GRAFTECH INTERNATIONAL LTD 10-K

Item 8. Financial Statements and Supplementary Data (Unless otherwise noted, all dollars are presented in thousands) Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 45 Consolidated Balance Sheets 47 Consolidated Statements of Operations and Comprehensive Income 48 Consolidated Statements of Cash Flows 49 Consolidated Statements of Stockholders’ Equity (Deficit) 51 Notes to the Consolidated Financial Statements 52 See the Table of Contents located at the beginning of this Report for more detailed page references to information contained in this Item. 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of GrafTech International Ltd.: Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of GrafTech International Ltd. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 45 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - Refer to Notes 1 and 6 to the financial statements Critical Audit Matter Description The Company’s goodwill balance was $171.1 million as of December 31, 2022, which relates to one reporting unit. The Company assesses goodwill for impairment testing annually or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit might be impaired. In evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company performed a qualitative assessment of relevant events and circumstances that could impact the fair value of such reporting unit. If, after assessing the totality of events and circumstances, it is deemed more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company estimates the fair value of the reporting unit by performing a quantitative goodwill impairment assessment. As a result of the analysis performed as of December 31, 2022, the Company determined that the goodwill was not more likely than not impaired, and no quantitative assessment was necessary. Qualitative factors included macroeconomic conditions, industry and market considerations, current discount rates, cost factors, historical and forecasted financial results and events specific to the reporting unit, which required a higher degree of auditor judgment to evaluate. We identified the evaluation of qualitative goodwill impairment indicators, or qualitative factors, as a critical audit matter as the assessment of the potential impact that these qualitative factors have on the reporting unit's fair value required the application of subjective auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the relevant qualitative factors in the Company’s December 31, 2022 qualitative assessment included the following, among others: • Tested the effectiveness of controls related to the evaluation of the assumptions and inputs used as part of management’s review of the qualitative assessment. • We evaluated the qualitative factors used by management for reasonableness, which included an assessment of the impact of those factors when applied to the Company’s last quantitative assessment performed. • We compared the actual results of the reporting unit to the Company’s historical forecasted performance to evaluate the accuracy of management’s estimates. • We evaluated whether the underlying assumptions of future performance for the reporting unit were consistent with information from analyst reports and macroeconomic industry and market considerations and whether there were other significant adverse considerations that would impact the underlying assumptions. • With the assistance of our fair value specialists, we evaluated the impact of changes in discount rates by developing a range of independent estimates based upon industry peers, including testing the underlying information and the mathematical accuracy of the calculations. /s/ DELOITTE & TOUCHE LLP Cleveland, Ohio February 14, 2023 We have served as the Company’s auditor since 2015. 46 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 134,641 $ 57,514 Accounts and notes receivable, net of allowance for doubtful accounts of $ 8,019 as of December 31, 2022 and $ 6,835 as of December 31, 2021 145,574 207,547 Inventories 447,741 289,432 Prepaid expenses and other current assets 87,272 73,364 Total current assets 815,228 627,857 Property, plant and equipment 869,168 815,298 Less: accumulated depreciation 350,022 313,825 Net property, plant and equipment 519,146 501,473 Deferred income taxes 11,960 26,187 Goodwill 171,117 171,117 Other assets 86,727 85,684 Total assets $ 1,604,178 $ 1,412,318 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 103,156 $ 117,112 Long-term debt, current maturities 124 127 Accrued income and other taxes 40,592 57,097 Other accrued liabilities 89,349 56,405 Related party payable - Tax Receivable Agreement 4,631 3,828 Total current liabilities 237,852 234,569 Long-term debt 921,803 1,029,561 Other long-term obligations 50,822 68,657 Deferred income taxes 45,065 40,674 Related party payable - Tax Receivable Agreement long-term 10,921 15,455 Commitments and contingencies – Note 12 Stockholders’ equity: Preferred stock, par value $ 0.01 , 300,000,000 shares authorized, none issued — — Common stock, par value $ 0.01 , 3,000,000,000 shares authorized, 256,597,342 and 263,255,708 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 2,566 2,633 Additional paid-in capital 745,164 761,412 Accumulated other comprehensive loss ( 8,070 ) ( 7,444 ) Accumulated deficit ( 401,945 ) ( 733,199 ) Total stockholders’ equity 337,715 23,402 Total liabilities and stockholders’ equity $ 1,604,178 $ 1,412,318 See accompanying Notes to the Consolidated Financial Statements 47 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands, except per share data) Year Ended December 31, 2022 2021 2020 STATEMENTS OF OPERATIONS Net sales $ 1,281,250 $ 1,345,788 $ 1,224,361 Cost of sales 726,373 701,335 563,864 Gross profit 554,877 644,453 660,497 Research and development 3,641 3,771 3,975 Selling and administrative expenses 76,977 132,608 67,913 Operating income 474,259 508,074 588,609 Other (income) expense, net ( 10,064 ) ( 16,451 ) 3,330 Related party Tax Receivable Agreement (benefit) expense ( 83 ) 231 ( 21,090 ) Interest expense 36,568 68,760 98,074 Interest income ( 4,480 ) ( 872 ) ( 1,750 ) Income before provision for income taxes 452,318 456,406 510,045 Provision for income taxes 69,356 68,076 75,671 Net income $ 382,962 $ 388,330 $ 434,374 Basic income per common share: Net income per share $ 1.48 $ 1.46 $ 1.62 Weighted average common shares outstanding 258,781,843 266,251,097 267,916,483 Diluted income per common share: Net income per share 1.48 1.46 1.62 Weighted average common shares outstanding 258,791,228 266,317,194 267,930,644 STATEMENTS OF COMPREHENSIVE INCOME Net income $ 382,962 $ 388,330 $ 434,374 Other comprehensive (loss) income: Foreign currency translation adjustments, net of tax of $ 0 , $ 0 and $( 162 ), respectively ( 7,024 ) ( 19,605 ) 6,568 Commodities, interest rate and foreign currency derivatives, net of tax of $( 2,591 ), $( 8,632 ) and $ 5,399 , respectively 6,398 31,802 ( 18,848 ) Other comprehensive (loss) income, net of tax: ( 626 ) 12,197 ( 12,280 ) Comprehensive income $ 382,336 $ 400,527 $ 422,094 See accompanying Notes to the Consolidated Financial Statements 48 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31, 2022 2021 2020 Cash flow from operating activities: Net income $ 382,962 $ 388,330 $ 434,374 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization 55,496 65,716 62,963 Related party Tax Receivable Agreement (benefit) expense ( 83 ) 231 ( 21,090 ) Deferred income tax provision 17,022 ( 3,657 ) 20,241 Loss on extinguishment of debt — — 8,329 Non-cash stock-based compensation expense 2,311 16,631 2,665 Non-cash interest expense ( 2,428 ) 12,051 6,192 Other adjustments ( 8,023 ) 7,107 7,861 Net change in working capital* ( 99,575 ) ( 16,377 ) 86,438 Change in related party Tax Receivable Agreement ( 3,745 ) ( 21,799 ) ( 27,857 ) Change in long-term assets and liabilities ( 19,309 ) ( 5,193 ) ( 16,470 ) Net cash provided by operating activities 324,628 443,040 563,646 Cash flow from investing activities: Capital expenditures ( 72,165 ) ( 58,257 ) ( 36,075 ) Proceeds from the sale of fixed assets 195 397 379 Net cash used in investing activities ( 71,970 ) ( 57,860 ) ( 35,696 ) Cash flow from financing activities: Debt issuance and modification costs ( 2,232 ) ( 3,109 ) ( 6,278 ) Proceeds from the issuance of long-term debt — — 500,000 Principal payments on long-term debt ( 110,124 ) ( 400,142 ) ( 896,360 ) Repurchase of common stock ( 60,000 ) ( 50,000 ) ( 30,099 ) Payments for taxes related to net share settlement of equity awards ( 230 ) ( 4,077 ) ( 71 ) Proceeds from exercise of stock options 225 351 — Dividends paid to non-related party ( 7,770 ) ( 7,439 ) ( 8,603 ) Dividends paid to related party ( 2,559 ) ( 3,206 ) ( 22,272 ) Interest rate swap settlements 6,423 ( 4,170 ) — Net cash used in financing activities ( 176,267 ) ( 471,792 ) ( 463,683 ) Net change in cash and cash equivalents 76,391 ( 86,612 ) 64,267 Effect of exchange rate changes on cash and cash equivalents 736 ( 1,316 ) 240 Cash and cash equivalents at beginning of period 57,514 145,442 80,935 Cash and cash equivalents at end of period $ 134,641 $ 57,514 $ 145,442 See accompanying Notes to the Consolidated Financial Statements 49 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) Year Ended December 31, 2022 2021 2020 Supplemental disclosures of cash flow information: Net cash paid during the periods for: Interest $ 39,503 $ 56,333 $ 86,962 Income taxes 67,122 63,791 73,971 * Net change in working capital due to the following components: Accounts and notes receivable, net $ 60,507 $ ( 28,927 ) $ 63,557 Inventories ( 153,579 ) ( 28,165 ) 44,633 Prepaid expenses and other current assets 593 ( 31,921 ) 3,028 Income taxes payable ( 15,029 ) 5,674 ( 12,420 ) Accounts payable and accruals 7,748 66,591 ( 12,790 ) Interest payable 185 371 430 Net change in working capital $ ( 99,575 ) $ ( 16,377 ) $ 86,438 See accompanying Notes to the Consolidated Financial Statements 50 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Dollars in thousands, except share data) Issued Shares of Common Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity (Deficit) Balance as of December 31, 2019 270,485,308 $ 2,705 $ 765,419 $ ( 7,361 ) $ ( 1,451,836 ) $ ( 691,073 ) Net income — — — — 434,374 434,374 Other comprehensive (loss) income: Commodity and interest rate derivatives loss, net of tax of $ 4,250 — — — ( 15,594 ) — ( 15,594 ) Commodity derivatives reclassification adjustments, net of tax of $ 879 — — — ( 3,254 ) — ( 3,254 ) Foreign currency translation adjustments, net of tax of $( 162 ) — — — 6,568 — 6,568 Total other comprehensive loss — — — ( 12,280 ) — ( 12,280 ) Repurchase of common stock ( 3,328,574 ) ( 33 ) ( 9,700 ) — ( 20,366 ) ( 30,099 ) Stock-based compensation 42,411 — 2,665 — — 2,665 Payments for taxes related to net share settlement of equity awards ( 10,598 ) — ( 30 ) — ( 41 ) ( 71 ) Dividends paid to related party ($ 0.115 per share) — — — — ( 22,272 ) ( 22,272 ) Dividends paid to non-related party ($ 0.115 per share) — — — — ( 8,603 ) ( 8,603 ) Adoption of ASC 326 — — — — ( 2,026 ) ( 2,026 ) Balance as of December 31, 2020 267,188,547 $ 2,672 $ 758,354 $ ( 19,641 ) $ ( 1,070,770 ) $ ( 329,385 ) Net income — — — — 388,330 388,330 Other comprehensive income (loss): Commodity and interest rate derivatives income, net of tax of $( 6,662 ) — — — 24,525 — 24,525 Commodity and interest rate derivatives reclassification adjustments, net of tax of $( 1,970 ) — — — 7,277 — 7,277 Foreign currency translation adjustments, net of tax of $ 0 — — — ( 19,605 ) — ( 19,605 ) Total other comprehensive income — — — 12,197 — 12,197 Repurchase of common stock ( 4,658,544 ) ( 46 ) ( 13,091 ) — ( 36,863 ) ( 50,000 ) Stock-based compensation 1,009,545 11 16,620 — — 16,631 Options exercised 33,500 — 351 — — 351 Payments for taxes related to net share settlement of equity awards ( 317,340 ) ( 4 ) ( 822 ) — ( 3,251 ) ( 4,077 ) Dividends paid to related party ($ 0.04 per share) — — — — ( 3,206 ) ( 3,206 ) Dividends paid to non-related party ($ 0.04 per share) — — — — ( 7,439 ) ( 7,439 ) Balance as of December 31, 2021 263,255,708 $ 2,633 $ 761,412 $ ( 7,444 ) $ ( 733,199 ) $ 23,402 Net income — — — — 382,962 382,962 Other comprehensive income (loss): Commodity, interest rate and foreign currency derivatives income, net of tax of $( 5,060 ) — — — 15,829 — 15,829 Commodity, interest rate and foreign currency derivatives reclassification adjustments, net of tax of $ 2,469 — — — ( 9,431 ) — ( 9,431 ) Foreign currency translation adjustments, net of tax of $ 0 — — — ( 7,024 ) — ( 7,024 ) Total other comprehensive loss — — — ( 626 ) — ( 626 ) Repurchase of common stock ( 6,662,421 ) ( 67 ) ( 18,721 ) — ( 41,212 ) ( 60,000 ) Stock-based compensation 1,348 — 2,311 — — 2,311 Options exercised 25,000 — 225 — — 225 Payments for taxes related to net share settlement of equity awards ( 22,293 ) — ( 63 ) — ( 167 ) ( 230 ) Dividends paid to related party ($ 0.04 per share) — — — — ( 2,559 ) ( 2,559 ) Dividends paid to non-related party ($ 0.04 per share) — — — — ( 7,770 ) ( 7,770 ) Balance as of December 31, 2022 256,597,342 $ 2,566 $ 745,164 $ ( 8,070 ) $ ( 401,945 ) $ 337,715 See accompanying Notes to the Consolidated Financial Statements 51 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except as otherwise noted) (1) Business and Summary of Significant Accounting Policies Discussion of Business and Structure GrafTech is a leading manufacturer of high-quality graphite electrode products essential to the production of EAF steel and other ferrous and non-ferrous metals. References herein to “GTI,” “we,” “our,” or “us” refer collectively to the Company and its subsidiaries. On August 15, 2015, GTI became an indirect wholly owned subsidiary of Brookfield. In April 2018, we completed our IPO of 38,097,525 shares of our common stock held by Brookfield at a price of $ 15.00 per share. We did not receive any proceeds related to the IPO. Our common stock is listed on the NYSE under the symbol “EAF.” Brookfield has since distributed a portion of its GrafTech common stock to the owners in the Brookfield consortium and sold shares of GrafTech common stock in public and private transactions, resulting in reduction of Brookfield's ownership of outstanding shares of GrafTech common stock to 24.9 % as of December 31, 2022 and 24.3 % as of December 31, 2021. See Note 14, "Stockholders' Equity," for more information. The increase in Brookfield's share ownership from December 31, 2021 to December 31, 2022 reflects a reduction of the Company's total outstanding shares due to the repurchase and retirement of 6.7 million shares of its common stock in 2022. The Company’s only reportable segment, Industrial Materials, is comprised of its two major product categories: graphite electrodes and petroleum needle coke products. Petroleum needle coke is our key raw material used in the production of graphite electrodes. The Company's vision is to provide highly engineered graphite electrode products, services and solutions to electric arc furnace operators. Summary of Significant Accounting Policies The Consolidated Financial Statements include the financial statements of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Cash Equivalents Cash equivalents consist of short-term, highly liquid investments with an original maturity of three months or less. Cash equivalents consist of certificates of deposit, money market funds and commercial paper. Revenue Recognition Revenue is recognized when a customer obtains control of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. To achieve this core principle, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. The Company sells the majority of its products directly to steel manufacturers located in various jurisdictions. The Company’s contracts consist of longer-term take-or-pay sales contracts of graphite electrodes with initial terms of up to five years and short-term purchase orders (deliveries within one year ). Collectability is assessed based on the customer’s ability and intention to pay, reviewing a variety of factors including the customer’s historical payment experience and published credit and financial information. Additionally, for multi-year contracts, we may require the customer to post a bank guarantee, guarantee of a parent, a letter of credit or a significant prepayment. The promises of delivery of graphite electrodes represent the distinct performance obligations of the Company's contracts. A small portion of the Company's sales consist of deliveries of by-products of the manufacturing processes, such as graphite powders, naphta and gasoil. Given their nature, the Company’s performance obligations are satisfied at a point in time when control of the products has been transferred to the customer. In most cases, control transfer is deemed to happen at the delivery point of the products defined under the incoterms, usually at time of loading the truck or the vessel. The Company has elected to treat the 52 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS transportation activity as a fulfillment activity instead of as a distinct performance obligation, and outbound freight cost is accrued when the product delivery promises are satisfied. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods to the customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer are excluded from the transaction price. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. The estimated variable consideration is reflected through revenue reversal accruals that are based on the Company's experience, as well as anticipated performance. Historically, these reversals have been insignificant. Additionally, when termination fees are invoiced under certain provisions of the LTAs, they are accounted for as an element of variable consideration that is constrained, i.e., not recognized, until collected. Contracts that contain multiple distinct performance obligations require an allocation of the transaction price to each performance obligation based on a relative stand-alone selling price basis. The Company regularly reviews market conditions and internally approved pricing guidelines to determine stand-alone selling prices for the different types of its customer contracts. The stand-alone prices as known at contract inception are utilized as the basis to allocate the transaction price to the distinct performance obligations. The allocation of the transaction price to the performance obligations remains unchanged if stand-alone selling prices change after contract inception. Changes to LTAs are reviewed to assess whether there has been a change in volume, price or both and whether any additional volumes are at their stand-alone selling price to determine whether the contract modification should be accounted for as (1) part of the existing contract, (2) the termination of the existing contract and the creation of a new contract or (3) a separate contract. Under the most commonly negotiated terms, the accounting is such that it treats these modified contracts as the termination of the existing contract and the creation of a new contract. Inventories Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out ("FIFO") or average cost, which approximates FIFO, methods. Elements of cost in inventory include raw materials, energy costs, direct labor, manufacturing overhead and depreciation of manufacturing fixed assets. The Company allocates fixed production overheads to the costs of conversion based on normal capacity utilization of the production facilities. The Company recognizes abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) as current period charges. Property, Plant and Equipment Expenditures for property, plant and equipment are recorded at cost. Maintenance and repairs of property and equipment are expensed as incurred. Expenditures for replacements and betterments are capitalized and the replaced assets are retired. Gains and losses from the sale of property, plant and equipment are included in cost of sales or other (income) expense, net on the Consolidated Statements of Operations. The Company depreciates its assets using the straight-line method over the estimated useful lives of the assets. The ranges of estimated useful lives are as follows: Years Buildings 25 - 40 Land improvements 20 Machinery and equipment 5 - 20 Furniture and fixtures 5 - 10 The carrying value of fixed assets is assessed when events and circumstances indicating impairment are present. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Depreciation expense was $ 45.4 million, $ 55.0 million and $ 51.5 million in 2022, 2021 and 2020, respectively. Accounts payable associated with capital expenditures totaled $ 23.4 million and $ 15.7 million as of December 31, 2022 and 2021, respectively. 53 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Leases The Company determines if an arrangement is a lease at inception. When an arrangement contains a lease, the Company then determines if it meets any of the criteria to be classified as a finance lease. Leases with a term of 12 months or less are not recorded on the balance sheet. Right of Use ("RoU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. RoU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. In order to compute the lease liability, when the rate implicit in the lease is not readily determinable, the Company discounts the lease payments using its estimated incremental borrowing rate for secured fixed rate debt over the same term, derived from information available at the lease commencement date. The Company's lease terms include the option to extend the lease when it is reasonably certain that option will be exercised. Lease and non-lease components are treated as a single lease component, except for leases of warehouse space where they will be accounted for separately. Leases may include variable lease and variable non-lease components costs, which are accounted for as variable lease expense in the Consolidated Statements of Operations. Accounts Receivable Trade accounts receivable primarily arise from sales of goods to customers and distributors in the normal course of business. Allowance for Doubtful Accounts The Company recognizes credit losses at the time the financial assets originate or are acquired using a lifetime of expected credit losses measurement. The Company's expected losses are adjusted each period for changes in expected lifetime credit losses. Debt Issuance Costs Deferred financing costs are amortized over the terms of the related debt using the effective interest method. If the terms of renewed or modified debt instruments are deemed to be substantially different, all unamortized financing costs associated with the modified debt are charged to earnings in the current period. If the terms are not substantially different, the costs associated with the renewal are capitalized and amortized over the remaining term of the debt instrument. For modifications affecting a line of credit, fees paid to a creditor and any third party costs will be capitalized and amortized over the remaining term of the new arrangement. Any unamortized deferred financing costs associated with the old arrangement are either deferred and amortized over the life of the new arrangement or written off, depending upon the nature of the modification and cost. The balance of any unamortized financing costs on extinguished debt is expensed upon extinguishment. Derivative Financial Instruments We do not use derivative financial instruments for trading purposes. They are used to manage well-defined commercial risks associated with commodity purchases, interest rates and currency exchange rate risks. On the date that a derivative contract for a hedging instrument is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge) or (4) a contract not designated as a hedging instrument. For a fair value hedge, both the effective and ineffective portions of the change in the fair value of the derivative are recorded in earnings and reflected in the Consolidated Statement of Operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss ("AOCL") in the Consolidated Balance Sheet. When the underlying hedged transaction is realized, the gain or loss included in AOCL is recorded in earnings and reflected in the Consolidated Statement of Operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. For a net investment hedge, the effective portion of the change in the fair value of the derivative is recorded in cumulative translation adjustment, which is a component of AOCL in the Consolidated Balance Sheet and is de-recognized upon liquidation or sale of the entity. For contracts not designated as hedging instruments, changes in fair value are adjusted through the statement of operations. 54 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS We formally document our hedge relationships, including the identification of the hedging instruments and the related hedged items, as well as our risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded at fair value in prepaid expenses and other current assets, other long-term assets, other current liabilities and other long-term obligations in the consolidated balance sheets. We also formally assess, both at inception and at least quarterly thereafter, whether a derivative used in a hedging transaction is highly effective in offsetting changes in either the fair value or the cash flows of the hedged item. When it is determined that a derivative ceases to be highly effective or that the hedged transaction is no longer probable of occurring, we discontinue hedge accounting. Foreign Currency Derivatives We enter into foreign currency derivatives from time to time to manage exposure to changes in currency exchange rates. These instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures, relating to non-dollar denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased foreign currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at fair value. These contracts may be designated as cash flow or fair value hedges to the extent that they are effective and are accounted for as described in section above (“Derivative Financial Instruments”). For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in cost of sales on the Consolidated Statements of Operations. Derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency. Commodity Contracts We enter into derivative contracts for refined oil products from time to time. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. All commodity contracts are carried at fair value and are treated as cash flow hedges to the extent they are effective. Changes in their fair values are included in AOCL in the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from settlement are first recognized in AOCL and are recorded in cost of sales on the Consolidated Statements of Operations when the underlying hedged item is realized. Interest Rate Swap Contracts We have entered into interest rate swap contracts that are "pay fixed, receive variable" with maturities of either two or five years . The Company’s risk management objective is to fix its cash flows associated with the risk in variability in the one-month USD LIBOR for a portion of its outstanding debt under the 2018 Term Loan Facility (as defined in Note 5, "Debt and Liquidity"). It is expected that these swaps will fix the cash flows associated with the forecasted interest payments on this notional amount of debt. Designated interest rate swaps are carried at their fair value and are treated as cash flow hedges. Changes in their fair value are included in AOCL on the Consolidated Balance Sheets until settlement. Realized gains and losses resulting from the settlement are recognized in interest expense in the period of settlement. Changes in fair value of the de-designated portion of interest rate swaps are recorded in the statement of operations. Income Taxes We file a consolidated U.S. federal income tax return for GTI and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained, when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized. Under the guidance on accounting for uncertainty in income taxes, we recognize the benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. 55 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company treats taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Tax Income ("GILTI") as a current period expense when incurred. See Note 13, "Income Taxes" for more information. Recent Law Changes On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which includes a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases after December 31, 2022, and several tax incentives to promote clean energy. The Company does not believe this legislation will have a material impact on its consolidated financial statements and will continue to assess the implications. Related Party Tax Receivable Agreement On April 23, 2018, the Company entered into a Tax Receivable Agreement that provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85 % of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal net operating losses ("NOLs"), previously taxed income under Section 959 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), foreign tax credits, and certain NOLs in Swissco (collectively, the "Pre-IPO Tax Assets"). In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00 % per annum. The term of the Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments. The Tax Receivable Agreement liability is recorded based on the best estimate of the utilization of Pre-IPO Tax Assets and is revised annually in the fourth quarter or earlier if and when significant changes in the forecast are identified. Retirement Plans and Post-Employment Benefits We use actuarial methods and assumptions to account for our defined benefit pension plans and our post-employment benefits. We recognize in earnings the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each year with a mark-to-market adjustment ("MTM Adjustment") and whenever a plan is remeasured (e.g., due to a significant curtailment, settlement, etc.). Pension and post-employment benefits expense includes the MTM Adjustment, actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets and adjustments due to plan settlements and curtailments. Contributions to the qualified U.S. retirement plan are made in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Additional information with respect to benefits plans is set forth in Note 11, “Retirement Plans and Post-Employment Benefits.” Stock-based Compensation The Company recognizes stock-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. Stock-based awards include stock options, restricted stock units ("RSUs") and deferred share units ("DSUs"). The fair value of RSUs and DSUs is primarily based on the closing market price of a share of the Company's common stock on the date of grant, modified as appropriate to take into account the features of such grants. Stock options are granted with an exercise price equal to the closing price of the Company's common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. The Company accounts for forfeitures as they occur. See Note 3, "Stock-Based Compensation" for additional information. Environmental, Health and Safety Matters Our operations are governed by laws addressing protection of the environment and worker safety and health. These laws provide for civil and criminal penalties and fines, as well as injunctive and remedial relief, for noncompliance and require remediation at sites where hazardous substances have been released into the environment. We have been in the past, and may become in the future, the subject of formal or informal enforcement actions or proceedings regarding noncompliance with these laws or the remediation of company-related substances released into the environment. Historically, such matters have been resolved by negotiation with regulatory authorities resulting in commitments 56 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS to compliance, abatement or remediation programs and in some cases payment of penalties. Historically, neither the commitments undertaken nor the penalties imposed on us have been material. Environmental considerations are part of all significant capital expenditure decisions. Environmental remediation , compliance and management expenses were approximately $ 22.4 million, $ 16.9 million and $ 11.1 million in 2022, 2021 and 2020, respectively. A charge to income is recorded when it is probable that a liability has been incurred and the cost can be reasonably estimated. When payments are fixed or determinable, the liability is discounted using a rate at which the payments could be effectively settled. The accrued liability relating to environmental remediation was $ 4.4 million and $ 4.9 million as of December 31, 2022 and 2021, respectively. Our environmental liabilities do not take into consideration possible recoveries of insurance proceeds. Because of the uncertainties associated with environmental remediation activities at sites where we may be potentially liable, future expenses to remediate sites could be considerably higher than the accrued liability. Foreign Currency Translation and Remeasurement We translate the financial statements of foreign subsidiaries, whose local currency is their functional currency, to U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenues, expenses, gains and losses. Differences arising from exchange rate changes are included in AOCL on the Consolidated Balance Sheets until such time as the operations of such non-U.S. subsidiaries are sold or substantially or completely liquidated. For our Russian, Swiss, Luxembourg, United Kingdom and Mexican subsidiaries, whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses arising from the fluctuations in currency for monetary accounts are recognized in other (income) expense, net, in the Consolidated Statements of Operations. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred. We have non-dollar denominated intercompany loans between some of our foreign subsidiaries. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. One of these loans has been deemed to be essentially permanent prior to settlement and, as a result, remeasurement gains and losses on this loan were recorded as a component of AOCL on the Consolidated Balance Sheets. The remaining loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency (gains) losses in other (income) expense, net, on the Consolidated Statements of Operations. Goodwill and Other Intangible Assets Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. We do not recognize deferred income taxes for the difference between the assigned value and the tax basis related to nondeductible goodwill. Goodwill is not amortized; however, impairment testing is performed annually or more frequently if circumstances indicate that impairment may have occurred. We perform the annual goodwill impairment test at December 31. The annual goodwill impairment testing may begin with a qualitative assessment of potential impairment indicators in order to determine whether it is necessary to perform the quantitative goodwill impairment test. Other amortizable intangible assets, which consist primarily of trademarks and trade names, technology and know-how and customer-related intangibles, are amortized over their estimated useful lives using the straight line or sum-of-the-years digits method. The estimated useful lives for each major category of amortizable intangible assets are: Years Trade names 5 - 20 Technology and know-how 5 - 14 Customer-related intangibles 5 - 15 Additional information about goodwill and other intangibles is set forth in Note 6, “Goodwill and Other Intangible Assets.” 57 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Major Maintenance and Repair Costs We perform scheduled major maintenance of the storage and processing units at our Seadrift plant (referred to as “overhaul”). Time periods between overhauls vary by unit. We also perform significant maintenance and repair shutdown of the plant (referred to as “turnaround”) every other year. Costs of overhauls and turnarounds include plant personnel, contract services, materials and rental equipment. We defer these costs when incurred and use the straight-line method to amortize them over the period of time estimated to lapse until the next scheduled overhaul of the applicable storage or processing unit. Under this policy, $ 17.2 million was deferred in 2022 and $ 0.7 million was deferred in 2021. Amortization of deferred maintenance costs totaled $ 4.7 million, $ 4.6 million and $ 6.0 million in 2022, 2021 and 2020, respectively. Earnings per share The calculation of basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share recognizes the dilution that would occur if stock options or restricted stock units were exercised or settled into common shares. See Note 15, “Earnings per Share.” Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses. Significant estimates and assumptions are used for, but are not limited to, inventory valuation, pension and other post-employment benefits, allowance for doubtful accounts, contingent liabilities, accruals and valuation allowances, asset impairment, and environmental-related accruals. Actual results could differ from our estimates . Reclassifications and Adjustments Certain items previously reported in specific financial statement captions within the Consolidated Statements of Cash Flows have been reclassified between lines within cash flow from financing activities to conform to the current presentation. Subsequent Events We evaluate events that occur after the balance sheet date but before financial statements are issued to determine if a material event requires our amending the financial statements or disclosing the event. See Note 17, "Subsequent Events" for further details. Recently Adopted Accounting Standards In January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-01, Reference Rate Reform (Topic 848): Scope , which amended Topic 848 reference rate reform to clarify the scope and availability of expedients for certain derivative instruments affected by reference rate reform. We have elected various optional expedients in Topic 848 related to hedging relationships and expect to make future elections related to contract modifications and other hedging relationships. The future election and application of these expedients are not expected to have a material impact on our financial position, results of operations and cash flows. Accounting Guidance Issued But Not Adopted In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations , which requires disclosures intended to enhance the transparency of supplier finance programs. The amendments in this ASU require buyers in a supplier finance program to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The amendments should be applied retrospectively to each period in which a balance sheet is presented, except for disclosure of rollforward information, which should be applied prospectively. The Company is currently evaluating the impact of adopting this guidance on its disclosures. 58 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (2) Revenue from Contracts with Customers Disaggregation of Revenue The following table provides information about disaggregated revenue by type of product and contract: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Graphite Electrodes - LTAs $ 870,287 $ 1,040,214 $ 1,069,772 Graphite Electrodes - Non-LTAs 351,140 258,426 123,845 By-products and other 59,823 47,148 30,744 Total Revenues $ 1,281,250 $ 1,345,788 $ 1,224,361 The Graphite Electrodes revenue categories include only graphite electrodes manufactured by GrafTech. Contract Balances Substantially all the Company's receivables relate to contracts with customers. Accounts receivable are recorded when the right to consideration becomes unconditional. Payment terms on invoices range from 30 to 120 days depending on the customary business practices of the jurisdictions in which we do business. Certain short-term and longer-term sales contracts require up-front payments prior to the Company’s fulfillment of any performance obligation. These contract liabilities are recorded as current or long-term deferred revenue, depending on the lag between the prepayment and the expected delivery of the related products. Additionally, deferred revenue or contract assets originate from contracts where the allocation of the transaction price to the performance obligations based on their relative stand-alone selling prices results in the timing of revenue recognition being different from the timing of the invoicing. In this case, deferred revenue is amortized into revenue based on the transaction price allocated to the remaining performance obligations and contract assets are realized through the contract invoicing. The Company did not have any contract asset balances as of December 31, 2022. Contract assets as of December 31, 2021 were $ 1.2 million, which are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheets. Current deferred revenue is included in "Other accrued liabilities" and long-term deferred revenue is included in "Other long-term obligations" on the Consolidated Balance Sheets. The following table provides our contract liability balances as of December 31, 2022 and 2021. December 31, 2022 December 31, 2021 (Dollars in thousands) Current deferred revenue $ 27,878 $ 9,840 Long-term deferred revenue — 4,303 The amount of revenue recognized in 2022 that was included in the December 31, 2021 deferred revenue current and long-term balances was $ 2.5 million and $ 0.1 million, respectively. The increase in the December 31, 2022 current deferred revenue balance versus the prior year was primarily driven by shipments relative to some contractual prepayments being postponed to the following year. Additionally, the balance includes cashed bank guarantees relative to outstanding arbitration proceedings whose outcome will determine timing of revenue recognition. The amount of revenue recognized in 2021 that was included in the December 31, 2020 deferred revenue current balance was $ 5.5 million. 59 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Transaction Price Allocated to the Remaining Performance Obligations The following table presents estimated revenues expected to be recognized in the corresponding period below related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of reporting period. The revenue associated with our LTAs is expected to be approximately as follows: 2023 2024 (Dollars in millions) Estimated LTA revenue $ 235 -$ 275 $ 100 -$ 135 (1) (1) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs. The majority of the LTAs are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. For the 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 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. 60 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (3) Stock-Based Compensation The Company's Omnibus Equity Incentive Plan permits the granting of options and other stock-based awards (including restricted stock units ("RSUs") and deferred share units ("DSUs")). As of December 31, 2022, the aggregate number of shares authorized under the plan since its initial adoption was 15.0 million. Shares issued upon vesting of awards or exercise of options are new share issuances. Upon the vesting or payment of stock awards, an employee may elect receipt of the full share amount and either pay the resulting taxes or have the Company withhold shares to cover the tax obligation. At December 31, 2022, 11.2 million common stock shares were available for future issuance. Stock-based compensation expense was $ 2.3 million, $ 16.6 million and $ 2.7 million in 2022, 2021 and 2020, respectively. A majority of the expense, $ 2.1 million in 2022, $ 14.6 million in 2021 and $ 2.3 million in 2020, was recorded as selling and administrative expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales. Stock-based compensation expense for 2021 included $ 14.7 million, recorded in the second quarter of 2021, due to the Change in Control accelerated vesting provisions of certain of the Company's awards. For the purpose of these grants, a Change in Control occurred when Brookfield and any affiliates thereof ceased to own stock of the Company that constituted at least thirty percent ( 30 %) or thirty-five percent ( 35 %), as applicable, of the total fair market value or total voting power of the stock of the Company. Out of the $ 14.7 million recorded with the Change in Control, $ 0.9 million accelerated at the 35 % ownership level and the remaining $ 13.8 million accelerated at the 30 % ownership level. The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based compensation awards are exercised or vest. The Company recognized tax benefits of less than $ 0.1 million, $ 1.8 million and $ 0.5 million in 2022, 2021 and 2020, respectively, relating to the issuance of common stock for the exercise/vesting of equity awards. Stock Options. Non-qualified stock options may be granted to our employees and directors. Stock options vest over a five-year period, with one-fifth of the award vesting on the anniversary date of the grant in each of the next five years and expire 10 years from the date of grant. Option exercises are satisfied through the issuance of common shares. Compensation expense for stock options is based on the estimated fair value of the option on the date of the grant. We calculate the estimated fair value of the option using the Black-Scholes option-pricing model. The weighted average assumptions used in our Black-Scholes option pricing model for options granted in 2022, 2021 and 2020 were as follows: 2022 2021 2020 Dividend yield 0.40 % - 0.56 % 0.32 % - 0.35 % 0.44 % - 3.77 % Expected volatility 58.14 % 61.62 % 50.00 % Risk-free interest rate 1.93 % - 2.89 % 1.10 % - 1.21 % 0.37 % - 1.22 % Expected term in years 6.5 years 6.5 years 6.5 years Dividend Yield . Our dividend yield estimate is based on our expected dividends and the stock price on the grant date. Expected Volatility . We estimate the volatility of our common stock at the date of grant based on the historical volatility of the Company’s stock. The volatility factor we use is based on our historical closing prices since our stock has been publicly traded. Risk-Free Interest Rate. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. Expected Term In Years. The expected life of awards granted represents the time period that the awards are expected to be outstanding. We determined the expected term of the grants using the “simplified” method as described by the Securities and Exchange Commission, since we do not have a history of stock option awards to provide a reliable basis for estimating such term. 61 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes activity related to stock options during 2022: Number of Options Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value (thousands) Weighted Average Remaining Term (Years) Outstanding at December 31, 2021 1,616,720 $ 13.08 Granted 447,562 9.68 Exercised ( 25,000 ) 9.02 Forfeited or expired ( 149,115 ) 13.40 Outstanding at December 31, 2022 1,890,167 $ 12.30 $ — 7.1 years Vested and Expected to vest as of December 31, 2022 1,890,167 $ 12.30 $ — 7.1 years Exercisable at December 31, 2022 1,460,664 $ 12.88 $ — 6.6 years Outstanding options have exercise prices ranging from $ 7.21 per share to $ 20.00 per share. A summary of the status and changes of stock options and the related average price per share follows: Number of Options Weighted- Average Grant Date Fair Value Outstanding unvested as of December 31, 2021 115,920 $ 6.64 Granted 447,562 5.33 Vested ( 49,936 ) 6.40 Forfeited ( 84,043 ) 6.06 Outstanding unvested as of December 31, 2022 429,503 $ 5.42 We recognized stock-based compensation expense of $ 0.6 million, $ 5.9 million and $ 1.1 million in 2022, 2021 and 2020, respectively, relating to stock options. As of December 31, 2022, there was $ 1.8 million of total unrecognized compensation cost related to unvested stock options, which is expected to be amortized over a weighted average period of 4.0 years. The total fair value of options vested was $ 0.3 million in 2022, $ 6.6 million in 2021 and $ 1.1 million in 2020. There were 25,000 and 39,700 options exercised during 2022 and 2021, respectively. No options were exercised during 2020. Cash received from option exercises during 2022 and 2021 was $ 0.2 million and $ 0.4 million, respectively. RSUs. RSUs constitute an agreement to deliver shares of common stock to the participant at the end of a vesting period. Compensation expense for RSUs is based on the closing price of our common stock on the date of grant, less forfeitures or cancellations of awards throughout the vesting period. RSUs vest over a five year period, with one-fifth of the award vesting on the anniversary date of the grant in each of the next five years . A summary of the status and changes of shares subject to RSU awards for employees and the related average price per share follows: Number of Shares Weighted- Average Grant Date Fair Value Outstanding unvested as of December 31, 2021 2,696 $ 13.96 Granted 554,004 9.76 Cancelled ( 78,035 ) 10.08 Vested ( 1,348 ) 13.96 Outstanding unvested as of December 31, 2022 477,317 $ 9.72 During 2022, 2021 and 2020, we recognized stock-based compensation expense of $ 0.7 million, $ 10.0 million and $ 1.0 million, respectively, relating to RSU awards for employees. The total fair value of RSU awards vested during 2022 was less than $ 0.1 million. The total fair value of RSU awards vested in 2021 and 2020 was $ 10.8 million and $ 0.6 million, 62 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS respectively. As of December 31, 2022, $ 3.9 million of expense with respect to non-vested RSUs has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 4.2 years. DSUs. DSUs are primarily granted to our independent directors in lieu of cash retainers and vest immediately upon grant. All whole DSUs will be settled in shares of our common stock after the Director's termination of service on the Board and any fractional shares will be settled in cash. During 2022, we granted 169,010 DSUs to our independent directors with a weighted-average grant date fair value of $ 5.84 per share. During 2022, 2021 and 2020, we recognized stock-based compensation expense of $ 1.0 million, $ 0.7 million and $ 0.6 million, respectively, relating to DSU awards. The total fair value of DSU awards vested was $ 1.0 million in both 2022 and 2021 and $ 0.5 million in 2020. (4) Segment Reporting Our Industrial Materials segment, our only reportable segment, manufactures high-quality graphite electrodes essential to the production of EAF steel and other ferrous and non-ferrous metals. Petroleum needle coke, a crystalline form of carbon derived from decant oil, is a key raw material used in the production of graphite electrodes. We utilize the majority of the needle coke that we produce internally to manufacture our graphite electrodes and as a result approximately 95 % of our revenues from external customers are derived from the sale of graphite electrodes. No single customer accounted for 10% or more of the Company's net sales in 2022, 2021 or 2020. The following tables summarize information as to the Company's operations in different geographic areas: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Net sales: United States $ 340,793 $ 285,710 $ 260,867 Americas (excluding the United States) 256,253 241,442 187,779 Asia Pacific 116,849 154,084 127,415 Europe, Middle East, Africa 567,355 664,552 648,300 Total $ 1,281,250 $ 1,345,788 $ 1,224,361 December 31, 2022 2021 (Dollars in thousands) Long-lived assets (a): United States $ 192,038 $ 179,003 Mexico 124,024 123,997 Brazil 4,327 4,090 France 93,880 93,579 Spain 104,392 100,248 Other countries 485 556 Total $ 519,146 $ 501,473 (a) Long-lived assets represent fixed assets, net of accumulated depreciation. 63 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (5) Debt and Liquidity The following table presents our long-term debt: December 31, 2022 December 31, 2021 (Dollars in thousands) 2018 Term Loan Facility $ 433,708 $ 543,708 2020 Senior Secured Notes 500,000 500,000 Other debt 268 429 Unamortized debt discount and issuance costs ( 12,049 ) ( 14,449 ) Total debt 921,927 1,029,688 Less: Long-term debt, current portion ( 124 ) ( 127 ) Long-term debt $ 921,803 $ 1,029,561 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 Inc. (“GrafTech Finance”) is the sole borrower under the 2018 Term Loan Facility while GrafTech Finance, GrafTech Switzerland SA (“Swissco”) and GrafTech Luxembourg II S.à.r.l. (“Luxembourg Holdco” and, together with GrafTech Finance and Swissco, the “Co-Borrowers”) are co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the 2018 Revolving Credit Facility mature on February 12, 2025 and 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 1.00 % 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 64 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 had satisfied all required amortization installments through such date. The 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to GrafTech and restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The 2018 Credit Agreement contains a financial covenant that requires GrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00 to 1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $ 35.0 million), taken together, exceed 35 % of the total amount of commitments under the 2018 Revolving Credit Facility. The 2018 Credit Agreement also contains customary events of default. The Company was in compliance with all of its debt covenants as of December 31, 2022 and 2021. 2020 Senior Secured Notes In December 2020, GrafTech Finance issued $ 500.0 million aggregate principal amount of 4.625 % senior secured notes due 2028 (the “2020 Senior Secured Notes”) in a private offering. The 2020 Senior Secured Notes and related guarantees are secured on a pari passu basis by the collateral securing the Senior Secured Credit Facilities. All of the proceeds from the 2020 Senior Secured Notes were used to partially repay borrowings under our 2018 Term Loan Facility. The 2020 Senior Secured Notes pay interest in arrears on June 15 and December 15 of each year, with the principal due in full on December 15, 2028. Prior to December 15, 2023, up to 40 % of the 2020 Senior Secured Notes may be redeemed with the net cash proceeds of certain equity offerings at a price equal to 104.625 % of the principal amount thereof, together with accrued and unpaid interest, if any. The 2020 Senior Secured Notes may be redeemed, in whole or in part, at any time prior to December 15, 2023 at a price equal to 100 % of the principal amount of the notes redeemed plus a premium together with accrued and unpaid interest, if any, to, but not including, the redemption date. Thereafter, the 2020 Senior Secured Notes may be redeemed, in whole or in part, at various prices depending on the date redeemed. The indenture governing the 2020 Senior Secured Notes (the “Indenture”) contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. Pursuant to the Indenture, if our pro forma consolidated first lien net leverage ratio is no greater than 2.00 to 1.00, we can make restricted payments so long as no default or event of default has occurred and is continuing. If our pro forma consolidated first lien net leverage ratio is greater than 2.00 to 1.00, we can make restricted payments pursuant to certain baskets. The Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or GrafTech Finance, all outstanding 2020 Senior Secured Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the 65 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. (6) Goodwill and Other Intangible Assets Goodwill and indefinite-lived intangible assets are required to be reviewed annually for impairment. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company's annual impairment tests performed in 2022, 2021 and 2020 did not result in the fair value of its reporting unit being less than its carrying value. We performed the step 0 qualitative assessment in 2022 and 2021. The goodwill balance, which relates to one reporting unit, was $ 171.1 million as of each of December 31, 2022 and 2021. The following table summarizes acquired intangible assets with determinable useful lives by major category which are included in "Other assets" on our Consolidated Balance Sheets: December 31, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Dollars in thousands) Trade names $ 22,500 $ ( 15,869 ) $ 6,631 $ 22,500 $ ( 13,935 ) $ 8,565 Technology and know-how 55,300 ( 42,371 ) 12,929 55,300 ( 38,486 ) 16,814 Customer-related intangibles 64,500 ( 32,513 ) 31,987 64,500 ( 28,195 ) 36,305 Total finite-lived intangible assets $ 142,300 $ ( 90,753 ) $ 51,547 $ 142,300 $ ( 80,616 ) $ 61,684 Amortization expense of intangible assets was $ 10.1 million, $ 10.7 million and $ 11.4 million in 2022, 2021 and 2020, respectively. Estimated annual amortization expense for the next five years will approximate $ 9.2 million in 2023, $ 8.0 million in 2024, $ 7.3 million in 2025, $ 6.7 million in 2026 and $ 6.1 million in 2027. (7) Interest Expense The following table presents an analysis of interest expense: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Interest incurred on debt $ 43,609 $ 56,731 $ 83,555 Accretion of original issue discount on 2018 Term Loan Facility 1,200 3,387 5,340 Amortization of debt issuance and modification costs 3,475 8,642 9,179 Unrealized mark-to-market gain on de-designated interest rate swap ( 7,111 ) — — Gain upon partial termination of embedded derivative ( 4,605 ) — — Total interest expense $ 36,568 $ 68,760 $ 98,074 66 Interest rates The 2020 Senior Secured Notes carry a fixed interest rate of 4.625 %. The 2018 Term Loan Facility had an interest rate of 7.38 % as of December 31, 2022, 3.50 % as of December 31, 2021 and 4.50 % as of December 31, 2020. The Company has several interest rate swap contracts to fix its cash flows associated with the risk in variability in the one-month USD London Interbank Offered Rate ("USD LIBOR") for the 2018 Term Loan Facility. The interest rate swaps fixed the cash flows associated with the payments on our Term Loan Facility to an effective fixed interest rate of 4.2 % throughout 2022. See Note 5, "Debt and Liquidity" for details of our debt and Note 8, "Fair Value Measurements and Derivative Instruments" for additional details on our interest rate swaps and embedded derivative. In 2022, the Company made voluntary prepayments of $ 110.0 million under its 2018 Term Loan Facility. In connection with this, the Company recorded $ 0.5 million of accelerated accretion of the original issue discount and $ 0.8 million of accelerated amortization of the debt issuance cost. In 2021, the Company made voluntary prepayments of $ 400.0 million under its 2018 Term Loan Facility. In connection with this, the Company recorded $ 2.3 million of accelerated accretion of the original issue discount and $ 3.7 million of accelerated amortization of the debt issuance costs. The Company also recorded $ 1.6 million of modification costs related to the 2018 Term Loan Facility repricing in the first quarter of 2021. In December 2020, the proceeds from the issuance of the $ 500.0 million 2020 Senior Secured Notes were used to repay $ 500.0 million of principal on the 2018 Term Loan Facility. The repayment of the 2018 Term Loan Facility was accounted for as a partial debt extinguishment and triggered $ 3.2 million of accelerated accretion of the original issue discount and $ 5.2 million of accelerated amortization of the debt issuance costs. The 2020 Senior Secured Notes were accounted for as new debt and the related debt issuance costs were deferred. (8) Fair Value Measurements and Derivative Instruments Fair Value Measurements Depending on the inputs, we classify each fair value measurement as follows: • Level 1 – Quoted market prices in active markets for identical assets or liabilities. • Level 2 – Inputs other than Level 1 inputs that are either directly or indirectly observable. • Level 3 – Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use. 67 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following tables present the classification of our assets and liabilities measured at fair value on a recurring basis: December 31, 2022 Total Level 1 Level 2 Level 3 Assets: (Dollars in thousands) Foreign currency derivatives $ 92 $ — $ 92 $ — Interest rate swap contracts 27,384 — 27,384 — Total assets at fair value $ 27,476 $ — $ 27,476 $ — Liabilities: Foreign currency derivatives $ 282 $ — $ 282 $ — Total liabilities at fair value $ 282 $ — $ 282 $ — December 31, 2021 Total Level 1 Level 2 Level 3 Assets: (Dollars in thousands) Foreign currency derivatives $ 388 $ — $ 388 $ — Commodity derivative contracts 8,469 — 8,469 — Interest rate swap contracts 6,060 — 6,060 — Total assets at fair value $ 14,917 $ — $ 14,917 $ — Liabilities: Foreign currency derivatives $ 2 $ — $ 2 $ — Interest rate swap contracts 140 — 140 — Total liabilities at fair value $ 142 $ — $ 142 $ — The carrying amounts and fair values of financial instruments, other than cash and cash equivalents, short-term notes and accounts receivable, accounts payable and other current payables, are shown in the table above. The carrying value of cash and cash equivalents, receivables and accounts payable approximate fair value due to the short-term nature of these instruments. The fair value of our debt as of December 31, 2022 and 2021 was $ 843.2 million and $ 1,051.6 million, respectively. The fair values were determined using Level 2 quoted market prices for the same or similar debt instruments. Additional fair value information related to our pension funds' assets can be found in Note 11, "Retirement Plans and Post-Employment Benefits." Derivative Instruments In the normal course of business, we are exposed to certain risks related to fluctuations in currency exchange rates, commodity prices and interest rates. We use various derivative financial instruments, primarily foreign currency derivatives, commodity derivative contracts and interest rate swaps as part of our overall strategy to manage risks from these market fluctuations. Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counterparties to our instruments. Foreign currency derivatives We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, are used to hedge global currency exposures such as foreign currency denominated debt, receivables, payables, sales and purchases. Foreign currency forward and swap contracts are used to mitigate the foreign exchange risk of balance sheet items. These derivatives are fair value hedges. Gains and losses from these derivatives are recorded in cost of sales and they are largely offset by the financial impact of translating foreign currency-denominated payables and receivables. In the first quarter of 2022, we entered into foreign currency derivatives with maturities of one month to 12 months in order to protect against the risk that cash flows associated with certain sales and purchases denominated in a currency other than 68 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS the U.S. dollar will be adversely affected by future changes in foreign exchange rates. These derivatives are designated as cash flow hedges. The resulting unrealized gains or losses from these derivatives are recorded in AOCL and subsequently, when realized, are reclassified to net sales or cost of sales in the Consolidated Statements of Operations when the hedged exposures affect earnings. Commodity derivative contracts We have entered into commodity derivative contracts for refined oil products. These contracts were entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. In the fourth quarter of 2017, we began to enter into LTAs with many of our customers and began to hedge the cash flows related to these contracts. The unrealized gains or losses related to commodity derivative contracts designated as cash flow hedges are recorded in accumulated other comprehensive income ("AOCI") and subsequently, when realized, are reclassified to the Consolidated Statement of Operations when the hedged item impacts earnings, which is when the finished product is sold. The last of our commodity derivative contracts matured as of June 30, 2022 and no new contracts were entered during 2022. Interest rate swap contracts We utilize interest rate swaps to limit exposure to market fluctuations on our variable-rate debt. Each derivative agreement's unrealized gain or loss is recorded in AOCL and, when realized, is recorded to interest expense. In the third quarter of 2019, we entered into interest rate swap contracts that are "pay fixed, receive variable." Our risk management objective was to fix our cash flows associated with the risk of variability in the one-month USD LIBOR for a portion of our outstanding debt. It was expected that the swaps would fix the cash flows associated with the forecasted interest payments on our debt to an effective fixed interest rate of 4.2 %, which could be lowered to 3.95 % depending on credit ratings. Since their modification concurrent with the 2018 Term Loan Facility modification in the first quarter of 2021, the swaps contain an other-than-insignificant financing element. As such, they are considered hybrid instruments composed of a debt host and an embedded derivative and the associated cash (outflows)/inflows are classified as financing (use)/source of cash. The debt host portion amounted to a liability of $ 3.8 million as of December 31, 2022, with $ 2.3 million included in "Other accrued liabilities" and $ 1.5 million in "Other long-term obligations" on the Consolidated Balance Sheets. As of December 31, 2021, the debt host portion amounted to a liability of $ 7.0 million, with $ 2.6 million included in "Other accrued liabilities" and $ 4.4 million included in "Other long-term obligations" on the Consolidated Balance Sheets. The corresponding loss is accounted for in AOCL and is being amortized over the remaining life of the swaps. The associated embedded derivative is treated as a cash flow hedge. In the first quarter of 2022, in connection with the repayment of principal on our 2018 Term Loan Facility discussed in Note 4, "Debt and Liquidity," and our probability assessment of the variable-rate debt remaining outstanding through the term of the swaps, we de-designated one interest rate swap contract with a $ 250.0 million notional amount, maturing in the third quarter of 2024. The fair value of the embedded derivative at the de-designation date was a gain of $ 6.6 million and was recorded in AOCI and will be amortized into interest expense over the remaining life of the swap. The change in fair value of the de-designated embedded derivative in 2022 resulted in a gain of $ 7.1 million and was recorded in interest expense in the Consolidated Statements of Operations. In the third quarter of 2022, we redeemed $ 67.0 million of our $ 250.0 million notional amount de-designated interest rate swap and recorded in interest expense in the Consolidated Statements of Operations a gain of $ 4.6 million on the reduction of the embedded derivative. The partial redemption of the interest rate swap also triggered a $ 0.7 million accelerated settlement of the associated debt host. All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in AOCL until the hedged item is recognized in earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through earnings. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates. 69 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The notional amounts of our outstanding derivative instruments as of December 31, 2022 and 2021 were as follows: December 31, 2022 December 31, 2021 Notional Amount Notional Amount (Dollars in thousands) Derivative instruments designated as hedges: Commodity derivative contracts $ — $ 19,474 Interest rate swap contracts 250,000 500,000 Derivative instruments not designated as hedges: Foreign currency derivatives $ 70,420 $ 99,260 Interest rate swap contracts 183,000 — The following table summarizes the fair value of our outstanding derivatives designated as hedges (on a gross basis) and balance sheet classification as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 Fair Value Fair Value (Dollars in thousands) Prepaid and other current assets Commodity derivative contracts $ — $ 8,469 Interest rate swap contracts 10,246 — Total $ 10,246 $ 8,469 Other assets Interest rate swap contracts $ 5,575 $ 6,060 Total $ 5,575 $ 6,060 Other accrued liabilities Interest rate swap contracts $ — $ ( 140 ) Total $ — $ ( 140 ) Net asset $ 15,821 $ 14,389 As a result of the settlement of commodity derivative contracts and foreign currency derivatives, as of December 31, 2022, net realized pre-tax gains of $ 17.6 million and net realized pre-tax losses of $ 5.5 million were reported in AOCL and will be released to earnings within the following 12 months. In addition, we recorded $ 0.8 million of ineffectiveness income to cost of sales in the Consolidated Statements of Operations in 2022 related to the settlement of commodity derivative contracts. No ineffectiveness expense was recorded in 2021 or 2020. See the table below for amounts recognized on the effective portion of our commodity derivative contracts in the Statement of Operations. 70 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The realized (gains) losses on cash flow hedges are recognized in the Statements of Operations when the hedged item impacts earnings and are as follows for the years ended December 31, 2022, 2021 and 2020: Amount of (Gain)/Loss Recognized Location of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations 2022 2021 2020 Derivatives designated as cash flow hedges: (Dollars in thousands) Foreign currency derivatives Cost of sales $ 1,975 $ — $ — Commodity derivative contracts Cost of sales ( 11,452 ) 6,440 ( 4,134 ) Interest rate swaps Interest expense ( 2,423 ) 1,846 4,390 Pre-tax gains and losses on non-designated derivatives recognized in earnings are as follows: Amount of (Gain)/Loss Recognized Location of Realized (Gain)/Loss Recognized in the Consolidated Statement of Operations 2022 2021 2020 Derivatives not designated as hedges: (Dollars in thousands) Foreign currency derivatives Cost of sales, other (income) expense, net $ ( 938 ) $ 3,895 $ ( 2,671 ) Commodity derivative contracts Cost of sales — ( 1,399 ) ( 530 ) Interest rate swaps Interest expense ( 11,716 ) 866 — The following table summarizes the fair value of our outstanding derivatives not designated as hedges (on a gross basis) and balance sheet classification as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 Fair Value Fair Value (Dollars in thousands) Prepaid and other current assets Interest rate swap contracts $ 7,492 $ — Foreign currency derivatives 92 388 Other assets Interest rate swap contracts 4,071 — Other accrued liabilities Foreign currency derivatives ( 282 ) ( 2 ) Net asset $ 11,373 $ 386 71 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (9) Supplementary Balance Sheet Detail The following tables present supplementary balance sheet details: December 31, 2022 December 31, 2021 (Dollars in thousands) Inventories: Raw materials and supplies $ 216,761 $ 132,113 Work in process 192,821 127,127 Finished goods 38,159 30,192 $ 447,741 $ 289,432 Prepaid expenses and other current assets: Prepaid expenses $ 15,261 $ 8,193 Value-added tax and other indirect taxes receivable 39,417 40,861 Spare parts inventory 12,990 12,408 Other current assets 19,604 11,902 $ 87,272 $ 73,364 Property, plant and equipment: Land and improvements $ 48,478 $ 49,201 Buildings 82,054 79,660 Machinery and equipment and other 655,823 621,808 Construction in progress 82,813 64,629 $ 869,168 $ 815,298 Other accrued liabilities: Payrolls (including incentive programs) $ 10,799 $ 16,904 Employee benefits 6,921 7,272 Deferred revenue 27,878 9,840 Other 43,751 22,389 $ 89,349 $ 56,405 Other long-term obligations: Post-employment benefits $ 11,996 $ 14,597 Pension and related benefits 22,768 31,139 Other 16,058 22,921 $ 50,822 $ 68,657 72 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table presents an analysis of the allowance for doubtful accounts for the years ended December 31: 2022 2021 2020 (Dollars in thousands) Balance at beginning of year $ 6,835 $ 8,243 $ 5,474 Charge to retained earnings - ASC 326 adoption impact — — 2,026 Charge (credit) to income 1,585 ( 1,266 ) 1,458 Deductions ( 401 ) ( 142 ) ( 715 ) Balance at end of year $ 8,019 $ 6,835 $ 8,243 (10) Leases The Company leases certain transportation and mobile manufacturing equipment such as railcars and forklifts, as well as real estate. The components of lease expense are as follows: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Operating lease cost $ 5,441 $ 5,399 $ 6,138 Short-term lease cost 163 408 159 Variable lease cost 756 453 429 Total lease cost $ 6,360 $ 6,260 $ 6,726 Supplemental cash-flow and other information related to leases is as follows: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) RoU assets obtained in exchange for new operating lease liabilities (non-cash) $ 2,303 $ 5,584 $ 5,262 Cash payments for operating leases ( 4,015 ) ( 5,466 ) ( 6,177 ) Supplemental balance sheet information related to leases is as follows: December 31, 2022 2021 (Dollars in thousands) Location Operating RoU lease assets Other assets $ 5,741 $ 7,646 Current operating lease liabilities Other accrued liabilities 3,575 4,109 Non-current operating lease liabilities Other long-term obligations 2,304 3,528 Total operating lease liabilities $ 5,879 $ 7,637 Weighted average remaining lease term (in years) 2.1 2.3 Weighted average discount rate 4.65 % 4.31 % 73 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2022, future minimum lease payments under noncancellable operating leases were as follows: (Dollars in thousands) 2023 3,648 2024 1,530 2025 601 2026 284 2027 139 2028 and thereafter — Total lease payments $ 6,202 Less: Imputed interest ( 323 ) Present value of lease payments $ 5,879 As of December 31, 2022, the Company has not entered into any additional operating lease commitments that have yet to commence. (11) Retirement Plans and Post-Employment Benefits Retirement Plans On February 26, 1991, we formed our own retirement plan covering substantially all our U.S. employees. Under our plan, covered employees earned benefit payments based primarily on their service credits and wages subsequent to February 26, 1991. Prior to that date, substantially all our U.S. employees were participants in the U.S. retirement plan of Union Carbide Corporation (“Union Carbide”). While service credit was frozen, covered employees continued to earn benefits under the Union Carbide plan based on their final average wages through February 26, 1991, adjusted for salary increases (not to exceed six percent per annum) through January 26, 1995, the date Union Carbide ceased to own a minimum 50 % of the equity of GTI. The Union Carbide plan is responsible for paying retirement and death benefits earned as of February 26, 1991. Effective January 1, 2002, we established a defined contribution plan for U.S. employees. Certain employees had the option to remain in our defined benefit plan for an additional period of up to five years . Employees not covered by this option had their benefits under our defined benefit plan frozen as of December 31, 2001, and began participating in the defined contribution plan. Effective March 31, 2003, we curtailed our qualified benefit plan and the benefits were frozen as of that date for the U.S. employees who had the option to remain in our defined benefit plan. We also closed our non-qualified U.S. defined benefit plan for the participating salaried workforce. The employees began participating in the defined contribution plan as of April 1, 2003. Pension coverage for employees of foreign subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves. The components of our consolidated net pension costs are set forth in the following table: Year Ended December 31, 2022 2021 2020 U.S. Foreign U.S. Foreign U.S. Foreign (Dollars in thousands) Service cost $ 1,390 $ 1,220 $ 1,328 $ 1,349 $ 1,322 $ 1,183 Interest cost 3,242 227 2,962 111 3,949 174 Expected return on assets ( 3,960 ) ( 640 ) ( 4,213 ) ( 545 ) ( 4,730 ) ( 401 ) Mark-to-market (gain) loss ( 181 ) ( 7,801 ) ( 2,428 ) ( 1,327 ) 613 2,596 Net periodic benefit (credit) cost $ 491 $ ( 6,994 ) $ ( 2,351 ) $ ( 412 ) $ 1,154 $ 3,552 74 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The mark-to-market gain in 2022 was primarily the result of a favorable change in the discount rate, partially offset by a worse than expected return on plan assets. The mark-to-market gain in 2021 was the result of a favorable change in the discount rate and favorable foreign currency translation, as well as a better than expected return on plan assets, particularly for the U.S. plans. The mark-to-market loss in 2020 was the result of an unfavorable change in the discount rate, new employee obligations and unfavorable foreign currency translation, partially offset by a better than expected return on plan assets, particularly for the U.S. plans. The reconciliation of the beginning and ending balances of our pension plans’ benefit obligations, fair value of assets, and funded status at December 31, 2022 and 2021 are shown below. December 31, 2022 December 31, 2021 U.S. Foreign U.S. Foreign (Dollars in thousands) Changes in Benefit Obligation: Net benefit obligation at beginning of period $ 129,906 $ 38,571 $ 140,254 $ 38,716 Service cost 1,390 1,220 1,328 1,349 Interest cost 3,242 227 2,962 111 Participant contributions — 557 — 580 Foreign currency exchange changes — ( 660 ) — ( 1,318 ) Actuarial gain ( 24,202 ) ( 7,293 ) ( 4,316 ) ( 1,104 ) Benefits paid ( 10,343 ) ( 1,557 ) ( 10,322 ) 237 Net benefit obligation at end of period $ 99,993 $ 31,065 $ 129,906 $ 38,571 Changes in Plan Assets: Fair value of plan assets at beginning of period $ 109,961 $ 26,913 $ 115,568 $ 25,082 Actual return on plan assets ( 20,061 ) 1,148 2,325 799 Foreign currency exchange rate changes — ( 325 ) — ( 746 ) Employer contributions 449 972 2,390 961 Participant contributions — 557 — 580 Benefits paid ( 10,343 ) ( 1,557 ) ( 10,322 ) 237 Fair value of plan assets at end of period $ 80,006 $ 27,708 $ 109,961 $ 26,913 Funded status (underfunded): $ ( 19,987 ) $ ( 3,357 ) $ ( 19,945 ) $ ( 11,658 ) Amounts recognized in the statement of financial position: Other accrued liabilities $ ( 409 ) $ ( 167 ) $ ( 420 ) $ ( 44 ) Other long-term obligations ( 19,578 ) ( 3,190 ) ( 19,525 ) ( 11,614 ) Net amount recognized $ ( 19,987 ) $ ( 3,357 ) $ ( 19,945 ) $ ( 11,658 ) The accumulated benefit obligation for all defined benefit pension plans was $ 129.5 million and $ 166.1 million as of December 31, 2022 and 2021, respectively. Plan Assets The accounting guidance on fair value measurements specifies a hierarchy based on the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 8, “Fair Value Measurements and Derivative Instruments" for a discussion of the fair value hierarchy. The following describes the methods and significant assumptions used to estimate the fair value of the investments: Cash and cash equivalents – Valued at cost. Cash equivalents are valued at net asset value as provided by the administrator of the fund. Foreign government bonds – Valued by the trustees using various pricing services of financial institutions. 75 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Fixed insurance contracts – Valued at the present value of the guaranteed payment streams. Collective trusts – Valued at the net asset value provided by the administrator of the fund (the practical expedient). The net asset value is primarily based on quoted market prices of the underlying securities for which quoted market prices of the underlying securities of the funds. Some of the underlying investments include securities for which quoted market prices are not available and are valued using data obtained by the trustee from the best available source or market value. This method may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The fair value of other plan assets by category is summarized below (dollars in thousands): December 31, 2022 Level 1 Level 2 Level 3 Total U.S. Plan Assets Cash and cash equivalents $ 706 $ — $ — $ 706 International Plan Assets Foreign government bonds — 1,023 — 1,023 Fixed insurance contracts — — 26,685 26,685 Total international plan assets $ — $ 1,023 $ 26,685 $ 27,708 U.S. Plan - Investments measured at net asset value $ 79,300 Total $ 706 $ 1,023 $ 26,685 $ 107,714 December 31, 2021 Level 1 Level 2 Level 3 Total U.S. Plan Assets Cash and cash equivalents $ 715 $ — $ — $ 715 International Plan Assets Foreign government bonds $ — $ 910 $ — $ 910 Fixed insurance contracts — — 26,003 26,003 Total international plan assets $ — $ 910 $ 26,003 $ 26,913 U.S. Plan - Investments measured at net asset value $ 109,246 Total $ 715 $ 910 $ 26,003 $ 136,874 The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy for international plan pension assets for the years ended December 31, 2022 and 2021 (dollars in thousands): Fixed Insurance Contracts Balance at December 31, 2020 $ 24,118 Gain / contributions / currency impact 1,900 Distributions ( 15 ) Balance at December 31, 2021 26,003 Gain / contributions / currency impact 864 Distributions ( 182 ) Balance at December 31, 2022 $ 26,685 76 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS We annually re-evaluate assumptions and estimates used in projecting pension assets, liabilities and expenses. These assumptions and estimates may affect the carrying value of pension assets, liabilities and expenses in our Consolidated Financial Statements. Assumptions used to determine net pension costs and projected benefit obligations are: Pension Benefit Obligations Key Assumptions December 31, 2022 2021 Weighted average assumptions to determine benefit obligations: Discount rate 4.43 % 2.14 % Rate of compensation increase 1.71 % 1.46 % Pension Cost Key Assumptions Weighted average assumptions to determine net cost: Discount rate 2.14 % 1.78 % Expected return on plan assets 3.50 % 3.48 % Rate of compensation increase 1.46 % 1.46 % We adjust our discount rate annually in relation to the rate at which the benefits could be effectively settled. Discount rates are set for each plan in reference to the yields available on AA-rated corporate bonds of appropriate currency and duration. The appropriate discount rate is derived by developing an AA-rated corporate bond yield curve in each currency. The discount rate for a given plan is the rate implied by the yield curve for the duration of that plan’s liabilities. In certain countries, where little public information is available on which to base discount rate assumptions, the discount rate is based on government bond yields or other indices and approximate adjustments to allow for the differences in weighted durations for the specific plans and/or allowance for assumed credit spreads between government and AA-rated corporate bonds. The expected return on assets assumption represents our best estimate of the long-term return on plan assets and generally was estimated by computing a weighted average return of the underlying long-term expected returns on the different asset classes, based on the target asset allocations. The expected return on assets assumption is a long-term assumption that is expected to remain the same from one year to the next unless there is a significant change in the target asset allocation, the fees and expenses paid by the plan or market conditions. The rate of compensation increase is based on the long-term inflation rate projection of the jurisdictions where we have active plans and on any incremental change due to merit or productivity. Plan Assets. The following table presents our retirement plan weighted average asset allocations at December 31, 2022, by asset category : Percentage of Plan Assets December 31, 2022 U.S. Foreign Equity securities and return seeking assets 20 % — % Fixed income, debt securities, or cash 80 % 100 % Total 100 % 100 % Investment Policy and Strategy. The investment policy and strategy of the U.S. plan is to invest approximately 20 % in equities and return seeking assets and approximately 80 % in fixed income securities. Rebalancing is undertaken monthly. To the extent we maintain plans in other countries, target asset allocation is 100 % fixed income investments. For each plan, the investment policy is set within both asset return and local statutory requirements. 77 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Information for our pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2022 and 2021 follows: 2022 2021 U.S. Foreign U.S. Foreign (Dollars in thousands) Accumulated benefit obligation $ 99,993 $ 1,884 $ 129,906 $ 35,247 Fair value of plan assets 80,006 — 109,961 26,003 Information for our pension plans with a projected benefit obligation in excess of plan assets at December 31, 2022 and 2021 follows: 2022 2021 U.S. Foreign U.S. Foreign (Dollars in thousands) Projected benefit obligation $ 99,993 $ 31,065 $ 129,906 $ 37,412 Fair value of plan assets 80,006 27,708 109,961 26,003 Following is our projected future pension plan cash flow by year: U.S. Foreign (Dollars in thousands) Expected contributions in 2023: Expected employer contributions $ 409 $ 986 Expected employee contributions — — Estimated future benefit payments reflecting expected future service for the years ending December 31: 2023 $ 9,136 $ 1,430 2024 9,009 2,912 2025 8,936 1,519 2026 8,836 2,648 2027 8,608 1,842 Next five years 38,940 12,201 Post-Employment Benefit Plans We have legacy post-employment medical coverage and life insurance benefits for eligible retired employees in the U.S. and in certain foreign jurisdictions. Effective December 31, 2005, all U.S. post-employment medical coverage plans were frozen. The post-employment benefit plans are un-funded and our periodic contributions correspond to the amount of benefits paid in the period. Our funding contributions were $ 1.2 million and $ 1.4 million in 2022 and 2021, respectively. The estimated liability for post-employment benefit plans was $ 13.5 million and $ 16.0 million as of December 31, 2022 and 2021, respectively. The Company recognized income of $ 0.9 million in the Consolidated Statement of Operations for post-employment benefits in 2022 and expense of $ 0.5 million and $ 0.7 million for 2021 and 2020, respectively. Included in post-employment benefit expense are mark-to-market gains of $ 1.6 million and $ 0.1 million in 2022 and 2021, respectively, and a mark-to-market gain of less than $ 0.1 million for 2020. Savings Plan Our employee savings plan provides eligible employees the opportunity for long-term savings and investment. The plan allows employees to contribute up to 5 % of pay as a basic contribution and an additional 45 % of pay as supplemental contribution. In 2022, 2021 and 2020, the Company's contributions to our savings plan were $ 3.0 million, $ 2.5 million and $ 2.2 million, respectively. 78 (12) Commitments and Contingencies Legal Proceedings We are involved in various investigations, lawsuits, claims, demands, labor disputes and other legal proceedings, including with respect to environmental and human exposure or other personal injury matters, arising out of or incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of these matters and proceedings, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows. Additionally, we are involved in the following legal proceedings. We are involved in certain arbitrations as respondents/counterclaimants, pending before the International Chamber of Commerce with a few customers who, among other things, have failed to perform under their LTAs and in certain instances are seeking to modify or frustrate their contractual commitments to us. In particular, Aperam South America LTDA, Aperam Sourcing S.C.A., ArcelorMittal Sourcing S.C.A., and ArcelorMittal Brasil S.A. (collectively, the “Claimants”) initiated a single arbitration proceeding against two of the Company’s subsidiaries in the International Chamber of Commerce in June 2020. In June 2021, the Claimants filed their statement of claim, seeking approximately $ 61.0 million plus interest in monetary relief and/or reimbursement in respect of several fixed price LTAs that were executed between such subsidiaries and the Claimants in 2017 and 2018. On December 16, 2022, the Claimants revised their calculation of damages to approximately $ 178.9 million including interest, covering the period from the first quarter of 2020 through the end of the third quarter of 2022 and interest covering the period from June 2020 through December 16, 2022. The Claimants argue, among other things, that they should no longer be required to comply with the terms of the LTAs that they signed due to an alleged drop in market prices for graphite electrodes in January 2020. Alternatively, the Claimants argue that they should not be required to comply with the LTAs that they signed due to alleged market circumstances at the time of execution. We believe we have valid defenses to these claims. We intend to vigorously defend them and enforce our rights under the LTAs. Pending litigation in Brazil has been brought by employees seeking to recover additional amounts and interest thereon under certain wage increase provisions applicable in 1989 and 1990 under collective bargaining agreements to which employers in the Bahia region of Brazil were a party (including our subsidiary in Brazil). Companies in Brazil have settled claims arising out of these provisions and, in May 2015, the litigation was remanded by the Brazilian Supreme Court in favor of the employees union. After denying an interim appeal by the Bahia region employers on June 26, 2019, the Brazilian Supreme Court finally ruled in favor of the employees union on September 26, 2019. The employers union has determined not to seek annulment of such decision. Separately, on October 1, 2015, a related action was filed by current and former employees against our subsidiary in Brazil to recover amounts under such provisions, plus interest thereon, which amounts together with interest could be material to us. If the Brazilian Supreme Court proceeding above had been determined in favor of the employers union, it would also have resolved this proceeding in our favor. In the first quarter of 2017, the state court initially ruled in favor of the employees. We appealed this state court ruling, and the appellate court issued a decision in our favor on May 19, 2020. The employees have further appealed and, on December 16, 2020, the court upheld the decision in favor of GrafTech Brazil. On February 22, 2021, the employees filed a further appeal and, on April 28, 2021, the court rejected the employees' appeal in favor of GrafTech Brazil. The employees filed a further appeal and on September 12, 2022 we filed our response in opposition. We intend to vigorously defend our position. As of December 31, 2022, we are unable to assess the potential loss associated with these proceedings as the claims do not currently specify the number of employees seeking damages or the amount of damages being sought. 79 Product Warranties We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. We also accrue for estimated warranty claims incurred based on a historical claims charge analysis. Claims accrued but not yet paid and the related activity within the reserve for 2021 and 2022 are as follows: (Dollars in thousands) Balance as of December 31, 2020 $ 1,997 Product warranty charges/adjustments 1,183 Payments and settlements ( 2,092 ) Balance as of December 31, 2021 $ 1,088 Product warranty charges/adjustments 456 Payments and settlements ( 724 ) Balance as of December 31, 2022 $ 820 Related Party Tax Receivable Agreement On April 23, 2018, the Company entered into the Tax Receivable Agreement that provides Brookfield, as the sole Pre-IPO stockholder, the right to receive future payments from us for 85 % of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of the pre-IPO Tax Assets. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to LIBOR plus 1.00 % per annum. The term of the Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments. As of December 31, 2022, total Tax Receivable Agreement liability was $ 15.5 million, of which $ 4.6 million was classified as a current liability "Related party payable - Tax Receivable Agreement" on the Consolidated Balance Sheets and $ 10.9 million was classified as a long-term liability in "Related party payable - Tax Receivable Agreement long-term" on the Consolidated Balance Sheets. As of December 31, 2021, the total Tax Receivable Agreement liability was $ 19.3 million, of which $ 3.8 million was classified as a current liability "Related party payable - Tax Receivable Agreement" on the Consolidated Balance Sheets and $ 15.5 million was classified as a long-term liability in "Related party payable - Tax Receivable Agreement long-term" on the Consolidated Balance Sheets. Long-term Incentive Plan The long-term incentive plan ("LTIP") was adopted by the Company in August 2015 and amended and restated in March 2018. The purpose of the plan was to retain senior management of the Company, to incentivize them to make decisions with a long-term view and to influence behavior in a way that is consistent with maximizing value for the pre-IPO stockholder of the Company in a prudent manner. Each participant was allocated a number of profit units, with a maximum of 30,000 profit units ("Profit Units") available under the plan. Awards of Profit Units generally vested in equal increments over a five-year period beginning on the first anniversary of the grant date of the Profit Units, subject to continued employment with the Company through each vesting date. If a participant ceased to provide services prior to any applicable vesting date for any reason, other than a termination for cause, then the participant forfeited all unvested Profit Units and any vested Profit Units remained outstanding. If a participant had been terminated for cause, both vested and unvested Profit Units would have been forfeited. Upon a Change in Control (as defined in the LTIP), the Profit Units entitled the participant to a payment based on a percentage of the sum of (i) all net "Sale Proceeds" (as defined in the LTIP) received by Brookfield Capital IV L.P. and its affiliates ("Brookfield Capital IV") less (ii) the "Threshold Value" (as defined in the LTIP), with such payment amount being determined by the Company's Board of Directors in its sole discretion. In the event that, in connection with a Change in Control, Brookfield Capital IV disposes of less than 100 % of its ownership interest in the Company, the amount of the Sale Proceeds in excess of the Threshold Value shall be determined on a pro-rata basis by reference to the percentage of ownership interest disposed, as determined by the Board of Directors of the Company. 80 The May 2021 secondary offering of our common stock by Brookfield Capital IV constituted a Change in Control under the LTIP. A Change in Control under the LTIP is defined as, among other things, a transaction or series of transactions (including, without limitation, the consummation of a combination, share purchases, recapitalization, redemption, issuance of capital stock, consolidation, reorganization or otherwise) pursuant to which following a public offering of the Company’s stock, Brookfield Capital IV ceases to have a beneficial ownership interest in at least 30 % of the Company’s outstanding voting securities (effective on the first of such date). Upon completion of the May 2021 secondary offering, Brookfield beneficially owned approximately 24 % of the Company's outstanding voting securities. Accordingly, the Company settled the vested Profit Units in lump sum payments within 30 days following the Change in Control. In the second quarter 2021, the settlement of the Profit Units resulted in the recording of a pre-tax charge of $ 73.4 million, of which $ 30.7 million was recorded in cost of sales and $ 42.7 million was recorded in selling and administrative expense. To date, $ 71.8 million of the charges have been settled in cash by the Company while the remainder of the liability, related to payroll taxes, is expected to be paid in subsequent quarters, which will satisfy all obligations under the LTIP. Mexico Value-Added Tax ("VAT") In July 2019, the Mexican Tax Authority ("MTA") opened an audit of the VAT filings of one of the Company's subsidiaries in Mexico for the period of January 1 to April 30, 2019. In September 2021, the MTA issued a tax assessment, claiming improper use of a certain VAT exemption rule for purchases from a foreign affiliate. The Company filed an administrative appeal against the tax assessment with the MTA's appeals office. In November 2022, the MTA appeal's office concluded its review and confirmed the tax assessment. The Company believes that the purchases from a foreign affiliate are exempt from VAT back-up withholding and in December 2022, the Company filed a Claim for Nullity with the Chamber Specialized in exclusive resolution of substance of the Federal Court of Administrative Justice. At the time of filing, the tax assessment for the four month period under audit amounted to approximately $ 23.5 million, including penalties, inflation and interest. After the filing of the Claim for Nullity, in January 2023, the MTA notified the same subsidiary in Mexico of its intent to assess $ 51.0 million, including penalties, inflation and interest for the period January 1 to December 31, 2018, asserting the same improper use of certain VAT exemption rules on purchases from a foreign affiliate.In Mexico, each tax assessment requires a separate claim. The Company intends to pursue administrative appeal procedures with the MTA to try and resolve this matter. The Company believes that its application of the VAT exemption rules is appropriate and, accordingly, does not believe that it is probable that it will incur a loss related to this matter for either of the two periods under the MTA's audit. The Company intends to vigorously defend its position. (13) Income Taxes Income before the provision for income taxes was derived from the following sources: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) U.S. $ 55,107 $ ( 69,087 ) $ 51,672 Foreign 397,211 525,493 458,373 Income before provision for income taxes $ 452,318 $ 456,406 $ 510,045 81 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The provision for income taxes consists of the following: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) U.S. income taxes: Current $ 3,590 $ 645 $ ( 7,660 ) Deferred 13,302 2,132 27,822 16,892 2,777 20,162 Foreign income taxes: Current 48,744 71,088 63,092 Deferred 3,720 ( 5,789 ) ( 7,583 ) 52,464 65,299 55,509 Provision for income taxes $ 69,356 $ 68,076 $ 75,671 The increase in the provision for income taxes in 2022 versus 2021 is primarily due to the mix of worldwide earnings from various countries taxed at different rates and the U.S. taxation of GILTI, partially offset by the reduction in pre-tax income. The provision for income taxes differed from the amount computed by applying the U.S. federal income tax rate of 21 % for the years ended December 31, 2022, 2021 and 2020 to income before the provision for income taxes as set forth in the following table: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Tax at statutory U.S. federal rate $ 94,987 $ 95,845 $ 107,109 Impact of U.S. Tax Cuts and Jobs Act of 2017 - GILTI 38,153 51,016 45,539 Impact of Tax Receivable Agreement ( 39 ) 49 ( 4,429 ) Valuation allowance ( 1,259 ) ( 2,208 ) ( 980 ) State taxes, net of federal tax benefit 2,182 1,414 3,591 U.S. tax impact of foreign earnings (net of foreign tax credits) 348 537 2,113 Establishment/resolution of uncertain tax positions ( 40 ) ( 48 ) ( 78 ) Adjustment for foreign income taxed at different rates ( 25,656 ) ( 38,530 ) ( 38,464 ) Foreign tax credits ( 34,264 ) ( 43,821 ) ( 37,280 ) Change-in-Control-related compensation ( 1,432 ) 10,626 — Other ( 3,624 ) ( 6,804 ) ( 1,450 ) Provision for income taxes $ 69,356 $ 68,076 $ 75,671 82 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are set forth in the following table: December 31, 2022 2021 (Dollars in thousands) Deferred tax assets: Post-employment and other employee benefits $ 15,088 $ 17,375 Foreign tax credit and other carryforwards 25,856 32,452 Capitalized research and experimental costs 736 1,935 Environmental reserves 1,040 1,133 Inventory adjustments 5,767 10,545 Long-term contract option amortization 934 982 Previously taxed income 8,304 5,229 Other 2,695 2,246 Total gross deferred tax assets 60,420 71,897 Less: valuation allowance ( 9,269 ) ( 10,550 ) Total deferred tax assets 51,151 61,347 Deferred tax liabilities: Fixed assets $ 51,410 $ 51,595 Inventory 14,649 8,834 Goodwill and acquired intangibles 10,089 9,502 Mark-to-market hedges 3,903 2,824 Other 4,205 3,079 Total deferred tax liabilities 84,256 75,834 Net deferred tax liability $ ( 33,105 ) $ ( 14,487 ) At each reporting period, the Company assesses the need for valuation allowances against deferred tax assets and whether it is more likely than not that deferred tax benefits will be realized in each jurisdiction. Consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence include a strong earnings history, an event or events that would increase the Company's taxable income or reduce expenses, or tax planning strategies that would create the ability to realize deferred tax assets. Examples of negative evidence include cumulative losses in recent years or a history of tax attributes expiring unused. In circumstances where the negative evidence outweighs the positive evidence, the Company has established or maintained valuation allowances on the jurisdiction’s net deferred tax assets. However, the recognition of the valuation allowance does not limit the Company's ability to utilize these tax assets on a tax return in the future should taxable income be realized in sufficient amount to realize the assets. Valuation allowance activity for the years ended December 31, 2022, 2021 and 2020 is as follows: (Dollars in thousands) Balance as of December 31, 2019 $ 13,736 Credited to income ( 980 ) Translation adjustment 17 Balance as of December 31, 2020 $ 12,773 Credited to income ( 2,208 ) Translation adjustment ( 15 ) Balance as of December 31, 2021 $ 10,550 Credited to income ( 1,259 ) Translation adjustment ( 22 ) Balance as of December 31, 2022 $ 9,269 83 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The decrease in the valuation allowance in 2022 was primarily attributable to changes in expected future utilization, state law changes and expiration of U.S. state NOL carryforwards during the year. The reduction in the valuation allowance in 2021 resulted primarily from expirations of NOL carryforwards upon which a valuation allowance was previously recorded. As of December 31, 2022, the Company had a total foreign tax credit carryforward of $ 6.9 million. These tax credit carryforwards begin to expire in 2027. In addition, the Company had state NOL carryforwards of $ 163.8 million (net of federal benefit), which can be carried forward from five to 20 years. These state NOL carryforwards resulted in a deferred tax asset of $ 12.2 million as of December 31, 2022. The Company also has U.S. state tax credits of $ 0.1 million as of December 31, 2022. The Company's foreign loss carryforwards on a gross basis were $ 6.8 million as of December 31, 2022 and may be carried forward indefinitely. As of December 31, 2022, the Company had unrecognized tax benefits of $ 0.1 million, which, if recognized, would have a favorable impact on the effective tax rate. No material amounts of accrued interest or penalties have been recorded as of December 31, 2022 or 2021. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (Dollars in thousands) Balance as of December 31, 2020 $ 125 Lapse of statute of limitations ( 45 ) Foreign currency impact ( 7 ) Balance as of December 31, 2021 $ 73 Lapse of statute of limitations ( 40 ) Foreign currency impact 3 Balance as of December 31, 2022 $ 36 It is reasonably possible that there will be no more unrecognized tax benefits within 12 months due to settlements and the expiration of statutes of limitation. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2018 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. Other jurisdictions are generally closed for years prior to 2017. As of December 31, 2022, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $ 1.2 billion. Because $ 1.1 billion of such earnings have previously been subject to taxation by way of the transition tax on foreign earnings required by the Tax Cuts and Jobs Act of 2017, as well as the current and previous years’ GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of GrafTech's foreign investments would generally be limited to foreign withholding and state taxes. The Company intends, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs. (14) Stockholders' Equity The following information should be read in conjunction with the Consolidated Statement of Stockholders' Equity (Deficit). Common Stock Repurchases On July 31, 2019, the Company announced that its Board of Directors approved the repurchase of up to $ 100.0 million of its common stock in open market purchases, including under Rule 10b5-1 and/or Rule 10b-18 plans. On November 4, 2021, the Company announced that its Board of Directors approved the repurchase of an additional $ 150.0 million of its common stock under this program. The stock repurchase program does not have an expiration date. The Company repurchased 6,662,421 shares of its common stock for $ 60.0 million in 2022, 4,658,544 shares of its common stock for $ 50.0 million in 2021 and 3,328,574 shares of its common stock for $ 30.1 million in 2020, under the stock repurchase program. 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. 84 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2022 , approximately $ 99.0 million remained available for stock repurchases under this authorization. Dividends The Company paid quarterly dividends of $ 0.085 through the first quarter of 2020. Effective in the second quarter of 2020, the quarterly dividend was reduced to $ 0.01 per share. Accumulated other comprehensive loss The balance in our AOCL is set forth in the following table: December 31, 2022 December 31, 2021 (Dollars in thousands) Foreign currency translation adjustments, net of tax $ ( 29,354 ) $ ( 22,330 ) Commodities, interest rate and foreign currency derivatives, net of tax 21,284 14,886 Total AOCL $ ( 8,070 ) $ ( 7,444 ) (15) Earnings per Share ("EPS") The following table presents a reconciliation of the numerator and denominator of basic and diluted EPS: Year Ended December 31, 2022 2021 2020 (Dollars in thousands, except per share amounts) Numerator for basic and diluted EPS: Net income $ 382,962 $ 388,330 $ 434,374 Denominator: Weighted average common shares outstanding for basic calculation 258,781,843 266,251,097 267,916,483 Add: Effect of equity awards 9,385 66,097 14,161 Weighted average common shares outstanding for diluted calculation 258,791,228 266,317,194 267,930,644 Basic EPS $ 1.48 $ 1.46 $ 1.62 Diluted EPS $ 1.48 $ 1.46 $ 1.62 Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding, which included 243,006 , 130,624 and 73,320 shares of participating securities in 2022, 2021 and 2020, respectively. Diluted EPS is calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities had been issued. The weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of 2,240,655 , 1,499,128 and 1,667,325 equivalent shares in 2022, 2021 and 2020, respectively, as these shares are anti-dilutive. See Note 14, "Stockholders' Equity" for details of the Company's common stock repurchases in 2022, 2021 and 2020. 85 GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (16) Other (Income) Expense, net The following table presents the details of other (income) expense: Year Ended December 31, 2022 2021 2020 (Dollars in thousands) Brazil value-added tax credit $ — $ ( 11,511 ) $ — Non-service pension and other post-employment (income) expense ( 9,950 ) ( 5,298 ) 3,584 Bank charges 938 1,098 962 Other ( 1,052 ) ( 740 ) ( 1,216 ) Total other (income) expense, net $ ( 10,064 ) $ ( 16,451 ) $ 3,330 In May 2021, the Brazilian Supreme Court ruled definitely to exclude the ICMS (state value-added tax) from the basis of calculation of certain federal value-added taxes, specifically the tax relative to the program of social integration ("PIS") and to the contribution for the financing of social security ("COFINS"), and confirmed the methodology for calculating the PIS-COFINS tax credit to which taxpayers are entitled. The Company's Brazilian subsidiary had previously filed a legal claim on this matter and is entitled to receive tax credits and interest dating back to five years preceding the date of the claim. The overpayments, plus interest, of PIS-COFINS related to the period from June 2005 to August 2021 represented $ 11.5 million, net of legal fees. In the fourth quarter of 2021, the Company's subsidiary obtained approval by the Brazilian Tax Authorities to start offsetting the PIS-COFINS credit against the current federal value-added tax payable and recorded the one-time credit as a realizable gain. As of December 31, 2022, the Company had offset $ 9.7 million of the credit. The balance of the PIS-COFINS credit is expected to be utilized within the next 12 months and is reported within "Prepaid expenses and other current assets" on the Consolidated Balance Sheet. Non-service pension and other post-employment (income) expense includes the components of pension and post-employment costs other than service cost. The Company recognized non-service pension and other post-employment income in 2022 and 2021 due to the recognition of mark-to-market gains of $ 9.6 million and $ 3.8 million, respectively. In 2020, the Company recognized mark-to-market losses of $ 3.2 million. See Note 11, "Retirement Plans and Post-Employment Benefits" for further discussion. (17) Subsequent Events Dividend declaration On February 9, 2023, the Board of Directors declared a dividend of $ 0.01 per share of common stock to stockholders of record as of the close of business on February 28, 2023, to be paid on March 31, 2023. 86 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.