GrafTech Reports Results, Announces Initiatives to Improve Efficiencies and Competitiveness
GrafTech International's financial results for the third quarter ended 30 September 2013 are as follows:
2013 Third Quarter Financial Review
Net sales were US$303 million, a decrease of 5%, compared to US$321 million in the third quarter of 2012.
Net loss of US$8 million or US$(0.06) per diluted share versus net income of US$30 million or US$0.22 per diluted share in the same period of the prior year. Excluding the impact of US$18 million of rationalization and related charges (US$13 million, net of tax), adjusted net income was US$6 million or US$0.04 per diluted share in the current quarter.
EBITDA was US$35 million (excluding the impact of rationalization and related charges) as compared to US$65 million in the third quarter of 2012. The decline was largely driven by lower realized pricing in our Industrial Materials segment.
Net cash provided by operating activities was US$54 million versus US$45 million in the third quarter of 2012.
Net debt was reduced US$27 million to US$565 million as compared to US$592 million at 30 June 2013.
Craig Shular, chief executive officer of GrafTech, commented, “We remain in a difficult operating environment, particularly for our Industrial Materials segment. We have announced initiatives today designed to significantly improve our competitiveness, allow us to better serve customers and position our Industrial Materials business well when global economies and steel demand recover.”
Industrial Materials Segment
The Industrial Materials segment’s net sales were US$233 million in the third quarter of 2013, as compared to US$260 million in the third quarter of 2012. Operating income for the Industrial Materials segment, excluding the impact of rationalization and related charges, was US$4 million in the third quarter of 2013, as compared to US$37 million in the third quarter of 2012. The reduction in sales and operating income is largely attributed to lower graphite electrode and needle coke pricing.
Engineered Solutions Segment
Net sales for the Engineered Solutions segment increased 15% to US$70 million in the third quarter of 2013 compared to US$61 million in the third quarter of 2012. Higher sales in our advanced consumer electronics product offerings drove the increase in revenue.
Operating income for the Engineered Solutions segment, excluding the impact of rationalization and related charges, was US$5 million in the third quarter of 2013 versus US$6 million in the same period in 2012. Despite solid growth in our advanced consumer electronics product line, operating income was negatively impacted by continued weakness in advanced graphite material products serving industrial sectors and start-up costs as we add production capabilities to serve growing markets.
Mr. Shular commented, “Our Engineered Solutions business had its second consecutive quarter of US$70 million in sales. We expect the majority of the start-up expenditures to be behind us and therefore target double-digit operating income margins for the segment in the fourth quarter as production ramps up for new products.”
Total company overhead expenses in the quarter were US$31 million versus US$36 million in the third quarter of 2012. The decline was largely a result of rightsizing initiatives, reduced discretionary spend and lower incentive compensation expense in a challenging operating environment.
Mr. Shular commented, “Our team has continued to aggressively manage overhead spend in this difficult operating environment. In the first nine months of 2013, overhead expense has been reduced by approximately 18% year-over-year.”
Interest expense in the quarter was US$9 million versus US$6 million in the third quarter of 2012. The increase was largely driven by the effects of the November 2012 issuance of US$300 million Senior Notes due in 2020, which lengthened our debt maturity profile.
In the third quarter, we recognized tax credits in support of our research and development efforts related to new high-tech Engineered Solutions products. In addition, jurisdictional profitability mix and the favorable settlement of tax audits also positively impacted the quarter. In total, these items resulted in a tax benefit of approximately US$3 million in the current quarter.
Initiatives to Drive Industrial Materials' Operating Efficiencies and Global Competitiveness
Today, we announced global initiatives to position the company to significantly reduce its Industrial Materials' cost base and improve our competitive position. The plan addresses three key areas: improving profitability, optimizing cash flow and positioning for future growth.
We intend to close, subject to certain ongoing union and workforce consultations, our two highest cost graphite electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia. Reductions in corporate overhead are also included in these initiatives. These actions would result in a reduction in our graphite electrode capacity by approximately 60,000 metric tons, which would leave us sufficient capacity to serve our customers worldwide and satisfy near term projected global demand. The planned closures and related overhead initiatives would yield approximately US$75 million of annual cost savings. The proposed rationalization is targeted to be substantially complete by the end of the second quarter of 2014 and would contribute approximately US$35 million in savings next year. These three facilities currently employ approximately 600 people or approximately 20% of our global workforce.
Total pre-tax costs for the rationalization plan are estimated to be approximately US$105 million, approximately US$30 million of which will be cash outlays to be paid in the fourth quarter of 2013 and through the first half of 2014, and funded through working capital improvements in 2014. The remaining US$75 million are non-cash costs, which primarily reflect the write-off of assets, and will be expensed throughout the wind-down period. We incurred approximately US$18 million of expense related to these initiatives in the third quarter and we expect approximately US$51 million of additional expense based on our current estimates to be recognized in the fourth quarter of 2013.
The rationalization plan will also focus on reducing inventory levels across our production network, and along with the completion of the wind-down agreement for third party supply of needle coke to us, is expected to generate working capital improvements of approximately US$100 million. The majority of the cash improvement, approximately US$75 million, will be reflected in 2014 with the remaining US$25 million expected to be realized in 2015. Going forward, we will utilize our advantaged, integrated supply chain to further reduce working capital requirements and optimize cash flow generation.
In addition to the above, these initiatives will also allow us to reduce future maintenance capital expenditures. We are targeting annual maintenance at our graphite electrode plants to be reduced by approximately 25% or over US$10 million annually. This would be a result of fewer stand-alone graphite electrode production facilities.
Mr. Shular commented, “While these are difficult choices as they impact members of our worldwide team, these initiatives will enable GrafTech to drive operating efficiencies and be more competitive globally, and continue to provide our customers with the highest quality electrodes. Our aim is to ensure that GrafTech is very well positioned as the global economies and steel demand recover.”
Positioning for future growth
As part of our strategy to grow our low-cost, advantaged manufacturing footprint, we have identified debottlenecking opportunities through Lean/Six Sigma efforts at our other four graphite electrode plants. These four graphite electrode facilities offer best-in-class production capabilities and can expand their capacity, in increments, up to a total of approximately 60,000 metric tons to respond to growth in demand. We currently estimate that the average cost to increase capacity across our graphite electrode production network is approximately US$2,500 per metric ton, which compares very favorably to industry averages for comparable expansion projects.
The first increment of potential expansion has been identified at our Monterrey, Mexico plant, one of our most advantaged facilities, strategically located 350 miles from our needle coke plant in Seadrift, Texas. As economic conditions improve and graphite electrode demand recovers, our Mexico facility could increase capacity by 15,000 metric tons in 9 to 12 months with minimal headcount additions. Growing this low-cost production site would further lower our overall graphite electrode cost structure.
Our team regularly reviews global customer demand and, as the European Union (EU) and other key markets recover, we will determine the best timing to commence the Mexico debottlenecking initiative.
Importantly, we continue to build our research and development capabilities to capitalize on our core competency of carbon and graphite material science and drive new product innovation and quality improvements across the organization, which provide us with sustainable competitive advantages that are difficult to replicate. Our annual research and development spend will be unaffected by these initiatives and is expected to be approximately US$12 million to US$15 million over the near term.
Mr. Shular commented, “We remain focused on strategically positioning for long-term growth and delivering sustainable value to our shareholders, and these initiatives, which are supported by a strong balance sheet, will drive improved profitability and competitiveness.”
In its 8 October 2013 report, the International Monetary Fund (IMF) reduced its estimate for 2013 global GDP growth to 2.9%, representing the fourth consecutive downward revision this year. The IMF noted that global growth remains slow and downside risks remain high. The IMF also noted that financial conditions in the EU are stabilizing and the region is expected to gradually emerge from the recession and return to growth in 2014.
On 21 October 2013, the World Steel Association (WSA) cited that global steel production, excluding China, declined 2.0% in the first nine months of 2013 as compared to the same period in the prior year. Looking into 2014, the WSA expects global steel consumption, excluding China, to rise 3.5% year-over-year.
We are targeting EBITDA for the full year 2013 to be in the range of US$145 million to US$155 million (a US$5 million reduction from the prior guidance mid-point) and fourth quarter EBITDA to be in the range of US$35 million to US$45 million. As a result, we are targeting operating cash flow guidance to be in the range of US$100 million to US$120 million. Given the difficult operating environment, and in addition to the plan outlined above, we are reducing our targeted overhead expense**
to approximately US$130 million in 2013.
Mr. Shular concluded, “Market conditions for our global steel customers continue to be challenging; however, there are leading indicators that point to an improvement in U.S. non-residential construction and that the EU recession is in a bottoming process. Some of our U.S. steel customers are cautiously optimistic and are seeing improvement in their non-residential construction business.”
In summary, our expectations for 2013, excluding the impact of rationalization and related charges, are as follows:
EBITDA targeted in the range of US$145 million to US$155 million (previous guidance was US$145 million to US$165 million);
Overhead expense (selling and administrative, and research and development expenses) of approximately US$130 million (previous guidance was US$135 million);
Interest expense of approximately US$36 million;
Capital expenditures in the range of US$90 million to US$100 million (previous guidance was US$90 million to US$110 million);
Depreciation and amortization expense of approximately US$95 million to US$100 million (previous guidance was US$95 million);
An effective annual tax rate in the range of 10% to 20% (previous guidance was 35% to 40%); and
Cash flow from operations in the range of US$100 million to US$120 million (previous guidance was US$110 million to US$130 million).