GrafTech International Ltd. (NYSE:GTI) today announced financial results for the third quarter ended September 30, 2011.

2011 Third Quarter Highlights
  • Net sales increased 35 percent to $346 million from $255 million in the third quarter of 2010.
  • EBITDA* improved 47 percent to $78 million versus $53 million in the third quarter of 2010. The improvement was driven by increased volumes in our graphite electrode and needle coke businesses.
  • Net income increased 55 percent to $40 million, or $0.28 per diluted share, as compared to $26 million, or $0.21 per diluted share, in the third quarter of 2010. Excluding the impact of purchase price accounting in the current quarter and acquisition-related expenses incurred in the third quarter of 2010, net income was $46 million versus $30 million, respectively. Third quarter 2010 net income was negatively impacted by $10 million in non-cash currency losses related to the remeasurement of intercompany loans.
  • Net cash provided by operating activities improved $7 million, or 18 percent, to $47 million, versus $40 million in the third quarter of 2010. The increase was largely driven by improved operational profitability.
  • Net debt* was $365 million at the end of the third quarter 2011, versus net debt of $375 million at the end of the second quarter 2011. Improvements in free cash flow allowed us to pay down debt in the third quarter of 2011.
  • The integration of Seadrift Coke, St. Marys and Micron Research is now complete. EBITDA contributions from these acquisitions are on track to meet our original target of $90 million.
  • GrafTech successfully concluded the refinancing of its principal revolving credit facility. The new five-year, $570 million revolver represents a $310 million increase over the prior facility and extends the maturity date to October 2016 with improvements to rates, terms and conditions. The facility will be used to fund traditional working capital requirements and provide a stronger platform for growth, organically and through acquisitions.

GrafTech Chief Executive Officer Craig Shular commented, “We have successfully increased our borrowing capacity at very favorable rates which provides us with improved financial flexibility and positions us well for future internal and external growth opportunities.”

Industrial Materials Segment

The Industrial Materials segment’s net sales increased 45 percent to $302 million as compared to net sales of $208 million in the third quarter of 2010. Graphite electrodes sales increased driven by higher volumes and favorable product mix and currency, offset by a slightly lower average graphite electrode price. Needle coke net sales from the Seadrift acquisition were additive to the year-over-year comparison.

Operating income for the Industrial Materials segment improved 52 percent to $54 million in the third quarter of 2011 versus $36 million in the same period in 2010. In the current quarter, favorable fixed cost absorption due to higher graphite electrode volumes was offset by increased raw material and other operating costs. Needle coke operating income was additive to the year-over-year comparison.

Engineered Solutions Segment

Net sales for the Engineered Solutions segment were $43 million in the third quarter of 2011 versus $47 million in the third quarter of 2010. Operating income for the Engineered Solutions segment was $3 million in the third quarter of 2011 as compared to operating income of $7 million in the same period in 2010. The reduction in operating income was largely driven by an unfavorable product mix given weaker sales in the solar and oil and gas industries. Offsetting this weakness in part was demand for our advanced electronics product line.

Corporate

Selling and administrative and research and development expenses were $35 million, or 10 percent of sales, versus $34 million, or 13 percent of sales, in the third quarter of 2010. Current quarter overhead expense also included $6 million due to the inclusion of the Seadrift, St. Marys and Micron Research teams and the impact of acquisition-related purchase price accounting. The third quarter of 2010 included $6 million in transaction-related costs associated with the acquisitions of Seadrift and St. Marys.

Interest expense was $5 million in the third quarter of 2011 versus $1 million in the same period of the prior year. Cash interest paid for the quarter was $2 million. The remainder is related to imputed non-cash interest on our $200 million Senior Subordinated Non-Interest Bearing Notes.

Outlook

The International Monetary Fund (IMF) has again reduced their 2011 estimate for global GDP growth to 4.0 percent (from 4.3 percent in the June 2011 estimate) due to a slower than expected recovery in advanced economies and the continuation of financial market volatility. IMF also reduced its 2012 global GDP growth forecast to 4.0 percent, down from 4.5 percent in June this year. Overall, the recovery is progressing slower than anticipated and uncertainty in global financial markets is further weighing on the recovery. While downside risks remain, the outlook for future recovery is expected to continue.

In the third quarter, we reported better than expected EBITDA performance driven by margins in the Industrial Materials segment. The margins exceeded our expectation primarily due to better than expected operating leverage benefit at our electrode facilities. The use of Seadrift coke also leveled off inside our electrode work-in-process, providing for less intercompany profit elimination than expected. In the fourth quarter, we project graphite electrode sales volumes to increase slightly over the third quarter as customers fulfill their annual contract requirements. It is important to note however, that our customer’s visibility for fourth quarter demand has been reduced due to increased uncertainty in the global economic environment. In light of the increased business risks, we are now targeting full year EBITDA to be in the range of $275 million to $285 million.

In its October 12, 2011 forecast, The World Steel Association (WSA) has issued a cautiously optimistic projection for 2012, projecting growth of more than 5 percent in steel consumption for 2012. Consistent with macro economic projections, the Association anticipates that the recovery of steel demand will be slower in advanced economies as compared to emerging economies that are witnessing better growth.

Based on WSA and other steel forecasts, we expect approximately 5 percent growth in global 2012 electric arc furnace (EAF) steel production, which would represent record production levels in response to growing global steel demand. We are now in the process of building our 2012 graphite electrode book and as usual, we plan to provide additional commentary in our fourth quarter earnings release.

In summary, based on IMF projections and other economic forecasts described above, we expect the following targeted results in 2011:
  • Full year EBITDA to be in the range of $275 million to $285 million (previous guidance was $285 million);
  • Overhead expense (selling and administrative, and research and development expenses) of approximately $145 million (previous guidance in the range of $145 million to $155 million);
  • Capital expenditures of approximately $145 million to $155 million (previous guidance in the range of $145 million to $160 million);
  • An effective tax rate in the range of 18 percent to 20 percent (previous guidance in the range of 22 percent to 24 percent); and
  • Cash flow from operations in the range of $140 million to $155 million (previous guidance in the range of $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 800-894-3831 for domestic and 763-416-5291 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 quarterly report on Form 10-Q for the period reported. Upon request, GrafTech will provide its stockholders with a hard copy of its complete financial statements, 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 about 65 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 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, petrochemical and other metals markets. We operate 16 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 2011 and 2012; the impact of acquired businesses; growth prospects; the markets we serve; our profitability, cash flow, and liquidity; future sales, costs, working capital, revenues, and business opportunities; future operational performance and operating rates; strategic plans; stock repurchase plans; costs of materials and production; supply chain management; the impact of cost competitiveness and liquidity initiatives; changes in production capacity or efficiency; capital expenditures; future prices and demand for our products; product quality; investments and acquisitions that we may make in the future; financing (including factoring and supply chain financing) activities; debt levels; our customers' operations, demand for their products and growth prospects; 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; and currency exchange and interest rates.

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 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; 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 and civil unrest and natural and nuclear disasters 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 and our ability to pass along increased costs and achieve profitability targets through increased 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 or investment returns including the impact on our pension and post-retirement benefit costs; 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 September 30, 2011
ASSETS
Current Assets:
Cash and cash equivalents $ 13,096 $ 11,340
Accounts and notes receivable, net of allowance for doubtful accounts of $3,892 at December 31, 2010 and $3,772 at September 30, 2011 179,755 239,376
Inventories 340,418 408,327
Prepaid expenses and other current assets 12,615   23,494  
Total current assets 545,884   682,537  
 
Property, plant and equipment 1,328,004 1,388,108
Less: accumulated depreciation 635,530   652,579  
Net property, plant and equipment 692,474 735,529
Deferred income taxes 6,746 5,806
Goodwill 499,238 498,656
Other assets 168,700 152,267
Restricted cash 141   -  
Total assets $ 1,913,183   $ 2,074,795  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 69,930 $ 64,193
Short-term debt 155 18,193
Accrued income and other taxes 30,019 27,672
Supply chain financing liability 24,959 22,002
Other accrued liabilities 95,580   98,356  
Total current liabilities 220,643   230,416  
 
Long-term debt 275,799 336,122
Other long-term obligations 114,728 111,915

Deferred income taxes
72,287 77,850
 
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 149,699,415 shares issued at September 30, 2011 1,491 1,497
Additional paid-in capital 1,782,859 1,796,193
Accumulated other comprehensive loss (235,758 ) (254,640 )
Accumulated deficit (203,941 ) (107,812 )
Less: cost of common stock held in treasury, 4,081,134 shares at December 31, 2010 and 4,191,075 at September 30, 2011 (113,942 ) (115,784 )
Less: common stock held in employee benefit and compensation trusts, 76,259 shares at December 31, 2010 and 74,549 shares at September 30, 2011 (983 ) (962 )
Total stockholders’ equity 1,229,726   1,318,492  
Total liabilities and stockholders’ equity $ 1,913,183   $ 2,074,795  
 

           

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

(Unaudited)
 

For the Three Months Ended September 30,

For the Nine Months Ended September 30,
2010   2011 2010   2011
 
Net sales $ 255,236 $ 345,832 $ 725,754 $ 972,200
Cost of sales 179,013   253,088   504,319   731,362  
Gross profit 76,223 92,744 221,435 240,838
 
Research and development 3,435 2,852 8,961 8,856
Selling and administrative expenses 30,315   32,401   84,578   97,276  
Operating income 42,473 57,491 127,896 134,706
 
Equity in earnings of non-consolidated affiliate (1,416 ) - (2,326 ) -
Other (income) expense, net 10,111 5,321 (1,744 ) 5,134
Interest expense 861 4,792 3,063 13,780
Interest income (160 ) (119 ) (1,228 ) (363 )
 
Income before provision for income taxes 33,077 47,497 130,131 116,155
Provision for income taxes 7,040   7,200   28,394   20,026  
Net income $ 26,037   $ 40,297   $ 101,737   $ 96,129  
 

Basic income per common share:
Net income per share $ 0.22   $ 0.28   $ 0.84   $ 0.66  
Weighted average common shares outstanding 120,559 145,413 120,484 145,293
 

Diluted income per common share:

Net income per share
$ 0.21   $ 0.28   $ 0.84   $ 0.66  

Weighted average common shares outstanding
121,355 146,181 121,242 146,113
 

           

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,
2010   2011 2010   2011
 
Cash flow from operating activities:
Net income $ 26,037 $ 40,297 $ 101,737 $ 96,129
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 10,478 20,361 29,175 60,682
Deferred income tax provision (benefit) 11,376 (719 ) 3,137 4,820
Equity in earnings of non-consolidated affiliate (1,416 ) - (2,326 ) -

Post-retirement and pension plan
918

1,342
2,754 3,122
Currency losses (gains) 10,482 187 (4,286 ) (886 )
Stock-based compensation 1,549 2,171 4,953 6,054
Interest expense 391 2,927 1,420 8,659
Other (credits) charges, net (1,351 ) (3,028 ) 1,065 (6,921 )
Increase in working capital* (18,255 ) (16,797 ) (79,167 ) (139,819 )
(Increase) decrease in long-term assets and liabilities (117 )

518
  (4,435 ) (2,544 )
Net cash provided by operating activities 40,092   47,259   54,027   29,296  
 
Cash flow from investing activities:
Capital expenditures (21,173 ) (40,195 ) (51,455 ) (102,018 )
Proceeds from repayment of loan to non-consolidated affiliate - - 6,000 -
Net proceeds from derivative instruments 1,098 4,704 978 7,772
Net change in restricted cash (775 ) - (529 ) 141
Cash paid for acquisition - - - (6,500 )
Other 72   (21 ) 275   287  
Net cash used in investing activities (20,778 ) (35,512 ) (44,731 ) (100,318 )
 
Cash flow from financing activities:
Short-term debt borrowings (reductions), net 24 6,592 (868 ) 18,030
Revolving Facility borrowings - 17,000 - 177,000
Revolving Facility reductions - (32,000 ) - (124,000 )
Principal payments on long-term debt - (62 ) (56 ) (178 )
Supply chain financing (18,548 ) (1,631 ) 11,056 (2,957 )
Proceeds from exercise of stock options 119 851 1,134 1,917
Purchase of treasury shares (44 ) (28 ) (1,182 ) (683 )
Excess tax benefit from stock-based compensation (78 ) 402 959 1,105
Long-term financing obligations (295 ) (19 ) (857 ) (436 )
Revolver facility refinancing cost (118 ) -   (4,510 ) -  
Net cash (used in) provided by financing activities (18,940 ) (8,895 ) 5,676   69,798  
 
Net increase (decrease) in cash and cash equivalents 374 2,852 14,972 (1,224 )
Effect of exchange rate changes on cash and cash equivalents 2,753 (808 ) 1,350 (532 )
Cash and cash equivalents at beginning of period 63,376   9,296   50,181   13,096  
Cash and cash equivalents at end of period $ 66,503   $ 11,340   $ 66,503   $ 11,340  
 
* Net change in working capital due to the following components:
Decrease (increase) in current assets:
Accounts and notes receivable, net $ 2,260 $ (7,815 ) $ (42,309 ) $ (54,914 )
Effect of factoring of accounts receivable - - (1,115 ) -
Inventories 3,939 (22,377 ) (38,974 ) (76,207 )
Prepaid expenses and other current assets 30 980 (2,854 ) (5,350 )
Restructuring payments (392 ) - (624 ) -
(Decrease) increase in accounts payables and accruals (24,092 ) 12,374 6,737 (3,259 )
Increase (decrease) in interest payable -   41   (28 ) (89 )
Increase in working capital $ (18,255 ) $ (16,797 ) $ (79,167 ) $ (139,819 )
 

           

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,
2010   2011 2010   2011
 
Net sales:
Industrial Materials $ 208,248 $ 302,355 $ 599,394 $ 835,591
Engineered Solutions 46,988   43,477   126,360   136,609  
Total net sales $ 255,236   $ 345,832   $ 725,754   $ 972,200  
 
Segment operating income:

Industrial Materials
$ 35,711 $ 54,130 $ 113,985 $ 120,465

Engineered Solutions
6,762   3,361   13,911   14,241  
Total segment operating income $ 42,473   $ 57,491   $ 127,896   $ 134,706  
 
Operating income margin:

Industrial Materials
17.1 % 17.9 % 19.0 % 14.4 %

Engineered Solutions
14.4 % 7.7 % 11.0 % 10.4 %
Total operating income margin 16.6 % 16.6 % 17.6 % 13.9 %
 

               

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

(Dollars in thousands)

(Unaudited)
 

Net Debt Reconciliation
 

At December 31, 2010

At June 30, 2011

At September 30, 2011
 
Long-term debt $ 275,799 $ 348,730 $ 336,122
Short-term debt 155 11,626 18,193
Supply chain financing 24,959 23,633 22,002
Total debt $ 300,913 $ 383,989 $ 376,317
 
Less:
Cash and cash equivalents 13,096 9,296 11,340
Net Debt

$

287,817

$

374,693

$

364,977
 

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.
           
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

(Dollars in thousands)

(Unaudited)
 

EBITDA Reconciliation
 

For the Three Months Ended September 30,

For the Nine Months Ended September 30,
2010   2011 2010   2011
Net sales $ 255,236   $ 345,832   $ 725,754   $ 972,200  
 
Net income $ 26,037 $ 40,297 $ 101,737 $ 96,129

Add:
Income taxes 7,040 7,200 28,394 20,026
Equity in earnings of non-consolidated affiliate (1,416 ) - (2,326 ) -
Other expense (income), net 10,111 5,321 (1,744 ) 5,134
Interest expense 861 4,792 3,063 13,780
Interest income (160 ) (119 ) (1,228 ) (363 )
Depreciation and amortization 10,312   20,122   28,678   59,965  
EBITDA $ 52,785   $ 77,613   $ 156,574   $ 194,671  
 

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 is generally accepted as providing useful information regarding a company’s ability to incur and service debt. GrafTech also believes that EBITDA provides useful information about the productivity and cash generation potential of its ongoing businesses. Management uses EBITDA as well as other financial measures in connection with its decision-making activities. EBITDA 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 may not be comparable to methods used by other companies and is not the same as the method for calculating EBITDA under its senior secured revolving credit facility.

GTI-G

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