GrafTech International Ltd. — Q1 2017 Form 10-Q
Period: Three months ended March 31, 2017; unaudited. GrafTech manufactures graphite electrodes and needle coke. Its Engineered Solutions business was classified as discontinued operations and held for sale. GrafTech disclosed that it was a voluntary filer and an indirect wholly owned subsidiary of Brookfield; the filing reports 100 common shares outstanding.
Financial performance
- Continuing-operations sales: $104.7 million, up 9.6% from $95.6 million. Management attributed the increase to 27% higher graphite-electrode sales volume, partly offset by a 17% decline in weighted-average electrode prices.
- Gross profit: $1.1 million, versus a $13.0 million gross loss; gross margin improved to about 1.0% from negative 13.6%. The inventory lower-of-cost-or-market charge fell to $1.3 million from $11.5 million.
- Operating loss: $11.4 million, compared with $27.4 million; operating margin improved to about negative 10.9% from negative 28.7%. Lower selling and administrative costs and improved production costs contributed to the improvement.
- Net loss: $26.3 million, versus $36.4 million. Continuing-operations loss was $22.3 million, compared with $33.8 million; discontinued-operations loss was $4.1 million, versus $2.6 million.
- Cash flow: Operating cash flow was $1.8 million, down from $9.7 million. Investing cash outflow was $7.6 million, including $8.0 million in capital expenditures. Financing provided $12.5 million, mainly from revolving-facility borrowings. Cash increased to $18.5 million from $11.6 million at year-end. Operating cash flow less capital expenditures was negative $6.2 million.
- Liquidity and debt: Cash was $18.5 million; total debt was $379.6 million, including $10.4 million short-term and $369.2 million long-term debt. The $225 million revolving facility had $73.8 million borrowed and $13.8 million in letters of credit. The company stated it was in compliance with applicable covenants.
- Other balance-sheet measures: Total assets were $1.164 billion and stockholders’ equity was $555.9 million at March 31, 2017. Inventories were $159.4 million, up from $156.1 million at year-end.
Material changes and unusual items
- Industrial Materials operating loss narrowed to $6.4 million from $20.2 million. Corporate, R&D and other operating costs also declined, to $5.0 million from $7.2 million.
- Other expense increased to $3.1 million from $0.2 million, mainly due to unfavorable foreign-currency effects on non-operating assets and liabilities. Interest expense rose to $7.5 million from $6.5 million, primarily reflecting higher revolving-credit borrowing costs.
- Engineered Solutions recorded a $2.5 million impairment in Q1 2017 as GrafTech revised its estimated fair value. The business remained for sale; proceeds from any qualifying asset sale are required to repay facility borrowings.
- Currency movements reduced Industrial Materials sales by $0.5 million and reduced cost of sales by $2.2 million year over year, according to management.
Outlook, liquidity conditions and risks
- The filing provides no specific company earnings or revenue guidance. Management cited the World Steel Association’s April 2017 forecast of 1.3% global steel-demand growth in 2017, while noting risks from uncertain economic conditions and regional differences.
- The revolving facility requires minimum liquidity above $25 million and includes financial and other restrictive covenants. The facility and term loan mature in April 2019; the Senior Notes mature in November 2020. The filing says cash from asset sales would be used to repay facility debt and that completion and terms of further divestitures are uncertain.
- Management warned that weaker demand, price pressure, customer order changes, input-cost or supply disruptions, currency and interest-rate movements, and covenant or financing constraints could affect results and liquidity. No material changes to the risk factors in the 2016 Form 10-K were reported.
- A Brazilian employee wage-claim case was ruled in favor of employees at the state-court level during Q1. GrafTech said it intends to appeal and vigorously defend the case; the potential amount, including interest, could be material. The company also cited a Brazilian graphite-electrode antitrust investigation as a risk.
- Management concluded disclosure controls were effective at a reasonable-assurance level as of March 31, 2017, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether electrode pricing and volume trends continue, and how they affect gross margins and inventory valuations.
- Available borrowing capacity and compliance with the $25 million minimum-liquidity requirement and facility covenants.
- Progress, valuation assumptions and timing of the Engineered Solutions divestiture, including any further impairment.
- Developments and potential exposure in the Brazilian wage litigation and antitrust investigation.
- Whether operating cash generation improves enough to fund capital spending and debt obligations without increased borrowing.