GrafTech International(EAF) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited H1 2019 financials show net sales growth and a strengthened balance sheet, with strong operating cash flow despite a net income decline Condensed Consolidated Balance Sheets As of June 30, 2019, total assets grew to $1.73 billion, liabilities decreased, and stockholders' deficit improved to $(709.8) million Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2019 (million) | December 31, 2018 (million) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $205.3 | $49.9 | | Total current assets | $881.3 | $638.1 | | Total assets | $1,726.4 | $1,505.5 | | Liabilities & Equity | | | | Total current liabilities | $260.1 | $327.1 | | Long-term debt | $1,991.3 | $2,050.3 | | Total liabilities | $2,436.2 | $2,582.3 | | Total stockholders' (deficit) | $(709.8) | $(1,076.8) | Condensed Consolidated Statements of Operations and Comprehensive Income Q2 2019 net sales grew 5% to $480.4 million, but net income decreased to $196.4 million due to higher cost of sales, with similar trends for the six-month period Q2 2019 vs Q2 2018 Performance (in millions, except EPS) | Metric | Three Months Ended June 30, 2019 (million) | Three Months Ended June 30, 2018 (million) | | :--- | :--- | :--- | | Net sales | $480.4 | $456.3 | | Gross profit | $283.3 | $290.4 | | Operating profit | $267.2 | $273.6 | | Net income | $196.4 | $201.4 | | Diluted EPS | $0.68 | $0.67 | H1 2019 vs H1 2018 Performance (in millions, except EPS) | Metric | Six Months Ended June 30, 2019 (million) | Six Months Ended June 30, 2018 (million) | | :--- | :--- | :--- | | Net sales | $955.4 | $908.2 | | Gross profit | $562.8 | $597.2 | | Operating profit | $530.8 | $564.0 | | Net income | $393.8 | $425.1 | | Diluted EPS | $1.36 | $1.41 | Condensed Consolidated Statements of Cash Flows H1 2019 operating activities generated $359.0 million in cash, with net cash outflow from financing activities primarily due to debt repayments and dividends Cash Flow Summary for Six Months Ended June 30 (in millions) | Cash Flow Activity | 2019 (million) | 2018 (million) | | :--- | :--- | :--- | | Net cash provided by operating activities | $359.0 | $377.7 | | Net cash used in investing activities | $(29.1) | $(27.9) | | Net cash used in financing activities | $(174.4) | $(195.8) | | Net change in cash and cash equivalents | $155.5 | $154.0 | - The net change in working capital resulted in a cash outflow of $102.5 million in the first half of 2019, compared to an outflow of $158.6 million in the prior year period[26] Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, debt structure, contingent liabilities, and a post-quarter $100 million share repurchase program Disaggregated Revenue for Six Months Ended June 30 (in millions) | Revenue Source | 2019 (million) | 2018 (million) | | :--- | :--- | :--- | | Graphite Electrodes - Long-term contracts | $773.6 | $617.4 | | Graphite Electrodes - Short-term/spot | $123.5 | $210.5 | | By-products and other | $58.2 | $80.3 | | Total Revenues | $955.4 | $908.2 | - The company estimates $4.5 billion in future revenue from remaining performance obligations under its three-to-five-year take-or-pay contracts as of June 30, 2019[49][50] - Total debt as of June 30, 2019 was approximately $2.03 billion. The company made a $125 million repayment on its 2018 Term Loan Facility in February 2019[68] - Subsequent to the quarter end, on July 30, 2019, the Board of Directors authorized a $100 million share repurchase program and declared a regular quarterly dividend of $0.085 per share[148] Management's Discussion and Analysis of Financial Condition and Results of Operations Management highlights stability from long-term contracts, with Q2 2019 net sales up 5% to $480.4 million despite gross profit decline, maintaining strong liquidity - The company's commercial strategy relies on three-to-five-year take-or-pay contracts, which have secured approximately 65-70% of its production capacity[151] Key Operating Metrics - Q2 2019 vs Q2 2018 | Metric | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Sales volume (MT, in thousands) | 45 | 42 | | Weighted average realized price ($/MT) | $10,014 | $9,783 | | Production volume (MT, in thousands) | 48 | 45 | | Capacity utilization | 83% | 87% | Reconciliation to Adjusted EBITDA (in millions) | Metric | Q2 2019 (million) | Q2 2018 (million) | | :--- | :--- | :--- | | Net income | $196.4 | $201.4 | | EBITDA from continuing operations | $281.8 | $228.1 | | Adjusted EBITDA from continuing operations | $284.4 | $292.0 | Results of Operations Q2 2019 net sales increased 5% to $480.4 million due to higher volume, but cost of sales surged 19% to $197.0 million, leading to a 2% gross profit decline - Q2 2019 net sales increased by $24.1 million (5%) YoY, driven by a 6% increase in sales volume of graphite electrodes and a higher weighted average realized price of $10,014 per MT[180] - Q2 2019 cost of sales increased by $31.1 million (19%) YoY, primarily due to sales of inventory manufactured with higher-priced needle coke[180][181] - The effective tax rate for Q2 2019 was 16.1%, a significant shift from a benefit of (9.4%) in Q2 2018, impacted by a valuation allowance release[187][188][189] Liquidity and Capital Resources As of June 30, 2019, total liquidity was strong at $452.2 million, with a $125 million debt repayment and a $100 million share repurchase program authorized - As of June 30, 2019, total liquidity was $452.2 million, consisting of $205.3 million in cash and $246.9 million available under the 2018 Revolving Facility[209] - On February 13, 2019, the company repaid $125 million on its 2018 Term Loan Facility[222] - A program to repurchase up to $100 million of outstanding common stock was authorized by the Board of Directors on July 30, 2019[220] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, currency, and energy prices, with a 100 basis point interest rate increase impacting interest expense by $10.5 million for H1 2019 - A hypothetical 100 basis point increase in interest rates would have increased interest expense by $10.5 million for the six months ended June 30, 2019, due to floating-rate debt[253] - The company uses commodity derivative contracts to manage exposure to refined oil products, which had a net unrealized pre-tax gain of $14.2 million as of June 30, 2019[251] Controls and Procedures Management, including CEO and CFO, deemed disclosure controls and procedures effective as of June 30, 2019, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2019[260] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[261] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including long-pending litigation in Brazil regarding wage increases, with potential loss currently not estimable - The company is defending against litigation in Brazil brought by employees concerning wage increase provisions from 1989 and 1990, with the potential loss not estimable as of June 30, 2019[265] Risk Factors No material changes have occurred to the risk factors previously disclosed in the Annual Report on Form 10-K filed on February 22, 2019 - No material changes to the Risk Factors disclosed in the Annual Report on Form 10-K filed on February 22, 2019 have occurred[267] Exhibits This section lists exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer - The report includes certifications from the CEO and CFO pursuant to Rules 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002[271]