Global Economic Conditions and Outlook
We are impacted in varying degrees, both positively and negatively, as global, regional or country conditions fluctuate. Our discussions about market data and global economic conditions below are based on or derived from published industry accounts and statistics.
Based on current International Monetary Fund (IMF) projections, the estimate for global GDP growth has been reduced to 3.3 percent in 2012, representing the third downward revision to growth estimates this year. The IMF highlights that the strength of the global economic recovery has weakened considerably and continues to face further downside risks. The IMF notes that the European debt crisis continues to be one the largest risk factors, particularly as growth momentum slows in emerging markets including China. The IMF also notes that momentum appears to be slowing in the United States, a region that was previously forecast to experience more robust growth earlier this year. Weaker growth is now forecast for both advanced and key emerging economies in the second half of 2012. As a result, IMF also significantly cut its 2013 global GDP growth forecast to 3.6 percent.
Based on published reports, global steel total crude production in the nine months ending September 30, 2012 has slowed to only 0.7% growth rate compared to the same period last year. Global steel capacity utilization was approximately 79.4%, a decrease of 2.6 percentage points compared to the same period last year. During the first nine months of 2012, global steel production, excluding China, decreased by 0.4% compared to the same period last year. Steel production in the European Union decreased 4.6% compared to the same period last year. China's steel production increased by an estimated 1.9% compared to same period last year. Demand for our industrial materials products is primarily linked with the global production of steel in an electric arc furnace and, to a lesser extent, with the total production of steel and certain other metals. EAF steel production has followed a similar trend as overall steel production, growing 0.4% globally in the first nine months of 2012 compared to the same period last year. During the first nine months of 2012, estimated EAF steel production, excluding China, increased by 0.2% compared to the same period last year. The European Union's estimated EAF steel production decreased by 5.9% compared to the same period last year. China's estimated EAF steel production increased by 1.9% during the first nine months of 2012 compared to the same period of 2011, contributing to the global EAF steel production increase. Generally, changes in graphite electrode demand have tracked changes in EAF steel production.
During the third quarter, as a result of rising raw material costs, we announced price increases to our customers for needle coke and graphite electrodes. In September 2012, we announced an increase of approximately 15 percent year-over-year from current pricing for normal premium grade needle coke. In early October 2012, we also announced an eight percent increase to the current prevailing prices for standard-size melter graphite electrodes. While we do not expect a material impact to 2012 results from these price increases as our 2012 business is substantially booked, they better position us in 2013 to manage margins amid rising costs.
In 2012, we commenced commercial production and sale of a super-premium grade of our needle coke, which we believe will enable us and our needle coke customers to produce higher quality electrodes. While this grade of needle coke requires slightly longer processing by us (and, as such to a certain extent, reduces available capacity), we believe that this impact will be more than offset by higher margins on this grade. We do not anticipate that these sales will materially impact our 2012 results.
The challenging economic environment as well as a decline in governmental support as a result of fiscal debt constraints has significantly reduced demand for solar products. Notwithstanding the challenging conditions, however, we are experiencing growing demand for many of the advanced consumer electronics products in our Engineered Solutions segment and sales of those products have more than offset the decline in sales of our solar products as we begin to benefit from capital investments made in that segment. Our Engineered Solutions achieved record sales in the third quarter, and we expect to exit the year with approximately $220 million in annual revenue for this segment, representing a cumulative growth rate of 22 percent over the past three years.
In this challenging economic environment, we are devoting significant efforts to reducing overhead and limiting capital expenditures to essential maintenance as well as growth capital where we believe there is both a long term business case and an acceptable return on investment, as more fully described under "Liquidity and Capital Resources."

In summary, based on IMF projections and other economic forecasts and factors described above, we expect the following targeted results in 2012:
• Earnings before interest, taxes, depreciation, amortization and other (income) expense to be in the range of $235 million to $245 million, calculated as operating income of $155 million to $160 million plus depreciation and amortization of $80 million to $85 million;

• Overhead expense (selling and administrative, and research and development expenses) of approximately $155 million;

• Interest expense of approximately $22 million;

• Capital expenditures in the range of $120 million to $130 million;

• An effective tax rate in the range of 21 percent to 23 percent;

• Cash flow from operations in the range of $100 million to $120 million; and

• Full year fully diluted share count of approximately 140 million shares.

                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
                                  (Unaudited)


Results of Operations and Segment Review
Three Months Ended September 30, 2011 as Compared to Three Months Ended
September 30, 2012.
The tables presented in our period-over-period comparisons summarize our
consolidated statements of income and illustrate key financial indicators used
to assess the consolidated financial results. Financial information is presented
for the three months ended September 30, 2011 and 2012. Throughout our MD&A,
changes that are less than 5% or less than $1.0 million, may be deemed not
meaningful and excluded from the discussion.

                                                   For the
                                             Three Months  Ended
                                                September 30,            Increase           %
(in thousands, except per share data
and % change)                                2011           2012        (Decrease)       Change
Net sales                                $  345,832     $  320,716     $   (25,116 )         (7 )%
Cost of sales                               253,088        240,730         (12,358 )         (5 )%
Gross profit                                 92,744         79,986         (12,758 )        (14 )%
Research and development                      2,852          2,778             (74 )         (3 )%
Selling and administrative expenses          32,401         33,645           1,244            4  %
Operating income                             57,491         43,563         (13,928 )        (24 )%
Other expense                                 5,321          1,653          (3,668 )        (69 )%
Interest expense                              4,792          5,839           1,047           22  %
Interest income                                (119 )          (33 )            86          (72 )%
Income before provision for income
taxes                                        47,497         36,104         (11,393 )        (24 )%
Provision for income taxes                    7,200          6,478            (722 )        (10 )%
Net income                               $   40,297     $   29,626     $   (10,671 )        (26 )%
Basic income per common share:           $     0.28     $     0.22     $     (0.06 )
Diluted income per common share:         $     0.28     $     0.22     $     (0.06 )

Net sales, by operating segment for the three months ended September 30, 2011 and 2012 were:

                                              For the
                                         Three Months Ended
                                           September 30,           Increase        %
(in thousands, except per % change)      2011          2012       (Decrease)    Change
Industrial Materials                  $  302,355    $ 260,180    $  (42,175 )    (14 )%
Engineered Solutions                      43,477       60,536        17,059       39  %
Total net sales                       $  345,832    $ 320,716    $  (25,116 )     (7 )%

An analysis of the components of change in net sales for Industrial Materials and Engineered Solutions is set forth in the following table:

                                                          Net
                     Volume    Price/Mix    Currency    Change
Industrial Materials  (21 )%       10 %       (3 )%      (14 )%
Engineered Solutions   40  %        1 %       (2 )%       39  %

Net sales. Net sales for our Industrial Materials segment decreased to $260.2 million in the three months ended September 30, 2012 from $302.4 million in the three months ended September 30, 2011. This decrease was primarily the result of lower sales volumes for graphite electrodes and needle coke. These volume decreases were partially offset by higher realized prices in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The weighted average selling price, excluding currency impact, of electrodes in the three months ended September 30, 2012 increased approximately 9% compared to the weighted average price in the three months ended September 30, 2011 as a result of electrode price increases implemented in late 2011 and early 2012 to address cost pressures.
Net sales for our Engineered Solutions segment increased to $60.5 million in the three months ended September 30, 2012, compared to net sales of $43.5 million in the three months ended September 30, 2011. This increase was largely driven by continued growth in sales of our advanced consumer electronics products and the incremental revenue associated with acquisitions. This increase was partially offset by the decline in sales of our advanced graphite materials products to the solar market.
Cost of sales. For the three months ended September 30, 2012, we experienced decreases in cost of sales of $12.4 million compared to the three months ended September 30, 2011. This decrease was driven by lower sales volumes in our Industrial Materials segment, primarily related to graphite electrodes. The flow through of higher raw material costs and overhead absorption rates was largely offset by a favorable foreign currency impact during the three months ended September 30, 2012. We anticipate that the impact of higher raw material costs and overhead absorption rates will continue to negatively impact our costs for the remainder of the year.
These net decreases in cost of sales in our our Industrial Materials segment were partially offset by higher costs associated with volume increases in our Engineered Solutions segment.
As discussed in Annual Report, for our defined benefit pension and postretirement plans, 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. The MTM adjustment in the fourth quarter may have a significant impact on our cost of sales and selling and administrative expenses.
Other expense. For the three months ended September 30, 2012, other expense was $1.7 million, compared to other expense of $5.3 million in the three months ended September 30, 2011. During the three months ended September 30, 2011, we recorded expenses related to insurable flood damages incurred at our Clarksburg, West Virginia facility.
Interest expense. Interest expense for the three months ended September 30, 2012 increased $1.0 million as a result of higher debt levels compared to the three months ended September 30, 2011 incurred to support the share repurchase program, capital expenditures and working capital requirements.
Segment operating income. Corporate expenses are allocated to segments based on each segment's percentage of consolidated sales. The following table represents our operating income by segment for the three months ended September 30, 2011 and 2012:

                                     For the Three Months Ended
                                           September 30,
                                          2011                2012
                                       (Dollars in thousands)
Industrial Materials           $       54,130               $ 37,301
Engineered Solutions                    3,361                  6,262
Total segment operating income $       57,491               $ 43,563

The percentage relationship of cost of operations to sales for Industrial Materials and Engineered Solutions is set forth in the following table:

Segment operating costs and expenses as a percentage of sales for Industrial Materials increased to 86% for the three months ended September 30, 2012, compared to 82% for the three months ended September 30, 2011. This increase was caused by the flow through of inventory with higher cost raw materials and overhead absorption rates in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. These increases in costs were offset by favorable foreign currency impacts. Total operating costs and expenses decreased $25.3 million in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, driven primarily by lower sales volumes for graphite electrodes and needle coke.
Segment operating costs and expenses as a percentage of sales for Engineered Solutions decreased from 92% for the three months ended September 30, 2011 to 90% for the three months ended September 30, 2012. Operating expenses decreased as a percentage of sales due to a favorable product mix within our advanced consumer electronics division, offset partially by the continued decline in demand for our solar applications.
Provision for income taxes. The following table summarizes the expense/(benefit) for income taxes for the three months ended September 30, 2011 and 2012:

                          For the Three Months Ended
                                 September 30,
                            2011               2012
                            (Dollars in thousands)
Tax expense/(benefit) $       7,200       $       6,478
Pretax income         $      47,497       $      36,104
Effective tax rates            15.2 %              17.9 %

For the three months ended September 30, 2012, we earned tax credits in support of our research and development efforts of high-tech Engineered Solutions products, which positively impacted the effective income tax rate for the quarter. The current quarter tax rate also differs from the U.S. statutory rate of 35% due to jurisdictional mix of income.

                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
                                  (Unaudited)


Nine Months Ended September 30, 2011 as Compared to Nine Months Ended
September 30, 2012.
The tables presented in our period-over-period comparisons summarize our
consolidated statements of income and illustrate key financial indicators used
to assess the consolidated financial results. Financial information is presented
for the nine months ended September 30, 2011 and 2012. Throughout our MD&A,
changes that are less than 5% or less than $1.0 million, may be deemed not
meaningful and excluded from the discussion.

                                                For the Nine
                                                Months Ended
                                                September 30,            Increase           %
(in thousands, except per share data
and % change)                                2011           2012        (Decrease)       Change
Net sales                                $  972,200     $  877,265     $   (94,935 )        (10 )%
Cost of sales                               731,362        645,971         (85,391 )        (12 )%
Gross profit                                240,838        231,294          (9,544 )         (4 )%
Research and development                      8,856          9,919           1,063           12  %
Selling and administrative expenses          97,276        107,228           9,952           10  %
Operating income                            134,706        114,147         (20,559 )        (15 )%
Other expense (income), net                   5,134         (1,376 )        (6,510 )       (127 )%
Interest expense                             13,780         15,733           1,953           14  %
Interest income                                (363 )         (178 )           185          (51 )%
Income before provision for income
taxes                                       116,155         99,968         (16,187 )        (14 )%
Provision for income taxes                   20,026         10,966          (9,060 )        (45 )%
Net income                               $   96,129     $   89,002     $    (7,127 )         (7 )%
Basic income per common share:           $     0.66     $     0.64     $     (0.02 )
Diluted income per common share:         $     0.66     $     0.63     $     (0.03 )

Net sales, by operating segment for the nine months ended September 30, 2011 and 2012 were:

                                           For the Nine Months Ended
                                                 September 30,             Increase          %
(in thousands, except per % change)           2011            2012        (Decrease)      Change
Industrial Materials                     $    835,591     $  715,461     $ (120,130 )        (14 )%
Engineered Solutions                          136,609        161,804         25,195           18  %
Total net sales                          $    972,200     $  877,265     $  (94,935 )        (10 )%

An analysis of the components of change in net sales for Industrial Materials and Engineered Solutions is set forth in the following table:

                                                           Net
                     Volume     Price/Mix    Currency    Change
Industrial Materials  (22 )%       9 %         (1 )%      (14 )%
Engineered Solutions   19  %       1 %         (2 )%       18  %

Net sales. Net sales for our Industrial Materials segment decreased to $715.5 million in the nine months ended September 30, 2012 compared to net sales of $835.6 million in the nine months ended September 30, 2011. This decrease was primarily the result of lower sales volumes for graphite electrodes and needle coke. These volume decreases were partially offset by higher realized prices in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The weighted average selling price, excluding currency impacts, of electrodes in the nine months ended September 30, 2012 increased approximately 9% compared to the average price

in the nine months ended September 30, 2011 as a result of electrode price increases implemented in late 2011 and early 2012 to address cost pressures. Net sales for our Engineered Solutions segment increased to $161.8 million in the nine months ended September 30, 2012, compared to net sales of $136.6 million in the nine months ended September 30, 2011. This increase was largely driven by continued growth in sales of our advanced consumer electronics products and the incremental revenue associated with acquisitions. This increase was partially offset by the decline in sales of our advanced graphite material products to the solar market.
Cost of sales. For the nine months ended September 30, 2012, we experienced decreases in cost of sales of $85.4 million as a result of lower sales volumes in our Industrial Materials segment, primarily related to graphite electrodes. Further decreasing cost of sales in the nine months ended September 30, 2012 was the favorable impact of foreign currency compared to the nine months ended September 30, 2011. Costs of sales in the nine months ended September 30, 2012 also benefited from the consumption during the first half for 2012 of inventories on hand at 2011 year-end. That inventory carried lower raw material costs and overhead absorption rates. The impact of this benefit was partially offset by the flow through of inventory carrying higher raw material costs and absorption rates in the third quarter. We anticipate that the impact of higher raw material costs and overhead absorption rates will continue to negatively impact our costs for the remainder of the year.
These net decreases in cost of sales for our Industrial Materials segment were partially offset by higher costs associated with volume increases in our Engineered Solutions segment.
Selling and administrative expenses. Selling and administrative expenses increased $10.0 million in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, due primarily to increases in incentive and stock-based compensation plan expense and additional expense resulting from acquisitions.
As discussed in Annual Report, for our defined benefit pension and postretirement plans, 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. The MTM adjustment in the fourth quarter may have a significant impact on our cost of sales and selling and administrative expenses.
Other expense (income), net. During the nine months ended September 30, 2012, we received $4.0 million of insurance reimbursements for claims made related to flood damages incurred at our Clarksburg, West Virginia facility during 2011. Interest expense. Interest expense for the nine months ended September 30, 2012 increased $2.0 million as a result of higher debt levels compared to the nine months ended September 30, 2011 incurred to support the share repurchase program, capital expenditures and working capital increases.
Segment operating income. Corporate expenses are allocated to segments based on each segment's percentage of consolidated sales. The following table represents our operating income by segment for the nine months ended September 30, 2011 and 2012:

                                         For the Nine
                                         Months Ended
                                        September 30,
                                      2011              2012
                                    (Dollars in thousands)
Industrial Materials           $     120,465         $ 104,103
Engineered Solutions                  14,241            10,044
Total segment operating income $     134,706         $ 114,147

The percentage relationship of cost of operations to sales for Industrial Materials and Engineered Solutions is set forth in the following table:

Segment operating costs and expenses as a percentage of sales for Industrial Materials decreased to 85% for the nine months ended September 30, 2012, compared to 86% for the nine months ended September 30, 2011. Favorable foreign currency impacts decreased operating expenses as a percentage of sales in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The first half of 2012 also benefited from lower costs as we consumed remaining year-end inventories. That inventory carried lower raw material costs and overhead absorption rates compared to inventory currently on hand. This benefit in the first half of the year was partially offset by the flow through of higher costs in the third quarter.
Segment operating costs and expenses as a percentage of sales for Engineered Solutions increased from 90% for the nine months ended September 30, 2011 to 94% for the nine months ended September 30, 2012. Operating expenses increased as a percentage of sales due to an unfavorable product mix and higher costs incurred to support growth initiatives for this segment. This product mix reflects the continued decline in demand for solar applications.
Provision for income taxes. The following table summarizes the expense for income taxes for the nine months ended September 30, 2011 and 2012:

                             September 30,
                          2011             2012
                        (Dollars in thousands)
Tax expense         $      20,026       $  10,966
Pretax income       $     116,155       $  99,968
Effective tax rates          17.2 %          11.0 %

Our net unrecognized tax benefits decreased by $9.2 million for the nine months ended September 30, 2012, primarily related to the resolution of uncertain tax . . .