GRAFTECH INTERNATIONAL LTD. The CompanyGrafTech is a leading manufacturer of graphite electrodes, the critical consumable for the electric arc furnace industry. We are the only graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrodes. Vertical integration has allowed us to adopt a commercial strategy with long-term, fixed price, fixed volume, take-or-pay contracts providing earnings stability and visibility. These contracts define volumes and prices, along with price-escalation mechanisms for inflation, and include significant termination payments (typically, 50% to 70% of remaining contracted revenue) and, in certain cases, parent guarantees and collateral arrangements to manage our customer credit risk. COVID-19GrafTech has been successful in managing through the COVID-19 pandemic. We have quickly adapted to changing situations throughout all of the regions of the world in which we operate and conduct business. Our executive-led COVID-19 response team continues to meet three times per week to monitor the situation and adapt as needed. We continue to limit travel and have employees working from home where possible. Our facilities perform temperature measurement upon entry and our team members continue to use personal protective equipment, such as masks and gloves. Daily disinfecting activities are performed and strict adherence to social distancing guidelines is required. All of these activities are guided by our "COVID-Safe-Work Playbook" and "Return to Work Protocols" and are closely monitored with daily "check sheets". The result of this hard work is that we have managed to keep 99% of our employees healthy to date. Commercial UpdateGrafTech services customers at over 300 locations across the globe all of which have been impacted by COVID-19. The recovery for some customers has begun, however, each region is impacted and recovering at significantly different rates. The commercial team worked diligently to achieve solid results in the second quarter of 2020. We delivered a total 31,000 metric tons ("MT") in the second quarter, of which 26,000 MT represented deliveries under our long-term agreements ("LTAs") and 5,000 MT were the result of spot sales. Our total deliveries under our LTAs were 55,000 MT for the first half of 2020 and we continue to expect deliveries under the LTAs of 100,000-115,000 MT for the full year. As anticipated, the spot price of graphite electrodes continued to trend lower during the second quarter. Our average price for non-LTA business in the second quarter was approximately$5,500 per MT and we expect further market spot price erosion in the third quarter. The needle coke market continued to soften as well. The current market continues to challenge our customers including those with LTAs. Over the course of the COVID-19 pandemic, we have received force majeure claims from approximately 35 customers. Several customers are struggling to take their committed volumes causing some delays and non-performance including a few arbitrations associated with, among other things, efforts to modify the existing contracts. We are working hard with our valued customers to develop mutually beneficial solutions to address the current challenging environment, but we will take every measure to ensure that customers fulfill their legal obligations and commitments under these contracts. These negotiations are ongoing and have successfully resulted in modifications with some of our strategic customers to provide near-term relief while extending the term of their contracts. Operational Update We have been successful at keeping our plants operational through the COVID-19 pandemic. We have aligned our operations to our expected sales and have maintained a 98% on-time delivery rate through these difficult times. Our Seadrift plant recently completed its scheduled maintenance outage on time and on budget. We have eliminated discretionary spending throughout the organization and adjusted our workforce to match current production levels. We met our goal of reducing fixed production costs by 15% in the second quarter of 2020 which assisted in achieving a 12% reduction year-to-date when compared to 2019 levels. We continue to manage our capital expenditures in line with our reduced target and expect approximately$35 million for the full year. 24 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES Capital Structure and Capital Allocation During the second quarter of 2020 we reduced our debt by approximately$103 million . We will continue to prioritize balance sheet flexibility and expect to use the majority of our incremental free cash flow in 2020 to reduce debt, but will continue to examine opportunities to repurchase stock. Outlook The second half of 2020 will continue to be challenging as we and our customers face macro-economic headwinds. We foresee a measured recovery in the industry when the pandemic eases as customers work through graphite electrode inventory levels that were elevated prior to the onset of the pandemic. We expect overall demand and pricing to remain low for the remainder of 2020. We have full confidence in the strengths of the Electric Arc Furnace and graphite electrode businesses. The environmental and economic attributes of these industries are key advantages and position them for continued growth over the longer term. We believeGrafTech is well positioned to navigate the challenges of the current environment and the opportunities in the future recovery given our leadership position in the industry, our strong cash flows, and our advantaged cost position. Key metrics used by management to measure performance In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance withU.S. generally accepted accounting principles ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our company. The "non-GAAP" financial measures consist of EBITDA and adjusted EBITDA, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. Key financial measures For the Six For the Three Months Ended Months June 30, Ended June 30, (in thousands) 2020 2019 2020 2019 Net sales$ 280,718 $ 480,390 $ 599,364 $ 955,384 Net income 92,776 196,368 215,044 393,804 EBITDA (1) 147,645 281,818 332,674 560,543 Adjusted EBITDA (1) 151,125 284,404 330,303 568,219
(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 Six
For the Three Months Ended Months
June 30, Ended June 30,
(in thousands, except price data) 2020 2019 2020 2019
Sales volume (MT)(1) 31 45 65 90
Production volume (MT)(2) 33 48 66 95
Production capacity excluding St. Marys (MT)(3)(4) 51 51 102 102
Capacity utilization excluding St. Marys (3)(5) 65 % 94 % 65 % 93 %
Total production capacity (MT)(4)(6) 58 58 116 116
Total capacity utilization(5)(6) 57 % 83 % 57 % 82 %
(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.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(4) Production capacity reflects expected maximum production volume during the
period under normal operating conditions, standard product mix and expected
maintenance outage. Actual production may vary.
(5) Capacity utilization reflects production volume as a percentage of
production capacity.
(6) Includes graphite electrode facilities in Calais, France ; Monterrey, Mexico ;
Pamplona , Spain and St. Marys, Pennsylvania .
Non-GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we
have provided certain financial measures that are not in accordance with GAAP.
EBITDA and adjusted EBITDA are non-GAAP financial measures. We define EBITDA, a
non-GAAP financial measure, as net income or loss plus interest expense, minus
interest income, plus income taxes, and depreciation and amortization. We define
adjusted EBITDA as EBITDA plus any pension and other post-employment benefit
("OPEB") plan expenses, initial and follow-on public offering and related
expenses, non-cash gains or losses from foreign currency remeasurement of
non-operating assets and liabilities in our foreign subsidiaries where the
functional currency is the U.S. dollar, related party Tax Receivable Agreement
expense, stock-based compensation and non-cash fixed asset write-offs. Adjusted
EBITDA is the primary metric used by our management and our board of directors
to establish budgets and operational goals for managing our business and
evaluating our performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it
is useful to present to investors, because we believe that it facilitates
evaluation of our period-to-period operating performance by eliminating items
that are not operational in nature, allowing comparison of our recurring core
business operating results over multiple periods unaffected by differences in
capital structure, capital investment cycles and fixed asset base. In addition,
we believe adjusted EBITDA and similar measures are widely used by investors,
securities analysts, ratings agencies, and other parties in evaluating companies
in our industry as a measure of financial performance and debt-service
capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
•adjusted EBITDA does not reflect our cash expenditures for capital equipment or
other contractual commitments, including any capital expenditure requirements to
augment or replace our capital assets;
•adjusted EBITDA does not reflect the interest expense or the cash requirements
necessary to service interest or principal payments on our indebtedness;
•adjusted EBITDA does not reflect tax payments that may represent a reduction in
cash available to us;
•adjusted EBITDA does not reflect expenses relating to our pension and OPEB
plans;
•adjusted EBITDA does not reflect the non-cash gains or losses from foreign
currency remeasurement of non-operating assets and liabilities in our foreign
subsidiaries where the functional currency is the U.S. dollar;
•adjusted EBITDA does not reflect initial and follow-on public offering and
related expenses;
•adjusted EBITDA does not reflect related party Tax Receivable Agreement
expense;
•adjusted EBITDA does not reflect stock-based compensation or the non-cash
write-off of fixed assets; and
•other companies, including companies in our industry, may calculate EBITDA and
adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
In evaluating EBITDA and adjusted EBITDA, you should be aware that in the
future, we will incur expenses similar to the adjustments in 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 non-recurring 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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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIESThe following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures:
For the Six
For the Three Months Ended Months
June 30, Ended June 30,
2020 2019 2020 2019
(in thousands)
Net income $ 92,776 $ 196,368 $ 215,044 $ 393,804
Add:
Depreciation and amortization 14,549 15,445 28,833 31,030
Interest expense 20,880 32,969 46,552 66,669
Interest income (348) (731) (1,489) (1,145)
Income taxes 19,788 37,767 43,734 70,185
EBITDA 147,645 281,818 332,674 560,543
Adjustments:
Pension and OPEB plan expenses (1) 541 827 1,083 1,597
Initial and follow-on public offering and related
expenses (2) - 610 4 1,296
Non-cash loss (gain) on foreign currency
remeasurement (3) 2,222 616 (1,239) 1,027
Stock-based compensation (4) 717 570 1,127 862
Non-cash fixed asset write-off (5) - (37) - 2,894
Related party Tax Receivable Agreement benefit(6) - - (3,346) -
Adjusted EBITDA $ 151,125 $ 284,404 $ 330,303 $ 568,219
(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market
loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial
and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of
non-operating assets and liabilities of our non-U.S. subsidiaries where the
functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash fixed asset write-off recorded for obsolete assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
Key Operating Metrics
In addition to measures of financial performance presented in accordance
with GAAP, we use certain operating metrics to analyze the performance of our
company. The key operating metrics consist of sales volume, production volume,
production capacity and capacity utilization. These metrics align with
management's assessment of our revenue performance and profit margin and will
help investors understand the factors that drive our profitability.
Sales volume reflects only graphite electrodes manufactured by GrafTech . For a
discussion of our revenue recognition policy, see our Annual Report on Form 10-K
"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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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Results of Operations
The Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30,
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
Management's Discussion and Analysis ("MD&A"), insignificant changes may be
deemed not meaningful and are generally excluded from the discussion.
For the Three Months Ended June
30, Increase/
2020 2019 Decrease % Change
(Dollars in thousands)
Net sales $ 280,718 $ 480,390 $ (199,672) (42) %
Cost of sales 130,600 197,047 (66,447) (34) %
Gross profit 150,118 283,343 (133,225) (47) %
Research and development 710 713 (3) - %
Selling and administrative expenses 16,001 15,394 607 4 %
Operating income 133,407 267,236 (133,829) (50) %
Other (income) expense, net 311 863 (552) (64) %
Interest expense 20,880 32,969 (12,089) (37) %
Interest income (348) (731) 383 (52) %
Income before provision for income taxes 112,564 234,135 (121,571) (52) %
Provision for income taxes 19,788 37,767 (17,979) (48) %
Net income 92,776 196,368 (103,592) (53) %
Net sales. Net sales decreased from $480.4 million in the three months ended
June 30, 2019 , to $280.7 million in the three months ended June 30, 2020 . The
decrease was primarily driven by a 31% decrease in sales volume of graphite
electrodes reflecting lower steel production levels and the impact of the
COVID-19 pandemic on the economy. Prices achieved from our long-term agreements
were down approximately 4% in the three months ended June 30, 2020 compared to
the same period of 2019, due primarily to mix. The spot price of graphite
electrodes declined significantly in three months ended June 30, 2020 compared
to the same period of 2019. We also had a reduction in the resale of purchased
electrodes.
Cost of sales. We experienced a decrease in cost of sales from $197.0 million in
the three months ended June 30, 2019 , to $130.6 million in the three months
ended June 30, 2020 , primarily due to the lower sales volume of manufactured
electrodes, which reduced cost of sales by $51.0 million as well as a reduction
in resale of purchased electrodes. Additionally, cost of sales was lower due to
less usage of third party needle coke.
Selling and administrative expenses. Selling and administrative expenses
remained approximately flat from the three months ended June 30, 2020 as
compared to the same period of 2019.
Interest Expense. Interest expense decreased from $33.0 million in the three
months ended June 30, 2019 , to $20.9 million in the three months ended June 30,
2020 , primarily due to lower interest rates and lower average borrowings. During
the three months ended June 30, 2020 , we repaid $103.3 million of our term
loans. We realized a $3.3 million benefit to interest expense resulting from
gains on certain of these transactions in the three months ended June 30, 2020 .
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Provision for income taxes. The following table summarizes the expense for
income taxes:
For the Three Months Ended September 30,
2020 2019
(Dollars in thousands)
Tax expense $ 19,788 $ 37,767
Pretax income 112,564 234,135
Effective tax rates 17.6 % 16.1 %
The effective tax rate for the three months ended June 30, 2020 was 17.6%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates which is offset by the
net increase related to the U.S. taxation of global intangible low taxed income
("GILTI") and the Section 250 Deduction and Foreign Tax Credits ("FTC").
The effective tax rate for the three months ended June 30, 2019 was 16.1%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates.
Tax expense decreased from $37.8 million for the three months ended June 30,
2019 to $19.8 million for the three months ended June 30, 2020 . This change is
primarily related to the reduction in profits.
The Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30,
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 Six Months
Ended June 30, Increase/
2020 2019 Decrease % Change
(Dollars in thousands)
Net sales $ 599,364 $ 955,384 $ (356,020) (37) %
Cost of sales 269,517 392,571 (123,054) (31) %
Gross profit 329,847 562,813 (232,966) (41) %
Research and development 1,422 1,350 72 5 %
Selling and administrative expenses 30,933 30,620 313 1 %
Operating income 297,492 530,843 (233,351) (44) %
Other (income) expense (3,003) 1,330 (4,333) (326) %
Related party Tax Receivable Agreement
benefit (3,346) - (3,346) N/A
Interest expense 46,552 66,669 (20,117) (30) %
Interest income (1,489) (1,145) (344) 30 %
Income before provision for income taxes 258,778 463,989 (205,211) (44) %
Provision for income taxes 43,734 70,185 (26,451) (38) %
Net income $ 215,044 $ 393,804 $ (178,760) (45) %
Net sales. Net sales decreased by $356.0 million , or 37%, from $955.4 million in
the six months ended June 30, 2019 to $599.4 million in the six months ended
June 30, 2020 . This decrease was driven by a 28% decrease in sales volume of
manufactured electrodes in the six months ended June 30, 2020 compared to the
same period in 2019, reflecting lower steel production levels and the impact of
the COVID-19 pandemic on the economy. We also had a reduction in the resale of
purchased electrodes.
Cost of sales. Cost of sales decreased by $123.1 million , or 31%, from $392.6
million in the six months ended June 30, 2019 to $269.5 million in the six
months ended June 30, 2020 . This decrease was primarily due to the lower sales
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
volume of manufactured electrodes, which reduced costs of sales by $87.3
million , as well as a reduction in resale of purchased electrodes. Additionally,
cost of sales was lower due to less usage of third party needle coke.
Selling and administrative expenses. Selling and administrative expenses were
approximately flat for the six months ended June 30, 2020 compared to the six
months ended June 30, 2019 .
Other (income) expense. Other expense changed by $4.3 million , from expense of
$1.3 million in the six months ended June 30, 2019 to income of $3.0 million in
the six months ended June 30, 2020 . This change was primarily due to
advantageous non-cash foreign currency impacts on non-operating 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
pandemic.
Interest expense. Interest expense decreased by $20.1 million from $66.7 million
in the six months ended June 30, 2019 to $46.6 million in the same period of
2020, primarily due to lower interest rates and lower average borrowings. We
made repayments of $125 million on our term loans in the first quarter of 2019
and $225 million in the fourth quarter of 2019. During the six months ended
June 30, 2020 , we repaid $103.3 million of our term loans. We realized a $3.3
million benefit to interest expense resulting from gains on certain of these
transactions in the six months ended June 30, 2020 .
Provision for income taxes. The following table summarizes the expense for
income taxes:
For the Six Months Ended June 30,
2020 2019
(Dollars in thousands)
Tax expense $ 43,734 $ 70,185
Pre-tax income 258,778 463,989
Effective tax rates 16.9 % 15.1 %
The effective tax rate for the six months ended June 30, 2020 was 16.9%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, which was offset by a
net increase related to the U.S. taxation of GILTI and FTC .
The tax expense decreased from $70.2 million for the six months ended June 30,
2019 to $43.7 million for the six months ended June 30, 2020 primarily from the
decrease in earnings.
The effective tax rate for the six months ended June 30, 2019 was 15.1%. This
rate differed from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates.
GrafTech has considered the tax impact of COVID-19 legislation, including the
U.S. Coronavirus Aid, Relief and Economic Security (CARES) Act and has concluded
that there is no material tax impact in the second quarter of 2020. The Company
continues to monitor the tax effects of any legislative changes.
Effects of Changes in Currency Exchange Rates
When the currencies of non-U.S. countries in which we have a manufacturing
facility decline (or increase) in value relative to the U.S. dollar, this has
the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales
and other expenses with respect to those facilities. In certain countries in
which we have manufacturing facilities, and in certain export markets, we sell
in currencies other than the U.S. dollar. Accordingly, when these currencies
increase (or decline) in value relative to the U.S. dollar, this has the effect
of increasing (or reducing) net sales. The result of these effects is to
increase (or decrease) operating profit and net income.
Many of the non-U.S. countries in which we have a manufacturing facility have
been subject to significant economic and political changes, which have
significantly impacted currency exchange rates. We cannot predict changes in
currency exchange rates in the future or whether those changes will have net
positive or negative impacts on our net sales, cost of sales or net income.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 $0.3 million and $2.0
million for the three and six months ended June 30, 2020 compared to the same
period of 2019. The impact of these changes on our cost of sales was a decrease
of $1.2 million and $4.4 million for the three and six months ended June 30,
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 repayments, share repurchases and other
obligations. Disruptions in the U.S. and international financial markets could
adversely affect our liquidity and the cost and availability of financing to us
in the future.
We believe that we have adequate liquidity to meet our needs. As of June 30,
2020 , we had liquidity of $434.6 million , consisting of $246.9 million of
availability under our 2018 Revolving Facility (subject to continued compliance
with the financial covenants and representations) and cash and cash equivalents
of $187.7 million . We had long-term debt of $1,704.5 million and short-term debt
of $8.1 million as of June 30, 2020 . As of December 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
representations) and cash and cash equivalents of $80.9 million . We had
long-term debt of $1,812.7 million and short-term debt of $0.1 million as of
December 31, 2019 .
As of June 30, 2020 and December 31, 2019 , $95.1 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 $1.7 million and $0.8 million as of
June 30, 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 Cuts and Jobs Act (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.
We had availability under the 2018 Revolving Facility of $246.9 million as of
June 30, 2020 and December 31, 2019 , which consisted of the $250 million limit
reduced by $3.1 million of outstanding letters of credit.
On February 12, 2018 , we entered into the 2018 Credit Agreement, which provides
for the 2018 Revolving Facility and the 2018 Term Loan Facility. 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 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
an 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
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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 our 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 have repurchased 3,328,574 shares of common
stock for a total purchase price of $30.1 million under this program since
inception. There were no shares repurchased under this program during the three
months ended June 30, 2020 .
In April 2020 , as a result of the deteriorating economic environment, our Board
of Directors reduced our dividend rate 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. During the second quarter of 2020, we
repaid $103.3 million of our term loans. At the end of June 2020 , we entered
into several debt repurchase commitments totaling $8.0 million under our 2018
Term Loan Facility, which remained unsettled at the end of the month. These
commitments settled in July 2020 . In light of the recent economic downturn we
are now prioritizing balance sheet flexibility 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 six months ended June 30, 2020 , we paid $4.9 million to various
tax collecting agencies worldwide.
Potential uses of our liquidity include dividends, share repurchases, capital
expenditures, acquisitions, scheduled debt repayments, optional debt repayments
and other general purposes. An improving economy, while resulting in improved
results of operations, could increase our cash requirements to purchase
inventories, make capital expenditures and fund payables and other obligations
until increased accounts receivable are converted into cash. A downturn,
including the current downturn caused by the COVID-19 pandemic, could
significantly and negatively impact our results of operations and cash flows,
which, coupled with increased borrowings, could negatively impact our credit
ratings, our ability to comply with debt covenants, our ability to secure
additional financing and the cost of such financing, if available.
In order to seek to minimize our credit risks, we may reduce our sales of, or
refuse to sell (except for prepayment, cash on delivery or under letters of
credit or parent guarantees), our products to some customers and potential
customers. Our unrecovered trade receivables worldwide have not been material
during the last two years individually or in the aggregate.
We manage our capital expenditures by taking into account quality, plant
reliability, safety, environmental and regulatory requirements, prudent or
essential maintenance requirements, global economic conditions, available
capital resources, liquidity, long-term business strategy and return on invested
capital for the relevant expenditures, cost of capital and return on invested
capital of the Company as a whole and other factors.
Capital expenditures totaled $24.4 million in the six months ended June 30,
2020 . We previously reduced our planned capital expenditures for the full year
by approximately one-half to a level of $30-$35 million and we remain committed
to this goal. We are managing inventory levels to match demand. Due to timing of
purchases, inventory levels increased during the first quarter of 2020. 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.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Cash Flows
The following table summarizes our cash flow activities:
For the Six Months
Ended June 30,
2020 2019
(in millions)
Cash flow provided by (used in):
Operating activities $ 287.7 $ 359.0
Investing activities $ (24.3) $ (29.1)
Financing activities $ (155.7) $ (174.4)
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.
During the six months ended June 30, 2020 , changes in working capital resulted
in a net source of funds of $34.1 million , which was impacted by:
•net cash inflows in accounts receivable of $58.7 million from the decrease in
accounts receivable due to lower sales;
•net cash inflows of $6.1 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 $25.1 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 $52.9
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 six months ended June 30, 2020 included contributions to
pension and other benefit plans of $1.8 million , cash paid for interest of $46.1
million and taxes paid of $4.9 million .
During the six months ended June 30, 2019 , changes in working capital resulted
in a net use of funds of $102.5 million , which was impacted by:
•net cash outflows in accounts receivable of $65.1 million from the increase in
accounts receivable due to the timing of sales and collections, as shipments in
the second quarter of 2019 were weighted towards the latter part of the quarter;
•net cash outflows from increases in inventory of $16.1 million , due primarily
to higher priced raw materials;
•net cash inflows from the utilization of prepaid assets of $3.3 million ;
33
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
•net cash outflows from decreased income taxes payable of $27.6 million ,
resulting from required tax payments as our profitability has increased; and
•net cash inflows from increases in accounts payable and accruals of $2.2
million , due to the timing of payments.
Uses of cash in the six months ended June 30, 2019 included contributions to
pension and other benefit plans of $1.6 million , cash paid for interest of $62.8
million and taxes paid of $74.8 million .
Investing Activities
Net cash used in investing activities was $24.3 million during the six months
ended June 30, 2020 , resulting from capital expenditures.
Net cash used investing activities was $29.1 million during the six months ended
June 30, 2019 , resulting from capital expenditures.
Financing Activities
Net cash outflow from financing activities was $155.7 million during the six
months ended June 30, 2020 , which was the result of the repayment of $100.0
million on our Term Loans, $25.5 million of total dividends to stockholders and
$30.1 million of stock repurchases.
Net cash outflow from financing activities was $174.4 million during the six
months ended June 30, 2019 , which was the result of our $125.0 million payment
on our Term Loan debt and $49.4 million of total dividends to stockholders.
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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