GrafTech International Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. GrafTech manufactures graphite electrodes and petroleum needle coke; its single reportable segment is Industrial Materials. Results reflect the effects of COVID-19, lower steel production, reduced customer demand and weaker spot pricing.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data, volumes and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $280.7 | $480.4 | $599.4 | $955.4 |
| Gross profit / margin | $150.1 / 53.5% | $283.3 / 59.0% | $329.8 / 55.0% | $562.8 / 58.9% |
| Operating profit / margin | $133.4 / 47.5% | $267.2 / 55.6% | $297.5 / 49.6% | $530.8 / 55.6% |
| Net income | $92.8 | $196.4 | $215.0 | $393.8 |
| Diluted EPS | $0.35 | $0.68 | $0.80 | $1.36 |
| Adjusted EBITDA | $151.1 | $284.4 | $330.3 | $568.2 |
- Q2 revenue fell 42% year over year; first-half revenue declined 37%. Manufactured-electrode sales volume decreased 31% in Q2 and 28% in the first half. Q2 deliveries were 31,000 metric tons, including 26,000 under long-term agreements (LTAs); first-half deliveries under LTAs were 55,000 metric tons.
- Q2 average LTA prices were approximately 4% lower year over year, primarily due to product mix. The average Q2 price for non-LTA business was approximately $5,500 per metric ton, and management expected further spot-price erosion in Q3.
- Six-month operating cash flow was $287.7, versus $359.0 in 2019. Investing cash outflow was $24.3, mainly capital spending; financing cash outflow was $155.7. Cash increased to $187.7 from $80.9 at year-end 2019.
- At June 30, total debt was $1,712.7, comprising $1,704.5 long-term and $8.1 short-term. Cash plus $246.9 of revolver availability produced reported liquidity of $434.6. The term loan’s effective interest rate was 4.50%, compared with 5.90% at year-end.
Changes, outlook and management commentary
- Lower sales volume, weaker spot prices, reduced resale of purchased electrodes and lower use of third-party needle coke drove the revenue and profit declines. Lower interest rates and average borrowings reduced interest expense.
- Management revised expected 2020 LTA revenue to $950–$1,100, from $1,251 previously expected. After $521 recorded in the first half, it anticipated approximately $430–$580 for the remainder of 2020. The reduction reflected COVID-related customer force majeure notices and non-performance by some customers; management said some lost 2020 revenue might be recovered in future years. Contracted revenue was $1,210 for 2021, $1,144 for 2022 and $49 for 2023 and thereafter, subject to customer credit, performance and demand risks.
- Management expected low overall demand and pricing through the rest of 2020 and a measured industry recovery as the pandemic eased and customers worked through elevated electrode inventories. It targeted full-year capital expenditures of approximately $30–$35 and said most incremental 2020 free cash flow would go toward debt reduction.
- GrafTech reduced fixed production costs 15% in Q2 and 12% year to date versus 2019, aligned production to expected sales and reported a 98% on-time delivery rate. Production capacity utilization was 57% in Q2, versus 83% a year earlier.
- The company received force majeure claims from approximately 35 customers and was pursuing contract modifications and arbitrations. It reported keeping 99% of employees healthy to date and maintaining plant operations, while warning that pandemic effects remained uncertain.
- The quarterly dividend had been reduced to $0.01 per share in April; on August 5, the board declared another $0.01-per-share dividend, payable September 30. Brookfield’s ownership was approximately 75% at quarter-end and fell to 65% after a July 22 distribution.
Risks, contingencies and unusual items
- COVID-19 could further weaken demand, disrupt customers, facilities or supply chains, and affect cash flow and financing access. Other principal risks include cyclical electrode prices, steel-industry dependence, needle-coke and energy supply, foreign-exchange exposure, debt and covenant constraints, and customer non-performance.
- A Brazilian employee wage-claim proceeding could be material, but the company said it could not assess potential loss because claimant numbers and damages were unspecified. An appellate court ruled in GrafTech’s favor in May 2020; employees appealed further. The company also described customer arbitrations and a Mexican water-usage administrative proceeding.
- The company repurchased $30.1 of stock in the first half, repaid approximately $103.3 of term loans during Q2, and had $8.0 of debt repurchase commitments unsettled at quarter-end; these settled in July. A $3.3 first-quarter Tax Receivable Agreement liability reduction was recorded as a benefit following lower profit expectations. First-half other comprehensive loss was $42.1, including derivative and currency effects.
- Potential LTIP payments upon a qualifying change in control were estimated at $55–$75 assuming full vesting; awards were 80% vested at June 30. The company reported disclosure controls effective and no material Q2 change in internal control over financial reporting.
Key facts for investors to verify
- Whether customers meet LTA volume commitments and whether force majeure claims or arbitration outcomes alter the revised 2020 contract-revenue outlook.
- Whether cash generation, revolver availability and covenant compliance remain adequate as demand and prices stay weak, and how much debt is repaid.
- Actual spot pricing, sales volumes, utilization, inventory levels and progress toward the $30–$35 capital-expenditure target.
- Potential exposure from the Brazilian litigation, customer disputes and Mexican water proceeding, as well as the effects of commodity and interest-rate hedges.
- Whether the reduced dividend continues and how Brookfield’s ownership changes affect control, governance and share sales.