GrafTech International Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated results; comparisons are with Q1 2012. GrafTech manufactures graphite and carbon-based products through its Industrial Materials and Engineered Solutions segments.
Financial performance
| Metric | Q1 2012 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $240.9 million | $253.7 million | +5% |
| Gross profit / margin | $66.9 million / 27.8% | $48.6 million / 19.1% | Profit down 27% |
| Operating income / margin | $24.0 million / 10.0% | $15.7 million / 6.2% | Income down 34% |
| Net income | $17.5 million | $4.2 million | Down 76% |
| Diluted EPS | $0.12 | $0.03 | Down $0.09 |
| Operating cash flow | $(15.4) million | $18.0 million | Improved |
| Capital expenditures | $31.4 million | $13.2 million | Down |
Industrial Materials sales rose 8% to $208.8 million, driven by higher graphite-electrode volume, partly offset by lower electrode pricing; the weighted-average electrode selling price excluding currency effects fell about 7%. Engineered Solutions sales fell 6% to $45.0 million, mainly from weaker advanced graphite materials demand. Segment operating income was $16.1 million for Industrial Materials, versus $24.9 million a year earlier; Engineered Solutions posted a $0.3 million loss, improved from a $0.9 million loss.
Cost of sales increased 18% to $205.2 million. Higher volumes accounted for $16.0 million of the increase, while higher raw-material and overhead costs on electrodes further pressured margins. Management expected these cost pressures to continue through Q2 and, to a lesser extent, Q3. Selling and administrative expense decreased $9.0 million, partly from lower incentive and stock compensation, a $1.2 million benefit from collecting delinquent receivables, and cost controls. Q1 2012 included a one-time $4.0 million flood-insurance recovery; Q1 2013 did not.
Balance sheet, debt and liquidity
At March 31, 2013, cash was $11.3 million, current assets $796.4 million and current liabilities $196.7 million. Total debt was approximately $554.0 million: $551.9 million long-term and $2.1 million short-term, versus $544.1 million at December 31, 2012. Stockholders’ equity was $1.354 billion. Inventory increased to $538.2 million from $513.1 million at year-end.
GrafTech reported $461 million of unused Revolving Facility capacity after covenant restrictions and approximately $6.8 million of letters of credit. The facility permits maximum borrowings of $570 million and matures in October 2016. The company was in compliance with its covenants at quarter-end and expected to remain compliant through 2013 based on expected results and cash flows. It also had a supply-chain financing arrangement with a stated limit of approximately $49.3 million; the related liability was $12.7 million at quarter-end, down from $27.0 million at year-end.
Operating cash flow improved to $18.0 million from cash use of $15.4 million, while working capital used $8.9 million. Cash declined to $11.3 million from $17.3 million at year-end. The filing attributes Q1 2013 working-capital cash use mainly to higher inventory and lower accounts payable and accruals, partly offset by reduced receivables.
Outlook and management commentary
Management lowered its 2013 EBITDA target by about 5% to $165 million–$195 million, from $175 million–$205 million, citing weaker-than-anticipated graphite-electrode demand and a soft start to the year in steel production. It also reduced capital-expenditure guidance to $90 million–$110 million from $90 million–$120 million.
- Q2 2013 targeted EBITDA: $30 million–$40 million.
- 2013 overhead expense: approximately $140 million; interest expense: $35 million–$40 million.
- 2013 depreciation: $90 million–$95 million; effective tax rate: 33%–36%.
- 2013 operating cash flow target: $150 million–$180 million.
Management expected stronger seasonal Industrial Materials volumes and improved Engineered Solutions profitability in Q2, offset by lower electrode pricing. It anticipated improved second-half profitability from higher revenue in both segments and lower Industrial Materials costs as higher-cost needle-coke inventory was depleted and electrode operating rates increased. The IMF outlook cited in the filing projected 3.25% global GDP growth for 2013; the World Steel Association reported first-quarter global steel production excluding China down 3.6% year over year and reduced its 2013 steel-demand growth forecast to 2.9%.
Risks, contingencies and other items
- Key risks include weak steel and graphite-electrode demand, pricing and competitive pressure, raw-material and energy costs, currency and interest-rate changes, global economic uncertainty, supply interruptions, and covenant or financing constraints.
- Legal proceedings and other claims were ongoing; management did not believe their ultimate disposition would materially adversely affect financial position, results or cash flows. The filing identifies a Brazilian labor-related dispute as a potential source of claims.
- Goodwill was approximately $497.7 million. No triggering impairment event was identified in Q1, but management cautioned that further economic deterioration or adverse changes in assumptions could lead to impairment.
- Q1 2013 effective tax rate was 32.6%, versus 22.9% in Q1 2012; the current-period rate was below the 35% U.S. statutory rate primarily because of a favorable enacted tax-law change.
- The company used foreign-currency and commodity derivatives to manage exposures. At March 31, 2013, currency contracts had $255.0 million aggregate notional value and refined-oil swaps $28.5 million. Management reported covenant compliance and effective disclosure controls.
Important facts for investors to verify
- Whether electrode pricing, steel-sector demand and sales volumes develop in line with the reduced EBITDA outlook.
- How long elevated raw-material and overhead costs affect margins, and whether inventory is worked down as planned.
- Progress toward the $150 million–$180 million operating-cash-flow target, given working-capital needs and low cash balances.
- Debt, revolving-facility availability, covenant headroom and the company’s ability to remain compliant if results weaken.
- Whether Engineered Solutions reaches sustained profitability and whether any legal, tax, goodwill-impairment or other contingencies change materially.