GrafTech International(EAF) - 2023 Q4 - Annual Report

PART I Presentation of Financial, Market and Industry Data Financial information is presented on a consolidated basis in U.S. dollars, with market and industry data from third-party sources whose accuracy is not guaranteed - Financial information is presented on a consolidated basis in U.S. dollars[10] - Market and industry data are obtained from third-party sources, but their accuracy or completeness is not guaranteed[11] Cautionary Note Regarding Forward-Looking Statements The report contains forward-looking statements on financial projections and operations, subject to risks like industry cycles and raw material supply, where actual results may differ materially - The report contains forward-looking statements regarding financial projections, future operations, and economic performance[12] - Key risks include dependence on the global steel industry, cyclical business nature, economic conditions, graphite electrode overcapacity, raw material supply disruptions, manufacturing hazards, and international operational risks[13][17] - Actual results may vary materially from forward-looking statements due to various risks and uncertainties[15] Item 1. Business GrafTech is a leading vertically integrated manufacturer of high-quality graphite electrodes for EAF steel, serving global producers with reduced 2024 capacity, emphasizing R&D, IP, and human capital Introduction GrafTech is a leading vertically integrated manufacturer of high-quality graphite electrodes, reducing 2024 production capacity due to market softness - GrafTech International Ltd. is a leading manufacturer of high-quality graphite electrode products essential to EAF steel production[19] - The company is substantially vertically integrated into petroleum needle coke, a key raw material, providing competitive advantages in product quality and cost[19] Stated Production Capacity | Year | Capacity (thousand MT) | | :--- | :--- | | As of Dec 31, 2023 | 202 | | Beginning 2024 | 178 | - The reduction in production capacity for 2024 is a result of a cost rationalization and footprint optimization plan, including an indefinite suspension of production activities at the St. Marys facility, in response to persistent softness in the commercial environment[21] Products and Raw Materials Graphite electrodes are essential for EAF steel, with UHP segment growth and increasing petroleum needle coke demand driven by EVs - Graphite electrodes are essential industrial consumables for EAF steel production, representing less than 5% of total steel production cost[23] - The company primarily competes in the Ultra-High Power (UHP) segment, which requires extensive proprietary manufacturing processes and high-quality needle coke[24][30] - EAF steelmaking is more energy-efficient and environmentally advantaged, producing 75% fewer carbon dioxide emissions compared to BOF steelmaking[33] - Global (excluding China) UHP graphite electrode demand is estimated to grow at a compound annual growth rate of approximately 3% to 4% through 2028[35] - Petroleum needle coke is a key raw material for graphite electrodes and synthetic graphite used in lithium-ion batteries for electric vehicles (EVs)[36] - GrafTech's Seadrift facility provides the majority of its petroleum needle coke requirements, offering superior quality for graphite electrode production[38] - Global (excluding China) petroleum needle coke capacity was approximately 750 thousand MT at the end of 2023, with Seadrift representing nearly one-fifth (140 thousand MT)[40] - Global needle coke demand for EV applications is expected to increase at a 20% or more compound annual growth rate through 2028, potentially leading to regional supply-demand imbalances[46] Contracts and Customers GrafTech sells products through diverse agreements, with a recent shift from multi-year LTAs towards short-term and spot sales - GrafTech sells products under short-term purchase agreements, multi-year purchase agreements (including take-or-pay LTAs), and spot sales[49] LTA Sales as Percentage of Net Sales | Year | % of Net Sales | | :--- | :--- | | 2023 | 41% | | 2022 | 68% | | 2021 | 77% | - As LTAs near their terms, the business mix has shifted towards short-term purchase agreements and spot orders, and multi-year agreements are not anticipated to make up the majority of the portfolio moving forward[53] 2023 Revenue and Production By Region EAF steel producers purchased most graphite electrodes, with a significant portion of net sales generated outside the United States - Approximately 89% of graphite electrodes were purchased by EAF steel producers in 2023[55] Sales Outside the United States as Percentage of Net Sales | Year | % of Net Sales | | :--- | :--- | | 2023 | 67% | | 2022 | 73% | | 2021 | 79% | - In 2023, Europe, the Middle East, Africa (EMEA) and the Americas collectively generated 89% of net sales[56] Sales and Customer Service The company differentiates through product quality, reliability, and technical service, offering the ArchiTech Furnace Productivity System for EAF operators - The company differentiates its graphite electrodes based on price, product quality and performance, delivery reliability, and customer technical service[58] - GrafTech offers the ArchiTech Furnace Productivity System 6.0, an advanced support and technical service platform for EAF operators, enabling real-time diagnostics and troubleshooting[61] Distribution The company uses demand and inventory management to meet delivery needs, storing finished products at global facilities and warehouses - The company employs demand and inventory management techniques to meet customer delivery requirements and maximize production capacity utilization[63] - Finished products are stored at manufacturing facilities and local warehouses globally[64] Research and Development GrafTech leverages over 135 years of R&D experience to improve graphite electrode quality, petroleum needle coke production, and explore adjacent markets - GrafTech has over 135 years of experience in R&D of graphite- and carbon-based solutions[66] - R&D focuses on improving graphite electrode quality and petroleum needle coke production, and evaluating technology in adjacent markets[66] Intellectual Property The company protects its intellectual property, including approximately 100 patents and the UCAR trademark, through various legal means and confidentiality agreements - The company's intellectual property portfolio includes approximately 100 U.S. and foreign patents and pending patent applications[68] - Protection relies on patent, trademark, copyright, and trade secret laws, as well as confidentiality agreements[70] - The UCAR trademark is licensed exclusively to GrafTech on a worldwide, royalty-free basis until January 2035[69] Insurance GrafTech maintains insurance for civil liabilities, property damage, business interruptions, and environmental matters, though losses may exceed coverage limits - GrafTech maintains insurance for civil liabilities, property damage, business interruptions, and environmental matters[72] - There is no assurance that losses will not be incurred beyond the limits or outside the coverage of the insurance policies[72] Regulatory Matters As a global company, GrafTech is subject to various environmental, data protection, and anti-corruption regulations, operating in material compliance with established accruals for liabilities - As a global company, GrafTech is subject to various federal, state, local, and foreign environmental, data protection (e.g., GDPR), anti-corruption, import/export, and safety regulations[74] - The company believes it operates in material compliance, and compliance costs and environmental liabilities are not expected to materially affect its financial position over the next several years[74] - Accruals for environmental liabilities are established when a liability is probable and can be reasonably estimated[74] Human Capital Resources GrafTech manages human capital with 1,249 employees, focusing on health, safety, diversity, competitive compensation, and continuous development - As of December 31, 2023, GrafTech had 1,249 employees, with approximately 35% covered by collective bargaining agreements[77][78] - The company reported no material work stoppages or strikes by employees during the past year[78] Total Recordable Incident Rate | Year | Rate per 200,000 work hours | | :--- | :--- | | 2023 | 0.61 | | 2022 | 0.94 | - Diversity and inclusion are foundational to the company's culture, with 40% of senior leadership and 14% of Board members being female as of December 31, 2023[80][81] - GrafTech offers competitive compensation and benefits, including performance bonuses and tuition reimbursement, to attract and retain talent[82][83] - The company conducts employee engagement surveys every other year, with the last one in October 2022 (56% participation) and the next expected in 2024[84] - Employee training and development are supported through detailed job profiles, a performance management system, and regular performance reviews[85][86] Available Information GrafTech makes its annual, quarterly, and current reports freely available on its corporate website - GrafTech makes its annual, quarterly, and current reports (Forms 10-K, 10-Q, 8-K) available free of charge on its website[88] Item 1A. Risk Factors GrafTech faces significant risks from the cyclical steel industry, volatile pricing, overcapacity, supply disruptions, operational hazards, geopolitical events, substantial indebtedness, and legal/regulatory challenges - The company is highly dependent on the global steel industry, particularly the EAF steel industry, which is cyclical and can lead to periods of reduced profitability or net losses[90] - Graphite electrode pricing is cyclical and has declined from 2018 highs, with spot prices decreasing in 2023 due to a softer commercial environment[93][95] - Global graphite electrode overcapacity and intense competition could adversely affect prices, sales, margins, and profitability[96][97] - Dependence on petroleum needle coke and other raw materials, along with reliance on a single facility (Monterrey, Mexico) for connecting pins, poses risks of supply disruptions or increased costs[98][99][101] - Substantial international operations expose the company to legal, economic, social, and political risks, including currency fluctuations, tariffs, and trade restrictions[106] - The company's indebtedness could limit financial and operating activities, and restrictive covenants in financing agreements could hinder adaptability to market conditions[125][129] - Stringent health, safety, and environmental laws, as well as global data and privacy protection laws, could result in substantial compliance costs, sanctions, or material liabilities[137][140] - Ongoing arbitrations with customers regarding non-performance under long-term agreements (LTAs) could have a material adverse effect on results[142] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - There are no unresolved staff comments[149] Item 1C. Cybersecurity GrafTech maintains a comprehensive cybersecurity program with Board oversight, integrating risks into enterprise management, and has reported no material incidents to date - GrafTech has an overarching cybersecurity program with documented policies, layered defenses, third-party penetration tests, and employee training[149] - The Board oversees cybersecurity risks, which are incorporated into the enterprise risk management processes[151] - As of the filing date, no material cybersecurity incidents have occurred that have materially affected the company's business strategy, results of operations, or financial condition[150] Item 2. Properties GrafTech operates global manufacturing facilities for its Industrial Materials segment, including key sites in Mexico, France, Spain, and Texas, with capacity utilization significantly decreasing to 44% in 2023 - GrafTech's principal physical properties serve its Industrial Materials segment for manufacturing, sales, and services[153] Graphite Electrode Manufacturing Facilities Capacity Utilization | Year | Capacity Utilization | | :--- | :--- | | 2023 | 44% | | 2022 | 78% | - Key owned facilities include graphite electrode and pin manufacturing in Monterrey, Mexico; graphite electrode manufacturing in St. Marys, Pennsylvania (production indefinitely suspended except machining); petroleum needle coke manufacturing (Seadrift) in Port Lavaca, Texas; and graphite electrode manufacturing in Calais, France and Pamplona, Spain[154][21] Item 3. Legal Proceedings GrafTech faces multiple legal proceedings, including arbitrations for $188.2 million in damages, environmental permit issues in Mexico, wage litigation in Brazil, and a stockholder class action, which it intends to vigorously defend - GrafTech is involved in arbitrations with customers (e.g., Aperam, ArcelorMittal) who have failed to perform under LTAs, with claimants seeking approximately $188.2 million in damages[156] - The Monterrey, Mexico facility experienced a temporary suspension in September 2022 due to environmental permit issues, which was lifted in November 2022, but an administrative proceeding is ongoing[157][158] - The company is involved in pending wage litigation in Brazil, where employees seek additional amounts under collective bargaining agreements; the potential loss is currently unassessable[159] - Mexican Tax Authority (MTA) audits for 2019 and 2018 VAT filings allege improper use of VAT exemption rules; the 2019 assessment of ~$28.8 million was annulled by court in January 2024 (MTA appealed), and the 2018 proposed assessment of ~$51.0 million is being challenged[160][161][162][163] - A stockholder class action was filed on January 25, 2024, alleging material misrepresentations related to the Monterrey facility suspension, seeking unquantified compensatory damages[164] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to GrafTech International Ltd - Mine safety disclosures are not applicable[165] Information About Our Executive Officers This section provides biographical information for GrafTech's current executive officers, including the Interim CEO, Interim CFO, COO, Chief Legal Officer, and SVP Commercial - Timothy K. Flanagan serves as Interim Chief Executive Officer and President, appointed in November 2023, previously Chief Financial Officer[168] - Catherine Hedoux-Delgado serves as Interim Chief Financial Officer and Treasurer, appointed in November 2023, previously Vice President, Corporate Controller[169] - Jeremy S. Halford is the Executive Vice President, Chief Operating Officer, appointed in October 2021[170] - Gina K. Gunning is the Chief Legal Officer and Corporate Secretary, joining in July 2018[171] - Iñigo Perez Ortiz is the Senior Vice President, Commercial and CTS, joining in February 2020[172] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities GrafTech's common stock trades on the NYSE, with its quarterly cash dividend suspended and $99.0 million remaining in its stock repurchase program, which saw no Q4 2023 activity - GrafTech's common stock is listed on the NYSE under the trading symbol 'EAF'[173] - As of December 31, 2023, there were seven registered holders of common stock[173] - The quarterly cash dividend of $0.01 per common share was suspended on August 2, 2023[174] - Approximately $99.0 million of the total $250.0 million authorized stock repurchase program remained available as of December 31, 2023, with no repurchase activity during Q4 2023[177] Item 6. [Reserved] This item is intentionally reserved and contains no information - This item is reserved[178] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations GrafTech experienced a significant 2023 downturn with decreased sales and production volumes, resulting in a $(255.3) million net loss and a $171.1 million goodwill impairment, despite maintaining $289.3 million liquidity and implementing cost savings Operational and Commercial Update Sales and production volumes significantly decreased in 2023 due to market softness and proactive production cuts, impacting non-LTA graphite electrode prices Sales and Production Volume (2023 vs. 2022) | Metric | 2023 (thousand MT) | 2022 (thousand MT) | Change YoY | | :--- | :--- | :--- | :--- | | Sales volume | 92 | 149 | -39% | | Production volume | 88 | 157 | -44% | Weighted-Average Realized Price for Non-LTA Graphite Electrodes | Year | Price per MT | | :--- | :--- | | 2023 | ~$5,400 | | 2022 | ~$6,000 | - Production volume was proactively reduced to align with evolving demand outlook and manage working capital levels[182] Capital Structure and Liquidity As of December 31, 2023, GrafTech maintained $289.3 million in liquidity, with total debt at approximately $950.1 million - As of December 31, 2023, liquidity was $289.3 million, consisting of $112.4 million availability under the 2018 Revolving Credit Facility and $176.9 million in cash and cash equivalents[183] - Total debt as of December 31, 2023, was approximately $950.1 million[183] Outlook Near-term demand for graphite electrodes is expected to remain weak in 2024, but cost rationalization and long-term growth drivers from EAF steel decarbonization and EV market are positive - Near-term demand for graphite electrodes is expected to remain weak in 2024 due to global economic uncertainty, but a modest year-over-year improvement in sales volume is anticipated[184] - The company announced a cost rationalization and footprint optimization plan, including indefinitely suspending production at its St. Marys facility and idling other assets[186][187] - These initiatives are expected to result in annualized cost savings of approximately $25.0 million, with $15.0 million in cost of goods sold and the remainder in selling and administrative expenses[188] - Stated production capacity will be reduced by 12% to approximately 178 thousand MT beginning in 2024[190] - Anticipated capital expenditures for 2024 are in the range of $35.0 million to $40.0 million, down from $54.0 million in 2023[191] - Longer term, the company is confident in demand growth for graphite electrodes due to EAF steel decarbonization and for petroleum needle coke from the growing EV market[192] Estimated LTA Shipments and Revenue for 2024 | Metric | 2024 (Estimated) | | :--- | :--- | | LTA volume (thousands of MT) | 13-16 | | LTA revenue (millions) | $100-$135 | Key metrics used by management to measure performance GrafTech utilizes both GAAP and non-GAAP financial measures, alongside operating metrics, to assess performance and analyze business trends - GrafTech uses both GAAP and non-GAAP financial measures (EBITDA, adjusted EBITDA, adjusted net income/loss, adjusted EPS, free cash flow, adjusted free cash flow, cash cost of goods sold per MT) and operating metrics (sales volume, production volume, production capacity, capacity utilization) to analyze performance[194][204][208][209] Key Financial Measures (2023 vs. 2022) | Metric | 2023 (thousands) | 2022 (thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $620,500 | $1,281,250 | $(660,750) | -52% | | Net (loss) income | $(255,250) | $382,962 | $(638,212) | -167% | | (Loss) earnings per share | $(0.99) | $1.48 | $(2.47) | -167% | | Adjusted EBITDA | $20,484 | $536,464 | $(515,980) | -96% | Key Operating Measures (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Sales volume (MT) | 91.6 thousand | 149.1 thousand | -39% | | Production volume (MT) | 88.1 thousand | 157.1 thousand | -44% | | Total capacity utilization | 38% | 68% | -30 pp | | Capacity utilization excluding St. Marys | 44% | 78% | -34 pp | Cash Cost of Goods Sold per MT | Year | Cost per MT | | :--- | :--- | | 2023 | $5,537 | | 2022 | $4,266 | Results of Operations Net sales decreased by 52% in 2023, leading to an operating loss of $(214.4) million and a net loss of $(255.3) million, primarily due to lower sales volume and a $171.1 million goodwill impairment - Net sales decreased by $660.8 million (52%) in 2023 compared to 2022, primarily due to lower sales volume, the residual impact of the Monterrey facility suspension, and a shift to non-LTA volume with lower prices[226] - Cost of goods sold decreased by $154.5 million (21%) but increased on a per MT basis due to higher-priced inventory and $62.4 million in fixed manufacturing costs expensed (vs. $16.0 million in 2022) due to reduced production levels[227][228] - A $12.4 million Lower of Cost or Market (LCM) inventory valuation adjustment was recorded in 2023[229] - Operating (loss) income shifted from $474.3 million income in 2022 to $(214.4) million loss in 2023, largely due to a $171.1 million goodwill impairment charge[226][230] - Interest expense increased by $21.5 million (59%) in 2023, driven by higher interest on the 2023 Senior Secured Notes and a $6.4 million reduction in net gains from interest rate swaps[232] - Net (loss) income was $(255.3) million in 2023, a 167% decrease from $383.0 million in 2022[226] Effects of Changes in Currency Exchange Rates Fluctuations in foreign currency exchange rates impact both net sales and cost of goods sold - Fluctuations in foreign currency exchange rates impact net sales and cost of goods sold[237][238] Impact of Currency Exchange Rate Changes on Net Sales (millions) | Year | Impact | | :--- | :--- | | 2023 | +$1.5 | | 2022 | -$11.7 | | 2021 | +$5.5 | Impact of Currency Exchange Rate Changes on Cost of Goods Sold (millions) | Year | Impact | | :--- | :--- | | 2023 | +$12.4 | | 2022 | -$20.6 | | 2021 | +$10.1 | Liquidity and Capital Resources GrafTech maintained $289.3 million in liquidity, issued $450 million in new notes to extend debt maturities, suspended its dividend, and anticipates $35.0-$40.0 million in 2024 capital expenditures - As of December 31, 2023, GrafTech had $289.3 million in liquidity, comprising $112.4 million in 2018 Revolving Credit Facility availability and $176.9 million in cash and cash equivalents[243] - The company issued $450 million of 2023 Senior Secured Notes to repay the 2018 Term Loan Facility, extending debt maturities to 2028[245] - The stock repurchase authorization had $99.0 million remaining as of December 31, 2023[247] - The quarterly cash dividend of $0.01 per share was suspended on August 2, 2023[248] Capital Expenditures (millions) | Year | Amount | | :--- | :--- | | 2023 | $54.0 | | 2024 (anticipated) | $35.0 - $40.0 | Cash flows Operating cash flow significantly decreased in 2023 due to lower net income, while financing activities shifted to a net cash inflow from new debt issuance Cash Flow from Operating Activities (thousands) | Year | Amount | | :--- | :--- | | 2023 | $76,561 | | 2022 | $324,628 | | 2021 | $443,040 | - The decrease in operating cash flow in 2023 was primarily due to a $638.2 million decrease in net income, partially offset by a $207.1 million increase in cash provided by working capital (mainly from reduced inventories)[255][256] Net Cash Used in Investing Activities (thousands) | Year | Amount | | :--- | :--- | | 2023 | $(53,820) | | 2022 | $(71,970) | | 2021 | $(57,860) | Net Cash Provided by (Used in) Financing Activities (thousands) | Year | Amount | | :--- | :--- | | 2023 | $18,713 | | 2022 | $(176,267) | | 2021 | $(471,792) | - The shift in financing cash flow in 2023 was primarily due to the issuance of $450.0 million in 2023 Senior Secured Notes and increased cash from interest rate swap settlements, partially offset by a $323.7 million increase in cash used to repay the 2018 Term Loan Facility[258] Financing transactions GrafTech's financing includes a $330 million revolving credit facility, $500.0 million in 2020 Senior Secured Notes, and $450.0 million in 2023 Senior Secured Notes, with all debt covenants in compliance - The 2018 Revolving Credit Facility has a $330 million commitment, matures on May 31, 2027, and had $112.4 million available for borrowing as of December 31, 2023[259] - The 2020 Senior Secured Notes have an aggregate principal amount of $500.0 million, bear interest at 4.625% per annum, and mature on December 15, 2028[265][267] - The 2023 Senior Secured Notes have an aggregate principal amount of $450.0 million, bear interest at 9.875% per annum, and mature on December 15, 2028; proceeds were used to repay the 2018 Term Loan Facility[270][273] - All debt instruments contain restrictive covenants, and GrafTech was in compliance with all debt covenants as of December 31, 2023[264][269][275] Material Cash Requirements Total contractual and other obligations amounted to $1.32 billion as of December 31, 2023, with the majority of long-term debt due in 2028 Total Contractual and Other Obligations (Dec 31, 2023) | Category | Total (thousands) | | :--- | :--- | | Long-term debt | $950,139 | | Interest on long-term debt | $334,999 | | Pension plan contributions | $5,386 | | Committed purchase obligations | $21,000 | | Related party Tax Receivable Agreement | $11,154 | | Total contractual and other obligations | $1,322,678 | - The majority of long-term debt ($950.0 million) is due in 2028[276] Costs Relating to Protection of the Environment Environmental expenses were $12.1 million in 2023, with capital expenditures for environmental protection at $7.6 million Environmental Expenses (thousands) | Year | Amount | | :--- | :--- | | 2023 | $12,085 | | 2022 | $22,395 | | 2021 | $16,914 | Capital Expenditures Related to Environmental Protection (thousands) | Year | Amount | | :--- | :--- | | 2023 | $7,588 | | 2022 | $6,012 | | 2021 | $7,014 | Critical accounting policies Critical accounting policies, including goodwill, employee benefits, and income taxes, require significant management judgment, with a $171.1 million goodwill impairment recorded in 2023 - A full goodwill impairment charge of $171.1 million was recorded in 2023 for the Graphite Electrode reporting unit, primarily due to reduced sales from softening demand and deteriorating electrode spot pricing[290] - No goodwill impairment resulted from annual tests in 2022 and 2021[291] - Critical accounting policies include goodwill, employee benefit plans, impairments of long-lived assets, income taxes, related-party Tax Receivable Agreement, and revenue recognition, all requiring significant management judgment and estimates[280][293][294][295][297][298] Item 7A. Quantitative and Qualitative Disclosures About Market Risk GrafTech manages market risks from interest rates, currency, and commodity prices using non-trading derivative instruments, with a 10% USD fluctuation impacting the foreign currency hedge portfolio by $2.0 million - GrafTech is exposed to market risks from changes in interest rates, currency exchange rates, and energy commodity prices[302] - The company uses derivative financial instruments, primarily foreign currency derivatives, to manage these risks, but not for trading purposes[302][306] - As of December 31, 2023, there were no outstanding interest rate swaps or commodity derivative contracts[305][307] - Foreign currency derivatives showed a net unrealized pre-tax gain of $0.1 million at December 31, 2023, compared to a net unrealized pre-tax loss of $0.2 million at December 31, 2022[307] - A 10% appreciation or depreciation in the U.S. dollar against foreign currencies would result in a corresponding $2.0 million decrease or increase, respectively, in the fair value of the foreign currency hedge portfolio[309] Item 8. Financial Statements and Supplementary Data This section presents GrafTech's audited consolidated financial statements, including a $(255.3) million net loss in 2023 and a significant decrease in assets due to goodwill impairment, with an unqualified opinion from Deloitte & Touche LLP Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on GrafTech's financial statements and internal controls, identifying goodwill impairment as a critical audit matter - Deloitte & Touche LLP issued an unqualified opinion on GrafTech's consolidated financial statements as of December 31, 2023 and 2022, and on the effectiveness of internal control over financial reporting as of December 31, 2023[315] - The critical audit matter identified was the goodwill impairment evaluation, which involved challenging judgments regarding forecasts of future revenues, EBITDA, capital expenditures, discount rates, and market multiples for the Graphite Electrode reporting unit[322][323] Consolidated Balance Sheets Total assets decreased to $1.29 billion in 2023, primarily due to the full impairment of goodwill, leading to a significant reduction in stockholders' equity Consolidated Balance Sheet Highlights (thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total assets | $1,288,889 | $1,604,178 | $(315,289) | | Goodwill | $0 | $171,117 | $(171,117) | | Total current assets | $674,793 | $815,228 | $(140,435) | | Total liabilities | $1,210,642 | $1,266,461 | $(55,819) | | Total stockholders' equity | $78,247 | $337,715 | $(259,468) | - The significant decrease in total assets and stockholders' equity in 2023 was primarily due to the full impairment of goodwill[326] Consolidated Statements of Operations and Comprehensive (Loss) Income GrafTech reported a $(255.3) million net loss in 2023, a 167% decline from 2022, driven by a 52% decrease in net sales and a $171.1 million goodwill impairment Consolidated Statements of Operations Highlights (thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $620,500 | $1,281,250 | $1,345,788 | | Gross profit | $36,212 | $554,877 | $644,453 | | Operating (loss) income | $(214,437) | $474,259 | $508,074 | | Net (loss) income | $(255,250) | $382,962 | $388,330 | | Diluted (loss) income per common share | $(0.99) | $1.48 | $1.46 | - The company reported a net loss of $(255.3) million in 2023, a significant decline from net income in prior years, primarily driven by a 52% decrease in net sales and a $171.1 million goodwill impairment charge[328] - A $12.4 million Lower of Cost or Market (LCM) inventory valuation adjustment was recorded in 2023[328] Consolidated Statements of Cash Flows Operating cash flow decreased significantly in 2023 due to lower net income, while financing activities provided cash from new debt issuance and swap settlements Consolidated Statements of Cash Flows Highlights (thousands) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $76,561 | $324,628 | $443,040 | | Net cash used in investing activities | $(53,820) | $(71,970) | $(57,860) | | Net cash provided by (used in) financing activities | $18,713 | $(176,267) | $(471,792) | | Net change in cash and cash equivalents | $41,454 | $76,391 | $(86,612) | - Cash flow from operating activities decreased significantly in 2023 due to lower net income, partially offset by increased cash from working capital[255][256] - Net cash provided by financing activities in 2023 was primarily driven by the issuance of 2023 Senior Secured Notes and interest rate swap settlements, partially offset by debt repayments[258] Consolidated Statements of Stockholders' Equity (Deficit) Total stockholders' equity decreased significantly in 2023 to $78.2 million, primarily due to the $(255.3) million net loss, increasing the accumulated deficit Total Stockholders' Equity (thousands) | Year | Amount | | :--- | :--- | | Dec 31, 2023 | $78,247 | | Dec 31, 2022 | $337,715 | | Dec 31, 2021 | $23,402 | - Total stockholders' equity decreased significantly in 2023, primarily due to the net loss of $(255.3) million[335] - Accumulated deficit increased from $(401.9) million at December 31, 2022, to $(662.4) million at December 31, 2023[335] Notes to the Consolidated Financial Statements This section provides detailed disclosures and accounting policies supporting the consolidated financial statements, including revenue recognition, debt, equity, and significant estimates Note 1. Business and Summary of Significant Accounting Policies This note details GrafTech's Industrial Materials segment, revenue recognition, inventory valuation, the $171.1 million goodwill impairment in 2023, and the Tax Receivable Agreement - GrafTech's only reportable segment is Industrial Materials, comprising graphite electrodes and petroleum needle coke products[338] - Revenue is recognized when a customer obtains control of promised goods, typically at the delivery point[341][345] - Inventories are stated at the lower of cost or net realizable value, with a $12.4 million LCM adjustment recorded in 2023[351] - Goodwill of $171.1 million, allocated to the Graphite Electrode reporting unit, was fully impaired in 2023 due to softening demand and deteriorating spot pricing[382][290] - The company defers major maintenance costs and amortizes them over the period until the next scheduled overhaul[386] - The Tax Receivable Agreement provides Brookfield the right to receive 85% of future cash savings from U.S. federal and Swiss tax utilization of pre-IPO tax assets[370] Note 2. Revenue from Contracts with Customers This note disaggregates revenue by type, showing $620.5 million in total revenues for 2023, and details $31.6 million in current deferred revenue Disaggregated Revenue by Type (thousands) | Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Graphite Electrodes - LTAs | $253,262 | $870,287 | $1,040,214 | | Graphite Electrodes - Non-LTAs | $338,746 | $351,140 | $258,426 | | By-products and other | $28,492 | $59,823 | $47,148 | | Total Revenues | $620,500 | $1,281,250 | $1,345,788 | - Estimated LTA revenue for 2024 is $100-$135 million, including expected termination fees[402] - Current deferred revenue was $31.6 million as of December 31, 2023, an increase from $27.9 million in 2022[400] Note 3. Stock-Based Compensation This note details stock-based compensation expense of $4.4 million in 2023, with 9.5 million shares available for future issuance under the Omnibus Equity Incentive Plan Stock-Based Compensation Expense (thousands) | Year | Amount | | :--- | :--- | | 2023 | $4,433 | | 2022 | $2,311 | | 2021 | $16,631 | - The 2021 expense included $14.7 million due to Change in Control accelerated vesting provisions[405] - As of December 31, 2023, 9.5 million common stock shares were available for future issuance under the Omnibus Equity Incentive Plan[404] - The company grants stock options, Restricted Stock Units (RSUs), Performance-Based Restricted Stock Units (PSUs), and Deferred Share Units (DSUs)[404][407][413][416][417][418] Note 4. Segment Reporting GrafTech's sole reportable segment is Industrial Materials, with 95% of external revenues from graphite electrodes, and this note provides geographic breakdowns of net sales and long-lived assets - GrafTech's only reportable segment is Industrial Materials, with approximately 95% of external revenues derived from graphite electrodes[421] Net Sales by Geographic Region (thousands) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | United States | $206,263 | $340,793 | $285,710 | | Americas (excluding the United States) | $100,364 | $256,253 | $241,442 | | Asia Pacific | $66,214 | $116,849 | $154,084 | | Europe, Middle East, Africa | $247,659 | $567,355 | $664,552 | | Total | $620,500 | $1,281,250 | $1,345,788 | Long-Lived Assets by Geographic Region (thousands, Dec 31, 2023) | Region | Amount | | :--- | :--- | | United States | $196,847 | | Mexico | $117,414 | | France | $93,660 | | Spain | $109,127 | | Brazil | $4,424 | | Other countries | $642 | | Total | $522,114 | Note 5. Debt and Liquidity This note details GrafTech's long-term debt, including $500.0 million in 2020 Senior Secured Notes and $450.0 million in 2023 Senior Secured Notes, and confirms compliance with all debt covenants Long-Term Debt (thousands) | Debt Instrument | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | 2018 Term Loan Facility | $0 | $433,708 | | 2020 Senior Secured Notes | $500,000 | $500,000 | | 2023 Senior Secured Notes | $450,000 | $0 | | Other debt | $139 | $268 | | Unamortized debt discount and issuance costs | $(24,494) | $(12,049) | | Total debt | $925,645 | $921,927 | - The 2018 Revolving Credit Facility has $112.4 million in availability as of December 31, 2023, and matures on May 31, 2027[426] - The 2020 Senior Secured Notes bear interest at 4.625% and mature on December 15, 2028[433][434] - The 2023 Senior Secured Notes bear interest at 9.875% and mature on December 15, 2028; proceeds were used to repay the 2018 Term Loan Facility[437][438] - GrafTech was in compliance with all debt covenants as of December 31, 2023 and 2022[432][436][442] Maturities on Long-Term Debt (thousands, Dec 31, 2023) | Year | Amount | | :--- | :--- | | 2024 | $139 | | 2025 | $0 | | 2026 | $0 | | 2027 | $0 | | 2028 | $950,000 | | 2029 and thereafter | $0 | | Total | $950,139 | Note 6. Goodwill and Other Intangible Assets Goodwill of $171.1 million was fully impaired in 2023 due to market conditions, with estimated annual amortization expense for intangible assets around $8.0 million in 2024 - Goodwill of $171.1 million, allocated entirely to the Graphite Electrode reporting unit, was fully impaired in 2023 due to reduced sales and deteriorating spot pricing[444][452] - No goodwill impairment was recorded in 2022 and 2021[453] Amortization Expense of Intangible Assets (thousands) | Year | Amount | | :--- | :--- | | 2023 | $9,200 | | 2022 | $10,100 | | 2021 | $10,700 | - Estimated annual amortization expense for the next five years will approximate $8.0 million in 2024, $7.3 million in 2025, $6.7 million in 2026, $6.1 million in 2027, and $5.5 million in 2028[454] Note 7. Interest Expense Total interest expense increased to $58.1 million in 2023, primarily due to higher interest on the 2023 Senior Secured Notes and changes in interest rate swap gains Total Interest Expense (thousands) | Year | Amount | | :--- | :--- | | 2023 | $58,087 | | 2022 | $36,568 | | 2021 | $68,760 | - Interest expense increased in 2023 primarily due to higher interest on the 2023 Senior Secured Notes and changes in interest rate swap gains/losses[457][459] - The repayment of the 2018 Term Loan Facility in June 2023 triggered $1.2 million of accelerated original issue discount accretion and $1.9 million of accelerated debt issuance cost amortization[457] - Termination of interest rate swap contracts in June 2023 resulted in $6.9 million realized gains recorded in interest expense[458] Note 8. Fair Value Measurements and Derivative Instruments GrafTech uses non-trading foreign currency derivatives to manage market risks, with no outstanding interest rate or commodity derivatives, and the fair value of its debt was $676.6 million in 2023 - GrafTech uses derivative financial instruments, primarily foreign currency derivatives, to manage exposure to changes in currency exchange rates, but not for trading purposes[467][469] - As of December 31, 2023, there were no outstanding interest rate swaps or commodity derivative contracts[473][472] - Foreign currency derivatives showed a net unrealized pre-tax gain of $0.1 million at December 31, 2023, compared to a net unrealized pre-tax loss of $0.2 million at December 31, 2022[307] - The fair value of the company's debt was $676.6 million as of December 31, 2023, down from $843.2 million in 2022[467] Note 9. Supplementary Balance Sheet Detail This note provides detailed balance sheet information, including $330.1 million in inventories, a $7.7 million allowance for doubtful accounts, and $4.6 million in Supplier Finance Program obligations Inventories (thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Raw materials and supplies | $109,084 | $216,761 | | Work in process | $186,473 | $192,821 | | Finished goods | $34,589 | $38,159 | | Total | $330,146 | $447,741 | - Allowance for doubtful accounts was $7.7 million as of December 31, 2023[485] - Supplier Finance Program (SFP) obligations outstanding were $4.6 million as of December 31, 2023[488] Note 10. Leases Total lease cost was $5.8 million in 2023, with weighted-average remaining lease terms of 2.4 years for operating leases and 4.1 years for finance leases Total Lease Cost (thousands) | Year | Amount | | :--- | :--- | | 2023 | $5,814 | | 2022 | $6,360 | | 2021 | $6,260 | - The weighted-average remaining lease term for operating leases was 2.4 years and for finance leases was 4.1 years as of December 31, 2023[491] Note 11. Retirement Plans and Post-Employment Benefits This note details pension plan costs, an underfunded status of $(26.4) million, and an estimated $14.3 million liability for unfunded post-employment benefits Net Periodic Benefit (Credit) Cost for Pension Plans (thousands) | Plan Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | U.S. | $(661) | $491 | $(2,351) | | Foreign | $5,173 | $(6,994) | $(412) | - The total underfunded status for all defined benefit pension plans was $(26.4) million as of December 31, 2023[501] - The estimated liability for unfunded post-employment benefit plans was $14.3 million as of December 31, 2023[516] - Expected employer contributions to pension plans in 2024 are $4.7 million for U.S. plans and $0.7 million for foreign plans[514] Note 12. Commitments and Contingencies GrafTech faces arbitrations seeking $188.2 million in damages, ongoing Mexican VAT assessments, a $77 thousand product warranty liability, and an $11.1 million Tax Receivable Agreement liability - GrafTech is involved in arbitrations with customers seeking approximately $188.2 million in damages for alleged non-performance under LTAs[520] - The 2019 Mexico VAT assessment of ~$28.8 million was annulled by court in January 2024, but the MTA filed an appeal; a 2018 proposed assessment of ~$51.0 million is also being challenged[529][530][531] - The product warranty liability was $77 thousand as of December 31, 2023[522] - The total Tax Receivable Agreement liability was $11.1 million as of December 31, 2023[524] Note 13. Income Taxes The company recorded a $(18.5) million tax benefit in 2023, with an effective tax rate of 6.8%, and maintains a $9.0 million valuation allowance against deferred tax assets (Benefit) Provision for Income Taxes (thousands) | Year | Amount | | :--- | :--- | | 2023 | $(18,514) | | 2022 | $69,356 | | 2021 | $68,076 | - The company recorded a tax benefit of $(18.5) million in 2023, compared to an expense in 2022, primarily due to a shift from pre-tax profit to loss and a non-tax deductible goodwill impairment charge[534] - The effective income tax rate was 6.8% in 2023, down from 15.3% in 2022[233] - A valuation allowance of $9.0 million was maintained against certain deferred tax assets as of December 31, 2023[537] - The company intends to indefinitely reinvest its accumulated undistributed foreign earnings of approximately $1.0 billion[544] - There were no unrecognized tax benefits as of December 31, 2023[542] Note 14. Stockholders' Equity GrafTech did not repurchase common stock in 2023, with $99.0 million remaining in its authorization, and suspended its quarterly dividend, leading to an increased accumulated other comprehensive loss - GrafTech did not repurchase any common stock in 2023, but repurchased $60.0 million in 2022 and $50.0 million in 2021[547] - Approximately $99.0 million remained available under the stock repurchase authorization as of December 31, 2023[548] - The quarterly cash dividend of $0.01 per share was suspended on August 2, 2023[549] - Accumulated other comprehensive loss (AOCL) increased from $(8.1) million in 2022 to $(11.5) million in 2023[550] Note 15. (Loss) Earnings per Share Diluted loss per common share was $(0.99) in 2023, with approximately 41,198 shares excluded from the calculation due to their anti-dilutive effect Basic and Diluted (Loss) Earnings per Share | Year | EPS | | :--- | :--- | | 2023 | $(0.99) | | 2022 | $1.48 | | 2021 | $1.46 | - The calculation for 2023 excludes the dilutive effect of approximately 41,198 shares, primarily related to restricted stock units, as their inclusion would have been anti-dilutive due to the net loss[552] Note 16. Other Expense (Income), net Other expense (income), net, shifted to a $4.7 million expense in 2023, primarily due to $3.0 million in mark-to-market losses on pension and OPEB plans Other Expense (Income), net (thousands) | Year | Amount | | :--- | :--- | | 2023 | $4,679 (expense) | | 2022 | $(10,147) (income) | | 2021 | $(16,220) (income) | - The shift to an expense in 2023 was primarily due to mark-to-market losses on pension and other post-employment benefit (OPEB) plans of $3.0 million, compared to gains of $9.6 million in 2022[556] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with the company's accountants regarding accounting or financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[558] Item 9A. Controls and Procedures Management and Deloitte & Touche LLP concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in the recent quarter - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[560] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on COSO criteria[563] - Deloitte & Touche LLP, the independent registered public accounting firm, audited and confirmed the effectiveness of the company's internal control over financial reporting[563] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[564] Item 9B. Other Information This section details adjustments to executive officer compensatory arrangements, including increased salaries and STIP opportunities for the Interim CEO and CFO, effective April 1, 2024, with no Rule 10b5-1 trading arrangement changes in Q4 2023 - The Interim Chief Financial Officer's annualized base salary increased from $305,500 to $353,500, effective April 1, 2024[566] - The Interim CEO, Interim CFO, and COO will continue to receive monthly stipends for their interim service and increased responsibilities in 2024[566] - Short-Term Incentive Plan (STIP) target award opportunities for the Interim CEO and Interim CFO increased to 100% and 65% of base salary and monthly stipend, respectively, for 2024[566] - No Rule 10b5-1 trading arrangements were adopted, modified, or terminated during the fiscal quarter ended December 31, 2023[567] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Disclosure regarding foreign jurisdictions that prevent inspections is not applicable to GrafTech International Ltd - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[568] PART III Item 10. Directors, Executive Officers and Corporate Governance Executive officer information is incorporated from Part I, and the company maintains a public Code of Conduct and Ethics, with other governance details referenced from the Proxy Statement - Information regarding executive officers is incorporated from the Supplemental Item to Part I of this Report[569] - A Code of Conduct and Ethics applies to employees, directors, and officers, and is available on the company's website[570] - Other information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Stockholders[571] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from various sections of the company's Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement, including Compensation Discussion and Analysis, Compensation Tables, CEO Pay Ratio, Pay Versus Performance, Director Compensation Program, Risk Oversight, and Compensation Committee Report[573] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated from the Proxy Statement, with 4.1 million securities to be issued under equity plans at a $11.27 weighted-average exercise price, and 9.5 million available for future issuance - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[575] Equity Compensation Plan Information (Dec 31, 2023) | Metric | Amount | | :--- | :--- | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | 4,117,469 | | Weighted-average exercise price of outstanding options, warrants and rights | $11.27 | | Number of securities remaining available for future issuance under equity compensation plans | 9,512,574 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships and related party transactions, and director independence is incorporated by reference from the company's Proxy Statement - Information on certain relationships and related party transactions, and director independence is incorporated by reference from the Proxy Statement[579] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[580] PART IV Item 15. Exhibit and Financial Statement Schedules This section lists the financial statements and notes included in Part II, Item 8, omits financial statement schedules due to information being in the consolidated statements, and provides a comprehensive list of exhibits - The report includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive (Loss) Income, Consolidated Statements of Cash Flows, Consolidated Statements of Stockholders' Equity (Deficit), and Notes to the Consolidated Financial Statements[581] - All financial statement schedules have been omitted because the required information is included in the consolidated financial statements or their notes[582] - A detailed list of exhibits filed or incorporated by reference is provided[583] Item 16. Form 10-K Summary There is no Form 10-K Summary included in this report - There is no Form 10-K Summary[588] Signatures The report is duly signed by GrafTech International Ltd.'s Interim CEO, Interim CFO, and Board of Directors, with all signatures dated February 14, 2024 - The report is signed by Timothy K. Flanagan (Interim Chief Executive Officer and President) and Catherine Hedoux-Delgado (Interim Chief Financial Officer and Treasurer)[592] - The report is also signed by the Chairman and other Directors[593] - All signatures are dated February 14, 2024[592][593]