EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Q1 2004)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004. GrafTech International Ltd. is a global manufacturer of synthetic and natural graphite and carbon products, primarily serving the steel, aluminum, electronics, and power generation industries. The company operates through three lines of business: synthetic graphite, natural graphite, and advanced carbon materials.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16% to $197 million, driven by a 16% increase in the Synthetic Graphite segment due to higher volumes (50,600 metric tons vs. 47,000) and higher average selling prices ($2,485/ton vs. $2,272/ton).
• Profitability: The company achieved breakeven net income compared to a $9 million net loss in Q1 2003. This improvement was primarily due to a significant reduction in restructuring charges ($1 million in 2004 vs. $19 million in 2003) and lower interest expense ($7 million vs. $14 million).
• Debt Restructuring: Long-term debt increased to $702 million (from $534 million at year-end 2003) following the issuance of $225 million in convertible debentures. Proceeds were used to repay term loans, make a $71 million provisional payment on the EU antitrust fine, and reduce accounts receivable factoring.
• Cash Flow: Operating cash flow usage increased significantly to $154 million, largely due to a $71 million provisional payment for the EU antitrust fine, $13 million in restructuring payments, and a $41 million reduction in accounts receivable factoring.

Guidance, Outlook, and Risks

• Outlook: Management expects net sales to increase approximately 10% in 2004. For graphite electrodes, average sales revenue per metric ton is expected to be between $2,500 and $2,525, with sales volume of approximately 210,000 metric tons.
• Antitrust Contingencies: The company maintains a $56 million reserve for antitrust liabilities. On April 29, 2004 (post-period), the EU antitrust fine was reduced on appeal to approximately €42 million plus accrued interest (approx. $59 million total). The company disputes the interest rate applied to the provisional payment.
• Liquidity Risks: The company is highly leveraged with a stockholders' deficit of $80 million. Compliance with financial covenants under the Senior Facilities is critical; failure to comply could trigger acceleration of debt maturity. The company has $197 million available under its Revolving Facility.
• Legal Proceedings: The company is pursuing a lawsuit against former parents Mitsubishi and Union Carbide seeking over $1.5 billion in damages, though the district court granted a motion to dismiss in January 2004, which the company has appealed.

Investor Verification Checklist

• Antitrust Reserve Adequacy: Verify if the $56 million reserve is sufficient given the recent EU fine reduction and ongoing interest accrual disputes.
• Covenant Compliance: Confirm continued compliance with the Senior Facilities' interest coverage and leverage ratios, given the high debt load and stockholders' deficit.
• Debt Maturity Profile: Review the maturity schedule of the $702 million in long-term debt, specifically the Senior Notes (due 2012) and Debentures (due 2024), and the impact of the new debenture interest payments starting July 2004.
• Operating Cash Flow Sustainability: Assess the ability to generate positive operating cash flow excluding one-time antitrust and restructuring payments, as Q1 2004 showed significant cash usage.
• Price Realization: Monitor the realization of announced graphite electrode price increases ($150/ton) and their impact on margins against rising energy and raw material costs.