EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Q1 2005)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. for the period ended March 31, 2005. The company operates in three primary lines of business: synthetic graphite (serving steel, aluminum, and semiconductor industries), natural graphite (serving electronics and automotive industries), and advanced carbon materials. Effective April 1, 2005, the company realigned its segments into "Graphite Electrode" and "Advanced Carbon Solutions," with the natural graphite line remaining unchanged.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7% to $211 million, driven primarily by higher average selling prices for graphite electrodes (up to $2,815/ton from $2,485/ton) and increased sales of advanced synthetic graphite materials. This offset a decline in graphite electrode volume (47,300 tons vs. 50,600 tons).
• Profitability: The company returned to profitability with $2 million in net income, compared to break-even in Q1 2004. Gross margin improved slightly to 23.0%.
• Expense Reductions: Significant one-time charges present in Q1 2004 were absent in Q1 2005, including $1 million in restructuring charges and $1 million in antitrust investigation charges. However, interest expense increased to $12 million from $7 million due to higher average debt levels and interest rates.
• Currency Impact: The company incurred $7 million in currency exchange losses in Q1 2005, primarily due to the weakening U.S. dollar against the Euro, South African Rand, and Brazilian Real. This negatively impacted cost of sales by approximately $4 million.
• Cash Flow Improvement: Cash used in operating activities improved significantly to $13 million from $153 million in the prior year, largely due to the absence of a $71 million provisional payment for EU antitrust fines in the current quarter.

Guidance, Outlook, and Risks

• 2005 Outlook: Management expects net sales to increase over 10% in 2005. Average graphite electrode revenue per metric ton is projected to be $2,900–$3,000 (15–20% higher than 2004), though sales volume is expected to be 6% lower. Production costs are expected to rise 10–12% due to inflation and currency effects.
• Capital Expenditures: Estimated at $45–$50 million for 2005.
• Tax Rate: The effective tax rate is expected to be between 36% and 38% for 2005.
• Liquidity: The company remains highly leveraged with a stockholders' deficit of $65 million. It maintains a $215 million Revolving Facility with $183 million available. Management expects to remain in compliance with all debt covenants.
• Legal Contingencies: A $40 million reserve remains for antitrust investigations and related lawsuits. The company has decided not to appeal the dismissal of its lawsuit against former parents Mitsubishi and Union Carbide, having incurred approximately $7 million in legal fees.
• Market Risks: Significant exposure to currency exchange rates and interest rate fluctuations. The company utilizes interest rate swaps and caps to manage debt exposure, capping effective rates at 11.3%.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the maximum net senior secured debt leverage ratio and minimum interest coverage ratio under the Revolving Facility.
• Antitrust Reserves: Monitor the $40 million reserve for antitrust liabilities and any potential new claims from foreign customer lawsuits.
• Currency Hedging: Assess the impact of continued currency volatility on cost of sales, given that production costs are largely outside the U.S. while raw materials (coke) are priced in dollars.
• Segment Realignment: Review Q2 2005 reporting for the new "Graphite Electrode" and "Advanced Carbon Solutions" segments to ensure comparability with historical data.
• Working Capital: Monitor inventory levels, which increased by $22 million in Q1 2005, to ensure they align with production stability initiatives and do not signal demand softness.