Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the accompanying notes and other financial information appearing elsewhere in this Annual Report. Discussion and analysis regarding our financial condition and results of operations for 2020 as compared to 2019 is included in Item 7 of our Annual Report for the year-ended December 31, 2020, filed with the SEC on February 23, 2021. Information in this section is intended to assist the reader in obtaining an understanding of our Consolidated Financial Statements, the changes in certain key items in those financial statements from year-to-year, the primary factors that accounted for those changes, any known trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as how certain accounting principles affect our Consolidated Financial Statements. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this Annual Report.
Overv iew
We are a leading manufacturer of high-quality graphite electrode products essential to the production of EAF steel and other ferrous and non‑ferrous metals. We believe that we have the most competitive portfolio of low‑cost UHP graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. Between 1984 and 2011, EAF steelmaking was the fastest‑growing segment of the steel sector, with production increasing at an average rate of 3.5% per year, based on WSA data. Historically, EAF steel production has grown faster than the overall steel market due to the greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature of EAF steelmaking. This trend was partially reversed between 2011 and 2015 due to global steel production overcapacity driven largely by Chinese BOF steel production. Beginning in 2016, efforts by the Chinese government to restructure China’s domestic steel industry have led to limits on BOF steel production and lower export levels, and developed economies, which typically have much larger EAF steel industries, have instituted a number of trade policies in support of domestic steel producers. In response to this increased demand, we modified our commercial strategy and executed LTAs with our customers. Since 2000, EAF production has grown at an average rate of 2.7%.
We service customers at over 300 locations across the globe. In the second half of 2020, we began to see a measured recovery in the global steel markets from the initial downturns resulting from the then challenging market conditions, with each region recovering at different rates. This recovery continued through 2021 and had a positive influence on graphite electrode demand. By the first quarter of 2021, both the global (ex-China) and U.S. steel market capacity utilization rates had surpassed 73%. These increased utilization rates continued through 2021, particularly in the United States.
The commercial team has worked diligently in 2021 to achieve solid results in the current environment. Full year 2021 sales volumes were 167,000 MT, consisting of LTA volumes of 110,000 MT and non-LTA volumes of 57,000 MT.
During the fourth quarter of 2021, our average price from LTAs was approximately $9,400 per MT and our average price for non-LTA business was approximately $5,000 per MT. Our average non-LTA graphite electrode price increased 10% sequentially from the third quarter of 2021.
Market prices for graphite electrodes began to increase in the first quarter of 2021, as steel producers' capacity utilization rates increased and they worked through carryover graphite electrode inventories from 2020. There is a lag between the time we negotiate price for non-LTA sales and when our electrodes are delivered and recognized in revenue, which depressed our non-LTA prices during 2021. Prices increased during the second quarter and throughout the remainder of 2021. Prices for non-LTA business reset on January 1, 2022 and we expect our average first quarter non-LTA prices to increase an additional 17 to 20% over the fourth quarter.
In parallel, we expect our costs to increase in 2022, driven by recent global inflationary pressures, particularly for third party needle coke, energy and freight. While we are anticipating our first quarter 2022 costs to increase 7 to 9% over the fourth quarter 2021, we expect further increases after the first quarter to be lower in magnitude as we continue to take steps to mitigate these cost increases.
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Capital structure and capital allocation
As of December 31, 2021, we had cash and cash equivalents of $57.5 million and total debt of approximately $1.0 billion. We continue to make progress in reducing our long-term debt, repaying $100 million in the fourth quarter, for a total debt repayment of $400 million in 2021.
We are committed to delivering value to our stockholders through our disciplined capital allocation strategy. In 2022, we will continue to focus on investing in our business, strengthening our balance sheet and making opportunistic purchases under the remaining $159 million stock repurchase authorization. Our capital expenditures in 2022 are focused on specific, highly targeted capital investments in operational improvement activities and are expected to be in the range of $70 and $80 million.
Industry conditions
The graphite electrode industry has historically followed the growth of the EAF steel industry and, to a lesser extent, the steel industry as a whole, which has been highly cyclical and affected significantly by general economic conditions. Historically, EAF steel production has grown faster than the overall steel market due to the greater resilience, more variable cost structure, lower capital intensity and more environmentally friendly nature of EAF steelmaking.
Increased demand for petroleum needle coke in 2018 and 2019 led to pricing increases in those years. Needle coke prices began to retreat in the second half of 2019 and continued to decline over the course of 2020. The price of needle coke increased throughout 2021, and we expect further increases in 2022. Graphite electrodes have typically been priced at a spread to petroleum needle coke. We believe that our substantial vertical integration into petroleum needle coke through our ownership of Seadrift provides a significant cost advantage relative to our competitors. We currently anticipate utilizing all of our needle coke internally, and will supplement with third-party purchases.
Outlook
Our estimated shipments of graphite electrodes for the final year of the initial term under our LTAs and for the years 2023 through 2024 are as follows:
2022 2023 through 2024
Estimated LTA volume (1)
95-105 35-45
Estimated LTA revenue (2)
$910-$1,010 $350-$450 (3)
(1) In 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
Components of results of operations
Net sales
Net sales reflect sales of our products, including graphite electrodes and associated by‑products. Several factors affect net sales in any period, including general economic conditions, competitive conditions, customer inventory levels, scheduled plant shutdowns by customers, national vacation practices, changes in customer production schedules in response to seasonal changes in energy costs, weather conditions, strikes and work stoppages at customer plants and changes in customer order patterns including those in response to the announcement of price increases or price adjustments.
Revenue is recognized when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. See Note 2, "Revenue from Contracts with Customers" to the Consolidated Financial Statements for more information. Our first quarter is historically the weakest sales quarter.
Cost of sales
Cost of sales includes the costs associated with products invoiced during the period as well as non‑inventoried manufacturing overhead costs and outbound transportation costs. Cost of sales includes all costs incurred at our production facilities to make products saleable, such as raw materials, energy costs, direct labor and indirect labor and facilities costs, including purchasing and receiving costs, plant management, inspection costs, product engineering and internal transfer costs. In addition, all depreciation associated with assets used to produce products and make them saleable is included in cost of sales.
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Direct labor costs consist of salaries, benefits, the service cost component of our pension and other post-employment benefit ("OPEB") plans and other personnel‑related costs for employees engaged in the manufacturing of our products.
Inventory valuation
Inventories are stated at the lower of cost or market. Cost is principally determined using the “first‑in, first‑out” (“FIFO”) and average cost, which approximates FIFO, methods. Elements of cost in inventory include raw materials, energy costs, direct labor, manufacturing overhead and depreciation of the manufacturing fixed assets. We allocate fixed production overheads to the costs of conversion based on normal capacity of the production facilities. We recognize abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) as current period charges. Market, or net realizable value, is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
Research and development
We conduct our R&D both independently and in conjunction with our strategic suppliers, customers and others. Expenditures relating to the development of new products and processes, including improvements to existing products, are expensed as incurred.
Selling and administrative expenses
Selling and administrative expenses include salaries, benefits and other personnel-related costs for employees engaged in sales and marketing, customer technical services, engineering, finance, information technology, human resources and executive management. Other costs include outside legal and accounting fees, risk management (insurance), global operational excellence, global supply chain, in‑house legal, the service cost component of our pension and OPEB plans, share‑based compensation and certain other administrative and global resources costs.
Other (income) expense, net
Other (income) expense, net consists of a gain related to the settlement of a value-added tax matter in Brazil, the non-service cost components of our pension and OPEB plans, including a “mark‑to‑market adjustment," which represents actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings these actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year. In addition, other (income) expense, net includes the impact of foreign currency on non‑operating assets and liabilities and other miscellaneous non-operating income and expense.
Related party Tax Receivable Agreement expense (benefit)
Related party Tax Receivable Agreement (benefit) expense represents our benefit or expense associated with Brookfield's right, as sole pre-IPO stockholder, to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO.
Interest expense
Interest expense consists primarily of interest expense on our 2018 Term Loan Facility, 2018 Revolving Credit Facility, 2020 Senior Secured Notes, amortization of debt issuance costs and accretion of original issue discounts, as well as the settlement losses (gains) on our interest rate swaps.
Effects of changes in currency exchange rates
When the currencies of non‑U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of sales and other expenses with respect to those facilities. In certain countries in which we have manufacturing facilities, and in certain export markets, we sell in currencies other than the U.S. dollar. Accordingly, when these currencies increase (or decline) in value relative to the U.S. dollar, this has the effect of increasing (or reducing) net sales. The result of these effects is to increase (or decrease) operating and net income.
The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our net sales was an increase of $5.5 million f or the year ended December 31, 2021, an increase of $3.6 million for the year ended December 31, 2020, and a decrease of $6.9 million for the year ended December 31, 2019.
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The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our cost of sales was an increase of $10.1 million for the year ended December 31, 2021, and decreases of $4.9 million and $9.1 million for the years ended December 31, 2020 and 2019, respectively.
As part of our cash management, we also have intercompany loans between our subsidiaries. These loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains or losses in other (income) expense, net on the Consolidated Statements of Operations.
We have in the past and may in the future use various financial instruments to manage certain exposures to risks caused by currency exchange rate changes, as described under “Quantitative and Qualitative Disclosures about Market Risk."
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our Company. The “non‑GAAP” financial measures consist of EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization.
Key financial measures
For the year ended December 31,
(in thousands, except per share amounts) 2021 2020
Net sales $ 1,345,788 $ 1,224,361
Net income 388,330 434,374
Earnings per share (1)
1.46 1.62
EBITDA (2)
590,010 669,332
Adjusted net income (2)
464,585 422,512
Adjusted earnings per share (1)(2)
1.74 1.58
Adjusted EBITDA (2)
669,940 658,946
(1) Earnings per share represents diluted earnings per share. Adjusted earnings per share represents adjusted diluted earnings per share.
(2) Non-GAAP financial measures; see below for information and reconciliations of EBITDA, adjusted EBITDA and adjusted net income to net income and adjusted EPS to EPS, the most directly comparable financial measures calculated and presented in accordance with GAAP.
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 this section. Sales volume helps investors understand the factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period. Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary. Capacity utilization reflects production volume as a percentage of production capacity. Production
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volume, production capacity and capacity utilization help us understand the efficiency of our production, evaluate cost of sales and consider how to approach our contract initiative.
For the year ended December 31,
(in thousands) 2021 2020
Sales volume (MT) (1)
167 135
Production volume (MT) (2)
165 134
Total production capacity (3)(4)
230 230
Total capacity utilization (4)(5)
72 % 58 %
Production capacity excluding St. Marys (MT) (3)(6)
202 202
Capacity utilization excluding St. Marys (5)(6)
82 % 66 %
(1) Sales volume reflects only graphite electrodes manufactured by GrafTech.
(2) Production volume reflects graphite electrodes we produced during the period.
(3) Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary.
(4) Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; Pamplona, Spain; and St. Marys, Pennsylvania.
(5) Capacity utilization reflects production volume as a percentage of production capacity.
(6) In the first quarter of 2018, our St. Marys, Pennsylvania facility began graphitizing a limited amount of electrodes sourced from our Monterrey, Mexico facility.
Non-GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we have provided certain financial measures that are not in accordance with GAAP. EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS are non-GAAP financial measures. We define EBITDA, a non‑GAAP financial measure, as net income or loss plus interest expense, minus interest income, plus income taxes and depreciation and amortization. We define adjusted EBITDA as EBITDA plus any pension and other post-employment benefit (OPEB) plan expenses, adjustments for public offerings and related expenses, non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar, related party payable - tax receivable agreement adjustments, stock-based compensation, non‑cash fixed asset write‑offs, value-added tax credit gains in Brazil and Change in Control charges that were triggered as a result of the ownership of our largest stockholder falling below 30% of our total outstanding shares. For purposes of this section, a "Change in Control" occurred when Brookfield and any affiliates thereof ceased to own stock of the Company that constitutes at least thirty percent (30%) or thirty-five percent (35%), as applicable, of the total fair market value or total voting power of the stock of the Company. Adjusted EBITDA is the primary metric used by our management and our Board of Directors to establish budgets and operational goals for managing our business and evaluating our performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period‑to‑period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt‑service capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments, including any capital expenditure requirements to augment or replace our capital assets;
• adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
• adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
• adjusted EBITDA does not reflect expenses relating to our pension and OPEB plans;
• adjusted EBITDA does not reflect the non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar;
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• adjusted EBITDA does not reflect public offerings and related expenses;
• adjusted EBITDA does not reflect related party payable - Tax Receivable Agreement adjustments;
• adjusted EBITDA does not reflect stock-based compensation or the non‑cash write‑off of fixed assets;
• adjusted EBITDA does not reflect gains on a value-added tax matter in Brazil;
• adjusted EBITDA does not reflect the Change in Control charges; and
• other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
We define adjusted net income, a non‑GAAP financial measure, as net income or loss and excluding the items used to calculate adjusted EBITDA, less the tax effect of those adjustments. We define adjusted EPS, a non‑GAAP financial measure, as adjusted net income divided by the weighted average of diluted common shares outstanding during the period. We believe adjusted net income and adjusted EPS are useful to present to investors because we believe that they assist investors’ understanding of the underlying operational profitability of the Company.
In evaluating EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, you should be aware that in the future, we will incur expenses similar to the adjustments in the reconciliation presented below, other than the Change in Control charges. Our presentations of EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non‑recurring items. When evaluating our performance, you should consider EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, alongside other measures of financial performance and liquidity, including our net income (loss), EPS, respectively, and other GAAP measures.
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The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures:
Reconciliation of Net Income to Adjusted Net Income For the year ended December 31,
2021 2020
Net income $ 388,330 $ 434,374
Diluted income per common share:
Net income per share $ 1.46 $ 1.62
Weighted average shares outstanding 266,317,194 267,930,644
Net income $ 388,330 $ 434,374
Adjustments, pre-tax:
Pension and OPEB plan (benefits) expenses (1)
(2,545) 6,096
Public offerings and related expenses (2)
663 264
Non‑cash (gains) losses on foreign currency remeasurement (3)
(119) 1,297
Stock-based compensation (4)
1,917 2,669
Non‑cash fixed asset write‑off (5)
3,197 378
Related party Tax Receivable Agreement adjustment (6)
231 (21,090)
Change in Control LTIP award (7)
73,384 —
Change in Control stock-based compensation acceleration (7)
14,713 —
Brazil value-added tax credit (8)
(11,511) —
Total non-GAAP adjustments pre-tax $ 79,930 $ (10,386)
Income tax impact on non-GAAP adjustments (9)
3,675 1,476
Adjusted net income $ 464,585 $ 422,512
(1) Net periodic (benefit) cost for our pension and OPEB plans, including a mark-to-market (gain) loss, representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.
(2) Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3) Non-cash (gains) losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Non-cash fixed asset write-off recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7) In the second quarter of 2021, we incurred Change in Control charges as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our shares outstanding.
(8) Gain from the settlement of a value-added tax matter in Brazil.
(9) The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.
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Reconciliation of EPS to Adjusted EPS
For the year ended December 31,
2021 2020
EPS $ 1.46 $ 1.62
Adjustments per share:
Pension and OPEB plan (benefits) expenses (1)
(0.01) 0.03
Public offerings and related expenses (2)
— —
Non-cash losses on foreign currency remeasurement (3)
— 0.01
Stock-based compensation (4)
— 0.01
Non-cash fixed asset write-off (5)
0.01 —
Related party Tax Receivable Agreement adjustment (6)
— (0.08)
Change in Control LTIP award (7)
0.27 —
Change in Control stock-based compensation acceleration (7)
0.06 —
Brazil value-added tax credit (8)
(0.04) —
Total non-GAAP adjustments pre-tax per share 0.29 (0.03)
Income tax impact on non-GAAP adjustments per share (9)
0.01 0.01
Adjusted EPS $ 1.74 $ 1.58
(1) Net periodic (benefit) cost for our pension and OPEB plans, including a mark-to-market (gain) loss, representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.
(2) Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3) Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Non-cash fixed asset write-off recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7) In the second quarter of 2021, we incurred Change in Control charges as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our total shares outstanding.
(8) Gain from the settlement of a value-added tax matter in Brazil.
(9) The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.
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Reconciliation of Net Income to Adjusted EBITDA For the year ended December 31,
2021 2020
Net income $ 388,330 $ 434,374
Add:
Depreciation and amortization 65,716 62,963
Interest expense 68,760 98,074
Interest income (872) (1,750)
Income taxes 68,076 75,671
EBITDA 590,010 669,332
Adjustments:
Pension and OPEB plan (benefits) expenses (1)
(2,545) 6,096
Public offerings and related expenses (2)
663 264
Non-cash (gains) losses on foreign currency remeasurement (3)
(119) 1,297
Stock-based compensation (4)
1,917 2,669
Non-cash fixed asset write-off (5)
3,197 378
Related party Tax Receivable Agreement adjustment (6)
231 (21,090)
Change in Control LTIP award (7)
73,384 —
Change in Control stock-based compensation acceleration (7)
14,713 —
Brazil value-added tax credit (8)
(11,511) —
Adjusted EBITDA $ 669,940 $ 658,946
(1) Net periodic (benefit) cost for our pension and OPEB plans, including a mark-to-market (gain) loss, representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.
(2) Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3) Non-cash (gains) losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Non-cash fixed asset write-off recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7) In the second quarter of 2021, we incurred Change in Control charges as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our shares outstanding.
(8) Gain from the settlement of a value-added tax matter in Brazil.
Customer base
We are a global company and sell our products in every major geographic market. Sales of these products to buyers outside the United States accounted for approximately 79% of our net sales in both 2021 and 2020 and 77% in 2019.
In 2021, five of our 10 largest customers were based in Europe, three in the United States, one in Brazil and one in Mexico. However, seven of our 10 largest customers are multi-national operations.
The following table summarizes information as to our operations in different geographical areas:
For the year ended December 31,
(in thousands) 2021 2020
Net sales:
United States $ 285,710 $ 260,867
Americas (excluding the United States) 241,442 187,779
Asia Pacific 154,084 127,415
Europe, Middle East, Africa 664,552 648,300
Total $ 1,345,788 $ 1,224,361
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In 2021, no customer accounted for 10% or more of our net sales, nor do we believe any customer poses a significant concentration of risk, as sales to one customer could be replaced by demand from other customers.
Results of operations
Results of operations for 2021 as compared to 2020
The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
For the Year Ended December 31, Increase/ Decrease % Change
(in thousands) 2021 2020
Net sales $ 1,345,788 $ 1,224,361 $ 121,427 10 %
Cost of sales 701,335 563,864 137,471 24 %
Gross profit 644,453 660,497 (16,044) (2) %
Research and development 3,771 3,975 (204) (5) %
Selling and administrative expenses 132,608 67,913 64,695 95 %
Operating income 508,074 588,609 (80,535) (14) %
Other (income) expense, net (16,451) 3,330 (19,781) N/A
Related party Tax Receivable Agreement expense (benefit) 231 (21,090) 21,321 N/A
Interest expense 68,760 98,074 (29,314) (30) %
Interest income (872) (1,750) (878) (50) %
Income before provision for income taxes 456,406 510,045 (53,639) (11) %
Provision for income taxes 68,076 75,671 (7,595) (10) %
Net income $ 388,330 $ 434,374 $ (46,044) (11) %
Net sales. Net sales increased $121.4 million, or 10%, from $1.2 billion in 2020 to $1.3 billion in 2021. 2020 was impacted by the then challenging market conditions. Stronger demand for our products in 2021 resulted in a 24% increase in sales volume compared to 2020. Partially offsetting the increased volume was a decrease in average realized sales prices. While the non-LTA prices increased throughout the year, the decrease in average realized sales prices reflects an increased percentage of non-LTA sales versus the prior year. Prices for non-LTA business reset on January 1, 2022 and we expect our average first quarter 2022 non-LTA prices to increase an additional 17 to 20% over the fourth quarter 2021.
Cost of sales. Cost of sales increased $137.5 million, or 24%, in 2021 compared to 2020, driven primarily by the increase in sales volume of manufactured electrodes. Additionally, cost of sales in 2021 was impacted by a one-time long-term incentive plan ("LTIP") charge of $30.8 million resulting from a Change in Control after our largest stockholder's ownership of our common stock was reduced below 30% of our outstanding common stock (see Note 12, "Commitments and Contingencies," to the Consolidated Financial Statements for additional information). We expect our costs to increase in 2022, driven by recent global inflationary pressures, particularly for third party needle coke, energy and freight. While we are anticipating our first quarter 2022 costs to increase 7 to 9% over the fourth quarter 2021, we expect further increases after the first quarter to be lower in magnitude as we continue to take steps to mitigate these cost increases.
Selling and administrative expenses. Selling and administrative expenses increased $64.7 million, or 95%, from $67.9 million in 2020 to $132.6 million in 2021 primarily due to the aforementioned Change in Control resulting in $42.6 million of one-time LTIP expense. Additionally, the Change in Control resulted in $12.9 million of one-time accelerated stock-based compensation expense.
Other (income) expense, net. Other (income) expense, net changed from an expense of $3.3 million in 2020 to an income generation of $16.5 million in 2021. This was primarily the result of an $11.5 million gain on a value-added tax matter in Brazil for which we received a beneficial ruling. Additionally, our annual pension and OPEB mark-to-market adjustment resulted in a benefit in 2021 of $3.9 million in 2021 compared to an expense of $3.2 million in 2020.
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Related party Tax Receivable Agreement expense (benefit). Related party Tax Receivable Agreement expense (benefit) increased from a benefit of $21.1 million in 2020 to an expense of $0.2 million in 2021. The benefit recorded in 2020 resulted from the revision of U.S. income estimates affecting the future usage of our U.S. tax attributes, which are required to be reimbursed to Brookfield under the Tax Receivable Agreement.
Interest expense. Interest expense decreased by $29.3 million, or 30%, from $98.1 million in 2020 to $68.8 million in 2021, due to lower average borrowings as we repaid $400 million of our 2018 Term Loan Facility during 2021.
Provision for income taxes. The following table summarizes the provision for income taxes in 2021 and 2020:
For the Year Ended December 31, 2021 For the Year Ended December 31, 2020
Provision for income taxes $ 68,076 $ 75,671
Income before provision for income taxes $ 456,406 $ 510,045
Effective income tax rate 14.9 % 14.8 %
The effective tax rate for the year ended December 31, 2021 was 14.9% and differs from the U.S. statutory tax rate of 21% primarily due to worldwide earnings from various countries taxed at different rates, partially offset by the net combined impact related to the U.S. taxation of Global Intangible Low Tax Income ("GILTI") and Foreign Tax Credits ("FTC's"). As of December 31, 2021, the balance of our valuation allowance against deferred tax assets was $10.6 million and does not limit the Company's ability to utilize these tax assets in the future. We expect the effective tax rate in 2022 to be approximately 14-18%.
The provision for income taxes changed from $75.7 million, with an effective tax rate of 14.8% for the year ended December 31, 2020 to a $68.1 million with a 14.9% effective rate for the year ended December 31, 2021. This change in effective tax rate is primarily due to the reduction in pre-tax income and the mix of worldwide earnings from various countries taxed at different rates that are offset by the U.S. taxation of GILTI and additional tax on non-deductible compensation due to the Change in Control.
GrafTech has considered the tax impact of COVID-19 legislation, including the American Rescue Plan Act, and has concluded that there is no material tax impact. The Company continues to monitor the tax effects of any legislative changes.
Currency translation and transactions
We translate the assets and liabilities of our non‑U.S. subsidiaries into U.S. dollars for consolidation and reporting purposes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830 , Foreign Currency Matters . Foreign currency translation adjustments are generally recorded as part of stockholders’ equity and identified as part of accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as their operations are sold or substantially or completely liquidated.
We account for our Russian, Swiss, Luxembourg, United Kingdom and Mexican subsidiaries using the U.S. dollar as the functional currency, as sales and purchases are predominantly U.S. dollar‑denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses from non‑permanent intercompany balances as part of cost of sales and other (income) expense, net.
Significant changes in currency exchange rates impacting us are described under “—Effects of changes in currency exchange rates” and “—Results of operations” in this section.
Liquidity and capital resources
Our sources of funds have consisted principally of cash flow from oper ations 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 the U.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future.
We believe that we have adequate liquidity to meet our needs for at least the next 12 months and for the foreseeable future. As of December 31, 2021, we had liquidity of $304.2 million, consisting of $246.7 million of availability under our 2018 Revolving Credit Facility (subject to continued compliance with the financial covenants and representations) and cash and
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cash equivalents of $57.5 million. We had long-term debt of $1.0 billion and short-term debt of $0.1 million as of December 31, 2021. As of December 31, 2020, we had liquidity of $391.8 million, consisting of $246.4 million available under our 2018 Revolving Credit Facility and cash and cash equivalents of $145.4 million. We had long-term debt of $1.4 billion and short-term debt of $0.1 million as of December 31, 2020.
As of December 31, 2021 and 2020, $49.1 million and $114.6 million, respectively, of our cash and cash equivalents were located outside of the U.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends do not exceed the amount of retained and current earnings. In addition, for our subsidiary in South Africa, the South Africa Central Bank imposes that certain solvency and liquidity ratios remain above defined levels after the dividend distribution, which historically has not materially affected our ability to repatriate cash from this jurisdiction. The cash and cash equivalents balances in South Africa were $0.5 million and $1.6 million as of December 31, 2021 and December 31, 2020, respectively. Upon repatriation to the United States, the foreign source portion of dividends we receive from our foreign subsidiaries is no longer subject to U.S. federal income tax as a result of the Tax Cuts and Jobs Act of 2017 ("Tax Act").
Cash flow and plans to manage liquidity. Our cash flow typically fluctuates significantly between quarters due to various factors. These factors include customer order patterns, fluctuations in working capital requirements, timing of tax and interest payments and other factors. We had positive cash flow from operating activities during 2021, 2020 and 2019. Although the global economic environment experienced significant swings in these periods, our working capital management and cost‑control initiatives allowed us to remain operating cash‑flow positive in both times of declining and improving operating results. Cash from operations is expected to remain at positive sustained levels.
As of December 31, 2021, we had total availability under the 2018 Revolving Credit Facility of $246.7 million after giving effect to $3.3 million of letters of credit. As of December 31, 2020, we had $3.6 million of letters of credit, for a total availability of $246.4 million under the 2018 Revolving Credit Facility.
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. We repurchased 4.7 million shares of common stock for a total purchase price of $50.0 million under this program during 2021. Additionally, on November 4, 2021, we announced that our Board of Directors authorized an additional $150 million of stock repurchases, bringing our total stock repurchase availability to $159.0 million, inclusive of the amount remaining under the previous authorization
In December 2020, GrafTech Finance Inc. ("GrafTech Finance") issued $500 million aggregate principal amount the 2020 Senior Secured Notes in a private offering. The 2020 Senior Secured Notes and related guarantees are secured on a pari passu basis by the collateral securing the Senior Secured Credit Facilities. All of the proceeds from the 2020 Senior Secured Notes were used to partially repay borrowings under our 2018 Term Loan Facility.
We repaid an additional $400 million on our 2018 Term Loan Facility in both 2021 and 2020 . We are committed to delivering value to our stockholders through our disciplined capital allocation strategy. In 2022, we will continue to focus on investing in our business, strengthening our balance sheet and making opportunistic purchases under the remaining $159.0 million stock repurchase authorization.
In February 2021, the Company entered into a second amendment (the "Second Amendment") to the 2018 Credit Agreement that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with 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.
Prior to April 2020, we had paid a quarterly cash dividend of $0.085 per share, or an aggregate of $0.34 per share on an annualized basis. In April 2020, as a result of the deteriorating economic environment, our Board of Directors reduced our dividend rate to $0.01 per share, or $0.04 per share on an annualized basis. There can be no assurance that we will pay dividends in the future in these amounts or at all. Our Board of Directors may change the timing and amount of any future dividend payments or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by our Board of Directors.
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Potential uses of our liquidity include dividends, stock repurchases, capital expenditures, acquisitions, scheduled debt repayments, optional debt repayments and other general purposes. An improving economy, while resulting in improved results of operations, could increase our cash requirements to purchase inventories, make capital expenditures and fund payables and other obligations until increased accounts receivable are converted into cash. A downturn 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 among other factors. Capital expenditures totaled $58.3 million in 2021. We anticipate capital expenditures between $70 and $80 million in 2022.
In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our 2018 Revolving Credit Facility, to the extent available.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2020 and 2021, and we expect to continue to do so in the future. These transactions include ongoing obligations under the Tax Receivable Agreement, stockholders rights agreement, as amended, and registration rights agreement, each with Brookfield.
Cash flows
The following table summarizes our cash flow activities:
For the Year Ended December 31,
2021 2020
(Dollars in millions)
Cash flow provided by (used in):
Operating activities $ 443.0 $ 563.6
Investing activities (57.9) (35.7)
Financing activities (471.8) (463.7)
Net change in cash and cash equivalents (86.6) 64.3
Operating activities
Cash provided by operating activities totaled $443.0 million in the year ended December 31, 2021 versus $563.6 million in the prior-year period. The decrease in operating cash-flows was primarily due to higher working capital in 2021 as compared to the prior year, driven by increased sales and higher production levels. In addition to the working capital change, cash from operating activities was negatively impacted by the $71 million one-time payment of the LTIP award triggered by the May 2021 Change in Control (see Note 12, "Commitments and Contingencies," to the Consolidated Financial Statements for additional information), partially offset by decreases versus the prior year in use of cash totaling $50 million for interest, tax payments, Tax Receivable Agreement payments and pension contributions.
The net impact of the changes in working capital (operating assets and liabilities), which are discussed in more detail below, include the impact of changes in: receivables, inventories, prepaid expenses, accounts payable, accrued liabilities, accrued taxes, interest payable and payments of other current liabilities.
In the year ended December 31, 2021, changes in working capital resulted in a net use of funds of $16.4 million, which was impacted by:
• use of funds in accounts receivable of $28.9 million due to the timing and increased level of sales;
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• use of funds from increases in inventory of $28.2 million due primarily to increases in both the price and quantity of raw materials;
• net use of funds from increases in prepaid expenses and other current assets of $31.9 million resulting primarily from the timing of refunds of value-added taxes in certain foreign jurisdictions, including the receivable associated with the one-time Brazil value-added tax credit;
• source of funds of $5.7 million resulting from an increase in income taxes payable driven primarily by the timing of income tax payments in 2021; and
• source of funds of $66.6 million from increases in accounts payable and other accruals primarily driven by increased purchases of raw materials resulting from higher levels of production and by the timing of payments.
Other uses of cash in the year ended December 31, 2021 included cash paid for interest of $56.3 million, cash paid for taxes of $63.8 million, cash paid for the Tax Receivable Agreement of $21.8 million and contributions to pension and other benefit plans of $4.2 million.
In the year ended December 31, 2020, changes in working capital resulted in a net source of funds of $86.4 million which was impacted by:
• net cash inflows in accounts receivable of $63.6 million from the decrease in accounts receivable due to lower sales;
• source of funds from decreases in inventory of $44.6 million from our efforts to reduce inventory due to the lower demand environment;
• use of funds of $12.4 million resulting from a decrease in income taxes payable driven primarily by the timing of income tax payments in 2020 and lower tax liabilities as a result of lower profitability; and
• use of funds of $12.8 million from decreases in accounts payable and other accruals primarily driven by decreased purchases of raw materials resulting from lower levels of production and timing of payments.
Other uses of cash in the year ended December 31, 2020 included cash paid for interest of $87.0 million, $74.0 million of cash paid for taxes, cash paid for the Tax Receivable Agreement of $27.8 million and contributions to pension and other benefit plans of $6.6 million.
Investing activities
Net cash used in investing activities was $57.9 million in the year ended December 31, 2021 compared to $35.7 million in the year ended December 31, 2020. The change is due to the increase in capital expenditures, as the 2020 spend had been lower due to the slowdown in production activity.
Financing activities
Net cash outflow from financing activities was $471.8 million during the year ended December 31, 2021, compared to $463.7 million during the year ended December 31, 2020. Repayments of long-term debt amounted to $400.0 million in 2021, which was substantially similar to the amount in the prior year. Repurchases of our common stock were $50.0 million in 2021, compared to $30.1 million in the prior year. Dividends payments were $10.6 million in 2021, compared to $30.9 million in the prior year as the quarterly dividend was decreased from $0.085 to $0.01 per share effective the second quarter of 2020. Other uses of cash were up by approximately $5 million versus the prior year, primarily due to the payment in 2021 of taxes related to the net share settlement of awards.
Financing transactions
In February 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 the June 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 $250 million 2018 Revolving Credit Facility. GrafTech Finance is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, GrafTech Switzerland SA (“Swissco”) and GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co-Borrowers”) are co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the 2018 Revolving Credit Facility mature on February 12, 2025 and February 12, 2023, respectively.
The 2018 Term Loan Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 3.00% per annum following an amendment in
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February 2021 (the “Second Amendment”) that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loan Facility. The Second Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
The 2018 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, we are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
The Senior Secured Credit Facilities are guaranteed by each of our domestic subsidiaries, subject to certain customary exceptions, and by GrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary of GrafTech, Luxembourg HoldCo, and Swissco (collectively, the “Guarantors”) with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”)).
All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, by: (i) a pledge of all of the equity securities of each domestic Guarantor and of each other direct, wholly owned domestic subsidiary of GrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign Corporation, and (ii) security interests in certain receivables and personal property of each Guarantor that is a Controlled Foreign Corporation, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement.
The 2018 Term Loan Facility amortizes at a rate of $112.5 million a year payable in equal quarterly installments, with the remainder due at maturity. The Co-Borrowers are permitted to make voluntary prepayments at any time without premium or penalty. GrafTech Finance is required to make prepayments under the 2018 Term Loan Facility (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company’s fiscal year ended December 31, 2019, 75% of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of Excess Cash Flow based on achievement of a senior secured first lien net leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00 and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loan Facility during any calendar year reduce, on a dollar-for-dollar basis, the amount of the required Excess Cash Flow prepayment for such calendar year, and the aggregate amount of Excess Cash Flow prepayments for any calendar year reduce subsequent quarterly amortization payments of the 2018 Term Loan Facility as directed by GrafTech Finance. As of December 30, 2021, we have satisfied all required amortization installments through the maturity date.
The 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to GrafTech and restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The 2018 Credit Agreement contains a financial covenant that requires GrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Facility. The 2018 Credit Agreement also contains customary events of default.
2020 Senior Secured Notes
On December 22, 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 outside the United States under Regulation S under the Securities Act.
The 2020 Senior Secured Notes were issued pursuant to the indenture among GrafTech Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the Company named therein as guarantors and U.S. Bank National Association, as trustee and notes collateral agent (the "Indenture").
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The 2020 Senior Secured Notes are guaranteed on a senior secured basis by the Company and all of its existing and future direct and indirect U.S. subsidiaries that guarantee, or borrow under, the credit facilities under its 2018 Credit Agreement. The 2020 Senior Secured Notes are secured on a pari passu basis by the collateral securing the term loans under the 2018 Credit Agreement. GrafTech Finance, the Company and the other guarantors granted a security interest in such collateral, consisting of substantially all of their respective assets, as security for the obligations of GrafTech Finance, the Company and the other guarantors under the 2020 Senior Secured Notes and the Indenture pursuant to a collateral agreement, dated as of December 22, 2020 (the “Collateral Agreement”), among GrafTech Finance, the Company, the other subsidiaries of the Company named therein as grantors and U.S. Bank National Association, as collateral agent.
The 2020 Senior Secured Notes bear interest at the rate of 4.625% per annum, which accrues from December 22, 2020 and is payable in arrears on June 15 and December 15 of each year, commencing on June 15, 2021. The 2020 Senior Secured Notes will mature on December 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the Indenture.
GrafTech Finance may redeem some or all of the 2020 Senior Secured Notes at the redemption prices and on the terms specified in the Indenture. If the Company or GrafTech Finance experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then GrafTech Finance must offer to repurchase the 2020 Senior Secured Notes on the terms set forth in the Indenture.
The Indenture contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. The Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or GrafTech Finance, all outstanding 2020 Senior Secured Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 30% in principal amount of the 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.
Fixed-rate obligations
As of December 31, 2021, we had $500 million of fixed-rate debt consisting of our 2020 Senior Secured Notes and $544 million of variable-rate debt. As of December 31, 2021, we have two remaining $250 million interest rate swap contracts that were modified in 2021 to align with the terms of the 2018 Term Loan Facility, maturing in third quarter of 2024. It is expected that these swaps will fix the cash flows associated with the forecasted interest payments on this notional amount of debt to an effective fixed interest rate of 4.2%, which could be lowered to 3.95% depending on credit ratings. See Note 5, "Debt and Liquidity," to the Consolidated Financial Statements for details.
Material Cash Requirements. The following tables summarize our long-term contractual and other obligations and commitments as of December 31, 2021:
Payments Due by Year Ending December 31,
Total 2022 2023-2024 2025-2026 2027+
(Dollars in Thousands)
Contractual and Other Obligations
Long-term debt (a) $ 1,044,137 $ 143 $ 286 $ 543,708 $ 500,000
Interest on long-term debt (b) 236,009 46,367 93,930 49,783 45,929
Total contractual obligations 1,280,146 46,510 94,216 593,491 545,929
Post-employment, pension and related benefits (c) 120,865 11,995 25,401 24,833 58,636
Related party Tax Receivable Agreement (d) 19,283 3,828 9,808 5,647 —
Total contractual and other obligations (e) $ 1,420,294 $ 62,333 $ 129,425 $ 623,971 $ 604,565
(a) Represents our total debt from our 2018 Term Loan Facility with an outstanding balance of $544 million, which matures on February 12, 2025, and from our 2020 Senior Secured Notes with an outstanding balance of $500 million due in 2028 (see "Financing transactions" in this section for full details of these obligations).
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(b) Represents estimated interest payments required on our 2018 Term Loan Facility using a monthly LIBOR curve through February 2025, net of interest rate swap impacts and estimated interest payments on the 2020 Senior Secured Notes through December 15, 2028.
(c) Represents estimated post-employment, pension and related benefits obligations based on actuarial calculations.
(d) Represents Brookfield's right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal NOLs, previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00% per annum. The term of the Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
(e) In addition, letters of credit of $3.3 million were issued under the 2018 Revolving Credit Facility as of December 31, 2021.
Costs Relating to Protection of the Environment
We have been and are subject to increasingly stringent environmental protection laws and regulations. In addition, we have an on‑going commitment to rigorous internal environmental protection standards. Environmental considerations are part of all significant operating and capital expenditure decisions. The following table sets forth certain information regarding environmental expenses and capital expenditures.
For the Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Expenses relating to environmental protection $ 16,914 $ 11,075 $ 11,629
Capital expenditures related to environmental protection 7,014 9,018 7,251
Critical accounting policies
Critical accounting policies are those that require difficult, subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We use and rely on estimates in determining the economic useful lives of our assets, obligations under our employee benefit plans, provisions for doubtful accounts, provisions for restructuring charges and contingencies, tax valuation allowances, evaluation of goodwill, other intangible assets, pension and OPEB and various other recorded or disclosed amounts, including inventory valuations. Estimates require us to use our judgment. While we believe that our estimates for these matters are reasonable, if the actual amount is significantly different than the estimated amount, our assets, liabilities or results of operations may be overstated or understated. The following accounting policies are deemed to be critical.
Goodwill. As a result of our acquisition by Brookfield, we have a significant amount of goodwill. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology under the income approach. This requires us to use significant judgment including estimation of future cash flows, which is based upon relevant market data, internal forecasts, estimation of the long‑term growth for our business, the useful life over which cash flows will occur and determination of the weighted average cost of capital for purposes of establishing a discount rate.
Refer to Note 1, "Business and Summary of Significant Accounting Policies" and Note 6, "Goodwill and Other Intangible Assets" to the Consolidated Financial Statements for information regarding our goodwill impairment testing.
Employee benefit plans. We sponsor various retirement and pension plans, including defined benefit and defined contribution plans and post-employment benefit plans that cover most employees worldwide. Excluding the defined contribution plans, accounting for these plans requires assumptions as to the discount rate, expected return on plan assets, expected salary increases and health care cost trend rate. See Note 11, "Retirement Plans and Post-employment Benefits," to the Consolidated Financial Statements for further details.
Impairments of long‑lived assets. We may record impairment losses on long‑lived assets used in operations when events and circumstances indicate that the assets might be impaired and the future undiscounted cash flows estimated to be
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generated by those assets are less than the carrying amount of those assets. Assets to be disposed are reported at the lower of the carrying amount or fair value less estimated costs to sell. Estimates of the future cash flows are subject to significant uncertainties and assumptions. If the actual value is significantly less than the estimated fair value, our assets may be overstated. Future events and circumstances, some of which are described below, may result in an impairment charge:
• new technological developments that provide significantly enhanced benefits over our current technology;
• significant negative economic or industry trends;
• changes in our business strategy that alter the expected usage of the related assets; and
• future economic results that are below our expectations used in the current assessments.
Accounting for income taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to make the following assessments:
• estimate our actual current tax liability in each jurisdiction;
• estimate our temporary differences resulting from differing treatment of items for tax and accounting purposes (which result in deferred tax assets and liabilities that we include within the Consolidated Balance Sheets); and
• assess the likelihood that our deferred tax assets will be recovered from future taxable income and, if we believe that recovery is not more likely than not, a valuation allowance is established.
If our estimates are incorrect, our deferred tax assets or liabilities may be overstated or understated.
As of December 31, 2021, we had a valuation allowance of $10.6 million against certain deferred tax assets. Our losses in certain tax jurisdictions in recent periods represented sufficient negative evidence to require a full valuation allowance. We also have a partial valuation allowance related to certain U.S. state net operating losses where realizability is unlikely due to discontinued operations in these states. Until we determine that we will generate sufficient jurisdictional taxable income to realize our net operating losses and deferred tax assets, we continue to maintain a valuation allowance.
Related-party Tax Receivable Agreement. On April 23, 2018, the Company entered into the Tax Receivable Agreement, which provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including 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 LIBO RateR 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 calculation of the Tax Receivable Agreement liability requires significant judgment with regards to the assumptions underlying the forecast of future taxable income, in total and by jurisdiction, as well as their timing.
Revenue recognition. Revenue is recognized when a customer obtains control of promised goods, in an amount that reflects the consideration which we expect to receive in exchange for those goods.
To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five‑step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
From 2018 to the present, our revenue streams primarily consisted of LTAs and short‑term purchase orders (deliveries within the year) directly with steel manufacturers. The promises of delivery of graphite electrodes represent the distinct performance obligations to which the contract consideration is allocated, based upon the electrode stand‑alone selling prices for the class of customers at the time the agreements are executed. The performance obligations are considered to be satisfied at a point in time when control of the electrodes has been transferred to the customer. The Company has elected to treat the transportation of the electrodes from our premises to the customer’s facilities as a fulfillment activity, and outbound freight cost is accrued when the graphite electrode performance obligation is satisfied. Any variable consideration is recognized up to its
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unconstrained amount (i.e., up to the amount for which it is probable that a significant reversal of the variable revenue will not happen).
Revenue recognition requires the estimation of the electrode stand-alone selling price, using a variety of inputs, from market observable information to internal pricing guidelines. The estimate of stand-alone selling price on the various classes of contracts is the basis for the allocation of revenue amongst periods for new and modified contracts. Historically the amount of contract assets and liabilities resulting from these estimates have been immaterial. See Note 2, "Revenue from Contracts with Customers," to the Consolidated Financial Statements for additional information.