GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended June 30, 2002)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. (formerly UCAR International Inc.) for the period ended June 30, 2002. The company is a global manufacturer of graphite and carbon-based products, primarily serving the steel, aluminum, fuel cell, and electronics industries. The company operates through two divisions: Graphite Power Systems and Advanced Energy Technology. During the period, the company completed a corporate realignment and changed its name to GrafTech International Ltd.
Key Financial Metrics
| Metric (in millions) | Six Months Ended June 30, 2002 | Six Months Ended June 30, 2001 |
|---|---|---|
| Net Sales | $299 | $342 |
| Gross Profit | $67 | $100 |
| Gross Margin | 22.4% | 29.2% |
| Net Loss | $(11) | $(36) |
| Diluted Loss Per Share | $(0.20) | $(0.80) |
| Cash Flow from Operations | $(36) | $1 |
| Total Debt | $710 | $638 (Dec 31, 2001) |
| Cash and Equivalents | $51 | $38 (Dec 31, 2001) |
| Stockholders' Deficit | $(348) | $(332) (Dec 31, 2001) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 13% year-over-year to $299 million, driven by lower volumes and prices for graphite electrodes and reduced sales in the Advanced Energy Technology division, partially offset by a 16% increase in cathode sales.
- Margin Compression: Gross margin declined to 22.4% from 29.2% due to lower average selling prices and higher production costs relative to sales volume.
- Improved Net Loss: Net loss improved significantly to $11 million from $36 million in the prior year, primarily due to the absence of a $58 million restructuring and impairment charge recorded in the 2001 second quarter.
- Debt Restructuring: The company issued $550 million in Senior Notes (10.25% interest) in February and May 2002. Proceeds were used to repay term loans under the Senior Facilities and reduce the revolving credit facility balance to zero.
- Impairment Charges: A $13 million non-cash impairment charge was recorded in Q2 2002 related to carbon electrode assets in Tennessee due to depressed demand in the silicon metal market.
Guidance, Outlook, and Risks
- Cost Savings Plan: Management announced a major cost savings plan targeting $80 million in recurring annual savings by the end of 2004. This includes mothballing the Caserta, Italy plant and expanding capacity in Mexico, France, and Spain.
- Market Outlook: Management believes global economic weakness bottomed in the first half of 2002. Graphite electrode demand is expected to remain stable with modest price increases in the second half. Carbon electrode demand remains depressed.
- Liquidity and Covenants: The company is highly leveraged with a stockholders' deficit of $348 million. Liquidity depends on cash flow from operations and the revolving credit facility. The company is currently in compliance with financial covenants under its Senior Facilities, but failure to comply could trigger a default.
- Antitrust Contingencies: A significant risk remains regarding antitrust investigations. The company has a $101 million reserve for fines and settlements (total reserve established at $350 million). A $50 million fine from the EU Competition Authority is under appeal, and payment terms are being negotiated. Additional civil lawsuits regarding carbon electrodes and cathodes are pending.
- Legal Action: The company is pursuing a lawsuit against former parents (Mitsubishi and Union Carbide) seeking over $1.5 billion in damages related to the 1995 recapitalization and price-fixing activities.
Investor Verification Checklist
- Antitrust Reserve Adequacy: Verify if the $101 million remaining reserve is sufficient to cover the EU fine, DOJ payments, and potential civil lawsuit settlements.
- Covenant Compliance: Monitor the company's ability to maintain the required interest coverage and leverage ratios under the Senior Facilities, especially given the high interest rate on the new Senior Notes.
- Cost Savings Realization: Track the progress of the $80 million cost savings plan, specifically the mothballing of the Italian plant and the expansion of lower-cost facilities.
- Carbon Electrode Market: Assess the recovery timeline for the silicon metal market, which drives demand for the impaired carbon electrode assets.
- Legal Proceedings: Monitor the status of the lawsuit against former parents and the outcome of the EU antitrust appeal.