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 2021 as compared to 2020 is included in Item 7 of our Annual Report for the year-ended December 31, 2021, filed with the SEC on February 22, 2022. 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.
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, 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 .
Outlook
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-
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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:
2023 2024
Estimated LTA volume (1)
27-32 13-16
Estimated LTA revenue (2)
$235-$275 $100-$135 (3)
(1) In thousands of MT
(2) In millions
(3) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs
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
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.
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Key financial measures
Year ended December 31,
(in thousands, except per share amounts) 2022 2021
Net sales $ 1,281,250 $ 1,345,788
Net income 382,962 388,330
Earnings per share (1)
1.48 1.46
EBITDA (2)
539,902 590,010
Adjusted net income (2)
379,666 464,585
Adjusted earnings per share (1)(2)
1.47 1.74
Adjusted EBITDA (2)
536,464 669,940
(1) Earnings per share represents diluted earnings per share. Adjusted earnings per share represents adjusted diluted earnings per share.
(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
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 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
Sales volume (MT) (1)
149.1 167.4
Production volume (MT) (2)
157.1 165.2
Total production capacity(MT) (3)(4)
230.0 230.0
Total capacity utilization (4)(5)
68 % 72 %
Production capacity excluding St. Marys (MT) (3)(6)
202.0 202.0
Capacity utilization excluding St. Marys (5)(6)
78 % 82 %
(1) Sales volume reflects only graphite electrodes manufactured by us.
(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) Our St. Marys, Pennsylvania facility graphitizes a limited number of electrodes and pins 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, non-cash stock-based compensation expense, non‑cash fixed asset write‑offs, value-added tax credit gains in Brazil and Change in
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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 public offerings and related expenses;
• adjusted EBITDA does not reflect the non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar;
• adjusted EBITDA does not reflect 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 Change in Control charges;
• adjusted EBITDA does not reflect gains from the settlement of a value-added tax matter in Brazil; 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 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 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.
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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,
2022 2021
Net income $ 382,962 $ 388,330
Diluted income per common share:
Net income per share $ 1.48 $ 1.46
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 (1)
(7,355) (2,545)
Public offerings and related expenses (2)
100 663
Non‑cash losses (gains) on foreign currency remeasurement (3)
521 (119)
Stock-based compensation expense (4)
2,311 1,917
Non‑cash fixed asset write‑off (5)
1,068 3,197
Related party Tax Receivable Agreement adjustment (6)
(83) 231
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 $ (3,438) $ 79,930
Income tax impact on non-GAAP adjustments (9)
(142) 3,675
Adjusted net income $ 379,666 $ 464,585
(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 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. 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
Year Ended December 31,
2022 2021
EPS $ 1.48 $ 1.46
Adjustments per share:
Pension and OPEB plan benefits (1)
(0.03) (0.01)
Public offerings and related expenses (2)
— —
Non-cash losses on foreign currency remeasurement (3)
— —
Stock-based compensation (4)
0.01 —
Non-cash fixed asset write-off (5)
0.01 0.01
Related party Tax Receivable Agreement adjustment (6)
— —
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 (0.01) 0.29
Income tax impact on non-GAAP adjustments per share (9)
— 0.01
Adjusted EPS $ 1.47 $ 1.74
(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 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. 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 Year Ended December 31,
2022 2021
Net income $ 382,962 $ 388,330
Add:
Depreciation and amortization 55,496 65,716
Interest expense 36,568 68,760
Interest income (4,480) (872)
Income taxes 69,356 68,076
EBITDA 539,902 590,010
Adjustments:
Pension and OPEB plan benefits (1)
(7,355) (2,545)
Public offerings and related expenses (2)
100 663
Non-cash losses (gains) on foreign currency remeasurement (3)
521 (119)
Stock-based compensation (4)
2,311 1,917
Non-cash fixed asset write-off (5)
1,068 3,197
Related party Tax Receivable Agreement adjustment (6)
(83) 231
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 $ 536,464 $ 669,940
(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 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. 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.
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Results of Operations
Results of operations for 2022 as compared to 2021
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.
Year Ended December 31, Increase/ Decrease % Change
(in thousands) 2022 2021
Net sales $ 1,281,250 $ 1,345,788 $ (64,538) (5) %
Cost of sales 726,373 701,335 25,038 4 %
Gross profit 554,877 644,453 (89,576) (14) %
Research and development 3,641 3,771 (130) (3) %
Selling and administrative expenses 76,977 132,608 (55,631) (42) %
Operating income 474,259 508,074 (33,815) (7) %
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) %
Interest income (4,480) (872) 3,608 414 %
Income before provision for income taxes 452,318 456,406 (4,088) (1) %
Provision for income taxes 69,356 68,076 1,280 2 %
Net income $ 382,962 $ 388,330 $ (5,368) (1) %
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.
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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:
Year Ended December 31, 2022 Year Ended December 31, 2021
Provision for income taxes $ 69,356 $ 68,076
Income before provision for income taxes $ 452,318 $ 456,406
Effective income tax rate 15.3 % 14.9 %
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
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, 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
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 a decrease of $11.7 million f or 2022 and increases of $5.5 million and $3.6 million for 2021 and 2020, respectively.
The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our cost of sales was a decrease of $20.6 million for 2022, an increase of $10.1 million for 2021 and a decrease of $4.9 million for 2020.
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."
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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 thereafter. As of December 31, 2022, we had liquidity of $461.6 million, consisting of $327.0 million of availability under our 2018 Revolving Credit Facility, after giving effect to $3.0 million of letters of credit, and cash and cash equivalents of $134.6 million. We remain subject to continued compliance with the financial covenant in our 2018 Revolving Credit Facility (see the "Financing Transactions" section and Note 5, "Long-Term Debt and Liquidity") and our future operating performance could result in the reduction of the availability under our 2018 Revolving Credit Facility. We expect our operating cash flow to be positive for 2023 and do not anticipate the need to borrow against our 2018 Revolving Credit Facility. We had long-term debt of $921.8 million and short-term debt of $0.1 million as of December 31, 2022. As of December 31, 2021, we had liquidity of $304.2 million, consisting of $246.7 million available under our 2018 Revolving Credit Facility, after giving effect to $3.3 million of letters of credit, and cash and 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, 2022 and 2021, $92.3 million and $49.1 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 $1.2 million and $0.5 million as of December 31, 2022 and December 31, 2021, 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 each of the last three years. Cash from operations is expected to remain at positive sustained levels on an annual basis.
In July 2019, our Board of Directors authorized a program to repurchase up to $100.0 million of our outstanding common stock. In November 2021, our Board of Directors authorized the repurchase of an additional $150.0 million of stock repurchases under this program. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock price, applicable legal requirements, other business objectives and market conditions. In 2022, we repurchased 6.7 million shares of our common stock for an aggregate of $60.0 million. As of December 31, 2022, we had $99.0 million remaining under our stock repurchase authorization.
In December 2020, GrafTech Finance Inc. ("GrafTech Finance") issued $500.0 million aggregate principal amount of 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 $110.0 million on our 2018 Term Loan Facility in 2022 . We are committed to delivering value to our stockholders through our disciplined capital allocation strategy.
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 reduce 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 $72.2 million in 2022. We anticipate capital expenditures between $55.0 million and $60.0 million in 2023.
In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our 2018 Revolving Credit Facility, to the extent available.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2022 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:
Year Ended December 31,
2022 2021
(Dollars in thousands)
Cash flow provided by (used in):
Operating activities $ 324,628 $ 443,040
Investing activities (71,970) (57,860)
Financing activities (176,267) (471,792)
Net change in cash and cash equivalents $ 76,391 $ (86,612)
Operating activities
Cash provided by operating activities totaled $324.6 million in 2022 versus $443.0 million in the prior-year period. The decrease in operating cash flow was primarily due to a $83.2 million increase in cash used for working capital. Cash flow used for inventories was $153.6 million in 2022 compared to $28.2 million in 2021, driven primarily by increases in both costs and quantities of raw materials in 2022. Cash flow provided by accounts payable and accruals decreased $58.8 million. In addition, cash provided by accounts receivable increased $89.4 million versus the prior-year period due to timing and decreased sales in 2022.
Investing activities
Net cash used in investing activities was $72.0 million in the year ended December 31, 2022 compared to $57.9 million in the year ended December 31, 2021 primarily driven by increased capital expenditures.
Financing activities
Net cash used in financing activities decreased $295.5 million primarily driven by a reduction in the amount of $290.0 million of voluntary prepayments made on our 2018 Term Loan Facility in 2022. In addition, interest rate swap settlements provided $6.4 million of cash in 2022, compared to using $4.2 million of cash in 2021. Partially offsetting these items was a $10.0 million increase in cash used for repurchases of our common stock during 2022.
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Financing transactions
2018 Term Loan and 2018 Revolving Credit Facility
In February 2018, the Company entered into a credit agreement (as amended, the "2018 Credit Agreement"), which provides for (i) a $2,250 million senior secured term facility (the "2018 Term Loan Facility") after giving effect to the June 2018 amendment (the “First Amendment”) that increased the aggregate principal amount of the 2018 Term Loan Facility from $1,500 million to $2.250 million and (ii) a $330 million senior secured revolving credit facility after giving effect to the May 2022 amendment that increased the revolving commitments under the 2018 Credit Agreement by $80 million from $250 million (the " 2018 Revolving Credit Facility" and, together with the 2018 Term Loan Facility, the "Senior Secured Credit Facilities"). 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 May 31, 2027, respectively. As of December 31, 2022 and 2021, there was no debt outstanding on the 2018 Revolving Credit Facility and there was $3.0 million and $3.3 million of letters of credit drawn against the 2018 Revolving Credit Facility, respectively.
The 2018 Term Loan Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 3.00% per annum following an amendment in February 2021 (the “Second Amendment”) that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loan Facility. The Second Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility.
The 2018 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Adjusted Term SOFR Rate, and Adjusted EURIBOR Rate (each, as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.00% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.00% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, we are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum.
The Senior Secured Credit Facilities are guaranteed by each of our domestic subsidiaries, subject to certain customary exceptions, and 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 per year payable in equal quarterly installments, with the remainder due at maturity. The Co-Borrowers are permitted to make voluntary prepayments at any time without premium or penalty. GrafTech Finance is required to make prepayments under the 2018 Term Loan Facility (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company’s fiscal year ended December 31, 2019, 75% of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of Excess Cash Flow based on achievement of a senior secured first lien net leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00 and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loan Facility during any calendar year reduce, on a dollar-for-dollar basis, the amount of the required Excess Cash Flow prepayment for such calendar year, and the aggregate amount of Excess Cash Flow prepayments for any calendar year reduce subsequent quarterly amortization payments of the 2018 Term Loan Facility as directed by GrafTech Finance. As of December 31, 2022, we have satisfied all required amortization installments through the maturity date.
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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. We were in compliance with all of our debt covenants as of December 31, 2022 and 2021.
2020 Senior Secured Notes
On December 22, 2020, GrafTech Finance issued $500.0 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").
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, 2022, we had $500.0 million of fixed-rate debt consisting of our 2020 Senior Secured Notes and $433.7 million of variable-rate debt. As of December 31, 2022, we had two remaining interest rate swap contracts with notional amounts totaling $433.0 million 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
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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 table summarizes our contractual and other material cash obligations as of December 31, 2022:
Payments Due by Year Ending December 31,
Total 2023 2024-2025 2026-2027 2028+
(Dollars in Thousands)
Contractual and Other Obligations
Long-term debt (a) $ 933,976 $ 124 $ 433,852 $ — $ 500,000
Interest on long-term debt (b) 184,403 41,986 73,042 46,892 22,483
Total contractual obligations 1,118,379 42,110 506,894 46,892 522,483
Pension plan contributions (c) 1,395 1,395 — — —
Related party Tax Receivable Agreement (d) 15,552 4,631 9,935 986 —
Total contractual and other obligations (e) $ 1,135,326 $ 48,136 $ 516,829 $ 47,878 $ 522,483
(a) Represents our total debt from our 2018 Term Loan Facility with an outstanding balance of $433.7 million, which matures on February 12, 2025, and from our 2020 Senior Secured Notes with an outstanding balance of $500.0 million due in 2028 (see "Financing transactions" in this section for full details of these obligations).
(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 contributions under our defined benefit pension plans. Contributions in future periods will be dependent upon regulatory requirements, the plans' funded ratios, plan investment performance, discount rates, actuarial assumptions, plan amendments, our contribution objectives and other factors. We anticipate funding those contributions with cash on hand or cash generated from operations. It is not practical to estimate the required contributions beyond 2023 at the present time.
(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 $3.0 million were issued under the 2018 Revolving Credit Facility as of December 31, 2022.
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.
Year Ended December 31,
2022 2021 2020
(Dollars in thousands)
Expenses relating to environmental protection $ 22,395 $ 16,914 $ 11,075
Capital expenditures related to environmental protection 6,012 7,014 9,018
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
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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. When reviewing goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
In performing a qualitative assessment, we consider business conditions and other factors including, but not limited to (i) adverse industry or economic trends, (ii) lower projections that may impact future operating results, (iii) sustained decline in our share price and (iv) overall financial performance and other events affecting the reporting units. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative impairment test is performed by estimating the fair value of the reporting unit and comparing it to its carrying value. If the carrying value of a reporting unit exceeds its fair value, we would record an impairment charge equal to the excess of the carrying value of the reporting unit over its fair value.
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 and determination of the weighted average cost of capital for purposes of establishing a discount rate.
It is possible that our assumptions about future performance, as well as the economic outlook and related conclusions regarding valuation, could change adversely, which may result in impairment that would have a material effect on our financial position and results of operations in future periods.
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 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.
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If our estimates are incorrect, our deferred tax assets or liabilities may be overstated or understated.
As of December 31, 2022, we had a valuation allowance of $9.3 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 Rate 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 2022, 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 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.