EAF

GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended Sept 30, 2006)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. for the period ended September 30, 2006. The company operates in two primary segments: Synthetic Graphite (graphite electrodes, advanced graphite materials, and cathodes) and Other (natural graphite, carbon electrodes, and refractories). The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18.4% in Q3 and 11.0% for the nine-month period compared to 2005, driven primarily by a 24.1% increase in the Synthetic Graphite segment due to higher volumes and selling prices for graphite electrodes.
• Profitability Decline: Despite revenue growth, Net Income decreased 37.3% in Q3 and 38.2% for the nine-month period compared to 2005. This was largely due to higher operating expenses, significant non-cash charges, and a higher effective tax rate.
• One-Time Charges: The nine-month period included $7.7 million in restructuring charges, $8.8 million in impairment losses (including $6.6 million for abandoned ERP implementation), and $2.5 million for antitrust lawsuit settlements.
• Segment Performance: The Synthetic Graphite segment saw gross margins improve to 29.6% in Q3. Conversely, the "Other" segment saw a decline in gross margin to 18.5% in Q3 due to lower volumes and rationalization costs.
• Cash Flow Improvement: Operating cash flow turned positive at $44.6 million for the nine months ended Sept 30, 2006, a significant improvement from a $20.0 million use of cash in the same period in 2005.

Guidance, Outlook, and Risks

• 2006 Outlook: Management expects full-year 2006 graphite electrode revenue to increase approximately 15% compared to 2005. Production costs are expected to rise 7% to 9% due to raw material and energy pressures.
• Divestiture: The company is in advanced discussions to sell its cathode assets (including a 70% equity interest in Carbone Savoie) to Alcan, Inc. for approximately $130-$140 million. Closing is expected in 2006.
• Restructuring: The company expects to incur an additional $2.0 million in restructuring charges through mid-2007. Approximately $6.4 million of the existing $10.6 million restructuring reserve is expected to be paid in Q4 2006.
• Antitrust: All pending civil antitrust lawsuits have been settled or dismissed as of September 30, 2006. A remaining reserve of $10.8 million covers the DOJ fine obligation through January 2007.
• Liquidity: The company remains highly leveraged with a stockholders' deficit. It relies on cash flow from operations and a $215 million Revolving Facility (with $176.4 million available as of Sept 30, 2006) to service debt and fund operations.
• Risks: Key risks include high leverage, volatility in raw material and energy costs, currency exchange fluctuations, and the potential failure to complete the cathode divestiture.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with financial covenants (leverage and interest coverage ratios) under the Revolving Facility, Senior Notes, and Debentures.
• Cathode Sale: Monitor the status of the proposed divestiture to Alcan, Inc., including regulatory approvals and the final transaction price.
• Restructuring Execution: Track the actual cash outflows for restructuring payments against the $10.6 million reserve and the timing of the remaining $2.0 million in expected charges.
• Raw Material Costs: Assess the impact of premium needle coke and energy price increases on the ability to maintain the projected 7-9% cost increase range.
• Antitrust Reserve: Confirm the schedule and completion of the remaining DOJ fine payments totaling $10.8 million.