GRAFTECH INTERNATIONAL LTD annual report, FY2020

GrafTech International Ltd. — FY 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. GrafTech manufactures graphite electrodes used primarily in electric-arc-furnace (EAF) steelmaking and is substantially vertically integrated through its Seadrift petroleum needle coke operation. Brookfield owned 55.3% at year-end.

Financial performance

Metric20202019
Net sales$1,224.4 million$1,790.8 million
Gross profit / margin$660.5 million / 53.9%$1,040.4 million / 58.1%
Operating income / margin$588.6 million / 48.1%$974.0 million / 54.4%
Net income$434.4 million$744.6 million
Diluted EPS$1.62$2.58
Adjusted EBITDA$658.9 million$1,048.3 million
Operating cash flow$563.6 million$805.3 million
Capital expenditures$36.1 million$64.1 million

Revenue fell 32%, net income 42%, and adjusted EBITDA 37%. Management attributed lower sales chiefly to a 21% decline in electrode sales volume and lower pricing amid pandemic-related demand weakness and customer destocking. Sales volume was 135,000 metric tons (MT), versus 171,000 MT; production was 134,000 MT, versus 177,000 MT. Total capacity utilization declined to 58% from 77%.

Fourth-quarter 2020 net sales were $338.0 million and net income was $125.1 million, compared with $414.6 million and $174.9 million, respectively, in fourth-quarter 2019. Fourth-quarter average realized prices were approximately $9,600/MT under long-term agreements (LTAs) and $4,900/MT for non-LTA sales.

Liquidity, debt and capital allocation

At December 31, 2020, cash and cash equivalents were $145.4 million, total debt was approximately $1.42 billion, and reported liquidity was $391.8 million, including $246.4 million available under the revolving facility. Approximate net debt was $1.27 billion. Interest expense was $98.1 million, down from $127.3 million. Operating cash flow included an $86.4 million source of working capital, principally from lower receivables and inventory.

GrafTech issued $500 million of 4.625% secured notes due 2028 and used the proceeds to repay term loans. It reported $400 million of term-loan repayments during 2020; the filing also describes additional debt transactions and debt repayment totals. After year-end, it repaid approximately $150 million of term loans and amended its credit agreement, reducing the term-loan interest rate by 1.0 percentage point. Management said debt repayment and balance-sheet flexibility would remain priorities. The quarterly dividend was cut in April 2020 to $0.01 per share; 2020 dividends totaled $0.12 per share as reported.

Business outlook and material items

  • Management estimated LTA shipments of 98,000–108,000 MT in 2021, 95,000–105,000 MT in 2022, and 35,000–45,000 MT in 2023–2024. Estimated associated LTA revenue was $925–$1,025 million, $910–$1,010 million, and $350–$450 million, respectively; the last range includes expected termination fees. These are estimates, not guaranteed collections or deliveries.
  • Management anticipated first-half 2021 EPS and adjusted EBITDA would decline by high single digits, percentage-wise, versus first-half 2020, reflecting lower non-LTA prices. It expected improving electrode market prices to benefit results beginning in the second half of 2021 and forecast 2021 capital expenditures of $55–$65 million.
  • COVID-19 affected customer demand, operations and financial performance; plants remained operational and fourth-quarter on-time delivery was 97%. Steel-market utilization improved during late 2020, but electrode demand and pricing remained weak. Management cited Chinese capacity additions and potential global overcapacity as further price risks.
  • Some LTA customers struggled to take committed volumes. GrafTech modified agreements with several customers and was involved in international arbitrations over alleged non-performance and disputes; management said it intended to enforce its contractual rights.
  • Other notable exposures include a Delaware stockholder suit challenging the 2019 $250 million repurchase from Brookfield and related transactions, and Brazilian employee litigation whose potential loss the company said it could not assess. A further appeal in the Brazilian matter was filed after year-end. The filing also cites cyclical steel demand, needle coke and energy supply/costs, foreign exchange, environmental obligations, debt covenants and concentrated ownership as risks.
  • The company reported $171.1 million of goodwill with no impairment recorded in 2020. The Tax Receivable Agreement liability was $40.9 million at year-end; the auditor identified its estimation as a critical audit matter. Deloitte gave unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether LTA customers perform, pay, and take contracted volumes, and how modifications, arbitrations or termination fees affect actual revenue and cash collection.
  • Whether electrode pricing, shipment volumes and capacity utilization recover as management expected, particularly after the first half of 2021.
  • Debt repayment progress, interest costs, covenant headroom and liquidity; reconcile reported debt repayment descriptions and totals against the debt notes.
  • Potential outcomes and financial exposure from the Delaware stockholder litigation and Brazilian employee claims.
  • Execution, costs and expected benefits of the Monterrey–St. Marys production-footprint projects, alongside environmental and raw-material risks.