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GrafTech Reports Fourth Quarter And Year Ended 2011 Results

Stocks in this article: GTI

According to the World Steel Association, total steel production declined approximately 5 percent from the third quarter to the fourth quarter in 2011, with Europe accounting for much of the decline. GrafTech also saw an impact in the fourth quarter sales to steel producers in that region as a number of our customers reduced their production levels, closed furnaces and executed sizeable layoffs. Historically, GrafTech has had approximately 30 percent of total company annual sales in Europe.

As a result of the above, we are expecting lower sales volume of graphite electrodes compared to last year in our Industrial Materials business. Our 2012 graphite electrode book building continues to lag behind prior years, especially in Europe, as customers continue to assess their 2012 requirements. In addition, some customers in Europe have carry over inventory of electrodes due to their low production rates in the fourth quarter, however we expect the average price of all the grades of electrodes we sell to be up 10 to 15 percent, which will help offset cost pressures.

In our Engineered Solutions business we have also felt the slowdown in the European region and in the solar sector. Globally, the solar industry continued to reduce production and is expected to be at levels significantly below 2011. Recovery in solar is not expected until late 2012 or 2013.

Considering the above economic conditions, we are targeting 2012 EBITDA to be in the range of $250 million to $290 million. We expect that the first quarter will be our weakest with EBITDA targeted to be in the range of $35 million to $45 million due primarily to the low steel production rates in the fourth quarter causing customers to carry extra graphite electrode inventory into the first quarter of 2012.

In summary, our expectations for 2012 are as follows:

  • EBITDA targeted in the range of $250 million to $290 million;
  • Overhead expense (selling and administrative, and research and development expenses) of approximately $170 million;
  • Interest expense in the range of $18 million to $22 million;
  • Capital expenditures of approximately $140 million to $160 million;
  • Depreciation expense of approximately $95 million;
  • An effective tax rate in the range of 23 percent to 25 percent;
  • Cash flow from operations in the range of $140 million to $170 million; and
  • Fully diluted share count of approximately 145 million shares.

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 available at www.graftech.com . This includes its annual report on Form 10-K for the period reported. Upon request, GrafTech will provide its stockholders with a hard copy of its complete audited financial statement, free of charge.

GrafTech International Ltd. is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products and technical and research and development services, with customers in 70 countries engaged in the manufacture of steel, automotive products and electronics. We manufacture graphite electrodes, products essential to the production of electric arc furnace steel and petroleum needle coke, the raw material essential to the production of graphite electrodes. We also manufacture thermal management, fuel cell and other specialty graphite and carbon products for, and provide services to, the electronics, power generation, solar, oil and gas, transportation, defense, petrochemical and other metals markets. We operate 19 manufacturing facilities strategically located on four continents. For additional information on GrafTech International Ltd., call 216-676-2000, or visit our website at 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 2012; growth prospects; the markets we serve; our profitability, cash flow, and liquidity; future sales, costs, working capital, revenues, and business opportunities; future operational performance; strategic plans; stock repurchase plans; supply chain management; the impact of cost competitiveness and liquidity initiatives; changes in production capacity, operating rates or efficiency; capital expenditures; future prices and demand for our products; product quality; the impact of acquired businesses; 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; 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, 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 2011 fourth quarter and full year results; the actual timing of the filing of our Form 10-K with the SEC and potential effects of delays in such filing; failure to achieve earnings or other estimates; 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; 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; 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; 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; 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; 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; 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.

           
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share data) (Unaudited)

 

At December 31, 2010

At December 31, 2011

ASSETS
Current Assets:
Cash and cash equivalents $ 13,096

 

$

12,429
Accounts and notes receivable, net of allowance for doubtful accounts of $3,892 at December 31, 2010 and $4,153 at December 31, 2011 179,755 253,151
Inventories 340,418 444,062
Prepaid expenses and other current assets 12,615   22,308  
Total current assets 545,884   731,950  
 
Property, plant and equipment 1,328,004 1,431,432
Less: accumulated depreciation 635,530   654,548  
Net property, plant and equipment 692,474 776,884
Deferred income taxes 6,746 7,931
Goodwill 499,238 498,681
Other assets 168,841   152,920  
Total assets $ 1,913,183  

 

$

2,168,366  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 69,930

 

$

74,280
Short-term debt 155 14,168
Accrued income and other taxes 30,019 44,330
Supply chain financing liability 24,959 29,930
Other accrued liabilities 95,580   114,545  
Total current liabilities 220,643   277,253  
 
Long-term debt 275,799 387,624
Other long-term obligations 114,728 131,300

Deferred income taxes

72,287 32,245
 
Stockholders’ equity:
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued - -
Common stock, par value $.01, 225,000,000 shares authorized, 149,063,197 shares issued at December 31, 2010 and 149,861,081 shares issued at December 31, 2011 1,491 1,499
Additional paid-in capital 1,782,859 1,798,161
Accumulated other comprehensive loss (235,758 ) (261,937 )
Accumulated deficit (203,941 ) (50,757 )
Less: cost of common stock held in treasury, 4,081,134 shares at December 31, 2010 and 6,265,114 at December 31, 2011 (113,942 ) (146,041 )
Less: common stock held in employee benefit and compensation trusts, 76,259 shares at December 31, 2010 and 75,807 shares at December 31, 2011 (983 ) (981 )
Total stockholders’ equity 1,229,726   1,339,944  
Total liabilities and stockholders’ equity $ 1,913,183  

 

$

2,168,366  
 

           
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share data)

(Unaudited)

 

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

2010   2011 2010   2011
 
Net sales $ 281,239 $ 347,984 $ 1,006,993 $ 1,320,184
Cost of sales 213,423   264,276   717,742   995,638  
Gross profit 67,816 83,708 289,251 324,546
 
Research and development 3,241 5,120 12,202 13,976
Selling and administrative expenses 34,431   47,285   119,009   144,561  
Operating income 30,144 31,303 158,040 166,009
 
Equity in losses (earnings) of, write-down of investment in and gain recorded on acquisition of non-consolidated affiliate (12,174 ) - (14,500 ) -
Other (income) expense, net (3,024 ) (299 ) (4,768 ) 4,835
Interest expense 2,013 4,527 5,076 18,307
Interest income (105 ) (61 ) (1,333 ) (424 )
 
Income before benefit from income taxes 43,434 27,136 173,565 143,291
Benefit from income taxes (29,489 ) (29,919 ) (1,095 ) (9,893 )
Net income $ 72,923   $ 57,055   $ 174,660   $ 153,184  
 

Basic income per common share:

Net income per share $ 0.57   $ 0.39   $ 1.42   $ 1.06  
Weighted average common shares outstanding 128,863 144,642 122,621 145,156
 

Diluted income per common share:

Net income per share

$ 0.56   $ 0.39   $ 1.41   $ 1.05  

Weighted average common shares outstanding

129,816 145,678 123,453 146,402
 

             
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

2010 2011 2010   2011
 
Cash flow from operating activities:
Net income $ 72,923 $ 57,055 $ 174,660 $ 153,184
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 13,489 21,271 42,664 81,953
Deferred income tax benefit (32,165 ) (49,873 ) (29,028 ) (45,053 )
Equity in losses (earnings) of, write-down of investment in and gain recorded on acquisition of non-consolidated affiliate (12,174 ) - (14,500 ) -
Post-retirement and pension plan changes 8,334 24,062 11,088 27,184
Currency gains (2,867 ) (577 ) (7,153 ) (1,463 )
Stock-based compensation, including incentive compensation paid in company stock 2,402 2,856 7,355 8,910
Interest expense 1,200 2,948 2,620 11,607
Other charges (credits), net 3,234 (4,280 ) 4,299 (11,201 )
Decrease (increase) in working capital* 37,377 (2,768 ) (41,790 ) (142,587 )
Increase in long-term assets and liabilities (858 ) (3,393 ) (5,293 ) (5,937 )
Net cash provided by operating activities 90,895   47,301   144,922   76,597  
 
Cash flow from investing activities:
Capital expenditures (34,594 ) (54,598 ) (86,049 ) (156,616 )
Loan repayment from non-consolidated affiliate - - 6,000 -
(Payments) proceeds from derivative instruments (2,087 ) 6,640 (1,109 ) 14,412
Cash paid for acquisitions net of cash acquired of $8,240 (241,204 ) (14,010 ) (241,204 ) (20,510 )
Other 1,064   320   810   748  
Net cash used in investing activities (276,821 ) (61,648 ) (321,552 ) (161,966 )
 
Cash flow from financing activities:
Short-term debt borrowings (reductions), net 18 (4,014 ) (850 ) 14,016
Revolving Facility borrowings 165,000 407,000 165,000 584,000
Revolving Facility reductions (35,000 ) (358,000 ) (35,000 ) (482,000 )
Principal payments on long-term debt - (44 ) (56 ) (222 )
Supply chain financing (501 ) 7,927 10,555 4,970
Proceeds from exercise of stock options 2,767 111 3,901 2,028
Purchase of treasury shares (249 ) (30,257 ) (1,431 ) (30,940 )
Excess tax benefit from stock-based compensation 905 (2,051 ) 1,864 (946 )
Long-term financing obligations (291 ) (21 ) (1,148 ) (457 )
Revolver facility refinancing cost (85 ) (4,988 ) (4,595 ) (4,988 )
Net cash provided by financing activities 132,564   15,663   138,240   85,461  
 
Net (decrease) increase in cash and cash equivalents (53,362 ) 1,316 (38,390 ) 92
Effect of exchange rate changes on cash and cash equivalents (45 ) (227 ) 1,305 (759 )
Cash and cash equivalents at beginning of period 66,503   11,340   50,181   13,096  
Cash and cash equivalents at end of period $ 13,096   $ 12,429   $ 13,096   $ 12,429  
 
* Net change in working capital due to the following components:
Decrease (increase) in current assets:
Accounts and notes receivable, net $ 2,529 $ (13,548 ) $ (39,780 ) $ (68,462 )
Effect of factoring of accounts receivable - - (1,115 ) -
Inventories 25,333 (35,188 ) (13,641 ) (111,395 )
Prepaid expenses and other current assets 1,135 3,268 (1,719 ) (2,082 )
Restructuring payments (185 ) - (809 ) -
Increase in accounts payables and accruals 8,292 42,356 15,029 39,097

Increase in interest payable

273   344   245   255  
Decrease (increase) in working capital $ 37,377   $ (2,768 ) $ (41,790 ) $ (142,587 )
 

           
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

SEGMENT DATA SUMMARY

(Dollars in thousands)

(Unaudited)

 

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

2010   2011 2010   2011
 
Net sales:
Industrial Materials $ 234,498 $ 296,603 $ 833,892 $ 1,132,194
Engineered Solutions 46,741   51,381   173,101   187,990  
Total net sales $ 281,239   $ 347,984   $ 1,006,993   $ 1,320,184  
 
Segment operating income:

Industrial Materials

$ 26,232 $ 38,083 $ 140,217 $ 158,547

Engineered Solutions

3,912   (6,780 ) 17,823   7,462  
Total segment operating income $ 30,144   $ 31,303   $ 158,040   $ 166,009  
 
Operating income margin:

Industrial Materials

11.2 % 12.8 % 16.8 % 14.0 %

Engineered Solutions

8.4 % -13.2 % 10.3 % 4.0 %
Total operating income margin 10.7 % 9.0 % 15.7 % 12.6 %
 

           
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

(Dollars in thousands)

(Unaudited)

 

EBITDA* Reconciliation

 

For theThree Months EndedDecember 31,

For theTwelve Months EndedDecember 31,

2010

 

2011

2010

 

2011

 
Net sales $ 281,239   $ 347,984   $ 1,006,993   $ 1,320,184  
 

Net income

$ 72,923 $ 57,055 $ 174,660 $ 153,184

Add:

Income taxes (29,489 ) (29,919 ) (1,095 ) (9,893 )
Equity in losses (earnings) of, write-down of investment in and gain recorded on acquisition of non-consolidated affiliate (12,174 ) - (14,500 ) -
Other (income) expense, net (3,024 ) (299 ) (4,768 ) 4,835
Interest expense 2,013 4,527 5,076 18,307
Interest income (105 ) (61 ) (1,333 ) (424 )
Depreciation and amortization 13,324   21,033   42,002   80,998  
EBITDA $ 43,468   $ 52,336   $ 200,042   $ 247,007  
 
Excluding Mark to Market Adjustment 7,369   22,263   7,369   22,263  
EBITDA adjusted $ 50,837   $ 74,599   $ 207,411   $ 269,270  
 

*Non-GAAP financial measures. Please see GrafTech’s SEC filing for description of pension related Mark to Market accounting treatment.

NOTE ON EBITDA RECONCILIATION: EBITDA and EBITDA adjusted (EBITDA measures) 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.

           
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

(Dollars in thousands)

(Unaudited)

 

Operating Income* Reconciliation

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

 

2010   2011 2010   2011
 

Total Company

Operating income $ 30,144 $ 31,303 $ 158,040 $ 166,009
Mark to Market Pension Adjustment 7,369 22,263   7,369 22,263
Adjusted Operating Income $ 37,513 $ 53,566   $ 165,409 $ 188,272
 
 
 

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

 

2010 2011 2010 2011
 

Industrial Materials

Operating income $ 26,232 $ 38,083 $ 140,217 $ 158,547
Mark to Market Pension Adjustment 4,910 11,261   4,910 11,261
Adjusted Operating Income $ 31,142 $ 49,344   $ 145,127 $ 169,808
 
 
 

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

 

2010 2011 2010 2011
 

Engineered Solutions

Operating income $ 3,912 $ (6,780 ) $ 17,823 $ 7,462
Mark to Market Pension Adjustment 2,458 11,002   2,458 11,002
Adjusted Operating Income $ 6,370 $ 4,222   $ 20,281 $ 18,464
 

*Non-GAAP financial measures. Please see GrafTech’s SEC filing for description of pension related Mark to Market accounting treatment.

               
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

(Dollars in thousands)

(Unaudited)

 

Net Income* Reconciliation

For the Three Months Ended December 31,

For the Twelve Months Ended December 31,

 

2010 2011 2010 2011
 

Total Company

Net Income $ 72,923 $ 57,055 $ 174,660 $ 153,184
Valuation Allowance Release (32,597 ) (26,463 ) (32,597 ) (26,463 )
Mark to Market Pension Adjustment (after tax) $ 6,055   $ 14,238   $ 6,055   $ 14,238  
Adjusted Net Income $ 46,381   $ 44,830   $ 148,118   $ 140,959  
 

*Non-GAAP financial measures. Please see GrafTech’s SEC filing for description of pension related Mark to Market accounting treatment.

           
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

(Dollars in thousands)

(Unaudited)

 

Net Debt Reconciliation

At December 31, 2010

At December 31, 2011

 
Long-term debt $ 275,799 $ 387,624
Short-term debt 155 14,168
Supply chain financing 24,959 29,930
Total debt $ 300,913 $ 431,722
 
Less:
Cash and cash equivalents 13,096 12,429

Net Debt

$

287,817

$

419,293
 
 

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 excludes cash and cash equivalents from net debt. 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.

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