EAF

GRAFTECH INTERNATIONAL LTD. - 2004 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2004. GrafTech International Ltd. (GTI) is the world's largest manufacturer of graphite electrodes, essential for electric arc furnace (EAF) steel production, and a leading producer of natural graphite products for electronics and fuel cells, as well as cathodes for the aluminum industry. The company operates 13 manufacturing facilities across four continents. In 2004, GTI reported a return to profitability, driven by strong global steel demand and improved pricing for graphite electrodes.

Key Financial Metrics (2004)

Note: Operating cash flow was negative primarily due to significant payments for antitrust fines ($83 million) and restructuring ($17 million), as well as a reduction in accounts receivable factoring.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 19% to $848 million, driven by an 18% increase in the Synthetic Graphite segment. This was due to higher graphite electrode volumes (222,000 metric tons vs. 200,500 in 2003) and higher average selling prices ($2,515/ton vs. $2,344/ton).
• Profitability: The company returned to net income ($17 million) from a net loss ($24 million) in 2003. Gross margin expanded to 24.7%.
• Antitrust Impact: GTI recorded an $11 million benefit related to antitrust matters, primarily due to a $12 million refund from the EU Competition Authority following a reduction of the EU antitrust fine. This offset a $1 million charge for additional potential liabilities.
• Debt Structure: Total debt increased to $673 million following the issuance of $225 million in 1.625% Convertible Senior Debentures in January 2004. Proceeds were used to repay term loans and make provisional payments on the EU antitrust fine.
• Restructuring: Unlike 2003, which saw $20 million in charges, 2004 recorded a nominal net restructuring benefit due to reductions in cost estimates for facility closures in Italy.

Guidance, Outlook, and Risks

2005 Outlook:

• Sales: Expected to increase over 10% compared to 2004.
• Pricing: Average graphite electrode revenue per metric ton is projected to be between $2,900 and $3,000 (15-20% higher than 2004).
• Volumes: Graphite electrode sales volume expected to be approximately 210,000 metric tons.
• Costs: Production costs expected to rise 10-12% due to inflation in raw materials (coke, energy) and currency exchange rates.
• Tax Rate: Effective tax rate expected to be 36-38%.

Key Risks and Contingencies:

• Antitrust Liabilities: A remaining reserve of $43 million exists for the U.S. DOJ antitrust fine. Total historical charges for antitrust matters reached $383 million. Pending lawsuits from foreign customers remain a risk.
• Leverage: The company is highly leveraged with a stockholders' deficit. Compliance with financial covenants (interest coverage and leverage ratios) under the Revolving Facility is critical.
• Raw Materials: Significant exposure to price fluctuations in petroleum coke and energy. GTI has secured most 2005 needle coke volume requirements.
• Legal Proceedings: GTI is pursuing a lawsuit against former parents (Mitsubishi and Union Carbide) seeking over $1.5 billion, though the outcome is uncertain.

Investor Verification Checklist

• Antitrust Reserve Adequacy: Verify if the $43 million reserve is sufficient to cover the remaining DOJ fine payments and potential interest, given the history of additional charges.
• Covenant Compliance: Monitor quarterly reports to ensure continued compliance with the Revolving Facility's interest coverage and leverage ratios, especially given the high debt load.
• Raw Material Hedging: Confirm the extent of price protection for petroleum coke and energy in 2005, as cost increases are projected at 10-12%.
• Cash Flow Sustainability: Assess whether operating cash flow can turn positive in 2005 without the large one-time antitrust payments that drove the 2004 negative cash flow.
• Debt-for-Equity Exchanges: Track future exchanges of Senior Notes for common stock, which impact debt levels and share count (dilution).