GrafTech International Ltd. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. GrafTech manufactures graphite electrodes and needle coke. Its continuing business is Industrial Materials; Engineered Solutions is reported as discontinued operations and was substantially divested. The company identifies itself as a voluntary filer and not subject to Exchange Act periodic-reporting requirements.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $137.2m | $111.6m | $358.3m | $322.5m |
| Gross profit (loss) | $16.6m | ($6.9m) | $27.3m | ($28.3m) |
| Operating profit (loss) | $1.9m | ($19.7m) | ($13.0m) | ($69.7m) |
| Continuing-operations net loss | ($7.2m) | ($24.1m) | ($42.8m) | ($80.2m) |
| Net loss, including discontinued operations | ($3.9m) | ($23.0m) | ($47.6m) | ($187.7m) |
- Sales increased 23% in Q3 and 11% year to date. Q3 growth primarily reflected an 18% increase in weighted-average graphite-electrode selling price; higher electrode volume contributed $6.2m of revenue, with $2.1m from favorable currency effects. Nine-month electrode volume rose 10%.
- Gross margin was approximately 12.1% in Q3 2017 versus negative 6.2% in Q3 2016; nine-month gross margin was 7.6% versus negative 8.8%. Operating margin was approximately 1.4% in Q3 and negative 3.6% year to date.
- For the nine months, operating results improved with lower inventory reserve charges ($1.8m versus $19.5m), reduced manufacturing costs and depreciation, and lower selling and administrative costs. The 2016 discontinued-operations loss included a $105.6m impairment, compared with $5.3m in 2017.
- Interest expense was $7.8m for Q3 and $23.2m for the nine months, up from $7.0m and $19.9m, respectively, primarily because of higher variable borrowing costs. Nine-month other expense was $3.6m, versus $1.5m of other income, mainly reflecting non-cash foreign-currency effects.
- Nine-month cash from operations was $33.6m, compared with $28.7m. Investing activities provided $7.8m, including divestiture and asset-sale proceeds, while financing used $36.9m, principally from net revolver repayments. Capital expenditures were $23.0m. Cash at period-end was $16.4m.
- At September 30, total debt was $333.7m ($13.3m short-term and $320.4m long-term), down from $365.4m at year-end 2016; reported equity was $550.9m. The $225m revolving facility had $35.3m borrowed and $11.6m in letters of credit drawn. The $18.8m term loan and revolving facility mature in April 2019; $300m principal of 6.375% Senior Notes mature in November 2020.
- Current assets were $296.4m and current liabilities $125.8m, including discontinued-operation balances. The filing does not provide a standalone continuing-operations liquidity ratio.
Changes, outlook and key matters
- Management cited tighter electrode supply and stronger demand, including reduced Chinese steel exports, increased steel production outside China, and environmental restrictions affecting Chinese electrode output. It reported a significant rise in spot prices and concern that supply constraints could persist into 2018. It gave no specific financial guidance or quantified price outlook.
- GrafTech began offering strategic customers three-to-five-year supply contracts, which management said could improve customer supply security and support investment in facilities. Management also cited more than $100m of sustainable operating improvements since Brookfield’s acquisition, driven by focus on electrodes, divestitures, production optimization, productivity and overhead reductions.
- Hurricane Harvey damaged the Seadrift facility; the company recorded $2.1m of related Q3 costs. Q3 results also included a $3.7m gain on asset sales. Most U.S. GAGM assets were sold September 30; the Italian asset sale closed October 5, and remaining wind-down was expected to be substantially complete by year-end. Cash proceeds from Engineered Solutions sales were applied to debt under the credit agreement.
- Liquidity is subject to a $25m minimum-liquidity covenant, financial covenants and other restrictions. The company reported compliance at quarter-end. It warned that downturns, working-capital needs during growth, increased borrowing, covenant compliance and access to financing could pressure liquidity. Dividends are restricted under the credit agreement.
- A Brazilian employee wage-claim case was ruled in favor of employees at the state-court level in Q1 2017; GrafTech appealed. The claims do not specify damages, and the company cannot estimate a loss range; potential exposure, including interest, could be material. The company said other proceedings were not expected to materially affect its financial position, results or cash flows.
- Other risks include electrode demand, pricing and competitive capacity; raw-material, energy, currency and interest-rate changes; customer order changes; manufacturing interruptions; and goodwill or asset valuation. The filing reported no material changes to the prior annual report’s risk factors. Disclosure controls were assessed effective.
Investor verification points
- Confirm subsequent electrode pricing, customer contract terms, volumes and whether tight supply persists; spot prices are not equivalent to realized company prices.
- Review cash availability against the $25m minimum-liquidity test, covenant thresholds, letters of credit and April 2019 facility maturities.
- Track the Brazilian litigation, appeal and any change in the currently unestimable loss range.
- Verify completion and proceeds of remaining Engineered Solutions dispositions and wind-down costs, and the application of proceeds to debt.
- Assess whether operating improvements and lower inventory reserves are sustainable, and monitor Hurricane Harvey impacts and capital spending.