GrafTech International Ltd. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Brookfield acquired GrafTech in August 2015. The filing presents January 1–August 14 as the “Predecessor” period and August 15–December 31 as the “Successor” period, with purchase-accounting changes; results across those periods and against prior years are therefore not fully comparable.
Business context
GrafTech manufactures graphite electrodes, needle coke and refractory products for steel and metals markets, as well as engineered graphite, composite and electronics products. Industrial Materials accounted for about 78% of 2015 sales. Brookfield became the indirect sole owner following its tender offer and merger.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $686.7 million | $1,085.3 million |
| Gross profit / gross margin | $56.9 million / 8.3% | $92.2 million / 8.5% |
| Operating loss | $105.2 million | $255.6 million |
| Net loss | $154.2 million | $285.4 million |
| Operating cash flow | $51.4 million | $120.9 million |
| Capital expenditures | $50.7 million | $85.0 million |
| Cash and cash equivalents at year-end | $6.9 million | $17.6 million |
2015 totals combine the two reported periods. Sales fell about 37% from 2014; this comparison is affected by the change in accounting basis after the acquisition, though management attributed the decline chiefly to weaker volumes and pricing. Cash flow from operations remained positive, supported in part by working-capital reductions, including inventory reductions.
Debt and liquidity: Year-end debt principal was approximately $394.6 million; the balance sheet reports total debt carrying value of $367.2 million, including $362.5 million long-term and $4.8 million short-term. The company had $98.0 million drawn under its secured revolving facility and approximately $205 million of unused capacity after covenant restrictions and letters of credit. It reported $811 million of stockholders’ equity. No cash dividends were paid in 2015.
Material changes versus prior period
- Industrial Materials sales were $535.2 million in 2015 versus $840.1 million in 2014; Engineered Solutions sales were $151.5 million versus $245.2 million. Management reported declines in both segments, with lower electrode volumes and prices, adverse currency effects, and weaker engineered-products demand.
- Operating and net losses narrowed from 2014, when results included $197.2 million of impairment charges. In 2015, GrafTech recorded a further $35.4 million goodwill impairment for needle coke, along with rationalization costs.
- GrafTech issued $150 million of preferred stock to Brookfield and used the proceeds, together with borrowings and other funds, to repay the $200 million Senior Subordinated Notes in August 2015. The $300 million principal Senior Notes due 2020 remained outstanding; their year-end carrying value was $267.8 million.
- Year-end cash was lower and revolving borrowings higher than in 2014. The company reduced inventory and continued facility, workforce and cost rationalizations.
Outlook, risks and unusual items
- Management described difficult steel-market conditions: steel imports, excess capacity and lower iron-ore costs favored blast-furnace production over EAF steel, pressuring electrode demand, pricing and volumes. The filing cited World Steel Association forecasts of 0.7% global steel-demand growth for 2016, but did not provide specific company revenue or earnings guidance.
- GrafTech was compliant with its credit-facility covenants at December 31, 2015, but said it was uncertain it could remain compliant throughout 2016 under prevailing industry conditions. It planned to seek a lender amendment; no assurance was given that an amendment, waiver or refinancing would be available on acceptable terms.
- Moody’s downgraded the Senior Notes from B1 to Caa1 in January 2016. Other key risks include substantial debt, variable-rate borrowings, cyclical steel markets, competition and pricing pressure, foreign-exchange exposure, raw-material and energy supply, and potential environmental and legal liabilities.
- A Brazilian employee wage-claim action filed in October 2015 could result in material amounts including interest; GrafTech said it would vigorously defend the case. A separate Brazilian graphite-electrode antitrust investigation was terminated in October 2015 without penalties.
- GrafTech was reviewing strategic alternatives for its Engineered Solutions businesses, potentially including a sale. It also planned to temporarily idle its U.S. graphite-electrode facility in 2016 to align production with demand.
- The Brookfield transaction triggered accelerated vesting of outstanding equity awards and contributed to approximately $25 million of tender-offer and proxy-related costs in the Predecessor period. Purchase accounting reset asset and liability values, limiting year-over-year comparability.
Important facts for investors to verify
- Whether GrafTech secured the planned covenant amendment and its resulting borrowing availability and covenant headroom.
- Whether weak EAF steel demand, electrode prices and needle-coke margins stabilized or deteriorated further.
- The status, potential exposure and any subsequent developments in the Brazilian wage-claim litigation.
- Whether the Engineered Solutions strategic review resulted in a transaction and how proceeds, if any, were used.
- The reconciliation of reported 2015 results across Predecessor and Successor periods, including acquisition-related purchase-accounting effects.