EDITOR: | July 30th, 2013

GrafTech Reports Second Quarter 2013 Results

| July 30, 2013 | No Comments
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July 30, 2013 (Source: Business Wire) — GrafTech International Ltd. (NYSE:GTI) today announced financial results for the second quarter ended June 30, 2013.

2013 Second Quarter Review

  • Net sales were $301 million, a decrease of 5 percent, versus $316 million in the second quarter of 2012.
    • Industrial Materials revenue was $231 million, a decrease of 12 percent year-over-year.
    • Engineered Solutions revenue was $70 million, an increase of 31 percent year-over-year.
  • EBITDA* was $40 million as compared to $67 million in the second quarter of 2012. The decline was largely driven by lower realized pricing in our Industrial Materials segment, partly offset by improved profitability in our Engineered Solutions segment.
  • Net income was $4 million or $0.03 per diluted share versus $42 million or $0.29 per diluted share in the same period of the prior year. The second quarter of 2012 included a $10 million non-cash benefit of discrete tax items. Excluding the non-cash tax benefit, second quarter 2012 net income was $32 million, or $0.22 per diluted share.
  • Net cash used in operating activities was $6 million versus $16 million in the second quarter of 2012.
  • Net debt* was $592 million as compared to $554 million at the end of 2012. The increase in net debt partially reflects higher inventories to support increased sales volumes in the second half of the year.

Craig Shular, Chief Executive Officer of GrafTech, commented, “Our team delivered second quarter results in line with expectations, in spite of a very challenging operating environment. Record sales in our Engineered Solutions segment and proactive cost management across the Company positively impacted these results. We expect overhead expense** to be approximately $135 million this year as compared to $155 million in 2012.”

Industrial Materials Segment

The Industrial Materials segment’s net sales were $231 million in the second quarter of 2013, as compared to $262 million in the second quarter of 2012. Net sales in the quarter decreased primarily as the result of lower graphite electrode and needle coke sales prices. Partially offsetting the impact of lower pricing was higher graphite electrode volume in the current quarter as compared to the same period in the prior year. It is important to note that the second quarter of 2012 reflected lower volumes due to the impact of customer inventory destocking initiatives.

Operating income for the Industrial Materials segment was $8 million in the second quarter of 2013, as compared to $42 million in the second quarter of 2012. The reduction in operating income is largely attributed to lower graphite electrode and needle coke pricing.

Mr. Shular commented, “The environment for our Industrial Materials products remains very difficult as steel production outside of China continues to decline year-over-year. This weakness is further exacerbated by overcapacity in the graphite electrode industry. We will continue to leverage our low-cost business model to optimize our performance in this extremely challenging environment.”

Engineered Solutions Segment

Net sales for the Engineered Solutions segment increased 31 percent to $70 million in the second quarter of 2013 compared to $53 million in the second quarter of 2012. Continued success and growth in our advanced consumer electronics product offerings drove the increase in revenue.

Operating income for the Engineered Solutions segment was $8 million in the second quarter of 2013, or twelve percent of sales. This compares to operating income of $5 million, or nine percent of sales in the same period in 2012. The increase is due to a more favorable product mix as we penetrate high-growth end markets with attractive margin profiles, offset in part by significant weakness in advanced graphite material products serving industrial sectors including transportation, chemical and metallurgical industries.

Mr. Shular commented, “Our Engineered Solutions segment achieved record sales of $70 million in the second quarter, representing nearly 25 percent of total Company revenue. Additionally, the segment delivered double-digit operating income margin performance, ramping from the first quarter of 2013, as the infrastructure investments to support growth are more effectively absorbed at a higher revenue level. As this business continues to gain traction, it is better positioned to provide a sustainable base for diversification in tough steel cycles.”

Corporate

Total company overhead expenses were $33 million versus $38 million in the second quarter of 2012. The decline in overhead was largely driven by rightsizing initiatives, reductions in discretionary expenses and lower incentive compensation expense in a difficult operating environment.

Interest expense in the quarter was $9 million, versus $5 million in the second quarter of 2012. The increase was largely driven by the issuance of the Senior Unsecured Notes in November 2012.

Outlook

In its July 9th report, the International Monetary Fund (IMF) reduced its estimate for 2013 global GDP growth to 3.1 percent, representing the third consecutive downward revision this year. The IMF also states that global growth has not accelerated as expected and has underperformed relative to its prior expectations due to several factors including protracted recessionary conditions in Europe, weaker than anticipated economic expansion in the United States and slower growth in emerging markets.

On July 22, 2013, the World Steel Association cited that global steel production, excluding China, declined 2.7 percent in the first half of 2013 as compared to the same period in the prior year. Expectations for improvement in the second half of 2013 are waning and steel customer confidence remains low.

As a result of the above economic factors, steel data and feedback from our customers, we are reducing our targeted EBITDA range for the full year 2013 to $145 million to $165 million to reflect weaker than previously anticipated demand for our Industrial Materials products. Consequently, we are also reducing our targeted operating cash flow guidance to $110 million to $130 million to reflect the reduction in profitability and higher than previously planned inventory levels.

It is important to note that 2013 marks the final year of a third party wind-down agreement triggered by the acquisition of Seadrift Coke in which GrafTech is obliged to purchase minimum third party needle coke quantities. Going forward, this will provide us with increased flexibility to further optimize our vertical integration with Seadrift and reduce inventories. Given the challenging operating environment, we are also reducing our targeted overhead expense** to approximately $135 million. This compares to overhead expense** of $155 million in 2012.

In the third quarter of 2013, we are targeting EBITDA to be in the range of $30 million to $40 million. Continued growth and improved profitability in the Engineered Solutions segment is expected to partially offset weakness in the Industrial Materials segment.

Mr. Shular concluded, “We have built an advantaged, low-cost business model supported by a solid capital structure. GrafTech is well positioned to emerge from this difficult part of the cycle stronger than we entered it.”

In summary, our expectations for 2013 are as follows:

  • EBITDA targeted in the range of $145 million to $165 million (previous guidance was $165 million to $195 million);
  • Overhead expense (selling and administrative, and research and development expenses) of approximately $135 million (previous guidance was $140 million);
  • Interest expense of approximately $37 million (previous guidance was $35 million to $40 million);
  • Capital expenditures in the range of $90 million to $110 million;
  • Depreciation and amortization expense of approximately $95 million (previous guidance was $90 million to $95 million);
  • An effective tax rate in the range of 35 percent to 40 percent (previous guidance was 33 percent to 36 percent); and
  • Cash flow from operations in the range of $110 million to $130 million (previous guidance was $150 million to $180 million).

In conjunction with this earnings release, you are invited to listen to our earnings call being held today at 11:00 a.m. Eastern. The call will be webcast and available at www.graftech.com, in the investor relations section. The earnings call dial-in number is 877-736-7716 for domestic and 706-501-7465 for international. A rebroadcast webcast will be available following the call, and for 30 days thereafter, at www.graftech.com, in the investor relations section. GrafTech also makes its complete financial reports that have been filed with the Securities and Exchange Commission (SEC) and other information available at www.graftech.com. This includes its quarterly report on Form 10-Q for the period reported. The information in our website is not part of this release or any other report we file or furnish to the SEC. Upon request, GrafTech will provide its stockholders with a hard copy of its complete audited financial statement, free of charge.

GrafTech International is a global company that has been redefining limits for more than 125 years. We offer innovative graphite material solutions for our customers in a wide range of industries and end markets, including steel manufacturing, advanced energy and latest generation electronics. GrafTech operates 20 principal manufacturing facilities on four continents and sells products in over 70 countries. Headquartered in Parma, Ohio, GrafTech employs approximately 3,000 people. For more information, call 216-676-2000 or visit www.graftech.com.

NOTE ON FORWARD-LOOKING STATEMENTS: This news release and related discussions may contain forward-looking statements about such matters as: our outlook for the third quarter and full year 2013; expected future or targeted operation and financial performance; growth prospects and rates; the markets we serve; our profitability, cash flow, and liquidity; future sales, costs, cost management, working capital, inventory management, revenues, and business opportunities and positioning; strategic plans; stock repurchase plans; supply chain management; the impact of cost competitiveness and liquidity initiatives; changes in production capacity, operating rates or efficiency in our operations or our competitors’ or customers’ operations; capital expenditures; future prices and demand for our products and changes therein; product quality; diversification, new products, and product improvements and their impact on our business, the impact of acquired businesses and backward integration; investments and acquisitions that we may make in the future; the integration of acquisitions into our operations; financing (including factoring and supply chain financing) activities; liquidity and debt levels; our customers’ operations, production levels and demand for their products; our position in markets we serve; regional and global economic and industry market conditions and changes therein, including our expectations concerning their impact on us and our customers and suppliers; conditions and changes in the global financial and credit markets; tax rates and the effects of jurisdictional mix; the impact of accounting changes; depreciation and amortization expenses and currency exchange and interest rates and expenses.

We have no duty to update these statements. Our expectations and targets are not predictions of actual performance and historically our performance has deviated, often significantly, from our expectations and targets. Actual future events, circumstances, performance and trends could differ materially, positively or negatively, from those set forth in these statements due to various factors, including: the extent of any adjustments to our announced 2013 second quarter results; the actual timing of the filing of our Form 10-Q with the SEC and potential effects of delays in such filing; failure to achieve earnings or other estimates; the actual outcome of uncertainties associated with assumptions and estimates using judgment when applying critical accounting policies and preparing financial statements having a material impact on results of operations or financial positions; failure to successfully develop and commercialize new or improved products; adverse changes in inventory or supply chain management; limitations or delays on capital expenditures; business interruptions including those caused by weather, natural disaster, or other causes; delays or changes in or non-consummation of investments or acquisitions that we may make in the future; failure to successfully integrate into our business any completed investments and acquisitions or to successfully realize upon completed investments; failure to achieve expected synergies or the performance or returns expected from any completed investments or acquisitions; inability to protect our intellectual property rights or infringement of intellectual property rights of others; changes in market prices of our securities; changes in our ability to obtain financing on acceptable terms; adverse changes in labor relations; adverse developments in legal proceedings or investigations; non-realization of anticipated benefits from organizational changes and restructurings; negative developments relating to health, safety or environmental compliance or remediation or liabilities; downturns, production reductions or suspensions, or changes in steel and other markets we or our customers serve; customer or supplier bankruptcy or insolvency events; political unrest which adversely impacts us or our customers’ businesses; declines in demand; intensified competition and price or margin decreases, including growth by producers in developing countries; graphite electrode and needle coke manufacturing capacity increases; fluctuating market prices for our products including adverse differences between actual graphite electrode prices and spot or announced prices; consolidation of steel producers; mismatches between manufacturing capacity and demand; significant changes in our provision for income taxes and effective income tax rate; changes in the availability or cost of key inputs, including petroleum-based coke or energy; changes in interest or currency exchange rates; inflation or deflation; failure to satisfy conditions to government grants; continuing uncertainty over U.S. fiscal policy or the continuation of the European debt crisis; changes in government fiscal and monetary policy; a protracted regional or global financial or economic crisis; and other risks and uncertainties, including those detailed in our SEC filings, as well as future decisions by us. This news release does not constitute an offer or solicitation as to any securities. References to street or analyst earnings estimates mean those published by First Call.

* Non-GAAP financial measures. See attached reconciliations.

** Excluding pension mark-to-market adjustments.

GRAFTECH   INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
As of December
31, 2012
As of June 30,  2013
ASSETS
Current   assets:
Cash   and cash equivalents $ 17,317 $ 10,986
Accounts   and notes receivable, net of allowance for doubtful accounts of
$7,573 as of December 31, 2012 and $6,860 as of June 30, 2013
236,429 206,661
Inventories 513,065 540,773
Prepaid   expenses and other current assets 56,190 73,271
Total   current assets 823,001 831,691
Property,   plant and equipment 1,532,359 1,548,088
Less:   accumulated depreciation 698,452 711,412
Net   property, plant and equipment 833,907 836,676
Deferred   income taxes 6,157 6,112
Goodwill 498,261 497,162
Other   assets 136,589 124,577
Total   assets $ 2,297,915 $ 2,296,218
LIABILITIES   AND STOCKHOLDERS’ EQUITY
Current   liabilities:
Accounts   payable $ 128,120 $ 111,379
Short-term   debt 8,426 2,777
Accrued   income and other taxes 30,923 28,047
Supply   chain financing liability 26,962 18,594
Other   accrued liabilities 50,953 50,301
Total   current liabilities 245,384 211,098
Long-term   debt 535,709 581,723
Other   long-term obligations 125,005 117,432
Deferred   income taxes 41,966 38,904
Stockholders’   equity:
Preferred   stock, par value $.01, 10,000,000 shares authorized, none issued
Common   stock, par value $.01, 225,000,000 shares authorized,
150,869,227 shares issued as of December 31, 2012 and 151,556,133
shares issued as of June 30, 2013
1,509 1,515
Additional paid-in capital 1,812,592 1,818,833
Accumulated other comprehensive loss (280,678 ) (297,603 )
Retained earnings 66,884 75,476
Less:   cost of common stock held in treasury, 16,418,710 shares as of
December 31, 2012 and 16,508,309 shares as of June 30, 2013
(249,487 ) (250,196 )
Less:   common stock held in employee benefit and compensation trusts,
76,095 shares as of December 31, 2012 and 78,943 shares as of
June 30, 2013
(969 ) (964 )
Total   stockholders’ equity 1,349,851 1,347,061
Total   liabilities and stockholders’ equity $ 2,297,915 $ 2,296,218

 

GRAFTECH   INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
For the   Three Months Ended For the   Six Months Ended
June   30, June   30,
2012 2013 2012 2013
CONSOLIDATED   STATEMENTS OF INCOME
Net   sales $ 315,611 $ 301,361 $ 556,549 $ 555,088
Cost of   sales 231,234 252,440 405,241 457,617
Gross   profit 84,377 48,921 151,308 97,471
Research   and development 2,942 2,787 7,141 5,880
Selling   and administrative expenses 34,858 30,161 73,583 59,874
Operating   income 46,577 15,973 70,584 31,717
Other   expense (income), net 394 975 (3,029 ) 1,525
Interest   expense 5,132 8,947 9,894 17,955
Interest   income (64 ) (49 ) (145 ) (113 )
Income   before provision for income taxes 41,115 6,100 63,864 12,350
(Benefit)   provision for income taxes (732 ) 1,718 4,488 3,758
Net   income $ 41,847 $ 4,382 $ 59,376 $ 8,592
Basic   income per common share:
Net   income per share $ 0.30 $ 0.03 $ 0.42 $ 0.06
Weighted   average common shares outstanding 141,399 134,854 142,717 134,816
Diluted   income per common share:
Net   income per share $ 0.29 $ 0.03 $ 0.41 $ 0.06
Weighted   average common shares outstanding 142,054 135,056 143,382 134,988

 

GRAFTECH   INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the   Three Months
Ended June 30,
For the   Six Months
Ended June 30,
2012 2013 2012 2013
Cash   flow from operating activities:
Net   income $ 41,847 $ 4,382 $ 59,376 $ 8,592
Adjustments   to reconcile net income to cash provided by operations:
Depreciation   and amortization 20,276 24,492 36,363 44,868
Deferred   income tax provision 3,943 1,937 3,725 277
Post-retirement   and pension plan changes 1,888 1,101 2,684 2,242
Currency   impact (2,800 ) 199 (2,939 ) 222
Stock-based   compensation 2,825 1,379 6,363 3,745
Interest   expense 3,097 3,486 6,072 6,919
Insurance   recoveries 4,007
Other   charges, net (4,196 ) 936 (10,643 ) 1,198
Increase   in working capital* (80,543 ) (42,082 ) (127,653 ) (51,016 )
Increase   in long-term assets and liabilities (2,430 ) (2,183 ) (8,822 ) (5,401 )
Net   cash (used in) provided by operating activities (16,093 ) (6,353 ) (31,467 ) 11,646
Cash   flow from investing activities:
Capital   expenditures (30,152 ) (25,362 ) (61,576 ) (38,518 )
Proceeds   from derivative instruments 3,298 (709 ) 6,921 1,472
Other 284 53 284
Net   cash used in investing activities (26,854 ) (25,787 ) (54,602 ) (36,762 )
Cash   flow from financing activities:
Short-term   debt reductions, net (2,886 ) 675 (5,898 ) (5,649 )
Revolving   Facility borrowings 173,000 45,000 273,000 111,000
Revolving   Facility reductions (48,000 ) (18,000 ) (95,000 ) (70,500 )
Principal   payments on long-term debt (42 ) (41 ) (139 ) (140 )
Supply   chain financing 452 5,935 (4,810 ) (8,369 )
Proceeds   from exercise of stock options 43 92 175
Purchase   of treasury shares (83,971 ) (528 ) (85,156 ) (709 )
Other (564 ) (793 ) (691 ) (6,440 )
Net   cash provided by financing activities 37,989 32,291 81,398 19,368
Net   decrease in cash and cash equivalents (4,958 ) 151 (4,671 ) (5,748 )
Effect   of exchange rate changes on cash and cash equivalents (722 ) (469 ) (621 ) (583 )
Cash   and cash equivalents at beginning of period 12,817 11,304 12,429 17,317
Cash   and cash equivalents at end of period $ 7,137 $ 10,986 $ 7,137 $ 10,986
* Net   change in working capital due to the following components:
Change   in current assets:
Accounts   and notes receivable, net $ (29,997 ) $ (19,691 ) $ 37,090 $ 28,076
Inventories (4,178 ) (9,595 ) (104,852 ) (33,384 )
Prepaid   expenses and other current assets (7,816 ) (15,176 ) (6,509 ) (16,362 )
Decrease   in accounts payable and accruals (38,632 ) 6,855 (53,242 ) (29,741 )
(Decrease)   increase in interest payable 80 (4,475 ) (140 ) 395
Increase   in working capital $ (80,543 ) $ (42,082 ) $ (127,653 ) $ (51,016 )

 

GRAFTECH   INTERNATIONAL LTD. AND SUBSIDIARIESSEGMENT   DATA SUMMARY

(Dollars   in thousands)

(Unaudited)

For the   Three Months Ended
June 30,
For the   Six Months Ended
June 30,
2012 2013 2012 2013
Net   sales:
Industrial   Materials $ 262,285 $ 231,339 $ 455,281 $ 440,116
Engineered   Solutions 53,326 70,022 101,268 114,972
Total   net sales $ 315,611 $ 301,361 $ 556,549 $ 555,088
Segment   operating income:
Industrial   Materials 41,877 7,530 66,802 23,608
Engineered   Solutions 4,700 8,443 3,782 8,109
Total   segment operating income $ 46,577 $ 15,973 $ 70,584 $ 31,717
Operating   income margin:
Industrial   Materials 16.0 % 3.3 % 14.7 % 5.4 %
Engineered   Solutions 8.8 % 12.1 % 3.7 % 7.1 %
Total   operating income margin 14.8 % 5.3 % 12.7 % 5.7 %

 

GRAFTECH   INTERNATIONAL LTD. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Dollars in thousands)
(Unaudited)
EBITDA   Reconciliation
For the   Three Months
Ended June 30,
For the   Six Months
Ended June 30,
Third   Quarter
Target
Full   Year Target
2012 2013 2012 2013 2013 2013
EBITDA $ 66,853 $ 40,465 $ 106,947 $ 76,585 $30,000   – $40,000 $145,000   – $165,000
Adjustments
Depreciation   and amortization (20,276 ) (24,492 ) (36,363 ) (44,868 ) (24,000) (95,000)
Interest   income 64 49 145 113
Interest   expense (5,132 ) (8,947 ) (9,894 ) (17,955 ) (9,000) (37,000)
Other   (income) expense, net (394 ) (975 ) 3,029 (1,525 )
Income   taxes 732 (1,718 ) (4,488 ) (3,758 ) 1,000 –   (3,000) (5,000)   – (12,000)
Net   income $ 41,847 $ 4,382 $ 59,376 $ 8,592 ($2,000)   – $4,000 $8,000   – $21,000

NOTE ON EBITDA RECONCILIATION: EBITDA is a non-GAAP financial measure that GrafTech currently calculates according to the schedule above, using GAAP amounts from the Consolidated Financial Statements. GrafTech believes that EBITDA measures are generally accepted as providing useful information regarding a Company’s ability to incur and service debt. GrafTech also believes that EBITDA measures provide useful information about the productivity and cash generation potential of its ongoing businesses. Management uses EBITDA measures as well as other financial measures in connection with its decision-making activities. EBITDA measures should not be considered in isolation or as a substitute for net income (loss), cash flows from operations or other consolidated income or cash flow data prepared in accordance with GAAP. GrafTech’s method for calculating EBITDA measures may not be comparable to methods used by other companies and is not the same as the method for calculating EBITDA measures under its senior secured revolving credit facility.

GRAFTECH   INTERNATIONAL LTD. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Dollars in thousands)
(Unaudited)
Net   Debt Reconciliation
As of   December
31, 2012
As of   June 30,
2013
Long-term   debt $ 535,709 $ 581,723
Short-term   debt 8,426 2,777
Supply   chain financing 26,962 18,594
Total   debt 571,097 603,094
Less:
Cash   and cash equivalents 17,317 10,986
Net   Debt $ 553,780 $ 592,108

NOTE ON NET DEBT RECONCILIATION: Net debt is a non-GAAP financial measure that GrafTech calculates according to the schedule above, using GAAP amounts from the Consolidated Financial Statements. GrafTech believes that net debt is generally accepted as providing useful information regarding a Company’s indebtedness and that net debt provides meaningful information to investors to assist them to analyze leverage. Management uses net debt as well as other financial measures in connection with its decision-making activities. Net debt should not be considered in isolation or as a substitute for total debt or total debt and other long-term obligations calculated in accordance with GAAP. GrafTech’s method for calculating net debt may not be comparable to methods used by other companies and is not the same as the method for calculating net debt under its senior secured revolving credit facility.


Raj Shah

Editor:

Raj Shah has professional experience working for over a half a dozen years at financial firms such as Merrill Lynch and First Allied Securities Inc., ... <Read more about Raj Shah>


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