GrafTech International Ltd. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Filed February 14, 2024. GrafTech manufactures graphite electrodes used mainly in electric arc furnace (EAF) steelmaking and petroleum needle coke, a key electrode input. Its substantial needle-coke integration is a stated competitive advantage.
Financial and operating performance
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Net sales | $620.5 million | $1,281.3 million | Down 52% |
| Gross profit / margin | $36.2 million / 5.8% | $554.9 million / 43.3% | Down 93% in gross profit |
| Operating income (loss) | $(214.4) million | $474.3 million | Includes $171.1 million goodwill impairment in 2023 |
| Net income (loss) / diluted EPS | $(255.3) million / $(0.99) | $383.0 million / $1.48 | 2023 adjusted net loss was $100.8 million; adjusted EPS was $(0.39) |
| Adjusted EBITDA | $20.5 million | $536.5 million | Non-GAAP; sharply lower |
| Operating cash flow / capital expenditures | $76.6 million / $54.0 million | $324.6 million / $72.2 million | Free cash flow was $22.5 million versus $252.5 million |
| Graphite electrode sales volume | 91.6 thousand MT | 149.1 thousand MT | Down 39% |
| Cash cost of goods sold per MT | $5,537 | $4,266 | Up about 30% |
Lower volume, weaker demand, a shift away from higher-priced long-term agreements (LTAs), and lower non-LTA realized prices drove the sales decline. LTA electrode sales were $253.3 million versus $870.3 million; non-LTA sales were $338.7 million versus $351.1 million. Realized electrode prices averaged approximately $8,800/MT for LTAs and $5,400/MT for non-LTA sales in 2023, compared with $9,500/MT and $6,000/MT, respectively, in 2022. LTA sales represented 41% of net sales, down from 68%.
Cash provided by working capital benefited from inventory reductions; inventory fell to $330.1 million from $447.7 million. The company also recorded a $12.4 million inventory valuation adjustment and $62.4 million of fixed manufacturing costs that otherwise would have been inventoried. Adjusted free cash flow was $50.0 million, including $27.5 million of interest-rate-swap settlement receipts; it should not be viewed as equivalent to recurring operating cash generation.
Debt and liquidity
At year-end, cash and cash equivalents were $176.9 million and reported revolver availability was $112.4 million, for total liquidity of $289.3 million, down from $461.6 million in 2022. Principal debt was approximately $950.1 million, primarily $500 million of 4.625% secured notes and $450 million of 9.875% secured notes, both due in 2028. The balance-sheet debt carrying amount was $925.6 million after unamortized discounts and issuance costs. Interest expense rose 59% to $58.1 million. The company reported covenant compliance, but revolver availability was reduced by operating performance and remains subject to covenant conditions.
Outlook, changes, and notable items
- Management expected near-term electrode demand to remain weak amid constrained steel production and economic uncertainty, while anticipating a modest year-over-year improvement in 2024 sales volume, particularly in the first quarter.
- On February 14, 2024, GrafTech announced cost and footprint actions: indefinite suspension of most production at St. Marys, Pennsylvania; idling certain assets elsewhere; overhead reductions; and flexible, reduced production. Stated capacity is expected to decline from approximately 202 thousand MT to 178 thousand MT.
- The plan is expected to deliver about $25 million in annualized savings when fully implemented, excluding approximately $5 million of one-time costs, most of which are expected to be cash costs. Management forecast a “low teen percentage point” year-over-year decline in cash cost of goods sold per MT. 2024 capital expenditures were estimated at $35–$40 million.
- Estimated 2024 LTA shipments were 13–16 thousand MT and LTA revenue $100–$135 million, including expected termination fees. Timing and amounts may vary with customer performance, force majeure notices, arbitration, credit risk, and contracted volume ranges.
- Longer term, management cited EAF adoption and battery-related needle-coke demand as potential growth drivers; these are industry expectations, not assured outcomes.
- The quarterly $0.01 dividend was suspended in August 2023. No 2023 share repurchases occurred. Management stated it believed liquidity was adequate for at least the next 12 months.
Risks and contingencies
- Core exposure is to cyclical EAF steel demand, electrode pricing and industry overcapacity. The company also identifies raw-material and energy costs, supply-chain disruption, foreign exchange, international operations, and production interruptions as significant risks.
- Customer arbitration: Aperam and ArcelorMittal entities seek relief from LTA commitments and allege approximately $188.2 million in damages, including interest. GrafTech says it has valid defenses; outcome is uncertain.
- Mexico VAT matters: a $28.8 million assessment for 2019 was annulled by a court in January 2024, but the tax authority appealed. A separate proposed assessment for 2018 is approximately $51.0 million; the company plans to challenge it and says a loss is not probable.
- A Brazilian employee wage-claim proceeding remains unresolved; the company says it cannot assess potential loss because the claimant count and damages are unspecified.
- A stockholder class action filed January 25, 2024 alleges misstatements or omissions concerning the Monterrey facility suspension; damages are unquantified. The company intends to defend the claims.
- Environmental, regulatory, and execution risks remain, including a Monterrey administrative proceeding following the 2022 temporary suspension. The facility resumed operations subject to agreed activities; the administrative matter was ongoing as described in the filing.
Important facts for investors to verify
- Whether volume, pricing, and cash generation stabilize, and how much of the 2024 cost-saving plan is realized after implementation costs.
- Cash-cost-per-MT trends, inventory levels, and the quality and recurrence of free cash flow, particularly excluding swap settlement proceeds.
- Actual revolver availability and covenant headroom as performance evolves, and the company’s capacity to service its approximately $950 million of principal debt.
- Progress and outcomes in the LTA arbitration, Mexico VAT disputes, Brazilian employee litigation, and stockholder class action.
- Execution and operational effects of the St. Marys suspension and other idling, including customer service, production flexibility, and any additional asset impairments.
- The 10-K reports an unqualified audit opinion and effective internal control over financial reporting; the auditor identified goodwill valuation as a critical audit matter. Goodwill was fully impaired in 2023.