CALCULATION OF REGISTRATION FEE
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Title of each class of securities
being registered
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Amount to be
registered(1)
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Proposed maximum
offering per
unit(2)
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Proposed maximum
aggregate offering
price(2)
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Amount of
registration fee
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Common stock, $0.01 par value per share
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20,125,000
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$14.36
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$288,995,000.00
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$35,026.19
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(1)
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Includes
2,625,000 shares of common stock that the underwriters have the option to purchase from the selling stockholder.
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(2)
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Estimated
solely for the purpose of calculating the amount of registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended,
based upon the average of the high and low sales prices of the registrant's common stock as reported by the New York Stock Exchange on March 1, 2019.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the
registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted.
Subject to completion, dated March 4, 2019
Preliminary Prospectus
17,500,000 shares
Common stock
The selling stockholder identified in this prospectus is selling 17,500,000 shares of our common stock. We will not receive any of the
proceeds from the sale of shares of our common stock by the selling stockholder.
Our
common stock is listed on the New York Stock Exchange (NYSE) under the symbol "EAF." On March 1, 2019, the last reported sale price of our common stock on the NYSE was $14.23
per share.
Investing in our common stock involves risks. See "Risk factors" beginning on page 15.
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Per share
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Total
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Public offering price
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$
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$
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Underwriting discount(1)
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$
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$
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Proceeds to the selling stockholder
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$
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$
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(1)
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See
"Underwriting" beginning on page 134 of the prospectus for additional information regarding total underwriting compensation.
The
selling stockholder has granted the underwriters the right to purchase up to 2,625,000 additional shares of common stock at the public offering price less underwriting discounts and
commissions, for 30 days after the date of this prospectus.
The
underwriters expect to deliver the shares of common stock to investors on or
about , 2019.
Neither the Securities and Exchange Commission (or SEC) nor any state securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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J.P. Morgan
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Credit Suisse
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Citigroup
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RBC Capital Markets
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HSBC
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BMO Capital Markets
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The date of this prospectus is , 2019.
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We are responsible for the information contained in this prospectus and in any related free-writing prospectus we may prepare or authorize
to be delivered to you. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. We and the selling
stockholder are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front of this prospectus.
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Table of Contents
Market and industry data and forecasts
Certain market and industry data included in this prospectus has been obtained from third party sources that we believe to be reliable. Market
estimates are calculated by using independent industry publications, government publications and third party forecasts in conjunction with our assumptions about our markets. We have not independently
verified such third party information. 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 "Special note regarding forward-looking statements" and "Risk factors" in this prospectus.
Trademarks
We own or otherwise have rights to the trademarks, service marks, copyrights and trade names, including those mentioned in this prospectus, used
in conjunction with the marketing and sale of our products and services. This prospectus includes trademarks, which are protected under applicable intellectual property laws and are our property
and/or the property of our subsidiaries. This prospectus may also contain trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners.
We do not intend our use or display of other companies' trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Solely for convenience, our trademarks, service marks and trade names referred to in this prospectus may appear without the ®, , or SM symbols, but such references are not
intended to indicate, in any way, that we
will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names.
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Prospectus summary
This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that
may be important to you. You should read the entire prospectus carefully, including the section entitled "Risk factors" and our financial statements and the related notes included elsewhere in this
prospectus, before making an investment decision to purchase shares of our common stock.
Unless the context suggests otherwise, references in this prospectus to "GrafTech," the "Company," "we," "us," and "our" refer to GrafTech
International Ltd., a Delaware corporation, and its consolidated subsidiaries. See "Our company" below for more information. References in this prospectus to the "selling stockholder" refer to
BCP IV GrafTech Holdings LP, an affiliate of Brookfield Asset Management Inc. and Brookfield Business Partners L.P., and the direct majority owner of GrafTech. References in this
prospectus to "Brookfield" refer to Brookfield Asset Management Inc. and its affiliates. All dollar amounts in this prospectus are in U.S. dollars and are expressed in thousands unless
specified otherwise. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (or GAAP).
Our company
We are a leading manufacturer of high quality graphite electrode products essential to the production of electric arc furnace (or 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 five
highest capacity facilities in the world (excluding China). We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, the primary
raw material for graphite electrode manufacturing, which is currently in limited supply. This unique position provides us with competitive advantages in product quality and cost. Founded in 1886, we
have over 130 years of experience in the research and development (or R&D) of graphite- and carbon-based solutions, and our intellectual property portfolio is extensive. We currently have
graphite electrode manufacturing facilities in Calais, France, Pamplona, Spain, Monterrey, Mexico and St. 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 services, solutions and products to EAF operators. Based on the high quality of our graphite
electrodes, reliability of our petroleum needle coke supply and our excellent customer service, we believe that we are viewed as a preferred supplier to the global EAF steel producer market.
Graphite
electrodes are an industrial consumable product used primarily in EAF steel production, one of the two primary methods of steel production and the steelmaking technology used by
all "mini-mills." 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. We
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 currently 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, and, in some cases, to pass on
this premium to their customers in the form of surcharges. 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.
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Petroleum
needle coke, a crystalline form of carbon derived from decant oil, is the primary 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 the second largest petroleum needle coke producer 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 in periods of tight petroleum needle coke supply, such
as the current market environment. We believe this cost advantage will grow 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, with usage going from approximately 1,000 MT in 2014 to 60,000 MT in 2017. This rapidly growing alternative source of demand is a
significant development for the petroleum needle coke industry and is contributing to the global shortage in petroleum needle coke. Going forward, we expect to purchase approximately one third of our
needle coke requirements from external sources, given the increase in our graphite electrode capacity from our debottlenecking initiative. As a result, we continue to experience higher third party
petroleum needle coke costs, including in the first quarter of 2019, which will affect our cost of sales in 2019.
According
to the World Steel Association (or WSA), EAFs accounted for 46%, or 394 million metric tons (or MT), of global crude steel production (excluding China) in 2017, which
represented an increase of 8% over 2016. 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 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 (or BOF)
steel production. Beginning in 2016, efforts by the Chinese government to restructure China's domestic steel industry have led to limits on Chinese BOF steel production and lower export levels. In
addition, 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, since 2016, the
EAF steel market has rebounded strongly and resumed its long-term growth trajectory. This revival in EAF steel production has resulted in increased demand for our graphite electrodes.
At
the same time, two supply-side structural changes have contributed to record high prices of graphite electrodes in 2018. First, ongoing consolidation and rationalization of graphite
electrode production capacity have limited the ability of graphite electrode producers to meet demand. We estimate that approximately 20% of graphite electrode industry production capacity (excluding
China) was closed or repurposed from 2014-2016, and we believe the majority of these closures represent permanent reductions. Second, demand for petroleum needle coke has outpaced supply due to
increasing demand for petroleum needle coke for lithium-ion batteries used in electric vehicles. As a result, graphite electrode prices have reached record high prices in 2018. 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) and fell to a historic low of
approximately $2,500 per MT in 2016. With the renewed demand for, and constrained supply of, graphite electrodes, industry spot prices have reached record highs in 2018. In the fourth quarter of 2018,
our weighted average realized price of graphite electrodes was $9,950 per MT, representing an increase of 2% from the prior quarter and 141% from the prior year. In light of improved market
conditions, the long lead time required to produce our products, our position as one of the market's largest producers and our ability, through our substantial vertical integration with Seadrift, to
provide customers with a reliable long-term supply of graphite electrodes despite the market shortage of petroleum needle coke, we have implemented a commercial strategy to sell graphite electrodes
through three- to five-year take-or-pay contracts.
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GrafTech historical weighted average realized prices and signed three- to five-year
weighted average contract prices for graphite electrodes
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(1)
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Weighted
average realized price for a period reflects the total revenues from sales of graphite electrodes for the period divided by the graphite electrode sales
volume for that period. The weighted average realized prices in this chart are shown in constant 2018 dollars for comparability. See "Management's discussion and analysis of financial condition and
results of operationsKey Operating Metrics."
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(2)
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Weighted
average contract price for a period reflects the volume-weighted average price for graphite electrodes to be delivered under the three- to five-year
take-or-pay contracts we have entered into in 2018 and 2019. All of these contracts have fixed prices and either fixed volumes (83% of the portfolio) or a specified volume range (17% of the
portfolio). For those contracts with a specified volume range, weighted average contract prices are computed using the volume midpoint. The aggregate difference between the volume midpoint 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 2019-2022. See "BusinessContracts
and customers."
As
a leading producer of graphite electrodes, we believe we are well-positioned to benefit from this industry transformation. In 2017, based on our three primary operating facilities, we
had the capability,
depending on product demand and mix, to manufacture approximately 167,000 MT of graphite electrodes per year. In 2018, we completed an operational improvement and debottlenecking initiative to
increase production capacity at these facilities by approximately 20% to approximately 202,000 MT. Currently, our warm idled St. Marys facility is finishing some electrodes sourced from other
facilities to provide flexibility to our overall manufacturing footprint. We could ramp up production at St. Marys if required to support our customers. If restarted, St. Marys would add
approximately 28,000 MT of annual capacity. This overall total production capacity would be comparable to our largest competitor, which we estimate currently has a total of approximately
230,000 MT of production capacity (excluding China). We believe the total worldwide graphite electrode production capacity was approximately 800,000 MT (excluding China) in 2018, with a
capacity utilization of approximately 90% (excluding China). We believe worldwide graphite electrode production capacity, excluding China, has now increased to approximately 850,000 MT. Electrode
production globally (excluding China) is focused on the manufacture of ultra-high power (or UHP) electrodes for EAFs, while the majority of Chinese production is of ladle electrodes for BOFs. The
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production
of UHP electrodes requires an extensive proprietary manufacturing process and material science knowledge, including the use of superior needle coke blends. As a result, graphite electrode
producers inside and outside of China are generally not in direct competition with each other for major product lines.
On
August 15, 2015, we became an indirect wholly owned subsidiary of Brookfield through a tender offer to shareholders and subsequent merger transaction. Brookfield 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 industrial sectors.
On
April 23, 2018, we completed our initial public offering (or IPO) of 35,000,000 shares of our common stock held by the selling stockholder at a price of $15.00 per share. On
April 26, 2018, we closed the sale of an additional 3,097,525 shares of common stock held by the selling stockholder at a price to the public of $15.00 per share, as a result of the partial
exercise by the underwriters in our IPO of their overallotment option. We did not receive any proceeds related to the IPO. Our common stock is listed on the NYSE under the symbol "EAF."
On
August 13, 2018, we repurchased 11,688,311 shares directly from the selling stockholder. These shares were retired upon repurchase. The price per share paid by us was equal to
the price at which the underwriters purchased the shares from the selling stockholder's August 2018 public secondary offering of 23,000,000 shares of our common stock, net of underwriting commissions
and discounts. We funded the share repurchase from cash on hand. After giving effect to the offerings by the selling stockholder and our repurchase of shares, the selling stockholder currently owns
approximately 79% of our common stock.
Our
executive offices are located at 982 Keynote Circle, Brooklyn Heights, Ohio 44131 and our telephone number is (216) 676-2000. Our Internet website address is www.graftech.com.
Information on, or accessible through, our website is not part of this prospectus. 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 two largest producers of graphite electrodes outside of China, 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 outside of China, we estimate that our three operating manufacturing facilities represent approximately 24% of estimated
production capacity for graphite electrodes, 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
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play provider of an essential consumable
for EAF steel producers, the fastest
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growing sector of the steel industry
According to WSA, EAF steelmaking grew at an annual pace of approximately 14% in 2017, compared with 4% 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
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producers
to continue to grow at a faster rate than BOF producers globally. Additionally, EAF 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. According to the WSA, in EMEA and the Americas, which
together made up 93% of our 2018 net sales, EAF producers have increased market share from approximately 37% in 2000 to 49% in 2017, reflecting growth from 190 million MT to 257 million
MT. In APAC, which made up approximately 7% of our 2018 net sales, government initiatives in China are expected to result in a greater use of the EAF method in steelmaking despite the historical
dominance of BOF producers. These initiatives are the result of efforts to eliminate excess steelmaking production capacity and to improve environmental conditions. The EAF method produces
approximately 25% of the carbon dioxide (or CO
2
) 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
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efficient growth opportunities
available to us
The graphite electrode industry responded to oversupplied markets from 2011 to 2015 with production capacity rationalization and consolidation,
and after the normalization of the market for EAF steel in 2017. 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. Similarly, brownfield development is complicated by significant capital costs and space and process constraints. 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. As a result of this long and uncertain time horizon to build new plants, we believe only a few companies have the necessary technology and expertise to
meet the rising demand for graphite electrodes.
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 are able to
achieve this large capacity increase with specific, highly targeted capital investments. These expansions will provide additional fixed cost absorption and drive further efficiencies of scale across
our manufacturing base. We also have our currently warm idled St. Marys facility, which remains a viable long-term option. Currently, St. Marys is graphitizing and machining some
semi-finished electrodes sourced from Monterrey in order to leverage existing infrastructure.
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 operating costs of more than $1,000 per MT lower than low capacity
manufacturing facilities. Our previous restructuring activities included the closures of our lower capacity manufacturing facilities in South Africa and Brazil and the idling of our St. Marys
facility, which together accounted for approximately 35% of our previous production capacity. Our restructuring actions have eliminated a significant amount of annual fixed manufacturing costs and
maintenance capital expenditure requirements since 2012. These actions allow us to run our Calais, Pamplona and Monterrey plants at a high level of capacity utilization. Since 2014, we have also
improved our manufacturing processes and made strategic investments across our
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plant
network, which have improved productivity while also reducing our energy and raw material consumption. Following our footprint optimization, we are producing a greater quantity of graphite
electrodes from our three primary operating facilities than we did from our six operating facilities in 2012. In 2017, the Calais and Pamplona plants exceeded previous annual record production levels
by 15% and 12%, respectively, and production at the Monterrey plant was 12% higher than the highest annual production level during the past 10 years. Our recently completed debottlenecking
initiative added approximately 20% to our capacity at a very low cost per MT. We believe that the optimization of our plant network will continue to drive improved fixed cost absorption.
Moreover,
our Seadrift, Calais, Pamplona, Monterrey and St. Marys facilities each provide unique advantages for us. Seadrift provides a substantial portion of our petroleum needle
coke supply needs internally and at a competitive cost and allows us to maximize capacity utilization more efficiently than competitors, who may be more constrained by 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 the second largest petroleum needle coke producer in the world. We also believe that
Calais, Pamplona and Monterrey are three of the five highest capacity graphite electrode facilities in the world (excluding China), allowing for significant operating leverage. We believe our
facilities have significant cost advantages given their scale and access to low cost, reliable energy sources. While much of the production capacity rationalized during the downturn was permanently
shut down, we temporarily idled our St. Marys facility and retain the option to restart it.
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 the second largest petroleum needle coke producer in the world. We produced approximately 110,000 MT of needle coke in 2018. We expect to produce approximately 125,000 MT in 2019 as we do not have
a planned maintenance outage in 2019 and we expect a modest productivity enhancement related to our efficiency improvement project. We believe that no petroleum needle coke production capacity has
been added
outside of China for at least 10 years, given high capital costs and technological barriers. Additionally, the growing petroleum needle coke demand from manufacturers of lithium-ion batteries
for electric vehicles has led to a limited supply of petroleum needle coke available to graphite electrode manufacturers. Sourcing the majority of our 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, significantly affecting graphite electrode production rates and cost.
Our graphite electrodes and petroleum needle coke are among the highest quality in the industry
After the divestiture of our non-core legacy Engineered Solutions businesses in 2016 and 2017, we focused on our core competency of graphite
electrode production and generated approximately $60 million in cash proceeds and release of working capital from these divestitures. 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 have identified and implemented mechanical and chemical improvements
to our electrodes, invested in the capability to
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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. By producing pins at our Monterrey plant, we are able to realize meaningful fixed-cost synergies with our graphite electrode production on site.
As a result, we believe the quality and the consistency of our electrodes is unrivaled in North America and EMEA and on par with that of any producer globally. We have seen customer satisfaction rise
to ten-year highs at a time when the industry has been focused on production capacity rationalization rather than quality. 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 around the world, enables our
engineers to work with our customers seamlessly to maximize the performance of their furnaces and 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. We have undertaken strategic investments to increase our production capacity in a
capital-efficient manner while reducing our cost position. Our executive and manufacturing leadership have led manufacturing companies through many cycles and are focused on positioning us for
profitable growth in any environment. Our operational improvement and debottlenecking initiative is completed and increased capacity by approximately 20%, or 35,000 MT. Currently, our warm idled
St. Marys facility is finishing some electrodes sourced from other facilities to provide flexibility to our overall manufacturing footprint. We could ramp up production at St. Marys if
required to support our customers. If restarted, St. Marys would add approximately 28,000 MT of annual capacity.
Additionally,
since our acquisition by Brookfield, we have reorganized our manufacturing facilities as profit centers. We use LEAN manufacturing techniques, which focus on the constant
elimination of waste from the manufacturing process. We also rely on Six Sigma methods, a set of management techniques intended to improve quality by significantly reducing the probability that an
error or defect will occur. We believe the LEAN and Six Sigma initiatives have increased overall utilization by optimizing our plant production capacity and controlled costs while also improving
quality. We also redesigned general manager incentive plans to reward efficiency gains. Similarly, our labor force is incentivized to drive efficiencies through country-specific labor incentive plans.
Risk factors
Our business is subject to numerous risks. See "Risk factors" beginning on page 15. In particular, our business may be adversely affected
by, among other factors:
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the possibility that the cyclical nature of our business and the selling prices of our products may lead to periods of reduced profitability
and net losses in the future;
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the possibility that we may be unable to implement our business strategies, including our initiative to secure and maintain longer-term
take-or-pay customer contracts, in an effective manner;
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the fact that pricing for graphite electrodes has historically been cyclical and, although current prices are relatively high, the price of
graphite electrodes may decline in the future;
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the sensitivity of our business and operating results to economic conditions;
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our dependence on the global steel industry generally and the EAF steel industry in particular;
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the possibility that global graphite electrode overcapacity may adversely affect graphite electrode prices;
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the competitiveness of the graphite electrode industry;
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our dependence on the supply of petroleum needle coke;
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our dependence on supplies of raw materials (in addition to petroleum needle coke) and energy; and
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the possibility that our manufacturing operations are subject to hazards.
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The offering
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Common stock offered by the selling stockholder
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17,500,000 shares, assuming no exercise by the underwriters of their options to purchase an additional 2,625,000 shares of common stock from the selling stockholder.
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Common stock to be issued and outstanding after this offering
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290,537,612 shares.
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Use of proceeds
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We will not receive any proceeds from the sale of our common stock by the selling stockholder named in this
prospectus.
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Dividend policy
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We currently pay a quarterly cash dividend of $0.085 per share, or an aggregate of $0.34 per share on an annualized basis.
See "Dividend policy."
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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 further discussion of the factors that may affect our business and our ability to pay dividends, see "Risk factorsRisks related to our business and industry" and "Risk factorsRisks related to our common stockWe may
not pay cash dividends on our common stock."
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Risk factors
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Please read the section entitled "Risk factors" beginning on page 15 for a discussion of some of the factors you should
carefully consider before deciding to invest in our common stock.
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NYSE listing and symbol
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|
Our common stock is listed on the NYSE under the symbol "EAF."
|
The
number of shares of common stock to be issued and outstanding after the completion of this offering is based on 290,537,612 shares of common stock issued and outstanding as of
February 15, 2019, and excludes an additional 15,000,000 shares reserved for future issuance under our Omnibus Equity Incentive Plan.
Except
as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional 2,625,000 shares of
common stock from the selling stockholder.
9
Table of Contents
Summary historical consolidated financial and other data
The following tables present selected consolidated financial information of the Company. You should read these tables along with "Management's
discussion and analysis of financial condition and results of operations," "Business" and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.
The
summary consolidated statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the summary consolidated balance sheet data at December 31,
2018 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be
expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except per
share amounts)
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,895,910
|
|
$
|
550,771
|
|
$
|
437,963
|
|
Income (loss) from continuing operations
|
|
|
853,888
|
|
|
14,212
|
|
|
(108,869
|
)
|
Net income (loss)
|
|
|
854,219
|
|
|
7,983
|
|
|
(235,843
|
)
|
Basic and diluted earnings (loss) per common share(a):
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per share(a)
|
|
$
|
2.87
|
|
$
|
0.05
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding(a)
|
|
|
297,748
|
|
|
302,226
|
|
|
302,226
|
|
Dividends per common share(b)
|
|
$
|
0.77
|
|
$
|
|
|
$
|
|
|
Balance sheet data (at period end):
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,505,491
|
|
$
|
1,199,103
|
|
$
|
1,172,276
|
|
Other long-term obligations(c)
|
|
|
72,519
|
|
|
68,907
|
|
|
82,148
|
|
Total long-term debt
|
|
|
2,050,311
|
|
|
322,900
|
|
|
356,580
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
836,603
|
|
$
|
36,573
|
|
$
|
22,815
|
|
Net cash used in investing activities
|
|
|
(67,295
|
)
|
|
(2,199
|
)
|
|
(10,471
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(731,044
|
)
|
|
(32,995
|
)
|
|
(8,317
|
)
|
-
(a)
-
Data
gives effect to the 3,022,259.23-for-1 stock split on our common stock effected on April 12, 2018.
-
(b)
-
Calculated
by 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.
-
(c)
-
Represents
pension and post-retirement benefits and related costs and miscellaneous other long-term obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
Key financial measures
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
EBITDA from continuing operations(1)
|
|
$
|
1,102,625
|
|
$
|
97,884
|
|
$
|
(12,251
|
)
|
Adjusted EBITDA from continuing operations(1)
|
|
$
|
1,205,021
|
|
$
|
95,806
|
|
$
|
(2,898
|
)
|
10
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
Key operating metrics
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except price
data)
|
|
Sales volume (MT)(2)
|
|
|
185
|
|
|
172
|
|
|
163
|
|
Weighted average realized price(3)
|
|
$
|
9,937
|
|
$
|
2,945
|
|
$
|
2,459
|
|
Production volume (MT)(4)
|
|
|
179
|
|
|
166
|
|
|
151
|
|
Production capacity excluding St. Marys during idle period (MT)(5)(6)
|
|
|
180
|
|
|
167
|
|
|
176
|
|
Capacity utilization excluding St. Marys during idle period(5)(7)
|
|
|
99
|
%
|
|
99
|
%
|
|
85
|
%
|
Total production capacity(6)(8)
|
|
|
208
|
|
|
195
|
|
|
195
|
|
Total capacity utilization(7)(8)
|
|
|
86
|
%
|
|
85
|
%
|
|
77
|
%
|
-
(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)
-
Sales
volume reflects the total volume of graphite electrodes sold for which revenue has been recognized during the period. See below for more information on our key
operating metrics.
-
(3)
-
Weighted
average realized price reflects the total revenues from sales of graphite electrodes for the period divided by the graphite electrode sales volume for that
period. See below for more information on our key operating metrics.
-
(4)
-
Production
volume reflects graphite electrodes produced during the period. See below for more information on our key operating metrics.
-
(5)
-
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.
-
(6)
-
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.
-
(7)
-
Capacity
utilization reflects production volume as a percentage of production capacity. See below for more information on our key operating metrics.
-
(8)
-
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 other post-employment benefit (or OPEB) plan expenses, impairments, rationalization-related
charges, IPO 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
11
Table of Contents
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 impairment of long-lived assets and goodwill;
-
-
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 IPO 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,
12
Table of Contents
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)
|
|
2018
|
|
2017
|
|
2016
|
|
Net income (loss)
|
|
$
|
854,219
|
|
$
|
7,983
|
|
$
|
(235,843
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
(331
|
)
|
|
6,229
|
|
|
126,974
|
|
Depreciation and amortization
|
|
|
66,413
|
|
|
64,025
|
|
|
77,614
|
|
Interest expense
|
|
|
135,061
|
|
|
30,823
|
|
|
26,914
|
|
Interest income
|
|
|
(1,657
|
)
|
|
(395
|
)
|
|
(358
|
)
|
Income taxes
|
|
|
48,920
|
|
|
(10,781
|
)
|
|
(7,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations
|
|
|
1,102,625
|
|
|
97,884
|
|
|
(12,251
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Pension and OPEB plan (gain) expenses(1)
|
|
|
3,893
|
|
|
(1,611
|
)
|
|
(626
|
)
|
Rationalization-related (gains)/charges(2)
|
|
|
|
|
|
(3,970
|
)
|
|
5,209
|
|
IPO expenses(3)
|
|
|
5,173
|
|
|
|
|
|
|
|
Acquisition and proxy contests costs(4)
|
|
|
|
|
|
886
|
|
|
8,036
|
|
Non-cash loss (gain) on foreign currency remeasurement(5)
|
|
|
818
|
|
|
1,731
|
|
|
(5,465
|
)
|
Stock-based compensation(6)
|
|
|
1,152
|
|
|
|
|
|
|
|
Non-cash fixed asset write-off(7)
|
|
|
4,882
|
|
|
886
|
|
|
2,199
|
|
Related party Tax Receivable Agreement expense(8)
|
|
|
86,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from continuing operations
|
|
$
|
1,205,021
|
|
$
|
95,806
|
|
$
|
(2,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
-
(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 the initial public offering.
-
(4)
-
Costs
associated with the merger transaction with Brookfield, resulting in change in control compensation expenses.
-
(5)
-
Non-cash
(gain) 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 manufacturing equipment.
-
(8)
-
Non-cash
expense for future payment to the selling stockholder for tax assets that are expected to be utilized.
13
Table of Contents
Key Operating Metrics
Key operating metrics consist of sales volume, weighted average realized price, production volume, production capacity and capacity utilization.
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 operationsCritical accounting policiesRevenue recognition." Weighted average realized price
reflects the total revenues from sales of graphite electrodes for the period divided by the graphite electrode sales volume for that period. Sales volume and weighted average realized price help
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.
14
Table of Contents
Risk factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors,
as well as other information contained in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could materially and adversely affect our
business, financial condition, results of operations and cash flow, in which case the trading price of our common stock could decline and you could lose all or part of your
investment.
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 a history 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 prospectus, 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 future 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 implement our business strategies for growth successfully. We have
undertaken, and will continue to undertake, various business strategies to sell a significant portion 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 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. 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. For example, our ability to make other operational improvements as planned may be delayed or interrupted by the need to obtain environmental
and other regulatory approvals, the availability of labor and materials, unforeseen hazards, such as weather conditions, and other risks customarily associated with construction projects.
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 depends,
among other things, on our ability to finance our operations, maintain high-quality and efficient manufacturing operations, 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.
15
Table of Contents
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.
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 most recent 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 production and constrained supply of needle coke, graphite electrode prices reached record highs in 2018. We have executed three- to five-year take-or-pay contracts, representing
approximately 60% to 65% of our production capacity from 2018 through 2022. The weighted average contract price for the contracted volumes over the next four years is approximately $9,700 per MT. If
spot prices remain above our contract prices, our profitability may be negatively impacted compared to what it would have been if we had sold the contracted volume in the spot market. 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. Our business, financial condition and
operating results could be materially and adversely affected to the extent prices for graphite electrodes decline in the future to or below our historical weighted average realized price levels.
Our business and operating results have been and will continue to be sensitive to economic conditions 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 historically has been highly cyclical and is affected by general economic conditions. An economic downturn may reduce customer demand, reduce prices for our products or
inhibit our ability to produce our products, which would negatively affect our operating results. Our business and operating results have also been and will continue to be sensitive to declining
consumer and business confidence; fluctuating commodity 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. These events would negatively impact our revenues and
results of operations.
We are dependent on the global steel industry generally and the EAF steel industry in particular, and a
downturn in these industries may materially adversely affect our business
.
We sell our products primarily to the EAF steel production industry. The steel industry historically has 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, which are industries that were negatively affected by the general economic downturn and the deterioration in financial markets, including severely restricted liquidity and credit
availability, in the recent past. In particular, EAF steel production
16
Table of Contents
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 production. Since 2016,
however, the EAF
steel market has rebounded strongly and resumed its long-term growth trajectory. 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.
Global graphite electrode overcapacity has adversely affected graphite electrode prices in the past, and may
adversely affect them again in the future, which could negatively impact our sales, margins and profitability.
Overcapacity in the graphite electrode industry has adversely affected pricing and may do so again. The rapid growth of 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 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 most recent demand trough, our weighted average realized price fell to approximately $2,500 per MT in 2016. Although Chinese
steel production has decreased since 2016 as a result of the enactment of certain Chinese governmental initiatives, any significant future growth in Chinese BOF steel production 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. 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 collectively make up over 90% of our market, can also exert downward pressure on graphite electrode prices, which negatively affects our sales,
margins and profitability.
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 as well as 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 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.
Petroleum needle coke is the primary raw material used in the production 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 has outpaced supply due to increasing demand for petroleum needle coke for use in the production of lithium-ion
batteries used in electric vehicles. Seadrift currently provides approximately 70% of our current petroleum needle coke requirements, and we purchase the remaining 30% from a variety of external
sources. We plan to rely on Seadrift-produced
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petroleum
needle coke to support the production 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 ability to achieve the anticipated benefits of these contracts if we are forced 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 the 30% of our
needle coke requirements currently used in the production of graphite electrodes for sale in 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:
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limitations, which may be imposed under new legislation or regulation;
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suppliers' allocations to meet demand from other purchasers during periods of shortage (or, in the case of energy suppliers, extended hot or
cold weather);
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interruptions or cessations in production by suppliers; and
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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.
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 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.
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
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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 Registration, Evaluation, Authorization and Restriction of Chemicals Regulation (or
REACH), 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, in the imposition of substantial fines and criminal sanctions and sometimes require the
installation of costly pollution control or safety equipment or costly changes in operations 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 creating 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 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 greenhouse gases (or 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 greenhouse gas 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 United
National Framework Convention on Climate Change 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 "BusinessEnvironment."
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
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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. 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 predict 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 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:
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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 due to the fact that the costs of our non-U.S. operations are
primarily incurred in local currencies while their products are primarily sold in dollars and euros;
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imposition of or increase in customs duties and other tariffs;
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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;
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imposition of or increases in revenue, income or earnings taxes and withholding and other taxes on remittances and other payments by
subsidiaries;
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inflation, deflation and stagflation in any country in which we have a manufacturing facility;
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imposition of or increases in investment or trade restrictions by the United States or other jurisdictions or trade sanctions adopted by the
United States;
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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 obtain complete financial or other information under local legal, judicial, regulatory, disclosure and other systems; and
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nationalization or expropriation of assets, and other risks that could result from a change in government or government policy, or from other
political, social or economic instability.
Any
of these risks could have a material adverse effect on our business, financial condition, results of 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
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manufacturing
facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other expenses with
respect to those facilities. In certain countries in which we have manufacturing facilities, and in certain 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 increasing (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 cash management, we have non-U.S. 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 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
ineffective in protecting against the impact of these fluctuations. We also may purchase or sell 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 laws 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 addition, our three operating manufacturing facilities are currently operating at a high level of production capacity utilization. As a result, in
the event manufacturing operations are substantially disrupted at one of our 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 production capacity expansions may be delayed or may not achieve the expected benefits.
Our ability to complete future production capacity expansions, including the potential full restart of our St. Marys plant, 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. For example, the potential full restart of our St. Marys plant will be substantially dependent on the
availability of external sources of petroleum needle coke and market
conditions. Moreover, the costs of these activities could have a negative impact on our results of operations, particularly until capacity utilization at the facility is sufficient to absorb the
incremental costs of expansion. In addition, completed capacity expansions from our debottlenecking initiative may not achieve the expected benefits as a result of changes in market conditions, raw
material shortages or other unforeseen contingencies.
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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. Following the completion
of our acquisition by Brookfield, our management team has been reorganized, including the establishment of new positions reporting directly to the chief executive officer, and significant competencies
have been added to the management team to further strengthen our business. 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, 2018, approximately 846
employees, or 61%, of our worldwide employees, are covered by collective bargaining or similar agreements. As of December 31, 2018, approximately 691 employees, or 50%, of our worldwide
employees, were covered by agreements that expire, or are subject to renegotiation, at various times through December 31, 2019. 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.
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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. For example, on February 26,
2016, we announced a strategic review of our Engineered Solutions businesses to better direct its resources and simplify its operations. The disposition of those businesses was substantially complete
by the end of the third quarter of 2017.
Any
acquisitions that we are able to identify and complete may involve a number of risks, including:
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our inability to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees;
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the diversion of our management's attention from our existing business;
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possible material adverse effects on our results of operations during the integration process;
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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
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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, 2018. Our annual impairment test of goodwill was
performed in the fourth quarter of 2018. The estimated fair values 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. In that annual impairment test, our graphite electrode reporting unit's fair value
exceeded its carrying value. A 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.
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 upgrade our systems, network disruptions and breaches of 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
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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), which became
enforceable on May 25, 2018, introduced a number of new 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:
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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;
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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
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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.
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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 the related products, and 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 increase 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.
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Significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions could
adversely affect our business, financial condition, 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 carryforwards 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.
Recent tax legislation could adversely affect us or our stockholders.
Recent tax legislation, the Tax Cuts and Jobs Act (or the Tax Act), was enacted on December 22, 2017. The Tax Act significantly revises
the U.S. corporate income tax regime by, among other things:
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lowering corporate income tax rates;
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temporarily allowing for immediate expensing of expenditures for certain tangible property;
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repealing the corporate alternative minimum tax;
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implementing a 100% dividends-received deduction on certain dividends from 10% or greater owned foreign subsidiaries;
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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);
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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);
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imposing limitations on the ability to deduct interest expense and utilize net operating losses (or NOLs); and
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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 are 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 the right to receive future
payments from us to certain of our pre-IPO stockholders (or the Existing Stockholders) 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
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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 will pay interest on the payments we will make to the Existing Stockholders 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, future payments under the TRA relating to the Pre-IPO Tax Assets will be approximately $86.5 million, which was recognized as an expense
in 2018, 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. Any payments made by us to our
counterparties under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us.
For
more information about the TRA, see "Certain relationships and related party transactionsTax 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 and our ability to fulfill our obligations under our existing and future indebtedness.
On February 12, 2018, we entered a credit agreement (or, as amended from time to time, the 2018 Credit Agreement) among us, various of
our subsidiaries, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A. as administrative agent and as collateral agent, which provides for (i) a $1,500 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 by the First Amendment, the Senior Secured Credit Facilities). The 2018 Revolving Credit Facility 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. On February 12, 2018, our wholly owned subsidiary, GrafTech Finance Inc., a Delaware corporation (or GrafTech Finance), borrowed $1,500 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.
On
June 15, 2018, we entered into a first amendment (or the First Amendment) to the 2018 Credit Agreement among us, GrafTech Finance, various of our other subsidiaries and
JPMorgan Chase Bank, N.A. as administrative agent and incremental term lender. The First Amendment amended the 2018 Credit Agreement to provide for an additional $750 million in aggregate
principal amount of incremental term loans (or the Incremental Term Loans) to GrafTech Finance, increasing 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.
As
of December 31, 2018, we had approximately $2,156.6 million of indebtedness outstanding, with $245.5 million available for borrowing under the 2018 Revolving
Credit Facility (taking into account approximately $4.5 million of outstanding letters of credit issued thereunder).
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Interest
expense for the years ended December 31, 2018 and December 31, 2017 was $135.1 million and $30.8 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;
-
-
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 interest 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.
Compliance
with our debt obligations under the Senior Secured Credit Facilities could materially limit our financial or operating activities, or hinder our ability to adapt to changing
industry conditions, which could result in our losing market share, a decline in our revenue or a negative impact on our operating results.
The 2018 Credit Agreement includes covenants that could restrict or limit our financial and business
operations.
The 2018 Credit Agreement contains a number of restrictive covenants that, subject to certain exceptions and qualifications, restrict or limit
our ability and the ability of our 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;
-
-
pay dividends or repurchase stock;
-
-
engage in certain affiliate transactions;
-
-
enter into agreements or otherwise restrict our subsidiaries from making distributions or paying dividends to the borrowers under the Senior
Secured Credit Facilities or to us or certain of our subsidiaries, as applicable; and
-
-
repay intercompany indebtedness or make intercompany distributions or pay intercompany dividends.
The
2018 Credit Agreement also contains certain affirmative covenants and contains a financial covenant that requires us 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
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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.
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. 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 the indebtedness, which
includes substantially all of our and our U.S. subsidiaries' assets and certain assets of certain of our 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 our obligations under the 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 Senior Secured Credit Facilities will depend on, among other things, the condition of the capital markets and our financial condition at the time. We 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 Senior 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 Senior 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 if the amount borrowed remains 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. 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.
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A lowering or withdrawal of the ratings assigned to our debt 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'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. Additionally, 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 credit ratings may make it more costly for us to engage in these activities.
Disruptions in the capital and credit markets, which may 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 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, which could adversely impact our business, results of operations, financial condition and cash flows. These
disruptions may also adversely impact the financial position of our customers and suppliers, which, in turn, could adversely affect our results of operations, financial condition and cash flows.
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.
Following the completion of this offering, Brookfield will own approximately 73% of our outstanding common stock, or 72% if the underwriters'
option to purchase additional shares is fully exercised. Accordingly, Brookfield will continue to own 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, including investors in this
offering. 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.
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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 the terms of the 2018 Credit Agreement. 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. Any change in the level of our dividends 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 calling special meetings of our
stockholders, except where the Delaware General Corporation Law (or the 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 common stock can elect all the directors standing for election;
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-
-
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 stockholders; and
-
-
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 expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by Brookfield, our management or
our board of directors. Public stockholders who might desire to participate in these types of transactions may 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 public stockholders to benefit from a change in control or to change our management and board of directors and, as a result,
may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.
In
addition, in the event of certain changes in control, including if Brookfield's ownership of our outstanding common stock were to fall below 30%, payments to certain of our senior
management may be triggered under certain of our compensation arrangements, which could have an adverse impact on us.
Our Amended Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be
the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, or employees.
Our 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
-
-
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 a "controlled company" within the meaning of the NYSE corporate governance standards and qualify for
exemptions from certain corporate governance requirements.
Because Brookfield owns a majority of our outstanding 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;
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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 exemptions. Accordingly, you may not have the same protections
afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. Brookfield's significant ownership interest could adversely affect investors' perceptions
of our corporate governance.
The market price and trading volume of our common stock may be volatile, which could result in rapid and
substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our
common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your
purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in
fluctuations in the price or trading volume of our common stock include:
-
-
variations in our quarterly or annual operating results;
-
-
changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by
investors and analysts;
-
-
the contents of published research reports about us or our industry or the 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;
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-
announcements by us or others and developments affecting us;
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actions by institutional stockholders;
-
-
litigation and governmental investigations;
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-
changes in market valuations of similar companies;
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-
speculation or reports by the press or investment community with respect to us or our industry in general;
-
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increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
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announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital
commitments; and
-
-
general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are
located.
These
broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to
time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company's
securities,
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securities
class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's
attention and resources.
Future offerings of debt or equity securities by us may adversely affect the market price of our common
stock.
In 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 acquisitions 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 dilute the economic and voting rights of our existing stockholders or
reduce 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 nature of 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.
The market price of our common stock could be negatively affected by sales of substantial amounts of our
common stock in the public markets.
After this offering, there will be 290,537,612 shares of common stock outstanding. This number includes the 17,500,000 shares that Brookfield is
selling in this offering (or 20,125,000 shares if the underwriters exercise their option to purchase additional shares in full), which will be freely transferable. Following completion of this
offering, approximately 73% of our outstanding common stock (or 72% if the underwriters exercise their option to purchase additional shares in full) will be held by Brookfield and can be resold into
the public markets in the future in accordance with the requirements of Rule 144. See "Shares eligible for future sale."
We
and our executive officers, directors and Brookfield (who will hold in the aggregate approximately 73% of our outstanding common stock immediately after the completion of this
offering or 72% if the underwriters exercise their option to purchase additional shares in full) have agreed with the underwriters that, subject to certain exceptions, for a period of 60 days
after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any common stock
or any securities convertible into or exercisable or exchangeable for common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of common
stock, or cause a registration statement covering any common stock to be filed, without the prior written consent of J.P. Morgan Securities LLC and Credit Suisse Securities
(USA) LLC. See "Underwriting." J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC may waive these restrictions at their discretion.
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The
market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. 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.
We have an aggregate of 2,694,462,388 shares of common stock authorized but unissued and not 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 certain exceptions. We
also intend to continue to evaluate acquisition opportunities and may issue common stock in connection with these 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, including those who purchase common stock in this offering.
As a public company, we incur additional costs and face increased demands on our management.
Since our acquisition by Brookfield in 2015, we have continued to comply with certain provisions of the Sarbanes-Oxley Act and regulations of
the SEC. However, as a public company with shares listed on a U.S. exchange, we must comply with additional rules and regulations that, until our initial public offering, had not applied to us since
2015. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a
public company, we added independent directors and created additional board committees. In addition, we are incurring additional costs associated with our public company reporting requirements and
maintaining directors' and officers' liability insurance. Any changes with respect to these rules may impose additional costs on us and materially affect our business, financial condition and results
of operations.
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.
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Special note regarding forward-looking statements
Some of the statements under "Prospectus summary," "Risk factors," "Management's discussion and analysis of financial condition and results of
operations," "Business," "Industry" and elsewhere in this prospectus 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 prospectus are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking
information should not be regarded as a representation by us, the selling stockholder, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be
achieved. These forward-looking statements are subject to various risks and 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 actual 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 the 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 recent tax legislation could adversely affect us or our stockholders;
-
-
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 sensitivity of our business and operating results to economic conditions;
-
-
our dependence on the global steel industry generally and the EAF steel industry in particular;
-
-
the possibility that global graphite electrode overcapacity may adversely affect graphite electrode prices;
-
-
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, 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, natural disasters, public health crises, political crises or other catastrophic events; the possibility that plant capacity
expansions may be delayed or may not achieve the expected benefits;
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-
-
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 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 subjects 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 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 NYSE corporate governance standards, which allows us to qualify for exemptions
from certain corporate governance requirements; and other risks described in the "Risk factors" section of this prospectus beginning on page 15.
These
factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking
statements made in this prospectus relate only to events as of the date on which the statements are made. We do not
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undertake
any obligation to publicly update or review any forward-looking statement except as required by law, whether as a 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 may have
expressed or implied 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 prospectus that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to
time, and it is impossible for us to predict those events or how they may affect us.
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Use of proceeds
The selling stockholder will receive all of the net proceeds from the sale of shares of our common stock it is offering pursuant to this
prospectus. The aggregate proceeds to the selling stockholder from the sale of shares of common stock will be the purchase price of the shares of common stock less underwriting discounts and
commissions, if any. We will not receive any proceeds from the sale of these shares of common stock, including from any exercise by the underwriters of their option to purchase additional shares. We
will bear all costs, fees and expenses in connection with this offering, which are estimated to be $1 million, except that the selling stockholder will pay all underwriting discounts and
commissions. See "Principal stockholders and selling stockholder."
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Market price of common stock
Our common stock has been listed on the NYSE under the symbol "EAF" since April 18, 2018. Prior to that date, there was no public trading
market for our common stock.
As
of February 15, 2019, we had 2 stockholders of record of our common stock. The actual number of stockholders is greater than this number of stockholders of record, and includes
stockholders who are beneficial owners, but whose shares are held in street name by brokers, trusts and other nominees.
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Dividend policy
In 2017, we reoriented our commercial strategy around a three- to five-year take-or-pay contract framework. We expect a high degree of stability
in our future operating results due to these contracts. We have executed three- to five-year take-or-pay contracts representing approximately 674,000 MT over the 2018-2023 period at a weighted average
contract price of approximately $9,800 per MT. In addition, we believe our ability to source substantially all of our 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 on our sales and provides us with substantial visibility into our
future raw material costs. See "BusinessContracts and customers." As a result of this recent contract initiative, we 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 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 contract 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 the terms of the 2018 Credit Agreement. 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. For further discussion of the factors that may affect our business and our ability to pay dividends, see "Risk factorsRisks related to our business and industry" and
"Risk factorsRisks related to our common stockWe may not pay cash dividends on our common stock."
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Business
Our company
We are a leading manufacturer of high quality graphite electrode products essential to the production of 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 five highest capacity
facilities in the world (excluding China). We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, the primary raw material for
graphite electrode manufacturing, which is currently in limited supply. This unique position provides us with competitive advantages in product quality and cost. Founded in 1886, we have over
130 years of experience in the R&D of graphite-and carbon-based solutions, and our intellectual property portfolio is extensive. We currently have graphite electrode manufacturing facilities in
Calais, France, Pamplona, Spain, Monterrey, Mexico and St. Marys, Pennsylvania. Our customers include major steel producers and other ferrous and non-ferrous metal producers in EMEA, the
Americas and APAC, which sell their products into the automotive, construction, appliance, machinery, equipment and transportation industries. Our vision is to provide
highly engineered graphite electrode services, solutions and products to EAF operators. Based on the high quality of our graphite electrodes, reliability of our petroleum needle coke supply and our
excellent customer service, we believe that we are viewed as a preferred supplier to the global EAF steel producer market.
Graphite
electrodes are an industrial consumable product used primarily in EAF steel production, one of the two primary methods of steel production and the steelmaking technology used by
all "mini-mills." 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. We
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 currently 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, and, in some cases, to pass on
this premium to their customers in the form of surcharges. 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.
Petroleum
needle coke, a crystalline form of carbon derived from decant oil, is the primary 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 in November 2010, significantly reducing our reliance on other suppliers. The petroleum needle coke industry is
highly concentrated. We believe Seadrift is the second largest petroleum needle coke producer 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 in periods of tight petroleum needle coke supply, such as the current market
environment. We believe this cost advantage will grow 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, with usage going from approximately 1,000 MT in 2014 to 60,000 MT in 2017. This rapidly growing alternative source of demand is a significant development for
the petroleum needle coke industry and is contributing to the global shortage in petroleum needle coke. Going forward, we expect to purchase approximately one third of our needle coke requirements
from external sources, given the increase in our graphite electrode capacity from our debottlenecking initiative. As a result, we continue to
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experience
higher third party petroleum needle coke costs, including in the first quarter of 2019, which will affect our cost of sales in 2019.
According
to the WSA, EAFs accounted for 46%, or 394 million MT, of global crude steel production (excluding China) in 2017, which represented an increase of 8% over 2016. 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 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 BOF steel production. Beginning in 2016, efforts by the Chinese
government to restructure China's domestic steel industry have led to limits on Chinese BOF steel production and lower export levels. In addition, 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, since 2016, the EAF steel market has rebounded strongly and resumed its long-term
growth trajectory. This revival in EAF steel production has resulted in increased demand for our graphite electrodes.
At
the same time, two supply-side structural changes have contributed to record high prices of graphite electrodes in 2018. First, ongoing consolidation and rationalization of graphite
electrode production capacity have limited the ability of graphite electrode producers to meet demand. We estimate that approximately 20% of graphite electrode industry production capacity (excluding
China) was closed or repurposed from 2014-2016, and we believe the majority of these closures represent permanent reductions. Second, demand for petroleum needle coke has outpaced supply due to
increasing demand for petroleum needle coke for lithium-ion batteries used in electric vehicles. As a result, graphite electrode prices have reached record high prices in 2018. 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) and fell to a historic low of
approximately $2,500 per MT in 2016. With the renewed demand for, and constrained supply of, graphite electrodes, industry spot prices have reached record highs in 2018. In the fourth quarter of 2018,
our weighted average realized price of graphite electrodes was $9,950 per MT, representing an increase of 2% from the prior quarter and 141% from the prior year. In light of improved
market conditions, the long lead time required to produce our products, our position as one of the market's largest producers and our ability, through our substantial vertical integration with
Seadrift, to provide customers with a reliable long-term supply of graphite electrodes despite the market shortage of petroleum needle coke, we have implemented a commercial strategy to sell graphite
electrodes through three- to five-year take-or-pay contracts.
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GrafTech historical weighted average realized prices and signed three-to five-year
weighted average contract prices for graphite electrodes
-
(1)
-
Weighted
average realized price for a period reflects the total revenues from sales of graphite electrodes for the period divided by the graphite electrode sales
volume for that period. The weighted average realized prices in this chart are shown in constant 2018 dollars for comparability. See "Management's discussion and analysis of financial condition and
results of operationsKey Operating Metrics."
-
(2)
-
Weighted
average contract price for a period reflects the volume-weighted average price for graphite electrodes to be delivered under the three- to five-year
take-or-pay contracts we have entered into in 2018 and 2019. All of these contracts have fixed prices and either fixed volumes (83% of the portfolio) or a specified volume range (17% of the
portfolio). For those contracts with a specified volume range, weighted average contract prices are computed using the volume midpoint. The aggregate difference between the volume midpoint 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 2019-2022. See "BusinessContracts
and customers."
As
a leading producer of graphite electrodes, we believe we are well-positioned to benefit from this industry transformation. In 2017, based on our three primary operating facilities, we
had the capability, depending on product demand and mix, to manufacture approximately 167,000 MT of graphite electrodes per year. In 2018, we completed an operational improvement and debottlenecking
initiative to increase production capacity at these facilities by approximately 20% to approximately 202,000 MT. Currently, our warm idled St. Marys facility is finishing some electrodes
sourced from other facilities to provide flexibility to our overall manufacturing footprint. We could ramp up production at St. Marys if required to support our customers. If restarted,
St. Marys would add approximately 28,000 MT of annual capacity. This overall total production capacity would be comparable to our largest competitor, which we estimate currently has a total of
approximately 230,000 MT of production capacity (excluding China). We believe the total worldwide graphite electrode production capacity was approximately 800,000 MT (excluding China) in 2018, with a
capacity utilization of approximately 90% (excluding China). We believe worldwide graphite electrode production capacity, excluding China, has now
increased to approximately 850,000 MT. Electrode production globally (excluding China) is focused on the manufacture of UHP electrodes for EAFs, while the majority of Chinese production is of ladle
electrodes for BOFs. The production of UHP
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electrodes
requires an extensive proprietary manufacturing process and material science knowledge, including the use of superior needle coke blends. As a result, graphite electrode producers inside
and outside of China are generally not in direct competition with each other for major product lines.
On
August 15, 2015, we became an indirect wholly owned subsidiary of Brookfield through a tender offer to shareholders and subsequent merger transaction. Brookfield 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 industrial sectors.
On
April 23, 2018, we completed our IPO of 35,000,000 shares of our common stock held by the selling stockholder at a price of $15.00 per share. On April 26, 2018, we
closed the sale of an additional 3,097,525 shares of common stock held by the selling stockholder at a price to the public of $15.00 per share, as a result of the partial exercise by the underwriters
in our IPO of their overallotment option. We did not receive any proceeds related to the IPO. Our common stock is listed on the NYSE under the symbol "EAF."
On
August 13, 2018, we repurchased 11,688,311 shares directly from the selling stockholder. These shares were retired upon repurchase. The price per share paid by us was equal to
the price at which the underwriters purchased the shares from the selling stockholder in the selling stockholder's August 2018 public secondary offering of 23,000,000 shares of our common stock, net
of underwriting commissions and discounts. We funded the share repurchase from cash on hand. After giving effect to the offerings by Brookfield and our repurchase of shares, Brookfield owns
approximately 79% of our common stock.
Our
executive offices are located at 982 Keynote Circle, Brooklyn Heights, Ohio 44131 and our telephone number is (216) 676-2000. Our Internet website address is www.graftech.com.
Information on, or accessible through, our website is not part of this prospectus. 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 two largest producers of graphite electrodes outside of China, 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 outside of China, we estimate that our three operating manufacturing facilities represent approximately 24% of estimated
production capacity for graphite electrodes, 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 WSA, EAF steelmaking grew at an annual pace of approximately 14% in 2017, compared with 4% 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 producers to continue to grow at a faster rate than
BOF producers globally. Additionally, EAF
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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. According to the WSA, in EMEA and the Americas, which together made up 93% of our 2018 net sales, EAF producers have increased market share from
approximately 37% in 2000 to 49% in 2017, reflecting growth from 190 million MT to 257 million MT. In APAC, which made up approximately 7% of our 2018 net sales, government initiatives
in China are expected to result in a greater use of the EAF method in steelmaking despite the historical dominance of BOF producers. These initiatives are the result of efforts to eliminate excess
steelmaking production capacity and to improve environmental conditions. The EAF method produces approximately 25% of the CO
2
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,
and after the normalization of the market for EAF steel in 2017. 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. Similarly, brownfield development is complicated by significant capital costs and space and process constraints. 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. As a result of this long and uncertain time horizon to build new plants, we believe only a few companies have the necessary technology and expertise to
meet the rising demand for graphite electrodes.
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 are able to
achieve this large capacity increase with specific, highly targeted capital investments. These expansions will provide additional fixed cost absorption and drive further efficiencies of scale across
our manufacturing base. We also have our currently warm idled St. Marys facility, which remains a viable long-term option. Currently, St. Marys is graphitizing and machining some
semi-finished electrodes sourced from Monterrey in order to leverage existing infrastructure.
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 operating costs of more than $1,000 per MT lower than low capacity
manufacturing facilities. Our previous restructuring activities included the closures of our lower capacity manufacturing facilities in South Africa and Brazil and the idling of our St. Marys
facility, which together accounted for approximately 35% of our previous production capacity. Our restructuring actions have eliminated a significant amount of annual fixed manufacturing costs and
maintenance capital expenditure requirements since 2012. These actions allow us to run our Calais, Pamplona and Monterrey plants at a high level of capacity utilization. Since 2014, we have also
improved our manufacturing processes and made strategic investments across our plant network, which have improved productivity while also reducing our energy and raw material consumption. Following
our footprint optimization, we are producing a greater quantity of graphite
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electrodes
from our three primary operating facilities than we did from our six operating facilities in 2012. In 2017, the Calais and Pamplona plants exceeded previous annual record production levels
by 15% and 12%, respectively, and production at the Monterrey plant was 12% higher than the highest annual production level during the past 10 years. Our recently completed debottlenecking
initiative added approximately 20% to our capacity at a very low cost per MT. We believe that the optimization of our plant network will continue to drive improved fixed cost absorption.
Moreover,
our Seadrift, Calais, Pamplona, Monterrey and St. Marys facilities each provide unique advantages for us. Seadrift provides a substantial portion of our petroleum needle
coke supply needs internally and at a competitive cost and allows us to maximize capacity utilization more efficiently than competitors, who may be more constrained by 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 the second largest petroleum needle coke producer in the world. We also believe that
Calais, Pamplona and Monterrey are three of the five highest capacity graphite electrode facilities in the world (excluding China), allowing for significant operating leverage. We believe our
facilities have significant cost advantages given their scale and access to low cost, reliable energy sources. While much of the production capacity rationalized during the downturn was permanently
shut down, we temporarily idled our St. Marys facility and retain the option to restart it.
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 the second largest petroleum needle coke producer in the world. We produced approximately 110,000 MT of needle coke in 2018. We expect to produce approximately 125,000 MT in 2019 as we do not have
a planned maintenance outage in 2019 and we expect a modest productivity enhancement related to our efficiency improvement project. We believe that no petroleum needle coke production capacity has
been added outside of China for at least 10 years, given high capital costs and technological barriers. Additionally, the growing petroleum needle coke demand from manufacturers of lithium-ion
batteries for electric vehicles has led to a limited supply of petroleum needle coke available to graphite electrode manufacturers. Sourcing the majority of our 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, significantly affecting graphite electrode production rates and cost.
Our graphite electrodes and petroleum needle coke are among the highest quality in the industry
After the divestiture of our non-core legacy Engineered Solutions businesses in 2016 and 2017, we focused on our core competency of graphite
electrode production and generated approximately $60 million in cash proceeds and release of working capital from these divestitures. 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 have identified and implemented mechanical and chemical improvements
to our electrodes, invested in the 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
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connect
and fasten graphite electrodes together in a furnace. By producing pins at our Monterrey plant, we are able to realize meaningful fixed-cost synergies with our graphite electrode production on
site. As a result, we believe the quality and the consistency of our electrodes is unrivaled in North America and EMEA and on par with that of any producer globally. We have seen customer satisfaction
rise to ten-year highs at a time when the industry has been focused on production capacity rationalization rather than quality. 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 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 around the world, enables our engineers to work with our
customers seamlessly to maximize the performance of their furnaces and 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. We have undertaken strategic investments to increase our production capacity in a
capital-efficient manner while reducing our cost position. Our executive and manufacturing leadership have led manufacturing companies through many cycles and are focused on positioning us for
profitable growth in any environment. Our operational improvement and debottlenecking initiative is completed and increased capacity by approximately 20%, or 35,000 MT. Currently, our warm idled
St. Marys facility is finishing some electrodes sourced from other facilities to provide flexibility to our overall manufacturing footprint. We could ramp up production at St. Marys if
required to support our customers. If restarted, St. Marys would add approximately 28,000 MT of annual capacity.
Additionally,
since our acquisition by Brookfield, we have reorganized our manufacturing facilities as profit centers. We use LEAN manufacturing techniques, which focus on the constant
elimination of waste from the manufacturing process. We also rely on Six Sigma methods, a set of management techniques intended to improve quality by significantly reducing the probability that an
error or defect will occur. We believe the LEAN and Six Sigma initiatives have increased overall utilization by optimizing our plant production capacity and controlled costs while also improving
quality. We also redesigned general manager incentive plans to reward efficiency gains. Similarly, our labor force is incentivized to drive efficiencies through country-specific labor incentive plans.
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Facilities
We currently operate the following facilities, which are owned or leased as indicated.
|
|
|
|
|
Location of Facility
|
|
Primary Use
|
|
Owned or
Leased
|
Americas
|
|
|
|
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Brooklyn Heights, Ohio
|
|
Corporate Headquarters, Innovation and Technology Center and Sales Office
|
|
Leased
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Monterrey, Mexico
|
|
Graphite Electrode Manufacturing Facility and Sales Office
|
|
Owned
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St. Marys, Pennsylvania
|
|
Graphite Electrode Manufacturing Facility(1)
|
|
Owned
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Port Lavaca, Texas
|
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Petroleum Needle Coke Manufacturing Facility (Seadrift)
|
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Owned
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Salvador, Bahia, Brazil
|
|
Graphite Electrode Machine Shop and Sales Office
|
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Owned
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Europe
|
|
|
|
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Calais, France
|
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Graphite Electrode Manufacturing Facility and Sales Office
|
|
Owned
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Moscow, Russia
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Sales Office
|
|
Leased
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Pamplona, Spain
|
|
Graphite Electrode Manufacturing Facility and Sales Office
|
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Owned
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Bussigny, Switzerland
|
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Global Sales and Production Planning Office
|
|
Leased
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Other International
|
|
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Beijing, China
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Sales Office
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|
Leased
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Hong Kong, China
|
|
Sales Office
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|
Leased
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Meyerton, South Africa
|
|
Sales Office
|
|
Leased
|
-
(1)
-
Currently,
our warm-idled St. Marys facility is semi-finishing products sourced from other plants to provide flexibility to our overall manufacturing
footprint.
We
currently manufacture our graphite electrodes in three manufacturing facilities strategically located in the Americas and EMEA, two of the largest EAF steelmaking markets. Our
locations allow us to serve our customers in the Americas and EMEA efficiently and are located near low-cost and reliable energy sources with essential logistical infrastructure in place. In addition
to these three facilities, we have a fourth graphite electrode manufacturing site in St. Marys, Pennsylvania that is currently warm idled. We estimate that the 202,000 MT of graphite electrode
production capacity at our three primary operating sites represents approximately 24% of estimated global graphite electrode production capacity (excluding China). Due to our productivity improvement
efforts, and because of the increased demand for graphite electrodes, we achieved near 100% capacity utilization at our Calais, France, Pamplona, Spain and Monterrey, Mexico plants in 2017 and 2018.
In 2017, the Calais and Pamplona plants exceeded previous annual record production levels by 15% and 12%, respectively, and production at the Monterrey plant was 12% higher than the highest annual
production level during the past 10 years. In 2018, we added capacity to all three locations through our debottlenecking initiative. 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. By operating three of the five highest capacity graphite electrode production facilities in the world, we are able to achieve meaningful operating
leverage relative to our competitors. Because of the attractive cost of labor available to our Monterrey facility, we believe we have a significant cost advantage in the production of pins, which are
used to connect and fasten graphite electrodes together in a furnace and are more labor-intensive to produce than other graphite electrodes. Our Calais, Pamplona and Monterrey facilities have access
to low-cost sources of electricity, a significant element of our manufacturing costs. Our Seadrift facility currently produces approximately 70% 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.
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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.
The
recent transformation in the industry was driven in part by substantial production capacity rationalization and consolidation. We estimate that, at the beginning of 2014, the
graphite electrode industry globally (excluding China) had capacity to produce approximately 1.0 million MT of graphite electrodes across 30 graphite electrode manufacturing facilities. We
estimate that the industry outside of China has closed or repurposed approximately 20% of production capacity from 2014-2016, reducing production capacity to approximately 800,000 MT of electrodes.
Moreover, the third-largest producer has acquired the second-largest producer. As part of this overall industry rationalization, we permanently shut down two plants and temporarily idled our
St. Marys plant, reducing our electrode manufacturing from six operating facilities in 2012 to three operating facilities in 2017. Despite this, we produced a greater quantity of graphite
electrodes in 2018 from our three primary operating facilities than we did in 2012 from our six facilities. We believe worldwide graphite electrode production capacity, excluding China, has now
increased to approximately 850,000 MT.
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. Graphitization
is energy intensive, and, according to CRU International Ltd (or CRU), requires around 3200 to 4800 kWh electricity per MT, representing 20% to 35% of the total electrode costs.
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, a less favorable substitute for petroleum
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
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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. Seadrift is one of the three largest
petroleum needle coke facilities in the world.
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
vary significantly depending on these rates and usage. 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.
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 a large customer technical service organization, with supporting application engineering and scientific groups and approximately 30 engineers and specialists around the world
serving in this area. We believe that we are one of the industry leaders in providing value added technical services to our 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 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.
We
believe we 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 engineers to work with our customers seamlessly to maximize the performance of their furnaces and provide
real-time diagnostics and troubleshooting.
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.
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, our strategic customers are highly focused on securing
certainty of supply of reliable, high quality graphite
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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
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. 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 approximately 70% 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 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 factorsRisks related to our business and industryPricing 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 factorsRisks related to our business and industryWe 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 source all of our 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.
We
have executed three- to five-year take-or-pay contracts, representing approximately 674,000 MT, or approximately 60% to 65% of our cumulative expected production capacity from 2018
through 2022. Approximately 90% of the contracted volumes have terms extending to 2022. We have contracted to sell approximately 148,000, 145,000, 128,000 and 120,000 MT in 2019, 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 midpoint 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
2019, 2020, 2021 and 2022.
All
of our take-or-pay contracts have fixed prices. The weighted average contract price for the contracted volumes over the next four years is approximately $9,700 per MT, with the
weighted average contract prices for contracts with a specified volume range computed using the volume midpoint. Weighted average contract prices for our contracted volume will differ from the
weighted average realized prices that we will actually realize for all MT of graphite electrodes we sell in these years because contracted volumes represent only a portion of our production capacity.
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Three
-
to Five
-
Year Take
-
or
-
Pay
Contract Volume and Price Profile
-
(1)
-
Contract
volume reflects volumes contracted under three- to five-year take-or-pay contracts. Contract volume in the above graph reflects the midpoint of the
contracts with a specified volume range.
-
(2)
-
Weighted
average contract price reflects the volume-weighted average price for graphite electrodes at which we have entered into three- to five-year take-or-pay
contracts as of February 22, 2019. For those contracts with a specified volume range, weighted average contract prices are computed using the volume midpoint.
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 and order. These fixed prices under the contracts also prevent us from passing along any changes related to the costs of raw materials to 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 contract year.
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 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.
Our
contracts provide our customers with certain remedies in the event that we are unable to deliver the contracted volumes of graphite electrodes on a quarterly basis. Our substantially
vertically
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integrated
Seadrift plant is particularly important to our ability to provide our customers with a reliable supply of graphite electrodes. Therefore, the likelihood that we will fail to deliver 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
factorsRisks related to our business and industryWe 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."
We
aim to be the leading producer of the highest performing graphite electrodes in order to enhance customer production efficiency. Our global manufacturing network, vertical integration
with needle coke and R&D team provide us with competitive advantages in product quality, product costs, and operational flexibility. We continuously work to improve the consistent overall quality of
our products and services, including the performance characteristics of each product, and the uniformity of the products manufactured at different facilities. We believe our efforts have succeeded, as
in 2017 and 2018 we improved our quality and performance metrics to the highest levels in ten years and added new, leading steelmakers as customers.
Approximately
91% of our graphite electrodes were purchased by EAF steel producers in 2018. 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 2018, one customer accounted for more than 10% of our net sales. We sell our products in every major geographic
region globally. Sales of our products to buyers outside the United States accounted for approximately 83% of net sales in 2016, approximately 81% of net sales in 2017 and approximately 77% of net
sales in 2018. Overall, in 2018, we generated more than 93% of our net sales from EMEA and the Americas.
2018 Revenue and production by region and end market
|
|
|
2018 Revenue by Region
|
|
2018 Graphite Electrode Sales by End Market
|
|
|
|
We
believe our three- to five-year take-or-pay contracting strategy provides cash flow visibility and stability to our customers and, as 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 ten 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 2018, approximately 71% of our sales came from our three-to-five year take-or-pay contracts.
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Research and development
We have over 130 years of experience in the R&D of graphite- and carbon-based solutions. By focusing our management's attention and R&D
spending exclusively on the graphite electrode business, we have been able to meaningfully improve the quality of our graphite electrodes, repositioning ourselves as an industry quality leader and
improving our relationships with strategic customers. Our focus on improving the quality of petroleum needle coke through R&D has led to our petroleum needle coke production at Seadrift now being
best-in-class for use in the 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
We believe that our intellectual property, consisting primarily of patents and proprietary know-how, provides us with competitive advantages and
is important to our growth opportunities. Our intellectual property portfolio is extensive, with approximately 200 carbon and graphite U.S. and foreign patents and published patent applications, which
we believe is more than any of our major competitors in the businesses in which we operate.
We
own or have obtained licenses 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-free basis until 2025. This particular license automatically renews for successive ten-year
periods. It permits non-renewal by Union Carbide at the end of any renewal period upon five years' notice of 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-how and information, by requiring employees, consultants, strategic partners and others who have access to such proprietary information and know-how to enter into confidentiality or
restricted use agreements.
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 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 circumstances. There can be no assurance that we will not incur losses beyond the limits of or outside the coverage of
our insurance.
Environment
Our facilities and operations are subject to a wide variety of federal, state, local and foreign environmental laws and regulations. These laws
and regulations relate to air emissions, water discharges and solid and hazardous waste generation, treatment, storage, handling, transportation and disposal; the presence of wastes and other
substances; the reporting of, responses to and liability for, releases of hazardous substances into 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 updated 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. On
March 1, 2019, the Department of Sustainable Development of the State of Nuevo León provided notice of an administrative proceeding with respect to the Company's Monterrey
facility. The proceeding requires the Company to design and implement certain corrective measures involving
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certain
potential violations of state environmental law relating to emissions. The Company is cooperating with the Department with respect to this matter.
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, 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) or state environmental protection agencies, as well as claims from
other parties, alleging that we are a potentially responsible party (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'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.
Certain
of our U.S. facilities have been or will be required to comply with 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, 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 best available control technology on our manufacturing operations outside the 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.
International
accords, foreign laws and regulations, and U.S. federal, state and local laws and regulations have been enacted to address concerns about the effects that CO
2
emissions and other identified GHGs may have on the environment and climate worldwide. These effects are widely referred to as Climate Change. The international community has taken actions to address
Climate Change issues on a global basis. In particular, in December 2015, the 21st Conference of Parties for the 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 set an emissions reduction target, referred to as
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"nationally
determined contributions" (or NDCs), with a review of the NDCs 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 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. In the United States, although the current
Administration has announced its intent to withdraw 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, the ETS, which was initially enacted under the provisions of the 1997 Kyoto Protocol, requires certain listed energy-intensive industries to participate in an international
"cap and trade" system of GHG emission allowances. A third phase of the EU ETS under Directive 2009/29/EC, covers 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. However, one of our European manufacturing operations was required to comply with these provisions under a more general fuel combustion category, because
its combustion units met the applicability levels. The operations subject to these provisions was eligible to receive free CO
2
emission allowances under the member state allocation
program. On November 9, 2017, to implement the EU's NDC under the Paris Agreement and 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 on April 8, 2018. The EU's current target for 2030 is to achieve a GHG reduction of
at least 40% compared to 1990 levels. Implementation of Phase 4 could increase the cost of our current GHG allowances and require us to obtain additional allowances. Based on information
currently available to us, we believe that compliance with international accords, U.S. and foreign laws and regulations concerning Climate Change which have been promulgated, or that could be
promulgated in the future, including Phase 4 of the ETS, will not have a material adverse effect on us.
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. For example, in connecting with REACH or the EU's Classification, Labelling and Packaging Regulation, any key raw material, chemical or substance, including our products, could
be classified as having a toxicological or health-related impact on the environment, users of our 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 we believe does not require us to obtain a specific authorization under the 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
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protection
regulatory compliance programs and for remedial response actions will not be 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, as
well as when new information becomes available that changes the prior estimates previously made and we believe our existing accruals are reasonable.
Employee relations
As of December 31, 2018, we had 1,387 employees (excluding contractors). A total of 451 employees were in Europe (including
Russia), 710 were in Mexico and Brazil, 3 were in South Africa, 216 were in the United States and 7 were in the Asia Pacific region. As of December 31, 2018, 945 of our employees were hourly
employees.
As
of December 31, 2018, approximately 846 employees, or 61%, of our worldwide employees, are covered by collective bargaining or similar agreements. As of December 31,
2018, approximately 691 employees, or 50%, of our worldwide employees, were covered by agreements that expire, or are subject to renegotiation, at various times through December 31,
2019. We believe that, in general, our relationships with our 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,
2018, 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.
Legal proceedings
We are involved in various investigations, lawsuits, claims, demands, 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.
Litigation
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). Companies in Brazil have settled claims arising out of these
provisions and, in May 2015, the litigation was remanded in favor of the employees, by the Brazilian Supreme Court to the lower courts for further proceedings which included procedural aspects of the
case, such as admissibility of instruments filed by the parties. On October 1, 2015, an 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. In the first quarter of 2017, the state court ruled in favor of the employees. We have
appealed this ruling and intend to vigorously defend it. As of December 31, 2018, 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.
On
March 1, 2019, the Department of Sustainable Development of the State of Nuevo León provided notice of an administrative proceeding with respect to the Company's
Monterrey facility. The proceeding requires the Company to design and implement certain corrective measures involving certain potential violations of state environmental law relating to emissions. The
Company is cooperating with the Department with respect to this matter.
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Industry
Graphite electrode industry
Graphite electrodes are an industrial consumable product used primarily in EAF steel production. EAFs and BOFs are the two primary technologies
for steel production. In the EAF method, steel scrap is melted and recycled to produce liquid steel, while in the BOF method, virgin iron ore is smelted with metallurgical coke, a carbon product
derived from metallurgical coal. According to the WSA, in 2017, EAF steel producers accounted for 46%, or 394 million MT, of global crude steel production (excluding China, which almost
exclusively uses the BOF method), an increase of 44% since 2000. EAFs have historically been the fastest-growing segment of the global steel industry
due to their greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature.
EAF
steel producers are the primary consumers of graphite electrodes, and use them to conduct electricity in a furnace, generating an electric arc of sufficient heat to melt scrap metal,
iron ore or other raw materials used to produce steel or other metals. EAFs operate using either alternating electric current or direct electric current. The vast majority of EAFs use alternating
electric current and typically use nine electrodes (in three columns of three electrodes each) at one time. Direct electric current EAFs typically use one column of three electrodes. Graphite
electrodes are the only known commercially available products that have both the capacity to handle high levels of electrical current and the capability to sustain the high levels of heat generated in
EAF steel production, making graphite electrodes essential to the EAF process.
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, three electrodes are fully consumed (requiring the addition of new electrodes), on average, every 8
to 10 operating hours. Graphite electrodes are consumed at a rate of approximately 1.7 kilograms per MT of steel production.
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. 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.
Market size and major producers
Electrode production globally (excluding China) is focused on the manufacture of UHP electrodes for EAFs, while the majority of Chinese
production is of ladle electrodes for BOFs. UHP electrodes must be able to endure more harsh operating environments than ladle electrodes, as EAFs melt solid scrap steel to a liquid state whereas BOF
ladle electrodes are used to maintain the temperature of steel already in a liquid state. UHP electrodes are more difficult to make and are sold at a premium relative to ladle electrodes because their
production requires an extensive proprietary manufacturing process and material science knowledge, including the use of superior needle coke blends. As a result, graphite electrode producers outside
of China and electrode producers in China are generally not in direct competition for major product lines.
We
believe the worldwide graphite electrode production capacity (excluding China) was approximately 800,000 MT in 2018. We believe worldwide graphite electrode production
capacity, excluding China, has now increased to approximately 850,000 MT. The industry is fairly consolidated with the top five players holding approximately 82% of the total capacity according
to management estimates. The five largest producers in the industry are Showa Denko K.K., GrafTech, Graphite India Limited, Tokai Carbon Co., Ltd. and HEG Ltd.
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Customers
of UHP graphite electrode producers primarily include EAF steel producers across the Americas and EMEA. As the capacity utilization and production levels for EAF steel
producers have increased beginning in 2017, demand for graphite electrodes exceeded production capacity. Customers have historically procured graphite electrodes through annual agreements negotiated
in the third and fourth quarters of each calendar year for graphite electrodes to be delivered the following year. In light of recent market trends described below, certainty of supply of graphite
electrodes has become a critical concern for EAF steelmakers.
We
believe that greenfield graphite electrode manufacturing projects have been difficult to develop due to significant capital costs, long lead times, technical know-how, and cumbersome
permitting and regulatory regimes. 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 potentially cost as much as approximately $10,000 per MT. Similarly, brownfield graphite electrode manufacturing development is complicated by significant capital costs. Only one greenfield
project and one brownfield expansion have been completed since the 1980s outside of China. Therefore, we believe that the industry does not currently have the ability to increase production capacity
easily to meet rising demand. Additionally, graphite electrodes require petroleum needle coke, which is an essential raw material for production. Needle coke is in short supply due to demand
constraints explained below.
Restructuring of industry production capacity
Supply trends
According to the WSA, between 1984 and 2011, EAF steel production has grown at 3.5% per year, encouraging the growth of the graphite electrode
industry. The rapid growth of Chinese steel production, primarily by the BOF method, created an oversupply in steel which led graphite electrode producers to rationalize production capacity and
consolidate between 2014 and 2016, a phase which we believe has concluded with renewed EAF steel demand. In 2013, the graphite electrode industry (excluding China) had capacity to produce
approximately 1.0 million MT of graphite electrodes across 30 graphite electrode plants. We estimate that from 2014-2016, the industry has 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 operating costs of more than $1,000
per MT lower than 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. Additionally, in October 2017, Showa Denko, the industry's third largest producer, acquired SGL Carbon, the second largest producer. The consolidation and production capacity reductions in
the graphite electrode industry, along with the EAF industry's recovery since 2016, lead us to believe that the graphite electrode industry has recovered from the downturn and will resume its
long-term growth trajectory. We estimate that in 2018, global production capacity (outside of China) was approximately 800,000 MT with a capacity utilization of approximately 90%, excluding
China. We believe worldwide graphite electrode production capacity, excluding China, has now increased to approximately 850,000 MT.
Demand trends
Our graphite electrodes are primarily used in the EAF steelmaking process, and global growth in that market has driven increasing demand for
graphite electrodes. EAF steelmaking has historically been the fastest-growing segment of the global steel market. According to the WSA, EAF steelmaking grew at an average annual rate of 3.5% from
1984, the first year for which data is available for all relevant countries, until 2011, while overall steel production (using all methods) grew at an average
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annual
rate of 2.9%. After average annual declines in EAF steel production of 2.7% from 2011 through 2015, EAF steel production grew by 2.8% in 2016 and 13.7% in 2017.
This
growth has resulted from the development by EAF steelmakers of diversified raw material sources, including non-scrap materials rich in iron content, such as direct reduced iron and
hot briquetted iron. These high quality sources of iron, in addition to technological advances in the EAF process, have enabled EAF steel producers to produce higher quality grades of steel
traditionally produced by BOF steelmakers and to enter new markets as a result. EAF steelmakers have therefore been able to increase both market share and overall production. According to the WSA, as
of 2017, EAF steel production has grown to 68% of total U.S. steel production from 47% in 2000, 46% of total EMEA steel production from 33% in 2000, and 41% of total APAC (excluding China) steel
production from 36% in 2000. Over the same period, global EAF production increased from 287 million MT in 2000 to 472 million MT in 2017, while non-EAF steel production
(excluding China) was relatively flat at 453 million MT in 2000 to 464 in 2017. This ongoing shift toward EAF steelmaking has resulted in increasing demand globally for graphite
electrodes.
We
believe there is a particular opportunity for EAF steelmaking to take further market share in China as well. China's 12
th
Five-Year Plan, released in 2011, called
for EAFs to constitute 20% of overall steel production by 2020. According to the WSA, in 2017, Chinese EAF production increased to 77 million MT, or 9% of China's total steel production,
up from 2016 levels of 51 million MT or 6% of China's total steel production. If Chinese EAF steelmaking production capacity were to reach 20%, based on 2017 production levels, that
would add 89 million MT of additional EAF production for a total of 166 million MT, compared to 2017 EAF production in the next largest regions of
68 million MT in the EU, 55 million MT in India and 56 million MT in the United States.
While
China's 13
th
Five-Year Plan, released in March 2016, did not explicitly address the EAF target, it did emphasize the importance of environmental efforts, such
that 10 of 25 targets in the plan were related to the environment. 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 given 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 total UHP graphite electrode demand in China will increase in 2019 and
going forward.
Pricing trends
Pricing for graphite electrodes is determined through contract negotiations and spot transactions between producers and consumers. Pricing has
historically been cyclical, reflecting the demand trends of the global EAF steelmaking industry and supply of graphite electrodes. Moreover, as petroleum needle coke represents a significant
percentage of the raw material cost of graphite electrodes, graphite electrodes have typically been priced at a spread to petroleum needle coke. Over the period from 2008 to 2017, the average graphite
electrode spread over petroleum needle coke was approximately $3,000 per MT, on an inflation-adjusted basis using constant 2018 dollars. In tight demand markets, this spread has increased, resulting
in higher graphite electrode prices. We believe that the new 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. While there is no widely accepted graphite electrode reference price, we believe that our weighted average realized prices are indicative
of prices in the overall industry. 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 most recent demand trough, our weighted average realized price of graphite electrodes fell to approximately $2,500 per MT in 2016. Following the significant rationalization of
graphite
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electrode
production globally, the resumption of growth in EAF steel production, falling scrap prices, reductions in Chinese steel, and constrained supply of needle coke, graphite electrode spot
prices increased in late 2017 and 2018. As of February 2019, current spot prices were approximately $12,000 per MT.
Needle coke industry
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 production 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 months to produce. Pitch needle coke, used principally by Asian graphite electrode manufacturers, is made from coal tar pitch, a byproduct
of coking metallurgical coal used in BOF steelmaking.
Graphite
electrode producers combine petroleum and pitch needle coke with binders and other ingredients to form graphite electrodes. Petroleum and pitch needle coke, relative to other
varieties of coke, are distinguished by their needle-like structure and their quality, which is measured by the presence of impurities, principally sulfur, nitrogen and ash. Petroleum 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. In order to minimize fractures caused by disproportionate expansion over the width of an electrode, and minimize the effect of impurities, large-diameter graphite
electrodes (18 inches to 32 inches) employed in high-intensity EAF applications are comprised almost exclusively of petroleum and pitch needle coke.
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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.
Graphite electrode industry production process
-
(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, in 2017, producers of petroleum needle coke only
agreed to six-month contracts. This practice has continued in 2018 and 2019. 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 approximately 70% 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 ten major producers of needle coke and only four major producers of petroleum
needle coke, excluding China. 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, 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 believe that Phillips 66 and Seadrift are the largest and
second largest needle coke producers in the world, respectively. We estimate that Seadrift has approximately 19% of the petroleum needle coke production capacity outside China.
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Graphite
electrode manufacturers prefer petroleum needle coke because of the meaningfully longer bake and graphitizing time required for pitch needle coke and the subsequent impact on
graphite electrode production throughput. Electric vehicle manufacturers prefer 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, excluding 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 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.
While
supply has become constrained, demand for petroleum needle coke is increasing due to the use of needle coke in lithium-ion batteries used in electric vehicles. The International
Energy Agency (or IEA) estimates that the global electric car stock exceeded three million vehicles in 2017, tripling from 2015 levels. The IEA further projects that the global electric car stock may
range between 9 million and 20 million by 2020, and between 40 million and 70 million by 2025. Most electric vehicles rely on lithium-ion batteries as their key performance
component. In the last two years, manufacturers of lithium-ion batteries for electric vehicles have begun using needle coke instead of other forms of graphite as a raw material for carbon anodes in
their batteries due to technological advances and the consistent quality that needle coke provides. We expect that lithium-ion battery manufacturers will continue to prefer petroleum needle coke
instead of pitch needle coke for the majority of their supply, due to petroleum needle coke's better energy density and superior energy storage. These qualities provide lithium-ion batteries made with
petroleum needle coke with longer potential driving ranges and battery lives. According to the ICC, electric vehicles comprised approximately 220,000 MT of total demand for needle coke in 2018,
up 56% from 2017. Based on IEA's estimates of growth in electric vehicle stock to 2025, requirements for petroleum needle coke to fulfill demand would grow exponentially.
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EAF steel industry
Emergence and initial period of growth
According to the WSA, global EAF production grew at a 3.5% compound annual growth rate from 1984 to 2011, while taking share from other methods
of steelmaking in most regions of the world, outside of China. EAFs benefit from their flexibility in 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 a 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 2017 had grown to 754 million MT,
representing approximately 91% 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 net steel exports peaked at 112 million MT in 2015. These exports negatively affected steel prices and led EAF producers to reduce production. In 2011,
EAF production globally was 454 million MT representing 30% of global steel production, but by 2015, EAF production had declined to 407 million MT, representing 25% of
global steel production respectively. Declining EAF production significantly impacted demand for our graphite electrode products.
EAFs recovering and positioned for long
-
term growth
The EAF steel industry has recovered since the downturn from 2011 to 2015. EAF production started to recover in 2016 with growth of 2.8%,
according to the WSA. EAF production is now rebounding very strongly. WSA reported an 14% growth in EAF production in 2017. 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
CO
2
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 70 million MT in 2018. This reduction in exports has resulted in increased steel production
outside of China, especially EAF steel production.
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Chinese Monthly Steel Exports
Sources:
China Customs, Baiinfo
Outlook
We expect EAF steel production to continue to grow globally. In 2000, according to the WSA, EAF steel production represented 47% of total U.S.
steel production, increasing to 68% of total U.S. steel production by 2017. In absolute terms, total EAF production in the United States increased from 48 million MT in 2000 to
56 million MT in 2017. In 2000, EAF steel production reflected 33% of total EMEA steel production, increasing to 46% of total EMEA steel production by 2017. This represented an increase
in total EAF production in EMEA from 111 million MT in 2000 to 166 million MT in 2017. In 2000, 36% of total APAC (excluding China) steel production was by the EAF method,
representing 77 million MT of EAF production. This share of production increased to 41% of total APAC (excluding China) steel production by 2017; this represents
137 million MT of EAF production, or an incremental increase of 60 million MT. As a result, we believe there is substantial opportunity for trends in the U.S. and EMEA
steel markets to replicate elsewhere.
China
also represents a significant opportunity for EAF growth and market share expansion. Chinese steel production today is substantially through the BOF method, but increasing focus on
environmental protection within China may encourage conversion from BOFs to EAFs. In its 12
th
Five-Year Plan, the Chinese government set a goal of achieving 20% EAF market share
by 2020. While China's 13
th
Five-Year Plan, released in March 2016, did not explicitly address the EAF target, it did emphasize the importance of environmental efforts, such that
10 of 25 targets in the plan were related to the environment. The government's increasing focus on the environment may eventually incentivize steelmakers to convert from BOFs to EAFs in order
to continue operating. Additionally, the rapid historical increase in Chinese steel production has resulted in increasing supplies of scrap, making EAFs more cost attractive relative to BOFs.
According to McKinsey, so much scrap is expected to become available that EAF production capacity in China would need to triple by 2020 to keep pace. Steel producers may conclude that lower-capital
intensity mini-mills are more attractive investment opportunities than rebuilding blast furnaces as they age, further supporting demand for graphite electrodes. China's crude steel output from
electric arc furnace producers is estimated to reach 90-100 million metric tons in 2018. This would mark a 20%-30% increase over 2017, S&P Global Platts calculates.
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Management
Directors and executive officers
The following table sets forth the name, age and position of our directors and executive officers. The following also includes certain
information regarding our directors' and executive officers' individual experience, qualifications, attributes and skills, and brief statements of those aspects of our directors' backgrounds that led
us to conclude that they should serve as directors.
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Denis A. Turcotte
|
|
57
|
|
Chairman and Director
|
David J. Rintoul
|
|
61
|
|
Director, President and Chief Executive Officer (or CEO)
|
Jeffrey C. Dutton
|
|
56
|
|
Director
|
Ron A. Bloom
|
|
63
|
|
Director
|
Quinn J. Coburn
|
|
55
|
|
Vice President, Chief Financial Officer (or CFO) and Treasurer
|
Brian L. Acton
|
|
67
|
|
Director
|
Michel J. Dumas
|
|
60
|
|
Director
|
Anthony R. Taccone
|
|
58
|
|
Director
|
Denis A. Turcotte
was elected to the board of directors in August 2015 and became Chairman of the Company's board of directors in March
2018. Mr. Turcotte is currently a Managing Partner at Brookfield. Prior to joining Brookfield in 2017, Mr. Turcotte was president and chief executive officer of North Channel Management
and North Channel Capital Partners, business consulting and private investing firms, from 2008 to 2017. He was also a member of the board of directors of the general partner of Brookfield Business
Partners L.P., an affiliate of Brookfield, from 2016 until he joined Brookfield in 2017. From 2002 to 2008, Mr. Turcotte was the president and CEO 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. Since 2012 and 2007, Mr. Turcotte has been a member of the board of directors for Norbord Inc. and Domtar Corporation, respectively. He was previously a member of the board of
directors for Coalspur Mines, Ltd. from 2010 to 2015 and Algoma Steel Inc. from 2002 to 2008.
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.
Jeffrey C. Dutton
was elected to the board of directors in 2017. Previously, Mr. Dutton served as President and CEO of the Company
from January 2017 until March 2018 and Vice President & Chief Operating Officer of the Company from August 2015 until January 2017. In these roles, Mr. Dutton oversaw all aspects of both
the Industrial Materials and Engineered Solutions businesses. Mr. Dutton has served as Senior Vice President of Brookfield since 2013. Brookfield became GrafTech's indirect parent company in
August 2015. Mr. Dutton served as the CEO 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
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to
2008. He served as President of Republic Paperboard Company of Eagle Materials Inc. from 2004 to 2006. Mr. Dutton has served as a director of Ember Resources Inc., an affiliate
of Brookfield, since August 2018. 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
was elected to the board of directors in February 2017. Since 2016, Mr. Bloom has been a Managing Partner and Vice
Chairman at Brookfield, where he focuses on managing the firm's private equity investments. Mr. Bloom has served as a director of Westinghouse Electric Company LLC, an affiliate of
Brookfield, since August 2018. Prior to joining Brookfield in 2016, from 2012 to 2016, 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 from February 2011 to August 2011 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 from 2009 to 2011 where he helped lead the restructuring of
General Motors and Chrysler LLC, and then led the Treasury's oversight of the companies thereafter, including General Motors' initial public offering. Mr. Bloom received his
undergraduate degree from Wesleyan University and graduated with distinction from the Harvard Graduate School of Business Administration.
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 an MBA from University of Pennsylvania's The Wharton School in 1992.
Brian L. Acton
was elected to the board of directors in April 2018. Mr. Acton has more than 40 years' experience in the
mining and bulk materials distribution industry, primarily devoted to mining and marketing of coal, and marketing of petroleum coke and other raw materials. Since August 2013, Mr. Acton has
served as President at Pac Basin Resources LLC, a mining and metals company. From July 2010 to June 2013, Mr. Acton served as a consultant to Oxbow Carbon & Minerals
Holdings, Inc. From 1996 to 2009, Mr. Acton served as President and COO of Oxbow Carbon and Minerals Holdings, Inc. Mr. Acton joined Oxbow in 1985 after working with Kaiser
Resources/Westar Mining since 1978. Mr. Acton served on the board of directors of Adriana Resources Inc. from March 2012 to February 2017. While on the Board, Mr. Acton served as
Chair of the Compensation Committee from 2012 to 2017 and as a member of the Audit Committee from 2014 to 2017. Mr. Acton is a graduate of Queen's University with a Bachelor of Applied Science
(Mining Engineering) degree and a Masters in Business Administration.
Michel J. Dumas
was elected to the board of directors in April 2018. Mr. Dumas has over thirty years of experience in the lumber,
pulp and paper industries. From 1997 until 2017, Mr. Dumas served as the Executive Vice President, Finance and Chief Financial Officer of Tembec, Inc., based in Quebec. Mr. Dumas
also served on the board of directors of Tembec, Inc. from January 2011 to February 2017. Mr. Dumas served as a director of Marathon Pulp Inc. from February 2000 to February 2009
and of Jager Building Systems from August 2001 to September 2008. From 1991 to 1997, Mr. Dumas was Vice President, Finance and Chief Financial Officer at Spruce Falls Inc., a newsprint
mill. Prior to joining Spruce Falls Inc., from 1985 to 1991, Mr. Dumas served as Controller at Tembec, Inc. Mr. Dumas received his undergraduate degree in Commerce from
University of Ottawa.
Anthony R. Taccone
was elected to the board of directors in April 2018. Mr. Taccone has over thirty years of experience consulting
to companies in the global steel industry and companies with interests in the steel industry, including suppliers, customers and investors. Since March 1998,
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Mr. Taccone
has served as a Founding Partner and co-owner of First River LLC, a boutique strategy consulting firm. While at First River, Mr. Taccone has worked with senior
management teams, boards of directors, investors and government agencies on challenging and complex issues facing companies in the steel industry, including financial restructurings, capacity
rationalizations, mergers and acquisitions, major capital investment decisions, raw material integration strategies, and investments in downstream businesses. Prior to joining First River,
Mr. Taccone was a strategy consultant at Beddows & Company from 1988 to 1998. From 1994 until 1998, Mr. Taccone was the North American practice leader and served on Beddows and
Company's Board of Directors. Prior to his career as a steel industry consultant, Mr. Taccone worked as a Country Risk Economist from 1985 to 1987 and an Industry Economist from 1987 to 1988 at
Mellon Bank. Mr. Taccone received his undergraduate degree in economics from Washington & Jefferson College and a Masters degree in economics from Duke University.
Board of directors
Our business and affairs are managed under the direction of our board of directors. Under our Amended Certificate of Incorporation, the number
of directors is fixed by our board of directors but will not be fewer than three directors. The board of directors currently consists of seven numbers. Within one year of the consummation of our IPO,
our board of directors will consist of eight members.
Our
Amended Certificate of Incorporation provides that our board of directors be divided into three classes of directors, with the classes to be as nearly equal in number as possible,
and with the directors serving three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their
respective three-year terms. Our directors are divided among the three classes as follows:
-
-
the Class I directors are Denis A. Turcotte and Michel J. Dumas, and their terms will expire at the annual meeting of stockholders to be
held in 2019;
-
-
the Class II directors are Ron A. Bloom, Brian L. Acton and David J. Rintoul, and their terms will expire at the annual meeting of
stockholders to be held in 2020; and
-
-
the Class III directors are Jeffrey C. Dutton and Anthony R. Taccone and their terms will expire at the annual meeting of stockholders
to be held in 2021.
Any
increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.
While Brookfield owns more than 50% of our outstanding common stock, the classification of the board of directors and the other provisions of the Amended Certificate of Incorporation may be amended by
the affirmative vote of the holders of a majority of the voting power of our outstanding common stock. After the selling stockholder ceases to own more than 50% of our outstanding common stock, these
provisions may be amended only by the affirmative vote of the holders of 66
2
/
3
% or more of the voting power of our outstanding common stock.
If
the total number of shares voted in favor of a director nominee in an uncontested election are less than the total number of shares voted against such director nominee, the director
nominee will tender his or her resignation immediately after the stockholder meeting and our board will determine whether to accept the resignation within 90 days of the stockholder meeting.
We
and the selling stockholder entered into a stockholder rights agreement (or the Stockholder Rights Agreement) in connection with our IPO. Under the Stockholder Rights Agreement, for
so long as the selling stockholder owns or controls at least 25% of our outstanding common stock, the selling stockholder will have the right to nominate the higher of 37.5% of the members of the
board of directors and three members of the board of directors (which we refer to as the Brookfield directors), and one Brookfield director will be in each class. The selling stockholder will also
have the right to select the chairman of the board of directors. In the event the selling stockholder owns or controls less than 25% of our outstanding common stock, the Brookfield directors will
promptly tender their
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resignations.
The board of directors (excluding the Brookfield directors) will have the option, but not the obligation, to accept the Brookfield directors' resignations. If the board of directors
(excluding the Brookfield directors) votes to accept these resignations, the Brookfield directors will cease to be members of the board of directors. If the board of directors (excluding the
Brookfield directors) votes not to accept these resignations, the Brookfield directors will continue to serve as members of the
board of directors until the next annual meeting of our stockholders, regardless of the time remaining in their respective terms of office. The Stockholder Rights Agreement provides that the initial
board members designated by the selling stockholder shall be Denis A. Turcotte, Ron A. Bloom and Jeffrey C. Dutton. For more information regarding the Stockholder Rights Agreement, see
"Certain relationships and related party transactionsStockholder Rights Agreement."
Our
Amended By-Laws provides that while the selling stockholder owns more than 50% of our outstanding common stock, at any meeting of our board of directors, the presence of (i) a
majority of the total number of directors and (ii) one Brookfield director will be required to constitute a quorum. After the selling stockholder ceases to own more than 50% of our outstanding
common stock, the presence of a majority of the total number of directors will be required to constitute a quorum.
Director independence
Because the selling stockholder owns a majority of our outstanding common stock, we are "controlled company" as that term is set forth in the
NYSE corporate governance standards. Under these rules, a "controlled company" may elect not to comply with certain corporate governance requirements, including: (i) the requirement that a
majority of our board of directors consist of independent directors, (ii) the requirement that our governance committee be composed entirely of independent directors with a written charter
addressing the committee's purpose and responsibilities, and (iii) the requirement that our compensation committee be composed entirely of independent directors with a written charter
addressing the committee's purpose and responsibilities. However, as a "controlled company," we must comply with the rules applicable to audit committees set forth in the NYSE corporate governance
standards. All three members of our audit committee are independent.
Our
board of directors has undertaken a review of the independence of the directors. Based on this review, the board has determined that three members of the board of directors, Michel
J. Dumas, Brian L. Acton and Anthony R. Taccone, currently qualify as "independent" under the NYSE listing standards. Within one year of the consummation of our IPO, our board will consist of eight
members, four of whom will qualify as "independent" under the NYSE listing standards.
In
making these determinations, our board of directors considered any current and prior relationships or transactions that each director has with the Company and other information
provided by each director concerning his or her background, employment and affiliations, including the beneficial ownership of our capital stock by each director and the transactions involving them
described in "Director Compensation" and "Certain Relationships and Related Party Transactions." Our board of directors considered the purchase by the Company in 2018 of access to steel
industry research data from a company of which Anthony R. Taccone is a partner. The amount involved in this purchase was well below $120,000. The board concluded that this transaction would not
interfere with Mr. Taccone's exercise of independent judgment in carrying out the responsibilities of a director and thus did not impair his independence.
Committees of the board of directors
The board of directors has established two standing committees to assist it in carrying out its responsibilities: the audit committee and the
governance and compensation committee. In the event the Company ceases to be a "controlled company" pursuant to the NYSE corporate governance standards, the board of directors will establish a
separate nominating and governance committee and a compensation committee. Each of the committees operate under its own written charter adopted by the board of directors. The membership and the
function of each of the committees are described below.
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Table of Contents
Audit committee
The audit committee:
-
-
appoints the independent auditor annually; monitors the quality of the work of the independent auditor, monitors their independence and
replaces them as necessary in the sole judgment of the committee; pre-approves the audit plan (including services relating to internal controls over financial reporting), any proposed audit-related,
tax and other services and pre-approves all related compensation; reviews with the auditor the results of the annual audit; reviews with the auditor any review of the quarterly financial statements
that the committee may direct the auditor to perform;
-
-
approves the annual corporate audit services plan and budget; reviews with the senior corporate audit services executive the results of the
audit work at least annually and more frequently as provided in the policy for reporting financial accounting and auditing concerns, as approved by the committee; at least annually reviews the
performance of the corporate audit services team;
-
-
reviews and discusses with management and the independent auditor the annual audited financial statements and the adequacy of the internal
controls over financial reporting;
-
-
discusses with management and the independent auditor significant financial reporting issues and judgments made in connection with the
preparation of our financial statements, including any significant changes in our selection or application of accounting principles, any significant issues (material weaknesses or significant
deficiencies as such terms are defined in the Sarbanes-Oxley Act) as to the adequacy of our accounting controls and any remediation used in connection with any such issues;
-
-
oversees company policies and practices with respect to financial risk assessment and risk management; and
-
-
regularly reports its work to the board.
The
members of the audit committee are Michel J. Dumas (Chair), Brian L. Acton and Anthony R. Taccone. Our board of directors has determined that (i) Michel J.
Dumas, Brian L. Acton and Anthony R. Taccone are independent directors, (ii) each director appointed to the audit committee is financially literate and (iii) Michel J. Dumas is our audit
committee financial expert. Our audit committee operates under a written charter that satisfies the applicable rules of the SEC and the NYSE listing standards.
Governance and compensation committee
The governance and compensation committee:
-
-
recommends to the board principles of corporate governance applicable to us;
-
-
oversees the processes established by management regarding compliance with legal and regulatory requirements and ethical programs and policies
as established by management and the board, including without limitation, our Code of Conduct and Ethics, our compliance program and our regulatory and quality compliance initiatives; and oversees
management's establishment of a process for reporting these matters to the audit committee, other board committees or the full board as appropriate;
-
-
receives regular reports from our Chief Legal Officer regarding material legal disputes and matters in litigation;
-
-
reviews and makes recommendations to the board regarding the size and structure of the board and the committees of the board;
-
-
determines the process for the annual self-assessments of the board and its committees and oversees the implementation and reporting back of
the results;
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Table of Contents
-
-
reviews and makes recommendations to the board regarding leadership and membership of committees of the board;
-
-
develops and administers the process and criteria for selecting new directors and nominees for vacancies on the board and candidates for board
membership;
-
-
with advice of outside counsel, (a) establishes a process for overseeing potential conflicts of interest between the company and
directors and the company and members of management, and (b) considers at least annually the independence of directors;
-
-
regularly reports its activities to the board;
-
-
recommends to the board of directors remuneration of the chief executive officer and determines remuneration of our other officers elected by
the board of directors;
-
-
conducts evaluation of the chief executive officer for submission to the board of directors;
-
-
grants options under and otherwise administers our stock incentive plans and approves and administers any other compensation plan in which our
executive officers participate;
-
-
reviews succession planning for the chief executive officer and senior executives, and reports on such matters to the board of directors;
-
-
retains compensation consultants and obtains advice from internal or external advisors, as necessary;
-
-
presents the annual Compensation Committee Report on Executive Compensation for our proxy statement; and
-
-
reviews its own performance annually.
The
governance and compensation committee operates under a written charter and consists of four directors, two of whom must qualify as "independent" under the NYSE listing standards and
two of whom are appointed by Brookfield. In the event the Company ceases to be a "controlled company" pursuant to the NYSE corporate governance standards, the board of directors will establish a
separate nominating and governance committee and a compensation committee. Each such committee will consist of three directors, each of whom will qualify as "independent" under the NYSE listing
standards.
The
members of the governance and compensation committee are Ron A. Bloom (chair), Denis A. Turcotte, Brian L. Acton and Anthony R. Taccone. Our board of directors has determined that
Brian L. Acton and Anthony R. Taccone are independent directors. Our governance and compensation committee operates under a written charter, that satisfies the applicable rules of the SEC and the NYSE
listing standards.
Governance and compensation committee interlocks and insider participation
None.
Code of conduct and ethics
Our board of directors has adopted a code of conduct and ethics applicable to our employees, directors and officers, in accordance with
applicable U.S. federal securities laws and the listing standards of the NYSE. Any waiver or amendment of this code for executive officers or directors may be made only by the Audit Committee
and will be promptly disclosed as required by applicable U.S. federal securities laws and the listing standards of the NYSE by posting such waiver or amendment on the "Investors" section of our
website.
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Table of Contents
Director compensation
Our independent non-employee directors received the following compensation for service on our board of directors in 2018. Mr. Rintoul
does not receive any compensation for his service on the board. The board of directors determined not to compensate the Brookfield directors for their service on the board.
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Name
|
|
Fees Earned
or Paid in Cash ($)(1)
|
|
Stock
Awards ($)(2)
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|
Option
Awards ($)
|
|
All Other Compensation ($)
|
|
Total ($)
|
|
Denis A. Turcotte
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Jeffrey C. Dutton
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Ron A. Bloom
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Brian L. Acton(3)
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62,500
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62,500
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|
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|
|
125,000
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|
Michel J. Dumas(3)
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70,000
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70,000
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140,000
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|
Anthony R. Taccone(3)
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|
62,500
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|
|
62,500
|
|
|
|
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|
125,000
|
|
-
(1)
-
Messrs. Acton
and Dumas chose to defer all of their cash fees into deferred share units (or DSUs) pursuant to the Director Deferred Fee Plan (described below)
receiving 3,904 and 4,372 DSUs, respectively.
-
(2)
-
Reflects
the aggregate grant date fair value pursuant to FASB ASC Topic 718, CompensationStock Compensation of DSUs granted under our Omnibus Equity
Incentive Plan (the "Equity Plan") in accordance with our director stock ownership guidelines. Additional details on accounting for stock-based compensation can be found in Note 4, "Stock Based
and Other Management Compensation" of the Notes to the Consolidated Financial Statements.
-
(3)
-
As
of December 31, 2018, Messrs. Acton, Dumas and Taccone held a total of 8,173, 9,154 and 4,087 DSUs, respectively, which includes accrued dividend
equivalents credited as additional DSUs.
Following
the IPO, the board of directors determined to compensate its independent directors with an annual cash retainer of $125,000, payable in equal installments at the end of each
quarter, with the audit committee chair receiving an additional retainer of $15,000. All out-of-pocket business travel and accommodation expenses are reimbursed.
Director stock ownership guidelines
Independent directors will be required, within five years of joining the board, to acquire shares or share equivalents in the Company having an
aggregate value equal to at least three times the then annual retainer (currently $375,000). Prior to achieving this, independent directors will receive fifty percent of their annual retainer in DSUs
under the Equity Plan, which will be fully vested upon grant. Directors may also elect to receive a portion of his or her annual cash retainer in DSUs voluntarily under the Amended and Restated
GrafTech International Ltd. Director Deferred Fee Plan (as amended, the Director Deferred Fee Plan). All DSUs will count towards the minimum holding requirement. After achieving the
threshold, there will not be any further requirement for independent directors to receive their compensation in the form of additional DSUs; however, the share ownership threshold test will be
calculated each year in December and in the event that an independent director who previously met the threshold no longer does, that director will need to acquire more common shares or to elect to
receive a portion of his or her annual retainer in DSUs for the following year in order to satisfy the minimum share ownership test by the following December. All DSUs will accrue dividend equivalents
that will be credited to the director as additional DSUs. All DSUs will be settled in shares of our common stock upon termination of service on the board.
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Table of Contents
Executive compensation
Compensation discussion and analysis
The Compensation Discussion and Analysis (or CD&A) details the objectives and design of our executive compensation program overseen by the
governance and compensation committee. The CD&A describes the compensation provided to our named executive officers (or NEOs) who are listed below and named in the Summary Compensation Table. During
2018, our named executive officers were:
-
-
Jeffrey C. Dutton, Former President and Chief Executive Officer
-
-
David J. Rintoul, President and Chief Executive Officer
-
-
Quinn J. Coburn, Chief Financial Officer, Vice President Finance and Treasurer
Executive summary
Our executive compensation program is driven by our strategic goals with the primary emphasis on paying for performance. Our executive
compensation program has consistently relied upon the two elements of competitive base salary and a performance-based annual cash incentive planthe Incentive Compensation Plan (or the
ICP)which rewards employees based on the financial and operational performance of the Company. Since our acquisition by Brookfield, and until our IPO, we have not relied upon equity
awards for incentivizing long-term performance. Instead, at the time of the acquisition, we adopted a long-term cash incentive programthe GrafTech International Ltd. Long-Term
Incentive Plan (or the LTIP)designed to retain senior management of the Company, to incentivize them to make decisions with a long-term view and to motivate and influence behavior on
their part that is consistent with maximizing value for the stockholders of the Company in a prudent manner. Given our IPO, we will be reviewing the structure of our long-term incentive program but
will continue to focus on the goal of creating long-term value for our stockholders. The year 2018 was a year of transition for the Company from being a privately held company to going public and with
changes in senior management. We hired Mr. Rintoul as our President and Chief Executive Officer in March of 2018 and his compensation for 2018 was driven in large part by his employment
agreement with the Company (or the Rintoul Agreement) (described below after the Summary Compensation Table) and an equity award granted to him in connection with the IPO under our Omnibus Equity
Incentive Plan (or Equity Plan), adopted at the time of the IPO.
Compensation framework
The design and operation of our executive compensation program reflect our objectives of driving financial and operational performance that will
deliver value and propel growth, while attracting and retaining talented executive leadership.
The
primary elements of our executive compensation program for 2018 are shown in the following table. The amounts of compensation were determined by the governance and compensation
committee based on the objectives described. The governance and compensation committee did not rely on formulas or survey results, but instead it used its judgment based on its assessment of the
Company's objectives. Executive officers generally played no role in determining executive compensation. The governance and compensation committee did not utilize the services of a compensation
consultant in 2018 but has engaged Meridian Compensation Partners with respect to the Company's 2019
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Table of Contents
compensation
program. Meridian Compensation Partners does no work for the Company other than providing advice to the governance and compensation committee.
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|
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Element
|
|
Objectives and 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."
|
ICP
|
|
Provides competitive incentives to executive officers by having a portion of their annual cash compensation dependent upon annual
performance and "at risk."
|
|
|
For 2018, the performance measure was Adjusted EBITDA from continuing operations (as described below).
|
Equity Plan and LTIP
|
|
Provide incentives for long-term value creation, aligning the interests of our named executive officers with those of our
stockholders.
|
Retirement Savings Plan (or the Savings Plan)
|
|
Provides 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 and on eligible earnings, up to
the limits set by the Code.
|
Compensation Deferral Plan
|
|
Provides savings in a tax-efficient manner.
|
|
|
Non-qualified deferral of up to 50% of base salary and 85% of ICP bonus.
|
Health, Welfare and Other Benefits
|
|
Attract and retain 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.
|
Base salary
Mr. Rintoul's base salary for 2018 was set at $625,000 under the Rintoul Agreement described below. Mr. Coburn's base salary was
changed during 2018 to $372,600 reflecting a 3.5% increase from his prior year's salary similar to the salary adjustments made for the Company's employees generally.
ICP
The ICP provides competitive incentives to executive officers by having a portion of their annual cash compensation dependent upon annual
performance and "at risk." This motivates and rewards executive officers for the achievement of targeted financial performance. For 2018, the financial measure was Adjusted EBITDA from continuing
operations, a non-GAAP financial measure, which we define as (i) net income or loss plus interest expense, minus interest income, plus income taxes, discontinued operations and depreciation and
amortization from continuing operations plus (ii) any pension and OPEB plan expenses, impairments, rationalization-related charges, initial public offering 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
111
Table of Contents
the
U.S. dollar, related party Tax Receivable Agreement expense, stock-based compensation and non-cash fixed asset write-offs. (See "Management's discussion and analysis of financial condition and
results of operationsNon-GAAP financial measures" for a reconciliation of Adjusted EBITDA from continuing operations to its most directly comparable GAAP measure.) The governance and
compensation committee chose Adjusted EBITDA from continuing operations as the performance measure as it 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.
Mr. Rintoul
and Mr. Coburn had bonus target amounts equal to 100% and 65%, respectively, of base salary. The governance and compensation committee used Mr. Rintoul's
full base salary rate of $625,000 (as set forth in the Rintoul Agreement) and Mr. Coburn's full base salary rate of $372,600 in calculating their awards under the ICP for 2018. Bonuses for 2018
were determined by the governance and compensation committee based on the Company's performance against pre-established Adjusted EBITDA from continuing operations targets. Final bonuses reflect a
fixed payment of 0.3x of target
bonus with an aggregate payment determined by performance against financial targets of up to 2.0x of target bonus. Based on the payout grid approved by the governance and compensation committee, each
of Mr. Rintoul and Coburn received 1.525x of his target bonus based on Adjusted EBITDA from continuing operations for 2018 of $1.2 billion. The actual bonus amounts received by
Messrs. Rintoul and Coburn are set forth in the Summary Compensation Table below.
Equity Plan
In connection with joining the Company, pursuant to the Rintoul Agreement, Mr. Rintoul was awarded stock options at the time of the IPO
determined by dividing $6,250,000 (representing 10x of his annual base salary) by the IPO share price. As these stock options become exercisable over five years following grant, they incentivize
steady, long-term value creation with a focus on increasing stock price and align Mr. Rintoul's compensation with the interests of the Company's stockholders. Following the IPO, the board of
directors also granted Mr. Rintoul DSUs with a fair market value of $290,015, which accrue dividend equivalents that are credited to Mr. Rintoul as additional DSUs (subject to the same
vesting conditions), will vest on the third anniversary of the grant date and will settle in shares of common stock upon his termination of employment from the Company. The DSUs provide for retention
and further directly align Mr. Rintoul's interests with the long-term interests of the stockholders. These awards granted under the Equity Plan are discussed further under "Grants
of plan-based awards."
LTIP
Mr. Coburn did not receive any awards under the Equity Plan in 2018. Mr. Coburn, however, participates in the LTIP as discussed
further under "Potential payments upon termination or change in control."
Policies on transactions in Company stock, including anti-hedging provisions
Our Insider Trading Policy imposes limits as to when and how Company employees, including our executive officers and directors, can engage in
transactions in our securities and prohibits hedging transactions with respect to our common stock.
Recoupment policy
The terms of our equity-based awards (other than the stock options granted under the Rintoul Agreement) (i) entitle, to the extent
permitted or required by applicable law, Company policy and/or the requirements of an exchange on which our shares are listed for trading, the Company to recoup compensation of whatever kind paid by
the Company at any time under our Equity Plan and
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Table of Contents
(ii) provide
for reduction, cancellation, forfeiture or recoupment of an award if the participant engages in Detrimental Conduct. "Detrimental Conduct" means activities which have been, are or
would reasonably be expected to be detrimental to the interests of the Company, as determined in the sole and good faith judgment of the governance and compensation committee. Such activities include
unlawful conduct under securities, antitrust, tax or other laws, improper disclosure or use of confidential or proprietary information or trade secrets, competition with or improper taking of a
corporate opportunity of any business of the Company, failure to cooperate in any investigation or legal proceeding, and misappropriation of property.
Savings Plan and other benefits
All of our regular, full-time U.S. employees, including eligible named executive officers, are eligible to participate in our Savings Plan. In
2018, we made a matching contribution to the Savings Plan for each participant who elected to contribute to the Savings Plan. The 2018 matching contribution was 100% of the first 3% of compensation
and 50% of the next 2% of compensation that a participant contributed. Effective January 1, 2019, the matching contribution is 100% of the first 5% 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
3% 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.
Our
named executive officers participate in the same medical, life and disability insurance programs, and other welfare plans as the rest of our employees.
Summary compensation table
The following table sets forth information concerning compensation earned by the Company's NEOs for fiscal years ended December 31, 2018,
2017 and 2016.
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|
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Name and principal position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)(3)
|
|
Option
Awards
($)(3)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Jeffrey C. Dutton
|
|
2018
|
|
|
110,000
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
11,137
|
(4)
|
|
121,137
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|
Former President
|
|
2017
|
|
|
425,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,680
|
|
|
469,680
|
|
and CEO
(1)
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2016
|
|
|
410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,574
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|
|
451,574
|
|
David J. Rintoul
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|
2018
|
|
|
520,833
|
|
|
187,500
|
(5)
|
|
261,023
|
|
|
2,395,853
|
|
|
765,625
|
(5)
|
|
326,676
|
(6)
|
|
4,457,510
|
|
President and CEO
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quinn J. Coburn
|
|
2018
|
|
|
371,550
|
|
|
72,657
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(5)
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|
|
|
|
|
|
|
296,683
|
(5)
|
|
17,692
|
(7)
|
|
758,582
|
|
Chief Financial Officer,
|
|
2017
|
|
|
360,000
|
|
|
402,480
|
|
|
|
|
|
|
|
|
|
|
|
16,451
|
|
|
778,931
|
|
Vice President Finance
|
|
2016
|
|
|
360,000
|
|
|
73,710
|
|
|
|
|
|
|
|
|
|
|
|
14,548
|
|
|
448,528
|
|
and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Mr. Dutton
served as the Company's Vice President and Chief Operating Officer until January 11, 2017. On January 11, 2017, our Board appointed
Mr. Dutton as President and CEO, effective that same date. Mr. Dutton served as President and CEO until March 1, 2018. He was employed by an affiliate of Brookfield. GrafTech
reimbursed Brookfield for his salary, housing and transportation expenses and 401(k) savings plan matching contributions. Mr. Dutton continues to serve on the board but received no compensation
for such service in 2018.
-
(2)
-
On
March 1, 2018, Mr. Rintoul joined the Company as President and CEO of the Company, replacing Mr. Dutton.
-
(3)
-
Reflects
the aggregate grant date fair value pursuant to FASB ASC Topic 718, CompensationStock Compensation of DSUs and options granted under our Equity
Plan. Additional details on accounting
113
Table of Contents
for
stock-based compensation can be found in Note 4, "Stock Based and Other Management Compensation", of the Notes to the Consolidated Financial Statements.
-
(4)
-
Includes
$5,909 in matching contributions to a Brookfield 401k savings plan and $5,228 for housing and transportation expenses.
-
(5)
-
Represents
payments under the ICP for 2018.
-
(6)
-
Includes
$9,899 in matching contributions and a $7,208 Company contribution to the Savings Plan, $563 in disability insurance premiums under the Company's long term
disability insurance plan, a $1,000 employer contribution to his Health Savings Account, $3,795 in life insurance premiums under the Company's group life insurance plan, $54,211 for relocation
expenses and $250,000 for losses associated with the sale of his home.
-
(7)
-
Includes
$11,000 in matching contributions and a $2,750 Company contribution to the Savings Plan, $676 in disability insurance premiums under the Company's long term
disability insurance plan, $1,610 employer contribution to his Health Savings Account and $1,656 in life insurance premiums under the Company's group life insurance plan.
Grants of plan-based awards
The following table sets forth, for each of the NEOs, the grants of awards under our Equity Plan and our ICP during the fiscal year ended
December 31, 2018.
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|
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|
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|
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|
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|
|
|
|
|
|
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
|
|
All Other
Stock Awards:
Number of
Shares of
Stock or
Units
(#)
|
|
All Other
Option Awards:
Number of
Securities
Underlying
Options
(#)
|
|
|
|
|
|
|
|
|
|
Exercise or
Base Price
of Option
Awards
($/Sh)
|
|
Grant Date
Fair Value
of Stock and
Option Awards
($)
|
|
Name
|
|
Grant
Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Jeffrey C. Dutton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David J. Rintoul
|
|
|
|
|
|
187,500
|
|
|
625,000
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/19/18
|
|
|
|
|
|
|
|
|
|
|
|
19,335
|
|
|
|
|
|
|
|
|
261,023
|
|
|
|
|
4/19/18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,670
|
|
|
15.00
|
(1)
|
|
2,395,853
|
|
Quinn J. Coburn
|
|
|
|
|
|
72,657
|
|
|
242,190
|
|
|
484,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Based
upon the IPO price of our stock.
Rintoul employment agreement
On March 1, 2018, the Company and Mr. Rintoul entered into an employment agreement that governs the terms and conditions of his
employment as President and CEO of the Company (or the Rintoul Agreement). The Rintoul Agreement provides that Mr. Rintoul is entitled to an annual base salary of $625,000 and will participate
in the ICP (with a target bonus of 100% of annual base salary). The Rintoul Agreement also provides that Mr. Rintoul will receive a one-time grant of stock options with a value on the date of
grant equal to ten times his annual base salary and an exercise price per share equal to $15.00 (the initial public offering price of our IPO). The Rintoul Agreement provides that the options will
vest ratably over the five year period following the date of grant, subject to acceleration under certain circumstances, including in the event Brookfield and its affiliates cease to own at least 35%
of the Company's stock or any other person or group acquires more than 50% of the Company's stock. In addition, Mr. Rintoul will be eligible to participate in Company-sponsored benefits,
including health benefits, a 401(k) plan and a defined contribution retirement plan. The Company agreed to modify the Rintoul Agreement and reimburse Mr. Rintoul for reasonable expenses
relating to his relocation, as well as up to $250,000 (increased by the Company from the $75,000 originally set forth in the Rintoul Agreement) for losses associated with the sale of his home;
provided that if Mr. Rintoul resigns from employment without Good Reason or is terminated for Cause (each as defined in the Rintoul Agreement) at any point prior to March 1, 2021, he
will reimburse any such amounts previously received.
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Table of Contents
Outstanding equity awards at fiscal year end
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|
|
|
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|
|
|
|
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|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units
of Stock
That Have Not
Vested (#)
|
|
Market Value of
Shares or Units
of Stock
That Have Not
Vested ($)(1)
|
|
Jeffrey C. Dutton
|
|
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|
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|
|
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|
|
David J. Rintoul
|
|
|
|
|
|
416,670
|
(2)
|
|
15.00
|
|
|
4/19/2028
|
|
|
20,830
|
(3)
|
|
238,295
|
|
Quinn J. Coburn
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-
(1)
-
Calculated
by multiplying the number of shares covered by the award by $11.44, the closing price of our common stock on the New York Stock Exchange on
December 31, 2018.
-
(2)
-
The
option vests in five equal installments beginning on April 19, 2019.
-
(3)
-
The
DSUs (including units credited as dividend equivalents) vest on April 19, 2021. Vested DSUs will be settled in shares of common stock which will be
delivered by the end of the calendar year in which Mr. Rintoul terminates employment with the Company.
Nonqualified deferred compensation
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|
|
|
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|
|
|
|
|
|
|
|
|
Name
|
|
Executive
Contributions
for 2018
($)
|
|
Registrant
Contributions
for 2018
($)
|
|
Aggregate
Earnings
in 2018
($)
|
|
Aggregate
Withdrawals/
Distributions
($)
|
|
Aggregate
Balance at
12/31/2018
($)
|
|
Jeffrey C. Dutton
|
|
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|
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|
David J. Rintoul
|
|
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|
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|
|
|
|
|
Quinn J. Coburn
|
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
|
|
4,437
|
|
Mr. Coburn
participates in our non-qualified deferred compensation plan (or the Compensation Deferral Plan). Under the Compensation Deferral Plan, participants are able to defer
up to 85% of their ICP compensation and 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, 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. Participants may also elect to have their account balances distributed upon a change in control of GrafTech. The Compensation Deferral
Plan is intended to comply with Section 409A of the Code governing deferred compensation arrangements except that amounts that were contributed to the Compensation Deferral Plan and fully
vested by December 31, 2004, including all of the frozen lump sums, are not subject to the restrictions of Section 409A. Amounts under the Compensation Deferral Plan are generally
payable in a lump sum, although participants may elect to have their accounts payable in annual installments instead.
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Table of Contents
Potential payments upon termination or change in control
We have set forth below information regarding contractual payments that would be made to Messrs. Rintoul and Coburn upon the occurrence
of certain termination and/or change in control events and post-employment restrictive covenant obligations of Messrs. Rintoul and Coburn.
David J. Rintoul
The table below sets forth the potential estimated payments to Mr. Rintoul under the Rintoul Agreement and his equity award agreements
under the Equity Plan, assuming for this purpose that his employment had been terminated and/or a change of control of the Company had occurred in each case on December 31, 2018.
|
|
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|
|
|
|
|
|
|
|
Triggering Event
|
|
Cash-Out Value of
Equity-Based
Awards
that Vest as
a Result of a
Triggering Event
($)
|
|
Value of
Severance
($)
|
|
Total
($)
|
|
Termination of Employment
|
|
|
|
|
|
|
|
|
|
|
Prior to a Change In Control without Cause or for Good Reason
|
|
|
|
|
|
1,250,000
|
(1)
|
|
1,250,000
|
|
After a Change In Control without Cause
|
|
|
238,295
|
(2)(3)
|
|
1,250,000
|
|
|
1,488,295
|
|
Change in Control
|
|
|
|
(3)
|
|
|
|
|
|
|
-
(1)
-
Payable
under the Rintoul Agreement. See "Rintoul Agreement" below.
-
(2)
-
Estimated
value of DSUs that would vest based the closing price of a share of common stock on December 31, 2018 of 11.44. See "Rintoul Equity
Awards" below.
-
(3)
-
Mr. Rintoul's
stock options would vest in full upon a change in control of the Company but no value is reflected in the table as the exercise price of such
options exceeds the closing price of a share of common stock on December 31, 2018 of $11.44. See "Rintoul equity awards" below.
Rintoul agr
e
ement
In the event that Mr. Rintoul's employment is terminated by Mr. Rintoul for "Good Reason" (as defined in the Rintoul Agreement) or
by the Company for a reason other than "Cause" (as defined in the Rintoul Agreement) or Mr. Rintoul's death or disability, the Company will pay Mr. Rintoul his base salary for one year
plus annual bonus, subject to his execution of a release agreement. The Rintoul Agreement provides that Mr. Rintoul is subject to non-compete and non-solicitation covenants during his
employment and for a period of two years following termination of his employment, as well as a perpetual non-disparagement covenant.
Rintoul equity awards
Mr. Rintoul's deferred share unit agreement provides that in the event that his employment is terminated by the Company without Cause
within the two (2) year period following the consummation of a Change in Control, any then-outstanding unvested DSUs shall immediately vest in full as of the date of such termination. For
purposes of this agreement, a "Change in Control" shall occur upon (a) Brookfield and its affiliates ceasing to own stock of GrafTech that constitutes at least 35% of the total fair market
value or total voting power of the stock of GrafTech or (b) any one person, or more than one person acting as a group (as defined under Treasury Regulation
§ 1.409A-3(i)(5)(v)(B)) other than GrafTech, Brookfield and its affiliates or any employee benefit plan sponsored by GrafTech acquires ownership of stock of GrafTech that, together
with stock held by such person or group,
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Table of Contents
constitutes
more than 50% of the total fair market value or total voting power of the stock of GrafTech and "Cause\" shall mean, unless otherwise provided in an employment agreement in effect
immediately prior to such termination, (i) a failure of Mr. Rintoul to reasonably and substantially perform his duties to the Company (other than as a result of physical or mental
illness or injury); (ii) his willful misconduct or gross negligence; (iii) his breach of the his fiduciary duty or duty of loyalty to the Company; (iv) his commission by of any
felony or other serious crime; or (v) his breach of the terms of any agreement with the Company or any Company policies.
Upon
the consummation of a Change in Control, any then-outstanding unvested portion of Mr. Rintoul's options shall immediately vest in full as of the date of such Change in
Control. Subject to his continued employment through the third anniversary of the grant date, Mr. Rintoul and the Board may, by mutual agreement, provide that any then-outstanding unvested
portion of the options shall vest in full in the event of early retirement, subject to a fully executed succession plan.
Quinn J. Coburn
Coburn LTIP
Mr. Coburn is the only named executive officer that participates in the LTIP. Under the LTIP, certain employees were awarded profits
units which 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 in the LTIP and described 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 in the LTIP and described 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 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 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 in its sole discretion. The LTIP defines "Sales Proceeds" as, as of any date of determination, the sum of all proceeds actually received by 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 in its sole discretion.
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Table of Contents
Assuming
a Change in Control had occurred for purposes of the LTIP on December 31, 2018, Mr. Coburn would have received approximately $12.1 million, based solely
upon the excess of the Sales Proceeds received to date by Brookfield Capital IV over the Threshold Value.
Coburn restrictive covenants
In 2014, the Company granted Mr. Coburn, certain equity awards pursuant to the Company's Equity Incentive Plan Award Agreement (or the
Award Agreement) which were cancelled at the time of Brookfield's acquisition of GrafTech in 2015. Pursuant to the Award Agreement, Mr. Coburn is subject to non-competition and non-solicitation
covenants set forth in his Award Agreement beginning on the effective date of the Award Agreement and continuing for a period of two years following his voluntary termination of employment with the
Company or certain events of involuntary termination of employment. The non-competition covenant provides that he will not, without the Company's prior written consent, engage in (a) the
business of manufacturing, distributing, selling or providing needle coke and/or carbon or graphite products, services, material or equipment of
the kind or type which are the same as or similar to those manufactured, distributed, sold or provided by GrafTech as of the date of termination or at any time while he was an employee of GrafTech, or
(b) any other business in which GrafTech directly or indirectly engaged as of the date of termination or at any time while he was an employee of GrafTech. The non-competition covenant applies
in any state, country, possession, or territory in which GrafTech directly or indirectly has offices, operations, customers or otherwise conducts business or planned to conduct business during his
employment.
Certain relationships and related party transactions
Under SEC rules, a related person is an officer, director, nominee for director or beneficial holder of more than 5% of any class of our voting
securities since the beginning of the last fiscal year or an immediate family member of any of the foregoing. We have a written related party transaction policy, pursuant to which directors (including
director nominees), executive officers and employees are required to report any transactions or circumstances that may create or appear to create a conflict between the personal interests of the
individual and our interests, regardless of the amount involved. Our head of legal reports these transactions to the audit committee of the board of directors, which is responsible for evaluating each
related party transaction and making a recommendation to the disinterested members of the board of directors as to whether the transaction at issue is fair, reasonable and within our policy and
whether it should be ratified and approved. The audit committee, in making its recommendation, considers various factors, including the benefit of the transaction to us, the terms of the transaction
and whether they are at arm's-length and in the ordinary course of our business, the direct or indirect nature of the related person's interest in the transaction, the size and expected term of the
transaction, and other facts and circumstances that bear on the materiality of the related party transaction under applicable law and listing standards.
Other
than compensation agreements and other arrangements which are described under "Executive Compensation" and the transactions described below, since January 1, 2018, there has
not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and
in which any related person had or will have a direct or indirect material interest.
We
have engaged in transactions with affiliates or related parties during the year ended December 31, 2018. These transactions include payment of dividends to Brookfield, entrance
into and repayment of the Brookfield Promissory Note and entrance into the Tax Receivable Agreement, Stockholders Rights Agreement, Registration Rights Agreement and Share Repurchase Agreement, each
with Brookfield. On August 13, 2018, in conjunction with a follow-on offering, we purchased 11,688,311 shares directly from Brookfield at a price of $19.25 per share for a total of
$225 million.
118
Table of Contents
Additionally,
during 2016, Brookfield purchased on the open market in aggregate approximately $53 million of the Senior Notes. We redeemed our Senior Notes on February 12, 2018.
We
have also reimbursed certain costs incurred by Brookfield as required under the Investment Agreement dated May 4, 2015 between Brookfield and GrafTech, including in connection
with transactions with our current or former subsidiaries, compensatory transactions with directors and officers including employee benefits (including reimbursement to Brookfield for compensation
costs incurred by it for certain personnel who devote substantially all of their working time to us), stock option and restricted stock grants, compensation deferral, stock purchases, and customary
indemnification and expense advancement arrangements.
Registration Rights Agreement
We and the selling stockholder entered into a registration rights agreement (or the Registration Rights Agreement) in connection with our IPO.
The Registration Rights Agreement provides the selling stockholder with certain demand registration rights, including shelf registration rights, in respect of any shares of our common stock or any of
our debt securities held by it, subject to certain conditions and limitations. The selling stockholder is entitled to a limited number of demand registrations. In addition, in the event that we
register additional shares of common stock or debt securities for sale to the public, we will be required to give notice of such registration to the selling stockholder of our intention to effect such
a registration, and, subject to certain limitations, include any shares of common stock or debt securities requested to be included in such registration held by it. We will be required to bear the
registration expenses, other than underwriting discounts and commissions, associated with any registration of shares of common stock or debt securities pursuant to the Registration Rights Agreement.
The agreement includes customary indemnification provisions in favor of the selling stockholder, its affiliates, directors and officers against certain losses and liabilities (including reasonable
legal expenses) resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which the selling stockholder sells shares of our common stock
or our debt securities, unless such liability arose from the selling stockholder's misstatement or omission and the selling stockholder has agreed to indemnify us against losses caused by its
misstatements or omissions, subject to certain limitations.
Stockholder Rights Agreement
We and the selling stockholder entered into the Stockholder Rights Agreement in connection with our IPO. Under the Stockholder Rights Agreement,
for so long as the selling stockholder owns or controls at least 25% of our outstanding common stock, the selling stockholder will have the right to nominate the higher of 37.5% of the members of the
board of directors and three members of the board of directors. The selling stockholder will also have the right to select the chairman of the board of directors. In the event the selling stockholder
owns or controls less than 25% of the Company, the Brookfield directors will promptly tender their resignations. The board of directors (excluding the Brookfield directors) will have the option, but
not the obligation, to accept the Brookfield directors' resignations. If the board of directors (excluding the Brookfield directors) votes to accept these resignations, the Brookfield directors will
cease to be members of the board of directors. If the board of directors (excluding the Brookfield directors) votes not to accept these resignations, the directors will continue to serve as members of
the board of directors until the next annual meeting of our stockholders, regardless of the time remaining in their respective terms of office. The Stockholder Rights Agreement provides that the
initial board members designated by the selling stockholder shall be Denis A. Turcotte, Ron A. Bloom and Jeffrey C. Dutton.
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Table of Contents
Tax Receivable Agreement
We and the selling stockholder entered into the TRA in connection with our IPO. The TRA provides the right to receive future payments from us to
the Existing Stockholders 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 the Pre-IPO Tax Assets. In addition, we will pay interest on the payments we will make to the Existing Stockholders 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.
For
purposes of the TRA, cash savings in income tax are computed by reference to the reduction in the liability for income taxes resulting from the utilization of the tax benefits
subject to the TRA. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
Our
counterparties under the TRA will not reimburse us for any payments previously made if such tax benefits are subsequently disallowed (although future payments would be adjusted to
the extent possible to reflect the result of such disallowance). As a result, in such circumstances we could make payments under the TRA that are greater than our actual cash tax savings.
While
the actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount and timing of the taxable income we and our
subsidiaries generate in the future, and our subsidiaries' use of Pre-IPO Tax Assets, we expect that, based on current tax laws (taking into account changes under the Tax Act), payments under the TRA
relating to the Pre-IPO Tax Assets will be approximately $86.5 million 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. No payments have come due under the TRA to date.
Any
future changes in the utility of the Pre-IPO Tax Assets will impact the amount of the liability that will be paid to our Existing Stockholders. Changes in the utility of these
Pre-IPO Tax Assets will be recorded in income tax expense (benefit) and any changes in the obligation under the TRA will be recorded in other income (expense). We plan to use cash flow from operations
and availability under our credit facilities to fund this obligation.
If
we undergo a Change of Control, the TRA will terminate and we will be required to make a payment equal to the present value of future payments under the TRA, which payment would be
based on certain assumptions, including those relating to our and our subsidiaries' future taxable income. Additionally, if we sell or otherwise dispose of any of our subsidiaries in a transaction
that is not a Change of Control, we will be required to make a payment equal to the present value of future payments under the TRA attributable to the Pre-IPO Tax Assets of such subsidiary that is
sold or disposed of, applying the assumptions described above.
The
TRA provides that in the event that we breach any of our material obligations under it, whether as a result of our failure to make any payment when due (subject to a specified cure
period), failure to honor any other material obligation under it or by operation of law as a result of the rejection of it in a case commenced under the United States Bankruptcy Code or otherwise,
then all our payment and other obligations under the TRA will be accelerated and will become due and payable applying the same assumptions described above. Such payments could be substantial and could
exceed our actual cash tax savings under the TRA.
Certain
transactions by the company could cause it to recognize taxable income (possibly material amounts of income) without a current receipt of cash. Payments under the TRA with
respect to such
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Table of Contents
taxable
income would cause a net reduction in our available cash. For example, transactions giving rise to cancellation of debt income, the accrual of income from original issue discount or deferred
payments, a "triggering event" requiring the recapture of dual consolidated losses, or "Subpart F" income would each produce income with no corresponding increase in cash. In these cases, we
may use some of the Pre-IPO Tax Assets to offset income from these transactions and, under the TRA, would be required to make a payment to our Existing Stockholders even though we receive no cash from
such income.
Because
we are a holding company with no operations of our own, our ability to make payments under the TRA is dependent on the ability of our subsidiaries to make distributions to us. To
the extent that we are unable to make payments under the TRA for specified reasons, such payments will be deferred and will accrue interest at a rate of LIBOR plus 1.00% per annum until paid.
In
the event that any determinations must be made under or any dispute arises involving the TRA, the Existing Stockholders will be represented by Brookfield Capital Partners
IV GP, Ltd. In any such instance, should any representatives of Brookfield Capital Partners IV GP then be serving on our board of directors, such directors will be excluded from
decisions of the board related to the relevant determination or dispute.
Brookfield Promissory Note
On April 19, 2018 we declared a dividend in the form of a $750 million promissory note to the selling stockholder. The issuance of
the Brookfield Promissory Note as a dividend 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 issuance of the Brookfield Promissory Note and (iii) the issuance occurring within 60 days from the dividend record date. Upon
publication of our Form 10-Q on May 7, 2018, these conditions were met and, as a result, the Brookfield Promissory Note was outstanding in the amount of $750 million.
On
June 15, 2018, the proceeds of the Incremental Term Loans were used to repay in the Brookfield Promissory Note in full for approximately $755 million, including accrued
interest. See "Management's discussion and analysis of financial condition and results of operationsFinancing transactionsBrookfield Promissory Note."
August 2018 Share Repurchase
On August 13, 2018, the selling stockholder completed an underwritten public secondary offering of 23,000,000 shares of our common stock
at a price to the public of $20.00 per share. Pursuant to a share repurchase agreement with the selling stockholder, we concurrently repurchased 11,688,311 shares directly from the selling stockholder
for $225 million in the aggregate. The price per share paid by us was $19.25, equal to the price at which the underwriters purchased the shares from the selling stockholder in the public
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.
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Table of Contents
Principal stockholders and selling stockholder
The following table sets forth information as of February 15, 2019 regarding the beneficial ownership of our common stock
by:
-
-
each person or group who beneficially owns more than 5% of our outstanding shares of common stock;
-
-
the selling stockholder;
-
-
each of our named executive officers;
-
-
each of our directors; and
-
-
all of our executive officers, and directors as a group.
Beneficial
ownership for the purposes of the following table is determined in accordance with the rules and regulations of the SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the power to vote or direct the voting of securities, or to dispose or direct the disposition of securities or has the right to acquire such
powers within 60 days. For purposes of calculating each person's percentage ownership, common stock issuable pursuant to options exercisable within 60 days are included as outstanding
and beneficially owned for that person or group, but are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as disclosed in the footnotes to this
table and subject to applicable community property laws, we believe that each beneficial owner identified in the table possesses sole voting and investment power over all common stock shown as
beneficially owned by the beneficial owner.
The
percentage of beneficial ownership is based on 290,537,612 shares of common stock issued and outstanding on February 15, 2019. Unless otherwise indicated in the table or
footnotes below, the
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Table of Contents
address
for each beneficial owner is c/o GrafTech International Ltd., 982 Keynote Circle, Brooklyn Heights, OH 44131.
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After the offering(1)
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|
Assuming
underwriters' option
to purchase
additional shares is
not exercised
|
|
Assuming
underwriters' option
to purchase
additional shares is
exercised in full
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Shares offered
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|
Prior to the offering
|
|
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|
Assuming
underwriters'
option to
purchase
additional
shares is
not
exercised
|
|
Assuming
underwriters'
option to
purchase
additional
shares is
exercised
in full
|
|
|
|
Number of shares
beneficially owned
|
|
Number of shares
beneficially owned
|
|
Number of shares
beneficially owned
|
|
Name
|
|
Number
of shares
|
|
Percentage
of shares
|
|
Number
of shares
|
|
Percentage
of shares
|
|
Number
of shares
|
|
Percentage
of shares
|
|
5% Stockholders and Selling stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCP IV GrafTech Holdings LP(2)
|
|
|
229,440,087
|
|
|
78.97
|
%
|
|
17,500,000
|
|
|
20,125,000
|
|
|
211,940,087
|
|
|
72.95
|
%
|
|
209,315,087
|
|
|
72.04
|
%
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David J. Rintoul
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quinn J. Coburn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey C. Dutton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denis A. Turcotte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ron A. Bloom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian L. Acton*(3)(4)
|
|
|
13,173
|
|
|
*
|
|
|
|
|
|
|
|
|
13,173
|
|
|
*
|
|
|
13,173
|
|
|
*
|
|
Michel J. Dumas*(3)
|
|
|
9,154
|
|
|
*
|
|
|
|
|
|
|
|
|
9,154
|
|
|
*
|
|
|
9,154
|
|
|
*
|
|
Anthony R. Taccone*(3)(4)
|
|
|
7,837
|
|
|
*
|
|
|
|
|
|
|
|
|
7,837
|
|
|
*
|
|
|
7,837
|
|
|
*
|
|
Joel L. Hawthorne
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Darrell A. Blair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lionel D. Batty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Current Executive Officers and Directors as a Group (8 Persons)
|
|
|
30,164
|
|
|
*
|
|
|
|
|
|
|
|
|
30,164
|
|
|
*
|
|
|
30,164
|
|
|
*
|
|
-
*
-
Less
than 1%
-
(1)
-
The
number of shares beneficially owned immediately after the completion of this offering is based on 290,537,612 shares of common stock outstanding as of
February 15, 2019.
-
(2)
-
BCP
IV GrafTech Holdings LP (or BCP IV) directly holds an aggregate of 229,440,087 shares of common stock. The general partner of BCP IV is BPE IV
(Non-Cdn) GP LP, and the general partner of BPE IV (Non-Cdn) GP LP is Brookfield Capital Partners Ltd. BCP GP Limited is the sole shareholder of Brookfield
Capital Partners Ltd. Each of BCP GP Limited, Brookfield Capital Partners Ltd. and BPE IV (Non-Cdn) GP LP (together with BCP IV, the "Brookfield Entities") is an
indirect parent of BCP IV and may therefore be deemed to beneficially own the shares of common stock that are directly held by BCP IV. Each of the Brookfield Entities disclaims beneficial ownership of
all shares of common stock that are directly held by BCP IV, except to the extent of any indirect pecuniary interest therein. The address of each of the Brookfield Entities is c/o Brookfield Asset
Management Inc., 181 Bay Street, Suite 300, Bay Wellington Tower, Toronto, ON M5J 2T3.
-
(3)
-
Brian
L. Acton, Michel J. Dumas and Anthony R. Taccone beneficially own 8,173, 9,154 and 4,087 DSUs, respectively. Each deferred share unit represents a contingent
right to receive one share of our common stock. The DSUs are fully vested. Vested DSUs will be settled in shares of common stock which will be delivered as soon as practicable after the director
terminates service on the Board but in any event no later than the end of the calendar year in which such termination date occurs.
-
(4)
-
Brian
L. Acton and Anthony R. Taccone also beneficially own 5,000 and 3,750 shares of our common stock, respectively.
123
Table of Contents
Description of capital stock
The following descriptions are summaries of the material terms of our Amended Certificate of Incorporation and Amended
By-Laws. These descriptions contain all information which we consider to be material, but may not contain all of the information that is important to you. To understand them fully, you should read our
Amended Certificate of Incorporation and Amended By-Laws, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part. The summary below is
qualified in its entirety by reference to our Amended Certificate of Incorporation and Amended By-Laws. The terms of these securities may also be affected by the DGCL.
Authorized capitalization
As of February 15, 2019, our capital structure consists of 3,000,000,000 authorized shares of common stock, par value $0.01 per share,
290,537,612 shares of which are currently outstanding, and 300,000,000 shares of preferred stock, par value $0.01 per share, none of which are currently outstanding. Upon the completion of this
offering, there will be 290,537,612 outstanding shares of common stock and no outstanding shares of preferred stock.
Common stock
The holders of our common stock are entitled to such dividends as our board of directors may declare from time to time from legally available
funds subject to the preferential rights of the holders of any shares of our preferred stock that we may issue in the future. The holders of our common stock are entitled to one vote per share on any
matter to be voted upon by stockholders, subject to the restrictions described below under the caption "Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Our By-Laws and
Delaware Law."
Our
Amended Certificate of Incorporation does not provide for cumulative voting in connection with the election of directors. Accordingly, directors will be elected by a majority of the
shares voting once a quorum is present. No holder of our common stock has any preemptive rights, conversion rights or other subscription rights, and there are no redemption or sinking fund provisions
applicable to our common stock.
Upon
any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our common stock are entitled to share, on a pro rata basis, all assets remaining
after payment to creditors and subject to prior distribution rights of any shares of preferred stock that we may issue in the future. All of the outstanding shares of common stock are, and the shares
offered by the selling stockholder in this offering will be, fully paid and non-assessable.
As
of February 15, 2019, we had 290,537,612 shares of common stock outstanding and 2 stockholders of record of common stock.
Preferred stock
No shares of our preferred stock are currently outstanding. Our Amended Certificate of Incorporation authorizes our board of directors, without
further action by our stockholders, to issue shares of preferred stock in one or more classes or series. The board may fix or alter the rights, preferences and privileges of the preferred stock, along
with any limitations or restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each class or series of preferred stock. The
preferred stock could have voting or conversion rights that could adversely affect the voting power or other rights of holders of our common stock. The issuance of preferred stock could also have the
effect, under certain circumstances, of delaying, deferring or preventing a change of control of our company. We currently have no plans to issue any shares of preferred stock.
124
Table of Contents
Stockholder Rights Agreement
For a description of the Stockholder Rights Agreement that we have entered into with the selling stockholder, see "Certain relationships and
related party transactionsStockholder Rights Agreement."
Anti-Takeover effects of provisions of our Certificate of Incorporation, our By-Laws and Delaware law
Our Amended Certificate of Incorporation and Amended By-Laws contain a number of provisions relating to corporate governance and to the rights
of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control or an unsolicited
acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by the stockholders.
These provisions include:
Classified board of directors
Our Amended Certificate of Incorporation provides that our board of directors will be divided into three classes of directors, with the classes
to be as nearly equal in number as possible, and with the directors serving three-year terms. As a result, approximately one-third of our board of directors will be elected each year. The Amended
Certificate of Incorporation provides that while the selling stockholder owns more than 50% of our outstanding common stock, the classification of the board of directors and the other provisions of
the Amended Certificate of Incorporation may be amended by the affirmative vote of the holders of a majority of the voting power of our outstanding common stock. The Amended Certificate of
Incorporation also provides that after the selling stockholder ceases to own more than 50% of our outstanding common stock, these provisions may be
amended only by the affirmative vote of the holders of 66
2
/
3
% of the voting power of our outstanding common stock. The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of our board of directors. Our Amended Certificate of Incorporation and Amended By-Laws provide that, subject to any rights of holders of preferred
stock to elect additional directors under specified circumstances, the number of directors are fixed from time to time exclusively pursuant to a resolution adopted by the board of directors. Our board
of directors currently has seven members. Within one year of the consummation of our IPO, our board will consist of eight members.
Removal of directors; vacancies
Our Amended Certificate of Incorporation provides that while the selling stockholder owns more than 50% of our outstanding common stock,
directors may be removed at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of our outstanding common stock. Our Amended Certificate of
Incorporation also provides that after the selling stockholder ceases to own more than 50% of our outstanding common stock, directors may be removed only for cause and then only by the affirmative
vote of the holders of 66
2
/
3
% or more of the voting power of our outstanding common stock. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy
resulting from an increase in the size of our board of directors, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum. These provisions
may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies created by such removal with its own nominees.
Business combinations
We have opted out of Section 203 of the DGCL, which regulates corporate takeovers; however, our Amended Certificate of Incorporation
contains similar provisions providing that we may not engage
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Table of Contents
in
certain "business combinations" with any "interested stockholder" for a three-year period following the time that the stockholder became an interested stockholder,
unless:
-
-
the business combination or the transaction which resulted in the stockholder becoming an interested stockholder was approved by the board of
directors;
-
-
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85% of our outstanding shares entitled to vote generally in the election of directors at the time the transaction commenced; or
-
-
on or after such time, the business combination is approved by the board of directors and authorized at a meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66
2
/
3
% of the outstanding shares entitled to vote generally in the election of directors that are not owned by the interested
stockholder.
Generally,
a "business combination" includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to certain
exceptions, an "interested stockholder" is any entity or person beneficially owning 15% or more of our outstanding shares entitled to vote generally in the election of directors or any entity or
person affiliated with or controlling or controlled by any of these entities or persons and who beneficially owned 15% or more of our outstanding shares entitled to vote generally in the election of
directors at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder or an entity or person
affiliated with or controlling or controlled by any of these entities or persons.
Under
certain circumstances, this provision will make it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation
for a three-year period. This provision may encourage companies interested in acquiring our Company to negotiate in advance with our board of directors because the stockholder approval requirement
would be avoided if our board of directors approves either the business combination or the transaction which results in the
stockholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
Our
Amended Certificate of Incorporation provides that Brookfield and its affiliates and any of their respective direct or indirect transferees and any group as to which such persons are
a party do not constitute "interested stockholders" for purposes of this provision.
Special stockholder meetings
Our Amended Certificate of Incorporation provides that special meetings of our stockholders may be called at any time only by or at the
direction of the board of directors or the chairman of the board of directors; provided, however, so long as Brookfield and its affiliates own more than 50% of our outstanding common stock, special
meetings of our stockholders may also be called by the board of directors or the chairman of the board of directors at the request of Brookfield and its affiliates. Our Amended By-Laws prohibit the
conduct of any business at a special meeting other than as specified in the notice for such meeting. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or
changes in control or management of our Company.
Requirements for advance notification of director nominations and stockholder proposals
Our Amended By-Laws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of directors. In order for any matter to be "properly brought" before a meeting, a stockholder will have to comply with
advance notice requirements and provide us with certain
126
Table of Contents
information.
Generally, to be timely, a stockholder's notice must be received at our principal executive offices not earlier than the opening of business 120 days prior, and not later than the
close of business
90 days before, the first anniversary date of the immediately preceding annual meeting of stockholders. Our Amended By-Laws also specify requirements as to the form and content of a
stockholder's notice. Our Amended By-Laws provide that the board of directors may adopt by resolution the rules and regulations for the conduct of meetings. Our Amended By-Laws allow the chairman of
the meeting at a meeting of the stockholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the
rules and regulations are not followed. These provisions will not apply to Brookfield and its affiliates so long for as long as they hold more than 50% of our outstanding common stock. These
provisions may also defer, delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to influence or
obtain control of our Company.
Stockholder action by written consent
Our Amended Certificate of Incorporation provides that stockholder action can be taken by written consent in lieu of a meeting while the selling
stockholder owns more than 50% of our outstanding common stock. After the selling stockholder ceases to own more than 50% of our outstanding common stock, stockholder action can be taken only at an
annual meeting or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting.
Supermajority provisions
Our Amended Certificate of Incorporation and Amended By-Laws provide that the board of directors is expressly authorized to adopt, make, alter,
amend or repeal our Amended By-Laws without a stockholder vote in any matter not inconsistent with the laws of the state of Delaware. After the selling stockholder ceases to own more than 50% of our
outstanding common stock, any adoption, alteration, amendment or repeal of our Amended By-Laws by our stockholders will require the affirmative vote of holders of at least 66
2
/
3
% of the
voting power of our outstanding common stock.
The
DGCL provides generally that the affirmative vote of a majority of the outstanding shares then entitled to vote is required to amend a corporation's certificate of incorporation,
unless the certificate of incorporation requires a greater percentage. Our Amended Certificate of Incorporation provides that after the selling stockholder ceases to own more than 50% of our
outstanding common stock, it may be amended only by a vote of at least 66
2
/
3
% of the voting power of our outstanding common stock.
The
combination of the classification of our board of directors, the lack of cumulative voting and the supermajority voting requirements will make it more difficult for our existing
stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Because our board of directors has the power to retain and
discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management.
These
provisions may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management or our Company, such as a merger, reorganization or
tender offer. These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of
transactions that may involve an actual or threatened acquisition of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions are also
intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a
consequence, they may also
127
Table of Contents
inhibit
fluctuations in the market price of our shares of common stock that could result from actual or rumored takeover attempts.
Authorized but unissued or undesignated capital stock
Our authorized capital stock consists of 3,000,000,000 shares of common stock. A large quantity of authorized but unissued shares may deter
potential takeover attempts because of the ability of our board of directors to authorize the issuance of some or all of these shares to a friendly party, or to the public, which would make it more
difficult for a potential acquirer to obtain control of us. This possibility may encourage persons seeking to acquire control of us to negotiate first with our board of directors. The authorized but
unissued stock may be issued by the board of directors in one or more transactions. In this regard, our Amended Certificate of Incorporation grants the board of directors broad power to establish the
rights and preferences of authorized and unissued preferred stock. The issuance of shares of preferred stock pursuant to the board of directors' authority described above could decrease the amount of
earnings and assets available for distribution to holders of common stock and adversely affect the rights and powers, including voting rights, of such holders and may have the effect of delaying,
deferring or preventing a change of control. The board of directors does not currently intend to seek stockholder approval prior to any issuance of preferred stock, unless otherwise required by law.
Dissenters' rights of appraisal and payment
Under the DGCL, with certain exceptions, our stockholders have appraisal rights in connection with a merger or consolidation of us. Pursuant to
the DGCL, stockholders who properly request and perfect appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares as
determined by the Court of Chancery in the State of Delaware.
Stockholders' derivative actions
Under the DGCL, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action,
provided that the stockholder bringing the action is a holder of our shares at the time of the transaction to which the action relates or such stockholder's stock thereafter devolved by operation of
law.
Choice of forum
Our Amended Certificate of Incorporation provides that unless we consent to the selection of an alternative forum, the Court of Chancery of the
State of Delaware is the sole and 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 pursuant to the DGCL, our Amended Certificate of Incorporation or Amended By-Laws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Any person
or entity purchasing or otherwise acquiring any interest in our shares of common stock shall be deemed to have notice of and consented to the forum provisions in our Amended Certificate of
Incorporation.
Conflicts of interest
Delaware law permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to the
corporation or its officers, directors or stockholders. Our Amended Certificate of Incorporation, to the maximum extent permitted from time to time by Delaware law, renounces any interest or
expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities that are from time to time presented to
128
Table of Contents
certain
entities and individuals associated with us. Our Amended Certificate of Incorporation provides that, to the fullest extent permitted by law, Brookfield or any person affiliated with Brookfield
(including any non-employee director affiliated with Brookfield who serves as one of our officers in both his director and officer capacities) or his or her affiliates will not have any duty to
refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing
with us or our affiliates. In addition, to the fullest extent permitted by law, in the event that Brookfield or any person affiliated with Brookfield acquires knowledge of a potential transaction or
other business opportunity which may be a corporate opportunity for itself or himself or its or his affiliates or for us or our affiliates, such person will have no duty to communicate or offer such
transaction or business opportunity to us or any of our affiliates, may take any such opportunity for themselves or offer it to another person or entity and shall not be liable to us or any of our
affiliates, subsidiaries or stockholders for breach of any duty as a stockholder, director or officer or otherwise for pursuing or acquiring such opportunity.
Limitation of liability and indemnification of officers and directors
Our Amended Certificate of Incorporation provides that no director shall be personally liable to us or any of our stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL. Our Amended Certificate of Incorporation
and Amended By-Laws provide that we will indemnify, hold harmless and advance expenses to the fullest extent permitted by the DGCL, any person made or threatened to be made a party to any action or is
involved in a proceeding by reason of the fact that the person is or was our director or officer, or our director or officer who, while a director or officer, is or was serving at the request of the
company as a director, officer, employee, agent or manager of another corporation, partnership, limited liability company, joint venture, trust or
other enterprise or non-profit entity, including service with respect to an employee benefit plan. Our Amended By-Laws also provide that, subject to applicable law, the company may, by action of its
board of directors, grant rights to indemnification and advancement of expenses to persons other than its directors and officers with such scope and effect as the board of directors may then
determine. We intend to enter into customary indemnification agreements with each of our executive officers and directors that provide them, in general, with customary indemnification in connection
with their service to us or on our behalf.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
Listing
Our common stock listed on the NYSE under the symbol "EAF."
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Table of Contents
Shares eligible for future sale
We cannot predict the effect, if any, that sales of shares or availability of any shares for sale will have on the market price of our common
stock prevailing from time to time. Sales of substantial amounts of common stock (including shares issued on the exercise of options, warrants or convertible securities, if any) or the perception that
such sales could occur, could adversely affect the market price of our common stock and our ability to raise additional capital through a future sale of securities.
On
February 15, 2019, we had 290,537,612 shares of common stock issued and outstanding. All of the 17,500,000 shares of our common stock sold in this offering (or 20,125,000
shares if the underwriters exercise their option to purchase additional shares in full) will be freely tradable without restriction or further registration under the Securities Act unless such shares
are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. Upon completion of this offering, approximately 73% (or 72% if the underwriters exercise their option
to purchase additional shares in full) of our
outstanding common stock will be held by the selling stockholder. These shares will be "restricted securities" as that phrase is defined in Rule 144. Subject to certain contractual
restrictions, including the lock-up agreements described below, holders of restricted shares will be entitled to sell those shares in the public market if they qualify for an exemption from
registration under Rule 144 or any other applicable exemption under the Securities Act. Subject to the lock-up agreements described below and the provisions of Rules 144 and 701,
additional shares will be available for sale as set forth below.
Lock-up Agreements
We, our directors, our executive officers and the selling stockholder have agreed with the underwriters, subject to certain exceptions, not to
dispose of or hedge any of our common stock or securities convertible into or exercisable or exchangeable for shares of our common stock, file or cause to be filed a registration statement covering
shares of common stock or any securities that are convertible into, exercisable or exchangeable for any shares of our common stock, or publicly disclose the intention to do any of the foregoing,
during the period from the date of this prospectus continuing through the date 60 days after the date of this prospectus, except with the prior written consent of J.P. Morgan
Securities LLC and Credit Suisse Securities (USA) LLC. For additional information, including regarding certain exceptions to which this agreement is subject, see "Underwriting."
Rule 144
In general, under Rule 144 under the Securities Act, a person (or persons whose shares are aggregated) who is not deemed to have been an
affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including
any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A
non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the
provisions of Rule 144.
A
person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for
at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock or the
average weekly trading volume of our common stock during the four calendar weeks preceding such sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about us.
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Table of Contents
Rule 701
In general, under Rule 701 of the Securities Act, most of our employees, consultants or advisors who purchased shares from us in
connection with a qualified compensatory stock plan or other written agreement are eligible to resell those shares 90 days after the date of this prospectus in reliance on Rule 144, but
without compliance with the holding period or certain other restrictions contained in Rule 144.
Equity Plan
On May 22, 2018, we filed a registration statement on Form S-8 under the Securities Act to register the issuance of 15,000,000
shares of common stock under the Equity Plan and we may file one or more Form S-8 registration statements in the future to register the issuance of additional shares under any other stock plans
approved in the future. The registration statement on Form S-8 filed on May 22, 2018 became effective upon filing. All of the shares issued or to be issued upon the exercise of stock
options or settlement of other awards under our stock plans are or will be eligible for resale in the public market without restrictions, subject to Rule 144 limitations applicable to
affiliates and the lock-up agreements described elsewhere in this prospectus.
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Table of Contents
Material U.S. federal income tax considerations to non-U.S. holders
The following discussion is a summary of material U.S. federal income tax considerations generally applicable to the purchase, ownership and
disposition of our common stock by Non-U.S. Holders. A "Non-U.S. Holder" means a beneficial owner of our common stock that is (for U.S. federal income tax
purposes):
-
-
a nonresident alien individual,
-
-
a foreign corporation,
-
-
a foreign estate or foreign trust, or
-
-
a person that is otherwise not subject to U.S. federal income tax on a net income basis in respect of such common stock.
A
"Non-U.S. Holder" does not include an individual who is present in the United States for 183 days or more in the taxable year of disposition and is not otherwise a resident of
the United States for U.S. federal income tax purposes. If you are such an individual, you should consult your own tax advisors regarding the U.S. federal income tax consequences of the sale, exchange
or other disposition of our common stock.
This
discussion deals only with common stock held as a capital asset by Non-U.S. Holders who purchased common stock in this offering. This discussion does not cover all aspects of U.S.
federal income taxation that may be relevant to the purchase, ownership or disposition of our common stock by prospective investors in light of their specific facts and circumstances. In particular,
this discussion does not address all of the tax considerations that may be relevant to persons in special tax situations, including, but not limited to: a foreign government or governmental entity, a
dealer in securities or
currencies, a financial institution, a regulated investment company, a real estate investment trust, a tax-exempt organization, an insurance company, a person holding common stock as part of a
hedging, integrated, conversion or straddle transaction or a person deemed to sell common stock under the constructive sale provisions of the Code, a trader in securities that has elected the
mark-to-market method of accounting, an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes or owners of such entity or arrangement, a person that received such
common stock in connection with the performance of services, a pension fund or retirement account, a "controlled foreign corporation," a "passive foreign investment company," a corporation that
accumulates earnings to avoid U.S. federal income tax, a person that will hold shares of our common stock in connection with a U.S. trade or business or a U.S. permanent establishment, or a former
citizen or long-term resident of the United States.
This
section does not address any other U.S. federal tax considerations (such as Medicare, estate or gift tax) or any state, local or non-U.S. tax considerations. You should consult your
own tax advisors about the tax consequences of the purchase, ownership and disposition of our common stock in light of your own particular circumstances, including the tax consequences under state,
local, foreign and other tax laws and the possible effects of any changes in applicable tax laws.
Furthermore,
this summary is based on the tax laws of the United States, including the Code, existing and proposed regulations, and administrative and judicial interpretations, all as
currently in effect. Such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax
consequences different from those discussed below.
Dividends
If we make a distribution of cash or property with respect to our common stock, such distributions generally will constitute dividends for U.S.
federal income tax purposes to the extent of our current or
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accumulated
earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a
tax-free return of your investment, up to your tax basis in the common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in "Sale,
Exchange or Other Taxable Disposition of Common Stock." Any distributions will also be subject to the
discussions below under the headings "Foreign Account Tax Compliance Act" and "Information Reporting and Backup Withholding."
Dividends
paid to you generally will be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable tax treaty. Even if you are
eligible for a lower treaty rate, we and other payers will generally be required to withhold at a 30% rate (rather than the lower treaty rate) on dividend payments to you, unless you have furnished to
us or such other payer a valid Internal Revenue Service (or IRS) Form W-8BEN or IRS Form W-8BEN-E, as applicable, or other documentary evidence establishing your entitlement to the lower
treaty rate with respect to such payments and neither we nor our paying agent (or other payer) have actual knowledge or reason to know to the contrary.
If
you are eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty or otherwise, you may obtain a refund of any excess amounts withheld by
timely filing an appropriate claim for refund with the IRS. Investors are encouraged to consult with their own tax advisors regarding the possible implications of these withholding requirements on
their investment in the common stock.
Sale, exchange or other taxable disposition of common stock
You generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale, exchange or other taxable disposition of
shares of our common stock unless we are or have been a United States real property holding corporation for U.S. federal income tax purposes and you held, directly or indirectly, at any time during
the five-year period ending on the date of the disposition, more than 5% of our common stock.
We
are not and do not anticipate becoming a United States real property holding corporation for U.S. federal income tax purposes.
Investors
are encouraged to consult with their own tax advisors regarding the possible implications of these withholding requirements on their investment in the common stock and the
potential for a refund or credit in the case of any withholding tax.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (or FATCA) imposes withholding taxes on certain types of payments made to "foreign financial
institutions" (as specially defined under these rules to include many entities that may not typically be thought of as financial institutions) and certain other non-U.S. entities if certification,
information reporting and other specified requirements are not met. FATCA imposes a 30% withholding tax on "withholdable payments" if they are paid to a foreign financial institution or to a foreign
non-financial entity unless (i) the foreign financial institution undertakes certain diligence and reporting obligations and other specified requirements are satisfied or (ii) the
foreign non-financial entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner and other specified requirements
are satisfied. "Withholdable payments" will generally include dividends on our common stock. If the payee is a foreign financial institution, it must enter into an agreement with the U.S. Treasury
requiring, among other things, that it undertake to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts and withhold
30% on payments to account holders whose actions prevent it from complying with these reporting and other
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requirements.
An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Prospective investors should consult
their own tax advisors regarding this legislation.
Information reporting and backup withholding
We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the
country in which you reside under the provisions of an applicable income tax treaty. You may be subject to backup withholding for dividends paid to you unless you certify under penalty of perjury that
you are not a U.S. person or otherwise establish an exemption.
Proceeds
from the sale, exchange or other disposition of our common stock by a Non-U.S. Holder effected outside the United States through a non-U.S. office of a non-U.S. broker generally
will not be subject to information reporting and backup withholding, provided that the proceeds are paid to the Non-U.S. Holder outside the United States. However, proceeds from the sale, exchange or
other disposition of our common stock by a Non-U.S. Holder effected through a non-U.S. office of a non-U.S. broker with certain specified U.S. connections or a U.S. broker generally will be subject to
information reporting (but generally not to backup withholding), even if the proceeds are paid to such Non-U.S. Holder outside the United States, unless such Non-U.S. Holder certifies under penalty of
perjury that it is not a U.S. person (for instance, by providing an IRS Form W-8BEN or W-8BEN-E to the applicable withholding agent) or otherwise establishes an exemption. Proceeds from the
sale, exchange or other disposition of our common stock by a Non-U.S. Holder effected through a U.S. office of a broker generally will be subject to information reporting and backup withholding unless
such Non-U.S. Holder certifies under penalty of perjury that it is not a U.S. person (for instance, by providing an IRS Form W-8BEN or W-8BEN-E to the applicable withholding agent) or otherwise
establishes an exemption.
Any
amounts withheld under the backup withholding rules may be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely
furnished to the IRS.
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Underwriting
The selling stockholder is offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan
Securities LLC and Credit Suisse Securities (USA) LLC are acting as joint book running managers of the offering and as representatives of the underwriters. We and the selling stockholder
have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, the selling stockholder has agreed to sell to the underwriters,
and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares
of common stock listed next to its name in the following table:
|
|
|
Name
|
|
Number of
shares
|
J.P. Morgan Securities LLC
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
Citigroup Global Markets Inc.
|
|
|
RBC Capital Markets, LLC
|
|
|
HSBC Securities (USA) Inc.
|
|
|
BMO Capital Markets Corp.
|
|
|
|
|
|
Total
|
|
|
|
|
|
The
underwriters are committed to purchase all the common shares offered by the selling stockholder if they purchase any shares. The underwriting agreement also provides that if an
underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The
underwriters propose to offer the common shares directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that
price less a concession not
in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to
$ per share from the public offering price. After
the closing of the offering of the shares to the public, if all the common shares are not sold at the public offering price, the underwriters may change the offering price and the other selling terms.
Sales of shares made outside of the United States may be made by affiliates of the underwriters.
The
underwriters have an option to buy up to 2,625,000 additional shares of common stock from the selling stockholder to cover sales of shares by the underwriters which exceed the number
of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this option to purchase additional shares. If any shares are purchased with
this option to purchase additional shares, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
The
underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to the selling stockholder per share of common stock. The
underwriting fee is $ per share. The following table shows the per share and total underwriting
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discounts
and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
|
|
|
|
|
|
|
|
|
|
Without
option to
purchase
additional
shares
exercise
|
|
With full
option to
purchase
additional
shares
exercise
|
|
Per Share
|
|
$
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
We
estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately $1 million. In addition, we have agreed to reimburse the underwriters for up to $25,000 of reasonable expenses, application fees and the fees
and disbursements of counsel incurred in connection with the filing and clearance of this offering with the Financial Industry Regulatory Authority, Inc.
A
prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The
underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the
representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We,
our directors, our executive officers and the selling stockholder have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of our common stock
or securities convertible into or exercisable or exchangeable for shares of our common stock, file or cause to be filed a registration statement covering shares of common stock or any securities that
are convertible into, exercisable or exchangeable for any shares of our common stock, or publicly disclose the intention to do any of the foregoing, during the period from the date of this prospectus
continuing through the date 60 days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC and Credit Suisse Securities
(USA) LLC, subject to certain exceptions, including:
-
(A)
-
the
shares of our common stock to be sold in this offering;
-
(B)
-
the
issuance of shares of our common stock or other securities (including securities convertible into shares of our common stock) in connection with the acquisition
by us or any of our subsidiaries of the securities, businesses, properties or other assets of another person or entity or pursuant to any employee benefit plan assumed by us in connection with such
acquisition; or
-
(C)
-
the
issuance of shares of our common stock or other securities (including securities convertible into shares of our common stock) in connection with joint ventures,
commercial relationships or other strategic transactions;
provided
that, in the case of clauses (B) and (C), the aggregate number of shares of our common stock issued in all such acquisitions and transactions will not exceed 5% of our issued and
outstanding common stock on the closing date of this offering and any recipients of such shares of our common stock will deliver a lock-up agreement to the underwriters.
We
and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
Our
common stock is listed on the NYSE under the symbol "EAF."
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In
connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open
market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of
the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock
on the open market to cover positions created by short sales. Short sales may be "covered" shorts, which are short positions in an amount not greater than the underwriters' option to purchase
additional shares referred to above, or may be "naked" shorts, which are short positions in excess of that amount. The underwriters may close
out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the
underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to
purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open
market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the
position.
The
underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise
affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing
transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These
activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as
a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any
time. The underwriters may carry out these transactions on the NYSE, in the over the counter market or otherwise.
Selling restrictions
Other than in the United States, no action has been taken by us, the selling stockholder or the underwriters that would permit a public offering
of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Notice to prospective investors in the European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State)
with effect from and including the date on
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which
the Prospectus Directive is implemented in that Relevant Member State, no offer of shares may be made to the public in that Relevant Member State other than:
A. to
any legal entity which is a qualified investor as defined in the Prospectus Directive;
B. to
fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the
representatives; or
C. in
any other circumstances falling within Article 3(2) of the Prospectus Directive;
provided
that no such offer of shares shall require us or the representatives to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to
Article 16 of the Prospectus Directive and each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with
each of the underwriters and the Company that it is a "qualified investor" within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive.
In the case of any shares being offered to a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, each such financial intermediary will be deemed to have
represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their
offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant Member State to qualified investors as so
defined or in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.
For
the purposes of this provision, the expression "an offer of shares to the public" in relation to any shares in any Relevant Member State means the communication in any form and by
means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase shares, as the same may be varied in that Member State by any
measure implementing the Prospectus Directive in that Member State, and the expression "Prospectus Directive" means Directive 2003/71/EC (as amended, including by Directive 2010/73/EU) and includes
any relevant implementing measure in the Relevant Member State.
Notice to prospective investors in the United Kingdom
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may
only be directed at persons who are "qualified investors" (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within
Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (or the Order) and/or (ii) who are high net worth companies (or persons
to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons) or otherwise in
circumstances which have not resulted and will not result in an offer to the public of shares in the United Kingdom within the meaning of the Financial Services and Markets Act 2000.
Any
person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United
Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons.
Notice to prospective investors in Canada
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in
National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103
Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any
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resale
of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws. Securities legislation in certain
provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the
remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province or territory. The purchaser should refer to
any applicable provisions of the securities legislation of the purchaser's province or territory for particulars of these rights or consult with a legal advisor.
Pursuant
to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure
requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Notice to prospective investors in Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (or SIX) or on any other stock exchange
or regulated trading facility in Switzerland. This document does not constitute a prospectus within the meaning of, and has been prepared without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules
of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly
distributed or otherwise made publicly available in Switzerland.
Neither
this document nor any other offering or marketing material relating to the offering, the Company, or the shares has been or will be filed with or approved by any Swiss regulatory
authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (or FINMA), and the offer of
shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (or CISA). The investor protection afforded to acquirers of interests in collective
investment schemes under the CISA does not extend to acquirers of shares.
Notice to prospective investors in the Dubai International Financial Centre (or DIFC)
This prospectus relates to an Exempt Offer in accordance with the Markets Rules 2012 of the Dubai Financial Services Authority (or DFSA).
This document is intended for distribution only to persons of a type specified in the Markets Rules 2012 of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA
has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus supplement nor taken steps to verify the information set
forth herein and has no responsibility for this document. The securities to which this document relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the
securities offered should conduct their own due diligence on the securities. If you do not understand the contents of this document you should consult an authorized financial advisor.
In
relation to its use in the DIFC, this document is strictly private and confidential and is being distributed to a limited number of investors and must not be provided to any person
other than the original recipient, and may not be reproduced or used for any other purpose. The interests in the securities may not be offered or sold directly or indirectly to the public in the DIFC.
Notice to prospective investors in the United Arab Emirates
The shares have not been, and are not being, publicly offered, sold, promoted or advertised in the United Arab Emirates (including the Dubai
International Financial Centre) other than in compliance
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with
the laws of the United Arab Emirates (and the Dubai International Financial Centre) governing the issue, offering and sale of securities. Further, this prospectus does not constitute a public
offer of securities in the United Arab Emirates (including the Dubai International Financial Centre) and is not intended to be a public offer. This prospectus has not been approved by or filed with
the Central Bank of the United Arab Emirates, the Securities and Commodities Authority or the Dubai Financial Services Authority.
Notice to prospective investors in Australia
This prospectus:
-
-
does not constitute a product disclosure document or a prospectus under Chapter 6D.2 of the Corporations Act 2001 (Cth) (or the
Corporations Act);
-
-
has not been, and will not be, lodged with the Australian Securities and Investments Commission (or ASIC), as a disclosure document for the
purposes of the Corporations Act and does not purport to include the information required of a disclosure document under Chapter 6D.2 of the Corporations Act;
-
-
does not constitute or involve a recommendation to acquire, an offer or invitation for issue or sale, an offer or invitation to arrange the
issue or sale, or an issue or sale, of interests to a "retail client" (as defined in section 761G of the Corporations Act and applicable regulations) in Australia; and
-
-
may only be provided in Australia to select investors who are able to demonstrate that they fall within one or more of the categories of
investors, or Exempt Investors, available under section 708 of the Corporations Act.
The
shares may not be directly or indirectly offered for subscription or purchased or sold, and no invitations to subscribe for or buy the shares may be issued, and no draft or
definitive offering memorandum, advertisement or other offering material relating to any shares may be distributed in Australia, except where disclosure to investors is not required under
Chapter 6D of the Corporations Act or is otherwise in compliance with all applicable Australian laws and regulations. By submitting an application for the shares, you represent and warrant to
us that you are an Exempt Investor.
As
any offer of shares under this document will be made without disclosure in Australia under Chapter 6D.2 of the Corporations Act, the offer of those securities for resale in
Australia within 12 months may, under section 707 of the Corporations Act, require disclosure to investors under Chapter 6D.2 if none of the exemptions in section 708
applies to that resale. By applying for the shares you undertake to us that you will not, for a period of 12 months from the date of issue of the shares, offer, transfer, assign or otherwise
alienate those securities to investors in Australia except in circumstances where disclosure to investors is not required under Chapter 6D.2 of the Corporations Act or where a compliant
disclosure document is prepared and lodged with ASIC.
Notice to prospective investors in Japan
The shares have not been and will not be registered pursuant to Article 4, Paragraph 1 of the Financial Instruments and Exchange
Act. Accordingly, none of the shares nor any interest therein may be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any "resident" of Japan (which term as used herein
means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to or for
the benefit of a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act and any other
applicable laws, regulations and ministerial guidelines of Japan in effect at the relevant time.
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Notice to prospective investors in Hong Kong
The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to
"professional investors" as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in
the document being a "prospectus" as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within
the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of
issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional
investors" as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Notice to prospective investors in Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other
document or material in connection with the offer or sale, or invitation for subscription or purchase, of shares may not be circulated or distributed, nor may the shares be offered or sold, or be made
the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the
Securities and Futures Act, Chapter 289 of Singapore (or the SFA), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in
accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where
the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) a
corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a
trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an
accredited investor,
securities
(as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries' rights and interest (howsoever described) in that trust shall not be transferred within
six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:
(a) to
an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in
Section 275(1A) or Section 276(4)(i)(B) of the SFA;
(b) where
no consideration is or will be given for the transfer;
(c) where
the transfer is by operation of law;
(d) as
specified in Section 276(7) of the SFA; or
(e) as
specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.
Solely
for the purposes of its obligations pursuant to Sections 309B(1)(a) and 309B(1)(c) of the SFA, the issuer has determined, and hereby notifies all relevant persons (as
defined in Section 309A of
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the
SFA) that the shares are "prescribed capital markets products" (as defined in the Securities and Futures (Capital Markets Products) Regulations 2018) and Excluded Investment Products (as
defined in MAS Notice SFA 04-N12: Notice on the Sale of Investment Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products).
Notice to prospective investors in Bermuda
Shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda which
regulates the sale of securities in Bermuda.
Additionally,
non-Bermudian persons (including companies) may not carry on or engage in any trade or business in Bermuda unless such persons are permitted to do so under applicable
Bermuda legislation.
Notice to prospective investors in Saudi Arabia
This prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Offers of Securities
Regulations as issued by the board of the Saudi Arabian Capital Market Authority (or CMA) pursuant to resolution number 2-11-2004 dated 4 October 2004 as amended by resolution
number 1-28-2008, as amended (or the CMA Regulations). The CMA does not make any representation as to the accuracy or completeness of this document and expressly disclaims any liability
whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the
accuracy of the information relating to the securities. If you do not understand the contents of this document, you should consult an authorized financial adviser.
Notice to prospective investors in the British Virgin Islands
The shares are not being, and may not be offered to the public or to any person in the British Virgin Islands for purchase or subscription by or
on behalf of the Company. The shares may be offered to companies incorporated under the BVI Business Companies Act, 2004 (British Virgin Islands), (or BVI Companies), but only where the offer will be
made to, and received by, the relevant BVI Company entirely outside of the British Virgin Islands. This prospectus has not been, and will not be, registered with the Financial Services Commission of
the British Virgin Islands. No registered prospectus has been or will be prepared in respect of the shares for the purposes of the Securities and Investment Business Act, 2010 (or SIBA) or the Public
Issuers Code of the British Virgin Islands.
Notice to prospective investors in China
This prospectus does not constitute a public offer of shares, whether by sale or subscription, in the People's Republic of China (or the PRC).
The shares are not being offered or sold directly or indirectly in the PRC to or for the benefit of, legal or natural persons of the PRC.
Further,
no legal or natural persons of the PRC may directly or indirectly purchase any of the shares or any beneficial interest therein without obtaining all prior PRC's governmental
approvals that are
required, whether statutorily or otherwise. Persons who come into possession of this document are required by the issuer and its representatives to observe these restrictions.
Notice to prospective investors in Korea
The shares have not been and will not be registered under the Financial Investments Services and Capital Markets Act of Korea and the decrees
and regulations thereunder (or the FSCMA), and the shares have been and will be offered in Korea as a private placement under the FSCMA. None of the shares may be offered, sold or delivered directly
or indirectly, or offered or sold to any person for
142
Table of Contents
re-offering
or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to the applicable laws and regulations of Korea, including the FSCMA and the Foreign Exchange
Transaction Law of Korea and the decrees and regulations thereunder (or the FETL). The shares have not been listed on any of the securities exchanges in the world including, without limitation, the
Korea Exchange in Korea. Furthermore, the purchaser of the shares shall comply with all applicable regulatory requirements (including but not limited to requirements under the FETL) in connection with
the purchase of the shares. By the purchase of the shares, the relevant holder thereof will be deemed to represent and warrant that if it is in Korea or is a resident of Korea, it purchased the shares
pursuant to the applicable laws and regulations of Korea.
Notice to prospective investors in Malaysia
No prospectus or other offering material or document in connection with the offer and sale of the shares has been or will be registered with the
Securities Commission of Malaysia (or Commission) for the Commission's approval pursuant to the Capital Markets and Services Act 2007. Accordingly, this prospectus and any other document or material
in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of
an invitation for subscription or purchase, whether directly or indirectly, to persons in Malaysia other than (i) a closed end fund approved by the Commission; (ii) a holder of a Capital
Markets Services Licence; (iii) a person who acquires the shares, as principal, if the offer is on terms that the shares may only be acquired at a consideration of not less
than RM250,000 (or its equivalent in foreign currencies) for each transaction; (iv) an individual whose total net personal assets or total net joint assets with his or her spouse exceeds
RM3 million (or its equivalent in foreign currencies), excluding the value of the primary residence of the individual; (v) an individual who has a gross annual income exceeding RM300,000
(or its equivalent in foreign currencies) per annum in the preceding twelve months; (vi) an individual who, jointly with his or her spouse, has a gross annual income of RM400,000 (or its
equivalent in foreign currencies), per annum in the preceding twelve months; (vii) a corporation with total net assets exceeding RM10 million (or its equivalent in a foreign currencies)
based on the last audited accounts; (viii) a partnership with total net assets exceeding RM10 million (or its equivalent in foreign currencies); (ix) a bank licensee or insurance
licensee as defined in the Labuan Financial Services and Securities Act 2010; (x) an Islamic bank licensee or takaful licensee as defined in the Labuan Financial Services and Securities Act
2010; and (xi) any other person as may be specified by the Commission; provided that, in the each of the preceding categories (i) to (xi), the distribution of the shares is made by a
holder of a Capital Markets Services Licence who carries on the business of dealing in securities. The distribution in Malaysia of this prospectus is subject to Malaysian laws. This prospectus does
not constitute and may not be used for the purpose of public offering or an issue, offer for subscription or purchase, invitation to subscribe for or purchase any securities requiring the registration
of a prospectus with the Commission under the Capital Markets and Services Act 2007.
Notice to prospective investors in Taiwan
The shares have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant securities laws and
regulations and may not be sold, issued or offered within Taiwan through a public offering or in circumstances which constitutes an offer within the meaning of the Securities and Exchange Act of
Taiwan that requires a registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorised to offer, sell, give advice regarding or otherwise
intermediate the offering and sale of the shares in Taiwan.
143
Table of Contents
Other relationships
Certain of the underwriters and their respective affiliates have provided in the past to us and our affiliates and may provide from time to time
in the future certain commercial
banking, financial advisory, investment banking and other services for us and our affiliates in the ordinary course of their business, for which they have received and may continue to receive
customary fees and commissions. In addition, from time to time, certain of the underwriters and their respective affiliates may effect transactions for their own account or the account of customers,
and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future. An affiliate of J.P. Morgan Securities LLC
is the administrative agent, collateral agent, swingline lender and issuing bank under the 2018 Credit Agreement. J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC,
Citigroup Global Markets Inc., HSBC Securities (USA) Inc. and RBC Capital Markets, LLC, or affiliates of such institutions, are joint-lead arrangers and joint bookrunners under
the 2018 Credit Agreement. In addition, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., HSBC Securities (USA) Inc. and RBC Capital Markets, LLC, or
affiliates thereof, are lenders and issuing banks under the 2018 Credit Agreement.
144
Table of Contents
Legal matters
Certain legal matters relating to this offering will be passed upon for us by Cleary Gottlieb Steen & Hamilton LLP, New York, New
York. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York. The validity of the shares of common stock to be sold in this offering will be passed
upon by Cleary Gottlieb Steen & Hamilton LLP, New York, New York.
Index to financial statements
(Unless otherwise noted, all dollars are presented in thousands)
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the stockholders and the Board of Directors of GrafTech International Ltd.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GrafTech International Ltd. and its subsidiaries (the "Company") as of
December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows for each of the three years in the
period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We 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 Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. 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 statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 22, 2019
We have served as the Company's auditor since 2015.
F-2
Table of Contents
GrafTech International Ltd. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,880
|
|
$
|
13,365
|
|
Accounts and notes receivable, net of allowance for doubtful accounts of $1,129 as of December 31, 2018 and $1,097 as of December 31,
2017
|
|
|
248,286
|
|
|
116,841
|
|
Inventories
|
|
|
293,717
|
|
|
174,151
|
|
Prepaid expenses and other current assets
|
|
|
46,168
|
|
|
44,872
|
|
Current assets of discontinued operations
|
|
|
|
|
|
5,313
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
638,051
|
|
|
354,542
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
688,842
|
|
|
642,651
|
|
Less: accumulated depreciation
|
|
|
175,137
|
|
|
129,810
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
513,705
|
|
|
512,841
|
|
Deferred income taxes
|
|
|
71,707
|
|
|
30,768
|
|
Goodwill
|
|
|
171,117
|
|
|
171,117
|
|
Other assets
|
|
|
110,911
|
|
|
129,835
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,505,491
|
|
$
|
1,199,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
88,097
|
|
$
|
69,110
|
|
Short-term debt
|
|
|
106,323
|
|
|
16,474
|
|
Accrued income and other taxes
|
|
|
82,255
|
|
|
9,737
|
|
Other accrued liabilities
|
|
|
50,452
|
|
|
53,226
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
3,412
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
327,127
|
|
|
151,959
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,050,311
|
|
|
322,900
|
|
Other long-term obligations
|
|
|
72,519
|
|
|
68,907
|
|
Deferred income taxes
|
|
|
45,825
|
|
|
41,746
|
|
Related party payable
|
|
|
86,478
|
|
|
|
|
Long-term liabilities of discontinued operations
|
|
|
|
|
|
376
|
|
Commitments and ContingenciesNotes 11 and 13
|
|
|
|
|
|
|
|
Stockholders' (deficit) equity:
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01, 300,000,000 shares authorized, none issued
|
|
|
|
|
|
|
|
Common stock, par value $.01, 3,000,000,000 shares authorized, 290,537,612 and 302,225,923 shares issued and outstanding as of December 31, 2018 and
December 31, 2017*, respectively
|
|
|
2,905
|
|
|
3,022
|
|
Additional paidin capital
|
|
|
819,622
|
|
|
851,315
|
|
Accumulated other comprehensive (loss) income
|
|
|
(5,800
|
)
|
|
20,289
|
|
Accumulated deficit
|
|
|
(1,893,496
|
)
|
|
(261,411
|
)
|
|
|
|
|
|
|
|
|
Total stockholders' (deficit) equity
|
|
|
(1,076,769
|
)
|
|
613,215
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
1,505,491
|
|
$
|
1,199,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
See
Note 1, "Business and Summary of Significant Accounting Policies" and Note 15, "Shareholders' Equity"
See accompanying Notes to the Consolidated Financial Statements
F-3
Table of Contents
GrafTech International Ltd. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Dollars in thousands, except
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net sales
|
|
$
|
1,895,910
|
|
$
|
550,771
|
|
$
|
437,963
|
|
Cost of sales
|
|
|
705,698
|
|
|
461,545
|
|
|
449,228
|
|
Additions to lower of cost or market inventory reserve
|
|
|
|
|
|
1,509
|
|
|
18,974
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
1,190,212
|
|
|
87,717
|
|
|
(30,239
|
)
|
Research and development
|
|
|
2,129
|
|
|
3,456
|
|
|
2,534
|
|
Selling and administrative expenses
|
|
|
62,032
|
|
|
52,506
|
|
|
58,515
|
|
Impairment of long-lived assets and goodwill
|
|
|
|
|
|
|
|
|
2,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,126,051
|
|
|
31,755
|
|
|
(94,131
|
)
|
Other expense (income), net
|
|
|
3,361
|
|
|
(2,104
|
)
|
|
(4,266
|
)
|
Related party Tax Receivable Agreement expense
|
|
|
86,478
|
|
|
|
|
|
|
|
Interest expense
|
|
|
135,061
|
|
|
30,823
|
|
|
26,914
|
|
Interest income
|
|
|
(1,657
|
)
|
|
(395
|
)
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision (benefit) for income taxes
|
|
|
902,808
|
|
|
3,431
|
|
|
(116,421
|
)
|
Provision (benefit) for income taxes
|
|
|
48,920
|
|
|
(10,781
|
)
|
|
(7,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
853,888
|
|
|
14,212
|
|
|
(108,869
|
)
|
Income (loss) from discontinued operations, net of tax*
|
|
|
331
|
|
|
(6,229
|
)
|
|
(126,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
854,219
|
|
$
|
7,983
|
|
$
|
(235,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.87
|
|
$
|
0.03
|
|
$
|
(0.78
|
)
|
Net Income (loss) from continuing operations per share
|
|
|
2.87
|
|
|
0.05
|
|
|
(0.36
|
)
|
Weighted average shares outstanding
|
|
|
297,748,327
|
|
|
302,225,923
|
|
|
302,225,923
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
2.87
|
|
|
0.03
|
|
|
(0.78
|
)
|
Diluted net income (loss) from continuing operations per share
|
|
|
2.87
|
|
|
0.05
|
|
|
(0.36
|
)
|
Weighted average diluted shares outstanding
|
|
|
297,753,770
|
|
|
302,225,923
|
|
|
302,225,923
|
|
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
854,219
|
|
$
|
7,983
|
|
$
|
(235,843
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax of ($288), $0, and $0, respectively
|
|
|
(18,391
|
)
|
|
23,028
|
|
|
2,574
|
|
Commodities and foreign currency derivatives and other, net of tax of $802, $0, and ($20), respectively
|
|
|
(7,698
|
)
|
|
4,819
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
(26,089
|
)
|
|
27,847
|
|
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
828,130
|
|
$
|
35,830
|
|
$
|
(233,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
Loss on discontinued operations includes a pretax impairment charge of $119,907 in the year ended December 31,
2016. See Note 3, "Discontinued Operations and Related Assets Held for Sale," for details.
See accompanying Notes to the Consolidated Financial Statements
F-4
Table of Contents
GrafTech International Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
854,219
|
|
$
|
7,983
|
|
$
|
(235,843
|
)
|
Adjustments to reconcile net income (loss) to cash provided by operations:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
66,413
|
|
|
66,443
|
|
|
82,891
|
|
Impairment of long-lived assets
|
|
|
|
|
|
5,300
|
|
|
122,750
|
|
Related party Tax Receivable Agreement expense
|
|
|
86,478
|
|
|
|
|
|
|
|
Deferred income tax provision
|
|
|
(37,078
|
)
|
|
(15,695
|
)
|
|
(12,062
|
)
|
Loss on extinguishment of debt
|
|
|
23,827
|
|
|
|
|
|
|
|
Non-cash interest expense
|
|
|
5,320
|
|
|
6,805
|
|
|
6,551
|
|
Other charges, net
|
|
|
15,761
|
|
|
(9,607
|
)
|
|
(735
|
)
|
Net change in working capital*
|
|
|
(177,754
|
)
|
|
(20,004
|
)
|
|
68,630
|
|
Change in long-term assets and liabilities
|
|
|
(583
|
)
|
|
(4,652
|
)
|
|
(9,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
836,603
|
|
|
36,573
|
|
|
22,815
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(68,221
|
)
|
|
(34,664
|
)
|
|
(27,858
|
)
|
Cash received from divestitures
|
|
|
|
|
|
27,254
|
|
|
15,889
|
|
Derivative instrument settlements, net
|
|
|
|
|
|
|
|
|
377
|
|
Proceeds from the sale of fixed assets
|
|
|
926
|
|
|
5,211
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(67,295
|
)
|
|
(2,199
|
)
|
|
(10,471
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term debt (reductions) borrowings, net
|
|
|
(12,607
|
)
|
|
5,110
|
|
|
7,363
|
|
Credit Facility borrowings
|
|
|
|
|
|
77,000
|
|
|
56,000
|
|
Credit Facility reductions
|
|
|
(45,692
|
)
|
|
(114,839
|
)
|
|
(70,469
|
)
|
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
|
|
|
(225,000
|
)
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(56,372
|
)
|
|
(266
|
)
|
|
(289
|
)
|
Dividends paid to non-related-party
|
|
|
(55,616
|
)
|
|
|
|
|
|
|
Dividends paid to related-party
|
|
|
(1,488,649
|
)
|
|
|
|
|
|
|
Related-party promissory note repayment
|
|
|
(750,000
|
)
|
|
|
|
|
|
|
Refinancing fees and debt issuance costs
|
|
|
(27,326
|
)
|
|
|
|
|
(922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(731,044
|
)
|
|
(32,995
|
)
|
|
(8,317
|
)
|
Net change in cash and cash equivalents
|
|
|
38,264
|
|
|
1,379
|
|
|
4,027
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,749
|
)
|
|
376
|
|
|
656
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,365
|
|
|
11,610
|
|
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
49,880
|
|
$
|
13,365
|
|
$
|
11,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the periods for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
108,006
|
|
$
|
25,277
|
|
$
|
23,578
|
|
Income taxes
|
|
|
21,444
|
|
|
3,467
|
|
|
3,329
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
Dividend payablePromissory Note**
|
|
|
750,000
|
|
|
|
|
|
|
|
* Net change in working capital due to the following components:
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable, net
|
|
$
|
(139,180
|
)
|
$
|
(29,755
|
)
|
$
|
3,432
|
|
Inventories
|
|
|
(126,355
|
)
|
|
(15,649
|
)
|
|
53,548
|
|
Prepaid expenses and other current assets
|
|
|
7,116
|
|
|
(10,565
|
)
|
|
(1,424
|
)
|
Income taxes payable
|
|
|
67,054
|
|
|
2,762
|
|
|
313
|
|
Accounts payable and accruals
|
|
|
15,724
|
|
|
33,317
|
|
|
12,686
|
|
Interest payable
|
|
|
(2,113
|
)
|
|
(114
|
)
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in working capital
|
|
$
|
(177,754
|
)
|
$
|
(20,004
|
)
|
$
|
68,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
**
-
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 7,
"Debt and Liquidity," for details.
See accompanying Notes to the Consolidated Financial Statements
F-5
Table of Contents
GrafTech International Ltd. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
|
302,225,923
|
|
$
|
3,022
|
|
$
|
851,315
|
|
$
|
(10,257
|
)
|
$
|
(33,551
|
)
|
$
|
810,529
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235,843
|
)
|
|
(235,843
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and foreign currency derivatives income (loss), net of tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and foreign currency derivatives reclassification adjustments, net of tax of ($20)
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
125
|
|
Foreign currency translation adjustments, net of tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
2,699
|
|
|
|
|
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
302,225,923
|
|
$
|
3,022
|
|
$
|
851,315
|
|
$
|
(7,558
|
)
|
$
|
(269,394
|
)
|
|
577,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,983
|
|
|
7,983
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity and foreign currency derivatives income (loss), net of tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
4,819
|
|
|
|
|
|
4,819
|
|
Commodity and foreign currency derivatives reclassification adjustments, net of tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and foreign currency derivatives income (loss), net of tax of $715
|
|
|
|
|
|
|
|
|
|
|
|
(6,866
|
)
|
|
|
|
|
(6,866
|
)
|
Commodity and foreign currency 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,488,649
|
)
|
|
(1,488,649
|
)
|
Related-party promissory note repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(750,000
|
)
|
|
(750,000
|
)
|
Dividends paid to non-related party stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,616
|
)
|
|
(55,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
|
290,537,612
|
|
$
|
2,905
|
|
$
|
819,622
|
|
$
|
(5,800
|
)
|
$
|
(1,893,496
|
)
|
$
|
(1,076,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements
F-6
Table of Contents
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 a leading manufacturer of high quality graphite electrode products essential to the
production of electric arc furnace steel and other ferrous and non-ferrous metals. References herein to "GTI," "we," "our," or "us" refer collectively to GrafTech International Ltd. and its
subsidiaries. On 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 and needle coke products. Needle coke is the key raw
material to producing graphite electrodes. The Company's vision is to provide the highest quality graphite electrodes at the lowest cost while providing the best customer service all while striving to
be the lowest cost producer.
We
previously operated an Engineered Solutions business segment. See Note 3, "Discontinued Operations and Assets Held for Sale," for further information. All results from the
Engineered Solutions business have been excluded from continuing operations, unless otherwise indicated.
Summary of Significant Accounting Policies
The Consolidated Financial Statements include the financial statements of GrafTech International Ltd. and its wholly 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 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 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 was recognized when they met four basic criteria (1) persuasive evidence of an arrangement existed,
(2) delivery had occurred, (3) the amount was determinable and (4) collection was reasonably assured. Sales were recognized when both title and the risks and rewards of ownership
were transferred to the customer or services had been rendered and fees had been earned in accordance with the contract.
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
F-7
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
be
entitled to receive in exchange for these goods. See Note 2, "Revenue from Contracts with 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.
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 sales or other expense (income),
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:
|
|
|
|
|
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 $53.5 million, $50.4 million, and $63.4 million in 2018, 2017 and 2016, respectively. Capital expenditures within accounts payable totaled
$13.7 million and $13.6 as of December 31, 2018 and 2017, 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
Judgment 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
F-8
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
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. We had capitalized bank fees of
$24.3 million and $0.4 million as of December 31, 2018 and 2017, 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 $3.5 million and $0.3 million and
$0.2 million in 2018, 2017 and 2016, 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 purchases 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 other current and long-term assets and other current and long-term liabilities in the consolidated balance
sheet. We also formally assess, both at inception and at least quarterly thereafter, 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.
F-9
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
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 may be designated as Cash-Flow or Fair Value hedges to the extent that they are effective and are accounted for as described in section above ("Derivative Financial
Instruments"). For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in Cost of Sales 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 have entered into derivative contracts for refined oil products. These contracts are entered into to protect against the risk that eventual
cash flows related to these products will be adversely affected by future changes in prices. 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 income (loss) in the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from
settlement are recognized in accumulated other comprehensive income (loss) and are recorded in cost of sales on the Consolidated Statements of Operations when the underlying hedged item is realized.
Research and Development
Expenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as
incurred.
Income Taxes
We file a consolidated United States ("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.
F-10
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
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 14, "Income Taxes," for more information.
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 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.
Additional
information with respect to benefits plans is set forth in Note 12, "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
F-11
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
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
$12.4 million, $8.0 million and $8.3 million in 2018, 2017 and 2016, 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 $4.2 million as of December 31, 2018 and $2.1 million as of December 31, 2017. 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.
For
our Mexican, Swiss 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 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) in other (income) expense, net, on the Consolidated Statements of Operations.
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,
F-12
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
impairment
testing is performed annually or more frequently if circumstances indicate that impairment may have occurred. We perform the annual goodwill impairment test 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 - 10
|
Technology and know-how
|
|
5 - 9
|
Customer related intangible
|
|
5 - 14
|
Additional
information about goodwill and other intangibles is set forth in Note 6 "Goodwill and Other Intangible 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 time estimated to lapse until the next scheduled overhaul of the applicable storage or processing unit. Under this policy $9.8 million was deferred in 2018 and
no costs were deferred in 2017. Amortization of deferred maintenance costs totaled $3.1 million, $3.3 million and $7.0 million in 2018, 2017 and 2016, respectively.
Earnings per share
The calculation of basic earnings per share is based on the number of common shares outstanding after giving effect to the stock split effected
on April 12, 2018 and common stock repurchase on
F-13
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
August 13,
2018. 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 16,
"Earnings Per Share," for further details.
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," for further
details.
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. See Note 18, "Subsequent Events," for further details.
Recent Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with
Customers
(Topic 606) . The Company adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective
on January 1, 2018 using the modified retrospective method. Please see Note 2, "Revenue from Contracts with Customers," for the required disclosures related to the impact of adopting
this standard and a discussion of the Company's updated policies related to revenue recognition.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230), Classification of Certain Cash Receipts and
Payments,clarifying guidance on the classification of certain
F-14
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(1) Business and Summary of Significant Accounting Policies (Continued)
cash
receipts and payments in the statement of cash flows. The adoption of ASU 2016-15 on January 1, 2018 did not have a material impact on our consolidated financial statements.
In
March 2017, the FASB issued ASU No. 2017-07,
Compensation-Retirement Benefits
(Topic 715). This standard requires an entity to
report the service cost component in the same line item as other compensation costs. The other components of net (benefit) cost, including our annual mark-to-market remeasurement, will be presented in
the income statement separately from the service cost component and outside a subtotal of income from operations. The adoption of ASU No. 2017-07 on January 1, 2018 changed the
presentation of benefit expenses, but did not have a material impact on our consolidated financial statements. The components of the net (benefit) cost are shown in Note 12, "Retirement Plans
and Postretirement Benefits." The following table summarizes the adjustments made to conform prior period classifications to the new guidance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
For the Year Ended December 31, 2016
|
|
|
|
(dollars in thousands)
|
|
|
|
As
Reported
|
|
Effect of
Accounting
Change
|
|
As
Adjusted
|
|
As
Reported
|
|
Effect of
Accounting
Change
|
|
As
Adjusted
|
|
Cost of Sales
|
|
$
|
461,339
|
|
$
|
206
|
|
$
|
461,545
|
|
$
|
448,016
|
|
$
|
1,212
|
|
$
|
449,228
|
|
Research and development
|
|
|
2,951
|
|
|
505
|
|
|
3,456
|
|
|
2,399
|
|
|
135
|
|
|
2,534
|
|
Selling and administrative expenses
|
|
|
49,479
|
|
|
3,027
|
|
|
52,506
|
|
|
57,784
|
|
|
731
|
|
|
58,515
|
|
Other (income) expense, net
|
|
|
1,634
|
|
|
(3,738
|
)
|
|
(2,104
|
)
|
|
(2,188
|
)
|
|
(2,078
|
)
|
|
(4,266
|
)
|
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). Under this new
guidance, a company will now 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 plans to adopt ASU No. 2016-02 on January 1, 2019, using the modified retrospective approach with the option of not restating comparative prior
periods presented in the financial statements. Under this method, we will recognize the effects of applying ASC 842 as a cumulative-effect adjustment to the opening balance of retained earnings as of
the effective date of adoption of January 1, 2019. The Company has completed its evaluation of the contracts. We anticipate additional assets and liabilities of approximately $10 million
to be recorded as a result with no material adjustment to retained earning required.
In
January 2017, the FASB issued ASU No. 2017-04,
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.
F-15
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(2) Revenue from Contracts with Customers
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
delivery of the Company's goods and will provide financial statement readers with enhanced disclosures. The reported results for 2018 reflect the application of ASC 606 guidance while the reported
results for 2017 and 2016 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 date of initial application or only to contracts that are not complete as of that date. We elected to apply the modified retrospective
method to contracts that are not complete as of the date of initial application. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of
January 1, 2018 was to be recorded as an adjustment to accumulated deficit as of the adoption date. As a result of 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
Company sells the majority of its products directly to steel manufacturers located in various jurisdictions. The Company's contracts consist of longer-term take-or-pay sales
contracts of graphite electrodes with terms of up to five years and short-term purchase orders (deliveries within one year). Collectability is assessed based on the customer's ability and intention to
pay, reviewing a variety of factors 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
manufacturing processes, such as graphite powders, naphta and gasoil.
Given
their nature, the Company's performance obligations are satisfied at a point in time when control of the 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
F-16
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(2) Revenue from Contracts with Customers (Continued)
activity
instead of as a distinct performance obligation, and outbound freight cost is accrued when the product delivery promises are satisfied.
The
transaction price is determined based on the consideration 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 Company 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 cumulative 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 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
Company expenses sales commissions as earned as their amortization period would not extend beyond the year in which they are incurred. These costs are recorded within selling and
administrative expense.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type of product and contract for 2018:
|
|
|
|
|
|
|
For the Year Ended
December 31, 2018
|
|
|
|
(Dollars in thousands)
|
|
Graphite ElectrodesThree-to-five-year contracts
|
|
$
|
1,341,557
|
|
Graphite ElectrodesShort-term contracts
|
|
|
500,834
|
|
By-products
|
|
|
53,519
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,895,910
|
|
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, 2018, had the previous revenue guidance still been in effect.
F-17
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(2) Revenue from Contracts with Customers (Continued)
Contract Balances
Receivables, net of allowances for doubtful accounts, were $248.3 million as of December 31, 2018 and $116.8 million as of
December 31, 2017. Accounts receivables are recorded when the right to consideration becomes unconditional. Payment terms on invoices range from 30 to 120 days depending on the customary
business practices of the jurisdictions in which we do business.
Certain
short-term and longer-term sales contracts require up-front payments prior to the Company's fulfillment of any performance obligation. These contract liabilities are recorded as
current or long-term deferred revenue, depending on the lag between the pre-payment and the expected delivery of the related products. Additionally, under ASC 606, deferred revenue originates from
contracts where the allocation of the transaction price to the performance obligations based on their relative stand-alone selling prices results in the timing of revenue recognition being different
from the timing of the invoicing. In this case, deferred revenue is amortized into revenue based on the transaction price allocated to the remaining performance obligations.
Current
deferred revenue is included in "Other accrued liabilities" and long-term deferred revenue is included in "Other long-term obligations" on the Consolidated Balance Sheets. The
following table provides information about deferred revenue from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
Current
deferred
revenue
|
|
Long-Term
deferred
revenue
|
|
|
|
(Dollars in thousands)
|
|
Balance as of December 31, 2017
|
|
$
|
20,784
|
|
$
|
|
|
Increases due to billings
|
|
|
15,548
|
|
|
8,241
|
|
Revenue recognized
|
|
|
(30,803
|
)
|
|
|
|
Foreign currency impact
|
|
|
(149
|
)
|
|
(525
|
)
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
5,380
|
|
$
|
7,716
|
|
Transaction Price Allocated to the Remaining Performance Obligations
The following table presents estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied
(or partially unsatisfied) at the end of the reporting 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)
|
|
2019
|
|
$
|
1,404,618
|
|
2020
|
|
|
1,327,449
|
|
2021
|
|
|
1,172,536
|
|
2022
|
|
|
1,127,105
|
|
Thereafter
|
|
|
8,715
|
|
|
|
|
|
|
Total
|
|
$
|
5,040,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(2) Revenue from Contracts with Customers (Continued)
In
addition to the expected remaining revenue to be recognized with the longer-term sales contracts, the Company recorded $1,341.6 million of revenue pursuant to these contracts
in the twelve months ended December 31, 2018.
(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 its 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 its divestiture represented a strategic
shift for the Company.
During
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 $120 million to align the carrying value with estimated fair value. We continued to update this estimate and during 2017, we further
reduced the estimated fair value by $5.3 million based upon current information at that time.
On
November 30, 2016, we completed the sale of our Fiber Materials Inc. ("Fiber Materials") 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 proceeds based on the earnings of the Fiber Materials
business over the 24 months following the transaction. We have elected to record this contingent consideration as it is realized and accordingly, it has not been recognized to date. Based on
the 2017 and preliminary 2018 results of Fiber Materials, we do not expect any material additional proceeds from this contingent consideration.
On
July 3, 2017, we completed the sale of our Advanced Energy Technologies ("AET") business. AET was a product line within our Engineered Solutions business that had been
classified as held for sale since the second quarter of 2016. The sale resulted in cash proceeds of $28.5 million.
On
September 30, 2017, we completed the sale of the majority of the U.S. assets of our GrafTech Advanced Graphite Materials ("GAGM") business, which was a component of our
Engineered Solutions business. The sale of the Italian GAGM assets closed on October 5, 2017. In the jurisdictions where the GAGM assets were not acquired, we initiated the wind-down of the
business. The sale was structured as a non-cash transaction with the buyer assuming certain liabilities associated with the assets acquired. In addition, GrafTech retained certain current assets of
GAGM, mostly receivables, which were substantially realized in the fourth quarter of 2017.
As
a result of the sales described above, we recorded a gain of $6.1 million in 2017. The disposition of the Engineered Solutions business is now substantially complete and in
accordance with our Credit Facility, all cash proceeds from these sales were used to pay down our revolving facility and term loan.
F-19
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(3) Discontinued Operations and Related Assets Held for Sale (Continued)
As
of December 31, 2018, we have ceased reporting discontinued operations and have included all remaining assets and liabilities within continuing operations.
The
following tables summarize the results of the Engineered Solutions business segment, reclassified as discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Net sales
|
|
$
|
2,574
|
|
$
|
82,299
|
|
$
|
115,336
|
|
Cost of sales
|
|
|
3,310
|
|
|
74,723
|
|
|
98,440
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(736
|
)
|
|
7,576
|
|
|
16,896
|
|
Research and development
|
|
|
|
|
|
1,429
|
|
|
3,145
|
|
Selling and administrative expenses
|
|
|
(628
|
)
|
|
12,239
|
|
|
19,022
|
|
(Gain) loss on sale of assets
|
|
|
(508
|
)
|
|
(6,091
|
)
|
|
198
|
|
Rationalizations
|
|
|
|
|
|
(35
|
)
|
|
(405
|
)
|
Impairment
|
|
|
|
|
|
5,300
|
|
|
119,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
(5,266
|
)
|
|
(124,971
|
)
|
Other expense (income)
|
|
|
30
|
|
|
(115
|
)
|
|
(66
|
)
|
Interest expense
|
|
|
|
|
|
1,133
|
|
|
3,258
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
|
|
370
|
|
|
(6,284
|
)
|
|
(128,163
|
)
|
Benefit for income taxes on discontinued operations
|
|
|
(39
|
)
|
|
(55
|
)
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
331
|
|
$
|
(6,229
|
)
|
$
|
(126,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) from discontinued operations per share
|
|
$
|
|
|
$
|
(0.02
|
)
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
significant components of our Statements of Cash Flows for discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Depreciation and amortization
|
|
$
|
|
|
$
|
2,418
|
|
$
|
5,277
|
|
Impairment
|
|
|
|
|
|
5,300
|
|
|
119,907
|
|
(Gain) loss on sale of assets
|
|
|
(508
|
)
|
|
(6,091
|
)
|
|
198
|
|
Net change in inventory
|
|
|
502
|
|
|
15,217
|
|
|
(917
|
)
|
Cash received from divestitures
|
|
|
|
|
|
27,254
|
|
|
15,889
|
|
Credit facility reductions
|
|
|
|
|
|
(27,254
|
)
|
|
(15,889
|
)
|
Deferred income taxes
|
|
|
40
|
|
|
(55
|
)
|
|
(1,189
|
)
|
Capital expenditures
|
|
|
|
|
|
558
|
|
|
4,713
|
|
F-20
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(3) Discontinued Operations and Related Assets Held for Sale (Continued)
The
following table summarizes the carrying value of the assets and liabilities of discontinued operations as of December 31, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2018
|
|
As of
December 31,
2017
|
|
|
|
(Dollars in thousands)
|
|
Assets of discontinued operations:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
$
|
3,351
|
|
Inventories
|
|
|
|
|
|
502
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
1,137
|
|
Net property, plant and equipment
|
|
|
|
|
|
226
|
|
Other assets
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
|
|
$
|
5,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
$
|
512
|
|
Accrued income and other taxes
|
|
|
|
|
|
158
|
|
Other accrued liabilities
|
|
|
|
|
|
2,742
|
|
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations
|
|
|
|
|
|
3,412
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
|
|
$
|
3,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Stock Based and Other Management Compensation
Our Omnibus Equity Incentive Plan permits the granting of options, and other stock-based awards (including restricted stock units and deferred share units). As of December 31,
2018, 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.
During
2018 our Board of Directors granted 979,790 stock options, 42,243 deferred share units and 6,740 restricted stock units under our Omnibus Equity Incentive Plan.
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 no stock-based compensation expense recognized in
2017 and 2016.
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.
F-21
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(4) Stock Based and Other Management Compensation (Continued)
Deferred Share and Restricted Stock Units.
Deferred share units represent one share of our common stock and will be delivered as shares
of our common
stock when the recipient ceases to provide services to the Company. Compensation expense for deferred share units and restricted stock share awards is based on the closing price of our common stock on
the date of grant. The weighted average grant date fair value of deferred share units and restricted stock units was approximately $12.88 per share at December 31, 2018.
Deferred
share units and restricted stock unit awards activity under the Omnibus Equity Incentive Plan for 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding unvested as of January 1, 2018
|
|
|
|
|
$
|
|
|
Granted
|
|
|
48,983
|
|
|
13.94
|
|
Vested
|
|
|
(21,413
|
)
|
|
15.29
|
|
|
|
|
|
|
|
|
|
Outstanding unvested as of December 31, 2018
|
|
|
27,570
|
|
$
|
12.88
|
|
During
2018, we granted 48,983 shares of deferred share units and restricted stock units to certain directors, officers and employees at prices ranging from $15.00 to $19.44. Of the
total deferred share units granted, 21,413 were granted to our Board of Directors and vested immediately upon grant. The remaining deferred share units and restricted stock units vest over a period of
two to five years.
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 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. The weighted average assumptions used in our Black-Scholes option-pricing model for options granted in 2018 are:
|
|
|
|
|
For the Year
Ended
December 31,
2018
|
Dividend yield
|
|
1.70% - 2.27%
|
Expected volatility
|
|
45%
|
Risk-free interest rate
|
|
2.84% - 2.98%
|
Expected term in years
|
|
6.5 years
|
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.
F-22
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(4) Stock Based and Other Management Compensation (Continued)
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, 2018, have a weighted average remaining contractual life of 9.3 years years, a weighted average remaining vesting period of 2.3 years, and an aggregate intrinsic
value of zero. There were no options exercised during 2018.
Stock
options outstanding and exercisable under our plans at December 31, 2018 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
|
|
$15.00 - $20.00
|
|
|
968,720
|
|
|
9.3
|
|
$
|
15.68
|
|
|
|
|
$
|
|
|
Stock
option awards activity under the Omnibus Equity Incentive Plan for 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding unvested as of January 1, 2018
|
|
|
|
|
$
|
|
|
Granted
|
|
|
979,790
|
|
|
15.67
|
|
Forfeited
|
|
|
(11,070
|
)
|
|
15.00
|
|
|
|
|
|
|
|
|
|
Outstanding unvested as of December 31, 2018
|
|
|
968,720
|
|
$
|
15.68
|
|
As
of December 31, 2018, we have 193,744 options expected to vest in the next year. No options were exercisable as of December 31, 2018.
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 earnings before income taxes and achieving cash flow targets and, to a lesser extent, strategic
targets. The balance of our accrued liability for ICP was $10.4 million at December 31, 2018 and $8.9 million as of December 31, 2017.
F-23
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(5) Segment Reporting
We previously operated two reportable business segments, Industrial Materials and Engineered Solutions. 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. Accordingly, the Engineered Solutions business qualified as held for sale status and the related results have
been excluded from continuing operations. See Note 3, "Discontinued Operations and Related Assets Held for Sale," for significant components of the results of our Engineered Solutions segment.
Our
Industrial Materials segment manufactures high quality graphite electrodes essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals.
Petroleum needle coke, a crystalline form of carbon derived from decant oil, is the primary raw material used in the production of graphite electrodes. We utilize substantially all the needle coke
that we produce internally to manufacture our graphite electrodes and as a result more than 95% of our revenues from external customers are derived from the sale of graphite electrodes and graphite
electrode by-products from our manufacturing processes.
In
2018, one customer accounted for more than 10% of our net sales. Due to the increased demand for our products, 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.
The
following tables summarize information as to our continuing operations in different geographic areas.
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
429,599
|
|
$
|
103,890
|
|
$
|
74,526
|
|
Americas
|
|
|
367,561
|
|
|
129,103
|
|
|
116,944
|
|
Asia Pacific
|
|
|
131,578
|
|
|
46,329
|
|
|
41,302
|
|
Europe, Middle East, Africa
|
|
|
967,172
|
|
|
271,449
|
|
|
205,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,895,910
|
|
$
|
550,771
|
|
$
|
437,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Long-lived assets(a):
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
169,301
|
|
$
|
177,298
|
|
Mexico
|
|
|
146,790
|
|
|
147,959
|
|
Brazil
|
|
|
3,320
|
|
|
3,547
|
|
France
|
|
|
91,022
|
|
|
80,035
|
|
Spain
|
|
|
103,121
|
|
|
103,819
|
|
Other countries
|
|
|
151
|
|
|
183
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
513,705
|
|
$
|
512,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Long-lived
assets represent fixed assets, net of accumulated depreciation.
F-24
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(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. For the years ended
December 31, 2018 and 2017 an assessment for potential impairment was performed and an impairment adjustment was not required.
The
following table represents the changes in the carrying value of goodwill and intangibles from December 31, 2016 through December 31, 2018:
|
|
|
|
|
|
|
Total
|
|
|
|
(Dollars in Thousands)
|
|
Balance as of December 31, 2016
|
|
$
|
171,117
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
171,117
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
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, 2018
|
|
As of December 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
|
(Dollars in Thousands)
|
|
Trade name
|
|
$
|
22,500
|
|
$
|
(7,721
|
)
|
$
|
14,779
|
|
$
|
22,500
|
|
$
|
(5,512
|
)
|
$
|
16,988
|
|
Technology and know-how
|
|
|
55,300
|
|
|
(23,503
|
)
|
|
31,797
|
|
|
55,300
|
|
|
(17,265
|
)
|
|
38,035
|
|
Customer related intangible
|
|
|
64,500
|
|
|
(15,070
|
)
|
|
49,430
|
|
|
64,500
|
|
|
(10,637
|
)
|
|
53,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
$
|
142,300
|
|
$
|
(46,294
|
)
|
$
|
96,006
|
|
$
|
142,300
|
|
$
|
(33,414
|
)
|
$
|
108,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense of intangible assets was $12.9 million, $13.6 million, $14.3 million in 2018, 2017 and 2016, respectively. Estimated annual amortization expense
for the next five years will approximate $12.2 million in 2019, $11.4 million in 2020, $10.7 million in 2021, $10.1 million in 2022 and $9.2 million in 2023.
F-25
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(7) Debt and Liquidity
The following table presents our long-term debt:
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2018
|
|
As of
December 31,
2017
|
|
|
|
(Dollars in thousands)
|
|
Old Credit Facility (Old Revolving Facility and Old Term Loan Facility)
|
|
$
|
|
|
$
|
58,192
|
|
Senior Notes
|
|
|
|
|
|
280,586
|
|
2018 Credit Facility (2018 Term Loan and 2018 Revolving Facility)
|
|
|
2,155,883
|
|
|
|
|
Other Debt
|
|
|
751
|
|
|
596
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
|
2,156,634
|
|
|
339,374
|
|
Less: Short-term Debt
|
|
|
(106,323
|
)
|
|
(16,474
|
)
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
$
|
2,050,311
|
|
$
|
322,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Revolving Facility and Term Loan Facility
On April 23, 2014, the Company and certain of its subsidiaries entered into an amended and restated credit agreement governing a
revolving facility with a borrowing capacity of $400 million and a maturity date of April 2019. On February 27, 2015, GrafTech and certain of its subsidiaries entered into a further
amended and restated credit agreement that provided for, among other things, greater financial flexibility and a $40 million senior secured delayed draw 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% of GrafTech's outstanding shares) to exclude the acquisition of shares by
Brookfield. 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
F-26
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(7) Debt and Liquidity (Continued)
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 had full access to the $225 million revolving facility, subject to the $25 million minimum liquidity requirement. As of December 31,
2017, the Company had $39.5 million of borrowings and $8.7 million of letters of credit, for a total of $48.2 million drawn against the revolving facility. See "Refinancing"
below.
The
$40 million term loan facility was fully drawn on August 11, 2015, in connection with the repayment of the Senior Subordinated Notes in 2015. See "Refinancing" below.
The
interest rate applicable to the revolving facility and term loan facility was LIBOR plus a margin ranging from 2.25% to 4.75% (depending on our total senior secured leverage ratio).
The borrowers were required to 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. In accordance with our credit facility, we used cash proceeds from the sale of our Engineered Solutions businesses to repay
borrowings outstanding under the revolving facility and the term loan.
As
of December 31, 2017, 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 were 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 were 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 bore 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 were to mature on
November 15, 2020.
The
Company was 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 could 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 occurred and thereafter certain downgrades of the ratings of the Senior Notes as specified in the
indenture occurred, the Company would be required to offer to repurchase any or all of the Senior Notes at a
F-27
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(7) Debt and Liquidity (Continued)
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 to our
acquisition by Brookfield. 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 contained covenants that, among other things, limited 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 contained 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 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 which were repaid in 2015. In the case of an event of default, the principal amount of the
Senior Notes plus accrued and unpaid interest may be accelerated.
Refinancing
On February 12, 2018, the Company entered into a credit agreement (the "2018 Credit Agreement") among the Company, GrafTech
Finance Inc., a Delaware corporation and a wholly owned subsidiary of GrafTech ("GrafTech Finance"), GrafTech Switzerland SA, a Swiss corporation and a wholly owned subsidiary of
GrafTech ("Swissco"), GrafTech Luxembourg II S.à.r.l., a Luxembourg société à responsabilité limitée and a
wholly owned subsidiary of GrafTech ("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
F-28
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(7) Debt and Liquidity (Continued)
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 the Old Credit Agreement and terminate all commitments
thereunder, (ii) redeem in full the 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 8, "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.
F-29
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(7) Debt and Liquidity (Continued)
All
obligations under the 2018 Credit Agreement are guaranteed by GrafTech Finance and each domestic subsidiary of GrafTech, subject to certain customary exceptions, and all obligations
under the 2018 Credit Agreement of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code")) are guaranteed by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à
responsabilité limitée and an indirect wholly owned subsidiary of GrafTech ("Luxembourg 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
F-30
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(7) Debt and Liquidity (Continued)
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.
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.
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.
F-31
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(8) Interest Expense
The following table presents an analysis of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Interest incurred on debt
|
|
$
|
100,844
|
|
$
|
24,060
|
|
$
|
20,408
|
|
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
|
|
|
6,305
|
|
Accretion of original issue discount on 2018 Term Loans
|
|
|
1,455
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
3,476
|
|
|
309
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
135,061
|
|
$
|
30,823
|
|
$
|
26,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates
The 2018 Credit Agreement had an effective interest rate of 6.02% as of December 31, 2018. The Old Revolving Facility and Old Term Loan
Facility had an effective interest rate of 4.57% as of December 31, 2017 and the Senior Notes had a fixed interest rate of 6.375%, both of which were repaid on February 12, 2018 as part
of our refinancing. See Note 7, "Debt and Liquidity," for further information.
As
a result of our February 12, 2018 refinancing, we paid a prepayment premium 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 related to the refinancing.
(9) Fair Value Measurements and Derivative Instruments
Fair Value Measurements
Depending on the inputs, we classify each fair value measurement as follows:
-
-
Level 1based upon quoted prices for
identical
instruments in active
markets,
-
-
Level 2based 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 3based upon one or more significant unobservable inputs.
F-32
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(9) Fair Value Measurements and Derivative Instruments (Continued)
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, 2018 approximated book value of $2,156.6 million. The fair value of our debt as of
December 31, 2017 was $359.2 million versus a book value of $339.4 million. The fair values of the Senior Notes and the revolving facility were determined using level 2 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. We had outstanding loss of
$0.1 million as of December 31, 2018 and 2017.
Commodity derivative contracts
Commodity derivative contracts are carried at fair value. We determine the fair value using observable, quoted refined
oil product prices that are determined by active markets and therefore classify the commodity derivative contracts as Level 2. We had outstanding gains of $0.3 million and outstanding
losses of $11.0 million as of December 31, 2018 and outstanding gains of $5.3 million and outstanding losses of $0.6 million losses as of December 31, 2017.
Additional
fair value information related to our Pension funds' assets can be found in Note 12, "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.
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.
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
F-33
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(9) Fair Value Measurements and Derivative Instruments (Continued)
currency
exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases.
We
had no foreign currency cashflow hedges outstanding as of December 31, 2018 and December 31, 2017 and therefore, no unrealized gains or losses reported under accumulated
other comprehensive income (loss).
As
of December 31, 2018, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of
$19.6 million. As of December 31, 2017, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of
$18.9 million. The foreign currency derivatives outstanding as of December 31, 2018 and December 31, 2017 had maturity dates in January 2019 and January 2018, respectively, and
were not designated as hedging instruments.
We have entered into commodity derivative contracts for refined oil products. These contracts are entered into to protect against the risk that
eventual cash flows related to these products will be adversely affected by future changes in prices. In 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, 2018, we had outstanding commodity derivative contracts with a notional amount of
$142.1 million and maturities from January 2019 to June 2022. As of December 31, 2017, we had outstanding commodity derivative contracts with a notional
amount of $143.9 million with maturities from January 2018 to June 2022. Within Accumulated Other Comprehensive income (loss), we had a net unrealized pre-tax loss of $10.7 million and a
net unrealized pre-tax gain of $4.7 million as of December 31, 2018 and 2017, respectively.
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 $9.5 million and $14.8 million as of December 31,
2018 and 2017, respectively. Within our currency translation adjustment portion of other comprehensive income (loss), we recorded a gain of $2.2 million in 2018, and a loss of
$1.4 million in 2017, resulting from these net investment hedges.
F-34
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(9) Fair Value Measurements and Derivative Instruments (Continued)
The
fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31, 2018 and 2017, 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
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
|
Prepaid and other current assets
|
|
$
|
2,518
|
|
Other accrued liabilities
|
|
$
|
|
|
|
|
Other long-term assets
|
|
|
2,808
|
|
Other long-term obligations
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
$
|
5,326
|
|
|
|
$
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
|
|
|
(Dollars in Thousands)
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
Prepaid and other current assets
|
|
$
|
|
|
Other current liabilities
|
|
$
|
43
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
Prepaid and other current assets
|
|
$
|
9
|
|
Other current liabilities
|
|
$
|
90
|
|
As
a result of the settlement of commodity derivative contracts, as of December 31, 2018 and December 31, 2017, net realized pre-tax gains of $7.0 million and $0.1,
respectively, were reported in Accumulated Other Comprehensive Income (loss) and will be released to earnings within the next 12 months.
F-35
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(9) Fair Value Measurements and Derivative Instruments (Continued)
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 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/
Loss Recognized
|
|
|
|
Location of (Gain)/Loss
Recognized in the
Consolidated Statement
of Operations
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward derivatives
|
|
Cost of sales
|
|
$
|
(919
|
)
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss
Recognized
|
|
|
|
Location of (Gain)/Loss
Recognized in the
Consolidated Statement
of Operations
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
Cost of sales, Other expense/(income)
|
|
$
|
(522
|
)
|
$
|
(1,565
|
)
|
$
|
549
|
|
F-36
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(10) Supplementary Balance Sheet Detail
The
following tables present supplementary balance sheet details:
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2018
|
|
As of
December 31,
2017
|
|
|
|
(Dollars in thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
99,935
|
|
$
|
39,434
|
|
Work in process
|
|
|
125,767
|
|
|
85,852
|
|
Finished goods
|
|
|
68,015
|
|
|
48,865
|
|
|
|
|
|
|
|
|
|
|
|
$
|
293,717
|
|
$
|
174,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
10,720
|
|
$
|
9,505
|
|
Value added tax and other indirect taxes receivable
|
|
|
19,242
|
|
|
18,627
|
|
Spare parts inventory
|
|
|
11,507
|
|
|
11,010
|
|
Other current assets
|
|
|
4,699
|
|
|
5,730
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,168
|
|
$
|
44,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
45,947
|
|
$
|
46,599
|
|
Buildings
|
|
|
68,680
|
|
|
59,608
|
|
Machinery and equipment and other
|
|
|
532,084
|
|
|
495,069
|
|
Construction in progress
|
|
|
42,131
|
|
|
41,375
|
|
|
|
|
|
|
|
|
|
|
|
$
|
688,842
|
|
$
|
642,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
Payrolls (including incentive programs)
|
|
$
|
17,284
|
|
$
|
14,196
|
|
Employee benefits
|
|
|
6,977
|
|
|
4,684
|
|
Deferred Revenue
|
|
|
5,380
|
|
|
20,784
|
|
Other
|
|
|
20,811
|
|
|
13,562
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,452
|
|
$
|
53,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long term obligations:
|
|
|
|
|
|
|
|
Postretirement benefits
|
|
$
|
16,192
|
|
$
|
20,508
|
|
Pension and related benefits
|
|
|
33,718
|
|
|
36,116
|
|
Other
|
|
|
22,609
|
|
|
12,283
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,519
|
|
$
|
68,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(10) Supplementary Balance Sheet Detail (Continued)
The
following table presents an analysis of the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
1,097
|
|
$
|
326
|
|
$
|
244
|
|
Additions
|
|
|
122
|
|
|
771
|
|
|
129
|
|
Deductions
|
|
|
(90
|
)
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,129
|
|
$
|
1,097
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11) Commitments
Lease commitments under non-cancelable operating leases extending for one year or more will require the following future payments:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2019
|
|
$
|
4,474
|
|
2020
|
|
|
2,747
|
|
2021
|
|
|
1,497
|
|
2022
|
|
|
334
|
|
2023
|
|
|
269
|
|
After 2023
|
|
|
343
|
|
Total
lease expenses under non-cancelable operating leases extending one year or more approximated $4.9 million in 2018, $5.3 million in 2017 and $3.6 million in
2016.
(12) 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.
F-38
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
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.
The
components of our consolidated net pension costs are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Service cost
|
|
$
|
1,315
|
|
$
|
674
|
|
$
|
1,305
|
|
$
|
710
|
|
$
|
1,325
|
|
$
|
698
|
|
Interest cost
|
|
|
4,709
|
|
|
253
|
|
|
5,352
|
|
|
199
|
|
|
5,744
|
|
|
243
|
|
Expected return on assets
|
|
|
(5,679
|
)
|
|
(330
|
)
|
|
(5,268
|
)
|
|
(299
|
)
|
|
(4,940
|
)
|
|
(298
|
)
|
Mark-to-market loss (gain)
|
|
|
2,473
|
|
|
503
|
|
|
(4,140
|
)
|
|
(53
|
)
|
|
(2,322
|
)
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension costs
|
|
$
|
2,818
|
|
$
|
1,100
|
|
$
|
(2,751
|
)
|
$
|
557
|
|
$
|
(193
|
)
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2017
was the result of better than expected returns on assets, partially offset by an unfavorable change to the discount rate. The mark-to-market gain in 2016 was the result of better than expected returns
on plan assets and favorable changes to the mortality tables, partially offset by unfavorable changes to the discount rate.
F-39
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
The
reconciliation of the beginning and ending balances of our pension plans' benefit obligations, fair value of assets, and funded status at December 31, 2018 and 2017 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
|
|
As of
December 31, 2017
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars in thousands)
|
|
Changes in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Benefit Obligation at beginning of period
|
|
$
|
139,746
|
|
$
|
20,407
|
|
$
|
140,230
|
|
$
|
18,237
|
|
Service cost
|
|
|
1,315
|
|
|
674
|
|
|
1,305
|
|
|
710
|
|
Interest cost
|
|
|
4,709
|
|
|
253
|
|
|
5,352
|
|
|
199
|
|
Participant contributions
|
|
|
|
|
|
392
|
|
|
|
|
|
252
|
|
Foreign currency exchange changes
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
1,069
|
|
Actuarial (gain) loss
|
|
|
(8,297
|
)
|
|
711
|
|
|
3,212
|
|
|
63
|
|
Benefits paid
|
|
|
(10,488
|
)
|
|
234
|
|
|
(10,353
|
)
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of period
|
|
$
|
126,985
|
|
$
|
22,332
|
|
$
|
139,746
|
|
$
|
20,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
109,845
|
|
$
|
13,618
|
|
$
|
100,905
|
|
$
|
11,871
|
|
Actual return on plan assets
|
|
|
(5,091
|
)
|
|
538
|
|
|
12,620
|
|
|
415
|
|
Foreign currency exchange rate changes
|
|
|
|
|
|
(154
|
)
|
|
|
|
|
545
|
|
Employer contributions
|
|
|
5,579
|
|
|
726
|
|
|
6,673
|
|
|
658
|
|
Participant contributions
|
|
|
|
|
|
392
|
|
|
|
|
|
252
|
|
Benefits paid
|
|
|
(10,488
|
)
|
|
234
|
|
|
(10,353
|
)
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
$
|
99,845
|
|
$
|
15,354
|
|
$
|
109,845
|
|
$
|
13,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (underfunded):
|
|
$
|
(27,140
|
)
|
$
|
(6,978
|
)
|
$
|
(29,901
|
)
|
$
|
(6,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
$
|
147
|
|
$
|
|
|
$
|
|
|
Current liabilities
|
|
|
(430
|
)
|
|
(117
|
)
|
|
(433
|
)
|
|
(146
|
)
|
Non-current liabilities
|
|
|
(26,710
|
)
|
|
(7,008
|
)
|
|
(29,468
|
)
|
|
(6,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(27,140
|
)
|
$
|
(6,978
|
)
|
$
|
(29,901
|
)
|
$
|
(6,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accumulated benefit obligation for all defined benefit pension plans was $147.6 million and $158.6 million as of December 31, 2018 and 2017, respectively.
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, "Fair Value Measurements and Derivative Instruments," for a discussion of the fair value hierarchy.
F-40
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
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.
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 (the practical expedient). The net asset value is primarily
based on quoted market prices of the underlying securities 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 trustee 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 valuation method is appropriate and consistent with other market participants, the use
of 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 other plan assets by category is summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
F-41
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
U.S. Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,094
|
|
$
|
|
|
$
|
|
|
$
|
2,094
|
|
International Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bonds
|
|
$
|
|
|
$
|
831
|
|
$
|
|
|
$
|
831
|
|
Fixed insurance contracts
|
|
|
|
|
|
|
|
|
12,787
|
|
|
12,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets in the fair value hierarchy
|
|
$
|
|
|
$
|
831
|
|
$
|
12,787
|
|
$
|
13,618
|
|
Investments measured at net asset value
|
|
|
|
|
|
|
|
|
|
|
$
|
107,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,094
|
|
$
|
831
|
|
$
|
12,787
|
|
$
|
123,463
|
|
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, 2017 and 2018 (dollars in thousands):
|
|
|
|
|
|
|
Fixed Insurance
Contracts
|
|
Balance at December 31, 2016
|
|
$
|
11,142
|
|
Gain / contributions / currency impact
|
|
|
1,651
|
|
Distributions
|
|
|
(6
|
)
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
12,787
|
|
Gain / contributions / currency impact
|
|
|
1,619
|
|
Distributions
|
|
|
(10
|
)
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
14,396
|
|
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:
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2018
|
|
2017
|
|
Pension Benefit Obligations Key Assumptions
|
|
|
|
|
|
|
|
Weighted average assumptions to determine benefit obligations:
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.71
|
%
|
|
3.20
|
%
|
Rate of compensation increase
|
|
|
1.74
|
%
|
|
1.57
|
%
|
Pension Cost Key Assumptions
|
|
|
|
|
|
|
|
Weighted average assumptions to determine net cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.20
|
%
|
|
3.61
|
%
|
Expected return on plan assets
|
|
|
4.94
|
%
|
|
4.95
|
%
|
Rate of compensation increase
|
|
|
1.57
|
%
|
|
1.57
|
%
|
F-42
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
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, 2018, by asset
category:
|
|
|
|
|
|
|
|
|
|
Percentage of
Plan Assets
as of
December 31,
2018
|
|
|
|
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, 2017 and 2018 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars in thousands)
|
|
Accumulated benefit obligation
|
|
$
|
126,985
|
|
$
|
20,601
|
|
$
|
139,746
|
|
$
|
18,843
|
|
Fair value of plan assets
|
|
|
99,845
|
|
|
14,396
|
|
|
109,845
|
|
|
13,618
|
|
F-43
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
Information
for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 2017 and 2018 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars in thousands)
|
|
Projected benefit obligation
|
|
$
|
126,985
|
|
$
|
21,520
|
|
$
|
139,746
|
|
$
|
20,407
|
|
Fair value of plan assets
|
|
|
99,845
|
|
|
14,396
|
|
|
109,845
|
|
|
13,618
|
|
Following
is our projected future pension plan cash flow by year:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars
in thousands)
|
|
Expected contributions in 2019:
|
|
|
|
|
|
|
|
Expected employer contributions
|
|
$
|
684
|
|
$
|
744
|
|
Expected employee contributions
|
|
|
|
|
|
|
|
Estimated future benefit payments reflecting expected future service for the years ending December 31:
|
|
|
|
|
|
|
|
2019
|
|
|
9,240
|
|
|
858
|
|
2020
|
|
|
9,221
|
|
|
755
|
|
2021
|
|
|
9,221
|
|
|
824
|
|
2022
|
|
|
9,182
|
|
|
824
|
|
2023
|
|
|
9,136
|
|
|
955
|
|
2024 - 2028
|
|
|
43,993
|
|
|
8,223
|
|
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.
F-44
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
The
components of our consolidated net postretirement costs are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars in thousands)
|
|
Service cost
|
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
2
|
|
$
|
|
|
$
|
4
|
|
Interest cost
|
|
|
264
|
|
|
700
|
|
|
333
|
|
|
653
|
|
|
360
|
|
|
764
|
|
Plan amendment / curtailment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(993
|
)
|
Mark-to-market (gain) loss
|
|
|
(1,028
|
)
|
|
47
|
|
|
(1,257
|
)
|
|
742
|
|
|
(191
|
)
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-employment benefits (benefit) cost
|
|
$
|
(764
|
)
|
$
|
748
|
|
$
|
(924
|
)
|
$
|
1,397
|
|
$
|
169
|
|
$
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2018
|
|
As of December 31,
2017
|
|
Postretirement Benefits
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars in thousands)
|
|
Changes in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of period
|
|
$
|
8,461
|
|
$
|
12,172
|
|
$
|
10,175
|
|
$
|
10,700
|
|
Service cost
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
Interest cost
|
|
|
264
|
|
|
700
|
|
|
333
|
|
|
653
|
|
Foreign currency exchange rates
|
|
|
|
|
|
(1,333
|
)
|
|
|
|
|
931
|
|
Actuarial (gain) loss
|
|
|
(1,028
|
)
|
|
47
|
|
|
(1,257
|
)
|
|
742
|
|
Gross benefits paid
|
|
|
(532
|
)
|
|
(926
|
)
|
|
(790
|
)
|
|
(856
|
)
|
Plan amendment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of period
|
|
$
|
7,165
|
|
$
|
10,661
|
|
$
|
8,461
|
|
$
|
12,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Employer contributions
|
|
|
532
|
|
|
926
|
|
|
790
|
|
|
856
|
|
Gross benefits paid
|
|
|
(532
|
)
|
|
(926
|
)
|
|
(790
|
)
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
$
|
(7,165
|
)
|
$
|
(10,661
|
)
|
$
|
(8,461
|
)
|
$
|
(12,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(783
|
)
|
$
|
(851
|
)
|
$
|
(855
|
)
|
$
|
(912
|
)
|
Non-current liabilities
|
|
|
(6,382
|
)
|
|
(9,810
|
)
|
|
(7,606
|
)
|
|
(11,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(7,165
|
)
|
$
|
(10,661
|
)
|
$
|
(8,461
|
)
|
$
|
(12,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
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
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Weighted average assumptions to determine benefit obligations:
|
|
|
|
|
|
|
|
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
|
|
|
8
|
|
|
8
|
|
Postretirement Benefit Costs
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Weighted average assumptions to determine net cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.07
|
%
|
|
4.80
|
%
|
Health care cost trend on covered charges:
|
|
|
|
|
|
|
|
Initial
|
|
|
6.86
|
%
|
|
6.80
|
%
|
Ultimate
|
|
|
6.23
|
%
|
|
5.96
|
%
|
Years to ultimate
|
|
|
7
|
|
|
7
|
|
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, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1
|
|
$
|
32
|
|
$
|
(1
|
)
|
$
|
(66
|
)
|
Effect on benefit obligations
|
|
$
|
14
|
|
$
|
506
|
|
$
|
(14
|
)
|
$
|
(442
|
)
|
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.
F-46
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(12) Retirement Plans and Postretirement Benefits (Continued)
The following table represents projected future postretirement cash flow by year:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
|
|
(Dollars
in thousands)
|
|
Expected contributions in 2019:
|
|
|
|
|
|
|
|
Expected employer contributions
|
|
$
|
783
|
|
$
|
851
|
|
Expected employee contributions
|
|
|
|
|
|
|
|
Estimated future benefit payments reflecting expected future service for the years ending December 31:
|
|
|
|
|
|
|
|
2019
|
|
|
783
|
|
|
851
|
|
2020
|
|
|
724
|
|
|
866
|
|
2021
|
|
|
663
|
|
|
891
|
|
2022
|
|
|
607
|
|
|
904
|
|
2023
|
|
|
554
|
|
|
899
|
|
2024 - 2025
|
|
|
2,174
|
|
|
4,769
|
|
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. In 2018, 2017 and 2016, the contributions to our Savings Plan were $1.3 million,
$1.6 million and $2.5 million, respectively.
(13) Contingencies
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.
Litigation
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). 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, in favor of the employees, by the Brazil Supreme Court to the lower courts for further
proceedings which included procedural aspects of the case, such as admissibility of instruments filed by the parties. On October 1, 2015, an 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. In the first quarter of 2017, the state
court ruled in favor of the employees. We have appealed this ruling and intend to vigorously defend it. As of December 31, 2018, we are unable to assess the potential loss associated with these
F-47
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(13) Contingencies (Continued)
proceedings
as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought.
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 2017 and 2018 are as follows:
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Balance as of December 31, 2016
|
|
$
|
969
|
|
Product warranty charges/adjustments
|
|
|
(149
|
)
|
Payments and settlements
|
|
|
(471
|
)
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the there was a full valuation allowance recorded against our deferred tax assets. During the second quarter of
2018, it was determined that the conditions were appropriate for the Company to release a valuation allowance of certain tax assets as we exited our three year cumulative loss position. This release
resulted in the recording of a $86.5 million liability related to the TRA on the Consolidated Statements of Operations as "Related party Tax Receivable Agreement Expense."
F-48
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(13) Contingencies (Continued)
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, it is reasonably possible that a Change in Control, as defined above, may ultimately happen and that the awarded Profit
Units will be
F-49
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(13) Contingencies (Continued)
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, 2018, the awards are 60% vested.
(14) Income Taxes
The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
U.S.
|
|
$
|
(68,032
|
)
|
$
|
(26,981
|
)
|
$
|
(44,971
|
)
|
Non-U.S.
|
|
|
970,840
|
|
|
30,412
|
|
|
(71,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
902,808
|
|
$
|
3,431
|
|
$
|
(116,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
U.S income taxes:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
787
|
|
$
|
(1,066
|
)
|
$
|
(878
|
)
|
Deferred
|
|
|
(52,145
|
)
|
|
38
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,358
|
)
|
|
(1,028
|
)
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. income taxes:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
85,252
|
|
|
5,924
|
|
|
5,389
|
|
Deferred
|
|
|
15,026
|
|
|
(15,677
|
)
|
|
(13,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,278
|
|
|
(9,753
|
)
|
|
(7,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
48,920
|
|
$
|
(10,781
|
)
|
$
|
(7,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
tax expense changed from a benefit of $(7.6) million and $(10.8) million for the years ended December 31, 2016 and 2017 to a tax expense of $48.9 million for the year
ended December 31, 2018 primarily due to the increase in earnings, the shift in the jurisdictional mix of earnings and losses from year to year, and offset by a partial release of a valuation
allowance recorded against the deferred tax asset related to certain U.S. tax attributes. Certain jurisdictions shifted from pre-tax losses in 2016 and 2017 to pretax earnings in 2018.
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
F-50
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(14) Income Taxes (Continued)
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 remeasurement of certain deferred tax asset and liabilities.
Due
to the complexities involved in accounting for the enactment of the Tax Act, SAB No. 118 allowed the Company to record provisional amounts in earnings for the year ended
December 31, 2017. SAB No. 118 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.
On
August 1, 2018, the U.S. Department of Treasury and the 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 has determined the impact of the GILTI provisions under the Tax Act and has recorded the estimate of this impact in the financial results of 2018. As these GILTI provisions
under the Tax Act are complex and subject to continuing regulatory interpretation by the IRS, the Company will continue to evaluate the impact. 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 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"). 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.
F-51
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(14) Income Taxes (Continued)
Income
tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income before expense (benefit) for taxes as set forth in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Tax at statutory U.S. federal rate
|
|
$
|
189,590
|
|
$
|
1,201
|
|
$
|
(40,747
|
)
|
Impact of U.S. Tax Cut and Jobs ActGILTI
|
|
|
93,739
|
|
|
|
|
|
|
|
Impact of the 2017 Tax Acttransition tax
|
|
|
|
|
|
39,628
|
|
|
|
|
Impact of the 2017 Tax Acttax rate change
|
|
|
|
|
|
52,228
|
|
|
|
|
Impact of Tax Receivable Agreement
|
|
|
18,160
|
|
|
|
|
|
|
|
Valuation allowance, net
|
|
|
(93,125
|
)
|
|
(89,269
|
)
|
|
35,091
|
|
State taxes, net of federal tax benefit
|
|
|
1,529
|
|
|
3,437
|
|
|
(2,324
|
)
|
U.S. tax impact of foreign earnings (net of foreign tax credits)
|
|
|
792
|
|
|
1,151
|
|
|
51
|
|
Investment in subsidiary impairment deduction
|
|
|
|
|
|
|
|
|
(10,114
|
)
|
Establishment/resolution of uncertain tax positions
|
|
|
(345
|
)
|
|
(840
|
)
|
|
(513
|
)
|
Adjustment for foreign income taxed at different rates
|
|
|
(95,822
|
)
|
|
(2,359
|
)
|
|
12,738
|
|
Foreign tax credits
|
|
|
(65,046
|
)
|
|
(17,956
|
)
|
|
(175
|
)
|
Other
|
|
|
(552
|
)
|
|
1,998
|
|
|
(1,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
48,920
|
|
$
|
(10,781
|
)
|
$
|
(7,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-52
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(14) Income Taxes (Continued)
The
tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2018 and
December 31, 2017 are set forth in the following table.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Postretirement and other employee benefits
|
|
$
|
18,395
|
|
$
|
19,392
|
|
Foreign tax credit and other carryforwards
|
|
|
111,325
|
|
|
175,229
|
|
Capitalized research and experimental costs
|
|
|
7,695
|
|
|
9,417
|
|
Environmental reserves
|
|
|
976
|
|
|
493
|
|
Inventory
|
|
|
14,251
|
|
|
7,933
|
|
Original issue discount
|
|
|
|
|
|
2,603
|
|
Long-term contract option amortization
|
|
|
1,144
|
|
|
1,204
|
|
Provision for rationalization charges
|
|
|
351
|
|
|
502
|
|
Other
|
|
|
4,270
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
158,407
|
|
|
218,309
|
|
Less: valuation allowance
|
|
|
(58,446
|
)
|
|
(150,839
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
99,961
|
|
|
67,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
59,521
|
|
$
|
68,098
|
|
Debt discount amortization / Deferred financing fees
|
|
|
|
|
|
3,191
|
|
Inventory
|
|
|
7,751
|
|
|
5,128
|
|
Goodwill and acquired intangibles
|
|
|
3,668
|
|
|
|
|
Other
|
|
|
3,138
|
|
|
2,031
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
74,078
|
|
|
78,448
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
25,883
|
|
$
|
(10,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
non-current deferred tax assets are separately stated as deferred income taxes in the amount of $30.8 million as of December 31, 2017 and $71.7 million as of
December 31, 2018. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $41.7 million at December 31, 2017 and
$45.8 million at December 31, 2018.
During
2016, an affiliate of Brookfield, 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 was taxable to GrafTech in 2016 and generated a deferred tax asset for an original issuance discount of
approximately $6.5 million. This deferred tax asset was $2.6 million at December 31, 2017. The GrafTech senior notes were retired in 2018 and the related deferred tax asset was
also released.
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
F-53
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(14) Income Taxes (Continued)
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, 2017 and 2018 was as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Balance as of December 31, 2015
|
|
$
|
165,539
|
|
Charged to income
|
|
|
78,469
|
|
Translation adjustment
|
|
|
583
|
|
Changes attributable to movement in underlying assets
|
|
|
250
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
244,841
|
|
Credited to income
|
|
|
(87,194
|
)
|
Translation adjustment
|
|
|
207
|
|
Changes attributable to movement in underlying assets
|
|
|
(7,015
|
)
|
|
|
|
|
|
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
|
|
In
the fourth quarter of 2017, with the enactment 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 lead to the utilization of the U.S. net operating loss carryforward in 2017 and a 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 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 US 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 is not sufficient positive evidence that the deferred tax asset related to the U.S. net operating loss will generate more than
its estimated economic benefit.
F-54
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(14) Income Taxes (Continued)
In
March of 2017, $19.5 million of foreign tax credit 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, 2018 we have a total
foreign tax credit carryforward of $38.9 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 a federal net operating loss carryforward of $25.2 million and state net operating losses carryforwards of
$320.3 million (net of federal benefit), which can be carried forward from 5 to 20 years. These net operating losses carryforwards generate a deferred tax asset of $59.3 million
as of December 31, 2018. We also have U.S. non-net operating loss related deferred tax assets of $3.0 million as of December 31, 2018. The federal net operating loss carryforward
is limited by IRC §382.
We
have non-U.S. loss and tax credit carryforwards on a gross tax effected basis of $10.1 million, which can be carried forward from 7 years to 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 lead to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2017.
As
of December 31, 2018, we had unrecognized tax benefits of $2.0 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, 2016 (an increase of
$0.1 million), $0.8 million as of December 31, 2017 (an increase of $0.0 million) and $0.9 million as of December 31, 2018 (an increase of
$0.1 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Balance as of December 31, 2016
|
|
$
|
3,338
|
|
Additions for tax positions of prior years
|
|
|
114
|
|
Lapse of statutes of limitations
|
|
|
(989
|
)
|
Foreign currency impact
|
|
|
29
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
2,492
|
|
Reductions for tax positions of prior years
|
|
|
(100
|
)
|
Lapse of statutes of limitations
|
|
|
(373
|
)
|
Settlements
|
|
|
(21
|
)
|
Foreign currency impact
|
|
|
(8
|
)
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
1,990
|
|
It
is reasonably possible that a reduction of unrecognized tax benefits of up to $2.0 million may occur within 12 months due to settlements and the expiration of statutes
of limitation.
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 2015 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 2012.
F-55
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(14) Income Taxes (Continued)
As of December 31, 2018, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.6 billion. Because
$998.3 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the Tax Act, 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.
(15) Stockholders' Equity
The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity.
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 (loss) per share" and "Income (loss) from continuing operations per share" calculations for the periods presented.
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 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 7, "Debt and Liquidity," for further information.
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
F-56
Table of Contents
GrafTech International Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
(Dollars in thousands, except as otherwise noted)
(15) Stockholders' Equity (Continued)
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 have 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.
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 paid our regular quarterly dividends of $0.85 per share on September 28 and December 31, 2018. Additionally, we paid a special dividend to stockholders of $0.70
per share on December 31, 2018.