2014 Fourth Quarter Review

• Net sales were US$260 million, a decrease of 16 percent, compared to US$309 million in the same period of the prior year.
• Reported net loss was US$(83) million, or US$(0.61) per diluted share, compared to reported net loss of US$(28) million, or US$(0.21) per diluted share in the same period of the prior year. These included special charges¹ (after tax) of US$91 million in the fourth quarter of 2014 and special charges (after tax) of US$24 million in the fourth quarter of 2013.
• Adjusted net income, which excludes special charges, was US$8 million, or US$0.06 per diluted share, in the fourth quarter of 2014, as compared to adjusted net loss* of US$(4) million, or US$(0.03) per diluted share, in the fourth quarter of 2013.
• EBITDA, which excludes special charges, was US$37 million, an increase of 13 percent, as compared to US$33 million in the same period of the prior year.
• Operating cash flow was US$38 million in the fourth quarter of 2014 and available liquidity at year-end was more thanUS$300 million.

2014 Full Year Review

• Net sales were US$1,085 million, a seven percent decline compared to US$1,167 million in 2013.
  • Industrial Materials segment revenue was US$840 million, a decrease of eight percent compared to 2013 primarily due to the realization of lower average graphite electrode prices.
  • Engineered Solutions segment revenue was US$245 million, a reduction of five percent versus 2013 due primarily to decreased volumes in the advanced consumer electronics market.
• Reported net loss of US$(285) million, or US$(2.10) per diluted share, compared to a reported net loss of US$(27) million, or US$(0.20) per diluted share, in 2013. These included special charges (after tax) of US$276 million in 2014 and special charges (after tax) of US$38 million in 2013.
• Adjusted net loss, which excludes special charges, was US$(9) million, or US$(0.07) per diluted share, in 2014, as compared to adjusted net income of US$10 million, or US$0.08 per diluted share, in 2013.
• EBITDA was US$121 million in 2014, as compared to US$144 million in 2013. The decline was largely driven by lower realized pricing in the company's Industrial Materials segment.
• Net cash provided by operating activities was US$121 million, an improvement of US$4 million year-over-year.
• Net debt was US$512 million at year-end, a US$28 million reduction from year-end 2013 due to effective working capital management.

"Over the past 15 months, we have been driving important change throughout the organization to build sustainable operating leverage and dramatically improve results," commented Joel Hawthorne, chief executive officer of GrafTech. "Macro challenges throughout 2014 included a difficult demand environment in our Industrial Materials segment and market headwinds in our Engineered Solutions segment. To counter this difficult operating environment, we implemented three major cost savings programs representing annual savings of more than US$120 million. I am extremely pleased with the progress our team continues to make on our cost savings programs and our ability to successfully generate and increase positive cash flow as we navigate through these industry challenges. We continue to make difficult but necessary decisions to significantly improve our cost structure, enhance our global competitiveness and create value for our stockholders.”
 
Segment Operating Income Presentation Update
During the 2014 fourth quarter, the company revised its allocation of corporate, research and development and other expenses based on the new management and operating structure. These costs were previously allocated to segments and are now being reported as unallocated expenses. This change is reflected in the segment operating results, enabling improved visibility to the operational performance of each segment. Prior periods have been adjusted to reflect this change. The tables below set forth the revised segment information. Dollar amounts are in thousands.

		For the Three Months								For the Twelve Months
		Ended 31 December								Ended 31 December
		2013				2014				2013				2014
Segment adjusted operating income:
Industrial Materials		US$	14,237			US$	21,981			US$	76,022			US$	63,375
Engineered Solutions			6,780				3,834				26,144				19,348
Corporate, R&D, and Other Expenses			(12,942	)			(11,797	)			(53,393	)			(52,047	)
Total adjusted operating income		US$	8,075			US$	14,018			US$	48,773			US$	30,676

Industrial Materials Segment
Net sales for Industrial Materials decreased 13 percent to US$206 million in the fourth quarter of 2014, compared toUS$236 million in the fourth quarter of 2013. The decline in revenue was largely driven by lower realized graphite electrode pricing and weaker graphite electrode shipments outside of the United States.
 
In the fourth quarter of 2014, the company recorded a US$76 million non-cash impairment charge, against the goodwill associated with the 2010 acquisition of Seadrift. On an after tax basis, the charge equates to US$66 million, or approximately US$0.48 per diluted share. The impairment was a result of the company's reassessment of estimated future cash flows and triggered by continued pricing declines in the needle coke market and a re-evaluation of future expectations.
 
The Industrial Materials segment had an operating loss of US$(58) million in the fourth quarter of 2014 as compared to an operating loss of US$(26) million in the same period of the prior year. Adjusted segment operating income, which excludes special charges in both periods, was approximately US$22 million in the fourth quarter of 2014, as compared to approximately US$14 million in the fourth quarter of 2013 and US$12 million in the third quarter of 2014.

		Q4				Q3				Q4
		2013				2014				2014
Industrial Materials net sales:		US$	236,054			US$	208,573			US$	206,099
Industrial Materials adjusted operating income:			14,237			12,283					21,981
Industrial Materials adjusted operating income margin:		6.0		percent		5.9		percent		10.7		percent

Mr. Hawthorne commented, "In spite of a very challenging global steel and graphite electrode market, our team increased Industrial Materials' quarterly adjusted operating income by more than 50 percent year-over-year. We are seeing positive results from the actions that we have taken to improve the cost structure and increase efficiency across our global platform. We are confident GrafTech is best positioned to capitalize on future growth of electric arc furnace steel demand."
 
Engineered Solutions Segment
Net sales for Engineered Solutions decreased 26 percent to US$54 million in the fourth quarter of 2014 compared toUS$72 million in the fourth quarter of 2013. The decline in revenue was largely driven by lower demand due to order cancellations for thermal solutions used in advanced consumer electronic products.
 
Operating loss for the Engineered Solutions segment was US$(7) million in the fourth quarter of 2014 compared to operating income of US$9 million in the same period in 2013. Adjusted segment operating income, which excludes special charges in both periods, was US$4 million in the fourth quarter of 2014 as compared to US$7 million in the fourth quarter of 2013 and US$1 million in the third quarter of 2014. Weak demand and order cancellations for the company's advanced consumer electronics products adversely impacted profitability in the quarter, but was offset partially by aggressive cost reduction efforts, leading to improved profitability compared to the third quarter of 2014.

		Q4				Q3				Q4
		2013				2014				2014
Engineered Solutions net sales:		US$	72,448			US$	51,885			US$	53,772
Engineered Solutions adjusted operating income:		6,780				1,226				3,834
Engineered Solutions adjusted operating income margin:		9.4		percent		2.4		percent		7.1		percent

Mr. Hawthorne commented, “Market conditions in this segment were challenging in 2014. We aggressively adapted to short-term volatility in some of our target high growth markets with cost initiatives to minimize the adverse impact. We will continue to leverage our core competencies in graphite material science in our new Innovation and Technology Center, where we have more than 20 projects in active development that will provide us with sustainable long-term growth opportunities in diverse high-tech markets.”
 
Selling and Administrative and Research and Development Expense
Total company selling and administrative expenses and research and development expenses, which include the above mentioned corporate expenses, were US$41 million for the fourth quarter of 2014, as compared to US$25 million in the fourth quarter of 2013. Overhead expense in the current quarter was negatively impacted by special charges ofUS$14 million, as compared to the prior year quarter, which benefited from a pension mark-to-market accounting gain ofUS$7 million. Excluding special charges in both periods, overhead expense declined approximately US$5 million, or 16 percent, year-over-year to US$27 million in the fourth quarter of 2014 as a result of the continued effort to reduce costs.
 
For the full year, total company selling and administrative expenses and research and development expenses, which include the previously mentioned corporate expenses, were US$139 million in 2014 and US$121 million in 2013. Excluding special charges in both periods, overhead expense declined US$6 million, or five percent, year-over-year toUS$123 million in 2014 from US$129 million in 2013.
 
Summary of Key Actions in 2014

• Announced an ongoing company-wide cost savings program, which is enabling GrafTech to achieve total annual cost savings of more than US$120 million, approximately US$100 million of which are cash savings (approximately 10 percent of annual sales) directly improving EBITDA .
• Delivered approximately US$50 million in cash savings in 2014.
• Optimized the graphite electrode manufacturing platform by rationalizing the two highest cost manufacturing sites, including significant manufacturing headcount reductions of approximately 20 percent, which will reduce annual capital expenditures by approximately US$10 million.
• Simplified the operating and management structure to decentralize the organization, accelerate decision-making and improve responsiveness to changes in customer demand.
• Redesigned the company’s research and development function to accelerate innovation for new product development and commercial introduction and maximize the efficiency of development costs.
• Downsized the company’s corporate functions, including headcount and other SG&A reductions, by approximately 20 percent.
• Rationalized and streamlined under-performing product lines.
• Increased borrowing capacity by over US$125 million in the past nine months.
• Reduced inventory significantly, generating approximately US$80 million of cash in 2014.
• Continued development of new products, which contributed approximately 30 percent of the revenue in the Engineered Solutions segment in 2014 and will provide long-term value creation for the company and its stockholders.

Outlook
In its 19 January 2015 report, the International Monetary Fund reduced its estimate for 2015 global GDP growth to 3.5 percent, 0.3 percentage points lower than its October 2014 forecast. The report states that lower oil prices will likely boost global growth but that negative factors, including investment weakness, have reduced growth expectations in many advanced and emerging economies. The report goes on to state that the United States is the only major economy for which growth expectations have been raised.
 
Steel customer sentiment remains cautiously optimistic in North America, although there are concerns given high import levels, reduced demand from the oil and gas and related service sectors, and the instability of global growth. Customers outside of North America are generally less optimistic as weakness has been observed in basic materials sectors.
 
The 2015 graphite electrode order book continues to be built, with approximately 60 percent of targeted order volumes confirmed. Of the orders booked to date, 2015 graphite electrode prices are on average lower than 2014 year-end pricing. Pricing for products in the Engineered Solutions segment is also lower. The company's previously announced cost savings programs remain on track and are anticipated to deliver US$50 million in cash savings to benefit 2015 EBITDA results, offsetting the impact of lower pricing. While the company expects to benefit from falling oil prices in its needle coke and graphite electrode businesses, lower near-term graphite electrode operating rates, driven by plans to further reduce inventory, are expected to largely offset this benefit.
 
Summary of 2015 Planned Actions

• Customer focus: delivering differentiated product quality, service and reliability remains a core priority and an essential element of GrafTech's product value;
• Cost leadership: leveraging the backward integration and capacity optimization of Seadrift;
• Portfolio optimization: rationalizing under-performing product lines to focus on higher margin businesses will continue to be a key focus;
• Innovation: developing, collaborating and executing on new product development by launching a focused initiative that builds on our past successes;
• Delevering: reducing capital expenditures, as planned, by approximately US$20 million and inventory by approximately US$50 million; and
• Improved liquidity: continuing debt reduction and liquidity maximization to position the company for growth.

As part of these 2015 actions, GrafTech is reviewing plans to further optimize the production platform for its advanced graphite materials business and expects a potential charge of up to US$10 million in the first half of 2015 related to this review. Current estimates indicate that the optimization could improve operating income by US$5 million annually.
 
In summary, the company’s expectations, excluding the impact of special charges, are as follows:

• First half 2015 EBITDA target of US$45 million to US$55 million;
• First half 2015 operating cash flow of approximately US$40 million to US$50 million (after approximately US$15 million to US$20 million of cash rationalization charges);
• Full year 2015 inventory reduction of approximately US$50 million; and
• Full year 2015 capital expenditures of approximately US$60 million to US$70 million.

Mr. Hawthorne concluded, “We continue to focus on improving the quality of the business model for our stockholders and delivering exceptional service and quality to our customers in a challenging and evolving end market. We anticipate that the first quarter will be the weakest of the year given industry headwinds and usual seasonality in both segments. First quarter profitability will be further negatively impacted by the timing of currency fluctuations. As we move throughout the year, we expect an improvement in profitability in the second half of 2015."
 
"Our team has a proven track record of successfully managing through steel market and graphite electrode industry cycles and has doubled revenues in Engineered Solutions with new product introductions. We will not be deterred by this short-term volatility and will continue to create opportunities to refine our product lines and leverage our business model and strategic advantages to drive long-term stockholder value.”