GrafTech International Ltd. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. GrafTech manufactures graphite and carbon products, reported in Industrial Materials and Engineered Solutions. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $315.6 million | $320.2 million | $556.5 million | $626.4 million |
| Gross profit / margin | $84.4 million / 26.7% | $75.2 million / 23.5% | $151.3 million / 27.2% | $148.1 million / 23.6% |
| Operating income / margin | $46.6 million / 14.8% | $39.6 million / 12.4% | $70.6 million / 12.7% | $77.2 million / 12.3% |
| Net income | $41.8 million | $28.6 million | $59.4 million | $55.8 million |
| Diluted EPS | $0.29 | $0.20 | $0.41 | $0.38 |
- Cash flow: Six-month operating cash flow was negative $31.5 million, versus negative $18.0 million a year earlier. Investing cash outflow was $54.6 million, including $61.6 million of capital expenditures. Financing provided $81.4 million, including net Revolving Facility borrowings of $178 million.
- Liquidity and debt: At June 30, cash was $7.1 million; short-term debt was $8.3 million and long-term debt was $570.8 million. The company reported $150 million of revolver availability, after letters of credit. Current assets were $810.7 million and current liabilities $228.0 million.
- Working capital: Inventories increased to $554.6 million from $444.1 million at year-end, contributing to cash use; management attributed the increase to higher inventory on hand amid lower sales volumes.
Material changes versus comparable periods
- Q2 sales declined 1%; six-month sales fell 11%. Industrial Materials sales declined 3% in Q2 and 15% year to date, mainly from lower graphite-electrode volumes, particularly in Europe. Higher electrode prices partly offset the volume declines.
- Engineered Solutions sales rose 6% in Q2 and 9% year to date, supported by advanced consumer electronics growth and acquisition revenue; weaker solar-market demand partly offset the growth.
- Q2 operating income increased 18%, as lower costs and favorable currency effects more than offset lower sales and higher selling and administrative expense. Six-month operating income declined 9%.
- Engineered Solutions operating income decreased to $4.7 million in Q2 from $7.4 million and to $3.8 million for the first half from $10.9 million. The filing cites unfavorable mix, solar-market weakness, and growth-support costs.
- Six-month net income increased 6% despite lower pretax income, reflecting a lower tax provision. Q2 included a tax benefit, and the company said resolution of prior-year uncertain tax positions reduced unrecognized tax benefits by $10.5 million, favorably affecting the effective tax rate.
Outlook, management commentary, risks, and unusual items
- 2012 targets: EBITDA (as defined in the filing) of $235–$255 million; operating income of $150–$170 million; depreciation and amortization of approximately $85 million; overhead expense of approximately $160 million; interest expense of approximately $22 million; capital expenditures of $120–$130 million; effective tax rate of 23%–25%; operating cash flow of $90–$120 million; and fully diluted share count of approximately 140 million.
- Management described a weaker global economic outlook, slower steel production growth, and continued European debt-crisis risks. It expected 2012 raw-material cost increases to be more fully reflected in the second half and said it was adjusting operating levels and monitoring raw-material purchases.
- The company received $4.0 million in insurance reimbursements for 2011 flood damage at its Clarksburg, West Virginia facility. It also recorded $3.3 million of severance charges in the first half as it adjusted operations to anticipated demand.
- GrafTech repurchased 8.8 million shares in Q2 for $89.9 million and repurchased the remaining 1.2 million shares under that program in July for $11.8 million. The board authorized a new program for up to 10 million shares on July 24, 2012.
- The company said it was in compliance with revolver covenants at June 30 and expected compliance through 2012. Risks include demand and pricing changes, raw-material and energy costs, foreign-exchange and interest-rate movements, customer credit, working-capital needs, liquidity and covenant headroom, and execution of growth initiatives. Management did not believe pending legal matters would materially adversely affect the company, but stated outcomes could not be determined.
Important facts for investors to verify
- Whether second-half demand, especially in Europe and steel-related markets, supports the full-year targets despite first-half Industrial Materials volume declines.
- Whether higher raw-material costs and inventory levels pressure second-half margins and cash conversion.
- Progress toward the $90–$120 million operating cash-flow target, given first-half operating cash outflow of $31.5 million.
- Debt, revolver availability, covenant compliance, and the funding impact of share repurchases and capital spending.
- The sustainability of tax benefits: the six-month effective rate was 7.0%, while management’s full-year target was 23%–25%.
- Performance and margins in Engineered Solutions, including exposure to solar-market weakness and the returns from growth initiatives and acquisitions.