UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 20192021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number: 1-13888
GRAFTECH INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
Delaware 27-2496053
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
982 Keynote Circle 44131
Brooklyn Heights, Ohio (Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (216) 676-2000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||
| Common Stock, $0.01 par value per share | EAF | New York Stock Exchange | ||||||||||||||||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 28, 201930, 2021 was $702.5$2,365.0 million, based on the closing price of the registrant’s common stock as reported on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second quarter.
On February 17, 2020, 268,930,98711, 2022, 263,255,708 shares of our common stock were outstanding, par value $0.01 per share.outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the “Definitive Proxy“Proxy Statement”) to be filed with the Securities and Exchange Commission relative to the registrant’s 20202022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
Table of Contents
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PART I
References herein to the "Company", "we", "our", or "us" refer collectively to GrafTech International Ltd. and its subsidiaries.
Presentation of Financial, Market and LegalIndustry Data
We present our financial information on a consolidated basis. Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Certain market and industry data included in this Annual Report on Form 10-K for the year ended December 31, 20192021 (the “Annual Report” or “report”“Report”) has been obtained from third partythird-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third partythird-party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third party information. We cannot guarantee the accuracy or completeness of this market and market share data and have not independently verified it. None of the sources has consented to the disclosure or use of data in this Annual Report. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Forward‑Looking“Forward-Looking Statements” and “Risk Factors” in this Annual Report.
Cautionary Note Regarding Forward-Looking Statements
•the cyclical nature ofultimate impact the COVID-19 pandemic has on our business, results of operations, financial condition and cash flows, including the duration and spread of any variants, the duration and scope of related government orders and restrictions, the impact on our employees, and the selling prices ofdisruptions and inefficiencies in our products may lead to periods of reduced profitability and net losses in the future;supply chain;
•the possibility that we may be unable to implement our business strategies, including our initiativeability to secure and maintain longer-term customer contracts, in an effective manner;
•the cyclical nature of our business and the selling prices of our products, which may decline in the future, may lead to periods of reduced profitability and net losses in the future;
•the risks and uncertainties associated with litigation, arbitration, and like disputes, including disputes related to contractual commitments;
•the possibility that global graphite electrode overcapacity may adversely affect graphite electrode prices;
•the sensitivity of our business and operating results to economic conditions and the possibility others may not be able to fulfill their obligations to us in a timely fashion or at all;
•the competitiveness of the graphite electrode industry;
•our dependence on the supply of raw materials, including decant oil, petroleum needle coke;coke, and energy, and disruptions in supply chains for these materials;
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•changes in, or more stringent enforcement of, health, safety and environmental regulations applicable to our manufacturing operations and facilities;
•the legal, compliance, economic, social and political risks associated with our substantial operations in multiple countries;
•the possibility that fluctuation of foreign currency exchange rates could materially harm our financial results;
•the possibility that our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period, including as a result of equipment failure, climate change, regulatory issues, natural disasters, public health crises, such as the COVID-19 pandemic, political crises or other catastrophic events;
•our dependence on third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services;
•the possibility that we are unable to recruit or retain key management and plant operating personnel or successfully negotiate with the representatives of our employees, including labor unions;
•the sensitivity of goodwill on our balance sheet to changes in the market;
•the possibility that we are subject to information technology systems failures, cybersecurity attacks, network disruptions and breaches of data security;
•our dependence on protecting our intellectual property;
property and the possibility that third parties may claim that our products or processes infringe their intellectual property rights;
•the possibility that our indebtedness could limit our financial and operating activities or that our cash flows may not be sufficient to service our indebtedness;
•the possibility that restrictive covenants in our financing agreements could restrict or limit our operations;
•the fact that borrowings under certain of our existing financing agreements subject us to interest rate risk;
•the possibility that disruptions in the capital and credit markets could adversely affect our results of operations, cash flows and financial condition, or those of our customers and suppliers;
•the possibility that the market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets, including by Brookfield (as defined below);Asset Management Inc. and its affiliates;
•the possibility that we may not pay cash dividends on our common stock in the future; and
•the fact that certain provisions of our Amended and Restated Certificate of Incorporation and our Amended and Restated By-Laws could hinder, delaystockholders have the right to engage or prevent a change of control;
invest in the fact that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders; and
These factors should not be construed as exhaustive and should be read in conjunction with the risk factors and other cautionary statements that are included in this report.Report. The forward‑lookingforward-looking statements made in this reportReport relate only to events as of the date on which the statements are made. WeExcept as required by law, we do not undertake any obligation to publicly update or review any forward‑lookingforward-looking statement, except as required by law, whether as a result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward‑lookingforward-looking statements. We caution that you should not place undue reliance on any of our forward‑lookingforward-looking statements. You should specifically consider the factors identified in this reportReport that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
For a more complete discussion of these and other factors, see "Risk Factors" in Part I of this report.Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Report.
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Our company
GrafTech International Ltd. is a leading manufacturer of high qualityhigh-quality graphite electrode products essential to the production of electric arc furnace (or EAF)("EAF") steel and other ferrous and non‑ferrousnon-ferrous metals. We believe that we have the most competitive portfolio of low‑costlow-cost ultra-high power (“UHP”) graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. This unique position provides us with competitive advantages in product quality and cost. Founded in 1886, we have over 130135 years of experience in the research and development (or (“R&D)&D”) of graphite- and carbon‑basedcarbon-based solutions, and our intellectual property portfolio is extensive. We currently have graphite electrode manufacturing facilities in Calais, France, Pamplona, Spain, Monterrey, Mexico and St. Marys, Pennsylvania. Our customers include major steel producers and other ferrous and non‑ferrousnon-ferrous metal producers in Europe, Russia and other Commonwealth of Independent States countries, the Middle East and Africa (or EMEA)(collectively, “EMEA”), the Americas and Asia‑Pacific (or APAC)Asia-Pacific (“APAC”), which sell their products into the automotive, construction, appliance, machinery, equipment and transportation industries. Our vision is to provide highly engineered graphite electrode services, solutions and products to EAF operators. Based on the high qualityhigh-quality of our graphite electrodes, reliability of our petroleum needle coke supply and our excellent customer service, we believe that we are viewed as a preferred supplier to the global EAF steel producer market.
Graphite electrodes are an industrial consumable product used primarily in EAF steel production, one of the two primary methods of steel production and the steelmaking technology used by all “mini‑mills.” Electrodes act as conductors of electricity in the furnace, generating sufficient heat to melt scrap metal, iron ore or other raw materials used to produce steel or other metals. We estimate that, on average, the cost of graphite electrodes represents only approximately 1% toless than 5% of the total production cost of steel in a typical EAF, but they are essential to EAF steel production. Graphite electrodes are currently the only known commercially available products that have the high levels of electrical conductivity and the capability to sustain the high levels of heat generated in EAF steel production. As a result, EAF steel manufacturers have been willing to pay a premium forrequire a reliable supply of high qualityhigh-quality graphite electrodes. Graphite electrodes are also used in steel refining in ladle furnaces and in other processes, such as the production of titanium dioxide, stainless steel, aluminum, silicon metals and other ferrous and non‑ferrous metals.
With the growth of EAF steel production, globally isgraphite electrode production has become focused on the manufacture of ultra-high power (or "UHP") electrodes for EAFs.UHP electrodes. The production of UHP electrodes requires an extensive proprietary manufacturing process and material science knowledge, including the use of higher quality needle coke blends. We primarily compete in the UHP graphite electrode market.
Petroleum needle coke, a crystalline form of carbon derived from decant oil, is athe key raw material usedwe use in the production of graphite electrodes. We achieved substantial vertical integration with this critical raw material source through our acquisition of Seadrift Coke LP (or Seadrift)L.P. (“Seadrift”) in November 2010, significantly reducing our reliance on other suppliers. The petroleum needle coke industry is highly concentrated. We believe Seadrift is one of the largest petroleum needle coke producers in the world. We also believe that the quality of Seadrift’s petroleum needle coke is superior for graphite electrode production compared to most of the petroleum needle coke available to our peers on the open market, allowing us to produce higher qualityhigh-quality electrodes in a cost‑efficient manner. Additionally, we believe that this vertical integration provides a significant cost advantage relative to our competitors. We believe this cost advantage will persist as demand for petroleum needle coke increases for use in lithium‑ion batteries in electric vehicles. The demand for petroleum needle coke in lithium‑ion batteries is growing rapidly. This alternative source of demand is a significant development for the petroleum needle coke industry and has disrupted global supply chains for petroleum needle coke.
As a leading producer of graphite electrodes, we believe we are well-positioned to be a key provider to the EAF steel making industry. In 2018, we completed an operational improvement and debottlenecking initiative to increaseOur production capacity at our three primary operating facilities byis approximately 20% to a total of 202,000200,000 metric tons ("MT"). We have recently begun a series of projects at1 through our primary manufacturing facilities in Calais, France, Pamplona, Spain, and Monterrey, and St. Marys facilities that will shiftMexico. In 2021, we shifted graphitization and machining of additional volumea portion of semi-finished productproducts from Monterrey to St. Marys. We expect these projects will further optimize our manufacturing footprint
Graphite electrodes are an essential consumable in the EAF steel production process and require a long lead time to manufacture, and our strategic customers are highly focused on securing certainty of supply of reliable, high qualityhigh-quality graphite electrodes. Therefore, beginning in the fourth quarter of 2017, we executed three- to five‑year take‑or‑pay sales contracts for approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. We believe we are uniquely capable among graphite electrode producers to pursue our three‑ to five‑year take‑or‑payLTA contracting strategy due to our substantial vertical integration into petroleum needle coke production.
On August 15, 2015, we became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (together with its affiliates, "Brookfield"). In April 2018, we completed our initial public offering (or IPO) of 38,097,525 shares of our common stock held by Brookfield at a price of $15.00 per share. We did not receive any proceeds related to the IPO.("IPO"). Our common stock is listed
1 Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary.
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on the NYSENew York Stock Exchange ("NYSE") under the symbol “EAF.” Brookfield ownsowned approximately 74% 24% of our common stock as of December 31, 2019.2021.
Our executive offices are located at 982 Keynote Circle, Brooklyn Heights, Ohio 44131 and our telephone number is (216) 676‑2000. Our website address is www.graftech.com. Information on, or accessible through, our website is not part of this Annual Report. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.
Competitive strengths
We are one of the largest producers of graphite electrodes in the world, accounting for approximately 24%a quarter of global production capacity (excluding China), and we believe our strategically positioned global footprint provides us with competitive advantagesadvantages.
We believe our facilities are among the most strategically located and lowest cost, large‑scale graphite electrode manufacturing plants in the world. Of the graphite electrode manufacturing facilities currently operating, we estimate that our three primary operating manufacturing facilities represent approximately 24%a quarter of estimated production capacity for graphite electrodes outside of China, making us a critical supplier to global EAF steel manufacturers. Our manufacturing facilities are located in the Americas and EMEA, providing us with access to low‑cost and reliable energy sources, logistical and freight advantages in sourcing raw materials and shipping our graphite electrodes to our customers compared to our competitors, and excellent visibility into the large North American and European EAF steelmaking markets. Our experience in producing graphite electrodes for a varied global customer base positions us to meet customer requirements across a range of product types and quality levels, including support and technical services, further distinguishing us from our competitors.
We are a pure‑play provider of an essential consumable for EAF steel producers, the fastest‑growing sector of the steel industryindustry.
According to the World Steel Association ("WSA"(“WSA”), since 2000, EAF steelmaking grew at an annual pace of approximately 10% in 2018,2%, compared with 5%1% for steelmaking overall.overall, excluding China. As a result of the increasing global availability of steel scrap and the more resilient, high‑variable cost and environmentally friendly EAF model, we expect EAF steel producers to continue to grow at a faster rate than blast oxygen furnace ("BOF") producers globally. Additionally, EAF steel producers are increasingly able to utilize higher quality scrap and iron units, their two primary raw materials, to produce higher quality steel grades and capture market share from BOF producers, while maintaining a favorable cost structure. The EAF method produces approximately 25% of the carbon dioxide (or (“CO2”) emissions of a BOF facility and does not require the smelting of virgin iron ore or the burning of coal. Additionally, as a result of significantly increased steel production in China since 2000, the supply of Chinese scrap is expected to increase substantially, which may result in lower scrap prices and provide the Chinese steel manufacturing industry with local scrap feedstock that was not historically available. We believe these trends will allow EAF steel producers to increase their market share and grow at a faster rate than BOF steel producers resulting in increasing demand for graphite electrodes.
We have capital‑efficient growth opportunities available to us
Seadrift provides a substantial portion of our petroleum needle coke supply needs internally at a competitive cost and allows us to maximize capacity utilization more efficiently than competitors, who may be more constrained by a limited or costly petroleum needle coke supply. Seadrift is one of only five petroleum needle coke facilities in the world outside of China, and we believe it is one of the largest petroleum needle coke producers in the world.
We are the only petroleum needle coke producer in the world specifically focused on the production of graphite electrodeselectrodes.
Our production of petroleum needle coke specifically for graphite electrodes provides us the opportunity to produce super premium petroleum needle coke of the highest quality and allows us to tailor graphite electrodes for customer requirements. Seadrift has approximately 140,000 MT ofof petroleum needle coke production capacity, which we believe makes it one of the largest petroleum needle coke producers in the world. The growing petroleum needle coke demand from manufacturers of lithium‑ion batteries for electric vehicles has increased demand for petroleum needle coke otherwise available to graphite electrode manufacturers. Sourcing the majority of our petroleum needle coke internally allows us to offer our customers certainty of supply, further enhancing our competitive position and supporting our three‑ to five‑year, take‑or‑pay contractsLTA strategy. To align with our three‑ to five‑year contractLTA profile, we have hedged the decant oil required to produce substantially all of the graphite electrodes sold under these contracts, providing us with substantial visibility into our future raw material costs. We believe our use of petroleum needle coke is a further competitive advantage, as the use of pitch needle coke, an alternative raw material, results in longer bake times during graphite electrode production.
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We provide highly engineered graphite electrode production. Our restructuredproducts and simplified business modelare competitively positioned to provide services and solutions to EAF operators.
We utilize our own R&D facility as well as process engineers located at plant sites to constantly work at process and product improvements. This work has reducedyielded the development of new products, which have improved our annual overhead expenses significantly since 2012, allowing us to redeploy the savings into our graphite electrode business. We identified and implemented mechanical and chemical improvements to our electrodes, invested in our capability to produce super premium petroleum needle coke needed for high‑margin UHP graphite electrodes, and optimized our production of pins at our Monterrey plant, which are a critical component used to connect and fasten graphite electrodes together in a furnace. As a result, our quality over the last three years has improved to its highest level in ten years. Wecompetitive position. In addition, we believe the quality and the consistency of our electrodes is among the highest in North America and EMEA and on par with that of any producer globally. We believe the durability and infrequent breakage of our graphite electrodes create operating efficiencies and value opportunities for our customers. We also believe we have a competitive advantage in offering customers our ArchiTech Furnace Productivity System (or ArchiTech), which we believe is the most advanced support and technical service platform in the graphite electrode industry.(“ArchiTech”) continues to provide a competitive advantage. ArchiTech, which has been installed inat customer furnaces around the world, enables our engineers to work with our customers seamlessly to maximize the performance of their furnaces and provide real‑time diagnostics and troubleshooting. This remote functionality has been particularly helpful during the COVID-19 pandemic. We believe our customers value our high qualityhigh-quality products and customer service, and have provided us with opportunities to expandwhich subsequently improves our business with them as a result.commercial opportunities.
Our experienced executive leadership and general managers and flexible workforce have positioned us for future earnings growthgrowth.
Our seasoned leadership is committed to earnings growth. Our executiveexecutive and manufacturing leadership have led manufacturing companies through many cycles and are focused on positioning us for profitable growth in any environment. We
have undertaken strategic investments to increase our production capacity in a capital‑efficient manner while reducingpositively impacting our cost position.structure.
Graphite electrode industry
EAF steel producers are the primary consumers of graphite electrodes. The size of the electrodes varies depending on the size of the furnace, the size of the furnace’s electric transformer and the planned productivity of the furnace. In a typical furnace using alternating electric current and operating at a typical number of production cycles per day, three electrodes are fully consumed (requiring the addition of new electrodes), on average, every 8eight to 10ten operating hours. UHP graphite electrodes are consumed at a rate of approximately 1.7 kilograms per MT of steel production in EAF facilities.
The actual rate of consumption and addition of electrodes for a particular furnace depends primarily on the efficiency and productivity of the furnace. Therefore, demand for graphite electrodes is directly related to the amount and efficiency of EAF steel production. EAF steel production requires significant heat (as high as 5,000° F) to melt the raw materials, primarily scrap metal, in the furnace. Heat is generated as electricity (as much as 150,000 amps) passes through the electrodes and creates an electric arc between the electrodes and the raw materials.
The industry is fairly consolidated, particularly outside of China. The five largest global producers in the industry are Showa Denko K.K., GrafTech, Fangda Carbon New Material Technology Co. LTD, Tokai Carbon Co., Ltd. and Graphite India Limited.
Supply trends
We estimate that from 2014-2016,2014 to 2016, the industry closed or repurposed approximately 20% of global production capacity outside of China, consisting of smaller, higher cost facilities. Based on our experience, high capacity manufacturing facilities can have ana significant operating cost advantage of more than $1,000 per MT as compared to low capacity manufacturing facilities, encouraging producers to consolidate facilities in order to reduce costs. We believe theThe majority of the production capacity reduction was permanent due to the demolition, long‑termlong-term environmental remediation and repurposing of most of these lower capacity facilities. Notwithstanding the current market challenges, theThese consolidation and production capacity reductions in the graphite electrode industry, along with the EAF steel industry’s recovery, since 2016, lead us to believe that the graphite electrode industry has recovered from the downturn and resumedwill continue its long‑termlong-term growth trajectory. We believe worldwide graphite electrode supply will increase in 2020 driven by Chinese capacity additions.
Demand trends
Our graphite electrodes are primarily used in the EAF steelmaking process, and long-term global growth in that market has driven increased demand for graphite electrodes. EAF steelmaking has historically been the fastest‑growingfastest-growing segment of the global steel market. According to the WSA, global EAF steel production grew at a 3.5%2.9% compound annual growth rate from 1984 to 2011,2020, while taking market share from other methods of steelmaking in most regions of the world, outside of China. EAF steel producers benefit from their flexibility in sourcing iron units, being able to make steel from either scrap or alternative sources of iron like direct reduced iron and hot briquetted iron, both made directly from iron ore. Most of the growth in EAF steelmaking has taken place in Western Europe and North America, two regions with substantial amounts of scrap available for use in EAFs.
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Source: World Steel Association
EAF Steel Production's Recovery and Outlook
We believe there is a particular opportunity for EAF steelmaking to take further market share in China as well. China’s Ministry of Industry and Information Technology's current draft guidelines call for EAF steelmaking to constitute 20%15% of overall steel production by 2025, more than doubling its current share of output. According to the WSA, in 2018, Chinese EAF steel production increased to 108 million MT, or 12%, of China’s total steel production, up from 2017 levels of 81 million MT, or 9%, of China's total steel production. If Chinese EAF steelmaking production capacity were to reach 20%15%, based on 20182020 production levels, that would add 7862 million MT of additional EAF steel production for a total of 186160 million MT, compared to 20182020 EAF steel production in the next largest regions of 7086 million MT in the EU, 60Europe, 71 million MT in North America and 56 million MT in India, and 59 million MT in the United States, according to WSA.
Pricing trends
Pricing for graphite electrodes is determined through contract negotiations and spot transactions between producers and consumers. Pricing has historically been cyclical, reflecting the demand trends of the global EAF steelmaking industry and supply of graphite electrodes. Moreover, as petroleum needle coke represents a significant percentage of the raw material cost of graphite electrodes, graphite electrodes have typically been priced at a spread to petroleum needle coke. Over the period from 20082007 to 2017,2021, the average graphite electrode spread over petroleum needle coke was approximately $3,000$3,600 per MT, on an inflation‑adjustedinflation-adjusted basis using constant 20182021 dollars. In tight demand markets, this spread has increased, resulting in higher graphite electrode prices. We believe that the new source of demand for petroleum needle coke presented by lithium‑ion battery producers for electric vehicles will place upward pressure on petroleum needle coke pricing compared to historical levels.
There is no widely accepted graphite electrode reference price. Historically, between 20082007 and 2017,2021, our weighted average realized price of graphite electrodes, excluding LTAs, was approximately $4,500$5,700 per MT (on an inflation‑adjustedinflation-adjusted basis using constant 20182021 dollars).
In 2019 and in 2020, market prices declined from the peaks of 2017 and 2018. The prices continued to decline into the first half of 2021 before starting to recover in the second half of the year. During the last demand troughfourth quarter of 2021, our average price for non-LTA business was approximately $5,000 per MT, 10% higher than in 2016,the third quarter of 2021. The non-LTA sales price reflects a mix of annual agreements negotiated in the fourth quarter of the prior year, semi-annual and quarterly agreements negotiated earlier in the year along with spot agreements. There is a lag between the time we negotiate price for non-LTA sales and when our weighted average realizedelectrodes are delivered and recognized in revenue. We expect our first quarter 2022 non-LTA prices to increase 17 to 20% over the fourth quarter of 2021 as the price of graphite electrodes fellannual and semi-annual agreements have now been reset to approximately $2,500 per MT in 2016. Following the significant rationalization of graphite electrode production globally, the resumption of growth in EAF steel production, falling scrap prices, reductions in Chinese steel exports, and constrained supply of needle coke, graphite electrode spot prices began to increase in late 2017 and reached record high prices in 2018. These record high spot prices began to retreat in 2019, falling 25% during the year. We expect additional decreases in 2020.current market conditions.
Needle coke industry
Introduction
Needle coke is the primary raw material for the production of graphite electrodes used by EAF steelmakers and producers of aluminum, stainless steel, silicon metals and other ferrous and non‑ferrousnon-ferrous metals, and is also a keyprimary raw material in the production of lithium‑ionlithium-ion batteries used to power electric vehicles. Needle coke is derived from two carbon sources. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil, a byproduct of the gasoline refining process, into petroleum needle coke and generally takes two to three months to produce. Pitch needle coke, used principally by Asian graphite electrode manufacturers, is made from coal tar pitch, a byproduct of coking metallurgical coal used in BOF steelmaking.
Graphite electrode producers combine petroleum needle coke and pitch needle coke with binders and other ingredients to form graphite electrodes. Petroleum needle coke and pitch needle coke, relative to other varieties of coke, are distinguished by their needle‑likeneedle-like structure and their quality, which is measured by the presence of impurities, principally sulfur, nitrogen and ash. Petroleum needle coke and pitch needle coke are typically low in these impurities. Additionally, the needle‑likeneedle-like structure of petroleum and pitch needle coke creates expansion along the length of the electrode, rather than the width, which reduces the likelihood of fractures. In order to minimize fractures caused by disproportionate expansion over the width of an electrode, and minimize the effect of impurities, large‑diameterlarge-diameter graphite electrodes (18 inches to 32 inches) employed in high‑intensityhigh-intensity EAF applications are comprised almost exclusively of petroleum needle coke and pitch needle coke.
The process map below shows the raw materials required to make graphite electrodes, the various consumers of these raw materials, as well as the consumers of graphite electrodes.
Source: Management estimates
Previously, producers of petroleum needle coke typically agreed to supply petroleum needle coke in twelve‑12 month contracts; however, since 2017, producers of petroleum needle coke have typically used six‑three to six month contracts. As a result, our competitors must continually renegotiate supply agreements in response to changing market conditions. We are substantially vertically integrated through our ownership of our Seadrift facility, which provides the majority of our needle coke requirements and insulates us from rapid changes in the needle coke market.
Market size and major producers
The needle coke industry is highly concentrated with approximately twelve major producers of needle coke and only five major producers of petroleum needle coke. These firms include Phillips 66 (U.S.), Seadrift (GrafTech), Petrocokes Japan Limited (Japan), JX Nippon Oil & Energy Co., Ltd. (Japan) and Petrochina International Jinzhou Co., Ltd. (China), which produce petroleum needle coke, and Mitsubishi Chemical Company (Japan), Baosteel Group (China), C‑Chem Co., Ltd. (Japan), Indian Oil Company Limited (India), JX Holdings Inc. (Japan), Petrochina International Jinzhou Co., Ltd. (China) and Anshan Kaitan Thermo‑Energy New Materials Co. Ltd (China), which produce pitch needle coke.concentrated. We estimate that Seadrift has approximately 19%one-fifth of the petroleum needle coke production capacity outside China.
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Graphite electrode manufacturers prefer petroleum needle coke because of the meaningfully longer bake and graphitizing time required for pitch needle coke. Additionally, the demand for petroleum needle coke in lithium-ion battery manufacturing is growing rapidly. Electric vehicle manufacturers prefer artificial graphite such as petroleum needle coke in lithium‑ionlithium-ion batteries because of its greater energy density, providing batteries with longer driving ranges and longevity.
Estimated Petroleum needle coke industry production capacity (excluding China) by company (MT)
Source: Management estimates
Industry trends
Petroleum needle coke production capacity outside of China has remained unchangedrelatively flat for at least the last 10several years due to the capital intensity, technical know‑howknow-how and long lead times required to build greenfield needle coke production facilities and the stringent regulatory process associated with building new needle coke production capacity. Furthermore, we believe that brownfield expansion opportunities in developed countries are generally not available as petroleum needle coke manufacturing is a continuous process with significant costs associated with shutting down and restarting facilities for maintenance or capital investment.
Contracts and Customers
The LTAs were entered into between the end of 2017 we reoriented our commercial strategy around a three‑ to five‑year take‑or‑pay contract framework and restructured our sales force incentives.early 2019. As graphite electrodes are an essential consumable in the EAF steel production process and require a long lead time to manufacture, we believe our strategic customers are highly focused on securing certainty of supply of reliable, high qualityhigh-quality graphite electrodes. Prior to our three‑ to five‑year take‑or‑pay contract initiative, our sales of graphite electrodes were generally negotiated annually through purchase orders on an uncontracted, nonbinding basis. The majority of our customers sought to secure orders for a supply of their anticipated volume requirements each upcoming year. The remaining, small balance of our graphite electrode customers purchased their electrodes as needed throughout the year at industry spot prices.
We believe we are uniquely capable among graphite electrode producers to pursue our three‑ to five‑year take‑or‑payLTA contracting strategy due to our substantial vertical integration into petroleum needle coke production. All of our petroleum needle coke production is used internally and is not sold to external customers. Demand for petroleum needle coke increased due to an increased demand for
2 Source: IEA Global Electric Vehicle Outlook 2020 for electric vehicle sales and battery pack capacity. This also assumes approximately 0.8 kilogram anode material per kilowatt-hour of battery pack capacity. Anode material is assumed to be approximately 50% synthetic and 50% natural graphite, with a yield of 50%.
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graphite electrodes and the use of needle coke in lithium‑ionlithium-ion batteries for electric vehicles, as well as increased demand for graphite electrodes.vehicles. Consequently, we expect this limited availability of petroleum needle coke will restrict new graphite electrode production. Seadrift, our wholly ownedwholly-owned subsidiary acquired in 2010, provides the majority of our petroleum needle coke requirements and produces sufficient needle coke to supply substantially all of the graphite electrode production that we have contracted under our take‑or‑pay contracts.LTAs. We have also hedged the decant oil required to produce substantially all of the graphite electrodes sold under these contracts, providing us substantial visibility into our future raw material costs.
Because the market price of graphite electrodes may be based, in part, on the current or forecasted costs of key raw materials, periods of raw material price volatility may have an impact on the market price. In particular, as petroleum needle coke represents a significant percentage of the raw material cost of graphite electrodes, the price of graphite electrodes has historically been influenced by the price of petroleum needle coke. See “Risk Factors-Risks RelatedFactors—Risks related to Our Businessour business and Industry-pricingindustry—Pricing for graphite electrodes has historically been cyclical, and current prices are relatively high, however, the price of graphite electrodes may decline in the future.” The fixed prices under our contracts prevent us from passing along changes related to our costs of raw materials to our customers. See “Risk Factors-Risks RelatedFactors—Risks related to Our Businessour business and Industry-Weindustry—We are dependent on the supply of petroleum needle coke. Our results of operations could deteriorate if recent disruptions in the supply of petroleum needle coke continue or worsen for an extended period.” However, as described above, we believe our ability to source substantially all of our petroleum needle coke requirements for these contracts from our Seadrift facility and our hedging of our purchases of decant oil mitigates the impact of periodic shortages and price fluctuations of raw materials.
All of our take‑or‑pay contractsLTAs have fixed prices. Within this contract framework, our customers agreeare contractually bound to purchase athe specified volume of product at the price under the contract. Contract customers are unable to renegotiate or adjust the price under the contract. These fixed prices under the contracts also prevent us from passing along any changes related to the costs of raw materials to contract customers. As a result of the take‑or‑payLTA obligation of the contracts, the customer must purchase the annual contracted volume (or annual volume within the specified range). In the event the customer does not take delivery of the annual volume specified in the contract, our contracts provide for a capacity payment equal to the product of the number of MTs short of the annual volume specified in the contract multiplied by the price under the contract for that contract year. The weighted average contract price for the contracted volumes over the next three years is approximately $9,600 per MT, with the weighted average contract prices for contracts with a specified volume range computed using the volume midpoint.
In addition to defining annual volumes and prices, these three‑ to five‑year take‑or‑pay contractsLTAs include significant termination payments (typically, 50% to 70% of remaining contracted revenue) and, in certain cases, parent guarantees and collateral arrangements to manage our customer credit risk. In most cases, the customer can only terminate the contract unilaterally:unilaterally only: (i) upon certain bankruptcy events; (ii) if we materially breach certain anti‑corruptionanti-corruption legislation; (iii) if we are affected by a force majeure event that precludes the delivery of the agreed‑toagreed-to graphite electrodes for more than a six‑monthsix-month period; or (iv) if we fail to ship certain minimum levels during a specified period of time. The customer will also be able to temporarily suspend obligations under the contract due to a force majeure event, as will we, with the contract term being extended by a period equal to the duration of such suspension.
Our contracts provide our customers with certain remedies in the event that we are unable to deliver the contracted volumes of graphite electrodes on a quarterly basis. Our substantially vertically integrated Seadrift plant is particularly important to our ability to provide our customers with a reliable supply of graphite electrodes. Therefore, the likelihood that we will fail to deliver the contracted volume is significantly reduced due to our substantial vertical integration. For a discussion of certain risks related to our take‑or‑payLTA contracting initiative, see “Risk Factors-RisksFactors—Risks related to our business and industry-Weindustry—We may be unable to implement our business strategies, including our initiative to secure and maintain three‑ to five‑year take‑or‑pay customer contracts,LTAs, in an effective manner.”
In addition to the LTAs, we continue to sell available volumes under annual, semi-annual, quarterly and spot purchase orders.
2021 Revenue and production by region and end market
Approximately 90%93% of our graphite electrodes were purchased by EAF steel producers in 2019.2021. The remaining portion is primarily used in various other ferrous and non‑ferrousnon-ferrous melting applications, BOF production, fused materials, chemical processing, and alloy metals. In 2019, one customer accounted for 10% of our net sales. We believe this customer does not pose a significant concentration of risk, as sales to this customer could be replaced by demand from other customers. We sell our products in every major geographic region globally. Sales of our products to buyers outside the United States accounted for approximately 81%79% of net sales in 2017,both 2021 and approximately2020 and 77% of net sales in each of 2018 and 2019. Overall, in 2019,2021, we generated more than 90%89% of our net sales from EMEA and the Americas.
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We believe our three‑ to five‑year take‑or‑payLTA contracting strategy provides us with cash flow visibility and stability to our customers and, as a result, has secured a high qualityhigh-quality customer base. We perform financial and credit reviews of all eligible potential customers prior to entering into these contracts. Less creditworthy customers are required to post a bank guarantee, letter of credit or significant cash prepayment. Based on total revenues over the life of the contracts,Sales from our ten largest customers represent 38% of total revenue, while the next ten customersLTAs represented 77% and all other customers represent 17% and 45% of total revenue, respectively. During 2019, approximately 80%87% of our net sales came from our three- to five-year take-or-pay contracts.in 2021 and 2020, respectively.
Sales and customer service
We differentiate and sell the value of our graphite electrodes primarily based on price, product quality and performance, delivery reliability and customer technical service.
We have a large customer technical service organization, with supporting application engineering and scientific groups and more thanapproximately 30 engineers and specialists around the world serving in this area. We believe that we are one of the industry leaders in providing value addedvalue-added technical services to our customers.
Our direct sales force currently operates from 1011 sales offices located around the world. We sell our graphite electrodes primarily through our direct sales force, independent sales representatives and distributors, all of whom are trained and experienced with our products.
We have customer technical service personnel based around the world to assist customers to maximize their production and minimize their costs. A portion of our engineers and technicians provide technical service and advice to key steel and other metals customers. These services relate to furnace applications and operation, as well as furnace upgrades to reduce energy consumption, improve raw material costs and increase output.
We believe we have a competitive advantage in offering customers ArchiTech, which we believe is the mostan advanced support and technical service platform in the graphite electrode industry. ArchiTech, which has been installed in customer furnaces worldwide, enables our engineers to work with our customers seamlessly to maximize the performance of their furnaces and provide real‑timereal-time diagnostics and troubleshooting.
Distribution
We deploy various demand management and inventory management techniques to seek to ensure that we can meet our customers’ delivery requirements while still maximizing the capacity utilization of our production capacity. We can experience significant variation in our customers’ delivery requirements as their specific needs vary and change throughthroughout the year. We generally seek to maintain appropriate inventory levels, taking into account these factors as well as the significant differences in manufacturing cycle times for graphite electrode products and our customers’ products.
Finished products are usually stored at our manufacturing facilities. Limited quantities of some finished products are also stored at local warehouses around the world to meet customer needs.
Facilities
We currently manufacture our graphite electrodes in three primary manufacturing facilities strategically located in the Americas and EMEA, two of the largest EAF steelmaking markets. Our locations allow us to serve our customers in the Americas and EMEA efficiently. Our production capacity is approximately 200,000 MT through our primary manufacturing
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facilities in Calais, France, Pamplona, Spain, and Monterrey, Mexico3. In addition to these three facilities,2021, we have a fourth graphite electrode manufacturing site in St. Marys, Pennsylvania. We have recently begun a series of projects at our Monterrey and St. Marys facilities that will shiftshifted graphitization and machining of additional volumea portion of semi-finished productproducts from Monterrey to St. Marys. We expect these projects will further optimize our manufacturing footprint by improvingMarys, Pennsylvania, in order to improve environmental performance, and production flexibility at both facilities and also leverageoverall cost efficiencies at our St. Marys facility.across the two facilities. We believe that we have approximately 202,000 MT of graphite electrode production capacity at our operating sites. We believe our business has the lowest manufacturing cost structure of all of our major competitors, primarily due to the large scale of our manufacturing facilities.
Our manufacturing facilities significantly benefit from their size and scale, work force flexibility, access to attractively‑pricedreliable sources of power and other key raw materials, and our substantial vertical integration with Seadrift. Our Calais, Pamplona, Monterrey and StSt. Marys facilities have access to low‑costreliable sources of electricity with essential logistical infrastructure in place, which is a significant element of our manufacturing costs. Our Seadrift facility currently produces the majority of our petroleum needle coke requirements for our graphite electrode production, allowing us to source our primary raw material internally and at cost, a significant advantage relative to our peers. Seadrift also produces sufficient needle coke to supply substantially all of the graphite electrode production that we have contracted under our take‑or‑pay contracts.LTAs.
Manufacturing
We manufacture graphite electrodes ranging in size up to 30 inches in diameter, over 11 feet in length, and weighing as much as 5,900 pounds (2.6 MT). The manufacturing process includes six main processes: screening of raw materials (needle coke) and blending with coal tar pitch followed by forming, or extrusion, of the electrode,electrode; baking the electrode,electrode; impregnating the electrode with a special pitch that improves strength, re‑bakingstrength; re-baking the electrode,electrode; graphitizing the electrode using electric resistance furnaces,furnaces; and machining. The first baking process converts the pitch into hard coke. During the baking process, the electrode pitch volatiles are removed, leaving porosities inside. To improve graphite electrode quality, the electrode is then impregnated with additional coal tar pitch to fill the porosities and baked a second time. After impregnation and re‑baking,re-baking, the manufacturing process continues with graphitization as the electrodes are heated at 5000°5,000° F in a special longitudinal furnace to convert the carbon into graphite. The graphitization cycle removes additional impurities and improves the electrodes’ key qualities: thermal and electrical conductivity, thermal shock resistance performance, lubricity, and abrasion resistance.
Production of a graphite electrode begins with the production of either petroleum needle coke, our primary raw material, or pitch needle coke. Petroleum needle coke is produced through a manufacturing process very similar to a refinery. The production process converts decant oil, a byproduct of the gasoline refining process, into petroleum needle coke and generally takes two to three months to produce. Needle coke takes its name from the needle‑likeneedle-like shape of the coke particles. We produce calcined petroleum needle coke at Seadrift. Seadrift is not dependent on any single refinery for decant oil. While Seadrift has purchased a substantial majority of its raw material inventory from a limited number of suppliers in recent years, we believe that there is a large supply of suitable decant oil in the United States available from a variety of sources. In addition, we use derivatives to hedge the decant oil required to produce substantially all of the graphite electrodes sold under our three‑ to five‑year take-or-pay contracts,LTAs, providing us with substantial visibility into our future raw material costs.
We purchase the electric power used in our manufacturing processes from local suppliers under contracts with pricing based on rate schedules or price indices. Our electricity costs can vary significantly depending on these rates and usage. Natural gas used in the baking and re‑bakingre-baking processes is purchased from local suppliers primarily under annual volume contracts with pricing based on various natural gas price indices.
Research and development
We have over 130135 years of experience in the R&D of graphite‑graphite- and carbon‑basedcarbon-based solutions. By focusing our management’s attention and R&D spending exclusively on the graphite electrode business, we have been able to meaningfully improve the quality
of our graphite electrodes, repositioning ourselves as an industry quality leader and improving our relationships with strategic customers. Our focus on improving the quality of petroleum needle coke through R&D has led to our petroleum needle coke production at Seadrift being best‑in‑classbest-in-class for use in the manufacturing of highly durable UHP electrodes. We believe that our technological and manufacturingthe above strengths and capabilities provide us with a competitive advantage.
3 Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary.
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Intellectual property
We believe that our intellectual property, consisting primarily of patents and proprietary know‑how,know-how, provides us with competitive advantages and is important to our growth opportunities. Our intellectual property portfolio is extensive, with approximately 200 carbon and graphiteover 135 U.S. and foreign patents and published patent applications, which we believe is more than any of our major competitors in the businesses in which we operate.applications.
We own, have the right to use or have obtained licenses for various trade names and trademarks used in our businesses. For example, the trade name andUCAR trademark UCAR areis owned by Union Carbide Corporation ("Union Carbide") (which was acquired by Dow Chemical Company) and areis licensed to us on a worldwide, exclusive and royalty‑freeroyalty-free basis until 2025. This particular license automatically renews for successive ten‑10 year periods. It permits non‑renewalnon-renewal by Union Carbide at the end of any renewal period upon five years’ notice of non‑renewal.non-renewal.
We rely on patent, trademark, copyright and trade secret laws, as well as appropriate agreements to protect our intellectual property. Among other things, we seek to protect our proprietary know‑howknow-how and information, by requiring employees, consultants, strategic partners and others who have access to such proprietary information and know‑howknow-how to enter into confidentiality or restricted use agreements.
Insurance
We maintain insurance against civil liabilities relating to personal injuries to third parties, for loss of or damage to property, for business interruptions and for certain environmental matters, that provides coverage, subject to the applicable coverage limits, deductibles and retentions, and exclusions, that we believe are appropriate upon terms and conditions and for premiums that we consider fair and reasonable in the circumstances. There can be no assurance that we will not incur losses beyond the limits of or outside the coverage of our insurance.
competitive position. Estimates of future costs for compliance with U.S. and foreign environmental protection laws and regulations, and for environmental liabilities, are necessarily imprecise due to numerous uncertainties, including the impact of potential new laws and regulations, the availability and application of new and diverse technologies, the extent of insurance coverage, the potential discovery of contaminated properties, or the identification of new hazardous substance disposal sites at which we may be a PRPpotentially responsible party ("PRP") and, in the case of sites subject to the SuperfundComprehensive Environmental Response, Compensation and Liability Act and similar state and foreign laws, the final determination of remedial requirements and the ultimate allocation of costs among the PRPs. Subject to the inherent imprecision in estimating such future costs, but taking into consideration our experience to date regarding environmental matters of a similar nature and facts currently known, we estimate that our costs and capital expenditures (in each case, before adjustment for inflation) for environmental protection regulatory compliance programs and for remedial response actions will not be material over the next several years. Furthermore, we establish accruals for environmental liabilities when it is probable that a liability has been or will be incurred, and the amount of the liability can be reasonably estimated. We adjust the accrual as new remedial actions or other commitments are made, as well as when new information becomes available that changes the prior estimates previously made and we believe our existing accruals are reasonable.
Human Capital Resources
As of December 31, 2019,2021, we had 1,3461,353 employees (excluding contractors)., 867 of which were hourly employees. A total of 439481 employees were in Europe (including Russia), 666573 were in Mexico and Brazil, 3two were in South Africa, 231290 were in the United States and 7seven were in the Asia Pacific region. As of December 31, 2019, 877 of our employees were hourly employees.
As of December 31, 2019,2021, approximately 774557 employees, or 58%, of our worldwide employees, are covered by collective bargaining or similar agreements. As of December 31, 2019, approximately 627 employees, or 47%41%, of our worldwide employees, were covered by collective bargaining or similar agreements that expire, or are subject to renegotiation, at various times through December 31, 2020.2022. We believe that, in general, our relationships with our employees' unions are satisfactorygood and that we will be able to renew or
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extend our collective bargaining or similar agreements on reasonable terms as they expire. We cannot assure, however, that renewed or extended agreements will be reached without a work stoppage or strike or will be reached on terms satisfactory to us. As of December 31, 2019, none of the employees in our Seadrift plant or St. Marys facility were covered by collective bargaining or similar agreements.
We have not had any material work stoppages or strikes during the past decade.
The health and safety of our global team is a top priority and is a core value of the Company. Our comprehensive programs strive to achieve zero injuries and no harm done. Our global Health, Safety and Environmental Protection ("HS&EP") Policy applies to all employees, contractors, and visitors, and governs our actions and decisions every day. We also have a Code of Conduct and Ethics for Suppliers and Contractors that includes HS&EP guidelines required for doing business with GrafTech. GrafTech’s focus on HS&EP is a top priority for all employees. We have built risk recognition into our HS&EP programs. From pre-job planning, safety walks and inspections, planned job observations, or training employees on health and safety best practices, we strive to identify and mitigate risks. In the spirit of continuous improvement, regular inspections, internal reviews and corporate audits are conducted to foster compliance with our high standards.
Available Information
We make available, free of charge, on or through our web site,website, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act") as soon as reasonably practicable after we electronically file them with, or furnish them to, the U.S. Securities and Exchange Commission (“SEC”). We maintain our website at http://www.graftech.com. The information contained on our web sitewebsite is not part of this Report. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Please see http://www.sec.gov for more information.
Item 1A.Risk Factors
Our business, financial condition, results of operations and cash flow can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below. You should carefully read all of the information included in this report and carefully consider, among other matters, the following risk factors, as well as any discussed under Part II, Item 7, “Management's“Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations.” Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. Moreover, the risks below are not the only risks we face and additional risks not currently known to us or that we presently deem immaterial may emerge or become material at any time. The occurrence of any of the following risks could materially and adversely affect our business, financial condition, results of operations and cash flow, in which case, the market price of our securities could decline.
Risks related to our business and industry
The COVID-19 pandemic and preventative measures taken to contain or mitigate the pandemic have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruption in the financial markets and economy both globally and in the United States. For example, as a result of the COVID-19 pandemic, the average approximate non-LTA price for graphite electrodes delivered and recognized in revenue in the first quarter of 2021 decreased 35% compared to the first quarter in 2020. In addition, we expect some cost increases in 2022, driven by recent global cost pressures, particularly for third-party needle coke, energy and freight. As the pandemic continues, we continue to limit travel and have certain employees working from home on rotations so that all employees are not in our offices at the same time. While these measures have been necessary and appropriate, they have resulted in additional costs and have adversely impacted our business and financial performance.
While the COVID-19 pandemic had begun to subside in certain areas of the world where we operate and serve our customers, the infection rates in some of these areas have experienced a resurgence in the spread of COVID-19 and the selling pricesinfection rates in other areas continue to escalate, including as a result of new variants of the virus. As a result, we are unable to predict the ultimate impact of the COVID-19 pandemic at this time. The pandemic has adversely affected, and is expected to continue to adversely affect, our productsbusiness, results of operations, financial position and cash flows. Such effects may leadbe material and the potential impacts include, but are not limited to:
•adverse impacts on our customers, and resultant impacts on demand for our products;
•disruptions at our facilities, including reductions in operating hours, labor shortages and changes in operating procedures, including additional cleaning and disinfecting procedures;
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•disruptions in our supply chain due to periodstransportation delays, travel restrictions, raw material cost increases and shortages, and closures of reduced profitabilitybusinesses or facilities;
•reductions in our operating effectiveness due to workforce disruptions from COVID-19 restrictions and net lossessocial distancing resulting from, among other things, “shelter in place” and “stay at home” orders, and the unavailability of key personnel necessary to conduct our business activities; and
•volatility in the future.
In addition, we cannot predict the impact that the COVID-19 pandemic will have on our customers, employees, suppliers and distributors, and any adverse impacts on these parties may have a number of factors, including the growth ratematerial adverse impact on our business. The impact of the graphite electrode industry, the price of our products, the cost to produce our products, the competitiveness of our products and the production capacity at our existing plants. WeCOVID-19 pandemic may incur significant losses in the future for a number of reasons, including due to thealso exacerbate other risks describeddiscussed in this Annual Report, any of which could have a material effect on us. This situation continues to change rapidly and weadditional impacts may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. In addition, as a public company, we now incur significant legal, accounting and other expensesarise that we didare not incur as a private company. As a result, our operations may not maintain profitability in the future and, even if we do maintain profitability, we may not be able to increase it.currently aware of.
We may be unable to implement our business strategies, including our initiative to secure and maintain three‑ to five‑year take‑or‑pay customer contracts,LTAs, in an effective manner.
Our future financial performance and success largely depend on our ability to successfully implement our business strategies for growth successfully.growth. We have undertaken, and will continue to undertake, various business strategies to sell a majority of our production capacity through three‑ to five‑year, take‑or‑pay contracts,LTAs, and improve operating efficiencies and generate cost savings. We cannot assure you that we will successfully implement our business strategies or that implementing these strategies will sustain or improve and not harm our results of operations. In particular, our ability to successfully implement our strategy to enter into and maintain three‑ to five‑year take‑or‑pay contracts successfullyLTAs is subject to certain risks, including customers seeking to renegotiate key terms of their contracts, such as pricing and specified volume commitments, in the event market conditions change during the contract term; our inability to extend contracts when they expire; and a disruption in our access to Seadrift‑produced petroleum needle coke, which we will rely on, in part, to deliver the contracted volumes under the contracts.our LTAs. Under current market conditions where the spot price of graphite electrodes is trending downwards,below our weighted average contract price for LTA contracted volumes, it may be unlikely that customers will commit to long-term, take-or-pay contracts.extend or re-enter into LTAs at the current prices of our LTAs. As a result, we cannot assure you that we will successfully implement this strategy or realize the anticipated benefits of these contracts. Recently, because of current market conditions, including the effects of the COVID-19 pandemic, certain customers with LTAs have struggled to take their committed volumes, which has resulted in some non-performance and disputes, including a few arbitrations, and we have modified some LTAs. In addition, the costs involved in implementing our strategies may be significantly greater than we currently anticipate.
Our business strategies are based on our assumptions about future demand for our products and on our continuing ability to produce our products profitably. Each of these factors depends, among other things, on our ability to finance our operations, maintain high‑quality and efficient manufacturing operations, effectively manage our customer relationships while enforcing customer commitments, respond to competitive and regulatory changes, access quality raw materials in a cost‑effective and timely manner and retain and attract highly skilled technical, managerial, marketing and finance personnel. Any failure to develop, revise or implement our business strategies in a timely and effective manner may adversely affect our business, financial condition, results of operations or cash flows.
Global graphite electrode overcapacity has adversely affected graphite electrode prices in the past, and may adversely affect them again, which could negatively impact our sales, margins and profitability.
Overcapacity in the graphite electrode industry has adversely affected pricing in the past and may do so again. The rapid growth of Chinese steel production after 2010, which was primarily produced from BOF steelmaking, created a significant global oversupply of steel. Chinese steel exports gained market share from EAF steel producers, creating graphite electrode industry oversupply and inventory de‑stocking in this period. Historically, between 2008 and 2017, our weighted average realized price of graphite electrodes was approximately $4,500 per MT (on an inflation‑adjusted basis using constant 2018 dollars). During the last demand trough in 2016, our weighted average realized price fell to approximately $2,500 per MT. Although Chinese steel exports hashave decreased since 2016, any significant future growth in Chinese steel exports could once again lead to an oversupply of steel, which would adversely affect the price of graphite electrodes.
An increase in global graphite electrode production capacity that outpaces an increase in demand for graphite electrodes could adversely affect the price of graphite electrodes. We believe worldwide graphite electrode supply will increase in 2020 driven by2022 as a result of Chinese capacity additions. While growth in the Chinese EAF steel market may support some of these capacity additions, the additional graphite electrode capacity may exceed local Chinese requirements. Excess production capacity may result in manufacturers producing and exporting electrodes at prices that are lower than prevailing domestic prices, and sometimes at or below their cost of production. Excessive imports into the Americas and EMEA, which markets collectively make up 90%89% of our net sales, can also exert downward pressure on graphite electrode prices, which negatively affects our sales, margins and profitability.
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Pricing for graphite electrodes has historically been cyclical current prices are receding from recent highs, and the price of graphite electrodes may continue to decline in the future.
Pricing for graphite electrodes has historically been cyclical, reflecting the demand trends of the global EAF steelmaking industry and the supply of graphite electrodes. In addition, as petroleum needle coke reflects a significant percentage of the raw material cost of graphite electrodes, graphite electrodes have historically been priced at a spread to petroleum needle coke, which in the past has increased in tight demand markets. Historically, between 20082007 and 2017,2021, our weighted average realized price of graphite electrodes was approximately $4,500$5,700 per MT (on an inflation‑adjusted basis using constant 20182021 dollars).
During the last demand trough in 2016, our weighted average realized price of graphite electrodes fell to approximately $2,500$2,800 per MT, in 2016, on an inflation‑adjusted basis using constant 20182021 dollars. Following the significant rationalization of graphite electrode production globally, the resumption of growth in EAF steel production, falling scrap prices, reductions in Chinese steel exports and constrained supply of needle coke, graphite electrode prices reached record highs in 2018.
Current prices have receded from the highs of 2018, and the price of graphite electrodes may continue to decline in the future. Supply and demand normalized in 2019, tipping towards overcapacity that exerts downward pressure on graphite electrode prices, and spot prices fell 25% during 2019. Spot prices decreased further in 2020, bottoming out in the spring of 2021 before beginning to increase. Despite this increase, current spot prices have fallenare below our weighted average contract price for long-termLTA contracted volumes. Our business, financial condition and operating results could be materially and adversely affected to the extent prices for graphite electrodes decline in the future.
We are dependent on the global steel industry generally and the EAF steel industry in particular, which historically have been highly cyclical, and a downturn in these industries may materially adversely affect our business.business.
We sell our products primarily to the EAF steel production industry. The EAF steel production industry historically has been highly cyclical and is affected significantly by general economic conditions. As a result, we have experienced periods of significant net losses.
Significant customers for the steel industry include companies in the automotive, construction, appliance, machinery, equipment and transportation industries, which are industries that were negatively affected by the general economic downturn and the deterioration in financial markets, including severely restricted liquidity and credit availability, in the recent past. In particular, EAF steel production declined approximately 17% from 2008 to 2009 as a result of that general economic downturn and deterioration in financial markets. In addition, EAF steel production declined approximately 10% from 2011 to 2015 due to global steel production overcapacity driven largely by Chinese BOF steel exports. Since 2016, however, the EAF steel market has rebounded and resumed its long‑term growth trajectory, though recently has slowed in some markets, notably Europe and South America.
Our customers, including major steel producers, have in the past experienced and may again experience downturns or financial distress that could adversely impact our ability to collect our accounts receivable on a timely basis or at all.
The graphite industry is highly competitive. Our market share, net sales or net income could decline due to vigorous price and other competition.
Competition in the graphite industry (other than, generally, with respect to new products) is based primarily on price, product differentiation and quality, delivery reliability and customer service. Graphite electrodes, in particular, are subject to rigorous price competition. Competition with respect to new products is, and is expected to continue to be, based primarily on price, performance and cost effectiveness, customer service and product innovation. Competition could prevent implementation of price increases, require price reductions or require increased spending on research and development,R&D, marketing and sales that
could adversely affect us. In such a competitive market, changes in market conditions, including customer demand and technological development, could adversely affect our competitiveness, sales and/or profitability.
We are dependent on the supply of petroleum needle coke. Our results of operations could deteriorate if recent disruptions in the supply of petroleum needle coke continue or worsen for an extended period.
Petroleum needle coke is aour key raw material used in the production of graphite electrodes. The supply of petroleum needle coke has been limited starting in the second half of 2017 as the demand for petroleum needle coke outpaced supply due to increasing demand for petroleum needle coke for use in the production of lithium‑ion batteries used in electric vehicles. Seadrift currently provides the majority of our current petroleum needle coke requirements, and we purchase the remainder from external sources. We plan to rely on Seadrift‑produced petroleum needle coke to support the production of substantially all of the contracted volumes of graphite electrodes under our three‑ to five‑year take‑or‑pay contracts.LTAs. As a result, a disruption in Seadrift’s production of petroleum needle coke, like the one that occurred in February 2021 due to a winter storm, could adversely affect our ability to achieve the anticipated benefits of these contracts if we are forced to purchase petroleum needle coke from external sources at a higher cost to support the production of these contracted volumes. Moreover, although estimates vary as to the duration of this period of tight petroleum needle coke supply, if the current If a market shortage of petroleum needle coke continues or worsens,occurs, we may be unable to acquire sufficient amounts of petroleum needle coke from external sources to support our remaining needle coke requirements currently
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used in the production of graphite electrodes for sale in the spot market. As a result, a continued or worsening disruption in the supply of petroleum needle coke could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are dependent on supplies of raw materials (in addition to petroleum needle coke) and energy. Our results of operations could deteriorate if those supplies increase in cost or are substantially disrupted for an extended period.
We purchase raw materials and energy from a variety of sources. In many cases, we purchase them under short‑term contracts or on the spot market, in each case at fluctuating prices. The availability and price of raw materials and energy may be subject to curtailment or change due to:
•limitations, which may be imposed under new legislation or regulation;
•suppliers’ allocations to meet demand from other purchasers during periods of shortage (or, in the case of energy suppliers, extended hot or cold weather);
•interruptions or cessationsterminations in production by suppliers; and
•market and other events and conditions.
Petroleum and coal products, including decant oil and coal tar pitch, which are our principal raw materials other than petroleum needle coke, and energy, particularly natural gas, have been subject to significant price fluctuations. For example, Seadrift may not always be able to obtain an adequate quantity of suitable low‑sulfur decant oil for the manufacture of petroleum needle coke, and capital may not be available to install equipment to allow use of higher sulfur decant oil (which is more readily available in the United States) if supplies of low‑sulfur decant oil become more limited in the future. Further, new low sulfurlow-sulfur emissions regulations adopted in 2020 by the International Maritime Organization (“IMO 2020”) may adversely impacthave at times negatively affected pricing for low-sulfur decant oil.oil and they may again in the future cause similar adverse impacts.
We have in the past entered into, and may continue in the future to enter into, derivative contracts and short‑duration fixed ratefixed-rate purchase contracts to effectively fix a portion of our exposure to certain products. These hedging strategies may not be available or successful in eliminating our exposure. A substantial increase in raw material or energy prices that cannot be mitigated or passed on to customers or a continued interruption in supply, particularly in the supply of decant oil or energy, would have a material adverse effect on our business, financial condition, results of operations or cash flows. These hedges may be insufficient or ineffective in protecting against the impact of these fluctuations.
Our operations are subject to hazards which could result in significant liability to us.
Our operations are subject to hazards associated with manufacturing and the related use, storage, transportation and disposal of raw materials, products and wastes. These hazards include explosions, fires, severe weather (including but not limited to hurricanes or other adverse weather that may be increasing as a result of climate change) and natural disasters, industrial accidents, mechanical failures, discharges or releases of toxic or hazardous substances or gases, transportation interruptions, human error and terrorist activities. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment as well as environmental damage, and may result in suspension of operations and the imposition of civil and criminal liabilities, including penalties and damage awards. While we believe our insurance policies are in accordance with customary industry practices, such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage,
of our insurance policies. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain. Costs associated with unanticipated events in excess of our insurance coverage could have a material adverse effect on our business, competitive or financial position or our ongoing results of operations.
We are subject to a variety of legal, economic, social and political risks associated with our substantial operations in multiple countries, which could have a material adverse effect on our financial and business operations.operations.
A substantial majority of our net sales are derived from sales outside the United States, and a majority of our operations and our property, plant and equipment and other long‑lived assets are located outside the United States. As a result, we are subject to risks associated with operating in multiple countries, including:
•currency fluctuations and devaluations in currency exchange rates, including impacts of transactions in various currencies, translation of various currencies into dollars for U.S. reporting and financial covenant compliance
purposes, and impacts on results of operations due to the fact that the costs of our non‑U.S. operations are primarily incurred in local currencies while their products are primarily sold in dollars and euros;
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•imposition of or increase in customs duties and other tariffs;
•imposition of or increases in currency exchange controls, including imposition of or increases in limitations on conversion of various currencies into dollars, euros, or other currencies, making of intercompany loans by subsidiaries or remittance of dividends, interest or principal payments or other payments by subsidiaries;
•imposition of or increases in revenue, income or earnings taxes and withholding and other taxes on remittances and other payments by subsidiaries;
•inflation, deflation and stagflation in any country in which we have a manufacturing facility;
•imposition of or increases in investment or trade restrictions by the United States or other jurisdictions or trade sanctions adopted by the United States;
•compliance with laws on anti-corruption, export controls, customs, sanctions and other laws governing our operations, including in challenging jurisdictions;
•inability to determine or satisfy legal requirements, effectively enforce contract or legal rights, including our rights under our three‑ to five‑year take‑or‑pay contractsLTAs and intellectual property rights, and obtain complete financial or other information under local legal, judicial, regulatory, disclosure and other systems; and
•nationalization or expropriation of assets, and other risks that could result from a change in government or government policy, or from other political, social or economic instability.
Any of these risks could have a material adverse effect on our business, financial condition, results of operations or cash flows, and we may not be able to mitigate these effects.
Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period for any reason, including equipment failure, climate change, natural disasters, public health crises, political crises or other catastrophic events.
Our manufacturing operations are subject to disruption due to equipment failure, extreme weather conditions, floods, hurricanes and tropical storms and similar events, major industrial accidents, including fires or explosions, cybersecurity attacks, strikes and lockouts, adoption of new laws or regulations, changes in interpretations of existing laws or regulations or changes in governmental enforcement policies, civil disruption, riots, terrorist attacks, war, public health crises, such as the COVID-19 pandemic, and other events. These events may also impact the operations of one or more of our suppliers. For example, the potential physical impacts of climate change on our operations are uncertain and will likely be particular to the geographic circumstances. These physical impacts may include changes in rainfall and storm patterns, shortages of water or other natural resources, changing sea levels, and changing global average temperatures. For instance, our Seadrift facility in Texas and our Calais facility in France are located in geographic areas less than 50 feet above sea level. As a result, any future rising sea levels could have an adverse impact on their operations and on their suppliers. In the event manufacturing operations are substantially disrupted at one of our primary operating facilities, we will not have the ability to increase production at our remaining operating facilities in order to compensate. To the extent any of these events occur, our business, financial condition and operating results could be materially and adversely affected.
Plant operational improvements may be delayed or may not achieve the expected benefits.
Our ability to complete future operational improvements, including the shift of graphitization and machining of additional volume of semi-finished product from Monterrey to St. Marys, may be delayed, interrupted or otherwise limited by the need to obtain environmental and other regulatory approvals, unexpected cost increases, availability of labor and materials, unforeseen
hazards such as weather conditions, and other risks customarily associated with construction projects. Moreover, the costs of these activities could have a negative impact on our results of operations. In addition, these operational improvements may not achieve the expected benefits as a result of changes in market conditions, raw material shortages or other unforeseen contingencies.
We depend on third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services.
We contract with third parties for certain services relating to the design, construction and maintenance of various components of our production facilities and other systems. If these third parties fail to comply with their obligations, the facilities may not operate as intended, which may result in delays in the production of our products and materially adversely affect our ability to meet our production targets and satisfy customer requirements or we may be required to recognize
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impairment charges. In addition, production delays could cause us to miss deliveries and breach our contracts, which could damage our relationships with our customers and subject us to claims for damages under our contracts. Any of these events could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We also rely primarily on third parties for the transportation of the products we manufacture. In particular, a significant portion of the goods we manufacture are transported to different countries, which requires sophisticated warehousing, logistics and other resources. If any of the third parties that we use to transport products are unable to deliver the goods we manufacture in a timely manner, we may be unable to sell these products at full value or at all, which could cause us to miss deliveries and breach our contracts, which could damage our relationships with our customers and subject us to claims for damages under our contracts. Any of these events could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We may not be able to recruit or retain key management and plant operating personnel.
Our information technology systems are an important element for effectively operating our business. Information technology systems failures,or processes, and the information technology systems or processes of our customers, our third-party service providers, our vendors or other parties that have been entrusted with our information, including risks associated with any failure to maintain or upgrade our systems, network disruptions and breaches of data security could disrupt our operations by impeding our processing of transactions, our ability to protect customer or company information or our financial reporting, leading to increased costs. It is possible that future technological developments could adversely affect the functionality of our computer systems and require further action and substantial funds to prevent or repair computer malfunctions. Our computer systems, including our back‑up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, cybercrimes, internal or external security breaches, events such as fires, earthquakes, floods, tornadoes and hurricanes, or errors by our employees. Although we have taken steps to address these concerns by implementing network security, back‑up systems and internal control measures, these steps may be insufficient or ineffectiveineffective. Security and/or privacy breaches, acts of vandalism or terror, computer viruses, misplaced or lost data, programming, and/or human error or other similar events with respect to our information technology systems or processes or the information technology systems or processes of third-parties that have been entrusted with our information expose us to a risk of loss or misuse of this information, litigation and a system failure or data security breachpotential liability, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are party to collective bargaining agreements and similar agreements with our employees. As of December 31, 2021, approximately 557 employees, or 41%, of our business activities and transfer such data between our affiliated entities, to and from our business partners and to third‑party service providers,worldwide employees, were covered by collective bargaining or similar agreements all of which may bewere covered by agreements that expire, or are subject to global data privacy lawsrenegotiation, at various times through December 31, 2022. Although we believe that, in general, our relationships with our employees are good, we cannot predict the outcome of current and cross‑border transfer restrictions. While we take steps to complyfuture negotiations and consultations with these legal requirements, any changes to such laws may impact our ability to effectively transfer data across borders in support of our business operations and any breach of such laws may lead to administrative, civil or criminal liability, as well as reputational harm to the Company and its employees. For example, the European Union’s General Data Protection Regulation (GDPR), introducedemployee representatives, which could have a number of obligations for subject companies, including obligations relating to data transfers and the security of personal data they process. We take steps to protect the security and integrity of the information we collect, but there is no guarantee that the steps we have taken will prevent inadvertent or unauthorized use or disclosure of such information, or prevent third parties from gaining unauthorized access to this information despite our efforts. Any such incident could result in legal claims or proceedings, liability under laws that protect the privacy of personally identifiable information (including the GDPR) and damage to our reputation.
We have significant goodwill on our balance sheet that is sensitive to changes in the market, which could result in impairment charges.
We had approximately $171 million of goodwill on our balance sheet as of December 31, 2021. Goodwill is tested for impairment annually in the fourth quarter or more often if events or changes in circumstances indicate a potential impairment may impose administrative fines for non‑complianceexist. Factors that could indicate that our goodwill is impaired include a decline in our stock price and market capitalization, lower than projected operating results and cash flows, and slower growth rates in our industry. Declines in our stock price, lower operating results and any decline in industry conditions in the future could increase the risk of upimpairment. Impairment testing incorporates our estimates of future operating results and cash flows, estimates of future growth rates, and our judgment regarding the applicable discount rates used on estimated operating results and cash flows. If we determine at a future time that impairment exists, it may result in a significant non-cash charge to €20,000,000 or 4% of the subject company’s annual, group‑wide turnover (whichever is higher)earnings and individuals who have suffered damage as a result of a subject company’s non‑compliance with the GDPR also have the right to seek compensation from such company. We will need to continue dedicating financial resources and management time to compliance efforts with respect to global data protection and privacy laws, including the GDPR.lower stockholders’ equity.
Our ability to grow and compete effectively depends on protecting our intellectual property. Failure to protect our intellectual property could adversely affect our businessbusiness.
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We believe that our intellectual property, consisting primarily of patents and proprietary know‑how and information, is important to our growth. Our intellectual property portfolio is extensive, with over 135 U.S. and foreign patents and published patent applications, which we believe is more than any of our major competitors in the businesses in which we operate. Failure to protect our intellectual property may result in the loss of the exclusive right to use our technologies. We rely on patent, trademark, copyright and trade secret laws and confidentiality and restricted userestricted-use agreements to
protect our intellectual property. However, some of our intellectual property is not covered by any patent or patent application or any such agreement. Intellectual property protection does not protect against technological obsolescence due to developments by others or changes in customer needs.
Patents are subject to complex factual and legal considerations. Accordingly, the validity, scope and enforceability of any particular patent can be uncertain. Therefore, we cannot assure you that:
•any of the U.S. or non‑U.S. patents now or hereafter owned by us, or that third parties have licensed to us or may in the future license to us, will not be circumvented, challenged or invalidated;
•any of the U.S. or non‑U.S. patents that third parties have non‑exclusively licensed to us, or may non‑exclusively license to us in the future, will not be licensed to others; or
•any of the patents for which we have applied or may in the future apply will be issued at all or with the breadth of claim coverage we seek.
Moreover, patents, even if valid, only provide protection for a specified limited duration. In addition, effective patent, trademark and trade secret protection may be limited or unavailable or we may not apply for it in the United States or in any of the other countries in which we operate.
The protection of our intellectual property rights may be achieved, in part, by prosecuting claims against others who we believe have misappropriated our technology or have infringed upon our intellectual property rights, as well as by defending against misappropriation or infringement claims brought by others against us. Our involvement in litigation to protect or defend our rights in these areas could result in a significant expense to us, adversely affect the development of sales of the related products, and divert the efforts of our technical and management personnel, regardless of the outcome of such litigation.
We cannot assure you that agreements designed to protect our proprietary know‑how and information will not be breached, that we will have adequate remedies for any such breach, or that our strategic alliance suppliers and customers, consultants, employees or others will not assert rights against us with respect to intellectual property arising out of our relationships with them.
Third parties may claim that our products or processes infringe their intellectual property rights, which may cause us to pay unexpected litigation costs or damages or prevent us from selling our products or services.
From time to time, we may become subject to legal proceedings, including allegations and claims of alleged infringement or misappropriation by us of the patents and other intellectual property rights of third parties. We cannot assure you that the use of our patented technology or proprietary know‑how or information does not infringe the intellectual property rights of others. In addition, attempts to enforce our own intellectual property claims may subject us to counterclaims that our intellectual property rights are invalid, unenforceable or are licensed to the party against whom we are asserting the claim or that we are infringing that party’s alleged intellectual property rights. We may also be obligated to indemnify affiliates or other partners who are accused of violating third parties’ intellectual property rights by virtue of those affiliates or partners’ agreements with us, and this could increase our costs in defending such claims and our damages.
Legal proceedings involving intellectual property rights, regardless of merit, are highly uncertain and can involve complex legal and scientific analyses, can be time consuming, expensive to litigate or settle and can significantly divert resources, even if resolved in our favor. Our failure to prevail in such matters could result in loss of intellectual property rights or judgments awarding substantial damages and injunctive or other equitable relief against us. If we were to be held liable or discover or be notified that our products or processes potentially infringe or otherwise violate the intellectual property rights of others, we may face a loss of reputation and may not be able to exploit some or all of our intellectual property rights or technology. If necessary, we may seek licenses to intellectual property of others. However, we may not be able to obtain the necessary licenses on terms acceptable to us or at all. Our failure to obtain a license from a third partythird-party for that intellectual property necessary for the production or sale of any of our products could cause us to incur substantial liabilities and/or suspend the production or shipment of products or the use of processes requiring the use of that intellectual property. We may be required to substantially re‑engineer our products or processes to avoid infringement.
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Any of the foregoing may require considerable effort and expense, result in substantial increases in operating costs, delay or inhibit sales or preclude us from effectively competing in the marketplace, which in turn could have a material adverse effect on our business and financial results.
Risks related to our indebtedness
Our indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs and our ability to fulfill our obligations under our existing and future indebtedness.
Our credit agreement (as amended, the "2018“2018 Credit Agreement"Agreement”) provides for (i) an aggregate $2,250 million senior secured term loan facility (or the 2018(the “2018 Term Loan Facility)Facility”) and (ii) a $250 million senior secured revolving credit facility (or the 2018(the “2018 Revolving Credit FacilityFacility” and, together with the 2018 Term Loan Facility, as amended, the Senior“Senior Secured Credit Facilities)Facilities”). In 2018, our wholly owned subsidiary, GrafTech Finance Inc., a Delaware corporation ("GrafTech Finance"), borrowed $2,250 million aggregate principal under the 2018 Term Loan Facility (or the 2018 Term Loans). The 2018 Term Loans mature on February 12, 2025. The maturity date for the 2018 Revolving Credit Facility is February 12, 2023.
As of December 31, 2019,2021, we had approximately $1,812.8$1,030 million of secured indebtedness outstanding with $246.9including borrowings under the Senior Secured Credit Facilities and our 4.625% Senior Secured Notes due 2028 (the “2020 Senior Secured Notes”). As of December 31, 2021, we had $246.7 million available for borrowing under the 2018 Revolving Credit Facility (taking into account approximately $3.1$3.3 million of outstanding letters of credit issued thereunder).
Interest expense for the years ended December 31, 20192021 and December 31, 20182020 was $127.3$68.8 million and $135.1$98.1 million, respectively.
•require us to dedicate a substantial portion of our cash flow to the payment of principal and interest, thereby reducing the funds available for operations and future business opportunities;
•make it more difficult for us to satisfy our obligations;
•limit our ability to borrow additional money if needed for other purposes, including working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes, on satisfactory terms or at all;
•limit our ability to adjust to changing economic, business and competitive conditions;
•place us at a competitive disadvantage with competitors who may have less indebtedness or greater access to financing;
•require us to reduce or delay capital expenditures or sell assets or operations to meet our scheduled debt service obligations;
•make us more vulnerable to an increase in interest rates, a downturn in our operating performance or a decline in general economic conditions; and
•make us more susceptible to changes in credit ratings, which could impact our ability to obtain financing in the future and increase the cost of such financing.
Compliance with our debt obligations under the Senior Secured Credit Facilities and 2020 Senior Secured Notes could materially limit our financial or operating activities, or hinder our ability to adapt to changing industry conditions, which could result in our losing market share, a decline in our revenue or a negative impact on our operating results.
The 2018 Credit Agreement includesand the indenture governing the 2020 Senior Secured Notes include covenants that could restrict or limit our financial and business operations.
The 2018 Credit Agreement containsand the indenture governing the 2020 Senior Secured Notes contain a number of restrictive covenants that, subject to certain exceptions and qualifications, restrict or limit our ability and the ability of our subsidiaries to, among other things:
•incur, repay or refinance indebtedness;
•create liens on or sell our assets;
•engage in certain fundamental corporate changes or changes to our business activities;
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•make investments or engage in mergers or acquisitions;
•pay dividends or repurchase stock;
•engage in certain affiliate transactions;
•enter into agreements or otherwise restrict our subsidiaries from making distributions or paying dividends to the borrowers under the Senior Secured Credit Facilities or to us or certain of our subsidiaries, as applicable; and
•repay intercompany indebtedness or make intercompany distributions or pay intercompany dividends.
The 2018 Credit Agreement also contains certain affirmative covenants and contains a financial covenant that requires us to maintain a senior secured first lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Facility.
These covenants and restrictions could affect our ability to operate our business and may limit our ability to react to market conditions or take advantage of potential business opportunities as they arise. Additionally, our ability to comply with these covenants may be affected by events beyond our control, including general economic and credit conditions and industry downturns.
If we fail to comply with the covenants in the 2018 Credit Agreement and the indenture governing the 2020 Senior Secured Notes, and are unable to obtain a waiver or amendment, an event of default would result, and the lenders and noteholders could, among other things, declare outstanding amounts due and payable or, with respect to the 2018 Credit Agreement, refuse to lend additional amounts to us or require deposit of cash collateral in respect of outstanding letters of credit. If we were unable to repay or pay the amounts due, the lenders under the 2018 Credit Agreement and the noteholders could, among other things, proceed against the collateral granted to them to secure the indebtedness, which includes substantially all of our and our U.S. subsidiaries’ assets and certain assets of certain of our non‑U.S. subsidiaries.
We are required to make payments under a Tax Receivable Agreement for certain tax benefits we may claim in the future, and the amounts we may pay could be significant.
In connection with the completion of our IPO, we entered into a tax receivable agreement (the “Tax Receivable Agreement”) that provides Brookfield the right to receive future payments from us of 85% of the amount of cash flowssavings, 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 GrafTech Switzerland S.A. (collectively, the “Pre‑IPO Tax Assets”). In addition, we pay interest on the payments we make to Brookfield with respect to the amount of this cash savings from the due date (without extensions) of our tax return where we realize this savings to the payment date at a rate equal to London Interbank Offered Rate ("LIBOR") plus 1.00% per annum. The term of the Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
We made our initial payment of approximately $28 million related to the Tax Receivable Agreement in February 2020 and have since made an additional payment of $22 million. We expect that, based on current tax laws, future payments under the Tax Receivable Agreement relating to the Pre-IPO Tax Assets will be approximately $19.3 million in the aggregate. The maximum amount over the term of the agreement is approximately $70 million.
Risks related to government regulation
Stringent health, safety and environmental regulations applicable to our manufacturing operations and facilities could result in substantial costs related to compliance, sanctions or material liabilities and may affect the availability of raw materials.
We are subject to stringent environmental, health and safety laws and regulations relating to our current and former properties (including former onsite landfills over which we have retained ownership), other properties that neighbor ours or to which we sent wastes for treatment or disposal, as well as our current raw materials, products, and operations. Some of our products (including our raw materials) are subject to extensive environmental and industrial hygiene regulations governing the registration and safety analysis of their component substances. Coal tar pitch, which is classified as a substance of very high concern under the EU’s Registration, Evaluation, Authorization and Restriction of Chemical Regulation (“REACH”)
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regulations, is used in certain of our processes but in a manner that we believe does not currently require us to obtain a specific authorization under the REACH guidelines. Violations of these laws and regulations, or of the terms and conditions of permits required for our operations, can result in damage claims, reputational harm, the imposition of substantial fines and criminal sanctions and sometimes require the installation of costly pollution control or safety equipment or costly changes in operations to limit pollution or decrease the likelihood of injuries. In addition, we are currently conducting remediation and/or monitoring at certain current and former properties and may become subject to material liabilities in the future for the investigation and cleanup of contaminated properties, including properties on which we have ceased operations. We have been in the past, and could be sufficientin the future, subject to serviceclaims alleging personal injury, death or property damage resulting from exposure to hazardous substances, accidents or otherwise for conditions creating an unsafe workplace. Further, alleged noncompliance with or stricter enforcement of, or changes in interpretations of, existing laws and regulations, adoption of more stringent new laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities or reputational harm that have a material adverse impact on our indebtedness,operations, costs or results of operations. It is also possible that the impact of safety and ifenvironmental regulations on our suppliers could affect the availability and cost of our raw materials.
For example, legislators, regulators and others, as well as many companies, are considering ways to reduce emissions of greenhouse gases (“GHGs”) due to scientific, political and public concern that GHG emissions are altering the atmosphere in ways that are affecting, and are expected to continue to affect, the global climate. The EU has established GHG regulations and is revising its emission trading system for the period after 2020 in a manner that may require us to incur additional costs. The United States required reporting of GHG emissions from certain large sources beginning in 2011. Further measures, in the EU and many other countries, may be enacted in the future. In particular, in December 2015, more than 190 countries participating in the United Nations Framework Convention on Climate Change (“UNFCC”) reached an international agreement related to curbing GHG emissions (the “Paris Agreement”). Further GHG regulations under the Paris Agreement or otherwise may take the form of a national or international cap‑and‑trade emissions permit system, a carbon tax, emissions controls, reporting requirements, or other regulatory initiatives. For more information, see the section entitled “Business.”
It is possible that some form of regulation of GHG emissions will also be introduced in the future in other countries in which we operate or market our products. Regulation of GHG emissions could impose additional costs, both direct and indirect, on our business, and on the businesses of our customers and suppliers, such as increased energy and insurance rates, higher taxes, new environmental compliance program expenses, including capital improvements, environmental monitoring and the purchase of emission credits, and other administrative costs necessary to comply with current and potential future requirements or limitations that may be imposed, as well as other unforeseen or unknown costs. To the extent that similar requirements and limitations are not imposed globally, this regulation may impact our ability to compete with companies located in countries that do not have these requirements or limitations. We may also experience a change in competitive position relative to industry peers, changes in prices received for products sold and changes to profit or loss arising from increased or decreased demand for our products. The impact of any future GHG regulatory requirements on our global business will be dependent upon the design of the regulatory schemes that are ultimately adopted and, as a result, we are unable to satisfypredict their significance to our obligations underoperations at this time.
Global data and privacy protection laws applicable to us require substantial costs related to compliance, and any failure to comply could result in significant liability to us, including fines and penalties.
We collect data, including personally identifiable information of our indebtedness, weemployees, in the course of our business activities and transfer such data between our affiliated entities, to and from our business partners and to third‑party service providers, which may be requiredsubject to seek other financing alternatives, whichglobal data privacy laws and cross‑border transfer restrictions. While we take steps to comply with these legal requirements, any changes to such laws may not be successful.
The cost of ongoing compliance with global data protection and other factors beyond our control. If our cash flowsprivacy laws and capital resources are insufficient to make these payments, wethe potential fines and penalties levied in the event of a breach of such laws may be required to seek additional financing sources, reduce or delay capital expenditures, sell assets or operations or refinance our indebtedness. These actions could have a materialan adverse effect on our business financial conditions and resultsoperations. For example, the GDPR currently provides that supervisory authorities in the EU may impose administrative fines for non‑compliance of operations. In addition, we may not be ableup to take any of these actions, and, even if successful, these actions may not permit us to meet our scheduled debt service obligations. Our ability to restructure€20,000,000 or refinance the debt under the Senior Secured Credit Facilities will depend on, among other things, the condition4% of the capital marketssubject company’s annual, group‑wide turnover (whichever is higher) and our financial condition at the time. We may not be able to restructure or refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot make scheduled payments on our debt, we will be in default and the outstanding principal and interest on our debt could be declared to be due and payable, in which case we could be forced into bankruptcy or liquidation or required to substantially restructure or alter our business operations or debt obligations.
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from such company. We will need to continue dedicating financial institutions could adversely affect our accessresources and management time to liquidity neededcompliance efforts with respect to conduct or expand our businesses or conduct acquisitions or make other discretionary investments, as well as our ability to effectively hedge our currency or interest rate risksglobal data protection and exposures, which could adversely impact our business, results of operations, financial condition and cash flows. These disruptions may also adversely impactprivacy laws, including the financial position of our customers and suppliers, which, in turn, could adversely affect our results of operations, financial condition and cash flows.GDPR.
Risks related to our common stock
If the ownership of our common stock continues to be highly concentrated, it may prevent minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.
As of December 31, 2019,February 11, 2022, Brookfield ownsowned approximately 74%24% of our outstanding common stock. As a result,Accordingly, Brookfield owns shares sufficient for the majority votehas significant influence over all matters requiring a stockholder vote, including the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our Amended and Restated Certificate of Incorporation (or (“Amended Certificate of Incorporation)Incorporation”) and our Amended and Restated By‑Laws (or By-Laws (“Amended By‑Laws)By-Laws”); and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Brookfield may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control. Also, Brookfield may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but that might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then‑currentthen-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.
Brookfield has other investments and business activities in addition to their ownership of us. Brookfield has the right, and has no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees. If Brookfield or any of its officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.
In the event that any of our directors and officers who is also a director, officer or employee of Brookfield acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us, if Brookfield pursues or acquires the corporate opportunity or if Brookfield does not present the corporate opportunity to us.
Certain provisions, including in our Amended Certificate of Incorporation and our Amended By‑Laws,By-Laws, could hinder, delay or prevent a change in control, which could adversely affect the price of our common stock.
Our Amended Certificate of Incorporation and Amended By‑LawsBy-Laws contain provisions that could make it more difficult for a third partythird-party to acquire us without the consent of our boardBoard of directorsDirectors or Brookfield, including:
•provisions in our Amended Certificate of Incorporation and Amended By‑LawsBy-Laws that prevent stockholders from calling special meetings of our stockholders, except where the Delaware General Corporation Law (“DGCL”) confers the right to fix the date of such meetings upon stockholders;
•advance notice requirements by stockholders with respect to director nominations and actions to be taken at annual meetings;
•no provision in our Amended Certificate of Incorporation or Amended By‑LawsBy-Laws provides for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all the directors standing for election;
•under our Amended Certificate of Incorporation, our boardBoard of directorsDirectors have authority to cause the issuance of preferred stock from time to time in one or more series and to establish the terms, preferences and rights of any such series of preferred stock, all without approval of our stockholders; and
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•nothing in our Amended Certificate of Incorporation precludes future issuances without stockholder approval of the authorized but unissued shares of our common stock.
These provisions may make it difficult and expensive for a third partythird-party to pursue a tender offer, change in control or takeover attempt that is opposed by Brookfield, our management or our board of directors. Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is favorable to stockholders. These anti‑takeoveranti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or to change our management and boardBoard of directorsDirectors and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.
Our Amended Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our Amended Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:
•any derivative action or proceeding brought on our behalf;
•any action asserting a breach of fiduciary duty;
•any action asserting a claim against us arising under the DGCL, our Amended Certificate of Incorporation or our Amended By‑Laws;By-Laws; and
•any action asserting a claim against us that is governed by the internal‑affairsinternal-affairs doctrine.
This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find the exclusive forum provision in our Amended Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our business.
The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
We may issue all of these shares ofnot pay cash dividends on our common stock without any action or approval bystock.
We currently pay cash dividends on our stockholders, subject to certain exceptions. We also intend to continue to evaluate acquisition opportunities and may issue common stock in connection with these acquisitions. Any common stock issued in connectionaccordance with our incentive plans, acquisitions,dividend policy. We cannot assure you, however, that we will pay dividends in the exercisefuture in these amounts or at all. Our Board of outstanding stock optionsDirectors may change the timing and
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amount of any future dividend payments or otherwise would diluteeliminate the percentage ownership held by public investors.payment of future dividends in its sole discretion, without any prior notice to our stockholders.
Item 2.Properties
The Company uses the following principal physical properties in connection with the manufacturing and sales of graphite electrodes and corporate administrative operations. The total capacity utilization, reflecting production volume as a percentage of production capacity, of our graphite electrode manufacturing facilities in Calais, France, Monterrey, Mexico, Pamplona, Spain and St. Marys, Pennsylvania, was 72% and 58% for the years ended December 31, 2021 and December 31, 2020, respectively. Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary. The properties that we own are encumbered by our 2018 Credit Agreement and our 2020 Senior Secured Notes.
| Primary Use | Owned or Leased | |||||||||||||
| Americas | ||||||||||||||
| Brooklyn Heights, Ohio | Corporate Headquarters, Innovation and Technology Center and Sales Office | Leased | ||||||||||||
| Monterrey, Mexico | Graphite Electrode Manufacturing Facility and Sales Office | Owned | ||||||||||||
| St. Marys, Pennsylvania | Graphite Electrode Manufacturing Facility | Owned | ||||||||||||
| Port Lavaca, Texas | Petroleum Needle Coke Manufacturing Facility (Seadrift) | Owned | ||||||||||||
| Salvador, Bahia, Brazil | Graphite Electrode Machine Shop and Sales Office | Owned | ||||||||||||
| Europe | ||||||||||||||
| Calais, France | Graphite Electrode Manufacturing Facility and Sales Office | Owned | ||||||||||||
| Pamplona, Spain | Graphite Electrode Manufacturing Facility and Sales Office | Owned | ||||||||||||
| Bussigny, Switzerland | Global Sales and Production Planning Office | Leased | ||||||||||||
Item 3.Legal Proceedings
We are involved in various investigations, lawsuits, claims, demands, labor disputes and other legal proceedings, including with respect to environmental and human exposure or other personal injury matters, arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters and proceedings, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows. Additionally, we are involved in the following legal proceedings.
We are involved in various arbitrations, sometimes as claimants and other times as respondents/counterclaimants, pending before the International Chamber of Commerce with several customers who, among other things, have failed to perform under their LTAs and in certain instances are seeking to modify or frustrate their contractual commitments to us. In particular, Aperam South America LTDA, Aperam Sourcing S.C.A., ArcelorMittal Sourcing S.C.A., and ArcelorMittal Brasil S.A. (collectively, the “Claimants”) initiated a single arbitration proceeding against two of the Company’s subsidiaries in the International Chamber of Commerce in June 2020. In June 2021, the Claimants filed their statement of claim, seeking approximately $61 million plus interest in monetary relief and/or reimbursement in respect of several fixed price LTAs that were executed between such subsidiaries and the Claimants in 2017 and 2018. The Claimants argue, among other things, that they should no longer be required to comply with the terms of the LTAs that they signed due to an alleged drop in market prices for graphite electrodes in January 2020. Alternatively, the Claimants argue that they should not be required to comply with the LTAs that they signed due to alleged market circumstances at the time of execution. We believe we have valid defenses to these claims. We intend to vigorously defend them and enforce our rights under the LTAs.
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
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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 the appellate court issued a decision in our favor on May 19, 2020. The employees have further appealed and, on December 16, 2020, the court upheld the decision in favor of GrafTech Brazil. On February 22, 2021, the employees filed a further appeal and, on April 28, 2021, the court rejected the employees' appeal in favor of GrafTech Brazil. The employees filed a further appeal and we intend to vigorously defend it.our position. As of December 31, 2019,2021, we are unable to assess the potential loss associated with these proceedings as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought.
On September 30, 2020, a stockholder of the Company filed a lawsuit in the Delaware Court of Chancery. The National Water Commissionstockholder filed an amended complaint on February 5, 2021, in Mexico, or CONAGUA, initiated an administrative proceeding with respectresponse to water usage atthe defendants' motion to dismiss. The amended complaint challenges the fairness of the Company’s Monterrey facilityrepurchase of shares of its common stock from Brookfield for $250 million pursuant to a December 3, 2019 share repurchase agreement and also a related block trade by Brookfield of shares of the Company’s common stock. The stockholder, on November 26, 2018.behalf of an alleged class of holders of shares of the Company’s common stock as of December 3, 2019 and also purportedly on behalf of the Company, asserts claims for breach of fiduciary duty against certain members of the Company’s Board of Directors and Brookfield. The inquiry relatesstockholder also challenges the appointment of the independent director who was appointed to the Company’s Board of Directors on August 5, 2020, as allegedly in violation of the Company’s Amended and Restated Certificate of Incorporation and the Stockholder Rights Agreement with certain Brookfield entities and affiliates. The stockholder seeks, among other things, an auditaward of historical water usage feesmonetary relief to the Company and related assessments fora declaration that the facility. The Companyappointment of the independent director to the Board of Directors is cooperating with CONAGUA with respectinvalid. On March 22, 2021, the defendants filed a motion to this matter.dismiss the amended complaint. On September 29, 2021, the stockholder voluntarily abandoned the stockholder's direct individual and class action claims challenging the share repurchase. On October 4, 2021, the Delaware Court of Chancery heard oral argument on the defendants' motion to dismiss the stockholder's remaining claims and took the matter under advisement. On January 21, 2022, the motion to dismiss was granted in favor of the defendants.
Item 4.Mine Safety Disclosures
Not applicable.
The following table sets forth information with respect to our current executive officers, including their ages, as of February 17, 2020. There are no family relationships between any of our executive officers.
ages.
| Name | Age | Position | ||||||||||||
| David J. Rintoul | ||||||||||||||
| Timothy K. Flanagan | 44 | Chief Financial Officer, Vice President of Finance and Treasurer | ||||||||||||
| Quinn J. Coburn | Senior Vice President | |||||||||||||
| Jeremy S. Halford | 49 | Executive Vice President, Chief | ||||||||||||
| Gina K. Gunning | Chief Legal Officer and Corporate Secretary | |||||||||||||
| Iñigo Perez Ortiz | Senior Vice President, Commercial | |||||||||||||
David J. Rintoul became PresidentChief Executive Officer and CEOPresident and was elected to the boardour Board of directorsDirectors in March 2018. Prior to joining the Company, Mr. Rintoul served as President of U.S. Steel Tubular Products, a fully-integrated tubular products manufacturer, and as a Senior Vice President of United States Steel Corporation (or ("U.S. Steel).Steel"), an integrated steel producer, since 2014. Before that, Mr. Rintoul has served in various roles at U.S. Steel since 2007, including oversight of U.S. Steel’s Slovak and Serbian operations. Mr. Rintoul’s career in the steel industry spans 3839 years with positions at both integrated and mini mill producers in the United States, Europe and Canada, including extensive mini‑millmini-mill operational experience at North StarNorth-Star Bluescope Steel in Delta, Ohio from 2001 to 2005 and from construction through full operations at Acme Steel Company in Riverdale, Illinois from 1995 to 2001. Mr. Rintoul holds an Associate’s degree in Mechanical Engineering Technology from Sault College of Applied Arts and Technology, a Bachelor’s degree in Business Administration from Lake Superior State University and a Master’s degree in Business Administration from the University of Notre Dame.
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Timothy K. Flanagan joined the Company as Chief Financial Officer, Vice President of Finance and Treasurer in November 2021. Mr. Flanagan previously served as Executive Vice President, Chief Financial Officer of Cleveland-Cliffs Inc., a flat-rolled steel producer and supplier of iron ore pellets, from January 2017 to February 2019. Prior to being promoted to Executive Vice President, Chief Financial Officer of Cleveland-Cliffs, he held a variety of financial leadership roles at Cleveland-Cliffs Inc. since joining in 2008, including being responsible for the accounting, reporting, treasury and financial planning and analysis functions and serving as the Vice President, Corporate Controller and Chief Accounting Officer from March 2012 to December 2016. Before joining the Company, Mr. Flanagan served as Chief Financial Officer of Benesch, Friedlander, Coplan & Aronoff, LLP, an AmLaw 200 law firm, from June 2019 to November 2021. He has a B.S. in Accounting from the University of Dayton.
Quinn J. Coburn became CFOSenior Vice President in September 2015.November 2021. Prior to that, Mr. Coburn served as Chief Financial Officer, Vice President Finance and Treasurer from September 2015 to November 2021. He became interim CFOChief Financial Officer beginning in May 2015 after previously serving as Vice President of Finance and Treasurer. He joined the Company in August 2010 after working at NCR Corporation from December 1992 until August 2010, including service as that company’sNCR Corporation's Vice President and Treasurer. Mr. Coburn graduated with a B.S. in Accounting from Utah State University in 1988. He received a MastersMaster of Business Administration from University of Pennsylvania’s The Wharton School in 1992.
Jeremy S. Halford became Executive Vice President, Chief Operating Officer in October 2021. Mr. Halford joined the Company onin May 1, 2019 as Senior Vice President, Operations and Development. Mr. Halford previously served as the President of Arconic Engineered Structures, a producer of highly engineered titanium and aluminum components for the aerospace, defense and oil and gas markets, a position he held since January 2017. Mr. Halford also was President of Doncasters Aerospace, a manufacturer of components and assemblies for the civil and military aero engine and airframe markets, from 2014 to 2016, and Vice President, Global Business Development, Doncasters Group Limited from 2013 to 2014. Previously, he also was President of Mayfran International from 2012 to 2013, and spent seven years at Alcoa Corporation ("Alcoa") in a variety of general management and strategy roles. Mr. Halford holds a MastersMaster of Business Administration degree from Harvard University and a Bachelor of Science degree in Mechanical Engineering from GMI Engineering and Management Institute (now Kettering University).
Gina K. Gunning joined the Company as Chief Legal Officer and Corporate Secretary in July 2018. She has nearlymore than 25 years of law firm and in-house corporate legal experience across multiple industries. Prior to joining GrafTech, she was an Associate General Counsel at FirstEnergy Corp., a distributor and generator of electricity, from 2012 to 2018,, where she was responsible for legal matters involving SEC reporting, business development, and capital markets, as well as corporate and executive compensation topics. She also served as a partner at Jones Day. Ms. Gunning holds a Juris Doctor from Notre Dame Law School and a Bachelor of Arts in English from the University of Notre Dame.
Iñigo Perez Ortiz joined the Company as Senior Vice President, Commercial in February 2020. Mr. Perez most recently served as Vice President, Europe and Asia, Sales and Customer Service at Alcoa, Corporation, a global industry leader in bauxite, alumina, and aluminum products, a position he held since 2017. Previously at Alcoa, Mr. Perez was Commercial Director, Europe and Asia Pacific from 2011 to 2017, Sales Manager, Europe from 2007 to 2011 and Sales Office Manager from 2002 to 2007. Prior to his career at Alcoa, Mr. Perez served in a variety of senior commercial roles at Autopulit S.A., Warner Electric and Babcock Wilcox Espanola, S.A. Mr. Perez holds a Master in Industrial Plans Management, Lean Manufacturing and Engineering degree from Polytechnic University of Barcelona, an Executive Master of Business Administration degree from Instituto de Empresa and a Mining Engineer degree from the University of the Basque Country.
PART II
Market Information
Our common stock IPO was completed on April 23, 2018 and our stock is listed on the NYSE under the trading symbol “EAF”.“EAF.”
Holders
As of December 31, 2019,2021, there were two12 registered holders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
Dividend Policies and Restrictions
We currently pay a quarterly cash dividend of $0.085$0.01 per share, or an aggregate of $0.34$0.04 per share on an annualized basis. We expect to continue to pay this dividend out of cash generated from operations; we do not intend to incur indebtedness to fund regular, quarterly dividend payments.
We cannot assure you, however, that we will pay dividends in the future in these amounts or at all. Our boardBoard of directorsDirectors 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 boardBoard of directors.Directors.
For further discussion of the factors that may affect our business and our ability to pay dividends, see “Risk Factors-Risks Relatedrelated to Our Businessour business and Industry”industry” and “Risk Factors-Risks Relatedrelated to our Common Stock-Wecommon stock-We may not pay cash dividends on our common stock.”
Repurchases
The table below sets forth the information on a monthly basis regarding GrafTech's purchases of its common stock, par value $0.01 per share, during the fourth quarter of 2019.2021.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
October 1 through October 31, 2019 (1) | 125,551 | $ | 11.01 | 125,551 | $ | 89,133,000 | |||||||
| November 1 through November 30, 2019 | — | — | — | — | |||||||||
December 1 through December 31, 2019 (2) | 19,047,619 | $ | 13.125 | — | — | ||||||||
| Total | 19,173,170 | 125,551 | $ | 89,133,000 | |||||||||
| Issuer Purchases of Equity Securities | |||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||||||||||||
| October 1 through October 31, 2021 | 364,620 | $ | 10.32 | 364,620 | $ | 9,030,314 | |||||||||||||||||
| November 1 through November 30, 2021 | — | — | — | 159,030,314 | |||||||||||||||||||
| December 1 through December 31, 2021 | — | — | — | 159,030,314 | |||||||||||||||||||
| Total | 364,620 | $ | 10.32 | 364,620 | $ | 159,030,314 | |||||||||||||||||
(1) Represents shares repurchased in open market transactions pursuant to the Share Repurchase Program (as defined below).Share repurchases were made pursuant to our previouslyOn July 31, 2019, we announced program to repurchase, which was authorized bythat our Board of Directors on July 30, 2019 (“Share Repurchase Program”). The Share Repurchase Program was announced on July 31, 2019 and allows forapproved the purchaserepurchase of up to $100 million of outstanding sharesour common stock in open market purchases, including under Rule 10b5-1 and/or Rule 10b-18 plans. On November 4, 2021, we announced that our Board of Directors approved the repurchase of up to an additional $150 million of our common stock from time to time on thein open market purchases, including under Rule 10b5-1 and/or Rule 10b-18 plans. As of December 31, 2021, we are now authorized to repurchase up to $159,030,314 million in shares of our common stock, inclusive of the amount remaining under the previous authorization. The sharestock repurchase program has no expiration date.
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| Successor | Predecessor | ||||||||||||||||||||||
| Year Ended December 31, | For the Period August 15 Through December 31, 2015 | For the Period January 1 Through August 14, 2015 (d) | |||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||||||
| Net sales | $ | 1,790,793 | $ | 1,895,910 | $ | 550,771 | $ | 437,963 | $ | 193,133 | $ | 339,907 | |||||||||||
Income (loss) from continuing operations | 744,602 | 853,888 | 14,212 | (108,869 | ) | (28,625 | ) | (101,970 | ) | ||||||||||||||
| Net income (loss) | 744,602 | 854,219 | 7,983 | (235,843 | ) | (33,551 | ) | (120,649 | ) | ||||||||||||||
Basic and diluted earnings (loss) per common share: | |||||||||||||||||||||||
Income (loss) from continuing operations per share | $ | 2.58 | $ | 2.87 | $ | 0.05 | $ | (0.36 | ) | $ | (0.09 | ) | $ | (0.74 | ) | ||||||||
| Weighted average common shares outstanding (a) | 289,057 | 297,748 | 302,226 | 302,226 | 302,226 | 137,152 | |||||||||||||||||
| Dividends per common share (b) | $ | 0.34 | $ | 7.71 | $ | — | — | $ | — | $ | — | ||||||||||||
Balance sheet data (at period end): | |||||||||||||||||||||||
| Total assets | $ | 1,526,164 | $ | 1,505,491 | $ | 1,199,103 | $ | 1,172,276 | $ | 1,422,015 | N/A (d) | ||||||||||||
| Other long-term obligations (c) | 72,562 | 72,519 | 68,907 | 82,148 | 94,318 | N/A (d) | |||||||||||||||||
| Total long-term debt | 1,812,682 | 2,050,311 | 322,900 | 356,580 | 362,455 | N/A (d) | |||||||||||||||||
| Other financial data: | |||||||||||||||||||||||
Net cash provided by operating activities | $ | 805,316 | $ | 836,603 | $ | 36,573 | $ | 22,815 | $ | 23,115 | $ | 28,323 | |||||||||||
Net cash used in investing activities | (63,884 | ) | (67,295 | ) | (2,199 | ) | (10,471 | ) | (17,484 | ) | (39,918 | ) | |||||||||||
Net cash (used in) provided by financing activities | (709,631 | ) | (731,044 | ) | (32,995 | ) | (8,317 | ) | (23,072 | ) | 20,824 | ||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the accompanying notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.Report. Discussion and analysis regarding our financial condition and results of operations for 20182020 as compared to 20172019 is included in Item 7 of our Annual Report on Form 10-K for the year-ended December 31, 2018,2020, filed with the SEC on February 22, 2019.23, 2021. Information in this section is intended to assist the reader in obtaining an understanding of our Consolidated Financial Statements, the changes in certain key items in those financial statements from year‑to‑year,year-to-year, the primary factors that accounted for those changes, any known trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as how certain accounting principles affect our Consolidated Financial Statements. This discussion and analysis contains forward‑lookingforward-looking statements that involve risks, uncertainties and assumptions. See “Special“Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those forward‑lookingforward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this Form 10-K.Annual Report.
We are a leading manufacturer of high qualityhigh-quality graphite electrode products essential to the production of electric arc furnace ("EAF")EAF steel and other ferrous and non‑ferrous metals. We believe that we have the most competitive portfolio of low‑cost UHP graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. Between 1984 and 2011, EAF steelmaking was the fastest‑growing segment of the steel sector, with production increasing at an average rate of 3.5% per year, based on World Steel Association ("WSA")WSA data. Historically, EAF steel production has grown faster than the overall steel market due to the greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature of EAF steelmaking. This trend was partially reversed between 2011 and 2015 due to global steel production overcapacity driven largely by Chinese blast furnace ("BOF")BOF steel production. Beginning in 2016, efforts by the Chinese government to restructure China’s domestic steel industry have led to limits on BOF steel production and lower export levels, and developed economies, which typically have much larger EAF steel industries, have instituted a number of trade policies in support of domestic steel producers. As a result, beginning in 2016, the EAF steel market rebounded strongly and resumed its long‑term growth trajectory. This revival in EAF steel production resulted in increased demand for our graphite electrodes.
In response to this increased demand, we modified our commercial strategy and executed three‑LTAs with our customers. Since 2000, EAF production has grown at an average rate of 2.7%.
We service customers at over 300 locations across the globe. In the second half of 2020, we began to five‑see a measured recovery in the global steel markets from the initial downturns resulting from the then challenging market conditions, with each region recovering at different rates. This recovery continued through 2021 and had a positive influence on graphite electrode demand. By the first quarter of 2021, both the global (ex-China) and U.S. steel market capacity utilization rates had surpassed 73%. These increased utilization rates continued through 2021, particularly in the United States.
The commercial team has worked diligently in 2021 to achieve solid results in the current environment. Full year take‑or‑pay contracts2021sales volumes were 167,000 MT, consisting of LTA volumes of 110,000 MT and non-LTA volumes of 57,000 MT.
During the fourth quarter of 2021, our average price from LTAs was approximately $9,400 per MT and our average price for non-LTA business was approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. In 2018, we shipped approximately 133,000 MT under these contracts at prices averaging approximately $10,100$5,000 per MT. In 2019, we shipped approximately 145,000 MT under these contracts at pricing averaging approximately $9,900 per MT. We have contractedOur average non-LTA graphite electrode price increased 10% sequentially from the third quarter of 2021.
Market prices for graphite electrodes began to sell approximately 142,000, 125,000increase in the first quarter of 2021, as steel producers' capacity utilization rates increased and 117,000 MT in 2020, 2021 and 2022, respectively. Approximately 83% of these volumes are under pre‑determined fixed annual volume contracts, while approximately 17% of the volumes are under contracts withthey worked through carryover graphite electrode inventories from 2020. There is a specified volume range. The aggregate differencelag between the midpoints abovetime we negotiate price for non-LTA sales and when our electrodes are delivered and recognized in revenue, which depressed our non-LTA prices during 2021. Prices increased during the minimum or maximum volumes acrosssecond quarter and throughout the remainder of 2021. Prices for non-LTA business reset on January 1, 2022 and we expect our cumulative portfolioaverage first quarter non-LTA prices to increase an additional 17 to 20% over the fourth quarter.
In parallel, we expect our costs to increase in 2022, driven by recent global inflationary pressures, particularly for third party needle coke, energy and freight. While we are anticipating our first quarter 2022 costs to increase 7 to 9% over the fourth quarter 2021, we expect further increases after the first quarter to be lower in magnitude as we continue to take steps to mitigate these cost increases.
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Capital structure and capital allocation
As of take‑or‑pay contracts with specified volume ranges is approximately 5,000 MT per year in 2020,December 31, 2021, we had cash and 2022. Contracted volumes may vary in timingcash equivalents of $57.5 million and total duedebt of approximately $1.0 billion. We continue to make progress in reducing our long-term debt, repaying $100 million in the credit risk associated with certain customers facing financial challenges as well as customer demand relatedfourth quarter, for a total debt repayment of $400 million in 2021.
We are committed to contracted volume ranges.delivering value to our stockholders through our disciplined capital allocation strategy. In 2020,2022, we expectwill continue to ship approximately 130,000 MT at prices averaging approximately $9,600 per MT.The weighted average contract price forfocus on investing in our business, strengthening our balance sheet and making opportunistic purchases under the contracted volumes overremaining $159 million stock repurchase authorization. Our capital expenditures in 2022 are focused on specific, highly targeted capital investments in operational improvement activities and are expected to be in the next three years is approximately $9,600 per MT, with the weighted average contract prices for contracts with a specified volume range computed using the volume midpoint.of $70 and $80 million.
The graphite electrode industry has historically followed the growth of the EAF steel industry and, to a lesser extent, the steel industry as a whole, which has been highly cyclical and affected significantly by general economic conditions. Historically, EAF steel production has grown faster than the overall steel market due to the greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature of EAF steelmaking.
Outlook
Our estimated shipments of graphite electrodes for the needfinal year of the initial term under our LTAs and for third-party purchases. However, recent steel production and graphite electrode consumption has slowed in some regions, notably Europe and South America.the years 2023 through 2024 are as follows:
| 2022 | 2023 through 2024 | ||||||||||
Estimated LTA volume(1) | 95-105 | 35-45 | |||||||||
Estimated LTA revenue(2) | $910-$1,010 | $350-$450(3) | |||||||||
(1) In its January 2020 report, the International Monetary Fund ("IMF") reported an estimated global growth rate for 2019thousands of 2.9%. They estimated 2020 global growth rate at 3.3% and 2021 is estimatedMT
(2) In millions
(3) Includes expected termination fees from a few customers that have failed to be 3.4%. The estimates for all three years were down slightly frommeet certain obligations under their October 2019 report. The downward revisions of 0.1% for 2019 and 2020 and 0.2% for 2021 were primarily driven by factors in emerging market economies, notably India.LTAs
Components of results of operations
Net sales
Net sales reflect sales of our products, including graphite electrodes and associated by‑products. Several factors affect net sales in any period, including general economic conditions, competitive conditions, customer inventory levels, scheduled plant shutdowns by customers, national vacation practices, changes in customer production schedules in response to seasonal changes in energy costs, weather conditions, strikes and work stoppages at customer plants and changes in customer order patterns including those in response to the announcement of price increases or price adjustments.
Revenue is recognized when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. See Note 2, "Revenue from Contracts with Customers" to the Consolidated Financial Statements for more information. Our first quarter is historically the weakest sales quarter.
Cost of sales
Cost of sales includes the costs associated with products invoiced during the period as well as non‑inventoried manufacturing overhead costs and outbound transportation costs. Cost of sales includes all costs incurred at our production facilities to make products saleable, such as raw materials, energy costs, direct labor and indirect labor and facilities costs, including purchasing and receiving costs, plant management, inspection costs, product engineering and internal transfer costs. In addition, all depreciation associated with assets used to produce products and make them saleable is included in cost of sales.
33
Direct labor costs consist of salaries, benefits, the service cost component of our pension and other post-employment benefit ("OPEB") plans and other personnel‑related costs for employees engaged in the manufacturing of our products.
Inventory valuation
Inventories are stated at the lower of cost or market. Cost is principally determined using the “first‑in, first‑out” (or FIFO)(“FIFO”) and average cost, which approximates FIFO, methods. Elements of cost in inventory include raw materials, energy costs, direct labor, manufacturing overhead and depreciation of the manufacturing fixed assets. We allocate fixed production overheads to the
costs of conversion based on normal capacity of the production facilities. We recognize abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) as current period charges. Market, or net realizable value, is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
Research and development
We conduct our research and developmentR&D both independently and in conjunction with our strategic suppliers, customers and others. Expenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as incurred.
Selling and administrative expenses
Selling and administrative expenses include salaries, benefits and other personnel relatedpersonnel-related costs for employees engaged in sales and marketing, customer technical services, engineering, finance, information technology, human resources and executive management. Other costs include outside legal and accounting fees, risk management (insurance), global operational excellence, global supply chain, in‑house legal, the service cost component of our pension and OPEB plans, share‑based compensation and certain other administrative and global resources costs. Our
Other (income) expense, net
Other (income) expense, net consists of a gain related to the settlement of a value-added tax matter in Brazil, the non-service cost components of our pension and OPEB plans, including a “mark‑to‑market adjustment” refers to our accounting policy regarding pensionadjustment," whichrepresents actuarial gains and other post-employment benefit ("OPEB") plans, where we immediately recognizelosses that result from the change in the fair valueremeasurement of plan assets and netobligations due to changes in assumptions or experience.We recognize in earnings these actuarial gains and losses annuallyin connection with the annual remeasurement in the fourth quarter of each year.
Related party Tax Receivable Agreement expense (benefit)
Related party Tax Receivable Agreement (benefit) expense represents the Company'sour benefit or expense associated with Brookfield's right, as sole pre-IPO stockholder, to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO.
Interest expense
Interest expense consists primarily of interest expense on our 2018 Term Loans,Loan Facility, 2018 Revolving Credit Facility, and the2020 Senior Secured Notes, accretion of the fair value adjustment on the Senior Notes and amortization of debt issuance costs.
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 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.
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 $5.5 million for the year ended December 31, 2021, an increase of $3.6 million for the year ended December 31, 2020, and a decrease of $6.9 million for the year ended December 31, 2019 and an increase of $10.5 million and $4.5 million for the years ended December 31, 2018 and 2017, respectively.2019.
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The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our cost of sales was a decreasean increase of $9.1$10.1 million for the year ended December 31, 20192021, and increasesdecreases of $3.6$4.9 million and $4.2$9.1 million in 2018for the years ended December 31, 2020 and 2017,2019, respectively.
As part of our cash management, we also have intercompany loans between our subsidiaries. These loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains or losses in other income (expense),(income) expense, net on the Consolidated Statements of Operations.
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 “Quantitative and Qualitative Disclosures about Market Risks.Risk."
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles in the United States ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our company.Company. The “non‑GAAP” financial measures consist of EBITDA, from continuing operationsadjusted EBITDA, adjusted net income and adjusted EBITDA from continuing operations,earnings per share, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization.
Key financial measures
| For the year ended December 31, | ||||||||||||||
| (in thousands, except per share amounts) | 2021 | 2020 | ||||||||||||
| Net sales | $ | 1,345,788 | $ | 1,224,361 | ||||||||||
| Net income | 388,330 | 434,374 | ||||||||||||
Earnings per share(1) | 1.46 | 1.62 | ||||||||||||
EBITDA(2) | 590,010 | 669,332 | ||||||||||||
Adjusted net income(2) | 464,585 | 422,512 | ||||||||||||
Adjusted earnings per share(1)(2) | 1.74 | 1.58 | ||||||||||||
Adjusted EBITDA(2) | 669,940 | 658,946 | ||||||||||||
| For the year ended December 31, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Net sales | $ | 1,790,793 | $ | 1,895,910 | $ | 550,771 | ||||||
| Net income | $ | 744,602 | $ | 854,219 | $ | 7,983 | ||||||
EBITDA from continuing operations(1) | $ | 1,027,268 | $ | 1,102,625 | $ | 97,884 | ||||||
Adjusted EBITDA from continuing operations(1) | $ | 1,048,259 | $ | 1,205,021 | $ | 95,806 | ||||||
| For the year ended December 31, | |||||||||
| (in thousands) | 2019 | 2018 | 2017 | ||||||
Sales volume (MT)(2) | 171 | 176 | 163 | ||||||
Production volume (MT)(3) | 177 | 179 | 166 | ||||||
Production capacity excluding St. Marys during idle period (MT)(4)(5) | 202 | 180 | 167 | ||||||
Capacity utilization excluding St. Marys during idle period(4)(6) | 88 | % | 99 | % | 85 | % | |||
Total production capacity(5)(7) | 230 | 208 | 195 | ||||||
Total capacity utilization(6)(7) | 77 | % | 86 | % | 85 | % | |||
| For the year ended December 31, | |||||||||
| (in thousands) | 2019 | 2018 | 2017 | ||||||
| Net income (loss) | 744,602 | 854,219 | 7,983 | ||||||
| Add: | |||||||||
| Discontinued operations | — | (331 | ) | 6,229 | |||||
| Depreciation and amortization | 61,819 | 66,413 | 64,025 | ||||||
| Interest expense | 127,331 | 135,061 | 30,823 | ||||||
| Interest income | (4,709 | ) | (1,657 | ) | (395 | ) | |||
| Income taxes | 98,225 | 48,920 | (10,781 | ) | |||||
| EBITDA from continuing operations | 1,027,268 | 1,102,625 | 97,884 | ||||||
| Adjustments: | |||||||||
Pension and OPEB plan expenses (gain)(1) | 6,727 | 3,893 | (1,611 | ) | |||||
Rationalization‑related gains(2) | — | — | (3,970 | ) | |||||
Intial and follow-on public offerings and related expenses(3) | 2,056 | 5,173 | — | ||||||
Acquisition and proxy contests costs(4) | — | — | 886 | ||||||
Non‑cash loss on foreign currency remeasurement(5) | 1,784 | 818 | 1,731 | ||||||
Stock-based compensation(6) | 2,143 | 1,152 | — | ||||||
Non‑cash fixed asset write‑off(7) | 4,888 | 4,882 | 886 | ||||||
Related party Tax Receivable Agreement expense(8) | 3,393 | 86,478 | — | ||||||
| Adjusted EBITDA from continuing operations | 1,048,259 | 1,205,021 | 95,806 | ||||||
Key Operating Metricsoperating measures
In addition to measures of financial performance presented in accordance with GAAP, we use certain operating metrics to analyze the performance of our company. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. These metrics align with management's assessment of our revenue performance and profit margin, and will help investors understand the factors that drive our profitability.
Sales volume reflects the total volume of graphite electrodes sold for which revenue has been recognized during the period. For a discussion of our revenue recognition policy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Revenue Recognition.”“—Critical accounting policies—Revenue recognition” in this section. 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, standarddepending on product mix and expected maintenance downtime.outage. Actual production may vary. Capacity utilization reflects production volume as a percentage of production capacity. Production
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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.
| For the year ended December 31, | ||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||
Sales volume (MT)(1) | 167 | 135 | ||||||||||||
Production volume (MT)(2) | 165 | 134 | ||||||||||||
Total production capacity(3)(4) | 230 | 230 | ||||||||||||
Total capacity utilization(4)(5) | 72 | % | 58 | % | ||||||||||
Production capacity excluding St. Marys (MT)(3)(6) | 202 | 202 | ||||||||||||
Capacity utilization excluding St. Marys(5)(6) | 82 | % | 66 | % | ||||||||||
(1) Sales volume reflects only graphite electrodes manufactured by GrafTech.
(2) Production volume reflects graphite electrodes we produced during the period.
(3) Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary.
(4) Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; Pamplona, Spain; and St. Marys, Pennsylvania.
(5) Capacity utilization reflects production volume as a percentage of production capacity.
(6) In the first quarter of 2018, our St. Marys, Pennsylvania facility began graphitizing a limited amount of electrodes sourced from our Monterrey, Mexico facility.
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 non-GAAP financial measures. We define EBITDA, a non‑GAAP 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 plus any pension and other post-employment benefit (OPEB) plan expenses, adjustments for public offerings and related expenses, non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar, related party payable - tax receivable agreement adjustments, stock-based compensation, non‑cash fixed asset write‑offs, value-added tax credit gains in Brazil 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. For purposes of this section, a "Change in Control" occurred when Brookfield and any affiliates thereof ceased to own stock of the Company that constitutes at least thirty percent (30%) or thirty-five percent (35%), as applicable, of the total fair market value or total voting power of the stock of the Company. 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 period‑to‑period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt‑service capabilities.
Our use of adjusted EBITDA 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 non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar;
36
•adjusted EBITDA does not reflect public offerings and related expenses;
•adjusted EBITDA does not reflect related party payable - Tax Receivable Agreement adjustments;
•adjusted EBITDA does not reflect stock-based compensation or the non‑cash write‑off of fixed assets;
•adjusted EBITDA does not reflect gains on a value-added tax matter in Brazil;
•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 non‑GAAP 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 non‑GAAP 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 and adjusted EPS, you should be aware that in the future, we will incur expenses similar to the adjustments in the reconciliation presented below, other than the Change in Control charges. Our presentations of EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non‑recurring items. When evaluating our performance, you should consider EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, alongside other measures of financial performance and liquidity, including our net income (loss), EPS, respectively, and other GAAP measures.
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The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures:
| Reconciliation of Net Income to Adjusted Net Income | For the year ended December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Net income | $ | 388,330 | $ | 434,374 | ||||||||||
| Diluted income per common share: | ||||||||||||||
| Net income per share | $ | 1.46 | $ | 1.62 | ||||||||||
| Weighted average shares outstanding | 266,317,194 | 267,930,644 | ||||||||||||
| Net income | $ | 388,330 | $ | 434,374 | ||||||||||
| Adjustments, pre-tax: | ||||||||||||||
Pension and OPEB plan (benefits) expenses(1) | (2,545) | 6,096 | ||||||||||||
Public offerings and related expenses(2) | 663 | 264 | ||||||||||||
Non‑cash (gains) losses on foreign currency remeasurement(3) | (119) | 1,297 | ||||||||||||
Stock-based compensation(4) | 1,917 | 2,669 | ||||||||||||
Non‑cash fixed asset write‑off(5) | 3,197 | 378 | ||||||||||||
Related party Tax Receivable Agreement adjustment(6) | 231 | (21,090) | ||||||||||||
Change in Control LTIP award (7) | 73,384 | — | ||||||||||||
Change in Control stock-based compensation acceleration (7) | 14,713 | — | ||||||||||||
Brazil value-added tax credit (8) | (11,511) | — | ||||||||||||
| Total non-GAAP adjustments pre-tax | $ | 79,930 | $ | (10,386) | ||||||||||
Income tax impact on non-GAAP adjustments (9) | 3,675 | 1,476 | ||||||||||||
| Adjusted net income | $ | 464,585 | $ | 422,512 | ||||||||||
(1)Net periodic (benefit) cost for our pension and OPEB plans, including a mark-to-market (gain) loss, representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.
(2)Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3)Non-cash (gains) 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 stockholder, Brookfield, moving below 30% of our shares outstanding.
(8)Gain from the settlement of a value-added tax matter in Brazil.
(9)The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.
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| Reconciliation of EPS to Adjusted EPS | ||||||||||||||
| For the year ended December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| EPS | $ | 1.46 | $ | 1.62 | ||||||||||
| Adjustments per share: | ||||||||||||||
Pension and OPEB plan (benefits) expenses (1) | (0.01) | 0.03 | ||||||||||||
Public offerings and related expenses (2) | — | — | ||||||||||||
Non-cash losses on foreign currency remeasurement (3) | — | 0.01 | ||||||||||||
Stock-based compensation (4) | — | 0.01 | ||||||||||||
Non-cash fixed asset write-off (5) | 0.01 | — | ||||||||||||
Related party Tax Receivable Agreement adjustment (6) | — | (0.08) | ||||||||||||
Change in Control LTIP award (7) | 0.27 | — | ||||||||||||
Change in Control stock-based compensation acceleration (7) | 0.06 | — | ||||||||||||
Brazil value-added tax credit (8) | (0.04) | — | ||||||||||||
| Total non-GAAP adjustments pre-tax per share | 0.29 | (0.03) | ||||||||||||
Income tax impact on non-GAAP adjustments per share (9) | 0.01 | 0.01 | ||||||||||||
| Adjusted EPS | $ | 1.74 | $ | 1.58 | ||||||||||
(1)Net periodic (benefit) cost for our pension and OPEB plans, including a mark-to-market (gain) loss, representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.
(2)Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3)Non-cash 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 stockholder, Brookfield, moving below 30% of our total shares outstanding.
(8)Gain from the settlement of a value-added tax matter in Brazil.
(9)The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.
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| Reconciliation of Net Income to Adjusted EBITDA | For the year ended December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Net income | $ | 388,330 | $ | 434,374 | ||||||||||
| Add: | ||||||||||||||
| Depreciation and amortization | 65,716 | 62,963 | ||||||||||||
| Interest expense | 68,760 | 98,074 | ||||||||||||
| Interest income | (872) | (1,750) | ||||||||||||
| Income taxes | 68,076 | 75,671 | ||||||||||||
| EBITDA | 590,010 | 669,332 | ||||||||||||
| Adjustments: | ||||||||||||||
Pension and OPEB plan (benefits) expenses (1) | (2,545) | 6,096 | ||||||||||||
Public offerings and related expenses (2) | 663 | 264 | ||||||||||||
Non-cash (gains) losses on foreign currency remeasurement (3) | (119) | 1,297 | ||||||||||||
Stock-based compensation (4) | 1,917 | 2,669 | ||||||||||||
Non-cash fixed asset write-off (5) | 3,197 | 378 | ||||||||||||
Related party Tax Receivable Agreement adjustment (6) | 231 | (21,090) | ||||||||||||
Change in Control LTIP award (7) | 73,384 | — | ||||||||||||
Change in Control stock-based compensation acceleration (7) | 14,713 | — | ||||||||||||
Brazil value-added tax credit (8) | (11,511) | — | ||||||||||||
| Adjusted EBITDA | $ | 669,940 | $ | 658,946 | ||||||||||
(1)Net periodic (benefit) cost for our pension and OPEB plans, including a mark-to-market (gain) loss, representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.
(2)Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3)Non-cash (gains) 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 stockholder, Brookfield, moving below 30% of our shares outstanding.
(8)Gain from the settlement of a value-added tax matter in Brazil.
Customer base
We are a global company and sell our products in every major geographic market. Sales of these products to buyers outside the United States accounted for approximately 77%, 78% and 81%79% of our net sales in 2019, 2018both 2021 and 2017, respectively.2020 and 77% in 2019.
In 2019, six2021, five of our ten10 largest customers were based in Europe, twothree in the United States, one in Brazil and one in each of Brazil and Mexico. However, seven of our ten10 largest customers are multi‑nationalmulti-national operations.
The following table summarizes information as to our operations in different geographical areas:
| For the year ended December 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Net sales: | |||||||||||
| United States | $ | 285,710 | $ | 260,867 | |||||||
| Americas (excluding the United States) | 241,442 | 187,779 | |||||||||
| Asia Pacific | 154,084 | 127,415 | |||||||||
| Europe, Middle East, Africa | 664,552 | 648,300 | |||||||||
| Total | $ | 1,345,788 | $ | 1,224,361 | |||||||
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| For the year ended December 31, | ||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||
| Net sales: | ||||||||
| United States | 403,916 | 429,599 | 103,890 | |||||
| Americas (excluding the United States) | 348,670 | 367,561 | 129,103 | |||||
| Asia Pacific | 172,439 | 131,578 | 46,329 | |||||
| Europe, Middle East, Africa | 865,768 | 967,172 | 271,449 | |||||
| Total | 1,790,793 | 1,895,910 | 550,771 | |||||
In 2019, one 2021,nocustomer accounted for 10% or more of our net sales. Wesales, nor do we believe thisany customer does not poseposes a significant concentration of risk, as sales to thisone customer could be replaced by demand from other customers.
Results of operations
Results of operations for 20192021 as compared to 20182020
The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
| For the Year Ended December 31, | Increase/ Decrease | % Change | |||||||||||||
| (in thousands) | 2019 | 2018 | |||||||||||||
| Net sales | $ | 1,790,793 | $ | 1,895,910 | $ | (105,117 | ) | (6 | )% | ||||||
| Cost of sales | 750,390 | 705,698 | 44,692 | 6 | % | ||||||||||
| Gross profit | 1,040,403 | 1,190,212 | (149,809 | ) | (13 | )% | |||||||||
| Research and development | 2,684 | 2,129 | 555 | 26 | % | ||||||||||
| Selling and administrative expenses | 63,674 | 62,032 | 1,642 | 3 | % | ||||||||||
| Operating income | 974,045 | 1,126,051 | (152,006 | ) | (13 | )% | |||||||||
| Other expense (income), net | 5,203 | 3,361 | 1,842 | 55 | % | ||||||||||
| Related party Tax Receivable Agreement expense | 3,393 | 86,478 | (83,085 | ) | N/A | ||||||||||
| Interest expense | 127,331 | 135,061 | (7,730 | ) | (6 | )% | |||||||||
| Interest income | (4,709 | ) | (1,657 | ) | (3,052 | ) | 184 | % | |||||||
| Income from continuing operations before provision for income taxes | 842,827 | 902,808 | (59,981 | ) | (7 | )% | |||||||||
| Provision for income taxes | 98,225 | 48,920 | 49,305 | 101 | % | ||||||||||
| Net income from continuing operations | $ | 744,602 | $ | 853,888 | $ | (109,286 | ) | (13 | )% | ||||||
| Income from discontinued operations, net of tax | — | 331 | (331 | ) | (100 | )% | |||||||||
| Net income | $ | 744,602 | $ | 854,219 | $ | (109,617 | ) | (13 | )% | ||||||
| For the Year Ended December 31, | Increase/ Decrease | % Change | ||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | ||||||||||||||||||||||||
| Net sales | $ | 1,345,788 | $ | 1,224,361 | $ | 121,427 | 10 | % | ||||||||||||||||||
| Cost of sales | 701,335 | 563,864 | 137,471 | 24 | % | |||||||||||||||||||||
| Gross profit | 644,453 | 660,497 | (16,044) | (2) | % | |||||||||||||||||||||
| Research and development | 3,771 | 3,975 | (204) | (5) | % | |||||||||||||||||||||
| Selling and administrative expenses | 132,608 | 67,913 | 64,695 | 95 | % | |||||||||||||||||||||
| Operating income | 508,074 | 588,609 | (80,535) | (14) | % | |||||||||||||||||||||
| Other (income) expense, net | (16,451) | 3,330 | (19,781) | N/A | ||||||||||||||||||||||
| Related party Tax Receivable Agreement expense (benefit) | 231 | (21,090) | 21,321 | N/A | ||||||||||||||||||||||
| Interest expense | 68,760 | 98,074 | (29,314) | (30) | % | |||||||||||||||||||||
| Interest income | (872) | (1,750) | (878) | (50) | % | |||||||||||||||||||||
| Income before provision for income taxes | 456,406 | 510,045 | (53,639) | (11) | % | |||||||||||||||||||||
| Provision for income taxes | 68,076 | 75,671 | (7,595) | (10) | % | |||||||||||||||||||||
| Net income | $ | 388,330 | $ | 434,374 | $ | (46,044) | (11) | % | ||||||||||||||||||
Net sales. Net sales decreased by $105.1increased $121.4 million, or 6%10%, from $1.9$1.2 billion in 20182020 to $1.8$1.3 billion in 2019. This decrease2021. 2020 was primarily drivenimpacted by the then challenging market conditions. Stronger demand for our products in 2021 resulted in a 3% decrease24% increase in sales volume of GrafTech manufactured electrodes as well ascompared to 2020. Partially offsetting the increased volume was a decrease in non-GrafTech manufactured electrodes sales. Graphite electrode volumes decreased significantlyaverage realized sales prices. While the non-LTA prices increased throughout the year, the decrease in average realized sales prices reflects an increased percentage of non-LTA sales versus the second half of 2019, asprior year. Prices for non-LTA business reset on January 1, 2022 and we expect our customers beganaverage first quarter 2022 non-LTA prices to de-stock their inventory of our products. Graphite electrode inventories remain elevated for many customers, but we are seeing early evidence that de-stocking is running its course. We continueincrease an additional 17 to expect inventory de-stocking through20% over the first half of 2020. We expect inventories to decline and conditions to improve as we move into the second half of 2020. Approximately 80% of our 2019 revenues were derived from customers with long-term agreements. Spot market prices for graphite electrodes declined approximately 25% in 2019. We expect additional decreases in 2020.fourth quarter 2021.
Cost of sales. Cost of sales increased by $44.7$137.5 million, or 6%24%, from $705.7 million in 20182021 compared to $750.4 million2020, driven primarily by the increase in 2019. This increase was primarily the resultsales volume of manufactured electrodes. Additionally, cost of sales in 2021 was impacted by a one-time long-term incentive plan ("LTIP") charge of inventory that$30.8 million resulting from a Change in Control after our largest stockholder's ownership of our common stock was manufactured using higher priced third-party needle coke. Costreduced below 30% of sales relatedour outstanding common stock (see Note 12, "Commitments and Contingencies," to third-partythe Consolidated Financial Statements for additional information). We expect our costs to increase in 2022, driven by recent global inflationary pressures, particularly for third party needle coke, peaked in 2019energy and freight. While we are anticipating our first quarter 2022 costs to increase 7 to 9% over the fourth quarter 2021, we expect modest declinesfurther increases after the first quarter to be lower in 2020.magnitude as we continue to take steps to mitigate these cost increases.
Selling and administrative expenses. Selling and administrative expenses remained relatively flatincreased $64.7 million, or 95%, from 2018$67.9 million in 2020 to 2019 as increased$132.6 million in 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 and bad debt expenses were mostly offset by lower initial and follow-on public offering and related expenses.expense.
Other (income) expense, (income), net. Other (income) expense, increased by $1.8 million,net changed from $3.4an expense of $3.3 million in 20182020 to $5.2an income generation of $16.5 million in 2019.2021. This increase was primarily due tothe result of an $11.5 million gain on a value-added tax matter in Brazil for which we received a beneficial ruling. Additionally, our annual pension and OPEB mark-to-market chargesadjustment resulted in a benefit in 2021 of $4.1$3.9 million in 2019 versus $1.92021 compared to an expense of $3.2 million in 2018.2020.
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Related party Tax Receivable Agreement expense (benefit). Related party Tax Receivable Agreement expense (benefit) increased from a benefit of $21.1 million in 2020 to an expense of $0.2 million in 2021. The benefit recorded in 2020 resulted from the revision of U.S. income estimates affecting the future usage of our U.S. tax attributes, which are required to be reimbursed to Brookfield under the Tax Receivable Agreement.
Interest expense. Interest expense decreased by $7.7$29.3 million, or 6%30%, from $135.1$98.1 million in 20182020 to $127.3$68.8 million in 2019, primarily2021, due to a $24.2lower average borrowings as we repaid $400 million decrease in refinancing charges, partially offset by an increase in borrowings over the full period.of our 2018 Term Loan Facility during 2021.
Provision for income taxes. The following table summarizes the benefitprovision for income taxes in 20192021 and 2018:2020:
| For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | ||||||||||
| Provision for income taxes | $ | 68,076 | $ | 75,671 | |||||||
| Income before provision for income taxes | $ | 456,406 | $ | 510,045 | |||||||
| Effective income tax rate | 14.9 | % | 14.8 | % | |||||||
| For the Year Ended December 31, 2019 | For the Year Ended December 31, 2018 | ||||||
| Tax expense | $ | 98,225 | $ | 48,920 | |||
| Income from continuing operations before provision for income taxes | 842,827 | $ | 902,808 | ||||
| Effective tax rates | 11.7 | % | 5.4 | % | |||
The effective tax rate for the year ended December 31, 20192021 was 11.7%14.9% and differs from the U.S. statutory tax rate of 21% primarily due to worldwide earnings from various countries taxed at different rates, a portion of U.S. income being exempt frompartially offset by the net combined impact related to the U.S. taxation as a result of the income qualifying for the foreign-derived intangible income deductionGlobal Intangible Low Tax Income ("GILTI") and a release of a valuation allowance recorded against the deferred tax asset related to U.S. state and foreign tax attributes.Foreign Tax Credits ("FTC's"). As of December 31, 2019,2021, the balance of our valuation allowance against deferred tax assets was $13.7$10.6 million and does not result in, or limit the Company's ability to utilize these tax assets in the future. We expect the effective tax rate in 20202022 to be approximately 14-18%.
The tax expenseprovision for income taxes changed from $48.9$75.7 million, with an effective tax rate of 5.4%14.8% for the year ended December 31, 20182020 to a $98.2$68.1 million with an 11.7%a 14.9% effective rate for the year ended December 31, 2019. 2021. This increasechange in the effective tax rate is primarily due to the partial releasereduction in pre-tax income and the mix of a valuation allowance recorded against the deferred tax asset related to U.S. state and foreign tax attributes which was smaller in 2019 than the partial valuation allowance release recorded in 2018.
GrafTech has considered the tax impact of COVID-19 legislation, including the American Rescue Plan Act, and has concluded that there is no material tax impact. The Company continues to monitor the tax effects of inflation on our costs incurred in each of these countries.any legislative changes.
Currency translation and transactions
We translate the assets and liabilities of our non‑U.S. subsidiaries into U.S. dollars for consolidation and reporting purposes in accordance with the Financial Accounting Standards Board (FASB)(“FASB”) Accounting Standards Codification (ASC)(“ASC”) 830, Foreign Currency Matters.Matters. Foreign currency translation adjustments are generally recorded as part of stockholders’ equity and identified as part of accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as their operations are sold or substantially or completely liquidated.
We account for our Russian, Swiss, Luxembourg, United Kingdom and Mexican subsidiaries using the U.S. dollar as the functional currency, as sales and purchases are predominantly U.S. dollar‑denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses from non‑permanent intercompany balances as part of cost of sales and other (income) expense, net.
Significant changes in currency exchange rates impacting us are described under “Effects“—Effects of Changeschanges in Currency Exchange Rates”currency exchange rates” and “Results“—Results of Operations.”operations” in this section.
Liquidity and capital resources
Our sources of funds have consisted principally of cash flow from operationsoperations 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 prepayments, sharerepayments, stock 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.needs for at least the next 12 months and for the foreseeable future. As of December 31, 2019,2021, we had liquidity of $327.8$304.2 million, consisting of $246.9$246.7 million of availability onunder our 2018 Revolving Credit Facility (subject to continued compliance with the financial covenants and representations) and cash and
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cash equivalents of $80.9$57.5 million. We had long‑termlong-term debt of $1,812.7 million$1.0 billion and short‑termshort-term debt of $0.1 million as of December 31, 2019.2021. As of December 31, 2018,2020, we had liquidity of $295.4$391.8 million, consisting of $245.5$246.4 million available onunder our 2018 Revolving Credit Facility and cash and cash equivalents of $49.9$145.4 million. We had long‑termlong-term debt of $2,050.3 million$1.4 billion and short‑termshort-term debt of $106.3$0.1 million as of December 31, 2018.2020.
As of December 31, 20192021 and 2018, $41.42020, $49.1 million and $38.4$114.6 million, respectively, of our cash and cash equivalents were located outside of the United States.U.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends do not exceed the amount of retained and current earnings. In addition, for our subsidiary in South Africa, the South Africa Central Bank imposes that certain solvency and liquidity ratios remain above defined levels after the dividend distribution, which historically has not materially affected our ability to repatriate cash from this jurisdiction. The cash and cash equivalents balances in South Africa were $0.8$0.5 million and $0.2$1.6 million as of December 31, 20192021 and December 31, 2018,2020, respectively. Upon repatriation to the United States, the foreign source portion of dividends we receive from our foreign subsidiaries is no longer subject to U.S. federal income tax as a result of the Tax Act.Cuts and Jobs Act of 2017 ("Tax Act").
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 capital expenditurestax and interest payments and other factors. We had positive cash flow from operating activities during 2019, 20182021, 2020 and 2017.2019. Although the global economic environment experienced significant swings in these periods, our working capital management and cost‑control initiatives allowed us to remain operating cash‑flow positive in both times of declining and improving operating results. Cash from operations is expected to remain at positive sustained levels due to the predictable earnings generated by our three-to-five-year sales contracts with our customers.levels.
As of December 31, 2019,2021, we had access tototal availability under the $250 million 2018 Revolving Facility. We had $3.1Credit Facility of $246.7 million after giving effect to $3.3 million of letters of credit, for a total availability on the 2018 Revolving Facility of $246.9 million.credit. As of December 31, 2018,2020, we had $4.5$3.6 million of letters of credit, for a total availability of $245.5 million on the 2018 Revolving Facility.
In December 2020, GrafTech Finance Inc. ("GrafTech Finance") issued $500 million aggregate principal amount the 2020 Senior Secured Notes in a private offering. The 2020 Senior Secured Notes and related guarantees are secured on a pari passu basis by the collateral securing the Senior Secured Credit Facilities. All of December 31, 2019the proceeds from the 2020 Senior Secured Notes were used to partially repay borrowings under our 2018 Term Loan Facility.
We repaid an additional $400 million on our 2018 Term Loan Facility in both 2021 and $72.32020. We are committed to delivering value to our stockholders through our disciplined capital allocation strategy. In 2022, we will continue to focus on investing in our business, strengthening our balance sheet and making opportunistic purchases under the remaining $159.0 million remaining as ofstock repurchase authorization.
In February 17, 2020.
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Potential uses of our liquidity include dividends, sharestock repurchases, capital expenditures, acquisitions, scheduled debt repayments, optional debt prepaymentsrepayments and other general purposes. Continued volatility in the global economy may require additional borrowings under the 2018 Revolving Facility. An improving economy, while resulting in improved results of operations, could increase our cash requirements to purchase inventories, make capital expenditures and fund payables and other obligations until increased accounts receivable are converted into cash. A downturn could significantly and negatively impact our results of operations and cash flows, which, coupled with increased borrowings, could negatively impact our credit ratings, our ability to comply with debt covenants, our ability to secure additional financing and the cost of such financing, if available.
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. As a part of our cash management activities, we manage accounts receivable credit risk, collections, and accounts payable vendor terms to maximize our free cash at any given time and minimize accounts receivable losses.
We manage our capital expenditures by taking into account quality, plant reliability, safety, environmental and regulatory requirements, prudent or essential maintenance requirements, global economic conditions, available capital resources, liquidity, long‑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 andamong other factors.
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.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2019.2020 and 2021, and we expect to continue to do so in the future. These transactions include ongoing obligations under the Tax Receivable Agreement, Stockholders Rights Agreementstockholders rights agreement, as amended, and Registration Rights Agreement,registration rights agreement, each with Brookfield. In November 2019, we amended the Stockholders Rights Agreement with Brookfield regarding compensation for the Brookfield designated directors. In December 2019, in conjunction with a secondary block trade by Brookfield pursuant to Rule 144 under the Securities Act of 1933, we repurchased approximately $250 million of common stock directly from Brookfield at the arms length price determined by the competitive bidding process in the secondary block trade. This resulted in 19,047,619 shares of common stock repurchased at a price of $13.125 per share, reducing total shares outstanding by approximately 7%.
Cash flows
The following table summarizes our cash flow activities:
| For the Year Ended December 31, | For the Year Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | 2021 | 2020 | ||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | ||||||||||||||||||||||||
| Cash flow provided by (used in): | Cash flow provided by (used in): | ||||||||||||||||||||||||
| Operating activities | $ | 805.3 | $ | 836.6 | Operating activities | $ | 443.0 | $ | 563.6 | ||||||||||||||||
| Investing activities | (63.9 | ) | (67.3 | ) | Investing activities | (57.9) | (35.7) | ||||||||||||||||||
| Financing activities | (709.6 | ) | (731.0 | ) | Financing activities | (471.8) | (463.7) | ||||||||||||||||||
| Net change in cash and cash equivalents | Net change in cash and cash equivalents | (86.6) | 64.3 | ||||||||||||||||||||||
Operating activities
Cash flow provided by operating activities representstotaled $443.0 million in the year ended December 31, 2021 versus $563.6 million in the prior-year period. The decrease in operating cash-flows was primarily due to higher working capital in 2021 as compared to the prior year, driven by increased sales and higher production levels. In addition to the working capital change, cash receiptsfrom operating activities was negatively impacted by the $71 million one-time payment of the LTIP award triggered by the May 2021 Change in Control (see Note 12, "Commitments and Contingencies," to the Consolidated Financial Statements for additional information), partially offset by decreases versus the prior year in use of 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:
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.
In the year ended December 31, 2019,2021, changes in working capital resulted in a net use of funds of $47.7$16.4 million, which was impacted by:
•use of funds in accounts receivable of $28.9 million due to the timing and increased level of sales;
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•use of funds from increases in inventory of $21.5$28.2 million due primarily to increases in both the increased quantities on hand;price and quantity of raw materials;
•source of funds of $5.7 million resulting from an increase in income taxes payable driven primarily by the timing of income tax payments in 2021; and
•source of funds of $66.6 million from increases in accounts payable and other accruals primarily driven by increased purchases of raw materials resulting from higher levels of production and by the timing of payments.
Other uses of cash in the year ended December 31, 2021 included cash paid for interest of $56.3 million, cash paid for taxes of $63.8 million, cash paid for the Tax Receivable Agreement of $21.8 million and contributions to pension and other benefit plans of $4.2 million.
In the year ended December 31, 2020, changes in working capital resulted in a net source of funds of $86.4 million which was impacted by:
•net cash inflows in accounts receivable of $63.6 million from the decrease in accounts receivable due to lower sales;
•source of funds from decreases in inventory of $44.6 million from our efforts to reduce inventory due to the lower demand environment;
•use of funds of $18.2$12.4 million resulting from a decrease in income taxes payable driven primarily by the timing of income tax payments in 2019;2020 and lower tax liabilities as a result of lower profitability; and
•use of funds of $11.6$12.8 million from decreases in accounts payable and other accruals primarily driven by decreased purchases of raw materials resulting from lower levels of production and timing of payments.
Other uses of cash in the year ended December 31, 20192020 included cash paid for interest of $121.1$87.0 million, $99.3$74.0 million of cash paid for taxes, cash paid for the Tax Receivable Agreement of $27.8 million and contributions to pension and other benefit plans of $3.2 million.
Investing activities
Net cash used in investing activities was $63.9$57.9 million in the year ended December 31, 2019 and included capital expenditures of $64.1 million.
Financing activities
Net cash outflow from financing activities was $709.6$471.8 million during the year ended December 31, 2019, which was driven by $350.1 million of repayments of long-term debt, $260.9 million of repurchases of our common stock and $98.6 million of dividend payments.
Financing transactions
The proceeds of the 2018 Term Loans were used to (i) repay in full all outstanding indebtedness of the Co‑Borrowers under our previous Amended and Restated Credit Agreement ("Old Credit Agreement") and terminate all commitments thereunder, (ii) redeem in full our previously held Senior Notes at a redemption price of 101.594% of the principal amount thereof plus accrued and unpaid interest to the date of redemption, (iii) pay fees and expenses incurred in connection with (i) and (ii) above and the Senior Secured Credit Facilities and related expenses, and (iv) declare and pay a dividend to the sole pre-IPO stockholder, with any remainder to be used for general corporate purposes. See Note 7 "Interest Expense" for a breakdown of expenses associated with these repayments. In connection with the repayment of the Old Credit Agreement and redemption of the Senior Notes, all guarantees of obligations under the Old Credit Agreement, the Senior Notes and related indenture were terminated, all mortgages and other security interests securing obligations under the Old Credit Agreement were released and the Old Credit Agreement and the indenture were terminated.
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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 initially equal to 2.50%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 Loans.Loan Facility. The Second Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, and Excluded Assets (as defined in the 2018 Credit Agreement), by: (i) a pledge of all of the equity securities of GrafTech Finance and each domestic Guarantor (other than GrafTech) and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of GrafTech Finance and each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation, and (ii) security interests in certain receivables and personal property of each Guarantor that is a Controlled Foreign Corporation, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loans amortizeLoan Facility amortizes at a rate equal to 5% per annum of the original principal amount of the 2018 Term Loans$112.5 million a year payable in equal quarterly installments, with the remainder due at maturity. The Co‑BorrowersCo-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
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.
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 2020 Senior Secured 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 "Indenture").
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The 2020 Senior Secured 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 Secured 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 Secured 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 Secured 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 Secured 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 Secured Notes at the redemption prices and on the effective dateterms 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 Secured 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 Secured 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 First Amendment.
The entirety of the 2020 Senior Secured Notes proceeds was used to repay, in full, the $750 millionpay down a portion of principal outstanding on the Brookfield Promissory Note.
As of December 31, 2019 and 2018, all2021, we had $500 million of fixed-rate debt consisting of our debt was based on variable2020 Senior Secured Notes and $544 million of variable-rate debt. As of December 31, 2021, we have two remaining $250 million interest rates. However, duringrate swap contracts that were modified in 2021 to align with the terms of the 2018 Term Loan Facility, maturing in third quarter of 2019, we entered into four interest rate swap contracts. The contracts are "pay fixed, receive variable" with notional amounts of $500 million maturing in two years and another $500 million maturing in five years.2024. 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%4.2%, which could be lowered to 4.85%3.95% depending on credit ratings. See Note 5, "Debt and Liquidity," to the Consolidated Financial Statements for details.
| Payments Due by Year Ending December 31, | |||||||||||||||||||||||||||||
| Total | 2022 | 2023-2024 | 2025-2026 | 2027+ | |||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||
| Contractual and Other Obligations | |||||||||||||||||||||||||||||
| Long-term debt (a) | $ | 1,044,137 | $ | 143 | $ | 286 | $ | 543,708 | $ | 500,000 | |||||||||||||||||||
| Interest on long-term debt (b) | 236,009 | 46,367 | 93,930 | 49,783 | 45,929 | ||||||||||||||||||||||||
| Total contractual obligations | 1,280,146 | 46,510 | 94,216 | 593,491 | 545,929 | ||||||||||||||||||||||||
| Post-employment, pension and related benefits (c) | 120,865 | 11,995 | 25,401 | 24,833 | 58,636 | ||||||||||||||||||||||||
| Related party Tax Receivable Agreement (d) | 19,283 | 3,828 | 9,808 | 5,647 | — | ||||||||||||||||||||||||
| Total contractual and other obligations (e) | $ | 1,420,294 | $ | 62,333 | $ | 129,425 | $ | 623,971 | $ | 604,565 | |||||||||||||||||||
(a)Represents our total debt from our 2018 Term Loan Facility with an outstanding balance of $544 million, which matures on February 12, 2025, and from our 2020 Senior Secured Notes with an outstanding balance of $500 million due in 2028 (see "Financing transactions" in this section for full details of these obligations).
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| Payments Due by Year Ending December 31, | |||||||||||||||||||
| Total | 2020 | 2021-2022 | 2023-2024 | 2025+ | |||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| Contractual and Other Obligations | |||||||||||||||||||
| 2018 Term Loan Facility (a) | $ | 1,844,032 | $ | — | $ | 100,282 | $ | 225,000 | $ | 1,518,750 | |||||||||
| Interest on Long-term Debt (b) | 464,971 | 96,635 | 187,123 | 171,781 | 9,432 | ||||||||||||||
| Leases | 8,628 | 4,496 | 3,395 | 645 | 92 | ||||||||||||||
| Total contractual obligations | 2,317,631 | 101,131 | 290,800 | 397,426 | 1,528,274 | ||||||||||||||
| Postretirement, pension and related benefits (c) | 118,365 | 11,771 | 23,275 | 24,401 | 58,918 | ||||||||||||||
| Committed purchase obligations (d) | 48,632 | 48,632 | — | — | — | ||||||||||||||
| Related party Tax Receivable Agreement (e) | 89,871 | 27,857 | 25,650 | 22,909 | 13,455 | ||||||||||||||
| Other long-term obligations | 12,682 | 9,108 | 1,172 | 578 | 1,824 | ||||||||||||||
| Uncertain income tax provisions | 185 | 72 | 80 | 33 | — | ||||||||||||||
| Total contractual and other obligations (f) | $ | 2,587,366 | $ | 198,571 | $ | 340,977 | $ | 445,347 | $ | 1,602,471 | |||||||||
| Other Commercial Commitments | |||||||||||||||||||
| Guarantees (g) | 2,935 | 2,935 | — | — | — | ||||||||||||||
| Total other commercial commitments | $ | 2,935 | $ | 2,935 | $ | — | $ | — | $ | — | |||||||||
(c)Represents estimated post-employment, pension and related benefits obligations based on actuarial calculations. (d)Represents Brookfield's right to receive future payments from us for 85% of the |
Costs Relating to Protection of the Environment
We have been and are subject to increasingly stringent environmental protection laws and regulations. In addition, we have an on‑going commitment to rigorous internal environmental protection standards. Environmental considerations are part of all significant operating and capital expenditure decisions. The following table sets forth certain information regarding environmental expenses and capital expenditures.
| For the Year Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Expenses relating to environmental protection | $ | 16,914 | $ | 11,075 | $ | 11,629 | |||||||||||||||||
| Capital expenditures related to environmental protection | 7,014 | 9,018 | 7,251 | ||||||||||||||||||||
| For the Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (Dollars in thousands) | |||||||||||
| Expenses relating to environmental protection | $ | 11,204 | $ | 12,355 | $ | 7,973 | |||||
| Capital expenditures related to environmental protection | 7,251 | 4,080 | 2,080 | ||||||||
Critical accounting policies
Critical accounting policies are those that require difficult, subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We use and rely on estimates in determining the economic useful lives of our assets, obligations under our employee benefit plans, provisions for doubtful accounts, provisions for restructuring charges and contingencies, tax valuation allowances, evaluation of goodwill, other intangible assets, pension and OPEB and various other recorded or disclosed amounts, including inventory valuations. Estimates require us to use our judgment. While we believe that our estimates for these matters are reasonable, if the actual amount is significantly different than the estimated amount, our assets, liabilities or results of operations may be overstated or understated. The following accounting policies are deemed to be critical.
As a result of our acquisition by Brookfield, we have a significant amount of goodwill. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology.methodology under the income approach. This requires us to use significant judgment including estimation of future cash flows, which is based upon relevant market data, internal forecasts, estimation of the long‑term growth for our business, the useful life over which cash flows will occur and determination of the weighted average cost of capital for purposes of establishing a discount rate.
Refer to Note 1, "Business and Summary of Significant Accounting Policies", of the Notes and Note 6, "Goodwill and Other Intangible Assets" to the Consolidated Financial Statements for information regarding our goodwill impairment testing.
Employee benefit plans. We sponsor various retirement and pension plans, including defined benefit and defined contribution plans and postretirementpost-employment benefit plans that cover most employees worldwide. Excluding the defined contribution plans, accounting for these plans requires assumptions as to the discount rate, expected return on plan assets, expected salary increases and health care cost trend rate. See Note 11, "Retirement Plans and Postretirement Benefits", of the NotesPost-employment Benefits," to the Consolidated Financial Statements for further details.
Impairments of long‑lived assets. We may record impairment losses on long‑lived assets used in operations when events and circumstances indicate that the assets might be impaired and the future undiscounted cash flows estimated to be
48
generated by those assets are less than the carrying amount of those assets. Assets to be disposed are reported at the lower of the carrying amount or fair value less estimated costs to sell. Estimates of the future cash flows are subject to significant uncertainties and assumptions. If the actual value is significantly less than the estimated fair value, our assets may be overstated. Future events and circumstances, some of which are described below, may result in an impairment charge:
•new technological developments that provide significantly enhanced benefits over our current technology;
•significant negative economic or industry trends;
•changes in our business strategy that alter the expected usage of the related assets; and
•future economic results that are below our expectations used in the current assessments.
Accounting for income taxes. When we prepare the Consolidated Financial Statements, weWe are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to make the following assessments:
•estimate our actual current tax liability in each jurisdiction;
•estimate our temporary differences resulting from differing treatment of items for tax and accounting purposes (which result in deferred tax assets and liabilities that we include within the Consolidated Balance Sheets); and
•assess the likelihood that our deferred tax assets will be recovered from future taxable income and, if we believe that recovery is not more likely than not, a valuation allowance is established.
If our estimates are incorrect, our deferred tax assets or liabilities may be overstated or understated.
As of December 31, 2019,2021, we had a valuation allowance of $13.7$10.6 million against certain deferred tax assets. Our losses in certain tax jurisdictions in recent periods represented sufficient negative evidence to require a full valuation allowance. We also have a partial valuation allowance related to certain U.S. state net operating losses where realizability is unlikely due to discontinued operations in these states. Until we determine that we will generate sufficient jurisdictional taxable income to realize our net operating losses and deferred tax assets, we continue to maintain a valuation allowance.
The calculation of the TRATax Receivable Agreement liability requires significant judgment with regards to the assumptions underlying the forecast of future taxable income, in total and by jurisdiction, as well as their timing.
Revenue recognition. We adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606 effective January 1, 2018 and elected the modified retrospective transition method. Under this method, any cumulative effect of applying the new revenue standard for contracts not yet completeRevenue is recorded as an adjustment to the opening balance of retained earnings as of the beginning of 2018. The comparative information for prior years was not revised and will continue to be reported under the accounting standards in effect for the period presented.
To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five‑step model to contracts when it
is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
49
unconstrained amount i.e.(i.e., up to the amount for which it is probable that a significant reversal of the variable revenue will not happen.happen).
Item 7A. Quantitative and qualitative disclosures about market riskQualitative Disclosures About Market Risk
We are exposed to market risks, primarily from changes in interest rates, currency exchange rates, energy commodity prices and commercial energy rates. From time to time, we enter into transactions that have been authorized according to documented policies and procedures in order to manage these risks. These transactions relate primarily to financial instruments described below. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not use financial instruments for trading purposes.
Our exposure to changes in interest rates results primarily from floating rate long‑termlong-term debt tied to LIBOR or Euro LIBOR.London Interbank Offered Rate.
Our exposure to changes in currency exchange rates results primarily from:
•sales made by our subsidiaries in currencies other than local currencies;
•raw material purchases made by our foreign subsidiaries in currencies other than local currencies; and
•investments in and intercompany loans to our foreign subsidiaries and our share of the earnings of those subsidiaries, to the extent denominated in currencies other than the U.S. dollar.
Our exposure to changes in energy commodity prices and commercial energy rates results primarily from the purchase or sale of refined oil products and the purchase of natural gas and electricity for use in our manufacturing operations.
Interest rate risk management. We periodically enter into agreements with financial institutions that are intended to limit our exposure to additional interest expense due to increases in variable interest rates. These instruments effectively cap our interest rate exposure. During the third quarter ofIn 2019, we entered into four interest rate swaps resultingswap contracts, and in 2021, we modified three contracts and closed one contract. As of December 31, 2021, we recorded an unrealized pre-tax gain of $5.9 million and a net unrealized pre-tax gainloss of $2.9$11.9 million as of December 31, 2019.2020. Additionally, as a result of the February 2021 modification, the modified swaps are considered hybrid instruments composed of a debt host and an embedded derivative. As of December 31, 2021, the debt host portion amounted to an unrealized pre-tax loss of $7.0 million which is amortized over the remaining life of the swaps.
Currency rate management. We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency derivatives, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. Forward exchange contracts and purchased currency options are carried at marketfair value.
The outstanding foreign currency derivatives represented a net unrealized gain of $0.2$0.4 million as of December 31, 2019,2021 and noa net unrealized gain or loss of $0.1 million as of December 31, 2018.2020.
Energy commodity management. We have entered into commodity derivative contracts to effectively fix some or all of our exposure to refined oil products. The outstanding commodity derivative contracts represented net unrealized gain of $8.5 million and a net unrealized loss of $3.7 million and net unrealized gain of $10.7$2.2 million as of December 31, 20192021 and December 31, 2018,2020, respectively.
Sensitivity analysis. We use sensitivity analysis to quantify potential impacts that market rate changes may have on the underlying exposures as well as on the fair values of our derivatives. The sensitivity analysis for the derivatives represents the hypothetical changes in value of the hedge position and does not reflect the related gain or loss on the forecasted underlying transaction.
50
A hypothetical increase in interest rates of 100 basis points (1%) would have increased our interest expense by $17.6$0.3 million, net of the impact of our interest rate swap, for the year ended December 31, 2019, including the impact of our interest rate swaps entered into in the third quarter of 2019.2021. The same 100 basis points increase would have resulted in an increase of $26.7$11.3 million in fair value of our interest rate swap portfolio.
As of December 31, 2019,2021, a 10% appreciation or depreciation in the value of the U.S. dollar against foreign currencies from the prevailing market rates would result in a corresponding decrease of $2.8$7.3 million or a corresponding increase of $2.8$7.3 million, respectively, in the fair value of the foreign currency hedge portfolio.
A 10% increase or decrease in the value of the underlying commodity prices that we hedge would result in a corresponding increase or decrease of $10.0$1.9 million in the fair value of the commodity hedge portfolio as of December 31, 2019.2021. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal changes in the value of the underlying exposure.
For further information related to the financial instruments described above, see Note 1, "Business and Summary of Significant Accounting Policies" and Note 8, "Fair Value Measurement and Derivative Instruments" to the Consolidated Financial Statements in Item 8.for additional information.
51
Item 8. Financial Statements and Supplementary Data
(Unless otherwise noted, all dollars are presented in thousands)
| Page | |||||
Report of Independent Registered Public Accounting Firm(PCAOB ID No. 34) | |||||
See the Table of Contents located at the beginning of this Report for more detailed page references to information contained in this Item.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersstockholders and the Board of Directors of GrafTech International Ltd.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of GrafTech International Ltd. and its subsidiaries (the "Company") as of December 31, 20192021 and 2018,2020, the related consolidated statements of operations and comprehensive income (loss), stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
53
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Related Party Tax Receivable Agreement - Refer to Notes 1 and 12 to the financial statements
Critical Audit Matter Description
On April 23, 2018, the Company entered into a tax receivable agreement (the "TRA")Tax Receivable Agreement that provides the sole pre-IPO stockholder, the right to receive future payments from the Company for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss Federal and Cantonal tax that the Company and its subsidiaries realize as a result of the utilization of certain deferred tax assets attributable to periods prior to the IPO. The Company’s TRATax Receivable Agreement liability was $89.9$19.3 million as of December 31, 2019.2021. The determination of the TRATax Receivable Agreement liability required management to make significant estimates and assumptions related to forecasted revenues and taxable income in the appropriate taxing jurisdiction, which are the primary drivers of utilization of the deferred tax assets.
Given the significant estimates and assumptions related to forecasted revenues and taxable income in the appropriate jurisdictions, auditing the TRATax Receivable Agreement liability required a high degree of auditor judgementjudgment and an increased extent of effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to forecasted revenues and taxable income included the following, among others:
•Tested the effectiveness of controls over the calculation and recording of the TRATax Receivable Agreement liability, including those over the forecasts of revenues and taxable income.
•With the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law and tested the mathematical accuracy of the calculation used to determine the TRATax Receivable Agreement liability.
•We evaluated management’s ability to accurately estimate revenues and taxable income by comparing actual results to management’s historical estimates and evaluating whether there have been any changes that would affect management’s ability to continue accurately estimating revenues and taxable income.
•We tested the reasonableness of management’s estimates of revenues and taxable income by jurisdiction by comparing management’s forecast to:
◦Historical revenues and income
◦Schedule of future revenues resulting from contracts with certain customers
◦Internal communications to management and the Board of Directors
◦Industry reports for the Company and the steel industry
•We evaluated whether the estimates of future revenues and taxable income were consistent with evidence obtained in other areas of the audit.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 21, 202022, 2022
We have served as the Company’s auditor since 2015.
54
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| As of December 31, | As of December 31, | |||||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 80,935 | $ | 49,880 | Cash and cash equivalents | $ | 57,514 | $ | 145,442 | |||||||||
| Accounts and notes receivable, net of allowance for doubtful accounts of $5,474 as of December 31, 2019 and $1,129 as of December 31, 2018 | 247,051 | 248,286 | ||||||||||||||||
| Accounts and notes receivable, net of allowance for doubtful accounts of $6,835 as of December 31, 2021 and $8,243 as of December 31, 2020 | Accounts and notes receivable, net of allowance for doubtful accounts of $6,835 as of December 31, 2021 and $8,243 as of December 31, 2020 | 207,547 | 182,647 | |||||||||||||||
| Inventories | 313,648 | 293,717 | Inventories | 289,432 | 265,964 | |||||||||||||
| Prepaid expenses and other current assets | 40,946 | 46,168 | Prepaid expenses and other current assets | 73,364 | 35,114 | |||||||||||||
| Total current assets | 682,580 | 638,051 | Total current assets | 627,857 | 629,167 | |||||||||||||
| Property, plant and equipment | 733,417 | 688,842 | Property, plant and equipment | 815,298 | 784,902 | |||||||||||||
| Less: accumulated depreciation | 220,397 | 175,137 | Less: accumulated depreciation | 313,825 | 278,685 | |||||||||||||
| Net property, plant and equipment | 513,020 | 513,705 | Net property, plant and equipment | 501,473 | 506,217 | |||||||||||||
| Deferred income taxes | 55,217 | 71,707 | Deferred income taxes | 26,187 | 32,551 | |||||||||||||
| Goodwill | 171,117 | 171,117 | Goodwill | 171,117 | 171,117 | |||||||||||||
| Other assets | 104,230 | 110,911 | Other assets | 85,684 | 93,660 | |||||||||||||
| Total assets | $ | 1,526,164 | $ | 1,505,491 | Total assets | $ | 1,412,318 | $ | 1,432,712 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 78,697 | $ | 88,097 | Accounts payable | $ | 117,112 | $ | 70,989 | |||||||||
| Short-term debt | 141 | 106,323 | Short-term debt | 127 | 131 | |||||||||||||
| Accrued income and other taxes | 65,176 | 82,255 | Accrued income and other taxes | 57,097 | 48,720 | |||||||||||||
| Other accrued liabilities | 48,335 | 50,452 | Other accrued liabilities | 56,405 | 56,501 | |||||||||||||
| Related party payable - tax receivable agreement | 27,857 | — | Related party payable - tax receivable agreement | 3,828 | 21,752 | |||||||||||||
| Total current liabilities | 220,206 | 327,127 | Total current liabilities | 234,569 | 198,093 | |||||||||||||
| Long-term debt | 1,812,682 | 2,050,311 | Long-term debt | 1,029,561 | 1,420,000 | |||||||||||||
| Other long-term obligations | 72,562 | 72,519 | Other long-term obligations | 68,657 | 81,478 | |||||||||||||
| Deferred income taxes | 49,773 | 45,825 | Deferred income taxes | 40,674 | 43,428 | |||||||||||||
| Related party payable | 62,014 | 86,478 | ||||||||||||||||
| Related party payable - tax receivable agreement long-term | Related party payable - tax receivable agreement long-term | 15,455 | 19,098 | |||||||||||||||
| Commitments and contingencies – Note 12 | Commitments and contingencies – Note 12 | 0 | 0 | |||||||||||||||
| Stockholders’ (deficit) equity: | ||||||||||||||||||
| Stockholders’ equity (deficit): | Stockholders’ equity (deficit): | |||||||||||||||||
| Preferred stock, par value $0.01, 300,000,000 shares authorized, none issued | — | — | Preferred stock, par value $0.01, 300,000,000 shares authorized, none issued | — | — | |||||||||||||
| Common stock, par value $0.01, 3,000,000,000 shares authorized, 270,485,308 and 290,537,612 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 2,705 | 2,905 | ||||||||||||||||
| Common stock, par value $0.01, 3,000,000,000 shares authorized, 263,255,708 and 267,188,547 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | Common stock, par value $0.01, 3,000,000,000 shares authorized, 263,255,708 and 267,188,547 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | 2,633 | 2,672 | |||||||||||||||
| Additional paid – in capital | 765,419 | 819,622 | Additional paid – in capital | 761,412 | 758,354 | |||||||||||||
| Accumulated other comprehensive (loss) income | (7,361 | ) | (5,800 | ) | ||||||||||||||
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (7,444) | (19,641) | |||||||||||||||
| Accumulated deficit | (1,451,836 | ) | (1,893,496 | ) | Accumulated deficit | (733,199) | (1,070,770) | |||||||||||
| Total stockholders’ (deficit) equity | (691,073 | ) | (1,076,769 | ) | ||||||||||||||
| Total stockholders’ equity (deficit) | Total stockholders’ equity (deficit) | 23,402 | (329,385) | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,526,164 | $ | 1,505,491 | Total liabilities and stockholders’ equity | $ | 1,412,318 | $ | 1,432,712 | |||||||||
See accompanying Notes to the Consolidated Financial Statements
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data)
| For the Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| STATEMENTS OF OPERATIONS | |||||||||||||||||
| Net sales | $ | 1,345,788 | $ | 1,224,361 | $ | 1,790,793 | |||||||||||
| Cost of sales | 701,335 | 563,864 | 750,390 | ||||||||||||||
| Gross profit | 644,453 | 660,497 | 1,040,403 | ||||||||||||||
| Research and development | 3,771 | 3,975 | 2,684 | ||||||||||||||
| Selling and administrative expenses | 132,608 | 67,913 | 63,674 | ||||||||||||||
| Operating income | 508,074 | 588,609 | 974,045 | ||||||||||||||
| Other (income) expense, net | (16,451) | 3,330 | 5,203 | ||||||||||||||
| Related party Tax Receivable Agreement expense (benefit) | 231 | (21,090) | 3,393 | ||||||||||||||
| Interest expense | 68,760 | 98,074 | 127,331 | ||||||||||||||
| Interest income | (872) | (1,750) | (4,709) | ||||||||||||||
| Income before provision for income taxes | 456,406 | 510,045 | 842,827 | ||||||||||||||
| Provision for income taxes | 68,076 | 75,671 | 98,225 | ||||||||||||||
| Net income | $ | 388,330 | $ | 434,374 | $ | 744,602 | |||||||||||
| Basic income per common share: | |||||||||||||||||
| Net income per share | $ | 1.46 | $ | 1.62 | $ | 2.58 | |||||||||||
| Weighted average common shares outstanding | 266,251,097 | 267,916,483 | 289,057,356 | ||||||||||||||
| Diluted income per common share: | |||||||||||||||||
| Net income per share | 1.46 | 1.62 | 2.58 | ||||||||||||||
| Weighted average common shares outstanding | 266,317,194 | 267,930,644 | 289,074,601 | ||||||||||||||
| STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||
| Net income | $ | 388,330 | $ | 434,374 | $ | 744,602 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
Foreign currency translation adjustments, net of tax of $0, $(162), and $(67), respectively | (19,605) | 6,568 | (6,371) | ||||||||||||||
Commodities and interest rate derivatives, net of tax of $(8,632), $5,399, and $(1,546), respectively | 31,802 | (18,848) | 4,810 | ||||||||||||||
| Other comprehensive income (loss), net of tax: | 12,197 | (12,280) | (1,561) | ||||||||||||||
| Comprehensive income | $ | 400,527 | $ | 422,094 | $ | 743,041 | |||||||||||
| For the Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net sales | $ | 1,790,793 | $ | 1,895,910 | $ | 550,771 | |||||
| Cost of sales | 750,390 | 705,698 | 463,054 | ||||||||
| Gross profit | 1,040,403 | 1,190,212 | 87,717 | ||||||||
| Research and development | 2,684 | 2,129 | 3,456 | ||||||||
| Selling and administrative expenses | 63,674 | 62,032 | 52,506 | ||||||||
| Operating income | 974,045 | 1,126,051 | 31,755 | ||||||||
| Other expense (income), net | 5,203 | 3,361 | (2,104 | ) | |||||||
| Related party tax receivable agreement expense | 3,393 | 86,478 | — | ||||||||
| Interest expense | 127,331 | 135,061 | 30,823 | ||||||||
| Interest income | (4,709 | ) | (1,657 | ) | (395 | ) | |||||
Income from continuing operations before provision (benefit) for income taxes | 842,827 | 902,808 | 3,431 | ||||||||
| Provision (benefit) for income taxes | 98,225 | 48,920 | (10,781 | ) | |||||||
| Net income from continuing operations | 744,602 | 853,888 | 14,212 | ||||||||
| Income (loss) from discontinued operations, net of tax | — | 331 | (6,229 | ) | |||||||
| Net income | $ | 744,602 | $ | 854,219 | $ | 7,983 | |||||
| Basic income per share: | |||||||||||
| Net income per share | $ | 2.58 | $ | 2.87 | $ | 0.03 | |||||
| Net Income from continuing operations per share | 2.58 | 2.87 | 0.05 | ||||||||
| Weighted average shares outstanding | 289,057,356 | 297,748,327 | 302,225,923 | ||||||||
| Diluted income per share: | |||||||||||
| Net income per share | 2.58 | 2.87 | 0.03 | ||||||||
| Diluted net income from continuing operations per share | 2.58 | 2.87 | 0.05 | ||||||||
| Weighted average diluted shares outstanding | 289,074,601 | 297,753,770 | 302,225,923 | ||||||||
| STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||
| Net income | $ | 744,602 | $ | 854,219 | $ | 7,983 | |||||
| Other comprehensive (loss) income: | |||||||||||
Foreign currency translation adjustments, net of tax of ($67), ($288), and $0, respectively | (6,371 | ) | (18,391 | ) | 23,028 | ||||||
Commodities and interest rate derivatives, net of tax of ($1,546), $802, and $0, respectively | 4,810 | (7,698 | ) | 4,819 | |||||||
| Other comprehensive (loss) income, net of tax: | (1,561 | ) | (26,089 | ) | 27,847 | ||||||
| Comprehensive income | $ | 743,041 | $ | 828,130 | $ | 35,830 | |||||
See accompanying Notes to the Consolidated Financial Statements
56
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Cash flow from operating activities: | Cash flow from operating activities: | |||||||||||||||||||||||||||
| Net income | $ | 744,602 | $ | 854,219 | $ | 7,983 | Net income | $ | 388,330 | $ | 434,374 | $ | 744,602 | |||||||||||||||
Adjustments to reconcile net income to cash provided by operations: | Adjustments to reconcile net income to cash provided by operations: | |||||||||||||||||||||||||||
| Depreciation and amortization | 61,819 | 66,413 | 66,443 | Depreciation and amortization | 65,716 | 62,963 | 61,819 | |||||||||||||||||||||
| Impairment of long-lived assets | — | — | 5,300 | |||||||||||||||||||||||||
| Related party Tax Receivable Agreement expense | 3,393 | 86,478 | — | |||||||||||||||||||||||||
| Related party Tax Receivable Agreement Expense (benefit) | Related party Tax Receivable Agreement Expense (benefit) | 231 | (21,090) | 3,393 | ||||||||||||||||||||||||
| Deferred income tax provision | 17,503 | (37,078 | ) | (15,695 | ) | Deferred income tax provision | (3,657) | 20,241 | 17,503 | |||||||||||||||||||
| Loss on extinguishment of debt | — | 23,827 | — | Loss on extinguishment of debt | — | 8,329 | — | |||||||||||||||||||||
| Non-cash interest expense | 6,344 | 5,320 | 6,805 | |||||||||||||||||||||||||
| Stock-based compensation | Stock-based compensation | 16,631 | 2,665 | 2,146 | ||||||||||||||||||||||||
| Interest expense | Interest expense | 12,051 | 6,192 | 6,344 | ||||||||||||||||||||||||
| Other charges, net | 21,831 | 15,761 | (9,607 | ) | Other charges, net | 7,107 | 7,861 | 19,685 | ||||||||||||||||||||
| Net change in working capital* | (47,687 | ) | (177,754 | ) | (20,004 | ) | Net change in working capital* | (16,377) | 86,438 | (47,687) | ||||||||||||||||||
| Change in related party tax receivable agreement | Change in related party tax receivable agreement | (21,799) | (27,857) | — | ||||||||||||||||||||||||
| Change in long-term assets and liabilities | (2,489 | ) | (583 | ) | (4,652 | ) | Change in long-term assets and liabilities | (5,193) | (16,470) | (2,489) | ||||||||||||||||||
| Net cash provided by operating activities | 805,316 | 836,603 | 36,573 | Net cash provided by operating activities | 443,040 | 563,646 | 805,316 | |||||||||||||||||||||
| Cash flow from investing activities: | Cash flow from investing activities: | |||||||||||||||||||||||||||
| Capital expenditures | (64,103 | ) | (68,221 | ) | (34,664 | ) | Capital expenditures | (58,257) | (36,075) | (64,103) | ||||||||||||||||||
| Cash received from divestitures | — | — | 27,254 | |||||||||||||||||||||||||
| Proceeds from the sale of fixed assets | 219 | 926 | 5,211 | Proceeds from the sale of fixed assets | 397 | 379 | 219 | |||||||||||||||||||||
| Net cash used in investing activities | (63,884 | ) | (67,295 | ) | (2,199 | ) | Net cash used in investing activities | (57,860) | (35,696) | (63,884) | ||||||||||||||||||
| Cash flow from financing activities: | Cash flow from financing activities: | |||||||||||||||||||||||||||
| Short-term debt (reductions) borrowings, net | — | (12,607 | ) | 5,110 | ||||||||||||||||||||||||
| Credit Facility borrowings | — | — | 77,000 | |||||||||||||||||||||||||
| Credit Facility reductions | — | (45,692 | ) | (114,839 | ) | |||||||||||||||||||||||
Proceeds from the issuance of long-term debt, net of original issue discount | — | 2,235,000 | — | |||||||||||||||||||||||||
| Repayment of Senior Notes | — | (304,782 | ) | — | ||||||||||||||||||||||||
| Short-term debt reductions, net | Short-term debt reductions, net | (142) | (146) | — | ||||||||||||||||||||||||
| Debt issuance and modification costs | Debt issuance and modification costs | (3,109) | (6,278) | — | ||||||||||||||||||||||||
| Proceeds from the issuance of long-term debt | Proceeds from the issuance of long-term debt | — | 500,000 | — | ||||||||||||||||||||||||
| Principal payments on long-term debt | Principal payments on long-term debt | (400,000) | (896,214) | (350,140) | ||||||||||||||||||||||||
| Repurchase of common stock - related party | (250,000 | ) | (225,000 | ) | — | Repurchase of common stock - related party | — | — | (250,000) | |||||||||||||||||||
| Repurchase of common stock - non-related party | (10,868 | ) | — | — | Repurchase of common stock - non-related party | (50,000) | (30,099) | (10,868) | ||||||||||||||||||||
| Principal payments on long-term debt | (350,140 | ) | (56,372 | ) | (266 | ) | ||||||||||||||||||||||
| Dividends paid to non-related-party | (20,613 | ) | (55,616 | ) | — | |||||||||||||||||||||||
| Dividends paid to related-party | (78,010 | ) | (1,488,649 | ) | — | |||||||||||||||||||||||
| Related-party promissory note repayment | — | (750,000 | ) | — | ||||||||||||||||||||||||
| Refinancing fees and debt issuance costs | — | (27,326 | ) | — | ||||||||||||||||||||||||
| Payments for taxes related to net share settlement of equity awards | Payments for taxes related to net share settlement of equity awards | (4,077) | (71) | — | ||||||||||||||||||||||||
| Dividends paid to non-related party | Dividends paid to non-related party | (7,439) | (8,603) | (20,613) | ||||||||||||||||||||||||
| Dividends paid to related party | Dividends paid to related party | (3,206) | (22,272) | (78,010) | ||||||||||||||||||||||||
| Other - primarily interest rate swap settlements | Other - primarily interest rate swap settlements | (3,819) | — | — | ||||||||||||||||||||||||
| Net cash used in financing activities | (709,631 | ) | (731,044 | ) | (32,995 | ) | Net cash used in financing activities | (471,792) | (463,683) | (709,631) | ||||||||||||||||||
| Net change in cash and cash equivalents | 31,801 | 38,264 | 1,379 | Net change in cash and cash equivalents | (86,612) | 64,267 | 31,801 | |||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (746 | ) | (1,749 | ) | 376 | Effect of exchange rate changes on cash and cash equivalents | (1,316) | 240 | (746) | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 49,880 | 13,365 | 11,610 | Cash and cash equivalents at beginning of period | 145,442 | 80,935 | 49,880 | |||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 80,935 | $ | 49,880 | $ | 13,365 | Cash and cash equivalents at end of period | $ | 57,514 | $ | 145,442 | $ | 80,935 | |||||||||||||||
See accompanying Notes to the Consolidated Financial Statements
57
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| For the Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Net cash paid during the periods for: | |||||||||||||||||
| Interest | $ | 56,333 | $ | 86,962 | $ | 121,075 | |||||||||||
| Income taxes | 63,791 | 73,971 | 99,278 | ||||||||||||||
| * Net change in working capital due to the following components: | |||||||||||||||||
| Accounts and notes receivable, net | $ | (28,927) | $ | 63,557 | $ | (404) | |||||||||||
| Inventories | (28,165) | 44,633 | (21,549) | ||||||||||||||
| Prepaid expenses and other current assets | (31,921) | 3,028 | 3,929 | ||||||||||||||
| Income taxes payable | 5,674 | (12,420) | (18,174) | ||||||||||||||
| Accounts payable and accruals | 66,591 | (12,790) | (11,551) | ||||||||||||||
| Interest payable | 371 | 430 | 62 | ||||||||||||||
| Net change in working capital | $ | (16,377) | $ | 86,438 | $ | (47,687) | |||||||||||
| For the Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Net cash paid during the periods for: | |||||||||||
| Interest | $ | 121,075 | $ | 108,006 | $ | 25,277 | |||||
| Income taxes | 99,278 | 21,444 | 3,467 | ||||||||
| Non-cash financing activities: | |||||||||||
| Dividend payable - Promissory Note** | — | 750,000 | — | ||||||||
| * Net change in working capital due to the following components: | |||||||||||
| Accounts and notes receivable, net | $ | (404 | ) | $ | (139,180 | ) | $ | (29,755 | ) | ||
| Inventories | (21,549 | ) | (126,355 | ) | (15,649 | ) | |||||
| Prepaid expenses and other current assets | 3,929 | 7,116 | (10,565 | ) | |||||||
| Income taxes payable | (18,174 | ) | 67,054 | 2,762 | |||||||
| Accounts payable and accruals | (11,551 | ) | 15,724 | 33,317 | |||||||
| Interest payable | 62 | (2,113 | ) | (114 | ) | ||||||
| (Increase) decrease in working capital | $ | (47,687 | ) | $ | (177,754 | ) | $ | (20,004 | ) | ||
See accompanying Notes to the Consolidated Financial Statements
58
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Dollars in thousands, except share data)
| Issued Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | 290,537,612 | $ | 2,905 | $ | 819,622 | $ | (5,800) | $ | (1,893,496) | $ | (1,076,769) | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 744,602 | 744,602 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Commodity derivatives income, net of tax of $(3,418) | — | — | — | 11,830 | — | 11,830 | |||||||||||||||||||||||||||||||||||||||||
| Commodity and foreign currency derivatives reclassification adjustments, net of tax of $1,872 | — | — | — | (7,020) | — | (7,020) | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax of $(67) | — | — | — | (6,371) | — | (6,371) | |||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | (1,561) | — | (1,561) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock - related party | (19,047,619) | (190) | (53,524) | — | (196,286) | (250,000) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock - non-related party | (1,004,685) | (10) | (2,825) | — | (8,033) | (10,868) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,146 | — | — | 2,146 | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to related party ($0.34 per share) | — | — | — | — | (78,010) | (78,010) | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to non-related party ($0.34 per share) | — | — | — | — | (20,613) | (20,613) | |||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 270,485,308 | $ | 2,705 | $ | 765,419 | $ | (7,361) | $ | (1,451,836) | (691,073) | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 434,374 | 434,374 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commodity and interest rate derivatives loss, net of tax of $4,250 | — | — | — | (15,594) | — | (15,594) | |||||||||||||||||||||||||||||||||||||||||
| Commodity derivatives reclassification adjustments, net of tax of $879 | — | — | — | (3,254) | — | (3,254) | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax of $(162) | — | — | — | 6,568 | — | 6,568 | |||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | (12,280) | — | (12,280) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock - non-related party | (3,328,574) | (33) | (9,700) | — | (20,366) | (30,099) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 42,411 | — | 2,665 | — | — | 2,665 | |||||||||||||||||||||||||||||||||||||||||
| Payments for taxes related to net share settlement of equity awards | (10,598) | — | (30) | — | (41) | (71) | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to related party ($0.115 per share) | — | — | — | — | (22,272) | (22,272) | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to non-related party ($0.115 per share) | — | — | — | — | (8,603) | (8,603) | |||||||||||||||||||||||||||||||||||||||||
| Adoption of ASC 326 | — | — | — | — | (2,026) | (2,026) | |||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 267,188,547 | 2,672 | 758,354 | (19,641) | (1,070,770) | (329,385) | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 388,330 | 388,330 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Commodity and interest rate derivatives income, net of tax of $(6,662) | — | — | — | 24,525 | — | 24,525 | |||||||||||||||||||||||||||||||||||||||||
| Commodity derivatives and interest rate swap reclassification adjustments, net of tax of $(1,970) | — | — | — | 7,277 | — | 7,277 | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax of $0 | — | — | — | (19,605) | — | (19,605) | |||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | 12,197 | — | 12,197 | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock - non-related party | (4,658,544) | (46) | (13,091) | — | (36,863) | (50,000) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 1,009,545 | 11 | 16,620 | — | — | 16,631 | |||||||||||||||||||||||||||||||||||||||||
| Options exercised | 33,500 | — | 351 | — | — | 351 | |||||||||||||||||||||||||||||||||||||||||
| Payments for taxes related to net share settlement of equity awards | (317,340) | (4) | (822) | — | (3,251) | (4,077) | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to related party ($0.04 per share) | — | — | — | — | (3,206) | (3,206) | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to non-related party ($0.04 per share) | — | — | — | — | (7,439) | (7,439) | |||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 263,255,708 | $ | 2,633 | $ | 761,412 | $ | (7,444) | $ | (733,199) | $ | 23,402 | ||||||||||||||||||||||||||||||||||||
Issued Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity (Deficit) | |||||||||||||||||
| Balance as of December 31, 2016 | 302,225,923 | $ | 3,022 | $ | 851,315 | $ | (7,558 | ) | $ | (269,394 | ) | $ | 577,385 | |||||||||
| Net loss | — | — | — | — | 7,983 | 7,983 | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||
| Commodity and foreign currency derivatives income (loss), net of tax of $0 | — | — | — | 4,819 | — | 4,819 | ||||||||||||||||
| Foreign currency translation adjustments, net of tax of $0 | — | — | — | 23,028 | — | 23,028 | ||||||||||||||||
| Total other comprehensive income | — | — | — | 27,847 | — | 27,847 | ||||||||||||||||
| Balance as of December 31, 2017 | 302,225,923 | $ | 3,022 | $ | 851,315 | $ | 20,289 | $ | (261,411 | ) | 613,215 | |||||||||||
| Net income | — | — | — | — | 854,219 | 854,219 | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||
| Commodity derivatives income (loss), net of tax of $715 | — | — | — | (6,866 | ) | — | (6,866 | ) | ||||||||||||||
Commodity derivatives reclassification adjustments, net of tax of $87 | — | — | — | (832 | ) | — | (832 | ) | ||||||||||||||
| Foreign currency translation adjustments, net of tax of ($288) | — | — | — | (18,391 | ) | — | (18,391 | ) | ||||||||||||||
| Total other comprehensive loss | — | — | — | (26,089 | ) | — | (26,089 | ) | ||||||||||||||
Common stock repurchased and retired (from related party) | (11,688,311 | ) | (117 | ) | (32,844 | ) | (192,039 | ) | (225,000 | ) | ||||||||||||
| Stock-based compensation | 1,151 | 1,151 | ||||||||||||||||||||
Dividends paid to related party stockholder ($ 5.14 per share) | — | — | — | — | (1,488,649 | ) | (1,488,649 | ) | ||||||||||||||
Dividends paid to non-related party stockholders ($0.9345 per share) | — | — | — | — | (55,616 | ) | (55,616 | ) | ||||||||||||||
| Related-party promissory note repayment | (750,000 | ) | (750,000 | ) | ||||||||||||||||||
| Balance as of December 31, 2018 | 290,537,612 | $ | 2,905 | $ | 819,622 | $ | (5,800 | ) | $ | (1,893,496 | ) | $ | (1,076,769 | ) | ||||||||
| Net income | — | — | — | — | 744,602 | 744,602 | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||
| Commodity and interest rate derivatives income (loss), net of tax of ($3,418) | — | — | — | 11,830 | — | 11,830 | ||||||||||||||||
Commodity derivatives reclassification adjustments, net of tax of $1,872 | — | — | — | (7,020 | ) | — | (7,020 | ) | ||||||||||||||
| Foreign currency translation adjustments, net of tax of ($67) | — | — | — | (6,371 | ) | — | (6,371 | ) | ||||||||||||||
| Total other comprehensive loss | — | — | — | (1,561 | ) | — | (1,561 | ) | ||||||||||||||
Common stock repurchased and retired (from related party) | (19,047,619 | ) | (190 | ) | (53,524 | ) | — | (196,286 | ) | (250,000 | ) | |||||||||||
Common stock repurchased and retired (from non-related party) | (1,004,685 | ) | (10 | ) | (2,825 | ) | (8,033 | ) | (10,868 | ) | ||||||||||||
| Stock based compensation | — | — | 2,146 | — | — | 2,146 | ||||||||||||||||
Dividends paid to related party stockholder ($0.34 per share) | — | — | — | — | (78,010 | ) | (78,010 | ) | ||||||||||||||
Dividends paid to non-related party stockholders ($0.34 per share) | — | — | — | — | (20,613 | ) | (20,613 | ) | ||||||||||||||
| Balance as of December 31, 2019 | 270,485,308 | $ | 2,705 | $ | 765,419 | $ | (7,361 | ) | $ | (1,451,836 | ) | $ | (691,073 | ) | ||||||||
See accompanying Notes to the Consolidated Financial Statements
59
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except as otherwise noted)
(1)Business and Summary of Significant Accounting Policies
Discussion of Business and Structure
GrafTech International Ltd. (the “Company”) is a leading manufacturer of high qualityhigh-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.the Company. and its subsidiaries. On August 15, 2015, GTI became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”(together with its affiliates, “Brookfield”). In April 2018, we completed our initial public offering ("IPO") throughof 38,097,525 shares of our common stock held by Brookfield at a tender offerprice of $15.00 per shares. We did not receive any proceeds related to our former stockholdersthe IPO. Our common stock is listed on the NYSE under the symbol “EAF.” Brookfield has since distributed a portion of its GrafTech common stock to the owners in the Brookfield consortium and subsequent merger transaction.sold shares of GrafTech common stock in public and private transactions, resulting in Brookfield's ownership of outstanding shares of GrafTech common stock decreasing to 55.3% as of December 31, 2020 and 24.3% as of December 31, 2021. See Note 14, "Stockholders Equity (Deficit)," for more information.
The Company’s only reportable segment, Industrial Materials, is comprised of our two2 major product categories: graphite electrodes and needle coke products. NeedlePetroleum needle coke is thea key raw material to producingused in the production of graphite electrodes. The Company's vision is to provide the highest qualityhighly engineered graphite electrodes at the lowest cost while providing the best customer service all while strivingelectrode services, solutions and products to be the lowest cost producer.electric arc furnace operators.
Summary of Significant Accounting Policies
The Consolidated Financial Statements include the financial statements of GrafTech International Ltd.the Company 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
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.
60
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 estimated variable consideration is reflected through revenue reversal accruals that are based on the Company's experience as well as anticipated performance. Historically, these reversals have been insignificant. Additionally, when termination fees are invoiced under certain provisions of the LTAs, they are accounted for as an element of variable consideration that is constrained, i.e. not recognized, until collected.
Contracts with Customers"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 more information.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.
Changes to LTAs are reviewed to assess whether there has been a change in volume, price or both and whether any additional volumes are at their stand-alone selling price to determine whether the contract modification should be accounted for as (1) part of the existing contract, (2) the termination of the existing contract and the creation of a new contract or (3) a separate contract. Under the most commonly negotiated terms, the accounting is such that it treats these modified contracts as the termination of the existing contract and the creation of a new contract.
Inventories
Inventories are stated at the lower of cost or market. Cost is principally determined using the “first-in first-out” (“FIFO”)FIFO and average cost, which approximates FIFO, methods. Elements of cost in inventory include raw materials, energy costs, direct labor, manufacturing overhead and depreciation of manufacturing overhead.fixed assets.
We allocate fixed production overheads to the costs of conversion based on normal capacity of the production facilities. We recognize abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) as current period charges.
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 (income) expense, (income), net. We depreciate our assets using the straight-line method over the estimated useful lives of the assets. The ranges of estimated useful lives are as follows:
| Years | ||||||
| Buildings | 25-40 | |||||
| 20 | ||||||
| Machinery and equipment | 5-20 | |||||
| Furniture and fixtures | 5-10 | |||||
The carrying value of fixed assets is assessed when events and circumstances indicating impairment are present. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Depreciation expense was $55.0 million, $51.5 million and $49.7 million $53.5in 2021, 2020 and 2019, respectively. Accounts payable associated with capital expenditures totaled $15.7 million and $50.4 million in 2019, 2018 and 2017, respectively. Capital expenditures within accounts payable totaled $11.5 million and $13.7$8.9 million as of December 31, 20192021 and 2018,2020, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Leases
The Company determines if an arrangement is a lease at inception. When an arrangement contains a lease, we then determine if it meets any of the criteria to be classified as a finance lease. Leases with a term of 12 months or less are not recorded on the balance sheet.
Right of Use ("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.
Lease and non-lease components are treated 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.
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
We capitalize bank feesdefer debt issuance costs upon the incurrence of debt and record them as a contra-liabilitydirect reduction against our debt. We had capitalized bank feesdeferred debt issuance costs of $20.2$11.8 million and $24.3$18.1 million as of December 31, 20192021 and 2018,2020, 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 feesdebt issuance costs amounted to $8.6 million, $9.2 million and $4.1 million $3.5 millionin 2021, 2020 and $0.3 million in 2019, 2018 and 2017, respectively. Capitalized bank feeDebt issuance costs 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)(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.Sheet and is de-recognized upon liquidation or sale of the entity.
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,
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
thereafter, whether a derivative used in a hedging transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a derivative ceases to be highly effective or that the hedged transaction is no longer probable of occurring, 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-flowcash 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 Costcost of Salessales 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 cash flow hedges to the extent they are effective. Changes in their fair values are included in accumulated other comprehensive income (loss)loss in the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from settlement are first recognized in accumulated other comprehensive income (loss)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 interetinterest rate swap contracts that are "pay variable,fixed, receive fixed"variable" 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 RateUSD LIBOR for a portion of our outstanding debt.debt under the 2018 Term Loan Facility (as defined in Note 5, "Debt and Liquidity"). 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)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.SU.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.
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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")Tax Receivable Agreement that provides Brookfield, as the sole pre-initial public offering ("IPO")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 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"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 TRATax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
The Tax Receivable Agreement liability is recorded based on the best estimate of the utilization of Pre-IPO Tax Assets and is revised annually in the fourth quarter or earlier if and when significant changes in the forecast are identified.
Retirement Plans and PostretirementPost-Employment Benefits
We use actuarial methods and assumptions to account for our defined benefit pension plans and our postretirementpost-employment benefits. We immediately recognize in earnings 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 postretirementpost-employment benefits expense includes the MTM adjustment,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.
Additional information with respect to benefits plans is set forth in Note 11, “Retirement Plans and PostretirementPost-Employment Benefits.”
Stock-based Compensation
The Company recognizes stock-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. Stock-based awards include stock options, restricted stock units ("RSUs") and deferred share units ("DSUs"). The fair value of RSUs and DSUs is primarily based on the closing market price of a share of the Company's common stock on the date of grant, modified as appropriate to take into account the features of such grants. Stock options are granted with an exercise price equal to the closing price of the Company's common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. The Company accounts for forfeitures as they occur. See Note 3, "Stock-Based and Other Management Compensation" for additional information.
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 $16.9 million, $11.1 million and $11.6 million $12.4 millionin 2021, 2020 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, 20192021 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.2020.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Our environmental liabilities do not take into consideration possible recoveries of insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where we may be potentially liable, future expenses to remediate sites could be considerably higher than the accrued liability.
Foreign Currency Translation and Remeasurement
We translate the financial statements of foreign subsidiaries, whose local currency is their functional currency, to U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues, expenses, gains and losses. Differences arising from exchange rate changes are included in accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as the operations of such non-U.S. subsidiaries are sold or substantially or completely liquidated.
For our Mexican, Swiss, 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. CertainOne of these loans hadhas been deemed to be essentially permanent prior to settlement and, as a result, remeasurement gains and losses on these loansthis loan were recorded as a component of accumulated other comprehensive income (loss)loss in the stockholders’ equity (deficit) 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-stepquantitative goodwill impairment test.
Other amortizable intangible assets, which consist primarily of trademarks and trade names, customer-related intangibles and technological know-how, are amortized over their estimated useful lives using the straight line or sum-of-the-years digits method. The estimated useful lives for each major category of amortizable intangible assets are:
| Years | |||||
| Trade name | 5-20 | ||||
| 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”). every other year.
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$0.7 million was deferred in 20192021 and $9.8$10.2 million of costs were deferred in 2018.2020. Amortization of deferred maintenance costs totaled $4.6 million, $6.0 million and $5.1 million $3.1 millionin 2021, 2020 and $3.3 million in 2019, 2018 and 2017, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share
The calculation of basic earnings per share is based on the weighted average number of common shares outstanding after giving effect to the stock split effected on April 12, 2018 and common stock repurchases.outstanding. 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 Perper Share”.
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-retirementpost-employment benefits, allowance for doubtful accounts, contingent liabilities, accruals and valuation allowances, asset impairment, and environmental-related accruals. Actual results could differ from our estimates.
Reclassifications and Adjustments
Certain items previously reported in specific financial statement captions within the Consolidated Statements of Cash Flows have been reclassified between lines within cash flow from operations to conform to the current presentation.
Subsequent Events
We evaluate events that occur after the balance sheet date but before financial statements are issued to determine if a material event requires our amending the financial statements or disclosing the event. See Note 17, "Subsequent Events" for further details.
Recently Adopted Accounting Standards
In February 2016,January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02,2021-01, LeasesReference Rate Reform (Topic 848): Scope (Topic 842). Under this guidance, companies recognize most leases, which amended Topic 848 reference rate reform to clarify the scope and availability of expedients for certain derivative instruments affected by reference rate reform. We have elected various optional expedients in Topic 848 related to hedging relationships and expect to make future elections related to contract modifications and other hedging relationships. The future election and application of these expedients are not expected to have a material impact 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 orand cash flows. See Note 10 "Leases" for information regarding this standard and its adoption.
In January 2017,December 2019, the FASB issued ASU No. 2017‑04,2019-12, Intangibles‑GoodwillIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to improve consistent application of Topic 740 and Other (Topic 350). This guidance was issued to simplify the accounting for goodwill impairment. The guidanceincome taxes. This pronouncement removes certain exceptions to 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 ageneral principles in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 is effective for annual and interim 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,periods beginning after December 15, 2020, with early adoption permitted for interim or annual goodwill impairment tests performedpermitted. The Company adopted ASU 2019-12 on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material2021, with an immaterial effect on the Company’sour financial position, results of operations orand cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), 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 iswas effective for the the Company on January 1, 2020. The adoption of this standard will impact the timingASU No. 2016-13 resulted in a cumulative-effect adjustment 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.
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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:contract:
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 | |||
| For the Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Graphite Electrodes - LTAs | $ | 1,040,214 | $ | 1,069,772 | $ | 1,437,354 | |||||||||||
| Graphite Electrodes - Non-LTAs | 258,426 | 123,845 | 260,979 | ||||||||||||||
| By-products and other | 47,148 | 30,744 | 92,460 | ||||||||||||||
| Total Revenues | $ | 1,345,788 | $ | 1,224,361 | $ | 1,790,793 | |||||||||||
Contract Balances
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 originatesor contract assets originate 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.obligations and contract assets are realized through the contract invoicing.
Contract assets as of December 31, 2021 were $1.2 million, which are included in "Prepaid expenses and other current assets", on the Consolidated Balance Sheets. Contract assets as of December 31, 2020 were $2.7 million, of which $1.5 million and $1.2 million are included in "Prepaid expenses and other current assets" and "Other assets," respectively, on the Consolidated Balance Sheets.
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The following table provides information about deferred revenue from contracts with customers. Current deferred revenue is included in "Other accrued liabilities" and long-term deferred revenue is included in "Other long-term obligations" on the Consolidated Balance Sheets. The following table provides information about deferred revenue from contracts with customers (in thousands):
| Current deferred revenue | Long-Term deferred revenue | ||||||||||
| (Dollars in thousands) | |||||||||||
| Balance as of December 31, 2019 | $ | 11,776 | $ | 3,858 | |||||||
| Increases due to cash received | 10,110 | — | |||||||||
| Revenue recognized | (6,270) | — | |||||||||
| Reclassification between long-term and current | (1,804) | 1,804 | |||||||||
| Foreign currency impact | (756) | — | |||||||||
| Balance as of December 31, 2020 | 13,056 | 5,662 | |||||||||
| Increases due to cash received | 32,466 | — | |||||||||
| Revenue recognized | (37,030) | — | |||||||||
| Reclassification between long-term and current | 1,359 | (1,359) | |||||||||
| Foreign currency impact | (11) | — | |||||||||
| Balance as of December 31, 2021 | $ | 9,840 | $ | 4,303 | |||||||
| 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).period. The estimated revenues do not include contracts with original duration of one year or less.The remaining revenue associated with our LTAs is expected to be approximately as follows:
| 2022 | 2023 through 2024 | ||||||||||
| Estimated LTA revenue | $910-$1,010 | $350-$450(1) | |||||||||
| 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 contractsLTAs are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. The estimated revenues forFor the year 2020 include our current expectation for2022 and beyond, the specified volume range contracts as well as for the impact of credit risk. The estimated revenues for the years 2021 and beyondcontractual revenue amounts above are based upon the mid-point of theminimum volume range for those contracts with specified ranges. The actual revenue realized from these contracted volumes may vary in timing and total due to contract non-performance, arbitrations, credit risk associated with certain customers facing financial challenges and customer demand related to contracted volume ranges.
In addition to the expected remaining revenue to be recognized with the longer-term sales contracts,LTAs, the Company recorded $1,437.4$1,040.2 million, $1,069.8 million and $1,341.6$1,437.4 million of revenue pursuant to these contracts in the year ended December 31, 20192021, 2020 and 2018,2019, respectively.
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(3) Stock BasedStock-Based and Other Management Compensation
Our Omnibus Equity Incentive Plan permits the granting of options and other stock-based awards (including restricted stock units ("RSUs") and deferred share units)units ("DSUs")). As of December 31, 2019,2021, the aggregate number of shares authorized under the plansplan since theirits initial adoption was 15,000,000.15.0 million. 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 sellhave the Company withhold shares in the open market to cover the tax obligation.
| 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 | — | |||||
Stock-based compensation expense recognizedwas $16.6 million, $2.7 million and $2.1 million in 2021, 2020 and 2019, was $2.1 million.respectively. A majority of the expense, $14.6 million in 2021, $2.3 million in 2020 and $1.9 million in 2019 was recorded as Sellingselling and Administrative Expensesadministrative expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales. Stock-based compensation expense recognized was $1.2for 2021 includes $14.7 million, recorded in 2018. A majoritythe second quarter of 2021, due to the Change in Control accelerated vesting provisions of certain of our awards. For the purpose of these grants, a Change in Control occurred when Brookfield and any affiliates thereof ceased to own stock of the expense, $1.0Company that constitutes at least thirty percent (30%) or thirty-five percent (35%), as applicable, of the total fair market value or total voting power of the stock of the Company. Out of the $14.7 million was recorded as Selling and Administrative Expenses in the Consolidated Statement of Operations, with the Change in Control, $0.9 million accelerated at the 35% ownership level and the remaining expenses incurred as Cost$13.8 million accelerated at the 30% ownership level.
The Company derives a tax deduction measured by the excess of Sales. There was 0the market value over the grant price at the date stock-based compensation expenseawards are exercised or vest. We recognized $1.8 million of tax benefits in 2017.2021, compared to $0.5 million of tax benefits in both 2020 and 2019 relating to the issuance of common stock for the exercise/vesting of equity awards.
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 | ||||
| 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 | |||
| 2021 | 2020 | 2019 | |||||||||||||||
| Dividend yield | 0.32% - 0.35% | 0.44% - 3.77% | 2.39% - 3.05% | ||||||||||||||
| Expected volatility | 62 | % | 50 | % | 50 | % | |||||||||||
| Risk-free interest rate | 1.1% - 1.21% | 0.37% - 1.22% | 1.79% - 2.63% | ||||||||||||||
| Expected term in years | 6.5 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 estimateFor 2021 and 2020, we estimated the volatility of our common stock at the date of grant based on the historical volatility of the Company’s stock. The volatility factor we use is based on our historical closing prices since our stock has been publicly traded. For 2019, we estimated 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.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity related to stock options during 2021:
| Number of Options | Weighted- Average Exercise Price Per Share | Aggregate Intrinsic Value (thousands) | Weighted Average Remaining Term (Years) | |||||||||||||||||||||||
| Outstanding at December 31, 2020 | 1,248,935 | $ | 13.66 | |||||||||||||||||||||||
| Granted | 479,500 | $ | 11.49 | |||||||||||||||||||||||
| Exercised | (39,700) | $ | 10.67 | |||||||||||||||||||||||
| Forfeited or expired | (72,015) | $ | 14.02 | |||||||||||||||||||||||
| Outstanding at December 31, 2021 | 1,616,720 | $ | 13.08 | $ | 972,123 | 7.6 years | ||||||||||||||||||||
| Vested and Expected to vest as of December 31, 2021 | 1,616,720 | $ | 13.08 | $ | 972,123 | 7.6 years | ||||||||||||||||||||
| Exercisable at December 31, 2021 | 1,500,800 | $ | 12.79 | $ | 972,123 | 7.6 years | ||||||||||||||||||||
Outstanding options have exercise prices ranging from $7.28 per share to $20.00 per share.
A summary of the status and changes of stock options and the related average price per share follows:
| Number of Options | Weighted- Average Grant Date Fair Value | |||||||||||||
| Outstanding unvested as of December 31, 2020 | 906,361 | $ | 4.94 | |||||||||||
| Granted | 479,500 | 6.50 | ||||||||||||
| Vested | (1,227,592) | 5.38 | ||||||||||||
| Forfeited | (42,349) | 5.09 | ||||||||||||
| Outstanding unvested as of December 31, 2021 | 115,920 | $ | 6.64 | |||||||||||
We recognized stock-based compensation expense of $5.9 million, $1.1 million and $1.2 million in 2021, 2020 and 2019, respectively, relating to stock options. As of December 31, 2021, there was $0.5 million of total unrecognized compensation cost related to unvested stock options, which is expected to be amortized over a weighted average period of 1.4 years. The total fair value of shares vested was $6.6 million in 2021 and $1.1 million in both 2020 and 2019. There were 39,700 options exercised during 2021. No options were exercised during 2020 or 2019. Cash received from option exercises during 2021 was $0.4 million.
RSUs. RSUs constitute an agreement to deliver shares of common stock to the participant at the end of a vesting period. Compensation expense for RSUs 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. RSUs 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,A summary of the status and changes of shares subject to RSU awards for employees and the related average price per share follows:
| Number of Shares | Weighted- Average Grant Date Fair Value | |||||||||||||
| Outstanding unvested as of December 31, 2020 | 502,770 | $ | 10.28 | |||||||||||
| Granted | 515,960 | 11.49 | ||||||||||||
| Cancelled | (16,795) | 10.78 | ||||||||||||
| Vested | (999,239) | 10.88 | ||||||||||||
| Outstanding unvested as of December 31, 2021 | 2,696 | $ | 13.96 | |||||||||||
During 2021, 2020 and 2019, have a weighted average remaining contractual lifewe recognized stock-based compensation expense of 8.5 years, a weighted average remaining vesting period of 1.9 years,$10.0 million, $1.0 million and an aggregate intrinsic$0.5 million, respectively, relating to RSU awards for employees. The total fair value of zero. There were no options exercisedRSU awards vested during 2019 or 2018.
| 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 | ||||||||
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 | ||||
$10.8 million and $0.6 million, respectively. No RSUs vested in 2019. 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.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DSUs. DSUs are granted to our independent directors in lieu of cash retainers and vest immediately upon grant. All whole DSUs will be settled in shares of our common stock after the Director's termination of service on the Board and any fractional shares will be settled in cash. During 2021, we granted 61,351 DSUs to our independent directors with a weighted-average grant date fair value of $11.48 per share. During 2021, 2020 and 2019, we recognized stock-based compensation expense of $0.7 million, $0.6 million and $0.4 million, respectively, relating to DSU awards. The total fair value of DSU awards vested during 2021, 2020 and 2019 was $1.0 million, $0.5 million and $0.4 million, respectively.
Annual Cash Incentive Compensation PlansPlan
We have a global annual cash incentive program for the majority of our worldwide salaried and hourly employees, the Short-Term Incentive Compensation Program (the “ICP”“STIP”), which includes a stockholder-approved executive incentive compensation plan. The ICP. In 2021, the STIP is based primarily on the performance metric of adjusted earnings beforeEBITDA, a non-GAAP financial measure. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report for additional information, as well as a reconciliation of adjusted EBITDA to net income, taxes, depreciationthe most directly comparable financial measure calculated and amortization.presented in accordance with GAAP. The balance of our accrued liability for ICPthe STIP was $6.9$10.9 million at December 31, 20192021 and $10.4$8.9 million as of December 31, 2018.2020.
(4) Segment Reporting
Our Industrial Materials segment, our only reportable segment, manufactures high qualityhigh-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%96% of our revenues from external customers are derived from the sale of graphite electrodes and graphite electrode by-products from our manufacturing processes.
electrodes. In 2019, one2021, no 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.areas:
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Net sales: | |||||||||||||||||
| United States | $ | 285,710 | $ | 260,867 | $ | 403,916 | |||||||||||
| Americas (excluding the United States) | 241,442 | 187,779 | 348,670 | ||||||||||||||
| Asia Pacific | 154,084 | 127,415 | 172,439 | ||||||||||||||
| Europe, Middle East, Africa | 664,552 | 648,300 | 865,768 | ||||||||||||||
| Total | $ | 1,345,788 | $ | 1,224,361 | $ | 1,790,793 | |||||||||||
| At December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Long-lived assets (a): | |||||||||||
| United States | $ | 179,003 | $ | 169,208 | |||||||
| Mexico | 123,997 | 132,867 | |||||||||
| Brazil | 4,090 | 4,309 | |||||||||
| France | 93,579 | 92,805 | |||||||||
| Spain | 100,248 | 106,467 | |||||||||
| Other countries | 556 | 561 | |||||||||
| Total | $ | 501,473 | $ | 506,217 | |||||||
(a)Long-lived assets represent fixed assets, net of accumulated depreciation.
71
| 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 | |||
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, 2021 | As of December 31, 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| 2018 Term Loan Facility | $ | 543,708 | $ | 943,708 | |||||||
| 2020 Senior Secured Notes | 500,000 | 500,000 | |||||||||
| Other Debt | 429 | 615 | |||||||||
| Unamortized debt discount and issuance costs | (14,449) | (24,192) | |||||||||
| Total Debt | 1,029,688 | 1,420,131 | |||||||||
| Less: Short-term Debt | (127) | (131) | |||||||||
| Long-term Debt | $ | 1,029,561 | $ | 1,420,000 | |||||||
| 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 Term Loan and 2018 Revolving Credit AgreementFacility
In 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$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, 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 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, and Lux Holdcothe “Co-Borrowers”) are Co‑Borrowersco-borrowers under the 2018 Revolving Credit Facility. On February 12, 2018, GrafTech Finance borrowed $1,500 million under theThe 2018 Term Loan Facility (the "2018 Term Loans"). The 2018 Term Loans mature on February 12, 2025. The maturity date forand the 2018 Revolving Credit Facility ismature on February 12, 2023.
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, and Excluded Assets (as defined in the 2018 Credit Agreement), by: (i) a pledge of all of the equity securities of GrafTech Finance and each domestic Guarantor (other than GrafTech) and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of GrafTech Finance and each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation,
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 amortizeLoan Facility amortizes at a rate equal to 5% per annum of the original principal amount of the 2018 Term Loans$112.5 million a year payable in equal quarterly installments, with the remainder due at maturity. The Co‑BorrowersCo-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.penalty. GrafTech Finance is required to make prepayments under the 2018 Term LoansLoan Facility (without payment of a premium) with (i) net cash proceeds from non‑ordinarynon-ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company’s fiscal year endingended December 31, 2019, 75%of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step‑downsstep-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 LoansLoan Facility during any calendar year reduce, on a dollar‑for‑dollardollar-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 LoansLoan Facility as directed by GrafTech Finance. As of December 31, 2021, we have satisfied all required amortization installments 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.
In December 2020, GrafTech Finance issued $500 million aggregate principal amount of 4.625% senior secured notes due 2028 (the “2020 Senior Secured Notes”) in a dividend inprivate offering. The 2020 Senior Secured Notes and related guarantees are secured on a pari passu basis by 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)collateral securing the Senior Secured First Lien Net Leverage Ratio (as definedCredit Facilities. All of the proceeds from the 2020 Senior Secured Notes were used to partially repay borrowings under our 2018 Term Loan Facility.
The 2020 Senior Secured Notes pay interest in arrears on June 15 and December 15 of each year, with the 2018 Credit Agreement), as calculated basedprincipal due in full on our final financial results forDecember 15, 2028. Prior to December 15, 2023, up to 40% of the first quarter2020 Senior Secured Notes may be redeemed with the net cash proceeds of 2018, beingcertain equity offerings at a price equal to 104.625% of the principal amount thereof, together with accrued and unpaid interest, if any. The 2020 Senior Secured Notes may be redeemed, in whole or lessin part, at any time prior to December 15, 2023 at a price equal to 100% of the principal amount of the notes redeemed plus a premium together with accrued and unpaid interest, if any, to, but not including, the redemption date. Thereafter, the 2020 Senior Secured Notes may be redeemed, in whole or in part, at various prices depending on the date redeemed.
The indenture governing the 2020 Senior Secured Notes (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. Pursuant to the Indenture, if our pro forma consolidated first lien net leverage ratio is no greater than 1.752.00 to 1.00, (ii)we can make restricted payments so long as no Defaultdefault or Eventevent of Default (each as defined in the 2018 Credit Agreement) havingdefault has occurred and is continuing. If our pro forma consolidated first lien net leverage ratio is greater than 2.00 to 1.00, we can make restricted payments pursuant to certain baskets.
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 Secured 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 that would result from the $750 million Brookfield Promissory Note and (iii) the satisfactionholders of at least 30% in principal amount of the conditions occurring within 60 days fromthen outstanding 2020 Senior Secured Notes may declare all of the dividend record date. Upon publication of our first quarter report on Form 10-Q, these conditions were met2020 Senior Secured Notes to be due and as a result, the Brookfield Promissory Note became payable.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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, 20192021 and 20182020, an assessment for potential impairment was performed and an impairment adjustment was not required.
| 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"Other assets" on our Consolidated Balance Sheets:
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||
| Trade name | $ | 22,500 | $ | (9,861 | ) | $ | 12,639 | $ | 22,500 | $ | (7,721 | ) | $ | 14,779 | |||||||||
| Technology and know-how | 55,300 | (29,112 | ) | 26,188 | 55,300 | (23,503 | ) | 31,797 | |||||||||||||||
| Customer related intangible | 64,500 | (19,473 | ) | 45,027 | 64,500 | (15,070 | ) | 49,430 | |||||||||||||||
| Total finite-lived intangible assets | $ | 142,300 | $ | (58,446 | ) | $ | 83,854 | $ | 142,300 | $ | (46,294 | ) | $ | 96,006 | |||||||||
| As of December 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Trade name | $ | 22,500 | $ | (13,935) | $ | 8,565 | $ | 22,500 | $ | (11,932) | $ | 10,568 | |||||||||||||||||||||||
| Technology and know-how | 55,300 | (38,486) | 16,814 | 55,300 | (34,091) | 21,209 | |||||||||||||||||||||||||||||
| Customer related intangible | 64,500 | (28,195) | 36,305 | 64,500 | (23,848) | 40,652 | |||||||||||||||||||||||||||||
| Total finite-lived intangible assets | $ | 142,300 | $ | (80,616) | $ | 61,684 | $ | 142,300 | $ | (69,871) | $ | 72,429 | |||||||||||||||||||||||
Amortization expense of intangible assets was $10.7 million, $11.4 million and $12.2 million $12.9 million, $13.6 million in 2019, 20182021, 2020 and 2017,2019, 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 2024.2024, $7.3 million in 2025 and $6.7 million in 2026.
(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 | |||||
| For the Year Ended December 31 | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Interest incurred on debt | $ | 56,731 | $ | 83,555 | $ | 121,010 | |||||||||||
| Accretion of original issue discount on 2018 Term Loan Facility | 3,387 | 5,340 | 2,196 | ||||||||||||||
| Amortization of debt issuance and modification costs | 8,642 | 9,179 | 4,125 | ||||||||||||||
| Total interest expense | $ | 68,760 | $ | 98,074 | $ | 127,331 | |||||||||||
Interest rates
The 2020 Senior Secured Notes carry a fixed interest rate of 4.625%. The 2018 Credit AgreementTerm Loan Facility had an effective interest rate of 3.50% as of December 31, 2021, 4.50% as of December 31, 2020 and 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 (See2019. See Note 5, "Debt and Liquidity"). for details of these transactions.
In December 2020, the proceeds from the issuance of the $500 million 2020 Senior Secured Notes were used to repay $500 million of principal on the 2018 Term Loan Facility. The repayment of the 2018 Term Loan Facility was accounted for as a partial debt extinguishment and triggered $3.2 million of accelerated accretion of the original issue discount and $5.2 million of accelerated amortization of the debt issuance costs. The 2020 Senior Secured Notes were accounted for as new debt and the related debt issuance costs were deferred.
74
The Company has several interest rate swap contracts to fix our cash flows associated with the risk in variability in the one-month U.S. London Interbank Offered Rate ("USD LIBOR") for a portion of our outstanding debt. See Note 8, " Fair Value Measurements and Derivative Instruments" for details of these transactions.
(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, 20192021 and December 31, 2018 approximated book value of $1,812.82020 was $1,051.6 million and $2,156.6$1,453.1 million, respectively. The fair values were determined using Level 3 inputs.
Foreign currency derivatives – Foreign currency derivatives are carried at marketfair value using Level 2 inputs. We had an outstanding gain of $0.2$0.4 million as of December 31, 20192021 and an outstanding loss of $0.1 million as of December 31, 2018.2020.
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 unrealized gains of $0.5 million and outstanding losses of $4.1$8.5 million as of December 31, 2019 and2021, outstanding unrealized gains of $0.3$0.6 million and outstanding unrealized losses of $11.0$2.8 million as of December 31, 2018.2020.
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$6.1 million and outstanding unrealized losses of $0.1 million as of December 31, 2019.2021. We had no outstanding unrealized gains and outstanding unrealized losses of $11.9 million as of December 31, 2020.
Additional fair value information related to our Pensionpension funds' assets can be found in Note 11, "Retirement Plans and PostretirementPost-Employment 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-partiescounterparties 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.
75
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We had no foreign currency cash flow hedges outstanding as of December 31, 20192021 and December 31, 20182020 and, therefore, no unrealized gains or losses reported under accumulated other comprehensive income (loss).loss.
As of December 31, 2019,2021, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $78.8$99.3 million. As of December 31, 2018,2020, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $19.6$71.0 million. The foreign currency derivatives outstanding as of December 31, 20192021 had maturity dates from January 20202022 to March 2020,April 2022, 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-LTAs, which are 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, 2019,2021, we had outstanding commodity derivative contracts with a notional amount of $99.5$19.5 million and maturities from January 20202022 to June 2022. As of December 31, 2018,2020, we had outstanding commodity derivative contracts with a notional amount of $142.1$61.3 million with maturities from January 20192021 to June 2022. Within Accumulated Other Comprehensive income (loss),accumulated other comprehensive loss, we had a net unrealized pre-tax lossgain of $3.7$8.5 million and a net unrealized pre-tax loss of $10.7$2.2 million as of December 31, 20192021 and 2018,2020, respectively. The fair value of these contracts was determined using Level 2 inputs.
In the fourth quarterconnection with de-designated commodity derivative contracts, we recognized no unrealized gains or losses in cost of 2019, we releasedsales in 2021 and a $0.4 million unrealized gain in 2020 as a result of the variation in fair value from accumulated other comprehensive income to cost of sales.the de-designation date. This resulted from a small portion of our commodity derivative contracts failingthat ceased 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 RateUSD LIBOR for a portion of our outstanding debt. It iswas expected that these swaps willwould 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. In December 2020, in connection with the $500 million principal repayment of the 2018 Term Loan Facility, we de-designated one interest rate swap contract of $250 million notional maturing in the third quarter of 2021, and in February 2021, we closed the contract and recorded a $0.9 million charge in interest expense.
Additionally, in February 2021, the Company modified the three remaining swaps with notional amounts of $250 million that matured in the third quarter 2021 and $500 million maturing in the third quarter 2024 in order to align their terms to the amended 2018 Term Loan Facility (see Note 5, "Debt and Liquidity" for details of the February 2021 repricing of the 2018 Term Loan Facility). 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 4.2%, which could be lowered to 3.95% depending on credit ratings. The modification triggered the de-designation and re-designation of the swaps. Because the modified swaps contained an other-than-insignificant financing element at re-designation date, they are considered hybrid instruments composed of a debt host and an embedded derivative and the associated cash (outflows)/inflows are classified as financing (use)/source of cash. The debt host portion amounted to a liability of $7.0 million as of December 31, 2021 with $2.6 million included in "Other accrued liabilities" and $4.4 million in "Other long-term obligations." The corresponding loss is accounted for in "Accumulated other comprehensive loss" and is amortized over the remaining life of the swaps. The embedded derivative is treated as a cash flow hedge.
Within accumulated other comprehensive incomeloss, we recorded a net unrealized pre-tax gain of $2.9$5.9 million and a net unrealized pre-tax loss of $11.9 million as of December 31, 2019.2021 and 2020, respectively. The fair value of these contracts was determined using Level 2 inputs.
76
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31, 20192021 and 2018,2020, 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, 2021 | (Dollars in thousands) | ||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||||||||
| Commodity derivative contracts | Prepaid and other current assets | $ | 8,469 | Other accrued liabilities | $ | — | |||||||||||||||||
| Other assets | — | Other long-term obligations | — | ||||||||||||||||||||
| Interest rate swap contracts | Prepaid and other current assets | $ | — | Other accrued liabilities | $ | 140 | |||||||||||||||||
| Other assets | 6,060 | Other long-term obligations | — | ||||||||||||||||||||
| Total fair value | $ | 14,529 | $ | 140 | |||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Commodity derivative contracts | Prepaid and other current assets | $ | 518 | Other accrued liabilities | $ | 888 | |||||||||||||||||
| Other assets | 63 | Other long-term obligations | 1,898 | ||||||||||||||||||||
| Interest rate swap contracts | Prepaid and other current assets | $ | — | Other accrued liabilities | $ | 4,080 | |||||||||||||||||
| Other assets | — | Other long-term obligations | 6,903 | ||||||||||||||||||||
| Total fair value | $ | 581 | $ | 13,769 | |||||||||||||||||||
| 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, 2021 | (Dollars in Thousands) | ||||||||||||||||||||||
| Derivatives not designated as hedges: | |||||||||||||||||||||||
| Foreign currency derivatives | Prepaid and other current assets | $ | 388 | Other accrued liabilities | $ | 2 | |||||||||||||||||
| Total fair value | $ | 388 | $ | 2 | |||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Derivatives not designated as hedges: | |||||||||||||||||||||||
| Foreign currency derivatives | Prepaid and other current assets | $ | 6 | Other accrued liabilities | $ | 111 | |||||||||||||||||
| Interest rate swap contracts | Prepaid and other current assets | — | Other accrued liabilities | 952 | |||||||||||||||||||
| Total fair value | $ | 6 | $ | 1,063 | |||||||||||||||||||
| 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 | |||||
The realized (gains) losses resulting from the settlement of commodity derivative contracts designated as hedges remain in "Accumulated other comprehensive loss" until they are recognized in the Statement of Operations when the hedged item impacts earnings, which is when the finished product is sold. As a result of the settlement of commodity derivative contracts, as of December 31, 20192021 and December 31, 2018,2020, net realized pre-tax gainsgain of $3.5$11.5 million and $7.0net realized pre-tax loss of $7.4 million, respectively, were reported in accumulated other comprehensive income (loss) and will be (were) released to earnings within the nextfollowing 12 months. See the table below for amounts recognized in the Statement of Operations.
77
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, 20182021, 2020 and 2017:2019:
| Amount of (Gain)/Loss Recognized | ||||||||||||||||||||||||||
| Location of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | (Dollars in thousands) | |||||||||||||||||||||||||
| Commodity derivative contracts | Cost of sales | $ | 6,440 | $ | (4,134) | $ | (8,892) | |||||||||||||||||||
| Interest rate swaps | Interest expense (income) | 1,846 | 4,390 | (1,050) | ||||||||||||||||||||||
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 Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Derivatives not designated as hedges: | (Dollars in thousands) | |||||||||||||||||||||||||
| Foreign currency derivatives | Cost of sales, Other (income) expense, net | $ | 3,895 | $ | (2,671) | $ | (506) | |||||||||||||||||||
| Commodity derivative contracts | Cost of sales | (1,399) | (530) | (223) | ||||||||||||||||||||||
| Interest rate swap contracts | Interest expense | 866 | — | — | ||||||||||||||||||||||
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 | ) | — | — | |||||||||
| Amount of (Gain)/Loss Recognized | ||||||||||||||||||||||||||
| Location of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Derivatives not designated as hedges: | (Dollars in thousands) | |||||||||||||||||||||||||
| Interest rate swap contracts | Interest expense | 2,807 | — | — | ||||||||||||||||||||||
The balance of the deferred pre-tax loss is $7.0 million as of December 31, 2021, reported in "Accumulated other comprehensive loss", of which $2.6 million will be released to earnings within the next 12 months.
78
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, 2021 | As of December 31, 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Inventories: | |||||||||||
| Raw materials and supplies | $ | 132,113 | $ | 101,098 | |||||||
| Work in process | 127,127 | 110,331 | |||||||||
| Finished goods | 30,192 | 54,535 | |||||||||
| $ | 289,432 | $ | 265,964 | ||||||||
| Prepaid expenses and other current assets: | |||||||||||
| Prepaid expenses | $ | 8,193 | $ | 9,242 | |||||||
| Value-added tax and other indirect taxes receivable* | 40,861 | 10,666 | |||||||||
| Spare parts inventory | 12,408 | 11,825 | |||||||||
| Other current assets | 11,902 | 3,381 | |||||||||
| $ | 73,364 | $ | 35,114 | ||||||||
| Property, plant and equipment: | |||||||||||
| Land and improvements | $ | 49,201 | $ | 50,285 | |||||||
| Buildings | 79,660 | 80,041 | |||||||||
| Machinery and equipment and other | 621,808 | 621,478 | |||||||||
| Construction in progress | 64,629 | 33,098 | |||||||||
| $ | 815,298 | $ | 784,902 | ||||||||
| Other accrued liabilities: | |||||||||||
| Payrolls (including incentive programs) | $ | 16,904 | $ | 13,159 | |||||||
| Employee benefits | 7,272 | 7,128 | |||||||||
| Deferred revenue | 9,840 | 13,056 | |||||||||
| Other | 22,389 | 23,158 | |||||||||
| $ | 56,405 | $ | 56,501 | ||||||||
| Other long-term obligations: | |||||||||||
| Post-employment benefits | $ | 14,597 | $ | 15,669 | |||||||
| Pension and related benefits | 31,139 | 37,847 | |||||||||
| Other | 22,921 | 27,962 | |||||||||
| $ | 68,657 | $ | 81,478 | ||||||||
| 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 | ||||
*Included in "Value-added tax and other indirect taxes receivable" is the recognition of the Brazil value-added tax credit of $11.5 million (see Note 16, "Other (Income) Expense, net").
79
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents an analysis of the allowance for doubtful accounts:
| 2021 | 2020 | 2019 | |||||||||||||||
| Balance at beginning of year | $ | 8,243 | $ | 5,474 | $ | 1,129 | |||||||||||
| Charge to retained earnings - ASC 326 adoption impact | — | 2,026 | — | ||||||||||||||
| (Credit) charge to income | (1,266) | 1,458 | 4,636 | ||||||||||||||
| Deductions | (142) | (715) | (291) | ||||||||||||||
| Balance at end of year | $ | 6,835 | $ | 8,243 | $ | 5,474 | |||||||||||
| 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 | |||||
(10)Leases
We lease certain transportation and mobile manufacturing equipment such as railcars and forklifts, as well as real estate.
Components of lease expense are as follows:
| For the Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Operating lease cost | $ | 5,399 | $ | 6,138 | $ | 4,816 | ||||||||||||||
| Short-term lease cost | 408 | 159 | 14 | |||||||||||||||||
| Variable lease cost | 453 | 429 | 227 | |||||||||||||||||
| Total lease cost | $ | 6,260 | $ | 6,726 | $ | 5,057 | ||||||||||||||
Supplemental cash-flow and other information related to leases is as follows:
| For the Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| RoU assets obtained in exchange for new operating lease liabilities (non-cash) | 5,584 | 5,262 | 4,995 | |||||||||||||||||
| Cash payments for operating leases | (5,466) | (6,177) | (4,724) | |||||||||||||||||
Supplemental balance sheet information related to leases is as follows:
| As of December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Location | |||||||||||||||||
| Operating RoU lease assets | Other assets | $ | 7,646 | $ | 7,164 | ||||||||||||
| Current operating lease liabilities | Other accrued liabilities | 4,109 | 4,102 | ||||||||||||||
| Non-current operating lease liabilities | Other long-term obligations | 3,528 | 3,195 | ||||||||||||||
| Total operating lease liabilities | $ | 7,637 | $ | 7,297 | |||||||||||||
| Weighted average remaining lease term (in years) | 2.3 | 2.7 | |||||||||||||||
| Weighted average discount rate | 4.31 | % | 5.82 | % | |||||||||||||
80
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 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 | ||
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, 2019,2021, 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 | ||
| (Dollars in thousands) | ||||||||
| 2022 | 4,200 | |||||||
| 2023 | 2,238 | |||||||
| 2024 | 969 | |||||||
| 2025 | 451 | |||||||
| 2026 and after | 152 | |||||||
| Total lease payments | $ | 8,010 | ||||||
| Less: Imputed interest | (373) | |||||||
| Present value of lease payments | $ | 7,637 | ||||||
As of December 31, 2019 ,2021, we have not entered into any additional operating lease commitments that have yet to commence.
| (Dollars in thousands) | |||
| 2019 | $ | 4,474 | |
| 2020 | 2,747 | ||
| 2021 | 1,497 | ||
| 2022 | 334 | ||
| 2023 | 269 | ||
| 2024 and thereafter | 343 | ||
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 six6 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, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 1,328 | $ | 1,349 | $ | 1,322 | $ | 1,183 | $ | 1,297 | $ | 624 | |||||||||||||||||||||||
| Interest cost | 2,962 | 111 | 3,949 | 174 | 5,070 | 275 | |||||||||||||||||||||||||||||
| Expected return on assets | (4,213) | (545) | (4,730) | (401) | (5,026) | (424) | |||||||||||||||||||||||||||||
| Mark-to-market (gain) loss | (2,428) | (1,327) | 613 | 2,596 | 205 | 3,302 | |||||||||||||||||||||||||||||
| Pension (benefits) costs | $ | (2,351) | $ | (412) | $ | 1,154 | $ | 3,552 | $ | 1,546 | $ | 3,777 | |||||||||||||||||||||||
| 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 | ||||||||||
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The mark-to-market gain in 2021 was the result of a favorable change in the discount rate and favorable foreign currency translation, as well as a better than expected return on plan assets, particularly for the U.S. plans. The mark-to-market loss in 2020 was the result of the unfavorable change in the discount rate, new employee obligations and unfavorable foreign currency translation, partially offset by better than expected return on plan assets, particularly for the U.S. plans. 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 reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31, 20192021 and 20182020 are:
| As of December 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Changes in Benefit Obligation: | |||||||||||||||||||||||
| Net benefit obligation at beginning of period | $ | 140,254 | $ | 38,716 | $ | 135,810 | $ | 28,903 | |||||||||||||||
| Service cost | 1,328 | 1,349 | 1,322 | 1,183 | |||||||||||||||||||
| Interest cost | 2,962 | 111 | 3,949 | 174 | |||||||||||||||||||
| Participant contributions | — | 580 | — | 470 | |||||||||||||||||||
| Foreign currency exchange changes | — | (1,318) | — | 2,869 | |||||||||||||||||||
| Actuarial (gain) loss | (4,316) | (1,104) | 9,583 | 2,683 | |||||||||||||||||||
| Benefits paid* | (10,322) | 237 | (10,410) | 2,434 | |||||||||||||||||||
| Net benefit obligation at end of period | $ | 129,906 | $ | 38,571 | $ | 140,254 | $ | 38,716 | |||||||||||||||
| Changes in Plan Assets: | |||||||||||||||||||||||
| Fair value of plan assets at beginning of period | $ | 115,568 | $ | 25,082 | $ | 107,832 | $ | 18,980 | |||||||||||||||
| Actual return on plan assets | 2,325 | 799 | 13,700 | 488 | |||||||||||||||||||
| Foreign currency exchange rate changes | — | (746) | — | 1,893 | |||||||||||||||||||
| Employer contributions | 2,390 | 961 | 4,446 | 817 | |||||||||||||||||||
| Participant contributions | — | 580 | — | 470 | |||||||||||||||||||
| Benefits paid* | (10,322) | 237 | (10,410) | 2,434 | |||||||||||||||||||
| Fair value of plan assets at end of period | $ | 109,961 | $ | 26,913 | $ | 115,568 | $ | 25,082 | |||||||||||||||
| Funded status (underfunded): | $ | (19,945) | $ | (11,658) | $ | (24,686) | $ | (13,634) | |||||||||||||||
| Amounts recognized in the statement of financial position: | |||||||||||||||||||||||
| Non-current assets | $ | — | $ | — | $ | — | $ | 13 | |||||||||||||||
| Current liabilities | (420) | (44) | (423) | (50) | |||||||||||||||||||
| Non-current liabilities | (19,525) | (11,614) | (24,263) | (13,597) | |||||||||||||||||||
| Net amount recognized | $ | (19,945) | $ | (11,658) | $ | (24,686) | $ | (13,634) | |||||||||||||||
| 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$166.1 million and $147.6$176.3 million as of December 31, 20192021 and 2018,2020, 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:
82
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| U.S. Plan Assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 715 | $ | — | $ | — | $ | 715 | |||||||||||||||
| International Plan Assets | |||||||||||||||||||||||
| Foreign government bonds | — | 910 | — | 910 | |||||||||||||||||||
| Fixed insurance contracts | — | — | 26,003 | 26,003 | |||||||||||||||||||
| Total assets in the fair value hierarchy | $ | — | $ | 910 | $ | 26,003 | $ | 26,913 | |||||||||||||||
| U.S. Plan - Investments measured at net asset value | $ | 109,246 | |||||||||||||||||||||
| Total | $ | 715 | $ | 910 | $ | 26,003 | $ | 136,874 | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| U.S. Plan Assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,850 | $ | — | $ | — | $ | 1,850 | |||||||||||||||
| International Plan Assets | |||||||||||||||||||||||
| Foreign government bonds | $ | — | $ | 995 | $ | — | $ | 995 | |||||||||||||||
| Fixed insurance contracts | — | — | 24,087 | 24,087 | |||||||||||||||||||
| Total assets in the fair value hierarchy | $ | — | $ | 995 | $ | 24,087 | $ | 25,082 | |||||||||||||||
| U.S. Plan - Investments measured at net asset value | $ | 113,718 | |||||||||||||||||||||
| Total | $ | 1,850 | $ | 995 | $ | 24,087 | $ | 140,650 | |||||||||||||||
| 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 | |||||||
83
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 20182020 and 20192021 (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 | |
| Fixed Insurance Contracts | |||||
| Balance at December 31, 2019 | $ | 17,985 | |||
| Gain / contributions / currency impact | 6,149 | ||||
| Distributions | (16) | ||||
| Balance at December 31, 2020 | 24,118 | ||||
| Gain / contributions / currency impact | 1,900 | ||||
| Distributions | (15) | ||||
| Balance at December 31, 2021 | $ | 26,003 | |||
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 Benefit Obligations Key Assumptions | As of December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Weighted average assumptions to determine benefit obligations: | |||||||||||
| Discount rate | 2.14 | % | 1.78 | % | |||||||
| Rate of compensation increase | 1.46 | % | 1.46 | % | |||||||
| 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 | % | |
| Pension Cost Key Assumptions | |||||||||||
| Weighted average assumptions to determine net cost: | |||||||||||
| Discount rate | 1.78 | % | 2.59 | % | |||||||
| Expected return on plan assets | 3.48 | % | 4.14 | % | |||||||
| Rate of compensation increase | 1.46 | % | 1.50 | % | |||||||
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 ratedAA-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.
84
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets. The following table presents our retirement plan weighted average asset allocations at December 31, 2019,2021, by asset category:
| Percentage of Plan Assets as of December 31, 2019 | |||||
| US | Foreign | ||||
| Equity securities and return seeking assets | 20 | % | — | % | |
| Fixed income, debt securities, or cash | 80 | % | 100 | % | |
| Total | 100 | % | 100 | % | |
Percentage of Plan Assets as of December 31, 2021 | |||||||||||
| U.S. | 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, 20182020 and 20192021 follows:
| 2021 | 2020 | ||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Accumulated benefit obligation | $ | 129,906 | $ | 35,247 | $ | 140,254 | $ | 35,316 | |||||||||||||||
| Fair value of plan assets | 109,961 | 26,003 | 115,568 | 24,118 | |||||||||||||||||||
| 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 | |||||||||||
Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 20182021 and 20192020 follows:
| 2021 | 2020 | ||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Projected benefit obligation | $ | 129,906 | $ | 37,412 | $ | 140,254 | $ | 37,734 | |||||||||||||||
| Fair value of plan assets | 109,961 | 26,003 | 115,568 | 24,118 | |||||||||||||||||||
| 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 2022: | |||||||||||
| Expected employer contributions | $ | 420 | $ | 958 | |||||||
| Expected employee contributions | — | — | |||||||||
| Estimated future benefit payments reflecting expected future service for the years ending December 31: | |||||||||||
| 2022 | 9,224 | 1,352 | |||||||||
| 2023 | 9,186 | 1,503 | |||||||||
| 2024 | 9,067 | 2,916 | |||||||||
| 2025 | 9,015 | 1,581 | |||||||||
| 2026 | 8,914 | 2,663 | |||||||||
| 2027-2031 | 40,997 | 12,312 | |||||||||
| 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 | |||||
| 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 | |||||||||
85
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 assumptionshave legacy post-employment medical coverage 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 forthlife insurance benefits for eligible retired employees 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 | |||
| 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 | |||
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 | ) | |||||
The following table represents projected future postretirement cash flow by year:estimated liability for post-employment benefit plans was $16.0 million and $17.2 million as of December 31, 2021 and 2020, respectively. The expense recognized in the Consolidated Statement of Operations for post-employment benefits was $0.5 million, $0.7 million and $1.6 million for 2021, 2020 and 2019, respectively. Included in post-employment benefit expense are mark-to-market gains of $0.1 million and less than $0.1 million for 2021 and 2020, respectively, and a mark-to-market loss of $0.6 million in 2019.
| 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 2021, 2020 and 2019, 2018 and 2017, the Company's matching contributions to our savings plan were $2.1$2.5 million, $1.3$2.2 million and $1.6$2.1 million, respectively.
(12)Commitments and Contingencies
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. Additionally, we are involved in the following legal proceedings described below.
We are involved in various arbitrations, sometimes as claimants and other times as respondents/counterclaimants, pending before the International Chamber of Commerce with several customers who, among other things, have failed to perform under their LTAs and in certain instances are seeking to modify or frustrate their contractual commitments to us. In particular, Aperam South America LTDA, Aperam Sourcing S.C.A., ArcelorMittal Sourcing S.C.A., and ArcelorMittal Brasil S.A. (collectively, the “Claimants”) initiated a single arbitration proceeding against two of the Company’s subsidiaries in the International Chamber of Commerce in June 2020. In June 2021, the Claimants filed their statement of claim, seeking approximately $61 million plus interest in monetary relief and/or reimbursement in respect of several fixed price LTAs that were executed between such subsidiaries and the Claimants in 2017 and 2018. The Claimants argue, among other things, that they should no longer be required to comply with the terms of the LTAs that they signed due to an alleged drop in market prices for graphite electrodes in January 2020. Alternatively, the Claimants argue that they should not be required to comply with the LTAs that they signed due to alleged market circumstances at the time of execution. We believe we have valid defenses to these claims. We intend to vigorously defend them and enforce our rights under the LTAs.
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 the appellate court issued a decision in our favor on May 19, 2020. The employees have further appealed and, on December 16, 2020, the court upheld the decision in favor of GrafTech Brazil. On February 22, 2021, the employees filed a further appeal and, on April 28, 2021, the court rejected the employees' appeal in
86
favor of GrafTech Brazil. The employees filed a further appeal and we intend to vigorously defend it.our position. As of December 31, 2019,2021, 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 20182020 and 20192021 are as follows:
| (Dollars in thousands) | |||||
| Balance as of December 31, 2019 | $ | 1,835 | |||
| Product warranty charges/adjustments | 1,220 | ||||
| Payments and settlements | (1,058) | ||||
| Balance as of December 31, 2020 | $ | 1,997 | |||
| Product warranty charges/adjustments | 1,183 | ||||
| Payments and settlements | (2,092) | ||||
| Balance as of December 31, 2021 | $ | 1,088 | |||
| (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")the Tax Receivable Agreement that provides Brookfield, as the sole pre-IPOPre-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‑IPOpre-IPO Tax Assets").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 TRATax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
In 2021, the Tax Receivable Agreement liability increased $0.2 million as a result of revised U.S. income estimates affecting the future usage of our U.S. tax attributes and related interest. The increase was recorded in "Related Party Tax Receivable Agreement Expense (Benefit)" on the Consolidated Statement of Operations. As of December 31, 2021, the total Tax Receivable Agreement liability is $19.3 million, of which $3.8 million is classified as a current liability "Related party payable - Tax Receivable Agreement" on the Consolidated Balance Sheets, as we expect this portion to be settled within twelve12 months, and $62.0$15.5 million of the liability remains as a long-term liability in "Related party payable - tax receivable agreement"Tax Receivable Agreement long-term" on the balance sheet.Consolidated Balance Sheets.
Long-term Incentive Plan
The long-term incentive plan ("LTIP") was adopted by the Company effective as ofin August 17, 2015 asand amended and restated as ofin March 15, 2018. The purpose of the plan iswas 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 iswas allocated a number of profit units, with a maximum of 30,000 profit units (or ("Profit Units)Units") available under the plan. Awards of Profit Units generally vestvested in equal increments over a five-year period beginning on the first anniversary of the grant date andof the Profit Units, subject to continued employment with the Company through each vesting date. AnyIf a participant ceased to provide services prior to any applicable vesting date for any reason, other than a termination for cause, then the participant forfeited all unvested Profit Units that have not been previously forfeited will accelerate and become fullyany vested upon a ‘‘Change in Control’’ (as defined below).
Profit Units will generally be settled inremained outstanding. If a lump sum payment within 30 days followingparticipant had been terminated for cause, both vested and unvested Profit Units would have been forfeited. Upon a Change in Control (as defined in the LTIP), the Profit Units entitled the participant to a payment based on a
87
percentage of the ‘‘Sales Proceeds’’sum of (i) all net "Sale Proceeds" (as defined below)in the LTIP) received by Brookfield Capital Partners IV L.P. (or, together withand its affiliates ("Brookfield Capital IV)IV") less (ii) the "Threshold Value" (as defined in the LTIP), with such payment amount being determined by the Company's Board of Directors in its sole discretion. In the event that, in connection with thea Change in Control. Control, Brookfield Capital IV disposes of less than 100% of its ownership interest in the Company, the amount of the Sale Proceeds in excess of the Threshold Value shall be determined on a pro-rata basis by reference to the percentage of ownership interest disposed, as determined by the Board of Directors of the Company.
The LTIP defines ‘‘May 2021 secondary offering of our common stock by Brookfield Capital IV constituted a Change in Control’’Control under the LTIP. A Change in Control under the LTIP is defined as, anyamong other things, a 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 ceasedceases 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). Upon completion of the May 2021 secondary offering, Brookfield beneficially owned approximately 24% of the Company's outstanding voting securities. Accordingly, the Company sells all or substantially all ofsettled the assets of the Company and its subsidiaries on a consolidated basis. It is intended that the occurrence of a Changevested Profit Units in Control in which Sales Proceeds exceed the Threshold Value would constitute a ‘‘substantial risk of forfeiture’’lump sum payments 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) upon30 days following 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.
The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before Provision (benefit)provision 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 | ||||||
| For the Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| U.S. | $ | (69,087) | $ | 51,672 | $ | 85,365 | |||||||||||
| Non-U.S. | 525,493 | 458,373 | 757,462 | ||||||||||||||
| Income before provision for income taxes | $ | 456,406 | $ | 510,045 | $ | 842,827 | |||||||||||
| 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 | ) | ||||
| For the Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| U.S. income taxes: | ||||||||||||||||||||
| Current | $ | 645 | $ | (7,660) | $ | 16,589 | ||||||||||||||
| Deferred | 2,132 | 27,822 | 5,690 | |||||||||||||||||
| 2,777 | 20,162 | 22,279 | ||||||||||||||||||
| Non-U.S. income taxes: | ||||||||||||||||||||
| Current | 71,088 | 63,092 | 64,134 | |||||||||||||||||
| Deferred | (5,789) | (7,583) | 11,812 | |||||||||||||||||
| 65,299 | 55,509 | 75,946 | ||||||||||||||||||
| Provision for income taxes | $ | 68,076 | $ | 75,671 | $ | 98,225 | ||||||||||||||
Provision for income taxes in 2021 was $68.1 million on income before taxes of $456.4 million. In 2020, provision for income taxes was $75.7 million on income before taxes of $510.0 million, and in 2019, provision for income taxes was $98.2 million on income before taxes of $842.8 million. The change in 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,year is primarily due to the increasereduction in earnings,pre-tax income, the shift in the jurisdictional mix of worldwide earnings from various countries taxed at different rates and losses from year to year. Partially offsetting these items was athe U.S. taxation of GILTI. The years 2019 and 2021 also included the 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.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| For the Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Tax at statutory U.S. federal rate | $ | 95,845 | $ | 107,109 | $ | 176,994 | |||||||||||
| Impact of U.S. Tax Cuts and Jobs Act of 2017 - GILTI | 51,016 | 45,539 | 65,531 | ||||||||||||||
| Impact of Tax Receivable Agreement | 49 | (4,429) | 713 | ||||||||||||||
| Valuation allowance | (2,208) | (980) | (14,548) | ||||||||||||||
| State taxes, net of federal tax benefit | 1,414 | 3,591 | 4,231 | ||||||||||||||
| U.S. tax impact of foreign earnings (net of foreign tax credits) | 537 | 2,113 | 2,181 | ||||||||||||||
| Establishment/resolution of uncertain tax positions | (48) | (78) | (1,293) | ||||||||||||||
| Adjustment for foreign income taxed at different rates | (38,530) | (38,464) | (76,922) | ||||||||||||||
| Foreign tax credits | (43,821) | (37,280) | (56,171) | ||||||||||||||
| Change-in-Control-related compensation | 10,626 | — | — | ||||||||||||||
| Other | (6,804) | (1,450) | (2,491) | ||||||||||||||
| Provision for income taxes | $ | 68,076 | $ | 75,671 | $ | 98,225 | |||||||||||
| 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 | ) | ||||
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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 ofat December 31, 20192021 and December 31, 20182020 are set forth in the following table.table:
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in thousands) | |||||||
| Deferred tax assets: | |||||||
| Postretirement and other employee benefits | $ | 18,256 | $ | 18,395 | |||
| Foreign tax credit and other carryforwards | 55,103 | 111,325 | |||||
| Capitalized research and experimental costs | 5,566 | 7,695 | |||||
| Environmental reserves | 1,110 | 976 | |||||
| Inventory adjustments | 14,863 | 14,251 | |||||
| Long-term contract option amortization | 1,080 | 1,144 | |||||
| Provision for rationalization charges | 232 | 351 | |||||
| Other | 1,872 | 4,270 | |||||
| Total gross deferred tax assets | 98,082 | 158,407 | |||||
| Less: valuation allowance | (13,736 | ) | (58,446 | ) | |||
| Total deferred tax assets | 84,346 | 99,961 | |||||
| Deferred tax liabilities: | |||||||
| Fixed assets | $ | 56,659 | $ | 59,521 | |||
| Inventory | 12,778 | 7,751 | |||||
| Goodwill and acquired intangibles | 6,996 | 3,668 | |||||
| Other | 2,468 | 3,138 | |||||
| Total deferred tax liabilities | 78,901 | 74,078 | |||||
| Net deferred tax asset | $ | 5,445 | $ | 25,883 | |||
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Post-employment and other employee benefits | $ | 17,375 | $ | 18,202 | |||||||
| Foreign tax credit and other carryforwards | 32,452 | 37,101 | |||||||||
| Capitalized research and experimental costs | 1,935 | 3,897 | |||||||||
| Environmental reserves | 1,133 | 1,111 | |||||||||
| Inventory adjustments | 10,545 | 7,381 | |||||||||
| Long-term contract option amortization | 982 | 1,031 | |||||||||
| Provision for rationalization charges | 71 | 96 | |||||||||
| Mark-to-market hedges | — | 3,552 | |||||||||
| Previously taxed income | 5,229 | 2,163 | |||||||||
| Other | 2,175 | 1,483 | |||||||||
| Total gross deferred tax assets | 71,897 | 76,017 | |||||||||
| Less: valuation allowance | (10,550) | (12,773) | |||||||||
| Total deferred tax assets | 61,347 | 63,244 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Fixed assets | $ | 51,595 | $ | 54,485 | |||||||
| Inventory | 8,834 | 8,573 | |||||||||
| Goodwill and acquired intangibles | 9,502 | 7,552 | |||||||||
| Mark-to-market hedges | 2,824 | — | |||||||||
| Other | 3,079 | 3,254 | |||||||||
| Total deferred tax liabilities | 75,834 | 73,864 | |||||||||
| Net deferred tax (liability) | $ | (14,487) | $ | (10,620) | |||||||
Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $71.7$61.3 million as of December 31, 20182021 and $55.2$63.2 million as of December 31, 2019.2020. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $45.8$75.8 million as ofat December 31, 20182021 and $49.8$73.9 million as ofat December 31, 2019.2020.
90
| (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
| (Dollars in thousands) | |||||
| 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 | |||
| Credited to income | (980) | ||||
| Translation adjustment | 17 | ||||
| Balance as of December 31, 2020 | $ | 12,773 | |||
| Credited to income | (2,208) | ||||
| Translation adjustment | (15) | ||||
| Balance as of December 31, 2021 | $ | 10,550 | |||
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.United States 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 2020, the reduction in the valuation allowance resulted primarily from expirations of NOLs upon which a valuation allowance was previously recorded. In 2021, the decrease in valuation allowance was mainly attributable to changes in expected future utilization, state law changes and expiration of U.S. state NOL carryforward during the year.
As of December 31, 2019,2021, we had unrecognized tax benefits of $0.2$0.1 million, which, if recognized, would have a favorable impact on our effective tax rate. WeNo material amounts of accrued interest or penalties have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.8 millionbeen recorded as of December 31, 2017, and $0.9 million as of December 31, 2018 (an increase of $0.1 million). We had 0 accrued interest and penalties as of December 31, 2019 (a decrease of $0.9 million).2021 or 2020. 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 | |
| (Dollars in thousands) | |||||
| Balance as of December 31, 2019 | $ | 184 | |||
| Settlements | (75) | ||||
| Foreign currency impact | 16 | ||||
| Balance as of December 31, 2020 | $ | 125 | |||
| Lapse of statutes of limitations | (45) | ||||
| Foreign currency impact | (7) | ||||
| Balance as of December 31, 2021 | $ | 73 | |||
It is reasonably possible that a reduction of unrecognized tax benefits of up to $0.2$0.1 million may occur within 12 months due to settlements and the expiration of statutes of limitation.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 20162018 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All otherOther jurisdictions are still opengenerally closed for years prior to examination beginning after 2013.2016.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019,2021, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.5$1.2 billion. Because $1.3$1.1 billion of such earnings have previously been subject to taxation by way of the transition tax on foreign earnings required by the Tax Cuts and Jobs Act of 2017, 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 withholding 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.
GrafTech has considered the tax impact of COVID-19 legislation, including the American Rescue Plan Act, and has concluded that there is no material tax impact. The Company continues to monitor the tax effects of any legislative changes.
(14)Stockholders' Equity (Deficit)
The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity.Equity (Deficit).
Follow-on OfferingOfferings and Common Stock Repurchases
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 armsarm's length price of $13.125 per share, 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 at the time by approximately 7%.
We repurchased 1,004,685 shares for $10.9 million in 2019, 3,328,574 shares for $30.1 million in 2020 and 4,658,544 shares for $50.0 million in 2021, under the first quarterstock repurchase program.
As of 2018 totaling $19.5December 31, 2021, we are authorized to repurchase up to $159 million which was paid on June 29, 2018 and represented a prorated quarterly dividend of $0.085 (or $0.34 per annum) per sharein shares of our common stock prorated fromunder the datestock repurchase program, inclusive of our IPO, April 23, 2018 to June 30, 2018. We havethe amount remaining under the previous authorization.
Dividends
The Company paid our regular quarterly dividends of $0.085 through the first quarter of 2020. Effective in the second quarter of 2020, the regular quarterly dividend was reduced to $0.01 per share since that time. Additionally, we paid a special dividend to stockholders of $0.70 per share on December 31, 2018.share.
Accumulated other comprehensive loss
The balance in our Accumulated other comprehensive (loss) incomeloss is set forth in the following table:
| As of December 31, 2021 | As of December 31, 2020 | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Foreign currency translation adjustments, net of tax | $ | (22,330) | $ | (2,725) | |||||||||||||
| Commodities and interest rate derivatives, net of tax | 14,886 | (16,916) | |||||||||||||||
| Total accumulated other comprehensive loss | $ | (7,444) | $ | (19,641) | |||||||||||||
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 | ) | |
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(15) Earnings per Share
The following table shows the information used in the calculation of our basic and diluted earnings per share calculation as of December 31, 2019, 20182021, 2020 and 2017.2019. See Note 14, "Stockholders' Equity"Equity (Deficit)" for details on our April 12, 2018 stock split andof our common stock repurchases on 2019in 2021, 2020 and 2018.2019.
| 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 | |||||
| For the Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Weighted average common shares outstanding for basic calculation | 266,251,097 | 267,916,483 | 289,057,356 | ||||||||||||||
| Add: Effect of equity awards | 66,097 | 14,161 | 17,245 | ||||||||||||||
| Weighted average common shares outstanding for diluted calculation | 266,317,194 | 267,930,644 | 289,074,601 | ||||||||||||||
Basic earnings per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding, which includes 32,981130,624, 73,320 and 5,59232,981 shares of participating securities in 20192021, 2020 and 2018,2019, 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 1,082,1131,499,128, 1,667,325 and 650,4321,082,113 equivalent shares in 20192021, 2020 and 2018,2019, respectively, as these shares are anti-dilutive.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(16) Summary of quarterly financial data (Unaudited)Other (Income) Expense, net
The following summarizes certain consolidated operating results by quarter for 2019 and 2018.table presents the details of other (income) expense:
| For the Year Ended December 31 | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Brazil value-added tax credit | $ | (11,511) | $ | — | $ | — | |||||||||||
| Pension and post-employment non-service cost | (5,298) | 3,584 | 4,382 | ||||||||||||||
| Bank charges | 1,098 | 962 | 1,173 | ||||||||||||||
| Other | (740) | (1,216) | (352) | ||||||||||||||
| Total other (income) expense, net | $ | (16,451) | $ | 3,330 | $ | 5,203 | |||||||||||
| 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 | ||||||||||||||||
Pension and post-employment non-service costs include the components of pension and post-employment costs other than service cost. The income in 2021 was due to a $3.8 million mark-to-market gain, compared to mark-to-market losses of $3.2 million and $3.5 million recorded in 2020 and 2019, respectively. See Note 11, "Retirement Plans and Post-Employment Benefits" for further discussion.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(17) Subsequent Events
Dividend declaration
On February 5, 2020,2, 2022, the Board of Directors declared a dividend of $0.085$0.01 per share of common stock to stockholders of record as of the close of business on February 28, 2020,2022, to be paid on March 31, 2020.2022.
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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate disclosure controls and procedures at the reasonable assurance level. Disclosure controls and procedures are designed at the reasonable assurance level to ensure that information required to be disclosed by a reporting companyus in the reports that it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to management, including theour Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process, designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel of a company, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,GAAP, and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its financial statements.
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the level of compliance with related policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 20192021 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019.2021. The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192021 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report, which is presented elsewhere in this Annual Report on Form 10-K.Report.
Changes in Internal Control over Financial Reporting
There hashave been no changechanges in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.Other Information
None.
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Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
We adopted a Code of Conduct and Ethics that applies to our employees, directors and officers, including our Chief Executive Officer and President our Chief Financial Officer, Vice President Finance and Treasurer. A copy of the Code of Conduct and Ethics is publicly available on our website at https://www.graftech.com/investors/default.aspx#governance. Any waiver or amendment of the Code of Conduct and Ethics for executive officers or directors (i) may be made only by the Audit Committee, (ii) will be promptly disclosed as required by applicable U.S. federal securities laws and the listing standards of the NYSE and (iii) will be available in the “Investors” section of our website, www.graftech.com.
The remaining information required by Items 10, 11, 12, 13this Item is incorporated herein by reference from the sections entitled "Proposal 1 Elect Four Directors for a Three-Year Term and 14 will appearOne Director for a One-Year Term or Until Their Successors are Elected and Qualified" and "Committees of the Board of Directors" in the definitive GrafTech International Ltd.our Proxy Statement for the Annual Meeting of Stockholders expected to be held on or about May 14, 2020, which12, 2022.
We will be filed pursuant to Regulation 14A underprovide disclosure of delinquent Section 16(a) reports, if any, in our Proxy Statement in the Securities Exchange Act of 1934section entitled "Delinquent Section 16(a) Reports," and such disclosure, if any, is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the sections entitled "Compensation Discussion and Analysis," "Compensation Tables and Related Information," "CEO Pay Ratio," "Director Compensation Program," "Risk Oversight," "Compensation Committee Report" and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Annual Report pursuantitem is incorporated by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
Equity Compensation Plan Information
The following table provides information about our common stock that may be issued under our Omnibus Equity Incentive Plan at December 31, 2021.
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||||||||||
| Equity compensation plans approved by security holders | 1,813,046(1) | $13.08(2) | 12,101,498 | |||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||||||||
| Total | 1,813,046(1) | $13.08(2) | 12,101,498 | |||||||||||||||||
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(1) This amount represents 1,616,720 shares of common stock subject to General Instruction G(3)outstanding stock options, 2,696 shares of Form 10-K (other thancommon stock subject to outstanding restricted stock units and 193,630 shares of stock subject to outstanding deferred share units.
(2) The weighted-average exercise price does not take into account shares of common stock subject to outstanding restricted stock units or outstanding deferred share units.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the portions thereof not deemed to be “filed” for the purpose of Section 18sections entitled “Certain Relationships and Related Party Transactions,” “Director Independence” and "Committees of the Securities Exchange ActBoard of 1934).Directors" in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the sections entitled "Proposal 2 Ratify the Selection of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for 2022" and "Independent Auditor Fees and Other Matters" in the Proxy Statement.
PART IV
(a) The following documents are filed as part of this report.Report:
The following financial statements are set forth under Part II, Item 8 of this Annual Report:
•Report on Form 10-K.of Independent Registered Public Accounting Firm;
•Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal years ended December 31, 2021, December 31, 2020 and December 31, 2019;
•Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2021, December 31, 2020 and December 31, 2019;
•Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended December 31, 2021, December 31, 2020 and December 31, 2019; and
•Notes to the Consolidated Financial Statements.
(2) Financial Statement Schedules
All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or because it is not required.
(3) Exhibits
The exhibits listed in the following table have been filed with, or incorporated by reference into,furnished, as applicable, with this Annual Report.Report, or have been incorporated herein by reference.
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99
100
____________________________
** Furnished herewith
+ Indicates management contract or compensatory plan or arrangement
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GRAFTECH INTERNATIONAL LTD. | ||||||||
| February 22, 2022 | ||||||||
| By: | ||||||||
| /s/ | ||||||||
| David J. Rintoul | ||||||||
| Title: | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signatures | Title | Date | ||||||||||||
| /s/ David J. Rintoul | (Principal Executive Officer) | February | ||||||||||||
| David J. Rintoul | ||||||||||||||
| /s/ | Chief Financial Officer, Vice President Finance and Treasurer (Principal Financial and Accounting Officer) | February | ||||||||||||
| /s/ Denis A. Turcotte | Chairman and Director | February | ||||||||||||
| Denis A. Turcotte | ||||||||||||||
| /s/ Brian L. Acton | Director | February | ||||||||||||
| Brian L. Acton | ||||||||||||||
| /s/ Catherine L. Clegg | Director | February | ||||||||||||
| Catherine L. Clegg | ||||||||||||||
| /s/ Michel | Director | February | ||||||||||||
| Michel | ||||||||||||||
| /s/ | Director | February | ||||||||||||
| /s/ Debra Fine | Director | February 22, 2022 | ||||||||||||
| Debra Fine | ||||||||||||||
| /s/ Jean-Marc Germain | Director | February 22, 2022 | ||||||||||||
| Jean-Marc Germain | ||||||||||||||
| /s/ David Gregory | Director | February | ||||||||||||
| David Gregory | ||||||||||||||
| /s/ Henry R. Keizer | Director | February 22, 2022 | ||||||||||||
| Henry R. Keizer | ||||||||||||||
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| /s/ Anthony R. Taccone | Director | February | ||||||||||||
| Anthony R. Taccone | ||||||||||||||
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