.

During the six months ended June 30, 2014, we settled our audits with the U.S. federal tax authorities for the tax years ended 2008 and 2010-2011, reducing our unrecognized tax benefits by $2.7 million, of which $0.3 million had a favorable impact on our effective tax rate.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S.

16

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


federal tax years prior to 2012 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2008.

We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have maintained valuation allowances on those net deferred tax assets. We established a valuation allowance against our U.S. net deferred tax assets in the second quarter of 2014, as described in more detail above.
(14)
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the US dollar.
Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-parties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was no ineffectiveness on these contracts designated as hedging instruments during the six months ended June 30, 2013 and 2014, respectively.
In 2013 and 2014, we entered into foreign forward currency derivatives denominated in the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from commercial and business transactions may be adversely affected by changes in exchange rates between the US dollar and the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. As of June 30, 2014, we had outstanding Mexican peso, Brazilian real, euro, and Japanese yen currency contracts with an aggregate notional amount of $98.2 million. The foreign currency derivatives outstanding as of June 30, 2014 have several maturity dates ranging from July 2014 to February 2015.
Commodity derivative contracts
We periodically enter into derivative contracts for certain refined oil products and natural gas. These contracts are entered into to protect against the risk that eventual cash flows related to these products may be adversely affected by future changes in prices. There was no ineffectiveness on these contracts during the six months ended June 30, 2014. As of June 30, 2014, we had outstanding derivative swap contracts for refined oil products with an aggregate notional amount of $8.5 million. These contracts have maturity dates ranging from July 2014 to August 2014.
Net Investment Hedges
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was $25.2 million and $12.2 million as of December 31, 2013 and June 30, 2014, respectively. Within our currency translation adjustment portion of other comprehensive income, we

17

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


recorded gains of $1.8 million and $0.2 million in three months ended June 30, 2013 and June 30, 2014, respectively, resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. The following tables present the fair values of our derivatives and their respective balance sheet locations as of December 31, 2013 and June 30, 2014:
 
 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2013
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
772

 
Other payables
 
$
1,185

Commodity derivative contracts
Other current assets
 
834

 
Other current liabilities
 

Total fair value
 
 
$
1,606

 
 
 
$
1,185

 
 
 
 
 
 
 
 
As of June 30, 2014
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
364

 
Other payables
 
$
198

Commodity derivative contracts
Other current assets
 
314

 
Other current liabilities
 

Total fair value
 
 
$
678

 
 
 
$
198

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

 
Other payables
 
$
24

Total fair value
 
 
$
328

 
 
 
$
24

 
 
 
 
 
 
 
 
As of June 30, 2014
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
230

 
Other payables
 
$
200

Total fair value
 
 
$
230

 
 
 
$
200


18

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


The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations when the hedged item impacts earnings and are as follows for the three and six months ended June 30, 2013 and 2014:
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Three Months Ended June 30,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2013
 
2014
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of $28 and ($3), respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
(284
)
 
$
27

Commodity forward derivatives, excluding
  tax of ($167) and $181, respectively
 
Cost of goods sold / Revenue
 
$
460

 
$
(503
)
 
 
 
 
 
 
 

 
 
 
 
Amount of (Gain)/Loss
Recognized
Three Months Ended June 30,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
 
2013
 
2014
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
360

 
$
130

 
 
 
 
 
 
 
 
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Six Months Ended June 30,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2013
 
2014
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of $19 and ($33), respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
(190
)
 
$
328

Commodity forward derivatives, excluding
  tax of ($50) and ($9), respectively.
 
Cost of goods sold / Revenue
 
$
137

 
$
26

 
 
 
 
 
 
 
 
 
 
 
Amount of (Gain)/Loss
Recognized
Six Months Ended June 30,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
 
2013
 
2014
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
(1,421
)
 
$
(61
)
Our foreign currency and commodity derivatives are treated as hedges and are required to be measured at fair value on a recurring basis. With respect to the inputs used to determine the fair value, we use observable, quoted rates that are determined by active markets and, therefore, classify the contracts as Level 2”. 

19

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


(15)
Guarantor Information

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

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

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

Investments in subsidiaries are recorded on the equity basis.

    The following tables set forth condensed consolidating balance sheets as of December 31, 2013 and June 30, 2014 and condensed consolidating statements of operations and comprehensive income for the three and six months ended June 30, 2013 and 2014 and condensed consolidating statements of cash flows for the six months ended June 30, 2013 and 2014 of the Parent, Guarantors and the Non-Guarantors.

Amounts presented in comprehensive income for the three and six months ended June 30, 2013 have been revised.  Previously, the Company did not present comprehensive income of subsidiaries in the guarantor column. This amount has been revised to present $4.1 million in comprehensive loss for the guarantors during the three months ended June 30, 2013 and $1.1 million in comprehensive income during the six months ended June 30, 2013.  


20

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


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

 
$
4,752

 
$
7,136

 
$

 
$
11,888

    Accounts receivable - affiliates
 
42,410

 
28,551

 
15,824

 
(86,785
)
 

    Accounts receivable - trade
 

 
48,998

 
150,568

 

 
199,566

    Inventories
 

 
174,935

 
315,479

 

 
490,414

    Prepaid and other current assets
 

 
22,555

 
51,235

 

 
73,790

      Total current assets
 
42,410

 
279,791

 
540,242

 
(86,785
)
 
775,658

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,709,914

 
828,012

 

 
(2,537,926
)
 

 Property, plant and equipment
 

 
540,273

 
280,712

 

 
820,985

 Deferred income taxes
 

 

 
10,334

 

 
10,334

 Goodwill
 

 
293,162

 
203,648

 

 
496,810

 Notes receivable - affiliate
 
51,090

 
7,413

 

 
(58,503
)
 

 Other assets
 
4,752

 
53,447

 
55,862

 

 
114,061

      Total assets
 
$
1,808,166

 
$
2,002,098

 
$
1,090,798

 
$
(2,683,214
)
 
$
2,217,848

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

 
$
58,206

 
$
28,579

 
$
(86,785
)
 
$

    Accounts payable - trade
 

 
41,971

 
73,241

 

 
115,212

    Short-term debt
 

 
165

 
996

 

 
1,161

    Accrued income and other taxes
 
2,678

 
4,736

 
23,273

 

 
30,687

    Rationalizations
 

 
1,890

 
16,531

 

 
18,421

    Supply chain financing liability
 

 

 
9,455

 

 
9,455

    Other accrued liabilities
 
2,444

 
12,404

 
26,091

 

 
40,939

         Total current liabilities
 
5,122

 
119,372

 
178,166

 
(86,785
)
 
215,875

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
51,090

 
7,413

 
(58,503
)
 

 Long-term debt - third party
 
475,675

 
50,525

 
15,393

 

 
541,593

 Other long-term obligations
 

 
66,590

 
31,357

 

 
97,947

 Deferred income taxes
 
6,620

 
4,607

 
30,457

 

 
41,684

 Stockholders' equity
 
1,320,749

 
1,709,914

 
828,012

 
(2,537,926
)
 
1,320,749

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

 
$
2,002,098

 
$
1,090,798

 
$
(2,683,214
)
 
$
2,217,848

 
 
 
 
 
 
 
 
 
 
 


21

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


CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2014
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
2,506

 
$
18,222

 
$

 
$
20,728

    Accounts receivable - affiliates
 
37,979

 
33,667

 
26,143

 
(97,789
)
 

    Accounts receivable - trade
 

 
48,287

 
129,254

 

 
177,541

    Inventories
 

 
175,040

 
275,381

 

 
450,421

    Prepaid and other current assets
 

 
23,468

 
70,225

 

 
93,693

      Total current assets
 
37,979

 
282,968

 
519,225

 
(97,789
)
 
742,383

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,563,399

 
808,923

 

 
(2,372,322
)
 

 Property, plant and equipment
 

 
426,710

 
256,074

 

 
682,784

 Deferred income taxes
 

 

 
12,059

 

 
12,059

 Goodwill
 

 
292,749

 
203,586

 

 
496,335

 Notes receivable - affiliate
 
42,906

 
7,413

 

 
(50,319
)
 

 Other assets
 
4,437

 
53,862

 
51,978

 

 
110,277

      Total assets
 
$
1,648,721

 
$
1,872,625

 
$
1,042,922

 
$
(2,520,430
)
 
$
2,043,838

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

 
$
64,124

 
$
33,665

 
$
(97,789
)
 
$

    Accounts payable - trade
 
28

 
54,390

 
68,010

 

 
122,428

    Short-term debt
 

 
142

 

 

 
142

    Accrued income and other taxes
 
147

 
1,685

 
21,187

 

 
23,019

    Rationalizations
 

 
805

 
2,787

 

 
3,592

    Other accrued liabilities
 
2,444

 
10,217

 
25,786

 

 
38,447

         Total current liabilities
 
2,619

 
131,363

 
151,435

 
(97,789
)
 
187,628

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
42,906

 
7,413

 
(50,319
)
 

 Long-term debt - third party
 
481,720

 
57,459

 
12,354

 

 
551,533

 Other long-term obligations
 

 
63,829

 
32,063

 

 
95,892

 Deferred income taxes
 

 
13,669

 
30,734

 

 
44,403

 Stockholders' equity
 
1,164,382

 
1,563,399

 
808,923

 
(2,372,322
)
 
1,164,382

    Total liabilities and stockholders' equity
 
$
1,648,721

 
$
1,872,625

 
$
1,042,922

 
$
(2,520,430
)
 
$
2,043,838

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


22

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


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended June 30, 2013
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
52,679

 
$
36,487

 
$
(89,166
)
 
$

 Sales - third party
 

 
127,592

 
173,769

 

 
301,361

    Net sales
 

 
180,271

 
210,256

 
(89,166
)
 
301,361

 Cost of sales
 

 
152,517

 
189,089

 
(89,166
)
 
252,440

      Gross profit
 

 
27,754

 
21,167

 

 
48,921

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 

 
2,787

 

 

 
2,787

 Selling and administrative expenses
 

 
10,588

 
19,573

 

 
30,161

      Operating income
 

 
14,379

 
1,594

 

 
15,973

 
 
 
 
 
 
 
 
 
 
 
 Other expense, net
 

 
671