Acquisitions

6 Months Ended

Jun. 30, 2011

Acquisitions

Acquisitions

(2) Acquisitions

Seadrift Coke L.P. and C/G Electrodes LLC

On November 30, 2010, we acquired from the equity holders of Seadrift Coke L.P. ("Seadrift") the 81.1% of the equity interests of Seadrift that we did not already own and from the equity holders of C/G Electrodes LLC ("St. Marys facility") 100% of the equity interests of the St. Marys facility. Because Seadrift and the St. Marys facility meet the SEC definition of common control, we have treated the transactions as the acquisition of one business. Seadrift and the St. Marys facility (collectively referred to as the "Acquisitions") are included in our Consolidated Financial Statements beginning as of December 1, 2010.

Seadrift is one of the largest producers of petroleum-based needle coke in the world and owns the world's only known stand-alone petroleum-based needle coke plant. Needle coke is the key raw material used to make graphite electrodes, including premium UHP graphite electrodes, which are critical consumables in electric arc furnace ("EAF") steel production. We believe the acquisition of Seadrift will assure us of a stable supply of a portion of our requirements for needle coke, the primary raw material in the production of graphite electrodes.

The St. Marys facility is a U.S.-based producer of large diameter premium UHP graphite electrodes used in the EAF steel making process. The St. Marys facility also sells various other graphite-related products, including specialty graphite blocks, granular graphite and partially processed electrodes. The acquisition of the St. Marys facility provides us with a large diameter graphite electrode manufacturing facility in the U.S. which we believe will allow us to respond to customer orders more quickly and reduce freight cost and transit time for North American shipments.

Consideration transferred: The consideration paid to the equity holders of Seadrift consisted of $90.0 million in cash (including working capital adjustments), approximately 12 million shares of GTI common stock and $100 million in aggregate face amount of Senior Subordinated Notes of GTI due 2015. The consideration paid to the equity holders of the St. Marys facility consisted of $159.5 million in cash (including working capital adjustments), approximately 12 million shares of GTI common stock and $100 million in aggregate face amount of Senior Subordinated Notes of GTI due in 2015.

The computation of the fair value of the total consideration at the date of acquisition follows (in thousands, except share price):

GTI common shares issued		24,000
Price per share of GTI common stock	$	19.47
Fair value of consideration attributable to common stock	$	467,280
Fair value of Senior Subordinated Notes		142,597
Cash		249,444
Total consideration paid to equity holders		859,321
Fair value of our previously held 18.9% equity interest in Seadrift		77,342
Total consideration	$	936,663

The volume weighted average price of a share of GTI common stock on November 30, 2010 was used to determine the fair value of the stock issued as consideration in connection with the Acquisitions. The fair value of the non-interest bearing senior subordinated notes was determined using an interest rate of 7%. Accounting guidance required us to remeasure the book value of our previously held 18.9% equity interest in Seadrift at November 30, 2010 to its fair value and recognize the resulting gain of $9.6 million in our 2010 earnings.

Recording of assets acquired and liabilities assumed: The Acquisitions are accounted for using the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations ("ASC 805"). 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 preliminary 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 purchase price allocations are subject to further adjustment until all pertinent information regarding the property, plant and equipment, intangible assets, other long-term assets, goodwill, long-term debt, other long-term liabilities, and deferred income tax liabilities are fully evaluated by us and independent valuations are complete.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date (in thousands):

Cash	$	8,240
Accounts receivable		23,079
Inventories		82,665
Property, plant and equipment		280,710
Intangible assets		158,200
Other assets		988
Accounts payable		14,130
Other accrued liabilities		6,830
Debt obligations		1,197
Other long-term liabilities		1,000
Deferred tax liability		83,306
Net identifiable assets acquired		447,419
Goodwill		489,244
Net assets acquired	$	936,663

Intangible assets: The following table is a summary of the fair values of the identifiable intangible assets and their estimated useful lives (dollars in thousands):

	Fair Value		Weighted Average Amortization Period
Customer relationships	$	107,500		13.4 years
Technology and know-how		42,800		8.1 years
Tradenames		7,900		7.7 years
Total intangible assets	$	158,200		11.6 years

Goodwill: Goodwill of approximately $489.2 million was recognized for the Acquisitions 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. Specifically, the goodwill recorded as part of the Acquisitions includes:

• the expected synergies and other benefits that we believe will result from combining the operations of Seadrift and the St. Marys facility with the operations of GrafTech;

• any intangible assets that do not qualify for separate recognition such as the assembled workforce; and

• the value of the going-concern element of Seadrift's and St. Marys facility's existing businesses (the higher rate of return on the assembled collection of net assets versus acquiring all of the net assets separately).

We have assigned the goodwill to our Industrial Materials segment. Approximately $168.2 million of the goodwill is deductible for federal income tax purposes.

Debt: We repaid $80.6 million of debt and interest rate swaps and assumed an additional $1.2 million of debt. The recorded amount of the debt assumed approximated its fair value. The following is a summary of the third-party debt assumed and not repaid in connection with the close of the Acquisitions (dollars in thousands):

Pennsylvania Industrial Development Authority mortgage note due 2018, interest rate of 3%	$	1,020
Secured promissory note due 2014, interest rate of 6.25%		177
Total debt assumed	$	1,197

Previously held 18.9% equity interest in Seadrift: On June 30, 2008, we acquired 100% of Falcon-Seadrift Holding Corp., now named GrafTech Seadrift Holding Corp. ("GTSD"), which held approximately 18.9% of the equity interests in Seadrift. The substance of the transaction was the acquisition of an asset, the limited partnership units, rather than a business combination. Because the amount we paid for the limited partnership interests exceeded their tax basis accounting guidance required us to recognize a deferred tax liability for this difference and increase our purchase price. We also had a deferred tax asset valuation allowance at the time we acquired the limited partnership units. Accounting guidance required us to reduce the valuation allowance and decrease the purchase price because the deferred tax liability recorded for the purchase was expected to reverse during the same period that our deferred tax assets were expected to reverse.

We accounted for our investment in Seadrift using the equity method of accounting because we had the ability to exercise significant influence, but not exercise control. In 2008 and 2009, we determined that the fair value of our investment was less than our carrying amount and that the losses in value were other than temporary. We recorded non-cash impairments of $34.5 million and $52.8 million in 2008 and 2009, respectively, to recognize these other than temporary losses in value. Summarized financial information for Seadrift, including adjustments for material intervening events, for the three and six months ended June 30, 2010 was (dollars in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2010
Net sales	$	39,911	$	62,700
Gross profit		14,006		16,937
Net income		10,912		10,037

Loan to Seadrift: In late June 2009 and July 2009, Seadrift entered into agreements to borrow up to $17.0 million from certain of its shareholders, which included up to $8.5 million from us. In early July the shareholder group loaned Seadrift $12.0 million which included $6.0 million from us. Each loan was evidenced by a demand note with an interest rate of 10%.

We recorded our $6.0 million loan at its face amount, which reasonably approximated its present value. Seadrift repaid the total borrowing of $12.0 million on March 31, 2010.

Micron Research Corporation

On February 9, 2011, we purchased substantially all of the assets and assumed certain trade liabilities of Micron Research Corporation ("Micron Research"), a subsidiary of E. Holdings, Inc, for $6.5 million of cash. Micron Research manufactures super fine grain graphite materials and primarily services Electrical Discharge Machining customers. We intend to utilize their technology and capability to service other applications including solar, electronics and medical. The substance of the transaction is the acquisition of a business and we accounted for the transaction following the guidance in ASC 805. Tangible assets acquired and liabilities assumed were recorded at their estimated fair values of $5.0 million and $0.2 million, respectively. The estimated fair values of finite-lived intangible assets acquired of $1.3 million related to technology and know-how and customer relationships are being amortized over their estimated useful lives ranging from 5 to 15 years. Goodwill of $0.4 million represents the excess of the consideration transferred over the net assets acquired and has been assigned to our Engineered Solutions segment.