GrafTech International Ltd. — Q1 2024 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2024. GrafTech manufactures graphite electrodes and petroleum needle coke and reports one segment, Industrial Materials. Comparisons below are year over year unless noted.
Key financial and operating results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $136.6 million | $138.8 million |
| Gross profit (loss) | $(1.3) million | $26.2 million |
| Operating income (loss) | $(21.4) million | $2.8 million |
| Net loss | $(30.9) million | $(7.4) million |
| Diluted loss per share | $(0.12) | $(0.03) |
| Adjusted EBITDA (non-GAAP) | $0.2 million | $15.1 million |
| Cash from operating activities | $(0.5) million | $24.8 million |
| Capital expenditures | $10.5 million | $25.3 million |
Sales volume rose 43% to 24.1 thousand metric tons (MT), while production volume rose 65% to 26.0 thousand MT. Non-LTA realized price was approximately $4,400/MT, down 27%; LTA realized price was approximately $8,700/MT. Cash cost of goods sold per MT, a non-GAAP measure, was $4,595 versus $5,636.
At March 31, cash and equivalents were $165.2 million; total liquidity was $275.2 million, including $110.0 million available under the revolving facility. Gross debt was approximately $950.1 million. Stockholders’ equity was $37.6 million. The company reported compliance with debt covenants; its operating performance reduces revolver availability, which remains subject to covenant requirements.
Changes versus prior period
- Revenue declined 2%, despite higher sales volume, primarily due to lower non-LTA realized prices and a shift in sales mix away from LTAs.
- Gross result deteriorated to a loss, with cost of goods sold up about 20% and a $2.7 million inventory valuation adjustment. The company also recorded $2.7 million of rationalization-related inventory and asset write-offs.
- SG&A declined 31% to $15.3 million, mainly from lower selling and variable compensation-related expenses. Rationalization expense was $3.1 million.
- Interest expense increased 22% to $15.6 million, primarily reflecting the 9.875% 2023 Senior Secured Notes. Operating cash flow moved from a $24.8 million inflow to a $0.5 million outflow.
- Cash and equivalents declined from $176.9 million at December 31, 2023. No dividend was paid in Q1 2024; the quarterly dividend has been suspended since August 2023.
Outlook, management commentary, and notable matters
- Management expects near-term graphite electrode demand to remain weak amid constrained steel production, economic uncertainty, and challenging pricing. Q2 2024 sales volume is expected to be broadly in line with Q1; a modest year-over-year increase in full-year volume is still expected.
- Full-year 2024 cash cost of goods sold per MT is now expected to decline by a mid-teen percentage compared with 2023, an improvement over prior guidance of a low-teen decline. The company expects approximately $25 million in annualized savings from its cost and footprint actions, excluding one-time costs.
- The company indefinitely suspended most production at St. Marys, Pennsylvania, and idled certain other assets. 2024 electrode capacity is approximately 178 thousand MT; headcount was reduced by about 130 employees, or 10%. Wind-down activities are expected to finish by the end of Q2 2024.
- 2024 capital expenditures are expected to be $35–$40 million. Existing LTAs are expected to generate $100–$135 million of 2024 revenue and 13–16 thousand MT of volume; revenue guidance includes expected termination fees. Actual timing and amounts may vary with customer performance, force majeure, arbitration, and credit risk.
- An international arbitration claim by several customers was entirely dismissed in March 2024; the claimants were ordered to pay GrafTech approximately $9.2 million in legal fees and related expenses.
- Two Mexican VAT matters remain contested: a $30.4 million assessment for 2019 was annulled by a court, but the tax authority appealed; a proposed approximately $51.0 million assessment for 2018 is expected to be challenged. The company says loss is not probable and intends to defend its position.
- Brazil employee litigation could involve material amounts, but the company cannot assess potential loss because the number of claimants and damages are unspecified. A stockholder class action concerning statements about the Monterrey facility suspension seeks unspecified damages; the company says it is too early to assess materiality.
- CEO Timothy K. Flanagan was appointed CEO and President effective March 26, 2024. Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether weak electrode demand and pricing persist, and whether volume and realized prices develop in line with management’s expectations.
- Progress, timing, and realized savings from the footprint and cost-reduction plan, including its effect on production capacity, costs, and one-time charges.
- Cash burn, working-capital requirements, capital spending, available revolver capacity, and covenant headroom given approximately $950 million of gross debt.
- Collection and timing of LTA revenue, including termination fees, and customer performance, credit, and contract-dispute risks.
- Developments in the Mexican VAT appeals, Brazil litigation, and stockholder class action, including any changes to loss assessments or accruals.
- Underlying GAAP performance alongside non-GAAP measures; adjusted EBITDA and adjusted cash cost exclude items and should not be viewed as substitutes for GAAP results or cash flows.