GrafTech International(EAF) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the periods ended June 30, 2021 Condensed Consolidated Balance Sheets Total assets decreased slightly to $1.40 billion, driven by debt repayment and a reduction in cash | Account | June 30, 2021 ($ in thousands) | Dec 31, 2020 ($ in thousands) | | :--- | :--- | :--- | | Total Current Assets | 604,340 | 629,167 | | Total Assets | 1,397,140 | 1,432,712 | | Total Current Liabilities | 215,429 | 198,093 | | Long-term Debt | 1,224,897 | 1,420,000 | | Total Liabilities | 1,573,700 | 1,762,097 | | Total Stockholders' Deficit | (176,560) | (329,385) | | Total Liabilities and Stockholders' Equity | 1,397,140 | 1,432,712 | Condensed Consolidated Statements of Operations and Comprehensive Income Net sales increased while net income significantly decreased due to higher selling and administrative expenses | Metric | Q2 2021 ($ in thousands) | Q2 2020 ($ in thousands) | H1 2021 ($ in thousands) | H1 2020 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 330,750 | 280,718 | 635,147 | 599,364 | | Gross Profit | 128,883 | 150,118 | 286,884 | 329,847 | | Operating Profit | 52,082 | 133,407 | 188,961 | 297,492 | | Net Income | 28,165 | 92,776 | 126,964 | 215,044 | | Diluted EPS | $0.11 | $0.35 | $0.47 | $0.80 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased, while cash used in financing increased due to debt repayments | Cash Flow Activity | H1 2021 ($ in thousands) | H1 2020 ($ in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | 208,755 | 287,656 | | Net cash used in investing activities | (25,833) | (24,290) | | Net cash used in financing activities | (214,612) | (155,729) | | Net change in cash and cash equivalents | (31,690) | 107,637 | Notes to Condensed Consolidated Financial Statements Notes detail a 'Change in Control' event from Brookfield's reduced ownership, which triggered a one-time expense - Brookfield's ownership of GrafTech common stock decreased from 55.3% as of December 31, 2020, to 23.9% as of June 30, 2021[45] - The company's only reportable segment is Industrial Materials, which comprises graphite electrodes and petroleum needle coke products[46] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong sales volume growth, the impact of one-time charges, and a positive outlook Commercial Update and Outlook Sales volumes increased significantly year-over-year, with expectations of improving non-LTA pricing | Metric | Q2 2021 | Q1 2021 | Q2 2020 | | :--- | :--- | :--- | :--- | | Sales Volume (kMT) | 43 | 37 | 31 | | Production Volume (kMT) | 44 | 36 | 33 | - Non-LTA prices for graphite electrodes are expected to improve in the second half of 2021, with a projected 10%-12% increase in Q3 2021 compared to Q2 2021[144] Estimated LTA Revenue and Volume | Period | Estimated LTA Volume (kMT) | Estimated LTA Revenue (millions) | | :--- | :--- | :--- | | 2021 | 98-108 | $925-$1,025 | | 2022 | 95-105 | $910-$1,010 | | 2023-2024 | 35-45 | $350-$450 | Results of Operations Net income declined sharply despite higher sales, primarily due to significant one-time 'Change in Control' charges Q2 2021 vs Q2 2020 Performance (in thousands) | Metric | Q2 2021 | Q2 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $330,750 | $280,718 | 18% | | Cost of Sales | $201,867 | $130,600 | 55% | | Selling & Admin Expenses | $75,783 | $16,001 | 374% | | Net Income | $28,165 | $92,776 | (70)% | - The increase in Cost of Sales for Q2 2021 was driven by higher sales volume and a one-time Long-term Incentive Plan (LTIP) charge of $30.7 million due to a Change in Control[177] - The surge in Selling and Administrative expenses in Q2 2021 was primarily due to a $42.6 million one-time LTIP expense and $12.9 million in accelerated stock-based compensation expense, both resulting from the Change in Control[178] Liquidity and Capital Resources The company maintained strong liquidity and continued its strategy of prioritizing debt repayment - Total liquidity was $360.5 million as of June 30, 2021, comprising $114.1 million in cash and $246.4 million available under the 2018 Revolving Credit Facility[205] - The company repaid $200 million of principal on its 2018 Term Loans during the first six months of 2021 and anticipates using a majority of cash flow generated in 2021 to continue repaying debt[224] Cash Flow Summary (Six Months Ended June 30) | Activity | 2021 ($ in millions) | 2020 ($ in millions) | | :--- | :--- | :--- | | Operating Activities | 208.8 | 287.7 | | Investing Activities | (25.8) | (24.3) | | Financing Activities | (214.6) | (155.7) | Quantitative and Qualitative Disclosures About Market Risk The company actively manages market risks from interest rates, currency exchange, and energy prices using derivatives - The company manages risks related to interest rates (from floating-rate debt), currency exchange rates (from international sales and operations), and energy commodity prices (for manufacturing)[247] - A hypothetical 100 basis point (1%) increase in interest rates would have increased interest expense by $0.1 million for the six months ended June 30, 2021, net of the impact from interest rate swaps[255] - As of June 30, 2021, a 10% appreciation or depreciation of the U.S. dollar against foreign currencies would result in a change of $6.8 million in the fair value of the foreign currency hedge portfolio[256] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021 - Based on an evaluation as of June 30, 2021, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[261] - No changes occurred during the three months ended June 30, 2021, that materially affected or are reasonably likely to materially affect the company's internal control over financial reporting[262] PART II. OTHER INFORMATION Legal Proceedings The company is involved in customer arbitrations over LTAs, historical wage claims, and a stockholder lawsuit - The company is in arbitration with several customers, including Aperam and ArcelorMittal, who have failed to perform under their LTAs, with claimants seeking approximately $61.0 million in monetary relief[266] - A stockholder lawsuit filed in Delaware challenges the fairness of the company's $250 million share repurchase from Brookfield in December 2019 and asserts claims for breach of fiduciary duty[268] Risk Factors No material changes have been made to the risk factors disclosed in the company's 2020 Annual Report - There have been no material changes to the Risk Factors disclosed in the company's Annual Report on Form 10-K filed on February 23, 2021[270] Unregistered Sale of Equity Securities and Use of Proceeds No shares were repurchased in Q2 2021, with $59.0 million remaining under the authorized program Share Repurchases in Q2 2021 | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | April 2021 | — | $— | $59,030,305 | | May 2021 | — | $— | $59,030,305 | | June 2021 | — | $— | $59,030,305 | | Total | — | $— | $59,030,305 | Exhibits This section lists the exhibits filed with the Form 10-Q, including required CEO and CFO certifications - The exhibits filed with this report include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act[280]