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Item 7. Management’s Discussion and Analysis

2023-02-14 compared with 2022-02-22 · 176 added, 249 removed, 343 unchanged (55% of the section changed)

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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.

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.

Operational and Commercial Update

Sales volume for 2022 was approximately 149 thousand MT, consisting of LTA volume of 91 thousand MT and non-LTA volume of 58 thousand MT, representing a decrease of 11% compared to 167 thousand MT in 2021, consisting of LTA volume of 110 thousand MT and non-LTA volume of 57 thousand MT.

In 2022, our weighted-average realized price from LTAs was approximately $9,500 per MT and our weighted-average realized price for non-LTA business sales of graphite electrodes was approximately $6,000 per MT.

Our weighted-average realized non-LTA price increased 34% compared to 2021.

In 2021, our weighted-average realized price from LTAs was approximately $9,500 per MT and our weighted-average realized price for non-LTA business sales of graphite electrodes was approximately $4,500 per MT.

Our operations at our manufacturing site in Monterrey, Mexico, were temporarily suspended between September 15 and November 15, 2022, as described in our Current Report on Form 8-K furnished on September 16, 2022 and our Current Report on Form 8-K furnished on November 18, 2022.

Refer to “Monterrey, Mexico Operations shutdown” in Item 3.

Legal Proceedings.

Production volume for the full year 2022 was approximately 157 thousand MT, decreasing 5% compared to 2021, with the fourth quarter's production representing a 36% decline year-over-year, primarily reflecting the impact of the temporary suspension of our operations in Monterrey, Mexico.

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.

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.

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

As of December 31, 2022, we had cash and cash equivalents of $134.6 million and total debt of approximately $921.8 million.

Maintaining a disciplined capital allocation strategy that focuses on the preservation of cash remains a priority for us in order to support financial flexibility as we manage through near-term challenges.

In the second half of 2022, we retained nearly all of our operating cash flow to increase our liquidity position by approximately $80.0 million since the end of the second quarter of 2022.

In the first half of the year, we voluntarily repaid $110.0 million of our long-term debt and repurchased 6.7 million shares of our common stock for an aggregate of $60.0 million.

As we move into 2023, we will continue to manage our working capital levels.

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.

For the year ended December 31, 2022, our capital expenditures were $72.2 million.

Our capital expenditures in 2023 are expected to be in the range of $55.0 million to $60.0 million .

As we enter 2023, we anticipate continued soft demand for graphite electrodes due to ongoing economic uncertainty and geopolitical conflict.

In addition, we expect the suspension of our operations in Monterrey, Mexico in late 2022 will have a significant impact on our sales volume for the first half of 2023.

Although the facility has resumed production, the suspension resulted in uncertainty during a key commitment window for customer purchases covering the first six months of 2023.

Reflecting these factors, we estimate our sales volume for the first six months of 2023 will be approximately half of the level reported in the same period of 2022, with the largest impact occurring in the first quarter.

We anticipate that the graphite electrode sales volumes will be in the range of 15 thousand MT to 18 thousand MT for the first quarter of 2023.

As we proceed into the second half of the year, we expect sales volume levels to recover, as we move past Monterrey suspension-

driven uncertainty and anticipate that a gradual improvement in market conditions will strengthen demand for graphite electrodes.

In response to these near-term challenges, we are proactively managing our operating costs, capital expenditures and working capital levels.

Amongst other things, we expect to reduce our production volume from our two European facilities to approximately one third of their capacity for the first half of 2023 to align our production volume with our near-term outlook for graphite electrode demand.

In 2023, we expect a 17% to 20% year-over-year increase in our cost of goods sold per metric ton as fixed manufacturing costs will be recognized over a smaller volume base and as the higher cost of raw materials purchased in the latter part of 2022 affects cost of sales.

In 2023, the continuing shift in mix from LTA to non-LTA volume will have a significant impact on our revenue.

For the first quarter 2023, we expect our weighted average non-LTA pricing to remain comparable to the 2022 full year average of approximately $6,00 per metric ton.

The table of estimated shipments of graphite electrodes under existing LTAs has been updated as follows to reflect our current expectations:

Estimated LTA volume (1)

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(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 reflect sales of our products, including graphite electrodes and associated by‑products.

Several factors affect net sales in any period, including general economic conditions, competitive conditions, customer inventory levels, scheduled plant shutdowns by customers, national vacation practices, changes in customer production schedules in response to seasonal changes in energy costs, weather conditions, strikes and work stoppages at customer plants and changes in customer order patterns including those in response to the announcement of price increases or price adjustments.

Revenue is recognized when a customer obtains control of promised goods.

The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods.

See Note 2, "Revenue from Contracts with Customers" to the Consolidated Financial Statements for more information.

Our first quarter is historically the weakest sales quarter.

Cost of sales

Cost of sales includes the costs associated with products invoiced during the period as well as non‑inventoried manufacturing overhead costs and outbound transportation costs.

Cost of sales includes all costs incurred at our production facilities to make products saleable, such as raw materials, energy costs, direct labor and indirect labor and facilities costs, including purchasing and receiving costs, plant management, inspection costs, product engineering and internal transfer costs.

In addition, all depreciation associated with assets used to produce products and make them saleable is included in cost of sales.

Direct labor costs consist of salaries, benefits, the service cost component of our pension and other post-employment benefit ("OPEB") plans and other personnel‑related costs for employees engaged in the manufacturing of our products.

Inventory valuation

Inventories are stated at the lower of cost or market.

Cost is principally determined using the “first‑in, first‑out” (“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.

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.

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."

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 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.

As it relates to the conflict between Ukraine and Russia, we have provided force majeure notices with respect to certain impacted LTAs.

In the event of a force majeure, the LTAs provide our counterparties with the right to terminate the LTA if the force majeure event continues for more than six months after the delivery of the force majeure notice, with no continuing obligations of either party.

Certain of our LTA counterparties have challenged the force majeure notices, but we will continue to enforce our contractual rights, while other LTAs have been terminated as a result of the force majeure period elapsing.

The estimates of LTA volume and revenue as set forth above in the immediately preceding table includes (i) our current view of the validity of such force majeure notices and (ii) our current expectations of termination fees from our customers who have failed to meet certain obligations under their LTAs.

Key metrics used by management to measure performance

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Key financial measures

For the year ended December 31,

Year ended December 31,

(in thousands, except per share amounts) 2022 2021

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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.

(2) Non-GAAP financial measure;

see below for information and reconciliations to the most directly comparable financial measures calculated and presented in accordance with GAAP.

Key operating measures

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Capacity utilization reflects production volume as a percentage of production capacity.

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,

Production volume, production capacity and capacity utilization help us understand the efficiency of our production and evaluate cost of sales.

Year ended December 31,

(in thousands) 2022 2021

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Production volume (MT) (2)

Total production capacity (3)(4)

Total production capacity(MT) (3)(4)

Total capacity utilization (4)(5)

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Capacity utilization excluding St.

(1) Sales volume reflects only graphite electrodes manufactured by GrafTech.

(1) Sales volume reflects only graphite electrodes manufactured by us.

(2) Production volume reflects graphite electrodes we produced during the period.

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(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.

Marys, Pennsylvania facility graphitizes a limited number of electrodes and pins sourced from our Monterrey, Mexico facility.

Non-GAAP financial measures

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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.

dollar, related party payable - Tax Receivable Agreement adjustments, non-cash stock-based compensation expense, 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.

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• 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.

• adjusted EBITDA does not reflect public offerings and related expenses;

• 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;

• 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;

• adjusted EBITDA does not reflect Change in Control charges;

• adjusted EBITDA does not reflect gains from the settlement of a value-added tax matter in Brazil;

• 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 define adjusted net income, a non‑GAAP financial measure, as net income or loss and exclude 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 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.

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 reconciliations presented below, other than the Change in Control charges.

Our presentations of EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non‑recurring items.

When evaluating our performance, you should consider EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, alongside other measures of financial performance and liquidity, including our net income (loss), EPS, respectively, and other GAAP measures.

The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures:

Reconciliation of Net Income to Adjusted Net Income For the year ended December 31,

The following tables reconcile our non-GAAP key financial measures to the most directly comparable GAAP measures:

Reconciliation of Net Income to Adjusted Net Income Year Ended December 31,

Net income $ 382,962 $ 388,330

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Net income per share $ 1.48 $ 1.46

Weighted average shares outstanding 266,317,194 267,930,644

Weighted average common shares outstanding 258,791,228 266,317,194

Net income $ 382,962 $ 388,330

Adjustments, pre-tax:

Pension and OPEB plan (benefits) expenses (1)

Pension and OPEB plan benefits (1)

(7,355) (2,545)

Public offerings and related expenses (2)

Non‑cash (gains) losses on foreign currency remeasurement (3)

Stock-based compensation (4)

Non‑cash losses (gains) on foreign currency remeasurement (3)

Stock-based compensation expense (4)

Non‑cash fixed asset write‑off (5)

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Adjusted net income $ 379,666 $ 464,585

(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.

(1) Net periodic benefit credit 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 the actuarial gains and losses in connection with the annual remeasurement in earnings 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.

(3) Non-cash losses (gains) from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S.

subsidiaries where the functional currency is the U.S.

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Reconciliation of EPS to Adjusted EPS

For the year ended December 31,

Year Ended December 31,

EPS $ 1.48 $ 1.46

Adjustments per share:

Pension and OPEB plan (benefits) expenses (1)

Pension and OPEB plan benefits (1)

(0.03) (0.01)

Public offerings and related expenses (2)

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Adjusted EPS $ 1.47 $ 1.74

We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.

We recognize the actuarial gains and losses in connection with the annual remeasurement in earnings 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.

(3) Non-cash losses (gains) from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S.

subsidiaries where the functional currency is the U.S.

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(9) The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.

Reconciliation of Net Income to Adjusted EBITDA For the year ended December 31,

Reconciliation of Net Income to Adjusted EBITDA Year Ended December 31,

Net income $ 382,962 $ 388,330

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EBITDA 539,902 590,010

Pension and OPEB plan (benefits) expenses (1)

Pension and OPEB plan benefits (1)

(7,355) (2,545)

Public offerings and related expenses (2)

Non-cash (gains) losses on foreign currency remeasurement (3)

Non-cash losses (gains) on foreign currency remeasurement (3)

Stock-based compensation (4)

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Adjusted EBITDA $ 536,464 $ 669,940

We recognize in earnings the actuarial gains and losses in connection with the annual remeasurement in the fourth quarter of each year.

We recognize the actuarial gains and losses in connection with the annual remeasurement in earnings 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.

(3) Non-cash losses (gains) from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S.

subsidiaries where the functional currency is the U.S.

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(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

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

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

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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

Year Ended December 31, Increase/ Decrease % Change

(in thousands) 2022 2021

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Operating income 474,259 508,074 (33,815) (7) %

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

Other income, net (10,064) (16,451) (6,387) (39) %

Related party Tax Receivable Agreement (benefit) expense (83) 231 (314) N/A

Interest expense 36,568 68,760 (32,192) (47) %

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Net income $ 382,962 $ 388,330 $ (5,368) (1) %

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.

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.

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.

Net sales decreased $64.5 million, or 5%, compared to the prior year, reflecting an 11% decrease in sales volume of manufactured electrodes, primarily due to the impact of the temporary suspension of our Monterrey, Mexico facility, and a shift in the mix of our business to non-LTA volume from volume derived from our LTAs, partially offset by improved pricing on non-LTA volume .

Our weighted-average realized price for non-LTAs in 2022 was $6,000 per MT, or an increase of 34%, compared to a weighted-average realized price of $4,500 per MT in 2021.

Cost of sales increased $25.0 million, or 4%, in 2022 compared to 2021.

Cost of sales for 2021 included $30.7 million of one-time Long-term Incentive Plan ("LTIP") charges 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.

Excluding this Change in Control charge, cost of sales increased $55.7 million, or 8%.

This increase was primarily due to an increase in our costs driven by recent global inflationary pressures, particularly for carbon-based inputs, energy and freight.

In addition, in connection with the Monterrey temporary suspension, we recorded in cost of sales fixed manufacturing costs that would otherwise have been inventoried.

These excess fixed manufacturing costs represented approximately $16.0 million for the year, including approximately $3.5 million of depreciation.

Out of the $16.0 million, approximately $14.0 million was recorded in the fourth quarter.

Selling and administrative expenses decreased $55.6 million, or 42%, in 2022 compared to 2021, primarily due to the aforementioned Change in Control event resulting in one-time charges recorded in 2021 of $42.6 million of LTIP expense and $12.9 million of accelerated stock-based compensation expense.

Absent these charges, selling and administrative expenses would have been flat compared to the prior year.

Other income, net decreased $6.4 million, or 39%, in 2022 compared to 2021.

This was primarily the result of the absence of an $11.5 million gain on a value-added tax matter in Brazil in 2021, partially offset by $5.8 million of increased mark-to-market gains on our pension and OPEB plans in 2022.

Interest expense decreased $32.2 million, or 47%, in 2022 compared to 2021 due to reductions to the principal of our variable-rate debt since the beginning of 2021, as well as a $4.6 million gain realized upon the early redemption of $67.0 million of our $250.0 million de-designated interest rate swap.

In addition, interest expense for 2022 includes $7.1 million of mark-to-market gains related to the remaining $183.0 million notional amount of our de-designated interest rate swap.

See Note 7, "Interest Expense," and Note 8, "Fair Value Measurements and Derivative Instruments," to the Consolidated Financial Statements for additional details.

Interest income increased $3.6 million, or 414%, in 2022 compared to 2021 due to interest received on past due payments from customers.

Provision for income taxes .

The following table summarizes the provision for income taxes in 2022 and 2021:

For the Year Ended December 31, 2021 For the Year Ended December 31, 2020

Year Ended December 31, 2022 Year Ended December 31, 2021

Provision for income taxes $ 69,356 $ 68,076

1 unchanged sentence

Effective income tax rate 15.3 % 14.9 %

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.

The provision for income taxes increased $1.3 million, or 2%, in 2022 compared to 2021 primarily due to the mix of worldwide earnings from various countries taxed at different rates and the U.S.

taxation of Global Intangible Low Tax Income ("GILTI"), partially offset by reduced pre-tax income.

The effective tax rate for 2022 and 2021 was lower than the U.S.

statutory 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 GILTI and Foreign Tax Credits ("FTCs").

Currency Translation and Transactions

7 unchanged sentences

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.

We also record foreign currency transaction gains and losses from non‑permanent intercompany balances as part of cost of sales and other income, 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.

Effects of Changes in Currency Exchange Rates