We believe that the graphite electrode industry manufacturing capacity utilization rate was about 93% in 2002 and 96% in 2003. We operated our graphite electrode manufacturing capacity at very high levels in 2003. The strengthening in the steel industry in 2003 and the tightening of the graphite electrode supply/demand balance lead to an increase in average graphite electrode prices in 2003 as compared to 2002.
Demand for cathodes in 2003 (excluding China) decreased from 2002 because of reduced construction of new aluminum smelters. We operated our cathode manufacturing capacity at relatively high operating levels in 2003. Demand for carbon refractories was strong in 2003 as a result of our increased penetration of various markets, including Europe and China, and increased blast furnace construction and refurbishment. Weak economic conditions resulted in relatively low demand and weak pricing in 2003 for most of our other products.
Worldwide graphite electrode demand increased to approximately 1 million metric tons driven by increased steel production and, in particular, EAF steel production. Graphite electrode supply remained tight for graphite electrodes used in EAF melter applications. Graphite electrode prices for the EAF melter segment increased over the course of 2004.
We estimate that worldwide aluminum production was about 29.8 million metric tons in 2004, about 7% higher than in 2003. Demand for cathodes increased slightly in 2004 as compared to 2003, primarily due to the construction of new aluminum smelting furnaces, offset by delays in relines of existing furnaces as a result of longer pot life from technology improvements. Consolidation of aluminum companies, including Alcan’s acquisition of Pechiney, also delayed the start of known new smelter projects. We believe that, in 2004, there was an excess supply of cathodes, on a worldwide basis.
Demand for carbon refractories strengthened consistent with growth in integrated steel production in 2004 and related increases in blast furnace lining refurbishments and, to a lesser extent, new blast furnace construction. Demand for carbon electrodes strengthened consistent with increases in production of silicon metal.
Demand for our advanced graphite materials strengthened in 2004 as compared to 2003, consistent with increased production by the customers we serve in the semiconductor, electronics, energy and transportation industries.
Throughout 2004, we experienced upward pressure on most of our raw material costs, including freight, energy and petroleum-based raw materials. These cost increases impacted almost all of our product lines. We believe these cost increases were experienced industry-wide.
Demand for thermal management solutions in smaller, more powerful electronic devices continued to grow rapidly in 2004. Our ETM solutions are enabling some of the most advanced, thinnest and lightest products being sold today. These devices include, among others, plasma display panels, liquid crystal displays, ultra-lightweight laptops and cell phones. Sales of our ETM products grew significantly to $11,585 in 2004 as compared to $2,393 in 2003.
2005.Graphite electrode demand is primarily linked with the global production of steel in electric arc furnaces and, to a lesser extent, with the total production of steel and certain other metals. This production is linked to global and regional economic conditions. Overall, global and regional economic conditions remained relatively stable in 2005. We estimate that worldwide steel production was about 1.13 billion metric tons in 2005, about an 8% increase as compared to 2004. China’s steel production, however, grew almost 25% in 2005 and represented the single largest contributor to the growth in global steel demand. Although approximately 88% of Chinese steel production is blast oxygen furnace steel production, China is also the growth leader for new EAF steel production. Overall, EAF steel production capacity continued to grow, primarily driven by new EAF furnaces in China, and to a lesser extent, in Russia, the Middle East and North America. This contributed to a more favorable global pricing environment in 2005.
Notwithstanding the growth in worldwide steel production, the steel industry in most of our major markets operated at lower operating rates in 2005. We believe that these lower operating rates resulted in a reduction of steel inventories in the U.S. and, to a lesser extent, in other regions of the world.
Our venture with Alcan/Pechiney, which is a 30% owner of our cathode business and which purchases cathodes from us under requirements contracts that remain in effect through 2006, continues to position us as the leading supplier of cathodes to the aluminum industry.
Our refractories business is linked primarily to construction and refurbishment of blast furnaces in the integrated segment of the global steel industry and, to a lesser extent, submerged arc furnaces in the ferroalloy industry. We have benefited from the growth of steel production in China through 2005, and have expanded our global sales to large markets such as India and Russia as well as several smaller markets.
Excluding China, carbon electrode demand in 2005 was essentially the same as in 2004. In 2005, certain silicon metal producers (who are the primary carbon electrode consumers) announced plans to idle capacity. We expect growth in China to continue to replace idle capacity elsewhere, leaving overall demand relatively flat in the near future. Carbon electrode average selling prices in 2005 remained at 2004 levels.
Demand for our advanced graphite materials increased in 2005 as compared to 2004. The increases were mainly in the energy related markets, including solar, silicon and oil and gas exploration, and defense and transportation industries. We operated our advanced graphite materials capacity at very high levels in 2005.
Demand for thermal management solutions in smaller, thinner, more powerful electronic devices continued to grow rapidly in 2005. Our ETM solutions are enabling some of the most advanced, thinnest and lightest products being sold today. These devices include, among others, flat panel displays, plasma and liquid crystal display (LCD), ultra-lightweight laptops, cell phones, and LED lighting applications. The flat panel display market is expected to grow from 27 million units (15% of the TV market) to 75 million units (40%) by 2008. Sales of our ETM products grew significantly, to about $19 million in 2005 as compared to about $12 million in 2004.
Throughout 2005, we continued to experience upward pressure on most of our raw material costs, including freight, energy and petroleum based materials. These cost increases impacted almost all of our product lines.
Outlook. Global and regional economic conditions are expected to remain relatively stable in 2006, with global EAF steel production growth of approximately 3%. We estimate that worldwide total steel production will increase to about 1.17 billion metric tons in 2006, about 4% higher than in 2005.
Worldwide graphite electrode demand is also expected to remain stable in 2006. We expect demand growth of approximately 2%, driven primarily by new EAF product capacity and higher EAF operating rates.
We expect net sales of graphite electrodes to increase approximately 15% in 2006. We expect graphite electrode sales volume to be approximately 210,000 to 215,000 metric tons, depending on market conditions. We expect upward pressure on most of our raw material costs, including freight, energy and petroleum-based raw materials. These cost increases will impact almost all of our product lines. We believe our graphite electrode production costs will increase approximately 10% to 12% in 2006 as compared to 2005.
We estimate that worldwide production of aluminum will increase in 2006 by about 2% – 3% over 2005. We expect demand for cathodes in 2006 to increase as compared to 2005, primarily due to the construction of new aluminum smelting furnaces and increased demand for relining, or expansion, of existing smelters. We believe that, in 2006, there will be an excess supply of cathodes, on a worldwide basis.
In 2006, we believe that the overall demand for advanced graphite materials will remain at a high level, resulting from continued strength in the energy markets and defense and transportation industries.
In 2006, we expect continued strong demand for our carbon refractories. The integrated steel industry is expected to remain strong through 2006, with growth continuing in China, India, and Brazil. A number of large expansion projects are known to be in the planning, engineering, and early construction phases. In addition, the Chinese government has announced its intention to close all small, inefficient blast furnaces, which we believe will require significant replacement capacity in the coming years.
For 2006, we expect net sales of ETM products of about $30 million. We continue to see the need for efficient thermal management in electronic devices as a major challenge for manufacturers. The move toward increased functionality and convergence is creating the need for larger amounts of memory in devices, larger color displays in portable devices, wireless and increased speed of data transmission, all resulting in significant thermal management issues. As a result, our ETM materials and solutions address these challenges and at the same time enable device manufacturers to capitalize on these growing trends in a more cost efficient manner.
Our outlook could be significantly impacted by, among other things, factors described under “Item 1A – Risk Factors” and “Item 1A – Forward Looking Statements” in this Report.
Financing Transactions
During 2004, we repurchased Senior Notes for cash or in exchange for shares of our common stock. See Note 5 to the Consolidated Financial Statement for more detailed information.
On January 22, 2004, we completed an offering of $225,000 aggregate principal amount of Debentures at a price of 100% of principal amount. The net proceeds from the offering were approximately $218,812. We used the net proceeds to repay the remaining $21,398 of term loans outstanding under the Senior Facilities, to make provisional payments of $74,064 against the fine (the “EU antitrust fine”) that was assessed against us in 2001 by the Directorate General IV of the European Communities (the “EU Competition Authority”), and to fund general corporate purposes, including replacement of financing previously provided by factoring of accounts receivable and strategic acquisitions that are complementary to our businesses. The balance was invested in short-term, investment quality, interest-bearing securities or deposits.
On February 8, 2005, we completed a substantial amendment and restatement of the Credit Agreement to effect a refinancing of the Revolving Facility. We believe the refinancing has enhanced our stability and liquidity. The Revolving Facility now provides for loans and letters of credit in a maximum amount outstanding at any time of up to $215 million and matures in July 2010. As a result of the refinancing, we have no material debt scheduled to mature prior to July 2010.
Antitrust Litigation Against Us
In 1997, the DOJ and the EU Competition Authority commenced investigations into alleged violations of the antitrust laws in connection with the sale of graphite electrodes. The antitrust authorities in Canada, Japan and Korea subsequently began similar investigations. The EU Competition Authority also commenced an investigation into alleged antitrust violations in connection with the sale of specialty graphite. These antitrust investigations have been resolved. Several of the investigations resulted in the imposition of fines against us. These fines, or payments in accordance with a payment schedule in the case of the DOJ antitrust fine, have been timely paid.
We have settled virtually all of the civil antitrust lawsuits (including class action lawsuits) previously pending against us, certain civil antitrust lawsuits threatened against us and certain possible civil antitrust claims against us arising out of alleged antitrust violations occurring prior to the date of the relevant settlement in connection with the sale of graphite electrodes, carbon electrodes and bulk graphite products. All settlement payments due have been timely paid. There remain, however, certain pending claims as well as pending lawsuits in the U.S. relating to the sale of graphite electrodes sold to foreign customers. It is also possible that additional antitrust lawsuits and claims could be asserted against us in the U.S. or other jurisdictions. We are currently not reserved for such matters.
Other Proceedings Against Us
On March 1, 2006, the Company was served with a complaint commencing a securities class action in the United States District Court for the District of Delaware. The complaint alleges that GTI and certain of our executive officers violated federal securities law by making false statements or failing to disclose adverse facts about us in, or in relation to, a press release issued by us on November 3, 2005. Our analysis and investigation relating to this lawsuit is in its earliest stages, and, as a result, we are not able to assess the likelihood of loss, if any, or the amount thereof. We have not yet filed a response to the complaint. We intend to vigorously defend against this lawsuit.
We are involved in various other investigations, lawsuits, claims and other legal proceedings incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of them, 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. Claims accrued but not yet paid amounted to $646 at December 31, 2004 and $610 at December 31, 2005. The following table presents the activity in this accrual for 2005:
| |
|---|
| |
|---|
| |
|---|
| Balance at December 31, 2004 | | | $ | 646 | |
| Product warranty charges | | | | 2,402 | |
| Payments and settlements | | | | (2,438 | ) |
|
| |
| Balance at December 31, 2005 | | | $ | 610 | |
|
| |
Realizability of Net Deferred Tax Assets and Valuation Allowances
At December 31, 2005, we had $248,022 of gross deferred income tax assets, of which $208,393 required a valuation allowance. In addition, we had $69,083 of gross deferred income
tax liabilities. Deferred income tax assets and liabilities are classified on a net current and net non-current basis for each tax jurisdiction.
The net change in gross deferred income tax assets for 2005 was an increase of $37,962, of which $27,447 was recorded in the fourth quarter with a full valuation allowance. The net change in the total valuation allowance for 2005 was a increase of $185,204. During the 2005 year end financial accounting closing process, we determined that the timing of when we will generate sufficient U.S. taxable income to realize our U.S. deferred tax assets became less certain. Accordingly, during the fourth quarter of 2005, we recorded a valuation allowance of $149,734 against deferred tax assets in the U.S. and $1,722 in certain non-U.S. jurisdictions, which resulted in a total net charge of $151,456. Until we determine that it is more likely than not that we will generate sufficient U.S. taxable income to realize our deferred income tax assets, income tax benefits in each current period will be full reserved. This adjustment does not affect our ability and intent to utilize the deferred income tax assets as we generate sufficient future profitability in the U.S.
We are executing current strategies, and developing future strategies, to improve sales, reduce costs and improve our capital structure in order to improve U.S. taxable income to a level sufficient to fully realize these benefits in future years. The current U.S. tax attributes, if utilized, will allow us to significantly reduce our cash tax obligations in the U.S. We currently expect our overall 2006 book tax rate to be 37% to 40% and our overall 2006 cash tax rate to be 32% to 35%.
Customer Base
We are a global company and serve all major geographic markets. Sales of our products to customers outside the U.S. accounted for about 76% of our net sales in 2003, 76% of our net sales in 2004 and 70% of our net sales in 2005. In 2005, four of our ten largest customers were based in Europe, three were in the U.S. and one was in each of Brazil, Canada, and Korea.
In 2005, three of our ten largest customers were purchasers of non-graphite electrode products. No single customer or group of affiliated customers accounted for more than 5% of our net sales in 2005.
Results of Operations
Financial information discussed below omits our non-strategic composite tooling business that was sold in June 2003 and has been accounted for as discontinued operations. The results of our discontinued operations were not material to our consolidated results of operations.
2004 Compared to 2003.
Consolidated. Net sales of $847,701 in 2004 represented a $135,364, or 19%, increase from net sales of $712,337 in 2003 primarily due to higher net sales of graphite electrodes, which increased $90,721, primarily due to higher sales volume and higher average graphite electrode sales revenue per metric ton. Higher sales volumes of carbon refractory products resulted in an increase of $14,057 while higher electronic thermal management sales resulted in an increase of $9,192. The remaining $21,394 increase in net sales occurred almost equally within advanced graphite materials and cathodes.
Cost of sales of $638,186 in 2004 represented a $93,990, or 17%, increase from cost of sales of $544,196 in 2003. Cost of sales increased $56,869 due to higher sales volumes and the impact of a less favorable product sales mix, $25,497 due to the net unfavorable impacts of currency exchange rate changes, $16,003 due to higher operating costs and $4,964 primarily due to increased electronic thermal management sales, partially offset by $9,343 of improvements of productivity throughout our manufacturing network.
Gross profit of $209,515 in 2004 represented a $41,374, or 25%, increase from gross profit of $168,141 in 2003. Gross margin increased to 24.7% of net sales in 2004 from 23.6% of net sales in 2003. See below for further details regarding such changes.
Selling, administrative and other expenses increased $3,823 from $85,546 in 2003 to $89,369 in 2004. The increase was due to investments to improve global business processes, primarily new global information systems and Sarbanes-Oxley compliance efforts. These changes in business processes resulted in higher costs of $5,000. In addition, we incurred higher selling expenses of $3,000 in 2004 as a result of higher net sales. The net unfavorable impact of changes in currency exchange rates increased costs by $2,000. These higher costs were partially offset by $8,000 of lower employee benefit costs consisting primarily of lower variable compensation expenses and, to a lesser extent, lower post retirement expense. Other costs which increased selling, administrative and other expenses were individually insignificant.
Research and development expenses decreased $2,370 from $10,410 in 2003 to $8,040 in 2004. The decrease was primarily due to both higher benefits from external funding proceeds from grants awarded to us in 2004 by the State of Ohio to support fuel cell development programs and lower net costs due to our 2003 voluntary severance programs and workforce attrition. These personnel reductions are net of increases in research and development resources dedicated to electronic thermal management development activities.
Other (income) expense, net, was expense of $21,189 in 2004 as compared to income of $12,060 in 2003. The net increase in expense of $33,249 was primarily due to the following:
• | losses due to changes in currency exchange rates, primarily associated with Euro-denominated intercompany loans, increasing $33,622 for 2004 as compared to 2003; |
• | losses attributable to a reduction of Senior Notes outstanding (due to debt for equity exchanges and repurchases), increasing $8,166 for 2004 as compared to 2003; |
• | expenses pertaining to legal, environmental and other related costs increasing $5,840 for 2004 as compared to 2003; offset by |
• | losses on foreign currency exchange rate contract, decreasing $6,244 for 2004 as compared to 2003; |
• | charges for employee benefit curtailment and other costs, decreasing $3,686 for 2004 as compared to 2003; and |
• | other costs, net, decreasing $4,449 in 2004 as compared to 2003. |
In 2003, we recorded a net restructuring charge of $19,765, consisting of an $11,266 charge associated with the closure and settlement with certain of our U.S pension plans, with the remaining primarily due to further organizational changes.
In 2004, we recorded a net restructuring benefit of $548, comprised primarily of the following:
• | a $2,473 net benefit associated with the closure of our graphite electrode manufacturing operations in Caserta, Italy (consisting of a reduction in cost estimate, partially offset by the completion of further severance agreements for employees terminated in connection with the closure), offset by |
• | a $1,329 charge relating primarily to severance programs and related benefits associated with the closure of our advanced graphite machining operations in Sheffield, United Kingdom; and |
• | a $596 charge associated primarily with changes in estimates related to U.S. voluntary and selective severance programs. |
The restructuring accrual is included in other accrued liabilities and other long-term obligations on the Consolidated Balance Sheets. The following table summarizes activity relating to the accrual:
| Severance
and
Related
Costs
| Plant Shutdown and
Related
Costs
| Total
|
|---|
| (Dollars in thousands) |
|---|
| |
| Balance at January 1, 2003 | | | $ | 2,441 | | $ | 11,543 | | $ | 13,984 | |
| |
| Restructuring charges | | | | 19,044 | | | 721 | | | 19,765 | |
Payments and settlements,
including non-cash items of $721 | | | | (2,763 | ) | | (3,650 | ) | | (6,413 | ) |
| Effect of change in currency exchange rates | | | | 531 | | | 796 | | | 1,327 | |
|
| |
| |
| |
| Balance at December 31, 2003 | | | $ | 19,253 | | $ | 9,410 | | $ | 28,663 | |
|
| |
| |
| |
| Restructuring charges | | | | 4,321 | | | 985 | | | 5,306 | |
| Change in estimates | | | | — | | | (5,854 | ) | | (5,854 | ) |
| Severance
and
Related
Costs
| Plant
Shutdown and
Related
Costs
| Total
|
|---|
Payments and settlements,
including non-cash items of $2,814 | | | | (18,367 | ) | | (1,300 | ) | | (19,667 | ) |
| Effect of change in currency exchange rates | | | | 340 | | | 64 | | | 404 | |
|
| |
| |
| |
| Balance at December 31, 2004 | | | $ | 5,547 | | $ | 3,305 | | $ | 8,852 | |
|
| |
| |
| |
In 2003, we recorded impairment charges of $6,991. Such charges consisted of $5,370 pertaining primarily to write-off of the remaining fixed assets in connection with the closure of our graphite electrode manufacturing operation in Caserta, Italy and $1,621 pertaining primarily to the net write-off of the remaining book value of assets of our former graphite electrode manufacturing operations in Clarksville, Tennessee.
We recorded a $32,073 charge in 2003 relating to the EU antitrust fine.
We recorded a $1,262 charge for additional potential liabilities and expenses in connection with antitrust investigations and related lawsuits and claims in the 2004 first quarter. This charge was offset by a gain due to the refund of €10 million ($12,163 based on currency exchange rates then in effect) that we received from the EU Competition Authority as a result of the reduction of the EU antitrust fine to €42 million, plus accrued interest of a €7.7 million (which was calculated at a rate of 8.04% per annum), an aggregate of about $59 million at currency exchange rates in effect at the time the decision on our appeal thereof was issued.
The following table presents an analysis of interest expense:
| | For the Year
Ended
December 31,
|
|---|
| | 2003
| 2004
|
|---|
| | (Dollars in thousands) |
|---|
| Interest incurred on debt | | | $ | 62,351 | | $ | 49,808 | |
| Interest rate swap benefit | | | | (13,022 | ) | | (10,092 | ) |
Amortization of fair value adjustments for terminated hedge
instruments | | | | (2,222 | ) | | (2,468 | ) |
| Accelerated amortization of fair value adjustments for terminated | | |
| hedge instruments due to reduction of Senior Notes | | | | (5,734 | ) | | (4,746 | ) |
| Amortization of debt issuance costs | | | | 3,148 | | | 4,834 | |
| Interest on DOJ antitrust fine, including imputed interest | | | | 955 | | | 710 | |
| Amortization of premium on Senior Notes | | | | (687 | ) | | (243 | ) |
| Amortization of discount on Debentures | | | | – | | | 867 | |
| Interest incurred on other items | | | | 352 | | | 508 | |
|
| |
| |
| Interest expense | | | $ | 45,141 | | $ | 39,178 | |
|
| |
| |
Average total debt outstanding was $675,553 in 2004 as compared to $696,723 in 2003. The average annual interest rate was 5.5% in 2004 as compared to 7.1% in 2003. These average annual rates include the benefits of our interest rate swaps, but exclude imputed interest on the DOJ antitrust fine, the amortization of the effective discount on the debentures, the amortization of the net proceeds from the sale of swaps and the acceleration of the amortization of gains realized from the sale of interest rate swaps due to the early extinguishment of debt from our exchange of common stock for, and repurchases of, Senior Notes outstanding.
We recorded interest income in 2004 of $1,161 primarily attributable to interest earned on cash proceeds from the issuance and sale of the Debentures.
Provision for income taxes was a charge of $46,310 in 2004 as compared to a charge of $4,695 in 2003. The effective income tax rate was 72% in 2004. The higher effective income tax rate was primarily due to the implementation of a standard tax election known as “Check-the-Box” (the “2004 special tax election”) that accelerated $215,177 of taxable income in the U.S. that resulted in the utilization of approximately $26,219 in deferred tax assets, of which approximately $19,969 were existing foreign tax credits. This resulted in tax expense that was $26,219 higher in 2004 than if we had not made this election. The effective rate in 2004 was also impacted by a benefit from the EU Competition Authority refund, which was non-taxable in the U.S., and by nondeductible expenses associated with certain restructuring charges. The effective income tax rate was not meaningful in 2003 because we incurred income tax expense of $4,695, even though we recognized a loss from continuing operations of $19,374, primarily due to tax expense of $8,362 associated with nondeductible antitrust related charges and an additional $4,989 from adjustments increasing the deferred tax asset valuation allowance. The effective income tax rate was 36% in 2004 and 40% in 2003, in each case excluding the impact of restructuring charges, antitrust charges or benefits, and the tax expense resulting from the 2004 special tax election.
During 2003, we recorded a $561 gain from the sale of our non-strategic composite tooling business. The discontinued business recorded a net income from operations of $476 in 2003.
As a result of the matters described above, net income was $17,041 in 2004 as compared to net loss of $24,277 in 2003.
Synthetic Graphite. Net sales of $752,436 in 2004 represented a $112,308, or 18%, increase from net sales of $640,128 in 2003, primarily due to higher sales volume of graphite electrodes and higher average graphite electrode sales revenue per metric ton.
Volume of graphite electrodes sold was 222,000 metric tons in 2004 as compared to 200,500 metric tons in 2003. The higher volume of graphite electrodes sold represented an increase of $50,668 in net sales. Average sales revenue per metric ton of graphite electrodes in 2004 was $2,515 per metric ton as compared to $2,344 per metric ton in 2003. The higher
average sales revenue per metric ton represented an increase of $48,033 in net sales, approximately one-third of which was due to the positive impact of net changes in currency exchange rates. Such increases were partially offset by a decrease in net sales of $7,981 due primarily to changes in product and geographical mix.
The remaining $21,843 increase in net sales in the synthetic graphite segment occurred almost equally within advanced graphite materials and cathodes. Advanced graphite materials sales increased primarily due to the strengthening in the semiconductor, electronics, energy and transportation markets. Higher volumes of products sold increased net sales by $4,910 while improved pricing increased net sales by $1,497. Remaining increases were due to net favorable impacts of currency exchange rate changes. Cathode net sales increased primarily due to $9,191 net favorable impacts of currency exchange rate changes and $6,992 due to a favorable change in product mix, offset by negative pricing impacts.
Cost of sales of $565,583 in 2004 represented a $76,453, or 16%, increase from cost of sales of $489,130 in 2003. Cost of sales increased $44,861 due to higher sales volumes and the impact of a less favorable product sales mix, $25,497 due to the net unfavorable impacts of currency exchange rate changes and $15,830 due to higher operating costs, partially offset by $9,343 of improvements in productivity throughout our manufacturing network and $393 of improvements in other costs.
As a result, gross profit in 2004 was $186,854, 24% or $35,856 higher than in 2003. Gross margin was 24.8% of net sales in 2004, while gross margin was 23.6% of net sales in 2003.
Other. Net sales of $95,265 in 2004 represented a $23,056, or 32%, increase from net sales of $72,209 in 2003. Refractory product sales increased $14,057 primarily due to higher sales volumes. Remaining increases of $8,999 were due primarily to higher electronic thermal management sales, offset by decreases in sales of other products.
Cost of sales of $72,604 in 2004 represented a $17,538, or 32%, increase from cost of sales of $55,066 in 2003. Increases of $13,065 were primarily due to higher sales volumes of carbon refractory products and upward pressure on energy and raw material costs in both refractories and carbon electrodes. Remaining increases were primarily due to increased electronic thermal management sales.
As a result, gross profit in 2004 was $22,661, 32% or $5,518 higher than in 2003. Gross margin was 24.7% of net sales in 2004, while gross margin was 23.7% of net sales in 2003.
2005 Compared to 2004.
Consolidated. Net sales of $886,699 in 2005 represented a $38,998, or 5%, increase from net sales of $847,701 in 2004. Net sales of graphite electrodes increased $14,162 primarily due to higher average graphite electrode sales revenue per metric ton, offset by lower sales volumes and a less favorable product sales mix. Advanced graphite materials net sales increased $9,326 due primarily to higher sales volumes and improved pricing. Net sales of cathodes increased $8,224 due to higher sales volumes along with a more favorable product sales mix,
offset by negative pricing impacts. Net sales of natural graphite increased $4,556 primarily due to an increase in ETM net sales, partially offset by decreases in sales of other natural graphite products. Remaining increases in net sales were primarily due to an increase in net sales of carbon electrodes, primarily driven by increased volumes.
Cost of sales of $654,342 in 2005 represented a $16,156, or 3%, increase from cost of sales of $638,186 in 2004. Cost of sales increased $33,679 due to higher operating costs, $2,992 due to a less favorable product sales mix, $7,265 due to the net unfavorable impacts of currency exchange rates and $2,716 due to other costs, partially offset by a decrease of $30,496 due to lower sales volumes.
Gross profit of $232,357 in 2005 represented a $22,842, or 11%, increase from gross profit of $209,515 in 2004. Gross margin increased to 26.2% of net sales in 2005 from 24.7% of net sales in 2004. See below for further details regarding such changes.
Selling, administrative and other expenses increased $11,070, or 12%, from $89,369 in 2004 to $100,439 in 2005. The increase was primarily due to higher selling expenses of approximately $2,320 associated with higher net sales, increased employee compensation costs of approximately $4,425 ($1,814 of which was associated with restricted stock grants), an increase in third party professional fees of $1,718 and $2,607 of other costs.
Research and development expenses increased $1,397, or 17%, from $8,040 in 2004 to $9,437 in 2005, with the increase primarily due to increased headcount to support growth in our ETM products and services.
Other (income) expense, net, was expense of $18,020 in 2005 as compared to expense of $21,189 in 2004. The net decrease in expense of $3,169 was primarily due to the following:
• | losses of $8,782 attributable to a reduction of Senior Notes outstanding (due to debt for equity exchanges and repurchases) occurred in 2004; |
• | expenses pertaining to legal, environmental and other related costs decreased $5,696 in 2005 as compared to 2004; |
• | non-income tax charges decreased $3,395 for 2005 as compared to 2004; |
• | benefits pertaining to foreign currency exchange rate contracts of $1,674 as gains were recognized in 2005 as compared to losses in 2004; |
• | a decrease in fair value adjustment losses on interest rate caps of $3,300 for 2005 as compared to 2004; and |
• | the net decrease in other costs of $3,717; offset by |
• | losses due to changes in currency exchange rates, primarily associated with Euro-denominated intercompany loans, increasing $23,395 for 2005 as compared to 2004. |
In 2004, we recorded a net restructuring charge of $548, comprised primarily of the following:
• | a $2,473 net benefit associated with the closure of our graphite electrode manufacturing operations in Caserta, Italy (consisting of a reduction in cost estimate, partially offset by the completion of further severance agreements for employees terminated in connection with the closure); offset by |
• | a $1,329 charge relating primarily to severance programs and related benefits associated with the closure of our advanced graphite machining operations in Sheffield, United Kingdom; and |
• | a $596 charge associated primarily with changes in estimates related to U.S. voluntary and selective severance programs. |
In 2005, we recorded a net restructuring charge of $9,729, comprised primarily of the following:
• | a $6,100 charge associated with the rationalization of our synthetic graphite facilities, including those in Brazil, France, and Russia; |
• | a $3,194 charge associated with the closure of our graphite electrode manufacturing operations at Caserta, Italy; |
• | a $523 charge primarily associated with the relocation of our corporate headquarters from Wilmington, Delaware to Parma, Ohio; |
• | an $804 charge associated with the phase out of our graphite electrode machining operations in Clarksville, Tennessee, scheduled for completion in the third quarter of 2006, and the closure of our administrative offices in Clarksville, scheduled for completion at the end of the first quarter of 2006; and |
• | a $430 charge associated with the closure of our advanced graphite machining operations in Sheffield, United Kingdom; offset by |
• | a $1,322 benefit associated with a change in estimate pertaining to the closure of certain graphite electrode manufacturing operations. |
We expect to record additional charges of approximately $7 million in 2006 and $2 million in 2007 related to such initiatives. Additionally, in the first quarter of 2006, we announced plans to shut down carbon electrode production operations at our Columbia, Tennessee manufacturing facility. This plan is expected to be completed by the end of the first quarter of 2007. We expect to record total charges of approximately $5 million throughout 2006 and 2007 related to such shut down.
As a result of the rationalization of our synthetic graphite facilities, we expect to achieve both operating efficiencies and production cost savings. The restructuring of our graphite electrode facilities is aimed at improving our operating performance, including leveraging our infrastructure for greater productivity and contributing to our continued growth. We anticipate annualized cost savings between $20 million and $22 million, with the full benefit of such savings expected to be realized in 2007 and beyond.
The restructuring accrual is included in other accrued liabilities and other long-term obligations on the Consolidated Balance Sheets. The following table summarizes activity relating to the accrual:
| Severance
and
Related
Costs
| Plant Shutdown
and
Related
Costs
| Total
|
|---|
| (Dollars in thousands) |
|---|
| |
| Balance at January 1, 2004 | | | $ | 19,253 | | $ | 9,410 | | $ | 28,663 | |
|
| |
| |
| |
| |
| Restructuring charges | | | | 4,321 | | | 985 | | | 5,306 | |
| Change in estimates | | | | — | | | (5,854 | ) | | (5,854 | ) |
Payments and settlements,
including non-cash items of $2,814 | | | | (18,367 | ) | | (1,300 | ) | | (19,667 | ) |
| Effect of change in currency exchange rates | | | | 340 | | | 64 | | | 404 | |
|
| |
| |
| |
| Balance at December 31, 2004 | | | | 5,547 | | | 3,305 | | | 8,852 | |
|
| |
| |
| |
| |
| Restructuring charges | | | | 10,880 | | | 474 | | | 11,354 | |
| Change in estimates | | | | (260 | ) | | (1,365 | ) | | (1,625 | ) |
Payments and settlements,
majority of which are cash payments | | | | (4,999 | ) | | (1,671 | ) | | (6,670 | ) |
| Effect of change in currency exchange rates | | | | (435 | ) | | 51 | | | (384 | ) |
|
| |
| |
| |
| Balance at December 31, 2005 | | | $ | 10,733 | | $ | 794 | | $ | 11,527 | |
|
| |
| |
| |
At December 31, 2005, the outstanding balance of our restructuring reserve was $11,527. We expect the majority of the remaining payments to be paid by the end of 2007. The components of the balance at December 31, 2005 consisted primarily of:
Synthetic Graphite:
• | $6,044 related to the rationalization of our synthetic graphite facilities, including Brazil, France, and Russia; |
• | $3,897 related to the closure of our graphite electrode manufacturing operations in Caserta, Italy; and |
• | $700 related to the phase out of our graphite electrode machining operations in Clarksville, Tennessee. |
Other Segment and Corporate:
• | $794 related primarily to remaining lease payments on our former corporate headquarters; and |
• | $92 related to the relocation of our corporate headquarters from Wilmington, Delaware to our research & development center in Parma, Ohio. |
In 2005, we recorded a $2,904 charge related to the impairment of our long-lived carbon electrode fixed assets in Columbia, Tennessee as a result of our 2005 fourth quarter review of our carbon electrode forecasts. The future estimated undiscounted cash flows expected to result from the use of these assets were below their respective carrying amounts. As a result, an impairment loss was measured as the difference between the assets’ carrying amount and fair value, which was based on current estimates of market price.
We recorded a $1,262 charge for additional potential liabilities and expenses in connection with antitrust investigations and related lawsuits and claims in the 2004 first quarter. This charge was offset by a gain due to the refund of €10 million ($12,163 based on currency exchange rates then in effect) that we received from the EU Competition Authority as a result of the reduction of the EU antitrust fine to €42 million, plus accrued interest of a €7.7 million (which was calculated at a rate of 8.04% per annum), an aggregate of about $59 million at currency exchange rates in effect at the time the decision on our appeal thereof was issued.
The following table presents an analysis of interest expense:
| | For the Year
Ended
December 31,
|
|---|
| | 2004
| 2005
|
|---|
| | (Dollars in thousands) |
|---|
| Interest incurred on debt | | | $ | 49,808 | | $ | 50,984 | |
| Interest rate swap benefit | | | | (10,092 | ) | | (1,633 | ) |
Amortization of fair value adjustments for terminated hedge
instruments | | | | (2,468 | ) | | (1,744 | ) |
| Accelerated amortization of fair value adjustments for terminated | | |
| hedge instruments due to reduction of Senior Notes | | | | (4,746 | ) | | — | |
| Amortization of debt issuance costs | | | | 4,834 | | | 3,569 | |
| Interest on DOJ antitrust fine | | | | 710 | | | 507 | |
| Amortization of premium on Senior Notes | | | | (243 | ) | | (162 | ) |
| Amortization of discount on Debentures | | | | 867 | | | 885 | |
| Interest incurred on other items | | | | 508 | | | 310 | |
|
| |
| |
| Interest expense | | | $ | 39,178 | | $ | 52,716 | |
|
| |
| |
Average total debt outstanding was $675,553 in 2004 as compared to $708,791in 2005. The average annual interest rate was 5.5% in 2004 as compared to 6.9% in 2005. These average rates represent the average rates on total debt outstanding and include the benefits, if any, of our interest rate swaps.
We recorded interest income in 2004 of $1,161 primarily attributable to interest earned on cash proceeds from the issuance and sale of the Debentures. We recorded interest income in 2005 of $1,200 primarily attributable to interest earned on prepayments made to the government.
Provision for income taxes was a charge of $165,813 in 2005 as compared to a charge of $46,310 in 2004. The effective income tax rate was approximately 411% in 2005. The higher effective income tax rate was primarily due to a charge resulting from a net change in the total valuation allowance for 2005 of $153,079. During the 2005 year-end financial accounting closing process, we determined that the timing of when we will generate sufficient U.S. taxable income to realize our U.S. deferred tax assets became less certain; therefore, we recorded a valuation allowance, primarily against our net federal deferred tax assets in the U.S., of $149,734. We recorded similar valuation allowances in certain other jurisdictions in both the second and fourth quarters of 2005, which resulted in charges totaling $3,345.
The effective income tax rate was 72% in 2004. The higher effective income tax rate was primarily due to the implementation of the 2004 special tax election that accelerated approximately $215,177 of taxable income in the U.S. that resulted in the utilization of approximately $26,219 in deferred tax assets, of which approximately $19,969 were existing foreign tax credits, and $6,250 of net operating loss carryforward. The effective rate in 2004 was also impacted by a benefit from the EU Competition Authority refund, which was non-taxable in the U.S., and by nondeductible expenses associated with certain restructuring charges.
Excluding the change in valuation allowances, impact of restructuring charges and the tax expense resulting from the 2004 special tax election, the 2005 effective tax rate was 38%. Excluding the impact of restructuring charges, the tax expense resulting from the 2004 special tax election and the antitrust benefits, the 2004 effective tax rate was 36%.
As a result of the matters described above, our net loss was $125,180 in 2005 as compared to net income of $17,041 in 2004.
Synthetic Graphite. Net sales of $784,148 in 2005 represented a $31,712, or 4%, increase from net sales of $752,436 in 2004.
Net sales of graphite electrodes increased $14,162 primarily due to higher average graphite electrode sales revenue per metric ton, offset by lower sales volumes and a less favorable product sales mix. The average sales revenue per metric ton of graphite electrodes in 2005 was $2,846 per metric ton as compared to the average in 2004 of $2,515 per metric ton. The higher average sales revenue per metric ton represented an increase of $87,165 in net sales, including the net unfavorable impact of changes in currency exchange rates. Volume of graphite electrodes sold was 201,300 metric tons in 2005 as compared to 222,000 metric tons in 2004. The lower volumes of graphite electrodes sold represented a decrease of $52,780 in net sales and resulted primarily from pricing initiatives. The effect of a less favorable product sales mix decreased net sales $15,999. Other decreases in net sales amounted to $4,224.
Advanced graphite materials net sales increased $9,326 due primarily to higher sales volumes, which increased net sales $5,814, and improved pricing, which increased net sales $3,512, including the net favorable impact of changes in currency exchange rates of $377. Net sales of cathodes increased $8,224 due to higher sales volumes of $5,529 along with a more favorable product sales mix of $4,410, offset by negative pricing impacts.
Cost of sales of $573,220 in 2005 represented an $7,638, or 1%, increase from cost of sales of $565,582 in 2004. Cost of sales increased $25,178 due to higher operating costs, $3,545 due to a less favorable product sales mix, $7,265 due to the net unfavorable impact of changes in currency exchange rates and $2,939 due to other costs, partially offset by a decrease of $31,289 due to lower sales volumes.
As a result, gross profit in 2005 was $210,928, 13% or $24,074 higher than in 2004. Gross margin was 26.9% of net sales in 2005, while gross margin was 24.8% of net sales in 2004.
Other. Net sales of $102,551 in 2005 represented a $7,286, or 8%, increase from net sales of $95,265 in 2004. Net sales of natural graphite increased $4,556 primarily due to an increase in ETM net sales of $7,127, partially offset by decreases in sales of other natural graphite products, primarily relating to softer automotive end market conditions. Remaining increases in net sales of the other segment were primarily due to an increase in net sales of carbon electrodes, primarily driven by increased volumes.
Cost of sales of $81,122 in 2005 represented an $8,518, or 12%, increase from cost of sales of $72,604 in 2004. The cost of sales of carbon electrodes increased $3,283 due to higher sales volumes and higher costs. Cost of sales of natural graphite increased $4,662 primarily due to an increase in certain higher raw material costs and higher overhead costs. Remaining increases were primarily within refractories and were due primarily to higher production costs.
As a result, gross profit in 2005 was $21,429, 5% or $1,232 lower than in 2004. Gross margin was 20.9% of net sales in 2005, while gross margin was 23.8% of net sales in 2004.
Effects of Inflation
We incur costs in the U.S. and each of the six non-U.S. countries in which we have a manufacturing facility. In general, our results of operations, cash flows and financial condition are affected by the effects of inflation on our costs incurred in each of these countries. See “Currency Translation and Transactions” for a further discussion of highly inflationary countries.
During the past three years, we experienced higher freight, energy and other raw material costs primarily due to substantial increases in regional and worldwide market prices of natural gas and other petroleum-based raw materials. We seek to mitigate the effects of those increases on our cost of sales through improved operating efficiencies, higher prices for our products and ongoing cost savings, and, in some cases, fixed price or derivative contracts.
We have in the past entered into, and may in the future enter into, natural gas derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas cost exposure. At December 31, 2005, we had fixed about 23% of our worldwide natural gas exposure through 2006 using such contracts. As of February 15, 2006, we had fixed about 32% of our worldwide natural gas exposure through such contracts.
Currency Translation and Transactions
We account for our non-U.S. subsidiaries under SFAS No. 52, “Foreign Currency Translation.” Accordingly, except for highly inflationary countries, the assets and liabilities of our non-U.S. subsidiaries are translated into dollars for consolidation and reporting purposes. Foreign currency translation adjustments are generally recorded as part of stockholders’ deficit and identified as part of accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as their operations are sold or substantially or completely liquidated.
Highly inflationary economies are defined as having cumulative inflation of about 100% or more over a period of three calendar years. In general, the financial statements of foreign operations in highly inflationary economies are remeasured as if the functional currency of their economic environments were the dollar and translation gains and losses relating to these foreign operations are included in other (income) expense, net, on the Consolidated Statements of Operations rather than as part of stockholders’ deficit on the Consolidated Balance Sheets. We have subsidiaries in Russia, Mexico, Brazil and other countries which have had in the past, and may have in the future, highly inflationary economies.
We account for our Mexican and Russian subsidiaries using the dollar as their functional currency, as sales and purchases for each subsidiary are predominantly dollar-denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses as part of other (income) expense, net.
Significant changes in currency exchange rates impacting us are described under “Effects of Changes in Currency Exchange Rates” and “Results of Operations.”
Effects of Changes in Currency Exchange Rates
We incur costs in dollars and the currency of each of the six non-U.S. countries in which we have a manufacturing facility, and we sell our products in multiple currencies. In general, our results of operations, cash flows and financial condition are affected by changes in currency exchange rates affecting these currencies relative to the dollar and, to a limited extent, each other.
When the currencies of non-U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the dollar, this has the effect of reducing (or increasing) the dollar equivalent cost of sales and other expenses with respect to those facilities. This effect is, however, partially offset by the cost of petroleum coke, a principal raw material used by us, which is priced in dollars. 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 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.
During 2003, the average exchange rate of the euro and the South African rand increased about 20% and 40%, respectively, when compared to the average exchange rate for 2002. During 2003, the average exchange rate for the Brazilian real and the Mexican peso declined about 1% and 11%, respectively, when compared to the average exchange rate for 2002. During 2004, the average exchange rate of the euro, South African rand, and Brazilian real increased about 10%, 17% and 5%, respectively, when compared to the average exchange rate for 2003. The Mexican peso declined about 5% when compared to the average exchange rate for 2003. During 2005, the average exchange rate of the euro, the South African rand, the Brazilian real and the Mexican peso increased about 1%, 2%, 21% and 4%, respectively, when compared to the average exchange rate for 2004.
In the case of net sales of graphite electrodes, the impact of these events was an increase of about $33,499 in 2003, an increase of about $18,484 in 2004 and a decrease of about $604 in 2005. In the case of cost of sales of graphite electrodes, the impact of these events was an increase of about $24,400 in 2003, an increase of about $17,900 in 2004 and an increase of about $5,262 in 2005. The impact of these events on net sales of cathodes was an increase of about $12,482 in 2003, an increase of about $9,191 in 2004 and a decrease of about $132 in 2005. The impact of these events on cost of sales of cathodes was an increase of about $10,529 in 2003, an increase of about $7,597 in 2004 and an increase of about $1,730 in 2005.
We have non-dollar denominated intercompany loans between GrafTech Finance and some of our foreign subsidiaries. At December 31, 2005, the aggregate principal amount of these loans was $414,622. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. A portion of these loans are deemed to be essentially permanent and, as a result, remeasurement gains and losses on these loans are recorded as a component of accumulated other comprehensive loss in the stockholders’ deficit section of the Consolidated Balance Sheets. The balance of 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. In 2003, we had a net total of $42,149 in currency gains, including $41,920 of exchange gains due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency. In 2004, we had a net total of $8,527 in currency gains, including $9,835 of exchange gains due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency. In 2005, we had a net total of $14,868 of currency losses, including $14,611 of exchange losses due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency. 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 changes in currency exchange rates, as described under “Item 7A–Quantitative and Qualitative Disclosures about Market Risks.”
Liquidity and Capital Resources
Our sources of funds have consisted principally of invested capital, cash flow from operations and debt and equity financings. Our uses of those funds (other than for operations) have consisted principally of capital expenditures, payment of fines, liabilities and expenses in connection with antitrust investigations, lawsuits and claims, payment of restructuring costs, pension and post-retirement contributions, debt reduction payments and other obligations.
We are highly leveraged and have other substantial obligations. At December 31, 2005, we had total debt of $704,148, cash and cash equivalents of $5,968 and a stockholders’ deficit of $209,577.
As part of our cash management activities, we manage accounts receivable credit risk, collections, and accounts payable and payments thereof to maximize our free cash at any given time and minimize accounts receivable losses. Certain subsidiaries sold receivables totaling $175,130 in 2003 and $7,036 in 2004. During 2005, certain subsidiaries sold receivables totaling $17,682, at a cost lower than the cost to borrow a comparable amount for a comparable period under the Revolving Facility. Proceeds of the sale of receivables were used to reduce debt. If we had not sold such receivables, our accounts receivable and our debt would have been unchanged at December 31, 2004 and about $13,095 higher at December 31, 2005. All such receivables sold during 2005 were sold without recourse, and no amount of accounts receivable sold remained on the Consolidated Balance Sheet at December 31, 2005.
We use cash and cash equivalents, funds available under the Revolving Facility (subject to continued compliance with the financial covenants and representations under the Revolving Facility) as well as cash flow from operations as our primary sources of liquidity. The Revolving Facility provides for maximum borrowings of up to $215 million. At December 31, 2005, $167,947 was available (after consideration of outstanding revolving and swingline loans of $39,000 and outstanding letters of credit of $8,053). It is possible that our future ability to borrow under the Revolving Facility may effectively be less because of the impact of additional borrowings upon our compliance with the maximum net senior secured debt leverage ratio permitted or minimum interest coverage ratio required under the Revolving Facility.
At December 31, 2005, we were in compliance with all financial and other covenants contained in the Senior Notes, the Debentures and the Revolving Facility, as applicable. Based on expected operating results and expected cash flows, we expect to be in compliance with these covenants over the next twelve months. If we were to believe that we would not continue to comply with these covenants, we would seek an appropriate waiver or amendment from the lenders thereunder. We cannot assure you that we would be able to obtain such waiver or amendment on acceptable terms or at all.
At December 31, 2005, 6% (or $40,376) of our total debt (excluding the fair value adjustments to debt and the unamortized bond premium and including the original value of the Debenture derivative liability relating to the Debentures redemption feature with a make-whole
provision) consists of variable rate obligations. Such amount includes $39,000 outstanding under the Revolving Facility and $1,376 of other debt.
At December 31, 2005, the Revolving Facility had an effective interest rate of 6.8%, our $434,631 principal amount of Senior Notes had a fixed rate of 10.25% and an effective rate of 10.02% (including the effect of the amortization of fair value adjustments for terminated hedge instruments) and our $225,000 principal amount of Debentures had a fixed rate of 1.625%. We estimate interest expense to be approximately $58 million for 2006.
We continue to implement interest rate management initiatives to seek to minimize interest expense and optimize the risk in our portfolio of fixed and variable interest rate obligations as described under “Item 7A–Quantitative and Qualitative Disclosures about Market Risk” in this Report.
Long-Term Contractual, Commercial and Other Obligations and Commitments. The following tables summarize our long-term contractual obligations and other commercial commitments at December 31, 2005.
| | Payment Due By Period
|
|---|
| | Total
| Year
Ending
December
2006
| Two
Years Ending
December
2008
| Two
Years Ending
December
2010
| Years
Ending After
December
2010
|
|---|
| | (Dollars in thousands) |
|---|
| | | | | | |
|---|
| Contractual and Other Obligations | | | | | | | | | | | | | | | | | |
| Long-term debt | | | $ | 699,602 | | $ | 39,045 | | $ | 434 | | $ | 191 | | $ | 659,932 | |
| Capital lease obligations | | | | — | | | — | | | — | | | — | | | — | |
| Operating leases | | | | 15,208 | | | 4,063 | | | 5,124 | | | 4,097 | | | 1,924 | |
| Unconditional purchase obligations (a) | | | | 26,776 | | | 7,974 | | | 8,776 | | | 8,776 | | | 1,250 | |
|
| |
| |
| |
| |
| |
| Total contractual obligations (a) | | | | 741,586 | | | 51,082 | | | 14,334 | | | 13,064 | | | 663,106 | |
Estimated liabilities and expenses in
connection with antitrust
investigations and related lawsuits
and claims (b) | | | | 26,000 | | | 20,625 | | | 5,375 | | | — | | | — | |
| Postretirement, pension and related | | |
| benefits (c) | | | | 76,983 | | | 11,996 | | | 6,499 | | | 6,499 | | | 51,989 | |
| Interest (d) | | | | 310,929 | | | 48,244 | | | 96,488 | | | 96,488 | | | 69,709 | |
| Other long-term obligations | | | | 17,200 | | | 7,371 | | | 2,484 | | | 853 | | | 6,492 | |
|
| |
| |
| |
| |
| |
Total contractual and other
obligations (a)(b)(c) | | | $ | 1,172,698 | | $ | 139,318 | | $ | 125,180 | | $ | 116,904 | | $ | 791,296 | |
|
| |
| |
| |
| |
| |
| |
| Other Commercial Commitments | | |
| Lines of credit (e) | | | | — | | | — | | $ | — | | $ | — | | | — | |
| Letters of credit | | | | 8,017 | | | 7,747 | | | 270 | | | — | | | — | |
| Guarantees | | | | 3,680 | | | 3,438 | | | 135 | | | — | | | 107 | |
|
| |
| |
| |
| |
| |
Total other commercial
commitments | | | $ | 11,697 | | $ | 11,185 | | $ | 405 | | $ | — | | $ | 107 | |
|
| |
| |
| |
| |
| |
_________________
| (a) | Effective April 2001, we entered into a ten-year service contract with CGI Group Inc. (“CGI”) valued at that time at $75 million ($23 million of which is the unconditional purchase obligation at December 31, 2005 included in the above table). Pursuant to this contract, CGI became the delivery arm for our global information services. Under the outsourcing provisions of this contract, CGI managed our data center services, networks, desktops, telecommunications and legacy systems. This contract was amended, effective September 2005, to reduce the scope of CGI’s management of our data center services, networks, desktops and telecommunications. We are dependent on CGI for these services. A failure by CGI to provide any of these services to us in a timely manner could have an adverse effect on our results of operations. |
| | In the 2002 third quarter, we entered into a ten-year outsourcing contract with CGI valued at that time at $36 million. Such amounts are excluded from the above table, as these amounts do not include an unconditional purchase obligation. Pursuant to this contract, CGI became the delivery arm for our finance and accounting business process services (“BPS”), including accounts receivable and accounts payable activities, and provided various related analytical services such as general accounting, cost accounting and financial analysis activities. During the fourth quarter of 2005, we entered into a memorandum of agreement with CGI, terminating such services. The memorandum was entered into after the parties determined that the termination of the contract was in their mutual best interest. Such termination is effective during the first quarter of 2006. Thereafter, we will be solely and entirely responsible for all of the services previously rendered by CGI under the contract. |
| (b) | Consists of the outstanding balance of the DOJ antitrust fine. |
| (c) | Represents estimated postretirement, pension and related benefits obligations based on actuarial calculations. |
| (d) | Excludes the accounting for deferred financing costs or gains on the sale of hedge instruments. Payments assume Senior Notes, with a fixed rate of interest of 10.25%, mature on February 15, 2012 and the Debentures, with a fixed rate of interest of 1.625%, effectively mature on January 15, 2011. |
| (e) | Local lines of credit are established by our foreign subsidiaries for working capital purposes and are not part of the Revolving Facility. The total amount available under the lines of credit amounted to $19 million at December 31, 2005. |
Cash Flow and Plans to Manage Liquidity. As a result of our significant leverage and other substantial obligations, our business strategies include efforts to enhance our capital structure by further reducing our gross obligations. Accordingly, we have placed the highest priority on accelerating the amount and speed of cash generated every day. Our efforts include leveraging our unique global manufacturing network by driving higher utilization rates and more productivity from our existing assets, accelerating commercialization initiatives across all of our businesses and realizing other global efficiencies. In addition, we may exchange or repurchase Senior Notes or Debentures as described below. We also continue to evaluate other
opportunities to reduce our obligations, including the obligations associated with our U.S. defined benefit plan, which was frozen in 2003.
Typically, the first quarter of each year results in neutral or negative cash flow from operations due to various factors. These factors include customer order patterns, fluctuations in working capital requirements and other factors. Typically, the other three quarters result in positive cash flow from operations. The third quarter tends to produce relatively less positive cash flow from operations primarily as a result of scheduled plant shutdowns by our customers for vacations. Our cash flow from operations in the first and third quarters typically is adversely impacted by the semi-annual interest payments on the Senior Notes and the Debentures. The second and fourth quarters correspondingly benefit from the absence of such interest payments.
In addition to the above factors, in 2003 and 2004, we had negative cash flow from operations primarily due to payments in connection with restructurings, antitrust investigations, lawsuits and claims and uses of cash from working capital. In 2005, we had positive cash flow from operations despite continued payments in connection with restructurings and antitrust investigations and the continued use of cash for working capital to, among other things, build inventories. For 2006, we expect increasingly positive cash flows from operations. In addition to the factors described above, we expect a weaker than normal 2006 first quarter due to, lower sales and profit because of weaker than normal customer shipments because graphite electrode customers took full contract volumes in the 2005 fourth quarter and a higher use of cash for temporarily higher inventory because of higher graphite electrode operating levels in the first quarter as compared to the lower shipments. This is expected to result in negative cash flow during the 2006 first quarter and debt levels that may be $40 million or more higher in the 2006 first quarter than those at the 2005 year end and generally higher than the average level expected for the full year 2006.
As part of our cash management activities, we seek to manage accounts receivable credit risk and collections, and payment of accounts payable to seek to maximize our free cash at any given time and minimize accounts receivable losses. In order to seek to minimize our credit risks, we reduced our sales of, or refused to sell (except for cash on delivery), graphite electrodes to some customers and potential customers in the U.S. and, to a limited extent, elsewhere. Our unrecovered trade receivables worldwide were only 0.1% of global net sales during the last 3 years. We cannot assure you that we will not be materially adversely affected by accounts receivable losses in the future. In addition, we have historically factored a portion of our accounts receivable and used the proceeds to reduce debt.
We use cash and cash equivalents, funds available under the Revolving Facility and cash flow from operations as our primary sources of liquidity. We believe that our business strategies will continue to improve the amount and speed of cash generated from operations under current economic conditions. Improvements in cash flow from operations resulting from these strategies are being partially offset by associated cash implementation costs while they are being implemented. We also believe that our planned asset sales together with these improvements in cash flow from operations should allow us to reduce our debt and other obligations over the long term.
We may from time to time and at any time repurchase Senior Notes or Debentures in open market or privately negotiated transactions, opportunistically on terms that we believe to be favorable. These purchases may be effected for cash (from cash and cash equivalents, borrowings under the Revolving Facility or new credit facilities, or proceeds from sale of debt or equity securities or assets), in exchange for common stock or other equity or debt securities, or a combination thereof. We will evaluate any such transaction in light of then prevailing market conditions and our then current and prospective liquidity and capital resources, including projected and potential needs and prospects for access to capital markets. Any such transactions may, individually or in the aggregate, be material.
Our high leverage and other substantial obligations could have a material impact on our liquidity. Cash flow from operations services payment of our debt and other obligations thereby reducing funds available to us for other purposes. Our leverage and these obligations make us more vulnerable to economic downturns in the event that these obligations are greater or timing of payment is sooner than expected.
We believe that the long term fundamentals of our business continue to be sound. Accordingly, although we cannot assure you that such will be the case, we believe that, based on our expected cash flow from operations, our existing capital resources, and taking into account our working capital needs and our efforts to reduce costs, improve efficiencies and product quality and accelerate commercialization of new products and cash flow, we will be able to manage our liquidity to permit us to service our debt and meet our obligations when due. Based on expected operating results and expected cash flows, we expect to be in compliance with financial covenants in 2006.
Related Party Transactions. Since January 1, 2003, we have not engaged in or been a party to any material transactions with affiliates or related parties other than transactions with our subsidiaries (including Carbone Savoie and AET) and compensatory transactions with directors and officers (including employee benefits, stock option and restricted stock grants, compensation deferral, executive employee loans and stock purchases).
Off-Balance Sheet Arrangements and Commitments. We have not undertaken or been a party to any material off-balance-sheet financing arrangements or other commitments (including non-exchange traded contracts), other than:
• | Interest rate caps, interest rate swaps, currency exchange rate contracts and natural gas contracts, which are described under “Item 7A – Quantitative and Qualitative Disclosures About Market Risk.” |
• | Commitments under non-cancelable operating leases that, at December 31, 2004, totaled no more than $4 million in each year and about $7,697 in the aggregate, and, at December 31, 2005, totaled no more than $4 million in each year and about $15,208 in the aggregate. |
• | Minimum required purchase commitments under our information technology outsourcing services agreement with CGI described above that, at December 31, 2004, totaled approximately $5 million in each year and about $32,484 in the aggregate and at December 31, 2005, totaled no more than $5 million in each year and about $23,276 in the aggregate. |
• | Factoring accounts receivable as described above. |
We are not affiliated with or related to any special purpose entity other than GrafTech Finance, our wholly-owned and consolidated finance subsidiary.
Cash Flows.
Cash Flow (Used in) Provided by Operating Activities. Cash flow (used in) provided by operating activities was ($25,106) in 2003, ($132,266) in 2004 and $7,989 in 2005.
Cash used in operating activities was $25,106 in 2003. Income from continuing operations, after adding back the net effect from non-cash items, amounted to $19,502. Such income was used in operating activities primarily as follows: a reduction in payables of $12,309 primarily due to timing of payment patterns, including our semi-annual interest payments on the Senior Notes and the Debentures, an increase in inventories of $8,674 to primarily support anticipated customer demand and an increase of $4,971 in accounts receivables.
Other uses in 2003 consisted of $4,588 of payments for antitrust investigations and related lawsuits and claims, $5,692 of restructuring costs related to severance and related payments and $9,796 of other payments consisting primarily of pension and post-retirement contributions and payments. Net cash provided from discontinued operations amounted to $1,422.
Cash used in operating activities was $132,266 in 2004. Net income, after adding back the net effect from non-cash items, amounted to $72,624. Such income was used in operating activities primarily as follows: an increase in accounts receivables of $66,300 primarily from the discontinuance of accounts receivable factoring and increased sales, and an increase in inventories of $6,276 primarily in anticipation of increased demand, offset by an increase in payables of $6,859 due primarily to timing of payment patterns.
Other uses in 2004 consisted of $83,480 of payments for antitrust investigations and related lawsuits and claims, $16,853 of restructuring costs related to severance and related payments and $38,840 of other payments consisting primarily of pension and post-retirement contributions and payments.
Cash provided by operating activities was $7,989 in 2005. Income from continuing operations, after adding back the net effect from non-cash items, amounted to $80,699. Such income was used in operating activities primarily as follows: an increase in inventories of $45,430 primarily to support anticipated growth in customer demand and an $2,690 decrease in payables primarily due to timing of payment patterns, offset by a decrease in accounts receivables of $10,921 primarily from increased factoring.
Other uses in 2005 consisted of $16,900 of payments for antitrust investigations and related lawsuits and claims, $6,670 of restructuring costs related to severance and related payments and $11,941 of other payments consisting primarily of pension and post-retirement contributions and payments.
Cash Flow Used in Investing Activities. Cash flow used in investing activities was $22,113 in 2003, $56,310 in 2004 and $60,381 in 2005.
Cash used in investing activities was $22,113 in 2003. Capital expenditures in 2003 were $40,485. Capital expenditures related primarily to the expansion of graphite electrode
manufacturing capacity, implementation of People Soft Enterprise One (formerly known as J.D. Edwards One World) information systems and essential capital maintenance. Expenditures were offset by $18,372 of cash, primarily provided from the sale of our non-strategic composite tooling business and the sale of other assets.
Cash used in investing activities was $56,310 in 2004. Capital expenditures in 2004 were $59,117 and related primarily to the expansion of graphite electrode manufacturing capacity, including expansion of our graphite electrode manufacturing facilities in Spain, France, and South Africa, implementation of People Soft Enterprise One (formerly known as J.D. Edwards One World) information systems and essential capital maintenance. Other investing uses of $3,539 pertained primarily to the purchase of derivative instruments. Such uses were offset by $6,346 in proceeds from the sale of assets, primarily pertaining to the sale of our fixed assets in connection with closure of our advanced synthetic graphite machining operations in Sheffield, United Kingdom.
Cash used in investing activities was $60,381 in 2005. Capital expenditures amounted to $48,071 in 2005 and related primarily to graphite electrode productivity and production stability initiatives and other essential capital maintenance. Such uses were offset primarily by proceeds from the sale of derivative instruments and the sale of other assets. Other investing uses of $15,597 pertained primarily to payments in connection with the sale of interest rate swaps. Such uses were partially offset by $3,287 from the sale of certain assets.
Cash Flow Provided by Financing Activities. Cash flow provided by financing activities was $69,133 in 2003, $176,606 in 2004 and $36,184 in 2005.
During 2003, we received net proceeds of $189,877 from a registered public offering of common stock and $30,188 from the sale of interest rate swaps. We used these proceeds primarily to repay term loans of $115,986 outstanding under the Senior Facilities, reduce the outstanding balance under the Revolving Facility and repay other short-term debt.
Cash provided by financing activities was $176,606 in 2004. During 2004, we received gross proceeds of $225,000 (less issuance costs of $7,355) from the issuance and sale of the Debentures and $7,843 from the exercise of stock options. We used these proceeds to repay term loans of $21,398 outstanding under the Senior Facilities, to pay $83,480 primarily to the EU Competition Authority and to replace cash previously provided by factoring of accounts receivable as described above in “Cash Flow Used in Operating Activities.” In addition, we purchased $22,869 aggregate principal amount of Senior Notes, plus accrued interest, for $27,342 in cash.
Cash provided by financing activities was $36,184 in 2005. During 2005, we incurred borrowings of $173,325, primarily under the Revolving Facility. We used these net borrowings to fund working capital requirements, primarily inventory that we have replenished and built in anticipation of stronger demand. Such borrowings were offset by payments under the Revolving Facility of $131,562 and $5,579 in financing and other costs.
Costs Relating to Protection of the Environment
We have been and are subject to increasingly stringent environmental protection laws and regulations. In addition, we have an on-going commitment to rigorous internal environmental protection standards. Environmental considerations are part of all significant capital expenditure decisions. The following table sets forth certain information regarding environmental expenses and capital expenditures.
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| | (Dollars in thousands) |
|---|
| Expenses relating to environmental protection | | | $ | 13,074 | | $ | 13,056 | | $ | 12,525 | |
| Capital expenditures related to environmental protection | | | | 2,118 | | | 2,787 | | | 2,749 | |
Critical Accounting Policies
Critical accounting policies are those that require difficult, subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements. The following accounting policies are deemed to be critical.
Reliance on Estimates. In preparing the Consolidated Financial Statements, we use and rely on estimates in determining the economic useful lives of our assets, obligations under our employee benefit plans, provisions for doubtful accounts, provisions for restructuring charges and contingencies, tax valuation allowances, evaluation of goodwill and other intangible assets, pension and postretirement benefit obligations and various other recorded or disclosed amounts. Estimates require us to use our judgment. While we believe that our estimates for these matters are reasonable, if the actual amount is significantly different than the estimated amount, our assets, liabilities or results of operations may be overstated or understated.
Employee Benefit Plans. We sponsor various retirement and pension plans, including defined benefit and defined contribution plans and postretirement benefit plans that cover most employees worldwide. Accounting for these plans requires assumptions as to the discount rate, expected return on plan assets, expected salary increases and health care cost trend rate. See Note 11 to the Consolidated Financial Statements for further details.
Financial Instruments. We are exposed to market risks primarily from changes in interest rates and currency exchange rates. We routinely enter into various transactions that have been authorized according to documented policies and procedures to manage well-defined currency exchange rate risks and interest rate risks. These transactions relate primarily to financial instruments described under “Item 7A–Quantitative and Qualitative Disclosures about Market Risks.” 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. Accounting for financial instruments requires us to make judgments about the value of those instruments at specified dates. While we believe that our estimates of values are reasonable, if the actual values
are significantly different than the estimated values, our assets, liabilities or results of operations may be overstated or understated.
Derivative Liability Associated with our Debentures. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the redemption option and its make-whole provision (the “Redemption Make-Whole Option”) contained in the Debentures, qualify as an embedded derivative that was not clearly and closely related to the characteristics of the Debentures upon issuance. Since the Redemption Make-Whole Option does not currently qualify for any scope exception within SFAS No. 133, it is required by SFAS No. 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments. The embedded derivative financial instrument was classified as a derivative liability upon issuance and is included in other long-term obligations in the Consolidated Balance Sheet.
We estimate the fair value of the Redemption Make-Whole Option using a financial model that uses several assumptions, including: historical stock price volatility, risk-free interest rates, remaining maturity and the closing price of our common stock to determine estimated fair value of our derivative liability. We believe that the assumption that has the greatest impact on the determination of fair value is the closing price of our common stock during each quarterly period.
Contingencies. We account for contingencies by recording an estimated loss or gain from a loss or gain contingency when information available prior to issuance of the Consolidated Financial Statements indicates that it is probable that an asset has been impaired or a liability has been incurred or a gain has become receivable at the date of the Consolidated Financial Statements and the amount of the loss or gain can be reasonably estimated. Accounting for contingencies such as those relating to environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss or gain from a contingency is significantly different from the estimated loss or gain, our results of operations may be overstated or understated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.
Impairments of Long-Lived Assets. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the discounted future cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future net cash flows to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value less estimated costs to sell. Estimates of the discounted future cash flows are subject to significant uncertainties and assumptions. If the actual value is significantly less than the estimated fair value, our assets may be overstated. Future events and circumstances, some of which are described below, may result in an impairment charge:
• | new technological developments that provide significantly enhanced benefits over our current technology; |
• | significant negative economic or industry trends; |
• | changes in our business strategy that alter the expected usage of the related assets; |
• | significant increases or decreases in our cost of capital; and |
• | future economic results that are below our expectations used in the current assessments. |
Accounting for Income Taxes. When we prepare the Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to make the following assessments:
• | estimate our actual current tax liability in each jurisdiction; |
• | estimate our temporary differences resulting from differing treatment of items, such as lease revenue and related depreciation, for tax and accounting purposes (which result in deferred tax assets and liabilities that we include within the Consolidated Balance Sheets); and |
• | assess the likelihood that our deferred tax assets will be recovered from future taxable income and, if we believe that recovery is not likely, establish a valuation allowance. |
If our estimates are incorrect, our deferred tax assets or liabilities may be overstated or understated.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS No. 123(R), companies are to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which Accounting Principles Board Opinion (“APB”) No. 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option equaled the price of the underlying stock at the grant date. In addition, SFAS No. 123(R) retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date and adjusted to reflect actual forfeitures and the outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date (except in the case of a liability award or if the award is modified). SFAS No. 123(R) is effective for annual periods beginning after June 15, 2005. We will be required to adopt SFAS No. 123(R) in the first quarter of 2006. The actual impact of the adoption of SFAS No. 123(R) will depend upon the amount, nature and type of stock-based compensation awards outstanding upon implementation and that we may issue in the future. Based on the current stock-based compensation plans in effect and awards issued, our estimated expense in 2006 for stock-based compensation is $4,055, $3,338 of which relates to 2005 restricted stock grants and $717 of which relates to unvested stock options.
The information required by this Item 7 with respect to other recent accounting pronouncements is set forth under “New Accounting Standards” in Note 3 to the Notes to the Consolidated Financial Statements contained in this Report, and is incorporated herein by reference.
Description of Our Financing Structure
The information required by this Item 7 with respect to our financing structure is set forth under “Long-Term Debt and Liquidity” in Note 5 to the Notes to the Consolidated Financial Statements contained in this Report, and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
(Unless otherwise noted, all dollars are presented in thousands)
We are exposed to market risks primarily from changes in interest rates, currency exchange rates, commercial energy rates and changes to the fair value of the Redemption Make-Whole Option. We 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, if any, 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 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 costs results primarily from the purchase of natural gas and electricity for use in our manufacturing operations. Our exposure to changes in the fair value of the Redemption Make-Whole Option results primarily from changes in the closing price of our common stock.
Interest Rate Management. We implement interest rate management initiatives to seek to minimize our interest expense and optimize the risk in our portfolio of fixed and variable interest rate obligations. Use of these initiatives is allowed under the Senior Notes and the Revolving Facility. We use interest rate swaps to effectively convert fixed rate debt (represented by the Senior Notes) into variable rate debt. At December 31, 2004, we had swaps for a notional amount of $450 million. At December 31, 2005, we had no interest rate swaps outstanding.
At December 31, 2004, $434,631 (out of our total outstanding $450 million notional amount) of interest rate swaps were designated as hedging the exposure to changes in the fair
value of the related debt (called a fair value hedge). The related debt for those swaps is the Senior Notes, of which $434,631 aggregate principal amount was outstanding at December 31, 2004. At December 31, 2004 (excluding the offsetting value of our interest rate caps), the principal value of our debt was reduced by $9,891 as a result of our current fair value hedges. The market values of those interest rate swaps, excluding changes in value resulting from accrued interest payable or receivable from the counterparty, are recorded as part of other long-term obligations on the Consolidated Balance Sheets. Accrued interest receivable from or payable to the counterparty is recorded as a component of interest expense on the Consolidated Statement of Operations.
At December 31, 2004, the remaining $15 million of our interest rate swaps were not designated as hedging exposure to changes in the fair value of any specific debt instrument. Any changes in the market value of those swaps are recorded in other (income) expense, net, on the Consolidated Statement of Operations. In 2004, the mark-to-market impact of the undesignated swaps was $350.
All of our swaps are valued monthly, and we are required to provide cash collateral to the counterparty to the extent that the fair market value of the swap liability, net of the fair market value of our interest rate caps, exceeds a specific threshold. At December 31, 2004, all of our swaps were with one counterparty and this threshold was $15 million. We were not required to provide any cash collateral at December 31, 2004.
During the first quarter of 2005, we sold $15 million notional amount of undesignated swaps and paid a nominal fee. Additionally, we sold $150 million notional amount of our fair value hedge swaps and paid $2,950 in cash. Immediately thereafter, we repurchased $150 million notional amount of fair value hedge swaps with a different counterparty. During the second quarter of 2005, we sold $285 million notional amount of swaps and paid $4,831. During the fourth quarter of 2005, we sold $150 million notional amount of swaps and paid $6,845. As a result of these transactions, at December 31, 2005, we had no interest rate swaps outstanding.
At December 31, 2004, the variable interest rate was calculated based on the six month LIBOR rate as of the date of payment plus 5.7940%, calculated in arrears. During 2005, a portion of the variable interest rate was calculated based on the six month LIBOR rate as of the date of payment plus 5.7940% calculated in arrears and a portion of the variable interest rate was calculated based on the six month LIBOR, set in advance, plus 5.7967%. At December 31, 2005, the Senior Notes are at a fixed rate of 10.25% per annum.
When we sell a fair value hedge swap, the gain or loss is amortized as a credit or charge to interest expense over the remaining term of the Senior Notes. When we effectively reduce the outstanding principal amount of the Senior Notes (through debt-for-equity exchanges, repurchases or otherwise), the related portion of such credit or charge is accelerated and recorded in the period in which such reduction occurs. At December 31, 2004 and 2005, the principal value of our debt was increased by $24,484 and $7,404, respectively, as a result of gains realized from previously sold swaps. The net impact of current and terminated hedge instruments was a $14,593 and a $7,404 increase in the fair value of our debt at December 31, 2004 and 2005,
respectively, and was recorded on the Consolidated Balance Sheets on the line entitled “fair value adjustments for hedge instruments.”
Additional information with respect to the impact of our swaps on interest expense is set forth under “Interest Expense” in Note 7 to the Consolidated Financial Statements and is incorporated herein by reference.
We enter into agreements with financial institutions that are intended to limit, or cap, our exposure to the incurrence of additional interest expense due to increases in variable interest rates. These instruments effectively cap our interest rate exposure, represented by the net impact of our swaps on the Senior Notes, to no greater than 11.3% per annum. At December 31, 2004, we had interest rate caps for a notional amount of $500 million. During 2005, we sold all of our outstanding interest rate caps. All of our interest rate caps are marked-to-market monthly. Gains and losses are recorded in other (income) expense, net, on the Consolidated Statements of Operations. The fair value adjustment on caps was a $914 loss for 2003, a $3,827 loss for 2004, and a $527 loss for 2005.
Currency Rate Management. We enter into foreign currency instruments 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, net, relating to euro-denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. 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. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at market value.
The notional amount of open foreign exchange contracts, used by us to minimize foreign currency exposure against euro depreciation, amounted to $54,481 at December 31, 2004. In 2005, one contract expired and we sold all remaining open foreign exchange contracts. As a result, at December 31, 2005, we had no such contracts outstanding. Gains and losses associated with these contracts amounted to a loss of $6,650 in 2003, a loss of $406 in 2004 and a gain of $1,268 in 2005.
Commercial Energy Rate Management. We have in the past entered into, and may in the future enter into, natural gas derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas cost exposure. The unrealized gain on outstanding contracts at December 31, 2003 amounted to $917. At December 31, 2005, we had fixed about 23% of our worldwide natural gas exposure through 2006 using such contracts. The outstanding contracts at December 31, 2005 were a nominal receivable. As of February 15, 2006, we had fixed about 32% of our worldwide natural gas exposure through such contracts.
We are required to provide cash collateral to certain counterparties to the extent that the fair market value of the natural gas derivative contracts exceeds a specific threshold. At
December 31, 2005, this threshold was $15 million. We were not required to provide any cash collateral at December 31, 2005.
Derivative Liability Associated with the Debentures. The Redemption Make-Whole Option is accounted for separately from the underlying debt evidenced by the Debentures and is recorded as a derivative financial instrument. The embedded derivative financial instrument was classified as a derivative liability upon issuance and is included in the other long-term obligations in the Consolidated Balance Sheet. At each balance sheet date, we adjust the derivative liability to its estimated fair value. Upon issuance at January 22, 2004, the estimated fair value of the derivative liability was $6,462. At December 31, 2004, the estimated fair value of the derivative liability was $3,986. At December 31, 2005, the estimated fair value of the derivative liability was $1,284. We estimate the fair value by using a financial model that uses several assumptions, including historical stock price volatility, risk-free interest rates, remaining maturity and the closing price of our common stock. We believe that the assumption that has the greatest impact on the determination of fair value is the closing price of our common stock.
Sensitivity Analysis. We used a sensitivity analysis to assess the potential effect of changes in currency exchange rates on gross margin, changes in interest rates on interest expense and changes in the more relevant variables on the Redemption Make-Whole Option for 2005 (particularly our current stock price, historical stock price volatility and borrowing costs). Based on this analysis, a hypothetical 10% weakening or strengthening in the dollar across all other currencies would have changed our reported gross margin for 2005 by about $12 million. In addition, based on this analysis, a hypothetical increase in interest rates of 100 basis points across all maturities would have increased our interest expense for 2005 by about $3 million. The sensitivity analysis used to assess the potential effect of changes in the more relevant variables impacting the Redemption Make-Whole Option (which was based on hypothetical changes of 10%) did not result in material changes.
Item 8. Financial Statements and Supplementary Data
(Unless otherwise noted, all dollars are presented in thousands)
Page
| Management’s Report on Internal Control over Financial Reporting | | 98 |
| Reports of Independent Registered Public Accounting Firms | | 99 |
| Consolidated Balance Sheets | | 102 |
| Consolidated Statements of Operations | | 103 |
| Consolidated Statements of Cash Flows | | 104 |
| Consolidated Statements of Stockholders’ Deficit | | 106 |
| Notes to Consolidated Financial Statements | | 107 |
See the Table of Contents located at the beginning of this Report for more detailed page references to information contained in this Item.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process, designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel of a company, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the company; |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of directors; and |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its financial statements. |
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the level of compliance with related policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2005 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2005.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report on page 99 of this Report.
Date: March 15, 2006
/s/ Craig S. Shular | | |
Craig S. Shular, | | |
Chief Executive Officer, President and
Interim Chief Financial Officer | | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of GrafTech International Ltd.:
We have completed integrated audits of GrafTech International Ltd.’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of GrafTech International Ltd. and its subsidiaries at December 31, 2005 and December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, appearing in Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2006
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
GrafTech International Ltd.
Wilmington, Delaware
We have audited the accompanying consolidated statements of operations, cash flows and stockholders’ deficit for the year ended December 31, 2003. These financial statements of Graftech International Ltd. and Subsidiaries are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Graftech International Ltd. for the year ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 12, 2004
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
| ASSETS | | | | | | | | |
| Current Assets: | | |
| Cash and cash equivalents | | | $ | 23,484 | | $ | 5,968 | |
| Accounts and notes receivable, net of allowance for doubtful accounts of $4,001 at | | |
| December 31, 2004 and $3,132 at December 31, 2005 | | | | 205,981 | | | 184,580 | |
| Inventories | | | | 225,104 | | | 255,038 | |
| Prepaid expenses and other current assets | | | | 24,883 | | | 14,101 | |
|
| |
| |
| Total current assets | | | | 479,452 | | | 459,687 | |
|
| |
| |
| |
| Property, plant and equipment | | | | 1,131,220 | | | 1,086,393 | |
| Less: accumulated depreciation | | | | 752,768 | | | 724,196 | |
|
| |
| |
| Net property, plant and equipment | | | | 378,452 | | | 362,197 | |
| Deferred income taxes | | | | 152,539 | | | 12,103 | |
| Goodwill | | | | 22,895 | | | 20,319 | |
| Other assets | | | | 34,480 | | | 32,514 | |
|
| |
| |
| Total assets | | | $ | 1,067,818 | | $ | 886,820 | |
|
| |
| |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| Current liabilities: | | |
| Accounts payable | | | $ | 85,889 | | $ | 92,192 | |
| Short-term debt | | | | 644 | | | 405 | |
| Accrued income and other taxes | | | | 38,162 | | | 24,826 | |
| Other accrued liabilities | | | | 98,802 | | | 96,990 | |
|
| |
| |
| Total current liabilities | | | | 223,497 | | | 214,413 | |
|
| |
| |
| Long-term debt: | | |
| Principal value | | | | 655,242 | | | 694,893 | |
| Fair value adjustments for hedge instruments | | | | 14,593 | | | 7,404 | |
| Unamortized bond premium | | | | 1,611 | | | 1,446 | |
|
| |
| |
| Total long-term debt | | | | 671,446 | | | 703,743 | |
|
| |
| |
| Other long-term obligations | | | | 149,462 | | | 107,704 | |
| Deferred income taxes | | | | 46,259 | | | 43,669 | |
| Commitments & contingencies | | | | — | | | — | |
| Minority stockholders’ equity in consolidated entities | | | | 30,126 | | | 26,868 | |
| Stockholders’ deficit: | | |
| Preferred stock, par value $.01, 10,000,000 shares authorized, none issued | | | | – | | | – | |
| Common stock, par value $.01, 150,000,000 shares authorized, 100,520,240 shares | | |
| issued at December 31, 2004 and 100,821,434 shares issued at December 31, 2005 | | | | 1,017 | | | 1,023 | |
| Additional paid-in capital | | | | 941,075 | | | 944,581 | |
| Accumulated other comprehensive loss | | | | (276,465 | ) | | (311,429 | ) |
| Accumulated deficit | | | | (626,307 | ) | | (751,487 | ) |
| Less: cost of common stock held in treasury, 2,451,035 shares at December 31, | | |
| 2004 and 2,455,466 shares at December 31, 2005 | | | | (85,583 | ) | | (85,621 | ) |
Less: common stock held in employee benefit and compensation trusts, 522,732
shares at December 31, 2004 and 518,301 shares at December 31, 2005 | | | | (6,709 | ) | | (6,644 | ) |
|
| |
| |
| Total stockholders’ deficit | | | | (52,972 | ) | | (209,577 | ) |
|
| |
| |
| Total liabilities and stockholders’ deficit | | | $ | 1,067,818 | | $ | 886,820 | |
|
| |
| |
See accompanying Notes to Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
| | For the Year Ended December 31,
|
|---|
| | | 2003
| | 2004
| | 2005
|
|---|
| Net sales | | | $ | 712,337 | | $ | 847,701 | | $ | 886,699 | |
| Cost of sales | | | | 544,196 | | | 638,186 | | | 654,342 | |
|
| |
| |
| |
| Gross profit | | | | 168,141 | | | 209,515 | | | 232,357 | |
| Research and development | | | | 10,410 | | | 8,040 | | | 9,437 | |
| Selling, administrative and other expenses | | | | 85,546 | | | 89,369 | | | 100,439 | |
| Restructuring charges | | | | 19,765 | | | (548 | ) | | 9,729 | |
| Impairment loss on long-lived and other assets | | | | 6,991 | | | — | | | 2,904 | |
| Antitrust investigations and related lawsuits and claims | | | | 32,073 | | | (10,901 | ) | | — | |
| Other (income) expense, net | | | | (12,060 | ) | | 21,189 | | | 18,020 | |
| Interest expense | | | | 45,141 | | | 39,178 | | | 52,716 | |
| Interest income | | | | (351 | ) | | (1,161 | ) | | (1,200 | ) |
|
| |
| |
| |
| | | | | 187,515 | | | 145,166 | | | 192,045 | |
Income (loss) from continuing operations before provision for income
taxes and minority stockholders’ share of income (loss) | | | | (19,374 | ) | | 64,349 | | | 40,312 | |
| Provision for income taxes | | | | 4,695 | | | 46,310 | | | 165,813 | |
|
| |
| |
| |
| Income (loss) from continuing operations before minority interest | | | | (24,069 | ) | | 18,039 | | | (125,501 | ) |
| Less: minority stockholders’ share of income (loss) | | | | 1,245 | | | 998 | | | (321 | ) |
|
| |
| |
| |
| Income (loss) from continuing operations | | | | (25,314 | ) | | 17,041 | | | (125,180 | ) |
| Income from discontinued operations, net of tax | | | | 476 | | | — | | | — | |
| Gain on sale of discontinued operations, net of tax | | | | 561 | | | — | | | — | |
|
| |
| |
| |
| Net income (loss) | | | $ | (24,277 | ) | $ | 17,041 | | $ | (125,180 | ) |
|
| |
| |
| |
| Basic income (loss) per common share: | | |
| Net income (loss) per share from continuing operations | | | $ | (0.38 | ) | $ | 0.18 | | $ | (1.28 | ) |
| Net income per share from discontinued operations | | | | 0.02 | | | — | | | — | |
|
| |
| |
| |
| Net income (loss) per share | | | $ | (0.36 | ) | $ | 0.18 | | $ | (1.28 | ) |
|
| |
| |
| |
| Diluted income (loss) per common share: | | |
| Net income (loss) per share from continuing operations | | | $ | (0.38 | ) | $ | 0.17 | | $ | (1.28 | ) |
| Net income per share from discontinued operations | | | | 0.02 | | | — | | | — | |
|
| |
| |
| |
| Net income (loss) per share | | | $ | (0.36 | ) | $ | 0.17 | | $ | (1.28 | ) |
|
| |
| |
| |
See accompanying Notes to Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| Cash flow from operating activities: | | | | | | | | | | | |
| Net income (loss) | | | $ | (24,277 | ) | $ | 17,041 | | $ | (125,180 | ) |
| Income from discontinued operations | | | | 476 | | | — | | | — | |
| Gain on sale of discontinued operations | | | | 561 | | | — | | | — | |
|
| |
| |
| |
| Income (loss) from continuing operations | | | | (25,314 | ) | | 17,041 | | | (125,180 | ) |
| Adjustments to reconcile net income (loss) to cash provided by operations: | | |
| Depreciation and amortization | | | | 30,623 | | | 35,459 | | | 36,926 | |
| Deferred income taxes | | | | 529 | | | 26,582 | | | 154,819 | |
| Antitrust investigations and related lawsuits and claims | | | | 32,073 | | | 1,260 | | | (119 | ) |
| Restructuring charges | | | | 19,765 | | | (548 | ) | | 9,729 | |
| Loss on exchange of common stock for Senior Notes | | | | — | | | 5,682 | | | — | |
| Impairment loss on long-lived and other assets | | | | 6,991 | | | — | | | 2,904 | |
| Interest expense | | | | — | | | (2,159 | ) | | 1,596 | |
| Post retirement plan changes | | | | — | | | (10,341 | ) | | (14,000 | ) |
| Gain on sale of assets | | | | — | | | (2,847 | ) | | (748 | ) |
| Fair value adjustments on interest rate caps | | | | — | | | 3,827 | | | 652 | |
| Fair value adjustments on Redemption Make-Whole Option | | | | — | | | (2,475 | ) | | (2,702 | ) |
| Other (credits) charges, net | | | | (45,165 | ) | | 1,143 | | | 16,822 | |
| (Increase) decrease in working capital (see * on next page) | | | | (36,180 | ) | | (167,068 | ) | | (61,787 | ) |
| (Increase) decrease long-term assets and liabilities | | | | (9,850 | ) | | (37,822 | ) | | (10,923 | ) |
|
| |
| |
| |
| Net cash (used in) provided by operating activities from continuing operations | | | | (26,528 | ) | | (132,266 | ) | | 7,989 | |
| Net cash provided by operating activities from discontinued operations | | | | 1,422 | | | — | | | — | |
|
| |
| |
| |
| Net cash provided by (used in) operating activities | | | | (25,106 | ) | | (132,266 | ) | | 7,989 | |
| Cash flow from investing activities: | | |
| Capital expenditures | | | | (40,485 | ) | | (59,117 | ) | | (48,071 | ) |
| Patent capitalization | | | | (534 | ) | | (298 | ) | | (797 | ) |
| Cost of interest rate swap termination | | | | — | | | — | | | (14,800 | ) |
| Purchase of derivative investments | | | | — | | | (3,241 | ) | | — | |
| Sale of derivative investments | | | | — | | | 755 | | | 1,913 | |
| Proceeds from sale of assets | | | | 3,214 | | | 5,591 | | | 1,374 | |
| Proceeds from sale of discontinued operations | | | | 15,692 | | | — | | | — | |
|
| |
| |
| |
| Net cash provided by (used in) investing activities | | | | (22,113 | ) | | (56,310 | ) | | (60,381 | ) |
| Cash flow from financing activities: | | |
| Short-term debt borrowings (reductions), net | | | | (18,891 | ) | | (780 | ) | | 1,881 | |
| Revolving Facility borrowings | | | | 357,131 | | | — | | | 171,138 | |
| Revolving Facility payments | | | | (367,266 | ) | | — | | | (131,562 | ) |
| Long-term debt borrowings | | | | 111 | | | 225,000 | | | 306 | |
| Long-term debt reductions | | | | (115,986 | ) | | (44,571 | ) | | (338 | ) |
| Proceeds from sale of interest rate swap | | | | 30,188 | | | — | | | — | |
| Purchase of interest rate caps | | | | (5,512 | ) | | — | | | — | |
| Proceeds from sale of common stock | | | | 189,877 | | | — | | | — | |
| Proceeds from exercise of stock options | | | | 3,759 | | | 7,843 | | | — | |
| Financing costs | | | | (529 | ) | | (7,355 | ) | | (5,241 | ) |
| Premium on repurchase of Senior Notes | | | | — | | | (3,531 | ) | | — | |
| Dividends paid to minority stockholders | | | | (3,749 | ) | | — | | | — | |
|
| |
| |
| |
| Net cash provided by (used in) financing activities | | | | 69,133 | | | 176,606 | | | 36,184 | |
| |
| Net increase (decrease) in cash and cash equivalents | | | | 21,914 | | | (11,970 | ) | | (16,208 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | | 1,482 | | | 1,448 | | | (1,308 | ) |
| Cash and cash equivalents at beginning of period | | | | 10,610 | | | 34,006 | | | 23,484 | |
|
| |
| |
| |
| Cash and cash equivalents at end of period | | | $ | 34,006 | | $ | 23,484 | | $ | 5,968 | |
|
| |
| |
| |
| Supplemental disclosures of cash flow information: | | |
| Net cash paid during the periods for: | | |
| Interest expense | | | | 61,467 | | | 39,052 | | | 43,547 | |
| Income taxes | | | | 10,629 | | | 11,967 | | | 28,183 | |
| Non-cash operating, investing and financing activities: | | |
| Exchanges of common stock for Senior Notes which decrease long-term debt | | | | 55,000 | | | 35,000 | | | — | |
| Common stock issued to savings and pension plan trusts | | | | 8,069 | | | 1,572 | | | 1,622 | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| | For the Year Ended December 31,
|
|---|
| | 2003
| 2004
| 2005
|
|---|
| *Net change in working capital due to the following components: | | | | | | | | | | | |
| (Increase) decrease in current assets: | | |
| Accounts and notes receivable, net | | | $ | (4,971 | ) | $ | (21,642 | ) | $ | (2,174 | ) |
| Effect of factoring of accounts receivable | | | | - | | | (44,658 | ) | | 13,095 | |
| Inventories | | | | (8,674 | ) | | (6,276 | ) | | (45,430 | ) |
| Prepaid expenses and other current assets | | | | 54 | | | (1,018 | ) | | (1,018 | ) |
| Payment for antitrust investigations and related lawsuits and claims | | | | (4,588 | ) | | (83,480 | ) | | (16,900 | ) |
| Restructuring payments | | | | (5,692 | ) | | (16,853 | ) | | (6,670 | ) |
| Increase (decrease) in accounts payables and accruals | | | | (12,309 | ) | | 6,859 | | | (2,690 | ) |
|
| |
| |
| |
| Increase in working capital | | | $ | (36,180 | ) | $ | (167,068 | ) | $ | (61,787 | ) |
|
| |
| |
| |
See accompanying Notes to Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Dollars in thousands, except share data)
| Issued
Shares of
Common
Stock
| Common
Stock
| Additional
Paid-in
Capital
| Accumulated
Other
Comprehensive
Loss
| Accumulated
Deficit
| Treasury
Stock
| Common Stock
Held
in Employee
Benefit & Compensation
Trust
| Total
Stockholders’
Deficit
| Total
Comprehensive
Income (Loss)
|
|---|
| Balance at January 1, 2003 | | | | 59,211,664 | | $ | 606 | | $ | 635,956 | | $ | (304,723 | ) | $ | (619,071 | ) | $ | (88,778 | ) | $ | (5,551 | ) | $ | (381,561 | ) | | | |
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Comprehensive loss: | | |
| Net loss | | | | — | | | — | | | — | | | — | | | (24,277 | ) | | — | | | — | | | (24,277 | ) | $ | (24,277 | ) |
| Other comprehensive income (loss): | | |
| Minimum pension liability, net of $2,506 of tax | | | | — | | | — | | | — | | | 5,701 | | | — | | | — | | | — | | | 5,701 | | | 5,701 | |
| Unrealized losses on securities | | | | — | | | — | | | — | | | (184 | ) | | — | | | — | | | — | | | (184 | ) | | (184 | ) |
| Foreign currency translation adjustments . | | | | — | | | — | | | — | | | 12,418 | | | — | | | — | | | — | | | 12,418 | | | 12,418 | |
| | | | | | | | |
| |
| Total comprehensive loss | | | | | | | | | | | | | — | | | — | | | — | | | — | | | | | $ | (6,342 | ) |
| | | | | | | | |
| |
| Exchange of common stock for Senior Notes | | | | 9,888,870 | | | 100 | | | 57,286 | | | — | | | — | | | — | | | — | | | 57,386 | | | | |
| Treasury stock | | | | — | | | — | | | (3,195 | ) | | — | | | — | | | 3,195 | | | — | | | — | | | | |
| Common stock issued to savings and pension | | | | — | |
| plan trusts | | | | 1,403,475 | | | 10 | | | 8,059 | | | — | | | — | | | — | | | — | | | 8,069 | | | | |
| Stock-based compensation | | | | — | | | — | | | 972 | | | — | | | — | | | — | | | (615 | ) | | 357 | | | | |
| Sale of common stock in equity offering, net . | | | | 25,300,000 | | | 257 | | | 189,620 | | | — | | | — | | | — | | | — | | | 189,877 | | | | |
| Sale of common stock under stock options | | | | 598,278 | | | 4 | | | 4,226 | | | — | | | — | | | — | | | — | | | 4,230 | | | | |
|
| |
| |
| |
| |
| |
| |
| |
| | | |
| Balance at December 31, 2003 | | | | 96,402,287 | | | 977 | | | 892,924 | | | (286,788 | ) | | (643,348 | ) | $ | (85,583 | ) | | (6,166 | ) | | (127,984 | ) | | | |
|
| |
| |
| |
| |
| |
| |
| |
| | | |
| Comprehensive loss: | | |
| Net income | | | | — | | | — | | | — | | | — | | | 17,041 | | | — | | | — | | | 17,041 | | $ | 17,041 | |
| Other comprehensive income (loss): | | |
| Minimum pension liability, net of $5,147 of tax | | | | — | | | — | | | — | | | (11,520 | ) | | — | | | — | | | — | | | (11,520 | ) | | (11,520 | ) |
| Unrealized losses on securities | | | | — | | | — | | | — | | | (147 | ) | | — | | | — | | | — | | | (147 | ) | | (147 | ) |
| Foreign currency translation adjustments, | | | | — | |
| net of $2,408 of tax | | | | — | | | — | | | — | | | 21,990 | | | — | | | — | | | — | | | 21,990 | | | 21,990 | |
| | | | | | | | |
| |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 27,364 | |
| | | | | | | | |
| |
| Exchange of common stock for Senior Notes | | | | 3,161,131 | | | 32 | | | 40,650 | | | — | | | — | | | — | | | — | | | 40,682 | | | | |
| Stock options granted | | | | — | | | — | | | 1,005 | | | — | | | — | | | — | | | — | | | 1,005 | | | | |
Common stock issued to savings and
pension plan trusts | | | | 146,285 | | | — | | | 1,572 | | | — | | | — | | | — | | | — | | | 1,572 | | | | |
| Stock-based compensation | | | | — | | | (1 | ) | | (637 | ) | | — | | | — | | | — | | | (543 | ) | | (1,181 | ) | | | |
| Sale of common stock under stock options | | | | 810,537 | | | 9 | | | 9,562 | | | — | | | — | | | — | | | — | | | 9,571 | | | | |
| Other stock option activity | | | | — | | | — | | | (4,001 | ) | | | | | — | | | — | | | — | | | (4,001 | ) | | | |
|
| |
| |
| |
| |
| |
| |
| |
| | | |
| Balance at December 31, 2004 | | | | 100,520,240 | | | 1,017 | | | 941,075 | | | (276,465 | ) | | (626,307 | ) | | (85,583 | ) | | (6,709 | ) | | (52,972 | ) | | | |
|
| |
| |
| |
| |
| |
| |
| |
| | | |
| Comprehensive income (loss): | | |
| Net income | | | | — | | | — | | | — | | | — | | | (125,180 | ) | | — | | | — | | | (125,180 | ) | $ | (125,180 | ) |
| Other comprehensive income: | | |
| Minimum pension liability | | | | — | | | — | | | — | | | (17,326 | ) | | — | | | — | | | — | | | (17,326 | ) | | (17,326 | ) |
| Unrealized losses on securities | | | | — | | | — | | | — | | | 41 | | | — | | | — | | | — | | | 41 | | | 41 | |
| Foreign currency translation adjustments . | | | | — | | | — | | | — | | | (17,679 | ) | | — | | | — | | | — | | | (17,679 | ) | | (17,679 | ) |
| | | | | | | | | | | | | | | | |
| |
| Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (160,144 | ) |
| | | | | | | | |
| |
| Stock-based compensation | | | | — | | | — | | | 1,890 | | | — | | | — | | | — | | | — | | | 1,890 | | | | |
| Treasury stock | | | | — | | | — | | | — | | | — | | | — | | | (38 | ) | | — | | | (38 | ) | | | |
Stock held in employee benefit and
compensation trusts | | | | — | | | — | | | — | | | — | | | — | | | — | | | 65 | | | 65 | | | | |
Common stock issued to savings
and pension plan trusts | | | | 301,194 | | | 6 | | | 1,616 | | | — | | | — | | | — | | | — | | | 1,622 | | | | |
|
| |
| |
| |
| |
| |
| |
| |
| | | |
| Balance at December 31, 2005 | | | | 100,821,434 | | $ | 1,023 | | $ | 944,581 | | $ | (311,429 | ) | $ | (751,487 | ) | $ | (85,621 | ) | $ | (6,644 | ) | $ | (209,577 | ) | | | |
|
| |
| |
| |
| |
| |
| |
| |
| | | |
See accompanying Notes to Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except as otherwise noted)
(1) Discussion of Business and Structure |
|
We have six major product categories: graphite electrodes, cathodes, carbon electrodes, carbon refractories, advanced graphite materials, and natural graphite, the results of which are reported in the following segments:
• | Synthetic graphite, which primarily serves the steel, aluminum, transportation and semiconductor industries and includes graphite electrodes, cathodes and advanced synthetic graphite materials and related services. We have a strategic alliance in the cathode business with Alcan/Pechiney, one of the world’s largest aluminum producers, which is a 30% owner of our cathode subsidiary, Carbone Savoie. |
• | Other, which includes carbon electrodes, carbon refractories and natural graphite. Our natural graphite products business, which is conducted by AET, primarily serves the electronics, automotive, petrochemical and power generation industries and includes advanced flexible graphite and flexible graphite solutions and related services. We have a strategic alliance in the natural graphite business with Ballard Power Systems, the world’s recognized leader in PEM fuel cells. Ballard Power Systems became a strategic investor in AET in June 2001, by investing $5 million in shares of Ballard Power Systems common stock for a 2.5% equity ownership interest in AET. Our other carbon product businesses serve the silicon metal, steel and ferro-alloy industries. |
Important Terms
Reference is made to “Part I. Preliminary Notes – Important Terms” for certain defined terms used in the Notes to the Consolidated Financial Statements.
(2) Summary of Significant Accounting Policies |
|
The Consolidated Financial Statements include the financial statements of GTI and its majority-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, we consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of overnight repurchase agreements and certificates of deposit.
Investments
Investments in marketable debt and equity securities are generally classified and accounted for as trading, held-to-maturity or available-for-sale securities. We determine the
appropriate classification of debt and equity securities at the time of purchase and reassess the classification at each reporting date. Debt securities classified as held-to-maturity are reported at amortized cost plus accrued interest. Securities classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related tax, recorded as a separate component of comprehensive loss on the Consolidated Statement of Stockholders’ Deficit until realized. Interest and amortization of premiums and discounts for debt securities are included in interest expense. Gains and losses on securities sold are determined based on the specific identification method and are included in other (income) expense, net. Unrealized losses on investment securities that are other than temporary are recognized in net income (loss). We do not hold securities for speculative or trading purposes.
Revenue Recognition
Revenue from sales of our products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, title has passed, the amount is determinable and collection is reasonably assured. Revenue from sales of services is recognized when persuasive evidence of an arrangement exists, services are completed, the amount is determinable and collection is reasonably assured. Product warranty claims and returns are estimated and recorded as a reduction to revenue. Volume discounts and rebates are recorded as a reduction of revenue in conjunction with the sale of the related products. Changes to estimates are recorded when they become probable. Shipping and handling revenues relating to products sold are included as an increase to revenue. Shipping and handling costs related to products sold are included as an increase to cost of sales.
Inventories
Inventories are stated at cost or market, whichever is lower. Cost is determined on the “first-in first-out” (“FIFO”) method.
Fixed Assets and Depreciation
Fixed assets are carried at cost. Expenditures for replacements are capitalized and the replaced assets are retired. Gains and losses from the sale of property are included in other (income) expense, net. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The average estimated useful lives are as follows:
| Years
|
|---|
| | |
|---|
| Buildings | | | | 25 | |
| Land improvements | | | | 20 | |
| Machinery and equipment | | | | 20 | |
| Furniture and fixtures | | | | 10 | |
| Transportation equipment | | | | 6 | |
The carrying value of fixed assets is assessed when events and circumstances indicating impairment are present. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated
by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell.
Allowance for Doubtful Accounts
A considerable amount of judgment is required in assessing the realizability of receivables, including the current creditworthiness of each customer, related aging of the past due balances and the facts and circumstances surrounding any non-payment. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its financial obligations. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. The allowance for doubtful accounts amounted to $4,001 and $3,132 at December 31, 2004 and 2005, respectively.
Capitalized Interest
We capitalize interest expense during the new construction or upgrade of qualifying assets. We capitalized $993, $1,412 and $952 of interest expense in 2003, 2004 and 2005, respectively.
Capitalized Bank Fees
We capitalize bank fees upon the incurrence of debt. At December 31, 2004 and December 31, 2005, capitalized bank fees amounted to $21,255 and $22,219, respectively. We amortize such amounts over the life of the respective debt instrument. The estimated useful life may be adjusted upon the occurrence of a triggering event. The expense associated with capitalized bank fees amounted to $6,823 and $5,051 in 2004 and 2005, respectively.
Derivative Financial Instruments
We do not use derivative financial instruments for trading purposes. They are used to manage well-defined currency exchange rate risks, interest rate risks and commercial energy contract risks.
In conjunction with the issuance of the Debentures, we incurred an embedded derivative financial instrument associated with the redemption option and the related make-whole provision (the “Redemption Make-Whole Option”) contained in the Debentures. Since the Redemption Make-Whole Option does not currently qualify for any scope exception within SFAS No. 133, it is required by SFAS No. 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments. The embedded derivative financial instrument was classified as a derivative liability upon issuance and is included in the other long-term obligations in the Consolidated Balance Sheet. At January 22, 2004, the estimated fair value of our derivative liability was $6,462.
At each balance sheet date, we adjust the Redemption Make-Whole Option to its estimated fair value. At December 31, 2004 and December 31, 2005, the estimated fair value of our derivative liability was $3,986 and $1,284, respectively. We estimate the fair value of the
Redemption Make-Whole Option using a financial model that uses several assumptions, including: historical stock price volatility, risk-free interest rates, remaining maturity and the closing price of our common stock.
We enter into foreign currency instruments to manage exposure to changes in currency exchange rates. These instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures, net, relating to euro-denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. 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. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at market value. Changes in market values related to these contracts are recognized in other (income) expense, net, on the Consolidated Statements of Operations.
We implement interest rate management initiatives to seek to minimize our interest expense and optimize the risk in our portfolio of fixed and variable interest rate obligations. Use of these initiatives is allowed under the Senior Notes and the Revolving Facility. We may enter into interest rate swaps that effectively convert fixed rate debt into variable rate debt.
We also may enter into agreements with financial institutions that are intended to limit, or cap, our exposure to the incurrence of additional interest expense due to increases in variable interest rates. Interest rate caps are carried at market value. Changes in market values are recorded in other (income) expense, net, on the Consolidated Statements of Operations.
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 may enter into short duration fixed rate natural gas purchase contracts with certain of our natural gas suppliers in order to mitigate commodity price risk. In addition, we may enter into natural gas derivative contracts to effectively fix a portion of our natural gas cost exposure. Natural gas derivative contracts are carried at market value. Changes in market values are recorded as part of cost of sales on the Consolidated Statements of Operations.
Research and Development
Expenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that includes the enactment date. A valuation allowance is recorded when it is determined that it is more likely than not that any portion of a recorded deferred tax asset will not be realized.
Stock-Based Compensation Plans
We account for stock-based compensation plans under the recognition and measurement of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense is recorded on the date of award only if the market price of the underlying stock exceeded the exercise price or if ultimate vesting is subject to performance conditions. If an award results in recognition of compensation expense, the total amount of recorded compensation expense is based on the number of awards that eventually vest. No compensation expense is recognized for forfeited awards, including awards forfeited due to a failure to satisfy a service requirement or failure to satisfy a performance condition. Our accruals of compensation expense for awards subject to performance conditions are based on our assessment of the probability of satisfying the performance conditions.
Compensation expense associated with our restricted stock grants has been recorded in the Consolidated Statements of Operation and in the stockholders’ deficit section of the Consolidated Balance Sheets. Compensation expense associated with options granted to non-employees has been recognized in the Consolidated Statements of Operations and in the stockholders’ deficit section of the Consolidated Balance Sheets. No compensation expense has been recognized for our time vesting options granted with exercise prices at not less than market price on the date of grant. At December 31, 2005, all awards subject to performance conditions were fully vested. If compensation expense for our stock-based compensation plans was determined by the fair value method prescribed by SFAS No. 123, “Accounting for Stock Based Compensation,” our net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| (Dollars in thousands, except per share data) |
|---|
| |
|---|
| Net income (loss) as reported | | | $ | (24,277 | ) | $ | 17,041 | | $ | (125,180 | ) |
Add: Total stock-based employee compensation expense, net
of related tax effects included in the determination of net
income as reported | | | | – | | | 604 | | | 1,890 | |
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects | | | | (564 | ) | | (4,536 | ) | | (9,485 | ) |
|
| |
| |
| |
| Pro forma net income (loss) | | | $ | (24,841 | ) | $ | 13,109 | | $ | (132,775 | ) |
|
| |
| |
| |
| Earnings per share: | | |
| Basic--as reported | | | $ | (0.36) | | $ | 0.18 | | $ | (1.28) | |
| Basic--pro forma | | | | (0.37) | | | 0.14 | | | (1.36) | |
| Diluted--as reported | | | | (0.36) | | | 0.17 | | | (1.28) | |
| Diluted--pro forma | | | | (0.37) | | | 0.13 | | | (1.36) | |
The calculation of weighted average common shares outstanding for the 2004 diluted calculations exclude the shares underlying the Debentures, as the effect would have been anti-dilutive.
The calculation of weighted average common shares outstanding for the 2005 diluted calculations exclude the effect of stock options, restricted stock and the shares underlying the Debentures, as the effect would have been anti-dilutive.
On November 30, 2005, the Compensation, Organization and Pension Committee of GrafTech’s Board of Directors approved the vesting of the remaining unvested stock options granted as part of the 2003-2005 Long Term Incentive Program, having an exercise price in the range of $6.56-$13.80 and held by current and former employees. Stock options relating to approximately 3 million shares of common stock were subject to this vesting. The decision to accelerate the vesting of these stock options was within the discretion of the Compensation, Organization and Pension Committee of GrafTech’s Board of Directors. Such decision was made due primarily to the achievement of a significant portion of the performance metrics for vesting as well as the achievement of other strategic initiatives. In addition, the decision to accelerate the vesting of stock options may have a positive effect on employee morale, retention and perception of option value. This vesting eliminates an estimated $4.5 million of future pre-tax compensation expense that would have otherwise been recognized in the Consolidated Statement of Operations under SFAS No. 123(R).
Retirement Plans
The cost of pension benefits under our retirement plans is recorded in accordance with SFAS No. 87, “Employee Accounting for Pensions,” as determined by us with assistance from
independent actuarial firms using the “projected unit credit” actuarial cost method. Contributions to the qualified U.S. retirement plan are made in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Benefits under the non-qualified retirement plan have been accrued, but not funded. Plan settlements and curtailments are recorded in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits.” Additional information with respect to benefits plans is set forth in Note 11 to the Consolidated Financial Statements.
Postretirement Health Care and Life Insurance Benefits
The estimated cost of future postretirement medical and life insurance benefits is determined by the Company with assistance from independent actuarial firms using the “projected unit credit” actuarial cost method. Such costs are recognized as employees render the service necessary to earn the postretirement benefits. Benefits have been accrued, but not funded. Effective November 1, 2001, the U.S. plan was modified to limit our cost of future annual postretirement medical benefits to the cost in 2001. Additional information with respect to benefits plans is set forth in Note 11 to the Consolidated Financial Statements.
Post-employment Benefits
We accrue the estimated cost of post-employment benefits expected to be paid before retirement, principally severance, over employees’ active service periods.
Environmental, Health and Safety Matters
Our operations are governed by laws addressing protection of the environment and worker safety and health. These laws provide for civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance and require remediation at sites where hazardous substances have been released into the environment.
We have been in the past, and may become in the future, the subject of formal or informal enforcement actions or proceedings regarding noncompliance with these laws or the remediation of company-related substances released into the environment. Historically, such matters have been resolved by negotiation with regulatory authorities resulting in commitments to compliance, abatement or remediation programs and in some cases payment of penalties. Historically, neither the commitments undertaken nor the penalties imposed on us have been material.
Environmental considerations are part of all significant capital expenditure decisions. Environmental remediation, compliance and management expenses were approximately $13,074 in 2003, $13,056 in 2004 and $12,525 in 2005. The accrued liability relating to environmental remediation was $7,669 at December 31, 2004 and $6,610 at December 31, 2005. When payments are fixed or determinable, the liability is discounted using a rate at which the payments could be effectively settled. A charge to income is recorded when it is probable that a liability has been incurred and the cost can be reasonably estimated. Our environmental liabilities do not take into consideration possible recoveries of insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where we may be potentially liable, future expenses to remediate sites could be considerably higher than the accrued liability.
However, while neither the timing nor the amount of ultimate costs associated with known environmental remediation matters can be determined at this time, management does not believe that these matters will have a material adverse effect on our financial position, results of operations or net cash flows.
Foreign Currency Translation
We account for our non-U.S. subsidiaries under SFAS No. 52, “Foreign Currency Translation.” Accordingly, except for highly inflationary countries, the assets and liabilities of our non-U.S. subsidiaries are translated into dollars for consolidation and reporting purposes. Foreign currency translation adjustments are generally recorded as part of stockholders’ deficit and identified as part of accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as the operations of such non-U.S. subsidiaries are sold or substantially or completely liquidated.
Highly inflationary economies are defined as having cumulative inflation of about 100% or more over a period of three calendar years. In general, the financial statements of foreign operations in highly inflationary economies are remeasured as if the functional currency of their economic environments were the dollar and translation gains and losses relating to these foreign operations are included in other (income) expense, net, on the Consolidated Statements of Operations rather than as part of stockholders’ deficit on the Consolidated Balance Sheets. We have subsidiaries in Russia, Mexico, Brazil and other countries which have had in the past, and may have in the future, highly inflationary economies.
We account for our Mexican and Russian subsidiaries using the dollar as their functional currency, as sales and purchases for each subsidiary are predominantly dollar-denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses as part of other (income) expense, net, on the Consolidated Statements of Operations.
We have non-dollar denominated intercompany loans between GrafTech Finance and some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. A portion of these loans are deemed to be essentially permanent and, as a result, remeasurement gains and losses on these loans are recorded as a component of accumulated other comprehensive loss in the stockholders’ deficit section of the Consolidated Balance Sheets. The balance of 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.
Restructuring
Effective January 1, 2003, we adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which was effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.
Software Development Costs
In connection with our development and implementation of global enterprise resource planning systems with advanced manufacturing, planning and scheduling software, we capitalized certain computer software costs after technological feasibility was established. These capitalized costs are amortized utilizing the straight-line method over the economic lives of the related products. Total costs capitalized as of December 31, 2004 and 2005 amounted to $16,692 and $17,262, respectively. Amortization expense was $860 for 2004 and $1,393 for 2005.
Intangibles
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” The adoption of SFAS No. 142 did not have a significant impact on our consolidated financial position, results of operations or net cash flows, except that we no longer amortize goodwill. In the 2005 fourth quarter, we performed the goodwill impairment reviews required by SFAS No. 142 and the results of these reviews did not require our existing goodwill to be written down. Goodwill, which pertains primarily to our synthetic graphite segment, amounted to $22,895 at December 31, 2004 and $20,319 at December 31, 2005, with the decrease due to changes in currency exchange rates.
Patents, net of accumulated amortization, amounted to $2,321 at December 31, 2004 and $2,784 at December 31, 2005.
Use of Estimates
We have made a number of estimates and assumptions relating to the recording and disclosure of assets and liabilities, including contingent assets and liabilities, to prepare the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. Actual amounts and values could differ from those estimates.
Reclassification
Certain amounts previously reported have been reclassified to conform to the current year presentation.
(3) New Accounting Standards |
|
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; and (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS
No. 155 is effective for all financial instruments acquired or issued after the beginning of our first fiscal year that begins after September 15, 2006. The fair value election of SFAS No. 155 may also be applied upon adoption of SFAS No. 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133, prior to the adoption of this Statement. We will be required to adopt SFAS No. 155 in the first quarter of 2007. We are currently in the process of assessing the impact of the adoption of SFAS No. 155 on our consolidated results of operations and financial position.
On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS No. 123(R), companies are to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB Opinion No. 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option equaled the price of the underlying stock at the grant date. In addition, SFAS No. 123(R) retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date and adjusted to reflect actual forfeitures and the outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date (except in the case of a liability award or if the award is modified). This Statement is effective for annual periods beginning after June 15, 2005. We will be required to adopt SFAS No. 123(R) in the first quarter of 2006. The actual impact of the adoption of SFAS No. 123(R) will depend upon the amount, nature and type of stock-based compensation awards outstanding upon implementation and that we may issue in the future. Based on the current stock-based compensation plans in effect and awards issued our estimated expense in 2006 for stock-based compensation is $4,055, $3,338 of which relates to 2005 restricted stock grants and $717 of which relates to unvested stock options.
On October 18, 2005, the FASB Staff issued FASB Staff Position (“FSP”) No. FAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R).” This FSP is in response to recent inquiries regarding the application of grant date as defined in SFAS No. 123(R). The definition of grant date under SFAS No. 123(R) includes criteria for determining that a share-based payment award has been granted. One of the criteria is a mutual understanding by the employer and employee of the key terms and conditions of a share-based payment award. Considering the practical difficulties of personally communicating the key terms and conditions of a share-based payment award, the FASB Staff believed a practical solution was warranted related to application of the concept of mutual understanding. As a practical accommodation, in determining the grant date of an award subject to SFAS No.123(R), a mutual understanding of the key terms and conditions of an award with an individual employee shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements if both of the following conditions are met: (a) the award is a unilateral grant and, therefore, the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer; and (b) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval.
On November 10, 2005, the FASB Staff issued FSP No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards.” This FSP provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. SFAS No. 123 (R), paragraph 81, indicates that, for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123 (R) (an “APIC pool”), an entity shall include the net excess tax benefits that would have qualified as such had the entity adopted SFAS No. 123 for recognition purposes. The FASB Staff has learned that a significant number of constituents do not have this information readily available. As a result, this FSP provides an elective alternative transition method. An entity may follow either the transition guidance for the APIC pool in paragraph 81 of SFAS No. 123(R) or the alternative transition method described in this FSP. We may take up to one year from the initial adoption of SFAS No. 123(R) to evaluate our available transition alternatives and make our one time election.
On August 31, 2005, the FASB Staff issued FSP No. FAS 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R)”, which defers, at this time, the requirement of SFAS No. 123 (revised 2004), Share-Based Payment, that a freestanding financial instrument originally subject to SFAS 123(R) becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles (“GAAP”) when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. It is the current FASB Staff position that a freestanding financial instrument issued to an employee in exchange for past or future employee services that is subject to SFAS No. 123(R) or was subject to SFAS No. 123(R) upon initial adoption of that Statement shall continue to be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the instrument, unless its terms are modified when the holder is no longer an employee. The guidance in this FSP supersedes EITF Issue No. 00-19-1, “Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation,” and amends paragraph 11(b) of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 133 Implementation Issue No. C3, “Scope Exceptions: Exception Related to Share-Based Payment Arrangements.” The adoption of this FSP will not have a significant impact on our consolidated results of operations or financial position.
In May 2005, the FASB directed the FASB Staff to issue a Position on “Application of Emerging Issues Task Force Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation” to clarify the application of EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” This FASB Staff Position clarifies that a requirement to deliver registered shares, in and of itself, will not result in liability classification for freestanding financial instruments originally issued as employee compensation. This clarification is consistent with the FASB’s intent in issuing SFAS No. 123(R). The adoption of this Position will not have a significant impact on our consolidated results of operations or financial position.
SFAS No.133 Implementation Issue No. B39 was posted by the FASB in June 2005. This Issue addresses circumstances in which an embedded call option (including a prepayment option), that can accelerate the settlement of a hybrid instrument containing a debt host contract, would not be subject to the conditions in paragraph 13(b) of SFAS No. 133. The FASB concluded that the conditions in paragraph 13(b) do not apply to an embedded call option in a
hybrid instrument containing a debt host contract if the right to accelerate the settlement of the debt can be exercised only by the debtor (issuer/borrower). Issue No. B39 will be effective for the first day of the first fiscal quarter beginning after December 15, 2005. The adoption of Issue No. B39 will not have any impact on our consolidated results of operations or financial position.
In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt this Statement effective January 1, 2006. Based on our current evaluation of this Statement, we do not expect the adoption of SFAS No. 154 to have a significant impact on our consolidated results of operations or financial position.
On November 24, 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of APB No. 43,” Chapter 4, which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and wasted material (spillage) to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Therefore, we are required to adopt this Statement effective January 1, 2006. We are currently in the process of assessing the impact of the adoption of SFAS No. 151 on our consolidated results of operations and financial position.
Our businesses are reported in the following reportable segments: synthetic graphite, which consists of graphite electrodes, cathodes and advanced graphite materials and related services; and other, which consists of natural graphite, carbon electrodes and refractories and related services.
We evaluate the performance of our segments based on gross profit. Intersegment sales and transfers are not material. The accounting policies of the reportable segments are the same as those for our Consolidated Financial Statements as a whole.
The following tables summarize financial information concerning our reportable segments.
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| |
|---|
| Net sales to external customers: | | | | | | | | | | | |
| Synthetic Graphite | | | $ | 640,128 | | $ | 752,436 | | $ | 784,148 | |
| Other | | | | 72,209 | | | 95,265 | | | 102,551 | |
|
| |
| |
| |
| Net sales | | | $ | 712,337 | | $ | 847,701 | | $ | 886,699 | |
|
| |
| |
| |
| Gross profit: | | |
| Synthetic Graphite | | | $ | 150,998 | | $ | 186,854 | | $ | 210,928 | |
| Other | | | | 17,143 | | | 22,661 | | | 21,429 | |
|
| |
| |
| |
| Gross profit | | | $ | 168,141 | | $ | 209,515 | | $ | 232,357 | |
|
| |
| |
| |
| Reconciliation of gross profit to income before provision for | | |
| income taxes and minority stockholders' share of income: | | |
| Gross profit | | | $ | 168,141 | | $ | 209,515 | | $ | 232,357 | |
| Research and development | | | | 10,410 | | | 8,040 | | | 9,437 | |
| Selling, administrative and other expenses | | | | 85,546 | | | 89,369 | | | 100,439 | |
| Other (income) expense, net | | | | (12,060 | ) | | 21,189 | | | 18,020 | |
| Restructuring charges | | | | 19,765 | | | (548 | ) | | 9,729 | |
| Impairment loss on long-lived and other assets | | | | 6,991 | | | -- | | | 2,904 | |
Antitrust investigations and related lawsuits
and claims charges | | | | 32,073 | | | (10,901 | ) | | -- | |
| Interest expense | | | | 45,141 | | | 39,178 | | | 52,716 | |
| Interest (income) | | | | (351 | ) | | (1,161 | ) | | (1,200 | ) |
|
| |
| |
| |
| Income (loss) from continuing operations before provision for | | |
| (benefit from) income taxes and minority stockholders' share | | |
| of income (loss) | | | $ | (19,374 | ) | $ | 64,349 | | $ | 40,312 | |
|
| |
| |
| |
We do not report assets by reportable segment. Assets are managed based on geographic location because both reportable segments share certain facilities. The following tables summarize information as to our operations in different geographic areas.
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| Net sales (a): | | | | | | | | | | | |
| U.S | | | $ | 205,548 | | $ | 240,303 | | $ | 263,208 | |
| Canada | | | | 5,696 | | | 3,995 | | | 4,469 | |
| Mexico | | | | 33,442 | | | 36,913 | | | 47,936 | |
| Brazil | | | | 40,679 | | | 52,199 | | | 53,400 | |
| France | | | | 168,228 | | | 183,648 | | | 188,561 | |
| Italy | | | | 32,122 | | | 34,808 | | | 26,243 | |
| Switzerland | | | | 102,587 | | | 144,123 | | | 152,834 | |
| South Africa | | | | 65,488 | | | 69,558 | | | 75,947 | |
| Spain | | | | 27,665 | | | 39,419 | | | 22,066 | |
| Other countries | | | | 30,882 | | | 42,735 | | | 52,035 | |
|
| |
| |
| |
| Total | | | $ | 712,337 | | $ | 847,701 | | $ | 886,699 | |
|
| |
| |
| |
___________
(a) Net sales are based on location of seller. | |
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| Long-lived assets (b): | | | | | | | | |
| U.S | | | $ | 70,691 | | $ | 74,365 | |
| Mexico | | | | 51,394 | | | 52,584 | |
| Brazil | | | | 27,990 | | | 32,982 | |
| France | | | | 151,232 | | | 130,701 | |
| Spain | | | | 36,723 | | | 31,428 | |
| South Africa | | | | 52,198 | | | 46,328 | |
| Switzerland | | | | 10,568 | | | 8,660 | |
| Other countries | | | | 551 | | | 5,468 | |
|
| |
| |
| Total | | | $ | 401,347 | | $ | 382,516 | |
|
| |
| |
___________
(b) Long-lived assets represent fixed assets, net of accumulated depreciation and goodwill.
(5) Long-Term Debt and Liquidity | |
The following table presents our long-term debt.
| At December 31,
|
|---|
| | 2004
| 2005
|
|---|
| | (Dollars in thousands) |
|---|
| |
|---|
| Revolving Facility | | | $ | - | | $ | 39,000 | |
| Senior Notes: | | |
| Senior Notes due 2012 | | | | 434,631 | | | 434,631 | |
| Fair value adjustments for current hedge instruments | | | | (9,891 | ) | | - | |
| Fair value adjustments for terminated hedge instruments* | | | | 24,484 | | | 7,404 | |
| Unamortized bond premium | | | | 1,611 | | | 1,446 | |
|
| |
| |
| Total Senior Notes | | | | 450,835 | | | 443,481 | |
| Debentures** | | | | 219,405 | | | 220,291 | |
| Other European debt | | | | 1,206 | | | 971 | |
|
| |
| |
| Total | | | $ | 671,446 | | $ | 703,743 | |
|
| |
| |
| | * | Fair value adjustments for terminated hedge instruments will be amortized as a credit to interest expense over the remaining term of the Senior Notes. |
| | ** | Excludes the derivative liability relating to our redemption feature with a make-whole provision, which amounts to $3,986 at December 31, 2004 and $1,284 at December 31, 2005 and is included in other long-term obligations on the Consolidated Balance Sheets. |
The aggregate maturities of long-term debt (excluding the fair value adjustments to debt and unamortized bond premium relating to the Senior Notes and including the original value of the derivative liability relating to the Debentures redemption feature with a make-whole provision) for each of the four years subsequent to 2005 and thereafter are set forth in the following table:
| 2006
| 2007
| 2008
| 2009
| 2010
(and thereafter)
| Total
|
|---|
| | (Dollars in thousands) |
|---|
| |
|---|
| | | | $ | 45 | | $ | 222 | | $ | 212 | | $ | 191 | | $ | 698,932 | | $ | 699,602 | |
At December 31, 2004 and 2005, we were in compliance with all financial and other covenants contained in the Senior Notes, the Debentures and the Senior Facilities, as applicable.
Revolving Facility
On February 8, 2005, we entered into an amended and restated Credit Agreement relating to the Revolving Facility. JPMorgan Chase Bank, N.A. is the administrative agent thereunder.
The Credit Agreement now provides for a Revolving Facility of $215 million, subject to provisions described below regarding the base credit limit. It also provides among other things, for an extension until July 15, 2010 of the maturity of the Revolving Facility and, subject to certain conditions (including a maximum senior secured leverage ratio test), an accordion feature that permits GrafTech Finance to establish additional credit facilities thereunder in an aggregate amount, together with the Revolving Facility, of up to $425 million.
The interest rate applicable to the Revolving Facility is, at our option, either LIBOR plus a margin ranging from 1.25% to 2.25% or, in the case of dollar denominated loans, the alternate base rate plus a margin ranging from 0.25% to 1.25%. The alternate base rate is the higher of (i) the prime rate announced by JP Morgan Chase Bank, N.A. or (ii) the federal fund effective rate plus 0.50%. GrafTech Finance pays a per annum fee ranging from 0.250% to 0.500% (depending on such ratio or rating) on the undrawn portion of the commitments under the Revolving Facility.
The Revolving Facility permits voluntary prepayments (without reducing availability for future revolving borrowings) and voluntary commitment reductions at any time, in each case without premium or penalty.
The obligations under the Revolving Facility are secured (with certain exceptions) by all of the assets of GrafTech Finance (except the unsecured intercompany term notes and unsecured intercompany term note guarantees created under, and pledged in part to secure, the Senior Notes). The obligations under the Revolving Facility are guaranteed (with certain exceptions) by GTI, each of our other domestic subsidiaries (other than AET) and our Swiss subsidiary, our French holding company, our French operating company engaged in the graphite electrode business, and our United Kingdom subsidiary. These guarantees and any intercompany loans of proceeds of borrowings under the Revolving Facility are secured (with certain exceptions, including the assets of AET) by all of the assets (including the AET Pledged Stock) of the respective guarantors and subsidiary borrowers.
Repayment of intercompany loans made to our foreign subsidiaries is restricted unless the relevant subsidiary borrower has no business use for the funds being repaid. The intent of this restriction is to seek to maximize the secured claims of the lenders against the assets of our foreign operating subsidiaries.
The guarantee of the Revolving Facility by our Swiss subsidiary is subject to the limitation under Swiss law that the amount guaranteed cannot exceed the amount that our Swiss subsidiary can distribute to its shareholders, after payment of any Swiss withholding tax. If such amount is or would become less than $100 million, our Swiss subsidiary will become subject to certain restrictions, including restrictions on distributions, investments and indebtedness.
The amount outstanding under the Credit Agreement (including any debt incurred under the accordion feature) at any time may not exceed a specified base credit limit. The intent of this provision is to seek to reduce credit availability under the Credit Agreement to the extent that there is a net diminution in the value of domestic or Swiss collateral. This provision would not affect the Revolving Facility until net diminution exceeded $110 million.
The Revolving Facility contains a number of covenants that restrict corporate activities. The covenants may restrict our ability to repurchase or redeem the Senior Notes and the Debentures, even if so required thereby. These covenants include financial covenants relating to specified minimum interest coverage ratios and maximum net senior secured debt leverage ratios (which is the ratio of our net senior secured debt to our EBITDA (as defined in the Revolving Facility)). The interest coverage ratio becomes more restrictive if our financial performance were to significantly deteriorate.
In addition to the failure to pay principal, interest and fees when due, events of default under the Revolving Facility include: failure to pay when due, or other defaults permitting acceleration of, other indebtedness exceeding $7.5 million or certain cash management arrangements or interest rate, exchange rate or commodity price derivatives; judgment defaults in excess of $7.5 million to the extent not covered by insurance; and certain changes in control.
Senior Notes
On February 15, 2002, GrafTech Finance issued $400,000 aggregate principal amount of Senior Notes. Interest on the Senior Notes is payable semi-annually on February 15 and August 15 of each year, commencing August 15, 2002, at the rate of 10.25% per annum. The Senior Notes mature on February 15, 2012.
On May 6, 2002, GrafTech Finance issued $150,000 aggregate principal amount of additional Senior Notes at a purchase price of 104.5% of principal amount, plus accrued interest from February 15, 2002, under the Senior Note Indenture. All of the Senior Notes constitute one class of debt securities under the Senior Note Indenture. The additional Senior Notes bear interest at the same rate and mature on the same date as the Senior Notes issued in February 2002. The $7 million premium received upon issuance of the additional Senior Notes was added to the principal amount of the Senior Notes shown on the Consolidated Balance Sheets and is amortized (as a credit to interest expense) over the term of the additional Senior Notes. As a result of our receipt of such premium, the effective annual interest rate on the additional Senior Notes is about 9.5%. Additional information regarding interest rate swaps is set forth in Note 6 to the Consolidated Financial Statements.
GrafTech Finance may not redeem the Senior Notes prior to February 15, 2007. On or after that date, GrafTech Finance may redeem the Senior Notes, in whole or in part, at specified redemption prices beginning at 105.125% of the principal amount redeemed for the year
commencing February 15, 2007 and reducing to 100.00% of the principal amount redeemed for the years commencing February 15, 2010 and thereafter, in each case plus accrued and unpaid interest to the redemption date.
Upon the occurrence of a change of control, GrafTech Finance will be required to make an offer to repurchase the Senior Notes at a price equal to 101.00% of the principal amount redeemed, plus accrued and unpaid interest to the redemption date. For this purpose, a change in control occurs on:
• | the date on which any person beneficially owns more than 35% of the total voting power of GTI; |
• | the date on which individuals, who on the issuance date of the Senior Notes were directors of GTI (or individuals nominated or elected by a vote of 66 2/3% of such directors or directors previously so elected or nominated), cease to constitute a majority of GTI’s Board of Directors then in office; |
• | the date on which a plan relating to the liquidation or dissolution of GTI is adopted; |
• | the date on which GTI merges or consolidates with or into another person, or another person merges into GTI, or all or substantially all of GTI’s assets are sold (determined on a consolidated basis), with certain specified exceptions; or |
• | the date on which GTI ceases to own, directly or indirectly, all of the voting power of GrafTech Global, UCAR Carbon and GrafTech Finance. |
GTI, GrafTech Global and UCAR Carbon and other U.S. subsidiaries that collectively hold a substantial majority of our U.S. assets have guaranteed the Senior Notes on a senior unsecured basis, except for the guarantee by UCAR Carbon. The guarantee by UCAR Carbon has been secured by a junior pledge of all of the shares of capital stock (constituting 97.5% of the outstanding shares of capital stock) of AET held by UCAR Carbon (called the “AET Pledged Stock”), subject to certain limitations. Additional information with respect to the guarantees and the pledge is set forth in Note 18 to the Consolidated Financial Statements.
The Senior Notes contain a number of covenants that restrict corporate activities. The covenants may restrict our ability to repurchase or redeem the Debentures, even if so required thereby. In addition to the failure to pay principal and interest when due or to repurchase Senior Notes when required, events of default under the Senior Notes include: failure to pay at maturity or upon acceleration indebtedness exceeding $10 million; and judgment defaults in excess of $10 million to the extent not covered by insurance.
In 2004, we exchanged $35,000 aggregate principal amount of Senior Notes, plus accrued interest of $432, for 3.2 million shares of common stock. Additionally, we purchased $22,869 aggregate principal amount of Senior Notes, plus accrued interest of $942, for $27,342 in cash. These transactions resulted in a loss of $8,724, which has been recorded in other (income) expense, net, on the Consolidated Statements of Operations.
Debentures
On January 22, 2004, GTI issued $225,000 aggregate principal amount of Debentures. Interest on the Debentures is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2004, at the rate of 1.625% per annum. The Debentures mature on January 15, 2024, unless earlier converted, redeemed or repurchased. We recorded the Debentures at the discounted principal value of $218,538 at issuance. Upon issuance, we also recorded a derivative liability of $6,462 for the embedded derivative portion of the Debentures, which is included in other long-term obligations on the Consolidated Balance Sheets. The net proceeds from the offering were approximately $218,812.
A holder of Debentures may convert its Debentures into shares of our common stock at a conversion rate of 60.3136 shares per $1,000 principal amount (equal to a conversion price of approximately $16.58 per share), subject to adjustment upon certain events, only under the following circumstances:
• | prior to January 15, 2019, in any fiscal quarter after the fiscal quarter ending March 31, 2004, if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the first trading day of such fiscal quarter is greater than 125% of the then current conversion price; |
• | on or after January 15, 2019, at any time after the last reported sale price of our common stock on any date is greater than 125% of the then current conversion price; |
• | during the 5 business days after any 10 consecutive trading days in which the trading price per $1,000 principal amount of Debentures for each such trading day was less than 98% of the product of the last reported sale price of our common stock and the then current conversion rate; |
• | if the credit rating or ratings on the Debentures are reduced by two rating categories below those initially assigned to the Debentures by S&P and Moody’s; |
• | if the Debentures are called for redemption; or |
• | upon the occurrence of certain corporate transactions. |
Upon conversion, GTI will have the right to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock.
Prior to January 15, 2011, the Redemption Make-Whole Option provides that GTI may redeem the Debentures, in whole or in part, at any time, for cash at a redemption price equal to 100% of principal amount, plus accrued and unpaid interest and liquidated damages, if any, only if the last reported sale price of our common stock has exceeded 125% of the then current conversion price for at least 20 trading days during the 30 consecutive trading days ending on the trading day prior to the date on which we mail the notice of redemption. If GTI so redeems the Debentures, GTI will make an additional “make-whole” payment in cash, shares of our common stock or a combination thereof on the redeemed Debentures equal to the present value of all remaining scheduled payments of interest on the redeemed Debentures through January 15,
2011. The Redemption Make-Whole Option qualified as an embedded derivative that was not clearly and closely related to the characteristics of the Debentures upon issuance. Since the Redemption Make-Whole Option does not currently qualify for any scope exception within SFAS No. 133, it is required by SFAS No. 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments. The embedded derivative financial instrument was classified as a derivative liability upon issuance and is included in the other long-term obligations in the Consolidated Balance Sheet.
On or after January 15, 2011, GTI may redeem the Debentures, in whole or in part, at any time, for cash at a redemption price equal to 100% of principal amount, plus accrued and unpaid interest and liquidated damages, if any.
A holder may require GTI to repurchase some or all of its Debentures on (i) January 15, 2011, January 15, 2014 or January 15, 2019, or (ii) if we experience a “fundamental change” at a repurchase price equal to 100% of principal amount, plus accrued and unpaid interest and liquidated damages, if any. For this purpose, a fundamental change occurs on:
• | the date on which a change in control (which has the same meaning as under the Senior Notes) occurs; or |
• | subject to certain exceptions, the date on which our common stock ceases to be listed on a U.S. national or regional securities exchange or approved for trading on the NASDAQ National Market or similar system of automated dissemination of quotations of securities prices. |
GrafTech Finance, GrafTech Global and UCAR Carbon and other U. S. subsidiaries that together hold a substantial majority of our U. S. assets have guaranteed the Debentures on a senior unsecured basis. Additional information with respect to the guarantees is set forth in Note 18 to the Consolidated Financial Statements.
Events of default under the Debentures are similar to those under the Senior Notes.
(6) Financial Instruments |
|
We use derivative financial instruments to manage well-defined currency exchange rate, interest rate and commercial energy contract risks. We do not use derivative financial instruments for trading purposes.
Foreign Currency Contracts
The notional amount of open foreign exchange contracts, used by us to minimize foreign currency exposure against euro depreciation, amounted to $54,481 at December 31, 2004. In 2005, one contract expired and we sold all remaining open foreign exchange contracts. As a result, at December 31, 2005, we had no such contracts outstanding. These contracts are marked-to-market monthly and gains and losses are recorded in other (income) expense, net, on the Consolidated Statements of Operations. Gains and losses associated with these contracts amounted to a loss of $6,650 in 2003, a loss of $406 in 2004, and a gain of $1,268 in 2005.
Interest Rate Risk Management
We implement interest rate management initiatives to seek to minimize our interest expense and optimize the risk in our portfolio of fixed and variable interest rate obligations. Use of these initiatives is allowed under the Senior Notes and the Revolving Facility. We use interest rate swaps to effectively convert fixed rate debt (represented by the Senior Notes) into variable rate debt. At December 31, 2004, we had swaps for a notional amount of $450 million.
At December 31, 2004, $434,631 (out of our total outstanding $450 million notional amount) of interest rate swaps were designated as hedging the exposure to changes in the fair value of the related debt (called a fair value hedge). The related debt for those swaps is the Senior Notes, of which $434,631 aggregate principal amount was outstanding at December 31, 2004. At December 31, 2004 (excluding the offsetting value of our interest rate caps), the principal value of our debt was reduced by $9,891 as a result of our current fair value hedges. The market values of those interest rate swaps, excluding changes in value resulting from accrued interest payable or receivable from the counterparty, are recorded as part of other long-term obligations on the Consolidated Balance Sheets. Accrued interest receivable from or payable to the counterparty is recorded as a component of interest expense on the Consolidated Statement of Operations.
At December 31, 2004, the remaining $15 million of our interest rate swaps were not designated as hedging exposure to changes in the fair value of any specific debt instrument. Any changes in the market value of those swaps are recorded in other (income) expense, net, on the Consolidated Statement of Operations. In 2004, the mark-to-market impact of the undesignated swaps was $350.
All of our swaps are valued monthly, and we are required to provide cash collateral to the counterparty to the extent that the fair market value of the swap liability, net of the fair market value of our interest rate caps, exceeds a specific threshold. At December 31, 2004, all of our swaps were with one counterparty and this threshold was $15 million. We were not required to provide any cash collateral at December 31, 2004.
During the first quarter of 2005, we sold $15 million notional amount of undesignated swaps and paid a nominal fee. Additionally, we sold $150 million notional amount of our fair value hedge swaps and paid $2,950 in cash. Immediately thereafter, we repurchased $150 million notional amount of fair value hedge swaps with a different counterparty. During the second quarter of 2005, we sold $285 million notional amount of swaps and paid $4,831. During the fourth quarter of 2005, we sold $150 million notional amount of swaps and paid $6,845. As a result of these transactions, at December 31, 2005, we had no notional amount of swaps outstanding.
At December 31, 2004, the variable interest rate was calculated based on the six month LIBOR rate as of the date of payment plus 5.7940%, calculated in arrears. During 2005, a portion of the variable interest rate was calculated based on the six month LIBOR rate as of the date of payment plus 5.7940% calculated in arrears and a portion of the variable interest rate was calculated based on the six month LIBOR, set in advance, plus 5.7967%. At December 31, 2005, the Senior Notes are at a fixed rate of 10.25% per annum.
When we sell a fair value hedge swap, the gain or loss is amortized as a credit or charge to interest expense over the remaining term of the Senior Notes. When we effectively reduce the outstanding principal amount of the Senior Notes (through debt-for-equity exchanges, repurchases or otherwise), the related portion of such credit or charge is accelerated and recorded in the period in which such reduction occurs. At December 31, 2004 and 2005, the principal value of our debt was increased by $24,484 and $7,404, respectively, as a result of gains realized from previously sold swaps. The net impact of current and terminated hedge instruments was a $14,593 and a $7,404 increase in the fair value of our debt at December 31, 2004 and 2005, respectively, and was recorded on the Consolidated Balance Sheets on the line entitled “fair value adjustments for hedge instruments.”
Additional information with respect to the impact of our swaps on interest expense is set forth in Note 7 to the Consolidated Financial Statements.
We enter into agreements with financial institutions that are intended to limit, or cap, our exposure to the incurrence of additional interest expense due to increases in variable interest rates. At December 31, 2004, we had interest rate caps for a notional amount of $500 million, which effectively capped our interest rate exposure, represented by the net impact of our swaps on the Senior Notes, to no greater than 11.3% per annum. During 2005, we sold all of our outstanding interest rate caps. All of our interest rate caps are marked-to-market monthly. Gains and losses are recorded in other (income) expense, net, on the Consolidated Statements of Operations. The fair value adjustment on caps was a $914 loss for 2003, a $3,827 loss for 2004, and a $527 loss for 2005.
Commercial Energy Rate Contracts
We have in the past entered into, and may in the future enter into, natural gas derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas cost exposure. The unrealized gain on outstanding contracts at December 31, 2003 amounted to $917. At December 31, 2005, we had fixed about 23% of our worldwide natural gas exposure through 2006 using such contracts. The outstanding contracts at December 31, 2005 were a nominal receivable.
We are required to provide cash collateral to certain counterparties to the extent that the fair market value of the natural gas derivative contracts exceeds a specific threshold. At December 31, 2005, this threshold was $15 million. We were not required to provide any cash collateral at December 31, 2005.
Fair Market Value Disclosures
SFAS No. 107, “Disclosure about Fair Market Value of Financial Instruments,” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Such fair values must often be determined by using one or more methods that indicate value based on estimates of quantifiable characteristics as of a particular date. Values were estimated as follows:
Cash and cash equivalents, short-term notes and accounts receivables, accounts payable and other current payables—The carrying amount approximates fair value because of the short maturity of these instruments.
Long-Term Debt—Fair value of long-term debt, including the embedded derivative instrument in the Debentures was $720,175 at December 31, 2004 and $663,695 at December 31, 2005.
Foreign currency contracts—Foreign currency contracts are carried at market value. The fair market value of open foreign exchange contracts used by us to minimize foreign currency exposure was an asset of $528 at December 31, 2004. We did not have any such contracts outstanding at December 31, 2005.
Interest rate swaps and caps—The fair value of our interest rate swaps was $9,891 at December 31, 2004. The fair value of our interest rate caps was $769 at December 31, 2004. We had no such instruments outstanding at December 31, 2005. See “Interest Rate Risk Management” above.
Natural gas contracts—See “Commercial Energy Rate Contracts” above.
The following table presents an analysis of interest expense:
| For the Year Ended
December 31,
|
|---|
| (Dollars in thousands) |
|---|
| 2003
| 2004
| 2005
|
|---|
| Interest incurred on debt | | | $ | 62,351 | | $ | 49,808 | | $ | 50,984 | |
| Interest rate swap benefit | | | | (13,022 | ) | | (10,092 | ) | | (1,633 | ) |
| Amortization of fair value adjustments for terminated hedge | | |
| instruments | | | | (2,222 | ) | | (2,468 | ) | | (1,744 | ) |
| Accelerated amortization of fair value adjustments for | | |
| terminated hedge instruments due to reduction of Senior | | |
| Notes | | | | (5,734 | ) | | (4,746 | ) | | - | |
| Amortization of debt issuance costs | | | | 3,148 | | | 4,834 | | | 3,569 | |
| Interest on DOJ antitrust fine, including imputed interest | | | | 955 | | | 710 | | | 507 | |
| Amortization of premium on Senior Notes | | | | (687 | ) | | (243 | ) | | (162 | ) |
| Amortization of discount on Debentures | | | | - | | | 867 | | | 885 | |
| Interest incurred on other items | | | | 352 | | | 508 | | | 310 | |
|
| |
| |
| |
| Total interest expense | | | $ | 45,141 | | $ | 39,178 | | $ | 52,716 | |
|
| |
| |
| |
Interest rates
At December 31, 2004, the Revolving Facility had an effective interest rate of 6.2%, our $435,000 principal amount of Senior Notes had an effective rate of 8.6% (i.e., a fixed rate of 10.25%, effectively swapped to a variable rate of the LIBOR plus 5.7940%) and our $225,000 principal amount of Debentures had a fixed rate of 1.625%.
At December 31, 2005, the Revolving Facility had an effective interest rate of 6.8%, our $434,631 principal amount of Senior Notes had a fixed rate of 10.25% and an effective rate of 10.02% (including the effect of the amortization of fair value adjustments for terminated hedge instruments) and our $225,000 principal amount of Debentures had a fixed rate of 1.625%.
(8) Other (Income) Expense, Net | |
The following table presents an analysis of other (income) expense, net:
| For the Year Ended
December 31,
|
|---|
| (Dollars in thousands) |
|---|
| 2003
| 2004
| 2005
|
|---|
| Loss on reduction of Senior Notes | | | $ | 616 | | $ | 8,782 | | $ | - | |
| Currency (gains) losses | | | | (42,149 | ) | | (8,527 | ) | | 14,868 | |
| Bank and other financing fees | | | | 4,503 | | | 3,137 | | | 2,433 | |
| Legal, environmental and other related costs | | | | 2,670 | | | 8,510 | | | 2,814 | |
| Employee benefit curtailment, settlement and other | | | | 3,504 | | | (182 | ) | | (145 | ) |
| Fair value adjustments on interest rate caps | | | | 914 | | | 3,827 | | | 527 | |
| Foreign currency exchange rate contracts (gains) losses | | | | 6,650 | | | 406 | | | (1,268 | ) |
| Fair value adjustments on Debenture Redemption Make-Whole | | |
| Option | | | | - | | | (2,475 | ) | | (2,702 | ) |
| Former parent company lawsuit legal expenses | | | | - | | | 692 | | | - | |
| Relocation expenses | | | | 820 | | | 927 | | | 905 | |
| Non-income taxes | | | | 3,434 | | | 3,395 | | | - | |
| Write-off of fixed or other assets | | | | 4,278 | | | 2,049 | | | - | |
| Gain on sale of assets | | | | (1,026 | ) | | (2,847 | ) | | (748 | ) |
| Write-off of capitalized bank fees and related debt | | |
| extinguishment costs | | | | 2,357 | | | 344 | | | 1,557 | |
| Other | | | | 1,369 | | | 3,151 | | | (221 | ) |
|
| |
| |
| |
| Total other (income) expense, net | | | $ | (12,060 | ) | $ | 21,189 | | $ | 18,020 | |
|
| |
| |
| |
We have non-dollar-denominated intercompany loans between GrafTech Finance and some of our foreign subsidiaries. At December 31, 2004 and 2005, the aggregate principal amount of these loans was $414,457 and $318,663, respectively (based on currency exchange rates in effect at such date). These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. A portion of these loans are deemed to be essentially permanent and, as a result, remeasurement gains and losses on these loans are recorded as a component of accumulated other comprehensive loss in the stockholders’ deficit section of the Consolidated Balance Sheets. The balance of 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. In 2003, we had a net total of $42,149 of currency gains, including $41,920 of exchange gains due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency. In 2004, we had a net total of $8,527 of currency gains, including $9,835 of exchange gains due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the
dollar as their functional currency. In 2005, we had a net total of $14,868 of currency losses, including $14,611 of exchange losses due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency.
(9) Supplementary Balance Sheet Detail | |
The following tables present supplementary balance sheet details:
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| |
|---|
| Accounts and notes receivable, net: | | | | | | | | |
| Trade | | | $ | 184,363 | | $ | 170,014 | |
| Other | | | | 25,619 | | | 17,698 | |
|
| |
| |
| | | | | 209,982 | | | 187,712 | |
| Allowance for doubtful accounts | | | | (4,001 | ) | | (3,132 | ) |
|
| |
| |
| | | | $ | 205,981 | | $ | 184,580 | |
|
| |
| |
| Inventories: | | |
| Raw materials and supplies | | | $ | 59,388 | | $ | 74,650 | |
| Work in process | | | | 141,586 | | | 150,816 | |
| Finished goods | | | | 24,130 | | | 29,572 | |
|
| |
| |
| | | | $ | 225,104 | | $ | 255,038 | |
|
| |
| |
| Property, plant and equipment: | | |
| Land and improvements | | | $ | 30,516 | | $ | 29,802 | |
| Buildings | | | | 159,910 | | | 154,947 | |
| Machinery and equipment and other | | | | 899,370 | | | 865,841 | |
| Construction in progress | | | | 41,424 | | | 35,803 | |
|
| |
| |
| | | | $ | 1,131,220 | | $ | 1,086,393 | |
|
| |
| |
| Accounts payable: | | |
| Trade | | | $ | 66,967 | | $ | 73,363 | |
| Interest | | | | 18,922 | | | 18,829 | |
|
| |
| |
| | | | $ | 85,889 | | $ | 92,192 | |
|
| |
| |
| Other accrued liabilities: | | |
| Accrued vendors payable | | | $ | 40,426 | | $ | 33,173 | |
| Payrolls (including incentive programs) | | | | 6,132 | | | 4,410 | |
| Restructuring | | | | 6,079 | | | 10,190 | |
| Employee compensation and benefits | | | | 12,098 | | | 11,828 | |
| Accrued interest | | | | 424 | | | 1,319 | |
Liabilities and expenses associated with antitrust investigations
and related lawsuits and claims | | | | 17,077 | | | 20,625 | |
| Other | | | | 16,566 | | | 15,445 | |
|
| |
| |
| | | | $ | 98,802 | | $ | 96,990 | |
|
| |
| |
| Other long term obligations: | | |
| Postretirement benefits | | | $ | 44,333 | | $ | 25,749 | |
| Pension and related benefits | | | | 35,260 | | | 51,243 | |
| Liabilities and expenses associated with antitrust investigations | | |
| and related lawsuits and claims | | | | 26,000 | | | 5,375 | |
| Long-term environmental liabilities | | | | 4,990 | | | 4,429 | |
| Fair value of interest rate swap | | | | 9,891 | | | - | |
| Derivative liability (Redemption Make-Whole Option) | | | | 3,986 | | | 1,284 | |
| Restructuring | | | | 2,773 | | | 1,337 | |
| Other | | | | 22,229 | | | 18,287 | |
|
| |
| |
| | | | $ | 149,462 | | $ | 107,704 | |
|
| |
| |
The following table presents an analysis of the allowance for doubtful accounts:
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| Balance at beginning of year | | | $ | 3,921 | | $ | 4,001 | |
| Additions | | | | 368 | | | 479 | |
| Deductions | | | | (288 | ) | | (1,348 | ) |
|
| |
| |
| Balance at end of year | | | $ | 4,001 | | $ | 3,132 | |
|
| |
| |
(10) Leases and Other Long Term Obligations | |
Lease commitments under non-cancelable operating leases extending for one year or more will require the following future payments:
| (Dollars in thousands) |
|---|
| |
|---|
| 2006 | | | $ | 4,063 | |
| 2007 | | | | 2,720 | |
| 2008 | | | | 2,404 | |
| 2009 | | | | 2,093 | |
| 2010 | | | | 2,004 | |
| After 2010 | | | | 1,924 | |
Total lease and rental expenses under non-cancelable operating leases extending one year or more were about $2,248 in 2003, $2,227 in 2004 and $4,067 in 2005.
During 2001, we outsourced our information technology function to CGI Group Inc. (“CGI”). Under this ten-year agreement, CGI manages our data services, networks, desktops and telecommunications. This contract was amended in the third quarter of 2005, effectively reducing the scope of services provided by CGI. The following schedule sets forth the future payments for base services.
| (Dollars in thousands) |
|---|
| |
|---|
| 2006 | | | $ | 4,474 | |
| 2007 | | | | 4,388 | |
| 2008 | | | | 4,388 | |
| 2009 | | | | 4,388 | |
| 2010 | | | | 4,388 | |
| After 2010 | | | | 1,250 | |
In September 2002, we entered into a ten-year outsourcing contract with CGI to provide finance and accounting business process services valued at $36 million. On November 15, 2005, we entered into a memorandum of agreement with CGI, terminating such services. The memorandum was entered into after the parties determined that the termination of the ten-year outsourcing contract was in their mutual best interest. Such termination is effective during the first quarter of 2006. Thereafter, we will be solely and entirely responsible for all of the services previously rendered by CGI under this contract. As a result, at December 31, 2005, our future payments amount to about $750 and will be paid during 2006.
Defined Benefit Plans
Until February 25, 1991, we participated in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). Effective February 26, 1991, we formed our own U.S. retirement plan which covers substantially all U.S. employees. Retirement and death benefits related to employee service through February 25, 1991 are covered by the Union Carbide plan. Benefits paid by the Union Carbide plan are based on final average pay through February 25, 1991, plus salary increases (not to exceed 6% per year) until January 26, 1995 when Union Carbide ceased to own at least 50% of the equity of GTI. All our employees who retired prior to February 25, 1991 are covered under the Union Carbide plan. Pension benefits under our plan are based primarily on years of service and compensation levels prior to retirement. Prior to January 1, 2002, our plan was a defined benefit plan. Effective January 1, 2002, a new defined contribution plan was established for U.S. employees. Some employees had the option to remain in the defined benefit plan for an additional period of up to five years. Those employees without the option to remain in the defined benefit plan for an additional five years began participating in the defined contribution plan and their benefits under the defined benefit plan were frozen as of December 31, 2001. Those employees with the initial option to remain in the defined benefit plan began participating in the defined contribution plan as of April 1, 2003 and their benefits under the defined benefit plan were frozen as of March 31, 2003. Effective March 31, 2003, we froze the qualified defined benefit plan for our remaining U.S. employees and closed our non-qualified U.S. defined benefit plan for the participating salaried workforce. Under the new defined contribution plan, we make quarterly contributions to each individual employee’s account equal to 2.5% of the employee’s pay up to the social security wage base ($90 in 2004 and $94 in 2005) plus 5% of their pay above the social security wage base. In 2005, we recorded expense of $1,355 related to this plan.
Pension coverage for employees of foreign subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves.
We use a December 31 measurement date for all of our plans.
The components of our consolidated net pension costs are set forth in the following table.
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| U.S. | Foreign | U.S. | Foreign | U.S. | Foreign |
|---|
| (Dollars in thousands) |
|---|
| |
|---|
| Service cost | | | $ | 2,050 | | $ | 1,007 | | $ | 912 | | $ | 309 | | $ | 740 | | $ | 424 | |
| Interest cost | | | | 7,904 | | | 4,178 | | | 7,528 | | | 4,349 | | | 7,714 | | | 4,434 | |
| Expected return on assets . | | | | (7,248 | ) | | (3,907 | ) | | (8,329 | ) | | (4,123 | ) | | (8,768 | ) | | (4,265 | ) |
| Amortization | | | | 455 | | | 411 | | | 176 | | | 354 | | | 1,355 | | | 990 | |
| Special termination benefits | | | | 2,490 | | | 298 | | | - | | | - | | | - | | | 485 | |
| Settlement (gain) loss | | | | (5,514 | ) | | (128 | ) | | - | | | (535 | ) | | - | | | 743 | |
| Curtailment loss | | | | 254 | | | 366 | | | - | | | 1 | | | - | | | (212 | ) |
|
|
| | | | $ | 391 | | $ | 2,225 | | $ | 287 | | $ | 355 | | $ | 1,041 | | $ | 2,599 | |
|
|
The reconciliation of beginning and ending balances of benefit obligations under, fair value of assets of and the funded status of our pension plans are as follows:
| Pension Benefits at December 31,
|
|---|
| 2004
| 2005
|
|---|
| U.S. | Foreign | U.S. | Foreign |
|---|
| |
|---|
| Changes in Benefit Obligation: | | | | | | | | | | | | | | |
| Net benefit obligation at beginning of year | | | $ | 124,875 | | $ | 73,172 | | $ | 131,009 | | $ | 74,773 | |
| Service cost | | | | 912 | | | 309 | | | 740 | | | 424 | |
| Interest cost | | | | 7,528 | | | 4,349 | | | 7,714 | | | 4,434 | |
| Impact of plan amendments | | | | - | | | 528 | | | - | | | - | |
| Participant contributions | | | | - | | | - | | | - | | | 96 | |
| Foreign currency exchange rates | | | | - | | | 6,345 | | | - | | | (7,464 | ) |
| Actuarial loss | | | | 7,796 | | | 2,792 | | | 10,994 | | | 9,851 | |
| Divestiture | | | | - | | | - | | | - | | | - | |
| Curtailment | | | | (1,901 | ) | | - | | | - | | | - | |
| Settlement | | | | - | | | (9,374 | ) | | - | | | (1,443 | ) |
| New plan 87 | | | | - | | | - | | | - | | | 1,189 | |
| Special termination benefits | | | | - | | | 241 | | | - | | | 485 | |
| Benefits paid | | | | (8,203 | ) | | (3,587 | ) | | (8,381 | ) | | (6,194 | ) |
|
|
| Net benefit obligation at end of year | | | $ | 131,007 | | $ | 74,775 | | $ | 142,076 | | $ | 76,151 | |
|
|
| Changes in Plan Assets: | | |
| Fair value of plan assets at beginning of year | | | $ | 91,876 | | $ | 59,714 | | $ | 109,988 | | $ | 63,834 | |
| Actual return on plan assets | | | | 3,307 | | | 5,473 | | | 1,227 | | | 9,141 | |
| New plan | | | | - | | | - | | | - | | | 1,420 | |
| Foreign currency exchange rate changes | | | | - | | | 5,442 | | | - | | | (6,216 | ) |
| Employer contributions | | | | 23,008 | | | 6,166 | | | 570 | | | 1,766 | |
| Employee contributions | | | | - | | | - | | | - | | | 96 | |
| Settlement | | | | - | | | (9,374 | ) | | - | | | (1,443 | ) |
| Benefits paid | | | | (8,203 | ) | | (3,587 | ) | | (8,381 | ) | | (6,194 | ) |
|
|
| Fair value of plan assets at end of year | | | $ | 109,988 | | $ | 63,834 | | $ | 103,404 | | $ | 62,404 | |
|
|
| Pension Benefits at December 31,
|
|---|
| 2004
| 2005
|
|---|
| U.S. | Foreign | U.S. | Foreign |
|---|
| |
|---|
| Reconciliation of funded status: | | |
| Funded status at end of year | | | $ | (21,020 | ) | $ | (10,941 | ) | $ | (38,672 | ) | $ | (13,748 | ) |
| Unrecognized net transition asset | | | | - | | | (1,179 | ) | | - | | | (729 | ) |
| Unrecognized prior service cost | | | | - | | | 1,673 | | | - | | | 1,328 | |
| Unrecognized net actuarial loss | | | | 25,180 | | | 14,959 | | | 42,362 | | | 16,490 | |
|
|
| Net amount recognized at end of year | | | $ | 4,160 | | $ | 4,512 | | $ | 3,690 | | $ | 3,341 | |
|
|
Amounts recognized in the statement of financial
position: | | |
| Prepaid benefit cost | | | $ | - | | $ | 3,138 | | $ | - | | $ | 2,630 | |
| Accrued benefit liability | | | | (21,020 | ) | | (8,012 | ) | | (38,672 | ) | | (7,845 | ) |
| Intangible asset | | | | - | | | 642 | | | - | | | 491 | |
| Accumulated other comprehensive loss | | | | 25,180 | | | 8,744 | | | 42,362 | | | 8,065 | |
|
|
| Net amount recognized | | | $ | 4,160 | | $ | 4,512 | | $ | 3,690 | | $ | 3,341 | |
|
|
The accumulated benefit obligation for all defined pension plans was $197,607 at December 31, 2004 and $208,819 at December 31, 2005.
We annually re-evaluate assumptions and estimates used in projecting pension assets, liabilities and expenses. These assumptions and estimates may affect the carrying value of pension assets, liabilities and expenses in the Consolidated Financial Statements. Assumptions used to determine net pension costs and pension projected benefit obligations are set forth in the following table:
| | Pension Benefit Obligations
|
|---|
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
Weighted average assumptions to determine
benefit obligations: | | | | | | | | |
| Discount rate | | | | 5 | .99% | | 5 | .66% |
| Rate of compensation increase | | | | 4 | .20% | | 3 | .51% |
| | Pension Benefit Costs
|
|---|
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
Weighted average assumptions to determine
net cost: | | | | | | | | |
| Discount rate | | | | 6 | .36% | | 5 | .99% |
| Expected return on plan assets | | | | 7 | .73% | | 7 | .71% |
| Rate of compensation increase | | | | 4 | .15% | | 3 | .51% |
We adjust our discount rate annually in relation to the rate at which the benefits could be effectively settled. Discount rates are set for each plan in reference to the yields available on AA-rated corporate bonds of appropriate currency and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve in each currency. The discount rate for a given plan is the rate implied by the yield curve for the duration of that plan's liabilities. In certain countries, where little public information is available on which to base discount rate assumptions, the discount rate is based on government bond yields or other indices and approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA corporate bonds.
The expected return on assets assumption represents our best estimate of the long-term return on plan assets and generally was estimated by computing a weighted average return of the underlying long-term expected returns on the different asset classes, based on the target asset allocations. The expected return on assets assumption is a long-term assumption that is expected to remain the same from one year to the next unless there is a significant change in the target asset allocation, the fees and expenses paid by the plan or market conditions.
The rate of compensation assumption is generally based on salary increases.
Plan Assets. The following table presents our retirement plan weighted average asset allocations at December 31, 2005, by asset category:
| Percentage of Plan |
|---|
| Assets at December 31, 2005 |
|---|
| U.S.
| Foreign
|
|---|
| Equity securities | | | | 69 | % | | 35 | % |
| Fixed Income | | | | 30 | | | 52 | |
| Other | | | | 1 | | | 13 | |
|
| |
| |
| Total | | | | 100 | % | | 100 | % |
|
| |
| |
Investment Policy and Strategy. The investment policy and strategy of the U.S. plan is to invest approximately 75% (60% large cap, 25% small- and mid-cap, 15% international) in equities and approximately 25% in short duration fixed income securities. The trust allows the plan to be invested up to 80% in equities, including shares of our common stock. Rebalancing is undertaken monthly. The investment policy of the U.K. plan is to invest 0% to 40% in equities and 60% to 100% debt securities. The goal of both plans is to fully fund the plans as soon as possible while investing plan assets prudently. To the extent we maintain plans in other countries, asset diversification ranges are between 5%-30% for equity investments and between 7%-95% for fixed income investments. For each plan, the investment policy is set within both asset return and local statutory requirements.
The following table presents our retirement plan weighted average target asset allocations at December 31, 2005, by asset category:
| Percentage of Targeted Plan |
|---|
| Assets at December 31, 2005 |
|---|
| U.S.
| Foreign
|
|---|
| Equity securities | | | | 75 | % | | 35 | % |
| Fixed Income | | | | 25 | | | 53 | |
| Other | | | | - | | | 12 | |
|
| |
| |
| Total | | | | 100 | % | | 100 | % |
|
| |
| |
The following table presents information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31:
| 2004 | 2005 |
|---|
| U.S.
| Foreign
| U.S.
| Foreign
|
|---|
| (Dollars in thousands) |
|---|
| Accumulated benefit obligation | | | $ | 131,009 | | $ | 59,252 | | $ | 142,076 | | $ | 64,989 | |
| Fair value of plan assets | | | | 109,988 | | | 51,241 | | | 103,404 | | | 60,226 | |
The following table presents information for pension plans with a projected benefit obligation in excess of plan assets at December 31:
| 2004
| 2005
|
|---|
| U.S.
| Foreign
| U.S.
| Foreign
|
|---|
| (Dollars in thousands) |
|---|
| Projected benefit obligation | | | $ | 131,008 | | $ | 74,774 | | $ | 142,076 | | $ | 75,187 | |
| Fair value of plan assets | | | | 109,988 | | | 63,834 | | | 103,404 | | | 61,238 | |
The following table represents projected future pension plan cash flow by year:
| U.S.
| Foreign
|
|---|
| (Dollars in thousands) |
|---|
| | |
|---|
| Expected contributions in 2006: | | | | | | | | |
| Expected employer contributions | | | $ | 570 | | $ | 4,250 | |
| Expected employee contributions | | | | - | | | - | |
| |
Estimated future benefit payments reflecting expected future
service for the fiscal years ending December 31: | | |
| 2006 | | | | 9,022 | | | 8,753 | |
| 2007 | | | | 9,206 | | | 3,484 | |
| 2008 | | | | 9,108 | | | 3,082 | |
| 2009 | | | | 8,873 | | | 3,105 | |
| 2010 | | | | 8,848 | | | 3,627 | |
| 2011-2015 | | | | 45,819 | | | 34,671 | |
Postretirement Benefit Plans
We provide healthcare and life insurance benefits for eligible retired employees. These benefits are provided through various insurance companies and health care providers. We accrue the estimated net postretirement benefit costs during the employees’ credited service periods. We use a December 31 measurement date for all of our plans.
In July 2002, we amended our U.S. postretirement medical coverage. In 2003 and 2004, we discontinued the Medicare Supplement Plan (for retirees 65 years or older or those eligible for Medicare benefits). This change applied to all U.S. active employees and retirees. In June 2003, we announced the termination of the existing early retiree medical plan for retirees under age 65, effective December 31, 2005. In addition, we limited the amount of retiree’s life insurance after December 31, 2004. These modifications are accounted for prospectively. The impact of these changes is being amortized over the average remaining period to full eligibility of the related postretirement benefits and resulted in a $7,618 net benefit in 2003, a $11,902 net benefit in 2004 and a $14,000 net benefit in 2005, reflected on the Consolidated Statements of Operations.
The components of our consolidated net postretirement cost (benefit) are set forth in the following table:
| | For the Year Ended December 31,
|
|---|
| | 2003
| 2004
| 2005
|
|---|
| | U.S.
| Foreign
| U.S.
| Foreign
| U.S.
| Foreign
|
|---|
| (Dollars in thousands) |
|---|
| Service Cost | | | $ | 278 | | $ | 127 | | $ | 109 | | $ | 215 | | $ | 18 | | $ | 238 | |
| Interest Cost | | | | 2,164 | | | 993 | | | 1,275 | | | 1,181 | | | 743 | | | 1,292 | |
| Amortization | | | | (11,195 | ) | | 15 | | | (14,733 | ) | | 51 | | | (16,387 | ) | | 96 | |
|
| |
| |
| |
| |
| |
| |
| | | | $ | (8,753 | ) | $ | 1,135 | | $ | (13,349 | ) | $ | 1,447 | | $ | (15,626 | ) | $ | 1,626 | |
| | | | | | |
The reconciliation of beginning and ending balances of benefit obligations under, fair value of assets of and the funded status of our postretirement plans is set forth in the following table:
| Postretirement Benefits at December 31,
|
|---|
| 2004
| 2005
|
|---|
| U.S.
| Foreign
| U.S.
| Foreign
|
|---|
| Changes in Benefit Obligation: | | | | | | | | | | | | | | |
| Net benefit obligation at beginning of year | | | $ | 27,703 | | $ | 16,090 | | $ | 14,939 | | $ | 18,793 | |
| Service cost | | | | 109 | | | 215 | | | 18 | | | 238 | |
| Interest cost | | | | 1,275 | | | 1,181 | | | 743 | | | 1,292 | |
| Impact of plan amendments | | | | (12,077 | ) | | — | | | — | | | — | |
| Foreign currency exchange rates | | | | — | | | 1,776 | | | — | | | (237 | ) |
| Actuarial loss | | | | 1,767 | | | 861 | | | (252 | ) | | (157 | ) |
| Divestiture | | | | — | | | — | | | — | | | — | |
| Curtailment | | | | — | | | — | | | — | | | — | |
| Settlement | | | | — | | | — | | | — | | | — | |
| Special termination benefits | | | | — | | | — | | | — | | | — | |
| Gross benefits paid | | | | (3,838 | ) | | (1,331 | ) | | (3,202 | ) | | (1,145 | ) |
|
| |
| |
| |
| |
| Net benefit obligation at end of year | | | $ | 14,939 | | $ | 18,792 | | $ | 12,246 | | $ | 18,784 | |
|
| |
| |
| |
| |
| Changes in Plan Assets: | | |
| Fair value of plan assets at beginning of year | | | $ | — | | $ | — | | $ | — | | $ | — | |
| Actual return on plan assets | | | | — | | | — | | | ��� | | | — | |
| Foreign currency exchange rate changes | | | | — | | | — | | | — | | | — | |
| Employer contributions | | | | 3,838 | | | 1,331 | | | 3,202 | | | 1,145 | |
| Settlement | | | | — | | | — | | | — | | | — | |
| Gross benefits paid | | | | (3,838 | ) | | (1,331 | ) | | (3,202 | ) | | (1,145 | ) |
|
| |
| |
| |
| |
| Fair value of plan assets at end of year | | | $ | — | | $ | — | | $ | — | | $ | — | |
|
| |
| |
| |
| |
| Postretirement Benefits at December 31,
|
|---|
| 2004
| 2005
|
|---|
| U.S.
| Foreign
| U.S.
| Foreign
|
|---|
| Reconciliation of funded status: | | |
| Funded status at end of year | | | $ | (14,939 | ) | $ | (18,792 | ) | $ | (12,246 | ) | $ | (18,784 | ) |
| Unrecognized prior service cost | | | | (52,478 | ) | | (4,301 | ) | | (31,366 | ) | $ | (4,165 | ) |
| Unrecognized net actuarial loss | | | | 39,536 | | | 6,641 | | | 34,559 | | | 6,253 | |
|
| |
| |
| |
| |
| Net amount recognized at end of year | | | $ | (27,881 | ) | $ | (16,452 | ) | $ | (9,053 | ) | $ | (16,696 | |
|
| |
| |
| |
| |
| Amounts recognized in the statement of financial position: | | |
| Prepaid benefit cost | | | $ | - | | $ | - | | $ | - | | $ | - | |
| Accrued benefit liability | | | | (27,881 | ) | | (16,452 | ) | | (9,053 | ) | | (16,969 | ) |
| Intangible asset | | | | — | | | — | | | — | | | — | |
| Accumulated other comprehensive income | | | | — | | | — | | | — | | | — | |
|
| |
| |
| |
| |
| Net amount recognized | | | $ | (27,881 | ) | $ | (16,452 | ) | $ | (9,053 | ) | $ | (16,969 | ) |
|
| |
| |
| |
| |
We annually re-evaluate assumptions and estimates used in projecting the postretirement liabilities and expenses. These assumptions and estimates may affect the carrying value of postretirement plan liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net postretirement benefit costs and postretirement projected benefit obligation are set forth in the following table:
| | Postretirement Benefit Obligations
|
|---|
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
Weighted average assumptions to determine
benefit obligations: | | | | | | | | |
| Discount rate | | | | 6 | .69% | | 6 | .07% |
| Health care cost trend on covered charges: |
| Initial | | | | 8 | .00% | | 8 | .23% |
| Ultimate | | | | 4 | .79% | | 5 | .77% |
| Years to ultimate | | | | 9 | | | 8 | |
| | Postretirement Benefit Costs
|
|---|
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
Weighted average assumptions to determine
net cost: | | | | | | | | |
| Discount rate | | | | 6 | .99% | | 6 | .69% |
| Health care cost trend on covered charges: |
| Initial | | | | 8 | .47% | | 7 | .81% |
| Ultimate | | | | 4 | .13% | | 5 | .62% |
| Years to ultimate | | | | 9 | | | 7 | |
For 2003, 2004 and 2005, as a result of certain amendments to our U.S. postretirement benefits, health care cost trend rates have no material effect on the amounts reported for net postretirement benefits.
Discount rates are set for each plan in reference to the yields available on AA-rated corporate bonds of appropriate currency and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve in each currency. The discount rate for a given plan is the rate implied by the yield curve for the duration of that plan's liabilities. In certain countries, where little public information is available on which to base discount rate assumptions, the discount rate is based on government bond yields or other indices and
approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA-rated corporate bonds.
The following table represents projected future postretirement cash flow by year:
| U.S.
| Foreign
|
|---|
| (Dollars in thousands) |
|---|
| Expected contributions in 2006: | | | | | | | | |
| Expected employer contributions | | | $ | 383 | | $ | 1,190 | |
| Expected employee contributions | | | | - | | | - | |
| |
Estimated future benefit payments reflecting expected
future service for the fiscal years ending December 31: | | |
| 2006 | | | | 383 | | | 1,190 | |
| 2007 | | | | 340 | | | 1,244 | |
| 2008 | | | | 376 | | | 1,291 | |
| 2009 | | | | 510 | | | 1,351 | |
| 2010 | | | | 526 | | | 1,415 | |
| 2011-2015 | | | | 1,364 | | | 8,033 | |
Other Non-Qualified Benefit Plans
Since January 1, 1995, we have established various unfunded, non-qualified supplemental retirement and deferred compensation plans for certain eligible employees. We established benefits protection trusts (collectively, the “Trust”) to partially provide for the benefits of employees participating in these plans. At December 31, 2004 and December 31, 2005, the Trust had assets of approximately $505 and $915, respectively, which are included in other assets on the Consolidated Balance Sheets. These assets include 426,400 shares of common stock that we contributed to the Trust in March 2001. These shares, if later sold, could be used for partial funding of our future obligations under certain of our compensation and benefit plans. The shares held in Trust are not considered outstanding for purposes of calculating earnings per share until they are committed to be sold or otherwise used for funding purposes.
Savings Plan
Our employee savings plan provides eligible employees the opportunity for long-term savings and investment. On January 1, 2002, the plan was revised to allow employees to contribute up to 5% of pay as a basic contribution and an additional 45% of pay as supplemental contribution. For 2003, 2004 and 2005, we contributed on behalf of each participating employee, in units of a fund that invests entirely in our common stock, 100% on the first 3% contributed by the employee and 50% on the next 2% contributed by the employee. We contributed 128,241 shares in 2004, resulting in expense of $1,565 and 301,194 shares in 2005, resulting in expense of $1,622.
(12) Restructuring and Impairment Charges | |
At December 31, 2005, the outstanding balance of our restructuring reserve was $11,527. We expect the majority of the remaining payments to be paid by the end of 2007. The components of the balance at December 31, 2005 consisted primarily of:
Synthetic Graphite Segment:
• | $6,044 related to the rationalization of our synthetic graphite facilities, including those in Brazil, France, and Russia; |
• | $3,897 related to the closure of our graphite electrode manufacturing operations in Caserta, Italy; and |
• | $700 related to the phase out of our graphite electrode machining operations in Clarksville, Tennessee. |
Other Segment and Corporate:
• | $794 related primarily to remaining lease payments on our former corporate headquarters; and |
• | $92 related to the relocation of our corporate headquarters from Wilmington, Delaware to Parma, Ohio. |
In 2003, we recorded a net restructuring charge of $19,765, consisting of an $11,266 charge associated with the closure and settlement with certain of our U.S pension plans, with the remaining primarily due to further organizational changes.
In 2004, we recorded a net restructuring benefit of $548, comprised primarily of the following:
• | a $2,473 net benefit associated with the closure of our graphite electrode manufacturing operations in Caserta, Italy (consisting of a reduction in cost estimate, partially offset by the completion of further severance agreements for employees terminated in connection with the closure), offset by |
• | a $1,329 charge relating primarily to severance programs and related benefits associated with the closure of our advanced graphite machining operations in Sheffield, United Kingdom; and |
• | a $596 charge associated primarily with changes in estimates related to U.S. voluntary and selective severance programs. |
In 2005, we recorded a net restructuring charge of $9,729, comprised primarily of the following:
• | a $6,100 charge associated with the rationalization of our synthetic graphite facilities, including those in Brazil, France, and Russia; |
• | a $3,194 charge associated with the closure of our graphite electrode manufacturing operations at Caserta, Italy; |
• | a $523 charge primarily associated with the relocation of our Corporate Headquarters from Wilmington, Delaware to Parma, Ohio; |
• | an $804 charge associated with the phase out of our graphite electrode machining operations in Clarksville, Tennessee, scheduled for completion in the third quarter of 2006, and the closure of our administrative offices in Clarksville, scheduled for completion at the end of the first quarter of 2006; and |
• | a $430 charge associated with the closure of our advanced graphite machining operations in Sheffield, United Kingdom; offset by |
• | a $1,322 benefit associated with a change in estimate pertaining to the closure of certain graphite electrode manufacturing operations. |
We expect to record additional charges in 2006 related to such initiatives.
The restructuring accrual is included in other accrued liabilities and other long-term obligations on the Consolidated Balance Sheets. The following table summarizes activity relating to the accrual:
| Severance
and
Related
Costs
| Plant Shutdown
and
Related
Costs
| Total
|
|---|
| (Dollars in thousands) |
|---|
| |
| Balance at December 31, 2003 | | | $ | 19,253 | | $ | 9,410 | | $ | 28,663 | |
|
| |
| |
| |
| |
| Restructuring charges | | | | 4,321 | | | 985 | | | 5,306 | |
| Change in estimates | | | | — | | | (5,854 | ) | | (5,854 | ) |
Payments and settlements,
including non-cash items of $2,814 | | | | (18,367 | ) | | (1,300 | ) | | (19,667 | ) |
| Effect of change in currency exchange rates | | | | 340 | | | 64 | | | 404 | |
|
| |
| |
| |
| Balance at December 31, 2004 | | | | 5,547 | | | 3,305 | | | 8,852 | |
|
| |
| |
| |
| |
| Restructuring charges | | | | 10,880 | | | 474 | | | 11,354 | |
| Change in estimates | | | | (260 | ) | | (1,365 | ) | | (1,625 | ) |
Payments and settlements,
majority of which are cash payments | | | | (4,999 | ) | | (1,671 | ) | | (6,670 | ) |
| Effect of change in currency exchange rates | | | | (435 | ) | | 51 | | | (384 | ) |
|
| |
| |
| |
| Balance at December 31, 2005 | | | $ | 10,733 | | $ | 794 | | $ | 11,527 | |
|
| |
| |
| |
In 2003, we recorded impairment charges of $6,991. Such charges consisted of $5,370 pertaining primarily to write-off of the remaining fixed assets in connection with the closure of our graphite electrode manufacturing operation in Caserta, Italy and $1,621 pertaining primarily
to the net write-off of the remaining book value of assets of our former graphite electrode manufacturing operations in Clarksville, Tennessee.
In 2005, we recorded a $2,904 charge related to the impairment of our long-lived carbon electrode fixed assets in Columbia, Tennessee. The future estimated undiscounted cash flows expected to result from the use of these assets were below their respective carrying amounts. As a result, an impairment loss was measured as the difference between the assets’ carrying amount and fair value, which was based on current estimates of market price.
| (13) | Management Compensation and Incentive Plans |
Stock Options
We historically have maintained several stock incentive plans. The aggregate number of shares reserved under the plans since their initial adoption was 14,500,000 shares at December 31, 2003 and December 31, 2004 and 19,300,000 shares at December 31, 2005. Such plans permitted options, restricted stock and other awards to be granted to employees and, in the case of two plans, also to non-employee directors.
The 2005 Equity Incentive Plan (the “2005 Plan”) was adopted in the second quarter of 2005. The 2005 Plan provides that the Management Stock Incentive Plan (Original Version), the Management Stock Incentive Plan (Senior Version), the Management Stock Incentive Plan (Mid-Management Version), the 1995 Equity Incentive Plan and the 1996 Mid-Management Equity Incentive Plan (collectively, the “existing plans”) are frozen and will remain in effect only to the extent of awards outstanding under the existing plans on May 25, 2005. The 2005 Plan initially covers 4,800,000 shares. Shares under the existing plans are added to and become available for awards under the 2005 Plan to the extent (but only to the extent) that stock options or stock grants outstanding on May 25, 2005 under the existing plans expire or are canceled or forfeited before they are exercised or vest, respectively, and limited to the extent of the current outstanding awards.
In 2003, we granted options to purchase shares as follows:
• | Options for 3,188,435 shares were issued to certain officers, management and directors at exercise prices ranging from $2.85 to $12.23 per share. We granted 10-year options for 91,935 shares that vest one year from the grant date and 10-year options for 25,000 shares that vest two years from the grant date. In addition, we granted options for 3,071,500 shares in connection with our long-term incentive program. These options were scheduled to vest on July 31, 2008 and expire December 31, 2008. Accelerated vesting occurs if certain cash flow performance targets are achieved in each of 2003, 2004 and 2005. At December 31, 2004, 1,109,634 of such options were vested. On November 30, 2005 the Compensation, Organization and Pension Committee of GrafTech’s Board of Directors vested the balance of these shares. At December 31, 2005, 3,061,767 of these options were vested. |
In 2004, we granted options to purchase shares as follows:
• | Options for 199,421 shares were issued to certain officers, management and directors at exercise prices ranging from $8.91 to $14.82 per share. We granted 10-year options for 30,421 shares that vest one year from the grant date and 10-year options for 84,500 shares that vest two years from the grant date. In addition, we granted options for 84,500 shares in connection with our long-term incentive program. These options were scheduled to vest July 31, 2008 and expire December 31, 2008. Accelerated vesting could occur if certain cash flow performance targets were achieved in each of 2004 and 2005. At December 31, 2004, none of these options were vested. On November 30, 2005 the Compensation, Organization and Pension Committee of GrafTech’s Board of Directors vested such options. Therefore, at December 31, 2005, 114,921 of these options were vested. |
In 2005, we granted 10-year options to purchase shares as follows:
• | Options for 195,000 shares were issued to certain officers and management at exercise prices ranging from $4.00 to $9.01 per share. All of these options vest two years from the date of grant. At December 31, 2005, none of these shares were vested. |
The following table summarizes the status of our stock-based compensation plans at the dates and for the periods indicated:
| | For the Year Ended December 31, |
|---|
| | 2003
| 2004
| 2005
|
|---|
| | Shares
| Weighted-Average
Exercise Price
| Shares
| Weighted-Average Shares
Exercise Price
| Shares
| Weighted-Average
Exercise Price
| |
|---|
| | (Shares in thousands) |
|---|
| Time vesting options: | | | | | | | | | | | | | | | | | | | | |
| Outstanding at beginning of year | | | | 9,005 | | $ | 15.34 | | | 11,208 | | $ | 13.14 | | | 10,631 | | $ | 13.42 | |
| Granted at market price | | | | 3,208 | | | 6.59 | | | 199 | | | 12.01 | | | 195 | | | 6.62 | |
| Exercised | | | | (552 | ) | | 8.45 | | | (712 | ) | | 8.36 | | | - | | | - | |
| Forfeited/canceled | | | | (453 | ) | | 15.81 | | | (64 | ) | | 17.65 | | | (243 | ) | | 13.81 | |
|
| |
| |
| |
| |
| |
| |
| Outstanding at end of year | | | | 11,208 | | | 13.14 | | | 10,631 | | | 13.42 | | | 10,583 | | | 13.28 | |
|
| |
| |
| |
| |
| |
| |
| Options exercisable at year end | | | | 7,593 | | | 15.44 | | | 7,108 | | | 16.32 | | | 10,240 | | | 13.40 | | | | |
Weighted-average fair value of
options granted during year: |
| At market | | | | | | | 6.59 | | | | | | 7.16 | | | | | | 4.80 | |
| Performance vesting options: | | |
Outstanding at beginning of
year | | | | 378 | | $ | 7.60 | | | 332 | | $ | 7.60 | | | 242 | | $ | 7.60 | |
| Granted | | | | - | | | - | | | - | | | - | | | - | | | - | |
| Exercised | | | | (46 | ) | | 7.60 | | | (90 | ) | | 7.60 | | | - | | | - | |
| Forfeited/canceled | | | | - | | | - | | | - | | | - | | | - | | | - | |
|
| |
| |
| |
| |
| |
| |
| Outstanding at end of year | | | | 332 | | | 7.60 | | | 242 | | | 7.60 | | | 242 | | | 7.60 | |
|
| |
| |
| |
| |
| |
| |
| Options exercisable at year end | | | | 332 | | $ | 7.60 | | | 242 | | $ | 7.60 | | | 242 | | $ | 7.60 | |
The fair value of each stock option is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2003, 2004 and 2005, respectively: dividend yield of 0.0% for all years; expected volatility of 76% in 2003, 67% in 2004 and 72% in 2005; risk-free interest rates of 4.0% in 2003, 3.7% in 2004 and 4.2% in 2005; and expected lives of 6 years in 2003, 6 years in 2004 and 8 years in 2005.
The following table summarizes information about stock options outstanding at December 31, 2005.
| Options Outstanding
| Options Exercisable
|
|---|
Range of Exercise Prices
| Number
Outstanding
| Weighted-
Average
Remaining
Contractual
Life
| Weighted-
Average
Exercise
Prices
| Number
Exercisable
| Weighted-
Average
Exercise
Prices
|
|---|
| (Shares in thousands) |
|---|
| Time vesting options: | | | | | | | | | | | |
| $2.83 to 11.10 | | 6,609 | | 4 years | | $ 7.51 | | 6,414 | | $ 7.54 | |
| $11.60 to $19.06 | | 2,486 | | 3 years | | 16.46 | | 2,338 | | 16.64 | |
| $22.82 to $29.22 | | 116 | | 2 years | | 25.54 | | 116 | | 25.54 | |
| $30.59 to $40.44 | | 1,372 | | 1 year | | 34.28 | | 1,372 | | 34.28 | |
|
| | | | | |
| | | |
| | | 10,583 | | | | 13.28 | | 10,240 | | 13.40 | |
|
| | | | | |
| | | |
| Performance vesting options: | |
| $7.60 | | 242 | | 1 year | | 7.60 | | 242 | | 7.60 | |
Restricted Stock
In 2005, we granted 1,355,907 shares of restricted stock to certain directors, officers and employees at prices ranging from $3.80 to $8.49. Of these shares, 40,000 shares vest one year from the date of grant, 455,907 shares vest two years from the date of grant and 860,000 shares vest over a three-year period, with one-third of the shares vesting on the anniversary date of the grant in each of the next three years.
Incentive Compensation Plans
In 2000, we implemented global incentive programs for our worldwide salaried and hourly employees. These plans were based on our financial performance and achievement of strategic or, in the case of hourly employees, local targets. The cost for this plan was nil in 2002. In 2003, the Incentive Compensation Program (the “ICP”) replaced the former programs, creating one program for all employees. The ICP is based primarily on achieving cash flow targets and, to a lesser extent, strategic targets. The cost for the ICP was $11,413 in 2003 and nil in 2004 and 2005.
Antitrust Investigations
In 1997, the DOJ and the EU Competition Authority commenced investigations into alleged violations of the antitrust laws in connection with the sale of graphite electrodes. The antitrust authorities in Canada, Japan and Korea subsequently began similar investigations. The EU Competition Authority also commenced an investigation into alleged antitrust violations in connection with the sale of specialty graphite. These antitrust investigations have been resolved. Several of the investigations resulted in the imposition of fines against us. These fines, or payments in accordance with a payment schedule in the case of the DOJ antitrust fine, have been timely paid. At December 31, 2004 and December 31, 2005, $43,077 and $26,000 remained in the reserve for liabilities and expenses in connection with these antitrust investigations and related lawsuits and claims, respectively. The reserve is unfunded and represents the remaining DOJ antitrust fine obligation, with quarterly payments scheduled through January 2007.
Antitrust Lawsuits
Through December 31, 2005, except as described in the following paragraphs, we have settled or obtained dismissal of all of the civil antitrust lawsuits (including class action lawsuits) previously pending against us, certain civil antitrust lawsuits threatened against us and certain possible civil antitrust claims against us arising out of alleged antitrust violations occurring prior to the date of the relevant settlements in connection with the sale of graphite electrodes, carbon electrodes and bulk graphite products. All payments due have been timely paid.
In 1999 and 2000, we and other producers of graphite electrodes were served with three complaints commencing three separate civil antitrust lawsuits in the United States District Court for the Eastern District of Pennsylvania (“EDPA District Court”.) In March 2002, we were served with another complaint commencing a separate civil antitrust lawsuit in the EDPA District Court. These lawsuits are called the “foreign customer lawsuits.” The first complaint, entitled Ferromin International Trade Corporation, et al. v. UCAR International Inc., et al., was filed by 27 steelmakers and related parties, all but one of whom are located outside the U.S. The second complaint, entitled BHP New Zealand Ltd. et al. v. UCAR International Inc., et al. was filed by 4 steelmakers, all of whom are located outside the U.S. The third complaint, entitled Saudi Iron and Steel Company v. UCAR International Inc., et al., was filed by a steelmaker who is located outside the U.S. The fourth complaint, entitled Arbed, S.A., et al. v. Mitsubishi Corporation, et al., was filed by 5 steelmakers, all of whom are located outside the U.S. In each complaint, the plaintiffs allege that the defendants violated U.S. federal antitrust law in connection with the sale of graphite electrodes sold or sourced from the U.S. and those sold and sourced outside the U.S. The plaintiffs seek, among other things, an award of treble damages resulting from such alleged violations. We believe that we have strong defenses against claims alleging that purchases of graphite electrodes outside the U.S. are actionable under U.S. federal antitrust law. We filed motions to dismiss the first and second complaints. In June and July 2001, our motions to dismiss the first and second complaints were granted with respect to substantially all of the plaintiffs’ claims. The claims not dismissed relate to sales invoiced from the United States. Appeals were filed by the plaintiffs and the defendants with the U.S. Court of Appeals for the Third Circuit with regard to these dismissals. The U.S. Court of Appeals for the
Third Circuit heard oral argument on these appeals on March 11, 2003. The third complaint was dismissed without prejudice to refile pending the resolution of such appeals. We filed a motion to stay the lawsuit commenced by the fourth complaint pending resolution of appeals in the other foreign customer lawsuits, and such motion was granted in July 2002. In June 2004, the U.S. Supreme Court issued its decision in the case of F. Hoffman-LaRoche v. Empagran S.A. et al., an antitrust case brought by foreign purchasers against the participants in an international vitamins cartel. Because of the relevance of this decision to the foreign customer lawsuits, the U.S. Court of Appeals for the Third Circuit reviewed the impact of this decision on the pending appeals in the foreign customer lawsuits. Subsequently, in August 2004, the U.S. Court of Appeals for the Third Circuit remanded the case to the EDPA District Court for its consideration of the impact of the Empagran decision on the foreign customer lawsuits.
We have been vigorously defending, and intend to continue to vigorously defend, against the foreign customer lawsuits as well as all threatened lawsuits and possible unasserted claims. We may at any time, however, settle these lawsuits as well as any threatened lawsuits and possible claims. It is possible that additional civil antitrust lawsuits seeking, among other things, to recover damages could be commenced against us in the U.S. and in other jurisdictions. We are currently not reserved for such matters.
Other Proceedings Against Us
We are involved in various other investigations, lawsuits, claims and other legal proceedings incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of them, 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. Claims accrued but not yet paid amounted to $646 at December 31, 2004 and $610 at December 31, 2005. The following table presents the activity in this accrual for 2005:
| |
|---|
| |
|---|
| Balance at December 31, 2004 | | | $ | 646 | |
| Product warranty charges | | | | 2,402 | |
| Payments and settlements | | | | (2,438 | ) |
|
| |
| Balance at December 31, 2005 | | | $ | 610 | |
|
| |
The following table summarizes the U.S. and non-U.S. components of income (loss) before provision for income taxes, minority interest and income from discontinued operations.
| | For the Year Ended
December 31,
|
|---|
| | 2003
| 2004
| 2005
|
|---|
| | (Dollars in thousands) |
|---|
| U.S | | | $ | (49,414 | ) | $ | (1,720 | ) | $ | (43,891 | ) |
| Non-U.S | | | | 30,040 | | | 66,069 | | | 84,203 | |
|
| |
| |
| |
| | | | $ | (19,374 | ) | $ | 64,349 | | $ | 40,312 | |
|
| |
| |
| |
Total income taxes were allocated as set forth in the following table.
| | For the Year Ended
December 31,
|
|---|
| | 2003
| 2004
| 2005
|
|---|
| | (Dollars in thousands) |
|---|
| Income tax expense from continuing operations | | | $ | 4,695 | | $ | 46,310 | | $ | 165,813 | |
| Income tax expense from discontinued operations | | | | 644 | | | - | | | - | |
|
| |
| |
| |
| | | | $ | 5,339 | | $ | 46,310 | | $ | 165,813 | |
|
| |
| |
| |
Income tax expense (benefit) attributable to income from continuing operations consists of the items set forth in the following table.
| | For the Year Ended
December 31,
|
|---|
| | 2003
| 2004
| 2005
|
|---|
| | (Dollars in thousands) |
|---|
| U.S income taxes: | | | | | | | | | | | |
| Current | | | $ | (4,928 | ) | $ | 1,968 | | $ | - | |
| Deferred | | | | (6,906 | ) | | 27,996 | | | 155,575 | |
|
| |
| |
| |
| | | | $ | (11,834 | ) | $ | 29,964 | | $ | 155,575 | |
|
| |
| |
| |
| Non-U.S. income taxes: | | |
| Current | | | $ | 7,564 | | $ | 17,760 | | $ | 10,994 | |
| Deferred | | | | 8,965 | | | (1,414 | ) | | (756 | ) |
|
| |
| |
| |
| | | | $ | 16,529 | | $ | 16,346 | | $ | 10,238 | |
|
| |
| |
| |
We have an income tax exemption from the Brazilian government on income generated from cathode and graphite electrode production through 2005 and 2006, respectively. The exemption did not reduce the net expense associated with income taxes for 2003 or 2004; however, the exemption reduced the net expense associated with income taxes by $490 in 2005.
Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income from operations as set forth in the following table.
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| Tax at statutory U.S. federal rate | | | $ | (6,781 | ) | $ | 22,522 | | $ | 14,109 | |
| Impact of U.S. special tax election for certain non-U.S | | |
| entities to be included in the U.S. tax return | | | | - | | | 27,524 | | | - | |
| Tax return adjustments to estimated tax expense | | | | 3,492 | | | - | | | (2,417 | ) |
| Adjustments to deferred tax asset valuation allowance, net | | | | 4,989 | | | (2,337 | ) | | 153,079 | |
Nondeductible expenses/(income) associated with antitrust
investigations and related lawsuits and claims | | | | 8,362 | | | (4,175 | ) | | - | |
| State tax expense (benefit) (net of federal tax benefit) . | | | | (5,312 | ) | | (459 | ) | | 714 | |
| Restructuring charges/(reversal) with no tax benefit | | | | 2,974 | | | (863 | ) | | 1,118 | |
| Impact of statutory tax rate changes | | | | (724 | ) | | (911 | ) | | (2,391 | ) |
| Impact of deemed and actual dividends of foreign earnings | | | | - | | | 6,475 | | | 2,667 | |
| Non-U.S. tax exemptions, holidays and credits | | | | (1,179 | ) | | (735 | ) | | (920 | ) |
| Tax effect of permanent differences | | | | (1,659 | ) | | 586 | | | 781 | |
| Foreign withholding taxes for which no tax credit can | | |
| be claimed | | | | 1,506 | | | - | | | - | |
| Other | | | | (973 | ) | | (1,317 | ) | | (927 | ) |
|
| |
| |
| |
| Total tax expense (benefit) from continuing operations | | | $ | 4,695 | | $ | 46,310 | | $ | 165,813 | |
|
| |
| |
| |
| | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and December 31, 2005 are set forth in the following table.
| At December 31,
|
|---|
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| Deferred tax assets: | | | | | | | | |
| Fixed assets | | | $ | 18,686 | | $ | 19,783 | |
| Postretirement and other employee benefits | | | | 36,640 | | | 48,202 | |
| Foreign tax credit and other carryforwards | | | | 106,506 | | | 136,807 | |
| Provision for scheduled plant closings and other | | |
| restructurings | | | | 7,446 | | | 7,356 | |
| Terminated hedge instruments | | | | 8,569 | | | 2,591 | |
| Capitalized research and experimental costs | | | | 9,732 | | | 9,304 | |
| Other | | | | 22,481 | | | 23,979 | |
|
| |
| |
| Total gross deferred tax assets | | | | 210,060 | | | 248,022 | |
| |
| Less: valuation allowance | | | | (23,189 | ) | | (208,393 | ) |
|
| |
| |
| Total deferred tax assets | | | $ | 186,871 | | $ | 39,629 | |
|
| |
| |
| | |
| |
| Deferred tax liabilities: | | |
| Fixed assets | | | $ | 60,525 | | $ | 60,937 | |
| Inventory | | | | 6,918 | | | 6,160 | |
| Other | | | | 3,815 | | | 1,986 | |
|
| |
| |
| Total deferred tax liabilities | | | | 71,258 | | | 69,083 | |
|
| |
| |
| Net deferred tax asset/(liability) | | | $ | 115,613 | | $ | (29,454 | ) |
|
| |
| |
Deferred income tax assets and liabilities are classified on a net current and non-current basis within each tax jurisdiction. Net deferred income tax assets are included in prepaid expenses and other current assets in the amount of $16,162 at December 31, 2004 and $8,257 at December 31, 2005 and separately stated as deferred income taxes in the amount of $152,539 at
December 31, 2004 and $12,103 at December 31, 2005. Net deferred tax liabilities are included in accrued income and other taxes in the amount of $6,829 at December 31, 2004 and $6,145 at December 31, 2005 and separately stated as deferred income taxes in the amount of $46,259 at December 31, 2004 and $43,669 at December 31, 2005.
The change in the total valuation allowance for 2005 was an increase of $185,204. During the 2005 year-end financial accounting closing process, we determined that the timing of when we will generate sufficient U.S. taxable income to realize our U.S. deferred tax assets became less certain. Accordingly, during the fourth quarter of 2005, we recorded a valuation allowance of $149,734 against deferred tax assets in the U.S. and $1,722 in certain non-U.S. jurisdictions, which resulted in a total net charge of $151,456. We also recorded additional deferred tax assets and related valuation allowances of $27,477. Until we determine that it is more likely than not that we will generate sufficient U.S. taxable income to realize our deferred income tax assets, income tax benefits in each current period will be full reserved.
We have total excess foreign tax credit carryforwards of $91,680 at December 31, 2005. Of these tax credit carryforwards, $1,089 expire in 2010, $17,499 expire in 2011, $36,646 expire in 2012, $1,517 expire in 2013, $31 expire in 2014, $8,787 expire in 2015 and $26,111 expire in 2016 and beyond. In addition, we have federal, state and foreign net operating losses, on a gross tax effected basis, of $32,126. Of these tax loss carryforwards, $511 expire in 2006, $2,907 expire in 2007, $3,292 expire in 2008, $1,409 expire in 2009, $857 expire in 2010, $10 expire in 2010, $1,907 expire in 2012, $2,156 expire in 2013, $1,503 expire in 2014 and $17,574 expire in 2015 and beyond. Based upon the level of historical taxable income and projections for future taxable income over the periods during which these credits are utilizable, we believe it is more likely than not that we will realize the tax benefits of these deferred tax assets consisting of net operating losses, net of the corresponding valuation allowances that exist at December 31, 2005.
In 2004, we implemented a tax planning strategy that together with other planning efforts, accelerated the utilization of certain tax assets. The strategy accelerated approximately $215,177 of taxable income to the U.S. through a standard election (commonly referred to as “check the box”) that resulted in the utilization of approximately $26,219 of deferred tax assets, of which approximately $19,969 were foreign tax credits.
With the exception of our Swiss, South African, U.K. and French subsidiaries (the “check the box” entities), taxes have not been provided on undistributed earnings of foreign subsidiaries because our intention is to reinvest these undistributed earnings indefinitely. To the extent that our circumstances change or future earnings are repatriated, we will provide for income tax on the earnings of the affected foreign subsidiaries. We believe that any U.S. income tax on repatriated earnings would be substantially offset by U.S. foreign tax credits.
Basic and diluted EPS are calculated based upon the provisions of SFAS No. 128, “Earnings Per Share,” and EITF Issue No. 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effects on Diluted Earnings Per Share,” using the following data:
| 2003
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| |
|---|
| Net income, as reported | | | $ | (24,277 | ) | $ | 17,041 | | $ | (125,180 | ) |
| Add: Interest on Debentures, net of tax benefit | | | | – | | | – | | | – | |
Add: Amortization of Debentures issuance costs, net
of tax benefit | | | | – | | | – | | | – | |
|
| |
| |
| |
| Net income, as adjusted | | | $ | (24,277 | ) | $ | 17,041 | | $ | (125,180 | ) |
|
| |
| |
| |
Weighted average common shares
outstanding for basic calculation | | | | 67,980,838 | | | 96,547,733 | | | 97,688,734 | |
| Add: Effect of stock options and restricted stock | | | | – | | | 1,602,204 | | | – | |
| Add: Effect of Debentures | | | | – | | | – | | | – | |
|
| |
| |
| |
Weighted average common shares
outstanding for diluted calculation | | | | 67,980,838 | | | 98,149,937 | | | 97,688,734 | |
|
| |
| |
| |
Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities, including those underlying the Debentures, had been issued. As a result of the net loss reported for 2003 and 2005, 508,215 of potential common shares underlying dilutive securities and 276,161 of potential common shares underlying dilutive securities, respectively have been excluded from the calculation of diluted earnings (loss) per share because their effect would reduce the loss per share.
The calculation of weighted average common shares outstanding for the diluted calculation excludes consideration of stock options covering 4,058,695 shares in 2003, 4,094,348 shares in 2004 and 9,809,780 shares in 2005, because the exercise of these options would not have been dilutive for those periods due to the fact that the exercise prices were greater than the weighted average market price of our common stock for each of those periods.
The calculation of weighted average common shares outstanding for the 2004 and 2005 diluted calculation also excludes the shares underlying the Debentures, as the effect would have been anti-dilutive.
(17) Stockholder Rights Plan |
|
Effective August 7, 1998, GTI adopted a Stockholder Rights Plan (the “Rights Plan”). Under the Rights Plan, one preferred stock purchase right (a “Right”) was distributed on September 21, 1998 to stockholders of record on August 20, 1998 as a dividend on each share of common stock outstanding on the record date. Each share of common stock issued after the record date is accompanied by a Right.
When a Right becomes exercisable, it entitles the holder to buy one one-thousandth of a share of a new series of preferred stock for $110. The Rights are subject to adjustment upon the occurrence of certain dilutive events. The Rights will become exercisable only when a person or group becomes the beneficial owner of 15% or more of the outstanding shares of common stock or 10 days after a person or group announces a tender offer to acquire beneficial ownership of 15% or more of the outstanding shares of common stock. No certificates representing the Rights will be issued, and the Rights are not transferable separately from the common stock, unless the Rights become exercisable.
Under certain circumstances, holders of Rights, except a person or group described above and certain related parties, will be entitled to purchase shares of common stock (or, in certain circumstances, other securities or assets) at 50% of the price at which the common stock traded prior to the acquisition or announcement (or 50% of the value of such other securities or assets). In addition, if GTI is acquired after the Rights become exercisable, the Rights will entitle those holders to buy the acquiring company’s common shares at a similar discount.
GTI is entitled to redeem the Rights for one cent per Right prior to the time when the Rights become exercisable. If not redeemed, the Rights will expire on August 7, 2008.
The preferred stock issuable upon exercise of Rights consists of Series A Junior Participating Preferred Stock, par value $.01 per share, of GTI. In general, each share of that preferred stock will be entitled to a minimum preferential quarterly dividend payment equal to the greater of $10.00 per share or 1,000 times the quarterly dividend declared on the common stock, will be entitled to a liquidation preference of $110,000 and will have 1,000 votes, voting together with the common stock.
(18) | Financial Information About the Issuer, the Guarantors and the Subsidiaries Whose Securities Secure the Senior Notes, the Debentures and Related Guarantees |
On February 15, 2002, GrafTech Finance (“Finco”), a direct subsidiary of GTI (the “Parent”), issued $400,000 aggregate principal amount of Senior Notes and, on May 6, 2002, $150,000 aggregate principal amount of additional Senior Notes. All of the Senior Notes have been issued under a single Indenture and constitute a single class of debt securities. The Senior Notes mature on February 15, 2012. The Senior Notes have been guaranteed on a senior basis by the Parent and the following wholly-owned direct and indirect subsidiaries of the Parent: GrafTech Global, UCAR Carbon, UCAR International Trading Inc., UCAR Carbon Technology LLC, and UCAR Holdings V Inc. (“Holdings V”). The Parent, Finco and these subsidiaries together hold a substantial majority of our U.S. assets. Holdings V has no material assets or operations, and has been dissolved.
On January 22, 2004, the Parent issued $225,000 aggregate principal amount of Debentures. The guarantors of the Debentures are the same as the guarantors of the Senior Notes, except for the Parent (which is the issuer of the Debentures but a guarantor of the Senior Notes) and Finco (which is a guarantor of the Debentures but the issuer of the Senior Notes). The Parent and Finco are both obligors on the Senior Notes and the Debentures, although in different capacities.
The guarantors of the Senior Notes and the Debentures, solely in their respective capacities as such, are collectively called the “U.S. Guarantors.” Our other subsidiaries, which are not guarantors of either the Senior Notes or the Debentures, are called the “Non-Guarantors.”
All of the guarantees are unsecured, except that the guarantee of the Senior Notes by UCAR Carbon has been secured by a junior pledge of all of the shares of capital stock (constituting 97.5% of the outstanding shares of capital stock) of AET held by UCAR Carbon (called the “AET Pledged Stock”), subject to the limitation that in no event will the value of the pledged portion of the AET Pledged Stock exceed 19.99% of the principal amount of the then outstanding Senior Notes. All of the guarantees are full, unconditional and joint and several. Finco and each of the other U.S. Guarantors (other than the Parent) 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. All of the guarantees of the Debentures continue until the Debentures have been paid in full, and payment under such guarantees could be required immediately upon the occurrence of an event of default under the Debentures. If a guarantor makes a payment under its guarantee of the Senior Notes or the Debentures, it would have the right under certain circumstances to seek contribution from the other guarantors of the Senior Notes or the Debentures, respectively.
Provisions in the Revolving Facility restrict the payment of dividends by our subsidiaries to the Parent. At December 31, 2005, retained earnings of our subsidiaries subject to such restrictions were approximately $729,426. Investments in subsidiaries are recorded on the equity basis.
The following table sets forth condensed consolidating balance sheets at December 31, 2004 and December 31, 2005 and condensed consolidating statements of operations and cash flows for each of the years in the three-year period ended December 31, 2005 of the Parent, Finco, all other U.S. Guarantors and the Non-Guarantors.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
at December 31, 2004
| Parent
(Issuer of
Debentures
and
Guarantor
of Senior
Notes)
| Finco (Issuer
of Senior
Notes and
Guarantor of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| ASSETS | | | | | | | | | | | | | | | | | | | | |
| Current assets: | | |
| Cash and cash equivalents | | | $ | - | | $ | 12,000 | | $ | 1,000 | | $ | 11,000 | | $ | - | | $ | 24,000 | |
| Intercompany loans | | | | 50,000 | | | 670,000 | | | -- | | | 62,000 | | | (782,000 | ) | | -- | |
| Intercompany accounts receivable | | | | 3,000 | | | 3,000 | | | 35,000 | | | 30,000 | | | (71,000 | ) | | -- | |
| Accounts receivable - third party | | | | -- | | | 3,000 | | | 33,000 | | | 170,000 | | | -- | | | 206,000 | |
|
| |
| |
| |
| |
| |
| |
| Accounts and notes receivable, net | | | | 53,000 | | | 676,000 | | | 68,000 | | | 262,000 | | | (853,000 | ) | | 206,000 | |
|
| |
| |
| |
| |
| |
| |
| Inventories | | | | -- | | | -- | | | 47,000 | | | 184,000 | | | (6,000 | ) | | 225,000 | |
| Prepaid expenses and other current assets | | | | 13,000 | | | -- | | | 4,000 | | | 22,000 | | | (14,000 | ) | | 25,000 | |
|
| |
| |
| |
| |
| |
| |
| Total current assets | | | | 66,000 | | | 688,000 | | | 120,000 | | | 479,000 | | | (873,000 | ) | | 480,000 | |
|
| |
| |
| |
| |
| |
| |
| Property, plant and equipment | | | | -- | | | -- | | | 45,000 | | | 338,000 | | | (5,000 | ) | | 378,000 | |
| Deferred income taxes | | | | 72,000 | | | 12,000 | | | 73,000 | | | 2,000 | | | (6,000 | ) | | 153,000 | |
| Investments in affiliates | | | | 27,000 | | | -- | | | -- | | | -- | | | (27,000 | ) | | -- | |
| Goodwill | | | | -- | | | -- | | | -- | | | 139,000 | | | (116,000 | ) | | 23,000 | |
| Other assets | | | | 6,000 | | | 16,000 | | | 6,000 | | | 8,000 | | | (2,000 | ) | | 34,000 | |
|
| |
| |
| |
| |
| |
| |
| Total assets | | | $ | 171,000 | | $ | 716,000 | | $ | 244,000 | | $ | 966,000 | | $ | (1,029,000 | ) | $ | 1,068,000 | |
|
| |
| |
| |
| |
| |
| |
| LIABILITIES AND STOCKHOLDERS' | | |
| EQUITY (DEFICIT) | | |
| Current liabilities: | | |
| Accounts payable | | | $ | 2,000 | | $ | 17,000 | | $ | 7,000 | | $ | 61,000 | | $ | (1,000 | ) | $ | 86,000 | |
| Intercompany loans | | | | -- | | | 66,000 | | | 170,000 | | | 629,000 | | | (865,000 | ) | | -- | |
| Third party loans | | | | -- | | | -- | | | -- | | | 1,000 | | | -- | | | 1,000 | |
|
| |
| |
| |
| |
| |
| |
| Short-term debt | | | | -- | | | 66,000 | | | 170,000 | | | 630,000 | | | (865,000 | ) | | 1,000 | |
| Accrued income and other taxes | | | | -- | | | 19,000 | | | -- | | | 34,000 | | | (15,000 | ) | | 38,000 | |
| Other accrued liabilities | | | | -- | | | -- | | | 34,000 | | | 67,000 | | | (2,000 | ) | | 99,000 | |
|
| |
| |
| |
| |
| |
| |
| Total current liabilities | | | | 2,000 | | | 102,000 | | | 211,000 | | | 792,000 | | | (883,000 | ) | | 224,000 | |
|
| |
| |
| |
| |
| |
| |
| Long-term debt | | | | 219,000 | | | 452,000 | | | -- | | | 1,000 | | | -- | | | 672,000 | |
| Other long-term obligations | | | | 3,000 | | | 9,000 | | | 86,000 | | | 47,000 | | | 4,000 | | | 149,000 | |
| Payable to equity of investees | | | | -- | | | -- | | | 73,000 | | | -- | | | (73,000 | ) | | -- | |
| Deferred income taxes | | | | -- | | | -- | | | -- | | | 56,000 | | | (10,000 | ) | | 46,000 | |
| Commitments and contingencies | | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
Minority stockholders' equity in
consolidated entities | | | | -- | | | -- | | | -- | | | 30,000 | | | -- | | | 30,000 | |
| Stockholders' equity (deficit) | | | | (53,000 | ) | | 153,000 | | | (126,000 | ) | | 40,000 | | | (67,000 | ) | | (53,000 | ) |
|
| |
| |
| |
| |
| |
| |
Total liabilities and stockholders'
deficit | | | $ | 171,000 | | $ | 716,000 | | $ | 244,000 | | $ | 966,000 | | $ | (1,029,000 | ) | $ | 1,068,000 | |
|
| |
| |
| |
| |
| |
| |
| | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
at December 31, 2005
| Parent
(Issuer of
Debentures
and
Guarantor
of Senior
Notes)
| Finco (Issuer
of Senior
Notes and
Guarantor of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| ASSETS | | | | | | | | | | | | | | | | | | | | |
| Current assets: | | |
| Cash and cash equivalents | | | $ | 143 | | $ | – | | $ | 36 | | $ | 5,877 | | $ | (88 | ) | $ | 5,968 | |
| Intercompany loans | | | | 51,315 | | | 166,292 | | | – | | | 108,716 | | | (326,323 | ) | | – | |
| Intercompany accounts receivable | | | | – | | | 2,676 | | | 27,689 | | | 31,079 | | | (61,444 | ) | | – | |
| Accounts receivable - third party | | | | – | | | – | | | 36,569 | | | 148,011 | | | – | | | 184,580 | |
|
| |
| |
| |
| |
| |
| |
| Accounts and notes receivable, net | | | | 51,315 | | | 168,968 | | | 64,258 | | | 287,806 | | | (387,767 | ) | | 184,580 | |
|
| |
| |
| |
| |
| |
| |
| Inventories | | | | – | | | – | | | 59,975 | | | 195,108 | | | (45 | ) | | 255,038 | |
| Prepaid expenses and other current assets . | | | | 7 | | | 16,431 | | | 1,793 | | | 12,287 | | | (16,417 | ) | | 14,101 | |
|
| |
| |
| |
| |
| |
| |
| Total current assets | | | | 51,465 | | | 185,399 | | | 126,062 | | | 501,078 | | | (404,317 | ) | | 459,687 | |
|
| |
| |
| |
| |
| |
| |
| Property, plant and equipment, net | | | | – | | | – | | | 46,586 | | | 320,096 | | | (4,485 | ) | | 362,197 | |
| Deferred income taxes | | | | – | | | – | | | 8,980 | | | 4,067 | | | (944 | ) | | 12,103 | |
| Intercompany loans | | | | – | | | 506,887 | | | – | | | – | | | (506,887 | ) | | – | |
| Investments in affiliates | | | | – | | | – | | | – | | | – | | | – | | | – | |
| Goodwill | | | | – | | | – | | | – | | | 20,319 | | | – | | | 20,319 | |
| Other assets | | | | 5,359 | | | 16,860 | | | 3,426 | | | 6,869 | | | – | | | 32,514 | |
|
| |
| |
| |
| |
| |
| |
| Total assets | | | $ | 56,824 | | $ | 709,146 | | $ | 185,054 | | $ | 852,429 | | $ | (916,633 | ) | $ | 886,820 | |
|
| |
| |
| |
| |
| |
| |
| LIABILITIES AND STOCKHOLDERS' | | |
| EQUITY (DEFICIT) | | |
| Current liabilities: | | |
| Accounts payable | | | $ | 1,836 | | $ | 17,242 | | $ | 12,392 | | $ | 60,810 | | $ | (88 | ) | $ | 92,192 | |
| Intercompany loans | | | | – | | | 109,284 | | | 217,009 | | | 61,655 | | | (387,948 | ) | | – | |
| Third party loans | | | | – | | | – | | | – | | | 405 | | | – | | | 405 | |
|
| |
| |
| |
| |
| |
| |
| Short-term debt | | | | – | | | 109,284 | | | 217,009 | | | 62,060 | | | (387,948 | ) | | 405 | |
| Accrued income and other taxes | | | | 1,939 | | | – | | | 20,963 | | | 18,341 | | | (16,417 | ) | | 24,826 | |
| Other accrued liabilities | | | | – | | | – | | | 34,644 | | | 62,346 | | | – | | | 96,990 | |
|
| |
| |
| |
| |
| |
| |
| Total current liabilities | | | | 3,775 | | | 126,526 | | | 285,008 | | | 203,557 | | | (404,453 | ) | | 214,413 | |
|
| |
| |
| |
| |
| |
| |
| Long-term debt | | | | 220,290 | | | 482,481 | | | – | | | 972 | | | – | | | 703,743 | |
| Intercompany loans | | | | – | | | – | | | – | | | 506,903 | | | (506,903 | ) | | – | |
| Other long-term obligations | | | | 1,284 | | | 37 | | | 59,051 | | | 47,332 | | | – | | | 107,704 | |
| Payable to equity of investees | | | | 41,045 | | | – | | | (526,601 | ) | | – | | | 485,556 | | | – | |
| Deferred income taxes | | | | 7 | | | – | | | – | | | 44,606 | | | (944 | ) | | 43,669 | |
| Commitments and contingencies | | | | – | | | – | | | – | | | – | | | – | | | – | |
| Minority stockholders' equity in | | |
| consolidated entities | | | | – | | | – | | | – | | | 26,868 | | | – | | | 26,868 | |
| Stockholders' equity (deficit) | | | | (209,577 | ) | | 100,102 | | | 367,596 | | | 22,191 | | | (489,889 | ) | | (209,577 | ) |
|
| |
| |
| |
| |
| |
| |
| Total liabilities and stockholders' | | |
| deficit | | | $ | 56,824 | | $ | 709,146 | | $ | 185,054 | | $ | 852,429 | | $ | (916,633 | ) | $ | 886,820 | |
|
| |
| |
| |
| |
| |
| |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
for the Year Ended December 31, 2003
| Parent
(Issuer of
Debentures
and
Guarantor of
Senior Notes)
| Finco
(Issuer of
Senior
Notes and
Guarantor
of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| |
| Net sales | | | $ | - | | $ | - | | $ | 234,000 | | $ | 629,000 | | $ | (151,000 | ) | $ | 712,000 | |
| Cost of sales | | | | - | | | - | | | 186,000 | | | 509,000 | | | (151,000 | ) | | 544,000 | |
|
| |
| |
| |
| |
| |
| |
| Gross profit | | | | - | | | - | | | 48,000 | | | 120,000 | | | - | | | 168,000 | |
| Research and development | | | | - | | | - | | | 5,000 | | | 6,000 | | | - | | | 11,000 | |
| Selling, administrative and other expenses | | | | - | | | - | | | 43,000 | | | 42,000 | | | - | | | 85,000 | |
| Restructuring charge | | | | - | | | - | | | 20,000 | | | - | | | - | | | 20,000 | |
| Impairment loss on long-lived and other assets | | | | - | | | - | | | 7,000 | | | - | | | - | | | 7,000 | |
| Antitrust investigations and related lawsuits | | |
| and claims | | | | - | | | - | | | 32,000 | | | - | | | - | | | 32,000 | |
| Other (income) expense, net | | | | 2,000 | | | (32,000 | ) | | 8,000 | | | 10,000 | | | - | | | (12,000 | ) |
| Interest expense | | | | 36,000 | | | 45,000 | | | - | | | 27,000 | | | (63,000 | ) | | 45,000 | |
| Interest income | | | | (3,000 | ) | | (60,000 | ) | | - | | | - | | | 63,000 | | | - | |
|
| |
| |
| |
| |
| |
| |
| Income (loss) from continuing operations | | | | (35,000 | ) | | 47,000 | | | (67,000 | ) | | 35,000 | | | - | | | (20,000 | ) |
| before provision for (benefit from) income | | |
| taxes and minority stockholders' share of | | |
| income | | |
| Provision for (benefit from) income taxes | | | | (108,000 | ) | | 21,000 | | | 76,000 | | | 16,000 | | | - | | | 5,000 | |
| Minority stockholders' share of income | | | | - | | | - | | | - | | | 1,000 | | | - | | | 1,000 | |
|
| |
| |
| |
| |
| |
| |
| Income (loss) from continuing operations | | | | 73,000 | | | 26,000 | | | (143,000 | ) | | 18,000 | | | - | | | (26,000 | ) |
| Income from discontinued operations, | | |
| net of taxes | | | | - | | | - | | | 1,000 | | | - | | | - | | | 1,000 | |
Gain on sale of discontinued operations,
net of taxes | | | | - | | | - | | | 1,000 | | | - | | | - | | | 1,000 | |
| Equity in earnings of subsidiaries | | | | (97,000 | ) | | - | | | 18,000 | | | - | | | 79,000 | | | - | |
|
| |
| |
| |
| |
| |
| |
| Net income (loss) | | | $ | (24,000 | ) | $ | 26,000 | | $ | (123,000 | ) | $ | 18,000 | | $ | 79,000 | | $ | (24,000 | ) |
|
| |
| |
| |
| |
| |
| |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
for the Year Ended December 31, 2004
| Parent
(Issuer of
Debentures
and
Guarantor of
Senior Notes)
| Finco
(Issuer of
Senior
Notes and
Guarantor
of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| |
| Net sales | | | $ | - | | $ | - | | $ | 261,000 | | $ | 757,000 | | $ | (170,000 | ) | $ | 848,000 | |
| Cost of sales | | | | - | | | - | | | 202,000 | | | 574,000 | | | (138,000 | ) | | 638,000 | |
|
| |
| |
| |
| |
| |
| |
| Gross profit | | | | - | | | - | | | 59,000 | | | 183,000 | | | (32,000 | ) | | 210,000 | |
| Research and development | | | | - | | | - | | | 3,000 | | | 5,000 | | | - | | | 8,000 | |
| Selling, administrative and other expenses | | | | - | | | - | | | 41,000 | | | 76,000 | | | (27,000 | ) | | 90,000 | |
| Restructuring charge | | | | - | | | - | | | 1,000 | | | (1,000 | ) | | - | | | - | |
Antitrust investigations and related lawsuits
and claims | | | | - | | | - | | | (11,000 | ) | | - | | | - | | | (11,000 | ) |
| Other (income) expense, net | | | | 5,000 | | | - | | | 7,000 | | | 9,000 | | | - | | | 21,000 | |
| Interest expense | | | | 29,000 | | | 43,000 | | | 20,000 | | | 22,000 | | | (75,000 | ) | | 39,000 | |
| Interest income | | | | (9,000 | ) | | (41,000 | ) | | (25,000 | ) | | (1,000 | ) | | 75,000 | | | (1,000 | ) |
|
| |
| |
| |
| |
| |
| |
Income (loss) from continuing operations
before provision for (benefit from) income
taxes and minority stockholders' share of
income | | | | (25,000 | ) | | (2,000 | ) | | 23,000 | | | 73,000 | | | (5,000 | ) | | 64,000 | |
| Provision for (benefit from) income taxes | | | | 27,000 | | | (11,000 | ) | | 10,000 | | | 19,000 | | | 1,000 | | | 46,000 | |
| Minority stockholders' share of income | | | | - | | | - | | | - | | | 1,000 | | | - | | | 1,000 | |
| Equity in earnings of subsidiaries | | | | (75,000 | ) | | - | | | (53,000 | ) | | - | | | 128,000 | | | - | |
|
| |
| |
| |
| |
| |
| |
| Net income (loss) | | | $ | 23,000 | | $ | 9,000 | | $ | 66,000 | | $ | 53,000 | | $ | (134,000 | ) | $ | 17,000 | |
|
| |
| |
| |
| |
| |
| |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
for the year ended December 31, 2005
| Parent
(Issuer of
Debentures
and
Guarantor of
Senior Notes)
| Finco
(Issuer of
Senior
Notes and
Guarantor
of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| |
| Net sales | | | $ | - | | $ | - | | $ | 264,104 | | $ | 802,178 | | $ | (179,583 | ) | $ | 886,699 | |
| Cost of sales | | | | - | | | - | | | 204,654 | | | 618,044 | | | (168,356 | ) | | 654,342 | |
|
| |
| |
| |
| |
| |
| |
| Gross profit | | | | - | | | - | | | 59,450 | | | 184,134 | | | (11,227 | ) | | 232,357 | |
| Research and development | | | | - | | | - | | | 3,206 | | | 6,231 | | | - | | | 9,437 | |
| Selling, administrative and other expenses | | | | 1,814 | | | 236 | | | 40,130 | | | 88,563 | | | (30,304 | ) | | 100,439 | |
| Restructuring charges | | | | 69 | | | - | | | 1,864 | | | 7,796 | | | - | | | 9,729 | |
| Impairment loss on long-lived and other assets | | | | - | | | - | | | 2,904 | | | - | | | - | | | 2,904 | |
| Antitrust investigations and related lawsuits | | |
| and claims | | | | - | | | - | | | - | | | - | | | - | | | - | |
| Other (income) expense, net | | | | (2,770 | ) | | (5,412 | ) | | 1,027 | | | (4,179 | ) | | 29,354 | | | 18,020 | |
| Interest expense | | | | 5,262 | | | 47,685 | | | 4,797 | | | 24,152 | | | (29,180 | ) | | 52,716 | |
| Interest income | | | | - | | | (37 | ) | | - | | | (1,163 | ) | | - | | | (1,200 | ) |
|
| |
| |
| |
| |
| |
| |
| Income (loss) before provision for (benefit | | |
| from) income taxes and minority | | |
| stockholders' share of income | | | | (4,375 | ) | | (42,472 | ) | | 5,522 | | | 62,734 | | | 18,903 | | | 40,312 | |
| Provision for (benefit from) income taxes | | | | 74,514 | | | (3,164 | ) | | 84,571 | | | 9,833 | | | 59 | | | 165,813 | |
| Minority stockholders' share of income (loss) | | | | - | | | - | | | - | | | (321 | ) | | - | | | (321 | ) |
| Deficit (equity) in earnings of subsidiaries | | | | 65,135 | | | - | | | (53,222 | ) | | - | | | (11,913 | ) | | - | |
|
| |
| |
| |
| |
| |
| |
| Net income (loss) | | | $ | (144,024 | ) | $ | (39,308 | ) | $ | (25,827 | ) | $ | 53,222 | | $ | 30,757 | | $ | (125,180 | ) |
|
| |
| |
| |
| |
| |
| |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
for the year ended December 31, 2003
| Parent
(Issuer of
Debentures
and
Guarantor of
Senior Notes)
| Finco
(Issuer of
Senior
Notes and
Guarantor
of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| |
| Net cash provided by (used in) operating | | | | | | | | | | | | | | | | | | | | |
| activities from continuing operations | | | $ | 228,000 | | $ | 3,000 | | $ | (81,000 | ) | $ | 40,000 | | $ | (216,000 | ) | $ | (26,000 | ) |
| Net cash provided by(used in) operating | | |
| activities from discontinued operations | | | | - | | | - | | | 1,000 | | | - | | | - | | | 1,000 | |
|
| |
| |
| |
| |
| |
| |
| Net cash provided by (used in) operating activities | | | | 228,000 | | | 3,000 | | | (80,000 | ) | | 40,000 | | | (216,000 | ) | | (25,000 | ) |
|
| |
| |
| |
| |
| |
| |
| Net cash by provided (used in) investing activities | | | | - | | | (97,000 | ) | | 11,000 | | | 121,000 | | | (57,000 | ) | | (22,000 | ) |
|
| |
| |
| |
| |
| |
| |
| Net cash provided by (used in) financing activities | | | | (228,000 | ) | | 107,000 | | | 65,000 | | | (148,000 | ) | | 273,000 | | | 69,000 | |
|
| |
| |
| |
| |
| |
| |
| Net increase (decrease) in cash and cash | | |
| equivalents | | | | - | | | 13,000 | | | (4,000 | ) | | 13,000 | | | - | | | 22,000 | |
Effect of exchange rate changes on cash and
cash equivalents | | | | - | | | - | | | - | | | 1,000 | | | - | | | 1,000 | |
| Cash and cash equivalents at beginning of period | | | | - | | | - | | | 4,000 | | | 7,000 | | | - | | | 11,000 | |
|
| |
| |
| |
| |
| |
| |
| Cash and cash equivalents at end of period | | | $ | - | | $ | 13,000 | | $ | - | | $ | 21,000 | | $ | - | | $ | 34,000 | |
|
| |
| |
| |
| |
| |
| |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
for the year ended December 31, 2004
| Parent
(Issuer of
Debentures
and
Guarantor of
Senior Notes)
| Finco
(Issuer of
Senior
Notes and
Guarantor
of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| |
| Cash flow from operating activities: | | | | | | | | | | | | | | | | | | | | |
| Net Income (loss) | | | $ | 23,000 | | $ | 9,000 | | $ | 66,000 | | $ | 53,000 | | $ | (134,000 | ) | $ | 17,000 | |
| Adjustment to reconcile net income (loss) to | | |
| cash provided by operations: | | |
| Depreciation and amortization | | | | - | | | - | | | 3,000 | | | 32,000 | | | - | | | 35,000 | |
| Deferred income taxes | | | | 23,000 | | | (13,000 | ) | | 10,000 | | | (2,000 | ) | | 8,000 | | | 26,000 | |
| Antitrust investigations and related | | |
| lawsuits and claims | | | | - | | | - | | | 1,000 | | | - | | | - | | | 1,000 | |
| Restructuring charge | | | | - | | | - | | | 1,000 | | | (1,000 | ) | | - | | | - | |
| Adjustment from cost to equity | | | | (75,000 | ) | | - | | | (53,000 | ) | | - | | | 128,000 | | | - | |
| Loss on exchange of common stock for | | |
| Senior Notes | | | | 5,000 | | | - | | | - | | | - | | | - | | | 5,000 | |
| Interest expense | | | | - | | | (2,000 | ) | | - | | | - | | | - | | | (2,000 | ) |
| Post retirement plan changes | | | | - | | | - | | | (10,000 | ) | | - | | | - | | | (10,000 | ) |
| Gain of sale of assets | | | | - | | | - | | | - | | | (3,000 | ) | | - | | | (3,000 | ) |
| Fair value adjustments on interest rate caps | | | | - | | | 4,000 | | | - | | | - | | | - | | | 4,000 | |
| Other charges, net | | | | 1,000 | | | (4,000 | ) | | - | | | 4,000 | | | - | | | 1,000 | |
| (Increase) decrease in working capital | | | | (62,000 | ) | | (1,000 | ) | | (253,000 | ) | | (70,000 | ) | | 219,000 | | | (167,000 | ) |
| Long term assets and liabilities | | | | (6,000 | ) | | 19,000 | | | (46,000 | ) | | 4,000 | | | (9,000 | ) | | (38,000 | ) |
|
| |
| |
| |
| |
| |
| |
| Net cash used in operating activities | | | | (91,000 | ) | | 12,000 | | | (281,000 | ) | | 17,000 | | | 212,000 | | | (131,000 | ) |
| |
| Cash flow from investing activities: | | |
| Intercompany investments | | | | (141,000 | ) | | 45,000 | | | 299,000 | | | 9,000 | | | (212,000 | ) | | - | |
| Capital expenditures | | | | - | | | - | | | (17,000 | ) | | (42,000 | ) | | - | | | (59,000 | ) |
| Patent capitalization | | | | - | | | - | | | - | | | - | | | - | | | - | |
| Purchase of derivative investments | | | | - | | | (3,000 | ) | | - | | | - | | | - | | | (3,000 | ) |
| Sale of derivative investments | | | | - | | | - | | | - | | | - | | | - | | | - | |
| Proceeds from sales of assets | | | | - | | | - | | | - | | | 6,000 | | | - | | | 6,000 | |
|
| |
| |
| |
| |
| |
| |
| Net cash used in investing activities | | | | (141,000 | ) | | 42,000 | | | 282,000 | | | (27,000 | ) | | (212,000 | ) | | (56,000 | ) |
| |
| Cash flow from financing activities: | | |
| Short-term debt borrowings (reductions), net | | | | - | | | - | | | - | | | (1,000 | ) | | - | | | (1,000 | ) |
| Revolving Facility borrowings | | | | - | | | - | | | - | | | - | | | - | | | - | |
| Revolving Facility payments | | | | - | | | - | | | - | | | - | | | - | | | - | |
| Long-term debt borrowings | | | | 225,000 | | | - | | | - | | | - | | | - | | | 225,000 | |
| Long-term debt reductions | | | | - | | | (44,000 | ) | | - | | | - | | | - | | | (44,000 | ) |
| Proceeds from exercise of stock options | | | | 7,000 | | | - | | | - | | | - | | | - | | | 7,000 | |
| Financing costs | | | | - | | | (8,000 | ) | | - | | | - | | | - | | | (8,000 | ) |
| Premium on repurchase of Senior Notes | | | | - | | | (3,000 | ) | | - | | | - | | | - | | | (3,000 | ) |
|
| |
| |
| |
| |
| |
| |
| Net cash provided by financing activities | | | | 232,000 | | | (55,000 | ) | | - | | | (1,000 | ) | | - | | | 176,000 | |
| |
| Net increase (decrease) in cash and cash | | |
| equivalents: | | | | - | | | (1,000 | ) | | 1,000 | | | (11,000 | ) | | - | | | (11,000 | ) |
Effect of exchange rate changes on cash and
cash equivalents | | | | - | | | - | | | - | | | 1,000 | | | - | | | 1,000 | |
| Cash and cash equivalents at beginning of period | | | | - | | | 13,000 | | | - | | | 21,000 | | | - | | | 34,000 | |
|
| |
| |
| |
| |
| |
| |
| Cash and cash equivalents at end of period | | | $ | - | | $ | 12,000 | | $ | 1,000 | | $ | 11,000 | | $ | - | | $ | 24,000 | |
|
| |
| |
| |
| |
| |
| |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
for the year ended December 31, 2005
| Parent
(Issuer of
Debentures
and
Guarantor of
Senior Notes)
| Finco
(Issuer of
Senior
Notes and
Guarantor
of
Debentures)
| All Other
U.S.
Guarantors
| Non-
Guarantors
| Consolidation/
Eliminations
| Consolidated
|
|---|
| (Dollars in thousands) |
|---|
| |
| | | | | | |
|---|
| Cash flow from operating activities: | | | | | | | | | | | | | | | | | | | | |
| Net Income (loss) | | | $ | (78,889 | ) | $ | (39,308 | ) | $ | (79,049 | ) | $ | 53,223 | | $ | 18,843 | | $ | (125,180 | ) |
| Adjustment to reconcile net income (loss) to net | | |
| cash (used in) provided by operations: | | |
| Depreciation and amortization | | | | - | | | - | | | 4,055 | | | 31,408 | | | 1,463 | | | 36,926 | |
| Deferred income taxes | | | | 74,514 | | | (3,164 | ) | | 84,572 | | | (1,099 | ) | | (4 | ) | | 154,819 | |
| Adjustment from cost to equity | | | | (65,134 | ) | | - | | | 53,223 | | | - | | | 11,911 | | | - | |
Antitrust investigations and related lawsuits and
claims | | | | - | | | - | | | (119 | ) | | - | | | - | | | (119 | ) |
| Interest expense | | | | 1,957 | | | 591 | | | (952 | ) | | - | | | - | | | 1,596 | |
| Restructuring charges | | | | - | | | - | | | 1,327 | | | 8,402 | | | - | | | 9,729 | |
| Impairment loss on long-lived and other assets | | | | - | | | - | | | 2,904 | | | - | | | - | | | 2,904 | |
| Gain on sale of assets | | | | - | | | - | | | (801 | ) | | 53 | | | - | | | (748 | ) |
| Fair value adjustment on Debenture redemption make | | |
| whole option | | | | (2,702 | ) | | - | | | - | | | - | | | - | | | (2,702 | ) |
| Fair value adjustments on interest rate caps | | | | - | | | 652 | | | - | | | - | | | - | | | 652 | |
| Post retirement plan changes | | | | - | | | - | | | (15,626 | ) | | 1,626 | | | - | | | (14,000 | ) |
| Other (credits) charges, net | | | | 53,250 | | | 1,852 | | | (105,522 | ) | | 81,231 | | | (13,989 | ) | | 16,822 | |
| (Increase) decrease in working capital | | | | 15,031 | | | (34,555 | ) | | 12,761 | | | (32,714 | ) | | (22,310 | ) | | (61,787 | ) |
| Long term assets and liabilities | | | | - | | | - | | | (5,270 | ) | | (5,653 | ) | | - | | | (10,923 | ) |
|
| |
| |
| |
| |
| |
| |
| Net cash used in operating activities | | | | (1,973 | ) | | (73,932 | ) | | (48,497 | ) | | 136,477 | | | (4,086 | ) | | 7,989 | |
| |
| Cash flow from investing activities: | | |
| Intercompany loans receivable/payable | | | | 3,485 | | | 1,339 | | | 7,950 | | | (12,030 | ) | | (744 | ) | | - | |
| Intercompany debt, net | | | | (1,369 | ) | | 39,220 | | | 46,549 | | | (89,075 | ) | | 4,675 | | | - | |
| Capital expenditures | | | | - | | | - | | | (8,253 | ) | | (39,885 | ) | | 67 | | | (48,071 | ) |
| Cost of sale of interest rate swaps | | | | - | | | (14,800 | ) | | - | | | - | | | - | | | (14,800 | ) |
| |
| Proceeds from sale of assets | | | | - | | | - | | | 720 | | | 654 | | | - | | | 1,374 | |
| Patent capitalization | | | | - | | | - | | | (374 | ) | | (423 | ) | | - | | | (797 | ) |
| Sale (purchase) of derivative investments | | | | - | | | 1,913 | | | - | | | - | | | - | | | 1,913 | |
|
| |
| |
| |
| |
| |
| |
| Net cash used in investing activities | | | | 2,116 | | | 27,672 | | | 46,592 | | | (140,759 | ) | | 3,998 | | | (60,381 | ) |
| |
| Cash flow from financing activities: | | |
| Short-term debt borrowings (reductions), net | | | | - | | | - | | | 1,924 | | | (43 | ) | | - | | | 1,881 | |
| Revolving Facility borrowings | | | | - | | | 171,138 | | | - | | | - | | | - | | | 171,138 | |
| Revolving Facility reductions | | | | - | | | (131,562 | ) | | - | | | - | | | - | | | (131,562 | ) |
| Long-term debt borrowings | | | | - | | | - | | | - | | | 306 | | | - | | | 306 | |
| Long-term debt reductions | | | | - | | | - | | | - | | | (338 | ) | | - | | | (338 | ) |
| Financing costs | | | | - | | | (5,241 | ) | | - | | | - | | | - | | | (5,241 | ) |
|
| |
| |
| |
| |
| |
| |
| Net cash provided by financing activities | | | | - | | | 34,335 | | | 1,924 | | | (75 | ) | | - | | | 36,184 | |
| |
| Net increase (decrease) in cash and cash | | |
| equivalents | | | | 143 | | | (11,925 | ) | | 19 | | | (4,357 | ) | | (88 | ) | | (16,208 | ) |
Effect of exchange rate changes on cash and cash
equivalents | | | | - | | | - | | | - | | | (1,308 | ) | | - | | | (1,308 | ) |
| Cash and cash equivalents at beginning of period | | | | - | | | 11,925 | | | 17 | | | 11,542 | | | - | | | 23,484 | |
|
| |
| |
| |
| |
| |
| |
| Cash and cash equivalents at end of period | | | $ | 143 | | $ | - | | $ | 36 | | $ | 5,877 | | $ | (88 | ) | $ | 5,968 | |
|
| |
| |
| |
| |
| |
| |
Unsecured intercompany term notes and unsecured guarantees of those unsecured intercompany term notes by certain of our foreign subsidiaries have been pledged by GrafTech Finance to secure the Senior Notes, subject to the limitation that at no time will the combined value of the pledged portion of any foreign subsidiary’s unsecured intercompany term note and unsecured guarantee of unsecured intercompany term notes issued by other foreign subsidiaries exceed 19.99% of the principal amount of the then outstanding Senior Notes. In addition, the guarantee of the Senior Notes by UCAR Carbon has been secured by a pledge of all of the AET Pledged Stock, subject to the limitation that at no time will the value of the pledged portion of the AET Pledged Stock exceed 19.99% of the principal amount of the then outstanding Senior Notes.
Rule 3-16 of Regulation S-X adopted by the SEC provides that, for each of the registrant’s affiliates whose securities constitute a “substantial” portion of the collateral for registered securities, financial statements (that would be required to be filed if the affiliate were a registrant) must be filed with an annual report on Form 10-K. Under Rule 3-16(b), securities of a person will be deemed to constitute a “substantial” portion of the collateral if the aggregate principal amount, par value, or book value of securities as carried by the registrant, or the market value of such securities, whichever is the greatest, equals 20% or more of the principal amount of the registered securities. In this case, the pledges of the AET Pledged Stock and the unsecured intercompany term notes and related guarantees have been limited such that they will never be more than 19.99% of the principal amount of the then outstanding Senior Notes. Therefore, no such financial statements are required to be included in this Report.
(19) Discontinued Operations | |
As part of our ongoing asset sale program, we sold our non-strategic composite tooling business based in Irvine, California in June 2003 for approximately $15,692, including a $692 working capital adjustment. This business was previously included in “Other” for segment presentation in accordance with SFAS No. 131. As a result, under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the composite tooling business is reflected as a discontinued operation. We have reflected prior year results of the composite tooling business as a discontinued operation on the Consolidated Statements of Operations and reclassified the assets and liabilities of the business separately on the Consolidated Balance Sheets.
The following table sets forth the results of the discontinued operation.
| For the Year Ended December 31,
|
|---|
| 2003
| 2004
| 2005
|
|---|
| (Dollars in thousands) |
|---|
| |
| Net sales | | | $ | 9,053 | | $ | - | | $ | - | |
| Income before provision for income taxes | | | | 1,681 | | $ | - | | $ | - | |
| | |
There were no assets or liabilities of the discontinued operation at December 31, 2004 or December 31, 2005.
Since December 31, 2005, and prior to the issuance of this Report, we have initiated the following actions in an effort to reduce overhead costs and improve the cash flow of our global organization:
• | On January 24, 2006, we announced plans to shut down all production operations at our Vyazma, Russia graphite electrode manufacturing facility. This plan is expected to be completed by the end of the third quarter of 2006. |
• | On March 9, 2006, we announced plans to shut down carbon electrode production operations at our Columbia, Tennessee manufacturing facility. This plan is expected to be completed by the end of the first quarter of 2007. |
On March 1, 2006, the Company was served with a complaint commencing a securities class action in the United States District Court for the District of Delaware (Civil Action No. 06-133). The complaint, entitled Edmund Spinney v. GrafTech International Ltd., et al., alleges that GrafTech, Craig S. Shular, the Chief Executive Officer, President and Interim Chief Financial Officer, Petrus J. Barnard, a Vice President and President, Graphite Electrodes, John J. Wetula, a Vice President and President, Natural Graphite, and Corrado De Gasperis, our former Chief Financial Officer, Chief Information Officer and Vice President, violated federal securities law by making false statements or failing to disclose adverse facts, in or in relation to press releases issued by us on November 3, 2005, about our graphite electrode pricing power, our cost-cutting measures, the market for our non-graphite product lines, our forecasting ability and internal controls and corporate compliance, and our restructuring activities and charges. The proposed class consists of all persons who purchased our securities during the period from November 3, 2005 until February 8, 2006. The complaint seeks, among other things, to recover damages resulting from such alleged violations. Our analysis and investigation relating to this lawsuit is in its earliest stages, and, as a result, we are not able to assess the likelihood of loss, if any, or the amount thereof. We have not yet filed a response to the complaint. We intend to vigorously defend against this lawsuit.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 interim Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005, and based on that evaluation, our Chief Executive Officer and interim Chief Financial Officer has concluded that these controls and procedures are effective at the reasonable assurance level as of December 31, 2005.
Changes in Internal Controls over Financial Reporting
During the 2005 third quarter, we announced the relocation of our principal executive office from Wilmington, Delaware to Parma, Ohio, the relocation of various business transaction processing and accounting functions from our offices in Clarkesville, Tennessee to Parma, and the relocation of certain management, accounting and treasury functions from our offices in Etoy, Switzerland to Parma. A significant number of our corporate employees (including employees involved in our control environment) have elected not to relocate and will leave the employment of the Company following a period during which their functions were or are being transitioned to other employees (including new employees hired or being hired in Parma). During the 2005 fourth quarter, we announced the termination of our business process services (“BPS”) agreement with CGI. Under this agreement, CGI managed certain of our accounting and finance functions and played a role in performing certain internal control functions. We no longer rely on the provider to perform these functions. The agreement’s effective termination date was February 28, 2006.
During the 2005 fourth quarter, we also announced the resignation of our Chief Financial Officer. Our Chief Financial Officer was also our principal accounting officer and was a key component of our overall control environment. In conjunction with his resignation, we named our Chief Executive Officer as our interim Chief Financial Officer.
Beginning in the 2005 fourth quarter, we have engaged in activities designed to ensure a smooth transition in connection with, and mitigate any material disruption to our business or our
control environment resulting from these events. As of December 31, 2005 and for the year-end closing and reporting processes, we believe that these events have not had a material adverse effect on our business and have not had a material adverse effect on our control environment.
Except as described above, there has been no change in our internal controls over financial reporting that occurred during the 2005 fourth quarter that materially affected or is reasonably likely to materially affect our internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
See Item 8 of this Report for “Management’s Report on Internal Control Over Financial Reporting.”
Limitations on Control Systems
A control system (including both disclosure controls and procedures and internal controls over financial reporting) is subject to inherent limitations. As a result, a control system can provide only reasonable, not absolute, assurance that the system’s objectives will be achieved. In the first instance, the design of a control system must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs. Further, decision-making in connection with system design or operation can be faulty, and breakdowns can occur because of simple error or mistake as well as fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls become inadequate because of change in conditions or because the level of compliance with the policies and procedures may deteriorate.
Item 9B. Other Information
Not Applicable.
PART III
Items 10 to 14 (inclusive).
Except as set forth below, the information required by Items 10, 11, 12, 13 and 14 will appear in the GrafTech International Ltd. Proxy Statement for the Annual Meeting of Stockholders to be held on May 24, 2006, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated by reference in this Report pursuant to General Instruction G(3) of Form 10-K (other than the portions thereof not deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934).
Executive Officers and Directors
The information set forth below is provided as required by Item 10 and the listing standards of the NYSE.
The following table sets forth information with respect to our current executive officers and directors, including their ages, as of March 1, 2006. There are no family relationships between any of our executive officers.
Name
| Age
| Position
|
|---|
| | |
|---|
| | |
|---|
| Craig S. Shular | | | | 53 | | Chief Executive Officer, President, Interim Chief Financial Officer and Director | | |
| John J. Wetula | | | | 47 | | Vice President and President, Natural Graphite | | |
| Petrus J. Barnard | | | | 56 | | Vice President and President, Graphite Electrodes | | |
| Luiz A. Freitas | | | | 55 | | General Manager, Advanced Graphite Material | | |
| Hermanus L. Pretorius | | | | 55 | | General Manager, Cathodes | | |
| Karen G. Narwold | | | | 46 | | Vice President, General Counsel, Human Resources and Secretary | | |
| R. Eugene Cartledge | | | | 76 | | Chairman of the Board | | |
| Mary B. Cranston | | | | 58 | | Director | | |
| John R. Hall | | | | 73 | | Director | | |
| Harold E. Layman | | | | 59 | | Director | | �� |
| Ferrell P. McClean | | | | 59 | | Director | | |
| Michael C. Nahl | | | | 63 | | Director | | |
| Frank A. Riddick, III | | | | 49 | | Director | | |
Executive Officers
Craig S. Shular became Chief Executive Officer and a director in January 2003 and has served as President since May 2002. From May 2002 through December 2002, he also served as Chief Operating Officer. From August 2001 to May 2002, he served as Executive Vice President of our former Graphite Power Systems Division. He served as Vice President and Chief Financial Officer from January 1999, with the additional duties of Executive Vice President, Electrode Sales and Marketing from February 2000, to August 2001. From 1976 through 1998, he held various financial, production and business management positions at Union Carbide, including the Carbon Products Division, from 1976 to 1979. We are the successor to the Carbon Products Division of Union Carbide. With the resignation of our Chief Financial Officer effective
December 12, 2005, Mr. Shular was also appointed as our interim Chief Financial Officer and Principal Accounting Officer.
Petrus J. Barnard became Vice President and President, Graphite Electrodes, in April 2005. From April 2003 to March 2005 he served as President, Advanced Carbon Materials. He served as Executive Vice President, Graphite Power Systems, from March 2000 to March 2003. He began his career with us in 1972 when he joined our South Africa subsidiary. He is a graduate of University of Potchefstroom - South Africa with a B.S. Sciences degree and an MBA.
Luiz A. Freitas became General Manager, Advanced Graphite Materials, in September 2005. He was Director, Operations – AET, from January 2002 to September 2005. He served as Director of Operations, Advanced Graphite Materials, from March 2000 to December 2001. He was Director of Worldwide Engineering from February 1999 to March 2000. He joined our Brazilian subsidiary in 1975 after graduating from Federal University of the State of Bahia, Brazil with a B.S. degree in Mechanical Engineering.
Hermanus L. Pretorius became General Manager, Cathodes, in September 2005. He served as Director Worldwide Operations and Engineering, Graphite Electrodes, from January 2003 to September 2005. From August 2001 to January 2003, he held various operations and supply chain positions for Europe, Asia and Africa. He began his career with us in Meyerton, South Africa in August 1977 before transferring to UCAR S.A. in Switzerland in March 1998. He is a graduate of University of Potchefstroom - South Africa with a B.S. Sciences degree and an MBA.
John J. Wetula became President of our natural graphite business, AET, in January 2003. From July 1999 to December 2002, he served as President of GrafTech Inc. From July 1998 to June 1999, he served as our Director of Export Sales. From October 1996 to June 1998, he was General Manager of our GRAFOIL® product line. He is a chemical engineer and MBA graduate of Cleveland State University.
Karen G. Narwold became Vice President, General Counsel and Secretary in September 1999 and also assumed responsibility for the human resources department effective January 2002. She joined our Law Department in July 1990 and served as Assistant General Counsel from June 1995 to January 1999 and Deputy General Counsel from January 1999 to September 1999. She was an associate with Cummings & Lockwood from 1986 to 1990.
Directors
R. Eugene Cartledge has been a director since 1996 and has served as Chairman of the Board since February 2005. From 1986 until his retirement in 1994, Mr. Cartledge was the Chairman of the Board and Chief Executive Officer of Union Camp Corporation. Mr. Cartledge retired as Chairman of the Board of Savannah Foods & Industries Inc. in December 1997; retired as a director of Chase Industries, Inc. in 2001; retired as a director of Delta Airlines, Inc. and Sun Company, Inc. in May 2002; and retired as a director of Formica Corporation in April 2005. He is currently a director of Blount International, Inc.
Mary B. Cranston has been a director since 2000. Ms. Cranston is a partner and has served since 1999 as Chair of Pillsbury Winthrop Shaw Pittman LLP, an international law firm. Ms. Cranston is based in San Francisco, California. Ms. Cranston has been practicing complex litigation, including antitrust, telecommunications and securities litigation, with Pillsbury Winthrop Shaw Pittman LLP since 1975. She is a trustee of Stanford University and the San Francisco Ballet and a director of the Bay Area Council, the Commonwealth Club of California, the Episcopal Charities, and the San Francisco Museum of Women.
John R. Hallhas been a director since 1995. Mr. Hall was Chairman of the Board and Chief Executive Officer of Ashland Inc. from 1981 until his retirement in January 1997 and September 1996, respectively. Mr. Hall had served in various engineering and managerial capacities at Ashland Inc. since 1957. He served as a director of Reynolds Metals Company from 1985 to 2000. He retired as Chairman of Arch Coal Inc. in 1998; retired as a director of CSX Corp. in May 2003; retired as a director of Canada Life in June 2003; and retired as a director of Bank One Corporation in May 2004. Mr. Hall currently serves as a member of the Boards of Humana Inc. and USEC Inc. Mr. Hall graduated from Vanderbilt University in 1955 with a degree in Chemical Engineering and later served as Vanderbilt’s Board Chairman from 1995 to 1999. Mr. Hall also serves as Chairman of the Blue Grass Community Foundation and the Commonwealth Fund for Kentucky Educational Television, and as President of the Markey Cancer Center Foundation.
Harold E. Layman has been a director since 2003. From 2001 until his retirement in 2002, Mr. Layman was President and Chief Executive Officer of Blount International, Inc. Prior thereto, Mr. Layman served in other capacities with Blount International, including President and Chief Operating Officer from 1999 to 2001, Executive Vice President and Chief Financial Officer from 1997 to 2000, and Senior Vice President and Chief Financial Officer from 1993 to 1997. From 1981 through 1992, he held various financial management positions with VME Group/Volvo AB. From 1970 to 1980, Mr. Layman held various operations and financial management positions with Ford Motor Company. He is currently a director of Blount International, Grant Prideco, Inc. and Infinity Property and Casualty Corporation.
Ferrell P. McClean has been a director since 2002. Ms. McClean was a Managing Director and Senior Advisor to the head of the Global Oil & Gas Group in Investment Banking at J.P. Morgan Chase & Co. from 2000 through the end of 2001. She joined J.P. Morgan & Co. Incorporated in 1969 and founded the Leveraged Buyout and Restructuring Group within the Mergers & Acquisitions Group in 1986. From 1991 until 2000, Ms. McClean was a Managing Director and co-headed the Global Energy Group within the Investment Banking Group at J.P. Morgan & Co. Ms. McClean is currently a director of El Paso Corporation. She retired as a director of Unocal Corporation in 2005.
Michael C. Nahl has been a director since 1999. Mr. Nahl has been Executive Vice President and Chief Financial Officer of Albany International Corp., a manufacturer of paper machine clothing, which are the belts of fabric that carry paper stock through the paper production process, since April 2005. Mr. Nahl joined Albany International Corp. in 1981 as Group Vice President, Corporate, and, prior to appointment to his present position, he was Senior Vice President and Chief Financial Officer. Mr. Nahl is currently a director of Lindsay Manufacturing Co. and a member of JPMorgan Chase & Company's Regional Advisory Board.
Frank A. Riddick, III became a director in September 2004. Mr. Riddick has served as President and Chief Executive Officer of Formica Corporation, a manufacturer of surfacing
materials used in countertops, cabinets, and flooring, since January 2002. Mr. Riddick was instrumental in assisting Formica to emerge from Chapter 11 bankruptcy proceedings in June 2004. He served as President and Chief Operating Officer of Armstrong Holdings, Inc. from August 2000 to December 2001 and in various other executive capacities at Armstrong and its subsidiaries from 1995 to 2000. In December 2000, Armstrong's principal operating subsidiary, Armstrong World Industries, Inc., filed for Chapter 11 bankruptcy protection as a result of Armstrong’s legacy asbestos liabilities. Prior to joining Armstrong, he held a number of financial managerial positions with FMC Corporation, General Motors Corporation and Merrill Lynch & Co., Inc.
NYSE Certification
Mr. Shular, Chief Executive Officer and President, has certified to the NYSE, pursuant to Section 303A.12 of the NYSE’s listing standards, that he is unaware of any violation by us of the NYSE’s corporate governance listing standards.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a)(1) Financial Statements | | |
| See Index to Consolidated Financial Statements at page 97 of this Report. |
| (2) Financial Statement Schedules | | |
| None. |
(b) Exhibits | | |
| The exhibits listed in the following table have been filed with this Report. |
| | | | | | | | | |
Exhibit Number
| | Description of Exhibit
|
| 2.1.0(1) | | Recapitalization and Stock Purchase and Sale Agreement dated as of November 14, 1994 among Union Carbide Corporation, Mitsubishi Corporation, GrafTech International Ltd. and GrafTech International Acquisition Inc. and Guaranty made by Blackstone Capital Partners II Merchant Banking Fund L.P. and Blackstone Offshore Capital Partners II L.P. |
| 2.2.0 | | Intentionally Omitted. |
| 2.3.0 | | Intentionally Omitted. |
| 2.4.0(1) | | Stock Purchase and Sale Agreement dated as of November 9, 1990 among Mitsubishi Corporation, Union Carbide Corporation and UCAR Carbon Company Inc. |
| 2.5.0 | | Intentionally Omitted. |
| 2.6.0 | | Intentionally Omitted. |
Exhibit Number
| | Description of Exhibit
|
| 2.7.0(1) | | Transfer Agreement dated January 1, 1989 between Union Carbide Corporation and UCAR Carbon Company Inc. |
| 2.7.1(1) | | Amendment No. 1 to Transfer Agreement dated December 31, 1989. |
| 2.7.2(1) | | Amendment No. 2 to Transfer Agreement dated July 2, 1990. |
| 2.7.3(1) | | Amendment No. 3 to Transfer Agreement dated as of February 25, 1991. |
| 2.8.0(1) | | Amended and Restated Realignment Indemnification Agreement dated as of June 4, 1992 among Union Carbide Corporation, Union Carbide Chemicals and Plastics Company Inc., Union Carbide Industrial Gases Inc., UCAR Carbon Company Inc. and Union Carbide Coatings Service Corporation. |
| 2.9.0(1) | | Environmental Management Services and Liabilities Allocation Agreement dated as of January 1, 1990 among Union Carbide Corporation, Union Carbide Chemicals and Plastics Company Inc., UCAR Carbon Company Inc., Union Carbide Industrial Gases Inc. and Union Carbide Coatings Service Corporation. |
| 2.9.1(1) | | Amendment No. 1 to Environmental Management Services and Liabilities Allocation Agreement dated as of June 4, 1992. |
| 2.10.0(4) | | Trade Name and Trademark License Agreement dated March 1, 1996 between Union Carbide Corporation and UCAR Carbon Technology Corporation. |
| 2.11.0(1) | | Employee Benefit Services and Liabilities Agreement dated January 1, 1990 between Union Carbide Corporation and UCAR Carbon Company Inc. |
| 2.11.1(1) | | Amendment to Employee Benefit Services and Liabilities Agreement dated January 15, 1991. |
| 2.11.2(1) | | Supplemental Agreement to Employee Benefit Services and Liabilities Agreement dated February 25, 1991. |
| 2.12.0(1) | | Letter Agreement dated December 31, 1990 among Union Carbide Chemicals and Plastics Company Inc., UCAR Carbon Company Inc., Union Carbide Grafito, Inc. and Union Carbide Corporation. |
| 3.1.0(3) | | Amended and Restated Certificate of Incorporation of GrafTech International Ltd. |
| 3.1.1(9) | | Certificate of Designations of Series A Junior Participating Preferred Stock of GrafTech International Ltd. |
| 3.1.2(15) | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of GrafTech International Ltd. |
| 3.1.3(19) | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of GrafTech International Ltd. |
| 3.2.0(17) | | Amended and Restated By-Laws of GrafTech International Ltd. dated December 13, 2002. |
Exhibit Number
| | Description of Exhibit
|
| 4.1.0(14) | | Indenture dated as of February 15, 2002 among GrafTech Finance Inc., GrafTech International Ltd., GrafTech Global Enterprises Inc., UCAR Carbon Company Inc., and the Subsidiary Guarantors from time to time party thereto and State Street Bank and Trust Company, as Trustee. |
| 4.1.1(19) | | First Supplemental Indenture, dated as of April 30, 2002, among GrafTech Finance Inc., GrafTech International Ltd., GrafTech Global Enterprises Inc., UCAR Carbon Company Inc., UCAR Holdings V. Inc., UCAR Carbon Technology LLC, UCAR Holdings III Inc. and UCAR International Trading Inc. and State Street Bank and Trust Company. |
| 4.2.0 | | Intentionally Omitted. |
| 4.2.1 | | Intentionally Omitted. |
| 4.3.0(20) | | Indenture dated as of January 22, 2004 among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Global Enterprises Inc., UCAR Carbon Company Inc., UCAR International Trading Inc. and UCAR Carbon Technology LLC and U.S. Bank National Association. |
| 4.3.1(2) | | Supplemental Indenture, dated as of February 7, 2005, among UCAR Holdings V Inc., GrafTech International Ltd., GrafTech Finance Inc., Graftech Global Enterprises Inc., UCAR Carbon Company Inc., UCAR International Trading Inc. and UCAR Carbon Technology LLC and U.S. Bank National Association. |
| 4.4.0(9) | | Rights Agreement dated as of August 7, 1998 between GrafTech International Ltd. and The Bank of New York, as Rights Agent. |
| 4.4.1(14) | | Amendment No. 1 to Rights Agreement dated as of November 1, 2000. |
| 4.4.2(20) | | Amendment No. 2 to Rights Agreement dated as of May 21, 2002. |
| 4.5.0 | | Intentionally Omitted. |
| 10.1.0(2) | | Amended and Restated Credit Agreement dated as of February 8, 2005 among GrafTech International Ltd. GrafTech Global Enterprises Inc., GrafTech Finance Inc., the LC Subsidiaries from time to time party thereto, the Lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent. |
| 10.1.1(2) | | Amendment and Restatement Agreement dated as of February 8, 2005 among GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc., the LC Subsidiaries from time to time party thereto; the Lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agents. |
| 10.1.2(2) | | Amended and Restated Guarantee Agreement dated as of February 8, 2005 made by GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc. and each Domestic Subsidiary party thereto in favor of JPMorgan Chase Bank, N.A., as Collateral Agent for the Secured Parties. |
Exhibit Number
| | Description of Exhibit
|
| 10.1.3(2) | | Amended and Restated Security Agreement dated as of February 8, 2005 made by GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc. and the subsidiaries of GrafTech from time to time party thereto, in favor of JP Morgan Chase Bank, N.A., as Collateral Agent for the Secured Parties. |
| 10.1.4(2) | | Amended and Restated Indemnity, Subrogation and Contribution Agreement dated as of February 8, 2005 among GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc., each of the Domestic Subsidiaries party thereto and JP Morgan Chase Bank, N.A., as Collateral Agent for the Secured Parties. |
| 10.1.5(2) | | Amended and Restated Domestic Pledge Agreement dated as of February 8, 2005 by GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc. and the direct and indirect subsidiaries of GrafTech that are signatories thereto in favor of JPMorgan Chase Bank, N.A., as Collateral Agent for the Secured Parties. |
| 10.1.6(2) | | Amended and Restated Intellectual Property Security Agreement dated as of February 8, 2005 made by GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc. and the subsidiaries of GrafTech from time to time party thereto in favor of JPMorgan Chase Bank, N.A., as Collateral Agent for the Secured Parties (schedules omitted). |
| 10.1.7 | | (11) First Amendment, dated as of May 25, 2005, to the Amended and Restated Credit Agreement, dated as of February 8, 2005, among GrafTech International, Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc., the LC Subsidiaries from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. |
| 10.2.0 | | Intentionally Omitted. |
| 10.2.1 | | Intentionally Omitted. |
| 10.2.2 | | Intentionally Omitted. |
| 10.2.3 | | Intentionally Omitted. |
| 10.2.4 | | Intentionally Omitted. |
| 10.2.5 | | Intentionally Omitted. |
| 10.2.6 | | Intentionally Omitted. |
| 10.2.7 | | Intentionally Omitted. |
| 10.2.8 | | Intentionally Omitted. |
| 10.2.9 | | Intentionally Omitted. |
| 10.2.10* | | Form of Restricted Stock Unit Agreement. |
| 10.8.0(18) | | GrafTech International Ltd. Management Stock Incentive Plan (Original Version) as amended and restated through July 31, 2003. |
| 10.9.0* | | Form of Restricted Stock Agreement (2005 LTIP Version). |
| 10.10.0(18) | | GrafTech International Ltd. Management Stock Incentive Plan (Senior Version) as amended and restated through July 31, 2003. |
| 10.11.0(8) | | Form of Restricted Stock Agreement (Standard Form). |
Exhibit Number
| | Description of Exhibit
|
| 10.12.0(18) | | GrafTech International Ltd. Management Stock Incentive Plan (Mid-Management Version) as amended and restated through July 31, 2003. |
| 10.13.0(18) | | GrafTech International Ltd. 1995 Equity Incentive Plan as amended and restated through July 31, 2003. |
| 10.14.0(18) | | GrafTech International Ltd. 1996 Mid-Management Equity Incentive Plan as amended and restated through July 31, 2003. |
| 10.15.0(20) | | UCAR Carbon Company Inc. Compensation Deferral Program effective March 31, 2003. |
| 10.15.1(2) | | First Amendment to the UCAR Carbon Compensation Deferral Plan dated as of October 7, 2004. |
| 10.15.2(2) | | Second Amendment to the UCAR Carbon Compensation Deferral Plan effective as of January 1, 2005. |
| 10.15.3* | | Third Amendment to the UCAR Carbon Compensation Deferral Plan effective as of November 1, 2005. |
| 10.16.0(8) | | GrafTech International Ltd. 2005 Equity Incentive Plan. |
| 10.17.0* | | Form of Severance Compensation Agreement for senior management (U.S. 2.0 Version). |
| 10.17.1* | | Form of Severance Compensation Agreement for senior management (International 2.0 Version). |
| 10.17.2* | | Form of Severance Compensation Agreement for senior management (U.S. 2.99 Version). |
| 10.17.3* | | Form of Severance Compensation Agreement for senior management (International 2.99 Version). |
| 10.18.0(20) | | UCAR Carbon Company Inc. Equalization Benefit Plan amended and restated as of March 31, 2003. |
| 10.19.0(20) | | UCAR Carbon Company Inc. Supplemental Retirement Income Plan amended and restated as of March 31, 2003. |
| 10.20.0(20) | | UCAR Carbon Company Inc. Enhanced Retirement Income Plan amended and restated as of March 31, 2003. |
| 10.21.0(20) | | UCAR Carbon Company Inc. Benefits Protection Trust amended and restated as of August 1, 2003. |
| 10.22.0(12) | | Separation Agreement between GrafTech International Ltd. and Scott C. Mason, dated November 15, 2005. |
| 10.22.1 | | Intentionally Omitted. |
| 10.22.2 | | Intentionally Omitted. |
| 10.22.3 | | Intentionally Omitted. |
| 10.23.0(7) | | Plea Agreement between the United States of America and GrafTech International Ltd. executed April 7, 1998. |
| 10.24.0(13) | | Outsourcing Services Agreement, dated as of March 30, 2001, effective April 2001, between CGI Information Systems and Management Consultants, Inc. and GrafTech International Ltd. (Confidential treatment requested as to certain portions.) |
Exhibit Number
| | Description of Exhibit
|
| 10.24.1* | | Memorandum of Agreement, dated as of November 14, 2005, between CGI Information Systems and Management Consultants, Inc. and GrafTech International Ltd. |
| 10.25.0(13) | | Joint Development and Collaboration Agreement, effective June 5, 2001, among UCAR Carbon Company Inc., Advanced Energy Technology Inc., and Ballard Power Systems Inc. (Confidential treatment requested as to certain portions.) |
| 10.26.0(13) | | Master Supply Agreement, effective June 5, 2001 between UCAR Carbon Company Inc. and Ballard Power Systems Inc. (Confidential treatment requested as to certain portions.) |
| 10.27.0(13) | | Agreement, effective as of January 1, 2001, between ConocoPhillips (U.K.) Limited f/k/a Conoco (U.K.) Limited and UCAR S.A. (confidential treatment requested as to certain portions.) |
| 10.27.1(2) | | Amendment to Agreement, effective as of January 1, 2005, between ConocoPhillips (U.K.) Limited and UCAR S.A. (confidential treatment requested as to certain portions) |
| 10.27.2* | | Amendment No. 3 to Agreement, effective as of January 1, 2006, between ConocoPhillips (U.K.) Limited and UCAR S.A. (confidential treatment requested as to certain portions) |
| 10.28.0(13) | | Agreement, effective as of January 1, 2001, between ConocoPhillips Company, UCAR Carbon Company Inc. and UCAR S.A. (Confidential treatment requested as to certain portions.) |
| 10.28.1(2) | | Amendment to Agreement, effective as of January 1, 2005, among ConocoPhillips Company, UCAR Carbon Company Inc. and UCAR S.A. (confidential treatment requested as to certain portions.) |
| 10.28.2* | | Amendment No. 3 to Agreement, effective as of January 1, 2006, among ConocoPhillips Company, UCAR Carbon Company Inc. and UCAR S.A. (confidential treatment requested as to certain portions.) |
| 10.29.0* | | Form of Terms and Conditions of Sale to standard graphite electrode contract of sale (revision of September 8, 2004) |
| 21.1.0* | | List of subsidiaries of GrafTech International Ltd. |
| 23.1.0* | | Consent of PricewaterhouseCoopers LLP. |
| 23.2.0* | | Consent of Deloitte & Touche LLP. |
| 24.1.0* | | Powers of Attorney (included on signature pages). |
| 31.1.0* | | Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Chief Executive Officer and President. |
| 31.2.0* | | Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Interim Chief Financial Officer. |
| 32.1.0* | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Craig S. Shular, Chief Executive Officer and President. |
| 32.2.0* | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Craig S. Shular, Interim Chief Financial Officer. |
(1) | Incorporated by reference to the Registration Statement of GrafTech International Ltd. and GrafTech Global Enterprises Inc. on Form S-1 (Registration No. 33-84850). |
(2) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2004 (File No. 1-13888). |
(3) | Incorporated by reference to the Registration Statement of the registrant on Form S-1 (Registration No. 33-94698). |
(4) | Incorporated by reference to the Quarterly Report of the registrant on Form l0-Q for the quarter ended March 31, 1996 (File No. 1-13888). |
(5) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-13888). |
(6) | Incorporated by reference to the Quarterly Report of the registrant on Form l0-Q for the quarter ended September 30, 1997 (File No. 1-13888). |
(7) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-13888). |
(8) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on September 6, 2005 (File No. 1-13888). |
(9) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 1998 (File No. 1-13888). |
(10) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-13888). |
(11) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended September 30, 2005 (File No. 1-13888). |
(12) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on November 15, 2005 (File No. 1-13888). |
(13) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-13888). |
(14) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2001 (File No. 1-3888). |
(15) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 2002 (File No. 1-13888). |
(16) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2002 (File No. 1-13888). |
(17) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2002 (File No. 1-13888). |
(18) | Incorporated by reference to the Registration Statement of the registrant on Form S-3 (Registration No. 333-108039). |
(19) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-13888). |
(20) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2003 (File No. 1-13888). |
SIGNATURES
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.
March 15, 2006 | By: /s/ Craig S. Shular |
Craig S. Shular
Title: Chief Executive Officer, President,
Interim Chief Financial Officer
and Director
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Craig S. Shular and Karen G. Narwold, and each of them individually, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this Report together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission any and all exhibits to this Report and any and all exhibits and schedules thereto, (iii) act on, sign and file any and all such certificates, notices, communications, reports, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and (iv) take any and all such actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, and hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures | Title | Date |
| | |
Craig S. Shular | Chief Executive Officer, President, Interim Chief Financial Officer and Director (Principal Executive Officer and Principal Accounting Officer) | March 15, 2006 |
| | |
| Director | March 15, 2006 |
R. Eugene Cartledge | | |
| | |
Mary B. Cranston | Director | March 15, 2006 |
| | |
John R. Hall | Director | March 15, 2006 |
| | |
Harold E. Layman | Director | March 15, 2006 |
| | |
Ferrell P. McClean | Director | March 15, 2006 |
| | |
Michael C. Nahl | Director | March 15, 2006 |
| | |
/s/ Frank A. Riddick, III Frank A. Riddick, III | Director | March 15, 2006 |
EXHIBIT INDEX
Exhibit Number
| | Description of Exhibit
|
| 10.2.10 | | Form of Restricted Stock Unit Agreement. |
| 10.9.0 | | Form of Restricted Stock Agreement (2005 LTIP Version). |
| 10.15.3 | | Third Amendment to the UCAR Carbon Compensation Deferral Plan effective as of November 1, 2005. |
| 10.17.0 | | Form of Severance Compensation Agreement for senior management (U.S. 2.0 Version). |
| 10.17.1 | | Form of Severance Compensation Agreement for senior management (International 2.0 Version). |
| 10.17.2 | | Form of Severance Compensation Agreement for senior management (U.S. 2.99 Version). |
| 10.17.3 | | Form of Severance Compensation Agreement for senior management (International 2.99 Version). |
| 10.24.1 | | Memorandum of Agreement, dated as of November 14, 2005, between CGI Information Systems and Management Consultants, Inc. and GrafTech International Ltd. |
| 10.27.2 | | Amendment No. 3 to Agreement, effective as of January 1, 2006, between ConocoPhillips (U.K.) Limited and UCAR S.A. (confidential treatment requested as to certain portions) |
| 10.28.2 | | Amendment No. 3 to Agreement, effective as of January 1, 2006, among ConocoPhillips Company, UCAR Carbon Company Inc. and UCAR S.A. (confidential treatment requested as to certain portions.) |
| 10.29.0 | | Form of Terms and Conditions of Sale to standard graphite electrode contract of sale (revision of September 8, 2004) |
| 21.1.0 | | List of subsidiaries of GrafTech International Ltd. |
| 23.1.0 | | Consent of PricewaterhouseCoopers LLP. |
| 23.2.0 | | Consent of Deloitte & Touche LLP. |
| 24.1.0 | | Powers of Attorney (included on signature pages). |
| 31.1.0 | | Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Chief Executive Officer and President. |
| 31.2.0 | | Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Interim Chief Financial Officer. |
| 32.1.0 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Craig S. Shular, Chief Executive Officer and President. |
| 32.2.0 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Craig S. Shular, Interim Chief Financial Officer. |
