EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. for the period ended June 30, 2003. GrafTech is a global manufacturer of natural and synthetic graphite and carbon-based products, primarily serving the steel (graphite electrodes), aluminum (cathodes), and fuel cell/electronics industries. The company operates 13 manufacturing facilities worldwide. In 2003, the company reorganized its operations into three lines of business: Graphite Power Systems, Advanced Energy Technology, and Advanced Carbon Materials.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 21% year-over-year, driven by higher graphite electrode prices (successful price increases implemented in 2003) and increased sales volumes in synthetic graphite and advanced carbon materials.
• Profitability Improvement: The net loss narrowed significantly from $11 million to $2 million. This was aided by a $13 million impairment loss in the prior year that did not recur, and improved gross margins.
• Restructuring Charges: The company recorded $20 million in restructuring charges in the first half of 2003 (compared to $5 million in 2002). This included $11 million for the closure of a U.S. non-qualified defined benefit plan and $9 million for organizational changes/severance.
• Debt Reduction: Total debt decreased by approximately $22 million from the prior year-end due to debt-for-equity exchanges and asset sales.

Guidance, Outlook, and Risks

• Outlook: Management expects to operate graphite electrode and cathode plants at capacity for the remainder of 2003. They target interest expense of approximately $50 million for 2003 and an effective tax rate of 40%.
• Liquidity: The company remains highly leveraged with a stockholders' deficit. Liquidity depends on cash flow from operations and the revolving credit facility. Management believes it will remain in compliance with financial covenants for 2003.
• Antitrust Contingencies: A significant risk remains regarding antitrust investigations. The company has a reserve of $350 million for related liabilities. As of June 30, 2003, $94 million remained in the reserve, covering the balance of the U.S. DOJ fine and the EU Competition Authority fine (approx. $58 million), which is currently under appeal.
• Legal Proceedings: The company is pursuing a lawsuit against former parents (Mitsubishi and Union Carbide) seeking over $1.5 billion in damages, though the outcome is uncertain.
• Subsequent Events: In July and August 2003, the company exchanged an additional $30 million of Senior Notes for common stock and entered into a new $500 million interest rate swap.

Investor Verification Checklist

• Antitrust Reserve Adequacy: Verify if the remaining $94 million reserve is sufficient to cover the EU fine and other potential settlements, given the uncertainty of the appeal outcome.
• Covenant Compliance: Monitor the company's ability to maintain the required interest coverage and leverage ratios under the Senior Facilities, especially given the high debt load.
• Price Sustainability: Assess whether the recent price increases for graphite electrodes can be maintained without eroding sales volume in a recovering global economy.
• Debt-for-Equity Impact: Review the dilution effects of the ongoing exchanges of Senior Notes for common stock.
• Cost Savings Realization: Track the realization of the targeted $30 million in annual cost savings from the 2002 restructuring plan.