2009 First Quarter Highlights
The gross profit has declined to $32 million or 23.9% of sales, against $108 million or 37.3% of sales in the year-ago quarter. The decrease in gross profit was largely driven by lower sales volumes and unfavorable fixed cost absorption associated with reduced operating rates. The company’s graphite electrode facilities ran at a 38% operating rate in the first quarter which aligned with market demand in the period.
The company’s operating income was $8 million, versus $83 million in the first quarter of 2008. Operating income margin reduced to 6.3% of sales, from 28.7% in the same period in 2008.
GrafTech’s net income before special items was $5 million, or $0.04 per diluted share, against $60 million, or $0.54 per diluted share, in the year-ago quarter.
The net cash provided by operating activities was $14 million, against $67 million in the year-ago quarter. The year-over-year decrease in operating net cash was largely driven by a reduction in profit, offset in part by our team’s continuing efforts to reduce working capital through effective management of accounts receivable, inventory and accounts payable.
The net debt was decreased by $212 million or nearly 75% year-over-year to $76 million and was a decrease of $2 million as compared to net debt in previous year end 2008.
Craig Shular, chief executive officer of GrafTech, commented, Our solid balance sheet and low cost business model positions our team to confront the current difficult and uncertain global economic environment. Our previously reported initiatives on cost reductions and productivity improvements have helped us to generate a small profit in the first quarter.
Industrial Materials Segment
The net sales for Industrial Materials segment were $105 million in 2009 first quarter, as compared to $248 million in the year-ago quarter. The operating income for this segment was $7 million, against $75 million in the year-ago quarter. The decrease was mainly due to lower sales volume for graphite electrodes related to the sharp decline in global steel demand. The diminish in sales volume was mitigated in part by the positive impact of currency movement year-over-year in the geographies in which we manufacture product.
Engineered Solutions Segment
The Engineered Solutions segment’s net sales were $30 million in the 2009 first quarter, against $42 million in the year-ago quarter. The operating income for this segment was $2 million, against to $8 million in the 2008 first quarter. The decline was mainly the result of lower sales volumes across multiple product lines which have been impacted by the global economic slowdown.
Corporate
The selling and administrative and research and development expenses were declined $1 million to $24 million in the 2009 first quarter as a result of execution on planned cost savings initiatives and lower variable compensation expense year-over-year, offset in part by a $3 million increase in the company’s bad debt reserve.
The interest expense for the first quarter of 2009 was $2 million, against $8 million in the year-ago quarter. The reduction was driven primarily by GrafTech’s successful deleveraging initiatives.
The other income, net, was $6 million in the 2009 first quarter largely the result of the re-measurement of inter-company loans which generated a non-cash gain of about $6 million. In the first quarter of 2008, the company recorded other expense, net, of $21 million due to the re-measurement of inter-company loans, which generated a $16 million non-cash loss, and the call premium and fees of $5 million linked with the early redemption of $125 million of our 10.25% Senior Notes.
Equity in earnings of the company’s non-consolidated affiliate, Seadrift, was $1 million in the first quarter 2009 after deducting $2 million of amortization for the difference between our cost of the investment and the net assets of Seadrift at acquisition.
The effective income tax rate for first quarter of 2009, excluding other special charges, was 30%, slightly better than previous guidance, mainly as a result of favorable jurisdictional profitability mix and effective tax planning initiatives. As such, the company currently expect the full year 2009 effective tax rate to be in the range of 28% to 32%.
Outlook
As per International Monetary Fund (IMF) projections and other global economic forecasts, the world economy is in its first global recession in about 60 years, impacting both advanced and emerging economies. The weak end market demand is estimated to persist with a high degree of uncertainty surrounding timing of an anticipated recovery. As a result, the steel producers continue to operate at very less rates in order to decrease inventory levels to match current market demand.
The majority of company’s customer base has very limited or no visibility to third and fourth quarter 2009 operating rates. Given present global economic conditions, which continue to be very volatile and uncertain, the company’s ability to project full year guidance is very limited.
GrafTech continue to expect 2009 to be very challenging for both of its business segments. The first quarter results came in better than estimated and generated a small profit. GrafTech believe second quarter results will be similar to those in the first quarter; however, a second quarter loss is possible given the variability in customer demand. Historically, the third quarter is a weaker quarter as many of our European customers planned plant shutdowns during the summer months. Given present economic conditions, it is possible that these planned production shutdowns could be extended, adversely impacting demand for our products in the third quarter of 2009. While a high degree of uncertainty around forward looking projections remains, the company expects a marginal improvement in the second half of 2009 as customers should have largely completed inventory destocking initiatives. Additionally, the estimated benefit of higher graphite electrode selling prices should be realized, offset in part by higher raw material costs.
In 2009, the company is targeting capital expenditures to be around $50 million to $55 million (previous guidance was $55 million), depreciation expense to be about $35 million and the effective tax rate to be in the range of 28% to 32% (previous guidance was 32% to 35%).
