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GrafTech Reports Third Quarter 2012 Results

The slowing pace of the global economic recovery has impacted steel producer sentiment and business confidence. According to the World Steel Association and other published reports, global steel production, excluding China, has declined 0.4 percent in the nine months ended September 30, 2012. Steel production in the European Union has decreased 4.6 percent during the same period.

Despite this very challenging global economic environment, we are targeting full year EBITDA to be in the range of $235 million to $245 million, which would represent our Company's fourth best performance.

Mr. Shular stated, "We continue to face a difficult operating environment and early indications for 2013 show little signs of improvement in the global economy. We remain focused on providing our customers with superior service and quality, and proactively managing costs within our control. As such, we have reduced our 2012 estimate for overhead expense by an additional $5 million."

Mr. Shular concluded, "GrafTech continues to maintain a strong balance sheet with excellent liquidity. We are targeting significant organic growth and have invested in innovative products and solutions that will enable us to expand into new growth markets and leverage our portfolio of 775 patents. As we progress into the future, our team remains committed to strengthening the business model and driving shareholder value."

In summary, based on IMF projections and other economic forecasts and factors described above, we expect the following targeted results in 2012:

  • EBITDA in the range of $235 million to $245 million (previous guidance was $235 million to $255 million);
  • Overhead expense (selling and administrative, and research and development expenses) of approximately $155 million (previous guidance was $160 million);
  • Interest expense of approximately $22 million;
  • Capital expenditures in the range of $120 million to $130 million;
  • Depreciation and amortization expense in the range of $80 million to $85 million (previous guidance was approximately $85 million);
  • An effective tax rate in the range of 21 percent to 23 percent (previous guidance was 23 percent to 25 percent);
  • Cash flow from operations in the range of $100 million to $120 million (previous guidance was $90 million to $120 million); and
  • Full year fully diluted share count of approximately 140 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 makes its complete financial reports that have been filed with the SEC, including its most recent annual report on Form 10-K, as well as its most recent investor presentation available at www.graftech.com . 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 19 principal manufacturing facilities on four continents and sells products in over 70 countries. Headquartered in Parma, Ohio, GrafTech employs 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 2012 and 2013; future profitability, cash flow, and liquidity; future sales, costs, debt levels, depreciation and amortization, working capital including variations in our inventory levels, revenues, margins, and business opportunities; scheduled maintenance; future operational performance; strategic plans; stock repurchase plans; supply chain obligations, opportunities and management; cost competitiveness and liquidity initiatives; changes in production capacity, operating rates or efficiency; capital expenditures; future prices and demand for our products; new products including their impact on our results; 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, electrode and needle coke usage, and demand for their products; our position in markets we serve; regional and global economic and industry prospects and market conditions, including third party projections and other economic forecasts and our expectations concerning their impact on us and our customers and suppliers; competitive pressure on sales and pricing; conditions and changes in the global financial and credit markets; future tax rates and the effects of jurisdictional mix; the impact of accounting changes; and currency exchange and interest rates and expenses.

We have no duty to update these statements. These statements are not predictions and historically actual future events, circumstances, performance and trends have deviated, often significantly, from our forward-looking statements. Actual future events, circumstances, performance and trends could differ materially, positively or negatively, from these statements due to various factors, including: any adjustments to our announced 2012 third quarter results; the actual timing of the filing of our Form 10-Q with the SEC and potential effects of delays in such filing; deteriorating economic conditions and the possibility of lower order rates, order cancellations, increases in past due receivables or bad debts, supply chain disruptions, inability to reduce production input sourcing commitments consistent with lower demand and other events that could adversely impact our revenues, profitability, cash flow, working capital, inventory levels, and debt levels; impacts of the delay or failure to resolve the European debt crisis or to address the U.S. “fiscal cliff;” failure to achieve financial targets or estimates; failure to successfully develop and commercialize new or improved products; adverse changes in inventory levels, including raw materials and finished goods; limitations or delays affecting capital expenditures or scheduled maintenance; production or other business or operating suspensions, interruptions or delays; delays or changes in investments or acquisitions or non-consummation of proposed investments or acquisitions; 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 and impact on our stock repurchase programs; changes in our ability to comply with financial covenants, maintain our business and implement our business plans within our current levels of revolving and other debt financing or maintain or obtain supply chain, local country company revolving debt and other debt 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, remediation or liabilities; changes in steel and other markets we or our customers serve; political unrest that adversely impacts us or our customers’ businesses; declines in demand; price or margin decreases; intensified competition, including growth by producers in developing countries; graphite electrode and needle coke manufacturing capacity increases; adverse differences between actual graphite electrode and needle coke 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 data)

(Unaudited)

  As of December 31, 2011  

As of September 30, 2012

ASSETS
Current assets:
Cash and cash equivalents $ 12,429 $ 16,193

Accounts and notes receivable, net of allowance for doubtful accounts of $4,153 at December 31, 2011 and $5,227 at September 30, 2012

253,151 230,096
Inventories 444,062 545,779
Prepaid expenses and other current assets 22,308   28,168  
Total current assets 731,950   820,236  
Property, plant and equipment 1,431,432 1,502,826
Less: accumulated depreciation 654,548   689,273  
Net property, plant and equipment 776,884 813,553
Deferred income taxes 7,931 6,629
Goodwill 498,681 498,471
Other assets 152,920   137,209  
Total assets $ 2,168,366   $ 2,276,098  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 74,280 $ 56,643
Short-term debt 14,168 170
Accrued income and other taxes 44,330 35,062
Supply chain financing liability 29,930 26,210
Other accrued liabilities 114,545   93,310  
Total current liabilities 277,253   211,395  
 
Long-term debt 387,624 593,453
Other long-term obligations 131,300 120,070
Deferred income taxes 32,245 33,529
Stockholders’ equity:
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued
Common stock, par value $.01, 225,000,000 shares authorized, 149,861,081 shares issued at December 31, 2011 and 150,623,174 shares issued at September 30, 2012 1,499 1,506
Additional paid-in capital 1,798,161 1,810,600
Accumulated other comprehensive loss (261,937 ) (282,658 )
(Accumulated deficit) Retained earnings (50,757 ) 38,245
Less: cost of common stock held in treasury, 6,265,114 shares at December 31, 2011 and 16,375,460 shares at September 30, 2012 (146,041 ) (249,095 )
Less: common stock held in employee benefit and compensation trusts, 75,807 shares at December 31, 2011 and 73,598 shares at September 30, 2012 (981 ) (947 )
Total stockholders’ equity 1,339,944   1,317,651  
Total liabilities and stockholders’ equity $ 2,168,366   $ 2,276,098  
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 
  For the Three Months Ended September 30,   For the Nine Months Ended September 30,
2011   2012 2011   2012
 
Net sales $ 345,832 $ 320,716 $ 972,200 $ 877,265
Cost of sales 253,088   240,730   731,362   645,971  
Gross profit 92,744 79,986 240,838 231,294
 
Research and development 2,852 2,778 8,856 9,919
Selling and administrative expenses 32,401   33,645   97,276   107,228  
Operating income 57,491 43,563 134,706 114,147
 
Other expense (income), net 5,321 1,653 5,134 (1,376 )
Interest expense 4,792 5,839 13,780 15,733
Interest income (119 ) (33 ) (363 ) (178 )
Income before provision for income taxes 47,497 36,104 116,155 99,968
 
Provision for income taxes 7,200   6,478   20,026   10,966  
Net income $ 40,297   $ 29,626   $ 96,129   $ 89,002  
 
Basic income per common share:
Net income per share $ 0.28   $ 0.22   $ 0.66   $ 0.64  
Weighted average common shares outstanding 145,413 134,347 145,293 139,939
 
Diluted income per common share:
Net income per share $ 0.28   $ 0.22   $ 0.66   $ 0.63  
Weighted average common shares outstanding 146,181 135,001 146,113 140,565
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

   
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2011   2012 2011   2012
Cash flow from operating activities:
Net income $ 40,297 $ 29,626 $ 96,129 $ 89,002
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 20,361 21,869 60,682 58,232
Deferred income tax provision (719 ) (1,819 ) 4,820 1,906
Post-retirement and pension plan changes 1,342 953 3,122 3,637
Currency gains 187 (412 ) (886 ) (3,351 )
Stock-based compensation 2,171 1,733 6,054 8,096
Interest expense 2,927 3,149 8,659 9,221
Insurance recoveries 4,007
Other charges, net (3,028 ) (2,750 ) (6,921 ) (13,393 )
Increase in working capital* (16,797 ) (708 ) (139,819 ) (128,361 )
Decrease (increase) in long-term assets and liabilities 518   (6,568 ) (2,544 ) (15,390 )
Net cash provided by operating activities 47,259 45,073 29,296 13,606
 
Cash flow from investing activities:
Capital expenditures (40,195 ) (31,251 ) (102,018 ) (92,827 )
Proceeds from derivative instruments 4,704 (114 ) 7,772 6,807
Cash paid for acquisition (6,500 )
Other (21 ) 68   428   121  
Net cash used in investing activities (35,512 ) (31,297 ) (100,318 ) (85,899 )
 
Cash flow from financing activities:
Short-term debt borrowings (reductions), net 6,592 (8,091 ) 18,030 (13,989 )
Revolving Facility borrowings 17,000 70,000 177,000 343,000
Revolving Facility reductions (32,000 ) (50,000 ) (124,000 ) (145,000 )
Principal payments on long-term debt (62 ) (43 ) (178 ) (182 )
Supply chain financing (1,631 ) 1,091 (2,957 ) (3,719 )
Proceeds from exercise of stock options 851 1,917 92
Purchase of treasury shares (28 ) (17,900 ) (683 ) (103,056 )
Excess tax benefit from stock-based compensation 402 667 1,105 531
Other (19 ) (518 ) (436 ) (1,073 )
Net cash (used in) provided by financing activities (8,895 ) (4,794 ) 69,798 76,604
 
Net (decrease) increase in cash and cash equivalents 2,852 8,982 (1,224 ) 4,311
Effect of exchange rate changes on cash and cash equivalents (808 ) 74 (532 ) (547 )
Cash and cash equivalents at beginning of period 9,296   7,137   13,096   12,429  
Cash and cash equivalents at end of period $ 11,340   $ 16,193   $ 11,340   $ 16,193  
* Net change in working capital due to the following components:
Change in current assets:
Accounts and notes receivable, net $ (7,815 ) $ (11,476 ) $ (54,914 ) $ 25,614
Inventories (22,377 ) 8,543 (76,207 ) (96,309 )
Prepaid expenses and other current assets 980 3,294 (5,350 ) (3,215 )
Increase (decrease) in accounts payables and accruals 12,374 (1,131 ) (3,259 ) (54,373 )
Increase (decrease) in interest payable 41   62   (89 ) (78 )
Increase in working capital $ (16,797 ) $ (708 ) $ (139,819 ) $ (128,361 )
 
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

SEGMENT DATA SUMMARY

(Dollars in thousands)

(Unaudited)

 
  For the Three Months Ended September 30,   For the Nine Months Ended September 30,
2011   2012 2011   2012
Net sales:
Industrial Materials $ 302,355 $ 260,180 $ 835,591 $ 715,461
Engineered Solutions 43,477   60,536   136,609   161,804  
Total net sales $ 345,832   $ 320,716   $ 972,200   $ 877,265  
 
Segment operating income:
Industrial Materials 54,130 37,301 120,465 104,103
Engineered Solutions 3,361   6,262   14,241   10,044  
Total segment operating income $ 57,491   $ 43,563   $ 134,706   $ 114,147  
 
Operating income margin:
Industrial Materials 17.9 % 14.3 % 14.4 % 14.6 %
Engineered Solutions 7.7 % 10.3 % 10.4 % 6.2 %
Total operating income margin 16.6 % 13.6 % 13.9 % 13.0 %
 

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Dollars in thousands)

(Unaudited)

 

EBITDA Reconciliation

  For the Three Months Ended September 30,   For the Nine Months Ended September 30,
2011   2012 2011   2012
Net sales $ 345,832   $ 320,716   $ 972,200   $ 877,265  
Net income $ 40,297 $ 29,626 $ 96,129 $ 89,002

Add:

Income taxes 7,200 6,478 20,026 10,966
Other (income) expense, net 5,321 1,653 5,134 (1,376 )
Interest expense 4,792 5,839 13,780 15,733
Interest income (119 ) (33 ) (363 ) (178 )
Depreciation and amortization 20,122   21,869   59,965   58,232  
EBITDA $ 77,613   $ 65,432   $ 194,671   $ 172,379  
 

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 June 30, 2012  

As of September 30, 2012

 
Long-term debt $ 570,758 $ 593,453
Short-term debt 8,270 170
Supply chain financing 25,119   26,210
Total debt 604,147 619,833
Less:
Cash and cash equivalents 7,137   16,193
Net Debt $ 597,010 $ 603,640
 

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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