GRAFTECH INTERNATIONAL LTD. - 10-Q Summary (Period Ended June 30, 2008)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for GrafTech International Ltd. for the period ended June 30, 2008. The company manufactures graphite electrodes, refractories, and advanced graphite materials. During the first quarter of 2008, the company revised its segment structure to "Industrial Materials" and "Engineered Solutions."
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Net Sales | $609.5 million | $484.1 million |
| Gross Profit | $222.5 million | $168.0 million |
| Gross Margin | 36.5% | 34.7% |
| Operating Income | $171.7 million | $115.1 million |
| Net Income | $92.3 million | $80.3 million |
| Diluted EPS | $0.80 | $0.72 |
| Cash Flow from Operations | $102.4 million | $53.8 million |
| Cash and Equivalents (End of Period) | $13.6 million | $33.5 million |
| Total Debt (Short + Long Term) | $177.7 million | $427.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 25.9% year-over-year, driven by favorable pricing (passing on raw material costs), increased demand for graphite electrodes, and favorable currency exchange rates (specifically the Euro).
- Profitability: Operating income increased 49.2% to $171.7 million. Gross margin improved to 36.5% due to price increases outpacing cost increases.
- Debt Reduction: Total debt decreased significantly from $427.2 million to $177.7 million. The company redeemed $125 million of Senior Notes and converted $225 million of Convertible Senior Debentures into common stock.
- Investing Activity: The company made a major equity investment of $134.6 million to acquire a 100% interest in Falcon-Seadrift Holding Corp (an indirect stake in Seadrift Coke, L.P.).
- Other Income/Expense: Net other expense increased to a charge of $28.0 million (compared to income of $14.3 million in 2007). This was primarily due to a $12.7 million currency loss on intercompany loans and a $9.0 million make-whole payment on the converted debentures.
Guidance, Outlook, and Risks
- 2008 Outlook: Management expects total net sales to increase 20-22%. The effective tax rate is projected at 27-29%. Capital expenditures are expected to be $70-75 million, and cash flow from operations is projected at approximately $190 million.
- Market Conditions: Global steel production (excluding China) is estimated to have increased 3.5% year-to-date. EAF steel production capacity continues to expand, supporting demand for graphite electrodes.
- Risks: Key risks include fluctuations in raw material and energy costs, currency exchange rate volatility (specifically the Euro), and the ability to pass cost increases to customers. The company is currently under federal audit by the IRS for tax year 2004 and under audit by French tax authorities for 2005-2007.
- Subsequent Event: On July 25, 2008, the company called for the redemption of an additional $35.0 million of Senior Notes, expected to occur in August 2008.
Investor Verification Checklist
- Debt Structure: Verify the remaining principal on Senior Notes ($74.8 million) and the terms of the Revolving Facility ($106.7 million available).
- Investment Valuation: Review the valuation and accounting treatment of the $136.1 million investment in Seadrift Coke, L.P., noting the $122 million basis difference pending valuation completion.
- Currency Exposure: Assess the impact of the $529.3 million in non-dollar-denominated intercompany loans on future earnings, given the recent $12.7 million currency loss.
- Raw Material Costs: Monitor the company's ability to sustain price increases to offset rising raw material and energy costs.
- Tax Position: Review the $6.8 million in unrecognized tax benefits and the potential impact of ongoing IRS and French tax audits.