UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 20162019
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number: 1-13888
GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
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Delaware | | 27-2496053 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S.(State or other jurisdiction of (I.R.S. Employer
Identification Number)
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Suite 300 - Park Center I | | 44131 |
6100 Oak Tree Boulevard | | (Zip Code) |
Independence, Ohio | | |
incorporation or organization) Identification Number)
982 Keynote Circle 44131
Brooklyn Heights, Ohio (Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (216) 676-2000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | | EAF | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Yes☒No☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yesx☐No¨☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes¨☒Nox☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒No¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “non-accelerated filer” andfiler," “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨filer☐Non-accelerated filer☐
Smaller reporting company¨☐Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
None12b-2 of the oustanding common stock of the registrant is held by a non-affiliate of the registrant and therefore theExchange Act). Yes☐No☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant is zero. as of June 28, 2019 was $702.5 million, based on the closing price of the registrant’s common stock as reported on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second quarter.
On February 1, 2017, 10017, 2020, 268,930,987 shares of our common stock were outstanding.outstanding, par value $0.01 per share.
(Explanatory Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d)DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been requireddefinitive proxy statement (the “Definitive Proxy Statement”) to be filed by Section 13 or 15(d) ofwith the Securities and Exchange ActCommission relative to the registrant’s 2020 Annual Meeting of 1934 during the preceding 12 months had the registrant been subject to such requirements.)Stockholders are incorporated by reference into Part III of this Report.
Table of Contents
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PART I
Preliminary Notes
Important Terms. We use the following terms to identify various matters. These terms help to simplify the presentation of information in this Report.
“Brookfield” means BCP IV GrafTech Holdings LP, an affiliate of Brookfield Asset Management Inc., and the direct owner of GrafTech
“Common Stock” means GTI common stock, par value $.01 per share.
“Credit Agreement” refersReferences herein to the credit agreement providing for our senior secured revolving and term credit facilities, dated as of April 23, 2014, as amended as of November 19, 2014, February 27, 2015, June 26, 2015, July 28, 2015 and April 27, 2016, as further amended, supplemented, restated"Company", "we", "our", or otherwise modified from time to time.
“GrafTech Finance” refers to GrafTech Finance Inc. only. GrafTech Finance is an indirect wholly-owned, special purpose finance subsidiary of GTI and the borrower under the Revolving Facility.
“GrafTech Global” refers to GrafTech Global Enterprises Inc. only. GrafTech Global is an indirect wholly-owned subsidiary of GTI and the direct or indirect holding company for many of our operating subsidiaries. GrafTech Global is a guarantor of the Revolving Facility.
“GTI” refers"us" refer collectively to GrafTech International Ltd. only. GTI is our U.S. parent company. GTI is a guarantor of the Revolving Facility.
“Indenture” refers to the indenture dated November 20, 2012, under which the Senior Notes were issued.
“MTM Adjustment” refers to our accounting policy regarding pension and other post-employment benefits plans (“OPEB”) whereby 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 (referred to as “mark-to-market”).
“Revolving Facility” refers to the senior secured revolving credit facility provided under the Credit Agreement, at the relevant time.
“Senior Notes” means our 6.375% senior notes due 2020 issued on November 20, 2012.
“Senior Subordinated Notes” means our senior subordinated promissory notes issued on November 30, 2010, in connection with the Seadrift Coke L.P. (“Seadrift”) and C/G Electrodes LLC (“C/G”) acquisitions, in an aggregate principal amount of $200 million. The Senior Subordinated Notes were non-interest bearing, due on November 30, 2015 and repaid in full in August 2015. Because the Senior Subordinated Notes are non-interest bearing, we were required to record them at each measurement date at their then present value (determined using an interest rate of 7.00%).
“Subsidiaries” refers to those companies that, at the relevant time, are or were majority owned or wholly-owned directly or indirectly by GTI or its predecessors to the extent that those predecessors’ activities related to the graphite and carbon business.
“We,” "GrafTech," “us” or “our” refers to GTI and its subsidiaries collectively or, if the context so requires, GTI, GrafTech Global, GrafTech Finance or GrafTech International Holdings Inc., individually.subsidiaries.
Presentation of Financial, Market and Legal Data. References to cost in the context ofData
We present our low cost advantages and strategies do not include the impact of special charges, expenses or credits, such as those related to investigations, lawsuits, claims, restructurings or impairments, or the impact of changes in accounting principles.
financial information on a consolidated basis. Unless otherwise noted, when we refer to “dollars”,dollars, we mean U.S. dollars. Unless otherwise noted, all dollars are presented in thousands.
References to spot prices for graphite electrodes mean prices under individual purchase orders (not part of an annual or other extended purchase arrangement) for near term delivery for standard size graphite electrodes used in large electric arc steel melting furnaces (sometimes called “melters” or “melter applications”) as distinct from, for example, a ladle furnace or a furnace producing non-ferrous metals.
Neither any statement madeCertain market and industry data included in this Annual Report nor any charge taken by us relating to any legal proceedings constitutes an admission as to any wrongdoing.
Unless otherwise noted, market and market share data in this Report are our own estimates. Market data relating to the steel, electronics, semiconductor, solar, thermal management, transportation, petrochemical and other metals industries, our general expectations concerning such industries and our market position and market share within such industries, both domestically and internationally, are derived from trade publications relating to those industries and other industry sources as well as assumptions made by us, based on such data and our knowledge of such industries. Market and market share data relating to the graphite and carbon industry as well as information relating to our competitors, our general expectations concerning such industry and our market position and market share within such industry, both domestically and internationally, are derived from the sources described above and public filings, press releases and other public documents of our competitors as well as assumptions made by us, based on such data and our knowledge of such industry. Such data are used to provide a gauge of our competitiveness against our competitors and are intended to describe things such as customer or potential customer bases, industries, or subsets of the industries in which we compete and intermediate or end use applications of the product or technology involved. Unless otherwise noted, references to "market share" are based on sales volumesForm 10-K for the relevant year. Similarly, product descriptionsyear ended December 31, 2019 (the “Annual Report” or “report”) has been obtained from third party sources that we believe to be reliable. Market estimates are used to help understand how we develop, produce, source, manage, market, sell, or account for products. Market datacalculated by using independent industry publications, government publications and product descriptions arethird party forecasts in conjunction with our assumptions about our markets. We have not intended to define markets or products from an antitrust, trade regulation, trade remedy, or other regulatory purpose. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors-Risks Relating to Us” and “Risk Factors-Forward Looking Statements” in this Report.independently verified such third party information. We cannot guarantee the accuracy or completeness of this market and market share data and have not independently verified it. None of the sources mentioned above has consented to the disclosure or use of data in this Annual Report. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Forward‑Looking Statements” and “Risk Factors” in this Annual Report.
Forward-Looking Statements
Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report may contain forward‑looking statements that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward‑looking statements by the use of forward‑looking words such as “will,” “may,” “plan,” “estimate,” “project,” “believe,” “anticipate,” “expect,” “intend,” “should,” “would,” “could,” “target,” “goal,” “continue to,” “positioned to” or the negative version of those words or other comparable words. Any forward‑looking statements contained in this report are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The GRAFTECH logo, GRAFCELL®, GRAFOAM®, GRAFIHXtm, eGraf® inclusion of this forward‑looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. These forward‑looking statements are subject to various risks and HOTPRESSED™uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our trademarksactual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:
the cyclical nature of our business and trade names usedthe selling prices of our products may lead to periods of reduced profitability and net losses in the future;
the possibility that we may be unable to implement our business strategies, including our initiative to secure and maintain longer-term customer contracts, in an effective manner;
the possibility that global graphite electrode overcapacity may adversely affect graphite electrode prices;
pricing for graphite electrodes has historically been cyclical and the price of graphite electrodes may continue to decline in the future;
the sensitivity of our business and operating results to economic conditions and the possibility others may not be able to fulfill their obligations to us in a timely fashion or at all;
our dependence on the global steel industry generally and the electric arc furnace ("EAF") steel industry in particular;
the competitiveness of the graphite electrode industry;
our dependence on the supply of petroleum needle coke;
our dependence on supplies of raw materials (in addition to petroleum needle coke) and energy;
the possibility that our manufacturing operations are subject to hazards;
changes in, or more stringent enforcement of, health, safety and environmental regulations applicable to our manufacturing operations and facilities;
the legal, compliance, economic, social and political risks associated with our substantial operations in multiple countries;
the possibility that fluctuation of foreign currency exchange rates could materially harm our financial results;
the possibility that our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period, including as a result of equipment failure, climate change, regulatory issues, natural disasters, public health crises, political crises or other catastrophic events;
our dependence on third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services;
the possibility that we are unable to recruit or retain key management and plant operating personnel or successfully negotiate with the representatives of our employees, including labor unions;
the possibility that we may divest or acquire businesses, which could require significant management attention or disrupt our business;
the sensitivity of goodwill on our balance sheet to changes in the market;
the possibility that we are subject to information technology systems failures, cybersecurity attacks, network disruptions and breaches of data security;
our dependence on protecting our intellectual property;
the possibility that third parties may claim that our products or processes infringe their intellectual property rights;
the possibility that significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions could adversely affect our business;
the possibility that tax legislation could adversely affect us or our stockholders;
the possibility that our indebtedness could limit our financial and operating activities or that our cash flows may not be sufficient to service our indebtedness;
the possibility that restrictive covenants in our financing agreements could restrict or limit our operations;
the fact that borrowings under certain of our existing financing agreements subject us to interest rate risk;
the possibility of a lowering or withdrawal of the ratings assigned to our debt;
the possibility that disruptions in the capital and credit markets could adversely affect our results of operations, cash flows and financial condition, or those of our customers and suppliers;
the possibility that highly concentrated ownership of our common stock may prevent minority stockholders from influencing significant corporate decisions;
the possibility that we may not pay cash dividends on our common stock in the future;
the fact that certain of our stockholders have the right to engage or invest in the same or similar businesses as us;
the possibility that the market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets, including by Brookfield (as defined below);
the fact that certain provisions of our Amended and Restated Certificate of Incorporation and our Amended and Restated By-Laws could hinder, delay or prevent a change of control;
the fact that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders; and
our status as a "controlled company" within the meaning of the New York Stock Exchange ("NYSE") corporate governance standards, which allows us to qualify for exemptions from certain corporate governance requirements.
These factors should not be construed as exhaustive and should be read in conjunction with the risk factors and other cautionary statements that are included in this report. This Report also contains trademarks and trade names belongingThe forward‑looking statements made in this report relate only to other parties.
We make available, free of charge, on or through our web site, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)events as of the Exchange Actdate on which the statements are made. We do not undertake any obligation to publicly update or review any forward‑looking statement except as soonrequired by law, whether as reasonably practicable aftera result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we electronically file them with,may have expressed or furnish themimplied by these forward‑looking statements. We caution that you should not place undue reliance on any of our forward‑looking statements. You should specifically consider the factors identified in this report that could cause actual results to the U.S. Securitiesdiffer before making an investment decision to purchase our common stock. Furthermore, new risks and Exchange Commission (“SEC”). We maintain our website at http://www.graftech.com. The information contained on our web siteuncertainties arise from time to time, and it is not partimpossible for us to predict those events or how they may affect us.
For a more complete discussion of these and other factors, see "Risk Factors" in Part I of this Report. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Please see http://www.sec.gov for more information.report.
We have a code of ethics (which we call our Code of Conduct and Ethics) that applies to our principal executive officer, principal financial officer, principal accounting officers and controller, and persons performing similar functions, as well as our other employees, and which is intended to comply, at a minimum, with the Sarbanes-Oxley Act of 2002 and the SEC rules adopted thereunder. A copy of our Code of Conduct and Ethics is available on our web site. We intend to report timely on our website any disclosures concerning amendments or waivers of our Code of Conduct and Ethics that would otherwise require the filing of a Form 8-K with the SEC.
IntroductionOur company
Our visionGrafTech International Ltd. is to enable customer leadership, better and faster than our competition, through the creation, innovation and manufacture of graphite and carbon material science-based solutions. We have over 125 years of experience in the research and development of graphite and carbon-based solutions and our intellectual property portfolio is extensive. Our business was founded in 1886 by the National Carbon Company. We are a leading manufacturer of a broad range of high quality graphite electrodes,electrode products essential to the production of electric arc furnace (“EAF”)(or EAF) steel and various other ferrous and nonferrousnon‑ferrous metals.
We currently manufacture ourbelieve that we have the most competitive portfolio of low‑cost graphite electrodes in 4electrode manufacturing facilities strategically located in North America and Europe. We believe our Industrial Materials business has the largest manufacturing capacity and oneindustry, including three of the lowest manufacturing cost structurehighest 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. This unique position provides us with competitive advantages in product quality and cost. Founded in 1886, we have over 130 years of allexperience in the research and development (or R&D) of graphite- and carbon‑based solutions, and our major competitors and delivers the highest-level quality products.intellectual property portfolio is extensive. We currently have the operating capability, depending on product demand and mix, to manufacture approximately 195,000 metric tons of graphite electrodes. Beginning in 2013 and continuing through 2015, we announced and implemented rationalization plans designed to significantly improve our competitiveness, allow us to better serve customers and position our Industrial Materials business for success. As a result we have reduced ourelectrode manufacturing facilities in Calais, France, Pamplona, Spain, Monterrey, Mexico and reducedSt. Marys, Pennsylvania. Our customers include major steel producers and other ferrous and non‑ferrous metal producers in Europe, the Middle East and Africa (or EMEA), the Americas and Asia‑Pacific (or APAC), which sell their products into the automotive, construction, appliance, machinery, equipment and transportation industries. Our vision is to provide highly engineered graphite electrode capacity. Additionally, we initiated changesservices, solutions and products to EAF operators. Based on the Company’s operating and management structure in order to streamline, simplify and decentralize the organization, resulting in savings within our corporate functions. These strategic initiatives addressed three key areas: profitability, cash flow and future growth.
We hold approximately 201 issued and pending patent applications related to our Industrial Materials business.
On August 15, 2015, GrafTech became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. through a tender offer to our shareholders and subsequent merger transaction. Brookfield Asset Management is an experienced operator of industrial, natural resource and other tangible asset businesses. This transaction has provided us with a stable equity partner with experience in cyclical capital intensive industries.
Industrial Materials Segment
Industrial Materials is our only reportable segment and it delivers high quality graphite electrodes and needle coke products. Graphite electrodes are key components of the conductive power systems used to produce steel and non-ferrous metals. Approximately 75% of our graphite electrodes, sold are consumed in the EAF steel melting process, the steel making technology used by all “mini-mills,” typically at a ratereliability of one graphite electrode every eight to ten operating hours. We believe that mini-mills constitute the higher long-term growth sector of the steel industry and that there is currently no commercially viable substitute for graphite electrodes in EAF steel making. The remaining approximately 25% of electrodes sold are primarily used in various other ferrous and non-ferrous melting applications, including steel refining (ladle furnace operations for both EAF and basic oxygen furnace steel production), fused materials, chemical processing, and alloy metals.
Additionally, through our Seadrift subsidiary, we are a producer of petroleum needle coke. Needle coke is the key raw material in the manufacture of the graphite electrodes used in melting operations. Petroleum needle coke, a crystalline form of carbon derived from decant oil, is used in the production of graphite electrodes. Our Needle coke production allows us to be the only vertically integrated graphite electrode manufacturer. We believe that Seadrift is the world's second largest petroleum-based needle coke producer andassuming normal annual maintenance, a product mix of only normal premium petroleum needle coke productionsupply and related by-products,our excellent customer service, we believe that we are viewed as a preferred supplier to the annual capacity is approximately 140,000 metric tons. Seadrift currently provides a substantial portion of our needle coke requirements.
Our Industrial Materials segment, which had net sales of $825 million in 2014, $533 million in 2015 and $438 million in 2016 manufactures and delivers high quality graphite electrodes and needle coke products, as well as provides customer technical services. We estimate that the worldwide sales for products serviced by our Industrial Materials segment was approximately $3.5 billion in 2015 and approximately $2.7 billion in 2016. The decline in worldwide sales is primarily the result of lower prices and volumes driven primarily by decreasedglobal EAF steel production. This decrease is caused by increased imports to the markets we serve and increased blast furnace steel production as iron ore prices have fallen.producer market.
Graphite Electrode Products.Graphite electrodes are consumedan industrial consumable product used primarily in EAF steel production, one of the two primary methods of steel makingproduction and the steelmaking technology used by all “mini-mills.“mini‑mills.” Graphite electrodes are also consumed in the refining of steel in ladle furnaces and in other smelting processes such as production of titanium dioxide.
Electrodes act as conductors of electricity in the furnace, generating sufficient heat to melt scrap metal, iron ore or other raw materials used to produce steel or other metals. TheWe estimate that, on average, the cost of graphite electrodes represents only approximately 1% to 5% of the total production cost of steel in a typical EAF, but they are essential to EAF steel production. Graphite electrodes are consumedcurrently the only known commercially available products that have the high levels of electrical conductivity and the capability to sustain the high levels of heat generated in EAF steel production. As a result, EAF steel manufacturers have been willing to pay a premium for a reliable supply of high quality graphite electrodes. Graphite electrodes are also used in steel refining in ladle furnaces and in other processes, such as the production of titanium dioxide, stainless steel, aluminum, silicon metals and other ferrous and non‑ferrous metals.
Electrode production globally is focused on the manufacture of ultra-high power (or "UHP") electrodes for EAFs. The production of UHP electrodes requires an extensive proprietary manufacturing process and material science knowledge, including the use of higher quality needle coke blends. We primarily compete in the courseUHP graphite electrode market.
Petroleum needle coke, a crystalline form of carbon derived from decant oil, is a key raw material used in the production of graphite electrodes. We achieved substantial vertical integration with this critical raw material source through our acquisition of Seadrift Coke LP (or Seadrift) in November 2010, significantly reducing our reliance on other suppliers. The petroleum needle coke industry is highly concentrated. We believe Seadrift is one of the largest petroleum needle coke producers in the world. We also believe that the quality of Seadrift’s petroleum needle coke is superior for graphite electrode production compared to most of the petroleum needle coke available to our peers on the open market, allowing us to produce higher quality electrodes in a cost‑efficient manner. Additionally, we believe that this vertical integration provides a significant cost advantage relative to our competitors. We believe this cost advantage will persist as demand for petroleum needle coke increases for use in lithium‑ion batteries in electric vehicles. The demand for petroleum needle coke in lithium‑ion batteries is growing rapidly. This alternative source of demand is a significant development for the petroleum needle coke industry and has disrupted global supply chains for petroleum needle coke.
As a leading producer of graphite electrodes, we believe we are well-positioned to be a key provider to the EAF steel making industry. In 2018, we completed an operational improvement and debottlenecking initiative to increase production capacity at our three primary operating facilities by approximately 20% to a total of 202,000 metric tons ("MT"). We have recently begun a series of projects at our Monterrey and St. Marys facilities that will shift graphitization and machining of additional volume of semi-finished product from Monterrey to St. Marys. We expect these projects will further optimize our manufacturing footprint
by improving environmental performance and production flexibility at both facilities and also leverage cost efficiencies at our St. Marys facility.
Graphite electrodes are an essential consumable in the EAF steel production process and require a long lead time to manufacture and our strategic customers are highly focused on securing certainty of supply of reliable, high quality graphite electrodes. Therefore, beginning in the fourth quarter of 2017, we executed three- to five‑year take‑or‑pay sales contracts for approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. We believe we are uniquely capable among graphite electrode producers to pursue our three‑ to five‑year take‑or‑pay contracting strategy due to our substantial vertical integration into petroleum needle coke production.
Electric arc furnaces operate using either alternatingOn 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 (or 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 owns approximately 74% of our common stock as of December 31, 2019.
Our executive offices are located at 982 Keynote Circle, Brooklyn Heights, Ohio 44131 and our telephone number is (216) 676‑2000. Our website address is www.graftech.com. Information on, or accessible through, our website is not part of this Annual Report. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.
Competitive strengths
We are one of the largest producers of graphite electrodes in the world, accounting for approximately 24% of global production capacity (excluding China), and we believe our strategically positioned global footprint provides us with competitive advantages
We believe our facilities are among the most strategically located and lowest cost large‑scale graphite electrode manufacturing plants in the world. Of the graphite electrode manufacturing facilities currently operating, we estimate that our three primary operating manufacturing facilities represent approximately 24% of estimated production capacity for graphite electrodes outside of China, making us a critical supplier to global EAF steel manufacturers. Our manufacturing facilities are located in the Americas and EMEA, providing us with access to low‑cost and reliable energy sources, logistical and freight advantages in sourcing raw materials and shipping our graphite electrodes to our customers compared to our competitors, and excellent visibility into the large North American and European EAF steelmaking markets. Our experience in producing graphite electrodes for a varied global customer base positions us to meet customer requirements across a range of product types and quality levels, including support and technical services, further distinguishing us from our competitors.
We are a pure‑play provider of an essential consumable for EAF steel producers, the fastest‑growing sector of the steel industry
According to the World Steel Association ("WSA"), EAF steelmaking grew at an annual pace of approximately 10% in 2018, compared with 5% for steelmaking overall. As a result of the increasing global availability of steel scrap and the more resilient, high‑variable cost and environmentally friendly EAF model, we expect EAF steel producers to continue to grow at a faster rate than blast oxygen furnace ("BOF") producers globally. Additionally, EAF steel producers are increasingly able to utilize higher quality scrap and iron units, their two primary raw materials, to produce higher quality steel grades and capture market share from BOF producers, while maintaining a favorable cost structure. The EAF method produces approximately 25% of the carbon dioxide (or CO2) emissions of a BOF facility and does not require the smelting of virgin iron ore or the burning of coal. Additionally, as a result of significantly increased steel production in China since 2000, the supply of Chinese scrap is expected to increase substantially, which may result in lower scrap prices and provide the Chinese steel manufacturing industry with local scrap feedstock that was not historically available. We believe these trends will allow EAF steel producers to increase their market share and grow at a faster rate than BOF steel producers resulting in increasing demand for graphite electrodes.
We have capital‑efficient growth opportunities available to us
The graphite electrode industry responded to oversupplied markets from 2011 to 2015 with production capacity rationalization and consolidation. Only one new greenfield graphite electrode facility outside of China has been built since the 1980s and only one significant brownfield expansion has occurred, reflecting the historical difficulty of adding further graphite electrode production capacity. We believe the lead time from initial permitting to full production of a greenfield graphite electrode manufacturing facility would be approximately three to five years and cost approximately $10,000 per MT in developed countries. Similarly, brownfield development is complicated by significant capital costs and space and process constraints.
Our current facilities are modern, strategically located and well‑maintained, providing us with ample operational optimization capabilities. In 2018, we completed the expansion of our production capacity by approximately 20%, to 202,000 MT, through strategic capital investments and operational improvements. As a result of our prior operational improvement activities, we were able to achieve this large capacity increase with specific, highly targeted capital investments. These expansions provided an additional fixed cost absorption and drive further efficiencies of scale across our manufacturing base.
We believe we have the industry’s most efficient production platform of high production capacity assets with substantial vertical integration
Based on our experience, high capacity manufacturing facilities can have an operating cost advantage of more than $1,000 per MT as compared to low capacity manufacturing facilities. Over the the past decade, we have rationalized inefficient plants during the downturn and more recently completed a manufacturing footprint optimization program, which resulted in our ability to produce a greater quantity of graphite electrodes from our three primary operating facilities than we did from the six operating facilities we had in 2012. We believe that the optimization of our graphite electrode plant network will continue to drive improved fixed cost absorption. Moreover, our Calais, Pamplona, Monterrey and St. Marys facilities each provide unique cost advantages given their scale and access to low cost, reliable energy sources.
Seadrift provides a substantial portion of our petroleum needle coke supply needs internally at a competitive cost and allows us to maximize capacity utilization more efficiently than competitors, who may be more constrained by a limited or costly petroleum needle coke supply. Seadrift is one of only five petroleum needle coke facilities in the world outside of China, and we believe it is one of the largest petroleum needle coke producers in the world.
We are the only petroleum needle coke producer in the world specifically focused on the production of graphite electrodes
Our production of petroleum needle coke specifically for graphite electrodes provides us the opportunity to produce super premium petroleum needle coke of the highest quality and allows us to tailor graphite electrodes for customer requirements. Seadrift has 140,000 MT of petroleum needle coke production capacity, which we believe makes it one of the largest petroleum needle coke producers in the world. The growing petroleum needle coke demand from manufacturers of lithium‑ion batteries for electric current or direct electric current. The vastvehicles has increased demand for petroleum needle coke otherwise available to graphite electrode manufacturers. Sourcing the majority of electric arcour petroleum needle coke internally allows us to offer our customers certainty of supply, further enhancing our competitive position and supporting our three‑ to five‑year, take‑or‑pay contracts strategy. To align with our three‑ to five‑year contract profile, we have hedged the decant oil required to produce all of the graphite electrodes sold under these contracts, providing us with substantial visibility into our future raw material costs. We believe our use of petroleum needle coke is a further competitive advantage, as the use of pitch needle coke, an alternative raw material, results in longer bake times during graphite electrode production.
Our graphite electrodes and petroleum needle coke are among the highest quality in the industry
Since the completion of the divestiture of our non‑core legacy Engineered Solutions businesses in 2017, we have focused on our core competency of graphite electrode production. Our restructured and simplified business model has reduced our annual overhead expenses significantly since 2012, allowing us to redeploy the savings into our graphite electrode business. We identified and implemented mechanical and chemical improvements to our electrodes, invested in our capability to produce super premium petroleum needle coke needed for high‑margin UHP graphite electrodes, and optimized our production of pins at our Monterrey plant, which are a critical component used to connect and fasten graphite electrodes together in a furnace. As a result, our quality over the last three years has improved to its highest level in ten years. We believe the quality and the consistency of our electrodes is among the highest in North America and EMEA and on par with that of any producer globally. We believe the durability and infrequent breakage of our graphite electrodes create operating efficiencies and value opportunities for our customers. We also believe we have a competitive advantage in offering customers our ArchiTech Furnace Productivity System (or ArchiTech), which we believe is the most advanced support and technical service platform in the graphite electrode industry. ArchiTech, which has been installed in customer furnaces use alternating current. Eacharound the world, enables our engineers to work with our customers seamlessly to maximize the performance of these alternating currenttheir furnaces typically uses nine electrodes (in three columnsand provide real‑time diagnostics and troubleshooting. We believe our customers value our high quality products and customer service, and have provided us with opportunities to expand our business with them as a result.
Our experienced executive leadership and general managers and flexible workforce have positioned us for future earnings growth
Our seasoned leadership is committed to earnings growth. Our executive and manufacturing leadership have led manufacturing companies through many cycles and are focused on positioning us for profitable growth in any environment. We
have undertaken strategic investments to increase our production capacity in a capital‑efficient manner while reducing our cost position.
Graphite electrode industry
EAF steel producers are the primary consumers of three electrodes each) at one time. The other electric arc furnaces, which use direct current, typically use one column of threegraphite electrodes. The size of the electrodes varies depending on the size of the furnace, the size of the furnace’s electric transformer and the planned productivity of the furnace. In a typical furnace using alternating electric current and operating at a typical number of production cycles per day, one of the ninethree electrodes isare fully consumed (requiring the addition of a new electrode)electrodes), on average, every eight8 to ten10 operating hours. UHP graphite electrodes are consumed at a rate of approximately 1.7 kilograms per MT of steel production in EAF facilities.
The actual rate of consumption and addition of electrodes for a particular furnace depends primarily on the efficiency and productivity of the furnace. Therefore, demand for graphite electrodes is directly related to the amount and efficiency of EAF steel production.
EAF steel production requires significant heat (as high as 5,000° F) to melt the raw materials, primarily scrap metal, in the furnace, primarily scrap metal.furnace. Heat is generated as electricity (as much as 150,000 amps) passes through the electrodes and creates an electric arc between the electrodes and the raw materials.
The industry is fairly consolidated, particularly outside of China. The five largest global producers in the industry are Showa Denko K.K., GrafTech, Fangda Carbon New Material Technology Co. LTD, Tokai Carbon Co., Ltd. and Graphite electrodes are currentlyIndia Limited.
Supply trends
We estimate that from 2014-2016, the only known commercially available productsindustry closed or repurposed approximately 20% of global production capacity outside of China, consisting of smaller, higher cost facilities. Based on our experience, high capacity manufacturing facilities can have an operating cost advantage of more than $1,000 per MT as compared to low capacity manufacturing facilities, encouraging producers to consolidate facilities in order to reduce costs. We believe the majority of the production capacity reduction was permanent due to the demolition, long‑term environmental remediation and repurposing of most of these lower capacity facilities. Notwithstanding the current market challenges, the consolidation and production capacity reductions in the graphite electrode industry, along with the EAF steel industry’s recovery since 2016, lead us to believe that have the high levels of electrical conductivitygraphite electrode industry has recovered from the downturn and the capability of sustaining the high levels of heat generatedresumed its long‑term growth trajectory. We believe worldwide graphite electrode supply will increase in an electric arc furnace producing steel. Therefore,2020 driven by Chinese capacity additions.
Demand trends
Our graphite electrodes are essentialprimarily used in the EAF steelmaking process, and long-term global growth in that market has driven increased demand for graphite electrodes. EAF steelmaking has historically been the fastest‑growing segment of the global steel market. According to the WSA, global EAF steel production grew at a 3.5% compound annual growth rate from 1984 to 2011, while taking market share from other methods of steelmaking in most regions of the world, outside of China. EAF steel producers benefit from their flexibility in electric arc furnaces. sourcing iron units, being able to make steel from either scrap or alternative sources of iron like direct reduced iron and hot briquetted iron, both made directly from iron ore. Most of the growth in EAF steelmaking has taken place in Western Europe and North America, two regions with substantial amounts of scrap available for use in EAFs.
Source: World Steel Association
Industry Disruption 2011 to 2015
According to the WSA, EAF steel production declined approximately 10% from 2011 to 2015, reversing the trend of annual growth from 1984 to 2011, largely due to substantial increases in Chinese steel production. In 1984, China produced 21 million MT of BOF steel, which by 2016 had grown to 757 million MT, representing approximately 94% of its total steel production. Growth in production capacity surpassed growth in demand, resulting in significant excess capacity within China and increased exports into global markets. China's net steel exports peaked at 112 million MT in 2015. These exports negatively affected steel prices and led EAF steel producers to reduce production. In 2011, global EAF steel production was 454 million MT, representing 30% of global steel production, but by 2015, EAF steel production had declined to 407 million MT, representing 25% of global steel production. Declining EAF steel production significantly impacted demand for our graphite electrode products.
EAF Steel Production's Recovery and Outlook
The EAF steel industry has recovered since the downturn from 2011 to 2015. EAF steel production started to recover in 2016 with growth of 2.8%, according to the WSA. The WSA reported 14% growth in EAF steel production in 2017 followed by 10% growth in 2018. This recovery has taken place since China began in 2015 to restructure its steel industry by encouraging consolidation and shutting down excess capacity. China has also begun to implement increased environmental regulations to improve air quality, which has been impacted by CO2 emissions associated with the burning of coal in BOF steelmaking. Additionally, developed economies such as North America and Western Europe have implemented trade decisions against BOF steel‑producing countries to protect their domestic steel industries against imports. These actions have resulted in a significant decrease in Chinese steel exports. According to China Customs and Baiinfo, Chinese steel exports have declined from 112 million MT in 2015 to 64 million MT in 2019. This reduction in exports has resulted in increased steel production outside of China, especially EAF steel production. However, recent steel production and graphite electrode consumption has slowed in some regions, notably Europe and South America and the WSA estimated that total steel production declined approximately 2% outside of China in 2019.
We believe there is currently no commercially viable substitutea particular opportunity for EAF steelmaking to take further market share in China as well. China’s Ministry of Industry and Information Technology's current draft guidelines call for EAF steelmaking to constitute 20% of overall steel production by 2025, more than doubling its current share of output. According to the WSA, in 2018, Chinese EAF steel production increased to 108 million MT, or 12%, of China’s total steel production, up from 2017 levels of 81 million MT, or 9%, of China's total steel production. If Chinese EAF steelmaking production capacity were to reach 20%, based on 2018 production levels, that would add 78 million MT of additional EAF steel production for a total of 186 million MT, compared to 2018 EAF steel production in the next largest regions of 70 million MT in the EU, 60 million MT in India and 59 million MT in the United States, according to WSA.
While China’s 13th Five‑Year Plan, released in March 2016, did not explicitly address the EAF steel production target, it did emphasize the importance of environmental efforts, and 10 of 25 targets in the plan were related to the environment. The current draft guidelines further support these efforts. The Chinese government’s increasing focus on the environment may
eventually incentivize steelmakers to convert from BOFs to EAFs in order to continue operating. Significant BOF capacity in the country has been shuttered since 2016 due to increasing government‑mandated environmental efforts. China’s rapid increase in BOF steel production between 2000 and 2016 has also created a significant new source of scrap. As a result of these factors, we believe that total UHP graphite electrode demand in China will increase going forward.
Pricing trends
Pricing for graphite electrodes inis determined through contract negotiations and spot transactions between producers and consumers. Pricing has historically been cyclical, reflecting the demand trends of the global EAF steel making. We estimate that, on average,steelmaking industry and supply of graphite electrodes. Moreover, as petroleum needle coke represents a significant percentage of the raw material cost of graphite electrodes, represents about 1-2% ofgraphite electrodes have typically been priced at a spread to petroleum needle coke. Over the total cost of producing steel in a typical electric arc furnace.
EAF steel productionperiod from 2008 to 2017, the average graphite electrode spread over petroleum needle coke was estimated to be approximately 395 million metric tons in 2016, representing approximately 25% of the world’s steel production. The World Steel Association's utilization rate for the total steel market was 70% in 2015 and 69% in 2016. EAF steel capacity utilization rates typically follow the trends of the overall steel industry, however recently blast furnace utilization$3,000 per MT, on an inflation‑adjusted basis using constant 2018 dollars. In tight demand markets, this spread has increased, to the detriment of EAF production as iron ore and coal prices have fallen faster than the price of scrap steel.
Relationship Between Graphite Electrode Demand and EAF Steel Production. The improved efficiency of electric arc furnaces has resultedresulting in a decrease in the average rate of consumption of graphite electrodes per metric ton of steel produced in electric arc furnaces (called “specific consumption”). We estimate that the average EAF melter specific consumption is approximately 1.7 kilograms of graphite electrodes per metric ton produced.
Over the long term, specific consumption will continue to decrease at a gradual pace, as the EAF steel makers investment cost (relative to the benefits) increases to achieve further efficiencies in specific consumption. Another contributing factor is the ongoing electrode quality improvements ofhigher graphite electrode manufacturers.
We further believe that the rate of decline in the future will be impacted by the addition of modern EAF steel making capacity which tends to have lower specific consumption than older electric arc furnaces. To the extent that this new capacity replaces old capacity, it has the effect of accelerating the reduction in industry wide specific consumption due to the efficiency of new electric arc furnaces relative to the old. However, to the extent that this new capacity increases industry wide EAF steel production capacity and that capacity is utilized, it creates additional demand for graphite electrodes.
Over the long term, graphite electrode demand is estimated to grow at an average annual net growth rate of approximately 1%-2%, based on the anticipated growth of EAF steel production (average historical growth rate of 1%-2%), partially offset by the decline in future specific consumption.
Production Capacity.prices. We believe that the worldwide totalnew source of demand for petroleum needle coke presented by lithium‑ion battery producers for electric vehicles will place upward pressure on petroleum needle coke pricing compared to historical levels.
There is no widely accepted graphite electrode manufacturing capacity was approximately 1.88 million metric tons for 2014, 1.85 million metric tons for 2015reference price. Historically, between 2008 and approximately 1.70 million metric tons for 2016. We believe that the worldwide graphite electrode industry manufacturing capacity utilization rate excluding China was approximately 68% for 2015 and 76% for 2016 and including China capacity utilization was approximately 64% in 2015 and 63% in 2016.. We routinely update2017, our estimates as more information, which can vary, becomes available, as stated capacities in some cases are effective capacity adjusted for production yields and product mix.
We have the capability, depending on product demand and mix, to manufacture approximately 195,000 metric tonsweighted average realized price of graphite electrodes duringwas approximately $4,500 per MT (on an inflation‑adjusted basis using constant 2018 dollars). During the last demand trough in 2016, our weighted average realized price of graphite electrodes fell to approximately $2,500 per MT in 2016. This production capacity is down approximately 60,000 metric tons from previous years due to ourFollowing the significant rationalization initiatives. See Note 4 to the Financial Statements for a discussion on these rationalization activities. As a result of our acquisition of Seadrift in November 2010, our graphite electrode production is vertically integrated. Seadrift currently provides a substantial portionglobally, the resumption of ourgrowth in EAF steel production, falling scrap prices, reductions in Chinese steel exports, and constrained supply of needle coke, requirements.graphite electrode spot prices began to increase in late 2017 and reached record high prices in 2018. These record high spot prices began to retreat in 2019, falling 25% during the year. We expect additional decreases in 2020.
Petroleum Needle Coke and Coke Products. We produce petroleum needle coke. Petroleum needle coke, a crystalline form of carbon derived from decant oil, is used primarily in the production of graphite electrodes. We are one of three petroleum needle coke producers in the world, and this backward integration reduces our reliance on other suppliers.Introduction
Needle coke is the primary raw material for the production of graphite electrodes used by EAF steelmakers and producers of aluminum, stainless steel, silicon metals and other ferrous and non‑ferrous metals, and is also a key raw material in the manufactureproduction of lithium‑ion batteries used to power electric vehicles. Needle coke is derived from two carbon sources. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil, a byproduct of the gasoline refining process, into petroleum needle coke and generally takes two to three months to produce. Pitch needle coke, used principally by Asian graphite electrodes which are consumedelectrode manufacturers, is made from coal tar pitch, a byproduct of coking metallurgical coal used in EAF steel production. BOF steelmaking.
Graphite electrode producers combine petroleum or coal tar (“pitch”)needle coke and pitch needle coke with binders and other ingredients to form graphite electrodes. Petroleum needle coke and pitch needle coke, relative to other varieties of coke, are distinguished by their needle-likeneedle‑like structure and their quality, which is measured by the presence of impurities, principally sulfur, nitrogen and ash. The needle-likePetroleum needle coke and pitch needle coke are typically low in these impurities. Additionally, the needle‑like structure of petroleum and pitch needle coke creates expansion along the length of the electrode, rather than the width, which reduces the likelihood of fractures. Impurities reduce quality because they increase the coefficient of thermal expansion and electrical resistivity of the graphite electrode, which can lead to uneven expansion and a build-up of heat and cause the graphite electrode to oxidize rapidly and break. Petroleum and pitch needle coke are typically low in these impurities. In order to minimize fractures caused by disproportionate expansion over the width of an electrode, and minimize the effect of impurities, large-diameterlarge‑diameter graphite electrodes (18 inches to 32 inches) employed in high-intensity electric arc furnacehigh‑intensity EAF applications are comprised almost exclusively of petroleum needle coke and pitch needle coke.
Engineered Solutions Business
The process map below shows the raw materials required to make graphite electrodes, the various consumers of these raw materials, as well as the consumers of graphite electrodes.
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| (1) | Graphite electrode sales represent sales outside of China |
Source: Management estimates
Previously, producers of petroleum needle coke typically agreed to supply petroleum needle coke in twelve‑month contracts; however, since 2017, producers of petroleum needle coke have typically used six‑month contracts. As a result, our competitors must continually renegotiate supply agreements in response to changing market conditions. We are substantially vertically integrated through our ownership of our Seadrift facility, which provides the majority of our needle coke requirements and insulates us from rapid changes in the needle coke market.
Market size and major producers
The needle coke industry is highly concentrated with approximately twelve major producers of needle coke and only five major producers of petroleum needle coke. These firms include Phillips 66 (U.S.), Seadrift (GrafTech), Petrocokes Japan Limited (Japan), JX Nippon Oil & Energy Co., Ltd. (Japan) and Petrochina International Jinzhou Co., Ltd. (China), which produce petroleum needle coke, and Mitsubishi Chemical Company (Japan), Baosteel Group (China), C‑Chem Co., Ltd. (Japan), Indian Oil Company Limited (India), JX Holdings Inc. (Japan), Petrochina International Jinzhou Co., Ltd. (China) and Anshan Kaitan Thermo‑Energy New Materials Co. Ltd (China), which produce pitch needle coke. We estimate that Seadrift has approximately 19% of the petroleum needle coke production capacity outside China.
Graphite electrode manufacturers prefer petroleum needle coke because of the meaningfully longer bake and graphitizing time required for pitch needle coke. Electric vehicle manufacturers prefer artificial graphite such as petroleum needle coke in lithium‑ion batteries because of its greater energy density, providing batteries with longer driving ranges and longevity.
Estimated Petroleum needle coke industry production capacity (excluding China) by company (MT)
Source: Management estimates
Industry trends
Petroleum needle coke production capacity outside of China has remained unchanged for at least the last 10 years due to the capital intensity, technical know‑how and long lead times required to build greenfield needle coke production facilities and the stringent regulatory process associated with building new needle coke production capacity. Furthermore, we believe that brownfield expansion opportunities in developed countries are generally not available as petroleum needle coke manufacturing is a continuous process with significant costs associated with shutting down and restarting facilities for maintenance or capital investment.
Demand for petroleum needle coke is increasing due to the use of needle coke in lithium‑ion batteries used in electric vehicles. According to the International Energy Agency ("IEA"), the global electric car fleet exceeded 5 million in 2018, up 2 million from the previous year and almost doubling the number of new electric car sales. The IEA projects that global annual sales of electric cars may range between 5 million and 8 million in 2020, and between 12 million and 24 million in 2025. Most electric vehicles rely on lithium‑ion batteries as their key performance component. Many manufacturers of lithium‑ion batteries for electric vehicles use needle coke as a raw material for carbon anodes in their batteries due to advantages in terms of charging rate and capacity. According to IEA, battery pack capacity has been increasing in recent years. In the future, the observed trend towards larger battery pack sizes is expected to continue. Based on IEA’s estimates for electric vehicle sales and battery pack size, and management estimates for needle coke used in anodes, demand for needle coke from electric vehicles could grow significantly from approximately 58,000 MT in 2018 to over 200,000 MT in 2020.
Contracts and Customers
In 2017, we reoriented our commercial strategy around a three‑ to five‑year take‑or‑pay contract framework and restructured our sales force incentives. As graphite electrodes are an essential consumable in the EAF steel production process and require a long lead time to manufacture, we believe our strategic customers are highly focused on securing certainty of supply of reliable, high quality graphite electrodes. Prior to our three‑ to five‑year take‑or‑pay contract initiative, our sales of graphite electrodes were generally negotiated annually through purchase orders on an uncontracted, nonbinding basis. The majority of our customers sought to secure orders for a supply of their anticipated volume requirements each upcoming year. The remaining, small balance of our graphite electrode customers purchased their electrodes as needed throughout the year at industry spot prices.
We also produce otherbelieve we are uniquely capable among graphite products withinelectrode producers to pursue our Engineered Solutions business, which includes advanced graphite materials, advanced energy technologies, refractory products and advanced composite materials. Advanced graphite materials are highly engineered synthetic graphite products used in many areasthree‑ to five‑year take‑or‑pay contracting strategy due to their unique propertiesour substantial vertical integration into petroleum needle coke production. All of our petroleum needle coke production is used internally and is not sold to external customers. Demand for petroleum needle coke increased due to the use of needle coke in lithium‑ion batteries for electric vehicles, as well as increased demand for graphite electrodes. Consequently, we expect this limited availability of petroleum needle coke will restrict new graphite electrode production. Seadrift, our wholly owned subsidiary acquired in 2010, provides the majority of our petroleum needle coke requirements and produces sufficient needle coke to supply substantially all of the graphite electrode production that we have contracted under our take‑or‑pay contracts. We have also hedged the decant oil required to produce all of the graphite electrodes sold under these contracts, providing us substantial visibility into our future raw material costs.
Because the market price of graphite electrodes may be based, in part, on the current or forecasted costs of key raw materials, periods of raw material price volatility may have an impact on the market price. In particular, as petroleum needle coke represents a significant percentage of the raw material cost of graphite electrodes, the price of graphite electrodes has historically been influenced by the price of petroleum needle coke. See “Risk Factors-Risks Related to Our Business and Industry-pricing for graphite electrodes has historically been cyclical and current prices are relatively high, however, the price of graphite electrodes may decline in the future.” The fixed prices under our contracts prevent us from passing along changes related to our costs of raw materials to our customers. See “Risk Factors-Risks Related to Our Business and Industry-We are dependent on the supply of petroleum needle coke. Our results of operations could deteriorate if recent disruptions in the supply of petroleum needle coke continue or worsen for an extended period.” However, as described above, we believe our ability to tailor them to specific solutions. These products are used in transportation, alternative energy, metallurgical, chemical, oil and gas exploration and various other industries. Advanced energy technologies products consist of electronic thermal management solutions, fuel cell components, and sealing materials. Refractory products are used in blast furnaces and submerged arc furnaces due to their high thermal conductivity and the ease with which they can be machined to large or complex shapes. Advanced composite materials are highly engineered carbon products that are woven into various shapes, primarily to support the aerospace and defense industries.
During the first quarter of 2016, we announced that we are exploring strategic options for our Engineered Solutions business to focus our efforts on our graphite electrode business. During the second quarter of 2016, our Engineered Solutions business qualified as held for sale status. All results have been excluded from continuing operations for both the current and prior years, unless otherwise noted. See Note 3 "Discontinued Operations and Assets Held for Sale" for significant components of the resultssource all of our Engineered Solutions segment.petroleum needle coke requirements for these contracts from our Seadrift facility and our hedging of our purchases of decant oil mitigates the impact of periodic shortages and price fluctuations of raw materials.
DuringBeginning in the fourth quarter of 2016,2017, we soldexecuted three‑ to five‑year take‑or‑pay contracts for approximately 60% to 65% of our advanced compositecumulative expected production capacity from 2018 through 2022. In 2018, we shipped approximately 133,000 MT under these contracts at prices averaging approximately $10,100 per MT. In 2019, we shipped approximately 145,000 MT under these contracts at pricing averaging approximately $9,900 per MT. We have contracted to sell approximately 142,000, 125,000 and 117,000 MT in 2020, 2021 and 2022, respectively. Approximately 83% of these volumes are under pre‑determined fixed annual volume contracts, while approximately 17% of the volumes are under contracts with a specified volume range. The aggregate difference between the midpoints above and the minimum or maximum volumes across our cumulative portfolio of take‑or‑pay contracts with specified volume ranges is approximately 5,000 MT per year in 2020, 2021 and 2022. Contracted volumes may vary in timing and total due to the credit risk associated with certain customers facing financial challenges as well as customer demand related to contracted volume ranges. In 2020, we expect to ship approximately 130,000 MT at prices averaging approximately $9,600 per MT.
All of our take‑or‑pay contracts have fixed prices. Within this contract framework, our customers agree to purchase a specified volume of product at the price under the contract. Contract customers are unable to renegotiate or adjust the price under the contract. These fixed prices under the contracts also prevent us from passing along any changes related to the costs of raw materials business, which produced highly engineered carbon productsto contract customers. As a result of the take‑or‑pay obligation of the contracts, the customer must purchase the annual contracted volume (or annual volume within the specified range). In the event the customer does not take delivery of the annual volume specified in the contract, our contracts provide for a capacity payment equal to the product of the number of MTs short of the annual volume specified in the contract multiplied by the price under the contract for that are woven into various shapes, primarily to support the aerospace and defense industries. We are continuing to negotiate with potential buyerscontract year. The weighted average contract price for the contracted volumes over the next three years is approximately $9,600 per MT, with the weighted average contract prices for contracts with a specified volume range computed using the volume midpoint.
In addition to defining annual volumes and prices, these three‑ to five‑year take‑or‑pay contracts include significant termination payments (typically, 50% to 70% of remaining Engineered Solutions’ businesses.contracted revenue) and, in certain cases, parent guarantees and collateral arrangements to manage our customer credit risk. In most cases, the customer can only terminate the contract unilaterally: (i) upon certain bankruptcy events; (ii) if we materially breach certain anti‑corruption legislation; (iii) if we are affected by a force majeure event that precludes the delivery of the agreed‑to graphite electrodes for more than a six‑month period; or (iv) if we fail to ship certain minimum levels during a specified period of time. The customer will also be able to temporarily suspend obligations under the contract due to a force majeure event, as will we, with the contract term being extended by a period equal to the duration of such suspension.
Business Strategies
We believeOur contracts provide our customers with certain remedies in the event that by growingwe are unable to deliver the contracted volumes of graphite electrodes on a quarterly basis. Our substantially vertically integrated Seadrift plant is particularly important to our revenues, successfully implementing LEAN initiatives, and maximizingability to provide our cash flows,customers with a reliable supply of graphite electrodes. Therefore, the likelihood that we will fail to deliver enhanced financial performance.the contracted volume is significantly reduced due to our substantial vertical integration. For a discussion of certain risks related to our take‑or‑pay contracting initiative, see “Risk Factors-Risks related to our business and industry-We may be unable to implement our business strategies, including our initiative to secure and maintain three‑ to five‑year take‑or‑pay customer contracts, in an effective manner.”
2019 Revenue and production by region and end market
Approximately 90% of our graphite electrodes were purchased by EAF steel producers in 2019. The remaining portion is primarily used in various other ferrous and non‑ferrous melting applications, BOF production, fused materials, chemical processing, and alloy metals. In 2019, one customer accounted for 10% of our net sales. We believe this strategy will position uscustomer does not pose a significant concentration of risk, as sales to capitalize on growth opportunities that may arise. We have transformed our operations, building competitive advantages to enable us to compete successfully, to realize enhanced performance as economic conditions improve and to exploit growth opportunitiesthis customer could be replaced by demand from our intellectual property portfolio. Our business strategies are designed to expand upon our competitive advantages by:
Leveraging Our Unique Global Manufacturing Network. We believe that our global manufacturing network, our backward integration and our research and development provides us with competitive advantages in product quality, product costs, timely and reliable delivery, and operational flexibility to adjust product mix to meet the diverse needs of a wide range of segments andother customers.
We continue to leverage our network to seek to achieve significant increases in throughput generated from our existing assets, through productivity improvements, capital expenditures, and other efficiency initiatives. We believe we can further exploit our network by focusing our technical and customer service capabilities on:
large global customers to whom we believe we are well positioned to offer products that meet their volume, product quality, product mix, delivery reliability and service needs at competitive prices; and
customers in targeted segments where we have competitive advantages to meet identified customer needs due to the range and quality of our products, the utilization of our capacity, the value of our customer technical service and our low cost supplier advantage.
We sell our products in every major geographic region.region globally. Sales of our products to buyers outside the U.S.United States accounted for approximately 76%81% of net sales in 2014,2017, and approximately 80%77% of net sales in 2015each of 2018 and 83%2019. Overall, in 2016. No single customer or group of affiliated customers accounted for2019, we generated more than 10%90% of our total net sales in 2014, 2015 or 2016.from EMEA and the Americas.
Driving Continuous Improvement with LEAN and Six Sigma.
We believe a consistent focus onour three‑ to five‑year take‑or‑pay contracting strategy provides cash flow visibility and stability to our customers and, diligence towards aligningas a result, has secured a high quality customer base. We perform financial and credit reviews of all eligible potential customers prior to entering into these contracts. Less creditworthy customers are required to post a bank guarantee, letter of credit or significant cash prepayment. Based on total revenues over the life of the contracts, our processesten largest customers represent 38% of total revenue, while the next ten customers and all other customers represent 17% and 45% of total revenue, respectively. During 2019, approximately 80% of our sales came from our three- to satisfy these customers is essential in today’s global market. five-year take-or-pay contracts.
Sales and customer service
We differentiate and sell the value of our graphite electrodes primarily based on price, product quality and performance, delivery reliability and customer technical service.
We have undertaken a comprehensive launch of LEANlarge customer technical service organization, with supporting application engineering and Six Sigma with dedicated resources at all of our key manufacturing plants intended to create a common languagescientific groups and tool set centeringmore than 30 engineers and specialists around LEAN and Six Sigma.
Our focus on waste reduction using a team approach creates knowledge at all levels of the organization. Concentrating on creating flow within processes enables us to capitalize on lower inventories while still maintaining a high percentage of on-time-delivery. Our metric driven behavior and process of deploying corrective actions to anomalies drives us towards customer centric solutions. We believe we will be able to continue to leverage our stream-lined processes as a sustainable competitive advantage with shorter lead times, lower costs, higher quality products, and exceptional service.
Delivering Exceptional and Consistent Quality. We believe that our products are among the highest quality products availableworld serving in our industry. We have been recognized as a preferred or certified supplier by many major steel companies and have received numerous technological innovation and other awards by industry groups, customers and others. Using our technological capabilities, we continually seek to improve the consistent overall quality of our products and services, including the performance characteristics of each product, the uniformity of the same product manufactured at different facilities and the expansion of the range of our products. We believe that improvements in overall quality create significant efficiencies and opportunities for us, provide us the opportunity to increase sales volumes and potential demand share, and create production efficiencies for our customers.
Providing Superior Technical Service.this area. We believe that we are recognized as one of the industry leaders in providing value added technical services to customers for our major product lines. customers.
Our direct sales force currently operates from 10 sales offices located around the world. We sell our graphite electrodes primarily through our direct sales force, independent sales representatives and distributors, all of whom are trained and experienced with our products.
We have a large customer technical service organization, with supporting engineering and scientific groups with more than 90 engineers and specialistspersonnel based around the world dedicated to our Industrial Materials business,assist customers to maximize their production and we believe that we are recognized as one of the industry leaders in providing value added technical services to customers for our major product lines.minimize their costs. A portion of these employees assistour engineers and technicians provide technical service and advice to key steel and other metals customers incustomers. These services relate to furnace applications operations and operation, as well as furnace upgrades to reduce energy consumption, improve raw material costs and increase output.
Maintaining Liquidity and Building Value.We believe thatwe have a competitive advantage in offering customers ArchiTech, which we believe is the most advanced support and technical service platform in the graphite electrode industry. ArchiTech, which has been installed in customer furnaces worldwide, enables our business strategies andengineers to work with our rationalization and related activities support our goal of growing revenues and operating income and maximizing the cash generated from operations. Maintaining liquidity remains a priority for us. As of December 31, 2016, we had Senior Notes with a carrying value of $274 million which will mature in 2020 with a redemption value of $300 million. We had outstanding borrowings on our Credit Agreement totaling $90.7 million and cash and cash equivalents of $11.6 million. As of December 31, 2015, we had outstanding borrowings under our Credit Agreement of $98 million, $268 million of Senior Notes and cash and cash equivalents of $6.9 million.
We continually review our assets, product lines and businesses to seek out opportunitiescustomers seamlessly to maximize value, through re-deployment, merger, acquisition, divestiture or other means, which could include taking on more debt. We may at any time buy or sell assets, product lines or businesses.
Production Planning
We plan and source productionthe performance of our products globally. We have evaluated virtually every aspect of our global supply chain, and we have redesigned and implemented changes to our global manufacturing, marketing and sales processes to leverage the strengths of our repositioned manufacturing network. Among other things, we have reduced manufacturing bottlenecks, improved product and service quality and delivery reliability, expanded our range of products, improved our global sourcing for our customers and have closed or plan to close high cost manufacturing locations when lower cost manufacturing locations can absorb or expand to meet needed production capacity.
We deploy synchronous work process improvements at most of our manufacturing facilities. We have also installed and continue to install and upgrade proprietary process technologies at our manufacturing facilities, and use statistical process controls in our manufacturing processes for all products, and employ LEAN processing improvement techniques.
Our global manufacturing network also helps us to minimize risks associated with dependence on any single economic region.
Manufacturing
Graphite Electrode Products. The manufacture of a graphite electrode takes, on average, about two months. We manufacture graphite electrodes ranging in size up to 30 inches in diameter and over 11 feet in length, and weighing as much as 5,900 pounds (2.6 metric tons). The manufacture of graphite electrodes includes six main processes: forming the electrode, baking the electrode, impregnating the electrode with a special pitch that improves the strength, rebaking the electrode, graphitizing the electrode using electric resistancetheir furnaces and machining.
We currently manufacture graphite electrodes in the United States, Mexico, Franceprovide real‑time diagnostics and Spain and we have an electrode machining center in Brazil. During 2016, we temporarily idled our U.S. facility to align with overall demand.
Petroleum Needle Coke and Coke Products. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil into petroleum needle coke shaped in a needle-like structure. We produce petroleum needle coke at one manufacturing facility in the U.S.
Quality Standards and Maintenance. Most of our global manufacturing facilities are certified and registered to ISO 9001-2008 international quality standards and some are certified to QS 9001-2008. Maintenance at our facilities is conducted on an ongoing basis.
Raw Materials and Suppliers. The primary raw materials for electrodes are engineered by-products and residues of the petroleum and coal industries. We use these raw materials because of their high carbon content. The primary raw materials for graphite electrodes are calcined needle coke and pitch. We purchase raw materials from a variety of sources and believe that the quality and cost of our raw materials on the whole is competitive with those available to our competitors. We obtained a substantial portion of our 2016 needle coke requirements internally and plan to do the same in 2017.
The primary raw material used by Seadrift to make petroleum needle coke is decant oil, a by-product of the gasoline refining process. Seadrift is not dependent on any single refinery for decant oil. While Seadrift has purchased a substantial majority of its raw material inventory from a limited number of suppliers in recent years, we believe that there is an abundant supply of suitable decant oil in the United States available from a variety of sources.
We purchase energy from a variety of sources. Electric power used in manufacturing processes is purchased from local suppliers under contracts with pricing based on rate schedules or price indices. Our electric costs can vary significantly depending on these rates and usage. Natural gas used in manufacturing processes is purchased from local suppliers primarily under annual volume contracts with pricing based on various natural gas price indices.
Distribution
We deploy various demand management and inventory management techniques to seek to ensure that we can meet our customers’ delivery requirements while still maximizing the capacity utilization of our production capacity. We can experience significant variation in our customers’ delivery requirements as their specific needs vary and change through the year. We generally seek to maintain appropriate inventory levels, taking into account these factors as well as the significant differences in manufacturing cycle times for graphite electrode products and our customers’ products.
Finished products are usually stored at our manufacturing facilities. Limited quantities of some finished products are also stored at local warehouses around the world to meet customer needs.
Sales and Customer Service
Facilities
We believecurrently manufacture our product quality, our globalgraphite electrodes in three primary manufacturing networkfacilities strategically located in the Americas and our low cost structureEMEA, two of the largest EAF steelmaking markets. Our locations allow us to deliverserve our customers in the Americas and EMEA efficiently. In addition to these three facilities, we have a broad rangefourth graphite electrode manufacturing site in St. Marys, Pennsylvania. We have recently begun a series of projects at our Monterrey and St. Marys facilities that will shift graphitization and machining of additional volume of semi-finished product offerings across various segments.from Monterrey to St. Marys. We differentiateexpect these projects will further optimize our manufacturing footprint by improving environmental performance and sell the value ofproduction flexibility at both facilities and also leverage cost efficiencies at our product offerings, depending on the segment or specific product application, primarily based on product quality and performance, delivery reliability, price, and customer technical service.
We price our products based on the value that we believe we deliver to our customers. Pricing may vary within any given industry, depending on the segment within that industry and the value of the offer to a specific customer.St. Marys facility. We believe that we have approximately 202,000 MT of graphite electrode production capacity at our operating sites. We believe our business has the lowest manufacturing cost structure of all of our major competitors, primarily due to the large scale of our manufacturing facilities.
Our manufacturing facilities significantly benefit from their size and scale, work force flexibility, access to attractively‑priced sources of power and other key raw materials, and our substantial vertical integration with Seadrift. Our Calais, Pamplona, Monterrey and St Marys facilities have access to low‑cost sources of electricity with essential logistical infrastructure in place, which is a significant element of our manufacturing costs. Our Seadrift facility currently produces the majority of our petroleum needle coke requirements for our graphite electrode production, allowing us to source our primary raw material internally and at cost, a significant advantage relative to our peers. Seadrift also produces sufficient needle coke to supply substantially all of the graphite electrode production that we have contracted under our take‑or‑pay contracts.
Manufacturing
We manufacture graphite electrodes ranging in size up to 30 inches in diameter, over 11 feet in length, and weighing as much as 5,900 pounds (2.6 MT). The manufacturing process includes six main processes: screening of raw materials (needle coke) and blending with coal tar pitch followed by forming, or extrusion, of the electrode, baking the electrode, impregnating the electrode with a special pitch that improves strength, re‑baking the electrode, graphitizing the electrode using electric resistance furnaces, and machining. The first baking process converts the pitch into hard coke. During the baking process, the electrode pitch volatiles are removed, leaving porosities inside. To improve graphite electrode quality, the electrode is then impregnated with additional coal tar pitch to fill the porosities and baked a second time. After impregnation and re‑baking, the manufacturing process continues with graphitization as the electrodes are heated at 5000°F in a special longitudinal furnace to convert the carbon into graphite. The graphitization cycle removes additional impurities and improves the electrodes’ key qualities: thermal and electrical conductivity, thermal shock resistance performance, lubricity, and abrasion resistance.
High quality graphite electrodes have low electrical resistivity and strong durability. Resistivity is enhanced by removing impurities during the production process, while durability is determined by the coefficient of thermal expansion (or CTE) of the raw material used to produce the graphite electrode. Lower CTE needle coke produces higher quality electrodes. UHP electrodes used in harsh EAF melter applications have low resistivity and low CTE to maximize efficient use of electricity in the EAF and minimize electrode consumption. The total manufacturing time of a graphite electrode and its associated connecting pin is on average approximately six months from needle coke production to customer delivery. We believe that the period of time required to produce a graphite electrode meaningfully constrains the ability of graphite electrode producers to react to real‑time changes in steel market environments and acts as a barrier to entry.
Production of a graphite electrode begins with the production of either petroleum needle coke, our primary raw material, or pitch needle coke. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil, a byproduct of the gasoline refining process, into petroleum needle coke and generally takes two to three months to produce. Needle coke takes its name from the needle‑like shape of the coke particles. We produce calcined petroleum needle coke at Seadrift. Seadrift is not dependent on any single refinery for decant oil. While Seadrift has purchased a substantial majority of its raw material inventory from a limited number of suppliers in recent years, we believe that there is a large supply of suitable decant oil in the United States available from a variety of sources. In addition, we use derivatives to hedge the decant oil required to produce all of the graphite electrodes sold under our three‑ to five‑year take-or-pay contracts, providing us with substantial visibility into our future raw material costs.
We purchase the electric power used in our manufacturing processes from local suppliers under contracts with pricing based on rate schedules or price indices. Our electricity costs can achieve increased competitiveness, customer demand,vary significantly depending on these rates and profitability through our valueusage. Natural gas used in the baking and re‑baking processes is purchased from local suppliers primarily under annual volume contracts with pricing based on various natural gas price indices.
added offerings to customers. In certain segments where the product is less differentiated, these value added offerings have less impact on our competitiveness.Research and development
We have a large customer technical service organization, with supporting application engineering and scientific groups and more than 90 engineers and specialists around the world dedicated to our Industrial Materials business. We believe that we are recognized as one of the industry leaders in providing value added technical services to customers for our major product lines.
We deploy these selling methods and our customer technical service to address the specific needs of all products. Our direct sales force currently operates from 6 sales offices located around the world.
We sell our Industrial Materials products primarily through our direct sales force, independent sales representatives and distributors, all of whom are trained and experienced with our products.
Historically, our graphite electrode customers generally seek to negotiate to secure the reliable supply of their anticipated volume requirements on an annual basis, sometimes called the “graphite electrode book building process”. These orders are subject to renegotiation or adjustment to meet changing conditions. The balance of our graphite electrode customers purchase their electrodes as needed at current market prices.
We have customer technical service personnel based around the world to assist customers to maximize their production and minimize their costs. A portion of our engineers and technicians provide technical service and advice to key steel and other metals customers. These services relate to furnace applications and operation, as well as furnace upgrades to reduce energy consumption, improve raw material costs and increase output.
Technology
We believe that we are an industry leader in graphite and carbon materials science and high temperature processing know-how and that we operate premier research, development and testing facilities for our industry. We have over 125130 years of experience in the researchR&D of graphite‑ and development ofcarbon‑based solutions. By focusing our management’s attention and R&D spending exclusively on the graphite and carbon technologies.electrode business, we have been able to meaningfully improve the quality
Research and Development. We conduct our research and development both independently and in conjunction with our strategic suppliers, customers and others. We opened a new dedicated innovation and technology center located near our corporate headquarters in Ohio in February 2015 which focuses on all products. This facility drives innovation to support new product development and commercialize the next generation technologies in carbon and graphite material science. The activities at this center are integrated with the efforts
of our engineers atgraphite electrodes, repositioning ourselves as an industry quality leader and improving our manufacturing facilities who are focusedrelationships with strategic customers. Our focus on improving manufacturing processes.
Research and development expenses amountedthe quality of petroleum needle coke through R&D has led to $9.7 million in 2014, $3.4 millionour petroleum needle coke production at Seadrift being best‑in‑class for use in the period January 1 through August 14, 2015, $1.1 million in the period August 15 through December 31, 2015 and $2.4 million in 2016.manufacturing of highly durable UHP electrodes. We believe that our technological and manufacturing strengths and capabilities provide us with a significant growth opportunity as well as a competitive advantage.
Intellectual Property.property
We believe that our intellectual property, consisting primarily of patents and proprietary know-how,know‑how, provides us with competitive advantages and is important to our growth opportunities. Our intellectual property portfolio is extensive, with approximately 201200 carbon and graphite U.S. and foreign patents and published patent applications, focused on our Industrial Materials business, which we believe is more than any of our major competitors (inin the business segmentsbusinesses in which we operate).operate.
We own andor have obtained licenses to,for various trade names and trademarks used in our businesses. For example, the trade name and trademark UCAR are owned by Union Carbide Corporation (which was acquired by Dow Chemical Company) and are licensed to us on a worldwide, exclusive and royalty-freeroyalty‑free basis until 2025. This particular license automatically renews for successive ten-yearten‑year periods. It permits non-renewalnon‑renewal by Union Carbide in 2025 or at the end of any renewal period upon five years’ notice of non-renewal.non‑renewal.
We rely on patent, trademark, copyright and trade secret laws, as well as appropriate agreements to protect our intellectual property. Among other things, we seek to protect our proprietary know-howknow‑how and information, through the requirement thatby requiring employees, consultants, strategic partners and others who have access to such proprietary information and know-how,know‑how to enter into confidentiality or restricted use agreements.
Competition
CompetitionWe maintain insurance against civil liabilities relating to personal injuries to third parties, for loss of or damage to property, for business interruptions and for certain environmental matters, that provides coverage, subject to the applicable coverage limits, deductibles and retentions, and exclusions, that we believe are appropriate upon terms and conditions and for premiums that we consider fair and reasonable in the Industrial Materials segment is intense and is based primarily on product differentiation and quality, delivery reliability, price, and customer service, depending oncircumstances. There can be no assurance that we will not incur losses beyond the segmentlimits of or specific product application.
In the most demanding product applications (that is, graphite electrodes that can operate in the largest, most productive and demanding EAF steel mills in the world), we compete primarily on product quality, delivery reliability, price and customer technical service. We believe these are prerequisite capabilities that not all producers of graphite electrodes possess or can demonstrate consistently. We primarily compete with higher quality graphite electrode producers, although this segment of the graphite electrode market has become increasingly competitive in recent years as more graphite electrode producers have improved the quality of their offerings and become qualified suppliers to some of the largest and most sophisticated EAF customers.
In other product applications, including ladle furnaces requiring less demanding performance and certain other ferrous and non-ferrous segments, we compete based on product differentiation, product quality and price. We believe our product quality, global manufacturing network, proximity to regional and local customers and the related lower cost structure allows us to deliver a broad range of product offerings across these various segments.
We believe that there are no current commercially viable substitutes for graphite electrodes in EAF steel production.
We believe that there are certain cost and technology barriers to entry into our industry, including the need for extensive product and process know-how and other intellectual property and a high initial capital investment. It also requires high quality raw material sources and a developed energy supply infrastructure. However, competing manufacturers, particularly Chinese manufacturers, have been able to expand their sales and manufacturing geographically.
There are a number of international graphite electrode producers, including SGL Carbon A.G. (Germany), Tokai Carbon Co., Ltd. (Japan), Showa Denko Carbon K.K. (Japan), Graphite India Limited (India), HEG Limited (India), SEC Corporation Limited (Japan), Nippon Carbon Co., Ltd. (Japan), Energoprom Group (Russia), Fangda Carbon New Material Technology Co., Ltd. (China), Nantong Yangzi Carbon Co. Ltd (China), Kaifeng Carbon Co., Ltd. (China) and Sinosteel Jilin Carbon Co., Ltd (China), as well as a number of others. In October 2016, SGL Carbon A.G. agreed to sell its performance products business, which is comprised mainly of their graphite electrode product line to Showa Denko Carbon K.K.
All graphite electrode manufacturers, even those without multinational manufacturing operations, are capable of, and many in fact are, supplying their products globally and are experiencing increased competition from Indian, Russian and Chinese graphite electrode manufacturers. The Chinese government has strongly supported and invested heavily in industrial expansion in recent years and continues to do so. As a part of this expansion, Chinese production of graphite electrodes has increased and the quality of the electrodes produced in China has improved. The Chinese currency policies regarding the Renminbi may provide Chinese producers with a competitive advantage with respect to exports of graphite electrodes.
Coke represents a significant portion of the cost to produce a graphite electrode. Competition in the needle coke industry is based primarily on price, reliability and product specifications. Our Seadrift facility competes primarily on the specifications and price of its needle coke.
We believe there are currently approximately nine other firms producing needle coke. These competitors include Phillips 66 (U.S.), Petrocokes Japan Limited (Japan), Mitsubishi Chemical Company, Baosteel Group (China), C-Chem Co., Ltd. (Japan), Indian Oil Company Limited (India), JX Holdings Inc. (Japan), Petrochina International Jinzhou Co., Ltd. (China) and Anshan Kaitan Thermo-Energy New Materials Co., Ltd (China).insurance.
Environmental MattersEnvironment
WeOur facilities and operations are subject to a wide variety of federal, state, local and foreign environmental laws and regulations that govern our properties, neighboring properties, and our current and former operations worldwide.regulations. These laws and regulations relate to the presence, use,air emissions, water discharges and solid and hazardous waste generation, treatment, storage, handling, generation, treatment, emission, release, dischargetransportation and disposaldisposal; the presence of wastes and other substances; the reporting of, responses to and liability for, releases of hazardous substances includinginto the environment; and the import, production, packaging, labeling and transportation of products that are defined as hazardous or toxic or otherwise believed to have potential to harm the environment or human health. These laws and regulations (and the enforcement thereof) are periodically changedupdated and are becoming increasingly stringent. We have incurred substantial costs in the past, and will continue to incur additional costs in the future, to comply with these legal requirements.
The principal U.S. laws to which our properties and operations are subject include:
the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act and similar state and local laws which regulate air emissions, water discharges and hazardous waste generation, treatment, storage, handling, transportation and disposal;
the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, and the Small Business Liability Relief and Brownfields Revitalization Act of 2002, and similar state laws that provide for the reporting of, responses to and liability for, releases of hazardous substances into the environment; and
the Toxic Substances Control Act and related laws that are designed to track and control chemicals that are produced or imported into the United States and assess the risk to health and to the environment of new products at early developmental stages.
Further, laws and regulations adopted or proposed in various states impose or may impose, as the case may be, environmental monitoring, reporting and/or remediation requirements if operations cease or property is transferred or sold.
We believe that we are currently in compliance in all material respects with the federal, state, local and foreign environmental laws and regulations to which we are subject. We have experienced some level of regulatory scrutiny at most of our current and former facilities and, in some cases, have been required to take or are continuing to take corrective or remedial actions and incur related costs, in the past, and may experience further regulatory scrutiny, and may be required to take further corrective or remedial actions and incur additional costs, in the future. Although it has not been the case in the past, these costs could have a material adverse effect on us in the future.
Further, laws and regulations in various jurisdictions impose or may impose, as the case may be, environmental monitoring, reporting and/or remediation requirements if operations cease or property is transferred or sold. We have sold or closed a number of facilities that had operated solid waste management units (landfills) on‑site. In most cases where we divested the properties, we have retained ownership of on‑site landfills. When our landfills were or are to be sold, we negotiate for contractual provisions providing for financial assurance to be maintained, which we believe will be adequate to protect us from any potential future liability associated with these landfills. When we have closed landfills, we believe that we have done so in material compliance with applicable laws and regulations. We continue to monitor these landfills and observe any reporting obligations we may have with respect to them pursuant to applicable laws and regulations. To date, the costs associated with the retained landfills have not had, and we do not anticipate that future costs will have, a material adverse effect on us.
We have received and may in the future receive notices from the U.S. Environmental Protection Agency (“(or U.S. EPA”)EPA) or state environmental protection agencies, as well as claims from other parties, alleging that we are a potentially responsible party (“PRP”)
(or PRP) under the Superfund Act and similar state laws for past and future remediation costs at waste disposal sites and other contaminated properties. Although Superfund Act liability is joint and several, in general, final allocation of responsibility at sites where there are multiple PRPs is made based on each PRP'sPRP’s relative contribution of hazardous substances to the site. Based on information currently available to us, we believe that any potential liability we may have as a PRP will not have a material adverse effect on us.
As a result of amendments to the Clean Air Act enacted in 1990, certainCertain of our U.S. facilities have been or will be required to comply with new reporting requirements under the Federal Clean Air Act and standards for air emissions that have been or may be adopted by the U.S. EPA and state environmental protection agencies pursuant to new and revised regulations, that have been or could be promulgated, including the possible promulgation of future maximum achievable control technology standards that apply specifically to our manufacturing sector(s), or more generally to our operation(s) or equipment. Achieving compliance with the regulations that have been promulgated to date has resulted in the need for additional administrative and engineered controls, changes to certain manufacturing processes, and increased monitoring and reporting obligations. Similar foreign laws and regulations have been or may also be adopted to establish new standards for air emissions, which may also require additional controlsbest available control technology on our manufacturing operations outside the U.S.United States. Based on information currently available to us, we believe that compliance with these regulations will not have a material adverse effect on us.
As mentioned, our manufacturing operations located outside of the U.S. are also subject to their national and local laws and regulations related to environmental protection and product safety. Under the European Union's (“EU”) regulations concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (commonly referred to as “REACH”), enacted in 2007, manufacturers within the EU and importers into the EU of certain chemical substances are required to register and evaluate the potential impacts of those substances on human health and the environment. Under REACH, the continued importation into the EU, manufacture and/or use of certain chemical substances may be restricted, and manufacturers and importers of certain chemicals will be required to undertake evaluations of those substances. The requirements of REACH are being phased in over a period of years, and compliance is requiring and will continue to require expenditures and resource commitments. Based on information currently available to us, we believe that compliance with these regulations will not have a material adverse effect on us.
International accords, foreign laws and regulations, and U.S. federal, state and local laws and regulations are increasingly beinghave been enacted to address concerns about the effects that carbon dioxide (“CO2”)CO2 emissions and other identified greenhouse gases (“GHG”("GHGs") may have on the environment and climate worldwide. These effects are widely referred to as Climate Change. Some members of theclimate change. The international community havehas taken actions in the past to address Climate Changeclimate change issues on a global basis. In 1997, an international Kyoto Protocol set binding GHG emission reduction targetsparticular, in December 2015, the 21st Conference of Parties for the participating industrialized countries. Participating members of the international community continue to meet at annual meetings of the United Nations Framework Convention on Climate Change (“UNFCC”("UNFCC") concluded with more than 190 countries adopting the Paris Agreement, which then came into force and was legally binding on the parties in November 2016. The Paris Agreement sets a goal of limiting the increase in global average temperature and consists of two elements: a legally binding commitment by each participating country to reach global agreements on Climate Changeset an emissions reduction target, referred to replaceas “nationally determined contributions” (or NDCs), with a review of the expired Kyoto Protocol.
TheNDCs that could lead to updates and enhancements every five years beginning in 2023, and a transparency commitment requiring participating countries to disclose in full their progress. Our activities in the European Union ("EU") are subject to the EU Emissions Trading Scheme (“(or ETS), and it is likely that requirements relating to GHG emissions will become more stringent and will continue to expand to other jurisdictions in the future as NDCs under the Paris Agreement are implemented. Although, in November 2019, the United States began the process of formally withdrawing from the Paris Agreement, the EPA currently requires reporting of GHG emissions from certain sources and, in the future, the EPA or states may impose permitting obligations on new sources or existing sources that seek to modify their operations that would otherwise result in an increase in certain GHG emissions.
In the EU, ETS”)the ETS, which was initially enacted under the provisions of the 1997 Kyoto Protocol, requires certain listed energy-intensiveenergy‑intensive industries to participate in an international “cap and trade” system of GHG
emission allowances. A third phase of the EU ETS started in January 2013 under Directive 2009/29/EC, whichcovers the period 2013 to 2020 and instituted a number of program changes. EU Member States brought into force the necessary laws, regulations and administrative provisions to comply with this EU Directive. Carbon and graphite manufacturing is still not a covered industry sector in the revised Annex 1 of this Directive.directive 2009/29/EC. However, one of our European manufacturing operations was required to comply with these provisions under a more general fuel combustion category, because theirits combustion units met the applicability levels. The operations subject to these provisions waswere eligible to receive free carbon dioxideCO2 emission allowances under the member state allocation program.
In December 2015, On November 9, 2017, to implement the 21st Conference of Parties for the UNFCC concluded with more than 190 countries adoptingEU’s NDC under the Paris Agreement which then cameand other GHG commitments, the European Parliament and Council announced a provisional agreement to revise and make more stringent the ETS during the Phase 4 period of 2021 to 2030. Among other changes, the Phase 4 provisions would further accelerate reduction in the current oversupply of allowances in the ETS market and establish further protections against the risks of carbon leakage. After extensive negotiations, the European Parliament and the Council formally supported the revision in February 2018. The revised EU ETS Directive (Directive (EU) 2018/410) entered into force and legally binding on the parties in November 2016, after the three criteria in Article 21 were satisfied.April 8, 2018. The Paris AgreementEU’s current target for 2030 is a partly binding and partly voluntary agreement to cut global carbon emissions in an effort to limit the rise in global temperatures. The U.S. has pledged to achieve significant reductionsa GHG reduction of at least 40% compared to 1990 levels. In addition, in CO2 emissions by 2020.December 2019, the European Commission presented the Communication on The U.S. may sign a future international Climate Change agreement and/or enact new national Climate Change legislation to reduceEuropean Green Deal announcing several upcoming legislative proposals for the EU 2050 climate neutrality objective and for increasing the EU 2030 GHG emissions in accordance with established goalsreduction target to at least 50% and deadlines. Such new legislationtowards 55% compared to 1990 levels. Implementation of Phase 4 could impact our industry directly or indirectly, for example by higher energy costs. One or moreincrease the cost of our U.S. facilities could be covered by such new legislationcurrent GHG allowances and we could incurrequire us to obtain additional compliance obligations and related expenses.
In 2009, a Final Mandatory Reporting of Greenhouse Gases Rule was issued by the U.S. EPA, which requires facilities with specified GHG sources that emit over the annual threshold quantities to monitor and report their GHG emissions annually. In addition, corporations that are large suppliers of petroleum products (including, by definition, importers and exporters that exceed the annual GHG threshold quantities) must also submit an annual activity report to the U.S. EPA. Some of our operations are covered under this Rule, and we believe that we have the necessary administrative systems in place to comply with the requirements. Under various other foreign and U.S. state regulations, we are currently required to report certain GHG emissions to the pertinent authorities. Furthermore, in December 2009, the U.S. EPA issued an “endangerment and cause or contribute finding” for GHG, under Section 202(a) of the Clean Air Act, allowing it to issue new rules that directly regulate GHG emissions under the existing federal New Source Review, Prevention of Significant Deterioration (PSD) and Title V Operating Permit programs. In May 2010, the U.S. EPA set GHG emissions thresholds to define when permits under these programs are required for new and existing industrial facilities. Under these programs, new or significantly modified facilities must also use best available control technologies to minimize GHG emissions. Therefore, we may incur future expenses to modify our air permits, implement additional administrative and engineered controls, invest in capital improvements, and/or make changes in certain manufacturing processes at our U.S. facilities to achieve compliance with these regulations or to expand our operations.
allowances. Based on information currently available to us, we believe that compliance with international accords, U.S. and foreign laws and regulations concerning Climate Changeclimate change which have been promulgated, or that could be promulgated in the future, including Phase 4 and any further GHG initiatives of the ETS, will not have a material adverse effect on us.
We have soldSome of our products (including our raw materials) are subject to extensive environmental and industrial hygiene regulations governing the registration and safety analysis of their component substances. For example, in connecting with the EU's Registration, Evaluation, Authorization and Restriction of Chemicals Regulation ("REACH") or closedthe EU’s Classification, Labelling and Packaging Regulation, any key raw material, chemical or substance, including our products, could be classified as having a number
toxicological or health‑related impact on the environment, users of facilitiesour products, or our employees. Coal tar pitch, which is classified as a substance of very high concern under REACH, is used in certain of our processes, but in a manner that had operated solid waste management units on‑site. In most cases where we divested the properties, we have retained ownership of on-site landfills. When our landfills were or are to be sold, we obtained or seekbelieve does not require us to obtain financial assurance we believe to be adequate to protect us from any potential future liability associated with these landfills. When we have closed landfills, we believe that we have done so in material compliance with applicable laws and regulations. We continue to monitor these landfills and observe any reporting obligations we may have with respect to them pursuant to applicable laws and regulations. To date,a specific authorization under the costs associated with the retained landfills have not been, and we do not anticipate that future costs will be, material to us.REACH guidelines.
Estimates of future costs for compliance with U.S. and foreign environmental protection laws and regulations, and for environmental liabilities, are necessarily imprecise due to numerous uncertainties, including the impact of potential new laws and regulations, the availability and application of new and diverse technologies, the extent of insurance coverage, the potential discovery of contaminated properties, or the identification of new hazardous substance disposal sites at which we may be a PRP and, in the case of sites subject to the Superfund Act and similar state and foreign laws, the final determination of remedial requirements and the ultimate allocation of costs among the PRPs. Subject to the inherent imprecision in estimating such future costs, but taking into consideration our experience to date regarding environmental matters of a similar nature and facts currently known, we estimate that our costs and capital expenditures (in each case, before adjustment for inflation) for environmental protection regulatory compliance programs and for remedial response actions will not increase materiallybe material over the next several years.
Furthermore, we establish accruals for environmental liabilities when it is probable that a liability has been or will be incurred, and the amount of the liability can be reasonably estimated. We adjust the accrual as new remedial
actions or other commitments are made, andas well as when new information becomes available that changes the prior estimates previously made.made and we believe our existing accruals are reasonable.
Insurance
We maintain insurance against civil liabilities relating to personal injuries to third parties, for loss of or damage to property, for business interruptions and for environmental matters, that provides coverage, subject to the applicable coverage limits, deductibles and retentions, and exclusions, that we believe are appropriate upon terms and conditions and for premiums that we consider fair and reasonable in the circumstances. We cannot assure you, however, that we will not incur losses beyond the limits of or outside the coverage of our insurance.
EmployeesEmployee relations
As of December 31, 2016,2019, we had 1,2441,346 employees in our Industrial Materials business and supporting corporate functions (excluding contractors), a decrease of 75 employees from December 31, 2015.. A total of 425439 employees were in Europe (including Russia), 593666 were in Mexico and Brazil, 63 were in South Africa, 211231 were in the U.S.United States and 97 were in the Asia Pacific region. As of December 31, 2016, 7502019, 877 of our employees were hourly employees.
As of December 31, 2016,2019, approximately 53%774 employees, or 58%, of our worldwide employees, are covered by collective bargaining or similar agreements. As of December 31, 2019, approximately 627 employees, or 47%, of our worldwide employees, were covered by collective bargaining or similar agreements which expire at various times in each of the next several years. As of December 31, 2016, approximately 536 employees, or 43% of our employees, were covered by agreements whichthat expire, or are subject to renegotiation, at various times through December 31, 2017.2020. We believe that, in general, our relationships with our employees' unions are satisfactory and that we will be able to renew or extend our collective bargaining or similar agreements on reasonable terms as they expire. We cannot assure, however, that renewed or extended agreements will be reached without a work stoppage or strike or will be reached on terms satisfactory to us. As of December 31, 2019, none of the employees in our Seadrift plant or St. Marys facility were covered by collective bargaining or similar agreements.
We have not had any material work stoppages or strikes during the past decade.
Available Information
We make available, free of charge, on or through our web site, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file them with, or furnish them to, the U.S. Securities and Exchange Commission (“SEC”). We maintain our website at http://www.graftech.com. The information contained on our web site is not part of this Report. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Please see http://www.sec.gov for more information.
An investment in our securities involves significant risks.Our business, financial condition, results of operations and cash flow can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below. You should carefully read all of the information included in this report and carefully consider, among other matters, the following risk factors, as well as any discussed under Part II, Item 7, “Management's“Management's Discussion and Analysis of Financial Conditions and Results of Operations.” If The occurrence of any of the conditions or eventsfollowing risks could materially and adversely affect our business, financial condition, results of operations and cash flow, in which case, the market price of our securities could decline.
Risks related to our business and industry
Our business is cyclical and the selling prices of our products may lead to periods of reduced profitability and net losses in the future.
We have experienced periods of significant net losses, including a net loss of $235.8 million for the year ended December 31, 2016. Our ability to maintain profitability depends on a number of factors, including the growth rate of the graphite electrode industry, the price of our products, the cost to produce our products, the competitiveness of our products and the production capacity at our existing plants. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Annual Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. In addition, as a public company, we now incur significant legal, accounting and other expenses that we did not incur as a private company. As a result, our operations may not maintain profitability in the following riskfuture and, even if we do maintain profitability, we may not be able to increase it.
We may be unable to implement our business strategies, including our initiative to secure and maintain three‑ to five‑year take‑or‑pay customer contracts, in an effective manner.
Our future financial performance and success largely depend on our ability to successfully implement our business strategies for growth successfully. We have undertaken, and will continue to undertake, various business strategies to sell a majority of our production capacity through three‑ to five‑year, take‑or‑pay contracts, and improve operating efficiencies and generate cost savings. We cannot assure you that we will successfully implement our business strategies or that implementing these strategies will sustain or improve and not harm our results of operations. In particular, our ability to implement our strategy to enter into and maintain three‑ to five‑year take‑or‑pay contracts successfully is subject to certain risks, including customers seeking to renegotiate key terms of their contracts, such as pricing and specified volume commitments, in the event market conditions change during the contract term; our inability to extend contracts when they expire; and a disruption in our access to Seadrift‑produced petroleum needle coke, which we will rely on, in part, to deliver the contracted volumes under the contracts. Under market conditions where the price of graphite electrodes is trending downwards, it may be unlikely customers will commit to long-term, take-or-pay contracts. As a result, we cannot assure you that we will successfully implement this strategy or realize the anticipated benefits of these contracts. In addition, the costs involved in implementing our strategies may be significantly greater than we currently anticipate.
Our business strategies are based on our assumptions about future demand for our products and on our continuing ability to produce our products profitably. Each of these factors weredepends, among other things, on our ability to occur,finance our operations, maintain high‑quality and efficient manufacturing operations, effectively manage our customer relationships while enforcing customer commitments, respond to competitive and regulatory changes, access quality raw materials in a cost‑effective and timely manner, and retain and attract highly skilled technical, managerial, marketing and finance personnel. Any failure to develop, revise or implement our business strategies in a timely and effective manner may adversely affect our business, financial condition, results of operations or cash flows.
Global graphite electrode overcapacity has adversely affected graphite electrode prices in the past, and may adversely affect them again, which could negatively impact our sales, margins and profitability.
Overcapacity in the graphite electrode industry has adversely affected pricing in the past and may do so again. The rapid growth prospectsof Chinese steel production after 2010, which was primarily produced from BOF steelmaking, created a significant global oversupply of steel. Chinese steel exports gained market share from EAF steel producers, creating graphite electrode industry oversupply and inventory de‑stocking in this period. Historically, between 2008 and 2017, our weighted average realized price of graphite electrodes was approximately $4,500 per MT (on an inflation‑adjusted basis using constant 2018 dollars). During the last demand trough in 2016, our weighted average realized price fell to approximately $2,500 per MT. Although, Chinese steel exports has decreased since 2016, any significant future growth in Chinese steel exports could once again lead to an oversupply of steel, which would adversely affect the price of graphite electrodes.
An increase in global graphite electrode production capacity that outpaces an increase in demand for graphite electrodes could adversely affect the price of graphite electrodes. We believe worldwide graphite electrode supply will increase in 2020 driven by Chinese capacity additions. While growth in the Chinese EAF steel market may support some of these capacity additions, the additional graphite electrode capacity may exceed local Chinese requirements. Excess production capacity may result in manufacturers producing and exporting electrodes at prices that are lower than prevailing domestic prices, and sometimes at or below their cost of production. Excessive imports into the Americas and EMEA, which markets collectively make up 90% of our net sales, can also exert downward pressure on graphite electrode prices, which negatively affects our sales, margins and profitability.
Pricing for graphite electrodes has historically been cyclical, current prices are receding from recent highs, and the price of graphite electrodes may continue to decline in the future.
Pricing for graphite electrodes has historically been cyclical, reflecting the demand trends of the global EAF steelmaking industry and the supply of graphite electrodes. In addition, as petroleum needle coke reflects a significant percentage of the raw material cost of graphite electrodes, graphite electrodes have historically been priced at a spread to petroleum needle coke, which in the past has increased in tight demand markets. Historically, between 2008 and 2017, our weighted average realized price of graphite electrodes was approximately $4,500 per MT (on an inflation‑adjusted basis using constant 2018 dollars).
During the last demand trough, our weighted average realized price of graphite electrodes fell to approximately $2,500 per MT in 2016, on an inflation‑adjusted basis using constant 2018 dollars. Following the significant rationalization of graphite electrode production globally, the resumption of growth in EAF steel production, falling scrap prices, reductions in Chinese steel exports and constrained supply of needle coke, graphite electrode prices reached record highs in 2018.
Current prices have receded from the highs of 2018 and the price of graphite electrodes may continue to decline in the future. Supply and demand normalized in 2019, tipping towards overcapacity that exerts downward pressure on graphite electrode prices, and current spot prices have fallen below our weighted average contract price for long-term contracted volumes. Our business, financial condition and operating results could be affected materially and adversely. In that case,adversely affected to the market price of our securities couldextent prices for graphite electrodes decline and you could lose part or all of your investment.
The risks described below are not the only ones facing us. Additional risks not presently known to us, or that we currently deem immaterial, individually or in the aggregate, may also impair our business operations.future.
RISKS RELATING TO US
A downturn in global economic conditions may materially adversely affect our business.
A global, regional or localized economic downturn may reduce customer demand or inhibit our ability to produce our products, negatively impacting our operating results. Our business and operating results have been and will continue to be sensitive to economic downturns (including credit market tightnessconditions and a downturn in economic conditions may materially adversely affect our business.
Our operations and performance are materially affected by global and regional economic conditions. As described further below, we are dependent on the steel industry, which can impacthistorically has been highly cyclical and is affected by general economic conditions. An economic downturn may reduce customer demand, reduce prices for our liquidity as well as that ofproducts or inhibit our customers, suppliersability to produce our products, which would negatively affect our operating results. Our business and other business partners),operating results have also been and will continue to be sensitive to declining consumer and business confidence,confidence; fluctuating commodity prices,prices; volatile exchange rates and other challenges that can affect the economy. Our customers may experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing, leading them to delay or cancel plans to purchase our products or seek to renegotiate terms of their supply contracts, and they may not be able to fulfill their obligations to us in a timely fashion. Further, suppliers and other business partners may experience similar conditions, which could impact their ability to fulfill their obligations to us. Also, it could be difficult to find replacements for business partners without incurring significant delays or cost increases). Suchincreases. These events and other economic matters would negatively impact our revenues and results of operations.
As more fully described under “Management's Discussion and Analysis of Financial Condition and Results of Operations,” we are currently facing a challenging environment for our products, particularly our Industrial Materials products, as a result of global economic conditions.
The International Monetary Fund reported GDP growth figures for 2016 at approximately 3.1 percent. We believe that worldwide the graphite electrode industry manufacturing capacity utilization rate excluding China was approximately 68% for 2015 and 76% for 2016 and including China capacity utilization was approximately 64% in 2015 and 63% in 2016.. These lower capacity utilization rates may continue to be driven by a challenging environment for our customers which would negatively impact demand for our Industrial Materials products and may adversely affect our revenue and results of operations for 2017.
We are dependent on the global steel industry.industry generally and the EAF steel industry in particular, and a downturn in these industries may materially adversely affect our business.
We sell our Industrial Materials products which accounted for 100% of our total net sales within continuing operations in 2016, primarily to the EAF steel production industry. Our customers, including major steel producers, are experiencing and may continue to experience downturns or financial distress that could adversely impact our ability to collect our accounts receivable or to collect them on a timely basis.
The steel industry historically has historically been highly cyclical and is affected significantly by general economic conditions. Significant customers for the steel industry include companies in the automotive, construction, appliance, machinery, equipment and transportation industries, all of which continue to beare industries that were negatively affected by the general economic downturn and the deterioration in financial markets, including severely restricted liquidity and credit availability.availability, in the recent past. In particular, EAF steel production declined approximately 17% from 2008 to 2009 as a result of that general economic downturn and deterioration in financial markets. In addition, EAF steel production declined approximately 10% from 2011 to 2015 due to global steel production overcapacity driven largely by Chinese BOF steel exports. Since 2016, however, the EAF steel market has rebounded and resumed its long‑term growth trajectory, though recently has slowed in some markets, notably Europe and South America.
Our customers, including major steel producers, have in the past experienced and may again experience downturns or financial distress that could adversely impact our ability to collect our accounts receivable on a timely basis or at all.
The graphite industry is highly competitive. Our market share, net sales or net income could decline due to vigorous price and other competition.
Competition in the graphite industry (other than, generally, with respect to new products) is based primarily on price, product differentiation and quality, delivery reliability and customer service. Graphite electrodes, in particular, are subject to rigorous price competition. Competition with respect to new products is, and is expected to continue to be, based primarily on price, performance and cost effectiveness, customer service and product innovation. Competition could prevent implementation of price increases, require price reductions or require increased spending on research and development, marketing and sales that
could adversely affect us. In such a competitive market, changes in market conditions, including customer demand and technological development, could adversely affect our competitiveness, sales and/or profitability.
We sell productsare dependent on the supply of petroleum needle coke. Our results of operations could deteriorate if recent disruptions in the supply of petroleum needle coke continue or worsen for an extended period.
Petroleum needle coke is a key raw material used in the transportation, semiconductor, solar, petrochemical, electronics, and other industries which are susceptibleproduction of graphite electrodes. The supply of petroleum needle coke has been limited starting in the second half of 2017 as the demand for petroleum needle coke outpaced supply due to global and regional economic downturns
Manyincreasing demand for petroleum needle coke for use in the production of lithium‑ion batteries used in electric vehicles. Seadrift currently provides the majority of our other products are sold primarilycurrent petroleum needle coke requirements, and we purchase the remainder from external sources. We plan to rely on Seadrift‑produced petroleum needle coke to support the electronics, transportation, alternative energy, and oil and gas exploration industries. These are global basic industries, and they are experiencing various degreesproduction of contraction, growth and consolidation. Customers in these industries are located in every major geographic region.substantially all of the contracted volumes of graphite electrodes under our three‑ to five‑year take‑or‑pay contracts. As a result, a disruption in Seadrift’s production of petroleum needle coke could adversely affect our customersability to achieve the anticipated benefits of these contracts if we are affected by changesforced to purchase petroleum needle coke from external sources at a higher cost to support the production of these contracted volumes. Moreover, although estimates vary as to the duration of this period of tight petroleum needle coke supply, if the current market shortage of petroleum needle coke continues or worsens, we may be unable to acquire sufficient amounts of petroleum needle coke from external sources to support our remaining needle coke requirements currently used in global and regional economic conditions. This,the production of graphite electrodes for sale in turn, affects overall demand and prices for our products sold to these industries.the spot market. As a result, a continued or worsening disruption in the supply of petroleum needle coke could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are dependent on supplies of raw materials (in addition to petroleum needle coke) and energy. Our results of operations could deteriorate if those supplies increase in cost or are substantially disrupted for an extended period.
We purchase raw materials and energy from a variety of sources. In many cases, we purchase them under short‑term contracts or on the spot market, in each case at fluctuating prices. The availability and price of raw materials and energy may be subject to curtailment or change due to:
limitations, which may be imposed under new legislation or regulation;
suppliers’ allocations to meet demand from other purchasers during periods of shortage (or, in the case of energy suppliers, extended hot or cold weather);
interruptions or cessations in production by suppliers; and
market and other events and conditions.
Petroleum and coal products, including decant oil and coal tar pitch, which are our principal raw materials other than petroleum needle coke, and energy, particularly natural gas, have been subject to significant price fluctuations. For example, Seadrift may not always be able to obtain an adequate quantity of suitable low‑sulfur decant oil for the manufacture of petroleum needle coke, and capital may not be available to install equipment to allow use of higher sulfur decant oil (which is more readily available in the United States) if supplies of low‑sulfur decant oil become more limited in the future. Further, new low sulfur emissions regulations adopted by the International Maritime Organization (“IMO 2020”) may adversely impact pricing for low-sulfur decant oil.
We have in the past entered into, and may continue in the future to enter into, derivative contracts and short‑duration fixed rate purchase contracts to effectively fix a portion of our exposure to certain products. These hedging strategies may not be available or successful in eliminating our exposure. A substantial increase in raw material or energy prices that cannot be mitigated or passed on to customers or a continued interruption in supply, particularly in the supply of decant oil or energy, would have a material adverse effect on our business, financial condition, results of operations or cash flows. These hedges may be insufficient or ineffective in protecting against the impact of these fluctuations.
Our operations are subject to hazards which could result in significant liability to us.
Our operations are subject to hazards associated with manufacturing and the related use, storage, transportation and disposal of raw materials, products and wastes. These hazards include explosions, fires, severe weather (including but not limited to hurricanes or other adverse weather that may be increasing as a result of climate change) and natural disasters, industrial accidents, mechanical failures, discharges or releases of toxic or hazardous substances or gases, transportation interruptions, human error and terrorist activities. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment as well as environmental damage, and may result in suspension of operations and the imposition of civil and criminal liabilities, including penalties and damage awards. While we believe our insurance policies are in accordance with customary industry practices, such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage,
of our insurance policies. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain. Costs associated with unanticipated events in excess of our insurance coverage could have a material adverse effect on our business, competitive or financial position or our ongoing results of operations.
Stringent health, safety and environmental regulations applicable to our manufacturing operations and facilities could result in substantial costs related to compliance, sanctions or material liabilities and may affect the availability of raw materials.
We are subject to stringent environmental, health and safety laws and regulations relating to our current and former properties (including former onsite landfills over which we have retained ownership), other properties that neighbor ours or to which we sent wastes for treatment or disposal, as well as our current raw materials, products, and operations. Some of our products (including our raw materials) are subject to extensive environmental and industrial hygiene regulations governing the registration and safety analysis of their component substances. Coal tar pitch, which is classified as a substance of very high concern under the EU’s REACH regulations, is used in certain of our processes but in a manner that we believe does not currently require us to obtain a specific authorization under the REACH guidelines. Violations of these laws and regulations, or of the terms and conditions of permits required for our operations, can result in damage claims, reputational harm, the imposition of substantial fines and criminal sanctions and sometimes require the installation of costly pollution control or safety equipment or costly changes in economicoperations to limit pollution or decrease the likelihood of injuries. In addition, we are currently conducting remediation and/or monitoring at certain current and former properties and may become subject to material liabilities in the future for the investigation and cleanup of contaminated properties, including properties on which we have ceased operations. We have been in the past, and could be in the future, subject to claims alleging personal injury, death or property damage resulting from exposure to hazardous substances, accidents or otherwise for conditions demandcreating an unsafe workplace. Further, alleged noncompliance with or stricter enforcement of, or changes in interpretations of, existing laws and pricingregulations, adoption of more stringent new laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities or reputational harm that have a material adverse impact on our operations, costs or results of operations. It is also possible that the impact of safety and environmental regulations on our suppliers could affect the availability and cost of our raw materials.
For example, legislators, regulators and others, as well as many companies, are considering ways to reduce emissions of GHGs due to scientific, political and public concern that GHG emissions are altering the atmosphere in ways that are affecting, and are expected to continue to affect, the global climate. The EU has established GHG regulations and is revising its emission trading system for the period after 2020 in a manner that may require us to incur additional costs. The United States required reporting of GHG emissions from certain large sources beginning in 2011. Further measures, in the EU and many other countries, may be enacted in the future. In particular, in December 2015, more than 190 countries participating in the UNFCC reached an international agreement related to curbing GHG emissions (or Paris Agreement). Further GHG regulations under the Paris Agreement or otherwise may take the form of a national or international cap‑and‑trade emissions permit system, a carbon tax, emissions controls, reporting requirements, or other regulatory initiatives. For more information, see the section entitled “Business-Environment.”
It is possible that some form of regulation of GHG emissions will also be introduced in the future in other countries in which we operate or market our products. Regulation of GHG emissions could impose additional costs, both direct and indirect, on our business, and on the businesses of our customers and suppliers, such as increased energy and insurance rates, higher taxes, new environmental compliance program expenses, including capital improvements, environmental monitoring and the purchase of emission credits, and other administrative costs necessary to comply with current and potential future requirements or limitations that may be imposed, as well as other unforeseen or unknown costs. To the extent that similar requirements and limitations are not imposed globally, this regulation may impact our ability to compete with companies located in countries that do not have these requirements or limitations. We may also experience a change in competitive position relative to industry peers, changes in prices received for products sold and changes to profit or loss arising from increased or decreased demand for our products soldproducts. The impact of any future GHG regulatory requirements on our global business will be dependent upon the design of the regulatory schemes that are ultimately adopted and, as a result, we are unable to these industries has fluctuatedpredict their significance to our operations at this time.
We are subject to a variety of legal, economic, social and political risks associated with our substantial operations in some cases declined significantly,multiple countries, which could have a material adverse effect on our financial and business operations.
A substantial majority of our net sales are derived from sales outside the United States, and a majority of our operations and our property, plant and equipment and other long‑lived assets are located outside the United States. As a result, we are subject to risks associated with operating in multiple countries, including:
currency fluctuations and devaluations in currency exchange rates, including impacts of transactions in various currencies, translation of various currencies into dollars for U.S. reporting and financial covenant compliance
purposes, and impacts on results of operations.
Demand for our products soldoperations due to these industries may be adversely affected by improvements in our products as well as in the manufacturing operations of customers, which reducefact that the rate of consumption or usecosts of our products.non‑U.S. operations are primarily incurred in local currencies while their products are primarily sold in dollars and euros;
Sales volumesimposition of or increase in customs duties and pricesother tariffs;
imposition of our products sold to these industries are impactedor increases in currency exchange controls, including imposition of or increases in limitations on conversion of various currencies into dollars, euros, or other currencies, making of intercompany loans by subsidiaries or remittance of dividends, interest or principal payments or other payments by subsidiaries;
imposition of or increases in revenue, income or earnings taxes and withholding and other taxes on remittances and other payments by subsidiaries;
inflation, deflation and stagflation in any country in which we have a manufacturing facility;
imposition of or increases in investment or trade restrictions by the supply/demand balance as well as overall changesUnited States or other jurisdictions or trade sanctions adopted by the United States;
compliance with laws on anti-corruption, export controls, customs, sanctions and other laws governing our operations, including in demand, excess capacitychallenging jurisdictions;
inability to determine or satisfy legal requirements, effectively enforce contract or legal rights, including our rights under our three‑ to five‑year take‑or‑pay contracts and growthintellectual property rights, and obtain complete financial or other information under local legal, judicial, regulatory, disclosure and other systems; and
nationalization or expropriation of assets, and consolidation within, the end markets for our products. In addition to the factors mentioned above, the supply/demand balance is affected by factors such as business cycles, rationalization, and increasesother risks that could result from a change in capacity and productivity initiatives within our industry and the end markets for our products, and certaingovernment or government policy, or from other political, social or economic instability.
Any of such factors are affected by decisions by us. Changes in the supply/demand balancethese risks could have a material adverse effect on our business, financial condition, results of operations.operations or cash flows, and we may not be able to mitigate these effects.
The fluctuation of foreign currency exchange rates could materially harm our financial results.
Changes in foreign currency exchange rates have in the past resulted, and may in the future result, in significant gains or losses. When the currencies of non‑U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other expenses with respect to those facilities. In addition, a continuationcertain countries in which we have manufacturing facilities, and in certain instances where we price our products for sale in export markets, we sell in currencies other than the dollar. Accordingly, increases (or declines) in value in these currencies relative to the U.S. dollar have the effect of the current difficult economic conditions may lead current or potential customersincreasing (or reducing) our net sales. The result of these effects is to increase (or decrease) operating profit and net income. Additionally, as part of our Engineered Solutions businesscash management, we have non‑U.S. dollar‑denominated intercompany loans between our subsidiaries. These loans are deemed to delaybe temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains and losses in other income (expense), net, on the Consolidated Statements of Income. We have in the past entered into, and may in the future enter into, foreign currency derivatives to attempt to manage exposure to changes in currency exchange rates. These hedges may be insufficient or reduce technology purchasesineffective in protecting against the impact of these fluctuations. We also may purchase or slow theirsell these financial instruments, and open and close hedges or other positions, at any time. Fluctuations in foreign currency exchange rates could materially harm our financial results.
Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period for any reason, including equipment failure, climate change, natural disasters, public health crises, political crises or other catastrophic events.
Our manufacturing operations are subject to disruption due to equipment failure, extreme weather conditions, floods, hurricanes and tropical storms and similar events, major industrial accidents, including fires or explosions, cybersecurity attacks, strikes and lockouts, adoption of new technologies. Thislaws or regulations, changes in interpretations of existing laws or regulations or changes in governmental enforcement policies, civil disruption, riots, terrorist attacks, war, public health crises and other events. These events may also impact the operations of one or more of our suppliers. For example, the potential physical impacts of climate change on our operations are uncertain and will likely be particular to the geographic circumstances. These physical impacts may include changes in rainfall and storm patterns, shortages of water or other natural resources, changing sea levels, and changing global average temperatures. For instance, our Seadrift facility in Texas and our Calais facility in France are located in geographic areas less than 50 feet above sea level. As a result, any future rising sea levels could have an adverse impact on their operations and on their suppliers. In the event manufacturing operations are substantially disrupted at one of our primary operating facilities, we will not have the ability to increase production at our remaining operating facilities in order to compensate. To the extent any of these events occur, our business, financial condition and operating results could be materially and adversely affected.
Plant operational improvements may be delayed or may not achieve the expected benefits.
Our ability to complete future operational improvements, including the shift of graphitization and machining of additional volume of semi-finished product from Monterrey to St. Marys, may be delayed, interrupted or otherwise limited by the need to obtain environmental and other regulatory approvals, unexpected cost increases, availability of labor and materials, unforeseen
hazards such as weather conditions, and other risks customarily associated with construction projects. Moreover, the costs of these activities could have a negative impact on our results of operations. In addition, these operational improvements may not achieve the expected benefits as a result of changes in market conditions, raw material shortages or other unforeseen contingencies.
We depend on third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services.
We contract with third parties for certain services relating to the design, construction and maintenance of various components of our production facilities and other systems. If these third parties fail to comply with their obligations, the facilities may not operate as intended, which may result in delays in the production of our products and materially adversely affect our ability to meet our production targets and satisfy customer requirements or we may be required to recognize impairment charges. In addition, production delays could cause us to miss deliveries and breach our contracts, which could damage our relationships with our customers and subject us to claims for damages under our contracts. Any of these events could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We also rely primarily on third parties for the transportation of the products we manufacture. In particular, a significant portion of the goods we manufacture are transported to different countries, which requires sophisticated warehousing, logistics and other resources. If any of the third parties that we use to transport products are unable to deliver the goods we manufacture in a timely manner, we may be unable to sell these products at full value or at all, which could cause us to miss deliveries and breach our contracts, which could damage our relationships with our customers and subject us to claims for damages under our contracts. Any of these events could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We may not be able to recruit or retain key management and plant operating personnel.
Our success is dependent on the management and leadership skills of our key management and plant operating personnel. The loss of any member of our reorganized key management team and personnel or an inability to attract, retain, develop and maintain additional personnel could prevent us from implementing our business strategy. In addition, our future growth and success also depend on our ability to attract, train, retain and motivate skilled managerial, sales, administration, operating and technical personnel. The loss of one or more members of our key management or plant operating personnel, or the failure to attract, retain and develop additional key personnel, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
If we are unable to successfully negotiate with the representatives of our employees, including labor unions, we may experience strikes and work stoppages.
We are party to collective bargaining agreements and similar agreements with our employees. As of December 31, 2019, approximately 774 employees, or 58%, of our worldwide employees, are covered by collective bargaining or similar agreements. As of December 31, 2019, approximately 627 employees, or 47%, of our worldwide employees, were covered by agreements that expire, or are subject to renegotiation, at various times through December 31, 2020. Although we believe that, in general, our relationships with our employees are good, we cannot predict the outcome of current and future negotiations and consultations with employee representatives, which could have a material adverse effect on our business. We may not succeed in renewing or extending these agreements on terms satisfactory to us. Although we have not had any material work stoppages or strikes during the past decade, they may occur in the future during renewal or extension negotiations or otherwise. A material work stoppage, strike or other union dispute could adversely affect our business, financial condition, results of operations and cash flows.
We may divest or acquire businesses, which could require significant management attention or disrupt our business.
We may divest or acquire businesses to rationalize or expand our businesses and enhance our cash flows. Any acquisitions that we are able to identify and complete may involve a number of risks, including:
our inability to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees;
the diversion of our management’s attention from our existing business;
possible material adverse effects on our results of operations during the integration process;
becoming subject to contingent or other liabilities, including liabilities arising from events or conduct predating the acquisition that were not known to us at the time of the acquisition; and
our possible inability to achieve the intended objectives of the transaction, including the inability to achieve cost savings and synergies.
Any divestitures may also involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of the affected business or business operations. Failure to timely complete or to consummate an acquisition or a divestiture may negatively affect the valuation of the affected business or business operations or result in restructuring charges.
We have significant goodwill on our balance sheet that is sensitive to changes in the market, which could result in impairment charges.
We have $171.1 million of goodwill on our balance sheet as of December 31, 2019. Goodwill is tested for impairment annually in the fourth quarter or more often if events or changes in circumstances indicate a potential impairment may exist. Factors that could indicate that our goodwill is impaired include a decline in our stock price and market capitalization, lower than projected operating results and cash flows, and slower growth rates in our industry. Declines in our stock price, lower operating results and any decline in industry conditions in the future could increase the risk of impairment. Impairment testing incorporates our estimates of future operating results and cash flows, estimates of future growth rates, and our judgment regarding the applicable discount rates used on estimated operating results and cash flows. If we determine at a future time that impairment exists, it may result in a continued reduction,significant non-cash charge to earnings and lower stockholders’ equity.
We may be subject to information technology systems failures, cybersecurity attacks, network disruptions and breaches of data security, which could compromise our information and expose us to liability.
Our information technology systems are an important element for effectively operating our business. Information technology systems failures, including risks associated with any failure to maintain or slower rateupgrade our systems, network disruptions and breaches of recovery,data security could disrupt our operations by impeding our processing of transactions, our ability to protect customer or company information or our financial reporting, leading to increased costs. It is possible that future technological developments could adversely affect the functionality of our computer systems and require further action and substantial funds to prevent or repair computer malfunctions. Our computer systems, including our back‑up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, cybercrimes, internal or external security breaches, events such as fires, earthquakes, floods, tornadoes and hurricanes, or errors by our employees. Although we have taken steps to address these concerns by implementing network security, back‑up systems and internal control measures, these steps may be insufficient or ineffective and a system failure or data security breach could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Further, we collect data, including personally identifiable information of our employees, in the course of our business activities and transfer such data between our affiliated entities, to and from our business partners and to third‑party service providers, which may be subject to global data privacy laws and cross‑border transfer restrictions. While we take steps to comply with these legal requirements, any changes to such laws may impact our ability to effectively transfer data across borders in support of our business operations and any breach of such laws may lead to administrative, civil or criminal liability, as well as reputational harm to the Company and its employees. For example, the European Union’s General Data Protection Regulation (GDPR), introduced a number of obligations for subject companies, including obligations relating to data transfers and the security of personal data they process. We take steps to protect the security and integrity of the information we collect, but there is no guarantee that the steps we have taken will prevent inadvertent or unauthorized use or disclosure of such information, or prevent third parties from gaining unauthorized access to this information despite our efforts. Any such incident could result in legal claims or proceedings, liability under laws that protect the privacy of personally identifiable information (including the GDPR) and damage to our reputation.
The cost of ongoing compliance with global data protection and privacy laws and the potential fines and penalties levied in the event of a breach of such laws may have an adverse effect on our business and operations. For example, the GDPR currently provides that supervisory authorities in the European Union may impose administrative fines for non‑compliance of up to €20,000,000 or 4% of the subject company’s annual, group‑wide turnover (whichever is higher) and individuals who have suffered damage as a result of a subject company’s non‑compliance with the GDPR also have the right to seek compensation from such company. We will need to continue dedicating financial resources and management time to compliance efforts with respect to global data protection and privacy laws, including the GDPR.
Our ability to grow and compete effectively depends on protecting our intellectual property. Failure to protect our intellectual property could adversely affect our business.
We believe that our intellectual property, consisting primarily of patents and proprietary know‑how and information, is important to our growth. Failure to protect our intellectual property may result in the loss of the exclusive right to use our technologies. We rely on patent, trademark, copyright and trade secret laws and confidentiality and restricted use agreements to
protect our intellectual property. However, some of our intellectual property is not covered by any patent or patent application or any such agreement. Intellectual property protection does not protect against technological obsolescence due to developments by others or changes in customer needs.
Patents are subject to complex factual and legal considerations. Accordingly, the validity, scope and enforceability of any particular patent can be uncertain. Therefore, we cannot assure you that:
any of the U.S. or non‑U.S. patents now or hereafter owned by us, or that third parties have licensed to us or may in the future license to us, will not be circumvented, challenged or invalidated;
any of the U.S. or non‑U.S. patents that third parties have non‑exclusively licensed to us, or may non‑exclusively license to us in the future, will not be licensed to others; or
any of the patents for which we have applied or may in the future apply will be issued at all or with the breadth of claim coverage we seek.
Moreover, patents, even if valid, only provide protection for a specified limited duration. In addition, effective patent, trademark and trade secret protection may be limited or unavailable or we may not apply for it in the United States or in any of the other countries in which we operate.
The protection of our intellectual property rights may be achieved, in part, by prosecuting claims against others who we believe have misappropriated our technology or have infringed upon our intellectual property rights, as well as by defending against misappropriation or infringement claims brought by others against us. Our involvement in litigation to protect or defend our rights in these areas could result in a significant expense to us, adversely affect the development of sales of our Engineered Solutionsthe related products, and increased price competition,divert the efforts of our technical and management personnel, regardless of the outcome of such litigation.
We cannot assure you that agreements designed to protect our proprietary know‑how and information will not be breached, that we will have adequate remedies for any such breach, or that our strategic alliance suppliers and customers, consultants, employees or others will not assert rights against us with respect to intellectual property arising out of our relationships with them.
Third parties may claim that our products or processes infringe their intellectual property rights, which may cause us to pay unexpected litigation costs or damages or prevent us from selling our products or services.
From time to time, we may become subject to legal proceedings, including allegations and claims of alleged infringement or misappropriation by us of the patents and other intellectual property rights of third parties. We cannot assure you that the use of our patented technology or proprietary know‑how or information does not infringe the intellectual property rights of others. In addition, attempts to enforce our own intellectual property claims may subject us to counterclaims that our intellectual property rights are invalid, unenforceable or are licensed to the party against whom we are asserting the claim or that we are infringing that party’s alleged intellectual property rights. We may also be obligated to indemnify affiliates or other partners who are accused of violating third parties’ intellectual property rights by virtue of those affiliates or partners’ agreements with us, and this could materiallyincrease our costs in defending such claims and our damages.
Legal proceedings involving intellectual property rights, regardless of merit, are highly uncertain and can involve complex legal and scientific analyses, can be time consuming, expensive to litigate or settle and can significantly divert resources, even if resolved in our favor. Our failure to prevail in such matters could result in loss of intellectual property rights or judgments awarding substantial damages and injunctive or other equitable relief against us. If we were to be held liable or discover or be notified that our products or processes potentially infringe or otherwise violate the intellectual property rights of others, we may face a loss of reputation and may not be able to exploit some or all of our intellectual property rights or technology. If necessary, we may seek licenses to intellectual property of others. However, we may not be able to obtain the necessary licenses on terms acceptable to us or at all. Our failure to obtain a license from a third party for that intellectual property necessary for the production or sale of any of our products could cause us to incur substantial liabilities and/or suspend the production or shipment of products or the use of processes requiring the use of that intellectual property. We may be required to substantially re‑engineer our products or processes to avoid infringement.
Any of the foregoing may require considerable effort and expense, result in substantial increases in operating costs, delay or inhibit sales or preclude us from effectively competing in the marketplace, which in turn could have a material adverse effect on our business and financial results.
Significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions could adversely affect our business, financial positioncondition, results or operations and cash flows.
Our future tax rates may be adversely affected by a number of factors, including the enactment of new tax legislation, other changes in tax laws or the interpretation of tax laws, changes in the estimated realization of our net deferred tax assets (arising, among other things, from tax loss carry forwards and our acquisition by Brookfield), changes to the jurisdictions in which profits are determined to be earned and taxed, adjustments to estimated taxes upon finalization of various tax returns, increases in expenses that are not deductible for tax purposes, including write‑offs of acquired in‑process R&D and impairment of goodwill in connection with acquisitions, changes in available tax credits and additional tax or interest payments resulting from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from period to period. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions could increase our tax rates and adversely impact our financial results in those periods.
Tax legislation could adversely affect us or our stockholders.
The Tax Cuts and Jobs Act (or the Tax Act) was enacted on December 22, 2017, and significantly revised the U.S. corporate income tax regime by, among other things:
lowering corporate income tax rates;
temporarily allowing for immediate expensing of expenditures for certain tangible property;
repealing the corporate alternative minimum tax;
implementing a 100% dividends‑received deduction on certain dividends from 10% or greater owned foreign subsidiaries;
imposing an income tax on deemed repatriated earnings of foreign subsidiaries generally as of December 31, 2017 (payable at reduced rates and potentially over an eight year period);
imposing tax at a reduced rate on certain income derived by foreign corporate subsidiaries in excess of a deemed return on tangible assets (i.e., tax on “global intangible low‑taxed income” or GILTI);
imposing limitations on the ability to deduct interest expense and utilize net operating losses (or NOLs), and
instituting certain proposals to limit base erosion (including the “base erosion anti‑abuse tax” or BEAT, and limitations on the deductibility of certain related‑party payments).
Although we currently anticipate that the Tax Act and the accompanying changes in the corporate tax rate and calculation of taxable income will have a favorable effect on our financial condition, profitability and cash flows, the overall implications of the Tax Act at this time remain uncertain, and it is not possible to predict the full effect of the Tax Act on our business and operations. Thus, the Tax Act and future implementing regulations, administrative guidance or interpretations of the legislation may have unanticipated adverse effects on us or our stockholders.
We are required to make payments under a tax receivable agreement for certain tax benefits we may claim in the future, and the amounts we may pay could be significant.
In connection with the completion of our IPO, we entered into a tax receivable agreement (or the TRA) that provides Brookfield the right to receive future payments from us of 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 Internal Revenue Code of 1986, as amended from time to time (or the Code), foreign tax credits, and certain NOLs in GrafTech Switzerland S.A. (or, collectively, the Pre‑IPO Tax Assets). In addition, we pay interest on the payments we make to Brookfield with respect to the amount of this cash savings from the due date (without extensions) of our tax return where we realize this 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.
We expect that, based on current tax laws, payments under the TRA relating to the Pre‑IPO Tax Assets will be approximately $89.9 million in the aggregate, which was recognized as an expense in 2018 and 2019, with a maximum amount of approximately $100 million. This figure does not account for our Pre‑IPO Tax Assets attributable to previously taxed income under Section 959 of the Code, the value of which is highly speculative, and certain NOLs in GrafTech Switzerland S.A., which we expected to have nominal value at the time of the IPO. Payments made by us to Brookfield under the TRA generally reduce the amount of overall cash flow that might have otherwise been available to us. We made our initial payment of $27.9 million related to the TRA in February 2020.
For more information about the TRA, see “Certain relationships and related party transactions-Tax Receivable Agreement.”
Risks related to our indebtedness
Our indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs.needs and our ability to fulfill our obligations under our existing and future indebtedness.
Our credit agreement (as amended, the "2018 Credit Agreement") provides for (i) an aggregate $2,250 million senior secured term loan facility (or the 2018 Term Loan Facility) and (ii) a $250 million senior secured revolving credit facility (or the 2018 Revolving Credit Facility and, together with the 2018 Term Loan Facility, as amended, the Senior Secured Credit Facilities). In 2018, our wholly owned subsidiary, GrafTech Finance Inc., a Delaware corporation ("GrafTech Finance"), borrowed $2,250 million aggregate principal under the 2018 Term Loan Facility (or 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.
As of December 31, 2016,2019, we had approximately $365.4$1,812.8 million of total indebtedness principal outstanding, This includes $274.1with $246.9 million of Senior Notes ($300.0 million due upon maturity). The Company also has access to a $225 million available for borrowing under the 2018 Revolving Credit Facility (subject to a $25 million minimum liquidity requirement). As of December 31, 2016, the Company had $61.2(taking into account approximately $3.1 million of borrowings and $12.3 million ofoutstanding letters of credit issued thereunder).
Interest expense for a total of $73.5the years ended December 31, 2019 and December 31, 2018 was $127.3 million drawn against the Revolving Facility.and $135.1 million, respectively.
. This substantial amount of indebtedness could:
require us to dedicate a substantial portion of our cash flow to the payment of principal and interest, thereby reducing the funds available for operations and future business opportunities;
make it more difficult for us to satisfy our obligations with respect to the Senior Notes, including our repurchase obligations;
limit our ability to borrow additional money if needed for other purposes, including working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes, on satisfactory terms or at all;
limit our ability to adjust to changing economic, business and competitive conditions;
place us at a competitive disadvantage with competitors who may have less indebtedness or greater access to financing;
make us more vulnerable to an increase in interestsinterest rates, a downturn in our operating performance or a decline in general economic conditions; and
make us more susceptible to changes in credit ratings, which could impact our ability to obtain financing in the future and increase the cost of such financing.
If complianceCompliance with our debt obligations under the Revolving FacilitySenior Secured Credit Facilities could materially limitslimit our financial or operating activities, or hindershinder our ability to adapt to changing industry conditions, we may losewhich could result in our losing market share, a decline in our revenue may decline andor a negative impact on our operating results may be negatively affected.results.
The 2018 Credit Agreement governing the Revolving Facility and the indenture governing the Senior Notes includes covenants that could restrict or limit our financial and business operations.
The 2018 Credit Agreement and the Indenture containcontains a number of restrictive covenants that, subject to certain exceptions and qualifications, restrict or limit GTI'sour ability and the ability of GTI'sour subsidiaries to, among other things:
incur, repay or refinance indebtedness;
create liens on or sell our assets;
engage in certain fundamental corporate changes or changes to our business activities;
make investments or engage in mergers or acquisitions;
engage in sale-leaseback transactions;
pay dividends or repurchase stock;
engage in certain affiliate transactions;
enter into agreements or otherwise restrict GTI'sour subsidiaries from making distributions or paying dividends to the borrowers under the Revolving Facility;Senior Secured Credit Facilities or to us or certain of our subsidiaries, as applicable; and
repay intercompany indebtedness owed to GTI or make intercompany distributions or pay dividends to GTI.intercompany dividends.
The 2018 Credit Agreement also contains certain affirmative covenants and contains a financial covenant that requires us to comply with financial coverage ratios regarding both our cash interest expense and ourmaintain a senior secured debt relativefirst 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 our EBITDA (as defined inor less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Agreement).Facility.
These covenants and restrictions could affect our ability to operate our business, and may limit our ability to react to market conditions or take advantage of potential business opportunities as they arise. Additionally, our ability to comply with these covenants may be affected by events beyond our control, including general economic and credit conditions and industry downturns.
If we fail to comply with the covenants in the 2018 Credit Agreement and are unable to obtain a waiver or amendment, an event of default would result, and the lenders and noteholders could, among other things, declare outstanding amounts due and payable or refuse to lend additional amounts to us, or require deposit of cash collateral in respect of outstanding letters of credit, or refuse to waive any restrictive covenants in the Credit Agreement, including the restriction which prohibits dividends and distributions from GTI's subsidiaries to GTI to fund payment of indebtedness, including the Senior Notes, during a default or event of default.credit. If we were unable to repay or pay the amounts due, the lenders under the 2018 Credit Agreement could, among
other things, proceed against the collateral granted to them to secure suchthe indebtedness, which includes substantially all of theour and our U.S. subsidiaries’ assets of GTI and its U.S. subsidiaries and certain assets of certain of GTI's foreignour non‑U.S. subsidiaries.
Our cash flows may not be sufficient to service our indebtedness, and if we are unable to satisfy our obligations under our indebtedness, we may be required to seek other financing alternatives, which may not be successful.
Our ability to make timely payments of principal and interest on our debt obligations, including the Senior Notes and our obligations under the Revolving Facility,Senior Secured Credit Facilities, depends on our ability to generate positive cash flows from operations, which is subject to general economic conditions, competitive pressures and certain financial, business and other factors beyond our control. If our cash flows and capital resources are insufficient to make these payments, we may be required to seek additional financing sources, reduce or delay capital expenditures, sell assets or operations or refinance our indebtedness. These actions could have a material adverse effect on our business, financial conditions and results of operations. In addition, we may not be able to take any of these actions, and, even if successful, these actions may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance the debt under the Revolving FacilitySenior Secured Credit Facilities will depend on, among other things, the condition of the capital markets and our financial condition at suchthe time. There can be no assurance that we willWe may not be able to restructure or refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot make scheduled payments on our debt, we will be in default and the outstanding principal and interest on our debt could be declared to be due and payable, in which case we could be forced into bankruptcy or liquidation or required to substantially restructure or alter our business operations or debt obligations.
Borrowings under the Revolving FacilitySenior Secured Credit Facilities bear interest at a variable rate, which subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
All of our borrowings under the Revolving FacilitySenior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on this variable rate indebtedness would increase even thoughif the amount borrowed remainedremains the same.
Additionally, we have in the past entered into, and may in the future enter into, interest rate swaps and caps to attempt to manage interest rate expense. During 2019, we entered into interest rate swap contractswith notional amounts of $500 million maturing in two years and another $500 million maturing in five years. We may purchase or sell these financial instruments, and open and close hedges or other positions, at any time. Changes in interest rates have in the past resulted, and may in the future result, in significant gains or losses. These instruments are marked‑to‑market monthly and related gains and losses are recorded in Other Comprehensive Income on the Consolidated Balance Sheets. These hedges may be insufficient or ineffective in protecting against the impact of these fluctuations.
Uncertainty relating to the calculation of London Interbank Offered Rate (LIBOR) and other reference rates and their potential discontinuance may adversely affect interest expense related to our outstanding debt, including amounts borrowed under our Senior Secured Credit Facilities.
National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be able to raiseguaranteed after 2021. As such, it appears highly likely that LIBOR will be discontinued or modified by the funds necessary to finance a changeend of control repurchase under the Indenture governing the Senior Notes.2021.
Upon the occurrence of a change of control repurchase event under the Indenture, holders of Senior Notes may require us to purchase their Senior Notes. However,
At this time, it is not possible to predict the effect that we would notthese developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates, may have sufficient funds at that timeon LIBOR or other benchmarks, including LIBOR-based borrowings under our Senior Secured Credit Facilities. Furthermore, the use of alternative reference rates or other reforms could cause the market value of, the applicable interest rate on and the amount of interest paid on our benchmark-based borrowings to make the required purchase of Senior Notes. We cannot assure you that we will have sufficient financial resources, or will be able to arrange financing, to pay the repurchase price in cash with respect to any Senior Notes tendered by holders for repurchase upon a change of control. Our failure to repurchase the Senior Notes when required would result in an event of default under the Indenture whichmaterially different than expected and could in turn, constitute a default under the terms of our other indebtedness, if any.
The Credit Agreement governing the Revolving Facility includes covenants that could restrict or limitmaterially adversely impact our ability to repurchase the Senior Notes inrefinance such borrowings or raise future indebtedness on a change of control repurchase event.cost effective basis.
Upon the occurrence of a change of control repurchase event under the indenture governing the Senior Notes, holders of Senior Notes may require us to purchase their Senior Notes. The Credit Agreement contains a restrictive covenant on the repurchase or retirement of indebtedness, which could limit or restrict our ability to make the required repurchase of Senior Notes. If the repurchase of Senior Notes does violate covenants in the Credit Agreement and if we are unable to obtain a waiver or amendment, an event of default would occur if we repurchased the Senior Notes, and the lenders under the Credit Agreement could, among other things, declare outstanding amounts thereunder due and payable, refuse to lend additional amounts to us, and require a deposit of cash collateral in respect of outstanding letters of credit. If we were unable to repay or pay the amounts due, the lenders could, among things, proceed against the collateral granted to them to secure such indebtedness, which includes substantially all of the assets of GTI and GTI's U.S. subsidiaries and certain assets of certain of GTI's foreign subsidiaries.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Any rating assigned to our debt could be lowered or withdrawn entirely by a rating agency if, in that rating agency'sagency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing. In January 2016, Moody's downgradedAdditionally, we enter into various forms of hedging arrangements against currency, interest rate or decant oil price fluctuations. Financial strength and credit ratings are also important to the availability and pricing of these hedging activities, and a downgrade of our Senior Notes from B1credit ratings may make it more costly for us to Caa1.
engage in these activities.
Disruptions in the capital and credit markets, which may continue indefinitely or intensify,occur at any time, could adversely affect our results of operations, cash flows and financial condition, or those of our customers and suppliers.
Disruptions in the capital and credit markets may adversely impact our results of operations, cash flows and financial condition, or those of our customers and suppliers. Disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed to conduct or expand our businesses or conduct acquisitions or make other discretionary investments, as well as our ability to effectively hedge our currency or interest rate risks and exposures. Suchexposures, which could adversely impact our business, results of operations, financial condition and cash flows. These disruptions may also adversely impact the capital needsfinancial position of our customers and suppliers, which, in turn, could adversely affect our results of operations, financial condition and cash flowsflows.
Risks related to our common stock
If the ownership of our common stock continues to be highly concentrated, it may prevent minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.
As of December 31, 2019, Brookfield owns approximately 74% of our outstanding common stock. As a result, Brookfield owns shares sufficient for the majority vote over all matters requiring a stockholder vote, including the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our Amended and Restated Certificate of Incorporation (or Amended Certificate of Incorporation) and our Amended and Restated By‑Laws (or Amended By‑Laws); and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Brookfield may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control. Also, Brookfield may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but that might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then‑current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.
Certain of our stockholders have the right to engage or invest in the same or similar businesses as us.
Brookfield has other investments and business activities in addition to their ownership of us. Brookfield has the right, and has no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees. If Brookfield or any of its officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.
In the event that any of our directors and officers who is also a director, officer or employee of Brookfield acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us, if Brookfield pursues or acquires the corporate opportunity or if Brookfield does not present the corporate opportunity to us.
We may not pay cash dividends on our common stock.
We currently pay cash dividends on our common stock in accordance with our dividend policy. We cannot assure you, however, 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. For example, we may or may not be able to, or may decide not to, pay dividends if we are unable, for any reason, to continue our three‑ to five‑year take‑or‑pay contracts strategy in the future or we experience a significant disruption in our manufacturing operations or our production of petroleum needle coke at Seadrift, that, in either case, inhibits our ability to deliver the contracted volumes under our three‑ to five‑year take‑or‑pay contracts. In addition, adverse market conditions may lead us to prioritize repaying the principal on our outstanding indebtedness. Our ability to pay dividends on our common stock is also limited as a practical matter by our credit facilities. In the future, we may also enter into other credit agreements or other borrowing arrangements or issue debt securities that, in each case, restrict or limit our ability to pay cash dividends on our common stock. In addition, since we are a holding company with no operations of our own, our ability to pay dividends is dependent on the ability of our subsidiaries to make distributions to us. Their ability to make such distributions will be subject to their operating results, cash requirements and financial condition.
We are subject to risks associated with operations Any change in multiple countries.
A substantial majoritythe level of our net sales are deriveddividends or the suspension of the payment thereof could adversely affect the market price of our common stock. See “Dividend Policy.”
Certain provisions, including in our Amended Certificate of Incorporation and our Amended By‑Laws, could hinder, delay or prevent a change in control, which could adversely affect the price of our common stock.
Our Amended Certificate of Incorporation and Amended By‑Laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors or Brookfield, including:
provisions in our Amended Certificate of Incorporation and Amended By‑Laws that prevent stockholders from sales outsidecalling special meetings of our stockholders, except where the U.S.,Delaware General Corporation Law (“DGCL”) confers the right to fix the date of such meetings upon stockholders;
advance notice requirements by stockholders with respect to director nominations and actions to be taken at annual meetings;
certain rights of Brookfield with respect to the designation of directors for nomination and election to our board of directors;
no provision in our Amended Certificate of Incorporation or Amended By‑Laws provides for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our operationscommon stock can elect all the directors standing for election;
under our Amended Certificate of Incorporation, our board of directors have authority to cause the issuance of preferred stock from time to time in one or more series and to establish the terms, preferences and rights of any such series of preferred stock, all without approval of our total property, plantstockholders; and equipment
nothing in our Amended Certificate of Incorporation precludes future issuances without stockholder approval of the authorized but unissued shares of our common stock.
These provisions may make it difficult and other long- lived assets are located outside the U.S. Asexpensive for a result, we are subjectthird party to risks associated with operatingpursue a tender offer, change in multiple countries, including:
currency devaluations and fluctuationscontrol or takeover attempt that is opposed by Brookfield, our management or our board of directors. Public stockholders who might desire to participate in currency exchange rates, including impactsthese types of transactions in various currencies, impact on translationmay not have an opportunity to do so, even if the transaction is favorable to stockholders. These anti‑takeover provisions could substantially impede the ability of various currencies into dollars for U.S. reporting and financial covenant compliance purposes, and impacts on results of operations duepublic stockholders to the fact that costs of our foreign subsidiaries are primarily incurred in local currencies while their products are primarily sold in dollars and euros;
imposition of or increases in customs duties and other tariffs;
imposition of or increases in currency exchange controls, including imposition of or increases in limitations on conversion of various currencies into dollars, euros, or other currencies, making of intercompany loans by subsidiaries or remittance of dividends, interest or principal payments or other payments by subsidiaries;
imposition of or increases in revenue, income or earnings taxes and withholding and other taxes on remittances and other payments by subsidiaries;
imposition of or increases in investment or trade restrictions by the U.S. or by non-U.S. governments or trade sanctions adopted by the U.S.;
inability to definitively determine or satisfy legal requirements, inability to effectively enforce contract or legal rights and inability to obtain complete financial or other information under local legal, judicial, regulatory, disclosure and other systems; and
nationalization or expropriation of assets, and other risks which could resultbenefit from a change in government or government policy, or from other political, social or economic instability.
We cannot assure you that such risks will not have a material adverse effect on us or that we would be able to mitigate such material adverse effects in the future.
In addition to the factors noted above, our results of operations and financial condition are affected by inflation, deflation and stagflation in each country in which we have a manufacturing facility. We cannot assure you that future increases in our costs will not exceed the rate of inflation or the amounts, if any, by which we may be able to increase prices for our products.
Our ability to grow and compete effectively depends on protecting our intellectual property. Failure to protect our intellectual property could adversely affect us.
We believe that our intellectual property, consisting primarily of patents and proprietary know-how and information, is important to our growth. Failure to protect our intellectual property may result in the loss of the exclusive right to use our technologies. We rely on patent, trademark, copyright and trade secret laws and confidentiality and restricted use agreements to protect our intellectual property. Some of our intellectual property is not covered by any patent or patent application or any such agreement.
Patents are subject to complex factual and legal considerations. Accordingly, there can be uncertainty as to the validity, scope and enforceability of any particular patent. Therefore, we cannot assure you that:
any of the U.S. or foreign patents now or hereafter owned by us, or that third parties have licensed to us or may in the future license to us, will not be circumvented, challenged or invalidated;
any of the U.S. or foreign patents that third parties have non-exclusively licensed to us, or may non-exclusively license to us in the future, will not be licensed to others; or
any of the patents for which we have applied or may in the future apply will be issued at all or with the breadth of claim coverage sought by us.
Moreover, patents, even if valid, only provide protection for a specified limited duration.
We cannot assure you that agreements designed to protect our proprietary know-how and information will not be breached, that we will have adequate remedies for any such breach, or that our strategic alliance suppliers and customers, consultants, employees or others will not assert rights against us with respect to intellectual property arising out of our relationships with them.
In addition, effective patent, trademark and trade secret protection may be limited, unavailable or not applied for in the U.S. or in any of the foreign countries in which we operate.
Further, we cannot assure you that the use of our patented technology or proprietary know-how or information does not infringe the intellectual property rights of others.
Intellectual property protection does not protect against technological obsolescence due to developments by others or changes in customer needs.
The protection of our intellectual property rights may be achieved, in part, by prosecuting claims against others whom we believe have misappropriated our technology or have infringed upon our intellectual property rights, as well as by defending against misappropriation or infringement claims brought by others against us. Our involvement in litigation to protect or defend our rights in these areas could result in a significant expense to us, adversely affect the development of sales of the related products, and divert the efforts of our technical and management personnel, regardless of the outcome of such litigation.
If necessary, we may seek licenses to intellectual property of others. However, we can give no assurance to you that we will be able to obtain such licenses or that the terms of any such licenses will be acceptable to us. Our failure to obtain a license from a third party for its intellectual property that is necessary for us to make or sell any of our products could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or use of processes requiring the use of such intellectual property.
Our current and former manufacturing operations are subject to increasingly stringent health, safety and environmental requirements.
We use and generate hazardous substances in our manufacturing operations. In addition, both the properties on which we currently operate and those on which we have ceased operations are and have been used for industrial purposes. Further, our manufacturing operations involve risks of personal injury or death. We are subject to increasingly stringent environmental, health and safety laws and regulations relating to our current and former properties, neighboring properties, and our current raw materials, products, and operations. These laws and regulations provide for substantial fines and criminal sanctions for violations and sometimes require evaluation and registration or the installation of costly pollution control or safety equipment or costly changes in operations to limit pollution or decrease the likelihoodchange our management and board of injuries. It is also possible that the impact of such regulations on our suppliers could affect the availability and cost of our raw materials. In addition, we may become subject to potential material liabilities for the investigation and cleanup of contaminated properties, for claims alleging personal injury or property damage resulting from exposure to or releases of hazardous substances, or for personal injury as a result of an unsafe workplace. Further, alleged noncompliance with or stricter enforcement of, or changes in interpretations of, existing laws and regulations, adoption of more stringent new laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could be material.
We may face risks related to greenhouse gas emission limitations and climate change.
There is growing scientific, political and public concern that emissions of greenhouse gases (“GHG”) are altering the atmosphere in ways that are affecting, and are expected to continue to affect, the global climate. Legislators,
regulators and others, as well as many companies, are considering ways to reduce GHG emissions. GHG emissions are regulated in the European Union via an Emissions Trading Scheme (“ETS”), otherwise known as a “Cap and Trade” program. In the United States, environmental regulations issued in 2009 and 2010 require reporting of GHG emissions by defined industries, activities and suppliers, and regulate GHG as a pollutant covered under the New Source Review, Prevention of Significant Deterioration (“PSD”) and Title V Operating Permit programs of the Clean Air Act Amendments. It is possible that some form of regulation of GHG emissions will also be forthcoming in other countries in which we operate or market our products. Regulation of GHG emissions could impose additional costs, both direct and indirect, on our business, and on the businesses of our customers and suppliers, such as increased energy and insurance rates, higher taxes, new environmental compliance program expenses, including capital improvements, environmental monitoring, and the purchase of emission credits, and other administrative costs necessary to comply with current requirements and potential future requirements or limitations that may be imposed, as well as other unforeseen or unknown costs. To the extent that similar requirements and limitations are not imposed globally, such regulation may impact our ability to compete with companies located in countries that do not have such requirements or do not impose such limitations. The company may also realize a change in competitive position relative to industry peers, changes in prices received for products sold, and changes to profit or loss arising from increased or decreased demand for products produced by the company. The impact of any future GHG regulatory requirements on our global business will be dependent upon the design of the regulatory schemes that are ultimately adopteddirectors and, as a result, we are unablemay adversely affect the market price of our common stock and your ability to predict their significance to our operations at this pointrealize any potential change of control premium.
In addition, in time.
The potential physical impactsthe event of climate change on the Company's operations are uncertain and will likely be particular to the geographic circumstances. These physical impacts may includecertain changes in rainfall and storm patterns, shortagescontrol, including if Brookfield’s ownership of water or other natural resources, changing sea levels, and changing global average temperatures. For instance, our Seadrift facility in Texas andoutstanding common stock were to fall below 30%, payments to certain of our Calais facility in France, are located in geographic areas less than 50 feet above sea level. As a result, any future rising sea levelssenior management may be triggered under certain of our compensation arrangements, which could have an adverse impact on their operations and on their suppliers. Due to these uncertainties, any future physical effectsus.
Our Amended Certificate of climate change may or may not adversely affectIncorporation provides that the operations at eachCourt of our production facilities,Chancery of the availabilityState of raw materials,Delaware will be the transportation of our products, the overall costs of conducting our business,exclusive forum for substantially all disputes between us and our financial performance.stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
We face certain litigationOur Amended Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:
any derivative action or proceeding brought on our behalf;
any action asserting a breach of fiduciary duty;
any action asserting a claim against us arising under the DGCL, our Amended Certificate of Incorporation, or our Amended By‑Laws; and legal proceedings risks
any action asserting a claim against us that is governed by the internal‑affairs doctrine.
This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find the exclusive forum provision in our Amended Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our business.
We are involved in various product liability, occupational, environmental,a “controlled company” within the meaning of the NYSE corporate governance standards and other legal claims, demands, lawsuits and other proceedings arising out of or incidental to the conductqualify for exemptions from certain corporate governance requirements.
Because Brookfield owns a majority of our business. The resultsoutstanding common stock, we are a “controlled company” as that term is set forth in the NYSE corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:
the requirement that a majority of our board of directors consist of independent directors;
the requirement that our governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
These requirements will not apply to us as long as we remain a “controlled company.” We may utilize some or all of these proceedingsexemptions. Accordingly, you may not have the same protections afforded to stockholders of companies that are difficultsubject to predict. Moreover, many of these proceedings do not specify the relief or amount of damages sought. Therefore, as to a numberall of the proceedings, we are unable to estimate the possible rangeNYSE corporate governance requirements. Brookfield’s significant ownership interest could adversely affect investors’ perceptions of liability that might be incurred should these proceedings be resolved against us. Certainour corporate governance.
The market price and trading volume of these matters involve types of claims that, if resolved against us, could give rise to substantial liability, which could have a material adverse effect on our financial position, liquidity and results of operations.
We are dependent on supplies of raw materials and energy. Our results of operations could deteriorate if that supply increases in cost or is substantially disrupted for an extended period.
We purchase raw materials and energy from a variety of sources. In many cases, we purchase them under short term contracts or on the spot market, in each case at fluctuating prices. The availability and price of raw materials and energycommon stock may be subject to curtailment or change due to:
limitations which may be imposed under new legislation or regulation;
supplier's allocations to meet demand of other purchasers during periods of shortage (or, in the case of energy suppliers, extended cold weather);
interruptions or cessations in production by suppliers, and
market and other events and conditions.
Petroleum and coal products, including decant oil, petroleum coke and pitch, our principal raw materials, and energy, particularly natural gas, have been subject to significant price fluctuations.
We have in the past entered into, and may continue in the future to enter into, derivative contracts and short duration fixed rate purchase contracts to effectively fix a portion of our exposure to certain products.
A substantial increase in raw material or energy prices which cannot be mitigated or passed on to customers or a continued interruption in supply, particularly in the supply of decant oil, petroleum coke or energy, would have a material adverse effect on us.
Seadriftcould beimpacted by a reduction in the availability of low sulfur decant oil or an increase in the pricing of petroleum needle coke feedstocks.
Seadrift uses low sulfur decant oil in the manufacture of petroleum needle coke. There is no assurance that Seadrift will always be able to obtain an adequate quantity of suitable feedstocks or that capital would be available to install equipment to allow for utilization of higher sulfur decant oil, which is more readily available in the United States, in the event that suppliers of lower sulfur decant oil were to become more limited in the future.Seadrift purchases approximately 1.5 million barrels of low sulfur decant oil annually. The prices paid by Seadrift for such feedstocks are governed by the market for heavy fuel oils, which prices can fluctuate widely for various reasons including, among other things, worldwide oil shortages and cold winter weather. Seadrift's petroleum needle coke is used in the manufacture of graphite electrodes, the price of which is subject to rigorous industry competition thus restricting Seadrift's ability to pass through raw material price increases.
We may divest or acquire businesses.
We may divest or acquire businesses to rationalize or expand our businesses and enhance our cash flows. No assurance can be given that we will be successful in any of such activities or as to the impact thereof on us financial or otherwise.
We have significant goodwill on our balance sheet that is sensitive to changes in the market,volatile, which could result in impairment charges.rapid and substantial losses for our stockholders.
Our annual impairment test of goodwill was performed in the fourth quarter. The estimated fair valuesmarket price of our reporting units were based on discounted cash flow models derived from internal earnings forecasts and assumptions. The assumptions and estimates used in these valuations incorporated the current and expected economic environment. Our graphite electrode reporting unit's fair value exceeds its carrying value (see Note 5 "Goodwill and Other Intangible Assets" to the Financial Statements). A further deterioration in the global economic environment or in any of the input assumptions in our calculation could adversely affect the fair value of our reporting units and result in further impairment of some or all of the goodwill on the balance sheet. See Item 7 "Management's Discussion and Analysis of Financial Conditions and Results of Operations-Critical Accounting Policies" for further information regarding goodwill.
Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period.
Our manufacturing operations are subject to disruption due to extreme weather conditions, floods, hurricanes and tropical storms and similar events, major industrial accidents, cybersecurity attacks, strikes and lockouts, adoption of new laws or regulations, changes in interpretations of existing laws or regulations or changes in governmental enforcement policies, civil disruption, riots, terrorist attacks, war, and other events. We cannot assure you that no such events will occur. If such an event occurs, it could have a material adverse effect on us.
We have non-dollar-denominated intercompany loans and have had in the past, and may in the future have, foreign currency financial instruments and interest rate swaps and caps. The related gains and losses have in the past been, and may in the future be, significant.
As part of our cash management, we have non-dollar denominated 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 / losses in other income (expense), net, on the Consolidated Statements of Income.
Additionally, we have in the past entered into, and may in the future enter into, interest rate swaps and caps to attempt to manage interest rate expense. We have also in the past entered into, and may in the future enter into, foreign currency financial instruments to attempt to hedge global currency exposures. We may purchase or sell these financial instruments, and open and close hedges or other positions, at any time. Changes in currency exchange rates or interest rates have in the past resulted, and may in the future result, in significant gains or losses with respect thereto. These instruments are marked-to-market monthly and gains and losses thereon are recorded in Other Comprehensive Income in the Consolidated Balance Sheets.
Therecommon stock may be volatility in our results of operations between quarters.
Sales of our products fluctuate from quarter to quarter due to such factors as changes in economic conditions, changes in competitive conditions, scheduled plant shutdowns by customers, national vacation practices, changes in customer production schedules in response to seasonal changes in energy costs, weather conditions, strikeshighly volatile 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. We have experienced, and expect to continue to experience, volatility with respect to demand for and prices of our industrial material products, specifically graphite electrodes, both globally and regionally. We have also experienced volatility with respect to prices of raw materials and energy, and we expect to experience volatility in such prices in the future. Accordingly, results of operations for any quarter are not necessarily indicative of the results of operations for a full year.
The graphite and carbon industry is highly competitive. Our market share, net sales or net income could decline due to vigorous price and other competition.
Competition in the graphite and carbon products industry (other than, generally, with respect to new products) is based primarily on price, product differentiation and quality, delivery reliability, and customer service. Electrodes, in particular, are subject to rigorous price competition. In such a competitive market, changes in market conditions, including customer demand and technological development, could adversely affect our competitiveness, sales and/or profitability.
Competition with respect to new products is, and is expected to be, generally based primarily on product innovation, price, performance and cost effectiveness as well as customer service.
Competition could prevent implementation of price increases, require price reductions or require increased spending on research and development, marketing and sales that could adversely affect us.
RISKS RELATING TO OUR SECURITIES
GTI is a holding company and all of its operations are conducted through its subsidiaries.
GTI is a holding company and derives substantially all of its cash flow from its subsidiaries. Since GTI's operations are conducted through its subsidiaries, its cash flow and its consequent ability to service its indebtedness, including the Senior Notes, is dependent upon the earnings of its subsidiaries and the distribution of those earnings to GTI or upon the payments of funds by those subsidiaries to GTI or the repayment of intercompany indebtedness owed to GTI. GTI's subsidiaries are separate and distinct legal entities with trade payables and other liabilities. In addition to any statutory restrictions, the payment of dividends and the making of distributions and the making of loans and advances to GTI by its subsidiaries are subject to contractual restrictions provided in the Revolving Facility. In addition, any right GTI may have to receive assets of any of its subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Senior Notes to participate in those assets) is effectively subordinated to the claims of such subsidiary's creditors, including trade creditors.
The Senior Notes are structurally subordinated to all of the existing and future liabilities, including trade payables, of GTI's subsidiaries that are not, or do not become, guarantors of the Senior Notes.
The Senior Notes are not guaranteed by all of GTI's subsidiaries or any of GTI's foreign subsidiaries. The Senior Notes are therefore structurally subordinated to all of the existing and future liabilities, including trade payables, of any non-guarantor subsidiary such that, in the event of an insolvency, liquidation, reorganization, dissolution or other winding up of any such subsidiary, all of such subsidiary's creditors (including trade creditors and preferred stockholders, if any) would be entitled to payment in full out of such subsidiary's assets before the holders of the Senior Notes would be entitled to any payment.
As of December 31, 2016, GTI's subsidiaries that are not guarantors of the Senior Notes had total liabilities, including trade payables (but excluding intercompany liabilities), of approximately $137.5 million or 24% of our total liabilities, and total assets (excluding intercompany receivables) of approximately $719.7 million, or 65% of our total assets. In addition, for the year ended December 31, 2016, our subsidiaries that are not guarantors of the Senior Notes generated approximately $350.9 million, or 80%, of our consolidated revenues and approximately $77.5 million of our consolidated operating loss of $92.1 million.
Under certain circumstances, subsidiary guarantees may be released.
Those subsidiaries that provide guarantees of the Senior Notes will be released from such guarantees upon the occurrence of certain events, including the following:
the unconditional release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Notes by such subsidiary guarantor;
the sale or other disposition, including by way of merger or consolidation or the sale of its capital stock following which such subsidiary guarantor is no longer a subsidiary of the Company; or
GTI's exercise of its legal defeasance option or its covenant defeasance option as described in the indenture applicable to the Senior Notes.
If any such subsidiary guarantee is released, no holder of the Senior Notes will have a claim as a creditor against any such subsidiary and the indebtedness and other liabilities, including trade payables and preferred stock, if any, of such subsidiary will be effectively senior to the claim or any holders of the Senior Notes.
We may incur substantially more debt ranking senior or equal in right of payment with the Senior Notes, including secured debt, which would increase the risks described herein.
The agreements relating to our debt, including the Credit Agreement, limit but do not prohibit our ability to incur additional debt, and the amount of debt that we could incur could be substantial. Accordingly, we could incur significant additional debt in the future, including additional debt under the Revolving Facility. Much of this additional debt could constitute secured debt, to which the Senior Notes would be effectively subordinated to the extent of the value of the collateral securing such debt (the collateral securing the Revolving Facility consists of substantially all of the assets of GTI and its U.S. subsidiaries and certain assets of certain of GTI's foreign subsidiaries). In addition, if we form or acquire any subsidiaries in the future, those subsidiaries also could incur debt, which debt would be effectively senior to the Senior Notes if those subsidiaries are not required to guarantee the Senior Notes. If new debt is added to our current debt levels, the related risks that we now face could intensify.
In addition, certain types of liabilities are not considered “Indebtedness” under the Credit Agreement, and the Credit Agreement does not impose any limitation on the amount of liabilities incurred by the subsidiaries, if any, that might be designated as “unrestricted subsidiaries.”
The ability of holders of Senior Notes to require us to repurchase Senior Notes as a result of a disposition of “substantially all” of our assets may be uncertain.
The definition of change of control in the indenture governing the Senior Notes includes a phrase relating to the sale of “all or substantially all” of our assets. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of such phrase under applicable law. Accordingly, the ability of a holder of Senior Notes to require us to repurchase its Senior Notes as a result of a sale or other disposition of less than all of our assets to another person or group may be uncertain.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Senior Notes.
Any default under the agreements governing our indebtedness, including a default under the Revolving Facility, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the Senior Notes and substantially decrease the market value of the Senior Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness (including covenants in the Credit Agreement and the indenture that governs the Senior Notes), we could be in default under the terms of the agreements governing such indebtedness, including the Credit Agreement and the indenture governing the Senior Notes. In the event of such default:
the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;
the lenders under the Revolving Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and
we could be forced into bankruptcy or liquidation.
Upon any such bankruptcy filing, we would be stayed from making any ongoing payments on the Senior Notes, and the holders of the Senior Notes would not be entitled to receive post-petition interest or applicable fees, costs or charges, or any “adequate protection” under Title 11 of the United States Code (the “Bankruptcy Code”). Furthermore, if a bankruptcy case were to be commenced under the Bankruptcy Code, we could be subject to claims, with respectwide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to any payments made within 90 days prior to commencement of such a case, that we were insolvent at the time any such payments were made and that all or a portion of such payments, which could include repayments of amounts due under the Senior Notes, might be deemed to constitute a preference, under the Bankruptcy Code, and that such payments should be voided by the bankruptcy court and recovered from the recipients for the benefit of the entire bankruptcy estate. Also, in the event that we were to become a debtor in a bankruptcy case seeking reorganization or other relief under the Bankruptcy Code, a delay and/or substantial reduction in payment under the Senior Notes may otherwise occur. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the Revolving Facility to avoid being in default. If we breach our covenants under the Credit Agreement and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the Revolving Facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Federal and state statutes could allow a court to void the Senior Notes or anymarket price of our subsidiaries' guarantees of the Senior Notes under fraudulent transfer laws and require noteholders to return payments received by us or the subsidiary guarantors to us or the subsidiary guarantors or to fund for the benefit of their respective creditors or subordinate the Senior Notes or the guarantees to other claims of us or the subsidiary guarantors.
Under the federal bankruptcy laws and comparable provisions of state fraudulent transfer laws, the Senior Notes or any of the guarantees thereof could be voided, or claims with respect to the Senior Notes or any of the guarantees could be subordinated to all other debts of GTI or the subsidiary guarantors. In addition, a bankruptcy court could void (i.e., cancel) any payments by GTI or the subsidiary guarantors pursuant to their guarantees and require those payments to be returned to GTI or the subsidiary guarantors or to a fund for the benefit of us or their respective creditors, or subordinate the Senior Notes or the guarantees to other claims of GTI or the subsidiary guarantors. The bankruptcy court might take these actions if it found, among other things, that GTI or the applicable subsidiary guarantor:
received less than reasonably equivalent value or fair consideration for the issuance of the Senior Notes or the incurrence of its guarantee; and
was (or was rendered) insolvent by such issuance or such incurrence;
was engaged or about to engage in a business or transaction for which its assets constituted unreasonably small capital to carry on its business;
intended to incur, or believed that it would incur, obligations beyond its ability to pay as the obligations matured; or
was a defendant in an action for money damages, or had a judgment for money damages docketed against it and, in either case, after final judgment, the judgment was unsatisfied.
A court would likely find that GTI or a subsidiary guarantor received less than fair consideration or reasonably equivalent value for the Senior Notes or its guarantee to the extent that it did not receive direct or indirect substantial benefit from the issuance of the Senior Notes or the incurrence of the guarantee. A court could also void the Senior Notes or any guarantee if it found that GTI or the subsidiary guarantor issued the Senior Notes or incurred the guarantee with actual intent to hinder, delay, or defraud any present or future creditors. Although courts in different jurisdictions measure solvency differently, in general, an entity would be deemed insolvent if the sum of its debts, including contingent and unliquidated debts, exceeds the fair value of its assets or if the present fair saleable value of its assets is less than the amount that would be required to pay the expected liability on its debts, including contingent and unliquidated debts, as they become due. We cannot predict what standard a court would apply in order to determine whether any of the Issuer or a subsidiary guarantor was insolvent as of the relevant date or whether, regardless of the method of valuation, a court would determine that the subsidiary guarantor was insolvent on that date, or whether a court would determine that the payments thereunder constituted fraudulent transfers or conveyances on other grounds. If the
issuance of the Senior Notes or the incurrence of the guarantee is deemed to be a fraudulent transfer, it could be voided altogether, or it could be subordinated to all other debts of GTI or the subsidiary guarantor, as applicable. In such case, any payment by GTI or the applicable subsidiary guarantor pursuant to the Senior Notes or its guarantee could be required to be returned to us or the applicable subsidiary guarantor or to a fund for the benefit of our or their respective creditors. Moreover, in such a case a court could subordinate the Senior Notes or guarantees to other claims of us or the subsidiary guarantor. If a guarantee is voided or held unenforceable for any other reason, holders of the Senior Notes would cease to have a claim against the subsidiary guarantor based on the guarantee and would be creditors only of GTI and any subsidiary guarantor whose guarantee was not similarly voided or otherwise held unenforceable.
Each guarantee will contain a provision intended to limit the subsidiary guarantor's liability to the maximum amount that it could incur without rendering the incurrence of obligations under its guarantee a fraudulent transfer. This provision may not be effective to protect the guarantees from being voided or subordinated under fraudulent transfer or conveyance law.
Forward Looking Statements
Forward Looking Statements and Risks. This Report contains forward looking statements. In addition, we or our representatives have made or may make forward looking statements on telephone or conference calls, by webcasts or emails, in person, in presentations or written materials, or otherwise. These include statements about such matters as future, targeted or expected (or the impact of current, future, expected or targeted): outlook for 2017 or beyond; operational and financial performance; growth prospects and rates; future or targeted profitability, cash flow, liquidity and capital resources, production rates, inventory levels and EBITDA; the impact of rationalization, product line change, cost and liquidity initiatives; changes in the operating rates or efficiency in our operations or our competitors' or customers' operations; product quality; diversification, new products, and product improvements and their impact on our business; the integration or impact of acquired businesses; divestitures, asset sales, investments and acquisitions that we may make in the future; possible debt or equity financing or refinancing (including factoring and supply chain financing) activities; the impact of customer bankruptcies; conditions and changes in the global financial and credit markets; possible changes in control of the Company and the impacts thereof; the impact of accounting changes; and currency exchange and interest rates and changes therein; .changes in production capacity in our operations and our competitors' or customers' operations and the utilization rates of that capacity; growth rates for, prices and sales of, and demand for, our products and our customers' products; costs of materials and production, including increases or decreases therein, our ability to pass on any such increases in our product prices or impose surcharges thereon, or customer or market demand to reduce our prices due to such decreases; changes in customer order patterns due to changes in economic conditions; productivity, business process and operational initiatives; the markets we serve and our position in those markets; financing and refinancing activities; investments and acquisitions and the performance of the businesses underlying such acquisitions and investments; employment and contributions of key personnel; employee relations and collective bargaining agreements covering many of our operations; tax rates and the effects of jurisdictional mix; capital expenditures and changes therein; nature and timing of restructuring and rationalization charges and payments; inventory and supply chain management; customer and supplier contractual provisions and related opportunities and issues; competitive activities; strategic plans, initiatives and business projects; regional and global economic and industry market conditions, the timing and magnitude of changes in such conditions; interest rate management activities; currency rate management activities; deleveraging activities; rationalization, restructuring, realignment, strategic alliance, raw material and supply chain, technology development and collaboration, investment, acquisition, venture, operational, tax, financial and capital projects; legal proceedings, investigations, contingencies, and environmental compliance including any regulatory initiatives with respect to greenhouse gas emissions; consulting projects; and costs, working capital, revenues, business opportunities, debt levels, cash flows, cost savings and reductions, margins, earnings and growth. The words “will,”“may,”“plan,”“estimate,”“project,”“believe,”“anticipate,”“expect,”“intend,”“should,”“would,”“could,”“target,”“goal,”“continue to,”“positioned to” and similar expressions, or the negatives thereof, identify some of these statements.
Our expectations and targets are not predictors of actual performance and historically our performance has deviated, oftencommon stock declines significantly, from our expectations and targets. Actual future events and circumstances (including future results and trends) could differ materially, positively or negatively, from those set forth in these statements due to various factors. These factors include:
the possibility that additions to capacity for producing EAF steel, increases in overall EAF steel production capacity, and increases or other changes in steel production may not occur or may not occur at the rates that we anticipate or may not be as geographically disbursed as we anticipate;
the possibility that increases or decreases in graphite electrode manufacturing capacity (including growth by producers in developing countries), competitive pressures (including changes in, and the mix, distribution, and pricing of, competitive products), reduction in specific consumption rates, increases or decreases in customer inventory levels, or other changes in the graphite electrode markets may occur, which may impact demand for, prices or unit and dollar volume sales of graphite electrodes and growth or profitability of our graphite electrodes business;
the possible failure of changes in EAF steel production or graphite electrode production to result in stable or increased, or offset decreases in, graphite electrode demand, prices, or sales volume;
the possibility that a determination that we have failed to comply with one or more export controls or trade sanctions to which we are subject with respect to products or technology exported from the United States or other jurisdictions could result in civil or criminal penalties, denial of export privileges and loss of revenues from certain customers;
the possibility that, for all of our product lines, capital improvement and expansion in our customers' operations or increases in demand for their products may not occur or may not occur at the rates that we anticipate or the demand for their products may decline, which may affect their demand for the products we sell to them, which could affect our profitability and cash flows as well as the recoverability of our assets;
the possibility that assumptions related to future expectations of financial performance materially change and impact our goodwill and long-lived asset carrying values;
the possibility that our financial assumptions and expectations materially change as a result of government or state-owned government subsidies, incentives and trade barriers;
the possibility that current economic disruptions or other conditions may result in idling or permanent closing of blast furnace capacity or delay of blast furnace capacity additions or replacements which may affect demand and prices for our refractory products;
the possibility that continued global consolidation of the world's largest steel producers could impact our business or industry;
the possibility that average graphite electrode revenue per metric ton in the future may be different than current spot or market prices due to changes in product mix, changes in currency exchange rates, changes in competitive market conditions or other factors;
the possibility that price increases, adjustments or surcharges may not be realized or that price decreases may occur;
the possibility that current challenging economic conditions and economic demand reduction may continue to impact our revenues and costs;
the possibility that U.S., European, Chinese, or other governmental monetary or fiscal policy may adversely affect global economic activity and demand for our products;
the possibility that potential future cuts in defense spending by the United States government as a part of efforts to reduce federal budget deficits could reduce demand for certain of our products and associated revenue;
the possibility that decreases in prices for energy and raw materials may lead to downward pressure on prices for our products and delays in customer orders for our products as customers anticipate possible future lower prices;
the possibility that customers may delay or cancel orders;
the possibility that we may not be able to reduce production costs or delay or cancel raw material purchase commitments;
the possibility that economic, political and other risks associated with operating globally, including national and international conflicts, terrorist acts, political and economic instability, civil unrest, community activism and natural or nuclear calamities might interfere with our supply chains, customers or activities in a particular location;
the possibility that reductions in customers' production, increases in competitors' capacity, competitive pressures, or other changes in other markets we serve may occur, which may impact demand for, prices of or unit and dollar volume sales of, our other products, or growth or profitability of our other product lines, or change our position in such markets;
the possibility that we will not be able to hire and retain key personnel, maintain appropriate relations with unions, associations and employees or to renew or extend our collective bargaining or similar agreements on reasonable terms as they expire or do so without a work stoppage or strike;
the possibility that an adverse determination in litigation pending in Brazil involving disputes related to the proper interpretation of certain collectively bargained wage increase provisions applicable to both us and other employers in the Bahia region might result in the filing of claims against our Brazilian subsidiary;
the possibility that a Brazilian graphite electrode antitrust investigation could result in material fines or penalties;
the possibility that we will fail to retain or develop new customers or applications for our Engineered Solutions products or such new product applications will not be adopted by the market place;
the possibility that our manufacturing capabilities may not be sufficient or that we may experience delays in expanding or fail to expand our manufacturing capacity to meet demand for existing, new or improved products;
the possibility that we may propose acquisitions or divestitures in the future, that we may not complete the acquisitions or divestitures, and that investments and acquisitions that we may make in the future may not be successfully integrated into our business or provide the performance or returns expected or that divestitures may not generate the proceeds anticipated;
the possibility that challenging conditions or changes in the capital markets will limit our ability to undertake refinancing activities or obtain financing for growth and other initiatives, on acceptable terms or at all;
the possibility that conditions or changes in the global equity markets may have a material impact on our future pension funding obligations and liabilities on our balance sheet;
the possibility that the amount or timing of our anticipated capital expenditures may be limited by our financial resources or financing arrangements or that our ability to complete capital projects may not occur timely enough to adapt to changes in market conditions or changes in regulatory requirements;
the possibility that the actual outcome of uncertainties associated with assumptions and estimates using judgment when applying critical accounting policies and preparing financial statements may have a material impact on our results of operations or financial position;
the possibility that weyou may be unable to protectresell your shares at or above your purchase price, if at all. The market price of our intellectual propertycommon stock may fluctuate or may infringedecline significantly in the intellectual property rightsfuture. Some of others, resultingthe factors that could negatively affect our share price or result in damages, limitations onfluctuations in the price or trading volume of our ability to producecommon stock include:
variations in our quarterly or sell productsannual operating results;
changes in our earnings estimates (if provided) or limitations ondifferences between our ability to prevent others from using that intellectual property to produce or sell products;actual financial and operating results and those expected by investors and analysts;
the occurrencecontents of unanticipated eventspublished research reports about us or circumstancesour industry or changing interpretationsthe failure of securities analysts to cover our common stock;
additions or departures of key management personnel;
any increased indebtedness we may incur in the future;
announcements by us or others and enforcement agendas relating to legal proceedingsdevelopments affecting us;
actions by institutional stockholders;
litigation and governmental investigations;
changes in market valuations of similar companies;
speculation or compliance programs;
reports by the occurrence of unanticipated eventspress or circumstances or changing interpretations and enforcement agendas relating to health, safety or environmental compliance or remediation obligations or liabilities to third parties or relating to labor relations;
the possibility that new or expanded regulatory initiativesinvestment community with respect to greenhouse gas emissions could increase the capital intensive natureus or our industry in general;
increases in market interest rates that may lead purchasers of our businessshares to demand a higher yield;
announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and add to our costs of production;
the possibility that our provision for income taxesgeneral market, political and effective income tax rate or cash tax rate may fluctuate significantly due to (i) changes in applicable tax rates or laws, (ii) changeseconomic conditions, including any such conditions and local conditions in the sourcesmarkets in which our customers are located.
These broad market and industry factors may decrease the market price of our income, (iii) changes in tax planning, (iv) new or changing interpretations of applicable regulations, (v) changes in profitability,
(vi) changes in our estimatecommon stock, regardless of our future ability to use foreign tax credits or other tax attributes, and (vii) other factors;
the possibility of changesactual operating performance. The stock market in interest or currency exchange rates or in inflation or deflation;
the possibility that our outlook could be significantly impacted by, among other things, developments in North Africa, the Middle East, North Korea, and other areas of concern, the occurrence of further terrorist acts and developments resulting from the war on terrorism;
the possibility that interruption in our major raw material, energy or utility supplies due to, among other things, natural or nuclear disasters, process interruptions, actions by producers and capacity limitations, may adversely affect our ability to manufacture and supply our products or result in higher costs;
the possibility that the magnitude of changes in the cost of major raw materials, energy or utility suppliers by reason of shortages, changes in market pricing, pricing terms in applicable supply contracts, or other events may adversely affect our ability to manufacture and supply our products or result in higher costs;
the possibility of interruptions in production at our facilities due to, among other things, critical equipment failure, which may adversely affect our ability to manufacture and supply our products or result in higher costs;
the possibility that we may not achieve the earnings or other financial or operational metrics that we provide as guidancegeneral has from time to time;
time experienced extreme price and volume fluctuations, including in recent months. In addition, in the possibility thatpast, following periods of volatility in the anticipated benefits from rationalizationsoverall market and other cost savings initiatives may be delayed or may not occur, may vary in cost or maythe market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in unanticipated disruptions;substantial costs and a diversion of our management’s attention and resources.
the possibility
Future offerings of security breaches affecting our information technology systems;
the possibility that our disclosuredebt or internal controls may become inadequate because of changes in conditions or personnel or that those controls may not operate effectively and may not prevent or detect misstatements or errors;
the possibility that severe economic conditionsequity securities by us may adversely affect our business, liquidity or capital resources;
the possibility that delays may occur in the financial statement closing process;
the possibility of changes in performance that may affect financial covenant compliance or funds available for borrowing; and
other risks and uncertainties, including those described elsewhere in this Report or our other SEC filings, as well as future decisions by us.
Occurrence of any of the events or circumstance described above could also have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our common stock.
No assurance can be given thatIn the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including commercial paper, medium‑term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to finance any future transaction about which forward looking statementsacquisitions through a combination of additional issuances of equity, corporate indebtedness, asset‑backed acquisition financing and/or cash from operations.
Issuing additional shares of our common stock or other equity securities or securities convertible into equity may be made will be completeddilute the economic and voting rights of our existing stockholders or asreduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or termsnature of any such transaction.our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us.
All subsequent writtenThe market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
Sales of substantial amounts of our common stock in the public markets, or the perception that these sales could occur, could cause the market price of our common stock to decline. In particular, the sale in the public markets of our common stock by Brookfield, which, as of December 31, 2019, owns approximately 74% of our outstanding common stock, or by our officers and oral forward looking statementsdirectors, or the perception that these sales may occur, could cause the market price of our common stock to decline. Brookfield may from time to time seek to sell or otherwise dispose of some or all of its shares, including by transferring shares to affiliates, distributing shares to its partners, members or attributable to usbeneficiaries, or persons acting onselling shares in underwritten offerings, block sales, open market transactions or otherwise. Brookfield and our behalf are expressly qualifiedofficers and directors may also sell shares into the public markets in their entirety by these factors. Except as otherwise required to be disclosed in periodic reports required to be filed by public companiesaccordance with the requirements of Rule 144, and Brookfield is entitled to request that we facilitate SEC registration of their sales of shares pursuant to the SEC's rules,terms of a registration rights agreement. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.
The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings.
As of February 17, 2020, we have no dutyan aggregate of 2,716,069,013 shares of common stock authorized but unissued and not otherwise reserved for issuance under our incentive plans. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to updatecertain exceptions. We also intend to continue to evaluate acquisition opportunities and may issue common stock in connection with these statements.acquisitions. Any common stock issued in connection with our incentive plans, acquisitions, the exercise of outstanding stock options or otherwise would dilute the percentage ownership held by public investors.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
| |
| Item 1B. | Unresolved Staff Comments |
Not applicable.
We currently operate the following facilities, which are owned or leased as indicated.
|
| | | | |
| Location of Facility | | Primary Use | | Owned or Leased |
U.S.Americas | | | | |
| | | | | |
Independence,Brooklyn Heights, Ohio | | Corporate Headquarters, Innovation and Technology Center and Sales Office | | Leased |
| | | | | |
Brooklyn Heights, OhioMonterrey, Mexico | | InnovationGraphite Electrode Manufacturing Facility and Technology CenterSales Office | | LeasedOwned |
| | | | | |
| St. Marys, Pennsylvania | | Graphite Electrode Manufacturing Facility | | Owned |
| | | | | |
| Port Lavaca, Texas | | Petroleum Needle Coke Manufacturing Facility (Seadrift) | | Owned |
| | | | |
| Salvador, Bahia, Brazil | | Graphite Electrode Machine Shop and Sales Office | | Owned |
| | | | | |
| Europe | | | | |
| | | | | |
| Calais, France | | Graphite Electrode Manufacturing Facility | | Owned |
| | | | |
Moscow, Russia | | and Sales Office | | LeasedOwned |
| | | | | |
| Pamplona, Spain | | Graphite Electrode Manufacturing Facility and Sales Office | | Owned |
| | | | | |
| Bussigny, Switzerland | | Global Sales and Production Planning Office | | Leased |
| | | | |
Other International | | | | |
| | | | |
Beijing, China | | Sales Office | | Leased |
| | | | |
Hong Kong, China | | Sales Office | | Leased |
| | | | |
Monterrey, Mexico | | Graphite Electrode Manufacturing Facility and Sales Office | | Owned |
| | | | |
Assets Held for Sale: |
| | | | |
Parma, Ohio | | Advanced Graphite Materials Machine Shop | | Owned |
| | | | |
Lakewood, Ohio | | Advanced Electronics Technologies Manufacturing Facility and Sales Office | | Owned |
| | | | |
Sharon Center, Ohio | | Advanced Electronics Technologies Manufacturing Facility | | Owned |
| | | | |
Columbia, Tennessee | | Advanced Graphite Materials and Refractory Products Manufacturing, Warehousing Facility and Sales Office | | Owned |
| | | | |
Lawrenceburg, Tennessee | | Refractory Products Manufacturing Facility | | Owned |
| | | | |
Clarksburg, West Virginia | | Advanced Graphite Materials Manufacturing Facility, Machine Shop and Sales Office | | Owned |
| | | | |
Malonno, Italy | | Advanced Graphite Materials Manufacturing and Machine Shop and Sales Office | | Owned |
| | | | |
Meyerton, South Africa | | Refractory Machine Shop and Sales Office | | Owned |
| | | | |
Salvador, Bahia, Brazil | | Graphite Electrode Machine Shop (will be maintained after sale) | | Owned |
| | | | |
Shanghai, China | | Sales Office | | Leased |
During the first quarter of 2016, we announced that we are exploring strategic options for our Engineered Solutions business to focus our efforts on our graphite electrode business. The assets categorized above as "Assets Held for Sale" represent mostly the assets pertaining to our Engineered Solutions business. A portion of our facility in Salvadore, Bahia, Brazil is currently being marketed as we have eliminated graphite electrode production in this facility. We will maintain a graphite electrode machine shop at our Brazil facility after any potential sale. Other than the assets discussed therein, we believe that our facilities, which are of varying ages and types of construction, are in good condition, are suitable for our operations and generally provide sufficient capacity to meet our requirements for the foreseeable future.
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs, labor disputes and other legal proceedings, including with respect to environmental and human exposure or other personal injury matters, arising out of or incidental to the conduct of our business. While it is not
possible to determine the ultimate disposition of each of these matters and proceedings, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
LitigationPending litigation in Brazil has been pending in Brazil 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), plus interest thereon. Prior to October 1, 2015, we were not party to such litigation.. Companies in Brazil have recently 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 BrazilBahia region employers on June 26, 2019, the Brazilian Supreme Court to the lower courts for further proceedings which included procedural aspectsfinally ruled in favor of the case, such as admissibility of instruments filed by the parties. We cannot predict the outcomeemployees union on September 26, 2019. The employers union has determined not to seek annulment of such litigation. Ondecision. Separately, on October 1, 2015, ana 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 have appealed this state court ruling as well and intend to vigorously defend such action.it. As of December 31, 2019, 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.
The National Water Commission in Mexico, or CONAGUA, initiated an administrative proceeding with respect to water usage at the Company’s Monterrey facility on November 26, 2018. The inquiry relates to an audit of historical water usage fees and related assessments for the facility. The Company is cooperating with CONAGUA with respect to this matter.
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
Item 4A. Information about our Executive Officers
The following table sets forth information with respect to our current executive officers, including their ages, as of ContentsFebruary 17, 2020. There are no family relationships between any of our executive officers.
|
| | | | |
| Name | | Age | | Position |
| David J. Rintoul | | 62 | | President and Chief Executive Officer |
| Quinn J. Coburn | | 56 | | Vice President, Chief Financial Officer and Treasurer |
| Jeremy S. Halford | | 47 | | Senior Vice President, Operations and Development |
| Gina K. Gunning | | 53 | | Chief Legal Officer and Corporate Secretary |
| Iñigo Perez Ortiz | | 48 | | Senior Vice President, Commercial |
David J. Rintoul became President and CEO and was elected to the board of directors in March 2018. Prior to joining the Company, Mr. Rintoul served as President of U.S. Steel Tubular Products and as a Senior Vice President of United States Steel Corporation (or U.S. Steel). Before that, Mr. Rintoul has served in various roles at U.S. Steel since 2007, including oversight of U.S. Steel’s Slovak and Serbian operations. Mr. Rintoul’s career in the steel industry spans 38 years with positions at both integrated and mini mill producers in the United States, Europe and Canada, including extensive mini‑mill operational experience at North Star Bluescope Steel in Delta, Ohio from 2001 to 2005 and from construction through full operations at Acme Steel Company in Riverdale, Illinois from 1995 to 2001. Mr. Rintoul holds an Associate’s degree in Mechanical Engineering Technology from Sault College of Applied Arts and Technology, a Bachelor’s degree in Business Administration from Lake Superior State University and a Master’s degree in Business Administration from the University of Notre Dame.
Quinn J. Coburn became CFO in September 2015. Mr. Coburn served as interim CFO beginning in May 2015 after previously serving as Vice President of Finance and Treasurer. He joined the Company in August 2010 after working at NCR Corporation from December 1992 until August 2010, including service as that company’s Vice President and Treasurer. Mr. Coburn graduated with a B.S. in Accounting from Utah State University in 1988. He received a Masters of Business Administration from University of Pennsylvania’s The Wharton School in 1992.
Jeremy S. Halford joined the Company on May 1, 2019 as Senior Vice President, Operations and Development. Mr. Halford previously served as the President of Arconic Engineered Structures, a producer of highly engineered titanium and aluminum components for the aerospace, defense and oil and gas markets, a position he held since January 2017. Mr. Halford also was President of Doncasters Aerospace, a manufacturer of components and assemblies for the civil and military aero engine and airframe markets, from 2014 to 2016, and Vice President, Global Business Development, Doncasters Group Limited from 2013 to 2014. Previously, he also was President of Mayfran International from 2012 to 2013, and spent seven years at Alcoa in a variety of general management and strategy roles. Mr. Halford holds a Masters of Business Administration degree from Harvard University and a Bachelor of Science degree in Mechanical Engineering from GMI Engineering and Management Institute (now Kettering University).
Gina K. Gunning joined the Company as Chief Legal Officer and Corporate Secretary in July 2018. She has nearly 25 years of law firm and in-house corporate legal experience across multiple industries. Prior to joining GrafTech, she was an Associate General Counsel at FirstEnergy Corp. from 2012 to 2018, where she was responsible for legal matters involving SEC reporting, business development, capital markets, as well as corporate and executive compensation topics. She also served as a partner at Jones Day. Ms. Gunning holds a Juris Doctor from Notre Dame Law School and a Bachelor of Arts in English from the University of Notre Dame.
Iñigo Perez Ortiz joined the Company as Senior Vice President, Commercial in February 2020. Mr. Perez most recently served as Vice President, Europe and Asia, Sales and Customer Service at Alcoa Corporation, a global industry leader in bauxite, alumina, and aluminum products, a position he held since 2017. Previously at Alcoa, Mr. Perez was Commercial Director, Europe and Asia Pacific from 2011 to 2017, Sales Manager, Europe from 2007 to 2011 and Sales Office Manager from 2002 to 2007. Prior to his career at Alcoa, Mr. Perez served in a variety of senior commercial roles at Autopulit S.A., Warner Electric and Babcock Wilcox Espanola, S.A. Mr. Perez holds a Master in Industrial Plans Management, Lean Manufacturing and Engineering degree from Polytechnic University of Barcelona, an Executive Master of Business Administration degree from Instituto de Empresa and a Mining Engineer degree from the University of the Basque Country.
PART II
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
There
Our common stock IPO was completed on April 23, 2018 and our stock is no market for our Common Stock.listed on the NYSE under the trading symbol “EAF”.
Holders
As of December 31, 2016, Brookfield was the sole holder2019, there were two holders of record of our Common Stock.common stock.
Dividend Policies and Restrictions
It has generally beenWe currently pay a quarterly cash dividend of $0.085 per share, or an aggregate of $0.34 per share on an annualized basis. We expect to continue to pay this dividend out of cash generated from operations; we do not intend to incur indebtedness to fund regular, quarterly dividend payments.
We cannot assure you, however, that we will pay dividends in the policyfuture 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.
For further discussion of the factors that may affect our business and our ability to pay dividends, see “Risk Factors-Risks Related to Our Business and Industry” and “Risk Factors-Risks Related to our Common Stock-We may not pay cash dividends on our common stock.”
Repurchases
The table below sets forth the information on a monthly basis regarding GrafTech's purchases of its common stock, par value $0.01 per share, during the fourth quarter of 2019.
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | |
October 1 through October 31, 2019 (1) | 125,551 |
| | $ | 11.01 |
| | 125,551 |
| | $ | 89,133,000 |
|
| November 1 through November 30, 2019 | — |
| | — |
| | — |
| | — |
|
December 1 through December 31, 2019 (2) | 19,047,619 |
| | $ | 13.125 |
| | — |
| | — |
|
| Total | 19,173,170 |
| |
| | 125,551 |
| | $ | 89,133,000 |
|
(1) Represents shares repurchased in open market transactions pursuant to the Share Repurchase Program (as defined below).Share repurchases were made pursuant to our previously announced program to repurchase, which was authorized by our Board of Directors on July 30, 2019 (“Share Repurchase Program”). The Share Repurchase Program was announced on July 31, 2019 and allows for the purchase of up to retain earnings$100 million of outstanding shares of our common stock from time to finance strategic and other plans and programs, conduct business operations, fund acquisitions, meet obligations and repay debt. We did not pay any cash dividends in 2014, 2015 time on the open market, including under Rule 10b5-1 and/or 2016. We periodically reviewRule 10b-18 plans. The share repurchase program has no expiration date.
(2) Represents shares repurchased directly from Brookfield, our dividend policy. majority stockholder.
| |
| Item 6. | Selected Financial Data |
The data set forth below should be read in conjunction with “Part I. Preliminary Notes-Important Terms”, “Item 7. Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto.
As a result of business combination accounting resulting from our acquisition by Brookfield, our financial statements are separated into two distinct periods, the period before the consummation of our acquisition by Brookfield (labeled “Predecessor”) and the period after that date (labeled “Successor”), to indicate the application of the different basis of accounting between the periods presented. There were no operational activities that changed as a result of our acquisition by Brookfield.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | Year Ended December 31, | For the Period January 1 Through August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | Year Ended December 31, |
| | 2012 | | 2013 | | 2014 | | | | 2016 |
| | (Dollars in thousands) |
Statement of Operations Data: (a) | | (a) | | | | | | | | |
| Net sales | $ | 1,003,283 |
| | $ | 893,844 |
| | $ | 825,145 |
| | $ | 339,907 |
| | $ | 193,133 |
| | $ | 437,963 |
|
Income (loss) from continuing operations (b) | 105,846 |
| | (35,591 | ) | | (152,520 | ) | | (101,970 | ) | | (28,625 | ) | | (108,869 | ) |
| Net income (loss) | 117,641 |
| | (27,259 | ) | | (285,376 | ) | | (120,649 | ) | | (33,551 | ) | | (235,843 | ) |
Basic earnings (loss) per common share: | | | | |
| | | | | | |
Income (loss) from continuing operations per share | $ | 0.76 |
| | $ | (0.26 | ) | | $ | (1.12 | ) | | $ | (0.74 | ) | | N/A |
| | N/A |
|
Weighted average common shares outstanding (in thousands) | 138,552 |
| | 135,067 |
| | 136,155 |
| | 137,152 |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | | | | | |
Income (loss) from continuing operations per share | $ | 0.76 |
| | $ | (0.26 | ) | | $ | (1.12 | ) | | $ | (0.74 | ) | | N/A |
| | N/A |
|
Weighted average common shares outstanding (in thousands) | 139,700 |
| | 135,067 |
| | 136,155 |
| | 137,152 |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | |
| Balance sheet data (at period end): | | | | | | | | | | |
| Total assets | $ | 2,297,915 |
| | $ | 2,217,848 |
| | $ | 1,833,805 |
| | N/A (d) | | $ | 1,422,015 |
| | $ | 1,172,276 |
|
| Other long-term obligations (c) | 125,000 |
| | 97,947 |
| | 107,586 |
| | N/A (d) | | 94,318 |
| | 82,148 |
|
| Total long-term debt | 535,709 |
| | 541,593 |
| | 341,615 |
| | N/A (d) | | 362,455 |
| | 356,580 |
|
| Other financial data: | | | | | | | | | | | |
Net cash provided by operating activities | $ | 101,400 |
| | $ | 116,837 |
| | $ | 120,903 |
| | $ | 28,323 |
| | $ | 23,115 |
| | $ | 22,815 |
|
| Net cash used in investing activities | (119,962 | ) | | (83,801 | ) | | (78,952 | ) | | (39,918 | ) | | (17,484 | ) | | (10,471 | ) |
Net cash (used in) provided by financing activities | 24,112 |
| | (37,645 | ) | | (35,077 | ) | | 20,824 |
| | (23,072 | ) | | (8,317 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, | | For the Period August 15 Through December 31, 2015 | | For the Period January 1 Through August 14, 2015 (d) |
| | 2019 | | 2018 | | 2017 | | 2016 | | |
| | (in thousands, except per share amounts) |
| Statement of Operations Data: | | | | | | | | | | |
| Net sales | $ | 1,790,793 |
| | $ | 1,895,910 |
| | $ | 550,771 |
| | $ | 437,963 |
| | $ | 193,133 |
| | $ | 339,907 |
|
Income (loss) from continuing operations | 744,602 |
| | 853,888 |
| | 14,212 |
| | (108,869 | ) | | (28,625 | ) | | (101,970 | ) |
| Net income (loss) | 744,602 |
| | 854,219 |
| | 7,983 |
| | (235,843 | ) | | (33,551 | ) | | (120,649 | ) |
Basic and diluted earnings (loss) per common share: | | | | | | | | | | | |
Income (loss) from continuing operations per share | $ | 2.58 |
| | $ | 2.87 |
| | $ | 0.05 |
| | $ | (0.36 | ) | | $ | (0.09 | ) | | $ | (0.74 | ) |
| Weighted average common shares outstanding (a) | 289,057 |
| | 297,748 |
| | 302,226 |
| | 302,226 |
| | 302,226 |
| | 137,152 |
|
| Dividends per common share (b) | $ | 0.34 |
| | $ | 7.71 |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
Balance sheet data (at period end): | | | | | | | | | | | |
| Total assets | $ | 1,526,164 |
| | $ | 1,505,491 |
| | $ | 1,199,103 |
| | $ | 1,172,276 |
| | $ | 1,422,015 |
| | N/A (d) |
| Other long-term obligations (c) | 72,562 |
| | 72,519 |
| | 68,907 |
| | 82,148 |
| | 94,318 |
| | N/A (d) |
| Total long-term debt | 1,812,682 |
| | 2,050,311 |
| | 322,900 |
| | 356,580 |
| | 362,455 |
| | N/A (d) |
| Other financial data: | | | | | | | | | | | |
Net cash provided by operating activities | $ | 805,316 |
| | $ | 836,603 |
| | $ | 36,573 |
| | $ | 22,815 |
| | $ | 23,115 |
| | $ | 28,323 |
|
Net cash used in investing activities | (63,884 | ) | | (67,295 | ) | | (2,199 | ) | | (10,471 | ) | | (17,484 | ) | | (39,918 | ) |
Net cash (used in) provided by financing activities | (709,631 | ) | | (731,044 | ) | | (32,995 | ) | | (8,317 | ) | | (23,072 | ) | | 20,824 |
|
| |
| (a) | 2012 and 2013 results do not represent complete discontinued operations as adjustments for interest allocations and Corporate and R&D expense were not reclassified priorSuccessor period data gives effect to 2014. All interest remains in continuing operations and an estimate of 80% of Corporate and R&D expenses was assumed to support continuing operations.the 3,022,259.23-for-1 stock split on our common stock effected on April 12, 2018. |
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| (b) | Income2018 calculated by period includes items listed below, which are pre-tax in nature unless otherwise noted.total dividends paid of $2,294,265 divided by weighted average shares outstanding. $2,022,000 of these dividends were declared and paid to Brookfield prior to our IPO. All other dividends were declared and paid to all common stockholders. |
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| (c) | Represents pension and post-retirement benefits and related costs and miscellaneous other long-term obligations. |
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| (d) | A closing balance sheet as of August 14, 2015 was not required as part of previous filings. |
For the Year Ended December 31, 2012:
a non-cash interest charge of $10.7 million related to the amortization of the discount on the Senior Subordinated Notes,
a $22.3 million charge related to the amortization of acquired intangible assets,
a $8.8 million loss for the MTM Adjustment for our pension and OPEB benefit plans, driven primarily by a decrease in the discount rate due to lower interest rates.
For the Year Ended December 31, 2013:
a $62.1 million charge for rationalization and rationalization related activities. This includes $18.9 million of severance and related charges, and $28.3 million of accelerated depreciation expense
a non-cash interest charge of $11.5 million related to the amortization of the discount on the Senior Subordinated Notes,
a $20.5 million charge related to the amortization of acquired intangible assets,
a $14.4 million gain for the MTM Adjustment for our pension and OPEB benefit plans, driven primarily by a increase in discount rates.
For the Year Ended December 31, 2014:
A goodwill impairment of $76.1 million related to our needle coke reporting unit,
a $40.8 million charge for rationalization and rationalization related activities. This includes $22.4 million of rationalization related depreciation expense, $7.9 million of severance and contract termination costs,
a non-cash interest charge of $12.3 million related to the amortization of the discount on the Senior Subordinated Notes,
a $19.0 million charge related to the amortization of acquired intangible assets,
a $19.0 million loss for the MTM Adjustment for our pension and OPEB benefit plans, driven primarily by a decrease in discount rates and adoption of new mortality tables in 2014.
For the Period January 1 through August 14, 2015:
a $35.4 million goodwill impairment charge related to our needle coke reporting unit,
$4.4 million charge for rationalization and related activities,
$23.6 million of charges related to our tender offer and proxy battle, which includes a $12.7 million charge related to stock-based compensation which was the result of change of control provisions that were triggered by our acquisition,
a non-cash interest charge of $12.0 million related to the accelerated amortization of the discount on the Senior Subordinated Notes,
a $10.8 million charge related to the amortization of acquired intangible assets,
For the Period August 15 through December 31, 2015:
a $1.8 million loss for the MTM adjustment for our pension and OPEB benefit plans
For the year ended December 31, 2016:
a lower of cost or market adjustment to inventory of $19.0 million
a $2.8 million charge to lower the carrying value of assets held for sale
a $2.9 million gain for the MTM adjustment for our pension and OPEB benefit plans
Quarterly Data:
The following quarterly selected consolidated financial data have been derived from the Consolidated Financial Statements for the periods indicated which have not been audited. The selected quarterly consolidated financial data set forth below should be read in conjunction with “Part I. Preliminary Notes–Presentation of Financial, Market and Legal Data,” “ItemItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto.
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| | Predecessor | | Successor |
| | | | | | For the Period July 1 Through August 14, 2015 | | For the Period August 15 Through September 30, 2015 | | |
| | First Quarter | | Second Quarter | | | | Fourth Quarter |
| | (Dollars in thousands, except per share data) |
| 2015 | | | | | | | | | |
| Net sales | $ | 162,494 |
| | $ | 125,809 |
| | $ | 51,604 |
| | $ | 74,774 |
| | $ | 118,359 |
|
| Gross profit | 16,492 |
| | 14,218 |
| | 4,196 |
| | 6,887 |
| | 5,401 |
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| Net income (loss) (a) | (55,608 | ) | | (22,817 | ) | | (42,224 | ) | | (7,303 | ) | | (26,250 | ) |
| Basic loss per common share | (0.08 | ) | | (0.17 | ) | | (0.31 | ) | | N/A |
| | N/A |
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| | | | | | | | | | | | | | | |
| | Successor |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | (Dollars in thousands, except per share data) |
| 2016 | | | | | | | |
| Net sales | $ | 95,576 |
| | $ | 115,365 |
| | $ | 111,590 |
| | $ | 115,432 |
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| Gross profit (loss) | (12,975 | ) | | (8,405 | ) | | (6,910 | ) | | (737 | ) |
| Net income (loss) (b) | (36,375 | ) | | (128,399 | ) | | (22,967 | ) | | (48,102 | ) |
(a) Net income by quarter for 2015 includes the following items:
First Quarter
$35.4 million impairment charge to write down goodwill associated with the Needle Coke reporting unit;
Rationalization and related charges of $3.4 million;
Amortization of acquired intangibles totaling $4.3 million, and
Interest expense of $8.9 million, driven by $4.8 million of expense related to the Senior Notes.
Second Quarter
Rationalization and related charges $0.8 million;
Expenses related to our proxy and tender offer totaling $3.3 million;
Amortization of intangibles totaling $4.4 million;
Interest expense of $9.2 million driven primarily by $4.8 of expense related to the Senior Notes.
Third Quarter
Expenses related to our proxy and tender offer totaling $21.2 million;
Interest expense of $12.7 million, driven by $4.8 million of expense related to the Senior Notes and $4.5 million of additional expense resulting from the prepayment our Senior Subordinated Notes
Fourth Quarter
a $1.8 million loss for the MTM adjustment for our pension and OPEB benefit plans
(b) Net income by quarter for 2016 includes the following items:
First Quarter
$11.1 million lower of cost or market adjustment to inventory;
Amortization of intangibles totaling $3.6 million.
Second Quarter
$3.5 million lower of cost or market adjustment to inventory
Amortization of intangibles totaling $3.6 million.
Third Quarter
$4.9 million lower of cost or market adjustment to inventory;
Amortization of intangibles totaling $3.5 million.
Fourth Quarter
a $2.9 million gain for the MTM adjustment for our pension and OPEB benefit plans;
Amortization of intangibles totaling $3.6 million;
A $0.5 million favorable adjustment to the lower of cost or market inventory reserve.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
General
Management’s DiscussionThe following discussion and Analysisanalysis of Financial Conditionour financial condition and Resultsresults of Operations (“MD&A”) is designed to provide information that is supplemental to, andoperations should be read together with our Consolidated Financial Statements and the accompanying notes.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 2018 as compared to 2017 is included in Item 7 of our Annual Report on Form 10-K for the year-ended December 31, 2018, filed with the SEC on February 22, 2019. Information in this Itemsection 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,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. In addition, this Item provides information about our business segmentsThis discussion and how theanalysis contains forward‑looking statements that involve risks, uncertainties and assumptions. See “Special Note Regarding Forward-Looking Statements.” Our actual results ofcould differ materially from those segments impact our financial condition and results of operationsforward‑looking statements as a whole.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 electric arc furnace ("EAF") steel and other ferrous and non‑ferrous metals. We believe that we have the most competitive portfolio of low‑cost 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 fastest‑growing segment of the steel sector, with production increasing at an average rate of 3.5% per year, based on World Steel Association ("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 blast furnace ("BOF") steel production. Beginning in 2016, efforts by the Chinese government to restructure China’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. As a result, beginning in 2016, the EAF steel market rebounded strongly and resumed its long‑term growth trajectory. This revival in EAF steel production resulted in increased demand for our graphite electrodes.
In response to this increased demand, we modified our commercial strategy and executed three‑ to five‑year take‑or‑pay contracts for approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. In 2018, we shipped approximately 133,000 MT under these contracts at prices averaging approximately $10,100 per MT. In 2019, we shipped approximately 145,000 MT under these contracts at pricing averaging approximately $9,900 per MT. We have contracted to sell approximately 142,000, 125,000 and 117,000 MT in 2020, 2021 and 2022, respectively. Approximately 83% of these volumes are under pre‑determined fixed annual volume contracts, while approximately 17% of the volumes are under contracts with a specified volume range. The aggregate difference between the midpoints above and the minimum or maximum volumes across our cumulative portfolio of take‑or‑pay contracts with specified volume ranges is approximately 5,000 MT per year in 2020, 2021 and 2022. Contracted volumes may vary in timing and total due to the credit risk associated with certain customers facing financial challenges as well as customer demand related to contracted volume ranges. In 2020, we expect to ship approximately 130,000 MT at prices averaging approximately $9,600 per MT.The weighted average contract price for the contracted volumes over the next three years is approximately $9,600 per MT, with the weighted average contract prices for contracts with a specified volume range computed using the volume midpoint.
Executive SummaryGlobal economic conditions and outlook
The world economygraphite 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.
This growth trend has resumed after a decline in EAF steelmaking between 2011 and 2015, as Chinese steel production, which is predominantly BOF‑based, grew significantly, taking market share from EAF steel producers. Beginning in 2016, efforts by the Chinese government to eliminate excess steelmaking production capacity and improve environmental and health conditions have led to limits on Chinese BOF steel production, including the closure of over 200 million MT of its steel production capacity, based on data from S&P Global Platts and the Ministry of Commerce of the People’s Republic of China. In 2017, Chinese steel exports fell by more than 30% from 2016. Chinese steel exports continued to experience ratesdecline an additional 8% in 2018 according to the
National Bureau of Statistics of China, reflecting the reduction in steel production capacity. As a result, the historical growth below pre-recession levels. The trend of EAF steelmaking relative to the overall steel market resumed and has led to increased demand for our graphite electrodes. Prior to this improvement in demand, the electrode industry experienced an extended, five‑year began withdownturn. At the same time, consolidation and rationalization of graphite electrode production capacity limited the ability of graphite electrode producers to meet this demand.
Demand for petroleum needle coke has outpaced supply due to increasing demand for petroleum needle coke in the production of lithium‑ion batteries used in electric vehicles. Increased demand has led to pricing increases for petroleum needle coke over the last two years. While prices have begun to retreat in the second half of 2019, they still remain at historical highs. 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 in periods of tight petroleum needle coke supply and we currently anticipate utilizing all of our needle coke internally, minimizing the need for third-party purchases. However, recent steel production and graphite electrode consumption has slowed in some regions, notably Europe and South America.
In its January 2020 report, the International Monetary Fund (IMF) forecasting a("IMF") reported an estimated global growth rate for 2019 of 3.4 percent. This estimate2.9%. They estimated 2020 global growth rate at 3.3% and 2021 is estimated to be 3.4%. The estimates for all three years were down slightly from their October 2019 report. The downward revisions of 0.1% for 2019 and 2020 and 0.2% for 2021 were primarily driven by factors in emerging market economies, notably India.
The WSA's October 2019 Short Range Outlook estimated that global steel demand outside of China increased by 1.6% in 2018, which was revised downward twice during the year with additional downside risk noted after the United Kingdom's referendumreduced by 0.6% from their April 2019 estimate. WSA also decreased their growth forecast for steel demand outside of China for 2019 from 1.7% in their April forecast to exit the European Union ("Brexit") ending at the most recent0.2% as uncertainty, trade tensions and geopolitical issues have weighed on investment and trade. WSA's growth forecast for steel demand outside of China for 2020 was reduced to 2.5% from their April estimate of 3.1 percent. 2.8%. Overall, WSA estimates that total steel production outside of China decreased by approximately 2% in 2019.
The graphite electrode industry saw further price declines in 2016, however, some indicators signal a potential bottoming out. The steel industry has experienced increasesmarket began to soften in the costssecond half of key raw materials2019. We expect global graphite electrode production capacity to run blasts furnaces coupled with declinesexpand in 2020 as a result of additions in China. Our graphite electrode sales volumes decreased significantly in the pricesecond half of scrap steel needed in EAF plants. These factors2019, as our customers began to de-stock their inventory of our products. Graphite electrode inventories remain elevated for many customers, but we are beginningseeing early evidence that de-stocking is running its course. We continue to re-balance the economics that make EAF mills more competitive. This resulted in an increase in our sales volume over the prior year, however, the decline in prices more than offset volume increases. Declines in the price of oil and our rationalization initiatives over the past 3 years have significantly improved our cost structure and have positioned us to benefit from any potential recovery.
Inexpect inventory de-stocking through the first half of 2016,2020. We expect inventories to decline and conditions to improve as we completedmove into the second half of 2020.
Components of results of operations
Net sales
Net sales reflect sales of our evaluationproducts, including graphite electrodes and associated by‑products. 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 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 non‑inventoried 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 personnel‑related 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 “first‑in, first‑out” (or 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 research and development both independently and in conjunction with our strategic alternativessuppliers, customers and others. Expenditures relating to the development of new products and processes, including significant 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, in‑house legal, share‑based compensation and certain other administrative and global resources costs. Our “mark‑to‑market adjustment” refers to our Engineered Solutions segmentaccounting policy regarding pension and determinedother 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 non‑operating assets and liabilities and miscellaneous income and expense.
Related party Tax Receivable Agreement expense
Related party Tax Receivable Agreement expense represents the Company's 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 would sell its businesses. This will allow usand our subsidiaries realize as a result of the utilization of certain tax assets attributable to focusperiods prior to our IPO.
Interest expense
Interest expense consists primarily of interest expense on our core competency, which is to be a leading low-cost, high quality provider2018 Term Loans, 2018 Revolving Facility and the Senior Notes, accretion of graphite electrodes. the fair value adjustment on the Senior Notes and amortization of debt issuance costs.
Income (loss) from discontinued operations
As of June 30, 2016, the Engineered Solutions businesssegment qualified for held for sale status. As a result,reporting as discontinued operations, and the operationsdisposition of the Engineered solutions have been excluded from continuing operations and are shown in discontinued operations for all current and prior periods.
We have two major product categories within our continuing operations: graphite electrodes and needle coke products, which comprise our only reportable segment Industrial Materials.
Reference is made to the information under “Part I” for background information on our businesses, industry and related matters.
Global Economic Conditions and Outlook
2017 Outlook. We are impacted in varying degrees, both positively and negatively, as global, regional or country conditions fluctuate. Our discussions about market data and global economic conditions below are based on or derived from published industry accounts and statistics.
In its January, 2017 report, the International Monetary Fund (IMF) estimated global growth at 3.4 percent in 2017. The IMF noted however that there is significant uncertainty in the forecast for advanced economies due to potential changes in the policy stance of the United States under the new administration.
In its short range outlook released on October 11, 2016, the World Steel Association (WSA) forecasts that global steel demand will increasewas substantially complete by 0.2% percent to 1,501 million tons in 2016 and will increase 0.5% in 2017. This estimate is higher than the 1,488 million tons that WSA forecasted in April for 2016. WSA noted that the increase was primarily attributable to a better than expected forecast for China and continued growth in emerging economies. In developed economies, the WSA expects steel demand to grow by 0.2% in 2016 and 1.1% in 2017. This represents a downward of the estimate by 1.5% for 2016 due to slower growth in the United States and the effects of Brexit.
Financing Transactions
Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of Senior Notes. These Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor. The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the Indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the Indenture.
If, prior to maturity, a change in control (as defined in the Indenture) of the Company occurs and thereafter certain downgrades of the ratings of the Senior Notes as specified in the Indenture occur, the Company will be required to offer to repurchase any or all of the Senior Notes at a repurchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus any accrued and unpaid interest.
The Senior Notes also contain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to: (i) create liens or use assets as security in other transactions; (ii) engage in certain sale/leaseback transactions; and (iii) merge, consolidate or sell, transfer, lease or dispose of substantially all of their assets.
The Senior Notes also contain customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the Indenture or the Senior Notes which failures are not cured or waived as provided in the Indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (as defined in the Indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $50.0 million, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $50.0 million against the Company, any Subsidiary Guarantor or any Significant Subsidiary that is not discharged, waived or stayed as provided in the Indenture, (vi) cessation of any subsidiary guarantee to be in full force and effect or denial or disaffirmance by any Subsidiary Guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.
Revolving Credit Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement with a borrowing capacity of $400 million and a maturity date of April 2019 (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into a further Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a $40 million senior secured delayed draw term loan facility (the "Term Loan Facility").
On July 28, 2015, GrafTech and certain of its subsidiaries entered into an amendment to the Amended and Restated Credit Agreement to change the terms regarding the occurrence of a default upon a change in control (which is defined thereunder to include the acquisition by any person of more than 25 percent of GrafTech’s outstanding shares) to exclude the acquisition of shares by Brookfield (see Note 2). In addition, effective upon such acquisition, the financial covenants were eased, resulting in increased availability under the Revolving Facility. The size of the Revolving Facility was also reduced from $400 million to $375 million. The size of the Term Loan Facility remained at $40 million.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. The size of the Revolving Facility was permanently reduced from $375 million to $225 million. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under the Revolving Facility) in excess of $25 million. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens and incur debt;
a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility and the Term Loan Facility; and changes to the Company’s financial covenants so that until the earlier of March 31, 2019 or the Company has $75 million in trailing twelve month EBITDA (as defined in the Revolving Facility), the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from ($40 million) to $35 million after which the Company’s existing financial covenants under the Revolving Facility will apply.
With this amendment, the Company has full access to the $225 million Revolving Facility, subject to the $25 million minimum liquidity requirement. As of December 31, 2016, the Company had $61.2 million of borrowings on the Revolving Facility and $12.3 million of letters of credit drawn against the Revolving Facility.
The $40 million Term Loan Facility was fully drawn on August 11, 2015, in connection with the repayment of the Senior Subordinated Notes. The balance of the Term Loan Facility was $29.5 million as of December 31, 2016.
The interest rate applicable to the Revolving Facility and Term Loan Facility is LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.70% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
Senior Subordinated Notes
On November 30, 2010, in connection with the acquisition of Seadrift Coke LP and C/G Electrodes LLC, we issued Senior Subordinated Notes for an aggregate total face amount of $200 million. These Senior Subordinated Notes were non-interest bearing and scheduled to mature in 2015. Because the Notes were non-interest bearing, we were required to record them at their present value (determined using an interest rate of 7%). The difference between the face amount of the Notes and their present value was recorded as debt discount. The debt discount was amortized using the imputed interest method, over the life of the Notes.
On August 11, 2015, we prepaid the entire $200,000,000 aggregate principal amount of the Notes after the Company's receipt of the proceeds of the issuance of Preferred Stock to Brookfield's affiliate. See Note 2 to the Financial Statements for further discussion of the Preferred stock issuance.
Customer Base
We are a global company and sell our products in every major geographic market. Sales of these products to buyers outside the U.S. accounted for about 76% in 2014, 80% in 2015 and 83% in 2016. In 2016, three of our ten largest customers were based in Europe, and one each in the U.S., Korea, Japan, Brazil, Russia, Egypt and India, however, all are multi-national operations.
In 2016, eight of our ten largest customers were purchasers of our Industrial Materials products. No single customer or group of affiliated customers accounted for more than 10% of our net sales in 2016.
Results of Operations and Segment Review
2016. The world economy continued to experience rates of growth below pre-recession levels. The year began with the International Monetary Fund (IMF) forecasting a global growth rate of 3.4 percent. This estimate was revised downward twice during the year with additional downside risk noted after the United Kingdom's referendum to exit the European Union ("Brexit") ending at the most recent estimate of 3.1 percent. The graphite electrode industry saw further price declines in 2016, however, some indicators signal a potential bottoming out. The steel industry has experienced increases in the costs of key raw materials to run blasts furnaces coupled with declines in the price of scrap steel needed in EAF plants. These factors are beginning to re-balance the economics that make EAF mills more competitive. This resulted in an increase in our sales volume over the prior year, however, the decline in prices more than offset volume increases. Declines in the price of oil and our rationalization initiatives over the past 3 years have significantly improved our cost structure and have positioned us to benefit from any potential recovery.
In the first half of 2016, we completed our evaluation of strategic alternatives for our Engineered Solutions segment and determined that we would sell its businesses. This will allow us to focus on our core competency, which is to be a leading low-cost, high quality provider of graphite electrodes. As of June 30, 2016 the Engineered Solutions
business qualified for held for sale status. As a result the operations of the Engineered solutions have been excluded from continuing operations and are shown in discontinued operations for all current and prior periods.
2015. Our business faced significant headwinds in the major industries that we serve throughout 2015. The U.S. and European steel markets, which represent our largest markets, have been flooded with large quantities of low cost imports, primarily from China. These imports and over-capacity in the steel industry have driven down prices as demand has not kept pace. Additionally, there has been a significant decline in the price of iron ore which is a key raw material for blast furnaces. Scrap steel, which is the key raw material for EAF production, has experienced price reductions as well, however not at the same rate as iron ore. As a result, steel producers are utilizing blast furnaces at rates higher than we have historically seen. These pressures have reduced EAF steel production and driven down the prices and volumes on graphite electrodes. While the decline in the price of oil has benefited our Industrial Materials cost structure overall, it contributed to lower pricing for petroleum needle coke and, indirectly, graphite electrodes.
Our Engineered Solutions segment suffered from declining prices and volumes as demand for our thermal solutions serving the advanced consumer electronics markets has declined. This decline in demand was driven by both decreased demand for the end product as well as competition from low cost producers. Our advanced graphite materials product line experienced new sales of high temperature furnace systems in 2014 that were not repeated in 2015 due to the bankruptcy of the primary customer we served.
2014. The slow rates of global economic growth continued throughout 2014. The year began with the IMF estimating 2014 growth at a rate of 3.7%, which was revised downward throughout the year to 3.3%. The World Steel Association noted that steel production, excluding China, increased 1.3% in 2014. This slow economic growth and stagnation in steel production year over year exerted continued downward pressure on prices for our Industrial Materials products during the year, which negatively impacted our profitability in 2014.
Our Engineered Solutions segment experienced 2014 sales growth in one of our AGM product group lines prior to the unexpected bankruptcy of our primary customer in that field. Our advanced consumer electronics products experienced pricing pressure and decreased demand throughout 2014 which decreased margins and sales. In the second quarter of 2014, we announced that we were ceasing production of our isomolded product group within AGM and undertaking rationalization initiatives to reduce costs and increase our global competitiveness.
In the third quarter of 2014 we announced rationalization initiatives to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. The Company incurred significant costs during 2014 related to these rationalization plans.
The tables presented in our year-over-year comparisons summarize our consolidated statements of income and illustrate key financial indicators used to assess the consolidated financial results. Financial information is presented for the years ended December 31, 2014, 2015, and 2016.
Throughout our MD&A, changes that2017. All results are less than 5%reported as gain or less than $1.0 million, may be deemed not material and excluded from the discussion. During 2014, as part of our initiative to decentralize the organization and reduce the costs of the global headquarter functions, the performance measure of our existing segments was changed to reflect our new management and operating structure. In the first quarter of 2016, the Company reorganized its businesses and moved the Refractory product line from the Industrial Materials segment to the Engineered Solutions segment. Advanced materials products will now be a part of the business segment where these products are produced. During the second quarter of 2016, our Engineered Solutions business qualified as held for sale status. All of Engineered Solutions' results have been excluded from continuing operations for both the current and prior years. All amounts below reflect these changes.
Results of Operations for 2016 as Compared to 2015
Business Combination Accounting
As a result of business combination accounting resulting from our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger" to the Financial Statements), the Company's financial statements are separated into two distinct periods, the period before the consummation of the Brookfield transaction (labeled predecessor) and the period after that date (labeled successor), to indicate the application of the different basis of accounting between the periods presented. There were no operational activities that changed as a result of the acquisition of the predecessor.
|
| | | | | | | | | | | | |
| | | Predecessor | | Successor |
| | | For the Period
January 1 Through
August 14, 2015 | | For the Period
August 15, 2015 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| (in thousands) | | | |
| Net sales | | $ | 339,907 |
| | $ | 193,133 |
| | $ | 437,963 |
|
| Cost of sales | | 305,001 |
| | 180,845 |
| | 448,016 |
|
Additions to lower of cost or
market inventory reserve | | — |
| | — |
| | 18,974 |
|
| Gross profit (loss) | | 34,906 |
| | 12,288 |
| | (29,027 | ) |
| Research and development | | 3,377 |
| | 1,083 |
| | 2,399 |
|
| Selling and administrative expenses | | 64,383 |
| | 23,485 |
| | 57,725 |
|
| Impairment of long-lived assets and goodwill | | 35,381 |
| | — |
| | 2,843 |
|
| Rationalizations | | 14 |
| | 283 |
| | 59 |
|
| Operating loss | | (68,249 | ) | | (12,563 | ) | | (92,053 | ) |
| Other expense (income), net | | 1,421 |
| | (813 | ) | | (2,188 | ) |
| Interest expense | | 26,211 |
| | 9,999 |
| | 26,914 |
|
| Interest income | | (363 | ) | | (6 | ) | | (358 | ) |
Loss from continuing operations
before provision for income taxes | | (95,518 | ) | | (21,743 | ) | | (116,421 | ) |
| (Benefit) provision for income taxes | | 6,452 |
| | 6,882 |
| | (7,552 | ) |
| Net loss from continuing operations | | $ | (101,970 | ) | | $ | (28,625 | ) | | $ | (108,869 | ) |
| | | | | | | |
| Loss from discontinued operations, net of tax | | (18,679 | ) | | (4,926 | ) | | (126,974 | ) |
| | | | | | | |
| Net loss | | $ | (120,649 | ) | | $ | (33,551 | ) | | $ | (235,843 | ) |
Net sales. Net sales for our Industrial Materials segment decreased from $339.9 million in the period January 1 through August 14, 2015, and $193.1 million in the period August 15 through December 31, 2015, to $438.0 million in 2016. This decrease was driven by a 27% decrease in prices for graphite electrodes. The price decrease was driven by overcapacity within the graphite electrode industry. Our customers were also negatively impacted by imported finished steel from China, which drove down production levels in the markets that we serve. The decrease in price was partially offset by a 12% increase in sales volumes.
Cost of sales. We experienced a decrease in cost of sales from $305.0 million in the period January 1 through August 14, 2015 and $180.8 million in the period August 15 through December 31, 2015 to $448.0 million in 2016. We achieved this reduction despite a 12% increase in sales volumes and increased depreciation expense resulting from the increase in fixed asset carrying value due to the step-up in value after our acquisition by Brookfield. We have benefited from the decrease in oil prices, which has driven down the price of decant oil, the key raw material to our production platform. Additionally, costs savings resulting from our rationalization initiatives that we have undertaken over the last 3 years generated the remainder of the favorable impact to cost of sales.
Lower of cost or market inventory adjustment. In 2016, we incurred a lower of cost or market adjustment of $19.0 million in certain product lines within our graphite electrode business reflecting the aforementioned decreased pricing.
Research and Development. Research and development expenses decreased from $3.4 million in the period January 1 through August 14, 2015, and $1.1 million in the period August 15 through December 31, 2015 to $2.4 million in 2016. This decrease was primarily driven by headcount reductions and our cost cutting efforts.
Selling and administrative expenses. Selling and general administrative expenses decreased from $64.4 million in the period January 1 through August 14, 2015, and $23.5 million in the period August 15 through December 31, 2015 to $57.7 million in 2016. This decrease was primarily driven by the reduction in non-recurring charges: fees associated with our proxy and tender offer represented $23.6 million in 2015 while we incurred one-time charges of $5.8 million in 2016 for organizational restructuring. Additionally, we incurred a $2.9 million decrease in our 2016 MTM
adjustment as compared to 2015. The remainder of the decrease was the result of headcount reductions and cost-cutting measures.
Impairments. As a result of our ongoing monitoring of triggering events, we recorded a goodwill impairment charge in our needle coke reporting unit totaling $35.4 million during the first quarter of 2015. During the fourth quarter of 2016 we impaired the value of assets held for sale at our facility in Brazil totaling $2.8 million.
Other expense (income). Other expense (income) decreased from $1.4 million of expense in the period January 1 through August 14, 2015, and $0.8 million of income in the period August 15 through December 31, 2015 to $2.2 million of income in 2016. The decrease was due to advantageous foreign currency impacts on non-operating assets and liabilities.
Interest expense. Interest expense decreased from $26.2 million in the period January 1 through August 14, 2015, and $10.0 million in the period August 15 through December 31, 2015 to $26.9 million in 2016. The decrease was due to prepayment of our Senior Subordinated Notes in 2015.
Loss from discontinued operations. We experienced an increase in the loss from discontinued operations, from $18.7 million in the period January 1 through August 14, 2015, and $4.9 million in the period August 15 through December 31, 2015 to $127.0 million in 2016. This increase was primarily due to $119.9 million impairment charge to adjust the carrying valuenet of assets held for sale to their fair value.
Segment operating income (loss). The following table represents our operating income (loss) by segment for 2015 and 2016:
|
| | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Period
January 1 Through
August 14, 2015 | | For the Period
August 15, 2015 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| | | |
| | (Dollars in thousands) |
| Industrial Materials | $ | (24,900 | ) | | $ | (2,529 | ) | | $ | (63,827 | ) |
| Corporate, R&D and Other Expenses | (43,349 | ) | | (10,034 | ) | | (28,226 | ) |
| Total operating loss | $ | (68,249 | ) | | $ | (12,563 | ) | | $ | (92,053 | ) |
Provision for income taxes. The following table summarizes the expense for income taxes in 2015 and 2016:
|
| | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Period
January 1 Through
August 14, 2015 | | For the Period
August 15, 2015 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| | | |
| | (Dollars in thousands) | | |
| Tax (benefit) expense | $ | 6,452 |
| | $ | 6,882 |
| | $ | (7,552 | ) |
Loss from continuing operations
before provision for income taxes | (95,518 | ) | | (21,743 | ) | | $ | (116,421 | ) |
| Effective tax rates | (6.8 | )% | | (31.7 | )% | | 6.5 | % |
During 2015, the effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to recent losses in the U.S. where we receive no tax benefit due to a full valuation allowance and taxes on worldwide earnings from various other countries. The recognition of the valuation allowance does not result in or limit the Company’s ability to utilize these tax assets in the future.
During 2016, the effective rate differs from the U.S. statutory rate of 35% primarily due to recent losses in the U.S. and Switzerland where we receive no tax benefit due to a full valuation allowance and taxes on worldwide earnings from various other countries. The recognition of the valuation allowance does not result in or limit the Company’s ability to utilize these tax assets in the future.
Results of Operations for 2015 as Compared to 2014
Business Combination Accounting
As a result of business combination accounting resulting from our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger" to the Financial Statements), the Company's financial statements are separated into two distinct periods, the period before the consummation of the Brookfield transaction (labeled predecessor) and the period after that date (labeled successor), to indicate the application of the different basis of accounting between the periods presented. There were no operational activities that changed as a result of the acquisition of the predecessor.
|
| | | | | | | | | | | |
| (in thousands) | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 |
| Net sales | $ | 825,145 |
| | $ | 339,907 |
| | $ | 193,133 |
|
| Cost of sales | 757,156 |
| | 305,001 |
| | 180,845 |
|
| Gross profit (loss) | 67,989 |
| | 34,906 |
| | 12,288 |
|
| Research and development | 9,738 |
| | 3,377 |
| | 1,083 |
|
| Selling and administrative expenses | 94,629 |
| | 64,383 |
| | 23,485 |
|
| Impairment of long-lived assets and goodwill | 75,650 |
| | 35,381 |
| | — |
|
| Rationalizations | 7,946 |
| | 14 |
| | 283 |
|
| Operating loss | (119,974 | ) | | (68,249 | ) | | (12,563 | ) |
| Other expense (income), net | 2,920 |
| | 1,421 |
| | (813 | ) |
| Interest expense | 35,736 |
| | 26,211 |
| | 9,999 |
|
| Interest income | (320 | ) | | (363 | ) | | (6 | ) |
Loss from continuing operations
before provision for income taxes | (158,310 | ) | | (95,518 | ) | | (21,743 | ) |
| (Benefit) provision for income taxes | (5,790 | ) | | 6,452 |
| | 6,882 |
|
| Net loss from continuing operations | $ | (152,520 | ) | | $ | (101,970 | ) | | $ | (28,625 | ) |
| | | | | | |
| Loss from discontinued operations, net of tax | (132,856 | ) | | (18,679 | ) | | (4,926 | ) |
| | | | | | |
| Net loss | $ | (285,376 | ) | | $ | (120,649 | ) | | $ | (33,551 | ) |
| | | | | | |
Net sales. Net sales for our Industrial Materials segment decreased from $825.1 million in 2014 to $339.9 million in the period January 1 through August 14, 2015, and $193.1 million in the period August 15 through December 31, 2015. This decrease was driven by a 23% decrease in volumes in our graphite electrode business caused by softening demand in the steel markets, particularly in EAF environments. This drove a decrease in the weighted average sales prices of 8 percent during 2015. Our graphite electrode product line was also negatively impacted by $37.8 million due to foreign currency rate declines primarily in the Euro region.
Cost of sales. We experienced decreases in cost of sales from $757.2 million in 2014 to $305.0 million in the period January 1 through August 14, 2015, and $180.8 million in the period August 15 through December 31, 2015. Lower volumes in our Industrial Materials segment resulted in a reduction of $105.2 million of cost in 2015 as compared to the same period of 2014. Decreases in the value of currencies in relation to the US Dollar, primarily in the euro region, benefited cost of sales by $37.5 million in the twelve months ended December 31, 2015 as compared to the same period of 2014. The remaining reduction in cost was driven by our improved cost structure resulting from our rationalization initiatives.
Research and Development. Research and development expenses were $9.7 million in 2014 compared to $3.4 million in the period January 1 through August 14, 2015, and $1.1 million in the period August 15 through December 31, 2015. This decrease was primarily driven by headcount reductions and our cost cutting efforts. Additionally, for the year ended December 31, 2014 our MTM adjustment resulted in an expense of $2.0 million in research and development. There was no significant MTM adjustment in 2015 within research and development.
Selling and administrative expenses. Selling and general administrative expenses decreased from $94.6 million 2014 to $64.4 million in the period January 1 through August 14, 2015, and $23.5 million in the period August 15 through December 31, 2015. This decrease was primarily driven by headcount reductions and cost cutting efforts. Additionally, we incurred a $6.5 million decrease in our 2015 MTM adjustment as compared to 2014. Our 2015 selling and administrative expenses also included fees associated with our proxy and tender offer totaling $23.6 million as compared to $8.2 million in 2014.
Impairments. As a result of our ongoing monitoring of triggering events, we recorded a goodwill impairment charge in our needle coke reporting unit totaling $35.4 million during the first quarter of 2015. This charge was driven by the margin contraction for petroleum needle coke and followed a similar charge totaling $76.1 million in the fourth quarter of 2014.
Rationalizations. We recorded a $7.9 million charge for rationalizations in 2014 compared to none in the period January 1 through August 14, 2015, and $0.3 million in the period August 15 through December 31, 2015. Our Industrial Materials and corporate rationalization programs were announced in 2013 and 2014 respectively and these programs wound down through 2015 and are substantially complete.
Other expense (income). Other expense (income) decreased from $2.9 million of expense in 2014 to $1.4 million in the period January 1 through August 14, 2015, and $0.8 million of income in the period August 15 through December 31, 2015. The decrease was due to advantageous foreign currency impacts on non-operating assets and liabilities.
Segment operating income (loss). The following table represents our operating loss by segment for 2014 and 2015: |
| | | | | | | | | | | |
| | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 |
| | (Dollars in thousands) |
| Industrial Materials | $ | (51,300 | ) | | $ | (24,900 | ) | | $ | (2,529 | ) |
| Corporate, R&D and Other Expenses | (68,674 | ) | | (43,349 | ) | | (10,034 | ) |
| Total segment operating loss | $ | (119,974 | ) | | $ | (68,249 | ) | | $ | (12,563 | ) |
Provision for income taxes. The following table summarizes the expense for income taxes in 2014 and 2015:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 |
| | (Dollars in thousands) |
| Tax (benefit) expense | $ | (5,790 | ) | | $ | 6,452 |
| | $ | 6,882 |
|
Loss from continuing operations
before provision for income taxes | $ | (158,310 | ) | | $ | (95,518 | ) | | $ | (21,743 | ) |
| Effective Tax Rates | 3.7 | % | | (6.8 | )% | | (31.7 | )% |
During the twelve months ended December 31, 2014, the effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to the recording of a valuation allowance against our U.S. deferred tax assets. During 2014, GrafTech impaired certain long-lived assets and announced the exit of certain product lines within our AGM product group as well as impaired goodwill on the needle coke reporting unit. See Note 3 and Note 6 to the Financial Statements. The impairment charges and other rationalization related charges were incurred primarily in the U.S. Therefore, it is no longer assured that it is more likely than not that we will generate sufficient future U.S. taxable income to realize our U.S. net deferred tax assets. As a result of recent losses, we recognized a $73.4 million non-cash charge in 2014 to increase the valuation allowance against these U.S. deferred tax assets, which adversely impacted our effective tax rate. The recognition of the valuation allowance does not result in or limit our ability to utilize these tax assets in the future.
Effects of Inflation
We incur costs in the U.S. and each of the non-U.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 non-U.S. subsidiaries into U.S. dollars for consolidation and reporting purposes in accordance with FASB 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 and Mexican subsidiaries using the dollar as the functional currency, as sales and purchases are predominantly dollar-denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses from non-permanent intercompany balances as part of 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.”
Effects of Changes in Currency Exchange Rates
When the currencies of non-U.S.non‑U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other expenses with respect to those facilities. In certain countries wherein which we have manufacturing facilities, and in certain instances where we price our products for sale in 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.
ManySome of the non-U.S.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.
For net sales of Industrial Materials, theThe impact of these eventschanges in the average exchange rates of other currencies against the U.S. dollar on our net sales was ana decrease of $1.2$6.9 million in 2014,for the year ended December 31, 2019 and an increase of $37.8$10.5 million and $4.5 million for the years ended December 31, 2018 and 2017, respectively.
The impact of these changes in 2015, and a increasethe average exchange rates of $0.4 million in 2016. For Industrial Materialsother currencies against the U.S. dollar on our cost of sales was a decrease of $9.1 million for the impactyear ended December 31, 2019 and increases of these events were decreases of $4.8 million, $37.5$3.6 million and $10.1$4.2 million in 2014, 20152018 and 2016,2017, respectively.
As part of our cash management, we also have intercompany loans between some of 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 Income.
We had a net total currency loss of $1.5 million in 2014, no net currency gain or loss in 2015 and a net currency loss of $0.6 million in 2016 resulting from the remeasurement of intercompany loans and the effect of transaction gains and losses on intercompany activities.Operations.
We have in the past and may in the future use various financial instruments to manage certain exposures to specific financial market 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 U.S. generally accepted accounting principles ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our company. The “non‑GAAP” financial measures consist of EBITDA 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) | | 2019 |
| | 2018 |
| | 2017 |
|
| Net sales | | $ | 1,790,793 |
| | $ | 1,895,910 |
| | $ | 550,771 |
|
| Net income | | $ | 744,602 |
| | $ | 854,219 |
| | $ | 7,983 |
|
EBITDA from continuing operations(1) | | $ | 1,027,268 |
| | $ | 1,102,625 |
| | $ | 97,884 |
|
Adjusted EBITDA from continuing operations(1) | | $ | 1,048,259 |
| | $ | 1,205,021 |
| | $ | 95,806 |
|
Key operating metrics
|
| | | | | | | | | |
| | | For the year ended December 31, | |
| (in thousands) | | 2019 |
| | 2018 |
| | 2017 |
|
Sales volume (MT)(2) | | 171 |
| | 176 |
| | 163 |
|
Production volume (MT)(3) | | 177 |
| | 179 |
| | 166 |
|
Production capacity excluding St. Marys during idle period (MT)(4)(5) | | 202 |
| | 180 |
| | 167 |
|
Capacity utilization excluding St. Marys during idle period(4)(6) | | 88 | % | | 99 | % | | 85 | % |
Total production capacity(5)(7) | | 230 |
| | 208 |
| | 195 |
|
Total capacity utilization(6)(7) | | 77 | % | | 86 | % | | 85 | % |
| |
| (1) | See below for more information and a reconciliation of EBITDA and adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP. |
| |
| (2) | Effective the first quarter of 2019, we have recast the sales volume above to include only graphite electrodes manufactured by GrafTech. This better reflects management's assessment of our profitability and excludes resales of low grade graphite electrodes manufactured by third party suppliers. For comparability purposes, the prior period has been recast to conform to this presentation. |
| |
| (3) | Production volume reflects graphite electrodes produced during the period. See below for more information on our key operating metrics. |
| |
| (4) | The St. Marys, Pennsylvania facility was temporarily idled effective the second quarter of 2016 except for the machining of semi‑finished products sourced from other plants. In the first quarter of 2018, our St. Marys facility began graphitizing a limited amount of electrodes sourced from our Monterrey, Mexico facility. |
| |
| (5) | Production capacity reflects expected maximum production volume during the period under normal operating conditions, standard product mix and expected maintenance downtime. Actual production may vary. See below for more information on our key operating metrics. |
| |
| (6) | Capacity utilization reflects production volume as a percentage of production capacity. See below for more information on our key operating metrics. |
| |
| (7) | Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; Pamplona, Spain and St. Marys, Pennsylvania. |
Non‑GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we have provided certain financial measures that are not in accordance with GAAP. EBITDA from continuing operations and adjusted EBITDA from continuing operations are non‑GAAP financial measures. We define EBITDA from continuing operations, a non‑GAAP financial measure, as net income
or loss plus interest expense, minus interest income, plus income taxes, discontinued operations and depreciation and amortization from continuing operations. We define adjusted EBITDA from continuing operations as EBITDA from continuing operations plus any pension and OPEB plan expenses, rationalization‑related charges, initial and follow-on public offering and related expenses, acquisition and proxy contest costs, non‑cash gains or losses from foreign currency remeasurement of non‑operating liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar, related party Tax Receivable Agreement expense, stock-based compensation and non‑cash fixed asset write‑offs. Adjusted EBITDA 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 period‑to‑period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA 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 debt‑service capabilities.
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;
adjusted EBITDA from continuing operations does not reflect the non‑cash gains or losses from foreign currency remeasurement of non‑operating 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 acquisition and proxy costs;
adjusted EBITDA from continuing operations does not reflect related party Tax Receivable Agreement expense;
adjusted EBITDA from continuing operations does not reflect rationalization‑related charges, stock-based compensation or the non‑cash write‑off 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 this presentation. 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 non‑recurring 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 (loss) 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) | | 2019 |
| | 2018 |
| | 2017 |
|
| | | |
| Net income (loss) | | 744,602 |
| | 854,219 |
| | 7,983 |
|
| Add: | | | | | | |
| Discontinued operations | | — |
| | (331 | ) | | 6,229 |
|
| Depreciation and amortization | | 61,819 |
| | 66,413 |
| | 64,025 |
|
| Interest expense | | 127,331 |
| | 135,061 |
| | 30,823 |
|
| Interest income | | (4,709 | ) | | (1,657 | ) | | (395 | ) |
| Income taxes | | 98,225 |
| | 48,920 |
| | (10,781 | ) |
| EBITDA from continuing operations | | 1,027,268 |
| | 1,102,625 |
| | 97,884 |
|
| Adjustments: | | | | | | |
Pension and OPEB plan expenses (gain)(1) | | 6,727 |
| | 3,893 |
| | (1,611 | ) |
Rationalization‑related gains(2) | | — |
| | — |
| | (3,970 | ) |
Intial and follow-on public offerings and related expenses(3) | | 2,056 |
| | 5,173 |
| | — |
|
Acquisition and proxy contests costs(4) | | — |
| | — |
| | 886 |
|
Non‑cash loss on foreign currency remeasurement(5) | | 1,784 |
| | 818 |
| | 1,731 |
|
Stock-based compensation(6) | | 2,143 |
| | 1,152 |
| | — |
|
Non‑cash fixed asset write‑off(7) | | 4,888 |
| | 4,882 |
| | 886 |
|
Related party Tax Receivable Agreement expense(8) | | 3,393 |
| | 86,478 |
| | — |
|
| Adjusted EBITDA from continuing operations | | 1,048,259 |
| | 1,205,021 |
| | 95,806 |
|
| |
| (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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Components of Results of Operations-Selling and Administrative Expenses” for more information. |
| |
| (2) | Costs associated with rationalizations in our graphite electrode manufacturing operations and in the corporate structure. They include severance charges, contract termination charges, write‑off of equipment and (gain)/loss on sale of manufacturing sites. |
| |
| (3) | Legal, accounting, printing and registration fees associated with initial and follow-on public offering and related expenses. |
| |
| (4) | Costs associated with the merger transaction with Brookfield, resulting in change in control compensation expenses. |
| |
| (5) | Non‑cash loss from foreign currency remeasurement of non‑operating liabilities of our non‑U.S. subsidiaries where the functional currency is the U.S. dollar. |
| |
| (6) | Non-cash expense for stock-based compensation grants. |
| |
| (7) | Non‑cash fixed asset write‑off recorded for obsolete assets. |
| |
| (8) | Non-cash expense for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. |
Key Operating Metrics
In addition to measures of financial performance presented in accordance with GAAP, we use certain operating metrics to analyze the performance of our company. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. These metrics align with management's assessment of our revenue performance and profit margin and will help investors understand the factors that drive our profitability.
Sales volume reflects 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Revenue Recognition.” Sales volume helps investors understand the factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period. Production capacity reflects expected maximum production volume during the period under normal operating conditions, standard product mix and expected maintenance downtime. Capacity utilization reflects production volume as a percentage of production capacity. Production volume, production capacity and capacity utilization help us understand the efficiency of our production, evaluate cost of sales and consider how to approach our contract initiative.
Customer base
We are a global company and sell our products in every major geographic market. Sales of these products to buyers outside the United States accounted for approximately 77%, 78% and 81% of our net sales in 2019, 2018 and 2017, respectively.
In 2019, six of our ten largest customers were based in Europe, two in the United States, and one in each of Brazil and Mexico. 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) | 2019 |
| | 2018 |
| | 2017 |
|
| Net sales: | | | | | |
| United States | 403,916 |
| | 429,599 |
| | 103,890 |
|
| Americas (excluding the United States) | 348,670 |
| | 367,561 |
| | 129,103 |
|
| Asia Pacific | 172,439 |
| | 131,578 |
| | 46,329 |
|
| Europe, Middle East, Africa | 865,768 |
| | 967,172 |
| | 271,449 |
|
| Total | 1,790,793 |
| | 1,895,910 |
| | 550,771 |
|
In 2019, one customer accounted for 10% of our net sales. We believe this customer does not pose a significant concentration of risk, as sales to this customer could be replaced by demand from other customers.
Results of operations
Results of operations for 2019 as compared to 2018
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/ Decrease | | % Change |
| (in thousands) | | 2019 | | 2018 | | |
| Net sales | | $ | 1,790,793 |
| | $ | 1,895,910 |
| | $ | (105,117 | ) | | (6 | )% |
| Cost of sales | | 750,390 |
| | 705,698 |
| | 44,692 |
| | 6 | % |
| Gross profit | | 1,040,403 |
| | 1,190,212 |
| | (149,809 | ) | | (13 | )% |
| Research and development | | 2,684 |
| | 2,129 |
| | 555 |
| | 26 | % |
| Selling and administrative expenses | | 63,674 |
| | 62,032 |
| | 1,642 |
| | 3 | % |
| Operating income | | 974,045 |
| | 1,126,051 |
| | (152,006 | ) | | (13 | )% |
| Other expense (income), net | | 5,203 |
| | 3,361 |
| | 1,842 |
| | 55 | % |
| Related party Tax Receivable Agreement expense | | 3,393 |
| | 86,478 |
| | (83,085 | ) | | N/A |
|
| Interest expense | | 127,331 |
| | 135,061 |
| | (7,730 | ) | | (6 | )% |
| Interest income | | (4,709 | ) | | (1,657 | ) | | (3,052 | ) | | 184 | % |
Income from continuing operations
before provision for income taxes | | 842,827 |
| | 902,808 |
| | (59,981 | ) | | (7 | )% |
| Provision for income taxes | | 98,225 |
| | 48,920 |
| | 49,305 |
| | 101 | % |
| Net income from continuing operations | | $ | 744,602 |
| | $ | 853,888 |
| | $ | (109,286 | ) | | (13 | )% |
| | | | | | |
|
| |
|
|
| Income from discontinued operations, net of tax | | — |
| | 331 |
| | (331 | ) | | (100 | )% |
| | | | | | |
|
| |
|
|
| Net income | | $ | 744,602 |
| | $ | 854,219 |
| | $ | (109,617 | ) | | (13 | )% |
Net sales. Net sales decreased by $105.1 million, or 6%, from $1.9 billion in 2018 to $1.8 billion in 2019. This decrease was primarily driven by a 3% decrease in sales volume of GrafTech manufactured electrodes as well as a decrease in non-GrafTech manufactured electrodes sales. Graphite electrode volumes decreased significantly in the second half of 2019, as our customers began to de-stock their inventory of our products. Graphite electrode inventories remain elevated for many customers, but we are seeing early evidence that de-stocking is running its course. We continue to expect inventory de-stocking through the first half of 2020. We expect inventories to decline and conditions to improve as we move into the second half of 2020. Approximately 80% of our 2019 revenues were derived from customers with long-term agreements. Spot market prices for graphite electrodes declined approximately 25% in 2019. We expect additional decreases in 2020.
Cost of sales. Cost of sales increased by $44.7 million, or 6%, from $705.7 million in 2018 to $750.4 million in 2019. This increase was primarily the result of sales of inventory that was manufactured using higher priced third-party needle coke. Cost of sales related to third-party needle coke peaked in 2019 and we expect modest declines in 2020.
Selling and administrative expenses. Selling and administrative expenses remained relatively flat from 2018 to 2019 as increased stock-based compensation and bad debt expenses were mostly offset by lower initial and follow-on public offering and related expenses.
Other expense (income), net. Other expense increased by $1.8 million, from $3.4 million in 2018 to $5.2 million in 2019. This increase was primarily due to a pension and OPEB mark-to-market charges of $4.1 million in 2019 versus $1.9 million in 2018.
Interest expense. Interest expense decreased by $7.7 million, or 6%, from $135.1 million in 2018 to $127.3 million in 2019, primarily due to a $24.2 million decrease in refinancing charges, partially offset by an increase in borrowings over the full period.
Provision for income taxes. The following table summarizes the benefit for income taxes in 2019 and 2018:
|
| | | | | | | |
| | For the Year Ended December 31, 2019 | | For the Year Ended December 31, 2018 |
| | | | |
| Tax expense | $ | 98,225 |
| | $ | 48,920 |
|
Income from continuing operations
before provision for income taxes | 842,827 |
| | $ | 902,808 |
|
| Effective tax rates | 11.7 | % | | 5.4 | % |
The effective tax rate for the year ended December 31, 2019 was 11.7% and differs from the U.S. statutory tax rate of 21% primarily due to worldwide earnings from various countries taxed at different rates, a portion of U.S. income being exempt from U.S. taxation as a result of the income qualifying for the foreign-derived intangible income deduction and a release of a valuation allowance recorded against the deferred tax asset related to U.S. state and foreign tax attributes. As of December 31, 2019, the balance of our valuation allowance against deferred tax assets was $13.7 million and does not result in, or limit the Company's ability to utilize these tax assets in the future. We expect the tax rate in 2020 to be approximately 14-18%.
The tax expense changed from $48.9 million, with an effective tax rate of 5.4% for the year ended December 31, 2018 to a $98.2 million with an 11.7% effective rate for the year ended December 31, 2019. This increase in the effective tax rate is primarily due to the partial release of a valuation allowance recorded against the deferred tax asset related to U.S. state and foreign tax attributes which was smaller in 2019 than the partial valuation allowance release recorded in 2018.
Effects of inflation
We incur costs in the United States and each of the non‑U.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 non‑U.S. subsidiaries into U.S. dollars for consolidation and reporting purposes in accordance with the Financial 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 and Mexican subsidiaries using the dollar as the functional currency, as sales and purchases are predominantly dollar‑denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses from non‑permanent intercompany balances as part of cost of sales and other (income) expense, net.
Significant changes in currency exchange rates asimpacting us are described under “Item 7A–Quantitative“Effects of Changes in Currency Exchange Rates” and Qualitative Disclosures about Market Risks.“Results of Operations.”
Liquidity and Capital Resourcescapital 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 Revolving Facility.financial covenants and representations). Our uses of those funds (other than for operations) have consisted principally of dividends, capital expenditures, cash paid for acquisitions and associated expenses andscheduled debt reduction paymentsrepayments, optional debt prepayments, share repurchases and other obligations. Disruptions in the U.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future.
As of December 31, 2016,
We believe that we had cash and cash equivalents of $11.6 million, long-term debt in the principal amount of $382.4 million, short-term debt of $8.9 million and stockholders' equity of $577 million. The Company has accesshave adequate liquidity to a $225 million Revolving Facility (subject to a $25 million minimum liquidity requirement).meet our needs. As of December 31, 2016, the Company2019, we had $61.2liquidity of $327.8 million, consisting of $246.9 million of borrowings and $12.3 million of letters of credit, for a total of $73.5 million drawn against the Revolving Facility.
In the event that operating cash flows fail to provide sufficient liquidity to meetavailability on our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our Revolving Facility, to the extent available. During 2016, as a result of a strategic review, we decided to sell our Engineered Solutions businesses. In November, 2016, we completed the sale of our Fiber Materials Inc. business. Cash proceeds from this and future sales will be used for repayment of borrowings outstanding under the Revolving Facility. We cannot
assure you that we will, or will be able to, consummate any such sales on acceptable terms or at all or as to the price, terms or conditions of any such sales.
We use cash flow from operations and funds available under the2018 Revolving Facility (subject to continued compliance with the financial covenants and representations under therepresentations) and cash and cash equivalents of $80.9 million. We had long‑term debt of $1,812.7 million and short‑term debt of $0.1 million as of December 31, 2019. As of December 31, 2018, we had liquidity of $295.4 million consisting of $245.5 million available on our 2018 Revolving Facility)Facility and cash and cash equivalents of $49.9 million. We had long‑term debt of $2,050.3 million and short‑term debt of $106.3 million as well as cash on hand as our primary sources of liquidity.December 31, 2018.
As of December 31, 2016, we were in compliance with all financial2019 and other covenants contained in the Revolving Facility, as applicable.
As of December 31, 20152018, $41.4 million and December 31, 2016 approximately 75% of debt consists of fixed rate obligations.
As a part$38.4 million, respectively, of our cash management activities, we manage accounts receivable credit risk, collections, and accounts payable vendor termscash equivalents were located outside of the United States. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends do not exceed the amount of retained and current earnings. In addition, for our subsidiary in South Africa, the South Africa Central Bank imposes that certain solvency and liquidity ratios remain above defined levels after the dividend distribution, which historically has not materially affected our ability to maximize our freerepatriate cash at any given timefrom this jurisdiction. The cash and minimize accounts receivable losses.
Long-Term Contractual, Commercialcash equivalents balances in South Africa were $0.8 million and Other Obligations and Commitments. The following tables summarize our long-term contractual obligations and other commercial commitments$0.2 million as of December 31, 2016.2019 and December 31, 2018, respectively. Upon repatriation to the United States, the foreign source portion of dividends we receive from our foreign subsidiaries is no longer subject to U.S. federal income tax as a result of the Tax Act.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Year Ending December 31, |
| | Total | | 2017 | | 2018-2019 | | 2020-2021 | | 2022+ |
| | (Dollars in Thousands) |
| Contractual and Other Obligations | | | | | | | | | |
| Long-term debt (a) | $ | 391,300 |
| | $ | 8,852 |
| | $ | 82,448 |
| | $ | 300,000 |
| | $ | — |
|
| Interest on long-term debt (b) | 75,703 |
| | 19,125 |
| | 38,250 |
| | 18,328 |
| | $ | — |
|
| Leases | 8,959 |
| | 2,637 |
| | 3,939 |
| | 1,481 |
| | 902 |
|
| Total contractual obligations | 475,962 |
| | 30,614 |
| | 124,637 |
| | 319,809 |
| | 902 |
|
| Postretirement, pension and related benefits (c) | 116,898 |
| | 11,882 |
| | 23,342 |
| | 23,146 |
| | 58,528 |
|
| Other long-term obligations | 11,898 |
| | 7,996 |
| | 689 |
| | 360 |
| | 2,853 |
|
| Uncertain income tax provisions | 3,338 |
| | — |
| | 1,348 |
| | 1,990 |
| | — |
|
| Total contractual and other obligations (d) | $ | 608,096 |
| | $ | 50,492 |
| | $ | 150,016 |
| | $ | 345,305 |
| | $ | 62,283 |
|
| Other Commercial Commitments | | | | | | | | | |
| Guarantees (e) | 5,681 |
| | 5,681 |
| | — |
| | — |
| | — |
|
| Total other commercial commitments | $ | 5,681 |
| | $ | 5,681 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
(a) | Senior Notes presently valued at $274 million as a result of purchase accounting and will accrete to the full redemption value of $300 million in 2020. |
| |
(b) | Represents interest payments required on Senior Notes with a fixed interest rate of 6.375% |
| |
(c) | Represents estimated postretirement, pension and related benefits obligations based on actuarial calculations. |
| |
(d) | Additional letters of credit of $12.3 million are issued under the Revolving Facility. |
| |
(e) | Represents surety bonds which are renewed annually. If rates were unfavorable, the letters of credit under our Revolving Facility would be utilized. |
Cash Flowflow and Plansplans to Manage Liquidity. Typically, ourmanage 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 capital expenditures acquisitions, stock repurchases and other factors.
Certain of our obligations could have material impact on our liquidity. Cash We had positive cash flow from operating activities during 2019, 2018 and 2017. Although the global economic environment experienced significant swings in these periods, our working capital management and cost‑control initiatives allowed us to remain operating cash‑flow positive in both times of declining and improving operating results. Cash from operations and from financing activities services payment ofis expected to remain at positive sustained levels due to the predictable earnings generated by our obligations, thereby reducing funds available to us for other purposes. The Company has access to a $225 million Revolving Facility (subject to a $25 million minimum liquidity requirement). three-to-five-year sales contracts with our customers.
As of December 31, 2016,2019, we had access to the Company$250 million 2018 Revolving Facility. We had $61.2 million of borrowings and $12.3$3.1 million of letters of credit, for a total availability on the 2018 Revolving Facility of $73.5$246.9 million. As of December 31, 2018, we had $4.5 million drawn againstof letters of credit, for a total availability of $245.5 million on the 2018 Revolving Facility.
On February 12, 2018, we entered into the 2018 Credit Agreement, which provides for the 2018 Revolving Facility and the 2018 Term Loan Facility. On February 12, 2018, our wholly owned subsidiary, GrafTech Finance, borrowed $1,500 million under the 2018 Term Loan Facility. The funds received were used to pay off our outstanding debt, including borrowings under our Old Credit Agreement and the Senior Notes and accrued interest relating to those borrowings and the Senior Notes, declare and pay a dividend of $1,112.0 million to our sole pre-IPO stockholder, pay fees and expenses incurred in connection therewith and for other general corporate purposes.
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note (as defined below) to the sole pre-IPO stockholder. The $750 million Brookfield 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 $750 million Brookfield 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 Brookfield Promissory Note became payable.
The Brookfield 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 Brookfield 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 prepayments at any time without premium or penalty. All obligations under the Brookfield 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 Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Brookfield Promissory Note was repaid, in full, on June 15, 2018.
On April 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 on May 8, 2018.
On June 15, 2018, GrafTech entered into the first amendment to its 2018 Credit Agreement ("First Amendment"). The First Amendment amends the 2018 Credit Agreement to provide for the additional $750 million in aggregate principal amount
of the incremental term loans ("Incremental Term Loans") to GrafTech Finance. The Incremental Term Loans increase the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $1,500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the existing term loans under the 2018 Credit Agreement, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the existing term loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal 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 on the Brookfield Promissory Note.
On August 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’s August 2018 public secondary offering of 23,000,000 shares of our common stock, net of underwriting commissions and discounts. GrafTech funded the share repurchase from cash on hand.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. As of December 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 of December 31, 2019 and $72.3 million remaining as of February 17, 2020.
On December 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 GrafTech 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 arms length price of $13.125 set by the competitive bidding process of the secondary block trade. As a result, the Company repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%.
We currently pay a quarterly cash dividend of $0.085 per share, or an aggregate of $0.34 per share on an annualized basis. Additionally, on December 31, 2018, we paid a special dividend of $0.70 per share totaling $203.4 million. 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 prepayments and other general purposes. Continued volatility in the global economy may require additional borrowings under ourthe 2018 Revolving Facility. 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 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.
As of December 31, 2016, we wereour cash for debt repayment in compliance2020 with all financial and other covenants contained in the Revolving Facility, as applicable.remainder for shareholder returns.
In order to seek to minimize our credit risks, we may reduce our sales of, or refuse to sell (except for cash on delivery or under letters of credit)credit or parent guarantees), our products to some customers and potential customers. In the current economic environment, our customers may experience liquidity shortages or difficulties in obtaining credit, including letters of credit. Our unrecovered trade receivables worldwide have not been material during the last 3two years individually or in the aggregate. We cannot assure you thatAs a part of our cash management activities, we will not be materially adversely affected bymanage accounts receivable losses in the future.credit risk, collections, and accounts payable vendor terms to maximize our free cash at any given time and minimize accounts receivable losses.
We manage our capital expenditures by taking into account quality, plant reliability, safety, environmental and regulatory requirements, prudent or essential maintenance requirements, global economic conditions, available capital resources, liquidity, long-termlong‑term business strategy and return on invested capital for the relevant expenditures, cost of capital and return on invested capital of the relevant segment and the Company as a whole and other factors.
We had positive cash flowhave announced a series of operational improvement projects at our Monterrey and St. Marys facilities. These projects are intended to help optimize our manufacturing footprint while improving environmental performance and increasing production flexibility. We expect these projects to be completed in the first half of 2021, at which time we will be able to shift additional
graphitization and machining from operating activities during 2014, 2015 and 2016. AlthoughMonterrey to St. Marys. We estimate that capital spending would be approximately $60-70 million in 2020 which is consistent with 2019 capital expenditures.
In the global economic environment experienced significant swings in these periods, our working capital management and cost-control initiatives allowed us to remainevent that operating cash flow positive in both times of declining and improving operating results.flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our 2018 Revolving Facility, to the extent available.
Prior to 2013, we experienced increased inventory levels resulting from lower sales volumes driven by reduced demand for our products as well as from contractually obligated raw material purchases. Related Party Transactions
We have since closed two graphite electrode manufacturing facilitiesengaged in transactions with affiliates or related parties during 2019. These transactions include ongoing obligations under the Tax Receivable Agreement, Stockholders Rights Agreement and Registration Rights Agreement, each with Brookfield. In November 2019, we amended the Stockholders Rights Agreement with Brookfield regarding compensation for the Brookfield designated directors. In December 2019, in conjunction with a secondary block trade by Brookfield pursuant to better align our production with customer demand andRule 144 under the Securities Act of 1933, we reduced inventoriesrepurchased approximately $250 million of common stock directly from Brookfield at the arms length price determined by the competitive bidding process in 2013 through 2016. We expect to continue to reduce inventory levels over the next 12 months which will provide positivesecondary 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%.
Cash flows
Cash flows include cash flows from both continuing and increase our liquidity.
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:
Notional amount of foreign exchange and commodity contracts.
Commitments under non-cancelable operating leases that, as of December 31, 2016, totaled no more than $2.6 million in each year and $9.0 million in the aggregate and as of December 31, 2016.
Letters of credit outstanding under the Revolving Facility of $12.3 million as of December 31, 2016.
Surety bonds and letters of credit with other banks totaling $5.7 million.
We are not affiliated with or related to any special purpose entity other than GrafTech Finance, our wholly-owned and consolidated finance subsidiary.
Cash Flows.discontinued operations.
The following is a discussion oftable summarizes our cash flow activities:
| | | | Predecessor | | Successor | | | | | |
| | For the Year Ended December 31, 2014 | | For the January 1 Through August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the Year Ended December 31, 2016 | For the Year Ended December 31, |
| | | | | 2019 | | 2018 | |
| | (Dollars in millions) | (Dollars in millions) |
| Cash flow provided by (used in): | | | | | | | | | | | |
| Operating activities | $ | 120.9 |
| | $ | 28.3 |
| | $ | 23.1 |
| | $ | 22.8 |
| $ | 805.3 |
| | $ | 836.6 |
| |
| Investing activities | (79.0 | ) | | (39.9 | ) | | (17.5 | ) | | (10.5 | ) | (63.9 | ) | | (67.3 | ) | |
| Financing activities | (35.1 | ) | | 20.8 |
| | (23.1 | ) | | (8.3 | ) | (709.6 | ) | | (731.0 | ) | |
Operating Activities
activities
Cash flow fromprovided by operating activities represents cash receipts and cash disbursements related to all of our activities other than to investing and financing activities. Operating cash flow is derived by adjusting net income (loss) for:
Non-cash items such as depreciation and amortization; stock-based compensation charges;impairment, post-retirement obligations and pension and post-retirement gains and losses, inventory write-downs
plan changes;
Gains and losses attributed to investing and financing activities such as gains and losses on the sale of assets and unrealized currency (gains)transaction gains and losseslosses; and
Changes in operating short and long-term 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 operationsoperations.
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. We continue to maximize our operating cash flows by focusing on those working capital items that are most directly affected by changes in sales volume, such as accounts receivable, inventories and accounts payable.
In 2014,the year ended December 31, 2019, changes in working capital resulted in a net sourceuse of funds of $56.8$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 $28.5$3.9 million from decreased prepaid and other current assets primarily resulting from the decreaselower value of imported goods impacting value-added taxes in accounts receivable, which was due primarily to the timing of sales and collections during the year;
source of funds from inventory reductions of $77.9 million primarily due to the planned reduction of inventory levels built up in prior years ; andcertain foreign jurisdictions;
use of funds of $33.5$18.2 million resulting from a decrease in income taxes payable driven primarily by the timing of income tax payments in 2019;
use of funds of $11.6 million from decreases in accounts payable and rationalization liabilities.other accruals primarily driven by decreased purchases of raw materials and timing of payments.
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.
In the period January 1 through August 14, 2015,year ended December 31, 2018, changes in working capital resulted in a net sourceuse of funds of $45.6 million which was impacted by:
net cash inflows in accounts receivable of $61.0 million from the decrease in accounts receivable due to the timing and collection of customer sales and collections;
net cash outflows from decreases in accounts payable and accruals of $18.7 million, due primarily to changes in tax accruals and payables; and
a increase in interest payable of $2.3 million.
In the period August 15 through December 31, 2015, changes in working capital resulted in a net source of funds of $26.8$177.8 million which was impacted by:
use of funds of $9.5$139.2 million from the increase in accounts receivable, which was due primarily to the timing ofincreased sales and collections during the year;
source of funds from prepaid and other asset reductions of $14.2 million primarily related to value added tax (VAT) receivable collections;
source of funds from inventory reductions of $47.9 million primarily due to the planned reduction of inventory levels built up in prior years ; anddriven by higher sales prices, partially offset by improved collection terms;
use of funds from increases in inventory of $19.8$126.4 million from a decreases in accounts payabledue to the increased price of raw materials and rationalization liabilities.
In 2016, changes in working capital resulted in a net source of funds of $68.6 million which was impacted by:higher production levels;
source of funds of $3.4$7.1 million from the decreasedecreased prepaid and other current assets primarily resulting from commodity hedge collections and a reduction in accounts receivable, which was due primarilyadvanced payments to the timing of sales and collections during the year;
source of funds from inventory reductions of $53.5 million primarily due to the planned reduction of inventory levels built up in prior years ; andsuppliers;
source of funds of $15.8$67.1 million resulting from an increase in income taxes payable driven by higher profits in 2018;
source of funds of $15.7 million from increases in accounts payable and rationalization liabilities.other accruals primarily driven by increased raw material costs.
useOther uses of funds of $2.8 million forcash in the extinguishment our rationalization related liabilities.
Operating cash flow alsoyear ended December 31, 2018 included cash outflowspaid for interest of $14.5$108.0 million, $14.6$21.4 million of cash paid for taxes and $11.0 million for contributions to pension and post retirementother benefit plans in 2014, 2015 and 2016, respectively.of $7.5 million.
Investing Activities.
activities
Net cash used in investing activities was $79.0$63.9 million in 2014the year ended December 31, 2019 and included:
included capital expenditures of $85.0 million;
cash outflows of $2.0 million related to derivative instruments;
cash inflows of $2.8 million related to insurance recoveries; and
cash inflows of $5.0 million related to the sale of fixed assets.$64.1 million.
Net cash used in investing activities was $39.9$67.3 million in the period of January 1 through August 14 throughyear ended December 31, 20152018 and included:
included capital expenditures of $32.3 million;
payments for derivative instruments of $8.3 million; and
cash inflows of $0.6$68.2 million related to the sale of fixed assets
Net cash used in investing activities was $17.5 million in the period of August 15 through December 31, 2015 and included:
capital expenditures of $18.4 million; and
cash inflows of $0.6 million related to the sale of fixed assets
Net cash used in investing activities was $10.5 million in 2016 and included:
capital expenditures of $27.9 million;
partially offset by proceeds from the sale of fixed assets of $1.1 million; and
cash inflows of $15.9 million from the divestiture of our Fiber Materials Inc. business.$0.9 million.
Financing Activities.activities
Net cash flow used byoutflow from financing activities was $35.1$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.
Net cash outflow from financing activities was $731.0 million during the year ended December 31, 2018, which was the net impact of our February 12, 2018 refinancing and subsequent amendment, proceeds of which were used to repay outstanding debt, pay dividends of $1,112 million to Brookfield and repay the $750 million Brookfield Promissory Note to Brookfield. We also repurchased $225 million of our common stock from Brookfield on August 13, 2018. Since our IPO in 20142018, we have paid a conditional dividend of $160 million to Brookfield, quarterly dividends on common stock of $68.9 million and included:a special dividend on common stock of $203.4 million.
Financing transactions
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.
The proceeds of the 2018 Term Loans were used to (i) repay in full all outstanding indebtedness of the Co‑Borrowers under our previous Amended and Restated Credit Agreement ("Old Credit Agreement") and terminate all commitments thereunder, (ii) redeem in full our previously held 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 the sole pre-IPO stockholder, with any remainder to be used for general corporate purposes. See Note 7 "Interest Expense" for a breakdown of expenses associated with these repayments. In connection with the repayment of the Old Credit Agreement and redemption of the Senior Notes, all guarantees of obligations under the Old Credit Agreement, the Senior Notes and related indenture were terminated, all mortgages and other security interests securing obligations under the Old Credit Agreement were released and the Old Credit Agreement and the indenture were terminated.
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 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.
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 GrafTech, 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 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 Parent"), 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 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation, and (ii) security interests in certain receivables and personal property of each Guarantor that is a Controlled Foreign Corporation, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement.
The 2018 Term 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 ending 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.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of a $750 million promissory note (the “Brookfield Promissory Note”) to the sole pre-IPO stockholder. The $750 million Brookfield 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 $750 million Brookfield Promissory Note and (iii) the satisfaction of the conditions occurring within 60 days from the dividend record date. Upon publication of our first quarter report on Form 10-Q, these conditions were met and, as a result, the Brookfield Promissory Note became payable.
The Brookfield 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 Brookfield 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 prepayments at any time without premium or penalty. All obligations under the Brookfield 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 the pre-IPO stockholder in connection with the Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Promissory Note was repaid in full on June 15, 2018.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into the First Amendment. The First Amendment amended the 2018 Credit Agreement to provide for 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.
The proceeds of the Incremental Term Loans were used to repay, in full, the $750 million of principal outstanding on the Brookfield Promissory Note.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility. We plan to use approximately 50-60% of our cash for debt repayment in 2020 with the remainder for shareholder returns.
Fixed rate obligations
As of December 31, 2019 and 2018, all of our debt was 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, 2019
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Year Ending December 31, |
| | Total | | 2020 | | 2021-2022 | | 2023-2024 | | 2025+ |
| | (Dollars in Thousands) |
| Contractual and Other Obligations | | | | | | | | | |
| 2018 Term Loan Facility (a) | $ | 1,844,032 |
| | $ | — |
| | $ | 100,282 |
| | $ | 225,000 |
| | $ | 1,518,750 |
|
| Interest on Long-term Debt (b) | 464,971 |
| | 96,635 |
| | 187,123 |
| | 171,781 |
| | 9,432 |
|
| Leases | 8,628 |
| | 4,496 |
| | 3,395 |
| | 645 |
| | 92 |
|
| Total contractual obligations | 2,317,631 |
| | 101,131 |
| | 290,800 |
| | 397,426 |
| | 1,528,274 |
|
| Postretirement, pension and related benefits (c) | 118,365 |
| | 11,771 |
| | 23,275 |
| | 24,401 |
| | 58,918 |
|
| Committed purchase obligations (d) | 48,632 |
| | 48,632 |
| | — |
| | — |
| | — |
|
| Related party Tax Receivable Agreement (e) | 89,871 |
| | 27,857 |
| | 25,650 |
| | 22,909 |
| | 13,455 |
|
| Other long-term obligations | 12,682 |
| | 9,108 |
| | 1,172 |
| | 578 |
| | 1,824 |
|
| Uncertain income tax provisions | 185 |
| | 72 |
| | 80 |
| | 33 |
| | — |
|
| Total contractual and other obligations (f) | $ | 2,587,366 |
| | $ | 198,571 |
| | $ | 340,977 |
| | $ | 445,347 |
| | $ | 1,602,471 |
|
| Other Commercial Commitments | | | | | | | | | |
| Guarantees (g) | 2,935 |
| | 2,935 |
| | — |
| | — |
| | — |
|
| Total other commercial commitments | $ | 2,935 |
| | $ | 2,935 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
| (a) | The Company entered into the 2018 Credit Agreement, which provided for the 2018 Term Loan Facility and 2018 Revolving Credit Facility. The proceeds of the 2018 Term Loan Facility were used to redeem the Senior Notes, repay outstanding indebtedness under the amended and restated credit agreement dated February 27, 2015, pay fees and expenses relating to the redemption of the Senior Notes and repayment of such indebtedness and pay a dividend. The 2018 Term Loan Facility has an outstanding balance of $1,844 million and matures on February 12, 2025. The term loan bears interest at a rate equal to either the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.50% per annum or the ABR Rate, plus an applicable margin initially equal to 2.50% per annum, in each case with one step down of 75 basis points based on achievement of certain public ratings of the 2018 Term Loans (see "Liquidity and Capital Resources" for full details of this transaction). |
| |
| (b) | Represents estimated interest payments required on 2018 Term Loan Facility using a monthly LIBOR curve through February 2025 net of interest rate swap impacts. |
| |
| (c) | Represents estimated postretirement, pension and related benefits obligations based on actuarial calculations. |
| |
| (d) | Represents committed purchases of raw materials. |
| |
| (e) | Represents Brookfield's 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 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. |
| |
| (f) | In addition, letters of credit of $3.1 million were issued under the Revolving Facility as of December 31, 2019. |
| |
| (g) | Represents surety bonds, which are renewed annually, and other bank guarantees. If rates were unfavorable, we would use letters of credit under our revolving facility. |
| |
| (h) | Represents our undiscounted non-cancelable operating lease future payments as of December 31, 2019. |
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 $24.0 million;
cash outflows$3.1 million as of $9.5December 31, 2019 and $4.5 million related to our supply chain financing agreement;as of December 31, 2018; and
cash paid for refinancing fees and debt issuance costs of $3.3 million.
Net cash flow provided by financing activities was $20.8 million in the period January 1 through August 14, 2015 and included:
cash proceeds of $150.0 million from our issuance of preferred shares;
cash inflows for net borrowings on our Revolving Facility of $79.5 million;
$200 million cash outflow for the prepayment of our Senior Subordinated Notes;
cash outflows of $5.1 million for refinancing fees; and
cash outflows of $3.4 million for issuance costs related to our preferred share issuance.
Net cash flow used by financing activities was $23.1 million for the period August 15 through December 31, 2015 and included:
net payments on our Revolving Facility of $21.5 million; and
cash outflows of $1.4 million for issuance costs related to our preferred share issuance.
Net cash flow used by financing activities was $8.3 million in 2016 and included:
net payments on our Revolving Facility of $7.1 million; and
net payments of $0.9 million for related to refinancing fees paid.53
| |
| • | Surety bonds and guarantees with other banks totaling $2.9 million. |
Costs Relating to Protection of the Environment
We have been and are subject to increasingly stringent environmental protection laws and regulations. In addition, we have an on-goingon‑going 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, | For the Year Ended December 31, |
| 2014 | | 2015 | | 2016 | 2019 | | 2018 | | 2017 |
(Dollars in thousands) | | Expenses relating to environmental protection | $ | 10,439 |
| | $ | 6,507 |
| | $ | 8,255 |
| $ | 11,204 |
| | $ | 12,355 |
| | $ | 7,973 |
|
| Capital expenditures related to environmental protection | 13,051 |
| | 2,082 |
| | 1,693 |
| 7,251 |
| | 4,080 |
| | 2,080 |
|
Critical Accounting Policiesaccounting 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. Our significant accounting policiesWe 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 described in Note 1 “Business and Summaryreasonable, if the actual amount is significantly different than the estimated amount, our assets, liabilities or results of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements.operations may be overstated or understated. The following accounting policies are deemed to be critical.
Business Combinationscombinations and Goodwill.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 third-partythird‑party 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 long-termlong‑term 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"Business and Summary of Significant Accounting Policies”Policies", of the Notes to the Consolidated Financial Statements for information regarding our goodwill impairment testing.
Predecessor and Successor Reporting. On August 17, 2015, the Company was acquired by affiliates of Brookfield Asset Management Inc. (see Note 2 "Preferred Share Issuance and Merger"). We elected to account for the acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of GTI were adjusted to their preliminary fair market value as of August 15, 2015, as this was the day that Brookfield effectively took control of the Company.
Our consolidated statements of operations subsequent to the Merger will include amortization expense relating to the fair value adjustments and depreciation expense based on the the fair value of the Company's property, plant and equipment that had previously been carried at historical cost less accumulated depreciation. Therefore, the Company's financial information prior to the Merger is not comparable to the financial information subsequent to the Merger. As a result, the financial statements and certain note presentations are separated into two distinct periods, the period before the consummation of the Merger (labeled "Predecessor") and the period after the date of merger (labeled "Successor"), to indicate the application of the different basis of accounting between the periods presented.
Reliance on Estimates. In preparing the Consolidated Financial Statements, we use and rely on estimates in determining the economic useful lives of our assets, obligations under our employeeEmployee benefit plans, provisions for doubtful accounts, provisions for restructuring charges and contingencies, tax valuation allowances, evaluation of goodwill, other intangible assets, pension and postretirement benefit obligations 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.
Employee Benefit Plans.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.rate. See Note 12 “Retirement11, "Retirement Plans and Postretirement Benefits”Benefits", of the Notes to the Consolidated Financial Statements for further details.
Contingencies. We account for contingencies by recording an estimated loss when information available prior to issuance of the Consolidated Financial Statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the Consolidated Financial Statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as those relating to environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss is significantly different from the estimated loss, our results of operations may be overstated or understated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.
Impairments of Long-Lived Assets.long‑lived assets. We record impairment losses on long-livedlong‑lived 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
future economic results that are below our expectations used in the current assessments.
Accounting for Income Taxes.income taxes. When we prepare the Consolidated Financial Statements, 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 establishedestablished.
If our estimates are incorrect, our deferred tax assets or liabilities may be overstated or understated.
Revenue Recognition. RevenueAs of December 31, 2019, we had a valuation allowance of $13.7 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 (the "TRA") that provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from salesus 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 net operating losses ("NOLs"), previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco (collectively, 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 commercial productstax 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 recognizedno potential for any future tax benefit payments.
The calculation of the TRA 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. We adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606 effective January 1, 2018 and elected the modified retrospective transition method. Under this method, any cumulative effect of applying the new revenue standard for contracts not yet complete is recorded as an adjustment to the opening balance of retained earnings as of the beginning of 2018. The comparative information for prior years was not revised and will continue to be reported under the accounting standards in effect for the period presented.
Under ASC 606, an entity recognizes revenue when persuasive evidenceits customer obtains control of promised goods or services, in an arrangement exists, delivery has occurred, title has passed,amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
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 five‑step 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 determinableallocated to the respective performance obligation when (or as) the performance obligation is satisfied.
In 2019 and collection2018, our revenue streams primarily consisted of three‑ to five‑year take‑or‑pay supply contracts and short‑term binding and non‑binding purchase orders (deliveries within the year) directly with steel manufacturers. In 2017, our revenue streams consisted primarily of annual non‑binding purchase orders. The promises of delivery of graphite electrodes represent the distinct performance obligations to which the contract consideration is reasonably assured. Salesallocated, based upon the electrode stand‑alone selling prices for the class of customers at the time the agreements are recognizedexecuted. The performance obligations are considered to be satisfied at a point in time when both title andcontrol of the risks and rewards of ownership areelectrodes has been transferred to the customer or services have been rendered and fees have been earned in accordance withcustomer. The company has elected to treat the contract.
Volume discounts and rebates are recordedtransportation of the electrodes from our premises to the customer’s facilities as a reduction of revenue in conjunction withfulfillment activity, and outbound freight cost is accrued when the salegraphite 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 related products. Changesvariable revenue will not happen.
Recent accounting pronouncements
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under ASU No. 2016-02, the Company recognizes most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. ASU No. 2016-02 was effective for fiscal years beginning after December 15, 2018. The Company adopted ASU No. 2016-02 on January 1, 2019. The adoption impact was not material to estimates are recorded when they become probable. Shippingour financial position, results of operations or cash flows. See Note 10 "Leases" for information regarding this standard and handling revenues relatingits adoption.
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017‑04, Intangibles‑Goodwill and Other (Topic 350). ASU No. 2017-04 was issued to products sold are included as an increase to revenue. Shipping and handling costs related to products sold are included as an increase to cost of sales.
Discontinued Operations and Assets Heldsimplify the accounting for Sale
When Management commits to a plan to sell assets or asset groups and a sale is probable, we reclassify those assets or asset groups into "Assets Held for Sale". Upon reclassification to assets held for sale, we evaluategoodwill impairment. ASU No. 2017-04 removes the book valuesecond step of the disposal groups against theirgoodwill 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, less costsnot to sell and asexceed the carrying amount of goodwill. ASU No. 2017-04 became effective on a result may impairprospective basis for the assets / asset groups. As and if new information becomes availableCompany on January 1, 2020. The adoption of this standard is not expected to have a material effect on the fair value of the assets/asset groups , we may adjust accordingly the impairment.
Once the assets of a business have been classified as held for sale, we evaluate if the divestiture represents a strategic shift in operations and if so, we exclude theCompany’s 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 is effective for the the Company on January 1, 2020. The adoption of this business from continuing operations. Allstandard will impact the timing of our credit losses; however, it is not expected to have a material effect on the Company’s financial position, results are reported as gainof operations or loss from discontinued operations, net of tax. During the second quarter of 2016, our Engineered Solutions business qualified as discontinued operations and as such, all results have been excluded from operations. See Note 3 "Discontinued Operations and Related Assets Held for Sale".cash flows.
Recent Accounting Pronouncements
We discuss recently adopted and issued accounting standards in Note 1 “Business and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 7 “Long-Term DebtItem 7A. Quantitative and Liquidity” of the Notes to the Consolidated Financial Statements.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
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. We, fromFrom time to time, routinelywe enter into various transactions that have been authorized according to documented policies and procedures in order to manage these well-defined 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-termlong‑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 gain of $2.9 million as of December 31, 2019.
Currency Rate Management.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 foreign currency options are instruments which give the holder the right, but not the obligation, to exchange
different currencies at a specified 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 gain of $0.2 million as of December 31, 2016represented a2019, and no net unrealized loss of $0.2 million. There were no outstanding gainsgain or lossesloss as of December 31, 2015.2018.
Energy Commodity Management.commodity management. We periodically enterhave entered into commodity derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas andexposure to refined oil product exposure. We had noproducts. The outstanding commodity derivative contracts represented a net unrealized loss of $3.7 million and net unrealized gain of $10.7 million as of December 31, 20152019 and December 31, 2016.2018, respectively.
Interest Rate Risk Management. We periodically implement interest rate management initiatives to seek to minimize our interest expense and the risk in our portfolio of fixed and variable interest rate obligations.
We periodically enter into agreements with financial institutions that are intended to limit, or cap, our exposure to incurrence of additional interest expense due to increases in variable interest rates. These instruments effectively cap our interest rate exposure. We currently do not have any such instruments outstanding.
Sensitivity Analysis.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 foreign currency derivatives and our commodity 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 $17.6 million for the year ended December 31, 2019, including the impact of our interest rate swaps entered into in the third quarter of 2019. The same 100 basis points increase would have resulted in an increase of $26.7 million in fair value of our interest rate swap portfolio.
As of December 31, 2016,2019, 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 increase or decrease of $1.9$2.8 million or a corresponding increase of $2.8 million, respectively, in the fair value of the foreign currency hedge portfolio. We had no exposure to
A 10% increase or decrease in the value of the underlying commodity prices asthat we had nohedge would result in a corresponding increase or decrease of $10.0 million in the fair value of the commodity hedges outstandinghedge portfolio as of December 31, 2016.2019. 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.
We had no interest rate derivativeFor further information related to the financial instruments outstanding asdescribed above, see Note 1 "Business and Summary of December 31, 2016. A hypothetical increaseAccounting Policies" and Note 8 "Fair Value Measurement and Derivative Instruments" to the Consolidated Financial Statements in interest rates of 100 basis points (1%)would have increased our interest expense by $1.0 million for the twelve months endedDecember 31, 2016.Item 8.
Item 8. Financial Statements and Supplementary Data
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Item 8. | Financial Statements and Supplementary Data |
(Unless otherwise noted, all dollars are presented in thousands)
See the Table of Contents located at the beginning of this Report for more detailed page references to information contained in this Item.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process, designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel of a company, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its financial statements.
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the level of compliance with related policies or procedures may deteriorate.
Management has conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has not been audited by Deloitte & Touche LLP, our independent registered public accounting firm.
Date: February 27, 2017
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/S/ Jeffrey C. Dutton
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Jeffrey C. Dutton |
President and Chief Executive Officer |
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/S/ Quinn J. Coburn
|
Quinn J. Coburn |
Vice President and Chief Financial
Officer
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of GrafTech International Ltd.
In our opinion, the consolidated statements of operations and comprehensive income (loss), of stockholders’ equity and of cash flowsfor the year ended December 31, 2014, before the effects of the adjustments to retrospectively reflect the discontinued operations described in Note 3 and before the effects of the adjustments to retrospectively reflect the change in the composition of reportable segments described in Note 5, present fairly, in all material respects, the results of operations and cash flows of GrafTech International Ltd. and its subsidiaries for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America (the 2014 financial statements before the effects of the adjustments discussed in Notes 3 and 5 are not presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit, before the effects of the adjustments described above, of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As noted in Note 7 to the consolidated financial statements, the Company amended its revolving agreement and entered into a new senior secured delayed draw term loan.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the discontinued operations described in Note 3 and the adjustments to retrospectively reflect the change in the composition of reportable segments described in Note 5and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
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/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP
Cleveland, Ohio
March 2, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Stockholders of
GrafTech International Ltd.:
Opinions on the Financial Statements and subsidiaries:Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of GrafTech International Ltd. and its subsidiaries (the "Company") as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations and comprehensive income (loss), stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 20162019, and 2015 (January 1, 2015the related notes (collectively referred to August 14, 2015, Predecessor Period, and August 15, 2015 toas the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2015, Successor Period)2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). These consolidated
In our opinion, the financial statements arereferred to above present fairly, in all material respects, the responsibilityfinancial position of the Company's management.Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. The consolidated financial statementsWe are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Company forSecurities and Exchange Commission and the year ended December 31, 2014, before the effects of the retrospective adjustments for the discontinued operations discussed in Note 3 and before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 5 to the consolidated financial statements, were audited by other auditors whose report, dated March 2, 2015, expressed an unqualified opinion on those statements.PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America.PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration oferror or fraud, and whether effective internal control over financial reporting as a basis for designing audit procedures that are appropriatewas maintained in the circumstances, but not for the purpose of expressing an opinion on the effectivenessall material respects.
Our audits of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesstatements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
InDefinition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion such 2016 and 2015 consolidatedon the financial statements, present fairly, in all material respects,taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Related Party Tax Receivable Agreement - Refer to Notes 1 and 12 to the financial positionstatements
Critical Audit Matter Description
On April 23, 2018, the Company entered into a tax receivable agreement (the "TRA") that provides the sole pre-IPO stockholder, the right to receive future payments from the Company for 85% of GrafTech International Ltd.the amount of cash savings, if any, in U.S. federal income tax and Swiss Federal and Cantonal tax that the Company and its subsidiaries realize as a result of the utilization of certain deferred tax assets attributable to periods prior to the IPO. The Company’s TRA liability was $89.9 million as of December 31, 20162019. The determination of the TRA liability required management to make significant estimates and 2015,assumptions related to forecasted revenues and the results of their operations and their cash flows for the years ended December 31, 2016 and 2015 (January 1, 2015 to August 14, 2015, Predecessor Period, and August 15, 2015 to December 31, 2015, Successor Period), in conformity with accounting principles generally acceptedtaxable income in the United Statesappropriate taxing jurisdiction, which are the primary drivers of America.utilization of the deferred tax assets.
We also have auditedGiven the retrospective adjustmentssignificant estimates and assumptions related to the 2014 consolidated financial statements for the operations discontinued in 2016, as discussed in Note 3 to the consolidated financial statements. We also have audited the adjustments to the 2014 consolidated financial statements to retrospectively adjust the disclosures for a changeforecasted revenues and taxable income in the compositionappropriate jurisdictions, auditing the TRA liability required a high degree of reportable segmentsauditor judgement and an increased extent of effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in 2016, as discussed in Note 5the Audit
Our audit procedures related to forecasted revenues and taxable income included the consolidated financial statements. Our proceduresfollowing, among others:
Tested the effectiveness of controls over discontinued operations included (1) obtaining the Company's underlying accounting analysis prepared by managementcalculation and recording of the retrospective adjustments for discontinued operationsTRA liability, including those over the forecasts of revenues and comparingtaxable income.
With the retrospectively adjusted amounts perassistance of our income tax specialists, we evaluated whether the 2014 financial statementssources of management’s estimated taxable income were of the appropriate character and sufficient to such analysis, (2) comparing previously reported amounts toutilize the previously issued financial statements for such year, (3) testingdeferred tax assets under the relevant tax law and tested the mathematical accuracy of the accounting analysis,calculation used to determine the TRA liability.
We evaluated management’s ability to accurately estimate revenues and (4) on a test basis,taxable income by comparing actual results to management’s historical estimates and evaluating whether there have been any changes that would affect management’s ability to continue accurately estimating revenues and taxable income.
We tested the adjustments to retrospectively adjustreasonableness of management’s estimates of revenues and taxable income by jurisdiction by comparing management’s forecast to:
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| ◦ | Historical revenues, cost of sales, and income |
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| ◦ | Schedule of future revenues resulting from contracts with certain customers |
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| ◦ | Internal communications to management and the Board of Directors |
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| ◦ | Industry reports for the Company and the steel industry |
We evaluated whether the financial statements for discontinued operations to the Company's supporting documentation. Our procedures over the changeestimates of future revenues and taxable income were consistent with evidence obtained in reportable segments included (1) comparing the adjustment amounts of segment revenues, operating income, and assets to the Company's underlying analysis and (2) testing the mathematical accuracyother areas of the reconciliation of segment amounts to the consolidated financial statements. In our opinion, such retrospective adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2014 consolidated financial statements of the Company other than with respect to the retrospective adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2014 consolidated financial statements taken as a whole.audit.
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/s/ Deloitte & Touche LLP |
Deloitte/s/ DELOITTE & ToucheTOUCHE LLP
Cleveland, Ohio
February 27, 201721, 2020
We have served as the Company’s auditor since 2015.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| | | | Successor | As of December 31, |
| | As of December 31, 2015 | | As of, December 31, 2016 | 2019 | | 2018 |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 6,927 |
| | $ | 11,610 |
| $ | 80,935 |
| | $ | 49,880 |
|
| Accounts and notes receivable, net of allowance for doubtful accounts of $244 as of December 31, 2015 and $326 as of December 31, 2016 | 82,390 |
| | 80,568 |
| |
| Accounts and notes receivable, net of allowance for doubtful accounts of $5,474 as of December 31, 2019 and $1,129 as of December 31, 2018 | | 247,051 |
| | 248,286 |
|
| Inventories | 218,130 |
| | 156,111 |
| 313,648 |
| | 293,717 |
|
| Prepaid expenses and other current assets | 21,150 |
| | 21,665 |
| 40,946 |
| | 46,168 |
|
| Current assets of discontinued operations | 98,281 |
| | 60,979 |
| |
| Total current assets | 426,878 |
| | 330,933 |
| 682,580 |
| | 638,051 |
|
| Property, plant and equipment | 571,329 |
| | 585,704 |
| 733,417 |
| | 688,842 |
|
| Less: accumulated depreciation | 20,166 |
| | 76,849 |
| 220,397 |
| | 175,137 |
|
| Net property, plant and equipment | 551,163 |
| | 508,855 |
| 513,020 |
| | 513,705 |
|
| Deferred income taxes | 15,326 |
| | 19,803 |
| 55,217 |
| | 71,707 |
|
| Goodwill | 172,059 |
| | 171,117 |
| 171,117 |
| | 171,117 |
|
| Other assets | 152,614 |
| | 141,568 |
| 104,230 |
| | 110,911 |
|
| Long-term assets of discontinued operations | 103,975 |
| | — |
| |
| Total assets | $ | 1,422,015 |
| | $ | 1,172,276 |
| $ | 1,526,164 |
| | $ | 1,505,491 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 40,147 |
| | $ | 47,663 |
| $ | 78,697 |
| | $ | 88,097 |
|
| Short-term debt | 4,772 |
| | 8,852 |
| 141 |
| | 106,323 |
|
| Accrued income and other taxes | 5,933 |
| | 5,256 |
| 65,176 |
| | 82,255 |
|
| Rationalizations | 1,195 |
| | 75 |
| |
| Other accrued liabilities | 20,987 |
| | 30,519 |
| 48,335 |
| | 50,452 |
|
| Current liabilities of discontinued operations | 23,082 |
| | 20,042 |
| |
| Related party payable - tax receivable agreement | | 27,857 |
| | — |
|
| Total current liabilities | 96,116 |
| | 112,407 |
| 220,206 |
| | 327,127 |
|
| Long-term debt | 362,455 |
| | 356,580 |
| 1,812,682 |
| | 2,050,311 |
|
| Other long-term obligations | 94,318 |
| | 82,148 |
| 72,562 |
| | 72,519 |
|
| Deferred income taxes | 57,430 |
| | 42,906 |
| 49,773 |
| | 45,825 |
|
| Long-term liabilities of discontinued operations | 1,167 |
| | 850 |
| |
| Commitments and Contingencies – Notes 11 and 13 |
|
| |
|
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| Stockholders’ equity: | | | | |
| Preferred stock, par value $.01, 10,000,000 shares authorized, none issued | — |
| | — |
| |
| Common stock, par value $.01, 225,000,000 shares authorized, 100 shares authorized and issued as of December 31, 2015 and 2016 | — |
| | — |
| |
| Related party payable | | 62,014 |
| | 86,478 |
|
| Commitments and contingencies – Note 12 | |
|
| |
|
|
| Stockholders’ (deficit) equity: | | | | |
| Preferred stock, par value $0.01, 300,000,000 shares authorized, none issued | | — |
| | — |
|
| Common stock, par value $0.01, 3,000,000,000 shares authorized, 270,485,308 and 290,537,612 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | | 2,705 |
| | 2,905 |
|
| Additional paid – in capital | 854,337 |
| | 854,337 |
| 765,419 |
| | 819,622 |
|
| Accumulated other comprehensive loss | (10,257 | ) | | (7,558 | ) | |
| Accumulated other comprehensive (loss) income | | (7,361 | ) | | (5,800 | ) |
| Accumulated deficit | (33,551 | ) | | (269,394 | ) | (1,451,836 | ) | | (1,893,496 | ) |
| Total stockholders’ equity | 810,529 |
| | 577,385 |
| |
| Total stockholders’ (deficit) equity | | (691,073 | ) | | (1,076,769 | ) |
| | | | | | | |
| Total liabilities and stockholders’ equity | $ | 1,422,015 |
| | $ | 1,172,276 |
| $ | 1,526,164 |
| | $ | 1,505,491 |
|
| | | | | |
See accompanying Notes to the Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| | | | |
| Net sales | $ | 825,145 |
| | $ | 339,907 |
| | $ | 193,133 |
| | $ | 437,963 |
|
| Cost of sales | 757,156 |
| | 305,001 |
| | 180,845 |
| | 448,016 |
|
Additions to lower of cost or
market inventory reserve | — |
| | — |
| | — |
| | 18,974 |
|
| Gross profit (loss) | 67,989 |
| | 34,906 |
| | 12,288 |
| | (29,027 | ) |
| Research and development | 9,738 |
| | 3,377 |
| | 1,083 |
| | 2,399 |
|
| Selling and administrative expenses | 94,629 |
| | 64,383 |
| | 23,485 |
| | 57,725 |
|
| Impairment of long-lived assets and goodwill | 75,650 |
| | 35,381 |
| | — |
| | 2,843 |
|
| Rationalizations | 7,946 |
| | 14 |
| | 283 |
| | 59 |
|
| Operating loss | (119,974 | ) | | (68,249 | ) | | (12,563 | ) | | (92,053 | ) |
| | | | | | | | |
| Other expense (income), net | 2,920 |
| | 1,421 |
| | (813 | ) | | (2,188 | ) |
| Interest expense | 35,736 |
| | 26,211 |
| | 9,999 |
| | 26,914 |
|
| Interest income | (320 | ) | | (363 | ) | | (6 | ) | | (358 | ) |
Loss from continuing operations
before provision for income taxes | (158,310 | ) | | (95,518 | ) | | (21,743 | ) | | (116,421 | ) |
| (Benefit) provision for income taxes | (5,790 | ) | | 6,452 |
| | 6,882 |
| | (7,552 | ) |
| Net loss from continuing operations | (152,520 | ) | | (101,970 | ) | | (28,625 | ) | | (108,869 | ) |
| | | | | | | |
| Loss from discontinued operations, net of tax* | (132,856 | ) | | (18,679 | ) | | (4,926 | ) | | $ | (126,974 | ) |
| | | | | | | | |
| Net loss | $ | (285,376 | ) | | $ | (120,649 | ) | | $ | (33,551 | ) | | $ | (235,843 | ) |
| | | | | | | | |
| Basic loss per common share: | | | | | | | |
| Net loss per share | $ | (2.10 | ) | | $ | (0.88 | ) | | N/A |
| | N/A |
|
| Weighted average common shares outstanding | 136,155 |
| | 137,152 |
| | N/A |
| | N/A |
|
| Diluted loss per common share: | | | | | | | |
| Net loss per share | $ | (2.10 | ) | | $ | (0.88 | ) | | N/A |
| | N/A |
|
| Weighted average common shares outstanding | 136,155 |
| | 137,152 |
| | N/A |
| | N/A |
|
| | | | | | | | |
| STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | | | | | | |
| Net loss | $ | (285,376 | ) | | $ | (120,649 | ) | | $ | (33,551 | ) | | $ | (235,843 | ) |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustments | (33,041 | ) | | (27,936 | ) | | (10,133 | ) | | 2,574 |
|
| Commodities and foreign currency derivatives and other, net of tax of ($63), ($68) and $21 and ($20), respectively | (10,859 | ) | | 1,262 |
| | (124 | ) | | 125 |
|
| Other comprehensive (loss)income, net of tax: | (43,900 | ) | | (26,674 | ) | | (10,257 | ) | | 2,699 |
|
| Comprehensive loss | $ | (329,276 | ) | | $ | (147,323 | ) | | $ | (43,808 | ) | | $ | (233,144 | ) |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net sales | $ | 1,790,793 |
| | $ | 1,895,910 |
| | $ | 550,771 |
|
| Cost of sales | 750,390 |
| | 705,698 |
| | 463,054 |
|
| Gross profit | 1,040,403 |
| | 1,190,212 |
| | 87,717 |
|
| Research and development | 2,684 |
| | 2,129 |
| | 3,456 |
|
| Selling and administrative expenses | 63,674 |
| | 62,032 |
| | 52,506 |
|
| Operating income | 974,045 |
| | 1,126,051 |
| | 31,755 |
|
| | | | | | |
| Other expense (income), net | 5,203 |
| | 3,361 |
| | (2,104 | ) |
| Related party tax receivable agreement expense | 3,393 |
| | 86,478 |
| | — |
|
| Interest expense | 127,331 |
| | 135,061 |
| | 30,823 |
|
| Interest income | (4,709 | ) | | (1,657 | ) | | (395 | ) |
Income from continuing operations before provision (benefit) for income taxes | 842,827 |
| | 902,808 |
| | 3,431 |
|
| Provision (benefit) for income taxes | 98,225 |
| | 48,920 |
| | (10,781 | ) |
| Net income from continuing operations | 744,602 |
| | 853,888 |
| | 14,212 |
|
| | | | | | |
| Income (loss) from discontinued operations, net of tax | — |
| | 331 |
| | (6,229 | ) |
| | | | | | |
| Net income | $ | 744,602 |
| | $ | 854,219 |
| | $ | 7,983 |
|
| | | | | | |
| Basic income per share: | | | | | |
| Net income per share | $ | 2.58 |
| | $ | 2.87 |
| | $ | 0.03 |
|
| Net Income from continuing operations per share | 2.58 |
| | 2.87 |
| | 0.05 |
|
| Weighted average shares outstanding | 289,057,356 |
| | 297,748,327 |
| | 302,225,923 |
|
| Diluted income per share: | | | | | |
| Net income per share | 2.58 |
| | 2.87 |
| | 0.03 |
|
| Diluted net income from continuing operations per share | 2.58 |
| | 2.87 |
| | 0.05 |
|
| Weighted average diluted shares outstanding | 289,074,601 |
| | 297,753,770 |
| | 302,225,923 |
|
| | | | | | |
| STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | | | | |
| Net income | $ | 744,602 |
| | $ | 854,219 |
| | $ | 7,983 |
|
| Other comprehensive (loss) income: | | | | | |
Foreign currency translation adjustments, net of tax of ($67), ($288), and $0, respectively | (6,371 | ) | | (18,391 | ) | | 23,028 |
|
Commodities and interest rate derivatives, net of tax of ($1,546), $802, and $0, respectively | 4,810 |
| | (7,698 | ) | | 4,819 |
|
| Other comprehensive (loss) income, net of tax: | (1,561 | ) | | (26,089 | ) | | 27,847 |
|
| Comprehensive income | $ | 743,041 |
| | $ | 828,130 |
| | $ | 35,830 |
|
* Loss on discontinued operations includes a pretax impairment charge of $119,907 in the twelve months endedDecember 31, 2016. See Note 3 "Discontinued Operations and Related Assets Held for Sale"
See accompanying Notes to the Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | Predecessor | | Successor | For the Year Ended December 31, |
| | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the Year Ended December 31, 2016 | 2019 | | 2018 | | 2017 |
| Cash flow from operating activities: | | | | | | | | | | | | |
| Net Loss | $ | (285,376 | ) | | $ | (120,649 | ) | | $ | (33,551 | ) | | $ | (235,843 | ) | |
Adjustments to reconcile net loss to
cash provided by operations: | | | | | | | | |
| Net income | | $ | 744,602 |
| | $ | 854,219 |
| | $ | 7,983 |
|
Adjustments to reconcile net income to cash provided by operations: | | | | | | |
| Depreciation and amortization | 119,708 |
| | 45,461 |
| | 28,618 |
| | 82,891 |
| 61,819 |
| | 66,413 |
| | 66,443 |
|
| Impairment of long-lived assets and goodwill | 197,220 |
| | 35,381 |
| | — |
| | 122,750 |
| |
| Rationalization related fixed asset write offs | 926 |
| | — |
| | — |
| | 636 |
| |
| Inventory write-downs | 19,600 |
| | — |
| | — |
| | 1,770 |
| |
| Deferred income taxes | (16,003 | ) | | 924 |
| | 5,368 |
| | (12,062 | ) | |
| Post-retirement and pension plan charges | 23,047 |
| | 2,998 |
| | 2,638 |
| | (698 | ) | |
| Stock-based compensation | 5,577 |
| | 15,357 |
| | — |
| | — |
| |
| Impairment of long-lived assets | | — |
| | — |
| | 5,300 |
|
| Related party Tax Receivable Agreement expense | | 3,393 |
| | 86,478 |
| | — |
|
| Deferred income tax provision | | 17,503 |
| | (37,078 | ) | | (15,695 | ) |
| Loss on extinguishment of debt | | — |
| | 23,827 |
| | — |
|
| Non-cash interest expense | 15,693 |
| | 14,180 |
| | 2,351 |
| | 6,551 |
| 6,344 |
| | 5,320 |
| | 6,805 |
|
| Loss on divestiture | — |
| | — |
| | — |
| | 198 |
| |
| Other charges, net | 1,441 |
| | 102 |
| | (1,934 | ) | | (2,641 | ) | 21,831 |
| | 15,761 |
| | (9,607 | ) |
| Net change in working capital* | 56,846 |
| | 45,594 |
| | 26,763 |
| | 68,630 |
| (47,687 | ) | | (177,754 | ) | | (20,004 | ) |
| Change in long-term assets and liabilities | (17,776 | ) | | (11,025 | ) | | (7,138 | ) | | (9,367 | ) | (2,489 | ) | | (583 | ) | | (4,652 | ) |
| Net cash provided by operating activities | 120,903 |
| | 28,323 |
| | 23,115 |
| | 22,815 |
| 805,316 |
| | 836,603 |
| | 36,573 |
|
| Cash flow from investing activities: | | | | | | | | | | | | |
| Capital expenditures | (84,981 | ) | | (32,301 | ) | | (18,442 | ) | | (27,858 | ) | (64,103 | ) | | (68,221 | ) | | (34,664 | ) |
| Insurance proceeds | 2,834 |
| | — |
| | — |
| | — |
| |
| Cash received from divestitures | — |
| | — |
| | — |
| | 15,889 |
| — |
| | — |
| | 27,254 |
|
| Derivative instrument settlements, net | (2,025 | ) | | (8,263 | ) | | 326 |
| | 377 |
| |
| Proceeds from the sale of fixed assets | 5,042 |
| | 646 |
| | 632 |
| | 1,121 |
| 219 |
| | 926 |
| | 5,211 |
|
| Other | 178 |
| | — |
| | — |
| | — |
| |
| Net cash used in investing activities | (78,952 | ) | | (39,918 | ) | | (17,484 | ) | | (10,471 | ) | (63,884 | ) | | (67,295 | ) | | (2,199 | ) |
| Cash flow from financing activities: | | | | | | | | | | | | |
| Short-term debt (reductions) borrowings, net | (1,021 | ) | | 18,511 |
| | (15,504 | ) | | 7,363 |
| — |
| | (12,607 | ) | | 5,110 |
|
| Credit Facility borrowings | 269,000 |
| | 160,000 |
| | 62,000 |
| | 56,000 |
| — |
| | — |
| | 77,000 |
|
| Credit Facility reductions | (293,000 | ) | | (99,000 | ) | | (68,000 | ) | | (70,469 | ) | — |
| | (45,692 | ) | | (114,839 | ) |
| Repayment of Senior Subordinated Notes | — |
| | (200,000 | ) | | — |
| | — |
| |
| Issuance of preferred shares | — |
| | 150,000 |
| | — |
| | — |
| |
Proceeds from the issuance of long-term debt, net of original issue discount | | — |
| | 2,235,000 |
| | — |
|
| Repayment of Senior Notes | | — |
| | (304,782 | ) | | — |
|
| Repurchase of common stock - related party | | (250,000 | ) | | (225,000 | ) | | — |
|
| Repurchase of common stock - non-related party | | (10,868 | ) | | — |
| | — |
|
| Principal payments on long-term debt | (192 | ) | | (89 | ) | | (183 | ) | | (289 | ) | (350,140 | ) | | (56,372 | ) | | (266 | ) |
| Supply chain financing | (9,455 | ) | | — |
| | — |
| | — |
| |
| Proceeds from exercise of stock options | 2,813 |
| | 32 |
| | — |
| | — |
| |
| Purchase of treasury shares | (894 | ) | | (63 | ) | | — |
| | — |
| |
| Dividends paid to non-related-party | | (20,613 | ) | | (55,616 | ) | | — |
|
| Dividends paid to related-party | | (78,010 | ) | | (1,488,649 | ) | | — |
|
| Related-party promissory note repayment | | — |
| | (750,000 | ) | | — |
|
| Refinancing fees and debt issuance costs | (3,279 | ) | | (5,068 | ) | | — |
| | (922 | ) | — |
| | (27,326 | ) | | — |
|
| Other | 951 |
| | (3,499 | ) | | (1,385 | ) | | — |
| |
Net cash (used in) provided by
financing activities | (35,077 | ) | | 20,824 |
| | (23,072 | ) | | (8,317 | ) | |
| Net cash used in financing activities | | (709,631 | ) | | (731,044 | ) | | (32,995 | ) |
| Net change in cash and cash equivalents | 6,874 |
| | 9,229 |
| | (17,441 | ) | | 4,027 |
| 31,801 |
| | 38,264 |
| | 1,379 |
|
Effect of exchange rate changes on cash
and cash equivalents | (1,212 | ) | | (1,746 | ) | | (665 | ) | | 656 |
| (746 | ) | | (1,749 | ) | | 376 |
|
| Cash and cash equivalents at beginning of period | 11,888 |
| | 17,550 |
| | 25,033 |
| | 6,927 |
| 49,880 |
| | 13,365 |
| | 11,610 |
|
| Cash and cash equivalents at end of period | $ | 17,550 |
| | $ | 25,033 |
| | $ | 6,927 |
| | $ | 11,610 |
| $ | 80,935 |
| | $ | 49,880 |
| | $ | 13,365 |
|
See accompanying Notes to the Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor | | |
| | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| | | | |
| Supplemental disclosures of cash flow information: | | | | | | | |
| Net cash paid during the periods for: | | | | | | | |
| Interest | $ | 21,549 |
| | $ | 10,661 |
| | $ | 10,880 |
| | $ | 23,578 |
|
| Income taxes | 10,611 |
| | 5,016 |
| | 1,646 |
| | 3,329 |
|
Non-cash operating, investing and financing activities: | | | | | | | |
Common stock issued to savings and pension plan trusts | 4,381 |
| | 1,874 |
| | — |
| | — |
|
* Net change in working capital due to
the following components: | | | | | | | |
| Decrease (increase) in current assets: | | | | | | | |
| Accounts and notes receivable, net | $ | 28,466 |
| | $ | 61,008 |
| | $ | (9,524 | ) | | $ | 3,432 |
|
| Inventories | 77,875 |
| | 1,164 |
| | 47,853 |
| | 53,548 |
|
| Prepaid expenses and other current assets | (14,898 | ) | | 2,551 |
| | 15,935 |
| | (1,424 | ) |
| Change in accounts payables and accruals | (25,849 | ) | | (18,728 | ) | | (21,503 | ) | | 15,757 |
|
| Rationalizations | (8,732 | ) | | (2,677 | ) | | (3,756 | ) | | (2,758 | ) |
| Increase in interest payable | (16 | ) | | 2,276 |
| | (2,242 | ) | | 75 |
|
| Decrease in working capital | $ | 56,846 |
| | $ | 45,594 |
| | $ | 26,763 |
| | $ | 68,630 |
|
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Supplemental disclosures of cash flow information: | | | | | |
| Net cash paid during the periods for: | | | | | |
| Interest | $ | 121,075 |
| | $ | 108,006 |
| | $ | 25,277 |
|
| Income taxes | 99,278 |
| | 21,444 |
| | 3,467 |
|
| Non-cash financing activities: | | | | | |
| Dividend payable - Promissory Note** | — |
| | 750,000 |
| | — |
|
| * Net change in working capital due to the following components: | | | | | |
| Accounts and notes receivable, net | $ | (404 | ) | | $ | (139,180 | ) | | $ | (29,755 | ) |
| Inventories | (21,549 | ) | | (126,355 | ) | | (15,649 | ) |
| Prepaid expenses and other current assets | 3,929 |
| | 7,116 |
| | (10,565 | ) |
| Income taxes payable | (18,174 | ) | | 67,054 |
| | 2,762 |
|
| Accounts payable and accruals | (11,551 | ) | | 15,724 |
| | 33,317 |
|
| Interest payable | 62 |
| | (2,113 | ) | | (114 | ) |
| (Increase) decrease in working capital | $ | (47,687 | ) | | $ | (177,754 | ) | | $ | (20,004 | ) |
**During the second quarter of 2018, we declared a $750 million dividend in the form of a Promissory Note that was a non-cash transaction. See Note 5 "Debt and Liquidity" for details.
See accompanying Notes to the Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PREDECESSOR |
| | Issued Shares of Common Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Accumulated Deficit) | | Treasury Stock | | Common Stock Held in Employee Benefit & Compensation Trust | | Total Stockholders’ Equity |
| Balance at January 1, 2014 | 151,929,565 |
| | $ | 1,519 |
| | $ | 1,820,451 |
| | $ | (292,624 | ) | | $ | 39,625 |
| | $ | (247,190 | ) | | $ | (1,032 | ) | | $ | 1,320,749 |
|
| Comprehensive income (loss): | | | | | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (285,376 | ) | | — |
| | — |
| | (285,376 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Commodity and foreign currency derivatives and other, net of tax of ($63) | — |
| | — |
| | — |
| | (10,859 | ) | | — |
| | — |
| | — |
| | (10,859 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | (33,041 | ) | | — |
| | — |
| | — |
| | (33,041 | ) |
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | (43,900 | ) | | — |
| | — |
| | — |
| | (43,900 | ) |
| Stock-based compensation | 322 |
| | — |
| | (1,765 | ) | | — |
| | — |
| | 7,379 |
| | — |
| | 5,614 |
|
| Common stock issued to savings and pension plan trusts | 574,973 |
| | 6 |
| | 4,381 |
| | — |
| | — |
| | — |
| | 236 |
| | 4,623 |
|
| Sale of common stock under stock options | 316,151 |
| | 3 |
| | 2,813 |
| | — |
| | — |
| | — |
| | — |
| | 2,816 |
|
| Balance at December 31, 2014 | 152,821,011 |
| | $ | 1,528 |
| | $ | 1,825,880 |
| | $ | (336,524 | ) | | $ | (245,751 | ) | | $ | (239,811 | ) | | $ | (796 | ) | | $ | 1,004,526 |
|
| Comprehensive income (loss): | | | | | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (120,649 | ) | | — |
| | — |
| | (120,649 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Commodity and foreign currency derivatives and other, net of tax of ($68) | — |
| | — |
| | — |
| | 1,262 |
| | — |
| | — |
| | — |
| | 1,262 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | (27,936 | ) | | — |
| | — |
| | — |
| | (27,936 | ) |
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | (26,674 | ) | | — |
| | — |
| | — |
| | (26,674 | ) |
| Brookfield preferred share issuance | — |
| | — |
| | 145,205 |
| | — |
| | — |
| | — |
| | — |
| | 145,205 |
|
| Stock-based compensation | (2,331 | ) | | — |
| | (16,530 | ) | | — |
| | — |
| | 31,826 |
| | — |
| | 15,296 |
|
| Common stock issued to savings and pension plan trusts | 423,273 |
| | 4 |
| | 1,874 |
| | — |
| | — |
| | — |
| | 796 |
| | 2,674 |
|
| Sale of common stock under stock options | 7,450 |
| | — |
| | 32 |
| | — |
| | — |
| | — |
| | — |
| | 32 |
|
| Balance at August 14, 2015 | 153,249,403 |
| | $ | 1,532 |
| | $ | 1,956,461 |
| | $ | (363,198 | ) | | $ | (366,400 | ) | | $ | (207,985 | ) | | $ | — |
| | $ | 1,020,410 |
|
See accompanying Notes to the Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)(DEFICIT)
(Dollars in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SUCCESSOR |
| | Issued Shares of Common Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Accumulated Deficit) | | Treasury Stock | | Common Stock Held in Employee Benefit & Compensation Trust | | Total Stockholders’ Equity |
| | | | | | | | | | | | | | | | |
| Balance at August 15, 2015 | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
| Brookfield capital contribution | 100 |
| | — |
| | 854,337 |
| | — |
| | — |
| | — |
| | — |
| | 854,337 |
|
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (33,551 | ) | | — |
| | — |
| | (33,551 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Commodity and foreign currency derivatives and other, net of tax of $21 | — |
| | — |
| | — |
| | (124 | ) | | — |
| | — |
| | — |
| | (124 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | (10,133 | ) | | — |
| | — |
| | — |
| | (10,133 | ) |
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | (10,257 | ) | | — |
| | — |
| | — |
| | (10,257 | ) |
| Balance at December 31, 2015 | 100 |
| | — |
| | 854,337 |
| | (10,257 | ) | | (33,551 | ) | | — |
| | — |
| | 810,529 |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Balance at January 1, 2016 | 100 |
| | — |
| | 854,337 |
| | (10,257 | ) | | (33,551 | ) | | — |
| | — |
| | 810,529 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (235,843 | ) | | — |
| | — |
| | (235,843 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | |
| Commodity and foreign currency derivatives and other, net of tax of ($20) | — |
| | — |
| | — |
| | 125 |
| | — |
| | — |
| | — |
| | 125 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | 2,574 |
| | — |
| | — |
| | — |
| | 2,574 |
|
| Total other comprehensive (loss) income | — |
| | — |
| | — |
| | 2,699 |
| | — |
| | — |
| | — |
| | 2,699 |
|
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2016 | 100 |
| | $ | — |
| | $ | 854,337 |
| | $ | (7,558 | ) | | $ | (269,394 | ) | | $ | — |
| | $ | — |
| | $ | 577,385 |
|
| | | | | | | | | | | | | | | | |
| |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2016 | 302,225,923 |
| | $ | 3,022 |
| | $ | 851,315 |
| | $ | (7,558 | ) | | $ | (269,394 | ) | | $ | 577,385 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | 7,983 |
| | 7,983 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
|
| Commodity and foreign currency derivatives income (loss), net of tax of $0 | — |
| | — |
| | — |
| | 4,819 |
| | — |
| | 4,819 |
|
| Foreign currency translation adjustments, net of tax of $0 | — |
| | — |
| | — |
| | 23,028 |
| | — |
| | 23,028 |
|
| Total other comprehensive income | — |
| | — |
| | — |
| | 27,847 |
| | — |
| | 27,847 |
|
| | | | | | | | | | | | |
| Balance as of December 31, 2017 | 302,225,923 |
| | $ | 3,022 |
| | $ | 851,315 |
| | $ | 20,289 |
| | $ | (261,411 | ) | | 613,215 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 854,219 |
| | 854,219 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
|
| Commodity derivatives income (loss), net of tax of $715 | — |
| | — |
| | — |
| | (6,866 | ) | | — |
| | (6,866 | ) |
Commodity derivatives reclassification adjustments, net of tax of $87
| — |
| | — |
| | — |
| | (832 | ) | | — |
| | (832 | ) |
| Foreign currency translation adjustments, net of tax of ($288) | — |
| | — |
| | — |
| | (18,391 | ) | | — |
| | (18,391 | ) |
| Total other comprehensive loss | — |
| | — |
| | — |
| | (26,089 | ) | | — |
| | (26,089 | ) |
Common stock repurchased and retired (from related party) | (11,688,311 | ) | | (117 | ) | | (32,844 | ) | | | | (192,039 | ) | | (225,000 | ) |
| Stock-based compensation | | | | | 1,151 |
| | | | | | 1,151 |
|
Dividends paid to related party stockholder ($ 5.14 per share) | — |
| | — |
| | — |
| | — |
| | (1,488,649 | ) | | (1,488,649 | ) |
Dividends paid to non-related party stockholders ($0.9345 per share) | — |
| | — |
| | — |
| | — |
| | (55,616 | ) | | (55,616 | ) |
| Related-party promissory note repayment | | | | | | | | | (750,000 | ) | | (750,000 | ) |
| Balance as of December 31, 2018 | 290,537,612 |
| | $ | 2,905 |
| | $ | 819,622 |
| | $ | (5,800 | ) | | $ | (1,893,496 | ) | | $ | (1,076,769 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | 744,602 |
| | 744,602 |
|
| Other comprehensive income (loss): | | | | | | | | | | | |
| Commodity and interest rate derivatives income (loss), net of tax of ($3,418) | — |
| | — |
| | — |
| | 11,830 |
| | — |
| | 11,830 |
|
Commodity derivatives reclassification adjustments, net of tax of $1,872
| — |
| | — |
| | — |
| | (7,020 | ) | | — |
| | (7,020 | ) |
| Foreign currency translation adjustments, net of tax of ($67) | — |
| | — |
| | — |
| | (6,371 | ) | | — |
| | (6,371 | ) |
| Total other comprehensive loss | — |
| | — |
| | — |
| | (1,561 | ) | | — |
| | (1,561 | ) |
Common stock repurchased and retired (from related party) | (19,047,619 | ) | | (190 | ) | | (53,524 | ) | | — |
| | (196,286 | ) | | (250,000 | ) |
Common stock repurchased and retired (from non-related party) | (1,004,685 | ) | | (10 | ) | | (2,825 | ) | | | | (8,033 | ) | | (10,868 | ) |
| Stock based compensation | — |
| | — |
| | 2,146 |
| | — |
| | — |
| | 2,146 |
|
Dividends paid to related party stockholder ($0.34 per share) | — |
| | — |
| | — |
| | — |
| | (78,010 | ) | | (78,010 | ) |
Dividends paid to non-related party stockholders ($0.34 per share) | — |
| | — |
| | — |
| | — |
| | (20,613 | ) | | (20,613 | ) |
| Balance as of December 31, 2019 | 270,485,308 |
| | $ | 2,705 |
| | $ | 765,419 |
| | $ | (7,361 | ) | | $ | (1,451,836 | ) | | $ | (691,073 | ) |
See accompanying Notes to the Consolidated Financial Statements
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except as otherwise noted)
| |
| (1) | Business and Summary of Significant Accounting Policies |
Discussion of Business and Structure
GrafTech International Ltd. (the “Company”) is one of the world’s largest manufacturers and providersa leading manufacturer of high quality syntheticgraphite electrode products essential to the production of electric arc furnace ("EAF") steel and natural graphiteother ferrous and carbon based products.non-ferrous metals. References herein to “GTI,” “we,” “our,” or “us” refer collectively to GrafTech International Ltd. and its subsidiaries. We have sevenOn August 15, 2015, GTI became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”) through a tender offer to our former stockholders and subsequent merger transaction.
The Company’s only reportable segment, Industrial Materials, is comprised of our two major product categories: graphite electrodes, refractory products, needle coke products, advanced graphite materials, advanced composite materials, advanced electronics technologies, and advanced materials, which are reported in the following segments:
On February 26, 2016, the Company announced it plans to realign its two business segments. Industrial Materials will now be comprised of graphite electrodes and needle coke products. Engineered Solutions will now be comprised of advancedNeedle coke is the key raw material to producing graphite materials, advanced composite materials, advanced electronic technologies, and refractory products. Refractory products was previously included inelectrodes. The Company's vision is to provide the Industrial Materials business segment. Advanced materials products will now be a part of the business segment where these products are produced. This realignment of the business segments will allow the Company to better direct its resources and simplify its operations. The Industrial Materials business segment will continue to focus on beinghighest quality graphite electrodes at the lowest cost producerwhile providing the best quality of graphite electrodes in a very challenging market. The Engineered Solutions business segment will continuecustomer service all while striving to leveragebe the intellectual property of carbon and graphite material science to innovate and commercialize advanced technologies and new products in high growth markets. The Company also announced that it was reviewing strategic alternatives for its Engineered Solutions business segment, as newly defined.lowest cost producer.
During the 2nd quarter 2016, the ES segment met the criteria of held-for-sale and because the contemplated divestiture represented a major strategic shift, we reclassified it as discontinued operations. All amounts within the financial statements and footnotes represent continuing operations, unless otherwise noted.
Summary of Significant Accounting Policies
The Consolidated Financial Statements include the financial statements of GrafTech International Ltd. and its wholly-ownedwholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Cash Equivalents
We consider all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of certificates of deposit, money market funds and commercial paper.
Revenue Recognition
The Company adopted Accounting Standards Codification ("ASC") 606 on January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's goods and will provide financial statement readers with enhanced disclosures. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 and prior were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous revenue guidance".
Prior to the adoption of ASC 606, revenue from sales of our commercial products iswas recognized when they meetmet four basic criteria (1) persuasive evidence of an arrangement exists,existed, (2) delivery hashad occurred, (3) the amount iswas determinable and (4) collection iswas reasonably assured. Sales arewere recognized when both title and the risks and rewards of ownership arewere transferred to the customer or services havehad been rendered and fees havehad been earned in accordance with the contract.
Volume discounts and rebates are estimated and are recorded asIn accordance with ASC 606, revenue is recognized when a reductioncustomer obtains control of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in conjunctionexchange for these goods. See Note 2, "Revenue from Contracts with the sale of the related products. Changes to estimates are recorded when they become probable. Shipping and handling revenues billed to our customers are included in net sales and the related shipping and handling costs are included as an increase to cost of sales.Customers" for more information.
Inventories
Inventories are stated at the lower of cost or market. Cost is principally determined using the “first-in first-out” (“FIFO”) and average cost, which approximates FIFO, methods. Elements of cost in inventory include raw materials, direct labor and manufacturing overhead.
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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Expenditures for property, plant and equipment are recorded at cost. Maintenance and repairs of property and equipment are expensed as incurred. Expenditures for replacements and betterments are capitalized and the replaced assets are retired. Gains and losses from the sale of property are included in cost of goods soldsales or other expense (income) expense,, net. We depreciate our assets using the straight-line method over the estimated useful lives of the assets. The ranges of estimated useful lives are as follows:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
| | Years |
| Buildings | 25-40 |
|
| Land improvements | 20 |
|
| Machinery and equipment | 5-20 |
|
| Furniture and fixtures | 5-10 |
|
The carrying value of fixed assets is assessed when events and circumstances indicating impairment are present. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Depreciation expense was $79.3$49.7 million, for 2014. Depreciation expense was $26.7 $53.5 million, for the period January 1 through August 14, 2015 and $18.8$50.4 million for the period August 15 throughin 2019, 2018 and 2017, respectively. Capital expenditures within accounts payable totaled $11.5 million and $13.7 million as of December 31, 2015. Depreciation expense was $63.4 million in 2016.2019 and 2018, respectively.
Accounts Receivable
Trade accounts receivable primarily arise from sales of goods to customers and distributors in the normal course of business.
Allowance for Doubtful Accounts
Considerable judgmentJudgment is required in assessing the likelihood of collection of receivables, including the current creditworthiness of each customer, related aging of the past due balances and the facts and circumstances surrounding any non-payment. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its financial obligations. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Receivables are charged off when amounts are determined to be uncollectible.
Capitalized Bank Fees
We capitalize bank fees upon the incurrence of debt and record them as a contra-liability against our debt. As of December 31, 2015 weWe had no capitalized bank fees of $20.2 million and $0.7$24.3 million of capitalized bank fees as of December 31, 2016.2019 and 2018, respectively. We amortize such amounts over the life of the respective debt instrument using the effective interest method. The estimated life may be adjusted upon the occurrence of a triggering event. Amortization of capitalized bank fees amounted to $2.1$4.1 million, $3.5 million and $0.3 million in the period January 1 through August 14, 2015, none in the period August 15 through December 31, 2015,2019, 2018 and $0.2 million in 2016,2017, respectively. Capitalized bank fee amortization is included in interest expense.
Derivative Financial Instruments
We do not use derivative financial instruments for trading purposes. They are used to manage well-defined commercial risks associated with commodity contractspurchases, interest rates and currency exchange rate risks. On the date that a derivative contract for a hedging instrument is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or 4) a contract not designated as a hedging instrument.
For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the Consolidated Statement of Operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the Consolidated Balance Sheet. When the underlying hedged transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the Consolidated Statement of Operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the effective portion of the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the Consolidated Balance Sheet.
We formally document our hedge relationships, including the identification of the hedging instruments and the related hedged items, as well as our risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded at fair value in prepaid expenses and other current assets, other long-term assets, other current liabilities and other long-term obligations in the consolidated balance sheets. We also formally assess, both at inception and at least quarterly thereafter,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
whether a derivative used in a hedging transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a derivative ceases to be highly effective, we discontinue hedge accounting.
Foreign Currency Derivatives
We enter into foreign currency derivatives from time to time to manage exposure to changes in currency exchange rates. These instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures, relating to non-dollar denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased foreign currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at fair value.
These contracts are treatedmay be designated as cash-flow or fair value hedges to the extent that they are effective. Changeseffective and are accounted for as described in fair values related to these contracts are recognized in other comprehensive income in the Consolidated Balance Sheets until settlement. At the time of settlement, realized gains and losses are recognized in revenue or cost of goods sold on the Consolidated Statements of Operations.section above (“Derivative Financial Instruments”). For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in Cost of Goods Sold or Other (Income) ExpenseSales on the Consolidated Statements of Operations. Derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency.
Commodity Derivative Contracts
We periodically enterhave entered into derivative contracts for natural gas and certain 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. All commodity contracts are carried at fair value and are treated as hedges to the extent they are effective. Changes in their fair values are included in accumulated other comprehensive lossincome (loss) in the Consolidated Balance Sheets until settlement. At the time of settlement of these hedge contracts, realizedRealized gains and losses resulting from settlement are recognized as part ofin accumulated other comprehensive income (loss) and are recorded in cost of goods soldsales on the Consolidated Statements of Operations.Operations when the underlying hedged item is realized.
ResearchInterest Rate Swap Contracts
We have entered into interet rate swap contracts that are "pay variable, receive fixed" with maturities of either two or five years. 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. All interest rate swaps are carried at their fair value and Development
Expenditures relating toare treated as cash flow hedges. Changes in their fair value are in included in accumulated other comprehensive income (loss) on the developmentConsolidated Balance Sheets until settlement. Realized gains and losses resulting from the settlement are recognized in interest expense in the period of new products and processes, including significant improvements to existing products, are expensed as incurred.settlement.
Income Taxes
We file a consolidated United States (“U.S.”)U.S federal income tax return for GTI and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained, when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Under the guidance on accounting for uncertainty in income taxes, we recognize the benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.
As a result of the enactment of the Tax Act of 2017, the Company is required to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Tax Income ("GILTI") as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred. See Note 13 "Income Taxes" for more information.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into a tax receivable agreement (the "TRA") that provides Brookfield, as the sole pre-initial public offering ("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 net operating losses ("NOLs"), previously taxed income under Section 959 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), foreign tax credits, and certain NOLs in Swissco (collectively, 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.
Retirement Plans and Postretirement Benefits
We use actuarial methods and assumptions to account for our defined benefit pension plans and our postretirement benefits. 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 (MTM Adjustment)with a mark-to-market adjustment ("MTM Adjustment") and whenever a plan is remeasured (e.g. due to a significant curtailment, settlement, etc.). Pension and postretirement benefits expense includes the MTM adjustment, actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets based on fair market values, and adjustments due to plan settlements and curtailments. Contributions to the qualified U.S. retirement plan are made in accordance with the requirements of the Employee Retirement Income Security Act of 1974.
Postretirement benefits and benefits under the non-qualified retirement plan have been accrued, but not funded. The estimated cost of future postretirement life insurance benefits is determined by the Company with assistance from independent actuarial firms using the “projected unit credit” actuarial cost method. Such costs are recognized as employees render the service necessary to earn the postretirement benefits. We record our balance sheet position based on the funded status of the plan.
We exclude the inactive participant portion of our pension and other postretirement benefit costs when calculating inventoriable costs. Additional information with respect to benefits plans is set forth in Note 12,11, “Retirement Plans and Postretirement Benefits.”
Environmental, Health and Safety Matters
Our operations are governed by laws addressing protection of the environment and worker safety and health. These laws provide for civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance and require remediation at sites where hazardous substances have been released into the environment.
We have been in the past, and may become in the future, the subject of formal or informal enforcement actions or proceedings regarding noncompliance with these laws or the remediation of company-related substances released into the environment. Historically, such matters have been resolved by negotiation with regulatory authorities resulting in commitments to compliance, abatement or remediation programs and in some cases payment of penalties. Historically, neither the commitments undertaken nor the penalties imposed on us have been material.
Environmental considerations are part of all significant capital expenditure decisions. Environmental remediation, compliance and management expenses were approximately $10.4$11.6 million, $12.4 million and $8.0 million in 2014, $6.5 million in 2015,2019, 2018 and $8.3 million in 2016. The accrued liability relating to environmental remediation was $5.0 million as of December 31, 2015 and $5.2 million as of December 31, 2016.2017, respectively. A charge to income is recorded when it is probable that a liability has been incurred and the cost can be reasonably estimated. When payments are fixed or determinable, the liability is discounted using a rate at which the payments could be effectively settled. The accrued liability relating to environmental remediation was $4.9 million as of December 31, 2019 and $4.2 million as of December 31, 2018. The increase in the liability was the result of a revised estimate for asset retirement obligations related to landfills.
Our environmental liabilities do not take into consideration possible recoveries of insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where we may be potentially liable, future expenses to remediate sites could be considerably higher than the accrued liability.
Foreign Currency Translation and Remeasurement
We translate the financial statements of foreign subsidiaries, whose local currency is their functional currency, to U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues, expenses, gains and losses. Differences arising from exchange rate changes are included in accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as the operations of such non-U.S. subsidiaries are sold or substantially or completely liquidated.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For our Mexican, Swiss, United Kingdom and Russian subsidiaries, whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses arising from the fluctuations in currency for monetary accounts are recognized in other (income) expense, net, in the Consolidated Statements of Operations. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred.
We have non-dollar denominated intercompany loans between some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. Certain of these loans had been deemed to be essentially permanent prior to settlement and, as a result, remeasurement gains and losses
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
on these loans were recorded as a component of accumulated other comprehensive income (loss) in the stockholders’ equity section of the Consolidated Balance Sheets. The remaining loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency (gains/losses)(gains) losses in other (income) expense, net, on the Consolidated Statements of Operations.
Rationalizations
We record costs for rationalization actions implemented to reduce excess and high-cost manufacturing capacity and operating and administrative costs. For ongoing post-employment benefit arrangements, a liability is recognized when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. These conditions are generally met when the rationalization plan is approved by management. For one-time benefit arrangements, a liability is incurred and must be accrued at the date the plan is communicated to employees, unless they will be retained beyond a minimum retention period. In this case, the liability is calculated at the date the plan is communicated to employees and is accrued ratably over the future service period. Other costs reported under Rationalization include contract termination costs.
In connection with rationalization initiatives, the company incurs additional costs such as inventory losses, fixed assets write-offs, impairment and accelerated depreciation as well as various non-recurring costs for dismantling, transferring or disposing of equipment and inventory. These rationalization related costs are measured and recorded based on the appropriate accounting guidance. Inventory losses are recorded in cost of sales. Fixed assets write-offs and accelerated depreciation are recorded in cost of sales, R&D and SG&A based upon the asset utilization. Other non-recurring costs are recorded in cost of sales and SG&A.
Goodwill and Other Intangible Assets
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. We do not recognize deferred income taxes for the difference between the assigned value and the tax basis related to nondeductible goodwill. Goodwill is not amortized; however, impairment testing is performed annually or more frequently if circumstances indicate that impairment may have occurred. We perform the annual goodwill impairment test annually at December 31.
The annual goodwill impairment testing may begin with a qualitative assessment of potential impairment indicators in order to determine whether it is necessary to perform the two-step goodwill impairment test.
The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying value. The fair value for each reporting unit with goodwill is determined in accordance with accounting guidance on determining fair value, which requires consideration of the income, market, and cost approaches as applicable. If the carrying value exceeds the fair value, there is potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment is recognized.
Other amortizable intangible assets, which consist primarily of trademarks and trade names, customer-related intangibles and technological know-how, are amortized over their estimated useful lives using the straight line or sum-of-the-years digits method. The estimated useful lives for each major category of amortizable intangible assets are:
|
| |
| | Years |
| Trade name | 5-105-20 |
| Technology and know-how | 5-95-14 |
| Customer related intangible | 5-145-15 |
Additional information about goodwill and other intangibles is set forth in Note 6, “Goodwill“Goodwill and Other Intangible Assets.Assets.”
Major Maintenance and Repair Costs
We perform scheduled major maintenance of the storage and processing units at our Seadrift plant (referred to as “overhaul”). Time periods between overhauls vary by unit. We also perform an annual scheduled significant maintenance and repair shutdown of the plant (referred to as “turnaround”).
Costs of overhauls and turnarounds include plant personnel, contract services, materials, and rental equipment. We defer these costs when incurred and use the straight-line method to amortize them over the period of
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
time estimated to lapse until the next scheduled overhaul of the applicable storage or processing unit. Under this policy, $0.8 million was deferred in 2015,2019 and $9.8 million of costs were deferred were $9.9in 2018. Amortization of deferred maintenance costs totaled $5.1 million, $3.1 million and costs amortized in the period January 1 through August 14, 2015 were $4.3 million and $2.1$3.3 million in 2019, 2018 and 2017, respectively.
Earnings per share
The calculation of basic earnings per share is based on the period Augustnumber of common shares outstanding after giving effect to the stock split effected on April 12, 2018 and common stock repurchases. Diluted earnings per share recognizes the dilution that would occur if stock options or restricted shares were exercised or converted into common shares. See Note 15, through December 31, 2015. We deferred no additional amounts in 2016 and amortization of deferred costs totaled $7.0 million.“Earnings Per Share”.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses. Significant estimates and assumptions are used for, but are not limited to inventory valuation, pension and other post-retirement benefits, allowance for doubtful accounts, contingent liabilities, accruals and valuation allowances, asset impairment, and environmental-related accruals. Actual results could differ from our estimates.
Discontinued Operations and Assets Held for Sale
When Management commits to a plan to sell assets or asset groups and a sale is probable, we reclassify those assets or asset groups into "Assets Held for Sale". Upon reclassification to assets held for sale, we evaluate the book value of the disposal groups against their fair value less costs to sell and as a result may impair the assets / asset groups. As and if new information becomes available on the fair value of the assets/asset groups , we may adjust accordingly the impairment.
Once the assets of a business have been classified as held for sale, we evaluate if the divestiture represents a strategic shift in operations and if so, we exclude the results of this business from continuing operations. All results are reported as gain or loss from discontinued operations, net of tax. During the second quarter of 2016, our Engineered Solutions business qualified as discontinued operations and as such, all its results have been excluded from continuing operations. See Note 3 "Discontinued Operations and Related Assets Held for Sale".
Reclassification
Certain amounts previously reported have been reclassified to conform to the current year presentation.
Subsequent Events
We evaluate events that occur after the balance sheet date but before financial statements are issued to determine if a material event requires our amending the financial statements or disclosing the event.
Predecessor and Successor Reporting
On August See Note 17 2015, the Company was acquired by affiliates of Brookfield Asset Management Inc. (see Note 2 "Preferred Share Issuance and Merger"). We elected to account"Subsequent Events" for the acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of GTI were adjusted to their fair market value as of August 15, 2015, as this was the day that Brookfield effectively took control of the Company.
Our consolidated statements of operations subsequent to the Merger will include amortization expense relating to the fair value adjustment of intangibles and depreciation expense based on the fair value of the Company's property, plant and equipment that had previously been carried at historical cost less accumulated depreciation. Therefore, the Company's financial information prior to the Merger is not comparable to the financial information subsequent to the Merger. As a result, the financial statements and certain note presentations are separated into two distinct periods, the period before the consummation of the Merger (labeled "Predecessor") and the period after the date of merger (labeled "Successor"), to indicate the application of the different basis of accounting between the periods presented.further details.
Recent Accounting Standards
Recently Adopted Accounting Standards
In November 2015February 2016, the Financial Accounting Standards Board (FASB)("FASB") issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which changes how deferred taxes are classified on our balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. We adopted the provisions of ASU 2015-17 as of December 31, 2015 on a prospective basis and as such we reclassified
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$10.7 million of current deferred tax assets and $23.3 million of current deferred tax liabilities to long term in our December 31, 2015 balance sheet.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 requires the recognition of adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. The effects of the adjustments to provisional amounts on depreciation, amortization or other income effects should be recognized in current-period earnings as if the accounting had been completed at the acquisition date. Disclosure of the portion of the adjustment recorded in current-period earnings that would have been reported in prior reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date is also required. The Company adopted ASU 2015-16 as of December 31, 2015. The adoption of ASU 2015-16 did not materially affect the Company's results of operations, statement of financial position or financial statement disclosures. See Note 2 "Preferred Share Issuance and Merger" for details of post-acquisition adjustments to goodwill.
In July 2015 the FASB issued ASU 2015-11, "Inventory - Simplifying the Measurement of Inventory""which requires companies to measure inventory (valued using first-in, first-out or average cost methods) at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The measurement of inventory valued using the last-in, first-out method is unchanged. ASU 2015-11 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years with early implementation permitted. The Company adopted ASU 2015-11 as of December 31, 2015 with no impact to the Company's financial position, results of operations or cash flows.
In April, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015 with early adoption permitted. The Company adopted ASU 2015-03 in the first quarter of 2016. We had no capitalized bank fees as of December 31, 2015 and $0.7 million of capitalized bank fees as of December 31, 2016 included within long-term debt.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. This ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU was expected to be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. On July 9, 2015, the FASB deferred the effective date to fiscal years beginning after December 15, 2017. During the fourth quarter of 2016, we completed the initial evaluation of the new standard and the related assessment and review of a representative sample of existing revenue contracts with our customers. We determined, on a preliminary basis, that although the timing and pattern of revenue recognition may change, the amount of revenue recognized during the year should remain substantially the same.
In February 2016, the FASB issued ASUUpdate ("ASU") No. 2016-02, Leases (Topic 842). Under this new guidance, a company will nowcompanies recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating theadopted ASU No. 2016-02 on January 1, 2019. The adoption impact of the adoption of this standard on itswas not material to our financial position, results of operations or cash flows. See Note 10 "Leases" for information regarding this standard and its adoption.
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill2017‑04, Intangibles‑Goodwill and Other (Topic 350). This guidance was issued to simplify the accounting for goodwill impairment. The guidance 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 this new guidance, 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. The guidance will become effective on a prospective basis for the Company on January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material effect on the Company’s 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 is effective for the the Company on January 1, 2020. The adoption of this standard will impact the timing of our credit losses; however, it is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
| |
(2) | Preferred Share Issuance and Merger |
Preferred Stock(2) Revenue from Contracts with Customers
On August 11, 2015,The Company adopted ASC 606 on January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the Company issued and sold to BCP IV GrafTech Holdings LP, an affiliate of Brookfield Asset Management Inc. (“Brookfield”) (i) 136,616 shares of a new Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), convertible into 19.9%delivery of the sharesCompany's goods and will provide financial statement readers with enhanced disclosures. The reported results for 2019 and 2018 reflect the application of Common StockASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous revenue guidance".
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method. Under this method, we could elect to apply the cumulative effect method to either all contracts as of the Company outstanding immediately priordate of initial application or only to such issuance and (ii) 13,384 sharescontracts that are not complete as of a new Series B Convertible Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock,” and, together withthat date. We elected to apply the Series A Preferred Stock, the “Preferred Stock”), for an aggregate purchase price of $150,000,000 in cash (the “Purchase Price”), under the Investment Agreement dated May 4, 2014 (the “Investment Agreement”) between the Company and Brookfield.
The closing of such issuance and sale occurred after the satisfactionmodified retrospective method to contracts that are not complete as of the closing conditions set forth indate of initial application. The cumulative effect of applying the Investment Agreement.
Pursuantnew guidance to the Investment Agreement, the Company reimbursed Brookfield for $500,000 in out-of-pocket fees and expenses (including fees and expensesall contracts with customers that were not completed as of legal counsel) incurred by Brookfield in connection with the transaction.
The proceeds from the issuance and sale were used by the Company, along with funds available under the Company’s $40 million delayed draw term loan facility, Revolving Facility and cash on hand,January 1, 2018 was to prepay the Company’s $200 million Senior Subordinated Notes due November 30, 2015.
Merger Agreement
On May 18, 2015, the Company entered intobe recorded as an Agreement and Plan of Merger (the “Merger Agreement”), dated May 17, 2015, with Brookfield (called “Parent” therein) and Athena Acquisition Subsidiary Inc. a wholly owned subsidiary of Parent (“Acquisition Sub”). Pursuantadjustment to the Merger Agreement, on May 26, 2015, Parent commenced a cash tender offer to purchase any and allaccumulated deficit as of the outstanding shares of Common Stock, par value $0.01 per share (the “Shares”), of the Company, atadoption date. As a purchase price of $5.05 per Share in cash (the “Offer Price”), on the terms and subject to the conditions set forth in the Offer to Purchase, dated May 26, 2015 (together with any amendments and supplements thereto, the “Offer to Purchase”) and in the related Letter of Transmittal (the “Letter of Transmittal” and, together with the Offer to Purchase, the “Offer”).result
On August 14, 2015, Acquisition Sub accepted for payment all Shares validly tendered in the Offer and not withdrawn prior to the expiration of the Offer, and payment of the Offer Price for such Shares was made promptly. On August 17, 2015, Acquisition Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger, each Share that was not tendered and accepted pursuant to the Offer (other than canceled Shares, dissenting Shares and Shares held by the Company’s subsidiaries or Parent’s subsidiaries (other than Acquisition Sub)) was canceled and converted into cash consideration in an amount equal to the Offer Price.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Business Combinationof using the modified retrospective method, there were no adjustments that were made to accounts on the Company's consolidated balance sheet as of January 1, 2018.
Impact of the adoption of ASC 606 on accounting policies
In accordance with ASC 606, 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.
To achieve this core principle, 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.
The computationCompany sells the majority of the fair valueits products directly to steel manufacturers located in various jurisdictions. The Company’s contracts consist of the total consideration at the datelonger-term take-or-pay sales contracts of acquisition follows:
|
| | | | | | | | | | | |
| Purchase Consideration |
| (In thousands except share price) |
| | | | | | | |
| | | # Shares | | Unit Price | | Amount |
| Convertible Preferred Equity | | | | | | |
| Series A and B | | 150 |
| | $ | 1,000.00 |
| | $ | 150,000 |
|
| Common Equity | | | | | | |
| Common Shares | | 139,397 |
| | $ | 5.05 |
| | $ | 703,955 |
|
| Net value of options | | | | | | $ | 382 |
|
| Total | | | | | | $ | 854,337 |
|
Recordinggraphite electrodes with terms of assets acquiredup to five years and liabilities assumed: The acquisition was accounted for using the acquisition method of accounting. Under the acquisition method, the identifiable assets acquired and the liabilities assumed are assigned a new basis of accounting reflecting their estimated fair values. The information included herein has been preparedshort-term purchase orders (deliveries within one year). Collectability is assessed based on the allocationcustomer’s ability and intention to pay, reviewing a variety of purchase price using estimatesfactors including the customer’s historical payment experience and published credit and financial information. Additionally, for multi-year contracts, we may require the customer to post a bank guarantee, guarantee of a parent, a letter of credit or a significant pre-payment.
The promises of delivery of graphite electrodes represent the distinct performance obligations of our contracts. A small portion of our sales consist of deliveries of by-products of the fair valuesmanufacturing processes, such as graphite powders, naphta and useful livesgasoil.
Given their nature, the Company’s performance obligations are satisfied at a point in time when control of assets acquiredthe products has been transferred to the customer. In most cases, control transfer is deemed to happen at the delivery point of the products defined under the incoterms, usually at time of loading the truck or the vessel. The Company has elected to treat the transportation activity as a fulfilment activity instead of as a distinct performance obligation, and liabilities assumedoutbound freight cost is accrued when the product delivery promises are satisfied.
The transaction price is determined based on the best available information determinedconsideration to which the Company will be entitled in exchange for transferring goods to the customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the assistanceCompany from a customer are excluded from the transaction price.
Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of independent valuations, quotedcumulative revenue under the contract will not occur. The Company’s contracts and customary practices involve few rebates or discounts. The Company provides a limited warranty on its products and may issue credit notes or replace products free of charge for valid quality claims; historically, quality claims have been insignificant and the Company records appropriate accruals for the estimated credit notes based on the historical statistical experience. Certain contracts provide for limited rebates when deliveries are late versus committed dates. These rebates are accrued for based on historical statistics of late deliveries on the contracts to which those terms apply.
Contracts that contain multiple distinct performance obligations require an allocation of the transaction price to each performance obligation based on a relative stand-alone selling price basis. The Company regularly reviews market conditions and internally approved pricing guidelines to determine stand-alone selling prices and management estimates.for the different types of its customer contracts. The stand-alone prices as known at contract inception are utilized as the basis to allocate the transaction price to the distinct performance obligations. The allocation of the transaction price to the performance obligations remains unchanged if stand-alone selling prices change after contract inception.
The following table summarizesCompany expenses sales commissions as earned as their amortization period would not extend beyond the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date:
|
| | | | |
| Net identifiable assets acquired | |
| | Cash | $ | 25,032 |
|
| | Accounts receivable | 94,298 |
|
| | Inventories | 344,765 |
|
| | Property, plant and equipment | 650,405 |
|
| | Intangible assets | 155,700 |
|
| | Deferred tax assets | 41,606 |
|
| | Prepaid and other current assets | 49,716 |
|
| | Other non-current assets | 8,428 |
|
| | Accounts payable | (68,005 | ) |
| | Short-term debt | (18,779 | ) |
| | Other accrued liabilities | (53,252 | ) |
| | Long-term debt | (367,811 | ) |
| | Other long-term liabilities | (101,648 | ) |
| | Deferred tax liabilities | (79,235 | ) |
| Net identifiable assets acquired | $ | 681,220 |
|
| | | |
| Goodwill | $ | 173,117 |
|
| | | |
| Net assets acquired | $ | 854,337 |
|
Goodwill: Goodwill of approximately $173.1 million was recognized for the acquisition and is calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was increased by $1.1 million in March 2016, as a result of a decreased inventory valuation of $2.0 million offset by an increase to deferred tax assets of $0.9 million.
| |
(3) | Discontinued Operations and Related Assets Held for Sale |
On February 26, 2016, the Company announced that it had initiated a strategic review of its Engineered Solutions business segment to better direct its resources and simplify its operations. Any potential sale of assets was prohibited by the Revolving Facility without approval of the requisite lenders thereunder. On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility (see Note 7 "Debt and Liquidity") which, among other things, permits the sale of assets with the restriction that the proceeds be utilized to pay down revolver borrowings. As of June 30, 2016, the Engineered Solutions segment qualified for reporting as discontinued operations as we expect the divestiture to be complete within 12 months of the qualification.
During the second quarter of 2016, we evaluated the fair value of the Engineered Solutions business segment utilizing the market approach (Level 3 measure). As a result, we incurred an impairment charge to our Engineered Solutions business segment of $105.6 million to align the carrying value with estimated fair value. The analysis was updated as of December 31, 2016, resulting in an additional impairment charge of $14.3 million. The estimate reflects Management’s view of the manneryear in which the Engineered Solutions business will be divested, including assumptions as to ifthey are incurred. These costs are recorded within selling and how it will be split, given the lines of business and asset groups that constitute the Engineered Solutionsadministrative expense.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
segment. Amongst other things,Disaggregation of Revenue
The following table provides information about disaggregated revenue by type of product and contract for 2019 and 2018:
|
| | | | | | | |
| | For the Year Ended December 31, 2019 | | For the
Year Ended
December 31, 2018 |
| | (Dollars in thousands) |
| Graphite Electrodes - Three- to five-year take-or-pay contracts | $ | 1,437,354 |
| | $ | 1,341,557 |
|
| Graphite Electrodes - Short-term agreements and spot sales | 260,979 |
| | 395,928 |
|
| By-products and other | 92,460 |
| | 158,425 |
|
| Total Revenues | $ | 1,790,793 |
| | $ | 1,895,910 |
|
Effective the split into groups influencesfirst quarter of 2019, the computationGraphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. The revenue category “By-products and Other” now includes re-sales of low-grade electrodes purchased from third party suppliers, which represent a minimal contribution to our profitability. For comparability purposes, the prior period has been recast to conform to this presentation.
Impact of New Revenue Guidance on Financial Statement Line Items
There would be no differences to the reported consolidated balance sheet, statement of operations and cash flows, as of and for the twelve months ended December 31, 2019 and 2018, had the previous revenue guidance still been in effect.
Contract Balances
Receivables, net of allowances for doubtful accounts, were $247.1 million as of December 31, 2019 and $248.3 million as of December 31, 2018. 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 impairment charge.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 assumptionscontract liabilities are recorded as current or long-term deferred revenue, depending on the lag between the pre-payment and estimates are subjectthe expected delivery of the related products. Additionally, under ASC 606, deferred revenue originates from contracts where the allocation of the transaction price to change until divestiture is completed and may be adjustedthe performance obligations based on their relative stand-alone selling prices results in the quarter thattiming of revenue recognition being different from the information becomes available.
On November 30, 2016, we completedtiming of the sale of our Fiber Materials Inc. business, which was a business line within our former Engineered Solutions business. The sale resulted in cash proceeds of $15.9 million and a loss of $0.2 million. We have the ability to realize up to $8.5 million of additional proceedsinvoicing. In this case, deferred revenue is amortized into revenue based on the earnings oftransaction price allocated to the Fiber Materials business over the 24 months following the transaction. We have elected to record this contingent consideration as itremaining performance obligations.
Current deferred revenue is realizedincluded in "Other accrued liabilities" and as such itlong-term deferred revenue is not part of the gain recognized thus farincluded in "Other long-term obligations" on the transaction.
Consolidated Balance Sheets. The following tables summarize the results of the Engineered Solutions business segment, reclassified as discontinued operations:table provides information about deferred revenue from contracts with customers (in thousands): |
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| | (dollars in thousands) |
| Net sales | $ | 260,160 |
| | $ | 98,024 |
| | $ | 55,608 |
| | $ | 115,336 |
|
| Cost of sales | 235,901 |
| | 94,817 |
| | 49,068 |
| | 98,440 |
|
| Gross profit | 24,259 |
| | 3,207 |
| | 6,540 |
| | 16,896 |
|
| Research and development | 5,107 |
| | 2,179 |
| | 1,265 |
| | 3,145 |
|
| Selling and administrative expenses | 29,550 |
| | 16,764 |
| | 8,627 |
| | 19,220 |
|
| Rationalizations | 3,679 |
| | 4,492 |
| | 791 |
| | (405 | ) |
| Impairment | 121,570 |
| | — |
| | — |
| | 119,907 |
|
| Operating loss | (135,647 | ) | | (20,228 | ) | | (4,143 | ) | | (124,971 | ) |
| Other expense (income) | (485 | ) | | (90 | ) | | (135 | ) | | (66 | ) |
| Interest expense | 1,320 |
| | 907 |
| | 918 |
| | 3,258 |
|
Loss from discontinued operations before income taxes | (136,482 | ) | | (21,045 | ) | | (4,926 | ) | | (128,163 | ) |
Benefit for income taxes on discontinued operations | (3,626 | ) | | (2,366 | ) | | — |
| | (1,189 | ) |
| Loss from discontinued operations | $ | (132,856 | ) | | $ | (18,679 | ) | | $ | (4,926 | ) | | $ | (126,974 | ) |
During 2014, GrafTech impaired certain long-lived assets and announced exiting the isomolded product line within our AGM product group resulting in the above impairment and rationalization charges.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The significant components of our Statements of Cash Flows for discontinued operations held for sale are as follows:
|
| | | | | | | |
| | Current deferred revenue | | Long-Term deferred revenue |
| | (Dollars in thousands) |
| Balance as of December 31, 2017 | $ | 20,784 |
| | $ | — |
|
| Increases due to cash received | 15,548 |
| | 8,241 |
|
| Revenue recognized | (30,803 | ) | | — |
|
| Foreign currency impact | (149 | ) | | (525 | ) |
| Balance as of December 31, 2018 | 5,380 |
| | 7,716 |
|
| Increases due to cash received | 7,961 |
| | — |
|
| Revenue recognized | (4,678 | ) | | — |
|
| Revision of estimates | — |
| | (694 | ) |
| Reclassification between long-term and current | 3,042 |
| | (3,042 | ) |
| Foreign currency impact | 71 |
| | (122 | ) |
| Balance as of December 31, 2019 | $ | 11,776 |
| | $ | 3,858 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15 Through September 30, 2015 | | For the Year Ended December 31, 2016 |
| | | | (dollars in thousands) | | |
| Depreciation and amortization | $ | 21,780 |
| | $ | 7,988 |
| | $ | 4,194 |
| | $ | 5,277 |
|
| Impairment | 121,570 |
| | — |
| | — |
| | 119,907 |
|
| Deferred income taxes | (3,626 | ) | | (2,366 | ) | | — |
| | (1,189 | ) |
| Cash received from divestitures | — |
| | — |
| | — |
| | 15,889 |
|
| Capital expenditures | 24,018 |
| | 10,104 |
| | 4,447 |
| | 4,713 |
|
| Credit Facility reductions | — |
| | — |
| | — |
| | (15,889 | ) |
The following table summarizespresents estimated revenues expected to be recognized in the carrying valuefuture related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the assetsreporting period (in thousands). The estimated revenues do not include contracts with original duration of one year or less.
|
| | | |
| | Three- to five-year take-or-pay contracts |
| | (Dollars in thousands) |
|
| 2020 | $ | 1,251,093 |
|
| 2021 | 1,211,036 |
|
| 2022 | 1,144,574 |
|
| 2023 and thereafter | 29,461 |
|
| Total | $ | 3,636,164 |
|
The majority of the long-term take-or-pay contracts are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. The estimated revenues for the year 2020 include our current expectation for the specified volume range contracts as well as for the impact of credit risk. The estimated revenues for the years 2021 and liabilitiesbeyond are based upon the mid-point of discontinued operations asthe volume range for those contracts with specified ranges.
In addition to the expected remaining revenue to be recognized with the longer-term sales contracts, the Company recorded $1,437.4 million and $1,341.6 million of revenue pursuant to these contracts in the year ended December 31, 20152019 and December 31, 2016.2018, respectively.
|
| | | | | | | |
| | As of December 31, 2015 | | As of
December 31, 2016 |
| | (dollars in thousands) |
| Assets of discontinued operations: | | | |
| Accounts receivable | $ | 20,425 |
| | $ | 17,094 |
|
| Inventories | 77,332 |
| | 71,816 |
|
| Prepaid expenses and other current assets | 524 |
| | 320 |
|
| Net property plant and equipment | 86,369 |
| | 79,048 |
|
| Other assets | 17,606 |
| | 12,608 |
|
| Total assets of discontinued operations prior to impairment | 202,256 |
| | 180,886 |
|
| | | | |
| Impairment of assets held for sale | — |
| | (119,907 | ) |
| | | | |
| Total assets of discontinued operations | $ | 202,256 |
| | $ | 60,979 |
|
| | | | |
| Liabilities of discontinued operations: | | | |
| Accounts payable | $ | 9,331 |
| | $ | 7,253 |
|
| Accrued income and other taxes | 3,113 |
| | 2,326 |
|
| Other accrued liabilities | 10,638 |
| | 10,463 |
|
| Total current liabilities of discontinued operations | 23,082 |
| | 20,042 |
|
| | | | |
| Other long-term obligations | 1,167 |
| | 850 |
|
| | | | |
| Total liabilities of discontinued operations | $ | 24,249 |
| | $ | 20,892 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Throughout 2013, 2014(3) Stock Based and 2015Other Management Compensation
Our Omnibus Equity Incentive Plan permits the Company undertook rationalization plans in order to streamline its organizationgranting of options, and lower its production costs. On October 31, 2013, we announced a global initiative to reduce our Industrial Materials segment's cost baseother stock-based awards (including restricted stock units and improve our competitive position.deferred share units). As part of this initiative, we ceased production at our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. On July 29, 2014, we announced additional rationalization initiatives to increase profitability, reduce cost and improve global competitiveness in our former Engineered Solutions segment, which impacted our Corporate, R&D and other. During the third quarter of 2014, we announced the conclusion of another phase of our on-going company-wide cost savings assessment. This resulted in changes to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. These actions were designed to reduce costs by a combination of reduced contractor costs, attrition, early retirements and layoffs. Additionally, the Company downsized its corporate functions by approximately 25 percent, relocated to a smaller, more cost effective corporate headquarters and established a new Technology and Innovation Center.
These initiatives were substantially complete as of December 31, 2016. 2019, the aggregate number of shares authorized under the plans since their initial adoption was 15,000,000. Shares issued upon vesting of awards or exercise of options are new share issuances. Upon the vesting or payment of stock awards, an employee may elect receipt of the full share amount and either pay the resulting taxes or sell shares in the open market to cover the tax obligation.
The rationalization liabilitynumber of stock-based awards granted by our Board of Directors for the years ended 2019, 2018 and 2017 were as follows:
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Award type: | | | | | |
| Stock options | 229,250 |
| | 979,790 |
| | — |
|
| Deferred share units | 31,829 |
| | 42,243 |
| | — |
|
| Restricted stock units | 260,640 |
| | 6,740 |
| | — |
|
Accounting for Stock-Based Compensation
Stock-based compensation expense recognized in 2019 was $2.1 million. A majority of the expense, $1.9 million, was recorded as Selling and Administrative Expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales. Stock-based compensation expense recognized was $1.2 million in 2018. A majority of the expense, $1.0 million, was recorded as Selling and Administrative Expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as Cost of Sales. There was 0 stock-based compensation expense recognized in 2017.
As of December 31, 2016 was $0.1 million consisting of the plan described below and severance payouts2019, unrecognized compensation cost related to prior rationalization plans. In Junenon-vested stock options, deferred share units and restricted stock units represents $7.6 million, which will be recognized over a weighted average period of 2016, we further impaired assets3.8 years. As of December 31, 2018, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units represents $5.4 million, which will be recognized over a weighted average period of 4.3 years.
Deferred Share Units and Restricted Stock Units. Compensation expense for deferred share units and restricted stock unit awards is based on the closing price of our South African facility within discontinued operations by $0.6 millioncommon stock on the date of grant, less forfeitures or cancellations of awards throughout the vesting period, which generally range between one and three years. The weighted average grant date fair value of deferred share units and restricted stock units was approximately $12.72 per share during 2019.
Deferred share units and restricted stock unit awards activity under the Omnibus Equity Incentive Plan for 2019 was as follows:
|
| | | | | | | |
| | | Number of Shares | | Weighted- Average Grant Date Fair Value |
| Outstanding unvested as of December 31, 2018 | | 27,570 |
| | $ | 12.88 |
|
| Granted | | 292,469 |
| | 12.72 |
|
| Cancelled | | (6,084 | ) | | 13.36 |
|
| Vested | | (31,239 | ) | | 12.30 |
|
| Outstanding unvested as of December 31, 2019 | | 282,716 |
| | $ | 12.83 |
|
During 2019, we granted 292,469 shares of deferred share units and restricted stock units to reflect a decline in market value. In December 2016, we further impaired assets relatedcertain directors, officers and employees at prices ranging from $11.14 to $13.36. Of the total deferred share units granted, 31,239 were granted to our facilityindependent directors in Brazil within continuing operations by $2.8 millionlieu of cash retainers and vested immediately upon grant. The remaining deferred share units and restricted stock units vest over a period of two to reflect a decline in market value.five years.
The following tables illustrate the impacts of these rationalization initiatives on our results of operations for 2014, 2015 and 2016.
|
| | | | | | | | | | | |
| For the Year Ended December 31, 2014 (Predecessor) |
| | Industrial Materials Segment | | Corporate, R&D and Other | | Total |
| | (Dollars in thousands) |
| Recorded in Cost of Sales | | | | | |
| Accelerated depreciation | $ | 22,388 |
| | $ | — |
| | $ | 22,388 |
|
| Inventory loss | 941 |
| | — |
| | 941 |
|
| Fixed asset write-offs and other | 5,552 |
| | — |
| | 5,552 |
|
| Recorded in Research and Development | | | | |
| Accelerated depreciation | — |
| | 2,312 |
| | 2,312 |
|
| Recorded in Selling and General Administrative | | | | |
| Accelerated depreciation | — |
| | 608 |
| | 608 |
|
| Other | 89 |
| | 515 |
| | 604 |
|
| Recorded in Rationalizations | | | | | |
| Severance and related costs | 5,040 |
| | 2,425 |
| | 7,465 |
|
| Contract terminations | 469 |
| | 11 |
| | 480 |
|
Total 2014 rationalization and related charges | $ | 34,479 |
| | $ | 5,871 |
| | $ | 40,350 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Options. Compensation expense for stock options is based on the estimated fair value of the option on the date of the grant. We calculate the estimated fair value of the option using the Black-Scholes option-pricing model. During 2019, we granted 229,250 options to certain of our officers and employees. The weighted average fair value of the options granted in 2019 was $5.13. During 2018, we granted 979,790 options to certain of our officers and employees. The weighted-average fair value of the options granted in 2018 was $6.08. There were no options granted in 2017. The weighted average assumptions used in our Black-Scholes option pricing model for options granted in 2019 and 2018 were as follows:
|
| | | | | |
| | For the Year Ended
December 31,2019 | | For the Year Ended December 31,2018 |
| Dividend yield | 2.39% - 3.05% |
| | 1.70% - 2.27% |
|
| Expected volatility | 50 | % | | 45 | % |
| Risk-free interest rate | 1.79% - 2.63% |
| | 2.84% - 2.98% |
|
| Expected term in years | 6.5 years |
| | 6.5 years |
|
|
| | | | | | | | | | | |
| For the Period January 1 Through August 14, 2015 (Predecessor) |
| | Industrial Materials Segment | | Corporate, R&D and Other | | Total |
| | (Dollars in thousands) |
| Recorded in Cost of Sales | | | | | |
| Accelerated depreciation | $ | 432 |
| | $ | 940 |
| | 1,372 |
|
| Inventory loss | (33 | ) | | — |
| | (33 | ) |
| Fixed asset write-offs and other | 1,715 |
| | — |
| | 1,715 |
|
| Recorded in Selling and General Administrative | | | | |
| Other | 400 |
| | 954 |
| | 1,354 |
|
| Recorded in Rationalizations | | | | | |
| Severance and related costs | 157 |
| | (168 | ) | | (11 | ) |
| Contract terminations | 25 |
| | — |
| | 25 |
|
| Total | $ | 2,696 |
| | $ | 1,726 |
| | $ | 4,422 |
|
Dividend Yield. Our dividend yield estimate is based on our expected dividends and the stock price on the grant date.
Expected Volatility. We estimate the volatility of our common stock at the date of grant based on the historical volatility of comparable companies over the most recent period commensurate with the expected life of the award.
Risk-Free Interest Rate. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.
Expected Term In Years. The expected life of awards granted represents the time period that the awards are expected to be outstanding. We determined the expected term of the grants using the “simplified” method as described by the SEC, since we do not have a history of stock option awards to provide a reliable basis for estimating such term.
The stock options vest over a five year period, with one-fifth of the award vesting on the anniversary date of the grant in each of the next five years. Options outstanding at December 31, 2019, have a weighted average remaining contractual life of 8.5 years, a weighted average remaining vesting period of 1.9 years, and an aggregate intrinsic value of zero. There were no options exercised during 2019 or 2018.
Stock options outstanding and exercisable under our plans at December 31, 2019 are:
|
| | | | | | | | | | | | | | | | |
| | | | | Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life in Years | | Weighted Average Exercise Prices | | Number Exercisable | | Weighted Average Exercise Prices |
| $11.14 | - | $20.00 | | 1,113,480 |
| | 8.5 | | $15.17 | | 181,822 |
| | $ | 15.73 |
|
|
| | | | | | | | | | | |
| For the Period August 15 Through December 31, 2015 (Successor) |
| | Industrial Materials Segment | | Corporate, R&D and Other | | Total |
| | |
| Recorded in Cost of Sales | | | | | |
| Inventory loss | $ | (649 | ) | | $ | — |
| | $ | (649 | ) |
| Fixed asset write-offs and other | 329 |
| | — |
| | 329 |
|
| Recorded in Selling and General Administrative | | | | |
| Other | 135 |
| | 290 |
| | 425 |
|
| Recorded in Rationalizations | | | | | |
| Severance and related costs | 154 |
| | 71 |
| | 225 |
|
| Contract terminations | 59 |
| | — |
| | 59 |
|
| Total | $ | 28 |
| | $ | 361 |
| | $ | 389 |
|
| | | | | | |
| For the Year Ended December 31, 2016 (Successor) |
| | Industrial Materials Segment | | Corporate, R&D and Other | | Total |
| | |
| Recorded in Cost of Sales | | | | | |
| Fixed asset write-offs and other | $ | 636 |
| | $ | — |
| | $ | 636 |
|
| Recorded in Selling and General Administrative | | | | |
| Other | 1,258 |
| | 412 |
| | 1,670 |
|
| Recorded in Rationalizations | | | | | |
| Severance and related costs | (52 | ) | | 111 |
| | 59 |
|
| Total | $ | 1,842 |
| | $ | 523 |
| | $ | 2,365 |
|
Stock option awards activity under the Omnibus Equity Incentive Plan for 2019 was as follows:
74
|
| | | | | | | |
| | | Number of Shares | | Weighted- Average Exercise Price |
| Outstanding unvested as of December 31, 2018 | | 968,720 |
| | $ | 15.68 |
|
| Granted | | 229,250 |
| | 12.90 |
|
| Vested | | (188,810 | ) | | 15.70 |
|
| Forfeited | | (77,502 | ) | | 14.87 |
|
| Outstanding unvested as of December 31, 2019 | | 931,658 |
| | $ | 15.06 |
|
As of December 31, 2019, we have 221,752 options expected to vest in the next year. There were 181,822 options exercisable as of December 31, 2019.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Incentive Compensation Plans
We have a global incentive program for our worldwide salaried and hourly employees, the Incentive Compensation Program (the “ICP”), which includes a stockholder-approved executive incentive compensation plan. The ICP is based primarily on adjusted earnings before income taxes, depreciation and amortization. The balance of our accrued liability for ICP was $6.9 million at December 31, 2019 and $10.4 million as of December 31, 2018.
(4) Segment Reporting
We previously operated two reportable business segments, Industrial Materials and Engineered Solutions. In the first quarter of 2016, the Company reorganized its businesses and moved the Refractory product line from the Industrial Materials segment to the Engineered Solutions segment. Additionally, advanced materials products will now be a part of the business segment where these products are produced. All prior period amounts have been recast to reflect this change.
During the second quarter of 2016, the Company decided to sell the businesses that comprised our Engineered Solutions segment to focus on our Industrial Materials segment. As such,Accordingly, the Engineered Solutions business qualified as held for saleheld-for-sale status and as such the related results have been excluded from continuing operations. See Note 3 "Discontinued Operations and Assets Held for Sale" for significant components of the results of our Engineered Solutions segment.
Our Industrial Materials segment manufactures and delivers high quality graphite electrodes and needle coke products. Electrodes are key componentsessential to the production of the conductive power systems used to produceEAF steel and other ferrous and non-ferrous metals. NeedlePetroleum needle coke, a crystalline form of carbon derived from decant oil, is thea key ingredient in, and israw material used primarily in the production of graphite electrodes.
During 2014, We utilize substantially all the needle coke that we produce internally to manufacture our graphite electrodes and as parta result approximately 95% of our initiative to decentralizerevenues from external customers are derived from the organizationsale of graphite electrodes and reduce the costs of the global headquarter functions, the performance measuregraphite electrode by-products from our manufacturing processes.
In 2019, one customer accounted for more than 10% of our existing segments was changednet sales. We believe this customer does not pose a significant concentration of risk, as sales to reflect our new management and operating structure. We currently exclude such expensesthis customer could be replaced by demand from the segment operating income measure and report them under “Corporate, R&D and Other Expenses” in order to reconcile to the consolidated operating income of the Company.
The following tables summarize financial information concerning our reportable segments and all prior periods have been recast to reflect our new methodology:
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Year Ended December 31, 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the Year Ended December 31, 2016 |
| | | | |
| | (Dollars in thousands) |
| Net sales to external customers: | | | | | | | |
| Industrial Materials | $ | 825,145 |
| | $ | 339,907 |
| | $ | 193,133 |
| | $ | 437,963 |
|
| | | | | | | | |
| Segment operating income (loss): | | | | | | | |
| Industrial Materials | $ | (51,300 | ) | | $ | (24,900 | ) | | $ | (2,529 | ) | | $ | (63,827 | ) |
| Corporate, R&D and Other expenses | (68,674 | ) | | (43,349 | ) | | (10,034 | ) | | (28,226 | ) |
| Total segment operating income (loss) | $ | (119,974 | ) | | $ | (68,249 | ) | | $ | (12,563 | ) | | $ | (92,053 | ) |
Reconciliation of segment operating income (loss) to loss from continuing operations before provision for income taxes: | | | | | | | |
| Other expense (income), net | $ | 2,920 |
| | $ | 1,421 |
| | $ | (813 | ) | | $ | (2,188 | ) |
| Interest expense | 35,736 |
| | 26,211 |
| | 9,999 |
| | 26,914 |
|
| Interest income | (320 | ) | | (363 | ) | | (6 | ) | | (358 | ) |
| Loss before provision for income taxes | $ | (158,310 | ) | | $ | (95,518 | ) | | $ | (21,743 | ) | | $ | (116,421 | ) |
Industrial Materials' operating loss for the year ended December 31, 2016 included $19.0 million of lower of cost or market inventory write-downs.
Industrial Materials' operating loss for the period January 1 through August 14, 2015 includes a $35.4 million goodwill impairment charge, $2.7 million of rationalization and related charges and $3.2 million of costs associated with the preferred share issuance. Corporate, R&D and Other expenses for the period January 1 through August 14, 2015 includes $19.4 million of costs associated with the preferred share issuance, tender offer and proxy contest and $1.7 million of rationalization and related costs.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating loss for the year ended December 31, 2014 includes a $76.1 million goodwill impairment charge in Industrial Materials. 2014 Operating loss also includes rationalization related charges of $34.5 million in Industrial Materials and $6.3 million in Corporate, R&D and Other expenses, as well as a pension mark-to-market loss of $3.5 million in Industrial Materials and $6.3 million in Corporate, R&D and Other expenses. Corporate, R&D and Other expenses includes $2.4 million of fees associated with proxy contest costs in 2014.
Assets are managed based on geographic location because certain continuing and discontinued operations share certain facilities. Assets by reportable segment are estimated based on the value of long-lived assets at each location and the activities performed at the location.All assets are assigned to our Industrial Materials segment as all of our operations exist to support that business.other customers.
The following tables summarize information as to our continuing operations in different geographic areas.
| | | | 2014 | | 2015 | | 2016 | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) | (Dollars in thousands) |
| Net sales:* | | | | | | |
| U.S. | $ | 195,264 |
| | $ | 107,517 |
| | $ | 74,526 |
| |
| Americas | 165,761 |
| | 132,917 |
| | 116,944 |
| |
| Net sales: | | | | | | |
| United States | | $ | 403,916 |
| | $ | 429,599 |
| | $ | 103,890 |
|
| Americas (excluding the United States) | | 348,670 |
| | 367,561 |
| | 129,103 |
|
| Asia Pacific | 80,832 |
| | 37,509 |
| | 41,302 |
| 172,439 |
| | 131,578 |
| | 46,329 |
|
| Europe, Middle East, Africa | 383,288 |
| | 255,097 |
| | 205,191 |
| 865,768 |
| | 967,172 |
| | 271,449 |
|
| Total | $ | 825,145 |
| | $ | 533,040 |
| | $ | 437,963 |
| $ | 1,790,793 |
| | $ | 1,895,910 |
| | $ | 550,771 |
|
* Net Sales were not impacted by purchase price accounting adjustments.
| | | | At December 31, | At December 31, |
| 2015 | | 2016 | 2019 | | 2018 |
(Dollars in thousands) | | Long-lived assets (a): | | | | | | |
| U.S. and Canada | $ | 209,634 |
| | $ | 191,502 |
| |
| United States | | $ | 174,307 |
| | $ | 169,301 |
|
| Mexico | 158,950 |
| | 151,288 |
| 141,621 |
| | 146,790 |
|
| Brazil | 8,787 |
| | 6,100 |
| 5,694 |
| | 3,320 |
|
| France | 76,535 |
| | 69,558 |
| 88,514 |
| | 91,022 |
|
| Spain | 93,049 |
| | 87,614 |
| 102,577 |
| | 103,121 |
|
| South Africa | 2,879 |
| | 2,547 |
| |
| Italy | 1,032 |
| | 10 |
| |
| Switzerland | 266 |
| | 192 |
| |
| Other countries | 31 |
| | 44 |
| 307 |
| | 151 |
|
| Total | $ | 551,163 |
| | $ | 508,855 |
| $ | 513,020 |
| | $ | 513,705 |
|
| |
| (a) | Long-lived assets represent fixed assets, net of accumulated depreciation. |
| |
(6) | Goodwill and Other Intangible Assets |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(5) Debt and Liquidity
The following table presents our long-term debt:
|
| | | | | | | |
| | As of
December 31, 2019 | | As of
December 31, 2018 |
| | (Dollars in thousands) |
| 2018 Credit Facility (2018 Term Loan and 2018 Revolving Facility) | $ | 1,812,204 |
| | $ | 2,155,883 |
|
| Other Debt | 619 |
| | 751 |
|
| Total Debt | 1,812,823 |
| | 2,156,634 |
|
| Less: Short-term Debt | (141 | ) | | (106,323 | ) |
| Long-term Debt | $ | 1,812,682 |
| | $ | 2,050,311 |
|
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.
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 our previously held 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 the sole pre-IPO stockholder, with any remainder to be used for general corporate purposes. See Note 7 "Interest Expense" for a breakdown of expenses associated with these repayments. In connection with the repayment of our previous credit agreement and redemption of our previously held senior notes, all guarantees of obligations under the previous credit agreement, the 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 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 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.
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
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 Parent"), 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 ending 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.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of a $750 million promissory note (the “Brookfield Promissory Note”) to the sole pre-IPO stockholder. The $750 million Brookfield 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 $750 million Brookfield Promissory Note and (iii) the satisfaction of the conditions occurring within 60 days from the dividend record date. Upon publication of our first quarter report on Form 10-Q, these conditions were met and, as a result, the Brookfield Promissory Note became payable.
The Brookfield 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 Brookfield Promissory Note) plus an applicable margin equal to 4.50% per annum,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
with an additional 2.00% per annum starting from the third anniversary from the date of issuance. We were permitted to make voluntary prepayments at any time without premium or penalty. All obligations under the Brookfield 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 the pre-IPO stockholder in connection with the Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Promissory Note was repaid in full on June 15, 2018.
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 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.
The proceeds of the Incremental Term Loans were used to repay, in full, the $750 million of principal outstanding on the Brookfield Promissory Note.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility.
(6) 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.
Our annual impairment test of goodwill was performed as of December 31, 2014 for all reporting units. The estimated fair values of our reporting units were determined based on For the income approach, using assumptions and estimates from the standpoint of potential market participants. Based on these valuations, the fair value for the needle coke reporting unit was below its carrying value resulting in a step two analysis and consequently a goodwill impairment charge of $76.1 million for the yearyears ended December 31, 2014.2019 and 2018 an assessment for potential impairment was performed and an impairment adjustment was not required.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We received notice, in March 2015, that the market prices for needle coke were decreasing by an additional 18%, effective for the second quarter of 2015. This decline further compressed our margins for needle coke products versus our annual plan assumptions. We determined that this change, which is driven by over capacity in the market indicated that the needle coke industry is facing a deeper and longer trough than previously expected. As such, we considered the additional price change as a triggering event for our Needle coke reporting unit and tested its goodwill for impairment as of March 31, 2015. In the first step of the analysis, we compared the estimated fair value of the reporting unit to its carrying value, including goodwill. The fair value of the reporting unit was determined based on an income approach, using a discounted cash-flow (“DCF”) model from a market participant’s perspective. The estimated future cash-flows were updated versus the year-end analysis to reflect the expectation of a longer trough. A discount rate of 10.5% was applied to the forecasted cash-flows and is based on a weighted average cost of capital ("WACC"). Company specific beta and mix of debt to equity are inputs into the determination of the WACC, which is then qualitatively assessed from the standpoint of potential market participants. Based on the step one analysis described earlier, the fair value of the needle coke reporting unit was below its carrying value, resulting in a step two analysis and consequently the full impairment of the needle coke goodwill, resulting in a charge of $35.4 million.
As a result of our acquisition by Brookfield, our goodwill and intangibles were revalued as of August 15, 2015. See Note 2 "Preferred Share Issuance and Merger" for description of the Merger and the results of purchase price accounting. The following tablestable represents the changes in the carrying value of goodwill and intangibles during the predecessor entity period of January 1, 2015 through August 14, 2015 and the successor entity from August 15, 2015 through December 31, 2016:
The changes in the Company’s carrying value of goodwill duringfor the years ended December 31, 20152018 and 2016 are as follows:2019:
|
| | | |
| | Total |
| | (Dollars in Thousands) |
| Balance as of December 31, 2017 | $ | 171,117 |
|
| Adjustments | — |
|
| Balance as of December 31, 2018 | 171,117 |
|
| Adjustments | — |
|
| Balance as of December 31, 2019 | $ | 171,117 |
|
|
| | | |
| | Total |
| Predecessor | (Dollars in Thousands) |
| Balance as of December 31, 2014 | $ | 420,129 |
|
| Impairment | (35,381 | ) |
| Currency translation effect | (616 | ) |
| Balance as of August 14, 2015 | $ | 384,132 |
|
| | |
| Successor | |
| Balance as of August 15, 2015 | $ | 170,418 |
|
| Adjustments | 1,641 |
|
| Balance as of December 31, 2015 | 172,059 |
|
| Adjustments (See Note 2) | 1,058 |
|
| Goodwill transferred to discontinued operations | (2,000 | ) |
| Balance as of December 31, 2016 | $ | 171,117 |
|
The following table summarizes acquired intangible assets with determinable useful lives by major category :which are included in Other Assets on our Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | As of December 31, 2018 |
Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (Dollars in Thousands) |
| Trade name | $ | 22,500 |
| | $ | (9,861 | ) | | $ | 12,639 |
| | $ | 22,500 |
| | $ | (7,721 | ) | | $ | 14,779 |
|
| Technology and know-how | 55,300 |
| | (29,112 | ) | | 26,188 |
| | 55,300 |
| | (23,503 | ) | | 31,797 |
|
| Customer related intangible | 64,500 |
| | (19,473 | ) | | 45,027 |
| | 64,500 |
| | (15,070 | ) | | 49,430 |
|
| Total finite-lived intangible assets | $ | 142,300 |
| | $ | (58,446 | ) | | $ | 83,854 |
| | $ | 142,300 |
| | $ | (46,294 | ) | | $ | 96,006 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2015 | | As of December 31, 2016 |
Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization / Impairment | | Net Carrying Amount |
| (Dollars in Thousands) | | (Dollars in Thousands) |
| Trade name | 22,500 |
| | (889 | ) | | 21,611 |
| | 22,500 |
| | (3,235 | ) | | 19,265 |
|
| Technology and know-how | 55,300 |
| | (2,900 | ) | | 52,400 |
| | 55,300 |
| | (10,397 | ) | | 44,903 |
|
| Customer related intangible | 64,500 |
| | (1,688 | ) | | 62,812 |
| | 64,500 |
| | (6,177 | ) | | 58,323 |
|
| Total finite-lived intangible assets | $ | 142,300 |
| | $ | (5,477 | ) | | $ | 136,823 |
| | $ | 142,300 |
| | $ | (19,809 | ) | | $ | 122,491 |
|
Amortization expense of intangible assets in 2014 was $18.4 million. Amortization expense of intangible assets was $10.5 million in the period January 1 through August 14, 2015 and $5.5 million in the period August 15 through December 31, 2015. Amortization expense of intangible assets totaled $14.3 million in 2016. Estimated
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense of intangible assets was $12.2 million, $12.9 million, $13.6 million in 2019, 2018 and 2017, respectively. Estimated annual amortization expense for the next five years will approximate $13.6$11.4 million in 2017, $12.9 million in 2018, $12.2 million in 2019, $11.4 million in 2020, $10.7 million in 2021, $10.1 million in 2022, $9.2 million in 2023 and $10.7$8.0 million in 2021.2024.
The following table presents our long-term debt:(7) Interest Expense
|
| | | | | | | |
| | As of
December 31, 2015 | | As of December 31, 2016 |
| | (Dollars in thousands) |
| Credit Facility (Revolving Facility and Term Loan Facility) | $ | 98,000 |
| | $ | 90,731 |
|
| Senior Notes | 267,827 |
| | 274,132 |
|
| Other Debt | 1,400 |
| | 569 |
|
| Total Debt | 367,227 |
| | 365,432 |
|
| Less: Short-term Debt | (4,772 | ) | | (8,852 | ) |
| Long-term Debt | $ | 362,455 |
| | $ | 356,580 |
|
Revolving Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement with a borrowing capacity of $400 million and a maturity date of April 2019 (the "Revolving Facility"). On February 27, 2015, GrafTech and certain of its subsidiaries entered into a further Amended and Restated Credit Agreement that provides for, among other things, greater financial flexibility and a $40 million senior secured delayed draw term loan facility (the "Term Loan Facility").
On July 28, 2015, GrafTech and certain of its subsidiaries entered into an amendment to the Amended and Restated Credit Agreement to change the terms regarding the occurrence of a default upon a change in control (which is defined thereunder to include the acquisition by any person of more than 25 percent of GrafTech’s outstanding shares) to exclude the acquisition of shares by Brookfield (see Note 2). In addition, effective upon such acquisition, the financial covenants were eased, resulting in increased availability under the Revolving Facility. The size of the Revolving Facility was also reduced from $400 million to $375 million. The size of the Term Loan Facility remained at $40 million.
On April 27, 2016, GrafTech and certain of its subsidiaries entered into an amendment to the Revolving Facility. The size of the Revolving Facility was permanently reduced from $375 million to $225 million. New covenants were also added to the Revolving Facility, including a requirement to make mandatory repayments of outstanding amounts under the Revolving Facility and the Term Loan Facility with the proceeds of any sale of all or any substantial part of the assets included in the Engineered Solutions segment and a requirement to maintain minimum liquidity (consisting of domestic cash, cash equivalents and availability under the Revolving Facility) in excess of $25 million. The covenants were also modified to provide for: the elimination of certain exceptions to the Company’s negative covenants limiting the Company’s ability to make certain investments, sell assets, make restricted payments, incur liens and incur debt; a restriction on the amount of cash and cash equivalents permitted to be held on the balance sheet at any one time without paying down the Revolving Facility and the Term Loan Facility; and changes to the Company’s financial covenants so that until the earlier of March 31, 2019 or the Company has $75 million in trailing twelve month EBITDA (as defined in the Revolving Facility), the Company is required to maintain trailing twelve month EBITDA above certain minimums ranging from ($40 million) to $35 million after which the Company’s existing financial covenants under the Revolving Facility will apply.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
With this amendment, the Company has full access to the $225 million Revolving Facility, subject to the $25 million minimum liquidity requirement. As of December 31, 2016, the Company had $61.2 million of borrowings on the Revolving Facility and $12.3 million of letters of credit drawn against the Revolving Facility.
The $40 million Term Loan Facility was fully drawn on August 11, 2015, in connection with the repayment of the Senior Subordinated Notes. The balance of the Term Loan Facility was $29.5 million as of December 31, 2016.
The interest rate applicable to the Revolving Facility and Term Loan Facility is LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio). The borrowers pay a per annum fee ranging from 0.35% to 0.70% (depending on our senior secured leverage ratio) on the undrawn portion of the commitments under the Revolving Facility.
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 Revolving Facility, to the extent available. We will use cash proceeds from the sale of our Engineered Solutions businesses to repay borrowings outstanding under the Revolving Facility and the Term Loan. We cannot assure you that we will, or will be able to, consummate any such sales on acceptable terms or at all or as to the price, terms or conditions of any such sales.
As of December 31, 2016, we were in compliance with all financial and other covenants contained in the Revolving Facility, as applicable.
Senior Notes
On November 20, 2012, the Company issued $300 million principal amount of 6.375% Senior Notes due 2020 (the "Senior Notes"). The Senior Notes are the Company's senior unsecured obligations and rank pari passu with all of the Company's existing and future senior unsecured indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's existing and future subsidiaries that guarantee certain other indebtedness of the Company or another guarantor.
The Senior Notes bear interest at a rate of 6.375% per year, payable semi-annually in arrears on May 15 and November 15 of each year. The Senior Notes mature on November 15, 2020.
The Company is entitled to redeem some or all of the Senior Notes at any time on or after November 15, 2016, at the redemption prices set forth in the indenture. In addition, prior to November 15, 2016, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium determined as set forth in the indenture.
If, prior to maturity, a change in control (as defined in the indenture) of the Company occurs and thereafter certain downgrades of the ratings of the Senior Notes as specified in the indenture occur, the Company will be required to offer to repurchase any or all of the Senior Notes at a repurchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus any accrued and unpaid interest. On August 17, 2015 a change in control occurred due the merger (see Note 2 to the Financial Statements). However, the downgrade of the ratings of the Senior Notes, as specified in the indenture, did not occur. Therefore, the company was not and will not be required to offer to repurchase the Senior Notes as a result of the merger.
The indenture for the Senior Notes also contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to: (i) create liens or use assets as security in other transactions; (ii) engage in certain sale/leaseback transactions; and (iii) merge, consolidate or sell, transfer, lease or dispose of substantially all of their assets.
The indenture for the Senior Notes also contains customary events of default, including (i) failure to pay principal or interest on the Senior Notes when due and payable, (ii) failure to comply with covenants or agreements in the indenture or the Senior Notes which failures are not cured or waived as provided in the indenture, (iii) failure to pay indebtedness of the Company, any Subsidiary Guarantor or Significant Subsidiary (each, as defined in the indenture) within any applicable grace period after maturity or acceleration and the total amount of such indebtedness unpaid or accelerated exceeds $50.0 million, (iv) certain events of bankruptcy, insolvency, or reorganization, (v) failure to pay any judgment or decree for an amount in excess of $50.0 million against the Company, any Subsidiary Guarantor or
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
any Significant Subsidiary that is not discharged, waived or stayed as provided in the indenture, (vi) cessation of any Subsidiary Guarantee (as defined in the indenture) to be in full force and effect or denial or disaffirmance by any subsidiary guarantor of its obligations under its subsidiary guarantee, and (vii) a default under the Company's Senior Subordinated Notes. In the case of an event of default, the principal amount of the Senior Notes plus accrued and unpaid interest may be accelerated.
Senior Subordinated Notes
On November 30, 2010, in connection with the acquisitions of Seadrift Coke LP and C/G Electrodes, LLC, the Company issued Senior Subordinated Notes in an aggregate total face amount of $200 million. These Senior Subordinated Notes were non-interest bearing and matured in 2015. Because the Senior Subordinated Notes were non-interest bearing, the Company was required to record them at their present value (determined using an interest rate of 7%). The difference between the face amount of the Senior Subordinated Notes and their present value is recorded as debt discount. The debt discount was amortized to income using the interest method, over the life of the Senior Subordinated Notes.
On July 9, 2015, the Company provided notice to all holders of the Senior Subordinated Notes that, as permitted under the Senior Subordinated Notes, the Company intended to prepay in full the entire $200 million aggregate principal amount of the Senior Subordinated Notes after the Company's receipt of the proceeds of the issuance of Preferred Stock to Brookfield. See Note 2 for further discussion of the Preferred Stock issuance. This prepayment was consummated on August 11, 2015.
The following table presents an analysis of interest expense:
|
| | | | | | | | | | | |
| | For the Year Ended December 31 |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| Interest incurred on debt | $ | 121,010 |
| | $ | 100,844 |
| | $ | 24,060 |
|
| Related Party Promissory Note interest expense | — |
| | 5,090 |
| | — |
|
| Senior Note redemption premium | — |
| | 4,782 |
| | — |
|
| Accretion of fair value adjustment on Senior Notes | — |
| | 19,414 |
| | 6,454 |
|
| Accretion of original issue discount on 2018 Term Loans | 2,196 |
| | 1,455 |
| | — |
|
| Amortization of debt issuance costs | 4,125 |
| | 3,476 |
| | 309 |
|
| Total interest expense | $ | 127,331 |
| | $ | 135,061 |
| | $ | 30,823 |
|
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the year Ended December 31,2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | For the year Ended December 31,2016 |
| | (Dollars in thousands) |
| Interest incurred on debt | $ | 20,099 |
| | $ | 12,066 |
| | $ | 7,694 |
| | $ | 20,408 |
|
Amortization of discount on Senior Subordinated Notes | 12,298 |
| | 12,027 |
| | — |
| | — |
|
Accretion of fair value adjustment on Senior Notes | — |
| | — |
| | 2,305 |
| | 6,305 |
|
| Amortization of debt issuance costs | 3,339 |
| | 2,118 |
| | — |
| | 201 |
|
| Total interest expense | $ | 35,736 |
| | $ | 26,211 |
| | $ | 9,999 |
| | $ | 26,914 |
|
Interest rates
The 2018 Credit Agreement had an effective interest rate of 5.30% as of December 31, 2019 and 6.02% as of December 31, 2018. The Old Revolving Facility and Old Term Loan Facility had an effective interest rate of 2.68% and 5.52%4.57% as of December 31, 20152017 and 2016, respectively. Thethe Senior Notes carry anhad a fixed interest rate of 6.375%. The Senior Subordinated Notes had an implied rate, both of 7.00%.
On August 11, 2015, we prepaidwhich were repaid on February 12, 2018 as part of our Senior Subordinated Notes (seerefinancing (See Note 75 "Debt and Liquidity"). This
As a result of our February 12, 2018 refinancing, we paid a prepayment resultedpremium for the redemption of our Senior Notes totaling $4.8 million. The accretion of the August 15, 2015 fair value adjustment to our Senior Notes totaling $19.4 million in 2018, included accelerated accretion of $18.7 million resulting from the prepayment. Amortization of debt issuance costs included $0.3 million of accelerated amortization of $4.5 million asrelated to the Notes were prepaid at the face value. The accelerated expense was recorded in the predecessor period.refinancing.
| |
(9) | Fair Value Measurements and Derivative Instruments |
(8) Fair Value Measurements and Derivative Instruments
Fair Market Value Measurements
Depending on the inputs, we classify each fair value measurement as follows:
Level 1 – based upon quoted prices for identical instruments in active markets,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Level 2 – based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations of all of whose significant inputs are observable, and
| |
| • | Level 1 – based upon quoted prices for identical instruments in active markets, |
| |
| • | Level 2 – based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations of all of whose significant inputs are observable, and |
Level 3 – based upon one or more significant unobservable inputs.
The following section describes key inputs and assumptions used in valuation methodologies of our assets and liabilities measured at fair value on a recurring basis:
Cash and cash equivalents, short-term notes and accounts receivable, accounts payable and other current payables – The carrying amount approximates fair value because of the short maturity of these instruments.
Debt – The fair value of our debt as of December 31, 2015, was $273.4 million versus a2019 and December 31, 2018 approximated book value of $367.2 million. As of December 31, 2016, the fair value was $342.1$1,812.8 million versus a book value of $365.4 million.and $2,156.6 million, respectively. The fair values of the Senior Notes and the Revolving Facility were determined using level 1 and level 3 inputs, respectively.
Assets held for sale – Assets held for sale values are determined using Level 3 fair value inputs. These represent management's estimate of fair value based upon current quotes from participants in the sales process.
Foreign currency derivatives – Foreign currency derivatives are carried at market value using Level 2 inputs. There were noWe had an outstanding gains or lossesgain of $0.2 million as of December 31, 20152019 and $0.2an outstanding loss of $0.1 million of outstanding losses as of December 31, 2016.2018.
Commodity derivative contracts – Commodity derivative contracts are carried at fair value. We determine the fair value using observable, quoted natural gas and refined oil product prices that are determined by active markets and therefore classify the commodity derivative contracts as Level 2. There were noWe had outstanding gains orof $0.5 million and outstanding losses of $4.1 million as of December 31, 20152019 and 2016.outstanding gains of $0.3 million and outstanding losses of $11.0 million as of December 31, 2018.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest rate swap contracts – Interest rate swap contracts are carried at fair value. We determine the fair value using the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present amount reflecting current market expectations about those future amounts. We had outstanding unrealized gains of $2.9 million and outstanding unrealized losses of $0.1 million as of December 31, 2019.
Additional fair value information related to our Pension funds' assets can be found in Note 1211 "Retirement Plans and Postretirement Benefits".
Derivative Instruments
We use derivative instruments as part of our overall foreign currency and commodity risk management strategies to manage the risk of exchange rate movements that would reduce the value of our foreign cash flows 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 US Dollar.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 counter-parties 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, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. There was
We had no ineffectiveness on these contracts during the twelve months endedforeign currency cash flow hedges outstanding as of December 31, 20152019 and December 31, 2018 and therefore, no unrealized gains or 2016.losses reported under accumulated other comprehensive income (loss).
In 2015 and 2016,As of December 31, 2019, we entered into foreign forward currency derivatives as hedges of anticipated cash flows denominated in thehad outstanding Mexican peso, South African rand, euro, and Japanese yen. These derivatives were entered into to protect the risk that the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates between the US dollar and the Mexican peso, South African rand, euro and Japanese yen. As of December 31, 2015, we had outstanding Mexican peso, Brazilian real, South African rand, euro,Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $18.7 million.$78.8 million. As of December 31, 2016,2018, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $22.6 million.$19.6 million. The foreign currency derivatives outstanding as of December 31, 2016 have a2019 had maturity date ofdates from January 27 2017.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2020 to March 2020, and were not designated as hedging instruments.
Commodity derivative contracts
We may periodically enterhave entered into commodity derivative contracts for natural gas and certain 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. WeIn the fourth quarter of 2017, we began to enter into three- to five-year take-or-pay contracts with many of our customers and began to hedge the cash flows related to these contracts. As of December 31, 2019, we had no outstanding commodity derivative contracts with a notional amount of $99.5 million and maturities from January 2020 to June 2022. As of December 31, 2018, we had outstanding commodity derivative contracts with a notional amount of $142.1 million with maturities from January 2019 to June 2022. Within Accumulated Other Comprehensive income (loss), we had a net unrealized pre-tax loss of $3.7 million and a net unrealized pre-tax loss of $10.7 million as of December 31, 2016.2019 and 2018, respectively. The fair value of these contracts was determined using Level 2 inputs.
In the fourth quarter of 2019, we released $0.4 million from accumulated other comprehensive income to cost of sales. This resulted from a portion of our commodity derivative contracts failing to qualify for hedge accounting.
Interest rate swap contracts
During the third quarter of 2019, the Company entered into 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. The Company’s risk management objective was to fix its cash flows associated with the risk in variability in the one-month US 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. Within accumulated other comprehensive income we recorded a net unrealized pre-tax gain of $2.9 million as of December 31, 2019. The fair value of these contracts was determined using Level 2 inputs.
Net Investment Hedges
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was $11.8$5.5 million and $13.3$9.5 million as of December 31, 20152019 and December 31, 2016,2018, respectively. Within our currency translation adjustment portion of other comprehensive income (loss), we recorded 0 gain or loss in 2019, and a gain of $1.4$2.2 million in the year ended December 31, 2015, and a loss of $1.5 million in the year ended December 31, 2016,2018, resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31, 20152019 and 2016,2018, the fair value of our derivatives and their respective balance sheet locations are presented in the following table:
|
| | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | Location | | Fair Value | | Location | | Fair Value |
| As of December 31, 2019 | (Dollars in thousands) |
| Derivatives designated as cash flow hedges: | | | | | | |
| Commodity derivative contracts | Prepaid and other current assets | | $ | 104 |
| | Other accrued liabilities | | $ | 1,872 |
|
| | Other long-term assets | | 369 |
| | Other long-term obligations | | 2,255 |
|
| Interest rate swap contracts | Prepaid and other current assets | | 253 |
| | Other accrued liabilities | | — |
|
| | Other long-term assets | | 2,684 |
| | Other long-term obligations | | 72 |
|
| Total fair value | | | $ | 3,410 |
| | | | $ | 4,199 |
|
| | | | | | | | |
| As of December 31, 2018 | | | | | | | |
| Commodity derivative contracts | Prepaid and other current assets | | $ | 90 |
| | Other accrued liabilities | | $ | 4,630 |
|
| | Other long-term assets | | 260 |
| | Other long-term obligations | | 6,393 |
|
| Total fair value | | | $ | 350 |
| | | | $ | 11,023 |
|
| | | | | | | | |
|
| | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | Location | | Fair Value | | Location | | Fair Value |
| As of December 31, 2019 | (Dollars in Thousands) |
| Derivatives not designated as hedges: | | | | | | |
| Foreign currency derivatives | Prepaid and other current assets | | $ | 239 |
| | Other current liabilities | | $ | 81 |
|
| Commodity derivative contracts | Prepaid and other current assets | | 376 |
| | Other accrued liabilities | | — |
|
| Total fair value | | | $ | 615 |
| | | | $ | 81 |
|
| | | | | | | | |
| As of December 31, 2018 | | | | | | | |
| Derivatives not designated as hedges: | | | | | | |
| Foreign currency derivatives | Prepaid and other current assets | | $ | — |
| | Other current liabilities | | $ | 43 |
|
As a result of the settlement of commodity derivative contracts, as of December 31, 2019 and December 31, 2018, net realized pre-tax gains of $3.5 million and $7.0 million, respectively, were reported in accumulated other comprehensive income (loss) and will be released to earnings within the next 12 months.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | Location | | Fair Value | | Location | | Fair Value |
| As of December 31, 2015 | (Dollars in Thousands) |
| Derivatives not designated as hedges: | | | | | | | |
| Foreign currency derivatives | Prepaid and other current assets | | $ | 76 |
| | Other current liabilities | | $ | 11 |
|
| Total fair value | | | $ | 76 |
| | | | $ | 11 |
|
| | | | | | | | |
| As of December 31, 2016 | | | | | | | |
| Derivatives not designated as hedges: | | | | | | | |
| Foreign currency derivatives | Prepaid and other current assets | | $ | 10 |
| | Other current liabilities | | $ | 188 |
|
| Total fair value | | | $ | 10 |
| | | | $ | 188 |
|
The location and amount of realized (gains) losses on derivatives are recognized in the Statements of Operations when the hedged item impacts earnings and are as follows for the years ended 2015December 31, 2019, 2018 and 2016:2017:
|
| | | | | | | | | | | | | | |
| | | | | Amount of (Gain)/Loss Recognized |
| | | Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations | | 2019 | | 2018 | | 2017 |
| Derivatives designated as cash flow hedges: | | (Dollars in thousands) | | |
| Commodity derivative contracts | | Cost of sales | | $ | (8,892 | ) | | $ | (919 | ) | | $ | — |
|
| Interest rate swaps | | Interest expense | | (1,050 | ) | | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of (Gain)/Loss Recognized (EffectivePortion) |
| | | Location of (Gain)/Loss Reclassified from Other Comprehensive Income (Effective Portion) | | 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | 2016 |
| Derivatives designated as cash flow hedges: | | (Dollars in Thousands) |
Foreign currency derivatives, excluding tax of $85, $106, $17 and $32, respectively | | Revenue/Cost of goods sold Other expense / (income) | | $ | (849 | ) | | $ | (1,062 | ) | | $ | (172 | ) | | $ | (322 | ) |
Commodity forward derivatives, excluding tax of $(120), $(424) and $0 respectively | | Cost of goods sold | | $ | 328 |
| | $ | 1,161 |
| | $ | — |
| | $ | — |
|
82
|
| | | | | | | | | | | | | | |
| | | | | Amount of (Gain)/Loss Recognized |
| | | Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations | | 2019 | | 2018 | | 2017 |
| Derivatives not designated as hedges: | | (Dollars in thousands) | | |
| Foreign currency derivatives | | Cost of sales, Other expense/(income) | | $ | (506 | ) | | $ | (522 | ) | | $ | (1,565 | ) |
| Commodity derivative contracts | | Cost of sales | | (223 | ) | | — |
| | — |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of (Gain)/Loss Recognized |
| | | Location of (Gain)/Loss Recognized in the Consolidated Statement of Income | | 2014 | | For the Period January 1
Through
August 14, 2015 | | For the Period August 15 Through December 31, 2015 | | 2016 |
| Derivatives not designated as hedges: | | (Dollars in thousands) |
| Foreign currency derivatives | | Cost of goods sold / Other expense / (income) | | $ | 1,020 |
| | $ | 1,060 |
| | $ | (560 | ) | | $ | 549 |
|
Our foreign currency and commodity derivatives are treated as hedges and are required to be measured at fair value on a recurring basis. With respect to the inputs used to determine the fair value, we use observable, quoted rates that are determined by active markets and, therefore, classify the contracts as “Level 2”.
| |
(10)(9) | Supplementary Balance Sheet Detail |
The following tables present supplementary balance sheet details:
|
| | | | | | | |
| | As of
December 31, 2019 | | As of
December 31, 2018 |
| | (Dollars in thousands) |
| Inventories: | | | |
| Raw materials and supplies | $ | 104,820 |
| | $ | 99,935 |
|
| Work in process | 137,230 |
| | 125,767 |
|
| Finished goods | 71,598 |
| | 68,015 |
|
| | $ | 313,648 |
| | $ | 293,717 |
|
| Prepaid expenses and other current assets: | | | |
| Prepaid expenses | $ | 9,986 |
| | $ | 10,720 |
|
| Value added tax and other indirect taxes receivable | 13,890 |
| | 19,242 |
|
| Spare parts inventory | 12,738 |
| | 11,507 |
|
| Other current assets | 4,332 |
| | 4,699 |
|
| | $ | 40,946 |
| | $ | 46,168 |
|
| Property, plant and equipment: | | | |
| Land and improvements | $ | 46,548 |
| | $ | 45,947 |
|
| Buildings | 71,784 |
| | 68,680 |
|
| Machinery and equipment and other | 567,715 |
| | 532,084 |
|
| Construction in progress | 47,370 |
| | 42,131 |
|
| | $ | 733,417 |
| | $ | 688,842 |
|
| Other accrued liabilities: | | | |
| Payrolls (including incentive programs) | $ | 11,801 |
| | $ | 17,284 |
|
| Employee benefits | 7,416 |
| | 6,977 |
|
| Deferred Revenue | 11,776 |
| | 5,380 |
|
| Other | 17,342 |
| | 20,811 |
|
| | $ | 48,335 |
| | $ | 50,452 |
|
| Other long term obligations: | | | |
| Postretirement benefits | $ | 16,528 |
| | $ | 16,192 |
|
| Pension and related benefits | 37,431 |
| | 33,718 |
|
| Other | 18,603 |
| | 22,609 |
|
| | $ | 72,562 |
| | $ | 72,519 |
|
|
| | | | | | | |
| | At December 31, |
| 2015 | | 2016 |
| | (Dollars in thousands) |
| | | | |
| Inventories: | | | |
| Raw materials and supplies | $ | 66,201 |
| | $ | 54,469 |
|
| Work in process | 89,453 |
| | 52,379 |
|
| Finished goods | 62,476 |
| | 49,263 |
|
| | 218,130 |
| | 156,111 |
|
| Prepaid expenses and other current assets: | | | |
| Prepaid expenses | $ | 9,041 |
| | $ | 6,096 |
|
| Value added tax and other indirect taxes receivable | 10,069 |
| | 12,984 |
|
| Other current assets | 2,040 |
| | 2,585 |
|
| | $ | 21,150 |
| | $ | 21,665 |
|
| Property, plant and equipment: | | | |
| Land and improvements | $ | 44,052 |
| | $ | 43,737 |
|
| Buildings | 55,843 |
| | 55,440 |
|
| Machinery and equipment and other | 431,226 |
| | 460,892 |
|
| Construction in progress | 40,208 |
| | 25,635 |
|
| | $ | 571,329 |
| | $ | 585,704 |
|
| Other accrued liabilities: | | | |
| Payrolls (including incentive programs) | $ | 4,028 |
| | $ | 4,802 |
|
| Employee compensation and benefits | 6,199 |
| | 11,439 |
|
| Other | 10,760 |
| | 14,278 |
|
| | $ | 20,987 |
| | $ | 30,519 |
|
| Other long term obligations: | | | |
| Postretirement benefits | $ | 20,102 |
| | $ | 19,002 |
|
| Pension and related benefits | 55,364 |
| | 45,876 |
|
| Other | 18,852 |
| | 17,270 |
|
| | $ | 94,318 |
| | $ | 82,148 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents an analysis of the allowance for doubtful accounts:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | |
| Balance at beginning of year | $ | 1,129 |
| | $ | 1,097 |
| | $ | 326 |
|
| Additions | 4,636 |
| | 122 |
| | 771 |
|
| Deductions | (291 | ) | | (90 | ) | | — |
|
| Balance at end of year | $ | 5,474 |
| | $ | 1,129 |
| | $ | 1,097 |
|
|
| | | | | | | | | | | | | | | |
| | 2014 | | For the Period January 1 through
August 14, 2015 | | For the Period August 15 through December 31, 2015 | | 2016 |
| | (Dollars in thousands) |
| Balance at beginning of year | $ | 6,262 |
| | $ | 6,969 |
| | $ | — |
| | $ | 244 |
|
| Additions | 3,520 |
| | 85 |
| | 244 |
| | 129 |
|
| Deductions | (2,813 | ) | | (1,177 | ) | | — |
| | (47 | ) |
| Balance at end of year | $ | 6,969 |
| | $ | 5,877 |
| | $ | 244 |
| | $ | 326 |
|
| |
(11)(10) | CommitmentsLeases |
LeaseWe lease certain transportation and mobile manufacturing equipment such as railcars and forklifts, as well as real estate.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 842 on January 1, 2019, which requires that all leases, financing and operating, be included on the balance sheet. The Company adopted ASC 842 using the modified retrospective approach under which prior periods’ financial statements are not restated and a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption is recorded, if applicable. The Company elected to adopt the transition package of practical expedients for lease identification, classification, initial direct costs and hindsight. At the adoption of ASC 842 on January 1, 2019, the Company recognized right-of-use ("RoU") assets and corresponding operating lease liabilities of $7.5 million with no cumulative-effect adjustment to retained earnings.
We determine if an arrangement is a lease at lease inception. When an arrangement contains a lease, we then determine if it meets any of the criteria for a financing lease. Leases with a term of 12 months or less are not recorded on the balance sheet.
RoU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. RoU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term.
In order to compute the lease liability, when the rate implicit in the lease is not readily determinable, we discount the lease payments using our estimated incremental borrowing rate for secured fixed rate debt over the same term, derived from information available at the lease commencement date. Our lease term includes the option to extend the lease when it is reasonably certain that we will exercise that option.
The Company has elected to account for the lease and non-lease components as a single lease component, except for leases of warehouse space where they will be accounted for separately. Leases may include variable lease and variable non-lease components costs which are accounted for as variable lease expense in the income statement.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Components of lease expense are as follows:
|
| | | | |
| | | For Year Ended December 31, 2019 |
| | (Dollars in thousands) |
| Operating lease cost | | 4,816 |
|
| Short-term lease cost | | 14 |
|
| Variable lease cost | | 227 |
|
| Total lease cost | | $ | 5,057 |
|
Supplemental cash-flow and other information related to leases is as follows:
|
| | | |
| | For Year Ended December 31, 2019 |
| (Dollars in thousands) |
| RoU assets obtained in exchange for new operating lease liabilities (non-cash) | | 4,995 |
|
| Operating (use of cash) from operating leases | | (4,724 | ) |
Supplemental balance sheet information related to leases is as follows:
|
| | | | |
| | | As of December 31, 2019 |
| | | (Dollars in thousands) |
| Operating RoU Assets* | | $ | 7,994 |
|
| *Amount included in Other assets | | |
| | | |
| Current operating lease liabilities | | 4,475 |
|
| Non-current operating lease liabilities | | 3,598 |
|
| Total operating lease liabilities** | | $ | 8,073 |
|
| **Amounts included in Other accrued liabilities and Other long-term obligations | | |
| | | |
| Weighted average remaining lease term (in years) | | 2.3 |
|
| Weighted average discount rate - operating leases | | 5.61 | % |
As of December 31, 2019, lease commitments under non-cancelable operating leases extending for one year or more will require the following future payments:
|
| | | | |
| | | (Dollars in thousands) |
| 2020 | | 4,496 |
|
| 2021 | | 2,693 |
|
| 2022 | | 702 |
|
| 2023 | | 358 |
|
| 2024 and thereafter | | 379 |
|
| Total lease payments | | $ | 8,628 |
|
| Less: Imputed interest | | (555 | ) |
| Present value of lease payments | | 8,073 |
|
| Less: Current operating lease liability | | (4,475 | ) |
| Non-current operating lease liability | | $ | 3,598 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| | (Dollars in thousands) |
| 2017 | $ | 2,637 |
|
| 2018 | 2,158 |
|
| 2019 | 1,781 |
|
| 2020 | 1,108 |
|
| 2021 | 373 |
|
| After 2021 | 902 |
|
TotalAs of December 31, 2019 , we have not entered into any additional operating lease and rental expensescommitments that have yet to commence.
Disclosure related to periods prior to adoption of the new lease standard
As of December 31, 2018, lease commitments under non-cancelable operating leases extending one year or more approximated $7.1 million in 2014, $6.2 million in 2015 and $3.6 million in 2016.required the following future payments:
|
| | | |
| | (Dollars in thousands) |
| 2019 | $ | 4,474 |
|
| 2020 | 2,747 |
|
| 2021 | 1,497 |
|
| 2022 | 334 |
|
| 2023 | 269 |
|
| 2024 and thereafter | 343 |
|
| |
(12)(11) | Retirement Plans and Postretirement Benefits |
Retirement Plans
On February 26, 1991, we formed our own retirement plan covering substantially all our U.S. employees. Under our plan, covered employees earned benefit payments based primarily on their service credits and wages subsequent to February 26, 1991.
Prior to that date, substantially all our U.S. employees were participants in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). While service credit was frozen, covered employees continued to earn benefits under the Union Carbide plan based on their final average wages through February 26, 1991, adjusted for salary increases (not to exceed six percent per annum) through January 26, 1995, the date Union Carbide ceased to own a minimum 50% of the equity of GTI. The Union Carbide plan is responsible for paying retirement and death benefits earned as of February 26, 1991.
Effective January 1, 2002, we established a defined contribution plan for U.S. employees. Certain employees had the option to remain in our defined benefit plan for an additional period of up to five years. Employees not covered by this option had their benefits under our defined benefit plan frozen as of December 31, 2001, and began participating in the defined contribution plan.
Effective March 31, 2003, we curtailed our qualified benefit plan and the benefits were frozen as of that date for the U.S. employees who had the option to remain in our defined benefit plan. We also closed our non-qualified U.S. defined benefit plan for the participating salaried workforce. The employees began participating in the defined contribution plan as of April 1, 2003.
Pension coverage for employees of foreign subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On March 27, 2015, we settled $62.0 million of projected benefit obligations for our United Kingdom plan through the purchase of a group annuity contract. The purchase was fully funded with pension plan assets.
The components of our consolidated net pension costs are set forth in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign |
| | | | | | (Dollars in thousands) |
| Service cost | $ | 1,297 |
| | $ | 624 |
| | $ | 1,315 |
| | $ | 674 |
| | $ | 1,305 |
| | $ | 710 |
|
| Interest cost | 5,070 |
| | 275 |
| | 4,709 |
| | 253 |
| | 5,352 |
| | 199 |
|
| Expected return on assets | (5,026 | ) | | (424 | ) | | (5,679 | ) | | (330 | ) | | (5,268 | ) | | (299 | ) |
| Mark-to-market loss (gain) | 205 |
| | 3,302 |
| | 2,473 |
| | 503 |
| | (4,140 | ) | | (53 | ) |
| Pension costs | $ | 1,546 |
| | $ | 3,777 |
| | $ | 2,818 |
| | $ | 1,100 |
| | $ | (2,751 | ) | | $ | 557 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | 2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15 Through December 31, 2015 |
| |
| | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign |
| | | | | | (Dollars in thousands) |
| Service cost | $ | 750 |
| | $ | 1,107 |
| | $ | 151 |
| | $ | 98 |
| | $ | 386 |
| | $ | 281 |
|
| Interest cost | 5,983 |
| | 2,669 |
| | 854 |
| | 554 |
| | 2,200 |
| | 94 |
|
| Expected return on assets | (5,215 | ) | | (2,516 | ) | | — |
| | — |
| | (1,885 | ) | | (59 | ) |
| Amortization of prior service cost | — |
| | 2 |
| | — |
| | (12 | ) | | — |
| | — |
|
| Curtailment gain | — |
| | (28 | ) | | — |
| | — |
| | — |
| | (675 | ) |
| Mark-to-market loss (gain) | 18,431 |
| | (534 | ) | | — |
| | — |
| | 716 |
| | 1,843 |
|
| Pension costs | $ | 19,949 |
| | $ | 700 |
| | $ | 1,005 |
| | $ | 640 |
| | $ | 1,417 |
| | $ | 1,484 |
|
|
| | | | | | | | |
| | | Successor |
| | | 2016 |
| | | U.S. | | Foreign |
| | |
| Service cost | | $ | 1,325 |
| | $ | 698 |
|
| Interest cost | | 5,744 |
| | 243 |
|
| Expected return on assets | | (4,940 | ) | | (298 | ) |
| Mark-to-market loss (gain) | | (2,322 | ) | | (220 | ) |
| Pension costs | | $ | (193 | ) | | $ | 423 |
|
The mark-to-market loss in 20152019 was causedthe result of the unfavorable change in the discount rate, partially offset by changesbetter than expected return on plan assets, particularly for the U.S. plans. The mark-to-market loss in 2018 was the result of less than expected return on plan assets, partially offset by a favorable change to the discount rate. The mark-to-market gain in 20162017 was
the result of better than expected
asset returns
on plan assets and favorable
changechanges to the mortality tables, partially offset by unfavorable changes to the discount rate.
Amounts recognized in other comprehensive income did not represent a significant portion of our total post-retirement cost. As a result of our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger"), our pension and post-retirement obligations were revalued as of August 15, 2015. The result of this valuation eliminated historical components of Other Comprehensive Income.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31, 20152019 and 20162018 are:
|
| | | | | | | | | | | | | | | |
| | As of
December 31, 2019 | | As of
December 31, 2018 |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Changes in Benefit Obligation: | | | | | | | |
| Net benefit obligation at beginning of period | $ | 126,985 |
| | $ | 22,332 |
| | $ | 139,746 |
| | $ | 20,407 |
|
| Service cost | 1,297 |
| | 624 |
| | 1,315 |
| | 674 |
|
| Interest cost | 5,070 |
| | 275 |
| | 4,709 |
| | 253 |
|
| Participant contributions | — |
| | 417 |
| | — |
| | 392 |
|
| Foreign currency exchange changes | — |
| | 379 |
| | — |
| | (339 | ) |
| Actuarial (gain) loss | 12,868 |
| | 3,319 |
| | (8,297 | ) | | 711 |
|
| Benefits paid | (10,410 | ) | | 1,557 |
| | (10,488 | ) | | 234 |
|
| Net benefit obligation at end of period | $ | 135,810 |
| | $ | 28,903 |
| | $ | 126,985 |
| | $ | 22,332 |
|
| Changes in Plan Assets: | | | | | | | |
| Fair value of plan assets at beginning of period | $ | 99,845 |
| | $ | 15,354 |
| | $ | 109,845 |
| | $ | 13,618 |
|
| Actual return on plan assets | 17,689 |
| | 441 |
| | (5,091 | ) | | 538 |
|
| Foreign currency exchange rate changes | — |
| | 377 |
| | — |
| | (154 | ) |
| Employer contributions | 708 |
| | 834 |
| | 5,579 |
| | 726 |
|
| Participant contributions | — |
| | 417 |
| | — |
| | 392 |
|
| Benefits paid | (10,410 | ) | | 1,557 |
| | (10,488 | ) | | 234 |
|
| Fair value of plan assets at end of period | $ | 107,832 |
| | $ | 18,980 |
| | $ | 99,845 |
| | $ | 15,354 |
|
| Funded status (underfunded): | $ | (27,978 | ) | | $ | (9,923 | ) | | $ | (27,140 | ) | | $ | (6,978 | ) |
Amounts recognized in accumulated other comprehensive loss: | | | | | | | |
| Prior service credit | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Amounts recognized in the statement of financial position: | | | | | | | |
| Non-current assets | $ | — |
| | $ | 37 |
| | $ | — |
| | $ | 147 |
|
| Current liabilities | (427 | ) |
| (43 | ) | | (430 | ) | | (117 | ) |
| Non-current liabilities | (27,551 | ) |
| (9,917 | ) | | (26,710 | ) | | (7,008 | ) |
| Net amount recognized | $ | (27,978 | ) | | $ | (9,923 | ) | | $ | (27,140 | ) | | $ | (6,978 | ) |
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2015 | | As of December 31, 2016 |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Changes in Benefit Obligation: | | | | | | | |
Net benefit obligation at
beginning of period, August 15, 2015
and January 1, 2016, respectively | $ | 146,790 |
| | $ | 18,512 |
| | $ | 142,126 |
| | $ | 18,271 |
|
| Service cost | 386 |
| | 281 |
| | 1,325 |
| | 698 |
|
| Interest cost | 2,200 |
| | 94 |
| | 5,744 |
| | 243 |
|
| Participant contributions | — |
| | 79 |
| | — |
| | 256 |
|
| Plan amendments / curtailments | — |
| | (578 | ) | | — |
| | (122 | ) |
| Foreign currency exchange changes | — |
| | (480 | ) | | — |
| | (527 | ) |
| Actuarial loss (gain) | (3,896 | ) | | 377 |
| | 1,293 |
| | (18 | ) |
| Benefits paid | (3,354 | ) | | (14 | ) | | (10,258 | ) | | (564 | ) |
| Net benefit obligation at end of period | $ | 142,126 |
| | $ | 18,271 |
| | $ | 140,230 |
| | $ | 18,237 |
|
| Changes in Plan Assets: | | | | | | | |
Fair value of plan assets at beginning of period, August 15, 2015 and January 1, 2016, respectively | $ | 97,473 |
| | $ | 12,811 |
| | $ | 93,897 |
| | $ | 11,293 |
|
| Actual return on plan assets | (2,727 | ) | | (1,407 | ) | | 8,556 |
| | 378 |
|
| Foreign currency exchange rate changes | — |
| | (346 | ) | | — |
| | (346 | ) |
| Employer contributions | 2,505 |
| | 170 |
| | 8,710 |
| | 854 |
|
| Participant contributions | — |
| | 79 |
| | — |
| | 256 |
|
| Benefits paid | (3,354 | ) | | (14 | ) | | (10,258 | ) | | (564 | ) |
| Fair value of plan assets at end of period | $ | 93,897 |
| | $ | 11,293 |
| | $ | 100,905 |
| | $ | 11,871 |
|
| Funded status (underfunded): | $ | (48,229 | ) | | $ | (6,978 | ) | | $ | (39,325 | ) | | $ | (6,366 | ) |
Amounts recognized in accumulated other comprehensive loss: | | | | | | | |
| Prior service credit | $ | — |
| | $ | (95 | ) | | $ | — |
| | $ | — |
|
Amounts recognized in the statement of financial position: | | | | | | | |
| Non-current assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (437 | ) | | (253 | ) | | (435 | ) | | (128 | ) |
| Non-current liabilities | (47,792 | ) | | (6,725 | ) | | (38,890 | ) | | (6,238 | ) |
| Net amount recognized | $ | (48,229 | ) | | $ | (6,978 | ) | | $ | (39,325 | ) | | $ | (6,366 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $158.9$162.6 million and $157.0$147.6 million at as of December 31, 20152019 and 2016,2018, respectively. We made contributions to the plan of $4.3 million and paid benefits of $5.3 million during the period January 1 through August 14, 2015. As a result of our acquisition by Brookfield and subsequent purchase price allocation, our assets and liabilities associated with the plans were revalued as of August 15, 2015.
Plan Assets
The accounting guidance on fair value measurements specifies a hierarchy based on the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 9,8, “Fair Value Measurements and Derivative Instruments,”Instruments", for a discussion of the fair value hierarchy.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following describes the methods and significant assumptions used to estimate the fair value of the investments:
Cash and cash equivalents – Valued at cost. Cash equivalents are valued at net asset value as provided by the administrator of the fund.
Foreign government bonds – Valued by the trustees using various pricing services of financial institutions.
Debt securities – Valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor’s and Telekurs.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Equity securities – Valued at the closing price reported on the active market on which the security is traded.
Fixed insurance contract – Valued at the present value of the guaranteed payment streams.
Investment contracts – Valued at the total cost of annuity contracts purchased, adjusted for market differences from the date of purchase to year-end.
Collective trusts – Valued at the net asset value provided by the administrator of the fund.fund (the practical expedient). The net asset value is primarily based on the valuequoted market prices of the underlying assets ownedsecurities for which quoted market prices of the underlying securities of the funds. Some of the underlying investments include securities for which quoted market prices are not available and are valued using data obtained by the fund, minustrustee from the best available source or market value. This method may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe its liabilities, divided byvaluation method is appropriate and consistent with other market participants, the numberuse of units outstanding.different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The fair value of theother plan assets by category is summarized below (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. Plan Assets | | | | | | | |
| Cash and cash equivalents | $ | 1,524 |
| | $ | — |
| | $ | — |
| | $ | 1,524 |
|
| International Plan Assets | | | | | | | |
| Foreign government bonds | $ | — |
| | $ | 995 |
| | $ | — |
| | $ | 995 |
|
| Fixed insurance contracts | — |
| | — |
| | 17,985 |
| | 17,985 |
|
| Total assets in the fair value hierarchy | $ | — |
| | $ | 995 |
| | $ | 17,985 |
| | $ | 18,980 |
|
| Investments measured at net asset value | | | | | | | $ | 106,308 |
|
| Total | $ | 1,524 |
| | $ | 995 |
| | $ | 17,985 |
| | $ | 126,812 |
|
| | | | | | | | |
| | As of December 31, 2018 |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| U.S. Plan Assets | | | | | | | |
| Cash and cash equivalents | $ | 1,978 |
| | $ | — |
| | $ | — |
| | $ | 1,978 |
|
| International Plan Assets | | | | | | | |
| Foreign government bonds | $ | — |
| | $ | 958 |
| | $ | — |
| | $ | 958 |
|
| Fixed insurance contracts | — |
| | — |
| | 14,396 |
| | 14,396 |
|
| Total assets in the fair value hierarchy | $ | — |
| | $ | 958 |
| | $ | 14,396 |
| | $ | 15,354 |
|
| Investments measured at net asset value | | | | | | | $ | 97,867 |
|
| Total | $ | 1,978 |
| | $ | 958 |
| | $ | 14,396 |
| | $ | 115,199 |
|
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2016 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. Plan Assets | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 1,986 |
| | $ | — |
| | $ | — |
| | $ | 1,986 |
| | $ | 1,502 |
| | $ | — |
| | $ | — |
| | $ | 1,502 |
|
| Collective trusts | — |
| | 91,911 |
| | — |
| | 91,911 |
| | — |
| | 99,403 |
| | — |
| | 99,403 |
|
| Total | $ | 1,986 |
| | $ | 91,911 |
| | $ | — |
| | $ | 93,897 |
| | $ | 1,502 |
| | $ | 99,403 |
| | $ | — |
| | $ | 100,905 |
|
| International Plan Assets | | | | | | | | | | | | | | | |
| Foreign government bonds | — |
| | 840 |
| | — |
| | 840 |
| | — |
| | 729 |
| | — |
| | 729 |
|
| Fixed insurance contracts | — |
| | — |
| | 10,453 |
| | 10,453 |
| | — |
| | — |
| | 11,142 |
| | 11,142 |
|
| Total | $ | — |
| | $ | 840 |
| | $ | 10,453 |
| | $ | 11,293 |
| | $ | — |
| | $ | 729 |
| | $ | 11,142 |
| | $ | 11,871 |
|
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy for international plan pension assets for the years ended December 31, 20152018 and 20162019 (dollars in thousands):
|
| | | |
| | Fixed Insurance Contracts |
| Balance at December 31, 2017 | $ | 12,787 |
|
| Gain / contributions / currency impact | 1,619 |
|
| Distributions | (10 | ) |
| Balance at December 31, 2018 | 14,396 |
|
| Gain / contributions / currency impact | 3,603 |
|
| Distributions | (14 | ) |
| Balance at December 31, 2019 | $ | 17,985 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| | Fixed Insurance Contracts |
| Balance as of August 15, 2015 (Predecessor) | $ | 13,336 |
|
| Gain / contributions / currency impact | (2,883 | ) |
| Distributions | — |
|
| Balance at December 31, 2015 (Successor) | 10,453 |
|
| Gain / contributions / currency impact | 707 |
|
| Distributions | (18 | ) |
| Balance at December 31, 2016 (Successor) | $ | 11,142 |
|
We annually re-evaluate assumptions and estimates used in projecting pension assets, liabilities and expenses. These assumptions and estimates may affect the carrying value of pension assets, liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net pension costs and projected benefit obligations are:
|
| | | | | |
| Pension Benefit Obligations Key Assumptions | As of December 31, |
| | 2019 | | 2018 |
| Weighted average assumptions to determine benefit obligations: | | | |
| Discount rate | 2.59 | % | | 3.71 | % |
| Rate of compensation increase | 1.50 | % | | 1.74 | % |
87
|
| | | | | |
| Pension Cost Key Assumptions | | | |
| Weighted average assumptions to determine net cost: | | | |
| Discount rate | 3.71 | % | | 3.20 | % |
| Expected return on plan assets | 4.92 | % | | 4.94 | % |
| Rate of compensation increase | 1.74 | % | | 1.57 | % |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | |
| Pension Benefit Obligations Key Assumptions | As of December 31, |
| | 2015 | | 2016 |
| Weighted average assumptions to determine benefit obligations: | | | |
| Discount rate | 3.86 | % | | 3.61 | % |
| Rate of compensation increase | 1.84 | % | | 1.57 | % |
|
| | | | | |
| Pension Cost Key Assumptions | | | |
| Weighted average assumptions to determine net cost: | | | |
| Discount rate | 3.79 | % | | 3.86 | % |
| Expected return on plan assets | 3.99 | % | | 4.97 | % |
| Rate of compensation increase | 2.08 | % | | 1.84 | % |
We adjust our discount rate annually in relation to the rate at which the benefits could be effectively settled. Discount rates are set for each plan in reference to the yields available on AA-rated corporate bonds of appropriate currency and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve in each currency. The discount rate for a given plan is the rate implied by the yield curve for the duration of that plan’s liabilities. In certain countries, where little public information is available on which to base discount rate assumptions, the discount rate is based on government bond yields or other indices and approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA rated corporate bonds.
The expected return on assets assumption represents our best estimate of the long-term return on plan assets and generally was estimated by computing a weighted average return of the underlying long-term expected returns on the different asset classes, based on the target asset allocations. The expected return on assets assumption is a long-term assumption that is expected to remain the same from one year to the next unless there is a significant change in the target asset allocation, the fees and expenses paid by the plan or market conditions.
The rate of compensation increase assumption is generally based on salary increases.
Plan Assets. The following table presents our retirement plan weighted average asset allocations at December 31, 2016,2019, by asset category:
|
| | | | | |
| | Percentage of Plan Assets
as of December 31, 2019 |
| | US | | Foreign |
| Equity securities and return seeking assets | 20 | % | | — | % |
| Fixed income, debt securities, or cash | 80 | % | | 100 | % |
| Total | 100 | % | | 100 | % |
|
| | | | | |
| | Percentage of Plan Assets
as of December 31, 2016 |
| | US | | Foreign |
| Equity securities and return seeking assets | 20 | % | | — | % |
| Fixed income, debt securities, or cash | 80 | % | | 100 | % |
| Total | 100 | % | | 100 | % |
Investment Policy and Strategy. The investment policy and strategy of the U.S. plan is to invest approximately 20% in equities and return seeking assets and approximately 80% in fixed income securities. Rebalancing is undertaken monthly. To the extent we maintain plans in other countries, target asset allocation is 100% fixed income investments. For each plan, the investment policy is set within both asset return and local statutory requirements.
Information for our pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 20152018 and 20162019 follows:
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Accumulated benefit obligation | $ | 135,810 |
| | $ | 26,829 |
| | $ | 126,985 |
| | $ | 20,601 |
|
| Fair value of plan assets | 107,832 |
| | 17,985 |
| | 99,845 |
| | 14,396 |
|
|
| | | | | | | | | | | | | | | |
| | 2015 | | 2016 |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Accumulated benefit obligation | $ | 142,126 |
| | $ | 16,749 |
| | $ | 140,230 |
| | $ | 16,057 |
|
| Fair value of plan assets | 93,897 |
| | 11,293 |
| | 100,905 |
| | 11,142 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 20152018 and 20162019 follows:
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Projected benefit obligation | $ | 135,810 |
| | $ | 27,944 |
| | $ | 126,985 |
| | $ | 21,520 |
|
| Fair value of plan assets | 107,832 |
| | 17,985 |
| | 99,845 |
| | 14,396 |
|
|
| | | | | | | | | | | | | | | |
| | 2015 | | 2016 |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Projected benefit obligation | $ | 142,126 |
| | $ | 18,271 |
| | $ | 140,230 |
| | $ | 17,415 |
|
| Fair value of plan assets | 93,897 |
| | 11,293 |
| | 100,905 |
| | 11,142 |
|
Following is our projected future pension plan cash flow by year:
|
| | | | | | | |
| | U.S. | | Foreign |
| | (Dollars in thousands) |
| Expected contributions in 2020: | | | |
| Expected employer contributions | $ | 4,419 |
| | $ | 737 |
|
| Expected employee contributions | — |
| | — |
|
| Estimated future benefit payments reflecting expected future service for the years ending December 31: | | | |
| 2020 | 9,271 |
| | 884 |
|
| 2021 | 9,240 |
| | 870 |
|
| 2022 | 9,195 |
| | 905 |
|
| 2023 | 9,145 |
| | 1,038 |
|
| 2024 | 9,012 |
| | 2,340 |
|
| 2025-2029 | 43,077 |
| | 9,168 |
|
|
| | | | | | | |
| | U.S. | | Foreign |
| | (Dollars in thousands) |
| Expected contributions in 2017: | | | |
| Expected employer contributions | $ | 6,654 |
| | $ | 561 |
|
| Expected employee contributions | — |
| | — |
|
| Estimated future benefit payments reflecting expected future service for the years ending December 31: | | | |
| 2017 | 9,259 |
| | 751 |
|
| 2018 | 9,247 |
| | 696 |
|
| 2019 | 9,218 |
| | 643 |
|
| 2020 | 9,256 |
| | 720 |
|
| 2021 | 9,278 |
| | 670 |
|
| 2022-2026 | 45,917 |
| | 5,705 |
|
Post-Employment Benefit Plans
We provide life insurance benefits for eligible retired employees. These benefits are provided through various insurance companies. We accrue the estimated net postretirement benefit costs during the employees’ credited service periods.
In July 2002, we amended our U.S. postretirement medical coverage. In 2003 and 2004, we discontinued the Medicare Supplement Plan (for retirees 65 years or older or those eligible for Medicare benefits). This change applied to all U.S. active employees and retirees. In June 2003, we announced the termination of the existing early retiree medical plan for retirees under age 65,, effective December 31, 2005. In addition, we limited the amount of retiree’s life insurance after December 31, 2004. These modifications are accounted for prospectively. The impact of these changes is being amortized over the average remaining period to full eligibility of the related postretirement benefits.
During 2009, we amended one of our U.S. plans to eliminate the life insurance benefit for certain non-pooled participants.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of our consolidated net postretirement costs are set forth in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
| Interest cost | 269 |
| | 684 |
| | 264 |
| | 700 |
| | 333 |
| | 653 |
|
| Mark-to-market loss (gain) | 585 |
| | 100 |
| | (1,028 | ) | | 47 |
| | (1,257 | ) | | 742 |
|
Post-employment benefits (benefit) cost | $ | 854 |
| | $ | 784 |
| | $ | (764 | ) | | $ | 748 |
| | $ | (924 | ) | | $ | 1,397 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | | | | | For the Period January 1 through August 14, 2015 | | For the Period August 15 Through December 31, 2015 |
| | 2014 | | |
| | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Service cost |
|
| | $ | 71 |
| | $ | — |
| | $ | 9 |
| | — |
| | $ | 5 |
|
| Interest cost | 396 |
| | 976 |
| | 223 |
| | 433 |
| | 142 |
| | 289 |
|
| Amortization of prior service credit | — |
| | (180 | ) | | — |
| | — |
| | — |
| | — |
|
| Plan amendment / curtailment | — |
| | (294 | ) | | — |
| | — |
| | — |
| | — |
|
| Mark-to-market (gain) loss | 1,151 |
| | 1,456 |
| | — |
| | — |
| | (100 | ) | | (621 | ) |
Post-employment benefits cost (benefit) | $ | 1,547 |
| | $ | 2,029 |
| | $ | 223 |
| | $ | 442 |
| | $ | 42 |
| | $ | (327 | ) |
|
| | | | | | | |
| | Successor |
| | 2016 |
| | U.S. | | Foreign |
| | |
| Service cost | $ | — |
| | $ | 4 |
|
| Interest cost | 360 |
| | 764 |
|
| Plan amendment / curtailment | — |
| | (993 | ) |
| Mark-to-market (gain) loss | (191 | ) | | (225 | ) |
| Post-employment benefits cost (benefit) | $ | 169 |
| | $ | (450 | ) |
Amounts recognized in other comprehensive income did not represent a significant portion of our total post-retirement cost. As a result of our acquisition by Brookfield (see Note 2 "Preferred Share Issuance and Merger"), our pension and post-retirement obligations were revalued as of August 15, 2015. The result of this valuation eliminated historical components of Other Comprehensive Income.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of beginning and ending balances of benefit obligations under, fair value of assets of, and the funded status of, our postretirement plans is set forth in the following table:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | |
| Postretirement Benefits | As of December 31, 2015 | | As of December 31, 2016 |
| | |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Changes in Benefit Obligation: | | | | | | | |
Net benefit obligation at beginning of period, August 15, 2015 and January 1, 2016, respectively | $ | 11,395 |
| | $ | 13,457 |
| | $ | 10,859 |
| | $ | 11,296 |
|
| Service cost | — |
| | 5 |
| | — |
| | 4 |
|
| Interest cost | 142 |
| | 289 |
| | 360 |
| | 764 |
|
| Foreign currency exchange rates | — |
| | (1,489 | ) | | — |
| | 709 |
|
| Actuarial loss (gain) | (100 | ) | | (621 | ) | | (191 | ) | | (225 | ) |
| Gross benefits paid | (578 | ) | | (345 | ) | | (853 | ) | | (855 | ) |
| Plan amendment | — |
| | — |
| | — |
| | (993 | ) |
| Net benefit obligation at end of period | $ | 10,859 |
| | $ | 11,296 |
| | $ | 10,175 |
| | $ | 10,700 |
|
| Changes in Plan Assets: | | | | | | | |
Fair value of plan assets at beginning of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Employer contributions | 578 |
| | 345 |
| | 853 |
| | 855 |
|
| Gross benefits paid | (578 | ) | | (345 | ) | | (853 | ) | | (855 | ) |
| Fair value of plan assets at end of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Funded status: | $ | (10,859 | ) | | $ | (11,296 | ) | | $ | (10,175 | ) | | $ | (10,700 | ) |
| Amounts recognized in accumulated other comprehensive loss: | | | | | | | |
| Prior service credit | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Amounts recognized in the statement of financial position: | | | | | | | |
| Current liabilities | $ | (1,298 | ) | | $ | (755 | ) | | $ | (1,134 | ) | | $ | (738 | ) |
| Non-current liabilities | (9,561 | ) | | (10,541 | ) | | (9,041 | ) | | (9,962 | ) |
| Net amount recognized | $ | (10,859 | ) | | $ | (11,296 | ) | | $ | (10,175 | ) | | $ | (10,700 | ) |
We made contributions to the plan of $1.6 million and paid benefits of $1.6 million during the period January 1 through August 14, 2015. As a result of our acquisition by Brookfield and subsequent purchase price allocation, the liabilities associated with the plans were revalued as of August 15, 2015. |
| | | | | | | | | | | | | | | |
| Postretirement Benefits | As of
December 31, 2019 | | As of
December 31, 2018 |
| | |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Changes in Benefit Obligation: | | | | | | | |
| Net benefit obligation at beginning of period | $ | 7,165 |
| | $ | 10,661 |
| | $ | 8,461 |
| | $ | 12,172 |
|
| Service cost | — |
| | — |
| | — |
| | 1 |
|
| Interest cost | 269 |
| | 684 |
| | 264 |
| | 700 |
|
| Foreign currency exchange rates |
|
| | 340 |
| | — |
| | (1,333 | ) |
Actuarial (gain) loss
| 585 |
| | 100 |
| | (1,028 | ) | | 47 |
|
| Gross benefits paid | (829 | ) | | (831 | ) | | (532 | ) | | (926 | ) |
| Plan amendment | — |
| | — |
| | — |
| | — |
|
| Net benefit obligation at end of period | $ | 7,190 |
| | $ | 10,954 |
| | $ | 7,165 |
| | $ | 10,661 |
|
| Changes in Plan Assets: | | | | | | | |
Fair value of plan assets at beginning of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Employer contributions | 829 |
| | 831 |
| | 532 |
| | 926 |
|
| Gross benefits paid | (829 | ) | | (831 | ) | | (532 | ) | | (926 | ) |
| Fair value of plan assets at end of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Funded status: | $ | (7,190 | ) | | $ | (10,954 | ) | | $ | (7,165 | ) | | $ | (10,661 | ) |
Amounts recognized in accumulated other comprehensive loss: | | | | | | | |
| Prior service credit | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Amounts recognized in the statement of financial position: | | | | | | | |
| Current liabilities | $ | (723 | ) | | $ | (893 | ) | | $ | (783 | ) | | $ | (851 | ) |
| Non-current liabilities | (6,467 | ) | | (10,061 | ) | | (6,382 | ) | | (9,810 | ) |
| Net amount recognized | $ | (7,190 | ) | | $ | (10,954 | ) | | $ | (7,165 | ) | | $ | (10,661 | ) |
We annually re-evaluate assumptions and estimates used in projecting the postretirement liabilities and expenses. These assumptions and estimates may affect the carrying value of postretirement plan liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net postretirement benefit costs and postretirement projected benefit obligation are set forth in the following table:
| | | Postretirement Benefit Obligations | | |
| | 2015 | | 2016 | 2019 | | 2018 |
| Weighted average assumptions to determine benefit obligations: | | | | | | |
| Discount rate | 5.10 | % | | 4.80 | % | 4.65 | % | | 5.57 | % |
| Health care cost trend on covered charges: | | | | | | |
| Initial | 6.67 | % | | 6.80 | % | 6.14 | % | | 6.53 | % |
| Ultimate | 6.48 | % | | 5.96 | % | 5.84 | % | | 6.05 | % |
| Years to ultimate | 2 |
| | 8 |
| 6 |
| | 8 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | |
| Postretirement Benefit Costs | | | |
| | 2019 | | 2018 |
| Weighted average assumptions to determine net cost: | | | |
| Discount rate | 5.57 | % | | 5.07 | % |
| Health care cost trend on covered charges: | | | |
| Initial | 6.53 | % | | 6.86 | % |
| Ultimate | 6.05 | % | | 6.23 | % |
| Years to ultimate | 7 |
| | 7 |
|
|
| | | | | |
| Postretirement Benefit Costs | | | |
| | 2015 | | 2016 |
| Weighted average assumptions to determine net cost: | | | |
| Discount rate | 4.91 | % | | 5.10 | % |
| Health care cost trend on covered charges: | | | |
| Initial | 6.55 | % | | 6.67 | % |
| Ultimate | 6.18 | % | | 6.48 | % |
| Years to ultimate | 0 |
| | 1 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for our postretirement benefits. A one-percentage point change in assumed health care cost trend rates would have the following effects at December 31, 2016:2019:
|
| | | | | | | | | | | | | | | |
| | One Percentage Point Increase | | One Percentage Point Decrease |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
Effect on total service cost and interest cost components | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | (42 | ) |
| Effect on benefit obligations | $ | 21 |
| | $ | 465 |
| | $ | (20 | ) | | $ | (409 | ) |
|
| | | | | | | | | | | | | | | |
| | One Percentage Point Increase | | One Percentage Point Decrease |
| | U.S. | | Foreign | | U.S. | | Foreign |
| | (Dollars in thousands) |
| Effect on total service cost and interest cost components | $ | 2 |
| | $ | 75 |
| | $ | (2 | ) | | $ | (63 | ) |
| Effect on benefit obligations | $ | 67 |
| | $ | 599 |
| | $ | (63 | ) | | $ | (507 | ) |
Discount rates are set for each plan in reference to the yields available on AA-rated corporate bonds of appropriate currency and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve in each currency. The discount rate for a given plan is the rate implied by the yield curve for the duration of that plan’s liabilities. In certain countries, where little public information is available on which to base discount rate assumptions, the discount rate is based on government bond yields or other indices and approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA-rated corporate bonds.
The following table represents projected future postretirement cash flow by year:
|
| | | | | | | |
| | U.S. | | Foreign |
| | (Dollars in thousands) |
| Expected contributions in 2020: | | | |
| Expected employer contributions | $ | 723 |
| | $ | 893 |
|
| Expected employee contributions | — |
| | — |
|
Estimated future benefit payments reflecting expected future service for the years ending December 31: | | | |
| 2020 | 723 |
| | 893 |
|
| 2021 | 657 |
| | 908 |
|
| 2022 | 596 |
| | 904 |
|
| 2023 | 540 |
| | 910 |
|
| 2024 | 492 |
| | 924 |
|
| 2025-2029 | 1,984 |
| | 4,689 |
|
|
| | | | | | | |
| | U.S. | | Foreign |
| | (Dollars in thousands) |
| Expected contributions in 2017: | | | |
| Expected employer contributions | $ | 1,134 |
| | $ | 738 |
|
| Expected employee contributions | — |
| | — |
|
| Estimated future benefit payments reflecting expected future service for the years ending December 31: | | | |
| 2017 | 1,134 |
| | 738 |
|
| 2018 | 1,065 |
| | 742 |
|
| 2019 | 984 |
| | 747 |
|
| 2020 | 898 |
| | 754 |
|
| 2021 | 809 |
| | 761 |
|
| 2020-2024 | 2,975 |
| | 3,931 |
|
Savings Plan
Our employee savings plan provides eligible employees the opportunity for long-term savings and investment. The plan allows employees to contribute up to 5% of pay as a basic contribution and an additional 45% of pay as supplemental contribution. For 2014,In 2019, 2018 and part of 2015, we contributed on behalf of each participating employee, in units of a fund that invested entirely in our Common Stock, 3% on2017, the first 100% contributed by the employee and 5% on the next 20% contributed by the employee. We contributed 581,006 shares in 2014, resulting in an expense of $4.4 million; 321,107 shares in 2015, resulting in an expense of $1.4 million. During 2015 we changed our method of funding the plan to cash contributions. We contributed $2.5 millioncontributions to our Savings Plan in 2016.savings plan were $2.1 million, $1.3 million and $1.6 million, respectively.
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 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.
LitigationPending litigation in Brazil has been pending in Brazil 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), plus interest thereon. Prior to October 1, 2015, we were not party to such litigation.. Companies in Brazil have recently 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 BrazilBahia region employers on June 26, 2019, the Brazilian Supreme Court to the lower courts for further proceedings which included procedural aspectsfinally ruled in favor of the case, such as admissibility of instruments filed by the parties. We cannot predict the outcomeemployees union on September 26, 2019. The employers union has determined not to seek annulment of such litigation. Ondecision. Separately, on October 1, 2015, ana 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 have appealed this state court ruling as well and intend to vigorously defend such action.it. As of December 31, 2019, 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. Product warranties were not impacted by purchase price accounting adjustments. Claims accrued but not yet paid and the related activity within the reserve for 20152018 and 20162019 are as follows:
|
| | | |
| | (Dollars in Thousands) |
| | |
| Balance as of December 31, 2017 | $ | 349 |
|
| Product warranty charges/adjustments | 1,510 |
|
| Payments and settlements | (331 | ) |
| Balance as of December 31, 2018 | $ | 1,528 |
|
| Product warranty charges/adjustments | 1,033 |
|
| Payments and settlements | (726 | ) |
| Balance as of December 31, 2019 | $ | 1,835 |
|
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into a tax receivable agreement (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 certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco (collectively, 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.
|
| | | |
| | (Dollars in Thousands) |
| Balance as of December 31, 2014 | $ | 520 |
|
| Product warranty charges/adjustments | 346 |
|
| Payments and settlements | (69 | ) |
| Balance as of August 14, 2015 | $ | 797 |
|
| | |
| | |
| Balance as of August 15, 2015 | $ | 797 |
|
| Product warranty charges/adjustments | (324 | ) |
| Payments and settlements | (85 | ) |
| Balance as of December 31, 2015 | $ | 388 |
|
| Product warranty charges/adjustments | 1,285 |
|
| Payments and settlements | (704 | ) |
| Balance as of December 31, 2016 | $ | 969 |
|
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 Operationsas "Related Party Tax Receivable Agreement Expense." As of December 31, 2019, the total TRA liability is $89.9 million, of which $27.9 million is classified as current liability "Related party payable - tax receivable agreement" on the balance sheet, as we expect this portion to be settled within twelve months, and $62.0 million of the liability remains 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 personnel 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 (or 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. (or, 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 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 advisor 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 Board of Directors in its sole discretion.
Given the successful completion of the IPO in the second quarter of 2018, 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. Assuming 100% vesting of the awarded Profit Units and depending on Brookfield’s sales proceeds, the potential liability triggered by a Change in Control is estimated to be in the range of $65 million to $90 million. As of December 31, 2019, the awards are 80% vested.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before provisionProvision (benefit) for income taxes:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| U.S. | $ | 85,365 |
| | $ | (68,032 | ) | | $ | (26,981 | ) |
| Non-U.S. | 757,462 |
| | 970,840 |
| | 30,412 |
|
| | $ | 842,827 |
| | $ | 902,808 |
| | $ | 3,431 |
|
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Year Ended December 31, 2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15
Through December 31, 2015 | | For the Year Ended
December 31, 2016 |
| | | | |
| | (Dollars in thousands) |
| U.S. | $ | (127,707 | ) | | $ | (84,599 | ) | | $ | (16,827 | ) | | $ | (44,971 | ) |
| Non-U.S. | (30,603 | ) | | (10,919 | ) | | (4,916 | ) | | (71,450 | ) |
| | $ | (158,310 | ) | | $ | (95,518 | ) | | $ | (21,743 | ) | | $ | (116,421 | ) |
Income tax expense (benefit) consists of the following:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | |
| U.S income taxes: | | | | | |
| Current | $ | 16,589 |
| | $ | 787 |
| | $ | (1,066 | ) |
| Deferred | 5,690 |
| | (52,145 | ) | | 38 |
|
| | 22,279 |
| | (51,358 | ) | | (1,028 | ) |
| Non-U.S. income taxes: | | | | | |
| Current | 64,134 |
| | 85,252 |
| | 5,924 |
|
| Deferred | 11,812 |
| | 15,026 |
| | (15,677 | ) |
| | 75,946 |
| | 100,278 |
| | (9,753 | ) |
| Total income tax expense (benefit) | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Year Ended December 31, 2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15
Through December 31, 2015 | | For the Year Ended
December 31, 2016 |
| | | |
| | (Dollars in thousands) |
| U.S income taxes: | | | | | | | |
| Current | $ | (1,261 | ) | | $ | (20 | ) | | $ | (52 | ) | | $ | (878 | ) |
| Deferred | (537 | ) | | 403 |
| | 686 |
| | 1,152 |
|
| | (1,798 | ) | | 383 |
| | 634 |
| | 274 |
|
| Non-U.S. income taxes: | | | | | | | |
| Current | 11,474 |
| | 5,547 |
| | 1,566 |
| | 5,389 |
|
| Deferred | (15,466 | ) | | 522 |
| | 4,682 |
| | (13,215 | ) |
| | (3,992 | ) | | 6,069 |
| | 6,248 |
| | (7,826 | ) |
| Total income tax benefit | $ | (5,790 | ) | | $ | 6,452 |
| | $ | 6,882 |
| | $ | (7,552 | ) |
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly revises the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures which have the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI. In general, these changes were effective beginning in 2018. The Tax Act also includes a one-time mandatory deemed repatriation or transition tax on the accumulated previously untaxed foreign earnings of our foreign subsidiaries.
For the fourth quarter of 2017, we were able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and re-measurement of certain deferred tax asset and liabilities.
Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118. SAB No. 118 allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 also provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Act. On October 15, 2018, the Company’s U.S. tax returns for 2017 were filed and the changes to the provisional tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 were recorded in 2018. These adjustments were immaterial to the Company’s financial statements.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 2018, the U.S. Department of Treasury and the U.S. Internal Revenue Service (IRS) issued proposed regulations under code section 965 and on January 15, 2019, the IRS issued final 965 regulations. The Company continues to analyze the effects of the Tax Act and newly issued final regulations on its financial statements. The final impact of the Tax Act and the regulations may differ from the amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, additional legislative or administrative actions to clarify the intent of the statutory language provided that they differ from the Company’s current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. We estimate that any change will be immaterial to the Company’s financial statements at this time.
The Company also continues to evaluate the impact of the GILTI provisions under the Tax Act which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election of either (1) the period cost method or (2) the deferred method. As of December 31, 2018, the Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred.
Income tax expense (benefit) differed from the amountsamount computed by applying the U.S.U.S, federal income tax rate of 21% for years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to income before provisionProvision (benefit) expense for income taxes as set forth in the following table:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| Tax at statutory U.S. federal rate | $ | 176,994 |
| | $ | 189,590 |
| | $ | 1,201 |
|
| Impact of U.S. Tax Act - GILTI | 65,531 |
| | 93,739 |
| | — |
|
| Impact of the 2017 Tax Act - transition tax | — |
| | — |
| | 39,628 |
|
| Impact of the 2017 Tax Act - tax rate change | — |
| | — |
| | 52,228 |
|
| Impact of Tax Receivable Agreement | 713 |
| | 18,160 |
| | — |
|
| Valuation allowance | (14,548 | ) | | (93,125 | ) | | (89,269 | ) |
| State taxes, net of federal tax benefit | 4,231 |
| | 1,529 |
| | 3,437 |
|
| U.S. tax impact of foreign earnings (net of foreign tax credits) | 2,181 |
| | 792 |
| | 1,151 |
|
| Establishment/resolution of uncertain tax positions | (1,293 | ) | | (345 | ) | | (840 | ) |
| Adjustment for foreign income taxed at different rates | (76,922 | ) | | (95,822 | ) | | (2,359 | ) |
| Foreign tax credits | (56,171 | ) | | (65,046 | ) | | (17,956 | ) |
| Other | (2,491 | ) | | (552 | ) | | 1,998 |
|
| Provision (benefit) for income taxes | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
|
| | | | | | | | | | | | | | | |
| | Predecessor | | Successor |
| | For the Year Ended December 31, 2014 | | For the Period January 1 Through August 14, 2015 | | For the Period August 15
Through December 31, 2015 | | For the Year Ended
December 31, 2016 |
| | | |
| | (Dollars in thousands) |
| Tax at statutory U.S. federal rate | $ | (55,409 | ) | | $ | (33,431 | ) | | $ | (7,610 | ) | | $ | (40,747 | ) |
| U.S. valuation allowance, net | 26,175 |
| | 21,532 |
| | 7,355 |
| | 35,091 |
|
| State taxes, net of federal tax benefit | (4,387 | ) | | (2,005 | ) | | (697 | ) | | (2,324 | ) |
U.S. tax return adjustments to estimated taxes | (368 | ) | | — |
| | — |
| | — |
|
| Resolution of uncertain tax positions | (513 | ) | | 71 |
| | 64 |
| | (513 | ) |
Adjustment for foreign income taxed at different rates | 10,408 |
| | 11,136 |
| | 7,120 |
| | 12,738 |
|
| U.S. tax credits | (1,000 | ) | | — |
| | — |
| | — |
|
Non-U.S. tax exemptions, holidays and credits | — |
| | (691 | ) | | 228 |
| | (175 | ) |
| Goodwill impairment | 17,161 |
| | 8,026 |
| | — |
| | — |
|
| Capital loss expiration | 2,422 |
| | — |
| | — |
| | — |
|
Investment in subsidiary impairment deduction | — |
| | — |
| | — |
| | (10,111 | ) |
| Other | (279 | ) | | 1,814 |
| | 422 |
| | (1,511 | ) |
| Total income tax (benefit) expense | $ | (5,790 | ) | | $ | 6,452 |
| | $ | 6,882 |
| | $ | (7,552 | ) |
The Companycompany has been granted a tax holiday in Brazil, which expires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities atas of December 31, 2015,2019 and December 31, 20162018 are set forth in the following table:table.
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | (Dollars in thousands) |
| Deferred tax assets: | | | |
| Postretirement and other employee benefits | $ | 18,256 |
| | $ | 18,395 |
|
| Foreign tax credit and other carryforwards | 55,103 |
| | 111,325 |
|
| Capitalized research and experimental costs | 5,566 |
| | 7,695 |
|
| Environmental reserves | 1,110 |
| | 976 |
|
| Inventory adjustments | 14,863 |
| | 14,251 |
|
| Long-term contract option amortization | 1,080 |
| | 1,144 |
|
| Provision for rationalization charges | 232 |
| | 351 |
|
| Other | 1,872 |
| | 4,270 |
|
| Total gross deferred tax assets | 98,082 |
| | 158,407 |
|
| Less: valuation allowance | (13,736 | ) | | (58,446 | ) |
| Total deferred tax assets | 84,346 |
| | 99,961 |
|
| Deferred tax liabilities: | | | |
| Fixed assets | $ | 56,659 |
| | $ | 59,521 |
|
| Inventory | 12,778 |
| | 7,751 |
|
| Goodwill and acquired intangibles | 6,996 |
| | 3,668 |
|
| Other | 2,468 |
| | 3,138 |
|
| Total deferred tax liabilities | 78,901 |
| | 74,078 |
|
| Net deferred tax asset | $ | 5,445 |
| | $ | 25,883 |
|
|
| | | | | | | |
| | As of December 31, |
| | 2015 | | 2016 |
| | (Dollars in thousands) |
| Deferred tax assets: | | | |
| Fixed assets | $ | 10,128 |
| | $ | 41,677 |
|
| Postretirement and other employee benefits | 34,713 |
| | 32,275 |
|
| Foreign tax credit and other carryforwards | 115,163 |
| | 153,169 |
|
| Capitalized research and experimental costs | 21,592 |
| | 18,146 |
|
| Environmental reserves | 4,273 |
| | 4,237 |
|
| Inventory | 12,719 |
| | 15,227 |
|
| Original issue discount | — |
| | 6,461 |
|
| Long-term contract option amortization | 2,138 |
| | 2,074 |
|
| Provision for rationalization charges | 5,967 |
| | 7,498 |
|
| Other | 1,005 |
| | 3,391 |
|
| Total gross deferred tax assets | 207,698 |
| | 284,155 |
|
| Less: valuation allowance | (165,539 | ) | | (244,841 | ) |
| Total deferred tax assets | 42,159 |
| | 39,314 |
|
| Deferred tax liabilities: | | | |
| Fixed assets | $ | 64,278 |
| | $ | 47,346 |
|
| Debt discount amortization / Deferred financing fees | 7,666 |
| | 6,544 |
|
| Inventory | 4,985 |
| | 3,482 |
|
| Goodwill and acquired intangibles | 2,686 |
| | 2,295 |
|
| Other | 4,647 |
| | 2,751 |
|
| Total deferred tax liabilities | 84,262 |
| | 62,418 |
|
| Net deferred tax (liability) asset | $ | (42,103 | ) | | $ | (23,104 | ) |
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which requires deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will only have one net noncurrent deferred tax asset or liability. This ASU does not change the existing requirement that only permits offsetting within a jurisdiction. The amendments in the update may be applied either prospectively or retrospectively to all prior periods presented. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We adopted the amendments as of December 31, 2015 on a prospective basis. Adoption of the amendments resulted in the presentation of all deferred income tax assets as noncurrent deferred income tax assets in our Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted and the adoption of the amendments had no impact on our consolidated results of operations or cash flows. Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $15.3 million as of December 31, 2015 and $19.8$71.7 million as of December 31, 2016.2018 and $55.2 million as of December 31, 2019. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $57.4$45.8 million at as of December 31, 20152018 and $42.9$49.8 million at as of December 31, 2016.2019.
We continue to assess the need for valuation allowances against 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. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused.
GrafTech impaired In circumstances where the fixed assets and announced exiting of certain product lines in our Advanced Graphite Material ("AGM") product group, insignificant positive evidence does not outweigh the Company’s second quarter Form 10-Q of 2014. During the third quarter of 2014,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
we announced the conclusion of another phase of our on-going companywide cost savings assessment. This resulted in changes to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. The impairment charges and other rationalization related charges were incurred primarily in the U.S. jurisdiction. As a result, we determined that it is no longer “more likely than not” that we will generate sufficient future U.S. taxable income to realize our deferred tax assets related to U.S. foreign tax credits and state net operating loss carryforwards, as well as our net U.S. deferred tax assets. With the additional significant negative evidence of recent losses, the Company recognizedin regards to whether or not a $73.4 million non-cash charge to the Statement of Operations in 2014 to reflect a full valuation allowance against these U.S.is required, we have established and maintained valuation allowances on those net deferred income tax assets. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
During 2016, an affiliate of Brookfield, our parent company, purchased on the open market in aggregate approximately $53 million of GrafTech’s traded senior notes. This related party transaction generated a gain due to the discount at which the senior note was trading. This gain is taxable to GrafTech in 2016 and generates a deferred tax asset for an original issuance discount of approximately $6.5 million.
Valuation allowance activity for the years ended December 31, 2014, 20152018 and 2016 is2019 was as follows:
|
| | | |
| | (Dollars in thousands) |
| Balance as of December 31, 2017 | $ | 150,839 |
|
| Credited to income | (93,125 | ) |
| Translation adjustment | (302 | ) |
| Changes attributable to movement in underlying assets | 1,034 |
|
| Balance as of December 31, 2018 | $ | 58,446 |
|
| Credited to income | (14,548 | ) |
| Changes attributable to write-off of underlying assets | (30,138 | ) |
| Translation adjustment | (24 | ) |
| Balance as of December 31, 2019 | $ | 13,736 |
|
|
| | | |
| Predecessor | (Dollars in thousands) |
| Balance as of January 1, 2014 | $ | 20,411 |
|
| (Credited) / charged to income | 74,157 |
|
| Translation adjustment | (800 | ) |
| Changes attributable to movement in underlying assets | 1,953 |
|
| Balance at December 31, 2014 | $ | 95,721 |
|
| (Credited) / charged to income | 29,363 |
|
| Translation adjustment | (1,467 | ) |
| Changes attributable to movement in underlying assets | (8,168 | ) |
| Balance as of August 14, 2015 | $ | 115,449 |
|
| | |
| Successor | |
| Balance as of August 15, 2015 | $ | 115,449 |
|
| (Credited) / charged to income | 6,780 |
|
| Translation adjustment | (101 | ) |
| Changes attributable to movement in underlying assets | 43,411 |
|
| Balance as of December 31, 2015 | $ | 165,539 |
|
| (Credited) / charged to income | 78,469 |
|
| Translation adjustment | 583 |
|
| Changes attributable to movement in underlying assets | 250 |
|
| Balance as of December 31, 2016 | $ | 244,841 |
|
We have total foreign tax credit carryforwards of $19.7 million as of December 31, 2016, for which a full valuation allowance is recorded. These tax credit carryforwards begin to expire as of March 15, 2017. In addition, we have a federal net operating loss carryforward of $244.6 million and state net operating losses carryforwards of $290.5 million, which can be carried forward from 5 to 20 years. These net operating losses carryforwards generate a deferred tax asset of $95.5 million as of December 31, 2016. We also have U.S. non-net operating loss related deferred tax assets of $100.9 million as of December 31, 2016. The federal net operating loss carryforward and foreign tax credit utilization will be limited by IRC §382 and §383, respectively.
We have assessed the need for valuation allowances against these 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, including existing level of profitability and recently available projections of future taxable income, which are comparable with current year results.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Based uponIn the levelsfourth quarter of historical federal and state2017, with the enactment of the Tax Act, additional taxable income and projectionswas derived as a result of future federal and stateinclusion of accumulated previously untaxed foreign earnings of GrafTech’s foreign subsidiaries. This additional taxable income overled to the periods during whichutilization of the carryforwards can be utilized, we do not believe it is more likely than not that we will realizeU.S. net operating loss carryforward in 2017 and a partial release of the tax benefits of thesevaluation allowance against the U.S. deferred tax assets. UntilThe valuation allowance was further reduced by the U.S. tax rate decrease from 35% to 21% as a result of the Tax Act. During 2018, we determinedetermined that we will generate sufficient jurisdictionalpositive evidence existed that allowed us to conclude that a full valuation allowance was no longer required to be recorded against the deferred tax assets related to the U.S. tax attributes. This positive evidence was primarily supplied by the Company exiting a cumulative loss period in the U.S. as well as sufficient U.S. current and forecasted taxable income to realize ourthat would utilize the U.S. tax attributes. As a result, a partial release (to reflect only the economic benefit of the attributes) of the valuation allowance against federal net operating losses and state losses was recorded in 2018 while a full release of the valuation allowance against the federal foreign tax credit carryforward, other federal deferred tax assets these assets will continuewas also recorded. A valuation allowance of $35.8 million is included in the December 31, 2018 balance reflected above as there was not sufficient positive evidence that the deferred tax asset related to be fully reserved.the U.S. federal net operating loss would generate more than its estimated economic benefit. This valuation allowance and the related deferred tax asset were subsequently released to the income statement in 2019.
WeIn March of 2017, $19.5 million of foreign tax credits expired. During the fourth quarter of 2017, we increased our foreign tax credit carryforward by $37.7 million, as a result of additional foreign taxable income derived in connections with the new U.S. tax legislation that was enacted on December 22, 2017. As of December 31, 2019, we have non-U.S. loss anda total foreign tax credit carryforward of $31.3 million. As indicated above, a valuation allowance is no longer recorded against this foreign tax credit carryforward. These tax credit carryforwards on a gross tax effected basisbegin to expire as of $34.3March 15, 2025. In addition, we have state net operating loss carryforwards of $250.0 million (net of federal benefit), which can be carried forward from 7 years5 to 20 years. These state net operating loss carryforwards generated a deferred tax asset of $14.9 million as of December 31, 2019. We also have U.S. state tax credits of $2.3 million as of December 31, 2019.
We have foreign loss carryforwards on a gross basis of $16.8 million as of December 31, 2019, which can be carried forward indefinitely.
During the fourth quarter of 2017, GrafTech Switzerland moved from a cumulative loss position to a cumulative profit position, as well as a current year utilization of its net operating loss carryforward. This positive evidence and utilization led to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2018.
As of December 31, 2016,2019, we had unrecognized tax benefits of $3.3$0.2 million, $3.0 million of which, if recognized, would have a favorable impact on our effective tax rate. We have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.5 million as of December 31, 2014 (a reduction of $0.1 million), $0.7 million as of December 31, 2015 (an increase of $0.2 million) and $0.8 million as of December 31, 20162017, and $0.9 million as of December 31, 2018 (an increase of $0.1 million). We had 0 accrued interest and penalties as of December 31, 2019 (a decrease of $0.9 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | |
| | (Dollars in thousands) |
| | |
| Balance as of December 31, 2017 | $ | 2,492 |
|
| Reductions for tax positions of prior years | (100 | ) |
| Lapse of statutes of limitations | (373 | ) |
| Foreign currency impact | (21 | ) |
| Settlements | (8 | ) |
| Balance as of December 31, 2018 | $ | 1,990 |
|
| Settlements | (1,383 | ) |
| Reductions for tax positions of prior years | (421 | ) |
| Foreign currency impact | (2 | ) |
| Balance as of December 31, 2019 | $ | 184 |
|
|
| | | |
| Predecessor | (Dollars in thousands) |
| Balance at January 1 | $ | 7,203 |
|
| Additions based on tax positions related to the current year | 268 |
|
| Additions for tax positions of prior years | 232 |
|
| Reductions for tax positions of prior years | (1,204 | ) |
| Lapse of statutes of limitations | (1,180 | ) |
| Settlements | (1,503 | ) |
| Foreign currency impact | (106 | ) |
| Balance at December 31, 2014 | $ | 3,710 |
|
| Foreign currency impact | (21 | ) |
| Balance as of August 14, 2015 | $ | 3,689 |
|
| | |
| Successor | |
| Balance as of August 15, 2015 | $ | 3,689 |
|
| Additions for tax positions of prior years | 301 |
|
| Foreign currency impact | (69 | ) |
| Balance as of December 31, 2015 | $ | 3,921 |
|
| Lapse of statutes of limitations | (603 | ) |
| Foreign currency impact | 20 |
|
| Balance as of December 31, 2016 | $ | 3,338 |
|
It is reasonably possible that a reduction of unrecognized tax benefits of up to $1.0$0.2 million may occur within 12 months due to settlements and the expiration of statutes of limitation.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 20132016 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2010.2013.
As of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.5 billion. Because $1.3 billion of such earnings have previously been subject to taxation by way of the transition tax on foreign earnings required by the Tax Act, as well as the current and previous years’ GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity.
Stock Split
On April 12, 2018, the Company effected a 3,022,259.23 to one stock split of the Company's then outstanding common stock. We have retroactively applied this split to all share presentations, as well as "Net income per share" and "Income from continuing operations per share" calculations for the periods presented.
Conditional Dividend to Pre-IPO Stockholder
On April 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 on May 8, 2018.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note to the sole pre-IPO stockholder. This note was repaid on June 15, 2018 with proceeds from our Incremental Term Loans. See Note 5 "Debt and Liquidity".
Initial Public Offering
On April 23, 2018, we completed the IPO of 35,000,000 shares of our common stock at a price of $15 per share. This offering represented a sale of 11.6% of our sole pre-IPO stockholder's ownership in the Company.
On April 26, 2018, we closed the sale of an additional 3,097,525 shares of common stock at a price to the public of $15 per share from the pre-IPO stockholder, as a result of the partial exercise by the underwriters in our IPO of their overallotment option. After giving effect to the partial exercise of the overallotment option, the total number of shares of common stock sold by the pre-IPO stockholder was 38,097,525.
The Company hasdid not provided for U.S. income taxes or foreign withholding taxesreceive any proceeds related to the offering. We incurred $5.1 million of legal, accounting, printing and other fees associated with this offering through December 31, 2018, which was recorded in "Selling and administrative" expenses in the Consolidated Statements of Operations.
Follow-on Offering and Common Stock Repurchases
On August 13, 2018, Brookfield completed an underwritten public secondary offering (the "Offering") of 23,000,000 shares of our common stock at a price to the public of $20.00 per share. The Company did not receive any proceeds related to the Offering. Pursuant to a share repurchase agreement with Brookfield, we concurrently repurchased 11,688,311 shares directly from Brookfield. The price per share paid by us in the repurchase was equal to the price at which the underwriters purchased the shares from Brookfield in the Offering net of underwriting commissions and discounts. We funded the share repurchase from cash on hand. The terms and conditions of the share repurchase were reviewed and approved by the audit committee of our board of directors, which is comprised solely of independent directors. All repurchased shares were retired.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the differences between the financial reporting basis in our foreign investments, and the tax basis in such investments, estimated to be $472.8 million, which are considered to be permanently reinvested as of December 31, 2016. Any outside basis difference would be taxable upon the sale open market, including under Rule 10b5-1 and/or liquidation of the foreign subsidiaries, or upon the remittance of dividends. The measurement of the unrecognized U.S. income taxes, if any, that may be associated with these outside basis differences, is not practicable.Rule 10b-18
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
(15) | Accumulated Other Comprehensive Loss |
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 of December 31, 2019, we had repurchased 1,004,685 shares of common stock totaling $10.9 million under this program.
On December 5, 2019, GrafTech announced two separate transactions. The first was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares of GrafTech common stock at a price of $13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, GrafTech entered into a share repurchase agreement with Brookfield to repurchase $250 million of stock from Brookfield at the arms length price of $13.125, set by the competitive bidding process of the secondary block trade. As a result, GrafTech repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%.
Dividends
The Board of Directors declared and paid a dividend of $0.0645 per share for the first quarter of 2018 totaling $19.5 million, which was paid on June 29, 2018 and represented a prorated quarterly dividend of $0.085 (or $0.34 per annum) per share of our common stock prorated from the date of our IPO, April 23, 2018 to June 30, 2018. We have paid our regular quarterly dividends of $0.085 per share since that time. Additionally, we paid a special dividend to stockholders of $0.70 per share on December 31, 2018.
The balance in our accumulatedAccumulated other comprehensive loss(loss) income is set forth in the following table:
|
| | | | | | | |
| | As of December 31, 2019 | | As of
December 31, 2018 |
| | (Dollars in thousands) |
| Foreign currency translation adjustments, net of tax | $ | (9,293 | ) | | $ | (2,922 | ) |
| Commodities, foreign currency and interest rate derivatives, net of tax | 1,932 |
| | (2,878 | ) |
| Total accumulated comprehensive (loss) income | $ | (7,361 | ) | | $ | (5,800 | ) |
|
| | | | | | | |
| | As of December 31, 2015 | | As of
December 31,
2016 |
| | (Dollars in thousands) |
| Foreign currency translation adjustments | $ | 10,134 |
| | $ | 7,560 |
|
| Commodities and foreign currency derivatives | 123 |
| | (2 | ) |
| Total accumulated comprehensive loss | $ | 10,257 |
| | $ | 7,558 |
|
As a result of our acquisition by Brookfield and the subsequent purchase price accounting adjustments, accumulated comprehensive losses in equity were reset on August 15, 2015.
| |
(16)(15) | Guarantor InformationEarnings per Share |
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation as of December 31, 2019, 2018 and 2017. See Note 14 "Stockholders' Equity" for details on our April 12, 2018 stock split and our common stock repurchases on 2019 and 2018.
On November 20, 2012, GrafTech International Ltd. (the “Parent”), issued $300 million aggregate principal amount |
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| Weighted average common shares outstanding for basic calculation | 289,057,356 |
| | 297,748,327 |
| | 302,225,923 |
|
| Add: Effect of equity awards | 17,245 |
| | 5,443 |
| | — |
|
| Weighted average common shares outstanding for diluted calculation | 289,074,601 |
| | 297,753,770 |
| | 302,225,923 |
|
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of Senior Notes. The Senior Notes mature on November 15, 2020common shares outstanding, which includes 32,981 and bear interest at a rate5,592 shares of 6.375%participating securities in 2019 and 2018, respectively. Diluted earnings per year, payable semi-annually in arrears on May 15 and November 15share are calculated by dividing net income (loss) by the sum of each year. The Senior Notesthe weighted average number of common shares outstanding plus the additional common shares that would have been guaranteed on a senior basis by the following wholly-owned direct and indirect subsidiaries of the Parent: GrafTech Finance Inc., GrafTech Holdings Inc., GrafTech USA LLC, Seadrift Coke LLP, Fiber Materials, Inc., Intermat, GrafTech Global Enterprises Inc., GrafTech International Holdings Inc., GrafTech DE LLC, GrafTech Seadrift Holding Corp, GrafTech International Trading Inc., GrafTech Technology LLC, GrafTech NY Inc., and Graphite Electrode Network LLC.
The guarantors of the Senior Notes, solely in their respective capacities as such, are collectively called the “Guarantors.” Our other subsidiaries, which are not guarantors of the Senior Notes, are called the “Non-Guarantors.”
All of the guarantees are unsecured. All of the guarantees are full, unconditional (subject to limited exceptions described below) and joint and several. Each of the Guarantors are 100% owned, directly or indirectly, by the Parent. All of the guarantees of the Senior Notes continue until the Senior Notes haveoutstanding if potentially dilutive securities had been paid in full, and payment under such guarantees could be required immediately upon the occurrence of an event of default under the Senior Notes. If a Guarantor makes a payment under its guarantee of the Senior Notes, it would have the right under certain circumstances to seek contribution from the other Guarantors.
issued.
The Guarantors will be released from the guarantees upon the occurrence of certain events, including the following: the unconditional release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Notes by such Guarantor; the sale or other disposition, including by way of merger or consolidation or the sale of its capital stock, following which such Guarantor is no longer a subsidiary of the Parent; or the Parent's exercise of its legal defeasance option or its covenant defeasance option as described in the indenture applicable to the Senior Notes. If any Guarantor is released, no holder of the Senior Notes will have a claim as a creditor against such Guarantor and the indebtedness and other liabilities, including trade payables and preferred stock, if any, of such Guarantor will be effectively senior to the claim of any holders of the Senior Notes.
Investments in subsidiaries are recorded on the equity basis.
The following tables set forth condensed consolidating balance sheets as of December 31, 2015 and December 31, 2016 and condensed consolidating statements of operations and comprehensive income (loss)weighted average common shares outstanding for the year ended December 31, 2014, 2015diluted earnings per share calculation excludes consideration of 1,082,113 and 2016650,432 equivalent shares in 2019 and condensed consolidating statements of cash flows for 2014, 2015 and 2016 of the Parent, Guarantors and the Non-Guarantors.2018, respectively, as these shares are anti-dilutive.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(16) Summary of quarterly financial data (Unaudited)
The following summarizes certain consolidated operating results by quarter for 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 |
| | | March 31 | | June 30 | | September 30 | | December 31 | | March 31 | | June 30 | | September 30 | | December 31 |
| | | (Dollars in thousands, except per share amounts) |
| As Reported: | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 474,994 |
| | $ | 480,390 |
| | $ | 420,797 |
| | $ | 414,612 |
| | $ | 451,899 |
| | $ | 456,332 |
| | $ | 454,890 |
| | $ | 532,789 |
|
| Gross profit | | 279,470 |
| | 283,343 |
| | 242,300 |
| | 235,290 |
| | 306,750 |
| | 290,422 |
| | 274,610 |
| | 318,430 |
|
| Research and development | | 637 |
| | 713 |
| | 611 |
| | 723 |
| | 429 |
| | 581 |
| | 518 |
| | 601 |
|
| Selling and administrative expenses | | 15,226 |
| | 15,394 |
| | 15,708 |
| | 17,346 |
| | 15,876 |
| | 16,239 |
| | 14,234 |
| | 15,683 |
|
| Other expense (income), net | | 467 |
| | 863 |
| | (688 | ) | | 4,561 |
| | 2,005 |
| | (974 | ) | | 1,502 |
| | 828 |
|
Related party Tax Receivable Agreement Expense | | — |
| | — |
| | — |
| | 3,393 |
| | — |
| | 61,801 |
| | — |
| | 24,677 |
|
| Interest Expense | | 33,700 |
| | 32,969 |
| | 31,803 |
| | 28,859 |
| | 37,865 |
| | 28,667 |
| | 33,855 |
| | 34,674 |
|
| Interest Income | | (414 | ) | | (731 | ) | | (1,765 | ) | | (1,799 | ) | | (115 | ) | | (391 | ) | | (562 | ) | | (589 | ) |
| Net income | | 197,436 |
| | 196,368 |
| | 175,876 |
| | 174,922 |
| | 223,673 |
| | 201,448 |
| | 199,466 |
| | 229,632 |
|
| Net income per share | | $ | 0.68 |
| | $ | 0.68 |
| | $ | 0.61 |
| | $ | 0.61 |
| | $ | 0.74 |
| | $ | 0.67 |
| | $ | 0.67 |
| | $ | 0.79 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING BALANCE SHEETS |
| As of December 31, 2015 |
| (in thousands) |
| | | | | | | | | Consolidating | | |
| | | | | | | Non- | | Entries and | | |
| | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| ASSETS | | | | | | | | | | |
| Current Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | — |
| | $ | 646 |
| | $ | 6,281 |
| | $ | — |
| | $ | 6,927 |
|
| Accounts receivable - affiliates | | 51,592 |
| | 9,803 |
| | 19,505 |
| | (80,900 | ) | | — |
|
| Accounts receivable - trade | | — |
| | 7,599 |
| | 74,791 |
| | — |
| | 82,390 |
|
| Inventories | | — |
| | 54,613 |
| | 163,517 |
| | — |
| | 218,130 |
|
| Prepaid and other current assets | | — |
| | 7,907 |
| | 13,243 |
| | — |
| | 21,150 |
|
| Current assets of discontinued operations | | — |
| | 81,638 |
| | 17,520 |
| | (877 | ) | | 98,281 |
|
| Total current assets | | 51,592 |
| | 162,206 |
| | 294,857 |
| | (81,777 | ) | | 426,878 |
|
| | | | | | | | | | | |
| Investment in affiliates | | 1,068,028 |
| | 668,113 |
| | — |
| | (1,736,141 | ) | | — |
|
| Property, plant and equipment | | — |
| | 209,633 |
| | 341,530 |
| | — |
| | 551,163 |
|
| Deferred income taxes | | — |
| | — |
| | 15,326 |
| | — |
| | 15,326 |
|
| Goodwill | | — |
| | 72,399 |
| | 99,660 |
| | — |
| | 172,059 |
|
| Notes receivable - affiliate | | — |
| | 46,074 |
| | — |
| | (46,074 | ) | | — |
|
| Other assets | | — |
| | 79,368 |
| | 73,246 |
| | — |
| | 152,614 |
|
| Long-term assets of discontinued operations | | — |
| | 99,457 |
| | 4,518 |
| | — |
| | 103,975 |
|
| Total Assets | | $ | 1,119,620 |
| | $ | 1,337,250 |
| | $ | 829,137 |
| | $ | (1,863,992 | ) | | $ | 1,422,015 |
|
| | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | |
| Accounts payable - affiliate | | $ | 159 |
| | $ | 71,099 |
| | $ | 9,642 |
| | $ | (80,900 | ) | | $ | — |
|
| Accounts payable - trade | | — |
| | 11,191 |
| | 28,956 |
| | — |
| | 40,147 |
|
| Short-term debt | | — |
| | 4,636 |
| | 136 |
| | — |
| | 4,772 |
|
| Accrued income and other taxes | | — |
| | 2,824 |
| | 3,109 |
| | — |
| | 5,933 |
|
| Rationalizations | | — |
| | 995 |
| | 200 |
| | — |
| | 1,195 |
|
| Other accrued liabilities | | 2,444 |
| | 4,841 |
| | 13,702 |
| | — |
| | 20,987 |
|
| Current liabilities of discontinued operations | | — |
| | 18,384 |
| | 5,575 |
| | (877 | ) | | 23,082 |
|
| Total current liabilities | | 2,603 |
| | 113,970 |
| | 61,320 |
| | (81,777 | ) | | 96,116 |
|
| | | | | | | | | | | |
| Long-term debt - affiliate | | 38,661 |
| | — |
| | 7,413 |
| | (46,074 | ) | | — |
|
| Long-term debt - third party | | 267,827 |
| | 93,758 |
| | 870 |
| | — |
| | 362,455 |
|
| Other long-term obligations | | — |
| | 60,508 |
| | 33,810 |
| | — |
| | 94,318 |
|
| Deferred income taxes | | — |
| | 248 |
| | 57,182 |
| | — |
| | 57,430 |
|
| Long-term liabilities of discontinued operations | | — |
| | 738 |
| | 429 |
| | — |
| | 1,167 |
|
| Stockholders' equity | | 810,529 |
| | 1,068,028 |
| | 668,113 |
| | (1,736,141 | ) | | 810,529 |
|
| Total Liabilities and Stockholders' Equity | | $ | 1,119,620 |
| | $ | 1,337,250 |
| | $ | 829,137 |
| | $ | (1,863,992 | ) | | $ | 1,422,015 |
|
(17) Subsequent Events
On February 5, 2020, the Board of Directors declared a dividend of $0.085 per share of common stock to stockholders of record as of the close of business on February 28, 2020, to be paid on March 31, 2020.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING BALANCE SHEETS |
| As of December 31, 2016 |
| (in thousands) |
| | | | | | | | | | | |
| | | | | | | | | Consolidating | | |
| | | | | | | Non- | | Entries and | | |
| | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| ASSETS | | | | | | | | | | |
| Current Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | — |
| | $ | 636 |
| | $ | 10,974 |
| | $ | — |
| | $ | 11,610 |
|
| Accounts receivable - affiliates | | 51,592 |
| | 3,624 |
| | 19,643 |
| | (74,859 | ) | | — |
|
| Accounts receivable - trade | | — |
| | 7,518 |
| | 73,050 |
| | — |
| | 80,568 |
|
| Inventories | | — |
| | 44,563 |
| | 111,548 |
| | — |
| | 156,111 |
|
| Prepaid and other current assets | | 1,350 |
| | 4,853 |
| | 15,462 |
| | — |
| | 21,665 |
|
| Current assets of discontinued operations | | — |
| | 51,160 |
| | 14,296 |
| | (4,477 | ) | | 60,979 |
|
| Total current assets | | 52,942 |
| | 112,354 |
| | 244,973 |
| | (79,336 | ) | | 330,933 |
|
| | | | | | | | | | | |
| Investment in affiliates | | 844,379 |
| | 601,597 |
| | — |
| | (1,445,976 | ) | | — |
|
| Property, plant and equipment | | — |
| | 191,503 |
| | 317,352 |
| | — |
| | 508,855 |
|
| Deferred income taxes | | — |
| | — |
| | 19,803 |
| | — |
| | 19,803 |
|
| Goodwill | | — |
| | 70,399 |
| | 100,718 |
| | — |
| | 171,117 |
|
| Notes receivable - affiliate | | — |
| | 49,003 |
| | — |
| | (49,003 | ) | | — |
|
| Other assets | | — |
| | 70,767 |
| | 70,801 |
| | — |
| | 141,568 |
|
| Total Assets | | $ | 897,321 |
| | $ | 1,095,623 |
| | $ | 753,647 |
| | $ | (1,574,315 | ) | | $ | 1,172,276 |
|
| | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | |
| Accounts payable - affiliate | | $ | 806 |
| | $ | 71,243 |
| | $ | 2,810 |
| | $ | (74,859 | ) | | $ | — |
|
| Accounts payable - trade | | 964 |
| | 8,033 |
| | 38,666 |
| | — |
| | 47,663 |
|
| Short-term debt | | — |
| | 3,062 |
| | 5,790 |
| | — |
| | 8,852 |
|
| Accrued income and other taxes | | — |
| | 2,095 |
| | 3,161 |
| | — |
| | 5,256 |
|
| Rationalizations | | — |
| | 57 |
| | 18 |
| | — |
| | 75 |
|
| Other accrued liabilities | | 2,444 |
| | 12,148 |
| | 15,927 |
| | — |
| | 30,519 |
|
| Current liabilities of discontinued operations | | — |
| | 20,381 |
| | 4,138 |
| | (4,477 | ) | | 20,042 |
|
| Total current liabilities | | 4,214 |
| | 117,019 |
| | 70,510 |
| | (79,336 | ) | | 112,407 |
|
| | | | | | | | | | | |
| Long-term debt - affiliate | | 41,590 |
| | — |
| | 7,413 |
| | (49,003 | ) | | — |
|
| Long-term debt - third party | | 274,132 |
| | 81,695 |
| | 753 |
| | — |
| | 356,580 |
|
| Other long-term obligations | | — |
| | 50,943 |
| | 31,205 |
| | — |
| | 82,148 |
|
| Deferred income taxes | | — |
| | 909 |
| | 41,997 |
| | — |
| | 42,906 |
|
| Long-term liabilities of discontinued operations | | — |
| | 678 |
| | 172 |
| | — |
| | 850 |
|
| Stockholders' equity | | 577,385 |
| | 844,379 |
| | 601,597 |
| | (1,445,976 | ) | | 577,385 |
|
| Total Liabilities and Stockholders' Equity | | $ | 897,321 |
| | $ | 1,095,623 |
| | $ | 753,647 |
| | $ | (1,574,315 | ) | | $ | 1,172,276 |
|
| | | | | | | | | | | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
| For the year ended December 31, 2014 (Predecessor) |
| (in thousands) |
| | | | | | | | | Consolidating | | |
| | | | | | | Non- | | Entries and | | |
| | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | | |
| Sales - affiliates | | $ | — |
| | $ | 240,295 |
| | $ | 142,651 |
| | $ | (382,946 | ) | | $ | — |
|
| Sales - third party | | — |
| | 203,609 |
| | 621,536 |
| | — |
| | 825,145 |
|
| Net sales | | — |
| | 443,904 |
| | 764,187 |
| | (382,946 | ) | | 825,145 |
|
| Cost of sales | | — |
| | 403,058 |
| | 737,044 |
| | (382,946 | ) | | 757,156 |
|
| Gross profit | | — |
| | 40,846 |
| | 27,143 |
| | — |
| | 67,989 |
|
| Research and development | | — |
| | 9,738 |
| | — |
| | — |
| | 9,738 |
|
| Selling and administrative expenses | | — |
| | 33,108 |
| | 61,521 |
| | — |
| | 94,629 |
|
| Impairments | | — |
| | 75,650 |
| | — |
| | — |
| | 75,650 |
|
| Rationalizations | | — |
| | 5,431 |
| | 2,515 |
| | — |
| | 7,946 |
|
| Operating loss | | — |
| | (83,081 | ) | | (36,893 | ) | | — |
| | (119,974 | ) |
| | | | | | | | | | | |
| Other expense (income), net | | — |
| | 2,049 |
| | 871 |
| | — |
| | 2,920 |
|
| Interest expense - affiliate | | — |
| | 806 |
| | — |
| | (806 | ) | | — |
|
| Interest expense - third party | | 32,118 |
| | 2,721 |
| | 897 |
| | — |
| | 35,736 |
|
| Interest income - affiliate | | (806 | ) | | — |
| | — |
| | 806 |
| | — |
|
| Interest income - third party | | — |
| | — |
| | (320 | ) | | — |
| | (320 | ) |
Loss from continuing operations before provision for income taxes | | (31,312 | ) | | (88,657 | ) | | (38,341 | ) | | — |
| ` | (158,310 | ) |
| Provision for income taxes | | 15,443 |
| | (17,240 | ) | | (3,993 | ) | | — |
| | (5,790 | ) |
| Equity in loss from continuing operations of subsidiary | | (105,765 | ) | | (34,348 | ) | | — |
| | 140,113 |
| | — |
|
| Net loss from continuing operations | | (152,520 | ) | | (105,765 | ) | | (34,348 | ) | | 140,113 |
| | (152,520 | ) |
| | |
| |
| |
| |
| |
|
| Loss from discontinued operations, net of tax | | — |
| | (126,217 | ) | | (6,639 | ) | | — |
| | (132,856 | ) |
Equity in loss from discontinued operations of subsidiary
| | (132,856 | ) | | (6,639 | ) | | — |
| | 139,495 |
| | — |
|
| Loss on discontinued operations | | (132,856 | ) | | (132,856 | ) | | (6,639 | ) | | 139,495 |
| | (132,856 | ) |
| | | | | | | | | | | |
| Net loss | | (285,376 | ) | | (238,621 | ) | | (40,987 | ) | | 279,608 |
| | (285,376 | ) |
| | | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss | | $ | (285,376 | ) | | $ | (238,621 | ) | | $ | (40,987 | ) | | $ | 279,608 |
| | $ | (285,376 | ) |
| Other comprehensive loss | | (43,900 | ) | | (43,900 | ) | | (28,650 | ) | | 72,550 |
| | (43,900 | ) |
| Comprehensive loss | | $ | (329,276 | ) | | $ | (282,521 | ) | | $ | (69,637 | ) | | $ | 352,158 |
| | $ | (329,276 | ) |
| | | | | | | | | | | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
| For the Period January 1 through August 14, 2015 (Predecessor) |
| (in thousands) |
| | | | | | | | | Consolidating | | |
| | | | | | | Non- | | Entries and | | |
| | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | | |
| Sales - affiliates | | $ | — |
| | $ | 117,366 |
| | $ | 52,683 |
| | $ | (170,049 | ) | | $ | — |
|
| Sales - third party | | — |
| | 80,243 |
| | 259,664 |
| | — |
| | 339,907 |
|
| Net sales | | — |
| | 197,609 |
| | 312,347 |
| | (170,049 | ) | | 339,907 |
|
| Cost of sales | | — |
| | 180,983 |
| | 294,067 |
| | (170,049 | ) | | 305,001 |
|
| Gross profit | | — |
| | 16,626 |
| | 18,280 |
| | — |
| | 34,906 |
|
| Research and development | | — |
| | 3,377 |
| | — |
| | — |
| | 3,377 |
|
| Selling and administrative expenses | | 6,750 |
| | 31,513 |
| | 26,120 |
| | — |
| | 64,383 |
|
| Impairments | | — |
| | 35,381 |
| | — |
| | — |
| | 35,381 |
|
| Rationalizations | | — |
| | (68 | ) | | 82 |
| | — |
| | 14 |
|
| Operating loss | | (6,750 | ) | | (53,577 | ) | | (7,922 | ) | | — |
| | (68,249 | ) |
| | | | | | | | | | | |
| Other expense (income), net | | — |
| | 889 |
| | 532 |
| | — |
| | 1,421 |
|
| Interest expense - affiliate | | 3 |
| | 372 |
| | — |
| | (375 | ) | | — |
|
| Interest expense - third party | | 24,366 |
| | 1,574 |
| | 271 |
| | — |
| | 26,211 |
|
| Interest income - affiliate | | (372 | ) | | (3 | ) | | — |
| | 375 |
| | — |
|
| Interest income - third party | | — |
| | — |
| | (363 | ) | | — |
| | (363 | ) |
Loss from continuing operations before provision for income taxes | | (30,747 | ) | | (56,409 | ) | | (8,362 | ) | | — |
| ` | (95,518 | ) |
| Provision for income taxes | | — |
| | 384 |
| | 6,068 |
| | — |
| | 6,452 |
|
| Equity in loss from continuing operations of subsidiary | | (71,223 | ) | | (14,430 | ) | | — |
| | 85,653 |
| | — |
|
| Net loss from continuing operations | | (101,970 | ) | | (71,223 | ) | | (14,430 | ) | | 85,653 |
| | (101,970 | ) |
| | | | | | | | | | | |
| Loss from discontinued operations, net of tax | | — |
| | (13,430 | ) | | (5,249 | ) | | — |
| | (18,679 | ) |
Equity in loss from discontinued operations of subsidiary
| | (18,679 | ) | | (5,249 | ) | | — |
| | 23,928 |
| | — |
|
| Loss on discontinued operations | | (18,679 | ) | | (18,679 | ) | | (5,249 | ) | | 23,928 |
| | (18,679 | ) |
| | | | | | | | | | | |
| Net loss | | (120,649 | ) | | (89,902 | ) | | (19,679 | ) | | 109,581 |
| | (120,649 | ) |
| | | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss | | $ | (120,649 | ) | | $ | (89,902 | ) | | $ | (19,679 | ) | | $ | 109,581 |
| | $ | (120,649 | ) |
| Other comprehensive loss | | (26,674 | ) | | (26,674 | ) | | (28,041 | ) | | 54,715 |
| | (26,674 | ) |
| Comprehensive loss | | $ | (147,323 | ) | | $ | (116,576 | ) | | $ | (47,720 | ) | | $ | 164,296 |
| | $ | (147,323 | ) |
| | | | | | | | | | | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
| For the Period August 15 Through December 31, 2015 (Successor) |
| (in thousands) |
| | | | | | | | | Consolidating | | |
| | | | | | | Non- | | Entries and | | |
| | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | | |
| Sales - affiliates | | $ | — |
| | $ | 48,988 |
| | $ | 31,898 |
| | $ | (80,886 | ) | | $ | — |
|
| Sales - third party | | — |
| | 40,279 |
| | 152,854 |
| | — |
| | 193,133 |
|
| Net sales | | — |
| | 89,267 |
| | 184,752 |
| | (80,886 | ) | | 193,133 |
|
| Cost of sales | | — |
| | 87,683 |
| | 174,048 |
| | (80,886 | ) | | 180,845 |
|
| Gross profit | | — |
| | 1,584 |
| | 10,704 |
| | — |
| | 12,288 |
|
| Research and development | | — |
| | 1,083 |
| | — |
| | — |
| | 1,083 |
|
| Selling and administrative expenses | | — |
| | 5,556 |
| | 17,929 |
| | — |
| | 23,485 |
|
| Rationalizations | | — |
| | 70 |
| | 213 |
| | — |
| | 283 |
|
| Operating loss | | — |
| | (5,125 | ) | | (7,438 | ) | | — |
| | (12,563 | ) |
| | |
| |
| |
| |
| |
|
| Other expense (income), net | | — |
| | 1,286 |
| | (2,099 | ) | | — |
| | (813 | ) |
| Interest expense - affiliate | | 226 |
| | — |
| | — |
| | (226 | ) | | — |
|
| Interest expense - third party | | 9,552 |
| | 161 |
| | 286 |
| | — |
| | 9,999 |
|
| Interest income - affiliate | | — |
| | (226 | ) | | — |
| | 226 |
| | — |
|
| Interest income - third party | | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
Loss from continuing operations before provision for income taxes | | (9,778 | ) | | (6,346 | ) | | (5,619 | ) | | — |
| ` | (21,743 | ) |
| Provision for income taxes | | — |
| | 634 |
| | 6,248 |
| | — |
|
| 6,882 |
|
| Equity in loss from continuing operations of subsidiary | | (18,847 | ) | | (11,868 | ) | | — |
| | 30,715 |
| | — |
|
| Net loss from continuing operations | | (28,625 | ) | | (18,848 | ) | | (11,867 | ) | | 30,715 |
| | (28,625 | ) |
| | |
| |
| |
| |
| |
|
| Loss from discontinued operations, net of tax | | — |
| | (4,154 | ) | | (772 | ) | | — |
| | (4,926 | ) |
Equity in loss from discontinued operations of subsidiary
| | (4,926 | ) | | (772 | ) | | — |
| | 5,698 |
| | — |
|
| Loss on discontinued operations | | (4,926 | ) | | (4,926 | ) | | (772 | ) | | 5,698 |
| | (4,926 | ) |
| | | | | | | | | | | |
| Net loss | | (33,551 | ) | | (23,774 | ) | | (12,639 | ) | | 36,413 |
| | (33,551 | ) |
| | | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss | | $ | (33,551 | ) | | $ | (23,774 | ) | | $ | (12,639 | ) | | $ | 36,413 |
| | $ | (33,551 | ) |
| Other comprehensive loss | | (10,257 | ) | | (10,257 | ) | | (10,257 | ) | | 20,514 |
| | (10,257 | ) |
| Comprehensive loss | | $ | (43,808 | ) | | $ | (34,031 | ) | | $ | (22,896 | ) | | $ | 56,927 |
| | $ | (43,808 | ) |
| | | | | | | | | | | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
| For the year ended December 31, 2016 (Successor) |
| (in thousands) |
| | | | | | | | | Consolidating | | |
| | | | | | | Non- | | Entries and | | |
| | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | | | |
| Sales - affiliates | | $ | — |
| | $ | 122,164 |
| | $ | 57,099 |
| | $ | (179,263 | ) | | $ | — |
|
| Sales - third party | | — |
| | 87,028 |
| | 350,935 |
| | — |
| | 437,963 |
|
| Net sales | | — |
| | 209,192 |
| | 408,034 |
| | (179,263 | ) | | 437,963 |
|
| Cost of sales | | — |
| | 190,558 |
| | 436,721 |
| | (179,263 | ) | | 448,016 |
|
Additions to lower of cost or
market inventory reserve | | — |
| | 6,822 |
| | 12,152 |
| | — |
| | 18,974 |
|
| Gross profit (loss) | | — |
| | 11,812 |
| | (40,839 | ) | | — |
| | (29,027 | ) |
| Research and development | | — |
| | 2,399 |
| | — |
| | — |
| | 2,399 |
|
| Selling and administrative expenses | | — |
| | 23,831 |
| | 33,894 |
| | — |
| | 57,725 |
|
| Impairments | | — |
| | — |
| | 2,843 |
| | — |
| | 2,843 |
|
| Rationalizations | | — |
| | 110 |
| | (51 | ) | | — |
| | 59 |
|
| Operating loss | | — |
| | (14,528 | ) | | (77,525 | ) | | — |
| | (92,053 | ) |
| | | | | | | | | | | |
| Other expense (income), net | | 6 |
| | 1,492 |
| | (3,686 | ) | | — |
| | (2,188 | ) |
| Interest expense - affiliate | | 984 |
| | — |
| | — |
| | (984 | ) | | — |
|
| Interest expense - third party | | 25,430 |
| | 1,136 |
| | 348 |
| | — |
| | 26,914 |
|
| Interest income - affiliate | | — |
| | (984 | ) | | — |
| | 984 |
| | — |
|
| Interest income - third party | | — |
| | — |
| | (358 | ) | | — |
| | (358 | ) |
Loss from continuing operations before provision for income taxes | | (26,420 | ) | | (16,172 | ) | | (73,829 | ) | | — |
|
| (116,421 | ) |
| Provision for income taxes | | — |
| | 274 |
| | (7,826 | ) | | — |
| | (7,552 | ) |
| Equity in loss from continuing operations of subsidiary | | (82,449 | ) | | (66,003 | ) | | — |
| | 148,452 |
| | — |
|
| Net loss from continuing operations | | (108,869 | ) | | (82,449 | ) | | (66,003 | ) | | 148,452 |
| | (108,869 | ) |
| | |
| |
| |
| |
| |
|
| Loss from discontinued operations, net of tax | | (1,918 | ) | | (121,741 | ) | | (3,315 | ) | | — |
| | (126,974 | ) |
Equity in loss from discontinued operations of subsidiary
| | (125,056 | ) | | (3,315 | ) | | — |
| | 128,371 |
| | — |
|
| Loss on discontinued operations | | (126,974 | ) | | (125,056 | ) | | (3,315 | ) | | 128,371 |
| | (126,974 | ) |
| | | | | | | | | | | |
| Net loss | | (235,843 | ) | | (207,505 | ) | | (69,318 | ) | | 276,823 |
| | (235,843 | ) |
| | | | | | | | | | | |
Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss | | $ | (235,843 | ) | | $ | (207,505 | ) | | $ | (69,318 | ) | | $ | 276,823 |
| | $ | (235,843 | ) |
| Other comprehensive income (loss) | | 2,699 |
| | 2,699 |
| | 2,699 |
| | (5,398 | ) | | 2,699 |
|
| Comprehensive loss | | $ | (233,144 | ) | | $ | (204,806 | ) | | $ | (66,619 | ) | | $ | 271,425 |
| | $ | (233,144 | ) |
| | |
| |
| |
| |
| |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| For the year ended December 31, 2014 |
| (in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
Net cash (used in) provided by
operating activities: | $ | (9,474 | ) | | $ | 79,864 |
| | $ | 50,513 |
| | $ | — |
| | $ | 120,903 |
|
| | | | | | | | | | |
| Cash flow from investing activities: | | | | | | | | | |
| Loan repayments from affiliates | 6,604 |
| | — |
| | — |
| | (6,604 | ) | | — |
|
| Capital expenditures | — |
| | (58,926 | ) | | (26,055 | ) | | — |
| | (84,981 | ) |
| Insurance recoveries | — |
| | — |
| | 2,834 |
| | — |
| | 2,834 |
|
| Proceeds (payments) for derivatives | — |
| | (2,195 | ) | | 170 |
| | — |
| | (2,025 | ) |
| Proceeds from fixed asset sales | — |
| | 1,700 |
| | 3,342 |
| | — |
| | 5,042 |
|
| Other | — |
| | — |
| | 178 |
| | — |
| | 178 |
|
Net cash provided by (used in)
investing activities | 6,604 |
| | (59,421 | ) | | (19,531 | ) | | (6,604 | ) | | (78,952 | ) |
| | | | | | | | | | |
| Cash flow from financing activities: | | | | | | | | | |
| Loans repayments to affiliates | — |
| | (6,604 | ) | | — |
| | 6,604 |
| | — |
|
| Short-term debt borrowings | — |
| | (34 | ) | | (987 | ) | | — |
| | (1,021 | ) |
| Revolving Facility borrowings | — |
| | 183,000 |
| | 86,000 |
| | — |
| | 269,000 |
|
| Revolving Facility reductions | — |
| | (193,000 | ) | | (100,000 | ) | | — |
| | (293,000 | ) |
| Principal payments on long term debt | — |
| | (132 | ) | | (60 | ) | | — |
| | (192 | ) |
| Supply chain financing | — |
| | — |
| | (9,455 | ) | | — |
| | (9,455 | ) |
| Proceeds from exercise of stock options | 2,813 |
| | — |
| | — |
| | — |
| | 2,813 |
|
| Purchase of treasury shares | (894 | ) | | — |
| | — |
| | — |
| | (894 | ) |
| Refinancing fees and debt issuance costs | — |
| | (2,922 | ) | | (357 | ) | | — |
| | (3,279 | ) |
| Other | 951 |
| | — |
| | — |
| | — |
| | 951 |
|
Net cash (used in) provided by
financing activities | 2,870 |
| | (19,692 | ) | | (24,859 | ) | | 6,604 |
| | (35,077 | ) |
| | | | | | | | | | |
Net increase in cash
and cash equivalents | — |
| | 751 |
| | 6,123 |
| | — |
| | 6,874 |
|
Effect of exchange rate changes
on cash and cash equivalents | — |
| | — |
| | (1,212 | ) | | — |
| | (1,212 | ) |
Cash and cash equivalents at
beginning of period | — |
| | 4,752 |
| | 7,136 |
| | — |
| | 11,888 |
|
Cash and cash equivalents
at end of period | $ | — |
| | $ | 5,503 |
| | $ | 12,047 |
| | $ | — |
| | $ | 17,550 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| For the Period January 1 through August 14, 2015 (Predecessor) |
| (in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| Net cash (used in) provided by operating activities: | $ | (4,017 | ) | | $ | 34,418 |
| | $ | 25,632 |
| | $ | (27,710 | ) | | $ | 28,323 |
|
| | | | | | | | | | |
| Cash flow from investing activities: | | | | | | | | | |
| Loans from (repayments to) affiliates | 36,204 |
| | (21,343 | ) | | — |
| | (14,861 | ) | | — |
|
| Capital expenditures | — |
| | (20,572 | ) | | (11,729 | ) | | — |
| | (32,301 | ) |
| Payments for derivative instruments | — |
| | (7,595 | ) | | (668 | ) | | — |
| | (8,263 | ) |
| Proceeds from sale of assets | — |
| | 397 |
| | 249 |
| | — |
| | 646 |
|
Net cash provided by (used in) investing activities | 36,204 |
| | (49,113 | ) | | (12,148 | ) | | (14,861 | ) | | (39,918 | ) |
| | | | | | | | | | |
| Cash flow from financing activities: | | | | | | | | | |
| Loans from (repayments to) affiliates | 21,343 |
| | (36,204 | ) | | — |
| | 14,861 |
| | — |
|
| Dividends to affiliates | — |
| | — |
| | (27,710 | ) | | 27,710 |
| | — |
|
| Short-term debt, net | — |
| | 14,002 |
| | 4,509 |
| | — |
| | 18,511 |
|
| Revolving Facility borrowings | — |
| | 126,000 |
| | 34,000 |
| | — |
| | 160,000 |
|
| Revolving Facility reductions | — |
| | (87,000 | ) | | (12,000 | ) | | — |
| | (99,000 | ) |
Repayment of Senior Subordinated Notes | (200,000 | ) | | — |
| | — |
| | — |
| | (200,000 | ) |
| Issuance of Preferred Shares | 150,000 |
| | — |
| | — |
| | — |
| | 150,000 |
|
| Principal payments on long term debt | — |
| | (89 | ) | | — |
| | — |
| | (89 | ) |
| Proceeds from exercise of stock options | 32 |
| | — |
| | — |
| | — |
| | 32 |
|
| Purchase of treasury shares | (63 | ) | | — |
| | — |
| | — |
| | (63 | ) |
| Revolver facility refinancing | — |
| | (5,037 | ) | | (31 | ) | | — |
| | (5,068 | ) |
| Other | (3,499 | ) | | — |
| | — |
| | — |
| | (3,499 | ) |
Net cash (used in) provided by financing activities | (32,187 | ) | | 11,672 |
| | (1,232 | ) | | 42,571 |
| | 20,824 |
|
| | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | — |
| | (3,023 | ) | | 12,252 |
| | — |
| | 9,229 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | (1,746 | ) | | — |
| | (1,746 | ) |
Cash and cash equivalents at beginning of period | — |
| | 5,503 |
| | 12,047 |
| | — |
| | 17,550 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 2,480 |
| | $ | 22,553 |
| | $ | — |
| | $ | 25,033 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| For the Period August 15 Through December 31, 2015 (Successor) |
| (in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
| Net cash (used in) provided by operating activities: | $ | (15,930 | ) | | $ | 18,471 |
| | $ | 20,574 |
| | $ | — |
| | $ | 23,115 |
|
| | | | | | | | | | |
| Cash flow from investing activities: | | | | | | | | | |
| Loans from (repayments to) affiliates | — |
| | (17,315 | ) | | — |
| | 17,315 |
| | — |
|
| Capital expenditures | — |
| | (8,438 | ) | | (10,004 | ) | | — |
| | (18,442 | ) |
| Payments for derivative instruments | — |
| | — |
| | 326 |
| | — |
| | 326 |
|
| Proceeds from sale of assets | — |
| | 492 |
| | 140 |
| | — |
| | 632 |
|
Net cash provided by (used in) investing activities | — |
| | (25,261 | ) | | (9,538 | ) | | 17,315 |
| | (17,484 | ) |
| | | | | | | | | | |
| Cash flow from financing activities: | | | | | | | | | |
| Loans from (repayments to) affiliates | 17,315 |
| | — |
| | — |
| | (17,315 | ) | | — |
|
| Short-term debt, net | — |
| | (10,998 | ) | | (4,506 | ) | | — |
| | (15,504 | ) |
| Revolving Facility borrowings | — |
| | 52,000 |
| | 10,000 |
| | — |
| | 62,000 |
|
| Revolving Facility reductions | — |
| | (36,000 | ) | | (32,000 | ) | | — |
| | (68,000 | ) |
| Issuance of Preferred Shares | (1,385 | ) | | — |
| | — |
| | — |
| | (1,385 | ) |
| Principal payments on long term debt | — |
| | (46 | ) | | (137 | ) | | — |
| | (183 | ) |
Net cash (used in) provided by financing activities | 15,930 |
| | 4,956 |
| | (26,643 | ) | | (17,315 | ) | | (23,072 | ) |
| | | | | | | | | | |
Decrease in cash and cash equivalents | — |
| | (1,834 | ) | | (15,607 | ) | | — |
| | (17,441 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | (665 | ) | | — |
| | (665 | ) |
Cash and cash equivalents at beginning of period | — |
| | 2,480 |
| | 22,553 |
| | — |
| | 25,033 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 646 |
| | $ | 6,281 |
| | $ | — |
| | $ | 6,927 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
| For the year ended December 31, 2016 |
| (in thousands) |
| | | | | | | | Consolidating | | |
| | | | | | Non- | | Entries and | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated |
Net cash (used in) provided by
operating activities: | $ | (19,032 | ) | | $ | 25,527 |
| | $ | 16,320 |
| | $ | — |
| | $ | 22,815 |
|
| | | | | | | | | | |
| Cash flow from investing activities: | | | | | | | | | |
| Loan repayments from affiliates | — |
| | (2,067 | ) | | — |
| | 2,067 |
| | — |
|
| Capital expenditures | — |
| | (9,019 | ) | | (18,839 | ) | | — |
| | (27,858 | ) |
| Payments for derivatives | — |
| | — |
| | 377 |
| | — |
| | 377 |
|
| Proceeds from the sale of fixed assets | — |
| | 462 |
| | 659 |
| | — |
| | 1,121 |
|
| Cash received (disposed) on divestiture | 16,173 |
| | (284 | ) | | — |
| | — |
| | 15,889 |
|
Net cash provided by (used in)
investing activities | 16,173 |
| | (10,908 | ) | | (17,803 | ) | | 2,067 |
| | (10,471 | ) |
| | | | | | | | | | |
| Cash flow from financing activities: | | | | | | | | | |
| Loans repayments to affiliates | 2,067 |
| | — |
| | — |
| | (2,067 | ) | | — |
|
| Dividends to affiliates | 792 |
| | (792 | ) | | | | | | — |
|
| Short-term debt borrowings | — |
| | 1,705 |
| | 5,658 |
| | — |
| | 7,363 |
|
| Revolving Facility borrowings | — |
| | 51,000 |
| | 5,000 |
| | — |
| | 56,000 |
|
| Revolving Facility reductions | — |
| | (65,469 | ) | | (5,000 | ) | | — |
| | (70,469 | ) |
| Principal payments on long term debt | — |
| | (151 | ) | | (138 | ) | | — |
| | (289 | ) |
| Refinancing fees and debt issuance costs | — |
| | (922 | ) | | — |
| | — |
| | (922 | ) |
Net cash provided by
(used in) financing activities | 2,859 |
| | (14,629 | ) | | 5,520 |
| | (2,067 | ) | | (8,317 | ) |
| | | | | | | | | | |
Net (decrease) increase in cash
and cash equivalents | — |
| | (10 | ) | | 4,037 |
| | — |
| | 4,027 |
|
Effect of exchange rate changes
on cash and cash equivalents | — |
| | — |
| | 656 |
| | — |
| | 656 |
|
Cash and cash equivalents at
beginning of period | — |
| | 646 |
| | 6,281 |
| | — |
| | 6,927 |
|
Cash and cash equivalents
at end of period | $ | — |
| | $ | 636 |
| | $ | 10,974 |
| | $ | — |
| | $ | 11,610 |
|
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
As a result of our acquisition by Brookfield, on August 14, 2015 PricewaterhouseCoopers LLP (“PwC”) resigned as the independent registered public accounting firm of the Company. PwC’s resignation resulted from its determination that it would no longer satisfy the independence requirement for continuing as the Company’s independent registered public accounting firm. Prior to such acquisition, PwC served as the Company’s independent registered public accounting firm and also provided services to Brookfield. The services provided to Brookfield included services that, under the Sarbanes-Oxley Act of 2002, are considered services that are prohibited services that an independent registered public accounting firm may not provide to an audit client.None.
The report of PwC on the financial statements of the Company for the fiscal year ended December 31, 2014 contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principle.
During the Company’s fiscal year ended December 31, 2014 and the subsequent interim period through August 14, 2015, there were no disagreements (as defined in Item 304 of Regulation S-K) with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused them to make reference thereto in their reports on the financial statements for such periods. Further, during the Company’s two most recent fiscal years ended December 31, 2014 and the subsequent interim period through August 14, 2015, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).102
On October 1, 2015, GrafTech International Ltd. (the “Company”) appointed Deloitte & Touche, LLP as its independent registered public accounting firm. During the Company's two most recent fiscal years (and the subsequent interim period prior to such engagement), neither the Company nor anyone on its behalf consulted Deloitte & Touche LLP regarding the application of accounting principles to a specified transaction (either completed or proposed) or the type of audit opinion that might be rendered on the Company's financial statements, or any matter that was the subject of a disagreement or a reportable event.
| |
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
The Company maintainsManagement is responsible for establishing and maintaining adequate disclosure controls and procedures thatat the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a reporting company in the Company’s reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’sSEC’s rules and formsforms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including itsthe Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carries out a variety of on-going procedures, underUnder the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and Chief Financial Officer, to evaluatewe have evaluated the effectiveness of the design and operation of the Company’sour disclosure controls and procedures.procedures as of December 31, 2019. Based on the foregoing, the Company’sthat evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosurethese controls and procedures wereare effective at athe reasonable assurance level as of the end of the period covered by this report.December 31, 2019.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internalreporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process, designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel of a company, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the United Statesboard of America.directors; and
Becauseprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its inherent limitations, internalfinancial statements.
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions or thatbecause the degreelevel of compliance with therelated policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the CompanyManagement has conducted an evaluationassessment of the effectiveness of our internal control over financial reporting as of December 31, 2019 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019. The effectiveness of the Company’s internal control over financial reporting based on the framework in “Internal Control — Integrated Framework” issued during 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that the internal control over financial reporting was effective as of December 31, 2016.2019 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report, which is presented elsewhere in this Annual Report on Form 10-K.
Changes in Internal Control over Financial ReportingSavings Plan
There has been no change inOur employee savings plan provides eligible employees the Company’s internal controls over financial reporting duringopportunity for long-term savings and investment. The plan allows employees to contribute up to 5% of pay as a basic contribution and an additional 45% of pay as supplemental contribution. In 2019, 2018 and 2017, the Company’s most recent fiscal quarter that has materially affected, or is reasonably likelycontributions to materially affect, the Company’s internal controls over financial reporting.our savings plan were $2.1 million, $1.3 million and $1.6 million, respectively.
| |
Item 9B.(12) | Other InformationContingencies |
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 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.
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 have appealed this state court ruling as well and intend to vigorously defend it. As of December 31, 2019, 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 reserve for 2018 and 2019 are as follows:
|
| | | |
| | (Dollars in Thousands) |
| | |
| Balance as of December 31, 2017 | $ | 349 |
|
| Product warranty charges/adjustments | 1,510 |
|
| Payments and settlements | (331 | ) |
| Balance as of December 31, 2018 | $ | 1,528 |
|
| Product warranty charges/adjustments | 1,033 |
|
| Payments and settlements | (726 | ) |
| Balance as of December 31, 2019 | $ | 1,835 |
|
Related Party Tax Receivable Agreement
On February 27, 2017, Jeffrey C. DuttonApril 23, 2018, the Company entered into a tax receivable agreement (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 Ron BloomSwiss 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 net operating losses ("NOLs"), previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco (collectively, 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 electedappropriate for the Company to release a valuation allowance of certain tax assets as directorswe 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 Operationsas "Related Party Tax Receivable Agreement Expense." As of December 31, 2019, the total TRA liability is $89.9 million, of which $27.9 million is classified as current liability "Related party payable - tax receivable agreement" on the balance sheet, as we expect this portion to be settled within twelve months, and $62.0 million of the liability remains 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 personnel of the Company, each to hold officeincentivize them to make decisions with a long-term view and to influence behavior in accordancea way that is consistent with maximizing value for the certificate of incorporation and bylawspre-IPO stockholder of the Company until their respective successors are duly electedin a prudent manner. Each participant is allocated a number of profit units, with a maximum of 30,000 profit units (or 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. (or, together with its affiliates, Brookfield Capital IV) in connection with the Change in Control. The LTIP defines ‘‘Change in Control’’ as any transaction or appointed and qualified. Biographical information regarding Messrs. Dutton and Bloom is set forth in Item 10.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth informationseries 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 respect to our current directors, including their ages, asBrookfield Capital IV acquires securities representing more than seventy percent (70%) of February 27, 2017. |
| |
J. PETER GORDON |
Age: 56
Director Since: August 2015
Managing Partner, Brookfield
Current Public Company Directorships:
Norbord Inc., North American Palladium Ltd.
Prior Public Company Directorships:
Western Forest Products Inc., Fraser Papers Inc. and Ainsworth Lumber Co. Ltd.
| Mr. Gordon was elected to the Board in August 2015 and became Chairman of GrafTech’s Board in September 2015. Mr. Gordon is a Managing Partner at Brookfield, where he is a senior manager with Brookfield Business Partners, L.P. He has over 25 years of industrial experience, principally in the mining and forest products industries, having held a number of senior management positions in the Brookfield portfolio companies, most recently as the President and CEO of Fraser Papers Inc. from 2007 to 2010.
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| |
|
| |
Jeffrey C. Dutton |
Age: 53
Director Since: February 2017
Chief Executive Officer, GrafTech
Board Committees:
None
Current Public Company Directorships:
GrafTech International Ltd.
Prior Public Company Directorships:
None
| Mr. Dutton became President and Chief Executive Officer January 2017. Previously, Mr. Dutton served as Vice President & Chief Operating Officer of the Company from August 2015 until January 2017 and oversaw all aspects of both the Industrial Materials and Engineered Solutions businesses. Mr. Dutton has served as Senior Vice President of Brookfield Asset Management Inc. ("BAM") since 2013. BAM became the Company's indirect parent company in August 2015. Mr. Dutton served as the Chief Executive Officer and President of Twin Rivers Paper Company, from 2010 to 2013. Mr. Dutton served in various executive capacities at Fraser Papers Inc. from 2008 to 2010, and as General Manager of East Papers operations at Fraser Papers Inc. from 2006 to 2008. He served as President of Republic Paperboard Company of Eagle Materials Inc. from 2004 to 2006. Mr. Dutton served as a director of Twin Rivers Paper Company in 2013 and has served as a director of the Hammerstone Corporation since 2014. Mr. Dutton received his Bachelor of Science in Mechanical Engineering Technology from the University of Maine.
|
| |
Ron A. Bloom |
Age: 61
Director Since: February 2017
Managing Partner and Vice Chairman at Brookfield
Board Committees:
None
Current Public Company Directorships:
None
Prior Public Company Directorships:
None
| Ron Bloom is a Managing Partner and Vice Chairman at Brookfield, where he focuses on managing of the firm’s private equity investments. Prior to joining Brookfield, Mr. Bloom was Vice Chairman, U.S. Investment Banking, at Lazard, focused on restructurings, and mergers and acquisitions. Prior to joining Lazard, Mr. Bloom served as Assistant to the President for Manufacturing Policy where he provided leadership on policy development and strategic planning for the Administration’s agenda to revitalize the manufacturing sector. He led the discussions with the auto industry which resulted in the industry’s support for new fuel economy standards.
Prior to joining the White House, Mr. Bloom served as Senior Advisor to the Secretary of the Treasury where he helped lead the restructuring of General Motors and Chrysler LLC, and then led the Treasury’s oversight of the companies thereafter, including GM’s Initial Public Offering, the largest IPO in US history. Mr. Bloom received his undergraduate degree from Wesleyan University and graduated with distinction from the Harvard Graduate School of Business Administration.
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| |
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DENIS A. TURCOTTE |
Age: 55
Director Since: August 2015
President and CEO, North Channel Management and North Channel Capital Partners
Current Public Company Directorships:
Norbord Inc. and Domtar Corporation.
Prior Public Company Directorships:
Coalspur Mines, Ltd., Algoma Steel Inc.
| Mr. Turcotte was elected to the Board in August 2015. Mr. Turcotte is currently president and chief executive officer of North Channel Management and North Channel Capital Partners, business consulting and private investing firms. He is also a member of the board of directors of the general partner of Brookfield Business Partners L.P., an affiliate of Brookfield Asset Management. From 2002 to 2008, Mr. Turcotte was the president and chief executive officer and a director of Algoma Steel Inc., a publicly listed North American steel company, and from 1992 to 2002 held a number of senior executive positions with companies in the pulp and paper industry, including president of the paper group and executive vice-president of corporate development and strategy of Tembec Inc., a leading integrated forest products company with operations in North America and France.
|
The following table sets forth information with respect to our current executive officers, including their ages, as of March 7, 2016. There are no family relationships between any of our executive officers. |
| | | | |
Name | | Age | | Position |
Jeffrey C. Dutton | | 53 | | President and Chief Executive Officer |
Quinn J. Coburn | | 52 | | Vice President and Chief Financial Officer |
Jeffrey C. Dutton, age 53, became President and Chief Executive Officer January 2017. Previously, Mr. Dutton served as Vice President & Chief Operating Officerthe outstanding voting securities of the Company or the entity surviving or resulting from August 2015 until January 2017such 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 oversaw all aspectsits subsidiaries on a consolidated basis. It is intended that the occurrence of botha Change in Control in which Sales Proceeds exceed the Industrial Materials and Engineered Solutions businesses. Mr. Dutton has servedThreshold Value would constitute a ‘‘substantial risk of forfeiture’’ within the meaning of Section 409A of the Code. The LTIP defines ‘‘Threshold Value’’ as, Senior Vice Presidentas of any date of determination, an amount equal to $855,000,000 (which represents the amount of the total invested capital of Brookfield Asset Management Inc. ("BAM") since 2013. BAM becameCapital IV as of August 17, 2015), plus the Company's indirect parent companydollar value of any cash or other consideration contributed to or invested in August 2015. Mr. Dutton served as the Chief Executive Officer and President of Twin Rivers Paper Company from 2010 to 2013. Mr. Dutton served in various executive capacities at Fraser Papers Inc. from 2008 to 2010, and as General Manager of East Papers operations at Fraser Papers Inc. from 2006 to 2008. He served as President of Republic Paperboard Company of Eagle Materials Inc. from 2004 to 2006. Mr. Dutton served as a director of Twin Rivers Paper Company in 2013 and has served as a director of the Hammerstone Corporation since 2014. Mr. Dutton received his Bachelor of Science in Mechanical Engineering Technology from the University of Maine.
Quinn J. Coburn, age 52, became Chief Financial Officer in September 2015. Mr. Coburn served as interim Chief Financial Officer beginning in May 2015 after previously serving as Vice President of Finance and Treasurer. He joined GrafTech in August 2010 after working at NCR Corporation from December 1992 until August 2010, including service as that company’s Vice President and Treasurer. Mr. Coburn graduated with a B.S. in Accounting from Utah State University in 1988. He received an MBA from University of Pennsylvania’s The Wharton School in 1992.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
Structure of the Board
Under our by-laws, the Board fixes the size of the Board, so long as the number of directors is not less than three or more than fifteen. The Board currently consists of three members.
GrafTech no longer has a class of equity securities registered pursuant to Section 12 of the Exchange Act and, accordingly, is not required and does not have standing committees of the Board, including an audit committee, a nominating and governance committee or an executive compensation committee. Given that GrafTech is wholly-owned by Brookfield there is no need for policies or procedures by which security holders may recommend nominees to the Board.Capital IV after August 17, 2015. The Board may periodically establish committees, in each case so that certain important matters canThreshold Value shall be addressed in greater depth than may be possible in a meeting of the entire Board.
Code of Conduct and Ethics
We have had for many years a Code of Conduct and Ethics. Our Code of Conduct and Ethics applies to all employees, including senior executives and financial officers, as well as to all directors. A copy of our Code of Conduct and Ethics is available on our website at http://www.graftech.com under “Company” and “Corporate Ethics & Responsibilities”. The information contained on our website is not part of this annual report. Only the Board or the Audit Committee may waive the provisions of our Code of Conduct and Ethics with respect to executive officers and directors. Any such waivers will be posted on our website.
Item 11.EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
We have designed a compensation program for our named executive officers that is driven by our strategic goals with the primary emphasis on paying for performance. This section of this annual report describes the executive compensation program and explains the compensation policies and decisions with respect to our named executive officers. The compensation program for these employees primarily consists of a base salary and cash incentive awards.
During 2016, our named executive officers (and their positions in 2016) were:
Joel L. Hawthorne, President and Chief Executive Officer
Quinn J. Coburn, Vice President and Chief Financial Officer
Jeffrey C. Dutton, Vice President and Chief Operating Officer
Darrell A. Blair, President - Industrial Materials
Lionel D. Batty, President - Engineered Solutions
Executive Summary
Leadership Changes
There were no substantial leadership changes in 2016.
On January 11, 2017, Mr. Hawthorne submitted his resignation for good reason, as defined in his July 13, 2000 Severance Compensation Agreement, as amended, to the GrafTech Board of Directors. Mr. Hawthorne’s resignation was accepted and March 12, 2017 was agreed upon as the date of termination of his GrafTech employment. Settlement of Mr. Hawthorne’s accrued compensation, severance and benefit continuation will be made in accordance with his Agreement.
Also on January 11, 2017, the GrafTech Board of Directors appointed Mr. Dutton as Mr. Hawthorne’s successor.
In January, 2017, Mr. Batty submitted his resignation for good reason, as defined in his July 13, 2000 Severance Compensation Agreement, as amended, to the GrafTech Board of Directors. Mr. Batty’s resignation was accepted and February 15, 2017 was agreed upon as the date of termination of his GrafTech employment. Settlement of Mr. Batty’s accrued compensation, severance and benefit continuation will be made in accordance with his Agreement.
In January, 2017, Mr. Blair submitted his resignation for good reason, as defined in his March 16, 2015 Severance Compensation Agreement, as amended, to the GrafTech Board of Directors. Mr. Blair’s resignation was accepted and February 28, 2017 was agreed upon as the date of termination of his GrafTech employment. Settlement of Mr. Blair’s accrued compensation, severance and benefit continuation will be made in accordance with his Agreement.
Compensation Framework
We provide an executive compensation program that is focused on promoting performance and long-term value. The design and operation of the program reflect the following objectives:
•Driving long-term financial and operational performance that will deliver value, including through incentives that drive return based performance and propel growth.
•Attracting and retaining talented executive leadership.
•Providing competitive pay opportunities relative to equivalent positions with other global companies of comparable size and complexity as well as within the Company.
•Motivating executives to achieve or exceed Company and individual performance goals that are difficult to achieve.
Our 2016 executive compensation program consisted of two elements: competitive base salary and pay for performance through an annual cash incentive program. Our executives also receive retirement and other customary welfare benefits. The annual cash incentive (bonus) plan only provides value if specific pre-established financial and performance goals are achieved.
2016 Compensation Decisions
The following summary highlights the key compensation decisions effective for 2016:
In October 2014, we suspended the non-qualified matching allocations and non-qualified retirement contributions for our named executive officers and certain other corporate officers under various unfunded, non-qualified supplemental retirement and deferred compensation plans for certain eligible employees established by GrafTech through certain benefits protection trusts. This suspension continued through 2016.
•We reserved a 30% portion of the annual target bonus to be based on individual performance to goals, with the remainder of the annual target bonus based on Company performance goals. This revision applied to all salaried employees with the exception of the President & CEO.
•For our 2016 annual bonus program, we adopted performance measures based on business unit EBITDA.
Compensation Consultant
We discontinued our relationship with Mercer as our third-party consultant on executive compensation matters in August 2015 after the Brookfield acquisition of GrafTech. No executive compensation studies were commissioned in 2015 or 2016.
Structure of Executive Compensation Program
We believe that our executive compensation program, each element alone and in total, effectively achieves our objectives. The primary elements of our executive compensation program, which are key to the attraction, retention and motivation of our named executive officers, are shown in the following table. The amounts of compensation are determined by the Board of Directors based onin its sole discretion. The LTIP defines ‘‘Sales Proceeds’’ as, as of any date of determination, the objectives described. Thesum 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 advisor 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 Board does not rely on formulas or survey results, but instead it usesof Directors in its judgment based on its assessmentsole discretion.
Given the successful completion of the Company’s objectivesIPO in the second quarter of 2018, it is reasonably possible that a Change in Control, as defined above, may ultimately happen and comparable executive compensation programs. The Board also does not have policies definingthat the parameters for the allocation between long-term and currentlyawarded Profit Units will be subsequently paid out portionsto the participants. Assuming 100% vesting of compensation. Executive officers generally play no rolethe awarded Profit Units and depending on Brookfield’s sales proceeds, the potential liability triggered by a Change in determining executive compensation.Control is estimated to be in the range of $65 million to $90 million. As of December 31, 2019, the awards are 80% vested.
Table of ContentsGRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
Element(13) | Objective | | Key Features |
Base Salary | Values the competencies, skills, experience and performance of individual executives.
Attracts and retains executive talent by providing a fixed level of compensation that is financially stable and not “at risk.”
| | Targeted at the median comparable companies. |
| | | |
Executive Incentive
Compensation Plan (“Executive Plan” or “ICP” or “bonus plan”)
| Provides competitive incentives to executive officers by having a portion of their annual cash compensation dependent upon annual performance and “at risk.”
Motivates and rewards executives for the achievement of targeted financial and strategic operational goals.
| | Our annual cash bonus plan provides for awards targeted at market median.
For 2016, the performance measures were Operating Income of Business Units (50%) and Operating Income of the total Company (50%).
|
| | | |
Retirement Savings Plan | Provide competitive market-based retirement savings benefits in a tax- efficient manner. | | Broad-based plan under which we make matching contributions that vary, based on the employee’s contribution, on eligible earnings up to the Code limit of $265,000 for 2016. |
| | | |
Compensation Deferral
Plan
| Provides savings in a tax-efficient manner. | | Non-Qualified deferral of up to 50% Salary and 85% Bonus. |
| | | |
Health, Welfare and Other Benefits | Attract and retain key executives by providing competitive health, welfare and other benefits. | | Generally, benefits are made available to executive officers on the same basis as benefits are made available to other eligible employees.Taxes |
Summary Compensation Table
The following table sets forth certain information concerning compensation received by our chief executive officer, our chief financial officersummarizes the U.S. and non-U.S. components of income (loss) from continuing operations before Provision (benefit) for income taxes:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| U.S. | $ | 85,365 |
| | $ | (68,032 | ) | | $ | (26,981 | ) |
| Non-U.S. | 757,462 |
| | 970,840 |
| | 30,412 |
|
| | $ | 842,827 |
| | $ | 902,808 |
| | $ | 3,431 |
|
Income tax expense (benefit) consists of the three other executive officers who were the most highly compensatedfollowing:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | |
| U.S income taxes: | | | | | |
| Current | $ | 16,589 |
| | $ | 787 |
| | $ | (1,066 | ) |
| Deferred | 5,690 |
| | (52,145 | ) | | 38 |
|
| | 22,279 |
| | (51,358 | ) | | (1,028 | ) |
| Non-U.S. income taxes: | | | | | |
| Current | 64,134 |
| | 85,252 |
| | 5,924 |
|
| Deferred | 11,812 |
| | 15,026 |
| | (15,677 | ) |
| | 75,946 |
| | 100,278 |
| | (9,753 | ) |
| Total income tax expense (benefit) | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
The tax expense changed from a benefit of $(10.8) million for the year ended December 31, 2016, all2017 to expense of whom we refer$48.9 million and $98.2 million for the years ended December 31, 2018 and 2019, primarily due to as our namedthe increase in earnings, the shift in the jurisdictional mix of earnings and losses from year to year. Partially offsetting these items was a partial release, both in 2018 and in 2019, of a valuation allowance recorded against the deferred tax asset related to certain foreign and U.S. federal and state tax attributes. Certain jurisdictions shifted from pre-tax losses in 2017 to pre-tax earnings in 2018 and 2019.
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly revises the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive
officers. |
| | | | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary ($) | Bonus (1)
($) | Stock Awards ($) | Option Awards
($) | Change in Pension Value & Nonqualified Deferred Compensation Earnings (2) ($) | All Other Compensation (3) ($) | Total ($) |
| Joel L. Hawthorne | 2016 | 700,000 |
| — |
| — |
| — |
| 5,490 |
| 14,443 |
| 719,933 |
|
| President and CEO | 2015 | 653,333 |
| — |
| — |
| — |
| 30,549 |
| 14,390 |
| 698,272 |
|
| | 2014 | 680,512 |
| — |
| 2,926,962 |
| 791,434 |
| 8,638 |
| 28,974 |
| 4,436,520 |
|
| Quinn J. Coburn | 2016 | 360,000 |
| 73,710 |
| — |
| — |
| — |
| 14,818 |
| 448,528 |
|
| Vice President and CFO | 2015 | 310,667 |
| — |
| — |
| — |
| — |
| 39,018 |
| 349,685 |
|
| Jeffrey C. Dutton | 2016 | 410,000 |
| — |
| — |
| — |
| — |
| 41,574 |
| 451,574 |
|
| Vice President and COO (4) | 2015 | 97,500 |
| — |
| — |
| — |
| — |
| 8,749 |
| 106,249 |
|
| Darrell A. Blair | 2016 | 394,400 |
| 73,061 |
| — |
| — |
| 2,280 |
| 61,504 |
| 531,245 |
|
| President, Industrial | 2015 | 380,217 |
| — |
| — |
| — |
| — |
| 43,309 |
| 423,526 |
|
| Materials | 2014 | 414,332 |
| — |
| 366,336 |
| 91,584 |
| — |
| 50,882 |
| 923,134 |
|
| Lionel D. Batty | 2016 | 300,000 |
| 57,050 |
| — |
| — |
| — |
| 11,543 |
| 368,593 |
|
| President, Engineered | 2015 | 290,000 |
| — |
| — |
| — |
| — |
| 9,974 |
| 299,974 |
|
| Solutions | 2014 | 299,026 |
| — |
| 305,280 |
| 76,320 |
| — |
| 10,450 |
| 691,076 |
|
| |
(1) | Mr. Coburn's bonus for 2016 is an estimate. The exact amount will not be calculable until March 15, 2017. |
| |
(2) | Nonqualified deferred compensation earnings in 2016 for Mr. Hawthorne, Mr. Coburn, Mr. Blair and Mr. Batty were $396, $292, $2,807 and $36,552 respectively. None of these earnings were “above market” or preferential and so have not been included in this column. In accordance with the Instructions to Item 402(c)(2)(viii), negative amounts are not reflected in the Summary Compensation Table, which include for Mr. Blair, negative changes in pension value of $31,382 in 2015 and for Mr. Batty, negative changes in pension value of $5,221 in 2016 and $41,803 in 2015. |
| |
(3) | For 2016, all other compensation for Mr. Hawthorne includes $10,000 in matching contributions to the Company’s savings plan and a $2,650 contribution to the Company’s defined contribution retirement plan and $1,793 in life insurance premiums under the Company’s group life insurance plan. For 2016, all other compensation for Mr. Coburn includes $10,600 in matching contributions to the Company’s savings plan and $3,093 contribution to the Company’s defined contribution retirement plan and $855 in life insurance premiums under the Company’s group life insurance plan. For 2016, all other compensation for Mr. Blair includes $43,949 in relocation benefits and associated gross-up. For 2016, all other compensation for Mr. Batty, includes $6,500 in matching contributions to the Company’s savings plan and $3,053 contribution to the Company’s defined contribution retirement plan and $1,828 in life insurance premiums under the Company’s group life insurance plan. For 2016, all other compensation for Mr. Dutton, includes $13,250 in matching contributions to a Brookfield 401k savings plan and $28,324 for housing and transportation expenses. |
| |
(4) | Mr. Dutton is employed by an affiliate of GrafTech’s parent company, Brookfield Asset Management. GrafTech reimburses Brookfield for his salary and 401(k) savings plan matching contributions. |
There were no award grants madecompensation. The Tax Act also transitions international taxation from a worldwide system to a named executive officermodified territorial system and includes base erosion prevention measures which have the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI. In general, these changes were effective beginning in 2018. The Tax Act also includes a one-time mandatory deemed repatriation or transition tax on the last completed fiscal year under any planaccumulated previously untaxed foreign earnings of our foreign subsidiaries.
For the fourth quarter of 2017, we were able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and re-measurement of certain deferred tax asset and liabilities.
Due to the complexities involved in accounting for the enactment of the Company, no equity awards exercised duringTax Act, the fiscal year and no equity awards were outstanding as of the end of the fiscal year.
Severance Agreements
Double-trigger Change in Control Agreements
Each named executive officer, other than Mr. Dutton, entered into a double-trigger Severance Compensation Agreement with us that applies only when there is (i) a change in control ofSEC staff issued Staff Accounting Bulletin ("SAB") No. 118. SAB No. 118 allowed the Company and (ii) the executive’s employment is terminatedto record provisional amounts in connection with or following such change in control. Both a change in control of the Company and corresponding executive termination must occur to trigger payment of the benefits under the Severance Compensation Agreement. A change in control occurred under each of the Agreements on August 11, 2015.
Under the Agreements, if a named executive officer’s employment is terminated due to a Termination for Cause or by the named executive officer other than with Good Reason for Resignation, upon death or due to Disability or Retirement (as such terms are defined in the Severance Compensation Agreements), the executive will be paid his full base salary and accrued vacation pay through the date of termination, plus any benefits or awards which have been earned or become payable but which have not yet been paid.
If the named executive officer’s employment is terminated due to Retirement (as such term is defined in the Severance Compensation Agreements) or death, the executive’s benefits will be determined in accordance with GrafTech’s retirement, disability and insurance programs then in effect.
Under each of the Agreements, upon termination following a change in control, the named executive officer is entitled to certain benefits. If the named executive officer’s employment is terminated subsequent to a change in control (a) by GrafTech other than for Retirement, death, Disability or Termination for Cause or (b) by the executive for Good Reason for Resignation, then the executive is entitled to the following benefits: accrued salary and vacation pay through the date of termination; accrued ICP compensation at target for the prior year if not previously paid plus a prorated portion of the targeted ICP compensation for the year of termination; a severance payment equal to 2.0 multiplied by the sum of the following amounts: (X) the greater of the named executive officer’s annual base salary immediately to the date of termination or immediately prior to the change in control; plus (Y) the greater of the amount of the named executive officer’s target ICP (or comparable compensation payment) for the year in which the date of termination occurs or for the year in which the change in control occurs; extended health, life and disability coverage; and with respect to Mr. Hawthorne and Mr. Batty, reimbursement for certain excise tax liabilities (and income tax liabilities attributable to the excise tax reimbursement) if the total severance equals or exceeds three times the executive’s “base amount” (as determined pursuant to Section 280G of the Code) by more than $50,000.
During any period prior to the date of termination that the named executive officer is Disabled, the executive will continue to receive his or her base salary at the rate in effect at the commencement of the Disability period, together with all other compensation and benefits that are payable or provided under GrafTech’s benefit plans, including its disability plans. After the date of termination for Disability, the executive’s benefits shall be determined in accordance with any retirement plan, insurance and other applicable programs of GrafTech. The compensation and benefits, other than salary, payable or provided under the Agreement by reason of a Disability will be the greater of (x) the amounts computed under any retirement plan, disability benefit plan, insurance and other applicable program in effect immediately prior to a change in control and (y) the amounts computed under any retirement plan, disability benefit plan, insurance and other applicable program in effect at the time the compensation and benefits are paid.
Under the Agreements, “Good Reason for Resignation” includes certain changes in the named executive officer’s status or position, reductions in the level of reporting responsibility, diminution of duties or responsibilities, reductions in compensationor benefits, relocation, failure of a successor to assume the severance agreement, and failure to pay certain earned compensation.
Effect of a Change in Control on Compensation Deferral Arrangements
Amounts deferred under the Compensation Deferral Plan become immediately payable upon a change in control if the participant elected to receive payment of deferred amounts upon a change in control. All other payments under the Compensation Deferral Plan will be distributed in accordance with the elections of the executive, which may include payments of all or some of the deferred amounts upon termination of employment. A change in control occurred on August 11, 2015.
Pension Benefits at Fiscal Year-End December 31, 2016
The following table shows the number of years of service credited to the named executive officers under the GrafTech International Holdings Inc. Retirement Plan, which has been frozen, including the number of such years credited for service with Union Carbide and its affiliates, as well as the present value of the executives’ benefits and payments made to the executives in the last fiscal year. The terms of the Retirement Plan are described below the table. |
| | | | | | | | | | | |
| Name | | Plan Name | | Number of Years Credited Service (#) | | Present Value of Accumulated Benefit ($) (1) | | Payments During Last Fiscal Year ($) |
| | | | | | | | | |
| Joel L. Hawthorne | | GrafTech International Holdings Inc. | | 2(2) |
| | 74,535 |
| (3) | — |
|
| Quinn J. Coburn | | n/a | | — |
| | | | — |
|
| Jeffrey C. Dutton | | n/a | | — |
| | | | — |
|
| Darrell A. Blair | | GrafTech International Holdings Inc. | | 22(4) |
| | 497,045 |
| (5) | — |
|
| Lionel D. Batty | | GrafTech International Holdings Inc. | | 20(6) |
| | 621,344 |
| (7) | — |
|
| |
(1) | The present values have been computed using an interest rate of 3.96% and using the RP-2014 tables with Scale MP-2016 mortality improvement (fully generational projection) as of December 31, 2016, which is the same pension plan measurement date used for our financial reporting purposes. |
| |
(2) | Includes for Mr. Hawthorne 2 years of service with GrafTech through December 31, 2001 (the date that non-grandfathered participants ceased accruing benefits and had their benefit accruals frozen under the Retirement Plan). |
| |
(3) | Mr. Hawthorne’s benefit has been valued assuming termination of employment as of December 31, 2016 and retirement at age 62, the earliest time at which Mr. Hawthorne may retire without any benefit reduction due to age. |
| |
(4) | Includes for Mr. Blair 22 years of service with GrafTech through March 31, 2003 (the date that grandfathered participants ceased accruing benefits and had their benefit accruals frozen under the Retirement Plan). |
| |
(5) | Mr. Blair’s benefit has been valued assuming termination of employment as of December 31, 2016 and retirement as of January 1, 2017, the earliest time at which Mr. Blair may retire without any benefit reduction due to age. |
| |
(6) | Includes for Mr. Batty 20 years of service with GrafTech through March 31, 2003 (the date that grandfathered participants ceased accruing benefits and had their benefit accruals frozen under the Retirement Plan). |
| |
(7) | Mr. Batty’s benefit has been valued assuming termination of employment as of December 31, 2016 and retirement as of January 1, 2017, the earliest time at which Mr. Batty may retire without any benefit reduction due to age. |
For further information concerning our pension plan, including assumptions and estimates used in projecting pension costs and projected benefit obligations, see Note 12 of our Consolidated Financial Statements contained in our Annual Report on Form 10-Kearnings for the year ended December 31, 2016,2017. SAB No. 118 also provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Act. On October 15, 2018, the Company’s U.S. tax returns for 2017 were filed and the changes to the provisional tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 were recorded in 2018. These adjustments were immaterial to the Company’s financial statements.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 2018, the U.S. Department of Treasury and the U.S. Internal Revenue Service (IRS) issued proposed regulations under code section 965 and on January 15, 2019, the IRS issued final 965 regulations. The Company continues to analyze the effects of the Tax Act and newly issued final regulations on its financial statements. The final impact of the Tax Act and the regulations may differ from the amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, additional legislative or administrative actions to clarify the intent of the statutory language provided that they differ from the Company’s current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. We estimate that any change will be immaterial to the Company’s financial statements at this time.
The Company also continues to evaluate the impact of the GILTI provisions under the Tax Act which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election of either (1) the period cost method or (2) the deferred method. As of December 31, 2018, the Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as fileda current period expense when incurred.
Income tax expense (benefit) differed from the amount computed by applying the U.S, federal income tax rate of 21% for years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to income before Provision (benefit) expense for income taxes as set forth in the following table:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| Tax at statutory U.S. federal rate | $ | 176,994 |
| | $ | 189,590 |
| | $ | 1,201 |
|
| Impact of U.S. Tax Act - GILTI | 65,531 |
| | 93,739 |
| | — |
|
| Impact of the 2017 Tax Act - transition tax | — |
| | — |
| | 39,628 |
|
| Impact of the 2017 Tax Act - tax rate change | — |
| | — |
| | 52,228 |
|
| Impact of Tax Receivable Agreement | 713 |
| | 18,160 |
| | — |
|
| Valuation allowance | (14,548 | ) | | (93,125 | ) | | (89,269 | ) |
| State taxes, net of federal tax benefit | 4,231 |
| | 1,529 |
| | 3,437 |
|
| U.S. tax impact of foreign earnings (net of foreign tax credits) | 2,181 |
| | 792 |
| | 1,151 |
|
| Establishment/resolution of uncertain tax positions | (1,293 | ) | | (345 | ) | | (840 | ) |
| Adjustment for foreign income taxed at different rates | (76,922 | ) | | (95,822 | ) | | (2,359 | ) |
| Foreign tax credits | (56,171 | ) | | (65,046 | ) | | (17,956 | ) |
| Other | (2,491 | ) | | (552 | ) | | 1,998 |
|
| Provision (benefit) for income taxes | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
The company has been granted a tax holiday in Brazil, which expires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities as of December 31, 2019 and December 31, 2018 are set forth in the following table.
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | (Dollars in thousands) |
| Deferred tax assets: | | | |
| Postretirement and other employee benefits | $ | 18,256 |
| | $ | 18,395 |
|
| Foreign tax credit and other carryforwards | 55,103 |
| | 111,325 |
|
| Capitalized research and experimental costs | 5,566 |
| | 7,695 |
|
| Environmental reserves | 1,110 |
| | 976 |
|
| Inventory adjustments | 14,863 |
| | 14,251 |
|
| Long-term contract option amortization | 1,080 |
| | 1,144 |
|
| Provision for rationalization charges | 232 |
| | 351 |
|
| Other | 1,872 |
| | 4,270 |
|
| Total gross deferred tax assets | 98,082 |
| | 158,407 |
|
| Less: valuation allowance | (13,736 | ) | | (58,446 | ) |
| Total deferred tax assets | 84,346 |
| | 99,961 |
|
| Deferred tax liabilities: | | | |
| Fixed assets | $ | 56,659 |
| | $ | 59,521 |
|
| Inventory | 12,778 |
| | 7,751 |
|
| Goodwill and acquired intangibles | 6,996 |
| | 3,668 |
|
| Other | 2,468 |
| | 3,138 |
|
| Total deferred tax liabilities | 78,901 |
| | 74,078 |
|
| Net deferred tax asset | $ | 5,445 |
| | $ | 25,883 |
|
Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $71.7 million as of December 31, 2018 and $55.2 million as of December 31, 2019. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $45.8 million as of December 31, 2018 and $49.8 million as of December 31, 2019.
We continue to assess the need for valuation allowances against 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. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused. 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. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
Valuation allowance activity for the years ended December 31, 2018 and 2019 was as follows:
|
| | | |
| | (Dollars in thousands) |
| Balance as of December 31, 2017 | $ | 150,839 |
|
| Credited to income | (93,125 | ) |
| Translation adjustment | (302 | ) |
| Changes attributable to movement in underlying assets | 1,034 |
|
| Balance as of December 31, 2018 | $ | 58,446 |
|
| Credited to income | (14,548 | ) |
| Changes attributable to write-off of underlying assets | (30,138 | ) |
| Translation adjustment | (24 | ) |
| Balance as of December 31, 2019 | $ | 13,736 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 2017, with the SECenactment of the Tax Act, additional taxable income was derived as a result of inclusion of accumulated previously untaxed foreign earnings of GrafTech’s foreign subsidiaries. This additional taxable income led to the utilization of the U.S. net operating loss carryforward in 2017 and “Compensation Discussiona partial release of the valuation allowance against the U.S. deferred tax assets. The valuation allowance was further reduced by the U.S. tax rate decrease from 35% to 21% as a result of the Tax Act. During 2018, we determined that sufficient positive evidence existed that allowed us to conclude that a full valuation allowance was no longer required to be recorded against the deferred tax assets related to the U.S. tax attributes. This positive evidence was primarily supplied by the Company exiting a cumulative loss period in the U.S. as well as sufficient U.S. current and Analysis” above.forecasted taxable income that would utilize the U.S. tax attributes. As a result, a partial release (to reflect only the economic benefit of the attributes) of the valuation allowance against federal net operating losses and state losses was recorded in 2018 while a full release of the valuation allowance against the federal foreign tax credit carryforward, other federal deferred tax assets was also recorded. A valuation allowance of $35.8 million is included in the December 31, 2018 balance reflected above as there was not sufficient positive evidence that the deferred tax asset related to the U.S. federal net operating loss would generate more than its estimated economic benefit. This valuation allowance and the related deferred tax asset were subsequently released to the income statement in 2019.
Other Compensation ArrangementsIn March of 2017, $19.5 million of foreign tax credits expired. During the fourth quarter of 2017, we increased our foreign tax credit carryforward by $37.7 million, as a result of additional foreign taxable income derived in connections with the new U.S. tax legislation that was enacted on December 22, 2017. As of December 31, 2019, we have a total foreign tax credit carryforward of $31.3 million. As indicated above, a valuation allowance is no longer recorded against this foreign tax credit carryforward. These tax credit carryforwards begin to expire as of March 15, 2025. In addition, we have state net operating loss carryforwards of $250.0 million (net of federal benefit), which can be carried forward from 5 to 20 years. These state net operating loss carryforwards generated a deferred tax asset of $14.9 million as of December 31, 2019. We also have U.S. state tax credits of $2.3 million as of December 31, 2019.
We have foreign loss carryforwards on a gross basis of $16.8 million as of December 31, 2019, which can be carried forward indefinitely.
During the fourth quarter of 2017, GrafTech Switzerland moved from a cumulative loss position to a cumulative profit position, as well as a current year utilization of its net operating loss carryforward. This positive evidence and utilization led to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2018.
As of December 31, 2019, we had unrecognized tax benefits of $0.2 million, which, if recognized, would have a favorable impact on our effective tax rate. We have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.8 million as of December 31, 2017, and $0.9 million as of December 31, 2018 (an increase of $0.1 million). We had 0 accrued interest and penalties as of December 31, 2019 (a decrease of $0.9 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | |
| | (Dollars in thousands) |
| | |
| Balance as of December 31, 2017 | $ | 2,492 |
|
| Reductions for tax positions of prior years | (100 | ) |
| Lapse of statutes of limitations | (373 | ) |
| Foreign currency impact | (21 | ) |
| Settlements | (8 | ) |
| Balance as of December 31, 2018 | $ | 1,990 |
|
| Settlements | (1,383 | ) |
| Reductions for tax positions of prior years | (421 | ) |
| Foreign currency impact | (2 | ) |
| Balance as of December 31, 2019 | $ | 184 |
|
It is reasonably possible that a reduction of unrecognized tax benefits of up to $0.2 million may occur within 12 months due to settlements and the expiration of statutes of limitation.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2016 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2013.
As of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.5 billion. Because $1.3 billion of such earnings have previously been subject to taxation by way of the transition tax on foreign earnings required by the Tax Act, as well as the current and previous years’ GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity.
Stock Split
On April 12, 2018, the Company effected a 3,022,259.23 to one stock split of the Company's then outstanding common stock. We have retroactively applied this split to all share presentations, as well as "Net income per share" and "Income from continuing operations per share" calculations for the periods presented.
Conditional Dividend to Pre-IPO Stockholder
On April 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 on May 8, 2018.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note to the sole pre-IPO stockholder. This note was repaid on June 15, 2018 with proceeds from our Incremental Term Loans. See Note 5 "Debt and Liquidity".
Initial Public Offering
On April 23, 2018, we completed the IPO of 35,000,000 shares of our common stock at a price of $15 per share. This offering represented a sale of 11.6% of our sole pre-IPO stockholder's ownership in the Company.
On April 26, 2018, we closed the sale of an additional 3,097,525 shares of common stock at a price to the public of $15 per share from the pre-IPO stockholder, as a result of the partial exercise by the underwriters in our IPO of their overallotment option. After giving effect to the partial exercise of the overallotment option, the total number of shares of common stock sold by the pre-IPO stockholder was 38,097,525.
The Company did not receive any proceeds related to the offering. We incurred $5.1 million of legal, accounting, printing and other fees associated with this offering through December 31, 2018, which was recorded in "Selling and administrative" expenses in the Consolidated Statements of Operations.
Follow-on Offering and Common Stock Repurchases
On August 13, 2018, Brookfield completed an underwritten public secondary offering (the "Offering") of 23,000,000 shares of our common stock at a price to the public of $20.00 per share. The Company did not receive any proceeds related to the Offering. Pursuant to a share repurchase agreement with Brookfield, we concurrently repurchased 11,688,311 shares directly from Brookfield. The price per share paid by us in the repurchase was equal to the price at which the underwriters purchased the shares from Brookfield in the Offering net of underwriting commissions and discounts. We funded the share repurchase from cash on hand. The terms and conditions of the share repurchase were reviewed and approved by the audit committee of our board of directors, which is comprised solely of independent directors. All repurchased shares were retired.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 of December 31, 2019, we had repurchased 1,004,685 shares of common stock totaling $10.9 million under this program.
On December 5, 2019, GrafTech announced two separate transactions. The first was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares of GrafTech common stock at a price of $13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, GrafTech entered into a share repurchase agreement with Brookfield to repurchase $250 million of stock from Brookfield at the arms length price of $13.125, set by the competitive bidding process of the secondary block trade. As a result, GrafTech repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%.
Dividends
The Board of Directors declared and paid a dividend of $0.0645 per share for the first quarter of 2018 totaling $19.5 million, which was paid on June 29, 2018 and represented a prorated quarterly dividend of $0.085 (or $0.34 per annum) per share of our common stock prorated from the date of our IPO, April 23, 2018 to June 30, 2018. We have paid our regular quarterly dividends of $0.085 per share since that time. Additionally, we paid a special dividend to stockholders of $0.70 per share on December 31, 2018.
The balance in our Accumulated other comprehensive (loss) income is set forth in the following table:
|
| | | | | | | |
| | As of December 31, 2019 | | As of
December 31, 2018 |
| | (Dollars in thousands) |
| Foreign currency translation adjustments, net of tax | $ | (9,293 | ) | | $ | (2,922 | ) |
| Commodities, foreign currency and interest rate derivatives, net of tax | 1,932 |
| | (2,878 | ) |
| Total accumulated comprehensive (loss) income | $ | (7,361 | ) | | $ | (5,800 | ) |
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation as of December 31, 2019, 2018 and 2017. See Note 14 "Stockholders' Equity" for details on our April 12, 2018 stock split and our common stock repurchases on 2019 and 2018.
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| Weighted average common shares outstanding for basic calculation | 289,057,356 |
| | 297,748,327 |
| | 302,225,923 |
|
| Add: Effect of equity awards | 17,245 |
| | 5,443 |
| | — |
|
| Weighted average common shares outstanding for diluted calculation | 289,074,601 |
| | 297,753,770 |
| | 302,225,923 |
|
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes 32,981 and 5,592 shares of participating securities in 2019 and 2018, 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 1,082,113 and 650,432 equivalent shares in 2019 and 2018, respectively, as these shares are anti-dilutive.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(16) Summary of quarterly financial data (Unaudited)
The following summarizes certain consolidated operating results by quarter for 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 |
| | | March 31 | | June 30 | | September 30 | | December 31 | | March 31 | | June 30 | | September 30 | | December 31 |
| | | (Dollars in thousands, except per share amounts) |
| As Reported: | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 474,994 |
| | $ | 480,390 |
| | $ | 420,797 |
| | $ | 414,612 |
| | $ | 451,899 |
| | $ | 456,332 |
| | $ | 454,890 |
| | $ | 532,789 |
|
| Gross profit | | 279,470 |
| | 283,343 |
| | 242,300 |
| | 235,290 |
| | 306,750 |
| | 290,422 |
| | 274,610 |
| | 318,430 |
|
| Research and development | | 637 |
| | 713 |
| | 611 |
| | 723 |
| | 429 |
| | 581 |
| | 518 |
| | 601 |
|
| Selling and administrative expenses | | 15,226 |
| | 15,394 |
| | 15,708 |
| | 17,346 |
| | 15,876 |
| | 16,239 |
| | 14,234 |
| | 15,683 |
|
| Other expense (income), net | | 467 |
| | 863 |
| | (688 | ) | | 4,561 |
| | 2,005 |
| | (974 | ) | | 1,502 |
| | 828 |
|
Related party Tax Receivable Agreement Expense | | — |
| | — |
| | — |
| | 3,393 |
| | — |
| | 61,801 |
| | — |
| | 24,677 |
|
| Interest Expense | | 33,700 |
| | 32,969 |
| | 31,803 |
| | 28,859 |
| | 37,865 |
| | 28,667 |
| | 33,855 |
| | 34,674 |
|
| Interest Income | | (414 | ) | | (731 | ) | | (1,765 | ) | | (1,799 | ) | | (115 | ) | | (391 | ) | | (562 | ) | | (589 | ) |
| Net income | | 197,436 |
| | 196,368 |
| | 175,876 |
| | 174,922 |
| | 223,673 |
| | 201,448 |
| | 199,466 |
| | 229,632 |
|
| Net income per share | | $ | 0.68 |
| | $ | 0.68 |
| | $ | 0.61 |
| | $ | 0.61 |
| | $ | 0.74 |
| | $ | 0.67 |
| | $ | 0.67 |
| | $ | 0.79 |
|
(17) Subsequent Events
On February 5, 2020, the Board of Directors declared a dividend of $0.085 per share of common stock to stockholders of record as of the close of business on February 28, 2020, to be paid on March 31, 2020.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| |
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate disclosure controls and procedures at the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a reporting company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures are effective at the reasonable assurance level as of December 31, 2019.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process, designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel of a company, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its financial statements.
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the level of compliance with related policies or procedures may deteriorate.
Management has conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report, which is presented elsewhere in this Annual Report on Form 10-K.
Savings Plan
AllOur employee savings plan provides eligible employees the opportunity for long-term savings and investment. The plan allows employees to contribute up to 5% of pay as a basic contribution and an additional 45% of pay as supplemental contribution. In 2019, 2018 and 2017, the contributions to our savings plan were $2.1 million, $1.3 million and $1.6 million, respectively.
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 regular, full-time U.S.business. While it is not possible to determine the ultimate 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.
Pending litigation in Brazil has been brought by employees including eligible named executive officers, are eligibleseeking to participaterecover 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 Savings Plan. Assetsfavor. In the first quarter of 2017, the state court initially ruled in favor of the employees. We have appealed this state court ruling as well and intend to vigorously defend it. As of December 31, 2019, 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 reserve for 2018 and 2019 are as follows:
|
| | | |
| | (Dollars in Thousands) |
| | |
| Balance as of December 31, 2017 | $ | 349 |
|
| Product warranty charges/adjustments | 1,510 |
|
| Payments and settlements | (331 | ) |
| Balance as of December 31, 2018 | $ | 1,528 |
|
| Product warranty charges/adjustments | 1,033 |
|
| Payments and settlements | (726 | ) |
| Balance as of December 31, 2019 | $ | 1,835 |
|
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into a tax receivable agreement (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 certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco (collectively, 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 Savingsrecording of a $86.5 million liability related to the TRA on the Consolidated Statements of Operationsas "Related Party Tax Receivable Agreement Expense." As of December 31, 2019, the total TRA liability is $89.9 million, of which $27.9 million is classified as current liability "Related party payable - tax receivable agreement" on the balance sheet, as we expect this portion to be settled within twelve months, and $62.0 million of the liability remains as a long-term liability in "Related party payable - tax receivable agreement" on the balance sheet.
Long-term Incentive Plan are held
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 personnel of the Company, to incentivize them to make decisions with a long-term view and to influence behavior in five typesa way that is consistent with maximizing value for the pre-IPO stockholder of accounts: an after-tax accountthe Company in a prudent manner. Each participant is allocated a number of profit units, with a maximum of 30,000 profit units (or 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. (or, 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 participants may make contributions(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 an after-tax basis; a before-tax account to which participants may make contributionsthe 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 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 advisor 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 Board of Directors in its sole discretion.
Given the successful completion of the IPO in the second quarter of 2018, 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. Assuming 100% vesting of the awarded Profit Units and depending on Brookfield’s sales proceeds, the potential liability triggered by a Change in Control is estimated to be in the range of $65 million to $90 million. As of December 31, 2019, the awards are 80% vested.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before Provision (benefit) for income taxes:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| U.S. | $ | 85,365 |
| | $ | (68,032 | ) | | $ | (26,981 | ) |
| Non-U.S. | 757,462 |
| | 970,840 |
| | 30,412 |
|
| | $ | 842,827 |
| | $ | 902,808 |
| | $ | 3,431 |
|
Income tax expense (benefit) consists of the following:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | |
| U.S income taxes: | | | | | |
| Current | $ | 16,589 |
| | $ | 787 |
| | $ | (1,066 | ) |
| Deferred | 5,690 |
| | (52,145 | ) | | 38 |
|
| | 22,279 |
| | (51,358 | ) | | (1,028 | ) |
| Non-U.S. income taxes: | | | | | |
| Current | 64,134 |
| | 85,252 |
| | 5,924 |
|
| Deferred | 11,812 |
| | 15,026 |
| | (15,677 | ) |
| | 75,946 |
| | 100,278 |
| | (9,753 | ) |
| Total income tax expense (benefit) | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
The tax expense changed from a benefit of $(10.8) million for the year ended December 31, 2017 to expense of $48.9 million and $98.2 million for the years ended December 31, 2018 and 2019, primarily due to the increase in earnings, the shift in the jurisdictional mix of earnings and losses from year to year. Partially offsetting these items was a partial release, both in 2018 and in 2019, of a valuation allowance recorded against the deferred tax asset related to certain foreign and U.S. federal and state tax attributes. Certain jurisdictions shifted from pre-tax basis;losses in 2017 to pre-tax earnings in 2018 and 2019.
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly revises the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures which have the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI. In general, these changes were effective beginning in 2018. The Tax Act also includes a one-time mandatory deemed repatriation or transition tax on the accumulated previously untaxed foreign earnings of our foreign subsidiaries.
For the fourth quarter of 2017, we were able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and re-measurement of certain deferred tax asset and liabilities.
Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118. SAB No. 118 allowed the Company contribution account to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 also provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Act. On October 15, 2018, the Company’s U.S. tax returns for 2017 were filed and the changes to the provisional tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 were recorded in 2018. These adjustments were immaterial to the Company’s financial statements.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 2018, the U.S. Department of Treasury and the U.S. Internal Revenue Service (IRS) issued proposed regulations under code section 965 and on January 15, 2019, the IRS issued final 965 regulations. The Company continues to analyze the effects of the Tax Act and newly issued final regulations on its financial statements. The final impact of the Tax Act and the regulations may differ from the amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, additional legislative or administrative actions to clarify the intent of the statutory language provided that they differ from the Company’s current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. We estimate that any change will be immaterial to the Company’s financial statements at this time.
The Company also continues to evaluate the impact of the GILTI provisions under the Tax Act which matching contributions are allocated;complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an employer contribution accountaccounting policy election of either (1) the period cost method or (2) the deferred method. As of December 31, 2018, the Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred.
Income tax expense (benefit) differed from the amount computed by applying the U.S, federal income tax rate of 21% for years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to income before Provision (benefit) expense for income taxes as set forth in the following table:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) |
| Tax at statutory U.S. federal rate | $ | 176,994 |
| | $ | 189,590 |
| | $ | 1,201 |
|
| Impact of U.S. Tax Act - GILTI | 65,531 |
| | 93,739 |
| | — |
|
| Impact of the 2017 Tax Act - transition tax | — |
| | — |
| | 39,628 |
|
| Impact of the 2017 Tax Act - tax rate change | — |
| | — |
| | 52,228 |
|
| Impact of Tax Receivable Agreement | 713 |
| | 18,160 |
| | — |
|
| Valuation allowance | (14,548 | ) | | (93,125 | ) | | (89,269 | ) |
| State taxes, net of federal tax benefit | 4,231 |
| | 1,529 |
| | 3,437 |
|
| U.S. tax impact of foreign earnings (net of foreign tax credits) | 2,181 |
| | 792 |
| | 1,151 |
|
| Establishment/resolution of uncertain tax positions | (1,293 | ) | | (345 | ) | | (840 | ) |
| Adjustment for foreign income taxed at different rates | (76,922 | ) | | (95,822 | ) | | (2,359 | ) |
| Foreign tax credits | (56,171 | ) | | (65,046 | ) | | (17,956 | ) |
| Other | (2,491 | ) | | (552 | ) | | 1,998 |
|
| Provision (benefit) for income taxes | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
The company has been granted a tax holiday in Brazil, which certainexpires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities as of December 31, 2019 and December 31, 2018 are set forth in the following table.
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | (Dollars in thousands) |
| Deferred tax assets: | | | |
| Postretirement and other employee benefits | $ | 18,256 |
| | $ | 18,395 |
|
| Foreign tax credit and other carryforwards | 55,103 |
| | 111,325 |
|
| Capitalized research and experimental costs | 5,566 |
| | 7,695 |
|
| Environmental reserves | 1,110 |
| | 976 |
|
| Inventory adjustments | 14,863 |
| | 14,251 |
|
| Long-term contract option amortization | 1,080 |
| | 1,144 |
|
| Provision for rationalization charges | 232 |
| | 351 |
|
| Other | 1,872 |
| | 4,270 |
|
| Total gross deferred tax assets | 98,082 |
| | 158,407 |
|
| Less: valuation allowance | (13,736 | ) | | (58,446 | ) |
| Total deferred tax assets | 84,346 |
| | 99,961 |
|
| Deferred tax liabilities: | | | |
| Fixed assets | $ | 56,659 |
| | $ | 59,521 |
|
| Inventory | 12,778 |
| | 7,751 |
|
| Goodwill and acquired intangibles | 6,996 |
| | 3,668 |
|
| Other | 2,468 |
| | 3,138 |
|
| Total deferred tax liabilities | 78,901 |
| | 74,078 |
|
| Net deferred tax asset | $ | 5,445 |
| | $ | 25,883 |
|
Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $71.7 million as of December 31, 2018 and $55.2 million as of December 31, 2019. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $45.8 million as of December 31, 2018 and $49.8 million as of December 31, 2019.
We continue to assess the need for valuation allowances against 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. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused. 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. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
Valuation allowance activity for the years ended December 31, 2018 and 2019 was as follows:
|
| | | |
| | (Dollars in thousands) |
| Balance as of December 31, 2017 | $ | 150,839 |
|
| Credited to income | (93,125 | ) |
| Translation adjustment | (302 | ) |
| Changes attributable to movement in underlying assets | 1,034 |
|
| Balance as of December 31, 2018 | $ | 58,446 |
|
| Credited to income | (14,548 | ) |
| Changes attributable to write-off of underlying assets | (30,138 | ) |
| Translation adjustment | (24 | ) |
| Balance as of December 31, 2019 | $ | 13,736 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 2017, with the enactment of the Tax Act, additional Company contributions are allocated;taxable income was derived as a result of inclusion of accumulated previously untaxed foreign earnings of GrafTech’s foreign subsidiaries. This additional taxable income led to the utilization of the U.S. net operating loss carryforward in 2017 and a Roth 401(k) after-tax accountpartial release of the valuation allowance against the U.S. deferred tax assets. The valuation allowance was further reduced by the U.S. tax rate decrease from 35% to 21% as a result of the Tax Act. During 2018, we determined that sufficient positive evidence existed that allowed us to conclude that a full valuation allowance was no longer required to be recorded against the deferred tax assets related to the U.S. tax attributes. This positive evidence was primarily supplied by the Company exiting a cumulative loss period in the U.S. as well as sufficient U.S. current and forecasted taxable income that would utilize the U.S. tax attributes. As a result, a partial release (to reflect only the economic benefit of the attributes) of the valuation allowance against federal net operating losses and state losses was recorded in 2018 while a full release of the valuation allowance against the federal foreign tax credit carryforward, other federal deferred tax assets was also recorded. A valuation allowance of $35.8 million is included in the December 31, 2018 balance reflected above as there was not sufficient positive evidence that the deferred tax asset related to the U.S. federal net operating loss would generate more than its estimated economic benefit. This valuation allowance and the related deferred tax asset were subsequently released to the income statement in 2019.
In March of 2017, $19.5 million of foreign tax credits expired. During the fourth quarter of 2017, we increased our foreign tax credit carryforward by $37.7 million, as a result of additional foreign taxable income derived in connections with the new U.S. tax legislation that was enacted on December 22, 2017. As of December 31, 2019, we have a total foreign tax credit carryforward of $31.3 million. As indicated above, a valuation allowance is no longer recorded against this foreign tax credit carryforward. These tax credit carryforwards begin to expire as of March 15, 2025. In addition, we have state net operating loss carryforwards of $250.0 million (net of federal benefit), which participantscan be carried forward from 5 to 20 years. These state net operating loss carryforwards generated a deferred tax asset of $14.9 million as of December 31, 2019. We also have U.S. state tax credits of $2.3 million as of December 31, 2019.
We have foreign loss carryforwards on a gross basis of $16.8 million as of December 31, 2019, which can be carried forward indefinitely.
During the fourth quarter of 2017, GrafTech Switzerland moved from a cumulative loss position to a cumulative profit position, as well as a current year utilization of its net operating loss carryforward. This positive evidence and utilization led to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2018.
As of December 31, 2019, we had unrecognized tax benefits of $0.2 million, which, if recognized, would have a favorable impact on our effective tax rate. We have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.8 million as of December 31, 2017, and $0.9 million as of December 31, 2018 (an increase of $0.1 million). We had 0 accrued interest and penalties as of December 31, 2019 (a decrease of $0.9 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | |
| | (Dollars in thousands) |
| | |
| Balance as of December 31, 2017 | $ | 2,492 |
|
| Reductions for tax positions of prior years | (100 | ) |
| Lapse of statutes of limitations | (373 | ) |
| Foreign currency impact | (21 | ) |
| Settlements | (8 | ) |
| Balance as of December 31, 2018 | $ | 1,990 |
|
| Settlements | (1,383 | ) |
| Reductions for tax positions of prior years | (421 | ) |
| Foreign currency impact | (2 | ) |
| Balance as of December 31, 2019 | $ | 184 |
|
It is reasonably possible that a reduction of unrecognized tax benefits of up to $0.2 million may make contributions on an after-tax basis. The maximum employee contribution (pre-taxoccur within 12 months due to settlements and after-tax combined) for any year for any participant is 50.0%the expiration of statutes of limitation.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2016 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2013.
As of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.5 billion. Because $1.3 billion of such participant’s compensation (subjectearnings have previously been subject to statutory limits).
We make a matching contribution to the Savings Plan for each participant who elects to contribute to the Savings Plan. The matching contribution is 100%taxation by way of the first 3% of compensation and 50% oftransition tax on foreign earnings required by the next 2% of compensation that a participant contributes. Matching contributions under the Savings Plan are fully vested at all times. In addition to matching contributions, we make employer contributions to the Savings Plan each year equal to 1% of a participant’s eligible compensation. A participant becomes vested in these employer contributions to the Savings Plan once he or she has completed three years of service.
Contributions to the Savings Plan are invested, as the employee directs, in various funds offered under the Savings Plan from time to time. Amounts invested under the Savings Plan may be switched into another investment option at any time. The account balances of participants reflect both their contributions and our contributionsTax Act, as well as the investment performancecurrent and previous years’ GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity.
Stock Split
On April 12, 2018, the Company effected a 3,022,259.23 to one stock split of the Company's then outstanding common stock. We have retroactively applied this split to all share presentations, as well as "Net income per share" and "Income from continuing operations per share" calculations for the periods presented.
Conditional Dividend to Pre-IPO Stockholder
On April 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 on May 8, 2018.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note to the sole pre-IPO stockholder. This note was repaid on June 15, 2018 with proceeds from our Incremental Term Loans. See Note 5 "Debt and Liquidity".
Initial Public Offering
On April 23, 2018, we completed the IPO of 35,000,000 shares of our common stock at a price of $15 per share. This offering represented a sale of 11.6% of our sole pre-IPO stockholder's ownership in the Company.
On April 26, 2018, we closed the sale of an additional 3,097,525 shares of common stock at a price to the public of $15 per share from the pre-IPO stockholder, as a result of the partial exercise by the underwriters in our IPO of their overallotment option. After giving effect to the partial exercise of the overallotment option, the total number of shares of common stock sold by the pre-IPO stockholder was 38,097,525.
The Company did not receive any proceeds related to the offering. We incurred $5.1 million of legal, accounting, printing and other fees associated with this offering through December 31, 2018, which was recorded in "Selling and administrative" expenses in the Consolidated Statements of Operations.
Follow-on Offering and Common Stock Repurchases
On August 13, 2018, Brookfield completed an underwritten public secondary offering (the "Offering") of 23,000,000 shares of our common stock at a price to the public of $20.00 per share. The Company did not receive any proceeds related to the Offering. Pursuant to a share repurchase agreement with Brookfield, we concurrently repurchased 11,688,311 shares directly from Brookfield. The price per share paid by us in the repurchase was equal to the price at which the underwriters purchased the shares from Brookfield in the Offering net of underwriting commissions and discounts. We funded the share repurchase from cash on hand. The terms and conditions of the share repurchase were reviewed and approved by the audit committee of our board of directors, which is comprised solely of independent directors. All repurchased shares were retired.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 of December 31, 2019, we had repurchased 1,004,685 shares of common stock totaling $10.9 million under this program.
On December 5, 2019, GrafTech announced two separate transactions. The first was a Rule 144 secondary block trade in which those amounts are invested. DistributionsBrookfield sold 11,175,927 shares of account balancesGrafTech common stock at a price of $13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, GrafTech entered into a share repurchase agreement with Brookfield to repurchase $250 million of stock from Brookfield at the arms length price of $13.125, set by the competitive bidding process of the secondary block trade. As a result, GrafTech repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%.
Dividends
The Board of Directors declared and paid a dividend of $0.0645 per share for the first quarter of 2018 totaling $19.5 million, which was paid on June 29, 2018 and represented a prorated quarterly dividend of $0.085 (or $0.34 per annum) per share of our common stock prorated from the Savings Plan are generally made upon retirement ordate of our IPO, April 23, 2018 to June 30, 2018. We have paid our regular quarterly dividends of $0.085 per share since that time. Additionally, we paid a special dividend to stockholders of $0.70 per share on December 31, 2018.
The balance in our Accumulated other termination of employment, unless deferred bycomprehensive (loss) income is set forth in the participant.following table:
Non-Qualified Deferred Compensation |
| | | | | | | |
| | As of December 31, 2019 | | As of
December 31, 2018 |
| | (Dollars in thousands) |
| Foreign currency translation adjustments, net of tax | $ | (9,293 | ) | | $ | (2,922 | ) |
| Commodities, foreign currency and interest rate derivatives, net of tax | 1,932 |
| | (2,878 | ) |
| Total accumulated comprehensive (loss) income | $ | (7,361 | ) | | $ | (5,800 | ) |
The following table shows the executive’s contributions, company contributions,information used in the calculation of our basic and diluted earnings per share calculation as of December 31, 2019, 2018 and year-end account balances2017. See Note 14 "Stockholders' Equity" for details on our named executive officersApril 12, 2018 stock split and our common stock repurchases on 2019 and 2018.
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| Weighted average common shares outstanding for basic calculation | 289,057,356 |
| | 297,748,327 |
| | 302,225,923 |
|
| Add: Effect of equity awards | 17,245 |
| | 5,443 |
| | — |
|
| Weighted average common shares outstanding for diluted calculation | 289,074,601 |
| | 297,753,770 |
| | 302,225,923 |
|
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes 32,981 and 5,592 shares of participating securities in GrafTech’s Compensation Deferral Plan, which is an unfunded, unsecured deferred compensation plan. The terms2019 and 2018, respectively. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the Compensation Deferral Planweighted 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 1,082,113 and 650,432 equivalent shares in 2019 and 2018, respectively, as these shares are described belowanti-dilutive.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(16) Summary of quarterly financial data (Unaudited)
The following summarizes certain consolidated operating results by quarter for 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 |
| | | March 31 | | June 30 | | September 30 | | December 31 | | March 31 | | June 30 | | September 30 | | December 31 |
| | | (Dollars in thousands, except per share amounts) |
| As Reported: | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 474,994 |
| | $ | 480,390 |
| | $ | 420,797 |
| | $ | 414,612 |
| | $ | 451,899 |
| | $ | 456,332 |
| | $ | 454,890 |
| | $ | 532,789 |
|
| Gross profit | | 279,470 |
| | 283,343 |
| | 242,300 |
| | 235,290 |
| | 306,750 |
| | 290,422 |
| | 274,610 |
| | 318,430 |
|
| Research and development | | 637 |
| | 713 |
| | 611 |
| | 723 |
| | 429 |
| | 581 |
| | 518 |
| | 601 |
|
| Selling and administrative expenses | | 15,226 |
| | 15,394 |
| | 15,708 |
| | 17,346 |
| | 15,876 |
| | 16,239 |
| | 14,234 |
| | 15,683 |
|
| Other expense (income), net | | 467 |
| | 863 |
| | (688 | ) | | 4,561 |
| | 2,005 |
| | (974 | ) | | 1,502 |
| | 828 |
|
Related party Tax Receivable Agreement Expense | | — |
| | — |
| | — |
| | 3,393 |
| | — |
| | 61,801 |
| | — |
| | 24,677 |
|
| Interest Expense | | 33,700 |
| | 32,969 |
| | 31,803 |
| | 28,859 |
| | 37,865 |
| | 28,667 |
| | 33,855 |
| | 34,674 |
|
| Interest Income | | (414 | ) | | (731 | ) | | (1,765 | ) | | (1,799 | ) | | (115 | ) | | (391 | ) | | (562 | ) | | (589 | ) |
| Net income | | 197,436 |
| | 196,368 |
| | 175,876 |
| | 174,922 |
| | 223,673 |
| | 201,448 |
| | 199,466 |
| | 229,632 |
|
| Net income per share | | $ | 0.68 |
| | $ | 0.68 |
| | $ | 0.61 |
| | $ | 0.61 |
| | $ | 0.74 |
| | $ | 0.67 |
| | $ | 0.67 |
| | $ | 0.79 |
|
(17) Subsequent Events
On February 5, 2020, the table.Board of Directors declared a dividend of $0.085 per share of common stock to stockholders of record as of the close of business on February 28, 2020, to be paid on March 31, 2020.
|
| | | | | | | | | | |
| Executive | Executive Contributions in Last FY ($) | Company Contribution in Last FY ($) | Aggregate Earnings in Last FY ($) (1) | Aggregate Withdrawals or Distributions in Last FY ($) | Aggregate Balance at Last FYE ($) |
| Hawthorne, J.L. | — |
| — |
| 396 |
| — |
| 5,370 |
|
| Coburn, Q.J. | — |
| — |
| 292 |
| — |
| 4,010 |
|
| Blair, D.A. | — |
| — |
| 2,807 |
| — |
| 26,432 |
|
| Batty, L.D. | — |
| — |
| 36,552 |
| — |
| 239,767 |
|
| |
(1)Item 9. | The amounts ListedChanges in this column are not included in the Summary Compensation Table because none of the earnings were “above market” or “preferential”. Earnings are basedand Disagreements with Accountants on the performance of investments available under the Compensation Deferral Plan, which are “notional” investments, including any interestAccounting and dividends paid on the investments.Financial Disclosure |
None.
| |
(2)Item 9A. | The amounts Listed in this column are not included in the Summary Compensation Table because none of the earnings were “above market” or “preferential”. Earnings are based on the performance of investments available under the Compensation Deferral Plan, which are “notional” investments, including any interestControls and dividends paid on the investments.Procedures |
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate disclosure controls and procedures at the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a reporting company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The named executive officers,Under the supervision and with the exceptionparticipation of Mr. Dutton, all participate in our non-qualified Compensation Deferral Plan. Undermanagement, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the Compensation Deferral Plan, participants are able to defer up to 85% of their ICP compensation, up to 50% of their base salary.
Deferrals and contributions to our Compensation Deferral Plan are credited with a rate of return based on the performance of various funds selected by the participants from indices which are designated by the Plan Administrator. An employee may prospectively change the funds for crediting rates of return at any time. The account balances of participants are credited with both their deferrals and our additions, as well as the rate of return on the funds selected by the participants for those amounts. Frozen Lump Sums and their earnings are held in notional investment accounts selected by the employee
Distributions of account balances from the Compensation Deferral Plan are generally made in January following retirement or other termination of employment or, if elected by the participant, upon a future date specified by the participant, except that Frozen Lump Sums and GrafTech allocations may not be distributed prior to age 50. Participants may also elect to have their account balances distributed upon a change in control of GrafTech. For purposeseffectiveness of the Compensation Deferral Plan, a change in control is generally defined in accordance with requirementsdesign and operation of the American Jobs Creation Act of 2004 for amounts deferred as noted after December 31, 2004. For amounts accruedour disclosure controls and vestedprocedures as of December 31, 2004,2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures are effective at the definitionreasonable assurance level as of December 31, 2019.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process, designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel of a changecompany, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in control is described under “Potential Payments on Termination or Changeaccordance with generally accepted accounting principles, and includes those policies and procedures that:
pertain to the maintenance of records that, in Control.” The Compensation Deferral Plan is intended to comply with Section 409Areasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Code governing deferred compensation arrangements exceptcompany;
provide reasonable assurance that amountstransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that were contributed to the Compensation Deferral Planreceipts and fully vested by December 31, 2004, including allexpenditures of the Frozen Lump Sums,company are being made only in accordance with authorizations of management and the board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its financial statements.
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the restrictionsrisk that controls may become inadequate because of Section 409A. Amounts underchanges in conditions or because the Compensation Deferral Plan are generally payable in a lump sum, although participants may elect to have their accounts payable in annual installments instead.
Director Compensation
Non-employee director Peter Gordon received no compensation from GrafTech for his services in 2016.
Non-employee director Denis Turcotte received $75,000 in meeting fees plus reimbursement for travel expenses and incidentals.
Director Committees
GrafTech no longer has a classlevel of equity securities registered pursuant to Section 12 of the Exchange Act and, accordingly, is not required to have standing committees of the Board, including an audit committee, a nominating and governance committee or an executive compensation committee. Given that GrafTech is wholly-owned by Brookfield, there is no need forcompliance with related policies or procedures by which security holders may recommend nominees or otherwise communicate with the Board. The Board may periodically establish committees, in each case so that certain important matters can be addressed in greater depth than may be possible in a meetingdeteriorate.
Management has conducted an assessment of the entire Board. We also do not currently feel an audit committee or compensation committee is required at this time due toeffectiveness of our internal control over financial reporting as of December 31, 2019 using the small sizecriteria set forth by the Committee of Sponsoring Organizations of the Board of Directors and the fact that three of the four members of the Board are deemed to be independent under New York Stock Exchange rules. As such, we do not have an audit committee financial expert.
Compensation Plan Risk
We regularly assess the risks related to our compensation programs and policies, including our executive compensation programs, and analyze the checks and balances associated with such plans. We have implemented control to manage those risks that include:
balanced and competitive mix of salaries, benefits, and annual and long-term incentives aligned with our operational and strategic goals;
our Board’s guidanceTreadway Commission (COSO) in developing our compensation arrangements, plans, programs and policies;
approval by our Board of significant compensation plans and programs; and
oversight by the Board of compensation plans and programs for management employees, including approval of incentive plan goals, review of actual performance against goals, and approval of award payouts.
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
All issued and outstanding shares of our Common Stock are owned by Brookfield. Upon the consummation of our acquisition by Brookfield, all compensation plans (including individual compensation arrangements) under which equity securities of the Company were previously authorized for issuance (whether or not previously approved by security holders) were terminated. Accordingly, the Company does not have any securities authorized for issuance under equity compensation plans.
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Board has determined that, to be considered independent, an outside director may not have a material relationship with the Company (directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). In determining whether a material relationship exists, the Board considers, among other things, whether a director or a member of his or her immediate family received in any 12-month period during the past three years more than $120,000 in direct compensation from the Company (other than director fees and pension or other deferred compensation for prior service), whether the director has in the last three years been a Company employee (or whether a member of the director’s immediate family has in the last three years been a GrafTech executive officer), whether the director or a member of the director’s immediate family is or has been affiliated with a current or former auditor of GrafTech, and whether the director is or has been part of an interlocking directorate.
The Board currently consists of four members. Mr. Dutton, who is a GrafTech employee, is not an independent director (within the meaning of the “independence” described above)Internal Control-Integrated Framework (2013). Based on the criteria described above, eachthat assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019. The effectiveness of the other membersCompany’s internal control over financial reporting as of the Board haveDecember 31, 2019 has been determined to be an independent director.
Due to their relationship with Brookfield, Messrs. Bloom, Gordon and Turcotte may be deemed to have an indirect interest in Brookfield’s investment in GrafTech and any payments madeaudited by GrafTech to Brookfield. Details of such transactions are described in the Company’s Current Reports on Form 8-K filed with the SEC on August 11, 2015 and August 18, 2015, which are incorporated by reference herein.
Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
Registered Independent Public Accounting Firm’s Fees
The following table sets forth fees paid or payable to Deloitte & Touche LLP, our independent registered public accounting firm, appointedas stated in October 1st, 2015. All oftheir report, which is presented elsewhere in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in the services providedCompany’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to us by Deloitte & Touche LLP were approved bymaterially affect, the Audit Committee in accordance with this pre-approval policy and procedure. Company’s internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
|
| | | |
| | 2015 | | 2016 |
| | | | |
| Audit Fees (a) | $1,694,684 | | $1,407,000 |
| Tax Fees (b) | — | | $101,947 |
| Total | $1,694,684 | | $1,508,947 |
(a) The categoryPART III
Items 10 to 14 (inclusive).
Except as set forth in Part I, the information required by Items 10, 11, 12, 13 and 14 will appear in the definitive GrafTech International Ltd. Proxy Statement for the Annual Meeting of “Audit Fees” includes feesStockholders to be held on May 14, 2020, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated by reference in connection with:
•auditsthis Annual Report pursuant to General Instruction G(3) of our annual consolidated financial statements;
•reviewsForm 10-K (other than the portions thereof not deemed to be “filed” for the purpose of our quarterly financial statements; and
•statutory and regulatory auditsSection 18 of subsidiaries.
(b) The categorythe Securities Exchange Act of “Tax Fees” includes fees in connection with:
•Tax compliance and consulting services1934).
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules |
The following documents are filed as part of this report.
(a)(1)Financial Statements
See Index to Consolidated Financial Statements at page 63The financial statements are set forth under Item 8 of this Report.
Annual Report on Form 10-K.
| |
| (2) | Financial Statement Schedules |
None.
The exhibits listed in the following table have been filed with, or incorporated by reference into, this Annual Report.
|
| | |
Exhibit Number | | Description of Exhibit |
2.1.0(1)2.1 | | Recapitalization and Stock Purchase and Sale Agreement dated as of November 14, 1994 among Union Carbide Corporation, Mitsubishi Corporation, GrafTech International Ltd. and GrafTech International Acquisition Inc. and Guaranty made by Blackstone Capital Partners II Merchant Banking Fund L.P. and Blackstone Offshore Capital Partners II L.P. |
2.2.0(1) | | Stock Purchase and Sale Agreement dated as of November 9, 1990 among Mitsubishi Corporation, Union Carbide Corporation and UCAR Carbon Company Inc. |
2.3.0(1) | | Transfer Agreement dated January 1, 1989 between Union Carbide Corporation and UCAR Carbon Company Inc. |
2.3.1(1) | | Amendment No. 1 to Transfer Agreement dated December 31, 1989. |
2.3.2(1) | | Amendment No. 2 to Transfer Agreement dated July 2, 1990. |
2.3.3(1) | | Amendment No. 3 to Transfer Agreement dated as of February 25, 1991. |
2.4.0(1) | | Amended and Restated Realignment Indemnification Agreement dated as of June 4, 1992 among Union Carbide Corporation, Union Carbide Chemicals and Plastics Company Inc., Union Carbide Industrial Gases Inc., UCAR Carbon Company Inc. and Union Carbide Coatings Service Corporation. |
2.5.0(1) | | Environmental Management Services and Liabilities Allocation Agreement dated as of January 1, 1990 among Union Carbide Corporation, Union Carbide Chemicals and Plastics Company Inc., UCAR Carbon Company Inc., Union Carbide Industrial Gases Inc. and Union Carbide Coatings Service Corporation. |
2.5.1(1) | | Amendment No. 1 to Environmental Management Services and Liabilities Allocation Agreement dated as of June 4, 1992. |
2.6.0(2) | | Trade Name and Trademark License Agreement dated March 1, 1996 between Union Carbide Corporation and UCAR Carbon Technology Corporation. |
2.7.0(1) | | Employee Benefit Services and Liabilities Agreement dated January 1, 1990 between Union Carbide Corporation and UCAR Carbon Company Inc. |
2.7.1(1) | | Amendment to Employee Benefit Services and Liabilities Agreement dated January 15, 1991. |
2.7.2(1) | | Supplemental Agreement to Employee Benefit Services and Liabilities Agreement dated February 25, 1991. |
2.8.0(1) | | Letter Agreement dated December 31, 1990 among Union Carbide Chemicals and Plastics Company Inc., UCAR Carbon Company Inc., Union Carbide Grafito, Inc. and Union Carbide Corporation. |
2.9.0(37) | | |
3.1.0(36)3.1 | |
|
3.2.0(36)3.2 | | |
4.1.0(29) | | 6.375% Senior Notes due 2020. |
10.1.0(27) | | European Guarantee and Luxembourg Security Agreement dated as of April 20, 2012, made(incorporated by GrafTech Luxembourg I S.à.r.l., GrafTech Luxembourg II S.à.r.l. and GrafTech Switzerland S.A., in favor of JPMorgan Chase Bank, N.A., as collateral agent for the Secured Parties (as defined therein). |
|
| | |
reference to Exhibit Number
| | Description of Exhibit |
10.1.1(27) | | Second Amended and Restated Indemnity, Subrogation and Contribution Agreement dated as of April 20,
2012, among 3.2 to GrafTech International Ltd., GrafTech Finance Inc., each of the other Domestic Subsidiaries (as
defined therein) from time to time party thereto, and JPMorgan Chase Bank, N.A., as collateral agent for the
Secured Parties (as defined therein)’s Registration Statement on Form S‑1/A (Registration No. 333‑223791) filed April 13, 2018).
|
|
| | |
10.1.2(27) | | Pledge Agreement dated as of March 26, 2012, by GrafTech Luxembourg I S.à.r.l. in favor of JPMorgan Chase Bank, N.A., as collateral agent for the Secured Parties (as defined therein).
|
10.1.3(27) | 4.1 |
|
10.1.4(21) | | Amended and Restated Intellectual Property Security Agreement dated as of April 28, 2010 made by GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc., and the other subsidiaries ofbetween GrafTech International Ltd. from timeand BCP GrafTech Holdings LP (incorporated by reference to time party thereto, in favor of JPMorgan Chase Bank, N.A., as Collateral Agent for the Secured Parties.
Exhibit 4.1 to GrafTech International Ltd.’s Form 10‑Q filed on August 3, 2018).
|
10.1.5(21)
| 4.2 | |
| 4.3* |
BCP IV GrafTech Holdings LP.
|
10.1.6(21)4.4* | | Form |
10.1.7(39) | 10.1 | Second Amended and Restated Credit Agreement, dated as of February 27, 2015,12, 2018, among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Luxembourg I S.à.r.l.,Switzerland SA and GrafTech Luxembourg II S.à.r.l. and GrafTech Switzerland S.A.; the LC Subsidiaries (as defined therein) from time to time party thereto; and JPMorgan Chase Bank, N.A.À.R.L., as Administrative Agentco‑borrowers, the lenders and Collateral Agent, as an Issuing Bank and as Swingline Lender (as defined therein), filed as Exhibit A to the Second Amendment and Restatement Agreement dated as of February 27, 2015, among such parties.
|
10.1.8(40) | | Second Amendment dated as of July 28, 2015 in respect of the Second Amended and Restated Credit Agreement dated as of February 27, 2015 among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Luxembourg I SarL, GrafTech Luxembourg II SarL, GrafTech Switzerland S.A., the LC Subsidiaries from time to time party thereto, the Lenders from time to timeissuing banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent as an Issuing Bank and as Swingline Lender.(incorporated by reference to Exhibit 10.1 to GrafTech International Ltd.’s Registration Statement on Form S‑1 (Registration No. 333‑223791) filed March 20, 2018). |
10.1.9(34) | 10.2 | Second Amended and Restated PledgeFirst Amendment to the Credit Agreement, dated as of April 23, 2014, byJune 15, 2018, among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Switzerland S.A. in favor ofSA, GrafTech Luxembourg II S.À.R.L. as co‑borrowers, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as collateral agent for the Secured Parties (as defined therein)Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to GrafTech International Ltd.’s Form 10‑Q filed on August 3, 2018).
|
10.1.10(34)10.3 | | Third Amended and Restated PledgeGuarantee Agreement, dated as of April 23, 2014,February 12, 2018, among GrafTech International Ltd., GrafTech Finance Inc., the other subsidiaries of GrafTech International Ltd. from time to time party thereto and JPMorgan Chase Bank, N.A., as collateral agent for the Secured Parties (as defined therein)Administrative Agent (incorporated by reference to Exhibit 10.2 to GrafTech International Ltd.’s Registration Statement on Form S‑1 (Registration No. 333‑223791) filed March 20, 2018). |
10.1.11(34) | 10.4 | Third Amended and Restated SecurityCollateral Agreement, dated as of April 23, 2014, made byFebruary 12, 2018, among GrafTech International Ltd., GrafTech Finance Inc., and the other subsidiaries ofgrantors party thereto and JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated by reference to Exhibit 10.3 to GrafTech International Ltd. from time’s Registration Statement on Form S‑1 (Registration No. 333‑223791) filed March 20, 2018). |
|
| |
| 10.5 | |
| 10.6 |
|
10.1.12(39)10.7 | | 2015 U.S. ReaffirmationPledge Agreement, dated as of February 27, 2015, among GrafTech International Ltd., GrafTech Finance Inc.,12, 2018, by GrafTech Luxembourg I S.à.r.l., GrafTech Luxembourg II S.à.r.l. and GrafTech Switzerland S.A.; the Subsidiaries party thereto; and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent. |
10.1.13(39) | | 2015 Luxembourg Reaffirmation Agreement dated as of February 27, 2015, among GrafTech International Holdings, Inc., GrafTech Luxembourg I S.à.r.l., and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent.
|
10.1.14(27) | | Second Amended and Restated Guarantee Agreement dated as of April 20, 2012, made by GrafTech International Ltd., GrafTech Finance Inc., and the other subsidiaries of GrafTech International Ltd. from time to time party thereto, À.R.L in favor of JPMorgan Chase Bank, N.A., as collateral agent for the Secured Parties (as defined therein)Collateral Agent (incorporated by reference to Exhibit 10.6 to GrafTech International Ltd.’s Registration Statement on Form S‑1 (Registration No. 333‑223791) filed March 20, 2018).
|
10.2.0(8)10.8 | |
| 10.9 | |
| 10.10 | |
| 10.11 | |
| 10.12 | |
| 10.13 | |
| 10.14 | |
| 10.15 | |
10.3.0(14) | | Forms of Restricted StockTax Receivable Agreement (2005 LTIP Version). |
10.4.0(26) | | Form of Long Term Incentive Plan Award Agreement (2010 Version). |
10.4.1(26) | | Form of Long Term Incentive Plan Award Agreement (2011 Version). |
10.4.2(30) | | Form of Long Term Incentive Plan Award Agreement (2012 Version). |
10.4.3(31) | | Form of Long Term Incentive Plan Award Agreement (2013 Version). |
10.4.4(36) | | Form of Equity Incentive Plan Award Agreement (Standard Version Effective 2014). |
10.4.5(33) | | Restricted Stock Agreement (2005 Plan; Director Version) |
10.5.0(9) | | between GrafTech International Ltd. Management Stock Incentive Plan (Senior Version) as amended and restated through July 31, 2003. |
10.6.0(10) | | Brookfield Capital Partners IV GP, Ltd. (incorporated by reference to Exhibit 10.14 to GrafTech International Ltd. Incentive Compensation Plan, effective January ’s Registration Statement on Form S‑1 2003. |
|
| 10.16+ | | |
10.6.1(16) | | Amendment No. 1 |
10.7.0(11)10.17+ | | Form of Restricted Stock Agreement (Standard Form). |
10.8.0(16) | | |
| 10.21+ | |
| 10.22+ | |
| 10.24+ | |
| 10.25+ | |
| 10.26+ | |
|
| |
| 10.27+ | |
Exhibit
Number
10.28+ | | Description |
10.9.0(26)10.29+ | |
| 10.30+ | |
| 10.31 | |
| 10.32+ | |
| 10.33+ | |
| 10.34+ |
|
10.10.0(8)10.35+ | | Form |
10.10.1(16) | | Form of IRS 409A Amendment to Severance Compensation Agreement for senior management (December 2008 U.S. 2.99 Version). |
10.10.2(25) | | Form of Severance Compensation Agreement for senior management (U.S. 2.99 Version - Revised). |
10.10.3(34) | | effective March 1, 2018, between GrafTech International Holdings Inc. 2014-2016 Executive Selective Severance Program |
10.10.4(41) | | Form of 2014 - 2016 Executive Selective Severance Program Notification Letter |
10.11.0(16) | | Form of IRS 409A Amendmentand David J. Rintoul (incorporated by reference to Severance Compensation Agreement for senior management (December 2008 International 2.99 Version). |
10.12.0(14) | | Form of Non-qualified Stock Option Agreement. |
10.14.0(14) | | Form of Terms and Conditions of SaleExhibit 10.35 to standard contract of sale (2007 revision) |
10.15.0(13) | | Technology License Agreement, dated as of December 5, 2006, among GrafTech International Ltd., UCAR Carbon Company Inc., Alcan France, and Carbone Savoie (confidential treatment requested under Rule 24b-2 as to certain portions which are omitted and's Annual Report on Form 10-K filed separately with the SEC.)February 22, 2019). |
10.16.0(24)10.36+ | | |
10.17.0(18) | | Executive Incentive Compensation Plan. |
10.19.0(23) | | Registration Rights and Stockholders’ Agreement, dated as of November 30, 2010, by and amongunder the GrafTech International Ltd. and each of the stockholders party thereto entered into pursuantOmnibus Equity Incentive Plan (incorporated by reference to April 28, 2010 Agreements and Plans of Merger. |
10.20.0(29) | | Indenture, dated November 20, 2012, amongExhibit 10.1 to GrafTech International Ltd., the Subsidiary Guarantors and U.S. Bank National Association, as Trustee.'s Quarterly Report on Form 10-Q filed May 1, 2019). |
10.21.0(38)10.37+ | |
| 10.38 | Investment
|
12.1.0(42)10.39+* | | Computation |
21.1.0(31)21.1* | | |
24.1.0(42)23.1* | | Powers |
31.1.0(42)31.1* | | |
31.2.0(42) | | Certification pursuant to Rule 13a-14(a) under the Exchange Act by QuinnDavid J. Coburn, Vice President and Chief Financial Officer. |
32.1.0(42) | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Joel L. Hawthorne, Chief Executive Officer and President. |
32.2.0(42) | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Quinn J. Coburn, Vice President and Chief Financial Officer. |
101 | | INS XBRL Instance Document |
101 | | SCH XBRL Taxonomy Extension Schema Document |
101 | | CAL XBRL Taxonomy Extension Calculation Linkbase Document |
101 | | DEF XBRL Taxonomy Extension Definition Linkbase Document |
101 | | LAB XBRL Taxonomy Extension Label Linkbase Document |
101 | | PRE XBRL Taxonomy Extension Presentation Linkbase Document |
| |
(1) | Incorporated by reference to the Registration Statement of GrafTech International Ltd. and GrafTech Global Enterprises Inc. on Form S-1 (Registration No. 33-84850). |
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(2) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 1996 (File No. 1-13888). |
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(3) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 1998 (File No. 1-13888). |
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(4) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-13888). |
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(5) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2001 (File No. 1-3888). |
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(6) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2004 (File No. 1-13888). |
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(7) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended September 30, 2005 (File No. 1-13888). |
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(8) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2005 (File No. 1-13888). |
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(9) | Incorporated by reference to the Registration Statement of the registrant on Form S-3 (Registration No. 333-108039). |
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(10) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 2006 (File No. 1-13888). |
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(11) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on September 6, 2005 (File No. 1-13888). |
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(12) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-13888). |
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(13) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2006 (File No. 1-13888). |
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(14) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2007 (File No. 1-13888). |
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(15) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2008 (File No. 1-13888). |
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(16) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2008 (File No. 1-13888). |
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(17) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 2009 (File No. 1-13888). |
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(18) | Incorporated by reference to the Definitive Proxy Statement for the 2009 Annual Meeting of Stockholders of the registrant (File No. 1-13888). |
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(19) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2009 (File No. 1-13888). |
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(20) | Incorporated by reference to Amendment No. 1 to the Annual Report of the registrant on Amendment No.1 to Form 10-K for the year ended December 31, 2009 (File No. 1-13888). |
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(21) | Incorporated by reference to the Registration Statement of GrafTech Holdings Inc. on Form S-4 (Registration No. 167446) filed June 10, 2010. |
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(22) | Incorporated by reference to Amendment No. 1 to the Registration Statement of GrafTech Holdings Inc. on Form S-4 (Registration No. 167446) filed August 19, 2010. |
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(23) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on November 30, 2010 (File No. 1-13888). |
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(24) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2010 (File No. 1-13888). |
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(25) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2011 (File No. 1-13888). |
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(26) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2011 (File No. 1-13888). |
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(27) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 2012 (File No. 1-13888). |
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(28) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended September 30, 2012 (File No. 1-13888). |
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(29) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on November 20, 2012 (File No. 1-13888). |
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(30) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2012 (File No. 1-13888). |
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(31) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2013 (File No. 1-13888). |
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(32) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on November 25, 2014 (File No. 1-13888). |
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(33) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2014 (File No. 1-13888). |
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(34) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended March 31, 2014 (File No. 1-13888). |
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(35) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended September 30, 2014 (File No. 1-13888). |
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(36) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on August 20, 2015 (File No. 1-13888). |
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(37) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on May 18, 2015 (File No. 1-13888). |
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(38) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on May 4, 2015 (File No. 1-13888). |
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(39) | Incorporated by reference to the Current Report of the registrant on Form 8-K filed on March 3, 2015 (File No. 1-13888). |
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(40) | Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2015 (File No. 1-13888). |
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(41) | Incorporated by reference to the Annual Report of the registrant on Form 10-K for the year ended December 31, 2014 (File No. 1-13888). |
EXHIBIT INDEX
The exhibits listed in the following table have been filed with this Report.
|
| | |
Exhibit
Number
| | Description of Exhibit |
| | |
12.1.0 | | Computation of Ratio of Earnings to Fixed Charges |
| | |
24.1.0 | | Powers of Attorney (Included on Signatures pages) |
| | |
31.1.0 | | Certification pursuant to Rule 13a-14(a) under the Exchange Act by Joel L. Hawthorne,Rintoul, President and Chief Executive Officer.Officer (Principal Executive Officer). |
| 31.2* | | |
31.2.0 | | |
| 32.1* | | |
32.1.0 | | |
| 32.2* | | |
32.2.0 | | |
| | |
| 101 | | INSThe following financial information from GrafTech International Ltd.'s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in Inline XBRL Instance Document(Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders' Equity (Deficit), and (vi) Notes to the Consolidated Financial Statements.
|
| 104 | | |
101 | | SCHCover Page Interactive Data file (formatted as Inline XBRL Taxonomy Extension Schema Document |
| | |
101 | | CAL XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101 | | DEF XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101 | | LAB XBRL Taxonomy Extension Label Linkbase Document |
| | |
101 | | PRE XBRL Taxonomy Extension Presentation Linkbase Documentand contained in Exhibit 101) |
____________________________
| |
| + | Indicates management contract or compensatory plan or arrangement |
| |
| Item 16. | Form 10-K Summary |
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | GRAFTECH INTERNATIONAL LTD.
|
| | | |
February 27, 201721, 2020 | By: | /s/ Jeffrey C. Dutton��David J. Rintoul |
| | | Jeffrey C. DuttonDavid J. Rintoul |
| | Title: | President and Chief Executive Officer |
| | |
February 27, 2017 | By: | /s/ Quinn J. Coburn |
| | Quinn J. Coburn |
| Title: | Vice President and Chief Financial Officer |
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Jeffrey C. Dutton and Quinn J. Coburn, and each of them individually, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this Report together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission any and all exhibits to this Report and any and all exhibits and schedules thereto, (iii) act on, sign and file any and all such certificates, notices, communications, reports, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and (iv) take any and all such actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, and hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signatures | | Title | | Date |
| | | | | |
/s/ Jeffrey C. DuttonDavid J. Rintoul | | President, and Chief Executive Officer and Director (Principal Executive Officer) | | February 27, 201721, 2020 |
Jeffrey C. DuttonDavid J. Rintoul | | | | |
| /s/ Quinn J. Coburn | | Vice President and Chief Financial Officer, Vice President Finance and Treasurer
(Principal Financial and Accounting Officer) | | February 27, 201721, 2020 |
| Quinn J. Coburn | | | | |
/s/ J. Peter Gordon | | Director | | February 27, 2017 |
J. Peter Gordon | | | | |
| /s/ Denis A. Turcotte | | Chairman and Director | | February 27, 201721, 2020 |
| Denis A. Turcotte | | | | |
/s/ Ron A. BloomBrian L. Acton | | Director | | February 27, 201721, 2020 |
Ron A. BloomBrian L. Acton | | | | |
| /s/ Catherine L. Clegg | | Director | | February 21, 2020 |
| Catherine L. Clegg | | | | |
| /s/ Michel L. Dumas | | Director | | February 21, 2020 |
| Michel L. Dumas | | | | |
| /s/ Jeffrey C. Dutton | | Director | | February 21, 2020 |
| Jeffrey C. Dutton | | | | |
| /s/ David Gregory | | Director | | February 21, 2020 |
| David Gregory | | | | |
| /s/ Anthony R. Taccone | | Director | | February 21, 2020 |
| Anthony R. Taccone | | | | |
