GrafTech International Ltd. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015. On August 17, 2015, Brookfield affiliates acquired GrafTech. The filing separates results into predecessor (through August 14) and successor (August 15 onward) periods because acquisition accounting created a new basis of accounting. Figures combined for the two 2015 periods below are arithmetic sums; comparisons with prior periods are therefore not fully like-for-like.
Business context and results
GrafTech manufactures graphite and carbon products through its Industrial Materials segment, serving primarily steel markets, and its Engineered Solutions segment, serving electronics, industrial, energy, transportation and defense markets.
| Metric | Q3 2015 reported periods combined | Q3 2014 |
|---|---|---|
| Net sales | $160.2 million | $260.5 million |
| Gross profit | $10.4 million | $17.6 million |
| Operating loss | $31.8 million | $23.1 million |
| Net loss | $49.5 million | $34.9 million |
| Gross margin | Approximately 6.5% | Approximately 6.8% |
Q3 2015 net sales fell about 38% from the prior-year quarter. Industrial Materials sales were $126.0 million across the reported 2015 periods; Engineered Solutions sales were $34.2 million. Management attributed the revenue decline mainly to weaker steel demand and lower graphite-electrode volumes and prices, plus softer demand for thermal solutions, advanced graphite materials and oil-and-gas products. The 2015 combined operating loss includes $11.7 million of accelerated stock-compensation expense and acquisition/proxy-related fees; predecessor-period interest expense also included a $4.5 million accelerated charge related to repayment of the subordinated notes.
For the nine months through September 30, 2015, reported periods combined produced sales of $532.5 million, gross profit of $47.1 million, operating loss of $90.6 million and net loss of $128.0 million, versus 2014 nine-month sales of $825.4 million and net loss of $201.9 million. The comparison is affected by the acquisition accounting split and by $121.6 million of 2014 impairment charges, compared with $35.4 million of 2015 impairment charges.
Cash flow, debt and liquidity
- Cash and cash equivalents were $13.5 million at September 30, 2015, down from $17.6 million at December 31, 2014.
- Total debt was $378.2 million: $9.6 million short-term and $368.6 million long-term. Debt was $529.7 million at December 31, 2014. GrafTech repaid its $200 million Senior Subordinated Notes in August, funded with preferred-stock proceeds, term-loan and revolver borrowings, and cash.
- The company reported $297 million of unused Revolving Facility capacity after covenant limitations and approximately $7.4 million of letters of credit. The facility matures in April 2019; Senior Notes of $266.3 million carry a 6.375% coupon and mature in November 2020.
- Cash from operations was $28.3 million in the January 1–August 14 predecessor period and $3.9 million in the August 15–September 30 successor period. Investing cash use was $39.9 million and $4.6 million, respectively; financing provided $20.8 million in the predecessor period and used $10.6 million in the successor period. Capital expenditures were $32.3 million and $5.2 million, respectively.
- Current assets were $513.3 million and current liabilities $131.7 million at September 30. Management said it believed liquidity was adequate and expected compliance with financial covenants through December 31, 2015.
Material changes, outlook and risks
- Brookfield’s acquisition closed August 17 at $5.05 per common share tender consideration. Brookfield’s affiliate had invested $150 million in convertible preferred shares immediately beforehand. The successor balance sheet reflects purchase accounting, including $170.0 million of goodwill and revalued assets and liabilities. Common shares outstanding were reported as 1,000 after the transaction.
- Management did not expect significant improvement in results for the remainder of 2015. It cited the weak steel outlook: global steel production fell about 2.4% in the first nine months of 2015, and the World Steel Association forecast a 1.7% decline in full-year global steel demand.
- Needle-coke market overcapacity and price declines led to a $35.4 million goodwill impairment in 2015; needle-coke goodwill was fully impaired in the predecessor period. Prior-year Engineered Solutions impairment followed deteriorating pricing, overcapacity and product-market challenges.
- Key operating risks include continued weak demand and pricing, competitor capacity, foreign-exchange movements, raw-material and energy costs, customer order delays, and the possibility that rationalization savings may be delayed or fail to materialize. Management cited foreign-exchange pressure on sales, partly offset by lower costs.
- Putative class actions related to the merger alleged inadequate valuation/process and misleading disclosures, and sought equitable relief including rescission and damages; defendants said they would vigorously defend the claims. Separately, Brazil’s CADE commissioners terminated a legacy antitrust investigation on October 14, 2015. The company said other legal matters were not expected to have a material adverse effect.
- Recent rationalization actions included closure of the Notre Dame, France facility and workforce reductions. As of September 30, sites held for sale included $7.7 million of assets and $1.5 million of liabilities. The company sold its Pennsylvania facility in Q3 for a $0.3 million gain.
- Management stated disclosure controls were effective as of September 30, 2015, and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How post-acquisition operating performance, cash generation and margins trend under the successor accounting basis; the short successor-period results are not directly comparable with prior periods.
- Whether weak steel, graphite-electrode and Engineered Solutions demand continues, and whether the company can stabilize volumes, prices and margins.
- Liquidity and covenant headroom, including the availability of the $297 million revolver capacity and the company’s projected covenant compliance after year-end 2015.
- The status and potential financial or governance effects of merger-related litigation and any other contingencies.
- The final purchase-price allocation, subsequent amortization and depreciation, and whether rationalization savings and asset-sale proceeds meet expectations.