GrafTech International Ltd. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. GrafTech manufactures graphite electrodes and petroleum needle coke; its only reportable segment is Industrial Materials. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $347.3 million | $287.0 million | $982.5 million | $886.4 million |
| Gross profit | $177.1 million | $155.1 million | $463.9 million | $485.0 million |
| Operating profit | $157.1 million | $135.4 million | $346.0 million | $432.9 million |
| Net income | $119.9 million | $94.2 million | $246.9 million | $309.3 million |
| Diluted EPS | $0.45 | $0.35 | $0.92 | $1.15 |
| Adjusted EBITDA (non-GAAP) | $172.2 million | $153.1 million | $487.1 million | $483.4 million |
| Adjusted net income (non-GAAP) | $119.0 million | $96.1 million | $333.4 million | $308.3 million |
Q3 gross margin was approximately 51.0% versus 54.1% a year earlier; nine-month gross margin was approximately 47.2% versus 54.7%. Q3 net margin was approximately 34.5% versus 32.8%. The nine-month GAAP profit comparison was affected by a $73.4 million one-time long-term incentive plan (LTIP) charge and $14.7 million of accelerated stock-based compensation associated with Brookfield’s reduced ownership.
- Cash flow: Nine-month operating cash flow was $343.0 million, down from $416.7 million. Capital expenditures were $40.4 million; investing cash outflow was $40.1 million. Financing cash outflow was $360.8 million, including $300.0 million of term-loan repayments, $42.4 million of share repurchases and $8.0 million of dividends.
- Cash and liquidity: Cash was $86.7 million at September 30, 2021, versus $145.4 million at year-end 2020. Total stated liquidity was $333.4 million, including $246.7 million available on the revolving facility, subject to covenant compliance.
- Debt and equity: Long-term debt was $1.127 billion, plus $0.1 million short-term debt, compared with $1.420 billion long-term debt at year-end 2020. Stockholders’ deficit improved to $110.7 million from $329.4 million.
Changes versus comparable periods
- Q3 sales rose 21%, while sales volume increased 30%; nine-month sales rose 11% with volume up 26%. Improved demand versus pandemic-affected 2020 drove the volume increase. Lower average realized prices, reflecting a higher share of lower-priced non-LTA sales, partly offset volume growth.
- Q3 gross profit increased 14%, but cost of sales rose 29%, largely with higher sales volume. Nine-month gross profit fell 4% as cost of sales rose 29% and included the $30.7 million LTIP charge in cost of sales.
- Nine-month operating profit fell 20% and net income fell 20%, principally reflecting the one-time LTIP and accelerated compensation costs. Adjusted EBITDA increased slightly to $487.1 million from $483.4 million.
- Interest expense declined 29% in Q3 and 21% for the nine-month period, primarily because of lower interest rates and lower average borrowings.
- Nine-month working capital provided $47.2 million, versus $85.1 million in the prior-year period. Accounts payable and accruals were a major source of cash, partly offset by inventory and prepaid-asset increases.
Outlook, commentary and risks
- Q3 sales were 43,000 metric tons: 28,000 LTA tons at an approximate average price of $9,500 per ton and 15,000 non-LTA tons at approximately $4,600 per ton. Non-LTA realized pricing increased 12% sequentially.
- Management expected Q4 2021 non-LTA realized prices to be 7%–9% above Q3, and 2022 non-LTA pricing to be significantly higher than in the second half of 2021. It also expected cost increases in late 2021 and 2022, particularly for third-party needle coke, energy and freight.
- Management’s LTA estimates: 2021 shipments of 106,000–110,000 metric tons and revenue of $1.000–$1.045 billion; 2022 shipments of 95,000–105,000 tons and revenue of $910 million–$1.010 billion; 2023–2024 shipments of 35,000–45,000 tons and revenue of $350–$450 million. Revenue estimates include expected termination fees in certain cases and depend on customer performance, arbitration, credit risk and demand within contractual volume ranges.
- Management expected 2021 capital expenditures of $55–$65 million and identified debt repayment as its primary expected use of cash for the rest of 2021. The board approved a new $150 million repurchase program; together with the prior program’s remaining authorization, the company reported authority to repurchase up to $163 million. A quarterly dividend of $0.01 per share was declared after quarter-end.
- Risks include cyclical electrode pricing and global overcapacity, dependence on steel demand and needle coke, inflation in energy and freight, COVID-19 impacts, foreign exchange and interest-rate exposure, debt and covenant constraints, and customer nonperformance under LTAs.
- Customer arbitration claimants sought approximately $61 million plus interest over fixed-price LTAs; GrafTech said it had valid defenses and intended to defend its contractual rights. A separate Brazilian employee proceeding could be material, but the company said potential loss could not be assessed because the claims did not specify claimant numbers or damages. The Delaware stockholder case remained pending on certain claims; the stockholder had abandoned direct and class claims challenging a share repurchase.
- The company reported no material changes to the risk factors in its 2020 Form 10-K. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether improving non-LTA prices translate into realized revenue gains, and whether needle coke, energy and freight cost increases offset them.
- Customer performance against LTA minimums and volume ranges, and any outcomes or settlements in the approximately $61 million arbitration claim and other contract disputes.
- Cash generation and liquidity after debt repayments, repurchases, dividends and planned capital expenditures; also monitor covenant headroom and floating-rate debt exposure.
- The size and timing of any further costs or cash payments connected with the Brookfield-related LTIP and accelerated equity awards, and the distinction between GAAP and adjusted results.
- Developments in the Brazilian employee litigation and Delaware stockholder litigation, including potential financial exposure.
- Actual execution of the repurchase authorization and dividend policy, which management noted may change or be discontinued.