GrafTech International Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. GrafTech manufactures graphite and carbon products. Engineered Solutions was classified as discontinued operations and held for sale in Q2 2016. Comparisons with 2015 require caution: the Brookfield acquisition in August 2015 created predecessor and successor reporting periods with different accounting bases.
Financial highlights
| Metric | Q3 2016 | Nine months 2016 |
|---|---|---|
| Net sales, continuing operations | $111.6 million | $322.5 million |
| Gross profit (loss) | $(6.9) million; approximately (6.2)% margin | $(28.3) million; approximately (8.8)% margin |
| Operating loss | $(19.7) million | $(69.7) million |
| Net loss from continuing operations | $(24.1) million | $(80.2) million |
| Net loss, including discontinued operations | $(23.0) million | $(187.7) million |
| Operating cash flow | Not separately presented in the supplied filing text | $28.7 million |
| Capital expenditures | Not separately presented in the supplied filing text | $22.3 million |
- At September 30, cash was $12.1 million; total debt was $370.6 million, comprising $6.5 million short-term and $364.1 million long-term debt. Debt fair value was reported as $328.7 million.
- Current assets were $371.1 million and current liabilities $100.7 million. The company reported $637 million of stockholders’ equity.
- The nine-month operating cash inflow included a $54.0 million working-capital source, notably a $41.4 million inventory reduction. Investing activities used $22.7 million; financing activities used $1.5 million.
- Q3 and nine-month gross losses included inventory valuation charges of $4.9 million and $19.5 million, respectively, reflecting lower graphite electrode prices.
Material changes and operating performance
- Management said Q3 graphite electrode weighted-average selling prices fell 29% year over year, while sales volume rose 22%. For the nine months, the reported price decline was 27% and volume increased 7%. Lower prices outweighed volume and cost improvements.
- Management attributed lower manufacturing costs to reduced raw-material costs, rationalization initiatives, plant optimization, and improved utilization. Nine-month Industrial Materials cost of sales also benefited by $8.1 million from currency effects.
- Engineered Solutions generated Q3 discontinued-operations income of $1.1 million, compared with losses in the 2015 comparison periods. Its nine-month discontinued-operations loss was $107.6 million, including a $105.6 million impairment charge on assets held for sale. The September valuation update produced no further adjustment; management noted estimates may change with the divestiture outcome.
- Assets of discontinued operations were $94.9 million at September 30, after the impairment, with related liabilities of $17.8 million.
- Balance-sheet cash increased from $6.9 million at year-end 2015 to $12.1 million; total debt rose from $367.2 million to $370.6 million.
Liquidity, outlook, risks, and other items
- The amended revolving facility has a $225 million commitment and matures in April 2019. At September 30, borrowings were $61.5 million and letters of credit were $13.9 million. The $36.0 million term loan was also outstanding and matures in April 2019. The facility requires minimum liquidity above $25 million and imposes financial and other covenants; GrafTech reported compliance at quarter-end.
- Proceeds from sales of all or a substantial part of Engineered Solutions assets must be used to repay revolving and term-loan borrowings. The strategic review and potential divestiture were ongoing; completion, timing, proceeds, and terms were uncertain.
- GrafTech provided no specific company earnings or revenue guidance in the supplied text. It cited the IMF’s July 2016 global growth estimates of 3.1% for 2016 and 3.4% for 2017, and the World Steel Association’s October forecast for global steel-demand growth of 0.2% in 2016 and 0.5% in 2017.
- Principal risks include continued graphite electrode price pressure, competitive capacity and demand changes, customer order volatility, covenant and financing constraints, currency and interest-rate movements, and uncertainty around the Engineered Solutions divestiture. The filing also flags potential adverse effects from Brexit-related currency volatility, including a weaker pound sterling.
- Senior Notes carry a 6.375% fixed rate and mature in November 2020. Revolving and term-loan rates were 5.28% at September 30. A 100-basis-point rate increase would have added an estimated $0.8 million to nine-month interest expense.
- Management said pending legal matters were not expected to have a material adverse effect, while acknowledging outcomes cannot be determined. Disclosure controls were judged effective; no material change in internal controls was reported.
Investor verification checklist
- Track graphite electrode pricing, volumes, customer orders, and whether cost reductions can offset price pressure.
- Confirm progress, valuation assumptions, sale structure, expected proceeds, and debt-repayment effects for Engineered Solutions.
- Monitor compliance with the $25 million minimum-liquidity requirement, EBITDA covenants, and available revolver capacity.
- Assess whether operating cash flow remains sustainable after the favorable working-capital contribution, particularly inventory reductions.
- Review the recoverability of assets and tax benefits, including the held-for-sale valuation and valuation allowances.
- Account for the filing’s predecessor/successor accounting break when interpreting year-over-year financial trends.