GRAFTECH INTERNATIONAL LTD. The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the accompanying notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Discussion and analysis regarding our financial condition and results of operations for 2019 as compared to 2018 is included in Item 7 of our Annual Report on Form 10-K for the year-endedDecember 31, 2019 , filed with theSEC onFebruary 21, 2020 . Information in this section is intended to assist the reader in obtaining an understanding of our Consolidated Financial Statements, the changes in certain key items in those financial statements from year-to-year, the primary factors that accounted for those changes, any known trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as how certain accounting principles affect our Consolidated Financial Statements. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See "Special Note Regarding Forward-Looking Statements." Our actual results could differ materially from those forward-looking statements as a result of many factors, including those discussed in "Risk Factors" and elsewhere in this Form 10-K. Overview We are a leading manufacturer of high quality graphite electrode products essential to the production of EAF steel and other ferrous and nonferrous metals. We believe that we have the most competitive portfolio of lowcost UHP graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. Between 1984 and 2011, EAF steelmaking was the fastestgrowing segment of the steel sector, with production increasing at an average rate of 3.5% per year, based on WSA data. Historically, EAF steel production has grown faster than the overall steel market due to the greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature of EAF steelmaking. This trend was partially reversed between 2011 and 2015 due to global steel production overcapacity driven largely by Chinese BOF steel production. Beginning in 2016, efforts by the Chinese government to restructureChina's domestic steel industry have led to limits on BOF steel production and lower export levels, and developed economies, which typically have much larger EAF steel industries, have instituted a number of trade policies in support of domestic steel producers. In response to this increased demand, we modified our commercial strategy and executed long-term takeorpay contracts with our customers. Since 2000, EAF production has grown at an average rate of 3.2%. We service customers at over 300 locations across the globe, all of which have been impacted by the COVID-19 pandemic during 2020. In the second half of 2020, we began to see a measured recovery in the global steel markets compared to the second quarter of 2020, with each region recovering at different rates, and anticipate this will have a positive influence on graphite electrode demand. In the fourth quarter of 2020, both the global (ex-China ) andU.S. steel market capacity utilization rates improved to over 72%. By lateFebruary 2021 , the capacity utilization rate in theU.S. steel market was approximately 77%. The commercial team has worked diligently in 2020 to achieve solid results in the current environment. Full year 2020 sales volumes were 135,000 MT, consisting of long-term agreement ("LTA") volumes of 113,000 MT and non-LTA volumes of 22,000 MT. During the fourth quarter of 2020, our average price from LTAs was approximately$9,600 per MT and our average price for non-LTA business was approximately$4,900 per MT. Market prices for graphite electrodes declined throughout 2020, including through the fourth quarter and into the early part of the first quarter of 2021. There is a lag between the time we negotiate price for non-LTA sales and when our electrodes are delivered and recognized in revenue. We estimate that our non-LTA price for electrodes delivered and recognized in revenue for the first six weeks of 2021 averaged approximately$4,200 per MT. Given this impact, for the first half of 2021 we anticipate earnings per share and adjusted EBITDA will decline by high single digits, on a percentage basis, compared to the first half of 2020. We believe market prices for graphite electrodes are now improving and expect this to positively impact our financial results beginning in the second half of 2021. During the challenging market conditions in 2020, we were able to work with our valued customers to develop mutually beneficial solutions to their challenges, including volume commitments. We are pleased to have successfully negotiated LTA modifications with many of these customers. We also continue to work to preserve our rights under the LTAs in a few arbitrations that arose from some LTA non-performance and other disputes during the year. 39 --------------------------------------------------------------------------------
COVID-19 and operational update
We continue to proactively manage through the COVID-19 crisis to support the health and safety of our team. Our plants have remained operational and maintained a 97% on-time delivery rate in the fourth quarter of 2020. Our global footprint gives us the flexibility to move or adjust production if needed. Capital structure and capital allocation As ofDecember 31, 2020 , we had cash and cash equivalents of$145 million and total debt of approximately$1.4 billion . During 2020, capital allocation included$400 million of debt repayment,$36 million of capital expenditures,$31 million of dividend payments, and$30 million for share repurchases. In 2021, we expect our primary use of cash to continue to be debt repayment. We expect 2021 full year capital expenditures to range between$55 and$65 million . OnDecember 22, 2020 , we issued our$500 million aggregate principal amount of 2020 Senior Notes. The proceeds of the 2020 Senior Notes were used to repay a portion of our secured 2018 Term Loans dueFebruary 2025 under the 2018 Credit Agreement . Industry conditions The graphite electrode industry has historically followed the growth of the EAF steel industry and, to a lesser extent, the steel industry as a whole, which has been highly cyclical and affected significantly by general economic conditions. Historically, EAF steel production has grown faster than the overall steel market due to the greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature of EAF steelmaking. Increased demand for petroleum needle coke in 2018 and 2019 led to pricing increases in those years. Needle coke prices began to retreat in the second half of 2019 and continued to decline over the course of 2020. Graphite electrodes have typically been priced at a spread to petroleum needle coke. We believe that our substantial vertical integration into petroleum needle coke through our ownership of Seadrift provides a significant cost advantage relative to our competitors. We currently anticipate utilizing all of our needle coke internally, minimizing third-party purchases. The impact of the COVID-19 pandemic on global steel production and corresponding graphite electrode demand, along with elevated graphite electrode inventories among EAF steel producers, caused market softness in 2020. As a result, our graphite electrode sales volumes decreased in 2020. We expect conditions to improve later in 2021.
Outlook
Our estimated shipments of graphite electrodes for the final two years of the
initial term under our LTAs and for the years 2023 through 2024 are 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 MT
(2) In millions
(3) Includes expected termination fees from a few customers that have failed to
meet certain obligations under their LTAs
Components of results of operations
Net sales
Net sales reflect sales of our products, including graphite electrodes and
associated byproducts. Several factors affect net sales in any period,
including general economic conditions, competitive conditions, customer
inventory levels, scheduled plant shutdowns by customers, national vacation
practices, changes in customer production schedules in response to seasonal
changes in energy costs, weather conditions, strikes and work stoppages at
customer plants and changes in customer order patterns including those in
response to the announcement of price increases or price adjustments.
Revenue is recognized when a customer obtains control of promised goods. The
amount of revenue recognized reflects the consideration to which the Company
expects to be entitled to receive in exchange for these goods. See Note 2
"Revenue
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from Contracts with Customers" to the Consolidated Financial Statements for more
information. Our first quarter is historically the weakest sales quarter.
Cost of sales
Cost of sales includes the costs associated with products invoiced during the
period as well as noninventoried manufacturing overhead costs and outbound
transportation costs. Cost of sales includes all costs incurred at our
production facilities to make products saleable, such as raw materials, energy
costs, direct labor and indirect labor and facilities costs, including
purchasing and receiving costs, plant management, inspection costs, product
engineering and internal transfer costs. In addition, all depreciation
associated with assets used to produce products and make them saleable is
included in cost of sales. Direct labor costs consist of salaries, benefits and
other personnelrelated costs for employees engaged in the manufacturing of our
products.
Inventory valuation
Inventories are stated at the lower of cost or market. Cost is principally
determined using the "firstin, firstout" ("FIFO") and average cost, which
approximates FIFO, methods. Elements of cost in inventory include raw materials,
energy costs, direct labor, manufacturing overhead and depreciation of the
manufacturing fixed assets. We allocate fixed production overheads to the costs
of conversion based on normal capacity of the production facilities. We
recognize abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) as current period charges. Market, or net
realizable value, is the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal and
transportation.
Research and development
We conduct our R&D both independently and in conjunction with our strategic
suppliers, customers and others. Expenditures relating to the development of new
products and processes, including improvements to existing products, are
expensed as incurred.
Selling and administrative expenses
Selling and administrative expenses include salaries, benefits and other
personnel related costs for employees engaged in sales and marketing, customer
technical services, engineering, finance, information technology, human
resources and executive management. Other costs include outside legal and
accounting fees, risk management (insurance), global operational excellence,
global supply chain, inhouse legal, sharebased compensation and certain other
administrative and global resources costs. Our "marktomarket adjustment"
refers to our accounting policy regarding pension and other post-employment
benefit ("OPEB") plans, where we immediately recognize the change in the fair
value of plan assets and net actuarial gains and losses annually in the fourth
quarter of each year.
Other expense (income)
Other expense (income) consists primarily of foreign currency impacts on
nonoperating assets and liabilities and miscellaneous income and expense.
Related party Tax Receivable Agreement (benefit) expense
Related party Tax Receivable Agreement (benefit) expense represents our expense
associated with Brookfield's right, as sole pre-IPO stockholder, to receive
future payments from us for 85% of the amount of cash savings, if any, in U.S.
federal income tax and Swiss tax that we and our subsidiaries realize as a
result of the utilization of certain tax assets attributable to periods prior to
our IPO.
Interest expense
Interest expense consists primarily of interest expense on our 2018 Term Loan
Facility, 2018 Credit Revolving Facility, 2020 Senior Notes, accretion of the
fair value adjustment, amortization of debt issuance costs and accretion of
original issue discounts.
Income (loss) from discontinued operations
As of June 30, 2016 , the Engineered Solutions segment qualified for reporting as
discontinued operations, and the disposition of the segment was substantially
complete by the end of the third quarter of 2017. All results are reported as
gain or loss from discontinued operations, net of tax.
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Effects of changes in currency exchange rates
When the currencies of nonU.S. countries in which we have a manufacturing
facility decline (or increase) in value relative to the U.S. dollar, this has
the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales
and other expenses with respect to those facilities. In certain countries in
which we have manufacturing facilities, and in certain export markets, we sell
in currencies other than the U.S. dollar. Accordingly, when these currencies
increase (or decline) in value relative to the U.S. dollar, this has the effect
of increasing (or reducing) net sales. The result of these effects is to
increase (or decrease) operating profit and net income.
Many of the non-U.S. countries in which we have a manufacturing facility have
been subject to significant economic and political changes, which have
significantly impacted currency exchange rates. We cannot predict changes in
currency exchange rates in the future or whether those changes will have net
positive or negative impacts on our net sales, cost of sales or net income.
The impact of these changes in the average exchange rates of other currencies
against the U.S. dollar on our net sales was an increase of $3.6 million for the
year ended December 31, 2020 , a decrease of $6.9 million for the year ended
December 31, 2019 , and an increase of $10.5 million for the year ended December
31, 2018 .
The impact of these changes in the average exchange rates of other currencies
against the U.S. dollar on our cost of sales was decreases of $4.9 million and
$9.1 million for the years ended December 31, 2020 and 2019, respectively, and
an increase of $3.6 million for the year ended December 31, 2018 .
As part of our cash management, we also have intercompany loans between our
subsidiaries. These loans are deemed to be temporary and, as a result,
remeasurement gains and losses on these loans are recorded as currency gains or
losses in other income (expense), net, on the Consolidated Statements of
Operations.
We have in the past and may in the future use various financial instruments to
manage certain exposures to risks caused by currency exchange rate changes, as
described under "Quantitative and Qualitative Disclosures about Market Risks".
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated
Financial Statements in accordance with GAAP (as defined below), we use certain
other financial measures and operating metrics to analyze the performance of our
company. The "nonGAAP" financial measures consist of EBITDA from continuing
operations and adjusted EBITDA from continuing operations, which help us
evaluate growth trends, establish budgets, assess operational efficiencies and
evaluate our overall financial performance. The key operating metrics consist of
sales volume, production volume, production capacity and capacity utilization.
Key financial measures
For the year ended December 31,
(in thousands) 2020 2019 2018
Net sales $ 1,224,361 $ 1,790,793 $ 1,895,910
Net income $ 434,374 $ 744,602 $ 854,219
EBITDA from continuing operations(1) $ 669,332 $
1,027,268
Adjusted EBITDA from continuing operations(1)
(1) See below for more information and a reconciliation of EBITDA from continuing operations and adjusted EBITDA from continuing operations to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key operating metrics
In addition to measures of financial performance presented in accordance with
GAAP, we use certain operating metrics to analyze the performance of our
company. The key operating metrics consist of sales volume, production volume,
production capacity and capacity utilization. These metrics align with
management's assessment of our revenue performance and profit margin, and will
help investors understand the factors that drive our profitability.
Sales volume reflects the total volume of graphite electrodes sold for which
revenue has been recognized during the period. For a discussion of our revenue
recognition policy, see "-Critical accounting policies-Revenue recognition" in
this section. Sales volume helps investors understand the factors that drive our
net sales.
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--------------------------------------------------------------------------------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.
For the year ended December 31,
(in thousands) 2020 2019 2018
Sales volume (MT)(1) 135 171 176
Production volume (MT)(2) 134 177 179
Production capacity excluding St. Marys (MT)(3)(4) 202 202 180
Capacity utilization excluding St. Marys(3)(5) 66 % 88 % 99 %
Total production capacity(4)(6) 230 230 208
Total capacity utilization(5)(6) 58 % 77 % 86 %
(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
generally accepted accounting principles in the United States ("GAAP"), we have
provided certain financial measures that are not in accordance with GAAP. EBITDA
from continuing operations and adjusted EBITDA from continuing operations are
nonGAAP financial measures. We define EBITDA from continuing operations, a
nonGAAP financial measure, as net income or loss plus interest expense, minus
interest income, plus income taxes, and depreciation and amortization. We define
adjusted EBITDA from continuing operations as EBITDA from continuing operations
plus any pension and OPEB plan expenses, initial and follow-on public offering
and related expenses, noncash gains or losses from foreign currency
remeasurement of nonoperating assets and liabilities in our foreign
subsidiaries where the functional currency is the U.S. dollar, related party Tax
Receivable Agreement (as defined below) adjustments, stock-based compensation,
and noncash fixed asset writeoffs. Adjusted EBITDA from continuing operations
is the primary metric used by our management and our Board of Directors to
establish budgets and operational goals for managing our business and evaluating
our performance.
We monitor adjusted EBITDA from continuing operations as a supplement to our
GAAP measures, and believe it is useful to present to investors, because we
believe that it facilitates evaluation of our periodtoperiod operating
performance by eliminating items that are not operational in nature, allowing
comparison of our recurring core business operating results over multiple
periods unaffected by differences in capital structure, capital investment
cycles and fixed asset base. In addition, we believe adjusted EBITDA from
continuing operations and similar measures are widely used by investors,
securities analysts, ratings agencies, and other parties in evaluating companies
in our industry as a measure of financial performance and debtservice
capabilities. We also monitor the ratio of total debt to adjusted EBITDA from
continuing operations, because we believe it is a useful and widely used way to
assess our leverage.
Our use of adjusted EBITDA from continuing operations has limitations as an
analytical tool, and you should not consider it in isolation or as a substitute
for analysis of our results as reported under GAAP. Some of these limitations
are:
•adjusted EBITDA from continuing operations does not reflect changes in, or cash
requirements for, our working capital needs;
•adjusted EBITDA from continuing operations does not reflect our cash
expenditures for capital equipment or other contractual commitments, including
any capital expenditure requirements to augment or replace our capital assets;
•adjusted EBITDA from continuing operations does not reflect the interest
expense or the cash requirements necessary to service interest or principal
payments on our indebtedness;
•adjusted EBITDA from continuing operations does not reflect tax payments that
may represent a reduction in cash available to us;
•adjusted EBITDA from continuing operations does not reflect expenses relating
to our pension and OPEB plans;
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•adjusted EBITDA from continuing operations 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 from continuing operations does not reflect initial and
follow-on public offering and related expenses;
•adjusted EBITDA from continuing operations does not reflect related party Tax
Receivable Agreement adjustments;
•adjusted EBITDA from continuing operations does not reflect stock-based
compensation or the noncash writeoff of fixed assets; and
•other companies, including companies in our industry, may calculate EBITDA from
continuing operations and adjusted EBITDA from continuing operations
differently, which reduces its usefulness as a comparative measure.
In evaluating EBITDA from continuing operations and adjusted EBITDA from
continuing operations, you should be aware that in the future, we will incur
expenses similar to the adjustments in the reconciliation presented elsewhere in
this Annual Report. Our presentations of EBITDA from continuing operations and
adjusted EBITDA from continuing operations should not be construed as suggesting
that our future results will be unaffected by these expenses or any unusual or
nonrecurring items. When evaluating our performance, you should consider EBITDA
from continuing operations and adjusted EBITDA from continuing operations
alongside other financial performance measures, including our net income and
other GAAP measures.
The following table reconciles our non-GAAP key financial measures to the most
directly comparable GAAP measures:
For the year ended December 31,
(in thousands) 2020 2019 2018
Net income (loss) $ 434,374 $ 744,602 $ 854,219
Add:
Discontinued operations - - (331)
Depreciation and amortization 62,963 61,819 66,413
Interest expense 98,074 127,331 135,061
Interest income (1,750) (4,709) (1,657)
Income taxes 75,671 98,225 48,920
EBITDA from continuing operations $ 669,332 $ 1,027,268 $ 1,102,625
Adjustments:
Pension and OPEB plan expenses(1) 6,096 6,727 3,893
Initial and follow-on public offerings and related expenses(2)
264 2,056 5,173
Noncash loss on foreign currency remeasurement(3) 1,297 1,784 818
Stock-based compensation(4) 2,669 2,143 1,152
Noncash fixed asset writeoff(5) 378 4,888 4,882
Related party Tax Receivable Agreement (benefit)
expense(6) (21,090) 3,393 86,478
Adjusted EBITDA from continuing operations $ 658,946 (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 theU.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. 44 -------------------------------------------------------------------------------- Customer base We are a global company and sell our products in every major geographic market. Sales of these products to buyers outsidethe United States accounted for approximately 79%, 77% and 78% of our net sales in 2020, 2019 and 2018, respectively. In 2020, seven of our ten largest customers were based inEurope , two inthe United States , and one inBrazil . However, seven of our ten largest customers are multi-national operations. The following table summarizes information as to our operations in different geographical areas: For the year ended December 31, (in thousands) 2020 2019 2018 Net sales: United States 260,867 403,916 429,599 Americas (excluding the United States) 187,779 348,670 367,561 Asia Pacific 127,415 172,439 131,578 Europe, Middle East, Africa 648,300 865,768 967,172 Total$ 1,224,361 $ 1,790,793 $ 1,895,910 In 2020, no customer accounted for 10% of our net sales, nor do we believe any customer poses a significant concentration of risk, as sales to one customer could be replaced by demand from other customers. Results of operations Results of operations for 2020 as compared to 2019 The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our Management Discussion and Analysis ("MD&A"), insignificant changes may be deemed not meaningful and are generally excluded from the discussion. For the Year Ended December 31, Increase/ (in thousands) 2020 2019 Decrease % Change Net sales$ 1,224,361 $ 1,790,793 $ (566,432) (32) % Cost of sales 563,864 750,390 (186,526) (25) % Gross profit 660,497 1,040,403 (379,906) (37) % Research and development 3,975 2,684 1,291 48 % Selling and administrative expenses 67,913 63,674 4,239 7 % Operating income 588,609 974,045 (385,436) (40) % Other expense (income), net 3,330 5,203 (1,873) (36) % Related party Tax Receivable Agreement (21,090) 3,393 (24,483) N/A (benefit) expense Interest expense 98,074 127,331 (29,257) (23) % Interest income (1,750) (4,709) (2,959) 63 % Income before provision for income taxes 510,045 842,827 (326,864) (39) % Provision for income taxes 75,671 98,225 (22,554) (23) % Net income $ 434,374$ 744,602 $ (310,228) (42) % Net sales. Net sales decreased by$566.4 million , or 32%, from$1.8 billion in 2019 to$1.2 billion in 2020. This decrease was primarily driven by a 21% decrease in sales volume ofGrafTech manufactured electrodes and decreased pricing for our products both driven by lower customer demand as a result of the COVID-19 pandemic and prolonged customer destocking taking place for the majority of 2020. The current market for graphite electrodes continues to be competitive, as our industry lags behind the improving fundamentals in the steel industry. If the strength in the steel industry continues, we would expect market conditions for our products to improve later in 2021. 45 -------------------------------------------------------------------------------- Cost of sales. Cost of sales decreased by$186.5 million , or 25%, from$750.4 million in 2019 to$563.9 million in 2020. This decrease was primarily the result of the lower sales volume and decreased usage of third-party needle coke as we progressed through 2020. Selling and administrative expenses. Selling and administrative expenses increased by$4.2 million , or 7%, from$63.7 million in 2019 to$67.9 million in 2020 due to increased legal expenses, partially offset by lower bad debt expense in 2020. Other expense (income), net. Other expense decreased by$1.9 million , from$5.2 million in 2019 to$3.3 million in 2020. This decrease was primarily due to advantageous non-cash foreign currency impacts on non-operating assets and liabilities. Related party Tax Receivable Agreement (benefit) expense. Related party Tax Receivable Agreement (benefit) expense decreased from an expense of$3.4 million in 2019 to a benefit of$21.1 million in 2020 as a result of revisedU.S. income estimates affecting the future usage of ourU.S. tax attributes which are required to be reimbursed to Brookfield under the Tax Receivable Agreement. Interest expense. Interest expense decreased by$29.3 million , or 23%, from$127.3 million in 2019 to$98.1 million in 2020, primarily due to a decreased average term loan outstanding as we repaid$400.0 million of our term loan during 2020 as well as benefiting from lower interest rates. Partially offsetting the increase were the impacts of$3.2 million of accelerated accretion of an original issue discount and$5.2 million of accelerated amortization of the debt issuance costs. Provision for income taxes. The following table summarizes the provision for income taxes in 2020 and 2019: For the Year Ended For the Year Ended December 31, 2020 December 31, 2019 Income tax expense $ 75,671 $ 98,225 Income from continuing operations before provision for income taxes $ 510,045 $ 842,827 Effective income tax rates 14.8 % 11.7 % The effective tax rate for the year endedDecember 31, 2020 was 14.8% and differs from theU.S. statutory tax rate of 21% primarily due to worldwide earnings from various countries taxed at different rates and a portion ofU.S. income being exempt fromU.S. taxation as a result of the income qualifying for the foreign-derived intangible income deduction. As ofDecember 31, 2020 , the balance of our valuation allowance against deferred tax assets was$12.8 million and does not result in, or limit the Company's ability to utilize these tax assets in the future. We expect the effective tax rate in 2021 to be approximately 14-18%. The tax expense changed from$98.2 million , with an effective tax rate of 11.7% for the year endedDecember 31, 2019 to a$75.7 million with an 14.8% effective rate for the year endedDecember 31, 2020 . This increase in the effective tax rate is primarily due to enacted tax rate changes in European jurisdictions. Effects of inflation We incur costs inthe United States and each of the nonU.S. countries in which we have a manufacturing facility. In general, our results of operations, cash flows and financial condition are affected by the effects of inflation on our costs incurred in each of these countries. Currency translation and transactions We translate the assets and liabilities of our nonU.S. subsidiaries intoU.S. dollars for consolidation and reporting purposes in accordance with theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 830, Foreign Currency Matters. Foreign currency translation adjustments are generally recorded as part of stockholders' equity and identified as part of accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as their operations are sold or substantially or completely liquidated. We account for our Russian, Swiss, Luxembourg,United Kingdom (the "U.K.") and Mexican subsidiaries using theU.S. dollar as the functional currency, as sales and purchases are predominantlyU.S. dollardenominated. Our remaining subsidiaries use their local currency as their functional currency. 46 -------------------------------------------------------------------------------- We also record foreign currency transaction gains and losses from nonpermanent intercompany balances as part of cost of sales and other (income) expense, net. Significant changes in currency exchange rates impacting us are described under "-Effects of changes in currency exchange rates" and "-Results of operations" in this section. 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 theU.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future. We believe that we have adequate liquidity to meet our needs. As ofDecember 31, 2020 , we had liquidity of$391.8 million , consisting of$246.4 million of availability under our 2018 Revolving 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 ofDecember 31, 2020 . As ofDecember 31, 2019 , we had liquidity of$327.8 million , consisting of$246.9 million available under our 2018 Revolving Facility 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 ofDecember 31, 2019 . As ofDecember 31, 2020 and 2019,$114.6 million and$41.4 million , respectively, of our cash and cash equivalents were located outside of theU.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 inSouth Africa , theSouth Africa Central Bank imposes that certain solvency and liquidity ratios remain above defined levels after the dividend distribution, which historically has not materially affected our ability to repatriate cash from this jurisdiction. The cash and cash equivalents balances inSouth Africa were$1.6 million and$0.8 million as ofDecember 31, 2020 andDecember 31, 2019 , respectively. Upon repatriation tothe United States , the foreign source portion of dividends we receive from our foreign subsidiaries is no longer subject toU.S. federal income tax as a result of the Tax Act. Cash flow and plans to manage liquidity. Our cash flow typically fluctuates significantly between quarters due to various factors. These factors include customer order patterns, fluctuations in working capital requirements, timing of tax payments, timing of capital expenditures, acquisitions, divestitures and other factors. We had positive cash flow from operating activities during 2020, 2019 and 2018. Although the global economic environment experienced significant swings in these periods, our working capital management and costcontrol initiatives allowed us to remain operating cashflow positive in both times of declining and improving operating results. Cash from operations is expected to remain at positive sustained levels due to the predictable earnings generated by our long-term take-or-pay contracts with our customers. As ofDecember 31, 2020 , we had total availability under 2018 Revolving Facility of$246.4 million after giving effect to$3.6 million of letters of credit. As ofDecember 31, 2019 , we had$3.1 million of letters of credit, for a total availability of$246.9 million under the 2018 Revolving Facility. OnFebruary 12, 2018 , we entered into the 2018 Credit Agreement, which provides for the 2018 Revolving Credit Facility and the 2018 Term Loan Facility. OnFebruary 12, 2018 , the Issuer 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 previous credit agreement and the previously outstanding senior notes and accrued interest relating to those borrowings and the senior notes, declare and pay a dividend of$1,112.0 million to Brookfield, pay fees and expenses incurred in connection therewith and for other general corporate purposes. OnApril 19, 2018 , we declared a dividend in the form of a promissory note in favor of Brookfield. The$750 million promissory note was conditioned upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (each as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the promissory note and (iii) the satisfaction of the conditions described in (i) and (ii) above occurring within 60 days from the dividend record date. Upon publication of our first quarterly report on Form 10-Q, these conditions were met and, as a result, the promissory note became payable. The promissory note had a maturity of eight years from the date of issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined in the promissory note) plus an applicable margin equal to 4.50% per annum, with an additional 2.00% per annum starting from the third anniversary from the date of issuance. We were permitted to make voluntary 47 -------------------------------------------------------------------------------- prepayments at any time without premium or penalty. All obligations under the promissory note were unsecured and guaranteed by all of our existing and future domestic wholly-owned subsidiaries that guarantee, or are borrowers under, the Senior Secured Credit Facilities. No funds were lent or otherwise contributed to us by Brookfield in connection with the promissory note. As a result, we received no consideration in connection with its issuance. As described below, the promissory note was repaid, in full, onJune 15, 2018 . OnApril 19, 2018 , we declared a$160 million cash dividend payable to Brookfield, the sole pre-IPO stockholder. Payment of this dividend was conditional upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the payment of the dividend and (iii) the payment occurring within 60 days from the dividend record date. The conditions of this dividend were met upon filing of our first quarter report on Form 10-Q and the dividend was paid onMay 8, 2018 . OnJune 15, 2018 ,GrafTech entered into the First Amendment to its 2018 Credit Agreement (the "First Amendment"). The First Amendment amends the 2018 Credit Agreement to provide for an additional$750 million in aggregate principal amount of incremental term loans (the "Incremental Term Loans") to the Issuer. The Incremental Term Loans increase the aggregate principal amount of term loans incurred by the Issuer under the 2018 Credit Agreement from$1,500 million to$2,250 million . The Incremental Term Loans have the same terms as those applicable to the existing term loans under the 2018 Credit Agreement, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature onFebruary 12, 2025 , the same date as the existing term loans. We paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment. The proceeds of the Incremental Term Loans were used to repay, in full, the$750 million in principal outstanding under the promissory note. OnAugust 13, 2018 , the Company repurchased 11,688,311 of our common stock directly from Brookfield. These shares were retired upon repurchase. The price per share paid by the Company was equal to the price at which the underwriters purchased the shares from Brookfield in Brookfield'sAugust 2018 public secondary offering of 23,000,000 shares of our common stock, net of underwriting commissions and discounts. We funded the share repurchase from cash on hand. OnJuly 30, 2019 , our Board of Directors authorized a program to repurchase up to$100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. As ofDecember 31, 2019 , we had repurchased 1,004,685 shares of common stock totaling$10.9 million under this program. The Company had$89.1 million remaining under this program as ofDecember 31, 2019 , and$59.0 million remaining as ofDecember 31, 2020 . OnDecember 5, 2019 , the Company announced two separate transactions. The first was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares of GTI common stock at a price of$13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, the Company entered into a share repurchase agreement with Brookfield to repurchase$250 million of stock from Brookfield at the arm's-length price of$13.125 set by the competitive bidding process of the secondary block trade. As a result, we repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%. OnDecember 22, 2020 , GrafTech Finance issued$500 million aggregate principal amount of 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 of 1933 (the "Securities Act") and to non-U.S. persons outsidethe United States under Regulation S under the Securities Act. The 2020 Senior Notes were issued pursuant to an indenture, dated as ofDecember 22, 2020 (the "Indenture"), among GrafTech Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the Company named therein as guarantors andU.S. Bank National Association , as trustee and notes collateral agent. The proceeds of the 2020 Senior Notes were used to pay down a portion of our 2018 Term Loans. We repaid an additional$400 million on our 2018 Term Loan Facility in 2020 and$350 million in 2019. Subsequent toDecember 31, 2020 , we repaid an additional$150.0 million of 2018 Term Loans Facility. 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. OnFebruary 17, 2021 , the Company entered into a second amendment ("Second Amendment") to the 2018 Credit Agreement to, among other things, (a) decrease the Applicable Rate (as defined in the Credit Agreement) with respect to any Initial Term Loan (as defined in the Credit Agreement) by 0.50% for each pricing level, (b) decrease the interest rate floor for all Initial Term Loans to 0.50%, (c) add certain technical provisions with respect to the impact ofEuropean Union bail-in 48 -------------------------------------------------------------------------------- banking legislation on liabilities of certain non-U.S. financial institutions, and (d) add certain technical provisions in connection with future replacement of the LIBO Rate (as defined in the Credit Agreement). As a result of the Second Amendment and the combined effect of the reduction in the interest rate margin and the reduction in the interest rate floor, the interest rate on the Initial Term Loan has been reduced by 1.0% per year. Prior toApril 2020 , we had paid a quarterly cash dividend of$0.085 per share, or an aggregate of$0.34 per share on an annualized basis. Additionally, onDecember 31, 2018 , we paid a special dividend of$0.70 per share totaling$203.4 million . InApril 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 per share 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. 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, longterm business strategy and return on invested capital for the relevant expenditures, cost of capital and return on invested capital of the Company as a whole among other factors. Capital expenditures totaled$36.1 million in 2020. We anticipate capital expenditures between$55 and$65 million in 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. Related Party Transactions We have engaged in transactions with affiliates or related parties during 2019 and 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. InNovember 2019 , we amended the stockholders rights agreement with Brookfield regarding compensation for the Brookfield designated directors. InDecember 2019 , in conjunction with a secondary block trade by Brookfield pursuant to Rule 144 under the Securities Act, we repurchased approximately$250 million of common stock directly from Brookfield at the arm's-length price determined by the competitive bidding process in the secondary block trade. This resulted in 19,047,619 shares of common stock repurchased at a price of$13.125 per share, reducing total shares outstanding by approximately 7%. 49 --------------------------------------------------------------------------------
Cash flows
The following table summarizes our cash flow activities:
For the Year Ended December 31,
2020 2019
(Dollars in millions)
Cash flow provided by (used in):
Operating activities $ 563.6 $ 805.3
Investing activities (35.7) (63.9)
Financing activities (463.7) (709.6)
Net change in cash and cash equivalents 64,267 31,801
Operating activities
Cash flow provided by operating activities represents cash receipts and cash
disbursements related to all of our activities other than investing and
financing activities. Operating cash flow is derived by adjusting net income
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.
In the year ended December 31, 2020 , changes in working capital resulted in a
net source of funds of $86.4 million which was impacted by:
•net cash inflows in accounts receivable of $63.6 million from the decrease in
accounts receivable due to lower sales;
•source of funds from decreases in inventory of $44.6 million from our efforts
to reduce inventory due to the lower demand environment;
•use of funds of $12.4 million resulting from a decrease in income taxes payable
driven primarily by the timing of income tax payments in 2020 and lower tax
liabilities as a result of lower profitability; and
•use of funds of $12.8 million from decreases in accounts payable and other
accruals primarily driven by decreased purchases of raw materials resulting from
lower levels of production and timing of payments.
Other uses of cash in the year ended December 31, 2020 included cash paid for
interest of $87.0 million , $74.0 million of cash paid for taxes and
contributions to pension and other benefit plans of $6.6 million .
In the year ended December 31, 2019 , changes in working capital resulted in a
net use of funds of $47.7 million , which was impacted by:
•use of funds from increases in inventory of $21.5 million due to the increased
quantities on hand;
•source of funds of $3.9 million from decreased prepaid and other current assets
primarily resulting from the lower value of imported goods impacting value-added
taxes in certain foreign jurisdictions;
•use of funds of $18.2 million resulting from a decrease in income taxes payable
driven primarily by the timing of income tax payments in 2019; and
•use of funds of $11.6 million from decreases in accounts payable and other
accruals primarily driven by decreased purchases of raw materials and timing of
payments.
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Other uses of cash in the year ended December 31, 2019 included cash paid for
interest of $121.1 million , $99.3 million of cash paid for taxes and
contributions to pension and other benefit plans of $3.2 million .
Investing activities
Net cash used in investing activities was $35.7 million in the year ended
December 31, 2020 comprised of capital expenditures of $36.1 million .
Net cash used in investing activities was $63.9 million in the year ended
December 31, 2019 and included capital expenditures of $64.1 million .
Financing activities
Net cash outflow from financing activities was $463.7 million during the year
ended December 31, 2020 , which was driven by $896.2 million of repayments of
long-term debt, $30.1 million of repurchases of our common stock, $30.9 million
of dividend payments and $6.3 million of debt issuance costs. Partially
offsetting these financing outflows was $500.0 million of proceeds from the
issuance of our 2020 Senior Notes.
Net cash outflow from financing activities was $709.6 million during the year
ended December 31, 2019 , which was driven by $350.1 million of repayments of
long-term debt, $260.9 million of repurchases of our common stock and $98.6
million of dividend payments.
Financing transactions
On February 12, 2018 , we entered into the 2018 Credit Agreement, among GTI, the
Issuer, Swissco, Lux Holdco (together with the Issuer and Swissco, the
"Co-Borrowers"), the lenders and issuing banks party thereto and JPMorgan Chase
Bank, N.A . (the "Administrative Agent"), which provides for (i) the 2018 Term
Loan Facility and (ii) the 2018 Revolving Credit Facility, which may be used
from time to time for revolving credit borrowings denominated in dollars or
Euro, the issuance of one or more letters of credit denominated in dollars,
Euro, Pounds Sterling or Swiss Francs and one or more swing line loans
denominated in dollars. The Issuer is the sole borrower under the 2018 Term Loan
Facility, while the Issuer, Swissco and Lux Holdco are Co-Borrowers under the
2018 Revolving Credit Facility. On February 12, 2018 , the Issuer borrowed the
term loans under the 2018 Term Loan Facility (the "2018 Term Loans"). On June
15, 2018 , we entered the First Amendment to the 2018 Credit Agreement. The First
Amendment amended the 2018 Credit Agreement to provide for the Incremental Term
Loans to the Issuer. The amount outstanding under the Senior Secured Credit
Facilities as of December 31, 2020 and 2019 was comprised solely of term loan
balances of $944 million and $1,564 million , respectively.
The 2018 Term Loans and the Incremental Term Loans mature on February 12, 2025 .
The maturity date for the 2018 Revolving Credit Facility is February 12, 2023 .
The proceeds of the 2018 Term Loans were used to (i) repay in full all
outstanding indebtedness of the Co-Borrowers under our previous credit agreement
and terminate all commitments thereunder, (ii) redeem in full the previously
outstanding 2012 senior notes at a redemption price of 101.594% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption, (iii)
pay fees and expenses incurred in connection with (i) and (ii) above and the
Senior Secured Credit Facilities and related expenses, and (iv) declare and pay
a dividend to Brookfield, with any remainder to be used for general corporate
purposes. In connection with the repayment of our previous credit agreement and
redemption of our previously outstanding 2012 senior notes, all guarantees of
obligations under the previous credit agreement and the 2012 senior notes and
related indenture were terminated, all mortgages and other security interests
securing obligations under the previous credit agreement were released and the
indenture were terminated.
Borrowings under the 2018 Term Loan Facility bear interest, at the Issuer's
option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the
2018 Credit Agreement), plus an applicable margin initially equal to 3.50% per
annum or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an
applicable margin initially equal to 2.50% per annum, in each case with one step
down of 25 basis points based on achievement of certain public ratings of the
2018 Term Loans. The 2018 Term Loan Facility had an interest rate of 4.50% as of
December 31, 2020 and 5.30% as of December 31, 2019 .
Borrowings under the 2018 Revolving Credit Facility bear interest, at the
applicable Co-Borrower's option, at a rate equal to either (i) the Adjusted LIBO
Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the
ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each
case with two 25 basis point step downs based on achievement of certain senior
secured first lien net leverage ratios. In addition, the Co-Borrowers will be
required to pay a quarterly commitment fee on the unused commitments under the
2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
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For borrowings under both the 2018 Term Loan Facility and the 2018 Revolving
Credit Facility, if the Administrative Agent determines that adequate and
reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the
LIBO Rate and such circumstances are unlikely to be temporary or the relevant
authority has made a public statement identifying a date after which the LIBO
Rate shall no longer be used for determining interest rates for loans, then the
Administrative Agent and the Co-Borrowers shall endeavor to establish an
alternate rate of interest, which shall be effective so long as the majority in
interest of the lenders for each Class (as defined in the 2018 Credit Agreement)
of loans under the 2018 Credit Agreement do not notify the Administrative Agent
otherwise. Until such an alternate rate of interest is determined, (a) any
request for a borrowing denominated in dollars based on the Adjusted LIBO Rate
will be deemed to be a request for a borrowing at the ABR Rate plus the
applicable margin for an ABR Rate borrowing of such loan while any request for a
borrowing denominated in any other currency will be ineffective and (b) any
outstanding borrowings based on the Adjusted LIBO Rate denominated in dollars
will be converted to a borrowing at the ABR Rate plus the applicable margin for
an ABR Rate borrowing of such loan while any outstanding borrowings denominated
in any other currency will be repaid.
All obligations under the 2018 Credit Agreement are guaranteed by the Issuer and
each domestic subsidiary of GTI, subject to certain customary exceptions, and
all obligations under the 2018 Credit Agreement of each foreign subsidiary of
GTI that is a Controlled Foreign Corporation (within the meaning of Section 956
of the Code) are guaranteed by the Credit Agreement Guarantors.
All obligations under the 2018 Credit Agreement are secured, subject to certain
exceptions and Excluded Assets (as defined in the 2018 Credit Agreement), by:
(i) a pledge of all of the equity securities of the Issuer and each domestic
Credit Agreement Guarantor (other than GTI) and of each other direct,
wholly-owned domestic subsidiary of GTI and any Credit Agreement 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 the Issuer and each domestic Credit Agreement
Guarantor, subject to permitted liens and certain exceptions specified in the
2018 Credit Agreement. The obligations of each foreign subsidiary of GTI 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 Credit Agreement
Guarantor that is a Controlled Foreign Corporation and of each direct,
wholly-owned subsidiary of any Credit Agreement Guarantor that is a Controlled
Foreign Corporation , and (ii) security interests in certain receivables and
personal property of each Credit Agreement Guarantor that is a Controlled
Foreign Corporation , subject to permitted liens and certain exceptions specified
in the 2018 Credit Agreement.
The 2018 Term Loans amortize at a rate equal to 5% per annum of the original
principal amount of the 2018 Term Loans payable in equal quarterly installments,
with the remainder due at maturity. The Co-Borrowers are permitted to make
voluntary prepayments at any time without premium or penalty. The Issuer is
required to make prepayments under the 2018 Term Loans (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 Loans
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 Loans as directed by the
Issuer.
The 2018 Credit Agreement contains customary representations and warranties and
customary affirmative and negative covenants applicable to GTI 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 GTI 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.
First Amendment to 2018 Credit Agreement
On June 15, 2018 , we entered into the First Amendment, which provided for an
additional $750 million in aggregate principal amount of Incremental Term Loans
to the Issuer. The Incremental Term Loans increased the aggregate principal
amount of term loans incurred by the Issuer under the 2018 Credit Agreement from
$1,500 million to $2,250 million . The Incremental Term Loans have the same terms
as those applicable to the 2018 Term Loans, including maturity date, interest
rate, payment and prepayment terms, representations and warranties and
covenants. We 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.
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The proceeds of the Incremental Term Loans were used to repay, in full, the $750
million of principal outstanding of previously issued debt.
2020 Senior Notes
On December 22, 2020 , GrafTech Finance issued $500 million aggregate principal
amount of 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 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
assets 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.
Term Loan Repricing
On February 17, 2021 (the "Effective Date"), the Company entered into a second
amendment (the "Second Amendment") to its 2018 Credit Agreement to, among other
things, (a) decrease the Applicable Rate (as defined in the Credit Agreement)
with respect to any Initial Term Loan (as defined in the Credit Agreement) by
0.50% for each pricing level, (b) decrease the interest rate floor for all
Initial Term Loans to 0.50%, (c) add certain technical provisions with respect
to the impact of European Union bail-in banking legislation on liabilities of
certain non-U.S. financial institutions, and (d) add certain technical
provisions in connection with future replacement of the LIBO Rate (as defined in
the Credit Agreement). As a result of the Second Amendment and the combined
effect of the reduction in the interest rate margin and the reduction in the
interest rate floor, the interest rate on the Initial Term Loan has been reduced
by 1.0% per year.
In connection with the Second Amendment, on February 12, 2021 , GrafTech Finance
repaid approximately $150 million aggregate principal amount of its Initial Term
Loans with cash on hand.
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Fixed-rate obligations
As of December 31, 2020 , we had $500 million of fixed-rate debt consisting of
our 2020 Senior Notes and $944 million of debt based on variable interest rates.
However, during the third quarter of 2019, we entered into four interest rate
swap contracts. The contracts are "pay fixed, receive variable" with notional
amounts of $500 million maturing in two years and another $500 million maturing
in five years. It is expected that these swaps will fix the cash flows
associated with the forecasted interest payments on this notional amount of debt
to an effective fixed interest rate of 5.1%, which could be lowered to 4.85%
depending on credit ratings.
Long-Term Contractual, Commercial and Other Obligations and Commitments. The
following tables summarize our long-term contractual obligations and other
commercial commitments as of December 31, 2020 :
Payments Due by Year Ending
Total 2021 2022-2023 2024-2025 2026+
(Dollars in Thousands)
Contractual and Other Obligations
Long-term Debt (a) $ 1,444,323 $ 154
380,111 71,398 139,952 99,386 69,375
Leases (c) 7,846 4,124 2,401 1,255 66
Total contractual obligations 1,832,280 75,676 142,660 1,044,503 569,441
Postretirement, pension and related
benefits (d) 121,211 11,838 23,454 24,710 61,209
Committed purchase obligations (e) 1,588 1,588 - - -
Related party Tax Receivable Agreement (f) 40,850 21,752 8,179 8,132 2,787
Other long-term obligations 12,330 1,810 1,590 705 8,225
Uncertain income tax provisions 125 47 42 36 -
Total contractual and other obligations (g)
2,437 2,437 - - -
Total other commercial commitments
$ - $ - $ -
(a)Represents our total debt from our 2018 Credit Facility with an outstanding balance of$944 million ,which matures onFebruary 12, 2025 and from our 2020 Senior Notes with an outstanding balance of$500 million due in 2028 (see "Financing transactions" in this section for full details of these obligations). (b)Represents estimated interest payments required on our 2018 Term Loan Facility using a monthly LIBOR curve throughFebruary 2025 , net of interest rate swap impacts and estimated interest payments on the 2020 Senior Notes throughDecember 15, 2028 . (c)Represents our undiscounted non-cancelable operating lease future payments as ofDecember 31, 2020 . (d)Represents estimated postretirement, pension and related benefits obligations based on actuarial calculations. (e)Represents committed purchases of raw materials. (f)Represents Brookfield's right to receive future payments from us for 85% of the amount of cash savings, if any, inU.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal NOLs, previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the Tax Receivable Agreement commenced onApril 23, 2018 and will continue until there is no potential for any future tax benefit payments. (g)In addition, letters of credit of$3.6 million were issued under the Revolving Facility as ofDecember 31, 2020 . (h)Represents surety bonds, which are renewed annually, and other bank guarantees. If rates were unfavorable, we would use letters of credit under the Revolving Facility. Off-Balance sheet arrangements and commitments. We have not undertaken or been a party to any material off-balance-sheet financing arrangements or other commitments (including non-exchange traded contracts), other than: •The notional amount of foreign exchange and commodity contracts; •Letters of credit outstanding under the Revolving Facility of$3.6 million as ofDecember 31, 2020 and$3.1 million as ofDecember 31, 2019 ; and 54 --------------------------------------------------------------------------------
•Surety bonds and guarantees with other banks totaling
We have been and are subject to increasingly stringent environmental protection
laws and regulations. In addition, we have an ongoing commitment to rigorous
internal environmental protection standards. Environmental considerations are
part of all significant capital expenditure decisions. The following table sets
forth certain information regarding environmental expenses and capital
expenditures.
For the Year Ended December 31,
2020 2019 2018
(Dollars in thousands)
Expenses relating to environmental protection $ 11,075 $ 11,204 $ 12,355
Capital expenditures related to environmental protection 9,018 7,251 4,080
Critical accounting policies
Critical accounting policies are those that require difficult, subjective or
complex judgments by management, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. We use and rely on estimates in determining the economic
useful lives of our assets, obligations under our employee benefit plans,
provisions for doubtful accounts, provisions for restructuring charges and
contingencies, tax valuation allowances, evaluation of goodwill, other
intangible assets, pension and OPEB and various other recorded or disclosed
amounts, including inventory valuations. Estimates require us to use our
judgment. While we believe that our estimates for these matters are reasonable,
if the actual amount is significantly different than the estimated amount, our
assets, liabilities or results of operations may be overstated or understated.
The following accounting policies are deemed to be critical.
Business combinations and goodwill. The application of the purchase method of
accounting for business combinations requires the use of significant estimates
and assumptions in the determination of the fair value of assets acquired and
liabilities assumed in order to properly allocate purchase price consideration
between goodwill and assets that are depreciated and amortized. Our estimates of
the fair values of assets and liabilities acquired are based on assumptions
believed to be reasonable and, when appropriate, include assistance from
independent thirdparty appraisal firms.
As a result of our acquisition by Brookfield, we have a significant amount of
goodwill. Goodwill is tested for impairment annually or more frequently if an
event or circumstance indicates that an impairment loss may have been incurred.
Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities to
reporting units, assignment of goodwill to reporting units and determination of
the fair value of each reporting unit. We estimate the fair value of each
reporting unit using a discounted cash flow methodology. This requires us to use
significant judgment including estimation of future cash flows, which is based
upon relevant market data, internal forecasts, estimation of the longterm
growth for our business, the useful life over which cash flows will occur and
determination of the weighted average cost of capital for purposes of
establishing a discount rate.
Refer to Note 1, "Business and Summary of Significant Accounting Policies," to
the Consolidated Financial Statements for information regarding our goodwill
impairment testing.
Employee benefit plans. We sponsor various retirement and pension plans,
including defined benefit and defined contribution plans and postretirement
benefit plans that cover most employees worldwide. Excluding the defined
contribution plans, accounting for these plans requires assumptions as to the
discount rate, expected return on plan assets, expected salary increases and
health care cost trend rate. See Note 11, "Retirement Plans and Postretirement
Benefits," to the Consolidated Financial Statements for further details.
Impairments of longlived assets. We may record impairment losses on longlived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the future undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those assets.
Assets to be disposed are reported at the lower of the carrying amount or fair
value less estimated costs to sell. Estimates of the future cash flows are
subject to significant uncertainties and assumptions. If the actual value is
significantly less than the estimated fair value, our assets may be overstated.
Future events and circumstances, some of which are described below, may result
in an impairment charge:
•new technological developments that provide significantly enhanced benefits
over our current technology;
•significant negative economic or industry trends;
•changes in our business strategy that alter the expected usage of the related
assets; and
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•future economic results that are below our expectations used in the current
assessments.
Accounting for income taxes. When we prepare the Consolidated Financial
Statements for the year ended December 31, 2020 , we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process
requires us to make the following assessments:
•estimate our actual current tax liability in each jurisdiction;
•estimate our temporary differences resulting from differing treatment of items
for tax and accounting purposes (which result in deferred tax assets and
liabilities that we include within the Consolidated Balance Sheets; and
•assess the likelihood that our deferred tax assets will be recovered from
future taxable income and, if we believe that recovery is not more likely than
not, a valuation allowance is established.
If our estimates are incorrect, our deferred tax assets or liabilities may be
overstated or understated.
As of December 31, 2020 , we had a valuation allowance of $12.8 million against
certain deferred tax assets. Our losses in certain tax jurisdictions in recent
periods represented sufficient negative evidence to require a full valuation
allowance. Until we determine that we will generate sufficient jurisdictional
taxable income to realize our net operating losses and deferred tax assets, we
continue to maintain a valuation allowance.
Related-party Tax Receivable Agreement. On April 23, 2018 , the Company entered
into a Tax Receivable Agreement that provides Brookfield, as the sole pre-IPO
stockholder, the right to receive future payments from us for 85% of the amount
of cash savings, if any, in U.S. federal income tax and Swiss tax that we and
our subsidiaries realize as a result of the utilization of certain tax assets
attributable to periods prior to our IPO, including certain federal NOLs,
previously taxed income under Section 959 of the Code, foreign tax credits, and
certain NOLs (collectively, the "Pre-IPO Tax Assets") in Swissco. In addition,
we will pay interest on the payments we will make to Brookfield with respect to
the amount of these cash savings from the due date (without extensions) of our
tax return where we realize these savings to the payment date at a rate equal to
LIBOR plus 1.00% per annum. The term of the Tax Receivable Agreement commenced
on April 23, 2018 and will continue until there is no potential for any future
tax benefit payments.
The calculation of the Tax Receivable Agreement liability requires significant
judgment with regards to the assumptions underlying the forecast of future
taxable income, in total and by jurisdiction, as well as their timing.
Revenue recognition. Revenue is recognized when a customer obtains control of
promised goods, in an amount that reflects the consideration which we expect to
receive in exchange for those goods.
To determine revenue recognition for arrangements that we determine are within
the scope of ASC 606, the following five steps are performed: (i) identify the
contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue
when (or as) we satisfy a performance obligation. We only apply the fivestep
model to contracts when it is probable that we will collect the consideration we
are entitled to in exchange for the goods or services we transfer to the
customer. At contract inception, once the contract is determined to be within
the scope of ASC 606, we assess the goods or services promised within each
contract and determine those that are performance obligations, and assess
whether each promised good or service is distinct. We then recognize as revenue
the amount of the transaction price that is allocated to the respective
performance obligation when (or as) the performance obligation is satisfied.
From 2018 to the present, our revenue streams primarily consisted of long-term
takeorpay supply contracts and shortterm purchase orders (deliveries within
the year) directly with steel manufacturers. The promises of delivery of
graphite electrodes represent the distinct performance obligations to which the
contract consideration is allocated, based upon the electrode standalone
selling prices for the class of customers at the time the agreements are
executed. The performance obligations are considered to be satisfied at a point
in time when control of the electrodes has been transferred to the customer. The
Company has elected to treat the transportation of the electrodes from our
premises to the customer's facilities as a fulfillment activity, and outbound
freight cost is accrued when the graphite electrode performance obligation is
satisfied. Any variable consideration is recognized up to its unconstrained
amount (i.e., up to the amount for which it is probable that a significant
reversal of the variable revenue will not happen).
Recently adopted accounting standards
In January 2017 , the FASB issued ASU No. 201704, IntangiblesGoodwill and Other
(Topic 350). ASU No. 2017-04 was issued to simplify the accounting for goodwill
impairment. ASU No. 2017-04 removes the second step of the goodwill impairment
test, which requires that a hypothetical purchase price allocation be performed
to determine the amount of impairment, if any. Under ASU No. 2017-04, a goodwill
impairment charge will be based on the amount by which a reporting unit's
carrying value exceeds its fair value, not to exceed the carrying amount of
goodwill. ASU No. 2017-04 became effective
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on a prospective basis for the Company on January 1, 2020 . The Company adopted
ASU No. 2017-04 on January 1, 2020 , with no impact to our financial position,
results of operations or cash flows.
In June 2016 , the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which introduces the Current Expected Credit Losses ("CECL")
accounting model. CECL requires earlier recognition of credit losses, while also
providing additional transparency about credit risk. CECL utilizes a lifetime
expected credit loss measurement objective for the recognition of credit losses
at the time the financial asset is originated or acquired. The expected credit
losses are adjusted each period for changes in expected lifetime credit losses.
ASU No. 2016-13 was effective for the Company on January 1, 2020 . The adoption
of ASU No. 2016-13 resulted in a cumulative-effect adjustment of $2.0 million
included as an adjustment to our accounts receivable reserve and to retained
earnings on January 1, 2020 .
Accounting standards not yet adopted
In March 2020 , the FASB issued ASU No. 2020-04, Facilitation of the Effects of
Reference Rate Reform on Financial Reporting (Topic 848). This pronouncement
contains optional expedients and exceptions for applying GAAP to contracts,
hedging relationships and other transactions affected by reference rate reform.
ASU 2020-04 is elective and applies to all entities, subject to meeting certain
criteria, that have contracts, hedging relationships and other transactions that
reference the LIBOR or another reference rate expected to be discontinued
because of reference rate reform. ASU 2020-04 can be elected for both interim
and annual periods from March 12, 2020 through December 31, 2022 . We plan to
adopt ASU 2020-04 as of January 1, 2023 . The adoption of ASU 2020-04 is not
expected to have a material impact on our financial position, results of
operations or cash flows.
In December 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to improve
consistent application of Topic 740 and simplify the accounting for income
taxes. This pronouncement removes certain exceptions to the general principles
in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 is
effective for annual and interim reporting periods beginning after December 12,
2020 , with early adoption permitted. The Company is currently evaluating the
effects of this on our financial position, results of operations and cash flows.
Item 7A. Quantitative and qualitative disclosures about market risk
We are exposed to market risks, primarily from changes in interest rates,
currency exchange rates, energy commodity prices and commercial energy rates.
From time to time, we enter into transactions that have been authorized
according to documented policies and procedures in order to manage these risks.
These transactions relate primarily to financial instruments described below.
Since the counterparties to these financial instruments are large commercial
banks and similar financial institutions, we do not believe that we are exposed
to material counterparty credit risk. We do not use financial instruments for
trading purposes.
Our exposure to changes in interest rates results primarily from floating rate
long-term debt tied to LIBOR or Euro LIBOR.
Our exposure to changes in currency exchange rates results primarily from:
•sales made by our subsidiaries in currencies other than local currencies;
•raw material purchases made by our foreign subsidiaries in currencies other
than local currencies; and
•investments in and intercompany loans to our foreign subsidiaries and our share
of the earnings of those subsidiaries, to the extent denominated in currencies
other than the U.S. dollar.
Our exposure to changes in energy commodity prices and commercial energy rates
results primarily from the purchase or sale of refined oil products and the
purchase of natural gas and electricity for use in our manufacturing operations.
Interest rate risk management. We periodically enter into agreements with
financial institutions that are intended to limit our exposure to additional
interest expense due to increases in variable interest rates. These instruments
effectively cap our interest rate exposure. During the third quarter of 2019, we
entered into interest rate swaps resulting in a net unrealized pre-tax loss of
$11.9 million as of December 31, 2020 and a net unrealized pre-tax gain of $2.9
million as of December 31, 2019 .
Currency rate management. We enter into foreign currency derivatives from time
to time to attempt to manage exposure to changes in currency exchange rates.
These foreign currency derivatives, which include, but are not limited to,
forward exchange contracts and purchased currency options, attempt to hedge
global currency exposures. Forward exchange contracts are agreements to exchange
different currencies at a specified future date and at a specified rate.
Purchased currency options are instruments which give the holder the right, but
not the obligation, to exchange different currencies at a specified
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rate at a specified date or over a range of specified dates. Forward exchange
contracts and purchased currency options are carried at market value.
The outstanding foreign currency derivatives represented a net unrealized loss
of $0.2 million as of December 31, 2020 , and a net unrealized gain of
$0.2 million as of December 31, 2019 .
Energy commodity management. We have entered into commodity derivative contracts
to effectively fix some or all of our exposure to refined oil products. The
outstanding commodity derivative contracts represented net unrealized losses of
$2.2 million and $3.7 million as of December 31, 2020 and December 31, 2019 ,
respectively.
Sensitivity analysis. We use sensitivity analysis to quantify potential impacts
that market rate changes may have on the underlying exposures as well as on the
fair values of our derivatives. The sensitivity analysis for the derivatives
represents the hypothetical changes in value of the hedge position and does not
reflect the related gain or loss on the forecasted underlying transaction.
A hypothetical increase in interest rates of 100 basis points (1%) would have
increased our interest expense by $3.7 million , net of the impact of our
interest rate swap, for the year ended December 31, 2020 . The same 100 basis
points increase would have resulted in an increase of $11.1 million in fair
value of our interest rate swap portfolio.
As of December 31, 2020 , a 10% appreciation or depreciation in the value of the
U.S. dollar against foreign currencies from the prevailing market rates would
result in a corresponding decrease of $6.0 million or a corresponding increase
of $6.0 million , respectively, in the fair value of the foreign currency hedge
portfolio.
A 10% increase or decrease in the value of the underlying commodity prices that
we hedge would result in a corresponding increase or decrease of $6.1 million in
the fair value of the commodity hedge portfolio as of December 31, 2020 . Because
of the high correlation between the hedging instrument and the underlying
exposure, fluctuations in the value of the instruments are generally offset by
reciprocal changes in the value of the underlying exposure.
For further information related to the financial instruments described above,
see Note 1 "Business and Summary of Accounting Policies" and Note 8 "Fair Value
Measurement and Derivative Instruments" to the Consolidated Financial Statements
in Item 8.
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