GrafTech International Ltd. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. GrafTech manufactures graphite electrodes, primarily for electric arc furnace steelmaking, and petroleum needle coke. Its single reportable segment is Industrial Materials.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $363.6 million | $330.8 million | $729.9 million | $635.1 million |
| Gross profit / margin | $162.2 million / 44.6% | $128.9 million / 39.0% | $337.2 million / 46.2% | $286.9 million / 45.2% |
| Operating income / margin | $143.4 million / 39.4% | $52.1 million / 15.7% | $296.3 million / 40.6% | $189.0 million / 29.8% |
| Net income | $115.0 million | $28.2 million | $239.2 million | $127.0 million |
| Diluted EPS | $0.44 | $0.11 | $0.92 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $158.2 million | $159.9 million | $327.8 million | $314.9 million |
Q2 revenue increased 10%; first-half revenue increased 15%. Higher non-LTA pricing was the main driver, partly offset in Q2 by a shift in sales mix from LTAs to non-LTAs. First-half sales volume rose 8%. Q2 sales volume was 42.3 thousand metric tons, including 24 thousand LTA tons at a weighted-average realized price of $9,600 per ton and 18 thousand non-LTA tons at $6,000 per ton. Non-LTA realized prices were 46% higher year over year in Q2.
Reported profit comparisons are affected by unusually large 2021 Change in Control compensation charges: $57.3 million across cost of sales and selling and administrative expenses in Q2 2021, plus $14.7 million of accelerated stock compensation. Excluding specified adjustments, Q2 adjusted EBITDA was slightly lower year over year; first-half adjusted EBITDA increased about 4%.
Cash flow and liquidity: First-half operating cash flow was $206.4 million, versus $208.8 million a year earlier. Inventory growth used $104.7 million of cash, compared with a $7.8 million source in the prior-year period. Capital expenditures were $29.3 million; investing cash outflow was $29.2 million. Financing cash outflow was $178.9 million, including $110.0 million of debt repayments and $60.0 million of share repurchases. Cash ended at $55.8 million, versus $57.5 million at year-end 2021.
At June 30, 2022, total debt was approximately $920.5 million, down from $1.03 billion at December 31, 2021. The company reported total liquidity of $381.6 million: $55.8 million cash and $325.8 million available under its revolving facility. The revolver had no borrowings outstanding; $4.2 million of letters of credit was issued against it. GrafTech reported compliance with debt covenants.
Current assets were $748.8 million, including $396.7 million of inventory; current liabilities were $274.0 million. Stockholders’ equity was $195.2 million. The company repurchased 6.7 million shares for $60 million in the first half and paid quarterly dividends of $0.01 per share.
Outlook, commentary, and risks
- Management expected second-half 2022 weighted-average non-LTA pricing to be comparable to first-half pricing. It expected costs to rise at a similar rate in Q3 as the 7% sequential increase reported in Q2; Q2 costs were 21% higher year over year, driven particularly by needle coke, energy, and freight inflation.
- Management estimated 2022 LTA shipments of 90–100 thousand metric tons and LTA revenue of $860–$960 million, including expected termination fees. Estimated LTA revenue was $200–$255 million for 2023 and $130–$165 million for 2024. Contract revenue may vary with customer performance, force majeure, arbitration, credit risk, and demand.
- Expected full-year 2022 capital expenditures were $70–$80 million. Management said its primary use of cash for the balance of 2022 was expected to be debt repayment. It also had $99 million remaining under its share-repurchase authorization.
- GrafTech issued force majeure notices for certain LTAs affected by the Russia-Ukraine conflict; some counterparties challenged the notices. The company stated it intended to enforce its contractual rights. Global steel conditions, inflation, raw-material and energy availability, foreign exchange, and economic downturns could affect results and cash flow.
- In an ongoing customer arbitration, claimants revised their damages calculation to $161.5 million including interest in a July 29, 2022 filing, after previously seeking approximately $61 million plus interest. GrafTech said it had valid defenses and would vigorously defend the claims. A separate Brazilian employee litigation could be material, but the company could not assess potential loss because the claims did not specify claimant numbers or damages.
- Management said it had adequate liquidity for at least the next twelve months. The filing cautions that forward-looking estimates are subject to risks and are not assurances of actual performance. No specific EPS or adjusted EBITDA guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether non-LTA prices and volumes hold up as steel-market utilization and demand change, and whether inflationary input costs continue to pressure margins.
- Whether LTA revenue and shipment estimates are affected by force majeure disputes, customer non-performance, termination fees, or arbitration outcomes.
- Progress on debt reduction and cash generation, particularly the effect of inventory and other working-capital needs on operating cash flow.
- Developments and potential financial exposure in the customer arbitration and Brazilian employee litigation; the Brazilian claims’ potential loss is not currently quantifiable.
- Whether the $70–$80 million capital-spending outlook and stated debt-repayment priority are maintained, alongside any further share repurchases or dividends.