Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 662K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
12: R1 Cover HTML 73K
13: R2 Consolidated Balance Sheets HTML 108K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 38K
15: R4 Consolidated Statements Of Operations And HTML 100K
Comprehensive Loss
16: R5 Consolidated Statements Of Operations And HTML 26K
Comprehensive Loss (Parenthetical)
17: R6 Consolidated Statements Of Cash Flows HTML 102K
18: R7 Consolidated Statements of Stockholders Equity HTML 103K
Statement
19: R8 Consolidated Statements of Stockholders Equity HTML 29K
(Parenthetical)
20: R9 Organization And Summary Of Significant Accounting HTML 29K
Policies
21: R10 Revenue From Contracts with Customers HTML 50K
22: R11 Goodwill And Other Intangible Assets HTML 40K
23: R12 Debt And Liquidity HTML 50K
24: R13 Inventories HTML 29K
25: R14 Interest Expense HTML 32K
26: R15 Contingencies HTML 39K
27: R16 Income Taxes HTML 34K
28: R17 Derivative Instruments HTML 82K
29: R18 Accumulated Other Comprehensive Income (Loss) HTML 29K
30: R19 Earnings Per Share HTML 30K
31: R20 Stock-Based Compensation HTML 44K
32: R21 Subsequent Events HTML 22K
33: R22 Organization And Summary Of Significant Accounting HTML 27K
Policies (Policies)
34: R23 Revenue from Contract with Customer (Tables) HTML 35K
35: R24 Goodwill And Other Intangible Assets (Tables) HTML 40K
36: R25 Debt And Liquidity (Tables) HTML 34K
37: R26 Inventories (Tables) HTML 30K
38: R27 Interest Expense (Tables) HTML 30K
39: R28 Contingencies (Tables) HTML 26K
40: R29 Income Taxes (Tables) HTML 28K
41: R30 Derivative Instruments (Tables) HTML 77K
42: R31 Accumulated Other Comprehensive Income (Loss) HTML 29K
(Tables)
43: R32 Earnings Per Share (Tables) HTML 28K
44: R33 Stock-Based Compensation (Tables) HTML 46K
45: R34 Organization And Summary Of Significant Accounting HTML 52K
Policies (Details)
46: R35 Revenue From Contracts with Customers - HTML 35K
Disaggregate Revenue (Details)
47: R36 Revenue From Contracts with Customers - Narratives HTML 42K
(Details)
48: R37 Revenue From Contracts with Customers - Current HTML 37K
and Deferred Contracts (Details)
49: R38 Revenue From Contracts with Customers - HTML 54K
Performance Obligation (Details)
50: R39 Goodwill And Other Intangible Assets (Schedule Of HTML 22K
Changes In The Carrying Value Of Goodwill)
(Details)
51: R40 Goodwill And Other Intangible Assets (Schedule Of HTML 36K
Intangible Assets With Determinable Useful Lives
By Major Category) (Details)
52: R41 Goodwill And Other Intangible Assets (Narrative) HTML 37K
(Details)
53: R42 Debt And Liquidity (Schedule Of Long-Term Debt) HTML 41K
(Details)
54: R43 Debt And Liquidity (Narrative) (Details) HTML 125K
55: R44 Inventories (Schedule Of Inventories) (Details) HTML 28K
56: R45 Interest Expense (Details) HTML 52K
57: R46 Contingencies (Details) HTML 86K
58: R47 Income Taxes (Summary Of Provision For Income HTML 31K
Taxes) (Details)
59: R48 Income Taxes (Narrative) (Details) HTML 30K
60: R49 Derivative Instruments (Narrative) (Details) HTML 88K
61: R50 Derivative Instruments - Balance Sheet Location HTML 54K
(Details)
62: R51 Derivative Instruments - Income Statement HTML 37K
(Details)
63: R52 Accumulated Other Comprehensive Income (Loss) HTML 30K
(Details)
64: R53 Earnings Per Share (Details) HTML 35K
65: R54 Stock-Based Compensation - Vested Options HTML 28K
(Details)
66: R55 Stock-Based Compensation - Narratives (Details) HTML 49K
67: R56 Stock-Based Compensation (Details) HTML 74K
68: R57 Subsequent Events (Details) HTML 24K
70: XML IDEA XML File -- Filing Summary XML 128K
11: XML XBRL Instance -- gti-20210331_htm XML 1.27M
69: EXCEL IDEA Workbook of Financial Reports XLSX 82K
7: EX-101.CAL XBRL Calculations -- gti-20210331_cal XML 180K
8: EX-101.DEF XBRL Definitions -- gti-20210331_def XML 644K
9: EX-101.LAB XBRL Labels -- gti-20210331_lab XML 1.34M
10: EX-101.PRE XBRL Presentations -- gti-20210331_pre XML 900K
6: EX-101.SCH XBRL Schema -- gti-20210331 XSD 129K
71: JSON XBRL Instance as JSON Data -- MetaLinks 335± 478K
72: ZIP XBRL Zipped Folder -- 0000931148-21-000091-xbrl Zip 255K
(Exact name of registrant as specified in its charter)
iDelaware
i27-2496053
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i982 Keynote
Circle
i44131
iBrooklyn Heights,
iOH
(Zip
code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (i216) i676-2000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock, $0.01 par value per share
iEAF
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
iAccelerated
Filer
☒
Emerging Growth Company
i☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No
☒
As of April 30, 2021, i267,258,940 shares of common stock, par value $0.01 per share, were outstanding.
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 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 (the "Report") are our own estimates or derived from sources described in our Annual Report on Form 10-K for the year ended December 31, 2020 ("Annual Report on Form 10-K") filed on February 23, 2021. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Forward-Looking Statements” and “Risk Factors” in this Report and in our Annual Report on Form 10-K. We cannot guarantee the accuracy or completeness of this market and market share data and have not independently verified it. None of the sources have consented to the disclosure or use of data in this Report.
Forward-Looking
Statements
Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “will,”“may,”“plan,”“estimate,”“project,”“believe,”“anticipate,”“expect,”“foresee,”“intend,”“should,”“would,”“could,”“target,”“goal,”“continue to,”“positioned to,”“are confident”, or the negative versions of those words or other comparable words. Any forward-looking statements contained in this Report are based upon our historical performance and on our current plans, estimates and expectations
considering information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will be achieved. Our expectations and targets are not predictions of actual performance and historically our performance has deviated, often significantly, from our expectations and targets. These forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:
•the ultimate impact that the COVID-19 pandemic has on our business, results of operations, financial condition and cash flows;
•the cyclical nature of our business and the selling prices of our products may lead to periods of reduced profitability and net losses in the future;
•the possibility that we may be unable to implement our business strategies, including our ability to secure and maintain longer-term customer contracts, in an effective manner;
•the risks and uncertainties associated with litigation, arbitration, and like disputes, including the current stockholder litigation and
disputes related to contractual commitments;
•the possibility that global graphite electrode overcapacity may adversely affect graphite electrode prices;
•pricing for graphite electrodes has historically been cyclical and the price of graphite electrodes may continue to decline in the future;
•the sensitivity of our business and operating results to economic conditions and the possibility others may not be able to fulfill their obligations to us in a timely fashion or at all;
•our dependence on the global steel industry generally and the electric arc furnace steel industry in particular;
•the competitiveness of the graphite electrode
industry;
•our dependence on the supply of petroleum needle coke;
•our dependence on supplies of raw materials (in addition to petroleum needle coke) and energy;
•our manufacturing operations are subject to hazards;
•changes in, or more stringent enforcement of, health, safety and environmental regulations applicable to our manufacturing operations and facilities;
•the legal, compliance, economic, social and political risks associated with our substantial operations in multiple countries; the possibility that fluctuation of foreign currency exchange rates could materially harm our financial results;
•the
possibility that our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period, including as a result of equipment failure, climate change, regulatory issues, natural disasters, public health crises, such as the COVID-19 pandemic, political crises or other catastrophic events;
•our dependence on third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services;
•the possibility that we are unable to recruit or retain key management and plant operating personnel or successfully negotiate with the representatives of our employees, including labor unions;
•the possibility that we may divest or acquire businesses, which could require significant management
attention or disrupt our business;
•the sensitivity of goodwill on our balance sheet to changes in the market;
•the possibility that we are subject to information technology systems failures, cybersecurity attacks, network disruptions and breaches of data security;
•our dependence on protecting our intellectual property;
•the possibility that third parties may claim that our products or processes infringe their intellectual property rights;
•the possibility that significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions could adversely affect our business;
•the
possibility that our indebtedness could limit our financial and operating activities or that our cash flows may not be sufficient to service our indebtedness;
•the possibility that restrictive covenants in our financing agreements could restrict or limit our operations;
•the fact that borrowings under certain of our existing financing agreements subject us to interest rate risk;
•the possibility of a lowering or withdrawal of the ratings assigned to our debt;
•the
possibility that disruptions in the capital and credit markets could adversely affect our results of operations, cash flows and financial condition, or those of our customers and suppliers;
•the possibility that highly concentrated ownership of our common stock may prevent minority stockholders from influencing significant corporate decisions;
•the possibility that we may not pay cash dividends on our common stock in the future;
•the fact that our stockholders have the right to engage or invest in the same or similar businesses as us;
•the possibility that the market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets, including
by Brookfield Asset Management Inc. and its affiliates;
•the fact that certain provisions of our Amended and Restated Certificate of Incorporation and our Amended and Restated By-Laws could hinder, delay or prevent a change of control;
•the fact that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders; and
•the loss of our status as a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards, which will result in us no longer qualifying for exemptions from
certain corporate governance requirements.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements, including the Risk Factors sections, that are included in our Annual Report on Form 10-K, and other filings with the Securities and Exchange Commission ("SEC"). The forward-looking statements made in this Report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by
these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this Report that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)iOrganization
and Summary of Significant Accounting Policies
A. Organization
GrafTech International Ltd. (the “Company”) is a leading manufacturer of high quality graphite electrode products essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals. References herein to “GrafTech,”“we,”“our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries.
On August 15, 2015, we became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (together with its affiliates, “Brookfield”). In April 2018, we completed our initial public offering ("IPO") of i38,097,525
shares of our common stock held by Brookfield at a price of $i15.00 per share. We did not receive any proceeds related to the IPO. Our common stock is listed on the NYSE under the symbol “EAF.” Brookfield has since distributed a portion of its GrafTech common stock to the owners in the Brookfield consortium and sold shares of GrafTech common stock, resulting in Brookfield's ownership of outstanding shares of GrafTech common stock being reduced to 55.3% as of December 31, 2020 and i36.6% as
of March 31, 2021.
The Company’s only reportable segment, Industrial Materials, is comprised of our itwo major product categories: graphite electrodes and petroleum needle coke products. Petroleum needle coke is a key raw material used in the production of graphite electrodes. The Company's vision
is to provide highly engineered graphite electrode services, solutions and products to electric arc furnace operators.
B. iBasis of Presentation
The interim condensed consolidated financial statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The December 31,
2020 financial position data included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 ("Annual Report on Form 10-K"), filed on February 23, 2021, but does not include all disclosures required by GAAP in audited financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, contained in our Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for
the interim periods presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. iNew Accounting Standards
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
ASU 2019-12 is intended to improve consistent application of Topic 740 and simplify the accounting for income taxes. This pronouncement removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 is effective for annual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 on January 1, 2021, with an immaterial effect on our financial position, results of operations and cash flows.
Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(Topic 848). This pronouncement contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. ASU 2020-04 is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 can be elected for both interim and annual periods from March 12, 2020 through December 31, 2022. We plan to adopt ASU 2020-04 as of January 1,
2023. The adoption of ASU 2020-04 is not expected to have a material impact on our financial position, results of operations and cash flows.
The following table provides information about disaggregated revenue by type of product and contract for the three months ended March 31, 2021 and 2020:
Graphite
Electrodes - Short-term agreements and spot sales
i47,255
i30,818
By-products
and other
i11,577
i11,449
Total
Revenues
$
i304,397
$
i318,646
/
The
Graphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. The revenue category “By-products and Other” includes resales of low-grade electrodes purchased from third-party suppliers, which represent a minimal contribution to our profitability.
Substantially all of the Company's receivables relate to contracts with customers. Accounts receivables are recorded when the right to consideration becomes unconditional. Payment terms on invoices range from i30
to i120 days depending on the customary business practices of the jurisdictions in which we do business.
Certain short-term and longer-term sales contracts require up-front payments prior to the Company’s fulfillment of any performance obligation. These contract liabilities are recorded as current
or long-term deferred revenue, depending on the lag between the pre-payment and the expected delivery of the related products. Additionally, deferred revenue or contract assets originate from contracts where the allocation of the transaction price to the performance obligations based on their relative stand-alone selling prices results in the timing of revenue recognition being different from the timing of the invoicing. In this case, deferred revenue is amortized into revenue based on the transaction price allocated to the remaining performance obligations and contract assets are realized through the contract
invoicing.
Contract assets as of March 31, 2021 were $i2.4 million, of which $i1.6 million
and $i0.8 million are included in "Prepaid expenses and other current assets" and "Other long-term assets," respectively, on the Condensed Consolidated Balance Sheets. Contract assets as of December 31, 2020 was $i2.7 million,
of which $i1.5 million and $i1.2 million
are included in "Prepaid expenses and other current assets" and "Other long-term assets," respectively, on the Condensed Consolidated Balance Sheets.
Current deferred revenue is included in "Other accrued liabilities" and long-term deferred revenue is included in "Other long-term obligations" on the Condensed Consolidated Balance Sheets.
Transaction
Price Allocated to the Remaining Performance Obligations
The following table presents estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of reporting period. The estimated revenues do not include contracts with original duration of one year or less. During the challenging market conditions in 2020, we were able to work with our customers to develop mutually beneficial solutions to their challenges, including volume commitments. We have negotiated long-term sales agreement ("LTA") modifications with many of these customers. We also worked to preserve our rights under the LTAs in a few arbitrations that arose from some non-performance and other
disputes during the year.
We recorded $i246 million of LTA revenue in the first three months of 2021, and we expect to record approximately $i675
million to $i775 million of LTA revenue for the remainder of 2021. iThe
remaining revenue associated with our LTAs is expected to be approximately as follows:
2022
2023 through 2024
(Dollars in millions)
Estimated LTA revenue
$i910-$i1,010
$i350-$i450(1)
(1) Includes
expected termination fees from a few customers that have failed to meet certain obligations under their LTAs.
The majority of the LTAs are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. For the year 2021 and beyond, the contractual revenue amounts above are based upon the minimum volume for those contracts with specified ranges. The actual revenue realized from these contracted volumes may vary in timing and total due to contract non-performance, contract arbitrations, credit risk associated with
certain customers facing financial challenges and customer demand related to contracted volume ranges.
(3)iGoodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill impairment is tested at the reporting unit level on an annual basis and between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Goodwill balance was $i171.1 million as of March 31, 2021 and December 31, 2020.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes intangible assets with determinable useful lives by major category which are included in "Other Assets" on our Condensed Consolidated Balance Sheets:
Amortization
expense of intangible assets was $i2.7 million and $i2.9 million in the three months ended March 31, 2021
and 2020, respectively. Estimated amortization expense will be approximately $i8.0 million for the remainder of 2021, $i10.1
million in 2022, $i9.2 million in 2023, $i8.0 million in
2024 and $i7.3 million in 2025.
2018 Credit Facility (2018 Term Loan and 2018 Revolving Credit Facility)
$
i793,708
$
i943,708
2020
Senior Notes
i500,000
i500,000
Other
debt
i591
i615
Unamortized
debt discount and issuance costs
(i21,176)
(i24,192)
Total
debt
i1,273,123
i1,420,131
Less:
Short-term debt
(i127)
(i131)
Long-term debt
$
i1,272,996
$
i1,420,000
/
In
February 2021, we repaid $i150 million of principal of our 2018 Term Loan Facility (as defined below). The fair value of our debt was approximately $i1,296 million and $i1,453
million as of March 31, 2021 and December 31, 2020, respectively. The fair value of the debt is measured using level 3 inputs.
2018 Credit Agreement
On February 12, 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”) among the Company, GrafTech Finance Inc. (“GrafTech Finance”), GrafTech Switzerland SA (“Swissco”), GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co-Borrowers”), the lenders and issuing banks party thereto and JPMorgan Chase Bank,
N.A. as administrative agent (the "Administrative Agent") and as collateral agent, which provides for (i) a $i1,500 million senior secured term facility (the “2018 Term Loan Facility”) and (ii) a $i250
million senior secured revolving credit facility (the “2018 Revolving Credit Facility” and, together with the 2018 Term Loan Facility, the “Senior Secured Credit Facilities”), which may be used from time to time for revolving credit borrowings denominated in dollars or Euro, the issuance of one or more letters of credit denominated in dollars, Euro, Pounds Sterling or Swiss Francs and one or more swing line loans denominated in dollars. GrafTech Finance is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, Swissco and Lux Holdco are Co-Borrowers under the 2018 Revolving Credit Facility. On February 12, 2018, GrafTech Finance borrowed $i1,500
million under the 2018 Term Loan Facility (the "2018 Term Loans"). The 2018 Term Loans mature on February 12, 2025. The maturity date for the 2018 Revolving Credit Facility is February 12, 2023.
Borrowings under the 2018 Term Loan Facility bear interest, at GrafTech Finance’s option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to i3.50%
per
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
annum or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to i2.50%
per annum, in each case with one step down of i25 basis points based on achievement of certain public ratings of the 2018 Term Loans.
Borrowings under the 2018 Revolving Credit Facility bear interest, at the applicable Co-Borrower’s option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to i3.75%
per annum or (ii) the ABR Rate, plus an applicable margin initially equal to i2.75% per annum, in each case with two i25 basis point step downs based on achievement
of certain senior secured first lien net leverage ratios. In addition, the Co-Borrowers will be required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to i0.25% per annum.
All obligations under the 2018 Credit Agreement are guaranteed by GrafTech Finance and each domestic subsidiary of GrafTech, subject to certain customary exceptions, and all obligations under the 2018 Credit Agreement of each foreign subsidiary
of GrafTech 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") are guaranteed 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").
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions and Excluded Assets (as defined in the 2018 Credit Agreement), by: (i) a pledge of all of the equity securities of GrafTech Finance and each domestic Guarantor (other than GrafTech) and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than i65%
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 GrafTech Finance and 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 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 Loans amortize at a rate equal to i5% per annum of the original principal amount of the 2018 Term Loans 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, except in the case of prepayments made in connection with certain repricing transactions with respect to the 2018 Term Loans effected within twelve months of the closing date of the 2018 Credit Agreement, to which a i1.00%
prepayment premium applies. GrafTech Finance is required to make prepayments under the 2018 Term Loans (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, i75% of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step-downs to i50%
and i0% of Excess Cash Flow based on achievement of a senior secured first lien net leverage ratio greater than i1.25 to 1.00 but less than or equal to i1.75
to 1.00 and less than or equal to i1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loans 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 Loans as directed by GrafTech Finance.
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 i4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding 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 $i35 million), taken together, exceed i35% of the total amount of commitments under the 2018 Revolving Credit
Facility. The 2018 Credit Agreement also contains customary events of default.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into a first amendment (the “First Amendment”) to its 2018 Credit Agreement. The First Amendment amended the 2018 Credit Agreement to provide for an additional $i750 million in
aggregate
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
principal amount of incremental term loans (the “Incremental Term Loans”) to GrafTech Finance. The Incremental Term Loans increased the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $i1,500
million to $i2,250 million. The Incremental Term Loans have the same terms as those applicable to the 2018 Term Loans, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the 2018 Term Loans. GrafTech paid an upfront fee of i1.00%
of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment.
In 2019, we repaid $i350 million of principal on our 2018 Term Loan Facility. During 2020 we reduced our 2018 Term Loan Facility principal by $i900 million,
of which $i500 million was funded by the 2020 Senior Notes (as defined below) issued on December 22, 2020.
2018 Term Loan Repricing
On February 17, 2021, the Company entered into a second amendment (the “Second Amendment”) to its 2018 Credit Agreement to, among other things, (a) decrease the Applicable Rate
(as defined in the 2018 Credit Agreement) with respect to any 2018 Term Loan (as defined in the 2018 Credit Agreement) by i0.50% for each pricing level, (b) decrease the interest rate floor for all 2018 Term Loans to i0.50%,
(c) add certain technical provisions with respect to the impact of European Union bail-in banking legislation on liabilities of certain non-U.S. financial institutions, and (d) add certain technical provisions in connection with future replacement of the LIBO Rate (as defined in the 2018 Credit Agreement). As a result of the Second Amendment and the combined effect of the reduction in the interest rate margin and the reduction in the interest rate floor, the interest rate on the 2018 Term Loans has been reduced by i1.0% per year.
In
connection with the Second Amendment, on February 12, 2021, GrafTech Finance repaid approximately $i150 million of principal on 2018 Term Loans with cash on hand.
2020 Senior Notes
On December 22, 2020, GrafTech Finance issued $i500 million
aggregate principal amount of i4.625% Senior Secured Notes due 2028 (the “2020 Senior Notes”) at an issue price of i100% of the principal amount thereof in a private offering to qualified
institutional buyers in accordance with Rule 144A under the Securities Act of 1933 (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 an indenture, dated as of December 22, 2020 (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 also 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, 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 i4.625%
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 i30%
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 proceeds from the 2020 Senior Notes were used to partially repay borrowings under our 2018 Term Loan Facility.
Accretion
of original issue discount on 2018 Term Loans
i1,271
i549
Amortization
of debt issuance and modification costs
i4,031
i1,031
Total
interest expense
$
i22,167
$
i25,672
/
Interest
Rates
The 2020 Senior Notes carry a fixed interest rate of i4.625%. The 2018 Credit Agreement had an effective interest rate of i3.50%
as of March 31, 2021 and i4.50% as of December 31, 2020. See Note 4 "Debt and Liquidity" for details of these transactions.
In connection with the $i150 million
prepayment of the borrowings under our 2018 Term Loan Facility in the first quarter of 2021, we recorded $i1.5 million of accelerated amortization of the debt issuance costs and $i0.9 million
accelerated accretion of the original issue discount, for the three months ended March 31, 2021. We also recorded $i1.6 million of modification costs related to the term loan repricing. See Note 4 "Debt and Liquidity" for details of these transactions.
The Company has several interest rate swap contracts
to fix our cash flows associated with the risk in variability in the one-month U.S. London Interbank Offered Rate ("US LIBO") for a portion of our outstanding debt. See Note 9 "Derivative Instruments" for details of these transactions.
(7)iContingencies
Legal Proceedings
We
are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial
position, results of operations or cash flows. Additionally, we are involved in the following legal proceedings described below.
Pending litigation in Brazil has been brought by employees seeking to recover additional amounts and interest thereon under certain wage increase provisions applicable in 1989 and 1990 under collective bargaining agreements to which employers in the Bahia region of Brazil were a party (including our subsidiary in Brazil). Companies in Brazil have settled claims arising out of these provisions and, in May 2015, the litigation was remanded by the Brazilian Supreme Court in favor of the employees union. After denying an interim appeal by the Bahia region employers on June 26, 2019, the Brazilian Supreme Court finally ruled in favor of the employees union on September 26, 2019. The employers union has
determined not to seek annulment of such decision. Separately, on October 1, 2015, a related action was filed by current and former employees against our subsidiary in Brazil to recover amounts under such provisions, plus interest thereon, which amounts together with interest could be material to us. If the Brazilian Supreme Court proceeding above had been determined in favor of the employers union, it would also have resolved this proceeding in our favor. In the first quarter of 2017, the state court initially ruled in favor of the employees. We appealed this state court ruling, and the appellate court issued a decision in our favor on May 19, 2020. The employees have further appealed and, on December 16, 2020, the court upheld the decision in favor of GrafTech Brazil. On February
22, 2021, the employees filed a further appeal and, on April 28, 2021, the court rejected the employees' appeal in favor of GrafTech Brazil. The court's decision remains subject to further appeal. As of March 31, 2021, we are unable to assess the potential loss associated with these proceedings as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. iClaims
accrued but not yet paid and the related activity within the accrual for the three months ended March 31, 2021, are presented below:
On April 23, 2018, the Company entered into the TRA that provides Brookfield, as the sole pre-IPO stockholder, the right to receive future
payments from us for i85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of the pre-IPO Tax Assets. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus i1.00% per
annum. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
There was no liability recognized on the date we entered into the TRA as there was a full valuation allowance recorded against our deferred tax assets. During the second quarter of 2018, it was determined that the conditions were appropriate for the Company to release a valuation allowance of certain tax assets as we exited our three year cumulative loss position. This release resulted in the recording of a $i86.5
million liability related to the TRA on the Consolidated Statements of Operationsas "Related Party Tax Receivable Agreement Expense."
As of December 31, 2019, the total TRA liability was $i89.9 million, of which $i27.9
million was classified as a current liability in "Related party payable-tax receivable agreement" on the balance sheet, and $i62.0 million of the liability remained as a long-term liability in "Related party payable-tax receivable agreement" on the balance sheet. The 2019 current liability was settled in the first quarter of 2020.
In 2020, the TRA liability was reduced by $i21.1
million as a result of revised U.S. income estimates affecting the future usage of our U.S. tax attributes. The reduction was recorded as a "Related Party Tax Receivable Agreement Benefit" on the Consolidated Statement of Operations. As of December 31, 2020, total TRA liability was $i40.9 million, of which
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$i21.8 million was classified as a current liability in "Related party payable - tax receivable agreement" on the balance sheet, as we expected this portion to be settled within twelve months, and $i19.1 million
of the liability remained as a long-term liability in "Related party payable - tax receivable agreement" on the balance sheet.
During the first quarter 2021, the previous current liability was settled. As of March 31, 2021, the total TRA liability was $i19.1 million, of which $i3.9
million was classified as a current liability in "Related party payable-tax receivable agreement" and $i15.2 million remained as a long-term liability in "Related party payable-tax receivable agreement" on the balance sheet.
Long-term Incentive Plan
The long-term incentive plan ("LTIP") was adopted by the Company effective as of August
17, 2015, as amended and restated as of March 15, 2018. The purpose of the plan is to retain senior management of the Company, to incentivize them to make decisions with a long-term view and to influence behavior in a way that is consistent with maximizing value for the pre-IPO stockholder of the Company in a prudent manner. Each participant is allocated a number of profit units, with a maximum of i30,000
profit units ("Profit Units") available under the plan. Awards of Profit Units generally vest in equal increments over a five-year period beginning on the first anniversary of the grant date and subject to continued employment with the Company through each vesting date. Any unvested Profit Units that have not been previously forfeited will accelerate and become fully vested upon a ‘‘Change in Control’’ (as defined below).
Profit Units will generally be settled in a lump sum payment within 30 days following a Change in Control based on the ‘‘Sales Proceeds’’ (as defined below) received by Brookfield Capital Partners IV, L.P. (together with its affiliates, "Brookfield Capital IV") in connection with the Change in Control. The LTIP defines ‘‘Change in Control’’ as any transaction or series of transactions (including, without limitation,
the consummation of a combination, share purchases, recapitalization, redemption, issuance of capital stock, consolidation, reorganization or otherwise) pursuant to which (a) a Person not affiliated with Brookfield Capital IV acquires securities representing more than seventy percent (i70%) of the combined voting power of the outstanding voting securities of the Company or the entity surviving or resulting from such transaction, (b) following a public offering of the
Company’s stock, Brookfield Capital IV has ceased to have a beneficial ownership interest in at least i30% of the Company’s outstanding voting securities (effective on the first of such date), or (c) the Company sells all or substantially all of the assets of the Company and its subsidiaries
on a consolidated basis. It is intended that the occurrence of a Change in Control in which Sales Proceeds exceed the Threshold Value would constitute a ‘‘substantial risk of forfeiture’’ within the meaning of Section 409A of the Code. The LTIP defines ‘‘Threshold Value’’ as, as of any date of determination, an amount equal to $i855,000,000 (which represents the amount of the total invested capital of Brookfield Capital IV as of August 17, 2015), plus the dollar value of any cash or other consideration contributed to or invested in the
Company by Brookfield Capital IV after August 17, 2015. The Threshold Value shall be determined by the Company's Board of Directors in its sole discretion. The LTIP defines ‘‘Sales Proceeds’’ as, as of any date of determination, the sum of all proceeds actually received by the Brookfield Capital IV, net of all Sales Costs (as defined below), (i) as consideration (whether cash or equity) upon the Change in Control and (ii) as distributions, dividends, repurchases, redemptions or otherwise as a holder of such equity interests in the Company. Proceeds that are not paid upon or prior to or in connection with the Change in Control, including earn-outs, escrows and other contingent or deferred consideration shall become ‘‘Sale Proceeds’’ only as and when
such proceeds are received by Brookfield Capital IV. ‘‘Sales Costs’’ means any costs or expenses (including legal or other advisory costs), fees (including investment banking fees), commissions or discounts payable directly by Brookfield Capital IV in connection with, arising out of or relating to a Change in Control, as determined by the Company's Board of Directors in its sole discretion.
The Profit Unit awards became i100%
vested in August 2020. Given the successful completion of the IPO in the second quarter of 2018 and Brookfield's subsequent distribution and sale of shares of common stock, it is reasonably possible that a Change in Control, as defined above, may ultimately happen and that the awarded Profit Units will be subsequently paid out to the participants. Depending on Brookfield’s sale proceeds, the potential liability triggered by a Change in Control is estimated to be in the range of $i65 million to $i75
million. This liability will be recorded and settled in cash by the Company if and when the Change in Control actually occurs.
(8)iIncome Taxes
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
The
effective tax rate for the three months ended March 31, 2021 was i14.1%. This rate differs from the U.S. statutory rate of i21%
primarily due to worldwide earnings from various countries taxed at lower rates, the Section 250 Deduction and Foreign Tax Credits offset by the net increase related to the U.S. taxation of global intangible low taxed income ("GILTI").
The effective tax rate for the three months ended March 31, 2020 was i16.4%. This rate differs from the U.S. statutory rate of i21%
primarily due to worldwide earnings from various countries taxed at different rates.
The tax expense decreased from $i23.9 million for the three months ended March 31, 2020 to $i16.3
million for the three months March 31, 2021. This change is primarily related to a reduction in pretax income and worldwide earnings from various countries taxed at different rates and U.S. taxation of GILTI.
As of March 31, 2021, we had unrecognized tax benefits of $i0.1 million, which, if recognized, would have a favorable impact
on our effective tax rate.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. U.S. federal tax years prior to 2017 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. Other jurisdictions are still open to examination beginning after 2014.
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.
(9)iDerivative
Instruments
We use derivative instruments as part of our overall foreign currency, interest rate and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows, manage the risk associated with fluctuations in interest rate indices and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the U.S. dollar.
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 counterparties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, are used to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables and purchases.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have no foreign currency cash flow hedges outstanding as of March 31, 2021 and December 31, 2020 and, therefore, no unrealized gains or losses reported under accumulated other comprehensive income (loss).
As of March 31, 2021, we had outstanding Mexican peso, euro, Swiss franc, South African rand and Japanese yen currency contracts with an aggregate notional amount of $i60.5
million. As of December 31, 2020, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with an aggregate notional amount of $i71.0 million. The foreign currency derivatives outstanding as of March 31, 2021 have maturities through September 30, 2021, and were not designated as hedging instruments.
We have entered into commodity derivative contracts for refined oil products. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. We had outstanding commodity derivative contracts as of March 31, 2021 with a notional amount of $i48.3
million with maturities from April 2021 to June 2022. The outstanding commodity derivative contracts represented a pre-tax net unrealized gain within "Accumulated Other Comprehensive Income" of $i6.2 million as of March 31, 2021. We had outstanding commodity derivative contracts
as of December 31, 2020 with a notional amount of $i61.3 million representing a pre-tax net unrealized loss of $i2.2
million.
During the third quarter of 2019, the Company entered into four interest rate swap contracts. The contracts are "pay fixed, receive variable" with notional amounts of $i500
million due to mature in August 2021 and another $i500 million due to mature in August 2024. The Company’s risk management objective was to fix its cash flows associated with the risk in variability in the one-month U.S. LIBO Rate for a portion of our outstanding debt. It is expected that these swaps will fix the cash flows associated with the forecasted interest payments on this notional amount of debt to an effective fixed interest rate of i5.1%,
which could be lowered to i4.85% depending on credit ratings. In December 2020, in connection with the $i500 million principal repayment of the 2018 Term Loan, we de-designated
one interest rate swap contract of $i250 million notional maturing in the third quarter of 2021. In February 2021, in connection with the $i150 million
principal repayment of the 2018 Term Loan, the Company closed one swap contract of $i250 million notional that was due to mature in the third quarter 2021 and recorded a $i0.9 million
charge in interest expense. Additionally, the Company modified the three remaining swaps with notional amounts of $i250 million maturing in the third quarter 2021 and $i500 million
maturing in the third quarter 2024 in order to align their terms to the amended 2018 Term Loan Facility (see Note 4 "Debt and Liquidity" for details of the February 2021 repricing of the 2018 Term Loan Facility). It is expected that these swaps will fix the cash flows associated with the forecasted interest payments on this notional amount of debt to an effective fixed interest rate of i4.2%, which could be lowered to i3.95%
depending on credit ratings. The modification triggered the de-designation and re-designation of the swaps. Because the modified swaps contained an other-than-insignificant financing element at re-designation date, they are considered hybrid instruments composed of a debt host and an embedded derivative. The debt host portion amounted to a liability of $i9.5 million as of March 31, 2021 with $i3.1 million
included in "Other accrued liabilities" and $i6.4 million in "Other long-term obligations". It is accounted for in "Accumulated Other Comprehensive income" and will be amortized over the remaining life of the swaps. The embedded derivative is treated as a cash-flow hedge.
Within "Accumulated Other Comprehensive Income", the interest rate swap portion qualifying as cash-flow hedges represented a net unrealized pre-tax gain of $i2.4 million
and a net unrealized pre-tax loss of $i11.9 million as of March 31, 2021 and December 31, 2020, respectively. The fair value of these contracts was determined using Level 2 inputs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
The fair value of all derivatives is recorded as assets or liabilities
on a gross basis in our Condensed Consolidated Balance Sheets. As of March 31, 2021 and December 31, 2020, the fair value of our derivatives and their respective balance sheet locations are presented in the following tables:
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 March 31, 2021 and 2020, net realized pre-tax losses of $i5.0
million and $i0.5 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations as
follows for the periods ended March 31, 2021 and 2020:
Amount of (Gain)/Loss Recognized
Location
of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations
Foreign currency translation adjustments, net of tax
$
(i16,156)
$
(i2,725)
Commodity
and interest rate derivatives, net of tax
(i4,561)
(i16,916)
Total
accumulated comprehensive (loss)
$
(i20,717)
$
(i19,641)
/
(11)iEarnings
per Share
During the three months ended March 31, 2020, we repurchased i3,328,574 shares of our common stock under the repurchase program that was approved on July 30, 2019. These shares were subsequently retired. There were ino
shares repurchased under this program during the three months ended March 31, 2021.
i
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation for the three months ended March 31, 2021 and 2020:
Weighted average common shares outstanding for basic calculation
i267,318,860
i269,216,820
Add: Effect
of stock options, deferred share units and restricted stock units
i146,459
i19,742
Weighted
average common shares outstanding for diluted calculation
i267,465,319
i269,236,562
/
Basic
earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes i110,647 and i53,204 shares of participating securities
in the three months ended March 31, 2021 and 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 i1,106,823
and i1,297,661 equivalent shares in the three months ended March 31, 2021 and 2020, respectively, as these shares are anti-dilutive.
In
the three months ended March 31, 2021 and 2020, we recognized $i0.8 million and $i0.4
million, respectively, in stock-based compensation expense. A majority of the expense, $i0.7 million and $i0.3 million
respectively, was recorded as selling and administrative expense in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales.
As of March 31, 2021, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units was $i16.2 million, which will be recognized
over the remaining weighted average life of i4.1 years. Certain of our awards include provisions that accelerate vesting in the event of a Change in Control. For the purpose of these grants, a “Change in Control” shall occur upon (i) Brookfield and any affiliates thereof (collectively, the “Majority Stockholder”) ceasing to own stock of the Company
that constitutes at least thirty percent (i30%) or thirty-five percent (i35%), as applicable, of the total fair market value or total voting power of the stock of the
Company or (ii) any one person, or more than one person acting as a group (as defined under Treasury Regulation § 1.409A-3(i)(5)(v)(B)) other than the Company, the Majority Stockholder or any employee benefit plan sponsored by the Company acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes one hundred percent (100%) of the total fair market value or total Voting Power of the stock of GrafTech. As of March 31, 2021, unrecognized compensation subject to this acceleration was $i15.2 million
and will result in an accelerated non-cash charge if and when a Change in Control actually occurs. Of this expense, approximately $i1.0 million will accelerate at the i35%
ownership level and the remaining $i14.2 million at the i30%
ownership level.
i
Stock option, deferred share unit and restricted stock unit award activity under the Company's Omnibus Equity Incentive Plan for the three months ended March 31, 2021 was as follows:
On May 3, 2021, our Board of Directors declared a quarterly dividend of $i0.01 per share to stockholders of record as of the close of business on May 28, 2021, to be paid on June 30, 2021.
GrafTech is a leading manufacturer of graphite electrodes, the critical consumable for the electric arc furnace industry. We are the only graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrodes. Vertical 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 certain cases, parent guarantees and collateral arrangements to manage our customer credit risk.
The environmental and economic advantages of electric arc furnace steel production positions 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. Our services and solutions we provide will position our customers and us for a better future.
Commercial Update and Outlook
GrafTech reported solid results in the first quarter of 2021 with sales volumes of 37 thousand metric tons ("MT"), consisting of LTA volumes of 26 thousand MT at an average approximate price of $9,500 per MT and non-LTA volumes of 11 thousand MT at an average approximate price of $4,200 per MT.
The estimated 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:
Q1 2021
Q4 2020
Q1 2020
Global (ex-China) capacity utilization rates
73%
72%
71%
U.S.
steel market capacity utilization rates
77%
72%
79%
With the improved market demand, we expect sales volumes to increase through the balance of the year.
In February 2021, we provided an outlook on earnings per share and adjusted EBITDA for the first half of 2021. Due to better than expected first quarter results, we now anticipate first half earnings per share and adjusted EBITDA will decline by mid-single digits, on a percentage basis, compared to the first half of 2020. These estimates exclude the possibility of any Change in Control charges that could be triggered if and when Brookfield's ownership actually falls below 30%, or 35% with respect to certain equity awards. These
charges could include a long-term incentive compensation ("LTIP") cash charge of $65 million to $75 million and non-cash accelerated equity compensation expense for certain equity awards of approximately $15.2 million.
Capital Structure and Capital Allocation
As of March 31, 2021, GrafTech had cash and cash equivalents of $96 million and total debt of approximately $1.3 billion.
Our 2021 capital expenditure range expectations are unchanged, between $55 and $65 million, and we continue to expect our primary use of cash to be debt repayment.
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles ("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 and adjusted EBITDA, 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 March 31,
(in thousands)
2021
2020
Net
sales
$
304,397
$
318,646
Net income
98,799
122,268
EBITDA (1)
153,725
185,029
Adjusted
EBITDA (1)
155,045
179,178
(1) Non-GAAP financial measures; see below for information and a reconciliation of EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key operating metrics
For
the Three Months Ended March 31,
(in thousands, except price data)
2021
2020
Sales volume (MT)(1)
37
34
Production volume (MT)(2)
36
33
Production
capacity excluding St. Marys (MT)(3)(4)
51
51
Capacity utilization excluding St. Marys (3)(5)
71
%
65
%
Total production capacity (MT)(4)(6)
58
58
Total
capacity utilization(5)(6)
62
%
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.
Non-GAAP financial measures
In addition to providing results that are determined in accordance with generally accepted accounting principles in the United States (“GAAP”), we have provided certain financial measures that are not in accordance
with GAAP. EBITDA and adjusted EBITDA 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, and non‑cash fixed asset write‑offs. 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. We also monitor the ratio of total debt to adjusted EBITDA, because we believe it is a useful and widely used way to assess our leverage.
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; and
•other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
In evaluating EBITDA and adjusted EBITDA, you should be aware that in the future, we will incur expenses similar to the adjustments in the reconciliation
below. Our presentations of EBITDA and adjusted EBITDA 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 and adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP measures.
Initial
and follow-on public offering and related expenses (2)
422
4
Non-cash gain on foreign currency remeasurement (3)
(348)
(3,461)
Stock-based compensation (4)
768
410
Related
party Tax Receivable Agreement adjustment (5)
47
(3,346)
Adjusted EBITDA
$
155,045
$
179,178
(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 expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
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.
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 March 31,
Increase/ Decrease
% Change
2021
2020
(Dollars in thousands)
Net
sales
$
304,397
$
318,646
$
(14,249)
(4)
%
Cost of sales
146,396
138,917
7,479
5
%
Gross
profit
158,001
179,729
(21,728)
(12)
%
Research and development
969
712
257
36
%
Selling
and administrative expenses
20,153
14,932
5,221
35
%
Operating income
136,879
164,085
(27,206)
(17)
%
Other
expense (income), net
(354)
(3,314)
2,960
(89)
%
Related party Tax Receivable Agreement expense (benefit)
47
(3,346)
3,393
N/A
Interest
expense
22,167
25,672
(3,505)
(14)
%
Interest income
(37)
(1,141)
1,104
(97)
%
Income
before provision for income taxes
115,056
146,214
(31,158)
(21)
%
Provision for income taxes
16,257
23,946
(7,689)
(32)
%
Net
income
$
98,799
$
122,268
$
(23,469)
(19)
%
Net sales. Net sales decreased from $318.6 million in the three months ended March 31, 2020 to $304.4 million in the three months ended March 31, 2021. Lower net sales reflect decreased realized sales prices in the
first quarter of 2021. This price decline reflects an increased percentage of non-LTA sales at prices lower than our LTA contracted prices as LTA deliveries have come down in accordance with the terms of the LTAs. Partially offsetting this impact was a 9% increase in sales volume due to the higher volume of non-LTA sales.
Cost of sales. We experienced an increase in cost of sales from $138.9 million in the three months ended March 31, 2020 to $146.4 million in the three months ended March 31, 2021, primarily due to the 9% increase in non-LTA sales volume of manufactured electrodes. Partially offsetting this increase was a per unit reduction of costs due to less usage of third-party needle coke.
Selling and administrative expenses. Selling
and administrative expenses increased from $14.9 million in the three months ended March 31, 2020 to $20.2 million in the three months ended March 31, 2021 primarily due to higher legal costs and additions to the allowance for doubtful accounts.
Other expense (income), net. Other income decreased from $3.3 million in the three months ended March 31, 2020 to $0.4 million in the three months ended March 31, 2021, primarily due to advantageous non-cash foreign currency impacts on non-operating assets and liabilities in 2020 that did not recur in 2021.
Related party Tax Receivable Agreement expense (benefit). Related party Tax Receivable
Agreement expense increased from a benefit of $3.3 million in the three months ended March 31, 2020 to an expense of $0.05 million in the three months ended March 31, 2021 due to a nonrecurring favorable adjustment that occurred in the first quarter of 2020.
Interest expense. Interest expense decreased from $25.7 million in the three months ended March 31, 2020 to $22.2 million in the three months ended March 31, 2021, primarily due to lower interest rates and lower average borrowings. During the three months ended March 31, 2021, we repriced our 2018 Term Loan Facility and reduced our term loan balance by an additional $150.0 million. These transactions
resulted in $1.5 million of accelerated amortization of debt issuance costs and
$0.9 million of accelerated accretion of the original issue discount for the three months ended March 31, 2021. We also recorded $1.6 million of modification costs related to the term loan repricing.
Provision for income taxes. The following table summarizes the expense for income taxes:
The effective tax rate for the three months ended March 31, 2021 was 14.1%. This rate differs from the U.S. statutory rate of 21% primarily due to worldwide earnings from various countries taxed at lower rates, the Section 250 Deduction and Foreign Tax Credits offset by the net increase related to the U.S. taxation of global intangible low taxed income ("GILTI").
The effective tax rate for the three months ended March 31, 2020 was 16.4%. 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 $23.9 million for the three months ended March 31, 2020 to $16.3 million for the three months ended March 31, 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.
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 expenses with respect to those facilities. In certain countries in 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.
The
impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our net sales was an increase of $4.7 million for the three months ended March 31, 2021, compared to the same period of 2020. The impact of these changes on our cost of sales was an increase of $3.4 million for the three months ended March 31, 2021, compared to the same period of 2020.
We have in the past and may in the future use various financial instruments to manage certain exposures to risks caused by currency exchange rate changes, as described under “Part I, Item 3–Quantitative and Qualitative Disclosures about Market 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 March 31, 2021, we had liquidity of $342.8 million, consisting of $246.4 million of availability under our 2018 Revolving Facility (subject to continued compliance with the financial covenants and representations) and cash and cash equivalents of $96.4
million. We had long-term debt of $1,273.0 million and short-term debt of $0.1 million as of March 31, 2021. As of December 31, 2020, we had liquidity of
$391.8 million consisting of $246.4 million available on our 2018 Revolving Facility (subject to continued compliance with the financial covenants and representations) 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 March 31, 2021 and December 31, 2020, $91.4 million and $114.6 million, respectively, of our cash and cash equivalents were located outside of the U.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends do not 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 $1.8 million and $1.6 million as of March 31, 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.
Cash flow and plans to 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 three-to-five-year sales contracts with our customers.
Debt Structure
We had availability under the 2018 Revolving Facility of $246.4 million as of March 31, 2021 and December 31, 2020, which consisted of the $250 million limit reduced by $3.6 million of outstanding letters of credit.
On February 12, 2018, we entered into the 2018 Credit Agreement, which provides for the 2018
Revolving Facility and the 2018 Term Loan Facility ("2018 Term Loans"). On February 12, 2018, our wholly owned subsidiary, GrafTech Finance, borrowed $1,500 million under the 2018 Term Loan Facility.
On June 15, 2018, GrafTech entered into the First Amendment to its 2018 Credit Agreement. The First Amendment amends the 2018 Credit Agreement to provide for an additional $750 million in Incremental Term Loans principal outstanding under the promissory note. The Incremental Term Loans increase the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $1,500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the existing term loans under the 2018 Credit Agreement, including interest rate, payment and prepayment terms, representations
and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the existing term loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment. The current principal outstanding on our 2018 Term Loans is $794.0 million.
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.
2018 Term Loan Repricing
On February 17, 2021, the Company entered into a second amendment (the “Second Amendment”) to its 2018 Credit Agreement to, among other things, (a) decrease the Applicable Rate (as defined in the 2018 Credit Agreement) with respect to any 2018 Term Loans (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level, (b) decrease the interest rate floor for all 2018 Term Loans to 0.50%, (c) add certain technical provisions with respect to the impact of European Union bail-in
banking legislation on liabilities of certain non-U.S. financial institutions, and (d) add certain technical provisions in connection with future replacement of the LIBO Rate (as defined in the 2018 Credit Agreement). As a result of the Second Amendment and the combined effect of the reduction in the interest rate margin and the reduction in the interest rate floor, the interest rate on the 2018 Term Loans has been reduced by 1.0% per year.
In connection with the Second Amendment, on February 12, 2021, GrafTech Finance repaid approximately $150 million aggregate principal amount of its 2018 Term Loans with cash on hand.
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 $41.0 million under this program since inception. There were no shares repurchased under this program during the three months ended March 31, 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.
During 2020, we reduced our long-term debt principal by $400 million. During the three months ended March 31, 2021, we repaid an additional $150 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 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, compensation-related Change in Control payments and other general 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 the current downturn caused by 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 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 or parent guarantees), our products to some customers and potential customers. Our unrecovered trade receivables worldwide have not been material during the last two years individually or in the aggregate.
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 Company as a whole and other factors.
The Company's long-term incentive plan ("LTIP") contains a Change in Control provision requiring a payout of the plan upon Brookfield's ownership of the Company's common stock falling below 30%. Brookfield currently owns approximately 36.6% of our outstanding shares of common stock. The estimated range of the cash payout
is $65 million to $75 million if and when a Change in Control actually occurs. For further information related to LTIP, see Note 7 "Contingencies" to the Notes to Condensed Consolidated Financial Statements.
Capital expenditures totaled $14.2 million in the three months ended March 31, 2021. We are managing inventory levels to match demand.
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 2018 Revolving Facility, to the extent available.
Cash Flows
The
following table summarizes our cash flow activities:
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:
•Non-cash items such as depreciation and amortization, impairment, post retirement obligations, and severance and pension plan changes;
•Gains and losses attributed to investing and financing activities such as gains and losses on the sale of assets and unrealized currency transaction gains and losses; and
•Changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results
of operations.
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.
During the three months ended March 31, 2021, changes in working
capital resulted in a net source of funds of $25.2 million, which was impacted by:
•net cash outflows in accounts receivable of $16.6 million from the increase in accounts receivable due to the timing of sales;
•net cash inflows due to decreased inventory of $11.6 million resulting from lower costs and sales outpacing production;
•net cash outflows from decreased income taxes payable of $18.4 million resulting from tax payments, partially offset by 2021 income tax accruals;
•net cash inflows from increases in accounts payable and accruals of $44.3 million, due to increased deferred revenue liabilities related to customer prepayments; and
•net
cash inflows of $5.7 million from increased interest payable due to interest accruing on our 2020 Senior Notes which will be paid semi-annually.
Uses of cash in the three months ended March 31, 2021 included contributions to pension and other benefit plans of $1.3 million, cash paid for interest of $11.6 million, payments under our tax receivable agreement, dated April 23, 2018 ("TRA") of $21.8 million and taxes paid of $35.8 million.
During the three months ended March 31, 2020, changes in working capital resulted in a net use of funds of $27.7 million, which was impacted by:
•net cash inflows in accounts receivable of $40.7 million from the decrease in accounts
receivable due to lower sales;
•net cash outflows from increases in inventory of $17.2 million, due primarily to higher quantities of decant oil on hand;
•net cash inflows of $7.4 million from the decrease in other current assets primarily due to value-added tax refunds received from foreign governments;
•net cash inflows from increased income taxes payable of $14.2 million resulting from our ability to defer a $50.0 million tax payment in a foreign jurisdiction resulting from government enacted COVID-19 relief, partially offset by lower required tax payments due to lower profitability; and
•net cash outflows from decreases in accounts payable and accruals of $17.4 million, due to lower purchases of
third-party needle coke.
Uses of cash in the three months ended March 31, 2020 included contributions to pension and other benefit plans of $0.7 million, cash paid for interest of $24.1 million, payments under our TRA of $27.9 million and taxes paid of $2.3 million.
Investing Activities
Net cash used in investing activities was $14.0 million during the three months ended March 31, 2021, resulting from capital expenditures.
Net cash used in investing activities was $13.8 million during the three months ended March 31, 2020, resulting from capital expenditures.
Financing Activities
Net
cash outflow from financing activities was $156.8 million during the three months ended March 31, 2021, which was the result of the repayment of $150.0 million of principal on our 2018 Term Loan Facility, $1.6 million of debt modification costs from our term loan repricing, $1.4 million of debt issuance costs from our 2020 Senior Note Issuance and $2.7 million of total dividends to stockholders.
Net cash outflow from financing activities
was $53.0 million during the three months ended March 31, 2020, which was the result of $22.9 million of total dividends to stockholders and $30.1 million of stock repurchases.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2021 and we expect to continue to do so in the future. These transactions include ongoing obligations under the TRA, Stockholders Rights Agreement and Registration Rights Agreement, each with Brookfield.
Recent
Accounting Pronouncements
We discuss recently adopted accounting standards in Note 1, "Organization and Summary of Significant Accounting Policies" of the Notes to Condensed Consolidated Financial Statements.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 4, "Debt and Liquidity" of the Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily from
changes in interest rates, currency exchange rates, energy commodity prices and commercial energy rates. From time to time, we enter into transactions that have been authorized according to documented policies and procedures in order to manage these risks. These transactions primarily relate 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 LIBO Rate or Euro LIBO Rate.
Our exposure to changes in currency exchange rates results primarily from:
•sales made by our subsidiaries
in currencies other than local currencies;
•raw material purchases made by our foreign subsidiaries in currencies other than local currencies; and
•investments in and intercompany loans to our foreign subsidiaries and our share of the earnings of those subsidiaries, to the extent denominated in currencies other than the U.S. dollar.
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.
Interest rate risk management. We periodically enter into agreements with financial institutions that are intended to limit our exposure to additional interest expense due to increases in variable interest rates. These instruments effectively cap our interest rate exposure. In 2019, we entered into four interest rate swap contracts and in 2021 we modified three contracts and closed one contract. As of March 31, 2021 we recorded an unrealized pre-tax gain of $2.4 million and a net unrealized pre-tax loss of $11.9 million as of December 31,
2020. Additionally, the modified swaps are considered hybrid instruments composed of a debt host and an embedded derivative. As of March 31, 2021, the debt host portion amounted to a pre-tax loss of $9.5 million, which will be amortized over the remaining life of the swaps.
Currency rate management. We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency derivatives, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures. Forward exchange contracts are agreements to exchange different currencies
at a specified future date and at a specified rate. Purchased currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. Forward exchange contracts and purchased currency options are carried at fair value.
The outstanding foreign currency derivatives represented
$0.3 million pre-tax net loss as of March 31, 2021 and a net pre-tax loss of $0.1 million as of December 31, 2020.
Energy commodity management. We have entered into commodity derivative contracts to effectively fix some or all of our exposure to refined oil products. The outstanding commodity derivative contracts represented a net unrealized gain of $6.2 million and a net unrealized loss of $2.2 million as of March 31, 2021 and December 31, 2020, respectively.
Sensitivity analysis. We
use sensitivity analysis to quantify potential impacts that market rate changes may have on the underlying exposures as well as on the fair values of our derivatives. The sensitivity analysis for the derivatives represents the hypothetical changes in value of the hedge position and does not reflect the related gain or loss on the forecasted underlying transaction.
A hypothetical increase in interest rates of 100 basis points (1%) would have increased our interest expense by $0.1 million, net of the impact of our interest rate swap, for the three months ended March 31, 2021. The same 100 basis points increase would have resulted in an increase of $13.6 million in the fair value of our interest rate swap portfolio.
As of March 31, 2021, a 10% appreciation or depreciation in the value
of the U.S. dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding decrease of $3.8 million or a corresponding increase of $3.8 million, respectively, in the fair value of the foreign currency hedge portfolio.
A 10% increase or decrease in the value of the underlying commodity prices that we hedge would have resulted in a corresponding increase or decrease of $4.8 million in the fair value of the commodity hedge portfolio as of March 31, 2021. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal changes in the value of the underlying exposure.
For further information related to the financial instruments described above, see Note 9 "Derivative Instruments"
to the Notes to Condensed Consolidated Financial Statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Management is responsible for establishing and maintaining adequate disclosure controls and procedures at the reasonable assurance level. Disclosure controls and procedures are designed at the reasonable assurance level to ensure that information required to be disclosed by a reporting company in the reports that it files or submits under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective at the reasonable assurance level as of March 31, 2021.
Changes
in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2021 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
We are involved in various investigations, lawsuits, claims, demands, labor disputes and other legal proceedings, including with respect to environmental and human exposure or other personal injury matters, arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters and proceedings, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows. Additionally, we are involved in the following legal proceedings.
We are involved in various arbitrations pending before the International Chamber of Commerce with several customers who, among other things, have failed to perform under their LTAs and in certain instances are seeking to modify or frustrate their contractual commitments to us. We intend
to vigorously enforce our rights under these agreements.
Pending litigation in Brazil has been brought by employees seeking to recover additional amounts and interest thereon under certain wage increase provisions applicable in 1989 and 1990 under collective bargaining agreements to which employers in the Bahia region of Brazil were a party (including our subsidiary in Brazil). Companies in Brazil have settled claims arising out of these provisions and, in May 2015, the litigation was remanded by the Brazilian Supreme Court in favor of the employees union. After denying an interim appeal by the Bahia region employers on June 26, 2019, the Brazilian Supreme Court finally ruled in favor of the employees union on September 26, 2019. The employers union has determined not to seek annulment
of such decision. Separately, on October 1, 2015, a related action was filed by current and former employees against our subsidiary in Brazil to recover amounts under such provisions, plus interest thereon, which amounts together with interest could be material to us. If the Brazilian Supreme Court proceeding above had been determined in favor of the employers union, it would also have resolved this proceeding in our favor. In the first quarter of 2017, the state court initially ruled in favor of the employees. We appealed this state court ruling, and the appellate court issued a decision in our favor on May 19, 2020. The employees have further appealed and, on December 16, 2020, the court upheld the decision in favor of GrafTech Brazil. On February
22, 2021, the employees filed a further appeal and, on April 28, 2021, the court rejected the employees' appeal in favor of GrafTech Brazil. The court's decision remains subject to further appeal. As of March 31, 2021, we are unable to assess the potential loss associated with these proceedings as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought.
On September 30, 2020, a stockholder of the Company filed a lawsuit in the Delaware Court of Chancery. The stockholder filed an amended complaint on February 5, 2021,
in response to the defendants' motion to dismiss. The amended complaint challenges the fairness of the Company’s repurchase of shares of its common stock from Brookfield for $250 million pursuant to a December 3, 2019 share repurchase agreement and also a related block trade by Brookfield of shares of the Company’s common stock. The stockholder, on behalf of an alleged class of holders of shares of the Company’s common stock as of December 3, 2019 and also purportedly on behalf of the Company, asserts claims for breach of fiduciary duty
against certain members of the Company’s Board of Directors and Brookfield. The stockholder also challenges the appointment of the newest independent director to the Company’s Board of Directors, as allegedly in violation of the Company’s Amended and Restated Certificate of Incorporation and the Stockholder Rights Agreement with certain Brookfield entities and affiliates. The stockholder seeks, among other things, an award of monetary relief to the Company and
a declaration that the appointment of the newest independent director to the Board of Directors is invalid. On March 22, 2021, the defendants filed a motion to dismiss the amended complaint.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors disclosed in Part I- Item 1A of our Annual Report on Form 10-K filed February 23, 2021.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
The table
below sets forth the information on a monthly basis regarding GrafTech's purchases of its common stock, par value $0.01 per share, during the first quarter of 2021.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(1)
Authorization remaining pursuant to our previously announced program to repurchase, which was authorized by our Board of Directors on July 30, 2019 (the “Share Repurchase Program”). The Share Repurchase Program was announced on July 31, 2019 and allows for the purchase of up to $100 million of outstanding shares of our common stock from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The Share Repurchase Program has no expiration date.
The following financial information from GrafTech International Ltd.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders' Equity (Deficit), and (v) Notes to the Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data file (formatted as Inline XBRL and contained in Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
