GrafTech International Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. GrafTech manufactures graphite and carbon products across Industrial Materials and Engineered Solutions.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2015 |
|---|---|---|
| Net sales | $280.8 million | $207.2 million |
| Gross profit / gross margin | $25.7 million / 9.2% | $20.8 million / 10.0% |
| Operating income (loss) | $(7.1) million | $(45.8) million |
| Net income (loss) | $(11.5) million | $(55.6) million |
| Basic and diluted loss per share | $(0.08) | $(0.41) |
| Operating cash flow | $22.1 million | $22.7 million |
| Capital expenditures | $21.7 million | $13.6 million |
Q1 2015 investing cash outflow was $20.7 million, including $7.6 million in derivative settlements. Financing used $7.4 million. Cash declined to $11.0 million from $17.6 million at year-end 2014. Working capital provided $22.0 million, primarily reflecting a $12.0 million inventory reduction.
At March 31, 2015, total debt was approximately $527.8 million: $191.4 million short-term and $336.3 million long-term. The company had $329 million of available revolving capacity, plus a $40 million delayed-draw term loan facility intended to help repay the 2015-maturing Senior Subordinated Notes. It reported compliance with debt covenants and expected compliance through 2015. Stockholders’ equity was $922.8 million; current assets were $600.7 million and current liabilities $339.1 million.
Material changes versus Q1 2014
- Sales fell 26%. Industrial Materials sales declined 25% and Engineered Solutions sales declined 32%.
- Industrial Materials’ operating result moved from $1.6 million income to a $25.9 million loss; Engineered Solutions moved from $5.4 million income to a $4.4 million loss.
- Lower demand, volume, pricing and unfavorable currency effects pressured sales. Industrial Materials sales also reflected lower graphite electrode volumes and prices; Engineered Solutions was affected by nonrecurring furnace-system sales to a customer that filed for bankruptcy and weaker advanced electronics demand.
- Operating loss included a $35.4 million noncash impairment that fully impaired needle coke goodwill. The trigger was an announced additional 18% needle coke price decline effective in Q2, amid industry overcapacity and a weaker-than-expected market outlook.
Outlook, management commentary and risks
- Management lowered first-half 2015 targets, excluding special charges: EBITDA of $30–$40 million, versus prior guidance of $45–$55 million; operating cash flow of approximately $30–$40 million, versus prior guidance of $40–$50 million. The revised cash-flow range assumes approximately $10–$15 million of cash rationalization charges.
- Management said cost-saving programs remained on track and were expected to deliver $50 million of cash savings benefiting 2015 EBITDA, but not enough to offset lower pricing and volumes. About 75% of targeted 2015 graphite electrode order volumes were confirmed; pricing remained under pressure. The filing’s first-half illustrative outlook showed a net loss of $70–$80 million.
- Rationalization actions included closure of the Notre Dame, France facility and workforce reductions of about 85 in the advanced graphite materials business. The plan was expected to incur about $10 million of charges, including approximately $8 million in cash outlays, mostly in 2015. A separate 2014 corporate/R&D plan was expected to total about $20 million in charges.
- On April 29, 2015, GrafTech and Brookfield signed nonbinding letters of intent concerning a proposed $150 million issuance of 7% convertible preferred stock and a potential $5.05-per-share tender offer. Definitive agreements and completion were not assured. The proposals could trigger change-of-control provisions, debt acceleration or repurchase obligations, equity-award costs, and other consequences.
- Other disclosed exposures include weak global steel demand and competition, further price pressure, customer order cancellations or credit difficulties, foreign-exchange and commodity volatility, pension and tax uncertainties, and legal matters including a Brazilian graphite-electrode antitrust investigation. The company said existing legal proceedings were not expected to have a material adverse effect; outcomes remain uncertain.
Most important facts to verify
- Whether the Brookfield preferred-stock financing or tender offer progressed to definitive agreements, and the resulting ownership, dilution, governance and change-of-control effects.
- Repayment or refinancing of the $191.3 million carrying value of Senior Subordinated Notes due in 2015, and compliance with related liquidity and credit-facility requirements.
- Actual first-half EBITDA and operating cash flow against revised ranges, including cash restructuring costs and realization of the planned savings.
- Needle coke pricing, demand and future impairment risk, alongside graphite electrode order volumes and pricing.
- Working-capital sustainability, particularly whether inventory reductions can continue without impairing operations or customer service.
- Potential outcomes and financial effects of disclosed legal, tax, pension and change-of-control contingencies.