EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended Sept 30, 2005)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. for the period ended September 30, 2005. The company operates in two primary segments: Synthetic Graphite (graphite electrodes, cathodes, advanced materials) and Other (natural graphite, carbon electrodes, refractories). The company is highly leveraged and has been actively managing its capital structure through debt refinancing and restructuring initiatives.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4% year-over-year (YoY) to $640 million, driven by higher average selling prices for graphite electrodes and growth in cathodes and advanced materials, partially offset by lower electrode volumes.
• Profitability: Net income improved significantly to $23 million from $8 million. This was largely due to a lower effective tax rate (28% vs. 80% in 2004) and the absence of a $25 million non-cash tax charge recorded in Q3 2004.
• Operating Expenses: Selling, administrative, and other expenses increased to $74 million from $68 million, primarily due to higher Sarbanes-Oxley compliance costs and selling expenses.
• Currency Impact: The company incurred $12 million in currency losses in the first nine months of 2005, compared to $2 million in 2004, primarily due to the remeasurement of Euro-denominated intercompany loans.
• Debt Levels: Total debt increased to $720 million. The company utilized its Revolving Facility (net borrowing of $50 million) to fund working capital needs, specifically inventory buildup.

Guidance, Outlook, and Risks

• 2005 Outlook: Management expects full-year net sales to increase over 5% compared to 2004. The average graphite electrode revenue per metric ton is expected to be approximately $2,850 (low end of guidance) due to currency weakness. The effective tax rate is expected to be 38-40%.
• 2006 Outlook: Anticipates strong growth in Electric Arc Furnace (EAF) steel capacity, particularly in China and Russia. Production cost increases for 2006 are projected to be 10-12%, mitigated by productivity initiatives.
• Restructuring: Subsequent to the reporting period, the company announced plans to relocate its Corporate Headquarters and reduce administrative activities in Switzerland, expecting $2-3 million in additional restructuring charges in the next 12 months.
• Liquidity: The company maintains a $215 million Revolving Facility with $157 million available. Management emphasizes deleveraging and asset sales to manage high leverage.
• Risks: Key risks include high leverage, volatility in steel production demand, raw material cost inflation (natural gas, petroleum coke), and currency exchange rate fluctuations.

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: Confirm the status of the $31 million reserve for antitrust investigations and related lawsuits; note that additional claims are not currently reserved.
• Working Capital Trends: Monitor the $42 million increase in inventory and the $26 million decrease in accounts receivable to ensure inventory levels align with demand forecasts.
• Restructuring Costs: Track the execution of the Clarksville, Tennessee facility phase-out and the subsequent headquarters relocation for actual cost impacts versus the estimated $2-3 million.
• Currency Exposure: Assess the impact of the $422 million in non-dollar intercompany loans on future earnings given the volatility in the Euro and other currencies.