GRAFTECH INTERNATIONAL: Discussion and analysis by management of the financial situation and the results of operations (form 10-Q)

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The Company
GrafTech is a leading manufacturer of graphite electrodes, the critical
consumable for the electric arc furnace industry. We are the only graphite
electrode producer that is substantially vertically integrated into petroleum
needle coke, a key raw material for graphite electrodes. Vertical integration
has allowed us to adopt a commercial strategy with long-term, fixed price, fixed
volume, take-or-pay contracts ("LTAs") providing earnings stability and
visibility. These contracts define volumes and prices, along with
price-escalation mechanisms for inflation, and include significant termination
payments (typically, 50% to 70% of remaining contracted revenue) and, in certain
cases, parent guarantees and collateral arrangements to manage our customer
credit risk.
The environmental and economic advantages of electric arc furnace steel
production positions both that industry and the graphite electrode industry for
continued long-term growth.
We believe GrafTech's leadership position, strong cash flows, and advantaged low
cost structure and vertical integration are sustainable competitive advantages.
The services and solutions we provide will position our customers and us for a
better future.
Commercial Update and Outlook
GrafTech reported strong sales volumes of 43 thousand metric tons ("MT") in the
second quarter of 2021, consisting of LTA volumes of 27 thousand MT, at an
average approximate price of $9,500 per MT, and non-LTA volumes of 16 thousand
MT, at an average approximate price of $4,100 per MT. Sales volumes increased
16% and 39% compared to the first quarter of 2021 and second quarter of 2020,
respectively.
As previously reported, spot prices negotiated during the first quarter of 2021
reached a recent low and have steadily improved since that time. Accordingly,
non-LTA prices for our graphite electrodes to be delivered and realized in
income in the second half of 2021 are improving. We expect this improvement in
non-LTA pricing to continue into 2022. In the third quarter of 2021, we expect
realized prices for non-LTA volumes to be up approximately 10%-12% compared to
the second quarter.
Production volume of 44 thousand MT in the second quarter of 2021 represented an
increase of 22% and 33% compared to the first quarter of 2021 and the second
quarter of 2020, respectively.
The estimated shipments of graphite electrodes for the final two years of the
initial term under our LTAs and for the years 2023 through 2024 remain unchanged
from our prior estimate as follows:
                                                     2021                        2022                    2023 through 2024
Estimated LTA volume (thousands of                  98-108                      95-105                         35-45
metric tons)
Estimated LTA revenue (in millions)               $925-$1,025                 $910-$1,010                   $350-$450(1)


(1) Includes expected termination fees from a few customers that have failed to
meet certain obligations under their LTAs
Global steel market capacity utilization rates have continued to improve
sequentially:
                                                       Q2 2021              Q1 2021              Q2 2020
Global steel market (ex-China) capacity
utilization rates (1)                                    75%                  73%                  56%
U.S. steel market capacity utilization rates (2)         80%                  77%                  56%


1 Source: World Steel Association and Metal Expert
2 Source: American Iron and Steel Institute
Capital Structure and Capital Allocation
As of June 30, 2021, GrafTech had cash and cash equivalents of $114 million and
total debt of approximately $1.2 billion. We continue to make progress in
reducing our long-term debt, repaying $50 million in the second quarter, for a
total
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

debt repayment of $ 200 million in the first half of 2021. We continue to expect that our primary use of cash for the remainder of this year will be debt repayment.


Our full year 2021 capital expenditure range expectations are unchanged, between
$55 and $65 million.
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated
Financial Statements in accordance with GAAP, we use certain other financial
measures and operating metrics to analyze the performance of our company. The
"non-GAAP" financial measures consist of EBITDA, adjusted EBITDA, adjusted net
income and adjusted EPS. which help us evaluate growth trends, establish
budgets, assess operational efficiencies and evaluate our overall financial
performance. The key operating metrics consist of sales volume, production
volume, production capacity and capacity utilization.
                             Key financial measures
                                                       For the Three Months Ended          For the Six Months
                                                                June 30,                     Ended June 30,
(in thousands), except per share data                      2021          2020               2021         2020
Net sales                                              $  330,750    $ 280,718          $ 635,147    $ 599,364
Net income                                             $   28,165    $  92,776          $ 126,964    $ 215,044
Earnings per share(1)                                  $     0.11    $    0.35          $    0.47    $    0.80
EBITDA(2)                                              $   68,017    $ 147,645          $ 221,742    $ 332,674
Adjusted net income(2)                                 $  114,487    $  96,005          $ 214,367    $ 212,235
Adjusted earnings per share(1)(2)                      $     0.43    $    0.36          $    0.80    $    0.79
Adjusted EBITDA (2)                                    $  159,903    $ 151,125          $ 314,948    $ 330,303


(1) Earnings per share represents diluted earnings per share. Adjusted earnings
per share represents adjusted diluted earnings per share.
(2) Non-GAAP financial measures; see below for information and reconciliations
of EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS to net income,
the most directly comparable financial measure calculated and presented in
accordance with GAAP.


                             Key operating metrics
                                                         For the Three Months Ended             For the Six Months
                                                                  June 30,                        Ended June 30,
(in thousands, except utilization)                           2021          2020                 2021           2020
Sales volume (MT)(1)                                             43            31                   80             65
Production volume (MT)(2)                                        44            33                   80             66
Production capacity excluding St. Marys (MT)(3)(4)               51            51                  102            102
Capacity utilization excluding St. Marys (3)(5)                  86  %         65  %                78  %          65  %
Total production capacity (MT)(4)(6)                             58            58                  116            116
Total capacity utilization(5)(6)                                 76  %         57  %                69  %          57  %


(1) Sales volume reflects only graphite electrodes manufactured by GrafTech.
(2) Production volume reflects graphite electrodes we produced during the
period.
(3) In the first quarter of 2018, our St. Marys facility began graphitizing a
limited amount of electrodes sourced from our Monterrey, Mexico facility.
(4) Production capacity reflects expected maximum production volume during the
period under normal operating conditions, standard product mix and expected
maintenance outage. Actual production may vary.
(5) Capacity utilization reflects production volume as a percentage of
production capacity.
(6) Includes graphite electrode facilities in Calais, France; Monterrey, Mexico;
Pamplona, Spain and St. Marys, Pennsylvania.
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Non-GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we
have provided certain financial measures that are not in accordance with GAAP.
EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS are non­GAAP
financial measures. We define EBITDA, a non­GAAP financial measure, as net
income or loss plus interest expense, minus interest income, plus income taxes,
and depreciation and amortization. We define adjusted EBITDA as EBITDA adjusted
for any pension and other post employment benefit ("OPEB") plan expenses or
gains, initial and follow-on public offering and related expenses, non­cash
gains or losses from foreign currency remeasurement of non­operating assets and
liabilities in our foreign subsidiaries where the functional currency is the
U.S. dollar, related party Tax Receivable Agreement (as defined below)
adjustments, stock-based compensation, non­cash fixed asset write­offs and
Change in Control charges that were triggered as a result of the ownership of
our largest stockholder falling below 30% of our total outstanding shares.
Adjusted EBITDA is the primary metric used by our management and our Board of
Directors to establish budgets and operational goals for managing our business
and evaluating our performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it
is useful to present to investors, because we believe that it facilitates
evaluation of our period­to­period operating performance by eliminating items
that are not operational in nature, allowing comparison of our recurring core
business operating results over multiple periods unaffected by differences in
capital structure, capital investment cycles and fixed asset base. In addition,
we believe adjusted EBITDA and similar measures are widely used by investors,
securities analysts, ratings agencies, and other parties in evaluating companies
in our industry as a measure of financial performance and debt­service
capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
•adjusted EBITDA does not reflect our cash expenditures for capital equipment or
other contractual commitments, including any capital expenditure requirements to
augment or replace our capital assets;
•adjusted EBITDA does not reflect the interest expense or the cash requirements
necessary to service interest or principal payments on our indebtedness;
•adjusted EBITDA does not reflect tax payments that may represent a reduction in
cash available to us;
•adjusted EBITDA does not reflect expenses relating to our pension and OPEB
plans;
•adjusted EBITDA does not reflect the non­cash gains or losses from foreign
currency remeasurement of non­operating assets and liabilities in our foreign
subsidiaries where the functional currency is the U.S. dollar;
•adjusted EBITDA does not reflect initial and follow-on public offering and
related expenses;
•adjusted EBITDA does not reflect related party Tax Receivable Agreement
adjustments;
•adjusted EBITDA does not reflect stock-based compensation or the non­cash
write­off of fixed assets;
•adjusted EBITDA does not reflect the Change in Control charges; and
•other companies, including companies in our industry, may calculate EBITDA and
adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
We define adjusted net income, a non­GAAP financial measure, as net income or
loss and excluding the items used to calculate adjusted EBITDA, less the tax
effect of those adjustments. We define adjusted EPS, a non­GAAP financial
measure, as adjusted net income divided by the weighted average of diluted
common shares outstanding during the period. We believe adjusted net income and
adjusted EPS are useful to present to investors because we believe that they
assist investors' understanding of the underlying operational profitability of
the Company.
In evaluating EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, you
should be aware that in the future, we will incur expenses similar to the
adjustments in the reconciliation below, other than change in control charges.
Our presentations of EBITDA, adjusted EBITDA, adjusted net income and adjusted
EPS should not be construed as suggesting that our future results will be
unaffected by these expenses or any unusual or non­recurring items. When
evaluating our performance, you should consider EBITDA, adjusted EBITDA,
adjusted net income, and adjusted EPS alongside other financial performance
measures, including our net income, EPS and other GAAP measures.
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

The following tables reconcile our non-GAAP key financial measures to the most
directly comparable GAAP measures:
Reconciliation of Net Income to Adjusted Net
Income
                                                   For the Three Months Ended          For the Six Months
                                                            June 30,                     Ended June 30,
                                                        2021         2020               2021         2020
                                                             (in thousands,

except per share data)


Net income                                         $    28,165    $ 92,776          $ 126,964    $ 215,044
Adjustments, pre-tax:
Pension and OPEB plan expenses (1)                         430         541                861        1,083
Initial and follow-on public offering and related
expenses (2)                                               241           -                663            4
Non-cash loss (gain) on foreign currency
remeasurement (3)                                        2,255       2,222              1,907       (1,239)
Stock-based compensation (4)                               550         717              1,318        1,127
Non-cash fixed asset write-off (5)                         313           -                313            -
Related party Tax Receivable Agreement adjustment
(6)                                                          -           -                 47       (3,346)
Change in Control LTIP award (7)                        73,384           -             73,384            -
Change in control stock-based compensation
acceleration (7)                                        14,713           -             14,713            -
Total non-GAAP adjustments pre-tax                      91,886       3,480             93,206       (2,371)
Income tax impact on non-GAAP adjustments                5,564         251              5,803          438
Adjusted net income                                $   114,487    $ 96,005  

$ 214,367 $ 212,235



(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market
loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial
and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of
non-operating assets and liabilities of our non-U.S. subsidiaries where the
functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash write-off of fixed assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred change in control charges as a
result of the ownership of our largest stockholder, Brookfield, moving below 30%
of our shares outstanding.
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Reconciliation of EPS to Adjusted EPS

                                                     For the Three Months          For the Six Months Ended
                                                        Ended June 30,                     June 30,
                                                       2021         2020               2021         2020

EPS                                                $     0.11    $   0.35          $     0.47    $   0.80
Adjustments per share:
Pension and OPEB plan expenses (1)                          -           -                   -           -
Initial and follow-on public offering and related
expenses (2)                                                -           -                   -           -
Non-cash gains and losses on foreign currency
remeasurement (3)                                        0.01        0.01                0.01           -
Stock-based compensation (4)                                -           -                0.01           -
Non-cash fixed asset write-off (5)                          -           -                   -           -
Related party Tax Receivable Agreement adjustment
(6)                                                         -           -                   -       (0.01)
Change in control LTIP award (7)                         0.27           -                0.27           -
Change in control stock-based compensation
acceleration (7)                                         0.06           -                0.06           -
Total non-GAAP adjustments pre-tax per share             0.34        0.01                0.35       (0.01)
Income tax impact on non-GAAP adjustments per
share                                                    0.02           -                0.02           -
Adjusted EPS                                       $     0.43    $   0.36          $     0.80    $   0.79


(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market
loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial
and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of
non-operating assets and liabilities of our non-U.S. subsidiaries where the
functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash fixed asset write-off recorded for obsolete assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred Change in Control charges as a
result of the ownership of our largest shareholder, Brookfield, moving below 30%
of our total shares outstanding.
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

                                                  For the Three Months Ended          For the Six Months
                                                           June 30,                     Ended June 30,
                                                      2021          2020               2021         2020
                                                                        (in thousands)
Net income                                        $   28,165    $  92,776          $ 126,964    $ 215,044
Add:

Depreciation and amortization                         16,292       14,549             32,831       28,833
Interest expense                                      15,994       20,880             38,161       46,552
Interest income                                         (199)        (348)              (236)      (1,489)
Income taxes                                           7,765       19,788             24,022       43,734
EBITDA                                                68,017      147,645            221,742      332,674
Adjustments:
Pension and OPEB plan expenses (1)                       430          541                861        1,083

Initial and follow-on public offering and related
expenses (2)                                             241            -                663            4
Non-cash loss (gain) on foreign currency
remeasurement (3)                                      2,255        2,222              1,907       (1,239)
Stock-based compensation (4)                             550          717              1,318        1,127
Non-cash fixed asset write-off (5)                       313            -                313            -
Related party Tax Receivable Agreement adjustment
(6)                                                        -            -                 47       (3,346)
Change in Control LTIP award (7)                      73,384            -             73,384            -
Change in control stock-based compensation
acceleration (7)                                      14,713            -             14,713            -
Adjusted EBITDA                                   $  159,903    $ 151,125          $ 314,948    $ 330,303


(1)Service and interest cost of our OPEB plans. Also includes a mark-to-market
loss (gain) for plan assets as of December of each year.
(2)Legal, accounting, printing and registration fees associated with the initial
and follow-on public offering and related expenses.
(3)Non-cash gains and losses from foreign currency remeasurement of
non-operating assets and liabilities of our non-U.S. subsidiaries where the
functional currency is the U.S. dollar.
(4)Non-cash expense for stock-based compensation grants.
(5)Non-cash write-off of fixed assets.
(6)Non-cash expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
(7)In the second quarter of 2021, we incurred change in control charges as a
result of the ownership of our largest shareholder, Brookfield, moving below 30%
of our shares outstanding.
Key operating metrics
In addition to measures of financial performance presented in accordance with
GAAP, we use certain operating metrics to analyze the performance of our
company. The key operating metrics consist of sales volume, production volume,
production capacity and capacity utilization. These metrics align with
management's assessment of our revenue performance and profit margin and will
help investors understand the factors that drive our profitability.
Sales volume reflects only graphite electrodes manufactured by GrafTech. For a
discussion of our revenue recognition policy, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Critical Accounting
Policies-Revenue Recognition." in our Annual Report on Form 10-K. Sales volume
helps investors understand the factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period.
Production capacity reflects expected maximum production volume during the
period under normal operating conditions, standard product mix and expected
maintenance downtime. Capacity utilization reflects production volume as a
percentage of production capacity. Production volume, production capacity and
capacity utilization help us understand the efficiency of our production,
evaluate cost of sales and consider how to approach our contract initiative.
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Results of Operations
The Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30,
2020
The tables presented in our period-over-period comparisons summarize our
Condensed Consolidated Statements of Operations and illustrate key financial
indicators used to assess the consolidated financial results. Throughout our
Management's Discussion and Analysis ("MD&A"), insignificant changes may be
deemed not meaningful and are generally excluded from the discussion.
                                                    For the Three Months Ended June
                                                                  30,                        Increase/
                                                        2021                2020             Decrease             % Change
                                                         (Dollars in thousands)

Net sales                                           $  330,750          $ 280,718          $   50,032                    18  %
Cost of sales                                          201,867            130,600              71,267                    55  %
   Gross profit                                        128,883            150,118             (21,235)                  (14) %
Research and development                                 1,018                710                 308                    43  %
Selling and administrative expenses                     75,783             16,001              59,782                   374  %
   Operating income                                     52,082            133,407             (81,325)                  (61) %
Other expense (income), net                                357                311                  46                    15  %

Interest expense                                        15,994             20,880              (4,886)                  (23) %
Interest income                                           (199)              (348)                149                   (43) %
Income before provision for income taxes                35,930            112,564             (76,634)                  (68) %
Provision for income taxes                               7,765             19,788             (12,023)                  (61) %
Net income                                          $   28,165          $  92,776          $  (64,611)                  (70) %


Net sales. Net sales increased from $280.7 million in the three months ended
June 30, 2020 to $330.8 million in the three months ended June 30, 2021. The
second quarter of 2020 was impacted by market conditions, including COVID-19.
Stronger demand for our products in the second quarter of 2021 resulted in a 39%
increase in sales volume compared to the same period of 2020. Partially
offsetting the increased volume was a decrease in non-LTA sales prices, as the
sales prices we realized in the second quarter of 2021 were primarily negotiated
late in the fourth quarter of 2020 as well as in the first quarter of 2021. The
sales price of graphite electrodes have increased since the first quarter of
2021 and we expect this to positively impact our second half 2021 results.
Cost of sales. We experienced an increase in cost of sales from $130.6 million
in the three months ended June 30, 2020 to $201.9 million in the three months
ended June 30, 2021, primarily due to the 39% increase in sales volume of
manufactured electrodes. Additionally, cost of sales in the second quarter of
2021 was impacted by a one-time Long-term Incentive Plan ("LTIP") charge of
$30.7 million resulting from a Change in Control after our largest stockholder's
ownership of our common stock was reduced below 30% of our outstanding common
stock.
Selling and administrative expenses. Selling and administrative expenses
increased from $16.0 million in the three months ended June 30, 2020 to
$75.8 million in the three months ended June 30, 2021 primarily due to the
aforementioned Change in Control resulting in $42.6 million of one-time LTIP
expense within selling and administrative expense. Additionally, the Change in
Control resulted in $12.9 million of one-time accelerated stock based
compensation expense.
Interest expense. Interest expense decreased from $20.9 million in the three
months ended June 30, 2020 to $16.0 million in the three months ended June 30,
2021, primarily due to lower interest rates and lower average borrowings.
Partially offsetting these decreases was the absence of a $3.3 million benefit
in 2020 resulting from discounts on debt repurchases.
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Provision for income taxes. The following table summarizes the expense for
income taxes:
                                      For the Three months ended June 30,
                                     2021                                  2020
                                             (Dollars in thousands)

       Tax expense           $          7,765                           $ 19,788
       Pretax income                   35,930                            112,564
       Effective tax rates               21.6    %                          17.6  %



The effective tax rate for the three months ended June 30, 2021 was 21.6%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, which was partially
offset by the net combined impact related to the U.S. taxation of global
intangible low taxed income ("GILTI") and Foreign Tax Credits ("FTCs"). A
portion of the one-time Change in Control charges recorded in the quarter was
not deductible and contributed to the increase in the effective rate. We expect
the full year effective tax rate to be approximately 16% to 17%.
The effective tax rate for the three months ended June 30, 2020 was 17.6%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates.
Tax expense decreased from $19.8 million for the three months ended June 30,
2020 to $7.8 million for the three months ended June 30, 2021. This change is
primarily related to a reduction in pretax income, worldwide earnings from
various countries taxed at different rates and the U.S. taxation of GILTI.
The Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30,
2020
The tables presented in our period-over-period comparisons summarize our
Condensed Consolidated Statements of Operations and illustrate key financial
indicators used to assess the consolidated financial results. Throughout our
MD&A, insignificant changes may be deemed not meaningful and are generally
excluded from the discussion.
                                                         For the Six Months
                                                           Ended June 30,                     Increase/
                                                       2021                  2020             Decrease             % Change
                                                       (Dollars in thousands)

Net sales                                       $    635,147             $ 599,364          $   35,783                     6  %
Cost of sales                                        348,263               269,517              78,746                    29  %

   Gross profit                                      286,884               329,847             (42,963)                  (13) %
Research and development                               1,987                 1,422                 565                    40  %
Selling and administrative expenses                   95,936                30,933              65,003                   210  %
   Operating income                                  188,961               297,492            (108,531)                  (36) %
Other (income) expense                                     3                (3,003)              3,006                  (100) %
Related party Tax Receivable Agreement expense
(benefit)                                                 47                (3,346)              3,393                      N/A
Interest expense                                      38,161                46,552              (8,391)                  (18) %
Interest income                                         (236)               (1,489)              1,253                   (84) %
Income before provision for income taxes             150,986               258,778            (107,792)                  (42) %
Provision for income taxes                            24,022                43,734             (19,712)                  (45) %
Net income from continuing operations                126,964               215,044             (88,080)                  (41) %

Net income                                      $    126,964             $ 215,044          $  (88,080)                  (41) %


Net sales. Net sales increased by $35.8 million, or 6%, from $599.4 million in
the six months ended June 30, 2020 to $635.1 million in the six months ended
June 30, 2021. Higher net sales reflect a 23% increase in sales volume driven
primarily by improved customer demand. The same period of 2020 was impacted by
market conditions, including COVID-19. Lower realized prices for the six months
ended June 30, 2021 partially offset the increased volume. Spot prices for
graphite electrodes
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

declined throughout 2020 and did not begin to increase until the first quarter
of 2021. We expect this increase in the price of electrodes to favorably impact
our results in the second half of 2021.
Cost of sales. Cost of sales increased by $78.7 million, or 29%, from $269.5
million in the six months ended June 30, 2020 to $348.3 million in the six
months ended June 30, 2021. This increase was primarily due to the 23% increase
in sales volume of manufactured electrodes. Additionally, cost of sales for the
six months ended June 30, 2021 was impacted by a one-time LTIP charge of $30.7
million resulting from a Change in Control after our largest stockholder's
ownership of our common stock was reduced below 30% of our outstanding common
stock.
Selling and administrative expenses. Selling and administrative expenses
increased from $30.9 million in the six months ended June 30, 2020 to $95.9
million in the six months ended June 30, 2021 primarily due to the
aforementioned Change in Control resulting in $42.6 million of one-time LTIP
expense. Additionally, the Change in Control resulted in $12.9 million of
one-time accelerated stock based compensation expense.
Other (income) expense. Other income decreased from income of $3.0 million in
the six months ended June 30, 2020 to income of zero in the six months ended
June 30, 2021. This change was primarily due to 2020 advantageous non-cash
foreign currency impacts on non-operating assets and liabilities in the six
months ended June 30, 2020 that did not recur in the same period of 2021.
Related party Tax Receivable Agreement expense (benefit). During the first
quarter of 2020, the Company recorded an adjustment to our related-party
payable-Tax Receivable Agreement liability resulting in a benefit of $3.3
million due to the revised profit expectation for the year 2020, primarily
caused by market conditions and the COVID-19 pandemic.
Interest expense. Interest expense decreased by $8.4 million from $46.6 million
in the six months ended June 30, 2020 to $38.2 million in the same period of
2021, primarily due to lower interest rates and lower average borrowings.
Partially offsetting these decreases was $2.0 million of accelerated
amortization of deferred financing fees and original issue discounts in the six
months ended June 30, 2021 resulting from prepayments on our term loan and the
the absence of a $3.3 million benefit in 2020 resulting from discounts on debt
repurchases.
Provision for income taxes. The following table summarizes the expense for
income taxes:
                                        For the Six Months Ended June 30,
                                       2021                              2020
                                             (Dollars in thousands)
          Tax expense           $        24,022                       $ 43,734
          Pre-tax income                150,986                        258,778
          Effective tax rates              15.9   %                       16.9  %


The effective tax rate for the six months ended June 30, 2021 was 15.9%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, partially offset by
the net combined impact related to the U.S. taxation of GILTI and FTCs.
For the six months ended June 30, 2020, the effective tax rate of 16.9% differs
from the U.S. statutory rate of 21% primarily due to worldwide earnings from
various countries taxed at different rates.
The tax expense decreased from $43.7 million for the six months ended June 30,
2020 to $24.0 million for the six months ended June 30, 2021. This change is
primarily related to the reduction in pretax income, worldwide earnings from
various countries taxed at different rates and the U.S. taxation of GILTI.
GrafTech has considered the tax impact of COVID-19 legislation, including the
U.S. Coronavirus Aid, Relief and Economic Security (CARES) Act and has concluded
that there is no material tax impact. The Company continues to monitor the tax
effects of any legislative changes.
 Effects of Changes in Currency Exchange Rates
When the currencies of non-U.S. countries in which we have a manufacturing
facility decline (or increase) in value relative to the U.S. dollar, this has
the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales
and other
                                       33
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

expenses with respect to those facilities. In certain countries in which we have
manufacturing facilities, and in certain export markets, we sell in currencies
other than the U.S. dollar. Accordingly, when these currencies increase (or
decline) in value relative to the U.S. dollar, this has the effect of increasing
(or reducing) net sales. The result of these effects is to increase (or
decrease) operating profit and net income.
Many of the non-U.S. countries in which we have a manufacturing facility have
been subject to significant economic and political changes, which have
significantly impacted currency exchange rates. We cannot predict changes in
currency exchange rates in the future or whether those changes will have net
positive or negative impacts on our net sales, cost of sales or net income.
The impact of these changes in the average exchange rates of other currencies
against the U.S. dollar on our net sales was an increase of $4.3 million and
$9.0 million for the three and six months ended June 30, 2021, respectively,
compared to the same period of 2020. The impact of these changes on our cost of
sales was an increase of $8.1 million and $11.5 million for the three and six
months ended June 30, 2021, respectively, compared to the same period of 2020.
We have in the past and may in the future use various financial instruments to
manage certain exposures to risks caused by currency exchange rate changes, as
described under "Part I, Item 3-Quantitative and Qualitative Disclosures about
Market Risk."
Liquidity and Capital Resources
Our sources of funds have consisted principally of cash flow from operations and
debt, including our credit facilities (subject to continued compliance with the
financial covenants and representations). Our uses of those funds (other than
for operations) have consisted principally of dividends, capital expenditures,
scheduled debt repayments, optional debt repayments, share repurchases and other
obligations. Disruptions in the U.S. and international financial markets could
adversely affect our liquidity and the cost and availability of financing to us
in the future.
We believe that we have adequate liquidity to meet our needs. As of June 30,
2021, we had liquidity of $360.5 million, consisting of $246.4 million of
availability under our 2018 Revolving Credit Facility (subject to continued
compliance with the financial covenants and representations) and cash and cash
equivalents of $114.1 million. We had long-term debt of $1,224.9 million and
short-term debt of $0.1 million as of June 30, 2021. As of December 31, 2020, we
had liquidity of $391.8 million consisting of $246.4 million available on our
2018 Revolving Credit Facility (subject to continued compliance with the
financial covenants and representations) and cash and cash equivalents of $145.4
million. We had long-term debt of $1,420.0 million and short-term debt of $0.1
million as of December 31, 2020.
As of June 30, 2021 and December 31, 2020, $84.1 million and $114.6 million,
respectively, of our cash and cash equivalents were located outside of the U.S.
We repatriate funds from our foreign subsidiaries through dividends. All of our
subsidiaries face the customary statutory limitation that distributed dividends
cannot exceed the amount of retained and current earnings. In addition, for our
subsidiary in South Africa, the South Africa Central Bank requires that certain
solvency and liquidity ratios remain above defined levels after the dividend
distribution, which historically has not materially affected our ability to
repatriate cash from this jurisdiction. The cash and cash equivalents balances
in South Africa were $2.6 million and $1.6 million as of June 30, 2021 and
December 31, 2020, respectively. Upon repatriation to the U.S., the foreign
source portion of dividends we receive from our foreign subsidiaries is no
longer subject to U.S. federal income tax as a result of The Tax Cuts and Jobs
Act of 2017.
Cash flow and plans to manage liquidity. Our cash flow typically fluctuates
significantly between quarters due to various factors. These factors include
customer order patterns, fluctuations in working capital requirements, timing of
tax payments, timing of capital expenditures, acquisitions, divestitures and
other factors. Cash flow from operations is expected to remain at positive
sustained levels due to the predictable earnings generated by our LTAs with our
customers.
Debt Structure
We had availability under the 2018 Revolving Credit Facility of $246.4 million
as of June 30, 2021 and December 31, 2020, which consisted of the $250 million
limit reduced by $3.6 million of outstanding letters of credit.
In February 2018, the Company entered into a credit agreement (the "2018 Credit
Agreement"), which provides for (i) a $2,250 million senior secured term
facility (the "2018 Term Loan Facility") after giving effect to the June 2018
amendment (the "First Amendment") that increased the aggregate principal amount
of the 2018 Term Loan Facility from $1,500 million to $2,250 million and (ii) a
$250 million senior secured revolving credit facility (the "2018 Revolving
Credit Facility" and,
                                       34
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

together with the 2018 Term Loan Facility, the "Senior Secured Credit
Facilities"). GrafTech Finance Inc. ("GrafTech Finance") is the sole borrower
under the 2018 Term Loan Facility while GrafTech Finance, GrafTech Switzerland
SA ("Swissco") and GrafTech Luxembourg II S.à.r.l. ("Luxembourg Holdco" and,
together with GrafTech Finance and Swissco, the "Co-Borrowers") are co-borrowers
under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the
2018 Revolving Credit Facility mature on February 12, 2025 and February 12,
2023, respectively.
The 2018 Term Loan Facility bears interest, at our option, at a rate equal to
either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement),
plus an applicable margin equal to 3.00% per annum following an amendment in
February 2021 (the "Second Amendment") that decreased the Applicable Rate (as
defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii)
the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable
margin equal to 2.00% per annum following the Second Amendment, in each case
with one step down of 25 basis points based on achievement of certain public
ratings of the 2018 Term Loan Facility. The Second Amendment also decreased the
interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
The 2018 Revolving Credit Facility bears interest, at our 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, we are 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.
The Senior Secured Credit Facilities are guaranteed by each of our domestic
subsidiaries, subject to certain customary exceptions, and by GrafTech
Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an
indirect wholly owned subsidiary of GrafTech, Luxembourg HoldCo, and Swissco
(collectively, the "Guarantors") with respect to all obligations under the 2018
Credit Agreement of each of our foreign subsidiaries that is a Controlled
Foreign Corporation (within the meaning of Section 956 of the Internal Revenue
Code of 1986, as amended from time to time (the "Code")).
All obligations under the 2018 Credit Agreement are secured, subject to certain
exceptions, by: (i) a pledge of all of the equity securities of each domestic
Guarantor 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 each domestic Guarantor, subject
to permitted liens and certain exceptions specified in the 2018 Credit
Agreement. The obligations of each foreign subsidiary of GrafTech that is a
Controlled Foreign Corporation under the 2018 Revolving Credit Facility are
secured by (i) a pledge of all of the equity securities of each Guarantor that
is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary
of any Guarantor that is a Controlled Foreign Corporation, and (ii) security
interests in certain receivables and personal property of each Guarantor that is
a Controlled Foreign Corporation, subject to permitted liens and certain
exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loan Facility amortizes at a rate of $112.5 million a year 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. GrafTech Finance is required to make prepayments under the
2018 Term Loan Facility (without payment of a premium) with (i) net cash
proceeds from non-ordinary course asset sales (subject to customary reinvestment
rights and other customary exceptions and exclusions), and (ii) commencing with
the Company's fiscal year ended December 31, 2019, 75% of Excess Cash Flow (as
defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of
Excess Cash Flow based on achievement of a senior secured first lien net
leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00
and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly
amortization payments of the 2018 Term Loan Facility 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 Loan Facility as directed by GrafTech Finance. As of
June 30, 2021, we have satisfied all amortization requirements through
prepayments through the maturity date.
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.
                                       35
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

2020 Senior Notes
On December 22, 2020, GrafTech Finance issued $500 million aggregate principal
amount of the 2020 Senior Notes at an issue price of 100% of the principal
amount thereof in a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act and to non-U.S. persons
outside the United States under Regulation S under the Securities Act.
The 2020 Senior Notes were issued pursuant to the indenture among GrafTech
Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the
Company named therein as guarantors and U.S. Bank National Association, as
trustee and notes collateral agent.
The 2020 Senior Notes are guaranteed on a senior secured basis by the Company
and all of its existing and future direct and indirect U.S. subsidiaries that
guarantee, or borrow under, the credit facilities under its 2018 Credit
Agreement. The 2020 Senior Notes are secured on a pari passu basis by the
collateral securing the term loans under the 2018 Credit Agreement. GrafTech
Finance, the Company and the other guarantors granted a security interest in
such collateral, consisting of substantially all of their respective assets, as
security for the obligations of GrafTech Finance, the Company and the other
guarantors under the 2020 Senior Notes and the Indenture pursuant to a
collateral agreement, dated as of December 22, 2020 (the "Collateral
Agreement"), among GrafTech Finance, the Company, the other subsidiaries of the
Company named therein as grantors and U.S. Bank National Association, as
collateral agent.
The 2020 Senior Notes bear interest at the rate of 4.625% per annum, which
accrues from December 22, 2020 and is payable in arrears on June 15 and December
15 of each year, commencing on June 15, 2021. The 2020 Senior Notes will mature
on December 15, 2028, unless earlier redeemed or repurchased, and are subject to
the terms and conditions set forth in the Indenture.
GrafTech Finance may redeem some or all of the 2020 Senior Notes at the
redemption prices and on the terms specified in the Indenture. If the Company or
GrafTech Finance experiences specific kinds of changes in control or the Company
or any of its restricted subsidiaries sells certain of its assets, then GrafTech
Finance must offer to repurchase the 2020 Senior Notes on the terms set forth in
the Indenture.
The Indenture contains certain covenants that, among other things, limit the
Company's ability, and the ability of certain of its subsidiaries, to incur or
guarantee additional indebtedness or issue preferred stock, pay distributions
on, redeem or repurchase capital stock or redeem or repurchase subordinated
debt, incur or suffer to exist liens securing indebtedness, make certain
investments, engage in certain transactions with affiliates, consummate certain
asset sales and effect a consolidation or merger, or sell, transfer, lease or
otherwise dispose of all or substantially all assets. The Indenture contains
events of default customary for agreements of its type (with customary grace
periods, as applicable) and provides that, upon the occurrence of an event of
default arising from certain events of bankruptcy or insolvency with respect to
the Company or GrafTech Finance, all outstanding 2020 Senior Notes will become
due and payable immediately without further action or notice. If any other type
of event of default occurs and is continuing, then the trustee or the holders of
at least 30% in principal amount of the then outstanding 2020 Senior Notes may
declare all of the Senior Notes to be due and payable immediately.
The entirety of the 2020 Senior Notes proceeds was used to pay down a portion of
our 2018 Term Loans.
Uses of Liquidity
On July 30, 2019, our Board of Directors authorized a program to repurchase up
to $100 million of our outstanding common stock. We may purchase shares from
time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18
plans. The amount and timing of repurchases are subject to a variety of factors
including liquidity, stock price, applicable legal requirements, other business
objectives and market conditions. We have repurchased 4,333,259 shares of common
stock for a total purchase price of $41.0 million under this program since
inception. There were no shares repurchased under this program during the six
months ended June 30, 2021.
We currently pay a quarterly dividend of $0.01 per share, or $0.04 on an
annualized basis. We review our capital structure with the Board of Directors on
an ongoing basis. There can be no assurance that we will pay dividends in the
future in these amounts or at all. Our Board of Directors may change the timing
and amount of any future dividend payments or eliminate the payment of future
dividends in its sole discretion, without any prior notice to our stockholders.
Our ability to pay dividends will depend upon many factors, including our
financial position and liquidity, results of operations, legal requirements,
restrictions that may be imposed by the terms of our current and future credit
facilities and other debt obligations and other factors deemed relevant by our
Board of Directors.
                                       36
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

During 2020, we reduced our long-term debt principal by $400 million. During the
six months ended June 30, 2021, we repaid an additional $200 million of
principal of our 2018 Term Loans. We continue to prioritize balance sheet
flexibility and debt repayment. We anticipate using a majority of the cash flow
that we generate in 2021 to repay debt, but we will continue to examine
opportunities to repurchase our common stock.
Potential uses of our liquidity include dividends, share repurchases, capital
expenditures, acquisitions, scheduled debt repayments, optional debt repayments,
and other general purposes. An improving economy, while resulting in improved
results of operations, could increase our cash requirements to purchase
inventories, make capital expenditures and fund payables and other obligations
until increased accounts receivable are converted into cash. A downturn,
including any potential resurgence of the COVID-19 pandemic, could significantly
and negatively impact our results of operations and cash flows, which, coupled
with increased borrowings, could negatively impact our credit ratings, our
ability to comply with debt covenants, our ability to secure additional
financing and the cost of such financing, if available.
In order to seek to minimize our credit risks, we may reduce our sales of, or
refuse to sell (except for prepayment, cash on delivery or under letters of
credit or parent guarantees), our products to some customers and potential
customers. Our unrecovered trade receivables worldwide have not been material
during the last two years individually or in the aggregate.
During the second quarter of 2021, the Company paid out $61.5 million under its
LTIP resulting from a Change in Control provision upon Brookfield's ownership of
the Company's common stock falling below 30% of our total outstanding shares,
which occurred in the second quarter of 2021. The remaining $11.9 million
related to payroll taxes will be paid out in the third quarter of 2021. For
details of the LTIP, see Note 7 "Contingencies" to the Notes to Condensed
Consolidated Financial Statements.
We manage our capital expenditures by taking into account quality, plant
reliability, safety, environmental and regulatory requirements, prudent or
essential maintenance requirements, global economic conditions, available
capital resources, liquidity, long-term business strategy and return on invested
capital for the relevant expenditures, cost of capital and return on invested
capital of the Company as a whole and other factors.
  Capital expenditures totaled $26.1 million in the six months ended June 30,
2021. We are managing inventory levels to match demand.
In the event that operating cash flows fail to provide sufficient liquidity to
meet our business needs, including capital expenditures, any such shortfall
would need to be made up by increased borrowings under our 2018 Revolving Credit
Facility, to the extent available.
  Cash Flows
The following table summarizes our cash flow activities:
                                       For the Six Months
                                         Ended June 30,
                                       2021           2020
                                         (in millions)
Cash flow provided by (used in):
Operating activities               $    208.8      $  287.7
Investing activities               $    (25.8)     $  (24.3)
Financing activities               $   (214.6)     $ (155.7)


Operating Activities
Cash flow from operating activities represents cash receipts and cash
disbursements related to all of our activities other than investing and
financing activities. Operating cash flow is derived by adjusting net income
(loss) for:
•Non-cash items such as depreciation and amortization, impairment, post
retirement obligations, and severance and pension plan changes;
•Gains and losses attributed to investing and financing activities such as gains
and losses on the sale of assets, loan modification charges and unrealized
currency transaction gains and losses; and
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

•Changes in operating assets and liabilities, which reflect timing differences
between the receipt and payment of cash associated with transactions and when
they are recognized in results of operations.
The net impact of the changes in working capital (operating assets and
liabilities), which are discussed in more detail below, include the impact of
changes in: receivables, inventories, prepaid expenses, accounts payable,
accrued liabilities, accrued taxes, interest payable and payments of other
current liabilities.
During the six months ended June 30, 2021, changes in working capital resulted
in a net source of funds of $50.4 million, which was impacted by:
•net cash inflows in accounts receivable of $9.3 million from the decrease in
accounts receivable due to the timing of sales;
•net cash inflows due to decreased inventory of $7.8 million resulting from
lower costs and quantities on hand;
•net cash outflows from decreased income taxes payable of $17.8 million
resulting from tax payments, partially offset by 2021 income tax accruals;
•net cash inflows from increases in accounts payable and accruals of $62.7
million, due to increased raw material purchases, increased deferred revenue
liabilities related to customer prepayments, and timing of payments of payroll
taxes; and
Uses of cash in the six months ended June 30, 2021 included payments under our
LTIP of $61.5 million, payments under our tax receivable agreement, dated April
23, 2018 ("TRA"), cash taxes paid of $44.6 million, cash paid for interest of
$30.5 million, and contributions to pension and other benefit plans of $2.3
million.
During the six months ended June 30, 2020, changes in working capital resulted
in a net source of funds of $61.9 million, which was impacted by:
•net cash inflows in accounts receivable of $58.7 million from the decrease in
accounts receivable due to lower sales;
•net cash inflows of $6.1 million from the decrease in other current assets
primarily due to value-added tax refunds received from foreign governments;
•net cash inflows from increased income taxes payable of $25.1 million resulting
from our ability to defer a $50.0 million tax payment in a foreign jurisdiction
resulting from government enacted COVID-19 relief, partially offset by lower
required tax payments due to lower profitability; and
•net cash outflows from decreases in accounts payable and accruals of $25.0
million, due to lower purchases of third-party needle coke and timing of
payments.
Uses of cash in the six months ended June 30, 2020 included payments under the
TRA of $27.9 million, cash paid for interest of $46.1 million and taxes paid of
$4.9 million, and contributions to pension and other benefit plans of $1.8
million.
Investing Activities
Net cash used in investing activities was $25.8 million during the six months
ended June 30, 2021, resulting from capital expenditures.
Net cash used in investing activities was $24.3 million during the six months
ended June 30, 2020, resulting from capital expenditures.
 Financing Activities
Net cash outflow from financing activities was $214.6 million during the six
months ended June 30, 2021, which was the result of the repayment of $200.0
million of principal on our 2018 Term Loan Facility, taxes paid related to stock
awards vesting of $4.1 million, $2.1 million of interest rate swap settlements,
$1.6 million of debt modification costs from our term loan repricing, $1.4
million of debt issuance costs from our 2020 Senior Note Issuance and $5.3
million of total dividends to stockholders.
                                       38
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                                PART I (CONT'D)
                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Net cash outflow from financing activities was $155.7 million during the six
months ended June 30, 2020, which was the result of the repayment of $100.0
million on our 2018 Term Loan Facility, $25.5 million of total dividends to
stockholders and $30.1 million of stock repurchases.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2021
and we expect to continue to do so in the future. These transactions include
ongoing obligations under the TRA, Stockholders Rights Agreement and
Registration Rights Agreement, each with Brookfield.
Recent Accounting Pronouncements
We discuss recently adopted accounting standards in Note 1, "Organization and
Summary of Significant Accounting Policies" of the Notes to Condensed
Consolidated Financial Statements.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 4, "Debt and
Liquidity" of the Notes to Condensed Consolidated Financial Statements.

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