NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except as otherwise noted)
(1)Business and Summary of Significant Accounting Policies
Discussion of Business and Structure
GrafTech International Ltd. (the “Company”) is a leading manufacturer of high-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 the Company. and its subsidiaries. On August 15, 2015, GTI became an indirect wholly owned subsidiary of Brookfield Asset Management Inc. (together with its affiliates, “Brookfield”). In April 2018, we completed our initial public offering ("IPO") of 38,097,525 shares of our common stock held by Brookfield at a price of $15.00 per shares. We did not receive any proceeds related to the 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 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 two major product categories: graphite electrodes and needle coke products. Petroleum needle coke is a key raw material used in the production of graphite electrodes. The Company's vision is to provide highly engineered graphite electrode services, solutions and products to electric arc furnace operators.
Summary of Significant Accounting Policies
The Consolidated Financial Statements include the financial statements of 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
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.
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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 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.
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 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 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, net. We depreciate our assets using the straight-line method over the estimated useful lives of the assets. The ranges of estimated useful lives are as follows:
| | | | | |
| Years |
Buildings | 25-40 |
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 in 2021, 2020 and 2019, respectively. Accounts payable associated with capital expenditures totaled $15.7 million and $8.9 million as of December 31, 2021 and 2020, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Leases
The Company determines if an arrangement is a lease at inception. When an arrangement contains a lease, we then determine if it meets any of the criteria to be classified as a finance lease. Leases with a term of 12 months or less are not recorded on the balance sheet.
Right of Use ("RoU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. RoU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. In order to compute the lease liability, when the rate implicit in the lease is not readily determinable, we discount the lease payments using our estimated incremental borrowing rate for secured fixed rate debt over the same term, derived from information available at the lease commencement date. Our lease term includes the option to extend the lease when it is reasonably certain that we will exercise that option.
Lease and non-lease components are treated as a single lease component, except for leases of warehouse space where they will be accounted for separately. Leases may include variable lease and variable non-lease components costs, which are accounted for as variable lease expense in the income statement.
Accounts Receivable
Trade accounts receivable primarily arise from sales of goods to customers and distributors in the normal course of business.
Allowance for Doubtful Accounts
We 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 expected lifetime credit losses.
Deferred Debt Issuance Costs
We defer debt issuance costs upon the incurrence of debt and record them as a direct reduction against our debt. We had deferred debt issuance costs of $11.8 million and $18.1 million as of December 31, 2021 and 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 debt issuance costs amounted to $8.6 million, $9.2 million and $4.1 million in 2021, 2020 and 2019, respectively. Debt 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) 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 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
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
thereafter, whether a derivative used in a hedging transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a derivative ceases to be highly effective or that the hedged transaction is no longer probable of occurring, we discontinue hedge accounting.
Foreign Currency Derivatives
We enter into foreign currency derivatives from time to time to manage exposure to changes in currency exchange rates. These instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures, relating to non-dollar denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased foreign currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at fair value.
These contracts may be designated as cash flow or fair value hedges to the extent that they are effective and are accounted for as described in section above (“Derivative Financial Instruments”). For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in cost of sales on the Consolidated Statements of Operations. Derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency.
Commodity 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 loss in the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from settlement are first recognized in accumulated other comprehensive 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 interest rate swap contracts that are "pay fixed, receive 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 USD LIBOR for a portion of our outstanding 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 included in accumulated other comprehensive loss on the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from the settlement are recognized in interest expense in the period of settlement.
Income Taxes
We file a consolidated U.S. federal income tax return for GTI and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained, when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Under the guidance on accounting for uncertainty in income taxes, we recognize the benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.
The Company treats 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. See Note 13, "Income Taxes" for more information.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into a Tax Receivable Agreement that provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), foreign tax credits, and certain NOLs in Swissco (collectively, the "Pre-IPO Tax Assets"). In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the Tax 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 Post-Employment Benefits
We use actuarial methods and assumptions to account for our defined benefit pension plans and our post-employment benefits. We 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 post-employment benefits expense includes the MTM Adjustment, actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets and adjustments due to plan settlements and curtailments. Contributions to the qualified U.S. retirement plan are made in accordance with the requirements of the Employee Retirement Income Security Act of 1974.
Additional information with respect to benefits plans is set forth in Note 11, “Retirement Plans and Post-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 in 2021, 2020 and 2019, 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, 2021 and 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 average exchange rates for each period for revenues, expenses, gains and losses. Differences arising from exchange rate changes are included in accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as the operations of such non-U.S. subsidiaries are sold or substantially or completely liquidated.
For our Mexican, Swiss, United Kingdom and Russian subsidiaries, whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses arising from the fluctuations in currency for monetary accounts are recognized in other (income) expense, net, in the Consolidated Statements of Operations. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred.
We have non-dollar denominated intercompany loans between some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. One of these loans has been deemed to be essentially permanent prior to settlement and, as a result, remeasurement gains and losses on this loan were recorded as a component of accumulated other comprehensive 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 quantitative goodwill impairment test.
Other amortizable intangible assets, which consist primarily of trademarks and trade names, customer-related intangibles and technological know-how, are amortized over their estimated useful lives using the straight line or sum-of-the-years digits method. The estimated useful lives for each major category of amortizable intangible assets are:
| | | | | |
| Years |
Trade name | 5-20 |
Technology and know-how | 5-14 |
Customer related intangible | 5-15 |
Additional information about goodwill and other intangibles is set forth in Note 6, “Goodwill and Other Intangible Assets.”
Major Maintenance and Repair Costs
We perform scheduled major maintenance of the storage and processing units at our Seadrift plant (referred to as “overhaul”). Time periods between overhauls vary by unit. We also perform 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, $0.7 million was deferred in 2021 and $10.2 million of costs were deferred in 2020. Amortization of deferred maintenance costs totaled $4.6 million, $6.0 million and $5.1 million in 2021, 2020 and 2019, 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. Diluted earnings per share recognizes the dilution that would occur if stock options or restricted shares were exercised or converted into common shares. See Note 15, “Earnings per Share”.
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-employment benefits, allowance for doubtful accounts, contingent liabilities, accruals and valuation allowances, asset impairment, and environmental-related accruals. Actual results could differ from our estimates.
Reclassifications and Adjustments
Certain items previously reported in specific financial statement captions within the Consolidated Statements of Cash Flows have been reclassified between lines within cash flow from operations to conform to the current presentation.
Subsequent Events
We evaluate events that occur after the balance sheet date but before financial statements are issued to determine if a material event requires our amending the financial statements or disclosing the event. See Note 17, "Subsequent Events" for further details.
Recently Adopted Accounting Standards
In January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-01, Reference Rate Reform (Topic 848): Scope, 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 our financial position, results of operations and cash flows.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to improve consistent application of Topic 740 and simplify the accounting for income taxes. This pronouncement removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 is effective for annual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 on January 1, 2021, with an immaterial effect on our financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which introduces the Current Expected Credit Losses ("CECL") accounting model. CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. ASU No. 2016-13 was effective for the Company on January 1, 2020. The adoption of ASU No. 2016-13 resulted in a cumulative-effect adjustment of $2.0 million included as an adjustment to our accounts receivable reserve and to retained earnings on January 1, 2020.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(2) Revenue from Contracts with Customers
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type of product and contract:
| | | | | | | | | | | | | | | | | |
| 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 | |
The Graphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. The revenue category “By-products and other" also includes re-sales of low-grade electrodes purchased from third-party suppliers, which represent a minimal contribution to our profitability.
Contract Balances
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, deferred revenue or 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 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.
| | | | | | | | | | | |
| 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 | |
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 reporting 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) |
(1) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs.
The majority of the LTAs are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. For the year 2022 and beyond, the contractual revenue amounts above are based upon the minimum volume 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 LTAs, the Company recorded $1,040.2 million, $1,069.8 million and $1,437.4 million of revenue pursuant to these contracts in the year ended December 31, 2021, 2020 and 2019, respectively.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(3) Stock-Based and Other Management Compensation
Our Omnibus Equity Incentive Plan permits the granting of options and other stock-based awards (including restricted stock units ("RSUs") and deferred share units ("DSUs")). As of December 31, 2021, the aggregate number of shares authorized under the plan since its initial adoption was 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 have the Company withhold shares to cover the tax obligation. At December 31, 2021, 12.1 million common stock shares were available for future issuance.
Stock-based compensation expense was $16.6 million, $2.7 million and $2.1 million in 2021, 2020 and 2019, 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 selling and administrative expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales. Stock-based compensation expense for 2021 includes $14.7 million, recorded in the 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 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. Out of the $14.7 million recorded with the Change in Control, $0.9 million accelerated at the 35% ownership level and the remaining $13.8 million accelerated at the 30% ownership level.
The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based compensation awards are exercised or vest. We recognized $1.8 million of tax benefits in 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.
Stock Options. Non-qualified stock options may be granted to our employees and directors. Stock options vest over a five year period, with one-fifth of the award vesting on the anniversary date of the grant in each of the next five years and expire 10 years from the date of grant. Option exercises are satisfied through the issuance of common shares. 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. The weighted average assumptions used in our Black-Scholes option pricing model for options granted in 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| | 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. For 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. 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, we recognized stock-based compensation expense of $10.0 million, $1.0 million and $0.5 million, respectively, relating to RSU awards for employees. The total fair value of RSU awards vested during 2021 and 2020 was $10.8 million and $0.6 million, respectively. No RSUs vested in 2019. As of December 31, 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 Plan
We have a global annual cash incentive program for the majority of our worldwide salaried and hourly employees, the Short-Term Incentive Program (the “STIP”). In 2021, the STIP is based primarily on the performance metric of adjusted EBITDA, 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, the most directly comparable financial measure calculated and presented in accordance with GAAP. The balance of our accrued liability for the STIP was $10.9 million at December 31, 2021 and $8.9 million as of December 31, 2020.
(4) Segment Reporting
Our Industrial Materials segment, our only reportable segment, manufactures high-quality graphite electrodes essential to the production of EAF steel and other ferrous and non-ferrous metals. Petroleum needle coke, a crystalline form of carbon derived from decant oil, is a key raw material used in the production of graphite electrodes. We utilize substantially all the needle coke that we produce internally to manufacture our graphite electrodes and as a result approximately 96% of our revenues from external customers are derived from the sale of graphite electrodes. In 2021, no customer accounted for more than 10% of our net sales.
The following tables summarize information as to our operations in different geographic 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.
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 | |
2018 Term Loan and 2018 Revolving Credit Facility
In February 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”), which provides for (i) a $2,250 million senior secured term facility (the “2018 Term Loan Facility”) after giving effect to the June 2018 amendment (the “First Amendment”) that increased the aggregate principal amount of the 2018 Term Loan Facility from $1,500 million to $2,250 million and (ii) a $250 million senior secured revolving credit facility (the “2018 Revolving Credit Facility” and, together with the 2018 Term Loan Facility, the “Senior Secured Credit Facilities”). GrafTech Finance Inc. (“GrafTech Finance”) is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, GrafTech Switzerland SA (“Swissco”) and GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co-Borrowers”) are co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the 2018 Revolving Credit Facility mature on February 12, 2025 and February 12, 2023, respectively. As of December 31, 2021 and 2020, there was no debt outstanding on the 2018 Revolving Credit Facility and there was $3.3 million and $3.6 million of letters of credit drawn against the 2018 Revolving Credit Facility, respectively.
The 2018 Term Loan Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 3.00% per annum following an amendment in February 2021 (the “Second Amendment”) that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loan Facility. The Second Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
The 2018 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, we are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
The Senior Secured Credit Facilities are guaranteed by each of our domestic subsidiaries, subject to certain customary exceptions, and by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech, Luxembourg HoldCo, and Swissco (collectively, the “Guarantors”) with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”)).
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, by: (i) a pledge of all of the equity securities of each domestic Guarantor and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation,
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 Loan Facility amortizes at a rate of $112.5 million a year payable in equal quarterly installments, with the remainder due at maturity. The Co-Borrowers are permitted to make voluntary prepayments at any time without premium or penalty. GrafTech Finance is required to make prepayments under the 2018 Term Loan Facility (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company’s fiscal year ended December 31, 2019, 75% of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of Excess Cash Flow based on achievement of a senior secured first lien net leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00 and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loan Facility during any calendar year reduce, on a dollar-for-dollar basis, the amount of the required Excess Cash Flow prepayment for such calendar year, and the aggregate amount of Excess Cash Flow prepayments for any calendar year reduce subsequent quarterly amortization payments of the 2018 Term Loan Facility as directed by GrafTech Finance. As of 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.
2020 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 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 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 principal due in full on December 15, 2028. Prior to December 15, 2023, up to 40% of the 2020 Senior Secured Notes may be redeemed with the net cash proceeds of certain 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 in 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 2.00 to 1.00, we can make restricted payments so long as no default or event of default 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 the holders of at least 30% in principal amount of the then outstanding 2020 Senior Secured Notes may declare all of the 2020 Senior Secured Notes to be due and payable immediately.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(6) Goodwill and Other Intangible Assets
We are required to review goodwill and indefinite-lived intangible assets annually for impairment. Goodwill impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For the years ended December 31, 2021 and 2020, an assessment for potential impairment was performed and an impairment adjustment was not required. There has been no change in the carrying value of goodwill for the years 2020 and 2021.
The following table summarizes acquired intangible assets with determinable useful lives by major category which are included in "Other assets" on our Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 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 in 2021, 2020 and 2019, respectively. Estimated annual amortization expense for the next five years will approximate $10.1 million in 2022, $9.2 million in 2023, $8.0 million in 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 |
| 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 Term Loan Facility had an 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. See Note 5, "Debt and Liquidity" for details of these transactions.
In 2021 we made prepayments for a total of $400 million under our 2018 Term Loan Facility. In connection with this, we recorded $2.3 million of accelerated accretion of the original 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 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
•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, 2021 and 2020 was $1,051.6 million and $1,453.1 million, respectively. The fair values were determined using Level 3 inputs.
Foreign currency derivatives – Foreign currency derivatives are carried at fair value using Level 2 inputs. We had an outstanding gain of $0.4 million as of December 31, 2021 and an outstanding loss of $0.1 million as of December 31, 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 $8.5 million as of December 31, 2021, outstanding unrealized gains of $0.6 million and outstanding unrealized losses of $2.8 million as of December 31, 2020.
Interest rate swap contracts – Interest rate swap contracts are carried at fair value. We determine the fair value using the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present amount reflecting current market expectations about those future amounts. We had outstanding unrealized gains of $6.1 million and outstanding unrealized losses of $0.1 million as of December 31, 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 pension funds' assets can be found in Note 11, "Retirement Plans and Post-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 counterparties 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, 2021 and December 31, 2020 and, therefore, no unrealized gains or losses reported under accumulated other comprehensive loss.
As of December 31, 2021, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $99.3 million. As of December 31, 2020, we had outstanding Mexican peso, South African rand, euro, Swiss franc and Japanese yen currency contracts, with aggregate notional amounts of $71.0 million. The foreign currency derivatives outstanding as of December 31, 2021 had maturity dates from January 2022 to 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 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, 2021, we had outstanding commodity derivative contracts with a notional amount of $19.5 million and maturities from January 2022 to June 2022. As of December 31, 2020, we had outstanding commodity derivative contracts with a notional amount of $61.3 million with maturities from January 2021 to June 2022. Within accumulated other comprehensive loss, we had a net unrealized pre-tax gain of $8.5 million and a net unrealized pre-tax loss of $2.2 million as of December 31, 2021 and 2020, respectively. The fair value of these contracts was determined using Level 2 inputs.
In connection with de-designated commodity derivative contracts, we recognized no unrealized gains or losses in cost of sales in 2021 and a $0.4 million unrealized gain in 2020 as a result of the variation in fair value from the de-designation date. This resulted from a small portion of our commodity derivative contracts that 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 USD LIBOR for a portion of our outstanding debt. It was expected that these swaps would 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 loss, we recorded a net unrealized pre-tax gain of $5.9 million and a net unrealized pre-tax loss of $11.9 million as of December 31, 2021 and 2020, respectively. The fair value of these contracts was determined using Level 2 inputs.
The 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
The fair value of all derivatives is recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At December 31, 2021 and 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, 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 | |
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, 2021 and December 31, 2020, net realized pre-tax gain of $11.5 million and net 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 following 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 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, 2021, 2020 and 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 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 | | | — | | | — | |
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
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 | |
*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 | |
(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
As of December 31, 2021, lease commitments under non-cancelable operating leases extending for one year or more will require the following future payments:
| | | | | | | | |
| | (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, 2021, we have not entered into any additional operating lease commitments that have yet to commence.
(11)Retirement Plans and Post-Employment Benefits
Retirement Plans
On February 26, 1991, we formed our own retirement plan covering substantially all our U.S. employees. Under our plan, covered employees earned benefit payments based primarily on their service credits and wages subsequent to February 26, 1991.
Prior to that date, substantially all our U.S. employees were participants in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). While service credit was frozen, covered employees continued to earn benefits under the Union Carbide plan based on their final average wages through February 26, 1991, adjusted for salary increases (not to exceed six percent per annum) through January 26, 1995, the date Union Carbide ceased to own a minimum 50% of the equity of GTI. The Union Carbide plan is responsible for paying retirement and death benefits earned as of February 26, 1991.
Effective January 1, 2002, we established a defined contribution plan for U.S. employees. Certain employees had the option to remain in our defined benefit plan for an additional period of up to five years. Employees not covered by this option had their benefits under our defined benefit plan frozen as of December 31, 2001, and began participating in the defined contribution plan.
Effective March 31, 2003, we curtailed our qualified benefit plan and the benefits were frozen as of that date for the U.S. employees who had the option to remain in our defined benefit plan. We also closed our non-qualified U.S. defined benefit plan for the participating salaried workforce. The employees began participating in the defined contribution plan as of April 1, 2003.
Pension coverage for employees of foreign subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves.
The components of our consolidated net pension costs are set forth in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 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 | |
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 reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31, 2021 and 2020 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) | |
•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 $166.1 million and $176.3 million as of December 31, 2021 and 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.
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 | |
| | | | | | | |
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, 2020 and 2021 (dollars in thousands):
| | | | | |
| Fixed Insurance Contracts |
Balance at December 31, 2019 | $ | 17,985 | |
Gain / contributions / currency impact | 6,149 | |
Distributions | (16) | |
Balance at December 31, 2020 | 24,118 | |
Gain / contributions / currency impact | 1,900 | |
Distributions | (15) | |
Balance at December 31, 2021 | $ | 26,003 | |
We annually re-evaluate assumptions and estimates used in projecting pension assets, liabilities and expenses. These assumptions and estimates may affect the carrying value of pension assets, liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net pension costs and projected benefit obligations are:
| | | | | | | | | | | |
Pension Benefit Obligations Key Assumptions | As of December 31, |
| 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 | 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-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, 2021, by asset category:
| | | | | | | | | | | |
| 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, 2020 and 2021 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 | |
Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 2021 and 2020 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 | |
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 | |
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Post-Employment Benefit Plans
We have legacy post-employment medical coverage and life insurance benefits for eligible retired employees in the U.S. and in certain foreign jurisdictions. Effective December 31, 2005, all U.S. post-employment medical coverage plans were frozen.
The post-employment benefit plans are un-funded and our periodic contributions correspond to the amount of benefits paid in the period. Our funding contributions were $1.4 million and $1.3 million in 2021 and 2020, respectively.
The 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.
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, the Company's matching contributions to our savings plan were $2.5 million, $2.2 million and $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 appealed this state court ruling, 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 our position. As of December 31, 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 2020 and 2021 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 | |
Related Party Tax Receivable Agreement
On April 23, 2018, the Company entered into the Tax Receivable Agreement that provides Brookfield, as the sole Pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of 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 Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
As of December 31, 2020, total Tax Receivable Agreement liability was $40.9 million, of which $21.8 million was classified as current liability "Related party payable - Tax Receivable Agreement" on the 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 12 months, and $15.5 million of the liability remains as a long-term liability in "Related party payable - Tax Receivable Agreement long-term" on the Consolidated Balance Sheets.
Long-term Incentive Plan
The long-term incentive plan ("LTIP") was adopted by the Company in August 2015 and amended and restated in March 2018. The purpose of the plan was to retain senior management 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 was allocated a number of profit units, with a maximum of 30,000 profit units ("Profit Units") available under the plan. Awards of Profit Units generally vested in equal increments over a five-year period beginning on the first anniversary of the grant date of the Profit Units, subject to continued employment with the Company through each vesting date. If 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 and any vested Profit Units remained outstanding. If a participant 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 sum of (i) all net "Sale Proceeds" (as defined in the LTIP) received by Brookfield Capital IV L.P. and its affiliates ("Brookfield Capital 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 a Change in 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 May 2021 secondary offering of our common stock by Brookfield Capital IV constituted a Change in Control under the LTIP. A Change in Control under the LTIP is defined as, among 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 following a public offering of the Company’s stock, Brookfield Capital IV ceases to have a beneficial ownership interest in at least 30% of the Company’s outstanding voting securities (effective on the first of such date). Upon completion of the May 2021 secondary offering, Brookfield beneficially owned approximately 24% of the Company's outstanding voting securities. Accordingly, the Company settled the vested Profit Units in lump sum payments within 30 days following the Change in Control. In the second quarter 2021, the settlement of the Profit Units resulted in the recording of a pre-tax charge of $73.4 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, 2021, $71.4 million of the 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.
(13)Income Taxes
The following table summarizes the U.S. and non-U.S. components of income before provision for income taxes:
| | | | | | | | | | | | | | | | | |
| 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 | |
Provision for income taxes consists of the following:
| | | | | | | | | | | | | | | | | | |
| 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 from year to year is primarily due to the reduction in pre-tax income, the mix of worldwide earnings from various countries taxed at different rates and the U.S. taxation of GILTI. The years 2019 and 2021 also included the partial release of a valuation allowance recorded against the deferred tax asset related to certain foreign, U.S. federal and state tax attributes.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Provision for income taxes differed from the amount computed by applying the U.S. federal income tax rate of 21% for the years ended December 31, 2021, 2020 and 2019 to income before the 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 | |
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 at December 31, 2021 and 2020 are set forth in the following table:
| | | | | | | | | | | |
| 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 deferred tax assets are separately stated as deferred income taxes in the amount of $61.3 million as of December 31, 2021 and $63.2 million as of December 31, 2020. Net deferred tax liabilities are separately stated as deferred income taxes in the amount of $75.8 million at December 31, 2021 and $73.9 million at December 31, 2020.
At 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 our assessment, we have established and maintained valuation allowances on those net deferred tax assets. However, the recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.
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:
| | | | | |
| (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 the U.S. tax attributes. This positive evidence was primarily supplied by the Company exiting a cumulative loss period in the United States as well as sufficient U.S. current and forecasted taxable income that would utilize the U.S. tax attributes. As a result, a partial release (to reflect only the economic benefit of the attributes) of the valuation allowance against federal net operating losses and state losses was recorded in 2018, while a full release of the valuation allowance against the federal foreign tax credit carryforward, other federal deferred tax assets was also recorded. A valuation allowance of $35.8 million is included in the December 31, 2018 balance reflected above as there was not sufficient positive evidence that the deferred tax asset related to the U.S. federal net operating loss would generate more than its estimated economic benefit. This valuation allowance and the related deferred tax asset were subsequently released to the income statement in 2019. In 2020, the reduction in the valuation allowance resulted primarily from expirations of NOLs upon which a valuation allowance was previously recorded. In 2021, the decrease in valuation allowance was mainly attributable to changes in expected future utilization, state law changes and expiration of U.S. state NOL carryforward during the year.
As of December 31, 2021, we have a total foreign tax credit carryforward of $13.1 million. These tax credit carryforwards begin to expire in 2027. In addition, we have state net operating loss carryforwards of $239.6 million (net of federal benefit), which can be carried forward from five to 20 years. These state net operating loss carryforwards result in a deferred tax asset of $14.3 million as of December 31, 2021. We also have U.S. state tax credits of $0.1 million as of December 31, 2021. Our foreign loss carryforwards on a gross basis are $6.8 million and may be carried forward indefinitely.
As of December 31, 2021, we had unrecognized tax benefits of $0.1 million, which, if recognized, would have a favorable impact on our effective tax rate. No material amounts of accrued interest or penalties have been recorded as of December 31, 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, 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 $0.1 million may occur within 12 months due to settlements and the expiration of statutes of limitation.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2018 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. Other jurisdictions are generally closed for years prior to 2016.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.2 billion. Because $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 (Deficit).
Follow-on Offerings and Common Stock Repurchases
On December 5, 2019, GrafTech announced two separate transactions. The first was a Rule 144 secondary block trade in which Brookfield sold 11,175,927 shares of GrafTech common stock at a price of $13.125 per share to a broker-dealer who placed the shares with institutional and other investors. Separately, GrafTech entered into a share repurchase agreement with Brookfield to repurchase $250 million of stock from Brookfield at the arm'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%.
Brookfield 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.
We announced on July 31, 2019, that 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. 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 stock repurchase program.
As of December 31, 2021, we are authorized to repurchase up to $159 million in shares of our common stock under the stock repurchase program, inclusive of the amount remaining under the previous authorization.
Dividends
The Company paid 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.
Accumulated other comprehensive loss
The balance in our Accumulated other comprehensive loss 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) | |
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, 2021, 2020 and 2019. See Note 14, "Stockholders' Equity (Deficit)" for details of our common stock repurchases in 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| 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 by the weighted average number of common shares outstanding, which includes 130,624, 73,320 and 32,981 shares of participating securities in 2021, 2020 and 2019, respectively. Diluted earnings per share are calculated by dividing net income 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 1,499,128, 1,667,325 and 1,082,113 equivalent shares in 2021, 2020 and 2019, respectively, as these shares are anti-dilutive.
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(16) Other (Income) Expense, net
The following 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 | |
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 2, 2022, the Board of Directors declared a dividend of $0.01 per share of common stock to stockholders of record as of the close of business on February 28, 2022, to be paid on March 31, 2022.