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. This vertical integration allowsGrafTech to enter into longer term agreements with its customers. These agreements have a duration of more than 12 months and include pre-determined ranges of volumes and prices. This provides greater earnings stability and visibility forGrafTech and a committed, secure source of supply for our customers. The environmental and economic advantages of electric arc furnace steel production positions both that industry and the graphite electrode industry for continued long-term growth. We believeGrafTech's leadership position, strong cash flows, and advantaged low cost structure and vertical integration are sustainable competitive advantages. The services and solutions we provide will position our customers and us for a better future. Commercial Update and OutlookGrafTech reported strong sales volumes of 43 thousand MT in the third quarter of 2021, consisting of long-term agreement ("LTA") volumes of 28 thousand MT at an average approximate price of$9,500 per MT and non-LTA volumes of 15 thousand MT at an average approximate price of$4,600 per MT. The non-LTA prices for graphite electrodes delivered and recognized in revenue in the third quarter increased 12% over second quarter non-LTA pricing. The non-LTA sales price reflects a mix of annual agreements negotiated in the fourth quarter of 2020, quarterly agreements negotiated earlier in 2021 along with spot agreements. By volume, more than three quarters of third quarter non-LTA sales were at prices agreed to under annual and quarterly agreements, when graphite electrode prices were lower than they are currently, and the remainder at spot pricing. In the fourth quarter, we expect our non-LTA price for graphite electrodes delivered and recognized in revenue to be 7-9% higher than in the third quarter of 2021. In 2022, we expect our non-LTA pricing to be significantly higher than the second half of 2021 as market conditions have improved since we last negotiated annual pricing contracts in late 2020. We also expect some cost increases in the fourth quarter of 2021 and into 2022, driven by recent global cost pressures, particularly for third-party needle coke, energy, and freight. Production volumes in the third quarter of 2021 increased 22% compared to the third quarter of 2020 but were impacted sequentially by our annual planned major maintenance work at our two European facilities. In the third quarter of 2021, we introduced additional connecting pin production capabilities at ourSt Marys, Pennsylvania facility. Globally, steel market capacity utilization rates continue to be strong: Q3 2021 Q2 2021 Q3 2020 Global steel market (ex-China ) capacity utilization rates (1) 74% 75% 60% U.S. steel market capacity utilization rates (2) 85% 82% 64% 1 Source:World Steel Association and Metal Expert 2 Source:American Iron and Steel Institute The estimated shipments of graphite electrodes under our LTAs for 2021 have been updated from our prior estimates as follows: 2021 2022 2023 through 2024 Estimated LTA volume (thousands of 106-110 95-105 35-45 metric tons) Estimated LTA revenue (in millions)$1,000-$1,045 $910-$1,010 $350-$450 (1)
(1) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Capital Structure and Capital Allocation
As of September 30, 2021 , GrafTech had cash and cash equivalents of $87 million
and total debt of approximately $1.1 billion . We continue to make progress in
reducing our long-term debt, repaying $100 million in the third quarter, for a
total debt repayment of $300 million in the first nine months of 2021.
We repurchased 4.3 million shares in the third quarter for approximately $46
million under our existing open market share repurchase authorization.
For the remainder of 2021, we continue to expect our primary use of cash to be
debt repayment. Our capital expenditure range expectations are unchanged,
between $55 and $65 million . In addition, our Board of Directors has approved a
new $150 million open market stock repurchase program. The Company is now
authorized to repurchase up to $163 million in shares of the Company's common
stock, inclusive of the $13 million remaining under the prior stock repurchase
program as of the end of the third quarter of this year.
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated
Financial Statements in accordance with GAAP, we use certain other financial
measures and operating metrics to analyze the performance of our company. The
"non-GAAP" financial measures consist of EBITDA, adjusted EBITDA, adjusted net
income and adjusted EPS. which help us evaluate growth trends, establish
budgets, assess operational efficiencies and evaluate our overall financial
performance. The key operating metrics consist of sales volume, production
volume, production capacity and capacity utilization.
Key financial measures
For the Three Months Ended For the Nine Months
September 30, Ended September 30,
(in thousands, except per share data) 2021 2020 2021 2020
Net sales $ 347,348 $ 286,987 $ 982,495 $ 886,351
Net income $ 119,886 $ 94,234 $ 246,850 $ 309,278
Earnings per share(1) $ 0.45 $ 0.35 $ 0.92 $ 1.15
EBITDA(2) $ 173,021 $ 150,960 $ 394,763 $ 483,634
Adjusted net income(2) $ 119,038 $ 96,109 $ 333,405 $ 308,344
Adjusted earnings per share(1)(2) $ 0.45 $ 0.36 $ 1.25 $ 1.15
Adjusted EBITDA(2) $ 172,175 $ 153,105 $ 487,123 $ 483,408
(1) Earnings per share represents diluted earnings per share. Adjusted earnings
per share represents adjusted diluted earnings per share.
(2) Non-GAAP financial measures; see below for information and reconciliations
of EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS to net income,
the most directly comparable financial measure calculated and presented in
accordance with GAAP.
Key operating metrics
For the Three Months Ended For the Nine Months
September 30, Ended September 30,
(in thousands, except utilization) 2021 2020 2021 2020
Sales volume (MT)(1) 43 33 123 98
Production volume (MT)(2) 39 32 119 98
Production capacity excluding St. Marys (MT)(3)(4) 48 48 150 150
Capacity utilization excluding St. Marys (3)(5) 81 % 67 % 79 % 65 %
Total production capacity (MT)(4)(6) 55 55 171 171
Total capacity utilization(5)(6) 71 % 58 % 70 % 57 %
(1) Sales volume reflects only graphite electrodes manufactured by GrafTech .
(2) Production volume reflects graphite electrodes we produced during the
period.
(3) In the first quarter of 2018, our St. Marys, Pennsylvania 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, adjusted EBITDA, adjusted net income, and adjusted EPS are nonGAAP
financial measures. We define EBITDA, a nonGAAP financial measure, as net
income or loss plus interest expense, minus interest income, plus income taxes,
and depreciation and amortization. We define adjusted EBITDA as EBITDA adjusted
for any pension and other post employment benefit ("OPEB") plan expenses or
gains, public offerings and related expenses, noncash gains or losses from
foreign currency remeasurement of nonoperating assets and liabilities in our
foreign subsidiaries where the functional currency is the U.S. dollar, related
party tax receivable agreement, dated April 27, 2018 ("TRA") adjustments,
stock-based compensation, noncash fixed asset writeoffs and Change in Control
charges that were triggered as a result of the ownership of our largest
stockholder falling below 30% of our total outstanding shares. For purposes of
this section, a "Change in Control" occurred when Brookfield and any affiliates
thereof ceased to own stock of the Company that constitutes at least thirty
percent (30%) or thirty-five percent (35%), as applicable, of the total fair
market value or total voting power of the stock of the Company. Adjusted EBITDA
is the primary metric used by our management and our Board of Directors to
establish budgets and operational goals for managing our business and evaluating
our performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it
is useful to present to investors, because we believe that it facilitates
evaluation of our periodtoperiod operating performance by eliminating items
that are not operational in nature, allowing comparison of our recurring core
business operating results over multiple periods unaffected by differences in
capital structure, capital investment cycles and fixed asset base. In addition,
we believe adjusted EBITDA and similar measures are widely used by investors,
securities analysts, ratings agencies, and other parties in evaluating companies
in our industry as a measure of financial performance and debtservice
capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
•adjusted EBITDA does not reflect our cash expenditures for capital equipment or
other contractual commitments, including any capital expenditure requirements to
augment or replace our capital assets;
•adjusted EBITDA does not reflect the interest expense or the cash requirements
necessary to service interest or principal payments on our indebtedness;
•adjusted EBITDA does not reflect tax payments that may represent a reduction in
cash available to us;
•adjusted EBITDA does not reflect expenses relating to our pension and OPEB
plans;
•adjusted EBITDA does not reflect the noncash gains or losses from foreign
currency remeasurement of nonoperating assets and liabilities in our foreign
subsidiaries where the functional currency is the U.S. dollar;
•adjusted EBITDA does not reflect public offerings and related expenses;
•adjusted EBITDA does not reflect related party TRA adjustments;
•adjusted EBITDA does not reflect stock-based compensation or the noncash
writeoff of fixed assets;
•adjusted EBITDA does not reflect the Change in Control charges; and
•other companies, including companies in our industry, may calculate EBITDA and
adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
We define adjusted net income, a nonGAAP financial measure, as net income or
loss and excluding the items used to calculate adjusted EBITDA, less the tax
effect of those adjustments. We define adjusted EPS, a nonGAAP financial
measure, as adjusted net income divided by the weighted average of diluted
common shares outstanding during the period. We believe adjusted net income and
adjusted EPS are useful to present to investors because we believe that they
assist investors' understanding of the underlying operational profitability of
the Company.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In evaluating EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, you
should be aware that in the future, we will incur expenses similar to the
adjustments in the reconciliation below, other than change in control charges.
Our presentations of EBITDA, adjusted EBITDA, adjusted net income and adjusted
EPS should not be construed as suggesting that our future results will be
unaffected by these expenses or any unusual or nonrecurring items. When
evaluating our performance, you should consider EBITDA, adjusted EBITDA,
adjusted net income, and adjusted EPS alongside other measures of financial
performance and liquidity, including our net income, EPS and other GAAP
measures.
The following tables reconcile our non-GAAP key financial measures to the most
directly comparable GAAP measures:
Reconciliation of Net Income to Adjusted Net
Income
For the Three Months ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands, except per share data)
Net income $ 119,886 $
94,234
Diluted income per common share: Net income per share $ 0.45$ 0.35 $ 0.92$ 1.15 Weighted average shares outstanding 267,178,963 267,279,555 267,441,394 267,920,890 Net income$ 119,886 $ 94,234 $ 246,850 $ 309,278 Adjustments, pre-tax: Pension and OPEB plan expenses (1) 434 583 1,295 1,666 Public offerings and related expenses (2) - - 663 4 Non-cash loss (gain) on foreign currency remeasurement (3) (1,542) 798 365 (441) Stock-based compensation (4) 262 764 1,580 1,891 Non-cash fixed asset write-off (5) - - 313 - Related party Tax Receivable Agreement adjustment (6) - - 47 (3,346) Change in Control LTIP award (7) - - 73,384 - Change in control stock-based compensation acceleration (7) - - 14,713 - Total non-GAAP adjustments pre-tax (846) 2,145 92,360 (226) Income tax impact on non-GAAP adjustments 2 270 5,805 708 Adjusted net income$ 119,038 $ 96,109 $ 333,405 $ 308,344 (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 public offerings 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 theU.S. dollar. (4)Non-cash expense for stock-based compensation grants. (5)Non-cash write-off of fixed assets. (6)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. (7)In the second quarter of 2021, we incurred change in control charges as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our shares outstanding. 28 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Reconciliation of EPS to Adjusted EPS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
EPS $ 0.45 $ 0.35 $ 0.92 $ 1.15
Adjustments per share:
Pension and OPEB plan expenses (1) - - - 0.01
Public offerings and related expenses (2) - - - -
Non-cash gains and losses on foreign currency
remeasurement (3) - 0.01 - -
Stock-based compensation (4) - - 0.02 0.01
Non-cash fixed asset write-off (5) - - - -
Related party Tax Receivable Agreement adjustment
(6) - - - (0.02)
Change in control LTIP award (7) - - 0.27 -
Change in control stock-based compensation
acceleration (7) - - 0.06 -
Total non-GAAP adjustments pre-tax per share - 0.01 0.35 -
Income tax impact on non-GAAP adjustments per
share - - 0.02 -
Adjusted EPS $ 0.45 $ 0.36 $ 1.25 $ 1.15
(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 public
offerings and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of
non-operating assets and liabilities of our non-U.S. subsidiaries where the
functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash fixed asset write-off recorded for obsolete assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred Change in Control charges as a
result of the ownership of our largest shareholder, Brookfield, moving below 30%
of our total shares outstanding.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Net income $ 119,886 $ 94,234 $ 246,850 $ 309,278
Add:
Depreciation and amortization 15,584 16,241 48,415 45,074
Interest expense 16,048 22,474 54,209 69,026
Interest income (417) (93) (653) (1,582)
Income taxes 21,920 18,104 45,942 61,838
EBITDA 173,021 150,960 394,763 483,634
Adjustments:
Pension and OPEB plan expenses (1) 434 583 1,295 1,666
Public offerings and related expenses (2) - - 663 4
Non-cash loss (gain) on foreign currency
remeasurement (3) (1,542) 798 365 (441)
Stock-based compensation (4) 262 764 1,580 1,891
Non-cash fixed asset write-off (5) - - 313 -
Related party Tax Receivable Agreement adjustment
(6) - - 47 (3,346)
Change in Control LTIP award (7) - - 73,384 -
Change in control stock-based compensation
acceleration (7) - - 14,713 -
Adjusted EBITDA $ 172,175 $ 153,105 $ 487,123 $ 483,408
(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 public
offerings and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of
non-operating assets and liabilities of our non-U.S. subsidiaries where the
functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash write-off of fixed assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred change in control charges as a
result of the ownership of our largest shareholder, Brookfield, moving below 30%
of our shares outstanding.
Key operating metrics
In addition to measures of financial performance presented in accordance with
GAAP, we use certain operating metrics to analyze the performance of our
company. The key operating metrics consist of sales volume, production volume,
production capacity and capacity utilization. These metrics align with
management's assessment of our revenue performance and profit margin and will
help investors understand the factors that drive our profitability.
Sales volume reflects only graphite electrodes manufactured by GrafTech . For a
discussion of our revenue recognition policy, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Critical Accounting
Policies-Revenue Recognition" in our Annual Report on Form 10-K. Sales volume
helps investors understand the factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period.
Production capacity reflects expected maximum production volume during the
period under normal operating conditions, standard product mix and expected
maintenance downtime. Capacity utilization reflects production volume as a
percentage of production capacity. Production volume, production capacity and
capacity utilization help us understand the efficiency of our production,
evaluate cost of sales and consider how to approach our contract initiative.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Results of Operations
The Three Months Ended September 30, 2021 Compared to the Three Months Ended
September 30, 2020
The tables presented in our period-over-period comparisons summarize our
Condensed Consolidated Statements of Operations and illustrate key financial
indicators used to assess the consolidated financial results. Throughout this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Quarterly Report on Form 10-Q ("MD&A"), insignificant
changes may be deemed not meaningful and are generally excluded from the
discussion.
For the Three Months Ended
September 30, Increase/
2021 2020 Decrease % Change
(Dollars in thousands)
Net sales $ 347,348 $ 286,987 $ 60,361 21 %
Cost of sales 170,286 131,862 38,424 29 %
Gross profit 177,062 155,125 21,937 14 %
Research and development 983 650 333 51 %
Selling and administrative expenses 19,006 19,062 (56) - %
Operating income 157,073 135,413 21,660 16 %
Other (income) expense, net (364) 694 (1,058) (152) %
Interest expense 16,048 22,474 (6,426) (29) %
Interest income (417) (93) (324) 348 %
Income before provision for income taxes 141,806 112,338 29,468 26 %
Provision for income taxes 21,920 18,104 3,816 21 %
Net income $ 119,886 $ 94,234 $ 25,652 27 %
Net sales. Net sales increased from $287.0 million in the three months ended
September 30, 2020 to $347.3 million in the three months ended September 30,
2021 . The third quarter of 2020 was impacted by market conditions, including the
COVID-19 pandemic. Stronger demand for our products in the third quarter of 2021
resulted in a 30% increase in sales volume compared to the same period of 2020.
Partially offsetting the increased volume was a decrease in average realized
sales prices. This decrease in prices reflects an increased percentage of
non-LTA sales at prices lower than our LTA contracted prices.
Cost of sales. We experienced an increase in cost of sales from $131.9 million
in the three months ended September 30, 2020 to $170.3 million in the three
months ended September 30, 2021 , primarily due to the 30% increase in sales
volume of manufactured electrodes. We expect some cost increases in the fourth
quarter of 2021 and into 2022, driven by recent global cost pressures,
particularly for third-party needle coke, energy and freight.
Selling and administrative expenses. Selling and administrative expenses were
flat from $19.1 million in the three months ended September 30, 2020 to
$19.0 million in the three months ended September 30, 2021 .
Interest expense. Interest expense decreased from $22.5 million in the three
months ended September 30, 2020 to $16.0 million in the three months ended
September 30, 2021 , primarily due to lower interest rates and lower average
borrowings.
Provision for income taxes. The following table summarizes the expense for
income taxes:
For the Three Months ended September 30,
2021 2020
(Dollars in thousands)
Tax expense $ 21,920 $ 18,104
Pre-tax income 141,806 112,338
Effective tax rates 15.5 % 16.1 %
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The effective tax rate for the three months ended September 30, 2021 was 15.5%.
This rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, which was partially
offset by the net combined impact related to the U.S. taxation of global
intangible low taxed income ("GILTI") and Foreign Tax Credits ("FTCs").
The effective tax rate for the three months ended September 30, 2020 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 increased from $18.1 million for the three months ended
September 30, 2020 to $21.9 million for the three months ended September 30 ,
2021.This change is primarily related to an increase in pre-tax income,
partially offset by a decrease in effective tax rate due to the mix of worldwide
earnings from various countries taxed at different rates and U.S. taxation of
GILTI.
The Nine Months Ended September 30, 2021 Compared to the Nine Months Ended
September 30, 2020
The tables presented in our period-over-period comparisons summarize our
Condensed Consolidated Statements of Operations and illustrate key financial
indicators used to assess the consolidated financial results. Throughout our
MD&A, insignificant changes may be deemed not meaningful and are generally
excluded from the discussion.
For the Nine Months
Ended September 30, Increase/
2021 2020 Decrease % Change
(Dollars in thousands)
Net sales $ 982,495 $ 886,351 $ 96,144 11 %
Cost of sales 518,549 401,379 117,170 29 %
Gross profit 463,946 484,972 (21,026) (4) %
Research and development 2,970 2,072 898 43 %
Selling and administrative expenses 114,942 49,995 64,947 130 %
Operating income 346,034 432,905 (86,871) (20) %
Other income (361) (2,309) 1,948 (84) %
Related party Tax Receivable Agreement expense
(benefit) 47 (3,346) 3,393 N/A
Interest expense 54,209 69,026 (14,817) (21) %
Interest income (653) (1,582) (929) 59 %
Income before provision for income taxes 292,792 371,116 (78,324) (21) %
Provision for income taxes 45,942 61,838 (15,896) (26) %
Net income $ 246,850 $ 309,278 $ (62,428) (20) %
Net sales. Net sales increased by $96.1 million , or 11%, from $886.4 million in
the nine months ended September 30, 2020 to $982.5 million in the nine months
ended September 30, 2021 . Higher net sales reflect a 26% increase in sales
volume driven primarily by improved customer demand, as the same period of 2020
was impacted by market conditions, including the COVID-19 pandemic. Partially
offsetting the increased volume was a decrease in average realized sales prices.
This decrease in prices reflects an increased percentage of non-LTA sales at
prices lower than our LTA contracted prices.
Cost of sales. Cost of sales increased by $117.2 million , or 29%, from $401.4
million in the nine months ended September 30, 2020 to $518.5 million in the
nine months ended September 30, 2021 . This increase was primarily due to the 26%
increase in sales volume of manufactured electrodes. Additionally, cost of sales
for the nine months ended September 30, 2021 was impacted by a one-time
long-term incentive plan ("LTIP") charge of $30.7 million resulting from a
Change in Control after our largest stockholder's ownership of our common stock
was reduced below 30% of our outstanding common stock. We expect some cost
increases in the fourth quarter of 2021 and into 2022, driven by recent global
cost pressures, particularly for third-party needle coke, energy and freight.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Selling and administrative expenses. Selling and administrative expenses
increased from $50.0 million in the nine months ended September 30, 2020 to
$114.9 million in the nine months ended September 30, 2021 primarily due to the
aforementioned Change in Control resulting in $42.6 million of one-time LTIP
expense. Additionally, the Change in Control resulted in $12.9 million of
one-time accelerated stock based compensation expense.
Other income. Other income decreased from $2.3 million in the nine months ended
September 30, 2020 to $0.4 in the nine months ended September 30, 2021 . This
change was primarily due to advantageous non-cash foreign currency impacts on
non-operating assets and liabilities in the nine months ended September 30, 2020
that did not recur in the same period of 2021.
Related party Tax Receivable Agreement expense (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 market conditions and the COVID-19 pandemic.
Interest expense. Interest expense decreased by $14.8 million from $69.0 million
in the nine months ended September 30, 2020 to $54.2 million in the same period
of 2021, primarily due to lower interest rates and lower average borrowings.
Partially offsetting these decreases was an increase of $4.3 million in
amortization of deferred financing fees and original issue discounts in the nine
months ended September 30, 2021 resulting from prepayments on our term loan.
Additionally, 2021 interest expense was negatively impacted by the absence of a
$3.8 million benefit that occurred in 2020 resulting from discounts on debt
repurchases.
Provision for income taxes. The following table summarizes the expense for
income taxes:
For the Nine Months Ended September 30,
2021 2020
(Dollars in thousands)
Tax expense $ 45,942 $ 61,838
Pre-tax income 292,792 371,116
Effective tax rates 15.7 % 16.7 %
The effective tax rate for the nine months ended September 30, 2021 was 15.7%.
This rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, partially offset by
the net combined impact related to the U.S. taxation of GILTI and FTCs.
For the nine months ended September 30, 2020 , the effective tax rate of 16.7%
differs from the U.S. statutory rate of 21% primarily due to worldwide earnings
from various countries taxed at different rates.
The tax expense decreased from $61.8 million for the nine months ended
September 30, 2020 to $45.9 million for the nine months ended September 30,
2021 . This change is primarily related to the reduction in pre-tax income and
the decrease in effective tax rate due to the mix of worldwide earnings from
various countries taxed at different rates and the U.S. taxation of GILTI.
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. 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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PART I (CONT'D)
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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 $0.4 million and an
increase of $9.1 million for the three and nine months ended September 30, 2021 ,
respectively, compared to the same period of 2020. The impact of these changes
on our cost of sales was an increase of $1.9 million and $13.5 million for the
three and nine months ended September 30, 2021 , respectively, compared to the
same period of 2020.
We have in the past and may in the future use various financial instruments to
manage certain exposures to risks caused by currency exchange rate changes, as
described under "Part I, Item 3-Quantitative and Qualitative Disclosures about
Market Risk."
Liquidity and Capital Resources
Our sources of funds have consisted principally of cash flow from operations and
debt, including our credit facilities (subject to continued compliance with the
financial covenants and representations). Our uses of those funds (other than
for operations) have consisted principally of dividends, capital expenditures,
scheduled debt repayments, optional debt repayments, share repurchases and other
obligations. Disruptions in the U.S. and international financial markets could
adversely affect our liquidity and the cost and availability of financing to us
in the future.
We believe that we have adequate liquidity to meet our needs. As of
September 30, 2021 , we had liquidity of $333.4 million , consisting of
$246.7 million of availability under our 2018 Revolving Credit Facility (as
defined below) (subject to continued compliance with the financial covenants and
representations) and cash and cash equivalents of $86.7 million . We had
long-term debt of $1,127.4 million and short-term debt of $0.1 million as of
September 30, 2021 . As of December 31, 2020 , we had liquidity of $391.8 million
consisting of $246.4 million available on our 2018 Revolving Credit Facility
(subject to continued compliance with the financial covenants and
representations) and cash and cash equivalents of $145.4 million . We had
long-term debt of $1,420.0 million and short-term debt of $0.1 million as of
December 31, 2020 .
As of September 30, 2021 and December 31, 2020 , $64.3 million and
$114.6 million , respectively, of our cash and cash equivalents were located
outside of the U.S. We repatriate funds from our foreign subsidiaries through
dividends. All of our subsidiaries face the customary statutory limitation that
distributed dividends cannot exceed the amount of retained and current earnings.
In addition, for our subsidiary in South Africa , the South Africa Central Bank
requires that certain solvency and liquidity ratios remain above defined levels
after the dividend distribution, which historically has not materially affected
our ability to repatriate cash from this jurisdiction. The cash and cash
equivalents balances in South Africa were $2.5 million and $1.6 million as of
September 30, 2021 and December 31, 2020 , respectively. Upon repatriation to the
U.S. , the foreign source portion of dividends we receive from our foreign
subsidiaries is no longer subject to U.S. federal income tax as a result of The
Tax Cuts and Jobs Act of 2017.
Cash 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 LTAs with our
customers.
Debt Structure
We had availability under the 2018 Revolving Credit Facility of $246.7 million
as of September 30, 2021 and $246.4 million as of December 31, 2020 , which
consisted of the $250 million limit reduced by $3.3 million and $3.6 million of
outstanding letters of credit, respectively.
In February 2018 , the Company entered into a credit agreement (the "2018 Credit
Agreement"), which provides for (i) a $2,250 million senior secured term
facility (the "2018 Term Loan Facility") after giving effect to the June 2018
amendment (the "First Amendment") that increased the aggregate principal amount
of the 2018 Term Loan Facility from $1,500 million to $2,250 million and (ii) a
$250 million senior secured revolving credit facility (the "2018 Revolving
Credit Facility" and, together with the 2018 Term Loan Facility, the "Senior
Secured Credit Facilities"). GrafTech Finance Inc. ("GrafTech Finance") is the
sole borrower under the 2018 Term Loan Facility while GrafTech Finance, GrafTech
Switzerland SA ("Swissco") and GrafTech Luxembourg II S.à.r.l. ("Luxembourg
Holdco " and, together with GrafTech Finance and Swissco, the "Co-Borrowers") are
co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan
Facility and the 2018 Revolving Credit Facility mature on February 12, 2025 and
February 12, 2023 , respectively.
The 2018 Term Loan Facility bears interest, at our option, at a rate equal to
either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement),
plus an applicable margin equal to 3.00% per annum following an amendment in
February 2021 (the "Second Amendment") that decreased the Applicable Rate (as
defined in the 2018 Credit Agreement) by
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit
Agreement), plus an applicable margin equal to 2.00% per annum following the
Second Amendment, in each case with one step down of 25 basis points based on
achievement of certain public ratings of the 2018 Term Loan Facility. The Second
Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018
Term Loan Facility.
The 2018 Revolving Credit Facility bears interest, at our option, at a 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, we are required to pay a quarterly commitment fee on the
unused commitments under the 2018 Revolving Credit Facility in an amount equal
to 0.25% per annum.
The Senior Secured Credit Facilities are guaranteed by each of our domestic
subsidiaries, subject to certain customary exceptions, and by GrafTech
Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an
indirect wholly owned subsidiary of GrafTech , Luxembourg HoldCo, and Swissco
(collectively, the "Guarantors") with respect to all obligations under the 2018
Credit Agreement of each of our foreign subsidiaries that is a Controlled
Foreign Corporation (within the meaning of Section 956 of the Internal Revenue
Code of 1986, as amended from time to time (the "Code")).
All obligations under the 2018 Credit Agreement are secured, subject to certain
exceptions, by: (i) a pledge of all of the equity securities of each domestic
Guarantor and of each other direct, wholly owned domestic subsidiary of GrafTech
and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of
each subsidiary that is a Controlled Foreign Corporation (within the meaning of
Section 956 of the Code), and (iii) security interests in, and mortgages on,
personal property and material real property of each domestic Guarantor, subject
to permitted liens and certain exceptions specified in the 2018 Credit
Agreement. The obligations of each foreign subsidiary of GrafTech that is a
Controlled Foreign Corporation under the 2018 Revolving Credit Facility are
secured by (i) a pledge of all of the equity securities of each Guarantor that
is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary
of any Guarantor that is a Controlled Foreign Corporation , and (ii) security
interests in certain receivables and personal property of each Guarantor that is
a Controlled Foreign Corporation , subject to permitted liens and certain
exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loan Facility amortizes at a rate of $112.5 million a year payable
in equal quarterly installments, with the remainder due at maturity. The
Co-Borrowers are permitted to make voluntary prepayments at any time without
premium or penalty. GrafTech Finance is required to make prepayments under the
2018 Term Loan Facility (without payment of a premium) with (i) net cash
proceeds from non-ordinary course asset sales (subject to customary reinvestment
rights and other customary exceptions and exclusions), and (ii) commencing with
the Company's fiscal year ended December 31, 2019 , 75% of Excess Cash Flow (as
defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of
Excess Cash Flow based on achievement of a senior secured first lien net
leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00
and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly
amortization payments of the 2018 Term Loan Facility during any calendar year
reduce, on a dollar-for-dollar basis, the amount of the required Excess Cash
Flow prepayment for such calendar year, and the aggregate amount of Excess Cash
Flow prepayments for any calendar year reduce subsequent quarterly amortization
payments of the 2018 Term Loan Facility as directed by GrafTech Finance. As of
September 30, 2021 , we have satisfied all amortization requirements through
prepayments through the maturity date.
The 2018 Credit Agreement contains customary representations and warranties and
customary affirmative and negative covenants applicable to GrafTech and
restricted subsidiaries, including, among other things, restrictions on
indebtedness, liens, investments, fundamental changes, dispositions, and
dividends and other distributions. The 2018 Credit Agreement contains a
financial covenant that requires GrafTech to maintain a senior secured first
lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal
amount of borrowings under the 2018 Revolving Credit Facility and 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.
2020 Senior Notes
On December 22, 2020 , GrafTech Finance issued $500 million aggregate principal
amount of the 4.628% senior secured notes due 2028 (the "2020 Senior Notes") at
an issue price of 100% of the principal amount thereof in a private offering to
qualified institutional buyers in accordance with Rule 144A under the Securities
Act and to non-U.S. persons outside the United States under Regulation S under
the Securities Act.
The 2020 Senior Notes were issued pursuant to the indenture among GrafTech
Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the
Company named therein as guarantors and U.S. Bank National Association , as
trustee and notes collateral agent (the "Indenture").
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The 2020 Senior Notes are guaranteed on a senior secured basis by the Company
and all of its existing and future direct and indirect U.S. subsidiaries that
guarantee, or borrow under, the credit facilities under its 2018 Credit
Agreement. The 2020 Senior Notes are secured on a pari passu basis by the
collateral securing the term loans under the 2018 Credit Agreement. GrafTech
Finance, the Company and the other guarantors granted a security interest in
such collateral, consisting of substantially all of their respective assets, as
security for the obligations of GrafTech Finance, the Company and the other
guarantors under the 2020 Senior Notes and the Indenture pursuant to a
collateral agreement, dated as of December 22, 2020 (the "Collateral
Agreement"), among GrafTech Finance, the Company, the other subsidiaries of the
Company named therein as grantors and U.S. Bank National Association , as
collateral agent.
The 2020 Senior Notes bear interest at the rate of 4.625% per annum, which
accrues from December 22, 2020 and is payable in arrears on June 15 and December
15 of each year, commencing on June 15, 2021 . The 2020 Senior Notes will mature
on December 15, 2028 , unless earlier redeemed or repurchased, and are subject to
the terms and conditions set forth in the Indenture.
GrafTech Finance may redeem some or all of the 2020 Senior Notes at the
redemption prices and on the terms specified in the Indenture. If the Company or
GrafTech Finance experiences specific kinds of changes in control or the Company
or any of its restricted subsidiaries sells certain of its assets, then GrafTech
Finance must offer to repurchase the 2020 Senior Notes on the terms set forth in
the Indenture.
The Indenture contains certain covenants that, among other things, limit the
Company's ability, and the ability of certain of its subsidiaries, to incur or
guarantee additional indebtedness or issue preferred stock, pay distributions
on, redeem or repurchase capital stock or redeem or repurchase subordinated
debt, incur or suffer to exist liens securing indebtedness, make certain
investments, engage in certain transactions with affiliates, consummate certain
asset sales and effect a consolidation or merger, or sell, transfer, lease or
otherwise dispose of all or substantially all assets. The Indenture contains
events of default customary for agreements of its type (with customary grace
periods, as applicable) and provides that, upon the occurrence of an event of
default arising from certain events of bankruptcy or insolvency with respect to
the Company or GrafTech Finance, all outstanding 2020 Senior Notes will become
due and payable immediately without further action or notice. If any other type
of event of default occurs and is continuing, then the trustee or the holders of
at least 30% in principal amount of the then outstanding 2020 Senior Notes may
declare all of the Senior Notes to be due and payable immediately.
The entirety of the 2020 Senior Notes proceeds was used to pay down a portion of
our 2018 Term Loans.
Uses of Liquidity
On July 30, 2019 , our Board of Directors authorized a program to repurchase up
to $100 million of our outstanding common stock. We may purchase shares from
time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18
plans. The amount and timing of repurchases are subject to a variety of factors
including liquidity, stock price, applicable legal requirements, other business
objectives and market conditions. We repurchased 4,293,924 shares of common
stock for a total purchase price of $46.2 million under this program during the
nine months ended September 30, 2021 . The Company had $12.8 million remaining
under this program as of September 30, 2021 . Additionally, our Board of
Directors has approved a new $150 million open market stock repurchase program.
We currently pay a quarterly dividend of $0.01 per share, or $0.04 on an
annualized basis. We review our capital structure with the Board of Directors on
an ongoing basis. There can be no assurance that we will pay dividends in the
future in these amounts or at all. Our Board of Directors may change the timing
and amount of any future dividend payments or eliminate the payment of future
dividends in its sole discretion, without any prior notice to our stockholders.
Our ability to pay dividends will depend upon many factors, including our
financial position and liquidity, results of operations, legal requirements,
restrictions that may be imposed by the terms of our current and future credit
facilities and other debt obligations and other factors deemed relevant by our
Board of Directors.
During 2020, we reduced our long-term debt principal by $400 million . During the
nine months ended September 30, 2021 , we repaid an additional $300 million of
principal of our 2018 Term Loans. For the remainder of 2021, we continue to
expect our primary use of cash to be debt repayment. Our capital expenditure
range expectations for 2021 are unchanged, between $55 and $65 million .
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 any potential resurgence of
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
During the second quarter of 2021, the Company paid out $61.5 million under its
LTIP resulting from a Change in Control provision upon Brookfield's ownership of
the Company's common stock falling below 30% of our total outstanding shares,
which occurred in the second quarter of 2021. We paid an additional $5.3 million
related to payroll taxes in the third quarter of 2021 and the remaining $6.6
million related to payroll taxes will be paid in subsequent quarters. For
details of the LTIP, see Note 7 "Contingencies" to the Notes to Condensed
Consolidated Financial Statements.
We manage our capital expenditures by taking into account quality, plant
reliability, safety, environmental and regulatory requirements, prudent or
essential maintenance requirements, global economic conditions, available
capital resources, liquidity, long-term business strategy and return on invested
capital for the relevant expenditures, cost of capital and return on invested
capital of the Company as a whole and other factors. Capital expenditures
totaled $40.4 million in the nine months ended September 30, 2021 .
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 Credit
Facility, to the extent available.
Cash Flows
The following table summarizes our cash flow activities:
For the Nine Months
Ended September 30,
2021 2020
(in millions)
Cash flow provided by (used in):
Operating activities $ 343.0 $ 416.7
Investing activities $ (40.1) $ (30.6)
Financing activities $ (360.8) $ (307.6)
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, loan modification charges 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 nine months ended September 30, 2021 , changes in working capital
resulted in a net source of funds of $47.2 million , which was impacted by:
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
•net cash outflows in accounts receivable of $3.5 million from the increase in
accounts receivable due to the timing of sales;
•net cash outflows due to increased inventory of $7.2 million resulting from
higher costs and quantities on hand;
•net cash outflows due to increased prepaid expense and other current assets of
$17.7 million resulting primarily from the timing of refunds of value-added
taxes in certain foreign jurisdictions;
•net cash outflows from decreased income taxes payable of $2.4 million resulting
from tax payments, partially offset by 2021 income tax accruals;
•net cash inflows from increases in accounts payable and accruals of $71.7
million , due to increased raw material purchases; and
•net cash inflows from increases in interest payable of $6.2 million , due to the
timing of interest payments on the 2020 Senior Notes.
Uses of cash in the nine months ended September 30, 2021 included payments under
our LTIP of $66.7 million , payments under the TRA of $21.8 million , cash taxes
paid of $51.4 million , cash paid for interest of $38.3 million , and
contributions to pension and other benefit plans of $3.6 million .
During the nine months ended September 30, 2020 , changes in working capital
resulted in a net source of funds of $85.1 million , which was impacted by:
•net cash inflows in accounts receivable of $78.4 million from the decrease in
accounts receivable due to lower sales;
•net cash inflows in inventory of $10.4 million from our efforts to reduce
inventory levels and lower production levels;
•net cash inflows of $5.4 million from the decrease in other current assets
primarily due to value-added tax refunds received from foreign governments;
•net cash inflows from increased income taxes payable of $16.0 million resulting
from our ability to defer approximately $50.0 million of 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 $25.1
million , due to lower purchases of third-party needle coke and payments.
Uses of cash in the nine months ended September 30, 2020 included payments under
the TRA of $27.9 million , cash paid for interest of $68.0 million and taxes paid
of $31.9 million , and contributions to pension and other benefit plans of $5.3
million .
Investing Activities
Net cash used in investing activities was $40.1 million during the nine months
ended September 30, 2021 , resulting primarily from capital expenditures.
Net cash used in investing activities was $30.6 million during the nine months
ended September 30, 2020 , resulting from capital expenditures.
Financing Activities
Net cash outflow from financing activities was $360.8 million during the nine
months ended September 30, 2021 , which was the result of the repayment of $300.0
million of principal on our 2018 Term Loan Facility, common stock repurchases of
$42.4 million , taxes paid related to stock awards vesting of $4.1 million , $3.1
million of debt issuance and modification costs and $8.0 million of total
dividends to stockholders.
Net cash outflow from financing activities was $307.6 million during the nine
months ended September 30, 2020 , which was the result of the repayment of $249.2
million on our 2018 Term Loan Facility, $28.2 million of total dividends to
stockholders and $30.1 million of stock repurchases.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2021
and we expect to continue to do so in the future. These transactions include
ongoing obligations under the TRA, Stockholders Rights Agreement and
Registration Rights Agreement, each with Brookfield.
Recent Accounting Pronouncements
We discuss recently adopted accounting standards in Note 1, "Organization and
Summary of Significant Accounting Policies" of the Notes to Condensed
Consolidated Financial Statements.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 4, "Debt and
Liquidity" of the Notes to Condensed Consolidated Financial Statements.
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