GrafTech International Ltd. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010. GrafTech makes graphite and carbon products for steelmaking and other markets, reported in Industrial Materials and Engineered Solutions. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2010 | Q1 2011 |
|---|---|---|
| Net sales | $215.7 million | $306.1 million |
| Gross profit / margin | $69.3 million / 32.1% | $72.9 million / 23.8% |
| Operating income / margin | $44.6 million / 20.7% | $37.6 million / 12.3% |
| Net income | $35.0 million | $27.3 million |
| Diluted earnings per share | $0.29 | $0.19 |
| Cash from operations | $20.4 million | $(1.1) million |
| Capital expenditures | $10.8 million | $23.8 million |
- At March 31, 2011, cash was $11.2 million; current assets were $613.4 million and current liabilities $232.5 million. Long-term debt was $296.3 million; short-term debt was $2.6 million. Including $33.5 million in supply-chain financing, total financing liabilities were $332.4 million.
- GrafTech had $103.8 million available under its $260 million revolving facility, after outstanding letters of credit. It reported compliance with applicable covenants. Stockholders’ equity was $1,275.2 million.
- Inventory increased to $374.8 million from $340.4 million at year-end 2010, while receivables rose to $203.5 million from $179.8 million.
Changes versus Q1 2010
- Sales rose 42%, with acquisitions contributing $65.4 million; excluding acquisitions, sales increased $25.1 million, primarily from higher volume. Industrial Materials sales rose 44%; Engineered Solutions sales rose 28%.
- Industrial Materials segment operating income fell to $34.2 million from $42.9 million; Engineered Solutions operating income increased to $3.4 million from $1.7 million. Industrial Materials faced lower electrode pricing, higher needle-coke costs and unfavorable currency effects.
- Despite higher revenue, gross profit increased only 5%; cost of sales rose 59%. Management cited higher volumes, $6.2 million of purchase-accounting adjustments, a $10.5 million increase in needle-coke input costs and $5.8 million of unfavorable currency impact.
- Net income declined 22%. Selling and administrative expense increased 45%, including acquisition-related costs and $4.2 million of amortization of acquired intangibles. Interest expense increased to $4.4 million from $0.9 million, including $2.4 million of discount amortization on acquisition-related notes.
- Operating cash flow turned negative as working capital used $54.6 million, mainly from higher receivables and inventory and lower accounts payable and accruals. Financing cash flow was $29.4 million, including $18.0 million of net revolving-facility borrowings and $8.6 million of net supply-chain financing borrowings.
Outlook, risks and notable items
- Management expected 2011 results to benefit from improved graphite-electrode volumes, partly offset by pressure on average selling prices. Its conditional full-year outlook was: EBITDA of $285–$315 million, operating income of $200–$230 million, overhead expense of $145–$155 million, capital expenditures of $135–$150 million, depreciation and amortization of approximately $85 million, an effective tax rate of 22%–24%, and operating cash flow of $185–$215 million.
- Management cited recovering steel production and improving demand, but warned that geopolitical uncertainty and rising commodity prices could threaten the recovery. Key business risks include electrode pricing and competition, raw-material and energy costs, foreign-exchange movements, customer demand, production interruptions, and acquisition integration and returns.
- The November 2010 Seadrift and St. Marys acquisitions were reflected in Q1 2011 results but not in the Q1 2010 comparison. GrafTech also paid $6.5 million for Micron Research assets in February 2011. Acquisition accounting remained preliminary; Seadrift/St. Marys generated approximately $489.2 million of goodwill.
- GrafTech changed its pension and postretirement accounting policy to recognize actuarial gains and losses more promptly, applied retrospectively. The policy change increased Q1 2011 net income by approximately $1.2 million; without the changes, reported net income would have been $26.1 million and diluted EPS $0.18. The 2010 comparative was also revised.
- Management said it believed liquidity was adequate, while noting that economic volatility, working-capital needs, availability of financing, and covenant headroom could affect liquidity. It reported no belief that the ultimate disposition of disclosed legal matters would materially adversely affect the company. A potential work stoppage at the Clarksburg facility and pending Brazilian wage litigation were identified as risks.
Important facts for investors to verify
- Whether volume growth and acquisition contributions can offset electrode price pressure and rising input costs, particularly needle coke.
- Whether working-capital growth converts to cash and the company achieves its $185–$215 million operating-cash-flow outlook.
- Debt, available revolver capacity, covenant compliance and the cost and terms of supply-chain financing.
- Final acquisition purchase-price allocations, expected synergies and returns, and the effect of acquired-asset amortization.
- The impact of the pension accounting change, pension funding assumptions, and the stated legal and labor contingencies.