GrafTech International Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. GrafTech manufactures graphite electrodes and petroleum needle coke, primarily serving electric arc furnace steel producers. Results are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $303.8 million | $347.3 million | $1,033.7 million | $982.5 million |
| Gross profit | $133.7 million | $177.1 million | $470.9 million | $463.9 million |
| Gross margin | 44.0% | 51.0% | 45.5% | 47.2% |
| Operating income | $114.1 million | $157.1 million | $410.4 million | $346.0 million |
| Net income | $93.5 million | $119.9 million | $332.6 million | $246.9 million |
| Diluted EPS | $0.36 | $0.45 | $1.28 | $0.92 |
| Adjusted EBITDA | $128.6 million | $172.2 million | $456.4 million | $487.1 million |
Q3 sales fell 13% year over year, mainly from lower shipment volume and the Monterrey suspension; higher non-LTA pricing partly offset the decline. Nine-month sales increased 5%, primarily on higher non-LTA prices. Q3 sales volume was 35,700 metric tons, including 23,000 LTA tons at a weighted-average realized price of $9,400 per ton and 13,000 non-LTA tons at $6,000 per ton. Non-LTA realized prices rose about 30% year over year for the quarter and 40% for the nine-month period. Q3 adjusted EBITDA declined 25% year over year.
Q3 interest expense fell to $6.4 million from $16.0 million, including a $4.6 million gain on partial redemption of a de-designated interest-rate swap. Nine-month interest expense was $25.0 million, down from $54.2 million. The nine-month 2021 comparison included $88.1 million of Change-in-Control-related LTIP and stock-compensation charges; this materially affects comparisons of reported and adjusted results.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $274.6 million, versus $343.0 million in 2021. The decline reflected working-capital use and lower adjusted EBITDA. Inventory absorbed $146.5 million of cash; inventory stood at $438.9 million at September 30, up from $289.4 million at year-end 2021.
- Capital expenditures were $45.3 million; investing cash use was $45.1 million. Financing cash use was $176.2 million, including $110.0 million of term-loan principal repayments, $60.0 million of share repurchases and $7.8 million of dividends. Cash increased $53.2 million to $109.4 million.
- Debt carrying value was $921.2 million, including $500 million of 4.625% secured notes due 2028 and the term loan. Management reported gross debt of $934.1 million and net debt of $824.7 million under its non-GAAP definitions. No revolving-credit borrowings were outstanding; $325.8 million was available, net of letters of credit. Total reported liquidity was $435.2 million. The company reported covenant compliance.
- Stockholders’ equity was $271.0 million, compared with $23.4 million at December 31, 2021. Cash and cash equivalents were $109.4 million, versus $57.5 million at year-end.
Outlook, material developments and risks
- Monterrey shutdown: State environmental authorities temporarily suspended production at the Monterrey, Mexico facility on September 15. The plant represents about 30% of annual production capacity excluding St. Marys and is the sole source of pin stock used across GrafTech electrodes. The company estimated a roughly $13 million Q3 adjusted EBITDA impact and said about 4,000 tons could not be shipped. At the filing date, production remained suspended; the duration and outcome were uncertain.
- Near-term outlook: Management expected Q4 2022 volume of 25,000–28,000 tons, with 10,000–12,000 tons of customer orders affected by the suspension. It expected Q4 non-LTA pricing comparable to Q3 and further sequential cost inflation. If Monterrey remained suspended, management anticipated first-half 2023 volume down 50% or more from first-half 2022, with recovery in the second half. It said it expected to meet LTA commitments through 2023.
- Mitigation and investment: GrafTech was pursuing legal and regulatory remedies and alternatives for pin-stock production, including a potential St. Marys restart. That restart would require permits and about $8 million of incremental capital expenditures; full implementation was expected to take the first half of 2023, with no assurance of effectiveness. Full-year 2022 capital expenditures were forecast at $70–$80 million.
- Contract outlook: Estimated LTA revenue was $830–$870 million for 2022, $225–$285 million for 2023 and $130–$165 million for 2024. The estimates reflect shifted deliveries related primarily to Monterrey; amounts may vary with customer performance, demand, credit risk, force majeure notices and arbitration outcomes. Some counterparties challenged force majeure notices related to the Russia-Ukraine conflict.
- Market and cost pressures: Management described steel-market conditions as volatile, with declining utilization and soft expected electrode demand in Q4 and into 2023. Q3 costs rose 24% per ton year over year, excluding depreciation and amortization, driven particularly by needle coke, energy and freight; management expected further cost inflation.
- Contingencies: Several customers are involved in LTA arbitrations. In one proceeding, claimants revised their damages demand to approximately $161.5 million including interest; GrafTech said it had valid defenses and would vigorously defend its contractual rights. A separate Brazil employee matter could be material, but the company said it could not assess potential loss because the claims did not specify the number of claimants or damages sought.
- Other disclosed risks include graphite-electrode pricing and cyclicality, inflation and raw-material availability, customer and contract performance, foreign exchange and interest rates, debt and covenant restrictions, and manufacturing disruption. The company stated that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether and when Monterrey production resumes, and whether permitting or court decisions change the suspension.
- Whether St. Marys obtains permits and can deliver the planned pin-stock capacity on schedule and within the estimated investment.
- Actual Q4 shipments, LTA delivery timing and pricing, and the extent of any 2023 volume and cost impacts.
- Progress and potential exposure in customer arbitrations and the Brazil employee litigation, including any changes in claims or loss estimates.
- Working-capital and inventory trends, cash generation, debt repayment priorities, and the effect of variable-rate borrowing costs.