GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
2021
|
|
2020
|
Cash flow from operating activities:
|
|
|
|
Net income
|
$
|
98,799
|
|
|
$
|
122,268
|
|
Adjustments to reconcile net income to cash provided by operations:
|
|
|
|
Depreciation and amortization
|
16,539
|
|
|
14,284
|
|
|
|
|
|
Related party Tax Receivable Agreement expense (benefit)
|
47
|
|
|
(3,346)
|
|
Deferred income tax provision
|
(2,840)
|
|
|
6,348
|
|
|
|
|
|
|
|
|
|
Interest expense
|
5,309
|
|
|
1,594
|
|
Other charges, net
|
2,349
|
|
|
(838)
|
|
Net change in working capital*
|
25,187
|
|
|
27,727
|
|
Change in related-party Tax Receivable Agreement
|
(21,799)
|
|
|
(27,857)
|
|
Change in long-term assets and liabilities
|
(1,166)
|
|
|
(897)
|
|
Net cash provided by operating activities
|
122,425
|
|
|
139,283
|
|
Cash flow from investing activities:
|
|
|
|
Capital expenditures
|
(14,174)
|
|
|
(13,901)
|
|
Proceeds from the sale of assets
|
151
|
|
|
62
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
(14,023)
|
|
|
(13,839)
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance and modification costs
|
(2,971)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock-non-related party
|
—
|
|
|
(30,099)
|
|
|
|
|
|
Principal repayments on long-term debt
|
(150,000)
|
|
|
—
|
|
|
|
|
|
Dividends paid to non-related-party
|
(1,394)
|
|
|
(5,926)
|
|
Dividends paid to related-party
|
(1,277)
|
|
|
(16,933)
|
|
Other
|
(1,120)
|
|
|
(46)
|
|
Net cash used in financing activities
|
(156,762)
|
|
|
(53,004)
|
|
Net change in cash and cash equivalents
|
(48,360)
|
|
|
72,440
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(636)
|
|
|
(1,266)
|
|
Cash and cash equivalents at beginning of period
|
145,442
|
|
|
80,935
|
|
Cash and cash equivalents at end of period
|
$
|
96,446
|
|
|
$
|
152,109
|
|
|
|
|
|
* Net change in working capital due to changes in the following components:
|
|
|
|
Accounts and notes receivable, net
|
$
|
(16,643)
|
|
|
$
|
40,743
|
|
Inventories
|
11,648
|
|
|
(17,236)
|
|
Prepaid expenses and other current assets
|
(1,510)
|
|
|
7,411
|
|
Income taxes payable
|
(18,368)
|
|
|
14,238
|
|
Accounts payable and accruals
|
44,333
|
|
|
(17,388)
|
|
Interest payable
|
5,727
|
|
|
(41)
|
|
Net change in working capital
|
$
|
25,187
|
|
|
$
|
27,727
|
|
See accompanying Notes to Condensed Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Dollars in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
Shares of
Common
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income(Loss)
|
|
Retained Earnings (Accumulated
Deficit)
|
|
Total
Stockholders’
Equity (Deficit)
|
Balance as of December 31, 2020
|
267,188,547
|
|
|
$
|
2,672
|
|
|
$
|
758,354
|
|
|
$
|
(19,641)
|
|
|
$
|
(1,070,770)
|
|
|
$
|
(329,385)
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98,799
|
|
|
98,799
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and interest rate derivatives income (loss), net of tax of $(3,144)
|
—
|
|
|
—
|
|
|
—
|
|
|
11,660
|
|
|
—
|
|
|
11,660
|
|
Commodity and interest rate derivatives reclassification adjustments, net of tax of $(187)
|
—
|
|
|
—
|
|
|
—
|
|
|
695
|
|
|
—
|
|
|
695
|
|
Foreign currency translation adjustments, net of tax of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,431)
|
|
|
—
|
|
|
(13,431)
|
|
Total other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,076)
|
|
|
—
|
|
|
(1,076)
|
|
Stock-based compensation
|
92,135
|
|
|
1
|
|
|
766
|
|
|
—
|
|
|
—
|
|
|
767
|
|
Dividends paid to related party stockholder ($0.01 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,277)
|
|
|
(1,277)
|
|
Dividends paid to non-related party stockholders ($0.01 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,394)
|
|
|
(1,394)
|
|
Common stock repurchased and retired (from non-related party)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock withheld for taxes on equity award settlement
|
(23,090)
|
|
|
—
|
|
|
(65)
|
|
|
—
|
|
|
(210)
|
|
|
(275)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2021
|
267,257,592
|
|
|
$
|
2,673
|
|
|
$
|
759,055
|
|
|
$
|
(20,717)
|
|
|
$
|
(974,852)
|
|
|
$
|
(233,841)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
270,485,308
|
|
|
$
|
2,705
|
|
|
$
|
765,419
|
|
|
$
|
(7,361)
|
|
|
$
|
(1,451,836)
|
|
|
$
|
(691,073)
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
122,268
|
|
|
122,268
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives foreign currency derivatives income (loss), net of tax of $10,322
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,577)
|
|
|
—
|
|
|
(37,577)
|
|
Commodity derivatives reclassification adjustments, net of tax of $605
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,204)
|
|
|
—
|
|
|
(2,204)
|
|
Foreign currency translation adjustments, net of tax $(163)
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,168)
|
|
|
—
|
|
|
(17,168)
|
|
Total other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(56,949)
|
|
|
—
|
|
|
(56,949)
|
|
Stock-based compensation
|
29,394
|
|
|
—
|
|
|
405
|
|
|
—
|
|
|
—
|
|
|
405
|
|
Dividends paid to related party stockholder ($0.085 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,933)
|
|
|
(16,933)
|
|
Dividends paid to non-related party stockholders ($0.085 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,926)
|
|
|
(5,926)
|
|
Common Stock Repurchased and Retired (from non-related party)
|
(3,328,574)
|
|
|
(33)
|
|
|
(9,700)
|
|
|
—
|
|
|
(20,366)
|
|
|
(30,099)
|
|
Common stock repurchased and retired for equity award settlement
|
(7,465)
|
|
|
—
|
|
|
(21)
|
|
|
—
|
|
|
(25)
|
|
|
(46)
|
|
Adoption of ASC 326
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,026)
|
|
|
(2,026)
|
|
Balance as of March 31, 2020
|
267,178,663
|
|
|
$
|
2,672
|
|
|
$
|
756,103
|
|
|
$
|
(64,310)
|
|
|
$
|
(1,374,844)
|
|
|
$
|
(680,379)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)Organization and Summary of Significant Accounting Policies
A. Organization
GrafTech International Ltd. (the “Company”) is a leading manufacturer of high quality graphite electrode products essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals. References herein to “GrafTech,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries.
On August 15, 2015, we became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (together with its affiliates, “Brookfield”). In April 2018, we completed our initial public offering ("IPO") of 38,097,525 shares of our common stock held by Brookfield at a price of $15.00 per share. We did not receive any proceeds related to the IPO. Our common stock is listed on the NYSE under the symbol “EAF.” Brookfield has since distributed a portion of its GrafTech common stock to the owners in the Brookfield consortium and sold shares of GrafTech common stock, resulting in Brookfield's ownership of outstanding shares of GrafTech common stock being reduced to 55.3% as of December 31, 2020 and 36.6% as of March 31, 2021.
The Company’s only reportable segment, Industrial Materials, is comprised of our two major product categories: graphite electrodes and petroleum needle coke products. Petroleum needle coke is a key raw material used in the production of graphite electrodes. The Company's vision is to provide highly engineered graphite electrode services, solutions and products to electric arc furnace operators.
B. Basis of Presentation
The interim condensed consolidated financial statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The December 31, 2020 financial position data included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 ("Annual Report on Form 10-K"), filed on February 23, 2021, but does not include all disclosures required by GAAP in audited financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, contained in our Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) which management considers necessary for a fair statement of financial position, results of operations, comprehensive income and cash flows for the interim periods presented. The results for the interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
C. New Accounting Standards
Recently Adopted Accounting Standards
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 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 on January 1, 2021, with an immaterial effect on our financial position, results of operations and cash flows.
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 London Interbank Offered Rate (“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 and cash flows.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2)Revenue from Contracts with Customers
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type of product and contract for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(Dollars in thousands)
|
Graphite Electrodes - Three-to-five-year take-or-pay contracts
|
$
|
245,565
|
|
|
$
|
276,379
|
|
|
|
|
|
Graphite Electrodes - Short-term agreements and spot sales
|
47,255
|
|
|
30,818
|
|
|
|
|
|
By-products and other
|
11,577
|
|
|
11,449
|
|
|
|
|
|
Total Revenues
|
$
|
304,397
|
|
|
$
|
318,646
|
|
|
|
|
|
The Graphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. The revenue category “By-products and Other” includes resales of low-grade electrodes purchased from third-party suppliers, which represent a minimal contribution to our profitability.
Contract Balances
Substantially all of the Company's receivables relate to contracts with customers. Accounts receivables are recorded when the right to consideration becomes unconditional. Payment terms on invoices range from 30 to 120 days depending on the customary business practices of the jurisdictions in which we do business.
Certain short-term and longer-term sales contracts require up-front payments prior to the Company’s fulfillment of any performance obligation. These contract liabilities are recorded as current or long-term deferred revenue, depending on the lag between the pre-payment and the expected delivery of the related products. Additionally, deferred revenue or contract assets originate from contracts where the allocation of the transaction price to the performance obligations based on their relative stand-alone selling prices results in the timing of revenue recognition being different from the timing of the invoicing. In this case, deferred revenue is amortized into revenue based on the transaction price allocated to the remaining performance obligations and contract assets are realized through the contract invoicing.
Contract assets as of March 31, 2021 were $2.4 million, of which $1.6 million and $0.8 million are included in "Prepaid expenses and other current assets" and "Other long-term assets," respectively, on the Condensed Consolidated Balance Sheets. Contract assets as of December 31, 2020 was $2.7 million, of which $1.5 million and $1.2 million are included in "Prepaid expenses and other current assets" and "Other long-term assets," respectively, on the Condensed Consolidated Balance Sheets.
Current deferred revenue is included in "Other accrued liabilities" and long-term deferred revenue is included in "Other long-term obligations" on the Condensed Consolidated Balance Sheets.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about deferred revenue from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Deferred Revenue
|
|
Long-Term Deferred Revenue
|
|
(Dollars in thousands)
|
Balance as of December 31, 2020
|
$
|
13,056
|
|
|
$
|
5,662
|
|
Increases due to cash received
|
32,190
|
|
|
—
|
|
|
|
|
|
Revenue recognized
|
(3,550)
|
|
|
—
|
|
Reclassifications between long-term and current
|
546
|
|
|
(546)
|
|
Foreign currency impact
|
30
|
|
|
—
|
|
Balance as of March 31, 2021
|
$
|
42,272
|
|
|
$
|
5,116
|
|
Transaction Price Allocated to the Remaining Performance Obligations
The following table presents estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of reporting period. The estimated revenues do not include contracts with original duration of one year or less. During the challenging market conditions in 2020, we were able to work with our customers to develop mutually beneficial solutions to their challenges, including volume commitments. We have negotiated long-term sales agreement ("LTA") modifications with many of these customers. We also worked to preserve our rights under the LTAs in a few arbitrations that arose from some non-performance and other disputes during the year.
We recorded $246 million of LTA revenue in the first three months of 2021, and we expect to record approximately $675 million to $775 million of LTA revenue for the remainder of 2021. The remaining revenue associated with our LTAs is expected to be approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2023 through 2024
|
|
|
|
(Dollars in millions)
|
Estimated LTA revenue
|
|
|
$910-$1,010
|
|
$350-$450(1)
|
(1) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs.
The majority of the LTAs are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. For the year 2021 and beyond, the contractual revenue amounts above are based upon the minimum volume for those contracts with specified ranges. The actual revenue realized from these contracted volumes may vary in timing and total due to contract non-performance, contract arbitrations, credit risk associated with certain customers facing financial challenges and customer demand related to contracted volume ranges.
(3)Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Goodwill balance was $171.1 million as of March 31, 2021 and December 31, 2020.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes intangible assets with determinable useful lives by major category which are included in "Other Assets" on our Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
As of March 31, 2021
|
|
As of December 31, 2020
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
(Dollars in thousands)
|
Trade name
|
$
|
22,500
|
|
|
$
|
(12,439)
|
|
|
$
|
10,061
|
|
|
$
|
22,500
|
|
|
$
|
(11,932)
|
|
|
$
|
10,568
|
|
Technological know-how
|
55,300
|
|
|
(35,237)
|
|
|
20,063
|
|
|
55,300
|
|
|
(34,091)
|
|
|
21,209
|
|
Customer–related intangible
|
64,500
|
|
|
(24,937)
|
|
|
39,563
|
|
|
64,500
|
|
|
(23,848)
|
|
|
40,652
|
|
Total finite-lived intangible assets
|
$
|
142,300
|
|
|
$
|
(72,613)
|
|
|
$
|
69,687
|
|
|
$
|
142,300
|
|
|
$
|
(69,871)
|
|
|
$
|
72,429
|
|
Amortization expense of intangible assets was $2.7 million and $2.9 million in the three months ended March 31, 2021 and 2020, respectively. Estimated amortization expense will be approximately $8.0 million for the remainder of 2021, $10.1 million in 2022, $9.2 million in 2023, $8.0 million in 2024 and $7.3 million in 2025.
(4)Debt and Liquidity
The following table presents our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2021
|
|
As of
December 31, 2020
|
|
(Dollars in thousands)
|
2018 Credit Facility (2018 Term Loan and 2018 Revolving Credit Facility)
|
$
|
793,708
|
|
|
$
|
943,708
|
|
2020 Senior Notes
|
500,000
|
|
|
500,000
|
|
Other debt
|
591
|
|
|
615
|
|
Unamortized debt discount and issuance costs
|
(21,176)
|
|
|
(24,192)
|
|
Total debt
|
1,273,123
|
|
|
1,420,131
|
|
Less: Short-term debt
|
(127)
|
|
|
(131)
|
|
Long-term debt
|
$
|
1,272,996
|
|
|
$
|
1,420,000
|
|
In February 2021, we repaid $150 million of principal of our 2018 Term Loan Facility (as defined below). The fair value of our debt was approximately $1,296 million and $1,453 million as of March 31, 2021 and December 31, 2020, respectively. The fair value of the debt is measured using level 3 inputs.
2018 Credit Agreement
On February 12, 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”) among the Company, GrafTech Finance Inc. (“GrafTech Finance”), GrafTech Switzerland SA (“Swissco”), GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co-Borrowers”), the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the "Administrative Agent") and as collateral agent, which provides for (i) a $1,500 million senior secured term facility (the “2018 Term Loan Facility”) and (ii) a $250 million senior secured revolving credit facility (the “2018 Revolving Credit Facility” and, together with the 2018 Term Loan Facility, the “Senior Secured Credit Facilities”), which may be used from time to time for revolving credit borrowings denominated in dollars or Euro, the issuance of one or more letters of credit denominated in dollars, Euro, Pounds Sterling or Swiss Francs and one or more swing line loans denominated in dollars. GrafTech Finance is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, Swissco and Lux Holdco are Co-Borrowers under the 2018 Revolving Credit Facility. On February 12, 2018, GrafTech Finance borrowed $1,500 million under the 2018 Term Loan Facility (the "2018 Term Loans"). The 2018 Term Loans mature on February 12, 2025. The maturity date for the 2018 Revolving Credit Facility is February 12, 2023.
Borrowings under the 2018 Term Loan Facility bear interest, at GrafTech Finance’s option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.50% per
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
annum or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 2.50% per annum, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loans.
Borrowings under the 2018 Revolving Credit Facility bear interest, at the applicable 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.
All obligations under the 2018 Credit Agreement are guaranteed by GrafTech Finance and each domestic subsidiary of GrafTech, subject to certain customary exceptions, and all obligations under the 2018 Credit Agreement of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time (the "Code") are guaranteed by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech, Luxembourg Holdco and Swissco (collectively, the "Guarantors").
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions and Excluded Assets (as defined in the 2018 Credit Agreement), by: (i) a pledge of all of the equity securities of GrafTech Finance and each domestic Guarantor (other than GrafTech) and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of GrafTech Finance and each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation, and (ii) security interests in certain receivables and personal property of each Guarantor that is a Controlled Foreign Corporation, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loans amortize at a rate equal to 5% per annum of the original principal amount of the 2018 Term Loans payable in equal quarterly installments, with the remainder due at maturity. The Co-Borrowers are permitted to make voluntary prepayments at any time without premium or penalty, except in the case of prepayments made in connection with certain repricing transactions with respect to the 2018 Term Loans effected within twelve months of the closing date of the 2018 Credit Agreement, to which a 1.00% prepayment premium applies. GrafTech Finance is required to make prepayments under the 2018 Term Loans (without payment of a premium) with (i) net cash proceeds from 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 GrafTech Finance.
The 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to GrafTech and restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The 2018 Credit Agreement contains a financial covenant that requires GrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Facility. The 2018 Credit Agreement also contains customary events of default.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into a first amendment (the “First Amendment”) to its 2018 Credit Agreement. The First Amendment amended the 2018 Credit Agreement to provide for an additional $750 million in aggregate
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
principal amount of incremental term loans (the “Incremental Term Loans”) to GrafTech Finance. The Incremental Term Loans increased the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $1,500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the 2018 Term Loans, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the 2018 Term Loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment.
In 2019, we repaid $350 million of principal on our 2018 Term Loan Facility. During 2020 we reduced our 2018 Term Loan Facility principal by $900 million, of which $500 million was funded by the 2020 Senior Notes (as defined below) issued on December 22, 2020.
2018 Term Loan Repricing
On February 17, 2021, 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 2018 Credit Agreement) with respect to any 2018 Term Loan (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level, (b) decrease the interest rate floor for all 2018 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 2018 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 2018 Term Loans has been reduced by 1.0% per year.
In connection with the Second Amendment, on February 12, 2021, GrafTech Finance repaid approximately $150 million of principal on 2018 Term Loans with cash on hand.
2020 Senior Notes
On December 22, 2020, GrafTech Finance issued $500 million aggregate principal amount of 4.625% Senior Secured Notes due 2028 (the “2020 Senior Notes”) at an issue price of 100% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933 (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 an indenture, dated as of December 22, 2020 (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 also 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, among GrafTech Finance, the Company, the other subsidiaries of the Company named therein as grantors and U.S. Bank National Association, as collateral agent.
The 2020 Senior Notes bear interest at the rate of 4.625% per annum, which accrues from December 22, 2020 and is payable in arrears on June 15 and December 15 of each year, commencing on June 15, 2021. The 2020 Senior Notes will mature on December 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the Indenture.
GrafTech Finance may redeem some or all of the 2020 Senior Notes at the redemption prices and on the terms specified in the Indenture. If the Company or GrafTech Finance experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then GrafTech Finance must offer to repurchase the 2020 Senior Notes on the terms set forth in the Indenture.
The Indenture contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 proceeds from the 2020 Senior Notes were used to partially repay borrowings under our 2018 Term Loan Facility.
(5)Inventories
Inventories are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2021
|
|
As of
December 31, 2020
|
|
(Dollars in thousands)
|
Inventories:
|
|
|
|
Raw materials
|
$
|
95,987
|
|
|
$
|
101,098
|
|
Work in process
|
112,411
|
|
|
110,331
|
|
Finished goods
|
42,412
|
|
|
54,535
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
250,810
|
|
|
$
|
265,964
|
|
(6)Interest Expense
The following tables present the components of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(Dollars in thousands)
|
Interest incurred on debt
|
$
|
16,865
|
|
|
$
|
24,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of original issue discount on 2018 Term Loans
|
1,271
|
|
|
549
|
|
|
|
|
|
Amortization of debt issuance and modification costs
|
4,031
|
|
|
1,031
|
|
|
|
|
|
Total interest expense
|
$
|
22,167
|
|
|
$
|
25,672
|
|
|
|
|
|
Interest Rates
The 2020 Senior Notes carry a fixed interest rate of 4.625%. The 2018 Credit Agreement had an effective interest rate of 3.50% as of March 31, 2021 and 4.50% as of December 31, 2020. See Note 4 "Debt and Liquidity" for details of these transactions.
In connection with the $150 million prepayment of the borrowings under our 2018 Term Loan Facility in the first quarter of 2021, we recorded $1.5 million of accelerated amortization of the debt issuance costs and $0.9 million accelerated accretion of the original issue discount, for the three months ended March 31, 2021. We also recorded $1.6 million of modification costs related to the term loan repricing. See Note 4 "Debt and Liquidity" for details of these transactions.
The Company has several interest rate swap contracts to fix our cash flows associated with the risk in variability in the one-month U.S. London Interbank Offered Rate ("US LIBO") for a portion of our outstanding debt. See Note 9 "Derivative Instruments" for details of these transactions.
(7) Contingencies
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows. Additionally, we are involved in the following legal proceedings described below.
Pending litigation in Brazil has been brought by employees seeking to recover additional amounts and interest thereon under certain wage increase provisions applicable in 1989 and 1990 under collective bargaining agreements to which employers in the Bahia region of Brazil were a party (including our subsidiary in Brazil). Companies in Brazil have settled claims arising out of these provisions and, in May 2015, the litigation was remanded by the Brazilian Supreme Court in favor of the employees union. After denying an interim appeal by the Bahia region employers on June 26, 2019, the Brazilian Supreme Court finally ruled in favor of the employees union on September 26, 2019. The employers union has determined not to seek annulment of such decision. Separately, on October 1, 2015, a related action was filed by current and former employees against our subsidiary in Brazil to recover amounts under such provisions, plus interest thereon, which amounts together with interest could be material to us. If the Brazilian Supreme Court proceeding above had been determined in favor of the employers union, it would also have resolved this proceeding in our favor. In the first quarter of 2017, the state court initially ruled in favor of the employees. We appealed this state court ruling, and the appellate court issued a decision in our favor on May 19, 2020. The employees have further appealed and, on December 16, 2020, the court upheld the decision in favor of GrafTech Brazil. On February 22, 2021, the employees filed a further appeal and, on April 28, 2021, the court rejected the employees' appeal in favor of GrafTech Brazil. The court's decision remains subject to further appeal. As of March 31, 2021, we are unable to assess the potential loss associated with these proceedings as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the accrual for the three months ended March 31, 2021, are presented below:
|
|
|
|
|
|
|
(Dollars in thousands)
|
Balance as of December 31, 2020
|
$
|
1,997
|
|
Product warranty accruals and adjustments
|
164
|
|
Settlements
|
(497)
|
|
Balance as of March 31, 2021
|
$
|
1,664
|
|
Tax Receivable Agreement
On April 23, 2018, the Company entered into the TRA that provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of the pre-IPO Tax Assets. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
There was no liability recognized on the date we entered into the TRA as there was a full valuation allowance recorded against our deferred tax assets. During the second quarter of 2018, it was determined that the conditions were appropriate for the Company to release a valuation allowance of certain tax assets as we exited our three year cumulative loss position. This release resulted in the recording of a $86.5 million liability related to the TRA on the Consolidated Statements of Operations as "Related Party Tax Receivable Agreement Expense."
As of December 31, 2019, the total TRA liability was $89.9 million, of which $27.9 million was classified as a current liability in "Related party payable-tax receivable agreement" on the balance sheet, and $62.0 million of the liability remained as a long-term liability in "Related party payable-tax receivable agreement" on the balance sheet. The 2019 current liability was settled in the first quarter of 2020.
In 2020, the TRA liability was reduced by $21.1 million as a result of revised U.S. income estimates affecting the future usage of our U.S. tax attributes. The reduction was recorded as a "Related Party Tax Receivable Agreement Benefit" on the Consolidated Statement of Operations. As of December 31, 2020, total TRA liability was $40.9 million, of which
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$21.8 million was classified as a current liability in "Related party payable - tax receivable agreement" on the balance sheet, as we expected this portion to be settled within twelve months, and $19.1 million of the liability remained as a long-term liability in "Related party payable - tax receivable agreement" on the balance sheet.
During the first quarter 2021, the previous current liability was settled. As of March 31, 2021, the total TRA liability was $19.1 million, of which $3.9 million was classified as a current liability in "Related party payable-tax receivable agreement" and $15.2 million remained as a long-term liability in "Related party payable-tax receivable agreement" on the balance sheet.
Long-term Incentive Plan
The long-term incentive plan ("LTIP") was adopted by the Company effective as of August 17, 2015, as amended and restated as of March 15, 2018. The purpose of the plan is to retain senior management of the Company, to incentivize them to make decisions with a long-term view and to influence behavior in a way that is consistent with maximizing value for the pre-IPO stockholder of the Company in a prudent manner. Each participant is allocated a number of profit units, with a maximum of 30,000 profit units ("Profit Units") available under the plan. Awards of Profit Units generally vest in equal increments over a five-year period beginning on the first anniversary of the grant date and subject to continued employment with the Company through each vesting date. Any unvested Profit Units that have not been previously forfeited will accelerate and become fully vested upon a ‘‘Change in Control’’ (as defined below).
Profit Units will generally be settled in a lump sum payment within 30 days following a Change in Control based on the ‘‘Sales Proceeds’’ (as defined below) received by Brookfield Capital Partners IV, L.P. (together with its affiliates, "Brookfield Capital IV") in connection with the Change in Control. The LTIP defines ‘‘Change in Control’’ as any transaction or series of transactions (including, without limitation, the consummation of a combination, share purchases, recapitalization, redemption, issuance of capital stock, consolidation, reorganization or otherwise) pursuant to which (a) a Person not affiliated with Brookfield Capital IV acquires securities representing more than seventy percent (70%) of the combined voting power of the outstanding voting securities of the Company or the entity surviving or resulting from such transaction, (b) following a public offering of the Company’s stock, Brookfield Capital IV has ceased to have a beneficial ownership interest in at least 30% of the Company’s outstanding voting securities (effective on the first of such date), or (c) the Company sells all or substantially all of the assets of the Company and its subsidiaries on a consolidated basis. It is intended that the occurrence of a Change in Control in which Sales Proceeds exceed the Threshold Value would constitute a ‘‘substantial risk of forfeiture’’ within the meaning of Section 409A of the Code. The LTIP defines ‘‘Threshold Value’’ as, as of any date of determination, an amount equal to $855,000,000 (which represents the amount of the total invested capital of Brookfield Capital IV as of August 17, 2015), plus the dollar value of any cash or other consideration contributed to or invested in the Company by Brookfield Capital IV after August 17, 2015. The Threshold Value shall be determined by the Company's Board of Directors in its sole discretion. The LTIP defines ‘‘Sales Proceeds’’ as, as of any date of determination, the sum of all proceeds actually received by the Brookfield Capital IV, net of all Sales Costs (as defined below), (i) as consideration (whether cash or equity) upon the Change in Control and (ii) as distributions, dividends, repurchases, redemptions or otherwise as a holder of such equity interests in the Company. Proceeds that are not paid upon or prior to or in connection with the Change in Control, including earn-outs, escrows and other contingent or deferred consideration shall become ‘‘Sale Proceeds’’ only as and when such proceeds are received by Brookfield Capital IV. ‘‘Sales Costs’’ means any costs or expenses (including legal or other advisory costs), fees (including investment banking fees), commissions or discounts payable directly by Brookfield Capital IV in connection with, arising out of or relating to a Change in Control, as determined by the Company's Board of Directors in its sole discretion.
The Profit Unit awards became 100% vested in August 2020. Given the successful completion of the IPO in the second quarter of 2018 and Brookfield's subsequent distribution and sale of shares of common stock, it is reasonably possible that a Change in Control, as defined above, may ultimately happen and that the awarded Profit Units will be subsequently paid out to the participants. Depending on Brookfield’s sale proceeds, the potential liability triggered by a Change in Control is estimated to be in the range of $65 million to $75 million. This liability will be recorded and settled in cash by the Company if and when the Change in Control actually occurs.
(8) Income Taxes
We compute and apply to ordinary income an estimated annual effective tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. The estimated annual effective tax rate is updated quarterly based on actual results and updated operating forecasts. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs as a discrete item of
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
tax.
The following table summarizes the provision for income taxes for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(Dollars in thousands)
|
Tax expense
|
$
|
16,257
|
|
|
$
|
23,946
|
|
|
|
|
|
Pretax income
|
115,056
|
|
|
146,214
|
|
|
|
|
|
Effective tax rates
|
14.1
|
%
|
|
16.4
|
%
|
|
|
|
|
The effective tax rate for the three months ended March 31, 2021 was 14.1%. This rate differs from the U.S. statutory rate of 21% primarily due to worldwide earnings from various countries taxed at lower rates, the Section 250 Deduction and Foreign Tax Credits offset by the net increase related to the U.S. taxation of global intangible low taxed income ("GILTI").
The effective tax rate for the three months ended March 31, 2020 was 16.4%. This rate differs from the U.S. statutory rate of 21% primarily due to worldwide earnings from various countries taxed at different rates.
The tax expense decreased from $23.9 million for the three months ended March 31, 2020 to $16.3 million for the three months March 31, 2021. This change is primarily related to a reduction in pretax income and worldwide earnings from various countries taxed at different rates and U.S. taxation of GILTI.
As of March 31, 2021, we had unrecognized tax benefits of $0.1 million, which, if recognized, would have a favorable impact on our effective tax rate.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. U.S. federal tax years prior to 2017 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. Other jurisdictions are still open to examination beginning after 2014.
We continue to assess the realization of our deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have established and maintained valuation allowances on those net deferred tax assets.
(9) Derivative Instruments
We use derivative instruments as part of our overall foreign currency, interest rate and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows, manage the risk associated with fluctuations in interest rate indices and to minimize commodity price volatility. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the U.S. dollar.
Certain of our derivative contracts contain provisions that require us to provide collateral. 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 anticipate nonperformance by any of the counterparties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, are used to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables and purchases.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have no foreign currency cash flow hedges outstanding as of March 31, 2021 and December 31, 2020 and, therefore, no unrealized gains or losses reported under accumulated other comprehensive income (loss).
As of March 31, 2021, we had outstanding Mexican peso, euro, Swiss franc, South African rand and Japanese yen currency contracts with an aggregate notional amount of $60.5 million. As of December 31, 2020, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with an aggregate notional amount of $71.0 million. The foreign currency derivatives outstanding as of March 31, 2021 have maturities through September 30, 2021, and were not designated as hedging instruments.
Commodity derivative contracts
We have entered into commodity derivative contracts for refined oil products. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. We had outstanding commodity derivative contracts as of March 31, 2021 with a notional amount of $48.3 million with maturities from April 2021 to June 2022. The outstanding commodity derivative contracts represented a pre-tax net unrealized gain within "Accumulated Other Comprehensive Income" of $6.2 million as of March 31, 2021. We had outstanding commodity derivative contracts as of December 31, 2020 with a notional amount of $61.3 million representing a pre-tax net unrealized loss of $2.2 million.
Interest rate swap contracts
During the third quarter of 2019, the Company entered into four interest rate swap contracts. The contracts are "pay fixed, receive variable" with notional amounts of $500 million due to mature in August 2021 and another $500 million due to mature in August 2024. The Company’s risk management objective was to fix its cash flows associated with the risk in variability in the one-month U.S. LIBO Rate for a portion of our outstanding debt. 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. In December 2020, in connection with the $500 million principal repayment of the 2018 Term Loan, we de-designated one interest rate swap contract of $250 million notional maturing in the third quarter of 2021. In February 2021, in connection with the $150 million principal repayment of the 2018 Term Loan, the Company closed one swap contract of $250 million notional that was due to mature in the third quarter 2021 and recorded a $0.9 million charge in interest expense. Additionally, the Company modified the three remaining swaps with notional amounts of $250 million maturing in the third quarter 2021 and $500 million maturing in the third quarter 2024 in order to align their terms to the amended 2018 Term Loan Facility (see Note 4 "Debt and Liquidity" for details of the February 2021 repricing of the 2018 Term Loan Facility). 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 4.2%, which could be lowered to 3.95% depending on credit ratings. The modification triggered the de-designation and re-designation of the swaps. Because the modified swaps contained an other-than-insignificant financing element at re-designation date, they are considered hybrid instruments composed of a debt host and an embedded derivative. The debt host portion amounted to a liability of $9.5 million as of March 31, 2021 with $3.1 million included in "Other accrued liabilities" and $6.4 million in "Other long-term obligations". It is accounted for in "Accumulated Other Comprehensive income" and will be amortized over the remaining life of the swaps. The embedded derivative is treated as a cash-flow hedge.
Within "Accumulated Other Comprehensive Income", the interest rate swap portion qualifying as cash-flow hedges represented a net unrealized pre-tax gain of $2.4 million and a net unrealized pre-tax loss of $11.9 million as of March 31, 2021 and December 31, 2020, respectively. The fair value of these contracts was determined using Level 2 inputs.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Condensed Consolidated Balance Sheets. As of March 31, 2021 and December 31, 2020, the fair value of our derivatives and their respective balance sheet locations are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
As of March 31, 2021
|
(Dollars in thousands)
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Commodity derivative contracts
|
Prepaid and other current assets
|
|
$
|
5,592
|
|
|
Other accrued liabilities
|
|
$
|
—
|
|
|
Other long-term assets
|
|
571
|
|
|
Other long-term obligations
|
|
—
|
|
Interest rate swap contracts
|
Prepaid and other current assets
|
|
—
|
|
|
Other accrued liabilities
|
|
848
|
|
|
Other long-term assets
|
|
3,291
|
|
|
Other long-term obligations
|
|
—
|
|
Total fair value
|
|
|
$
|
9,454
|
|
|
|
|
$
|
848
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Commodity derivative contracts
|
Prepaid and other current assets
|
|
$
|
518
|
|
|
Other accrued liabilities
|
|
$
|
888
|
|
|
Other long-term assets
|
|
63
|
|
|
Other long-term obligations
|
|
1,898
|
|
Interest rate swap contracts
|
Prepaid and other current assets
|
|
—
|
|
|
Other accrued liabilities
|
|
4,080
|
|
|
Other long-term assets
|
|
—
|
|
|
Other long-term obligations
|
|
6,903
|
|
Total fair value
|
|
|
$
|
581
|
|
|
|
|
$
|
13,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
As of March 31, 2021
|
(Dollars in thousands)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
Foreign currency derivatives
|
Prepaid and other current assets
|
|
$
|
146
|
|
|
Other accrued liabilities
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
$
|
146
|
|
|
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
Foreign currency derivatives
|
Prepaid and other current assets
|
|
$
|
6
|
|
|
Other accrued liabilities
|
|
$
|
111
|
|
Commodity derivatives contracts
|
Prepaid and other current assets
|
|
—
|
|
|
Other accrued liabilities
|
|
952
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
$
|
6
|
|
|
|
|
$
|
1,063
|
|
The realized (gains) losses resulting from the settlement of commodity derivative contracts designated as hedges remain in "Accumulated Other Comprehensive Income" until they are recognized in the Statement of Operations when the hedged item impacts earnings, which is when the finished product is sold. As of March 31, 2021 and 2020, net realized pre-tax losses of $5.0 million and $0.5 million, respectively, were reported under "Accumulated Other Comprehensive Income" and will be and were, respectively, released to earnings within the following 12 months. See the table below for amounts recognized in the Statement of Operations.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations as follows for the periods ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss
Recognized
|
|
|
Location of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations
|
|
For the Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
Derivatives designated as cash flow hedges:
|
|
|
|
(Dollars in thousands)
|
Commodity derivative contracts
|
|
Cost of sales
|
|
$
|
549
|
|
|
$
|
(2,809)
|
|
Interest rate swap contracts
|
|
Interest expense (income)
|
|
1,330
|
|
|
(206)
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
Cost of sales, Other expense (income)
|
|
$
|
1,629
|
|
|
$
|
(499)
|
|
Commodity derivative contracts
|
|
Cost of sales
|
|
—
|
|
|
(139)
|
|
Interest rate swap contracts
|
|
Interest expense
|
|
866
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10) Accumulated Other Comprehensive Income (Loss)
The balance in our accumulated other comprehensive income (loss) is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2021
|
|
As of
December 31, 2020
|
|
|
|
(Dollars in thousands)
|
Foreign currency translation adjustments, net of tax
|
|
|
$
|
(16,156)
|
|
|
$
|
(2,725)
|
|
Commodity and interest rate derivatives, net of tax
|
|
|
(4,561)
|
|
|
(16,916)
|
|
Total accumulated comprehensive (loss)
|
|
|
$
|
(20,717)
|
|
|
$
|
(19,641)
|
|
(11) Earnings per Share
During the three months ended March 31, 2020, we repurchased 3,328,574 shares of our common stock under the repurchase program that was approved on July 30, 2019. These shares were subsequently retired. There were no shares repurchased under this program during the three months ended March 31, 2021.
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic calculation
|
267,318,860
|
|
|
269,216,820
|
|
|
|
|
|
Add: Effect of stock options, deferred share units and restricted stock units
|
146,459
|
|
|
19,742
|
|
|
|
|
|
Weighted average common shares outstanding for diluted calculation
|
267,465,319
|
|
|
269,236,562
|
|
|
|
|
|
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes 110,647 and 53,204 shares of participating securities in the three months ended March 31, 2021 and 2020, respectively. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of 1,106,823 and 1,297,661 equivalent shares in the three months ended March 31, 2021 and 2020, respectively, as these shares are anti-dilutive.
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) Stock-Based Compensation
Stock-based compensation awards granted by our Board of Directors for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Award type:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
477,500
|
|
|
298,000
|
|
|
|
|
|
|
|
|
|
Deferred share units
|
11,811
|
|
|
12,552
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
514,460
|
|
|
309,389
|
|
|
|
|
|
|
|
|
|
In the three months ended March 31, 2021 and 2020, we recognized $0.8 million and $0.4 million, respectively, in stock-based compensation expense. A majority of the expense, $0.7 million and $0.3 million respectively, was recorded as selling and administrative expense in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales.
As of March 31, 2021, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units was $16.2 million, which will be recognized over the remaining weighted average life of 4.1 years. Certain of our awards include provisions that accelerate vesting in the event of a Change in Control. For the purpose of these grants, a “Change in Control” shall occur upon (i) Brookfield and any affiliates thereof (collectively, the “Majority Stockholder”) ceasing to own stock of the Company that constitutes at least thirty percent (30%) or thirty-five percent (35%), as applicable, of the total fair market value or total voting power of the stock of the Company or (ii) any one person, or more than one person acting as a group (as defined under Treasury Regulation § 1.409A-3(i)(5)(v)(B)) other than the Company, the Majority Stockholder or any employee benefit plan sponsored by the Company acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes one hundred percent (100%) of the total fair market value or total Voting Power of the stock of GrafTech. As of March 31, 2021, unrecognized compensation subject to this acceleration was $15.2 million and will result in an accelerated non-cash charge if and when a Change in Control actually occurs. Of this expense, approximately $1.0 million will accelerate at the 35% ownership level and the remaining $14.2 million at the 30% ownership level.
Stock option, deferred share unit and restricted stock unit award activity under the Company's Omnibus Equity Incentive Plan for the three months ended March 31, 2021 was as follows:
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-
Average
Exercise
Price
|
Outstanding unvested as of December 31, 2020
|
906,361
|
|
|
$
|
13.01
|
|
Granted
|
477,500
|
|
|
11.49
|
|
Vested
|
(81,200)
|
|
|
10.39
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding unvested as of March 31, 2021
|
1,302,661
|
|
|
$
|
12.62
|
|
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred Share Unit and Restricted Stock Unit awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
Outstanding unvested as of December 31, 2020
|
524,488
|
|
|
$
|
10.41
|
|
Granted
|
526,271
|
|
|
11.50
|
|
Vested
|
(99,847)
|
|
|
10.69
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding unvested as of March 31, 2021
|
950,912
|
|
|
$
|
10.98
|
|
(13) Subsequent Events
On May 3, 2021, our Board of Directors declared a quarterly dividend of $0.01 per share to stockholders of record as of the close of business on May 28, 2021, to be paid on June 30, 2021.
PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES