Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the accompanying notes and other financial information appearing elsewhere in this Annual Report. Discussion and analysis regarding our financial condition and results of operations for 2022 as compared to 2021 is included in Item 7 of our Annual Report for the year-ended December 31, 2022, filed with the SEC on February 14, 2023. Information in this section is intended to assist the reader in obtaining an understanding of our Consolidated Financial Statements, the changes in certain key items in those financial statements from year-to-year, the primary factors that accounted for those changes, any known trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as how certain accounting principles affect our Consolidated Financial Statements. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this Annual Report.
Operational and Commercial Update
Sales volume for 2023 was approximately 92 thousand MT, consisting of LTA volume of 29 thousand MT and non-LTA volume of 63 thousand MT, representing a decrease of 39% compared to 149 thousand MT in 2022, consisting of LTA volume of 91 thousand MT and non-LTA volume of 58 thousand MT.
In 2023, our weighted-average realized price from LTAs was approximately $8,800 per MT and our weighted-average realized price for non-LTA business sales of graphite electrodes was approximately $5,400 per MT. Our weighted-average realized non-LTA price decreased 10% compared to 2022, reflecting the soft commercial environment. In 2022, our weighted-average realized price from LTAs was approximately $9,500 per MT and our weighted-average realized price for non-LTA business sales of graphite electrodes was approximately $6,000 per MT.
Production volume for 2023 was approximately 88 thousand MT, decreasing 44% compared to 2022, as we proactively reduced our graphite electrode production volume to align with our evolving demand outlook and to manage our working capital levels. We also temporarily idled needle coke production at our Seadrift facility for a portion of 2023 to align our needle coke inventory with our graphite electrode production needs.
Capital Structure and Liquidity
As of December 31, 2023, we had liquidity of $289.3 million, consisting of $112.4 million of availability under our 2018 Revolving Credit Facility and cash and cash equivalents of $176.9 million. As of December 31, 2023, we had total debt of approximately $950.1 million. We continue to have adequate liquidity in 2024 to navigate the persistent softness in the commercial environment.
Outlook
As we enter 2024, we expect demand for graphite electrodes in the near term will remain weak, reflecting persistent softness in the commercial environment as steel industry production remains constrained by global economic uncertainty. However, we anticipate a modest year-over-year improvement in our sales volume for 2024, most notably in the first quarter of 2024, as the first quarter of 2023 was significantly impacted by the temporary suspension of our Monterrey, Mexico facility in late 2022.
Reflecting industry-wide softness in graphite electrode demand, challenging pricing dynamics have persisted in most regions. As a result, we are being selective in the commercial opportunities we choose to pursue.
In addition, the Company has announced a set of initiatives designed to reduce our cost structure and optimize our manufacturing footprint while, at the same time, preserving our ability to deliver excellent customer service and to capitalize on long-term growth opportunities for our Company. Key elements include the following:
• Indefinitely suspending production activities at our St. Marys, Pennsylvania facility, with the exception of graphite electrode and pin machining, as well as indefinitely idling certain assets within our remaining graphite electrode manufacturing footprint.
• Reducing the Company's overhead structure and expenses.
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• Operating our remaining graphite electrode production facilities at reduced levels, as needed, to align production with our view on market demand.
These initiatives, most notably the indefinite suspension of production at St. Marys and the reduction in Company overhead, are expected to result in annualized cost savings of approximately $25.0 million once fully implemented, excluding the impact of one-time costs. Of the anticipated cost savings, approximately $15.0 million are expected to be realized in cost of goods sold with the remainder in selling and administrative expenses. One-time costs are expected to be approximately $5.0 million, of which the majority are cash-related.
These actions, combined with the benefit of reduced market pricing for certain raw materials and energy as well as the anticipated improvement in our sales and production volume levels, are expected to result in a low teen percentage point year-over-year decline in our cash cost of goods sold per MT.
As of December 31, 2023, our stated graphite electrode production capacity was approximately 202 thousand MT. As a result of indefinitely idling certain assets, beginning in 2024, our stated production capacity will be approximately 178 thousand MT, a reduction of 12%.
Further, during 2024, we will continue to operate these facilities at reduced levels, as needed, to align production with our view on electrode demand. In addition to being a key component of the incremental actions we are taking in response to weak market conditions, this will also support our efforts to further reduce our inventory levels and manage capital expenditures in 2024. Specific to capital expenditures, for 2024 we anticipate spending to be in the range of $35.0 million to $40.0 million. This compares to capital expenditures of $54.0 million for the year ended December 31, 2023.
Longer term, we remain confident that the steel industry’s accelerating efforts to decarbonize will lead to increased adoption of the EAF method of steelmaking, driving long-term demand growth for graphite electrodes. We also anticipate the demand for petroleum needle coke, the key raw material we use to produce graphite electrodes, to accelerate driven by its utilization in producing synthetic graphite for use in lithium-ion batteries for the growing electric vehicle market. We believe that the near-term actions we are taking, supported by an industry-leading position and our sustainable competitive advantages, including our substantial vertical integration into petroleum needle coke via our Seadrift facility, will optimally position GrafTech to benefit from that long-term growth.
The table of estimated shipments of graphite electrodes under existing LTAs is as follows, reflecting our current expectations for 2024:
2024
Estimated LTA volume (1)
13-16
Estimated LTA revenue (2)
$100-$135 (3)
(1) In thousands of MT
(2) In millions
(3) Includes expected termination fees from a few customers that have failed to meet certain obligations under their LTAs
The majority of the LTAs are defined as pre-determined fixed annual volume contracts while a small portion are defined with a specified volume range. For 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.
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our Company. The “non‑GAAP” financial measures consist of EBITDA, adjusted EBITDA, adjusted net (loss) income and adjusted (loss) earnings per share, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization.
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Key financial measures
Year ended December 31,
(in thousands, except per share amounts) 2023 2022
Net sales $ 620,500 $ 1,281,250
Net (loss) income (255,250) 382,962
(Loss) earnings per share (1)
(0.99) 1.48
EBITDA (2)
(162,227) 539,902
Adjusted net (loss) income (2)
(100,752) 379,666
Adjusted (loss) earnings per share (1)(2)
(0.39) 1.47
Adjusted EBITDA (2)
20,484 536,464
(1) (Loss) earnings per share represents diluted (loss) earnings per share. Adjusted (loss) earnings per share represents adjusted diluted (loss) earnings per share.
(2) Non-GAAP financial measure; see below for information and reconciliations to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Key operating measures
In addition to measures of financial performance presented in accordance with GAAP, we use certain operating metrics to analyze the performance of our company. The key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. These metrics align with management's assessment of our revenue performance and profit margin, and will help investors understand the factors that drive our profitability.
Sales volume reflects the total volume of graphite electrodes sold for which revenue has been recognized during the period. For a discussion of our revenue recognition policy, see “—Critical accounting policies—Revenue recognition” in this section. Sales volume helps investors understand the factors that drive our net sales.
Production volume reflects graphite electrodes produced during the period. Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary. Capacity utilization reflects production volume as a percentage of production capacity. Production volume, production capacity and capacity utilization help us understand the efficiency of our production and evaluate cost of goods sold.
Year ended December 31,
(in thousands, except percentages) 2023 2022
Sales volume (MT) 91.6 149.1
Production volume (MT) (1)
88.1 157.1
Total production capacity(MT) (2)(3)
230.0 230.0
Total capacity utilization (3)(4)
38 % 68 %
Production capacity excluding St. Marys (MT) (2)(5)
202.0 202.0
Capacity utilization excluding St. Marys (4)(5)
44 % 78 %
(1) Production volume reflects graphite electrodes we produced during the period.
(2) Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary.
(3) Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; Pamplona, Spain; and St. Marys, Pennsylvania. During the periods presented in this table, our St. Marys, Pennsylvania facility graphitized and machined a limited number of electrodes and pins sourced from our Monterrey, Mexico facility. The remaining production processes at St. Marys were restarted beginning in the second quarter of 2023. In the first quarter of 2024, in response to persistent softness in the commercial environment, we announced an indefinite suspension of production activities at St. Marys, with the exception of graphite electrode and pin machining.
(4) Capacity utilization reflects production volume as a percentage of production capacity.
(5) Includes graphite electrode facilities in Calais, France; Monterrey, Mexico; and Pamplona, Spain.
As of December 31, 2023, our stated production capacity was approximately 202 thousand MT through our primary manufacturing facilities in Calais, Pamplona and Monterrey. On February 14, 2024, the Company announced a cost rationalization and footprint optimization plan, in response to persistent softness in the commercial environment. This includes an indefinite suspension of production activities at our St. Marys facility, with the exception of graphite electrode and pin machining. We are also indefinitely idling certain assets within our remaining graphite electrode manufacturing
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footprint. As a result of these initiatives, beginning in 2024, our stated production capacity will be approximately 178 thousand MT.
Non-GAAP financial measures
In addition to providing results that are determined in accordance with GAAP, we have provided certain financial measures that are not in accordance with GAAP. EBITDA, adjusted EBITDA, adjusted net (loss) income, adjusted (loss) earnings per share, free cash flow, adjusted free cash flow and cash cost of goods sold per MT are non-GAAP financial measures.
We define EBITDA, a non‑GAAP financial measure, as net income or loss plus interest expense, minus interest income, plus income taxes and depreciation and amortization. We define adjusted EBITDA as EBITDA plus any pension and other post-employment benefit (“OPEB”) plan expenses or benefits, adjustments for public offerings and related expenses, non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar, stock-based compensation expense, non-cash fixed asset write-offs, related party payable - Tax Receivable Agreement adjustments and goodwill impairment charges. Adjusted EBITDA is the primary metric used by our management and our Board of Directors to establish budgets and operational goals for managing our business and evaluating our performance.
We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period‑to‑period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt‑service capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments, including any capital expenditure requirements to augment or replace our capital assets;
• adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
• adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
• adjusted EBITDA does not reflect expenses or benefits relating to our pension and OPEB plans;
• adjusted EBITDA does not reflect public offerings and related expenses;
• adjusted EBITDA does not reflect the non‑cash gains or losses from foreign currency remeasurement of non‑operating assets and liabilities in our foreign subsidiaries where the functional currency is the U.S. dollar;
• adjusted EBITDA does not reflect stock-based compensation expense;
• adjusted EBITDA does not reflect the non‑cash write‑off of fixed assets;
• adjusted EBITDA does not reflect related party payable - Tax Receivable Agreement adjustments;
• adjusted EBITDA does not reflect goodwill impairment charges; and
• other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
We define adjusted net (loss) income, a non‑GAAP financial measure, as net (loss) income, excluding the items used to calculate adjusted EBITDA, less the tax effect of those adjustments. We define adjusted (loss) earnings per share, a non‑GAAP financial measure, as adjusted net (loss) income divided by the weighted average diluted common shares outstanding during the period. We believe adjusted net (loss) income and adjusted (loss) earnings per share are useful to present to investors because we believe that they assist investors’ understanding of the underlying operational profitability of the Company.
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We define free cash flow, a non-GAAP financial measure, as net cash provided by operating activities less capital expenditures. We define adjusted free cash flow, a non-GAAP financial measure, as free cash flow adjusted by payments made or received from the settlement of interest rate swap contracts and payments of the Change in Control charges that were triggered as a result of the ownership of our largest stockholder falling below 30% of our total outstanding shares. We use free cash flow and adjusted free cash flow as critical measures in the evaluation of liquidity in conjunction with related GAAP amounts. We also use these measures when considering available cash, including for decision-making purposes related to dividends and discretionary investments. Further, these measures help management, the audit committee, and investors evaluate the Company's ability to generate liquidity from operating activities. For the purpose of this measure, a Change in Control occurred when Brookfield and any affiliates thereof ceased to own stock of the Company that constitutes at least thirty percent (30%) or thirty-five percent (35%), as applicable, of the total fair market value or total voting power of the stock of the Company (the "Change in Control").
We define cash cost of goods sold per MT, a non-GAAP financial measure, as cost of goods sold less depreciation and amortization and less cost of goods sold associated with the portion of our sales that consists of deliveries of by-products of the manufacturing processes, with this total divided by our sales volume measured in MT. We believe this is an important measure as it is used by our management and Board of Directors to evaluate our costs on a per MT basis.
In evaluating EBITDA, adjusted EBITDA, adjusted net (loss) income, adjusted (loss) earnings per share, free cash flow and adjusted free cash flow you should be aware that in the future, we will incur expenses similar to the adjustments in the reconciliations presented below. Our presentations of EBITDA, adjusted EBITDA, adjusted net (loss) income adjusted (loss) earnings per share, free cash flow and adjusted free cash flow should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non‑recurring items. When evaluating our performance, you should consider EBITDA, adjusted EBITDA, adjusted net (loss) income, adjusted (loss) earnings per share, free cash flow and adjusted free cash flow alongside other measures of financial performance and liquidity, including our net (loss) income, (loss) earnings per share and cash flow from operating activities, respectively, and other GAAP measures.
The following tables reconcile our non-GAAP key financial measures to the most directly comparable GAAP measures:
Reconciliation of Net (Loss) Income to Adjusted Net (Loss) Income Year Ended December 31,
2023 2022
(Dollars in thousands, except per share data)
Net (loss) income $ (255,250) $ 382,962
Diluted (loss) income per common share:
Net (loss) income per share $ (0.99) $ 1.48
Weighted average common shares outstanding 257,042,843 258,791,228
Net (loss) income $ (255,250) $ 382,962
Adjustments, pre-tax:
Pension and OPEB plan expenses (benefits) (1)
6,309 (7,355)
Public offerings and related expenses (2)
— 100
Non‑cash losses on foreign currency remeasurement (3)
603 521
Stock-based compensation expense (4)
4,433 2,311
Non‑cash fixed asset write‑off (5)
— 1,068
Related party Tax Receivable Agreement adjustment (6)
249 (83)
Goodwill impairment charges (7)
171,117 —
Total non-GAAP adjustments pre-tax $ 182,711 $ (3,438)
Income tax impact on non-GAAP adjustments (8)
28,213 (142)
Adjusted net (loss) income $ (100,752) $ 379,666
(1) Net periodic benefit cost (credit) for our pension and OPEB plans, including a mark-to-market loss (gain), representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize the actuarial gains and losses in connection with the annual remeasurement in earnings in the fourth quarter of each year.
(2) Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
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(3) Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Non-cash fixed asset write-off recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7) Non-cash goodwill impairment charges.
(8) The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.
Reconciliation of (Loss) Earnings Per Share to Adjusted (Loss) Earnings Per Share
Year Ended December 31,
2023 2022
(Loss) Earnings per share $ (0.99) $ 1.48
Adjustments per share:
Pension and OPEB plan expenses (benefits) (1)
0.02 (0.03)
Public offerings and related expenses (2)
— —
Non‑cash losses on foreign currency remeasurement (3)
— —
Stock-based compensation expense (4)
0.02 0.01
Non‑cash fixed asset write‑off (5)
— 0.01
Related party Tax Receivable Agreement adjustment (6)
— —
Goodwill impairment charges (7)
0.67 —
Total non-GAAP adjustments pre-tax per share 0.71 (0.01)
Income tax impact on non-GAAP adjustments per share (8)
0.11 —
Adjusted (Loss) Earnings per share $ (0.39) $ 1.47
(1) Net periodic benefit cost (credit) for our pension and OPEB plans, including a mark-to-market loss (gain), representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize the actuarial gains and losses in connection with the annual remeasurement in earnings in the fourth quarter of each year.
(2) Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3) Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Non-cash fixed asset write-off recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7) Non-cash goodwill impairment charges.
(8) The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates.
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Reconciliation of Net (Loss) Income to Adjusted EBITDA Year Ended December 31,
2023 2022
(Dollars in thousands)
Net (loss) income $ (255,250) $ 382,962
Add:
Depreciation and amortization 56,889 55,496
Interest expense 58,087 36,568
Interest income (3,439) (4,480)
Income taxes (18,514) 69,356
EBITDA (162,227) 539,902
Adjustments:
Pension and OPEB plan expenses (benefits) (1)
6,309 (7,355)
Public offerings and related expenses (2)
— 100
Non‑cash losses on foreign currency remeasurement (3)
603 521
Stock-based compensation expense (4)
4,433 2,311
Non‑cash fixed asset write‑off (5)
— 1,068
Related party Tax Receivable Agreement adjustment (6)
249 (83)
Goodwill impairment charges (7)
171,117 —
Adjusted EBITDA $ 20,484 $ 536,464
(1) Net periodic benefit cost (credit) for our pension and OPEB plans, including a mark-to-market loss (gain), representing actuarial gains and losses that result from the remeasurement of plan assets and obligations due to changes in assumptions or experience. We recognize the actuarial gains and losses in connection with the annual remeasurement in earnings in the fourth quarter of each year.
(2) Legal, accounting, printing and registration fees associated with the public offerings and related expenses.
(3) Non-cash losses from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is the U.S. dollar.
(4) Non-cash expense for stock-based compensation grants.
(5) Non-cash fixed asset write-off recorded for obsolete assets.
(6) Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized.
(7) Non-cash goodwill impairment charges.
Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow and Adjusted Free Cash Flow
Year Ended December 31,
2023 2022
(Dollars in thousands)
Net cash provided by operating activities $ 76,561 $ 324,628
Capital expenditures (54,040) (72,165)
Free cash flow 22,521 252,463
Interest rate swap settlements (1)(2)
27,453 6,423
Change in Control payment (3)
— 443
Adjusted free cash flow $ 49,974 $ 259,329
(1) Receipt of cash related to the monthly settlement of our outstanding interest rate swap contracts.
(2) The year ended December 31, 2023 includes cash received from the termination of our interest rate swap contracts.
(3) In the second quarter of 2021, we incurred pre-tax Change in Control charges of $88 million as a result of the ownership of our largest stockholder, Brookfield, moving below 30% of our total shares outstanding. Of the $88 million in pre-tax Change in Control charges, $73 million were cash and $15 million were non-cash. An aggregate of $72 million of the cash charges have been paid through the fourth quarter of 2023 and an additional $1 million will be paid in subsequent quarters, as a result of the timing of related payroll tax payments.
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Reconciliation of Cost of Goods Sold to Cash Cost of Goods Sold per MT
Year Ended December 31,
2023 2022
(Dollars in thousands)
Cost of goods sold $ 571,857 $ 726,373
Less:
Depreciation and amortization (1)
50,124 48,680
Cost of goods sold - by-products and other (2)
14,500 41,611
Cash cost of goods sold 507,233 636,082
Sales volume (in thousands of MT) 91.6 149.1
Cash cost of goods sold per MT $ 5,537 $ 4,266
(1) Reflects the portion of depreciation and amortization that is recognized in cost of goods sold.
(2) Primarily reflects cost of goods sold associated with the portion of our sales that consists of deliveries of by-products of the manufacturing processes.
Results of Operations
Results of operations for 2023 as compared to 2022
The tables presented in our period-over-period comparisons summarize our Consolidated Statements of Operations and illustrate key financial indicators used to assess the consolidated financial results. Throughout our Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), insignificant changes may be deemed not meaningful and are generally excluded from the discussion.
Year Ended December 31, Increase/ Decrease % Change
(in thousands) 2023 2022
Net sales $ 620,500 $ 1,281,250 $ (660,750) (52) %
Cost of goods sold 571,857 726,373 (154,516) (21) %
Lower of cost or market inventory valuation adjustment 12,431 — 12,431 NM
Gross profit 36,212 554,877 (518,665) (93) %
Research and development 5,520 3,641 1,879 52 %
Selling and administrative expenses 74,012 76,977 (2,965) (4) %
Goodwill impairment charges 171,117 — 171,117 NM
Operating (loss) income (214,437) 474,259 (688,696) (145) %
Other expense (income), net 4,679 (10,147) (14,826) (146) %
Interest expense 58,087 36,568 21,519 59 %
Interest income (3,439) (4,480) (1,041) (23) %
(Loss) income before (benefit) provision for income taxes (273,764) 452,318 (726,082) (161) %
(Benefit) provision for income taxes (18,514) 69,356 (87,870) (127) %
Net (loss) income $ (255,250) $ 382,962 $ (638,212) (167) %
NM = Not Meaningful.
Net sales decreased $660.8 million, or 52%, compared to the prior year, primarily reflecting lower sales volume driven by the residual impact of the temporary suspension of our operations in Monterrey, Mexico in late 2022 and industry-wide softness in graphite electrode demand. A shift in the mix of our business from LTA volume to non-LTA volume and lower weighted-average realized prices also contributed to the decline in net sales.
Cost of goods sold decreased $154.5 million, or 21%, in 2023 compared to 2022, primarily reflecting lower sales volume. Reduced sales volume was partially offset by an increase in our costs on a per MT basis as higher priced inventory was sold during 2023, reflecting the full-year impact of raw material, energy and freight cost increases that occurred throughout
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2022. In addition, due to reduced production levels, we recorded fixed manufacturing costs of $62.4 million and $16.0 million that would have otherwise been inventoried for years ended December 31, 2023 and 2022, respectively.
Lower of cost or market (“LCM”) inventory valuation adjustment represents a write-down of inventory recorded in 2023. The net realizable value of certain of our inventories fell below their carrying amounts as of December 31, 2023, and as a result, we recorded a LCM inventory valuation adjustment of $12.4 million in order to state our inventories at market.
Selling and administrative expenses decreased $3.0 million, or 4%, in 2023 compared to 2022, primarily due to reduced selling expenses driven by reduced sales volumes.
Goodwill impairment charges includes non-recurring charges relating to goodwill. Refer to Note 6, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements for additional discussion.
Other expense (income), net was expense of $4.7 million in 2023, compared to income of $10.1 million in 2022. 2023 included mark-to-market losses on our pension and OPEB plans of $3.0 million, while 2022 included mark-to-market gains of $9.6 million.
Interest expense increased $21.5 million, or 59%, in 2023 compared to 2022 primarily due to higher interest incurred on debt associated with our 2023 Senior Secured Notes that carry a fixed interest rate of 9.875%. In addition, there was a $6.4 million reduction of net gains recognized on our interest rate swaps in 2023, compared to 2022. See Note 7, "Interest Expense," to the Consolidated Financial Statements for additional details.
(Benefit) provision for income taxes . The following table summarizes the (benefit) provision for income taxes in 2023 and 2022:
Year Ended December 31, 2023 Year Ended December 31, 2022
(Benefit) provision for income taxes $ (18,514) $ 69,356
(Loss) income before (benefit) provision for income taxes $ (273,764) $ 452,318
Effective income tax rate 6.8 % 15.3 %
The provision for income taxes represented a benefit for the year ended December 31, 2023 compared to an expense for the year ended December 31, 2022. Total pre-tax earnings shifted from a profit position to a loss position and the Company recorded a goodwill impairment charge that is not tax deductible.
Currency Translation and Transactions
We translate the assets and liabilities of our non‑U.S. subsidiaries into U.S. dollars for consolidation and reporting purposes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830 , Foreign Currency Matters . Foreign currency translation adjustments are generally recorded as part of stockholders’ equity and identified as part of accumulated other comprehensive loss on the Consolidated Balance Sheets until such time as their operations are sold or substantially or completely liquidated.
We account for our Russian, Swiss, Luxembourg, United Kingdom and Mexican subsidiaries using the U.S. dollar as the functional currency, as sales and purchases are predominantly U.S. dollar‑denominated. Our remaining subsidiaries use their local currency as their functional currency.
We also record foreign currency transaction gains and losses from non‑permanent intercompany balances as part of cost of goods sold and other expense (income), net.
Significant changes in currency exchange rates impacting us are described under “—Effects of Changes in Currency Exchange Rates” and “—Results of Operations” in this section.
Effects of Changes in Currency Exchange Rates
When the currencies of non‑U.S. countries in which we have a manufacturing facility decline (or increase) in value relative to the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar equivalent cost of goods sold and other expenses with respect to those facilities. In certain countries in which we have manufacturing facilities, and in certain export
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markets, we sell in currencies other than the U.S. dollar. Accordingly, when these currencies increase (or decline) in value relative to the U.S. dollar, this has the effect of increasing (or reducing) net sales. The result of these effects is to increase (or decrease) operating and net (loss) income.
Many of the non-U.S. countries in which we have a manufacturing facility have been subject to significant economic and political changes, which have significantly impacted currency exchange rates. We cannot predict changes in currency exchange rates in the future or whether those changes will have net positive or negative impacts on our net sales, cost of goods sold or net (loss) income.
The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our net sales was an increase of $1.5 million in 2023, a decrease of $11.7 million in 2022 and an increase of $5.5 million in 2021.
The impact of these changes in the average exchange rates of other currencies against the U.S. dollar on our cost of goods sold was an increase of $12.4 million in 2023, a decrease of $20.6 million in 2022 and an increase of $10.1 million in 2021.
As part of our cash management, we also have intercompany loans between our subsidiaries. These loans are deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency gains or losses in other expense (income), net on the Consolidated Statements of Operations.
We have in the past and may in the future use various financial instruments to manage certain exposures to risks caused by currency exchange rate changes, as described under “Quantitative and Qualitative Disclosures about Market Risk."
Liquidity and Capital Resources
Our sources of funds have consisted principally of cash flow from oper ations and debt, including our credit facilities (subject to continued compliance with the financial covenants and representations). Our uses of those funds (other than for operations) have consisted principally of dividends, capital expenditures, scheduled debt repayments, optional debt repayments, stock repurchases and general purposes. Disruptions in the U.S. and international financial markets could adversely affect our liquidity and the cost and availability of financing to us in the future.
We believe that we have adequate liquidity to meet our needs for at least the next twelve months and for the foreseeable future thereafter. As of December 31, 2023, we had liquidity of $289.3 million, consisting of $112.4 million of availability under our 2018 Revolving Credit Facility, after giving effect to $3.1 million of letters of credit, and cash and cash equivalents of $176.9 million. As any borrowings under the 2018 Revolving Credit Facility remain subject to compliance with the financial covenant thereunder (see below and Note 5, “Debt and Liquidity”), our operating performance as of December 31, 2023 resulted in a reduction of the availability under the facility. We do not anticipate the need to borrow against our 2018 Revolving Credit Facility. We had gross long-term debt of $950.0 million and short-term debt of $0.1 million as of December 31, 2023. As of December 31, 2022, we had liquidity of $461.6 million, consisting of $327.0 million available under our 2018 Revolving Credit Facility, after giving effect to $3.0 million of letters of credit, and cash and cash equivalents of $134.6 million. We had gross long-term debt of $933.8 million and short-term debt of $0.1 million as of December 31, 2022.
As of December 31, 2023 and 2022, $75.3 million and $92.3 million, respectively, of our cash and cash equivalents were located outside of the U.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends do not exceed the amount of retained and current earnings. Upon repatriation to the United States, the foreign source portion of dividends we receive from our foreign subsidiaries is not subject to U.S. federal income tax because the amounts were either previously taxed or are exempted from tax by Section 245A of the Internal Revenue Service Code (the "Code").
Cash flow and plans to manage liquidity. Our cash flow typically fluctuates significantly between quarters due to various factors. These factors include customer order patterns, fluctuations in working capital requirements, timing of tax and interest payments and other factors. During the second quarter of 2023, GrafTech Global Enterprises Inc. issued $450 million of 2023 Senior Secured Notes. This transaction extended our debt maturities to 2028 as the net proceeds from this offering were used to repay the debt outstanding under the 2018 Term Loan Facility that was scheduled to mature in 2025 under our credit agreement. We had positive cash flow from operating activities during each of the last three years.
Uses of Liquidity
In July 2019, our Board of Directors authorized a program to repurchase up to $100.0 million of our outstanding common stock. In November 2021, our Board of Directors authorized the repurchase of an additional $150.0 million of stock repurchases under this program. We may purchase shares from time to time on the open market, including under Rule 10b5-1 and/or Rule 10b-18 plans. The amount and timing of repurchases are subject to a variety of factors including liquidity, stock
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price, applicable legal requirements, other business objectives and market conditions. In 2023, we did not repurchase any shares of our common stock. As of December 31, 2023, we had $99.0 million remaining under our stock repurchase authorization.
Throughout 2022 and through the second quarter of 2023, we paid a quarterly dividend of $0.01 per share. On August 2, 2023, the Company’s Board of Directors elected to suspend the quarterly cash dividend of $0.01 per share. There can be no assurance that we will resume paying dividends in the future in these amounts or at all. Our Board of Directors may change the timing and amount of any future dividend payments, if reinstated, or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by our Board of Directors.
Potential uses of our liquidity (other than operations) include capital expenditures, debt repayments, dividends, share repurchases and other general purposes. Any such potential uses of our liquidity may be funded by existing available liquidity, the incurrence of new secured or unsecured loans or capital market issuances. An improving economy, while resulting in improved results of operations, could increase our cash requirements to purchase inventories, make capital expenditures and fund payables and other obligations until increased accounts receivable are converted into cash. A downturn, including any recession or potential resurgence of a global pandemic, could significantly and negatively impact our results of operations and cash flows, which, coupled with increased borrowings, could negatively impact our credit ratings, our ability to comply with debt covenants, our ability to secure additional financing and the cost and availability of such financing.
In order to seek to reduce our credit risks, we may reduce our sales of, or refuse to sell (except for prepayment, cash on delivery or under letters of credit or parent guarantees), our products to some customers and potential customers. Our unrecovered trade receivables worldwide have not been material during the last two years individually or in the aggregate.
We manage our capital expenditures by taking into account quality, plant reliability, safety, environmental and regulatory requirements, prudent or essential maintenance requirements, global economic conditions, available capital resources, liquidity, long‑term business strategy and return on invested capital for the relevant expenditures, cost of capital and return on invested capital of the Company as a whole among other factors. Capital expenditures totaled $54.0 million in 2023. We anticipate capital expenditures between $35.0 million and $40.0 million in 2024.
In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would be expected to be made up by borrowings under our 2018 Revolving Credit Facility, to the extent available. The Company also maintains access to credit and capital markets and may incur additional debt or issue equity securities from time to time, which may provide an additional source of liquidity. However, there can be no guarantee that we would be able to access the credit or capital markets on commercially satisfactory terms or at all.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during 2023 and 2022 and we expect to continue to do so in the future. These transactions include ongoing obligations under the Tax Receivable Agreement, stockholders rights agreement, as amended, and registration rights agreement, each with Brookfield.
Cash flows
The following table summarizes our cash flow activities:
Year Ended December 31,
2023 2022
(Dollars in thousands)
Cash flow provided by (used in):
Operating activities $ 76,561 $ 324,628
Investing activities (53,820) (71,970)
Financing activities 18,713 (176,267)
Net change in cash and cash equivalents $ 41,454 $ 76,391
Operating activities
Cash provided by operating activities totaled $76.6 million in 2023 versus $324.6 million in the prior-year period. The decrease in operating cash flow was primarily due to a $638.2 million decrease in net income, which included a non-cash goodwill impairment charge of $171.1 million in 2023. Partially offsetting reduced net income was an increase in cash provided
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by working capital of $207.1 million. Cash flow provided by inventories increased $261.4 million, compared to 2022, primarily driven by reduced quantities on hand. Cash flow provided by accounts receivable decreased $14.8 million, compared to 2022, primarily due to reduced sales volume. Cash flow used for accounts payable and accruals was $23.9 million in 2023 compared to a source of cash of $7.7 million in 2022 primarily due to a reduced amount of purchases in 2023 versus 2022.
Investing activities
Net cash used in investing activities was $53.8 million in the year ended December 31, 2023 compared to $72.0 million in the year ended December 31, 2022 primarily driven by decreased capital expenditures.
Financing activities
Net cash provided by financing activities was $18.7 million in 2023 compared to $176.3 million of net cash used in financing activities in 2022. The change was primarily due to the issuance of $450.0 million of 2023 Senior Secured Notes net of an $11.4 million original issue discount, the absence of $60.0 million of stock repurchases in 2023 compared to 2022 and $21.0 million of increased cash received from the settlement of interest rate swaps, partially offset by a $323.7 million increase in cash used to repay the 2018 Term Loan Facility.
Financing transactions
2018 Term Loan and 2018 Revolving Credit Facility
In February 2018, the Company entered into a credit agreement (as amended, the "2018 Credit Agreement"), which provided 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 Third Amendment that increased the revolving commitments under the 2018 Credit Agreement by $80 million from $250 million (the "2018 Revolving Credit Facility"). GrafTech Finance Inc. (“GrafTech Finance”) was 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 Revolving Credit Facility matures on May 31, 2027. The net proceeds from the 2023 Senior Secured Notes (as defined below) were used to repay outstanding borrowings under our 2018 Term Loan Facility. As of December 31, 2023 and 2022, the availability under our 2018 Revolving Credit Facility was $112.4 million and $327.0 million, respectively. As any borrowings under the 2018 Revolving Credit Facility remain subject to compliance with the financial covenant thereunder, our operating performance as of December 31, 2023 resulted in a reduction of the availability under the facility. As of December 31, 2023 and December 31, 2022, there were no borrowings outstanding on the 2018 Revolving Credit Facility and there was $3.1 million and $3.0 million of letters of credit drawn against the 2018 Revolving Credit Facility as of each date, respectively.
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 2018 Revolving Credit Facility is 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 Revolving Credit Facility 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 Revolving Credit Facility 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 Revolving Credit Facility. The obligations of each foreign subsidiary of GrafTech that is a Controlled Foreign Corporation under the 2018 Revolving Credit Facility are secured by (i) a pledge of all of the equity securities of each Guarantor that is a Controlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is a Controlled Foreign
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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 Revolving Credit Facility.
The 2018 Revolving Credit Facility 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 Revolving Credit Facility contains a financial covenant that requires GrafTech to maintain a senior secured first lien net leverage ratio not greater than 4.00:1.00 when the aggregate principal amount of borrowings under the 2018 Revolving Credit Facility and outstanding letters of credit issued under the 2018 Revolving Credit Facility (except for undrawn letters of credit in an aggregate amount equal to or less than $35 million), taken together, exceed 35% of the total amount of commitments under the 2018 Revolving Credit Facility. The 2018 Revolving Credit Facility also contains customary events of default. We were in compliance with all of our debt covenants as of December 31, 2023 and 2022.
2020 Senior Secured Notes
In December 2020, GrafTech Finance issued $500.0 million aggregate principal amount of the 2020 Senior Secured Notes at an issue price of 100% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933 (the "Securities Act") and to non-U.S. persons outside the United States under Regulation S under the Securities Act.
The 2020 Senior Secured Notes are guaranteed on a senior secured basis by the Company and all of its existing and future direct and indirect U.S. subsidiaries that guarantee, or borrow under, the 2018 Revolving Credit Facility, other than GrafTech Finance. The 2020 Senior Secured Notes are secured on a pari passu basis by the collateral securing the debt under the 2018 Revolving Credit Facility and the 2023 Senior Secured Notes. GrafTech Finance, the Company and the other guarantors granted a security interest in such collateral, consisting of substantially all of their respective assets, as security for the obligations of GrafTech Finance, the Company and the other guarantors under the 2020 Senior Secured Notes and the indenture governing the 2020 Senior Secured Notes (the “2020 Indenture”) pursuant to a collateral agreement, dated as of December 22, 2020 (the “Collateral Agreement”), among GrafTech Finance, the Company, the other subsidiaries of the Company named therein as grantors and U.S. Bank National Association, as collateral agent.
The 2020 Senior Secured Notes bear interest at the rate of 4.625% per annum, which accrues from December 22, 2020 and is payable in arrears on June 15 and December 15 of each year, commencing on June 15, 2021. The 2020 Senior Secured Notes will mature on December 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the 2020 Indenture.
GrafTech Finance may redeem some or all of the 2020 Senior Secured Notes at the redemption prices and on the terms specified in the 2020 Indenture. If the Company or GrafTech Finance experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then GrafTech Finance must offer to repurchase the 2020 Senior Secured Notes on the terms set forth in the 2020 Indenture.
The 2020 Indenture contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. The 2020 Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or GrafTech Finance, all outstanding 2020 Senior Secured Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 30% in principal amount of the then outstanding 2020 Senior Secured Notes may declare all of the 2020 Senior Secured Notes to be due and payable immediately. We were in compliance with all of our debt covenants as of December 31, 2023 and 2022.
2023 Senior Secured Notes
In June 2023, GrafTech Global Enterprises Inc. issued $450.0 million aggregate principal amount of 2023 Senior Secured Notes, including $11.4 million of original issue discount. The 2023 Senior Secured Notes were issued at an issue price of 97.456% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside the United States under Regulation S under the Securities Act.
The 2023 Senior Secured Notes are or will be, as applicable, guaranteed on a senior secured basis by (i) GrafTech Finance, (ii) the Company and all of its direct and indirect U.S. subsidiaries that, as of the date of the 2023 Senior Secured
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Notes, guarantee (or are borrowers of) the debt under the 2018 Revolving Credit Facility, other than GrafTech Global Enterprises Inc., and (iii) all of the Company’s future direct and indirect subsidiaries that guarantee (or are borrowers of) debt under the 2018 Revolving Credit Facility, the 2020 Senior Secured Notes and certain other future indebtedness, in each case, other than certain excluded foreign subsidiaries and GrafTech Global Enterprises Inc. The 2023 Senior Secured Notes and the note guarantees are secured on a first-priority basis by liens on the collateral of GrafTech Global Enterprises Inc. and the U.S. guarantors securing the debt under the 2018 Revolving Credit Facility and the 2020 Senior Secured Notes, on an equal and ratable basis with the debt under the 2018 Revolving Credit Facility and 2020 Senior Secured Notes, in each case subject to permitted liens and certain exceptions, pursuant to a collateral agreement, dated as of June 26, 2023 among GrafTech Global Enterprises Inc., the Company, the other subsidiaries of the Company named therein as grantors and U.S. Bank Trust Company, National Association, as collateral agent.
The 2023 Senior Secured Notes bear interest at a rate of 9.875% per annum which accrued from June 26, 2023 and is payable in arrears on June 15 and December 15 of each year, commencing on December 15, 2023. The 2023 Senior Secured Notes will mature on December 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms of the indenture governing the 2023 Senior Secured Notes (the “2023 Indenture”).
GrafTech Global Enterprises Inc. may redeem some or all of the 2023 Senior Secured Notes at the redemption prices and on the terms specified in the 2023 Indenture. If the Company or GrafTech Global Enterprises experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then GrafTech Global Enterprises Inc. must offer to repurchase the 2023 Senior Secured Notes on the terms set forth in the 2023 Indenture.
The 2023 Indenture contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. The 2023 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 Global Enterprises Inc., all outstanding 2023 Senior Secured Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 30% in principal amount of the then outstanding 2023 Senior Secured Notes may declare all of the 2023 Senior Secured Notes to be due and payable immediately. We were in compliance with all of our debt covenants as of December 31, 2023.
Material Cash Requirements. The following table summarizes our contractual and other material cash obligations as of December 31, 2023:
Payments Due by Year Ending December 31,
Total 2024 2025-2026 2027-2028 2029+
(Dollars in Thousands)
Contractual and Other Obligations
Long-term debt (a) $ 950,139 $ 139 $ — $ 950,000 $ —
Interest on long-term debt (b) 334,999 67,563 135,126 132,310 —
Total contractual obligations 1,285,138 67,702 135,126 1,082,310 —
Pension plan contributions (c) 5,386 5,386 — — —
Committed purchase obligations (d) 21,000 7,000 14,000 — —
Related party Tax Receivable Agreement (e) 11,154 5,417 5,737 — —
Total contractual and other obligations (f) $ 1,322,678 $ 85,505 $ 154,863 $ 1,082,310 $ —
(a) Represents our total debt from our 2020 Senior Secured Notes with an outstanding balance of $500.0 million due in 2028 and our 2023 Senior Secured Notes with an outstanding balance of $450.0 million due 2028 (see "Financing transactions" in this section for full details of these obligations).
(b) Represents estimated interest payments on the 2020 and 2023 Senior Secured Notes through December 15, 2028.
(c) Represents estimated contributions under our defined benefit pension plans. Contributions in future periods will be dependent upon regulatory requirements, the plans' funded ratios, plan investment performance, discount rates, actuarial assumptions, plan amendments, our contribution objectives and other factors. We anticipate funding those contributions with cash on hand or cash generated from operations. It is not practical to estimate the required contributions beyond 2024 at the present time.
(d) Represents committed purchases of raw materials.
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(e) Represents Brookfield's right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including certain federal NOLs, previously taxed income under Section 959 of the Code, foreign tax credits, and certain NOLs in Swissco. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to the one-month period secured overnight financing rate administered by the Federal Reserve Bank of New York plus 1.10% 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.
(f) In addition, letters of credit of $3.1 million were issued under the 2018 Revolving Credit Facility as of December 31, 2023.
Costs Relating to Protection of the Environment
We have been and are subject to stringent environmental protection laws and regulations. In addition, we have an on‑going commitment to rigorous internal environmental protection standards. Environmental considerations are part of all significant operating and capital expenditure decisions. The following table sets forth certain information regarding environmental expenses and capital expenditures.
Year Ended December 31,
2023 2022 2021
(Dollars in thousands)
Expenses relating to environmental protection $ 12,085 $ 22,395 $ 16,914
Capital expenditures related to environmental protection 7,588 6,012 7,014
Critical accounting policies
Critical accounting policies are those that require difficult, subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We use and rely on estimates in determining the economic useful lives of our assets, obligations under our employee benefit plans, provisions for doubtful accounts, provisions for restructuring charges and contingencies, tax valuation allowances, evaluation of goodwill, other intangible assets, pension and OPEB and various other recorded or disclosed amounts, including inventory valuations. Estimates require us to use our judgment. While we believe that our estimates for these matters are reasonable, if the actual amount is significantly different than the estimated amount, our assets, liabilities or results of operations may be overstated or understated. The following accounting policies are deemed to be critical.
Goodwill. Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. The Company has two reporting units, Graphite Electrodes and Needle Coke. The acquisition of the Company by Brookfield in 2015 generated a goodwill amount of $171.1 million, which was allocated entirely to the Graphite Electrode reporting unit.
Goodwill is tested for impairment annually as of December 31 and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. When reviewing goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
In performing a qualitative assessment, we consider business conditions and other factors including, but not limited to (i) adverse industry or economic trends, (ii) lower projections that may impact future operating results, (iii) sustained decline in our share price and (iv) overall financial performance and other events affecting the reporting units. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative impairment test is performed by estimating the fair value of the reporting unit and comparing it to its carrying value. If the carrying value of a reporting unit exceeds its fair value, we would record an impairment charge equal to the excess of the carrying value of the reporting unit over its fair value.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology under the income approach. This requires us to use significant judgment including estimation of future cash flows, which is based
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upon relevant market data, internal forecasts, estimation of the long‑term growth for our business and determination of the weighted average cost of capital for purposes of establishing a discount rate.
For the 2023 annual impairment testing, the Company performed a quantitative assessment of the fair value of the reporting unit, using a combination of the income approach and the market approach (Level 3 in the fair value hierarchy) from a market participant’s perspective. The valuation of the Graphite Electrode reporting unit is performed with cash flows that are adjusted to present this reporting unit as purchasing petroleum needle coke entirely from third parties at anticipated market prices.
The income approach was based on discounted projected debt-free cash flows for the graphite electrode reporting unit. The forecast of cash flows included several assumptions regarding future sales growth, revenues, earnings before interest, taxes, depreciation and amortization (“EBITDA”), capital expenditures and working capital changes. In addition to the estimates of future cash flows, the income approach involves the determination of the discount rate based upon market participant’s assumptions.
The market approach fair value was based on valuation multiples that were applied to the graphite electrode reporting unit’s actual and projected EBITDA. The multiples were derived under the guideline public company method from analyzing market multiples of EBITDA for a group of comparable public companies. The techniques used in the Company’s assessment incorporate a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date.
Key assumptions relate to customer demand and sales growth, graphite electrode and needle coke pricing trends, operating costs and capital expenditures. Assumptions in estimating future cash flows are subject to a degree of judgement.
The testing determined that the fair value of the Graphite Electrode reporting unit was less than its carrying amount by more than the amount of goodwill. As a result, we recorded a full impairment charge of $171.1 million, which was recorded in Goodwill impairment charges in the Consolidated Statements of Income. The goodwill impairment was caused primarily by reduced sales of graphite electrodes due to softening demand and the deterioration of the electrode spot pricing.
For the 2022 and 2021 annual goodwill impairment testing, the Company performed a qualitative assessment first to determine whether it was more likely than not that the fair value of the Graphite Electrode reporting unit was less than its carrying amount. We assessed relevant events and circumstances, including industry, market and macroeconomic conditions, as well as Company and reporting unit-specific factors. Based on this review, we determined that it was not more likely than not that the fair value of the Graphite Electrode reporting unit was less than its carrying amount and concluded that the quantitative goodwill impairment test was not required. No impairment of goodwill resulted from our annual impairment tests in 2022 and 2021.
Refer to Note 1, "Business and Summary of Significant Accounting Policies" and Note 6, "Goodwill and Other Intangible Assets" to the Consolidated Financial Statements for information regarding our goodwill impairment testing.
Employee benefit plans. We sponsor various retirement and pension plans, including defined benefit and defined contribution plans and post-employment benefit plans that cover most employees worldwide. Excluding the defined contribution plans, accounting for these plans requires assumptions as to the discount rate, expected return on plan assets, expected salary increases and health care cost trend rate. See Note 11, "Retirement Plans and Post-employment Benefits," to the Consolidated Financial Statements for further details.
Impairments of long‑lived assets. We may record impairment losses on long‑lived assets used in operations when events and circumstances indicate that the assets might be impaired and the future undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Assets to be disposed are reported at the lower of the carrying amount or fair value less estimated costs to sell. Estimates of the future cash flows are subject to significant uncertainties and assumptions. If the actual value is significantly less than the estimated fair value, our assets may be overstated. Future events and circumstances, some of which are described below, may result in an impairment charge:
• new technological developments that provide significantly enhanced benefits over our current technology;
• significant negative economic or industry trends;
• changes in our business strategy that alter the expected usage of the related assets; and
• future economic results that are below our expectations used in the current assessments.
As of December 31, 2023, we tested our long-lived assets for impairment and determined that their carrying value was recoverable.
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Accounting for income taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to make the following assessments:
• estimate our actual current tax liability in each jurisdiction;
• estimate our temporary differences resulting from differing treatment of items for tax and accounting purposes (which result in deferred tax assets and liabilities that we include within the Consolidated Balance Sheets); and
• assess the likelihood that our deferred tax assets will be recovered from future taxable income and, if we believe that recovery is not more likely than not, a valuation allowance is established.
If our estimates are incorrect, our deferred tax assets or liabilities may be overstated or understated.
As of December 31, 2023, we had a valuation allowance of $9.0 million against certain deferred tax assets. Our losses in certain tax jurisdictions in recent periods represented sufficient negative evidence to require a full valuation allowance. We also have a partial valuation allowance related to certain U.S. state net operating losses where realizability is unlikely due to discontinued operations in these states. Until we determine that we will generate sufficient jurisdictional taxable income to realize our net operating losses and deferred tax assets, we continue to maintain a valuation allowance.
Related-party Tax Receivable Agreement. On April 23, 2018, the Company entered into the Tax Receivable Agreement, which provides Brookfield, as the sole pre-IPO stockholder, the right to receive future payments from us for 85% of the amount of cash savings, if any, in U.S. federal income tax and Swiss tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our IPO, including the pre-IPO Tax Assets. In addition, we will pay interest on the payments we will make to Brookfield with respect to the amount of these cash savings from the due date (without extensions) of our tax return where we realize these savings to the payment date at a rate equal to the one-month period secured overnight financing rate administered by the Federal Reserve Bank of New York plus 1.10%. The term of the Tax Receivable Agreement commenced on April 23, 2018 and will continue until there is no potential for any future tax benefit payments.
The calculation of the Tax Receivable Agreement liability requires significant judgment with regards to the assumptions underlying the forecast of future taxable income, in total and by jurisdiction, as well as their timing.
Revenue recognition. Revenue is recognized when a customer obtains control of promised goods, in an amount that reflects the consideration which we expect to receive in exchange for those goods.
To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, the following five steps are performed: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five‑step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Our revenue streams primarily consist of LTAs and short‑term purchase orders (deliveries within the year) directly with steel manufacturers. The promises of delivery of graphite electrodes represent the distinct performance obligations to which the contract consideration is allocated, based upon the electrode stand‑alone selling prices for the class of customers at the time the agreements are executed. The performance obligations are considered to be satisfied at a point in time when control of the electrodes has been transferred to the customer. The Company has elected to treat the transportation of the electrodes from our premises to the customer’s facilities as a fulfillment activity, and outbound freight cost is accrued when the graphite electrode performance obligation is satisfied. Any variable consideration is recognized up to its unconstrained amount (i.e., up to the amount for which it is probable that a significant reversal of the variable revenue will not happen).
Revenue recognition requires the estimation of the electrode stand-alone selling price, using a variety of inputs, from market observable information to internal pricing guidelines. The estimate of stand-alone selling price on the various classes of contracts is the basis for the allocation of revenue amongst periods for new and modified contracts. Historically the amount of contract assets and liabilities resulting from these estimates has been immaterial. See Note 2, "Revenue from Contracts with Customers," to the Consolidated Financial Statements for additional information.
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