GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended Sept 30, 2004)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. for the period ended September 30, 2004. GrafTech is a global manufacturer of synthetic and natural graphite and carbon products, primarily serving the steel, aluminum, electronics, and power generation industries. The company operates three main lines of business: Synthetic Graphite, Natural Graphite, and Advanced Carbon Materials.
Key Financial Metrics
| Metric (in millions) | 9 Months Ended Sept 30, 2004 | 9 Months Ended Sept 30, 2003 | 3 Months Ended Sept 30, 2004 |
|---|---|---|---|
| Net Sales | $616 | $524 | $206 |
| Gross Profit | $153 | $123 | $54 |
| Gross Margin | 24.8% | 23.5% | 25.9% |
| Net Income (Loss) | $8 | $4 | $(10) |
| Diluted EPS | $0.08 | $0.06 | $(0.10) |
| Cash and Equivalents | $61 (Sept 30, 2004) | $34 (Dec 31, 2003) | - |
| Total Debt | $696 (Sept 30, 2004) | $535 (Dec 31, 2003) | - |
| Operating Cash Flow | $(142) | $(54) | - |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18% year-over-year for the nine-month period, driven by higher volumes and prices in the Synthetic Graphite segment due to strong global steel production.
- Profitability: While the nine-month period showed a net income of $8 million (up from $4 million), the third quarter resulted in a net loss of $10 million compared to a $6 million profit in the prior year's third quarter.
- Debt Structure: Total long-term debt increased significantly to $695 million from $534 million. This was primarily due to the issuance of $225 million in Debentures in January 2004. Proceeds were used to repay term loans, make provisional payments on EU antitrust fines, and replace cash previously generated from factoring receivables.
- Working Capital: Operating cash flow was negative $142 million, heavily impacted by $80 million in payments for antitrust investigations and lawsuits, $15 million in restructuring payments, and a $45 million reduction in accounts receivable factoring.
Guidance, Outlook, and Risks
- Outlook: Management expects net sales to increase by over 10% in 2004 compared to 2003. Average sales revenue per metric ton of graphite electrodes is expected to be approximately $2,500 for 2004, rising to between $2,700 and $2,800 for 2005.
- Antitrust Contingencies: The company maintains a $46 million reserve for antitrust liabilities. A significant portion of the remaining reserve is allocated to the U.S. DOJ fine. The company is also defending foreign customer lawsuits which could result in material damages.
- Legal Proceedings: GrafTech is pursuing a lawsuit against former parents Mitsubishi Corporation and Union Carbide Corporation seeking over $1.5 billion in damages related to 1995 price-fixing activities. The lawsuit was dismissed in January 2004, and the company has appealed.
- Tax Impact: A non-cash tax charge of $25 million in the third quarter resulted from a tax planning strategy that accelerated the use of deferred tax assets, significantly impacting the effective tax rate for the quarter (141%).
- Liquidity: The company remains highly leveraged. It relies on cash flow from operations, the Revolving Facility (with $200 million available), and asset sales to service debt. Compliance with financial covenants is critical.
Investor Verification Checklist
- Antitrust Reserve Adequacy: Verify if the remaining $46 million reserve is sufficient to cover the DOJ fine balance and potential outcomes of pending foreign customer lawsuits.
- Debt Covenants: Confirm continued compliance with the Senior Facilities' financial covenants, specifically the maximum net senior secured debt leverage ratio and minimum interest coverage ratio.
- Raw Material Costs: Monitor the impact of rising needle coke and energy costs on 2005 margins, as the company expects a 10-15% increase in average needle coke prices.
- EPS Dilution: Note the potential impact of new EITF rules (Issue 04-8) on diluted EPS calculations regarding the contingent convertible Debentures, which could reduce EPS by approximately $0.04 to $0.05 for 2004.
- Asset Sales: Track progress on the target of $20 million in additional non-strategic asset sales through 2005 to support debt reduction.