Navigating Near-term Challenges in the
Operating Environment
GrafTech’s Facility in Monterrey, Mexico
Remains Temporarily Suspended
GrafTech International Ltd. (NYSE: EAF) ("GrafTech" or the
"Company") today announced financial results for the quarter and
nine months ended September 30, 2022.
Third Quarter 2022 Highlights
- Net income of $93 million
- Earnings per share ("EPS")(1) of $0.36 and adjusted EPS(1)(2)
of $0.37
- Adjusted EBITDA(2) of $129 million, for a 42% adjusted EBITDA
margin(3)
- Sales volume of 36 thousand metric tons ("MT")
- Production volume of 38 thousand MT
- Cash flow from operating activities of $68 million
CEO Comments
"Third quarter results fell short of our expectations,
reflecting near-term challenges in the operating environment," said
Marcel Kessler, Chief Executive Officer and President. “Ongoing
geopolitical tensions and global economic uncertainty have softened
near-term demand for steel and, therefore, graphite electrodes.
This, combined with the current inflationary environment and the
impact of the suspension of our operations in Mexico, led to
declines in our key operating and financial metrics for the
quarter."
"I am proud of our team as they are working tirelessly to
navigate the current market uncertainties, while pursuing all
options to ensure our operations in Mexico can resume as promptly
as possible," said Mr. Kessler. "In addition, we are aligning
operating and capital expenditures with the current environment as
we remain committed to maintaining a strong balance sheet. We are
confident that these actions, supported by an industry-leading
position and our sustainable competitive advantages, will optimally
position GrafTech to benefit from the long-term growth of the
graphite electrode market and to deliver future shareholder
value."
Third Quarter 2022 Financial
Performance
(dollars in thousands, except per share
amounts)
Nine Months Ended September
30,
Q3 2022
Q2 2022
Q3 2021
2022
2021
Net sales
$
303,840
$
363,646
$
347,348
$
1,033,731
$
982,495
Net income
$
93,451
$
114,997
$
119,886
$
332,631
$
246,850
EPS(1)
$
0.36
$
0.44
$
0.45
$
1.28
$
0.92
Cash flow from operating activities
$
68,166
$
60,123
$
134,256
$
274,605
$
343,011
Adjusted net income(2)
$
93,883
$
115,102
$
119,038
$
334,905
$
333,405
Adjusted EPS(1)(2)
$
0.37
$
0.44
$
0.45
$
1.29
$
1.25
Adjusted EBITDA(2)
$
128,567
$
158,196
$
172,175
$
456,363
$
487,123
Adjusted free cash flow(4)
$
52,233
$
47,630
$
125,145
$
229,767
$
369,303
Net sales for the third quarter of 2022 were $304 million, a
decrease of 13% compared to $347 million in the third quarter of
2021. The decrease primarily reflected lower sales volume,
including the impact of approximately four thousand MT of customer
orders, predominately related to short-term agreements and spot
sales ("non-LTA"), that could not be shipped due to the suspension
of our operations in Monterrey, Mexico. A shift in the mix of our
business to non-LTA volume from volume derived from our take-or-pay
agreements that had initial terms of three-to-five years ("LTA")
also contributed to the decline in net sales. These factors were
partially offset by improved pricing on non-LTA volume.
Net income for the third quarter of 2022 was $93 million, or
$0.36 per share, compared to $120 million, or $0.45 per share, in
the third quarter of 2021. Adjusted EBITDA(2) was $129 million in
the third quarter of 2022, compared to $172 million in the third
quarter of 2021, with the decline primarily reflecting lower sales
volume and higher costs. We estimate that the suspension of our
operations in Monterrey, Mexico had a negative impact of
approximately $13 million on adjusted EBITDA in the third quarter
of 2022, primarily reflecting the foregone sales volume. Adjusted
EBITDA margin(3) was 42% for the third quarter of 2022.
In the third quarter of 2022, cash flow from operating
activities was $68 million and adjusted free cash flow(4) was $52
million, with both measures decreasing compared to the same period
in 2021 reflecting higher working capital and lower net income. For
the third quarter of 2022, 41% of adjusted EBITDA(2) was converted
to adjusted free cash flow(5).
Operational and Commercial
Update
Key operating metrics
Nine Months Ended September
30,
(in thousands, except
percentages)
Q3 2022
Q2 2022
Q3 2021
2022
2021
Sales volume (MT)(6)
35.7
42.3
43.4
121.3
123.1
Production volume (MT)(7)
37.7
43.9
39.5
127.7
119.0
Total production capacity (MT)(8)(9)
55.0
58.0
55.0
171.0
171.0
Total capacity utilization(9)(10)
69
%
76
%
72
%
75
%
70
%
Production capacity excluding St. Marys
(MT)(8)(11)
48.0
51.0
48.0
150.0
150.0
Capacity utilization excluding St.
Marys(10)(11)
79
%
86
%
82
%
85
%
79
%
GrafTech reported sales volume of 36 thousand MT in the third
quarter of 2022, a decrease of 18% compared to the third quarter of
2021, consisting of 23 thousand MT of LTA volume and 13 thousand MT
of non-LTA volume.
For the third quarter of 2022, the weighted-average realized
price for our LTA volume was $9,400 per MT. For our non-LTA volume,
the weighted-average realized price for graphite electrodes
delivered and recognized in revenue in the third quarter of 2022
was $6,000 per MT, an increase of approximately 30% compared to the
third quarter of 2021 and consistent with the weighted-average
non-LTA price for the first six months of 2022.
Production volume was 38 thousand MT in the third quarter of
2022, a decrease of 5% compared to the third quarter of 2021.
Annual planned maintenance work at our two European facilities
occurred in the third quarter of both years.
Steel market capacity utilization rates have been as
follows:
Q3 2022
Q2 2022
Q3 2021
Global (ex-China) capacity utilization
rate(12)
64
%
69
%
71
%
U.S. capacity utilization rate(13)
78
%
81
%
84
%
The table of estimated shipments of graphite electrodes under
existing LTAs has been updated as follows to reflect our current
expectations(14)(15):
2022
2023
2024
Estimated LTA volume (in thousands of
MT)
88-92
26-33
12-15
Estimated LTA revenue (in millions)
$830-$870
$225-$285
$130-$165(16)
Update on Operations in Monterrey, Mexico
On September 15, 2022, inspectors from the State Attorney’s
Office for the Secretary of Environment of the State of Nuevo León,
Mexico issued a temporary suspension notice for our operations
located in Monterrey, Mexico, as described in our Current Report on
Form 8-K furnished on September 16, 2022. Currently, production
operations in Monterrey remain shut down while certain activities,
including movement of existing inventory, are permitted to
continue.
While we are complying with the suspension notice, we strongly
disagree with the course of action taken by the state authorities
and will continue to seek resolution, including a restart of our
Monterrey production operations. As we work to resolve this matter
as promptly as possible, we are pursuing all available legal
remedies, as well as engaging in dialogue with the respective state
and local authorities involved in these matters. However, at this
time, we are not able to assess how long production operations at
our Monterrey facility will remain suspended.
Our facility in Monterrey has been operating since 1959, has
over 550 employees and represents approximately 60 thousand MT of
annual production capacity, or 30% of our total annual production
capacity excluding St. Marys. Monterrey's operations can produce a
broad portfolio of products, including various sizes of graphite
electrodes and pins, and is currently our only site that produces
the pin stock utilized for all of our graphite electrodes.
As such, we are pursuing several alternatives with respect to
production and sourcing of pin stock as well as other mitigation
activities to minimize the impact on our business and our customers
if the Monterrey suspension continues for the foreseeable future.
These include a potential restart of our St. Marys, Pennsylvania
facility, where the scope of production is currently limited to
graphitizing and machining of electrodes and pins(11). We
anticipate these mitigation activities will take the first half of
2023 to fully implement, and we cannot provide any assurance that
such measures will be effective in limiting the impact of the
suspension.
Until operations in Monterrey are resumed or mitigation
activities are successfully implemented, our ability to fulfill
customer orders will be significantly impacted. Specific to the
fourth quarter of 2022, after considering current pin stock
inventory, we estimate the suspension will impact approximately 10
thousand MT to 12 thousand MT of such customer orders.
Capital Structure and Capital Allocation
As of September 30, 2022, GrafTech had cash and cash equivalents
of $109 million and total debt of approximately $921 million.
Maintaining a prudent and disciplined capital allocation strategy
remains a priority for the Company. In the third quarter of 2022,
we retained all of our free cash flow to increase the Company's
liquidity position in order to support financial flexibility as we
manage through near-term challenges, including the suspension of
our operations in Monterrey. In the first half of the year, we
repaid $110 million of our long-term debt and repurchased 6.7
million shares of our common stock for an aggregate of $60 million.
We continue to expect full-year capital expenditures to be in the
range of $70 million to $80 million in 2022.
Outlook
The current environment for the steel industry remains volatile
with key markets, such as Europe, continuing to experience
weakening demand as broader macroeconomic conditions deteriorate.
Steel industry trends have also softened somewhat in the U.S.,
although the market remains comparatively healthy and more stable.
As a result, we expect graphite electrode demand to remain soft in
the fourth quarter of 2022 and into 2023 reflecting market
dynamics, which continue to be dictated by geopolitical conflict
and economic uncertainty.
At the same time, as is the case for nearly all industries,
costs remain elevated for raw materials, energy and logistics. Due
to the current inflationary environment, we anticipate sequential
cost increases to continue in the fourth quarter of 2022.
In addition to the efforts to resolve the situation involving
our Monterrey, Mexico facility, we are aligning operating and
capital expenditures with the current environment as we remain
committed to maintaining a strong balance sheet. Longer term, we
remain confident that the steel industry’s accelerating efforts to
decarbonize will lead to increased adoption of the electric arc
furnace method of steelmaking, driving long-term demand for
graphite electrodes. The actions we are taking will optimally
position GrafTech to benefit from that long-term growth. In
addition, our vertical integration into petroleum needle coke
production via our Seadrift facility is a critical differentiator
from our competitors and foundational for our ability to reliably
deliver high-quality graphite electrodes.
Conference Call Information
In connection with this earnings release, you are invited to
listen to our earnings call being held on November 4, 2022 at 10:00
a.m. (EDT). The webcast and accompanying slide presentation will be
available on our investor relations website at:
http://ir.graftech.com. The earnings call dial-in number is +1
(888) 396-8049 toll-free in North America or +1 (416) 764-8646 for
overseas calls, conference ID: 84245557. Archived replays of the
conference call and webcast will be made available on our investor
relations website at: http://ir.graftech.com. 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. The information on our website is
not part of this release or any report we file or furnish to the
SEC.
About GrafTech
GrafTech International Ltd. is a leading manufacturer of
high-quality graphite electrode products essential to the
production of electric arc furnace steel and other ferrous and
non-ferrous metals. The Company has a competitive portfolio of
low-cost, ultra-high power graphite electrode manufacturing
facilities, including three of the highest capacity facilities in
the world. We are the only large-scale graphite electrode producer
that is substantially vertically integrated into petroleum needle
coke, a key raw material for graphite electrode manufacturing. This
unique position provides us with competitive advantages in product
quality and cost.
________________________
(1)
EPS represents diluted earnings per share.
Adjusted EPS represents diluted adjusted earnings per share.
(2)
A non-GAAP financial measure, see below
for more information and a reconciliation of EBITDA, adjusted
EBITDA and adjusted net income to net income, and adjusted EPS to
EPS, the most directly comparable financial measures calculated and
presented in accordance with accounting principles generally
accepted in the United States of America ("GAAP").
(3)
Adjusted EBITDA margin is calculated as
adjusted EBITDA divided by net sales (Q3 2022 adjusted EBITDA of
$128.6 million/Q3 2022 net sales of $303.8 million).
(4)
A non-GAAP financial measure, see below
for more information and a reconciliation of adjusted free cash
flow and free cash flow to cash flow from operating activities, the
most directly comparable financial measure calculated and presented
in accordance with GAAP.
(5)
Adjusted free cash flow conversion is
calculated as adjusted free cash flow divided by adjusted EBITDA
(Q3 2022 adjusted free cash flow of $52.2 million/Q3 2022 adjusted
EBITDA of $128.6 million).
(6)
Sales volume reflects only graphite
electrodes manufactured by us.
(7)
Production volume reflects graphite
electrodes we produced during the period.
(8)
Production capacity reflects expected
maximum production volume during the period depending on product
mix and expected maintenance outage. Actual production may
vary.
(9)
Includes graphite electrode facilities in
Calais, France; Monterrey, Mexico; Pamplona, Spain; and St. Marys,
Pennsylvania.
(10)
Capacity utilization reflects production
volume as a percentage of production capacity.
(11)
Our St. Marys, Pennsylvania facility
graphitizes a limited number of electrodes and pins sourced from
our Monterrey, Mexico facility.
(12)
Source: World Steel Association, Metal
Expert and GrafTech analysis, as of October 2022.
(13)
Source: American Iron and Steel Institute,
as of October 2022.
(14)
As it relates to the conflict between
Ukraine and Russia, we have provided force majeure notices with
respect to certain impacted LTAs. Certain of our LTA counterparties
have challenged the force majeure notices, but we will continue to
enforce our contractual rights. In the event of a force majeure,
the LTAs provide our counterparties with the right to terminate the
LTA if the force majeure event continues for more than six months
after the delivery of the force majeure notice, with no continuing
obligations of either party. The estimates of LTA revenue as set
forth in the table above reflects (i) our current view of the
validity of such force majeure notices and (ii) our current
expectations of termination fees from our customers who have failed
to meet certain obligations under their LTAs.
(15)
The estimates set forth in this table
reflect our current expectations regarding the shift of LTA revenue
out of 2022 into 2023, primarily due to the suspension of our
operations in Monterrey, Mexico.
(16)
Includes expected termination fees from a
few customers that have failed to meet certain obligations under
their LTAs.
Cautionary Note Regarding Forward-Looking Statements
This press release and related discussions may contain
forward-looking statements within the meaning of the safe harbor
provisions of the U.S. Private Securities Litigation Reform Act of
1995. Forward-looking statements reflect our current views with
respect to, among other things, financial projections, plans and
objectives of management for future operations, and future economic
performance. Examples of forward-looking statements include, among
others, statements we make regarding future estimated revenues and
volumes derived from our LTAs, future pricing of non-LTAs,
anticipated levels of capital expenditures, and guidance relating
to earnings per share and adjusted EBITDA. You can identify these
forward-looking statements by the use of forward-looking words such
as “will,” “may,” “plan,” “estimate,” “project,” “believe,”
“anticipate,” “expect,” “foresee,” “intend,” “should,” “would,”
“could,” “target,” “goal,” “continue to,” “positioned to,” “are
confident,” or the negative versions of those words or other
comparable words. Any forward-looking statements contained in this
press release are based upon our historical performance and on our
current plans, estimates and expectations considering information
currently available to us. The inclusion of this forward-looking
information should not be regarded as a representation by us that
the future plans, estimates, or expectations contemplated by us
will be achieved. Our expectations and targets are not predictions
of actual performance and historically our performance has
deviated, often significantly, from our expectations and targets.
These forward-looking statements are subject to various risks and
uncertainties and assumptions relating to our operations, financial
results, financial condition, business, prospects, growth strategy
and liquidity. Accordingly, there are or will be important factors
that could cause our actual results to differ materially from those
indicated in these statements. We believe that these factors
include, but are not limited to: the ultimate impact the COVID-19
pandemic has on our business, results of operations, financial
condition and cash flows, including the duration and spread of any
variants, the duration and scope of related government orders and
restrictions, the impact on our employees, and the disruptions and
inefficiencies in our supply chain; the ultimate impact the
conflict between Russia and Ukraine has on our business, results of
operations, financial condition and cash flows, including the
duration and scope of such conflict, its impact on disruptions and
inefficiencies in our supply chain and our ability to procure
certain raw materials; the possibility that we may be unable to
implement our business strategies, including our ability to secure
and maintain longer-term customer contracts, in an effective
manner; the cyclical nature of our business and the selling prices
of our products, which may decline in the future, may lead to
periods of reduced profitability and net losses in the future; the
impact of inflation and our ability to mitigate the effect on our
costs; the risks and uncertainties associated with litigation,
arbitration, and like disputes, including disputes related to
contractual commitments; the possibility that global graphite
electrode overcapacity may adversely affect graphite electrode
prices; our dependence on the global steel industry generally and
the electric arc furnace steel industry in particular; the
sensitivity of our business and operating results to economic
conditions, including any recession, and the possibility others may
not be able to fulfill their obligations to us in a timely fashion
or at all; the competitiveness of the graphite electrode industry;
our dependence on the supply of raw materials, including decant
oil, petroleum needle coke, and energy, and disruptions in supply
chains for these materials; our manufacturing operations are
subject to hazards; changes in, or more stringent enforcement of,
health, safety and environmental regulations applicable to our
manufacturing operations and facilities; the legal, compliance,
economic, social and political risks associated with our
substantial operations in multiple countries; the possibility that
fluctuation of foreign currency exchange rates could materially
harm our financial results; the possibility that our results of
operations could deteriorate if our manufacturing operations were
substantially disrupted for an extended period, including as a
result of equipment failure, climate change, regulatory issues,
natural disasters, public health crises, such as the COVID-19
pandemic, political crises or other catastrophic events, including
the suspension of our operations located in Monterrey, Mexico and
our ability to resume operations in Monterrey; our dependence on
third parties for certain construction, maintenance, engineering,
transportation, warehousing and logistics services; the possibility
that we are unable to recruit or retain key management and plant
operating personnel or successfully negotiate with the
representatives of our employees, including labor unions; the
sensitivity of goodwill on our balance sheet to changes in the
market; the possibility that we are subject to information
technology systems failures, cybersecurity attacks, network
disruptions and breaches of data security; our dependence on
protecting our intellectual property and the possibility that third
parties may claim that our products or processes infringe their
intellectual property rights; the possibility that our indebtedness
could limit our financial and operating activities or that our cash
flows may not be sufficient to service our indebtedness; the
possibility that restrictive covenants in our financing agreements
could restrict or limit our operations; the fact that borrowings
under certain of our existing financing agreements subject us to
interest rate risk; the possibility that disruptions in the capital
and credit markets could adversely affect our results of
operations, cash flows and financial condition, or those of our
customers and suppliers; the possibility that the market price of
our common stock could be negatively affected by sales of
substantial amounts of our common stock in the public markets,
including by Brookfield Asset Management Inc. and its affiliates
("Brookfield"); the possibility that we may not pay cash dividends
on our common stock in the future; and the fact that our
stockholders have the right to engage or invest in the same or
similar businesses as us.
These factors should not be construed as exhaustive and should
be read in conjunction with the Risk Factors and other cautionary
statements that are included in our most recent Annual Report on
Form 10-K and other filings with the SEC. The forward-looking
statements made in this press release relate only to events as of
the date on which the statements are made. Except as required by
law, we do not undertake any obligation to publicly update or
review any forward-looking statement, whether as a result of new
information, future developments or otherwise.
Non‑GAAP Financial Measures
In addition to providing results that are determined in
accordance with GAAP, we have provided certain financial measures
that are not in accordance with GAAP. EBITDA, adjusted EBITDA,
adjusted EBITDA margin, adjusted net income, adjusted EPS, free
cash flow, adjusted free cash flow, and adjusted free cash flow
conversion are non-GAAP financial measures.
We define EBITDA, a non‑GAAP financial measure, as net income or
loss plus interest expense, minus interest income, plus income
taxes and depreciation and amortization. We define adjusted EBITDA
as EBITDA plus any pension and other post-employment benefit
("OPEB") plan expenses, adjustments for public offerings and
related expenses, non‑cash gains or losses from foreign currency
remeasurement of non‑operating assets and liabilities in our
foreign subsidiaries where the functional currency is the U.S.
dollar, stock-based compensation expense, non-cash fixed asset
write-offs, related party payable - Tax Receivable Agreement
adjustments and Change in Control charges that were triggered as a
result of the ownership of our largest stockholder falling below
30% of our total outstanding shares. Adjusted EBITDA is the primary
metric used by our management and our Board of Directors to
establish budgets and operational goals for managing our business
and evaluating our performance. For purposes of this release, a
Change in Control occurred when Brookfield and any affiliates
thereof ceased to own stock of the Company that constitutes at
least thirty percent (30%) or thirty-five percent (35%), as
applicable, of the total fair market value or total voting power of
the stock of the Company (the "Change in Control").
We monitor adjusted EBITDA as a supplement to our GAAP measures,
and believe it is useful to present to investors, because we
believe that it facilitates evaluation of our period‑to‑period
operating performance by eliminating items that are not operational
in nature, allowing comparison of our recurring core business
operating results over multiple periods unaffected by differences
in capital structure, capital investment cycles and fixed asset
base. Adjusted EBITDA margin is also a non-GAAP financial measure
used by our management and our Board of Directors as supplemental
information to assess the Company’s operational performance and is
calculated as adjusted EBITDA divided by net sales. In addition, we
believe adjusted EBITDA, adjusted EBITDA margin and similar
measures are widely used by investors, securities analysts, ratings
agencies, and other parties in evaluating companies in our industry
as a measure of financial performance and debt‑service
capabilities. We also monitor the ratio of total debt to trailing
twelve month adjusted EBITDA, because we believe it is a useful and
widely used way to assess our leverage.
Our use of adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP. Some
of these limitations are:
- adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
- adjusted EBITDA does not reflect our cash expenditures for
capital equipment or other contractual commitments, including any
capital expenditure requirements to augment or replace our capital
assets;
- adjusted EBITDA does not reflect the interest expense or the
cash requirements necessary to service interest or principal
payments on our indebtedness;
- adjusted EBITDA does not reflect tax payments that may
represent a reduction in cash available to us;
- adjusted EBITDA does not reflect expenses relating to our
pension and OPEB plans;
- adjusted EBITDA does not reflect public offerings and related
expenses;
- adjusted EBITDA does not reflect the non‑cash gains or losses
from foreign currency remeasurement of non‑operating assets and
liabilities in our foreign subsidiaries where the functional
currency is the U.S. dollar;
- adjusted EBITDA does not reflect stock-based compensation
expense;
- adjusted EBITDA does not reflect the non‑cash write‑off of
fixed assets;
- adjusted EBITDA does not reflect related party payable - Tax
Receivable Agreement adjustments;
- adjusted EBITDA does not reflect Change in Control charges;
and
- other companies, including companies in our industry, may
calculate EBITDA, adjusted EBITDA and adjusted EBITDA margin
differently, which reduces its usefulness as a comparative
measure.
We define adjusted net income, a non‑GAAP financial measure, as
net income or loss, excluding the items used to calculate adjusted
EBITDA, less the tax effect of those adjustments. We define
adjusted EPS, a non‑GAAP financial measure, as adjusted net income
divided by the weighted average diluted common shares outstanding
during the period. We believe adjusted net income and adjusted EPS
are useful to present to investors because we believe that they
assist investors’ understanding of the underlying operational
profitability of the Company.
Free cash flow and adjusted free cash flow, non-GAAP financial
measures, are metrics used by our management and our Board of
Directors to analyze cash flows generated from operations. We
define free cash flow as net cash provided by operating activities
less capital expenditures. We define adjusted free cash flow as
free cash flow adjusted by payments of the Change in Control
charges that were triggered as a result of the ownership of our
largest stockholder falling below 30% of our total outstanding
shares. We believe these free cash flow metrics are useful to
present to investors because we believe that they facilitate
comparison of the Company’s performance with its competitors.
Adjusted free cash flow conversion is also a non-GAAP financial
measure used by our management and our Board of Directors as
supplemental information to evaluate the Company’s ability to
convert earnings from our operational performance to cash. We
calculate adjusted free cash flow conversion as adjusted free cash
flow divided by adjusted EBITDA.
In evaluating EBITDA, adjusted EBITDA, adjusted EBITDA margin,
adjusted net income, adjusted EPS, free cash flow, adjusted free
cash flow and adjusted free cash flow conversion, you should be
aware that in the future, we will incur expenses similar to the
adjustments in the reconciliations presented below, other than the
Change in Control charges. Our presentations of EBITDA, adjusted
EBITDA, adjusted EBITDA margin, adjusted net income, adjusted EPS,
free cash flow, adjusted free cash flow and adjusted free cash flow
conversion should not be construed as suggesting that our future
results will be unaffected by these expenses or any unusual or
non‑recurring items. When evaluating our performance, you should
consider EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted
net income, adjusted EPS, free cash flow, adjusted free cash flow
and adjusted free cash flow conversion alongside other measures of
financial performance and liquidity, including our net income, EPS
and cash flow from operating activities, respectively, and other
GAAP measures.
GRAFTECH INTERNATIONAL LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(Dollars in thousands, except per
share data)
(Unaudited)
September 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$
109,394
$
57,514
Accounts and notes receivable, net of
allowance for doubtful accounts of $7,288 as of September 30, 2022
and $6,835 as of December 31, 2021
179,139
207,547
Inventories
438,866
289,432
Prepaid expenses and other current
assets
74,344
73,364
Total current assets
801,743
627,857
Property, plant and equipment
815,318
815,298
Less: accumulated depreciation
331,535
313,825
Net property, plant and equipment
483,783
501,473
Deferred income taxes
18,607
26,187
Goodwill
171,117
171,117
Other assets
91,717
85,684
Total assets
$
1,566,967
$
1,412,318
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current liabilities:
Accounts payable
$
119,410
$
117,112
Long-term debt, current maturities
113
127
Accrued income and other taxes
38,585
57,097
Other accrued liabilities
87,385
56,405
Related party payable - Tax Receivable
Agreement
4,481
3,828
Total current liabilities
249,974
234,569
Long-term debt
921,090
1,029,561
Other long-term obligations
69,111
68,657
Deferred income taxes
44,818
40,674
Related party payable - Tax Receivable
Agreement long-term
10,973
15,455
Stockholders’ equity:
Preferred stock, par value $0.01,
300,000,000 shares authorized, none issued
—
—
Common stock, par value $0.01,
3,000,000,000 shares authorized, 256,597,342 and 263,255,708 shares
issued and outstanding as of September 30, 2022 and December 31,
2021, respectively
2,566
2,633
Additional paid-in capital
744,519
761,412
Accumulated other comprehensive loss
(26,375
)
(7,444
)
Accumulated deficit
(449,709
)
(733,199
)
Total stockholders’ equity
271,001
23,402
Total liabilities and stockholders’
equity
$
1,566,967
$
1,412,318
GRAFTECH INTERNATIONAL LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per
share data)
(Unaudited)
Three Months
Nine Months
Ended September 30,
Ended September 30,
2022
2021
2022
2021
Net sales
$
303,840
$
347,348
$
1,033,731
$
982,495
Cost of sales
170,171
170,286
562,881
518,549
Gross profit
133,669
177,062
470,850
463,946
Research and development
1,014
983
2,617
2,970
Selling and administrative expenses
18,578
19,006
57,862
114,942
Operating income
114,077
157,073
410,371
346,034
Other income, net
(598
)
(364
)
(1,358
)
(314
)
Interest expense
6,424
16,048
25,035
54,209
Interest income
(241
)
(417
)
(2,197
)
(653
)
Income before provision for income
taxes
108,492
141,806
388,891
292,792
Provision for income taxes
15,041
21,920
56,260
45,942
Net income
$
93,451
$
119,886
$
332,631
$
246,850
Basic income per common share:
Net income per share
$
0.36
$
0.45
$
1.28
$
0.92
Weighted average common shares
outstanding
256,848,575
267,106,109
259,415,295
267,327,888
Diluted income per common share:
Net income per share
$
0.36
$
0.45
$
1.28
$
0.92
Weighted average common shares
outstanding
256,853,454
267,178,963
259,424,885
267,441,394
GRAFTECH INTERNATIONAL LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months
Nine Months
Ended September 30,
Ended September 30,
2022
2021
2022
2021
Cash flow from operating activities:
Net income
$
93,451
$
119,886
$
332,631
$
246,850
Adjustments to reconcile net income to
cash provided by operations:
Depreciation and amortization
13,262
15,584
41,708
48,415
Deferred income tax provision
4,659
(1,985
)
11,216
(6,180
)
Non-cash stock-based compensation
expense
628
262
1,666
16,293
Non-cash interest expense
571
2,551
(3,103
)
9,750
Other adjustments
(3,181
)
3,430
230
6,784
Net change in working capital*
(39,633
)
(3,260
)
(101,622
)
47,174
Change in related party Tax Receivable
Agreement
—
—
(3,828
)
(21,752
)
Change in long-term assets and
liabilities
(1,591
)
(2,212
)
(4,293
)
(4,323
)
Net cash provided by operating
activities
68,166
134,256
274,605
343,011
Cash flow from investing activities:
Capital expenditures
(15,933
)
(14,374
)
(45,281
)
(40,426
)
Proceeds from the sale of fixed assets
22
137
161
356
Net cash used in investing activities
(15,911
)
(14,237
)
(45,120
)
(40,070
)
Cash flow from financing activities:
Debt issuance and modification costs
—
(25
)
(2,232
)
(3,109
)
Principal payments on long-term debt
—
(100,000
)
(110,000
)
(300,000
)
Repurchase of common stock - non-related
party
—
(42,378
)
(60,000
)
(42,378
)
Payments for taxes related to net share
settlement of equity awards
—
—
(230
)
(4,074
)
Proceeds from exercise of stock
options
—
—
225
—
Dividends paid to non-related party
(1,926
)
(2,028
)
(5,843
)
(5,446
)
Dividends paid to related party
(640
)
(640
)
(1,919
)
(2,567
)
Interest rate swap settlements
5,195
(1,155
)
3,762
(3,264
)
Net cash provided by (used in) financing
activities
2,629
(146,226
)
(176,237
)
(360,838
)
Net change in cash and cash
equivalents
54,884
(26,207
)
53,248
(57,897
)
Effect of exchange rate changes on cash
and cash equivalents
(1,325
)
(1,268
)
(1,368
)
(889
)
Cash and cash equivalents at beginning of
period
55,835
114,131
57,514
145,442
Cash and cash equivalents at end of
period
$
109,394
$
86,656
$
109,394
$
86,656
* Net change in working capital due to
changes in the following components:
Accounts and notes receivable, net
$
23,348
$
(12,760
)
$
22,229
$
(3,455
)
Inventories
(41,784
)
(15,069
)
(146,501
)
(7,246
)
Prepaid expenses and other current
assets
15,718
(5,593
)
1,690
(17,664
)
Income taxes payable
(3,790
)
15,390
(20,226
)
(2,371
)
Accounts payable and accruals
(39,013
)
9,000
35,373
71,748
Interest payable
5,888
5,772
5,813
6,162
Net change in working capital
$
(39,633
)
$
(3,260
)
$
(101,622
)
$
47,174
NON-GAAP
RECONCILIATION
(Dollars in thousands, except per
share data)
The following table reconciles our
non-GAAP key financial measures to the most directly comparable
GAAP measures:
Reconciliation of Net Income to
Adjusted Net Income
Nine Months
Ended September 30,
Q3 2022
Q2 2022
Q3 2021
2022
2021
Net income
$
93,451
$
114,997
$
119,886
$
332,631
$
246,850
Diluted income per common
share:
Net income per share
$
0.36
$
0.44
$
0.45
$
1.28
$
0.92
Weighted average shares outstanding
256,853,454
258,845,588
267,178,963
259,424,885
267,441,394
Adjustments, pre-tax:
Pension and OPEB plan expenses(1)
534
553
434
1,638
1,295
Public offerings and related
expenses(2)
—
100
—
100
663
Non-cash (gains) losses on foreign
currency remeasurement(3)
(532
)
(1,002
)
(1,542
)
(298
)
365
Stock-based compensation expense(4)
628
573
262
1,666
1,580
Non-cash fixed asset write-off (5)
—
—
—
—
313
Related party payable - Tax Receivable
Agreement adjustment(6)
—
—
—
(180
)
47
Change in Control LTIP award(7)
—
—
—
—
73,384
Change in Control stock-based compensation
acceleration(7)
—
—
—
—
14,713
Total non-GAAP adjustments pre-tax
630
224
(846
)
2,926
92,360
Income tax impact on non-GAAP
adjustments(8)
198
119
2
652
5,805
Adjusted net income
$
93,883
$
115,102
$
119,038
$
334,905
$
333,405
(1)
Net periodic benefit cost for our pension
and OPEB plans.
(2)
Legal, accounting, printing and
registration fees associated with the public offerings and related
expenses.
(3)
Non-cash (gains) losses from foreign
currency remeasurement of non-operating assets and liabilities of
our non-U.S. subsidiaries where the functional currency is the U.S.
dollar.
(4)
Non-cash expense for stock-based
compensation grants.
(5)
Non-cash write-off of fixed assets.
(6)
Non-cash expense adjustment for future
payment to our sole pre-IPO stockholder for tax assets that are
expected to be utilized.
(7)
In the second quarter of 2021, we incurred
Change in Control charges as a result of the ownership of our
largest stockholder, Brookfield, moving below 30% of our shares
outstanding.
(8)
The tax impact on the non-GAAP adjustments
is affected by their tax deductibility and the applicable
jurisdictional tax rates.
NON-GAAP RECONCILIATION
The following table reconciles our
non-GAAP key financial measures to the most directly comparable
GAAP measures:
Reconciliation of EPS to Adjusted
EPS
Nine Months
Ended September 30,
Q3 2022
Q2 2022
Q3 2021
2022
2021
EPS
$
0.36
$
0.44
$
0.45
$
1.28
$
0.92
Adjustments per share:
Pension and OPEB plan expenses(1)
—
—
—
—
—
Public offerings and related
expenses(2)
—
—
—
—
—
Non-cash (gains) losses on foreign
currency remeasurement(3)
—
—
—
—
—
Stock-based compensation expense(4)
0.01
—
—
0.01
0.02
Non-cash fixed asset write-off (5)
—
—
—
—
—
Related party payable - Tax Receivable
Agreement adjustment(6)
—
—
—
—
—
Change in Control LTIP award(7)
—
—
—
—
0.27
Change in Control stock-based compensation
acceleration(7)
—
—
—
—
0.06
Total non-GAAP adjustments pre-tax per
share
0.01
—
—
0.01
0.35
Income tax impact on non-GAAP adjustments
per share(8)
—
—
—
—
0.02
Adjusted EPS
$
0.37
$
0.44
$
0.45
$
1.29
$
1.25
(1)
Net periodic benefit cost for our pension
and OPEB plans.
(2)
Legal, accounting, printing and
registration fees associated with the public offerings and related
expenses.
(3)
Non-cash (gains) losses from foreign
currency remeasurement of non-operating assets and liabilities of
our non-U.S. subsidiaries where the functional currency is the U.S.
dollar.
(4)
Non-cash expense for stock-based
compensation grants.
(5)
Non-cash write-off of fixed assets.
(6)
Non-cash expense adjustment for future
payment to our sole pre-IPO stockholder for tax assets that are
expected to be utilized.
(7)
In the second quarter of 2021, we incurred
Change in Control charges as a result of the ownership of our
largest stockholder, Brookfield, moving below 30% of our shares
outstanding.
(8)
The tax impact on the non-GAAP adjustments
is affected by their tax deductibility and the applicable
jurisdictional tax rates.
NON-GAAP RECONCILIATION
(Dollars in thousands)
The following table reconciles our
non-GAAP key financial measures to the most directly comparable
GAAP measures:
Reconciliation of Net Income to
Adjusted EBITDA
Nine Months
Ended September 30,
Q3 2022
Q2 2022
Q3 2021
2022
2021
Net income
$
93,451
$
114,997
$
119,886
$
332,631
$
246,850
Add:
Depreciation and amortization
13,262
14,012
15,584
41,708
48,415
Interest expense
6,424
9,399
16,048
25,035
54,209
Interest income
(241
)
(1,858
)
(417
)
(2,197
)
(653
)
Income taxes
15,041
21,422
21,920
56,260
45,942
EBITDA
127,937
157,972
173,021
453,437
394,763
Adjustments:
Pension and OPEB plan expenses(1)
534
553
434
1,638
1,295
Public offerings and related
expenses(2)
—
100
—
100
663
Non-cash (gains) losses on foreign
currency remeasurement(3)
(532
)
(1,002
)
(1,542
)
(298
)
365
Stock-based compensation expense(4)
628
573
262
1,666
1,580
Non-cash fixed asset write-off (5)
—
—
—
—
313
Related party payable - Tax Receivable
Agreement adjustment(6)
—
—
—
(180
)
47
Change in Control LTIP award(7)
—
—
—
—
73,384
Change in Control stock-based compensation
acceleration(7)
—
—
—
—
14,713
Adjusted EBITDA
$
128,567
$
158,196
$
172,175
$
456,363
$
487,123
(1)
Net periodic benefit cost for our
pension and OPEB plans.
(2)
Legal, accounting, printing and
registration fees associated with the public offerings and related
expenses.
(3)
Non-cash (gains) losses from
foreign currency remeasurement of non-operating assets and
liabilities of our non-U.S. subsidiaries where the functional
currency is the U.S. dollar.
(4)
Non-cash expense for stock-based
compensation grants.
(5)
Non-cash write-off of fixed
assets.
(6)
Non-cash expense adjustment for
future payment to our sole pre-IPO stockholder for tax assets that
are expected to be utilized.
(7)
In the second quarter of 2021, we
incurred Change in Control charges as a result of the ownership of
our largest stockholder, Brookfield, moving below 30% of our shares
outstanding.
NON-GAAP
RECONCILIATION
(Dollars in thousands)
The following table reconciles our
non-GAAP key financial measures to the most directly comparable
GAAP measures:
Reconciliation of
Net Cash Provided by Operating Activities to Free Cash Flow and
Adjusted Free Cash Flow
Nine Months Ended
September 30,
Q3 2022
Q2 2022
Q3 2021
2022
2021
Net cash provided by operating
activities
$
68,166
$
60,123
$
134,256
$
274,605
$
343,011
Capital expenditures
(15,933
)
(12,493
)
(14,374
)
(45,281
)
(40,426
)
Free cash flow
52,233
47,630
119,882
229,324
302,585
Change in Control payment(1)
—
—
5,263
443
66,718
Adjusted free cash flow
$
52,233
$
47,630
$
125,145
$
229,767
$
369,303
(1)
In the second quarter of 2021, we incurred pre-tax Change in
Control charges of $88 million as a result of the ownership of our
largest stockholder, Brookfield, moving below 30% of our total
shares outstanding. Of the $88 million in pre-tax Change in Control
charges, $73 million were cash and $15 million were non-cash. An
aggregate of $72 million of the cash charges have been paid through
the third quarter of 2022 and an additional $1 million will be paid
in subsequent quarters, as a result of the timing of related
payroll tax payments.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20221103006081/en/
Michael Dillon 216-676-2000 investor.relations@graftech.com
GrafTech (NYSE:EAF)
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