GRAFTECH INTERNATIONAL LTD. The CompanyGrafTech is a leading manufacturer of graphite electrodes, the critical consumable for the electric arc furnace ("EAF") 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 providing earnings stability and visibility. These contracts define volumes and prices, along with priceescalation 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. COVID-19GrafTech has been proactive from the onset of the COVID-19 crisis. We created a COVID-19 response team composed of senior management that meets three to five times per week to monitor conditions and formulate appropriate action plans. These initial meetings resulted in early actions to cancel travel and eliminate in-person meetings. Our team members are working from home where possible, and we have established a "Safe-Work Playbook" for our sites. Our plant procedures include temperature measurements where permitted, personal protective equipment, mandatory use of gloves, social distancing, frequent cleaning and disinfecting, and the use of daily check sheets to keep team members highly focused on these new procedures. These actions have been very successful, as over 99% of our workforce has remained healthy through this crisis. In addition, we have developed return to work protocols so when the time is right, we may have team members currently working from home safely return to the office. We have worked hard during this COVID-19 crisis to minimize the impact on our employees, our customers, and our operations. We have navigated and implemented eight different sets of government controls and guidelines to keep all of our plants open and operating safely. Despite this challenging environment, we met all customer orders and achieved a 96% on-time delivery rate for the first quarter of 2020. At the same time, we achieved record levels of safety and environmental performance. Commercial Update We service customers at over 300 locations across the globe and most of them have been impacted as a result of this pandemic. In spite of the steel industry being deemed an essential business in many countries, a number of our customers have temporarily suspended or otherwise reduced operations. This is having a significant impact on demand, which we expect to last through the remainder of this year, and into 2021. The impact of the virus has induced over 20 of our long-term contract customers to submit force majeure notices. The long-term contracts provide for the deferral of volume during the force majeure period and extension of the term of the agreement for the length of such period. Other long-term contract customers have been impacted by plant closures and lower steel demand, and are struggling to take their committed electrode volumes. We have had no additional customer bankruptcies at this point, but as a result of the above factors we are experiencing some delays and non-performance from certain customers on their long-term agreements. As a result of this macro environment spot pricing is now below the long-term contract price, and some customers are attempting to renegotiate their contracts or delay shipments. We will continue to work with our valued customers who have benefited from these long-term contracts in recent years while contract prices have been below spot prices, but we will take every measure to ensure that our customers fulfill their legal obligations and commitments under these contracts. We have contracted to sell approximately 142,000, 125,000 and 117,000 metric tons ("MT") in 2020, 2021 and 2022, respectively. The weighted average contract price for the contracted volumes over the next three years is approximately$9,600 per MT. Approximately 83% of these volumes are under predetermined fixed annual volume contracts, while approximately 17% of the volumes are under contracts with a specified volume range. The aggregate difference between the midpoints above and the minimum or maximum volumes across our cumulative portfolio of takeorpay contracts with specified volume ranges is approximately 5,000 MT per year in 2020, 2021 and 2022. Contracted volumes may vary in timing and total due to the credit risk associated with certain customers facing financial challenges as well as customer demand related to contracted volume ranges. In our previous disclosures, we estimated that long-term contract volumes in 2020 would be approximately 130,000 MT. Given the current pandemic and the factors noted above, our long-term contracts are being impacted by deferrals due to force majeure events or other take or pay shortfalls, and potential losses due to financial distress or disputes. We now estimate that our long-term contract 22
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
volume in 2020 will be in the range of 100,000 to 115,000 MT. We expect that
some of this decrease in 2020 long-term contract volume will be recovered in
future years.
Electrode spot prices continue to trend lower. Our average price for
non-long-term agreement business in the first quarter of 2020 was approximately
$6,500 per MT. As a result of the COVID-19 pandemic and the reduction in overall
demand, we expect the spot price for graphite electrodes will decrease further.
Operational Update
Due to the COVID-19 impact and the resulting decrease in customer demand, we
have reduced the operating level of our graphite electrode plants. We will
operate our electrode plants to match customer demand while meeting customer
requirements with continued high levels of on-time delivery performance.
We have been successful at continuing to operate our Seadrift needle coke plant
at full capacity during this COVID-19 crisis. We have scheduled our planned
biannual Seadrift maintenance outage for later in the second quarter this year.
This outage will last about four weeks. We have adequate needle coke inventory
to cover this outage.
Steel production levels are down significantly as a result of this pandemic and
the associated impact on all manufacturing supply chains. Our customers'
graphite electrode destocking initiatives were progressing as expected in the
first quarter of 2020 prior to the COVID-19 outbreak. We had expected this
process to complete in the second half of 2020 but now expect destocking to
continue through the end of the year, and depending on levels of activity across
metal based manufacturing supply chains, potentially into 2021.
Cost Reduction Initiatives
In response to the challenging environment created by the global pandemic, we
have proactively taken concrete actions to reduce costs and preserve cash. We
have eliminated all discretionary spending and have reduced our full-time
workforce and adjusted production to our expected sales. We have also eliminated
our temporary workforce and substantially eliminated contractors. In total, our
headcount at electrode plants is being reduced by 15%. We are also reducing our
fixed costs at our electrode plants by 15%, and variable costs will be lower in
2020 as a result of the lower utilization rates.
Capital expenditures totaled $14 million in the first quarter of 2020, and we
are reducing our planned capital expenditures for the full year by approximately
one-half to a level of $30 to $35 million . Due to timing of purchases, inventory
levels increased during the first quarter, but we are managing to reduce levels
to match demand moving forward and expect overall inventory levels to come down
over the course of the year.
Capital Structure and Capital Allocation
In addition to the cost reduction initiatives outlined above, we are actively
taking steps to further strengthen our balance sheet and increase our financial
flexibility. Given the extent and duration of the impact of the pandemic on the
macro environment, our quarterly dividend is being reduced to $0.01 per share.
The Board will revisit the dividend level as conditions improve and the business
environment becomes clearer.
We are also reprioritizing our capital allocation to focus on liquidity and
balance sheet flexibility. In the first quarter of 2020, we returned over $50
million to shareholders in the form of share repurchases and dividends. We now
expect to use the majority of our incremental free cash flow in 2020 to reduce
debt, but will continue to examine opportunities to repurchase stock.
Outlook
We remain fully confident in the long-term growth trajectory of electric arc
furnace ("EAF") steel production. Global warming and other environmental
concerns are critical issues facing society and global companies, and the EAF
steelmakers are among the largest recycling industries in the world. EAF steel
making produces 75% less carbon emissions than traditional blast oxygen furnace
steel making. EAF growth is continuing with significant capacity additions
having been announced.
GrafTech is one of the largest graphite electrode producers in the world and a
mission critical supplier to the EAF industry. We have three of the most
efficient and largest graphite electrode plants in the world and are the only
substantially vertically integrated producer. With this backdrop, and the
decisive actions we have taken to manage through the COVID-19 pandemic, we are
well positioned to weather this downturn.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated
Financial Statements in accordance with
Key financial measures
For the Three Months
Ended March 31,
(in thousands) 2020 2019
Net sales $ 318,646 $ 474,994
Net income 122,268 197,436
EBITDA (1) 185,029 278,725Adjusted EBITDA (1) 179,178 283,815
(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) 2020 2019
Sales volume (MT)(1) 34 45
Production volume (MT)(2) 33 48
Production capacity excluding St. Marys (MT)(3)(4) 51 51
Capacity utilization excluding
58 58
Total capacity utilization(5)(6) 57 % 83 %
(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 .
NonGAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we
have provided certain financial measures that are not in accordance with GAAP.
EBITDA and adjusted EBITDA are nonGAAP financial measures. We define EBITDA, a
nonGAAP 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 plus any pension and OPEB plan expenses, initial and
follow-on public offering and related expenses, noncash gains or losses from
foreign currency remeasurement of nonoperating liabilities in our foreign
subsidiaries where the functional currency is the U.S. dollar, related party Tax
Receivable Agreement expense, stock-based compensation and noncash fixed asset
writeoffs. 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 periodtoperiod 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
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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
debtservice capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
• adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• adjusted EBITDA does not reflect our cash expenditures for capital
equipment or other contractual commitments, including any capital
expenditure requirements to augment or replace our capital assets;
• adjusted EBITDA does not reflect the interest expense or the cash
requirements necessary to service interest or principal payments on our
indebtedness;
• adjusted EBITDA does not reflect tax payments that may represent a
reduction in cash available to us;
• adjusted EBITDA does not reflect expenses relating to our pension and
OPEB plans;
• adjusted EBITDA does not reflect the noncash gains or losses from
foreign currency remeasurement of nonoperating 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
expense;
• adjusted EBITDA does not reflect stock-based compensation or the
noncash writeoff 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 this presentation. 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 nonrecurring items. When evaluating our performance, you should consider EBITDA and adjusted EBITDA alongside other financial performance measures, including our net income (loss) and other GAAP measures.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The following table reconciles our nonGAAP key financial measures to the most directly comparable GAAP measures:
For the Three Months
Ended March 31,
2020 2019
(in thousands)
Net income $ 122,268 $ 197,436
Add:
Depreciation and amortization 14,284 15,585
Interest expense 25,672 33,700
Interest income (1,141 ) (414 )
Income taxes 23,946 32,418
EBITDA 185,029 278,725
Adjustments:
Pension and OPEB plan expenses (1) 542 770
Initial and follow-on public offering and related expenses (2) 4 685
Noncash (gain) loss on foreign currency remeasurement (3) (3,461 ) 411 Stock-based compensation (4)
410 292
Noncash fixed asset write-off (5) - 2,932
Related party Tax Receivable Agreement benefit(6) (3,346 ) -
Adjusted EBITDA $ 179,178 $ 283,815
(1) Service and interest cost of our OPEB plans. Also includes a
marktomarket 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) Noncash gains and losses from foreign currency remeasurement of
nonoperating liabilities of our nonU.S. subsidiaries where the
functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Noncash fixed asset writeoff recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
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
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The Three Months Ended March 31, 2020 Compared to the Three Months Ended
March 31, 2019
The tables presented in our period-over-period comparisons summarize our
Condensed Consolidated Statements of Operations and illustrate key financial
indicators used to assess the consolidated financial results. Throughout our
MD&A, insignificant changes may be deemed not meaningful and are generally
excluded from the discussion.
For the Three Months
Ended March 31, Increase/
2020 2019 Decrease % Change
(Dollars in thousands)
Net sales $ 318,646 $ 474,994 $ (156,348 ) (33 )%
Cost of sales 138,917 195,524 (56,607 ) (29 )%
Gross profit 179,729 279,470 (99,741 ) (36 )%
Research and development 712 637 75 12 %
Selling and administrative expenses 14,932 15,226 (294 ) (2 )%
Operating income 164,085 263,607 (99,522 ) (38 )%
Other (income) expense (3,314 ) 467 (3,781 ) (810 )%
Related party Tax Receivable Agreement
benefit (3,346 ) - (3,346 ) N/A
Interest expense 25,672 33,700 (8,028 ) (24 )%
Interest income (1,141 ) (414 ) (727 ) 176 %
Income before
provision for income taxes 146,214 229,854 (83,640 ) (36 )%
Provision for income taxes 23,946 32,418 (8,472 ) (26 )%
Net income $ 122,268 $ 197,436 $ (75,168 ) (38 )%
Net sales. Net sales decreased by
Cost of sales. Cost of sales decreased by$56.6 million , or 29%, from$195.5 million in the three months endedMarch 31, 2019 to$138.9 million in the three months endedMarch 31, 2020 . This decrease was primarily the result of lower sales volumes. Selling and administrative expenses. Selling and administrative expenses were flat for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Other (income) expense. Other expense changed by$3.8 million , or 810%, from expense of$0.5 million in the three months endedMarch 31, 2019 to income of$3.3 million in the three months endedMarch 31, 2020 . This change was primarily due to advantageous noncash foreign currency impacts on nonoperating assets and liabilities. Related party Tax Receivable Agreement benefit. During the first quarter of 2020, the Company recorded an adjustment to our Related-party payable-Tax Receivable Agreement liability resulting in a benefit of$3.3 million due to the revised profit expectation for the year 2020, primarily caused by the COVID-19 crisis. Interest expense. Interest expense decreased by$8.0 million from$33.7 million in the three months endedMarch 31, 2019 to$25.7 million in the same period of 2019 primarily due to lower borrowings driven by debt repayments of$125 million in the first quarter of 2019 and$225 million in the fourth quarter of 2019. 27
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Provision for income taxes. The following table summarizes the expense for
income taxes:
For the Three Months Ended March 31,
2020 2019
(Dollars in thousands)
Tax expense $ 23,946 $ 32,418
Pre-tax income 146,214 229,854
Effective tax rates 16.4 % 14.1 %
The effective tax rate for the three months ended
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 theU.S. dollar, this has the effect of reducing (or increasing) theU.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 theU.S. dollar. Accordingly, when these currencies increase (or decline) in value relative to theU.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 theU.S. dollar on our net sales was a decrease of$0.1 million for the three months endedMarch 31, 2020 compared to the same period of 2019. The impact of these changes on our cost of sales was a decrease of$2.6 million for the three months endedMarch 31, 2020 compared to the same period of 2019. 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 prepayments, share repurchases and other obligations. Disruptions in theU.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 ofMarch 31, 2020 , we had liquidity of$399.0 million consisting of$246.9 million of availability on our 2018 Revolving Facility (subject to continued compliance with the financial covenants and representations) and cash and cash equivalents of$152.1 million . We had longterm debt of$1,814.3 million and shortterm debt of$0.1 million as ofMarch 31, 2020 . As ofDecember 31, 2019 , we had liquidity of$327.8 million consisting of$246.9 million available on our 2018 Revolving Facility (subject to continued compliance with the financial covenants and 28
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
representations) and cash and cash equivalents of $80.9 million . We had
longterm debt of $1,812.7 million and shortterm debt of $0.1 million as of
December 31, 2019 .
As of March 31, 2020 and December 31, 2019 , $109.0 million and $41.4 million ,
respectively, of our cash and cash equivalents were located outside of the
United States . 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 $3.6 million and $0.8 million as of
March 31, 2020 and December 31, 2019 , respectively. Upon repatriation to the
United States , 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 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.
As of March 31, 2020 and December 31, 2019 , we had access to the $250 million
2018 Revolving Facility. We had $3.1 million of letters of credit, for a total
availability on the 2018 Revolving Facility of $246.9 million .
On February 12, 2018 , we entered into the 2018 Credit Agreement, which provides
for the 2018 Revolving Facility and the 2018 Term Loan Facility. On February 12,
2018 , our wholly owned subsidiary, GrafTech Finance, borrowed $1,500 million
under the 2018 Term Loan Facility. The funds received were used to pay off our
outstanding debt, including borrowings under our prior credit facility and the
previously outstanding senior notes and accrued interest relating to those
borrowings and the senior notes, declare and pay a dividend of $1,112.0 million
to our sole pre-IPO stockholder, pay fees and expenses incurred in connection
therewith and for other general corporate purposes.
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
the additional $750 million in aggregate principal amount of the Incremental
Term Loans to GrafTech Finance. 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
proceeds of the Incremental Term Loans were used to repay, in full, the $750
million of our existing debt to sole pre-IPO stockholder.
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 repurchased 3,328,574 shares of common
stock for a total purchase price of $30.1 million under this program.
Given the current economic environment, our Board of Directors reduced our
second quarter cash dividend to $0.01 per share or $0.04 on an annualized basis.
We expect our Board of Directors to revisit the dividend level when economic
conditions improve. 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.
We repaid $125 million and $250 million on our 2018 Term Loan Facility in
February and December, 2019, respectively. In light of the recent economic
downturn we are now prioritizing liquidity and debt repayment. We anticipate
using a majority of the remaining free cash flow that we generate in 2020 to
repay debt but we will continue to examine opportunities to repurchase our
common stock. As a result of government enacted COVID-19 relief in a foreign
jurisdiction, we were able to defer a tax payment of $50.0 million that was
scheduled to be made in the first quarter of 2020 until the fourth quarter of
2020. During the three months ended March 31, 2020 , we paid $2.3 million to
various tax collecting agencies worldwide.
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Potential uses of our liquidity include dividends, share repurchases, capital
expenditures, acquisitions, scheduled debt repayments, optional debt prepayments
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, longterm 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.
Capital expenditures totaled $14 million in the first quarter of 2020, and we
are reducing our planned capital expenditures for the full year by approximately
one-half to a level of $30-$35 million . We are managing inventory levels to
match demand. Due to timing of purchases, inventory levels increased during the
first quarter. We expect overall inventory levels to come down over the
remainder of 2020.
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:
For the Three Months
Ended March 31,
2020 2019
in millions
Cash flow provided by (used in):
Operating activities $ 139.3 $ 156.8
Investing activities $ (13.8 ) $ (14.5 )
Financing activities $ (53.0 ) $ (149.7 )
Operating 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.
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During the three months ended March 31, 2020 , changes in working capital
resulted in a net use of funds of $0.1 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 $45.2
million , due to lower purchases of third-party needle coke and payments
made to our related-party for our tax receivable agreement.
Uses of cash in the three months ended
increase in accounts receivable due to the timing of sales;
• net cash outflows from increases in inventory of $4.7 million , due
primarily to higher priced raw materials;
• net cash inflows from the utilization of prepaid assets of
• net cash outflows from decreases in accounts payable and accruals of$5.3 million , due to the timing of payments; and • net cash outflows from decreased income taxes payable of$38.3 million resulting from required tax payments as our profitability has increased. Uses of cash in the three months endedMarch 31, 2019 included contributions to pension and other benefit plans of$0.7 million , cash paid for interest of$31.4 million and taxes paid of$61.1 million . Investing Activities Net cash used in investing activities was$13.8 million during the three months endedMarch 31, 2020 , resulting from capital expenditures. Net cash used investing activities was$14.5 million during the three months endedMarch 31, 2019 , resulting from capital expenditures. Financing Activities Net cash outflow from financing activities was$53.0 million during the three months endedMarch 31, 2020 , which was the result of$22.9 million of total dividends to stockholders and$30.1 million of stock repurchases. Net cash outflow from financing activities was$149.7 million during the three months endedMarch 31, 2019 , which was the result of our$125.0 million payment on our long-term debt and dividends to stockholders totaling$24.7 million . Related Party Transactions We have engaged in transactions with affiliates or related parties during 2020 and we expect to continue to do so in the future. These transactions include ongoing obligations under the Tax Receivable Agreement, 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 5, "Debt and Liquidity" of the Notes to Condensed Consolidated Financial Statements.
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