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. 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. Our services and solutions we provide will position our customers and us for a better future. COVID-19 and Operational UpdateGrafTech continues to proactively manage through the COVID-19 crisis. Our executive-led COVID-19 response team meets three times per week to monitor the ongoing situation and respond as needed. Our plants have remained operational through the current pandemic and maintained a 98% on-time delivery rate. Our global footprint gives us the flexibility to move or adjust production if needed. We continue to focus on containing our costs and aligning production to current sales levels for the remainder of the year. We expect to meet our reduced full year capital expenditure estimate of approximately$35 million . Commercial UpdateGrafTech services customers at over 300 locations across the globe, all of which have been impacted by COVID-19. We are seeing a measured recovery in the global steel markets compared to the second quarter, with each region recovering at different rates, and anticipate this will have a positive influence on graphite electrode demand. In the third quarter, the global (ex-China ) steel market capacity utilization rate improved to over 60%. In theU.S. , the third quarter capacity utilization rate was approximately 64%. By late October, the capacity utilization rate in theU.S. steel market approached 70%. The commercial team has worked diligently to achieve solid results in the current environment. Year-to-date sales volumes through the third quarter were 98 thousand metric tons ("MT"), consisting of LTA volumes of 82 thousand MT and non-LTA volumes of 16 thousand MT. During the third quarter, our average price from LTAs declined slightly to approximately$9,300 per MT, reflecting the impacts of product mix, LTA modifications and other adjustments. Due to favorable mix in the quarter, the average price for our non-LTA business increased slightly to approximately$5,700 per MT. However, as anticipated, we believe the general spot price of graphite electrodes continued to trend lower during the third quarter. Given the continuing uncertainty caused by the pandemic and the macro-economic headwinds we and our customers face, we expect overall demand and pricing for our graphite electrodes to remain low for the remainder of 2020 as our customers continue to work through their existing graphite electrode inventories. The current market conditions are challenging for our customers, including those with LTAs, and we have some customers that are continuing to struggle to take their committed volumes. This is causing some non-performance and disputes, including a few arbitrations associated with, among other things, efforts to modify existing contracts. As such, we will continue to work to preserve our rights under the LTAs. We are working hard with our valued customers to develop mutually beneficial solutions and have successfully negotiated LTA modifications with several of these customers during the third quarter. We are able to provide near-term relief in exchange for additional contractual commitments going forward. We expect to continue to finalize more of these beneficial negotiations in the coming months. 24 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES Capital Structure and Capital Allocation During the third quarter, we reduced our debt by approximately$150 million . After the quarter end, we further reduced our debt by an additional$60 million , bringing 2020 debt reduction to$313 million through the end of October. We will continue to prioritize balance sheet flexibility and expect to use the majority of fourth quarter incremental free cash flow to reduce debt. Outlook For the remainder of 2020, we anticipate our full year LTA sales volumes to be above the midpoint of the expected range of 100 thousand - 115 thousand MT. We now expect our full year LTA revenue will be between$1,000 million and$1,080 million in 2020. With the LTA modifications and ongoing customer discussions, we are able to provide estimated shipments of graphite electrodes for the final two years of the initial term under our LTAs and for the years 2023 through 2024 as follows: 2021 2022 2023 through 2024 Estimated LTA volume(1) 98-108 95-105 35-45 Estimated LTA revenue(2)$925-$1,025 $910-$1,010 $350-$450 (3) (1) In thousands of metric tons (2) In millions (3) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs Key metrics used by management to measure performance In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance withU.S. generally accepted accounting principles ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our company. The "non-GAAP" financial measures consist of EBITDA and adjusted EBITDA, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. Key financial measures For the Three Months Ended For the Nine Months September 30, Ended September 30, (in thousands) 2020 2019 2020 2019 Net sales$ 286,987 $ 420,797 $ 886,351 $ 1,376,181 Net income 94,234 175,876 309,278 569,680 EBITDA (1) 150,960 242,026 483,634 802,569 Adjusted EBITDA (1) 153,105 245,454 483,408 813,673
(1) Non-GAAP financial measures; see below for information and a reconciliation of EBITDA and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key operating metrics
For the Three Months Ended For the Nine Months
September 30, Ended September 30,
(in thousands, except price data) 2020 2019 2020 2019
Sales volume (MT)(1) 33 40 98 130
Production volume (MT)(2) 32 40 98 136
Production capacity excluding St. Marys (MT)(3)(4) 48 48 150 150
Capacity utilization excluding St. Marys (3)(5) 67 % 83 % 65 % 91 %
Total production capacity (MT)(4)(6) 55 55 171 171
Total capacity utilization(5)(6) 58 % 73 % 57 % 80 %
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(1) Sales volume reflects only graphite electrodes manufactured by GrafTech .
(2) Production volume reflects graphite electrodes we produced during the
period.
(3) In the first quarter of 2018, our St. Marys facility began graphitizing a
limited amount of electrodes sourced from our Monterrey, Mexico facility.
(4) Production capacity reflects expected maximum production volume during the
period under normal operating conditions, standard product mix and expected
maintenance outage. Actual production may vary.
(5) Capacity utilization reflects production volume as a percentage of
production capacity.
(6) Includes graphite electrode facilities in Calais, France ; Monterrey, Mexico ;
Pamplona , Spain and St. Marys, Pennsylvania .
Non-GAAP financial measures
In addition to providing results that are determined in accordance with 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
adjustment, 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
adjustments;
•adjusted EBITDA does not reflect stock-based compensation or the non-cash
write-off of fixed assets; and
•other companies, including companies in our industry, may calculate EBITDA and
adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
In evaluating EBITDA and adjusted EBITDA, you should be aware that in the
future, we will incur expenses similar to the adjustments in 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 Three Months Ended For the Nine Months
September 30, Ended September 30,
2020 2019 2020 2019
(in thousands)
Net income $ 94,234 $ 175,876 $ 309,278 $ 569,680
Add:
Depreciation and amortization 16,241 15,357 45,074 46,387
Interest expense 22,474 31,803 69,026 98,472
Interest income (93) (1,765) (1,582) (2,910)
Income taxes 18,104 20,755 61,838 90,940
EBITDA 150,960 242,026 483,634 802,569
Adjustments:
Pension and OPEB plan expenses (1) 583 800 1,666 2,397
Initial and follow-on public offering and related
expenses (2) - 160 4 1,409
Non-cash loss (gain) on foreign currency
remeasurement (3) 798 (185) (441) 842
Stock-based compensation (4) 764 706 1,891 1,568
Non-cash fixed asset write-off (5) - 1,947 - 4,888
Related party Tax Receivable Agreement
adjustment(6) - - (3,346) -
Adjusted EBITDA $ 153,105 $ 245,454 $ 483,408 $ 813,673
(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 "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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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Results of Operations
The Three Months Ended September 30, 2020 Compared to the Three Months Ended
September 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
September 30, Increase/
2020 2019 Decrease % Change
(Dollars in thousands)
Net sales $ 286,987 $ 420,797 $ (133,810) (32) %
Cost of sales 131,862 178,497 (46,635) (26) %
Gross profit 155,125 242,300 (87,175) (36) %
Research and development 650 611 39 6 %
Selling and administrative expenses 19,062 15,708 3,354 21 %
Operating income 135,413 225,981 (90,568) (40) %
Other expense (income), net 694 (688) 1,382 (201) %
Interest expense 22,474 31,803 (9,329) (29) %
Interest income (93) (1,765) 1,672 (95) %
Income before provision for income taxes 112,338 196,631 (84,293) (43) %
Provision for income taxes 18,104 20,755 (2,651) (13) %
Net income $ 94,234 $ 175,876 $ (81,642) (46) %
Net sales. Net sales decreased from $420.8 million in the three months ended
September 30, 2019 to $287.0 million in the three months ended September 30,
2020 . Lower net sales reflect an 18% decrease in sales volume driven primarily
by the impact of COVID-19 on steel production levels and continued customer
inventory destocking. We realized lower average spot prices resulting from this
lower demand. Prices achieved from our long-term agreements ("LTAs") were also
lower in the three months ended September 30, 2020 as compared to the same
period of 2019 due primarily to mix, LTA modifications and other adjustments.
Cost of sales. We experienced a decrease in cost of sales from $178.5 million in
the three months ended September 30, 2019 to $131.9 million in the three months
ended September 30, 2020 , primarily due to the 18% decrease in sales volume of
manufactured electrodes. Additionally, cost of sales was lower due to less usage
of third-party needle coke.
Selling and administrative expenses. Selling and administrative expenses
increased from $15.7 million in the three months ended September 30, 2019 to
$19.1 million in the three months ended September 30, 2020 primarily due to
higher legal costs.
Interest expense. Interest expense decreased from $31.8 million in the three
months ended September 30, 2019 to $22.5 million in the three months ended
September 30, 2020 , primarily due to lower interest rates and lower average
borrowings. During the three months ended September 30, 2020 , we reduced our
term loan by $150.0 million . We realized a $0.8 million benefit to interest
expense resulting from gains on certain of these transactions in the three
months ended September 30, 2020 .
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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 $ 18,104 $ 20,755
Pretax income 112,338 196,631
Effective tax rates 16.1 % 10.6 %
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 which are 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 September 30, 2019 was 10.6%.
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 $20.8 million for the three months ended
September 30, 2019 to $18.1 million for the three months ended September 30,
2020 . This change is primarily related to the reduction in profits.
The Nine Months Ended September 30, 2020 Compared to the Nine Months Ended
September 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 Nine Months
Ended September 30, Increase/
2020 2019 Decrease % Change
(Dollars in thousands)
Net sales $ 886,351 $ 1,376,181 $ (489,830) (36) %
Cost of sales 401,379 571,068 (169,689) (30) %
Gross profit 484,972 805,113 (320,141) (40) %
Research and development 2,072 1,961 111 6 %
Selling and administrative expenses 49,995 46,328 3,667 8 %
Operating income 432,905 756,824 (323,919) (43) %
Other (income) expense (2,309) 642 (2,951) (460) %
Related party Tax Receivable Agreement benefit (3,346) - (3,346) N/A
Interest expense 69,026 98,472 (29,446) (30) %
Interest income (1,582) (2,910) 1,328 (46) %
Income before provision for income taxes 371,116 660,620 (289,504) (44) %
Provision for income taxes 61,838 90,940 (29,102) (32) %
Net income $ 309,278 $ 569,680 $ (260,402) (46) %
Net sales. Net sales decreased by $489.8 million , or 36%, from $1,376.2 million
in the nine months ended September 30, 2019 to $886.4 million in the nine months
ended September 30, 2020 . Lower net sales reflect a 25% decrease in sales volume
driven primarily by the impact of COVID-19 on steel production levels and
continued customer inventory destocking. Additionally, during the same period,
spot prices declined significantly and we experienced a reduction in the resale
of purchased electrodes.
Cost of sales. Cost of sales decreased by $169.7 million , or 30%, from $571.1
million in the nine months ended September 30, 2019 to $401.4 million in the
nine months ended September 30, 2020 . This decrease was primarily due to the
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
25% decrease in sales volume of manufactured electrodes, as well as less usage
of third-party needle coke. Additionally, cost of sales was lower due to a
reduction in the resale of purchased electrodes.
Selling and administrative expenses. Selling and administrative expenses
increased from $46.3 million in the nine months ended September 30, 2019 to
$50.0 million in the nine months ended September 30, 2020 primarily due to
increased legal costs.
Other (income) expense. Other expense changed by $3.0 million , from an expense
of $0.6 million in the nine months ended September 30, 2019 to income of $2.3
million in the nine months ended September 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 $29.4 million from $98.5 million
in the nine months ended September 30, 2019 to $69.0 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 nine months ended
September 30, 2020 , we reduced our term loan by $253 million . We realized a $3.8
million benefit to interest expense resulting from gains on certain of these
transactions in the nine months ended September 30, 2020 .
Provision for income taxes. The following table summarizes the expense for
income taxes:
For the Nine Months Ended September 30,
2020 2019
(Dollars in thousands)
Tax expense $ 61,838 $ 90,940
Pre-tax income 371,116 660,620
Effective tax rates 16.7 % 13.8 %
The effective tax rate for the nine months ended September 30, 2020 was 16.7%.
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 $90.9 million for the nine months ended
September 30, 2019 to $61.8 million for the nine months ended September 30, 2020
primarily from the decrease in earnings.
The effective tax rate for the nine months ended September 30, 2019 was 13.8%.
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. 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
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
exchange rates in the future or whether those changes will have net positive or
negative impacts on our net sales, cost of sales or net income.
The impact of these changes in the average exchange rates of other currencies
against the U.S. dollar on our net sales was an increase of $2.5 million and
$0.5 million for the three and nine months ended September 30, 2020 ,
respectively, compared to the same period of 2019. The impact of these changes
on our cost of sales was a decrease of $0.7 million and $5.0 million for the
three and nine months ended September 30, 2020 , respectively, 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
September 30, 2020 , we had liquidity of $405.7 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 $158.8 million . We had long-term debt of $1,564.4
million and short-term debt of $0.1 million as of September 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 September 30, 2020 and December 31, 2019 , $130.3 million and
$41.4 million , respectively, of our cash and cash equivalents were located
outside of the U.S. We repatriate funds from our foreign subsidiaries through
dividends. All of our subsidiaries face the customary statutory limitation that
distributed dividends do not exceed the amount of retained and current earnings.
In addition, for our subsidiary in South Africa , the South Africa Central Bank
requires that certain solvency and liquidity ratios remain above defined levels
after the dividend distribution, which historically has not materially affected
our ability to repatriate cash from this jurisdiction. The cash and cash
equivalents balances in South Africa were $0.6 million and $0.8 million as of
September 30, 2020 and December 31, 2019 , 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 (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
September 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,
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
payment and prepayment terms, representations and warranties and covenants. The
Incremental Term Loans mature on February 12, 2025 , the same date as the
existing term loans. GrafTech paid an upfront fee of 1.00% of the aggregate
principal amount of the Incremental Term Loans on the effective date of the
First Amendment. The proceeds of the Incremental Term Loans were used to repay,
in full, the $750 million of our existing debt to 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 4,333,259 shares of common
stock for a total purchase price of $40.9 million under this program since
inception. There were no shares repurchased under this program during the three
months ended September 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 $350 million on our 2018 Term Loan Facility in 2019. During the three
and nine months ended September 30, 2020 , we retired $149.7 million and $253.0
million of principal of our term loans, respectively. Subsequent to September
30, 2020 , we repaid an additional $60.0 million of our term loans. In light of
the recent economic downturn, we are now prioritizing balance sheet flexibility
and debt repayment. We anticipate using a majority of the cash flow that we
generate to repay debt, but we will continue to examine opportunities to
repurchase our common stock. As a result of government enacted COVID-19 relief
in a foreign jurisdiction, we were able to defer a tax payment of approximately
$50 million that was scheduled to be made in the first quarter of 2020 until the
fourth quarter of 2020. During the nine months ended September 30, 2020 , we paid
$31.9 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 $30.7 million in the nine months ended
September 30, 2020 . We previously reduced our planned capital expenditures for
the full year by approximately one-half to a level of approximately $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 decrease 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 Nine Months
Ended September 30,
2020 2019
(in millions)
Cash flow provided by (used in):
Operating activities $ 416.7 $ 584.8
Investing activities $ (30.6) $ (44.0)
Financing activities $ (307.6) $ (208.5)
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 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 contributions
to pension and other benefit plans of $5.3 million , cash paid for interest of
$68.0 million , payments under our Tax Receivable Agreement of $27.9 million and
taxes paid of $31.9 million .
During the nine months ended September 30, 2019 , changes in working capital
resulted in a net use of funds of $80.3 million , which was impacted by:
•net cash outflows in accounts receivable of $20.7 million from the increase in
accounts receivable due to the timing of sales and collections;
•net cash outflows from increases in inventory of $19.9 million , due primarily
to higher priced raw materials;
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
•net cash inflows from the utilization of prepaid assets of $5.7 million ;
•net cash outflows from decreased income taxes payable of $28.2 million ,
resulting from required tax payments as our profitability has increased; and
•net cash inflows from increases in accounts payable and accruals of $17.3
million , due to the timing of payments.
Uses of cash in the six months ended September 30, 2019 included contributions
to pension and other benefit plans of $2.3 million , cash paid for interest of
$93.6 million and taxes paid of $87.0 million .
Investing Activities
Net cash used in investing activities was $30.6 million during the nine months
ended September 30, 2020 , resulting from capital expenditures.
Net cash used in investing activities was $44.0 million during the nine months
ended September 30, 2019 , resulting from capital expenditures.
Financing Activities
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 Term Loans, $28.2 million of total dividends to stockholders and
$30.1 million of stock repurchases.
Net cash outflow from financing activities was $208.5 million during the nine
months ended September 30, 2019 , which was the result of our $125.0 million
payment on our Term Loan debt, $74.0 million of total dividends to stockholders
and $9.5 million of stock repurchases.
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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