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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, 2016
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
 
filinglogoa30.jpg
GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
 
Delaware
27-2496053
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
Suite 300 Park Center I
44131
6100 Oak Tree Boulevard
(Zip code)
Independence, OH
 
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (216) 676-2000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No   ¨*
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  ý
As of October 15, 2016, 100 shares of common stock, par value $.01 per share, were outstanding.
* The registrant is a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934. However, during the preceding 12 months, the registrant has filed all reports that it would have been required to file by Section 13 or 15(d) of the Securities Exchange Act of 1934 if the registrant was subject to the filing requirements of the Securities Exchange Act of 1934.


Table of Contents

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

2

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Unuaudited
 
Successor
 
As of December 31, 2015
 
As of
September 30,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,927

 
$
12,147

Accounts and notes receivable, net of allowance for doubtful accounts of
$300 as of December 31, 2015 and $434 as of September 30, 2016
82,390

 
74,613

Inventories
218,130

 
166,683

Prepaid expenses and other current assets
21,157

 
22,792

Current assets of discontinued operations
98,281

 
94,886

Total current assets
426,885

 
371,121

Property, plant and equipment
571,329

 
594,727

Less: accumulated depreciation
20,166

 
61,810

Net property, plant and equipment
551,163

 
532,917

Deferred income taxes
15,326

 
20,324

Goodwill
172,059

 
171,117

Other assets
152,613

 
143,131

Long-term assets of discontinued operations
103,975

 

Total assets
$
1,422,021

 
$
1,238,610

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
40,147

 
$
41,982

Short-term debt
4,772

 
6,465

Accrued income and other taxes
5,933

 
5,577

Rationalizations
1,195

 
210

Other accrued liabilities
20,994

 
29,469

Current liabilities of discontinued operations
23,082

 
16,953

Total current liabilities
96,123

 
100,656

Long-term debt
362,455

 
364,132

Other long-term obligations
94,318

 
89,181

Deferred income taxes
57,430

 
46,867

Long-term liabilities of discontinued operations
1,167

 
867

Contingencies – Note 11

 

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

 

Common stock, par value $.01, 225,000,000 shares authorized,
100 shares issued as of December 31, 2015 and September 30, 2016

 

Additional paid-in capital
854,337

 
854,337

Accumulated other comprehensive (loss) income
(10,255
)
 
3,864

Accumulated deficit
(33,554
)
 
(221,294
)
Total stockholders’ equity
810,528

 
636,907

 
 
 
 
Total liabilities and stockholders’ equity
$
1,422,021

 
$
1,238,610

 See accompanying Notes to Condensed Consolidated Financial Statements

3

Table of Contents

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Predecessor
 
Successor
 
For the Period July 1 2015 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Three Months Ended September 30, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
Net sales
$
51,604

 
$
74,774

 
$
111,590

Cost of sales
47,408

 
67,887

 
113,602

Additions to lower of cost or
market inventory reserve

 

 
4,898

Gross profit (loss)
4,196

 
6,887

 
(6,910
)
Research and development
710

 
220

 
526

Selling and administrative expenses
24,585

 
6,809

 
12,215

Rationalizations
(39
)
 
156

 

Operating loss
(21,060
)
 
(298
)
 
(19,651
)
 
 
 
 
 
 
Other expense (income), net
269

 
703

 
(567
)
Interest expense
8,790

 
3,349

 
6,964

Interest income
(22
)
 
(21
)
 
(158
)
Loss from continuing operations before
provision for income taxes
(30,097
)
 
(4,329
)
 
(25,890
)
 
 
 
 
 
 
Provision for (benefit from) income taxes
5,234

 
1,107

 
(1,789
)
Net loss from continuing operations
(35,331
)
 
(5,436
)
 
(24,101
)
 
 
 
 
 
 
    (Loss) income from discontinued operations, net of tax
(6,893
)
 
(1,867
)
 
1,134

 
 
 
 
 
 
Net loss
$
(42,224
)
 
$
(7,303
)
 
$
(22,967
)
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE LOSS
 
 
 
 
Net loss
$
(42,224
)
 
$
(7,303
)
 
$
(22,967
)
Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustments
(5,840
)
 
(5,966
)
 
2,300

Commodities and foreign currency derivatives and other, net of tax of $10, $13 and $(12), respectively
375

 
(237
)
 
118

Other comprehensive (loss) income, net of tax:
(5,465
)
 
(6,203
)
 
2,418

Comprehensive loss
$
(47,689
)
 
$
(13,506
)
 
$
(20,549
)

See accompanying Notes to Condensed Consolidated Financial Statements



GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

4

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Predecessor
 
Successor
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Nine Months Ended September 30, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
Net sales
$
339,907

 
$
74,774

 
$
322,530

Cost of sales
305,001

 
67,887

 
331,297

Additions to lower of cost or
market inventory reserve

 

 
19,523

Gross profit (loss)
34,906

 
6,887

 
(28,290
)
Research and development
3,377

 
220

 
1,964

Selling and administrative expenses
64,383

 
6,809

 
39,372

Rationalizations
14

 
156

 
58

Impairments
35,381

 

 

Operating loss
(68,249
)
 
(298
)
 
(69,684
)
 
 
 
 
 
 
Other expense (income), net
1,421

 
703

 
(1,528
)
Interest expense
26,211

 
3,349

 
19,860

Interest income
(363
)
 
(21
)
 
(169
)
Loss from continuing operations before
provision for income taxes
(95,518
)
 
(4,329
)
 
(87,847
)
 
 
 
 
 
 
Provision for (benefit from) income taxes
6,452

 
1,107

 
(7,675
)
Net loss from continuing operations
(101,970
)
 
(5,436
)
 
(80,172
)
 
 
 
 
 
 
    Loss from discontinued operations, net of tax *
(18,679
)
 
(1,867
)
 
(107,568
)
 
 
 
 
 
 
Net loss
$
(120,649
)
 
$
(7,303
)
 
$
(187,740
)
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE LOSS
 
 
 
 
Net loss
$
(120,649
)
 
$
(7,303
)
 
$
(187,740
)
Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustments
(27,936
)
 
(5,966
)
 
13,974

Commodities and foreign currency derivatives and other, net of tax of ($68), $13 and $1, respectively
1,262

 
(237
)
 
145

Other comprehensive (loss) income, net of tax:
(26,674
)
 
(6,203
)
 
14,119

Comprehensive loss
$
(147,323
)
 
$
(13,506
)
 
$
(173,621
)
* Loss on discontinued operations includes a pretax impairment charge of $105,600 in the nine months ended September 30, 2016. See Note 3 "Discontinued Operations and Related Assets Held for Sale"

See accompanying Notes to Condensed Consolidated Financial Statements

5

Table of Contents

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, unaudited)
 
Predecessor
 
Successor
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Nine Months Ended September 30, 2016
Cash flow from operating activities:
 
 
 
 
 
Net loss
$
(120,649
)
 
$
(7,303
)
 
$
(187,740
)
Adjustments to reconcile net loss to
cash provided by operations:
 
 
 
 
 
Depreciation and amortization
45,461

 
10,604

 
62,775

Impairments
35,381

 

 
105,623

Change in lower of cost or market inventory
reserve, net of depreciation

 

 
6,000

Deferred income tax provision
924

 
863

 
(11,738
)
Post-retirement and pension plan changes
2,998

 
486

 
3,164

Stock-based compensation
15,357

 

 

Interest expense
14,180

 
786

 
4,872

Other charges, net
102

 
(492
)
 
(2,042
)
Net change in working capital*
45,594

 
(47
)
 
54,005

Increase in long-term assets and liabilities
(11,025
)
 
(985
)
 
(6,188
)
Net cash provided by operating activities
28,323

 
3,912

 
28,731

Cash flow from investing activities:
 
 
 
 
 
Capital expenditures
(32,301
)
 
(5,239
)
 
(22,257
)
Proceeds from the sale of assets
646

 
542

 
685

Derivative instrument settlements, net
(8,263
)
 
84

 
(1,171
)
Net cash used in investing activities
(39,918
)
 
(4,613
)
 
(22,743
)
Cash flow from financing activities:
 
 
 
 
 
Short-term debt, net
18,511

 
(10,180
)
 
503

Revolving Facility borrowings
160,000

 
22,000

 
40,000

Revolving Facility reductions
(99,000
)
 
(21,000
)
 
(41,000
)
Repayment of Senior Subordinated Notes
(200,000
)
 

 

Issuance of Preferred Shares
150,000

 

 

Principal payments on long-term debt
(89
)
 
(12
)
 
(104
)
Proceeds from exercise of stock options
32

 

 

Purchase of treasury shares
(63
)
 

 

Revolving Facility refinancing fees
(5,068
)
 

 
(922
)
Other
(3,499
)
 
(1,385
)
 

Net cash provided by (used in) financing activities
20,824

 
(10,577
)
 
(1,523
)
Net change in cash and cash equivalents
9,229

 
(11,278
)
 
4,465

Effect of exchange rate changes on cash and cash equivalents
(1,746
)
 
(294
)
 
755

Cash and cash equivalents at beginning of period
17,550

 
25,033

 
6,927

Cash and cash equivalents at end of period
$
25,033

 
$
13,461

 
$
12,147

* Net change in working capital due to the following components:
 
 
 
 
Accounts and notes receivable, net
$
61,008

 
$
(16,927
)
 
$
9,685

Inventories
1,164

 
18,436

 
41,399

Prepaid expenses and other current assets
2,551

 
3,375

 
(1,170
)
Change in accounts payable and accruals
(18,728
)
 
(5,822
)
 
1,774

Rationalizations
(2,677
)
 
(1,642
)
 
(2,544
)
Increase in interest payable
2,276

 
2,533

 
4,861

Net change in working capital
$
45,594

 
$
(47
)
 
$
54,005

See accompanying Notes to Condensed Consolidated Financial Statements

6

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



(1)
Organization and Summary of Significant Accounting Policies
A. Organization
GrafTech International Ltd. (the "Company") is one of the world’s largest manufacturers and providers of high quality 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.
On February 26, 2016, the Company announced it plans to realign its two business segments. Industrial Materials will now be comprised of graphite electrodes and needle coke products. Engineered Solutions will now be comprised of advanced graphite materials, advanced composite materials, advanced electronic technologies, and refractory products. Refractory products was previously included in the Industrial Materials business segment. Advanced materials products will now be a part of the business segment where these products are produced.
This realignment of the business segments will allow the Company to better direct its resources and simplify its operations. The Industrial Materials business segment will continue to focus on being the lowest cost producer providing the best quality of graphite electrodes in a very challenging market. The Engineered Solutions business segment will continue to leverage the intellectual property of carbon and graphite material science to innovate and commercialize advanced technologies and new products in high growth markets.
The Company also announced that it plans to review strategic alternatives for its Engineered Solutions business segment. This process is currently under way. See Note 3 "Discontinued Operations and Assets Held for Sale" for further information.
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, 2015 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, 2015 (the “Annual Report”) but does not include all disclosures required by GAAP in audited financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, contained in the Annual Report.
The unaudited consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for the interim periods presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. Predecessor and Successor Reporting
On August 17, 2015, the Company was acquired by affiliates of Brookfield Asset Management Inc. (see Note 2 "Preferred Share Issuance and Merger"). We elected to account for the acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of GTI were adjusted to their fair market value as of August 15, 2015, the day that Brookfield effectively took control of the Company.
Our consolidated statements of operations subsequent to the acquisition include amortization expense relating to the fair value adjustments and depreciation expense based on the fair value of the Company's property, plant and equipment that had previously been carried at historical cost less accumulated depreciation. Therefore, the Company's financial information prior to the acquisition is not comparable to the financial information subsequent to the Merger. As a result, the financial statements and certain note presentations are separated into two distinct periods, the period before the consummation of the acquisition (labeled "Predecessor") and the period after the date of acquisition (labeled "Successor"), to indicate the application of the different basis of accounting between the periods presented.

7

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


D. New Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. This ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU was expected to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. On July 9, 2015, the FASB deferred the effective date to fiscal years beginning after December 15, 2017. 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.
In April 2015, the FASB issued ASU 2015-3, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015 with early adoption permitted. We had no capitalized debt issuance costs as of December 31, 2015. We adopted this ASU as of January 1, 2016, and adoption resulted in no significant impact on the Company's financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this new guidance, a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This ASU is effective for fiscal years beginning after Decemeber 15, 2018. The Company is currently evaluating the impact of the adoption of this standard on its financial position, results of operations or cash flows.
(2)
Preferred Share Issuance and Merger
Preferred Stock
On August 11, 2015, the Company issued and sold to BCP IV GrafTech Holdings LP ("BCP"), an affiliate of Brookfield Asset Management Inc. (“Brookfield”) (i) 136,616 shares of a new Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), convertible into 19.9% of the shares of common stock of the Company outstanding immediately prior to such issuance and (ii) 13,384 shares of a new Series B Convertible Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock,” and, together with the Series A Preferred Stock, the “Preferred Stock”), for an aggregate purchase price of $150,000,000 in cash (the “Purchase Price”), under the Investment Agreement dated May 4, 2015 (the “Investment Agreement”) between the Company and Brookfield.
The closing of such issuance and sale occurred after the satisfaction of the closing conditions set forth in the Investment Agreement.
Pursuant to the Investment Agreement, the Company reimbursed Brookfield for $500,000 of out-of-pocket fees and expenses (including fees and expenses of legal counsel) incurred by Brookfield in connection with the transaction.
The proceeds from the issuance and sale were used by the Company, along with funds available under the Company’s $40 million delayed draw term loan facility, senior revolving credit facility and cash on hand, to prepay the Company’s $200 million Senior Subordinated Notes due November 30, 2015.
Merger Agreement
On May 18, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated May 17, 2015, with BCP and Athena Acquisition Subsidiary Inc. a wholly owned subsidiary of BCP (“Acquisition Sub”). Pursuant to the Merger Agreement, on May 26, 2015, BCP commenced a cash tender offer to purchase any and all of the outstanding shares of common stock, par value $0.01 per share (the “Shares”), of the Company, at a purchase price of $5.05 per Share in cash (the “Offer Price”), on the terms and subject to the conditions set forth in the Offer to Purchase, dated May 26, 2015 (together with any amendments and supplements thereto, the “Offer to Purchase”) and in the related Letter of Transmittal (the “Letter of Transmittal” and, together with the Offer to Purchase, the “Offer”).
On August 14, 2015, Acquisition Sub accepted for payment all Shares validly tendered in the Offer and not withdrawn prior to the expiration of the Offer, and payment of the Offer Price for such Shares was made promptly. On August 17, 2015, Acquisition Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of BCP (the "Merger").

8

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


Pursuant to the Merger Agreement, upon consummation of the Merger, each Share that was not tendered and accepted pursuant to the Offer (other than canceled shares, dissenting shares and shares held by the Company’s subsidiaries or BCP’s subsidiaries (other than Acquisition Sub)) was canceled and converted into cash consideration in an amount equal to the Offer Price.
Business Combination
The computation of the fair value of the total consideration at the date of acquisition follows:
Purchase Consideration
 
 
 
 
 
 
(In thousands except share price)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 # Shares
 
  Unit Price
 
 Amount
 
 
 
 
 
 
 
Convertible Preferred Equity
 
 
 
 
 
 
    Series A and B
 
150

 
$
1,000.00

 
$
150,000

Common Equity
 
 
 
 
 
 
    Common Shares
 
139,397

 
$
5.05

 
$
703,955

    Net value of options
 
 
 
 
 
$
382

Total
 
 
 
 
 
$
854,337

Recording of assets acquired and liabilities assumed: The acquisition was accounted for using the acquisition method of accounting. Under the acquisition method, the identifiable assets acquired and the liabilities assumed are assigned a new basis of accounting reflecting their estimated fair values. The information included herein has been prepared based on the allocation of purchase price using estimates of the fair values and useful lives of assets acquired and liabilities assumed based on the best available information determined with the assistance of independent valuations, quoted market prices and management estimates.
The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date:
Net identifiable assets acquired
 
 
Cash
$
25,032

 
Accounts receivable
94,298

 
Inventories
344,765

 
Property, plant and equipment
650,405

 
Intangible assets
155,700

 
Deferred tax assets
41,606

 
Prepaid and other current assets
49,716

 
Other non-current assets
8,428

 
Accounts payable
(68,005
)
 
Short-term debt
(18,779
)
 
Other accrued liabilities
(53,252
)
 
Long-term debt
(367,811
)
 
Other long-term liabilities
(101,648
)
 
Deferred tax liabilities
(79,235
)
Net identifiable assets acquired
$
681,220

 
 
 
Goodwill
$
173,117

 
 
 
Net assets acquired
$
854,337


9

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


Goodwill: Goodwill of approximately $173.1 million was recognized for the acquisition and is calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was increased by $1.1 million in March 2016, as a result of a decreased inventory valuation of $2.0 million offset by an increase to deferred tax assets of $0.9 million.
(3)
Discontinued Operations and Related Assets Held for Sale
On February 26, 2016, the Company announced that it had initiated a strategic review of its Engineered Solutions business segment to better direct its resources and simplify its operations. Any potential sale of assets was prohibited by the Revolving Facility without approval of the requisite lenders thereunder. On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility (see Note 8 "Debt and Liquidity") which, among other things, permits the sale of assets with the restriction that the proceeds be utilized to pay down revolver borrowings. As of June 30, 2016, the Engineered Solutions segment qualified for reporting as discontinued operations as we expect the divestiture to be complete within 12 months of the qualification.
During the second quarter, we evaluated the fair value of the Engineered Solutions business segment utilizing the market approach (Level 3 measure). As a result, we incurred an impairment charge to our Engineered Solutions business segment of $105.6 million to align the carrying value with estimated fair value. The analysis was updated as of September 30, 2016, and did not result in further adjustment. The estimate reflects Management’s view of the manner in which the Engineered Solutions business will be divested, including  assumptions as to if and how it will be split, given the lines of business and asset groups that constitute the Engineered Solutions segment. Amongst other things, the split into groups influences the computation of the impairment charge. The impairment charge and resulting loss in the nine months ended September 30, 2016 is not offset by expected gains on certain group(s), and as a result may or may not later be partially offset through gains depending on the outcome of the divestiture. These assumptions and estimates are subject to change until divestiture is completed and may be adjusted in the quarter that the information becomes available.

10

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


The following tables summarize the results of the Engineered Solutions business segment, reclassified as discontinued operations for the three and nine months ended September 30, 2015 and 2016.
 
For the Period July 1 2015 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Three Months Ended September 30, 2016
 
(dollars in thousands)
Net sales
$
13,994

 
$
19,816

 
$
30,165

Cost of sales
16,779

 
17,712

 
23,497

    Gross profit (loss)
(2,785
)
 
2,104

 
6,668

Research and development
501

 
440

 
707

Selling and administrative expenses
4,557

 
2,797

 
4,113

Rationalizations
743

 
681

 
(130
)
    Operating (loss) income
(8,586
)
 
(1,814
)
 
1,978

Other expense (income)
(26
)
 
(24
)
 
(3
)
Interest expense
212

 
351

 
783

(Loss) income from discontinued operations
    before income taxes
(8,772
)
 
(2,141
)
 
1,198

Provision for (benefit from) income
    taxes on discontinued operations
1,879

 
274

 
(64
)
(Loss) income from discontinued operations
$
(6,893
)
 
$
(1,867
)
 
$
1,134

 
For the Period January 1 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Nine Months Ended September 30, 2016
 
(dollars in thousands)
Net sales
$
98,024

 
$
19,816

 
$
89,184

Cost of sales
94,817

 
17,712

 
74,051

    Gross profit
3,207

 
2,104

 
15,133

Research and development
2,179

 
440

 
2,398

Selling and administrative expenses
16,008

 
2,797

 
13,674

Rationalizations
5,248

 
681

 
(200
)
Impairment

 

 
105,623

    Operating loss
(20,228
)
 
(1,814
)
 
(106,362
)
Other expense (income)
(90
)
 
(24
)
 
(75
)
Interest expense
907

 
351

 
2,452

Loss from discontinued operations
    before income taxes
(21,045
)
 
(2,141
)
 
(108,739
)
Provision for income taxes on
    discontinued operations
2,366

 
274

 
1,171

Loss from discontinued operations
$
(18,679
)
 
$
(1,867
)
 
$
(107,568
)




11

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


The significant components of our Statements of Cash Flows for the Engineered Solutions business segment held for sale are as follows:
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the
Nine Months Ended September 30, 2016
 
(dollars in thousands)
 
 
Depreciation and amortization
$
7,988

 
$
1,931

 
$
3,849

Impairment

 

 
105,623

Deferred income taxes
(2,366
)
 
(273
)
 
(1,172
)
Capital expenditures
10,104

 
1,229

 
3,621

The following table summarizes the carrying value of the assets and liabilities of discontinued operations as of December 31, 2015 and September 30, 2016.
 
As of
December 31, 2015
 
As of
September 30, 2016
 
(dollars in thousands)
Assets of discontinued operations:
 
 
 
  Accounts receivable
$
20,425

 
$
20,842

  Inventories
77,332

 
77,719

  Prepaid expenses and other current assets
524

 
643

  Net property plant and equipment
86,369

 
87,099

  Other assets
17,606

 
14,183

     Total assets of discontinued operations prior to impairment
202,256

 
200,486

 
 
 
 
  Impairment upon reclassification to held for sale

 
(105,600
)
 
 
 
 
         Total assets of discontinued operations
$
202,256

 
$
94,886

 
 
 
 
Liabilities of discontinued operations:
 
 
 
  Accounts payable
$
9,331

 
$
5,830

  Accrued income and other taxes
3,113

 
2,163

  Other accrued liabilities
10,638

 
8,960

     Total current liabilities of discontinued operations
23,082

 
16,953

 
 
 
 
  Other long-term obligations
1,167

 
867

 
 
 
 
          Total liabilities of discontinued operations
$
24,249

 
$
17,820


12

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


(4)
Rationalizations
Throughout 2013, 2014 and 2015 the Company undertook rationalization plans in order to streamline its organization and lower its production costs. The majority of these initiatives were substantially complete as of September 30, 2016. The rationalization liability as of September 30, 2016 was $0.2 million consisting of the plan described below and severance payouts related to prior rationalization plans. In June of 2016, we further impaired assets related to our South African facility by $0.6 million to reflect a decline in market value.
2015 Advanced Graphite Materials Rationalization
On March 2, 2015, GrafTech announced plans to further optimize the production platform for its advanced graphite materials business. These actions included the closure of our Notre Dame, France facility and further reductions in force in our Columbia, Tennessee facility and other locations totaling approximately 85 people. The 2015 Advanced Graphite Materials rationalization plan will result in approximately $10 million of charges consisting of severance, inventory losses and other related costs. Approximately $8 million of these costs were to be cash outlays, the majority of which were disbursed in 2015. We incurred rationalization and related charges of $0.8 million in the period July 1 through August 14, 2015, $6.6 million in the period January 1 through August 14, 2015 and $1.3 million in the period August 15 through September 30, 2015. We incurred insignificant charges for this plan during the three and nine months ended September 30, 2016. The remaining liability associated with this plan is $0.6 million as of September 30, 2016.
(5)
Segment Reporting

We operate two reportable business segments: Industrial Materials and Engineered Solutions. On February 26, 2016, the Company announced plans to realign its business segments (see Note 1A "Organization and Summary of Significant Accounting Policies"). As a result of this realignment, our refractory product line was moved from the Industrial Materials business segment to the Engineered Solutions business segment. Additionally, advanced materials products will now be a part of the business segment where these products are produced. All prior period amounts have been recast to reflect this change. Our business segments now consist of the following:
Industrial Materials. Our Industrial Materials segment manufactures and delivers high quality graphite electrodes and needle coke products. Electrodes are key components of the conductive power systems used to produce steel and other non-ferrous metals. Needle coke, a crystalline form of carbon derived from decant oil, is the key ingredient in, and is used primarily in, the production of graphite electrodes.
Engineered Solutions. The Engineered Solutions segment includes advanced electronics technologies, advanced graphite materials, advanced composite materials and refractory products. Advanced electronics technologies products consist of electronic thermal management solutions, fuel cell components and sealing materials. Advanced graphite materials are highly engineered synthetic graphite products used in many areas due to their unique properties and the ability to tailor them to specific solutions. These products are used in transportation, alternative energy, metallurgical, chemical, oil and gas exploration and various other industries. Advanced composite materials are highly engineered carbon products that are woven into various shapes primarily to support the aerospace and defense industries. 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. During the second quarter of 2016, our Engineered Solutions segment qualified as held for sale status and as such our Engineered Solution's results have been excluded from continuing operations. See Note 3 "Discontinued Operations and Assets Held for Sale" for significant components of the results of our Engineered Solutions segment.

13

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


The following tables summarize financial information concerning our reportable segments and all prior periods have been recast to reflect our new segmentation:
 
Predecessor
 
Successor
 
For the Period
July 1 Through
August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Three Months Ended
September 30, 2016
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
 
Industrial Materials
$
51,604

 
$
74,774

 
$
111,590

 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
Industrial Materials
(2,588
)
 
2,918

 
(14,238
)
Corporate, R&D and Other expenses
(18,472
)
 
(3,216
)
 
(5,413
)
Total operating loss
$
(21,060
)
 
$
(298
)
 
$
(19,651
)
 
 
 
 
 
 
Reconciliation of segment operating loss to
    loss before provision for income taxes
 
 
 
 
 
Other expense (income), net
$
269

 
$
703

 
$
(567
)
Interest expense
8,790

 
3,349

 
6,964

Interest income
(22
)
 
(21
)
 
(158
)
Loss from continuing operations before
   provision for income taxes
$
(30,097
)
 
$
(4,329
)
 
$
(25,890
)

 
Predecessor
 
Successor
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Nine Months Ended
September 30, 2016
 
2015
 
 
 
2016
 
(Dollars in thousands)
Net sales to external customers:
 
 
 
 
 
Industrial Materials
$
339,907

 
$
74,774

 
$
322,530

 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
Industrial Materials
(24,900
)
 
2,918

 
(50,776
)
Corporate, R&D and Other expenses
(43,349
)
 
(3,216
)
 
(18,908
)
Total operating loss
$
(68,249
)
 
$
(298
)
 
$
(69,684
)
 
 
 
 
 
 
Reconciliation of segment operating loss to
    loss before provision for income taxes
 
 
 
 
 
Other expense (income), net
$
1,421

 
$
703

 
$
(1,528
)
Interest expense
26,211

 
3,349

 
19,860

Interest income
(363
)
 
(21
)
 
(169
)
Loss from continuing operations before
   provision for income taxes
$
(95,518
)
 
$
(4,329
)
 
$
(87,847
)

14

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


(6)
Benefit Plans
The components of our consolidated net pension costs are set forth in the following table:
 
Predecessor
 
Successor
 
For the Period
July 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Three
Months Ended September 30, 2016
 
(Dollars in thousands)
Service cost
$
323

 
$
227

 
$
506

Interest cost
762

 
776

 
1,498

Expected return on plan assets
(676
)
 
(658
)
 
(1,310
)
Amortization of prior service cost
1

 

 
3

Net cost
$
410

 
$
345

 
$
697

 
Predecessor
 
Successor
 
For the Period
January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Nine
Months Ended September 30, 2016
 
(Dollars in thousands)
Service cost
$
1,656

 
$
227

 
$
1,517

Interest cost
3,814

 
776

 
4,494

Expected return on plan assets
(3,384
)
 
(658
)
 
(3,929
)
Amortization of prior service cost
3

 

 
7

Net cost
$
2,089

 
$
345

 
$
2,089


The components of our consolidated net postretirement costs are set forth in the following table: 
 
Predecessor
 
Successor
 
For the Period
July 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Three
Months Ended September 30, 2016
 
(Dollars in thousands)
Service cost
$
3

 
$
2

 
$
1

Interest cost
156

 
152

 
272

Amortization of prior service cost
(22
)
 

 

Net cost
$
137

 
$
154

 
$
273


 
Predecessor
 
Successor
 
For the Period
January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Nine
Months Ended September 30, 2016
 
(Dollars in thousands)
Service cost
$
11

 
$
2

 
$
3

Interest cost
786

 
152

 
815

Amortization of prior service cost
(108
)
 

 

Net cost
$
689

 
$
154

 
$
818



15

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


(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 (for example, graphite electrodes, needle coke, etc.) 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.
We received notice in March 2015 that the market prices for needle coke were decreasing by an additional 18%, effective for the second quarter of 2015. This decline further compressed our margins for needle coke products versus our annual plan. We determined that this change, which was driven by overcapacity in the market, indicated that the needle coke industry is facing a deeper and longer trough than previously expected. We considered the additional price change as a triggering event and tested our needle coke goodwill for impairment as of March 31, 2015. This test resulted in an impairment charge for the remaining needle coke goodwill of $35.4 million.
As a result of our acquisition by Brookfield, our goodwill and intangibles were revalued as of August 15, 2015. See Note 2 "Preferred Share Issuance and Merger" for description of the Merger and the results of purchase price accounting. The following tables represents the changes in the carrying value of goodwill and intangibles during the predecessor entity period of January 1, 2015 through August 14, 2015 and the successor entity period of August 15, 2015 through September 30, 2016:
Goodwill
Predecessor
(Dollars in Thousands)
Balance as of December 31, 2014
$
420,129

   Impairment
(35,381
)
   Currency translation effect
(616
)
Balance as of August 14, 2015
$
384,132

 
 
 
 
Successor
 
Balance as of August 15, 2015
$
170,418

   Adjustments
1,641

Balance as of December 31, 2015
$
172,059

   Adjustments (See Note 2)
1,058

   Goodwill transferred to discontinued operations
(2,000
)
Balance as of September 30, 2016
$
171,117

Intangible Assets
 
As of December 31, 2015
 
As of September 30, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization & Impairment
 
Net
Carrying
Amount
 
(Dollars in Thousands)
Trade name
$
22,000

 
$
(896
)
 
$
21,104

 
$
22,500

 
$
(2,659
)
 
$
19,841

Technological know-how
54,100

 
(2,934
)
 
51,166

 
55,300

 
(8,621
)
 
46,679

Customer –related
    intangible
61,500

 
(1,602
)
 
59,898

 
64,500

 
(5,059
)
 
59,441

Total finite-lived
    intangible assets
$
137,600

 
$
(5,432
)
 
$
132,168

 
$
142,300

 
$
(16,339
)
 
$
125,961

Amortization expense of acquired intangible assets was $2.1 million in the period July 1 through August 14, 2015, $10.6 million in the period January 1 through August 14, 2015 and $2.7 million in the period August 15 through September 30, 2015. Amortization expense of acquired intangible assets was $3.5 million and $10.7 million in the three months and nine months ended September 30, 2016, respectively. Estimated amortization expense will

16

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


approximate $3.6 million in the remainder of 2016, $13.6 million in 2017, $12.9 million in 2018, $12.2 million in 2019 and $11.4 million in 2020.
(8)
Debt and Liquidity
The following table presents our long-term debt: 
 
As of
December 31, 2015
 
As of
September 30, 2016
 
(Dollars in thousands)
Credit Facility (Revolving Facility and Term Loan Facility)
$
98,000

 
$
97,500

Senior Notes
267,827

 
272,542

Other Debt
1,400

 
555

Total Debt
367,227

 
370,597

Less: Short-term Debt
(4,772
)
 
(6,465
)
Long-term Debt
$
362,455

 
$
364,132

The fair value of debt, which was determined using Level 2 inputs, was $328.7 million versus a book value of $370.6 million as of September 30, 2016. As a result of our acquisition by Brookfield and the resulting purchase price accounting adjustments (see Note 2 "Preferred Share Issuance and Merger"), our Senior Notes were adjusted to their fair market value as of August 15, 2015. The discount to fair value will be accreted over the remaining term of the Notes.
Credit Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement with a borrowing capacity of $400 million and a maturity date of April 2019 (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into a further Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a $40 million senior secured delayed draw term loan facility (the "Term Loan Facility").
On July 28, 2015, GrafTech and certain of its subsidiaries entered into an amendment to the Amended and Restated Credit Agreement to change the terms regarding the occurrence of a default upon a change in control (which is defined thereunder to include the acquisition by any person of more than 25 percent of GrafTech’s outstanding shares) to exclude the acquisition of shares by Brookfield (see Note 2).  In addition, effective upon such acquisition, the financial covenants were eased, resulting in increased availability under the Revolving Facility. The size of the Revolving Facility was also reduced from $400 million to $375 million. The size of the Term Loan Facility remained at $40 million.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. The size of the Revolving Facility was permanently reduced from $375 million to $225 million. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under the Revolving Facility) in excess of $25 million. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens and incur debt; a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility and the Term Loan Facility; and changes to the Company’s financial covenants so that until the earlier of March 31, 2019 or the Company has $75 million in trailing twelve month EBITDA (as defined in the Revolving Facility), the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from ($40 million) to $35 million after which the Company’s existing financial covenants under the Revolving Facility will apply.

17

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


With this amendment, the Company has full access to the $225 million Revolving Facility, subject to the $25 million minimum liquidity requirement. As of September 30, 2016, the Company had $61.5 million of borrowings on the Revolving Facility and $13.9 million of letters of credit drawn against the Revolving Facility.
The $40 million Term Loan Facility was fully drawn on August 11, 2015, in connection with the repayment of the Senior Subordinated Notes. The balance of the Term Loan Facility was $36.0 million as of September 30, 2016.
The interest rate applicable to the Revolving Facility and Term Loan Facility is LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.70% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of 6.375% Senior Notes due 2020 (the "Senior Notes"). The Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
 
The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.
 
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the indenture. 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 indenture for the Senior Notes states that if, prior to maturity, a change in control (as defined in the indenture) of the Company occurs and thereafter certain downgrades of the ratings of the Senior Notes as specified in the indenture occur, the Company will be required to offer to repurchase any or all of the Senior Notes at a repurchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus any accrued and unpaid interest. On August 17, 2015, a change in control occurred due to the Merger (see Note 2 to the Financial Statements). However, the downgrade of the ratings of the Senior Notes, as specified in the indenture, did not occur. Therefore, the Company was not and will not be required to offer to repurchase the Senior Notes as a result of the Merger.

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

The indenture for the Senior Notes also contains customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the indenture or the Senior Notes which failures are not cured or waived as provided in the indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (each, as defined in the indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $50.0 million, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $50.0 million against the Company, any Subsidiary Guarantor or any Significant Subsidiary that is not discharged, waived or stayed as provided in the indenture, (vi) cessation of any Subsidiary Guarantee (as defined in the indenture) to be in full force and effect or denial or disaffirmance by any subsidiary guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.

18

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


(9)
Inventories
Inventories are comprised of the following: 
 
As of
December 31, 2015
 
As of
September 30, 2016
 
(Dollars in thousands)
Inventories:
 
 
 
Raw materials and supplies
$
66,201

 
$
51,166

Work in process
89,198

 
56,113

Finished goods
62,731

 
59,404

         Total
$
218,130

 
$
166,683

Due to decreased pricing in our graphite electrode product line, we recorded a lower of cost or market inventory adjustment of $4.9 million and $19.5 million in the three and nine months ended September 30, 2016, respectively.
(10) Interest Expense
The following tables present the components of interest expense: 
 
Predecessor
 
Successor
 
For the Period
July 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Three
Months Ended September 30, 2016
 
(Dollars in thousands)
 
 
 
 
 
 
Interest incurred on debt
$
2,308

 
$
2,576

 
$
5,306

Amortization of discount on Senior
   Subordinated Notes
5,560

 

 

Accretion of fair value adjustment on Senior Notes

 
773

 
1,581

Amortization of debt issuance costs
922

 

 
77

Total interest expense
$
8,790

 
$
3,349

 
$
6,964

 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
Successor
 
For the Period
January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Nine
Months Ended September 30, 2016
 
(Dollars in thousands)
 
 
 
 
 
 
Interest incurred on debt
$
12,066

 
$
2,576

 
$
15,020

Amortization of discount on Senior
   Subordinated Notes
12,027

 

 

Accretion of fair value adjustment on
   Senior Notes

 
773

 
4,715

Amortization of debt issuance costs
2,118

 

 
125

Total interest expense
$
26,211

 
$
3,349

 
$
19,860

 
 
 
 
 
 

19

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


Interest Rates
The Revolving Facility had an effective interest rate of 2.68% and 5.28% as of December 31, 2015 and September 30, 2016, respectively. The Term Loan Facility had an interest rate of 2.49% as of December 31, 2015 and 5.28% as of September 30, 2016. The Senior Notes have a fixed interest rate of 6.375%
(11)
Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the nine months ended September 30, 2016, are presented below: 
 
(Dollars in thousands)
Balance as of December 31, 2015
$
388

Product warranty adjustments
1,312

Payments and settlements
(705
)
Balance as of September 30, 2016
$
995

(12)
Income Taxes
We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.

20

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


The following tables summarize the provision for income taxes for the three and nine months ended September 30, 2015 and September 30, 2016:
 
Predecessor
 
Successor
 
For the Period
July 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Three
Months Ended September 30, 2016
 
(Dollars in thousands)
Tax (benefit) expense
$
5,234

 
$
1,107

 
$
(1,789
)
Pretax loss
(30,097
)
 
(4,329
)
 
(25,890
)
Effective tax rates
(17.4
)%
 
(25.6
)%
 
6.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
Successor
 
For the Period
January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Nine
Months Ended September 30, 2016
 
(Dollars in thousands)
Tax (benefit) expense
$
6,452

 
$
1,107

 
$
(7,675
)
Pretax loss
(95,518
)
 
(4,329
)
 
(87,847
)
Effective tax rates
(6.8
)%
 
(25.6
)%
 
8.7
%
 
 
 
 
 
 
For the three and nine months ended September 30, 2016, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to recent losses in foreign jurisdictions where a tax benefit will be recognized, offset by recent losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future. The effective tax rate for the three and nine months ended September 30, 2016 differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates.
As of September 30, 2016, we had unrecognized tax benefits of $3.6 million, $3.1 million of which, if recognized, would have a favorable impact on our effective tax rate.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2013 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 2009.

We continue to assess the realization of our deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have established and maintained valuation allowances on those net deferred tax assets.
(13)
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the U.S. dollar.

21

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


Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-parties to our instruments. Our derivative risk management strategy has not resulted in a material impact to our financial results in 2015 or 2016. Our derivative assets and liabilities are included within "Prepaid expenses and other current assets" and "Other current liabilities" on the Condensed Consolidated Balance Sheets and effects of these derivatives are recorded in revenue, cost of goods sold and other expense (income) on the Condensed Consolidated Statements of Operations.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was no ineffectiveness on these contracts designated as hedging instruments during the nine months ended September 30, 2015 and 2016, respectively.
In 2015 and 2016, we entered into foreign currency derivatives denominated in the Mexican peso, South African rand, Brazilian real, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from commercial and business transactions may be adversely affected by changes in exchange rates between the U.S. dollar and the Mexican peso, euro and Japanese yen. As of September 30, 2016, we had outstanding Mexican peso, euro, and Japanese yen currency contracts with an aggregate notional amount of $23.1 million. The foreign currency derivatives outstanding as of September 30, 2016, have maturities that range from October, 2016 to December, 2016.
Commodity derivative contracts
We periodically enter into derivative contracts for certain refined oil products and natural gas. These contracts are entered into to protect against the risk that eventual cash flows related to these products may be adversely affected by future changes in prices. As of September 30, 2016, we had no outstanding derivative swap contracts for refined oil products or natural gas.
Net Investment Hedges
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt denominated in foreign currency and designated as a non-derivative net investment hedging instrument was $11.8 million and $13.3 million as of December 31, 2015 and September 30, 2016, respectively. Within the currency translation adjustment portion of other comprehensive income, we recorded a gain of $1.8 million for the three months ended September 30, 2015, and we incurred $0.9 million loss in three months ended September 30, 2016, resulting from these net investment hedges. We recorded a gain of $2.6 million in the nine months ended September 30, 2015 and a loss of $1.5 million in the nine months ended September 30, 2016 within other comprehensive income related to theses hedges.
(14)
Guarantor Information

On November 20, 2012, GrafTech International Ltd. (the “Parent”) issued $300 million aggregate principal amount of Senior Notes. The Senior Notes mature on November 15, 2020 and bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes have been guaranteed on a senior basis by the following wholly-owned direct and indirect subsidiaries of the Parent: GrafTech Finance Inc., GrafTech Holdings Inc., GrafTech USA LLC, Seadrift Coke LLP, Fiber Materials, Inc., Intermat, GrafTech Global Enterprises Inc., GrafTech International Holdings Inc., GrafTech DE LLC, GrafTech Seadrift Holding Corp, GrafTech International Trading Inc., GrafTech Technology LLC, GrafTech NY Inc., and Graphite Electrode Network LLC.
The guarantors of the Senior Notes, solely in their respective capacities as such, are collectively called the “Guarantors.” Our other subsidiaries, which are not guarantors of the Senior Notes, are called the “Non-Guarantors.”

22

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


    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, 2015 and September 30, 2016 and condensed consolidating statements of operations and comprehensive income for the periods January 1 and July 1 through August 14, 2015(Predecessor), the period August 15 through September 30, 2015 (Successor), and the three and nine months ended September 30, 2016 (Successor) and condensed consolidating statements of cashflows for the periods January 1 through August 14, 2015 (Predecessor), August 15 through September 30, 2015 and the nine months ended September 30, 2016 (Successor) of the Parent Guarantors and the Non-Guarantors.



23

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


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

 
$
646

 
$
6,281

 
$

 
$
6,927

    Accounts receivable - affiliates
 
51,592

 
9,803

 
19,505

 
(80,900
)
 

    Accounts receivable - trade
 

 
7,599

 
74,791

 

 
82,390

    Inventories
 

 
54,613

 
163,517

 

 
218,130

    Prepaid and other current assets
 

 
7,913

 
13,244

 

 
21,157

    Current assets of discontinued operations
 

 
81,638

 
17,520

 
(877
)
 
98,281

      Total current assets
 
51,592

 
162,212

 
294,858

 
(81,777
)
 
426,885

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
1,068,027

 
668,113

 

 
(1,736,140
)
 

 Property, plant and equipment
 

 
209,633

 
341,530

 

 
551,163

 Deferred income taxes
 

 

 
15,326

 

 
15,326

 Goodwill
 

 
72,399

 
99,660

 

 
172,059

 Notes receivable - affiliate
 

 
46,074

 

 
(46,074
)
 

 Other assets
 

 
79,367

 
73,246

 

 
152,613

 Long-term assets of discontinued operations
 

 
99,457

 
4,518

 

 
103,975

      Total Assets
 
$
1,119,619

 
$
1,337,255

 
$
829,138

 
$
(1,863,991
)
 
$
1,422,021

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 
$
159

 
$
71,099

 
$
9,642

 
$
(80,900
)
 
$

    Accounts payable - trade
 

 
11,191

 
28,956

 

 
40,147

    Short-term debt
 

 
4,636

 
136

 

 
4,772

    Accrued income and other taxes
 

 
2,824

 
3,109

 

 
5,933

    Rationalizations
 

 
995

 
200

 

 
1,195

    Other accrued liabilities
 
2,444

 
4,847

 
13,703

 

 
20,994

    Short-term liabilities of discontinued operations
 

 
18,384

 
5,575

 
(877
)
 
23,082

         Total current liabilities
 
2,603

 
113,976

 
61,321

 
(81,777
)
 
96,123

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 
38,661

 

 
7,413

 
(46,074
)
 

 Long-term debt - third party
 
267,827

 
93,758

 
870

 

 
362,455

 Other long-term obligations
 

 
60,508

 
33,810

 

 
94,318

 Deferred income taxes
 

 
248

 
57,182

 

 
57,430

 Long-term liabilities of discontinued operations
 

 
738

 
429

 

 
1,167

 Stockholders' equity
 
810,528

 
1,068,027

 
668,113

 
(1,736,140
)
 
810,528

   Total Liabilities and Stockholders' Equity
 
$
1,119,619

 
$
1,337,255

 
$
829,138

 
$
(1,863,991
)
 
$
1,422,021

 
 
 
 
 
 
 
 
 
 
 



24

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


CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2016
(in thousands)
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 
    Cash and cash equivalents
 
$

 
$
1,266

 
$
10,881

 
$

 
$
12,147

    Accounts receivable - affiliates
 
51,592

 
1,729

 
19,372

 
(72,693
)
 

    Accounts receivable - trade
 

 
7,579

 
67,034

 

 
74,613

    Inventories
 

 
46,972

 
119,711

 

 
166,683

    Prepaid and other current assets
 

 
9,155

 
13,637

 

 
22,792

    Current assets of discontinued operations
 

 
82,738

 
18,068

 
(5,920
)
 
94,886

      Total current assets
 
51,592

 
149,439

 
248,703

 
(78,613
)
 
371,121

 
 
 
 
 
 
 
 
 
 
 
 Investment in affiliates
 
914,173

 
623,611

 

 
(1,537,784
)
 

 Property, plant and equipment
 

 
198,577

 
334,340

 

 
532,917

 Deferred income taxes
 

 

 
20,324

 

 
20,324

 Goodwill
 

 
70,399

 
100,718

 

 
171,117

 Notes receivable - affiliate
 

 
56,235

 

 
(56,235
)
 

 Other assets
 

 
71,126

 
72,005

 

 
143,131

      Total Assets
 
$
965,765

 
$
1,169,387

 
$
776,090

 
$
(1,672,632
)
 
$
1,238,610

 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 
    Accounts payable - affiliate
 
$
269

 
$
70,960

 
$
1,464

 
$
(72,693
)
 
$

    Accounts payable - trade
 

 
8,711

 
33,271

 

 
41,982

    Short-term debt
 

 
5,824

 
641

 

 
6,465

    Accrued income and other taxes
 

 
1,467

 
4,110

 

 
5,577

    Rationalizations
 

 
195

 
15

 

 
210

    Other accrued liabilities
 
7,225

 
5,879

 
16,365

 

 
29,469

    Liabilities of discontinued operations
 

 
15,504

 
7,369

 
(5,920
)
 
16,953

         Total current liabilities
 
7,494

 
108,540

 
63,235

 
(78,613
)
 
100,656

 
 
 
 
 
 
 
 
 
 
 
 Long-term debt - affiliate
 
48,822

 

 
7,413

 
(56,235
)
 

 Long-term debt - third party
 
272,542

 
90,656

 
934

 

 
364,132

 Other long-term obligations
 

 
55,091

 
34,090

 

 
89,181

 Deferred income taxes
 

 
249

 
46,618

 

 
46,867

 Long-term liabilities of discontinued operations
 

 
678

 
189




867

 Stockholders' equity
 
636,907

 
914,173

 
623,611

 
(1,537,784
)
 
636,907

   Total Liabilities and Stockholders' Equity
 
$
965,765

 
$
1,169,387

 
$
776,090

 
$
(1,672,632
)
 
$
1,238,610

 
 
 
 
 
 
 
 
 
 
 



25

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


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Period July 1 through August 14, 2015 (Predecessor)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
20,042

 
$
10,405

 
$
(30,447
)
 
$

 Sales - third party
 

 
15,705

 
35,899

 

 
51,604

    Net sales
 

 
35,747

 
46,304

 
(30,447
)
 
51,604

 Cost of sales
 

 
32,658

 
45,197

 
(30,447
)
 
47,408

      Gross profit
 

 
3,089

 
1,107

 

 
4,196

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 

 
710

 

 

 
710

 Selling and administrative expenses
 
6,750

 
13,419

 
4,416

 

 
24,585

 Rationalizations
 

 
(39
)
 

 

 
(39
)
      Operating (loss) income
 
(6,750
)
 
(11,001
)
 
(3,309
)
 

 
(21,060
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 

 
97

 
172

 

 
269

 Interest expense - affiliate
 
3

 
67

 

 
(70
)
 

 Interest expense - third party
 
7,984

 
746

 
60

 

 
8,790

 Interest income - affiliate
 
(67
)
 
(3
)
 

 
70

 

 Interest income - third party
 

 

 
(22
)
 

 
(22
)
 Income (Loss) from
  continuing operations before
   provision for income taxes
 
(14,670
)
 
(11,908
)
 
(3,519
)
 

 `
(30,097
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for income taxes
 

 
4,075

 
1,159

 

 
5,234

 Equity in loss from
continuing operations of subsidiary
 
(20,661
)
 
(4,678
)
 

 
25,339

 

      Net (loss) income from
continuing operations
 
(35,331
)
 
(20,661
)
 
(4,678
)
 
25,339

 
(35,331
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued
     operations, net of tax
 

 
(7,786
)
 
893

 

 
(6,893
)
Equity in income (loss) from
    discontinued operations of
      subsidiary

 
(6,893
)
 
893

 

 
6,000

 

      Net (loss) income from
discontinued operations
 
(6,893
)
 
(6,893
)
 
893

 
6,000

 
(6,893
)
 
 
 
 
 
 
 
 
 
 
 
      Net loss
 
$
(42,224
)
 
$
(27,554
)
 
$
(3,785
)
 
$
31,339

 
$
(42,224
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income (Loss)
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 

Net loss
 
$
(42,224
)
 
$
(27,554
)
 
$
(3,785
)
 
$
31,339

 
$
(42,224
)
Other comprehensive loss
 
(5,465
)
 
(5,465
)
 
(5,834
)
 
11,299

 
(5,465
)
Comprehensive loss
 
$
(47,689
)
 
$
(33,019
)
 
$
(9,619
)
 
$
42,638

 
$
(47,689
)
 
 
 
 
 
 
 
 
 
 
 


26

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


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Period August 15 through September 30, 2015 (Successor)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
18,516

 
$
13,174

 
$
(31,690
)
 
$

 Sales - third party
 

 
17,548

 
57,226

 

 
74,774

    Net sales
 

 
36,064

 
70,400

 
(31,690
)
 
74,774

 Cost of sales
 

 
32,552

 
67,025

 
(31,690
)
 
67,887

      Gross profit
 

 
3,512

 
3,375

 

 
6,887

 
 
 
 
 
 
 
 
 
 
 
 Research and development
 

 
220

 

 

 
220

 Selling and administrative expenses
 

 
1,844

 
4,965

 

 
6,809

 Rationalizations
 

 

 
156

 

 
156

      Operating (loss) income
 

 
1,448

 
(1,746
)
 

 
(298
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 

 
507

 
196

 

 
703

 Interest expense - affiliate
 
67

 

 

 
(67
)
 

 Interest expense - third party
 
3,227

 
32

 
90

 

 
3,349

 Interest income - affiliate
 

 
(67
)
 

 
67

 

 Interest income - third party
 

 

 
(21
)
 

 
(21
)
 Income (Loss) from
  continuing operations before
   provision for income taxes
 
(3,294
)
 
976

 
(2,011
)
 

 `
(4,329
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for income taxes
 

 
745

 
362

 

 
1,107

 Equity in loss from
continuing operations of subsidiary
 
(2,142
)
 
(2,373
)
 

 
4,515

 

      Net (loss) income from
continuing operations
 
(5,436
)
 
(2,142
)
 
(2,373
)
 
4,515

 
(5,436
)
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued
     operations, net of tax
 

 
(1,295
)
 
(572
)
 

 
(1,867
)
Equity in loss from discontinued operations of subsidiary

 
(1,867
)
 
(572
)
 

 
2,439

 

      Net (loss) income from
discontinued operations
 
(1,867
)
 
(1,867
)
 
(572
)
 
2,439

 
(1,867
)
 
 
 
 
 
 
 
 
 
 
 
      Net loss
 
$
(7,303
)
 
$
(4,009
)
 
$
(2,945
)
 
$
6,954

 
$
(7,303
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(7,303
)
 
$
(4,009
)
 
$
(2,945
)
 
$
6,954

 
$
(7,303
)
Other comprehensive loss
 
(6,203
)
 
(6,203
)
 
(6,203
)
 
12,406

 
(6,203
)
Comprehensive loss
 
$
(13,506
)
 
$
(10,212
)
 
$
(9,148
)
 
$
19,360

 
$
(13,506
)
 
 
 
 
 
 
 
 
 
 
 


27

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


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

 
$
16,334

 
$
10,078

 
$
(26,412
)
 
$

 Sales - third party
 

 
21,891

 
89,699

 

 
111,590

    Net sales
 

 
38,225

 
99,777

 
(26,412
)
 
111,590

 Cost of sales
 

 
36,886

 
103,128

 
(26,412
)
 
113,602

Additions to lower of cost or
market inventory reserve
 

 
1,915

 
2,983

 

 
4,898

      Gross profit (loss)
 

 
(576
)
 
(6,334
)
 

 
(6,910
)
 
 
 
 
 
 
 
 
 
 
 
 Research and development
 

 
526

 

 

 
526

 Selling and administrative expenses
 

 
3,906

 
8,309

 

 
12,215

      Operating loss
 

 
(5,008
)
 
(14,643
)
 

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

 
287

 
(854
)
 

 
(567
)
 Interest expense - affiliate
 
268

 

 

 
(268
)
 

 Interest expense - third party
 
6,362

 
473

 
129

 

 
6,964

 Interest income - affiliate
 

 
(268
)
 

 
268

 

 Interest income - third party
 

 

 
(158
)
 

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

 `
(25,890
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for (benefit from)
     income taxes
 

 
123

 
(1,912
)
 

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

 
29,319

 

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

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

 
958

 
176

 

 
1,134

Equity in income from discontinued
    operations of subsidiary

 
1,134

 
176

 

 
(1,310
)
 

      Net income from
discontinued operations
 
1,134

 
1,134

 
176

 
(1,310
)
 
1,134

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

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

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

 
2,418

 
2,418

 
(4,836
)
 
2,418

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

 
$
(20,549
)
 
 
 
 
 
 
 
 
 
 
 


28

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


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Period January 1 through August 14, 2015 (Predecessor)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
117,366

 
$
52,683

 
$
(170,049
)
 
$

 Sales - third party
 

 
80,243

 
259,664

 

 
339,907

    Net sales
 

 
197,609

 
312,347

 
(170,049
)
 
339,907

 Cost of sales
 

 
180,983

 
294,067

 
(170,049
)
 
305,001

      Gross profit
 

 
16,626

 
18,280

 

 
34,906

 
 


 


 


 


 


 Research and development
 

 
3,377

 

 

 
3,377

 Selling and administrative expenses
 
6,750

 
31,513

 
26,120

 

 
64,383

 Impairments
 

 
35,381

 

 

 
35,381

 Rationalizations
 

 
(68
)
 
82

 

 
14

      Operating income (loss)
 
(6,750
)
 
(53,577
)
 
(7,922
)
 

 
(68,249
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 

 
889

 
532

 

 
1,421

 Interest expense - affiliate
 
3

 
372

 

 
(375
)
 

 Interest expense - third party
 
24,366

 
1,574

 
271

 

 
26,211

 Interest income - affiliate
 
(372
)
 
(3
)
 

 
375

 

 Interest income - third party
 

 

 
(363
)
 

 
(363
)
 Loss from continuing operations
before provision for income taxes
 
(30,747
)
 
(56,409
)
 
(8,362
)
 

 `
(95,518
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for income taxes
 

 
384

 
6,068

 

 
6,452

 Equity in loss from
continuing operations of subsidiary
 
(71,223
)
 
(14,430
)
 

 
85,653

 

      Net (loss) income from
continuing operations
 
(101,970
)
 
(71,223
)
 
(14,430
)
 
85,653

 
(101,970
)
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued
     operations, net of tax
 

 
(13,430
)
 
(5,249
)
 

 
(18,679
)
Equity in loss from discontinued operations of subsidiary

 
(18,679
)
 
(5,249
)
 

 
23,928

 

      Net (loss) income from
discontinued operations
 
(18,679
)
 
(18,679
)
 
(5,249
)
 
23,928

 
(18,679
)
 
 
 
 
 
 
 
 
 
 
 
      Net loss
 
$
(120,649
)
 
$
(89,902
)
 
$
(19,679
)
 
$
109,581

 
$
(120,649
)
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

 

 

 Statements of
Comprehensive Income (Loss)
 

 

 

 

 

 
 

 

 

 

 

Net loss
 
$
(120,649
)
 
$
(89,902
)
 
$
(19,679
)
 
$
109,581

 
$
(120,649
)
Other comprehensive loss
 
(26,674
)
 
(26,674
)
 
(28,041
)
 
54,715

 
(26,674
)
Comprehensive loss
 
$
(147,323
)
 
$
(116,576
)
 
$
(47,720
)
 
$
164,296

 
$
(147,323
)
 
 
 
 
 
 
 
 
 
 
 

29

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


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Period August 15 through September 30, 2015 (Successor)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
18,516

 
$
13,174

 
$
(31,690
)
 
$

 Sales - third party
 

 
17,548

 
57,226

 

 
74,774

    Net sales
 

 
36,064

 
70,400

 
(31,690
)
 
74,774

 Cost of sales
 

 
32,552

 
67,025

 
(31,690
)
 
67,887

      Gross profit
 

 
3,512

 
3,375

 

 
6,887

 
 


 


 


 


 


 Research and development
 

 
220

 

 

 
220

 Selling and administrative expenses
 

 
1,844

 
4,965

 

 
6,809

 Rationalizations
 

 

 
156

 

 
156

      Operating (loss) income
 

 
1,448

 
(1,746
)
 

 
(298
)
 
 

 

 

 

 

 Other expense (income), net
 

 
507

 
196

 

 
703

 Interest expense - affiliate
 
67

 

 

 
(67
)
 

 Interest expense - third party
 
3,227

 
32

 
90

 

 
3,349

 Interest income - affiliate
 

 
(67
)
 

 
67

 

 Interest income - third party
 

 

 
(21
)
 

 
(21
)
 Income (Loss) from
  continuing operations before
   provision for income taxes
 
(3,294
)
 
976

 
(2,011
)
 

 `
(4,329
)
 
 

 

 

 

 

 Provision for income taxes
 

 
745

 
362

 

 
1,107

 Equity in loss from
continuing operations of subsidiary
 
(2,142
)
 
(2,373
)
 

 
4,515

 

      Net loss from
continuing operations
 
(5,436
)
 
(2,142
)
 
(2,373
)
 
4,515

 
(5,436
)
 
 

 

 

 

 

Loss from discontinued
     operations, net of tax
 

 
(1,295
)
 
(572
)
 

 
(1,867
)
Equity in loss from discontinued operations of subsidiary

 
(1,867
)
 
(572
)
 

 
2,439

 

      Net loss from
discontinued operations
 
(1,867
)
 
(1,867
)
 
(572
)
 
2,439

 
(1,867
)
 
 


 


 


 


 


      Net loss
 
$
(7,303
)
 
$
(4,009
)
 
$
(2,945
)
 
$
6,954

 
$
(7,303
)
 
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(7,303
)
 
$
(4,009
)
 
$
(2,945
)
 
$
6,954

 
$
(7,303
)
Other comprehensive loss
 
(6,203
)
 
(6,203
)
 
(6,203
)
 
12,406

 
(6,203
)
Comprehensive loss
 
$
(13,506
)
 
$
(10,212
)
 
$
(9,148
)
 
$
19,360

 
$
(13,506
)
 
 


 


 


 


 




30

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


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Nine Months Ended September 30, 2016 (Successor)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 Sales - affiliates
 
$

 
$
95,471

 
$
45,802

 
$
(141,273
)
 
$

 Sales - third party
 

 
64,534

 
257,996

 

 
322,530

    Net sales
 

 
160,005

 
303,798

 
(141,273
)
 
322,530

 Cost of sales
 

 
142,299

 
330,271

 
(141,273
)
 
331,297

Additions to lower of cost or
market inventory reserve
 

 
5,697

 
13,826

 

 
19,523

      Gross profit (loss)
 

 
12,009

 
(40,299
)
 

 
(28,290
)
 
 
 
 
 
 
 
 
 
 
 
 Research and development
 

 
1,964

 

 

 
1,964

 Selling and administrative expenses
 

 
13,580

 
25,792

 

 
39,372

 Rationalizations
 

 
115

 
(57
)
 

 
58

      Operating (loss)
 

 
(3,650
)
 
(66,034
)
 

 
(69,684
)
 
 
 
 
 
 
 
 
 
 
 
 Other expense (income), net
 
6

 
1,029

 
(2,563
)
 

 
(1,528
)
 Interest expense - affiliate
 
702

 

 

 
(702
)
 

 Interest expense - third party
 
19,059

 
527

 
274

 

 
19,860

 Interest income - affiliate
 

 
(702
)
 

 
702

 

 Interest income - third party
 

 

 
(169
)
 

 
(169
)
 Loss from continuing operations
before provision for income taxes
 
(19,767
)
 
(4,504
)
 
(63,576
)
 

 `
(87,847
)
 
 
 
 
 
 
 
 
 
 
 
 Provision for (benefit from) income taxes
 

 
378

 
(8,053
)
 

 
(7,675
)
 Equity in loss from continuing
    operations of subsidiary
 
(60,405
)
 
(55,523
)
 

 
115,928

 

      Net loss from
continuing operations
 
(80,172
)
 
(60,405
)
 
(55,523
)
 
115,928

 
(80,172
)
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued
     operations, net of tax
 

 
(104,372
)
 
(3,196
)
 

 
(107,568
)
Equity in loss from discontinued
    operations of subsidiary

 
(107,568
)
 
(3,196
)
 

 
110,764

 

      Net loss from
discontinued operations
 
(107,568
)
 
(107,568
)
 
(3,196
)
 
110,764

 
(107,568
)
 
 
 
 
 
 
 
 
 
 
 
      Net loss
 
$
(187,740
)
 
$
(167,973
)
 
$
(58,719
)
 
$
226,692

 
$
(187,740
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Statements of
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(187,740
)
 
$
(167,973
)
 
$
(58,719
)
 
$
226,692

 
$
(187,740
)
Other comprehensive income
 
14,119

 
14,119

 
14,119

 
(28,238
)
 
14,119

Comprehensive loss
 
$
(173,621
)
 
$
(153,854
)
 
$
(44,600
)
 
$
198,454

 
$
(173,621
)
 
 
 
 
 
 
 
 
 
 
 

31

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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Period January 1 through August 14, 2015 (Predecessor)
(in thousands)
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
Net cash (used in) provided by
 operating activities:
$
(4,017
)
 
$
34,418

 
$
25,632

 
$
(27,710
)
 
$
28,323

 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
   Repayments from (loans to) affiliates
36,204

 
(21,343
)
 

 
(14,861
)
 

  Capital expenditures

 
(20,572
)
 
(11,729
)
 

 
(32,301
)
  Payments for derivative instruments

 
(7,595
)
 
(668
)
 

 
(8,263
)
  Proceeds from sale of fixed assets

 
397

 
249

 

 
646

    Net cash provided by
        (used in) investing activities
36,204

 
(49,113
)
 
(12,148
)
 
(14,861
)
 
(39,918
)
 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
  Loans from (Repayments to) affiliates
21,343

 
(36,204
)
 

 
14,861

 

  Dividends to affiliates

 

 
(27,710
)
 
27,710

 

  Short-term debt, net

 
14,002

 
4,509

 

 
18,511

  Revolving Facility borrowings

 
126,000

 
34,000

 

 
160,000

  Revolving Facility reductions

 
(87,000
)
 
(12,000
)
 

 
(99,000
)
  Repayment of Senior Subordinated Notes
(200,000
)
 

 

 

 
(200,000
)
  Issuance of Preferred Shares
150,000

 

 

 

 
150,000

  Principal payments on long term debt

 
(89
)
 

 

 
(89
)
  Proceeds from exercise of stock options
32

 

 

 

 
32

  Purchase of treasury shares
(63
)
 

 

 

 
(63
)
  Revolver facility refinancing

 
(5,037
)
 
(31
)
 

 
(5,068
)
  Other
(3,499
)
 

 

 

 
(3,499
)
    Net cash (used in) provided by
         financing activities
(32,187
)
 
11,672

 
(1,232
)
 
42,571

 
20,824

 
 
 
 
 
 
 
 
 
 
Net change in cash and
   cash equivalents

 
(3,023
)
 
12,252

 

 
9,229

Effect of exchange rate changes
   on cash and cash equivalents

 

 
(1,746
)
 

 
(1,746
)
Cash and cash equivalents at
   beginning of period

 
5,503

 
12,047

 

 
17,550

Cash and cash equivalents
   at end of period
$

 
$
2,480

 
$
22,553

 
$

 
$
25,033



32

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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Period August 15 through September 30, 2015 (Successor)
(in thousands)
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
Net cash (used in) provided by operating activities:
$
(6,367
)
 
$
(212
)
 
$
10,491

 
$

 
$
3,912

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

 
(7,752
)
 

 
7,752

 

  Capital expenditures

 
(2,136
)
 
(3,103
)
 

 
(5,239
)
  Payments for derivative instruments

 

 
84

 

 
84

  Proceeds from sale of fixed assets

 
486

 
56

 

 
542

    Net cash (used in) provided by
       investing activities

 
(9,402
)
 
(2,963
)
 
7,752

 
(4,613
)
 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
  Loans from (Repayments to) affiliates
7,752

 

 

 
(7,752
)
 

  Dividends to affiliates

 

 

 

 

  Short-term debt, net

 
(5,699
)
 
(4,481
)
 

 
(10,180
)
  Revolving Facility borrowings

 
22,000

 

 

 
22,000

  Revolving Facility reductions

 
(9,000
)
 
(12,000
)
 

 
(21,000
)
  Principal payments on long term debt

 
(12
)
 

 

 
(12
)
  Other
(1,385
)
 

 

 

 
(1,385
)
    Net cash provided by (used in)
         financing activities
6,367

 
7,289

 
(16,481
)
 
(7,752
)
 
(10,577
)
 
 
 
 
 
 
 
 
 
 
Net change in cash and
   cash equivalents

 
(2,325
)
 
(8,953
)
 

 
(11,278
)
Effect of exchange rate changes
   on cash and cash equivalents

 

 
(294
)
 

 
(294
)
Cash and cash equivalents at
   beginning of period

 
2,480

 
22,553

 

 
25,033

Cash and cash equivalents
   at end of period
$

 
$
155

 
$
13,306

 
$

 
$
13,461



33

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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2016 (Successor)
(in thousands)
 
 
 
 
 
 
 
Consolidating
 
 
 
 
 
 
 
Non-
 
Entries and
 
 
 
Parent
 
Guarantors
 
Guarantors
 
Eliminations
 
Consolidated
Net cash (used in) provided by operating activities:
$
(9,568
)
 
$
19,207

 
$
19,092

 
$

 
$
28,731

 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
  Loans to affiliates

 
(9,568
)
 

 
9,568

 

  Capital expenditures

 
(7,453
)
 
(14,804
)
 

 
(22,257
)
  Payments for derivative instruments

 

 
(1,171
)
 

 
(1,171
)
  Proceeds from sale of assets

 
458

 
227

 

 
685

    Net cash (used in) provided by
         investing activities

 
(16,563
)
 
(15,748
)
 
9,568

 
(22,743
)
 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
  Loans from affiliates
9,568

 

 

 
(9,568
)
 

  Short-term debt, net

 
3

 
500

 

 
503

  Revolving Facility borrowings

 
35,000

 
5,000

 

 
40,000

  Revolving Facility reductions

 
(36,000
)
 
(5,000
)
 

 
(41,000
)
  Principal payments on long term debt

 
(104
)
 

 

 
(104
)
  Revolver facility refinancing

 
(922
)
 

 

 
(922
)
    Net cash provided by (used in)
         financing activities
9,568

 
(2,023
)
 
500

 
(9,568
)
 
(1,523
)
 
 
 
 
 
 
 
 
 


Net change in cash and
   cash equivalents

 
621

 
3,844

 

 
4,465

Effect of exchange rate changes
   on cash and cash equivalents

 

 
755

 

 
755

Cash and cash equivalents at
   beginning of period

 
646

 
6,281

 

 
6,927

Cash and cash equivalents
   at end of period
$

 
$
1,267

 
$
10,880

 
$

 
$
12,147



34

Table of Contents    
PART I (CONT’D)
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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
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): outlook for 2016 or beyond; operational and financial performance; growth prospects and rates; profitability, cash flow, liquidity and capital resources, production rates, inventory levels and EBITDA; rationalization, product line change, cost and liquidity initiatives; changes in the operating or utilization rates or efficiency in our operations or our competitors' or customers' operations; product quality; diversification, new products, and product improvements; divestitures, asset sales, investments and acquisitions that we may make in the future; possible debt or equity financing or refinancing (including factoring and supply chain financing) activities; customer bankruptcies; conditions and changes in the global financial and credit markets; accounting changes; currency exchange and interest rates and changes therein; changes in production capacity in our operations and our competitors' or customers' operations; 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; the markets we serve and our position in those markets; employment and contributions of key personnel; employee relations and collective bargaining agreements covering many of our operations; tax rates and the effects of jurisdictional mix; capital expenditures and changes therein; nature and timing of restructuring and rationalization charges and payments; inventory and 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; 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.

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Our expectations and targets are not predictions 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;
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 control or trade sanction laws to which we are subject 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 closure 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;

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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;
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 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 liabilities for our Brazilian subsidiary;
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;

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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;
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 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.

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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 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 2015 Annual Report on Form 10-K.

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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. Our discussions about market data and global economic conditions below are based on or derived from published industry accounts and statistics.
In its July, 2016 report, the International Monetary Fund (IMF) reduced its estimated global growth by 0.1% for both 2016 and 2017 to 3.1% and 3.4%, respectively. This revision was primarily the result of the U.K. vote to exit the European union ("Brexit") as the IMF stated pre-Brexit estimates indicated a 0.1% increase in global growth for 2017. Projections for advanced economies declined 0.1% and 0.2% to 1.8% for both 2016 and 2017. Emerging market and developing economies estimates remained diverse.
In its short range outlook released on October 11, 2016, the World Steel Association (WSA) forecasts that global steel demand will increase by 0.2% percent to 1,501 million tons in 2016 and 0.5% in 2017. This estimate is higher than the 1,488 million tons that WSA forecasted in April for 2016. WSA noted that the increase was primarily attributable to a better than expected forecast for China and continued growth in emerging economies. In developed economies, the WSA expects steel demand to grow by 0.2% in 2016 and 1.1% in 2017. This represents a downward estimate of 1.5% for 2016 due to slower growth in the United States and the effects of Brexit.

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Results of Operations and Segment Review
The Periods July 1 Through August 15, 2015 (Predecessor) and August 15 Through September 30, 2015 (Successor) as Compared to the Three Months Ended September 30, 2016 (Successor).
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. Throughout our MD&A, insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
Business Combination Accounting
As a result of business combination accounting resulting from our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger"), the Company's financial statements are separated into two distinct periods, the period before the consummation of the Brookfield transaction (labeled predecessor) and the period after that date (labeled successor), to indicate the application of different basis of accounting between the periods presented.
 
 
Predecessor
 
Successor
(in thousands)
 
For the Period July 1 2015 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Three Months Ended September 30, 2016
Net sales
 
$
51,604

 
$
74,774

 
$
111,590

Cost of sales
 
47,408

 
67,887

 
113,602

Additions to lower of cost or
market inventory reserve
 

 

 
4,898

     Gross profit (loss)
 
4,196

 
6,887

 
(6,910
)
Research and development
 
710

 
220

 
526

Selling and administrative expenses
 
24,585

 
6,809

 
12,215

Rationalizations
 
(39
)
 
156

 

     Operating loss
 
(21,060
)

(298
)
 
(19,651
)
Other expense (income), net
 
269

 
703

 
(567
)
Interest expense
 
8,790

 
3,349

 
6,964

Interest income
 
(22
)
 
(21
)
 
(158
)
Loss from continuing operations before
provision for income taxes
 
(30,097
)
 
(4,329
)
 
(25,890
)
Provision for (benefit from) income taxes
 
5,234

 
1,107

 
(1,789
)
Net loss from continuing operations
 
(35,331
)
 
(5,436
)
 
(24,101
)
(Loss) Income from discontinued
    operations, net of tax
 
(6,893
)
 
(1,867
)
 
1,134

Net loss
 
$
(42,224
)
 
$
(7,303
)
 
$
(22,967
)
Net sales. Net sales for our Industrial Materials segment decreased from $51.6 million in the period July 1 through August 14, 2015 and $74.8 million in the period August 15 through September 30, 2015 to $111.6 million in the three months ended September 30, 2016. Our graphite electrode product line was negatively impacted by a 29% decline in the weighted average selling price compared to the same period of the prior year decreasing revenues by $41.2 million. This decline in sales price was partially offset by a 22% increase in sales volumes.
Cost of sales. We experienced decreases in cost of sales from $47.4 million in the period July 1 through August 14, 2015 and $67.9 million in the period August 15 to September 30, 2015 compared to $113.6 million in the three months ended September 30, 2016. This decrease was in spite of the 22% increase in sales volumes and was primarily the result of decreases in the price of raw materials and increased utilization. Increased utilization was driven primarily by our rationalization initiatives over the last three years, continued cost control initiatives and optimization of our graphite electrode plant capacity.

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Lower of cost or market inventory adjustment. In the three months ended September 30, 2016, we incurred a lower of cost or market adjustment of $4.9 million in certain product lines within our graphite electrode business reflecting the aforementioned decreased pricing.
Selling and administrative expenses. Selling and administrative expenses have decreased from $24.6 million in the period July 1 through August 14, 2015 and $6.8 million in the period August 15 through September 30, 2015 to $12.2 million in the three months ended September 30, 2016. This decrease was primarily driven by one-time charges related to our acquisition in 2015 for stock based compensation vesting and proxy-related fees totaling $18.0 million.
Research and development expenses. Research and development expenses decreased from $0.7 million in the period July 1 through August 14, 2015 and $0.2 million in the period August 15 through September 30, 2015 to $0.5 million in the three months ended September 30, 2016 due primarily to headcount reductions as well as overall cost control measures.
Other (Income) Expense. Other expense decreased from $0.3 million in the period July 1 through August 14 and $0.7 million in the period August 15 through September 30, 2015, to income of $0.6 million in the three months ended September 30, 2016 due to advantageous foreign currency impacts on non-operating assets and liabilities.
Interest Expense. Interest expense decreased from $8.8 million in the period July 1 through August 14, 2015 and $3.3 million in the period August 15 through September 30, 2015, to $7.0 million in the three months ended September 30, 2016 primarily due to $4.5 million of accelerated interest expense resulting from the prepayment of our senior subordinated notes in the predecessor period.
Loss from Discontinued Operations. Our loss from discontinued operations improved from a loss of $6.9 million in the period July 1 through August 14, 2015 and $1.9 million in the period August 15 through September 30, 2015 to income of $1.1 million in the three months ended September 30, 2016. This improvement was primarily driven by an improved cost structure resulting from our rationalization initiatives.
Segment operating income (loss). The following table represents our operating income (loss) by segment:
 
Predecessor
 
Successor
 
For the Period July 1 2015 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Three Months Ended September 30, 2016
 
(Dollars in thousands)
Industrial Materials
$
(2,588
)
 
$
2,918

 
$
(14,238
)
Corporate, R&D and Other Expenses
(18,472
)
 
(3,216
)
 
(5,413
)
Total operating loss
$
(21,060
)
 
$
(298
)
 
$
(19,651
)
Provision for income taxes. The following table summarizes the expense/(benefit) for income taxes:  
 
Predecessor
 
Successor
 
For the Period July 1 2015 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Three Months Ended September 30, 2016
 
(Dollars in thousands)
Tax expense (benefit)
$
5,234

 
$
1,107

 
$
(1,789
)
Pretax loss
(30,097
)
 
(4,329
)
 
(25,890
)
Effective tax rates
(17.4
)%
 
(25.6
)%
 
6.9
%
For the three months ended September 30, 2016, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to recent losses in foreign jurisdictions where a tax benefit will be recognized, offset by recent losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates. The recognition of the valuation allowance does not result in or limit the

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Company's ability to utilize these tax assets in the future. The provision for income taxes for the three months ended September 30, 2015 differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates.
The Periods January 1 Through August 15, 2015 (Predecessor) and August 15 Through September 30, 2015 (Successor) as Compared to the Nine Months Ended September 30, 2016 (Successor)
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. Throughout our MD&A, insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
Business Combination Accounting
As a result of business combination accounting resulting from our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger"), the Company's financial statements are separated into two distinct periods, the period before the consummation of the Brookfield transaction (labeled predecessor) and the period after that date (labeled successor), to indicate the application the of different basis of accounting between the periods presented.
 
Predecessor
 
 
 
Successor
(in thousands)
For the Period January 1 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Nine Months Ended September 30, 2016
Net sales
$
339,907

 
$
74,774

 
$
322,530

Cost of sales
305,001

 
67,887

 
331,297

Additions to lower of cost or
market inventory reserve

 

 
19,523

     Gross profit (loss)
34,906

 
6,887

 
(28,290
)
Research and development
3,377

 
220

 
1,964

Selling and administrative expenses
64,383

 
6,809

 
39,372

Rationalizations
14

 
156

 
58

Impairments
35,381

 

 

     Operating loss
(68,249
)
 
(298
)
 
(69,684
)
Other expense (income), net
1,421

 
703

 
(1,528
)
Interest expense
26,211

 
3,349

 
19,860

Interest income
(363
)
 
(21
)
 
(169
)
Loss from continuing operations before
provision for income taxes
(95,518
)
 
(4,329
)
 
(87,847
)
Provision for (benefit from) income taxes
6,452

 
1,107

 
(7,675
)
Net loss from continuing operations
(101,970
)
 
(5,436
)
 
(80,172
)
Loss from discontinued operations, net of tax
(18,679
)
 
(1,867
)
 
(107,568
)
Net loss
$
(120,649
)
 
$
(7,303
)
 
$
(187,740
)
Net sales. Net sales for our Industrial Materials segment decreased from $339.9 million in the period January 1 through August 14, 2015 and $74.8 million in the period August 15 through September 30, 2015 to $322.5 million in the nine months ended September 30, 2016. This decrease was primarily driven by a 27% decrease in the weighted average sales price of our graphite electrode products which decreased $109.6 million revenues by $41.2 million compared to the same period of the prior year. This decrease was partially offset by a 7% increase in volumes.
Cost of sales. Cost of sales decreased from $305.0 million for the period January 1 through August 14, 2015 and $67.9 million in the period August 15 through September 30, 2015 to $331.3 million in the nine months ended September 30, 2016. This decrease was driven primarily by reduced variable manufacturing costs. These reductions

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have been driven by lower raw material prices, an improved cost structure from our rationalization initiatives and plant optimization. Cost of sales also benefited from an advantageous currency impact of $8.1 million.
Lower of cost or market inventory adjustment. In the nine months ended September 30, 2016, we incurred a lower of cost or market adjustment of $19.5 million in certain product lines within our graphite electrode business reflecting the decreased pricing.
Selling and general administrative. Selling and general administrative expenses decreased from $64.4 million in the period January 1 through August 14, 2015 and $6.8 million in the period August 15 through September 30, 2015 compared to $39.4 million in the nine months ended September 30, 2016 driven primarily by one-time charges related to our acquisition in 2015 for stock based compensation vesting and proxy-related fees totaling $23.0 million. Additional decreases have been the result of headcount reductions and continued cost control measures.
Impairments. During the first quarter of 2015, we recorded a $35.4 million goodwill impairment charge in our needle coke reporting unit resulting from price declines that were to take effect in the second quarter of 2015 as a result of overcapacity in the industry.
Other (Income) Expense. Other expense decreased from $1.4 million in the period January 1 through August 14 and $0.7 million in the period August 14 through September 30, 2015, to income of $1.5 million in the nine months ended September 30, 2016 due to due to advantageous foreign currency impacts on non-operating assets and liabilities.
Interest Expense. Interest expense decreased from $26.2 million in the period January 1 through August 14, 2015 and $3.3 million in the period August 15 through September 30, 2015 to $19.9 million in nine months ended September 30, 2016 primarily due to the repayment of our Senior Subordinated Notes in August 2015 which has reduced our overall annual interest expense. The prepayment also resulted in a $4.5 million accelerated interest charge within the predecessor period.
Loss from Discontinued Operations. Results from our discontinued operations improved from a loss of $18.7 million in the period January 1 through August 14, 2015 and $1.9 million in the period August 15 through September 30, 2015 to $107.6 million in the nine months ended September 30, 2016. This decrease was driven by in impairment charge of $105.6 million to align the value of our assets held for sale with the estimated fair market value as of September 30, 2016. This was partially offset by an improved cost structure resulting from our rationalization initiatives.
Segment operating income (loss). The results discussed above are reflected in our operating income (loss) by segment as follows: 
 
Predecessor
 
Successor
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Nine Months Ended September 30, 2016
 
(Dollars in thousands)
Industrial Materials
$
(24,900
)
 
$
2,918

 
$
(50,776
)
Corporate, R&D and Other Expenses
(43,349
)
 
(3,216
)
 
(18,908
)
Total operating loss
$
(68,249
)
 
$
(298
)
 
$
(69,684
)
 Provision for income taxes. The following table summarizes the expense/(benefit) for income taxes:  
 
Predecessor
 
Successor
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15, 2015 Through September 30, 2015
 
For the Nine Months Ended September 30, 2016
 
(Dollars in thousands)
Tax expense (benefit)
$
6,452

 
$
1,107

 
$
(7,675
)
Pretax loss
(95,518
)
 
(4,329
)
 
(87,847
)
Effective tax rates
(6.8
)%
 
(25.6
)%
 
8.7
%

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For the nine months ended September 30, 2016, the effective tax rate differs from the U.S. statutory rate of 35% primarily due to recent losses in foreign jurisdictions where a tax benefit will be recognized, offset by recent losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries tax at different rates. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future. The provision for income taxes for the nine months ended ended September 30, 2015 differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates.
 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, 2016 was an decrease of $0.4 million compared to the same period of 2015. The impact of the exchange rate changes on cost of sales of Industrial Materials for the nine months ended September 30, 2016 was a decrease of $8.1 million compared to the same period of 2015.
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 $0.9 million in the nine months ended September 30, 2015 compared to a loss of $0.9 million in the nine months ended September 30, 2016.
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”.
 Liquidity and Capital Resources
We believe that we have adequate liquidity to meet our needs. As of September 30, 2016, we had cash and cash equivalents of $12.1 million, long-term debt of $364.1 million, short-term debt of $6.5 million and stockholder’s equity of $637 million.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. As a result of the amendment, the size of the Revolving Facility was permanently reduced from $375 million to $225 million. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under the Revolving Facility) in excess of $25 million. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens and incur debt; a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility; and changes to the Company’s financial covenants so that, until the earlier of March 31, 2019 or the Company has $75 million in trailing twelve month EBITDA, the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from
($40 million) to $35 million after which the Company’s existing financial covenants under the Revolving Facility will apply.
With this amendment, the Company has full access to the $225 million Revolving Facility, subject to the $25 million minimum liquidity requirement. As of September 30, 2016, the Company had $61.5 million of borrowings on the Revolving Facility and $13.9 million of letters of credit drawn against the Revolving Facility. In addition to the Revolving Facility, the Company has $36.0 million outstanding on its Term Loan Facility.
We use cash flow from operations 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. The Revolving Facility and the Term Loan Facility both mature in April 2019. Under the Revolving Facility, we have additional flexibility for investments, capital expenditures and acquisitions and we can issue letters of credit under the Revolving Facility in an amount not to exceed $35 million.
The interest rate applicable to the Revolving Facility and the Term Loan Facility is LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.70% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.

Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of 6.375% Senior Notes due 2020 (the "Senior Notes"). The Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor. The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.

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.
As of December 31, 2015 and September 30, 2016, approximately 73% and 74% of our debt, respectfully, consisted of fixed rate or zero interest rate obligations.
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 and other factors.
The Company has access to a $225 million Revolving Facility (subject to a $25 million minimum liquidity requirement). As of September 30, 2016, the Company had $61.5 million of borrowings and $13.9 million of letters of credit, for a total of $75.4 million drawn against the Revolving Facility.
Potential uses of our liquidity include capital expenditures, acquisitions, debt repayments 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.
In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our Revolving Facility, to the extent available. We have begun to look at strategic alternatives for our Engineered Solutions businesses that could result in the sale of one or more of such businesses. Cash proceeds from such sales would be used to repay borrowings outstanding under the Term Loan Facility and Revolving Facility. We cannot assure you that we will, or will

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be able to, consummate any such sales on acceptable terms or at all or as to the price, terms or conditions of any such sales. 
As of September 30, 2016, we were in compliance with all financial and other covenants contained in the Revolving Facility, as applicable.
In order to seek to minimize our credit risks, we may 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 had positive cash flow from operating activities during 2012, 2013, 2014, 2015 and through September 30, 2016. 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.
Related Party Transactions. We have not engaged in or been a party to any other material transactions with affiliates or related parties except for reimbursement of certain costs incurred by Brookfield as required under the Investment Agreement, transactions with our current or former subsidiaries, compensatory transactions with directors and officers including employee benefits (including reimbursement to Brookfield for compensation costs incurred by it for certain personnel who devote substantially all of their working time to us), stock option and restricted stock grants, compensation deferral, stock purchases, and customary indemnification and expense advancement arrangements.
Cash Flows.
The following table summarizes our cash flow activities:
 
Predecessor
 
Successor
 
For the Period January 1 Through August 14, 2015
 
For the Period August 15 Through September 30, 2015
 
For the Nine
Months Ended
September 30, 2016
 
(Dollars in millions)
Cash flow provided by (used in):
 
 
 
 
 
Operating activities
$
28.3

 
$
3.9

 
$
28.7

Investing activities
$
(39.9
)
 
$
(4.6
)
 
$
(22.7
)
Financing activities
$
20.8

 
$
(10.6
)
 
$
(1.5
)
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.

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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.
During the period January 1 through August 14, 2015, changes in working capital resulted in a net source of funds of $45.6 million which was impacted by:
net cash inflows in accounts receivable of $61.0 million from the decrease in accounts receivable due to the timing and collection of customer sales and collections;
net cash outflows from decreases in accounts payable and accruals of $18.7 million, due primarily to changes in tax accruals and payables; and
a decrease in interest expense of $2.3 million.
During the period August 15 through September 30, 2015, there was no significant change to net working capital.
During the nine months ended September 30, 2016, changes in working capital resulted in a net source of funds of $54.0 million which was impacted by:
net cash inflows in accounts receivable of $9.7 million from the decrease in accounts receivable due to the collection of customer sales;
net cash inflows from decreases in inventory of $41.4 million, due primarily to inventory management initiatives;
net cash outflows from increased prepaid expense of $1.2 million due to value added tax payments;
net cash inflows due to increase in accounts payable and accruals of $1.8 million primarily resulting from timing of payments.
Other uses of cash in the nine months ended September 30, 2016 included contributions to pension and other benefit plans of $8.8 million.
Investing Activities
Net cash used in investing activities was $39.9 million during the period January 1 through August 14, 2015 and included capital expenditures of $32.3 million and $8.3 million related to cash settlements of derivative instruments. During the period August 15 through September 30, 2015 net cash used in investing activities was $4.6 million resulting primarily from $5.2 million of capital expenditures.
Net cash used in investing activities was $22.7 million during the nine months ended September 30, 2016 and included capital expenditures of $22.3 million and $1.2 million related to cash settlements of derivative instruments.
 Financing Activities
Net cash inflow from financing activities was $20.8 million during the period January 1 through August 14, 2015. We received $150 million of cash as proceeds from our issuance of preferred shares and had net borrowings under our Revolving Facility and short term debt agreements resulted in a source of cash of $79.5 million. These were offset by the $200 million repayment of our Senior Subordinated Notes, $5.1 million of credit facility refinancing fees and $3.4 million of preferred share issuance costs.
Net cash inflow from financing activities was $1.5 million during the nine months ended September 30, 2016, resulting from net borrowings $0.5 million under our Revolving Facility and fees paid for the refinancing of our revolving credit facility totaling $0.9 million.
Restrictions on Dividends and Stock Repurchases
It has generally been the policy of our Board of Directors to retain earnings to finance strategic and other plans and programs, conduct business operations, fund acquisitions, meet obligations and repay debt. We did not pay any

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cash dividends in 2013, 2014 or 2015. We periodically review our dividend policy.  We amended our Credit Facility on April 27, 2016 and, under the terms of the amendment, we are restricted from paying dividends.
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, “Debt and Liquidity” of the Notes to Consolidated Financial Statements.

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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, 2015 represented no unrealized gain or loss. The net unrealized loss as of September 30, 2016 was $0.4 million.
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. We had no outstanding commodity derivative contracts as of September 30, 2016.
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, 2016, 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 $1.9 million or a corresponding increase of $1.9 million, respectively, in the fair value of the foreign currency 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, 2016. A hypothetical increase in interest rates of 100 basis points (1%) would have increased our interest expense by $0.8 million for the nine months ended September 30, 2016.

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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, 2016. 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, 2016.
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, 2016 that materially affected or are reasonably likely to materially affect our internal controls over financial reporting.


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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES


Item 1. Legal Proceedings
Additional information required by this Item is set forth in Note 10, “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.
    
As a result of the June 23, 2016 referendum by British voters to exit the European Union, global markets and foreign currencies have been adversely impacted. In particular, the value of the Pound Sterling has sharply declined as compared to the U.S. Dollar and other currencies. This volatility in foreign currencies is expected to continue as the U.K. negotiates and executes its exit from the European Union but it is uncertain over what time period this will occur. A significantly weaker Pound Sterling compared to the U.S. Dollar could have a significant negative effect on the Company’s business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.

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

Not Applicable



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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
 
 
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 Quinn J Coburn, 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 Quinn J Coburn, 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


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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 27, 2016
By:
/s/ Quinn J Coburn
 
 
 
Quinn J Coburn
 
 
 
Vice President and Chief Financial
Officer (Principal Financial Officer)


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