GrafTech International Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. GrafTech manufactures graphite electrodes and petroleum needle coke, with one reportable segment, Industrial Materials. Figures below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $475.0 | $451.9 | +5% |
| Gross profit / gross margin | $279.5 / 58.8% | $306.8 / 67.9% | Profit down 9% |
| Operating profit / operating margin | $263.6 / 55.5% | $290.4 / 64.3% | Profit down 9% |
| Net income | $197.4 | $223.7 | Down 12% |
| Diluted earnings per share | $0.68 | $0.74 | Down $0.06 |
| EBITDA from continuing operations | $278.7 | $304.8 | Down 9% |
| Adjusted EBITDA from continuing operations | $283.8 | $310.3 | Down 9% |
| Cash provided by operations | $156.8 | $140.6 | Up $16.3 |
| Capital expenditures | $14.6 | $14.0 | Up $0.5 |
- Sales volume of GrafTech-produced electrodes rose 7% to 45,000 metric tons; production volume was 48,000 metric tons. Realized price was $9,954 per metric ton, versus $9,989.
- Cost of sales increased 35% to $195.5 million, principally from higher needle-coke input costs and increased production volumes. Gross margin contracted by about 9 percentage points.
- Cash and cash equivalents were $42.3 million at quarter-end, down from $49.9 million at December 31, 2018. Working-capital changes used $71.4 million of cash, including higher receivables and tax payments.
- Total debt was $2.033 billion: $15.5 million short-term and $2.018 billion long-term. GrafTech repaid $125 million of term-loan principal during the quarter. The term loan’s effective interest rate was 6.00% at March 31.
- Reported liquidity was $287.8 million, comprising $42.3 million cash and $245.5 million of revolving-facility availability, subject to covenant compliance. The company reported no revolver borrowings and $4.5 million of letters of credit.
Material changes and business developments
- Revenue grew, mainly because of higher electrode sales volume following debottlenecking. However, higher needle-coke costs more than offset the volume benefit, reducing gross profit, operating profit, and net income.
- Long-term take-or-pay contracts generated approximately 83% of Q1 revenue, compared with 60% a year earlier. Revenue from these contracts was $396.0 million, versus $272.2 million. GrafTech reported about $4.899 billion of estimated future revenue from remaining performance obligations under such contracts, excluding contracts with an original duration of one year or less.
- The company said approximately 148,000, 145,000, 128,000, and 120,000 metric tons were contracted for 2019 through 2022, respectively, representing about 65–70% of production capacity. Debottlenecking increased stated capacity by 20% to approximately 200,000 metric tons.
- Financing cash outflow was $149.7 million, primarily the $125.0 million debt repayment and $24.7 million of dividends. Q1 2018 interest expense included unusual refinancing charges: $18.7 million accelerated accretion and a $4.8 million redemption premium; this makes the year-over-year interest comparison less representative of recurring borrowing costs.
Outlook, risks, and unusual items
- Outlook: No formal full-year earnings or revenue guidance is provided in the supplied filing text. Management targeted returning approximately 50–60% of 2019 cash flow after capital expenditures to stockholders, with the remainder used for debt repayment. The board declared a $0.085-per-share quarterly dividend for payment in June 2019.
- Management cited slowing global growth and a reduced 2019 steel-demand growth forecast outside China. It noted that graphite-electrode spot prices had declined from recent highs but remained above historical averages, while electric-vehicle battery demand was tightening needle-coke supply and increasing costs. GrafTech expected to source approximately one-third of its needle coke from third parties; higher costs were expected to continue affecting earnings.
- Key business exposures include steel-industry cyclicality, possible electrode price declines or global overcapacity, needle-coke and other input availability and prices, and floating-rate debt. A hypothetical 100-basis-point interest-rate increase would have increased Q1 interest expense by $5.3 million, according to the filing’s sensitivity analysis.
- A Brazilian employee wage-claim lawsuit remains on appeal. The company said the potential loss could be material but could not be assessed because the number of claimants and damages sought were unspecified. GrafTech also disclosed a March 2019 environmental administrative proceeding concerning potential emissions violations at its Monterrey facility; the company said it was cooperating with the state authority.
- The company recorded a $23.9 million current and $62.6 million long-term payable under its tax receivable agreement with Brookfield. It also estimated a potential $65–$90 million long-term incentive-plan liability if a qualifying change in control occurs, assuming full vesting and depending on Brookfield’s sale proceeds; awards were 60% vested at quarter-end.
- Management reported disclosure controls were effective as of March 31, 2019, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether needle-coke costs and other input inflation continue to pressure margins, and how effectively contract pricing or other measures offset those costs.
- Execution and economics of the increased production capacity, including contracted volumes, realized prices, and the share of sales under take-or-pay contracts.
- Debt repayment progress, floating-rate interest exposure, revolver availability, covenant headroom, and the planned allocation of cash flow between dividends and debt reduction.
- Developments and any quantifiable exposure in the Brazilian litigation and Monterrey environmental proceeding.
- Whether the $4.899 billion of disclosed remaining contract revenue converts to revenue and cash as expected, and the related customer, termination, and collection risks.