GrafTech International Ltd. — FY2019 Form 10-K
Business context and reporting period. GrafTech manufactures graphite electrodes used primarily in electric arc furnace (EAF) steelmaking and produces petroleum needle coke, a key raw material, at its Seadrift facility. This summary covers the fiscal year ended December 31, 2019; the filing also reports quarterly results. The company had approximately 202,000 metric tons of electrode capacity at operating sites and sold about 90% of its electrodes to EAF steel producers.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,790.8 million | $1,895.9 million |
| Gross profit / margin | $1,040.4 million / 58.1% | $1,190.2 million / 62.8% |
| Operating income / margin | $974.0 million / 54.4% | $1,126.1 million / 59.4% |
| Net income / diluted EPS | $744.6 million / $2.58 | $854.2 million / $2.87 |
| Adjusted EBITDA | $1,048.3 million | $1,205.0 million |
| Cash from operating activities | $805.3 million | $836.6 million |
| Capital expenditures | $64.1 million | $68.2 million |
- Sales volume was 171,000 MT, down 3% from 176,000 MT; production was 177,000 MT versus 179,000 MT. Capacity utilization excluding St. Marys’ idle period was 88%, compared with 99% in 2018.
- At year-end, cash and equivalents were $80.9 million and total debt was approximately $1,812.8 million. Revolver availability was $246.9 million, giving reported liquidity of $327.8 million. Long-term debt matures in 2025; the $250 million revolving facility matures in 2023.
- Interest expense was $127.3 million. The effective tax rate was 11.7%, compared with 5.4%; management expected a 2020 tax rate of approximately 14%–18%.
- The company paid $0.34 per share in regular dividends during 2019. It also repurchased $250 million of stock directly from Brookfield and $10.9 million under its public repurchase program.
Changes versus the prior comparable period
- Revenue decreased 6%, net income decreased 13%, and adjusted EBITDA decreased 13%. Gross margin fell about 4.7 percentage points as sales weakened and cost of sales rose.
- Management attributed lower sales primarily to customer inventory destocking, especially in the second half of 2019, and lower sales of third-party electrodes. Spot electrode prices declined approximately 25% during 2019.
- Cost of sales rose 6%, largely because inventory sold in 2019 included electrodes made using higher-priced third-party needle coke. Management said these costs peaked in 2019 and expected modest declines in 2020.
- Operating cash flow remained substantial but declined from $836.6 million. Working capital used $47.7 million in 2019, versus $177.8 million in 2018.
- Debt fell by approximately $343.8 million during 2019, including $350 million of term-loan repayments. The company entered into interest-rate swaps on $1 billion of notional debt, targeting an effective fixed rate of 5.1%, potentially 4.85% subject to credit ratings.
Outlook, commentary, risks and unusual items
- About 80% of 2019 sales came from three- to five-year take-or-pay contracts. GrafTech reported 2020 contracted volume of approximately 142,000 MT, but expected to ship approximately 130,000 MT at an average price near $9,600/MT. Contract volumes may vary with customer credit conditions and volume-range provisions; contracts have fixed prices.
- Management expected inventory destocking to continue through the first half of 2020, with conditions potentially improving in the second half. It also anticipated further spot-price declines in 2020 and additional global electrode capacity, driven by Chinese additions.
- The company planned to use approximately 50%–60% of 2020 cash for debt repayment, with the balance for shareholder returns. Planned 2020 capital spending was $60–$70 million. Monterrey and St. Marys operational projects were expected to finish in the first half of 2021.
- Key exposures include the cyclical EAF steel market and electrode prices, customer destocking and credit risk, needle-coke supply and pricing, energy and raw-material costs, foreign exchange, variable-rate debt, and execution of plant projects. The company relies substantially on Seadrift for needle coke; disruption there could affect contracted deliveries.
- A Brazilian employee wage-claim action could be material, but the company said it could not estimate potential loss because the claims did not specify the number of employees or damages sought. A Mexican water-use assessment proceeding concerning historical fees was ongoing.
- The Brookfield tax receivable agreement (TRA) liability was $89.9 million at year-end; Brookfield is generally entitled to 85% of specified tax savings. The company made its initial $27.9 million TRA payment in February 2020. The 2019 TRA expense was $3.4 million, compared with $86.5 million in 2018.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at year-end. The auditor identified the TRA liability valuation as a critical audit matter.
Important facts for investors to verify
- Whether destocking ends as expected and whether 2020 shipments, realized prices, and contract volumes match management’s estimates.
- Customer credit quality and enforceability of take-or-pay provisions, including capacity payments, guarantees, and termination protections.
- Electrode spot prices, new capacity additions—particularly in China—and needle-coke supply, costs, and Seadrift operating reliability.
- Debt repayment progress, interest costs, liquidity and covenant headroom, and the balance between debt reduction and shareholder returns.
- The eventual outcome and potential exposure from the Brazilian wage litigation and the Mexican water-use proceeding.
- TRA payments and assumptions underlying tax-asset utilization; also verify the status of the planned facility projects and associated capital spending.