GRAFTECH INTERNATIONAL LTD - FORM 10-Q - October 30, 2014

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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, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from              to             
 
Commission file number: 1-13888
 

GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
 
Delaware
27-2496053
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
12900 Snow Road
44130
Parma, OH
(Zip code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (216) 676-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of October 14, 2014, 136,420,023 shares of common stock, par value $.01 per share, were outstanding.


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

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
 
As of December 31, 2013
 
As of September 30,
 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,888

 
$
10,878

Accounts and notes receivable, net of allowance for doubtful accounts of
   $6,718 as of December 31, 2013 and $8,592 as of September 30, 2014
199,566

 
163,971

Inventories
490,414

 
418,477

Prepaid expenses and other current assets
73,790

 
87,988

Total current assets
775,658

 
681,314

Property, plant and equipment
1,588,880

 
1,573,995

Less: accumulated depreciation
767,895

 
908,440

Net property, plant and equipment
820,985

 
665,555

Deferred income taxes
10,334

 
13,614

Goodwill
496,810

 
495,944

Other assets
114,061

 
105,018

Total assets
$
2,217,848

 
$
1,961,445

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

 
$
98,722

Short-term debt
1,161

 
1,144

Accrued income and other taxes
30,687

 
26,073

Rationalizations
18,421

 
12,747

Supply chain financing liability
9,455

 
—

Other accrued liabilities
40,939

 
44,211

Total current liabilities
215,875

 
182,897

Long-term debt
541,593

 
539,509

Other long-term obligations
97,947

 
89,984

Deferred income taxes
41,684

 
40,676

Contingencies – Note 12

 

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

 
—

Common stock, par value $.01, 225,000,000 shares authorized,
   151,929,565 shares issued as of December 31, 2013 and 152,604,441
   shares issued as of September 30, 2014
1,519

 
1,525

Additional paid-in capital
1,820,451

 
1,826,935

Accumulated other comprehensive loss
(292,624
)
 
(313,560
)
Retained earnings (deficit)
39,625

 
(162,268
)
Less: cost of common stock held in treasury, 16,341,311 shares as of
   December 31, 2013 and 16,092,662 shares as of September 30, 2014
(247,190
)
 
(243,098
)
Less: common stock held in employee benefit and compensation trusts,
   87,206 shares as of December 31, 2013 and 107,406 shares as of
   September 30, 2014
(1,032
)
 
(1,155
)
Total stockholders’ equity
1,320,749

 
1,108,379

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

 
$
1,961,445

 See accompanying Notes to Consolidated Financial Statements

3

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
Net sales
$
303,084

 
$
260,458

 
$
858,172

 
$
825,433

Cost of sales
266,440

 
242,814

 
724,057

 
764,142

Gross profit
36,644

 
17,644

 
134,115

 
61,291

Research and development
2,994

 
2,871

 
8,874

 
8,544

Selling and administrative expenses
27,626

 
26,980

 
87,500

 
89,024

Rationalizations
14,593

 
10,844

 
14,593

 
11,761

Impairments
—

 
—

 
—

 
121,570

Operating (loss) income
(8,569
)
 
(23,051
)
 
23,148

 
(169,608
)
 
 
 
 
 
 
 
 
Other expense, net
(772
)
 
1,149

 
753

 
1,902

Interest expense
9,098

 
9,069

 
27,053

 
27,223

Interest income
(49
)
 
(144
)
 
(162
)
 
(257
)
Loss before provision for income taxes
(16,846
)
 
(33,125
)
 
(4,496
)
 
(198,476
)
 
 
 
 
 
 
 
 
Provision for income taxes
(9,216
)
 
1,818

 
(5,458
)
 
3,417

Net (loss) income
$
(7,630
)
 
$
(34,943
)
 
$
962

 
$
(201,893
)
 
 
 
 
 
 
 
 
Basic (loss) income per common share:
 
 
 
 
 
 
 
Net (loss) income per share
$
(0.06
)
 
$
(0.26
)
 
$
0.01

 
$
(1.48
)
Weighted average common shares outstanding
135,134

 
136,375

 
134,949

 
136,007

 
 
 
 
 
 
 
 
Diluted (loss) income per common share:
 
 
 
 
 
 
 
Net (loss) income per share
$
(0.06
)
 
$
(0.26
)
 
$
0.01

 
$
(1.48
)
Weighted average common shares outstanding
135,134

 
136,375

 
135,122

 
136,007

 
 
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net (loss) income
$
(7,630
)
 
$
(34,943
)
 
$
962

 
$
(201,893
)
Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
5,230

 
(22,579
)
 
(11,902
)
 
(20,432
)
Commodities and foreign currency derivatives and other, net of tax of ($170), ($39), ($265) and ($92), respectively
476

 
(668
)
 
683

 
(504
)
Other comprehensive income (loss), net of tax:
5,706

 
(23,247
)
 
(11,219
)
 
(20,936
)
Comprehensive income (loss)
$
(1,924
)
 
$
(58,190
)
 
$
(10,257
)
 
$
(222,829
)

See accompanying Notes to Consolidated Financial Statements


4

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Nine Months Ended
 
September 30,
 
2013
 
2014
Cash flow from operating activities:
 
 
 
Net income (loss)
$
962

 
$
(201,893
)
Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization
71,770

 
93,123

Impairments
—

 
121,570

Inventory write-downs
1,600

 
18,800

Deferred income tax provision
(2,563
)
 
(4,943
)
Post-retirement and pension plan changes
3,468

 
4,097

Stock-based compensation
5,938

 
4,009

Interest expense
10,459

 
11,105

Other charges, net
3,016

 
4,047

(Increase) decrease in working capital*
(22,003
)
 
48,577

Increase in long-term assets and liabilities
(7,469
)
 
(15,603
)
Net cash provided by operating activities
65,178

 
82,889

Cash flow from investing activities:
 
 
 
Capital expenditures
(62,698
)
 
(69,314
)
Proceeds from the sale of assets
—

 
4,079

Proceeds from (payments for) derivative instruments
852

 
(573
)
Insurance recoveries
2,333

 
2,834

Net cash used in investing activities
(59,513
)
 
(62,974
)
Cash flow from financing activities:
 
 
 
Short-term debt reductions, net
(4,082
)
 
(17
)
Revolving Facility borrowings
134,000

 
229,000

Revolving Facility reductions
(118,500
)
 
(240,000
)
Principal payments on long-term debt
(189
)
 
(158
)
Supply chain financing
(14,422
)
 
(9,455
)
Proceeds from exercise of stock options
175

 
2,813

Purchase of treasury shares
(844
)
 
(620
)
Revolving Facility refinancing
—

 
(2,741
)
Other
(7,206
)
 
1,011

Net cash used in financing activities
(11,068
)
 
(20,167
)
Net decrease in cash and cash equivalents
(5,403
)
 
(252
)
Effect of exchange rate changes on cash and cash equivalents
(444
)
 
(758
)
Cash and cash equivalents at beginning of period
17,317

 
11,888

Cash and cash equivalents at end of period
$
11,470

 
$
10,878

 
 
 
 
* Net change in working capital due to the following components:
 
 
 
      Change in current assets:
 
 
 
Accounts and notes receivable, net
$
30,971

 
$
29,693

Inventories
(13,581
)
 
46,424

Prepaid expenses and other current assets
(11,049
)
 
(15,560
)
Decrease in accounts payable and accruals
(47,541
)
 
(11,072
)
Rationalizations
14,129

 
(5,671
)
Increase in interest payable
5,068

 
4,763

(Increase) decrease in working capital
$
(22,003
)
 
$
48,577


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, 2013 financial position data included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Annual Report”) but does not include all disclosures required by GAAP. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, contained in the Annual Report.
The unaudited consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for the interim period presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued guidance on Income Taxes titled “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This guidance requires that financial statements reflect a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward as reduced by any unrecognized tax benefit or a portion of an unrecognized tax benefit. The updated guidance became effective for the Company's interim and annual periods beginning after December 15, 2013. We adopted the guidance effective January 1, 2014 and its implementation did not have a material impact to our financial statements.
In May 2014, 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 effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. 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.
(2)
Rationalizations and Impairments
2013 Industrial Materials Rationalization
On October 31, 2013, we announced a global initiative to reduce our Industrial Materials segment's cost base and improve our competitive position. As part of this initiative, we ceased production at our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. These actions were substantially completed during the first half of 2014. Our graphite electrode capacity was reduced by approximately

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


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.

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

Total 2013 Rationalization Initiatives Impact to 2014 Financial Results
In the three and nine months ended September 30, 2014, as a result of the 2013 rationalization initiatives we incurred rationalization charges of $0.1 million and $0.9 million, respectfully, primarily related to contract termination costs. We also incurred non-cash accelerated depreciation charges of $0.8 million and $22.5 million in the three and nine months ended September 30, 2014, respectively. Other rationalization-related charges recorded in cost of sales in the three and nine months ended September 30, 2014 were $1.6 million and $6.8 million, respectively, and included cleaning and dismantling costs and loss reserves for inventory.

Charges incurred related to the 2013 rationalization initiatives for the three and nine months ended September 30, 2014 are as follows:
 
For the Three Months Ended
September 30, 2014
 
For the Nine Months Ended
September 30, 2014
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Total
 
Industrial Materials Segment
 
Engineered Solutions Segment
 
Total
 
(Dollars in thousands)
 
(Dollars in thousands)
Accelerated depreciation
    (recorded in Cost of sales)
$
838

 
$
—

 
$
838

 
$
21,690

 
$
826

 
$
22,516

Other (recorded in Cost
    of sales)
1,618

 
6

 
1,624

 
6,194

 
622

 
6,816

Other (recorded in Selling
    and administrative)
21

 
—

 
21

 
99

 
—

 
99

Severance and related costs
    (recorded in Rationalizations)
(52
)
 
—

 
(52
)
 
366

 
(28
)
 
338

Contract terminations
(recorded in Rationalizations)
81

 
—

 
81

 
609

 
—

 
609

   Total 2013 rationalization plan
    and related charges
$
2,506

 
$
6

 
$
2,512

 
$
28,958

 
$
1,420

 
$
30,378


The 2013 rationalization initiatives will result in approximately $100 million of pre-tax charges, of which approximately $30 million will be cash outlays (net of cash inflows). Through September 30, 2014, we incurred $96.1 million of expense related to these initiatives.

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


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

Charges incurred
693

Change in estimates
254

Payments and settlements
(16,053
)
Effect of change in currency exchange rates
(997
)
Balance as of September 30, 2014
$
2,318


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.

As a result of the above, we tested our long-lived assets used to produce advanced graphite materials for recovery, based on undiscounted cash flows from the use and eventual disposition of these assets. The carrying value of the assets exceeded these undiscounted cash flow and, accordingly, we estimated the fair-value of these long-lived assets based on a market participant view. This resulted in an impairment charge totaling $121.6 million in the nine months months ended September 30, 2014, and included the impairment of certain acquired customer relationship and technology intangible assets. Goodwill associated with this line of business of $0.4 million was fully impaired, and included in the $121.6 million charge. Other impairment related charges, primarily inventory write-downs, were $13.4 million in the nine months ended September 30, 2014. If business conditions and plans do not achieve our expected returns in the Engineered Solutions segment, we may undertake additional restructurings, rationalizations or similar actions which could result in additional charges, write-offs and impairments.

Charges incurred related to the 2014 Engineered Solutions rationalization initiatives for the three and nine months ended September 30, 2014 are as follows:
 
For the Three
 Months Ended
September 30, 2014
 
For the Nine
Months Ended
September 30, 2014
 
(dollars in thousands)
 
 
 
 
Accelerated depreciation (recorded in Cost of sales)
$
2,802

 
$
2,802

Other (recorded in Cost of sales)
2,780

 
13,341

Severance and related charges (recorded in Rationalizations)
2,537

 
2,537

Contract terminations (recorded in Rationalizations)
74

 
74

Impairments (recorded in Impairments)
—

 
121,570

   Total 2014 Engineered Solutions rationalization
        and related charges
$
8,193

 
$
140,324

 
 
 
 
The 2014 Engineered Solution rationalization will result in approximately $25 million of pre-tax charges (excluding impairments of $121.6 million), of which, approximately $5 million will be cash outlays (net of cash inflows),

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


the majority of which will be incurred in 2014. Through September 30, 2014 we have incurred $18.8 million related to this program.

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.
 
(Dollars in thousands)
Balance as of December 31, 2013
$
—

Charges incurred
2,611

Change in estimates
—

Payments and settlements
(386
)
Effect of change in currency exchange rates
—

Balance as of September 30, 2014
$
2,225



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 will reduce costs by a combination of reduced contractor costs, attrition, early retirements and layoffs. Additionally, the Company will downsize its corporate functions by approximately 25 percent, relocate to a smaller, more cost effective corporate headquarters and establish a new Technology and Innovation Center.
Charges incurred related to the 2014 Corporate and Research & Development rationalization initiatives for the three and nine months ended September 30, 2014 are as follows:
 
For the Three and Nine
 Months Ended
September 30, 2014
 
(dollars in thousands)
 
 
Accelerated depreciation (recorded in Cost of sales)
$
5

Accelerated depreciation (recorded in Overhead)
89

Severance and related costs (recorded in Rationalizations)
8,130

Contract terminations (recorded in Rationalizations)
74

   Total 2014 corporate rationalization
        and related charges
$
8,298

 
 
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.


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 Corporate and Research & Development rationalization initiatives described above. This liability is recorded as a current liability on the Consolidated Balance Sheet.
 
(Dollars in thousands)
Balance as of December 31, 2013
$
—

Charges incurred
8,204

Change in estimates
—

Payments and settlements
—

Effect of change in currency exchange rates
—

Balance as of September 30, 2014
$
8,204


(3)
Stock-Based Compensation
For the three months ended September 30, 2013 and 2014, we recognized stock-based compensation expense totaling $2.2 million and $1.3 million, respectively. A majority of the expense, $2.0 million and $1.2 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.
For the nine months ended September 30, 2013 and 2014, we recognized stock-based compensation expense of $5.9 million and $4.0 million, respectively. A majority of the expense, $5.4 million and $3.3 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 September 30, 2014, the total compensation cost related to non-vested restricted stock, performance shares and stock options not yet recognized was $7.2 million, which will be recognized over the remaining weighted average life of 1.23 years.
Restricted Stock and Performance Shares
Restricted stock and performance share awards activity under the plans for the nine months ended September 30, 2014 was:
 
Number of
Shares
 
Weighted-
Average
Grant  Date
Fair Value
Outstanding unvested as of January 1, 2014
1,633,491

 
$
10.98

Granted
215,100

 
10.53

Vested
(188,732
)
 
13.90

Forfeited/canceled/expired
(807,296
)
 
10.20

Outstanding unvested as of September 30, 2014
852,563

 
10.98

 

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


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

 
$
12.47

Granted
145,034

 
11.56

Forfeited/canceled/expired
(174,093
)
 
11.64

Exercised
(316,733
)
 
8.88

Outstanding as of September 30, 2014
1,570,926

 
13.20

(4)
Earnings per Share
The following table shows the information used in the calculation of our share counts for basic and diluted earnings per share:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
Weighted average common shares outstanding
    for basic calculation
135,134,144

 
136,374,914

 
134,948,507

 
136,006,573

Add: Effect of stock options and restricted stock
—

 
—

 
173,107

 
—

Weighted average common shares outstanding
    for diluted calculation
135,134,144

 
136,374,914

 
135,121,614

 
136,006,573

Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of stock options covering 1,529,213 and 1,541,048 shares in the three months ended September 30, 2013 and 2014, respectively, and 1,529,213 and 1,193,851 shares in the nine months ended September 30, 2013 and 2014 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

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


defense industries. Advanced materials use carbon and graphite powders as components or additives in a variety of industries, including metallurgical processing, battery and fuel cell components, and polymer additives.
We continue to evaluate the performance of our segments based on segment operating income. Intersegment sales and transfers are not material and the accounting policies of the reportable segments are the same as those for our Consolidated Financial Statements as a whole. Corporate expenses are allocated to segments based on each segment’s percentage of consolidated net sales.
The following tables summarize financial information concerning our reportable segments:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
 
 
 
Industrial Materials
$
233,277

 
$
208,573

 
$
673,394

 
$
634,004

Engineered Solutions
69,807

 
51,885

 
184,778

 
191,429

Total net sales
$
303,084

 
$
260,458

 
$
858,172

 
$
825,433

Segment operating (loss) income:
 
 
 
 
 
 
 
Industrial Materials
$
(12,945
)
 
$
(7,219
)
 
$
10,663

 
$
(28,009
)
Engineered Solutions
4,376

 
(15,832
)
 
12,485

 
(141,599
)
Total segment operating (loss) income
$
(8,569
)
 
$
(23,051
)
 
$
23,148

 
$
(169,608
)
 
 
 
 
 
 
 
 
Reconciliation of segment operating (loss) income to
    loss before provision for income taxes
 
 
 
 
 
 
 
Other expense (income), net
$
(772
)
 
$
1,149

 
$
753

 
$
1,902

Interest expense
9,098

 
9,069

 
27,053

 
27,223

Interest income
(49
)
 
(144
)
 
(162
)
 
(257
)
Loss before provision for income taxes
$
(16,846
)
 
$
(33,125
)
 
$
(4,496
)
 
$
(198,476
)
Assets are managed based on geographic location because our reportable segments share certain facilities. Assets by reportable segment are estimated based on the value of property, plant and equipment at each location and the activities performed at the location.  As a result of the rationalization initiatives and related impairments discussed in Note 2, the carrying value of our property, plant and equipment has changed significantly since December 31, 2013. The following is a summary of property, plant and equipment by reportable segment.
 
As of
December 31, 2013
 
As of
September 30,
2014
 
(Dollars in thousands)
Property, plant & equipment:
 
 
 
Industrial Materials
$
601,322

 
$
568,213

Engineered Solutions
219,663

 
97,342

Total property, plant & equipment
$
820,985

 
$
665,555


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


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

 
$
473

 
$
1,467

 
$
1,419

Interest cost
1,985

 
2,169

 
5,955

 
6,507

Expected return on plan assets
(1,706
)
 
(1,938
)
 
(5,118
)
 
(5,814
)
Amortization of prior service cost
6

 
1

 
18

 
3

Net cost
$
774

 
$
705

 
$
2,322

 
$
2,115


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

 
$
19

 
$
84

 
$
57

Interest cost
331

 
352

 
993

 
1,056

Curtailment loss
—

 
—

 
—

 
1,048

Amortization of prior service benefit
(50
)
 
(47
)
 
(150
)
 
(141
)
Net cost
$
309

 
$
324

 
$
927

 
$
2,020


(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, 2013 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 values substantially exceeded our carrying values. In addition to the quantitative analysis, we qualitatively assessed our reporting units and believe that the quantitative analysis supporting the fair values in excess of the carrying values was appropriate.
As a result of the deteriorating market conditions impacting our AGM product group, as discussed in Note 2, goodwill assigned to our AGM reporting unit of $0.4 million was written off in the second quarter of 2014.
We evaluated potential triggering events as of September 30, 2014 and noted that the aggregate carrying value of our consolidated net assets significantly exceeded our market capitalization. As a result, we determined that the recent decline in our market capitalization was a triggering event and tested our goodwill for impairment. The estimated fair values of our reporting units were based on long term discounted cash flow models derived from internal earnings forecasts and assumptions. These DCF models included twelve years of forecasted cash flows, plus an estimated terminal value. For the first several years in the models, the cash flows were based on the current operating and capital plans as prepared by management and approved by executive management. These plans were based on existing operating performance, as adjusted for current trends regarding pricing and currency rates, as well as known or expected near-term changes in product mix, operating costs, operating configuration and system-wide capacity. These plans also incorporated required or anticipated near-term capital projects and working capital changes. In a DCF model, the earlier years have a more pronounced impact on the calculated value as compared to later periods.

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


As such, if economic conditions were to deteriorate or events were to occur resulting in the ultimate operating results for these initial years being significantly lower than what is reflected in the DCF, that would have an unfavorable effect on estimated fair values.
Discount rates are based on appropriately 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. WACC has a significant impact on estimated fair values since this rate is used to discount the projected cash flows. As WACC increases, estimated fair values based on DCF decrease and vice versa.
Based on these valuations, the implied fair value of the reporting units substantially exceeded their carrying values. The results of the discounted cash flows for all reporting units, after deducting corporate debt, were compared to the market capitalization to determine an implied control premium. We evaluated the appropriateness of the implied control premium using equity valuations based on a share price average range, spot share prices as well as  third party estimates of earnings and share price.
In addition to the quantitative analysis, we qualitatively assessed our reporting units and we believe that the quantitative analysis supporting the fair values in excess of the carrying values is appropriate. However, a further deterioration in the global economic environment or in any of the input assumptions in our calculation could adversely affect the fair values of our reporting units and result in an impairment of some or all of the goodwill on the balance sheet.
The changes in the carrying value of goodwill during the nine months ended September 30, 2014 is as follows:
 
Total
 
(Dollars in
Thousands)
Balance as of December 31, 2013
$
496,810

Impairment
(413
)
Currency translation effect
(453
)
Balance as of September 30, 2014
$
495,944

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

 
$
(3,944
)
 
$
3,956

 
$
7,900

 
$
(4,495
)
 
$
3,405

Technological know-how
43,349

 
(18,582
)
 
24,767

 
43,349

 
(23,446
)
 
19,903

Customer –related
    intangible
110,798

 
(44,664
)
 
66,134

 
110,798

 
(54,209
)
 
56,589

Total finite-lived
    intangible assets
$
162,047

 
$
(67,190
)
 
$
94,857

 
$
162,047

 
$
(82,150
)
 
$
79,897

Accumulated amortization as of September 30, 2014 included impairment charges related to our rationalization initiatives discussed in Note 2. The impairments represented charges of $0.4 million to customer-related intangible assets and $0.3 million to technological know-how.
Amortization expense of acquired intangible assets was $5.0 million and $4.7 million in the three months ended September 30, 2013 and September 30, 2014, respectively. Estimated amortization expense will approximate $4.7 million in the remainder of 2014, $17.1 million in 2015, $13.1 million in 2016, $11.8 million in 2017 and $10.7 million in 2018.

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


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

 
$
53,000

Senior Notes
300,000

 
300,000

Senior Subordinated Notes
175,675

 
184,820

Other Debt
1,918

 
1,689

Total
$
541,593

 
$
539,509

 
The fair value of long-term debt, which was determined using Level 2 inputs, was $549.8 million, versus a book value of $541.6 million as of December 31, 2013. As of September 30, 2014, the fair value of our long-term debt was $527.5 million versus a book value of $539.5 million.
Revolving Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the "Revolving Facility") that provides for, among other things, a five-year tenor, reduced borrowing spreads and greater financial flexibility. The Revolving Facility has a borrowing capacity of $470 million and matures in April 2019.
The interest rate applicable to the Revolving Credit Facility is, at GrafTech’s option, either LIBOR plus a margin ranging from 1.25% to 2.00% (depending on our total net leverage ratio) or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.25% to 1.00% (depending upon such ratio). The alternate base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, N.A., (ii) the federal fund effective rate plus one-half of 1.0% and (iii) the London interbank offering rate (as adjusted) for a one-month period plus 1.0%. The borrowers pay a per annum fee ranging from 0.20% to 0.35% (depending on our total leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
The financial covenants under the Revolving Facility require us to maintain a minimum cash interest coverage ratio of 2.50 to 1.00 and a maximum senior secured leverage ratio of 3.00 to 1.00, subject to adjustment for certain events.
Senior Notes
On November 20, 2012, 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.


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


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

The 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 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 our acquisitions of Seadrift Coke L.P. and C/G Electrodes LLC, the Company issued Senior Subordinated Notes for an aggregate face amount of $200 million (the "Senior Subordinated Notes"). The Senior Subordinated Notes are non-interest bearing and mature in 2015. Because the Senior Subordinated 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 Senior Subordinated Notes and their present value is recorded as debt discount. The debt discount is amortized to income using the interest method, over the life of the notes. The loan balance, net of unamortized discount, was $175.7 million as of December 31, 2013 and $184.8 million as of September 30, 2014.
(9)
Inventories
Inventories are comprised of the following: 
 
As of December 31, 2013
 
As of September 30, 2014
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
184,420

 
$
150,340

Work in process
245,160

 
191,340

Finished goods
78,446

 
97,063

 
508,026

 
438,743

Reserves
(17,612
)
 
(20,266
)
         Total
$
490,414

 
$
418,477


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


(10) Interest Expense
The following table presents an analysis of interest expense: 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Interest incurred on debt
$
5,372

 
$
5,448

 
$
16,255

 
$
16,115

Amortization of discount on Senior Subordinated Notes
2,897

 
3,100

 
8,546

 
9,145

Amortization of debt issuance costs
729

 
521

 
1,872

 
1,916

Supply Chain Financing mark-up
100

 
—

 
380

 
47

Total interest expense
$
9,098

 
$
9,069

 
$
27,053

 
$
27,223

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

We have a supply chain financing arrangement with a financing party. Under this arrangement, we essentially assign our rights to purchase needle coke from a supplier to the financing party. The financing party purchases the product from a supplier under the supplier's standard payment terms and then immediately resells it to us under longer payment terms. The financing party pays the supplier the purchase price for the product and then we pay the financing party. Our payment to the financing party for this needle coke includes a mark-up (the “Mark-Up”). The Mark-Up is a premium expressed as a percentage of the purchase price. The Mark-Up is subject to quarterly reviews. This arrangement helps us to maintain a balanced cash conversion cycle between purchased inventory and the collection of receivables. Based on the terms of the arrangement, the total amount that we owe to the financing party cannot exceed $49.3 million at any point in time.
We record the inventory once title and risk of loss transfers from the supplier to the financing party. We record our liability to the financing party as an accrued liability. Our liability under this arrangement was $9.5 million as of December 31, 2013 and nil as of September 30, 2014. We recognized Mark-Up of $0.4 million as interest expense in the nine months ended September 30, 2013 and nil through September 30, 2014.
(12)
Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
GrafTech and Brazil Legacy Antitrust Investigation - On October 8, 2014, the General Superintendent of the Administrative Council of Economic Defense ("CADE") in Brazil announced that the agency would be continuing an investigation of anticompetitive activity allegedly affecting the Brazilian market from 1992 to 1998. The investigation was originally commenced in 2002 and has essentially been dormant for many years. There have been no penalties assessed or asserted against GrafTech.
The investigation purportedly relates to violations of antitrust laws that were previously investigated in 1997 - 2002 by the U.S. Department of Justice, the European Commission, and other countries in connection with the sale of graphite electrodes. Those antitrust investigations and related lawsuits and claims have long been resolved. Several

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


of the investigations and related lawsuits and claims resulted in fines and settlements, all of which were timely paid many years ago.
GrafTech has cooperated in all of these legacy investigations, including having timely responded to requests for information from the Brazilian agency several years ago. GrafTech plans to respond as appropriate to the resurrection of the Brazilian matter. GrafTech believes that it has procedural and substantive defenses to the allegations in the Brazilian matter and that no further investigatory activities are warranted.
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, 2014, are presented below: 
 
(Dollars in thousands)
Balance as of December 31, 2013
$
1,050

Product warranty adjustments
(117
)
Payments and settlements
(202
)
Balance as of September 30, 2014
$
731

(13)
Income Taxes
We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.
The following table summarizes the provision for income taxes for the three and nine months ended September 30, 2013 and September 30, 2014:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2014
 
2013
 
2014
 
(Dollars in thousands)
 
(Dollars in thousands)
Tax (benefit) expense
$
(9,216
)
 
$
1,818

 
$
(5,458
)
 
$
3,417

Pretax income (loss)
$
(16,846
)
 
$
(33,125
)
 
$
(4,496
)
 
$
(198,476
)
Effective tax rates
54.7
%
 
(5.5
)%
 
121.4
%
 
(1.7
)%
During the second quarter of 2014, we impaired certain long-lived assets and announced the exit of certain product lines within our Advanced Graphite Material ("AGM") product group, which is described in more detail in Note 2. The impairment charges and other impairment related charges were incurred primarily in the U.S. jurisdiction. As a result, we determined that it is no longer “more likely than not” that we will generate sufficient future U.S. taxable income to realize our deferred tax assets related to U.S. foreign tax credits and state net operating loss carryforwards, as well as our net U.S. deferred tax assets.
For the three and nine months ended September 30, 2014, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to the recording of a valuation allowance against U.S. net deferred tax assets. As a result of the significant negative evidence of recent losses, the Company recognized a $57.0 million non-cash charge in the second quarter of 2014 to increase the valuation allowance against these deferred income tax assets. During the third quarter of 2014, the Company again incurred a loss in the U.S. jurisdiction. As a result, a valuation allowance against the related deferred tax asset has been reflected in the quarterly effective tax rate. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.

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


We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have maintained valuation allowances on those net deferred tax assets. We established a valuation allowance against our U.S. net deferred tax assets in the second quarter of 2014, as described in more detail above.

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

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

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. 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.
(14)
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the 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 nine months ended September 30, 2013 and 2014, respectively.
In 2013 and 2014, we entered into foreign forward currency derivatives denominated in the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from commercial and business transactions may be adversely affected by changes in exchange rates between the U.S. dollar and the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. As of September 30, 2014, we had outstanding Mexican peso, South Afican rand, euro, and Japanese yen currency contracts with an aggregate notional amount of $124.2 million. The foreign currency derivatives outstanding as of September 30, 2014 have several maturity dates ranging from October 2014 to September 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 nine months ended

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


September 30, 2014. As of September 30, 2014, we had outstanding derivative swap contracts for refined oil products with an aggregate notional amount of $11.6 million. These contracts have maturity dates ranging from October 2014 to December 2014.
Net Investment Hedges
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was $25.2 million and $11.5 million as of December 31, 2013 and September 30, 2014, respectively. Within our currency translation adjustment portion of other comprehensive income, we recorded gains of $0.2 million and $0.7 million in three months ended September 30, 2013 and September 30, 2014, respectively, resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. The following tables present the fair values of our derivatives and their respective balance sheet locations as of December 31, 2013 and September 30, 2014:
 
 
Asset Derivatives
 
Liability Derivatives
 
Location
 
Fair  Value
 
Location
 
Fair  Value
As of December 31, 2013
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
772

 
Other payables
 
$
1,185

Commodity derivative contracts
Other current assets
 
834

 
Other current liabilities
 
—

Total fair value
 
 
$
1,606

 
 
 
$
1,185

 
 
 
 
 
 
 
 
As of September 30, 2014
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
1,130

 
Other payables
 
$
274

Commodity derivative contracts
Other current assets
 
—

 
Other current liabilities
 
532

Total fair value
 
 
$
1,130

 
 
 
$
806

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

 
Other payables
 
$
24

Total fair value
 
 
$
328

 
 
 
$
24

 
 
 
 
 
 
 
 
As of September 30, 2014
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency derivatives
Other receivables
 
$
240

 
Other payables
 
$
336

Total fair value
 
 
$
240

 
 
 
$
336


20
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 nine months ended September 30, 2013 and 2014:
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Three Months Ended September 30,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2013
 
2014
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of ($23) and $19, respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
228

 
$
(191
)
Commodity forward derivatives, excluding
  tax of ($164) and ($35), respectively
 
Cost of goods sold / Revenue
 
$
454

 
$
98

 
 
 
 
 
 
 

 
 
 
 
Amount of (Gain)/Loss
Recognized
Three Months Ended September 30,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
 
2013
 
2014
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
509

 
$
444

 
 
 
 
 
Amount of (Gain)/Loss
Recognized (Effective
Portion)
Nine Months Ended September 30,
 
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
 
2013
 
2014
(Dollars in Thousands)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
Foreign currency derivatives, excluding tax
  of ($4) and ($14), respectively
 
Cost of goods sold/Other expense / (income) / Revenue
 
$
38

 
$
137

Commodity forward derivatives, excluding
  tax of ($214) and ($45), respectively
 
Cost of goods sold / Revenue
 
$
591

 
$
124

 
 
 
 
Amount of (Gain)/Loss
Recognized
Nine Months Ended September 30,
 
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
 
2013
 
2014
(Dollars in thousands)
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency derivatives
 
Cost of goods sold/Other expense (income)
 
$
(912
)
 
$
383

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”. 

21
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(15)
Guarantor Information

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

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

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

Investments in subsidiaries are recorded on the equity basis.

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

Amounts presented in comprehensive income for the three and nine months ended September 30, 2013 have been revised.  Previously, the Company did not present comprehensive income of subsidiaries in the guarantor column. This amount has been revised to present $2.9 million in comprehensive loss for the guarantors during the three months ended September 30, 2013 and $4.0 million in comprehensive income during the nine months ended September 30, 2013.  


22
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

 
$
4,752

 
$
7,136

 
$
—

 
$
11,888

    Accounts receivable - affiliates
 
42,410

 
28,551

 
15,824

 
(86,785
)
 
—

    Accounts receivable - trade
 
—

 
48,998

 
150,568

 
—

 
199,566

    Inventories
 
—

 
174,935

 
315,479

 
—

 
490,414

    Prepaid and other current assets
 
—

 
22,555

 
51,235

 
—

 
73,790

      Total current assets
 
42,410

 
279,791

 
540,242

 
(86,785
)
 
775,658

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,709,914

 
828,012

 
—

 
(2,537,926
)
 
—

 Property, plant and equipment
 
—

 
540,273

 
280,712

 
—

 
820,985

 Deferred income taxes
 
—

 
—

 
10,334

 
—

 
10,334

 Goodwill
 
—

 
293,162

 
203,648

 
—

 
496,810

 Notes receivable - affiliate
 
51,090

 
7,413

 
—

 
(58,503
)
 
—

 Other assets
 
4,752

 
53,447

 
55,862

 
—

 
114,061

      Total assets
 
$
1,808,166

 
$
2,002,098

 
$
1,090,798

 
$
(2,683,214
)
 
$
2,217,848

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

 
$
58,206

 
$
28,579

 
$
(86,785
)
 
$
—

    Accounts payable - trade
 
—

 
41,971

 
73,241

 
—

 
115,212

    Short-term debt
 
—

 
165

 
996

 
—

 
1,161

    Accrued income and other taxes
 
2,678

 
4,736

 
23,273

 
—

 
30,687

    Rationalizations
 
—

 
1,890

 
16,531

 
—

 
18,421

    Supply chain financing liability
 
—

 
—

 
9,455

 
—

 
9,455

    Other accrued liabilities
 
2,444

 
12,404

 
26,091

 
—

 
40,939

         Total current liabilities
 
5,122

 
119,372

 
178,166

 
(86,785
)
 
215,875

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 
—

 
51,090

 
7,413

 
(58,503
)
 
—

 Long-term debt - third party
 
475,675

 
50,525

 
15,393

 
—

 
541,593

 Other long-term obligations
 
—

 
66,590

 
31,357

 
—

 
97,947

 Deferred income taxes
 
6,620

 
4,607

 
30,457

 
—

 
41,684

 Stockholders' equity
 
1,320,749

 
1,709,914

 
828,012

 
(2,537,926
)
 
1,320,749

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

 
$
2,002,098

 
$
1,090,798

 
$
(2,683,214
)
 
$
2,217,848

 
 
 
 
 
 
 
 
 
 
 


23
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

 
$
1,362

 
$
9,516

 
$
—

 
$
10,878

    Accounts receivable - affiliates
 
39,243

 
41,619

 
35,617

 
(116,479
)
 
—

    Accounts receivable - trade
 
—

 
39,252

 
124,719

 
—

 
163,971

    Inventories
 
—

 
161,791

 
256,686

 
—

 
418,477

    Prepaid and other current assets
 
—

 
18,156

 
69,832

 
—

 
87,988

      Total current assets
 
39,243

 
262,180

 
496,370

 
(116,479
)
 
681,314

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,513,267

 
772,957

 
—

 
(2,286,224
)
 
—

 Property, plant and equipment
 
—

 
433,350

 
232,205

 
—

 
665,555

 Deferred income taxes
 
—

 
—

 
13,614

 
—

 
13,614

 Goodwill
 
—

 
292,749

 
203,195

 
—

 
495,944

 Notes receivable - affiliate
 
44,020

 
7,413

 
—

 
(51,433
)
 
—

 Other assets
 
4,237

 
51,473

 
49,308

 
—

 
105,018

      Total assets
 
$
1,600,767

 
$
1,820,122

 
$
994,692

 
$
(2,454,136
)
 
$
1,961,445

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

 
$
74,859

 
$
41,620

 
$
(116,479
)
 
$
—

    Accounts payable - trade
 
—

 
36,316

 
62,406

 
—

 
98,722

    Short-term debt
 
—

 
1,130

 
14

 
—

 
1,144

    Accrued income and other taxes
 
343

 
3,659

 
22,071

 
—

 
26,073

    Rationalizations
 
—

 
9,239

 
3,508

 
—

 
12,747

    Other accrued liabilities
 
7,225

 
11,360

 
25,626

 
—

 
44,211

         Total current liabilities
 
7,568

 
136,563

 
155,245

 
(116,479
)
 
182,897

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 
—

 
44,020

 
7,413

 
(51,433
)
 
—

 Long-term debt - third party
 
484,820

 
53,427

 
1,262

 
—

 
539,509

 Other long-term obligations
 
—

 
59,604

 
30,380

 
—

 
89,984

 Deferred income taxes
 
—

 
13,241

 
27,435

 
—

 
40,676

 Stockholders' equity
 
1,108,379

 
1,513,267

 
772,957

 
(2,286,224
)
 
1,108,379

    Total liabilities and stockholders' equity
 
$
1,600,767

 
$
1,820,122

 
$
994,692

 
$
(2,454,136
)
 
$
1,961,445

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


24
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

 
$
57,727

 
$
39,196

 
$
(96,923
)
 
$
—

 Sales - third party
 
—

 
122,360

 
180,724

 
—

 
303,084

    Net sales
 
—

 
180,087

 
219,920

 
(96,923
)
 
303,084

 Cost of sales
 
—

 
155,803

 
207,560

 
(96,923
)
 
266,440

      Gross profit
 
—

 
24,284

 
12,360

 
—

 
36,644

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 
—

 
2,994

 
—

 
—

 
2,994

 Selling and administrative expenses
 
—

 
9,751

 
17,875

 
—

 
27,626

 Rationalizations
 
—

 
2,424

 
12,169

 
—

 
14,593

      Operating income
 
—

 
9,115

 
(17,684
)
 
—

 
(8,569
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense, net
 
—

 
(1,476
)
 
704

 
—

 
(772
)
 Interest expense - affiliate
 
—

 
279

 
190

 
(469
)
 
—

 Interest expense - third party
 
7,849

 
779

 
470

 
—

 
9,098

 Interest income - affiliate
 
(272
)
 
(189
)
 
(8
)
 
469

 
—

 Interest income - third party
 
—

 
—

 
(49
)
 
—

 
(49
)
 (Loss) income before income taxes
 
(7,577
)
 
9,722

 
(18,991
)
 
—

 `
(16,846
)
 
 
 
 
 
 
 
 
 
 
 
 (Benefit) provision for income taxes
 
(2,743
)
 
1,904

 
(8,377
)
 
—

 
(9,216
)
 Equity in earnings of subsidiary
 
(2,796
)
 
(10,614
)
 
—

 
13,410

 
—

      Net income (loss)
 
$
(7,630
)
 
$
(2,796
)
 
$
(10,614
)
 
$
13,410

 
$
(7,630
)
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(7,630
)
 
$
(2,796
)
 
$
(10,614
)
 
$
13,410

 
$
(7,630
)
Other comprehensive (loss) income
 
5,706

 
5,706

 
3,892

 
(9,598
)
 
5,706

Comprehensive (loss) income
 
$
(1,924
)
 
$
2,910

 
$
(6,722
)
 
$
3,812

 
$
(1,924
)
 
 
 
 
 
 
 
 
 
 
 


25
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended September 30, 2014
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$
—

 
$
68,424

 
$
38,171

 
$
(106,595
)
 
$
—

 Sales - third party
 
—

 
93,457

 
167,001

 
—

 
260,458

    Net sales
 
—

 
161,881

 
205,172

 
(106,595
)
 
260,458

 Cost of sales
 
—

 
157,726

 
191,683

 
(106,595
)
 
242,814

      Gross profit
 
—

 
4,155

 
13,489

 
—

 
17,644

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 
—

 
2,871

 
—

 
—

 
2,871

 Selling and administrative expenses
 
—

 
11,347

 
15,633

 
—

 
26,980

 Impairments
 
—

 
—

 
—

 
—

 
—

 Rationalizations
 
—

 
(1,592
)
 
12,436

 
—

 
10,844

      Operating loss
 
—

 
(8,471
)
 
(14,580
)
 
—

 
(23,051
)
 
 
 
 
 
 
 
 
 
 
 
 Other (income) expense, net
 
—

 
461

 
688

 
—

 
1,149

 Interest expense - affiliate
 
—

 
193

 
—

 
(193
)
 
—

 Interest expense - third party
 
8,055

 
883

 
131

 
—

 
9,069

 Interest income - affiliate
 
(193
)
 
—

 
—

 
193

 
—

 Interest income - third party
 
—

 
—

 
(144
)
 
—

 
(144
)
   Loss before income taxes
 
(7,862
)
 
(10,008
)
 
(15,255
)
 
—

 `
(33,125
)
 
 
 
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
 
(2,830
)
 
3,313

 
1,335

 
—

 
1,818

Equity in losses of subsidiary
 
(29,911
)
 
(16,590
)
 
—

 
46,501

 
—

      Net (loss) income
 
$
(34,943
)
 
$
(29,911
)
 
$
(16,590
)
 
$
46,501

 
$
(34,943
)
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(34,943
)
 
$
(29,911
)
 
$
(16,590
)
 
$
46,501

 
$
(34,943
)
Other comprehensive income (loss)
 
(23,247
)
 
(23,247
)
 
(21,996
)
 
45,243

 
(23,247
)
Comprehensive (loss) income
 
$
(58,190
)
 
$
(53,158
)
 
$
(38,586
)
 
$
91,744

 
$
(58,190
)
 
 
 
 
 
 
 
 
 
 
 


26
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 nine months ended September 30, 2013
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$
—

 
$
155,673

 
$
111,835

 
$
(267,508
)
 
$
—

 Sales - third party
 
—

 
348,148

 
510,024

 
—

 
858,172

    Net sales
 
—

 
503,821

 
621,859

 
(267,508
)
 
858,172

 Cost of sales
 
—

 
431,146

 
560,419

 
(267,508
)
 
724,057

      Gross profit
 
—

 
72,675

 
61,440

 
—

 
134,115

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 
—

 
8,874

 
—

 
—

 
8,874

 Selling and administrative expenses
 
—

 
32,833

 
54,667

 
—

 
87,500

 Rationalizations
 
—

 
2,424

 
12,169

 
—

 
14,593

      Operating income
 
—

 
28,544

 
(5,396
)
 
—

 
23,148

 
 
 
 
 
 
 
 
 
 
 
 Other (income) expense, net
 
—

 
(762
)
 
1,515

 
—

 
753

 Interest expense - affiliate
 
—

 
1,112

 
566

 
(1,678
)
 
—

 Interest expense - third party
 
23,393

 
2,374

 
1,286

 
—

 
27,053

 Interest income - affiliate
 
(982
)
 
(565
)
 
(131
)
 
1,678

 
—

 Interest income - third party
 
—

 
—

 
(162
)
 
—

 
(162
)
 Income before income taxes
 
(22,411
)
 
26,385

 
(8,470
)
 
—

 `
(4,496
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for income taxes
 
(8,113
)
 
6,922

 
(4,267
)
 
—

 
(5,458
)
 Equity in earnings of subsidiary
 
15,260

 
(4,203
)
 
—

 
(11,057
)
 
—

      Net income
 
$
962

 
$
15,260

 
$
(4,203
)
 
$
(11,057
)
 
$
962

 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
962

 
$
15,260

 
$
(4,203
)
 
$
(11,057
)
 
$
962

Other comprehensive (loss) income
 
(11,219
)
 
(11,219
)
 
(12,216
)
 
23,435

 
(11,219
)
Comprehensive (loss) income
 
$
(10,257
)
 
$
4,041

 
$
(16,419
)
 
$
12,378

 
$
(10,257
)
 
 
 
 
 
 
 
 
 
 
 


27
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the nine months ended September 30, 2014
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$
—

 
$
192,740

 
$
106,742

 
$
(299,482
)
 
$
—

 Sales - third party
 
—

 
315,387

 
510,046

 
—

 
825,433

    Net sales
 
—

 
508,127

 
616,788

 
(299,482
)
 
825,433

 Cost of sales
 
—

 
472,202

 
591,422

 
(299,482
)
 
764,142

      Gross profit
 
—

 
35,925

 
25,366

 
—

 
61,291

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 
—

 
8,544

 
—

 
—

 
8,544

 Selling and administrative expenses
 
—

 
35,479

 
53,545

 
—

 
89,024

 Impairments
 
—

 
121,570

 
—

 
—

 
121,570

 Rationalizations
 
—

 
(1,540
)
 
13,301

 
—

 
11,761

      Operating loss
 
—

 
(128,128
)
 
(41,480
)
 
—

 
(169,608
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 
—

 
1,281

 
621

 
—

 
1,902

 Interest expense - affiliate
 
—

 
629

 
—

 
(629
)
 
—

 Interest expense - third party
 
24,010

 
2,529

 
684

 
—

 
27,223

 Interest income - affiliate
 
(629
)
 
—

 
—

 
629

 
—

 Interest income - third party
 
—

 
—

 
(257
)
 
—

 
(257
)
   Loss before income taxes
 
(23,381
)
 
(132,567
)
 
(42,528
)
 
—

 `
(198,476
)
 
 
 
 
 
 
 
 
 
 
 
(Benefit from) provision for income taxes
 
(8,417
)
 
17,712

 
(5,878
)
 
—

 
3,417

Equity in losses of subsidiary
 
(186,929
)
 
(36,650
)
 
—

 
223,579

 
—

      Net (loss) income
 
$
(201,893
)
 
$
(186,929
)
 
$
(36,650
)
 
$
223,579

 
$
(201,893
)
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(201,893
)
 
$
(186,929
)
 
$
(36,650
)
 
$
223,579

 
$
(201,893
)
Other comprehensive income (loss)
 
(20,936
)
 
(20,936
)
 
(19,474
)
 
40,410

 
(20,936
)
Comprehensive (loss) income
 
$
(222,829
)
 
$
(207,865
)
 
$
(56,124
)
 
$
263,989

 
$
(222,829
)
 
 
 
 
 
 
 
 
 
 
 


28
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2013
(in thousands)
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by
 operating activities:
$
(5,857
)
 
$
50,244

 
$
20,791

 
$
—

 
$
65,178

 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
   (Loans to) repayments from affiliates
7,015

 
—

 
—

 
(7,015
)
 
—

  Capital expenditures
—

 
(37,081
)
 
(25,617
)
 
—

 
(62,698
)
  Proceeds from derivative instruments
—

 
(22
)
 
874

 
—

 
852

  Insurance recoveries
—

 
280

 
2,053

 
—

 
2,333

    Net cash (used in) provided by
         investing activities
7,015

 
(36,823
)
 
(22,690
)
 
(7,015
)
 
(59,513
)
 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
  Loans from (repayments to) affiliates
—

 
(7,015
)
 
—

 
7,015

 
—

  Short-term debt borrowings
—

 
—

 
(4,082
)
 
—

 
(4,082
)
  Revolving Facility borrowings
—

 
67,000

 
67,000

 
—

 
134,000

  Revolving Facility reductions
—

 
(73,500
)
 
(45,000
)
 
—

 
(118,500
)
  Principal payments on long term debt
—

 
(131
)
 
(58
)
 
—

 
(189
)
  Supply chain financing
—

 
—

 
(14,422
)
 
—

 
(14,422
)
  Proceeds from exercise of stock options
175

 
—

 
—

 
—

 
175

  Purchase of treasury shares
(844
)
 
—

 
—

 
—

 
(844
)
  Other
(489
)
 
(16
)
 
(6,701
)
 
—

 
(7,206
)
    Net cash used in
         financing activities
(1,158
)
 
(13,662
)
 
(3,263
)
 
7,015

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

 
(241
)
 
(5,162
)
 
—

 
(5,403
)
Effect of exchange rate changes
   on cash and cash equivalents
—

 
—

 
(444
)
 
—

 
(444
)
Cash and cash equivalents at
   beginning of period
—

 
4,425

 
12,892

 
—

 
17,317

Cash and cash equivalents
   at end of period
$
—

 
$
4,184

 
$
7,286

 
$
—

 
$
11,470



29
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2014
(in thousands)
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
Net cash (used in) provided by operating activities:
$
(10,274
)
 
$
50,298

 
$
42,865

 
$
—

 
$
82,889

 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
  Repayments from affiliates
7,070

 
—

 
—

 
(7,070
)
 
—

  Capital expenditures
—

 
(49,756
)
 
(19,558
)
 
—

 
(69,314
)
  Payments for (proceeds from) derivatives
—

 
(51
)
 
(522
)
 
—

 
(573
)
  Proceeds from sale of assets
—

 
1,706

 
2,373

 
—

 
4,079

  Insurance recoveries
—

 
—

 
2,834

 
—

 
2,834

    Net cash provided by (used in)
         investing activities
7,070

 
(48,101
)
 
(14,873
)
 
(7,070
)
 
(62,974
)
 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
  Repayments to affiliates
—

 
(7,070
)
 
—

 
7,070

 
—

  Short-term debt borrowings
—

 
965

 
(982
)
 
—

 
(17
)
  Revolving Facility borrowings
—

 
151,000

 
78,000

 
—

 
229,000

  Revolving Facility reductions
—

 
(148,000
)
 
(92,000
)
 
—

 
(240,000
)
  Principal payments on long term debt
—

 
(98
)
 
(60
)
 
—

 
(158
)
  Supply chain financing
—

 
—

 
(9,455
)
 
—

 
(9,455
)
  Proceeds from exercise of stock options
2,813

 
—

 
—

 
—

 
2,813

  Purchase of treasury shares
(620
)
 
—

 
—

 
—

 
(620
)
  Revolver facility refinancing
—

 
(2,384
)
 
(357
)
 
—

 
(2,741
)
  Other
1,011

 
—

 
—

 
—

 
1,011

    Net cash provided by (used in)
         financing activities
3,204

 
(5,587
)
 
(24,854
)
 
7,070

 
(20,167
)
 
 
 
 
 
 
 
 
 
 
Net increase in cash
   and cash equivalents
—

 
(3,390
)
 
3,138

 
—

 
(252
)
Effect of exchange rate changes
   on cash and cash equivalents
—

 
—

 
(758
)
 
—

 
(758
)
Cash and cash equivalents at
   beginning of period
—

 
4,752

 
7,136

 
—

 
11,888

Cash and cash equivalents
   at end of period
$
—

 
$
1,362

 
$
9,516

 
$
—

 
$
10,878


Introduction to Part I, Item 2, and Part II, Item 1 and Item 1A
Important Terms. We define various terms to simplify the presentation of information in this Report. These terms, which definitions are incorporated herein by reference, are defined in “Part I – Preliminary Notes – Important Terms” of the Annual Report.
Presentation of Financial, Market and Legal Data. We present our financial information on a consolidated basis.
Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Unless otherwise specifically noted, market and market share data in this Report are our own estimates or derived from sources described in “Part I – Preliminary Notes – Presentation of Financial, Market and Legal Data” in the Annual Report, which description is incorporated herein by reference. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Forward Looking Statements and Risks” in this Report and “Forward Looking Statements” and “Risk Factors” in the Annual Report. We cannot guarantee the accuracy or completeness of this market and market share data and have not independently verified it. None of the sources has consented to the disclosure or use of data in this Report.
Reference is made to the Annual Report for background information on various risks and contingencies and other matters related to circumstances affecting us and our industry.
Neither any statement made in this Report nor any charge taken by us relating to any legal proceedings constitutes an admission as to any wrongdoing.
Forward Looking Statements and Risks. This Report contains forward looking statements. In addition, we or our representatives have made or may make forward looking statements on telephone or conference calls, by webcasts or emails, in person, in presentations or written materials, or otherwise. These include statements about such matters as future, targeted or expected (or the impact of current, future, expected or targeted): operational and financial performance; changes in production capacity in our operations and our competitors' or customers' operations and the utilization rates of that capacity; growth rates for, prices and sales of, and demand for, our products and our customers' products; costs of materials and production, including increases or decreases therein, our ability to pass on any such increases in our product prices or impose surcharges thereon, or customer or market demand to reduce our prices due to such decreases; changes in customer order patterns due to changes in economic conditions; productivity, business process and operational initiatives; our position in markets we serve; financing and refinancing activities; investments and acquisitions and the performance of the businesses underlying such acquisitions and investments; employment and contributions of key personnel; employee relations and collective bargaining agreements covering many of our operations; tax rates; capital expenditures and changes therein; nature and timing of restructuring and rationalization charges and payments; stock repurchase activities; supply chain management; customer and supplier contractual provisions and related opportunities and issues; competitive activities; strategic plans, initiatives and business projects; regional and global economic and industry market conditions, the timing and magnitude of changes in such conditions; interest rate management activities; currency rate management activities; deleveraging activities; rationalization, restructuring, realignment, strategic alliance, raw material and supply chain, technology development and collaboration, investment, acquisition, venture, operational, tax, financial and capital projects; legal proceedings, investigations, contingencies, and environmental compliance including any regulatory initiatives with respect to greenhouse gas emissions; consulting projects; potential offerings, sales and other actions regarding debt or equity securities of us or our subsidiaries; and costs, working capital, revenues, business opportunities, debt levels, cash flows, cost savings and reductions, margins, earnings and growth. The words “will,” “may,” “plan,” “estimate,” “project,” “believe,” “anticipate,” “expect,” “intend,” “should,” “would,” “could,” “target,” “goal,” “continue to,” “positioned to” and similar expressions, or the negatives thereof, identify some of these statements.
Our expectations and targets are not predictors of actual performance and historically our performance has deviated, often significantly, from our expectations and targets. Actual future events and circumstances (including future results and trends) could differ materially, positively or negatively, from those set forth in these statements due to various factors. These factors include:
•
the possibility that additions to capacity for producing EAF steel, increases in overall EAF steel production capacity, and increases or other changes in steel production may not occur or may not occur at the rates that we anticipate or may not be as geographically disbursed as we anticipate;

30
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

•
the possibility that increases or decreases in graphite electrode manufacturing capacity (including growth by producers in developing countries), competitive pressures (including changes in, and the mix, distribution, and pricing of, competitive products), reduction in specific consumption rates, increases or decreases in customer inventory levels, or other changes in the graphite electrode markets may occur, which may impact demand for, prices or unit and dollar volume sales of graphite electrodes and growth or profitability of our graphite electrodes business;
•
the possible failure of changes in EAF steel production or graphite electrode production to result in stable or increased, or offset decreases in, graphite electrode demand, prices, or sales volume;
•
the possibility that a determination that we have failed to comply with one or more export controls or trade sanctions to which we are subject with respect to products or technology exported from the United States or other jurisdictions could result in civil or criminal penalties, denial of export privileges and loss of revenues from certain customers;
•
the possibility that, for all of our product lines, capital improvement and expansion in our customers' operations or increases in demand for their products may not occur or may not occur at the rates that we anticipate or the demand for their products may decline, which may affect their demand for the products we sell to them, which could affect our profitability and cash flows as well as the recoverability of our assets;
•
the possibility that assumptions related to future expectations of financial performance materially change and impact our goodwill and long-lived asset carrying values;
•
the possibility that our financial assumptions and expectations materially change as a result of government or state-owned government subsidies, incentives and trade barriers;
•
the possibility that current economic disruptions or other conditions may result in idling or permanent closing of blast furnace capacity or delay of blast furnace capacity additions or replacements which may affect demand and prices for our refractory products;
•
the possibility that continued global consolidation of the world's largest steel producers could impact our business or industry;
•
the possibility that average graphite electrode revenue per metric ton in the future may be different than current spot or market prices due to changes in product mix, changes in currency exchange rates, changes in competitive market conditions or other factors; 
•
the possibility that price increases, adjustments or surcharges may not be realized or that price decreases may occur;
•
the possibility that current challenging economic conditions and economic demand reduction may continue to impact our revenues and costs;
•
the possibility that U.S., European, Chinese, or other governmental monetary or fiscal policy may adversely affect global economic activity and demand for our products;
•
the possibility that potential future cuts in defense spending by the United States government as a part of efforts to reduce federal budget deficits could reduce demand for certain of our products and associated revenue;
•
the possibility that decreases in prices for energy and raw materials may lead to downward pressure on prices for our products and delays in customer orders for our products as customers anticipate possible future lower prices;
•
the possibility that customers may delay or cancel orders;
•
the possibility that we may not be able to reduce production costs or delay or cancel raw material purchase commitments;

31
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

•
the possibility that economic, political and other risks associated with operating globally, including national and international conflicts, terrorist acts, political and economic instability, civil unrest, community activism and natural or nuclear calamities might interfere with our supply chains, customers or activities in a particular location;
•
the possibility that reductions in customers' production, increases in competitors' capacity, competitive pressures, or other changes in other markets we serve may occur, which may impact demand for, prices of or unit and dollar volume sales of, our other products, or growth or profitability of our other product lines, or change our position in such markets;
•
the possibility that we will not be able to hire and retain key personnel, maintain appropriate relations with unions, associations and employees or to renew or extend our collective bargaining or similar agreements on reasonable terms as they expire or do so without a work stoppage or strike;
•
the possibility that an adverse determination in litigation pending in Brazil involving disputes related to the proper interpretation of certain collectively bargained wage increase provisions applicable to both us and other employers in the Bahia region might result in the filing of claims against our Brazilian subsidiary;
•
the possibility that a Brazilian graphite electrode antitrust investigation could result in material fines or penalties;
•
the possibility of delays in or failure to achieve successful development and commercialization of new or improved Engineered Solutions products or that such products or solutions could be subsequently displaced by other products or technologies;
•
the possibility that we will fail to develop new customers or applications for our Engineered Solutions products or such new product applications will not be adopted by the market place;
•
the possibility that our manufacturing capabilities may not be sufficient or that we may experience delays in expanding or fail to expand our manufacturing capacity to meet demand for existing, new or improved products;
•
the possibility that we may propose acquisitions or divestitures in the future, that we may not complete the acquisitions or divestitures, and that investments and acquisitions that we may make in the future may not be successfully integrated into our business or provide the performance or returns expected or that divestitures may not generate the proceeds anticipated;
•
the possibility that challenging conditions or changes in the capital markets will limit our ability to undertake refinancing activities or obtain financing for growth and other initiatives, on acceptable terms or at all;
•
the possibility that conditions or changes in the global equity markets may have a material impact on our future pension funding obligations and liabilities on our balance sheet;
•
the possibility that the amount or timing of our anticipated capital expenditures may be limited by our financial resources or financing arrangements or that our ability to complete capital projects may not occur timely enough to adapt to changes in market conditions or changes in regulatory requirements;
•
the possibility that the actual outcome of uncertainties associated with assumptions and estimates using judgment when applying critical accounting policies and preparing financial statements may have a material impact on our results of operations or financial position;
•
the possibility that we may be unable to protect our intellectual property or may infringe the intellectual property rights of others, resulting in damages, limitations on our ability to produce or sell products or limitations on our ability to prevent others from using that intellectual property to produce or sell products;
•
the occurrence of unanticipated events or circumstances or changing interpretations and enforcement agendas relating to legal proceedings or compliance programs;
•
the occurrence of unanticipated events or circumstances or changing interpretations and enforcement agendas relating to health, safety or environmental compliance or remediation obligations or liabilities to third parties or relating to labor relations;

32
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

•
the possibility that new or expanded regulatory initiatives with respect to greenhouse gas emissions could increase the capital intensive nature of our business and add to our costs of production;
•
the possibility that our provision for income taxes and effective income tax rate or cash tax rate may fluctuate significantly due to (i) changes in applicable tax rates or laws, (ii) changes in the sources of our income, (iii) changes in tax planning, (iv) new or changing interpretations of applicable regulations, (v) changes in profitability, (vi) changes in our estimate of our future ability to use foreign tax credits or other tax attributes, and (vii) other factors;
•
the possibility of changes in interest or currency exchange rates or in inflation or deflation;
•
the possibility that our outlook could be significantly impacted by, among other things, developments in North Africa, the Middle East, North Korea, and other areas of concern, the occurrence of further terrorist acts and developments resulting from the war on terrorism;
•
the possibility that interruption in our major raw material, energy or utility supplies due to, among other things, natural or nuclear disasters, process interruptions, actions by producers and capacity limitations, may adversely affect our ability to manufacture and supply our products or result in higher costs;
•
the possibility that the magnitude of changes in the cost of major raw materials, energy or utility suppliers by reason of shortages, changes in market pricing, pricing terms in applicable supply contracts, or other events may adversely affect our ability to manufacture and supply our products or result in higher costs;
•
the possibility of interruptions in production at our facilities due to, among other things, critical equipment failure, which may adversely affect our ability to manufacture and supply our products or result in higher costs;
•
the possibility that we may not achieve the earnings or other financial or operational metrics that we provide as guidance from time to time;
•
the possibility that the anticipated benefits from rationalizations and other cost savings initiatives may be delayed or may not occur, may vary in cost or may result in unanticipated disruptions;
•
the possibility of security breaches affecting our information technology systems;
•
the possibility that our disclosure or internal controls may become inadequate because of changes in conditions or personnel or that those controls may not operate effectively and may not prevent or detect misstatements or errors;
•
the amount, prices and timing of purchases, if any, of shares purchased pursuant to our share repurchase program;
•
the possibility that severe economic conditions may adversely affect our business, liquidity or capital resources;
•
the possibility that delays may occur in the financial statement closing process;
•
the possibility of changes in performance that may affect financial covenant compliance or funds available for borrowing; and
•
other risks and uncertainties, including those described elsewhere in this Report or our other SEC filings, as well as future decisions by us.
Occurrence of any of the events or circumstance described above could also have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our common stock.
No assurance can be given that any future transaction about which forward looking statements may be made will be completed or as to the timing or terms of any such transaction.
All subsequent written and oral forward looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Except as otherwise required to be disclosed in periodic

33
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

reports required to be filed by public companies with the SEC pursuant to the SEC's rules, we have no duty to update these statements.
For a more complete discussion of these and other factors, see “Risk Factors,” in Part I, Item 1A of our 2013 Annual Report on Form 10-K.
 

34
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Global Economic Conditions and Outlook

Outlook. We are impacted in varying degrees, both positively and negatively, as global, regional or country conditions fluctuate.
In its October 7, 2014 report, the International Monetary Fund (IMF), reduced its estimate for 2014 global GDP growth to 3.3 percent, which is 0.4 percent lower than its April forecast. The report states that downside risks to the global economic recovery have increased due to geopolitical uncertainty and volatility in financial markets. Although recoveries in certain developed economies including the United States have been stronger than previously expected, the slowdown in emerging economies has contributed to the lower global growth projection.
The IMF stated that with a worsening of geopolitical tensions and a reversal of recent risk spread and volatility compression in financial markets, the downside risks have increased since the spring. The global economy would face medium-term risks of a stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets.
According to the World Steel Association, 2014 global steel production increased two percent, excluding China, through the end of September 2014.  While North American operating rates continued to show improvement in the third quarter of 2014, the European Union reported lower steel production year-over-year in the month of September, reversing prior growth trends. GrafTech continues to face a challenging operating environment and we have seen five to ten percent of graphite electrode shipments for the second half of 2014 being delayed into 2015, resulting in reduced graphite electrode production rates. We remain focused on execution of our cost savings initiatives and providing our customers with superior service and quality.
See below for a reconciliation of 2014 targeted EBITDA to targeted net income attributable to GrafTech International Ltd., the most directly comparable financial measure calculated and reported in accordance with GAAP:
 
Full Year Target
 
2014
 
(Dollars in thousands)
EBITDA
$105,000 - $115,000
Adjustments
 
Depreciation
and amortization
$(90,000)
Rationalization related
depreciation
(30,324)
Rationalizations
(11,761)
Impairments
(121,570)
Rationalizations related charges
(23,345)
Advanced graphite materials customer bad debt and inventory charge
(4,829)
Proxy contest expenses
(2,438)
Operating income
(179,267) - (169,267)
Other (expense) income, net
(2,500)
Interest expense
(36,000)
Interest income
300
Income taxes
0 - (3,000)
Net (loss) income
$(217,467) - $(210,467)

*NOTE ON EBITDA:  EBITDA is a non-GAAP financial measure that we currently calculate using GAAP amounts from the Consolidated Financial Statements. We believe that EBITDA measures are generally accepted as providing useful information

35
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

regarding a company's ability to incur and service debt. We also believe that EBITDA measures provide useful information about the productivity and cash generation potential of its ongoing businesses. Management uses EBITDA measures as well as other financial measures in connection with its decision-making activities. EBITDA measures should not be considered in isolation or as a substitute for net income (loss), cash flows from operations or other consolidated income or cash flow data prepared in accordance with GAAP. Our method for calculating EBITDA measures may not be comparable to methods used by other companies and is not the same as the method for calculating EBITDA measures under our senior secured Revolving Facility.


36
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Results of Operations and Segment Review
Three Months Ended September 30, 2013 as Compared to Three Months Ended September 30, 2014.
The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Financial information is presented for the three months ended September 30, 2013 and September 30, 2014. Throughout our MD&A, changes that are less than 5% or less than $1.0 million, may be deemed not meaningful and are generally excluded from the discussion.

 
 
For the
Three Months  Ended

 
 
 
 
 
 
September 30,
 
Increase
 
%
(in thousands, except per share data and % change)
 
2013
 
2014
 
(Decrease)
 
Change
Net sales
 
$
303,084

 
$
260,458

 
$
(42,626
)
 
(14
)%
Cost of sales
 
266,440

 
242,814

 
(23,626
)
 
(9
)%
     Gross profit
 
36,644

 
17,644

 
(19,000
)
 
(52
)%
Research and development
 
2,994

 
2,871

 
(123
)
 
(4
)%
Selling and administrative expenses
 
27,626

 
26,980

 
(646
)
 
(2
)%
Rationalizations
 
14,593

 
10,844

 
(3,749
)
 
(26
)%
     Operating loss
 
(8,569
)
—

(23,051
)
 
(14,482
)
 
169
 %
Other (income) expense, net
 
(772
)
 
1,149

 
1,921

 
(249
)%
Interest expense
 
9,098

 
9,069

 
(29
)
 
—
 %
Interest income
 
(49
)
 
(144
)
 
(95
)
 
194
 %
     Loss before provision for income taxes
 
(16,846
)
 
(33,125
)
 
(16,279
)
 
97
 %
(Benefit from) Provision for income taxes
 
(9,216
)
 
1,818

 
11,034

 
(120
)%
      Net loss
 
$
(7,630
)
 
$
(34,943
)
 
$
(27,313
)
 
358
 %
Basic loss per common share:
 
$
(0.06
)
 
$
(0.26
)
 
$
(0.20
)
 
 
Diluted loss per common share:
 
$
(0.06
)
 
$
(0.26
)
 
$
(0.20
)
 
 

Net sales, by operating segment for the three months ended September 30, 2013 and September 30, 2014 were:
 
 
 
For the
Three Months Ended

 
 
 
 
 
 
September 30,
 
(Decrease)
 
%
(in thousands, except per % change)
 
2013
 
2014
 
Increase
 
Change
Industrial Materials
 
$
233,277

 
$
208,573

 
$
(24,704
)
 
(11
)%
Engineered Solutions
 
69,807

 
51,885

 
(17,922
)
 
(26
)%
Total net sales
 
$
303,084

 
$
260,458

 
$
(42,626
)
 
(14
)%

An analysis of the components of change in net sales for Industrial Materials and Engineered Solutions is set forth in the following table:
 
 
Volume
 
Price/Mix
 
Currency
 
Net
Change
Industrial Materials
(5
)%
 
(6
)%
 
—
%
 
(11
)%
Engineered Solutions
(19
)%
 
(7
)%
 
—
%
 
(26
)%


37
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Net sales. Net sales for our Industrial Materials segment decreased to $208.6 million in the three months ended September 30, 2014 from $233.3 million in the three months ended September 30, 2013. This decrease was driven by the continued deterioration of the realized selling price of graphite electrodes and decreased graphite electrode sales volumes outside of the U.S. The weighted average selling price, excluding currency impacts, of electrodes in the three months ended September 30, 2014 decreased approximately 8% compared to the three months ended September 30, 2013. Additionally, our needle coke business experienced third party price declines in the three months ended September 30, 2014 compared to the same period of 2013. We also experienced decreased third party sales volume of needle coke as we are sourcing a greater percentage of needle coke internally.
Net sales for our Engineered Solutions segment decreased to $51.9 million in the three months ended September 30, 2014 compared to net sales of $69.8 million in the three months ended September 30, 2013. The decrease in revenue was primarily driven by both decreased pricing and decreased volumes for our thermal solutions serving the advanced consumer electronics markets.
Cost of sales. For the three months ended September 30, 2014, we experienced decreases in cost of sales of $23.6 million compared to the same period of 2013. Costs related to rationalization initiatives recorded in cost of sales for the three months ended September 30, 2014 and 2013 were $8.1 million and $3.0 million, respectively. Excluding these charges, cost of sales decreased by $28.7 million compared to the three months ended September 30, 2013. The decrease was primarily driven by lower sales volumes for our needle coke products as a result of an increase in internal coke usage and reduced graphite electrode manufacturing costs driven by our rationalization initiatives. 
Rationalizations. During the three months ended September 30, 2014, we recorded a $10.8 million charge for rationalizations, primarily related to severance and contract termination costs related to our corporate and research and development rationalization. This rationalization initiative is driving changes to our operating and management structure in order to streamline, simplify and decentralize the organization. These actions are expected to generate annualized recurring cost savings of approximately $30 million, approximately 75 percent of which will be reflected in overhead expense and the remainder in costs of goods sold. The majority of the savings are expected to be realized in 2015. There will not be a material benefit from these actions in 2014. See Note 2 to the financial statements for further discussion of rationalization activities.
During the three months ended September 30, 2013, we recorded a $14.6 million charge for rationalizations, primarily related to severance charges for our Industrial Materials segment. These charges were due to the planned closures of our South Africa and Brazil graphite electrode plants and our machine shop in Russia, as well as headcount reductions throughout our Industrial Materials segment and at our corporate facility in Parma, Ohio. See Note 2 to the financial statements for further discussion of rationalization activities.
Other expense (income). During the three months ended September 30, 2013, we recorded a $2.0 million gain in other expense due to the favorable resolution of a previously recorded loss contingency.
Segment operating income (loss). Corporate expenses are allocated to segments based on each segment’s percentage of consolidated net sales. The following table represents our operating income (loss) by segment for the three months ended September 30, 2013 and September 30, 2014:
 
 
For the Three Months
Ended September 30,
 
2013
 
2014
 
(Dollars in thousands)
Industrial Materials
$
(12,945
)
 
$
(7,219
)
Engineered Solutions
4,376

 
(15,832
)
Total segment operating loss
$
(8,569
)
 
$
(23,051
)

38
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

The percentage relationship of cost of operations to net sales for Industrial Materials and Engineered Solutions is set forth in the following table: 
 
For the Three Months Ended September 30,
 
(Percentage of sales)
 
2013
 
2014
 
Change
Industrial Materials
106
%
 
104
%
 
(2
)%
Engineered Solutions
94
%
 
131
%
 
37
 %
Segment operating costs and expenses as a percentage of net sales for Industrial Materials decreased to 104% for the three months ended September 30, 2014 compared to 106% for the three months ended September 30, 2013. During the three months ended September 30, 2013, rationalization and related expenses were $14.6 million compared to $9.7 million in the three months ended September 30, 2014. Excluding these charges, Industrial Materials was essentially break even for both periods. Although we experienced significant cost savings as a result of our rationalization initiatives, the continued downward pricing pressure for both our graphite electrodes and needle coke products, as well as volume decreases, eroded operating income to break even levels.
 Segment operating costs and expenses as a percentage of sales for Engineered Solutions increased from 94% for the three months ended September 30, 2013 to 131% for the three months ended September 30, 2014 due in part to our recently announced rationalization initiatives. Excluding these rationalization and related costs of $9.4 million, operating expenses as a percentage of sales would have been 109%, a 15% increase from the three months ended September 30, 2013. Our advanced consumer electronics products saw significant margin contraction, driven by weak end user demand for some of our customers' products. Additionally, we recorded bad debt expense and inventory write-downs totaling $4.8 million due to the unexpected bankruptcy of a customer within our Advanced Graphite Materials ("AGM") line of business during the three months ended September 30, 2014.
Provision for income taxes. The following table summarizes the expense/(benefit) for income taxes for the three months ended September 30, 2013 and September 30, 2014:  
 
For the Three Months
Ended September 30,
 
2013
 
2014
 
(Dollars in thousands)
Tax (benefit) expense
$
(9,216
)
 
$
1,818

Pretax loss
$
(16,846
)
 
$
(33,125
)
Effective tax rates
54.7
%
 
(5.5
)%

For the three months ended September 30, 2014, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to the recording of a valuation allowance against U.S. net deferred tax assets. During the second quarter of 2014, GrafTech impaired certain long-lived assets and announced the exit of certain product lines within our AGM product group. See Note 2 to the financial statements. The impairment charges and other impairment related charges were incurred primarily in the U.S. As a result it is no longer sufficiently assured that it is more likely than not that we will generate sufficient future U.S. taxable income to realize our U.S. net deferred tax assets. As a result of recent losses, we recognized a $57.0 million non-cash charge in the second quarter of 2014 to increase the valuation allowance against these deferred income tax assets. During the third quarter of 2014, we again incurred a loss in the U.S. As a result, a valuation allowance against the related deferred tax asset has been reflected in the quarterly effective tax rate. The recognition of the valuation allowance does not result in or limit our ability to utilize these tax assets in the future.

For the three months ended September 30, 2013, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to the jurisdictional mix of income driven by rationalization charges incurred in the quarter. In addition, our tax rate for the three months ended September 30, 2013 was favorably impacted by the effective resolution of uncertain tax positions from prior years and by tax credits that were recognized in support of the research and development efforts of our Engineered Solutions products.

39
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Nine Months Ended September 30, 2013 as Compared to Nine Months Ended September 30, 2014.
The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Financial information is presented for the nine months ended September 30, 2013 and September 30, 2014. Throughout our MD&A, changes that are less than 5% or less than $1.0 million, may be deemed not meaningful and are generally excluded from the discussion.

 
 
For the Nine Months Ended
 
 
 
 
 
 
September 30,
 
Increase
 
%
(in thousands, except per share data and % change)
 
2013
 
2014
 
(Decrease)
 
Change
Net sales
 
$
858,172

 
$
825,433

 
$
(32,739
)
 
(4
)%
Cost of sales
 
724,057

 
764,142

 
40,085

 
6
 %
     Gross profit
 
134,115

 
61,291

 
(72,824
)
 
(54
)%
Research and development
 
8,874

 
8,544

 
(330
)
 
(4
)%
Selling and administrative expenses
 
87,500

 
89,024

 
1,524

 
2
 %
Rationalizations
 
14,593

 
11,761

 
(2,832
)
 
(19
)%
Impairments
 
—

 
121,570

 
121,570

 
100
 %
     Operating income (loss)
 
23,148

 
(169,608
)
 
(192,756
)
 
(833
)%
Other expense, net
 
753

 
1,902

 
1,149

 
153
 %
Interest expense
 
27,053

 
27,223

 
170

 
1
 %
Interest income
 
(162
)
 
(257
)
 
(95
)
 
59
 %
     Loss before provision for income taxes
 
(4,496
)
 
(198,476
)
 
(193,980
)
 
4,315
 %
(Benefit from) provision for income taxes
 
(5,458
)
 
3,417

 
8,875

 
(163
)%
     Net income (loss)
 
$
962

 
$
(201,893
)
 
$
(202,855
)
 
(21,087
)%
Basic income (loss) per common share:
 
$
0.01

 
$
(1.48
)
 
$
(1.49
)
 


Diluted income (loss) per common share:
 
$
0.01

 
$
(1.48
)
 
$
(1.49
)
 


Net sales, by reportable segment for the nine months ended September 30, 2013 and September 30, 2014 were: 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
(Decrease)
 
%
(in thousands, except per % change)
 
2013
 
2014
 
Increase
 
Change
Industrial Materials
 
$
673,394

 
$
634,004

 
$
(39,390
)
 
(6
)%
Engineered Solutions
 
184,778

 
191,429

 
6,651

 
4
 %
Total net sales
 
$
858,172

 
$
825,433

 
$
(32,739
)
 
(4
)%
An analysis of the components of change in net sales for Industrial Materials and Engineered Solutions is set forth in the following table: 
 
Volume
 
Price/Mix
 
Currency
 
Net Change
Industrial Materials
4
%
 
(11
)%
 
1
%
 
(6
)%
Engineered Solutions
9
%
 
(5
)%
 
—
%
 
4
 %
Net sales. Net sales for our Industrial Materials segment decreased by $39.4 million in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Net sales were impacted by a deterioration in the realized selling price of electrodes in the nine months ended September 30, 2014. The weighted average selling price, excluding currency impacts, of electrodes in the nine months ended September 30, 2014

40
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

decreased approximately 11% compared to the nine months ended September 30, 2013. Partially offsetting the decrease in electrode pricing was an increase in segment volumes of 4%, driven primarily by a 7% increase in graphite electrode volumes, offset slightly by lower third party sales and pricing in our needle coke business as we have sourced a greater percentage of needle coke internally.
Net sales for our Engineered Solutions segment increased $6.7 million in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Sales of our AGM products in the nine months ended September 30, 2014 increased $21.2 million compared to the same period of 2013. The increase in revenue was primarily driven by $17.5 million of new product sales of high temperature furnace systems servicing a single customer that filed for bankruptcy in October 2014, which has created uncertainty related to future high temperature furnace systems sales. Offsetting this increase was a decrease in our advanced electronics technologies product sales of $11.8 million due to pricing and volume declines in products serving the advanced consumer electronics markets.
Cost of sales. For the nine months ended September 30, 2014, we experienced increases in cost of sales of $40.1 million compared to the nine months ended September 30, 2013. Excluding rationalization and impairment related charges (primarily accelerated depreciation), cost of sales decreased $2.4 million. This decrease was primarily driven by lower graphite electrode volumes, an improved cost structure as a result of our rationalization initiatives and lower input costs due to the increased internal sourcing of our needle coke.
Rationalizations. During the nine months ended September 30, 2014, we recorded a $11.7 million charge for rationalizations, primarily related to severance and contract termination costs related to our Engineered Solutions and corporate and research and development rationalizations. The corporate and research and development initiative resulted in the changes to our operating and management structure in order to streamline, simplify and decentralize the organization. These actions are expected to generate annualized recurring cost savings of approximately $30 million, approximately 75 percent of which will be reflected in overhead expense and the remainder in costs of goods sold. The majority of the savings are expected to be realized in 2015. There will not be a material benefit from these actions in 2014. See Note 2 to the financial statements for further discussion of rationalization activities.
During the nine months ended September 30, 2013, we recorded a $14.6 million charge for rationalizations, primarily related to severance charges for our Industrial Materials segment. These charges were due to the planned closures of our South Africa and Brazil graphite electrode plants and our machine shop in Russia, as well as headcount reductions throughout our Industrial Materials segment and at our corporate facility in Parma, Ohio. See Note 2 to the financial statements for further discussion of rationalization activities.
Impairments. In the second quarter of 2014, we announced additional rationalization initiatives in our Engineered Solutions segment resulting from deteriorated pricing and competitor responses for certain products (see Note 2 to the financial statements). As a result we recorded long-lived asset impairment charges of $121.6 million and other related charges totaling $13.4 million. Going forward, we anticipate that these actions will result in annual savings of $18 million, with approximately $1 million to be realized in 2014.
Other expense (income). During the nine months ended September 30, 2013, we recorded a $2.0 million gain in other expense due to the favorable resolution of a previously recorded loss contingency.
Segment operating income (loss). Corporate expenses are allocated to segments based on each segment’s percentage of consolidated sales. The following table represents our operating income (loss) by segment for the nine months ended September 30, 2013 and September 30, 2014: 
 
For the Nine Months Ended
  
September 30,
 
2013
 
2014
 
(Dollars in thousands)
Industrial Materials
$
10,663

 
$
(28,009
)
Engineered Solutions
12,485

 
(141,599
)
Total segment operating income (loss)
$
23,148

 
$
(169,608
)

41
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

The percentage relationship of cost of operations to net sales for Industrial Materials and Engineered Solutions is set forth in the following table:
 
For the Nine Months Ended
 
September 30,
 
(Percentage of sales)
 
2013
 
2014
 
Change
Industrial Materials
98
%
 
104
%
 
6
%
Engineered Solutions
93
%
 
174
%
 
47
%
Segment operating costs and expenses as a percentage of net sales for Industrial Materials increased to 104% for the nine months ended September 30, 2014 compared to 98% for the nine months ended September 30, 2013. Excluding rationalization and related charges of $36.1 million for the nine months ended September 30, 2014, operating income as a percentage of sales was essentially break even. For the nine months ended September 30, 2013, excluding rationalization and related costs, operating expenses as a percentage of sales was 96%. Although we experienced significant cost savings as a result of our rationalization initiatives in the nine months ended September 30, 2014, the continued downward pricing pressure for both our graphite electrodes and needle coke products, as well as volume decreases, eroded operating income to break even levels.
Segment operating costs and expenses as a percentage of sales for Engineered Solutions increased from 93% for the nine months ended September 30, 2013 to 174% for the nine months ended September 30, 2014 due to rationalization initiatives and related impairments. Excluding these costs of $142.9 million, as well as charges related to inventory write-offs and bad debt expenses related to an unexpected bankruptcy of a advanced graphite materials customer, segment operating costs and expenses as a percentage of sales would have increased slightly to 97%. This increase was due to margin contraction caused by decreased pricing and volume in our consumer electronics business and higher costs related to the introduction of new products into the market.
 Provision for income taxes. The following table summarizes the expense/(benefit) for income taxes for the nine months ended September 30, 2013 and September 30, 2014:  
 
For the Nine Months Ended
 
September 30,
 
2013
 
2014
 
(Dollars in thousands)
Tax (benefit) expense
$
(5,458
)
 
$
3,417

Pretax loss
$
(4,496
)
 
$
(198,476
)
Effective tax rates
121.4
%
 
(1.7
)%

For the nine months ended September 30, 2014, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to the recording of a valuation allowance against our U.S. deferred tax assets. During the second quarter of 2014, GrafTech impaired certain long-lived assets and announced the exit of certain product lines within our AGM product group. See Note 2 to the financial statements. The impairment charges and other impairment related charges were incurred primarily in the U.S. As a result it is no longer sufficiently assured that it is more likely than not that we will generate sufficient future U.S. taxable income to realize our U.S. net deferred tax assets. As a result of recent losses, we recognized a $57.0 million non-cash charge in the second quarter of 2014 to increase the valuation allowance against these deferred income tax assets. During the third quarter of 2014, we again incurred a loss in the U.S. As a result, a valuation allowance against the related deferred tax asset has been reflected in the nine month effective tax rate. The recognition of the valuation allowance does not result in or limit our ability to utilize these tax assets in the future.

The effective tax rate for the nine months ended September 30, 2013 differs from the U.S. statutory rate of 35% primarily due to the jurisdictional mix of income, which was driven by the rationalization charges associated with the global initiative to reduce our Industrial Materials cost base and improve our competitive position as stated above. In addition, our tax rate for the nine months ended September 30, 2013 was favorably impacted by the effective

42
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

resolution of uncertain tax positions from prior years and by tax credits that were recognized in support of the research and development efforts of our Engineered Solutions products.

 Effects of Changes in Currency Exchange Rates

When the currencies of non-U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other expenses with respect to those facilities. In certain countries where we have manufacturing facilities, and in certain instances where we price our products for sale in export markets, we sell in currencies other than the dollar. Accordingly, when these currencies increase (or decline) in value relative to the dollar, this has the effect of increasing (or reducing) net sales. The result of these effects is to increase (or decrease) operating profit and net income.
Many of the non-U.S. countries in which we have a manufacturing facility have been subject to significant economic and political changes, which have significantly impacted currency exchange rates. We cannot predict changes in currency exchange rates in the future or whether those changes will have net positive or negative impacts on our net sales, cost of sales or net income.
For net sales of Industrial Materials, the impact of changes in the average exchange rates of other currencies against the U.S. dollar for the nine months ended September 30, 2014 was an increase of $4.3 million compared to the same period of 2013. The impact of the exchange rate changes on cost of sales of Industrial Materials for the nine months ended September 30, 2014 was an increase of $0.2 million compared to the same period of 2013. Changes in currency exchange rates increased net sales of our Engineered Solutions segment by $0.5 million and increased cost of sales by $0.4 million in the nine months ended September 30, 2014 as compared to the same period for 2013.
As part of our cash management, we also have intercompany loans between our subsidiaries. These loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains / losses in other income (expense), net, on the Consolidated Statements of Operations.
The remeasurement of intercompany loans and the effect of transaction gains and losses on intercompany activities resulted in a gain of $1.6 million in the nine months ended September 30, 2013 compared to a loss of $1.5 million in the nine months ended September 30, 2014.
We have in the past and may in the future use various financial instruments to manage certain exposures to specific financial market risks caused by currency exchange rate changes, as described under “Part I, Item 3–Quantitative and Qualitative Disclosures about Market Risk”.


43
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)


 Liquidity and Capital Resources
We believe that we have adequate liquidity to meet our needs. As of September 30, 2014, we had cash and cash equivalents of $10.9 million, long-term debt of $539.5 million, short-term debt of $1.1 million and stockholder’s equity of $1,108 million. We also had $277 million of unused borrowing capacity under the Revolving Facility (after considering financial covenant restrictions and outstanding letters of credit of approximately $5.7 million).
We use cash flow from operations, funds from supply chain financing, and funds available under the Revolving Facility (subject to continued compliance with the financial covenants and representations under the Revolving Facility) as well as cash on hand as our primary sources of liquidity. Disruptions in the U.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future. As a part of our cash management activities, we manage accounts receivable credit risk, collections, and accounts payable vendor terms to maximize our free cash at any given time and minimize accounts receivable losses. Our uses of funds available to us (other than for operations) have consisted principally of capital expenditures, the repurchase of common shares outstanding, acquisitions and associated expenses, and debt reduction payments and other obligations.
On April 23, 2014, GrafTech and certain of its subsidiaries entered into an Amended and Restated Credit Agreement for the Revolving Facility that provides for, among other things, a five-year tenor, reduced borrowing spreads and greater financial flexibility. The Revolving Credit Facility has a maximum borrowing capacity of $470 million principal and matures in April 2019. As of September 30, 2014, we had outstanding borrowings drawn from the Revolving Facility of $54.0 million and outstanding letters of credit of $5.7 million. 
The interest rate applicable under the Amended and Restated Credit Agreement is, at GrafTech’s option, either LIBOR plus a margin ranging from 1.25% to 2.00% (depending on our total net leverage ratio) or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.25% to 1.00% (depending upon such ratio). The alternate base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, N.A., (ii) the federal fund effective rate plus one-half of 1.0% and (iii) the London interbank offering rate (as adjusted) for a one-month period plus 1.0%. We pay a per annum fee ranging from 0.20% to 0.35% (depending on our total leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
As of September 30, 2014, we were in compliance with all financial and other covenants contained in the Revolving Facility. These covenants include maintaining a cash minimum interest coverage ratio of at least 2.50 to 1.00 and a maximum senior secured leverage ratio of 3.00 to 1.00, which are measured based on a rolling average of the prior four quarters. Based on expected operating results and expected cash flows, we expect to be in compliance with these covenants through December 31, 2014. If we were to believe that we would not continue to comply with these covenants, we would seek an appropriate waiver or amendment from the lenders thereunder. We cannot assure you that we would be able to obtain such waiver, amendment or refinancing on acceptable terms or at all.
We have a supply chain financing arrangement with a financing party that provides additional working capital liquidity of up to $49.3 million. Under this arrangement, we essentially assigned our rights to purchase needle coke from a third-party supplier to the financing party. The financing party purchases the product from our supplier under the supplier's standard payment terms and then immediately resells it to us under longer payment terms. The financing party pays the supplier the purchase price for the product and then we pay the financing party. Our payment to the financing party for this needle coke includes a mark-up (the “Mark-Up”). The Mark-Up is subject to quarterly reviews. In effect, we have a longer period of time to pay the financing party than by purchasing directly from the supplier which helps us maintain a balanced cash conversion cycle between inventory payments and receivables collection. We recognized Mark-Up of $0.4 million as interest expense in the nine months ended September 30, 2013 and nil as in the nine months ended September 30, 2013.
As of September 30, 2014, approximately 90% of our debt consisted of fixed rate or zero interest rate obligations compared to 86% as of December 31, 2013.
Cash Flow and Plans to Manage Liquidity. Our cash flow typically fluctuates significantly between quarters due to various factors. These factors include customer order patterns, fluctuations in working capital requirements, timing of capital expenditures, acquisitions, stock repurchases and other factors.
Certain of our obligations could have a material impact on our liquidity. Cash flow from operations and from financing activities services payment of our obligations, thereby reducing funds available to us for other purposes. As

44
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

of September 30, 2014, we had $277 million of unused borrowing capacity under the Revolving Facility (after considering financial covenant restrictions and outstanding letters of credit of approximately $5.7 million). Potential uses of this capacity include capital expenditures, acquisitions, debt repayments, stock repurchases and other general purposes, including cash outflows related to rationalization activities. Continued volatility in the global economy may require additional borrowings under the Revolving Facility. An improving economy, while resulting in improved results of operations, could increase our cash requirements to purchase inventories, make capital expenditures and fund payables and other obligations until increased accounts receivable are converted into cash. A downturn could significantly and negatively impact our results of operations and cash flows, which, coupled with increased borrowings, could negatively impact our credit ratings, our ability to comply with debt covenants, our ability to secure additional financing and the cost of such financing, if available.
Based on expected operating results and expected cash flows, we expect to be in compliance with our existing financial covenants through December 31, 2014. The non-cash portion of rationalization charges do not affect the Company's liquidity or compliance with debt covenants.
In order to seek to minimize our credit risks, we reduce our sales of, or refuse to sell (except for cash on delivery or under letters of credit) our products to some customers and potential customers. In the current economic environment, our customers may experience liquidity shortages or difficulties in obtaining credit, including letters of credit. Our unrecovered trade receivables worldwide have not been material during the last 3 years individually or in the aggregate. We cannot assure you that we will not be materially adversely affected by accounts receivable losses in the future.
We manage our capital expenditures taking into account quality, plant reliability, safety, environmental and regulatory requirements, prudent or essential maintenance requirements, global economic conditions, available capital resources, liquidity, long-term business strategy and return on invested capital for the relevant expenditures, cost of capital and return on invested capital of the relevant segment and GrafTech as a whole, and other factors. We focus on growth capital expenditures which exceed our weighted average cost of capital.  We prioritize projects with superior returns, which are often associated with high growth markets.
We had positive cash flow from operating activities during 2010, 2011, 2012, 2013 and through September 30, 2014. Although the global economic environment experienced significant swings in these periods, our working capital management and cost-control initiatives allowed us to remain operating cash flow positive in both times of declining and improving operating results. Additionally, we continually look at means to enhance our liquidity and believe that many options are available to us to enhance both our near and long term liquidity. We plan to further reduce our inventory levels which will provide additional cash flow and we may enter into accounts receivable factoring arrangements ($50 million of which are permitted under the Revolving Facility).
On July 24, 2012, our Board of Directors authorized a repurchase program for up to ten million shares. Purchases under the program may take place from time to time in the open market, or through privately negotiated transactions, as market, industry and economic conditions warrant. No shares have yet been purchased through this repurchase program. In addition, upon the vesting or payment of stock awards, an employee may elect receipt of the full share amount and either pay the resulting taxes or have shares sold in the open market to cover the tax obligation. We sometimes elect to purchase these shares rather than have them sold in the open market.
Related Party Transactions. Mr. Nathan Milikowsky, a current director of GrafTech and previously a director of GrafTech from December 2010 through May 2013, and certain members of his immediate family and certain entities in which he and members of his immediate family have interests, were substantial equity owners of Seadrift and C/G prior to the acquisitions of those entities by the Company. In connection with those acquisitions, Mr. Milikowsky, his immediate family members and those entities received a portion of the aggregate consideration paid to the equity holders of Seadrift and C/G pursuant to the Seadrift Merger Agreement and the C/G Merger Agreement, which was comprised of shares of the Company's common stock, cash and Senior Subordinated Notes.
We have not engaged in or been a party to any other material transactions with affiliates or related parties except for transactions with our current or former subsidiaries, compensatory transactions with directors and officers including employee benefits, stock option and restricted stock grants, compensation deferral, stock purchases, and customary indemnification and expense advancement arrangements.

45
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Cash Flows.
The following table summarizes our cash flow activities:
 
For the Nine Months Ended
 
September 30,
 
2013
 
2014
 
(Dollars in millions)
Cash flow provided by (used in):
 
 
 
Operating activities
$
65.2

 
$
82.9

Investing activities
$
(59.5
)
 
$
(63.0
)
Financing activities
$
(11.1
)
 
$
(20.2
)
Operating Activities
Cash flow from operating activities represents cash receipts and cash disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting net income (loss) for:
•
Non-cash items such as depreciation and amortization; post retirement obligations, severance and pension plan changes; and stock-based compensation charges;
•
Gains and losses attributed to investing and financing activities such as gains and losses on the sale of assets and unrealized currency transaction gains and losses;
•
Changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.
The net impact of the changes in working capital (operating assets and liabilities), which are discussed in more detail below, include the impact of changes in: receivables, inventories, prepaid expenses, accounts payable, accrued liabilities, accrued taxes, interest payable, and payments of other current liabilities.
We continue to attempt to maximize our operating cash flows by focusing on working capital items that are most directly affected by changes in sales volume, such as accounts receivable, inventories and accounts payable.
During the nine months ended September 30, 2013, changes in working capital resulted in a net use of funds of $22.0 million which was impacted by:
•
net cash outflows from increases in inventories of $13.6 million primarily due to increased volumes on hand as a result of seasonally variability and the wind down of third-party needle coke purchase commitments;
•
net cash outflows from decreases in accounts payable and accruals of $47.5 million through normal operations;
•
increase in rationalization accruals of $14.1 million;
•
net cash inflows in accounts receivable of $31.0 million from the decrease in accounts receivable due to the timing and collection of customer sales;
Other uses of cash in the nine months ended September 30, 2013 included contributions to pension and other benefit plans of $7.0 million.
During the nine months ended September 30, 2014, changes in working capital resulted in a net source of funds of $48.6 million which was impacted by:
•
net cash inflows in accounts receivable of $29.7 million from the decrease in accounts receivable due to the timing and collection of customer sales and collections;
•
the change in inventories of $46.4 million due primarily to reduced volumes on hand;

46
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

•
net cash outflows from decreases in accounts payable and accruals of $11.1 million, due primarily to changes in tax accruals and payables; and
•
a decrease in rationalization accruals of $5.7 million, due primarily to severance payments.
Other uses of cash in the nine months ended September 30, 2014 included contributions to pension and other benefit plans of $11.1 million.
Investing Activities
Net cash used in investing activities was $59.5 million during the nine months ended September 30, 2013, and included capital expenditures of $62.7 million and proceeds from derivative instruments of $0.9 million.
Net cash used in investing activities was $63.0 million during the nine months ended September 30, 2014 and included capital expenditures of $69.3 million and proceeds from the sales of assets of $4.1 million (including rationalization related scrap proceeds of $1.0 million). During the nine months ended September 30, 2014, we received $2.8 million of recoveries related to an insurance claim made for casualty losses related to productive equipment damaged in a fire.
 Financing Activities
Net cash flow provided by financing activities was $11.1 million during the nine months ended September 30, 2013 and included net borrowings under our Revolving Facility of $15.5 million which were primarily used to fund capital expenditures and fund working capital additions.
Net cash flow used in financing activities was $20.2 million during the nine months ended September 30, 2014, including $9.5 million to reduce the outstanding balance under our supply chain financing agreement to zero. Net borrowings under our Revolving Facility and short term debt agreements resulted in a use of cash of $11.0 million.
Restrictions on Dividends and Stock Repurchases
A description of the restriction on our ability to pay dividends and our ability to repurchase common stock is set forth under “Item 5 – Dividend Policies and Restrictions” in the Annual Report and such description is incorporated herein by reference. Such description contains all of the information required with respect thereto.
Under the Revolving Facility, in general, GrafTech is permitted to pay dividends and repurchase common stock in an aggregate amount (cumulative from October 2011) up to $75 million (or $500 million, if certain leverage ratio requirements are satisfied) plus, each year, an aggregate amount equal to 50% of the consolidated net income in the prior year.
Recent Accounting Pronouncements
We discuss recently adopted accounting standards in Note 1, “Organization and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 8, “Long-Term Debt and Liquidity” of the Notes to Consolidated Financial Statements.


47
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks primarily from changes in interest rates, currency exchange rates, energy commodity prices and commercial energy rates. We, from time to time, routinely enter into various transactions that have been authorized according to documented policies and procedures to manage these well-defined risks. These transactions relate primarily to financial instruments described below. 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 use financial instruments for trading purposes.
Our exposure to changes in interest rates results primarily from floating rate long-term debt tied to LIBOR or Euro LIBOR. Our exposure to changes in currency exchange rates results primarily from:
•
sales made by our subsidiaries in currencies other than local currencies;
•
raw material purchases made by our foreign subsidiaries in currencies other than local currencies; and
•
investments in and intercompany loans to our foreign subsidiaries and our share of the earnings of those subsidiaries, to the extent denominated in currencies other than the dollar.
Our exposure to changes in energy commodity prices and commercial energy rates results primarily from the purchase or sale of refined oil products and the purchase of natural gas and electricity for use in our manufacturing operations.
Currency Rate Management. We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency derivatives, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased foreign currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. Forward exchange contracts and purchased currency options are carried at market value.
The outstanding foreign currency derivatives as of December 31, 2013 represented a net unrealized loss of $0.1 million and a net unrealized gain of $0.8 million as of September 30, 2014.
Energy Commodity Management. We periodically enter into commodity derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas and refined oil product exposure. The outstanding contracts as of December 31, 2013 and September 30, 2014 represented net unrealized gain of $0.8 million and a net unrealized loss of $0.5 million, respectively.
Interest Rate Risk Management. We periodically implement interest rate management initiatives to seek to minimize our interest expense and the risk in our portfolio of fixed and variable interest rate obligations.
We periodically enter into agreements with financial institutions that are intended to limit, or cap, our exposure to incurrence of additional interest expense due to increases in variable interest rates. These instruments effectively cap our interest rate exposure. We currently do not have any such instruments outstanding.
Sensitivity Analysis. We use sensitivity analysis to quantify potential impacts that market rate changes may have on the fair values of our foreign currency derivatives and our commodity derivatives. The sensitivity analysis represents the hypothetical changes in value of the hedge position and does not reflect the related gain or loss on the forecasted underlying transaction. As of September 30, 2014, a 10% appreciation or depreciation in the value of the U.S. dollar against foreign currencies from the prevailing market rates would result in a corresponding decrease of $1.4 million or a corresponding increase of $1.3 million, respectively, in the fair value of the foreign currency hedge portfolio. A 10% increase or decrease in the value of the underlying commodity prices that we hedge would result in a corresponding increase or decrease of $1.2 million as of September 30, 2014 in the fair value of the commodity hedge portfolio. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal changes in the value of the underlying exposure.
We had no interest rate derivative instruments outstanding as of September 30, 2014. A hypothetical increase in interest rates of 100 basis points (1%) would have increased our interest expense by $0.6 million for the nine months ended September 30, 2014.

48
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Management is responsible for establishing and maintaining adequate disclosure controls and procedures at the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a reporting company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures are effective at the reasonable assurance level as of September 30, 2014.
Changes in Internal Controls over Financial Reporting. There have been no changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2014 that materially affected or are reasonably likely to materially affect our internal controls over financial reporting.


49
PART II. OTHER INFORMATION
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES


Item 1. Legal Proceedings
Director Advancement - We have received a request from a director to reimburse approximately $500,000 incurred by the Director in connection with the investigation conducted by the Special Committee of the GrafTech Board formed in September 2012 and a subsequent investigation by the SEC.  The request is based on GrafTech’s bylaws, an indemnification agreement between GrafTech and the director and Delaware law and, thereunder, advancement of expenses reasonably incurred in a civil, criminal, administrative or investigative action, suit, or proceeding by reason of the fact that the person is or was a director is generally required, subject to, among other things, an undertaking by the director to repay if it turns out he or she did not meet the applicable standards.
Seadrift Coke, L.P and U.S. Environmental Protection Agency - As a result of its audit of the Company’s Seadrift Coke, L.P. subsidiary, the U.S. Environmental Protection Agency (“EPA”) in the 2014 second quarter alleged that the subsidiary failed to accurately report emissions under the Emergency Planning and Community Right-to-Know Act.  The subsidiary is in settlement negotiations with the EPA.  Any fines or penalties are not expected to be material to our financial condition, results of operations or cash flows.
Additional information required by this Item is set forth in Note 12, “Contingencies” of the Notes to Consolidated Financial Statements and is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors disclosed in Part I-Item IA of the Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 24, 2012, our Board of Directors authorized a share repurchase program for up to ten million shares of our common stock. Purchases under this program may take place from time to time in the open market, or through privately negotiated transactions, as market, industry and economic conditions warrant. We had not made any purchases under this program as of September 30, 2014.
Upon the vesting or payment of stock awards, an employee may elect receipt of the full share amount and either pay the resulting taxes or sell shares in the open market to cover the tax obligation. We sometimes elect to purchase these shares rather than allow them to be sold in the open market. These repurchases are in addition to the programs authorized by our Board of Directors described above.
Period
Total
Number of
Shares
Purchased*
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Publicly Announced Plans or Programs
July 1 through July 31, 2014
7,473

 
$
9.86

 
—

 
10,000,000

August 1 through August 31, 2014
2,062

 
8.54

 
—

 
10,000,000

September 1 through September 30, 2014
12,043

 
7.75

 
—

 
10,000,000


* Purchases of vested restricted stock shares from employees as payment for the withholding taxes due upon the vesting or payment of stock awards.
 
Item 3. Defaults Upon Senior Securities
Not Applicable.

Item 4. Mine Safety Disclosures
Not Applicable.
 
Item 5. Other Information.
Not Applicable.

50
PART II. OTHER INFORMATION
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Item 6. Exhibits
The exhibits listed in the following table have been filed as part of this Report.
 
Exhibit
Number
Description of Exhibit
 
 
10.1
Executive Selective Severance Program - 2014-2016
 
 
31.1
Certification pursuant to Rule 13a-14(a) under the Exchange Act by Joel L. Hawthorne, President and Chief Executive Officer (Principal Executive Officer).
 
 
31.2
Certification pursuant to Rule 13a-14(a) under the Exchange Act by Erick R. Asmussen, Vice President and Chief Financial Officer (Principal Financial Officer).
 
 
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Joel L. Hawthorne, President and Chief Executive Officer (Principal Executive Officer).
 
 
32.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Erick R. Asmussen, Vice President and Chief Financial Officer (Principal Financial Officer).
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


51

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
GRAFTECH INTERNATIONAL LTD.
Date:
October 30, 2014
By:
/s/ Erick R. Asmussen
 
 
 
Erick R. Asmussen
 
 
 
Vice President and Chief Financial
Officer (Principal Financial Officer)


52

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