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Article by DailyStocks_admin    (10-08-08 08:12 AM)

The Daily Magic Formula Stock for 10/07/2008 is Graftech International Ltd. According to the Magic Formula Investing Web Site, the ebit yield is 20% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

INTRODUCTION

Our vision is to enable customer leadership, better and faster than our competition, through the creation, innovation and manufacture of graphite and carbon material science-based solutions. We have over 120 years of experience in the research and development of graphite and carbon-based solutions and our intellectual property portfolio is extensive. Our business was founded in 1886 by the National Carbon Company.

We are one of the world’s largest manufacturers of the broadest range of high quality graphite electrodes, products essential to the production of electric arc furnace (“ EAF ”) steel and various other ferrous and nonferrous metals. We are one of the largest manufacturers of high quality natural graphite products enabling thermal management solutions for the electronics industry and fuel cell solutions for the transportation and power generation industries. We are one of the world’s largest manufacturers and providers of graphite and carbon products, as well as related technical services, including advanced graphite and carbon materials for the transportation, solar, and oil and gas exploration industries. We service customers in about 80 countries, including industry leaders such as Arcelor Mittal, BaoSteel, Gerdau S.A. and ThyssenKrupp Steel in steel, Samsung and Sony in electronics, and Griffin Wheel in the transportation industry.

We currently manufacture our products in 11 manufacturing facilities strategically located on four continents. We believe our network has the largest manufacturing capacity, one of the lowest manufacturing cost structures of all of our major competitors and delivers the highest-level quality products. We currently have the operating capability, depending on product mix, to manufacture approximately 220,000 metric tons of graphite electrodes annually from our existing assets. We believe that our global manufacturing network provides us with significant competitive advantages in product quality, proximity to customers, timely and reliable product delivery, and product costs. Given our global network, we are well positioned to serve the growing number of consolidated, global, multi-plant steel customers as well as certain smaller, regional customers and segments.



We operate one of the premier research, development and testing facilities in the graphite and carbon industry, and we believe we are an industry leader in graphite and carbon material science and high temperature processing know-how. We believe our technological capabilities for developing products with superior thermal, electrical and physical characteristics provide us with a competitive advantage. These capabilities have enabled us to accelerate development and commercialization of our technologies to exploit markets with high growth potential.

Products. We have four major product categories: graphite electrodes, advanced graphite materials, carbon refractories and natural graphite.

Reportable Segments. Our businesses are reported in the following reportable segments: graphite electrodes, advanced graphite materials, and other businesses, which include natural graphite and refractories. The information required by Item 1 with respect to financial information regarding our reportable segments and geographic areas is set forth under “Segment Reporting” in Note 4 to the Consolidated Financial Statements and is incorporated herein by reference.

Graphite Electrode . Our graphite electrode segment manufactures and delivers high quality graphite electrodes and related services. Electrodes are key components of the conductive power systems used to produce steel and other non-ferrous metals.

We are one of the world’s largest manufacturers of the broadest range of high quality graphite electrodes. Approximately 70% of our graphite electrodes sold is consumed in the EAF steel melting process, the steel making technology used by all “mini-mills,” typically at a rate of one graphite electrode every eight to ten operating hours. We believe that mini-mills constitute the higher long-term growth sector of the steel industry and that there is currently no commercially viable substitute for graphite electrodes in EAF steel making. Therefore, graphite electrodes are essential to EAF steel production. The remaining 30% of our graphite electrodes sold is primarily used in various other ferrous and non-ferrous melting applications, including steel refining (that is, ladle furnace operations for both EAF and basic oxygen furnace steel production), titanium dioxide production and chemical processing.

Advanced Graphite Materials. Advanced graphite materials include primary and specialty products for the transportation, solar, and oil and gas exploration industries as further described below.

Other Businesses . Other businesses include natural graphite products and refractories, as further described below.

GRAPHITE ELECTRODE SEGMENT

Our graphite electrode segment, which had net sales of $582.5 million in 2005, $670.0 million in 2006, and $812.3 million in 2007, manufactures and delivers high quality graphite electrodes as well as provides customer technical services. Graphite electrode sales represented approximately 75%, 78% and 81% of consolidated net sales for 2005, 2006, and 2007, respectively. We estimate that, in 2007, the worldwide market for graphite electrodes was over $4.3 billion. Customers for these products are located in all major geographic markets.

Use of graphite electrodes in electric arc furnaces. Graphite electrodes are consumed primarily in electric arc furnace steel production, the steel making technology used by all “mini-mills.” Graphite electrodes are also consumed in the refining of steel in ladle furnaces and in other smelting processes such as production of titanium dioxide.

Electrodes act as conductors of electricity in the furnace, generating sufficient heat to melt scrap metal, iron ore or other raw materials used to produce steel or other metals. The electrodes are consumed in the course of that production.

Electric arc furnaces operate using either alternating electric current or direct electric current. The vast majority of electric arc furnaces use alternating current. Each of these alternating current furnaces typically uses nine electrodes (in three columns of three electrodes each) at one time. The other electric arc furnaces, which use direct current, typically use one column of three electrodes. The size of the electrodes varies depending on the size of the furnace, the size of the furnace’s electric transformer and the planned productivity of the furnace. In a typical furnace using alternating current and operating at a typical number of production cycles per day, one of the nine electrodes is fully consumed (requiring the addition of a new electrode), on average, every eight to ten operating hours. The actual rate of consumption and addition of electrodes for a particular furnace depends primarily on the efficiency and productivity of the furnace. Therefore, demand for graphite electrodes is directly related to the amount and efficiency of electric arc furnace steel production.

Electric arc furnace steel production requires significant heat (as high as 5,000 degrees Fahrenheit) to melt the raw materials in the furnace, primarily scrap metal. Heat is generated as electricity (as much as 150,000 amps) passes through the electrodes and creates an electric arc between the electrodes and the raw materials.

Graphite electrodes are currently the only known commercially available products that have the high levels of electrical conductivity and the capability of sustaining the high levels of heat generated in an electric arc furnace producing steel. Therefore, graphite electrodes are essential to the production of steel in electric arc furnaces. We believe there is currently no commercially viable substitute for graphite electrodes in electric arc furnace steel making. We estimate that, on average, the cost of graphite electrodes represents about 2% of the cost of producing steel in a typical electric arc furnace.

Electric arc furnace steel production for the last five years has grown at an estimated average annual growth rate of about 5%. We believe that EAF steel production will continue to grow at an average annual long term growth rate of about 2-3%. Electric arc furnace steel production was approximately 405 million metric tons in 2007, representing approximately a third of the world’s steel production. We estimate that steel makers worldwide added 20 million metric tons of new EAF capacity in 2007, not all of which was fully operational in 2007. We are aware of about 30 million metric tons of announced new electric arc furnace steel production capacity that is scheduled to be added in the 2008 through 2010 time period. Additionally, not all of such capacity is expected to be fully operational during this time period.

Relationship Between Graphite Electrode Demand and EAF Steel Production. The improved efficiency of electric arc furnaces has resulted in a decrease in the average rate of consumption of graphite electrodes per metric ton of steel produced in electric arc furnaces (called “ specific consumption ”). We estimate that EAF melter specific consumption declined from about 2.5 kilograms of graphite electrodes per metric ton of steel produced in 2000 to about 2.0 kilograms per metric ton in 2007. During 2007, we estimate that specific consumption decreased 0.1 kilograms per metric ton. We believe that the rate of decline of specific consumption over the long term has become lower. We believe that the decline in specific consumption will continue at a more gradual pace, on average, as the costs (relative to the benefits) increase for EAF steel makers to achieve further efficiencies in specific consumption. We further believe that the rate of decline in the future will be impacted by the addition of new EAF steel making capacity. To the extent that this new capacity replaces old capacity, it has the accelerated effect of reducing industry wide specific consumption due to the efficiency of new electric arc furnaces relative to the old. However, to the extent that this new capacity increases industry wide EAF steel production capacity and that capacity is utilized, it creates additional demand for graphite electrodes.

Increases in EAF steel production, offset by declines in specific consumption, resulted in corresponding changes in demand for graphite electrodes. Graphite electrode demand is expected to grow over the long term at an estimated average annual net growth rate of about 1% to 2%, based on the anticipated growth of EAF steel production, partially offset by the decline in specific consumption described above. We believe that the graphite electrode industry manufacturing capacity utilization rate worldwide was about 95% in 2005 and 2006, and 92% in 2007.

Production Capacity. We believe that the worldwide total graphite electrode manufacturing capacity is over 1.4 million metric tons. The market in which we compete, which excludes capacity used to make electrodes for non-melter applications in China, is approximately 1.1 million metric tons. There are 2 global, and approximately 8 other notable regional or local producers (excluding China), who we believe have approximately 865,000 metric tons of this capacity. The remaining capacity is maintained by over ten other local or regional manufacturers, most of which also export worldwide.

We believe that in the markets in which we compete there is over 1.0 million metric tons of demand that corresponds with this capacity, representing a utilization rate of over 95%.

As a result of repositioning our global manufacturing network and other actions, as well as our proprietary process and technological improvements, we have the capability, depending on product demand and mix, to manufacture approximately 220,000 metric tons of graphite electrodes annually from our existing assets. We believe that our Monterrey, Mexico facility is one of the largest graphite electrode manufacturing facilities in the world.

Graphite Electrode Market Share. We estimate that about 53% of the EAF steel makers worldwide (other than in China, for which reliable information is not generally available) and about 59% of the EAF steel makers in the U.S. and the markets where we have manufacturing facilities, purchased all or a portion of their graphite electrodes from us in 2007. For 2007, we further estimate that we supplied about 33% of all graphite electrodes purchased in the U.S. and the markets where we have manufacturing facilities, about 16% worldwide (including China), and about 20% in markets in which we compete (excluding domestic China). We estimate that the worldwide market for graphite electrodes was approximately $4.3 billion in 2007 (including China).

We estimate that, in 2007, we sold graphite electrodes in over 60 countries. Sales in the United States and South Africa account for approximately 10% and 11%, respectively, of total net sales of our graphite electrode segment. No other country accounts for more than 10% of the total net sales of our graphite electrode segment.

ADVANCED GRAPHITE MATERIALS SEGMENT

Demand for our advanced graphite materials increased in 2007 as compared to 2006. The increases were mainly in the energy related markets, including solar, oil and gas exploration, and transportation industries.

Our advanced graphite materials segment had sales of $88.5 million in 2005, $103.7 million in 2006, and $114.4 million in 2007. Advanced graphite materials represented approximately 12% of consolidated net sales for 2005, approximately 12% for 2006 and approximately 11% for 2007. We estimate that our addressable worldwide market for advanced graphite materials was $332 million in 2007.

Advanced graphite materials include extruded products in a variety of shapes and grades, weighing from a few kilograms to ten metric tons, for diverse applications. These materials include primary products (such as bulk graphite blocks (called “ billets ”) that are sold to customers for further processing or finishing for end users) and specialty products (such as pressure casting molds for steel railroad car wheels).

Our extruded products are used in applications including fused refractories, diamond drill bits and semiconductor components as well as in applications in aluminum refining. In addition, certain of our materials, when combined with advanced flexible graphite, provide superior heat management solutions for insulation packages, induction furnaces, high temperature vacuum furnaces and direct solidification furnaces and other industrial thermal management applications.

OTHER BUSINESSES

Natural Graphite Products. We manufacture natural graphite products, consisting of advanced flexible graphite and flexible graphite, including our electronic thermal management (“ETM”) solutions, used for the electronics, power generation, automotive, petrochemical, and transportation industries. We are one of the world’s largest manufacturers of natural graphite products for these uses and applications.

Refractories. We also manufacture carbon, semi-graphitic, and graphite refractory bricks which are used primarily for their high thermal conductivity. Common applications in blast furnace and submerged arc furnaces include cooling courses in the hearth bottoms for heat distribution and removal, backup linings in hearth walls for improved heat transfer and safety, and lintels over copper cooling plates where a single brick cannot span the cooling plate.



BUSINESS STRATEGIES

We believe that, by maximizing the amount and speed of our cash flows, we will deliver enhanced financial performance and return on shareholder value. We have transformed our operations, building competitive advantages to enable us to compete successfully in our major product lines, to realize enhanced performance as economic conditions improve and to exploit growth opportunities from our intellectual property portfolio. Our business strategies are designed to expand upon our competitive advantages by:

Leveraging Our Unique Global Manufacturing Network. Over the past few years, we have repositioned our global manufacturing network by shutting down higher cost facilities and redeploying that capacity to our lower cost facilities. We have also adopted a constraint-management philosophy that systematically seeks to drive higher utilization rates (constraint utilization) and more productivity from our existing assets. We believe that our global manufacturing network provides us with significant competitive advantages in product quality, product costs, timely and reliable delivery, and operational flexibility to adjust product mix to meet the diverse needs of a wide range of market segments and customers.

We continue to leverage our network to seek to achieve significant increases in throughput generated from our existing assets, through productivity improvements, capital expenditures, and other efficiency initiatives. We believe we can further exploit our network by focusing our technical and customer service capabilities on:


Ÿ

the increasing number of large global customers created by the continuing consolidation trend within the steel industry, to whom we believe we are well positioned to offer products that meet their volume, product quality, product mix, delivery reliability and service needs at competitive prices; and


Ÿ

customers in targeted market segments where we have competitive advantages to meet identified customer needs due to the range and quality of our products, the utilization of our capacity, the value of our customer

technical service and our low cost supplier advantage.

We believe that our graphite electrode business has one of the top market shares in the world. In 2007, our worldwide market share in markets we participate in was about 20% in graphite electrodes.

We sell our products in every major geographic market. Sales of these products outside the U.S. accounted for about 77% of net sales in 2006 and 83% in 2007. No single customer or group of affiliated customers accounted for more than 10% of our total net sales in 2005, 2006 or 2007.

Accelerating Commercialization of Advantaged Technologies. We believe that our technological capabilities for developing products with superior thermal, electrical and physical characteristics provide us with a potential growth opportunity as well as a competitive advantage. We seek to exploit these capabilities and our intellectual property portfolio to accelerate development and commercialization of these technologies across all of our businesses, to improve existing products, including super-size graphite electrodes and large-diameter pinless electrodes used in the most demanding electric arc steel production furnaces, and to develop and commercialize new products for higher growth rate markets such as electronic thermal management technologies. For the past five years, we have received R&D Magazine’s prestigious R&D 100 Award, granted to identify the 100 most technologically significant commercialized products each year. We received this award in 2003 and 2004 for our achievements in electronic thermal management products, in 2005 for our large-diameter pinless graphite electrodes, in 2006 for GRAFOAM ® carbon foam, a unique high strength, light weight carbon foam, and in 2007 for GrafCell ® , a key component to the commercialization of fuel cells.

Delivering Exceptional and Consistent Quality. We believe that our products are among the highest quality products available in our industry. We have been recognized as a preferred or certified supplier by many major steel companies and have received numerous technological innovations and other awards by industry groups, customers and others. Using our technological capabilities, we continually seek to improve the consistent overall quality of our products and services, including the performance characteristics of each product, the uniformity of the same product manufactured at different facilities and the expansion of the range of our products. We believe that improvements in overall quality create significant efficiencies and market opportunities for us, provide us the opportunity to increase sales volumes and market share, and create production efficiencies for our customers.

Providing Superior Technical Service. We believe that we are recognized as one of the industry leaders in providing value added technical services to customers for our major product lines. We believe that we have the largest customer technical service and related supporting engineering and scientific organizations in our industry, with more than 200 engineers, scientists and specialists around the world. Our employees assist key steel and other metals customers in furnace applications, operations and upgrades to reduce energy consumption, improve raw material costs and increase output.

Deleveraging and Building Stockholder Value. We believe that our business strategies support our goal of maximizing the cash generated from operations and should accelerate our ability to enhance our capital structure by further reducing our gross debt obligations. Deleveraging remains a priority for us and we intend to purchase Senior Notes and Debentures in the open market or in privately negotiated transactions from time to time. In 2007, we redeemed $235 million of the Senior Notes at 105.125% of the principal amount, plus accrued interest. On January 15, 2008, we announced our plans to redeem an additional $125 million of the Senior Notes. This redemption occurred in February 2008.

In connection with and building on our focus on deleveraging, we continually review our assets, product lines and businesses to seek out opportunities to maximize value, through re-deployment, merger, acquisition, divestiture or other means, which could include taking on more debt or issuing more equity. We may at any time buy or sell assets, product lines or businesses.

CEO BACKGROUND

MARY B. CRANSTON Director since 2000
Age 60
Ms. Cranston is the senior partner and, from 1999 to December 2006, served as Chair of Pillsbury Winthrop Shaw Pittman LLP, an international law firm. Ms. Cranston is based in San Francisco, California. Ms. Cranston has been practicing complex litigation, including antitrust, telecommunications and securities litigation, with Pillsbury Winthrop Shaw Pittman LLP since 1975. Ms. Cranston is currently a director of Juniper Networks Inc. and Visa, Inc. She is a trustee of Stanford University and the San Francisco Ballet and a director of the California State Automobile Association, the Bay Area Council, the Commonwealth Club of California, the Episcopal Charities, and the San Francisco Museum of Women.


HAROLD E. LAYMAN Director since 2003
Age 61
From 2001 until his retirement in 2002, Mr. Layman was President and Chief Executive Officer of Blount International, Inc. Prior thereto, Mr. Layman served in other capacities with Blount International, including President and Chief Operating Officer from 1999 to 2001, Executive Vice President and Chief Financial Officer from 1997 to 2000, and Senior Vice President and Chief Financial Officer from 1993 to 1997. From 1981 through 1992, he held various financial management positions with VME Group/Volvo AB. From 1970 to 1980, Mr. Layman held various operations and financial management positions with Ford Motor Company. He is currently a director of Blount International Inc., Grant Prideco, Inc. and Infinity Property and Casualty Corporation.


FERRELL P. McCLEAN Director since 2002
Age 61
Ms. McClean was a Managing Director and the Senior Advisor to the head of the Global Oil & Gas Group in Investment Banking at J.P. Morgan Chase & Co. from 2000 through the end of 2001. She joined J.P. Morgan & Co. Incorporated in 1969 and founded the Leveraged Buyout and Restructuring Group within the Mergers & Acquisitions Group in 1986. From 1991 until 2000, Ms. McClean was a Managing Director and co-headed the Global Energy Group within the Investment Banking Group at J.P. Morgan & Co. Ms. McClean is currently a director of El Paso Corporation. She retired as a director of Unocal Corporation in 2005.


MICHAEL C. NAHL Director since 1999
Age 65
Mr. Nahl has been Executive Vice President and Chief Financial Officer of Albany International Corp., a manufacturer of paper machine clothing, which are the belts of fabric that carry paper stock through the paper production process, since April 2005. Mr. Nahl joined Albany International Corp. in 1981 as Group Vice President, Corporate, and, prior to appointment to his present position, he was Senior Vice President and Chief Financial Officer. Mr. Nahl is currently a director of Lindsay Corporation and a member of JPMorgan Chase and Company’s Regional Advisory Board.


FRANK A. RIDDICK, III Director since 2004
Age 51
Mr. Riddick has served as President and Chief Executive Officer of Formica Corporation, a manufacturer of surfacing materials used in countertops, cabinets, and flooring, since January 2002. Mr. Riddick was instrumental in assisting Formica to emerge from Chapter 11 bankruptcy proceedings in June 2004. He served as President and Chief Operating Officer of Armstrong Holdings, Inc. from February 2000 to November 2001 and in various other executive capacities at Armstrong and its subsidiaries from 1995 to 2000. In December 2000, Armstrong’s principal operating subsidiary, Armstrong World Industries, Inc., filed for Chapter 11 bankruptcy protection as a result of Armstrong’s legacy asbestos liabilities. Prior to joining Armstrong, he held a number of financial managerial positions with FMC Corporation, General Motors Corporation and Merrill Lynch & Co., Inc. Mr. Riddick is a director of Formica Corporation and a member of the Board of Visitors of the Fuqua School of Business at Duke University.


CRAIG S. SHULAR Director since 2003 and Chairman of the Board since February 2007.
Age 55
Mr. Shular was elected Chairman of the Board in February 2007. He became Chief Executive Officer and a director of GrafTech in January 2003 and has served as President since May 2002. With the resignation of GrafTech’s Chief Financial Officer effective December 12, 2005, Mr. Shular was also appointed as the interim Chief Financial Officer and served in that role until May 2006.
From 1976 through 1998, Mr. Shular held various financial, production, sales and senior business management positions at Union Carbide Corporation. He entered Union Carbide’s Management Development Program with its Carbon Products Division (GrafTech’s predecessor) after which Mr. Shular moved to Union Carbide’s Corporate Group and held several senior positions in the areas of business management, sales and marketing, operations, government relations, corporate internal audits, international finance, and accounting, serving assignments in Hong Kong, Indonesia, Singapore, Europe and the United States.
Mr. Shular joined GrafTech as its Vice President and Chief Financial Officer in January 1999, and assumed the additional duties of Executive Vice President, Electrode Sales and Marketing in February 2000 until August 2001. From August 2001 to May 2002, he served as Executive Vice President of GrafTech’s largest business—Graphite Electrodes. From May 2002 through December 2002, Mr. Shular served as Chief Operating Officer.
Mr. Shular is a Certified Public Accountant, graduating from The State University of New York at Buffalo in 1974 with a Bachelor of Science degree in Business/Marketing, cum laude, and received a degree of Master of Business Administration with honors (concentration in Finance/Accounting) from the same institution in 1976.

MANAGEMENT DISCUSSION FROM LATEST 10K

RESULTS OF OPERATIONS

Financial information discussed below excludes our cathodes business that was sold in December 2006 and has been accounted for as discontinued operations.

2006 Compared to 2005.

Consolidated . Net sales of $855.4 million in 2006 represented an $82.4 million or 10.7% increase from net sales of $773.0 million in 2005. Net sales of graphite electrodes increased $87.5 million, or 15.0%, primarily due to increased sales volumes and favorable pricing driven by higher demand, offset slightly by an unfavorable product mix in 2006 compared to 2005. Advanced graphite materials net sales increased $15.2 million, or 17.2%, due to favorable volumes and prices in 2006 compared to 2005.

Cost of sales of $612.3 million in 2006 represented a $53.0 million, or 9.5%, increase from cost of sales of $559.3 million in 2005. Cost of sales increased due to higher sales volumes, higher raw material and operating costs, and increased employee compensation costs related to our incentive compensation program. These increases were offset by a decrease due to reduced period costs associated with the exit of the carbon electrode business.

Gross profit of $243.1 million in 2006 represented a $29.3 million, or 13.7%, increase from gross profit of $213.8 million in 2005. Gross margin increased to 28.4% of net sales in 2006 from 27.7% of net sales in 2005.

Research and development expenses increased $3.2 million, or 43.2%, from $7.4 million in 2005 to $10.6 million in 2006, with the increase primarily due to a $1.1 million increase in employee compensation costs related to our incentive compensation program and increased expenses relating to other research and development efforts primarily attributable to our graphite electrode segment and natural graphite products division.

Selling and administrative expenses increased $16.6 million, or 19.6%, from $84.8 million in 2005 to $101.4 million in 2006. The increase was due primarily to increased employee compensation costs related to our incentive compensation program of $11.3 million, increased employee benefit costs of $1.3 million and $4.0 million of other selling expenses associated with higher net sales, including higher bad debt and personal property and other tax expenses.

Other (income) expense, net was a benefit of $6.6 million in 2006 compared to a charge of $19.0 million in 2005. The increase was caused by a decrease in currency losses of $24.3 million, a decrease of costs related to the write-off of capitalized bank fees and related debt extinguishment costs of $1.6 million, an increase in gains on the sale of fixed assets of $4.6 million, and a $1.5 million benefit related to our Brazil sales tax provision recorded in 2006. These decreases were offset by an increase in legal, environmental and other related costs of $0.7 million, and an increase in other costs of $5.6 million, due primarily to favorable fair value adjustments on the Debenture redemption make-whole option of $2.7 million in 2005 that did not occur in 2006.

In 2005, we recorded a net restructuring charge of $9.5 million comprised primarily of the following: a $4.6 million charge associated with the rationalization of our graphite electrode facilities, including those in Brazil, France, and Russia, a net $4.0 million charge associated with the closure of our graphite electrode manufacturing operations at Caserta, Italy and Clarksville, Tennessee. We also incurred a $0.5 million charge primarily associated with the relocation of our corporate headquarters from Wilmington, Delaware to Parma, Ohio and a $0.4 million charge associated with the closure of our advanced graphite machining operations in Sheffield, United Kingdom.

In 2006, we recorded a net restructuring charge of $10.0 million, pertaining primarily to a $3.7 million charge associated with the rationalization of our graphite electrode facilities, including those in France and the United States, a $1.8 million charge associated with the closure of our graphite electrodes manufacturing operations in Caserta, Italy, a $1.4 million charge primarily associated with the relocation of our corporate headquarters from Wilmington, Delaware to Parma, Ohio and a $2.7 million charge associated with severance and other costs for the shutdown of our carbon electrode production operations in Columbia, Tennessee.



The restructuring accrual is included in other accrued liabilities and other long-term obligations on the Consolidated Balance Sheets.

*

Includes restructuring charges of $0.2 million related to our cathodes operations.



At December 31, 2006, the outstanding balance of our restructuring reserve was $7.9 million. The components of the balance at December 31, 2006 consisted primarily of:

Graphite Electrode
Ÿ

$2.2 million related to the rationalization of our graphite electrode facilities in France;


Ÿ

$3.4 million related to the closure of our graphite electrode manufacturing operations in Caserta, Italy; and


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$0.8 million related to the phase out of our graphite electrode machining operations in Clarksville, Tennessee.



Other Businesses
Ÿ

$0.9 million related to the shutdown of our carbon electrode production operations at our Columbia, Tennessee facility.


Ÿ

$0.3 million related to the relocation of our corporate headquarters from Wilmington, Delaware to Parma, Ohio, including lease payments on our former Corporate Headquarters and severance expenses for former employees.

In the first quarter of 2006, we abandoned long-lived fixed assets associated with costs capitalized for our enterprise resource planning system implementations due to an indefinite delay in the implementation of the remaining facilities. As a result, we recorded a $6.6 million impairment loss, including the write off of capitalized interest, in accordance with SFAS No. 144. Additionally, we recorded a $1.4 million impairment loss to adjust the carrying value of the assets in Switzerland to the estimated fair value less estimated selling costs. In the third quarter of 2006, we sold the long-lived assets at our Etoy, Switzerland facility for $7.1 million.

In the second quarter of 2006, we abandoned certain long-lived fixed assets associated with the accelerated closing of our carbon electrode facility in Columbia, Tennessee due to changes in our initial plan of restructuring the facility. As a result, we recorded a $0.6 million impairment loss in accordance with SFAS No. 144. Also in the second quarter, management established a plan to sell our subsidiary in Vyazma, Russia. We classified those assets as held for sale in the Consolidated Balance Sheet in accordance with SFAS No. 144.

In the fourth quarter of 2006, we abandoned certain fixed assets related to our graphite electrode operations. As a result, we recorded a $1.7 million loss in association with SFAS No. 144.

Average total debt outstanding was approximately $708.8 million in 2005 as compared to $722.4 million in 2006. The average annual interest rate was 6.9% in 2005 as compared to 7.2% in 2006. These average rates represent the average rates on total debt outstanding and include the gain or loss, if any, of our interest rate swaps.

The effective income tax rate was approximately 354.0% in 2005. The higher effective income tax rate was primarily due to a charge resulting from a net change in the total valuation allowance for 2005 of $153.1 million. During the 2005 year-end financial accounting closing process, we determined that the timing of when we will generate sufficient U.S. taxable income to realize our U.S. deferred tax assets became less certain; therefore, we recorded a valuation allowance, primarily against our net federal deferred tax assets in the U.S., of $149.7 million. We recorded similar valuation allowances in certain other jurisdictions in both the second and fourth quarters of 2005, which resulted in charges totaling $3.3 million.

Provision for income taxes was $27.1 million in 2006 as compared to $168.0 million in 2005. The effective income tax rate was approximately 39.1% in 2006. The lower effective income tax rate is primarily due to a benefit resulting from a net decrease in the total valuation allowance for 2006 of $1.4 million, primarily related to utilization of net operating losses and the release of valuation allowance on deferred tax assets. Excluding the change in valuation allowances related to the discontinued operations, impact of restructuring charges, asset impairments and the tax expense resulting from the cathode sale, the 2006 effective tax rate was approximately 33%.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended June 30, 2008 as Compared to Three Months Ended June 30, 2007.

Consolidated . Net sales of $319.5 million in the three months ended June 30, 2008 represented a $63.6 million, or 24.9%, increase from net sales of $255.9 million in the three months ended June 30, 2007. Net sales for both of our operating segments increased, primarily due to favorable pricing, along with currency impacts of $15.1 million. High demand for most of our products, together with passing significant raw material cost increases on to our customers, has resulted in increased prices, particularly related to graphite electrodes. Favorable currency exchange rates, particularly related to the euro, have also been a strong driver of our sales increase in the three months ended June 30, 2008 compared to the three months ended June 30, 2007. These increases in sales were offset by a $3.7 million unfavorable sales mix and other items in our industrial materials segment.

Cost of sales of $205.2 million in the three months ended June 30, 2008 represented a $42.0 million, or 25.7%, increase from cost of sales of $163.2 million in the three months ended June 30, 2007. Cost of sales for both segments increased as a result of our higher sales volumes. Further, our businesses, particularly our industrial materials segment, continue to experience significant rising raw material costs. The effects of foreign currency exchange rates have also increased our costs of sales compared to the same period in 2007.

Gross profit of $114.4 million in the three months ended June 30, 2008 represented a $21.7 million, or 23.4%, increase from gross profit of $92.7 million in the three months ended June 30, 2007. Gross margin decreased slightly to 35.8% of net sales, from 36.2% in the three months ended June 30, 2007.

Research and development expenses decreased $0.2 million, or 10%, from $2.0 million in the three months ended June 30, 2007 to $1.8 million in the three months ended June 30, 2008. This decrease was primarily the result of increased State and Federal grant activity related to specific research projects, which offset a portion of our research and development costs.

Selling and administrative expenses decreased to $23.7 million for the three months ended June 30, 2008 compared to $25.5 million for the three months ended June 30, 2007. This decrease was caused primarily by favorable employee related costs for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Selling and administrative expenses have remained relatively consistent even with the higher sales due to our continued focus of monitoring and controlling discretionary expenses.

estructuring charges were $0.2 million for the three months ended June 30, 2008, compared to a net benefit of $0.1 million in the three months ended June 30, 2007.

Other (income) expense, net was a charge of $7.0 million in the three months ended June 30, 2008 compared to income of $24.3 million in three months ended June 30, 2007. In the three months ended June 30, 2008 we incurred a $9.0 million charge for the Debenture make-whole payment that was made in conjunction with the conversion of the Debentures. The income in the three months ended June 30, 2007 was primarily the result of a $23.9 million gain on the sale of assets, which was driven by the sale of our Caserta, Italy facility. We also incurred a $2.8 million loss on the extinguishment of debt in connection with the redemption of $50 million of our outstanding Senior Notes in the three months ended June 30, 2007.

Average debt outstanding (long-term debt and the outstanding Revolver) was $282.1 million in the three months ended June 30, 2008 as compared to $531.4 million in the three months ended June 30, 2007. The average annual interest rate for these instruments, excluding amortization of issuance costs and other similar non-cash charges, was 4.3% in the three months ended June 30, 2008 as compared to 6.4% in the three months ended June 30, 2007. This rate reduction was the result of a decrease in the amount of our 10.25% Senior Notes outstanding during the three months ended June 30, 2008 compared to the three months ended June 30, 2007.

Provision for income taxes was a charge of $24.4 million for the three months ended June 30, 2008 and $15.4 million for the three months ended June 30, 2007. The effective tax rate was 31.2% for the three months ended June 30, 2008 as compared to 19.2% for the three months ended June 30, 2007. The increase in the effective tax rate was primarily due to the shift of income in lower tax jurisdictions as well as changes in the utilization of attributes and related valuation allowances.

Net sales for the industrial materials segment increased primarily due to a favorable price/mix increase as a result of increased demand, particularly related to our graphite electrode products. Currency rate fluctuations also increased sales, driven by the strengthening of the euro. Sales volume for the segment increased driven by high sales volumes for refractories, as well as slight increases in graphite electrode volumes.

Net sales for engineered solutions increased primarily due to favorable price/mix increases and favorable currency exchange rates, also related to the strengthening of the euro. Volumes for our engineered solutions increased 6% for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. This volume increase was related primarily to higher volumes in our ETM products. During the three months ended June 30, 2008, we also recognized $0.7 million of order cancellation fees related to certain advanced graphite material products.

Segment operating costs and expenses as a percentage of sales for industrial materials decreased 1% point in the three months ended June 30, 2008. However, in total, segment operating costs and expenses increased $36.1 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The largest increase in operating expenses was caused by increased raw material costs of $24.4 million. The strengthening of certain currencies, primarily the euro, increased production costs an additional $9.7 million, and net volume increases and other expenses drove costs $3.2 million higher. Selling and administrative and other expenses decreased $1.2 million as a result of our efforts to reduce discretionary expenses.

Segment operating costs and expenses as a percentage of sales for engineered solutions decreased by 9% points to 80%. However, total segment operating costs and expenses increased by $4.3 million. This increase was driven by increased production costs, driven primarily by raw materials, related to our advanced graphite materials products of $1.2 million. Selling and administrative costs did not fluctuate materially even with the increased sales levels, as a result of our continued focus on reducing and controlling selling and administrative expenses.

CONF CALL

Kelly Powell

Thank you Robby. Good morning and welcome to GrafTech International's second quarter conference call. On the call today is GrafTech Chief Executive Officer, Craig Shular, and our Chief Financial Officer, Mark Widmar.

We issued our earnings release this morning. If you did not receive a copy, please contact Jen Raedake at 216-676-2281 and she will be happy to fax or e-mail a copy to you.

As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call.

Also to the extent that we discussed any non-GAAP financial measures, you will find reconciliations in our press release which is posted on our website at www.graftech.com in the Investors Relations section.

At this time, I would like to turn the call to Craig.

Craig S. Shular

Thank you, Kelly. Good morning to everyone and thank you for joining our call. Today we will take you to our second quarter and first half '08 highlights and then we will open up to questions.

Net sales in the quarter increased 25% to 320 million. Operating income was up 36% to 89 million, while operating and income margin improved more than two full percentage points to 27.7%. Income from continuing operations before special items increased over 50% to 60 million resulting in $0.51 EPS.

First half '08 operating cash flow nearly doubled to 102 million as compared to 54 million a year ago. In June, we completed a redemption and conversion of all of our 225 million outstanding convertible debentures, allowing us to complete the quarter with net debt at 163 million, a reduction of $277 million year-over-year.

We are pleased to have announced also in the quarter, the acquisition of an 18.9% stake in Seadrift Coke, the world's second largest needle coke producer. This strategic investment reinforces our view on the strong electrode industry supply chain fundamentals and allowed us a partial hedge for our most important single-largest raw material needle coke, which currently represents approximately 40% of the cost to produce graphite electrode.

Turning to our industrial material segment, net sales increased 25% to 275 million. Operating income for the segment was 80 million, an increase of 30% over the prior year.

Our graphite electrode segment benefitted from a number of factors including higher selling prices, execution on productivity initiatives, positive impact of currency, and the continued benefit of lower cost raw materials purchased in '07 and sold from inventory in the first half of this year.

It is important to note that as expected and detailed in our Q1 earnings release, our lower cost raw material has been virtually all utilized in the first half of '08 and we anticipate that the full impact of '08 raw material cost increases will be more fully reflected in the second half of this year.

As a result, we expect a $0.03 EPS headwind as we move into the third quarter as higher cost raw materials begin to flow through our results. We also anticipate in Q3 an approximate $0.02 decline sequentially as a result of lower sales volume associated with the usual seasonal slowness in Europe as a result of their summer holiday period. Both of these items are very consistent with our experience in Q3 last year.

In the engineered solution segment, second quarter sales grew 27% to 44 million, as compared to 35 million in the same period last year. Operating income for the segment more than doubled to 9 million. This segment recall serves non-steel sectors with solid growth profiles.

These include the electronics, oil exploration, transportation, and thermoprocessing industries. Increased sales into these end-markets resulted in improved operating income for the segment.

Recapping first half '08 performance. We are continuing to see solid year-over-year improvement in our results as the initiatives we have undertaken continue to gain traction.

The impact of these initiatives is reflected in our first half '08 results. Sales are up 26%, operating income improved 49% in the first half. Operating margins in the industrial materials business improved three full percentage points, and engineered solution operating margins are up a full 12 percentage points.

Income from continued operations before specials increased 77% to 121 million, and operating cash flow nearly doubled to a little over a $100 million. Return on sales for the first half '08 improved over five full percentage points to 19.9% up from 14.1% in the same period last year. Net debt declined in the first half over 60% to $163 million. Our team has delivered a very solid first half result.

Turning to outlook, yesterday we announced the retirement of 35 million of our most expensive debt, our 10 and a quarter senior notes. Following this redemption, we will have just 40 million of senior notes remaining from the original 550 million outstanding in issue. Congrats to our team.

We remain encouraged by underlying demand for our products and continue to anticipate a solid year for global EAF and the markets to drive our engineered-solution segment. We expect the total company '08 sales to increase 20% to 22%, up from our previous guidance of 16% to 18%.

As a result of this, we are increasing our full year guidance for '08. We target income before specials to improve approximately 35% year-over-year to the 320, 330 million range, and cash flow from ops to be approximately $190 million.

That concludes our prepared remarks, and let us open it up for questions.

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