GrafTech International Ltd. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited. GrafTech manufactures graphite electrodes and petroleum needle coke. The former Engineered Solutions business is reported as discontinued operations.
Financial and operating results
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $456.3 million | $116.3 million | $908.2 million | $221.1 million |
| Gross profit | $290.4 million | $9.9 million | $597.2 million | $11.2 million |
| Gross margin | 63.6% | 8.5% | 65.8% | 5.1% |
| Operating income (loss) | $273.6 million | $(3.2) million | $564.0 million | $(14.4) million |
| Net income (loss) | $201.4 million | $(17.4) million | $425.1 million | $(43.7) million |
| Adjusted EBITDA from continuing operations | $292.0 million | $12.3 million | $602.3 million | $16.5 million |
| Operating cash flow | Not provided for the quarter | $377.7 million | $3.5 million |
- Q2 sales rose 292%; H1 sales rose 311%. Growth was driven mainly by realized graphite-electrode prices: $9,933/MT in Q2 and $10,027/MT in H1, versus $2,430/MT and $2,362/MT, respectively, in 2017. H1 sales volume increased 2.9% to 88,000 MT.
- H1 cost of sales increased 48% to $311.1 million, reflecting higher needle-coke and pitch costs and a $10.4 million adverse currency impact. H1 interest expense rose to $66.5 million from $15.4 million, including refinancing-related charges.
- H1 operating cash flow benefited from earnings but included a $158.6 million working-capital outflow, principally higher receivables and inventory. Capital expenditures were $28.7 million; investing cash outflow was $27.9 million.
- At June 30, cash was $166.1 million, total debt was $2.210 billion ($2.104 billion long-term and $106.4 million short-term), and stated liquidity was $409.6 million, including $243.5 million available under the revolver. Stockholders’ deficit was $991.0 million.
Material changes and notable transactions
- GrafTech completed its IPO in April 2018. The 38.1 million shares sold were shares of the pre-IPO stockholder; the company received no offering proceeds.
- In February, the company refinanced prior debt with a $1.5 billion term loan, repaid the old credit facility and redeemed its Senior Notes. In June, it borrowed an additional $750 million under the term facility to repay a $750 million promissory note issued to Brookfield. The term loans mature in 2025; the $250 million revolver matures in 2023. The term-loan effective interest rate was 5.59% at June 30.
- The company made substantial distributions to Brookfield, including a $1.112 billion dividend funded in connection with the February refinancing, a $160 million cash dividend paid in May, and a $750 million promissory-note dividend later repaid with incremental borrowing. H1 cash-flow statements report $1.291 billion of dividends paid. The distributions contributed to the shift from year-end equity of $613.2 million to a June 30 deficit.
- A $61.8 million Tax Receivable Agreement expense was recorded after a partial release of the valuation allowance on U.S. tax assets. The charge relates to Brookfield’s right to 85% of specified future tax savings; it is not described as a current-period cash payment.
Outlook, risks and contingencies
- Management said approximately 60%–65% of production capacity is targeted for three-to-five-year take-or-pay contracts. The filing lists about $5.53 billion of remaining expected revenue under such contracts, excluding contracts with original terms of one year or less. Approximately 75% of Q2 revenue and 68% of H1 revenue came from these contracts.
- Management reported Q2 capacity utilization of 100% excluding the temporarily idled St. Marys facility. A debottlenecking program is expected to increase operating capacity by about 21%, or 35,000 MT, by year-end 2018. Expected 2018 capital expenditures are $65–$70 million, including about $42 million for debottlenecking and $35 million for maintenance.
- Management noted strong demand and constrained industry supply, but expects higher raw-material costs during 2018. Needle-coke prices were described as four to six times year-earlier levels; GrafTech purchases about 25% of its needle-coke needs externally. Electrode pricing is historically cyclical, and management cautioned that prices may decline from recent record highs. No earnings or revenue guidance was provided.
- Principal risks include EAF steel demand and broader economic conditions, electrode price cyclicality and industry capacity, needle-coke and other input availability and cost, foreign exchange, floating-rate debt, and the ability to service debt and comply with covenants. A 100-basis-point interest-rate increase would have increased H1 interest expense by an estimated $6.9 million.
- A Brazilian employee wage-claim case remains on appeal; the company said it cannot assess potential loss because the claims do not specify claimant numbers or damages, and the amount could be material. Other legal matters were not expected by management to materially affect results.
- Potential LTIP payouts upon a qualifying change in control were estimated at $65–$90 million assuming full vesting; awards were 40% vested at June 30. The filing also reports no material change in risk factors from the Q1 filing.
Important facts for investors to verify
- Whether elevated electrode prices, demand, and take-or-pay contract economics persist, and how much production remains exposed to spot pricing.
- Execution, timing, cost, and realized capacity benefits of the debottlenecking program, alongside higher raw-material costs.
- Debt-service burden, floating-rate exposure, revolver availability, covenant headroom, and cash generation after working-capital needs and capital spending.
- The ultimate tax benefits and cash payments under the Tax Receivable Agreement, and the consequences of further valuation-allowance changes.
- Developments and possible exposure in the Brazilian litigation, and any change-of-control-related LTIP liability.
- The filing states ASC 606 adoption did not change reported 2018 balance-sheet, income-statement, or cash-flow amounts compared with prior revenue guidance; confirm comparability when assessing year-over-year trends.