GrafTech International Ltd. — Q1 2022 Form 10-Q
Business and period: GrafTech manufactures graphite electrodes and petroleum needle coke, serving electric-arc-furnace steel producers and other metals markets. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise stated. GrafTech has one reportable segment, Industrial Materials.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $366.2 million | $304.4 million | +20% |
| Gross profit / margin | $175.0 million / 47.8% | $158.0 million / 51.9% | Profit +11%; margin down |
| Operating income / margin | $152.9 million / 41.7% | $136.9 million / 45.0% | Income +12%; margin down |
| Net income | $124.2 million | $98.8 million | +26% |
| Diluted EPS | $0.47 | $0.37 | Up $0.10 |
| Adjusted EBITDA (non-GAAP) | $169.6 million | $155.0 million | +9% |
| Operating cash flow | $146.3 million | $122.4 million | +$23.9 million |
| Capital expenditures | $16.9 million | $14.2 million | +$2.8 million |
Revenue growth reflected stronger demand and higher non-LTA prices. Sales volume was 43,000 metric tons, up 16%; production volume was 46,000 metric tons, up 28%. LTA volume was 25,000 metric tons at an average realized price of $9,600 per metric ton; non-LTA volume was 18,000 metric tons at $6,000 per metric ton. Non-LTA prices recognized in Q1 were 43% above Q1 2021 and 19% above Q4 2021. LTA revenue was $242.5 million versus $245.6 million; non-LTA revenue was $108.1 million versus $47.3 million.
Cash, debt and liquidity
- Cash and cash equivalents were $85.1 million at March 31, 2022, up from $57.5 million at year-end. Total liquidity was $330.8 million, including $245.7 million available on the revolving facility, subject to covenant compliance.
- Total debt was approximately $961.4 million, down from approximately $1.03 billion at December 31, 2021. GrafTech repaid $70 million of term-loan principal during the quarter. The $500 million senior secured notes bear fixed interest at 4.625% and mature in 2028; the term loan matures in 2025.
- Cash from operations was $146.3 million; investing used $16.8 million and financing used $103.5 million. Financing included $70 million of debt repayments and $30 million of share repurchases. Working capital provided $12.6 million, but inventory absorbed $24.2 million of cash.
- Management said it expects positive sustained operating cash flow and believes liquidity is adequate for at least the next 12 months. It expects debt repayment to remain the primary use of cash.
Material changes and unusual items
- Cost of sales rose 31%, faster than sales, reflecting 16% higher sales volume and a 15% increase in costs. Gross margin declined from 51.9% to 47.8% amid inflation, particularly in needle coke and other carbon-based inputs, energy and freight.
- Interest expense fell by $13.0 million, largely because of lower variable-rate debt and a $3.9 million mark-to-market gain following the de-designation of a $250 million interest-rate swap. The gain is an unusual item and affected reported earnings.
- Q1 included a $30 million repurchase of 3.04 million shares at an average $9.88 per share; $129.0 million remained under the authorization. Quarterly dividends were $0.01 per share.
- Accumulated other comprehensive income improved to $12.5 million from a $7.4 million loss, principally reflecting derivative and currency movements.
Outlook, risks and contingencies
- Management expects Q2 2022 average non-LTA pricing to be consistent with Q1. It expects costs to continue rising during the rest of 2022, but at a lower rate than in Q1 as mitigation actions take effect.
- Full-year 2022 capital expenditures are expected to be $70–$80 million. Estimated LTA shipments are 90,000–100,000 metric tons in 2022 and 40,000–50,000 metric tons in 2023–2024. Estimated LTA revenue is $860–$960 million in 2022 and $400–$500 million in 2023–2024; figures include expected termination fees from certain customers. Timing and amounts depend on performance, demand, credit risk and other contract factors. The filing does not provide clear full-year EPS or adjusted EBITDA guidance.
- GrafTech issued force majeure notices for certain LTAs serving Russian customers because of the Russia-Ukraine conflict. Management also cited COVID-19, inflation, supply-chain disruptions, raw-material and energy costs, steel-market cyclicality, pricing, foreign exchange, interest rates and customer contract performance as risks.
- Customer arbitrations include a claim seeking approximately $61 million plus interest relating to fixed-price LTAs; GrafTech says it has valid defenses and intends to defend its rights. A Brazilian employee-related proceeding could be material, but the company said it could not assess the potential loss because the claimants and damages were unspecified. Other legal matters were not expected by management to have a material adverse effect.
- The company reported no material changes to the risk factors in its 2021 Form 10-K. Management concluded disclosure controls were effective as of March 31, 2022, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether non-LTA pricing and demand remain strong enough to offset continued cost inflation and protect margins.
- Realization and timing of forecast LTA volumes and revenue, including customer performance, termination fees and the effect of Russia-related force majeure notices.
- Working-capital and inventory requirements, cash conversion, and progress on debt reduction relative to repurchases, dividends and planned capital spending.
- Exposure to floating rates and the effects of interest-rate swaps, including the nonrecurring $3.9 million gain in Q1.
- Developments in the $61 million customer arbitration and the unquantified Brazilian employee litigation, as well as compliance with debt covenants and availability of revolving-credit liquidity.