GRAFTECH INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion and analysis of our financial condition and results of
operations should be read together with our Consolidated Financial Statements
and the accompanying notes and other financial information appearing elsewhere
in this Annual Report on Form 10-K. Discussion and analysis regarding our
financial condition and results of operations for 2018 as compared to 2017 is
included in Item 7 of our Annual Report on Form 10-K for the year-ended December
31, 2018, filed with the SEC on February 22, 2019. Information in this section
is intended to assist the reader in obtaining an understanding of our
Consolidated Financial Statements, the changes in certain key items in those
financial statements from year­to­year, the primary factors that accounted for
those changes, any known trends or uncertainties that we are aware of that may
have a material effect on our future performance, as well as how certain
accounting principles affect our Consolidated Financial Statements. This
discussion and analysis contains forward­looking statements that involve risks,
uncertainties and assumptions. See "Special Note Regarding Forward-Looking
Statements." Our actual results could differ materially from those
forward­looking statements as a result of many factors, including those
discussed in "Risk Factors" and elsewhere in this Form 10-K.
Overview
We are a leading manufacturer of high quality graphite electrode products
essential to the production of electric arc furnace ("EAF") steel and other
ferrous and non­ferrous metals. We believe that we have the most competitive
portfolio of low­cost graphite electrode manufacturing facilities in the
industry, including three of the highest capacity facilities in the world. We
are the only large scale graphite electrode producer that is substantially
vertically integrated into petroleum needle coke, a key raw material for
graphite electrode manufacturing. Between 1984 and 2011, EAF steelmaking was the
fastest­growing segment of the steel sector, with production increasing at an
average rate of 3.5% per year, based on World Steel Association ("WSA") data.
Historically, EAF steel production has grown faster than the overall steel
market due to the greater resilience, more variable cost structure, lower
capital intensity and more environmentally friendly nature of EAF steelmaking.
This trend was partially reversed between 2011 and 2015 due to global steel
production overcapacity driven largely by Chinese blast furnace ("BOF") steel
production. Beginning in 2016, efforts by the Chinese government to restructure
China's domestic steel industry have led to limits on BOF steel production and
lower export levels, and developed economies, which typically have much larger
EAF steel industries, have instituted a number of trade policies in support of
domestic steel producers. As a result, beginning in 2016, the EAF steel market
rebounded strongly and resumed its long­term growth trajectory. This revival in
EAF steel production resulted in increased demand for our graphite electrodes.
In response to this increased demand, we modified our commercial strategy and
executed three­ to five­year take­or­pay contracts for approximately 60% to 65%
of our cumulative expected production capacity from 2018 through 2022.  In 2018,
we shipped approximately 133,000 MT under these contracts at prices averaging
approximately $10,100 per MT.  In 2019, we shipped approximately 145,000 MT
under these contracts at pricing averaging approximately $9,900 per MT.  We have
contracted to sell approximately 142,000, 125,000 and 117,000 MT in 2020, 2021
and 2022, respectively. 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 2020, we expect to ship approximately 130,000 MT at
prices averaging approximately $9,600 per MT. The weighted average contract
price for the contracted volumes over the next three years is approximately
$9,600 per MT, with the weighted average contract prices for contracts with a
specified volume range computed using the volume midpoint.
Global economic conditions and outlook
The graphite electrode industry has historically followed the growth of the EAF
steel industry and, to a lesser extent, the steel industry as a whole, which has
been highly cyclical and affected significantly by general economic conditions.
Historically, EAF steel production has grown faster than the overall steel
market due to the greater resilience, more variable cost structure, lower
capital intensity and more environmentally friendly nature of EAF steelmaking.
This growth trend has resumed after a decline in EAF steelmaking between 2011
and 2015, as Chinese steel production, which is predominantly BOF­based, grew
significantly, taking market share from EAF steel producers. Beginning in 2016,
efforts by the Chinese government to eliminate excess steelmaking production
capacity and improve environmental and health conditions have led to limits on
Chinese BOF steel production, including the closure of over 200 million MT of
its steel production capacity, based on data from S&P Global Platts and the
Ministry of Commerce of the People's Republic of China. In 2017, Chinese steel
exports fell by more than 30% from 2016. Chinese steel exports continued to
decline an additional 8% in 2018 according to the

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National Bureau of Statistics of China, reflecting the reduction in steel
production capacity. As a result, the historical growth trend of EAF steelmaking
relative to the overall steel market resumed and has led to increased demand for
our graphite electrodes. Prior to this improvement in demand, the electrode
industry experienced an extended, five­year downturn. At the same time,
consolidation and rationalization of graphite electrode production capacity
limited the ability of graphite electrode producers to meet this demand.
Demand for petroleum needle coke has outpaced supply due to increasing demand
for petroleum needle coke in the production of lithium­ion batteries used in
electric vehicles. Increased demand has led to pricing increases for petroleum
needle coke over the last two years. While prices have begun to retreat in the
second half of 2019, they still remain at historical highs. Graphite electrodes
have typically been priced at a spread to petroleum needle coke. We believe that
our substantial vertical integration into petroleum needle coke through our
ownership of Seadrift provides a significant cost advantage relative to our
competitors in periods of tight petroleum needle coke supply and we currently
anticipate utilizing all of our needle coke internally, minimizing the need for
third-party purchases. However, recent steel production and graphite electrode
consumption has slowed in some regions, notably Europe and South America.
In its January 2020 report, the International Monetary Fund ("IMF") reported an
estimated global growth rate for 2019 of 2.9%. They estimated 2020 global growth
rate at 3.3% and 2021 is estimated to be 3.4%. The estimates for all three years
were down slightly from their October 2019 report. The downward revisions of
0.1% for 2019 and 2020 and 0.2% for 2021 were primarily driven by factors in
emerging market economies, notably India.
The WSA's October 2019 Short Range Outlook estimated that global steel demand
outside of China increased by 1.6% in 2018, which was reduced by 0.6% from their
April 2019 estimate. WSA also decreased their growth forecast for steel demand
outside of China for 2019 from 1.7% in their April forecast to 0.2% as
uncertainty, trade tensions and geopolitical issues have weighed on investment
and trade. WSA's growth forecast for steel demand outside of China for 2020 was
reduced to 2.5% from their April estimate of 2.8%. Overall, WSA estimates that
total steel production outside of China decreased by approximately 2% in 2019.
The graphite electrode market began to soften in the second half of 2019. We
expect global graphite electrode production capacity to expand in 2020 as a
result of additions in China. Our graphite electrode sales volumes decreased
significantly in the second half of 2019, as our customers began to de-stock
their inventory of our products. Graphite electrode inventories remain elevated
for many customers, but we are seeing early evidence that de-stocking is running
its course. We continue to expect inventory de-stocking through the first half
of 2020. We expect inventories to decline and conditions to improve as we move
into the second half of 2020.
Components of results of operations
Net sales
Net sales reflect sales of our products, including graphite electrodes and
associated by­products. Several factors affect net sales in any period,
including general economic conditions, competitive conditions, customer
inventory levels, scheduled plant shutdowns by customers, national vacation
practices, changes in customer production schedules in response to seasonal
changes in energy costs, weather conditions, strikes and work stoppages at
customer plants and changes in customer order patterns including those in
response to the announcement of price increases or price adjustments.
Revenue is recognized when a customer obtains control of promised goods. The
amount of revenue recognized reflects the consideration to which the Company
expects to be entitled to receive in exchange for these goods. See Note 2
"Revenue from Contracts with Customers" to the Consolidated Financial Statements
for more information. Our first quarter is historically the weakest sales
quarter.
Cost of sales
Cost of sales includes the costs associated with products invoiced during the
period as well as non­inventoried manufacturing overhead costs and outbound
transportation costs. Cost of sales includes all costs incurred at our
production facilities to make products saleable, such as raw materials, energy
costs, direct labor and indirect labor and facilities costs, including
purchasing and receiving costs, plant management, inspection costs, product
engineering and internal transfer costs. In addition, all depreciation
associated with assets used to produce products and make them saleable is
included in cost of sales. Direct labor costs consist of salaries, benefits and
other personnel­related costs for employees engaged in the manufacturing of our
products.
Inventory valuation
Inventories are stated at the lower of cost or market. Cost is principally
determined using the "first­in, first­out" (or FIFO) and average cost, which
approximates FIFO, methods. Elements of cost in inventory include raw materials,
energy costs, direct labor, manufacturing overhead and depreciation of the
manufacturing fixed assets. We allocate fixed production overheads to the

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costs of conversion based on normal capacity of the production facilities. We
recognize abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) as current period charges. Market, or net
realizable value, is the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal and
transportation.
Research and development
We conduct our research and development both independently and in conjunction
with our strategic suppliers, customers and others. Expenditures relating to the
development of new products and processes, including significant improvements to
existing products, are expensed as incurred.
Selling and administrative expenses
Selling and administrative expenses include salaries, benefits and other
personnel related costs for employees engaged in sales and marketing, customer
technical services, engineering, finance, information technology, human
resources and executive management. Other costs include outside legal and
accounting fees, risk management (insurance), global operational excellence,
global supply chain, in­house legal, share­based compensation and certain other
administrative and global resources costs. Our "mark­to­market adjustment"
refers to our accounting policy regarding pension and other post-employment
benefit ("OPEB") plans, where we immediately recognize the change in the fair
value of plan assets and net actuarial gains and losses annually in the fourth
quarter of each year.
Other expense (income)
Other expense (income) consists primarily of foreign currency impacts on
non­operating assets and liabilities and miscellaneous income and expense.
Related party Tax Receivable Agreement expense
Related party Tax Receivable Agreement expense represents the Company's expense
associated with Brookfield's right, as sole pre-IPO stockholder, to receive
future payments from us for 85% 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 certain tax assets attributable to periods prior to
our IPO.
Interest expense
Interest expense consists primarily of interest expense on our 2018 Term Loans,
2018 Revolving Facility and the Senior Notes, accretion of the fair value
adjustment on the Senior Notes and amortization of debt issuance costs.
Income (loss) from discontinued operations
As of June 30, 2016, the Engineered Solutions segment qualified for reporting as
discontinued operations, and the disposition of the segment was substantially
complete by the end of the third quarter of 2017. All results are reported as
gain or loss from discontinued operations, net of tax.
Effects of changes in currency exchange rates
When the currencies of non­U.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.
Some of the non­U.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 a decrease of $6.9 million for the
year ended December 31, 2019 and an increase of $10.5 million and $4.5 million
for the years ended December 31, 2018 and 2017, respectively.
The impact of these changes in the average exchange rates of other currencies
against the U.S. dollar on our cost of sales was a decrease of $9.1 million for
the year ended December 31, 2019 and increases of $3.6 million and $4.2 million
in 2018 and 2017, respectively.

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As part of our cash management, we also have intercompany loans between our
subsidiaries. These loans are deemed to be temporary and, as a result,
remeasurement gains and losses on these loans are recorded as currency gains or
losses in other income (expense), net, on the Consolidated Statements of
Operations.
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 "Quantitative and Qualitative Disclosures about Market Risks."
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 "non­GAAP" financial
measures consist of EBITDA from continuing operations and adjusted EBITDA from
continuing operations, 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 year ended December 31,
(in thousands)                                          2019           2018         2017
Net sales                                       $  1,790,793    $ 1,895,910    $ 550,771
Net income                                      $    744,602    $   854,219    $   7,983
EBITDA from continuing operations(1)            $  1,027,268    $ 1,102,625    $  97,884
Adjusted EBITDA from continuing operations(1)   $  1,048,259    $ 1,205,021    $  95,806


                             Key operating metrics
                                                               For the year ended December 31,
(in thousands)                                              2019           2018           2017
Sales volume (MT)(2)                                         171            176            163
Production volume (MT)(3)                                    177            179            166

Production capacity excluding St. Marys during idle period (MT)(4)(5)

                                            202            180            167

Capacity utilization excluding St. Marys during idle period(4)(6)

                                                  88 %           99 %           85 %
Total production capacity(5)(7)                              230            208            195
Total capacity utilization(6)(7)                              77 %           86 %           85 %

(1) See below for more information and a reconciliation of EBITDA and adjusted

       EBITDA to net income (loss), the most directly comparable financial
       measure calculated and presented in accordance with GAAP.

(2) Effective the first quarter of 2019, we have recast the sales volume above

to include only graphite electrodes manufactured by GrafTech. This better

reflects management's assessment of our profitability and excludes resales

of low grade graphite electrodes manufactured by third party suppliers.

For comparability purposes, the prior period has been recast to conform to

this presentation.

(3) Production volume reflects graphite electrodes produced during the period.

       See below for more information on our key operating metrics.


(4)    The St. Marys, Pennsylvania facility was temporarily idled effective the

second quarter of 2016 except for the machining of semi­finished products

sourced from other plants. In the first quarter of 2018, our St. Marys

facility began graphitizing a limited amount of electrodes sourced from

our Monterrey, Mexico facility.

(5) Production capacity reflects expected maximum production volume during the

       period under normal operating conditions, standard product mix and
       expected maintenance downtime. Actual production may vary. See below for
       more information on our key operating metrics.


(6)    Capacity utilization reflects production volume as a percentage of

production capacity. See below for more information on our key operating

       metrics.


(7)    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 from continuing operations and adjusted EBITDA from continuing operations
are non­GAAP financial measures. We define EBITDA from continuing operations, a
non­GAAP financial measure, as net income

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or loss plus interest expense, minus interest income, plus income taxes,
discontinued operations and depreciation and amortization from continuing
operations. We define adjusted EBITDA from continuing operations as EBITDA from
continuing operations plus any pension and OPEB plan expenses,
rationalization­related charges, initial and follow-on public offering and
related expenses, acquisition and proxy contest costs, 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 from continuing operations 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 from continuing operations 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 differences in capital structure, capital investment
cycles and fixed asset base. In addition, we believe adjusted EBITDA from
continuing operations 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 from continuing operations 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 from continuing operations does not reflect changes in,
          or cash requirements for, our working capital needs;


•         adjusted EBITDA from continuing operations 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 from continuing operations does not reflect the
          interest expense or the cash requirements necessary to service interest
          or principal payments on our indebtedness;


•         adjusted EBITDA from continuing operations does not reflect tax
          payments that may represent a reduction in cash available to us;


•         adjusted EBITDA from continuing operations does not reflect expenses
          relating to our pension and OPEB plans;


•         adjusted EBITDA from continuing operations 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 from continuing operations does not reflect initial and

follow-on public offering and related expenses;

• adjusted EBITDA from continuing operations does not reflect acquisition

          and proxy costs;


•         adjusted EBITDA from continuing operations does not reflect related
          party Tax Receivable Agreement expense;


•         adjusted EBITDA from continuing operations does not reflect
          rationalization­related charges, stock-based compensation or the
          non­cash write­off of fixed assets; and

• other companies, including companies in our industry, may calculate

EBITDA from continuing operations and adjusted EBITDA from continuing

operations differently, which reduces its usefulness as a comparative

measure.

In evaluating EBITDA from continuing operations and adjusted EBITDA from
continuing operations, you should be aware that in the future, we will incur
expenses similar to the adjustments in this presentation. Our presentations of
EBITDA from continuing operations and adjusted EBITDA from continuing operations
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 from continuing operations and adjusted
EBITDA from continuing operations alongside other financial performance
measures, including our net income (loss) and other GAAP measures.

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The following table reconciles our non­GAAP key financial measures to the most directly comparable GAAP measures:

                                                       For the year ended December 31,
(in thousands)                                           2019          2018         2017

Net income (loss)                                     744,602       854,219        7,983
Add:
Discontinued operations                                     -          (331 )      6,229
Depreciation and amortization                          61,819        66,413       64,025
Interest expense                                      127,331       135,061       30,823
Interest income                                        (4,709 )      (1,657 )       (395 )
Income taxes                                           98,225        48,920      (10,781 )
EBITDA from continuing operations                   1,027,268     1,102,625 

97,884

Adjustments:

Pension and OPEB plan expenses (gain)(1)                6,727         3,893       (1,611 )
Rationalization­related gains(2)                            -             -       (3,970 )
Intial and follow-on public offerings and
related expenses(3)                                     2,056         5,173            -
Acquisition and proxy contests costs(4)                     -             - 

886

Non­cash loss on foreign currency
remeasurement(5)                                        1,784           818 

1,731

Stock-based compensation(6)                             2,143         1,152            -
Non­cash fixed asset write­off(7)                       4,888         4,882          886
Related party Tax Receivable Agreement
expense(8)                                              3,393        86,478            -

Adjusted EBITDA from continuing operations 1,048,259 1,205,021

      95,806


(1)    Service and interest cost of our OPEB plans. Also includes a

mark­to­market loss (gain) for plan assets as of December of each year.

       See "Management's Discussion and Analysis of Financial Condition and
       Results of Operations-Components of Results of Operations-Selling and
       Administrative Expenses" for more information.


(2)    Costs associated with rationalizations in our graphite electrode

manufacturing operations and in the corporate structure. They include

severance charges, contract termination charges, write­off of equipment

and (gain)/loss on sale of manufacturing sites.

(3) Legal, accounting, printing and registration fees associated with initial

and follow-on public offering and related expenses.

(4) Costs associated with the merger transaction with Brookfield, resulting in

       change in control compensation expenses.


(5)    Non­cash loss from foreign currency remeasurement of non­operating

liabilities of our non­U.S. subsidiaries where the functional currency is

the U.S. dollar.

(6) Non-cash expense for stock-based compensation grants.

(7) Non­cash fixed asset write­off recorded for obsolete assets.

(8)    Non-cash expense 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 the total volume of graphite electrodes sold for which
revenue has been recognized during the period. 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." 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.

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Customer base
We are a global company and sell our products in every major geographic market.
Sales of these products to buyers outside the United States accounted for
approximately 77%, 78% and 81% of our net sales in 2019, 2018 and 2017,
respectively.
In 2019, six of our ten largest customers were based in Europe, two in the
United States, and one in each of Brazil and Mexico. However, seven of our ten
largest customers are multi­national operations.
The following table summarizes information as to our operations in different
geographical areas:
                                           For the year ended December 31,
(in thousands)                                2019             2018       2017
Net sales:
United States                              403,916          429,599    103,890
Americas (excluding the United States)     348,670          367,561    129,103
Asia Pacific                               172,439          131,578     46,329
Europe, Middle East, Africa                865,768          967,172    271,449
Total                                    1,790,793        1,895,910    550,771


In 2019, one customer accounted for 10% of our net sales. We believe this
customer does not pose a significant concentration of risk, as sales to this
customer could be replaced by demand from other customers.
Results of operations
Results of operations for 2019 as compared to 2018
The tables presented in our period-over-period comparisons summarize our
Consolidated Statements of Operations and illustrate key financial indicators
used to assess the consolidated financial results. Throughout our Management
Discussion and Analysis ("MD&A"), insignificant changes may be deemed not
meaningful and are generally excluded from the discussion.
                                             For the Year Ended December 31,        Increase/
(in thousands)                                   2019                 2018          Decrease       % Change
Net sales                                 $      1,790,793       $  1,895,910     $  (105,117 )        (6 )%
Cost of sales                                      750,390            705,698          44,692           6  %
Gross profit                                     1,040,403          1,190,212        (149,809 )       (13 )%
Research and development                             2,684              2,129             555          26  %
Selling and administrative expenses                 63,674             62,032           1,642           3  %
Operating income                                   974,045          1,126,051        (152,006 )       (13 )%
Other expense (income), net                          5,203              3,361           1,842          55  %
Related party Tax Receivable Agreement               3,393             86,478         (83,085 )       N/A
expense
Interest expense                                   127,331            135,061          (7,730 )        (6 )%
Interest income                                     (4,709 )           (1,657 )        (3,052 )       184  %
  Income from continuing operations                842,827            902,808         (59,981 )        (7 )%
before provision for income taxes
Provision for income taxes                          98,225             

48,920 49,305 101 % Net income from continuing operations $ 744,602 $ 853,888 $ (109,286 ) (13 )%

Income from discontinued operations,                     -                331            (331 )      (100 )%
net of tax

Net income                                $        744,602       $    854,219     $  (109,617 )       (13 )%



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Net sales. Net sales decreased by $105.1 million, or 6%, from $1.9 billion in
2018 to $1.8 billion in 2019. This decrease was primarily driven by a 3%
decrease in sales volume of GrafTech manufactured electrodes as well as a
decrease in non-GrafTech manufactured electrodes sales. Graphite electrode
volumes decreased significantly in the second half of 2019, as our customers
began to de-stock their inventory of our products. Graphite electrode
inventories remain elevated for many customers, but we are seeing early evidence
that de-stocking is running its course. We continue to expect inventory
de-stocking through the first half of 2020. We expect inventories to decline and
conditions to improve as we move into the second half of 2020. Approximately 80%
of our 2019 revenues were derived from customers with long-term agreements. Spot
market prices for graphite electrodes declined approximately 25% in 2019. We
expect additional decreases in 2020.
Cost of sales. Cost of sales increased by $44.7 million, or 6%, from $705.7
million in 2018 to $750.4 million in 2019. This increase was primarily the
result of sales of inventory that was manufactured using higher priced
third-party needle coke. Cost of sales related to third-party needle coke peaked
in 2019 and we expect modest declines in 2020.
Selling and administrative expenses. Selling and administrative expenses
remained relatively flat from 2018 to 2019 as increased stock-based compensation
and bad debt expenses were mostly offset by lower initial and follow-on public
offering and related expenses.
Other expense (income), net. Other expense increased by $1.8 million, from $3.4
million in 2018 to $5.2 million in 2019. This increase was primarily due to a
pension and OPEB mark-to-market charges of $4.1 million in 2019 versus $1.9
million in 2018.
Interest expense. Interest expense decreased by $7.7 million, or 6%, from $135.1
million in 2018 to $127.3 million in 2019, primarily due to a $24.2 million
decrease in refinancing charges, partially offset by an increase in borrowings
over the full period.
Provision for income taxes. The following table summarizes the benefit for
income taxes in 2019 and 2018:
                                                    For the Year Ended         For the Year Ended
                                                     December 31, 2019          December 31, 2018

Tax expense                                      $            98,225         $           48,920
  Income from continuing operations
before provision for income taxes                            842,827         $          902,808
Effective tax rates                                             11.7 %                      5.4 %


The effective tax rate for the year ended December 31, 2019 was 11.7% and
differs from the U.S. statutory tax rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, a portion of U.S.
income being exempt from U.S. taxation as a result of the income qualifying for
the foreign-derived intangible income deduction and a release of a valuation
allowance recorded against the deferred tax asset related to U.S. state and
foreign tax attributes. As of December 31, 2019, the balance of our valuation
allowance against deferred tax assets was $13.7 million and does not result in,
or limit the Company's ability to utilize these tax assets in the future. We
expect the tax rate in 2020 to be approximately 14-18%.
The tax expense changed from $48.9 million, with an effective tax rate of 5.4%
for the year ended December 31, 2018 to a $98.2 million with an 11.7% effective
rate for the year ended December 31, 2019. This increase in the effective tax
rate is primarily due to the partial release of a valuation allowance recorded
against the deferred tax asset related to U.S. state and foreign tax attributes
which was smaller in 2019 than the partial valuation allowance release recorded
in 2018.
Effects of inflation
We incur costs in the United States and each of the non­U.S. countries in which
we have a manufacturing facility. In general, our results of operations, cash
flows and financial condition are affected by the effects of inflation on our
costs incurred in each of these countries.
Currency translation and transactions
We translate the assets and liabilities of our non­U.S. subsidiaries into
U.S. dollars for consolidation and reporting purposes in accordance with the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 830, Foreign Currency Matters. Foreign currency translation adjustments
are generally recorded as part of stockholders' equity and identified as part of
accumulated other comprehensive loss on the Consolidated Balance Sheets until
such time as their operations are sold or substantially or completely
liquidated.
We account for our Russian, Swiss, Luxembourg, United Kingdom and Mexican
subsidiaries using the dollar as the functional currency, as sales and purchases
are predominantly dollar­denominated. Our remaining subsidiaries use their local
currency as their functional currency.
We also record foreign currency transaction gains and losses from non­permanent
intercompany balances as part of cost of sales and other (income) expense, net.
Significant changes in currency exchange rates impacting us are described under
"Effects of Changes in Currency Exchange Rates" and "Results of Operations."
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 the U.S. and international financial markets
could adversely affect our liquidity and the cost and availability of financing
to us in the future.

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We believe that we have adequate liquidity to meet our needs. As of December 31,
2019, we had liquidity of $327.8 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 $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 December 31, 2018, we had
liquidity of $295.4 million consisting of $245.5 million available on our 2018
Revolving Facility and cash and cash equivalents of $49.9 million. We had
long­term debt of $2,050.3 million and short­term debt of $106.3 million as of
December 31, 2018.
As of December 31, 2019 and 2018, $41.4 million and $38.4 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 imposes 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 $0.8 million and $0.2 million as of December 31, 2019 and
December 31, 2018, 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
capital expenditures and other factors. We had positive cash flow from operating
activities during 2019, 2018 and 2017. Although the global economic environment
experienced significant swings in these periods, our working capital management
and cost­control initiatives allowed us to remain operating cash­flow positive
in both times of declining and improving operating results. Cash 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 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. As of December 31, 2018, we had
$4.5 million of letters of credit, for a total availability of $245.5 million on
the 2018 Revolving Facility.
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 Old Credit Agreement and the
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 April 19, 2018, we declared a dividend in the form of the Brookfield
Promissory Note (as defined below) to the sole pre-IPO stockholder. The $750
million Brookfield Promissory Note was conditioned upon (i) the Senior Secured
First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as
calculated based on our final financial results for the first quarter of 2018,
being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default
(each as defined in the 2018 Credit Agreement) having occurred and continuing or
that would result from the $750 million Brookfield Promissory Note and (iii) the
satisfaction of the conditions described in (i) and (ii) above occurring within
60 days from the dividend record date. Upon publication of our first quarterly
report on Form 10-Q, these conditions were met and, as a result, the Brookfield
Promissory Note became payable.
The Brookfield Promissory Note had a maturity of eight years from the date of
issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined
in the Brookfield Promissory Note) plus an applicable margin equal to 4.50% per
annum, with an additional 2.00% per annum starting from the third anniversary
from the date of issuance. We were permitted to make voluntary prepayments at
any time without premium or penalty. All obligations under the Brookfield
Promissory Note were unsecured and guaranteed by all of our existing and future
domestic wholly owned subsidiaries that guarantee, or are borrowers under, the
Senior Secured Credit Facilities. No funds were lent or otherwise contributed to
us by Brookfield in connection with the Brookfield Promissory Note. As a result,
we received no consideration in connection with its issuance. As described
below, the Brookfield Promissory Note was repaid, in full, on June 15, 2018.
On April 19, 2018, we declared a $160 million cash dividend payable to
Brookfield, the sole pre-IPO stockholder. Payment of this dividend was
conditional upon (i) the Senior Secured First Lien Net Leverage Ratio (as
defined in the 2018 Credit Agreement), as calculated based on our final
financial results for the first quarter of 2018, being equal to or less than
1.75 to 1.00, (ii) no Default or Event of Default (as defined in the 2018 Credit
Agreement) having occurred and continuing or that would result from the payment
of the dividend and (iii) the payment occurring within 60 days from the dividend
record date. The conditions of this dividend were met upon filing of our first
quarter report on Form 10-Q and the dividend was paid on May 8, 2018.
On June 15, 2018, GrafTech entered into the first amendment to its 2018 Credit
Agreement ("First Amendment"). The First Amendment amends the 2018 Credit
Agreement to provide for the additional $750 million in aggregate principal
amount

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of the incremental term loans ("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 in principal outstanding on the Brookfield
Promissory Note.
On August 13, 2018, the Company repurchased 11,688,311 of our common stock
directly from Brookfield. These shares were retired upon repurchase. The price
per share paid by the Company was equal to the price at which the underwriters
purchased the shares from Brookfield in Brookfield's August 2018 public
secondary offering of 23,000,000 shares of our common stock, net of underwriting
commissions and discounts. GrafTech funded the share repurchase from cash on
hand.
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. As of December 31, 2019 we had repurchased
1,004,685 shares of common stock totaling $10.9 million under this program. The
Company had $89.1 million remaining under this program as of December 31, 2019
and $72.3 million remaining as of February 17, 2020.
On December 5, 2019, the Company announced two separate transactions. The first
was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares
of GrafTech common stock at a price of $13.125 per share to a broker-dealer who
placed the shares with institutional and other investors. Separately, the
Company entered into a share repurchase agreement with Brookfield to repurchase
$250 million of stock from Brookfield at the arms length price of $13.125 set by
the competitive bidding process of the secondary block trade. As a result, the
Company repurchased 19,047,619 shares of common stock, reducing total shares
outstanding by approximately 7%.
We currently pay a quarterly cash dividend of $0.085 per share, or an aggregate
of $0.34 per share on an annualized basis. Additionally, on December 31, 2018,
we paid a special dividend of $0.70 per share totaling $203.4 million. 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.
Potential uses of our liquidity include dividends, share repurchases, capital
expenditures, acquisitions, scheduled debt repayments, optional debt prepayments
and other general purposes. Continued volatility in the global economy may
require additional borrowings under the 2018 Revolving Facility. 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 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.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On
December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility. We
plan to use approximately 50-60% of our cash for debt repayment in 2020 with the
remainder for shareholder returns.
In order to seek to minimize our credit risks, we may reduce our sales of, or
refuse to sell (except for 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. As a part of our cash management
activities, we manage accounts receivable credit risk, collections, and accounts
payable vendor terms to maximize our free cash at any given time and minimize
accounts receivable losses.
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.
We have announced a series of operational improvement projects at our Monterrey
and St. Marys facilities. These projects are intended to help optimize our
manufacturing footprint while improving environmental performance and increasing
production flexibility. We expect these projects to be completed in the first
half of 2021, at which time we will be able to shift additional

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graphitization and machining from Monterrey to St. Marys. We estimate that
capital spending would be approximately $60-70 million in 2020 which is
consistent with 2019 capital expenditures.
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.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2019.
These transactions include ongoing obligations under the Tax Receivable
Agreement, Stockholders Rights Agreement and Registration Rights Agreement, each
with Brookfield. In November 2019, we amended the Stockholders Rights Agreement
with Brookfield regarding compensation for the Brookfield designated directors.
In December 2019, in conjunction with a secondary block trade by Brookfield
pursuant to Rule 144 under the Securities Act of 1933, we repurchased
approximately $250 million of common stock directly from Brookfield at the arms
length price determined by the competitive bidding process in the secondary
block trade. This resulted in 19,047,619 shares of common stock repurchased at a
price of $13.125 per share, reducing total shares outstanding by approximately
7%.
Cash flows
Cash flows include cash flows from both continuing and discontinued operations.
The following table summarizes our cash flow activities:
                                    For the Year Ended December 31,
                                       2019                2018
                                         (Dollars in millions)
Cash flow provided by (used in):
Operating activities             $       805.3       $       836.6
Investing activities                     (63.9 )             (67.3 )
Financing activities                    (709.6 )            (731.0 )


Operating activities
Cash flow provided by 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 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) include the impact of changes in: receivables, inventories, prepaid
expenses, accounts payable, accrued liabilities, accrued taxes, interest payable
and payments of other current liabilities.
In the year ended December 31, 2019, changes in working capital resulted in a
net use of funds of $47.7 million which was impacted by:
•         use of funds from increases in inventory of $21.5 million due to the
          increased quantities on hand;


•         source of funds of $3.9 million from decreased prepaid and other
          current assets primarily resulting from the lower value of imported

goods impacting value-added taxes in certain foreign jurisdictions;

• use of funds of $18.2 million resulting from a decrease in income taxes

          payable driven primarily by the timing of income tax payments in 2019;

• use of funds of $11.6 million from decreases in accounts payable and

other accruals primarily driven by decreased purchases of raw materials

          and timing of payments.



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Other uses of cash in the year ended December 31, 2019 included cash paid for
interest of $121.1 million, $99.3 million of cash paid for taxes and
contributions to pension and other benefit plans of $3.2 million.
In the year ended December 31, 2018, changes in working capital resulted in a
net use of funds of $177.8 million which was impacted by:
•         use of funds of $139.2 million from the increase in accounts
          receivable, which was due primarily to increased sales driven by higher
          sales prices, partially offset by improved collection terms;


•         use of funds from increases in inventory of $126.4 million due to the
          increased price of raw materials and higher production levels;


•         source of funds of $7.1 million from decreased prepaid and other

current assets primarily resulting from commodity hedge collections and

          a reduction in advanced payments to suppliers;


•         source of funds of $67.1 million resulting from an increase in income
          taxes payable driven by higher profits in 2018;

• source of funds of $15.7 million from increases in accounts payable and

other accruals primarily driven by increased raw material costs.

Other uses of cash in the year ended December 31, 2018 included cash paid for
interest of $108.0 million, $21.4 million of cash paid for taxes and
contributions to pension and other benefit plans of $7.5 million.
Investing activities
Net cash used in investing activities was $63.9 million in the year ended
December 31, 2019 and included capital expenditures of $64.1 million.
Net cash used in investing activities was $67.3 million in the year ended
December 31, 2018 and included capital expenditures of $68.2 million partially
offset by proceeds from the sale of fixed assets of $0.9 million.
Financing activities
Net cash outflow from financing activities was $709.6 million during the year
ended December 31, 2019, which was driven by $350.1 million of repayments of
long-term debt, $260.9 million of repurchases of our common stock and $98.6
million of dividend payments.
Net cash outflow from financing activities was $731.0 million during the year
ended December 31, 2018, which was the net impact of our February 12, 2018
refinancing and subsequent amendment, proceeds of which were used to repay
outstanding debt, pay dividends of $1,112 million to Brookfield and repay the
$750 million Brookfield Promissory Note to Brookfield. We also repurchased $225
million of our common stock from Brookfield on August 13, 2018. Since our IPO in
2018, we have paid a conditional dividend of $160 million to Brookfield,
quarterly dividends on common stock of $68.9 million and a special dividend on
common stock of $203.4 million.
Financing transactions
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
"Co­Borrowers"), 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 $1,500 million senior secured term
facility (the "2018 Term Loan Facility") and (ii) a $250 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

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Finance, Swissco and Lux Holdco are Co­Borrowers under the 2018 Revolving Credit
Facility. On February 12, 2018, GrafTech Finance borrowed $1,500 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.
The proceeds of the 2018 Term Loans were used to (i) repay in full all
outstanding indebtedness of the Co­Borrowers under our previous Amended and
Restated Credit Agreement ("Old Credit Agreement") and terminate all commitments
thereunder, (ii) redeem in full our previously held Senior Notes at a redemption
price of 101.594% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption, (iii) pay fees and expenses incurred in
connection with (i) and (ii) above and the Senior Secured Credit Facilities and
related expenses, and (iv) declare and pay a dividend to the sole pre-IPO
stockholder, with any remainder to be used for general corporate purposes. See
Note 7 "Interest Expense" for a breakdown of expenses associated with these
repayments. In connection with the repayment of the Old Credit Agreement and
redemption of the Senior Notes, all guarantees of obligations under the Old
Credit Agreement, the Senior Notes and related indenture were terminated, all
mortgages and other security interests securing obligations under the Old Credit
Agreement were released and the Old Credit Agreement and the indenture were
terminated.
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 3.50% per annum or (ii) the ABR Rate (as defined in the 2018 Credit
Agreement), plus an applicable margin initially equal to 2.50% per annum, in
each case with one step down of 25 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 Co­Borrower's option, at a rate equal to either (i) the Adjusted LIBO
Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the
ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each
case with two 25 basis point step downs based on achievement of certain senior
secured first lien net leverage ratios. In addition, the Co­Borrowers will be
required to pay a quarterly commitment fee on the unused commitments under the
2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
For borrowings under both the 2018 Term Loan Facility and the 2018 Revolving
Credit Facility, if the Administrative Agent determines that adequate and
reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the
LIBO Rate and such circumstances are unlikely to be temporary or the relevant
authority has made a public statement identifying a date after which the LIBO
Rate shall no longer be used for determining interest rates for loans, then the
Administrative Agent and the Co-Borrowers shall endeavor to establish an
alternate rate of interest, which shall be effective so long as the majority in
interest of the lenders for each Class (as defined in the 2018 Credit Agreement)
of loans under the 2018 Credit Agreement do not notify the Administrative Agent
otherwise. Until such an alternate rate of interest is determined, (a) any
request for a borrowing denominated in dollars based on the Adjusted LIBO Rate
will be deemed to be a request for a borrowing at the ABR Rate plus the
applicable margin for an ABR Rate borrowing of such loan while any request for a
borrowing denominated in any other currency will be ineffective and (b) any
outstanding borrowings based on the Adjusted LIBO Rate denominated in dollars
will be converted to a borrowing at the ABR Rate plus the applicable margin for
an ABR Rate borrowing of such loan while any outstanding borrowings denominated
in any other currency will be repaid.
All obligations under the 2018 Credit Agreement are guaranteed by GrafTech,
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 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 Parent"), 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
65% of the equity interests of each subsidiary that is a Controlled Foreign
Corporation (within the meaning of Section 956 of the Code), and (iii) security
interests in, and mortgages on, personal property and material real property of
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 2018 Revolving Credit Facility are secured by (i) a pledge of all of
the equity securities of each Guarantor that is a Controlled Foreign Corporation
and of each direct, wholly owned subsidiary of any Guarantor that is a
Controlled Foreign Corporation, and (ii) security interests in certain
receivables and personal property of each Guarantor that is a Controlled Foreign
Corporation, subject to permitted liens and certain exceptions specified in the
2018 Credit Agreement.
The 2018 Term Loans amortize at a rate equal to 5% per annum of the original
principal amount of the 2018 Term Loans payable in equal quarterly installments,
with the remainder due at maturity. The Co­Borrowers 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

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transactions with respect to the 2018 Term Loans effected within twelve months
of the closing date of the 2018 Credit Agreement, to which a 1.00% 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
non­ordinary course asset sales (subject to customary reinvestment rights and
other customary exceptions and exclusions), and (ii) commencing with the
Company's fiscal year ending December 31, 2019, 75% of Excess Cash Flow (as
defined in the 2018 Credit Agreement), subject to step­downs to 50% and 0% of
Excess Cash Flow based on achievement of a senior secured first lien net
leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00
and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly
amortization payments of the 2018 Term Loans during any calendar year reduce, on
a dollar­for­dollar 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 4.00:1.00 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 $35
million), taken together, exceed 35% of the total amount of commitments under
the 2018 Revolving Credit Facility. The 2018 Credit Agreement also contains
customary events of default.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of a $750 million
promissory note (the "Brookfield Promissory Note") to the sole pre-IPO
stockholder. The $750 million Brookfield Promissory Note was conditioned upon
(i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018
Credit Agreement), as calculated based on our final financial results for the
first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default
or Event of Default (each as defined in the 2018 Credit Agreement) having
occurred and continuing or that would result from the $750 million Brookfield
Promissory Note and (iii) the satisfaction of the conditions occurring within 60
days from the dividend record date. Upon publication of our first quarter report
on Form 10-Q, these conditions were met and, as a result, the Brookfield
Promissory Note became payable.
The Brookfield Promissory Note had a maturity of eight years from the date of
issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined
in the Brookfield Promissory Note) plus an applicable margin equal to 4.50% per
annum, with an additional 2.00% per annum starting from the third anniversary
from the date of issuance. We were permitted to make voluntary prepayments at
any time without premium or penalty. All obligations under the Brookfield
Promissory Note were unsecured and guaranteed by all of our existing and future
domestic wholly owned subsidiaries that guarantee, or are borrowers under, the
Senior Secured Credit Facilities. No funds were lent or otherwise contributed to
us by the pre-IPO stockholder in connection with the Brookfield Promissory Note.
As a result, we received no consideration in connection with its issuance. As
described below, the Promissory Note was repaid in full on June 15, 2018.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into the First Amendment. The First
Amendment amended the 2018 Credit Agreement to provide for 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 $1,500 million to $2,250 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 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 principal outstanding on the Brookfield Promissory Note.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On
December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility. We
plan to use approximately 50-60% of our cash for debt repayment in 2020 with the
remainder for shareholder returns.
Fixed rate obligations
As of December 31, 2019 and 2018, all of our debt was based on variable interest
rates. However, during the third quarter of 2019, we entered into four interest
rate swap contracts. The contracts are "pay fixed, receive variable" with
notional amounts of $500 million maturing in two years and another $500 million
maturing in five years. It is expected that these swaps will fix

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the cash flows associated with the forecasted interest payments on this notional
amount of debt to an effective fixed interest rate of 5.1%, which could be
lowered to 4.85% depending on credit ratings.
Long-Term Contractual, Commercial and Other Obligations and Commitments. The
following tables summarize our long-term contractual obligations and other
commercial commitments as of December 31, 2019
                                              Payments Due by Year Ending December 31,
                               Total            2020         2021-2022       2023-2024         2025+
                                                       (Dollars in Thousands)
Contractual and Other
Obligations
2018 Term Loan Facility (a) $ 1,844,032     $        -     $   100,282     $   225,000     $ 1,518,750
Interest on Long-term Debt
(b)                             464,971         96,635         187,123         171,781           9,432
Leases                            8,628          4,496           3,395             645              92
Total contractual
obligations                   2,317,631        101,131         290,800         397,426       1,528,274
Postretirement, pension and
related benefits (c)            118,365         11,771          23,275          24,401          58,918
Committed purchase
obligations (d)                  48,632         48,632               -               -               -
Related party Tax
Receivable Agreement (e)         89,871         27,857          25,650          22,909          13,455
Other long-term obligations      12,682          9,108           1,172             578           1,824
Uncertain income tax
provisions                          185             72              80              33               -
Total contractual and other
obligations (f)             $ 2,587,366     $  198,571     $   340,977     $   445,347     $ 1,602,471
Other Commercial
Commitments
Guarantees (g)                    2,935          2,935               -               -               -
Total other commercial
commitments                 $     2,935     $    2,935     $         -     $         -     $         -


(a)  The Company entered into the 2018 Credit Agreement, which provided for the

2018 Term Loan Facility and 2018 Revolving Credit Facility. The proceeds of

the 2018 Term Loan Facility were used to redeem the Senior Notes, repay

outstanding indebtedness under the amended and restated credit agreement

dated February 27, 2015, pay fees and expenses relating to the redemption of

the Senior Notes and repayment of such indebtedness and pay a dividend. The

2018 Term Loan Facility has an outstanding balance of $1,844 million and

matures on February 12, 2025. The term loan bears interest at a rate equal

to either the Adjusted LIBO Rate, plus an applicable margin initially equal

to 3.50% per annum or the ABR Rate, plus an applicable margin initially

equal to 2.50% per annum, in each case with one step down of 75 basis points

based on achievement of certain public ratings of the 2018 Term Loans (see

"Liquidity and Capital Resources" for full details of this transaction).

(b) Represents estimated interest payments required on 2018 Term Loan Facility

using a monthly LIBOR curve through February 2025 net of interest rate swap

impacts.

(c) Represents estimated postretirement, pension and related benefits

obligations based on actuarial calculations.

(d) Represents committed purchases of raw materials.

(e) Represents Brookfield's right to receive future payments from us for 85% 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

certain tax assets attributable to periods prior to our IPO, including

certain federal NOLs, previously taxed income under Section 959 of the Code,

foreign tax credits, and the Pre­IPO 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 1.00% 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.


(f)  In addition, letters of credit of $3.1 million were issued under the
     Revolving Facility as of December 31, 2019.


(g)  Represents surety bonds, which are renewed annually, and other bank

guarantees. If rates were unfavorable, we would use letters of credit under

our revolving facility.

(h) Represents our undiscounted non-cancelable operating lease future payments

     as of December 31, 2019.

Off­Balance sheet arrangements and commitments. We have not undertaken or been a party to any material off­balance­sheet financing arrangements or other commitments (including non­exchange traded contracts), other than: • The notional amount of foreign exchange and commodity contracts;

•         Letters of credit outstanding under the Revolving Facility of $3.1
          million as of December 31, 2019 and $4.5 million as of December 31,
          2018; and



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• Surety bonds and guarantees with other banks totaling $2.9 million.

Costs Relating to Protection of the Environment

We have been and are subject to increasingly stringent environmental protection
laws and regulations. In addition, we have an on­going commitment to rigorous
internal environmental protection standards. Environmental considerations are
part of all significant capital expenditure decisions. The following table sets
forth certain information regarding environmental expenses and capital
expenditures.
                                                      For the Year Ended December 31,
                                                     2019            2018           2017
                                                           (Dollars in thousands)

Expenses relating to environmental protection $ 11,204 $ 12,355

$    7,973
Capital expenditures related to environmental
protection                                             7,251          4,080          2,080


Critical accounting policies
Critical accounting policies are those that require difficult, subjective or
complex judgments by management, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. We use and rely on estimates in determining the economic
useful lives of our assets, obligations under our employee benefit plans,
provisions for doubtful accounts, provisions for restructuring charges and
contingencies, tax valuation allowances, evaluation of goodwill, other
intangible assets, pension and OPEB and various other recorded or disclosed
amounts, including inventory valuations. Estimates require us to use our
judgment. While we believe that our estimates for these matters are reasonable,
if the actual amount is significantly different than the estimated amount, our
assets, liabilities or results of operations may be overstated or understated.
The following accounting policies are deemed to be critical.
Business combinations and goodwill. The application of the purchase method of
accounting for business combinations requires the use of significant estimates
and assumptions in the determination of the fair value of assets acquired and
liabilities assumed in order to properly allocate purchase price consideration
between goodwill and assets that are depreciated and amortized. Our estimates of
the fair values of assets and liabilities acquired are based on assumptions
believed to be reasonable and, when appropriate, include assistance from
independent third­party appraisal firms.
As a result of our acquisition by Brookfield, we have a significant amount of
goodwill. Goodwill is tested for impairment annually or more frequently if an
event or circumstance indicates that an impairment loss may have been incurred.
Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities to
reporting units, assignment of goodwill to reporting units and determination of
the fair value of each reporting unit. We estimate the fair value of each
reporting unit using a discounted cash flow methodology. This requires us to use
significant judgment including estimation of future cash flows, which is based
upon relevant market data, internal forecasts, estimation of the long­term
growth for our business, the useful life over which cash flows will occur and
determination of the weighted average cost of capital for purposes of
establishing a discount rate.
Refer to Note 1, "Business and Summary of Significant Accounting Policies", of
the Notes to the Consolidated Financial Statements for information regarding our
goodwill impairment testing.
Employee benefit plans. We sponsor various retirement and pension plans,
including defined benefit and defined contribution plans and postretirement
benefit plans that cover most employees worldwide. Excluding the defined
contribution plans, accounting for these plans requires assumptions as to the
discount rate, expected return on plan assets, expected salary increases and
health care cost trend rate. See Note 11, "Retirement Plans and Postretirement
Benefits", of the Notes to the Consolidated Financial Statements for further
details.

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Impairments of long­lived assets. We record impairment losses on long­lived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the future undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those assets.
Assets to be disposed are reported at the lower of the carrying amount or fair
value less estimated costs to sell. Estimates of the future cash flows are
subject to significant uncertainties and assumptions. If the actual value is
significantly less than the estimated fair value, our assets may be overstated.
Future events and circumstances, some of which are described below, may result
in an impairment charge:
•         new technological developments that provide significantly enhanced
          benefits over our current technology;

• significant negative economic or industry trends;

•         changes in our business strategy that alter the expected usage of the
          related assets; and


•         future economic results that are below our expectations used in the
          current assessments.

Accounting for income taxes. When we prepare the Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to make the following assessments: • estimate our actual current tax liability in each jurisdiction;

• estimate our temporary differences resulting from differing treatment

of items for tax and accounting purposes (which result in deferred tax

assets and liabilities that we include within the Consolidated Balance

Sheets); and

• assess the likelihood that our deferred tax assets will be recovered

from future taxable income and, if we believe that recovery is not more

likely than not, a valuation allowance is established.

If our estimates are incorrect, our deferred tax assets or liabilities may be
overstated or understated.
As of December 31, 2019, we had a valuation allowance of $13.7 million against
certain deferred tax assets. Our losses in certain tax jurisdictions in recent
periods represented sufficient negative evidence to require a full valuation
allowance. Until we determine that we will generate sufficient jurisdictional
taxable income to realize our net operating losses and deferred tax assets, we
continue to maintain a valuation allowance.
Related Party Tax Receivable Agreement. On April 23, 2018, the Company entered
into a tax receivable agreement (the "TRA") that provides Brookfield, as the
sole pre-IPO stockholder, the right to receive future payments from us for 85%
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 certain
tax assets attributable to periods prior to our IPO, including certain federal
net operating losses ("NOLs"), previously taxed income under Section 959 of the
Code, foreign tax credits, and certain NOLs in Swissco (collectively, the
"Pre­IPO 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 1.00% 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.
The calculation of the TRA liability requires significant judgment with regards
to the assumptions underlying the forecast of future taxable income, in total
and by jurisdiction, as well as their timing.
Revenue recognition. We adopted Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 606 effective January 1, 2018 and
elected the modified retrospective transition method. Under this method, any
cumulative effect of applying the new revenue standard for contracts not yet
complete is recorded as an adjustment to the opening balance of retained
earnings as of the beginning of 2018. The comparative information for prior
years was not revised and will continue to be reported under the accounting
standards in effect for the period presented.
Under ASC 606, an entity recognizes revenue when its customer obtains control of
promised goods or services, in an amount that reflects the consideration which
the entity expects to receive in exchange for those goods or services.
To determine revenue recognition for arrangements that we determine are within
the scope of ASC 606, the following five steps are performed: (i) identify the
contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue
when (or as) we satisfy a performance obligation. We only apply the five­step
model to contracts when it

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is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to the customer. At contract
inception, once the contract is determined to be within the scope of ASC 606, we
assess the goods or services promised within each contract and determine those
that are performance obligations, and assess whether each promised good or
service is distinct. We then recognize as revenue the amount of the transaction
price that is allocated to the respective performance obligation when (or as)
the performance obligation is satisfied.
In 2019 and 2018, our revenue streams primarily consisted of three­ to five­year
take­or­pay supply contracts and short­term binding and non­binding purchase
orders (deliveries within the year) directly with steel manufacturers. In 2017,
our revenue streams consisted primarily of annual non­binding purchase orders.
The promises of delivery of graphite electrodes represent the distinct
performance obligations to which the contract consideration is allocated, based
upon the electrode stand­alone selling prices for the class of customers at the
time the agreements are executed. The performance obligations are considered to
be satisfied at a point in time when control of the electrodes has been
transferred to the customer. The company has elected to treat the transportation
of the electrodes from our premises to the customer's facilities as a
fulfillment activity, and outbound freight cost is accrued when the graphite
electrode performance obligation is satisfied. Any variable consideration is
recognized up to its unconstrained amount, i.e., up to the amount for which it
is probable that a significant reversal of the variable revenue will not happen.
Recent accounting pronouncements
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under ASU
No. 2016-02, the Company recognizes most leases on its balance sheet as lease
liabilities with corresponding right-of-use assets. ASU No. 2016-02 was
effective for fiscal years beginning after December 15, 2018.  The Company
adopted ASU No. 2016-02 on January 1, 2019. The adoption impact was not material
to our financial position, results of operations or cash flows. See Note 10
"Leases" for information regarding this standard and its adoption.
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017­04, Intangibles­Goodwill and Other
(Topic 350). ASU No. 2017-04 was issued to simplify the accounting for goodwill
impairment. ASU No. 2017-04 removes the second step of the goodwill impairment
test, which requires that a hypothetical purchase price allocation be performed
to determine the amount of impairment, if any. Under ASU No. 2017-04, a goodwill
impairment charge will be based on the amount by which a reporting unit's
carrying value exceeds its fair value, not to exceed the carrying amount of
goodwill. ASU No. 2017-04 became effective on a prospective basis for the
Company on January 1, 2020. The adoption of this standard is not expected to
have a material effect on the Company's financial position, results of
operations or cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which introduces the Current Expected Credit Losses ("CECL")
accounting model. CECL requires earlier recognition of credit losses, while also
providing additional transparency about credit risk. CECL utilizes a lifetime
expected credit loss measurement objective for the recognition of credit losses
at the time the financial asset is originated or acquired. The expected credit
losses are adjusted each period for changes in expected lifetime credit losses.
ASU No. 2016-13 is effective for the the Company on January 1, 2020. The
adoption of this standard will impact the timing of our credit losses; however,
it is not expected to have a material effect on the Company's financial
position, results of operations or cash flows.

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