GRAFTECH INTERNATIONAL LTD. The Company
We are a leading manufacturer of high-quality graphite electrode products essential to the production of EAF steel and other ferrous and nonferrous metals. We believe that we have the most competitive portfolio of lowcost ultra-high power graphite electrode manufacturing facilities in the industry, including three of the highest capacity facilities in the world. We are the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, a key raw material for graphite electrode manufacturing. This vertical integration allowsGrafTech to enter into longer term agreements with its customers. These agreements have a duration of more than 12 months and include pre-determined ranges of volumes and prices. This provides greater earnings stability and visibility forGrafTech and a committed, secure source of supply for our customers.
The environmental and economic advantages of electric arc furnace steel production positions both that industry and the graphite electrode industry for continued long-term growth.
We believeGrafTech's leadership position, strong cash flows, advantaged low cost structure and vertical integration are sustainable competitive advantages. The services and solutions we provide will position our customers and us for a better future.
Commercial Update and Outlook
GrafTech reported solid results in the first quarter of 2022 with sales volume of 43 thousand metric tons ("MT"), consisting of LTA volume of 25 thousand MT at an average realized price of$9,600 per MT and non-LTA volume of 18 thousand MT at an average realized price of$6,000 per MT. Consistent with our expectations, the non-LTA prices for graphite electrodes delivered and recognized in revenue in the first quarter of 2022 increased 19% compared to the average non-LTA price for the fourth quarter of 2021 as prices for virtually all of our non-LTA business were reset onJanuary 1, 2022 . We expect our average non-LTA pricing for the second quarter of 2022 to be consistent with our first quarter 2022 average. In parallel, our costs in the first quarter of 2022 increased, driven by recent global inflationary pressures, particularly for third party needle coke, energy and freight. We expect further increases throughout the remainder of 2022 to be lower in magnitude as we continue to take steps to mitigate these cost increases.
Production volume in the first quarter of 2022 increased 28% compared to the first quarter of 2021.
Globally, steel market capacity utilization rates continue to be strong:
Q1 2022 Q4 2021 Q1 2021
Global (ex-China) capacity utilization rate(1) 72% 75% 73%
77%
(1) Source:
The estimated shipments of graphite electrodes under our LTAs for 2022 through 2024 have been updated as follows:
2022 2023 through 2024
Estimated LTA volume(1) 90-100 40-50
Estimated LTA revenue(2) $860-$960 $400-$500 (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
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
As it relates to the conflict between Ukraine and Russia , we have provided force
majeure notices with respect to certain LTAs serving customers in Russia . The
estimates of graphite electrodes under our LTAs as set forth in the immediately
preceding table take into account such force majeure notices.
Capital Structure and Capital Allocation
As ofMarch 31, 2022 ,GrafTech had cash and cash equivalents of$85.1 million and total debt of approximately$961.4 million . We continue to make progress in reducing our long-term debt, repaying$70.0 million in the first quarter of 2022. We continue to expect our primary use of cash to be debt repayment. We also have$129.0 million available under our stock repurchase authorization. We repurchased 3.0 million shares of our common stock in the first quarter of 2022 at an average price of$9.88 per share, for an aggregate of$30.0 million under our common stock repurchase authorization.
We continue to expect full-year capital expenditures to be in the range of
Key metrics used by management to measure performance
In addition to measures of financial performance presented in our Condensed Consolidated Financial Statements in accordance with generally accepted accounting principles inthe United States ("GAAP"), we use certain other financial measures and operating metrics to analyze the performance of our Company. Our "non-GAAP" financial measures consist of EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share, which help us evaluate growth trends, establish budgets, assess operational efficiencies and evaluate our overall financial performance. Our key operating metrics consist of sales volume, production volume, production capacity and capacity utilization. Key financial measures For the Three Months Ended March 31, (in thousands, except per share data) 2022 2021 Net sales$ 366,245 $ 304,397 Net income 124,183 98,799 Earnings per share(1) 0.47 0.37 EBITDA(2) 167,528 153,725 Adjusted net income(2) 125,920 99,880 Adjusted earnings per share(1)(2) 0.48 0.37 Adjusted EBITDA(2) 169,600 155,045 (1) Earnings per share represents diluted earnings per share. Adjusted earnings per share represents adjusted diluted earnings per share. (2) Non-GAAP financial measure; see below for information and reconciliations of EBITDA, adjusted EBITDA and adjusted net income to net income and adjusted EPS to EPS, 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 our Annual Report on Form 10-K. 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,
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
production capacity and capacity utilization help us understand the efficiency
of our production, evaluate cost of sales and consider how to approach our
contract initiative.
For the Three Months
Ended March 31,
(in thousands, except utilization) 2022 2021
Sales volume (MT)(1) 43 37
Production volume (MT)(2) 46 36
Total production capacity (MT)(3)(4) 58 58
Total capacity utilization(4)(5)
79 % 62 %
Production capacity excludingSt. Marys (MT)(3)(6)
51 51
Capacity utilization excludingSt. Marys (5)(6)
90 % 71 %
(1) Sales volume reflects only graphite electrodes manufactured by us. (2) Production volume reflects graphite electrodes we produced during the period. (3) Production capacity reflects expected maximum production volume during the period depending on product mix and expected maintenance outage. Actual production may vary. (4) Includes graphite electrode facilities in Calais,France ;Monterrey, Mexico ;Pamplona ,Spain ; andSt. Marys, Pennsylvania . (5) Capacity utilization reflects production volume as a percentage of production capacity. (6) In the first quarter of 2018, ourSt. Marys, Pennsylvania facility began graphitizing a limited amount of electrodes sourced from ourMonterrey, Mexico facility. 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 income and adjusted EPS are non-GAAP financial measures. We define EBITDA, a nonGAAP 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, adjustments for public offerings and related expenses, noncash gains or losses from foreign currency remeasurement of nonoperating assets and liabilities in our foreign subsidiaries where the functional currency is theU.S. dollar, stock-based compensation expense and related party payable - Tax Receivable Agreement adjustments. 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 periodtoperiod 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 debtservice 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 relating to our pension and OPEB plans;
•adjusted EBITDA does not reflect the noncash gains or losses from foreign currency remeasurement of nonoperating assets and liabilities in our foreign subsidiaries where the functional currency is theU.S. dollar;
•adjusted EBITDA does not reflect public offerings and related expenses;
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES•adjusted EBITDA does not reflect related party payable - Tax Receivable Agreement adjustments;
•adjusted EBITDA does not reflect stock-based compensation expense; 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 income, a nonGAAP financial measure, as net income or loss and exclude the items used to calculate adjusted EBITDA, less the tax effect of those adjustments. We define adjusted EPS, a nonGAAP financial measure, as adjusted net income divided by the weighted average diluted common shares outstanding during the period. We believe adjusted net income and adjusted EPS are useful to present to investors because we believe that they assist investors' understanding of the underlying operational profitability of the Company. In evaluating EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, 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 income and adjusted EPS, should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or nonrecurring items. When evaluating our performance, you should consider EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, alongside other measures of financial performance and liquidity, including our net income and EPS, 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 Income to Adjusted Net Income
For the Three Months
Ended March 31,
2022 2021
(Dollars in thousands, except per
share data)
Net income $ 124,183 $ 98,799
Diluted income per common share:
Net income per share $ 0.47 $ 0.37
Weighted average shares outstanding 262,657,799 267,465,319
Adjustments, pre-tax: Pension and OPEB plan expenses(1) 551 431 Public offerings and related expenses(2) - 422 Non-cash losses (gains) on foreign currency remeasurement(3) 1,236 (348) Stock-based compensation expense(4) 465 768 Related party payable - Tax Receivable Agreement adjustment(5) (180) 47 Total non-GAAP adjustments pre-tax 2,072 1,320 Income tax impact on non-GAAP adjustments(6) 335 239 Adjusted net income$ 125,920 $ 99,880 (1)Net periodic benefit cost for our pension and OPEB plans. (2)Legal, accounting, printing and registration fees associated with the public offerings and related expenses. (3)Non-cash losses (gains) from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is theU.S. dollar. (4)Non-cash expense for stock-based compensation grants. (5)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. (6)The tax impact on the non-GAAP adjustments is affected by their tax deductibility and the applicable jurisdictional tax rates. 26 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Reconciliation of EPS to Adjusted EPS
For the Three Months
Ended March 31,
2022 2021
EPS $ 0.47 $ 0.37
Adjustments per share:
Pension and OPEB plan expenses(1) - -
Public offerings and related expenses(2) - -
Non-cash losses (gains) on foreign currency remeasurement(3) 0.01 -
Stock-based compensation expense(4) - -
Related party payable - Tax Receivable Agreement adjustment(5) - -
Total non-GAAP adjustments pre-tax per share 0.01 -
Income tax impact on non-GAAP adjustments per share(6) - -
Adjusted EPS $ 0.48 $ 0.37
(1)Net periodic benefit cost for our pension and OPEB plans.
(2)Legal, accounting, printing and registration fees associated with the public
offerings and related expenses.
(3)Non-cash losses (gains) 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 expense adjustment for future payment to our sole pre-IPO
stockholder for tax assets that are expected to be utilized.
(6)The tax impact on the non-GAAP adjustments is affected by their tax
deductibility and the applicable jurisdictional tax rates.
For the Three Months Ended
Reconciliation of Net Income to Adjusted EBITDA March 31,
2022 2021
(Dollars in thousands)
Net income $ 124,183 $ 98,799
Add:
Depreciation and amortization 14,434 16,539
Interest expense 9,212 22,167
Interest income (98) (37)
Income taxes 19,797 16,257
EBITDA 167,528 153,725
Adjustments:
Pension and OPEB plan expenses(1) 551 431
Public offerings and related expenses(2) - 422 Non-cash losses (gains) on foreign currency remeasurement(3) 1,236 (348) Stock-based compensation expense(4)
465 768
Related party payable - Tax Receivable Agreement adjustment(5) (180) 47 Adjusted EBITDA$ 169,600 $ 155,045 (1)Net periodic benefit cost for our pension and OPEB plans. (2)Legal, accounting, printing and registration fees associated with the public offerings and related expenses. (3)Non-cash losses (gains) from foreign currency remeasurement of non-operating assets and liabilities of our non-U.S. subsidiaries where the functional currency is theU.S. dollar. (4)Non-cash expense for stock-based compensation grants. (5)Non-cash expense adjustment for future payment to our sole pre-IPO stockholder for tax assets that are expected to be utilized. 27 -------------------------------------------------------------------------------- PART I (CONT'D) GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Results of Operations
The Three Months Ended
The tables presented in our period-over-period comparisons summarize our
Condensed Consolidated Statements of Operations and illustrate key financial
indicators used to assess the consolidated financial results. Throughout this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Report ("MD&A"), insignificant changes may be deemed not
meaningful and are generally excluded from the discussion.
For the Three Months Ended March
31, Increase/
2022 2021 Decrease % Change
(Dollars in thousands)
Net sales $ 366,245 $ 304,397 $ 61,848 20 %
Cost of sales 191,214 146,396 44,818 31 %
Gross profit 175,031 158,001 17,030 11 %
Research and development 880 969 (89) (9) %
Selling and administrative expenses 21,254 20,153 1,101 5 %
Operating income 152,897 136,879 16,018 12 %
Other income, net (197) (307) 110 (36) %
Interest expense 9,212 22,167 (12,955) (58) %
Interest income (98) (37) (61) 165 %
Income before provision for income taxes 143,980 115,056 28,924 25 %
Provision for income taxes 19,797 16,257 3,540 22 %
Net income $ 124,183 $ 98,799 $ 25,384 26 %
Net sales. Net sales increased $61.8 million , or 20%, from $304.4 million in the
three months ended March 31, 2021 to $366.2 million in the three months ended
March 31, 2022 . Prices for non-LTA business reset on January 1, 2022 and our
average realized price increased 19% compared to the average realized price for
the fourth quarter of 2021 and 43% compared to the average realized price for
the first quarter of 2021. In addition, stronger demand for our products in the
first quarter of 2022 resulted in a 16% increase in sales volume compared to the
first quarter of 2021.
Cost of sales. Cost of sales increased $44.8 million , or 31%, from $146.4
million in the three months ended March 31, 2021 to $191.2 million in the three
months ended March 31, 2022 , due to a 16% increase in sales volume of
manufactured electrodes, as well as a 15% increase in our costs. We expect our
costs to continue to increase throughout the remainder of 2022, driven by recent
global inflationary pressures, particularly for carbon-based inputs, energy and
freight, but we expect these increases to be lower in magnitude than the first
quarter of 2022 as we continue to take steps to mitigate these cost increases.
Selling and administrative expenses. Selling and administrative expenses
increased $1.1 million , or 5%, from $20.2 million in the three months ended
March 31, 2021 to $21.3 million in the three months ended March 31, 2022 . The
increase is due to higher employment-related costs and additions to the bad debt
reserve.
Interest expense. Interest expense decreased $13.0 million , or 58%, from $22.2
million in the three months ended March 31, 2021 to $9.2 million in the three
months ended March 31, 2022 primarily due to reductions to our variable-rate
debt over the past year, as well as a $3.9 million mark-to-market gain due to
the de-designation of one of our $250.0 million interest rate swaps.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Provision for income taxes. The following table summarizes the provision for
income taxes:
For the Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Provision for income taxes $ 19,797 $ 16,257
Pre-tax income 143,980 115,056
Effective tax rate 13.7 % 14.1 %
The effective tax rate for the three months ended March 31, 2022 was 13.7%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at different rates, which was partially
offset by the net combined impact related to the U.S. taxation of GILTI and
FTCs.
The effective tax rate for the three months ended March 31, 2021 was 14.1%. This
rate differs from the U.S. statutory rate of 21% primarily due to worldwide
earnings from various countries taxed at lower rates, the Section 250 Deduction
and FTCs, offset by the net increase related to GILTI.
The provision for income taxes increased from $16.3 million for the three months
ended March 31, 2021 to $19.8 million for the three months ended March 31, 2022 .
This change is primarily due to an increase in pre-tax income, partially offset
by a decrease in the effective tax rate due to the mix of worldwide earnings
from various countries taxed at different rates and U.S. taxation of GILTI.
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 theU.S. dollar, this has the effect of reducing (or increasing) theU.S. dollar equivalent cost of sales and other expenses with respect to those facilities. In certain countries in which we have manufacturing facilities, and in certain export markets, we sell in currencies other than theU.S. dollar. Accordingly, when these currencies increase (or decline) in value relative to theU.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 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 sales or net income. The impact of these changes in the average exchange rates of other currencies against theU.S. dollar on our net sales was a decrease of$1.8 million for the three months endedMarch 31, 2022 , compared to the same period of 2021. The impact of these changes on our cost of sales was a decrease of$5.2 million for the three months endedMarch 31, 2022 , compared to the same period of 2021. 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 "Part I, Item 3-Quantitative and Qualitative Disclosures about Market Risk."
Liquidity and Capital Resources
Our sources of funds have consisted principally of cash flow from operations 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, share repurchases and other obligations. Disruptions in theU.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 hereafter. As ofMarch 31, 2022 , we had liquidity of$330.8 million , consisting of$245.7 million of availability under our 2018 Revolving Credit Facility (subject to continued compliance with the financial covenants and 29 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
representations) and cash and cash equivalents of
As ofMarch 31, 2022 andDecember 31, 2021 ,$65.8 million and$49.1 million , respectively, of our cash and cash equivalents were located outside of theU.S. We repatriate funds from our foreign subsidiaries through dividends. All of our subsidiaries face the customary statutory limitation that distributed dividends cannot exceed the amount of retained and current earnings. In addition, for our subsidiary inSouth Africa , theSouth Africa Central Bank imposes that certain solvency and liquidity ratios remain above defined levels after the dividend distribution, which historically has not materially affected our ability to repatriate cash from this jurisdiction. The cash and cash equivalents balances inSouth Africa were$0.4 million and$0.5 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Upon repatriation to theU.S. , the foreign source portion of dividends we receive from our foreign subsidiaries are not subject toU.S. federal income tax because the amounts were either previously taxed or are exempted from tax by Internal Revenue Service Code Section 245A. 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. Cash from operations is expected to remain at positive sustained levels.
Debt Structure
We had total availability under the 2018 Revolving Credit Facility of$245.7 million as ofMarch 31, 2022 and$246.7 million as ofDecember 31, 2021 , which consisted of the$250.0 million limit reduced by$4.3 million and$3.3 million of outstanding letters of credit, respectively.
2018 Term Loan and 2018 Revolving Credit Facility
InFebruary 2018 , the Company entered into the 2018 Credit Agreement, which provides for (i) the$2.3 billion 2018 Term Loan Facility after giving effect to theJune 2018 amendment (the "First Amendment") that increased the aggregate principal amount of the 2018 Term Loan Facility from$1.5 billion to$2.3 billion and (ii) the$250 million 2018 Revolving Credit Facility.GrafTech Finance is the sole borrower under the 2018 Term Loan Facility whileGrafTech Finance,GrafTech Switzerland SA ("Swissco") and GrafTech Luxembourg II S.à.r.l. ("Luxembourg Holdco" and, together with GrafTech Finance and Swissco, the "Co-Borrowers") are co-borrowers under the 2018 Revolving Credit Facility. The 2018 Term Loan Facility and the 2018 Revolving Credit Facility mature onFebruary 12, 2025 andFebruary 12, 2023 , respectively. The 2018 Term Loan Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 3.00% per annum following an amendment inFebruary 2021 (the "Second Amendment") that decreased the Applicable Rate (as defined in the 2018 Credit Agreement) by 0.50% for each pricing level or (ii) the ABR Rate (as defined in the 2018 Credit Agreement), plus an applicable margin equal to 2.00% per annum following the Second Amendment, in each case with one step down of 25 basis points based on achievement of certain public ratings of the 2018 Term Loan Facility. The Second Amendment also decreased the interest rate floor from 1.0% to 0.50% for the 2018 Term Loan Facility. The 2018 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Adjusted LIBO Rate, plus an applicable margin initially equal to 3.75% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.75% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios. In addition, we are required to pay a quarterly commitment fee on the unused commitments under the 2018 Revolving Credit Facility in an amount equal to 0.25% per annum. The Senior Secured Credit Facilities are guaranteed by each of our domestic subsidiaries, subject to certain customary exceptions, and byGrafTech Luxembourg I S.à.r.l., a Luxembourg société à responsabilité limitée and an indirect wholly owned subsidiary ofGrafTech , Luxembourg HoldCo, and Swissco (collectively, the "Guarantors") with respect to all obligations under the 2018 Credit Agreement of each of our foreign subsidiaries that is aControlled Foreign Corporation (within the meaning of Section 956 of the Code). All obligations under the 2018 Credit Agreement are secured, subject to certain exceptions, by: (i) a pledge of all of the equity securities of each domestic Guarantor and of each other direct, wholly owned domestic subsidiary ofGrafTech and any Guarantor, (ii) a pledge on no more than 65% of the equity interests of each subsidiary that is a Controlled Foreign 30 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES Corporation (within the meaning of Section 956 of the Code), and (iii) security interests in, and mortgages on, personal property and material real property of each domestic Guarantor, subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The obligations of each foreign subsidiary ofGrafTech that is aControlled 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 aControlled Foreign Corporation and of each direct, wholly owned subsidiary of any Guarantor that is aControlled Foreign Corporation , and (ii) security interests in certain receivables and personal property of each Guarantor that is aControlled Foreign Corporation , subject to permitted liens and certain exceptions specified in the 2018 Credit Agreement. The 2018 Term Loan Facility amortizes at a rate of$112.5 million a year payable in equal quarterly installments, with the remainder due at maturity. The Co-Borrowers are permitted to make voluntary prepayments at any time without premium or penalty. GrafTech Finance is required to make prepayments under the 2018 Term Loan Facility (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to customary reinvestment rights and other customary exceptions and exclusions), and (ii) commencing with the Company's fiscal year endedDecember 31, 2019 , 75% of Excess Cash Flow (as defined in the 2018 Credit Agreement), subject to step-downs to 50% and 0% of Excess Cash Flow based on achievement of a senior secured first lien net leverage ratio greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00 and less than or equal to 1.25 to 1.00, respectively. Scheduled quarterly amortization payments of the 2018 Term Loan Facility during any calendar year reduce, on a dollar-for-dollar basis, the amount of the required Excess Cash Flow prepayment for such calendar year, and the aggregate amount of Excess Cash Flow prepayments for any calendar year reduce subsequent quarterly amortization payments of the 2018 Term Loan Facility as directed by GrafTech Finance. As ofMarch 31, 2022 , we have satisfied all required amortization installments through the maturity date. The 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable toGrafTech and restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The 2018 Credit Agreement contains a financial covenant that requiresGrafTech 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 Credit Agreement also contains customary events of default. 2020 Senior Secured Notes InDecember 2020 , GrafTech Finance issued$500 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 outsidethe United States under Regulation S under the Securities Act. The 2020 Senior Secured Notes were issued pursuant to the Indenture among GrafTech Finance, as issuer, the Company, as a guarantor, the other subsidiaries of the Company named therein as guarantors andU.S. Bank National Association , as trustee and notes collateral agent. The 2020 Senior Secured Notes are guaranteed on a senior secured basis by the Company and all of its existing and future direct and indirectU.S. subsidiaries that guarantee, or borrow under, the credit facilities under its 2018 Credit Agreement. The 2020 Senior Secured Notes are secured on a pari passu basis by the collateral securing the term loans under the 2018 Credit Agreement.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 pursuant to a collateral agreement, dated as ofDecember 22, 2020 (the "Collateral Agreement"), among GrafTech Finance, the Company, the other subsidiaries of the Company named therein as grantors andU.S. Bank National Association , as collateral agent. The 2020 Senior Secured Notes bear interest at the rate of 4.625% per annum, which accrues fromDecember 22, 2020 and is payable in arrears onJune 15 andDecember 15 of each year, commencing onJune 15, 2021 . The 2020 Senior Secured Notes will mature onDecember 15, 2028 , unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the 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 Indenture. If the Company or GrafTech Finance experiences specific kinds of changes in control or the 31 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES 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 Indenture. The Indenture contains certain covenants that, among other things, limit the Company's ability, and the ability of certain of its subsidiaries, to incur or guarantee additional indebtedness or issue preferred stock, pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt, incur or suffer to exist liens securing indebtedness, make certain investments, engage in certain transactions with affiliates, consummate certain asset sales and effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets. The Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or GrafTech Finance, all outstanding 2020 Senior Secured Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the 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.
The entirety of the 2020 Senior Secured Notes proceeds was used to pay down a portion of our 2018 Term Loan Facility.
Uses of Liquidity
InJuly 2019 , our Board of Directors authorized a program to repurchase up to$100 million of our outstanding common stock. InNovember 2021 , our Board of Directors authorized the repurchase of an additional$150 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 price, applicable legal requirements, other business objectives and market conditions. During the first quarter of 2022, we repurchased 3.0 million shares of our common stock at an average purchase price of$9.88 per share, or$30.0 million in the aggregate. As ofMarch 31, 2022 , we had$129.0 million remaining under this authorization. We currently pay a quarterly dividend of$0.01 per share, or$0.04 on an annualized basis. There can be no assurance that we will pay 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 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. During 2021, we reduced our long-term debt principal by$400.0 million . During the three months endedMarch 31, 2022 , we repaid an additional$70.0 million of principal of our 2018 Term Loan Facility. For the remainder of 2022, we continue to expect our primary use of cash to be debt repayment. We also have$129.0 million available under our stock repurchase authorization. Potential uses of our liquidity include dividends, share repurchases, capital expenditures, scheduled debt repayments, optional debt repayments, and other general purposes. 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 potential resurgence of the COVID-19 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 of such financing, if available. In order to seek to minimize 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 and other factors. Capital expenditures totaled$16.9 million in the three months endedMarch 31, 2022 . We continue to expect full-year capital expenditures to be in the range of$70 to$80 million for 2022. 32 -------------------------------------------------------------------------------- PART I (CONT'D)GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES In the event that operating cash flows fail to provide sufficient liquidity to meet our business needs, including capital expenditures, any such shortfall would need to be made up by increased borrowings under our 2018 Revolving Credit Facility, to the extent available.
Cash Flows
The following table summarizes our cash flow activities:
For the Three Months
Ended March 31,
2022 2021
(in thousands)
Cash flow provided by (used in):
Operating activities $ 146,316 $ 122,425
Investing activities (16,782) (14,023)
Financing activities (103,517) (156,762)
Net change in cash and cash equivalents
Operating Activities
Cash provided by operating activities totaled$146.3 million in the first three months of 2022 compared to$122.4 million in the prior-year period. The increase in operating cash flow was primarily due to reductions of$24.7 million in the first three months of 2022 in the combined impact of cash paid for our Tax Receivable Agreement and interest, as well as$14.6 million of increased adjusted EBITDA. Partially offsetting these increases, was a decrease of$12.6 million in cash provided by working capital, primarily driven by increased sales and production levels in the first three months of 2022. Cash flow used for inventories was$24.2 million in the first quarter of 2022 compared to providing$11.6 million of cash in the first quarter of 2021, driven by increased production levels in the first three months of 2022. Cash flow used for accounts receivable decreased$15.4 million versus the prior-year period due to increased sales in the first three months of 2022. In addition, cash flow provided by accounts payable and accruals increased$12.7 million compared to the first three months of 2021, driven by increased customer prepayments.
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash used in financing activities was$103.5 million during the three months endedMarch 31, 2022 compared to$156.8 million in the three months endedMarch 31, 2021 . The decrease was primarily due to$80.0 million of less debt repayments in the first three months of 2022 compared to the first three months of 2021, partially offset by an increase due to$30.0 million of stock repurchases made in the first three months of 2022.
Related Party Transactions
We have engaged in transactions with affiliates or related parties during the first three months of 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 and Registration Rights Agreement, each with Brookfield.
Description of Our Financing Structure
We discuss our financing structure in more detail in Note 4, "Debt and Liquidity" in the Notes to the Condensed Consolidated Financial Statements.
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PART I (CONT'D)
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