GrafTech International Ltd. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone Q4 filing; quarterly detail is limited in the supplied text. GrafTech manufactures graphite electrodes used primarily in electric-arc-furnace steelmaking and is vertically integrated through its Seadrift petroleum needle coke operation.
Financial and operating performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,345.8 million | $1,224.4 million | +10% |
| Gross profit / margin | $644.5 million / 47.9% | $660.5 million / 53.9% | Profit -2% |
| Operating income / margin | $508.1 million / 37.8% | $588.6 million / 48.1% | -14% |
| Net income | $388.3 million | $434.4 million | -11% |
| Diluted EPS | $1.46 | $1.62 | -10% |
| Adjusted EBITDA (non-GAAP) | $669.9 million | $658.9 million | +2% |
| Cash from operations | $443.0 million | $563.6 million | -$120.6 million |
| Capital expenditures | $58.3 million | $36.1 million | +$22.2 million |
| Total debt at year-end | $1,029.7 million | $1,420.1 million | -$390.4 million |
- Sales volume rose 24% to 167,000 metric tons; production volume was 165,000 metric tons. Capacity utilization was 72%, compared with 58% in 2020 (82% versus 66% excluding St. Marys).
- Cash and cash equivalents were $57.5 million; revolving facility availability was $246.7 million, for reported total liquidity of $304.2 million. Current assets were $627.9 million and current liabilities $234.6 million.
- GrafTech repaid $400 million of term debt during 2021. Interest expense fell 30% to $68.8 million. Cash flow from operations included a $71 million one-time cash payment related to incentive awards and a $16.4 million working-capital cash use.
- Long-term agreements (LTAs) contributed 77% of 2021 net sales, down from 87% in 2020. LTA electrode revenue was $1,040.2 million; non-LTA electrode revenue was $258.4 million.
Material changes and unusual items
- Revenue increased with stronger demand and higher volume, but average realized selling prices declined, partly because non-LTA sales made up a larger share of the mix and recognized prices lagged market movements. Higher sales volume, the change in mix and one-time costs contributed to cost of sales rising 24%, faster than revenue.
- A change in Brookfield’s ownership below 30% triggered $73.4 million of pre-tax long-term incentive plan charges and accelerated stock compensation. The charges affected cost of sales and selling and administrative expense; the company reported adjusted EBITDA of $669.9 million after its non-GAAP adjustments.
- Other income included an $11.5 million Brazilian value-added tax credit, approved for offset against taxes payable. Pension and post-employment non-service costs also generated income in 2021, versus expense in 2020.
- Net income and reported EPS fell despite higher sales, while adjusted EBITDA increased modestly. The filing attributes the decline in operating income primarily to higher costs and one-time compensation charges.
Outlook, risks and contingencies
- Management expected first-quarter 2022 non-LTA prices to rise 17%–20% versus Q4 2021; Q4 2021 average prices were approximately $9,400 per metric ton for LTA sales and $5,000 for non-LTA sales. Management anticipated Q1 2022 costs to rise 7%–9% versus Q4, particularly due to third-party needle coke, energy and freight, with smaller increases thereafter expected as mitigation actions take effect.
- Estimated LTA shipments for 2022 were 95,000–105,000 metric tons, with estimated revenue of $910–$1,010 million. For 2023–2024 combined, estimated LTA volume was 35,000–45,000 metric tons and revenue $350–$450 million; estimates include expected termination fees from certain customers and are subject to performance, credit and demand risks.
- Planned 2022 capital expenditures were $70–$80 million. Management said it had adequate liquidity for at least the next 12 months and intended to prioritize business investment, debt reduction and opportunistic repurchases under the remaining $159 million authorization.
- Key risks include cyclical electrode pricing and possible industry overcapacity, steel-market demand, inflation and needle coke/energy/freight supply costs, COVID-19 and operational disruptions, foreign-exchange exposure, and substantial secured debt and covenant restrictions. Management noted Chinese capacity additions could increase electrode supply in 2022.
- Several customer arbitrations concern LTA performance. Aperam and ArcelorMittal-related claimants seek approximately $61 million plus interest; GrafTech says it has defenses and intends to enforce its contractual rights. Brazilian employee litigation could be material, but the company said the potential loss could not be assessed because claimants had not specified the number of employees or damages sought.
- The filing reports audited GAAP statements and effective internal control over financial reporting. The auditor’s critical audit matter was the $19.3 million Tax Receivable Agreement liability, which depends on forecasts of future revenue and taxable income.
Investor facts to verify
- Whether expected non-LTA price increases materialized and outweighed higher input, energy and freight costs.
- Actual LTA deliveries, collections, modifications, termination fees and outcomes of the customer arbitrations.
- Progress on debt reduction, liquidity, cash conversion and use of the remaining share repurchase authorization.
- Whether projected 2022 capital spending and operational improvements delivered expected capacity and cost benefits.
- Developments in the Brazilian employee claims and realization of the VAT credit and remaining Tax Receivable Agreement payments.