GRAFTECH INTERNATIONAL LTD. The Company
We are a leading manufacturer of high-quality graphite electrode products essential to the production of EAF steel and other ferrous and nonferrous metals. We believe that we have the most competitive portfolio of low cost ultra-high power graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, our key raw material for graphite electrode manufacturing.
The environmental and economic advantages of electric arc furnace steel production position both that industry and the graphite electrode industry for continued long-term growth.
We believe
Operational and Commercial Update
Sales volume for the first quarter of 2023 was 16.9 thousand metric tons ("MT"),
consisting of 7.4 thousand MT of LTA volume and 9.5 thousand MT of non-LTA
volume, and decreased 61% compared to the first quarter of 2022, primarily
reflecting the residual impact of the suspension of our operations in Monterrey,
Mexico that began near the end of the third quarter of 2022. Although the
facility resumed production during the fourth quarter of 2022, the suspension
coincided with a key commitment window for customer purchases covering the first
six months of 2023. The resulting uncertainty during this timeframe limited our
ability to enter into new customer commitments for the first half of 2023. In
addition, the lower sales volume was partially attributable to softness in
graphite electrode demand.
For the first quarter of 2023, the weighted-average realized price for our LTA
volume was $9,000 per MT, a reduction of 6% compared to $9,600 per MT in the
first quarter of 2022. For our non-LTA volume, the weighted-average realized
price for graphite electrodes delivered and recognized in revenue in the first
quarter of 2023 was $6,000 per MT, consistent with the weighted-average realized
non-LTA price for 2022.
Production volume was 15.8 thousand MT in the first quarter of 2023, a decrease
of 66% compared to the first quarter of 2022, as we proactively reduced
production at our European graphite electrode manufacturing facilities to align
our production volume with our evolving demand outlook.
Outlook
The suspension of our operations inMonterrey, Mexico in late 2022 will have a significant impact on our sales volume through the end of the second quarter of 2023. In addition, we anticipate continued soft demand for graphite electrodes due to ongoing economic uncertainty and geopolitical conflict. Reflecting these factors, we estimate our sales volume for the second quarter of 2023 will be in the range of 24 thousand MT to 27 thousand MT, with non-LTA pricing expected to decline slightly from first quarter 2023 levels. In the second half of the year, we anticipate sales volume levels will further recover, as we move pastMonterrey suspension-driven uncertainty and anticipate that a gradual improvement in market conditions will strengthen demand for graphite electrodes. As a result, we currently estimate our sales volume for the full year of 2023 will be in the range of 100 thousand MT to 115 thousand MT. For the full year of 2023, we also continue to expect a significant year-over-year increase in our cash cost of goods sold per MT as fixed costs are being recognized over a smaller volume base and reflecting the full-year impact of higher raw material costs that increased throughout 2022. In response to higher input costs, we are closely managing our operating costs and capital expenditures, as well as our working capital levels. Looking ahead, we remain confident in our ability to overcome near-term challenges and are optimistic about the longer-term outlook for our business. We anticipate the steel industry's accelerating efforts to decarbonize will lead to increased adoption of the electric arc furnace method of steelmaking, driving long-term demand growth for graphite electrodes. We also anticipate the demand for petroleum needle coke, the key raw material we use to produce our graphite electrodes, to accelerate driven by its use to produce synthetic graphite for use in lithium-ion batteries for the growing electric vehicle market. We believe that the actions we are taking, supported by a distinct set of capabilities, including our vertical integration into petroleum needle coke production via our Seadrift facility, will optimally positionGrafTech to benefit from these sustainable industry tailwinds. 24 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Steel market capacity utilization rates have been as follows:
Q1 2023 Q4 2022 Q1 2022
Global (ex-China) capacity utilization rate(1) 65% 64% 70%
80%
(1) Source:World Steel Association , Metal Expert andGrafTech analysis, as ofApril 2023 (2) Source:American Iron and Steel Institute , as ofApril 2023 The table of estimated shipments of graphite electrodes under existing LTAs has been updated as follows to reflect our current expectations for the full years of 2023 and 2024: 2023 Outlook 2024 Outlook Estimated LTA volume(1) 27-31 13-16 Estimated LTA revenue(2)$235-$265 $100-$135 (3) (1) In thousands of MT (2) In millions (3) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs We recorded 7.4 thousand MT of LTA volume and$69.9 million of LTA revenue in the three months endedMarch 31, 2023 , and we expect to record 20 thousand to 24 thousand MT of LTA volume and approximately$165.0 million to$195.0 million of LTA revenue for the remainder of 2023. 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 years 2023 and through 2024, 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, force majeure notices, arbitrations, credit risk associated with certain customers facing financial challenges and customer demand related to contracted volume ranges. The estimates of LTA volume and revenue as set forth above in the immediately preceding table includes our current expectations of termination fees from our customers who have failed to meet certain obligations under their LTAs.
Capital Structure and Capital Allocation
As ofMarch 31, 2023 ,GrafTech had cash and cash equivalents of$135.4 million and gross debt of approximately$934.0 million , with these metrics relatively unchanged compared to the end of 2022. The Company's current capital allocation approach is focused on maintaining sufficient liquidity as we recover from the impact of the temporary suspension of our operations inMonterrey, Mexico , while making targeted investments to support long-term growth.
We continue to expect full year capital expenditures to be in the range of
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Condensed Consolidated Financial Statements in accordance with generally accepted accounting principles inthe United States ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our Company. Our "non-GAAP" financial measures consist of EBITDA, adjusted EBITDA, adjusted net (loss) income and adjusted (loss) earnings per share, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. Our key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. 25
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Key financial measures
Three Months Ended March 31,
(in thousands, except per share data) 2023 2022
Net sales $ 138,802 $ 366,245
Net (loss) income (7,369) 124,183
(Loss) earnings per share(1) (0.03) 0.47
EBITDA(2) 12,938
167,528
Adjusted net (loss) income(2) (5,549)
125,920
Adjusted (loss) earnings per share(1)(2) (0.02) 0.48
Adjusted EBITDA(2) 15,115 169,600
(1) (Loss) earnings per share represents diluted (loss) earnings per share.
Adjusted (loss) earnings per share represents adjusted diluted (loss) earnings
per share.
(2) Non-GAAP financial measure; see below for information and reconciliations of
EBITDA, adjusted EBITDA and adjusted net (loss) income to net (loss) income and
adjusted (loss) earnings per share to (loss) earnings per share, the most
directly comparable financial measures calculated and presented in accordance
with GAAP.
Key operating measures
In addition to measures of financial performance presented in accordance with
GAAP, we use certain operating metrics to analyze the performance of our
Company. The key operating metrics consist of sales volume, production volume,
production capacity and capacity utilization. These metrics align with
management's assessment of our revenue performance and profit margin, and will
help investors understand the factors that drive our profitability.
Sales volume reflects the total volume of graphite electrodes sold for which
revenue has been recognized during the period. For a discussion of our revenue
recognition policy, see "-Critical accounting policies-Revenue recognition" in
our Annual Report on Form 10-K. Sales volume helps investors understand the
factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period. Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary. Capacity utilization reflects production volume as a percentage of production capacity. Production volume, production capacity and capacity utilization help us understand the efficiency of our production, evaluate cost of goods sold and consider how to approach our contract initiative.
Three Months Ended March 31,
(in thousands, except utilization) 2023 2022
Sales volume (MT) 16.9 43.3
Production volume (MT)(1) 15.8 46.1
Total production capacity (MT)(2)(3) 58.0 58.0
Total capacity utilization(3)(4) 27 % 79 %
Production capacity excluding St. Marys (MT)(2)(5) 51.0 51.0
Capacity utilization excluding St. Marys(4)(5) 31 % 90 %
(1) Production volume reflects graphite electrodes we produced during the
period.
(2) Production capacity reflects expected maximum production volume during the
period depending on product mix and expected maintenance outage. Actual
production may vary.
(3) Includes graphite electrode facilities in Calais, France ; Monterrey, Mexico ;
Pamplona , Spain ; and St. Marys, Pennsylvania .
(4) Capacity utilization reflects production volume as a percentage of
production capacity.
(5) Our St. Marys, Pennsylvania facility graphitizes a limited number of
electrodes and pins sourced from our Monterrey, Mexico facility.
26
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIESResults of Operations
The Three Months Ended
The table presented in our period-over-period comparisons summarizes our
Condensed Consolidated Statements of Operations and illustrates key financial
indicators used to assess the consolidated financial results. Throughout this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Report ("MD&A"), insignificant changes may be deemed not
meaningful and are generally excluded from the discussion.
Three Months Ended March 31, Increase/
2023 2022 Decrease % Change
(Dollars in thousands)
Net sales $ 138,802 $ 366,245 $ (227,443) (62) %
Cost of goods sold 112,645 191,214 (78,569) (41) %
Gross profit 26,157 175,031 (148,874) (85) %
Research and development 1,192 880 312 35 %
Selling and administrative expenses 22,151 21,254 897 4 %
Operating income 2,814 152,897 (150,083) (98) %
Other expense (income), net 653 (197) 850 (431) %
Interest expense 12,806 9,212 3,594 39 %
Interest income (372) (98) (274) 280 %
(Loss) income before (benefit) provision
for income taxes (10,273) 143,980 (154,253) (107) %
(Benefit) provision for income taxes (2,904) 19,797 (22,701) (115) %
Net (loss) income $ (7,369) $ 124,183 $ (131,552) (106) %
Net sales decreased $227.4 million , or 62%, compared to the first quarter of
2022, primarily reflecting lower sales volume, as well as a shift in the mix of
our business from volume derived from LTAs to volume derived from non-LTAs.
Cost of goods sold decreased $78.6 million , or 41%, compared to the first
quarter of 2022, primarily reflecting lower sales volume, partially offset by an
increase in our costs as higher priced inventory was sold during the first
quarter of 2023, reflecting the full-year impact of raw material, energy and
freight cost increases that occurred throughout 2022. In addition, due to the
reduced production levels in the first quarter of 2023, we recorded excess fixed
manufacturing costs of approximately $12.6 million , including $2.8 million of
depreciation, that would have otherwise been inventoried.
Selling and administrative expenses increased $0.9 million , or 4%, compared to
the first quarter of 2022, primarily reflecting increased administrative
spending, partially offset by reduced selling expenses driven by reduced sales
volume.
Interest expense increased $3.6 million , or 39%, compared to the first quarter
of 2022 primarily due the recognition of a $1.4 million mark-to-market loss in
the first quarter of 2023, compared to a $3.9 million mark-to-market gain
recorded in the first quarter of 2022 related to our de-designated interest rate
swap.
The following table summarizes the (benefit) provision for income taxes:
Three Months Ended March 31,
2023 2022
(Dollars in thousands)
(Benefit) provision for income taxes $ (2,904) $ 19,797 Pre-tax (loss) income (10,273) 143,980 Effective tax rate 28.3 % 13.7 % 27
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The reduction in the provision for income taxes decreased in the first quarter
of 2023 compared to the first quarter of 2022 primarily due to a decrease in
pre-tax income.
The effective tax rate for the first quarter of 2023 varied from the U.S.
statutory tax rate of 21% primarily due to worldwide earnings from various
countries taxed at different rates. The effective tax rate for the first quarter
of 2022 was lower than the U.S. statutory tax rate of 21% primarily due to
worldwide earnings from various countries taxed at different rates, which was
partially offset by the net combined impact related to the U.S. taxation of
GILTI and FTCs.
Effects of Changes in Currency Exchange Rates
When the currencies of non-U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to theU.S. dollar, this has the effect of reducing (or increasing) theU.S. dollar equivalent cost of goods sold and other expenses with respect to those facilities. In certain countries in which we have manufacturing facilities, and in certain export markets, we sell in currencies other than theU.S. dollar. Accordingly, when these currencies increase (or decline) in value relative to theU.S. dollar, this has the effect of increasing (or reducing) net sales. The result of these effects is to increase (or decrease) operating and net (loss) income. Many of the non-U.S. countries in which we have a manufacturing facility have been subject to significant economic and political changes, which have significantly impacted currency exchange rates. We cannot predict changes in currency exchange rates in the future or whether those changes will have net positive or negative impacts on our net sales, cost of goods sold or net (loss) income. The impact of these changes in the average exchange rates of other currencies against theU.S. dollar on our net sales was a decrease of$1.2 million for the first quarter endedMarch 31, 2023 , compared to the same period of 2022. The impact of these changes on our cost of goods sold was an increase of$2.6 million for the three months endedMarch 31, 2023 , compared to the same period in 2022. We have in the past and may in the future use various financial instruments to manage certain exposures to risks caused by currency exchange rate changes, as described under "Part I, Item 3-Quantitative and Qualitative Disclosures about Market Risk."
Liquidity and Capital Resources
Our sources of funds have consisted principally of cash flow from operations and debt, including our credit facilities (subject to continued compliance with the financial covenants and representations). Our uses of those funds (other than for operations) have consisted principally of dividends, capital expenditures, scheduled debt repayments, optional debt repayments, stock repurchases and other obligations. Disruptions in theU.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future. We believe that we have adequate liquidity to meet our needs for at least the next twelve months and for the foreseeable future thereafter. As ofMarch 31, 2023 , we had liquidity of$462.4 million , consisting of$327.0 million of availability under our 2018 Revolving Credit Facility and cash and cash equivalents of$135.4 million . We remain subject to continued compliance with the financial covenant in our 2018 Revolving Credit Facility (see below and Note 4, "Debt and Liquidity") and our future operating performance could result in the reduction of the availability under our 2018 Revolving Credit Facility. We expect our operating cash flow to be positive for 2023 and do not anticipate the need to borrow against our 2018 Revolving Credit Facility. We had gross long-term debt of$933.9 million and gross short-term debt of$0.1 million as ofMarch 31, 2023 . As ofDecember 31, 2022 , we had liquidity of$461.6 million consisting of$327.0 million available under our 2018 Revolving Credit Facility (subject to continued compliance with the financial covenants and representations) and cash and cash equivalents of$134.6 million . We had gross long-term debt of$933.9 million and gross short-term debt of$0.1 million as ofDecember 31, 2022 . As ofMarch 31, 2023 andDecember 31, 2022 ,$80.0 million and$92.3 million , respectively, of our cash and cash equivalents were located outside of theU.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends cannot exceed the amount of retained and current earnings. Upon repatriation to theU.S. , the foreign source portion of dividends we receive from our foreign subsidiaries are not subject toU.S. federal income tax because the amounts were either previously taxed or are exempted from tax by Section 245A of the Internal Revenue Service Code (the "Code"). 28 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES Cash flow and plans to manage liquidity. Our cash flow typically fluctuates significantly between quarters due to various factors. These factors include customer order patterns, fluctuations in working capital requirements, timing of tax and interest payments and other factors.
Debt Structure
We had total availability under the 2018 Revolving Credit Facility of$327.0 million as ofMarch 31, 2023 andDecember 31, 2022 . The balance consisted of the$330.0 million limit reduced by$3.0 million of outstanding letters of credit in both periods.
2018 Term Loan and 2018 Revolving Credit Facility
InFebruary 2018 , the Company entered into the 2018 Credit Agreement, which provides for (i) the$2.3 billion 2018 Term Loan Facility after giving effect to theJune 2018 amendment (the "First Amendment") that increased the aggregate principal amount of the 2018 Term Loan Facility from$1.5 billion to$2.3 billion and (ii) the$330 million 2018 Revolving Credit Facility after giving effect to theMay 2022 amendment that increased the revolving commitments under the 2018 Credit Agreement by$80.0 million from$250.0 million . 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 andSwissco , the "Co-Borrowers") are co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the 2018 Revolving Credit Facility mature onFebruary 12, 2025 andMay 31, 2027 , 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 inFebruary 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 Term SOFR Rate and Adjusted EURIBOR Rate (each, as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.00% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.00% 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 byGrafTech Luxembourg I S.à r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary ofGrafTech , Luxembourg HoldCo, andSwissco (collectively, the "Guarantors") with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is aControlled Foreign Corporation (within the meaning of Section 956 of 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 ofGrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is aControlled 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 ofGrafTech that is aControlled 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 aControlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is aControlled Foreign Corporation , and (ii) security interests in certain receivables and personal property of each Guarantor that is aControlled 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 endedDecember 31, 2019 , 75% of 29 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES 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 ofMarch 31, 2023 , 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 toGrafTech 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 requiresGrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00 to 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$35.0 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. We were in compliance with all of our debt covenants as ofMarch 31, 2023 andDecember 31, 2022 .
2020 Senior Secured Notes
InDecember 2020 , GrafTech Finance issued$500 million aggregate principal amount of the 2020 Senior Secured Notes at an issue price of 100% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933 (the "Securities Act") and to non-U.S. persons outsidethe United States under Regulation S under the Securities Act. The 2020 Senior Secured Notes were issued pursuant to the Indenture among GrafTech Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the Company named therein as guarantors andU.S. Bank National Association , as trustee and notes collateral agent. The 2020 Senior Secured Notes are guaranteed on a senior secured basis by the Company and all of its existing and future direct and indirectU.S. subsidiaries that guarantee, or borrow under, the credit facilities under its 2018 Credit Agreement. The 2020 Senior Secured Notes are secured on a pari passu basis by the collateral securing the term loans under the 2018 Credit Agreement.GrafTech Finance, the Company and the other guarantors granted a security interest in such collateral, consisting of substantially all of their respective assets, as security for the obligations of GrafTech Finance, the Company and the other guarantors under the 2020 Senior Secured Notes and the Indenture pursuant to a collateral agreement, dated as ofDecember 22, 2020 (the "Collateral Agreement"), among GrafTech Finance, the Company, the other subsidiaries of the Company named therein as grantors andU.S. Bank National Association , as collateral agent. The 2020 Senior Secured Notes bear interest at the rate of 4.625% per annum, which accrues fromDecember 22, 2020 and is payable in arrears onJune 15 andDecember 15 of each year, commencing onJune 15, 2021 . The 2020 Senior Secured Notes will mature onDecember 15, 2028 , unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the Indenture. GrafTech Finance may redeem some or all of the 2020 Senior Secured Notes at the redemption prices and on the terms specified in the Indenture. If the Company or GrafTech Finance experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, thenGrafTech Finance must offer to repurchase the 2020 Senior Secured Notes on the terms set forth in the Indenture. The Indenture contains certain covenants that, among other things, limit the Company's ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. The Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or GrafTech Finance, all outstanding 2020 Senior Secured Notes will become due and payable immediately without further action or notice. If any other 30 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES 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.
The entirety of the 2020 Senior Secured Notes proceeds was used to pay down a portion of our 2018 Term Loan Facility.
Uses of Liquidity
InJuly 2019 , our Board of Directors authorized a program to repurchase up to$100.0 million of our outstanding common stock. InNovember 2021 , our Board of Directors authorized the repurchase of an additional$150.0 million of stock repurchases under this program. 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. In the first three months of 2023, we did not repurchase any shares of our common stock. As ofMarch 31, 2023 , we had$99.0 million remaining under our stock repurchase authorization. We currently pay a quarterly dividend of$0.01 per share, or$0.04 on an annualized basis. There can be no assurance that we will pay dividends in the future in these amounts or at all. Our Board of Directors may change the timing and amount of any future dividend payments or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by our Board of Directors. In 2022, we voluntarily repaid$110.0 million of principal of our 2018 Term Loan Facility. There were no voluntary repayments of debt during the first quarter of 2023. Potential uses of our liquidity include dividends, share repurchases, capital expenditures, scheduled debt repayments, optional debt repayments, refinancing of our credit facilities and other general purposes. Any such potential uses of our liquidity may be funded by existing available liquidity, the incurrence of new secured or unsecured loans or capital market issuances. We continue to monitor the loan and debt capital markets for opportunities to proactively refinance or otherwise extend the maturity of our 2018 Term Loan Facility. An improving economy, while resulting in improved results of operations, could increase our cash requirements to purchase inventories, make capital expenditures and fund payables and other obligations until increased accounts receivable are converted into cash. A downturn, including any recession or potential resurgence of the COVID-19 pandemic, could significantly and negatively impact our results of operations and cash flows, which, coupled with increased borrowings, could negatively impact our credit ratings, our ability to comply with debt covenants, our ability to secure additional financing and the cost of such financing, if available. In order to seek to minimize our credit risks, we may reduce our sales of, or refuse to sell (except for prepayment, cash on delivery or under letters of credit or parent guarantees), our products to some customers and potential customers. Our unrecovered trade receivables worldwide have not been material during the last two years individually or in the aggregate. We manage our capital expenditures by taking into account quality, plant reliability, safety, environmental and regulatory requirements, prudent or essential maintenance requirements, global economic conditions, available capital resources, liquidity, long-term business strategy and return on invested capital for the relevant expenditures, cost of capital and return on invested capital of the Company as a whole and other factors. Capital expenditures totaled$25.3 million in the three months endedMarch 31, 2023 . We continue to expect full-year capital expenditures to be in the range of$55.0 million to$60.0 million for 2023. In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our 2018 Revolving Credit Facility, to the extent available. The Company also maintains access to capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity. 31 --------------------------------------------------------------------------------
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Cash Flows
The following table summarizes our cash flow activities:
Three Months
Ended March 31,
2023 2022
(in thousands)
Cash flow provided by (used in):
Operating activities $ 24,798 $ 146,316
Investing activities (25,179) (16,782)
Financing activities 807 (103,517)
Net change in cash and cash equivalents
Operating Activities
Cash provided by operating activities totaled$24.8 million in the first three months of 2023 compared to$146.3 million in the prior-year period. The decrease in operating cash flow was primarily due to the$131.6 million reduction in net income in the first quarter of 2023 versus the first quarter of 2022. Partially offsetting reduced net income was an increase in cash provided by working capital of$13.1 million . Cash flow provided by accounts receivable increased$63.6 million , compared to the first three months of 2022, primarily due to reduced sales volumes. Cash flow provided by prepaid expenses and other current assets increased$17.9 million , compared to the first three months of 2022, primarily due to timing of payments. Cash flow used for inventories decreased$7.3 million , compared to the first three months of 2022, driven by reduced volume. Cash flow used for accounts payable and accruals was$12.5 million in the first three months of 2023 compared to a source of cash of$57.0 million in the first three months of 2022 primarily due to a reduced amount of customer pre-payments in the first quarter of 2023 versus the first quarter of 2022.
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities was$0.8 million for the three months endedMarch 31, 2023 compared to$103.5 million used in financing activities in the first three months of 2022. The decrease was primarily due to$70.0 million of debt repayments and$30.0 million of stock repurchases made in the first three months of 2022, which did not re-occur in the first quarter 2023.
Related Party Transactions
We have engaged in transactions with affiliates or related parties in the three months endedMarch 31, 2023 and we expect to continue to do so in the future. These transactions include ongoing obligations under the Tax Receivable Agreement, Stockholders Rights Agreement and Registration Rights Agreement, each with Brookfield.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 4, "Debt and Liquidity" in the Notes to the Condensed Consolidated Financial Statements.
Non-GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we
have provided certain financial measures that are not in accordance with GAAP.
EBITDA, adjusted EBITDA, adjusted net (loss) income, adjusted (loss) earnings
per share, free cash flow, adjusted free cash flow and cash cost of goods sold
per MT are non-GAAP financial measures. We define EBITDA, a nonGAAP financial
measure, as net (loss) income plus interest expense, minus interest income, plus
income taxes and depreciation and amortization. We define adjusted EBITDA as
EBITDA plus any pension and
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
other post-employment benefit ("OPEB") plan expenses (benefits), noncash losses
from foreign currency remeasurement of nonoperating assets and liabilities in
our foreign subsidiaries where the functional currency is the U.S. dollar,
stock-based compensation expense, non-cash fixed asset write-offs and related
party payable - Tax Receivable Agreement adjustments. Adjusted EBITDA is the
primary metric used by our management and our Board of Directors to establish
budgets and operational goals for managing our business and evaluating our
performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it
is useful to present to investors, because we believe that it facilitates
evaluation of our periodtoperiod operating performance by eliminating items
that are not operational in nature, allowing comparison of our recurring core
business operating results over multiple periods unaffected by differences in
capital structure, capital investment cycles and fixed asset base. In addition,
we believe adjusted EBITDA and similar measures are widely used by investors,
securities analysts, ratings agencies, and other parties in evaluating companies
in our industry as a measure of financial performance and debtservice
capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments, including any capital expenditure requirements to augment or replace our capital assets;
•adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
•adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
•adjusted EBITDA does not reflect expenses or benefits relating to our pension and OPEB plans;
•adjusted EBITDA does not reflect the noncash gains or losses from foreign currency remeasurement of nonoperating assets and liabilities in our foreign subsidiaries where the functional currency is theU.S. dollar;
•adjusted EBITDA does not reflect stock-based compensation expense;
•adjusted EBITDA does not reflect the non-cash write-off of fixed assets;
•adjusted EBITDA does not reflect related party payable - Tax Receivable Agreement adjustments; and
•other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
We define adjusted net (loss) income, a nonGAAP financial measure, as net
(loss) income and exclude the items used to calculate adjusted EBITDA, less the
tax effect of those adjustments. We define adjusted (loss) earnings per share, a
nonGAAP financial measure, as adjusted net (loss) income divided by the
weighted average diluted common shares outstanding during the period. We believe
adjusted net (loss) income and adjusted (loss) earnings per share are useful to
present to investors because we believe that they assist investors'
understanding of the underlying operational profitability of the Company.
Free cash flow and adjusted free cash flow, non-GAAP financial measures, are
metrics used by our management and our Board of Directors to analyze cash flows
generated from operations. We define free cash flow as net cash provided by
operating activities less capital expenditures. We define adjusted free cash
flow as free cash flow adjusted by payments made or received from the settlement
of interest rate swap contracts and payments of the Change in Control charges
that were triggered as a result of the ownership of our largest stockholder
falling below 30% of our total outstanding shares. We believe these free cash
flow metrics are useful to present to investors because we believe that they
facilitate comparison of the Company's performance with its competitors. For
purposes of this release, 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 (the "Change
in Control").
We define cash cost of goods sold per MT as cost of goods sold less depreciation
and amortization and less cost of goods sold associated with the portion of our
sales that consists of deliveries of by-products of the manufacturing processes,
with this total divided by our sales volume measured in MT. We believe this is
an important measure as it is used by our management and Board of Directors to
evaluate our costs on a per MT basis.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In evaluating EBITDA, adjusted EBITDA, adjusted net (loss) income and adjusted
(loss) earnings per share, you should be aware that in the future, we will incur
expenses similar to the adjustments in the reconciliations presented below. Our
presentations of EBITDA, adjusted EBITDA, adjusted net (loss) income and
adjusted (loss) earnings per share, should not be construed as suggesting that
our future results will be unaffected by these expenses or any unusual or
nonrecurring items. When evaluating our performance, you should consider
EBITDA, adjusted EBITDA, adjusted net (loss) income and adjusted (loss) earnings
per share, alongside other measures of financial performance and liquidity,
including our net (loss) income and (loss) earnings per share, respectively, and
other GAAP measures.
The following tables reconcile our non-GAAP key financial measures to the most directly comparable GAAP measures:
Reconciliation of Net (Loss) Income to Adjusted Net (Loss) Income
Three Months Ended
March 31,
2023 2022
(Dollars in thousands, except per
share data)
Net (loss) income Diluted (loss) income per common share: Net (loss) income per share$ (0.03) $ 0.47 Weighted average shares outstanding
256,974,904 262,657,799
Adjustments, pre-tax: Pension and OPEB plan expenses(1) 918 551 Non-cash losses on foreign currency remeasurement(2) 447 1,236 Stock-based compensation expense(3) 796 465 Related party payable - Tax Receivable Agreement adjustment(4) 16 (180) Total non-GAAP adjustments pre-tax 2,177 2,072 Income tax impact on non-GAAP adjustments(5) 357 335 Adjusted net (loss) income
(1)Net periodic benefit cost for our pension and OPEB plans. (2)Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is theU.S. dollar. (3)Non-cash expense for stock-based compensation grants. (4)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. (5)The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates. 34 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES Reconciliation of (Loss) Earnings per share to Adjusted (Loss) Earnings per share Three Months Ended March 31, 2023 2022 (Loss) Earnings per share$ (0.03) $ 0.47 Adjustments per share: Pension and OPEB plan expenses(1) 0.01 - Non-cash losses on foreign currency remeasurement(2) - 0.01 Stock-based compensation expense(3) - - Related party payable - Tax Receivable Agreement adjustment(4) - - Total non-GAAP adjustments pre-tax per share 0.01 0.01 Income tax impact on non-GAAP adjustments per share(5) - - Adjusted (loss) earnings per share
(1)Net periodic benefit cost for our pension and OPEB plans. (2)Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is theU.S. dollar. (3)Non-cash expense for stock-based compensation grants. (4)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. (5)The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates. Reconciliation of Net (Loss) Income to Adjusted EBITDA Three Months Ended March 31, 2023 2022 (Dollars in thousands) Net (loss) income$ (7,369) $ 124,183 Add: Depreciation and amortization 10,777 14,434 Interest expense 12,806 9,212 Interest income (372) (98) Income taxes (2,904) 19,797 EBITDA 12,938 167,528 Adjustments: Pension and OPEB plan expenses(1) 918 551 Non-cash losses on foreign currency remeasurement(2) 447 1,236 Stock-based compensation expense(3) 796 465 Related party payable - Tax Receivable Agreement adjustment(4) 16 (180) Adjusted EBITDA$ 15,115 $ 169,600 (1)Net periodic benefit cost for our pension and OPEB plans. (2)Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is theU.S. dollar. (3)Non-cash expense for stock-based compensation grants. (4)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. 35 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow and Adjusted Free Cash Flow Three Months Ended March 31, 2023 2022 (Dollars in thousands) Net cash provided by operating activities$ 24,798 $ 146,316 Capital expenditures (25,271) (16,855) Free cash flow (473) 129,461 Interest rate swap settlements(1) 3,630 (887) Change in Control payment(2) - 443 Adjusted free cash flow$ 3,157 $ 129,017 (1) Receipt (payment) of cash related to the monthly settlement of our outstanding interest rate swap contracts. (2) In the second quarter of 2021, we incurred pre-tax Change in Control charges of$88 million as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our total shares outstanding. Of the$88 million in pre-tax Change in Control charges,$73 million were cash and$15 million were non-cash. An aggregate of$72 million of the cash charges have been paid through the first quarter of 2023 and an additional$1 million will be paid in subsequent quarters, as a result of the timing of related payroll tax payments.
Reconciliation of Cost of Goods Sold to Cash Cost of Goods Sold per MT
Three Months Ended March 31,
2023 2022
(Dollars in thousands)
Cost of goods sold $ 112,645 $ 191,214
Less:
Depreciation and amortization(1) 9,065 12,733
Cost of goods sold - by-products and other(2) 8,332 12,469
Cash cost of goods sold 95,248 166,012
Sales volume (in thousands of MT) 16.9 43.3
Cash cost of goods sold per MT $
5,636
(1) Reflects the portion of depreciation and amortization that is recognized in cost of goods sold. (2) Primarily reflects cost of goods sold associated with the portion of our sales that consists of deliveries of by-products of the manufacturing processes.
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