NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except as otherwise noted)
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(1)
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Business and Summary of Significant Accounting Policies
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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 ("EAF") 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.
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 Accounting Standards Codification ("ASC") 606 on January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's goods and will provide financial statement readers with enhanced disclosures. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 and prior were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous revenue guidance".
Prior to the adoption of ASC 606, revenue from sales of our commercial products 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 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:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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|
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Years
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Buildings
|
25-40
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Land improvements
|
20
|
|
Machinery and equipment
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5-20
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Furniture and fixtures
|
5-10
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|
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 $49.7 million, $53.5 million, and $50.4 million in 2019, 2018 and 2017, respectively. Capital expenditures within accounts payable totaled $11.5 million and $13.7 million as of December 31, 2019 and 2018, respectively.
Accounts Receivable
Trade accounts receivable primarily arise from sales of goods to customers and distributors in the normal course of business.
Allowance for Doubtful Accounts
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 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 $20.2 million and $24.3 million as of December 31, 2019 and 2018, respectively. We amortize such amounts over the life of the respective debt instrument using the effective interest method. The estimated life may be adjusted upon the occurrence of a triggering event. Amortization of capitalized bank fees amounted to $4.1 million, $3.5 million and $0.3 million in 2019, 2018 and 2017, respectively. Capitalized bank fee amortization is included in interest expense.
Derivative Financial Instruments
We do not use derivative financial instruments for trading purposes. They are used to manage well-defined commercial risks associated with commodity purchases, interest rates and currency exchange rate risks. On the date that a derivative contract for a hedging instrument is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or 4) a contract not designated as a hedging instrument.
For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the Consolidated Statement of Operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the Consolidated Balance Sheet. When the underlying hedged transaction is realized, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the Consolidated Statement of Operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the effective portion of the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the Consolidated Balance Sheet.
We formally document our hedge relationships, including the identification of the hedging instruments and the related hedged items, as well as our risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded at fair value in prepaid expenses and other current assets, other long-term assets, other current liabilities and other long-term obligations in the consolidated balance sheets. We also formally assess, both at inception and at least quarterly thereafter,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
whether a derivative used in a hedging transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a derivative ceases to be highly effective, we discontinue hedge accounting.
Foreign Currency Derivatives
We enter into foreign currency derivatives from time to time to manage exposure to changes in currency exchange rates. These instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures, relating to non-dollar denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased foreign currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at fair value.
These contracts 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.
Interest Rate Swap Contracts
We have entered into interet rate swap contracts that are "pay variable, receive fixed" with maturities of either two or five years. The Company’s risk management objective was to fix its cash flows associated with the risk in variability in the one-month U.S. LIBO Rate for a portion of our outstanding debt. It is expected that these swaps will fix the cash flows associated with the forecasted interest payments on this notional amount of debt. All interest rate swaps are carried at their fair value and are treated as cash flow hedges. Changes in their fair value are in included in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from the settlement are recognized in interest expense in the period of settlement.
Income Taxes
We file a consolidated U.S federal income tax return for GTI and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained, when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Under the guidance on accounting for uncertainty in income taxes, we recognize the benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.
As a result of the enactment of the Tax Act of 2017, the Company is required to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Tax Income ("GILTI") as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred. See Note 13 "Income Taxes" for more information.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into a tax receivable agreement (the "TRA") that provides Brookfield, as the sole pre-initial public offering ("IPO") stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), foreign tax credits, and certain NOLs in Swissco (collectively, the "Pre‑IPO Tax Assets"). In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
Retirement Plans and Postretirement Benefits
We use actuarial methods and assumptions to account for our defined benefit pension plans and our postretirement benefits. We immediately recognize the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each year 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 11, “Retirement Plans and Postretirement Benefits.”
Environmental, Health and Safety Matters
Our operations are governed by laws addressing protection of the environment and worker safety and health. These laws provide for civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance and require remediation at sites where hazardous substances have been released into the environment.
We have been in the past, and may become in the future, the subject of formal or informal enforcement actions or proceedings regarding noncompliance with these laws or the remediation of company-related substances released into the environment. Historically, such matters have been resolved by negotiation with regulatory authorities resulting in commitments to compliance, abatement or remediation programs and in some cases payment of penalties. Historically, neither the commitments undertaken nor the penalties imposed on us have been material.
Environmental considerations are part of all significant capital expenditure decisions. Environmental remediation, compliance and management expenses were approximately $11.6 million, $12.4 million and $8.0 million in 2019, 2018 and 2017, respectively. A charge to income is recorded when it is probable that a liability has been incurred and the cost can be reasonably estimated. When payments are fixed or determinable, the liability is discounted using a rate at which the payments could be effectively settled. The accrued liability relating to environmental remediation was $4.9 million as of December 31, 2019 and $4.2 million as of December 31, 2018. The increase in the liability was the result of a revised estimate for asset retirement obligations related to landfills.
Our environmental liabilities do not take into consideration possible recoveries of insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where we may be potentially liable, future expenses to remediate sites could be considerably higher than the accrued liability.
Foreign Currency Translation and Remeasurement
We translate the financial statements of foreign subsidiaries, whose local currency is their functional currency, to U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues, expenses, gains and losses. Differences arising from exchange rate changes are included in accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as the operations of such non-U.S. subsidiaries are sold or substantially or completely liquidated.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For our Mexican, Swiss, United Kingdom and Russian subsidiaries, whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses arising from the fluctuations in currency for monetary accounts are recognized in other (income) expense, net, in the Consolidated Statements of Operations. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred.
We have non-dollar denominated intercompany loans between some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. Certain of these loans had been deemed to be essentially permanent prior to settlement and, as a result, remeasurement gains and losses 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, 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:
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|
|
|
Years
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Trade name
|
5-20
|
Technology and know-how
|
5-14
|
Customer related intangible
|
5-15
|
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, $0.8 million was deferred in 2019 and $9.8 million of costs were deferred in 2018. Amortization of deferred maintenance costs totaled $5.1 million, $3.1 million and $3.3 million in 2019, 2018 and 2017, 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 repurchases. Diluted earnings per share recognizes the dilution that would occur if stock options or restricted shares were exercised or converted into common shares. See Note 15, “Earnings Per Share”.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses. Significant estimates and assumptions are used for, but are not limited to inventory valuation, pension and other post-retirement benefits, allowance for doubtful accounts, contingent liabilities, accruals and valuation allowances, asset impairment, and environmental-related accruals. Actual results could differ from our estimates.
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 17 "Subsequent Events" for further details.
Recent Accounting Standards
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). Under this guidance, companies 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 adopted ASU No. 2016-02 on January 1, 2019. The adoption impact was not material to our financial position, results of operations or cash flows. See Note 10 "Leases" for information regarding this standard and its adoption.
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017‑04, Intangibles‑Goodwill and Other (Topic 350). This guidance was issued to simplify the accounting for goodwill impairment. The guidance removes the second step of the goodwill impairment test, which requires that a hypothetical purchase price allocation be performed to determine the amount of impairment, if any. Under this new guidance, a goodwill impairment charge will be based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will become effective on a prospective basis for the Company on January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), which introduces the Current Expected Credit Losses ("CECL") accounting model. CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. ASU No. 2016-13 is effective for the the Company on January 1, 2020. The adoption of this standard will impact the timing of our credit losses; however, it is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
(2) 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 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous revenue guidance".
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method. Under this method, we could elect to apply the cumulative effect method to either all contracts as of the 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
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type of product and contract for 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
For the
Year Ended
December 31, 2019
|
|
For the
Year Ended
December 31, 2018
|
|
(Dollars in thousands)
|
Graphite Electrodes - Three- to five-year take-or-pay contracts
|
$
|
1,437,354
|
|
|
$
|
1,341,557
|
|
Graphite Electrodes - Short-term agreements and spot sales
|
260,979
|
|
|
395,928
|
|
By-products and other
|
92,460
|
|
|
158,425
|
|
Total Revenues
|
$
|
1,790,793
|
|
|
$
|
1,895,910
|
|
Effective the first quarter of 2019, the Graphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. The revenue category “By-products and Other” now includes re-sales of low-grade electrodes purchased from third party suppliers, which represent a minimal contribution to our profitability. For comparability purposes, the prior period has been recast to conform to this presentation.
Impact of New Revenue Guidance on Financial Statement Line Items
There would be no differences to the reported consolidated balance sheet, statement of operations and cash flows, as of and for the twelve months ended December 31, 2019 and 2018, had the previous revenue guidance still been in effect.
Contract Balances
Receivables, net of allowances for doubtful accounts, were $247.1 million as of December 31, 2019 and $248.3 million as of December 31, 2018. Accounts receivables are recorded when the right to consideration becomes unconditional. Payment terms on invoices range from 30 to 120 days depending on the customary business practices of the 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):
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
Current deferred revenue
|
|
Long-Term deferred revenue
|
|
(Dollars in thousands)
|
Balance as of December 31, 2017
|
$
|
20,784
|
|
|
$
|
—
|
|
Increases due to cash received
|
15,548
|
|
|
8,241
|
|
Revenue recognized
|
(30,803
|
)
|
|
—
|
|
Foreign currency impact
|
(149
|
)
|
|
(525
|
)
|
Balance as of December 31, 2018
|
5,380
|
|
|
7,716
|
|
Increases due to cash received
|
7,961
|
|
|
—
|
|
Revenue recognized
|
(4,678
|
)
|
|
—
|
|
Revision of estimates
|
—
|
|
|
(694
|
)
|
Reclassification between long-term and current
|
3,042
|
|
|
(3,042
|
)
|
Foreign currency impact
|
71
|
|
|
(122
|
)
|
Balance as of December 31, 2019
|
$
|
11,776
|
|
|
$
|
3,858
|
|
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)
|
|
2020
|
$
|
1,251,093
|
|
2021
|
1,211,036
|
|
2022
|
1,144,574
|
|
2023 and thereafter
|
29,461
|
|
Total
|
$
|
3,636,164
|
|
The majority of the long-term take-or-pay contracts are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. The estimated revenues for the year 2020 include our current expectation for the specified volume range contracts as well as for the impact of credit risk. The estimated revenues for the years 2021 and beyond are based upon the mid-point of the volume range for those contracts with specified ranges.
In addition to the expected remaining revenue to be recognized with the longer-term sales contracts, the Company recorded $1,437.4 million and $1,341.6 million of revenue pursuant to these contracts in the year ended December 31, 2019 and 2018, respectively.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(3) 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, 2019, the aggregate number of shares authorized under the plans since their initial adoption was 15,000,000. Shares issued upon vesting of awards or exercise of options are new share issuances. Upon the vesting or payment of stock awards, an employee may elect receipt of the full share amount and either pay the resulting taxes or sell shares in the open market to cover the tax obligation.
The number of stock-based awards granted by our Board of Directors for the years ended 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Award type:
|
|
|
|
|
|
Stock options
|
229,250
|
|
|
979,790
|
|
|
—
|
|
Deferred share units
|
31,829
|
|
|
42,243
|
|
|
—
|
|
Restricted stock units
|
260,640
|
|
|
6,740
|
|
|
—
|
|
Accounting for Stock-Based Compensation
Stock-based compensation expense recognized in 2019 was $2.1 million. A majority of the expense, $1.9 million, was recorded as Selling and Administrative Expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales. Stock-based compensation expense recognized was $1.2 million in 2018. A majority of the expense, $1.0 million, was recorded as Selling and Administrative Expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as Cost of Sales. There was no stock-based compensation expense recognized in 2017.
As of December 31, 2019, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units represents $7.6 million, which will be recognized over a weighted average period of 3.8 years. As of December 31, 2018, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units represents $5.4 million, which will be recognized over a weighted average period of 4.3 years.
Deferred Share Units and Restricted Stock Units. Compensation expense for deferred share units and restricted stock unit awards is based on the closing price of our common stock on the date of grant, less forfeitures or cancellations of awards throughout the vesting period, which generally range between one and three years. The weighted average grant date fair value of deferred share units and restricted stock units was approximately $12.72 per share during 2019.
Deferred share units and restricted stock unit awards activity under the Omnibus Equity Incentive Plan for 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
Outstanding unvested as of December 31, 2018
|
|
27,570
|
|
|
$
|
12.88
|
|
Granted
|
|
292,469
|
|
|
12.72
|
|
Cancelled
|
|
(6,084
|
)
|
|
13.36
|
|
Vested
|
|
(31,239
|
)
|
|
12.30
|
|
Outstanding unvested as of December 31, 2019
|
|
282,716
|
|
|
$
|
12.83
|
|
During 2019, we granted 292,469 shares of deferred share units and restricted stock units to certain directors, officers and employees at prices ranging from $11.14 to $13.36. Of the total deferred share units granted, 31,239 were granted to our independent directors in lieu of cash retainers and vested immediately upon grant. The remaining deferred share units and restricted stock units vest over a period of two to five years.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Options. Compensation expense for stock options is based on the estimated fair value of the option on the date of the grant. We calculate the estimated fair value of the option using the Black-Scholes option-pricing model. During 2019, we granted 229,250 options to certain of our officers and employees. The weighted average fair value of the options granted in 2019 was $5.13. During 2018, we granted 979,790 options to certain of our officers and employees. The weighted-average fair value of the options granted in 2018 was $6.08. There were no options granted in 2017. The weighted average assumptions used in our Black-Scholes option pricing model for options granted in 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
For the Year Ended
December 31,2019
|
|
For the Year Ended
December 31,2018
|
Dividend yield
|
2.39% - 3.05%
|
|
|
1.70% - 2.27%
|
|
Expected volatility
|
50
|
%
|
|
45
|
%
|
Risk-free interest rate
|
1.79% - 2.63%
|
|
|
2.84% - 2.98%
|
|
Expected term in years
|
6.5 years
|
|
|
6.5 years
|
|
Dividend Yield. Our dividend yield estimate is based on our expected dividends and the stock price on the grant date.
Expected Volatility. We estimate the volatility of our common stock at the date of grant based on the historical volatility of comparable companies over the most recent period commensurate with the expected life of the award.
Risk-Free Interest Rate. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.
Expected Term In Years. The expected life of awards granted represents the time period that the awards are expected to be outstanding. We determined the expected term of the grants using the “simplified” method as described by the SEC, since we do not have a history of stock option awards to provide a reliable basis for estimating such term.
The stock options vest over a five year period, with one-fifth of the award vesting on the anniversary date of the grant in each of the next five years. Options outstanding at December 31, 2019, have a weighted average remaining contractual life of 8.5 years, a weighted average remaining vesting period of 1.9 years, and an aggregate intrinsic value of zero. There were no options exercised during 2019 or 2018.
Stock options outstanding and exercisable under our plans at December 31, 2019 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Weighted
Average
Exercise
Prices
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Prices
|
$11.14
|
-
|
$20.00
|
|
1,113,480
|
|
|
8.5
|
|
$15.17
|
|
181,822
|
|
|
$
|
15.73
|
|
Stock option awards activity under the Omnibus Equity Incentive Plan for 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted-
Average
Exercise
Price
|
Outstanding unvested as of December 31, 2018
|
|
968,720
|
|
|
$
|
15.68
|
|
Granted
|
|
229,250
|
|
|
12.90
|
|
Vested
|
|
(188,810
|
)
|
|
15.70
|
|
Forfeited
|
|
(77,502
|
)
|
|
14.87
|
|
Outstanding unvested as of December 31, 2019
|
|
931,658
|
|
|
$
|
15.06
|
|
As of December 31, 2019, we have 221,752 options expected to vest in the next year. There were 181,822 options exercisable as of December 31, 2019.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Incentive Compensation Plans
We have a global incentive program for our worldwide salaried and hourly employees, the Incentive Compensation Program (the “ICP”), which includes a stockholder-approved executive incentive compensation plan. The ICP is based primarily on adjusted earnings before income taxes, depreciation and amortization. The balance of our accrued liability for ICP was $6.9 million at December 31, 2019 and $10.4 million as of December 31, 2018.
(4) Segment Reporting
We previously operated two reportable business segments, Industrial Materials and Engineered Solutions. 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.
Our Industrial Materials segment manufactures high quality graphite electrodes essential to the production of EAF steel and other ferrous and non-ferrous metals. Petroleum needle coke, a crystalline form of carbon derived from decant oil, is a key raw material used in the production of graphite electrodes. We utilize substantially all the needle coke that we produce internally to manufacture our graphite electrodes and as a result approximately 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 2019, one customer accounted for more than 10% of our net sales. We believe this customer does not pose a significant concentration of risk, as sales to this customer could be replaced by demand from other customers.
The following tables summarize information as to our continuing operations in different geographic areas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in thousands)
|
Net sales:
|
|
|
|
|
|
United States
|
$
|
403,916
|
|
|
$
|
429,599
|
|
|
$
|
103,890
|
|
Americas (excluding the United States)
|
348,670
|
|
|
367,561
|
|
|
129,103
|
|
Asia Pacific
|
172,439
|
|
|
131,578
|
|
|
46,329
|
|
Europe, Middle East, Africa
|
865,768
|
|
|
967,172
|
|
|
271,449
|
|
Total
|
$
|
1,790,793
|
|
|
$
|
1,895,910
|
|
|
$
|
550,771
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
2019
|
|
2018
|
(Dollars in thousands)
|
Long-lived assets (a):
|
|
|
|
United States
|
$
|
174,307
|
|
|
$
|
169,301
|
|
Mexico
|
141,621
|
|
|
146,790
|
|
Brazil
|
5,694
|
|
|
3,320
|
|
France
|
88,514
|
|
|
91,022
|
|
Spain
|
102,577
|
|
|
103,121
|
|
Other countries
|
307
|
|
|
151
|
|
Total
|
$
|
513,020
|
|
|
$
|
513,705
|
|
|
|
(a)
|
Long-lived assets represent fixed assets, net of accumulated depreciation.
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(5) Debt and Liquidity
The following table presents our long-term debt:
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2018
|
|
(Dollars in thousands)
|
2018 Credit Facility (2018 Term Loan and 2018 Revolving Facility)
|
$
|
1,812,204
|
|
|
$
|
2,155,883
|
|
Other Debt
|
619
|
|
|
751
|
|
Total Debt
|
1,812,823
|
|
|
2,156,634
|
|
Less: Short-term Debt
|
(141
|
)
|
|
(106,323
|
)
|
Long-term Debt
|
$
|
1,812,682
|
|
|
$
|
2,050,311
|
|
2018 Credit Agreement
On February 12, 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”) among the Company, GrafTech Finance Inc. (“GrafTech Finance”), GrafTech Switzerland SA (“Swissco”), GrafTech Luxembourg II S.à.r.l.(“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co‑Borrowers”), the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the "Administrative Agent") and as collateral agent, which provides for (i) a $1,500 million senior secured term facility (the “2018 Term Loan Facility”) and (ii) a $250 million senior secured revolving credit facility (the “2018 Revolving Credit Facility” and, together with the 2018 Term Loan Facility, the “Senior Secured Credit Facilities”), which may be used from time to time for revolving credit borrowings denominated in dollars or Euro, the issuance of one or more letters of credit denominated in dollars, Euro, Pounds Sterling or Swiss Francs and one or more swing line loans denominated in dollars. GrafTech Finance is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, Swissco and Lux Holdco are Co‑Borrowers under the 2018 Revolving Credit Facility. On February 12, 2018, GrafTech Finance borrowed $1,500 million under the 2018 Term Loan Facility (the "2018 Term Loans"). The 2018 Term Loans mature on February 12, 2025. The maturity date for the 2018 Revolving Credit Facility is February 12, 2023.
The proceeds of the 2018 Term Loans were used to (i) repay in full all outstanding indebtedness of the Co‑Borrowers under our previous credit agreement and terminate all commitments thereunder, (ii) redeem in full our previously held senior notes at a redemption price of 101.594% of the principal amount thereof plus accrued and unpaid interest to the date of redemption, (iii) pay fees and expenses incurred in connection with (i) and (ii) above and the Senior Secured Credit Facilities and related expenses, and (iv) declare and pay a dividend to the sole pre-IPO stockholder, with any remainder to be used for general corporate purposes. See Note 7 "Interest Expense" for a breakdown of expenses associated with these repayments. In connection with the repayment of our previous credit agreement and redemption of our previously held senior notes, all guarantees of obligations under the previous credit agreement, the senior notes and related indenture were terminated, all mortgages and other security interests securing obligations under the previous credit agreement were released and the indenture were terminated.
Borrowings under the 2018 Term Loan Facility bear interest, at GrafTech Finance’s option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.50% per annum or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 2.50% per annum, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loans.
Borrowings under the 2018 Revolving Credit Facility bear interest, at the applicable Co‑Borrower’s option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, the Co‑Borrowers will be required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
For borrowings under both the 2018 Term Loan Facility and the 2018 Revolving Credit Facility, if the Administrative Agent determines that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate and such circumstances are unlikely to be temporary or the relevant authority has made a public statement identifying a date after which the LIBO Rate shall no longer be used for determining interest rates for loans, then the Administrative Agent and the Co-Borrowers shall endeavor to establish an alternate rate of interest, which shall be effective so long as the majority in interest of the lenders for each Class (as defined in the 2018 Credit Agreement) of loans under the 2018 Credit Agreement do not notify the Administrative Agent otherwise. Until such an alternate rate of interest is determined, (a) any request for a borrowing denominated in dollars based on the Adjusted LIBO Rate will be deemed to be a request for a borrowing at the ABR Rate plus the applicable
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
margin for an ABR Rate borrowing of such loan while any request for a borrowing denominated in any other currency will be ineffective and (b) any outstanding borrowings based on the Adjusted LIBO Rate denominated in dollars will be converted to a borrowing at the ABR Rate plus the applicable margin for an ABR Rate borrowing of such loan while any outstanding borrowings denominated in any other currency will be repaid.
All obligations under the 2018 Credit Agreement are guaranteed by GrafTech Finance and each domestic subsidiary of GrafTech, subject to certain customary exceptions, and all obligations under the 2018 Credit Agreement of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code) are guaranteed by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech ("Luxembourg Parent"), Luxembourg Holdco and Swissco (collectively, the "Guarantors").
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions and Excluded Assets (as defined in the 2018 Credit Agreement), by: (i) a pledge of all of the equity securities of GrafTech Finance and each domestic Guarantor (other than GrafTech) and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of GrafTech Finance and each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation, and (ii) security interests in certain receivables and personal property of each Guarantor that is a Controlled Foreign Corporation, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loans amortize at a rate equal to 5% per annum of the original principal amount of the 2018 Term Loans payable in equal quarterly installments, with the remainder due at maturity. The Co‑Borrowers are permitted to make voluntary prepayments at any time without premium or penalty, except in the case of prepayments made in connection with certain repricing transactions with respect to the 2018 Term Loans effected within twelve months of the closing date of the 2018 Credit Agreement, to which a 1.00% prepayment premium applies. GrafTech Finance is required to make prepayments under the 2018 Term Loans (without payment of a premium) with (i) net cash proceeds from non‑ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company’s fiscal year ending December 31, 2019, 75%of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step‑downs to 50% and 0% of Excess Cash Flow based on achievement of a senior secured first lien net leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00 and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loans during any calendar year reduce, on a dollar‑for‑dollar basis, the amount of the required Excess Cash Flow prepayment for such calendar year, and the aggregate amount of Excess Cash Flow prepayments for any calendar year reduce subsequent quarterly amortization payments of the 2018 Term Loans as directed by GrafTech Finance.
The 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to GrafTech and restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The 2018 Credit Agreement contains a financial covenant that requires GrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Facility. The 2018 Credit Agreement also contains customary events of default.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of a $750 million promissory note (the “Brookfield Promissory Note”) to the sole pre-IPO stockholder. The $750 million Brookfield Promissory Note was conditioned upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (each as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the $750 million Brookfield Promissory Note and (iii) the satisfaction of the conditions occurring within 60 days from the dividend record date. Upon publication of our first quarter report on Form 10-Q, these conditions were met and, as a result, the Brookfield Promissory Note became payable.
The Brookfield Promissory Note had a maturity of eight years from the date of issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined in the Brookfield Promissory Note) plus an applicable margin equal to 4.50% per annum,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
with an additional 2.00% per annum starting from the third anniversary from the date of issuance. We were permitted to make voluntary prepayments at any time without premium or penalty. All obligations under the Brookfield Promissory Note were unsecured and guaranteed by all of our existing and future domestic wholly owned subsidiaries that guarantee, or are borrowers under, the Senior Secured Credit Facilities. No funds were lent or otherwise contributed to us by the pre-IPO stockholder in connection with the Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Promissory Note was repaid in full on June 15, 2018.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into a first amendment (the “First Amendment”) to its 2018 Credit Agreement. The First Amendment amended the 2018 Credit Agreement to provide for an additional $750 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”) to GrafTech Finance. The Incremental Term Loans increased the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $1,500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the 2018 Term Loans, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the 2018 Term Loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment.
The proceeds of the Incremental Term Loans were used to repay, in full, the $750 million of principal outstanding on the Brookfield Promissory Note.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility.
(6) Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill
impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For the years ended December 31, 2019 and 2018 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 for the years 2018 and 2019:
|
|
|
|
|
|
Total
|
|
(Dollars in Thousands)
|
Balance as of December 31, 2017
|
$
|
171,117
|
|
Adjustments
|
—
|
|
Balance as of December 31, 2018
|
171,117
|
|
Adjustments
|
—
|
|
Balance as of December 31, 2019
|
$
|
171,117
|
|
The following table summarizes acquired intangible assets with determinable useful lives by major category which are included in Other Assets on our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
(Dollars in Thousands)
|
Trade name
|
$
|
22,500
|
|
|
$
|
(9,861
|
)
|
|
$
|
12,639
|
|
|
$
|
22,500
|
|
|
$
|
(7,721
|
)
|
|
$
|
14,779
|
|
Technology and know-how
|
55,300
|
|
|
(29,112
|
)
|
|
26,188
|
|
|
55,300
|
|
|
(23,503
|
)
|
|
31,797
|
|
Customer related intangible
|
64,500
|
|
|
(19,473
|
)
|
|
45,027
|
|
|
64,500
|
|
|
(15,070
|
)
|
|
49,430
|
|
Total finite-lived intangible assets
|
$
|
142,300
|
|
|
$
|
(58,446
|
)
|
|
$
|
83,854
|
|
|
$
|
142,300
|
|
|
$
|
(46,294
|
)
|
|
$
|
96,006
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense of intangible assets was $12.2 million, $12.9 million, $13.6 million in 2019, 2018 and 2017, respectively. Estimated annual amortization expense for the next five years will approximate $11.4 million in 2020, $10.7 million in 2021, $10.1 million in 2022, $9.2 million in 2023 and $8.0 million in 2024.
(7) Interest Expense
The following table presents an analysis of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in thousands)
|
Interest incurred on debt
|
$
|
121,010
|
|
|
$
|
100,844
|
|
|
$
|
24,060
|
|
Related Party Promissory Note interest expense
|
—
|
|
|
5,090
|
|
|
—
|
|
Senior Note redemption premium
|
—
|
|
|
4,782
|
|
|
—
|
|
Accretion of fair value adjustment on Senior Notes
|
—
|
|
|
19,414
|
|
|
6,454
|
|
Accretion of original issue discount on 2018 Term Loans
|
2,196
|
|
|
1,455
|
|
|
—
|
|
Amortization of debt issuance costs
|
4,125
|
|
|
3,476
|
|
|
309
|
|
Total interest expense
|
$
|
127,331
|
|
|
$
|
135,061
|
|
|
$
|
30,823
|
|
Interest rates
The 2018 Credit Agreement had an effective interest rate of 5.30% as of December 31, 2019 and 6.02% as of December 31, 2018. The Old Revolving Facility and Old Term Loan Facility had an effective interest rate of 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 5 "Debt and Liquidity").
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.
(8) Fair Value Measurements and Derivative Instruments
Fair Value Measurements
Depending on the inputs, we classify each fair value measurement as follows:
|
|
•
|
Level 1 – based upon quoted prices for identical instruments in active markets,
|
|
|
•
|
Level 2 – based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations of all of whose significant inputs are observable, and
|
|
|
•
|
Level 3 – based upon one or more significant unobservable inputs.
|
The following section describes key inputs and assumptions used in valuation methodologies of our assets and liabilities measured at fair value on a recurring basis:
Cash and cash equivalents, short-term notes and accounts receivable, accounts payable and other current payables – The carrying amount approximates fair value because of the short maturity of these instruments.
Debt – The fair value of our debt as of December 31, 2019 and December 31, 2018 approximated book value of $1,812.8 million and $2,156.6 million, respectively. The fair values were determined using Level 3 inputs.
Foreign currency derivatives – Foreign currency derivatives are carried at market value using Level 2 inputs. We had an outstanding gain of $0.2 million as of December 31, 2019 and an outstanding loss of $0.1 million as of December 31, 2018.
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 $0.5 million and outstanding losses of $4.1 million as of December 31, 2019 and outstanding gains of $0.3 million and outstanding losses of $11.0 million as of December 31, 2018.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest rate swap contracts – Interest rate swap contracts are carried at fair value. We determine the fair value using the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present amount reflecting current market expectations about those future amounts. We had outstanding unrealized gains of $2.9 million and outstanding unrealized losses of $0.1 million as of December 31, 2019.
Additional fair value information related to our Pension funds' assets can be found in Note 11 "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 U.S. dollar.
Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counter-parties to our instruments.
Foreign currency derivatives
We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures such as foreign currency denominated debt, sales, receivables, payables, and purchases.
We had no foreign currency cash flow hedges outstanding as of December 31, 2019 and December 31, 2018 and therefore, no unrealized gains or losses reported under accumulated other comprehensive income (loss).
As of December 31, 2019, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $78.8 million. 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. The foreign currency derivatives outstanding as of December 31, 2019 had maturity dates from January 2020 to March 2020, and were not designated as hedging instruments.
Commodity derivative contracts
We have entered into commodity derivative contracts for refined oil products. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. 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, 2019, we had outstanding commodity derivative contracts with a notional amount of $99.5 million and maturities from January 2020 to June 2022. As of December 31, 2018, we had outstanding commodity derivative contracts with a notional amount of $142.1 million with maturities from January 2019 to June 2022. Within Accumulated Other Comprehensive income (loss), we had a net unrealized pre-tax loss of $3.7 million and a net unrealized pre-tax loss of $10.7 million as of December 31, 2019 and 2018, respectively. The fair value of these contracts was determined using Level 2 inputs.
In the fourth quarter of 2019, we released $0.4 million from accumulated other comprehensive income to cost of sales. This resulted from a portion of our commodity derivative contracts failing to qualify for hedge accounting.
Interest rate swap contracts
During the third quarter of 2019, the Company entered into interest rate swap contracts. The contracts are "pay fixed, receive variable" with notional amounts of $500 million maturing in two years and another $500 million maturing in five years. The Company’s risk management objective was to fix its cash flows associated with the risk in variability in the one-month US LIBO Rate for a portion of our outstanding debt. It is expected that these swaps will fix the cash flows associated with the forecasted interest payments on this notional amount of debt to an effective fixed interest rate of 5.1%, which could be lowered to 4.85% depending on credit ratings. Within accumulated other comprehensive income we recorded a net unrealized pre-tax gain of $2.9 million as of December 31, 2019. The fair value of these contracts was determined using Level 2 inputs.
Net Investment Hedges
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was $5.5 million and $9.5 million as of December 31, 2019 and 2018, respectively. Within our currency translation adjustment portion of other comprehensive income (loss), we recorded no gain or loss in 2019, and a gain of $2.2 million in 2018, resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31, 2019 and 2018, the fair value of our derivatives and their respective balance sheet locations are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
As of December 31, 2019
|
(Dollars in thousands)
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Commodity derivative contracts
|
Prepaid and other current assets
|
|
$
|
104
|
|
|
Other accrued liabilities
|
|
$
|
1,872
|
|
|
Other long-term assets
|
|
369
|
|
|
Other long-term obligations
|
|
2,255
|
|
Interest rate swap contracts
|
Prepaid and other current assets
|
|
253
|
|
|
Other accrued liabilities
|
|
—
|
|
|
Other long-term assets
|
|
2,684
|
|
|
Other long-term obligations
|
|
72
|
|
Total fair value
|
|
|
$
|
3,410
|
|
|
|
|
$
|
4,199
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
Prepaid and other current assets
|
|
$
|
90
|
|
|
Other accrued liabilities
|
|
$
|
4,630
|
|
|
Other long-term assets
|
|
260
|
|
|
Other long-term obligations
|
|
6,393
|
|
Total fair value
|
|
|
$
|
350
|
|
|
|
|
$
|
11,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
As of December 31, 2019
|
(Dollars in Thousands)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
Foreign currency derivatives
|
Prepaid and other current assets
|
|
$
|
239
|
|
|
Other current liabilities
|
|
$
|
81
|
|
Commodity derivative contracts
|
Prepaid and other current assets
|
|
376
|
|
|
Other accrued liabilities
|
|
—
|
|
Total fair value
|
|
|
$
|
615
|
|
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
Foreign currency derivatives
|
Prepaid and other current assets
|
|
$
|
—
|
|
|
Other current liabilities
|
|
$
|
43
|
|
As a result of the settlement of commodity derivative contracts, as of December 31, 2019 and December 31, 2018, net realized pre-tax gains of $3.5 million and $7.0 million, respectively, were reported in accumulated other comprehensive income (loss) and will be released to earnings within the next 12 months.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss
Recognized
|
|
|
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
|
|
2019
|
|
2018
|
|
2017
|
Derivatives designated as cash flow hedges:
|
|
(Dollars in thousands)
|
|
|
Commodity derivative contracts
|
|
Cost of sales
|
|
$
|
(8,892
|
)
|
|
$
|
(919
|
)
|
|
$
|
—
|
|
Interest rate swaps
|
|
Interest expense
|
|
(1,050
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain)/Loss
Recognized
|
|
|
Location of (Gain)/Loss Recognized in the Consolidated Statement of Operations
|
|
2019
|
|
2018
|
|
2017
|
Derivatives not designated as hedges:
|
|
(Dollars in thousands)
|
|
|
Foreign currency derivatives
|
|
Cost of sales, Other expense/(income)
|
|
$
|
(506
|
)
|
|
$
|
(522
|
)
|
|
$
|
(1,565
|
)
|
Commodity derivative contracts
|
|
Cost of sales
|
|
(223
|
)
|
|
—
|
|
|
—
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
(9)
|
Supplementary Balance Sheet Detail
|
The following tables present supplementary balance sheet details:
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2018
|
|
(Dollars in thousands)
|
Inventories:
|
|
|
|
Raw materials and supplies
|
$
|
104,820
|
|
|
$
|
99,935
|
|
Work in process
|
137,230
|
|
|
125,767
|
|
Finished goods
|
71,598
|
|
|
68,015
|
|
|
$
|
313,648
|
|
|
$
|
293,717
|
|
Prepaid expenses and other current assets:
|
|
|
|
Prepaid expenses
|
$
|
9,986
|
|
|
$
|
10,720
|
|
Value added tax and other indirect taxes receivable
|
13,890
|
|
|
19,242
|
|
Spare parts inventory
|
12,738
|
|
|
11,507
|
|
Other current assets
|
4,332
|
|
|
4,699
|
|
|
$
|
40,946
|
|
|
$
|
46,168
|
|
Property, plant and equipment:
|
|
|
|
Land and improvements
|
$
|
46,548
|
|
|
$
|
45,947
|
|
Buildings
|
71,784
|
|
|
68,680
|
|
Machinery and equipment and other
|
567,715
|
|
|
532,084
|
|
Construction in progress
|
47,370
|
|
|
42,131
|
|
|
$
|
733,417
|
|
|
$
|
688,842
|
|
Other accrued liabilities:
|
|
|
|
Payrolls (including incentive programs)
|
$
|
11,801
|
|
|
$
|
17,284
|
|
Employee benefits
|
7,416
|
|
|
6,977
|
|
Deferred Revenue
|
11,776
|
|
|
5,380
|
|
Other
|
17,342
|
|
|
20,811
|
|
|
$
|
48,335
|
|
|
$
|
50,452
|
|
Other long term obligations:
|
|
|
|
Postretirement benefits
|
$
|
16,528
|
|
|
$
|
16,192
|
|
Pension and related benefits
|
37,431
|
|
|
33,718
|
|
Other
|
18,603
|
|
|
22,609
|
|
|
$
|
72,562
|
|
|
$
|
72,519
|
|
The following table presents an analysis of the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
Balance at beginning of year
|
$
|
1,129
|
|
|
$
|
1,097
|
|
|
$
|
326
|
|
Additions
|
4,636
|
|
|
122
|
|
|
771
|
|
Deductions
|
(291
|
)
|
|
(90
|
)
|
|
—
|
|
Balance at end of year
|
$
|
5,474
|
|
|
$
|
1,129
|
|
|
$
|
1,097
|
|
We lease certain transportation and mobile manufacturing equipment such as railcars and forklifts, as well as real estate.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 842 on January 1, 2019, which requires that all leases, financing and operating, be included on the balance sheet. The Company adopted ASC 842 using the modified retrospective approach under which prior periods’ financial statements are not restated and a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption is recorded, if applicable. The Company elected to adopt the transition package of practical expedients for lease identification, classification, initial direct costs and hindsight. At the adoption of ASC 842 on January 1, 2019, the Company recognized right-of-use ("RoU") assets and corresponding operating lease liabilities of $7.5 million with no cumulative-effect adjustment to retained earnings.
We determine if an arrangement is a lease at lease inception. When an arrangement contains a lease, we then determine if it meets any of the criteria for a financing lease. Leases with a term of 12 months or less are not recorded on the balance sheet.
RoU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. RoU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term.
In order to compute the lease liability, when the rate implicit in the lease is not readily determinable, we discount the lease payments using our estimated incremental borrowing rate for secured fixed rate debt over the same term, derived from information available at the lease commencement date. Our lease term includes the option to extend the lease when it is reasonably certain that we will exercise that option.
The Company has elected to account for the lease and non-lease components as a single lease component, except for leases of warehouse space where they will be accounted for separately. Leases may include variable lease and variable non-lease components costs which are accounted for as variable lease expense in the income statement.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Components of lease expense are as follows:
|
|
|
|
|
|
|
|
For Year Ended December 31, 2019
|
|
(Dollars in thousands)
|
Operating lease cost
|
|
4,816
|
|
Short-term lease cost
|
|
14
|
|
Variable lease cost
|
|
227
|
|
Total lease cost
|
|
$
|
5,057
|
|
Supplemental cash-flow and other information related to leases is as follows:
|
|
|
|
|
|
|
For Year Ended December 31, 2019
|
|
(Dollars in thousands)
|
RoU assets obtained in exchange for new operating lease liabilities (non-cash)
|
|
4,995
|
|
Operating (use of cash) from operating leases
|
|
(4,724
|
)
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
|
(Dollars in thousands)
|
Operating RoU Assets*
|
|
$
|
7,994
|
|
*Amount included in Other assets
|
|
|
|
|
|
Current operating lease liabilities
|
|
4,475
|
|
Non-current operating lease liabilities
|
|
3,598
|
|
Total operating lease liabilities**
|
|
$
|
8,073
|
|
**Amounts included in Other accrued liabilities and Other long-term obligations
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
2.3
|
|
Weighted average discount rate - operating leases
|
|
5.61
|
%
|
As of December 31, 2019, lease commitments under non-cancelable operating leases extending for one year or more will require the following future payments:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2020
|
|
4,496
|
|
2021
|
|
2,693
|
|
2022
|
|
702
|
|
2023
|
|
358
|
|
2024 and thereafter
|
|
379
|
|
Total lease payments
|
|
$
|
8,628
|
|
Less: Imputed interest
|
|
(555
|
)
|
Present value of lease payments
|
|
8,073
|
|
Less: Current operating lease liability
|
|
(4,475
|
)
|
Non-current operating lease liability
|
|
$
|
3,598
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019 , we have not entered into any additional operating lease commitments that have yet to commence.
Disclosure related to periods prior to adoption of the new lease standard
As of December 31, 2018, lease commitments under non-cancelable operating leases required the following future payments:
|
|
|
|
|
|
(Dollars in thousands)
|
2019
|
$
|
4,474
|
|
2020
|
2,747
|
|
2021
|
1,497
|
|
2022
|
334
|
|
2023
|
269
|
|
2024 and thereafter
|
343
|
|
|
|
(11)
|
Retirement Plans and Postretirement Benefits
|
Retirement Plans
On February 26, 1991, we formed our own retirement plan covering substantially all our U.S. employees. Under our plan, covered employees earned benefit payments based primarily on their service credits and wages subsequent to February 26, 1991.
Prior to that date, substantially all our U.S. employees were participants in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). While service credit was frozen, covered employees continued to earn benefits under the Union Carbide plan based on their final average wages through February 26, 1991, adjusted for salary increases (not to exceed six percent per annum) through January 26, 1995, the date Union Carbide ceased to own a minimum 50% of the equity of GTI. The Union Carbide plan is responsible for paying retirement and death benefits earned as of February 26, 1991.
Effective January 1, 2002, we established a defined contribution plan for U.S. employees. Certain employees had the option to remain in our defined benefit plan for an additional period of up to five years. Employees not covered by this option had their benefits under our defined benefit plan frozen as of December 31, 2001, and began participating in the defined contribution plan.
Effective March 31, 2003, we curtailed our qualified benefit plan and the benefits were frozen as of that date for the U.S. employees who had the option to remain in our defined benefit plan. We also closed our non-qualified U.S. defined benefit plan for the participating salaried workforce. The employees began participating in the defined contribution plan as of April 1, 2003.
Pension coverage for employees of foreign subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves.
The components of our consolidated net pension costs are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
|
|
|
|
(Dollars in thousands)
|
Service cost
|
$
|
1,297
|
|
|
$
|
624
|
|
|
$
|
1,315
|
|
|
$
|
674
|
|
|
$
|
1,305
|
|
|
$
|
710
|
|
Interest cost
|
5,070
|
|
|
275
|
|
|
4,709
|
|
|
253
|
|
|
5,352
|
|
|
199
|
|
Expected return on assets
|
(5,026
|
)
|
|
(424
|
)
|
|
(5,679
|
)
|
|
(330
|
)
|
|
(5,268
|
)
|
|
(299
|
)
|
Mark-to-market loss (gain)
|
205
|
|
|
3,302
|
|
|
2,473
|
|
|
503
|
|
|
(4,140
|
)
|
|
(53
|
)
|
Pension costs
|
$
|
1,546
|
|
|
$
|
3,777
|
|
|
$
|
2,818
|
|
|
$
|
1,100
|
|
|
$
|
(2,751
|
)
|
|
$
|
557
|
|
The mark-to-market loss in 2019 was the result of the unfavorable change in the discount rate, partially offset by better than expected return on plan assets, particularly for the U.S. plans. The mark-to-market loss in 2018 was the result of less than expected return on plan assets, partially offset by a favorable change to the discount rate. The mark-to-market gain in 2017 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.
The reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31, 2019 and 2018 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2018
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Changes in Benefit Obligation:
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of period
|
$
|
126,985
|
|
|
$
|
22,332
|
|
|
$
|
139,746
|
|
|
$
|
20,407
|
|
Service cost
|
1,297
|
|
|
624
|
|
|
1,315
|
|
|
674
|
|
Interest cost
|
5,070
|
|
|
275
|
|
|
4,709
|
|
|
253
|
|
Participant contributions
|
—
|
|
|
417
|
|
|
—
|
|
|
392
|
|
Foreign currency exchange changes
|
—
|
|
|
379
|
|
|
—
|
|
|
(339
|
)
|
Actuarial (gain) loss
|
12,868
|
|
|
3,319
|
|
|
(8,297
|
)
|
|
711
|
|
Benefits paid
|
(10,410
|
)
|
|
1,557
|
|
|
(10,488
|
)
|
|
234
|
|
Net benefit obligation at end of period
|
$
|
135,810
|
|
|
$
|
28,903
|
|
|
$
|
126,985
|
|
|
$
|
22,332
|
|
Changes in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
99,845
|
|
|
$
|
15,354
|
|
|
$
|
109,845
|
|
|
$
|
13,618
|
|
Actual return on plan assets
|
17,689
|
|
|
441
|
|
|
(5,091
|
)
|
|
538
|
|
Foreign currency exchange rate changes
|
—
|
|
|
377
|
|
|
—
|
|
|
(154
|
)
|
Employer contributions
|
708
|
|
|
834
|
|
|
5,579
|
|
|
726
|
|
Participant contributions
|
—
|
|
|
417
|
|
|
—
|
|
|
392
|
|
Benefits paid
|
(10,410
|
)
|
|
1,557
|
|
|
(10,488
|
)
|
|
234
|
|
Fair value of plan assets at end of period
|
$
|
107,832
|
|
|
$
|
18,980
|
|
|
$
|
99,845
|
|
|
$
|
15,354
|
|
Funded status (underfunded):
|
$
|
(27,978
|
)
|
|
$
|
(9,923
|
)
|
|
$
|
(27,140
|
)
|
|
$
|
(6,978
|
)
|
Amounts recognized in accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amounts recognized in the statement
of financial position:
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
147
|
|
Current liabilities
|
(427
|
)
|
|
(43
|
)
|
|
(430
|
)
|
|
(117
|
)
|
Non-current liabilities
|
(27,551
|
)
|
|
(9,917
|
)
|
|
(26,710
|
)
|
|
(7,008
|
)
|
Net amount recognized
|
$
|
(27,978
|
)
|
|
$
|
(9,923
|
)
|
|
$
|
(27,140
|
)
|
|
$
|
(6,978
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was $162.6 million and $147.6 million as of December 31, 2019 and 2018, 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 8, “Fair Value Measurements and Derivative Instruments", for a discussion of the fair value hierarchy.
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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Equity securities – Valued at the closing price reported on the active market on which the security is traded.
Fixed insurance contract – Valued at the present value of the guaranteed payment streams.
Investment contracts – Valued at the total cost of annuity contracts purchased, adjusted for market differences from the date of purchase to year-end.
Collective trusts – Valued at the net asset value provided by the administrator of the fund (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, 2019
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
U.S. Plan Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,524
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,524
|
|
International Plan Assets
|
|
|
|
|
|
|
|
Foreign government bonds
|
$
|
—
|
|
|
$
|
995
|
|
|
$
|
—
|
|
|
$
|
995
|
|
Fixed insurance contracts
|
—
|
|
|
—
|
|
|
17,985
|
|
|
17,985
|
|
Total assets in the fair value hierarchy
|
$
|
—
|
|
|
$
|
995
|
|
|
$
|
17,985
|
|
|
$
|
18,980
|
|
Investments measured at net asset value
|
|
|
|
|
|
|
$
|
106,308
|
|
Total
|
$
|
1,524
|
|
|
$
|
995
|
|
|
$
|
17,985
|
|
|
$
|
126,812
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
U.S. Plan Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,978
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,978
|
|
International Plan Assets
|
|
|
|
|
|
|
|
Foreign government bonds
|
$
|
—
|
|
|
$
|
958
|
|
|
$
|
—
|
|
|
$
|
958
|
|
Fixed insurance contracts
|
—
|
|
|
—
|
|
|
14,396
|
|
|
14,396
|
|
Total assets in the fair value hierarchy
|
$
|
—
|
|
|
$
|
958
|
|
|
$
|
14,396
|
|
|
$
|
15,354
|
|
Investments measured at net asset value
|
|
|
|
|
|
|
$
|
97,867
|
|
Total
|
$
|
1,978
|
|
|
$
|
958
|
|
|
$
|
14,396
|
|
|
$
|
115,199
|
|
|
|
|
|
|
|
|
|
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, 2018 and 2019 (dollars in thousands):
|
|
|
|
|
|
Fixed Insurance
Contracts
|
Balance at December 31, 2017
|
$
|
12,787
|
|
Gain / contributions / currency impact
|
1,619
|
|
Distributions
|
(10
|
)
|
Balance at December 31, 2018
|
14,396
|
|
Gain / contributions / currency impact
|
3,603
|
|
Distributions
|
(14
|
)
|
Balance at December 31, 2019
|
$
|
17,985
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We annually re-evaluate assumptions and estimates used in projecting pension assets, liabilities and expenses. These assumptions and estimates may affect the carrying value of pension assets, liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net pension costs and projected benefit obligations are:
|
|
|
|
|
|
|
Pension Benefit Obligations Key Assumptions
|
As of December 31,
|
|
2019
|
|
2018
|
Weighted average assumptions to determine benefit obligations:
|
|
|
|
Discount rate
|
2.59
|
%
|
|
3.71
|
%
|
Rate of compensation increase
|
1.50
|
%
|
|
1.74
|
%
|
|
|
|
|
|
|
|
Pension Cost Key Assumptions
|
|
|
|
Weighted average assumptions to determine net cost:
|
|
|
|
Discount rate
|
3.71
|
%
|
|
3.20
|
%
|
Expected return on plan assets
|
4.92
|
%
|
|
4.94
|
%
|
Rate of compensation increase
|
1.74
|
%
|
|
1.57
|
%
|
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, 2019, by asset category:
|
|
|
|
|
|
|
|
Percentage of Plan Assets
as of December 31, 2019
|
|
US
|
|
Foreign
|
Equity securities and return seeking assets
|
20
|
%
|
|
—
|
%
|
Fixed income, debt securities, or cash
|
80
|
%
|
|
100
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
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, 2018 and 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Accumulated benefit obligation
|
$
|
135,810
|
|
|
$
|
26,829
|
|
|
$
|
126,985
|
|
|
$
|
20,601
|
|
Fair value of plan assets
|
107,832
|
|
|
17,985
|
|
|
99,845
|
|
|
14,396
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 2018 and 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Projected benefit obligation
|
$
|
135,810
|
|
|
$
|
27,944
|
|
|
$
|
126,985
|
|
|
$
|
21,520
|
|
Fair value of plan assets
|
107,832
|
|
|
17,985
|
|
|
99,845
|
|
|
14,396
|
|
Following is our projected future pension plan cash flow by year:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Expected contributions in 2020:
|
|
|
|
Expected employer contributions
|
$
|
4,419
|
|
|
$
|
737
|
|
Expected employee contributions
|
—
|
|
|
—
|
|
Estimated future benefit payments reflecting expected future service for the years ending December 31:
|
|
|
|
2020
|
9,271
|
|
|
884
|
|
2021
|
9,240
|
|
|
870
|
|
2022
|
9,195
|
|
|
905
|
|
2023
|
9,145
|
|
|
1,038
|
|
2024
|
9,012
|
|
|
2,340
|
|
2025-2029
|
43,077
|
|
|
9,168
|
|
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.
The components of our consolidated net postretirement costs are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest cost
|
269
|
|
|
684
|
|
|
264
|
|
|
700
|
|
|
333
|
|
|
653
|
|
Mark-to-market loss (gain)
|
585
|
|
|
100
|
|
|
(1,028
|
)
|
|
47
|
|
|
(1,257
|
)
|
|
742
|
|
Post-employment benefits (benefit)
cost
|
$
|
854
|
|
|
$
|
784
|
|
|
$
|
(764
|
)
|
|
$
|
748
|
|
|
$
|
(924
|
)
|
|
$
|
1,397
|
|
The reconciliation of beginning and ending balances of benefit obligations under, fair value of assets of, and the funded status of, our postretirement plans is set forth in the following table:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
As of
December 31, 2019
|
|
As of
December 31, 2018
|
|
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Changes in Benefit Obligation:
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of period
|
$
|
7,165
|
|
|
$
|
10,661
|
|
|
$
|
8,461
|
|
|
$
|
12,172
|
|
Service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Interest cost
|
269
|
|
|
684
|
|
|
264
|
|
|
700
|
|
Foreign currency exchange rates
|
|
|
|
340
|
|
|
—
|
|
|
(1,333
|
)
|
Actuarial (gain) loss
|
585
|
|
|
100
|
|
|
(1,028
|
)
|
|
47
|
|
Gross benefits paid
|
(829
|
)
|
|
(831
|
)
|
|
(532
|
)
|
|
(926
|
)
|
Plan amendment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net benefit obligation at end of period
|
$
|
7,190
|
|
|
$
|
10,954
|
|
|
$
|
7,165
|
|
|
$
|
10,661
|
|
Changes in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets
at beginning of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer contributions
|
829
|
|
|
831
|
|
|
532
|
|
|
926
|
|
Gross benefits paid
|
(829
|
)
|
|
(831
|
)
|
|
(532
|
)
|
|
(926
|
)
|
Fair value of plan assets at end of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status:
|
$
|
(7,190
|
)
|
|
$
|
(10,954
|
)
|
|
$
|
(7,165
|
)
|
|
$
|
(10,661
|
)
|
Amounts recognized in accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amounts recognized in the statement of
financial position:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(723
|
)
|
|
$
|
(893
|
)
|
|
$
|
(783
|
)
|
|
$
|
(851
|
)
|
Non-current liabilities
|
(6,467
|
)
|
|
(10,061
|
)
|
|
(6,382
|
)
|
|
(9,810
|
)
|
Net amount recognized
|
$
|
(7,190
|
)
|
|
$
|
(10,954
|
)
|
|
$
|
(7,165
|
)
|
|
$
|
(10,661
|
)
|
We annually re-evaluate assumptions and estimates used in projecting the postretirement liabilities and expenses. These assumptions and estimates may affect the carrying value of postretirement plan liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net postretirement benefit costs and postretirement projected benefit obligation are set forth in the following table:
|
|
|
|
|
|
|
Postretirement Benefit Obligations
|
|
|
2019
|
|
2018
|
Weighted average assumptions to determine benefit obligations:
|
|
|
|
Discount rate
|
4.65
|
%
|
|
5.57
|
%
|
Health care cost trend on covered charges:
|
|
|
|
Initial
|
6.14
|
%
|
|
6.53
|
%
|
Ultimate
|
5.84
|
%
|
|
6.05
|
%
|
Years to ultimate
|
6
|
|
|
8
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Postretirement Benefit Costs
|
|
|
|
|
2019
|
|
2018
|
Weighted average assumptions to determine net cost:
|
|
|
|
Discount rate
|
5.57
|
%
|
|
5.07
|
%
|
Health care cost trend on covered charges:
|
|
|
|
Initial
|
6.53
|
%
|
|
6.86
|
%
|
Ultimate
|
6.05
|
%
|
|
6.23
|
%
|
Years to ultimate
|
7
|
|
|
7
|
|
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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Percentage
Point Increase
|
|
One Percentage
Point Decrease
|
|
U.S.
|
|
Foreign
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Effect on total service cost
and interest cost components
|
$
|
—
|
|
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
(42
|
)
|
Effect on benefit obligations
|
$
|
21
|
|
|
$
|
465
|
|
|
$
|
(20
|
)
|
|
$
|
(409
|
)
|
Discount rates are set for each plan in reference to the yields available on AA-rated corporate bonds of appropriate currency and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve in each currency. The discount rate for a given plan is the rate implied by the yield curve for the duration of that plan’s liabilities. In certain countries, where little public information is available on which to base discount rate assumptions, the discount rate is based on government bond yields or other indices and approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA-rated corporate bonds.
The following table represents projected future postretirement cash flow by year:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
(Dollars in thousands)
|
Expected contributions in 2020:
|
|
|
|
Expected employer contributions
|
$
|
723
|
|
|
$
|
893
|
|
Expected employee contributions
|
—
|
|
|
—
|
|
Estimated future benefit payments reflecting expected
future service for the years ending December 31:
|
|
|
|
2020
|
723
|
|
|
893
|
|
2021
|
657
|
|
|
908
|
|
2022
|
596
|
|
|
904
|
|
2023
|
540
|
|
|
910
|
|
2024
|
492
|
|
|
924
|
|
2025-2029
|
1,984
|
|
|
4,689
|
|
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 2019, 2018 and 2017, the contributions to our savings plan were $2.1 million, $1.3 million and $1.6 million, respectively.
Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, environmental compliance programs and other legal proceedings arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.
Pending litigation in Brazil has been brought by employees seeking to recover additional amounts and interest thereon under certain wage increase provisions applicable in 1989 and 1990 under collective bargaining agreements to which employers in the Bahia region of Brazil were a party (including our subsidiary in Brazil). Companies in Brazil have settled claims arising out of these provisions and, in May 2015, the litigation was remanded by the Brazilian Supreme Court in favor of the employees union. After denying an interim appeal by the Bahia region employers on June 26, 2019, the Brazilian Supreme Court finally ruled in favor of the employees union on September 26, 2019. The employers union has determined not to seek annulment of such decision. Separately, on October 1, 2015, a related action was filed by current and former employees against our subsidiary in Brazil to recover amounts under such provisions, plus interest thereon, which amounts together with interest could be material to us. If the Brazilian Supreme Court proceeding above had been determined in favor of the employers union, it would also have resolved this proceeding in our favor. In the first quarter of 2017, the state court initially ruled in favor of the employees. We have appealed this state court ruling as well and intend to vigorously defend it. As of December 31, 2019, we are unable to assess the potential loss associated with these proceedings as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought.
Product Warranties
We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the reserve for 2018 and 2019 are as follows:
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Balance as of December 31, 2017
|
$
|
349
|
|
Product warranty charges/adjustments
|
1,510
|
|
Payments and settlements
|
(331
|
)
|
Balance as of December 31, 2018
|
$
|
1,528
|
|
Product warranty charges/adjustments
|
1,033
|
|
Payments and settlements
|
(726
|
)
|
Balance as of December 31, 2019
|
$
|
1,835
|
|
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into a tax receivable agreement (the "TRA") that provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco (collectively, the "Pre‑IPO Tax Assets"). In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
There was no liability recognized on the date we entered into the TRA as there was a full valuation allowance recorded against our deferred tax assets. During the second quarter of 2018, it was determined that the conditions were appropriate for the Company to release a valuation allowance of certain tax assets as we exited our three year cumulative loss position. This release resulted in the recording of a $86.5 million liability related to the TRA on the Consolidated Statements of Operations as "Related Party Tax Receivable Agreement Expense." As of December 31, 2019, the total TRA liability is $89.9 million, of which $27.9 million is classified as current liability "Related party payable - tax receivable agreement" on the balance sheet, as we expect this portion to be settled within twelve months, and $62.0 million of the liability remains as a long-term liability in "Related party payable - tax receivable agreement" on the balance sheet.
Long-term Incentive Plan
The long-term incentive plan ("LTIP") was adopted by the Company effective as of August 17, 2015, as amended and restated as of March 15, 2018. The purpose of the plan is to retain senior management personnel of the Company, to incentivize them to make decisions with a long-term view and to influence behavior in a way that is consistent with maximizing value for the pre-IPO stockholder of the Company in a prudent manner. Each participant is allocated a number of profit units, with a maximum of 30,000 profit units (or Profit Units) available under the plan. Awards of Profit Units generally vest in equal increments over a five-year period beginning on the first anniversary of the grant date and subject to continued employment with the Company through each vesting date. Any unvested Profit Units that have not been previously forfeited will accelerate and become fully vested upon a ‘‘Change in Control’’ (as defined below).
Profit Units will generally be settled in a lump sum payment within 30 days following a Change in Control based on the ‘‘Sales Proceeds’’ (as defined below) received by Brookfield Capital Partners IV, L.P. (or, together with its affiliates, Brookfield Capital IV) in connection with the Change in Control. The LTIP defines ‘‘Change in Control’’ as any transaction or series of transactions (including, without limitation, the consummation of a combination, share purchases, recapitalization, redemption, issuance of capital stock, consolidation, reorganization or otherwise) pursuant to which (a) a person not affiliated with Brookfield Capital IV acquires securities representing more than seventy percent (70%) of the combined voting power of the outstanding voting securities of the Company or the entity surviving or resulting from such transaction, (b) following a public offering of the Company’s stock, Brookfield Capital IV has ceased to have a beneficial ownership interest in at least 30% of the Company’s outstanding voting securities (effective on the first of such date), or (c) the Company sells all or substantially all of the assets of the Company and its subsidiaries on a consolidated basis. It is intended that the occurrence of a Change in Control in which Sales Proceeds exceed the Threshold Value would constitute a ‘‘substantial risk of forfeiture’’ within the meaning of Section 409A of the Code. The LTIP defines ‘‘Threshold Value’’ as, as of any date of determination, an amount equal to $855,000,000 (which represents the amount of the total invested capital of Brookfield Capital IV as of August 17, 2015), plus the dollar value of any cash or other consideration contributed to or invested in the Company by Brookfield Capital IV after August 17, 2015. The Threshold Value shall be determined by the Board of Directors in its sole discretion. The LTIP defines ‘‘Sales Proceeds’’ as, as of any date of determination, the sum of all proceeds actually received by the Brookfield Capital IV, net of all Sales Costs (as defined below), (i) as consideration (whether cash or equity) upon the Change in Control and (ii) as distributions, dividends, repurchases, redemptions or otherwise as a holder of such equity interests in the Company. Proceeds that are not paid upon or prior to or in connection with the Change in Control, including earn-outs, escrows and other contingent or deferred consideration shall become ‘‘Sale Proceeds’’ only as and when such proceeds are received by Brookfield Capital IV. ‘‘Sales Costs’’ means any costs or expenses (including legal or other advisor costs), fees (including investment banking fees), commissions or discounts payable directly by Brookfield Capital IV in connection with, arising out of or relating to a Change in Control, as determined by the Board of Directors in its sole discretion.
Given the successful completion of the IPO in the second quarter of 2018, it is reasonably possible that a Change in Control, as defined above, may ultimately happen and that the awarded Profit Units will be subsequently paid out to the participants. Assuming 100% vesting of the awarded Profit Units and depending on Brookfield’s sales proceeds, the potential liability triggered by a Change in Control is estimated to be in the range of $65 million to $90 million. As of December 31, 2019, the awards are 80% vested.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in thousands)
|
U.S.
|
$
|
85,365
|
|
|
$
|
(68,032
|
)
|
|
$
|
(26,981
|
)
|
Non-U.S.
|
757,462
|
|
|
970,840
|
|
|
30,412
|
|
|
$
|
842,827
|
|
|
$
|
902,808
|
|
|
$
|
3,431
|
|
Income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
U.S income taxes:
|
|
|
|
|
|
Current
|
$
|
16,589
|
|
|
$
|
787
|
|
|
$
|
(1,066
|
)
|
Deferred
|
5,690
|
|
|
(52,145
|
)
|
|
38
|
|
|
22,279
|
|
|
(51,358
|
)
|
|
(1,028
|
)
|
Non-U.S. income taxes:
|
|
|
|
|
|
Current
|
64,134
|
|
|
85,252
|
|
|
5,924
|
|
Deferred
|
11,812
|
|
|
15,026
|
|
|
(15,677
|
)
|
|
75,946
|
|
|
100,278
|
|
|
(9,753
|
)
|
Total income tax expense (benefit)
|
$
|
98,225
|
|
|
$
|
48,920
|
|
|
$
|
(10,781
|
)
|
The tax expense changed from a benefit of $(10.8) million for the year ended December 31, 2017 to expense of $48.9 million and $98.2 million for the years ended December 31, 2018 and 2019, primarily due to the increase in earnings, the shift in the jurisdictional mix of earnings and losses from year to year. Partially offsetting these items was a partial release, both in 2018 and in 2019, of a valuation allowance recorded against the deferred tax asset related to certain foreign and U.S. federal and state tax attributes. Certain jurisdictions shifted from pre-tax losses in 2017 to pre-tax earnings in 2018 and 2019.
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly revises the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures which have the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI. In general, these changes were effective beginning in 2018. The Tax Act also includes a one-time mandatory deemed repatriation or transition tax on the accumulated previously untaxed foreign earnings of our foreign subsidiaries.
For the fourth quarter of 2017, we were able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and re-measurement of certain deferred tax asset and liabilities.
Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118. SAB No. 118 allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 also provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Act. On October 15, 2018, the Company’s U.S. tax returns for 2017 were filed and the changes to the provisional tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 were recorded in 2018. These adjustments were immaterial to the Company’s financial statements.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 2018, the U.S. Department of Treasury and the U.S. Internal Revenue Service (IRS) issued proposed regulations under code section 965 and on January 15, 2019, the IRS issued final 965 regulations. The Company continues to analyze the effects of the Tax Act and newly issued final regulations on its financial statements. The final impact of the Tax Act and the regulations may differ from the amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, additional legislative or administrative actions to clarify the intent of the statutory language provided that they differ from the Company’s current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. We estimate that any change will be immaterial to the Company’s financial statements at this time.
The Company also continues to evaluate the impact of the GILTI provisions under the Tax Act which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election of either (1) the period cost method or (2) the deferred method. As of December 31, 2018, the Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred.
Income tax expense (benefit) differed from the amount computed by applying the U.S, federal income tax rate of 21% for years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to income before Provision (benefit) expense for income taxes as set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in thousands)
|
Tax at statutory U.S. federal rate
|
$
|
176,994
|
|
|
$
|
189,590
|
|
|
$
|
1,201
|
|
Impact of U.S. Tax Act - GILTI
|
65,531
|
|
|
93,739
|
|
|
—
|
|
Impact of the 2017 Tax Act - transition tax
|
—
|
|
|
—
|
|
|
39,628
|
|
Impact of the 2017 Tax Act - tax rate change
|
—
|
|
|
—
|
|
|
52,228
|
|
Impact of Tax Receivable Agreement
|
713
|
|
|
18,160
|
|
|
—
|
|
Valuation allowance
|
(14,548
|
)
|
|
(93,125
|
)
|
|
(89,269
|
)
|
State taxes, net of federal tax benefit
|
4,231
|
|
|
1,529
|
|
|
3,437
|
|
U.S. tax impact of foreign earnings (net of foreign tax credits)
|
2,181
|
|
|
792
|
|
|
1,151
|
|
Establishment/resolution of uncertain tax positions
|
(1,293
|
)
|
|
(345
|
)
|
|
(840
|
)
|
Adjustment for foreign income taxed at different rates
|
(76,922
|
)
|
|
(95,822
|
)
|
|
(2,359
|
)
|
Foreign tax credits
|
(56,171
|
)
|
|
(65,046
|
)
|
|
(17,956
|
)
|
Other
|
(2,491
|
)
|
|
(552
|
)
|
|
1,998
|
|
Provision (benefit) for income taxes
|
$
|
98,225
|
|
|
$
|
48,920
|
|
|
$
|
(10,781
|
)
|
The company has been granted a tax holiday in Brazil, which expires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities as of December 31, 2019 and December 31, 2018 are set forth in the following table.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(Dollars in thousands)
|
Deferred tax assets:
|
|
|
|
Postretirement and other employee benefits
|
$
|
18,256
|
|
|
$
|
18,395
|
|
Foreign tax credit and other carryforwards
|
55,103
|
|
|
111,325
|
|
Capitalized research and experimental costs
|
5,566
|
|
|
7,695
|
|
Environmental reserves
|
1,110
|
|
|
976
|
|
Inventory adjustments
|
14,863
|
|
|
14,251
|
|
Long-term contract option amortization
|
1,080
|
|
|
1,144
|
|
Provision for rationalization charges
|
232
|
|
|
351
|
|
Other
|
1,872
|
|
|
4,270
|
|
Total gross deferred tax assets
|
98,082
|
|
|
158,407
|
|
Less: valuation allowance
|
(13,736
|
)
|
|
(58,446
|
)
|
Total deferred tax assets
|
84,346
|
|
|
99,961
|
|
Deferred tax liabilities:
|
|
|
|
Fixed assets
|
$
|
56,659
|
|
|
$
|
59,521
|
|
Inventory
|
12,778
|
|
|
7,751
|
|
Goodwill and acquired intangibles
|
6,996
|
|
|
3,668
|
|
Other
|
2,468
|
|
|
3,138
|
|
Total deferred tax liabilities
|
78,901
|
|
|
74,078
|
|
Net deferred tax asset
|
$
|
5,445
|
|
|
$
|
25,883
|
|
Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $71.7 million as of December 31, 2018 and $55.2 million as of December 31, 2019. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $45.8 million as of December 31, 2018 and $49.8 million as of December 31, 2019.
We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have established and maintained valuation allowances on those net deferred tax assets. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
Valuation allowance activity for the years ended December 31, 2018 and 2019 was as follows:
|
|
|
|
|
|
(Dollars in thousands)
|
Balance as of December 31, 2017
|
$
|
150,839
|
|
Credited to income
|
(93,125
|
)
|
Translation adjustment
|
(302
|
)
|
Changes attributable to movement in underlying assets
|
1,034
|
|
Balance as of December 31, 2018
|
$
|
58,446
|
|
Credited to income
|
(14,548
|
)
|
Changes attributable to write-off of underlying assets
|
(30,138
|
)
|
Translation adjustment
|
(24
|
)
|
Balance as of December 31, 2019
|
$
|
13,736
|
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 2017, with the 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 led 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 to the U.S. tax attributes. This positive evidence was primarily supplied by the Company exiting a cumulative loss period in the U.S. as well as sufficient U.S. current and forecasted taxable income that would utilize the U.S. tax attributes. As a result, a partial release (to reflect only the economic benefit of the attributes) of the valuation allowance against federal net operating losses and state losses was recorded in 2018 while a full release of the valuation allowance against the federal foreign tax credit carryforward, other federal deferred tax assets was also recorded. A valuation allowance of $35.8 million is included in the December 31, 2018 balance reflected above as there was not sufficient positive evidence that the deferred tax asset related to the U.S. federal net operating loss would generate more than its estimated economic benefit. This valuation allowance and the related deferred tax asset were subsequently released to the income statement in 2019.
In March of 2017, $19.5 million of foreign tax credits expired. During the fourth quarter of 2017, we increased our foreign tax credit carryforward by $37.7 million, as a result of additional foreign taxable income derived in connections with the new U.S. tax legislation that was enacted on December 22, 2017. As of December 31, 2019, we have a total foreign tax credit carryforward of $31.3 million. As indicated above, a valuation allowance is no longer recorded against this foreign tax credit carryforward. These tax credit carryforwards begin to expire as of March 15, 2025. In addition, we have state net operating loss carryforwards of $250.0 million (net of federal benefit), which can be carried forward from 5 to 20 years. These state net operating loss carryforwards generated a deferred tax asset of $14.9 million as of December 31, 2019. We also have U.S. state tax credits of $2.3 million as of December 31, 2019.
We have foreign loss carryforwards on a gross basis of $16.8 million as of December 31, 2019, which can be carried forward indefinitely.
During the fourth quarter of 2017, GrafTech Switzerland moved from a cumulative loss position to a cumulative profit position, as well as a current year utilization of its net operating loss carryforward. This positive evidence and utilization led to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2018.
As of December 31, 2019, we had unrecognized tax benefits of $0.2 million, which, if recognized, would have a favorable impact on our effective tax rate. We have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.8 million as of December 31, 2017, and $0.9 million as of December 31, 2018 (an increase of $0.1 million). We had no accrued interest and penalties as of December 31, 2019 (a decrease of $0.9 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance as of December 31, 2017
|
$
|
2,492
|
|
Reductions for tax positions of prior years
|
(100
|
)
|
Lapse of statutes of limitations
|
(373
|
)
|
Foreign currency impact
|
(21
|
)
|
Settlements
|
(8
|
)
|
Balance as of December 31, 2018
|
$
|
1,990
|
|
Settlements
|
(1,383
|
)
|
Reductions for tax positions of prior years
|
(421
|
)
|
Foreign currency impact
|
(2
|
)
|
Balance as of December 31, 2019
|
$
|
184
|
|
It is reasonably possible that a reduction of unrecognized tax benefits of up to $0.2 million may occur within 12 months due to settlements and the expiration of statutes of limitation.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2016 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2013.
As of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.5 billion. Because $1.3 billion of such earnings have previously been subject to taxation by way of the transition tax on foreign earnings required by the Tax Act, as well as the current and previous years’ GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
|
|
(14)
|
Stockholders' Equity
|
The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity.
Stock Split
On April 12, 2018, the Company effected a 3,022,259.23 to one stock split of the Company's then outstanding common stock. We have retroactively applied this split to all share presentations, as well as "Net income per share" and "Income from continuing operations per share" calculations for the periods presented.
Conditional Dividend to Pre-IPO Stockholder
On April 19, 2018, we declared a $160 million cash dividend payable to Brookfield, the sole pre-IPO stockholder. Payment of this dividend was conditional upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the payment of the dividend and (iii) the payment occurring within 60 days from the dividend record date. The conditions of this dividend were met upon filing of our first quarter report on Form 10-Q and the dividend was paid on May 8, 2018.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note to the sole pre-IPO stockholder. This note was repaid on June 15, 2018 with proceeds from our Incremental Term Loans. See Note 5 "Debt and Liquidity".
Initial Public Offering
On April 23, 2018, we completed the IPO of 35,000,000 shares of our common stock at a price of $15 per share. This offering represented a sale of 11.6% of our sole pre-IPO stockholder's ownership in the Company.
On April 26, 2018, we closed the sale of an additional 3,097,525 shares of common stock at a price to the public of $15 per share from the pre-IPO stockholder, as a result of the partial exercise by the underwriters in our IPO of their overallotment option. After giving effect to the partial exercise of the overallotment option, the total number of shares of common stock sold by the pre-IPO stockholder was 38,097,525.
The Company did not receive any proceeds related to the offering. We incurred $5.1 million of legal, accounting, printing and other fees associated with this offering through December 31, 2018, which was recorded in "Selling and administrative" expenses in the Consolidated Statements of Operations.
Follow-on Offering and Common Stock Repurchases
On August 13, 2018, Brookfield completed an underwritten public secondary offering (the "Offering") of 23,000,000 shares of our common stock at a price to the public of $20.00 per share. The Company did not receive any proceeds related to the Offering. Pursuant to a share repurchase agreement with Brookfield, we concurrently repurchased 11,688,311 shares directly from Brookfield. The price per share paid by us in the repurchase was equal to the price at which the underwriters purchased the shares from Brookfield in the Offering net of underwriting commissions and discounts. We funded the share repurchase from cash on hand. The terms and conditions of the share repurchase were reviewed and approved by the audit committee of our board of directors, which is comprised solely of independent directors. All repurchased shares were retired.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. As of December 31, 2019, we had repurchased 1,004,685 shares of common stock totaling $10.9 million under this program.
On December 5, 2019, GrafTech announced two separate transactions. The first was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares of GrafTech common stock at a price of $13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, GrafTech entered into a share repurchase agreement with Brookfield to repurchase $250 million of stock from Brookfield at the arms length price of $13.125, set by the competitive bidding process of the secondary block trade. As a result, GrafTech repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%.
Dividends
The Board of Directors declared and paid a dividend of $0.0645 per share for the first quarter of 2018 totaling $19.5 million, which was paid on June 29, 2018 and represented a prorated quarterly dividend of $0.085 (or $0.34 per annum) per share of our common stock prorated from the date of our IPO, April 23, 2018 to June 30, 2018. We have paid our regular quarterly dividends of $0.085 per share since that time. Additionally, we paid a special dividend to stockholders of $0.70 per share on December 31, 2018.
The balance in our Accumulated other comprehensive (loss) income is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2018
|
|
(Dollars in thousands)
|
Foreign currency translation adjustments, net of tax
|
$
|
(9,293
|
)
|
|
$
|
(2,922
|
)
|
Commodities, foreign currency and interest rate derivatives, net of tax
|
1,932
|
|
|
(2,878
|
)
|
Total accumulated comprehensive (loss) income
|
$
|
(7,361
|
)
|
|
$
|
(5,800
|
)
|
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation as of December 31, 2019, 2018 and 2017. See Note 14 "Stockholders' Equity" for details on our April 12, 2018 stock split and our common stock repurchases on 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic calculation
|
289,057,356
|
|
|
297,748,327
|
|
|
302,225,923
|
|
Add: Effect of equity awards
|
17,245
|
|
|
5,443
|
|
|
—
|
|
Weighted average common shares outstanding for diluted calculation
|
289,074,601
|
|
|
297,753,770
|
|
|
302,225,923
|
|
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes 32,981 and 5,592 shares of participating securities in 2019 and 2018, respectively. Diluted earnings per share are calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued.
The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of 1,082,113 and 650,432 equivalent shares in 2019 and 2018, respectively, as these shares are anti-dilutive.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(16) Summary of quarterly financial data (Unaudited)
The following summarizes certain consolidated operating results by quarter for 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(Dollars in thousands, except per share amounts)
|
As Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
474,994
|
|
|
$
|
480,390
|
|
|
$
|
420,797
|
|
|
$
|
414,612
|
|
|
$
|
451,899
|
|
|
$
|
456,332
|
|
|
$
|
454,890
|
|
|
$
|
532,789
|
|
Gross profit
|
|
279,470
|
|
|
283,343
|
|
|
242,300
|
|
|
235,290
|
|
|
306,750
|
|
|
290,422
|
|
|
274,610
|
|
|
318,430
|
|
Research and development
|
|
637
|
|
|
713
|
|
|
611
|
|
|
723
|
|
|
429
|
|
|
581
|
|
|
518
|
|
|
601
|
|
Selling and administrative expenses
|
|
15,226
|
|
|
15,394
|
|
|
15,708
|
|
|
17,346
|
|
|
15,876
|
|
|
16,239
|
|
|
14,234
|
|
|
15,683
|
|
Other expense (income), net
|
|
467
|
|
|
863
|
|
|
(688
|
)
|
|
4,561
|
|
|
2,005
|
|
|
(974
|
)
|
|
1,502
|
|
|
828
|
|
Related party Tax Receivable
Agreement Expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,393
|
|
|
—
|
|
|
61,801
|
|
|
—
|
|
|
24,677
|
|
Interest Expense
|
|
33,700
|
|
|
32,969
|
|
|
31,803
|
|
|
28,859
|
|
|
37,865
|
|
|
28,667
|
|
|
33,855
|
|
|
34,674
|
|
Interest Income
|
|
(414
|
)
|
|
(731
|
)
|
|
(1,765
|
)
|
|
(1,799
|
)
|
|
(115
|
)
|
|
(391
|
)
|
|
(562
|
)
|
|
(589
|
)
|
Net income
|
|
197,436
|
|
|
196,368
|
|
|
175,876
|
|
|
174,922
|
|
|
223,673
|
|
|
201,448
|
|
|
199,466
|
|
|
229,632
|
|
Net income per share
|
|
$
|
0.68
|
|
|
$
|
0.68
|
|
|
$
|
0.61
|
|
|
$
|
0.61
|
|
|
$
|
0.74
|
|
|
$
|
0.67
|
|
|
$
|
0.67
|
|
|
$
|
0.79
|
|
(17) Subsequent Events
On February 5, 2020, the Board of Directors declared a dividend of $0.085 per share of common stock to stockholders of record as of the close of business on February 28, 2020, to be paid on March 31, 2020.