NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except as otherwise noted)
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|
(1)
|
Business and Summary of Significant Accounting Policies
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Discussion of Business and Structure
GrafTech International Ltd. is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. We have seven major product categories: graphite electrodes, refractory products, needle coke products, advanced graphite materials, advanced composite materials, advanced electronics technologies, and advanced materials, which are reported in the following segments:
On February 26, 2016, the Company announced it plans to realign its two business segments. Industrial Materials will now be comprised of graphite electrodes and needle coke products. Engineered Solutions will now be comprised of advanced graphite materials, advanced composite materials, advanced electronic technologies, and refractory products. Refractory products was previously included in the Industrial Materials business segment. Advanced materials products will now be a part of the business segment where these products are produced. This realignment of the business segments will allow the Company to better direct its resources and simplify its operations. The Industrial Materials business segment will continue to focus on being the lowest cost producer providing the best quality of graphite electrodes in a very challenging market. The Engineered Solutions business segment will continue to leverage the intellectual property of carbon and graphite material science to innovate and commercialize advanced technologies and new products in high growth markets. The Company also announced that it was reviewing strategic alternatives for its Engineered Solutions business segment, as newly defined.
During the 2
nd
quarter 2016, the ES segment met the criteria of held-for-sale and because the contemplated divestiture represented a major strategic shift, we reclassified it as discontinued operations. All amounts within the financial statements and footnotes represent continuing operations, unless otherwise noted.
Summary of Significant Accounting Policies
The Consolidated Financial Statements include the financial statements of GrafTech International Ltd. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Cash Equivalents
We consider all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of certificates of deposit, money market funds and commercial paper.
Revenue Recognition
Revenue from sales of our commercial products is recognized when they meet four basic criteria (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the amount is determinable and (4) collection is reasonably assured. Sales are recognized when both title and the risks and rewards of ownership are transferred to the customer or services have been rendered and fees have been earned in accordance with the contract.
Volume discounts and rebates are estimated and 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 billed to our customers are included in net sales and the related shipping and handling costs are included as an increase to cost of sales.
Inventories
Inventories are stated at the lower of cost or market. Cost is principally determined using the “first-in first-out” (“FIFO”) and average cost, which approximates FIFO, methods. Elements of cost in inventory include raw materials, direct labor and manufacturing overhead.
We allocate fixed production overheads to the costs of conversion based on normal capacity of the production facilities. We recognize abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) as current period charges.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Expenditures for property, plant and equipment are recorded at cost. Maintenance and repairs of property and equipment are expensed as incurred. Expenditures for replacements and betterments are capitalized and the replaced assets are retired. Gains and losses from the sale of property are included in cost of goods sold or other (income) expense, net. We depreciate our assets using the straight-line method over the estimated useful lives of the assets. The ranges of estimated useful lives are as follows:
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Years
|
Buildings
|
25-40
|
|
Land improvements
|
20
|
|
Machinery and equipment
|
5-20
|
|
Furniture and fixtures
|
5-10
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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 undiscounted 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 of are reported at the lower of the carrying amount or fair value less costs to sell.
Depreciation expense was
$79.3 million
for
2014
. Depreciation expense was
$26.7 million
for the period January 1 through August 14, 2015 and
$18.8 million
for the period August 15 through December 31, 2015. Depreciation expense was
$63.4 million
in 2016.
Accounts Receivable
Trade accounts receivable primarily arise from sales of goods to customers and distributors in the normal course of business.
Allowance for Doubtful Accounts
Considerable judgment is required in assessing the likelihood of collection 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. Receivables are charged off when amounts are determined to be uncollectible.
Capitalized Bank Fees
We capitalize bank fees upon the incurrence of debt and record them as a contra-liability against our debt. As of December 31,
2015
we had no capitalized bank fees and $0.7 million of capitalized bank fees as of December 31, 2016. We amortize such amounts over the life of the respective debt instrument using the effective interest method. The estimated life may be adjusted upon the occurrence of a triggering event. Amortization of capitalized bank fees amounted to
$2.1 million
in the period January 1 through August 14, 2015,
none
in the period August 15 through December 31,
2015
, and
$0.2 million
in
2016
, respectively. Capitalized bank fee amortization is included in interest expense.
Derivative Financial Instruments
We do not use derivative financial instruments for trading purposes. They are used to manage well-defined commercial risks associated with commodity contracts and currency exchange rate risks.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Derivatives
We enter into foreign currency derivatives from time to time 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, relating to non-dollar 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 fair value. These contracts are treated as hedges to the extent they are effective. Changes in fair values related to these contracts are recognized in other comprehensive income in the Consolidated Balance Sheets until settlement. At the time of settlement, realized gains and losses are recognized in revenue or cost of goods sold on the Consolidated Statements of Operations. For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in Cost of Goods Sold or Other (Income) Expense on the Consolidated Statements of Operations. Derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency.
Commodity Derivative Contracts
We periodically enter into derivative contracts for natural gas and certain refined oil products. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. All commodity contracts are carried at fair value and are treated as hedges to the extent they are effective. Changes in their fair values are included in other comprehensive loss in the Consolidated Balance Sheets until settlement. At the time of settlement of these hedge contracts, realized gains and losses are recognized as part of cost of goods sold 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
We file a consolidated United States (“U.S.”) federal income tax return for GTI and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained, when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Under the guidance on accounting for uncertainty in income taxes, we recognize the benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Retirement Plans and Postretirement Benefits
We use actuarial methods and assumptions to account for our defined benefit pension plans and our postretirement benefits. We immediately recognize the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each year (MTM Adjustment) and whenever a plan is remeasured (e.g. due to a significant curtailment, settlement, etc.). Pension and postretirement benefits expense includes the MTM adjustment, actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets based on fair market values, and adjustments due to plan settlements and curtailments. Contributions to the qualified U.S. retirement plan are made in accordance with the requirements of the Employee Retirement Income Security Act of 1974.
Postretirement benefits and benefits under the non-qualified retirement plan have been accrued, but not funded. The estimated cost of future postretirement 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. We record our balance sheet position based on the funded status of the plan.
We exclude the inactive participant portion of our pension and other postretirement benefit costs when calculating inventoriable costs. Additional information with respect to benefits plans is set forth in Note 12, “Retirement Plans and Postretirement Benefits.”
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
$10.4 million
in
2014
,
$6.5 million
in
2015
, and
$8.3 million
in
2016
. The accrued liability relating to environmental remediation was
$5.0 million
as of December 31,
2015
and
$5.2 million
as of December 31,
2016
. A charge to income is recorded when it is probable that a liability has been incurred and the cost can be reasonably estimated. When payments are fixed or determinable, the liability is discounted using a rate at which the payments could be effectively settled.
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.
Foreign Currency Translation
We translate the financial statements of foreign subsidiaries, whose local currency is their functional currency, to U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues, expenses, gains and losses. Differences arising from exchange rate changes are included in 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.
For our Mexican, Swiss and Russian subsidiaries, whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses arising from the fluctuations in currency for monetary accounts are recognized in other (income) expense, net, in the Consolidated Statements of Operations. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred.
We have non-dollar denominated intercompany loans between some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. Certain of these loans had been deemed to be essentially permanent prior to settlement and, as a result, remeasurement gains and losses
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
on these loans were recorded as a component of accumulated other comprehensive income (loss) in the stockholders’ equity section of the Consolidated Balance Sheets. The remaining 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.
Rationalizations
We record costs for rationalization actions implemented to reduce excess and high-cost manufacturing capacity and operating and administrative costs. For ongoing post-employment benefit arrangements, a liability is recognized when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. These conditions are generally met when the rationalization plan is approved by management. For one-time benefit arrangements, a liability is incurred and must be accrued at the date the plan is communicated to employees, unless they will be retained beyond a minimum retention period. In this case, the liability is calculated at the date the plan is communicated to employees and is accrued ratably over the future service period. Other costs reported under Rationalization include contract termination costs.
In connection with rationalization initiatives, the company incurs additional costs such as inventory losses, fixed assets write-offs, impairment and accelerated depreciation as well as various non-recurring costs for dismantling, transferring or disposing of equipment and inventory. These rationalization related costs are measured and recorded based on the appropriate accounting guidance. Inventory losses are recorded in cost of sales. Fixed assets write-offs and accelerated depreciation are recorded in cost of sales, R&D and SG&A based upon the asset utilization. Other non-recurring costs are recorded in cost of sales and SG&A.
Goodwill and Other Intangible Assets
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. We do not recognize deferred income taxes for the difference between the assigned value and the tax basis related to nondeductible goodwill. Goodwill is not amortized; however, impairment testing is performed annually or more frequently if circumstances indicate that impairment may have occurred. We perform the goodwill impairment test annually at December 31.
The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying value. The fair value for each reporting unit with goodwill is determined in accordance with accounting guidance on determining fair value, which requires consideration of the income, market, and cost approaches as applicable. If the carrying value exceeds the fair value, there is potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment is recognized.
Other amortizable intangible assets, which consist primarily of trademarks and trade names, customer-related intangibles, and technological know-how, are amortized over their estimated useful lives using the straight line or sum-of-the-years digits method. The estimated useful lives for each major category of amortizable intangible assets are:
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|
|
|
Years
|
Trade name
|
5-10
|
Technology and know-how
|
5-9
|
Customer related intangible
|
5-14
|
Additional information about goodwill and other intangibles is set forth in Note 6 “
Goodwill and Other Intangible Assets
.”
Major Maintenance and Repair Costs
We perform scheduled major maintenance of the storage and processing units at our Seadrift plant (referred to as “overhaul”). Time periods between overhauls vary by unit. We also perform an annual scheduled significant maintenance and repair shutdown of the plant (referred to as “turnaround”).
Costs of overhauls and turnarounds include plant personnel, contract services, materials, and rental equipment. We defer these costs when incurred and use the straight-line method to amortize them over the period of
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
time estimated to lapse until the next scheduled overhaul of the applicable storage or processing unit. Under this policy in
2015
, costs deferred were
$9.9 million
and costs amortized in the period January 1 through August 14, 2015 were
$4.3 million
and
$2.1 million
in the period August 15 through December 31, 2015. We deferred
no
additional amounts in
2016
and amortization of deferred costs totaled
$7.0 million
.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses. Significant estimates and assumptions are used for, but are not limited to inventory valuation, pension and other post-retirement benefits, allowance for doubtful accounts, accruals and valuation allowances, asset impairment, and environmental-related accruals. Actual results could differ from our estimates.
Discontinued Operations and Assets Held for Sale
When Management commits to a plan to sell assets or asset groups and a sale is probable, we reclassify those assets or asset groups into "Assets Held for Sale". Upon reclassification to assets held for sale, we evaluate the book value of the disposal groups against their fair value less costs to sell and as a result may impair the assets / asset groups. As and if new information becomes available on the fair value of the assets/asset groups , we may adjust accordingly the impairment.
Once the assets of a business have been classified as held for sale, we evaluate if the divestiture represents a strategic shift in operations and if so, we exclude the results of this business from continuing operations. All results are reported as gain or loss from discontinued operations, net of tax. During the second quarter of 2016, our Engineered Solutions business qualified as discontinued operations and as such, all its results have been excluded from continuing operations. See Note 3 "Discontinued Operations and Related Assets Held for Sale".
Reclassification
Certain amounts previously reported have been reclassified to conform to the current year presentation.
Subsequent Events
We evaluate events that occur after the balance sheet date but before financial statements are issued to determine if a material event requires our amending the financial statements or disclosing the event.
Predecessor and Successor Reporting
On August 17, 2015, the Company was acquired by affiliates of Brookfield Asset Management Inc. (see Note 2 "Preferred Share Issuance and Merger"). We elected to account for the acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of GTI were adjusted to their fair market value as of August 15, 2015, as this was the day that Brookfield effectively took control of the Company.
Our consolidated statements of operations subsequent to the Merger will include amortization expense relating to the fair value adjustment of intangibles and depreciation expense based on the fair value of the Company's property, plant and equipment that had previously been carried at historical cost less accumulated depreciation. Therefore, the Company's financial information prior to the Merger is not comparable to the financial information subsequent to the Merger. As a result, the financial statements and certain note presentations are separated into two distinct periods, the period before the consummation of the Merger (labeled "Predecessor") and the period after the date of merger (labeled "Successor"), to indicate the application of the different basis of accounting between the periods presented.
Recent Accounting Standards
Recently Adopted Accounting Standards
In November 2015 the Financial Accounting Standards Board (FASB) issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which changes how deferred taxes are classified on our balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. We adopted the provisions of ASU 2015-17 as of December 31, 2015 on a prospective basis and as such we reclassified
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$10.7 million
of current deferred tax assets and
$23.3 million
of current deferred tax liabilities to long term in our December 31, 2015 balance sheet.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 requires the recognition of adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. The effects of the adjustments to provisional amounts on depreciation, amortization or other income effects should be recognized in current-period earnings as if the accounting had been completed at the acquisition date. Disclosure of the portion of the adjustment recorded in current-period earnings that would have been reported in prior reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date is also required. The Company adopted ASU 2015-16 as of December 31, 2015. The adoption of ASU 2015-16 did not materially affect the Company's results of operations, statement of financial position or financial statement disclosures. See Note 2 "Preferred Share Issuance and Merger" for details of post-acquisition adjustments to goodwill.
In July 2015 the FASB issued ASU 2015-11, "Inventory - Simplifying the Measurement of Inventory"
"
which requires companies to measure inventory (valued using first-in, first-out or average cost methods) at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The measurement of inventory valued using the last-in, first-out method is unchanged. ASU 2015-11 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years with early implementation permitted. The Company adopted ASU 2015-11 as of December 31, 2015 with no impact to the Company's financial position, results of operations or cash flows.
In April, 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015 with early adoption permitted. The Company adopted ASU 2015-03 in the first quarter of 2016. We had
no
capitalized bank fees as of December 31, 2015 and $0.7 million of capitalized bank fees as of December 31, 2016 included within long-term debt.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. This ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU was expected to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. On July 9, 2015, the FASB deferred the effective date to fiscal years beginning after December 15, 2017. During the fourth quarter of 2016, we completed the initial evaluation of the new standard and the related assessment and review of a representative sample of existing revenue contracts with our customers. We determined, on a preliminary basis, that although the timing and pattern of revenue recognition may change, the amount of revenue recognized during the year should remain substantially the same.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this new guidance, a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of this standard on its financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other (Topic 350). This guidance was issued to simplify the accounting for goodwill impairment. The guidance removes the second step of the goodwill impairment test, which requires that a hypothetical purchase price allocation be performed to determine the amount of impairment, if any. Under this new guidance, a goodwill impairment charge will be based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will become effective on a prospective basis for the Company on January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
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(2)
|
Preferred Share Issuance and Merger
|
Preferred Stock
On August 11, 2015, the Company issued and sold to BCP IV GrafTech Holdings LP, an affiliate of Brookfield Asset Management Inc. (“Brookfield”) (i)
136,616
shares of a new Series A Convertible Preferred Stock, par value
$0.01
per share (the “Series A Preferred Stock”), convertible into
19.9%
of the shares of Common Stock of the Company outstanding immediately prior to such issuance and (ii)
13,384
shares of a new Series B Convertible Preferred Stock, par value
$0.01
per share (the “Series B Preferred Stock,” and, together with the Series A Preferred Stock, the “Preferred Stock”), for an aggregate purchase price of
$150,000,000
in cash (the “Purchase Price”), under the Investment Agreement dated May 4, 2014 (the “Investment Agreement”) between the Company and Brookfield.
The closing of such issuance and sale occurred after the satisfaction of the closing conditions set forth in the Investment Agreement.
Pursuant to the Investment Agreement, the Company reimbursed Brookfield for
$500,000
in out-of-pocket fees and expenses (including fees and expenses of legal counsel) incurred by Brookfield in connection with the transaction.
The proceeds from the issuance and sale were used by the Company, along with funds available under the Company’s
$40 million
delayed draw term loan facility, Revolving Facility and cash on hand, to prepay the Company’s
$200 million
Senior Subordinated Notes due November 30, 2015.
Merger Agreement
On May 18, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated May 17, 2015, with Brookfield (called “Parent” therein) and Athena Acquisition Subsidiary Inc. a wholly owned subsidiary of Parent (“Acquisition Sub”). Pursuant to the Merger Agreement, on May 26, 2015, Parent commenced a cash tender offer to purchase any and all of the outstanding shares of Common Stock, par value
$0.01
per share (the “Shares”), of the Company, at a purchase price of
$5.05
per Share in cash (the “Offer Price”), on the terms and subject to the conditions set forth in the Offer to Purchase, dated May 26, 2015 (together with any amendments and supplements thereto, the “Offer to Purchase”) and in the related Letter of Transmittal (the “Letter of Transmittal” and, together with the Offer to Purchase, the “Offer”).
On August 14, 2015, Acquisition Sub accepted for payment all Shares validly tendered in the Offer and not withdrawn prior to the expiration of the Offer, and payment of the Offer Price for such Shares was made promptly. On August 17, 2015, Acquisition Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger, each Share that was not tendered and accepted pursuant to the Offer (other than canceled Shares, dissenting Shares and Shares held by the Company’s subsidiaries or Parent’s subsidiaries (other than Acquisition Sub)) was canceled and converted into cash consideration in an amount equal to the Offer Price.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Business Combination
The computation of the fair value of the total consideration at the date of acquisition follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Consideration
|
(In thousands except share price)
|
|
|
|
|
|
|
|
|
|
# Shares
|
|
Unit Price
|
|
Amount
|
Convertible Preferred Equity
|
|
|
|
|
|
|
Series A and B
|
|
150
|
|
|
$
|
1,000.00
|
|
|
$
|
150,000
|
|
Common Equity
|
|
|
|
|
|
|
Common Shares
|
|
139,397
|
|
|
$
|
5.05
|
|
|
$
|
703,955
|
|
Net value of options
|
|
|
|
|
|
$
|
382
|
|
Total
|
|
|
|
|
|
$
|
854,337
|
|
Recording of assets acquired and liabilities assumed:
The acquisition was accounted for using the acquisition method of accounting. Under the acquisition method, the identifiable assets acquired and the liabilities assumed are assigned a new basis of accounting reflecting their estimated fair values. The information included herein has been prepared based on the allocation of purchase price using estimates of the fair values and useful lives of assets acquired and liabilities assumed based on the best available information determined with the assistance of independent valuations, quoted market prices and management estimates.
The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
|
Net identifiable assets acquired
|
|
|
Cash
|
$
|
25,032
|
|
|
Accounts receivable
|
94,298
|
|
|
Inventories
|
344,765
|
|
|
Property, plant and equipment
|
650,405
|
|
|
Intangible assets
|
155,700
|
|
|
Deferred tax assets
|
41,606
|
|
|
Prepaid and other current assets
|
49,716
|
|
|
Other non-current assets
|
8,428
|
|
|
Accounts payable
|
(68,005
|
)
|
|
Short-term debt
|
(18,779
|
)
|
|
Other accrued liabilities
|
(53,252
|
)
|
|
Long-term debt
|
(367,811
|
)
|
|
Other long-term liabilities
|
(101,648
|
)
|
|
Deferred tax liabilities
|
(79,235
|
)
|
Net identifiable assets acquired
|
$
|
681,220
|
|
|
|
|
Goodwill
|
$
|
173,117
|
|
|
|
|
Net assets acquired
|
$
|
854,337
|
|
Goodwill:
Goodwill of approximately
$173.1 million
was recognized for the acquisition and is calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was increased by
$1.1 million
in March 2016, as a result of a decreased inventory valuation of
$2.0 million
offset by an increase to deferred tax assets of
$0.9 million
.
|
|
(3)
|
Discontinued Operations and Related Assets Held for Sale
|
On February 26, 2016, the Company announced that it had initiated a strategic review of its Engineered Solutions business segment to better direct its resources and simplify its operations. Any potential sale of assets was prohibited by the Revolving Facility without approval of the requisite lenders thereunder. On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility (see Note 7 "Debt and Liquidity") which, among other things, permits the sale of assets with the restriction that the proceeds be utilized to pay down revolver borrowings. As of June 30, 2016, the Engineered Solutions segment qualified for reporting as discontinued operations as we expect the divestiture to be complete within 12 months of the qualification.
During the second quarter of 2016, we evaluated the fair value of the Engineered Solutions business segment utilizing the market approach (Level 3 measure). As a result, we incurred an impairment charge to our Engineered Solutions business segment of
$105.6 million
to align the carrying value with estimated fair value. The analysis was updated as of
December 31,
2016
, resulting in an additional impairment charge of
$14.3 million
. The estimate reflects Management’s view of the manner in which the Engineered Solutions business will be divested, including assumptions as to if and how it will be split, given the lines of business and asset groups that constitute the Engineered Solutions
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
segment. Amongst other things, the split into groups influences the computation of the impairment charge.
These assumptions and estimates are subject to change until divestiture is completed and may be adjusted in the quarter that the information becomes available.
On November 30, 2016, we completed the sale of our Fiber Materials Inc. business, which was a business line within our former Engineered Solutions business. The sale resulted in cash proceeds of
$15.9 million
and a loss of
$0.2 million
. We have the ability to realize up to
$8.5 million
of additional proceeds based on the earnings of the Fiber Materials business over the 24 months following the transaction. We have elected to record this contingent consideration as it is realized and as such it is not part of the gain recognized thus far on the transaction.
The following tables summarize the results of the Engineered Solutions business segment, reclassified as discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2014
|
|
For the Period January 1 Through August 14, 2015
|
|
For the Period August 15 Through December 31, 2015
|
|
For the Year Ended December 31, 2016
|
|
(dollars in thousands)
|
Net sales
|
$
|
260,160
|
|
|
$
|
98,024
|
|
|
$
|
55,608
|
|
|
$
|
115,336
|
|
Cost of sales
|
235,901
|
|
|
94,817
|
|
|
49,068
|
|
|
98,440
|
|
Gross profit
|
24,259
|
|
|
3,207
|
|
|
6,540
|
|
|
16,896
|
|
Research and development
|
5,107
|
|
|
2,179
|
|
|
1,265
|
|
|
3,145
|
|
Selling and administrative expenses
|
29,550
|
|
|
16,764
|
|
|
8,627
|
|
|
19,220
|
|
Rationalizations
|
3,679
|
|
|
4,492
|
|
|
791
|
|
|
(405
|
)
|
Impairment
|
121,570
|
|
|
—
|
|
|
—
|
|
|
119,907
|
|
Operating loss
|
(135,647
|
)
|
|
(20,228
|
)
|
|
(4,143
|
)
|
|
(124,971
|
)
|
Other expense (income)
|
(485
|
)
|
|
(90
|
)
|
|
(135
|
)
|
|
(66
|
)
|
Interest expense
|
1,320
|
|
|
907
|
|
|
918
|
|
|
3,258
|
|
Loss from discontinued operations
before income taxes
|
(136,482
|
)
|
|
(21,045
|
)
|
|
(4,926
|
)
|
|
(128,163
|
)
|
Benefit for income taxes on
discontinued operations
|
(3,626
|
)
|
|
(2,366
|
)
|
|
—
|
|
|
(1,189
|
)
|
Loss from discontinued operations
|
$
|
(132,856
|
)
|
|
$
|
(18,679
|
)
|
|
$
|
(4,926
|
)
|
|
$
|
(126,974
|
)
|
During 2014, GrafTech impaired certain long-lived assets and announced exiting the isomolded product line within our AGM product group resulting in the above impairment and rationalization charges.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The significant components of our Statements of Cash Flows for discontinued operations held for sale are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2014
|
|
For the Period January 1 Through August 14, 2015
|
|
For the Period August 15 Through September 30, 2015
|
|
For the Year Ended December 31, 2016
|
|
|
|
(dollars in thousands)
|
|
|
Depreciation and amortization
|
$
|
21,780
|
|
|
$
|
7,988
|
|
|
$
|
4,194
|
|
|
$
|
5,277
|
|
Impairment
|
121,570
|
|
|
—
|
|
|
—
|
|
|
119,907
|
|
Deferred income taxes
|
(3,626
|
)
|
|
(2,366
|
)
|
|
—
|
|
|
(1,189
|
)
|
Cash received from divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
15,889
|
|
Capital expenditures
|
24,018
|
|
|
10,104
|
|
|
4,447
|
|
|
4,713
|
|
Credit Facility reductions
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,889
|
)
|
The following table summarizes the carrying value of the assets and liabilities of discontinued operations as of
December 31, 2015
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2015
|
|
As of
December 31, 2016
|
|
(dollars in thousands)
|
Assets of discontinued operations:
|
|
|
|
Accounts receivable
|
$
|
20,425
|
|
|
$
|
17,094
|
|
Inventories
|
77,332
|
|
|
71,816
|
|
Prepaid expenses and other current assets
|
524
|
|
|
320
|
|
Net property plant and equipment
|
86,369
|
|
|
79,048
|
|
Other assets
|
17,606
|
|
|
12,608
|
|
Total assets of discontinued operations prior to impairment
|
202,256
|
|
|
180,886
|
|
|
|
|
|
Impairment of assets held for sale
|
—
|
|
|
(119,907
|
)
|
|
|
|
|
Total assets of discontinued operations
|
$
|
202,256
|
|
|
$
|
60,979
|
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
Accounts payable
|
$
|
9,331
|
|
|
$
|
7,253
|
|
Accrued income and other taxes
|
3,113
|
|
|
2,326
|
|
Other accrued liabilities
|
10,638
|
|
|
10,463
|
|
Total current liabilities of discontinued operations
|
23,082
|
|
|
20,042
|
|
|
|
|
|
Other long-term obligations
|
1,167
|
|
|
850
|
|
|
|
|
|
Total liabilities of discontinued operations
|
$
|
24,249
|
|
|
$
|
20,892
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Throughout 2013, 2014 and 2015 the Company undertook rationalization plans in order to streamline its organization and lower its production costs. On October 31, 2013, we announced a global initiative to reduce our Industrial Materials segment's cost base and improve our competitive position. As part of this initiative, we ceased production at our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. On July 29, 2014, we announced additional rationalization initiatives to increase profitability, reduce cost and improve global competitiveness in our former Engineered Solutions segment, which impacted our Corporate, R&D and other. During the third quarter of 2014, we announced the conclusion of another phase of our on-going company-wide cost savings assessment. This resulted in changes to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. These actions were designed to reduce costs by a combination of reduced contractor costs, attrition, early retirements and layoffs. Additionally, the Company downsized its corporate functions by approximately
25 percent
, relocated to a smaller, more cost effective corporate headquarters and established a new Technology and Innovation Center.
These initiatives were substantially complete as of
December 31,
2016
. The rationalization liability as of
December 31,
2016
was
$0.1 million
consisting of the plan described below and severance payouts related to prior rationalization plans. In June of 2016, we further impaired assets related to our South African facility within discontinued operations by
$0.6 million
to reflect a decline in market value. In December 2016, we further impaired assets related to our facility in Brazil within continuing operations by
$2.8 million
to reflect a decline in market value.
The following tables illustrate the impacts of these rationalization initiatives on our results of operations for 2014, 2015 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2014 (Predecessor)
|
|
Industrial Materials Segment
|
|
Corporate, R&D and Other
|
|
Total
|
|
(Dollars in thousands)
|
Recorded in Cost of Sales
|
|
|
|
|
|
Accelerated depreciation
|
$
|
22,388
|
|
|
$
|
—
|
|
|
$
|
22,388
|
|
Inventory loss
|
941
|
|
|
—
|
|
|
941
|
|
Fixed asset write-offs and other
|
5,552
|
|
|
—
|
|
|
5,552
|
|
Recorded in Research and Development
|
|
|
|
|
Accelerated depreciation
|
—
|
|
|
2,312
|
|
|
2,312
|
|
Recorded in Selling and General Administrative
|
|
|
|
|
Accelerated depreciation
|
—
|
|
|
608
|
|
|
608
|
|
Other
|
89
|
|
|
515
|
|
|
604
|
|
Recorded in Rationalizations
|
|
|
|
|
|
Severance and related costs
|
5,040
|
|
|
2,425
|
|
|
7,465
|
|
Contract terminations
|
469
|
|
|
11
|
|
|
480
|
|
Total 2014 rationalization
and related charges
|
$
|
34,479
|
|
|
$
|
5,871
|
|
|
$
|
40,350
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period January 1 Through August 14, 2015 (Predecessor)
|
|
Industrial Materials Segment
|
|
Corporate, R&D and Other
|
|
Total
|
|
(Dollars in thousands)
|
Recorded in Cost of Sales
|
|
|
|
|
|
Accelerated depreciation
|
$
|
432
|
|
|
$
|
940
|
|
|
1,372
|
|
Inventory loss
|
(33
|
)
|
|
—
|
|
|
(33
|
)
|
Fixed asset write-offs and other
|
1,715
|
|
|
—
|
|
|
1,715
|
|
Recorded in Selling and General Administrative
|
|
|
|
|
Other
|
400
|
|
|
954
|
|
|
1,354
|
|
Recorded in Rationalizations
|
|
|
|
|
|
Severance and related costs
|
157
|
|
|
(168
|
)
|
|
(11
|
)
|
Contract terminations
|
25
|
|
|
—
|
|
|
25
|
|
Total
|
$
|
2,696
|
|
|
$
|
1,726
|
|
|
$
|
4,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period August 15 Through December 31, 2015 (Successor)
|
|
Industrial Materials Segment
|
|
Corporate, R&D and Other
|
|
Total
|
|
|
Recorded in Cost of Sales
|
|
|
|
|
|
Inventory loss
|
$
|
(649
|
)
|
|
$
|
—
|
|
|
$
|
(649
|
)
|
Fixed asset write-offs and other
|
329
|
|
|
—
|
|
|
329
|
|
Recorded in Selling and General Administrative
|
|
|
|
|
Other
|
135
|
|
|
290
|
|
|
425
|
|
Recorded in Rationalizations
|
|
|
|
|
|
Severance and related costs
|
154
|
|
|
71
|
|
|
225
|
|
Contract terminations
|
59
|
|
|
—
|
|
|
59
|
|
Total
|
$
|
28
|
|
|
$
|
361
|
|
|
$
|
389
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016 (Successor)
|
|
Industrial Materials Segment
|
|
Corporate, R&D and Other
|
|
Total
|
|
|
Recorded in Cost of Sales
|
|
|
|
|
|
Fixed asset write-offs and other
|
$
|
636
|
|
|
$
|
—
|
|
|
$
|
636
|
|
Recorded in Selling and General Administrative
|
|
|
|
|
Other
|
1,258
|
|
|
412
|
|
|
1,670
|
|
Recorded in Rationalizations
|
|
|
|
|
|
Severance and related costs
|
(52
|
)
|
|
111
|
|
|
59
|
|
Total
|
$
|
1,842
|
|
|
$
|
523
|
|
|
$
|
2,365
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We previously operated
two
reportable business segments, Industrial Materials and Engineered Solutions. In the first quarter of 2016, the Company reorganized its businesses and moved the Refractory product line from the Industrial Materials segment to the Engineered Solutions segment. Additionally, advanced materials products will now be a part of the business segment where these products are produced. All prior period amounts have been recast to reflect this change.
During the second quarter of 2016 the Company decided to sell the businesses that comprised our Engineered Solutions segment to focus our Industrial Materials segment. As such, the Engineered Solutions business qualified as held for sale status and as such the related results have been excluded from continuing operations. See Note 3 "Discontinued Operations and Assets Held for Sale" for significant components of the results of our Engineered Solutions segment.
Our Industrial Materials segment manufactures and delivers high quality graphite electrodes and needle coke products. Electrodes are key components of the conductive power systems used to produce steel and other non-ferrous metals. Needle coke, a crystalline form of carbon derived from decant oil, is the key ingredient in, and is used primarily in, the production of graphite electrodes.
During 2014, as part of our initiative to decentralize the organization and reduce the costs of the global headquarter functions, the performance measure of our existing segments was changed to reflect our new management and operating structure. We currently exclude such expenses from the segment operating income measure and report them under “Corporate, R&D and Other Expenses” in order to reconcile to the consolidated operating income of the Company.
The following tables summarize financial information concerning our reportable segments and all prior periods have been recast to reflect our new methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
For the Year Ended December 31, 2014
|
|
For the Period January 1
Through
August 14, 2015
|
|
For the Period August 15 Through
December 31, 2015
|
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
(Dollars in thousands)
|
Net sales to external customers:
|
|
|
|
|
|
|
|
Industrial Materials
|
$
|
825,145
|
|
|
$
|
339,907
|
|
|
$
|
193,133
|
|
|
$
|
437,963
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss):
|
|
|
|
|
|
|
|
Industrial Materials
|
$
|
(51,300
|
)
|
|
$
|
(24,900
|
)
|
|
$
|
(2,529
|
)
|
|
$
|
(63,827
|
)
|
Corporate, R&D and Other expenses
|
(68,674
|
)
|
|
(43,349
|
)
|
|
(10,034
|
)
|
|
(28,226
|
)
|
Total segment operating income (loss)
|
$
|
(119,974
|
)
|
|
$
|
(68,249
|
)
|
|
$
|
(12,563
|
)
|
|
$
|
(92,053
|
)
|
Reconciliation of segment operating income
(loss) to loss from continuing operations
before provision for income taxes:
|
|
|
|
|
|
|
|
Other expense (income), net
|
$
|
2,920
|
|
|
$
|
1,421
|
|
|
$
|
(813
|
)
|
|
$
|
(2,188
|
)
|
Interest expense
|
35,736
|
|
|
26,211
|
|
|
9,999
|
|
|
26,914
|
|
Interest income
|
(320
|
)
|
|
(363
|
)
|
|
(6
|
)
|
|
(358
|
)
|
Loss before provision for income taxes
|
$
|
(158,310
|
)
|
|
$
|
(95,518
|
)
|
|
$
|
(21,743
|
)
|
|
$
|
(116,421
|
)
|
Industrial Materials' operating loss for the year ended December 31, 2016 included
$19.0 million
of lower of cost or market inventory write-downs.
Industrial Materials' operating loss for the period
January 1 through August 14,
2015 includes a
$35.4 million
goodwill impairment charge,
$2.7 million
of rationalization and related charges and
$3.2 million
of costs associated with the preferred share issuance. Corporate, R&D and Other expenses for the period
January 1 through August 14,
2015 includes
$19.4 million
of costs associated with the preferred share issuance, tender offer and proxy contest and
$1.7 million
of rationalization and related costs.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating loss for the year ended December 31, 2014 includes a
$76.1 million
goodwill impairment charge in Industrial Materials. 2014 Operating loss also includes rationalization related charges of
$34.5 million
in Industrial Materials and
$6.3 million
in Corporate, R&D and Other expenses, as well as a pension mark-to-market loss of
$3.5 million
in Industrial Materials and
$6.3 million
in Corporate, R&D and Other expenses. Corporate, R&D and Other expenses includes
$2.4 million
of fees associated with proxy contest costs in 2014.
Assets are managed based on geographic location because certain continuing and discontinued operations share certain facilities. Assets by reportable segment are estimated based on the value of long-lived assets at each location and the activities performed at the location.
All assets are assigned to our Industrial Materials segment as all of our operations exist to support that business.
The following tables summarize information as to our operations in different geographic areas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
(Dollars in thousands)
|
Net sales:*
|
|
|
|
|
|
U.S.
|
$
|
195,264
|
|
|
$
|
107,517
|
|
|
$
|
74,526
|
|
Americas
|
165,761
|
|
|
132,917
|
|
|
116,944
|
|
Asia Pacific
|
80,832
|
|
|
37,509
|
|
|
41,302
|
|
Europe, Middle East, Africa
|
383,288
|
|
|
255,097
|
|
|
205,191
|
|
Total
|
$
|
825,145
|
|
|
$
|
533,040
|
|
|
$
|
437,963
|
|
*
Net Sales were not impacted by purchase price accounting adjustments.
|
|
|
|
|
|
|
|
|
|
At December 31,
|
2015
|
|
2016
|
(Dollars in thousands)
|
Long-lived assets (a):
|
|
|
|
U.S. and Canada
|
$
|
209,634
|
|
|
$
|
191,502
|
|
Mexico
|
158,950
|
|
|
151,288
|
|
Brazil
|
8,787
|
|
|
6,100
|
|
France
|
76,535
|
|
|
69,558
|
|
Spain
|
93,049
|
|
|
87,614
|
|
South Africa
|
2,879
|
|
|
2,547
|
|
Italy
|
1,032
|
|
|
10
|
|
Switzerland
|
266
|
|
|
192
|
|
Other countries
|
31
|
|
|
44
|
|
Total
|
$
|
551,163
|
|
|
$
|
508,855
|
|
|
|
(a)
|
Long-lived assets represent fixed assets, net of accumulated depreciation.
|
|
|
(6)
|
Goodwill and Other Intangible Assets
|
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill
impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Our annual impairment test of goodwill was performed as of December 31, 2014 for all reporting units. The estimated fair values of our reporting units were determined based on the income approach, using assumptions and estimates from the standpoint of potential market participants. Based on these valuations, the fair value for the needle coke reporting unit was below its carrying value resulting in a step two analysis and consequently a goodwill impairment charge of
$76.1 million
for the year ended December 31, 2014.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We received notice, in March 2015, that the market prices for needle coke were decreasing by an additional
18%
, effective for the second quarter of 2015. This decline further compressed our margins for needle coke products versus our annual plan assumptions. We determined that this change, which is driven by over capacity in the market indicated that the needle coke industry is facing a deeper and longer trough than previously expected. As such, we considered the additional price change as a triggering event for our Needle coke reporting unit and tested its goodwill for impairment as of March 31, 2015. In the first step of the analysis, we compared the estimated fair value of the reporting unit to its carrying value, including goodwill. The fair value of the reporting unit was determined based on an income approach, using a discounted cash-flow (“DCF”) model from a market participant’s perspective. The estimated future cash-flows were updated versus the year-end analysis to reflect the expectation of a longer trough. A discount rate of
10.5%
was applied to the forecasted cash-flows and is based on a weighted average cost of capital ("WACC"). Company specific beta and mix of debt to equity are inputs into the determination of the WACC, which is then qualitatively assessed from the standpoint of potential market participants. Based on the step one analysis described earlier, the fair value of the needle coke reporting unit was below its carrying value, resulting in a step two analysis and consequently the full impairment of the needle coke goodwill, resulting in a charge of
$35.4 million
.
As a result of our acquisition by Brookfield, our goodwill and intangibles were revalued as of August 15, 2015. See Note 2 "Preferred Share Issuance and Merger" for description of the Merger and the results of purchase price accounting. The following tables represents the changes in the carrying value of goodwill and intangibles during the predecessor entity period of January 1, 2015 through August 14, 2015 and the successor entity from August 15, 2015 through December 31, 2016:
The changes in the Company’s carrying value of goodwill during the years ended
December 31, 2015
and
2016
are as follows:
|
|
|
|
|
|
Total
|
Predecessor
|
(Dollars in Thousands)
|
Balance as of December 31, 2014
|
$
|
420,129
|
|
Impairment
|
(35,381
|
)
|
Currency translation effect
|
(616
|
)
|
Balance as of August 14, 2015
|
$
|
384,132
|
|
|
|
Successor
|
|
Balance as of August 15, 2015
|
$
|
170,418
|
|
Adjustments
|
1,641
|
|
Balance as of December 31, 2015
|
172,059
|
|
Adjustments (See Note 2)
|
1,058
|
|
Goodwill transferred to discontinued operations
|
(2,000
|
)
|
Balance as of December 31, 2016
|
$
|
171,117
|
|
The following table summarizes acquired intangible assets with determinable useful lives by major category :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
As of December 31, 2016
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization /
Impairment
|
|
Net
Carrying
Amount
|
(Dollars in Thousands)
|
|
(Dollars in Thousands)
|
Trade name
|
22,500
|
|
|
(889
|
)
|
|
21,611
|
|
|
22,500
|
|
|
(3,235
|
)
|
|
19,265
|
|
Technology and know-how
|
55,300
|
|
|
(2,900
|
)
|
|
52,400
|
|
|
55,300
|
|
|
(10,397
|
)
|
|
44,903
|
|
Customer related intangible
|
64,500
|
|
|
(1,688
|
)
|
|
62,812
|
|
|
64,500
|
|
|
(6,177
|
)
|
|
58,323
|
|
Total finite-lived intangible assets
|
$
|
142,300
|
|
|
$
|
(5,477
|
)
|
|
$
|
136,823
|
|
|
$
|
142,300
|
|
|
$
|
(19,809
|
)
|
|
$
|
122,491
|
|
Amortization expense of intangible assets in
2014
was
$18.4 million
. Amortization expense of intangible assets was
$10.5 million
in the period January 1 through August 14, 2015 and
$5.5 million
in the period August 15 through December 31, 2015. Amortization expense of intangible assets totaled
$14.3 million
in 2016. Estimated
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
annual amortization expense for the next five years will approximate
$13.6 million
in
2017
,
$12.9 million
in
2018
,
$12.2 million
in
2019
,
$11.4 million
in
2020
and
$10.7 million
in
2021
.
The following table presents our long-term debt:
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2015
|
|
As of
December 31, 2016
|
|
(Dollars in thousands)
|
Credit Facility (Revolving Facility and Term Loan Facility)
|
$
|
98,000
|
|
|
$
|
90,731
|
|
Senior Notes
|
267,827
|
|
|
274,132
|
|
Other Debt
|
1,400
|
|
|
569
|
|
Total Debt
|
367,227
|
|
|
365,432
|
|
Less: Short-term Debt
|
(4,772
|
)
|
|
(8,852
|
)
|
Long-term Debt
|
$
|
362,455
|
|
|
$
|
356,580
|
|
Revolving Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement with a borrowing capacity of
$400 million
and a maturity date of April 2019 (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into a further Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a
$40 million
senior secured delayed draw term loan facility (the "Term Loan Facility").
On July 28, 2015, GrafTech and certain of its subsidiaries entered into an amendment to the Amended and Restated Credit Agreement to change the terms regarding the occurrence of a default upon a change in control (which is defined thereunder to include the acquisition by any person of more than
25
percent of GrafTech’s outstanding shares) to exclude the acquisition of shares by Brookfield (see Note 2). In addition, effective upon such acquisition, the financial covenants were eased, resulting in increased availability under the Revolving Facility. The size of the Revolving Facility was also reduced from
$400 million
to
$375 million
. The size of the Term Loan Facility remained at
$40 million
.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. The size of the Revolving Facility was permanently reduced from
$375 million
to
$225 million
. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under the Revolving Facility) in excess of
$25 million
. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens and incur debt; a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility and the Term Loan Facility; and changes to the Company’s financial covenants so that until the earlier of March 31, 2019 or the Company has
$75 million
in trailing twelve month EBITDA (as defined in the Revolving Facility), the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from (
$40 million
) to
$35 million
after which the Company’s existing financial covenants under the Revolving Facility will apply.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
With this amendment, the Company has full access to the
$225 million
Revolving Facility, subject to the $25 million minimum liquidity requirement. As of
December 31, 2016
, the Company had
$61.2 million
of borrowings on the Revolving Facility and
$12.3 million
of letters of credit drawn against the Revolving Facility.
The
$40 million
Term Loan Facility was fully drawn on August 11, 2015, in connection with the repayment of the Senior Subordinated Notes. The balance of the Term Loan Facility was
$29.5 million
as of
December 31, 2016
.
The interest rate applicable to the Revolving Facility and Term Loan Facility is LIBOR plus a margin ranging from
2.25%
to
4.75%
(depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from
0.35%
to
0.70%
(depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our Revolving Facility, to the extent available. We will use cash proceeds from the sale of our Engineered Solutions businesses to repay borrowings outstanding under the Revolving Facility and the Term Loan. We cannot assure you that we will, or will be able to, consummate any such sales on acceptable terms or at all or as to the price, terms or conditions of any such sales.
As of
December 31, 2016
, we were in compliance with all financial and other covenants contained in the Revolving Facility, as applicable.
Senior Notes
On November 20, 2012, the Company issued $
300 million
principal amount of
6.375%
Senior Notes due 2020 (the "Senior Notes"). The Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
The Senior Notes bear interest at a rate of
6.375%
per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to
100%
of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the indenture.
If, prior to maturity, a change in control (as defined in the indenture) of the Company occurs and thereafter certain downgrades of the ratings of the Senior Notes as specified in the indenture occur, the Company will be required to offer to repurchase any or all of the Senior Notes at a repurchase price equal to
101%
of the aggregate principal amount of the Senior Notes, plus any accrued and unpaid interest. On August 17, 2015 a change in control occurred due the merger (see Note 2 to the Financial Statements). However, the downgrade of the ratings of the Senior Notes, as specified in the indenture, did not occur. Therefore, the company was not and will not be required to offer to repurchase the Senior Notes as a result of the merger.
The indenture for the Senior Notes also contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to: (i) create liens or use assets as security in other transactions; (ii) engage in certain sale/leaseback transactions; and (iii) merge, consolidate or sell, transfer, lease or dispose of substantially all of their assets.
The indenture for the Senior Notes also contains customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the indenture or the Senior Notes which failures are not cured or waived as provided in the indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (each, as defined in the indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $
50.0 million
, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $
50.0 million
against the Company, any Subsidiary Guarantor or
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
any Significant Subsidiary that is not discharged, waived or stayed as provided in the indenture, (vi) cessation of any Subsidiary Guarantee (as defined in the indenture) to be in full force and effect or denial or disaffirmance by any subsidiary guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.
Senior Subordinated Notes
On November 30, 2010, in connection with the acquisitions of Seadrift Coke LP and C/G Electrodes, LLC, the Company issued Senior Subordinated Notes in an aggregate total face amount of
$200 million
. These Senior Subordinated Notes were non-interest bearing and matured in 2015. Because the Senior Subordinated Notes were non-interest bearing, the Company was required to record them at their present value (determined using an interest rate of
7%
). The difference between the face amount of the Senior Subordinated Notes and their present value is recorded as debt discount. The debt discount was amortized to income using the interest method, over the life of the Senior Subordinated Notes.
On July 9, 2015, the Company provided notice to all holders of the Senior Subordinated Notes that, as permitted under the Senior Subordinated Notes, the Company intended to prepay in full the entire
$200 million
aggregate principal amount of the Senior Subordinated Notes after the Company's receipt of the proceeds of the issuance of Preferred Stock to Brookfield. See Note 2 for further discussion of the Preferred Stock issuance. This prepayment was consummated on August 11, 2015.
The following table presents an analysis of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
For the year Ended December 31,2014
|
|
For the Period January 1 Through August 14, 2015
|
|
For the Period August 15 Through December 31, 2015
|
|
For the year Ended December 31,2016
|
|
(Dollars in thousands)
|
Interest incurred on debt
|
$
|
20,099
|
|
|
$
|
12,066
|
|
|
$
|
7,694
|
|
|
$
|
20,408
|
|
Amortization of discount on
Senior Subordinated Notes
|
12,298
|
|
|
12,027
|
|
|
—
|
|
|
—
|
|
Accretion of fair value adjustment
on Senior Notes
|
—
|
|
|
—
|
|
|
2,305
|
|
|
6,305
|
|
Amortization of debt issuance costs
|
3,339
|
|
|
2,118
|
|
|
—
|
|
|
201
|
|
Total interest expense
|
$
|
35,736
|
|
|
$
|
26,211
|
|
|
$
|
9,999
|
|
|
$
|
26,914
|
|
Interest rates
The Revolving Facility had an effective interest rate of
2.68%
and
5.52%
as of December 31,
2015
and
2016
, respectively. The Senior Notes carry an interest rate of
6.375%
. The Senior Subordinated Notes had an implied rate of
7.00%
.
On August 11, 2015, we prepaid our Senior Subordinated Notes (see Note 7 "Debt and Liquidity"). This prepayment resulted in accelerated amortization of
$4.5 million
as the Notes were prepaid at the face value. The accelerated expense was recorded in the predecessor period.
|
|
(9)
|
Fair Value Measurements and Derivative Instruments
|
Fair Market Value Measurements
Depending on the inputs, we classify each fair value measurement as follows:
|
|
•
|
Level 1 – based upon quoted prices for
identical
instruments in active markets,
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
•
|
Level 2 – based upon quoted prices for
similar
instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations of all of whose significant inputs are observable, and
|
|
|
•
|
Level 3 – based upon one or more significant unobservable inputs.
|
The following section describes key inputs and assumptions used in valuation methodologies of our assets and liabilities measured at fair value on a recurring basis:
Cash and cash equivalents, short-term notes and accounts receivable, accounts payable and other current payables
– The carrying amount approximates fair value because of the short maturity of these instruments.
Debt
– The fair value of our debt as of December 31,
2015
, was
$273.4 million
versus a book value of
$367.2 million
. As of December 31,
2016
, the fair value was
$342.1 million
, versus a book value of
$365.4 million
. The fair values of the Senior Notes and the Revolving Facility were determined using level 1 and level 3 inputs, respectively.
Assets held for sale
– Assets held for sale values are determined using Level 3 fair value inputs. These represent management's estimate of fair value based upon current quotes from participants in the sales process.
Foreign currency derivatives
– Foreign currency derivatives are carried at market value using Level 2 inputs. There were
no
outstanding gains or losses as of December 31
2015
and
$0.2 million
of outstanding losses as of December 31,
2016
.
Commodity derivative contracts
– Commodity derivative contracts are carried at fair value. We determine the fair value using observable, quoted natural gas and refined oil product prices that are determined by active markets and therefore classify the commodity derivative contracts as Level 2. There were
no
outstanding gains or losses as of December 31,
2015
and
2016
.
Additional fair value information related to our Pension funds' assets can be found in Note 12 "Retirement Plans and Postretirement Benefits".
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the US Dollar.
Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-parties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was no ineffectiveness on these contracts during the twelve months ended December 31,
2015
or
2016
.
In
2015
and
2016
, we entered into foreign forward currency derivatives as hedges of anticipated cash flows denominated in the Mexican peso, South African rand, euro and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates between the US dollar and the Mexican peso, South African rand, euro and Japanese yen. As of December 31,
2015
, we had outstanding Mexican peso, Brazilian real, South African rand, euro, and Japanese yen currency contracts, with aggregate notional amounts of
$18.7 million
. As of December 31,
2016
, we had outstanding Mexican peso, euro and Japanese yen currency contracts, with aggregate notional amounts of
$22.6 million
. The foreign currency derivatives outstanding as of December 31,
2016
have a maturity date of
January, 27 2017
.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Commodity derivative contracts
We may periodically enter into derivative contracts for natural gas and certain refined oil products. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. We had no outstanding commodity derivative contracts as of
December 31, 2016
.
Net Investment Hedges
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was
$11.8 million
and
$13.3 million
as of
December 31, 2015
and
December 31, 2016
, respectively. Within our currency translation adjustment portion of other comprehensive income, we recorded a gain of
$1.4 million
in the year ended
December 31, 2015
, and a loss of
$1.5 million
in the year ended
December 31, 2016
, resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31,
2015
and
2016
, the fair value of our derivatives and their respective balance sheet locations are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
As of December 31, 2015
|
(Dollars in Thousands)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
Prepaid and other current assets
|
|
$
|
76
|
|
|
Other current liabilities
|
|
$
|
11
|
|
Total fair value
|
|
|
$
|
76
|
|
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
Prepaid and other current assets
|
|
$
|
10
|
|
|
Other current liabilities
|
|
$
|
188
|
|
Total fair value
|
|
|
$
|
10
|
|
|
|
|
$
|
188
|
|
The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations when the hedged item impacts earnings and are as follows for the years ended
2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss Recognized (EffectivePortion)
|
|
|
Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion)
|
|
2014
|
|
For the Period January 1
Through
August 14, 2015
|
|
For the Period August 15 Through December 31, 2015
|
|
2016
|
Derivatives designated as cash flow hedges:
|
|
(Dollars in Thousands)
|
Foreign currency
derivatives, excluding tax
of $85, $106, $17 and $32,
respectively
|
|
Revenue/Cost of
goods sold
Other expense /
(income)
|
|
$
|
(849
|
)
|
|
$
|
(1,062
|
)
|
|
$
|
(172
|
)
|
|
$
|
(322
|
)
|
Commodity forward
derivatives, excluding
tax of $(120), $(424) and
$0 respectively
|
|
Cost of goods sold
|
|
$
|
328
|
|
|
$
|
1,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss
Recognized
|
|
|
Location of (Gain)/Loss Recognized in the Consolidated Statement of Income
|
|
2014
|
|
For the Period January 1
Through
August 14, 2015
|
|
For the Period August 15 Through December 31, 2015
|
|
2016
|
Derivatives not designated as hedges:
|
|
(Dollars in thousands)
|
Foreign currency derivatives
|
|
Cost of goods sold /
Other expense /
(income)
|
|
$
|
1,020
|
|
|
$
|
1,060
|
|
|
$
|
(560
|
)
|
|
$
|
549
|
|
Our foreign currency and commodity derivatives are treated as hedges and are required to be measured at fair value on a recurring basis. With respect to the inputs used to determine the fair value, we use observable, quoted rates that are determined by active markets and, therefore, classify the contracts as “Level 2”.
|
|
(10)
|
Supplementary Balance Sheet Detail
|
The following tables present supplementary balance sheet details:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
2015
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
Inventories:
|
|
|
|
Raw materials and supplies
|
$
|
66,201
|
|
|
$
|
54,469
|
|
Work in process
|
89,453
|
|
|
52,379
|
|
Finished goods
|
62,476
|
|
|
49,263
|
|
|
218,130
|
|
|
156,111
|
|
Prepaid expenses and other current assets:
|
|
|
|
Prepaid expenses
|
$
|
9,041
|
|
|
$
|
6,096
|
|
Value added tax and other indirect taxes receivable
|
10,069
|
|
|
12,984
|
|
Other current assets
|
2,040
|
|
|
2,585
|
|
|
$
|
21,150
|
|
|
$
|
21,665
|
|
Property, plant and equipment:
|
|
|
|
Land and improvements
|
$
|
44,052
|
|
|
$
|
43,737
|
|
Buildings
|
55,843
|
|
|
55,440
|
|
Machinery and equipment and other
|
431,226
|
|
|
460,892
|
|
Construction in progress
|
40,208
|
|
|
25,635
|
|
|
$
|
571,329
|
|
|
$
|
585,704
|
|
Other accrued liabilities:
|
|
|
|
Payrolls (including incentive programs)
|
$
|
4,028
|
|
|
$
|
4,802
|
|
Employee compensation and benefits
|
6,199
|
|
|
11,439
|
|
Other
|
10,760
|
|
|
14,278
|
|
|
$
|
20,987
|
|
|
$
|
30,519
|
|
Other long term obligations:
|
|
|
|
Postretirement benefits
|
$
|
20,102
|
|
|
$
|
19,002
|
|
Pension and related benefits
|
55,364
|
|
|
45,876
|
|
Other
|
18,852
|
|
|
17,270
|
|
|
$
|
94,318
|
|
|
$
|
82,148
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents an analysis of the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
For the Period January 1 through
August 14, 2015
|
|
For the Period August 15 through
December 31, 2015
|
|
2016
|
|
(Dollars in thousands)
|
Balance at beginning of year
|
$
|
6,262
|
|
|
$
|
6,969
|
|
|
$
|
—
|
|
|
$
|
244
|
|
Additions
|
3,520
|
|
|
85
|
|
|
244
|
|
|
129
|
|
Deductions
|
(2,813
|
)
|
|
(1,177
|
)
|
|
—
|
|
|
(47
|
)
|
Balance at end of year
|
$
|
6,969
|
|
|
$
|
5,877
|
|
|
$
|
244
|
|
|
$
|
326
|
|
Lease commitments under non-cancelable operating leases extending for one year or more will require the following future payments:
|
|
|
|
|
|
(Dollars in thousands)
|
2017
|
$
|
2,637
|
|
2018
|
2,158
|
|
2019
|
1,781
|
|
2020
|
1,108
|
|
2021
|
373
|
|
After 2021
|
902
|
|
Total lease and rental expenses under non-cancelable operating leases extending one year or more approximated
$7.1 million
in
2014
,
$6.2 million
in
2015
and
$3.6 million
in
2016
.
|
|
(12)
|
Retirement Plans and Postretirement Benefits
|
Retirement Plans
On February 26, 1991, we formed our own retirement plan covering substantially all our U.S. employees. Under our plan, covered employees earned benefit payments based primarily on their service credits and wages subsequent to February 26, 1991.
Prior to that date, substantially all our U.S. employees were participants in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). While service credit was frozen, covered employees continued to earn benefits under the Union Carbide plan based on their final average wages through February 26, 1991, adjusted for salary increases (not to exceed
six
percent per annum) through January 26, 1995, the date Union Carbide ceased to own a minimum
50%
of the equity of GTI. The Union Carbide plan is responsible for paying retirement and death benefits earned as of February 26, 1991.
Effective January 1, 2002, we established a defined contribution plan for U.S. employees. Certain employees had the option to remain in our defined benefit plan for an additional period of up to
five
years. Employees not covered by this option had their benefits under our defined benefit plan frozen as of December 31, 2001, and began participating in the defined contribution plan.
Effective March 31, 2003, we curtailed our qualified benefit plan and the benefits were frozen as of that date for the U.S. employees who had the option to remain in our defined benefit plan. We also closed our non-qualified U.S. defined benefit plan for the participating salaried workforce. The employees began participating in the defined contribution plan as of April 1, 2003.
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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On March 27, 2015, we settled
$62.0 million
of projected benefit obligations for our United Kingdom plan through the purchase of a group annuity contract. The purchase was fully funded with pension plan assets.
The components of our consolidated net pension costs are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
2014
|
|
For the Period January 1 Through August 14, 2015
|
|
For the Period August 15 Through December 31, 2015
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
|
|
(Dollars in thousands)
|
Service cost
|
$
|
750
|
|
|
$
|
1,107
|
|
|
$
|
151
|
|
|
$
|
98
|
|
|
$
|
386
|
|
|
$
|
281
|
|
Interest cost
|
5,983
|
|
|
2,669
|
|
|
854
|
|
|
554
|
|
|
2,200
|
|
|
94
|
|
Expected return on assets
|
(5,215
|
)
|
|
(2,516
|
)
|
|
—
|
|
|
—
|
|
|
(1,885
|
)
|
|
(59
|
)
|
Amortization of prior service cost
|
—
|
|
|
2
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
Curtailment gain
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(675
|
)
|
Mark-to-market loss (gain)
|
18,431
|
|
|
(534
|
)
|
|
—
|
|
|
—
|
|
|
716
|
|
|
1,843
|
|
Pension costs
|
$
|
19,949
|
|
|
$
|
700
|
|
|
$
|
1,005
|
|
|
$
|
640
|
|
|
$
|
1,417
|
|
|
$
|
1,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
2016
|
|
|
U.S.
|
|
Foreign
|
|
|
Service cost
|
|
$
|
1,325
|
|
|
$
|
698
|
|
Interest cost
|
|
5,744
|
|
|
243
|
|
Expected return on assets
|
|
(4,940
|
)
|
|
(298
|
)
|
Mark-to-market loss (gain)
|
|
(2,322
|
)
|
|
(220
|
)
|
Pension costs
|
|
$
|
(193
|
)
|
|
$
|
423
|
|
The mark-to-market loss in 2015 was caused by changes to the discount rate. The mark-to-market gain in 2016 was the result of better than expected asset returns and favorable change to the mortality tables, partially offset by unfavorable changes to the discount rate.
Amounts recognized in other comprehensive income did not represent a significant portion of our total post-retirement cost. As a result of our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger"), our pension and post-retirement obligations were revalued as of August 15, 2015. The result of this valuation eliminated historical components of Other Comprehensive Income.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31,
2015
and
2016
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2015
|
|
As of
December 31, 2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Changes in Benefit Obligation:
|
|
|
|
|
|
|
|
Net benefit obligation at
beginning of period, August 15, 2015
and January 1, 2016, respectively
|
$
|
146,790
|
|
|
$
|
18,512
|
|
|
$
|
142,126
|
|
|
$
|
18,271
|
|
Service cost
|
386
|
|
|
281
|
|
|
1,325
|
|
|
698
|
|
Interest cost
|
2,200
|
|
|
94
|
|
|
5,744
|
|
|
243
|
|
Participant contributions
|
—
|
|
|
79
|
|
|
—
|
|
|
256
|
|
Plan amendments / curtailments
|
—
|
|
|
(578
|
)
|
|
—
|
|
|
(122
|
)
|
Foreign currency exchange changes
|
—
|
|
|
(480
|
)
|
|
—
|
|
|
(527
|
)
|
Actuarial loss (gain)
|
(3,896
|
)
|
|
377
|
|
|
1,293
|
|
|
(18
|
)
|
Benefits paid
|
(3,354
|
)
|
|
(14
|
)
|
|
(10,258
|
)
|
|
(564
|
)
|
Net benefit obligation at end of period
|
$
|
142,126
|
|
|
$
|
18,271
|
|
|
$
|
140,230
|
|
|
$
|
18,237
|
|
Changes in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of period, August 15, 2015
and January 1, 2016, respectively
|
$
|
97,473
|
|
|
$
|
12,811
|
|
|
$
|
93,897
|
|
|
$
|
11,293
|
|
Actual return on plan assets
|
(2,727
|
)
|
|
(1,407
|
)
|
|
8,556
|
|
|
378
|
|
Foreign currency exchange rate changes
|
—
|
|
|
(346
|
)
|
|
—
|
|
|
(346
|
)
|
Employer contributions
|
2,505
|
|
|
170
|
|
|
8,710
|
|
|
854
|
|
Participant contributions
|
—
|
|
|
79
|
|
|
—
|
|
|
256
|
|
Benefits paid
|
(3,354
|
)
|
|
(14
|
)
|
|
(10,258
|
)
|
|
(564
|
)
|
Fair value of plan assets at end of period
|
$
|
93,897
|
|
|
$
|
11,293
|
|
|
$
|
100,905
|
|
|
$
|
11,871
|
|
Funded status (underfunded):
|
$
|
(48,229
|
)
|
|
$
|
(6,978
|
)
|
|
$
|
(39,325
|
)
|
|
$
|
(6,366
|
)
|
Amounts recognized in accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
(95
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Amounts recognized in the statement
of financial position:
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(437
|
)
|
|
(253
|
)
|
|
(435
|
)
|
|
(128
|
)
|
Non-current liabilities
|
(47,792
|
)
|
|
(6,725
|
)
|
|
(38,890
|
)
|
|
(6,238
|
)
|
Net amount recognized
|
$
|
(48,229
|
)
|
|
$
|
(6,978
|
)
|
|
$
|
(39,325
|
)
|
|
$
|
(6,366
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was
$158.9 million
and
$157.0 million
at December 31,
2015
and
2016
, respectively. We made contributions to the plan of
$4.3 million
and paid benefits of
$5.3 million
during the period January 1 through August 14, 2015. As a result of our acquisition by Brookfield and subsequent purchase price allocation, our assets and liabilities associated with the plans were revalued as of August 15, 2015.
Plan Assets
The accounting guidance on fair value measurements specifies a hierarchy based on the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 9, “Fair Value Measurements and Derivative Instruments,” for a discussion of the fair value hierarchy.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following describes the methods and significant assumptions used to estimate the fair value of the investments:
Cash and cash equivalents
– Valued at cost. Cash equivalents are valued at net asset value as provided by the administrator of the fund.
Foreign government bonds
– Valued by the trustees using various pricing services of financial institutions.
Debt securities
– Valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor’s and Telekurs.
Equity securities
– Valued at the closing price reported on the active market on which the security is traded.
Fixed insurance contract
– Valued at the present value of the guaranteed payment streams.
Investment contracts
– Valued at the total cost of annuity contracts purchased, adjusted for market differences from the date of purchase to year-end.
Collective trusts
– Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding.
The fair value of the plan assets by category is summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
U.S. Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,986
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,986
|
|
|
$
|
1,502
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,502
|
|
Collective trusts
|
—
|
|
|
91,911
|
|
|
—
|
|
|
91,911
|
|
|
—
|
|
|
99,403
|
|
|
—
|
|
|
99,403
|
|
Total
|
$
|
1,986
|
|
|
$
|
91,911
|
|
|
$
|
—
|
|
|
$
|
93,897
|
|
|
$
|
1,502
|
|
|
$
|
99,403
|
|
|
$
|
—
|
|
|
$
|
100,905
|
|
International Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bonds
|
—
|
|
|
840
|
|
|
—
|
|
|
840
|
|
|
—
|
|
|
729
|
|
|
—
|
|
|
729
|
|
Fixed insurance contracts
|
—
|
|
|
—
|
|
|
10,453
|
|
|
10,453
|
|
|
—
|
|
|
—
|
|
|
11,142
|
|
|
11,142
|
|
Total
|
$
|
—
|
|
|
$
|
840
|
|
|
$
|
10,453
|
|
|
$
|
11,293
|
|
|
$
|
—
|
|
|
$
|
729
|
|
|
$
|
11,142
|
|
|
$
|
11,871
|
|
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy for international plan pension assets for the years ended December 31,
2015
and
2016
(dollars in thousands):
|
|
|
|
|
|
Fixed Insurance
Contracts
|
Balance as of August 15, 2015 (Predecessor)
|
$
|
13,336
|
|
Gain / contributions / currency impact
|
(2,883
|
)
|
Distributions
|
—
|
|
Balance at December 31, 2015 (Successor)
|
10,453
|
|
Gain / contributions / currency impact
|
707
|
|
Distributions
|
(18
|
)
|
Balance at December 31, 2016 (Successor)
|
$
|
11,142
|
|
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 our Consolidated Financial Statements. Assumptions used to determine net pension costs and projected benefit obligations are:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Pension Benefit Obligations Key Assumptions
|
As of December 31,
|
|
2015
|
|
2016
|
Weighted average assumptions to determine benefit obligations:
|
|
|
|
Discount rate
|
3.86
|
%
|
|
3.61
|
%
|
Rate of compensation increase
|
1.84
|
%
|
|
1.57
|
%
|
|
|
|
|
|
|
|
Pension Cost Key Assumptions
|
|
|
|
Weighted average assumptions to determine net cost:
|
|
|
|
Discount rate
|
3.79
|
%
|
|
3.86
|
%
|
Expected return on plan assets
|
3.99
|
%
|
|
4.97
|
%
|
Rate of compensation increase
|
2.08
|
%
|
|
1.84
|
%
|
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 rated 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 increase assumption is generally based on salary increases.
Plan Assets.
The following table presents our retirement plan weighted average asset allocations at December 31,
2016
, by asset category
:
|
|
|
|
|
|
|
|
Percentage of Plan Assets
as of December 31, 2016
|
|
US
|
|
Foreign
|
Equity securities and return seeking assets
|
20
|
%
|
|
—
|
%
|
Fixed income, debt securities, or cash
|
80
|
%
|
|
100
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
Investment Policy and Strategy.
The investment policy and strategy of the U.S. plan is to invest approximately
20%
in equities and return seeking assets and approximately
80%
in fixed income securities. Rebalancing is undertaken monthly. To the extent we maintain plans in other countries, target asset allocation is
100%
fixed income investments. For each plan, the investment policy is set within both asset return and local statutory requirements.
Information for our pension plans with an accumulated benefit obligation in excess of plan assets at December 31,
2015
and
2016
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Accumulated benefit obligation
|
$
|
142,126
|
|
|
$
|
16,749
|
|
|
$
|
140,230
|
|
|
$
|
16,057
|
|
Fair value of plan assets
|
93,897
|
|
|
11,293
|
|
|
100,905
|
|
|
11,142
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31,
2015
and
2016
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2016
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Projected benefit obligation
|
$
|
142,126
|
|
|
$
|
18,271
|
|
|
$
|
140,230
|
|
|
$
|
17,415
|
|
Fair value of plan assets
|
93,897
|
|
|
11,293
|
|
|
100,905
|
|
|
11,142
|
|
Following is our projected future pension plan cash flow by year:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Expected contributions in 2017:
|
|
|
|
Expected employer contributions
|
$
|
6,654
|
|
|
$
|
561
|
|
Expected employee contributions
|
—
|
|
|
—
|
|
Estimated future benefit payments reflecting expected future service for the years ending December 31:
|
|
|
|
2017
|
9,259
|
|
|
751
|
|
2018
|
9,247
|
|
|
696
|
|
2019
|
9,218
|
|
|
643
|
|
2020
|
9,256
|
|
|
720
|
|
2021
|
9,278
|
|
|
670
|
|
2022-2026
|
45,917
|
|
|
5,705
|
|
Post-Employment Benefit Plans
We provide life insurance benefits for eligible retired employees. These benefits are provided through various insurance companies. We accrue the estimated net postretirement benefit costs during the employees’ credited service periods.
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.
During 2009, we amended one of our U.S. plans to eliminate the life insurance benefit for certain non-pooled participants.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of our consolidated net postretirement costs are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
|
|
|
|
For the Period January 1 through August 14, 2015
|
|
For the Period August 15 Through December 31, 2015
|
|
2014
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Service cost
|
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
—
|
|
|
$
|
5
|
|
Interest cost
|
396
|
|
|
976
|
|
|
223
|
|
|
433
|
|
|
142
|
|
|
289
|
|
Amortization of prior service credit
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendment / curtailment
|
—
|
|
|
(294
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mark-to-market (gain) loss
|
1,151
|
|
|
1,456
|
|
|
—
|
|
|
—
|
|
|
(100
|
)
|
|
(621
|
)
|
Post-employment benefits
cost (benefit)
|
$
|
1,547
|
|
|
$
|
2,029
|
|
|
$
|
223
|
|
|
$
|
442
|
|
|
$
|
42
|
|
|
$
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
2016
|
|
U.S.
|
|
Foreign
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
4
|
|
Interest cost
|
360
|
|
|
764
|
|
Plan amendment / curtailment
|
—
|
|
|
(993
|
)
|
Mark-to-market (gain) loss
|
(191
|
)
|
|
(225
|
)
|
Post-employment benefits cost (benefit)
|
$
|
169
|
|
|
$
|
(450
|
)
|
Amounts recognized in other comprehensive income did not represent a significant portion of our total post-retirement cost. As a result of our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger"), our pension and post-retirement obligations were revalued as of August 15, 2015. The result of this valuation eliminated historical components of Other Comprehensive Income.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
|
As of
December 31, 2015
|
|
As of
December 31, 2016
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Changes in Benefit Obligation:
|
|
|
|
|
|
|
|
Net benefit obligation at
beginning of period, August 15, 2015
and January 1, 2016, respectively
|
$
|
11,395
|
|
|
$
|
13,457
|
|
|
$
|
10,859
|
|
|
$
|
11,296
|
|
Service cost
|
—
|
|
|
5
|
|
|
—
|
|
|
4
|
|
Interest cost
|
142
|
|
|
289
|
|
|
360
|
|
|
764
|
|
Foreign currency exchange rates
|
—
|
|
|
(1,489
|
)
|
|
—
|
|
|
709
|
|
Actuarial loss (gain)
|
(100
|
)
|
|
(621
|
)
|
|
(191
|
)
|
|
(225
|
)
|
Gross benefits paid
|
(578
|
)
|
|
(345
|
)
|
|
(853
|
)
|
|
(855
|
)
|
Plan amendment
|
—
|
|
|
—
|
|
|
—
|
|
|
(993
|
)
|
Net benefit obligation at end of period
|
$
|
10,859
|
|
|
$
|
11,296
|
|
|
$
|
10,175
|
|
|
$
|
10,700
|
|
Changes in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets
at beginning of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer contributions
|
578
|
|
|
345
|
|
|
853
|
|
|
855
|
|
Gross benefits paid
|
(578
|
)
|
|
(345
|
)
|
|
(853
|
)
|
|
(855
|
)
|
Fair value of plan assets at end of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status:
|
$
|
(10,859
|
)
|
|
$
|
(11,296
|
)
|
|
$
|
(10,175
|
)
|
|
$
|
(10,700
|
)
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amounts recognized in the statement of financial position:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(1,298
|
)
|
|
$
|
(755
|
)
|
|
$
|
(1,134
|
)
|
|
$
|
(738
|
)
|
Non-current liabilities
|
(9,561
|
)
|
|
(10,541
|
)
|
|
(9,041
|
)
|
|
(9,962
|
)
|
Net amount recognized
|
$
|
(10,859
|
)
|
|
$
|
(11,296
|
)
|
|
$
|
(10,175
|
)
|
|
$
|
(10,700
|
)
|
We made contributions to the plan of
$1.6 million
and paid benefits of
$1.6 million
during the period January 1 through August 14, 2015. As a result of our acquisition by Brookfield and subsequent purchase price allocation, the liabilities associated with the plans were revalued as of August 15, 2015.
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
|
|
|
2015
|
|
2016
|
Weighted average assumptions to determine benefit obligations:
|
|
|
|
Discount rate
|
5.10
|
%
|
|
4.80
|
%
|
Health care cost trend on covered charges:
|
|
|
|
Initial
|
6.67
|
%
|
|
6.80
|
%
|
Ultimate
|
6.48
|
%
|
|
5.96
|
%
|
Years to ultimate
|
2
|
|
|
8
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Postretirement Benefit Costs
|
|
|
|
|
2015
|
|
2016
|
Weighted average assumptions to determine net cost:
|
|
|
|
Discount rate
|
4.91
|
%
|
|
5.10
|
%
|
Health care cost trend on covered charges:
|
|
|
|
Initial
|
6.55
|
%
|
|
6.67
|
%
|
Ultimate
|
6.18
|
%
|
|
6.48
|
%
|
Years to ultimate
|
0
|
|
|
1
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for our postretirement benefits. A one-percentage point change in assumed health care cost trend rates would have the following effects at December 31,
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Percentage
Point Increase
|
|
One Percentage
Point Decrease
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Effect on total service cost and interest cost components
|
$
|
2
|
|
|
$
|
75
|
|
|
$
|
(2
|
)
|
|
$
|
(63
|
)
|
Effect on benefit obligations
|
$
|
67
|
|
|
$
|
599
|
|
|
$
|
(63
|
)
|
|
$
|
(507
|
)
|
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 2017:
|
|
|
|
Expected employer contributions
|
$
|
1,134
|
|
|
$
|
738
|
|
Expected employee contributions
|
—
|
|
|
—
|
|
Estimated future benefit payments reflecting expected future service for the years ending December 31:
|
|
|
|
2017
|
1,134
|
|
|
738
|
|
2018
|
1,065
|
|
|
742
|
|
2019
|
984
|
|
|
747
|
|
2020
|
898
|
|
|
754
|
|
2021
|
809
|
|
|
761
|
|
2020-2024
|
2,975
|
|
|
3,931
|
|
Savings Plan
Our employee savings plan provides eligible employees the opportunity for long-term savings and investment. The plan allows employees to contribute up to
5%
of pay as a basic contribution and an additional
45%
of pay as supplemental contribution. For
2014
, and part of
2015
, we contributed on behalf of each participating employee, in units of a fund that invested entirely in our Common Stock,
3%
on the first
100%
contributed by the employee and
5%
on the next
20%
contributed by the employee. We contributed
581,006
shares in
2014
, resulting in an expense of
$4.4 million
;
321,107
shares in
2015
, resulting in an expense of
$1.4 million
. During 2015 we changed our method of funding the plan to cash contributions. We contributed
$2.5 million
to our Savings Plan in
2016
.