GrafTech International Ltd. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. GrafTech manufactures graphite electrodes and petroleum needle coke; its single reportable segment is Industrial Materials. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $330.8 million | $280.7 million | $635.1 million | $599.4 million |
| Gross profit | $128.9 million | $150.1 million | $286.9 million | $329.8 million |
| Operating profit | $52.1 million | $133.4 million | $189.0 million | $297.5 million |
| Net income / diluted EPS | $28.2 million / $0.11 | $92.8 million / $0.35 | $127.0 million / $0.47 | $215.0 million / $0.80 |
| Adjusted EBITDA (non-GAAP) | $159.9 million | $151.1 million | $314.9 million | $330.3 million |
| Operating cash flow | — | $208.8 million | $287.7 million |
Quarterly gross margin was approximately 39%, versus 53% a year earlier; the six-month margin was approximately 45%, versus 55%. Reported profitability fell despite higher sales, while adjusted EBITDA increased 6% in Q2 and declined 5% for the first half. Adjusted measures exclude specified items and are not GAAP results.
Q2 sales volume was 43 thousand metric tons, up 39% year over year; production was 44 thousand metric tons, up 33%. In Q2, long-term agreement (LTA) electrode volume was 27 thousand metric tons at an average price of about $9,500 per metric ton; non-LTA volume was 16 thousand metric tons at about $4,100 per metric ton.
At June 30, cash was $114.1 million and total debt was approximately $1.225 billion, down from $1.420 billion at year-end 2020 after $200 million of first-half term-loan repayments. Reported liquidity was $360.5 million, including $246.4 million of revolving-facility availability. Operating cash flow less capital expenditures was approximately $182.7 million for the first half. The company paid $5.3 million in dividends during the period.
Material changes and unusual items
- Revenue rose 18% in Q2 and 6% for the first half, primarily on higher sales volumes and demand; lower realized electrode prices partly offset volume growth. Management attributed the prior-year comparison in part to COVID-19 market conditions.
- Cost of sales increased 55% in Q2 and 29% for the first half, reflecting higher volume and a $30.7 million LTIP charge recorded in cost of sales.
- Selling and administrative expense included $42.6 million of one-time LTIP expense and $12.9 million of accelerated stock-based compensation expense tied to a change in control. Total Q2 change-in-control adjustments used in the company’s non-GAAP reconciliation were $88.1 million: $73.4 million for LTIP awards and $14.7 million for accelerated stock compensation.
- Brookfield’s ownership fell from 55.3% at December 31, 2020 to 23.9% at June 30, 2021 following a May secondary offering. The change triggered the incentive-plan settlement; $61.5 million was paid in cash by June 30, with a further $11.9 million of payroll-tax-related liability expected to be paid in Q3.
- Interest expense declined 23% in Q2 and 18% for the first half, primarily due to lower rates and average borrowings. The term loan was repriced in February 2021, reducing its applicable margin.
Outlook, risks and contingencies
- Management expects non-LTA realized prices in Q3 2021 to increase approximately 10%–12% from Q2 and anticipates price improvement continuing into 2022. This is management’s expectation, not a guarantee.
- 2021 capital expenditure guidance remained $55–$65 million. Management expected the primary use of cash for the rest of 2021 to be debt repayment and forecast a full-year effective tax rate of approximately 16%–17%.
- Management estimated LTA revenue of $425–$525 million for the remainder of 2021, $910–$1,010 million in 2022, and $350–$450 million in 2023–2024. Estimates include expected termination fees from certain customers and depend on contract performance, arbitration outcomes, customer credit and demand.
- Customer disputes include an ICC arbitration in which Aperam and ArcelorMittal-related claimants seek approximately $61 million, alleging they should not have to honor certain LTAs; GrafTech says it has valid defenses and intends to enforce its rights. A Brazilian employee wage-related case remains pending; the potential loss could be material, but the company could not assess it because the claim does not specify claimant numbers or damages.
- A stockholder lawsuit challenges the fairness of a 2019 company share repurchase from Brookfield and a related block trade, and disputes an independent director’s appointment. The filing also cites risks including steel-industry cyclicality, electrode pricing and overcapacity, needle-coke and energy supply, COVID-19 effects, foreign exchange, debt and covenant constraints, and customer nonperformance.
- The board declared a $0.01-per-share quarterly dividend on August 4, payable September 30, 2021 to holders of record August 31. Future dividends are discretionary and subject to financial and contractual constraints.
Key facts for investors to verify
- Whether higher non-LTA prices and expected Q3 improvement materialize, and how the mix of LTA and spot sales affects margins.
- Actual cash generation after working-capital needs, LTIP-related payments, capital spending, dividends and debt repayments.
- Progress on debt reduction, revolving-credit availability, and compliance with financing covenants and debt restrictions.
- Performance of customer LTAs, including the $61 million arbitration and the assumptions behind remaining LTA revenue estimates.
- Resolution and potential financial exposure from the Brazilian employee litigation and stockholder lawsuit.