10-Q 1 a2015-q110q.htm 10-Q 2015 - Q1 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 March 31, 2015
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)
 
 
Suite 300 Park Center I
44131
6100 Oak Tree Boulevard
(Zip code)
Independence, OH
 
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (216) 676-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of April 17, 2015, 137,179,692 shares of common stock, par value $.01 per share, were outstanding.



TABLE OF CONTENTS
 
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, 2014
 
As of
March 31,
 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,550

 
$
10,961

Accounts and notes receivable, net of allowance for doubtful accounts of
   $7,471 as of December 31, 2014 and $6,582 as of March 31, 2015
162,919

 
155,108

Inventories
382,903

 
364,152

Prepaid expenses and other current assets
81,623

 
70,475

Total current assets
644,995

 
600,696

Property, plant and equipment
1,500,821

 
1,453,080

Less: accumulated depreciation
846,781

 
819,741

Net property, plant and equipment
654,040

 
633,339

Deferred income taxes
16,819

 
14,819

Goodwill
420,129

 
384,436

Other assets
97,822

 
92,373

Total assets
$
1,833,805

 
$
1,725,663

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
86,409

 
$
79,756

Short-term debt
188,104

 
191,446

Accrued income and other taxes
24,506

 
17,321

Rationalizations
9,563

 
8,632

Other accrued liabilities
43,319

 
41,946

Total current liabilities
351,901

 
339,101

Long-term debt
341,615

 
336,321

Other long-term obligations
107,566

 
100,983

Deferred income taxes
28,197

 
26,507

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,
   152,821,011 shares issued as of December 31, 2014 and 153,050,285
   shares issued as of March 31, 2015
1,528

 
1,535

Additional paid-in capital
1,825,880

 
1,827,672

Accumulated other comprehensive loss
(336,524
)
 
(365,290
)
Retained earnings (deficit)
(245,751
)
 
(301,359
)
Less: cost of common stock held in treasury, 15,922,729 shares as of
   December 31, 2014 and 15,877,371 shares as of March 31, 2015
(239,811
)
 
(239,107
)
Less: common stock held in employee benefit and compensation trusts,
   80,967 shares as of December 31, 2014 and 72,679 shares as of
   March 31, 2015
(796
)
 
(700
)
Total stockholders’ equity
1,004,526

 
922,751

Total liabilities and stockholders’ equity
$
1,833,805

 
$
1,725,663

 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
 
March 31,
 
2014
 
2015
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Net sales
$
280,791

 
$
207,211

Cost of sales
255,097

 
186,448

Gross profit
25,694

 
20,763

Research and development
2,770

 
2,431

Selling and administrative expenses
29,907

 
26,290

Rationalizations
86

 
2,494

Impairments

 
35,381

Operating loss
(7,069
)
 
(45,833
)
 
 
 
 
Other expense (income), net
794

 
393

Interest expense
8,999

 
8,921

Interest income
(58
)
 
(73
)
Loss before provision for income taxes
(16,804
)
 
(55,074
)
 
 
 
 
(Benefit) provision for income taxes
(5,287
)
 
534

Net loss
$
(11,517
)
 
$
(55,608
)
 
 
 
 
Basic loss per common share:
 
 
 
Net loss per share
$
(0.08
)
 
$
(0.41
)
Weighted average common shares outstanding
135,730

 
136,981

 
 
 
 
Diluted loss income per common share:
 
 
 
Net loss per share
$
(0.08
)
 
$
(0.41
)
Weighted average common shares outstanding
135,730

 
136,981

 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Net loss
$
(11,517
)
 
$
(55,608
)
Other comprehensive income:
 
 
 
Foreign currency translation adjustments
2,387

 
(29,611
)
Commodities and foreign currency derivatives and other, net of tax of $116 and ($154), respectively
(315
)
 
845

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

 
(28,766
)
Comprehensive loss
$
(9,445
)
 
$
(84,374
)

See accompanying Notes to Consolidated Financial Statements


4


GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended
 
March 31,
 
2014
 
2015
Cash flow from operating activities:
 
 
 
Net loss
$
(11,517
)
 
$
(55,608
)
Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
39,661

 
20,570

Impairments

 
35,381

Deferred income tax provision
(1,222
)
 
2,973

Post-retirement and pension plan changes
1,012

 
1,262

Stock-based compensation
522

 
1,572

Interest expense
3,645

 
3,764

Other charges, net
(1,593
)
 
(2,757
)
(Increase) decrease in working capital*
(6,665
)
 
21,991

Increase in long-term assets and liabilities
(1,753
)
 
(6,430
)
Net cash provided by operating activities
22,090

 
22,718

Cash flow from investing activities:
 
 
 
Capital expenditures
(21,728
)
 
(13,601
)
Proceeds from the sale of assets
1,895

 
521

Payments for derivative instruments
(367
)
 
(7,603
)
Insurance recoveries
3,057

 

Net cash used in investing activities
(17,143
)
 
(20,683
)
Cash flow from financing activities:
 
 
 
Short-term debt, net
(994
)
 
1

Revolving Facility borrowings
75,000

 
27,000

Revolving Facility reductions
(65,000
)
 
(32,000
)
Principal payments on long-term debt
(92
)
 
(33
)
Supply chain financing
(9,455
)
 

Proceeds from exercise of stock options
82

 

Purchase of treasury shares
(141
)
 
(41
)
Revolving Facility refinancing fees

 
(2,247
)
Other
918

 
(54
)
Net cash provided by (used in) financing activities
318

 
(7,374
)
Net increase (decrease) in cash and cash equivalents
5,265

 
(5,339
)
Effect of exchange rate changes on cash and cash equivalents
171

 
(1,250
)
Cash and cash equivalents at beginning of period
11,888

 
17,550

Cash and cash equivalents at end of period
$
17,324

 
$
10,961

 
 
 
 
* Net change in working capital due to the following components:
 
 
 
      Change in current assets:
 
 
 
Accounts and notes receivable, net
$
(5,684
)
 
$
1,040

Inventories
955

 
11,978

Prepaid expenses and other current assets
(4,670
)
 
7,525

Increase (decrease) in accounts payable and accruals
6,506

 
(2,483
)
Rationalizations
(8,580
)
 
(846
)
Increase in interest payable
4,808

 
4,777

(Increase) decrease in working capital
$
(6,665
)
 
$
21,991


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. (the "Company") is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. We have seven major product categories: graphite electrodes, refractory products, needle coke products, advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, which are reported in the following segments:
Industrial Materials includes graphite electrodes, refractory products, and needle coke products, and primarily serves the steel industry.
Engineered Solutions includes advanced electronics technologies, advanced graphite materials, advanced composite materials and advanced materials, and provides primary and specialty products to the advanced electronics, industrial, energy, transportation and defense industries.
B. Basis of Presentation
The interim Consolidated Financial Statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The December 31, 2014 financial position data included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “Annual Report”) but does not include all disclosures required by GAAP. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, contained in the Annual Report.
The unaudited consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for the interim period presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. New Accounting Standards
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. This ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is supposed to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. On April 1, 2015, the FASB proposed a one year deferral of the effective date to fiscal years beginning after December 15, 2017. This proposal is not a final decision and subject to the FASB's approval process, which includes a public comment period. We are in the process of assessing the impact of the adoption of ASU 2014-09 on the Company's financial position, results of operations and cash flows.
On April 7, 2015, FASB issued ASU 2015-3, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015. The Company had $9.7 million and $11.9 million of capitalized bank fees included within "Other Assets" on our consolidated balance sheets as of December 31, 2014 and March 31, 2015, respectively.
(2)
Rationalizations and Impairments
Throughout 2013, 2014 and 2015 the Company undertook rationalization plans in order to streamline our organization and lower our production costs. The total rationalization and related charges incurred during the three months ended March 31, 2014 and 2015 are as follows:

6

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


All Plans
For the Three Months Ended March 31, 2014
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Corporate, R&D and Other
 
Total
 
(Dollars in thousands)
Accelerated depreciation
    (recorded in Cost of sales)
$
17,020

 
$
413

 
$

 
$
17,433

Inventory loss (recorded in Cost
    of sales)
815

 
(10
)
 

 
805

Fixed asset write-offs and other(recorded in Cost of sales)
(494
)
 
 
 

 
(494
)
Other (recorded in Selling
    and administrative)
25

 

 

 
25

Severance and related costs
    (recorded in Rationalizations)
114

 
(28
)
 

 
86

Total
$
17,480

 
$
375

 
$

 
$
17,855

All Plans
For the Three Months Ended March 31, 2015
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Corporate, R&D and Other
 
Total
 
(Dollars in thousands)
Accelerated depreciation
    (recorded in Cost of sales)
$
433

 
$

 
$

 
$
433

Inventory loss (recorded in Cost
    of sales)
(61
)
 
803

 

 
742

Fixed asset write-offs and other(recorded in Cost of sales)
1,243

 
(99
)
 

 
1,144

Accelerated depreciation
(recorded in Research
       and development)

 

 
621

 
621

Other (recorded in Selling
    and administrative)

 
3

 
1,066

 
1,069

Severance and related costs
    (recorded in Rationalizations)
53

 
2,366

 

 
2,419

Contract terminations
(recorded in Rationalizations)
25

 
50

 

 
75

Total
$
1,693

 
$
3,123

 
$
1,687

 
$
6,503

2013 Industrial Materials Rationalization
On October 31, 2013, we announced a global initiative to reduce our Industrial Materials segment's cost base and improve our competitive position. As part of this initiative, we ceased production at our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. Our graphite electrode capacity was reduced by approximately 60,000 metric tons as a result of these actions. In parallel, we adopted measures for reductions in overhead and related corporate operations. These actions and measures reduced global headcount by approximately 600 people, or approximately 20 percent of our global workforce. These actions were substantially completed during the first half of 2014.


7

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


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

Total 2013 Rationalization Initiatives Impact to Financial Results
Charges incurred related to the 2013 rationalization initiatives for the three months ended March 31, 2014 and March 31, 2015 are as follows:
2013 Plan
For the Three Months Ended March 31, 2014
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Corporate, R&D and Other
 
Total
 
(Dollars in thousands)
Accelerated depreciation
    (recorded in Cost of sales)
$
17,020

 
$
413

 
$

 
$
17,433

Inventory loss (recorded in Cost
    of sales)
815

 
(10
)
 

 
805

Fixed asset write-offs and other(recorded in Cost of sales)
(494
)
 

 

 
(494
)
Other (recorded in Selling
    and administrative)
25

 

 

 
25

Severance and related costs
    (recorded in Rationalizations)
114

 
(28
)
 

 
86

Total
$
17,480

 
$
375

 
$

 
$
17,855


2013 Plan
For the Three Months Ended March 31, 2015
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Corporate, R&D and Other
 
Total
 
(Dollars in thousands)
Accelerated depreciation
    (recorded in Cost of sales)
$
433

 
$

 
$

 
$
433

Inventory loss (recorded in Cost
    of sales)
(61
)
 

 

 
(61
)
Fixed asset write-offs and other(recorded in Cost of sales)
1,243

 
9

 

 
1,252

Severance and related costs
    (recorded in Rationalizations)
87

 

 

 
87

Contract terminations
(recorded in Rationalizations)
25

 

 

 
25

Total
$
1,727

 
$
9

 
$

 
$
1,736



8

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


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

       Charges incurred
613

       Change in estimates
153

       Payments and settlements
(16,494
)
       Effect of change in currency exchange rates
(1,658
)
Balance as of December 31, 2014
1,035

Charges incurred

Change in estimates
112

Payments and settlements
(549
)
Effect of change in currency exchange rates
(108
)
Balance as of March 31, 2015
$
490


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

Charges incurred related to the 2014 Engineered Solutions rationalization initiatives in 2015 are as follows:
2014 Engineered Solutions Plan
 
For the Three Months Ended March 31, 2015
 
 
(Dollars in thousands)
Inventory loss (recorded in Cost
    of sales)
 
434

Fixed asset write-offs and other(recorded in Cost of sales)
 
(3
)
Severance and related costs
    (recorded in Rationalizations)
 
(16
)
Contract terminations
(recorded in Rationalizations)
 
50

Total
 
$
465


9

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


The following table represents the roll-forward of the liability incurred for employee termination benefits and contract termination costs incurred in connection with the 2014 Engineered Solutions rationalization initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
2014 Engineered Solutions Plan
 
(Dollars in thousands)
Balance as of December 31, 2013
$

Charges incurred
2,611

Change in estimates
(40
)
Payments and settlements
(916
)
Balance as of December 31, 2014
1,655

Charges incurred
50

Change in estimates
(16
)
Payments and settlements
(434
)
Balance as of March 31, 2015
$
1,255


2014 Corporate and Research & Development Rationalization
During the third quarter of 2014, we announced the conclusion of another phase of our on-going company-wide cost savings assessment. This resulted in changes to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. These actions are designed to reduce costs by a combination of reduced contractor costs, attrition, early retirements and layoffs. Additionally, the Company downsized its corporate functions by approximately 25 percent, relocated to a smaller, more cost effective corporate headquarters and established a new Technology and Innovation Center. The 2014 Corporate and Research and Development rationalization plan will result in approximately $20 million of charges consisting of severance, accelerated depreciation and other related costs. Approximately $12 million of these costs will be cash outlays, the majority of which are expected to be disbursed in 2015.
Charges incurred related to the 2014 Corporate and Research & Development rationalization initiatives for 2015 are as follows:
2014 Corporate and R&D Plan
For the Three Months Ended March 31, 2015
 
Industrial Materials Segment
 
Corporate, R&D and Other
 
(Dollars in thousands)
 
(Dollars in thousands)
Accelerated depreciation
(recorded in Research
and development)
$

 
$
621

Other (recorded in Selling
    and administrative)

 
1,066

Severance and related costs
    (recorded in Rationalizations)
(34
)
 

Total
$
(34
)
 
$
1,687



10

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


The following table represents the roll-forward of the liability incurred for employee termination benefits and contract termination costs incurred in connection with the 2014 Corporate and Research & Development rationalization initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
2014 Corporate and R&D Plan
 
(Dollars in thousands)
Balance as of December 31, 2013
$

Charges incurred
8,159

Change in estimates
21

Payments and settlements
(1,155
)
Effect of change in currency exchange rates
(152
)
Balance as of December 31, 2014
6,873

Charges incurred
(2
)
Change in estimates
(34
)
Payments and settlements
(2,231
)
Effect of change in currency exchange rates
(48
)
Balance as of March 31, 2015
$
4,558

2015 Advanced Graphite Materials Rationalization
On March 2, 2015, GrafTech announced plans to further optimize the production platform for its advanced graphite materials business. These actions included the closure of our Notre Dame, France facility and further reductions in force in our Columbia, Tennessee facility and other locations totaling approximately 85 people. The 2015 Advanced Graphite Materials rationalization plan will result in approximately $10 million of charges consisting of severance, inventory losses and other related costs. Approximately $8 million of these costs will be cash outlays, the majority of which are expected to be disbursed in 2015.
Charges incurred related to the 2015 Advanced Graphite Materials rationalization initiative for the three months ended March 31, 2015 are as follows:
2015 Advanced Graphite Materials Rationalization
For the Three
 Months Ended
March 31, 2015
 
(Dollars in thousands)
Inventory loss (recorded in Cost of sales)
$
369

Fixed asset write-offs and other(recorded in Cost of sales)
(105
)
Other (recorded in Selling and administrative)
3

Severance and related costs (recorded in Rationalizations)
2,382

Total
$
2,649

The following table represents the roll-forward of the liability incurred for employee termination benefits and contract termination costs incurred in connection with the 2015 Advanced Graphite Materials rationalization initiative described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
2015 Advanced Graphite Materials Rationalization
 
(Dollars in thousands)
Balance as of December 31, 2014
$

Charges incurred
2,382

Payments and settlements

(36
)
Effect of change in currency exchange rates

(17
)
Balance as of March 31, 2015
$
2,329


11

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


(3)
Stock-Based Compensation
For the three months ended March 31, 2014 and 2015, we recognized stock-based compensation expense of $0.5 million and $1.6 million, respectively. Substantially all of the expense, $0.5 million and $1.5 million, respectively, was recorded as selling and administrative expenses in the Consolidated Statements of Operations, with the remaining expenses recorded as cost of sales and research and development.
As of March 31, 2015, the total compensation cost related to non-vested restricted stock, performance shares based on current forecasts, and stock options not yet recognized was $10.6 million, which will be recognized over the remaining weighted average life of 1.75 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the three months ended March 31, 2015 was:
 
Number of
Shares
 
Weighted-
Average
Grant  Date
Fair Value
Outstanding unvested as of January 1, 2015
1,814,130

 
$
6.31

Granted
3,000

 
4.02

Vested
(44,922
)
 
9.90

Forfeited/canceled/expired
(41,836
)
 
6.68

Outstanding unvested as of March 31, 2015
1,730,372

 
6.20

 
Stock Options
Stock option activity under the plans for the three months ended March 31, 2015 was:
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
Outstanding as of January 1, 2015
2,042,074

 
$
10.93

Forfeited/canceled/expired
(61,468
)
 
16.14

Outstanding as of March 31, 2015
1,980,606

 
10.77

(4)
Earnings per Share
The following table shows the information used in the calculation of our share counts for basic and diluted earnings per share:
 
For the Three Months Ended
 
March 31,
 
2014
 
2015
Weighted average common shares outstanding
    for basic calculation
135,729,809

 
136,981,193

Add: Effect of stock options and restricted stock

 

Weighted average common shares outstanding
    for diluted calculation
135,729,809

 
136,981,193

Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.

12

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


The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of stock options covering 1,131,088 and 1,980,607 shares in the three months ended March 31, 2014 and 2015 respectively, as these shares are anti-dilutive.
(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. Prior to 2014, certain global expenses such as research and development, shared IT and accounting services as well as corporate headquarter’s finance, HR, legal and executive management were allocated to the segments mostly based on each segment’s contribution to consolidated sales. During 2014, as part of our initiative to decentralize the organization and reduce the costs of the global headquarter functions, the performance measure of our existing segments was changed to reflect our new management and operating structure. We currently exclude such expenses from the segment operating income measure and report them under “Corporate, R&D and Other Expenses” in order to reconcile to the consolidated operating income of the Company.

13

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


The following tables summarize financial information concerning our reportable segments and all prior periods have been recast to reflect our new methodology:
 
 
For the Three Months Ended
 
 
March 31,
 
 
2014
 
2015
 
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
Industrial Materials
 
$
218,776

 
$
165,037

Engineered Solutions
 
62,015

 
42,174

Total net sales
 
$
280,791

 
$
207,211

Operating (loss) income:
 
 
 
 
Industrial Materials
 
$
1,600

 
$
(25,898
)
Engineered Solutions
 
5,406

 
(4,393
)
Corporate, R&D and Other expenses
 
(14,075
)
 
(15,542
)
Total operating loss
 
$
(7,069
)
 
$
(45,833
)
 
 
 
 
 
Reconciliation of segment operating loss to
    loss before provision for income taxes
 
 
 
 
Other expense (income), net
 
$
794

 
$
393

Interest expense
 
8,999

 
8,921

Interest income
 
(58
)
 
(73
)
Loss before provision for income taxes
 
$
(16,804
)
 
$
(55,074
)
(6)
Benefit Plans
The components of our consolidated net pension costs are set forth in the following table:
 
 
 
For the Three
Months Ended
 
 
March 31,
 
 
2014
 
2015
 
 
(Dollars in thousands)
Service cost
 
$
473

 
$
827

Interest cost
 
2,169

 
1,526

Expected return on plan assets
 
(1,938
)
 
(1,354
)
Amortization of prior service cost
 
1

 
1

Net cost
 
$
705

 
$
1,000


The components of our consolidated net postretirement costs are set forth in the following table: 
 
 
For the Three Months Ended
 
 
March 31,
 
 
2014
 
2015
 
 
(Dollars in thousands)
Service cost
 
$
19

 
$
4

Interest cost
 
352

 
315

Amortization of prior service benefit
 
(47
)
 
(43
)
Net cost
 
$
324

 
$
276


14

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



On March 27, 2015, we settled $59.0 million of projected benefit obligations through the purchase of a group annuity contract. The purchase was fully funded with pension assets. The obligation associated with this transaction will require no additional cash contributions by the company. The results of this settlement were not material to our operations.
(7)
Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill impairment is tested at the reporting unit level (graphite electrodes, needle coke and advanced graphite materials) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Our annual impairment test of goodwill was performed as of December 31, 2014 for all reporting units. The estimated fair values of our reporting units were based on discounted cash flow ("DCF") models derived from internal earnings forecasts and assumptions. The assumptions and estimates used in these valuations incorporated the then current and expected economic environment. Based on these valuations, the fair value for the needle coke reporting unit was below the carrying value resulting in a step two analysis and consequently a goodwill impairment charge of $75.7 million for the year ended December 31, 2014.

We received notice in March, 2015, that the market prices for needle coke were decreasing by an additional 18%, effective for the second quarter of 2015. This decline is further compressing our margins for needle coke products versus our annual plan. We determined that this change, which is driven by over capacity in the market indicated that the needle coke industry is facing a deeper and longer trough than previously expected. As such we considered the additional price change as a triggering event and tested our needle coke goodwill for impairment as of March 31, 2015.

In the first step of the analysis, we compared the estimated fair value of the reporting unit to its carrying value, including goodwill. The fair value of the reporting units was determined based on an income approach, using discounted cash flow ("DCF") models from a market participant’s perspective. The DCF model included seventeen years of forecasted cash flows, plus an estimated terminal value. For the first several years in the models, the cash flows were based upon the current operating and capital plans as prepared by management and approved by executive management, adjusted to reflect the perspective of potential market participants.. Beyond the first several years, the DCF model reflects known trends of cycles in the industry and incorporates them in the terminal value. Actual results may differ from those assumed in the Company’s forecast. A discount rate of 10.5% was applied to the forecasted cash-flows and is based on a weighted average cost of capital ("WACC"). Company specific beta and mix of debt to equity are inputs into the determination of the discount rate, which is then qualitatively assessed from the standpoint of potential market participants.

As a result of the step one analysis described earlier, the fair value of the Needle Coke reporting unit was less than its carrying value. Consequently, we performed the second step of the impairment analysis in order to determine the implied fair value of the goodwill associated with the reporting unit. The implied fair value of goodwill represents the excess of the fair value of the reporting unit over the sum of the fair value amounts assigned to all of the assets and liabilities of the reporting unit as if it were to be acquired in a business combination and the current fair value of the reporting unit (as calculated in the first step) was the purchase consideration. The implied fair value of goodwill was then compared to the carrying value of the goodwill to determine the impairment charge. The Needle coke goodwill was fully impaired, resulting in a charge of $35.4 million. The full impairment of the Needle Coke reporting unit‘s goodwill was a result of our reassessment of the estimated future cash-flows, triggered by the pricing decline in the needle coke market effective April 1, 2015. Due to these factors, we decreased the short and mid-term estimates of the cash-flows of the Needle Coke reporting unit that are utilized in assessing goodwill for impairment.


15

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


The changes in the carrying value of goodwill during the three months ended March 31, 2015 is as follows:
 
Total
 
(Dollars in
Thousands)
Balance as of December 31, 2014
$
420,129

Impairment
(35,381
)
Currency translation effect
(312
)
Balance as of March 31, 2015
$
384,436

The following table summarizes acquired intangible assets with determinable useful lives by major category as of December 31, 2014 and March 31, 2015:
 
As of December 31, 2014
 
As of March 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
(Dollars in Thousands)
Trade name
$
7,900

 
$
(4,817
)
 
$
3,083

 
$
7,900

 
$
(4,986
)
 
$
2,914

Technological know-how
43,349

 
(24,940
)
 
18,409

 
43,349

 
(26,433
)
 
16,916

Customer –related
    intangible
110,798

 
(57,192
)
 
53,606

 
110,798

 
(59,874
)
 
50,924

Total finite-lived
    intangible assets
$
162,047

 
$
(86,949
)
 
$
75,098

 
$
162,047

 
$
(91,293
)
 
$
70,754

Amortization expense of acquired intangible assets was $4.8 million and $4.3 million in the three months ended March 31, 2014 and March 31, 2015, respectively. Estimated amortization expense will approximate $12.8 million in the remainder of 2015, $13.1 million in 2016, $11.8 million in 2017, $10.7 million in 2018 and $9.2 million in 2019.
(8)
Debt and Liquidity
The following table presents our long-term debt: 
 
As of
December 31, 2014
 
As of
March 31, 2015
 
(Dollars in thousands)
Revolving Facility
$
40,000

 
$
35,000

Senior Notes
300,000

 
300,000

Other Debt
1,615

 
1,321

Total
$
341,615

 
$
336,321

The following table presents our short-term debt:
 
As of
December 31, 2014
 
As of
March 31, 2015
 
(Dollars in thousands)
Senior Subordinated Notes
187,973

 
191,314

Other debt
131

 
132

Total Short-Term Debt
$
188,104

 
$
191,446

The fair value of debt, which was determined using Level 2 inputs, was $473.3 million, versus a book value of $529.7 million as of December 31, 2014. As of March 31, 2015, the fair value of our long-term debt was $459.8 million versus a book value of 527.8 million. As of March 31, 2015, we were in compliance with all of our debt covenants.

16

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


Revolving Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into an Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a new $40 million senior secured delayed draw term loan facility.The Revolving Facility has a borrowing capacity of $400 million and matures in April 2019.
As of March 31, 2015, we had $329 million of unused borrowing capacity under the revolving credit facility (after considering financial covenants restrictions and the outstanding letters of credit of approximately $5.4 million).
The additional $40 million delayed draw term loan facility is to be used connection with the repayment of the Senior Subordinated Notes.
The interest rate applicable to the Amended and Restated Credit Facility is LIBOR plus a margin ranging from 2.25% to 3.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.50% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility. The new financial covenants require us to maintain a minimum cash interest coverage ratio of 2.50 to 1.00 and a maximum senior secured leverage ratio ranging from 3.75 to 1.00 to 3.00 to 1.00, subject to adjustment for certain events.
Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of 6.375% Senior Notes due 2020 (the "Senior Notes"). The Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
 
The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.
 
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the indenture. The Company is also entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes before November 15, 2015 with the net proceeds from certain equity offerings at a redemption price of 106.375% of the principal amount plus accrued and unpaid interest, if any.

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

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

The indenture for the Senior Notes also contain customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the indenture or the Senior Notes which failures are not cured or waived as provided in the indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (each, as defined in the indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $50.0 million, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $50.0 million against the Company, any Subsidiary Guarantor or any Significant Subsidiary that is not discharged, waived or stayed as provided in the indenture, (vi) cessation of

17

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


any Subsidiary Guarantee (as defined in the indenture) to be in full force and effect or denial or disaffirmance by any subsidiary guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.
Senior Subordinated Notes
On November 30, 2010, in connection with the acquisitions of Seadrift Coke LP and C/G Electrodes, LLC, we issued Senior Subordinated Notes for an aggregate total face amount of $200 million. These Senior Subordinated Notes are non-interest bearing and mature in 2015. Because the promissory notes are non-interest bearing, we were required to record them at their present value (determined using an interest rate of 7%). The difference between the face amount of the promissory notes and their present value is recorded as debt discount. The debt discount will be amortized to income using the interest method, over the life of the promissory notes. The loan balance, net of unamortized discount, was $191.3 million as of March 31, 2015. This balance was reclassified in November 2014 to short-term debt on our balance sheet as the maturity date is within one year.
(9)
Inventories
Inventories are comprised of the following: 
 
As of December 31, 2014
 
As of March 31, 2015
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
122,218

 
$
112,416

Work in process
176,141

 
172,737

Finished goods
84,544

 
78,999

         Total
$
382,903

 
$
364,152

(10) Interest Expense
The following table presents an analysis of interest expense: 
 
For the Three Months Ended
 
March 31,
 
2014
 
2015
 
(Dollars in thousands)
 
 
 
 
Interest incurred on debt
$
5,322

 
$
5,171

Amortization of discount on Senior Subordinated Notes
2,997

 
3,207

Amortization of debt issuance costs
633

 
543

Supply Chain Financing mark-up
47

 

Total interest expense
$
8,999

 
$
8,921

Interest Rates
The Revolving Facility had an effective interest rate of 2.17% and 2.44% as of December 31, 2014 and March 31, 2015, respectively. The Senior Subordinated Notes have an implied interest rate of 7.00%. The Senior Notes have a fixed interest rate of 6.375%

18

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


(11)
Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the three months ended March 31, 2015, are presented below: 
 
(Dollars in thousands)
Balance as of December 31, 2014
$
923

Product warranty adjustments
335

Payments and settlements
(315
)
Balance as of March 31, 2015
$
943

(12)
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.
The following table summarizes the provision for income taxes for the three months ended March 31, 2014 and March 31, 2015:
 
 
For the Three Months Ended
 
 
March 31,
 
 
2014
 
2015
 
 
(Dollars in thousands)
Tax (benefit) expense
 
$
(5,287
)
 
$
534

Pretax loss
 
$
(16,804
)
 
$
(55,074
)
Effective tax rates
 
31.5
%
 
(1.0
)%
For the three months ended March 31, 2015, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future. The provision for income taxes for the three months ended March 31, 2014 reflects a discrete period effective tax rate applied to ordinary income of 31.5%. A discrete period calculation was used to report the tax provision for the first three months of 2014 rather than an estimated annual effective tax rate because the estimated range of forecasted annual profit before tax produces significant variability and makes it difficult to reasonably estimate the annual effective tax rate. Discrete items of tax included in the three month periods ended March 31, 2014 and 2015 were not material.

As of March 31, 2015, we had unrecognized tax benefits of $3.7 million, $2.7 million of which, if recognized, would have a favorable impact on our effective tax rate.


19

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


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

We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have maintained valuation allowances on those net deferred tax assets.
(13)
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the U.S. dollar.
Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-parties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was no ineffectiveness on these contracts designated as hedging instruments during the three months ended March 31, 2014 and 2015, respectively.
In 2014 and 2015, we entered into foreign currency derivatives denominated in the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from commercial and business transactions may be adversely affected by changes in exchange rates between the U.S. dollar and the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. As of March 31, 2015, we had outstanding Mexican peso, South Afican rand, euro, and Japanese yen currency contracts with an aggregate notional amount of $108.7 million. The foreign currency derivatives outstanding as of March 31, 2015 have several maturity dates ranging from April 2015 to December 2015.
Commodity derivative contracts
We periodically enter into derivative contracts for certain refined oil products and natural gas. These contracts are entered into to protect against the risk that eventual cash flows related to these products may be adversely affected by future changes in prices. There was no ineffectiveness on these contracts during the three months ended March 31, 2015. As of March 31, 2015, we had outstanding derivative swap contracts for refined oil products with an aggregate notional amount of $4.4 million. These contracts mature in April 2015.
Net Investment Hedges
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt denominated in foreign currency and designated as a non-derivative net investment hedging instrument was $15.8 million and $15.1 million as of December 31, 2014 and March 31, 2015, respectively. Within the currency translation adjustment portion of other comprehensive income, we recorded gains of $0.1 million and $0.7 million in three months ended March 31, 2014 and March 31, 2015, respectively, resulting from these net investment hedges.

20

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


The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. The following tables present the fair values of our derivatives and their respective balance sheet locations as of December 31, 2014 and March 31, 2015:
 
 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2014
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Prepaid and other current assets
 
$
722

 
Other current liabilities
 
$
1,234

Commodity derivative contracts
Prepaid and other current assets
 

 
Other current liabilities
 
7,067

Total fair value
 
 
$
722

 
 
 
$
8,301

 
 
 
 
 
 
 
 
As of March 31, 2015
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Prepaid and other current assets
 
$
2,211

 
Other current liabilities
 
$
1,108

Commodity derivative contracts
Prepaid and other current assets
 
44

 
Other current liabilities
 
1

Total fair value
 
 
$
2,255

 
 
 
$
1,109

 
 
 
 
 
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2014
(Dollars in Thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Prepaid and other current assets
 
$
80

 
Other current liabilities
 
$
428

Total fair value
 
 
$
80

 
 
 
$
428

 
 
 
 
 
 
 
 
As of March 31, 2015
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Prepaid and other current assets
 
$
17

 
Other current liabilities
 
$
325

Total fair value
 
 
$
17

 
 
 
$
325


21

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


The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations when the hedged item impacts earnings and are as follows for the three and three months ended March 31, 2014 and 2015:
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Three Months Ended March 31,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2014
 
2015
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of ($4) and $71, respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
301

 
$
(712
)
Commodity forward derivatives, excluding
  tax of ($190) and ($97), respectively
 
Cost of goods sold / Revenue
 
$
529

 
$
265

 
 
 
 
Amount of (Gain)/Loss
Recognized
Three Months Ended March 31,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
 
2014
 
2015
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
(191
)
 
$
889

Our foreign currency and commodity derivatives are treated as hedges and are required to be measured at fair value on a recurring basis. With respect to the inputs used to determine the fair value, we use observable, quoted rates that are determined by active markets and, therefore, classify the contracts as Level 2”. 
(14)
Guarantor Information

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

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

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

22

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


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

Investments in subsidiaries are recorded on the equity basis.

    The following tables set forth condensed consolidating balance sheets as of December 31, 2014 and March 31, 2015 and condensed consolidating statements of operations and comprehensive income for the three months ended March 31, 2014 and 2015 and condensed consolidating statements of cash flows for the three months ended March 31, 2014 and 2015 of the Parent Guarantors and the Non-Guarantors.


23

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


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

 
$
5,503

 
$
12,047

 
$

 
$
17,550

    Accounts receivable - affiliates
 
40,474

 
35,618

 
40,185

 
(116,277
)
 

    Accounts receivable - trade
 

 
45,861

 
117,058

 

 
162,919

    Inventories
 

 
148,080

 
234,823

 

 
382,903

    Prepaid and other current assets
 

 
17,336

 
64,287

 

 
81,623

      Total current assets
 
40,474

 
252,398

 
468,400

 
(116,277
)
 
644,995

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,414,278

 
762,251

 

 
(2,176,529
)
 

 Property, plant and equipment
 

 
431,602

 
222,438

 

 
654,040

 Deferred income taxes
 

 

 
16,819

 

 
16,819

 Goodwill
 

 
217,099

 
203,030

 

 
420,129

 Notes receivable - affiliate
 
35,722

 
7,413

 

 
(43,135
)
 

 Other assets
 
4,110

 
45,617

 
48,095

 

 
97,822

      Total Assets
 
$
1,494,584

 
$
1,716,380

 
$
958,782

 
$
(2,335,941
)
 
$
1,833,805

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

 
$
80,659

 
$
35,618

 
$
(116,277
)
 
$

    Accounts payable - trade
 
47

 
35,435

 
50,927

 

 
86,409

    Short-term debt
 
187,973

 
131

 

 

 
188,104

    Accrued income and other taxes
 
344

 
3,380

 
20,782

 

 
24,506

    Rationalizations
 

 
7,538

 
2,025

 

 
9,563

    Supply chain financing liability
 

 

 

 

 

    Other accrued liabilities
 
2,444

 
15,252

 
25,623

 

 
43,319

         Total current liabilities
 
190,808

 
142,395

 
134,975

 
(116,277
)
 
351,901

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
35,722

 
7,413

 
(43,135
)
 

 Long-term debt - third party
 
300,000

 
40,393

 
1,222

 

 
341,615

 Other long-term obligations
 

 
77,724

 
29,842

 

 
107,566

 Deferred income taxes
 

 
5,118

 
23,079

 

 
28,197

 Stockholders' equity
 
1,003,776

 
1,415,028

 
762,251

 
(2,176,529
)
 
1,004,526

   Total Liabilities and Stockholders' Equity
 
$
1,494,584

 
$
1,716,380

 
$
958,782

 
$
(2,335,941
)
 
$
1,833,805

 
 
 
 
 
 
 
 
 
 
 



24

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


CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2015
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
1,837

 
$
9,124

 
$

 
$
10,961

    Accounts receivable - affiliates
 
41,988

 
18,786

 
30,911

 
(91,685
)
 

    Accounts receivable - trade
 

 
36,890

 
118,218

 

 
155,108

    Inventories
 

 
145,506

 
218,646

 

 
364,152

    Prepaid and other current assets
 

 
13,091

 
57,384

 

 
70,475

      Total current assets
 
41,988

 
216,110

 
434,283

 
(91,685
)
 
600,696

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,338,408

 
735,037

 

 
(2,073,445
)
 

 Property, plant and equipment
 

 
427,681

 
205,658

 

 
633,339

 Deferred income taxes
 

 

 
14,819

 

 
14,819

 Goodwill
 

 
181,718

 
202,718

 

 
384,436

 Notes receivable - affiliate
 
36,817

 
7,413

 

 
(44,230
)
 

 Other assets
 
3,985

 
44,190

 
44,198

 

 
92,373

      Total Assets
 
$
1,421,198

 
$
1,612,149

 
$
901,676

 
$
(2,209,360
)
 
$
1,725,663

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

 
$
72,904

 
$
18,781

 
$
(91,685
)
 
$

    Accounts payable - trade
 
43

 
33,527

 
46,186

 

 
79,756

    Short-term debt
 
191,179

 
132

 
135

 

 
191,446

    Accrued income and other taxes
 

 
2,070

 
15,251

 

 
17,321

    Rationalizations
 

 
5,820

 
2,812

 

 
8,632

    Supply chain financing liability
 

 

 

 

 

    Other accrued liabilities
 
7,225

 
10,930

 
23,791

 

 
41,946

         Total current liabilities
 
198,447

 
125,383

 
106,956

 
(91,685
)
 
339,101

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 

 
36,817

 
7,413

 
(44,230
)
 

 Long-term debt - third party
 
300,000

 
35,360

 
961

 

 
336,321

 Other long-term obligations
 

 
71,051

 
29,932

 

 
100,983

 Deferred income taxes
 

 
5,130

 
21,377

 

 
26,507

 Stockholders' equity
 
922,751

 
1,338,408

 
735,037

 
(2,073,445
)
 
922,751

   Total Liabilities and Stockholders' Equity
 
$
1,421,198

 
$
1,612,149

 
$
901,676

 
$
(2,209,360
)
 
$
1,725,663

 
 
 
 
 
 
 
 
 
 
 



25

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


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

 
$
70,357

 
$
35,207

 
$
(105,564
)
 
$

 Sales - third party
 

 
111,124

 
169,667

 

 
280,791

    Net sales
 

 
181,481

 
204,874

 
(105,564
)
 
280,791

 Cost of sales
 

 
157,029

 
203,632

 
(105,564
)
 
255,097

      Gross profit
 

 
24,452

 
1,242

 

 
25,694

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 

 
2,770

 

 

 
2,770

 Selling and administrative expenses
 

 
9,867

 
20,040

 

 
29,907

 Rationalizations
 

 
36

 
50

 

 
86

      Operating income (loss)
 

 
11,779

 
(18,848
)
 

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

 
824

 
(30
)
 

 
794

 Interest expense - affiliate
 

 
226

 

 
(226
)
 

 Interest expense - third party
 
7,952

 
740

 
307

 

 
8,999

 Interest income - affiliate
 
(226
)
 

 

 
226

 

 Interest income - third party
 

 

 
(58
)
 

 
(58
)
 Income (loss) before income taxes
 
(7,726
)
 
9,989

 
(19,067
)
 

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

 
(7,058
)
 

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