GrafTech International Ltd. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included below where relevant. GrafTech manufactures graphite electrodes used mainly in electric arc furnace (EAF) steelmaking and produces petroleum needle coke, a key input. Its only reportable segment is Industrial Materials.
Financial and operating results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,895.9 million | $550.8 million |
| Gross profit / gross margin | $1,190.2 million / 62.8% | $87.7 million / 15.9% |
| Operating income / operating margin | $1,126.1 million / 59.4% | $31.8 million / 5.8% |
| Net income | $854.2 million | $8.0 million |
| Diluted earnings per share | $2.87 | $0.03 |
| Adjusted EBITDA from continuing operations | $1,205.0 million | $95.8 million |
| Cash from operating activities | $836.6 million | $36.6 million |
| Capital expenditures | $68.2 million | $34.7 million |
- Sales rose 244%, principally because graphite electrode weighted average realized price increased 235%, from $2,945 to $9,937 per metric ton (MT); sales volume rose 7% to 185,000 MT. Production was 179,000 MT, versus 166,000 MT.
- Operating capacity utilization was 99% at the three primary plants. The completed debottlenecking initiative increased their annual capacity to approximately 202,000 MT; St. Marys remained warm-idled.
- Operating cash flow included a $177.8 million working-capital use, largely from higher receivables and inventory. Cash and equivalents were $49.9 million at year-end.
- Year-end debt was $2,156.6 million, including $106.3 million classified as short-term; long-term debt was $2,050.3 million. Liquidity was $295.4 million: $49.9 million cash plus $245.5 million available on the revolving facility. All debt was variable-rate; a 100-basis-point rate increase was estimated to add $18.1 million to annual interest expense.
- Fourth-quarter 2018 sales were $532.8 million and net income was $229.6 million, compared with $192.5 million and $55.6 million, respectively, in fourth-quarter 2017.
Material changes and unusual items
- Higher prices and sales volumes drove the sharp year-over-year improvement. Cost of sales increased 53%, substantially less than revenue; management cited sales of inventory made using higher-priced needle coke and pitch.
- GrafTech refinanced in February 2018, borrowing $1.5 billion under a new term facility, and added $750 million of term loans in June. It used proceeds and related transactions to repay prior debt and a $750 million Brookfield promissory note. Interest expense increased to $135.1 million from $30.8 million, including $23.8 million of debt-extinguishment costs.
- A $1.112 billion dividend to Brookfield was funded in connection with the February financing; the company also paid a $160 million conditional dividend to Brookfield, repurchased $225 million of its shares from Brookfield, and paid regular and special dividends. A $203.4 million special dividend was paid to common stockholders on December 31.
- Net income included an $86.5 million related-party Tax Receivable Agreement expense. The 5.4% effective tax rate also reflected a $93.1 million benefit from a partial release of valuation allowances. Adjusted EBITDA excludes the TRA expense and other specified items; it is a non-GAAP measure.
- Brookfield held approximately 79% of the common stock after the IPO, secondary offerings and share repurchase. IPO shares were sold by Brookfield; GrafTech received no IPO proceeds.
- 2018 environmental protection expenses were $12.4 million and related capital expenditures were $4.1 million. The filing describes a Brazilian employee wage litigation matter whose potential loss could be material but could not be assessed because the claims did not specify the number of claimants or damages sought.
Outlook, commentary and risks
- Management cited a recovering EAF steel market, constrained electrode and needle-coke supply, and increased electric-vehicle battery demand for needle coke as factors supporting the strong 2018 market. It warned that electrode prices are cyclical and may decline.
- Take-or-pay contracts covered approximately 674,000 MT for 2018–2022, or roughly 60%–65% of expected cumulative production capacity. Approximately 71% of 2018 sales came from these contracts. Contracted volumes were approximately 147,000 MT in 2019, 144,000 MT in 2020, 127,000 MT in 2021 and 120,000 MT in 2022; their weighted average price was approximately $9,700 per MT. Fixed contract prices can also limit the ability to pass through rising input costs.
- The filing reported 2019 primary-plant capacity of 202,000 MT and expected 125,000 MT of needle-coke production, compared with 110,000 MT produced in 2018. It also said higher third-party needle-coke costs would affect 2019 cost of sales. As of February 2019, management estimated spot electrode prices at approximately $12,000 per MT; this is a market estimate, not company guidance.
- Management expected term-loan repayments of approximately $125 million in future quarters of 2019 after repaying $125 million on February 13, 2019. The company said cash generation and liquidity were adequate, while noting dividends remain discretionary and subject to debt restrictions and operating conditions.
- Key risks include electrode-price and steel-market cyclicality, needle-coke availability and cost, reliance on Seadrift and highly utilized plants, variable-rate debt, customer or supplier disruption, environmental and other contingencies, and Brookfield’s control of the company. The company forecast approximately $86.5 million of future TRA payments under current tax laws, with a stated maximum of approximately $100 million, excluding certain speculative tax assets.
Important facts for investors to verify
- Whether contracted volumes, fixed prices and customer credit protections support expected margins and deliveries, especially if spot prices or raw-material costs move sharply.
- Current debt, repayment progress, interest-rate exposure, covenant headroom and cash available after working-capital needs, capital expenditures and dividends.
- Whether the 202,000 MT capacity and planned 125,000 MT needle-coke output were achieved, and whether third-party needle-coke supply remains adequate and affordable.
- The treatment and cash timing of the TRA, the valuation-allowance assumptions behind the reported tax benefit, and the potential outcome of the Brazilian employee litigation.
- Brookfield’s ownership, governance influence, related-party transactions and any future share sales or capital returns.