EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Q1 2009)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. GrafTech International Ltd. manufactures graphite electrodes and refractory products for the steel industry (Industrial Materials) and advanced graphite materials for transportation, solar, and oil/gas sectors (Engineered Solutions). The company is operating in a severe global economic downturn, characterized by a financial crisis, frozen credit markets, and a drastic reduction in global steel production and operating rates.

Key Financial Metrics

Note: Total Debt calculated as Short-term debt ($11,985) + Total long-term debt ($65,375) for Q1 2009.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 53.8% ($156.0 million) primarily due to a 62% volume decline in the Industrial Materials segment caused by the global steel crisis and customer inventory destocking. Currency headwinds (stronger USD) reduced sales by an additional $6.1 million.
• Margin Compression: Gross margin fell to 24.0% from 37.3%. This was driven by lower volumes and a $7.2 million charge under SFAS No. 151 for fixed production overheads due to production levels below normal capacity.
• Operating Income Collapse: Operating income dropped 89.9% to $8.4 million. While costs decreased due to lower volumes, the revenue drop was more severe. The Industrial Materials segment operating income fell from $74.7 million to $6.8 million.
• Currency Impact: The company recorded a $6.4 million currency gain in Q1 2009 (vs. a $15.5 million loss in Q1 2008) due to the strengthening of the USD against the Euro on intercompany loans.
• Debt Reduction: Interest expense decreased significantly to $1.6 million from $7.7 million, reflecting the redemption of $125 million in Senior Notes in 2008 and the retirement of Debentures.

Guidance, Outlook, and Risks

• Outlook: Management does not provide a full-year 2009 outlook due to extreme economic volatility. They expect the challenging environment for Industrial Materials to continue into Q2 2009. New EAF steel capacity projects are expected to be postponed.
• Capital Expenditures: Expected to be approximately $50 - $55 million for the year.
• Liquidity: The company maintains a Revolving Facility with $153.8 million available (of $215 million total). They utilize accounts receivable factoring and supply chain financing to manage cash flow. Management believes liquidity is adequate but notes that further economic deterioration could impact credit ratings and borrowing costs.
• Risks: Key risks include continued depression in global steel demand, inability to pass on raw material cost increases, potential impairment of the investment in Seadrift Coke L.P. (a needle coke producer), and the possibility of failing to comply with debt covenants if operating results worsen.
• Unusual Items: A $7.2 million charge was recorded for idle facility expenses and fixed overhead allocation adjustments. Additionally, a $1.2 million equity loss was recorded from the non-consolidated affiliate (Seadrift).

Investor Verification Checklist

• Debt Covenants: Verify compliance with the Revolving Facility covenants (Interest Coverage Ratio > 1.75; Leverage Ratio < 2.25) given the sharp drop in operating income.
• Seadrift Investment: Monitor the $120 million investment in Seadrift Coke L.P. for potential future impairment charges, as the company noted uncertainty regarding fair value estimates in the current economic climate.
• Working Capital Management: Assess the sustainability of the accounts receivable factoring program and supply chain financing, as lower sales volumes may reduce the capacity to utilize these liquidity tools.
• Capacity Utilization: Track the impact of the $7.2 million SFAS 151 charge on future margins as production levels remain below normal capacity.
• Customer Credit Quality: Review the allowance for doubtful accounts ($5.3 million at March 31, 2009) and potential exposure to customer defaults in the distressed steel sector.