EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended June 30, 2005)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, and the six months ended June 30, 2005. GrafTech International Ltd. is a global manufacturer of synthetic graphite products, primarily graphite electrodes for steel production and cathodes for aluminum smelting. The company operates in two reportable segments: Synthetic Graphite and Other (natural graphite, carbon electrodes, and refractories). The company remains highly leveraged with a stockholders' deficit.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3% in Q2 and 5% in the first half of 2005 compared to the prior year. This was driven by higher average selling prices for graphite electrodes and increased volumes in cathodes and advanced synthetic graphite products, partially offset by lower electrode volumes due to pricing initiatives and unfavorable product mix.
• Profitability Decline: Despite higher gross profit, Net Income dropped significantly (72% in Q2, 61% in 6 months). This was primarily due to a higher effective tax rate (52% in Q2 2005 vs. 20% in Q2 2004) caused by a $1.6 million non-cash charge related to an Ohio state tax law change, and increased interest expense.
• Interest Expense: Interest expense rose to $13 million in Q2 2005 from $10 million in Q2 2004, driven by higher average debt balances and the termination of certain interest rate swaps.
• Working Capital: Cash flow from operations improved significantly to a use of $8 million in the first half of 2005 compared to $152 million in the prior year, largely due to reduced payments for antitrust fines and restructuring costs.

Guidance, Outlook, and Risks

• 2005 Outlook: Management expects net sales to increase over 5% in 2005. Average graphite electrode revenue per metric ton is expected to be at the low end of the $2,900-$3,000 guidance range (approx. $2,850 at current rates). Total 2005 sales volume is projected at 200,000 metric tons.
• Cost Guidance: Production cost increases for 2005 are targeted at the lower end of the 10-12% range. Capital expenditures are estimated at $45 million for the year.
• Tax Rate: The 2005 cash tax rate is targeted below 30%, while the effective tax rate is expected to range between 36% and 38%.
• Liquidity: The company maintains a $215 million Revolving Facility with $177 million available as of June 30, 2005. Management expects to remain in compliance with all financial covenants for the next 12 months.
• Risks: Key risks include global steel production slowdowns, currency exchange fluctuations (notably the Euro), raw material cost increases (petroleum coke), and ongoing antitrust litigation (though most investigations are resolved, foreign customer lawsuits remain pending).

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the maximum net senior secured debt leverage ratio and minimum interest coverage ratio under the Revolving Facility.
• Antitrust Reserves: Confirm the status of the $35 million reserve for antitrust liabilities and the timeline for remaining DOJ fine payments through January 2007.
• Ohio Tax Impact: Assess the long-term impact of the Ohio state tax law change on deferred tax assets and future effective tax rates.
• Steel Demand: Monitor global steel production rates, particularly in China, as the primary driver for graphite electrode demand.
• Interest Rate Exposure: Review the company's hedging strategy given the termination of $285 million in interest rate swaps, leaving 27% of debt at variable rates.