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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.
Our business and operating results have been and will continue to be sensitive to economic conditions and a downturn in economic conditions may materially adversely affect our business.
Our operations and performance are materially affected by global and regional economic conditions. As described further below, we are dependent on the steel industry, which historically has been highly cyclical and is affected by general economic conditions. An economic downturn may reduce customer demand, reduce prices for our products or inhibit our ability to produce our products, which would negatively affect our operating results. Our business and operating results have also been and will continue to be sensitive to declining consumer and business confidence; fluctuating commodity prices; volatile exchange rates and other challenges that can affect the economy. Our customers may experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing, leading them to delay or cancel plans to purchase our products or seek to renegotiate terms of their supply contracts, and they may not be able to fulfill their obligations to us in a timely fashion. Further, suppliers and other business partners may experience similar conditions, which could impact their ability to fulfill their obligations to us. Also, it could be difficult to find replacements for business partners without incurring significant delays or cost increases. These events would negatively impact our revenues and results of operations.
We are dependent on the global steel industry generally and the EAF steel industry in particular, 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
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.
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 REACH 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 in the future, subject to claims alleging personal injury, death or property damage resulting from exposure to hazardous substances, accidents or otherwise for conditions creating an unsafe workplace. Further, alleged noncompliance with or stricter enforcement of, or changes in interpretations of, existing laws and regulations, adoption of more stringent new laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities or reputational harm that have a material adverse impact on our operations, costs or results of operations. It is also possible that the impact of safety and environmental regulations on our suppliers could affect the availability and cost of our raw materials.
For example, legislators, regulators and others, as well as many companies, are considering ways to reduce emissions of 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 UNFCC reached an international agreement related to curbing GHG emissions (or Paris Agreement). Further GHG regulations under the Paris Agreement or otherwise may take the form of a national or international cap‑and‑trade emissions permit system, a carbon tax, emissions controls, reporting requirements, or other regulatory initiatives. For more information, see the section entitled “Business-Environment.”
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 predict their significance to our operations at this time.
We are subject to a variety of legal, economic, social and political risks associated with our substantial operations in multiple countries, which could have a material adverse effect on our financial and business operations.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;
•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.
The fluctuation of foreign currency exchange rates could materially harm our financial results.
Changes in foreign currency exchange rates have in the past resulted, and may in the future result, in significant gains or losses. When the currencies of non‑U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other expenses with respect to those facilities. In certain countries in which we have manufacturing facilities, and in certain instances where we price our products for sale in export markets, we sell in currencies other than the dollar. Accordingly, increases (or declines) in value in these currencies relative to the U.S. dollar have the effect of increasing (or reducing) our net sales. The result of these effects is to increase (or decrease) operating profit and net income. Additionally, as part of our cash management, we have non‑U.S. dollar‑denominated intercompany loans between our subsidiaries. These loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains and losses in other income (expense), net, on the Consolidated Statements of Income. We have in the past entered into, and may in the future enter into, foreign currency derivatives to attempt to manage exposure to changes in currency exchange rates. These hedges may be insufficient or ineffective in protecting against the impact of these fluctuations. We also may purchase or sell these financial instruments, and open and close hedges or other positions, at any time. Fluctuations in foreign currency exchange rates could materially harm our financial results.
Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period for any reason, including equipment failure, climate change, natural disasters, public health crises, political crises or other catastrophic events.
Our manufacturing operations are subject to disruption due to equipment failure, extreme weather conditions, floods, hurricanes and tropical storms and similar events, major industrial accidents, including fires or explosions, cybersecurity attacks, strikes and lockouts, adoption of new laws or regulations, changes in interpretations of existing laws or regulations or changes in governmental enforcement policies, civil disruption, riots, terrorist attacks, war, public health crises, 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
impairment charges. In addition, production delays could cause us to miss deliveries and breach our contracts, which could damage our relationships with our customers and subject us to claims for damages under our contracts. Any of these events could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We also rely primarily on third parties for the transportation of the products we manufacture. In particular, a significant portion of the goods we manufacture are transported to different countries, which requires sophisticated warehousing, logistics and other resources. If any of the third parties that we use to transport products are unable to deliver the goods we manufacture in a timely manner, we may be unable to sell these products at full value or at all, which could cause us to miss deliveries and breach our contracts, which could damage our relationships with our customers and subject us to claims for damages under our contracts. Any of these events could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We may not be able to recruit or retain key management and plant operating personnel.
Our success is dependent on the management and leadership skills of our key management and plant operating personnel. The loss of any member of our reorganized key management team and personnel or an inability to attract, retain, develop and maintain additional personnel could prevent us from implementing our business strategy. In addition, our future growth and success also depend on our ability to attract, train, retain and motivate skilled managerial, sales, administration, operating and technical personnel. The loss of one or more members of our key management or plant operating personnel, or the failure to attract, retain and develop additional key personnel, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
If we are unable to successfully negotiate with the representatives of our employees, including labor unions, we may experience strikes and work stoppages.
We are party to collective bargaining agreements and similar agreements with our employees. As of December 31, 2019, approximately 774 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%, of our worldwide employees, were covered by agreements that expire, or are subject to renegotiation, at various times through December 31, 2020. Although we believe that, in general, our relationships with our employees are good, we cannot predict the outcome of current and future negotiations and consultations with employee representatives, which could have a material adverse effect on our business. We may not succeed in renewing or extending these agreements on terms satisfactory to us. Although we have not had any material work stoppages or strikes during the past decade, they may occur in the future during renewal or extension negotiations or otherwise. A material work stoppage, strike or other union dispute could adversely affect our business, financial condition, results of operations and cash flows.
We may divest or acquire businesses, which could require significant management attention or disrupt our business.
We may divest or acquire businesses to rationalize or expand our businesses and enhance our cash flows. Any acquisitions that we are able to identify and complete may involve a number of risks, including:
our inability to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees;
the diversion of our management’s attention from our existing business;
possible material adverse effects on our results of operations during the integration process;
becoming subject to contingent or other liabilities, including liabilities arising from events or conduct predating the acquisition that were not known to us at the time of the acquisition; and
our possible inability to achieve the intended objectives of the transaction, including the inability to achieve cost savings and synergies.
Any divestitures may also involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of the affected business or business operations. Failure to timely complete or to consummate an acquisition or a divestiture may negatively affect the valuation of the affected business or business operations or result in restructuring charges.
We have significant goodwill on our balance sheet that is sensitive to changes in the market, which could result in impairment charges.
We have $171.1 million of goodwill on our balance sheet as of December 31, 2019. Goodwill is tested for impairment annually in the fourth quarter or more often if events or changes in circumstances indicate a potential impairment may exist. 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 impairment. 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 earnings and lower stockholders’ equity.
We may be subject to information technology systems failures, cybersecurity attacks, network disruptions and breaches of data security, which could compromise our information and expose us to liability.
Our information technology systems are an important element for effectively operating our business. Information technology systems failures,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.
Further,If we collect data, including personally identifiable informationare unable to successfully negotiate with the representatives of our employees, in the courseincluding labor unions, we may experience strikes and work stoppages.
We are party to collective bargaining agreements and similar agreements with our employees. As of December 31, 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.
The cost of ongoing compliance with global data protection and privacy laws and the potential fines and penalties levied in the event of a breach of such laws may have anmaterial adverse effect on our business and operations. For example,business. We may not succeed in renewing or extending these agreements on terms satisfactory to us. Although we have not had any material work stoppages or strikes during the GDPR currently provides that supervisory authoritiespast decade, they may occur in the European Unionfuture during renewal or extension negotiations or otherwise. A material work stoppage, strike or other union dispute could adversely affect our business, financial condition, results of operations and cash flows.
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.
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.
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.
Significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions could adversely affect our business, financial condition, results or operations and cash flows.
Our future tax rates may be adversely affected by a number of factors, including the enactment of new tax legislation, other changes in tax laws or the interpretation of tax laws, changes in the estimated realization of our net deferred tax assets (arising, among other things, from tax loss carry forwards and our acquisition by Brookfield), changes to the jurisdictions in which profits are determined to be earned and taxed, adjustments to estimated taxes upon finalization of various tax returns, increases in expenses that are not deductible for tax purposes, including write‑offs of acquired in‑process R&D and impairment of goodwill in connection with acquisitions, changes in available tax credits and additional tax or interest payments resulting from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from period to period. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions could increase our tax rates and adversely impact our financial results in those periods.
Tax legislation could adversely affect us or our stockholders.
The Tax Cuts and Jobs Act (or the Tax Act) was enacted on December 22, 2017, and significantly revised the U.S. corporate income tax regime by, among other things:
lowering corporate income tax rates;
temporarily allowing for immediate expensing of expenditures for certain tangible property;
repealing the corporate alternative minimum tax;
implementing a 100% dividends‑received deduction on certain dividends from 10% or greater owned foreign subsidiaries;
imposing an income tax on deemed repatriated earnings of foreign subsidiaries generally as of December 31, 2017 (payable at reduced rates and potentially over an eight year period);
imposing tax at a reduced rate on certain income derived by foreign corporate subsidiaries in excess of a deemed return on tangible assets (i.e., tax on “global intangible low‑taxed income” or GILTI);
imposing limitations on the ability to deduct interest expense and utilize net operating losses (or NOLs), and
instituting certain proposals to limit base erosion (including the “base erosion anti‑abuse tax” or BEAT, and limitations on the deductibility of certain related‑party payments).
Although we currently anticipate that the Tax Act and the accompanying changes in the corporate tax rate and calculation of taxable income will have a favorable effect on our financial condition, profitability and cash flows, the overall implications of the Tax Act at this time remain uncertain, and it is not possible to predict the full effect of the Tax Act on our business and operations. Thus, the Tax Act and future implementing regulations, administrative guidance or interpretations of the legislation may have unanticipated adverse effects on us or our stockholders.
We are required to make payments under a tax receivable agreement for certain tax benefits we may claim in the future, and the amounts we may pay could be significant.
In connection with the completion of our IPO, we entered into a tax receivable agreement (or the TRA) that provides Brookfield the right to receive future payments from us of 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal NOLs, previously taxed income under Section 959 of the Internal Revenue Code of 1986, as amended from time to time (or the Code), foreign tax credits, and certain NOLs in GrafTech Switzerland S.A. (or, collectively, the Pre‑IPO Tax Assets). In addition, we 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 LIBOR plus 1.00% per annum. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
We expect that, based on current tax laws, payments under the TRA relating to the Pre‑IPO Tax Assets will be approximately $89.9 million in the aggregate, which was recognized as an expense in 2018 and 2019, with a maximum amount of approximately $100 million. This figure does not account for our Pre‑IPO Tax Assets attributable to previously taxed income under Section 959 of the Code, the value of which is highly speculative, and certain NOLs in GrafTech Switzerland S.A., which we expected to have nominal value at the time of the IPO. Payments made by us to Brookfield under the TRA generally reduce the amount of overall cash flow that might have otherwise been available to us. We made our initial payment of $27.9 million related to the TRA in February 2020.
For more information about the TRA, see “Certain relationships and related party transactions-Tax Receivable Agreement.”
Risks related to our indebtedness
Our indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs and our ability to fulfill our obligations under our existing and future indebtedness.
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.
This substantial amount ofOur indebtedness could:
•require us to dedicate a substantial portion of our cash flow to the payment of principal and interest, thereby reducing the funds available for operations and future business opportunities;
•make it more difficult for us to satisfy our obligations;
•limit our ability to borrow additional money if needed for other purposes, including working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes, on satisfactory terms or at all;
•limit our ability to adjust to changing economic, business and competitive conditions;
•place us at a competitive disadvantage with competitors who may have less indebtedness or greater access to financing;
•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;
•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.
OurRisks related to tax matters
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”)
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.
Our ability to make timely payments of principal and interest on our debt obligations, including our obligations under the Senior Secured Credit Facilities, depends onimpact our ability to generate positive cash flowseffectively 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 EU’s GDPR, introduced 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 operations, which is subjectgaining unauthorized access to general economic conditions, competitive pressuresthis 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 certain financial, businessdamage to our reputation.
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.
Borrowings under the Senior Secured Credit Facilities bear interest at a variable rate, which subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
All of our borrowings under the Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on this variable rate indebtedness would increase even if the amount borrowed remains the same.
Additionally, weindividuals who have in the past entered into, and may in the future enter into, interest rate swaps and caps to attempt to manage interest rate expense. During 2019, we entered into interest rate swap contractswith notional amounts of $500 million maturing in two years and another $500 million maturing in five years. We may purchase or sell these financial instruments, and open and close hedges or other positions, at any time. Changes in interest rates have in the past resulted, and may in the future result, in significant gains or losses. These instruments are marked‑to‑market monthly and related gains and losses are recorded in Other Comprehensive Income on the Consolidated Balance Sheets. These hedges may be insufficient or ineffective in protecting against the impact of these fluctuations.
Uncertainty relating to the calculation of London Interbank Offered Rate (LIBOR) and other reference rates and their potential discontinuance may adversely affect interest expense related to our outstanding debt, including amounts borrowed under our Senior Secured Credit Facilities.
National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. As such, it appears highly likely that LIBOR will be discontinued or modified by the end of 2021.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates, may have on LIBOR or other benchmarks, including LIBOR-based borrowings under our Senior Secured Credit Facilities. Furthermore, the use of alternative reference rates or other reforms could cause the market value of, the applicable interest rate on and the amount of interest paid on our benchmark-based borrowings to be materially different than expected and could materially adversely impact our ability to refinance such borrowings or raise future indebtedness on a cost effective basis.
A lowering or withdrawal of the ratings assigned to our debt by rating agencies may increase our future borrowing costs and reduce our access to capital.
Any rating assigned to our debt could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing. Additionally, we enter into various forms of hedging arrangements against currency, interest rate or decant oil price fluctuations. Financial strength and credit ratings are also important to the availability and pricing of these hedging activities, and a downgrade of our credit ratings may make it more costly for us to engage in these activities.
Disruptions in the capital and credit markets, which may occur at any time, could adversely affect our results of operations, cash flows and financial condition, or those of our customers and suppliers.
Disruptions in the capital and credit marketssuffered damage as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significanta 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 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.
CertainOur largest stockholder, Brookfield, whose representatives serve on our Board of our stockholders haveDirectors, has the right to engage or invest in the same or similar businesses as us.
Brookfield has other investments and business activities in addition to their ownership of us. Brookfield has the right, and has no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees. If Brookfield or any of its officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.
In the event that any of our directors and officers who is also a director, officer or employee of Brookfield acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us, if Brookfield pursues or acquires the corporate opportunity or if Brookfield does not present the corporate opportunity to us.
We may not pay cash dividends on our common stock.
We currently pay cash dividends on our common stock in accordance with our dividend policy. We cannot assure you, however, that we will pay dividends in the future in these amounts or at all. Our board of directors may change the timing and amount of any future dividend payments or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and
liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by our board of directors. For example, we may or may not be able to, or may decide not to, pay dividends if we are unable, for any reason, to continue our three‑ to five‑year take‑or‑pay contracts strategy in the future or we experience a significant disruption in our manufacturing operations or our production of petroleum needle coke at Seadrift, that, in either case, inhibits our ability to deliver the contracted volumes under our three‑ to five‑year take‑or‑pay contracts. In addition, adverse market conditions may lead us to prioritize repaying the principal on our outstanding indebtedness. Our ability to pay dividends on our common stock is also limited as a practical matter by our credit facilities. In the future, we may also enter into other credit agreements or other borrowing arrangements or issue debt securities that, in each case, restrict or limit our ability to pay cash dividends on our common stock. In addition, since we are a holding company with no operations of our own, our ability to pay dividends is dependent on the ability of our subsidiaries to make distributions to us. Their ability to make such distributions will be subject to their operating results, cash requirements and financial condition. Any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our common stock. See “Dividend Policy.”
Certain provisions, including in our Amended Certificate of Incorporation and our Amended By‑Laws,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;
certain rights•provisions in our Amended Certificate of Brookfield with respect to the designationIncorporation provide for a classified Board of Directors such that only one of three classes of directors for nomination and election tois elected each year, which prevents our board of directors;stockholders from replacing the majority our directors at once;
•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
•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.
In addition, in the event of certain changes in control, including if Brookfield’s ownership of our outstanding common stock were to fall below 30%, payments to certain of our senior management may be triggered under certain of our compensation arrangements, which could have an adverse impact on us.
Our Amended Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our Amended Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:
•any derivative action or proceeding brought on our behalf;
•any action asserting a breach of fiduciary duty;
•any action asserting a claim against us arising under the DGCL, our Amended Certificate of Incorporation or our Amended By‑Laws;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.
We are a “controlled company” within the meaning of the NYSE corporate governance standards and qualify for exemptions from certain corporate governance requirements.
Because Brookfield owns a majority of our outstanding common stock, we are a “controlled company” as that term is set forth in the NYSE corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:
the requirement that a majority of our board of directors consist of independent directors;
the requirement that our governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
These requirements will not apply to us as long as we remain a “controlled company.” We may utilize some or all of these exemptions. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. Brookfield’s significant ownership interest could adversely affect investors’ perceptions of our corporate governance.
The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
variations in our quarterly or annual operating results;
changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;
the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock;
additions or departures of key management personnel;
any increased indebtedness we may incur in the future;
announcements by us or others and developments affecting us;
actions by institutional stockholders;
litigation and governmental investigations;
changes in market valuations of similar companies;
speculation or reports by the press or investment community with respect to us or our industry in general;
increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and
general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are located.
These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including commercial paper, medium‑term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to finance any future acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset‑backed acquisition financing and/or cash from operations.
Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us.
The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
Sales of substantial amounts of our common stock in the public markets, or the perception that these sales could occur, could cause the market price of our common stock to decline. In particular, theThe sale in the public markets of our common stock by Brookfield, which, as of December 31, 2019, ownsFebruary 11, 2022, owned approximately 74%24% of our outstanding common stock, or by our officers and directors, or the perception that these sales may occur, could cause the market price of our common stock to decline.decline or cause the market price of our common stock to trade at a discount. Brookfield may from time to time seek to sell or otherwise dispose of some or all of its shares, including by transferring shares to affiliates, distributing shares to its partners, members or beneficiaries, or selling shares in underwritten offerings, block sales, open market transactions or otherwise. Brookfield and our officers and directors may also sell shares into the public markets in accordance with the requirements of Rule 144, and Brookfield is entitled to request that we facilitate SEC registration of their sales of shares pursuant to the terms of a registration rights agreement. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.
The future issuanceWe cannot guarantee that our stock repurchase program will be fully consummated or that it will enhance long-term stockholder value. Stock repurchases could also increase the volatility of additional commonthe trading price of our stock in connection withand will diminish our incentive plans, acquisitions or otherwise will dilute all other stockholdings.cash reserves.
AsAlthough our Board of February 17, 2020, weDirectors has authorized a stock repurchase program that does not have an aggregateexpiration date, the program does not obligate us to acquire any particular amount of 2,716,069,013 shares of common stock, authorized but unissued and not otherwise reserved for issuance underthe stock repurchase program may be suspended or discontinued at any time at our incentive plans. discretion. We cannot guarantee that the program will be fully consummated or that it will enhance long-term stockholder value. The program could affect the trading price of our stock, and increase volatility, and any announcement of a termination of this program may result in a decrease in the trading price of our common stock. In addition, our use of this program will diminish our cash.
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
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.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
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Item 1B. | Unresolved Staff Comments |
Item 1B.Unresolved Staff Comments
Not applicable.
None.
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.
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Item 2.Location of Facility | Properties | Primary Use | | Owned or Leased |
We currently operate the following facilities, which are owned or leased as indicated.
Americas | | | | |
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Location of Facility | | Primary Use | | Owned
or
Leased
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Americas | | | | |
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Brooklyn Heights, Ohio | | Corporate Headquarters, Innovation and Technology Center and Sales Office | | Leased |
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Monterrey, Mexico | | Graphite Electrode Manufacturing Facility and Sales Office | | Owned |
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St. Marys, Pennsylvania | | Graphite Electrode Manufacturing Facility | | Owned |
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Port Lavaca, Texas | | Petroleum Needle Coke Manufacturing Facility (Seadrift) | | Owned |
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Salvador, Bahia, Brazil | | Graphite Electrode Machine Shop and Sales Office | | Owned |
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Europe | | | | |
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Calais, France | | Graphite Electrode Manufacturing Facility and Sales Office | | Owned |
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Pamplona, Spain | | Graphite Electrode Manufacturing Facility and Sales Office | | Owned |
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Bussigny, Switzerland | | Global Sales and Production Planning Office | | Leased |
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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
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.
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Item 4. | Mine Safety Disclosures |
Item 4.Mine Safety Disclosures
Not applicable.
Item 4A.Supplemental Item. Information about our Executive Officers
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.
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Name | | Age | | Position |
David J. Rintoul | | 6264 | | President and Chief Executive Officer and President |
Timothy K. Flanagan | | 44 | | Chief Financial Officer, Vice President of Finance and Treasurer |
Quinn J. Coburn | | 5658 | | Senior Vice President |
Jeremy S. Halford | | 49 | | Executive Vice President, Chief FinancialOperating Officer and Treasurer |
Jeremy S. Halford | | 47 | | Senior Vice President, Operations and Development |
Gina K. Gunning | | 5355 | | Chief Legal Officer and Corporate Secretary |
Iñigo Perez Ortiz | | 4850 | | 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.
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
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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.
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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 |
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November 1 through November 30, 2019 | — |
| | — |
| | — |
| | — |
|
December 1 through December 31, 2019 (2) | 19,047,619 |
| | $ | 13.125 |
| | — |
| | — |
|
Total | 19,173,170 |
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| | 125,551 |
| | $ | 89,133,000 |
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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.
(2) Item 6.Represents shares repurchased directly from Brookfield, our majority stockholder.[Reserved]
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Item 6. | Selected Financial Data |
The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto.
As a result of business combination accounting resulting from our acquisition by Brookfield, our financial statements are separated into two distinct periods, the period before the consummation of our acquisition by Brookfield (labeled “Predecessor”) and the period after that date (labeled “Successor”), to indicate the application of the different basis of accounting between the periods presented. There were no operational activities that changed as a result of our acquisition by Brookfield.
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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 |
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Dividends per common share (b) | $ | 0.34 |
| | $ | 7.71 |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
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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 |
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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 |
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(a) | Successor period data gives effect to the 3,022,259.23-for-1 stock split on our common stock effected on April 12, 2018. |
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(b) | 2018 calculated by total dividends paid of $2,294,265 divided by weighted average shares outstanding. $2,022,000 of these dividends were declared and paid to Brookfield prior to our IPO. All other dividends were declared and paid to all common stockholders. |
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(c) | Represents pension and post-retirement benefits and related costs and miscellaneous other long-term obligations. |
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(d) | A closing balance sheet as of August 14, 2015 was not required as part of previous filings. |
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.
OverviewOverview
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.
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.
Global economicIndustry conditions and outlook
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.
This growth trend has resumed after a decline in EAF steelmaking between 2011 and 2015, as Chinese steel production, which is predominantly BOF‑based, grew significantly, taking market share from EAF steel producers. Beginning in 2016, efforts by the Chinese government to eliminate excess steelmaking production capacity and improve environmental and health conditions have led to limits on Chinese BOF steel production, including the closure of over 200 million MT of its steel production capacity, based on data from S&P Global Platts and the Ministry of Commerce of the People’s Republic of China. In 2017, Chinese steel exports fell by more than 30% from 2016. Chinese steel exports continued to decline an additional 8% in 2018 according to the
National Bureau of Statistics of China, reflecting the reduction in steel production capacity. As a result, the historical growth trend of EAF steelmaking relative to the overall steel market resumed and has led to increased demand for our graphite electrodes. Prior to this improvement in demand, the electrode industry experienced an extended, five‑year downturn. At the same time, consolidation and rationalization of graphite electrode production capacity limited the ability of graphite electrode producers to meet this demand.
Demand for petroleum needle coke has outpaced supply due to increasingIncreased demand for petroleum needle coke in the production of lithium‑ion batteries used in electric vehicles. Increased demand has2018 and 2019 led to pricing increases for petroleum needlein those years. Needle coke over the last two years. While prices have begunbegan to retreat in the second half of 2019 they still remain at historical highs.and continued to decline over the course of 2020. The price of needle coke increased throughout 2021, and we expect further increases in 2022. Graphite electrodes have typically been priced at a spread to petroleum needle coke. We believe that our substantial vertical integration into petroleum needle coke through our ownership of Seadrift provides a significant cost advantage relative to our competitors in periods of tight petroleum needle coke supply and wecompetitors. We currently anticipate utilizing all of our needle coke internally, minimizingand will supplement with third-party purchases.
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
The WSA's October 2019 Short Range Outlook estimated that global steel demand outside of China increased by 1.6% in 2018, which was reduced by 0.6% from their April 2019 estimate. WSA also decreased their growth forecast for steel demand outside of China for 2019 from 1.7% in their April forecast to 0.2% as uncertainty, trade tensions and geopolitical issues have weighed on investment and trade. WSA's growth forecast for steel demand outside of China for 2020 was reduced to 2.5% from their April estimate of 2.8%. Overall, WSA estimates that total steel production outside of China decreased by approximately 2% in 2019.
The graphite electrode market began to soften in the second half of 2019. We expect global graphite electrode production capacity to expand in 2020 as a result of additions in China. Our graphite electrode sales volumes decreased significantly in the second half of 2019, as our customers began 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 continue to expect inventory de-stocking through the first half of 2020. We expect inventories to decline and conditions to improve as we move into the second half of 2020.
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.
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.
Other In addition, other (income) expense, (income)
Other expense (income) consists primarilynet includes the impact of foreign currency impacts on non‑operating assets and liabilities and other miscellaneous non-operating income and expense.
Related party Tax Receivable Agreement expense
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.
Income (loss) from discontinued operations
Ascosts and accretion of June 30, 2016,original issue discounts, as well as the Engineered Solutions segment qualified for reporting as discontinued operations, and the disposition of the segment was substantially complete by the end of the third quarter of 2017. All results are reported as gain or loss from discontinued operations, net of tax.settlement losses (gains) on our interest rate swaps.
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.
Some of the non‑U.S. countries in which we have a manufacturing facility have been subject to significant economic and political changes, which have significantly impacted currency exchange rates. We cannot predict changes in currency exchange rates in the future or whether those changes will have net positive or negative impacts on our net sales, cost of sales or net income.
The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our net sales was an increase of $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.
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 |
|
(1) Earnings per share represents diluted earnings per share. Adjusted earnings per share represents adjusted diluted earnings per share.Key operating metrics
|
| | | | | | | | | |
| | 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 | % |
| |
(1) | See below for more information and a reconciliation of EBITDA and adjusted EBITDA to net income (loss), the most directly comparable financial measure(2) Non-GAAP financial measures; see below for information and reconciliations of EBITDA, adjusted EBITDA and adjusted net income to net income and adjusted EPS to EPS, the most directly comparable financial measures calculated and presented in accordance with GAAP. |
| |
(2) | Effective the first quarter of 2019, we have recast the sales volume above to include only graphite electrodes manufactured by GrafTech. This better reflects management's assessment of our profitability and excludes resales of low grade graphite electrodes manufactured by third party suppliers. For comparability purposes, the prior period has been recast to conform to this presentation. |
| |
(3) | Production volume reflects graphite electrodes produced during the period. See below for more information on our key operating metrics. |
| |
(4) | The St. Marys, Pennsylvania facility was temporarily idled effective the second quarter of 2016 except for the machining of semi‑finished products sourced from other plants. In the first quarter of 2018, our St. Marys facility began graphitizing a limited amount of electrodes sourced from our Monterrey, Mexico facility. |
| |
(5) | Production capacity reflects expected maximum production volume during the period under normal operating conditions, standard product mix and expected maintenance downtime. Actual production may vary. See below for more information on our key operating metrics. |
| |
(6) | Capacity utilization reflects production volume as a percentage of production capacity. See below for more information on our key operating metrics. |
| |
(7) | Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; Pamplona, Spain and St. Marys, Pennsylvania. |
Non‑GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we have provided certain financial measures that are not in accordance with GAAP. EBITDA from continuing operations and adjusted EBITDA from continuing operations are non‑GAAP financial measures. We define EBITDA from continuing operations, a non‑GAAP financial measure, as net income
or loss plus interest expense, minus interest income, plus income taxes, discontinued operations and depreciation and amortization from continuing operations. We define adjusted EBITDA from continuing operations as EBITDA from continuing operations plus any pension and OPEB plan expenses, rationalization‑related charges, initial and follow-on public offering and related expenses, acquisition and proxy contest costs, non‑cash gains or losses from foreign currency remeasurement of non‑operating liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar, related party Tax Receivable Agreement expense, stock-based compensation and non‑cash fixed asset write‑offs. Adjusted EBITDA from continuing operations is the primary metric used by our management and our board of directors to establish budgets and operational goals for managing our business and evaluating our performance.
We monitor adjusted EBITDA from continuing operations as a supplement to our GAAP measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period‑to‑period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA from continuing operations and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt‑service capabilities.
Our use of adjusted EBITDA from continuing operations has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
adjusted EBITDA from continuing operations does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA from continuing operations does not reflect our cash expenditures for capital equipment or other contractual commitments, including any capital expenditure requirements to augment or replace our capital assets;
adjusted EBITDA from continuing operations does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
adjusted EBITDA from continuing operations does not reflect tax payments that may represent a reduction in cash available to us;
adjusted EBITDA from continuing operations does not reflect expenses relating to our pension and OPEB plans;
adjusted EBITDA from continuing operations does not reflect the non‑cash gains or losses from foreign currency remeasurement of non‑operating liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar;
adjusted EBITDA from continuing operations does not reflect initial and follow-on public offering and related expenses;
adjusted EBITDA from continuing operations does not reflect acquisition and proxy costs;
adjusted EBITDA from continuing operations does not reflect related party Tax Receivable Agreement expense;
adjusted EBITDA from continuing operations does not reflect rationalization‑related charges, stock-based compensation or the non‑cash write‑off of fixed assets; and
other companies, including companies in our industry, may calculate EBITDA from continuing operations and adjusted EBITDA from continuing operations differently, which reduces its usefulness as a comparative measure.
In evaluating EBITDA from continuing operations and adjusted EBITDA from continuing operations, you should be aware that in the future, we will incur expenses similar to the adjustments in this presentation. Our presentations of EBITDA from continuing operations and adjusted EBITDA from continuing operations should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non‑recurring items. When evaluating our performance, you should consider EBITDA from continuing operations and adjusted EBITDA from continuing operations alongside other financial performance measures, including our net income (loss) and other GAAP measures.
The following table reconciles our non‑GAAP key financial measures to the most directly comparable GAAP measures:
|
| | | | | | | | | |
| | For the year ended December 31, |
(in thousands) | | 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 |
|
| |
(1) | Service and interest cost of our OPEB plans. Also includes a mark‑to‑market loss (gain) for plan assets as of December of each year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Components of Results of Operations-Selling and Administrative Expenses” for more information.
|
| |
(2) | Costs associated with rationalizations in our graphite electrode manufacturing operations and in the corporate structure. They include severance charges, contract termination charges, write‑off of equipment and (gain)/loss on sale of manufacturing sites. |
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(3) | Legal, accounting, printing and registration fees associated with initial and follow-on public offering and related expenses. |
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(4) | Costs associated with the merger transaction with Brookfield, resulting in change in control compensation expenses. |
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(5) | Non‑cash loss from foreign currency remeasurement of non‑operating liabilities of our non‑U.S. subsidiaries where the functional currency is the U.S. dollar. |
| |
(6) | Non-cash expense for stock-based compensation grants. |
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(7) | Non‑cash fixed asset write‑off recorded for obsolete assets. |
| |
(8) | Non-cash expense for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. |
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
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;
•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.
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.
| | | | | | | | | | | | | | |
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.
| | | | | | | | | | | | | | |
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 | |
|
| | | | | | | | |
| 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.
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.
Effects of inflation
We incur costs in the United States and each of the non‑U.S.worldwide earnings from various countries in which we have a manufacturing facility. In general, our results of operations, cash flows and financial conditiontaxed at different rates that are affectedoffset by the U.S. taxation of GILTI and additional tax on non-deductible compensation due to the Change in Control.
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
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.
On February 12, 2018, we entered into the 2018 Credit Agreement, which provides for the 2018 Revolving Facility and the 2018 Term Loan Facility. On February 12, 2018, our wholly owned subsidiary, GrafTech Finance, borrowed $1,500$246.4 million under the 2018 Term LoanRevolving Credit Facility. The funds received were used to pay off our outstanding debt, including borrowings under our Old Credit Agreement and the Senior Notes and accrued interest relating to those borrowings and the Senior Notes, declare and pay a dividend of $1,112.0 million to our sole pre-IPO stockholder, pay fees and expenses incurred in connection therewith and for other general corporate purposes.
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note (as defined below) 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 basedWe announced 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 orJuly 31, 2019, that would result from the $750 million Brookfield Promissory Note and (iii) the satisfaction of the conditions described in (i) and (ii) above occurring within 60 days from the dividend record date. Upon publication of our first quarterly report on Form 10-Q, these conditions were met and, as a result, the Brookfield Promissory Note became payable.
The Brookfield Promissory Note had a maturity of eight years from the date of issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined in the Brookfield Promissory Note) plus an applicable margin equal to 4.50% per annum, with an additional 2.00% per annum starting from the third anniversary from the date of issuance. We were permitted to make voluntary prepayments at any time without premium or penalty. All obligations under the Brookfield Promissory Note were unsecured and guaranteed by all of our existing and future domestic wholly owned subsidiaries that guarantee, or are borrowers under, the Senior Secured Credit Facilities. No funds were lent or otherwise contributed to us by Brookfield in connection with the Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Brookfield Promissory Note was repaid, in full, on June 15, 2018.
On April 19, 2018, we declared a $160 million cash dividend payable to Brookfield, the sole pre-IPO stockholder. Payment of this dividend was conditional upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the payment of the dividend and (iii) the payment occurring within 60 days from the dividend record date. The conditions of this dividend were met upon filing of our first quarter report on Form 10-Q and the dividend was paid on May 8, 2018.
On June 15, 2018, GrafTech entered into the first amendment to its 2018 Credit Agreement ("First Amendment"). The First Amendment amends the 2018 Credit Agreement to provide for the additional $750 million in aggregate principal amount
of the incremental term loans ("Incremental Term Loans") to GrafTech Finance. The Incremental Term Loans increase the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $1,500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the existing term loans under the 2018 Credit Agreement, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the existing term loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment. The proceeds of the Incremental Term Loans were used to repay, in full, the $750 million in principal outstanding on the Brookfield Promissory Note.
On August 13, 2018, the Company repurchased 11,688,311 of our common stock directly from Brookfield. These shares were retired upon repurchase. The price per share paid by the Company was equal to the price at which the underwriters purchased the shares from Brookfield in Brookfield’s August 2018 public secondary offering of 23,000,000 shares of our common stock, net of underwriting commissions and discounts. GrafTech funded the share repurchase from cash on hand.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. As of December 31, 2019 we hadWe repurchased 1,004,6854.7 million shares of common stock totaling $10.9for a total purchase price of $50.0 million under this program. The Company had $89.1program during 2021. Additionally, on November 4, 2021, we announced that our Board of Directors authorized an additional $150 million of stock repurchases, bringing our total stock repurchase availability to $159.0 million, inclusive of the amount remaining under this program asthe previous authorization
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.
On December 5, 2019, the Company 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,2021, the Company entered into a share repurchase agreementsecond amendment (the "Second Amendment") to the 2018 Credit Agreement that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with Brookfield to repurchase $250 millionone step down of stock from Brookfield at the arms length price25 basis points based on achievement of $13.125 set by the competitive bidding processcertain public ratings of the secondary block trade. As a result,2018 Term Loan Facility. The Second Amendment also decreased the Company repurchased 19,047,619 shares of common stock, reducing total shares outstanding by approximately 7%. interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
We currently payPrior to April 2020, we had paid a quarterly cash dividend of $0.085 per share, or an aggregate of $0.34 per share on an annualized basis. Additionally, on December 31, 2018, we paidIn April 2020, as a specialresult of the deteriorating economic environment, our Board of Directors reduced our dividend of $0.70rate to $0.01 per share, totaling $203.4 million.or $0.04 per share on an annualized basis. There can be no assurance that we will pay dividends in the future in these amounts or at all. Our Board of Directors may change the timing and amount of any future dividend payments or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by our Board of Directors.
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.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility. We plan to use approximately 50-60% of our cash for debt repayment in 2020 with the remainder for shareholder returns.
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.
We have announced a series of operational improvement projects at our Monterrey and St. Marys facilities. These projects are intended to help optimize our manufacturing footprint while improving environmental performance and increasing production flexibility. We expect these projects to be completed in the first half of 2021, at which time we will be able to shift additional
graphitization and machining from Monterrey to St. Marys. We estimate that capital spending would be approximately $60-70 Capital expenditures totaled $58.3 million in 2020 which is consistent with 20192021. We anticipate capital expenditures.expenditures between $70 and $80 million in 2022.
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
Cash flows include cash flows from both continuing and discontinued operations.
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:
Non-cash items such as depreciation and amortization; impairment, post-retirement obligationstotaling $50 million for interest, tax payments, Tax Receivable Agreement payments and pension plan changes;
Gains and losses attributed to investing and financing activities such as gains and losses on the sale of assets and unrealized currency transaction gains and losses; and
Changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.contributions.
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;
•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•net use of funds of $3.9 million from decreasedincreases in prepaid expenses and other current assets of $31.9 million resulting primarily resulting from the lower valuetiming of imported goods impactingrefunds of value-added taxes in certain foreign jurisdictions;jurisdictions, including the receivable associated with the one-time Brazil value-added tax credit;
•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.
In the year ended December 31, 2018, changes in working capital resulted in a net use of funds of $177.8 million which was impacted by:
use of funds of $139.2 million from the increase in accounts receivable, which was due primarily to increased sales driven by higher sales prices, partially offset by improved collection terms;
use of funds from increases in inventory of $126.4 million due to the increased price of raw materials and higher production levels;
source of funds of $7.1 million from decreased prepaid and other current assets primarily resulting from commodity hedge collections and a reduction in advanced payments to suppliers;
source of funds of $67.1 million resulting from an increase in income taxes payable driven by higher profits in 2018;
source of funds of $15.7 million from increases in accounts payable and other accruals primarily driven by increased raw material costs.
Other uses of cash in the year ended December 31, 2018 included cash paid for interest of $108.0 million, $21.4 million of cash paid for taxes and contributions to pension and other benefit plans of $7.5$6.6 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.
Net cash used in investing activities was $67.32021 compared to $35.7 million in the year ended December 31, 2018 and included2020. The change is due to the increase in capital expenditures, of $68.2 million partially offset by proceeds fromas the sale of fixed assets of $0.9 million.2020 spend had been lower due to the slowdown in production activity.
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.
Net cash outflow from financing activities was $731.02021, compared to $463.7 million during the year ended December 31, 2018,2020. Repayments of long-term debt amounted to $400.0 million in 2021, which was substantially similar to the net impact of our February 12, 2018 refinancing and subsequent amendment, proceeds of which were used to repay outstanding debt, pay dividends of $1,112 million to Brookfield and repayamount in the $750 million Brookfield Promissory Note to Brookfield. We also repurchased $225 millionprior year. Repurchases of our common stock were $50.0 million in 2021, compared to $30.1 million in the prior year. Dividends payments were $10.6 million in 2021, compared to $30.9 million in the prior year as the quarterly dividend was decreased from Brookfield on August 13, 2018. Since our IPO$0.085 to $0.01 per share effective the second quarter of 2020. Other uses of cash were up by approximately $5 million versus the prior year, primarily due to the payment in 2018, we have paid a conditional dividend2021 of $160 milliontaxes related to Brookfield, quarterly dividends on common stockthe net share settlement of $68.9 million and a special dividend on common stock of $203.4 million.awards.
Financing transactions
2018 Credit Agreement
OnIn February 12, 2018, the Company entered into a credit agreementthe 2018 Credit Agreement, which provides for (i) the $2.3 billion 2018 Term Loan Facility after giving effect to the June 2018 amendment (the “2018“First Amendment”) that increased the aggregate principal amount of the 2018 Term Loan Facility from $1.5 billion to $2.3 billion and (ii) the $250 million 2018 Revolving Credit Agreement”) among the Company,Facility. GrafTech Finance Inc. (“is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance”),Finance, GrafTech Switzerland SA (“Swissco”), and GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co‑Borrowers”), the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the "Administrative Agent"“Co-Borrowers”) and as collateral agent, which provides for (i) a $1,500 million senior secured term facility (the “2018 Term Loan Facility”) and (ii) a $250 million senior secured revolving credit facility (the “2018 Revolving Credit Facility” and, together with the 2018 Term Loan Facility, the “Senior Secured Credit Facilities”), which may be used from time to time for revolving credit borrowings denominated in dollars or Euro, the issuance of one or more letters of credit denominated in dollars, Euro, Pounds Sterling or Swiss Francs and one or more swing line loans denominated in dollars. GrafTech Finance is the sole borrower under the 2018 Term Loan Facility while GrafTech
Finance, Swissco and Lux Holdco are Co‑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, 2023.2025 and February 12, 2023, respectively.
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.
Borrowings under the 2018 Term Loan Facility bearbears interest, at GrafTech Finance’sour option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.50%3.00% per annum following an amendment in
February 2021 (the “Second Amendment”) that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin 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.
Borrowings under theThe 2018 Revolving Credit Facility bearbears interest, at the applicable Co‑Borrower’sour option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, the Co‑Borrowers will bewe are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
For borrowings under both the 2018 Term Loan Facility and the 2018 RevolvingThe Senior Secured Credit Facility, if the Administrative Agent determines that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate and such circumstances are unlikely to be temporary or the relevant authority has made a public statement identifying a date after which the LIBO Rate shall no longer be used for determining interest rates for loans, then the Administrative Agent and the Co-Borrowers shall endeavor to establish an alternate rate of interest, which shall be effective so long as the majority in interest of the lenders for each Class (as defined in the 2018 Credit Agreement) of loans under the 2018 Credit Agreement do not notify the Administrative Agent otherwise. Until such an alternate rate of interest is determined, (a) any request for a borrowing denominated in dollars based on the Adjusted LIBO Rate will be deemed to be a request for a borrowing at the ABR Rate plus the applicable margin for an ABR Rate borrowing of such loan while any request for a borrowing denominated in any other currency will be ineffective and (b) any outstanding borrowings based on the Adjusted LIBO Rate denominated in dollars will be converted to a borrowing at the ABR Rate plus the applicable margin for an ABR Rate borrowing of such loan while any outstanding borrowings denominated in any other currency will be repaid.
All obligations under the 2018 Credit AgreementFacilities are guaranteed by GrafTech, GrafTech Finance and each of our domestic subsidiary of GrafTech,subsidiaries, subject to certain customary exceptions, and all obligations under the 2018 Credit Agreement of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code) are guaranteed by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech, ("Luxembourg Parent"), Luxembourg HoldcoHoldCo, and Swissco (collectively, the "Guarantors"“Guarantors”) with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”)).
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, 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
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 30, 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.
Brookfield Promissory Note2020 Senior Secured Notes
On April 19, 2018, we declared a dividend in the form of a $750 million promissory note (the “Brookfield Promissory Note”) to the sole pre-IPO stockholder. The $750 million Brookfield Promissory Note was conditioned upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (each as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the $750 million Brookfield Promissory Note and (iii) the satisfaction of the conditions occurring within 60 days from the dividend record date. Upon publication of our first quarter report on Form 10-Q, these conditions were met and, as a result, the Brookfield Promissory Note became payable.
The Brookfield Promissory Note had a maturity of eight years from the date of issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined in the Brookfield Promissory Note) plus an applicable margin equal to 4.50% per annum, with an additional 2.00% per annum starting from the third anniversary from the date of issuance. We were permitted to make voluntary prepayments at any time without premium or penalty. All obligations under the Brookfield Promissory Note were unsecured and guaranteed by all of our existing and future domestic wholly owned subsidiaries that guarantee, or are borrowers under, the Senior Secured Credit Facilities. No funds were lent or otherwise contributed to us by the pre-IPO stockholder in connection with the Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Promissory Note was repaid in full on June 15, 2018.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into the First Amendment. The First Amendment amended the 2018 Credit Agreement to provide for the Incremental Term Loans to GrafTech Finance. The Incremental Term Loans increased the aggregate principal amount of term loans incurred byDecember 22, 2020, GrafTech Finance under the 2018 Credit Agreement from $1,500issued $500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the 2018 Term Loans, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the 2018 Term Loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans2020 Senior Secured Notes at an issue price of 100% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933 (the "Securities Act") and to non-U.S. persons outside the United States under Regulation S under the Securities Act.
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").
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 proceedsthen outstanding 2020 Senior Secured Notes may declare all of the Incremental Term Loans were2020 Senior Secured Notes to be due and payable immediately.
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.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility. We plan to use approximately 50-60% of our cash for debt repayment in 2020 with the remainder for shareholder returns.
Fixed rateFixed-rate obligations
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.
Long-Term Contractual, Commercial and Other Obligations and Commitments.Material Cash Requirements. The following tables summarize our long-term contractual obligations and other commercialobligations and commitments as of December 31, 20192021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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).
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
| | $ | — |
| | $ | — |
| | $ | — |
|
(b)Represents estimated interest payments required on our 2018 Term Loan Facility using a monthly LIBOR curve through February 2025, net of interest rate swap impacts and estimated interest payments on the 2020 Senior Secured Notes through December 15, 2028. | |
(a) | The Company entered into the 2018 Credit Agreement, which provided for the 2018 Term Loan Facility and 2018 Revolving Credit Facility. The proceeds of the 2018 Term Loan Facility were used to redeem the Senior Notes, repay outstanding indebtedness under the amended and restated credit agreement dated February 27, 2015, pay fees and expenses relating to the redemption of the Senior Notes and repayment of such indebtedness and pay a dividend. The 2018 Term Loan Facility has an outstanding balance of $1,844 million and matures on February 12, 2025. The term loan bears interest at a rate equal to either the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.50% per annum or the ABR Rate, plus an applicable margin initially equal to 2.50% per annum, in each case with one step down of 75 basis points based on achievement of certain public ratings of the 2018 Term Loans (see "Liquidity and Capital Resources" for full details of this transaction). |
| |
(b) | Represents estimated interest payments required on 2018 Term Loan Facility using a monthly LIBOR curve through February 2025 net of interest rate swap impacts. |
| |
(c) | Represents estimated postretirement, pension and related benefits obligations based on actuarial calculations. |
| |
(d) | Represents committed purchases of raw materials. |
| |
(e) | (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 amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal NOLs, previously taxed income under Section 959 of the Code, foreign tax credits, and the Pre‑IPO Tax Assets. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the TRA commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments. |
| |
(f) | In addition, letters of credit of $3.1 million were issued under the Revolving Facility as of December 31, 2019. |
| |
(g) | Represents surety bonds, which are renewed annually, and other bank guarantees. If rates were unfavorable, we would use letters of credit under our revolving facility. |
| |
(h) | Represents our undiscounted non-cancelable operating lease future payments as of December 31, 2019. |
Off‑Balance sheet arrangements and commitments. We have not undertaken or been a party to any material off‑balance‑sheet financing arrangements or other commitments (including non‑exchange traded contracts), other than:
The notional amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal NOLs, previously taxed income under Section 959 of the Code, foreign exchangetax credits, and commodity contracts;certain NOLs in Swissco. 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 Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
Letters(e)In addition, letters of credit outstandingof $3.3 million were issued under the 2018 Revolving Credit Facility of $3.1 million as of December 31, 2019 and $4.5 million as of December 31, 2018; and2021.
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• | Surety bonds and guarantees with other banks totaling $2.9 million.
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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.
Business combinations and goodwill.Goodwill. The application of the purchase method of accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between goodwill and assets that are depreciated and amortized. Our estimates of the fair values of assets and liabilities acquired are based on assumptions believed to be reasonable and, when appropriate, include assistance from independent third‑party appraisal firms.
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
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.
Related PartyRelated-party Tax Receivable Agreement. On April 23, 2018, the Company entered into a tax receivable agreement (the "TRA") thatthe Tax Receivable Agreement, which provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco (collectively, the "Pre‑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 LIBORLIBO RateR 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 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.
Under ASC 606, an entity recognizes revenuerecognized when itsa customer obtains control of promised goods, or services, in an amount that reflects the consideration which the entity expectswe expect to receive in exchange for those goods or services.goods.
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.
In 2019 andFrom 2018 to the present, our revenue streams primarily consisted of three‑ to five‑year take‑or‑pay supply contractsLTAs and short‑term binding and non‑binding purchase orders (deliveries within the year) directly with steel manufacturers. In 2017, our revenue streams consisted primarily of annual non‑binding purchase orders. The promises of delivery of graphite electrodes represent the distinct performance obligations to which the contract consideration is allocated, based upon the electrode stand‑alone selling prices for the class of customers at the time the agreements are executed. The performance obligations are considered to be satisfied at a point in time when control of the electrodes has been transferred to the customer. The companyCompany has elected to treat the transportation of the electrodes from our premises to the customer’s facilities as a fulfillment activity, and outbound freight cost is accrued when the graphite electrode performance obligation is satisfied. Any variable consideration is recognized up to its
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).
Recent accounting pronouncements
Recently Adopted Accounting Standards
In February 2016,Revenue recognition requires the FASB issued ASU No. 2016-02, Leases (Topic 842). Under ASU No. 2016-02, the Company recognizes most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. ASU No. 2016-02 was effective for fiscal years beginning after December 15, 2018. The Company adopted ASU No. 2016-02 on January 1, 2019. The adoption impact was not material to our financial position, results of operations or cash flows. See Note 10 "Leases" for information regarding this standard and its adoption.
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017‑04, Intangibles‑Goodwill and Other (Topic 350). ASU No. 2017-04 was issued to simplify the accounting for goodwill impairment. ASU No. 2017-04 removes the second stepestimation of the goodwill impairment test, which requires thatelectrode stand-alone selling price, using a hypothetical purchasevariety of inputs, from market observable information to internal pricing guidelines. The estimate of stand-alone selling price on the various classes of contracts is the basis for the allocation be performed to determineof revenue amongst periods for new and modified contracts. Historically the amount of impairment, if any. Under ASU No. 2017-04, a goodwill impairment charge will be based oncontract assets and liabilities resulting from these estimates have been immaterial. See Note 2, "Revenue from Contracts with Customers," to the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 became effective on a prospective basisConsolidated Financial Statements for the Company on January 1, 2020. The adoption of this standard is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.additional information.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), which introduces the Current Expected Credit Losses ("CECL") accounting model. CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. ASU No. 2016-13 is effective for the the Company on January 1, 2020. The adoption of this standard will impact the timing of our credit losses; however, it is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
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.
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.
Item 8. Financial Statements and Supplementary Data
(Unless otherwise noted, all dollars are presented in thousands)
See the Table of Contents located at the beginning of this Report for more detailed page references to information contained in this Item.
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, cost of sales, 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 |
◦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.
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
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
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
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 | ) |
**During the second quarter of 2018, we declared a $750 million dividend in the form of a Promissory Note that was a non-cash transaction. See Note 5 "Debt and Liquidity" for details.
See accompanying Notes to the Consolidated Financial Statements
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
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 |
(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
The Company adopted Accounting Standards Codification ("ASC") 606 on January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's goods and will provide financial statement readers with enhanced disclosures. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 and prior were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous revenue guidance".
Prior to the adoption of ASC 606, revenue from sales of our commercial products was recognized when they met four basic criteria (1) persuasive evidence of an arrangement existed, (2) delivery had occurred, (3) the amount was determinable and (4) collection was reasonably assured. Sales were recognized when both title and the risks and rewards of ownership were transferred to the customer or services had been rendered and fees had been earned in accordance with the contract.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. See Note 2, "Revenue
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.
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:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
| Years |
Buildings | 25-40 |
Land improvements | 20 |
Land improvements | 20 |
|
Machinery and equipment | 5-20 |
|
Furniture and fixtures | 5-10 |
|
The carrying value of fixed assets is assessed when events and circumstances indicating impairment are present. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Depreciation expense was $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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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
Judgment is requiredWe recognize credit losses at the time the financial assets originate or are acquired using a lifetime of expected credit losses measurement. Our expected losses are adjusted each period for changes in assessing the likelihood of collection of receivables, including the current creditworthiness of each customer, related aging of the past due balances and the facts and circumstances surrounding any non-payment. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its financial obligations. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Receivables are charged off when amounts are determined to be uncollectible.expected lifetime credit losses.
Capitalized Bank FeesDeferred Debt Issuance Costs
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,
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
As a result of the enactment of the Tax Act of 2017, theThe Company is required to make an accounting policy election of either (1) treatingtreats taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Tax Income ("GILTI") as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred. See Note 13, "Income Taxes" for more information.
63
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.
Postretirement benefits and benefits under the non-qualified retirement plan have been accrued, but not funded. The estimated cost of future postretirement life insurance benefits is determined by the Company with assistance from independent actuarial firms using the “projected unit credit” actuarial cost method. Such costs are recognized as employees render the service necessary to earn the postretirement benefits. We record our balance sheet position based on the funded status of the plan.
Additional information with respect to benefits plans is set forth in Note 11, “Retirement Plans and 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.
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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For our Mexican, Swiss, United Kingdom and Russian subsidiaries, whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses arising from the fluctuations in currency for monetary accounts are recognized in other (income) expense, net, in the Consolidated Statements of Operations. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred.
We have non-dollar denominated intercompany loans between some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. 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.
The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying value. The fair value for each reporting unit with goodwill is determined in accordance with accounting guidance on determining fair value, which requires consideration of the income, market, and cost approaches as applicable. If the carrying value exceeds the fair value, there is potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment is recognized.
Other amortizable intangible assets, which consist primarily of trademarks and trade names, customer-related intangibles and technological know-how, are amortized over their estimated useful lives using the straight line or sum-of-the-years digits method. The estimated useful lives for each major category of amortizable intangible assets are:
|
| | | | |
| Years |
Trade name | 5-20 |
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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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”.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses. Significant estimates and assumptions are used for, but are not limited to inventory valuation, pension and other post-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.
Recent Accounting Standards
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.
Accounting Standards Not Yet Adopted
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.
(2) Revenue from Contracts with Customers
The Company adopted ASC 606 on January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's goods and will provide financial statement readers with enhanced disclosures. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as the "previous revenue guidance".
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method. Under this method, we could elect to apply the cumulative effect method to either all contracts as of the date of initial application or only to contracts that are not complete as of that date. We elected to apply the modified retrospective method to contracts that are not complete as of the date of initial application. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was to be recorded$2.0 million included as an adjustment to accumulated deficit as of the adoption date. As a resultour accounts receivable reserve and to retained earnings on January 1, 2020.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
of using the modified retrospective method, there were no adjustments that were made to accounts on the Company's consolidated balance sheet as of January 1, 2018.
Impact of the adoption of ASC 606 on accounting policies
In accordance(2) Revenue from Contracts with ASC 606, revenue is recognized when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods.
To achieve this core principle, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
The Company sells the majority of its products directly to steel manufacturers located in various jurisdictions. The Company’s contracts consist of longer-term take-or-pay sales contracts of graphite electrodes with terms of up to five years and short-term purchase orders (deliveries within one year). Collectability is assessed based on the customer’s ability and intention to pay, reviewing a variety of factors including the customer’s historical payment experience and published credit and financial information. Additionally, for multi-year contracts, we may require the customer to post a bank guarantee, guarantee of a parent, a letter of credit or a significant pre-payment.
The promises of delivery of graphite electrodes represent the distinct performance obligations of our contracts. A small portion of our sales consist of deliveries of by-products of the manufacturing processes, such as graphite powders, naphta and gasoil.
Given their nature, the Company’s performance obligations are satisfied at a point in time when control of the products has been transferred to the customer. In most cases, control transfer is deemed to happen at the delivery point of the products defined under the incoterms, usually at time of loading the truck or the vessel. The Company has elected to treat the transportation activity as a fulfilment activity instead of as a distinct performance obligation, and outbound freight cost is accrued when the product delivery promises are satisfied.
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods to the customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer are excluded from the transaction price.
Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. The Company’s contracts and customary practices involve few rebates or discounts. The Company provides a limited warranty on its products and may issue credit notes or replace products free of charge for valid quality claims; historically, quality claims have been insignificant and the Company records appropriate accruals for the estimated credit notes based on the historical statistical experience. Certain contracts provide for limited rebates when deliveries are late versus committed dates. These rebates are accrued for based on historical statistics of late deliveries on the contracts to which those terms apply.
Contracts that contain multiple distinct performance obligations require an allocation of the transaction price to each performance obligation based on a relative stand-alone selling price basis. The Company regularly reviews market conditions and internally approved pricing guidelines to determine stand-alone selling prices for the different types of its customer contracts. The stand-alone prices as known at contract inception are utilized as the basis to allocate the transaction price to the distinct performance obligations. The allocation of the transaction price to the performance obligations remains unchanged if stand-alone selling prices change after contract inception.
The Company expenses sales commissions as earned as their amortization period would not extend beyond the year in which they are incurred. These costs are recorded within selling and administrative expense.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Customers
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 | |
Effective the first quarter of 2019, the The Graphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. The revenue category “By-products and Other” nowother" also includes re-sales of low-grade electrodes purchased from third partythird-party suppliers, which represent a minimal contribution to our profitability. For comparability purposes, the prior period has been recast to conform to this presentation.
Impact of New Revenue Guidance on Financial Statement Line Items
There would be no differences to the reported consolidated balance sheet, statement of operations and cash flows, as of and for the twelve months ended December 31, 2019 and 2018, had the previous revenue guidance still been in effect.
Contract Balances
Receivables, net of allowances for doubtful accounts, were $247.1 million as of December 31, 2019 and $248.3 million as of December 31, 2018.Substantially all the Company's receivables relate to contracts with customers. Accounts receivables are recorded when the right to consideration becomes unconditional. Payment terms on invoices range from 30 to 120 days depending on the customary business practices of the jurisdictions in which we do business.
Certain short-term and longer-term sales contracts require up-front payments prior to the Company’s fulfillment of any performance obligation. These contract liabilities are recorded as current or long-term deferred revenue, depending on the lag between the pre-payment and the expected delivery of the related products. Additionally, under ASC 606, deferred revenue 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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| Current deferred revenue | | Long-Term deferred revenue |
| (Dollars in thousands) |
Balance as of December 31, 2017 | $ | 20,784 |
| | $ | — |
|
Increases due to cash received | 15,548 |
| | 8,241 |
|
Revenue recognized | (30,803 | ) | | — |
|
Foreign currency impact | (149 | ) | | (525 | ) |
Balance as of December 31, 2018 | 5,380 |
| | 7,716 |
|
Increases due to cash received | 7,961 |
| | — |
|
Revenue recognized | (4,678 | ) | | — |
|
Revision of estimates | — |
| | (694 | ) |
Reclassification between long-term and current | 3,042 |
| | (3,042 | ) |
Foreign currency impact | 71 |
| | (122 | ) |
Balance as of December 31, 2019 | $ | 11,776 |
| | $ | 3,858 |
|
Transaction Price Allocated to the Remaining Performance Obligations
The following table presents estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands).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 |
|
(1) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs.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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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.
The number of stock-based awards granted by our Board of Directors At December 31, 2021, 12.1 million common stock shares were available for the years ended 2019, 2018 and 2017 were as follows:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Award type: | | | | | |
Stock options | 229,250 |
| | 979,790 |
| | — |
|
Deferred share units | 31,829 |
| | 42,243 |
| | — |
|
Restricted stock units | 260,640 |
| | 6,740 |
| | — |
|
Accounting for Stock-Based Compensationfuture issuance.
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.
As of December 31, 2019, unrecognized compensation cost related to non-vestedStock Options. Non-qualified stock options deferred share unitsmay be granted to our employees and restricted stock units represents $7.6 million, which will be recognizeddirectors. Stock options vest over a weighted averagefive year period, with one-fifth of 3.8 years. As of December 31, 2018, unrecognized compensation cost related to non-vested stock options, deferred share units and restricted stock units represents $5.4 million, which will be recognized over a weighted average period of 4.3 years.
Deferred Share Units and Restricted Stock Units. Compensation expense for deferred share units and restricted stock unit awards is basedthe award vesting on the closing priceanniversary date of our common stock onthe grant in each of the next five years and expire 10 years from the date of grant, less forfeitures or cancellationsgrant.Option exercises are satisfied through the issuance of awards throughout the vesting period, which generally range between one and three years. The weighted average grant date fair value of deferred share units and restricted stock units was approximately $12.72 per share during 2019.common shares.
Deferred share units and restricted stock unit awards activity under the Omnibus Equity Incentive Plan for 2019 was as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted- Average Grant Date Fair Value |
Outstanding unvested as of December 31, 2018 | | 27,570 |
| | $ | 12.88 |
|
Granted | | 292,469 |
| | 12.72 |
|
Cancelled | | (6,084 | ) | | 13.36 |
|
Vested | | (31,239 | ) | | 12.30 |
|
Outstanding unvested as of December 31, 2019 | | 282,716 |
| | $ | 12.83 |
|
During 2019, we granted 292,469 shares of deferred share units and restricted stock units to certain directors, officers and employees at prices ranging from $11.14 to $13.36. Of the total deferred share units granted, 31,239 were granted to our independent directors in lieu of cash retainers and vested immediately upon grant. The remaining deferred share units and restricted stock units vest over a period of two to five years.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Options. Compensation expense for stock options is based on the estimated fair value of the option on the date of the grant. We calculate the estimated fair value of the option using the Black-Scholes option-pricing model. During 2019, we granted 229,250 options to certain of our officers and employees. The weighted average fair value of the options granted in 2019 was $5.13. During 2018, we granted 979,790 options to certain of our officers and employees. The weighted-average fair value of the options granted in 2018 was $6.08. There were no options granted in 2017. The weighted average assumptions used in our Black-Scholes option pricing model for options granted in 20192021, 2020 and 20182019 were as follows:
|
| | | | | |
| For the Year Ended December 31,2019 | | For the Year Ended December 31,2018 |
Dividend yield | 2.39% - 3.05% |
| | 1.70% - 2.27% |
|
Expected volatility | 50 | % | | 45 | % |
Risk-free interest rate | 1.79% - 2.63% |
| | 2.84% - 2.98% |
|
Expected term in years | 6.5 years |
| | 6.5 years |
|
| | | | | | | | | | | | | | | | | |
| | 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.
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.
Stock options outstanding2021 and exercisable under our plans at December 31, 2019 are:
|
| | | | | | | | | | | | | | | | |
| | | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life in Years | | Weighted Average Exercise Prices | | Number Exercisable | | Weighted Average Exercise Prices |
$11.14 | - | $20.00 | | 1,113,480 |
| | 8.5 | | $15.17 | | 181,822 |
| | $ | 15.73 |
|
Stock option awards activity under the Omnibus Equity Incentive Plan for 20192020 was as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted- Average Exercise Price |
Outstanding unvested as of December 31, 2018 | | 968,720 |
| | $ | 15.68 |
|
Granted | | 229,250 |
| | 12.90 |
|
Vested | | (188,810 | ) | | 15.70 |
|
Forfeited | | (77,502 | ) | | 14.87 |
|
Outstanding unvested as of December 31, 2019 | | 931,658 |
| | $ | 15.06 |
|
$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.
2021, less than
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$0.1 million of expense with respect to non-vested RSUs has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 1.3 years.
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
We previously operated two reportable business segments, Industrial Materials and Engineered Solutions. During the second quarter of 2016, the Company decided to sell the businesses that comprised our Engineered Solutions segment to focus on our Industrial Materials segment. Accordingly, the Engineered Solutions business qualified as held-for-sale status and the related results have been excluded from continuing operations.
Our Industrial Materials segment, 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.
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (Dollars in thousands) |
Net sales: | | | | | |
United States | $ | 403,916 |
| | $ | 429,599 |
| | $ | 103,890 |
|
Americas (excluding the United States) | 348,670 |
| | 367,561 |
| | 129,103 |
|
Asia Pacific | 172,439 |
| | 131,578 |
| | 46,329 |
|
Europe, Middle East, Africa | 865,768 |
| | 967,172 |
| | 271,449 |
|
Total | $ | 1,790,793 |
| | $ | 1,895,910 |
| | $ | 550,771 |
|
|
| | | | | | | |
| At December 31, |
2019 | | 2018 |
(Dollars in thousands) |
Long-lived assets (a): | | | |
United States | $ | 174,307 |
| | $ | 169,301 |
|
Mexico | 141,621 |
| | 146,790 |
|
Brazil | 5,694 |
| | 3,320 |
|
France | 88,514 |
| | 91,022 |
|
Spain | 102,577 |
| | 103,121 |
|
Other countries | 307 |
| | 151 |
|
Total | $ | 513,020 |
| | $ | 513,705 |
|
| |
(a) | Long-lived assets represent fixed assets, net of accumulated depreciation. |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(5) Debt and Liquidity
The following table presents our long-term debt:
| | | | | | | | | | | |
| As of December 31, 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
On
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.
The proceeds2025 and February 12, 2023, respectively. As of December 31, 2021 and 2020, there was no debt outstanding on the 2018 Term Loans were used to (i) repay in full all outstanding indebtednessRevolving Credit Facility and there was $3.3 million and $3.6 million of letters of credit drawn against the Co‑Borrowers under our previous credit agreement and terminate all commitments thereunder, (ii) redeem in full our previously held senior notes at a redemption price of 101.594% of the principal amount thereof plus accrued and unpaid interest to the date of redemption, (iii) pay fees and expenses incurred in connection with (i) and (ii) above and the Senior Secured2018 Revolving Credit Facilities and related expenses, and (iv) declare and pay a dividend to the sole pre-IPO stockholder, with any remainder to be used for general corporate purposes. See Note 7 "Interest Expense" for a breakdown of expenses associated with these repayments. In connection with the repayment of our previous credit agreement and redemption of our previously held senior notes, all guarantees of obligations under the previous credit agreement, the senior notes and related indenture were terminated, all mortgages and other security interests securing obligations under the previous credit agreement were released and the indenture were terminated.Facility, respectively.
Borrowings under theThe 2018 Term Loan Facility bearbears interest, at GrafTech Finance’sour option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.50%3.00% per annum following an amendment in February 2021 (the “Second Amendment”) that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin 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.
Borrowings under theThe 2018 Revolving Credit Facility bearbears interest, at the applicable Co‑Borrower’sour option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, the Co‑Borrowers will bewe are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
For borrowings under both the 2018 Term Loan Facility and the 2018 RevolvingThe Senior Secured Credit Facility, if the Administrative Agent determines that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate and such circumstances are unlikely to be temporary or the relevant authority has made a public statement identifying a date after which the LIBO Rate shall no longer be used for determining interest rates for loans, then the Administrative Agent and the Co-Borrowers shall endeavor to establish an alternate rate of interest, which shall be effective so long as the majority in interest of the lenders for each Class (as defined in the 2018 Credit Agreement) of loans under the 2018 Credit Agreement do not notify the Administrative Agent otherwise. Until such an alternate rate of interest is determined, (a) any request for a borrowing denominated in dollars based on the Adjusted LIBO Rate will be deemed to be a request for a borrowing at the ABR Rate plus the applicable
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
margin for an ABR Rate borrowing of such loan while any request for a borrowing denominated in any other currency will be ineffective and (b) any outstanding borrowings based on the Adjusted LIBO Rate denominated in dollars will be converted to a borrowing at the ABR Rate plus the applicable margin for an ABR Rate borrowing of such loan while any outstanding borrowings denominated in any other currency will be repaid.
All obligations under the 2018 Credit AgreementFacilities are guaranteed by GrafTech Finance and each of our domestic subsidiary of GrafTech,subsidiaries, subject to certain customary exceptions, and all obligations under the 2018 Credit Agreement of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code) are guaranteed by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech, ("Luxembourg Parent"), Luxembourg HoldcoHoldCo, and Swissco (collectively, the "Guarantors"“Guarantors”) with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”)).
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, 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,
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.
Brookfield Promissory Note
On April 19, 2018, we declared2020 Senior Secured Notes
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.
The Brookfield Promissory Note had a maturity of eight years from the date of issuance and bore interest at a rate equal to the Adjusted LIBO Rate (as defined in the Brookfield Promissory Note) plus an applicable margin equal to 4.50% per annum,
payable immediately.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
with an additional 2.00% per annum starting from the third anniversary from the date of issuance. We were permitted to make voluntary prepayments at any time without premium or penalty. All obligations under the Brookfield Promissory Note were unsecured and guaranteed by all of our existing and future domestic wholly owned subsidiaries that guarantee, or are borrowers under, the Senior Secured Credit Facilities. No funds were lent or otherwise contributed to us by the pre-IPO stockholder in connection with the Brookfield Promissory Note. As a result, we received no consideration in connection with its issuance. As described below, the Promissory Note was repaid in full on June 15, 2018.
First Amendment to 2018 Credit Agreement
On June 15, 2018, the Company entered into a first amendment (the “First Amendment”) to its 2018 Credit Agreement. The First Amendment amended the 2018 Credit Agreement to provide for an additional $750 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”) to GrafTech Finance. The Incremental Term Loans increased the aggregate principal amount of term loans incurred by GrafTech Finance under the 2018 Credit Agreement from $1,500 million to $2,250 million. The Incremental Term Loans have the same terms as those applicable to the 2018 Term Loans, including interest rate, payment and prepayment terms, representations and warranties and covenants. The Incremental Term Loans mature on February 12, 2025, the same date as the 2018 Term Loans. GrafTech paid an upfront fee of 1.00% of the aggregate principal amount of the Incremental Term Loans on the effective date of the First Amendment.
The proceeds of the Incremental Term Loans were used to repay, in full, the $750 million of principal outstanding on the Brookfield Promissory Note.
On February 13, 2019, we repaid $125 million on our 2018 Term Loan Facility. On December 20, 2019, we repaid $225 million on our 2018 Term Loan Facility.
(6) Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill
impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For the years ended December 31, 20192021 and 20182020, an assessment for potential impairment was performed and an impairment adjustment was not required.
The following table represents the changes There has been no change in the carrying value of goodwill and intangibles for the years 20182020 and 2019:2021.
|
| | | |
| 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 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
AsIn 2021 we made prepayments for a resulttotal of $400 million under our February 12, 2018 refinancing,Term Loan Facility. In connection with this, we paid a prepayment premium for the redemptionrecorded $2.3 million of our Senior Notes totaling $4.8 million. Theaccelerated accretion of the August 15, 2015 fair value adjustment to our Senior Notes totaling $19.4 million in 2018, included accelerated accretion of $18.7 million resulting from the prepayment. Amortization of debt issuance costs included $0.3original issue discount and we recorded $3.7 million of accelerated amortization of the debt issuance costs. We also recorded $1.6 million of modification costs related to the refinancing.2018 Term Loan Facility repricing in the first quarter of 2021. See Note 5, "Debt and Liquidity" for details of the Second Amendment.
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.
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 •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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest rate swap contracts – Interest rate swap contracts are carried at fair value. We determine the fair value using the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present amount reflecting current market expectations about those future amounts. We had outstanding unrealized gains of $2.9$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.
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.
Net Investment HedgesThe change in the fair value of the de-designated interest rate swap contract from the de-designation date to December 31, 2020, was recorded in interest expense and was immaterial.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We use certain intercompany debt to hedge a portion of our net investment in our foreign operations against currency exposure (net investment hedge). Intercompany debt designated in foreign currency and designated as a non-derivative net investment hedging instrument was $5.5 million and $9.5 million as of December 31, 2019 and 2018, respectively. Within our currency translation adjustment portion of other comprehensive income (loss), we recorded 0 gain or loss in 2019, and a gain of $2.2 million in 2018, resulting from these net investment hedges.
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31, 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.
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 | ) | | — |
| | — |
|
In addition, the loss deferred to "Accumulated other comprehensive loss" in the first quarter of 2021 as a result of the portion of the interest rate swaps qualifying as a debt host is amortized to interest expense over the term of the swaps. The amount of the amortization is as follows for 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(9)Supplementary Balance Sheet Detail
| |
(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").
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 | % |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASC 842 on January 1, 2019, which requires that all leases, financing and operating, be included on the balance sheet. The Company adopted ASC 842 using the modified retrospective approach under which prior periods’ financial statements are not restated and a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption is recorded, if applicable. The Company elected to adopt the transition package of practical expedients for lease identification, classification, initial direct costs and hindsight. At the adoption of ASC 842 on January 1, 2019, the Company recognized right-of-use ("RoU") assets and corresponding operating lease liabilities of $7.5 million with no cumulative-effect adjustment to retained earnings.
We determine if an arrangement is a lease at lease inception. When an arrangement contains a lease, we then determine if it meets any of the criteria for a financing lease. Leases with a term of 12 months or less are not recorded on the balance sheet.
RoU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. RoU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term.
In order to compute the lease liability, when the rate implicit in the lease is not readily determinable, we discount the lease payments using our estimated incremental borrowing rate for secured fixed rate debt over the same term, derived from information available at the lease commencement date. Our lease term includes the option to extend the lease when it is reasonably certain that we will exercise that option.
The Company has elected to account for the lease and non-lease components as a single lease component, except for leases of warehouse space where they will be accounted for separately. Leases may include variable lease and variable non-lease components costs which are accounted for as variable lease expense in the income statement.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Components of lease expense are as follows:
|
| | | | |
| | For Year Ended December 31, 2019 |
| (Dollars in thousands) |
Operating lease cost | | 4,816 |
|
Short-term lease cost | | 14 |
|
Variable lease cost | | 227 |
|
Total lease cost | | $ | 5,057 |
|
Supplemental cash-flow and other information related to leases is as follows:
|
| | | |
| | For Year Ended December 31, 2019 |
| (Dollars in thousands) |
RoU assets obtained in exchange for new operating lease liabilities (non-cash) | | 4,995 |
|
Operating (use of cash) from operating leases | | (4,724 | ) |
Supplemental balance sheet information related to leases is as follows:
|
| | | | |
| | As of December 31, 2019 |
| | (Dollars in thousands) |
Operating RoU Assets* | | $ | 7,994 |
|
*Amount included in Other assets | | |
| | |
Current operating lease liabilities | | 4,475 |
|
Non-current operating lease liabilities | | 3,598 |
|
Total operating lease liabilities** | | $ | 8,073 |
|
**Amounts included in Other accrued liabilities and Other long-term obligations | | |
| | |
Weighted average remaining lease term (in years) | | 2.3 |
|
Weighted average discount rate - operating leases | | 5.61 | % |
As of December 31, 2019,2021, 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 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | (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.
Disclosure related to periods prior to adoption of the new lease standard
As of December 31, 2018, lease commitments under non-cancelable operating leases required the following future payments:
|
| | | |
| (Dollars in thousands) |
2019 | $ | 4,474 |
|
2020 | 2,747 |
|
2021 | 1,497 |
|
2022 | 334 |
|
2023 | 269 |
|
2024 and thereafter | 343 |
|
(11)Retirement Plans and Post-Employment Benefits | |
(11) | Retirement Plans and Postretirement Benefits |
Retirement Plans
On February 26, 1991, we formed our own retirement plan covering substantially all our U.S. employees. Under our plan, covered employees earned benefit payments based primarily on their service credits and wages subsequent to February 26, 1991.
Prior to that date, substantially all our U.S. employees were participants in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). While service credit was frozen, covered employees continued to earn benefits under the Union Carbide plan based on their final average wages through February 26, 1991, adjusted for salary increases (not to exceed 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 |
|
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 result of better than expected returns on plan assets and favorable changes to the mortality tables, partially offset by unfavorable changes to the discount rate.
The reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31, 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 | ) |
•For certain international jurisdictions, the amount reported under "Benefits paid" include obligations and assets that have been transferred into our plans in connection with personnel hired during the year.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:
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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Equity securities – Valued at the closing price reported on the active market on which the security is traded.
Fixed insurance contract – Valued at the present value of the guaranteed payment streams.
Investment contracts – Valued at the total cost of annuity contracts purchased, adjusted for market differences from the date of purchase to year-end.
Collective trusts – Valued at the net asset value provided by the administrator of the fund (the practical expedient). The net asset value is primarily based on quoted market prices of the underlying securities for which quoted market prices of the underlying securities of the funds. Some of the underlying investments include securities for which quoted market prices are not available and are valued using data obtained by the trustee from the best available source or market value. This method may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The fair value of other plan assets by category is summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 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 |
|
| | | | | | | |
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 | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We annually re-evaluate assumptions and estimates used in projecting pension assets, liabilities and expenses. These assumptions and estimates may affect the carrying value of pension assets, liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net pension costs and projected benefit obligations are:
|
| | | | | |
Pension Benefit Obligations Key Assumptions | As of December 31, |
| 2019 | | 2018 |
Weighted average assumptions to determine benefit obligations: | | | |
Discount rate | 2.59 | % | | 3.71 | % |
Rate of compensation increase | 1.50 | % | | 1.74 | % |
| | | | | | | | | | | |
Pension 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.
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 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 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 |
|
Post-Employment Benefit Plans
We provide life insurance benefits for eligible retired employees. These benefits are provided through various insurance companies. We accrue the estimated net postretirement benefit costs during the employees’ credited service periods.
In July 2002, we amended our U.S. postretirement medical coverage. In 2003 and 2004, we discontinued the Medicare Supplement Plan (for retirees 65 years or older or those eligible for Medicare benefits). This change applied to all U.S. active employees and retirees. In June 2003, we announced the termination of the existing early retiree medical plan for retirees under age 65, effective December 31, 2005. In addition, we limited the amount of retiree’s life insurance after December 31, 2004. These modifications are accounted for prospectively. The impact of these changes is being amortized over the average remaining period to full eligibility of the related postretirement benefits.
During 2009, we amended one of our U.S. plans to eliminate the life insurance benefit for certain non-pooled participants.
The components of our consolidated net postretirement costs are set forth in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign |
| (Dollars in thousands) |
Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
|
Interest cost | 269 |
| | 684 |
| | 264 |
| | 700 |
| | 333 |
| | 653 |
|
Mark-to-market loss (gain) | 585 |
| | 100 |
| | (1,028 | ) | | 47 |
| | (1,257 | ) | | 742 |
|
Post-employment benefits (benefit) cost | $ | 854 |
| | $ | 784 |
| | $ | (764 | ) | | $ | 748 |
| | $ | (924 | ) | | $ | 1,397 |
|
The reconciliation of beginning and ending balances of benefit obligations under, fair value of assets of, and the funded status of, our postretirement plans is set forth in the following table:
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | |
Postretirement Benefits | As of December 31, 2019 | | As of December 31, 2018 |
| |
| U.S. | | Foreign | | U.S. | | Foreign |
| (Dollars in thousands) |
Changes in Benefit Obligation: | | | | | | | |
Net benefit obligation at beginning of period | $ | 7,165 |
| | $ | 10,661 |
| | $ | 8,461 |
| | $ | 12,172 |
|
Service cost | — |
| | — |
| | — |
| | 1 |
|
Interest cost | 269 |
| | 684 |
| | 264 |
| | 700 |
|
Foreign currency exchange rates |
|
| | 340 |
| | — |
| | (1,333 | ) |
Actuarial (gain) loss
| 585 |
| | 100 |
| | (1,028 | ) | | 47 |
|
Gross benefits paid | (829 | ) | | (831 | ) | | (532 | ) | | (926 | ) |
Plan amendment | — |
| | — |
| | — |
| | — |
|
Net benefit obligation at end of period | $ | 7,190 |
| | $ | 10,954 |
| | $ | 7,165 |
| | $ | 10,661 |
|
Changes in Plan Assets: | | | | | | | |
Fair value of plan assets at beginning of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Employer contributions | 829 |
| | 831 |
| | 532 |
| | 926 |
|
Gross benefits paid | (829 | ) | | (831 | ) | | (532 | ) | | (926 | ) |
Fair value of plan assets at end of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Funded status: | $ | (7,190 | ) | | $ | (10,954 | ) | | $ | (7,165 | ) | | $ | (10,661 | ) |
Amounts recognized in accumulated other comprehensive loss: | | | | | | | |
Prior service credit | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Amounts recognized in the statement of financial position: | | | | | | | |
Current liabilities | $ | (723 | ) | | $ | (893 | ) | | $ | (783 | ) | | $ | (851 | ) |
Non-current liabilities | (6,467 | ) | | (10,061 | ) | | (6,382 | ) | | (9,810 | ) |
Net amount recognized | $ | (7,190 | ) | | $ | (10,954 | ) | | $ | (7,165 | ) | | $ | (10,661 | ) |
Post-Employment Benefit PlansWe 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 |
|
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | |
Postretirement Benefit Costs | | | |
| 2019 | | 2018 |
Weighted average assumptions to determine net cost: | | | |
Discount rate | 5.57 | % | | 5.07 | % |
Health care cost trend on covered charges: | | | |
Initial | 6.53 | % | | 6.86 | % |
Ultimate | 6.05 | % | | 6.23 | % |
Years to ultimate | 7 |
| | 7 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for our postretirement benefits. A one-percentage point changeU.S. and in assumed health care cost trend rates would have the following effects atcertain foreign jurisdictions. Effective December 31, 2019:2005, all U.S. post-employment medical coverage plans were frozen.
|
| | | | | | | | | | | | | | | |
| One Percentage Point Increase | | One Percentage Point Decrease |
| U.S. | | Foreign | | U.S. | | Foreign |
| (Dollars in thousands) |
Effect on total service cost and interest cost components | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | (42 | ) |
Effect on benefit obligations | $ | 21 |
| | $ | 465 |
| | $ | (20 | ) | | $ | (409 | ) |
Discount ratesThe post-employment benefit plans are set for each plan in referenceun-funded and our periodic contributions correspond to the yields available on AA-rated corporate bondsamount of appropriate currencybenefits paid in the period. Our funding contributions were $1.4 million and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve$1.3 million 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 indices2021 and approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA-rated corporate bonds.2020, respectively.
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
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.
There was no liability recognized on the date we entered into the TRA as there was a full valuation allowance recorded against our deferred tax assets. During the second quarter of 2018, it was determined that the conditions were appropriate for the Company to release a valuation allowance of certain tax assets as we exited our three year cumulative loss position. This release resulted in the recording of a $86.5 million liability related to the TRA on the Consolidated Statements of Operationsas "Related Party Tax Receivable Agreement Expense." As of December 31, 2019, the2020, total TRATax Receivable Agreement liability is $89.9was $40.9 million, of which $27.9$21.8 million iswas classified as current liability "Related party payable - tax receivable agreement"Tax Receivable Agreement" on the balance sheet,Consolidated Balance Sheets, as we expected this portion to be settled within 12 months, and $19.1 million of the liability remained as a long-term liability in "Related party payable - Tax Receivable Agreement long-term" on the Consolidated Balance Sheets. The 2020 current liability was settled in the first quarter of 2021.
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
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.
Given the successful completion of the IPO inControl. In the second quarter 2021, the settlement of 2018, it is reasonably possible that a Change in Control, as defined above, may ultimately happen and that the awarded Profit Units will be subsequently paid out to the participants. Assuming 100% vesting of the awarded Profit Units and depending on Brookfield’s sales proceeds, the potential liability triggered by a Change in Control is estimated to beresulted in the rangerecording of $65a pre-tax charge of $73.4 million, to $90 million.of which $30.7 million was recorded in cost of sales and $42.7 million was recorded in selling and administrative expense. As of December 31, 2019,2021, $71.4 million of the awards are 80% vested.charges have been settled in cash by the Company while the remainder of the liability, related to payroll taxes, is expected to be paid in subsequent quarters, which will satisfy all obligations under the LTIP.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before Provision (benefit)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 | |
Income tax expense (benefit)Provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| |
U.S income taxes: | | | | | |
Current | $ | 16,589 |
| | $ | 787 |
| | $ | (1,066 | ) |
Deferred | 5,690 |
| | (52,145 | ) | | 38 |
|
| 22,279 |
| | (51,358 | ) | | (1,028 | ) |
Non-U.S. income taxes: | | | | | |
Current | 64,134 |
| | 85,252 |
| | 5,924 |
|
Deferred | 11,812 |
| | 15,026 |
| | (15,677 | ) |
| 75,946 |
| | 100,278 |
| | (9,753 | ) |
Total income tax expense (benefit) | $ | 98,225 |
| | $ | 48,920 |
| | $ | (10,781 | ) |
| | | | | | | | | | | | | | | | | | |
| 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.
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly revises the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures which have the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI. In general, these changes were effective beginning in 2018. The Tax Act also includes a one-time mandatory deemed repatriation or transition tax on the accumulated previously untaxed foreign earnings of our foreign subsidiaries.
For the fourth quarter of 2017, we were able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and re-measurement of certain deferred tax asset and liabilities.
Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118. SAB No. 118 allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 also provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Act. On October 15, 2018, the Company’s U.S. tax returns for 2017 were filed and the changes to the provisional tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 were recorded in 2018. These adjustments were immaterial to the Company’s financial statements.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 1, 2018, the U.S. Department of Treasury and the U.S. Internal Revenue Service (IRS) issued proposed regulations under code section 965 and on January 15, 2019, the IRS issued final 965 regulations. The Company continues to analyze the effects of the Tax Act and newly issued final regulations on its financial statements. The final impact of the Tax Act and the regulations may differ from the amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, additional legislative or administrative actions to clarify the intent of the statutory language provided that they differ from the Company’s current interpretation, any changes in accounting standardsProvision for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. We estimate that any change will be immaterial to the Company’s financial statements at this time.
The Company also continues to evaluate the impact of the GILTI provisions under the Tax Act which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election of either (1) the period cost method or (2) the deferred method. As of December 31, 2018, the Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred.
Income tax expense (benefit) differed from the amount computed by applying the U.S,U.S. federal income tax rate of 21% for the years ended December 31, 20192021, 2020 and 2018 and 35% for the year ended December 31, 20172019 to income before Provision (benefit) expensethe provision for income taxes as set forth in the following table:
| | | | | | | | | | | | | | | | | |
| 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 | ) |
89
The company has been granted a tax holiday in Brazil, which expires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities as 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.
We continue toAt each reporting period, we assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required,our assessment, we have established and maintained valuation allowances on those net deferred tax assets. TheHowever, the recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
Valuation allowance activity for the years ended December 31, 2018 and 2019 was as follows: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
Valuation allowance activity for the years ended December 31, 2021, 2020 and 2019 is as follows:
In the fourth quarter of 2017, with the enactment of the Tax Act, additional taxable income was derived as a result of inclusion of accumulated previously untaxed foreign earnings of GrafTech’s foreign subsidiaries. This additional taxable income led to the utilization of the U.S. net operating loss carryforward in 2017 and a partial release of the valuation allowance against the U.S. deferred tax assets. The valuation allowance was further reduced by the U.S. tax rate decrease from 35% to 21% as a result of the Tax Act. | | | | | |
| (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.
In March of 2017, $19.5 million of foreign tax credits expired. During the fourth quarter of 2017, we increased our foreign tax credit carryforward by $37.7 million, as a result of additional foreign taxable income derived in connections with the new U.S. tax legislation that was enacted on December 22, 2017. As of December 31, 2019,2021, we have a total foreign tax credit carryforward of $31.3$13.1 million. As indicated above, a valuation allowance is no longer recorded against this foreign tax credit carryforward. These tax credit carryforwards begin to expire as of March 15, 2025.in 2027. In addition, we have state net operating loss carryforwards of $250.0$239.6 million (net of federal benefit), which can be carried forward from 5five to 20 years. These state net operating loss carryforwards generatedresult in a deferred tax asset of $14.9$14.3 million as of December 31, 2019.2021. We also have U.S. state tax credits of $2.3$0.1 million as of December 31, 2019.
We have2021. Our foreign loss carryforwards on a gross basis of $16.8are $6.8 million as of December 31, 2019, which canand may be carried forward indefinitely.
During the fourth quarter of 2017, GrafTech Switzerland moved from a cumulative loss position to a cumulative profit position, as well as a current year utilization of its net operating loss carryforward. This positive evidence and utilization led to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2018.
As of December 31, 2019,2021, 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.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 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.
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).
Stock Split
On April 12, 2018, the Company effected a 3,022,259.23 to one stock split of the Company's then outstanding common stock. We have retroactively applied this split to all share presentations, as well as "Net income per share" and "Income from continuing operations per share" calculations for the periods presented.
Conditional Dividend to Pre-IPO Stockholder
On April 19, 2018, we declared a $160 million cash dividend payable to Brookfield, the sole pre-IPO stockholder. Payment of this dividend was conditional upon (i) the Senior Secured First Lien Net Leverage Ratio (as defined in the 2018 Credit Agreement), as calculated based on our final financial results for the first quarter of 2018, being equal to or less than 1.75 to 1.00, (ii) no Default or Event of Default (as defined in the 2018 Credit Agreement) having occurred and continuing or that would result from the payment of the dividend and (iii) the payment occurring within 60 days from the dividend record date. The conditions of this dividend were met upon filing of our first quarter report on Form 10-Q and the dividend was paid on May 8, 2018.
Brookfield Promissory Note
On April 19, 2018, we declared a dividend in the form of the Brookfield Promissory Note to the sole pre-IPO stockholder. This note was repaid on June 15, 2018 with proceeds from our Incremental Term Loans. See Note 5 "Debt and Liquidity".
Initial Public Offering
On April 23, 2018, we completed the IPO of 35,000,000 shares of our common stock at a price of $15 per share. This offering represented a sale of 11.6% of our sole pre-IPO stockholder's ownership in the Company.
On April 26, 2018, we closed the sale of an additional 3,097,525 shares of common stock at a price to the public of $15 per share from the pre-IPO stockholder, as a result of the partial exercise by the underwriters in our IPO of their overallotment option. After giving effect to the partial exercise of the overallotment option, the total number of shares of common stock sold by the pre-IPO stockholder was 38,097,525.
The Company did not receive any proceeds related to the offering. We incurred $5.1 million of legal, accounting, printing and other fees associated with this offering through December 31, 2018, which was recorded in "Selling and administrative" expenses in the Consolidated Statements of Operations.
Follow-on OfferingOfferings and Common Stock Repurchases
On August 13, 2018, Brookfield completed an underwritten public secondary offering (the "Offering") of 23,000,000 shares of our common stock at a price to the public of $20.00 per share. The Company did not receive any proceeds related to the Offering. Pursuant to a share repurchase agreement with Brookfield, we concurrently repurchased 11,688,311 shares directly from Brookfield. The price per share paid by us in the repurchase was equal to the price at which the underwriters purchased the shares from Brookfield in the Offering net of underwriting commissions and discounts. We funded the share repurchase from cash on hand. The terms and conditions of the share repurchase were reviewed and approved by the audit committee of our board of directors, which is comprised solely of independent directors. All repurchased shares were retired.
On July 30, 2019, our Board of Directors authorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. As of December 31, 2019, we had repurchased 1,004,685 shares of common stock totaling $10.9 million under this program.
On December 5, 2019, GrafTech announced two separate transactions. The first was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares of GrafTech common stock at a price of $13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, GrafTech entered into a share repurchase agreement with Brookfield to repurchase $250 million of stock from Brookfield at the 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%.
DividendsBrookfield has since distributed a portion of its GrafTech common stock to the owners in the Brookfield consortium and 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.
TheWe announced on July 31, 2019, that our Board of Directors declaredauthorized a program to repurchase up to $100 million of our outstanding common stock. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and paidtiming of repurchases are subject to a dividendvariety of $0.0645 per sharefactors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. On November 4, 2021, we announced that our Board of Directors approved an additional $150 million open market stock repurchase authorization. The stock repurchase program does not have an expiration date.
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 | ) |
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.
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 |
|
In May 2021, the Brazilian Supreme Court ruled definitely to exclude the ICMS (state value-added tax) from the basis of calculation of certain federal value-added taxes, specifically the tax relative to the program of social integration ("PIS") and to the contribution for the financing of social security ("COFINS"), and confirmed the methodology for calculating the PIS-COFINS tax credit to which taxpayers are entitled. The Company's Brazilian subsidiary had previously filed a legal claim on this matter and is entitled to receive tax credits and interests dating back to five years preceding the date of the claim. The overpayments, plus interests, of PIS-COFINS related to the period from June 2005 to August 2021 represent $11.5 million, net of legal fees. In the fourth quarter of 2021, the Company's subsidiary obtained the approval by the Brazilian Tax Authorities to start offsetting the PIS-COFINS credit against the current federal value-added tax payable and recorded the one-time credit as a realizable gain. As of December 31, 2021, the Company had offset $1.2 million of the credit. The balance of the PIS-COFINS credit is expected to be utilized within the next 12 months and is reported within "Prepaid expenses and other current assets" on the Consolidated Balance Sheet.
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.
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.
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
| |
Item 9A. | Controls and Procedures |
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.
Under the supervision andManagement, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we havehas evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019.2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures arewere effective at the reasonable assurance level as of December 31, 2019.2021.
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 |
Item 9B.Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Items 10 to 14 (inclusive).
Item 10. Directors, Executive Officers and Corporate Governance.
Except asThe information regarding our executive officers is set forth in the Supplemental Item to Part I of this Report under the caption "Supplemental Item. Information about our Executive Officers" and is incorporated herein by reference.
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 |
(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
| |
Item 15. | Exhibits and Financial Statement Schedules |
Item 15.Exhibit and Financial Statement Schedules
(a) The following documents are filed as part of this report.Report:
(a) (1) Financial Statements
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;
| |
(2) | Financial Statement Schedules |
None.•Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020;
•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.
|
| | | | | | | |
Exhibit Number
| Description of Exhibit | |
2.1 | | |
3.1 |
| |
3.2 | | |
| | | | | | | | |
4.1 | | |
4.2 | | |
4.3*4.3 | | |
4.4*4.4 | | |
10.14.5 | Indenture, dated as of December 22, 2020, among GrafTech Finance Inc., as issuer, GrafTech International Ltd., as a guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and collateral agent, relating to GrafTech Finance Inc.’s 4.625% Senior Secured Notes due 2028 (incorporated herein by reference to Exhibit 4.1 to GrafTech International Ltd.'s Current Report on Form 8-K filed December 23, 2020). | |
4.6 | | |
10.1 | Credit Agreement, dated February 12, 2018, among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Switzerland SA and GrafTech Luxembourg II S.À.R.L., as co‑borrowers, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated herein by reference to Exhibit 10.1 to GrafTech International Ltd.’s Registration Statement on Form S‑1 (Registration No. 333‑223791) filed March 20, 2018). | |
10.2 | First Amendment to the Credit Agreement, dated June 15, 2018, among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Switzerland SA, GrafTech Luxembourg II S.À.R.L. as co‑borrowers, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated herein by reference to Exhibit 10.1 to GrafTech International Ltd.’s Quarterly Report on Form 10‑Q filed on August 3, 2018). | |
10.3 | | |
10.4 | |
|
| |
10.5 | | |
10.6 | | |
10.7 | | |
10.8 | | |
10.9 | | |
10.10 | | |
10.11 | | |
| | | | | | | | |
10.12 | | |
10.13 | | |
10.14 | | |
10.15 | | |
10.16+ | | |
10.17+ | | |
10.21+10.18+ | | |
10.22+10.19+ | | |
10.24+10.20+ | | |
10.25+10.21+ | | |
10.26+10.22+ | |
|
| |
10.27+10.23+ | | |
10.28+10.24+ | | |
10.29+10.25+ | | |
10.30+10.26+ | |
10.31 | |
10.32+ | | |
10.33+10.27+ | | |
10.34+10.28+ |
| |
10.35+10.29+ | | |
10.36+10.30+ | | |
| | | | | | | | |
10.37+10.31+ | | |
10.3810.32+ | | |
10.33 |
| |
10.39+*10.34 | Second Amendment to the Credit Agreement, dated February 17, 2021, among GrafTech International Ltd., GrafTech Finance Inc., GrafTech Luxembourg II S.À.R.L., GrafTech Switzerland SA, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders and issuing banks party thereto(incorporated herein by reference to Exhibit 10.1 to GrafTech International Ltd.’s Current Report on Form 8-K filed on February 19, 2021). | |
10.35*+ | | |
10.36*+ | | |
21.1*10.37*+ | | |
21.1* | | |
23.1* | | |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101 | The following financial information from GrafTech International Ltd.'s Annual Report on Form 10-K for the year ended December 31, 20192021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders' Equity (Deficit), and (vi) Notes to the Consolidated Financial Statements.
| |
104 | Cover Page Interactive Data fileFile (formatted as Inline XBRL and contained in Exhibit 101) | |
____________________________
| |
+ | Indicates management contract or compensatory plan or arrangement |
** Furnished herewith
+ Indicates management contract or compensatory plan or arrangement
| |
Item 16. | Form 10-K Summary |
Not applicableItem 16.Form 10-K Summary
None.
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 | GRAFTECH INTERNATIONAL LTD.
|
By: | | |
February 21, 2020 | By: | /s/ ��David J. Rintoul |
| | David J. Rintoul |
| Title: | President and Chief Executive Officer and President |
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 |
| | | | |
Signatures | | Title | | Date |
| | | | |
/s/ David J. Rintoul | | President, Chief Executive Officer and President and Director
(Principal Executive Officer)
| | February 21, 202022, 2022 |
David J. Rintoul | | | | |
/s/ Quinn J. CoburnTimothy K. Flanagan | | Chief Financial Officer, Vice President Finance and Treasurer (Principal Financial and Accounting Officer)
| | February 21, 202022, 2022 |
Quinn J. CoburnTimothy K. Flanagan | | | | |
/s/ Denis A. Turcotte | | Chairman and Director | | February 21, 202022, 2022 |
Denis A. Turcotte | | | | |
/s/ Brian L. Acton | | Director | | February 21, 202022, 2022 |
Brian L. Acton | | | | |
/s/ Catherine L. Clegg | | Director | | February 21, 202022, 2022 |
Catherine L. Clegg | | | | |
/s/ Michel L.J. Dumas | | Director | | February 21, 202022, 2022 |
Michel L.J. Dumas | | | | |
/s/ Jeffrey C. DuttonLeslie D. Dunn | | Director | | February 21, 202022, 2022 |
Jeffrey C. DuttonLeslie D. Dunn | | | | |
/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 21, 202022, 2022 |
David Gregory | | | | |
/s/ Henry R. Keizer | | Director | | February 22, 2022 |
Henry R. Keizer | | | | |
| | | | | | | | | | | | | | |
/s/ Anthony R. Taccone | | Director | | February 21, 202022, 2022 |
Anthony R. Taccone | | | | |