GrafTech International Ltd. — Q1 2021 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2021. GrafTech manufactures graphite electrodes and petroleum needle coke; its single reportable segment is Industrial Materials. Its commercial strategy includes multi-year fixed-price, fixed-volume take-or-pay contracts (LTAs). Brookfield owned 36.6% of outstanding shares at quarter-end.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $304.4 million | $318.6 million | Down 4% |
| Gross profit / margin | $158.0 million / 51.9% | $179.7 million / 56.4% | Profit down 12% |
| Operating profit / margin | $136.9 million / 45.0% | $164.1 million / 51.5% | Profit down 17% |
| Net income / diluted EPS | $98.8 million / $0.37 | $122.3 million / $0.45 | Income down 19% |
| Adjusted EBITDA | $155.0 million | $179.2 million | Down 13% |
| Operating cash flow | $122.4 million | $139.3 million | Down $16.9 million |
Revenue and volumes: Graphite-electrode sales volume increased 9% to 37,000 metric tons. Q1 sales comprised 26,000 MT under LTAs at an average approximate price of $9,500/MT and 11,000 MT of non-LTA sales at approximately $4,200/MT. LTA revenue was $245.6 million versus $276.4 million; short-term and spot graphite-electrode revenue rose to $47.3 million from $30.8 million.
Cash flow and liquidity: Cash and equivalents were $96.4 million at March 31, versus $145.4 million at December 31, 2020. Liquidity, including $246.4 million of revolver availability, was $342.8 million, down from $391.8 million. Investing cash outflow was $14.0 million, primarily capital expenditures. Financing cash outflow was $156.8 million, mainly the $150 million term-loan repayment. Working-capital changes provided $25.2 million of cash, including customer prepayments reflected in accrued liabilities.
Debt and equity: Total debt was approximately $1.273 billion, down from $1.420 billion at year-end; quarter-end cash implies net debt of about $1.177 billion. In February, the company repaid $150 million of term loans and repriced the remaining facility, reducing its interest rate by 1.0 percentage point; the reported effective rate was 3.50%. The $500 million 2020 senior notes bear 4.625% interest and mature in 2028. Stockholders’ deficit was $233.8 million. A quarterly dividend of $0.01 per share was declared in May.
Material changes and management commentary
- Sales fell as realized prices declined with a greater share of lower-priced non-LTA sales, as LTA deliveries decreased under contract terms. Higher sales volume partly offset the price impact.
- Cost of sales increased 5%, mainly due to higher manufactured-electrode sales volume; lower use of third-party needle coke partly offset the increase. Selling and administrative expense rose 35%, primarily from higher legal costs and additions to the doubtful-account allowance.
- Interest expense decreased 14% due mainly to lower interest rates and average borrowings, notwithstanding $4.0 million of accelerated debt-cost amortization and modification-related costs associated with the repayment and repricing.
- Global steel capacity utilization excluding China improved to 73% from 72% in Q4 2020; U.S. utilization was 77%, versus 72% in Q4 2020.
Outlook, risks and unusual items
- Management expects sales volumes to increase through the rest of 2021 as market demand improves. It anticipates first-half 2021 EPS and adjusted EBITDA will decline by mid-single digits, as a percentage, versus first-half 2020; these are management estimates, not guaranteed results.
- 2021 capital expenditure expectations remain $55–$65 million. Management expects debt repayment to remain the primary use of cash.
- Estimated LTA revenue is $925–$1,025 million for 2021, $910–$1,010 million for 2022, and $350–$450 million for 2023–2024. The 2021 remainder-of-year estimate after Q1 is approximately $675–$775 million. Estimates include potential termination fees and depend on customer performance, arbitration outcomes, credit risk and demand within contracted ranges.
- A Brookfield ownership decline below specified thresholds could trigger estimated cash LTIP payments of $65–$75 million and approximately $15.2 million of accelerated non-cash equity compensation expense. Brookfield held 36.6% at March 31, 2021. Management’s first-half outlook excludes these potential charges.
- GrafTech is pursuing customer arbitrations over alleged LTA non-performance. A Brazilian employee wage-related claim could be material, but the company said it could not assess potential loss; an April 2021 ruling favored GrafTech Brazil but remains subject to further appeal. A stockholder lawsuit challenges a 2019 share repurchase and related matters; defendants moved to dismiss.
- Key risks include COVID-19 effects, cyclical electrode pricing and global overcapacity, dependence on steel markets and petroleum needle coke, customer contract performance, foreign exchange and energy costs, litigation, and the company’s substantial debt and financing covenants. Management reported disclosure controls were effective as of March 31, 2021.
Important facts for investors to verify
- Whether improving demand translates into the expected volume recovery and whether lower-priced spot sales continue to pressure realized prices and margins.
- Customer performance under LTAs, including the revenue estimates, termination-fee assumptions, and outcomes of pending arbitrations.
- Liquidity and debt-repayment progress, including access to the revolver, interest-rate exposure, and compliance with debt covenants.
- Whether Brookfield ownership crosses a change-in-control threshold and triggers the disclosed LTIP and equity-compensation charges.
- Developments in the Brazilian claim and Delaware stockholder litigation, including any change to the company’s assessment of potential exposure.