EAF

Business Context and Reporting Period

Company: GrafTech International Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: GrafTech is a global manufacturer of synthetic and natural graphite and carbon products, primarily serving the steel (graphite electrodes), aluminum (cathodes), and electronics (thermal management) industries. The company operates 13 manufacturing facilities across four continents.

Key Financial Metrics

Note: Total debt includes $690 million in long-term debt carrying value and $15 million in short-term debt as of September 30, 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 19% year-over-year for the nine-month period ($524M vs. $440M), driven by an 18% increase in the Synthetic Graphite segment due to higher volumes and improved pricing for graphite electrodes.
• Profitability Turnaround: The company returned to profitability, reporting net income of $4 million for the nine months ended September 30, 2003, compared to a net loss of $16 million in the same period in 2002. This was driven by higher gross margins and reduced interest expense.
• Restructuring Charges: Restructuring charges increased significantly to $20 million in the first nine months of 2003 (vs. $5 million in 2002), primarily due to organizational changes ($9M) and the closure of a U.S. non-qualified defined benefit plan ($11M).
• Interest Expense Reduction: Interest expense decreased to $36 million (nine months 2003) from $45 million (nine months 2002), aided by interest rate swaps that reduced expense by approximately $16 million.
• Discontinued Operations: The company sold its non-strategic composite tooling business in June 2003 for $17 million, recording a $1 million gain. This business is now reported as discontinued operations.

Guidance, Outlook, and Risks

• 2003 Outlook: Management expects full-year 2003 net sales of approximately $700 million. Interest expense is targeted at $45 million, and the effective income tax rate is targeted at 35%.
• Debt Reduction Targets: Following a public offering of common stock in October 2003 (subsequent to the reporting period), the company targets total debt of $500 million to $530 million and cash of $16 million to $27 million by December 31, 2003.
• Market Conditions: Graphite electrode capacity is virtually sold out for 2003 and 2004. Price increases implemented in 2003 are expected to impact results in 2004. Demand for cathodes remains strong due to new aluminum smelter construction.
• Antitrust Contingencies: The company maintains a $350 million reserve for antitrust liabilities. As of September 30, 2003, $93 million remained in the reserve. Significant risks include the pending appeal of a €50.4 million EU fine and potential interest accruals on this fine.
• Liquidity Risks: The company relies on its revolving credit facility and operating cash flow for liquidity. Compliance with financial covenants (leverage and interest coverage ratios) is critical. A requirement to post collateral for the EU fine could significantly reduce available borrowing capacity.

Investor Verification Checklist

• Antitrust Reserve Adequacy: Verify the sufficiency of the $93 million remaining reserve against the potential outcome of the EU fine appeal and accrued interest.
• Debt Covenant Compliance: Confirm continued compliance with the Senior Facilities' leverage and interest coverage ratios, especially given the high debt load relative to equity.
• Subsequent Equity Offering: Review the impact of the October 2003 public offering ($190M net proceeds) on the balance sheet and debt reduction targets.
• Interest Rate Hedging: Assess the effectiveness and fair value adjustments of the $485 million notional amount of interest rate swaps held.
• Working Capital Trends: Monitor the $59 million use of cash for working capital in the first nine months of 2003 and its impact on future liquidity.