10-Q 1 a2017-q310xq.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended September 30, 2017
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
 
graftechinternationala03.jpg
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)
 
 
982 Keynote Circle
44131
Brooklyn Heights, 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  o    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 o
Accelerated Filer o
Emerging Growth Company  o
Non-Accelerated Filer o
Smaller Reporting Company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act. o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of October 14, 2017, 100 shares of common stock, par value $.01 per share, were outstanding.
(Explanatory Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)


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
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Unuaudited
 
As of December 31, 2016
 
As of
September 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,610

 
$
16,376

Accounts and notes receivable, net of allowance for doubtful accounts of
$326 as of December 31, 2016 and $387 as of September 30, 2017
80,568

 
80,132

Inventories
156,111

 
164,568

Prepaid expenses and other current assets
21,665

 
19,978

Current assets of discontinued operations
60,979

 
15,375

Total current assets
330,933

 
296,429

Property, plant and equipment
585,704

 
627,582

Less: accumulated depreciation
76,849

 
118,118

Net property, plant and equipment
508,855

 
509,464

Deferred income taxes
19,803

 
19,220

Goodwill
171,117

 
171,117

Other assets
141,568

 
123,778

Total assets
$
1,172,276

 
$
1,120,008

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
47,663

 
$
58,376

Short-term debt
8,852

 
13,282

Accrued income and other taxes
5,256

 
8,131

Other accrued liabilities
30,594

 
34,027

Current liabilities of discontinued operations
20,042

 
11,957

Total current liabilities
112,407

 
125,773

Long-term debt
356,580

 
320,430

Other long-term obligations
82,148

 
78,976

Deferred income taxes
42,906

 
43,368

Long-term liabilities of discontinued operations
850

 
581

Contingencies – Note 9
—

 
—

Stockholders’ equity:
 
 
 
Common stock, par value $.01, 1,000 shares authorized, 100 shares
issued as of December 31, 2016 and September 30, 2017
—

 
—

Additional paid-in capital
854,337

 
854,337

Accumulated other comprehensive (loss) income
(7,558
)
 
13,583

Accumulated deficit
(269,394
)
 
(317,040
)
Total stockholders’ equity
577,385

 
550,880

 
 
 
 
Total liabilities and stockholders’ equity
$
1,172,276

 
$
1,120,008

See accompanying Notes to Condensed Consolidated Financial Statements

3


GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)
 
 
For the Three
Months Ended September 30,
 
For the Nine
Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
Net sales
$
111,590

 
$
137,245

 
$
322,530

 
$
358,298

Cost of sales
113,602

 
120,420

 
331,297

 
329,200

Additions to lower of cost or
market inventory reserve
4,898

 
264

 
19,523

 
1,773

Gross (loss) profit
(6,910
)
 
16,561

 
(28,290
)
 
27,325

Research and development
526

 
1,338

 
1,964

 
3,110

Selling and administrative expenses
12,215

 
13,322

 
39,430

 
37,200

Operating (loss) profit
(19,651
)
 
1,901

 
(69,684
)
 
(12,985
)
 
 
 
 
 
 
 
 
Other (income) expense, net
(567
)
 
(643
)
 
(1,528
)
 
3,610

Interest expense
6,964

 
7,792

 
19,860

 
23,240

Interest income
(158
)
 
(58
)
 
(169
)
 
(320
)
Loss from continuing operations before
provision for income taxes
(25,890
)
 
(5,190
)
 
(87,847
)
 
(39,515
)
 
 
 
 
 
 
 
 
(Benefit from) provision for income taxes
(1,789
)
 
1,963

 
(7,675
)
 
3,249

Net loss from continuing operations
(24,101
)
 
(7,153
)
 
(80,172
)
 
(42,764
)
 
 
 
 
 
 
 
 
    Income (loss) from discontinued operations, net of tax
1,134

 
3,234

 
(107,568
)
 
(4,882
)
 
 
 
 
 
 
 
 
Net loss
$
(22,967
)
 
$
(3,919
)
 
$
(187,740
)
 
$
(47,646
)
 
 
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
Net loss
$
(22,967
)
 
$
(3,919
)
 
$
(187,740
)
 
$
(47,646
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,300

 
7,546

 
13,974

 
21,141

Commodities and foreign currency
    derivatives and other
118

 
—

 
145

 
—

Other comprehensive income, net of tax:
2,418

 
7,546

 
14,119

 
21,141

Comprehensive (loss) income
$
(20,549
)
 
$
3,627

 
$
(173,621
)
 
$
(26,505
)

See accompanying Notes to Condensed Consolidated Financial Statements

4

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, unaudited)
 
For the Nine Months Ended September 30, 2016
 
For the Nine Months Ended September 30, 2017
Cash flow from operating activities:
 
 
 
Net loss
$
(187,740
)
 
$
(47,646
)
Adjustments to reconcile net loss to
cash provided by operations:
 
 
 
Depreciation and amortization
62,775

 
50,982

Impairments
105,623

 
5,300

Gain on sale of assets
—

 
(3,676
)
Change in inventory lower-of-cost-or-market reserve
net of depreciation
6,000

 
(1,578
)
Deferred income tax provision
(11,738
)
 
(3,049
)
Post-retirement and pension plan changes
3,164

 
2,226

Interest expense
4,872

 
5,089

Other charges, net
(2,042
)
 
4,877

Net change in working capital*
54,005

 
22,197

Change in long-term assets and liabilities
(6,188
)
 
(1,141
)
Net cash provided by operating activities
28,731

 
33,581

Cash flow from investing activities:
 
 
 
Capital expenditures
(22,257
)
 
(23,028
)
Proceeds from the sale of assets
685

 
4,038

Proceeds from divestitures
—

 
26,818

Other
(1,171
)
 
—

Net cash (used in) provided by investing activities
(22,743
)
 
7,828

Cash flow from financing activities:
 
 
 
Short-term debt, net
503

 
5,945

Revolving Facility borrowings
40,000

 
35,000

Revolving Facility reductions
(41,000
)
 
(77,755
)
Revolving Facility refinancing fees
(922
)
 
—

Principal payments on long-term debt
(104
)
 
(107
)
Net cash used in financing activities
(1,523
)
 
(36,917
)
Net change in cash and cash equivalents
4,465

 
4,492

Effect of exchange rate changes on cash and cash equivalents
755

 
274

Cash and cash equivalents at beginning of period
6,927

 
11,610

Cash and cash equivalents at end of period
$
12,147

 
$
16,376

* Net change in working capital due to the following components:
 
 
 
Accounts and notes receivable, net
$
9,685

 
$
1,961

Inventories
41,399

 
8,588

Prepaid expenses and other current assets
(1,170
)
 
(187
)
Change in accounts payable and accruals
(770
)
 
7,135

Increase in interest payable
4,861

 
4,700

Net change in working capital
$
54,005

 
$
22,197


Note: The Statements of Cash Flows include both continuing and discontinued operations


See accompanying Notes to Condensed Consolidated Financial Statements

5
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED 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 graphite electrodes and needle coke. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. On August 15, 2015, GTI became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. ("Brookfield") through a tender offer to our former shareholders and subsequent merger transaction.
The Company's only reportable segment, Industrial Materials, is comprised of our two major product categories: graphite electrodes and needle coke products. Needle coke is the key raw material to producing graphite electrodes. The Industrial Materials business segment focuses on providing the highest quality graphite electrodes and providing the best customer service all while striving to be the lowest cost producer.
We previously operated an Engineered Solutions business segment. See Note 2 "Discontinued Operations and Assets Held for Sale" for further information. All results from the Engineered Solutions business have been excluded from continuing operations, unless otherwise indicated.
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, 2016 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, 2016 (the “Annual Report”) but does not include all disclosures required by GAAP in audited financial statements. 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 periods 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, 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. 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 was expected to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. On July 9, 2015, the FASB deferred the effective date to fiscal years beginning after December 15, 2017. During the fourth quarter of 2016, we completed the initial evaluation of the new standard and the related assessment and review of a representative sample of existing revenue contracts with our customers. We determined, on a preliminary basis, that although the timing and pattern of revenue recognition may change, the amount of revenue recognized during the year should remain substantially the same. We intend to adopt this standard using the modified retrospective method. We have begun an initiative to offer three to five year supply contracts to our strategic customers. ASU No. 2014-09 could have a material impact on the way in which we would recognize revenue under these contracts. We will continue to evaluate revenue recognition of these contracts as they are entered into.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this new guidance, a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of this standard on its financial position, results of operations or cash flows.

6
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other (Topic 350). This guidance was issued to simplify the accounting for goodwill impairment. The guidance removes the second step of the goodwill impairment test, which requires that a hypothetical purchase price allocation be performed to determine the amount of impairment, if any. Under this new guidance, a goodwill impairment charge will be based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will become effective on a prospective basis for the Company on January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this standard on its results of operations.
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715). This standard requires an entity to report the service cost component in the same line item as other compensation costs. The other components of net (benefit) cost including our annual mark-to-market re-measurement, will be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2017. The components of the net (benefit) cost are shown in Note 4, "Benefit Plans."
(2)
Discontinued Operations and Related Assets Held for Sale
On February 26, 2016, the Company announced that it had initiated a strategic review of its Engineered Solutions business segment to better direct its resources and simplify its operations. Any potential sale of assets was prohibited by the Revolving Facility without approval of the requisite lenders thereunder. On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility (see Note 6 "Debt and Liquidity") which, among other things, permits the sale of assets with the restriction that the proceeds be utilized to pay down revolver borrowings. As of June 30, 2016, the Engineered Solutions segment qualified for reporting as discontinued operations as its divestiture represents a strategic shift for the Company.
During 2016, we evaluated the fair value of the Engineered Solutions business segment utilizing the market approach (Level 3 measure). As a result, we incurred an impairment charge to our Engineered Solutions business segment of $120 million to align the carrying value with estimated fair value. We continued to update this estimate and during the nine months ended September 30, 2017, we further reduced the estimated fair value by $5.3 million based upon current information.
On November 30, 2016, we completed the sale of our Fiber Materials Inc. business, which was a business line within our former Engineered Solutions business. The sale resulted in cash proceeds of $15.9 million and a loss of $0.2 million. We have the ability to realize up to $8.5 million of additional proceeds based on the earnings of the Fiber Materials business over the 24 months following the transaction. We have elected to record this contingent consideration as it is realized and as such, it is not recognized thus far on the transaction.
On July 3, 2017 we completed the sale of our Advanced Energy Technologies (AET) business. AET was a product line within our Engineered Solutions business which had been classified as held for sale since the second quarter of 2016. The sale resulted in cash proceeds of $28.5 million.
On September 30, 2017, we completed the sale of the majority of the U.S. assets of our GrafTech Advanced Graphite Materials (GAGM) business, which was a component of our Engineered Solutions business. The sale of the Italian GAGM assets closed on October 5, 2017. In the jurisdictions where the GAGM assets were not acquired, we initiated the wind-down of the business which we expect to be substantially completed by year-end. The sale was structured as a non-cash transaction with the buyer assuming certain liabilities associated with the assets acquired. In addition, GrafTech retained certain current assets of GAGM, mostly receivables, which will be substantially realized in the course of the 4th quarter of 2017. As such, the disposition of the GAGM assets did not result in any cash proceeds in the third quarter of 2017.
As a result of the sales described above, we recorded a gain of $3.7 million in the third quarter of 2017. The disposition of the Engineered Solutions business is now substantially complete, with only the wind-down in the fourth quarter of 2017 remaining.
In accordance with our Credit Facility, all cash proceeds from these sales were used to pay down our Revolving Facility and Term Loan.

7
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following tables summarize the results of the Engineered Solutions business segment, reclassified as discontinued operations for the three and nine months ended September 30, 2016 and 2017.
 
For the Three Months Ended September 30,
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Net sales
$
30,165

 
$
14,528

 
$
89,184

 
$
78,721

Cost of sales
23,497

 
14,574

 
74,051

 
71,596

    Gross profit (loss)
6,668

 
(46
)
 
15,133

 
7,125

Research and development
707

 
106

 
2,398

 
1,387

Selling and administrative expenses
3,983

 
3,561

 
13,474

 
11,360

Gain on sale of assets
—

 
(3,676
)
 
—

 
(3,676
)
Impairments
—

 
—

 
105,623

 
5,300

    Operating income (loss)
1,978

 
(37
)
 
(106,362
)
 
(7,246
)
Other income
(3
)
 
(56
)
 
(75
)
 
(71
)
Interest expense
783

 
—

 
2,452

 
1,131

Income (loss) from discontinued operations
    before income taxes
1,198

 
19

 
(108,739
)
 
(8,306
)
Provision for (benefit from) income taxes
    on discontinued operations
64

 
(3,215
)
 
(1,171
)
 
(3,424
)
Income (loss) from discontinued operations
$
1,134

 
$
3,234

 
$
(107,568
)
 
$
(4,882
)
The significant components of our Statements of Cash Flows for the Engineered Solutions business segment held for sale are as follows:
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
(Dollars in thousands)
 
 
 
 
Depreciation and amortization
$
3,849

 
$
2,418

Impairment
105,623

 
5,300

Gain on sale of assets
—

 
(3,676
)
Inventory
(217
)
 
13,804

Deferred income taxes
(1,172
)
 
(3,068
)
Capital expenditures
3,621

 
528


8
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes the carrying value of the assets and liabilities of discontinued operations as of December 31, 2016 and September 30, 2017.
 
As of
December 31, 2016
 
As of
September 30, 2017
 
(Dollars in thousands)
Assets of discontinued operations:
 
 
 
  Accounts receivable
$
17,094

 
$
10,004

  Inventories
71,816

 
8,092

  Prepaid expenses and other current assets
320

 
2,173

  Net property plant and equipment
79,048

 
8,892

  Other assets
12,608

 
746

     Total assets of discontinued operations prior to impairment
180,886

 
29,907

 
 
 
 
  Impairment
(119,907
)
 
(14,532
)
 
 
 
 
         Total assets of discontinued operations
$
60,979

 
$
15,375

 
 
 
 
Liabilities of discontinued operations:
 
 
 
  Accounts payable
$
7,253

 
$
1,270

  Accrued income and other taxes
2,326

 
238

  Other accrued liabilities
10,463

 
10,449

     Total current liabilities of discontinued operations
20,042

 
11,957

 
 
 
 
  Other long-term obligations
850

 
581

 
 
 
 
          Total liabilities of discontinued operations
$
20,892

 
$
12,538

(3)
Segment Reporting

We previously operated two reportable business segments, Industrial Materials and Engineered Solutions. During 2016 the Company decided to sell the businesses that comprised our Engineered Solutions segment to focus on our Industrial Materials segment. During the second quarter of 2016 the Engineered Solutions segment qualified as held for sale status and as such the related results have been excluded from continuing operations. See Note 2 "Discontinued Operations and Assets Held for Sale" for significant components of the results of our Engineered Solutions segment.
Our Industrial Materials segment manufactures and delivers high quality graphite electrodes and needle coke products. Electrodes are key components of the conductive power systems used to produce steel and other non-ferrous metals. 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.

9
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Information concerning our reportable segment is as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
 
 
 
Industrial Materials
$
111,590

 
$
137,245

 
$
322,530

 
$
358,298

 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
Industrial Materials
(14,238
)
 
8,308

 
(50,776
)
 
4,218

Corporate, R&D and Other expenses
(5,413
)
 
(6,407
)
 
(18,908
)
 
(17,203
)
Total operating (loss) income
$
(19,651
)
 
$
1,901

 
$
(69,684
)
 
$
(12,985
)
 
 
 
 
 
 
 
 
Reconciliation of segment operating loss to
    loss before provision for income taxes
 
 
 
 
 
 
 
Other expense (income), net
$
(567
)
 
$
(643
)
 
$
(1,528
)
 
$
3,610

Interest expense
6,964

 
7,792

 
19,860

 
23,240

Interest income
(158
)
 
(58
)
 
(169
)
 
(320
)
Loss from continuing operations before
   provision for income taxes
$
(25,890
)
 
$
(5,190
)
 
$
(87,847
)
 
$
(39,515
)
(4)
Benefit Plans
The components of our consolidated net pension costs are set forth in the following table:
 
For the Three Months Ended September 30,
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
Service cost
$
506

 
$
496

 
$
1,517

 
$
1,487

Interest cost
1,498

 
1,385

 
4,494

 
4,154

Expected return on plan assets
(1,307
)
 
(1,389
)
 
(3,922
)
 
(4,166
)
Net cost
$
697

 
$
492

 
$
2,089

 
$
1,475

The components of our consolidated net postretirement costs are set forth in the following table: 
 
For the Three Months Ended September 30,
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
Service cost
$
1

 
$
1

 
$
3

 
$
1

Interest cost
272

 
241

 
815

 
724

Net cost
$
273

 
$
242

 
$
818

 
$
725

(5)
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 graphite electrodes 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.
The following tables represent the changes in the carrying value of goodwill and intangibles for the nine months ended September 30, 2017:

10
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Goodwill
Balance as of December 31, 2016
$
171,117

   Adjustments
—

Balance as of September 30, 2017
$
171,117

Intangible Assets
 
As of December 31, 2016
 
As of September 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
(Dollars in Thousands)
Trade name
$
22,500

 
$
(3,235
)
 
$
19,265

 
$
22,500

 
$
(4,954
)
 
$
17,546

Technological know-how
55,300

 
(10,397
)
 
44,903

 
55,300

 
(15,646
)
 
39,654

Customer –related
    intangible
64,500

 
(6,177
)
 
58,323

 
64,500

 
(9,527
)
 
54,973

Total finite-lived
    intangible assets
$
142,300

 
$
(19,809
)
 
$
122,491

 
$
142,300

 
$
(30,127
)
 
$
112,173

Amortization expense of acquired intangible assets was $3.5 million and $10.7 million in the three and nine months ended September 30, 2016 and $3.4 million and $10.3 million in the three and nine months ended September 30, 2017. Estimated amortization expense will approximate $3.3 million in the remainder of 2017, $12.9 million in 2018, $12.2 million in 2019, $11.4 million in 2020 and $10.7 million in 2021.
(6)
Debt and Liquidity
The following table presents our long-term debt: 
 
As of
December 31, 2016
 
As of
September 30, 2017
 
(Dollars in thousands)
Credit Facility (Revolving Facility and Term Loan Facility)
$
90,731

 
$
54,076

Senior Notes
274,132

 
278,959

Other Debt
569

 
677

Total Debt
365,432

 
333,712

Less: Short-term Debt
(8,852
)
 
(13,282
)
Long-term Debt
$
356,580

 
$
320,430

The fair value of debt, which was determined using Level 2 inputs, was $347.4 million versus a book value of $333.7 million as of September 30, 2017. As a result of our acquisition by Brookfield and the resulting purchase price accounting adjustments, our Senior Notes were adjusted to their fair market value as of August 15, 2015. The discount to fair value will be accreted over the remaining term of the Notes.
Credit Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement with a borrowing capacity of $400 million and a maturity date of April 2019 (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into a further Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a $40 million senior secured delayed draw term loan facility (the "Term Loan Facility").
On July 28, 2015, GrafTech and certain of its subsidiaries entered into an amendment to the Amended and Restated Credit Agreement to change the terms regarding the occurrence of a default upon a change in control (which is defined thereunder to include the acquisition by any person of more than 25 percent of GrafTech’s outstanding shares) to exclude the acquisition of shares by Brookfield.  In addition, effective upon such acquisition, the financial

11
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


covenants were eased, resulting in increased availability under the Revolving Facility. The size of the Revolving Facility was also reduced from $400 million to $375 million. The size of the Term Loan Facility remained at $40 million.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. The size of the Revolving Facility was permanently reduced from $375 million to $225 million. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under the Revolving Facility) in excess of $25 million. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens, incur debt and prepay or redeem other indebtedness; a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility and the Term Loan Facility; and changes to the Company’s financial covenants so that until the earlier of March 31, 2019 or the Company has $75 million in trailing twelve month EBITDA (as defined in the Revolving Facility), the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from ($40 million) to $35 million after which the Company’s existing financial covenants under the Revolving Facility will apply.
With this amendment, the Company has full access to the $225 million Revolving Facility, subject to the $25 million minimum liquidity requirement. As of September 30, 2017, the Company had $35.3 million of borrowings on the Revolving Facility and $11.6 million of letters of credit drawn against the Revolving Facility.
The $40 million Term Loan Facility was fully drawn on August 11, 2015, in connection with the repayment of the Senior Subordinated Notes. The balance of the Term Loan Facility was $18.8 million as of September 30, 2017.
The interest rate applicable to the Revolving Facility and Term Loan Facility is LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.70% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
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.

The indenture for the Senior Notes states that 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. On August 17, 2015, a change in control occurred due to the Merger. However, the downgrade of the ratings of the Senior Notes, as specified in the indenture, did not occur. Therefore, the Company was not required to offer to repurchase the Senior Notes as a result of the Merger.

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.


12
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The indenture for the Senior Notes also contains 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 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.
(7)
Inventories
Inventories are comprised of the following: 
 
As of
December 31, 2016
 
As of
September 30, 2017
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
54,469

 
$
55,492

Work in process
52,379

 
65,349

Finished goods
49,263

 
43,727

         Total
$
156,111

 
$
164,568

We recorded lower of cost or market inventory adjustments of $19.5 million and $1.8 million in the nine months ended September 30, 2016 and September 30, 2017, respectively. The decrease is attributable to the reduction in product costs and increases in prices.
(8) Interest Expense
The following tables present the components of interest expense: 
 
For the Three Months Ended September 30,
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
Interest incurred on debt
$
5,306

 
$
6,097

 
$
15,020

 
$
18,183

Accretion of fair value adjustment on
   Senior Notes
1,581

 
1,618

 
4,715

 
4,826

Amortization of debt issuance costs
77

 
77

 
125

 
231

Total interest expense
$
6,964

 
$
7,792

 
$
19,860

 
$
23,240

Interest Rates
The Revolving Facility and Term Loan Facility had an effective interest rate of 5.52% and 5.99% as of December 31, 2016 and September 30, 2017, respectively. The Senior Notes have a fixed interest rate of 6.375%. 
(9)
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

13
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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.
Litigation has been pending in Brazil brought by employees seeking to recover additional amounts under certain wage increase provisions applicable in 1989 and 1990 under collective bargaining agreements to which employers in the Bahia region of Brazil were a party (including our subsidiary in Brazil), plus interest thereon. Prior to October 1, 2015, we were not party to such litigation. Companies in Brazil have recently settled claims arising out of these provisions and, in May 2015, the litigation was remanded, in favor of the employees, by the Brazil Supreme Court to the lower courts for further proceedings which included procedural aspects of the case, such as admissibility of instruments filed by the parties. We cannot predict the outcome of such litigation. On October 1, 2015, an action was filed by current and former employees against our subsidiary in Brazil to recover amounts under such provisions, plus interest thereon, which amounts together with interest could be material to us. In the 1st quarter 2017, this case was ruled in favor of the employees at the state court level. The Company has appealed and intends to vigorously defend itself. The claims specify neither the employees covered nor the amount of damages sought, therefore a range of potential losses cannot be estimated.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the nine months ended September 30, 2017, are presented below: 
 
(Dollars in thousands)
Balance as of December 31, 2016
$
969

Product warranty adjustments
(210
)
Accruals and Payments
(290
)
Balance as of September 30, 2017
$
469

(10)
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 tables summarize the provision for income taxes for the three and nine months ended September 30, 2016 and September 30, 2017:
 
For the Three Months Ended September 30,
 
For the Nine Months
Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
 
 
 
 
 
 
Tax (benefit) expense
$
(1,789
)
 
$
1,963

 
$
(7,675
)
 
$
3,249

Pretax loss
(25,890
)
 
(5,190
)
 
(87,847
)
 
(39,515
)
Effective tax rates
6.9
%
 
(37.8
)%
 
8.7
%
 
(8.2
)%
For the three and nine months ended September 30, 2016 and 2017 the effective tax rate differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.

14
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As of September 30, 2017, we had unrecognized tax benefits of $2.6 million, $2.3 million of which, if recognized, would have a favorable impact on our effective tax rate.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2014 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 2010.

We continue to assess the realization of our 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 established and maintained valuation allowances on those net deferred tax assets.
(11)
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. Our derivative risk management strategy has not resulted in a material impact to our financial results in 2016 or 2017. Our derivative assets and liabilities are included within "Prepaid expenses and other current assets" and "Other current liabilities" on the Condensed Consolidated Balance Sheets and effects of these derivatives are recorded in revenue, cost of goods sold and other expense (income) on the Condensed Consolidated Statements of Operations.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was no ineffectiveness on these contracts designated as hedging instruments during the nine months ended September 30, 2016 and 2017, respectively.
In 2016 and 2017, 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, euro, South African rand and Japanese yen. As of September 30, 2017, we had outstanding Mexican peso, euro, and Japanese yen currency contracts with an aggregate notional amount of $18.8 million. The foreign currency derivatives outstanding as of September 30, 2017, have maturities through December 29, 2017.
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. As of September 30, 2017, we had no outstanding derivative swap contracts for refined oil products or natural gas.

15
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 $13.3 million and $13.5 million as of December 31, 2016 and September 30, 2017, respectively. Within the currency translation adjustment portion of other comprehensive income, we recorded losses of $0.9 million and $1.5 million for the three and nine months ended September 30, 2016, respectively. We incurred a gain of $0.5 million and a loss of $0.2 million in the three and nine months ended September 30, 2017, respectively, resulting from these net investment hedges.
(12)
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 are 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 LP, GrafTech Global Enterprises Inc., GrafTech International Holdings Inc., GrafTech DE LLC, GrafTech Seadrift Holding Corp, 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, 2016 and September 30, 2017, condensed consolidating statements of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2017 and the condensed consolidating statements of cashflows for the nine months ended September 30, 2016 and 2017.

16
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2016
(in thousands)
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$
—

 
$
636

 
$
10,974

 
$
—

 
$
11,610

    Accounts receivable - affiliates
 
51,592

 
3,624

 
19,643

 
(74,859
)
 
—

    Accounts receivable - trade
 
—

 
7,518

 
73,050

 
—

 
80,568

    Inventories
 
—

 
44,563

 
111,548

 
—

 
156,111

    Prepaid and other current assets
 
1,350

 
4,853

 
15,462

 
—

 
21,665

    Current assets of discontinued operations
 
—

 
51,160

 
14,296

 
(4,477
)
 
60,979

      Total current assets
 
52,942

 
112,354

 
244,973

 
(79,336
)
 
330,933

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
844,379

 
601,597

 
—

 
(1,445,976
)
 
—

 Property, plant and equipment
 
—

 
191,503

 
317,352

 
—

 
508,855

 Deferred income taxes
 
—

 
—

 
19,803

 
—

 
19,803

 Goodwill
 
—

 
70,399

 
100,718

 
—

 
171,117

 Notes receivable - affiliate
 
—

 
49,003

 
—

 
(49,003
)
 
—

 Other assets
 
—

 
70,767

 
70,801

 
—

 
141,568

      Total Assets
 
$
897,321

 
$
1,095,623

 
$
753,647

 
$
(1,574,315
)
 
$
1,172,276

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 
$
806

 
$
71,243

 
$
2,810

 
$
(74,859
)
 
$
—

    Accounts payable - trade
 
964

 
8,033

 
38,666

 
—

 
47,663

    Short-term debt
 
—

 
3,062

 
5,790

 
—

 
8,852

    Accrued income and other taxes
 
—

 
2,095

 
3,161

 
—

 
5,256

    Other accrued liabilities
 
2,444

 
12,205

 
15,945

 
—

 
30,594

    Short-term liabilities of discontinued operations
 
—

 
20,381

 
4,138

 
(4,477
)
 
20,042

         Total current liabilities
 
4,214

 
117,019

 
70,510

 
(79,336
)
 
112,407

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 
41,590

 
—

 
7,413

 
(49,003
)
 
—

 Long-term debt - third party
 
274,132

 
81,695

 
753

 
—

 
356,580

 Other long-term obligations
 
—

 
50,943

 
31,205

 
—

 
82,148

 Deferred income taxes
 
—

 
909

 
41,997

 
—

 
42,906

 Long-term liabilities of discontinued operations
 
—

 
678

 
172

 
—

 
850

 Stockholders' equity
 
577,385

 
844,379

 
601,597

 
(1,445,976
)
 
577,385

   Total Liabilities and Stockholders' Equity
 
$
897,321

 
$
1,095,623

 
$
753,647

 
$
(1,574,315
)
 
$
1,172,276

 
 
 
 
 
 
 
 
 
 
 

17
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2017
(in thousands)
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$
—

 
$
1,117

 
$
15,259

 
$
—

 
$
16,376

    Accounts receivable - affiliates
 
51,592

 
9,022

 
25,510

 
(86,124
)
 
—

    Accounts receivable - trade
 
—

 
9,262

 
70,870

 
—

 
80,132

    Inventories
 
—

 
41,118

 
123,450

 


 
164,568

    Prepaid and other current assets
 
555

 
3,641

 
15,782

 
—

 
19,978

    Current assets of discontinued operations
 
—

 
10,083

 
5,447

 
(155
)
 
15,375

      Total current assets
 
52,147

 
74,243

 
256,318

 
(86,279
)
 
296,429

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
839,335

 
592,304

 
—

 
(1,431,639
)
 
—

 Property, plant and equipment
 
—

 
179,635

 
329,829

 
—

 
509,464

 Deferred income taxes
 
—

 
—

 
19,220

 
—

 
19,220

 Goodwill
 
—

 
70,399

 
100,718

 
—

 
171,117

 Notes receivable - affiliate
 


 
61,006

 
—

 
(61,006
)
 
—

 Other assets
 
—

 
61,554

 
62,224

 
—

 
123,778

      Total Assets
 
$
891,482

 
$
1,039,141

 
$
768,309

 
$
(1,578,924
)
 
$
1,120,008

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 
$
825

 
$
77,103

 
$
8,196

 
$
(86,124
)
 
$
—

    Accounts payable - trade
 
—

 
10,392

 
47,984

 
—

 
58,376

    Short-term debt
 
—

 
4,334

 
8,948

 
—

 
13,282

    Accrued income and other taxes
 
—

 
1,686

 
6,445

 
—

 
8,131

    Other accrued liabilities
 
7,225

 
9,350

 
17,452

 
—

 
34,027

    Liabilities of discontinued operations
 
—

 
8,805

 
3,307

 
(155
)
 
11,957

         Total current liabilities
 
8,050

 
111,670

 
92,332

 
(86,279
)
 
125,773

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 
53,593

 
—

 
7,413

 
(61,006
)
 
—

 Long-term debt - third party
 
278,959

 
40,595

 
876

 
—

 
320,430

 Other long-term obligations
 
—

 
45,882

 
33,094

 
—

 
78,976

 Deferred income taxes
 
—

 
1,283

 
42,085

 
—

 
43,368

 Long-term liabilities of discontinued operations
 
—

 
376

 
205

—

—

—

581

 Stockholders' equity
 
550,880

 
839,335

 
592,304

 
(1,431,639
)
 
550,880

   Total Liabilities and Stockholders' Equity
 
$
891,482

 
$
1,039,141

 
$
768,309

 
$
(1,578,924
)
 
$
1,120,008

 
 
 
 
 
 
 
 
 
 
 



18
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three months ended September 30, 2016
(in thousands)
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$
—

 
$
16,334

 
$
10,078

 
$
(26,412
)
 
$
—

 Sales - third party
 
—

 
21,891

 
89,699

 
—

 
111,590

    Net sales
 
—

 
38,225

 
99,777

 
(26,412
)
 
111,590

 Cost of sales
 
—

 
36,886

 
103,128

 
(26,412
)
 
113,602

Additions to lower cost or market inventory reserve
 
—

 
1,915

 
2,983

 
—

 
4,898

      Gross loss
 
—

 
(576
)
 
(6,334
)
 
—

 
(6,910
)
 
 
 
 
 
 
 
 
 
 
 
 Research and development
 
—

 
526

 
—

 
—

 
526

 Selling and administrative expenses
 
—

 
3,906

 
8,309

 
—

 
12,215

      Operating loss
 
—

 
(5,008
)
 
(14,643
)
 
—

 
(19,651
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 
—

 
287

 
(854
)
 
—

 
(567
)
 Interest expense - affiliate
 
268

 
—

 
—

 
(268
)
 
—

 Interest expense - third party
 
6,362

 
473

 
129

 
—

 
6,964

 Interest income - affiliate
 
—

 
(268
)
 
—

 
268

 
—

 Interest income - third party
 
—

 
—

 
(158
)
 
—

 
(158
)
 Loss from continuing operations
  before provision for income taxes
 
(6,630
)
 
(5,500
)
 
(13,760
)
 
—

 `
(25,890
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for income taxes
 
—

 
123

 
(1,912
)
 
—

 
(1,789
)
 Equity in loss from continuing
operations of subsidiary
 
(17,471
)
 
(11,848
)
 
—

 
29,319

 
—

      Net loss from
continuing operations
 
(24,101
)
 
(17,471
)
 
(11,848
)
 
29,319

 
(24,101
)
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued
     operations, net of tax
 
—

 
958

 
176

 
—

 
1,134

Equity in income from
   discontinued operations
 
1,134

 
176

 
—

 
(1,310
)
 
—

      Net income from
discontinued operations
 
1,134

 
1,134

 
176

 
(1,310
)
 
1,134

 
 
 
 
 
 
 
 
 
 
 
      Net loss
 
$
(22,967
)
 
$
(16,337
)
 
$
(11,672
)
 
$
28,009

 
$
(22,967
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(22,967
)
 
$
(16,337
)
 
$
(11,672
)
 
$
28,009

 
$
(22,967
)
Other comprehensive income
 
2,418

 
2,418

 
2,418

 
(4,836
)
 
2,418

Comprehensive loss
 
$
(20,549
)
 
$
(13,919
)
 
$
(9,254
)
 
$
23,173

 
$
(20,549
)
 
 
 
 
 
 
 
 
 
 
 


19
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three months ended September 30, 2017
(in thousands)
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$
—

 
$
23,063

 
$
22,665

 
$
(45,728
)
 
$
—

 Sales - third party
 
—

 
32,617

 
104,628

 
—

 
137,245

    Net sales
 
—

 
55,680

 
127,293

 
(45,728
)
 
137,245

 Cost of sales
 
—

 
58,380

 
107,768

 
(45,728
)
 
120,420

Additions to lower of cost or
market inventory reserve
 
—

 
—

 
264

 
—

 
264

      Gross (loss) profit
 
—

 
(2,700
)
 
19,261

 
—

 
16,561

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 
—

 
1,338

 
—

 
—

 
1,338

 Selling and administrative expenses
 
—

 
3,471

 
9,851

 
—

 
13,322

      Operating (loss) income
 
—

 
(7,509
)
 
9,410

 
—

 
1,901

 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 
1

 
229

 
(873
)
 
—

 
(643
)
 Interest expense - affiliate
 
916

 
—

 
—

 
(916
)
 
—

 Interest expense - third party
 
6,399

 
1,264

 
129

 
—

 
7,792

 Interest income - affiliate
 
—

 
(916
)
 


 
916

 
—

 Interest income - third party
 
—

 
—

 
(58
)
 
—

 
(58
)
 (Loss) income from continuing
   operations before provision for
     income taxes
 
(7,316
)
 
(8,086
)
 
10,212

 
—

 `
(5,190
)
 
 
 
 
 
 
 
 
 
 
 
 (Benefit from) provision
    for income taxes
 
—

 
(524
)
 
2,487