GrafTech Reports Second Quarter 2013 Results
2013 Second Quarter Review
Net sales were US$301 million, a decrease of 5%, versus US$316 million in the second quarter of 2012.
Industrial Materials revenue was US$231 million, a decrease of 12% year-over-year.
Engineered Solutions revenue was US$70 million, an increase of 31% year-over-year.
EBITDA was US$40 million as compared to US$67 million in the second quarter of 2012. The decline was largely driven by lower realized pricing in our Industrial Materials segment, partly offset by improved profitability in our Engineered Solutions segment.
Net income was US$4 million versus US$42 million in the same period of the prior year. The second quarter of 2012 included a US$10 million non-cash benefit of discrete tax items. Excluding the non-cash tax benefit, second quarter 2012 net income was US$32 million.
Net cash used in operating activities was US$6 million versus US$16 million in the second quarter of 2012.
Net debt was US$592 million as compared to US$554 million at the end of 2012. The increase in net debt partially reflects higher inventories to support increased sales volumes in the second half of the year.
Craig Shular, chief executive officer of GrafTech, commented, "Our team delivered second quarter results in line with expectations, in spite of a very challenging operating environment. Record sales in our Engineered Solutions segment and proactive cost management across the Company positively impacted these results. We expect overhead expense to be approximately US$135 million this year as compared to US$155 million in 2012."
Industrial Materials Segment
The Industrial Materials segment’s net sales were US$231 million in the second quarter of 2013, as compared to US$262 million in the second quarter of 2012. Net sales in the quarter decreased primarily as the result of lower graphite electrode and needle coke sales prices. Partially offsetting the impact of lower pricing was higher graphite electrode volume in the current quarter as compared to the same period in the prior year. It is important to note that the second quarter of 2012 reflected lower volumes due to the impact of customer inventory destocking initiatives.
Operating income for the Industrial Materials segment was US$8 million in the second quarter of 2013, as compared toUS$42 million in the second quarter of 2012. The reduction in operating income is largely attributed to lower graphite electrode and needle coke pricing.
Mr. Shular commented, "The environment for our Industrial Materials products remains very difficult as steel production outside of China continues to decline year-over-year. This weakness is further exacerbated by overcapacity in the graphite electrode industry. We will continue to leverage our low-cost business model to optimize our performance in this extremely challenging environment."
Engineered Solutions Segment
Net sales for the Engineered Solutions segment increased 31% to US$70 million in the second quarter of 2013 compared to US$53 million in the second quarter of 2012. Continued success and growth in our advanced consumer electronics product offerings drove the increase in revenue.
Operating income for the Engineered Solutions segment was US$8 million in the second quarter of 2013, or twelve% of sales. This compares to operating income of US$5 million, or nine% of sales in the same period in 2012. The increase is due to a more favorable product mix as we penetrate high-growth end markets with attractive margin profiles, offset in part by significant weakness in advanced graphite material products serving industrial sectors including transportation, chemical and metallurgical industries.
Mr. Shular commented, "Our Engineered Solutions segment achieved record sales of US$70 million in the second quarter, representing nearly 25% of total Company revenue. Additionally, the segment delivered double-digit operating income margin performance, ramping from the first quarter of 2013, as the infrastructure investments to support growth are more effectively absorbed at a higher revenue level. As this business continues to gain traction, it is better positioned to provide a sustainable base for diversification in tough steel cycles."
Total company overhead expenses were US$33 million versus US$38 million in the second quarter of 2012. The decline in overhead was largely driven by rightsizing initiatives, reductions in discretionary expenses and lower incentive compensation expense in a difficult operating environment.
Interest expense in the quarter was US$9 million, versus US$5 million in the second quarter of 2012. The increase was largely driven by the issuance of the Senior Unsecured Notes in November 2012.
In its 9 July report, the International Monetary Fund (IMF) reduced its estimate for 2013 global GDP growth to 3.1%, representing the third consecutive downward revision this year. The IMF also states that global growth has not accelerated as expected and has underperformed relative to its prior expectations due to several factors including protracted recessionary conditions in Europe, weaker than anticipated economic expansion in the United States and slower growth in emerging markets.
On 22 July 2013, the World Steel Association cited that global steel production, excluding China, declined 2.7% in the first half of 2013 as compared to the same period in the prior year. Expectations for improvement in the second half of 2013 are waning and steel customer confidence remains low.
As a result of the above economic factors, steel data and feedback from our customers, we are reducing our targeted EBITDA range for the full year 2013 to US$145 million to US$165 million to reflect weaker than previously anticipated demand for our Industrial Materials products. Consequently, we are also reducing our targeted operating cash flow guidance to US$110 million to US$130 million to reflect the reduction in profitability and higher than previously planned inventory levels.
It is important to note that 2013 marks the final year of a third party wind-down agreement triggered by the acquisition of Seadrift Coke in which GrafTech is obliged to purchase minimum third party needle coke quantities. Going forward, this will provide us with increased flexibility to further optimize our vertical integration with Seadrift and reduce inventories. Given the challenging operating environment, we are also reducing our targeted overhead expense** to approximately US$135 million. This compares to overhead expense** of US$155 million in 2012.
In the third quarter of 2013, we are targeting EBITDA to be in the range of US$30 million to US$40 million. Continued growth and improved profitability in the Engineered Solutions segment is expected to partially offset weakness in the Industrial Materials segment.
Mr. Shular concluded, "We have built an advantaged, low-cost business model supported by a solid capital structure. GrafTech is well positioned to emerge from this difficult part of the cycle stronger than we entered it."
In summary, our expectations for 2013 are as follows:
EBITDA targeted in the range of US$145 million to US$165 million (previous guidance was US$165 million to US$195 million);
Overhead expense (selling and administrative, and research and development expenses) of approximately US$135 million (previous guidance was US$140 million);
Interest expense of approximately US$37 million (previous guidance was US$35 million to US$40 million);
Capital expenditures in the range of US$90 million to US$110 million;
Depreciation and amortization expense of approximately US$95 million (previous guidance was US$90 million to US$95 million);
An effective tax rate in the range of 35% to 40% (previous guidance was 33% to 36%); and
Cash flow from operations in the range of US$110 million to US$130 million (previous guidance was US$150 million to US$180 million).