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Organization and Summary of Significant Accounting Policies
 6 Months Ended
Jun. 30, 2011
Organization and Summary of Significant Accounting Policies  
Organization and Summary of Significant Accounting Policies

(1) Organization and Summary of Significant Accounting Policies
A. Organization

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 five major product categories: graphite electrodes, refractory products, needle coke products, advanced graphite materials and natural graphite, which are reported in the following segments:

Industrial Materials includes graphite electrodes, refractory products, and needle coke products, and primarily serves the steel industry.

Engineered Solutions include advanced graphite materials products for the transportation, solar, and oil and gas exploration industries, as well as natural graphite thermal management products used in electronics.

B. Basis of Presentation

The interim Consolidated Financial Statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with GAAP have been omitted or condensed. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, including the accompanying Notes, contained in our Annual Report on Form 10-K/A for the year ended December 31, 2010 (the "Annual Report").

The unaudited consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations and cash flows for the interim period presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.

C. Significant Accounting Policies

Change in Accounting Policy Regarding Pension and Other Postretirement Benefits

Effective January 1, 2011, we elected to change our method of recognizing actuarial gains and losses for our defined benefit pension plans and other postretirement benefit plans. Previously, we recognized the actuarial gains and losses as a component of Stockholders' Equity on our consolidated balance sheets on an annual basis and amortized them into our operating results to the extent such gains and losses were outside of a corridor. In addition, we used a calculated market-related value of plan assets for purposes of calculating the expected return on plan assets. We have elected to 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.). The remaining components of pension and other postretirement benefits expense will be recorded on a quarterly basis (On-going Pension Expense). While our historical policy of recognizing pension and other postretirement benefit expense was considered acceptable, we believe that the new policy is preferable as it eliminates the delay in recognizing gains and losses in our operating results. This change will also improve transparency in our operating results by more quickly recognizing the effects of economic and interest rate conditions on plan obligations and assets.

We have applied these changes retrospectively, adjusting all prior periods.

Effective January 1, 2011, we also elected to change our method of accounting for certain costs included in inventory. We have elected to exclude the inactive portion of our pension and other postretirement benefit costs as a component of inventoriable costs. While our historical policy of including all pension and other postretirement benefit costs as components of inventoriable costs was acceptable, we believe that the new policy is preferable, as it only includes costs that are directly attributable to current inventory production.

Applying this change retrospectively, in connection with the change in accounting for pension and other postretirement benefit costs, did not have a material impact on previously reported inventory and cost of sales in any prior period presented.

The impacts of all adjustments made to the financial statements are summarized below (in thousands, except per share amounts):

Consolidated Statement of Income

 

     For the Three Months Ended June 30,
2010		  
     Previously
Reported		      Revised      Effect of
Change		  

Cost of sales

    $ 180,127       $ 178,936       $ (1,191 ) 

Research and development

      3,191         3,091         (100 ) 

Selling and administrative expense

      32,308         32,030         (278 ) 

Income before provision for income taxes

      48,719         50,288         1,569   

Provision for income taxes

      9,397         9,541         144   

Net income

      39,322         40,747         1,425   

Earnings per share of common stock-basic

      0.33         0.34         0.01   

Earnings per share of common stock-diluted

      0.32         0.34         0.02   

 

Consolidated Statement of Income

 

     For the Six Months Ended June 30,
2010		  
     Previously
Reported		      Revised      Effect of
Change		  

Cost of sales

    $ 327,688       $ 325,306       $ (2,382 ) 

Research and development

      5,726         5,526         (200 ) 

Selling and administrative expense

      54,819         54,263         (556 ) 

Income before provision for income taxes

      93,916         97,054         3,138   

Provision for income taxes

      21,066         21,354         288   

Net income

      72,850         75,700         2,850   

Earnings per share of common stock-basic

      0.61         0.63         0.02   

Earnings per share of common stock-diluted

      0.60         0.63         0.03   

Consolidated Statement of Cash Flows

 

     For the Six Months Ended June 30,
2010		  
     Previously
Reported		     Revised     Effect of
Change		  

Net income

    $ 72,850      $ 75,700      $ 2,850   

Deferred income tax provision

      (8,242 )      (8,239 )      3   

Postretirement and pension plan

      4,689        1,836        (2,853 ) 

Had these changes not been made in 2011, net income would have been $27.4 million compared to the $28.6 million actually recorded for the three months ended June 30, 2011 and $53.4 million compared to the $55.8 million actually recorded for the six months ended June 30, 2011. Diluted earnings per share would have been $0.19 compared to $0.20 for the three months ended June 30, 2011 and $0.37 compared to $0.38 for the six months ended June 30, 2011.

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 time estimated to lapse until the next scheduled overhaul of the applicable storage or processing unit or over one year for our turnaround. In the three and six months ended June 30, 2011, we deferred $4.9 million and $5.4 million, respectively under this policy.

Our turnaround, normally scheduled during the spring or early summer of each year, was completed during the three months ended June 30, 2011.

D. New Accounting Standards

Revenue Recognition

We adopted a new revenue recognition standard that applies to sales arrangements entered into or materially modified in the year beginning January 1, 2011. The guidance:

 

  •  

Provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and consideration allocated;

 

  •  

Eliminates the residual method of allocating revenue;

 

  •  

Requires the allocation of consideration received in a bundled revenue arrangement among the separate deliverables by introducing an estimated selling price method for valuing elements if vendor-specific objective evidence or third-party evidence of a selling price is not available; and

 

  •  

Expands related disclosure requirements.

The adoption of this standard had no material effect on our consolidated financial statements or on existing revenue recognition policies.

 

E. Recently Issued Accounting Standards

Accounting guidance issued by various standard setting and governmental authorities that have not yet become effective with respect to our Consolidated Financial Statements are described below, together with our assessment of the potential impact they may have on our results of operation and financial position.

Fair Value Measurement and Disclosure

In May 2011 the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"). The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. While disclosure requirements have been enhanced, most amendments clarify existing guidance in U.S. GAAP.

ASU 2011-04 becomes effective for us in the first quarter of 2012, with early adoption prohibited. All amendments are to be applied prospectively. We are currently assessing its impact on our Consolidated Financial Statements.