We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of tax.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 20142017 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All otherOther jurisdictions are still open to examination beginning after 2010.
We continue to assess the realization of our deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In
circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have established and maintained valuation allowances on those net deferred tax assets.
Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-partiescounterparties to our instruments. Our derivative risk management strategy has not resulted in a material impact to our financial results in 2016 or 2017. Our derivative assets and liabilities are included within "Prepaid expenses and other current assets" and "Other current liabilities" on the Condensed Consolidated Balance Sheets and effects of these derivatives are recorded in revenue, cost of goods sold and other expense (income) on the Condensed Consolidated Statements of Operations.
Investments in subsidiaries are recorded on the equity basis.21
The following tables set forth condensed consolidating balance sheets as of December 31, 2016 and September 30, 2017, condensed consolidating statements of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2017 and the condensed consolidating statements of cashflows for the nine months ended September 30, 2016 and 2017.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The realized (gains) losses resulting from the settlement of commodity derivative contracts designated as hedges remain in "Accumulated Other Comprehensive Income" until they are recognized in the Statement of Operations when the hedged item impacts earnings, which is when the finished product is sold. As of June 30, 2021 and 2020, net realized pre-tax gains of $2.4 million and net realized pre-tax losses of $5.7 million, respectively, were reported under "Accumulated Other Comprehensive Income" and will be and were, respectively, released to earnings within the following 12 months. See the table below for amounts recognized in the Statement of Operations.
The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations as follows for the periods ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | | Amount of (Gain)/Loss Recognized |
| | Location of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations | | For the Three Months Ended June 30, |
| | | 2021 | | 2020 |
Derivatives designated as cash flow hedges: | | | | (Dollars in thousands) |
Commodity derivative contracts | | Cost of sales | | $ | 4,498 | | | $ | (1,130) | |
Interest rate swap contracts | | Interest expense | | 289 | | | 1,521 | |
| | | | | | |
Derivatives not designated as hedges: | | | | | | |
Foreign currency derivatives | | Cost of sales, Other expense (income) | | $ | 264 | | | $ | (217) | |
Commodity derivative contracts | | Cost of sales | | (242) | | | 25 | |
| | | | | | |
| | | | Amount of (Gain)/Loss Recognized |
| | Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations | | For the Six Months Ended June 30, |
| | | 2021 | | 2020 |
Derivatives designated as cash flow hedges: | | | | (Dollars in thousands) |
Commodity contract hedges | | Cost of sales | | $ | 5,047 | | | $ | (3,939) | |
Interest rate swap contracts | | Interest expense | | 1,285 | | | 1,315 | |
| | | | | | |
Derivatives not designated as hedges: | | | | | | |
Foreign currency derivatives | | Cost of sales, Other expense (income) | | $ | 1,893 | | | $ | (716) | |
Commodity derivative contracts | | Cost of sales | | (242) | | | (114) | |
Interest rate swap contracts | | Interest expense | | 866 | | | 0 | |
(10) Accumulated Other Comprehensive Income (Loss)
The balance in our accumulated other comprehensive income (loss) is set forth in the following table:
| | | | | | | | | | | | | |
| | | As of June 30, 2021 | | As of December 31, 2020 |
| | | (Dollars in thousands) |
Foreign currency translation adjustments, net of tax | | | $ | (7,302) | | | $ | (2,725) | |
Commodity and interest rate derivatives, net of tax | | | 6,911 | | | (16,916) | |
Total accumulated comprehensive (loss) | | | $ | (391) | | | $ | (19,641) | |
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEETS |
As of December 31, 2016 |
(in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | |
Current Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 636 |
| | $ | 10,974 |
| | $ | — |
| | $ | 11,610 |
|
Accounts receivable - affiliates | | 51,592 |
| | 3,624 |
| | 19,643 |
| | (74,859 | ) | | — |
|
Accounts receivable - trade | | — |
| | 7,518 |
| | 73,050 |
| | — |
| | 80,568 |
|
Inventories | | — |
| | 44,563 |
| | 111,548 |
| | — |
| | 156,111 |
|
Prepaid and other current assets | | 1,350 |
| | 4,853 |
| | 15,462 |
| | — |
| | 21,665 |
|
Current assets of discontinued operations | | — |
| | 51,160 |
| | 14,296 |
| | (4,477 | ) | | 60,979 |
|
Total current assets | | 52,942 |
| | 112,354 |
| | 244,973 |
| | (79,336 | ) | | 330,933 |
|
| | | | | | | | | | |
Investment in affiliates | | 844,379 |
| | 601,597 |
| | — |
| | (1,445,976 | ) | | — |
|
Property, plant and equipment | | — |
| | 191,503 |
| | 317,352 |
| | — |
| | 508,855 |
|
Deferred income taxes | | — |
| | — |
| | 19,803 |
| | — |
| | 19,803 |
|
Goodwill | | — |
| | 70,399 |
| | 100,718 |
| | — |
| | 171,117 |
|
Notes receivable - affiliate | | — |
| | 49,003 |
| | — |
| | (49,003 | ) | | — |
|
Other assets | | — |
| | 70,767 |
| | 70,801 |
| | — |
| | 141,568 |
|
Total Assets | | $ | 897,321 |
| | $ | 1,095,623 |
| | $ | 753,647 |
| | $ | (1,574,315 | ) | | $ | 1,172,276 |
|
| | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | |
Accounts payable - affiliate | | $ | 806 |
| | $ | 71,243 |
| | $ | 2,810 |
| | $ | (74,859 | ) | | $ | — |
|
Accounts payable - trade | | 964 |
| | 8,033 |
| | 38,666 |
| | — |
| | 47,663 |
|
Short-term debt | | — |
| | 3,062 |
| | 5,790 |
| | — |
| | 8,852 |
|
Accrued income and other taxes | | — |
| | 2,095 |
| | 3,161 |
| | — |
| | 5,256 |
|
Other accrued liabilities | | 2,444 |
| | 12,205 |
| | 15,945 |
| | — |
| | 30,594 |
|
Short-term liabilities of discontinued operations | | — |
| | 20,381 |
| | 4,138 |
| | (4,477 | ) | | 20,042 |
|
Total current liabilities | | 4,214 |
| | 117,019 |
| | 70,510 |
| | (79,336 | ) | | 112,407 |
|
| | | | | | | | | | |
Long-term debt - affiliate | | 41,590 |
| | — |
| | 7,413 |
| | (49,003 | ) | | — |
|
Long-term debt - third party | | 274,132 |
| | 81,695 |
| | 753 |
| | — |
| | 356,580 |
|
Other long-term obligations | | — |
| | 50,943 |
| | 31,205 |
| | — |
| | 82,148 |
|
Deferred income taxes | | — |
| | 909 |
| | 41,997 |
| | — |
| | 42,906 |
|
Long-term liabilities of discontinued operations | | — |
| | 678 |
| | 172 |
| | — |
| | 850 |
|
Stockholders' equity | | 577,385 |
| | 844,379 |
| | 601,597 |
| | (1,445,976 | ) | | 577,385 |
|
Total Liabilities and Stockholders' Equity | | $ | 897,321 |
| | $ | 1,095,623 |
| | $ | 753,647 |
| | $ | (1,574,315 | ) | | $ | 1,172,276 |
|
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) Earnings per Share
During the six months ended June 30, 2020, we repurchased 3,328,574 shares of our common stock under the repurchase program that was approved on July 30, 2019. These shares were subsequently retired. There were 0 shares repurchased under this program during the six months ended June 30, 2021.
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation for the six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
Weighted average common shares outstanding for basic calculation | 267,560,712 | | | 267,249,580 | | | 267,440,501 | | | 268,233,233 | |
Add: Effect of stock options, deferred share units and restricted stock units | 247,232 | | | 10,815 | | | 324,877 | | | 10,764 | |
Weighted average common shares outstanding for diluted calculation | 267,807,944 | | | 267,260,395 | | | 267,765,378 | | | 268,243,997 | |
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes 122,455 and 116,631 shares of participating securities in the three and six months ended June 30, 2021, respectively, and 65,062 and 59,166 shares of participating securities in the three and six months ended June 30, 2020, respectively. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of 1,358,696 and 1,250,722 equivalent shares in the three and six months ended June 30, 2021, respectively, and 1,734,610 and 1,603,198 in the three and six months ended June 30, 2020, respectively, as these shares are anti-dilutive.
(12) Stock-Based Compensation
Stock-based compensation awards granted by our Board of Directors for the three and six months ended June 30, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
Award type: | | | | | | | | | | | |
Stock options | 2,000 | | | 2,000 | | | 479,500 | | | 300,000 | | | | | |
Deferred share units | 13,861 | | | 12,091 | | | 25,672 | | | 24,643 | | | | | |
Restricted stock units | 1,500 | | | 2,602 | | | 515,960 | | | 311,991 | | | | | |
In the three months ended June 30, 2021 and 2020, we recognized $15.3 million and $0.7 million, respectively, in stock-based compensation expense. A majority of the expense, $13.4 million and $0.6 million, respectively, was recorded as selling and administrative expense in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales.
In the six months ended June 30, 2021 and 2020, we recognized $16.0 million and $1.1 million, respectively, in stock - based compensation expense. A majority of expense, $14.1 million and $1.0 million, respectively, was recorded as selling and administrative expense in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales.
In the three and six months ended June 30, 2021, the expense includes $14.7 million due to the "Change in Control" accelerated vesting provisions of certain of our awards. For the purpose of these grants, a “Change in Control” occurred when Brookfield and any affiliates thereof (collectively, the “Majority Stockholder”) ceased to own stock of the Company that constitutes at least thirty percent (30%) or thirty-five percent (35%), as applicable, of the total fair market value or total voting
|
| | | | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEETS |
As of September 30, 2017 |
(in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | |
Current Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 1,117 |
| | $ | 15,259 |
| | $ | — |
| | $ | 16,376 |
|
Accounts receivable - affiliates | | 51,592 |
| | 9,022 |
| | 25,510 |
| | (86,124 | ) | | — |
|
Accounts receivable - trade | | — |
| | 9,262 |
| | 70,870 |
| | — |
| | 80,132 |
|
Inventories | | — |
| | 41,118 |
| | 123,450 |
| |
|
| | 164,568 |
|
Prepaid and other current assets | | 555 |
| | 3,641 |
| | 15,782 |
| | — |
| | 19,978 |
|
Current assets of discontinued operations | | — |
| | 10,083 |
| | 5,447 |
| | (155 | ) | | 15,375 |
|
Total current assets | | 52,147 |
| | 74,243 |
| | 256,318 |
| | (86,279 | ) | | 296,429 |
|
| | | | | | | | | | |
Investment in affiliates | | 839,335 |
| | 592,304 |
| | — |
| | (1,431,639 | ) | | — |
|
Property, plant and equipment | | — |
| | 179,635 |
| | 329,829 |
| | — |
| | 509,464 |
|
Deferred income taxes | | — |
| | — |
| | 19,220 |
| | — |
| | 19,220 |
|
Goodwill | | — |
| | 70,399 |
| | 100,718 |
| | — |
| | 171,117 |
|
Notes receivable - affiliate | |
|
| | 61,006 |
| | — |
| | (61,006 | ) | | — |
|
Other assets | | — |
| | 61,554 |
| | 62,224 |
| | — |
| | 123,778 |
|
Total Assets | | $ | 891,482 |
| | $ | 1,039,141 |
| | $ | 768,309 |
| | $ | (1,578,924 | ) | | $ | 1,120,008 |
|
| | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | |
Accounts payable - affiliate | | $ | 825 |
| | $ | 77,103 |
| | $ | 8,196 |
| | $ | (86,124 | ) | | $ | — |
|
Accounts payable - trade | | — |
| | 10,392 |
| | 47,984 |
| | — |
| | 58,376 |
|
Short-term debt | | — |
| | 4,334 |
| | 8,948 |
| | — |
| | 13,282 |
|
Accrued income and other taxes | | — |
| | 1,686 |
| | 6,445 |
| | — |
| | 8,131 |
|
Other accrued liabilities | | 7,225 |
| | 9,350 |
| | 17,452 |
| | — |
| | 34,027 |
|
Liabilities of discontinued operations | | — |
| | 8,805 |
| | 3,307 |
| | (155 | ) | | 11,957 |
|
Total current liabilities | | 8,050 |
| | 111,670 |
| | 92,332 |
| | (86,279 | ) | | 125,773 |
|
| | | | | | | | | | |
Long-term debt - affiliate | | 53,593 |
| | — |
| | 7,413 |
| | (61,006 | ) | | — |
|
Long-term debt - third party | | 278,959 |
| | 40,595 |
| | 876 |
| | — |
| | 320,430 |
|
Other long-term obligations | | — |
| | 45,882 |
| | 33,094 |
| | — |
| | 78,976 |
|
Deferred income taxes | | — |
| | 1,283 |
| | 42,085 |
| | — |
| | 43,368 |
|
Long-term liabilities of discontinued operations | | — |
| | 376 |
| | 205 |
| — |
| — |
| — |
| 581 |
|
Stockholders' equity | | 550,880 |
| | 839,335 |
| | 592,304 |
| | (1,431,639 | ) | | 550,880 |
|
Total Liabilities and Stockholders' Equity | | $ | 891,482 |
| | $ | 1,039,141 |
| | $ | 768,309 |
| | $ | (1,578,924 | ) | | $ | 1,120,008 |
|
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
power of the stock of the Company. Out of the $14.7 million recorded with the Change in Control, $0.9 million accelerated at the 35% ownership level and the remaining $13.8 million accelerated at the 30% ownership level.
As of June 30, 2021, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units was $0.8 million, which will be recognized over the remaining weighted average life of 1.9 years.
Stock option, deferred share unit and restricted stock unit award activity under the Company's Omnibus Equity Incentive Plan for the six months ended June 30, 2021 was as follows:
Stock Options
| | | | | | | | | | | |
| Number of Shares | | Weighted- Average Exercise Price |
Outstanding unvested as of December 31, 2020 | 906,361 | | | $ | 13.01 | |
Granted | 479,500 | | | 11.49 | |
Vested | (1,214,192) | | | 11.96 | |
Forfeited | (42,349) | | | 13.36 | |
Outstanding unvested as of June 30, 2021 | 129,320 | | | $ | 17.17 | |
Deferred Share Unit and Restricted Stock Unit awards
| | | | | | | | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value |
Outstanding unvested as of December 31, 2020 | 524,488 | | | $ | 10.41 | |
Granted | 541,632 | | | 11.51 | |
Vested | (1,046,631) | | | 10.96 | |
Forfeited | (16,793) | | | 10.78 | |
Outstanding unvested as of June 30, 2021 | 2,696 | | | $ | 13.96 | |
(13) Subsequent Events
On August 4, 2021, our Board of Directors declared a quarterly dividend of $0.01 per share to stockholders of record as of the close of business on August 31, 2021, to be paid on September 30, 2021.
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
For the Three months ended September 30, 2016 |
(in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | |
Sales - affiliates | | $ | — |
| | $ | 16,334 |
| | $ | 10,078 |
| | $ | (26,412 | ) | | $ | — |
|
Sales - third party | | — |
| | 21,891 |
| | 89,699 |
| | — |
| | 111,590 |
|
Net sales | | — |
| | 38,225 |
| | 99,777 |
| | (26,412 | ) | | 111,590 |
|
Cost of sales | | — |
| | 36,886 |
| | 103,128 |
| | (26,412 | ) | | 113,602 |
|
Additions to lower cost or market inventory reserve | | — |
| | 1,915 |
| | 2,983 |
| | — |
| | 4,898 |
|
Gross loss | | — |
| | (576 | ) | | (6,334 | ) | | — |
| | (6,910 | ) |
| | | | | | | | | | |
Research and development | | — |
| | 526 |
| | — |
| | — |
| | 526 |
|
Selling and administrative expenses | | — |
| | 3,906 |
| | 8,309 |
| | — |
| | 12,215 |
|
Operating loss | | — |
| | (5,008 | ) | | (14,643 | ) | | — |
| | (19,651 | ) |
| | | | | | | | | | |
Other expense (income), net | | — |
| | 287 |
| | (854 | ) | | — |
| | (567 | ) |
Interest expense - affiliate | | 268 |
| | — |
| | — |
| | (268 | ) | | — |
|
Interest expense - third party | | 6,362 |
| | 473 |
| | 129 |
| | — |
| | 6,964 |
|
Interest income - affiliate | | — |
| | (268 | ) | | — |
| | 268 |
| | — |
|
Interest income - third party | | — |
| | — |
| | (158 | ) | | — |
| | (158 | ) |
Loss from continuing operations before provision for income taxes | | (6,630 | ) | | (5,500 | ) | | (13,760 | ) | | — |
| ` | (25,890 | ) |
| | | | | | | | | | |
Provision for income taxes | | — |
| | 123 |
| | (1,912 | ) | | — |
| | (1,789 | ) |
Equity in loss from continuing operations of subsidiary | | (17,471 | ) | | (11,848 | ) | | — |
| | 29,319 |
| | — |
|
Net loss from continuing operations | | (24,101 | ) | | (17,471 | ) | | (11,848 | ) | | 29,319 |
| | (24,101 | ) |
| | | | | | | | | | |
Income from discontinued operations, net of tax | | — |
| | 958 |
| | 176 |
| | — |
| | 1,134 |
|
Equity in income from discontinued operations | | 1,134 |
| | 176 |
| | — |
| | (1,310 | ) | | — |
|
Net income from discontinued operations | | 1,134 |
| | 1,134 |
| | 176 |
| | (1,310 | ) | | 1,134 |
|
| | | | | | | | | | |
Net loss | | $ | (22,967 | ) | | $ | (16,337 | ) | | $ | (11,672 | ) | | $ | 28,009 |
| | $ | (22,967 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | |
Net loss | | $ | (22,967 | ) | | $ | (16,337 | ) | | $ | (11,672 | ) | | $ | 28,009 |
| | $ | (22,967 | ) |
Other comprehensive income | | 2,418 |
| | 2,418 |
| | 2,418 |
| | (4,836 | ) | | 2,418 |
|
Comprehensive loss | | $ | (20,549 | ) | | $ | (13,919 | ) | | $ | (9,254 | ) | | $ | 23,173 |
| | $ | (20,549 | ) |
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
For the Three months ended September 30, 2017 |
(in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | |
Sales - affiliates | | $ | — |
| | $ | 23,063 |
| | $ | 22,665 |
| | $ | (45,728 | ) | | $ | — |
|
Sales - third party | | — |
| | 32,617 |
| | 104,628 |
| | — |
| | 137,245 |
|
Net sales | | — |
| | 55,680 |
| | 127,293 |
| | (45,728 | ) | | 137,245 |
|
Cost of sales | | — |
| | 58,380 |
| | 107,768 |
| | (45,728 | ) | | 120,420 |
|
Additions to lower of cost or market inventory reserve | | — |
| | — |
| | 264 |
| | — |
| | 264 |
|
Gross (loss) profit | | — |
| | (2,700 | ) | | 19,261 |
| | — |
| | 16,561 |
|
| | | | | | | | | | |
Research and development | | — |
| | 1,338 |
| | — |
| | — |
| | 1,338 |
|
Selling and administrative expenses | | — |
| | 3,471 |
| | 9,851 |
| | — |
| | 13,322 |
|
Operating (loss) income | | — |
| | (7,509 | ) | | 9,410 |
| | — |
| | 1,901 |
|
| | | | | | | | | | |
Other expense (income), net | | 1 |
| | 229 |
| | (873 | ) | | — |
| | (643 | ) |
Interest expense - affiliate | | 916 |
| | — |
| | — |
| | (916 | ) | | — |
|
Interest expense - third party | | 6,399 |
| | 1,264 |
| | 129 |
| | — |
| | 7,792 |
|
Interest income - affiliate | | — |
| | (916 | ) | |
|
| | 916 |
| | — |
|
Interest income - third party | | — |
| | — |
| | (58 | ) | | — |
| | (58 | ) |
(Loss) income from continuing operations before provision for income taxes | | (7,316 | ) | | (8,086 | ) | | 10,212 |
| | — |
| ` | (5,190 | ) |
| | | | | | | | | | |
(Benefit from) provision for income taxes | | — |
| | (524 | ) | | 2,487 |
| | — |
| | 1,963 |
|
Equity in income from continuing operations of subsidiary | | 163 |
| | 7,725 |
| | — |
| | (7,888 | ) | | — |
|
Net (loss) income from continuing operations | | (7,153 | ) | | 163 |
| | 7,725 |
| | (7,888 | ) | | (7,153 | ) |
| | | | | | | | | | |
Income (loss) income from discontinued operations, net of tax | | — |
| | 7,637 |
| | (4,403 | ) | | — |
| | 3,234 |
|
Equity in income (loss) from discontinued operations | | 3,234 |
| | (4,403 | ) | | — |
| | 1,169 |
| | — |
|
Net income (loss) from discontinued operations | | 3,234 |
| | 3,234 |
| | (4,403 | ) | | 1,169 |
| | 3,234 |
|
| | | | | | | | | | |
Net (loss) income | | $ | (3,919 | ) | | $ | 3,397 |
| | $ | 3,322 |
| | $ | (6,719 | ) | | $ | (3,919 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | |
Net (loss) income | | $ | (3,919 | ) | | $ | 3,397 |
| | $ | 3,322 |
| | $ | (6,719 | ) | | $ | (3,919 | ) |
Other comprehensive income | | 7,546 |
| | 7,546 |
| | 7,546 |
| | (15,092 | ) | | 7,546 |
|
Comprehensive income | | $ | 3,627 |
| | $ | 10,943 |
| | $ | 10,868 |
| | $ | (21,811 | ) | | $ | 3,627 |
|
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
For the Nine Months Ended September 30, 2016 |
(in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | |
Sales - affiliates | | $ | — |
| | $ | 95,471 |
| | $ | 45,802 |
| | $ | (141,273 | ) | | $ | — |
|
Sales - third party | | — |
| | 64,534 |
| | 257,996 |
| | — |
| | 322,530 |
|
Net sales | | — |
| | 160,005 |
| | 303,798 |
| | (141,273 | ) | | 322,530 |
|
Cost of sales | | — |
| | 142,299 |
| | 330,271 |
| | (141,273 | ) | | 331,297 |
|
Additions to lower cost or market inventory reserve | | — |
| | 5,697 |
| | 13,826 |
| | — |
| | 19,523 |
|
Gross profit (loss) | | — |
| | 12,009 |
| | (40,299 | ) | | — |
| | (28,290 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Research and development | | — |
| | 1,964 |
| | — |
| | — |
| | 1,964 |
|
Selling and administrative expenses | | — |
| | 13,695 |
| | 25,735 |
| | — |
| | 39,430 |
|
Operating (loss) income | | — |
| | (3,650 | ) | | (66,034 | ) | | — |
| | (69,684 | ) |
| |
| |
| |
| |
| |
|
Other expense (income), net | | 6 |
| | 1,029 |
| | (2,563 | ) | | — |
| | (1,528 | ) |
Interest expense - affiliate | | 702 |
| | — |
| | — |
| | (702 | ) | | — |
|
Interest expense - third party | | 19,059 |
| | 527 |
| | 274 |
| | — |
| | 19,860 |
|
Interest income - affiliate | | — |
| | (702 | ) | | — |
| | 702 |
| | — |
|
Interest income - third party | | — |
| | — |
| | (169 | ) | | — |
| | (169 | ) |
Income (Loss) from continuing operations before provision for income taxes | | (19,767 | ) | | (4,504 | ) | | (63,576 | ) | | — |
| ` | (87,847 | ) |
| |
| |
| |
| |
| |
|
Provision for (benefit from) income taxes | | — |
| | 378 |
| | (8,053 | ) | | — |
| | (7,675 | ) |
Equity in loss from continuing operations of subsidiary | | (60,405 | ) | | (55,523 | ) | | — |
| | 115,928 |
| | — |
|
Net loss from continuing operations | | (80,172 | ) | | (60,405 | ) | | (55,523 | ) | | 115,928 |
| | (80,172 | ) |
| |
| |
| |
| |
| |
|
Loss from discontinued operations, net of tax | | — |
| | (104,372 | ) | | (3,196 | ) | | — |
| | (107,568 | ) |
Equity in loss from discontinued operations
| | (107,568 | ) | | (3,196 | ) | | — |
| | 110,764 |
| | — |
|
Net loss from discontinued operations | | (107,568 | ) | | (107,568 | ) | | (3,196 | ) | | 110,764 |
| | (107,568 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net loss | | $ | (187,740 | ) | | $ | (167,973 | ) | | $ | (58,719 | ) | | $ | 226,692 |
| | $ | (187,740 | ) |
| |
| |
| |
| |
| |
|
| | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | |
Net loss | | $ | (187,740 | ) | | $ | (167,973 | ) | | $ | (58,719 | ) | | $ | 226,692 |
| | $ | (187,740 | ) |
Other comprehensive income | | 14,119 |
| | 14,119 |
| | 14,119 |
| | (28,238 | ) | | 14,119 |
|
Comprehensive loss | | $ | (173,621 | ) | | $ | (153,854 | ) | | $ | (44,600 | ) | | $ | 198,454 |
| | $ | (173,621 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
For the Nine Months Ended September 30, 2017 |
(in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | |
Sales - affiliates | | $ | — |
| | $ | 69,860 |
| | $ | 47,373 |
| | $ | (117,233 | ) | | $ | — |
|
Sales - third party | | — |
| | 76,980 |
| | 281,318 |
| | — |
| | 358,298 |
|
Net sales | | — |
| | 146,840 |
| | 328,691 |
| | (117,233 | ) | | 358,298 |
|
Cost of sales | | — |
| | 150,164 |
| | 296,269 |
| | (117,233 | ) | | 329,200 |
|
Additions to lower of cost or market inventory reserve | | — |
| | 934 |
| | 839 |
| | — |
| | 1,773 |
|
Gross (loss) profit | | — |
| | (4,258 | ) | | 31,583 |
| | — |
| | 27,325 |
|
| | | | | | | | | | |
Research and development | | — |
| | 3,110 |
| | — |
| | — |
| | 3,110 |
|
Selling and administrative expenses | | — |
| | 10,740 |
| | 26,460 |
| | — |
| | 37,200 |
|
Operating (loss) profit | | — |
| | (18,108 | ) | | 5,123 |
| | — |
| | (12,985 | ) |
| | | | | | | | | | |
Other expense (income), net | | 7 |
| | 665 |
| | 2,938 |
| | — |
| | 3,610 |
|
Interest expense - affiliate | | 2,363 |
| | — |
| | — |
| | (2,363 | ) | | — |
|
Interest expense - third party | | 19,170 |
| | 3,739 |
| | 331 |
| | — |
| | 23,240 |
|
Interest income - affiliate | | — |
| | (2,363 | ) | | — |
| | 2,363 |
| | — |
|
Interest income - third party | | — |
| | — |
| | (320 | ) | | — |
| | (320 | ) |
(Loss) income from continuing operations before provision for income taxes | | (21,540 | ) | | (20,149 | ) | | 2,174 |
| | — |
| ` | (39,515 | ) |
| | | | | | | | | | |
(Benefit from) provision for income taxes | | — |
| | (270 | ) | | 3,519 |
| | — |
| | 3,249 |
|
Equity in loss from continuing operations of subsidiary | | (21,224 | ) | | (1,345 | ) | | — |
| | 22,569 |
| | — |
|
Net loss from continuing operations | | (42,764 | ) | | (21,224 | ) | | (1,345 | ) | | 22,569 |
| | (42,764 | ) |
| | | | | | | | | | |
Income (loss) from discontinued operations, net of tax | | 77 |
| | (143 | ) | | (4,816 | ) | | — |
| | (4,882 | ) |
Equity in loss from discontinued operations | | (4,959 | ) | | (4,816 | ) | | — |
| | 9,775 |
| | — |
|
Net loss from discontinued operations | | (4,882 | ) | | (4,959 | ) | | (4,816 | ) | | 9,775 |
| | (4,882 | ) |
| | | | | | | | | | |
Net loss | | $ | (47,646 | ) | | $ | (26,183 | ) | | $ | (6,161 | ) | | $ | 32,344 |
| | $ | (47,646 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | |
Net loss | | $ | (47,646 | ) | | $ | (26,183 | ) | | $ | (6,161 | ) | | $ | 32,344 |
| | $ | (47,646 | ) |
Other comprehensive income | | 21,141 |
| | 21,141 |
| | 21,141 |
| | (42,282 | ) | | 21,141 |
|
Comprehensive (loss) income | | $ | (26,505 | ) | | $ | (5,042 | ) | | $ | 14,980 |
| | $ | (9,938 | ) | | $ | (26,505 | ) |
| | | | | | | | | | |
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
For the Nine Months Ended September 30, 2016 |
(in thousands) |
| | | | | | | Consolidating | | |
| | | | | Non- | | Entries and | | |
| Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
Net cash (used in) provided by operating activities: | $ | (9,568 | ) | | $ | 19,207 |
| | $ | 19,092 |
| | $ | — |
| | $ | 28,731 |
|
| | | | | | | | | |
Cash flow from investing activities: | | | | | | | | | |
(Loans to) repayments from affiliates | — |
| | (9,568 | ) | | — |
| | 9,568 |
| | — |
|
Capital expenditures | — |
| | (7,453 | ) | | (14,804 | ) | | — |
| | (22,257 | ) |
Other | — |
| | — |
| | (1,171 | ) | | — |
| | (1,171 | ) |
Proceeds from sale of fixed assets | — |
| | 458 |
| | 227 |
| | — |
| | 685 |
|
Net cash (used in) provided by investing activities | — |
| | (16,563 | ) | | (15,748 | ) | | 9,568 |
| | (22,743 | ) |
| | | | | | | | | |
Cash flow from financing activities: | | | | | | | | | |
Loans from (Repayments to) affiliates | 9,568 |
| | — |
| | — |
| | (9,568 | ) | | — |
|
Short-term debt, net | — |
| | 3 |
| | 500 |
| | — |
| | 503 |
|
Revolving Facility borrowings | — |
| | 35,000 |
| | 5,000 |
| | — |
| | 40,000 |
|
Revolving Facility reductions | — |
| | (36,000 | ) | | (5,000 | ) | | — |
| | (41,000 | ) |
Principal payments on long term debt | — |
| | (104 | ) | | — |
| | — |
| | (104 | ) |
Revolver facility refinancing | — |
| | (922 | ) | | — |
| | — |
| | (922 | ) |
Net cash provided by (used in) financing activities | 9,568 |
| | (2,023 | ) | | 500 |
| | (9,568 | ) | | (1,523 | ) |
| | | | | | | | | |
Net change in cash and cash equivalents | — |
| | 621 |
| | 3,844 |
| | — |
| | 4,465 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 755 |
| | — |
| | 755 |
|
Cash and cash equivalents at beginning of period | — |
| | 646 |
| | 6,281 |
| | — |
| | 6,927 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 1,267 |
| | $ | 10,880 |
| | $ | — |
| | $ | 12,147 |
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
For the Nine Months Ended September 30, 2017 |
(in thousands) |
| | | | | | | Consolidating | | |
| | | | | Non- | | Entries and | | |
| Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
Net cash (used in) provided by operating activities: | $ | (9,660 | ) | | $ | 25,784 |
| | $ | 42,076 |
| | $ | (24,619 | ) | | $ | 33,581 |
|
| | | | | | | | | |
Cash flow from investing activities: | | | | | | | | | |
Loans to affiliates | — |
| | (9,660 | ) | | — |
| | 9,660 |
| | — |
|
Capital expenditures | — |
| | (2,835 | ) | | (20,193 | ) | | — |
| | (23,028 | ) |
Proceeds from sale of assets | — |
| | 433 |
| | 3,605 |
| | — |
| | 4,038 |
|
Proceeds from divestitures | — |
| | 26,818 |
| | — |
| | — |
| | 26,818 |
|
Net cash provided by (used in) investing activities | — |
| | 14,756 |
| | (16,588 | ) | | 9,660 |
| | 7,828 |
|
| | | | | | | | | |
Cash flow from financing activities: | | | | | | | | | |
Loans from affiliates | 9,660 |
| | — |
| | — |
| | (9,660 | ) | | — |
|
Dividends to affiliates | — |
| | — |
| | (24,619 | ) | | 24,619 |
| | — |
|
Short-term debt, net | — |
| | 2,803 |
| | 3,142 |
| | — |
| | 5,945 |
|
Revolving Facility borrowings | — |
| | 35,000 |
| | — |
| | — |
| | 35,000 |
|
Revolving Facility reductions | — |
| | (77,755 | ) | | — |
| | — |
| | (77,755 | ) |
Principal payments on long term debt | — |
| | (107 | ) | | — |
| | — |
| | (107 | ) |
Net cash provided by (used in) financing activities | 9,660 |
| | (40,059 | ) | | (21,477 | ) | | 14,959 |
| | (36,917 | ) |
| | | | | | | | |
|
|
Net change in cash and cash equivalents | — |
| | 481 |
| | 4,011 |
| | — |
| | 4,492 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 274 |
| | — |
| | 274 |
|
Cash and cash equivalents at beginning of period | — |
| | 636 |
| | 10,974 |
| | — |
| | 11,610 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 1,117 |
| | $ | 15,259 |
| | $ | — |
| | $ | 16,376 |
|
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
Introduction to Part I, Item 2, and Part II, Item 1 and Item 1A
Important Terms. We define various terms to simplify the presentation of information in this Report. These terms, which definitions are incorporated herein by reference, are defined in “Part I – Preliminary Notes – Important Terms” of the Annual Report.
Presentation of Financial, Market and Legal Data. We present our financial information on a consolidated basis.
Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Unless otherwise specifically noted, market and market share data in this Report are our own estimates or derived from sources described in “Part I – Preliminary Notes – Presentation of Financial, Market and Legal Data” in the Annual Report, which description is incorporated herein by reference. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Forward Looking Statements and Risks” in this Report and “Forward Looking Statements” and “Risk Factors” in the Annual Report. We cannot guarantee the accuracy or completeness of this market and market share data and have not independently verified it. None of the sources has consented to the disclosure or use of data in this Report.
Reference is made to the Annual Report for background information on various risks and contingencies and other matters related to circumstances affecting us and our industry.
Neither any statement made in this Report nor any charge taken by us relating to any legal proceedings constitutes an admission as to any wrongdoing.
Forward Looking Statements
Forward Looking Statements and Risks. This Report contains forward looking statements. In addition, we or our representatives have made or may make forward looking statements on telephone or conference calls, by webcasts or emails, in person, in presentations or written materials, or otherwise. These include statements about such matters as future, targeted or expected (or the impact of current, future, expected or targeted): outlook for 2017 or beyond; operational and financial performance; growth prospects and rates; future or targeted profitability, cash flow, liquidity and capital resources, production rates, inventory levels and EBITDA; the impact of rationalization, product line change, cost and liquidity initiatives; changes in the operating rates or efficiency in our operations or our competitors' or customers' operations; product quality; diversification, new products, and product improvements and their impact on our business; the integration or impact of acquired businesses; divestitures, asset sales, investments and acquisitions that we may make in the future; possible debt or equity financing or refinancing (including factoring and supply chain financing) activities; the impact of customer bankruptcies; conditions and changes in the global financial and credit markets; possible changes in control of the Company and the impacts thereof; the impact of accounting changes; and currency exchange and interest rates and changes therein; changes in production capacity in our operations and our competitors' or customers' operations and the utilization rates of that capacity; growth rates for, prices and sales of, and demand for, our products and our customers' products; costs of materials and production, including increases or decreases therein, our ability to pass on any such increases in our product prices or impose surcharges thereon, or customer or market demand to reduce our prices due to such decreases; changes in customer order patterns due to changes in economic conditions; productivity, business process and operational initiatives; the markets we serve and our position in those markets; financing and refinancing activities; investments and acquisitions and the performance of the businesses underlying such acquisitions and investments; employment and contributions of key personnel; employee relations and collective bargaining agreements covering many of our operations; tax rates and the effects of jurisdictional mix; capital expenditures and changes therein; nature and timing of restructuring and rationalization charges and payments; inventory and supply chain management; customer and supplier contractual provisions and related opportunities and issues; competitive activities; strategic plans, initiatives and business projects; regional and global economic and industry market conditions, the timing and magnitude of changes in such conditions; interest rate management activities; currency rate management activities; deleveraging activities; rationalization, restructuring, realignment, strategic alliance, raw material and supply chain, technology development and collaboration, investment, acquisition, venture, operational, tax, financial and capital projects; legal proceedings, investigations, contingencies, and environmental compliance including any regulatory initiatives with respect to greenhouse gas emissions; consulting projects; and costs, working capital, revenues, business opportunities, debt levels, cash flows, cost savings and reductions, margins, earnings and growth. The words “will,”“may,”“plan,”“estimate,”“project,”“believe,”
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
“anticipate,”“expect,”“intend,”“should,”“would,”“could,”“target,”“goal,”“continue to,”“positioned to” and similar expressions, or the negatives thereof, identify some of these statements.
Our expectations and targets are not predictors of actual performance and historically our performance has deviated, often significantly, from our expectations and targets. Actual future events and circumstances (including future results and trends) could differ materially, positively or negatively, from those set forth in these statements due to various factors. These factors include:
the possibility that additions to capacity for producing electric arc furnace ("EAF") steel, increases in overall EAF steel production capacity, and increases or other changes in steel production may not occur or may not occur at the rates that we anticipate or may not be as geographically distributed as we anticipate;
the possibility that increases or decreases in graphite electrode manufacturing capacity (including growth by producers in developing countries), competitive pressures (including changes in, and the mix, distribution, and pricing of, competitive products), reduction in specific consumption rates, increases or decreases in customer inventory levels, or other changes in the graphite electrode markets may occur, which may impact demand for, prices or unit and dollar volume sales of graphite electrodes and growth or profitability of our graphite electrodes business;
the possible failure of changes in EAF steel production or graphite electrode production to result in stable or increased, or offset decreases in, graphite electrode demand, prices, or sales volume;
the possibility that a determination that we have failed to comply with one or more export controls or trade sanctions to which we are subject with respect to products or technology exported from the United States or other jurisdictions could result in civil or criminal penalties, denial of export privileges and loss of revenues from certain customers;
the possibility that, for all of our product lines, capital improvement and expansion in our customers' operations or increases in demand for their products may not occur or may not occur at the rates that we anticipate or the demand for their products may decline, which may affect their demand for the products we sell to them, which could affect our profitability and cash flows as well as the recoverability of our assets;
the possibility that assumptions related to future expectations of financial performance materially change and impact our goodwill and long-lived asset carrying values;
the possibility that our financial assumptions and expectations materially change as a result of government or state-owned government subsidies, incentives and trade barriers;
the possibility that current economic disruptions or other conditions may result in idling or permanent closing of blast furnace capacity or delay of blast furnace capacity additions or replacements which may affect demand and prices for our refractory products;
the possibility that continued global consolidation of the world's largest steel producers could impact our business or industry;
the possibility that average graphite electrode revenue per metric ton in the future may be different than current spot or market prices due to changes in product mix, changes in currency exchange rates, changes in competitive market conditions or other factors;
the possibility that price increases, adjustments or surcharges may not be realized or that price decreases may occur;
the possibility that current challenging economic conditions and economic demand reduction may continue to impact our revenues and costs;
the possibility that U.S., European, Chinese, or other governmental monetary or fiscal policy may adversely affect global economic activity and demand for our products;
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
the possibility that potential future cuts in defense spending by the United States government as a part of efforts to reduce federal budget deficits could reduce demand for certain of our products and associated revenue;
the possibility that decreases in prices for energy and raw materials may lead to downward pressure on prices for our products and delays in customer orders for our products as customers anticipate possible future lower prices;
the possibility that customers may delay or cancel orders;
the possibility that we may not be able to reduce production costs or delay or cancel raw material purchase commitments;
the possibility that economic, political and other risks associated with operating globally, including national and international conflicts, terrorist acts, political and economic instability, civil unrest, community activism and natural or nuclear calamities might interfere with our supply chains, customers or activities in a particular location;
the possibility that reductions in customers' production, increases in competitors' capacity, competitive pressures, or other changes in other markets we serve may occur, which may impact demand for, prices of or unit and dollar volume sales of, our other products, or growth or profitability of our other product lines, or change our position in such markets;
the possibility that we will not be able to hire and retain key personnel, maintain appropriate relations with unions, associations and employees or to renew or extend our collective bargaining or similar agreements on reasonable terms as they expire or do so without a work stoppage or strike;
the possibility that there will be an adverse determination in litigation pending in Brazil involving disputes related to the proper interpretation of certain collectively bargained wage increase provisions applicable to both us and other employers in the Bahia region;
the possibility that our manufacturing capabilities may not be sufficient or that we may experience delays in expanding or fail to expand our manufacturing capacity to meet demand for existing, new or improved products;
the possibility that we may propose acquisitions or divestitures in the future, that we may not complete the acquisitions or divestitures, and that investments and acquisitions that we may make in the future may not be successfully integrated into our business or provide the performance or returns expected or that divestitures may not generate the proceeds anticipated;
the possibility that challenging conditions or changes in the capital markets will limit our ability to undertake refinancing activities or obtain financing for growth and other initiatives, on acceptable terms or at all;
the possibility that conditions or changes in the global equity markets may have a material impact on our future pension funding obligations and liabilities on our balance sheet;
the possibility that the amount or timing of our anticipated capital expenditures may be limited by our financial resources or financing arrangements or that our ability to complete capital projects may not occur timely enough to adapt to changes in market conditions or changes in regulatory requirements;
the possibility that the actual outcome of uncertainties associated with assumptions and estimates using judgment when applying critical accounting policies and preparing financial statements may have a material impact on our results of operations or financial position;
the possibility that we may be unable to protect our intellectual property or may infringe the intellectual property rights of others, resulting in damages, limitations on our ability to produce or sell products or limitations on our ability to prevent others from using that intellectual property to produce or sell products;
the occurrence of unanticipated events or circumstances or changing interpretations and enforcement agendas relating to legal proceedings or compliance programs;
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
the occurrence of unanticipated events or circumstances or changing interpretations and enforcement agendas relating to health, safety or environmental compliance or remediation obligations or liabilities to third parties or relating to labor relations;
the possibility that new or expanded regulatory initiatives with respect to greenhouse gas emissions could increase the capital intensive nature of our business and add to our costs of production;
the possibility that our provision for income taxes and effective income tax rate or cash tax rate may fluctuate significantly due to (i) changes in applicable tax rates or laws, (ii) changes in the sources of our income, (iii) changes in tax planning, (iv) new or changing interpretations of applicable regulations, (v) changes in profitability, (vi) changes in our estimate of our future ability to use foreign tax credits or other tax attributes, and (vii) other factors;
the possibility of changes in interest or currency exchange rates or in inflation or deflation;
the possibility that our outlook could be significantly impacted by, among other things, developments in North Africa, the Middle East, North Korea, and other areas of concern, the occurrence of further terrorist acts and developments resulting from the war on terrorism;
the possibility that interruption in our major raw material, energy or utility supplies due to, among other things, natural or nuclear disasters, process interruptions, actions by producers and capacity limitations, may adversely affect our ability to manufacture and supply our products or result in higher costs;
the possibility that the magnitude of changes in the cost of major raw materials, energy or utility suppliers by reason of shortages, changes in market pricing, pricing terms in applicable supply contracts, or other events may adversely affect our ability to manufacture and supply our products or result in higher costs;
the possibility of interruptions in production at our facilities due to, among other things, critical equipment failure, which may adversely affect our ability to manufacture and supply our products or result in higher costs;
the possibility that we may not achieve the earnings or other financial or operational metrics that we provide as guidance from time to time;
the possibility that the anticipated benefits from rationalizations and other cost savings initiatives may be delayed or may not occur, may vary in cost or may result in unanticipated disruptions;
the possibility of security breaches affecting our information technology systems;
the possibility that our disclosure or internal controls may become inadequate because of changes in conditions or personnel or that those controls may not operate effectively and may not prevent or detect misstatements or errors;
the possibility that severe economic conditions may adversely affect our business, liquidity or capital resources;
the possibility that delays may occur in the financial statement closing process;
the possibility of changes in performance that may affect financial covenant compliance or funds available for borrowing; and
other risks and uncertainties, including those described elsewhere in this Report or our other SEC filings, as well as future decisions by us.
Occurrence of any of the events or circumstance described above could also have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities.
No assurance can be given that any future transaction about which forward looking statements may be made will be completed or as to the timing or terms of any such transaction.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
All subsequent written and oral forward looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC's rules, we have no duty to update these statements.
For a more complete discussion of these and other factors, see “Risk Factors,” in Part I, Item 1A of our 2016 Annual Report on Form 10-K.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Global Economic Conditions, Outlook and Business Overview
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.
In its July, 2017 report, the International Monetary Fund (IMF) confirmed its April estimated global growth rate of 3.5 percent for 2017 and 3.6 percent for 2018. The IMF noted that the unchanged global growth projections mask somewhat different contributions at a country level. U.S. growth projections are lower than in April reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated. Growth estimated for Japan and the Euro area have increased due to "positive surprises to activity in late 2016 and early 2017". The IMF estimates for China have also been revised upwards since April 2017 due to a strong first quarter of 2017.
In its short range outlook released on October 16, 2017, the World Steel Association (WSA) forecasts that global steel demand will increase to 1,622 million tons in 2017 and 1,648 in 2018. Additionally, WSA estimates global steel production outside of China will grow 2.8% in 2017 and 3.0% in 2018. WSA noted that both advanced and developing economies are exhibiting stronger economic momentum this year. Confidence and investment sentiments are improving in a large part of the world despite some financial market volatility and growing concern of stock market overvaluation.
The Company
GrafTech is a leading manufacturer of graphite electrode industry has historically followedelectrodes, the growth ofcritical consumable for the electric arc furnace ("EAF") steel producing industry and toindustry. We are the only graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a lesser extent, the steel industry as a whole. Recent macroeconomic and industry-specific conditions have created significant increases in demandkey raw material for graphite electrodes. First, Chinese steel exports have been reducedVertical integration has allowed us to adopt a commercial strategy with long-term, fixed price, fixed volume, take-or-pay contracts ("LTAs") providing earnings stability and visibility. These contracts define volumes and prices, along with price-escalation mechanisms for inflation, and include significant termination payments (typically, 50% to 70% of remaining contracted revenue) and, in 2017, leadingcertain cases, parent guarantees and collateral arrangements to increasedmanage our customer credit risk.
The environmental and economic advantages of electric arc furnace steel production outsidepositions both that industry and the graphite electrode industry for continued long-term growth.
We believe GrafTech's leadership position, strong cash flows, and advantaged low cost structure and vertical integration are sustainable competitive advantages. The services and solutions we provide will position our customers and us for a better future.
Commercial Update and Outlook
GrafTech reported strong sales volumes of China which are43 thousand metric tons ("MT") in the markets that we serve. The sharesecond quarter of steel produced by EAF as2021, consisting of LTA volumes of 27 thousand MT, at an average approximate price of $9,500 per MT, and non-LTA volumes of 16 thousand MT, at an average approximate price of $4,100 per MT. Sales volumes increased 16% and 39% compared to blast furnaces is significantly higher outsidethe first quarter of China resulting2021 and second quarter of 2020, respectively.
As previously reported, spot prices negotiated during the first quarter of 2021 reached a recent low and have steadily improved since that time. Accordingly, non-LTA prices for our graphite electrodes to be delivered and realized in increased overall EAF production and increased demand for electrodes. Additionally, economic advantages that traditional blast furnace steel shops were experiencingincome in the recent past due to lower raw material costs have subsided, allowing EAF production and blast furnace production economics to be more in line with their historical balance. Finally, recent environmental restrictions imposed on Chinese manufacturing facilities has decreased graphite electrode production in China. Prior tosecond half of 2021 are improving. We expect this improvement in demandnon-LTA pricing to continue into 2022. In the electrode industry experienced a five year extended downturn resultingthird quarter of 2021, we expect realized prices for non-LTA volumes to be up approximately 10%-12% compared to the second quarter.
Production volume of 44 thousand MT in a reductionthe second quarter of electrode capacity2021 represented an increase of approximately 200,000 metric tons (or approximately 20%) outside22% and 33% compared to the first quarter of China.2021 and the second quarter of 2020, respectively.
The culmination of these factors has led to considerable concern over the graphite electrode industry's ability to meet customers' demand in 2018. As a result, there has been a significant increase in the current spot market price of graphite electrodes. There are indications that this demand and supply imbalance could be an issue that persists for some time. As a result, we have begun an initiative to offer three to five year supply contracts to our strategic customers. We believe that these contracts will benefit our customers by providing them with long-term security of supply. This would also give us greater certainty to invest in our facilities to continue to provide the level of service, quality, and reliability that our customers expect and value.
Since our acquisition by Brookfield two years ago, we have improved our operating performance by refocusing on our core electrode business, divesting of non-core segments, optimizing production and improving productivity at our low-cost plants, improving electrode performance, enhancing commercial strategy and reducing corporate overhead. These actions have resulted in over $100 million of sustainable operating improvements. This, along with the benefit of vertical integration in needle coke, positions us to be one of the most reliable, lowest cost, highest quality producersestimated shipments of graphite electrodes for the final two years of the initial term under our LTAs and for the years 2023 through 2024 remain unchanged from our prior estimate as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2022 | | 2023 through 2024 |
Estimated LTA volume (thousands of metric tons) | | 98-108 | | 95-105 | | 35-45 |
Estimated LTA revenue (in millions) | | $925-$1,025 | | $910-$1,010 | | $350-$450(1) |
(1) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs
Global steel market capacity utilization rates have continued to improve sequentially:
| | | | | | | | | | | |
| Q2 2021 | Q1 2021 | Q2 2020 |
Global steel market (ex-China) capacity utilization rates (1) | 75% | 73% | 56% |
U.S. steel market capacity utilization rates (2) | 80% | 77% | 56% |
1 Source: World Steel Association and Metal Expert
2 Source: American Iron and Steel Institute
Capital Structure and Capital Allocation
As of June 30, 2021, GrafTech had cash and cash equivalents of $114 million and total debt of approximately $1.2 billion. We continue to make progress in reducing our industry.long-term debt, repaying $50 million in the second quarter, for a total
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
debt repayment of $200 million in the first half of 2021. We continue to expect our primary use of cash for the balance of this year to be debt repayment.
Our full year 2021 capital expenditure range expectations are unchanged, between $55 and $65 million.
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance with GAAP, we use certain other financial measures and operating metrics to analyze the performance of our company. The “non-GAAP” financial measures consist of EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS. which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization.
Key financial measures
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
(in thousands), except per share data | 2021 | 2020 | | 2021 | 2020 |
Net sales | $ | 330,750 | | $ | 280,718 | | | $ | 635,147 | | $ | 599,364 | |
Net income | $ | 28,165 | | $ | 92,776 | | | $ | 126,964 | | $ | 215,044 | |
Earnings per share(1) | $ | 0.11 | | $ | 0.35 | | | $ | 0.47 | | $ | 0.80 | |
EBITDA(2) | $ | 68,017 | | $ | 147,645 | | | $ | 221,742 | | $ | 332,674 | |
Adjusted net income(2) | $ | 114,487 | | $ | 96,005 | | | $ | 214,367 | | $ | 212,235 | |
Adjusted earnings per share(1)(2) | $ | 0.43 | | $ | 0.36 | | | $ | 0.80 | | $ | 0.79 | |
Adjusted EBITDA (2) | $ | 159,903 | | $ | 151,125 | | | $ | 314,948 | | $ | 330,303 | |
(1) Earnings per share represents diluted earnings per share. Adjusted earnings per share represents adjusted diluted earnings per share.
(2) Non-GAAP financial measures; see below for information and reconciliations of EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key operating metrics
| | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | |
(in thousands, except utilization) | 2021 | 2020 | | 2021 | 2020 | |
Sales volume (MT)(1) | 43 | | 31 | | | 80 | | 65 | | |
Production volume (MT)(2) | 44 | | 33 | | | 80 | | 66 | | |
Production capacity excluding St. Marys (MT)(3)(4) | 51 | | 51 | | | 102 | | 102 | | |
Capacity utilization excluding St. Marys (3)(5) | 86 | % | 65 | % | | 78 | % | 65 | % | |
Total production capacity (MT)(4)(6) | 58 | | 58 | | | 116 | | 116 | | |
Total capacity utilization(5)(6) | 76 | % | 57 | % | | 69 | % | 57 | % | |
(1) Sales volume reflects only graphite electrodes manufactured by GrafTech.
(2) Production volume reflects graphite electrodes we produced during the period.
(3) In the first quarter of 2018, our St. Marys facility began graphitizing a limited amount of electrodes sourced from our Monterrey, Mexico facility.
(4) Production capacity reflects expected maximum production volume during the period under normal operating conditions, standard product mix and expected maintenance outage. Actual production may vary.
(5) Capacity utilization reflects production volume as a percentage of production capacity.
(6) Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; Pamplona, Spain and St. Marys, Pennsylvania.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Non-GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we have provided certain financial measures that are not in accordance with GAAP. EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS are non‑GAAP financial measures. We define EBITDA, a non‑GAAP financial measure, as net income or loss plus interest expense, minus interest income, plus income taxes, and depreciation and amortization. We define adjusted EBITDA as EBITDA adjusted for any pension and other post employment benefit ("OPEB") plan expenses or gains, initial and follow-on public offering and related expenses, non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar, related party Tax Receivable Agreement (as defined below) adjustments, stock-based compensation, non‑cash fixed asset write‑offs and Change in Control charges that were triggered as a result of the ownership of our largest stockholder falling below 30% of our total outstanding shares. Adjusted EBITDA is the primary metric used by our management and our Board of Directors to establish budgets and operational goals for managing our business and evaluating our performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period‑to‑period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt‑service capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments, including any capital expenditure requirements to augment or replace our capital assets;
•adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
•adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
•adjusted EBITDA does not reflect expenses relating to our pension and OPEB plans;
•adjusted EBITDA does not reflect the non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar;
•adjusted EBITDA does not reflect initial and follow-on public offering and related expenses;
•adjusted EBITDA does not reflect related party Tax Receivable Agreement adjustments;
•adjusted EBITDA does not reflect stock-based compensation or the non‑cash write‑off of fixed assets;
•adjusted EBITDA does not reflect the Change in Control charges; and
•other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
We define adjusted net income, a non‑GAAP financial measure, as net income or loss and excluding the items used to calculate adjusted EBITDA, less the tax effect of those adjustments. We define adjusted EPS, a non‑GAAP financial measure, as adjusted net income divided by the weighted average of diluted common shares outstanding during the period. We believe adjusted net income and adjusted EPS are useful to present to investors because we believe that they assist investors’ understanding of the underlying operational profitability of the Company.
In evaluating EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, you should be aware that in the future, we will incur expenses similar to the adjustments in the reconciliation below, other than change in control charges. Our presentations of EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non‑recurring items. When evaluating our performance, you should consider EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS alongside other financial performance measures, including our net income, EPS and other GAAP measures.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The following tables reconcile our non-GAAP key financial measures to the most directly comparable GAAP measures:
| | | | | | | | | | | | | | | | | |
Reconciliation of Net Income to Adjusted Net Income | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2021 | 2020 | | 2021 | 2020 |
| (in thousands, except per share data) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net income | $ | 28,165 | | $ | 92,776 | | | $ | 126,964 | | $ | 215,044 | |
Adjustments, pre-tax: | | | | | |
Pension and OPEB plan expenses (1) | 430 | | 541 | | | 861 | | 1,083 | |
Initial and follow-on public offering and related expenses (2) | 241 | | — | | | 663 | | 4 | |
Non-cash loss (gain) on foreign currency remeasurement (3) | 2,255 | | 2,222 | | | 1,907 | | (1,239) | |
Stock-based compensation (4) | 550 | | 717 | | | 1,318 | | 1,127 | |
Non-cash fixed asset write-off (5) | 313 | | — | | | 313 | | — | |
Related party Tax Receivable Agreement adjustment (6) | — | | — | | | 47 | | (3,346) | |
Change in Control LTIP award (7) | 73,384 | | — | | | 73,384 | | — | |
Change in control stock-based compensation acceleration (7) | 14,713 | | — | | | 14,713 | | — | |
Total non-GAAP adjustments pre-tax | 91,886 | | 3,480 | | | 93,206 | | (2,371) | |
Income tax impact on non-GAAP adjustments | 5,564 | | 251 | | | 5,803 | | 438 | |
Adjusted net income | $ | 114,487 | | $ | 96,005 | | | $ | 214,367 | | $ | 212,235 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash write-off of fixed assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred change in control charges as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our shares outstanding.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | |
Reconciliation of EPS to Adjusted EPS | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | |
| 2021 | 2020 | | 2021 | 2020 | | | |
| | | | | | | | |
EPS | $ | 0.11 | | $ | 0.35 | | | $ | 0.47 | | $ | 0.80 | | | | |
Adjustments per share: | | | | | | | | |
Pension and OPEB plan expenses (1) | — | | — | | | — | | — | | | | |
Initial and follow-on public offering and related expenses (2) | — | | — | | | — | | — | | | | |
Non-cash gains and losses on foreign currency remeasurement (3) | 0.01 | | 0.01 | | | 0.01 | | — | | | | |
Stock-based compensation (4) | — | | — | | | 0.01 | | — | | | | |
Non-cash fixed asset write-off (5) | — | | — | | | — | | — | | | | |
Related party Tax Receivable Agreement adjustment (6) | — | | — | | | — | | (0.01) | | | | |
Change in control LTIP award (7) | 0.27 | | — | | | 0.27 | | — | | | | |
Change in control stock-based compensation acceleration (7) | 0.06 | | — | | | 0.06 | | — | | | | |
Total non-GAAP adjustments pre-tax per share | 0.34 | | 0.01 | | | 0.35 | | (0.01) | | | | |
Income tax impact on non-GAAP adjustments per share | 0.02 | | — | | | 0.02 | | — | | | | |
Adjusted EPS | $ | 0.43 | | $ | 0.36 | | | $ | 0.80 | | $ | 0.79 | | | | |
(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash fixed asset write-off recorded for obsolete assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred Change in Control charges as a result of the ownership of our largest shareholder, Brookfield, moving below 30% of our total shares outstanding.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2021 | 2020 | | 2021 | 2020 |
| (in thousands) |
Net income | $ | 28,165 | | $ | 92,776 | | | $ | 126,964 | | $ | 215,044 | |
Add: | | | | | |
| | | | | |
Depreciation and amortization | 16,292 | | 14,549 | | | 32,831 | | 28,833 | |
Interest expense | 15,994 | | 20,880 | | | 38,161 | | 46,552 | |
Interest income | (199) | | (348) | | | (236) | | (1,489) | |
Income taxes | 7,765 | | 19,788 | | | 24,022 | | 43,734 | |
EBITDA | 68,017 | | 147,645 | | | 221,742 | | 332,674 | |
Adjustments: | | | | | |
Pension and OPEB plan expenses (1) | 430 | | 541 | | | 861 | | 1,083 | |
| | | | | |
Initial and follow-on public offering and related expenses (2) | 241 | | — | | | 663 | | 4 | |
Non-cash loss (gain) on foreign currency remeasurement (3) | 2,255 | | 2,222 | | | 1,907 | | (1,239) | |
Stock-based compensation (4) | 550 | | 717 | | | 1,318 | | 1,127 | |
Non-cash fixed asset write-off (5) | 313 | | — | | | 313 | | — | |
Related party Tax Receivable Agreement adjustment (6) | — | | — | | | 47 | | (3,346) | |
Change in Control LTIP award (7) | 73,384 | | — | | | 73,384 | | — | |
Change in control stock-based compensation acceleration (7) | 14,713 | | — | | | 14,713 | | — | |
Adjusted EBITDA | $ | 159,903 | | $ | 151,125 | | | $ | 314,948 | | $ | 330,303 | |
(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash write-off of fixed assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred change in control charges as a result of the ownership of our largest shareholder, Brookfield, moving below 30% of our shares outstanding.
Key operating metrics
In addition to measures of financial performance presented in accordance with GAAP, we use certain operating metrics to analyze the performance of our company. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. These metrics align with management's assessment of our revenue performance and profit margin and will help investors understand the factors that drive our profitability.
Sales volume reflects only graphite electrodes manufactured by GrafTech. For a discussion of our revenue recognition policy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Revenue Recognition.” in our Annual Report on Form 10-K. Sales volume helps investors understand the factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period. Production capacity reflects expected maximum production volume during the period under normal operating conditions, standard product mix and expected maintenance downtime. Capacity utilization reflects production volume as a percentage of production capacity. Production volume, production capacity and capacity utilization help us understand the efficiency of our production, evaluate cost of sales and consider how to approach our contract initiative.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Results of Operations and Segment Review
The Three Months Ended SeptemberJune 30, 20162021 Compared to the Three Months Ended SeptemberJune 30, 20172020
The tables presented in our period-over-period comparisons summarize our Condensed Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our Management's Discussion and Analysis ("MD&A"), insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | Increase/ Decrease | | % Change |
| | 2021 | | 2020 | | |
| | (Dollars in thousands) | | | | |
| | | | | | | | |
Net sales | | $ | 330,750 | | | $ | 280,718 | | | $ | 50,032 | | | 18 | % |
Cost of sales | | 201,867 | | | 130,600 | | | 71,267 | | | 55 | % |
Gross profit | | 128,883 | | | 150,118 | | | (21,235) | | | (14) | % |
Research and development | | 1,018 | | | 710 | | | 308 | | | 43 | % |
Selling and administrative expenses | | 75,783 | | | 16,001 | | | 59,782 | | | 374 | % |
Operating income | | 52,082 | | | 133,407 | | | (81,325) | | | (61) | % |
Other expense (income), net | | 357 | | | 311 | | | 46 | | | 15 | % |
| | | | | | | | |
Interest expense | | 15,994 | | | 20,880 | | | (4,886) | | | (23) | % |
Interest income | | (199) | | | (348) | | | 149 | | | (43) | % |
Income before provision for income taxes | | 35,930 | | | 112,564 | | | (76,634) | | | (68) | % |
Provision for income taxes | | 7,765 | | | 19,788 | | | (12,023) | | | (61) | % |
Net income | | $ | 28,165 | | | $ | 92,776 | | | $ | (64,611) | | | (70) | % |
Net sales. Net sales increased from $280.7 million in the three months ended June 30, 2020 to $330.8 million in the three months ended June 30, 2021. The second quarter of 2020 was impacted by market conditions, including COVID-19. Stronger demand for our products in the second quarter of 2021 resulted in a 39% increase in sales volume compared to the same period of 2020. Partially offsetting the increased volume was a decrease in non-LTA sales prices, as the sales prices we realized in the second quarter of 2021 were primarily negotiated late in the fourth quarter of 2020 as well as in the first quarter of 2021. The sales price of graphite electrodes have increased since the first quarter of 2021 and we expect this to positively impact our second half 2021 results.
Cost of sales. We experienced an increase in cost of sales from $130.6 million in the three months ended June 30, 2020 to $201.9 million in the three months ended June 30, 2021, primarily due to the 39% increase in sales volume of manufactured electrodes. Additionally, cost of sales in the second quarter of 2021 was impacted by a one-time Long-term Incentive Plan ("LTIP") charge of $30.7 million resulting from a Change in Control after our largest stockholder's ownership of our common stock was reduced below 30% of our outstanding common stock.
Selling and administrative expenses. Selling and administrative expenses increased from $16.0 million in the three months ended June 30, 2020 to $75.8 million in the three months ended June 30, 2021 primarily due to the aforementioned Change in Control resulting in $42.6 million of one-time LTIP expense within selling and administrative expense. Additionally, the Change in Control resulted in $12.9 million of one-time accelerated stock based compensation expense.
Interest expense. Interest expense decreased from $20.9 million in the three months ended June 30, 2020 to $16.0 million in the three months ended June 30, 2021, primarily due to lower interest rates and lower average borrowings. Partially offsetting these decreases was the absence of a $3.3 million benefit in 2020 resulting from discounts on debt repurchases.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Provision for income taxes. The following table summarizes the expense for income taxes:
| | | | | | | | | | | |
| For the Three months ended June 30, |
| 2021 | | 2020 |
| (Dollars in thousands) |
| | | |
Tax expense | $ | 7,765 | | | $ | 19,788 | |
Pretax income | 35,930 | | | 112,564 | |
Effective tax rates | 21.6 | % | | 17.6 | % |
The effective tax rate for the three months ended June 30, 2021 was 21.6%. This rate differs from the U.S. statutory rate of 21% primarily due to worldwide earnings from various countries taxed at different rates, which was partially offset by the net combined impact related to the U.S. taxation of global intangible low taxed income (“GILTI”) and Foreign Tax Credits (“FTCs”). A portion of the one-time Change in Control charges recorded in the quarter was not deductible and contributed to the increase in the effective rate. We expect the full year effective tax rate to be approximately 16% to 17%.
The effective tax rate for the three months ended June 30, 2020 was 17.6%. This rate differs from the U.S. statutory rate of 21% primarily due to worldwide earnings from various countries taxed at different rates.
Tax expense decreased from $19.8 million for the three months ended June 30, 2020 to $7.8 million for the three months ended June 30, 2021. This change is primarily related to a reduction in pretax income, worldwide earnings from various countries taxed at different rates and the U.S. taxation of GILTI.
The Six Months Ended June 30, 2021 Compared to the Six Months EndedJune 30, 2020
The tables presented in our period-over-period comparisons summarize our Condensed Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our MD&A, insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, | | Increase/ Decrease | | % Change |
| 2021 | | 2020 | | |
| (Dollars in thousands) | | | | |
| | | | | | | |
Net sales | $ | 635,147 | | | $ | 599,364 | | | $ | 35,783 | | | 6 | % |
Cost of sales | 348,263 | | | 269,517 | | | 78,746 | | | 29 | % |
| | | | | | | |
Gross profit | 286,884 | | | 329,847 | | | (42,963) | | | (13) | % |
Research and development | 1,987 | | | 1,422 | | | 565 | | | 40 | % |
Selling and administrative expenses | 95,936 | | | 30,933 | | | 65,003 | | | 210 | % |
Operating income | 188,961 | | | 297,492 | | | (108,531) | | | (36) | % |
Other (income) expense | 3 | | | (3,003) | | | 3,006 | | | (100) | % |
Related party Tax Receivable Agreement expense (benefit) | 47 | | | (3,346) | | | 3,393 | | | N/A |
Interest expense | 38,161 | | | 46,552 | | | (8,391) | | | (18) | % |
Interest income | (236) | | | (1,489) | | | 1,253 | | | (84) | % |
Income before provision for income taxes | 150,986 | | | 258,778 | | | (107,792) | | | (42) | % |
Provision for income taxes | 24,022 | | | 43,734 | | | (19,712) | | | (45) | % |
Net income from continuing operations | 126,964 | | | 215,044 | | | (88,080) | | | (41) | % |
| | | | | | | |
Net income | $ | 126,964 | | | $ | 215,044 | | | $ | (88,080) | | | (41) | % |
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2016 | | 2017 |
| | (Dollars in thousands) |
| | | | |
Net sales | | $ | 111,590 |
| | $ | 137,245 |
|
Cost of sales | | 113,602 |
| | 120,420 |
|
Additions to lower of cost or market inventory reserve | | 4,898 |
| | 264 |
|
Gross (loss) profit | | (6,910 | ) | | 16,561 |
|
Research and development | | 526 |
| | 1,338 |
|
Selling and administrative expenses | | 12,215 |
| | 13,322 |
|
Operating (loss) income | | (19,651 | ) | | 1,901 |
|
Other expense (income), net | | (567 | ) | | (643 | ) |
Interest expense | | 6,964 |
| | 7,792 |
|
Interest income | | (158 | ) | | (58 | ) |
Loss from continuing operations before provision for income taxes | | (25,890 | ) | | (5,190 | ) |
(Benefit from) provision for income taxes | | (1,789 | ) | | 1,963 |
|
Net loss from continuing operations | | (24,101 | ) | | (7,153 | ) |
Income from discontinued operations, net of tax | | 1,134 |
| | 3,234 |
|
Net loss | | $ | (22,967 | ) | | $ | (3,919 | ) |
Net sales. Net sales increased by $35.8 million, or 6%, from $111.6$599.4 million in the threesix months ended SeptemberJune 30, 20162020 to $137.2 millionin the three months ended September 30, 2017. The increase was primarily driven by an 18% increase in the weighted average sales price of graphite electrodes. Additionally, increased graphite electrode volumes contributed $6.2 million of additional revenue and we benefited from $2.1 million of advantageous foreign currency impacts.
Cost of sales. We experienced increases in cost of sales from $113.6$635.1 million in the threesix months ended SeptemberJune 30, 2016 to $120.4 million2021. Higher net sales reflect a 23% increase in the three months ended September 30, 2017. This increase was primarily the result of increased graphite electrode volumes increasing costs by $4.4 million. Additionally, costs were negatively impacted by $3.0 million of foreign currency impact and $2.1 million of cost resulting from damage to our Seadrift facility from Hurricane Harvey. Partially offsetting these increases were lower depreciation expense and lower per-unit cost. Depreciation decreased as a result of purchase price adjustments that have fully depreciated and per-unit cost decreases weresales volume driven primarily by our rationalization initiatives over the last three years, continued cost control initiatives and optimization of our graphite electrode plant capacity.
Lower of cost or market inventory adjustment. In the three months ended September 30, 2016, we incurred a lower of cost or market adjustment of $4.9 million in certain product lines within our graphite electrode business reflecting decreased pricing. This adjustment totaled $0.3 million in theimproved customer demand. The same period of 2017. The decrease is attributable to2020 was impacted by market conditions, including COVID-19. Lower realized prices for the reduction in product costs and improvement in sales prices in the threesix months ended SeptemberJune 30, 2017 as compared to2021 partially offset the same period of 2016.
increased volume. Spot prices for graphite electrodes
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
declined throughout 2020 and did not begin to increase until the first quarter of 2021. We expect this increase in the price of electrodes to favorably impact our results in the second half of 2021.
Interest Expense. Interest expenseCost of sales. Cost of sales increased by $78.7 million, or 29%, from $7.0$269.5 million in the threesix months ended SeptemberJune 30, 2016,2020 to $7.8$348.3 million in the threesix months ended SeptemberJune 30, 20172021. This increase was primarily due to anthe 23% increase in sales volume of manufactured electrodes. Additionally, cost of sales for the variable interest rate onsix months ended June 30, 2021 was impacted by a one-time LTIP charge of $30.7 million resulting from a Change in Control after our Revolving Credit Facility.largest stockholder's ownership of our common stock was reduced below 30% of our outstanding common stock.
Income from Discontinued Operations. Our income from discontinued operationsSelling and administrative expenses. Selling and administrative expenses increased from $1.1 million for the three months ended September 30, 2016 to $3.2$30.9 million in the threesix months ended SeptemberJune 30, 2017. The 2016 results included three months of results from our AET business that was sold on July 3, 2017.
Segment operating income (loss). The following table represents a reconciliation of our segment operating income (loss)2020 to total operating income (loss):
|
| | | | | | | |
| Three Months Ended September 30, |
| 2016 | | 2017 |
| (Dollars in thousands) |
| | | |
Industrial Materials | $ | (14,238 | ) | | $ | 8,308 |
|
Corporate, R&D and Other Expenses | (5,413 | ) | | (6,407 | ) |
Total operating (loss) income | $ | (19,651 | ) | | $ | 1,901 |
|
Provision for income taxes. The following table summarizes$95.9 million in the expense/(benefit) for income taxes:
|
| | | | | | | |
| Three Months Ended September 30, |
| 2016 | | 2017 |
| (Dollars in thousands) |
| | | |
Tax (benefit) expense | $ | (1,789 | ) | | $ | 1,963 |
|
Pretax loss | (25,890 | ) | | (5,190 | ) |
Effective tax rates | 6.9 | % | | (37.8 | )% |
For the threesix months ended SeptemberJune 30, 2016 and 2017, the effective tax rate differs from the U.S. statutory rate of 35% 2021 primarily due to recent lossesthe aforementioned Change in Control resulting in $42.6 million of one-time LTIP expense. Additionally, the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates. The recognitionChange in Control resulted in $12.9 million of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
The Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2017
The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our MD&A, insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
| (Dollars in thousands) |
| | | |
Net sales | $ | 322,530 |
| | $ | 358,298 |
|
Cost of sales | 331,297 |
| | 329,200 |
|
Additions to lower of cost or market inventory reserve | 19,523 |
| | 1,773 |
|
Gross (loss) profit | (28,290 | ) | | 27,325 |
|
Research and development | 1,964 |
| | 3,110 |
|
Selling and administrative expenses | 39,430 |
| | 37,200 |
|
Operating loss | (69,684 | ) | | (12,985 | ) |
Other expense (income), net | (1,528 | ) | | 3,610 |
|
Interest expense | 19,860 |
| | 23,240 |
|
Interest income | (169 | ) | | (320 | ) |
Loss from continuing operations before provision for income taxes | (87,847 | ) | | (39,515 | ) |
(Benefit from) provision for income taxes | (7,675 | ) | | 3,249 |
|
Net loss from continuing operations | (80,172 | ) | | (42,764 | ) |
Loss from discontinued operations, net of tax | (107,568 | ) | | (4,882 | ) |
Net loss | $ | (187,740 | ) | | $ | (47,646 | ) |
Net sales. Net sales increased from $322.5 million in the nine months ended September 30, 2016 to $358.3 millionin the nine months endedSeptember 30, 2017. Graphite electrode sales volume increased 10% in the nine months endedSeptember 30, 2017 compared to the same period of 2016 driving the sales increase.
Cost of sales. Cost of sales decreased from $331.3 million in the nine months ended September 30, 2016to $329.2 million in the nine months ended September 30, 2017. Although greater sales volume of graphite electrodes increased total cost of sales by $19.2 million, this was more than offset by lower manufacturing costs and lower depreciationOther (income) expense. Manufacturing costs were $12.5 million lower driven by lower raw materials cost and lower fixed costs from our rationalization initiatives and the optimization of our production platform. Depreciation expense was $9.2 million lower which was the result of purchase price adjustments that have fully depreciated.
Lower of cost or market inventory adjustment. We incurred a lower of cost or market adjustment of $19.5 million in the nine months ended September 30, 2016 and $1.8 million in the nine months ended September 30, 2017 for certain product lines within our graphite electrode business. The year over year decrease is attributable to the reduction in product costs and improved pricing in the nine months ended September 30, 2017 as compared to the same period of 2016.
Selling and general administrative. Selling and general administrative expenses decreased from $39.4 million in the nine months endedSeptember 30, 2016 compared to $37.2 million in the nine months ended September 30, 2017 driven primarily by continued cost reduction efforts.
Other (Income) Expense. Other expenseincome decreased from income of $1.5$3.0 million in the ninesix months endedSeptember June 30, 2016,2020 to expenseincome of $3.6 millionzero in the ninesix months ended SeptemberJune 30, 20172021. This change was primarily due to 2020 advantageous non-cash foreign currency impacts on non-operating assets and liabilities partially offset by interest income received as partin the six months ended June 30, 2020 that did not recur in the same period of 2021.
Related party Tax Receivable Agreement expense (benefit). During the resolutionfirst quarter of a value added tax dispute2020, the Company recorded an adjustment to our related-party payable-Tax Receivable Agreement liability resulting in a foreign jurisdiction.benefit of $3.3 million due to the revised profit expectation for the year 2020, primarily caused by market conditions and the COVID-19 pandemic.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
Interest Expense.expense. Interest expense increaseddecreased by $8.4 million from $19.9$46.6 million in the ninesix months endedSeptember June 30, 20162020 to $23.2$38.2 million in the nine months ended September 30, 2017same period of 2021, primarily due to increased borrowing costslower interest rates and lower average borrowings. Partially offsetting these decreases was $2.0 million of accelerated amortization of deferred financing fees and original issue discounts in the six months ended June 30, 2021 resulting from prepayments on our Revolving Credit Facility.term loan and the the absence of a $3.3 million benefit in 2020 resulting from discounts on debt repurchases.
Loss from Discontinued Operations. Results from our discontinued operations represented a loss of $107.6 million in the nine months ended September 30, 2016 and a loss of $4.9 million in the nine months ended September 30, 2017. The decrease in loss was primarily due to a $105.6 million impairment charge to align the carrying value of assets held for sale to their estimated fair value in the nine months endedSeptember 30, 2016 compared to an impairment of $5.3 million in the nine months ended September 30, 2017.
Segment operating income (loss). The following table represents a reconciliation of our segment operating income (loss) to total operating income (loss):
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
| (Dollars in thousands) |
| | | |
Industrial Materials | $ | (50,776 | ) | | $ | 4,218 |
|
Corporate, R&D and Other Expenses | (18,908 | ) | | (17,203 | ) |
Total operating loss | $ | (69,684 | ) | | $ | (12,985 | ) |
Provision for income taxes. The following table summarizes the expense/(benefit)expense for income taxes:
| | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2021 | | 2020 |
| (Dollars in thousands) |
Tax expense | $ | 24,022 | | | $ | 43,734 | |
Pre-tax income | 150,986 | | | 258,778 | |
Effective tax rates | 15.9 | % | | 16.9 | % |
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
| (Dollars in thousands) |
| |
Tax (benefit) expense | $ | (7,675 | ) | | $ | 3,249 |
|
Pretax loss | (87,847 | ) | | (39,515 | ) |
Effective tax rates | 8.7 | % | | (8.2 | )% |
ForThe effective tax rate for the ninesix months ended SeptemberJune 30, 2017 and 2016, the effective tax2021 was 15.9%. This rate differs from the U.S. statutory rate of 35%21% primarily due to losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and worldwide earnings from various countries taxed at different rates, partially offset by the net combined impact related to the U.S. taxation of GILTI and FTCs.
For the six months ended June 30, 2020, the effective tax rate of 16.9% differs from the U.S. statutory rate of 21% primarily due to worldwide earnings from various countries taxed at different rates.
The recognitiontax expense decreased from $43.7 million for the six months ended June 30, 2020 to $24.0 million for the six months ended June 30, 2021. This change is primarily related to the reduction in pretax income, worldwide earnings from
various countries taxed at different rates and the U.S. taxation of GILTI.
GrafTech has considered the valuation allowance does not result in or limittax impact of COVID-19 legislation, including the Company's abilityU.S. Coronavirus Aid, Relief and Economic Security (CARES) Act and has concluded that there is no material tax impact. The Company continues to utilize thesemonitor the tax assets in the future.effects of any legislative changes.
Effects of Changes in Currency Exchange Rates
When the currencies of non-U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
expenses with respect to those facilities. In certain countries wherein which we have manufacturing facilities, and in certain export markets, we sell in currencies other than the U.S. dollar. Accordingly, when these currencies increase (or decline) in value relative to the U.S. dollar, this has the effect of increasing (or reducing) net sales. The result of these effects is to increase (or decrease) operating profit and net income.
Many of the non-U.S. countries in which we have a manufacturing facility have been subject to significant economic and political changes, which have significantly impacted currency exchange rates. We cannot predict changes in currency exchange rates in the future or whether those changes will have net positive or negative impacts on our net sales, cost of sales or net income.
For net salesThe impact of Industrial Materials, the impact ofthese changes in the average exchange rates of other currencies against the U.S. dollar on our net sales was an increase of $4.3 million and $9.0 million for the ninethree and six months ended SeptemberJune 30, 2017 was a increase of $0.3 million2021, respectively, compared to the same period of 2016.2020. The impact of the exchange ratethese changes on our cost of sales was an increase of Industrial Materials$8.1 million and $11.5 million for the ninethree and six months ended SeptemberJune 30, 2017 was a decrease of $0.4 million2021, respectively, compared to the same period of 2016.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
As part of our cash management, we also have intercompany loans between our subsidiaries. These loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains / losses in other income (expense), net, on the Consolidated Statements of Operations.
The remeasurement of intercompany loans and the effect of transaction gains and losses on intercompany activities resulted in a loss of $0.9 million in the nine months ended September 30, 2016 compared to a loss of $1.5 million in the nine months ended September 30, 2017.2020.
We have in the past and may in the future use various financial instruments to manage certain exposures to specific financial market risks caused by currency exchange rate changes, as described under “Part I, Item 3–Quantitative and Qualitative Disclosures about Market Risk”.Risk.”
Liquidity and Capital Resources
Our sources of funds have consisted principally of cash flow from operations and debt, including our credit facilities (subject to continued compliance with the financial covenants and representations). Our uses of those funds (other than for operations) have consisted principally of dividends, capital expenditures, scheduled debt repayments, optional debt repayments, share repurchases and other obligations. Disruptions in the U.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future.
We believe that we have adequate liquidity to meet our needs. As of SeptemberJune 30, 2017,2021, we had cash and cash equivalentsliquidity of $16.4$360.5 million,, long-term debt consisting of $320.4$246.4 million, short-term debt of$13.3 million and stockholder’s equity of $551 million.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. As a result of the amendment, the size of the Revolving Facility was permanently reduced from $375 million to $225 million. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under theour 2018 Revolving Facility) in excess of $25 million. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens and incur debt; a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility; and changes to the Company’s financial covenants so that, until the earlier of March 31, 2019 or the Company has $75 million in trailing twelve month EBITDA, the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from ($40 million) to $35 million after which the Company’s existing financial covenants under the Revolving Facility will apply.
With this amendment, the Company has full access to the $225 million Revolving Facility, subject to the $25 million minimum liquidity requirement. As of September 30, 2017, the Company had $35.3 million of borrowings on the Revolving Facility and $11.6 million of letters of credit drawn against the Revolving Facility. In addition to the Revolving Facility, the Company has $18.8 million outstanding on its Term Loan Facility.
We use cash flow from operations and funds available under the RevolvingCredit Facility (subject to continued compliance with the financial covenants and representations under the Revolving Facility)representations) and cash and cash equivalents of $114.1 million. We had long-term debt of $1,224.9 million and short-term debt of $0.1 million as well as cash on hand as our primary sources of liquidity. The Revolving Facility and the Term Loan Facility both mature in April 2019. Under the Revolving Facility, we have additional flexibility for investments, capital expenditures and acquisitions and we can issue letters of credit under the Revolving Facility in an amount not to exceed $35 million.
The interest rate applicable to the Revolving Facility and the Term Loan Facility is LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.70% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of 6.375% Senior Notes due 2020 (the "Senior Notes"). The Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor. The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
If, prior to maturity, a change in control (as defined in the indenture) of the Company occurs and thereafter certain downgrades of the ratings of the Senior Notes as specified in the indenture occur, the Company will be required to offer to repurchase any or all of the Senior Notes at a repurchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus any accrued and unpaid interest.
June 30, 2021. As of December 31, 20162020, we had liquidity of $391.8 million consisting of $246.4 million available on our 2018 Revolving Credit Facility (subject to continued compliance with the financial covenants and Septemberrepresentations) and cash and cash equivalents of $145.4 million. We had long-term debt of $1,420.0 million and short-term debt of $0.1 million as of December 31, 2020.
As of June 30, 2017, approximately 75%2021 and 84%December 31, 2020, $84.1 million and $114.6 million, respectively, of our debt, respectfully, consistedcash and cash equivalents were located outside of fixed rate or zero interest rate obligations.the U.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends cannot exceed the amount of retained and current earnings. In addition, for our subsidiary in South Africa, the South Africa Central Bank requires that certain solvency and liquidity ratios remain above defined levels after the dividend distribution, which historically has not materially affected our ability to repatriate cash from this jurisdiction. The cash and cash equivalents balances in South Africa were $2.6 million and $1.6 million as of June 30, 2021 and December 31, 2020, respectively. Upon repatriation to the U.S., the foreign source portion of dividends we receive from our foreign subsidiaries is no longer subject to U.S. federal income tax as a result of The Tax Cuts and Jobs Act of 2017.
Cash Flowflow and Plansplans to Manage Liquidity.manage liquidity. Our cash flow typically fluctuates significantly between quarters due to various factors. These factors include customer order patterns, fluctuations in working capital requirements, timing of tax payments, timing of capital expenditures, acquisitions, divestitures and other factors. Cash flow from operations is expected to remain at positive sustained levels due to the predictable earnings generated by our LTAs with our customers.
Debt Structure
We had availability under the 2018 Revolving Credit Facility of $246.4 million as of June 30, 2021 and December 31, 2020, which consisted of the $250 million limit reduced by $3.6 million of outstanding letters of credit.
In February 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”), which provides for (i) a $2,250 million senior secured term facility (the “2018 Term Loan Facility”) after giving effect to the June 2018 amendment (the “First Amendment”) that increased the aggregate principal amount of the 2018 Term Loan Facility from $1,500 million to $2,250 million and (ii) a $250 million senior secured revolving credit facility (the “2018 Revolving Credit Facility” and,
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
together with the 2018 Term Loan Facility, the “Senior Secured Credit Facilities”). GrafTech Finance Inc. (“GrafTech Finance”) is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, GrafTech Switzerland SA (“Swissco”) and GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co-Borrowers”) are co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the 2018 Revolving Credit Facility mature on February 12, 2025 and February 12, 2023, respectively.
The Company has access2018 Term Loan Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 3.00% per annum following an amendment in February 2021 (the “Second Amendment”) that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loan Facility. The Second Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
The 2018 Revolving Credit Facility bears interest, at our option, at a $225rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, we are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
The Senior Secured Credit Facilities are guaranteed by each of our domestic subsidiaries, subject to certain customary exceptions, and by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech, Luxembourg HoldCo, and Swissco (collectively, the “Guarantors”) with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”)).
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, by: (i) a pledge of all of the equity securities of each domestic Guarantor and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation, and (ii) security interests in certain receivables and personal property of each Guarantor that is a Controlled Foreign Corporation, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loan Facility amortizes at a rate of $112.5 million Revolvinga year payable in equal quarterly installments, with the remainder due at maturity. The Co-Borrowers are permitted to make voluntary prepayments at any time without premium or penalty. GrafTech Finance is required to make prepayments under the 2018 Term Loan Facility (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company’s fiscal year ended December 31, 2019, 75% of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of Excess Cash Flow based on achievement of a $25 million minimum liquidity requirement).senior secured first lien net leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00 and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loan Facility during any calendar year reduce, on a dollar-for-dollar basis, the amount of the required Excess Cash Flow prepayment for such calendar year, and the aggregate amount of Excess Cash Flow prepayments for any calendar year reduce subsequent quarterly amortization payments of the 2018 Term Loan Facility as directed by GrafTech Finance. As of SeptemberJune 30, 2017,2021, we have satisfied all amortization requirements through prepayments through the Company had $35.3 millionmaturity date.
The 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to GrafTech and restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The 2018 Credit Agreement contains a financial covenant that requires GrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and $11.6 million ofoutstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Facility. The 2018 Credit Agreement also contains customary events of default.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
2020 Senior Notes
On December 22, 2020, GrafTech Finance issued $500 million aggregate principal amount of the 2020 Senior Notes at an issue price of 100% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside the United States under Regulation S under the Securities Act.
The 2020 Senior Notes were issued pursuant to the indenture among GrafTech Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the Company named therein as guarantors and U.S. Bank National Association, as trustee and notes collateral agent.
The 2020 Senior Notes are guaranteed on a senior secured basis by the Company and all of its existing and future direct and indirect U.S. subsidiaries that guarantee, or borrow under, the credit facilities under its 2018 Credit Agreement. The 2020 Senior Notes are secured on a pari passu basis by the collateral securing the term loans under the 2018 Credit Agreement. GrafTech Finance, the Company and the other guarantors granted a security interest in such collateral, consisting of substantially all of their respective assets, as security for the obligations of GrafTech Finance, the Company and the other guarantors under the 2020 Senior Notes and the Indenture pursuant to a collateral agreement, dated as of December 22, 2020 (the “Collateral Agreement”), among GrafTech Finance, the Company, the other subsidiaries of the Company named therein as grantors and U.S. Bank National Association, as collateral agent.
The 2020 Senior Notes bear interest at the rate of 4.625% per annum, which accrues from December 22, 2020 and is payable in arrears on June 15 and December 15 of each year, commencing on June 15, 2021. The 2020 Senior Notes will mature on December 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the Indenture.
GrafTech Finance may redeem some or all of the 2020 Senior Notes at the redemption prices and on the terms specified in the Indenture. If the Company or GrafTech Finance experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then GrafTech Finance must offer to repurchase the 2020 Senior Notes on the terms set forth in the Indenture.
The Indenture contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. The Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or GrafTech Finance, all outstanding 2020 Senior Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 30% in principal amount of the then outstanding 2020 Senior Notes may declare all of the Senior Notes to be due and payable immediately.
The entirety of the 2020 Senior Notes proceeds was used to pay down a portion of our 2018 Term Loans.
Uses of Liquidity
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. We have repurchased 4,333,259 shares of common stock for a total purchase price of $46.9$41.0 million drawn againstunder this program since inception. There were no shares repurchased under this program during the Revolving Facility.six months ended June 30, 2021.
We currently pay a quarterly dividend of $0.01 per share, or $0.04 on an annualized basis. We review our capital structure with the Board of Directors on an ongoing basis. There can be no assurance that we will pay dividends in the future in these amounts or at all. Our Board of Directors may change the timing and amount of any future dividend payments or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by our Board of Directors.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
During 2020, we reduced our long-term debt principal by $400 million. During the six months ended June 30, 2021, we repaid an additional $200 million of principal of our 2018 Term Loans. We continue to prioritize balance sheet flexibility and debt repayment. We anticipate using a majority of the cash flow that we generate in 2021 to repay debt, but we will continue to examine opportunities to repurchase our common stock.
Potential uses of our liquidity include dividends, share repurchases, capital expenditures, acquisitions, scheduled debt repayments, optional debt repayments, and other general purposes, including cash outflows related to rationalization activities. Continued volatility in the global economy may require additional borrowings under the Revolving Facility.purposes. An improving economy, while resulting in improved results of operations, could increase our cash requirements to purchase inventories, make capital expenditures and fund payables and other obligations until increased accounts receivable are converted into cash. A downturn, including any potential resurgence of the COVID-19 pandemic, could significantly and negatively impact our results of operations and cash flows, which, coupled with increased borrowings, could negatively impact our credit ratings, our ability to comply with debt covenants, our ability to secure additional financing and the cost of such financing, if available.
In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our Revolving Facility, to the extent available. We have sold all of our Engineered Solutions businesses within the past twelve months in accordance with our plan to divest businesses that are not core to our graphite electrode business. The cash proceeds from the sales were used to repay borrowings outstanding under the Revolving Facility and Term Loan Facility in accordance with our Credit Facility.
As of September 30, 2017, we were in compliance with all financial and other covenants contained in the Revolving Facility, as applicable.
In order to seek to minimize our credit risks, we may reduce our sales of, or refuse to sell (except for prepayment, cash on delivery or under letters of credit)credit or parent guarantees), our products to some customers and potential customers. In the current economic environment, our customers may experience liquidity shortages or difficulties in obtaining credit, including letters of credit. Our unrecovered trade receivables worldwide have not been material during the last threetwo years individually or in the aggregate. We cannot assure you that we will not be materially adversely affected by accounts receivable losses
During the second quarter of 2021, the Company paid out $61.5 million under its LTIP resulting from a Change in Control provision upon Brookfield's ownership of the Company's common stock falling below 30% of our total outstanding shares, which occurred in the future.second quarter of 2021. The remaining $11.9 million related to payroll taxes will be paid out in the third quarter of 2021. For details of the LTIP, see Note 7 "Contingencies" to the Notes to Condensed Consolidated Financial Statements.
We manage our capital expenditures by taking into account quality, plant reliability, safety, environmental and regulatory requirements, prudent or essential maintenance requirements, global economic conditions, available capital resources, liquidity, long-term business strategy and return on invested capital for the relevant expenditures, cost of capital and return on invested capital of the relevant segment and GrafTechCompany as a whole and other factors.
Capital expenditures totaled $26.1 million in the six months ended June 30, 2021. We had positive cash flow from operating activities during 2013, 2014, 2015, 2016 and through September 30, 2017. Althoughare managing inventory levels to match demand.
In the global economic environment experienced significant swings in these periods, our working capital management and cost-control initiatives allowed us to remainevent that operating cash flow positive in both times of declining and improving operating results.flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our 2018 Revolving Credit Facility, to the extent available.
Related Party Transactions. We have not engaged in or been a party to any other material transactions with affiliates or related parties except for reimbursement of certain costs incurred by Brookfield as required under the Investment Agreement, transactions with our current or former subsidiaries, compensatory transactions with directors and officers including employee benefits (including reimbursement to Brookfield for compensation costs incurred by it for certain personnel who devote substantially all of their working time to us), stock option and restricted stock grants, compensation deferral, stock purchases, and customary indemnification and expense advancement arrangements.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(Unaudited)
Cash Flows.Flows
The following table summarizes our cash flow activities:
| | | | | | | | For the Six Months Ended June 30, |
| For the Nine Months Ended September 30, 2016 | | For the Nine Months Ended September 30, 2017 | | 2021 | | 2020 |
| in millions | | (in millions) |
Cash flow provided by (used in): | | | | Cash flow provided by (used in): | |
Operating activities | $ | 28.7 |
| | $ | 33.6 |
| Operating activities | $ | 208.8 | | | $ | 287.7 | |
Investing activities | $ | (22.7 | ) | | $ | 7.8 |
| Investing activities | $ | (25.8) | | | $ | (24.3) | |
Financing activities | $ | (1.5 | ) | | $ | (36.9 | ) | Financing activities | $ | (214.6) | | | $ | (155.7) | |
Cash flow from operating activities represents cash receipts and cash disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting net income (loss) for:
The net impact of the changes in working capital (operating assets and liabilities), which are discussed in more detail below, include the impact of changes in: receivables, inventories, prepaid expenses, accounts payable, accrued liabilities, accrued taxes, interest payable and payments of other current liabilities.
Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk
We are exposed to market risks, primarily from changes in interest rates, currency exchange rates, energy commodity prices and commercial energy rates. We, fromFrom time to time, routinelywe enter into various transactions that have been authorized according to documented policies and procedures in order to manage these well-defined risks. These transactions primarily relate primarily to financial instruments described below. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not use financial instruments for trading purposes.
Our exposure to changes in interest rates results primarily from floating rate long-term debt tied to LIBORLIBO Rate or Euro LIBOR. LIBO Rate.
Our exposure to changes in energy commodity prices and commercial energy rates results primarily from the purchase or sale of refined oil products and the purchase of natural gas and electricity for use in our manufacturing operations.
Item 4. Controls and Procedures
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered SalesSale of Equity Securities and Use of Proceeds
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES