GrafTech International Ltd. (NYSE: EAF) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. GrafTech manufactures graphite electrodes used in electric-arc-furnace steelmaking and produces petroleum needle coke, a key electrode raw material. Its only reportable segment is Industrial Materials.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $159.0 million | $303.8 million | $483.4 million | $1,033.7 million |
| Gross profit (margin) | $1.4 million (0.9%) | $133.7 million (44.0%) | $55.9 million (11.6%) | $470.9 million (45.5%) |
| Operating income (loss) | $(18.1) million | $114.1 million | $(6.7) million | $410.4 million |
| Net income (loss) | $(22.6) million | $93.5 million | $(37.8) million | $332.6 million |
| Diluted EPS | $(0.09) | $0.36 | $(0.15) | $1.28 |
| Adjusted EBITDA | $0.9 million | $128.6 million | $42.1 million | $456.4 million |
| Cash from operations | $51.5 million | $68.2 million | $67.3 million | $274.6 million |
- Q3 sales declined 48% year over year; nine-month sales declined 53%. Management attributed the weakness to soft electrode demand, lower volume, a shift from long-term-agreement (LTA) sales toward non-LTA sales, and lower realized prices.
- Q3 sales volume was 24.2 thousand metric tons, down 32%; production was 22.7 thousand metric tons, down 40%. Capacity utilization was 41%, versus 69% a year earlier.
- Q3 realized prices were $8,650 per metric ton for LTA volume and approximately $5,400 for non-LTA volume; the latter was approximately $6,000 in Q3 2022.
- Cash cost of goods sold per metric ton increased to $5,863 in Q3 from $4,290. Reduced production led to $23.3 million of excess fixed manufacturing costs in Q3 and $48.7 million for the first nine months, recognized rather than inventoried. Higher-cost raw materials, energy and freight also weighed on costs.
- Interest expense was $15.7 million in Q3 and $42.4 million for the first nine months, up from $6.4 million and $25.0 million, respectively. The increase reflects the 9.875% 2023 notes and changes in interest-rate-swap gains.
Liquidity, debt and capital allocation
- At September 30, cash and equivalents were $172.8 million. Reported liquidity was $285.1 million, including $112.3 million of available revolving-credit capacity; management said operating performance had reduced that availability. The company reported compliance with debt covenants.
- Gross debt was approximately $950.3 million; balance-sheet debt was $924.5 million after unamortized discounts and issuance costs. In June, GrafTech issued $450 million of 9.875% secured notes due 2028 and used the proceeds to repay its $433.7 million term loan. The existing $500 million 2020 secured notes bear 4.625% and are also due 2028.
- Nine-month capital expenditures were $48.3 million. Operating cash flow less capital expenditures was $19.0 million; adjusted free cash flow, including swap settlements, was $46.4 million. Cash increased $38.1 million from year-end 2022.
- The board suspended the quarterly $0.01 dividend on August 2, 2023. No shares were repurchased in the first nine months; $99.0 million remained under the repurchase authorization.
Outlook, commentary and risks
- Management expects near-term electrode demand to remain weak and Q4 2023 sales volume to decline modestly from Q3. It expects Q4 cash cost per metric ton below Q3 but above Q4 2022, and continues to expect a significant full-year increase year over year.
- 2023 capital expenditures are expected to be $55–$60 million. Management expects positive operating cash flow and adjusted free cash flow for 2023 and does not anticipate drawing on the revolver for the rest of the year.
- Estimated LTA volume and revenue for 2023 are 28–29 thousand metric tons and $245–$255 million; for 2024, 13–16 thousand metric tons and $100–$135 million. The 2024 revenue estimate includes expected termination fees from some customers. Actual results may vary due to customer performance, force majeure, arbitration, credit risk and demand within contract ranges.
- Management cited long-term potential from increased EAF steelmaking and demand for needle coke in synthetic graphite for EV batteries, while noting current economic and industry uncertainty. It temporarily idled needle-coke production at Seadrift in Q3 and reduced electrode production to align output with demand and manage working capital.
- CEO and President Marcel Kessler was expected to resign effective November 15, 2023; CFO Timothy Flanagan was expected to become interim CEO, and Catherine Hedoux-Delgado interim CFO. Kessler was to remain on the board.
- Material contingencies include customer arbitration claims revised to approximately $188.2 million, which GrafTech disputes, and Mexican VAT matters involving a $26.5 million assessment and a proposed assessment of approximately $51.0 million. The company says it believes its VAT treatment is appropriate and does not consider a loss probable. A Brazilian employee litigation matter has an unquantified potential loss.
- Key risks include weak steel and electrode markets, elevated unit costs from underutilized capacity, customer and LTA performance, substantial secured debt and restricted revolver availability, restrictive debt covenants, and the pending legal and tax matters. The company says dividends may remain suspended.
Important facts for investors to verify
- Whether sales volumes, realized prices and Q4 demand develop in line with management’s outlook.
- Available revolver capacity, covenant headroom and the company’s ability to service debt carrying higher interest costs.
- Actual LTA deliveries and revenue, including the treatment and collectability of expected termination fees.
- Developments and potential financial exposure in the customer arbitration, Mexican VAT disputes and Brazilian litigation.
- Whether cash generation supports planned capital spending and whether or when the dividend could resume.