GrafTech International Ltd :EAF-US: Earnings Analysis: Q3, 2017 By the Numbers : April 30, 2018

GrafTech International Ltd reports financial results for the quarter ended September 29, 2017.

Highlights

  • Summary numbers: Revenues of USD 137.25 million, Net Earnings of USD -7.15 million.
  • Gross margins widened from -6.19% to 12.07% compared to the same period last year, operating (EBITDA) margins now 14.27% from -0.09%.
  • Change in operating cash flow of 71.59% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-29 2017-06-29 2017-03-30 2016-12-30 2016-09-29
Relevant Numbers (Quarterly)
Revenues (mil) 137.25 116.31 104.74 115.43 111.59
Revenue Growth (%YOY) 22.99 0.82 9.59 -2.47 -11.7
Earnings (mil) -7.15 -13.33 -22.28 -28.7 -24.1
Earnings Growth (%YOY) 70.32 40.11 34.11 -23.75 40.88
Net Margin (%) -5.21 -11.46 -21.27 -24.86 -21.6
EPS -71530 -133330 -222780 -286970 -241010
Return on Equity (%) -1.3 -2.42 -3.93 -4.73 -3.72
Return on Assets (%) -2.52 -4.61 -7.63 -9.52 -7.68

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, EAF-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if EAF-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 18.00% and earnings by 46.35% compared to the previous period.

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from -6.19% to 12.07% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from -0.09% to 14.27% compared to the same period last year. For comparison, gross margins were 8.32% and EBITDA margins were 10.77% in the last reporting period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

EAF-US’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days are now 129.20 days compared to 226.71 days for the same period last year.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company’s cash versus earnings numbers to gauge whether its performance is sustainable.

EAF-US’s year-on-year change in operating cash flow of 71.59% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from -17.61% to 1.39% and (2) one-time items. The company’s pretax margins are now -3.78% compared to -23.20% for the same period last year.

EBIT Margin History
PreTax Margin History

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Company Profile

GrafTech International Ltd (GTI) is a manufacturer of graphite electrodes, products essential to the production of electric arc furnace (EAF) steel and various other ferrous and nonferrous metals. The Company also produces needle coke products, which are the primary raw material needed in the manufacture of graphite electrodes. The Company is manufactures and provides graphite and carbon materials used in the transportation, solar and oil and gas exploration industries. The Company’s operating segments include Industrial Materials, which include graphite electrodes, refractory products and needle coke products, and Engineered Solutions, which includes advanced electronics technologies, advanced graphite materials, advanced composite materials, and advanced materials. The Company has seven product categories: graphite electrodes, refractory products, needle coke products, advanced graphite materials, advanced composite materials, advanced electronics technologies and advanced materials.

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