GrafTech International Ltd. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. GrafTech makes graphite electrodes and needle coke in its Industrial Materials segment. Engineered Solutions is classified as discontinued operations and held for sale. The company states it is a voluntary filer and not subject to Exchange Act periodic filing requirements.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales, continuing operations | $116.3 | $115.4 | $221.1 | $210.9 |
| Gross profit (loss) | $9.7 | $(8.4) | $10.8 | $(21.4) |
| Gross margin | 8.3% | (7.3)% | 4.9% | (10.1)% |
| Operating loss | $(3.5) | $(22.6) | $(14.9) | $(50.0) |
| Loss from continuing operations | $(13.3) | $(22.3) | $(35.6) | $(56.1) |
| Net loss, including discontinued operations | $(17.4) | $(128.4) | $(43.7) | $(164.8) |
- Q2 sales rose 0.8%; management attributed the modest increase to volume, partly offset by currency, and an approximately 2% increase in weighted-average selling price—the first measurable year-over-year price increase since 2012.
- For the first half, sales increased 4.8%. Higher electrode volume contributed $25.8 million, partly offset by a 7.4% decline in weighted-average electrode price.
- Lower raw-material costs, improved utilization, lower depreciation and reduced inventory write-downs drove the gross-profit recovery. Selling and administrative costs also declined. Q2 Industrial Materials generated $2.3 million of operating income, but corporate, R&D and other costs left consolidated continuing operations with an operating loss.
- Interest expense increased to $7.9 million in Q2 and $15.4 million for the first half, principally due to higher variable borrowing costs. First-half other expense of $4.3 million included unfavorable currency effects, partly offset by interest income related to resolution of a foreign VAT dispute.
Cash, debt and liquidity
- At June 30, cash was $11.9 million; total debt was $376.0 million, comprising $8.0 million short-term and $368.0 million long-term debt. Total debt increased from $365.4 million at year-end 2016.
- First-half operating cash flow was $3.5 million, versus $11.2 million a year earlier. Investing used $10.3 million, including $13.4 million of capital expenditures; financing provided $7.1 million. Cash increased $0.3 million from the start of the year.
- The $225 million revolving facility had $68.5 million borrowed and $14.1 million of letters of credit outstanding at June 30. The facility and term loan mature in April 2019; the $29.5 million term-loan balance was fully drawn originally in 2015. The company reported compliance with its debt covenants and stated it believed liquidity was adequate.
- Facility terms require minimum liquidity above $25 million and use of proceeds from qualifying Engineered Solutions asset sales to repay revolving and term-loan borrowings. Dividends are restricted under the credit amendment.
Changes, outlook and key risks
- Discontinued-operations losses fell to $4.1 million in Q2 and $8.1 million for the first half, compared with $106.1 million and $108.7 million, respectively, in 2016. The prior period included a $105.6 million impairment; 2017 included $2.8 million in Q2 and $5.3 million in the first half of impairments.
- After quarter-end, on July 3, GrafTech completed the sale of Advanced Energy Technologies for $28.5 million. Proceeds were applied to revolving-facility and term-loan debt. A separate Fiber Materials sale had closed in November 2016; up to $8.5 million of additional contingent proceeds may be realized based on post-sale earnings.
- Management cited improved customer demand and limited industry supply as supporting electrode pricing. It referenced World Steel Association forecasts of 1.3% global steel-demand growth in 2017 and projected growth in 2018, while noting China was expected to have no growth in 2017 and a decline in 2018. The filing gives no specific company earnings or revenue guidance.
- Management identified risks including changes in steel and electrode demand, selling prices and competition; customer order delays; raw-material, energy and currency volatility; production interruptions; and liquidity, covenant and refinancing constraints. A downturn could pressure cash flow, borrowing capacity and covenant compliance.
- Brazilian employees’ wage-increase litigation received an adverse state-court ruling in Q1 2017. GrafTech appealed; the claimed employee population and damages are unspecified, so a loss range cannot be estimated. Management said other legal matters were not expected to have a material adverse effect.
- Management concluded disclosure controls were effective as of June 30, 2017; no material change in internal control over financial reporting was reported. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether price increases and demand gains persist, given first-half electrode prices were still down 7.4% year over year.
- Remaining availability under the revolving facility after borrowings and letters of credit, and ongoing compliance with the $25 million minimum-liquidity and EBITDA covenants.
- Debt repayment from the AET sale and the timing and proceeds of any remaining Engineered Solutions divestiture.
- Potential exposure and developments in the Brazil litigation, for which the filing provides no estimable loss range.
- Whether operating cash flow can fund capital spending and obligations without materially greater borrowing.